Taylor Morrison Home Corporation

Good morning, and welcome to Taylor Morrison's second quarter 2021 earnings conference call. Currently, all participants are on a listen-only mode. Later, we'll 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 Aaron, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. Good morning. I am joined today by Cheryl Palmer, Chairman and Chief Executive Officer, and Dave Cohn, 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 at www.taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now, let me turn the call over to Cheryl.

Thank you, Mackenzie, and good morning, everyone. We appreciate you joining us today. and I sincerely hope each of you are doing well. I will start today's call with a brief overview of our second quarter results, and then spend some time discussing our strategic focus on driving long-term sustainable improvement in our earnings potential into 2022, as well as our view on the market. During the quarter, we delivered 3,268 homes at an average sales price of $503,000, driving a 12% year-over-year increase in our home closings revenue to $1.6 billion. While a few of our second quarter closings were slightly delayed by weather and supply chain interruptions in some of our markets, we remain committed to our prior full-year guidance of 14,500 to 15,000 closed homes. Our home closings gross margin improved 370 basis points year-over-year to 19.1%, exceeding our prior guidance in setting the stage for further improvement in the quarters ahead. From a demand perspective, the market remained favorable, particularly in April and May, with some normalization in June. This drove strong pricing power across our markets and a 23% year-over-year increase in our monthly absorption pace to 3.4 net sales per community. Each of our consumer groups experienced year-over-year growth in sales paces. led by outperformance among active adult buyers who are notably reengaged in the market and responding well to the recent national expansion of our premier lifestyle brand, Esplanade. However, we intentionally limited our sales releases and delayed the release of spec homes until later in the construction cycle to maximize our gross margin and navigate the tight supply side governors on housing as we build through our record backlog of over 10,200 sold homes. In anticipation of elongating cycle times and constrained labor and material availability, we intentionally accelerated our construction cadence and successfully increased our monthly production pace by 140% year over year and 17% sequentially to a record 4.8 starts per community during the quarter. This left us with all the starts in the ground necessary for our full year closings target and we are proactively working to stay ahead of further supply challenges through the remainder of the year. And lastly, we continue to make progress towards further streamlining of our operations, leveraging our leading market position and expanding our land financing tools. To the latter point, I'm pleased that we recently finalized new land financing vehicles that will enable us to cost-effectively increase our option land position to at least 40% within the next 18 months. These arrangements improve the capital efficiency of our land portfolio and reduce risk while enhancing our returns without any meaningful change to our long-term gross margin opportunity. This focus on capital efficiency is one pillar of our strategic playbook, which also includes operational excellence and customer experience. By focusing on these three strategic pillars, we are committed to taking full advantage of our competitive strengths after gaining the scale, product portfolio, and team capable of generating attractive long-term returns for our shareholders. These efforts are gaining traction and will drive notable gains in our operating metrics beginning in the second half of the year. This is consistent with our original timeline following the acquisition of William Lyon Homes last year as we have now established our new consolidated cost structure and paved the way for further operational leverage in the quarters ahead. With six homebuilder acquisitions completed in the past seven years, we have a proven track record of acquiring underperforming companies and driving significant improvement in their financial performance by applying our strategic playbook. As we have shared in the past, it takes approximately 18 months before the benefits of a sizable acquisition can be recognized in our financial results. To give you a sense of the magnitude in looking at the markets impacted by our acquisition of AB Homes in late 2018, we have improved gross margins by over 500 basis points to an average level that is more than 100 basis points stronger than the overall company since early last year when our new starts and operational improvements began to take effect. On a similar note, we have also seen notable improvements in cycle times and returns in each of those markets, driven by the simplification and scale achieved after our integration efforts. Because of similar progress with our William Lyon acquisition as we approach the critical 18-month mark since that deal's closing, we now expect to deliver a full-year home closings gross margin in the high 19 to 20 percent range this year. This strength is expected to continue in 2022, and based on the composition of our sold homes and backlog and confidence in the operational enhancements and synergies of our combined business, we expect to generate a home closings gross margin of approximately 22% next year. Combined with our focus on optimizing our balance sheet and cash flows, this margin improvement is expected to drive a return on equity in the high teens range this year, followed by further improvement to an ROE over 20% in 2022, both of which would mark new company highs. This would represent improvement from ROEs of 10% in 2019 and 8% in 2020 as we have quickly and meaningfully pulled through the benefits of our acquisitions and strategic initiatives that have transformed our ability to compete effectively and generate long-term value. We believe this positive momentum warrants significant multiple expansion from our current stock valuation, which in our view does not appropriately account for our attractive and improving earnings and returns. Accordingly, we more than doubled our share repurchase to $107 million during the quarter to buy back 3.8 million shares outstanding and expect to continue to utilize share buybacks to opportunistically return excess capital to our shareholders and further enhance our returns. Now I'd like to spend some time discussing the operational enhancements underway that support this outlook. After multiple large acquisitions that propelled us into a top five home builder last year, we have a renewed opportunity to double down on our core focus of operational excellence, especially within our newer markets, to fully capture the benefits of scalable, production-oriented home building across our entire portfolio by streamlining and simplifying our business. To that end, our teams are working closely to optimize our floor plan and option offerings from the combined business and pursue cost rationalization and value engineering opportunities. To further accelerate these goals, we recently hired a national senior leader focused on product design that brings over 35 years of residential construction and engineering experience to enhance our product portfolio for improved construction efficiency and consumer appeal. By identifying the most efficient and profitable plans and SKUs, we can drive lower costs, faster cycle times, and streamline our trade partner schedules. In addition, our purchasing team is working closely with our operators and supply partners to maximize our buying power and secure product availability and find solutions in today's supply-constrained market. They also continue to push ahead on evaluating our material contracts, supporting skew rationalization and improving our purchasing processes to reduce our construction costs. During the quarter, we also completed the rollout of our standardized design packages, known as Canvas, to all our divisions and achieved our goal of implementing them as the template for all spec homes as well as many of our model homes going forward. These Canvas palettes are curated by interior designers using features with the highest take rates margins, and product availability to offer our customers a compelling value and easier design experience. In addition, these packages improve supply chain visibility, increase expected home closings gross margins, and reduce anticipated construction timelines. Early pilot markets results indicate more than a two-week cycle time advantage compared to our non-Canvas homes, even in today's unique market. Given the many benefits, this package approach design options is a notable shift away from our traditional design center model that we envision becoming the norm for a significant portion of our sales, including to-be-built homes, especially within the first-time and first-move-up consumer groups. This evolution in our option strategy is just one way in which we are harnessing our scale to create a more efficient, predictable, and profitable business. Amid today's favorable market conditions, we are also leveraging our strategic sales tools to maximize our top-line growth, as evidenced by the 32% year-over-year increase in our average order price to $597,000. This strong growth was also partly a function of favorable mix driven by our 50-plus lifestyle buyers and our strategic emphasis on lot premiums, which have more than doubled on sold homes in our 22 backlogs. To balance pace and price, we have raised base pricing in nearly all our communities, limited sales releases, and selectively employed competitive bidding processes that drove these higher lot premiums. Looking forward, while we continue to see pricing opportunity across our markets, we are cognizant of the impact of higher prices on buyer sentiment and affordability and expect market dynamics, including the pace of price inflation, to return to more sustainable levels in the coming months. With this in mind, we have been thoughtful in our pricing strategies to protect the long-term value of our communities and maintain affordability by using our strategic selling processes tailored to each neighborhood's price point and life cycle. As you have heard me share before, one way in which we gauge our consumers' financial ability to withstand higher pricing or interest rates is by monitoring the spread between the actual interest rate of our buyers' finance by Taylor Morrison Home Funding and the maximum rate they could have qualified with, all else being equal. This spread was roughly stable sequentially at approximately 700 basis points for conventional buyers and 500 basis points for FHA buyers. Average LTVs, debt-to-income ratios, and credit scores were also stable at very healthy levels on a sequential and year-over-year basis for our borrowers. Other metrics we monitor for buyer affordability also remain healthy. For example, the square footage of sold homes increased sequentially in the second quarter and is poised to increase further in the back half of the year based on our backlog. In other words, our buyers are choosing to spend more to buy bigger homes that meet their needs, another strong sign of financial health and confidence. And lastly, while much attention has been given to the impact of out-of-state buyers on local affordability, we expect favorable migration and demographic trends to continue to support healthy demand and pricing in markets such as Austin and Southwest Florida, which have long been attractive destinations for their employment and lifestyle opportunities. In fact, in recent months, we have seen further acceleration in the share of out-of-state shoppers and buyers from California in our Texas and Nevada markets, as well as Northeast consumers in the Southeast and Florida. In these markets, the share of these out-of-state buyers is back or above pre-COVID levels and not showing any signs of reversing. Now, let me turn the call over to Dave for his financial review.