Q3 2020 Taylor Morrison Home Corp Earnings Call
[music].
All participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded I would now like to introduce Mackenzie Aron Vice President Investor Relations.
Thank you. We appreciate you joining us for Taylor Morrison's third quarter 2020 earnings Conference call.
We today are Sheryl Palmer share Chairman and Chief Executive Officer, and Dave Cone Executive Vice President and Chief Financial Officer.
Sheryl will begin the call with an overview of our performance and market outlook well, Dave will take you through the highlights our financial results.
After which we will be happy to take your questions.
We ask that you please limit yourself to one question and one follow up.
Let me remind you that todays call, including the question and answer session includes forward looking statements that are subject to the safe Harbor statement for forward looking information that you will find in todays news release.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and production.
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 and we do not undertake any obligation to update our forward looking statements.
I would also like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release, which is available on the Investor relations portion of our website.
With that let me turn the call over to Cheryl.
Thank you Mackenzie and good morning, everyone. We appreciate the opportunity to update you on our recent results and business strategy.
Certainly the year has unfolded differently than we could have ever anticipated yeah. I'm. So pleased with how our team has navigated the unprecedented environment. While also working through an integration, allowing us to deliver our stronger than expected third quarter performance.
Our adjusted diluted EPS diluted earnings per share increased 53% year over year to a dollar one excluding transaction related expenses and refinancing charges, while our GAAP diluted earnings per share was up 38% to 87 cents.
Building upon the rebound in activity that began in may our sales remained strong throughout the third quarter.
Our net orders increased 74% year over year, driven in part by the benefit from our <unk> acquisition of William Lyon homes in February.
And a continuation of robust demand.
The smart notable acceleration from 23% growth in the second quarter.
Our monthly absorption pace increased 53% year over year to 3.8 sales per community.
Highest quarterly level and our public companies history.
Among our sales pace was up by nearly 70% in July just over 55% in August and approximately 40% in September.
Despite leaning more heavily on price to appropriately manage our backlog our absolute sales pace remained in a relatively consistent rain throughout the quarter and has even accelerated thus far in October from Septembers run rate and is expected to be up more than 50% year over year for the month.
Reflecting the remarkable resiliency and today's housing market.
Our industry is clearly benefiting from several tailwinds, including historically low interest rates.
Limited inventory and a shift in to the new home market by consumers in search of clean healthy and functional spaces for their families.
These trends have magnified favorable demographics that were in place prior to the pandemic and will likely persist long after it.
Collectively these dynamics renew our conviction in the long term opportunity for housing that we are all well positioned to capitalize on after years of strategic transformation into the nation's fifth largest homebuilder.
The sales success, we experienced during the quarter was driven across nearly all our geography and consumer group.
Across the country, all our markets experienced year over year growth with notable strength in our Phoenix, Northern California, and southwest Florida market.
Among our buyer groups sales pace and our entry level segment was generally consistent with the second quarter, while activity in each of our move up and active adult segments improved meaningfully.
Notably our active adult consumers are increasingly engaged with our sales team and we are seeing real traction, particularly among returning out of state buyers as we enter the win as we enter the winter selling season for our lifestyle community.
Of course, the strong sales environment has put a renewed emphasis on the critical price versus pace balance.
Well, we have always navigated that trade off at the community level to fully maximize profitability and returns on an asset by asset basis. We.
We have generally prioritize price at this point in the market rebound.
We implemented a nation wide price increase in August reduced our incentives across the board and achieved price increases in virtually all our communities.
As Dave will elaborate on we believe the pricing increases we have realized thus far are sufficient to cover anticipated lumber and other cost inflation as we look ahead to 2021.
Well there is further runway to raise prices in the current environment, particularly in the move up and luxury segment. We also recognize the need to be mindful of preserving affordability for our prospective buyers, particularly at the affordable entry level.
We will continue to carefully manage our price and pace in each community based on demand trends, our supply pipeline and the competitive environment.
I want to also spend a moment discussing our industry, leading virtual selling tools and digital capabilities.
As we discussed last quarter, we introduced two additions to our online suite earlier this year so.
Self guided tours of inventory homes and online home reservation.
Following on those successes, we are in the process of rolling out standardized option packages that will be available in both our in person and online sign centers offering offering curated feature selection to streamline our design process.
I am pleased about the positive impact these tools have on the overall customer experience and equally encouraged by the longer term financial benefits on the business.
For instance, home buyers that use one of our virtual tools are less likely than other buyers to use a real estate broker. Additionally, the internet was our top lead source for buyers for the second consecutive quarter at 46% versus 38% for brokers.
Both trends present opportunities to reduce our commission expense over time.
Additionally, the adoption of standardized option packages will help us improve our material cost and processes and reduce our cycle time.
Well these initiatives are still in the early innings, we remain committed to finding innovative ways to drive improved operating efficiencies enhanced margins and increased returns.
Shifting gears to another exciting development that has been one year since we announced our entry into the build to read market be a strategic partnership with Christopher Todd communities and I'm happy to share an update on our progress.
At the time, we expressed our optimism that the build to rent market presented opportunities to leverage our core homebuilding and land acquisition expertise in a new way, helping to increase our delivery velocity enhance our production process and diversify our offerings to meet consumer demand.
Given the cleared deficit of affordable single family housing across the country and shifting consumer preferences post co bid away from Dans traditional apartments to more spacious single storey living our confidence in this opportunity has only increased over the last year.
We have broken ground on two communities in Phoenix, but five additional projects in their pipeline expanded into four new markets completed a strategy playbook to be utilized across our divisions and are in the process of finalizing our new national product Library.
We have plans for further expansion in 21 as we continue to quickly scale the partnership.
Once the communities reached stabilized rental levels, we intend to monetize the assets that are in the process of evaluating potential exit strategies for 2022 and beyond.
Most importantly, the relativity streamlined and concentrated production provided by our build to rent operations will add further depth to our overall scale, allowing us to capture greater construction efficiencies that should be accretive to our margin and return profile over time.
Now as I said earlier, we expect housing activity dream remain healthy for the foreseeable future and believe our market presence is well suited to meet that demand.
However, we also remain cognizant of the uncertainties and risks facing the economy related to the ongoing pandemic uneven employment recovery waning government stimulus and of course next week's presidential election.
Regardless of the economic backdrop, our strategy is designed to allow us to navigate the cyclical environment equipped with both financial and operational flexibility.
Now, let me turn the call over to Dave for his financial review, Thanks, Cheryl and good morning, everyone.
I'm pleased with the strong financial results, we delivered in the quarter.
We also made further progress in de leveraging our balance sheet, we refinanced a portion of our 2023 and 2025 senior notes in July and then paid off the remaining balance of those same notes in September for a total reduction of 285 million paid with cash on hand.
We also paid down $200 million of our corporate revolver.
These actions will lower annualized interest expense by approximately 21 million.
As a result, our net debt to capital ratio declined by over 400 basis points sequentially to 41.6% at the end of the third quarter.
Since our acquisition of William Lyon homes in February we have reduced our net debt balance by a total of 497 million or approximately 17%.
We have officially reduce the leverage assumed in the transaction at a pace faster than originally projected.
Given the progress made thus far we now expect our net debt to capital ratio declined to approximately 40% by year end.
And the high 30% range by the end of 2021.
Overall, our balance sheet is in strong shape with nearly 1 billion of total available liquidity, including approximately 550 million of cash on hand.
Going forward, we will continue to look for ways to opportunistic we manage our balance sheet with an eye towards further de leveraging.
In addition, we intend to pay down all or substantially all the remaining revolver balance by the end of the year.
Yeah.
The robot sales environment that Sheryl discussed left us with a company record backlog of 7761 units, representing a sales value of approximately 3.8 billion.
48% from a year ago.
We are focused on managing our production schedules to deliver these sold homes in a timely manner for our customers. While also rebuilding our spec inventory to more normalized levels.
Specifically into the quarter, our spec inventory inclusive of finished specs equaled 3.1 per community.
This is below our typical run rate due to strong demand for inventory homes.
We anticipate building our total spec inventory over the next two quarters to more normalized levels as we prepare for next year's spring selling season.
We will continue to target finished specs per community at just over one which is slightly above the level. We ended with this quarter.
Moving to closings, we delivered 3469 homes, a 51% increase over the same quarter last year.
This was ahead of expectations that we shared last quarter, given a faster than expected sales piece of our inventory homes.
As we discussed on last quarter's call our prior for your closings guidance, partially reflected our view that supply side constraints would likely push a portion of our backlog into early 2021.
However, the strong success in the third quarter and continued momentum into the fourth quarter is allowing us to increase our closings guidance to approximately 12500 for the full year.
Turning to margins, our GAAP home closings gross margin was 17.2% inclusive of capitalized interest and purchase accounting, which exceeded the expected range, we shared last quarter.
On an adjusted basis, our margin equaled, 17.8%, which excludes an approximate 60 basis point impact from purchase accounting.
Driven by the strong housing environment and supply governors, the industry is experiencing lumber inflation and potentially upward pressure on labor costs.
However, rising home prices are helping to offset these headwinds and we have already seen lumber inflation start to ease.
As a result in the fourth quarter, we expect GAAP home closings gross margin to improve sequentially to about 18%, which would be for your margins in the mid 16% range an increase over our prior estimate.
The impact of purchase accounting is expected to moderate to approximately 25 basis points in the fourth quarter, leaving the full year impact at roughly 125 basis points.
Overall for 2021, we do not anticipate any material impact from purchase accounting next year and expect sequential margin accretion as we start to see the advantages from the acquisition synergies operating efficiencies and pricing trends in our backlog.
SGN as a percentage of home closings revenue improved 210 basis points year over year to 9% as we have continued to capture the benefits of increased scale strong market conditions and cost control measures.
For the full year, we now expect our S. You need percentage to be in the high 9% range.
Looking ahead to 2021 is important to note that while we expect to continue to leverage scale benefits. These savings will be partially offset by an increase in costs as we return to more normalized course of business post the pandemic.
Regarding our ongoing integration of William Lyon homes, we are running slightly ahead of where we initially planned to be at this point and expect to be mostly complete by the end of the fourth quarter.
The one area that we are eager to make further headway on our the cultural and relationship aspects of bringing together two companies that have naturally been more challenging in a remote work environment.
Given the progress made to date, we can once again reaffirm or 80 million in annualized synergy target.
We have completed our overhead rationalization and renegotiation of national procurement contracts and are now in the process of working through local cost programs with our fuel purchasing teams.
Overall, we remain confident in our ability to close the gap between legacy William Lyon, and Taylor Morrisons normalized margins within the 12 to 18 month timeframe. We initially laid out.
Moving now to our community Count Man portfolio, we ended the quarter with an average of 393 communities down from 411 in the second quarter, but up from 346 a year ago.
Well, we opened nearly 50, new communities across our footprint during the quarter. The elevated sales piece experienced over the last several months has naturally resulted in accelerated closeouts of existing communities.
As a result average community count in the fourth quarter is anticipated to be approximately 375 to 380 and as we look out to 2021, we expect our average community count to remain roughly flat from the fourth quarter level.
We invested over 370 million in land and development during the quarter, bringing the year to date total to 1.1 billion.
We expect a further ramp up the pace of our land investment in coming quarters, Although we remain disciplined to our philosophy of acquiring prime land in core Submarkets.
We already own or control nearly all of the lots we need to support our growth in 2021 and are focused on investing to support further community count expansion in 2022 and beyond.
At the end of the third quarter, our land pipeline period of supply of approximately 68200 owned and controlled lots, which represented 4.8 years of supply based on pro forma Taylor Morrison and William Lyon home closings over the last 12 months.
Of which 3.4 years were owned.
Lots controlled represented 29% of our total lot supply up from 19% a year ago.
As we underwrite new land deals we remain focused on incrementally expanding our controlled sure to maximize returns and minimize risk now I will turn the call back over to Cheryl.
Thank you Dave.
To wrap up I would like to share a few thoughts about where we go from here.
Over the last seven years, we have completed six acquisitions, expanding our total market count by third since 2013 to 21.
Calibrated our footprint to ensure we are located in the markets that have the strongest macroeconomic drivers in place to drive sustainable long term growth through a full housing cycle.
We have also expanded our local market share to provide critical operating efficiencies and greater depth in each of our consumer segment.
This intentional transformation of the organization has provided us with a national platform that is focused on generating industry leading returns.
Well, we still have significant work ahead of us to achieve our long term strategic goals. Our top priority is demonstrating the benefits of our expanded scale.
The team portfolio and products in place, we see opportunity to leverage our size to reduce construction cost.
Utilize our industry, leading virtual sales tools to streamline overhead.
And optimize our balance sheet to drive sustainable cash flow growth to reinvest in the business and maximize returns.
We are committed to taking full advantage of our competitive strength as we get through the final stages of our latest integration efforts and enter 2021 are they fully align team.
Before we moved to queuing day I want to end with a note of gratitude to our team for their tireless commitment to our organization and customers.
I'm excited about our outlook and look forward to continuing to update you on our progress in the coming quarters.
And lastly, and most importantly, I sincerely hope each of you and your families has been healthy during these times and I wish you the best as we continue to move forward.
Now I'd like to open the call to your questions. Operator, please provide our participants with instructions.
Thank you as a reminder to ask the question.
Star one on your telephone.
A question press the Taqi.
First question comes from Carl.
BTG Your line is now open.
Good morning, everybody talk to you.
I wanted to ask just about California.
Given your expanded presence there can you just talk to me a little bit about how the coastal markets are comparing to the markets.
Then as you look at your mix in California into 21, and maybe overall the company how is it shifting more towards smaller.
This type of stuff and is that going to help your absorption rate next year.
Given the comps are going to be quite hard.
Well, thank you Carl absolutely so.
Yes, the tail of the number of stories, if I start in southern California.
Obviously, you know that was home base for the Lion acquisitions from our business there.
Five six times in totality.
More importantly, I think the market the pace is that we've seen throughout the southern Cal.
Doubled.
And we're seeing that interestingly enough Carl.
The entire business.
Certainly the paces are higher.
Hi.
Portable levels.
The other shifts we have in California.
That's probably used to be 65, 75% back.
It's probably moving to a more 50 50.
I think as we look for and we'll even see.
Stronger to be built.
To your point has really seen accelerated demand I mean with folks.
Able to work from home.
<unk>.
It's actually not at all.
Probably an honorable mention to the bay for talking about California, because we've seen such a shift there as well I mean, there were a number of quarters.
Last year earlier this year that we talked about some of the pressures and the bay, we've seen some of the best paces over the last quarter that we've seen in a couple of years.
Part of the contribution there is a real shift in <unk> down.
Over the last couple of quarters would be.
He started down that road and then certainly with the addition of.
<unk>.
Okay, Thanks and.
And then Dick can I ask just sort of what do you think given how fast you been able to reduce the debt here as you look going forward likely you're going to be more cash flow generative on a go forward basis to what kind of target debt to cap are you are you looking at for the company overall over time is it is it changing at all can you operate.
So.
Thanks, a lot.
Yeah, Carl definitely I think our perspective is changed.
We always said that we're very comfortable operating around 40%.
The cap ratio.
But we are focused on driving down that leverage and as we commented we expect to be high 30%.
By the end of next year and when we look at our cash needs. We don't have any debt maturing until 2023, we have a strong ability to generate cash flow and really no need to take on additional debt to grow the business. So.
We're working through our 21 plan right now so Q4 call I'll, probably have a better long term target for you, but I would expect it to be under what we're seeing right now high 30% range within a 21.
Is going to be below that probably on a go forward basis.
Makes sense, thanks, very much for taking the questions. Thanks Carl.
Thank you and our next question comes from Mike Dahl of RBC capital markets. Your line is now open.
Hi, This is actually Chris on for Mike Thanks for taking my questions.
For my first question just a point of clarification the community count outlook. He said it was going to be flat for Q is that on average for next year are ending and how should we expect that to ramp next year should we should we think of as more back half weighted.
Yeah, it's to the average community count for Q4.
And then.
It's got to be somewhat but I think as we move through the year again, we're finalizing our 2021 plans.
Right now, you'll probably see slightly higher.
Maybe towards the middle of the year.
That'll probably be kind of more of that that peak point for us.
A lot of this just depends obviously on our biddy ability to continue with the strong sales demand, we're assuming you know.
Elevated pace kind of more in line with what we've seen recently.
If we see that move a little bit higher than obviously that might accelerate some some closeouts.
Got it that makes sense and then just my second question you guys you guys mentioned that.
You bet, you've been able to realize pricing to fully meet the inflationary pressures. So I guess when you look when you look past that into next year. How are you guys thinking about the.
The pace versus price given that day.
They now that you've kind of laughter.
The <unk> expenses yourself to it to get ahead of the price.
Cost inflation, how should we think about your thinking there.
You know I think globally, that's always a tricky question to answer and as we said in our prepared remarks I mean, if you. If you have a pivot I would say, it's certainly a bias toward price today, and we want to make sure that we really do time, our sales and our production capacity.
We make these decisions at a local level on a community by community basis, I would tell you that there are markets and communities.
We are metering out sales.
Seeing lots on you know every two weeks and there are other communities where were continuing to rise.
But once again, if I were to like make a comment across the portfolio. The bias would be toward price. If you look at our historic pesos over the last couple of years, we've been somewhere in.
Mid twos per community.
Per month, you can see we've made tremendous traction this year and that was certainly one of the objectives.
Innovation to really focus on <unk>.
Hey.
I think you'll find a more natural run rate somewhere between the two I don't think we'll continue to run at the 373.
But I don't expect were going to go back into the mid to Andrew.
Just with our low spec inventory I think that speaks to that focus on on price.
Tori is so tight right now.
That said, we want to maintain kind of that production cadence as well, but with a tight inventory, we're going to focus more on price.
Got it appreciate the color. Thank you.
Yeah.
Thank you and our next question comes from Jane Machine last of Wedbush. Your line is now open.
Hey, good morning, Thanks for taking my questions.
I guess, the first one going back to the community count and thinking about 41.
With the movies like we're talking about Cheryl the further out reaches of the inland Empire or are you all looking at shifting maybe some openings or do you have the flexibility to shift some of your openings sees more far flung regions or you basically kind of.
To the land plan you had.
Three months ago or six months ago.
I guess a couple of comments there you know when you look across the board and you look at the demand as I said, we're seeing it.
Price points.
And so good news right, we're selling faster than we anticipated.
Looking forward that doesn't really allow us to bring in communities sooner when I look kind of to 21.
Thank the formula starts to look a little bit different than we would've thought last year will be generally flat.
But we'll expect elevated paces as we've been talking about protecting creates a more efficient business.
Absolutely with the addition of William Lyon homes than some of the shifts we had.
We are.
I'm looking at more affordable positions across the board.
<unk> and it's more than just the inland Empire I really think it's about how you control and.
As you know we've talked enough times about the average size of our communities has moved down a bit so.
And be prepared for anything the market.
Because right now those communities and those pieces are doing very well when.
When interest rates move over time, we're not going to put all of our eggs in that one basket. So I do like the diversity of our portfolio I think with that strategy you should expect to see significant.
Closing growth next year.
The team is just so focused on kind of longer term growth kind of move that to just our ramp up in land spend in Q3.
We approved probably two to two and a half times the land in Q3 than what we've done for probably the last five years.
So once again, it's about how we control that but it's really across all price points, including the more affordable price points, but also an active adult and that first time I.
I think the same can be said, we're trying to accelerate.
On the development side as well, but.
It's obviously a long runway to get there that's not going to impact 21 as much as hopefully going to set us up for a stronger 22 23.
That's great.
And then wanted to ask on cycle times were those running now and avail.
Availability of labor schools headwinds can you just talk around that and what impact those are having on cycle times.
Sure you know cycle times overall are generally flat to slightly better than this time last year.
Surprisingly, we haven't seen much impact of cycle times lease yet related to the pandemic.
But we're continuing to watch this closely.
Working with our trade Dan municipalities.
I expect some level of pressure in Q4 as builders are trying to deliver their year.
That's kind of more of that than normal course, I think you know municipalities have probably been most impacted from a.
The pandemic as far as their availability that said I think they've done a fairly nice job working with us and working across the industry.
To help us get communities open or deliver deliver closings yeah. I think it's about how you look at the cycle times I mean, if you look at to date points kind of start to.
Delivery.
We really haven't seen much movement now not to say, there's not pressure point at different parts of the cycle and we'll see that continue through the end of the year and I believe given the ramp up across the industry.
I continue.
But that's kind of what we do I think the greater impact has really been under as a virtual environment.
That's right I mean, just pulling a permit today is very different than what it used to.
<unk> have gotten our arms around it and others are still struggling so you've seen some permitting movements. So we've been really trying to dissect our kind of cycle times to look at where are we from sales to actual start and.
How do we continue to improve that and helping municipalities and then how do we retain the cycle times on the construction the vertical side.
<unk>.
Great. Thanks for taking my questions.
Again, one day.
Thank you and our next question comes from Jack Micenko Susquehanna. Your line is now open.
Hi, Good morning, Jack you all have Oh, you don't.
Really don't you, creating and Oh things were on the share buyback.
Following some of these acquisitions I guess the question is do you feel.
So much it make it really you know.
Good with that extra shopping with the cash flow I'm going.
Going forward as you're sure issue.
Jones like your first full males and de leveraging.
Well good bye bye.
Is that the way to think about.
Yeah, Let me, let me add a couple of points and I'll work and.
Answering that question.
Obviously 2020 has been very interesting from a capital allocation perspective, you know with a pandemic right now we're feeling really good about our cash position overall liquidity.
And that's with the recent pay down as we mentioned the 200 million on a revolver plus the 285 that we did on the most recent refinery.
Like I said no debt coming due until 2021.
At this point, we've essentially returned to our normal capital allocation philosophy.
Reinvesting back into the business through land and development spend.
So Sheryl said you know you mentioned that.
Oh, sorry, no debt due 2023, sorry.
We like.
Like I said, we were back to spending on land development spend Cheryl mentioned Q.
Q3 for US was a big quarter as far as deals that Weve approved.
From there, we're going to look at paying down the debt and the shares or both.
Both.
Depending on several factors, we have about 8 million left on our current share repurchase authorization.
Well, obviously look at maybe extending that increasing that as we go through our 21 planned work, but we're going to continue to invest with the cash we generate and that's going to be in a way that we can avoid any kind of drag on a return when we look at how we're going to allocate that capital is going to be up against the cost of land.
And where the stock is trading and where interest rates are and the debt market I'd tell you right now given all those factors were probably leaning a little bit more towards the de leverage just given the current.
Macro environment.
<unk>.
So that.
You know I notice to the capture rate in the mortgage business is up.
Quite nicely year to year and.
Taking a part of that is probably.
And getting away more claims business into <unk>.
Until the Taylor Morrison.
She split.
Sure he seems rating by the G preschool, you've got something directly to this most of the world Courier influence constituted of deferral does that is that is it is the more direct to consumer approach. It for tools allow also hopes and hoping fluctuations like that.
Number in the mid Eightys sustainable.
You know that system.
Same question to be honest.
I had not correlated to on Monday.
Just to say.
HM.
The virtual environment has certainly changed our relationship with the consumer.
It makes sense that.
The folks that are operating 100% virtual that our process.
On our virtual mortgage process.
That customer experience.
Very difficult for me to quantify.
In addition to that you know in all honesty early independent Mac, we did do.
A promotion and closing costs.
That would have helped it a bit but I actually think the capture is coming through the sales and the service experience that Taylor Morrison home funding provides our customers.
The ease of the experience all of our virtual tools and I, probably talked about on last quarter's call right. When the pandemic yet I mean, we aren't that team our mortgage team went to work to protect that backlog lock in rates all those things that literally they jumped on day, one that kept our can rate.
So I think it's not just one thing, but I will now look for that correlation on you know if I look at the deals that were seeing completely virtually I will try to correlate that to mortgage capture it's a great question.
Thank you. Thank you.
Thank you and our next question comes from Alan Ratner with Zelman and Associates. Your line is now open.
Hey, guys. Good morning, Congrats on the great results and glad to hear everyone is doing well on your end.
Hi, My first question Sheryl you guys do a lot of great work on on the the the buyer segments and I'm curious because we've seen we've seen on the mortgage side, some pretty significant increases in second home demand and I'm curious I know, it's probably not a big part of your business, but I'm curious if you're seeing any increased activity among second home buyers in your business right now.
Yeah, I think we are it's modest it's not a.
Upset that.
Will rise to a consumer set at this point, Alan but I think we are seeing it absolutely in the active adult is that consumer is returning.
That's always been a a good part of that business and you know our highest pesos in the quarter, where the active adult business, which is Jeff.
Fascinating if you look at the lower than we had had one or two quarters ago, where the only business. We could really see there was in state.
Because they weren't getting on planes now they're driving further in fact I was just looking at the out of state numbers and.
On this past quarter, we were pretty close to normal.
Run rate on out of state. So I think that's where we're capturing the greatest piece of that second home market.
Interesting.
Second you you talked a lot about the price versus pace dynamic and how closely you guys are watching affordability and I'm curious if you could share with us any particular metrics, maybe you're looking at prices are up a lot. Obviously rates are down. So is there a particular metric whether it's monthly payment at the end.
Comp that you kind of have on your dashboard is something that that might be an indicator that things are are going up too much and and I'm. Just curious if there's any anecdotes you can give us about may be instances, where you actually have seen some resistance to price increases or do you feel like across the board there really hasn't been.
Thank you for that question, it's a really good one yeah. There's a couple of places I'll start with your second question first there's a couple of places where I think pricing create a little sticker shock.
We took a pause what the consumer adapt but I would say generally the price increases across the business before we get to the affordability question have been well received and as you can see by our pieces they have not slowed down.
[music].
Interestingly enough Alan on the affordability side, you know I, probably haven't quoted this for a couple of quarters, but you'll recall that we used to on a pretty regular basis talk about that cushion and the both the FHLB.
And the conventional buyer on what their spending and what they can afford to buy any either you would see that as you know added interest rate are you to that and buying a bigger house.
So all of the stats that you articulated absolutely we're watching but what I think summarizes them Wow is just the rate question.
And we're seeing on the FHLB side still somewhere between three and 500 basis points. So once again, they could afford a rate somewhere between three and 500 basis points than what they are locking and day.
Or they can buy a bigger house and on the conventional side, it's actually increased its something closer to six to 700 basis points.
I mean that is significant and took it talks a lot about where rates are but I think it talks more to the way that consumers looking at their relationship with their monthly obligation.
Appreciate you sharing that with us and thanks, a lot good luck take care.
Thank you and our next question comes from Michael Rehaut JP Morgan. Your line is now open.
Hi, Good morning, this is Maggie on for Mike.
My first question is just on the pick up in sales pace.
That you pointed to in October versus September and I. I think did you said that absolute pace was relatively consistent throughout the quarter, but I was just wondering as you look from that maybe 40 person in September to up in the 50% ish range in.
October is there anything else or any change or improvement, that's driving that or is that mostly a function of.
A bit easier on the comp.
No I don't think it's an easier comp I just think it's all the factors that we've been talking about Maggie it's not really fair question, because you would expect a much greater seasonal influence.
At this point, but.
But if I look at the cost out from a comp perspective on a pace Maggie our September and October of last year was the exact same amount same number sales for house has been playing.
Hey, same same pace.
So you know once again the first three weeks don't make the mine, we've got probably nine days from when we quoted.
Hi, you know if it's.
10, higher or 10th lower I think the point for US is that the demand continues strong.
And we're seeing it across the board and that's even with that.
Some of the pricing you know that were taking a reduction in incentives and increases in base prices.
We're seeing really across the board.
Okay. Thank you and then second question just on those.
Reduction in incentive and the price that you're taking could you.
Quantify that at all for us.
Yeah, Theres a range, obviously by market and by consumer group.
We have as I.
I said I think in my remarks, we have probably a little greater opportunity.
Docket active adult buyer, but somewhere in that 2% to 3% on average I think we've got places, where we're seeing stronger increases and you've got some where you're kind of in the one person, but I would say the two two and a half would probably be an average across the portfolio magnets and we're seeing that in our backlog I.
Just on the deliveries we had in Q3, but it's still holding strong in the backlog.
Got it. Thank you. Thank you.
Thank you and our next question comes from Truman Patterson of Wells Fargo. Your line is open.
Thanks actually this possibility.
First I guess from your commentary it sounds like you're just wanting to.
Get your spec package for for next spring back to you know on par with where it was this year is there any particular reason given you know strong market dynamics that you wouldn't want to try and push out a little bit hotter.
It's a great question, Paul you know a couple of things there when we're trying to get it back I think that's fair that you want to operate with a certain level of spec inventory and be available for those consumers that hobby immediate needs and the moving having said that [laughter] excuse me, having said that.
You know, where we've got you know I'll take a market like Phoenix.
Where you know, we probably have a two month backlog pretty much across the country. A two month backlog I'm still not started which is about right. When you think about the time to from sales to pulling a permanent starting if you can fill that pipeline to rebuild.
And it does a lot.
It creates a very strong efficiency in the production cadence.
It generally would deliver a higher margin profile and I think de risk the business over time, because as things slow down you know covered was a great example of that it's those buyers that aren't as emotionally committed that will be the first to back away.
Because they haven't picked up a lot they haven't design the house, they're very personal taste. So it's a balancing act for us we like the shaft in the to be built business, but we do want to have a reasonable inventory on hand, yeah. So we're prioritizing where that inventories going into those different obviously you know the most affordable price points is where we would like to see.
The biggest pickup.
Okay.
I guess with your community count, it's better to be you know somewhat.
Somewhat flat next year any color you can provide on the number of.
Fully developed.
There are lots that you can bring to market next year from.
A growth despite the EPS it can be cash flow you have the number you know.
Opportunity through increased finished lots to increase your sales.
You know, it's a great question polymer going through the planning and we're not dodging next year, because we've tried to give you guys great amount of color on 21, but we actually have on our budget meetings next week that is the million dollar question. You know if you think about and April may we really slow down development on any phases.
That had not started or that we're at a comfortable place until we really understood the impact.
So now getting that machine up both on the horizontal side on the vertical side is part of what you're seeing in Q4, but on the horizontal side I think most importantly, we have to see what that kind of 90 day slowdown does to the capacity and 2021 and that's why we'll be in a better position to go.
Have you kind of closing numbers, because it's not sales Oh, you can see that it's really what a what can we get in the ground and when can we get those lots.
Two our construction teams to be able to begin construction.
Thanks.
Then just one quick final one you talked about your move to you know a.
Standardized design package here some of your peers have quantify you know margin benefits from that you have a target youd like to share with yeah, you know I'm a little hesitant because its early days, we have rolled out our canvas package, which I'm quite excited about its about five or six.
Standardized package is and we've absolutely seen some margin.
And that selection process and my numbers. So far you know are from the pilot market, which is one market, where we saw it as you know as much as a kind of a couple hundred basis points. We are now live in seven divisions with probably four or five more happening before the end.
The year or January.
And then we have the other eight probably coming on in the first half so you'll start to see a pickup I would say aspirationally I would expect that to be a couple of hundred basis point, you'll really see the impact of that on the piano and 22.
Okay. Thank you I appreciate it thank you so much.
Thank you and our next question comes from outer Triangle B. Riley. Your line is now open.
Thank you you mentioned the expectation for sequential improvement in gross margins and 2021, you've addressed this in a couple of different ways on the call, but can you kind of come back in sort of summarize and maybe even quantify some of those drivers to gross margin improvement 2021.
Yeah, Alex its a little early for me to quantify that as I mentioned, we're working on are 21 plans right now, but we do expect accretion or something that is going to come as purchase accounting lapses, but more importantly, as we benefit from synergies from the transaction as well as pricing power, even with the impact of.
Number we anticipate.
Margin accretion next year and I can tell ya.
Some confidence of that as I look at our backlog for the first half of next year.
We already see it there so.
But we'll come back to you with more of the specifics in Q4 as we finalize our plans.
And circling around to a lean into purchases.
What is the availability look like right now out there in the marketplace and how has the cost of land or changed.
Subsequent to cope with.
Uh Huh, it's a great question, it's competitive but you know if you had asked me that question anytime in the last 20 years I, probably would have answered it pretty similarly.
You know, we didn't really see a blip with cove it maybe the.
The blip, we saw was we got.
Sellers to delay action so no change on price no change on cost, but maybe we got a little bit more time.
On you know take.
<unk>.
I'm going hard on deals, but that was short lived.
You know no real change in our underwriting at this point as we look forward, but I would tell you the markets.
Sellers have very high expectations, given the paces you're seeing.
The builder community and people are moving through their land quicker than anticipated and the sellers are pretty savvy and see that.
And so it's it's more of the same I can't tell you, there's any greenfield, but like I said it our teams are doing a tremendous job navigating and looking for those opportunities and building on the relationships they have in the market.
Thank you.
Thank you.
Thank you and then next question comes from actually kind of housing Research Center. Your line is now open.
Yes, Thank you and great job in the quarter and Dave I was wondering should we expect the need for their transaction expenses related William line quarter are we pretty much done.
Alex this is probably going to be a little bit.
I would say maybe four to 6 million that we'll probably see come through in the fourth quarter, but then it should largely take us to the end.
Got it.
And the other question I had was you guys got some pretty good leverage and financial services segment.
Is that something that you know you think we can continue to expect going forward.
[noise], we're going to probably see that moderate a little bit into a 21. Some of that is just the way that we're doing.
Some of the incentives.
So like I said, it will it will moderate a little bit, but we'll give you some more detail on that and secondary market left but that's all very timing related the team is good as I said earlier, just a tremendous job.
Taking advantage.
You know when we came out of Cove it how we lock those secondary markets.
Hard to say that it will continue at that level, but I think we'll continue to see the strong capture.
And then we'll see how the secondary market treat them.
Okay, great well, thank you and best of luck.
Thank you so much.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to Sheryl Palmer for any closing remarks.
Thank you for being with US today appreciate the opportunity to share our Q3 results.
You all a very good quarter Stacy.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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