Taylor Morrison Home Corporation

Thank you for your patience everyone. The Taylor Morrison Home Corp earnings webcast and conference call will begin shortly. During the presentation you will have the opportunity to ask a question by pressing start followed by one on your telephone keypad. © transcript Emily Beynon Thank you. Welcome to today's Taylor Morrison Home Corp earnings webcast and conference call. My name is Drew and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. If you change your mind, please press star followed by two. Now going to hand over to Mackenzie Aaron, Vice President, Investor Relations to begin. Please go ahead.

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 statement. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP 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, everyone. Joining me today is Lou Steffens, our Chief Financial Officer, and Eric Huser, our Chief Corporate Operations Officer. As always, I will share our quarterly highlights as well as an update on the market environment and how we are navigating and positioning the company for success. After my remarks, Eric will discuss our Healthy Land portfolio that remains a source of long-term value, while Lou will provide a detailed review of our financial results. I am pleased to share that our team once again delivered record profitability metrics this quarter, including new highs for home closings gross margin, earnings per share, and return on equity. We achieved these results, despite the continued affordability and supply chain challenges facing our industry, as well as the significant impacts from Hurricane Ian. Most importantly, our team members and residents came through the storm safely and most of our communities and homes under construction to not suffer any damage. However, the abundance of preparation in our storm protocols, as well as the recovery and cleanup needs following the storms, reduced our volume of home closings and sales in our Florida and Carolina markets. We expect the extensive damage and renovation needs will add further complexity to an already challenged supply chain and have impacts on both construction and development for the next many months which Lou will discuss in greater detail. Nevertheless, our teams delivered 3,050 homes at a record home closings gross margin of 27.5% and an all-time low SG&A ratio of 7.4%. These results drove a more than 100% increase in our earnings per diluted share to a new company high of $2.72. In addition, during the quarter, we strengthened our capital flexibility through a successful expansion of our corporate revolving credit facility to $1 billion and took steps to further reduce debt outstanding, leaving us on track to reach a net debt to capitalization ratio in the mid 20% range by year end. At the same time, we continue to invest in our shares outstanding with repurchases of $105 million during the quarter. In total, these strong earnings and our disciplined balance sheet management more than doubled our return on equity to 26% from 13% a year ago. Turning to the market, as I shared on last quarter's call, we have begun to see shoppers cautiously re-engaging with our sales teams and online tools in July, albeit from abnormally low levels in June. This translated into sequential improvement in net sales orders in July and August. However, activity slowed again in September alongside a reacceleration in interest rates. In total, we recorded 2,069 net sales orders, which represented a monthly absorption pace of 2.1 net orders per community, both of which were down sharply from a year ago. The slowdown has been felt across our wide range of price points, geographies, and consumer groups. Consistent with trends in the second quarter, our first and second move-up segment, which accounted for the majority of the quarter's net sales, has been the most resilient, with particular strength in the southeast. Within our resort lifestyle business, we experienced pullback in demand as these savvy consumers have taken a wait and see approach to their purchasing decisions and the market volatility, although cancellations are the lowest in this segment due to their significant financial strength and emotional attachment to their homes. It is also worth noting that our resort lifestyle business is highly concentrated in Florida, so it was most impacted from a sales perspective by Hurricane Ian at the end of the quarter and into October. And lastly, our entry-level communities continued to face the most pressure as we would expect given the greatest affordability constraints among these buyers. However, we are still seeing healthy traffic activity at these lower price points and are working diligently on qualification solutions. Generally speaking, higher mortgage rates and uncertainties surrounding the economy has pushed many potential homebuyers in all consumer cohorts to the sidelines. And we continue to believe it will take some time for the market to find its new equilibrium as interest rates have most recently reached as high as 8%. This will require stabilization in pricing as much as an improvement in consumer confidence and buyer psychology led by clarity in the Federal Reserve's strategy. Accordingly, our approach will remain grounded in our prudent and long-term view of the business. Our playbook is simple, to position ourselves to be opportunistic by balancing pace and price, maintaining healthy inventory levels, and preserving our capital. Let me share the guiding priorities we are focused on. First, as Eric and Lou will elaborate on, we have adjusted our capital allocation to reflect the evolving market conditions by pulling back on land investment and prioritizing the health of our balance sheet. We control an attractive land portfolio, the majority of which was contracted more than two years ago. Second, we will prudently manage our starts pace as evidenced by the moderation in our monthly starts to one and a half homes per community during the quarter from three and a half a year ago. At quarter end, our inventory remained healthy with just over 2,500 unsold homes under construction of which 0.5 per community were finished. Additionally, our teams are engaged with our suppliers and trade partners to reduce costs and rationalize expenses to current market conditions with success likely to be based on each market's total starts activity. The rationalization of our operating structure, option SKUs and floor plans over the last couple years has greatly streamlined our business for improved efficiency And we will continue to press ahead on production-oriented opportunities, and our teams are in a position with additional permits on hand should the market shift, as we expect it will in time. And lastly, on the sales floor, we will responsibly respond to market pricing and competitive pressures to mean acceptable sales paces, while also protecting the value of our communities and backlog. As market conditions evolve, we are offering compelling incentives and adjusting pricing to recalibrate affordability and stimulate demand as needed on an asset by asset basis, appreciating each community's inventory, duration, competitive dynamics, and targeted consumer group. In new communities and those with small backlogs, we have aggressively sought to find market with our pricing strategies while taking a more conservative approach in longer dated existing communities. Combined, these pricing adjustments and incentives have averaged mid to high single digits. As I emphasized on last quarter's call, we strongly believe in the value of using finance as a sales tool by offering generous mortgage incentives versus simply reducing price as the benefit to the buyer is often much greater. This includes a range of tools offered by Taylor Morrison Home Funding, including permanent and temporary interest rate buy downs, extended rate locks, and various financing programs. For many borrowers, the interest rates provided by Taylor Morrison Home Funding are more competitive than what is available broadly in the market, and our team provides solutions tailored to each of our unique buyer circumstances to maximize the monthly payment savings and overcome cash out of pocket obstacles. In addition to helping drive sales with new buyers, our mortgage team has been diligent in working with our backlog customers to lock in their interest rates and secure mortgage qualification. Let me share a little more about what we experienced with our backlog during the third quarter. At quarter end, our backlog of over 7,900 sold homes was backed by average deposits of nearly 10% or over $66,000 per home. Approximately 60% of our buyers in backlog purchased a to-be-built home that they designed to meet their lifestyle needs. The emotional attachment to these personalized homes cannot be overstated, as nearly 95% of our third quarter cancellations were for spec homes the majority of which were sold earlier this year. These factors have helped limit the extent of our cancellations, which increased modestly but remained historically low at 4.3% of our opening backlog versus our long-term average of approximately 7%. These cancellations equated to 15.6% of gross orders, although we believe this metric is less informative at current depressed sales levels. As I always share, our buyers tend to be highly qualified and financially secure. In the third quarter, our home buyers using Taylor Morrison home funding continued to display prime credit metrics, including an average credit score of 752 and a down payment of 23%. Additionally, a high teen share of our buyers used all cash to purchase their home, up from a mid-teen share a year ago. The vast majority of our buyers have the financial flexibility to absorb higher monthly payments from a purely mortgage qualification perspective based on the meaningful interest rate cushions I have previously reported that once again remain relatively consistent at healthy levels in the third quarter. As a result, it is not surprising that our recent consumer survey feedback indicates that many of our customers are waiting for visibility on pricing trends, the economy, or their own financial situation before moving forward with a desired home purchase. On the topic of pricing and even more prevalent today, transparency around pricing, I'm delighted to share that we recently unveiled an enhanced end-to-end digital reservation system for to-be-built homes in our first community in Florida. You may recall we led the industry's pursuit of digital innovation by being the first home builder to launch a reservation system in March of 2021 and now have further cemented ourselves as the leader in this space by self-developing technology that gives home shoppers the ability to build a new home entirely online and then reserve the configuration with a small deposit. Aligned with our commitment to help consumers make informed choices, the reservation system shows an estimated purchase price and monthly payment, both of which update as each selection is made throughout the process. Before placing the reservation on the home they digitally built, customers can go into their shopping cart and review an itemized list totaling their selections and can adjust based on their desired budget. During the third quarter, our spec and to-be-built online reservations had a sales conversion rate of approximately 40% and accounted for 13% of our company sales. There is so much worth sharing as we look at the data trends of our last quarter reservations, but a particular unexpected favorite is the consumer mix. We would have expected to see high take-up with our millennial shoppers And although they do have a slight lead in total reservations, we actually have a fairly consistent mix between millennials, Gen Z, and even baby boomers. Innovation is core to Taylor Morrison, and we know that proactively responding to evolving customer behaviors and interests is simply good business. Now I will turn the call over to Eric to discuss our healthy land portfolio and the conservative stance we are taking for new land spend.