Taylor Morrison Home Corporation

Good morning and welcome to Taylor Morrison's first quarter 2022 earnings conference call. Currently, all participants are in listen only mode. Later, we will conduct a question and answer session. An introduction instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce you to Mackenzie Aron, Vice President of Investor Relations. Please go ahead.

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 gap figures in the release. Now, let me turn the call over to our Chairman and Chief Executive Officer, Cheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. I am pleased to also be joined today by Lou Steffens, our Chief Financial Officer, and Eric Huser, our Chief Corporate Operations Officer. I will share the highlights from this quarter as well as an update on the market environment and the favorable positioning of our portfolio in today's rising rate environment. After my remarks, Eric will discuss our land supply and disciplined investment strategy, and Lou will give a detailed review of our quarterly results and financial guidance. To begin, we are pleased to share the results of our first quarter performance, which exceeded our expectations across each of our key operating metrics despite the challenges facing our industry from ongoing supply chain constraints, further inflationary pressure, and the swift rise in mortgage rates. Among the highlights, our home closings gross margin improved 450 basis points year over year to the strongest level since 2013. Our SG&A percentage declined 120 basis points to the lowest first quarter level ever. and our return on equity improved nearly 900 basis points to the highest return since 2013. Each of these record results reflects the culmination of our acquisition journey, which began nearly 10 years ago and more than tripled our annual deliveries to add critical scale and diversification to our business. As you have heard me discuss before, since completing our last acquisition two years ago, We have been entirely focused on operational priorities designed to leverage our core strengths of market scale, prime land positions, and consumer-centric products. This primarily includes streamlining and simplifying our production capabilities and driving greater capital efficiency in our land investments. These are long-term structural improvements to our business that are allowing us to compete more effectively than ever before. This positive momentum is expected to drive even stronger results in the quarters ahead, starting with our backlog of 9,400 sold homes. As a result, I am pleased to share that we are reaffirming our 2022 home closings guidance of 14,000 to 15,000 deliveries And we are once again raising our 2022 home closings gross margin guidance, which we now expect to improve to at least 24.5%. This margin would be up over 400 basis points from 2021 and nearly 800 basis points from 2020. And combined with SG&A leverage and the success of our land lighter strategy, We are also raising our 2022 return on equity guidance to the mid to high 20% range. In both absolute and relative terms, these strong anticipated results reflect our team's focus on operational effectiveness to capture the unique earnings power of our well-balanced and attractive land portfolio. While rising interest rates and geopolitical issues have added another layer of complexity to the already challenging operating environment, we are confident in our outlook and are focused on delivering a record year of financial performance. From a demand perspective, activity was healthy and shoppers were engaged across our markets and consumer groups in the first quarter. We raised base house prices in effectively all of our communities while emphasizing higher lot premiums through our competitive bidding strategies and driving higher option revenue with an eye on protecting long-term value in our communities. Collectively, this drove a 24% year-over-year increase in our average net sales order price. At the same time, we also continued to manage our sales and ended the quarter with a monthly absorption pace of 3.1 net sales orders per community. While strong demand certainly exceeded this level, we intentionally metered sales in the vast majority of our communities and delayed the release of available spec homes until later in the construction cycle to gain increased visibility into cost and maximize price. With the majority of our spec homes in early stages of production and very few finished units, The number of available homes ready to be released for sale was limited. However, as our spec inventory progressed through the quarter, our sales pace accelerated and ended the quarter on a high note. Additionally, we are leveraging our virtual sales tools to serve our buyers with added convenience and flexibility while also enhancing transaction efficiency. For example, consumers who utilize our online home reservation system to purchase a spec home closed on their purchase nearly two weeks faster than those without a reservation. The positive sales momentum has continued thus far into April, and our sales teams across the country continue to report that activity overall remains resilient. However, we should expect that the recent rise in mortgage rates could begin to impact the consumer, particularly in communities focused on the most affordable segment of entry-level buyers, which are only a small minority of our portfolio. In fact, as I look at our overall portfolio today, I am encouraged by the strength of our buyers, position of our backlog, diversification of our consumer groups, and the quality of our land position. So let me share some additional thoughts on why these factors drive our continued confidence. Beginning with our sold backlog, these 9,400 homes enjoy strong embedded equity and are backed by deposits of nearly 9% and more than $57,000 per unit, both of which are up significantly year over year and are higher than market averages as we have been successfully increasing our upfront collections. This skin in the game, as well as our diligent pre-qualification of nearly all our buyers by Taylor Morrison Home funding, contributes to our below average cancellation rates, which were among all-time lows at approximately 6% last quarter. Additionally, our backlog reflects the well-diversified, financially secure consumer set we seek to serve with our prime land positions in core sub-markets. For example, of our borrowers and backlog, average credit scores are among all-time highs at 752 and average down payments of 24% are higher than a year ago on a larger loan amount. From an affordability perspective, as I always share, we closely track the interest rate qualification buffer of our buyers financed by our wholly owned mortgage company. Taylor Morrison Home funding as an important indicator of consumer strength. Unsurprisingly, these buffers compressed in the first quarter alongside higher interest rates, although they remain at healthy levels given rising incomes and credit strength, even when considering the most recent rate increases. Specifically, looking at first quarter closings, we estimate our conventional borrowers could have qualified at an interest rate nearly 650 basis points higher than their actual rate. This trend extends into our backlog, where the 82% of borrowers qualified for a conventional loan have similarly strong financial positions to absorb higher rates even before adjusting loan terms or other offsets. Additionally, representing only 16% of our first quarter mortgage volume and even a smaller share of our backlog, government, FHA, and VA borrowers also have solid qualification metrics with the first quarter rate cushion of about 370 basis points as our price points tend to attract high-quality professional first-time buyers. With rates continuing to move higher, we are working closely with our borrowers in backlog to communicate the impact and to successfully move forward with their home purchase. The visibility and control we gain from the ongoing communication and analysis by our financial services team provides invaluable insight and allows us to use finance as an extension of our sales team, which reduces cancellation risk and improves the overall customer experience. To that end, to help us maintain strong mortgage capture rates and offer our customers increased protection and peace of mind in today's uncertain rate environment, Taylor Morrison Home Funding recently introduced a new extended rate lock program that allows our new shoppers to cost-effectively secure an interest rate for up to one year. the buyer will provide a 1% of loan amount fee at the time of lock, which further strengthens their commitment to their home purchase and TMHF borrowers will receive the normal contribution to closing costs. The cost of this program was considered in our original guidance and therefore does not impact our strengthened home closing gross margin outlook. To wrap, I would like to share a few notable takeaways from our consumer surveys, which included feedback from over 1,500 home shoppers in the first quarter. First, in response to how higher mortgage rates would impact their home search, only a single digit percentage of all respondents said they would stop their home search if affordability became a constraint. instead opting to modify their plans either by reducing square footage, increasing their down payment, or slowing down their search. This is quite different from what surveys indicated as rates increased in 2018 when shoppers were twice as likely to say they would stop their home search at that time, suggesting current demand is much more determined to move ahead. Slicing the data by location, Shoppers looking in poor markets are two times more likely to continue their search than shoppers in new emerging markets who indicate they would stop their search, reinforcing our concentration on prime land positions with proximity to employment, schools, and amenities. In fact, only 10% of our communities would be considered emerging markets according to our internal rating system. Feedback also reveals different levels of resiliency among consumer groups and income levels. For example, more than half of shoppers in our active lifestyle communities indicated that higher rates would have no impact on their home search as compared to just over a quarter of all other home shoppers. Given their lower rate sensitivity and the above average gross margins and revenue we generate in this segment, Our active lifestyle business, which accounts for about a quarter of our total sales, is an important and attractive element of our portfolio strategy. On the other hand, shoppers with relatively lower income and those looking for more affordably priced homes are more likely to slow or stop their search compared to higher incomes and higher home prices. Generally, these first-time buyers do not have equity from an existing home to help offset the movement in price and interest rates. These consumer insights help support why we have long prioritized a portfolio approach to our business. Over the past many years, our multiple acquisitions and organic investment, we have intentionally strengthened our market position to add critical market scale and product diversification while staying disciplined to our core focus on serving well-qualified, credit-worthy homebuyers with prime land positions. This strategy has been grounded in our view that a diversified, high-quality portfolio is best positioned to generate attractive, risk-adjusted returns over the course of a housing cycle. Now I will turn the call over to Eric to provide additional detail on our land portfolio.