Q1 2020 Earnings Call
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Another sales pace per community for the quarter of 3.1, which was also up nearly 35% from the sales pace of 2.3 in the first quarter of 2019.
Consistent with most of the industry our sales orders in the first two months of the year started extremely strong with January sales up 46% and the pace of 3.2.
February sales were up 64% with the pace, increasing to 3.5 and continuing into the first half of March.
However, the last 10 days of March were slower with a deceleration in the sales pace to 2.5, as our team and the broader market adjusted to our new reality.
While we're pleased with our first quarter results what I'm. Most encouraged to see is the momentum we built in April where we saw a week over week improvement throughout the month in both gross and net sales specifically the number of gross sales in the last week up the month were more than two and a half times now.
Europe sales in the first week, while the number of net sales given the reduction in cancellations was nearly five times the sales recorded in the first week.
During the quarter, we had an average community count of 378, recognizing we only had seven weeks included with William Lyon communities.
The cancellation rate for the quarter held relatively steady at 13.8% versus 13.3% during the first quarter for 2019.
The rate was about 10% in January and February and year to date through April is at 17%.
Closings for the quarter came in at 2761, which was that more than 42% versus the first quarter of 2019.
We saw less of initial impact from coven 19, and our closings with our results for March also up more than 42% year over year.
We ended the quarter with our largest backlog yet was 6565 homes in backlog and a sales fab two of 3.1 billion.
As we started to see restrictions being put in place to flatten occur we moved very quickly to address our backlog and understand which of our buyers had any potential risk will talk more about the mortgage environment later, but having an industry leading team of seasoned mortgage professionals in house with Taylor Morrison.
Funding has been critical during this time.
And Taylor Morrison, we pride ourselves on our ability to consistently execute in our market and im amazed and truly appreciative per how our teams across the country have been able to pivot so quickly and I'd like to take a few minutes to walk you through some of the more meaningful shift we've made as an organization.
In response to the pandemic.
To help us successfully navigate through this process. We immediately created a coated 19 task force comprised of the company's senior corporate infield leaders.
Upon creation of the task force the team met each morning to discuss the pertinent information for the day and make the necessary decisions to strategically guide our business.
The experience and diversity of skill sets represented has allowed us to effectively assess the rapidly changing internal and external parameters and proactively plan and respond.
With the spread of Coven 19, there hasn't been a single part of our business that hasn't had to change in some capacity to adapt.
When we transitioned to a work from home platform in mid March we made our sales centers and model homes available by appointment only and staffed our construction sites with skeleton crews appropriately following social distancing orders.
As the economy now begins to slow we reopened and find its new fitting we remain as focused as ever.
On the core elements that anchored our team members together long before the onset of this crisis performance culture and proactive two way communication.
When I look at our Salesforce and 180 degree turn Dave made to conduct their business completely virtually it's quite impressive.
We've now seen triple digits sales conducted in higher lead virtually meaning no prior physical interaction with that homebuyer whatsoever.
While this decision to operate strictly under a by appointment only model limited the amount of people in our communities at any given time, it hasnt dampened the creativity and proactive outreach of our sales teams.
During our customers greatest time of need our sales team was available calling to check in on their wellbeing and their families sharing pictures and videos of their construction progress and of financing bear new home answering any questions regarding the mortgage environment and any changes that could impact or closing.
I'll market activity traffic and sales are all showing up differently, we've begun to see a positive shift in consumer sentiment overall and a pickup in traffic in sales week over week for the last four weeks.
It's worth sharing that we've been conducting surveys.
Of all first time registrations on our website since the week stay at home orders were enacted to help us understand the impacts of koeppen 19, among potential buyers.
Consistently people have been visiting the website with plans to make a future purchase end to understand available inventory with 30% specifically looking for move in ready homes.
Most importantly, 74% of visitors have shared that third decision to purchase has not been impacted by Covance 19, and that's up from about 55% a few weeks ago and many of those that have indicated an impact simply suggest a slight pause as they seek to understand the.
Overall market conditions and mortgage environment.
By geography, the west appears to be the hardest hit with the strict to stay at home orders in California, and the Pacific Northwest.
As discussed on our fourth quarter call, we unveiled a new company website in October of 2019, which printed been better timed the forward thinking features allowing customers to complete morph. The shopping experience online became increasingly important amid the koeppen 19 shelter in place restrictions.
And while transforming the customer experience even further through our new website in 2020 was always in the plan the need to do so drastically was drastically expedited.
With our new website already boasting a more digital retail experience, we were able to quickly poll on our capabilities and elevate our website to serve as an extension for our sales teams.
We created a dedicated virtual tourist landing page, making it possible for shoppers to experience visiting a Taylor Morrison model or community without having to walk out their front door and we even made it easier than ever to schedule, a bird a virtual or in percent appointment.
Just three weeks into the shelter in place orders, we saw our web site engagement begin to increase again week over week and in most instances with much higher conversion rates. We are excited that we've seen more than 1500 appointments scheduled within the past four weeks through our new online scheduling feature.
Our first of its kind in our industry.
While website visitors can schedule in person or virtual appointment, which makes up more than 85% of the appointment. They can also scheduled time, specifically to complete and signed their contract in fact more than 20% of our April net sales were completely virtual.
As you are all aware residential homebuilding was deemed an essential service across most of our markets from the very beginning allowing us to continue having trades on our job sites. Fortunately today, we have been able to avoid any significant supply chain issues, depending on the specific product there's about three to six months.
Of supply in the market and most of our key vendors have been able to sustain operations. Despite any current her prior restrictions.
We have many mitigating measures in place to ensure that no single product will disrupt our construction processes and timelines.
From a production standpoint, the biggest hurdle we've had to work through our some of the changes that municipalities have implemented.
There are many municipalities are working through social distancing standards to fill supply permits and complete inspections, albeit sometimes on a slower timeline. There are some that have been forced to get more creative to keep local construction moving.
As buyers move toward closing their homes, our title company inspired title services has adopted a practice, we refer to as curbside closings, whereby a notary delivers the closing package at a safe distance and witnesses signatures from outside the buyers vehicle window.
Today, all of our closings are handled using alternative methods to ensure the safety of our teams and our customers.
Closings are expedited using our E closing process, where we provide the vast majority of documents electronically days before the actual settlement date.
The combination of closing and curbside offerings is making a positive impact on our customers experience.
As the industry and states adopt E close as a standard we expect that our innovative practices will become part of our new normal, allowing our customers to close on their home and assays convenient and efficient way.
One area of Taylor Morrison, then didn't need any adjusting one the pandemic unfolded with our philosophy around transparent timely communications with our workforce.
In fact, we doubled down on it as the cornerstone of our crisis management strategy.
When we launched our daily stand up hurdles in July of 2019, as part of our quest to create a differentiated customer experience. We did so hoping they would help us become better at communicating and collaborating to better serve our customers.
And they have also proven to be a key tool and ensuring that our William Lyon integration efforts remain on track.
It's really difficult for me to imagine how we could have completed any of the integration work sold or closed any William Lyon homes in this environment appreciating that the pandemic impacts happened just over 30 days after the transaction closing without having our hurdles in place.
But now the handles our lifeline and we were extremely fortunate to have had so much practice communicating daily and in real time, especially as our workforce was forced to physically disconnect through dose through social distancing.
All of that said I'm happy to share that even though these challenge through these challenging times, we continue to make progress with the integration of William Lyon.
We completed town Hall meetings pre and then immediately post closing with all team members to begin the onboarding and integration process.
Of course, we then had to Reprioritize some items given the current environment, but major symptoms systems and processes continue to be transitioned.
We were also able to complete the renegotiation and implementation of all of our national and regional contracts, which has benefited both legacy brands more than initially anticipated.
From a financing an accounting perspective, we've reconciled accounting policies and mapped all GL accounts to ensure a timely and accurate closing of the books on an ongoing basis. We've also been able to add the William Lyon communities to many of our key operating report that track sales margin and construction cycle times, the William Lyon divisions.
Our also up to speed on our investment committee processes for current and future land deals and our risk management team has updated all of our policies to account for the new combined business.
Although we've made progress on many fronts. There are some items that have been impacted for example in person training has been transition to virtual training sessions until we can bring teams from across divisions. Together again. This was particularly challenging initially in our virtual selling environment as the legacy business.
Had not started down that path across our company.
The other area that has been more difficult to advance as quickly as we as we like our the new non overlapping markets in the portfolio.
Unfortunately, these markets have had added pressures with Seattle, deeming construction has a non essential business and Las Vegas being uniquely shut down with a peak and unemployment.
We are encouraged that last week construction was able to resume in Seattle, albeit with some exceptionally strict protocols.
Assuming a normalized environment, we remain confident in achieving the 80 million annualized synergy level as previously discussed for 2021 with that said I couldn't be prouder of the work that the teams have cut in since the close of the acquisition and specifically since the onset of the cobot related work restrictions to it.
Ensure that the critical integration work continues to be executed with a great deal of focus and energy.
Lastly, we talked before turning the call over to Dave Let me spend just a moment on the benefits from the share diversity and strength of our consumers and product offerings.
Through a number of our acquisitions, we've expanded our presence and entry level. The last few years.
And it's been an important piece of our product strategy, even as Weve maintained strong positions across other consumer groups with our family move up and lifestyle community buyers.
As we've shared before our first time buyer is more of a professional entry level buyer and as a result tends to be better qualified and may have a better chance of weathering some of the current volatility.
As I mentioned earlier, we have seen different actions by different consumer cohorts. The first time move up buyer has represented the most consistent behaviors across all markets with steady sales and low cancellations followed by first time buyers. The first time buyer has been the most active on the sales front, but.
Most of volatile in the backlog and the and at the most affordable price points. The most challenged in this new credit environment.
However, it has impacted the timing of the 55 plus lifestyle buyer as these are the least likely consumers to complete the entire process virtually and the consumer that has been asked to be sure to stay home. During these last many weeks.
We know we won't be immune to cancellations given the current uncertainties and its impact to consumer sentiment, but after spending a considerable amount of time understanding the position of our homeowners and backlog, we believe that we're well positioned to close these homes through the year.
Similar to our prior acquisitions, we have taken a very aggressive stance in cleaning the backlog and co that only increased that urgency for us we have a strong backlog with average deposits near 7% to purchase price illustrating that our customers have put forth a serious financial commitment toward closing their new home.
I believe Taylor Morrison, our industry is prepared to weather the storm in today's environment is very different than the financial crisis inventory levels for new and resale homes were extremely low prior to cope and 19 and remain low today and although we're seeing a surge in forbearance claims homeowners today have.
Sizable equity in their homes and the demographics support continued household formation overtime as we work through the reopening of America and people begin to get back to work.
With that I'll turn the call over to David for the detailed financial review, Thanks, Sheryl and Hello, everyone before I get into more normal for an annual review I'd like to take a minute to address our strong liquidity position. As this is a focus for every business in today's environment.
We ended the quarter with about 750 million in total available liquidity.
Over 500 million of that was from cash on hand, and the remaining difference was from available capacity on our 800 million dollar corporate revolver.
We did have $485 million in borrowings on the revolver at quarter end, but as you can tell much of that has been held in cash on our balance sheet.
As we borrowed 250 million in the middle of March at the onset of Kobin 19 to ensure abundant liquidity for daily operations.
Our net debt to capital ratio up into the quarter was 46.8%.
Given our planned reduction in land and development spend over the next several quarters, which I will touch on in a moment.
We anticipate Q1 to be that peak of our net debt to cap ratio for the year as we monetize our backlog and began to pay down our revolver balance.
Lastly, we are no senior notes maturities until 2023.
As Joe mentioned Weve exert a great effort to maintain our backlog and to pull through every closing we can.
We also implemented additional controls on how we spend our cash.
As we announced a few weeks ago, all named executive officers voluntarily reduce their base salaries by 25% I will defer those payments through the duration of the cobot 19 restrictions.
Additionally, substantially all members of senior corporate management and Division Presidents have decided to take the same temporary paid referral and the board of directors have deferred their cash retainers for the current quarter.
Well these compensation adjustment for the helped in the short term we are evaluating our go forward workforce structure as well.
We are eliminate all non essential cash expenditures, including but not limited to working with land sellers and developers.
And our internal development teams on approximately $320 million of land and development spend.
Which pushed out or reduce payments on over 8000 launch.
These partners understand the impact of the current environment and in most cases are more than willing to work with us.
We have also been quite discerning on any new land acquisitions and have increased scrutiny on the next phase of development dollars to limit expenditures and extend timeline timelines where appropriate.
With respect to vertical with we've implemented a revised cadence on all new home starts both inventory unsold homes to assure greater certainty on closing performance.
We have always had a stranger prequalifying process at the time of sale for our own buyers, but we've added a requalification process at the time of home start to ensure continued viability.
Turning back to the results for the quarter net income was 70 million and diluted earnings per share was 50 757 cents when adjusted for expenses related to the William Lyon homes acquisition.
Including the acquisition expenses, we reported a net net loss of 31 million and diluted loss per share of 26 cents on a GAAP basis.
Total revenues for the quarter or 1.35 billion, including homebuilding revenues of more than 1.26 billion.
Although the revenues were up more than 40% from the prior year.
For the quarter GAAP home closings gross margins was 15.4% inclusive of capitalized interest and purchase accounting.
The impact from purchase accounting adjustments during the quarter was about 220 basis points.
We anticipate the Q2 purchase accounting impact to be at or slightly below Q1, recognizing that it will be a full quarter impact of legacy William Lyon operations and mix should moderate through the year.
Also we had a focused effort on selling through finished spec inventory from legacy William Lyon, which pressured margins during the quarter.
We anticipate margins increasing closer to our pre acquisition levels as we move through the second half of the year working through purchase accounting finished spec inventory and realizing purchasing and construction synergies.
Moving to financial services, we generated approximately $28 million in revenue for the quarter and more than 11 million in gross profit when adjusted for the impact from William Lyon.
Our mortgage company capture rate for the quarter came in at 75% compared to 69% during the first quarter of 2019.
We are pleased with the capture rate as our legacy Taylor Morrison and William Lyon Financial services team have come together, both quickly and efficiently.
Our April backlog capture rate for the new combined business is that 86%.
We transferred the William Lyon book of business to our platform and the team members are now license under Taylor Morrison home funding.
We look forward to enhancing our efficiencies as our mortgage operation also moves forward as one brand.
As soon as a percentage of home closings revenue was 10.8% representing 70 basis points of leverage over the same quarter last year. The leverage was driven by increased scale as well as strong market conditions. We experienced ahead of the cobot 19 pandemic.
Adjusted EBITA margin was 7%.
In Q1, we had approximately 123 million of purchase accounting and onetime expenses related to the William Lyon homes acquisition.
This represents the majority of the acquisition expense, but we will continue to see additional expenses over the next few quarters, we continue to integrate the business.
Income tax was less than $1 million is tax expense attributable to core operations was largely offset by certain deductible onetime expenses from the William Lyon acquisition and the benefit of energy credits.
During the quarter, we spent over $300 million and land purchases and development at the end of the quarter. We had approximately 75000 lots owned and controlled a percentage of lots owned was just under 74% with the remainder under control. This is down from almost 80% at year end as we positively benefited from the lower.
Our percentage of owned land that William Lyon carried.
On average our land bank had approximately 5.3 years of supply of which 3.9 years were owned at quarter end based on a trailing 12 months of closings, including a full year impact of the William Lyon acquisition.
Total specs at quarter end were 2694 of which 655 were completed or about 1.7 per community.
This is up from about 1.1 finished specs per community at year end, but the majority of that increase was anticipated as part of the acquisition as William Lyon operated with a higher percentage of inventory homes.
Although some of the increased cancellations from Kobin 19 will result in additional specs we in the industry more broadly we're fortunate to be operating with a limited inventory supply when the pandemic started.
With that said, we are focusing some incentive dollars toward moving our completed inventory homes through Taylor Morrison home funding. We are currently offering to pay all closing costs on an inventory home with a closing date before June 30, and we'll pay 1% toward a lower interest rate.
We believe reducing cash out of pocket to assist customers with their financing is a prudent use of our incentive dollars and a compelling value to keep moving inventory homes.
Near the end of February we announced a new $100 million share repurchase authorization from our board authorization was substantially exhausted during the quarter as we bought 5.4 billion shares for just over $90 million.
We cease repurchasing stock as the pandemic developed so we could focus on liquidity, but we will continue to evaluate the opportunity to repurchase stock as a key part of our capital allocation framework in the future.
We also want to provide an update on the continued progress of our build the rent strategy. Currently we have two projects in Phoenix under development with construction activity planned for late this summer and early fall with occupancy in early Q1 2021.
We recently closed on a credit facility for the first project, which aid to the capital efficiency of the BTR model. The team has also actively managing a pipeline of projects in Phoenix and Dallas with lease activity for our subsequent projects in late 2021 and 2022.
Charlotte and Florida projects are under review, but slightly behind Dallas, given the realities of stay at home orders.
We have been encouraged as we track the performance of the current Christopher Todd communities. Despite the impact from Kobin 19 rent forbearance too many multifamily assets that are resulting from renter job losses today that Chris for Todd communities have held up better than the overall multifamily market as it.
The single family lifestyle communities provide a true detached lifestyle and possess on average higher income renter renters than typical multifamily apartments.
We strongly believe this asset classes meaningful meaningfully underserved and provides opportunity through the market recovery and beyond.
As we hear of buoyancy in the investment arena as well.
Cheryl mentioned, we're encouraged by our efforts to continue to secure our backlog, but due to the uncertainty surrounding the current environment. We are unable to provide guidance on what we think the second quarter or full year might look like we have always prided ourselves on the level of transparency and information we're willing to provide but at this time is just too difficult to predict with.
Accuracy, given the impacts of cobot 19.
Thanks, and I'll now turn the call back over to Sheryl. Thank you Dave.
So before we move into Q in a I'd like to turn to a few national local market update beginning with what we're seeing in the mortgage interest rate environment.
Although rates have remained at historical lows there has been extreme volatility in the market in general Luckily for US we have one of the most tenured and experienced teams in the homebuilder mortgage industry that has helped us strategically and creatively navigate the erratic interest rate environment initially rates moved higher a strong refinanced demand quickly.
Well in the industry capacity to meet demand. However, while capacity has somewhat adjusted credit an economic uncertainty has sent added new pressure to lenders has the mortgage market attempts to price for the new higher risk environment.
And amid the rapid changing environment, we empowered our mortgage loan consultant to quickly help our customers secure the lowest rate and provide formal mortgage approvals before credit tightening could affect their qualifications.
Within days of shelter in place orders are outstanding March projected closings were locked in and by the end of March nearly half of our April projected closings were secured this is important because when a customer locks their interest rate certainty around closing is significantly higher has now the lender is able to provide a formal approval, giving the customer survey.
Dave payment and terms and also reaffirms the customers commitment to this to the transaction.
During these unique times, we have seen this as the single most important customer affirmation in the process. This strategy strengthen the visibility into our backlog and provided confident about closing date, we continue to see strong lock activity with our projected closings for may secured with historically low end.
Chris Trades and June well on its way.
Taylor Morrison home funding has been a key part of our business for a long time and allows us to assess the strength of our customers financial situation and ability to consummate their home purchase.
This has always been vital to our business, but never more than is today given the impact of the government's forbearance plan and rising delinquency rate on the broader mortgage industry. As these dynamics continue to unfold. We expect continued disruption. However, a taylor Morrison our platform gives us the ability to navigate these high.
Headwind, while ensuring we can continue to serve our home buyers with attractive and convenient financing options.
Historically, we've strategically chosen not to retain servicing of our mortgages. So the company does not have the forbearance servicing financial burden that other mortgage companies are currently facing.
However, we have quickly pivoted in response to the contraction in sub servicer availability and chose to engage in loan servicing for a portion of our loans that we originate going forward.
This decision alleviates, the overlay challenges that constricted credit availability across the industry and importantly illustrates the nimbleness and strength of our mortgage platform that allows Taylor Morrison to provide strong mortgage options for our home buyers.
One last point worth mentioning is that although an incredible amount of work went into innovating our business operations seemingly overnight for the current virtual environment. We expect these innovations to serve us well beyond these challenging days, a silver lining in tough times.
We also know a second wave of tremendous work is upon us as the economy begins to reopen and we blend our new virtual wins and innovation into our normal business operations.
We have documented our plan to generally aligned with how the president three phase approach will work for our business and we stand ready to get to a fully reopen stayed on a market by market basis. In fact that work has already begun in Texas, and Georgia, and the Florida market, who led the nation and reopening.
While transitioning is going to be hard work for all companies. Taylor Morrison included we do feel comfortable that we've positioned ourselves to move as quickly as possible given the size of the business our daily communication and the decisions we've made to preserve liquidity.
One at a lesser talked about challenges when it comes to reopening businesses will be how we delicately handle the anxiety from team members and customers alike, who are fearful about re entering back into society.
I focus on health and wellness has one of the core tenets of our culture and we have a long history of carrying deeply about the health of our communities as a result, a significant part of our plan to fully reopen includes aiding our customers team members and trade in ensuring their healthy on all levels and feel safe.
During these difficult times it was really nice to receive some good news a couple of weeks ago. When we found out that Taylor Morrison was named builder magazine's 2020 builder of the here by handily Wood and Myers research.
There were many achievements that elevated Taylor Morrison to the top for this award, but a few key reasons. They noted where our talent trust and litany of M&A milestones, but more importantly for the compassion and customer care, we infused into every interaction.
So warranted a nice reminder of how our organization continues to be perceived and I'm truly honored to receive the distinction knowing wholeheartedly. We accomplished it was so much passion across our entire organization.
Very proud of the Taylor Morrison team members for this achievement and I look forward to celebrating with all of them as soon as we can.
So before wrapping I would like to acknowledge how incredible it was to watch the entire homebuilding industry come together to collectively support the communities and cities that we built in as the pp shortage came to light in certain parts of the country team members gathered mass space Shields and goggles.
Industry related organizations like homemade also stepped up and served as a conduit to aggregate these supplies and get them deliver to the places where they had the largest impact primarily the medical community.
Our normally seen as competitors at times like these that make you take a step back and realize there are things outside of the industry that can bring us all together to support a common cause much bigger than any of us.
I always end our calls with an enormous thank you to our teams across the organization I also don't want to forget our trade and business partners as well they all deserve that recognition now more than ever it's a true honored to lead set to supplement carrying organization their innovation in times of crisis and their relentless pursuit of doing the right thing.
For all of our customers, both internal and external is inspiring.
And lastly, but certainly not least a special thank you to the frontline of Americans across medical and emergency and service industries that have worked tirelessly through this global healthcare crisis.
With that I'd like to open the call to questions. Operator, please provide our participants with instruction.
Ladies and gentlemen, if you have a question at this time. Please press star one on your Touchtone telephone if your question and answer you wish remove yourself from the Q. Please press the pound.
To prevent any background noise, we ask that you. Please. Please your line on mute once your question has been stated.
Our first question comes from the line of Jack.
Nicole.
Your line is open. Please go ahead.
Hi, good morning, and I hope, everybody as well and showcase for the increase detail.
All in operations and absolutely.
Good morning.
A number of club you gave us a lot of color on sales pace.
April and net versus just as well there.
We'll take that activity.
Is it possible until you integrate William wants you recently as possible to give us an apples to apples on what April activity was versus a year ago auto sort of it seems a little basis.
Yes, interestingly enough Jack I don't have the numbers flat because we integrated.
The community then obviously all the overlapping.
Market, but what I would tell you is if you. If you go back to 2019, you'll see that through the year as our sales success ramp.
We closed out of a number of communities. So when I look at the compare of communities from the end of Q1 19.
We ended Q1 tiny.
The good in the bad is there was not in real difference there was only an average of six communities difference because.
Our close as last year on our ramp that moves through this year.
So.
We only have to peel them apart because candidly the numbers excuse me.
The numbers.
Quarter over year over year quarter are pretty similar so the pace of that and that's what really mattered.
Okay, Okay and then.
You know Dave without.
Given guidance, obviously visibility is limited for everybody to speak with some confidence on the margin improvement.
In the back half of the year. So I guess the question Larry is.
[music].
I would assume or it sounds like a lot of that is already maybe in the bag so to speak what kind of an inside of environment.
Looking for that improvement scenario.
How much of the purchase accounting kind of burns through kind of help us understand that statement how much of that is what you can control versus what you can't equal.
All right Jack Great question.
First of all let's say purchase accounting, that's the biggest driver and when we talk about overall margin improvement in the back half are really talking about burning through that purchase accounting.
You saw that number about 220 basis points in Q1, I mentioned that we're going to see something similar to that in Q2 as we work work through the with inventory.
But then that should start to moderate in the second half of the year.
So that will be the big driver you look at several things you mentioned incentives that also further cost environment in there.
Costs from an input standpoint.
Many of those are down relative to where they were so that should help.
As we move forward.
When we look at just kind of underlying business we are leveraging.
[music].
As the margins are coming in line with our overall business. So we're through all that integration work.
A side.
I think where we have that the headwinds obviously are any kind of discounting or incentives based on the market conditions that were seeing out there right now.
Going into.
Kind of this time period.
For Q1 deliveries, our incentives were down year over year.
As well as down sequentially from Q4.
[music].
Quite possibly could increase in Q2 of the battle through the current market conditions will take a similar approach to what we've done well we saw their previous slowdowns, but right. Now were spent a lot of time kind of repackaging, our incentives to keep them refreshing and drive some urgency as well.
And then of course will have some incentives as we work through finished spec inventory as we stayed focused on on turning the assets as well.
I think one interesting point to add on.
As Dave said, our incentives were down year over year sequentially.
Half our sales have been spec homes and about half our sales have been our friend to be built our incentives are focused on quick closing.
Even with that it's been interesting to me to watch the amount of kind of future business, that's coming in the door today.
I, probably just I think the known for all of US probably the biggest factor going forward, it's just going to be the lasting impact of cobot 19 and.
How long this will disrupt the economy, but we'll just we'll just play through that as the comps.
Okay. So it sounds like there is there there is some expectation increased incentives in that that broader view.
Yeah.
Yes, I think it's hard to say.
Look today, we are seeing some increased incentives on the market I'd say, where there were found to have a lot of inventory I think it's being responsible it's generally on quick closes.
But we have seen some increased incentives in the market I think we've stayed relatively disciplined.
But when your head to head.
The inventory, but like I said, even with those incentives were seeing.
About half the sales come without that without incentives because they're on to be built for this.
Consumer gets to pick the lot and make all their own selection.
Incentives that were used today are aren't actually on top of incentives they've really been gen targeting the incentives.
On the credit opportunity that Dave discussed.
Thanks, and good luck.
Thank you.
Thank you and our next question comes from the line.
And with assignments Zelman and associates. Your line is open. Please go ahead.
Thank you and good morning, guys appreciate all the.
Excellent insights and know how tough it must be in this environment, but kudos to you on the website and the virtual sales. So first let me just on the San Siro did you say you guys are servicing now or are you servicing with the sub servicer.
Clarified no no.
Absolutely like I said, we've taken looking at the exposure that brought into the industry.
We absolutely have had to make some shifts.
So, we're using aggregators, who and co issue Servicers.
So that we're not is impacted by the correspondent lending channel.
And I think Ivy you know all the reasons. This has happened between share our ability to execute the best mortgage experience for our customer without getting those.
But I would call very disruptive overlays, we've seen in pricing issue.
Today, we're selling the Fannie and Freddie because we think thats been our best execution.
Pricing advantages.
And before the quick we were selling all of our loan.
Volume to Aggregators servicing release was most often our best execution, but now we've been able to open that.
Service Lounging utilize a sub servicer on which I think given Tim HF increased optionality and allows us to better leverage the risk and profitability advantages with minimal disruption.
No I understand why you did it makes sense could you break down the products, but in terms of mortgage type how much is conventional versus government versus jumbo.
Absolutely.
It's interesting we haven't seen any real shift over.
Many many quarters.
I look at Q1 20.
About 81% with conventional about 8% FHLB.
From 6% last year, if that makes sense for the AD units with William Lyon.
8%.
And only 4% John.
Which is way down.
The 9% last year.
Got it and while you provided very good.
Detail around the change from beginning of April to the end of April really Didnt say, just flat out what the year over year decline was like other builders have provided so is there a reason that you're not telling us.
No. There's no reason I would tell you that year over year, it's about 30%.
But I look at the gross sales and the net sales when I look at the total net and that is down about 30% because as I said, we really took an aggressive aggressive stance cleansing our backlog.
Started that.
For the mid February with.
With the acquisition just to make sure we cleaned that up and then obviously continued forward with Kobe when I look at the gross sales I'm quite pleased but I'm happy to cleanser backlog, which gives us a net about 30% down year over year.
Great and.
So relative to the industry, that's kind of a little bit better middle to a better than average I'd say.
With respect to what we've heard so far.
Within your backlog the move up buyer likely has a home to sell and selling homes right now it's difficult.
Do you have concern or do you feel the deposits are big enough could you just given some color around those buyers that have a home to sell and back.
So as I said, Ivy, where we Sprague are we scrubbed, our backlog and are very proactive to understand where our customers are and the ones that have a home to solve home to close I think last time I looked at the a couple of weeks ago. I think it was about six or 7% had a contingency.
The backlog.
I believe Dave mentioned in our prepared remarks, we're taking a second look at our backlog before we begin construction.
Want to make sure we have full visibility.
We are considering starting a new home per customer.
I think 100% Ivy, but I think is absolutely reduces our risk.
And I think we've demonstrated over time with our very low can rate the tight controls we have in our backlog so.
I feel pretty good part of the GM HF process have also been tracking all coded related risks.
Furloughs and job losses and Kate.
So we've been paying very close attention and have a pretty rigorous process in place on the backlog and like I said got very aggressive I guess lastly share because when I look at the progress in our can rate over the last.
Oh, My goodness 456 weeks now it would have started.
Six weeks ago at something like 50 for sand and this past week.
Single digits. So I think we're getting back to a pretty normalized play.
On the backlog.
Fantastic good.
Very impressive could you.
Lastly for me and then I'll get back into just in terms of.
Your stock being hit so hard is a lot to do with.
Old.
Average of used to an exposure and with the energy prices. So maybe just go around the horn a little bit obviously, you're in Vegas, you said, where you can provide.
Sort of the market color, where you're seeing the greatest impact.
As opposed to where you're seeing outperformance would be helpful.
You bet Ivy I mean, Texas I think you have a few different things going on Austin.
Has continued remarkably strong I mean with an integration on their plate.
I would say very conservative stay at home protocols.
I believe last week, Boston had our highest both gross and net sales in the company.
Not something I would've expected. So just very strong I would say, even though weve reopen the state Avastin and we've entered into excuse me, we entered the state of Texas.
And Ryan and entered into phase one of our back to work.
I think the markets are all responding little different Austin, probably remains the most conservative as far as just how the consumers viewing things Dallas I would say middle of the road in Houston.
Kind of co Ed.
They didn't stay at home during the Covance stay at home and they're not staying at home now.
Interesting about Houston, specifically Ivy like you said, we were in it I think the.
Just crisis in general is in the oil pressures in general very different than what we saw last time.
It'd be hard to say, it's not creating additional headwinds in the market, but there are certainly a number of new facts that I think you have to look at the put it all in.
Contacts.
The market's changed dramatically since we were a wholly reliant on oil and gas segment I think if we look at to Houston workforce at something like 1.2%.
Reliant on certainly there's lots of ancillary roles.
I look at Taylor Morrison.
They are asked from 2014.
Houston represented about 23%.
Our total community count.
That's dropped to less than half of that so our volume is very different when I look at our balance sheet became very low percentage.
The more important than ever anything is.
Just continuing right deals there even through these last three four weeks beyond to my surprise.
It is holding up surprisingly well hands or kind of in the same place the rest of the country.
Kind of the middle of the road for Us.
Atlanta, if I go to Georgia.
Pretty well I mean, thats, where we really do serve that first time buyer.
Lowest can rate in the company actually the southeast overall has been very low.
Weve opened Georgia as well.
As I look at the.
Our affordable position.
Our doing quite well the in town business, a little slower come back.
But we started to see some real movement there the last Sunday, great website traffic there.
Skip around a bit, but FICO kind of to the west, California also a bit.
The markets are behaving very differently, so that's probably where we've been the most consistent.
Ill still doing well in the inland Empire.
We're seeing good traction at the lower price points.
Sales have really been coming off the market there so.
And Tories are very low I think in both new and resale.
The Irvine buyer has probably been.
Slide is to return the market's Nick buyer.
The higher price point has been moving the slowest there.
But all in all I'd say, it's fan.
Pretty consistent over the last two three weeks.
And when I look at our price point in Southern California, I look at our closing Asap and I look at our.
Backlog a ASP under 600000, that's close to half of what it was a couple of years ago.
I think everyone knows the bay is probably had the most restrictive orders.
We are starting in the last 10 days to really see some traction there.
If I move to the Pac northwest Seattle I put in the same categories. The bay the most restricted.
Construction nonessential, we've just reopen but even with that reopened.
Opening very prescriptive.
The public is low I think to get back there I'm a fair amount of inventory that we'll be working through a contrast that to Portland.
Probably kogut.
It's been amazing that every part of that market field unaffected our solid sales.
Very normal not just across I think homebuilding, but most of businesses in Portland.
If I go to Arizona.
Continues to be very solid.
Obviously, everyone knew that was that market had our some of our highest paces across the country.
I'd say that that continues strong margins continue strong governor just announced its going into phase one of opening we have not made the decision that just happened this week to reopen in Arizona, but that will be happen very quickly.
Colorado Big integration market for us.
Much more affordable price points.
Well.
And then I'll wrap up with Florida.
As I mentioned on the call active adult.
It's been interesting probably some at the most engaged consumers, but the slowest actually come to appointments.
Actually get out of their home and not the most virtual but also where we've seen very very low camera.
So I hope that helps a little around the world.
Absolutely. Thank you so much good luck.
Q.
Thank you and our next question comes from the line of Michael Rock with Jpmorgan. Your line is open. Please go ahead.
Hi, Thanks, Thanks, very much good morning, everyone.
Hope, everyone safe and healthy.
First question I guess, just circling back.
Sure ill appreciate the down 34 April but I see what was really the most important part of that is as you described in the in the press release in your prepared remarks is around the improvement that you saw during the month.
You also noted that your sales rates, where your sales pace was around 2.5.
During the last I guess 10 days at March I was curious and obviously typically you want and expect to where we want to ask a week by week.
Just given the volatility in general Indian consistency week to week, but I was just kind of hoping on on the back half of April.
As Steve perhaps started to stabilize a little bit.
We are that sales pace that net sales pace ended up.
Yes that could obviously kind of take out some of the noise that you saw in the first half of the moment.
Yes, I don't have the page five week, Michael Im proud to me I don't know if you do day bye.
What I guess last week or two Michael it's certainly not going to be the paces. What we saw on January February.
I would tell you it's more can have the historic business.
When you're on appointment.
Some parts of the country completely closed I'm, just I'm just really.
Encouraged by the pace as we've seen yes, I mean to Cheryls point, Michael If you look at like February if you were kind of extrapolate week by week, we're probably at a four.
And end of March and then last two weeks of March kind of early April that was one.
And then as we kind of got to mid April through the rest. The April again extrapolating week by week, you're probably two plus.
Building throughout the week.
Okay, and then at that kind of makes sense.
I guess secondly, the comments around.
Mortgage tightening at points in in some of the needs that you've done on on the servicing side or some working with sub servicers.
Just wanted to.
Delved into both of those aspects a little bit on on the tightening or the lending.
Lending standards.
If you can give us a sense.
Kind of how Thats expected.
You know what portion of potential buyers that you have out there you kind of mentioned that you have 8% at AJ another 8% EA.
And then a little bit jumbo.
But even on the conventional product just wanted to get a sense of how do you feel in general it's kind of Schlumpf your buyer pool at all.
What type of impact Thats had on what kind of rough percentage of your buyers and secondly, just be clear on the sub servicer.
Moves that you've made whether or not that has any pipe, but whether or not.
Those.
Actions are alliances your partnerships have any type of servicing list that comes back onto Taylor Morrison itself or the home lending.
Okay, there's a lot packed in there, but let me give it a shot Michael Jaime Tim May Jeff has had a strong group of Aggregators longstanding relationships that I think have allowed us.
Total leverage and maximize our product offerings with that with really best execution. As you know, we're also approved with Fannie and Freddie and Fannie and Freddie lender, which means we can sell our loans directly to the sees rather than going through third party aggregators and that's really important for us as it allows us to avoid some of the overlays you're referring to.
That they have imposed given I think the disruption.
We've seen in the servicing market.
As a result him HF is really been able to mitigate much of the credit tightening for our own customers no matter, which category you're talking about.
We're seeing most lenders and aggregators raised their minimum credit scores to anywhere from 640 to 60 60 in the FHLB base and jumbo probably around 700 with 20% down.
Im pleased we're still able to qualify customer that 640 credit score, although the pricing that's available today does reflect the risk at those lower FICO scores.
No.
We reacted to the environment by opening our ability to retain the servicing on a portion of the lounge wear the servicing market has either dried up or become what we'd call irrational on the pricing side Thats why we did it it gives us the ability to continue to serve these customers.
Avoiding the credit tightening.
Let them the broader markets are experiencing.
FHLB when I look at our book has been most impacted as we said.
On.
10% of our past with FHLB when I look at their credit scores today are closed in the quarter FHC buyers for like at a 696.
Our backlog.
Seven nine for first time buyers.
So why don't really good place once again with jumbo, even though jumbos also in non QM programs.
Probably been equally or more impacted.
The relationships that.
Half with.
Different mortgage product providers has really not in any way hampered our ability.
Our sub servicer Dover, Neil on Michael very strong respected service or because of when we are now just beginning the servicing we don't have any of that prior liabilities that others have had we also have a very stringent process and helping the consumer I understand.
Forbearance says what we have to do before we close the alone. So I really don't see I see any downside risk very limited if any.
Thank you.
Thank you.
Thank you and our next question comes from the line of Jay Mccanless with Wedbush. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my questions.
The first one I had.
Could you give us the community count was actually.
The quarter and then also maybe what your split is now in the community count between first time move up an active adult.
Andy Count is about four can.
And the breakout between.
Hi, I don't have that I think we havent.
We could we could call that we don't have that with us today.
Hi can follow.
What I would share.
Third of our buyers generally are that first time buyer.
And when I look at total units I don't have it by community count.
20, some percent, 20% that 50 class depends if you're talking age restricted communities are serving that buyer.
The rate or the ratios have it very much.
Okay.
Then just staying on the active adult.
I think I think I heard your comments correctly Cheryl.
The cans aren't moving up.
Traffic is really coming back I mean is has that changed since we moved into may or is that buyers to a tentative and.
No you I know you talked about that in terms of Florida, but you guys also have some active adult North Carolina as well as Arizona.
Are you seeing the same responses from the active adult customer in all those different states.
Just Florida ish.
It's a great questions are behaving a little different Mike in Houston, Interestingly enough, we've actually seen quite a pickup.
And our active adult buyer in the last couple of weeks.
I think in Florida.
We've seen if I look at Naples. For example, we've we've seen that have very discretionary buyer I would say that was really.
Hard hit at the beginning that's a second home buyer were seeing some pickup in activity. There Sarasota, we're seeing the sales kick up week over week, but like I said. This is a buyer that needs to kind of feel attach third generally not they're going to be a very small percentage of that virtual buyer that.
Goes online makes an appointment to do a virtual tour and then.
From there.
I'll do everything.
Through virtual or even about we'll be introducing sorry, I'm going to take a sidebar.
So that's another area I don't think this fire, we'll take advantage of we'll be introducing a lot reservation system online where you can actually go in and reserve a lot.
Mostly on inventory to start and then we'll move it up.
To the rest of the product offerings from there, but this isn't that buyer that will play quite as much in that space.
So as Florida reopened and given what we've seen the last two weeks I'm encouraged and they've stayed very engaged I think thats whats most encouraging or sales people are talking to them everyday setting up appointments to chat.
And now we're starting to see him come into the sales offices.
That's great. Thanks for taking my questions of course.
Thank you and our next question comes from the line of Mike Dahl with RBC capital markets. Your line is open. Please go ahead.
Hi, Thanks for taking my questions.
One one more on the on the mortgage side. It seems like you guys have been fairly proactive and then you are worth rigorous round.
Scrubbing the backlog I just wanted to.
Ask for a little more detail there could can you actually kind of just walk us through that process has been what percentage if you have it of.
Your backlog Thats scheduled to close over the three next three months or or into Q.
Have you been able to actively verify employment incomes still there qualifications or are still there and Cheryl sort of this multi part but thank you you talked about that rate walk, which which is really interesting, but one other things that we've all heard is lenders are required.
Requiring re verification that the closing tables from some of these things so any color you have on.
Has there been any instances, where you've got notes rate locks then by the time. He gets the closing table that deal so falls through because it qualification changes.
Yes, I know, it's a great question and you know we spent a lot of time talking about that upfront. When we were like I said very proactive on really delegating the authority to our front line arm our loan consultants Nontax say, okay. If we need to do this to make sure we get the rate took place at the consumers.
We are comfortable because what's happened with guidelines.
That rate lock has really assisted us I'm looking for the number real quickly, but I think that are locked pull through is somewhere in the low 90% range.
So interestingly enough Michael even though it's an emotional commitment we are not losing those buyers ones, we lock, which why like I said why we think it's such an important part really understanding the backlog we do.
Obviously go through a confirmation process before we lock and you're absolutely right. We have to do at three days before but we are pulling those buyers through its been an integral part of our process. So April is behind US may is locked.
I think last time I loved we were in the probably 30% to 40% range.
So we're continuing to get ahead of that maybe actually over the last few days 50%.
Sorry, My most recent report so.
I feel good about the next 90 days.
And we're still and we're still selling specs for the quarter Michael.
Okay, Great. That's that's helpful.
My second question, obviously, there's been some concern within the investment community interest around the timing of.
William Lyon close relative to that in a precipitous drop in hope builder.
Uhhuh patients you guys didn't have any impairments.
This quarter, it's not surprising so so early on but can you.
Give us anymore color on just as you kind of close that deal and then subsequent to.
The covert issues.
As you kind of reevaluate or walk us through what you've done too.
Get comfort around the William Lyon land values post.
You know us entering into this this downturn.
Are you can imagine Michael you're not the first wanted to ask that question. So.
Now we have had a lot of time to really dig through the assets over these last.
Couple of many weeks and I tell you that we have the same level of conviction around this transaction as we did when we came to an agreement last summer.
This wasn't a short term play for us and all though I could if not in my wildest dreams imagine our plan for a pandemic and that we would 30 days. After the closing send people you know to work from home as I said in my prepared remarks, we haven't missed a staff in the integration and that.
Includes really understanding the land bank.
So when I look at the deal the strategy haven't changed for US we added some really good long term markets to the portfolio. We added good assets to the portfolio.
We added scale in Austin, Denver in Southern California, and it's a great consumer complement.
We will as we get reopen continue.
To dive into the individual assets and put it through the thing process, we put all of the Taylor Morrison assets through.
We will continue to pull on the synergies as we said in the prepared remarks.
Confident on the 80 million.
And I think as we continue to scale up the business will continue to see the enhancements you know when you do.
One business like this is for sale you have worked that's why we bought the business around Buck we felt a great muscle fixing the are creating the opportunities in the businesses. These assets are going to be with us well beyond that and we're going to optimize their performance well good about and ancillary better.
The Sheryl set around scale I mean, you're seeing what that's helping to do on the Sta line. Our backlog has remained strong relatively intact. Unlike other folks you know we're focused on building up cash getting that liquidity and the combined business and what we're able to generate from a cash flow perspective.
It's actually really strong and use our net debt to cap ratio. It's.
Head of where we thought it would be so yes. The timing is a tough sure but when we look at the longer play we're still very excited about the way in wind transaction.
And sorry, I think I'm going to throw one more thing on top.
Dave talked in his prepared remarks about the great work the team's done on.
Looking at.
The deals that were coming through the pipeline I would say two thirds of the deals that have come through our investment Committee.
Have had some changes made to it and those have generally been around deferring dollars on average we've deferred take downs on average about 150 days on about $300 million.
Good chunk of that is William Lyon, and so that gives us more time, Michael to really get under the skin a lot of that as those landing deals that they have.
To really work with those land sellers to be able to optimize those those assets.
Okay. Thanks, Thats really helpful.
Thank you and our next question comes from the line of Matthew broadly with Barclays. Your line is open. Please go ahead.
Hey, good morning, Thanks for all the detail today I Hope you guys are well.
Sure I wanted to ask about the the 20% of sales that are coming through virtually in April I guess number one to presumably that's more weighted to spec product and number two.
If there is some.
Traditional to be built in there I guess what are those customers that are closing virtually on what are they doing with with the design features and options and upgrades.
Through that process like it.
Yeah No great question, we're excited about it it's just.
It's the beginning of I think where this goes allowing our customers to interact with us in a way that they prefer to its a direct line to our sales team.
Where they can go and set up an appointment online and they have.
A laundry list of ways that they can interact with assets through a virtual tore they can set up an appointment to do a tour. They can set up an appointment online to talk with the sales person to come in and haven't in person appointment to write a contract or did you option selections.
It's interesting about 80% to 85% of the point that have been made online.
Have been to make an appointment to come in and meet with the sales person. So most customers still prefer to ultimately get face to face with us sales team member, but I think theres something about this more personal catch this private exclusive kind of opportunity.
For that this is going to continue to evolve when we are fully open.
Allowing our customers to kind of self service the way they want to work with us in the way that they're shopping for other things like I said, we'll be introducing our lot holds where they can make a deposit online.
So I'm I'm excited but that 20%.
Of those sales those were folks that created an online appointment.
They had never been in our.
Had any had any contact with the company before that they made an online appointment they went through it virtually.
And then we did a contract with them virtually any never came and saw a model in person.
I think a year ago.
Nobody could have imagined that would happen in certainly at these numbers.
Thats great color.
In the last thing and as I think forward in the real opportunity.
If the Cobra.
Imagine what the future opportunity that is for the industry in the business. If you know not everyone's represented at the same levels we've seen.
Brokers.
Yes, I know it as it has a very interesting dynamics. So thank you for those details.
And then I guess shifting gears on the construction side have you have you sensed any changes around the construction process. I know this has happened so quickly and I guess, it's got to be market specific but yeah, just with social distancing on the job sites, perhaps any incremental move towards offsite manufacturing or perhaps going forward.
Would you think this accelerate some of those trends.
Hi, It's a great question you I'd say first as we look out there yet we see obviously changes out in the field.
We haven't seen it come much in the way of impacting the cycle times as of yet, but obviously koby nike's still fairly recent so we're watching that closely.
When it comes that trades, and I'd say municipalities as well.
No I don't know from an Offsite standpoint.
I think our position still the same there's opportunities ahead that will impact the industry going forward.
This may help further down along but again. This is all just so so recent I don't think we've seen any great strides or a changes and that short term, but this just like it did with virtual sales.
Could add maybe another layer of progression that industry overtime.
Health and safety in general has been I think I thought that not too long ago that construction was one of the safest or have the best numbers. When you look that cobot cases, the safe distancing has actually been pretty easy to execute in the field and our trades have done a tremendous job with it but the treatment the trades have remained where they could with.
A few exceptions onsite and very productive in fact, I think in some areas, we've actually seen improvement in cycle time.
And as Dave said I think some of the other work will be a little bit more on the margin, we're continuing to be involved but it hasn't been the focus Alaska.
Got it thanks again for all the details hope everyone stays well. Thank you in this game with you.
Thank you and our last question comes from the line of Alex Barron with housing Research. Your line is open. Please go ahead.
Yes. Thanks for taking my question I know this has been on while hope you guys well.
I just wanted to ask about the transaction costs.
Did you guys pretty much book them. All this quarter is can we expect anything else for next quarter.
We out about 86 million in the quarter. What we've said previously is probably going to be around 100 million.
I think you'll see a chunk of that probably in the second and third quarter.
But then we'll we'll obviously.
Dissipate after that.
Okay, great, Thanks, and Stacy.
Thank you.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to show Parma for any closing remarks.
Thank you operator, and thank you all for joining us for Q1 call. Thanks for hanging with US I know the long call. We wanted to make sure you at all the information.
Okay, well stay safe and we will talk to next quarter.
Ladies and gentlemen. This concludes today's conference you may now disconnect.
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