Q2 2021 Taylor Morrison Home Corp Earnings Call
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Thank you for standing by the second quarter 2021, Taylor Morrison Home Corp earnings Conference call will be get into approximately 2 minutes. Thank you for your patience and please continue the standby.
And then.
And then.
And Oh.
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Good morning, and welcomed the Taylor Morrison.
And second quarter 2021 earnings conference call.
Currently all participants are in a listen only mode.
Later, we will conduct the 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 Mackenzie Aron Vice President.
Investor Relations. Please go ahead.
Thank you and good morning, I am joined today by Sheryl Palmer, Chairman and Chief Executive Officer, and Dave Cone Executive Vice President and Chief Financial Officer.
Sheryl will provide an overview of our performance and strategic priorities while Dave.
Dave will share of the highlights of our financial results after which we will be happy to take your questions.
And the interest of time, we ask that you. Please limit yourself to 1 question and 1 follow up.
Today's call, including the question and answer session includes forward looking statements that are subject to the safe Harbor statement.
And of.
And your information that you will find and today's earnings release, which is available on the Investor relations portion of our website.
And.
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These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations.
<unk> production.
These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the SEC and we do not undertake any obligation to update our forward looking statements.
In addition, we will refer to certain non-GAAP financial measures on the call, which I reconcile.
And for the GAAP figures.
Now, let me turn the call over to Sheryl.
Thank you Mackenzie and good morning, everyone. We appreciate you joining us today and I sincerely hope each of you are doing well.
We'll start today's call with the brief overview of our second quarter results and then spend some time discussing.
And our strategic focus on driving long term sustainable improvement and our earnings potential into 2020, 2 as well as our view on the market.
During the quarter, we delivered 3268 home.
And at an average sales price of 503000, driving a 12% year over.
Of your increase in our home closings revenue to $1.6 billion.
While a few of our second quarter closings were slightly delayed by weather and supply chain interruptions and some of our markets. We remain committed to our prior full year guidance of 14005 hundred to 15000 clubs towns.
Our home closings.
And with gross margin improved 370 basis point year over year to 19, 1% exceeding our prior guidance and setting the stage for further improvement in the quarters ahead.
From a demand perspective as the market remain favorable, particularly in April and May with some normalization in June.
Close drove strong pricing power across our markets and the 23 per cent year over year increase and our monthly absorption pace of 3 point for net sales per community.
Each of our consumer groups experienced year over year growth and sales paces led by outperformance among active adult buyers, who are notably re engaged.
And the market and responding well to the recent national expansion of our Premier lifestyle brand Esplanade.
However, we intentionally and limited our sales releases and delayed the release of spec homes until later in the construction cycle to maximize our gross margin and navigate the tight supply side governors on housing as.
We build true our record backlog of over 10200 sold home.
And anticipation of a long gating cycle times, and constrained labor and material availability, we intentionally accelerated our construction cadence and successfully increased our monthly protection pace by 140% year over.
And 17% sequentially to a record for 8 starts per community during the quarter.
This left us with all of the starts and the ground necessary for full year of closings target and we are proactively working to stay ahead of further supply challenges through the remainder of the year.
And the.
Every year, we continue to make progress towards further streamlining of our operations, leveraging our leading market position and expanding our land pine Ensing tools.
For the latter point I am pleased that we recently finalized new land financing vehicles that will enable us to cost effectively increase our option land.
And lastly to at least 40% within the next 18 months.
These and these arrangements and prove the capital efficiency of our land portfolio and reduce risk while enhancing our returns without any meaningful change to our long term gross margin opportunity.
This focus.
And positional efficiency is 1 pillar of our strategic playbook, which also includes operational excellence and customer experience.
By focusing on these 3 strategic pillars, we're committed to taking full advantage of our competitive strength after gaining the scale product portfolio and team capable of generating attractive.
And on Cat long term returns for our shareholders.
These efforts are gaining traction and will drive notable gains and our operating metrics beginning in the second half of the year. This is consistent with our original timeline. Following the acquisition of William Lyon homes last year as we have now established our new consolidated cost.
<unk> of where and paved the way for further operational leverage and the quarters ahead.
With 6 homebuilder acquisitions completed in the past 7 years, we have a proven track record of acquiring underperforming companies and driving significant improvement and their financial performance by applying.
Strict strategic playbook.
As we have shared in the past it takes approximately 18 months before the benefits of the sizable acquisition can be recognized and our financial results.
To give you a sense of the magnitude and looking at the markets impacted by our acquisition of a b homes and late 2018, we have improved gross margin.
<unk> are so for 500 basis points to an average level that is more than 100 basis points stronger than the overall company since early last year, when our new starts and operational improvement began to take effect on a similar net we have also seen notable improvement and cycle times and returns and each of those markets driven by.
And as by amplification and scale achieved after our integration efforts.
Because of similar progress with our William Lyon acquisition as we approach the critical 18 month Mark since that deal is closing, we now expect to deliver a full year of home closings gross margin and the high 19 to 20 per cent range. This.
This year.
The strength is expected to continue in 2020, 2 and based on the composition of our sold homes and backlog and confidence and the operational enhancements and synergies of our combined business, we expect to generate of home closings gross margin of approximately 22% next year.
Combined.
By the set of our focus on optimizing our balance sheet and cash flows. This margin improvement is expected to drive of return on equity and the high teens range. This year, followed by further improvement to an ROE of over 20% in 2022.
Both of which would mark new company highs.
Bind with would represent an improvement from <unk> of 10% and 2019, and 8% and 2020 as we have quickly and meaningfully pull through of the benefits of our acquisition and strategic initiatives that have transformed our ability to compete effectively and generate long term value.
We believe.
This positive momentum warrants significant multiple expansion from our current stock valuation, which in our view does not appropriately accounts for our attractive and improving earnings and returns.
Accordingly, we more than doubled our share repurchase to of $107 million during the quarter to buy back 3.8 million shares outstanding.
<unk> and expect to continue to utilize share buybacks to opportunistically return excess capital to our shareholders and further enhance our returns.
Now I'd like to spend some time discussing the operational enhancements underway that support this outlook after multiple large acquisitions that propelled us into a top 5.
Homebuilder last year, we have a renewed opportunity to double down on our core focus of operational excellence, especially within our newer markets to fully capture the benefits of scalable production oriented home building across our entire portfolio by streamlining and simplifying our business.
To that and our.
We're working closely to optimize our floor plan and option offerings from the combined business and pursue cost rationalization and value engineering opportunities.
To further accelerate these goals, we recently hired of National Senior leader focused on product design that brings over 35 years of residential construction and engineering experience.
And to enhance our product portfolio for improved construction efficiency and consumer appeal by.
And by identifying the most efficient and profitable plant and Skus, we can drive lower cost faster cycle times and streamline our trade partners schedules.
In addition, our purchasing team.
And is working closely with our operators and supply partners to maximize our buying power and secure product availability and find solutions and today's supply constrained market.
And they also continue to push ahead on evaluating our material contracts supporting SKU rationalization and improving our purchasing processes to reduce.
Production costs.
During the quarter. We also completed the rollout of our standardized design packages known as canvas to all our divisions and achieved our goal of implementing them as the template for all spec homes as well as many of our model homes going forward.
These canvas pallets are curated.
Aided by interior designers using features with the highest take rates margins and product availability to offer our customers a compelling value and easier design experience.
In addition, these packages and improve supply chain visibility increase expected home closings gross margin and reduce.
The anticipated construction timelines.
Early pilot markets results indicate more than a 2 week cycle time advantage compared to our non canvas homes, even in today's unique market.
Given the many benefits of this package approach design options as a notable shift away from our traditional.
Same center model that we envisioned becoming the norm for a significant portion of our sales including to be built homes, especially within the first time and first move up consumer groups.
This evolution and our option strategy is just 1 way and which we are harnessing our scale to create a more efficient predictable and.
And profitable business.
Amid today's favorable market conditions. We are also leveraging our strategic sales tools to maximize our topline growth as evidenced by the 32% year over year increase and our average order price to 597000.
The strong growth.
And was also partly a function of favorable mix driven by a 50 plus lifestyle buyers and our strategic emphasis on lot premiums, which have more than doubled unsold homes and our 'twenty 2 backlog.
To balance pace and price, we have raised base pricing and nearly all of our communities limited sales.
And he says and selectively employed competitive bidding processes that drove these higher lot premiums.
Looking forward and while we continue to see pricing opportunity across our markets. We are cognizant of the impact of higher prices on buyer sentiment and affordability and expect Mark.
Right now mix, including the pace of price inflation to return to more sustainable levels in the coming months.
With this in mind, we have been thoughtful on our pricing strategies to protect the long term value of our communities and maintain affordability by using our strategic selling processes tailored to each neighborhoods price point.
Good day on lifecycle.
And if you have heard me share before 1 way and which we gauge our consumers' financial ability to withstand higher pricing on interest rates is by monitoring of the spread between the actual interest rate of our buyers financed by Taylor Morrison home funding and the maximum rate they.
And qualified with all else being equal.
The spread was roughly stable sequentially at approximately 700 basis points for conventional buyers and 500 basis points for FHA buyers.
Average ltvs and debt to income ratios and credit scores were also stable at very.
They could of the levels on a sequential and year over year basis for our borrowers.
Other metrics, we monitor for buyer of affordable affordability also remained healthy for.
For example of the square footage of sold homes increased sequentially and the second quarter and is poised to increase further in.
And the back half of the year based on our backlog and other words, our buyers are choosing to spend more to buy bigger homes that meet their needs and another strong sign of financial health and confidence.
Yeah.
And lastly, while much attention has been given to the impact of out of.
Very hires on local affordability, we expect favorable migration and demographic trends to continue to support healthy demand and pricing in markets, such as Austin, and southwest, Florida, which have long been attractive destinations for their employment and lifestyle opportunities and.
In fact in recent months we.
Stapling further acceleration and the share of out of state shoppers and buyers from California, and our Texas, and Nevada markets as well as northeast consumers in the southeast and Florida.
And these markets the share of these out of state buyers is back or above pre COVID-19 levels and not showing any signs.
And of reversing.
Now, let me turn the call over to Dave for his financial review.
Thanks, Sheryl and good morning, everyone.
Before diving into this quarter's financial performance.
And I take a moment to address the recent announcement of bought my upcoming retirement and.
After nearly a decade of Taylor Morrison and were joking.
And at our IPO.
Homebuilder acquisitions, and the exit of our Canadian operations and.
So much more not the least of which has been the wife and relationships and friendships I've been fortunate to develop with our team members and partners.
Colleagues and the industry and investors.
Out of position to step back.
For my professional career.
And more time with my family and on philanthropic interests.
While I will greatly miss of the people and culture of Taylor Morrison, which are second to none.
And I am confident and I will be leaving the company well positioned for future success, and I'm committed to ensuring a seamless transition to my successor.
The search process is well underway as we seek the strongest candidate to help lead the company and its next chapter.
Until then I will be here working closely with Sheryl and our teams as we head into the second half of the year, which I believe we will deliver the strong financial results, we have been striving toward.
Now, let me turn to the details.
The second quarter results.
We generated net income of 124 million or of 95 per diluted share.
Compared to the second quarter of 2020, this was up 90% on a GAAP basis and 19% on an adjusted basis. After excluding the impacts of our acquisition of William Lyon homes and the prior year period.
Sales of our the quarter net sales orders toward the totaled 3422, which was roughly flat year over year, while our monthly absorption pace increased 23% year over year to $3 for net sales orders per community.
As Sheryl described we manage activity to maximize our margin opportunity by limiting the release.
Lease of SEC homes later and the construction cycle.
And built for a record backlog.
At quarter end. This backlog was 10228 homes, representing a sales value of $5.7 billion up 78% year over year.
Our cancellation rate was 5.2% and.
The time company low that reflects the strength of our backlog and consumer quality.
Our average community count of 332 was consistent with our prior guidance.
Looking ahead. This metric is now expected to be approximately 330 to 335 and the third quarter as well as for the full year.
As we look out further and we anticipate double digit growth and our ending community count to the high 300 range in 2022.
Followed by a sharp inflection higher in 2023 based on our pipeline of new community openings and development timelines.
In addition, we continue to expect to open nearly 1.
150, new communities this year.
These new communities are spread across our portfolio and and scoops consumer groups led by gains and Phoenix, Austin, Sarasota, and Naples, which are among our highest margin contributors.
Turning to closings and the second quarter, we delivered 3268 homes.
With the strong acceleration and our starts pace to of $4.8 homes per community and our construction and purchasing teams close coordination with our trade partners and suppliers. We remain committed to delivering between 14005 hundred 15000 closed homes this year and 18% year over year increase at the midpoint.
This.
And this includes 3003 hundred to 3005 hundred homes and the third quarter.
Our home closings gross margin improved 370 basis points year over year to 19, 1% exceeding our prior guidance.
Building on this positive momentum and we anticipate our home closings gross margin to improve to about 20.
20% and the third quarter, and the low 21% range and the fourth quarter.
Yeah.
This will drive our full year gross margin to the high 19% to 20% range, which is ahead of our prior expectation and the low 19% range due to strong pricing trends and faster than anticipated traction of our operational.
And this guidance.
As Sheryl discussed and 2022, we expect to drive further margin improvement to approximately 22%.
This would represent gains of at least 200 basis points from our 2021 anticipated gross margin and approximately 540 basis points from 2020 due to benefits.
<unk> of our recent acquisitions.
Our SG&A as a percentage of home closings revenue was 10, 2% for.
For the full year, we continue to expect our SG&A to decline to the mid 9% range driven by cost leverage from the anticipated increase and our total revenue and overhead synergies from our enhanced scale.
Turning now to our land portfolio, we invested approximately $451 million and land acquisition and development and the second quarter and continue to expect our total land investment to be approximately 2 billion for this year.
Our land underwriting process remains disciplined to acquire land with attractive risk adjusted returns that are.
2 of our overall portfolio, where we see opportunities to drive profitable growth over a full housing cycle.
Because we are well subscribed in the near term the land acquisitions. We are of proving today are largely expected to impact deliveries in 2023 and beyond.
And the second quarter we.
The accrued approximately 3000 lots on a net sequential basis to our total supply of lots owned and controlled of 76000 home sites.
This represented 6 years of total supply of which $3.9 years was owned.
Approximately 35% of our lots of our controlled via options and other arrangements up from.
We added up 8% and the second quarter of 2020, even before the benefit of our recently finalized new land financing vehicles that Sheryl described earlier.
Quipped with these new land ventures, we expect to achieve an increase and our control share to at least 40% next year.
These new land financing vehicles.
Vehicles include more programmatic land banking for short dated holdings and a land venture for long dated parcels. These.
These tools offer another layer of sophistication to our existing asset light land strategy, such as joint ventures seller financing and project financing.
We will lead the execution of these new vehicles and.
And work closely with our local operating teams to identify of land opportunities, where such financing and provides the optimal risk adjusted cost of capital.
Turning now to our balance sheet, we ended the quarter with $1.1 billion of total liquidity, including $366 million of unrestricted cash and 755 million of available.
And on our 800 million revolving credit facility, which is undrawn outside of the normal course of letters of credit.
Additionally, at quarter, and our total spec inventory equaled $4.7 homes per community nearly all of which were under construction.
This was up from approximately 3 homes for.
Per community at the end of the first quarter going forward, we intend to balance our mix of to be built and spec homes as we deploy both strategies, depending on local market conditions and the price point of our diverse portfolio of communities.
Our net debt to capital ratio equaled, 45% based on our outlook for strong cash.
The <unk> generation, we continue to expect our net debt to capital ratio and to reach the low 30% range by year end followed by further deleveraging in 2022.
Lastly, as previously announced and the second quarter, our board of directors authorized an increase and our share repurchase authorization to 250 million.
Cash flow through the end of 2022.
On the quarter. The 107 million spent brought our cumulative share repurchases since 2015 to nearly $795 million or 33% of shares outstanding at an attractive average price of 2050.
At quarter.
And we had approximately $192 million remaining on our current repurchase authorization and expect to continue to be opportunistic given our compelling stock valuation.
With a strong operating cash flow outlook and excess of $600 million annually we.
We are well positioned to continue to invest and our business for profitable growth.
Further deleverage our balance sheet and return excess capital to our shareholders via share repurchases.
Now I'll turn the call back over to Sheryl.
Thank you, Dave and I'll wrap up by saying that we continue to expect 2021 to Mark an important inflection point and a multiyear journey to realize the operational and.
And financial advantages of our significant growth.
As I look ahead to the second half of the year and energized by our team's strong focus on achieving our operational priorities and delivering a record year at home closings for our buyers.
Our disciplined focus on managing sales paces controlling costs and ramping production.
<unk> is expected to drive strong improvement and our home closings and gross margin in the coming quarters and into 2020.2.
To summarize our outlook and the next 6 months, we expect to realize the significant pivot and our financial results highlighted by our expectation for at home.
And the things.
<unk> margin of approximately 22% in 2022.
This performance is expected to drive new record high returns on equity and the high teens percent range in 2021, followed by further accretion to over 20% and 2022, all while deleveraging our balance.
This growth of our strong cash flow, we firmly expect these results to set the stage for meaningful multiple expansion part of our stock's current discounted levels.
And as we've described the strong improvement is a function of the sustainable realization of operational synergies from our multiple acquisitions and are focused.
Sheet, when maximizing profitability through strategic selling and cost management strategies as we successfully execute our business plan.
In addition to our company specific opportunity. The housing market is supported by a long running mismatch between limited new construction supply and growing household formation.
Cash on hand, and evolving consumer needs.
We believe the size and breadth of our portfolio of serving first time buyers through luxury lifestyle consumers is well positioned to meet this demand in the coming years.
Lastly, I want to thank all of our team members and trade partners for their commitment to serving our organization and customers.
During today's unique market conditions. It is their effort and collaboration that will allow us to achieve our goals and I and endlessly thankful for their dedication.
Now I'd like to open the call for your questions. Operator, please provide our participants with instructions.
The ask a question.
So Thats Star then 1 with your question has the answer and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Carl Reichardt with <unk>. Your line is open.
Morning, everybody Taylor thanks.
Thanks for all of the detail and Dave you enjoy your retirement and congratulations Mike Earle Youre welcome.
And so the 22% gross margin guidance for next year.
Obviously your your guidance right now your backlog is on a 1500 units of your backlog would flow into next year or so.
As I as I can I can understand your land costs are going to be and what your stores are going to be what are you assuming.
And please on average selling price in terms of trend are you basically saying prices kind of flat today is similar communities open next year and we can get to this 22% or is there an assumption and price growth next year, that's embedded in that margin guidance.
Hi, Thanks for the question Carl No there would be no assumed price appreciation.
And our forward guidance you know the <unk>.
Market will determine price.
And I would tell you Carl that you know as we look to the next few months I would expect that we will still see some pockets of opportunity on to.
And to continue to move price is probably not as aggressively as you have seen.
<unk> seen over the last 6.8 months on but I think youll see some movement and more modest levels of.
But there's absolutely no appreciation assumed in the forward guide of truly a function of all of the things that we talked about and our prepared remarks and the same could be said Carl from a cost perspective, we're kind of looking at things everything being equal right now.
And obviously if there is movement on on price of that helps of its costs down and that helps.
And that's what's embedded in our backlog right now because it's what we're seeing from a price and cost perspective today.
Okay. Thank you for that and then on average order price for this quarter, which was which nearly 600000 and I think.
Phil You mentioned, there was a product mix shift towards active adult to some degree of could you expand on that I'm also assuming that that because the orders and the central region and sell that excess is less of a contributor which also sort of raise the average order price. So maybe just a little more detail on.
The question Karl I think it's better if you do.
Some of them mixed shift obviously with the central order volume, but when you look at our active adult or of 55 plus lifestyle buyer.
And you see the strength that we've seen if you look at the mix in the quarter I think the sales were something like 25 per cent. So that would be up a few hundred basis points, Carl and generally what we see with.
You have higher and higher lot premiums I think I mentioned that in my prepared remarks.
The options are generally 2 times, but we would see and the company average and as I look out on the backlog next year within our lifestyle communities. Their premiums are 2 times, but there are lot premiums of 2 times what.
With this we've seen this year are historically.
Now we have a act of adult President operating team, that's working with all of our markets. The bear on acceptance that we've seen and the ASP on the odds is really taking hold and we're really seeing great value creation. So excited about.
About this consumer set and as it continues to grow as a portion of our portfolio.
That's super helpful. Thanks, Sheryl Thanks, Dave here.
Our next question comes from Matthew Bouley with Barclays. Your line is open.
Hi, This is Ashley Kim on for Matt.
Okay.
My first question is just on the 22% gross margin guidance for next year on lumber specifically is that embedding a lump of tailwind or the lower leverage.
A lot.
Repeat the last of the embedding of lumber Oh, no no and really not some of it a moderation yeah.
Right now.
We still have costs that are flowing in.
Call, it 50% above where its trading and the market today.
I think we're going to see lumber peak Q3, Q4, it will hopefully start to come down and.
And 2022, but we're not embedding that and there yet yeah actually.
And to Dave's point, we're certainly not expecting the peak that we've seen.
But it's kind of early and to be of 100%, where the prices go where the cost goes next year. What we're really trying to do is lean and and give visibility of what we're showing in our backlog certainly through the first quarter and the opportunity that we see beyond that but 20.
So and that's something that we feel we can deliver despite some market movements. Obviously, we will see you got 6 more months to.
Get to all of the Q4 call of the firm it up and we can give you a little bit more information at that point.
Okay. That's helpful. And then can you comment on what else you're seeing that.
The 2% read on the buyer demand just given that the restriction on sales basis, obviously, not telling the whole picture.
I am so sorry, Ashley I missed part of the question can we give a read on what.
And just what youre seeing and buyer demand.
Given that the restriction on sales pace and telling the whole picture.
Yeah absolutely.
Ashley we're managing our sales programs, probably and 75% to 80% of our communities.
And it's still very strong by any historical standards.
I would actually call early in the year somewhat frenzy, the and today, a very healthy market with tremendous.
Event on but it is very difficult to paint a single brush across the U S. You need to look at the geographies and the consumer groups as we plan on our sales strategy community by community.
We saw paces up with all consumer groups for the quarter.
Despite the number of dynamics.
This moment, we've seen in the marketplace.
You know, we've seen a little seasonality I wouldnt say its typical.
And demand is stronger than generally what you would see in the summer months.
But we're seeing tremendous for summer travel.
And given you know everyone has felt somewhat.
Cage stop.
I would tell you the consumer.
As a bit fatigued after levels of lotteries and of that was that of and in the market. The hob of absorbing some of the price appreciation, but looking forward and certainly as we've entered into July and we continue to see very strong.
And that meant on me you know you might say.
Not have on a lottery and you might not have 50 people you might have 20 people, but still tremendous demand.
I would describe today as a.
The healthier place and a more sustainable environment for the consumer.
Strong for the company certainly for our trades to be able to deliver a good customer experience.
Thank you both I'll leave it there thank you.
Our next question comes from Truman Patterson with Wolfe Research Your line is open.
Thanks for this actually.
So the scheme.
And I was wondering on your gross margin improvement can you slice of that a little bit further and.
And maybe break out how much is coming from the William Lyon's synergies, how much is coming from correct.
Pricing dynamics and then how much is coming from the shift in <unk>.
The polls efficient construction processes.
Canvas.
So are you talking about the quarter margin or the guidance the.
Actually both of you could okay.
You know I'd say for Q2, that's really more around pricing power of the spec.
The spec homes that we were able to sell and close during the quarter.
And then obviously there definitely was a component of that where some of the William Lyon synergies were starting to take hold and all.
For the vast majority of that though is really going on we see a little bit more and in Q3.
And we were able to take our guidance up for.
For the year, just because we're seeing that coming in and a little bit maybe faster than we thought initially, but it's really going to be more. So in Q4 is kind of that true inflection point for us around the synergies truly taking the old plus the various actions that we've taken that we talked about and the prepared remarks.
That's the.
And the synergies from William Lyon.
Been at that improved cost structure.
Looking at floor plan rationalization and value engineering, which was especially focused on the William Lyon plans that allowed us to reduce costs without impacting the homes of aesthetics.
Expanding our standard design package that helps to reduce cycle.
Which is big and while also expanding our buying power on the concentrated set of Skus.
And then floor plans and simplification that puts more emphasis on narrowing of our offering to the high profit homes.
And then I also mentioned in the prepared remarks, just our mix of new community openings are more weighted to markets that deliver some of our.
Timeless margins.
So that's setting us up well for for Q4, but definitely we start seeing that full benefit when we get into 2022 and.
And maybe I'll just add to that day to your point, Paul Kansas, We expect that to be more of a contributor as we look forward and neither early days.
And our high rolled out across the country as we said and our prepared remarks, but when we look at the margin trajectory.
And our early and pilot markets and just what we're seeing we like it and.
And without overstating the obvious part of the pickup you're seeing Paul is we came into the year with a tremendous backlog and.
And unfortunately.
We've used that backlog took a great deal of pressure on the lumber as we saw peak numbers and.
You know early in the year, so being able to lap of that and move into some of the spec inventory as well as you know the price movement from our newest sales. That's also gives us a great.
Deal of confidence as we look for me, yes Sheryl.
Sure I'll sort of we're leaning in and a little bit more on 2020.2 earlier than we normally would and I don't want to get.
Too much further out there, but a lot of the things that we're putting in place now that will impact next year, we actually think the accretion will carry beyond 2022 and into 2023, you know all the.
<unk> and equal and then when you couple that with kind of that inflection around the community count growth that we expect to see at the end of 2022 and bodes well for gross margin dollars and 22, and <unk> and really starting in 'twenty 3 and good point.
Okay.
The second question your SG&A ticked up a little bit and the quarter.
And what was the driver of that and Oh.
Along those lines.
And the strong demand out there we know a lot of builders are actually cutting external broker commissions are you doing that or are you, putting the external or internal sales.
Emissions and.
And if so what would be the timing and magnitude of impact.
The.
We'll probably tag team on this point, a little bit from an SG&A and we were down sequentially up a little bit year over year remember in Q2 of last year, we leaned pretty heavily on the William Lyon's spec. So I would argue we pushed a little bit more closings through when I look at this Q2.
We were able to meet our guidance on closings.
And at the lower end of the range. So I think if we were a little bit more of their and the middle of that obviously would have would have helped.
So a lot of it is just around timing Paul.
If you go back to our full year guidance, we haven't come off of that we're still on that mid 9% range. So it really.
It's just timing of youre going to see.
Some stronger leverage obviously in Q3 and Q4, just given the overall level of of closings coming through.
And then I'll pick up and Dave on the breadth of our peak.
No Paul we have made some adjustments and the markets across the U S.
And it's everything from adjusted on the actual fee.
And 2 we've gone to a national and <unk>.
Program of just paying commissions on the base price. Once again, we came into the year with the very strong backlog and you've seen very little of that traction.
Initially hit because that was all done early this year and so it really wouldn't of only impacted the small percentage of our spec closings and the other thing that deserves and on a real mention par would be our virtual environment and those closings start to come through the system and we've had hundreds of closings that are completely virtually.
Completely virtual excuse me and they generally carry a lower broker participation and so you've got a lower participation and a lower fee that we get to look forward to and we are.
We're seeing leverage on the low selling line of its really the G&A and of the timing of expenses.
And then relative to the to the top line, which is impacting the deleverage.
And the action.
Thank you I appreciate it thank you Eric Palmer.
And.
Our next question comes from Jay Mccanless with Wedbush. Your line is open.
Hey, good morning, everyone.
So on the fiscal 'twenty to guide just to be clear the.
The price cost benefit.
And that's expected as coming from the land side, if I'm hearing you correctly, it's going to be less on <unk>.
Assuming lots of were acquired and the willing mind deal and probably more legacy Taylor Morrison land.
For <unk>, you're talking about the margin guidance for.
And for 'twenty 2 this is.
However, it comes out we're taking on operational enhancements, that's going to be the bulk of the of the driver of.
All of the things that are just kind of went through they're all designed to either help enhance price.
But just as much for all even more so is on the cost side sharpening and art.
The back office to get them reflective of our overall size and scale the the land component of it I mean.
It varies based on mix, but you know all things being equal that gets a little bit more expensive every year. So you know you're typically on a typical years, saying that off with the price and hopefully better efficiency, yeah, and if you.
Of course, the residual obviously theres actually been some pickup and the residual as prices have moved up on the existing but I would I completely concur with day that I would say generally same same.
The modest pick up of modest savings, but.
And that won't be the driver.
Okay.
Alright. Thank you for that clarification on the second question I had just any update on Christopher Todd and your single family per round efforts.
Absolutely.
Jamie we've announced 7 markets already and have.
And in the process of planning to new market.
We're actually recruiting only on leader and Houston, right now and will be explained expanding our Florida operations as well each markets and a slightly different place and Phoenix is the most advanced with projects and multiple stages J from design to development to under construction and leases are expected to start.
For your and.
And it's and it's interesting Phoenix has been somewhat of the melting pot of the Ctr NSF our strategies, but there's been very little traction and are Christopher Todd model outside of Arizona. So we're pretty excited about the operation that will be active and certainly at least 7.
By the end of the year.
Right now we have approximately 2.
25 to 30 deals at some stage from accepted LOI through on land.
Recognizing these sales are a little bit more complex and they take some time to entitle for argues I mean, you won't really see and.
Mark it's on the financials until we begin to sell assets likely late next year. So as we think about 'twenty 2 guidance, we'll get much more specific with you and you know as we optimize the explorer of the best way to optimize the price.
And 21 day.
Dave I don't even think there'll be lots and lots.
And the rental.
Rental income would be so modest I don't think of them and you will see any yeah, and that's going to go and our amenity.
And the other revenue line and the Sheryl said it'll be minimal you wont really notice much of an impact this year, but as we move through the next couple of years and it becomes more meaningful and I actually think it'll be pre leasing this year, Jay and then you'll really start to see the income next year.
Okay.
And Pat Greg and thanks for taking my questions. Thank you.
And next question comes of Alex Rygiel with B Riley Your line is open.
Yeah.
Thank you quick question to follow up there on that last 1 as it relates to built for rent how much capital of your invested into that business to date and how.
Should we think about sort of capital allocation into that business on an annual basis moving forward.
You know the gross number of Alex is probably 130 million of which we've done some financing around that just to help from a return perspective.
And it you know 60% of that number.
And going.
Going forward and it'll be it'll be a few hundred million dollars, but that's built on our overall.
The land and development budgets and still even with that we're going to throw off of.
And cash flow of $600 million or more each year and once again each of these projects will be individually project financed yet.
Of course, and then coming back to your guidance I'm clearly your guidance suggested and incredibly strong fourth quarter for closings can you discuss sort of your confidence level on that and the visibility on this and you know where there are risks and where there are opportunities for that.
Yeah, you bet, you get to our implied guidance of between 50.154 items.
And we're still early on the construction cycle for many of the fourth quarter deliveries.
But our team they know whats ahead at the big fourth quarter.
As the head, we're working with our teams daily on it and we're discussing the.
And and opportunities around the construction cycle every day to help deliver here and the second half.
You know our priority, though is always going to be delivering a complete home.
Some of the biggest challenges and I don't think it's anything new that you haven't already heard is really around the material shortages that are out there.
Some of the biggest pain points right now of Windows, We've seen lead times almost double there.
Other things just the name a couple of more roof trusses and bricks that continues to be of challenge.
But the things come up every day around shortages, we work the kind of knock it out by the end of the day only to wake up the next day and see yet another channel.
<unk>.
But it's the reality for us right now and <unk>.
So far we've been able to overcome many of those and we're going to continue to push for the end of the year.
The only thing I'd add is you know if you look at the past years, we would actually start houses.
<unk> well into August and to deliver in the air.
We have everything and the ground, but dave's spot on you know.
And the supply constraints are real and our teams are managing them every day, so with what we know which day.
And we have a very big fourth quarter, we need conditions not to worsen you know home.
There's no impact from this COVID-19 very and dropping crews.
Because if that that would create some more timing issues, but as we sit here today and we plan to get there and were order and materials a lot sooner than we typically would and we're on.
Also of stock borrowings for materials, where it makes sense as well yeah.
Yeah.
It'll be harder for the company.
[noise].
We our next question comes from Alan Ratner with Zelman and Associates. Your line is open.
Hey, guys. Good morning, Thanks for taking my question.
And now.
So I'd love to drill in a little bit on the <unk>.
And I can start so really impressive getting to almost 5 starts per community and the quarter per month.
I'm guessing that's not something you would tell US is is kind of a new target run rate or is necessarily sustainable, but I'm curious if the current market conditions and strength has kind of caused you to kind of rethink that steady run rate and terms of starts per community or sales per community like you've talked about and.
And the past and <unk>.
Given that success and the growth and starts are you starting to pull back on some of those limitations on sales that you've been kind of putting in place over the the the vast majority of your communities.
Yeah, I'll I'll jump in on the starts maybe sure of what the sales side. So.
You know Alan.
We continue to align our starts with the order pace. Our Q2 starts they were probably a bit inflated and we had significant weather challenges and Q1 not to mention we had a large backlog from last year and that we had to get started so I was a little bit of a catch up coupled with the strong pace that we saw.
And we can do 1 of the most of the Q2.
And Q2 was and Sheryl just mentioned is the big quarter for us to get everything and in the ground to help us deliver for the year and that's what took us of that cadence of about 4 point of it starts for our community.
This should normalize and probably somewhere in the high <unk> range for starts per community.
And I would argue this is probably a healthier start pace for us, especially given the supply chain challenges that are out there right now.
And so I wouldn't take it Allen as a read on the market that we're slowing it down and we're just going to try and get to a normal sustainable pace with the to Dave's point, probably high threes to low.
Q2 is unique on a lot of different levels.
You know as far as of the sales front looking forward, we'll continue to deploy different strategies by community. Alan you know I would expect some communities will go back to more traditional releases.
Some will continue to still be me on it.
And we are still holding specs and some community.
And until they get further into the construction cycle.
Having said that there's others that we're releasing at start you know we.
Really important to understand the existing market conditions and the strategies of the other builders and potentially get ahead of any sort of glut of inventory that's being held back.
Back today.
You know a lot of folks have mentioned not wanting to keep a customer and backlog any longer then you have to so that certainly plays into it. So there's a number of things of the teams are managing but you know the.
The momentum and the strength continues and.
To be quite good.
Got it and I appreciate that color guys.
Second question that you know I was hoping and I was just tough, but I was hoping you can maybe provide a little bit of clarity just on where we should think about your your price point going on.
Order price that you mentioned Sheryl was maybe the impacted a little bit by mix and the quarter, but it's almost 100000 above your delivery price right now.
And I know that's been kind of moving around here, So where do you see as you look at your community count and and some of the the growth coming through the pipe, where where do you see that price average price going over the next year.
Year on year and a half.
Assuming price appreciation kind of normalizes as you anticipate.
Yeah, you know as we mentioned.
But I, certainly think you're going to see price.
Up next here over 2020.1.
My.
Instinct is given the mix of of the communities and 23, you'll see it settled back a bit just as I look at the new communities are coming on line. So I think.
22, probably provides the peak Alan.
You know I mentioned I think of couple of times that what we're seeing and lot premiums and all of any of the competitive environment that we've been we've really steered the buyers.
To lot premiums versus base.
And on price because I think we evolved into a place where you don't want to see any movement backwards on base price. So that's feeding some of the price appreciation and certainly a great deal of what you saw and the selling price and Q2.
And that level of about I would expect that overall pricing once again, we're taking price.
And some communities, we're just not taking it at the level that we took it earlier and the year.
On our overall ASP for you from an order perspective, it's largely written on them a lot of mix of if you get into 2020, 2 we might see mix weighted a little bit more of a factor as well yeah.
Great I appreciate that guys. Thanks a lot.
Price sorry on I'm going to mention whether the 1 other thing that I think does play into the price you know as we look at you know the consumers' behavior today and.
And we look at our backlog and a square footages are still going up their.
We're spending more and the design center. So it's not just on.
He handed me I'm sort of buying a bigger house on a home site that meets their needs, which I think says a lot about their ability to qualify and what's important to them. When we look at our spec inventory that we're putting the market, we're actually reducing square footage of little bit to try to continue to serve that more affordable consumer so.
So that's why I think you'll get the kind of blurring of our mix.
And overall price and I think you'll see it settle back of it.
Makes sense. Thanks, a lot. Thank you.
Our next question comes from Mike Dahl of RBC capital markets. Your line is open.
Yeah.
Hi.
And actually Chris Kalata on for Mike Thanks for taking my questions.
I just want to go back to the selling pace outlook for the back half of the year.
And when can we see absorptions kind of return back to your more normal and 2 to 3 month level.
Clearly you have 3.4 per month, we saw the size of stepped down from from <unk>.
I mean based on what you're seeing in July.
Hi. This is the speak this is going to continue into the next quarter or do you see more of the structural improvement in your and your selling price.
I think me and if I look at July let me start there. If you look at July certainly of the months not done yet, but I expect that July will be relatively consistent with Q2.
You know when.
July did get our historical paces of low to mid twos I don't think we'll go back to the 2 to 3 but I do think that something more in the low to mid threes becomes more realistic long term.
So I think and the back half, you'll see you'll see kind of that normalization, mostly because.
And we loved and managed pieces, we're talking about but I think you'll also get some seasonality in there and if you look at 2020 or you know a bit of on a non.
And normally here with the pandemic and you know what where was slow and then it picked up.
The 2019, you also have to remember we're a different company with the.
The.
The more affordable higher paces more west coast geared and some aspects as well, which typically have a higher pace. So I think you're on.
Also seeing just the structural shift of the business.
Okay.
[noise].
Understood and that makes sense.
And for my follow up.
I was wondering if you guys are seeing or if you of a way of tracking on.
Whether whether there could be any kind of overestimation and the current breadth of demand out there I mean for example for example, you gave the example of seeing 20 beds and the lottery system instead of the 50 prior.
Is that of dynamic at all off of buyers kind of hedging their their odds.
And then placing bets across multiple communities is that something that you're hearing or seeing out there for contemplating on the all in your outlook.
Yeah.
And you know as I mentioned I, we're managing on the sales programs and 75% to 80% of our community and the demand is quite strong by any standards, but it.
And has and normalized from the frenzy pace that we saw and.
I would say in the.
First quarter and moving into the second quarter.
I actually think we're in a much better place to provide them a better experience for our customers it's been very.
The difficult for the consumer and today's environment, they have been participating and multiple lotteries for theirs.
Actually I would tell you early and the euro a decent amount of fear about being able to secure a home and.
So I like where the business is going I like the fact that you know well.
We're.
And managing our pace to match our construction cycle.
Cycle, and we can provide a better experience for the consumer there is still a tremendous amount of demand because I think what continues to feed. This is we are under supplied as a country I mean millions of units. So I think we've got some runway.
And we're ahead.
Got it I appreciate the color. Thank you.
Our next question comes from Deepa Raghavan with Wells Fargo. Your line is open.
Yeah.
Hi, good morning, everyone. Thanks for taking.
A question.
Sheryl I'm under the tag on that demand question and I got asked.
Would you say is the traffic that is now slow or not.
Not the depth of demand and the demand is still as strong.
And not necessarily created the worst is the only of the year or would you say there had been somewhat.
The material impacts for whatever reason.
And then.
You know maybe it is via the T theres the nowadays.
Lack of availability of affordable houses et cetera, So how would you.
You know how do we think about the slowdown in the bidding and the number of bids et cetera that you get but then.
And why the drop is still pretty strong so is it more like of traffic versus demand.
The dynamic or is there something more happening.
And as I said, the but I think I do think it remains very strong we just have to understand what we're holding ourselves up against and if we consider the frenzied environment and we know that's not a sustained.
And the battle environment traffic per community is actually up I think here every year of somewhere around 10%. Our conversion rates are up when I look at our web traffic on for our divisions really all indicators are strong on web traffic is up.
And now 1 of our web conversions are a tremendously which.
Staying on surprises and meet considering that all communities are up and and they weren't a year ago.
And so I think you have all of the things we've talked about I think you do have a little bit of fatigue. I think you do have a little bit of seasonality.
And so we have we see 2 weeks for people pull back then with the right back at it.
And so I think that's just the.
And good strong normalization when you think about affordability.
We've actually seen sequential strength and our buyers you know the way I tried to look at it Deepa is if I take a $400000 house, a year ago, and that's up 20%.
And you know just using the generic numbers that had been posted you know the buyers' overall payment is modestly higher today, because it's a.
A buyer of the table that put more down and they're over credit profile is strong or of the ratios are better their incomes are up so their overall monthly expense is relatively unchanged.
They're able to absorb the.
The price movement.
In fact, when I look at our backlog and they really are absorbing these increases and today's buyer has even a greater spread between the qualifying income that would be the income we used to qualify them and their total household income.
And what they had a year ago, and then as I said, they're buying bigger houses and putting more money into it. So I think the buyers and pretty good shape, you know the FHA buyer might be slightly different we haven't seen the same lift and income the ratios might be a little tighter, but they still or and.
Kind of place than they were a year ago with 500 basis points of ground.
And so I think.
I would caution it's not the point to 1 thing because I think we have a very strong high demand market, but obviously, you're going to see movement for month to month and quarter to quarter and I think you're using last year's kind.
And of better paces I think about our June of last year I think was our piece of the company has ever seen that's for 0.7, if we tried to qualify that as the normal I think will disappoint ourselves.
Alright got it that's helpful. My follow up is on gross margin you raised the 2021guide on gross margin.
And of Pla towards the 20% of upper and 90.919 points of laws et cetera, all of it.
Does that already incorporate incorporate some of the costs ACH and benefits that actually play much strongly into 2020.2 or is or is that raise the current way is more just grow and pricing actions the seer et cetera.
And so the deeper.
And then on the cost side and the enhancements that we're making yes. It's in there I would describe it as you know kind of early innings as it's coming through and in Q3 and Q4.
Relative to our expectations, it's coming in and a little bit faster a little bit more meaningful.
And we thought so that's that's the great news of it.
But also of pricing is playing a factor of that prices have been staying ahead of costs.
To date, which is also a very favorable thing.
Oh, okay.
That's helpful, but would you say the 22% that you're giving.
And for next year is that the full run rate of all the cost actions or what what is the run rate of of all of all of that.
Well like I said, we're 6 months out and vivo from you know, finishing this year, we will give you more color.
Over the next couple of quarters, as we kind of firm things up.
But we will be at a run rate of around the synergies sometime in Q4 on an annualized basis really more taking hold and in Q1, but we think that there is an additional enhancements that we're going to be able to make and 'twenty..2 that will also benefit of 2023, but like I said give us some time, we'll firm that.
The deeper we would not typically if this type of forward guidance, but based on the stock price. We just believe there's a true misunderstanding of the trajectory of the business.
I have an appreciation that we haven't provided of quarter without real acquisition or integration noise, you know 1 time costs.
For nearly 3 years.
But we've always said this is the pivot point at 18 months after an acquisition and now that we're approaching that time period.
And it probably feels a little longer with you know how the pandemic distorted everything but we believe it's just time to put that stake and the ground and keep everyone better visibility, but we're really.
Leaning and because its pretty early so as we get greater visibility in the coming quarters will continue to update.
Yeah.
Thank you that's that's very helpful.
Thank you.
Yeah.
And next question comes from title of battery with Janney. Your line is open.
Good morning, Thanks for taking my questions..1 on 1 multi part question for me in terms of the <unk>.
And financing vehicles on the return profiles or the underwriting metrics of the hurdles differently than what you were using before and then perhaps more and more broadly on the land market generally.
And she said what youre seeing on the price side of things and then also.
There are a number of builders that are really kind of when the bulk of our land position and theres. Some others that are a little bit longer in terms of their ramp.
I mean, how comfortable are you with where you are right now looking towards 2023 and would you expect a substantial.
The stansell step up and your spending and so.
The next year to really ramp of the business and 2023 and beyond.
So I'll pick up on your land hurdle question relative to the financing Tyler so of our hurdles changed no, we're still underwriting and and the same way.
Obviously as the unique demand Sheryl.
On pricing here and a minute, but you know obviously asps are different costs are different.
Corporate of lot of sensitivities and to help US understand you know what is a good deal.
The financing vehicles themselves those are designed to actually enhance the.
And I'll return of a project us enhancing the overall return.
For the.
Any other.
There is a little bit of a gross margin drag that comes with that that's the trade off to get the better return, but we've been talking a lot today around all of the various operational enhancements that we're putting in place.
Overall, we feel theyre going to more than offset that drag. There. So this is really a way to lighten the balance sheet increase our option lots and really enhance returns over the next many years.
Yeah. So there's 2 there's 2 vehicles as we mentioned 1 of those kind of act like.
The land banking vehicle and the rates that we've been able to put in place honestly are as competitive as kind of anything we've ever seen before the other 1 is more of adventure and kind of acts like a JV and that would be for larger assets.
Each day on will be underwritten individually.
Both parties.
And kept.
And I have considered and.
Capital allocation tool for us and we'll that will be available when it makes sense and allow us to capitalize on additional growth opportunities.
<unk>.
While importantly, mitigating risk at this point and the cycle.
And the first 30 day.
Of putting these vehicles in place and we expect to pay for something.
Between $2.$50.260 million of LNG spend I don't think this will be of monthly run rate for us, but we've actually been waiting to get to the first closing and so we're delighted to Dave's point of what this will do for kind of of the launch.
Long term returns or the trajectory of the business.
As far as land pricing and the competition and the markets I would tell you it's about it's fears.
Anytime I recall them.
And the sellers are seeing the price movement and housing today.
And I think.
And they have higher expectation on the cost terms.
And I'm seeing some things out there that are.
And we need to continue to retain.
Our kind of underwriting standards were seeing things that are getting close very quickly without.
Proper due diligence.
And maybe closing earlier and the entitlement I would tell you that we're going to retain.
Our cadence and and approval regimens and I'm, not adding appreciation and but really hedging with sensitivities on costs.
Maybe base.
It's it's tight but.
But it's always tie.
And we will get the teams are actually putting some very good deals on the books. So when I look at some of the stuff and the pipeline today.
Actually across the business of its high quality.
Okay.
Great. That's all for me thank you for the detail.
Net.
Yeah.
Our next question comes from Alex Barron with housing Research your line is open.
Yes, thank you very much.
And last quarter you discussed the.
The increased amount of out of state.
And parents I was curious if you guys have measure of what it was this quarter versus last quarter.
And you know Alex.
And.
We have continued to see traction and I'm, saying, if I can actually grab that schedule, we might have to get back to you with the <unk>.
The buyers of effects and but as I said in my prepared comments.
And we've really seen is strong for us, California fires, and both Texas, and Arizona and Colorado and.
Really strong and Nevada.
And then.
Really the foreseen a tremendous surge.
Kind of North east into our Florida business, maybe even the Carolinas.
When I mean were happy to get offline with you because we have a tremendous amount of detail.
And then we have on our shoppers and buyers and the trajectory of that out of state business is pretty meaningful.
Okay and just for here.
On the other thing I.
And I was curious about is what do you feel is the greater concern of shortage at this point you know the material side of things or labor.
And you get the home sale.
Yeah.
Yeah kind of warm weather.
The other that's on the.
The market, yes, it depends on the market it depends on where they are and the construction cycle I would say it this way Alex I think we're more accustomed to dealing with the labor shortage as an industry.
I think the level of material shortage that that's new for us and it's something that we don't typically deal with and it's been a change.
But they do still go somewhat hand in hand, you know and I must say it like this Alex Dave I don't know if you agree if we had the materials that were needed across the industry to meet the.
The supply and Thats being brought to market and you probably have more of a labor shortage right, yes true.
Because we just you know trade by trade Theyre not able to meet the demand because of some of the shortfalls and you know and logistics and you've got this issue with commodities and you've got a tremendous issue.
Adjusted and that's everything from us.
Containers at the ports that are creating some of the pain points to trucking and drivers. So theres a lot of things that are making the material side of it very difficult and the labor is trying to keep up with what they're getting.
And with Lynn. Thank you so much.
Yeah.
Yeah.
There are no further questions. Please proceed with any closing remarks.
Thank you very much for joining us for our Q2 call today and have a great day and look forward to talking to you next quarter.
Yeah.
Yeah.
This does conclude the conference you may now disconnect everyone have a great day.
Yeah.
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Yeah.
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