Hello, everyone, Good morning, and welcome to Taylor Morrison's First Quarter 2023 Earnings Conference Call. Currently, all participants are in listen mode only. Later, we will conduct a 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 MacKenzie Aron, Vice President of Investor Relations. Please go [technical difficulty]

Thank you. And good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. 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 SEC and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now, I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Thank you, Mackenzie, and good morning everyone. Joining me is Lou Steffens, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. Also with us is Curt VanHyfte, our West Area President. And as you may have seen in this morning's earning release, Lou will be stepping down from his CFO responsibilities in order to attend to family matters that require him to relocate out of Arizona. While this move precludes him from continuing with the demanding requirements of the CFO position, Lou will remain an important member of our leadership team as he shifts into the role of EVP of Strategic and Operational Initiatives, where he will drive our continuous focus on enhanced processes and performance. In his place, Curt will step into the role of interim CFO effective this Monday, May 1. Curt currently oversees our West Region, and has nearly 30 years of homebuilding experience, as both a finance leader and field operator from roles in corporate finance and as a division and regional president for several national homebuilders, an ideal background that maintains the strong operational and finance cohesion that we specifically look for and have benefited from under Lou's tenure. At the same time, we are commencing a search for a permanent successor, we are incredibly grateful and confident in Curt's willingness and ability to lead our finance teams. We are also thankful for Lou's meaningful contributions as CFO during his time in Arizona and look forward to his continued leadership while most importantly wishing his family all the best. Now let's dive into our call. As always, I will share our quarterly highlights and update on the market and our strategic priorities. After my remarks, Erik will discuss our land portfolio and investment approach, while Lou will review our financial results and…

Thanks, Sheryl. And good morning, everyone. I will share an update on our attractive land bank and our disciplined investment approach, which remains highly opportunistic. Last year, we quickly moderated our land spend and its housing market conditions began to turn, sharpening our already stringent approach to underwriting and capital allocation. With a strong pipeline of lots already owned and controlled, we were in the fortunate position of being able to reduce our pace of investment while still maintaining strong market positioning. Today, with housing showing some signs of stabilization but the macroeconomic outlook remaining highly uncertain, we continue to be prudent and patient in our investment decisions. This includes re-underwriting every phase of land development, lot tank down and deal closing to ensure each dollar invested continues to reflect market conditions and our stress-tested return thresholds. In the first quarter, we spent $321 million on homebuilding land acquisition and development, of which 68% was development related. This was down from $394 million in the first quarter of 2022, when just over 50% of spend was dedicated to development. Also of note, we incurred a modest $1 million in walkaway expenses, related to deals that no longer met our requirements during the quarter. As we look ahead, we have significant financial flexibility to take advantage of market opportunities. At this time, we continue to expect our total land spend this year to be similar to 2022 at around $1.6 billion, driven mainly by development although our ultimate investment will be dependent on market conditions and deal flow. At quarter end, we owned and controlled approximately 73,000 homebuilding lots, this represented 5.9 years of total supply. With 42% of these lots controlled via options and other off-balance-sheet structures. Our supply of owned lots was just 3.4 years. Each of these metrics remained within our targeted ranges. When underwriting new deals, we evaluate cost of capital, risk mitigation and expected returns to determine the optimal financing structure for each project driving a balanced portfolio that we believe optimizes long-term performance. Overall, we remain pleased with the composition and basis of our well-underwritten capital-efficient lot portfolio that is concentrated in prime core submarkets. Approximately 55% of our own lot supply was negotiated in 2020 or earlier, providing an attractive historic cost basis that we expect will enhance our relative gross margin profile going forward. With that, I will turn the call to Lou.

Thanks, Erik. And good morning, everyone. I will review our financial results and provide detailed guidance for the second quarter and introduce our expanded outlook for the full year. Before I dive in, I'll first address this morning's announcement. I'm incredibly grateful for Sheryl and the Board's understanding as I transition into this new role, which provides me with the flexibility I need to address personal family matters. The team at Taylor Morrison has been my extended family for the last 16 years, and I'm deeply committed to our continued success. By focusing on our strategic and operational initiatives, I will remain engaged in the areas of the business where we can continue to have a significant opportunity to further capitalize on enhanced scale and integration successes. I will also closely support Curt and know he will be a terrific leader and advocate for our teams in the CFO seat. Thank you all for your understanding and your support of Taylor Morrison. With that, let's turn to the exceptional performance our teams delivered in the first quarter. We generated $1.74 of earnings per diluted share. Compared to the first quarter of 2022, this was up 21% driven primarily by improvement in our home closings gross margin, greater financial services profitability and a 10% lower diluted share count. We delivered 2,541 homes at an average closing price of $635,000, which generated home closings revenue of $1.6 billion. Compared to our guidance, closings benefited from greater spec homes sold and closed during the quarter, while the average sales price was as expected. During the quarter, we accelerated our starts volume to approximately 2,500 homes, given the improvement in sales activity and our focus on rebuilding inventory levels to maintain approximately one finished spec home per community. This equal 2.6 starts per community…

Thank you, Lou. Before ending today's call, I want to briefly elaborate on one of the critical long-term trends driving our focus as an organization. In 2022, ethnically diverse consumers increased to 61% of our homebuyers from just 45% in 2020, a significant shift that we expect will continue to evolve as younger, more racially diverse cohorts enter the prime homebuying years. With multicultural population growth reshaping homebuying demographics, we are responding to the needs of these communities with our land strategy and by incorporating diverse design principles increased pricing and sales transparency and functional and esthetic preferences of our growth audiences. I shared more of our focus on these important shifts in my recent shareholder letter, which you can find on our website and look forward to continuing to update you on our evolving strategy to thoughtfully cater to our consumer base. In closing, I'd like to thank our Taylor Morrison team for another impressive quarter. The team is second to none and I'm so appreciative of their teamwork and commitment. Thank you all. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

[Operator Instructions] Our first question comes from Truman Patterson from Wolfe Research. Truman, your line is now open. Please go ahead.

Good morning. Actually, this is a Paul Przybylski. I guess the first question, what percent of your communities have seen pricing come off the bottom? And then what percent of your communities would you actually be seeing incremental incentives and what markets were those really be in?

As far the number of -- good. As far as the number of communities that we've seen adjustments, and I would say those adjustments would be both pricing adjustments as well as a reduction in incentives. It's just about -- just over 50% of our communities. And the second question, I missed part of what you said, do you mind repeating?

Yes, I guess, what markets are you seeing continuing to see incremental incentives?

Incremental incentives. So when I look across the organization, probably the place that we've seen the greatest incentives have been Portland, Houston earlier in the quarter, Denver earlier in the quarter. I would tell you besides that, we have seen strength across really the rest of the portfolio. When I look at our sales in the quarter, we saw Charlotte, Tampa [technical difficulty] up year-over-year in sales. Dallas had its best quarter within two years and we've seen some nice recovery from places like Austin and Phoenix that I think you know we're fairly stressed last year.

Okay. I appreciate the spec build-to-order margin color. Is that in any way being colored by, let's call it, second half of last year cancellations or -- of customize homes that you may have to be discounting more than you would a normal spec and so just kind of a temporary differential.

No, I don't think so, Paul. In fact, I would tell you that we are returning to what I would say the old norms. I mean 20 -- late 2021, early 2022, I think that was the exception and that was really because we continue to see, as you know, back then something like 1% a month price appreciation and builders were holding back sales until those homes were next to complete, where the to-be-built homes didn't get the benefit of that price appreciation because they may have been in backlog eight to 12 months. They also, unfortunately, got the added cost. But interestingly in that, if I look at Q1, Paul, our to-be-built margins were up about 480 basis points year-over-year and our quick closings were down over 500, that's more of the historic norm.

Okay. And finally, demand is obviously better than expected in the first quarter. But what are you hearing from the field for buyers that are qualified, what is actually keeping them on the sideline for our prospects, I should say?

You know, it's interesting, I would say that there is -- the consumers are behaving a little different across the country, Paul. In one of our markets, coupled with -- actually a couple of our markets, we heard the narrative from the field that as builders were getting more aggressive with pricing and discounts, it actually is an unsettling feeling for the consumer, because when buyers believe that prices are continuing to drop, there is not a strong motivation to jump in. I think we saw the same thing with interest rates. I think part of the continued momentum we've seen that we aren't seeing continuing price deterioration, interest rates have settled. And I think we're actually in many places viewing that as a sales tool to [technical difficulty] consumers recognize that next weekend we might be raising prices. So when I look at cancellations compared to sales, it's really around financial capacity or ability and most of our cancellations have been on the first-time buyer side. So not real different than what -- to answer your question on what's stopping them on the sidelines. But once again, I think the demand to the momentum that we saw and you look at our gross sales up year-over-year, I think it gives you the confidence of how we've really seen those folks return off the sidelines.

Our next question comes from Carl Reichardt from BTIG. Carl, your line is now open. Please go ahead.

Thanks. Good morning, everybody. Lou, best of luck in your new role too. So Sheryl, following with Paul's question, I think -- You're welcome. So the narrative out there for a while has been, oh gosh, move up customers their rate locked, they're likely to stay in their spot but you're seeing a substantial improvement there. So I'm curious, what are you hearing or thinking about the narrative that rate lock is keeping people out? And then have you started to see a change in buyers? We saw lots of in-migration state-to-state post-COVID, are we starting to see more local customers now stay within their markets and move up? And so I'm just, I'm interested in how the move-up world is working so well in the face of the narratives that we've all been chatting about for a couple of years.

It's such an important topic. I appreciate the question, Carl. You're right. The narrative has been something like 85% of the mortgages across the country are sitting there with a rate less than 5%. And so where rates have been, certainly the back half of last year where they were at some point actually got to 8%. Along with what has happened on the pricing appreciation side, that was a tough touch. Now that rates have settled and I know we've seen some movement week over week, but now that rates have settled, I would say in that low 6% range. The ability for our consumers have locked down their rate to something that is more consistent with what they've had, I think it's very different than what we saw last year. Another stat that I think is just so interesting is that when we look at our current backlog, 45% of them own a home today and are buying a new one. The number of folks that actually owned a home, but are probably already sold their home and sitting waiting for their next home to be complete is probably significantly higher than that. And at that 45%, probably 65% or so we'll be listing and closing on their home before they buy the new one, and 30% to 40% of those folks will retain the option of keeping that home maybe using it as a rental before purchasing. So I think because of where rates have settled, a lot of that narrative is honestly going away.

And maybe, Sheryl, just on the migration point, from a macro point and then a micro point. Carl, if you look at the -- we like our footprint a lot. So as you think about migration happening across the country in terms of states, Florida right now, as I understand, is the winner capturing over $400,000 of kind of in-migration, Texas of $350,000, North Carolina over $100,000, over $100,000 and Arizona at about $100,000. So I think that's kind of a micro point -- from a macro point. From a micro-point, if you look at a market like Naples, in which we operate, you know surveying a lot of age-targeted buyers, about 56% of our buyers that are coming from out of state. So, kind of, if you think about that consumer group and then you think about [technical difficulty] consumer group in Sacramento, for example, in California, 96% of those buyers are coming from in-state. And so kind of a similar consumer but a terribly different migratory pattern.

So the post-COVID in migration activity has waned, but the traditional in-migration activity that we've historically seen in this business continues. I guess that's the best way to summarize that.

Okay. Thank you. And then the second question is on community count. So post the land deal community count, I think it's way below a little bit, but generally been relatively flat and sell-through is part of that. But I'm curious when you look at your land portfolio now, when you would expect the community count to begin to ramp more meaningfully if it's not going to be '23, it's 24 more an inflection year or is there something we should -- we'll wait for longer? Thanks.

Yes, good question, Carl. And maybe a couple of things affecting our outlets post William Lyon and some strategic initiatives. One we've talked about the last few quarters that Texas is in the middle of a strategic change, where we had a large percentage of our outlets that were enhanced plans on the same lot size as many other builders. So slowly, they've been reducing our exposure to those master plans and have more wholly owned communities that drive a little bit higher pace. So that transition has impacted negatively our outlets a bit. We've talked also about especially when Q4, we had the tougher sales environment, our teams have made a shift to open our communities when models and entrances are complete. And then probably a handful of outlets later this year that we had expected are being impacted by our Q3 and Q4 walkaways, but we are still pleased with the land portfolio having the 73,000 lot, currently that we own and control will provide us an opportunity for future outlet growth. It's just, I'd say a bit of timing based on some of those items I mentioned. And then maybe lastly, a small amount. The weather we've seen in California and then the hurricanes in Florida have delayed some of our more recent outlets opening due to transformers and other things that have been delayed.

So I guess in total, Lou, I mean, obviously, we had planned on some more growth this year. But given all those factors, some of that got pushed into next year. So the simple answer, Carl, if you'll start to see a ramp-up as we move through next year that this year we'll probably -- and the sales, like you said, we've also sold through a number of more communities than we had anticipated. But you'll start to see that ramp up as we move into next year.

I know all about the weather in California. I appreciate it all. Thanks so much.

Thanks, Carl.

Our next question is from Mike Rehaut from JPMorgan. Mike, your line is now open. Please go ahead.

Hi, good morning. Doug Wardlaw on for Mike. To the extent that demand continues on its trend, how does your land strategy change? And also in the event that the macro environment stabilizes and demand stays robust going into 2024. Do you anticipate a material change in your land strategy long term?

Yes, It's a good question, Doug. And maybe just as a reminder, we have been investing prudently. We continue to invest, as Lou suggested, we've got 73,000 lots, 5.9 years. So we feel real good about where we sit today and we've used the word opportunistic quite a bit in the last number of quarters. But to your point, I think as the environment stabilizes, we will be looking to lean in a bit more. We're really focused on where we can add positions that are accretive to the near-term community count growth. So I do think, to your point, as things continue to stabilize, as our confidence grows and as the crystal ball gets a little clearer, we will start leaning in a bit more.

Got it. Great. And then I guess switching gears a little bit, I guess kind of going back to the incentive pricing question. Your strategy moving forward again in the event that demand stays where it is and there's not a drop off at any point throughout the year. In some of the areas where there is more so increase incentives or more base price cuts, how are you guys planning to approach that as you're going to be a community-by-community basis, or just kind of a national strategy there? And then in addition to that, regionally has demand kind of surprised you anywhere, I guess recovery wise based on kind of like the levels we've seen recently?

Yes. I would tell you that on the pricing side, those decisions really do need to happen locally because you really have to understand the competitive environment and supply environment. But I think as we've also shared price cuts become our last strategic resorts because we are able to help the consumers in such a greater way by putting those dollars towards finance incentives. And I think about 88% of our closings in the first quarter had assistance with discount points to help them get to that closing table. And the ratio as you know 3:4:1 so it's very meaningful, absolutely where some markets late last year that we had to do some repricing, but I'd say today that is actually not one of the tools we're using too often. And the second part of the question is, where we're seeing greater strength? Is that correct?

Also, areas where there's been a strong recovery from kind of the bottom as we've seen towards the end of 2022.

Yes. I would really point to Phoenix and Austin, probably because they ramped up the fastest and the most on the pricing curve. In Austin, the growth continue to be really quite strong, but with cans continue to be a little higher than I would say the company average. In Phoenix, the growth on the net, we're seeing that pull through and we're also seeing pricing strength. Florida continues to be strong, maybe the other call out of Charlotte. We've seen great strength in Charlotte, pace -- one of the leading. And on the very last one, I would say it's been a little surprising is the Bay, one of our strongest paces in the country in the first quarter. So almost across the board, I mean, you're seeing some in pockets across most of our markets.

I don't know how you feel Sheryl, but one of the nice surprises there was a lot of concern last year about excess inventory getting absorbed and [technical difficulty] done job absorbing that I think going back to showing the demographics and being underserved -- under-supplied in the industry.

No, I think that's key because we didn't -- we haven't -- we were quite worried I think on the new home.

Yes.

Right? Because of what was happening with cancellations and the amount of starts and we certainly haven't seen it on the resale market. So we continue to be --

Nice tailwind.

Yes.

Our next question comes from Alan Ratner from Zelman and Associates. Alan, your line is now open. Please go ahead.

Good morning. Thanks as always for all the great information so far. I thought the spec to-be-built commentary and margins, it was really interesting. And I just wanted to dig into that a little bit more, because your guidance on margin for the remainder of the year implies a bit of a drift lower. And I think you kind of alluded to, that's more of a mix impact from higher spec closings. But I'm just curious if you could kind of detail specifically what's embedded in that guidance as far as pricing and costs, specifically?

Yes. Really good question, Alan, good morning. I would tell you a couple of things. One, we still have a lot of our strong backlog closed or sold earlier last year, that is starting to come down. As we've increased our spec percentage, you'll see more of those coming through in the latter part of the year that generally are a little bit lower price where we've had very strong to-be-built home sales in the last couple of quarters. Those generally have a little bit longer cycle time. So you'll see some of those benefits through the remainder of the year, but they're generally taking a little bit longer than the average spec that we build. So we're starting to see some of those already after we start them as to-be-built moving into early next year, which will give us some pricing strength starting at the beginning of next year. And so I'd really wrap it all up that some of this is going to come down to what we see with cycle times for the remainder of the year. We had our calls with our teams last week. And generally overall, very positive. But so far, we've just seen from days to a couple of weeks on the front end, not seeing that still come through the back end, but you'd expect after a couple of quarters of lower starts in the industry that, that will give us some opportunities later in the year, which we're not counting on. So if we can pull some of that higher margin backlog into this year, we may have some opportunities but we're not counting on that today.

Got it. But just on that point, you're not embedding any additional incentives or anything needed to move those specs or any meaningful cost changes. It's really just kind of flowing through the current environment, and any upside or downside is going to be more timing related to the cycle times?

A little [technical difficulty] on the units that we sold in the middle of last or early last year. It's probably a little bit embedded.

Yes, there's probably a little bit. But that was the nice thing this quarter on our order revenues. We didn't have the noise that we've had the last couple of quarters, because we haven't had to go back to previous backlog and discount as much to get them to the finish line. So that to me is a sign of strength of the market improving. So from that standpoint, we've been very pleased. And I'd say the rest of it, the specs, we're showing what we think we need to sell them today. So if the market continues to firm up we hope there's opportunities there.

Yes. And then I think on the interest rate question, on the cost side of the interest rate, Alan. It's just not costing us as much as it was a couple of quarters ago to help customers get their mortgage in place. So we have to see if we maintain that spread. So there's probably -- I think we've assumed lower and not going back to where we were, but we did have to see what happens to interest rates.

Got it. That's helpful. And on a similar note, I just want to make sure I'm understanding the strategy correctly here. So you as well as a lot of other builders last year ramped your spec starts and I think that strategy is paying dividends here just based on how type of resale market is and kind of where the demand has trended. Your 60% specs right now which is higher than you've historically been, it sounds like you're seeing improving demand on to-be-built and the margin differential is returning to historical norms. So as you think about your start pace here going forward, are you replacing spec starts at the pace you're selling through them or are you looking to over the course of this year, get back to a more historical mix of to-be-development spec, which I would imagine would require starting fewer spec homes?

Yes, I would say definitely want to replace our specs as we sell them. I think in the last couple of quarters, we've said we wanted to get our starts back to our sales pace. This quarter was a little bit short at the 2.6%, but part of that is, as you mentioned that we've sold a few more to-be-built, we went up from 500 basis points on our to-be-built sales this quarter from Q4. So it takes a little bit longer from the sale to start up those. Although, we have also made pretty significant progress in reducing our sale to start times as more of our homes go through our Canvas program. So overall, I think that we're still in the ramp-up process of getting a few more starts in the ground than we've been tracking but we still like specs, it's been a good balance for us more recently.

Yes, I think the key for us Alan, is going to be aligning our specs to consumer demand. I mean I know that sounds so obvious, but we're seeing the majority of that demand at the first time buyer, interesting as we're looking for some of the research for the quarter. One in four of our shoppers said they would prefer a spec, that they can be motivated by a spec at a high percentage. So I think the macro environment is to continue to impact our strategy. Obviously, if we can have to-be-built where we're getting that kind of margin enhancement, we're going to do that. But having said that, even though kind of historically something like 7% to 10% of our consumers bought a spec due to incentives. Today, that number is closer to 40% because of the environment we've been operating in. But like Lou said, we're going to continue to start specs as we replace them. But at the same time, we want to ramp up our production and continue to grow our to-be-built business.

Maybe just worth mentioning, I think our teams have made huge strides in trying to improve our closing cadence. And having those specs available has really helped though. Based on our guidance, we hope to have close to half of our year closed in the first half, which is the best we've done since before 2000 and it really helps from a -- from our trade base perspective in terms of having visibility and consistency.

Our next question comes from Matthew Bouley from Barclays. Matthew, your line is now open. Please go ahead.

Good morning. You have Elizabeth on for Matt today. I know that rate lock-ins have been a focus for your incentive strategy. Is that still what people are the most responsive to? Or are there any other types of incentives that have been getting people over the finish line? And generally, is there a clearing rate or a specific number that -- of interest rate where you're seeing people if they're particular -- particularly responsive to it?

Yes. Good questions. I would say the buy-downs are absolutely the preference for most of our buyers across the country. Second, certainly for our active adult buyers, Elizabeth, would be -- maybe option incentives, where some of those buyers tend to use more cash or take smaller loans or don't plan on holding them as long. As far as the clearing price, I think that's actually the best part of the news. As the consumer has really adjusted to this new rate environment, they no longer believe that rates are going to return to 3% or 4%. And when you look at our note rate for the quarter, I think it was something around 5.5%, and that's generally where I think the consumer has gotten quite comfortable. We were at 5.65% for Q1, which was a little, I think a few basis points lower than Q4.

Thank you. And then kind of switching over to the construction cycle. I know that you mentioned that there is still some pain points in the back end. I was wondering if you could maybe dig in on that a little bit and touch on if there are any construction costs that you're seeing maybe they're a little bit more resilient or if you're seeing any declines?

Yes. No problem, Elizabeth. Good question. We definitely, this quarter, we've seen some stabilization in our costs, as we've talked about the last several quarters. Lumber is finally starting to come through the P&L in the first quarter and then throughout the remainder of this year. So our costs, like I said, probably down just slightly on a square foot basis, probably the pressure points we've seen more recently on the concrete side especially where we see large commercial volumes in our markets. Concrete has gone up a bit. And then more specifically to going back to Florida with the hurricanes as there is a lot of insurance where we see our teams in Florida having to pay some premiums to get drywall completed in several of their jobs. But otherwise, I'd say pretty stable and we've seen some small opportunities on the front end, but with the ramp-up and starts again probably not as optimistic as we had been when the starts have been lower for a while.

And you know what I'm going to jump back-in because I neglected and I should have especially since we've been talking about our to-be-built, I'm going back to your first question, Elizabeth. One of the other programs that we introduced early this year is our by-lock six-year. So it's a 12-month lock for our customers that are doing to-be-built homes and that has continued to increase in its overall demand. And I think it's just giving folks confidence that they can lock in by today and know what the rate is going to be 12 months from now.

Our next question comes from Jay McCanless from Wedbush. Jay, your line is now open. Please go ahead.

Hi, good morning, everyone. Just -- one of your competitors yesterday characterized their backlogs, the people in it now are comfortable with this new rate environment. I think based on a couple of answers that you've given that it sounds like their backlogs in the same position, but any color you could provide there and how much more potentially you might have to maybe from a percentage terms have to do some discounting to get people across the fence?

No. I would agree with that completely. We're seeing that the consumer really is getting very comfortable in that 5.5% range. I think we have some very strategic low 5% or 4.99% money that we very rarely use. But I would say generally the customer is locking somewhere between 5.25%, 5.75%. And in many of our forward commitments and by down programs, if rates continue to drop they will have the opportunity for a one-time slowdown. But there we're not hearing. So it's kind of like a double win, Jay, because we're not hearing that people need to get back into the 4% or 3.99% and our cost is a lot less than we're not having to buy down as far. So I think the consumer has really adjusted to today's environment.

That's great. Thank you, Sheryl. And then the other question I had, I think you said during the prepared comments that roughly 50% of the current land lots that you have were bought pre-2020. Just wondering, when you think that, that ratio starts to shift and what type of impact it might have on the gross margin as that shift occurs?

Yes. Hey, Jay. It's Erik. Yes, it's a step that we've been kind of thrown out over the last number of quarters, and it does come down I don't know 5% or so every quarter. So it will continue to come down, and that's really the percent of deals -- land that we negotiated in 2020 or prior. So again, it does point to margin strength going forward. And we're negotiating today, at current market rates, that for margins that kind of approximate where we're gravitating to in terms of identifying what a normalized market is. And so, we're reloading at deals that we find attractive at current market.

Yes, it's very hard to give you forward guidance on what happens two, three years from now as that land they continue.

Got it. And then just sticking on land for a minute. I guess, what have land prices done? Have you seen any opportunities to rebid some deals or the sellers holding fast on where pricing is now?

Yes. I think, Jay, fourth quarter and maybe even just into the very first part of the year. I think there was a little bit of a stall in the land market, and that did create a little bit of capitulation mostly in terms of timelines, in terms on deals not necessarily creating [technical difficulty] on land prices. I would say that, given our prudence and patience, we were able to get some strategically attractive deals. But certainly not a tidal wave of those coming through. As we sit here today, I think consistent with some of the things you're hearing from us [technical difficulty] confidence is kind of gaining. And as I suggested a bit more. So I do think you'll see stabilization in the land market, it certainly didn't fall a lot, but it did hesitate a bit with a lot of land. Sellers and buyers are looking at each other and really not figured -- not figuring a way through, but I think you're going to start seeing some more activity.

Our next question comes from Mike Dahl from RBC Capital Markets. Mike, your line is now open. Please go ahead.

Hi, this is Ryan Frank on for Mike Dahl. Thanks for squeezing me in here. I wanted to follow up on the spec and BTO commentary. It sounds like near term, the 60-40 is kind of the right run rate. But as we kind of look-out, I mean is that a more normalized area for Taylor Morrison to operate in? Or as -- or do you think it'll kind of overtime drift back down being maybe more BTO heavy given the margin front?

And I think Sheryl mentioned, we're going to continue -- we'll monitor it based on demand. We have an opportunity to do both, depending on what demand is. In the last few years, it has been more elevated from a spec perspective. But as we mentioned, we like the spec business as it provides that balance to our closing cadence and really helps us drive some of the returns. So I think we'll just follow what demand is, we like -- the build to orders as well because of the premium margins we see. So it's sort of a good balance today and we'll just see what the market does.

And if you look over the last few years, you take out that short period of time, the market was a little different. We were always in -- somewhere between 60-40, one way or the other. So it could be 60% to-be-built, 60% specs or somewhere in between. But once again, to Lou's point, we just have to watch the market and it's also going to really depend on the mix of our communities. Because if we have more first-time buyer communities to the market, we're going to have a higher spec percentage. On the other side, I think it's interesting as we look at our square footage over, like the quarter and over the last couple of years, no matter what happens with that mix, that square footage hasn't moved. I mean this quarter it was about 2,500 square feet. It was up about 40 or 50 square feet both on the to-be-built and the specs. So where we are putting inventory in the ground for that first time move up or the active adult. We're making sure that we mirror what they're buying on a to-be-built.

Got it. Thank you. And then last one, I think 12%, 13% of your sales at this point come from your digital reservations. Can you just talk about the margin profile difference in there, is it higher gross margin because of BTO? Or is it SG&A savings from lower commissions?

Well, they're actually a combination. So you're right. The 13% depends how we look at. 13% we're an absolute, they completed the entire process and they put a deposit online to secure the lot. If we look at, they got all the way through, but they didn't put the money down and then they called into the roaster and want to contract that would be closer to 18%, but that's a combination of our inventory reservations as well as our built to order reservations. We have our built-to-order program in probably 30%, 40% of the communities across the country. So that's continuing to build. And honestly, it's our highest conversion depending on which parts of the country those reservations come from depends on the improvement we're seeing in the broker participation, where we see today our highest reservations have been Houston, Austin and Orlando. And home growth tends to be pretty high in Texas. So we haven't seen the same kind of benefit we will when I think we're distributed across the country. What we are seeing improvement on is days to contract from when they start the process to when they complete. And it's interesting the last data point I gave you is this, when these programs started, they were highly targeted -- are not targeted but the participation was really around millennials leaving them. Now, we're seeing a good balance across all consumer groups about 40% of millennials, 30% are Gen Xers, 20% of boomers. So that's going to continue I think to fare well for us.

Our next question comes from Dan Oppenheim from Credit Suisse. Dan, your line is now open. Please go ahead.

Thanks very much. Just a quick question. I was wondering in terms of the community count where you're talking about essentially flat over the course of the year. But given that we'll have many communities closing and then opening up new ones, where do you see the communities coming online? I guess, as you -- over the past year as you've decided to hold off some openings until the models are ready and such. Is this a point where you will be replenishing what's in the Eastern Central holding off in the West? How do you think about the mix as we move through the year?

Yes, as you've seen, we had some strong outlet growth in the west. And I would say, what we're seeing more for the remainder of the year Southeast, Florida and Texas are going to have a higher percentage of the new openings than what we had earlier. So that would be where I would say the mix and majority of the new openings as a percentage would be going forward for the remainder of the year.

Got it. Okay. And much of that, I guess, thinking more into, obviously, new openings have met some of the west is just slower closeouts there, which is sort of keeping that elevated in terms of the growth at this point.

They actually did see outlet growth as well.

Our next question comes from Alex Barron from Housing Research Center. Alex, your line is now open. Please go ahead.

Yes, thank you. Sheryl, I remember a couple of years ago or so, you used to talk about the flexibility and how much room the consumer had for rates going up. And thankfully, you were right. But I'm wondering today, is there still room left or not as much?

Well, thank you for that question, Alex. I love it. It's my favorite spreadsheet every quarter. But when I look at our backlog, I look at what we closed. It's interesting in Q1, the conventional buyer got just a little bit more room just close to about 450 basis points of rate question, now that's down from early 2022 where it was 600. But it's certainly up from what we saw kind of at the end of the year rates have really peaked. Unfortunately, our FHA buyer, they got a little tighter, so they have about 170 bps of room before they [technical difficulty] challenge qualifying.

Okay. That's helpful. The other question is, I think a couple of quarters ago, maybe it's a little bit longer, you guys were talking about rationalizing number of floor plans reducing SKUs going more to I think pallets and stuff like that. How far along is that process? And how much more opportunity do you still have there?

Yes, Alex, I mean it's a continuous process for us. We actually have somebody leading that charge from the planned perspective. And I think we mentioned a lot of it was due to finalizing our work with William Lyon, but it's part of our process in all our divisions now. So it's getting through the first pass and we'll continue to review it, making sure we have the most popular floor plans, value engineering as it goes along with it. And then our purchasing teams are very involved in looking at the frequency of our options sales as well. And what they do is if we're not seeing the take-up, we eliminate them because it complicates really our bidding process and makes -- gives us an opportunity to get better cost for trades when they don't have to bid as many of those options that aren't selling.

I think somebody on the team said, it was similar to painting the Golden Gate Bridge. You just get done and you have to start again and I think that's true. Especially if you think about some of our closing comments around some of the shifts we're seeing with the consumer, we can never just assume that the plan library, it will get stale, if you don't really continue to understand the consumer needs and how they're evolving.

We currently have no further questions. I would like to turn the call back to Sheryl for closing remarks. Please go ahead.

Well, thank you all for joining us to share our Q1 results. We look forward to talking to you next quarter. Take care. Be safe.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines. Thank you.