Taylor Morrison Home Corporation

Good morning, and welcome to Taylor Morrison's third 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 Aaron, Vice President of Investor Relations.

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 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. I will begin today's call with the highlights of our third quarter performance and the market environment, and then provide an update on our strategic focus on operational and capital efficiency. I am pleased to share that our teams delivered a strong quarter that met or exceeded our expectations across each of our key operating metrics as they overcame the intense supply side challenges facing our industry. Most notably, we delivered 3,327 homes, which was within our prior guidance range at a significantly stronger than anticipated home closings gross margin of 21.2%. This margin improvement of 400 basis points year over year and 210 basis points sequentially is largely a reflection of revenue and cost synergies from our William Lyon acquisition that we had indicated would begin to materialize at this stage of our integration. These advantages help to more than offset the timing and cost pressure from material and labor constraints that intensify during the quarter. and are unlikely to abate in the foreseeable future. With these bottlenecks introducing a much greater than normal degree of uncertainty into near-term production schedules and delaying our construction timelines by two to four weeks, we are adjusting our prior full-year home closings guidance by approximately 5% to around 14,000 units. However, despite these delays, we are increasing our home closings gross margin expectations to the low 20% range this year, followed by at least 200 basis points of improvement to a margin in excess of 22% in 2022, based on our confidence in continued synergy realization, operational enhancements, and the strength of our sole backlog strategy. As you would expect, we are proactively working to stay ahead of further supply chain challenges by communicating closely with our trade partners and suppliers to ensure visibility into our vertical and horizontal development cycles, control costs, and maintain our commitment to delivering an exceptional customer experience and fully complete houses for our homebuyers. In addition, during the quarter, we started 3.5 new homes per community per month, made further progress in rebuilding our inventory of spec homes, and continued to align our sales pace with production. Because of this disciplined approach and our attractive land pipeline and product portfolio, we are in a strong position to capitalize on favorable market tailwinds while also navigating supply-related disruptions. From a demand perspective, activity was healthy across each of our consumer groups and geographies, albeit at a more normalized and sustainable level of activity compared to earlier in the year. Notably, in contrast to typical seasonality, we experienced accelerating month-over-month sales momentum in both order volume and absorption pace, as the quarter progressed, and October is on track to post similarly strong results. Amid this positive demand backdrop, we continue to strategically limit sales releases in approximately 70% of our communities to manage our backlog and balance pace versus price to maximize our return potential. Among our consumer groups, the 55-plus active lifestyle segment once again experienced the strongest trends with year-over-year growth in both orders and absorption pace as these buyers have the financial resources and motivation to move ahead with their purchase decisions. Representing over a quarter of our year-to-date net sales, we believe the 55-plus active lifestyle demand is poised to continue to outperform as demographic household growth is forecasted to be more than two times the overall market rate over the next five years within our footprint, and the 73 million strong baby boomer generation progresses through peak retirement ages. The national expansion of our premier lifestyle brand, Esplanade, is well-timed to meet this growth with a consistent strategy that continues to perform well in its core Florida markets and has exceeded expectations to date in its newest West Coast communities. Across the business, forward-looking indicators such as community traffic, conversion rates, and consumer credit metrics suggest demand and buyer interest remain healthy and supportive of further pricing power. However, as I indicated last quarter, We're cognizant of the impact of higher prices on consumer sentiment and affordability and expect market dynamics, including the pace of price inflation, to stabilize at more sustainable levels, which we are already beginning to see evidence of. This outlook is reflected in our pricing strategies, which are calibrated at a community level to optimize performance, and in our disciplined land underwriting assumptions which have remained grounded in long-term market fundamentals and a preference for prime core locations. In addition, our well-balanced consumer diversification and the relative strength of our buyer profile provide additional layers of risk mitigation. Specific to our consumers' financial health, our homebuyers financed by Taylor Morrison Home Funding which held an 83% capture rate, had credit scores, incomes, debt ratios, and down payments that were stable or improved from the prior quarter and a year ago. Because of this strength, our buyers' ability to absorb higher pricing remained significant with the estimated buffer between their average actual interest rate and the maximum rate allowed for qualification purposes after considering compensating factors remaining at roughly 700 basis points for conventional borrowers and 500 basis points for government borrowers, both of which were more favorable than historic norms by approximately 50 to 100 basis points. This is not to suggest that our buyers would want to or be willing to absorb a rate shock of that magnitude. but rather indicates that the financial durability of our consumer set is strong in both absolute and historical terms. In addition, we continue to see our diverse consumer groups spending more on higher square footage floor plans and the home site of their choice, as well as enhanced design specifications to meet their needs and preferences, which have clearly evolved post-COVID. This ongoing strength can be partially attributed to migration trends as we continue to see a growing share of out-of-state buyers, particularly from higher-cost markets such as California, New York, and New Jersey to Texas, Nevada, and Florida. It is also worth sharing that when we parse our consumer survey data, we have seen a growing trend of home shoppers expecting to pay more of their income towards housing. with the greatest impact among first-time home buyers. With low interest rates enabling this trend today, we are monitoring these metrics closely and taking proactive steps to ensure continued affordability and design flexibility, such as intentionally increasing lower square footage floor plans within our spec home inventory. From an operational perspective, Our priority remains to streamline and simplify our business to effectively leverage our scale and improve construction efficiency. As you have heard me discuss in recent quarters, we are focused on operational strategies designed to create a more efficient, predictable, and profitable business now that we are past the integration phase of our transformative multi-year acquisition journey. This strategic focus is already delivering strong results as evidenced by the 400 basis points year-over-year improvement in our third quarter home closings gross margin. Let me now provide an update on the work underway to continue this positive momentum going forward. First, our teams are working closely to optimize our product portfolio by evaluating our floor plan and option offerings for value engineering cost rationalization, and consumer appeal, with the greatest runway for improvement still within our William Lyon impacted markets. To frame the financial opportunity from such efforts, our Florida operations are a compelling example from which to start. Without the operational complexities inherent in other markets where we have been more acquisitive, Florida is furthest along in leveraging the power of shared architecture, floor plan repetition, and option rationalization. This contributed to an average year-to-date home closings gross margin, advantage of nearly 300 basis points, and cycle time benefit of about one month compared to our markets on the West Coast that have the most opportunity for product and process consolidation due to more recent acquisition impacts. As we achieve similar operational efficiency across the country, we expect comparable results to drive meaningful margin and return accretion in the coming quarters. Second, our purchasing departments are driving further skew rationalization to improve our procurement processes, control costs, and manage production timelines. an effort that has become even more critical in helping us overcome material shortages. Over the last three quarters, we have reduced our option count by nearly a third, exceeding our goal for this year, and expect to achieve further gains in utilization rates as we roll out enhanced national specifications. This progress is supported by the success of our Canvas standardized design packages, which have gained swift traction in our entry-level communities and increasingly in our move-up price points. These curated option palettes offer a more consumer-friendly design experience that removes the complexity of a traditional design center approach. The average revenue of these packages is aligned with the historical range of options spent in our design centers by consumer group at an improved margin and more efficient production timeline. And lastly, but certainly not least, from a sales and marketing perspective, we are continuing to lead the industry in the digitization of home buying to empower consumers to complete their home shopping journey with the same ease and flexibility they have come to expect from the world of e-commerce. Over the last year and a half, we have introduced industry-leading capabilities to reserve inventory homes online which was then expanded to enable consumers to select a home site and floor plan and design a to-be-built home online. Building on these advancements, we recently launched a first-of-its-kind digital community that empowers consumers to schedule a visit online, independently tour and virtually design and reserve a home. Because of the functionality of these tools, We eliminated the need for a traditional onsite sales team by designing our model homes with Amazon's Alexa to seamlessly guide home shoppers through their visit with informative and interactive touchscreens and QR codes. They can then reserve a home and select their Canvas design package online, either immediately onsite or later from the comfort of their couch. Please take a look at the new slide added to our third quarter investor deck once it is posted later today for more details. Since our model opening in this groundbreaking community on October 1st, we have already enjoyed an overwhelming positive response with an interest list of more than 1,300 prospective buyers and a reservation to sales conversion rate that is two and a half times higher than our company average despite no in-person sales team and lower than normal external broker participation rates. With similar results across each of our virtual capabilities, we have meaningful opportunity to leverage these tools for a more cost-effective sales strategy. Following this community's early success, we have two additional digital communities expected to open under our new venture brand in the coming months and look forward to continuing to expand this promising new chapter of our virtual evolution that provides a seamless and on-demand home buying experience that we believe is unparalleled in our industry. I am proud that we achieved these milestones because of our team's forward-looking approach to technological innovation and serving our home buyers on their terms that predates the pandemic-driven acceleration in consumer adoption. Our focus on these operational strategies to drive stronger earnings are matched by an equal commitment to enhancing our capital efficiency to achieve greater balance sheet and cash flow optimization. The new land financing vehicles that I announced last quarter are an important element of this strategy by enabling us to meaningfully decrease the upfront capital intensity of our investment in land acquisition and development and accelerate our pivot to an asset lighter balance sheet. We have quickly operationalized these new vehicles with the initial assets slated to close this year representing total expected balance sheet relief of approximately $850 million over the life of these projects. These and other arrangements that enable us to cost effectively increase the control percentage of our land portfolio are accretive to our long-term return expectations and importantly mitigate cyclical risk. We have also been active in returning excess capital to our shareholders with approximately 8.6 million shares repurchased year-to-date while also remaining committed to reducing our net debt leverage to targeted levels below 30% next year. Collectively, these operational and capital initiatives are expected to drive our return on equity to the high teens range this year, followed by further improvement to over 20% in 2022. These return expectations would mark new company highs and meaningful accretion over the historical results as the enhanced scale and operational advantages that we achieved through our strategic journey have transformed our ability to sustainably generate long-term value for our shareholders. Now let me turn the call over to Dave for his financial review.