Good morning and welcome to Taylor Morrison's Third Quarter 2018 Earnings Conference Call. Currently all participants are in a listen-only mode. Later we will conduct and question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.

Thank you and welcome everyone to Taylor Morrison's third quarter 2018 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Please note, there's a presentation posted to our investor relations Website that is referenced throughout the prepared remarks. You can access that presentation by licking into the events tab and searching under the upcoming event section. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results along with our guidance. Then Sheryl will conclude with the outlook for the business, after which we will be happy to take your questions. Before I turn the call over to Sheryl, let me remind you that today's call, including the question and answer session, includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today's news release. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. And we do not undertake any obligation to update our forward-looking statements. Now let me turn the call over to Sheryl Palmer.

Thank you Jason and thank you everyone for joining us this morning. We are eager to share with you our third quarter results, our views on the current environment and provide an update on our recently completed acquisition of AV Homes. Getting right to our results, once again, we delivered, or exceeded, on all points of guidance which is a direct reflection of our teams effort and focus on driving shareholder value. Looking at Page 3 of our earnings presentation, you'll see a summary of our results focused on our key metrics. For the quarter, we closed 2115 homes which is a 15% increase over the same period in the prior year. All regions saw year-over-year increases with the East region up the most at 23% followed by the Central and West which were up 12% and 6% respectively. Sales for the quarter were up year-over-year to 1822 despite a lower average community count of 275 driven by a higher sales pace of 2.2. Based on our October pace, we are still on track to deliver on our full-year guidance and expected to be around 2.4. Our performance in the third quarter drove an EBT margin of 9.7% which was a sequential improvement of 160 basis points higher than in our second quarter and 100 basis points higher than this time last year. That led to $0.83 of diluted EPS, an increase of $0.38 compared to the third quarter of 2017. The sales environment has been a topic of interest this earning cycle and I would like to offer our opinion on what's happening through the lens of what we're seeing in the field. We believe there are a few different factors at play. First, we believe we're experiencing some normal seasonality where we typically see the population of interested…

Thanks Sheryl and hello everyone. A summary of our financial results for the quarter can be found on Page 5 of the presentation. For the quarter, net income was $94 million and diluted earnings per share was $0.83. Total revenues were just over $1 billion for the quarter including homebuilding revenues of $1 billion. Home closings gross margin includes both capitalized interest, was 18.9% and on the upper end of our expectations. This represents a 90 basis point improvement on a sequential basis and a 30 basis point improvement when compared to the same time last year. We experienced geographic mix-shifts into some of our higher rate divisions such as Phoenix and the Bay area and out of lower rate divisions such as Southern California. Within divisions we also experienced some product shifts and higher margin deliveries. We did experience some anticipated cost pressures and materials relative to last year. However, we fortunately saw commensurate or better pricing power in many of our communities helping to offset those cost pressures. On a total gross margin basis for the quarter, we came in at 19.2% which was a hundred basis point improvement on a sequential basis and a 30 basis improvement when compared to the same time last year. This was driven by both high margin land sales and financial services. Moving to financial services, we generated more than $17 million in revenue for the quarter and just under 40% margin for that business. Our mortgage company capture rate came in at 71% or a 100 basis point improvement sequentially. SG&A as a percentage of home closings revenue came in at 9.9% which was a decrease of about 80 basis points from the prior year's quarter and about a 60 basis point decrease from the second quarter of this year. In…

Thank you Dave. I've made it a point the last few quarters to share specific findings from our internal customer research and I'm hopeful that it's offered you a different perspective if you think about our business. Today I would like to share a quick update on the research we discussed earlier this summer as it relates to the differences in demand with differing buying groups. But first let me reiterate and review our good fortunate of attracting buyers that have a strong financial profile as that will provide the necessary backdrop for the discussion. On average, our borrowers have solid credit and personal balance sheets. A loan to value of 76% with a debt to income ratio of 38% on a loan amount of approximately $346,000. Over the last 15 quarters our average borrower profile has a credit score of 740 or higher and in the third quarter that number was approaching 750. Our strong buyer profile is no doubt influenced by our mix of professional first-time buyers, move-up and active adult customers which also strongly correlates to our high cash business which was nearly 20% for the quarter. Now let me share some of the subtle changes we saw in the shopper research we collected and compare to the Q2 data last provided. The first question centered around the buyers desire to spend more or less than what they could qualify for and as expected, there were slight movements as the number of shoppers willing to spend more than they qualify for went down by about 20% and the number of shoppers wanting to spend less than they are qualified for went up by about the same amount. What I found most interesting was the interest rate sensitivity question with a higher number of shoppers suggesting greater tolerances…

[Operator Instructions]. Your first question comes from the line of Stephen East of Wells Fargo.

Congratulations on closing AV. If you look at the synergies from it, what's your timeline for that $30 million, when do you think you'll be at that run rate and if you could help us out on where the buckets are and do you see any other issues that could cause you to either fall short of that or to exceed that as you look forward?

Yes, Stephen, this is Dave. So on the synergies we said about $30 million and I'd say that in the second half of 2019 we'll be on kind of that annualized run rate to deliver that $30 million. Then obviously you get the full impact of that in 2020. So it's going to ramp up as we move through between now and the first half of 2019. The breakdown, when you look at it, about 2/3 of that is coming from SG&A savings and the other third is a mix of rebates, mortgage insurance, kind of rounding that out. So one thing that we've mentioned in the past is we also have some potential for construction efficiencies which will come through the integration. So I think to your question that $30 million, we're confident we can deliver on that. We actually are hopeful that we can maybe even inch that up a little bit higher through some other construction efficiencies.

Got you, okay. And then Sheryl, I agree pretty much as we walk these markets, I agree with what you all are talking about, what your consumers - the way they're acting, etc., Are there any markets though that you see true affordability issues versus what I just called sticker shock and if so, you know, how are you all handling those from an incentive perspective whether it's rate buy-downs, something else and if this slowdown lasts into the spring, what do you do differently then maybe what you're trying to do today?

Stephen, yes, let me try to hit each of those. So, you know, I think we've been talking about the markets where we've seen kind of the in - the rate of pace on year-over-year and quarter-over-quarter increases moved a level that I think we've been uncomfortable with. And I would tell you that's primarily Southern Cal, the Bay, Dallas. You know, Dallas - I mean, Denver interestingly enough has also had a very significant pace on price appreciation but we haven't seen the same consumer reaction in Denver as we have in what I would say are the California markets. And Dallas, we've been talking about that now for, gosh, probably two years Stephen. When I think about incentives, you look at a market like even an affordable community in Southern California where maybe a year ago the price was a half million dollars, today when you take the combination of that price appreciation, 6%, 7%, 8% in 12 months, and the change of interest rates, it is sticker shock for the consumer. I mean, that mortgage payment, with all things - all other things being equal could be up 20% to 25%. So what we're really doing with the incentive is obviously as we started to really feel the pace of mortgage interest rates moving. We made a, I think, strategic decision at the field level to make sure we align our incentives with the specific needs of the buyer. And if you can imagine, they're all very different. Some need help in closing costs, some need help with a lower rate, we'll use it for a buy down some, maybe an extended lock. So it's a little bit different but we have is the flexibility within those communities to work with the individual customer needs. As I look forward, I think we need to see, I mean, we'll continue to use the incentive dollars when you just want to talk about the sales floor incentive, I think more importantly it's really making sure that we use the time to help our customers understand what they have. You know, we prequalify our buyers, obviously before we get them into contract and that's been really important for us, but I think in today's environment it's so easy just to jump to interest rate. And what we really have to do is make sure our sales team and our loan consultants are properly trained to talk to the customer; the natural tendency is just to go right to rates. But, like I said in my prepared comments, the real issue is payment. So we need to walk them through the numbers. Don't lead with the interest rate, help them understand what they can afford because, like I said, on average they have somewhere between 300 and 500 basis points of room before they're priced out.

And I would just throw in a couple of other things there. You know, what we typically see sequentially from Q3 to Q4 is incentive rate does pick up. That's been the case for every year for the last several years. So nothing too unusual about that and as Sheryl mentioned, it's based on community and consumer specific. But also for the year, we're projecting our incentives to be roughly flat to last year. So recognizing the sales environment and the incentive needed we think they're going to be flat and that's built into our guidance.

Our next question comes from the line of Michael Rehaut of JP Morgan.

This is actually Maggie Wellborn on for Mike. I guess first, you talked a little bit about your capital allocation strategy and how following the AV closing you kind of have shifted back to share repurchase. But I guess what I'm wondering is, how are you thinking about M&A over the next 2 to 3 years and do you still have an appetite to expand your footprint by potentially taking advantage of other buildings, trading an attractive price to book multiples.

You know, what I would tell you about - let me just hit the M&A thing an then Dave if you want to throw anything on the capital allocation but I would tell you about M&A Maggie is we're not even 30 days into the closing of AV. So it's really important that we digest that first. We have a lot of work to do, we've done a lot of good work to get us here but across the markets we have a lot of work to integrate and get this thing humming where we all want it. So when I look at future M&A, it's hard to imagine right now that there's really any better investment than buying back our stock and I think you heard Dave in his prepared comments talk about the feverishness that we've been buying back since the day we could after the closing because the team put the 10b5-1 in place to allow us to do that. So I think that's where we are for now but certainly are we always looking - I would tell you the same thing we've always said, it's the best use of cash, we'll continue to evaluate the markets, look at the opportunity for greater depth and some of our other markets and always look at new ones but right now the focus is really digesting what we have. Anything Dave?

Yes, and lastly, I think Maggie, it goes back to the way we built our balance sheet. We really built that to be a platform for us to give us optionality. So everything that Sheryl said, this is going to allow us to pivot based on market conditions. If you look at this year we're able to do the AV transaction, actually just go out and get some short-term borrowings to help fund the transaction which we'll pay off next year, but we still have the ability to buy back stock. We bought back about 3 million, we have 48 million left on our authorization. That's 3 million shares, 48 million left on our authorization and given where the stocks trading, you can probably expect us to exhaust that by the end of this year.

Okay. And then next question, as far as regional demand trends go, you talked a little bit about the geographic mix shift with margins and incentives and all of that but can you give any color to how sales pace progressed through the quarters, maybe across the different markets, if there's any - did any like particular ones weaken?

Yes, I think as we look - I'll resist going to a market-by-market recap for you Maggie. But I think as we look across the markets, as I said in the comments, when I look at just the East in total, what we really had going on there was a reduction in community count. Paces were up but just total unit, total orders, were down but that was community count driven. When I look across the West we were generally flat, we were up on sales, slightly up on community count and flat on sales pace. As we look through the quarter it was really the Bay that we probably started feeling the pressure first and then followed by Southern Cal but Phoenix and Denver continued to stay very, very strong. When I look at central, community count was generally flat. Units were up, pace was up, so you almost have to go market-by-market but it was a pretty good mix.

The next question is from the line of Ivy Zelman of Zelman & Associates.

Congrats on the AV closing. Sheryl, you know your opening comments are really the best in the space. You really provide so much insight and it's extremely helpful. One of the things about the market on a big picture basis that I think is hard for people to read the tea leaves is the fact that rates have been headed downward for over 30 years and we now had a situation where a lot of people that live in existing homes are at a variable rate and I think it's something like 80% are below a 5% mortgage. So when you think about your buyers and you're more skewed to the move up, when you think of rates continue to move higher, that being an impediment because people have not only a higher home price that they arguably would have to pay up to buy a home, a second home move up or first time move up but now they also have a higher monthly payment. So thinking about history, have you looked back in higher periods where I know like for example rates shot up into the tech [indiscernible] prior to the recession and then came back down. So is there anything that you'd look at historically that can gleam some help around the risk that people just stay in their homes and age in place because it's just more expensive for them?

Yes, good question Ivy. You know, as you might imagine we've done a fair deep dive. We've got just an amazing research team here and we continue to talk to shoppers, buyers and look historically at the trends. So, you're right, I think one of the things that has been under estimated or expected on this hesitation is that 75%, 85% of buyers that are sitting there either in a new home or a refinanced home with a rate that's somewhere in the low to high 3's, and that's why I made the comment about that 200 basis points in my prepared comments because all of the research that we're doing suggests, because it's moved, it's moved from when we did it earlier in the year, it's moved from when we've done it mid-year and what continues to be consistent is that it's about 200 basis points from where rates are trading that the buyer seemed to articulate what will make them a little bit more uneasy. Now, I acknowledge that our buyers are going to be different than maybe somebody else's portfolio of buyers but this is a shopper survey. But then when I look historically you see that went rates have shot up, and this is really over the last number of decades, when rates have shot up there's anywhere between a 2 and 6 quarter hesitation. What we don't know, because we really don't have good history on them coming from such a historical low, is how quick do buyers adjust this time? We saw it back a couple of years ago, we saw it last a couple of quarters. The last thing I'd give you Ivy, is when we really take a deep dive into the data and talk to our shoppers and really understand, in the last quarter we've actually seen fewer people, or actually excuse me, I would say flat percentage of folks saying that they've had a concern in interest rates. I talked already about the fact that they might reduce what they're buying and where we are seeing the pressure is in that most affordable buyer. Those are the folks today that I think it supports the numbers why we've seen units and household formation pick up with the most affordable buyer is because they're racing out to market because they're going to get to a point where they will get priced out. But when I look at the bulk, our active adults, the move-up, I think for them it's more of a hesitation and they need a catalyst, they need a catalyst because they have a home, they don't have to move tomorrow.

But they are well qualified buyers. I mean, we continually run our credit scores. Our buyers are typically in the 740's and it's held that way now for several years.

Yes, I hope that's helpful Ivy.

So when you look at the performance on the quarter, when you look at the performance on the quarter and breaking out the segments and, I apologize, I've been listening, I don't think you've said this, the rate of absorption by buyer segment if you see a difference with what you, how you, just commented with respect to the affordable segment there's more of an urgency. Is that performing, outperforming and if so, remind us all like what percent is first time for you officially? And then I had a quick one for you Dave. You mentioned incentives, you expect to be flat. That's for this year, is that correct? You weren't referring to 2019?

No, that was for the rest of this year, Ivy.

Right. So I have another one if you'll allow me but if you want to just take that first one please, I would appreciate it.

Okay, you bet, Ivy. You know, the way I've looked at it and really tried to dive into the information has been both geographic and by consumer as compared to a roll-up because we - I think the roll-ups are not - I think they're slightly misleading because I have some markets where that first time buyer is actually where we've seen the greatest number of cans and it's because they're not qualifying. I have some markets where the cans have actually been at the higher end and the primary reason for those cancellations, and I would say net sales rate by consumer group Ivy, is because they can't sell the house that they have today. And so I won't simplify it by saying that there's this trend in first timers. Where we're seeing buildup is inventory in many of our markets is around the fringe and that would lead to the assumption that people are seeing more cans . We have - you know, as you know, we've really tried to stay core. We've certainly dipped our toe in some of the peripheral markets but we're not in there heavy. So it's a - I won't default to just consumer group, it's very geographic specific and then consumer group.

Got it, understand. Can I sneak another one in real quick?

Go for it.

Just on incentives. I know recognizing that you guys have been really a good actor, more prudent, focusing more on profitability but I think the builders are starting to step on the gas and this time of year it's likely to always increase but it's above normal and we think that only accelerates. So do you hold the toe, do you draw the line and continue to take that more prudent strategy or do you feel at some point you'd have to follow the market at risk of sitting on inventory that you want to monetize? How do you think about it on a go-forward basis?

Yes, you're going to hate my answer only because it's not a default. But, I'd love to sit here and say we're going to hold the line but that wouldn't be completely honest. We'd have to make those decisions in each community. When we look at what's happening there's a - you are right, there's a lot of pressure around year-end closings, there's a lot of inventory that's in - under production right now for year-end closings and I think there are two things going on. I think you've seen an acceleration in cans, so some of that pressure is because there's more inventory than maybe people have planned on because they were building to a pace that then moderated. The good news around it, so far, is that most of what you would say you described as being a little crazy, tends to be following year-end closings. That's a pattern we see every fourth quarter. So yes, has it accelerated a little bit? It has, because people want to be responsible with what they have on a finished inventory going into the new year. So we're holding stead where it makes sense. We have to look at the volume of inventory that we have. We have to look at the volume of inventory the competition has and the run rate of that. So it's a very community, by community decision but as Dave articulated, I still think as we look at the year our incentives will be down for the year.

Probably flattish year-on-year. Yes.

I'm sorry, for the quarter probably more likely.

Yes.

Our next question comes from the line of Jack Micenko of SIG.

This is actually Soham Bhonsle on for Jack this morning. So my first question was on your land pipeline. So you held your land and development spend for the year at the $1.1 billion, even with AV coming on. So should we take that to mean that you're looking to take your pipeline down from the $5.5 billion today or is that just a timing issue for the quarter?

That's as much timing, I think, than anything. We - we're obviously looking at just the land market right now and with the softness that doesn't really change our approach, we believe it's somewhat short-term. We always talk about, we don't necessarily make long-term decisions on short-term market conditions. Some of this is also just digesting the AV transaction. So the $1.1 billion, we think, gives us enough in the pipeline to go forward. We're really - have everything we need for 2019 and this is kind of building more for 2020.

Is there sort of a target that you guys have discussed about with AV just a faster turning product coming on now. Is there a target that you guys have internally?

As far a target on -

Land years, years of land.

Yes, I would be really careful there. As Dave said, we don't even put targets - because we tend to be very opportunistic. Like I would tell you in some markets today we are seeing land deals that we might have lost come back our way. So what happens when sales moderate is the land market changes. What we're not seeing yet is sellers really kind of change their position on the value of what they own. But it would be difficult today for us to put a target on it. You've seen us work our land pipeline down over the last few years because - and you've seen us move the structure of the pipeline as well. So I would rather us look at it that way and say there's some markets we're going to continue to operate a little shorter. I think with their book of business, some of it is these bigger, larger, master plans, active adult, that will be a little larger but that's offset by some of their more first time business which we'll move through quicker. So I don't - it's a long way of saying I don't expect it to be very different than what you've seen with us around the five years but give us a couple of quarters and I think we'll have a greater perspective on that.

Okay, that's fair. And then in terms of funding the acquisition with shares trading where they are today, how are you guys thinking about the mix of cash on hand versus debt and equity? I think on the Q1 call you spoke about a 60/40 cash equity mix.

Yes I mean - well, we finalized all of that and I think that when you look at where the shares traded, it actually ended up being a little bit more like 70/30 when it was all said and done and we have the $80 million converts that were part of the deal. All of those bondholders opted to convert to cash so that component is gone as well.

Okay, and then just quickly on deliveries guidance for the fourth quarter, does that contemplate any impact from the hurricanes in the quarter?

Yes, you know it does. It includes a couple of things. Obviously the recent softness that we're seeing across the industry, that's impacting our ability to sell and close homes in the fourth quarter. And when that softness happens in the back half of the year it's hard to make all of those closings. Weather is also playing a factor in places such as Texas and Florida. We had a tremendous amount of rain in Texas and then obviously hurricanes out East. So, there wasn't any one event I would say that drove it. This is more a culmination of events that did have an impact kind of both the sales side and the production side.

And I might even give it a specific call out because you're right, the current hurricanes had an impact because we were closed for maybe ten days in the Carolinas. But I think the thing that's underappreciated honestly, and it sounds like whining and I don't mean to, is the impact of the hurricanes from last year on labor this year. We've really seen that in Florida specifically, I mean, for example roofers. I mean, having to build houses out of sequence. So, even the lasting effect we actually have had more of a challenge with labor this quarter and last quarter than we did last year post-hurricane.

Our next question comes from the line of Mike Dahl of RBC Capital Markets, your line is open.

Good morning, thanks for taking my questions and also offer my congrats on closing the deal. A couple of questions kind of focused around some of the AV impacts. So the first one, Dave, could you detail kind of what the closings guidance includes for AVHI units in 4Q and then also as you're thinking about kind of the - you gave us the margin that's all in terms of purchase accounting. What's your current expectation as far as the total purchase accounting impact over the next handful of quarters?

So for the fourth quarter it's about 600 units for closings related to AV. That's in our closing guidance. And as far as your second question regarding the PPA, really what we're kind of focused on right now is fourth quarter. We've had them now for 20 days, 29 days inside of the portfolio so we're still doing the fair valuation work and that's going to be wrapped up here in probably the next month or two. So I don't want to get too far out ahead with 2019 quite yet but I'd tell you that the drag that we're seeing in the fourth quarter is going to be the most significant. We'll see a little bit less drag probably in the first quarter and then it starts to really come down in the second quarter and we'll work through it by the end of the third quarter next year.

Got it, okay. And my second question then just following-on, it seems like the AV closings have been pretty light. They had a guide out there early in the year. It looks like they're falling or would have fallen well short of that. I know that may be one reason why there was some back and forth on the deal towards the end but could you just give us a little insight as to how the last few months progressed for AV from an order standpoint and any color you have on kind of what you think the good run rate would be for that business as we're thinking about a contribution for a full year?

Sure, I'd start with - it's hard to get into where the Street was for AV or where there projections were. Obviously they weren't in our portfolio at that time. What I can tell you is that based on our underwriting around the transaction, it's very much in line and you're right, that did lead to some discussion around price and got us to where we ultimately ended up which was around book value. So we're actually comfortable with the way that business has been trending and as we go into the fourth quarter again I would say our expectations are in line with underwriting with maybe the caveat of obviously the softness that the industry has seen, there might be a little bit of kind of delay in timing on some of that and we'll work through that as we will on the legacy side of the business.

And maybe I'll just pile on Michael because I think Dave is right. I mean, from a run rate standpoint this is generally in line with what we thought and once again, as he said on maybe the last few weeks of softness and just what they were going through as the company was being sold. But as we look forward, I'll tell you we're excited about a lot of the assets. There are - and I think we've talked about this pretty openly since the deal was done, you look at Arizona and it's a very strong business, it's a very nice compliment to ours. You look at Florida, same thing, it's a really big business with a nice active adult presence, balanced with a very affordable consumer and once again, we're very excited on what that does for our business in Orlando and then we add Jacksonville. We've got some work to do to get that thing up to scale. The Carolinas put us in a top-5 position in both Charlotte and Raleigh. They needed to, we needed to, work through and they did pretty much before the closing, some of the legacy stuff under Raleigh acquisition but as we look forward we're excited and then Dallas was probably the area where we're having to make the most changes on the land portfolio, the product positioning, really make sure that it's appropriately targeted to the consumer in the right submarket. So some repositioning to do; we've got some opportunities to take some of their product as well. So it will take us, as I said before, a couple of quarters. So I think we'll get a better run rate when we really are able to kind of synthesize the positioning appropriately to the consumer.

But we hit the ground running on Day 1, on October 2. We actually had our teams merge physically in one location. We are now one team. That's at the corporate and at the division level and of course we're going through, right now, our planning process for next year and both sides are very much a part of that. So we're actually excited at where we are right now.

Our next question comes from the line of Nishu Sood of Deutsche Bank.

This is actually Tim Daley on for Nishu, thanks for the time. So I guess quickly, so Sheryl, the last quarter you discussed a repositioning along with some early closeouts which caused a short-term reduction for the community count as well as the guidance for the second half of the year. You kind of just touched on some of these repositioning activities that were, I guess, mentioned last quarter. So as we think about community count growth for the quarter, on the legacy Taylor Morrison basis, has there been any changes in these factors which maybe could reverse some of these short-term reductions and is this also something that you experienced that AV as you were looking at the community mix on the platform during the kind of, I guess, pre-acquisition period?

Yes. No, good question. Maybe I'll start with AV. I would say no not as much on AV because they - we knew what we had there and they - and so from a closeout and opening, they didn't have a lot of new stuff coming to market. I would tell you on the legacy TM, now, they're not a real changing condition because what happened coming into the third quarter is we closed out. As I talked about in the second quarter, we closed out of communities quicker and that was the case a few times in the third quarter, probably not quite as prevalent as it was in the second quarter. When I look at closeouts versus openings. But what I will tell you, unfortunately has stayed consistent is the difficulty in getting communities open. And I wish I could say this was just happening in a market or two but we are really seeing this across the portfolio and I think it's the most difficult thing we have to give you guys is community count guidance. Because I think best intentions, the teams do very good planning, they work with the municipalities but it's tougher and getting stuff out the cities, getting actual - you know, first those maps approved to start. So if there's an area that we very rarely get to pull up its new communities. So even though we close them quicker, our ability to recapture earlier than planned is very difficult. We do our best to hold steady and not see delays in other communities that are expected to open in those quarters.

I really appreciate the detail there. So, I guess on my second question, thinking about kind of the mix of the two businesses as well. So, you had mentioned earlier in the call the kind of varying sensitivity in the recent changes in affordability across the buyer types that are serviced by Taylor Morrison. So, you particularly highlighted that kind of entry level feeling a bit more pain there. So could you kind of give us an update on what the resulting mix is across the new platform in terms of units. So, kind of entry level versus active adult, where that stands?

In the quarter, I would tell you for third quarter it hasn't changed dramatically from prior quarters as far as when we - we've always, I think, historically talked about that third, third and the third. That first time buyer being a third but maybe a more, what we call the professional first time buyer, going forward what will happen is you'll have a change in that first time buyer mix because we will have more affordable first time larger percentage of the portfolio going forward. That move up, I think, comes down just as a result of both ends of the barbells going up from a penetration standpoint, and then one of the things that we've been so excited about with AV is their active adult penetration but they've done it a little differently. We've - our active adult tends to be at a little bit higher price point, a little bit more of a luxury adult buyer where theirs is more affordable. So I think you're going to see the active adult move up slightly; the overall first time move up slightly and the middle will get squeezed.

Our next question comes from the line of Matthew Bouley of Barclays.

I wanted to ask about the full-year sales pace guidance. It just - it seemed to suggest a decline year-over-year in the fourth quarter pro forma, and correct me if I'm wrong there, and obviously you mentioned some caution around your ability to sell and close in 4Q and where there's a part of that. But is there anything related to the integration in there as well or really is this kind of just a market issue as you say?

No, thank you. I'd say it's more market. You know, October isn't what we had hoped. The good news about October is we've seen week-over-week improvement. So we kind of hit what we believe are trough was at the end of September and we're seen it pick up a little bit each week but certainly not at the levels that we're comfortable with. As you move further into the fourth quarter, it's hard to imagine that gets significantly better. So we're still sharing that we'll hit the, our original, guidance for the year despite the softness. Part of that is obviously with the health of AV but I'd say it's more market related than anything else.

Okay, that's helpful. And then just the second question quickly the 20% year-over-year increase in specs. Is there anything that you wanted to call out there? Is that kind of potential strategic changes just kind of around what you're saying is happening or what you're seeing in the market right now or is that really just timing? Anything there?

It's probably more timing than anything. I mean, we're a bit higher overall if you take specs and process and the completed specs. Partially that was trying to have a bit more on the finished spec side. We've talked for the last couple of quarters, we actually think we run maybe a little bit low on a finish spec per community. But obviously with the current environment we're maybe not seeing as many specs sales right now. We talked about some of that impact in the fourth quarter. But we saw this obviously several weeks ago. So probably at the end of August we started to slow new spec starts. So the spec count kind of overall, you'll probably see that even out in the first half of 2019 which gets me to it's really more around timing.

Our next question comes from the line of Jay McCanless of Wedbush Securities.

The first one I wanted to touch on, can you guys give us what the operating data orders, backlog, etc., was for AV at the end of their September quarter?

You bet. So their backlog units were 1024 and the value of that was $350 million. ASP and backlog around $342 million.

Okay. And then do you have what they booked for orders in the quarter?

They were 576 which was a little bit up over their prior year, about 4.5%.

The next question I had, Sheryl, I wanted to touch on what you talked about with land earlier. You said some deals had been coming back to you guys but at the same price you had seen them before. Is that correct and are you seeing any areas where land prices maybe are finally starting to break a little bit.

Yes, very market specific. There's places where it should be breaking and it's not. But what I would tell you is there's some markets where we put in offers and we were probably in second place and we were probably shy but that's okay because we stayed true to our underwriting and low and behold 2, 4, 6 weeks later, they come back and honestly 2, 4, 6 weeks later paces have moderated so our price doesn't hold what it was. So you find yourself negotiating. So it - that would be an extreme example of where I would tell you when the seller has lost the transaction that maybe they're willing to talk with you. Most often what happens is our teams go in, they meet with sellers and try to show them the facts to help them understand. We're pretty transparent about our modeling and showing them how we get to our offers. But if I were to take the most broad statement, quite honestly, we're not seeing - maybe a little bit in terms but very, very reluctant sellers to move on price yet. I don't think we've seen enough. I don't think we've seen pain in the markets to let that happen quite yet.

Got it. And then the last one I had, and apologies if you've already given it, but what was the can rate for the quarter and what was it last year?

The can rate for the quarter was 1407. Last year was 1204. But to Sheryl's comment, we saw the trough on sales at the end of September. We also saw cans kind of peak at that point too. We've seen as sales have picked up the last several weeks, and in October every weeks been better than the previous week. We've also seen the can rate drop.

Our next question is from the line of Ryan Gilbert of BTIG.

It's actually Carl Reichardt on. You literally just got through all my questions except one. Sheryl, can you talk a little bit about what the elastic response has been where in places where you have offered incentives, whatever they may be, is the consumer continuously hesitant, are you seeing them bite when you're offering those incentives? How low do you have to go? Just trying to gauge elasticity as opposed to I guess expectations of further reductions.

Yes, it's so hard to answer that generically because you really have to dive into the detail. I'm not hedging the question I'm just - I'm seeing some places where we haven't had to, you know - I would take a market like Phoenix where I was looking at incentives quarter-over-quarter, house by house. It happens - we haven't had to do anything and then there's other markets where you're absolutely seeing a tick-up in incentives and it could be $2500 and a refrigerator could get somebody off the market and others it could be depending on price point, 10 to 15. We are tending to, like I said earlier, really do that within the mortgage company or tying it to the mortgage company and really work to their mortgage product so we really do use the incentives in a way that best fit the needs of that customer. It's better than just throwing generic dollars at it. It's really understanding what their need is to get to the closing table and almost personalizing the incentive for them.

May I just as a follow-up, would you generalize and say that the elasticity is less prevalent in a market where prices had really run up aggressively like California relative to a market where the supply/demand dynamics are sort of a little more fluid like Texas?

Sure, that would be a fair comment.

Yes, I mean overall I think that's fair. You always have to go even a little bit below the market even in Southern California there's parts of it that continue to do well and there's other parts that are probably a little bit more challenged around affordability. So I don't know if you want to paint necessarily a broad brush around an entire market. It is a little bit community specific.

And it's moving so fast. I mean, you picked on Southern California, people start talking about Southern California slowing down many months ago. Really it's probably been 3, 4 months, I think we've been hearing about it for different reasons. First we heard about the Chinese buyers and we heard about pricing interest rates. We really started seeing it about 4 weeks ago. We changed our strategy in Southern Cal and we went to a more affordable in the inland as well as Irvine and I'm very pleased the team did that 2 or 3 years back. But - so it's so sensitive because four weeks ago I would have had a very different answer and today I'm going to tell you that absolutely sales have slowed down and incentives have picked up.

Our next question comes from the line of Alex Rygiel of B. Riley FBR.

Have you seen any change in consumer appetite for options and/or lot premiums?

Not at all. Usually it's a really good question because - and once again, I mean, some of what I'm sharing is kind of third quarter so those are sales that we would have seen early in the year. But usually the first thing that goes is lot premiums, not necessarily options to be honest because they want what they want in the house. But when I look at percentage of options and backlog and everything it's just not - there's no material movement.

Excellent. And how should we think about makeshift as we look out into 2019? I know you've talked a fair amount about mix it almost sounds like if we just take former Taylor Morrison, probably don't anticipate too much makeshift in 2019, is that a fair conclusion?

Yes, except like I said before, except I think you'll see your first timer pick up, you'll see your active adult pick up and the middle will get squeezed.

Right, on a pro forma basis.

Yes.

Yes. The percentages.

Yes, as we look - as I was looking at 2019. Going back to your other question though jut to make sure I properly answered it. I think as we start to do more work with the more affordable buyer, I do think we'll see more sensitivity on both options and lot premiums. So I think we'll watch that closely and report it out in the coming quarters.

Our next question is from the line of Alex Barron from Housing Research. Alex Barrón: I think I heard you say you were starting to tweak your spec start strat - your spec starts? I was just curious about generally your strategy if the market were to stay long, lower longer than you expect, how that would adjust?

Yes I mean, when we say tweak I guess let's revisit what we did. If you go the last couple of quarters we talked about our finished specs per community being a little bit lower. We thought there was opportunity to increase that by a slight amount. I mean, we're still targeting about one per community and we've been running under that. So, we put a little bit more specs into the ground, again, just a little bit more earlier in the year softening, we just dialed that back to kind of more normal levels. So we're comfortable where it is right now and we think it's going to even out in the first half of next year. Obviously if we see something more prolonged around this current environment, we'll just be mindful about how we're putting specs into the ground. As you know, we're very focused on inventory management and spec is a big component of that.

And Dave, wouldn't you say that some piece of that is also really the mix-shift you spoke of before? That for some reason over the last quarter or two we are seeing people prefer a to-be built.

To-be built.

And so it's making our specs just a little bit longer. So we'll have to see if that continues.

But I tell you, I don't have any real concern over the spec count. We do a really good job of selling the vast majority of them before construction is complete and like I said, if we tick up a little bit, I think it's just going to be a short duration just given the amount of specs we're putting in the ground. Alex Barrón: Got it. And in terms of the nature of incentives that you're offering or what you're finding to be most effective, are you mainly like offering rate buy-downs or are you offering more credits towards design center or are you having to cut prices, like what are you guys finding right now?

It's very, very rare that we actually adjust base prices. You don't do that because of your backlog, you don't do that because of the impact to the community. So, we are certainly not seeing that. I would tell you that - you know, you probably start with options generally but usually it's tied to - a piece of that is tied to the mortgage program but we vary, like I said, a couple of times. We really do work with the customer to understand what their needs are and how to best use those dollars because some really do need the help at closing and some with closing costs and cash. And others don't and they've got the cash but they're very focused on a lower rate. Some are trying to get extended locks because they want us to build the house and not buy a spec and so we'll use those dollars to extend a lock or to buy down points. So, it's really about not locking into one program and being flexible for the consumer.

Thank you. And at this time this does conclude the question and answer session. I would like to turn the conference back over to Sheryl Palmer for any closing remarks.

Thank you all for hanging with us today and joining us on our Q3 call. Have a great day and we'll talk to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may now disconnect. Everyone have a great day.