Taylor Morrison Home Corporation

Good morning and welcome to Taylor Morrison's second quarter 2023 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 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 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, I will turn the call over to our Chairman and Chief Executive Officer, Cheryl Palmer.

CHERYL PALMER Thank you, Mackenzie, and good morning, everyone. Joining me is Kurt Van Hefty, our Chief Financial Officer, and Eric Heuser, our Chief Corporate Operations Officer. As you may have seen in this morning's earnings release, our Board of Directors has appointed Kurt as our EVP and Chief Financial Officer. Kurt has been serving as our interim CFO since May and has been with the company since 2020 when he joined by way of the William Lyon acquisition. He has held numerous home building field and finance leadership roles throughout his nearly 30-year career, and I couldn't be more pleased to have him in the role. Now diving into our call, as usual, I will begin with our quarterly highlights, an update on the market, and our strategic priorities. After my remarks, Eric will discuss our strong land portfolio and investment strategy, while Kurt will review our financial results and guidance metrics. Our second quarter results once again outperformed our expectations across all key metrics as we continue to realize the benefits of our scale, streamlined operations, and balanced portfolio along with improved market conditions. Among the highlights, we delivered 3,125 homes at a home closings gross margin of 24.2% and an SG&A ratio of 9.2%. resulting in diluted earnings per share of $2.12. Coupled with nearly $400 million in share repurchases over the last 18 months, this performance drove a 30% year-over-year increase in our book value per share to almost $46 and a return on equity of 22%. Our focus on the operational efficiencies that generated these earnings has been equally matched by our balance sheet stewardship. As a result, we have never been in a stronger position to support future growth as we ended the quarter with an all-time high liquidity position of $2.3 billion and a home building net debt to capital ratio of just 15.4%, which was down 2,100 basis points from a year ago. On the demand front, sales and shopper activity remained healthy throughout the quarter, Maintaining the momentum that began in the early spring selling season. In total, our net sales orders increased 6% sequentially and 18% year over year, driven by a monthly absorption pace of 3.1 per community as compared to 2.9 in the first quarter and 2.6 a year ago. It's worth noting that one of the many ways in which we are driving a more efficient, faster turning business is by targeting an annualized absorption rate in the low three range as compared to our historical low to mid twos. This increase reflects the intentional shift in our community mix and geographic footprint in recent years. At the same time, we have increased the average size of our newly underwritten communities by approximately 50% over the same period which will also improve our sales velocity and cost leverage as we drive enhanced long-term returns on our invested capital. When I look across our portfolio, sales momentum was evident once again across nearly all our markets. Strength was most pronounced in our west region, led by Sacramento, Seattle, and Phoenix. Our central region also improved meaningfully, most notably in Dallas and Houston, which was encouraging given its slower start to the year. And lastly, in the east, nearly all our markets continue to see healthy trends, with Raleigh and Charlotte standing out most positively. By consumer group, our second quarter net sales orders were comprised of our move-up category at 39%, our entry-level segment at 33%, and our resort lifestyle communities at 28%. Compared to a year ago, our entry level and resort lifestyle sales have recovered strongly, while our core move up segment has remained the most stable in recent quarters at healthy paces. Alongside the improvement in demand, we raised pricing or reduced incentives sequentially in the majority of our communities during the second quarter. These pricing adjustments have generally been modest as we continue to balance affordability with pricing power on a community-by-community basis. Most importantly, this renewed stability has reinforced shoppers' sense of urgency and further solidified the value of our backlog, which is also secured by average deposits of $62,000, or just over 9% per home, while also partially offsetting any cost pressures. Thus far in July, activity has been consistent with seasonal norms while leading indicators, including web and foot traffic, mortgage pre-qualifications, and digital home reservations are stable at healthy levels. On the latter, it's worth sharing that our online home reservation systems contributed 16% of our second quarter growth sales with an all-time outsized conversion rate of 47%. Since the Federal Reserve began its aggressive fight against inflation a little over one year ago, an equilibrium has emerged where consumers have reset their expectations and our industry has recalibrated its pricing, incentives, and product offerings to align with today's higher interest rate environment. At the same time, consumers have been met with a historic lack of for sale inventory in the existing home market where approximately two-thirds of homeowners hold interest rates below 4%. This has driven meaningful share gains for new construction, with the percentage of new home listings more than doubling from long-term norms to over 30% of the market. Further compounding these dynamics, our research indicates that homebuyers are increasingly preferring new construction to existing homes for ease of living customization, or cultural preferences. While affordability remains top of mind and a true challenge for some consumers, especially those in the most entry-level price points who require more support to achieve manageable monthly payments, the lack of inventory coupled with underlying demographic strength have supported resilient demand for new homes. At Taylor Morrison, we are well-positioned to continue to serve that need across our balanced portfolio of entry-level, move-ups, and resort lifestyle communities. In each of those segments, we primarily invest in well-located prime core sub-markets where performance has proven to be the most durable throughout housing cycles, as has been the case over the last 18 months as pricing pressures were felt most acutely in non-core areas where we have little exposure. In addition, this strategy allows us to attract a relatively well-qualified consumer, even among our first-time homebuyers, who are generally better equipped to carry higher housing costs if needed. For example, of our buyers financed by Taylor Morrison Home Funding in the second quarter, 41% were first-time buyers, and by age group, 51% were millennials, and another 4% were Gen Z. Across all of these borrowers, credit metrics were excellent, with an average credit score of 753, an average down payment of 24%, and an average household income above $180,000. Also underscoring the strength of our typical buyer, the average square footage of those choosing a to-be-built home has increased year-to-date despite the interest rate environment. As you have heard me emphasize on prior earnings calls, we are committed to leveraging the power of finance as a sales tool to overcome interest rate volatility and offer various personalized incentive solutions. Driving an all-time high mortgage capture rate of 86%, this finance-first strategy reinforces the compelling value and confidence we can offer our customers while also minimizing the gross margin headwind we would otherwise experience from outsized pricing adjustments, as evidenced by the strength of our second quarter home closings gross margin of 24.2%. On the construction side of the business, we remain focused on driving faster inventory turns, tighter production schedules, and lower costs through simplification and streamlining. While we have made substantial progress in reducing the breadth of our option offerings and floor plans to drive critical efficiencies for our trade partners and builders without sacrificing consumer appeal, the opportunity is ongoing. Critical to those efforts, our Canvas option packages have achieved strong utilization rates across all price points as buyers are responding to the value ease and design aesthetics of our well-curated offerings. In addition to the time savings and operational ease of these nationally managed packages, our Canvas year-to-date option margins have exceeded those in our design studios. Driven in part by these initiatives, improving cycle times, including approximately two weeks sequentially in the second quarter and more expected going forward, will allow us to reduce the amount of work in progress inventory on our balance sheet, improve our inventory turns, and increase our overall production potential. Before I wrap up, while this week's Federal Reserve actions have once again reinforced the need for a highly dynamic approach to managing our business as we navigate continued interest rate volatility and macroeconomic uncertainty, we are well equipped to continue to do so. The tools we have put in place over the last year and the exceptional cohesion between our home building and financial services team will allow us to remain strongly focused on operating efficiently, investing for future growth, and serving our customers well. We have gained critical advantages by achieving greater scale, simplifying our operations, and embracing innovations to drive both growth opportunity and enhanced bottom line results And we will continue to leverage those strengths as we move forward. Now let me turn the call to Eric to share more on our land strategy.