Taylor Morrison Home Corporation

Good morning, and welcome to Taylor Morrison's first quarter 2021 earnings conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Ayer, Vice President of Investor Relations.

Thank you, and good morning. I am joined today by Cheryl Palmer, Chairman and Chief Executive Officer, and Dave Cohen, Executive Vice President and Chief Financial Officer. Cheryl will provide an overview of our performance and strategic priorities, while Dave will share the highlights of our financial results, after which we will be happy to take your questions. In the interest of time, we ask that you please limit yourself to one question and one follow-up. 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 earnings release which is available on the investor relations portion of our website. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now, we will turn the call over to Cheryl.

Thank you, Mackenzie, and good morning, everyone. I appreciate you joining us today and sincerely hope each of you and your loved ones remain healthy and safe. I am pleased to share with you our first quarter results, which reflect the initial benefits of our enhanced scale and local market debt as we continue to execute our strategic plan. We achieved a 42% increase in our monthly absorption pace to an all-time high of 4.3 net sales per community and a 320 basis point improvement in our home closings gross margin. In addition, we ended the quarter with a company record backlog of over 10,000 homes and more than 73,000 total home building lots under control, positioning us to capitalize on the strong demand momentum we are experiencing across each of our price points and markets. And most importantly, we made progress towards our operational priorities aimed at increasing our profitability and return metrics over the next several quarters. After years of strategic growth and multiple acquisitions aimed at improving our long-term return potential, we are committed to delivering financial performance reflective of the size and operational advantages we have achieved in becoming a top-five homebuilder. To that end, across the organization, our priorities are aligned to improve gross margins, increase asset efficiency, leverage our overheads, and optimize our balance sheet. On the operational front, this work encompasses everything from streamlining our floor plans and design options, optimizing our strategic selling process, reducing our cost through procurement initiatives, and leveraging our virtual sales tools. These efforts have always been key to our strategy, but there is still room to apply our best practices consistently across our newer markets to partially offset the higher land residuals and construction costs in our newly acquired communities. We are following the proven roadmap we have used in other acquisition markets, such as Phoenix, Atlanta, Orlando, and Charlotte, where we have successfully realized significant accretion to deliver margins at or above the company average, following similar integration efforts and expect to achieve comparable results in our William Lyon impacted market. I am pleased that these efforts are beginning to translate into strong results as reflected in the composition of our homes and backlogs that we expect will drive accelerated margin accretion in the second half of the year and into 2022. For example, to streamline and optimize our business, we eliminated over 5,000 option skews from our inventory in the first quarter alone and have reduced our floor plan library by over a third since we began our rationalization effort. We have also introduced our standardized option pallets to well over 50% of our markets, further simplifying our design and construction processes. These initiatives are driving increased option penetration, higher option margins, and greater production efficiencies. In addition, our strategic selling practices have doubled lot premiums year over year on sold homes and backlogs. We are also continuing to find creative ways to optimize our sales structure to drive additional bottom line accretion. The most exciting and impactful of which is our innovative suite of new virtual selling tools, which we recently expanded with the launch of a new, first of its kind, online home configuration and reservation system for to-be-built homes. This new tool allows our buyers to pick a home site and design a floor plan entirely online on their own terms. With lower broker representation and higher conversion rates than the company average, our virtual sales tools are enabling us to reduce realtor commission expenses, leverage our overhead, and enhance our customer experience. In total, this focus on operational excellence and balance sheet optimization is expected to drive our return on equity to the mid-teens range in 2021, followed by further expansion in 2022 and beyond, before considering the anticipated benefit from more programmatic land financing vehicles. As I shared last quarter, we're exploring several opportunities that would allow us to grow our business with enhanced capital efficiency I am pleased we advanced those discussions during the quarter and expect to share more detail in the months ahead. From a macro perspective, all indicators are pointing to continued strength in consumer demand for housing. Interest rates remain at historically low levels at approximately 3%, enhancing borrower's purchasing power, and affordability remains favorable even when considering strong home price appreciation. In looking at the buying power of our consumers, we remain encouraged by their overall financial health and affordability metrics. In addition, we intentionally seek to serve a diverse mix of homebuyers and carefully manage our balance of pace versus price, especially within our entry-level communities, to mitigate affordability risk. As you've heard me share before, we monitor the difference between the actual interest rate of our borrowers served by Taylor Morrison Home Funding versus the maximum interest rate they could have qualified for as a gauge of affordability. In the first quarter, this spread averaged over 700 basis points for our conventional borrowers and over 500 basis points for our FHA borrowers, giving us confidence in our customers' financial flexibility if and when interest rates move higher. This strong interest rate cushion is a reflection of our consumer quality. Specifically in the first quarter, our Taylor Morrison home funding borrowers provided an average down payment of 20%, had an average debt-to-income ratio of 36%, and an average credit score of 750%. Notably, these strong credit metrics were slightly improved from a year ago levels, despite our mortgage first-time homebuyer share growing by over 1,000 basis points to a company high of 40%, and our cash rate also expanding by 1,000 basis points to 85% over the same period last year. In other words, while we have increased and broadened our customer base to serve more homebuyers, particularly at the entry level, We have maintained the high credit quality and consumer strength we have long enjoyed. I attribute this to our mortgage team's diligent prequalification of nearly all our home buyers prior to entering into a purchase agreement and the embedded value of our financial services to our customers and home building operations. Turning now to our sales success, in the first quarter, our strong activity was driven by gains across all geographies and consumer groups. There are a couple highlights worth sharing. Among our markets, we experienced the strongest year-over-year increase in our monthly absorption pace in our central region, which includes Texas and Colorado. This strength has been partially driven by an influx of homebuyers from California whose share of our Texas sales orders in the first quarter doubled pre-COVID levels, with accelerations throughout the quarter in California home shoppers suggesting further gains in the months ahead. Among our consumer groups, our active adult segment drove the highest year-over-year gains in net sales orders and absorption pays as this cohort is increasingly re-engaged as the vaccine rollout accelerates and strong home equity gains appeal mobility among existing homeowners. These active adult buyers are also relatively less impacted by changes in interest rates due to an above-average share of all cash transactions. Given the demographic tailwind in this segment of the market, I'm excited to share that we are expanding our signature active adult lifestyle brand, Esplanade, nationally from its home base in Florida, where we have established a reputation for distinctive resort style living and concierge services that command a strong premium among active adult home buyers. We recently introduced the Esplanade brand to the West Coast with two new communities in California and have plans to open another in North Carolina later this year. The expansion has been well received as our Southern California community has been selling with limited releases amid strong demand since its successful grand opening in March, while our Sacramento community, slated to open in May, already has a wait list of over 2,000 interested shoppers. The nationalization of our Esplanade brand will bring greater consistency to our active adult communities, leverage our brand awareness, and meet the needs of active lifestyle residents in our market. With above average gross margins partially driven by higher option take rates and lot premiums that are more than two times the company average, we expect this growth will be a long-term benefit to our overall profitability. However, today's remarkably strong housing market is not without its challenges. The supply side of our industry remains constrained by the severe deficit of trade labor, ongoing COVID-19 and weather-related disruptions affecting product manufacturers and distributors, and municipality-level delays. Our teams are navigating this environment by holding new sales to align to our start pace, managing construction cycles, and leveraging trade relationships. to ensure our business continued to run effectively. In the first quarter, our production pace of 4.1 starts per community was up more than 70% year-over-year to another company record high, and our cycle times were roughly flattened year-over-year as our teams have accelerated our construction capacity despite the supply side challenges. In addition, we are raising prices in nearly all our communities, and as mentioned, limiting releases to align with production. This disciplined approach ensures we are realizing appropriate price increases in excess of cost inflation, managing the length of our backlog, and maximizing the return potential of each asset. In closing, we're committed to taking full advantage of our competitive strengths and executing on our long-term strategic vision, which has been years in the making after six acquisitions that have equipped us with the size and team capable of generating attractive long-term returns for our shareholders. As I have said before, we believe 2021 marks an important inflection point in our multi-year journey to realize the operational and financial advantages of our significant growth and I look forward to continuing to update you on our progress as we move forward. Now let me turn the call over to Dave for his financial review.