Taylor Morrison Home Corporation

Good morning and welcome to the Taylor Morrison Supported 2021 Earnings Conference Call. My name is Gemma and I'll be the operator today. Currently, all participants are in this session. 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'd now like to introduce Mackenzie Aram, Vice President of Investor Relations. Please go ahead. Thank you.

Thank you and good morning. Before we get started, 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 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. I am pleased to also be joined today by Lou Steffens, our new Chief Financial Officer, and Eric Kueser, our Chief Corporate Operations Officer. Lou officially stepped into the CFO role January 1st after several years spearheading our transformational M&A strategy and integration execution. In his nearly 15 years with the company, Lou also held a number of regional and area president roles, and I am thrilled to be kicking off 2022 with him in this new capacity. Eric leads our strategic direction, and oversees our land investments as well as our sales, marketing, and research teams. He joins us this morning to provide an update on our strategic partnerships with a focus on our build to rent business. Before we dive in, I want to begin by acknowledging the extraordinary efforts of our home building and financial services team members throughout 2021 and especially in the fourth quarter. Their dedication and resiliency allowed us to end the year on a high note to deliver record-breaking results for our organization while serving our home buyers with an uncompromising commitment to construction quality and customer service, despite the severe supply chain disruptions felt across the industry. Our customer-centric approach is key to our long-term success, and I believe has become even more differentiated in this challenging operating environment as we recently earned the coveted distinction of America's most trusted home builder for the seventh consecutive year. With our highest trust index score yet, this special recognition is a testament to our tremendous team members across the organization. Let me review just some of the other highlights of the past year. In 2021, we increased our home closings by 9% to 13,699 homes, expanded our home closings revenue by 22% to nearly $7.2 billion, and improved our home closings gross margin by 370 basis points to 20.3%. We also realized meaningful cost leverage and benefited from the strong performance in our financial services business. As a result, our pre-tax margin improved by over 600 basis points and we grew diluted earnings per share by 176% each to new company highs. These strong results were achieved even with the unpredictable labor and material constraints that added significant complexity, extended construction timelines, and pressured costs throughout the year. While some anticipated fourth quarter closings and community openings were delayed because of these challenges, We are well positioned heading into 2022 to realize another year of significant growth in revenue and profitability as we continue to navigate these supply headwinds and benefit from our strategic focus on operational and capital efficiencies. This year, we expect to deliver between 14,000 to 15,000 homes at a home closings gross margin of at least 23.5%. This strengthened margin outlook implies more than 300 basis points of year-over-year improvement and nearly 700 basis points over the last two years. Combined with our focus on optimizing our balance sheet and cash flows through lamb-lighter investment and disciplined capital allocation, we also now expect to generate a new company high return on equity in the mid-20% range. As I have shared before, since reaching the critical inflection point, in our integration of William Lyon Homes last year, the largest and most transformative of our six acquisitions since 2013. This phase of our strategic journey is focused entirely on capturing the many advantages of our enhanced scale and portfolio diversification that has transformed our ability to generate long-term value. From an operational perspective, while we have made significant progress in rolling out enhanced processes, we still have meaningful opportunity ahead to further enhance gross margins and improve asset efficiency. For example, we rationalized our floor plans in 2021 and are targeting additional reductions this year, even as we open more communities. We are also eliminating option variation within the plans we build, which is even more beneficial to our construction efficiencies. In 2021 our option library was reduced by more than 30% and will benefit further with the introduction of new national design specifications in the coming quarters. This strategic simplification allows us to streamline production and leverage our supplier relationships, while ensuring we are offering only the most profitable and consumer desired plans. These efforts are supported by the growing share of our starts under our new curated option program known as Canvas, which represented approximately 15% of our second half net sales and will steadily ramp higher throughout 2022. In fact, approximately 70% of our existing communities now offer Canvas, as will all new community openings going forward. With a simplified design process and faster cycle times, this program is driving greater production efficiency, improved profitability, and a better customer experience. This focus on operational performance is matched by our focus on capital efficiency to drive greater cash flows. This includes strengthening our balance sheet and executing on new capital efficient land financing tools. After increasing the controlled percentage of our land portfolio by approximately 700 basis points to 38% last year, we now expect to grow our controlled share to approximately 45% by the end of 2022 as the new land financing vehicles that we established last year with Vardy Partners have accelerated our land lighter balance sheet strategy. These cost-effective arrangements improve our ability to finance new land investments, reduce the amount of inventory held on our balance sheet, minimize long-term risk, and meaningfully improve expected returns. As Eric will discuss, I am pleased to share that we expect to add additional financing capacity specific to build-to-rent projects that will enable us to cost-effectively scale this growing segment of our business. From a demand perspective, during the fourth quarter, we continued to benefit from favorable trends across each of our consumer groups and geographies. Strength was most notable within our move-up segment, which experienced year-over-year growth in both net orders and absorption pace, and represented slightly more than half of our total sales versus 44% a year earlier. Our 55-plus active lifestyle segment also continued to enjoy strong momentum. Thus far into the new year, consumer engagement across our portfolio has remained healthy, and our monthly sales pace has been consistent with the 3.2 pace experienced in the fourth quarter. While this is down from the record-breaking activity experienced in the first quarter of 2020 to more sustainable levels, We believe underlying demand is strong and supported by demographics at both ends of the buyer spectrum, evolving consumer needs and preferences, migration trends, and limited availability of new and resale supply. However, given the significant tightness in the supply chain, we have remained disciplined in our sales strategy to align net orders with construction capacity. As a result, Approximately 75% of our communities metered sales activity during the fourth quarter and a similar share raised base pricing, which helped drive a 23% increase in our average net order price. By prioritizing production ahead of sales and carefully balancing price and pace at the community level, we successfully increased new starts per community by 7% year over year to 3.4 during the quarter and more than doubled our inventory of spec homes to six spec homes per community at quarter end from just 2.8 homes at the end of 2020. Only a handful of those homes were completed. In today's supply-constrained market, this disciplined approach is providing greater visibility into our cost, improved efficiencies, and a better customer experience by releasing the homes for sale as they progress through the building cycle. Before I turn the call over, I want to spend a moment discussing our buyers' financial position and affordability considerations. As I share every quarter, one way we gauge affordability is by tracking the interest rate qualification buffer of our home buyers financed by Taylor Morrison Home Funding, which had a capture rate of 82% in the fourth quarter. We test the strength of these buyers by determining the maximum allowable interest rate they could have qualified for after considering compensating factors versus their actual interest rate. For conventional borrowers, which accounted for 84% of fourth quarter mortgage closings, this spread was stable at roughly 700 basis points. For our government, FHA, and VA borrowers, The spread compressed slightly on a sequential basis but remained healthy at 400 basis points. Said differently, because our buyers generally have strong credit profiles with an average credit score of 752 and debt-to-income ratio of 36% in the fourth quarter, they have many levers to pull to offset higher rates or prices if necessary. Even more meaningfully, we estimated our customers and backlog could absorb similar increase in interest rates before adjusting their loan terms. However, as you would expect, first-time homebuyers have experienced slightly more affordability compression than our overall portfolio. In addition, our backlog is secured by substantial deposits at nearly 8.5% and more than $53,000 per unit on average. Collectively, These favorable trends supported below average cancellation rates of 8.2% in the fourth quarter and a company low 6.6% in 2021. Nevertheless, we are mindful of the significant movement in home prices and interest rates most recently and have taken proactive steps in our product design and spec inventory choices to ensure continued affordability, particularly in our entry-level communities. Lastly, before turning the call over to Eric, I want to highlight that we recently were recognized as the only home builder on Bloomberg's Gender Equality Index for the fourth consecutive year for our long-held dedication to supporting diversity at all levels of our organization. This commitment to equality and transparency was recently strengthened further when we welcomed Christopher Yip to our board of directors, making the majority of our boards diverse. We expect his significant experience in real estate technology to complement our focus on digital innovation. Now, Eric will update us on our expanding Build to Rent operations, which is well on its way to becoming a meaningful and accretive portion of our overall business.