Taylor Morrison Home Corporation (TMHC) Q1 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to Taylor Morrison's First Quarter 2026 Earnings Webcast. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations.

Thank you, and good morning, everyone. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. These statements 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 where applicable. 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 Curt VanHyfte, our Chief Financial Officer; and Eric Heuser, our Chief Corporate Operations Officer. I am pleased to share the results of our first quarter performance and look forward to providing an update on the progress we are making towards our strategic priorities for the remainder of the year. Our first quarter results reflected the effectiveness of our diversified strategy, the quality of our core locations and the disciplined execution of our teams. We delivered 2,268 homes at an average price of $578,000, generating home closings revenue of approximately $1.3 billion at an adjusted home closings gross margin of 20.6%. This drove adjusted earnings per diluted share of $1.12 and 11% year-over-year growth in our book value per share to $64. On the capital front, we invested $503 million in land and development and $150 million in share repurchases and ended the quarter with $1.6 billion in liquidity. As I shared on our last earnings call in February, early signs heading into the spring selling season were positive, and the quarter played out largely as we expected. With sales activity building through the quarter and March representing our strongest month. That momentum is consistent with normal seasonal patterns, albeit with slightly less acceleration than we have seen historically, reflecting continued consumer cautiousness. April started off somewhat slower as typical, coinciding with the holiday weekend, but momentum then picked back up, and we're looking forward to a strong end to the month, even with all the headline noise. Most importantly, as we prioritize the balance between price and pace, we achieved our first quarter sales with a significant increase in the share of to-be-built orders to 38% from 28% in the fourth quarter. As a result, we began to rebuild our backlog, which increased 23% from year-end to 3,465 homes. As we anticipated, this reacceleration in demand for to-be-built homes suggests that historic bio preferences are reemerging as excess spec inventory is cleared across the industry, and our new community openings support compelling value propositions for our shoppers to personalize their new home. One way in which we are helping drive this shift is through design center open houses, which enjoyed record attendance in the first quarter at over 140 events across the country and drove to-be-built sales activity with a strong average conversion rate of 23%. We are further supporting this shift with mortgage incentive programs that provide confidence to our build-to-order customers and enhance their buying power, generally at less cost than incentives required for spec sales. In addition to this favorable mix shift, we also realized more than a 100 basis point sequential reduction in incentives on new orders. And lastly, we made significant progress in selling through our finished inventory, which declined 30% from year-end to 863 homes as we reach targeted spec levels in most of our communities. We have positioned 2026 to be a year focused on setting the stage for reacceleration of growth in 2027 and beyond. This includes a plan to open more than 125 new communities this year, roughly 30% more than we opened in 2025, including about 40 that already opened in the first quarter. supported by an enhanced community opening framework that is helping our teams execute these openings successfully, another 45 or so communities are scheduled to open this quarter during the remainder of the selling season. These openings support our expectation that we will end the year with between 365 to 370 communities which would be up 8% at the midpoint compared to 341 communities at the end of 2025. These communities will generally begin contributing closing later in the second half and into 2027. I'm particularly excited that over 20 of these new openings are in Esplanade communities. This includes the anticipated grand opening of our first Esplanade in Nevada, providing unmatched views of the Las Vegas skyline. This community is already enjoying significant interest with a 1,400 plus lead list and is expected to command record lot and option premiums, with Esplanade consistently generating superior home prices mid- to high 20% gross margins and strong demand resiliency the growth in this unique segment of our portfolio is expected to be an important driver of our future performance. Since we last spoke, the market has been faced with another round of geopolitical turmoil intensified macro uncertainty and a shift higher in mortgage rates. As we would expect, consumer confidence has been impacted by these developments, exasperating affordability constraints and AI-related employment concerns. However, we believe the underlying desire for the homes and communities we build remain strong even as the broader macro environment has given consumers a reason to be more deliberate in their decision-making. On the policy front, we continue to have positive dialogue with the administration regarding how we and the industry can contribute to enhanced affordability and housing accessibility. While any solutions are likely to be incremental, we are encouraged by the ongoing focus on this issue and are pleased with the progress we are making in advancing constructive proposals. Erik will touch on read-throughs to our Yardley business in just a moment. Before I turn the call over to him, I want to touch on the progress we are making in technology. Our online reservation system continues to be a standout example. In the first quarter, we recorded over 1,000 reservations with a 58% conversion rate. Reservation buyers continue to transact at a higher average selling price with stronger option attachment than our nonreservation sales. Encouragingly, we achieved the lowest copra rate we have seen in years, reflecting the power of our reservation platform. On the AI front, we now have more than a dozen AI-powered applications in production across finance, sales, purchasing and customer experience and adoption has more than doubled year-over-year with over 2.4 million internal AI interactions recorded in the first quarter alone compared to approximately $3 million for all of last year. On the customer-facing side, our AI-powered contact center is delivering real-time agent coaching and dynamic scripting on every customer call with automated quality management applied consistently across all interactions driving improved customer satisfaction and sales outcomes. These investments are translating directly into results with an increase to more than 11,000 online sales appointments generated in the first quarter. We are achieving all of this through technology and automation, not incremental spend with more than half of these capabilities built in-house by our own teams. As a result, our overall technology costs are declining even as these capabilities continue to scale. There are many more initiatives advancing through our project management office that I look forward to sharing as they go live in the months ahead. In closing, our ability to reaffirm our full year 2026 guidance in the face of a more challenging macro environment speaks to the underlying strength of our business and the effectiveness of our diversified strategy. We are concentrating our resources where we have the greatest competitive advantage, managing costs and capital with discipline and positioning Taylor Morrison to establish an even stronger and more differentiated portfolio. I believe the actions we are taking today will seperate us in the years ahead as we look to continue creating value for our customers, our communities and our shareholders. With that, let me turn the call to Erik.

Thanks, Sheryl, and good morning, everyone. At quarter end, we owned or controlled 75,626 homebuilding lots, of which 51% were controlled off balance sheet. While our controlled ratio has recently declined due to normal first takedowns and our active reevaluation of our deal pipeline against current market conditions, we still intend to manage toward our long-term target of at least 65% control. Based on trailing 12-month home closings, we owned 3 years of lots out of a total of 6.2 years of the controlled supply, which we believe is the right balance in today's environment. As Sheryl laid out, our land investment strategy is focused on core, well-located communities that serve our discerning customer base with approximately $2 billion of planned homebuilding acquisition and development spend in 2026. In the first quarter, we invested $503 million comprised of $279 million for lot acquisitions and $224 million for development. As we deploy this capital, we will remain prudent and balanced in our use of land financing tools. These include seller financing, joint ventures, traditional option agreements and land banking, and we selectively deploy each as we seek to optimize cost, risk and return at the individual asset level. Our preference is seller financing when available as it tends to be the lowest cost. When it is not, we evaluate JV structures, traditional options or land banking. The result is a diversified and flexible pool of structures that allow us to cost-effectively control lots off balance sheet or defer cash outflows to improve our returns and manage our portfolio risk. Given the increased investor focus on land banking, I wanted to share some perspective on this topic. As of quarter end, approximately 10,000 of our controlled lots were in a land bank representing approximately 13% of our total lot supply and about 25% of our controlled lots. Our remaining control lots were spread between 33% in JVs, 26% in single takedowns and 16% in traditional lot options. To further put our selective use of land banking in context, in the first quarter, only 6% of our lots approved by our investment committee were tagged to be financed via a land bank. We believe this balanced approach is a source of competitive advantage and one that is reflected in our relative gross margin performance with only about 25 to 30 basis points of capitalized interest in the first quarter attributable to land banking and seller financing related project financing. Turning to another area of focus, our build-to-rent platform Yardly develops purpose-built, single parcel horizontal apartment communities. We have been encouraged by our engagement with policymakers and their general recognition that Yardly's model is fundamentally distinct from the scattered single-family rental activity targeted by our recent legislative discussions, and we continue to believe we are well positioned as that policy dialogue evolves with flexibility around product and execution optionality. Operationally, we closed on the sale of 1 JV-owned Yardly community for approximately $41 million during the quarter. We now have 16 projects actively leasing and an additional 13 projects currently under development. Supported by our land bank, roughly 90% of Yardly's total units are controlled off balance sheet with a total investment of approximately $320 million at quarter end. While we await greater clarity on the regulatory front, we remain confident in the long-term demand dynamics for this unique rental offering that provides affordable housing solutions for those seeking an alternative to traditional multifamily apartments, often before being ready to commit to home ownership. Now I will turn the call to Curt.

Thanks, Erik, and good morning, everyone. I will begin with the details of our first quarter financial performance and then review our guidance metrics. For the first quarter, reported net income was $99 million or $1.01 per diluted share, adjusted net income was $109 million or $1.12 per diluted share after excluding inventory impairment charges, of $8.2 million and pre-acquisition abandonment charges of $5.6 million. This compares to reported net income of $213 million or $2.07 per diluted share and adjusted net income of $226 million or $2.19 per diluted share in the first quarter of 2025. Both closings volume and average selling price came in roughly in line with our guidance, with 2,268 homes delivered at an average price of $578,000 generating home closings revenue of approximately $1.3 billion. This was down from $1.8 billion in the first quarter of 2025 driven primarily by lower closings volume. Our adjusted home closings gross margin of 20.6% came in stronger than our guidance of approximately 20%, driven by several factors, including favorable costs as well as product and geographic mix during the quarter. On a reported basis, home closings gross margin was 20%, inclusive of $8.2 million of inventory impairment charges. This compares to an adjusted gross margin of 24.8% and reported gross margin of 24% in the first quarter of 2025. As anticipated, the decline reflects a higher mix of spec home closings and elevated incentive levels. Looking ahead, we expect that our margin trajectory will be shaped by 2 offsetting dynamics. On one hand, the recent rise in mortgage rates in a more cautious demand environment are likely to sustain the incentive pressure. On the other hand, the progress we are making in rebuilding our to-be-built sales mix is a tailwind. To-be-built homes carry higher gross margins than spec closings. And as those sales convert to closings, we expect this mix improvement to be the primary driver of margin recovery. On balance, we continue to expect gradual margin improvement beginning in the second half of the year with the pace and magnitude dependent on how the sales and interest rate backdrop evolve through the remainder of the selling season. This also assumes relatively stable construction costs at mid-single-digit lot cost inflation. SG&A expense was $149 million in the first quarter or 11.4% of home closings revenue compared to 9.7% in the first quarter of 2025 due to the deleveraging impact of lower revenue. However, in dollar terms, SG&A expense was down $28 million or 16% year-over-year, driven primarily by lower commission expense and payroll costs as we have effectively managed our overhead structure. As closings ramp through the year, we expect the SG&A ratio to improve toward our full year target in the mid-10% range. Now to sales. Net orders in the first quarter totaled 2,914 homes, down 14% year-over-year at an average selling price of $603,000, up 2% versus the prior year. Our monthly absorption pace was 2.7 net orders per community, up from 2.4% in the fourth quarter of 2025, but below 3.3 in the first quarter of 2025. We ended the quarter with 356 active selling communities, up 4% both sequentially and year-over-year. Cancellation trends remained manageable with our cancellation rate at 10% of gross orders in the quarter, down from 12.5% in the prior quarter and from 11% a year ago. This was the lowest cancellation rate since the third quarter of 2024. Turning to starts. We started 2,371 homes in the first quarter. or approximately 2.2 homes per community per month. This compares to a monthly starts space of 2.1% in the prior quarter and 3.3% a year ago reflecting our management of spec production as we work through existing inventory. Going forward, we will continue to roughly align our starts pace with community-level sales activity. With cycle times down more than 1 month year-over-year, we have greater flexibility to start and close homes, including to-be-built orders within the year. We also made progress in working through our finished spec inventory during the quarter. Finished specs declined 30% sequentially to 863 homes while total specs declined 9% to 2,692, which is roughly in line with targeted levels. Net interest expense was $11.2 million in the first quarter compared to $8.5 million in the prior year, reflecting land banking activity. This is consistent with our prior guidance, the net interest expense would increase modestly year-over-year. Our financial services team achieved an 88% capture rate in the quarter, stable compared to a year ago, supported by competitive mortgage offerings and strong alignment with our homebuilding operations. Among customers using our mortgage company, the average credit score was 750. Average household income was approximately $181,000, average loan-to-value ratio of 80% and an average debt-to-income ratio of 39%, reflecting the financial quality and resilience of our buyer base. Turning to our balance sheet. We ended the quarter with total liquidity of approximately $1.6 billion, inclusive of $653 million of cash and no outstanding borrowings on our revolving credit facility. Our net homebuilding debt to capitalization ratio was 20.5%, unchanged from a year ago. Our next senior note maturity is not until 2028. We remain committed to disciplined and returns-driven capital allocation, including the return of excess capital to shareholders after investing in profitable growth opportunities. During the quarter, we repurchased approximately 2.5 million shares of our common stock for $150 million at an average price of $61 per share. We continue to target $400 million of share repurchases this year with $863 million remaining on our $1 billion authorization, which expires in December of 2027, Despite the evolving market backdrop, we are pleased to reaffirm our full year 2020 guidance across all key metrics, including approximately 11,000 home closings at an average closing price of $580,000 to $590,000. Our ending community count is expected to be between 365 and 370 by year-end. We expect our SG&A ratio to be in the mid-10% range of home closings revenue and our effective tax rate to be approximately 25%. In terms of capital allocation, we expect our homebuilding land investment to be approximately $2 billion. Lastly, we expect to repurchase approximately $400 million of our common stock leading to an average expected diluted share count of approximately $95 million for the full year. For the second quarter, we expect to deliver between 2,500 to 2,600 closings at an average closing price of approximately $575,000 and a home closing gross margin of at least 20%, excluding any inventory-related charges. We expect our ending community count to increase to around 370. Our second quarter effective tax rate is expected to be approximately 25.5% and our average diluted share count is expected to be approximately $95 million. Now I will turn the call back over to Sheryl.

Thank you, Curt. As I reflect on the first quarter, I am proud of what this team delivered in a market facing elevated uncertainty and consumer caution, we exceeded our gross margin guidance, rebuilt our backlog, made meaningful progress on spec inventory and reaffirmed our full year outlook, all while continuing to advance the strategic priorities that will define Taylor Morrison's next chapter. None of this happens without the dedication and discipline of our team members who show up every day to serve our customers and execute our strategy. To our team, thank you. Your commitment is what makes this company exceptional. Looking ahead, I'm confident in the strategic direction we have chartered. The pivots we are making, concentrating our portfolio in the strongest markets and consumer segments, scaling our footprint and especially our Esplanade resort lifestyle brands, improving our sales mix and deploying technology to drive efficiency are already bearing fruit. As we continue to execute through 2026, we're laying the groundwork for a reacceleration in 2027 and beyond. I look forward to sharing our continued progress with you. Thank you to everyone who joined us today. Operator, please open the call to questions.

[Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays.

You have Elizabeth Langan on for Matt today. I was wondering if you could touch -- I was wondering if you could touch on the maybe your expectations around the cadence of margin [indiscernible] quarter with your 2Q guide is implying maybe a plan to step down and then you noted that things should improve through the back half as you increase your mix of tubibuilt homes. Is that going to look more like a onetime step up? Or is that going to be more of a sequential improvement throughout the year?

Elizabeth great question. Maybe just to kind of start with kind of Q1. In Q1, as we alluded to in our prepared comments, we did have several factors that went into the margin, and I just want to touch on a couple of those relative to the mix. So on the mix front, we did close more homes than anticipated in our higher-margin divisions. So that was a key contributor. We also closed more to-be-built in the quarter than anticipated as we pulled some in from Q2 into Q1. And finally, what I would say is we closed fewer homes on lower-margin homes that we had anticipated and now have moved into Q2. So when we begin to think about the margin guide for Q2, all of those are then going to reverse and have that impact for Q2, which is kind of one of the main drivers as we looked at developing the guide for the quarter. And so we looked at cost mix, incentives, higher interest rates and where we kind of landed was when we look at maybe 3 key areas: the reverse of the mix dynamic in Q1; two, the continued kind of moving through and clearing our inventory; and three, just the higher interest rates that are in the market. And of course, we tend to work with all of our consumers on a one-on-one basis to make sure we're maximizing the efforts for each person's situation. And so that's kind of behind the backdrop from a Q2 perspective. And then when we begin to think about Q3 and beyond, we haven't necessarily guided to that. But based on the progress that we've done relative to clearing the inventory and increasing our to-be-built mix of sales in Q1 we do continue to expect to see that mark a gradual increase in our margins in the back half of the year. Now the tough thing about that is what is the magnitude of that? And that's going to be highly dependent on interest rate, the market backdrop, consumer sentiment, a bunch of different things. But if all things hold here today, we would expect a gradual increase in margin in the back half of the year.

Okay. And kind of a follow-up to that. With the potential for the gradual margin increase throughout the year, is that -- can you maybe speak about incentives, like how much that could play into it? And are you assuming that, that 100 basis point step down. Is that something that should be consistent throughout the year? Or was that more a onetime step down in 1Q?

Elizabeth, this is Sheryl. Thanks for the question. The 100 basis point sequential reduction, I believe, was a real positive. And reflects a number of different factors. The mix, as Curt mentioned, the mix of to-be-built versus inventory homes with that 100 1,000 basis point improvement. As you know, these incentives program tends to be less costly. So the mix is a tailwind. And I hope it continues to be with our focus on to be built. . Even with the progress we made in selling through finished spec inventory, which declined as Curt mentioned, 30%, we were able to be more disciplined in pricing even on the spec home. Some were correlated to competition probably getting off the year and aggressive incentives, but mostly a discipline in how we are how low we're willing to go. I think our sales teams did a great job holding the line. As I've said before, we aren't going to sell at any cost. We placed just too much value within our communities, and we'll continue to sell them from a position of strength. Some communities are going to be about volume, particularly as we sell out of these more remote locations, but others -- it's all about capturing value. We also replaced in many instances, our most expensive forward commitment programs with another version of our proprietary buy bill program, which is allowing our customers to get a lower monthly payment than some of our most aggressive forward commitment rates I do expect that to continue. And as we've said before, it's all about personalizing a program to meet each consumer's needs. So to your -- will it continue overall, the rate environment will clearly be a factor. And we should expect incentive pressures to persist as long as rates remain elevated. That said, we are very focused on community by community optimization using every tool available to balance that pace and price as we did in the first quarter. I'd say, in total, we're cautiously optimistic that incentive levels will stabilize, but we'll be prepared to adjust as the market dictates.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

This is Chris on for Mike. I was hoping you guys could touch on your expectations for start cadence in the coming months and the delivery outlook for the second half of this year, the 2Q guide implies a sequential step down and certain increase in the back half as a result. I just want to get your thoughts on timing there, 3Q vs 4Q on deliveries?

Yes. Chris, I can take that one. Thanks for the question. Relative to the starts cadence, as you saw in Q1, I think we started 2,371 homes, we sold 2,900. So in Q2, and that -- part of that was as we were clearing out some of the inventory. And now as we look to Q2, we would expect our starts to approximate our sales which is kind of what our consistent message has been as -- even though we had to work through some of the inventory on a go-forward basis. So that's kind of what we're aligning to on a go-forward basis for Q2 is aligning our starts with sales. And so you can imagine that we would be taking up our starts in Q2 relative to that.

And the good news is, given what's happened to cycle times, Curt, we can actually start homes, Chris, much later in the year than you've seen over the past. So you'll see much more of an even cadence than this huge spurt to get to the year-end finish line.

Understood. Appreciate that. And just going back to the second half gross margin trajectory. I realize you are putting out guidance, but the modest improvement -- is there any way you could put some numbers around the mix of step up? It sounds like your new communities are slated towards the back half of the year and that is margin accretive. Is there any kind of colocation providers just the mix dynamic alone in terms of delivery timing?

I think it will ultimately depend on the spec sales that we sell and close in the quarter. So it's hard to quantify exactly what that looks like. But as Curt mentioned, we still have a number of finished specs, but we've made great progress. We'll continue to make our way through those in the coming quarters. But as you noted correctly, you will see a heavier back end on the to-be-built based on the success we've had first quarter and our new openings with a high focus on to-be-builds.

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

Great. I'd love to there's been some encouraging trends, I guess, with yesterday's report by one of your large competitors in this morning around seasonality kind of holding in there -- you alluded to maybe the month starting out -- month of April starting out a little slower but starting to pick up again. And I'm curious, as you look at the trends in March and April, maybe better than peer just given all the macro noise, if you're seeing any relative strength within that across your footprint, either by buyer segment. And in particular, I'm thinking about move-up or active adult or even by region, that kind of stands out in your view is kind of anchored or led the results that you've seen?

Yes. It's a fair question, Mike. As I mentioned in the prepared remarks, April started that first week, the holiday week, just a tad slower but once again, I think when I looked historically when Easter falls, that is pretty consistent. But then momentum immediately picked up, and we're looking forward, as I said, to a strong ended the month, even with all the headline noise we're seeing. But more broadly, I think what we saw through Q1 was pretty consistent with normal seasonal patterns. Sales built through the quarter, with March being the strongest month. In fact, I think we've seen an improvement in sales every month since late summer. As everyone's mentioned, consumer confidence was clearly has been impacted by the war and just overall macro uncertainty. But as we've said in the past for the most part for our customers, it's about, should I buy now not can I? And so what we're seeing is really the underlying desire for homeownership remains strong. I think last year, we felt a lot of folks were just hanging around the hoop and they've come off the sidelines. Traffic in our communities remain steady. In fact, we had our lowest cancellation rate since the third quarter of '24. So at 10%, I think that says a lot about the way the consumer is feeling. They're transacted. The ones that are transacting are committed and they're qualified. If I think about some of the regional differences, Mike, you'd expect performance was slightly varied across the market. The West was, I'd say, our most resilient area with orders just down about 8%, and they were led by the bay that was actually up year-over-year. And the rest of the markets in the West were just slightly down. Phoenix was also a pretty nice standout with year-over-year improvement in absorption. I also think as I look across the West markets, they were aided with low resale inventory across each of the markets. And once again, pretty consistent across each of the West divisions. When I move to the East Coast, it was down a bit more 17%. But I'd remind us that Florida had a very strong first quarter last year and some very difficult comps. But either the Florida markets held their own. We saw a nice resurgence in Naples for the season. The Orlando business was probably down the furthest, and that was -- we had a number of closeout and opened new community openings. We also saw a really good mix shift in communities with our average sales price in Orlando, up over $100,000 year-over-year. When I think about other markets in the East, Atlanta saw the greatest increase year-over-year in sales across our entire company, and that growth came in both community count and pace. And particularly nice to see the job growth in our Florida markets and the continued reduction in new supply pretty much across the entire East. Central was down somewhere in between the 2 on orders with a shopper -- probably what I describe as a sharper closings decline, partly a function of mix and timing of community life cycle transitions. A number of new openings in Houston and Austin. Austin actually finally saw what I would say, some stabilization in backlog, had the best sales month in quite some time and can seem to stabilize. So in total, Mike, I think as we continue to shift our strategic priority to core well-located communities, reduced exposure to noncore locations where we've seen just the greatest pricing sensitivity. I think you'll see continued pickup in our central markets. Across all the regions, we're executing on the same strategy, calibrating incentives, pricing community by community, really balancing that pace and price, doing it through differentiating our product. And I should also mention leveraging our online sales capabilities that really were helpful throughout the quarter.

Great. That's a great overview. I appreciate it, Sheryl. I guess, secondly, I'd love to kind of understand incentive trends across your markets as well and don't necessarily have to go through around the around the world per se. But just maybe even on a broader basis on a consolidated basis, how would you characterize incentives as they trended through the quarter? And if you expect, we're starting to hear about some level of stability potentially if you're seeing that and expecting that to persist into the second quarter? And if that has anything to do in your view with how inventory trends may have potentially also started to stabilize as well, both new and existing.

Yes. It's a fair question. We talked already about the 100 basis points improvement in sales. But if I were to talk about it broadly, Mike, I would say similar to past quarters. The most expensive incentives tend to be with our first-time buyer group. Obviously, with the success we're having on the to-be-built, that was part of that was a good part of the 100 basis point improvement. But honestly, just as much of it came through a reduction in our spec incentives. So it was nice to see it in both areas. When I look at the cost of our forward commitments, the more expensive incentives, they were down quarter-over-quarter. When I look at our noncontract incentives, they were down. When I look at our contract incentives, they were down. So I'd say pretty much across the business, the exception would be where we had a higher penetration of specs and first-time buyer business, Mike, the last thing I'd probably mention on that just because I think it's an interesting stat as we looked at all the numbers is our incentives were down even though we offered the lowest average interest rate as we've seen in a number of quarters. So to think that our customers got the benefit of a lower rate and our incentives were down. It was a nice trajectory.

Sheryl I think as Mike suggested, I think the supply factors are also helping a little bit. If you look at unsold finished inventory, it's really down in almost all markets across the U.S. and the starts per community have kind of rationalized. And so as we think about the general new home inventory, there seems to be some stabilization. And on the resale market, I would say, in a good way, it's somewhat boring. Our markets average about 4.5 months. We've seen real stabilization on listings, only up 1% month-on-month and pricing actually a little bit of pricing power in the markets in resale. So it seems like a general stabilization that's helping that backdrop for both new and resale.

And we saw what about 1/3 of our communities, Curt, with some pricing. That was just base price adjustments. -- obviously, it'd be a much larger number if we considered a reduction in incentives.

Your next question comes from the line of Jonathan Bettenhausen with Truist Securities.

So you made a comment in your prepared remarks about buyer preferences returning to kind of more historical norms. Can you give us some more specifics on what exactly you mean by that? Is that more of a preference towards build to order? Or are you also referring to specific feature of the home as well?

Yes. No, fair question. I think honestly, it was more relating to the shift in the 38% to-be-built orders from the 28% in the fourth quarter. I think an important milestone and reflects what we think is a reemergence of for us, historic buyer preferences, obviously, clearing the spec inventory is helping that I mentioned on the call as well that we have hosted a number of design center open houses, and that's certainly been a key catalyst. We held over 140 events in the first quarter with a 23% conversion. But I think most importantly is that most of those sales were to-be-built sales. So we really saw customers coming in wanting to personalize their house. So I'd say it was more on the mix. But we also saw an overall increase in design center revenues. So I think it's also on the personalization of what they want in their homes.

And also the share of the community, right, Sheryl as you think about 82% of our buyers say that the community is as important as the house. And I think it's beyond just the offering and hopefully, that long-term gravitation to the overall community as well.

And you're saying it's a fair point, Erik, because we're also seeing it in lot premiums being generally slightly up in most divisions, flat overall. So I hope that helps.

Yes, that's helpful color for sure. And then also, it was a strong quarter for the Financial Services business on a year-over-year basis. What kind of went into that and should we expect that performance to continue through the balance of the year?

Yes. Great question, Jonathan. A couple of things that I would say are the main drivers there. One is the high investor demand in the secondary market was very favorable in the quarter. And the second thing I would say is we're operating the business with just a lower cost structure overall. So those are kind of the 2 main contributors to that. As we look forward for the rest of the year, a lot of that will be dependent on, again, that investor demand in the secondary market, and we'll just kind of keep our fingers crossed, and we'll see how the rest of the year plays out.

Your next question comes from the line of Rafe Jadrosich with Bank of America. .

Great. I really appreciate all of the color that you gave on the land banking exposure. Just a couple of follow-ups on it. Can you talk about the like accrued interest or the option maintenance fees relative to what's like flowing through your P&L today. And if it's sort of matched up and how we think about the potential like margin implications longer term? And then how do you think about seller financing like relative to land banking as you continue to sort of increase the option mix?

Yes. Rafe, it's Erik. I'll start and then maybe when it gets to some of the accounting, ask Curt to jump in as well. When it comes to seller financing, it's always been a preferred tool of ours. When we have the ability to talk to a land seller, and really add value over time to their property. We found that cost of capital to be lighter than most other sources. So historically, it's kind of gravitated in that 6% to 7% range. So that is a preferred methodology. When it comes to land banking, yes, we did make mention of kind of the gross margin impact to the business. We do cost it in 2 different buckets, being capitalized interest and interest expense. And it does flow over time. So depending on what you have flowing through the portfolio, the timing of those communities, you're going to see a little bit of kind of picking the python as it moves through the financial statements.

Yes, Rafe, generally speaking, when a site is under development, we capitalize the interest into inventory. And then when those houses close, they get -- they come through on the closing on the margin front relative to that home. -- when a site is done with its development, we then treat that interest expense as a period cost, and it gets run through the P&L down in interest expense.

Great. That's really helpful. And then on the margin outlook side, I think you're assuming sort of stable construction costs, have you seen any impact from inflation related to the geopolitical backdrop yet? And what's the expectation there? Like we've seen some price letters and obviously, diesel costs are up, do you have contracts that like lock you near term? And what's the potential just the overall impact.

Yes. Great question, Rafe. What I would say, first and foremost, our costs quarter-over-quarter were down. So we're very proud of that. Our teams continue to do a lot of great work and working with our trade partners and our suppliers on trying to execute on our house cost reduction and mitigation strategies. Relative to what we're seeing relative to the Middle East conflict is today, nothing tangible has come through. To your point, there's been a lot of news out there relative to potential increases coming. But thus far, we have not seen any of those come through yet to us and hit us. Now if they were to happen to come through based on what I articulated a second ago is that we continue to work on our house cost reduction strategies overall. And so if there is some impact, I think we can overcome a lot of that and offset a lot of it based on some of those strategies. And if there is some flow-through for this year, it's going to be mainly a Q4 event if it does impact us. But I'm pretty optimistic about our team's ability to continue to work on our strategies to minimize overall cost increases.

Your next question comes from the line of Jay McCanless with Citizens Bank.

So a couple of questions. And Sheryl, thank you for all the color around the design center events. I guess, could you maybe give us some context of how many of those you ran last year and what type of conversion improvement you saw versus last year? Or was this a new initiative that you all did this year to try and see what kind of to-be-build demand was out there?

No. We've been doing it design days for years. I would say we ramped it up pretty meaningfully. We've gotten better at it, and we really have focused it. It's not exclusively around to be built. But by giving folks the time with design experts in a very relaxed evening environment, we've just found it to be a remarkable tool. So I don't want to say it's double, but it's close to that.

Okay. And then the second question, you guys talked about mid-single-digit land inflation. I guess kind of a 2-part question. One, has the resurgence of to be built demand come faster than you all expected? And I guess, two, is there an opportunity to maybe rebalance some of your land portfolio to walk away, sell, however you want to term it, some of the more entry-level dirt to focus on more of the A and B locations that you have sitting in the land portfolio now and maybe help offset some of that land cost inflation with higher gross margins, et cetera?

It's a great question, Jay. And we continue to open up. If we look at community strategy. I think it really has set us up for a repositioning and a reacceleration into '27. When you look at the communities we opened in the first quarter and a number of what we've we have planned to open in the second and the back half, many of them are focused on the move up. Yes, we do have to continue to sell through on what I would call our first-time buyer position. But when I look at some of the success in those openings, specifically, I mentioned Atlanta. Our team there opened 2 new move-up communities in the quarter, booking nearly 60 sales. Only 3 of those 6 specs. They did just a great job in presales a lot about what I talked about with the new -- the enhanced framework on our community openings, really making sure that we're doing a nice job in the presales. And it's just continuing to yield dividends for us. Last quarter, I think I talked a great deal about, a new community that we opened in Phoenix with the success we had. In fact, that's a community that's mostly move up. And we're restricting sales in that community to ensure that we can align sales and construction cadence and have the ability to raise prices. So it's evolving through our investment committee approvals. But yes, you'll continue to see a greater pivot to the move-up and the Esplanade.

And Jay, that kind of inflationary number is kind of the historic perspective of what's running through the P&L. So to Sheryl's point, and you know that we've spent some time and energy kind of pairing the portfolio fourth quarter and first quarter as you see some of those walkaway costs. And so to your point, as we look forward, that in step with what's coming through the investment committee, I think last quarter, we mentioned about 85% of what came through in 2025, we would deem core and 100% in the first quarter. So that will continue to kind of evolve and get us back to where we want to be. .

Your next question comes from Ken Zener of Seaport Research.

Could you -- looking at order seasonality, which historically peaks in 1Q, then kind of moderates. Can you talk to the expectations given that orders and starts are going to kind of be reflective of each other? It sounds like in your commentary. And is that like driven by new communities?

Yes. We've talked about a fairly significant opening cadence. So I think to Curt's point, that will align well with starts. We talked a little bit about April and the momentum we're seeing there. So given the increase in communities and just the robust reception that we're seeing from the consumer, I think you'll continue to see a balanced view on specs and to-be-builts. But overall, I don't see much difference in our overall absorption levels as we continue to work our way through the second quarter.

So you say absorption, are you referring to the pace kind of holding the same?

Yes. I think pace generally holding the same and then obviously a ramp-up in communities. .

Your next question comes from Alan Ratner of Zelman & Associates.

So I appreciate all the color so far. I was hoping to dig in just real quickly on the pace and price kind of decision or strategy and really kind of trying to figure out the elasticity you're seeing in demand right now because when I look at your orders for the quarter, down 14% year-over-year, it seems like that was in line with your plan, given the fact that you reiterated the guide, but it does seem a little bit lighter than what we've seen from some of your competitors. And I'm curious, as you kind of drill into the local market data, do you feel like you lost a little bit of share in the quarter? And was that at all a function of dialing back those incentives and maybe prioritizing the price and margin over pace in the quarter? Or am I perhaps thinking about that the wrong way? Just curious if you've done any analysis on that front.

Yes. No, I appreciate the question, Alan. Interestingly enough, and I understand that we missed consensus on orders. But when I look at our internal plan, we were actually spot on. So when we plan the year, guided to say 11,000 closings, our internal expectations on sales, pretty accurate. When I look at the pace market by market. As I said, we had a couple of markets that had larger misses. I pointed to Orlando with some of the repositioning. So with a reduction in community count a little bit in Denver. But across the rest of the business, I'd say exactly within expectations. As far as dialing back incentives, we've always talked about, Alan, that certain communities are intended to operate at a higher pace and some were going to extract all the value out of. And I really believe that. We have too much confidence in the communities we build that we're just not going to come to some of the aggressive discounting that we've seen. We don't need to. We think we can create more value this way. So in total, a little lighter, I know than what the market expected, but actually in line with our expectations.

Got it. I appreciate that. And I guess I'll leave it there since the market is open. So I appreciate you squeezing me in. Thank you. .

Your next question comes from Paul Przybylski with Wolfe Research.

I guess, Sheryl, you mentioned that geopolitical events the rate increase tied to that has been a headwind to consumer confidence in the first quarter. In prior shocks like this, how long has it taken the consumer to rebound, if you will. Would you expect maybe the spring selling season extends into the second half of the year? Or is the consumer more apt to wait until '27 for more certainty?

No. I think we're already, it's an interesting question, Paul. And I'd say each market performing a little different on what the consumer is saying on the sales floor. I mean our web traffic is up considerably year-over-year, which I find a very encouraging sign. Foot traffic down a bit in most of our markets. But certain markets, I'll speak to Denver. It seems to be very, very tied to interest rate volatility. Other markets, I would say the macro just hasn't seemed to impact the way the consumers think in. So my instinct is, you're right, that we will see the spring selling season behave a little bit differently this year. It has been pretty consistent to what I'd say has been more historic norms if we know what normal looks like anymore and probably will go a little bit longer. Based on the level of activity that we're seeing and the engagement on the website and with our sales and online sales team members.

And maybe just one encouraging thing, Sheryl, as you think about generations, millennials specifically, 88% when they show up, they say they're definitely or seriously considering a home purchase. And so -- it's just one data point, but it is encouraging to see when they are engaged, that they are serious. And so you always imagine that all to your point, there are some things that pull people off the fence. Some of it will be some of the things you mentioned. And for others, it will be something else. But it's encouraging to see some of the folks that are showing up very engaged.

Well, and our conversions are at record highs. So the folks to your point here that are showing up have intent to buy.

And then you mentioned AI employment concerns. Is that still pretty much contained to IT sector? Or are you seeing that broaden out across your consumer segmentation.

Yes. You mean as far as any resistance because of concerns around jobs. Yes. It's not something that our sales team hear a lot about. Certainly, there are some tech markets that may be a little bit. But I wouldn't say today that it's been a significant factor. When I look at the cancellations even though they're low, and I tried to get any trends there, Paul. There's some -- there's been some job concern, but it's actually a very small piece of the total cans.

There are no further questions at this time. We reached the end of the Q&A session. I will now turn back the call to Sheryl Palmer for closing remarks.

Well, thank you very much for joining us to discuss our first quarter. We wish everyone a good few months, and we'll look forward to seeking you at the end of Q2.

This concludes today's call. Thank you for attending. You may now disconnect.