Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Good morning, and welcome to Taylor Morrisons fourth quarter 2019 earnings Conference call. Currently all participants are in listen only mode. Later, we will conduct a question and answer session.
Instructions will be given at that time.
As a reminder, this conference call is being recorded I would now like to introduce Mr., Jason Lenderman, Vice President Investor Relations and Treasury.
Thank you and welcome everyone to Taylor Morrison fourth quarter 2019 earnings Conference call with me today are Sheryl Palmer, Chairman and Chief Executive Officer, Dave Koning, Executive Vice President and Chief Financial Officer.
Sure, we'll begin the call with an overview of our business before much of our strategic priorities.
Dave will take you through or financial review of our results along with our guide.
Then Sheryl will conclude with the outlook for the business after which we'll be happy to take your questions.
Before I turn the call over to Sheryl, 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.
Forward looking information that you'll find in today's news release. These statements are subject to risks and uncertainties that could cause actual results could 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 Securities and Exchange Commission.
Do not undertake any obligation to update or forward looking statements.
Now, let me turn the call over to Sheryl Palmer.
Thank you Jason and good morning, everyone. We appreciate you joining us today is we share a yearend results for 29 chain and look ahead, what would be a transformational year for the company as we've seen close on our acquisition of William Lyon homes.
Before I get into too many details I'd like to take a step back to reflect on what the last decade meant to Taylor Morrison.
In 2010, we total 2300 sales orders across eight U.S. market.
In 2011, we were required by private equity firms TPG and Oaktree.
In 2012 plans to deepen our presence in Texas, we completed our first acquisition with Darling homes.
In early 2013, we became a public company through the largest IPO of a homebuilder in New York Stock Exchange history.
We sold our Canadian operations in 2015 and continued our acquisition activity, that's two more that year G.H. and Arlene.
We furthered our southeast expansion in 2016, when we acquired Acadia homes in Atlanta.
And then our private equity partner successfully exited their investment inner company in January of 2018.
Same here, we closed on our fifth acquisition up the decade, and our first public company deal with Baby home [laughter].
Intentional focus on and dedication to smart growth and operational excellence put us in a position to make 29 chain our biggest area.
We ended the year with 10517 sales orders across 21 market throughout the U.S., representing an 18% compounded annual growth rate over that 10 year period.
Passing 10000 homes as a significant milestone for Taylor Morrison and I believe it positions us to take a big lead fall in 2020.
We are extremely optimistic about the landscape today as markets are in a strong place to kick off the new decade economic indicators remain in our favor and consumers have many reasons to be confident unemployment continues to remain at a 50 year low personal income growth continues to pick up and can.
Humor balance sheets are stronger than ever.
We see that's manifesting in our sales offices, where we just came off our strongest Q4 sales performance in company history. That's what the mid William Lyon home acquisition announcement and integration planning activity occurring in our company during that time.
Sales pace was 2.6 for the quarter up over 62% compared to the same period last year and orders were up 42% year over year.
Keep in mind that Q4 was also our first comp that's fully food Avi in the prior year period.
It's just actually notable that our Q4 pace actually tied Q2 at the high Mark for the year, which obviously have been typical given the seasonality we normally see during the holiday months versus the usual strong spring selling season, the fall squarely in Q2.
The success like the sales pace for the year above our expectations at 2.5 on an ending average community count for 2019th of 351.
Our sales success has continued into 2020 across all geographies and consumer segment, leading to a 46% growth in sales at a sales pace of over 3.0 for January.
In fact, we're pleased to see a positive market that is paid off in strong movement in paces in the William Lyon business as well, which includes a resurgence of activity for them in the Pacific Northwest.
William Lyon saw a more than 30% increase in January sales over the prior year period.
With this strong momentum we would be remiss, if we tend to acknowledge the impact of having kb home's fully integrated into the business in 2019.
The initial investment thesis with baby was to expand our presence in entry level versus where we were as a standalone company.
Immediately following the acquisition acquisition, we had work to do to reposition some of the acquired assets, which are teams did rather quickly, allowing us to reap the benefits to be a strong failed and paces as the year progressed.
It probably won't surprise anyone to learn that the consumer segment with the highest pace during the fourth quarter was entry level, but it's important to note that we had strong sales success across all consumer segment.
Entry level first move up and second move up were all up at least 50% in sales orders for the quarter.
With the baby integration now well behind US, we anticipate our collective organizational experience with our prior five acquisitions to pay off tremendously during the work ahead with William Lyon, and we've already seen that play out in the or in the early integration planning work.
I started to be it a follower merger related filings and announcement no. We are prepared to close the transaction. This week both sets of respective shareholders approve the deal on Thursday January Thirtyth and we're now completing the final steps before officially clothing and moving forward as one combined company.
With each passing day, we haven't even a stronger conviction about the marriage up to still.
The addition of William Lyon checked a number of strategic boxes for us. It allows us to increase scale a number of our existing markets gain entry into three markets that have been at the top if our watch list add to our entry level exposure and complement the Taylor Morrison culture and values, but that the talented William Lyon team.
As part of this morning's earnings release, we also provided a flash <unk> results for the William Lyon business, which were in line with our expectation.
The integration planning process began immediately following the announcement to ensure we are able to hit the ground running upon closing.
As we've discussed during the AB transaction, we formed in integration management office, where I'm out.
That was led by our president of M&A lose Stephan and remained in place throughout the entire Avi integration.
A key lesson, we learned during the havey processes that we need and more substantial representation from the acquired company that was part of this transaction. We've added a senior member from William Lyon leadership to the I know in order to ensure that their knowledge base is properly transport and that all team members from both kinda.
And he is our communicated to throughout the entire process.
This means that our IMO actually consists of three key leaders today the Stephens.
I am Wyatt IMO Dee Ann IMO lead from within the Taylor Morrison business.
Additionally, we need with an acquisition as transformational if that it would require the next evolution of our organizational structure.
To support our continued growth, we must think differently operate differently and use our resources differently in December we announced a new corporate and regional structure led by hair accuser, our chief corporate operations Officer, and Dar Air and our Chief Field operations officer effective upon close of the fact.
Position.
By splitting the company's operations into these two distinct groups. It will provide greater line of sight into our corporate functions and the way we support the growing field team and helped US rationalized the regional areas given the added scale from William Lyon.
Our regional structure will move from three to five regions and be led by area President from both Taylor Morrison annually in line.
Ralph this process, we pursued a talent strategy very similar to what we employed during the baby acquisition, which included hundreds of interviews for both William Lyon and Taylor Morrison team members.
But if the toughest challenges in this industry is finding top talent and this demanding unnecessary process allowed us to identify talented individuals that will move forward as part of the larger combined company.
During this time, we also identified the second half the two board members that will join the Taylor Morrison Board effect of closing.
When we announced the acquisition in early November we were pleased to share that Bill H. Lyon William lines Curried Chairman of the board would be joining our board and now we're delighted to share that Gary each hunt William winds lead independent director will also join us upon closing.
I'm sure everyone familiar with Phil and we're excited about what Gary will bring to our board as well is diverse experience in real estate politics strategy and consulting will help round out the already impressive background that our board members bring to the table.
In addition to our approach on the new organizational structure, we set ambitious goals to achieve by day, one or soon thereafter, one of them being ensuring our teams and the overlapping markets are together in the same office space as quickly as possible. Fortunately most team members will be able to achieve that upon damn close well.
Some we'll get there shortly thereafter.
Plans are in place for all of the office space I won't be use going forward and the Taylor Morrison website is ready to go lives with all of the William Lyon community information and all relevant branding decisions have been made in each market.
We believe the key to a successful integration is moving as fast as possible from US and then wheat and these steps allow for us to begin that process immediately.
Ensuring that we have the appropriate organizational structure a time of class was important but equally important is the evaluation of every asset in the new combined company and the required go forward positioning in each of our market.
Our goal across the company is to ensure that we're investing in assets in areas of the business that are the best use of cash based on generating accretive returns.
Using this criteria, we have completed the sale of all of our assets into Chicago market.
This impacted our financials during the fourth quarter based on the write down required to complete the transaction.
We've also taken some additional impairments during the quarter related to a small number of Taylor Morrison communities that will require some repositioning post close of the acquisition.
Similar adjustments will likely be required on some William Lyon assets as well, although those will show up within the purchase price accounting process.
It through each of these thoughtful and deliberate effort that we've been able to outline an extremely strong combined business and assure we have the best organizational structure and portfolio in place.
Turning back to our results for 2019, we deliver 9964 closings, which was nearly 14% higher than last year and near the high end of our most recently increased guidance.
Overall, it was a strong quarter and it put an exclamation point on a very strong year for us we're extremely active in 2019, and it's a testament to the organization and its ability to deliver great result, even when we're taking imperative stuff that's a business up for an even stronger future.
With that I'll turn the call ever today for the detailed financial review.
Thanks, Sheryl and award one for 2019, adjusted net income was 323 million and adjusted diluted earnings per share was $2.90.
On a GAAP basis net income was 255 million diluted earnings per share was $2.35.
Total revenues for the year were almost 4.8 billion, including homebuilding revenues of more than 4.6 billion.
Homebuilding revenues were up just over 12% from the prior year.
Sure I imagine there were certain unusual items during the quarter that impacted many of our key metrics.
The impact to earnings before taxes included almost 50 million for an increase in our reserve related to Remediating, the warranty issue that impacted or central region.
13 million for the write off related to our Chicago exit.
Almost 11 million for transaction expenses related to both TV and William Lyon.
9 million for the impairments and almost 6 million related to the loss on extinguishment of debt due to the refinancing transactions earlier in the year.
With all of this behind US we're confident now this sets up the business in strengthens the balance sheet for the future.
For the year adjusted home closings gross margin was 18.2% when adjusted for the 53 million an unusual charges that impacted the metric.
Got home closing gross margin for the year were 70%.
Moving to financial services, we generated approximately 93 million in revenue for the year and approximately 42 million gross profit.
Experienced continued strength during the year and actually achieved our highest profit per unit in company history during the fourth quarter.
Our mortgage company capture rate for the year came in at 75% compared to 71% during 2018.
As we integrated the easy business into our financial services operations throughout 2019.
It was notable to see that are capture rate actually increased every quarter throughout the year and even Q4 at 80%.
Sure I'll mention that we evaluated our organizational structure headed into this transaction that applies the financial services as well.
The go forward organization will be focused on to combine builder business and we will now benefit from an east Andy complimentary West Coast fulfillment Center in Phoenix.
To expand the reach of the financial services team, which is based in Florida with smaller field teams embedded within each market.
This while the team to better serve our customers across the country and provide a seamless experience across all time zones.
As Judy as a percentage of home closings revenue adjusted for the impact of unusual items was 10.4%.
On a reported basis it was 10.6%.
Adjusted EBITDA margin was 8.6%, but 6.8% on an as reported basis.
Our effective tax rate for the year was 20.9%.
The effective tax rate was positively benefited by recently approved energy tax credits.
For the year, we spent almost 1.2 billion in land purchases and development and ended the quarter. We had approximately 54000 lots owned and controlled.
A percentage of lots owned was 79% with the remainder under control.
On average our landbank had approximately 5.4 years of supply at quarter end based on a trailing 12 months of closings.
From a land pipeline perspective, we're almost exclusively focused on securing land for 2021 and beyond for the new combined company.
At the into the quarter, we had 4711 units and our backlog would they sales value of approximately 2.3 billion.
Compared to last year. This represents an increase of 13% in units and an increase of 9% sales value.
We also had 1774 total specs at quarter end, which included 361 finished specs were about 1.1 per community.
This is down from the almost 1.7 finished specs per community that we had at the end of 2018, and it's actually flat from our Q3 any balance.
The finished spec population that we entered the year with is helping position us for a strong spring selling season this year.
We added William Lyon, we expect our spec population to increase but we ran a working it back down closer to historical averages over time, but do you recognize that many of their positions operate solely as a fight turn inventory model.
As I look back on the year I'm proud of the work, we where we were able to complete when it comes the capital allocation.
We completed the integration of baby homes, we paid off 200 million in debt as the bridge loan for the acquisition came due we exhausted our share repurchase authorization, which took our total shares repurchased after the Avi deal up to 16.9 million for $296 million and we continued to invest in our core bill.
Yes.
Which help lead to a record results we saw this year.
From a liquidity perspective, we ended the year with approximately $850 million total available liquidity.
326 million about liquidity was cash on hand, and the rest was from our 600 million corporate revolver. Excluding normal course letters of credit that have been issued against it.
At the end of the quarter, we had no drawn balance on the revolver and our net debt to capital ratio was 37.2%.
On a pro forma basis as a 12 31, the combined company would have had a net debt to capital ratio in the mid 40% range as we look beyond the acquisition close date this could reach as high as the 50% range as the year progresses and seasonal cash needs increase.
As we mentioned when we announced the deal one of our focus is through this year and next we'll be continuing to reduce the leverage level.
We've also worked to upsize, our current corporate revolver to 800 million to account for the increased size and skills. The combined company. This will be effective as of the close of the transaction.
The 2020 year should prove exciting with the closing and integration of William Lyon, which will have a significant impact on or operating and financial metrics.
As we mentioned in the William Land acquisition announcement in November of last year, we will be in a position to provide annual guidance on the combined business during our first quarter call in late April.
For now let me, let me wrap up by sharing our Q1 guidance for Taylor Morrison on a standalone basis.
For the first quarter, we anticipate community count to be between 320 and 330.
It's important to remember that our strong sales success in Q4 and January is having a short term impact on our overall community count as several communities have or maybe closing out sooner than expected.
It's difficult to pull new community openings forward.
Community openings are more back half weighted for 2020 and should normalize by the end of the year.
Closing for the quarter or plan to be between 2000 102200.
GAAP on closings gross margin inclusive of capitalized interest is expected to be about 18%.
As many as a percentage of homebuilding revenue is expected to be amid a 11% range.
The effective tax rate is expected to be about 23.5%.
Our first quarter metrics will be impacted by the closing of William Lyon, which will include a portion of February and all of marches operations. Thanks, and I'll now turn the call back over to Sheryl. Thank you Dave.
Before we moved acuity I'd like to provide a quick update on our build trend strategy and the continued progress of our new business unit during the fourth quarter.
We officially closed on the purchase of our first site in Phoenix and have started to Feldman development work on this project, which is a big milestone for the initial efforts.
We anticipate closing on our second Phoenix project. This month and are excited to start attacking the pipeline that's been built thus far.
We are also thrilled to announce that we've expanded our build to rent strategy to three additional markets outside of Phoenix.
Dallas, Charlotte and Orlando.
We believe our investment thesis fit well in each of these markets as need and demand for the product are apparent in the local teams are excited to capitalize on the opportunity.
We expect to continue our expansion into additional markets throughout 2020, and we'll have much more to report as the year progressive.
As we've discussed our expectation for build to rent. This here is to continue growing the land pipeline and control additional properties within the identify bill to read markets as well as continued development work with some vertical construction by year end with our initial projects.
We'll start leasing activities later this year with any material financial impact from everything from our initial built friend projects expected as we look to divest the projects in late 2021 and or 2022.
I'd also like to take a momentous share a couple of recent announcements that emphasize what makes Taylor Morrison unique all of which enhance the operational and financial highlights we've already discussed this morning.
Most recently, we were named America's most trusted homebuilder by life story research for an unprecedented fit here in a row.
The very nature of building home means our customers place an incredible amount of trust and has each and every day and we at Taylor Morrison, our determined to make that experience as magical as it can and should be.
With Great Trust comes great responsibility, it's what inspires and motivates us to continue to always do the right thing and put our customers at the forefront of everything we do as we all know trust is hard to earn and even harder to keep so I'm, especially proud at the longevity that we've been able to achieve and the discretionary effort.
That the team has put in to ensure the repeat of this honor.
Also I couldn't be more delighted to share that we've been honored for the second time with a glass door employs choice award recognizing the best places to work for 2020.
This isn't a war that recognizes the best places to work in America based on the anonymous instead of employee.
Taylor Morrison ranks number 42 out of the top 100 companies and were again, the only homebuilder on the list.
I believe that the feedback glass door garnered was a direct result of our customer first mentality that focuses on our internal customers as much as it does our home buyers.
In mid 2019 through a partnership with the Ritz Carlton focused on enhancing our customer experience, we began hosting daily hurdles across the organization, where all team members come together at all levels up the organization to discuss our culture customer service best practices as well as timely.
Relevant business news.
These short 15 minute hurdles reinforce our mission to find train and retain leaders, who inspired or teams to passion and authenticity through engaging two way communication vehicles.
I believe our commitment to focusing on the whole person with our employees customers and homeowners sets us apart not only in the building industry, but in corporate America large.
Thirdly, I would like to quickly highlight our recent a recognition as a repeat member of Bloomberg's gender equality index. This list distinguishes companies committed to transparency engender reporting and advancing women's a quality.
Our recruitment philosophy has never been tied to meeting quotas, but rather always hired the best person free trials.
Our industry can benefit from greater diversity of thought and I'm proud that the exceptional leadership and talent Taylor Morrison enjoys today grew organically and that everyone. Regardless of gender for race can see at home for themselves and Taylor Morrison.
This recognition not only acknowledges the makeup of our current workforce, but our board of directors as well where today, we enjoy an almost 50% mail to female split.
And last but not least I'm also very proud that we were added to fortune magazine's world. Most admired companies last for the second consecutive year.
We scored best in the areas of social responsibility innovation people management and product quality all areas that we care about deeply the rankings for this honor based on survey responses from industry executives and analysts who provide feedback based on company performance and reputation.
We've been fortunate to be the recipient of many awards, but there's something very special about being recognized by other leaders in our industry.
To say that 2019 was a pivotal year and the company's history would be an understatement and 2020 is already proving to be yet another one.
It's hard to imagine there's more amazing things occurring within the organization outside of the acquisition related activity, but it's true.
Just last Friday, it was announced that we would be joining the S&P 400 mid cap index has I've tomorrow.
Our teams also continue to seek new and smarter ways of conducting business that will add to our transformational journey things like our recently launched chat bots, Olivia who had her first week alone generated more than 1600 interactions and 400 conversions the successful appointments being the every day.
Taylor Morrison home funding has also made significant progress streamlining the mortgage journey through bought and digital transformation of the mortgage application process.
During the busy holiday season T. M. HF was able to originate and close homes in record time actually as quick as nine days.
Most importantly, as we expedite the process, we're providing an elevated experience at each turn for our customers.
These are small up and meaningful steps that our teams continue to take that improve the Taylor Morrison customer experience.
Oh, and our call today like I always do by providing an enormous and heartfelt. Thank you to our Taylor Morrison team their effort to day in day out to deliver strong result, while working diligently to ensure a smooth integration of William Lyon. After closing is so inspiring.
With that I'd like to open the call. The question operator, please provide our participants with infection.
Thank you to ask a question. Please press the Star then one key on your Touchtone telephone.
To withdraw your question press the pound key again to ask a question press Star one.
Our first question comes from Alan Ratner with Zelman and Associates. Your line is open.
Hi, guys. Good morning, congrats on the quarter and the the earlier than expected to close the deal very exciting thing.
Good morning. So first question I guess, just thinking about the go forward of the business yet the decision to expand into five regions and obviously sounds like you're taking a kind of a deep look at the organization as you've been.
Looking at the integration here.
No in the past you've kind of targeted a sub 10% Das Gionee and you know this year was a little bit of a step backwards here and a lot going on obviously, but how should we think about where the new kind of goalposts. Our with this current organizational structure. You are you still kind of targeting that type of level will there be any near term impact from the the restructure.
Greetings and I guess just more broadly.
Understanding not giving annual guidance, but how should we think about just the go forward business in terms of where you wanted to be whether its thinking about margins absorptions returns any metrics you'd be willing to at least directionally share would be helpful.
Sure well I guess I'll start on with was asked DNA.
You're correct, we're not changing our long term vision.
You know driving leverage on EPS DNA.
The increase in the skillful from William Lyon, That's obviously going to help that leverage but that will just take a little bit of time, we'll need to work through the integration.
And we will have better insight into that when we get to our Q1 call.
I tell you ought to legacy basis, we would expect to be flat to slightly leveraging even before the William Lyon acquisition, we are continuing to invest in growth and our BTR business. Those revenues are going to come a little bit later, but as we look out longer term, we do feel like with.
The structure, we haven't place, we're going to be able to drive a leverage going forward.
And then maybe on a couple other ones. The ahead on I think you hit on a absorptions and margins. So you know all start maybe on the absorption side.
Looking at 20, we would anticipate to be a up relative to 2019 on legacy basis, I think if anything a there'll be a maybe a little bit of a governor on pace more around lot availability.
Not necessarily demand because demand is strong but with the William wine business. It is a higher pacing business. So part of our strategy there was to enhance pace going forward.
And we still firmly believe that and then maybe lastly, I'd head on.
The margin again, just maybe a little color on the legacy side, we would anticipate margins to be accretive.
Getting the better benefits from synergies just from Avi, where we see the strong demand.
Well have a little bit a noise, obviously through the integration of William Lyon with purchase accounting, but again the strategy around this is to drive scale and we think going forward, we have upside potential in margin.
Often I really appreciate that day, that's very helpful.
I guess, just secondly, very impressive order growth I think you and your peers, obviously your or are putting up some some strong numbers. This quarter January sounds like it's off to a great start as well yeah, you kind of touched on it a little bit with the margin outlook again, and maybe on the flip side the lot count, perhaps becoming a bit of a governor but what are you doing on the price.
In front at this point that you guys there more aggressive price increases coming given the fact that it seems like communities are closing out faster maybe lot count becomes an issue labor might become tighter as the year goes on what does that translate to in terms of pricing power right. Now yeah. Good question. Alan you know I think as you can see were quite focused on driving pace in each of the.
Communities, even at the expense a little bit of community Count I do think there's still pricing power amongst all segments. You know if you just look at the simple economics of demand specifically on the entry level, we're seeing it but I think there's also a sensitivity to cross the sector that people.
Don't get ahead of ourselves and certainly at that entry level that you know, we're a little more disciplined and sensitive to the impact of the buyer I think what's most important as we look at kind of managing pace in prices given the labor market. As you mentioned, it's that we really match cases to construct.
And capacity.
And so it's really our plan to continue to maintain and production cadence. So that the trades can plan accordingly, and we don't put them in a difficult position.
Got it thanks, guys. Good luck with everything thank you.
Thank you. Our next question comes from Jack must Cinco with aside you. Your line is open.
Hi, Good morning first question, you know Cheryl in past deals.
You've been pretty active.
Around share repurchase following the closing.
And you talked about leverage maybe taking up to the year is just the normal production.
Cadence occurs.
How are we thinking about buybacks relative to you know that leverage level that you know you talked about 38, maybe moving up into the end of the low fiftys temporarily.
Do we think about that.
In the context of some of the prior.
Deals you guys have closed.
Jack I'll take that one as you know, we like share repurchases as part of our overall strategy.
Since Q4 of 2018, we've purchased almost $300 million and stock.
For now we'll need to wait until we close the transaction before we likely go out and seek a new share repurchase authorization.
You know the combined business is expected to generate sufficient cash flows going forward.
But I'd also say given where current interest rates are.
Yeah, we might have a little bit more of a bias towards looking out the debt.
Potentially refine some of the debt that we're getting through the William Lyon transaction, and even possibly paying some of that down. So we're going to continue to take a balanced approach to capital allocation.
You've heard us talk about it before reinvesting back into the business looking at M&A opportunities, which obviously with William Lyon, we're checking that box going to debt leverage and I'm looking at share repurchase and it's going to be really a function.
Around our free cash flow and in this case, where interest rates are they're very favorable right now and we feel like that's something we might want to take advantage will be opportunistic.
All right. That's helpful. Thank you and then.
You know you've got the five acquisitions.
Since 20, I guess 2015, or 22015, or so and a number of those were or have been really first time oriented as is the William wines deal.
You know asked another company. This this quarter, what's the Taylor Morrison brand.
At the entry level going forward now that you combine all that I mean, right you've got some competitor doing very small footprint very strip down you've got build to order you've got everything include where where his taylor going to compete.
In the entry level from a branding perspective.
I think I'll.
Take a stab at that one I think everyone's playing this first time consumer a little bit differently and you're absolutely right. The first time kind of first time buyer penetration has been a key focus of the organization.
But I think it's really critical that we look at this consumer market by market because we've talked before we do us or we do.
We do serve that very affordable first time or in some markets and we do that through simplified product maybe attached product very simple back levels little choice for the consumer and for those folks it's really about being in the right you know the right house quality home in the.
Right place at the right price.
Along the first time or continuum, though we also serve what weve coined the professional first time buyer and with that consumer you know, we do give them a little bit more choice and they do spend a little bit more money and time really customizing the specifications to there.
Liking so when we talk about our first time or I think it's a pretty broad breadth across the portfolio I'm very affordable to truly something that would be right on the edge of that first time move up.
I think with the William Lyon penetration.
We definitely are gonna have a greater penetration of that more affordable I would say or overall entry level position will probably move up somewhere around five or six percentage points.
And we'll have a larger piece of the spec business as Dave discussed where that would really be I'm much more simplified product.
Alright. Thank you. Thank you.
Thank you next question comes from Michael Rehaut with JP Morgan Your line is open.
Hi, Thanks, Good morning, everyone and congrats on getting the deal down a little earlier than expected.
First question right first question I had was Oh Honda deal and I know Cheryl you have a lot of comments and obviously put a lot of work into the deal or the victim. What do you expect from the combined company.
Going forward upland your clothes.
I was hoping to get maybe a little additional perspective from the standpoint that.
You've done several deals you know over the past few years, William Lyon will be the biggest we've also had a couple of other.
You know deals out in the industry you know some that haven't gone as well or were more criticizes having have not gone as well, yes, so ugly count land extend pack, which you know investors had different views on.
You know when ours takeover of countless Nick you know I think you know what was a bit different and perhaps a bit more successful, but as you look at you know the deals that you've done and in some of the others in the industry, you're one of the two or three things that you know you're.
Particularly mindful of that that you feel can you know put this you know the the acquisition of William Lyon on the right path over the next year too.
Yeah, you know, that's a really easy complicated topic and easy answer or off.
You know as you go through the process. Michael Obviously, you go through the due diligence you underwrite all the asked that the price has to work.
At the most difficult thing to underwrite and the most important piece of any transaction is making sure you have to people right because at the end of the day. If you don't properly staffing you don't have the right people you don't integrate the cultures, you actually have very little chance to have a successful acquisition yeah.
So I would tell you you know and I think I've spent some time in my prepared comments talking about the depth and which we go through this and there's not one methodology, but ours is we're going to put the best you know team in the field and every role you know, even though we have a wonderful organization within Taylor Morrison.
We're acquiring this business not to rip it apart the actually enhance it and that's by bringing their history. There people their processes seeing what you know better than ours, and having a very open mindset to that so.
So we start with the people we go through a very diligent process of interviewing for every single roll on and making sure that we have the best team in the field and then it's really as I said getting to a we very quickly and making sure that we have an open mind understand the best about organization to not be comes to go forward strategy and I'd.
Double down on that a little bit and say, even the best integration plans have bumps and you have to plan accordingly for those bumps in a lot of things that cheryls done around dedicating the necessary resources to do this where there is a little bit of cost upfront the dividends that it pays on the back end or a tremendous.
Financially for sure, but also just from a morale standpoint for our team members.
No that there are supported during this process, which as you know a is difficult to times as you go through an integration.
Yeah. That's her one one last thing on it Michael communication key.
Another key through the entire process. So we've been talking to team members and both organization since the day of announcement, we send multiple memos a week.
Its really about keeping everything in front of on the daily hurdle that I spoke about is gonna be critical to the success, because we will be putting our arms around the entire organization on a daily basis and getting to know people.
I'll tell you if it isn't for the last five transactions and the muscle that we've kind of develops we would not have been prepared for the quick quick trigger on this one as we said in the November call 'em. We didn't think this was going to happen till the end of March I'm thinking it's very quickly that's great news, but my confidence.
As really because of kind of the IMO team and what they've been able to do to get us ready for this week.
That's great I appreciate that and obviously best of luck this year as you execute those plans.
I guess, secondly, secondly, I want to circle back to.
You know SG universe, I think you know that was earlier question on it and you know if you look back over the last.
Four or five years since 2015.
Yes, you they has been kind of flattish in the let's say roughly 10% to 10.5% range. Despite revenues going from 2.7 to this year around 4.7.
And understanding obviously that you're building out the organization. There's a lot of investment involved in that you know there's been.
You a different systems in functional investments.
But I think you and going forward.
When you look at the lower you valuation multiple yeah.
I think you're trying to drive a better operating margin better returns will be critical so yeah, Dave and Sheryl I mean as you look at over the next two or three years.
What do you think the real opportunity is in terms of that number because you talked about kind of legacy basis, maybe you know being flat to down a little bit.
But you know how do you think about where that that number should be overtime and what would the levers be to to get there.
Sure Michael you know I think I'd first by start by going to you know our S. You in a rate I think if you look at it against the their peer group I would argue it's actually very competitive.
You're right, we have made investments coming through the different acquisitions, we've done.
We have made several investments around [laughter].
And our purchasing function or construction cycle and as Cheryl mentioned that was part of creating that in muscle to allow us to do acquisitions and to be successful at at integration. So those are actually things that we're very proud of and it lays the foundation for where we are today and where we're going forward.
William Lyon for Us is going to be transformational. This is a you know this is going to change the game for us a little bit.
We're not in a position to go and.
Long term messy any rates right now because as we said we want to get at least a couple of months under our belt established guidance for this year, but I'll tell you as we look out strategically.
Once we decided to move Fortive William Lyon.
Leveraging S you in a high being accretive margins.
Generating additional cash it was all based on enhancing our returns going forward.
But you know in the short term, we have to get through a the process of of the integration, but when we come out the other and we think we're going to be well positioned we're going to continue to be very competitive in our sector and ER and take advantage of market conditions and I think your earlier point day, when we come out the other end at the integration and when we actually.
We have the revenue stream is gonna be t. are not just the investment side.
So lot of good stuff had.
Thank you. Thank you.
Thank you. Our next question comes from Mike Dahl with RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
Hey, Michael.
I wanted to come back to the absorption question I think that's a allen kind of asked around it earlier, but <unk>.
<unk>.
In the press release, you talked about those January sales translating to over a three sales per foot.
For the month it seems like you're actually looks the numbers <unk>, one Q on pace for more like three and a half or so a month, that's a number even north of three that as a public company at least <unk> Taylor Morrison hasn't produced and in any quarter. So I just wanted to follow up and just ask is there something structurally different.
About the way that you're looking to manage the business on a go forward basis with respect to.
Pace versus price notwithstanding that the mix impact coming from William Lyon, but.
On the legacy or is there any evidence that you're seeing I guess secondly that this is kind of a.
Pull forward alongside the a alongside the pullback in rates or anything like that.
Think anything structural.
At all Michael like I said, I think we've been talking about for a couple of quarters that for a long time you saw has had a very strong bias to margin.
On price and is that you know started moderating you know, we probably have more of a corporate bias to pace in the advantages that.
That gives you market by market, but at the end of the day, it's a community by community decision on pay silver price, even though we've certainly wanted to see the benefits of that acceleration you know is there a pull forward we ask ourselves that every time.
If you think about the last two three years and there were some you know strong activity out in the field. We say is this a pace you know pull forward you know I don't think rates are pulling us forward in fact, I think I. Even saw this morning that rates are likely going to you know given the concerns around the virus, we could even see rate could pull back even more.
Up a little more so I don't think so I think all the things you know it's almost the perfect storm in a good way around what we're saying on the way the consumers feeling on inventories tight I mean inventories tight across the markets and that is creating some of the energy and excitement if you go market by market.
I also throw and that you know when you look at Avi when we acquired.
Them, they were a higher pacing business and we had to get through the integration into Sheryl talked about in our last quarter call.
We completed the integration I think what you're seeing is now that efficiency that we expected out of that business.
Really coming through our offers well.
Ah and we're delighted to see that with the entry level, but as we said in our prepared comments. We are so excited to see that strength across all consumer groups and to see that first and second time move up.
Buyer also up 50% year over year.
It's tremendous.
Got it yeah, it's great to see the rebound extending into move up and beyond.
Entry level. There second question, just around margins and understand that you're going to hold off on providing a pro forma guidance until next quarter, but specifically as we look to.
Build out models and think about those purchase impact the accounting impacts day, if that you mentioned.
And any way you can size those the number of specific purchase accounting and when you talk about.
Margins off.
Gross margins up year on year on old legacy basis, but some noise should we still think that margins even inclusive of purchase accounting are flat to up just does anything you can you can give us there.
Yeah, I'll speak a little bit more to the legacy side, and then I'll touch on purchase accounting, but.
Yeah, like I said, a legacy basis, I would expect or margin to be.
Accretive year over year from the benefits from the synergies that we've seen through Avi obviously, the strong demand is plan a bit of a factor from a cost perspective input costs has been somewhat you know normalize.
And we're looking at our backlog you know that gives us some confidence in the first half a year.
You know, we're seeing strong margins so.
But you're right you know the William Lyon, a transaction will will have an impact on purchase accounting and I'd tell you right. Now this is a core focus for us as we.
Begin this integration process, but there's a lot at this stage that that we don't know we know overall purchase price for the transaction, but we'll have to do a deeper dive around fair value.
Of the assets and see how that allocates out so we're not in a position a the share that right now would be if kind of a pure speculation.
At this point, but maybe one thing I would I leave you with is.
We did the Avi transaction around onetime book, we're doing this transaction roughly around one time book.
But we have a little bit more work to do and it will take us all the way through next quarter, but we'll have it for you in our in our Q1 call as we guide for Q2 on the full year.
Okay understood. Thank you.
Thank you. Our next question comes from China Patterson with Wells Fargo. Your line is open.
Hi, good morning, everyone.
First just wanted to touch on on gross margin you know, it's been a little messy over the past year with purchase accounting there was the market deceleration and increasing incentives. So it's been difficult to see what kind of gross margins synergies have flown through from the acquisition can you just walk us through.
Do you know or possibly quantify what kind of synergies you guys have seen and have actually flown through your European out today.
Yeah, you bet you know, we Ah, we talked a little bit about it last quarter that our overall synergy number [noise] as we move through Navy transaction ultimately ended up at 50 million.
About two thirds of that ultimately goes through the margin, but at the end of December were about 15 months in their takes US you know call. It 12 18 months for that to fully go through.
So we're still seeing that that benefit come into.
A play as we move into the 2021 and you're right I mean, its noisy with transactions what we saw last year was.
The impacts of purchase accounting.
You know for example, Avi they had a lower margin reason than we typically did so as the purchase accounting.
Benefits started to Wayne we started to see improvement on.
The underlying margin rate as we got better better cost more efficiency out of that.
But it does take some time and like I said here in the next quarter I will probably at that point had kind of more that annualized run rate going forward.
Okay. Okay. Thank you and then kind of a multipart question on on community count.
You all guided first quarter down about 10% to 15% year over year, how should we think about you know the cadence through the year will it actually inflect positive by the ended the year and then.
Regarding the William Lyon acquisition, no. It's generally thought of in the industry that M&A leads to a bit of a slower growth rate than you know what maybe the pro forma combined company would would suggest you know as managers focus on integration.
You know.
And your account openings become a little more difficult. They maybe a billion to act, even sometimes suffers I guess, what kind of safeguards do you. All have you know to kind of keep that community count in growth rate from from gapping out.
Well, let's start with.
Community Count for 2020 again, you don't want to legacy basis, you know I would expect us to be.
I'll call it.
Probably flat to slightly up relative to Q4 of this year.
So our average community count was around 333, as we talked about in the prepared remarks, we'll see a little bit of a dip in the first quarter, we have communities coming online.
Late second quarter, but more.
Second half weighted.
But we'll see that again kind of flatten out or maybe flat to slightly up by ended the year.
I'd add to that Truman as you know you're right. When you pull these together there's lots of work to do and I think you know if you look at kind of William lie and sales trends in the quarter. When you know the deal was first announced I think it was a slower start as it was all being digested into the organization they saw.
That pick up as the year went on and people begin to understand what the future look like and certainly they've seen it coming into January with a very good you know sales and pace in January and we've seen it across the board for them really delighted as I said earlier on the Pacific Northwest where paces were.
We are amongst the top in the organization.
So I think that you know what will be our intent to be able to integrate the then really not see too many blips on the community openings side, because our teams are already starting to work together on that.
Okay. Thank you.
Thank you and our next question comes from Jay Mccanless with Wedbush. Your line is open.
Hey, good morning. So the first question Sheryl I think about the pro forma company. After the transaction, where do you guys believe your entry level versus active adult versus move up how are those buckets gonna look like the on a percentage basis.
No. We've normally talk about gay is kind of that third third and third right.
And that could back.
That that first time buyer is kind of a third of business and that's the makeup of that entry level, a maybe a little bit moving into the first move up the kind of middle of the market as a third and then that 50 plus is a third I'm not specific to active adult communities, but really where they show up in the.
Total portfolio my expectation as I look at the blended business and I look at the lot.
Kind of the go forward lots of the two organization is you're going to see probably that first buyer entry level buyer you know move up a few percentage points.
And I think you're going to see that first time that first move up buyer probably move up a few percentage point and you'll see the second move up luxury business.
Slightly reduced.
That's great.
And then the second question I had.
In terms of thinking about for Ford model.
They're gonna be a meaningful change if we just took the community count William We mine and Taylor Morrison today.
Sported a week. After you guys have closed the deal is they're gonna be an immediate impact on the community count So the mine businesses after closing.
Or as we're thinking about our model, we should assume roughly the same amount of communities for the blended business are going to be operating for the next student.
Yeah, I think the only feedback I'd throw in Dave If you concur is that both with the sales success. Both businesses are saying, we're seeing closeouts move quickly.
We're seeing moving into some clothes, that's a little earlier than we anticipated in that shows up and the guidance that Dave just shared I think they're seeing the very same thing.
<unk> and as we analyze the portfolio.
The work that early work that we've done there might be a few positions that.
We might think long term don't make sense in the portfolio and we might have a different strategy generally I'd say, that's correct, but the bias is probably a little lighter given the strategy on some community.
Sounds good thanks for taking my questions. Thank you.
Thank you and on next question comes from call Reinhart, but B T. G. Your line is open.
Thanks, winning all.
I just had one Truman got my other one.
And I guess that crude way to ask it usually is are you done doing deals [laughter] nicely to ask it is if you look at the footprint post close and the scale and depth of share you do you think you'll have.
In a relatively stable market is your footprint kind of where you want it to be is your scale, where you want it to be.
As it as it sits now.
Well I like your crude and probably approach [laughter] Iraq is good.
You know, we are head down and it I can't even sit here today and think about another large transaction were very busy I think you'll see us busy for a little while here, we're going to make just like we had to make sure Avi was a appropriately integrate and we were ready for this we would have to do the same before we'd ever consider anything good.
Frank.
When I look at the strategic benefits of this transaction and I look at the market dynamics, a Denver being one of the markets that I would say with subscale and what's happened there I look at Austin doubling the size I look at what it's done door, California footprint I'm very delighted as well as the added Mark.
As of the Pacific Northwest and Las Vegas, So I think we feel like we're in a very good place I could never comment on what 12 18 months 24 months from now holds but I'm not really thinking about that right now to be quite honestly I think we're in a very good place, we like the portfolio and I don't see any big deals.
Eminent at all.
Thanks, a lot.
Thank you.
Thank you. Our next question comes from Alex cycle with B. Riley FBR. Your line is open.
Thank you two quick questions could you give us a little bit update on Williams lines in the month of January as it relates to sell space in order activity as well could you quickly run through sort of a regional update on sort of what else you're seeing feeling in the trenches.
Yeah, I'd be happy to so as far as the preliminary numbers that we've seen from William Lyon, I think that their sales, Indiana, where like I said it was quite strong I think they had a pace of something close to three and Uh huh.
So that that's tremendous I think it was slightly ahead of their expectations and I think each week. They saw the business pick up so excited about that and as I said when I look at the pace is up the last four weeks compared to their last you know a 12 week.
The activity has been good.
If I do a quick around the world for Yeah, you know I would tell you generally things are feeling.
Nice across the board I think before I do a quick toward probably makes sense to talk about some of the market that let's say over the last 12 months. We've seen you know maybe a little bit more challenge maybe some in inventory Cree, maybe some pricing resistant and I'd start with the Bay.
They thought half back half of 2018, and then a little resurgence in Q1 of 19, and then paces dropped considerably as we move through the year, having said that it feels like the last three months, we've seen some pickup in traffic and sales activity and even seeing pricing power back in some of the Submarkets January felt pretty good with their cell site.
The about their budget and interestingly enough. It beat seems like we saw on NPAC with that January Chinese trade deals finding things some of those buyers back in the community.
As I move for the rest of the state of California, I'm. So Cal repositioned the business over the last couple of years, and our A.S.P.S. down more than 30% year over year until when I look at how that started last year and then the movement through the year quite favorable discounts reduced each quarter through.
The year and it feels like there I'm very predictable sitting I'm in and they've come out of the gate very strong in January and obviously that business is going to change dramatically with the out of William Lyon Sacramento steady as you go I mean, it's just been really good last three quarters in the market in in the company we've seen strong sales we've seen.
Really in the decade.
But there's a lot of new entries that have come into a lot of new competitive entries in Soc.
Dallas I would tell you see other market that I think I'm over the last year. There was a lot of noise greatest inventory challenges last year, a lot of national process pricing could run just too hard that's the place we probably had the most repositioning to do to work through some of the JV assets, but it feels much more consistent than we've seen inside.
Time jobs are good inventories actually tightening up I think the teams done a really nice job there.
If I round out Texas.
Just strong [laughter], often I think our opportunity challenge there is making sure sales don't get ahead of our ability to get lots on the ground, we keep pace with production cap capacity and Houston seen great results year over year with Grace with growth and pace per community.
And excited to see that business really a that the often business probably double in size and the out of the William Lyon Houston startup business.
Caroline upgrade activity I take the markets are slightly down year over year, but we see that over the last few months, we've seen that begin to improve.
Probably the most notable trend we've seen in the Carolinas, specifically in Charlotte is kind of a shift from single family to multifamily.
Raleigh is probably where we had a lot of repositioning to do from Avi as well and I think we're starting to see the fruits of the team's hard work.
That's left Florida.
Tremendous growth year over year in quarter over quarter in each of the.
Markets, both in Taylor Morrison in the market as a whole.
You know we didn't we didn't specifically call out active adult as having a year over year growth like the other consumer sat.
And that was really a function for us positions being closed out in our large esplanade communities and a lot of new positions opening up early this year.
And let me finish with Atlanta strong Denver strong all about lot availability.
Once again that business is going to change dramatically and Phoenix God just continues to charge card.
Phoenix is the only business that will be affected by that is affected by both the Avi and the William Lyon acquisitions, but they've handled that masterfully, they're humming along with sales up more than 30% in January its really a production machine for the business and I think really reaping the benefits of what scaling them.
Mark It can do and what the planned production cadence can really do and probably a worth <unk>, noting that if I look at Phoenix in 2019 on a pro forma basis I think we would have been number one in revenue so a really big move for Phoenix.
Thank you.
You bet you.
Our next question comes from Matthew Bouley with Barclays. Your line is open.
Hi, Good morning, Thanks for fitting me in here I wanted to ask on the on the pricing power side again, Cheryl you gave some color around pricing power still being sort of fickle, obviously incentives have left the market. So maybe that's a piece of it but I guess would just be great to hear your perspective around sort of if or when pricing power could.
Returned to the market I mean, we've already seen resell inventory is tightening demand is strong rates are favorable I guess, what else would it take to kind of bring pricing back into the market from your perspective like it.
You bet well.
We do have pricing power in the market I think when you're seeing is the builders.
Act responsibly to make sure that we don't shut this off so I'm a fan of taking a much more measured approach and you know as you. When you look at long you know communities with long shelf life, you Wanna be really careful where you really see some opportunities is as you're closing.
Out of community. If you know that theres not a replacement opportunity. So I wouldn't say, we don't have pricing power in fact, I do think we have pricing power and we're seeing it in all markets I think the differences instead of seeing you know 5000, a shock you know, we're probably being a little bit more responsible.
And metering it out a little bit more carefully to make sure that we don't get over our ski tips.
Okay understood appreciate that and then.
Secondly, just on the synergy side I appreciate the full guidance is still yet to come but I guess just ahead of the deal closure with Lion have you guys been able to sort of get a head start around the synergy is whether it's on the material or land sourcing side, just kind of any updates on how you're thinking about that like it.
Yeah, Matt if you were in the seems maybe where are we announced the deal. So what we're expecting them right now would be a run rate target of around $80 million.
Again, probably take US 12 18 months.
You know to work through that we're continuing to work on identifying local regional and national synergies.
Probably 75% or the synergies are going to come from overheads through consolidation of our divisional and corporate offices.
Yeah, I would say that you know, we're starting with 80 billion or we hope to deliver something more but again. It's early in this process, we have work to do in.
Each quarter, we'll come back with an update as to where we think synergies are trending.
Okay. Appreciate the detail thanks again.
Thank you and that's all the time, we have for questions today I'd like to turn the call back to Charles for any closing remarks.
Thank you very much I appreciate everyone joining us today as we talk about the or Q4 results and more importantly, the exciting year have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect everyone have a great day.
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