Q4 2020 Taylor Morrison Home Corp Earnings Call
Ladies and gentlemen of today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Good morning, and welcome to Taylor Morrison's fourth quarter 2020 earnings Conference call.
Currently all participants are in a listen only mode.
Peter.
A conduct a question and answer session and instructions will be given at that time.
As a reminder of this conference call is being recorded.
I would now like to introduce the Mackenzie Aron Vice President of Investor Relations.
Thank you we appreciate your interest and our fourth quarter, 'twenty and 'twenty earnings Conference call I.
I am joined by Sheryl Palmer, Chairman, and Chief Executive Officer, and Dave Collins, Executive Vice President and Chief Financial Officer.
Sheryl will provide an overview of our performance and strategic priorities, while Dave will share of the highlights of our financial results after which we will be happy to take your questions.
I 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 earnings release, which is available on the Investor relations portion of our website.
These statements are subject to risks and uncertainties and could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the Securities and Exchange Commission and we do not undertake any obligation to update our forward looking statements.
In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures and our earnings release.
With that let me turn the call over to Sheryl.
Thank you Mackenzie and good morning, everyone. We appreciate your time this morning, and sincerely hope for you and your families have managed to stay healthy and safe.
To begin today's call I want to thank for Taylor Morrison team for their tremendous efforts and dedication to our customers and organization over the past here.
Their commitment and allowed us to navigate 2000, twenty's many challenges to deliver our strong fourth quarter results to cap off a pivotal year for our company and further position us to capitalize on our enhanced scale and expanding business opportunities.
To recap some of the highlights during the year, we delivered over 12500 homes adopted new industry, leading digital capabilities that allow us to operate more effectively and paved the way for future innovation and expanded our growing built for rent operations.
Our financial services team achieved record financial results and a mortgage capture rate of about 8%, providing critical visibility into our backlog and highlighting the strong value and service and mortgage company offers for our buyers.
Collectively these strong results helped to drive our operating cash flow to a record high of $1 1 billion after investing $1 4 billion and new land and development.
Additionally, we exceeded our deleveraging targets with a nearly 300 basis point sequential decline and our net debt to capitalization ratio to just under 39% and ended the year with ample financial flexibility.
This month also marks the one year anniversary of our closing on the William Lyon homes, the largest and most transformative of our six acquisitions over the last seven years from.
And I'm proud of the progress our team made to fully integrate into one company on schedule just for.
Part of having to do so almost entirely remotely through the pandemic.
And as a result, we are well on track to achieve our annualized synergy target of $80 million and.
And lastly, but certainly not least I'm very proud of the Taylor Morrison was recently recognized as America's most trusted home builder by life story research in 'twenty and 'twenty one for the sixth consecutive year based on survey responses by nearly 50000 home shoppers to earn this trust even during a pandemic.
And highlights our unwavering commitment to integrity and a differentiated experience for our home buyers that is core to who we are as an organization.
The successes position and asked for an even stronger 2021 and beyond.
This morning, I would like to share with you our vision for the company's next chapter as we turn the page on our integration efforts and transition into the value creation phase of our strategic journey. After seven years of growth into the nation's fifth largest home builder. We are now focused entirely on pulling for the financial benefits of the.
The enhanced scale local market debt and consumer and geographic diversification that we have achieved along this journey.
And our driving thesis behind our growth strategy has been our conviction and the benefits of our market share at the local and regional level.
The top five market position and 14 of our 21 markets, including top three and seven of those markets, we have meaningful opportunity to drive topline growth improve efficiency and reduce costs.
Our strategy playbook is grounded and a commitment to delivering attractive sustainable returns to the operational effectiveness and balance sheet efficiency, our strong fourth quarter performance and 'twenty 'twenty. One guidance reflects the early results of our strategic growth, which we expect and we will continue to build upon in the cash.
Orders ahead.
With our targeted market footprint and product portfolio now and place the key to our future success will lie largely and our operational efficiencies.
While this has always been and a central pillar of our strategy, we recognize the opportunity to ensure the organization is operating at the level reflective of bar and hand side industry, leading customer experience and valuable land positions.
Topping our list of priorities is a drive towards stronger per unit profitability through improved gross margin and asked the deficiency, which were temporarily impacted by our numerous acquisitions over time, we strive to again deliver margins that are competitive with our industry and expect our performance over the next two years to narrow the gap with her.
Peers.
While the opportunity is greatest within our newly acquired communities, where there is still meaningful runway to enhance construction and purchasing the efficiency to offset their high land residuals parents and also opportunity to improve our legacy margins to reflect the full benefit of our greater procurement capabilities and others.
Strategic benefits of our increased market presence now.
Now with William Lyon, and now the William Lyon is fully integrated we expect our new starts to increasingly reflect these competitive advantages, which will drive improving performance has recently started homes convert to deliveries in the coming quarters.
Among the many ways we are focused on achieving this enhanced profitability is the renewed emphasis on scalable repeatable processes that ensure best practices are fully utilized across our team, especially within our newer divisions. This encompasses everything from optimizing our strategic selling process.
Thus, reducing our build cost and further planned rationalization and value engineering, and maximizing our purchasing contracts and standardizing our option pallets, all with the intention of maximizing revenue, reducing cost and managing our cycle times.
In addition to these operational enhancements, we have I'll flip and focus on the management of our land portfolio with our emphasis on driving the turns we have managed our land supply to ensure an appropriate level of lots to meet demand. While also taking advantage of opportunities to improve our capital efficiency.
We have successfully driven our years of lots of supply down to one of the lowest and most efficient levels and our company's history, while all for growing our total lot supply to nearly 70000 of March.
And at year end and this represented five and a half years of supply, which we believe is just slightly ahead of the optimal range for a project mix and community development expertise.
Most importantly, we have the hall from expanded the share of our lots of controlled via options and the other arrangement to over 31% from a low of 21% and the third quarter of 2019, driving our own lots of supply to three eight years.
Within the next two years, we're targeting we are targeting of controlled share of 40% as we look for further and minimize risk and maximize returns.
And 2020, we laid the ground work for further progress on this front with more than 40% of our approved watch during the year controlled via options joint ventures or other arrangements and we also restructured a number of William Lyon's previous ventures, and land banking arrangements that will further enhance the castle and <unk>.
Turn profile of some of the acquired asset.
In addition, and I'm excited to announce that in 'twenty and 'twenty. One we expect to further improve the capital efficiency of our business with the introduction of new land financing vehicles, and we will share more details in the coming quarters.
Over all we expect the land and initiatives, we have underway will support improve returns and and have enhanced cash flow generation.
While also reducing our long term risk profile.
These efforts will allow us to participate even more competitively and the land market, while remaining disciplined and our underwriting to acquire land, where we see opportunities to drive profitable growth over the full cycle.
Before turning the call over to day I want to share some comments on the current market.
And the fourth quarter, we experienced strong sales growth across each of our consumer groups led and surprisingly by the entry level. However, our active adult buyers are also increasingly we engaged and the market and the early traction that we noted last quarter during the early winter selling season drove strong.
And sales activity through year end.
Additionally, our move up communities are enjoying healthy demand among buyers and eager to find the home well suited to their evolving needs and strong price appreciation has fueled the mobility within our move up price points.
In total our fourth quarter net sales orders increased 46% year over year, driving our monthly absorption pace to three point for sales per community tie with the second highest level and our company's history and well ahead of normal seasonality.
The strength has continued into the new year with net order growth accelerating to just over 50% in January and putting us on a strong path as we head into the spring selling season.
While we are leaning heavily on price and the current environment, where supply is extremely limited and demand is very strong and we do so and recognition of the importance of maintaining affordability, especially at our entry level communities has always our diverse price points drive our approach to balancing price.
And pace of the community level with the intention of fully maximizing returns on each asset.
In addition, we are mindful of the market wide limitations on capacity to efficiently deliver the industry of significant backlog of sold homes with ongoing labor tightness delays with the municipalities and other supply side constraint unlikely to change and the near term I think it's important to knowledge the many bottlenecks.
Constraining the industry's production machine.
And Taylor Morrison I believe the operational priorities I laid out along with our enhanced scale that has further improved our access to land and labor is allowing us to navigate these challenges successfully and.
In addition, our teams are carefully monitoring sales and lot releases to align with the production capacity to avoid overextending. Our backlog. We're also working closely to manage our production paces and construction timelines by leveraging our long standing relationships with our trade base to ensure our business continues to run and.
Tactically.
Lastly, we're also remaining disciplined and our strategic selling and pricing strategies to ensure recovering construction cost pressures and maximizing our margin opportunity.
With this backdrop in mind, we expect to increase our home closings by as much as 20% year over year and 2021, while also generating significantly stronger margin and return metrics.
Now, let me turn the call over to Dave for his financial review.
Thanks, Sheryl and good morning, everyone and.
For the fourth quarter, our adjusted earnings was <unk> 87 per diluted share after excluding transaction related and other certain expenses.
Our GAAP earnings was 72 cents per diluted share of 41% from the prior year quarter.
Demand remains strong with our fourth quarter net orders of 46% year over year, driven by strength across our markets and consumer groups.
Our fourth quarter monthly absorption pace increased 31% year over year to $3 four net orders per community.
Which was tied with the second highest level and our company history behind only last quarters record breaking sales pace.
The strong success drove our average community count to 360 day, that's faster than expected community closeouts due to elevated absorbed from levels outpaced new community openings.
As a result, and the first quarter, our average community count is anticipated to be between $3 62 of $3 65.
For the for year base by a continuation of strong sales paces and planned community openings.
We now expect our average community count and 2021 to moderate to between $3 60 to $3 65, before modestly rebounding and late 2022, and inflect and higher in 'twenty and 'twenty three.
While we expect the opened nearly 150 new communities. This year the strong growth will be partially offset by faster closeout of existing communities than originally anticipated given the continuation of elevated sales paces.
We ended the quarter with a company record backlog of 8000 and 403 homes.
This represented a sales value of $4 2 billion, which was up 86% year over year positioning us for strong revenue growth and 2021.
We are accelerating our level of new home starts and closely managing our construction schedules and working closely with our teams and trades to increase capacity to deliver our sole backlog and gradually rebuild our spec inventory.
On a per community basis, our total spec inventory equaled 2.8 homes at the end of the quarter, including less than one completed spec home.
This is below our typical run rate due to strong demand for moving ready homes as our spec starts are converting the sales at a faster than normal range.
Based on our homes under contract and and production, we expect our first quarter closings to be between 2850 and 2950.
And 2021 of our full year deliveries are expected to be and the range of 14500 of 15000, which would be up 18% at the midpoint compared to 2020.
Turning now to gross margin our fourth quarter adjusted home closings gross margin was 19% after excluding the impact of purchase accounting and inventory impairment.
This was up 120 basis points sequentially from the third quarter.
Our GAAP home closings gross margin was 18, 3% of 110 basis points sequentially.
Building on the strength, we expect our first quarter GAAP home closings gross margin to improve to the mid 18% range, which would be up from 15, 4% and the first quarter of 2020.
As Sheryl mentioned, we have significant opportunities and drive operational efficiency across the organization and began to more fully realize the cost and operational synergies from our acquisitions.
Additionally, we do not anticipate any material impact from purchase accounting and 2021.
As a result, coupled with broad based strength of the housing market. We anticipate our full year 2021, GAAP home closings gross margin to improve to about 19% from 16, 6% and 2020.
This expected margin improvement of accounts for the rising cost of lumber other materials and labor, which we have so far been able to successfully offset with home price appreciation.
Yeah.
On a reported basis SG&A as a percentage of home closings revenue improved 40 basis points year over year to nine 6%.
We are committed to continuing to deleverage with the increased scale of our business and anticipate our 2021 full year SG&A to be in the mid 9% range.
It is also worth noting that we incurred $17 million and transaction expenses during the quarter.
This was ahead of our prior expectation due to costs related to the buyout of one of the William Lyon's legacy Joint ventures that Sheryl mentioned will enhance the long term performance of the acquired assets.
Turning now to our balance sheet at year end, we had $1 3 billion of total liquidity. This included $533 million of cash on hand, and $736 million of available capacity on our revolving credit facilities.
Which was undrawn outside of normal course letters of credit as we paid off the remaining outstanding balance during the fourth quarter.
This drove our net debt to capital ratio down nearly 300 basis points sequentially to 38, 7%.
Given the faster than expected progress and reducing the leverage we assumed and the William Lyon acquisition. We now expect to drive further deleveraging for the low 30% range by year and versus our prior expectation and the high 30 per cent range.
We will continue to be proactive in managing our balance sheet as market opportunities dictate and our targeting and net debt to capital ratio in line with our peers over the next two years.
Overall, our capital and liquidity position are in solid shape, and we will continue to manage the business within the context of our disciplined capital allocation framework.
We aim to enhance the long term value of our company be balanced and opportunistic and our approach to investing and the business.
Managing our balance sheet and deploying excess capital to shareholders via share repurchases.
Our top capital allocation priority of investing in our land portfolio to support profitable growth.
Since 2015, and we have invested more than 6 billion and land acquisition and development.
<unk> and $1 4 billion and 2020 before the consideration of our numerous acquisitions.
And 2021, we are targeting an increase and our land and development of investment to approximately $2 billion.
Which we believe is appropriate for the enhanced sides of our business.
We will continue to be prudent and our underwriting process and expect this investment to drive community count expansion beginning in late 'twenty and 'twenty two.
As we already owned or controlled nearly all of the lots needed to support our strong anticipated growth over the next two years.
Lastly, our board of directors authorized the renewal of our share repurchase program for up to $100 million through year end 2021.
And December and January we spent $32 million to repurchase of one 3 million shares at a 6% discount to our fourth quarter of book value per share.
Since 2015, we have spend of approximately 670 million to repurchase a total of nearly 30% of our company shares at an average discount of 29% to our fourth quarter book value per share.
Going forward, we will continue the utilize share buybacks as a means to return value to our shareholders.
To wrap up I want to echo Sheryl appreciation to our team for their hard work. This past year that has positioned us to continue the positive momentum in the coming quarters.
Thanks, and I'll now turn the call back over to show.
Thank you Dave.
As we embark on this next chapter of our company's evolution I'm excited about the opportunity for us to make further progress in achieving our vision of building a consumer centric homebuilding operation that generate strong sustainable returns over the course of the housing cycle.
The next phase of our journey began to net of dynamic housing market propelled by strong tailwind that we expect will continue to drive healthy absorption levels and pricing power for the foreseeable future and.
In addition, the new administration appears committed to finding new ways to further support of affordability and housing development and.
Taylor Morrison and we are well positioned to capitalize on the spot on this strong environment through our traditional of homebuilding operations as well as our growing build to rent business. We recently announced the entry of our built around operations into Austin and have two additional markets slated for expansion later, this year, which would bring our build to rent mark.
<unk> count to nine of our 21 total markets.
While we remain mindful of the continued uncertainty amid the ongoing pandemic I'm confident 'twenty 'twenty, one will be a defining year for our organization that begins a multi year opportunity to drive improving returns in 'twenty and 'twenty. One we expect our focus on operational effectiveness and ongoing shift to land lighter balance.
And <unk> to drive our return on equity to the mid teens range, followed by further expansion in 'twenty and 'twenty two before considering the anticipated benefits from our revolving lands and financing vehicles.
And I look forward to updating you on our progress and sincerely wish you all health and the best of luck in 'twenty and 'twenty one now.
Now I'd like to open the call to your questions. Operator, please provide our participants with instructions.
And as a reminder to ask the question you will need the press star one of your telephone twist. Joe. Your question. Please press the pound key.
Semi while we compile the Q&A roster.
Our first question comes from Jack in the single with S. A G. Your line is open.
Hello, and good morning.
And I wanted to just kind of go back to some of the margin commentary on the backlog.
The the purchase accounting benefit going forward it sounds like it's going to fade and the walk from sort of and 18 18, three GAAP two of 19 at GAAP on the guide is that just all know pricing power going forward or.
Was there some sort of legacy tail benefit from a starting point at the beginning of the year of.
M.
On the gross margin as we look through 'twenty, two 'twenty 'twenty one.
Yes, Jack good morning, it's really two things are definitely pricing power.
That is helping.
But I think just equally as important we're starting to see the margin improvement.
And from the William Lyon acquisition as well.
That was a big focus obviously getting that scale.
And now we're focused on operational excellence. So those are the two big drivers.
Okay, Okay, and then Sheryl sounds like you know the.
Corporate level, there's and there's a pivot here somewhat from growth.
For returns and when you talk about.
Hum.
And please don't Reaccelerate from 'twenty, two and 'twenty free.
And do you expect returns true.
The improve and the face of the community Count growth and then you know when you think about about 'twenty one.
It sounds like you're maybe pivoting a bit more towards price and pace than maybe you had been.
Third quarter of just given the backlog can you just talk about some of those moving parts.
Yeah. Thanks, I certainly can Jack.
I think when you look at Taylor Morrison and over the last few years Youre right Theres been a lot of growth as we talk about our six acquisitions and you've seen a great deal of community count acceleration, but I think we've been talking for the last 12 18 months about really making sure that we optimize each and every asset that we have and making sure that the pace is appropriate for that.
So when you look at all of the competitive conditions and the runway that asset has so it's a combination but return has always been at the forefront.
Of harsh strategy, but obviously with every acquisition you take a slice of that backwards. So as I look today and it really is about optimizing each asset and and that's the balance that's the balance of price and pace and I'll tell you that we deploy slightly different strategies on each asset, but when I look at the home and I look at the backdrop of Maher.
Market the market there.
Absolutely right I'm going to really take us slight pivot to price to make sure I can one maximize each asset to the offset some of the pressures that we're seeing from the cost side and you just you have to take it one of its there Jack and it's there right now and I'd.
That's all for our strong ability to generate cash flow that that plays a significant factor when you look at what we're doing we're working up our margin.
Through the enhancements of scale, but we're definitely prioritizing cash and returns we're looking at lightning and our balance sheet going forward, we're going to use that excess cash to continue to reduce our debt, which we have debt not due until 'twenty three sway of some flexibility. But then also a couple of that with buying back shares and we're going to pivot between.
And debt reduction and buying back shares based on market conditions, but it's all going to be focused on maximizing our returns and we have the flexibility to do that now.
That's the good luck.
Thank you Jack.
Our next question comes from the Carl Reichardt with the T. I G and line is open and thanks. Good morning, everybody lots of Amgen and Carl Good morning, Sheryl. Thank you for for AR and.
And the type of today.
I wouldn't just short term question can you talk a little bit about our pricing power or sales performance by product segment and the talk a little bit of maybe about how the entry level move up and active adult flash moved down performed during this quarter are you seeing more pricing power and taken that's outside of the entry level.
And and how sales for per segment.
And we are and to your point, we are have a number of strategies across markets and consumer set and they you know they can defer within the market from from community. The community. Karl we really are seeing pricing strength across each of the segments.
So and really across.
All of geographies with very few exceptions and why.
And I look across the portfolio, we have something like 85% to 90% Carl of our communities that we would have deployed either some sort of sales cap.
By month, you know limited release says level of very controlling and make sure that we can manage that pace with production.
And with each of those limitations comes additional pricing opportunity.
You know when I look across things like our Prequalification and.
Those are up significantly 35, 40% from week over week.
And we're seeing that and each of the consumers.
And we talk and the last quarter about beginning to see some real nice traction on the active adult and returning and I would tell you that full stop and we actually saw a tremendous year over year sales and the active adult when I look at the Florida communities, great strength, when I look at our first and.
And move up communities, that's probably where we also have probably and some of the highest pricing power.
And as I said in my prepared remarks with that first type of tumor.
Theres some pricing power, we just need to be very mindful of also keeping an eye on affordability and making sure that you know we don't price consumers out.
Okay. Thank you for that true and then the bigger picture question and you talked about.
<unk> up to closer to peer average and keeps us sort of the.
The center of Aro <unk> next.
The next year or so.
Longer term, what do you have a long tomorrow.
The target that you see.
And can produce and that sort of the inherent basis and optimization and and and it.
If so.
What are the what's in your mind, the the lowest hanging fruit to improve returns out of the strategies and tactics that you outlined.
Yeah.
So I'll jump in on that and I'm sure Sheryl will add and there Carl.
Returns are a little bit of a moving target just based on market conditions I would say if you take the kind of the study and that we see today.
Ideally we would be in the high teens over the next couple of years, and then expand expand from there, but as market changes that could either increase or decrease that obviously of the balance that with our ability to continue to reinvest and land and development, but as we also talked about we're exploring.
Current ways to light and the balance sheet, which should hopefully free up cash and we can put to use to drive returns, even further and I agree and Dave I think you I wouldn't point to just one and Carl I think you have to look across the board we have the opportunities on the balance sheet on the land side, we absolutely as we've articulated hopefully clearly and the prepared.
Remarks, we also have it on the operational side, so we're going to get it from everywhere and I think you'll see that focus continue I do want to go back if it's OK Corral and just kind of double down on some of the affordability factors because I know, there's so much noise out there around affordability and especially at the first time buyer, so interestingly enough the Texas.
And pretty hard looks at you know the buying power of the consumer has today for says you know one year ago and just looking at the interest rates are consumers have you now properly.
A 15% improvement on the same E. S. P on their monthly mortgage payment and at the more affordable levels, that's very very important and when I take an average 300000 dollar house just looking at the interest rates gives our customers something about $60000 of additional buying power.
Which honestly, they're not taking advantage of because of stat that I share with you.
And these guys all the time is how much room, our consumers have and their ability.
To you know look at either interest rates or overall price and on our conforming our conventional loans our customers have still over 700 basis points. When I look of what they're qualifying work versus what they're buying and on FHA over 500 basis point, So theres still of.
A lot of room from the consumer standpoint, and we can talk about the emotional piece of that and say and they may not want from extra ourselves out, but we still have some runway.
Great. Thank you so much for that color Sheryl thanks al. Thank.
Thank you.
And our next question comes from Matthew Bouley with Barclays. Your line is open.
Good morning.
And I wanted to ask about some of the scale benefits, you're seeing and those markets, where you overlap and and scaled up with William Lyon, Sheryl you spoke quite a bit about it and your opening remarks, certainly the the synergies I guess capture some of the discrete parts of that but I'm curious if you're starting to see the other Ben.
And if it's a scale better.
Maybe less of immediately discrete or are you finding more access to land maybe it's some of these new land financing vehicles that you're speaking about a part of that something else going on with cost control I guess, what else are you seeing or expecting beyond the synergies. Thank you.
Thank you, it's really all of the above I mean, I I believe that our land teams have always had great access to land and it's really about those relationships and each and every market and through the cycle. We make sure we always invest in our land teams because you can't go to market. You know just when you think you want it and so I think that's.
And I always been there but of course the larger you are the bigger of the player and puts you in a position to be able to look at larger assets, maybe look of different kinds of partnerships. We just had a very unique opportunity and.
And in auction here, and Arizona, where we partnered with another large builder and overcame some and they're very significant partnership. So it would be naive to say that that doesn't exist at the land market and what youre seeing and really what was I think obvious and Dave's prepared comments on the margin is both the synergies and we.
Talk a lot about the synergies of the new acquired business, but when you do something and combination of Avi and William Lyon and you actually have to look at the benefit of provide the legacy Taylor Morrison M units as well so we're really starting to see the benefit and recognizing that we are just now really.
Looking at new William Lyon production units that are going to start coming through the P&L because the you know all of last year. It was really about earning off of our existing and been their existing inventory. So we're going to see and at the national level and we're gonna stay at the local level from the purchasing power, we're absolutely going to see it and the land market and then you can.
Can't you have to look at all the ancillary benefits of your marketing dollars and what those are doing for you and your and your team synergies it's across the business.
And maybe going back to the cost side as Sheryl said, we're able to double down a little bit because we're looking at the total scale of the organization, especially at national and regional level and and that's really important, especially in more challenging times created by the pandemic and now we're seeing about increased demand and that just gives you a lot more cloud when you're out and talk.
And to your your suppliers and your trades as far as getting access to material and that can't be overlooked as well and that's a really important piece, Dave I mean in today's environment. The trace can go anywhere they want and today.
They have to want to come to our job sites.
Okay got it no that's really helpful color. Thank you both.
Second one I asked the ask back on the pricing side, just because of the order a S. P of 527000.
It's just such a larger number of compared to where you're closing prices are and I don't know if you're.
Yes, youre not guiding on closing Isps, but.
Any commentary on like for like versus mix and then just you know kind of how we can think about closing asps and 'twenty, one and in light of where you're selling today.
Okay.
Yeah, I think from a modeling perspective, where we are it's probably going to be somewhere and the $5 10 range from of closing perspective for 'twenty one.
We definitely continue to see the price and as you mentioned you see it and the new orders coming through some of that is going to be partially offset by mix, though as we move through the year ultimately it'll just be determined based on the strength of demand as we move through the year, but for five to 10 range is what we're thinking right now.
Perfect. Thank you Dave.
Thank you. Our next question comes from Ivy Zelman with Zelman and Associates. Your line is open.
Thanks, guys.
Congratulations on a great year, Sheryl, maybe you can dig in a little for us and I'm looking at your footprint when.
And when you look at buyers that have come from out of state have you measured where they are where that level is today.
We've seen a lot of as we call the great American shuffle, continuing and.
Where it compare whereas it where it compared to prior periods have you do you guys track that and that's my first question.
Yeah of course, we do Ivy, it's a great question and so I appreciate you asking it.
Talking to the divisions and just looking at the data that's been coming through of month over month I would tell you. The most significant shift I'm, saying and many of our markets and I would put Arizona.
Colorado, Nevada, and Texas at the top of the list is the disproportionate amount of California and migration.
And places like Las Vegas that could be 60% to 70% of our traffic.
And what's really interesting is when you think of that combine that with your pricing discussion IV and.
And you know as you're seeing these kind of pricing ramp up I'll take a market like Las Vegas, it's a little bit of sticker shock to the local consumer but for the California, It's actually still very very affordable to the California.
And so we're seeing a great deal of California traffic when I go to the East coast. The good news that we talked about we hoped we would see and at the end of last quarter is we're actually seeing the same traffic challenge and are active.
Yeah can you just sorry for that that 60 per cent of the traffic and and in Las Vegas as compare to how does that compare the history.
Yeah.
And that I'd have to dig into that one item the only because lots of this is our first year and Nevada, If I think about my history and Nevada.
Or you could take tax, yes, maybe take Texas ticket take Eddie market and just give us a relative comparison to prior my cash.
And scheme and how significant it is.
Yeah. My my strong gut would tell me that we're seeing probably of California penetration of double of what we've seen in the past and but then anything different than that and I'll get back to you, but I can look of traffic and sales and king of a tremendous penetration and boats.
I mean, it's just the startling number and then the Guinea autos when I learned GAAP taxes, we're starting to see just a greater out of state penetration and when I look at Florida, We're seeing the act of adult return from those Midwestern markets. The East coast market and New Jersey, you know where people can sell their houses and New York.
So we are starting to see a normalization and those traffic patterns.
No that's very helpful and any detail maybe post call on more specifics on the market migration should be helpful. So share. When you guys spend of 1 billion for on land I'm not sure of how much of that was an actual rolla.
Of all land versus finished lots, but just thinking about when we look at your assumptions in your underwriting are you assuming the current absorption pace, you're using today and todays prices and do you see risk that.
All of the input costs that are rising the gross margins just because of your more conservative underwriting are going to be lower than where you are right now in backlog and.
When you actually develop that land or build on those lots.
Yeah now another good question Ivy. So first thing I would share is that if I look at our 'twenty and 'twenty impact our 2020 span it's probably in the first year that we've actually spent more on development and acquisition.
And we've been cloud, maybe 45 55, but we were actually higher on the development side and 'twenty 'twenty, one and I look at 'twenty, one and I look at the $2 billion that Dave talked about that's probably going to be 50 50. So it gives you some confidence that we'll be developing land that we've had for some time and that's up from the historical which was true.
60 per cent land yeah.
Mark it's of Mark shift, especially at these numbers right, but then if you look at our underwriting and and.
Another really important topic.
Because of that you know we're in a unique place today, but first I would tell you that we're maintaining our long term strategy around location.
And there's a lot of moving out to the fringe and we'll put our toe in there and we will structure some deal and very purposefully we're going to be very careful at what level of our portfolio of finds its way out there because when things do slow down our win.
And when interest rates move those will be the places most affected.
We're going to retain our strong processes and approvals no appreciation and our underwriting and we're back and a place for we're doing a lot of kind of hedging.
And with sensitivities and well both around cost and pace and price because if we were to take today's.
You know price and pace of assumptions that would be the way to put yourselves and future harms way when I look at our 'twenty and 'twenty underwriting interestingly enough and I compare it over the last 10 years, our land residual is actually lower in 'twenty and 'twenty than our 10 year average and you can say once again.
And you know maybe that's because prices have moved but that time for the whole of course of the year before we really started seeing that depreciation and so I actually feel real good about that.
And their duration of the land and we brought in and and improved and 'twenty 'twenty is slightly higher and <unk>.
Maybe a month or two on our 10 year average of once again when you look at the approvals covering 40% being controlled that also hedges aren't bad.
And about 80% of the land, we approved in 'twenty and 'twenty was raw.
And when I look at once again across just overall the last 10 years, both our return and margin expectations are higher than we've seen in the number of years.
I think price is a larger conversation IV and once again and that's why the sensitivities play such a key role and what our land teams do is really ground and their cell phone and the forecast. So if you have a forecast that you've submitted at certain pace for price expectations, we're not going to do new underwriting it too.
20% higher 10% higher of either.
So hopefully that helps.
Yeah, I guess just more directly if you don't if you could just thinking about you know what would be getting delivered in this period and in 'twenty two based on what you bought land in 'twenty will.
Will the margins be sustained where you have margins and backlog right now or assuming no no future price increases.
Yeah I mean.
If you want to talk specifically in the 'twenty two I would expect that our margin should move with the market and given the pricing power I would expect slightly higher if nothing stable because and I would expect our pricing power to be offset by cost pressures. So I would say same or better yes, I agree with that from the margin perspective there.
Things that we've put in place and Q4 of 'twenty I read it.
Just given the production cycle times by the time, those closing and start to come out they're going to be more late 'twenty, one and then definitely into 'twenty two so that additional scaling.
And the benefit we get from scale will continue to come through at least through 2022, and you think about your 'twenty two closings of Ivy you know a good chunk of that land is 19 land.
And I articulated in the comment we feel we have nice runway both on the margin and the return profile for the for a number of years ahead.
Good good luck guys. Thanks, so much for your answers to free cash.
Yes.
Our next question comes from Michael Rehaut with Jpmorgan. Your line is open.
Thanks, Good morning, everyone.
The first question I had.
And what forget.
Veterans day.
For Sheryl.
And Dave you know what.
And you talk about in the prepared remarks at the beginning of the opportunities.
And to improve on the operational side and on the margin side you know what.
And I and I believe you kind of put it in a two year timeframe. So you know talking about between now and the end of 'twenty two.
And you know what that can mean.
You know in terms of the.
Amount of improvement that debt.
Looking at and particularly I'm thinking about the the gross margins here, which are kind of at the lower end of our universe range, the guiding to about 19% which is obviously.
The great improvement off of 'twenty.
And.
But a lot of that is the purchase accounting and burning off and any gains you're still talking about the lower and so you know I was hoping to get a little more quantification in terms of where that 19%.
Specifically could be over the next few years and I know that you are looking at many different facets and also of balance sheet and and you underwrite to returns, but you know when you talk about the operational improvements and I was hoping to get better clarity in terms of and maybe the top two or three.
Buckets or areas and and what that can mean.
From a margin standpoint.
Sure Mike.
Let me jump in and Sheryl I'm sure will add.
You know it is hard to say, what the margin rate will actually be and.
And the future you take something just like pricing the dynamic around pricing and some of the cost increase for seeing that makes it hard so I'm going to look at it relative to our peer set I would tell you that we are where we want to be from of scale perspective, now and our focus is maximizing our margins through operational excellence, maybe a couple of the big buckets for.
That is definitely on the cost side. So again, we're beating the drum on this the advantage that we get from a cost side with the larger scale.
We've done a lot of that work and in 'twenty and it will come through in 'twenty, one and 22, various other things, where we can simple by our process.
To help take cost further out that's a large focus of us. So I look at where we want our margin to be we expect to be.
Amongst the top performers and our industry, that's where we're focused especially from a return perspective, but we know that we have.
The GAAP to close on margins and we have the plans in place to do just that but it will take us a couple of years, yeah and I.
I think that's right, Dave and I pile on that just a couple of things Michael you know when you do acquisitions the size of and a V and the William Lyon I mean, I'm sure you remember that was entered into the portfolio at a much lower margin rate and you've got you know tens of thousands of lot and you can never change your base.
For some of those lot. So all of the things that we do and those first few years and you've seen it with our smaller acquisitions I can go back and.
And take you to Atlanta, or Charlotte, where we bought the shingle market acquisitions, and Michael and it's two or three years before you really see the traction because first you have to you know start with your products, who youre kind of get your some of your initial efficiencies really quick with and perfecting the product youre going to get you in.
National purchasing and <unk>.
Get the benefits of that scale, but you still have to burn through that land and where you really start to see the benefit is when you start bringing net new land into that market, which gets the benefit of all of those operational efficiencies. So it's the simplification that Dave talked about it to the national purchasing it's making sure of the plan lineup erratic.
And if you think about the timing on that and 19% margin or one year and so we're just really now kind of start to see our very first closings from William Lyon and that we built and we're a year and on a D. A.
And that's why when I look kind of to eat well I mean of year in and beyond that line of 100% of our own new starch that would be built started refine and built on the Taylor Morrison.
And so when I look at like I said other markets, where we've done you know Orleans or Atlanta businesses over a two to four year period, and we've improved those margins by hundreds of basis points. So yeah, I know, where we are I'm very delighted with the 240 basis point improvement year over year from 19 to 12.
One of 20 to 21 that we're expecting and I think you'll see M continued runway from there and I think when you look at.
And for Us for our East region, primarily impacted by AAV.
William Lyon and.
And that number and you can see quarter by quarter of the progress.
And on those margins and and we actually continue to still expect of more progress from here as well, so and just kind of to me it helps articulate Charles' point.
That you know after a couple of years, you really start to see the benefit not necessarily and the first 12 months.
For the long game Okay.
I appreciate it.
Hum.
And secondly, I wanted to switch gears to the sales pace and you know you mentioned debt.
No your meter and sales right now and I believe you said $85 95 per cent of the community.
You know when you look at your sales pace again, I guess compared to.
The P.
Peer set.
And you know you're out of point in the back half of you know doing three and a half of plus or minus per month.
That's pretty reasonable.
And it gets very much foots with your quarterly.
Certainly you could certainly of.
For Rami and a lot part of and other peers have done so.
So kind of looking at 2021.
How would you characterize your ability to hold on to the current sales pace that you have and others are facing obviously very tough comps.
And when they look into the back half of the year, but you know to the extent that you're kind of under the.
Well you're clearly.
Neither of the idea just wanted to get us the if you could give us the review.
And what you think you could do in terms of sales per month.
On average for 'twenty, one and you know if you.
You can kind of hold on to this mid threes level throughout the year given that demand hasnt really fallen off at all.
Yeah, and there was a lot and there Michael.
My best shot.
And because theres a lot that goes into that right and you have a different strategy on every asset and its hard you know I. Appreciate your comments about the peer group, but we all have various product profiles different price point and so it's hard to look at those sort of compare.
And I look at our sales pace and Q4.
Fair for the strong.
If you think about how this has run over the last few years, you're seeing you know 40, and 50% and sales pace. When I look of January our sales rate was very strong and very pleased with the performance.
It's stronger than what we saw in the fourth quarter and it came out the gate.
January and second I mean, the demand is out there. So right now we're balancing that pay for even with stripping release says and capping sales were running higher paces I'm gonna balance that at some level. There is a direct correlation Michael as I saw more I can't just replace that community count.
So that's why you see some volatility and the community count numbers. So I feel very good about our ability to retain and the paces that we saw and and the back half of last year, but at the same time make sure that I don't let it get ahead of ourselves and we understand what those homes are going and caused us to bill.
And we'll continue to manage that down to the asset level.
It's a different business today than what you saw 123 years ago, Michael I mean, obviously when you look at the percentage of our more affordable product for running those of different paces and we're running those harder. So I think the paces that you've seen these last few quarters is more indicative of where you'll see us go and the future.
Yeah.
Great. Thanks, so much.
Thank you have a good one.
Our next question comes from Jay Mccanless with Wedbush. Your line is open.
Hey, good morning, Thanks for taking my questions.
The first one and and I think I'll touch on this a little bit, but it sounds like the mix and the backlog and potentially the mix of the communities going forward, there's going to be a little more heavier weighted towards move up could you talk about what your split is now between move up active adult and the first time and where do you think that's going to evolve through the year.
Yeah.
I don't really expect Jay.
A marked difference I mean, if you look at our sales of orders.
M in 'twenty and 'twenty you know it was about a third of entry level.
You know probably a quarter of active adult.
And those would be your specified active adult 55, plus branded communities lifestyle communities and then the balances that first and second time move up you know theres a lot of Blurriness between that first time move up and that first time buyer because the worst thing.
Much more kind of financially capable of kind of waiting longer first time buyer.
So I would expect you'll see that blend generally continue.
Okay and it sounds great and then my other question.
And then and I apologize I got disconnected during the call, but can you talk about some of these new land financing ventures, and what type of impact you're going to expect that to have on gross margin.
And you know you always we are always looking at ways to enhance our performance and minimize the balance sheet impacts and we're working on a number of strategies to do just that you know as I'm sure. You know Jay we have a very you know quite of few different relationships on the JV side land sellers.
With the absolute goal of the light and the balance sheet enhance returns and mitigate risk at this point and the cycle.
Theres a few things we're working on and I'll be excited to share with you over the next couple of quarters.
What I'd add is these kind of arrangements typically put pressure on margins, but for everything that we've talked about regarding our operational enhancements. We think we're going to be able to offset that but this is definitely prioritizing cash and returns I had a margin that said, we still believe we can drive accretive margins from where we are right now.
Sounds great. Thanks for taking my questions.
Thank you.
Our next question comes from Mike Dahl with RBC capital markets. Your line is open.
Hi, Thanks for fitting me in and I appreciate the color so far.
Sheryl Dave I wanted to go back with my first question to kind of the.
The pace, but also kind of the community count and and Lam discussion and.
And definitely a big advocate for the returns focus but the play Devil's advocate if you look at your peer.
Peer group and there has been a lot of reinvestment and land there are tough comps across the industry.
I think your peers are still largely speaking expecting some return to growth.
And community count, even while improving margins by the end of call. It this year and maybe early next year.
And you guys have spent money on land and you've talked about the acceleration and spend so I wanted to ask is there some sort of organized the organizational constraint.
And that's different for you than than your peer group is that your development mix of Tau.
Or is it the is it that you're being more disciplined.
Staying close to the core versus going out to the fringes just any more color you can give on what.
To me it seems to be a bit of the disconnect on the growth path there.
Yeah.
And I, probably see it exactly the same way and Michael as far as the disconnect. I think you know right now of land and the markets I think everyone's out there spending and at the competitive market, we are going to stay disciplined and our underwriting and as I've talked about we'll retain our strategy of you know how far and the peripheral will go.
We think that makes great sense as you go through the.
Kind of of the full cycle, you know, having said that there might be a couple of things that if I look at some of the assets you know with William Lyon that we've opted not to move forward on.
But on the margin not not real different we have a good appetite for new land, having said that we're going to underwrite it the right way.
We have sold at a much faster pace and we're not going to be able to replace those communities.
And he quicker.
But no I wouldn't say, there's any inherent differences in the structure the.
And the financing of.
Of our land acquisition, and I think and the prepared remarks, we mentioned we're opening about 150 new communities. So we're focused on that are shipping and the development dollars Sheryl mentioned earlier 50 50 towards development.
This is as much to do with the fact that we are selling through faster coupled with I think there are some.
Industry constraints with municipalities.
And the like as far as bringing in the communities openings.
It's harder to accelerate those and we all have those and we yes.
And I'll have that challenge yeah.
But think about the pace over two years.
And Mike we've gone from running you know something in the low twos to something in the mid threes at a significant pace and you're just not going to replace those.
At that same speed.
Right, Okay makes sense and certainly I mean understand the entire industries seem.
Similar issues and maybe.
The comps from others and upcoming and closer to yours, as well and and in terms of and the I'm seeing some more pressure than what some current expectations are.
I guess just as of as a follow up to that is the expectation is to maintain pace around the mid threes, which makes sense given your mix and current trends as we kind of look forward I know youre not giving specific guide around 22, but conceptually.
And once we hit a point, where absorptions flatten out.
And.
And there's not community count growth until later next year should we expect 22 to be more of a plateau year. When we're thinking about revenues, maybe theres a little lift from the asps, but from a volume standpoint potentially of cueto and closings.
Yeah.
Yes, Mike It's a good question I mean I think for.
First I don't think Youll see a plateau on the revenue dollars because I think we'll continue to see pricing power.
But from a community count standpoint, as we mentioned.
Based on our current pace expectations, we'll see a little bit of growth and 22, but more so that inflection and 'twenty three.
And beyond what we expect for this year, that's obviously going to put a little incremental pressure on community count going forward, but we'll just have to adjust and adapt to that but I would assume that that's happening the man's good and pricing remained strong which should hopefully lead to our margin story of continuing to see margin accretion.
And I mean, working and continue to pace, Mike The way, we are and you know, we'll make the decision asset by asset if we let it run harder given the market condition and wanting to take people out of the market, but outside of running the machine faster.
And putting like Dave said, some timing pressure I don't see at the plateau.
Okay.
Got it thank you.
Thank you our last question comes from Alex Barron with housing Research Center of your line is open.
Yeah. Thank you.
So I guess over the last couple of years you guys.
And doubled your size through the JV homes, and the William Lyon and acquisitions.
And I'm kind of wondering you know going forward.
Are you still open to more M&A for US is the focus going to be more on organic growth.
You know today, Alex I would tell you, where we are head down and we're going to make sure that we operationalize. This act. These last two large acquisitions and fully get the benefit of the dollars we spend coming through the business.
And you never say never but it's it's not something we're spending time on today. So we can talk about the future of that gets here, but right now we are.
Appropriately busy on making sure that and focused on making sure that we get the benefit of.
The scale that we integrate our teams I mean I'm looking for it to the day, where I get to bring the William Lyon team members back to work because we sent them home almost immediately after the acquisition.
And so now what we're pretty busy with what we're on and and as Dave said, we've got about $2 billion of organic growth plan for 'twenty 'twenty, one and about half of that is new land and about half of that is developing the land and we've been acquiring over the last couple of years.
Okay. Thanks, and on the share repurchases I think you guys. Just mentioned you were going to do that but is that going to be more systematic or just more opportunistic.
Oh, you know we've been very consistent over the last many years.
Buying back stock, but it's been at varying levels.
And it's because we try to be a bit more opportunistic, but we do see that M.
As a critical component of our plan to continue to drive rich.
The returns higher.
Okay, great well best of luck. Thank you.
Thank you.
Thank you. This concludes the question the answer session I would now like to turn the call back of the Sheryl Palmer for closing remarks.
Well. Thank you really appreciate everyone joining us for our wrap up for 'twenty and 'twenty.
Excited about 'twenty and 'twenty, one brings and look forward to speaking to you next quarter and take care of yourself.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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And then.
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