Taylor Morrison Home Corporation

Good morning, everyone, and welcome to the Taylor Morrison's second quarter 2022 earnings conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. As a reminder, the conference call is being recorded. I would now like to hand over to Mackenzie Aron, Vice President of Investor Relations.

Thank you and good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question and answer session, will include forward-looking statements that are subject to the Safe Harbor Statement for forward-looking information that you can review in our earnings release 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, I will turn the call over to our Chairman and Chief Executive Officer, Cheryl Palmer.

Thank you, Mackenzie, and good morning. I am pleased to also be joined today by Lou Steffens, our Chief Financial Officer, and Eric Kuser, our Chief Corporate Operations Officer. I will share our second quarter highlights and then provide an update on the market environment and how we are positioned to navigate the headwinds facing our industry today. After my remarks, Eric will discuss our strong land position and why we feel confident in the long-term earnings power of our portfolio, after which Lou will provide a detailed review of our results and updated financial guidance. In the second quarter, we generated record levels of profitability and earnings. Most notably, our home closings gross margin of 26.6% was up 750 basis points from 19.1% a year ago and more than 1,100 basis points from 15.4% two years ago. This improvement reflects strong pricing power as well as the benefit of operational enhancements and acquisition synergies that have transformed our business effectiveness. At the same time, our SG&A percentage improved 140 basis points to 8.8% of home closings revenue, the lowest second quarter levels in our history, as we have leveraged our scale and unique virtual capabilities to operate with greater flexibility and resiliency. These results drove our earnings per diluted share to a new company high of $2.45. In addition, we deployed our strong cash flow to reduce debt and repurchase 172 million of our shares outstanding. Combined with the effective execution of our asset lighter approach to land investment, our return on equity improved more than 1,000 basis points year over year to just over 23%. This record performance demonstrates the strength of our scale, team, strategy, land portfolio, and well-qualified consumer set, and is a culmination of our years-long acquisition journey. As we go forward, I am confident these strengths will continue to serve us well as we adapt to today's market reality. During the quarter, higher interest rates collided with home price appreciation, stock market volatility, and geopolitical tensions. The rapid deterioration in affordability and consumer confidence pulled home buying demand quickly as shoppers faced significant uncertainty related as much to the shock of higher costs as to the sheer speed of change. We were still managing sales releases in most of our communities in April, less so in May, and almost not at all in June as these headwinds became more pronounced in the latter weeks of the quarter. In total, our monthly sales absorption pace moderated to 2.6 net orders per community, which was down from the record levels experienced during last year's frenzy, but consistent with our second quarter norm prior to 2021. The impact has been felt across our wide range of price points, geographies, and consumer groups, albeit to varying degrees. Our move-up and active lifestyle segments have displayed greater resiliency from a traffic, sales, pricing, and cancellation perspective compared to our entry-level segment. Our home building and mortgage teams have acted quickly to reestablish sales momentum, maintain the quality of our backlog, and manage production and inventory levels. Given the diversity of our price point and product portfolio, Our approach to managing pace and price is calibrated at the community level, which is even more critical in today's highly fluid market that has required a nimble and strategic response that we are fine-tuning by the day. We have deployed a number of mortgage financing programs through our wholly-owned mortgage company to customize solutions depending on customer need and maximize the benefit of our targeted incentive dollars. By using finance as a sales tool, we are helping our customers address their greatest concerns, whether that be monthly payment, cash to close, or some combination of both. Our strategic allocation of incentive dollars is often far more beneficial to the home buyer than the typical industry playbook of price adjustments as those dollars go further to reduce buyer's payments and secure mortgage qualification. while also better protecting our profitability as well as the long-term value of our communities. This approach extends to our backlog of over 8,900 homes where the vast majority of our buyers continue to be strongly committed to their home purchases. These customers have average deposits of nearly 10%, embedded equity, solid financial positions backed by the confidence of a pre-qualification with our mortgage company, and lastly, the attachment our to-be-built customers have to the home they have designed to meet their individualized lifestyle. For these reasons, while our second quarter cancellation rate increased sequentially to 10.8% of gross orders and just over 3% of our opening backlog from historic lows, it remains well below our long-term run rate. As I always share, our buyers tend to be highly qualified and financially secure. In the second quarter, borrowers' average credit scores were among all-time highs at 755, average household income increased 13% from a year ago, and average down payments increased 300 basis points to 23%, despite larger loan amounts. As a result, our buyers continue to have the flexibility to absorb higher mortgage rates from a qualification perspective. For our second quarter mortgage closings, the buffer between actual contract interest rate and the estimated maximum rate allowed for qualification for our typical buyer was approximately 530 basis points for conventional borrowers, which account for more than 80%. of our volume and 270 basis points for the smaller mid-teen share of our customers that utilize government-backed FHA or VA financing. However, while most of our buyers can qualify at higher rates, we do recognize the emotional element of the equation will likely take some time to reset. As the market continues to search for its new equilibrium, we have seen continued pressure on sales activity thus far in July, as well as an expected increase in cancellations. However, in many of our markets, we're beginning to see signs that our new sales programs and adjustments have begun to provide necessary confidence to shoppers to cautiously re-engage. Our web traffic is trending higher once again. Mortgage pre-qualification volume has also inflected positively since mid-June, and weekly sales conversion rates have been improving over the last few weeks, including a conversion rate of nearly 30% thus far in July for our online sales tools, which are a small but growing piece of our overall volume. Additionally, since the rollout of our national summer marketing event, early survey feedback has revealed a growing share of our shoppers are looking to purchase as soon as possible, indicating healthy demand elasticity. Our recent consumer research also shows that our shoppers are more optimistic about their household income and personal financial situation over the next 12 months compared to a national survey benchmark, which we believe, once again, reflects the overall strength of our buyers. Let me end by saying that we remain constructive on the long-term underlying drivers of demand in our markets and consumer groups and are confident in our team's ability to navigate any uncertainty ahead. We will be diligent in protecting our strong balance sheet and maintaining disciplined guardrails on land investment. With a well-vintage land pipeline of 82,000 home sites, we are well positioned to drive future growth, be patient with investment spend, and weather any changing market conditions. And most importantly, we will continue to take a consumer-centric, dynamic approach to managing our business for the long term as housing finds a new footing in the months ahead. Now I will turn the call over to Eric to discuss our land strategy.