Taylor Morrison Home Corporation

Good morning and welcome to Taylor Morrison's third 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. 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. These statements 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 obligations 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.

Thank you, Mackenzie, and good morning, everyone. Joining me is Kurt Van Hefty, our Chief Financial Officer, and Eric Huser, our Chief Corporate Operations Officer. I will briefly cover this quarter's performance and then discuss the strategy behind our balanced operating model, which we believe is critical to our success in the current housing environment. After, Eric will discuss our healthy land portfolio and investment strategy, while Curt will review our financial results and guidance metrics. In the third quarter, our team once again achieved strong results, including the delivery of over 2,600 homes at a better than expected adjusted home closings gross margin of 23.9%. At the same time, we flexed each of our capital allocation priorities to increase our land investment, retire debt outstanding, and repurchase our shares, all while ending the quarter with a significant liquidity position of $1.6 billion. In total, this drove a 21% year-over-year increase in our book value per share to a new high of nearly $47. Our core performance was healthy, with margins and returns remaining well above our historic norm, given the meaningful enhancements to our operating model over the last several years that we believe will continue to drive enhanced long-term performance. However, at the same time, it is important to recognize that this quarter reflected the temporary impact of last year's slower starts and sales activity and compared to record profitability achieved this time last year. We also acknowledge that the rapid re-acceleration in interest rates in September has once again injected some hesitation into the market and drove a moderation in sales momentum that has continued into October alongside typical seasonal slowing. As I will spend some time discussing, the strength of our diversified consumer strategy and balanced product portfolio better equips our home building and financial services teams to effectively manage these headwinds. As a result, I am pleased that despite the challenges, we are once again raising our full year guidance for home closings and adjusted home closings gross margin, as Kurt will discuss. The resiliency of our business is a function of our diversification across buyer groups, emphasis on high quality community locations, and return focused investment strategy that has been years in the making. Our portfolio meets buyer demand across entry level, move up, and resort lifestyle consumers with the necessary local and national scale to compete effectively. By consumer group, our third quarter net sales orders were comprised of our move up category at 43%, our entry level segment at 35%, and resort lifestyle at 22%. With different needs and preferences, Among these consumer sets, this approach allows us to operate both a spec and to-be-built operating model, with our spec business largely serving our entry level and first move up buyers, while our to-be-built homes are most prevalent in our second move up and resort lifestyle communities. Approximately 55% of our third quarter sales were for our spec homes, while the other 45% were to-be-built orders similar to recent quarters. This balanced, community-driven approach provides several important advantages. Our spec production offers cost-efficient consistency and repeatability that drives affordable, just-in-time offerings for our entry-level buyers, while our to-be-built business generates outsized, high-margin revenue when buyers pay a premium to personalize their home on their desired lot. This two-pronged production approach also improves our starts cadence, expands our land investment opportunities, and minimizes portfolio risk. For both spec and to be built homes, the strong utilization of our nationally managed canvas option packages further streamlines our purchasing and construction processes without sacrificing option revenue. In addition to these production advantages, our consumer diversification is strategically critical, especially in the current environment, because each of these groups respond differently to interest rate volatility. On one hand, rate and affordability concerns are least acute for our resort lifestyle and second move-up buyers, as they typically have significant financial flexibility. In fact, the vast majority of our 55-plus buyers pay all cash at a rate that is three times higher than younger buyers. Their financial strength is also evident in our sizable third quarter lot premiums and option revenue, which average nearly $110,000 in total and can contribute up to a several hundred basis point advantage for to-be-built gross margins compared to our spec margins. This is consistent with the long term premium commanded by to be built sales prior to the pandemic that we expect will persist going forward. On the other hand, our entry level and first move up communities benefit from a deep demand pool that we expect will continue to grow in coming years alongside household formation, but with much greater sensitivity to pricing that often requires outsized incentives. Ultimately, both ends of the buyer spectrum are important to our long-term success, and we aim to serve each of our targeted consumer groups with appropriate product offerings, pricing and incentive tools, and an exceptional customer experience. Let me share a bit more color on the sales front. During the quarter, our net sales orders increased 25% year-over-year, driven by a monthly absorption pace of 2.7 per community as compared to 2.1 a year ago. This healthy demand allowed us to raise pricing in approximately 60% of our communities. It's worth sharing that 15% of our third quarter sales originated from online reservations at an outsized 45% conversion rate. By month, sales were healthy and consistent in July and August at healthy paces. However, alongside normal slower seasonal patterns, the rapid rise in rates in September drove a moderation in sales momentum that has continued into October, as would be expected with this magnitude of rate volatility. In this current environment, our longstanding strategic prioritization of finance incentives is even more critical to our sales strategy. As you have heard me discuss before, the benefit to our home buyer from finance incentives outweighs that of a price reduction by nearly four to one for our typical home. While we will also adjust pricing and other incentives as necessary to maintain appropriate sales cases in each of our communities, this finance first strategy better protects our gross margins, community values, and consumer confidence while also further differentiating our value versus resale homes in today's inventory constrained market. There are a number of ways we leverage our finance incentives to best serve each borrower. One way is by providing closing cost assistance, which we have typically offered to most borrowers to offset various transaction costs. More recently, over the last several quarters, we have expanded our incentive programs with the purchase of forward commitment below market interest rates. These rates can be used on spec homes with quick move-in dates, as well as with to-be-built homes when combined with an extended rate lock for up to one year, offering permanent interest rate security. If rates improve during the build cycle, we offer a free float down. And lastly, we can utilize our incentives to provide temporary interest rate buy downs, allowing borrowers to ease into home ownership while still having the confidence that they qualified at the permanent note rate of a below market fixed rate mortgage. These incentives can be combined as needed to optimize their effectiveness, and we are highly targeted with how we leverage these tools to meet each borrower's unique circumstances and based on each community sales strategy. Generally, our entry-level and first move-up communities prefer rate buy downs to aid affordability. As a result, in the third quarter, while only 18% of our closings utilized a forward commitment, an outsized 50% of those were first-time buyers. On the other hand, our second move-up and resort lifestyle buyers which, as I highlighted earlier, are much less reliant on financing, tend to favor closing cost assistance and other concessions to minimize upfront cash out of pocket. In total, we tend to attract well-qualified consumers, even among our first-time homebuyers. To illustrate, in the third quarter, among our buyers financed by Taylor Morrison Home Funding, which achieved an all-time capture rate of 88%, credit metrics remained excellent. Borrowers had an average credit score of 753, provided average down payments of 24%, and earned average household incomes of nearly 180,000. This strength extends to our backlog, where customers are secured with average deposits of more than 62,000, or about 9% per home, providing critical financial commitment that minimizes cancellation risk. in addition our financial services team has thorough pre-qualification standards and is diligent in locking in our backlog buyers interest rate to further reduce risk and provide confidence during the build cycle equipped with all of these compelling programs we are well positioned to navigate the headwinds from today's higher interest rates and macro uncertainty to wrap up Let me once again reiterate that our strategy will remain focused on serving our buyers with appropriate product offerings, pricing, and incentives, and an exceptional customer experience. We are focused on capitalizing on the benefits of both spec and to-be-built production driven by the needs of our targeted consumer groups. Together, the exceptional quality of our buyers, the location of our communities, and ability to use powerful finance incentives overcome interest rate headwinds enables our business to be resilient. Our experienced and dedicated team members are focused on continuing to drive smart, a creative growth, and we will remain nimble in our operating decisions as we move into the new year, supported by significant liquidity and a healthy committed backlog. With that, let me turn the call to Eric.