Good morning and welcome to Taylor Morrison's Third Quarter 2019 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at 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 2019 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. 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'll 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. 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 good morning, everyone. We appreciate you joining us today as we share our results for the third quarter of 2019. It was another successful quarter for Taylor Morrison as we met or exceeded our guidance in each of our key metrics.We finished the quarter with 2,540 net orders, representing a substantial 39% increase compared to the same quarter last year. In mid-September, we released our July and August sales sharing our year-to-year order growth of 30% for the first two months of the quarter, nicely illustrating the buildup of strength that we saw as the quarter progressed with September up more than 60% year-over-year. This growth in sales was driven by strength across all regions as well as all price points. All three of our regions had sales orders up at least 20% led by the east, which was at nearly 64%.Average community count in the third quarter was 346, leading to a sales pace of 2.4 for the quarter. This compares to sales pace of 2.2 in Q3 of 2018 and keeps us on track to achieve an annual sales pace in line or slightly better year-over-year. As we talked about last quarter our performance on sales this year has impacted our community count as we're selling out of communities faster than we anticipated. And do expect that could continue into the fourth quarter.We delivered 2,296 closings, which is 9% higher than our results last year and in line with our guidance for the quarter. This growth was consistent across geographies with all three regions up year-over-year. I believe this was a particularly good result despite being impacted by the Florida hurricane activity and the torrential rains in Houston, resulting in a loss at five or six business days, pushing approximately 50 to 75 closings…

Thanks Sheryl and hello everyone. For the third quarter net income was 67 million, earnings per share was $0.63. Excluding the loss on extinguishment of debt EPS was $0.65 as adjusted. Total revenues were just over 1.1 billion for the quarter, including homebuilding revenues of just under 1.1 billion. Total revenue was up about 7% from the same quarter last year.GAAP home closings gross margin inclusive of capitalized interest, the impact from purchase accounting and the mix impact from AV closings was 18.5%. This rate exceeded our third quarter guidance as we benefited from the efficiencies of scale that Sheryl mentioned.Our margin rate also benefited from some true-ups that we took during the quarter related to vendor rebates and profit participation arrangements. In total these two items positively impacted margin by just over $5 million.Moving to financial services, we generated approximately 23 million in revenue for the quarter and more than 10 million in gross profit. Our mortgage capture rate for the quarter came in at 77% compared to 71% in the same quarter last year.We've been successful in getting the legacy AV operations up to speed on the financial services side, which not only benefits the company's financial performance but also provides greater visibility into our buyer pipeline.SG&A as the percentage of home closings revenue came in at 11.1%. This rate was impacted by the de-leverage from the pushed closings due to weather and timing of certain items. We continue to maintain our annual SG&A guidance in the low 10% range of homebuilding revenue.We also had a $3.6 million charge for a loss on extinguishment of debt related to our refinancing transaction completed in July. As Sheryl mentioned, our EBT margin for the quarter was 8.2% on a reported basis, but 8.5% excluding the debt extinguishment charge.Our effective tax…

Thank you, Dave. Before we move to Q&A, I'd like to take a moment to share a couple of market highlights, some recent consumer segment findings and an update on our new website and brand messaging. Almost all markets have felt good Phoenix continues to lead the pack in a meaningful way. Their consistent performance and growth has been a key part of our success. In Q3 closings were up in the market more than 30% for the fourth consecutive quarter and sales were up more than 20% for the fifth consecutive quarter. The market actually led the company in a number of categories for the quarter, including sales pace, closings and margin rate.Sales pace for the entire company was at more than 9% in the quarter and there were a number of markets that contributed to that. Austin, Sacramento, Orlando, Southwest Florida and Atlanta all had year-over-year sales pace increases in the double digits. Over the last few quarters we have discussed the moderation and pricing challenges we've seen in Dallas. The team here has done a nice job in repositioning some of the legacy AV products that needed to be addressed. And generally, the market feels like it's slowly getting better. As we've seen over the years, markets throughout the country will naturally go through some ebbs and flows and Dallas certainly would have fallen into that category.Markets like Phoenix, Houston and Austin have also seen that over recent years, with each of them recovering nicely. If I were to pick a market that appears to be feeling a bit of pressure at the moment, it would be the Bay. As everyone is aware the market there has experienced an extremely strong run over the last few years, and we've started to see a bit of softness over…

[Operator Instructions] And our first question is from Alan Ratner from Zelman & Associates. Your line is now open.

Hey guys, good morning. Nice quarter.

Thank you, Alan.

Good morning. So my first question, I was hoping you can maybe give us a little bit of a peek into the mindset of the consumer today and the buyer, obviously benefiting a ton from low rates this year, but I feel like there's still this kind of mindset or belief out there that it's still a little bit of a tenuous buyer today and that if rates were to start to creep higher, that you could see a pretty dramatic fall off in demand. And obviously, that's tough to really forecast, but maybe you can kind of just tell us a little bit what you're seeing both from an affordability as well as a confidence standpoint. Maybe in the markets where you're raising prices today, are you seeing any impact to demand? Are you seeing any pullback in order growth? Or do you feel like there's still room to run and that the consumer confidence has rebounded to a point that even if rates were to creep a bit higher that that the market could still remain on solid footing?

Okay, you packed a lot in there, Alan, but let me give it my best shot. I would tell you that we are seeing general strength across our consumers all price points, and I think the consumer is feeling pretty good and like I said in my prepared remarks, I think they have a lot to feel good about. So if I look at the normal indicators, and I look at our foot traffic coming in the doors were up year-over-year on a community basis. If I look at web traffic and engagement on the website, I would share the very same thing. Now, some of that's going to be the rollout of our new website, as I talked about, but honestly that just happened in the last three weeks. So I've seen that pattern through the year. We've increased prices and about 40% of our communities this year albeit slightly more modest increases, but I think that's healthy. The narrative on the sales floor with our sales associates is actually very strong. Some markets you're going to see that manifesting itself through offers. But most it's just engagement and how quick can I find my lot and when are you going to release the new phase of lots. So I don't think the buyer is in a very tenuous state.Now, having said all of that, I would share two things. One is, if we continue to look and test our backlog, we are seeing the same condition that I had spoke about for at least eight to 10 quarters and that our buyers can afford somewhere between 300 and 600 basis points of higher interest rate or a larger house. Having said that, I think we learned a lot in the fourth quarter. And even though our buyers could still afford 300 or 400, 500 basis points, they were paralyzed. There was an emotional reaction, but I don't think it was a 100% the interest rate, I think it was the speed in which that interest rate moved in the prior three months. And along with that and all the other noise that was happening from a macro standpoint that had an impact. As I look forward, I mean, we'll see what the Fed does today. But if the economists are accurate, we're expecting likely another increase today. And probably some posture – I'm seeing a decrease today, thank you, Dave – another decrease today and probably some posturing to let's wait and see, and probably just kind of holding stead between now and the election. And I think you're going to have rates float somewhere in the high threes to the low fours for the foreseeable future. So I think that all bodes well.

I really appreciate that very comprehensive answer. So thank you, Sheryl. Second question, I guess just in this is maybe just a little bit more confirming some of the guidance, but also just get your thoughts on the community count in general. So Dave, I think for to get to the full year 345 average, I mean, you're running close to 360 through the first three quarters, it would seem to imply fourth quarter drops off quite meaningfully maybe down to the 300 switch. I guess I'm curious, how much of that is timing. I mean, how quickly do you think that that can rebound back to the levels you were at when you first closed the AV deal? And I guess more broadly, I mean, how important is community count for you guys to post growth? I mean, when you look at your portfolio today, even if community cap doesn't rebound back to those levels, are you still confident that you can at least kind of maintain market level growth next year?

Yeah, Alan, I'll start maybe with the mechanics of it. For the fourth quarter, our community accounts probably going to be in the low 330s and that'll get us to our annual guidance. And it really is – it's about timing of – when communities are rolling off and coming on in a given quarter, and obviously, the strength of our order success. And maybe just a little bit into next year, I think what you're going to see is a slow ramp in the first half of 2020 and then that ramp will accelerate back towards the second half of the year. But your question's a good one around the importance of community count. I mean, for us, it's going to be both. Obviously, we want to drive community count growth. As you can see in over the last several years, we're very focused on that level of growth, but it's also the efficiency in each one of our communities. So driving the absorption is up. For us I think that some of the great strength in what we're going to drive the leverage that we want in the business as well.

Got it and very helpful, Dave. Yeah, I was a little confused on the community count because I'm just – by plugging into 330 in the fourth quarter, I get closer to 350 for the full year, but maybe I'm looking at it a bit differently than you guys are. But in any case, good luck and thanks for answering my questions.

Thanks, Alan. Have a good one.

Thank you. Our next question is from Jack Micenko from SIG. Your line is now open.

Hey good morning guys. This is actually Sam [ph] on for Jack this morning. So Sheryl, good morning. So Sheryl, you talked a little bit the scale benefits that you guys are realizing today. Could you maybe just spend some time just talking through some of the specifics? Is that more on the labor front? Is that materials? Are you getting better land terms now that you just bigger? And then what could that mean sort of for gross margins going forward?

Yeah, all of the above are very good question. But you see it certainly from the external standpoint of what it does to the land market. I think where we've excelled in the past is we've always felt like we've – through good and bad times, we've retained our relationships in land markets. And so getting that first look and quality of selection is significant. This certainly helps. When you look at the production side, I think we're seeing it there in so many places. We're seeing it in our local purchasing power. We're seeing it in our ability to partner with our trade and give them visibility of the schedules for months to come. It allows them to bring the crews on site and keep them there. When I look at the regional and national purchasing power, the teams have done a tremendous job, which is why we're able to take up some of our synergies in the last quarter call. And then you see it on the internal SG&A, it just gives you greater efficiency because so much of that fixed cost benefits from those added unit in every community. So we will continue to focus on scale in every market, certainly the AV transaction made a huge mark on the organization.

Great and then Dave just on gross margin, the true up this quarter looks like it's about 40 basis points on the margin. Do you think you guys are through that now with the negotiations or is there more to be had there?

No, we're through it. I think x that – the 40 basis points, that's kind of where we've been running from a margin perspective for most of the year. And we're taken that into consideration and will be somewhere similar in Q4.

Got it, thank you.

Thank you. Our next question is from Michael Rehaut from JP Morgan. Your line is now open.

Thanks, good morning everyone. So I just wanted to circle back on an earlier question around the community count and I appreciate, Dave, the thoughts around 4Q that was helpful. But as – if I heard you alright as well, you're talking about growing from that low 30 space a little bit in the first half of the year and then maybe a little bit more of a pickup in the second half. And so in that type of backdrop, should we – how should we be thinking about overall growth for the year. I mean, obviously, it's a little premature for 2020 guidance, but just directionally would be helpful. It would seem like barring any major shifts in sales pace, your order growth might be down double digits in the first half of the year. And then depending on community count in the back half the second half might be a different story. That was the right way to think about it just from a modeling perspective.

Yeah, I mean, some of this Michael's going to be obviously timing of when they come on, but I would expect overall for our growth to be probably aligned with industry expectations, which are probably kind of mid-single digits. From an order growth perspective I think we have to look at the compare in the first quarter of what will be 2020 over the 2019. As you remember, we got off to a slower start; the industry did in the first quarter, spring selling season started a little bit later, so I think we'll need to take that into consideration. But all that said, and we're focused on growing orders, year-over-year into 2020. It is a little early for us to give guidance. We're in that process right now. But we'll come out with more details on that in the fourth quarter call.

And I agree with what you said, Dave. It's going to really be a strong combination of community camp growth and pace improvement as we've seen all the way through this year. I think what gives us a lot of excitement is when we look at some of the communities that are under development today and what we expect to – how we expect them to perform early in the year when they open and I think it gives us great confidence on our paces looking forward. A lot of them are going to be both in that entry first time buyer segment as well as the 55 plus buyers so it's right in our sweet spot.

Okay, I appreciate that. I guess also, I was hoping to delve in a little bit to the very strong September that you had. Obviously, builders stopped reporting monthly orders long time ago for a good reason. But at the same point, I was curious if there were any specific drivers, perhaps from a community count opening perspective or certain markets that really pushed that September to be so strong relative to the first two months of the year. And if you're thinking about – if you're seeing that type of stronger sales pace continues into the fourth quarter.

Yeah, Michael, we're quite excited about the consistent sales pace that we saw July through September. I mean, the orders were pretty consistent as we made it through the quarter, which normally you begin to see them drop off and even more excited and what we're seeing in the first 20 – what's today is that 30 or the first 29 days of October. We're right on track with where we were in September, somewhere around that two, four pace, which is about 50% higher than our pace for the whole fourth quarter last year. I don't think it’s one thing. I think it's the quality of the communities. I think it's the marketing message, new energy around our website. I think the sales teams are doing a really nice job. We have good inventory on the ground, as Dave talked about in his prepared remarks and the consumer's feeling good. So I don't think it's just one silver bullet.

And I had one more thing, just the integration of the legacy AV communities, those are all fully integrated up and running and we're maximizing those as well.

That's great. And one last one if I could sneak in, Dave, did I here you right that you're expecting a gross margin, x the true up benefit in the fourth quarter similar the third quarter, in other words, like a low 18%, 18, one-ish, something like that.

That's right, yeah, low 18.

Okay, perfect. Thank you.

Thank you. Our next question is from Carl Reichardt from BTIG. Your line is now open.

Good morning everyone. A couple of little ones just – one, can you Dave talk just about what the certain items were in the SG&A? And then can you also just chat a little bit about California and the power outages? And obviously, you've got a lot in San Jose, which wasn't really impacted, but some others, just what can we expect in terms of delays in pedal stone installations or sales traffic, just curious about that living through it myself?

Sure, yes. I'll start with the SG&A Carl. So on one side of it is timing related to the closing. As you recall, we kind of pulled some closings forward in Q2, just with a strong spec sale environment and we did shift some out from Q3 to Q4 just some of the weather that Sheryl mentioned. And then from more the expense standpoint, there's a couple of things in there. Probably the biggest ones were the accelerated model amortization. And that is tied directly to our order strength, so we're selling through the communities faster, which is increasing the amortization because we're closing out the communities. So instead of taking one quarter for the amortization, we could be taking two to three quarters worth as we're selling it out faster than we anticipated. And then there's just some other general timing things. Some of it was also for us some of the website work that we did, so some of that gets capitalized, but some of that gets expensive as well. But we do feel like it is timing. That's why we're holding our annual guidance to the low 10%. We're still seeing for the year that increased scale from AV that's going to help us drive the leverage. And ultimately, the strength of deliveries for the fourth quarter will drive the amount of leverage that we see.

On the California fires, I don't think we know yet to be completely honest. I mean my first concern is our team members and that they're all safe. And we have a great kind of crisis management to keep in touch with everyone. So once we understand how long these are with us, I think we can assume it's going to impact if this is like any of the others we've seen in the past. We can assume it's going to have some impact on the trade. It's going to definitely have the greatest impact on the utility companies. But I can't articulate that yet. We have to get to the other side of it. Very similar to what we saw. Not very similar, a little different than what we saw in Texas this year where we lost about five days. Thank goodness the storm never really materialized the way we had thought, not in Texas really more in this range really more in Florida. But you still have to go through all the emotions. And those emotions cost us a few days. I'm hoping we don't have any sites in danger, so I don't see any massive changes. So if we have any impacts it will be timing, but it's just a little too early to know.

Alright, thanks.

I hope everything's okay with your property Carl and family?

We're fine property wise just the powers, power has been an issue for a lot of folks out here.

I know that we have a lot of team members that have already been displaced and have no power and some that have actually been evacuated. But I don't know how long it goes on yet.

Fair enough. Thank you and then just one big picture question for you Sheryl. So as you look at let's call it your pre-tax margin or your EBITDA margin and where you'd like it to go long-term as you think about balancing price and pace. Really strong paces, margins are not quite where some in the rest of the industry are. So what is the sort of the long-term strategy let's say to get your pre-tax up to say maybe a double digit? Is that something that's sort of in your sights? And how will you get there if it is?

Of course it is. So our expectation is if you kind of look at this business over time, Carl, you know quite well that we should expect to see something in well over 10%. And so all the steps that we've been taking for the last few years in growing the business, these are a long-term strategy to put the business in the right place. So it's not one specific strategy. It really is directed through the scale across the entire business and in each of our markets to gain the efficiencies that I can talk. There's going to be a lot of tactics that we'll deploy to get there and that's everything from the way we buy our land to our pricing strategy to really kind of pivoting toward pace. Certainly the innovation and the way we're looking at building sciences and some of the long-term opportunities there. We're already starting to see tremendous innovation on the mortgage side. Each of these is going to have a role to driving our pre-tax to that 10 plus percent rate.

Thanks, Sheryl. Thanks, David.

Thank you.

Thank you. Our next question is from Paul Przybylski from Wells Fargo. Your line is now open.

Thank you. Good quarter. First off, I was wondering if you could give us some color on active adult demand and how you see that consumer shaping up with their upcoming selling season given the economic and political backdrop.

Yeah, I would tell you that the kind of shoulder season that we're just stepping into gives me confidence when I look at Florida, which where we really say that the largest piece of our active adult business today, they're doing well. It's also it's interesting when you kind of dissect the numbers, Florida is a place where I would say the larger builders look for the greatest volume. And so we tend to see in the early fall going into the kind of year and closing depending what your year end is, we tend to see the most aggressive incentives in Florida than I really do anywhere else. But it's a place where we really do drive volume. And so far, the consumers like I said feel pretty good across all segments, including active adult.As far as the political backdrop, I think back to the last campaign year and I can't imagine this one plays out any differently as far as just the media noise. I think at some level it becomes a white noise for the consumer. I don't know that it can get any – could be much worse than it was for three years ago. So I think as long as the consumer is feeling good about their own personal situation, their ability to sell their house, I expect to have a nice shoulder and certainly leading into a strong spring selling. Specifically to the company, we have some important new openings early next year in Southwest Florida that I think are going to own a deal for overall impact to the spring selling.

Okay. And I was recently in Orlando and it seemed to me like some of your AV communities were making a concerted effort to introduce some new products and drive down the selling price and move to a package type design program, is that going to be a nationwide strategy? And what impact do you expect that to have on maybe some volumes in the near margin as you move forward with that?

Yeah, I think you have to – we look at this consumer segment by consumer, so we absolutely have a national kind of approach to it, but it's not universal it's not one size fits all. So at the more affordable segment, we absolutely are looking at more packages. When I look at what's happened in Orlando, between the AV, the repositioning of the product, the simplification, our paces are up well over 50% there. And so I think it really played into it. We're quite delighted with where that Orlando business is going and it's a really nice combination of the entry level primarily the AV business, the active adult entry level complemented with kind of that more traditional active adult. So it's a little bit of everything. Like I said, probably a third of that business, I really think they're trying to simplify. But we're also seeing those efforts across the business. But I think it's really important that we understand the consumer in each sub market and not go with a one size fits all. I think that's what folks get in trouble.

Okay, appreciate it. Thank you very much.

Thank you.

Thank you. Our next question is from Jay McCanless from Wedbush. Your line is now open.

Hey, good morning and I want to thank for taking my questions. The first one Sheryl on the 40% communities where you're raising prices, how does that split out between legacy Taylor Morrison versus the communities you acquired?

Jay, we don't look at it that way because they're all Taylor Morrison communities today. What we do look at is kind of new opening communities, closed out communities to see where we're seeing quarter-over-quarter, year-over-year, like house by house price increases. And I would tell you, it's across the board. We're seeing it in all consumer sets, which would imply that a good percentage of the AV communities would also see in some of those increases. And I think as I might have already said earlier. If I didn’t, I apologize. The increases are a little bit more modest. But I think that's actually pretty healthy. But if I look down literally every product, every home in our portfolio year-over-year, it's really across the board. I'm seeing it in first time communities, first time buyer communities, I'm seeing and in 50 plus, I'm actually seeing it in some of our luxury communities as well. If there's a place I'm probably not seeing pricing power, it's in the close outs. We'd be trying to move through those and we're definitely seeing in new communities where we have a very strategic kind of ramp up of pricing. So to me, that's good news. It's not – we're not seeing strength in one consumer group, but really across the portfolio.

Thank you. My second question, in the prepared comments on the build-to-rent business, you talked about $25 million, I believe similar to the fourth quarter. Is that just some expense we should build in for the rollout of that project?

That's part of our L&D spend, Jay, so of the 1.2 billion that we forecasted, we're just letting you know that 25 million of that is being directed to build-to-rent. So it would just be land and development spend likelihood in any other community.

And won't be till sometime second quarter, let's call it next year that you'll begin to see some of the vertical construction. So like Dave said, it's really L&D and then you'll start to see us go vertical next year and then be introducing new market as well next year.

Okay, that sounds great, thanks for taking my question.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Sheryl for closing remarks.

Thank you all for joining us today to share our Q3 results. I appreciate everyone's time and look forward to speaking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.