Good morning and welcome to the Taylor Morrison Second Quarter 2020 Earnings Conference Call [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce Mr. Jason Lenderman, Vice President, Investor Relations and Treasurer.

Thank you, and welcome, everyone, to Taylor Morrison's second quarter 2020 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. 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 good morning, everyone. We appreciate you joining us today. We continue to find ourselves navigating these uncertain times, and I sincerely hope that you have all been healthy and safe and will continue to be. Earlier this month, we provided an update on our second quarter results as a part of our debt refinancing project, which Dave will discuss in more detail soon. And at that time, we expressed how pleased we were with how the business has performed in the last few months after the initial impact of COVID-19. I'm happy to report that those trends have continued through July. And with two more days left in the month, we're on track to deliver year-over-year growth in net sales of approximately 80%. That sales success translates to a projected pace of nearly 4 sales per outlet per month, about 60% growth year-over-year. The resiliency of the business has been remarkable and something that has produced great pride within the organization. We pivoted quickly, established new norms and aggressively pursued strategies to ensure the safety of our team members and customers conforming to the necessary social distancing practices. It's because of this flexibility that we were able to deliver our impressive second quarter results. So let me share some key highlights. We finished the quarter with 3,453 net sales, representing year-over-year growth of 23%. April represented our lowest sales point during the pandemic, where we were down year-over-year by 36%. May was up 17%, and then June was an extraordinary up 94% on a year-over-year basis. The consumer data driving these numbers is worth sharing. Three of our largest consumer groups saw overly quarterly growth, entry level, first and second move-up and active adult, and they each have their own story. The first two groups delivered…

Thanks, Sheryl, and hello, everyone. Before I get into our second quarter financial review, I'm going to take a minute to discuss our recent debt offering because it showcases our consistent commitment to the stewardship of our balance sheet. At the time of the William Lyon acquisition, we discussed our desire to eventually refinance a portion of the debt assumed as part of that transaction. Earlier this month began that effort when we raised $500 million, upsized from $400 million due to healthy demand to partially refinance our acquired 2023 and 2025 bonds. In addition, we used $125 million of our cash on hand to partially pay down the same sets of notes while also covering the standard fees and call premiums associated with the refinance. In total, this effort will save the company about $10 million in annualized interest while also helping our focus to delever over time. This is a first step in the overall vision of managing our existing debt, and we'll continue to be opportunistic as the market dictates. Assuming current trends continue, we hope to address the roughly $185 million remaining balances on the 2023 and 2025 bonds through a partial or complete pay down in the coming months. We were able to incorporate a significant paydown piece to this refinancing project because of our strong liquidity. At the end of the second quarter and before the debt refinancing, we had over $900 million in total available liquidity. About $675 million of that was cash on hand, with the remaining difference being capacity in our $800 million corporate revolver. We did have $485 million in borrowings on the revolver at quarter end, but similar to the end of the first quarter, much of that has been held in cash on our balance sheet as we've…

Thank you, Dave. Before we move to Q&A, I'd like to share some local market updates. First, I'll focus on a few states that have been in the news lately with higher infection rates of COVID-19, including Arizona, Texas and Florida. Out of the 11 states in which we operate, those three are in the top five for quarterly net sales growth on a year-over-year basis. When I look at pace, Arizona and Texas are in the top three for quarterly year-over-year growth. So the recent surge in cases doesn't appear to be dampening consumer demand. As for the balance of our portfolio, each of those markets are at different stages of reopening with a few notable call-outs. In California, we saw nice sales recovery in each of the markets, including the Bay, which is still our only market that is not 100% open for business due to regulatory constraints. Colorado business has added a needed affordable segment of the portfolio with overall ASP down nearly 10% for the quarter. The Pacific Northwest has seen meaningful improvement in sales over the last few weeks, even with Seattle on an appointment-only basis, while experiencing municipality restrictions similar to what we're seeing in the Bay. The good news is our Seattle production was in the ground early in the year, and it is a high inventory turn market. The last topic I'll address is the progress we're making with the integration of William Lyon Homes. Let's break up the different integration categories, beginning with people and brand management. We're 100% complete and have been for some time. Our other categories of processes, systems, product and synergies continue to advance, making good progress through the oversight of our integration management office. And I would describe each of them somewhere between 50% and 75% complete, just less than six months from the acquisition closing. To say I'm pleased with our progress, given all that we've had to manage through, would be an understatement. It's because of this great integration work and what Dave alluded to in his comments that we remain in a position to reaffirm our $80 million synergy estimate on an annualized basis. I want to close with a heartfelt thank you to our teams for exhibiting the type of resiliency we've always talked about but now have the opportunity to demonstrate. It's an honor to watch it, and I hope you know that you inspire me on a daily basis. To our trade partners, thank you for being wonderful partners through such difficult times and for working with us to deliver the best experience we can to our customers. And to those customers, thank you for your business and for your loyalty to Taylor Morrison. With that, I'd like to open the call to questions. Operator, please provide our participants with instructions.

[Operator Instructions] Our first question comes from the line of Carl Reichardt with BTIG.

I had just a clarification question on the guidance to start with, just on the margins, David. And I guess it's a broader question, too. What's the purchase accounting and integration impact likely to be in basis points or dollars on Q3 and for the year? And then when do you expect it to really bleed off and we're looking at sort of a core normalized margin?

So first, from a purchase accounting impact for Q3, it's likely going to be around 100 basis points. And then we're estimating right now for Q4 about 50 basis points. And that obviously will determine, be determined based on mix, but it should be somewhere in that neighborhood. From a core margin perspective, and I think you know we've talked about this in the past, it takes us about 12 to 18 months to bring, in this case, the legacy William Lyon margins up to a level that's equal to legacy Taylor Morrison. And we've seen that with our past acquisitions, more recently with AV, when we were able to do it. It took us a little bit more than a year. And I anticipate this to play out the same way. We've done a lot of work around our national contracts as well as regional contracts and a lot of the heavy lifting that's going on right now is down at the local level from a cost perspective. And the way things are trending, we're confident we're going to fall back in between that 12 to 18-month window to get the margins where we want them to be.

And then just, again, a bigger picture question here. So post Lyon, obviously, the mix has shifted significantly to the West. It's gone downstream to a certain degree. So Sheryl, as you look at the markets that you have now and the mix that you have now, over the course of maybe 3 to 5 years, are you kind of happy with where this is? Or how would you like that, the change? Or where might you shift that over time?

So let me break that into two pieces. I think one would be geographic and one would be consumer. When I look at our footprint today, with the addition of Lyon and getting into the Pac Northwest and into Nevada, we really like our footprint. There's always possibilities, but we're quite content with where the business is today and being in the key markets across the U.S. When I look at consumers, Carl, part of the strategy with both AV and Lyon was that we had a stronger bias to that more entry-level buyer. When I look at the business today, William Lyon was just over 80% entry-level and first move-up. Today, the combined business is about 72%. So when you take that and you add the active adult, we're really pleased with the consumer mix. I would say that as part of that, it was really about a change in average sales price. When I look at markets like Austin, for example, the Taylor Morrison ASP was about 50% higher. And I look at places like Phoenix and Denver, where we probably brought those ASPs down 10-plus percent as well. So I like the entry level, I like the more professional entry level that we have. We like the active adults. We're starting to see real movement there. So a long way of saying, I think the mix could move a few basis points, but it feels pretty good.

Thank you. And our next question comes from the line of Jack Micenko with SIG. Your line is open. Please go ahead.

I guess, first question, Dave, on the balance sheet. When I'm looking at Bloomberg here, I think you had said you were thinking about paying off the balance of the '23s and '25s. They get about $150 million there. Am I thinking that right? And I'm assuming that $10 million interest guide does not include the payoff of the stub upon those 2. Am I thinking about that correctly in total?

Yes. Let me just clarify one thing. The payoff's about $185 million or that's what we have left remaining on the two tranches. But to your point, yes, the $10 million that we talked about in the prepared remarks, that's just for the refinancing part that we took care of, plus the small paydown a few weeks ago. If we were to, just as an example, pay off that entire $185 million, the savings annualized on the combined between the previous transaction and what could be the second transaction is probably more around $18 million, $19 million savings in interest.

And then Sheryl, just bigger picture -- you highlighted virtual, I think, maybe more than your peers and two sales a day completely virtual is pretty surprising. I'm thinking about what this means longer term on the SG&A side. And you think about maybe less agent co-op, maybe more sales, less sales people per community, maybe more of a multi community. How are you thinking about -- you kind of had this real estate marketing has made like 5 to 10 years of advancements in about 6 weeks. How are you thinking about that at a higher level on those points?

Yes, it's a really good question, and Jack, one we're spending a lot of time on. So there's so much there. Let me try to attack it a couple of different ways. I mean, I think, first and foremost, this was really about allowing the customer to interact with us, meeting them where they want to be, giving them a direct line to our sales associates, even when they can't come in. And we did that through the original technology, and that was setting up appointments. When we started to see the success there, and to date, we've had over 9000 appointments set, there's still a desire for personal contact. If I look at those 9000 appointments in the last 3 months, 80% of them set up an appointment directly with the salesperson to come in and still meet with them and still have a private tour. And the rest kind of divide their way between the other vehicles that they take and took advantage of. I'm surprised, but I'm not surprised because when I look at the way they're interacting with the site, Jack, it's really been interesting. So if I look at like the new trends with the self-guided tours or the reservations, those are just literally a couple of weeks in. But we're already seeing pretty significant trends in the way they're going deep into the site. They're spending their time. If they're booking a tour, they're spending about 11 minutes on our site. If they're making a reservation, it's closer to 14, 15 minutes. That's 5 times historical averages. So what we're learning from the consumer is they really crave data and giving them the ability to self-select, I think, is part of our new normal. So when you look at our reservations today on inventory homes, I expect that will evolve sometime, hopefully, later this year, to reservations on to be built, pick a lot, pick a house. And then I think the impacts of that, to your point, will really start showing up in the way we look at model centers, the number of plans that we have to put into our model centers, our co-broke opportunities, we're already seeing a trend. Now it's small numbers so far. So we'll continue to watch it, and I can update you next quarter. But we are already seeing a trend that those reservations are coming at a lower percentage of co-broke than you would normally see in the business. So early days, but I think it becomes very promising. Probably the last thing that I should mention is the real impact to SG&A is we spent about 50% in advertising in the second quarter that we did in the first quarter and generated significantly higher traffic, both, I mean, specifically on the website, and you saw what our sales were, up 94% in June. So I think it bodes very well.

And our next question comes from the line of Alan Ratner with Zelman and Associates.

Congrats on all the progress, and nice job in the quarter here. So first question, maybe this is for Dave, just looking at the closing guidance. So if I look at your full year, it implies that 4Q closings are actually going to be less than 3Q, which obviously is counter seasonal and especially given the strong order activity. And I'm imagining a lot of that has to do with all the disruption during the pandemic, but I'm curious if you could just kind of talk a little bit about what you're seeing as far as cycle times, labor availability. What's really driving that conservatism in the 4Q closing guide? And kind of building on that a little bit, what's your current strategy related to specs because I know Lyon obviously was more spec-heavy than legacy Taylor Morrison? And I think you had indicated that you were kind of willing to keep an elevated spec count on those projects going forward, but the closing guide doesn't seem to suggest that.

Alan, yes, thanks for the question. It's a good one. So yes, if you take the midpoint, it does imply that Q4 will not be the highest quarter closes as what is traditional. I think if we go back, we look at April and May when the pandemic came on, call it, late March, us, like the rest of the industry, we pulled back on starts. Call it, April and May, our starts were down probably about one third. They were down a little bit in June, and we're just now kind of ramping that back up. So if you think about, as you said, the mix of specs that we have in our business, not having those starts, we don't have those homes to close in Q4. And just from a cycle time perspective and you're starting to kind of, April, May, June is probably going to close in the fourth quarter. So that is the main driver of Q4 and the closing guidance. From a cycle time perspective, that one is actually pretty interesting. I would tell you, with the pandemic and what's going out in the industry, we've actually seen cycle times either be flat to slightly better than they were, call it, this point last year. I think with the reduced level of starts, there was a little bit of a catch-up out there in the industry, which obviously favored cycle times. The one probably push on that is maybe around the municipalities. But I would say, by and large, they've been great and working with us as well, trying to get either home started or over the finish line. We'll see how that plays out for the rest of the year. I think we're putting starts back in the ground, obviously, with strong demand, to your point. We're targeting, call it, 6 to 7 specs per community. That's both in process and finished. We're obviously lower than that right now because of the shortfall and starts in April and May, but we expect to build that back up over the course of the year.

And maybe I'd just add, Alan, I'll take the opposite, the unusual role for Dave and I to be more of the pessimist of the group. We saw that improvement in cycle time, and we saw that lag in total work. Some of this is just we don't know. Day to day, you see COVID crew impacts, you see manufacture impacts. If we can retain those cycle times, but you have everyone, that lag doesn't exist anymore. Everyone put in a lot of starts. So if you can retain those cycle times, which I, I would expect we could. I think if you lose a week or 2, you do lose your fourth quarter, some impact on the fourth quarter closings. Then hopefully, we're a little conservative. It's hard to be sure. If that's what we deliver for the year, we're going to have a wonderful first quarter.

And then, Sheryl, I guess just thinking about the portfolio now, obviously, through all the acquisitions, you guys are as diverse as you've ever been from a geographic and product standpoint. And as you start to step back on the gas on land acquisition, I'm curious, based on what you're seeing in the market and your kind of views on what this post pandemic world could look like from a housing perspective. Should we think about any notable mix shifts in the business going forward in terms of where you're allocating your spend today? Is there a price point you are more bullish on or more conservative on? Is there a geography you're more positive on going forward compared to where your current portfolio is?

Yes, I think like I said before, Alan, I actually feel pretty good about the portfolio. I look at our overall inventory of 3.5 years owned. That's the number we haven't seen before, almost five years control, total cloned and controlled I like that. We're pretty much done for '21. '22, honestly, we're actually in pretty good place. So there will be some opportunistic. When I look well beyond that, it's really going to be on the kinds of deals we put on the books really to drive the returns. But as far as the geographic and the consumer mix, I'm very happy with where we are. I think the other opportunity that you'll see us spending some dollars on is BTR. Now we haven't really updated the Street because we are now just have gone horizontal on our first two projects. We're under contract on a number of other projects in Arizona and starting in Texas and Florida. So I think you'll see some dollars spent there. And I think that also bodes well. When I look out over the next few years, the demand characteristics as potentially interest rates move, that this whole need, everything we're talking about for single-family living, will be very much alive and, if not, on steroids. And I think we'll be prepared on both sides of that.

And our next question comes from the line of Michael Rehaut with JPMorgan.

This is Maggie on for Mike. First question on incentives. You mentioned that 2Q was down booked sequentially and year-on-year. I was wondering if you could give us kind of a month-by-month breakdown of how those trended as demand strengthened, and then looking into 3Q and into July, what you were seeing in terms of incentives and any opportunity to take price in your markets.

So yes, go back to kind of the March, April when the pandemic first began. Our bias was towards pace, obviously, moving the inventory because we weren't sure what was going to happen. So incentives did creep up during the April time frame and into May. Call it, early to mid-May, we started to see the strength. We started to pull back on incentives, and they have fallen from there. Sheryl will give you an update on July. Market continues to be very strong, and we're taking back incentives where we can and obviously pushing price where we can.

And I think that's the interesting pattern, Maggie, still, every month was lower than last year, but sequentially, to Dave's point, they came down. So first, incentives came down and then prices started to move up.

And second, just on SG&A and some of the cost control measures that you took early in the quarter. In terms of those measures, as you're looking towards over the kind of the medium to longer term, how many of those cost control measures would you say are temporary and that those costs will come back as demand has returned? And how many would you say are kind of more permanent in nature?

Maggie, I'd say the vast majority were more temporary. They were around headcount primarily deferring some projects, things like that. We not only are seeing demand that has returned. It's actually, as you know, in excess of what we saw in the first half of the year. So as we think about our business going forward, we're in the process of kind of ramping back up to meet the demand and the deliveries that we're going to have over the next six to nine months. That said, our SG&A runs relatively low, especially relative to the rest of the peer group. And we continue to expect that will happen as we get the efficiencies of scale from William Lyon. We're starting to see that come through a little bit, but that's going to happen more so, call it, over the next three to four quarters.

Yes, and I would hope the more permanent buckets, because from a headcount standpoint, Dave's right.

Advertising.

I mean look at the run rate of the business today based on our sales and the size of this business. But if you think about advertising and the efficiencies we're going to get through this virtual environment, if you think about co-broke, it won't change overnight, but even modest trends on the kinds of co-broke dollars are significant. So you'll see some of those offsets.

Thank you. And our next question comes from the line of Jay McCanless with Wedbush. Your line is open. Please go ahead.

Good morning. Thanks for taking my questions. The first one I had, if we look at the orders in 2Q, could you break out what percentage of those were to-be-built homes versus spec, and then in terms of the to-be-builts, when those should approximately deliver?

It's close to half and half, Jay. So your to-be-builts, if you sold them in Q2, you have some markets that will deliver some, and then you have some that just won't. Because if you think about from sale day to start, I would say, depending on the municipality, could be anywhere from 3 to 10 weeks. It's quite a range. But I think that to your point, the real important data point here is just that we continue to see success in both the to-be-built market as well as the inventory. People are, the consumer today knows what they want and are willing to wait for it and pay for it.

Definitely a good sign of confidence that people are waiting on the to-be-built home. The other question I had is around your split between your orders or closings, however you want to express it. First-time buyers versus the move-up versus active adult, where are those percentage splits hitting now?

Yes. So like I said, Jay, it's, really, there's been a fair amount of movement year-over-year with the combined business. So right now, we are about 72% for the quarter. If I'm, depending on closing, if I'm talking closings or sales, one, they're 2 points apart. So 70%, 72% of entry level, first move-up. There's a lot of blurriness between those 2 segments because a lot of folks from a price point are buying their first house, but they're waiting longer. So there's, so I kind of put those two together. We've seen a reduction in our second move-up, and in the quarter, a very slight reduction in active adult. I expect that when I look at the active adult business, we'll see that ramp back up in the shoulder season given all the buying signals we're seeing from the active adult today. They're spending a lot of time on the phone with our sales teams, hours on the website. They've become our largest web user, which was a surprising step for me.

Yes. So if I could sneak one more in. You talked about how the luxury active adult buyer seems to be hanging in there. What have you seen from more blue collar entry-level, white collar type of active adult buyer?

Yes. So another, like I said, another area of interesting kind of trend is we really dissected this active adult and what their behaviors were. I mean all along, we've seen the lowest can activity. But when we look community by community and product line by product line, there's two real interesting trends, and that's why we mentioned them. One is the amount of in-state business. I mean our in-state numbers have gone, especially in Florida, have moved meaningfully. And it's not because the total is down, so it's not a percentage game. It's the absolute numbers have really moved. The out of state, we've seen another interesting trend, and then I'll get to the subset, is things like, Connecticut has become a really important feeder for Florida that those folks are all of a sudden able to sell their homes because there's a lot of movement out of New York and then relocate to Florida. So that's where a lot of the Internet business is coming from. But so far, we've seen our most success in what I would say are our highest price point, luxury living. I think these folks look at the environment and see it as a staycation and moving to Florida and within this country club environment. Having said all of that, probably in early June, we've started to see the more affordable active adult come back in larger numbers. It just took a little bit longer.

And our next question comes from the line of Ryan Frank with RBC Capital Markets.

So some of your peers, there's been some difference in how everyone is approaching pace versus price. And with kind of absorptions running hot across the industry, I just want to see where you fall in that spectrum, if you're willing to run pace a little more, maybe run out some community counts or if you're thinking about pushing price to kind of slow that for the balance of the year.

So you're not going to love the answer because, but it's just being honest. It really does depend. But let me walk you through the journey. If I think back to early in the year, it was really about moving our pace to a better place. We felt that we had greater opportunity and we generate more efficiencies with something much closer to 3 than 2s. As we got to COVID, it was probably that on steroids, not knowing, not having a crystal ball. You have to plan for the worst. We knew we had some very challenged inventory. It was about moving that inventory.

That's the William Lyon.

And that was the William Lyon inventory. Thank you. And we had, it wasn't just the quality. It was the amount of inventory in specific positions. Yes. Some of their specs were just a little dated, and we had too many in the wrong place. So it was about moving those. So it was absolutely a pace. As you got to mid-May, I would tell you that has changed. And as we said earlier, we start really pulling back discount. And then by early June, I would tell you, we were really starting to move price. Having said all of that, I'm going to say there's this overall cover of you really have to look at each individual community, the competitive factors, the supply, what's behind it, our ability to replace it, the gaps you're creating. But if I were to say, if I were to generalize over the portfolio today, I would tell you, my bias is price. But 90 days ago, I would have told you it was pace.

And then just one last quick one for me. How are you thinking about kind of the mix of owned versus options on a go-forward basis over the next couple of years?

Yes. Ryan, kind of going back in time a little bit, we were, a few years ago, kind of in that low to mid-30% range. With the acquisition of AV that was largely owned, that dropped us down to, call it, the 20% range. And then William Lyon actually kind of boosted that back up to the mid-20% range. I would tell you, longer term, we would like to see the control number go up. That's probably somewhere ideally back to the low to mid. You see that we're working on our total years of supply. We're now down below 5, but we're always going to be a little bit longer maybe on the owned just given that we're a developer as well. But we do see opportunity over the next, call it, two years to continue to increase that ratio of controlled versus owned.

And our next question comes from the line of Truman Patterson with Wells Fargo.

This is Paul Przybylski. Dave, I guess looking at your 3Q gross margin guidance, it looks like the lion's share of that improvement is going to be from reduced purchase accounting impacts. And then if I were to add in some hits from the William Lyon inventory sales this quarter, that kind of implies that your core gross margins might be down slightly quarter-over-quarter. Am I thinking about that correctly?

No. I wouldn't say they're going to be down. I mean, I guess, keep in mind, the largest two drivers are going to be purchase accounting like you mentioned. But it's also the mix. So going back to the earlier discussion around the William Lyon margins right now are running lower than what they are on the TM side. We're going to see that kind of persist, hopefully get a little bit of an increase. But the greater mix in there is going to have an impact. I can tell you, on the data that we have on the legacy TM side, we're definitely seeing margin accretion. A lot of this is going to come down to what we're able to do from a specs standpoint on homes that we can both sell and close in the quarter and what we can do from a pricing standpoint. So no, I would argue that we're going to be, probably worst case, flattish, but I actually think slightly up on a core basis in Q3. And I feel more strongly about that as we go into Q4 and into next year.

And then, Sheryl, thanks for the walk around the MSAs or demand. But as we look out into the fourth quarter, obviously, June and July is strong for everybody. There's going to be a tremendous push for the industry to close. Any particular areas you're more concerned about from a labor perspective and getting those closings across the finish line? And on top of that, you mentioned some material issues. Are you seeing any shortages in any product categories?

Yes, there's a flavor of the week each week, Paul. I would tell you, the more systemic ones have been appliances. That one has been the most difficult, I think that started with a lot of COVID cases. And I think management was in the manufacturer plant trying to get appliances out. So I think that one has probably been the most systemic from there, it gets very local. I mean I've seen landscape crews go down. We've seen some cabinets. When you combine that with the volume of starts, I think the places where I've heard the most pressure are Phoenix. I mean, the market is just tremendously hot. And I mean we are holding back releases and taking very healthy price increases with every release out to market in just about every community we have. I would tell you, we're seeing that through Texas. And parts of Florida. So this is what we do, and we'll work our way through it. But I think that's why it's hard to project. You get a letter one day that has the cabinet plant shutting down or the window plant shutting down. If it stays down for three days, we'll make it up. If it stays down for two weeks, we probably won't because everybody else is going to be in the same bind. So I wish I could be more specific, but it's really hard to know. In many places, we have the inventory, and I'm not concerned at all about the deliveries, where we have a lot of May, June, July starts. Those if the labor gets tighter or there's this race across the industry or hopefully not a bidding up of labor, we'll get there. It's just going to be a little lumpy.

And our next question comes from the line of Matthew Bouley with Barclays.

This is Ashley Kim on for Matt. The first question I wanted to ask was on the 2Q orders saw a strong exit rate pro forma of around 30% in June and kind of continuing to similar levels in July. When you think about the tough comp in 3Q and the assumption that this probably, in part, reflects some pent-up demand from the shutdowns, how much of this do you view as kind of sustainable going into the back half of the year?

So I just want to make sure I answer the question you're asking. I don't know if you're on a speaker phone, but it's not coming real clear, Kim. Do you mind giving me that one more time?

So when you think about the 2Q, the strong exit rate in June and July and you think about the 3Q comps and the assumption that this probably, in part, reflects some pent-up demand from the shutdowns, how much of that do you view as sustainable into the back half of the year?

I don't think we're going to continue on a four pace like we saw in June and July. We don't, we won't have the inventory given the sales pace. We are absolutely selling out of communities, which doesn't allow you to bring communities up. I expect that the trend will, positive trends will continue. We will have some seasonality come into the back half of the year. And I think we'll continue to see great year-over-year success, but I wouldn't expect them to be at the 80% to 100% that we've seen in the last couple of months.

And then on community count, when you think about your positioning, especially into 2021 as these orders kind of sell through and go through your land supply, how are you thinking about community count into 2021? Are you comfortable with the amount of land you have in the pipeline to support growth next year?

Yes. We're not quite ready to get into '21 from a guidance perspective. But from a land perspective, I can tell you for the closings that we're planning, we have about 99% of the land either owned or controlled. And in fact, you get out to '22, we're over 90%. But give us a little bit more time to come back from a community count perspective. I don't know if there's going to be much of a deviation, probably slightly up. But like I said, we'll have to see where demand is this year. That's obviously going to drive it for closing out communities a little bit faster than maybe we originally thought. But we'll know here in the next quarter or so.

And our next question comes from the line of Alex Barron with Housing Research.

I wanted to ask, I think last quarter, you had guided to about $10 million of transaction expenses, and it was a little bit higher. So should we expect that there's going to be no more in third quarter? Or are you still expecting a little bit more in third quarter?

We're probably going to see a little bit leak into, call it, the next two quarters. I don't think it's going to be much. The vast majority of it was in Q1 and Q2. I think if we do see any kind of excess, it's probably going to come from maybe some leases or if we extend folks on retention, obviously, it's a different work environment with folks working at home. So if we're doing the integration, we're, as we talked about, we're well on track for that. But we might have to extend some folks as well just because things are a little bit more challenging in a stay-at-home environment.

There are some things we just can't get done until we put people together, yes.

And maybe the last thing I'd add on that, Alex, is a chunk of that would probably be noncash as well. So some of that could come through [indiscernible] the cash side.

And then as it pertains to your mix of homes now that you've integrated William Lyon and AV Homes, what percentage, I guess, of your orders that came in this quarter would you say are entry level or first time? And how does that relate to your land purchases for that same type of product at this point or going forward?

I would say there's not real differences between what we're seeing in the orders and our investment strategy and replacing the communities that we have, Alex. And as I said, I mean, when I look at our orders and our closings, I think that's really what says it best. There's not really a difference between, if I look at entry level first move-up on the closings, it's about 70%. When I look at it on the sales, it's 71%. So pretty darn consistent, and I think our land strategy generally follows suit.

And our next question comes from the line of Alex Rygiel with B. Riley.

You touched upon it a little bit, but can you go into a little more detail on your build-to-rent program? I believe you have two projects now. You had looked at three new markets. Has COVID changed your views at all in the build-to-rent market?

COVID has, I mean it might have put us 4 to 6 weeks behind in the new markets that we were going into, that we were starting to staff up. But now I think from a strategy standpoint, it's only accelerated our excitement on this asset class and the opportunity that it creates. Once again, if you, if we were to kind of talk through all the things that we're seeing in our consumer research and the need for space in single-family living, this has actually helped us right in the sweet spot. People want to get out of multifamily. People want their backyard. They want high technology, and they still want a lifestyle. And if they can achieve that in a single-family home and be part of a community without having the burden or maybe they don't have the financial resources to buy, I think that this is an asset class you need to watch very carefully in the next five years, because I think it's going to be a very different thing than it is today.

And I'm not showing any further questions. And I'd like to hand the conference back over to Ms. Sheryl Palmer for any further remarks.

Well, thank you very much. I appreciate you joining us today. I hope you all take care of yourselves. Stay safe, stay healthy.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Everyone, have a great day.