Sheryl Palmer - President and CEO Dave Cone - CFO Jason Lenderman - VP, IR and Treasury.

Ivy Zelman - Zelman & Associates Michael Rehaut - JPMorgan Nishu Sood - Deutsche Bank Mike Dahl - Credit Suisse Jack Micenko - Susquehanna Financial Group Patrick Kealey - FBR Capital Markets Jay Mccanless - Sterne, Agee Alvaro Lacayo - Gabelli & Company Alex Barron - Housing Research Center.

Good morning, and welcome to Taylor Morrison’s First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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 Mr.

Jason Lenderman, Vice President, Investor Relations and Treasury..

Thank you, Vanessa, and welcome everyone to Taylor Morrison’s first quarter 2016 earnings conference call. With me today are Sheryl Palmer, President and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities.

Dave will take you through a financial review of our results along with our guidance for the next quarter and for the full year. 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. With the first quarter of 2016 behind us, I’m pleased to share our results for what could only be described as a unique period.

Despite the implications produced by the volatility in the stock market over the last several months, we had a healthy start to the spring season. Consistent with past quarters, I will share some thoughts about the business and industry in general and walk you through our vision and approach for the rest of the year.

From there, Dave will provide a review of our operating results and I will close with some final remarks. Our hope is that you leave today’s call with the appreciation for our continued belief that the underlying market conditions for our industry are sound and that Taylor Morrison is well positioned to take advantage of those fundamentals.

This conviction allows us to be consistent in our strategy and in the tactical execution of our plans. With that in mind, and before I dive into the details of our quarterly performance, I want to talk about a handful of national economic indicators that still suggest an overall healthy backdrop for homebuilding.

Months of supply for both existing homes and new homes continue at good levels as demand and supply find an equilibrium. Existing home supply is roughly flat year-over-year at 4.5 months and new home supply is still in a good place at under six months.

Building permits missed some estimates in the month of March but it’s important to note they were still up year-over-year and during that same release, February was revised upward, which represented a nine-year high.

If we take a step back and look at the larger trends for these metrics, as opposed to focusing on single data points, the trajectory is positive even if the slope of the line isn’t as steep. As discussed before, the pace in which these metrics are advancing is more controlled than in the past, but we still believe this is a healthier path.

Mortgage rates are also providing nice traction to the industry in a few different ways. Despite the first Fed hike in December, rates continue to be at historically low levels and current signaling from the Fed would suggest moderate and cautious increases as we move through the year.

The financial health of the consumer is also improving as evidenced by foreclosure filings reaching their lowest levels since the fourth quarter of 2006.

Similarly, the percentage of underwater mortgages has been in single digits for three straight quarters and real estate equity on personal balance sheets saw another significant sequential quarterly improvement.

Knowing that Texas and more specifically Houston is a focus, let me provide some specific economic metrics that help paint the picture for that market. In the first quarter, pending home sales for the entire market increased year-over-year in every month; 9.1% in January, 1.3% in February and 4.9% in March.

Oil has also seen some stabilization even in light of negotiations around production levels. Of course, we will be interested to see if any progress is made during the next OPEC meeting in June. I call your attention to these data points as a way to provide context what is proving to be a fairly resilient and diverse economy in Houston.

Please do not take this to mean that Houston is producing positive compares for us year-over-year, because that is not the case. The explanation for our comparative Houston performance is multifaceted and not isolated to the oil industry.

First, for Taylor Morrison specifically, as you will likely remember from last year, we had an extremely strong first half 2015 in Houston, which makes for a difficult compare in the best of market circumstances.

We did nearly 60% of our sales volume in the first half of last year compared to 2014, which was another tremendous year in Houston for us where sales for the first half of the 2014 year were closer to 45% of the annual total.

But an even distribution in 2015 demonstrates how our Houston communities were late to feel the impact of the recent market downturn with a lag as long as two or three quarters. Interestingly enough, we felt the effects in our Darling business start in the third quarter of last year and it appears to have found the bottom in Q4.

Our Taylor Morrison business didn’t feel the impact until Q4 of last year and saw some additional slippage as we rolled into January of 2016.

I’m happy to report that both businesses had their best month in April with sales approximately 25% better than any prior month this year and recent feedback from the field suggest better footing moving forward. Another telling data point is our Houston margin performance, which was flat year-over-year.

It speaks to our belief that our land positions and our confidence that even in a tough market like Houston, we still have some very good assets that add quality to our total portfolio. Keep in mind too that as the company portfolio continues to grow, our exposure to Houston is diluted.

So while performance is down year-over-year in Houston, our susceptibility to an outsized impact to the total company is minimized. From a balance sheet perspective, Houston’s land inventory has continued to trend down year-over-year and is roughly 10% as a percentage of the total company.

One of the benefits of having the diversified geographic footprint is that it allows us to lean on other areas where markets are strong right now, such as Phoenix. Forward-looking metrics support the thesis of a solid market with new home sales and building permits, both of around 30% in the first quarter versus the prior year.

So while we manage through the choppiness in Houston, we are able to offset some of that headwind with other parts of our portfolio, which fits squarely into our strategy and has driven part of our recent decisions concerning diversifications and the growth of our footprint. Now onto our company results for the quarter.

I am very pleased to report that we met or exceeded every point of our quarterly guidance, most notably with higher than expected closings and improved margins. We increased community count by 36% year-over-year to an average of 310 communities. Net sales order totaled 1,828 in the quarter, up about 6%.

This growth rate is obviously down from what we saw in January but as you look at the details, an important distinction emerges. Sales growth in January and February was very healthy but March sales were basically flat year-over-year.

Similar to other recent discussions, we believe March performance was primarily driven by the Easter holiday following earlier in this year. The strength of April underscores the anomaly of March as April has seen a healthy rebound on a sequential basis.

April sales were up approximately 23% year-over-year even in light of the Houston market being shut down for a week due to inclement weather. I’m extremely pleased to see the strong start to the second quarter as our Q2 2015 creates our most difficult sales comp for this year.

Q1 sales per outlet came in at two per month as we expected coming into the new year. As we discussed in the last call, we will manage this somewhere between 2 and 2.2 depending on the quarter and would expect to be somewhere in between for the full year. Finally, cancellations were about 13.8%. Overall, a solid start to the year.

What’s more encouraging is that in spite of the media tendency to focus on negative narratives around the economy, these results show that there are positive indicators within our industry. Now, I will turn the call over to Dave for the financial review..

Thanks, Sheryl, and hello, everyone. Before I begin, I want to remind everyone of two changes communicated in our last earnings call. The first change was the expansion of our segment reporting from two to three areas within our home building operations.

First, the West area which is comprised of operations within California, Arizona, Colorado and Illinois. Second, the Central area comprised of operations within Texas. And lastly, the East area which is comprised of operations in North Carolina, Georgia and Florida.

For purposes of this call, I will focus on total company results with some added color where necessary for different segments. The second change was a shift in how we communicate margin results. Moving forward, I will only reference the GAAP homebuilding margin rate or put another way, the margin rate that includes capitalized interest.

The intent in doing this is to simplify our financial story while also providing the best data points for financial modeling purposes. For the first quarter, net income was 26 million, which equated to $0.21 in earnings per share.

As a reminder, the first quarter of 2015 included the sale of our Canadian operations as well as the hedge gain associated with that transaction. After adjusting for these two items, our adjusted net income was 21.1 million for the first quarter of last year.

When doing that, our first quarter 2016 net income and EPS growth year-over-year is approximately 23%. We believe pointing this out is important in understanding our results from continuing operations given the transformative year we experienced in 2015.

Home closings gross margin, including capitalized interest, was 18.2% for the quarter which was ahead of our expectations. On a year-over-year basis, our home closings gross margins increased 30 basis points. The main driver of the improvement was 65 basis points from lower capitalized interest on a per closing basis.

This was partially offset by 25 basis points from purchased price accounting. We have been quite pleased with the level of impact purchased accounting has had on the business with the three acquisitions in the last 12 months. We think this speaks well of our acquisition process and the final price we paid for each business.

Finally, we did experience some modest increase in labor year-over-year. Labor continues to be a challenge especially in our higher volume markets. However, we have seen some minor easing in certain areas such as Houston. Moving to mortgage operations.

We generated 9.6 million of revenue during the quarter representing a 26% increase over the prior year. Gross profit was 3.1 million while our capture rate increased by 500 basis points year-over-year coming in at 79%. SG&A as a percentage of home closings revenue came in at 12.3%, which is higher than the same quarter last year.

This was expected as the increase relates in part to the investments we’ve made into the business in the second half of last year in both people and systems, which we believe is necessary to further strengthen the foundation to manage our continued growth.

In addition, we also had expenses related to the integration of our 2015 acquisitions and the acquisition of Acadia Homes within the quarter. As I mentioned, SG&A came within our expectations and we remain committed to driving a full year rate of about 10% for 2016.

We continue to focus on efficiencies but our key remains diligent in managing costs across the organization. Our earnings before income taxes totaled 39 million or 6% of total revenue. Income taxes totaled 13 million for the quarter representing an effective rate of 33.1%.

At quarter end, we had an increase of 17.6 in our backlog to 3,432, which equated to 1.6 billion. During the quarter, we spent 189 million in land purchases and development and we continue to be on track to spend about $1 billion for the year.

The land acquisition and development cost split continues to equalize to a range that is closer to 50-50 when compared to last year where the split was 56% land acquisition and 44% development. This shift is a conscious decision as the cycle matures and we position ourselves to monetize our assets.

Our total land bank at the end of Q1 consisted of approximately 45,000 lots owned and controlled. The percentage of lots owned was approximately 74% with the remainder under control. On average, our land bank had 6.4 years of supply at quarter end based on a trailing 12 months of closings.

Our strong well-positioned land bank gives us increased flexibility especially in times when there appears to be a lack of land price capitulation. We will invest our capital carefully, thoughtfully and at the right time.

This philosophy promotes the management of the portfolio as a whole and it helps us navigate the ups and downs that are bound to impact individual markets. With our 6.4 years of supply, it allows us to be selective and opportunistic in our investments while maximizing total shareholder returns with the acquisition of truly core assets.

We ended the quarter with about 141 million of cash and our net debt to capital ratio was 44%. At quarter end we had outstanding borrowings of 310 million under our $500 million unsecured revolving credit facility. This is a temporary bridge to fund short-term cash needs. Our cash position was strengthened by the strategy to manage finished specs.

As discussed in our last call, we have historically aimed to have 1 to 1.5 finished specs per community. We made a decision at the beginning of the year to target our finished specs to about one per community while focusing on a measured approach to limit the margin impact. Through the first quarter, we have succeeded in doing just that.

Our capital allocation priorities remain consistent and that we will always focus on the best use of cash. Organic investment is our first consideration and it lays the foundation for our future. We follow that evaluation up with M&A considerations that result in either geographic or product diversification.

From there, we consider deleveraging our balance sheet by paying down debt. Lastly, we look at our options and returning excess cash to our shareholders through dividends or share repurchase. Within the last 15 months, we have been able to exploit each of these capital strategies as they rose to the top of our analysis at different times.

As an example, in January of this year, we repurchased $5 million of our stock given the compelling price. Our investment philosophy and prioritization is and will continue to be a critical component in driving short-term performance while securing long-term health of the overall business.

Even in light of the new target level for our finished specs that I mentioned earlier, our incentive strategy remains relatively stable and we have not relied on it heavily to drive volume. We anticipate it will remain in a steady state on a total portfolio basis with certain movements from market to market, as is always the case.

Our approach to incentives is rooted in our pricing philosophy and our strongly held belief in the quality of our land positions. Now let’s turn to our guidance. For the full year, it remains unchanged and we expect to have an average community count between 310 and 320 leading to a maintained monthly absorption phase between 2 and 2.2.

We anticipate closings growth to be between 10% and 15%. GAAP home closings margin, including capitalized interest, will be in the low to mid 18% range inclusive of our new operations and purchased accounting impacts. SG&A as a percentage of homebuilding revenue is expected to be around 10%.

JV income is expected to be between 10 million and 15 million and we anticipate an effective tax rate between 33% and 35%. Similar to 2015, land and development spend is expected to be at or just below 1 billion for the year. For the second quarter, we anticipate community count to be generally flat sequentially to Q1.

Closings are planned to be between 10% to 15% over Q2 of last year with GAAP home closings margin, including capitalized interest, expected to be in the mid-17% range.

The continued impact of purchased accounting and our desire to manage our completed spec inventory more efficiently is leading to a projected higher mix towards specs and to-be-build homes. Putting a bit of pressure on the margin rate, we still favor this spec strategy as it helps to drive cash flows. Thanks.

I’ll now turn the call back over to Sheryl..

Thank you, Dave. Dave mentioned a couple of topics that I’d like to expand on. First, let’s talk about labor. As Dave explained, we have seen some positive movement in certain markets such as Houston. There has been a gradual labor transfer happening between the oil industry and other industries such as homebuilding.

That transfer was probably slower than some might have thought, so we have started to see some benefits come through.

Of course, there still are markets in which labor is just as constrained as it was last year and we don’t expect any significant relief, only that pressure points will continue to move through different phases of the construction schedule. Phoenix is a good example for this case.

Demand is high, volumes are up year-over-year and the frontend trade continued to fall further behind. Recognizing this is likely be a new normal for the industry for a while, we continue to work closely with our division to instill a superior plan production cadence in order to assist our trade partners in optimizing their efficiencies.

Given our significant growth over the last few years and to complement the good work the team has done to continue growing our legacy business, we thought it was critical to further focus the team on enhanced excellence in operations.

Alan Laing, our Executive Vice President of Homebuilding Operations just completed three months with the company and has already made a substantial impact.

With the continued labor shortages that we have now been discussing in our industry for more than three years and a rising land and construction cost environment, the teams under Alan’s leadership have a heightened focus on the benefits that our new scale provides.

As we have said since our IPO, there is a right time to aggressively grow our land parcel and in fast and longer, more strategic assets compared to a maturing cycle when we need to use our discipline to invest differently and to double our efforts to optimize operations and enhance our bottom line.

Part of that operational efficiency will help with our integration efforts, which is another significant benefit at that focus. Through our acquisitions in the last year, we have grown our geographic footprint by five divisions.

The integration of these divisions are at different stages with the JEH and the Orleans divisions almost at a point of complete integration. Acadia is, of course, our most recent acquisition and as such is still in the middle of that process.

As I mentioned last quarter, early indications have all been very positive and we have been able to apply learnings from our earlier integrations to make this most recent acquisition as seamless as possible. From a brand perspective, each have been fully integrated into the Taylor Morrison’s portfolio.

Now, I’d like to provide a quick update on mortgage. With more than six months since the industry moved to the TILA-RESPA Integrated Disclosure world or Know Before You Owe, the mortgage industry continued to adapt to those changes.

Recent reports suggest improved average time to close and Taylor Morrison Home Funding is experiencing the same positive improvements. All loans originated by TMHF in the first quarter of 2016 were subject to the new disclosures and 51% of the loans closed in the first quarter were under the new rules.

While TMHF has successfully transitioned to the new disclosure and processes, it is encouraging to us that the CFPB recently informed the industry that it acknowledges the need to clarify and provide greater certainty within some areas of the rule, and have begun drafting a Notice of Proposed Rulemaking.

Overall, our borrowers are not experiencing any delays or disruptions in the mortgage process related to TRID and we have not experienced significant challenges in delivery of our conforming and jumbo loans.

Because TMHF has multiple sources to sell their loans and the ability to go direct to Fannie May, we are well positioned to continue to serve our customers’ financing needs and embrace the new requirements.

We continue to see a very strong borrower profile with an average credit score of 744 in the first quarter compared to 740 in the prior year period with an LTV of 76% and an average DTI of 37% on an average loan amount of 327,000.

Using finance as a sales tool, TMHF attracts a strong first-time buyer representing 31% of our first quarter TMHF closings. The baby boomer segment represented 29% of our TMHF closings for the quarter whereas millennials represented 25% of TMHF closings and had credit scores higher and debt ratios lower than the national average.

In summary, I believe we have gotten off to a good start in 2016 and we are optimistic about our markets and our defined strategies to enhance our results. By sticking to our capital allocation philosophy and focusing on our four-pillar strategy, we will position the company for meaningful success in the short term and long term.

We can never lose sight of our purpose to manage through full homebuilding cycles while driving shareholder returns. I’m convinced we have the right strategies and right people in place to accomplish the former while maximizing the latter. I’ll close with a big thank you to our Taylor Morrison family.

The first quarter was another quarter with solid year-over-year growth in almost every metric. 2016 is shaping up to be a year where we will once again deliver a great experience to our customers, our shareholders and to each other. With that, I would like to open the call to questions. Operator, please provide our participants with instructions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We have our first question from Ivy Zelman with Zelman & Associates..

Thank you. Good morning, everybody. I appreciate you taking the questions..

Good morning..

Sheryl, can you start by just chatting a little with us about what’s going on in California? Obviously, the performance there on a year-over-year basis was under pressure. Do you feel good about that market? There’s been concern about high end and slowing, but many have not reported that in California. So, tell us what’s going on there.

And then maybe just take us around some of the other markets, west – at the Mississippi? What’s happening in Arizona and Nevada and update in some of the core markets in terms of fundamentals and your level of conviction that things are off to a good start for this spring?.

Okay, you bet, Ivy. So let me start with I think California is what you specifically asked and I will head around the country. California is a few different stories to be quite honest about it. Let me take the stay and kind of break it apart. Let me start with the quarter and then I’ll kind of roll into March.

Most of the story for us in California really just comes down to availability of products this year and then really the comps that we’ve had in 2015. So if I start in southern Cal, probably three quarters of our sales in Q1 '15 were delivered from four communities. And they were unique products, attached products and good price points.

One of them was the Costa Mesa product, which was the lowest price point in the market. We had a lot of volume I guess is what I’m saying.

And so when we look at where our sales came from and then we look at what’s happened with our new communities in southern California and the average sales price, which is now about $1 million, our paces are actually in line with our expectations.

As I move up into northern California, we did have also some good comps there within the first quarter of 2015 and similar where we had some very, very high volume communities in first quarter of last year generating significant paces.

As we’ve closed out of some of those communities – some of our new communities would be what I would call them more normal pace. When we get to the Bay, that’s a little bit different story. Last year we sold through the majority of our Silicon Valley project and when we replaced those, those generally tend to be in, like the East Bay.

And given the product profile, those don’t generate the same types of absorptions that we would have with the multifamily product in the Bay. So once again, there’s nothing there that is unexpected for us. It’s truly a combination of product availability and product offerings in '15 versus '16.

If I move through the rest of the country, let me start with Phoenix. Phoenix continues to be very strong, Ivy. Paces are up. Our opportunity candidly in Phoenix is just about getting them filled given the sales pace. If anything, I’d say we’re holding sales paces back in certain communities in Phoenix to make sure that we manage backlog properly.

Carolinas, still very early days for us, good teams. Steady is how I would describe the Carolinas. We still need to get both of those – each of those businesses to scale, still very affordable market. I think the fundamentals are good and feeling very good. Atlanta, I would say similar; very good success in Atlanta.

We’re now starting to take good growth in community count within our business but I think actually what’s happening in the market is we’re seeing significant growth in community count there as well. So I think it’s really about making sure you’re in the right submarkets. Market’s very affordable. Our paces are good. Our margins are good.

Really, really have been a great addition to the portfolio. Denver continues to be strong. I’d say any – if there’s anything I’d add to Denver is I think we’ve seen a lot of price appreciation year-over-year. I think you’re going to see movement to more affordable – I mean strategy to a more affordable product given what we’re seeing there.

So I still feel good about Denver. Employment flowing a bit but very good underlying fundamentals on supply. It’s probably one of the lowest supply markets in the country with just about a month of supply. Florida also continued very well. Tampa felt really good in the first quarter, very affordable.

Employment growth has been strong and I think it’s key to the continued success we’ll see there. North Florida also very strong employment growth. It seems like North Florida has gotten to a real steady kind of state on absorptions and price. West Florida, I think it’s been a little bit more ebb and flow. I think the market continues strong.

We saw a little bit of movement early in the quarter from discretionary buyers, but generally steady. Naples probably saw a little bit more of that than probably the Sarasota area. And where else? Chicago. Chicago I still say it’s slower. As I mentioned last quarter than maybe we had expected, I still think it’s one of the most affordable market.

Employment growth is good – employment’s good but probably no real growth yet, so I still think that’s one a little bit of when not – when we’re going to see that market return. And then let me wrap up with Texas, Ivy. I talked a little bit about Houston in my prepared remarks. Dallas; very, very strong.

I think from an employment growth, it’s one of – I think it’s number three in the country first quarter.

I think for us in Dallas we had a good first quarter last year, but when I looked at the timing of some of our communities, our closed out communities this year compared to what we had last year, I think it probably was a little lighter than we would have expected given our own portfolio. And Austin also doing well.

Number two employment growth, very right resell market. I think affordability is tough, so we’re going to continue to watch that market..

Extremely helpful, Sheryl, thank you for that. And I think just to follow up in summary on that, it sounds like there’s really not markets that at this point other than maybe Chicago which might be a little bit softer than you expected, generally it sounds like things are on track.

So if we took Houston out which was down 25% I believe year-over-year, do you know what orders were year-over-year excluding Houston? I think we had a question from a client.

And then secondly, the bigger question is on capital deployment and strategically where you’re investing for growth because what we hear from many is the challenges with respect to inflationary land and all of the components that go into that including impact fees and others. It’s much harder to pencil returns.

So when you talked about – I think, Dave, you talked about how much money, I think you said 1 billion, that you’re on track to spend.

Where is that money going? Where do you see within the portfolio the best opportunities and are you buying for now '18 and beyond and you’re pretty much set for '17?.

Okay, so let me hit the sales first, Ivy. I don’t have the breakout with me on sub-Houston but I think it’s important when you look at the central numbers to realize that Houston was down, no doubt about it. And as we’ve talked about, we had very strong compares and those continue.

When I looked at Houston last year, some of our strongest months in 2015 were actually March and April. So that continued for us through the second quarter. Dallas, as I also mentioned, so that was a central number you saw down 25%. So Dallas was slightly down but not much at all, so most of it did come from Houston.

On the capital deployment standpoint, as Dave mentioned, we’re going to spend just somewhere around $1 billion this year. When we look at what we approved in the first quarter, Ivy, it was across the board to be quite honest. Probably a little lighter in Houston of all markets, but we approved the land. So there’s really two ways to look at it.

We look at both the dollars that went out the door and the spend that we approved. And when I look at the lots that we approved, there was a fair amount in our new markets; Atlanta and the Carolinas, some in California, Dallas. As you know, we’re bringing Taylor Morrison to Dallas and Phoenix as well.

As you know, we did the land auction in Phoenix on the state land. I think your point about the markets, we’re having to take great care and consideration as we always have in our underwriting and the cadence around that, because some markets, we’ll take a step back and some markets we’re still very aggressive in..

When you mentioned the approval as opposed to thinking about something on there that’s new, is again think about your manufacturing machine of what you’re incrementally approving is going into the machine for '16 and '17 versus what’s new for '18? And I think just recognizing the last part of my question, and then I’ll go online and come back is what percent of your overall mortgage originations are sold direct to Fannie and Freddie of your total originations on an annualized basis or roughly speaking?.

Okay..

So on the land side, Ivy, are you getting to how much of that do we have in the pipeline already?.

Yes, I guess that’s what I’m trying to say. Like you approved it, you’ve been in due diligence, you’ve been on the land development side..

Yes, so '16 is obviously we’re done; '17 we’re probably 95% there. So most of the land buying we’re doing now is '18 and beyond..

Yes, and I think the other thing, Ivy, which obviously you recognized is that a lot of the spend that’s going out, that $1 billion that Dave spoke of, those are deals that could have been approved 12 to 24 months ago..

That’s what I wanted to make sure people understood, so that’s exactly right..

Yes, so you’re exactly right there. A good chunk of that came into the year already preapproved before they could be takedowns over a long-term period. Specifically on what we’re selling to the agencies, I think what you’re getting to is jumbo, recognizing some of the chatter that’s been out there.

We now have the ability to sell directly to Fannie on the conforming business. But as you might know that it’s pretty new for us. So we have that outlet if necessary and we’re glad to have it. But we’re actually not having any problems selling jumbo product off of our lines..

Great. Thanks, guys. Good luck..

Thank you..

Thank you. Our next question comes from Michael Rehaut with JPMorgan..

Thanks. Good morning..

Good morning, Michael..

Just had one question around the – bigger kind of picture question around the gross margins. And I know you’ve obviously reiterated guidance for this year despite the better than expected performance in the first quarter.

But as we look out and I know that you kind of sometimes refrain on giving guidance further than this year what you’ve already – you don’t give more than one year. But just over the next two to three years if you could just kind of remind us where that low to mid-18% should go.

If we have a situation where, again, you’re looking at kind of a stable home price cost environment, certainly the underwriting you’d expect to do, obviously most builders are in the low 20 to 20s type of range. As you grow the business, I would assume also the interest amortization leverage improves.

Any thoughts around the next two or three years directionally from the gross margin level would be helpful, I think..

Yes, Michael, you hit on a lot of the key factors. So if you look at a low 20s environment, as we get scale, it’s obviously going to help us from an interest perspective. Also, we’re continuing with some of the purchased price accounting and that needs to roll off over, call it the next year or so.

And then in addition to that, there is a component of new markets typically taking time to gain scale, get the benefits from national, regional rebates and cost advantages. So margins initially start off a bit lower but in time we try to work them up more so to the company average.

So given a lot of the acquisitions that we had now, plus where we are from a spec perspective. I talked about our desire to kind of accelerate some of the spec sales here this year to get that number down on a per community basis to about one.

It’s putting some short-term pressure but as we work through that, I think you should see something more normal for us going forward..

I think I’d add to that, Michael, from a long-term perspective, some of the things I spoke about in my prepared comments around planned production.

If you look at the growth the company has had over the last 24 months, we really have the opportunity to advantage ourselves from the growth that we’ve had and make sure that our efficiency levels are where they need to be.

And with Alan’s arrival, we have wonderful initiatives that will continue to allow us I believe to get what the market gives us and make sure that we can get more than our fair share..

That’s very helpful. And then I guess on the flipside, the SG&A continues to be an area of relative strength and I think kind of at the better end of the peer group.

As the company continues to grow over the next couple of years, do you think there is some incremental room to improve there because at some point the incremental variable equals where you are? And so it kind of gets tougher every year but certainly you’d expect perhaps a little bit of leverage as you grow.

Is that the right way to think about it?.

That is. I mean we do expect some leverage. Obviously, if you’re using 60 as kind of the compare point, we have expenses rolling through related to M&A and integration.

Again, as well as the new market typically run a little bit higher SG&A, not to mention the investments that we’ve made back into the organization, as I mentioned more so from the people system standpoint. So this is to help prepare us for that future growth, Michael. And that’s going to help drive the leverage.

So it’s going to come through the top line as we move forward..

Great. Thanks very much..

Thanks, Michael..

Thank you. Our next question comes from Nishu Sood with Deutsche Bank..

Thank you, and thanks for all the detail in the prepared commentary. My first question is about the trend in gross margins from 1Q to 2Q. Dave, you mentioned that the efforts to reduce specs will be a primary factor in causing the trend line to fall in gross margins into the second quarter. So a couple of things around that.

Is that the main factor? What gives you the confidence that the gross margins will have a strong enough trend in the back half of the year to keep you on track for the full year guidance? And also around the reducing spec, you’re being aggressive in terms of reducing spec. I just wanted to dig into that a little bit.

1.5 is not a huge number relative to some of the numbers we see out there for other builders trying to get it down to one. It is the spring season, so you would think you’d have the luxury of taking a little bit more time especially with the demand factor up being things stable and decent.

Specs might actually help to mitigate some of the delivery issues in some markets.

So why be so aggressive on spec at this time enough that it’s going to kind of temporarily derail the gross margin trend?.

Thanks, Nishu. I guess first I want to emphasize we’re not changing our underlying spec strategy. That’s still a very critical component due to our overall strategy. What we’re really talking about is just managing it more efficiently. We want to really focus on selling the specs and getting in a position to close it when we’re done with construction.

So it’s really that lag time at how long they sit out there finished before we close them..

And just to add to that, Dave, just to make sure that what you’re talking about is our finished spec strategy. So that 1 to 1.5 is finished spec, it’s not total spec..

Got it, okay. So that makes sense.

And then in terms of the confidence, what are the factors that are going to – or what gives you the confidence that what you’re seeing in your backlog on the spec versus the to-be-built margins, what gives you the confidence that it will rise in the back half of the year?.

Yes, well let’s maybe start with Q2 because the spec obviously plays a component and it’s also purchased accounting. So we have probably about 30 basis points of impact there. And if I were to look at Q2 relative to the year, this is kind of the peak year for the purchased accounting and the spec as far as impact on the margin and the quarter.

We did beat our guidance in Q1, so some of this is a little bit – was a pull forward into Q1 taken that out of Q2. But the backlog when we look at Q3, that’s what really gives the confidence. We’re showing backlog north of 18% as we move through the rest of the year.

So unlike last year where Q2 was kind of our peak margin for the year and 2016 Q2 is going to be the low point for the year, but it is going to trend higher than through the rest of Q3, Q4..

Got it, very helpful. My second question is kind of a similar flavor question on SG&A. You had great closings growth in 1Q, 31% well above I think the 10% to 15% you’re guiding for the year. But SG&A leverage was negative in terms of – the SG&A percentage is higher than it was a year ago. You’re still expecting the full year SG&A to be on track.

So you kind of mentioned it, Dave, but I just wanted to dig into it a little bit. It sounds like there were some significant integration expenses in 1Q.

Is the fade on the integration expenses what gets you back to being flat on a year-over-year basis on SG&A or what are the main factors there please?.

Yes, it’s really two things. So what we’re really seeing is short-term deleverage here in the first half. So it is a couple of things. M&A costs and then some integration cost as we continue to work through that. That is definitely having an impact.

But we’re also having to anniversary some of the investments that we made kind of Q2, Q3, a little bit into Q4 of last year. So as we lap that for Q1, it is our toughest compare. As we look to the back half, we actually expect to leverage the back half on SG&A..

Got it, okay. Thanks..

Thank you. Our next question comes from Mike Dahl with Credit Suisse..

Hi. Thanks for taking my questions..

Hi, Mike..

Hi. Sheryl, I wanted to go back to a couple of your answers to Ivy’s questions just to maybe elaborate a little more just since there are some heightened sensitivities in the market around California in particular.

So just to confirm again, it sounds like when you walk through your portfolio, you’re seeing this as primarily a product issue and kind of temporary positioning in comps and you are not seeing a step back in the high end buyer in California.

Is that fair? And if so, maybe you could also touch on Marblehead specifically and how you’re seeing that project and demand play out?.

Yes, that’s a fair question, Mike. Specifically, are we seeing a step back? No. Did we see through the quarter different trends? We absolutely did. So this isn’t just California but we absolutely saw it in California too. January was good, February was a little better and March really wasn’t. It was slightly down.

April has picked up significantly specifically in our California market. So I would point to that being a slowdown in the market, I think some of it’s in timing, like I said.

The devil’s really in the detail when I dig and I look at the absorption, I look at when new communities are coming on line when we’re basically sitting there with closed out product in other communities. And then when I look at some of the new stuff that’s opening in April and the success we’ve had, I’m still good.

Now having said that, as I’ve always said we don’t sell to a specific kind of global pace. It’s based on the underwriting we do for every community.

And so for example, if we’re introducing new communities in southern Cal that have an average – $1.5 million, we’re not expecting to do those at the same pace in Newport that we might have in Costa Mesa for an attached product.

So I know we like to do a year-over-year compare but for us what we really hold ourselves to is making sure that these communities are performing for the underwriting.

Specific to Marblehead, which I think was the last part of your question and then you’ll have to tell me if I missed anything, Michael, is it actually follows a very similar trend line that I just articulated.

First quarter; January was okay, February was okay, March was kind of slow and April bounced back and we were actually way over budget in March. So I like to see that that will continue but we haven’t seen anything specific to the high end buyer in any of our California markets..

Okay, great. And you didn’t miss anything there but it sounds like so everything is – maybe there are some puts and takes through the first four months of the year but net, you’re performing to underwriting..

Yes, I would have been surprised if we hadn’t seen some kind of movement given the volatility in the stock market. I think as I said last quarter, generally people are being a little bit more cautious and I also think they have more choices than they did a year ago not just in Taylor Morrison.

But I think the decision process is taking a little longer..

Fair. And then on Dallas specifically because I think you highlighted that as being a very strong market and certainly something that we hear and others have said. But then it sounded like you made a comment that your sales were still off a little bit.

And so just wanted to understand is there something going on there in terms of similar issues in terms of product positioning or community count that we should be aware of that’s keeping that sales pace depressed in Dallas relative to what looks to be a strong market?.

No, it’s a great market. You have that exactly right, Michael. No, Dallas truly as I mentioned – hopefully I mentioned in my prepared remarks. Dallas – or rather in my first question with Ivy, Dallas is really about the timing of our closeouts in the first quarter and the ramp up what we’re selling for models or what we’re selling for trailers.

So no, we feel very, very good about the Dallas market. April when we actually got the merchandize that continues to be very strong. So no, don’t take any signals there at all..

Okay. And one last one for Dave maybe. I think you made a comment around some of the – or maybe Sheryl made the comment, but some of the comments around Houston labor easing.

And Dave, I think last call you had mentioned when we think about the Houston margin maybe we see incentives pick up a little bit but you do expect to see some of that easing and labor pressures offset.

So can you kind of talk through how the experience has actually been and are you seeing enough of easing in labor pressures to offset anything that you’re seeing on the incentive side in Houston specifically?.

Yes, we definitely have started to see some easing in the Houston labor as we move through into last year. So maybe a little bit of that where we got year end in the first quarter but a lot of that we’re going to see as we move through the next couple of quarters.

But yes, our belief is still that the benefit we get there will probably be traded off with some incentives. So we’re in the same point..

And I think the good news around Houston, if I could add to Dave’s comment, is we’re seeing it on the labor side but we’re also seeing it on the land side. For the first time in a long time we’re seeing a different level of discussions with land sellers, our ability to negotiate. Price is always the last to happen but we are seeing it in term.

We’re seeing it in a willingness for this talk. And so it’s going to take a little time to get that all through the P&L on both the land and the construction. But I think we have some opportunities ahead..

Great. Thank you..

Thank you..

Thank you. Our next question comes from Jack Micenko with SIG..

Hi. Good morning..

Good morning..

I think in the prepared comments you had said Houston was 10%.

I’m just curious, was that land or is that dollars or how do we put that 10% in context?.

It was inventory. It was real estate inventory, Jack..

Okay, great.

And then getting back to Nishu’s question on the specs, is any of that some alignment with sort of integrating the acquisitions more and maybe more aligning?.

No..

Now it’s just across the board..

No. I just want to make sure that everyone understands the message. As Dave said, this is not a change in strategy. This is a discipline within the organization that you want to sell, we love that, and they’re an important part of our short and long-term strategy.

But what you really want to do with specs is sell them before they’re complete and close them within the months that they complete.

And so we think from just a pure discipline standpoint in the field, it makes sense to carry one finished spec on average per community compared to one and a half to make sure that we’re turning those and that we have a good cadence around our strategy, the kinds of spec, the way we merchandize our spec. So that’s what it is.

It’s actually just a good business practice..

Okay.

And then just one real quick one, [indiscernible] ticked up a little, was that mostly out of the central market?.

Yes..

Okay, all right. Thanks for taking the questions..

You bet..

Thank you. Our next question comes from Patrick Kealey with FBR..

Good morning. Thanks for taking my questions..

You bet..

So just wanted to focus on I think you said you saw 23% kind of year-over-year growth to start off the quarter in April.

Is there any particular market that was driving it so far or was that essentially broad-based kind of ex-Houston, if you will?.

Yes, pretty broad based across all markets and I would – as I said in my comments, Patrick, even that Houston still down because it’s up against some tough comp, it still compared to what we’ve seen over the last six months plus really, really good. So it was really across the whole portfolio I’m delighted to report..

Okay, great. And also think you mentioned for kind of your mortgage services business, first-time buyers made up 31% and I think millennials were 25%.

So can you maybe give us what that split looked like maybe a year ago just for comparison purposes? And then maybe if you could also kind of give us some color on what you’ve actually seen out of the first-time buyer cohort to start out the year? I think that would be helpful..

Yes, I can do that. So first-time buyers if I were to give you a compare – sorry, give me one second. It’s absolutely up from about 28% through first-time buyers to 31% in 2016. And as I also mentioned, our boomer buyer is also up. The other interesting that came out is because I think it’s important when we talk about first-time buyers.

We’re also tracking millennial buyers very, very closely. And when I look at millennials, interestingly enough, Ellie Mae just put out a report this week on kind of millennial borrowers around the country and recognizing this is a cohort of about 87 million, about 90% of them said they want to buy a home one day.

And when I look at our millennials and how that aligns to Ellie Mae, we’re pretty consistent generally running somewhere in that low 30% across most of our markets. But I think it helps to sell the discussion that millennials aren’t homebuyers..

Okay, great. Thank you..

You bet..

Thank you. Our next question comes from Jay Mccanless with Sterne, Agee..

Hi. My questions have been answered. Thank you..

Thanks, Jay..

Thank you. Our next question comes from Alvaro Lacayo with Gabelli & Company..

Good morning, guys..

Good morning..

I just had a quick follow up on just order pace on the West. I mean you guys sort of detailed the moving pieces in California. Was California the only reason there was a bit of softness in order pace year-on-year? And then there was a comment about sort of normalized pace in one of your segments within California.

How should we think about the order pace in the West going forward for the rest of the year?.

If I look at the first quarter and the orders being flat, it was California. Denver was generally flat, a few units maybe. So California was down, Arizona was up and Denver was generally flat..

And we had obviously Chicago in there which wasn’t in there last year..

Yes, our smallest market. So it was really California that made up the total numbers..

Got it, okay. And then just on backlog conversion, it was stronger year-on-year.

Just wondering how you think about it for the rest of the year? And I know you mentioned some puts and takes and Houston labor easing, but just some of the drivers of the stronger conversion and if you expect to see that in the next coming quarters?.

I think you’ll see the conversions more or less in mind was last year, probably in the second and third quarters and probably something similar for the fourth quarter..

Okay, great. That’s it for me. Thank you..

Thanks so much..

Thank you. [Operator Instructions]. Our next question comes from Alex Barron with the Housing Research Center..

Thanks. Good morning.

I was hoping you can comment a little bit more on Texas, what do you expect the direction of your community count in Houston I guess to go the remainder of the year? Is your strategy to just let communities wear off as they close out or are you guys still trying to kind of maintain a flat community count [ph]?.

Our Houston market when I look at what’s coming on and off the line this year, it’s generally I think pretty flat when I combine both the Darling Houston and the Taylor Morrison Houston business. Then I look at the one opening and coming down, so generally flat..

Okay.

And then can you comment a little more on why Dallas you said was down a little bit? Is that timing of communities or is that signaling maybe that market has kind of hit a peak you think?.

No, it’s not any signal. It’s absolutely the timing of – when I look at what we had opened first quarter last year from a compare and the timing of our closeouts in first quarter and our new openings, a number of communities we had opened in first part of this year.

We’re kind of entering that closeout mode, so they’re just going to have the same level of product. And then we had a number of new communities coming online and maybe models not open kind of a presale environment, so no. As we got those open actually in April we saw some great resilience.

So no, no signals about the market, just facts based on kind of year-over-year mix..

Great. Thanks so much..

Thank you so much..

Thank you. We have no further questions at this time. I will now turn the call over to Sheryl Palmer for closing remarks..

Thank you all for joining us today and have a wonderful afternoon..

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating and you may now disconnect..