Q3 2021 Taylor Morrison Home Corp Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good morning, and welcome to Taylor Morrison's third quarter 2021.
Earnings Conference call.
Currently all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
As a reminder, this conference call is being recorded.
I would now like to introduce Mackenzie Aron Vice President of Investor Relations.
Thank you and good morning.
I'm joined today by Sheryl Palmer, Chairman and Chief Executive Officer.
Executive Vice President and Chief Financial Officer.
Sheryl will provide an overview of our performance and strategic priorities.
Dave will share the highlights of our financial results after which we will be happy to take your questions.
In the interest of time, we ask that you. Please limit yourself to one question and one follow up.
Today's 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.
E W. W Dot Taylor Morrison Dot com.
These statements are subject to risks and uncertainties that 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 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 are reconciled to GAAP figures in the release.
Now, let me turn the call over to Sheryl.
Thank you Mackenzie and good morning, everyone.
We appreciate you joining us today.
I will begin today's call with the highlights of our third quarter performance and the market environment, and then provide an update on our strategic focus on operational and capital efficiency.
I am pleased to share that our teams delivered a strong quarter that met or exceeded our expectations across each of our key operating metrics.
Overcame the intense supply side challenges facing our industry.
Most notably we delivered 3327 homes, which was within our prior guidance range at a significantly stronger than anticipated home closings gross margin of 21, 2%.
This margin improvement of 400 basis points year over year, and 210 basis points sequentially.
Largely a reflection of revenue and cost synergies from our William Lyon acquisition that we had indicated would begin to materialize at this stage of our integration.
These advantages helped to more than offset the timing and cost pressure from material and labor constraints that intensified during the quarter and are unlikely to abate in the foreseeable future.
With these bottlenecks.
Producing a much greater than normal degree of uncertainty into near term production schedules and delaying our construction timelines by two to four weeks, we are adjusting our prior full year home closings guidance by approximately 5% to around 14000 use.
Right.
However, despite these delays we are increasing our home closings gross margin expectations to the low 20% range. This year, followed by at least 200 basis points of improvement to our margin in excess of 22% in 2022.
Based on our confidence in continued synergy realization operational enhancement and the strength of our sold backlog.
As you would expect we are proactively working to stay ahead of further supply chain challenges by communicating closely with our trade partners and suppliers to ensure visibility into our vertical and horizontal development cycles control costs and maintain our commitment to <unk>.
Levering an exceptional customer experience.
And fully comes to get houses for our homebuyers.
In addition, during the quarter, we started 3.5 new homes per community per month made further progress in rebuilding our inventory of spec homes and continue to align our sales pace with production.
Because of this disciplined approach and our attractive land pipeline and product portfolio. We are in a strong position to capitalize on favorable market tailwind, while also navigating supply related disruptions.
From a demand perspective activity was healthy across each of our consumer groups and geographies.
Be it at a more normalized and sustainable level of activity compared to earlier in the year.
Notably in contrast, the typical seasonality, we experienced accelerating month over month sales momentum in both order volume and absorption pace as the quarter progressed and October is on track to post similarly strong results.
I met this positive demand backdrop, we continue to strategically limit sales releases and approximately 70% of our community.
To manage our backlog and balance pace versus price to maximize our return potential.
Among our consumer groups. The 55, plus active lifestyle segment once again experienced the strongest trends with year over year growth in both orders and absorption pace as these buyers have the financial resources and motivation to move ahead with their purchase decisions.
Representing over a quarter of our year to date net sales. We believe the 55 plus active lifestyle demand is poised to continue to outperform as demographics household growth is forecasted to be more than two times the overall market rate over the.
In next five years within our footprint and the 73 million strong baby Boomer generation progresses through peak retirement ages.
The national expansion of our Premier lifestyle brand Esplanade is well timed to meet this growth with a consistent strategy that continues to perform well and its core Florida markets and has exceeded expectations today and its newest west coast communities.
Across the business forward looking indicators, such as community traffic conversion rates and consumer credit metrics suggest demand and buyer interest remain healthy and supportive of further pricing power.
However, as I indicated last quarter, we're cognizant of the impact of higher prices on consumer sentiment and affordability and expect market dynamics, including the pace of price inflation to stabilize at more sustainable levels, which were already beginning to see evidence of.
This outlook is reflected in our pricing strategies, which are calibrated at a community level to optimize performance and in our disciplined land underwriting assumptions, which have may remain grounded in long term market fundamentals and a preference for prime core location.
Yeah.
In addition, our well balanced consumer diversification and the relative strength of our buyer profile provide additional layers of risk mitigation.
Specific to our consumers financial health, our homebuyers financed by Taylor Morrison home hunting, which held an 83% capture rate.
Had credit scores income debt ratios and down payments that were stable or improved from the prior quarter and a year ago.
Because of this strength, our buyers' ability to absorb higher pricing remains significant with the estimated buffer between their average actual interest rate and the maximum rate allowed for qualification purposes. After considering compensating factors remaining remaining at roughly.
700 basis points for conventional borrowers and 500 basis point.
For government borrowers.
So which were more favorable than historic norms by approximately 50 to 100 basis points.
This is not to suggest that our buyers would want to or be willing to absorb a rate shock of that magnitude.
But rather indicates that the financial durability of our consumers that is strong in both absolute and historical terms.
In addition, we continue to see our diverse consumer groups are spending more on higher square footage floor plans and the home side of their choice as well as enhanced design specifications to meet their needs and preferences, which has clearly evolved post COVID-19.
This ongoing strength can be partially attributed to migration trends as we continue to see a growing share of out of state buyers, particularly from higher cost markets, such as California, New York, and New Jersey to Texas, Nevada and Florida.
It is also worth sharing that when we parse our consumer survey data, we have seen a growing trend of home shoppers expecting to pay more of their income towards housing with the greatest impact among first time buyers homebuyers.
With low interest rates and enabling this trend today, we are monitoring these metrics closely and taking proactive steps to ensure continued affordability and design flexibility such as intentionally increasing lower square footage floor plans within our spec home inventory.
From an operational perspective.
Our priority remains to streamline and simplify our business to effectively leverage our scale and improved construction efficiency.
As you have heard me discuss in recent quarters. We are focused on operational strategies designed to create a more efficient predictable and profitable business now that we're past the integration phase of our transformative multiyear acquisition journey.
This strategic focus is already delivering strong results as evidenced by the 400 basis points year over year improvement in our third quarter home closings gross margin.
Let me now provide an update on the work underway to continue this positive momentum going forward.
<unk>.
Our teams are working closely to optimize our product portfolio by evaluating our floor plan and option offerings for value engineering cost rationalization and consumer appeal with the greatest runway for improvement still within our William Lyon impacted markets.
To frame the financial opportunity from such efforts, our Florida operations are a compelling example from which to start.
Without the operational complexities complexities inherent in other markets, where we have been more acquisitive, Florida is furthest along in leveraging the power of shared architecture floor plan repetition and option rationalization.
This contributed to an average year to date home closings gross margin.
Vantage up nearly 300 basis point and cycle time benefit of about one month compared to our markets on the west coast that have the most opportunity for product and process consolidation due to more recent acquisition impacts.
We achieved similar operational efficiency across the country, we expect comparable results to drive meaningful margin and return accretion in the coming quarters.
Second our purchasing departments are driving further SKU rationalization to improve our procurement processes control costs and manage production timelines.
An effort that has become even more critical in helping us overcome material shortages.
Over the last three quarters, we have reduced our option count by nearly a third exceeding our goal for this year and expect to achieve further gains in utilization rates as we roll out enhanced national specification.
This progress has supported by the success of our canvas standardized design features which have gained swift traction in our entry level communities and increasingly in our move up price point. These curated option pallets offer a much.
More consumer friendly design experience that removes and complexity of a traditional design center approach.
The average revenue of these packages is aligned with the historical range of options spend in our design centers by consumer group had an improved margin and more efficient production timeline.
And lastly, but certainly not least from a sales and marketing perspective, we are continuing to lead the industry in the digitization of home buying to empower consumers to complete their home shopping journey with the same ease and flexibility they have come to expect from the world of E Commerce.
Over the last year and a half we have introduced industry, leading capabilities to reserve inventory homes online, which was then expanded to enable consumers to select a homesite and floor plan and design a to be built home online.
Building on these advancements we recently launched a first of its kind digital community that empowers consumers to schedule a visit online independently tour and virtually design and reserve a home.
Because of the functionality of these tolls.
We eliminated the need for a traditional on site sales team by designing our model homes with Amazon's Alexa to seamlessly guide home shoppers through their visit with informative and interactive touch screens and QR codes.
They can then reserve at home and select their canvas design package online either immediately on site or later from the comfort of their couch.
Take a look at the new slide added to our third quarter investor deck. Once it is posted later today for more details.
Since our model opening in this groundbreaking community on October 1st we have already enjoyed an overwhelming positive response with an interest list of more than 1300 perspective buyers and a reservation to sales conversion rate that is two and a half times higher than our company average.
Despite no in person sales team and lower than normal external broker participation rate with.
With similar results across each of our virtual capabilities, we have meaningful opportunity to leverage these tools for a more cost effective sales strategy.
Yeah.
Following this community's early success, we have two additional digital communities expected to open under our new venture brand in the coming months and look forward to continuing to expand this promising new chapter of our virtual evolution that provides a seamless and on demand home buying experience.
That we believe is unparalleled in our industry.
Hi, I'm proud that we achieved these milestones because of our team's forward looking approach to technological innovation and serving our homebuyers on their terms that predate the pandemic driven acceleration and consumer adoption.
Our focus on these operational strategies to drive stronger earnings are matched by an equal commitment to enhancing our capital efficiency to achieve greater balance sheet and cash flow optimization.
The new land financing vehicles that I announced last quarter are an important element of this strategy by enabling us to meaningfully decrease the upfront capital intensity of our investment in land acquisition and development and accelerate our pivot to an asset lighter balance sheet, we have.
Quickly operationalize these new vehicles with the initial assets slated to close this year, representing total expected balance sheet relief of approximately $850 million over the life of these projects.
These and other arrangements that enable us to cost effectively increase the control percentage of our land portfolio are accretive to our long term return expectations and importantly, mitigate cyclical risk.
We have also been active in returning excess capital to our shareholders with approximately $8 6 million shares repurchased year to date, while also remaining committed to reducing our net debt leverage to targeted levels below 30% next year.
Collectively these operational and capital initiatives are expected to drive our return on equity to the high teens range. This year, followed by further improvement to over 20% in 2022 theater return expectations with Mark New company height and meaningful accretion over the historical results as Ian has.
<unk> scale and operational advantages that we achieved through our strategic journey have transformed our ability to sustainably generate long term value for our shareholders.
Now, let me turn the call over to Dave for his financial review, Thanks, Sheryl and good morning, everyone.
Third quarter, we generated net income of $168 million or $1 34 per diluted share, marking a 54% year over year increase.
Net sales orders totaled 3372, while our monthly absorption pace was a healthy three three net sales orders per community with notable month over month strength throughout the quarter that persisted into October.
<unk> continued sales restrictions in the majority of our communities.
In addition, our cancellation rate remained below historical averages at six 7%.
My mom or consumer groups, we experienced the greatest strength within our 55, plus active lifestyle segment, which increased 700 basis points to 27% of our total net sales orders.
With above average lot premiums and design experience compared to our entry level and move up consumer groups.
And in power combined with ongoing market strength drove 31% increase in our average net order price to 641000.
At quarter end, our backlog was 10273 homes, representing a sales value of $6 1 billion up 63% year over year.
Our community Count averaged 338, which was ahead of our prior guidance range.
We expect our community count to remain in line with this level in the fourth quarter driving our full year average guidance range slightly higher to 335% to $3 40.
With approximately 78000 lots under control, we have a strong land pipeline to support.
Future community growth, particularly as we reach 2023, however supply side challenges have also extended into horizontal land development and if these issues persist or worsen it could delay the timing of some community openings in the back half of 2022.
Turning to closings, we delivered 3327 homes, which was within our prior guidance range.
However, a sheryl noted earlier because of the unpredictability of material availability elongated construction time lines and severe labor constraints.
Now expect to deliver about 4600 homes in the fourth quarter and around 14000 homes for the full year.
This represents a 5% reduction from our prior full year guidance range and attempts to fully account for the fluid day to day operating environment that our construction and purchasing teams are navigating in the field.
Each market is experiencing challenges at different stages of the construction process and generally speaking.
<unk> for more severe as you move east along our coast to coast footprint with the least amount of pressure in our California markets.
As our teams work to stay ahead of these challenges to deliver sold homes to our homebuyers in a timely manner. We have also rebuilt our inventory of spec homes to more normalized levels in advance of the upcoming spring selling season.
Our quarter end, our total spec inventory equaled five three homes per community nearly all of which were under construction.
This was up from $4 seven homes per community at the end of the second quarter.
Our home closing gross margin improved 400 basis points year over year to 21, 2%.
This exceeded our prior guidance of approximately 20% due primarily to stronger than expected pricing and volume of inventory of homes sold and closed during the quarter.
In the fourth quarter, we expect a home closings gross margin of about 21% given favorable pricing and operational leverage that is expected to more than offset higher construction costs.
This drove an increase in our full year home closings gross margin guidance to the low 20% range.
Following the strength, we now expect at least 200 basis points of year over year improvement to a home closings gross margin in excess of 22% in 2022.
This positive trend reflects the sustainable structural changes in our scale and production efficiency that we have achieved throughout our strategic growth and operational enhancements.
Our SG&A as a percentage of home closings revenue was nine 5% and we continue to anticipate a full year SG&A ratio in the mid 90% range. Despite the reduction in our home closings guidance.
Turning now to our land portfolio, we invested approximately $478 million in land acquisition and development during the quarter and continue to expect our total land investment to be approximately $2 billion. This year.
Our total lot supply increased to approximately 78000 homesites representing six two years of total supply in four years of owned lots.
And 36% of our loss were controlled via options and other arrangements, which was up approximately 700 basis points year over year.
Going forward, we expect to expand this year further as we utilized the new land vehicles that were announced last quarter as well as our traditional asset light land strategies.
Such as joint ventures, and seller of project financing.
We expect these tools to enable us to cost effectively increase our option land position to at least 40% within the next year, thereby improving the capital efficiency of our land portfolio, reducing long term risk and enhancing our returns.
Shifting to our balance sheet, we ended the quarter with $1 1 billion of total liquidity, including $373 million of unrestricted cash and $722 million of available capacity on our revolving credit facilities.
Our net debt to capital ratio equaled 41, 1% deleveraging our balance sheet remains a top capital allocation priority and we continue to expect our net debt to capital ratio to reach the low 30% range by year end, followed by a further decline to below 30% in 2022.
In recognition of our history.
To date in improving our leverage since our acquisition of William Lyon, I am pleased that S&P global recently revised its outlook to stable and affirmed its credit rating.
Wow.
Lastly, during the quarter, we repurchased three 3 million shares outstanding for $92 million, bringing our year to date total to $8 6 million shares for $237 million.
We have repurchased just over half of the shares issued in connection with our William Lyon transaction and more than a third of our total shares outstanding since 2015.
Going forward, we expect to continue to utilize share repurchases opportunistically to return excess capital to our shareholders.
Now I'll turn the call back over to Sheryl.
Thank you Dave.
To recap our strong third quarter performance reflected the strategic and operational focus our teams have been driving toward since our acquisition of William Lyon homes, a little over 18 months ago.
We have communicated that milestone is a critical pivot point from which we would begin to meaningfully benefit from the synergy and scale opportunities that became available to us after integrating into one company.
Going forward, our focus is squarely on operational execution to fully take advantage of our scale product and geographic positioning and balance sheet strength.
While the unprecedented level of supply chain disruptions has added complexity and timing delays into the current operating environment market fundamentals remain positive and our fourth quarter is still expected to mark a significant inflection in our growth and profitability that will carry into 2022 and.
Beyond.
As we entered this exciting next phase I'm thrilled to announce that after an exhaustive search of both internal and external candidates to identify the best qualified person to succeed Dave following his retirement at year end, we have appointed loose Stephens has our next chief financial Officer.
Lou has wanted to Taylor Morrison, most tenured and proven leaders with over 30 years of homebuilding operational and financial experience and is uniquely qualified to lead our company in the next leg of its strategic journey.
From his role as president of mergers and acquisitions in which he led and executed each of our six acquisitions and integrations and his background in finance and operations is an area and divisional president in various markets across the country. He brings an invaluable depth of knowledge and expertise to our finance team that we can.
That we expect will expedite the execution of our strategic plan and elevate the level of cohesion between our finance and field operations.
Since gaining the scale and diversification, we set out to achieve with our M&A strategy has most recently shifted focus to lead our results management office, where he has spearheaded the rationalization of our operations and other initiatives that are contributing to our enhanced margin and returns.
He has been instrumental in deploying strategies to enhance the profitability and resiliency of our business and is deeply familiar with our with our capital market accounting and financial planning processes, making him well suited to seamlessly step into this new role.
<unk> January one after a collaborative transition with Dave.
With this announcement, it's equally bitter sweet to approach the end of Dave's decade long history of Taylor, Morrison, and which he oversaw our transformation from nearly a 5000 unit homebuilder at the time of our initial public offering in 2013.
Two one that is on track to deliver approximately 14000 units this year with further momentum it had.
Along this journey he has been a true partner for me an effective leader to our team.
A key contributor to our company's culture that will be missed dearly by all.
However, we are excited that he'll be able to spend more time with his family after achieving so much in his professional career.
And I wish him all the best in his next chapter.
And lastly, I want to end with my deepest appreciation to our teams across the country, who are working tirelessly to deliver our largest year end ever during this unprecedented operating environment.
All while maintaining their commitment and passion to delivering an unmatched customer experience for our homebuyers.
Two our construction sales and marketing teams that are on the frontline to making this happen day in and day out.
I sincerely truly thank you.
Now I'd like to open the call to your questions. Operator, please provide our participants with instructions.
Yeah.
Thank you to ask a question you will need to press Star then one on your telephone to withdraw your question. Please press the pound key we ask that you limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Our first question comes from the line of Matthew Bouley with Barclays. Your line is now open.
Hi, This is Ashley Kim on for Matt This morning.
So really nice gross margin result, now look here can you just quantify any pressure in gross margins you're experiencing from supply chain constraints, whether that's outright cost inflation or loss leverage on delayed closings or anything along those lines.
Yeah actually I would say on the direct build cost we saw call. It low single digits increase sequentially from Q2 that excludes the lumber, though I mean numbers actually.
Working in our favor now as you as you know pricing power is more than covered cross cost increases year to date.
To quantify it's hard because there's so many moving pieces, though what we're seeing right now I mean, we're definitely seeing increased costs some balance.
But again pricing power is there to help offset that we're working closely with our trade partners.
Some of that burden as well.
Thanks, that's helpful. And then just on the sales pace are you finding that you're still kind of capping sales to the same extent that you wear throughout this year.
Hi, Ashley.
As we said in the prepared remarks, it's about 70% of our communities, but you really have to deep dive into that because they look different some of those might be you know that we're releasing a certain number of lots on a monthly basis, and we provide kind of notice to the public and then do lotteries we serve.
We arent seeing the level of hopper of as I say theres only a handful across the country, mostly it's really to just align with production.
We're not holding back specs you know, we're pretty much releasing those at the start of construction. So I would say, it's a very healthy market, but it has normalized from where we were earlier in the year.
That's helpful color I'll leave it there. Thank you. Thank you Ashley.
Our next question comes from the line of Mike <unk> with J P. Morgan. Your line is now open.
Hi, I'm, Doug we're buying from Mike Rehaut.
In terms of incentives where are you guys currently versus about two months ago.
Yeah.
Yeah. So from an incentive standpoint, if you look at the Q3 deliveries are down meaningfully year over year.
And also down sequentially from Q2.
Our backlog, we do have reduced incentives.
On a go forward basis, I would tell you that out in the market in general are they starting to come back a little bit I would say, we're seeing are probably more in the periphery, probably more than anything but.
But it's still very very modest yeah, I think as we look across our portfolio. Dave really are incentives continue to be focused on mortgage.
Beyond that there, they're very very sparse anywhere in the country.
Yeah.
Our next question comes from the line of Truman Patterson with Wolfe Research. Your line is now open.
Sure.
Thanks, it's actually a function of both field.
I guess starting off with your <unk> closing guide it implies.
Increased year over year conversion rate, which hasn't really happened I guess for the past four quarters or so what gives you the confidence that youre going to be able to get those homes across the finish line Kevin.
The supply constrains the boundaries.
The whole industry, making the yearend push.
Yeah, well, what I want to be clear you're talking about backup.
Backlog conversion when Youre seeing conversion rate, yes, okay.
Okay. So maybe just a minute on kind of how we got here.
The material shortages, there had been an issue for some time.
Watching it closely it's been difficult to predict given the unprecedented challenges that we're faced with.
As an industry as well as out of the country.
Just on what we do 90 days ago.
And I would say, even 30 days ago, we expected to deliver on our original guidance. However, we saw delivery date for materials slide more meaningfully over the last month.
And even if all the material that we need were to show up before year end, we think that we would struggle to get the labor there to install it.
So we adjusted our guidance to take that into consideration and that shift in material deliveries are probably those labor challenges that are there, it's still a big quarter for us.
Our teams are true partners were all poised to deliver I mean, this is effectively just a little bit of a timing push of what we're seeing what we thought would be in Q4, just going into early 2022.
And Paul the only thing I'd add is you know your point's well taken it's a big quarter, it's going to be a big December for us will be the companys largest.
We're having the call lots of different levers to make sure we're ready, but we've been working on that for some time.
That will include weekend signings to get you know through mortgage and closing.
We believe we've taken all of that into account.
The challenges you've seen across the industry there are some.
That become very unpredictable until the day they happen, but we think we have the universe to do this but it's a unique.
<unk> and something we've not seen before but the teams have done really a masterful job.
Even getting into our closing range in Q3 so.
It's a big pushback, we're planning on getting there.
Okay.
And then on your <unk>.
Gross margin guide, it's flat quarter over quarter, and you guys elevated closings is there.
Lumber costs or what's kind of the swing later, because I would've thought you would've been up a little bit just from a leverage perspective.
Yes, I mean, when you look at kind of Q3 Q4 for US Paul we've talked about that being more of an inflection point from a margin perspective, but you are seeing it in lumber the biggest pressures coming from lumber, we actually anticipate lumber cost P easier in Q4, and then it will start to step down a little bit in Q.
<unk> Q2, but more meaningfully step down in the second half of next year.
Only other.
Thing worth mentioning Paul It is at the end of the day, it's going to come down to mix.
If you look at what we pushed into next year those generally tend to be the bigger more complicated houses some of those carry higher margins. If we could bring any of those over the finish line. This year could have an impact but it's the pressure of lumber and then it's really it's good news for 2010 right Dave.
But it does keep us kind of flat for the year.
Okay I appreciate it thank you.
Thank you.
Our next question comes from the line of Carl Reichardt with <unk>. Your line is now open. Thanks, good morning, everybody.
<unk> on for Karl.
Good to hear your horse Gotcha.
Hey, Dave at Mackenzie.
I want to go back to the comment you made about the 70% sales mix and Sheryl or.
Anyone.
What are the are there specific guideposts, we should be looking forward to then conclude that it's now time to remove those restrictions I mean, what.
What do we need to see or you need to see in order to feel comfortable that now you can start reducing those restrictions and I think it just.
I think this is a part of it and you tell me of the.
Three and a half homes per community per month that you started.
<unk> what percentage of those were spec versus pre sold.
You bet, we'll tag team this.
I wish I could tell you that there's just one thing that we need to.
Look at here. This is a decision that's got to be made community by community. One event one of the big areas is really the production capacity in the marketplace.
Because as you've heard I think us and everybody else talk about Karl it's really about trying to align.
Production and sales and as you can see we've put our start a little bit ahead of our sales to make sure that we're bringing more inventory into the business and we've had we've made you know had some good movement. This year and we will continue to grow that to get us ready for the spring selling season.
And so even though we're managing sales in a number of our communities I still think it's a more normalized environment because it's not like we're seeing.
These are massive.
Wait less we're still seeing some we're generally selling through them. If we werent able to sell what we were releasing that would probably be a signal that we would be more just opened and we are open and like I said about 30% of our communities. So I think its production capacity I actually expect Carl that as we move into the <unk>.
Bring selling season, we're going to see a very strong spring and that could put us back in a more managed sales program again.
So it's going to be supply chain generally market conditions generally supply and demand in the individual local markets that will really drive that.
And then Dave you want to talk about the kind of the spec starts in total.
Yes.
<unk> been increasing our percentage of specs relative to where it was a year ago. As you know, we kind of got that down a little bit lower we're focused on to be built.
But as we kind of move through the year, we've been able to put more specs on the ground and you can see that just based on our spec level.
And our inventory were about $5 two specs.
As a total company per community.
Again, which is a pretty good chunk. So we're still running more to be built since specs.
And that will continue to be the case going forward, but we like the position of room from a spec perspective, yeah, because I would say looking historically, Carl I mean being a to be built business has always been something that's been very favorable over the years for me. It certainly wasn't the first couple of quarters. This year.
But now I think that trend reverses and you'll see that as we pull through so I think we have a healthy number of specs today's point, we wanted to get probably closer to that six to seven especially in our more affordable business.
But we're delighted now that the to be built.
You know I think will be more advantageous mix for us.
Okay. Thank you both I appreciate that and then Sheryl another comment you made in the prepared remarks was about out of state buyers and it was due.
You to expand on that if you can talk about the percentage of your deliveries that are two out of state buyers.
That's changed.
And what the impact in your mind, what impact that's had on your sales prices in other words is it an arbitrage opportunity coming from expensive places to T places what does that do to the local buyer who may be looking at prices, saying this is.
And these are too expensive.
An important dynamic.
And so I'd, just like to just expand and give us some more color on how you how you look at that thanks very much.
You bet Carl you actually have to Savi Savi point that you bring up because in some of our markets I think our teams with specifically.
Outline that with the price movement that we've seen it's much more difficult for the local consumer to adjust to that pricing.
And as I mentioned in the prepared remarks, we're seeing a strong influx from really what I would call high.
High cost market.
That would be your California that would be your kind of.
Northeast markets and they come to the markets, let's talk about the northeast coming into Florida with a very different expectation on what they can what they are selling their house for and what they can afford to buy so they're able to spend more and buy app.
And that's why I think we're seeing what we are once again I'll use Florida when I look at what we have in backlog.
An example would be Carl what these folks are able to spend on lot premiums and options. You know if I look at our third quarter lot premiums and I compare those two my whole 2020 year theyre up about 40%.
When I look at the 'twenty two backlog they are up again, a similar amount.
The options also very telling theyre, putting more money into the house or up about 10% over 2020, and when I look at 2022 and they are up about another 20% that is really the it that is really the power of the migration trends that we're seeing.
If I look at our California, and we're seeing probably two times the penetration that we've seen historically in places like Nevada, Arizona, Texas, Colorado from California, and I think that's why we continue to see the pricing power that we have.
Great. Thanks for that I appreciate it.
Beth.
Our next question comes from the line of Alex <unk> with B Riley Your line is open.
Thank you and very nice quarter first question here.
Very confident in capturing 200 basis points of margin growth in 2022 and that would be fantastic can you break that down a little bit between the lumber price mix, so on and so forth.
Yes, Alex.
It's hard to break down all the moving pieces just because of all the activity that we're seeing out there from a pricing from from a cost but.
But yeah to reiterate we expect homebuilding clothing margin in excess of 22% for next year, which is.
From R. R.
Our prior comments are confident on the margin improvement is evident in our 2022 backlog we built so far.
And you might recall, we came out six months earlier than we normally would.
Talk about the 22 margin just given that level of confidence we do anticipate seeing margin improvement sequentially over the next several quarters. We're excited that we're at this inflection point after being focus the last few years on integration activities.
We talked a little bit about it earlier, we expect.
Lumber impact on deliveries to start to increase in Q1, and Q2 be more meaningful in the second half, but we've also left a little bit of room in our 'twenty two margin guidance.
For any upside if lumber were to.
Go above kind of the current level. So we create a little bit of buffer there in case that were to happen, but we're going to be back to you.
Andy days, a little bit more specific margin guidance for 2022.
And then I just had a couple of things I think Dave's exactly right, it's hard to break it apart Alex because there are so many moving parts and pieces, so I, probably simplify it and say all the work that we've been talking about on these operational enhancements are really coming through that's number one number two we didn't have any spec inventory at the beginning of last year.
And so what we had was the drag of these lumber lumber impacts on our to be built now you've got all that benefit working for you the pricing because we had contracts locked in in 2020 and they got the damn they got the negative impact of the lumber now what you have is our pricing has caught up to market.
Our new contracts and you've got specs that are real time, along with the operational enhancement. The 200 basis points to daves, describing you know we are extremely confident about and I think we'll be able to give you more detail around that next quarter.
And you've been progressing down that path.
<unk> the home buying process for some time now where do you think we are in this number one process from your standpoint number two consumer adoption of it.
I think that's exciting part Alex is you know the consumer is asking for it and so I think as an industry.
Probably talked in the past that we've been somewhat antiquated and adopting kind of this whole world of E. Commerce in this demand environment, We said housing was different.
The consumer doesn't feel that way certainly COVID-19 I think change the perspective of in our industry.
But what's been really interesting as we've been talking to the consumers that have been subscribing and when I look at.
Kind of all of the virtual tools and I look at the conversion rate and I look at what we're hearing from the consumer I'll give you a couple of examples.
Our conversion rate on inventory homes that are being reserved.
It's about 17%.
Our conversion rate on to be built homes that are being reserved is about 19%. These are two times generally in general industry conversion rate.
I look at our reservations just in the last 30 days nearly 800 reservations came through our system.
And then when we talk in and by the way those generally tend to come with a lower realtor, but then when we talk to the consumer so with our new project venture we have been.
Interviewing every consumer to see why they.
How they enjoyed it why they did it and the biggest takeaway from all of the exit surveys is that people enjoy having the freedom to do this on their out and that's kind of the way with.
All on demand services. So I think the adoption is really strong and we are in such early days I think when this becomes more of the norm you'll see continued efficiency that can be built from here.
Thank you.
Thank you.
Okay.
Our next question comes from the line of Jay Mccanless with Wedbush. Your line is open.
Yes.
Hey, good morning, everyone. Thank you for taking my questions.
The first one on the active adult.
Growth that Youre seeing there is just the growth there being driven across the board by some of the legacy communities you acquired a few years ago as well as.
The newer communities or is most of the growth weighted to those newer communities.
Hi, Jay I would tell you it's both.
I really would we have some new communities in California, but we also have a number of new communities throughout Florida.
And I think they are all doing quite well.
I think really the.
The brand acceptance of Esplanade in the brand growth of Esplanade has also helped I also think you have to just think about the change in attitude. That's come with this consumer having been through Covid I think theres, a real urgency in their buying decision.
I think social interaction and all the things that come with a with an esplanade.
Key importance to this consumer group.
We talk about the migration from some of these high cost markets. The Midwest I think that's also playing into it and then in all fairness I think it's important to say when you look year over year.
They didn't come back to the market as quick as other consumer groups.
When I look at the pace and total absorption I mean improvement some of that I think is because last year wasn't as strong as it could have been I think it really started picking up in Q3, if I tell you there was kind of a half of a quarter lag there, but I think it's all of it.
Okay. That's great. Thank you Sheryl.
And then my second question on <unk>.
The fully automated communities I guess, maybe where where does that go as a percentage of total community count.
Yeah.
The homes, presumably the.
These buyers are picking a package et cetera. Many of these homes that should have a shorter cycle time.
Even even than your traditional entry level product, where you have a salesperson in there I'm just.
Just wanted to one more depth around.
Where does this go as part of the business, but that also.
Does this help shrink down your overall cycle time, because these homes are.
I guess.
Very low option level et cetera.
Yeah, It's a great question and I don't want to get over my ski tips I Love. The question I'm quite excited about the new venture brands. So if I look at our first community in Orlando.
What I would tell you that those are all pre panelized houses so just that the simplification of the product.
Absolutely drives efficiency and reduce the cycle time.
You know when you have the buyer and the mixed and you've got different options being selected you just can't help elongate that so I'd say, yes, we will get greater efficiency I think you'll see this move to other consumer groups, but I think our first few pilot communities will be at the more affordable fully panelized product.
Which will absolutely to your point reduce cycle time.
Or do we go from here its really early days I think we're very excited for these communities. This year I think the consumer will tell us I have great expectations that as we move into 2022 will continue to introduce new venture communities. It's probably a little early for me to tell you what it will be as a percentage of the portfolio, but I think as we bring new.
<unk> to market it gives us the opportunity to say, what's the best way I'm not sure we're prepared to do it in the active adult environment, yet because that's a consumer that probably needs a little bit more interaction I think it's also we know it is a consumer that enjoys the design center experience and spend a lot of money. There. So we will look at the portfolio and understand the best play.
But I think you'll continue to see growth through the portfolio.
That's great. Thanks for taking my questions. Thank you.
Our next question comes from the line of Alan Ratner with Zelman and Associates. Your line is open.
Hey, good morning, nice quarter, and congrats to to Lou and todays its exciting.
So.
My first question.
Hoping you can give a little bit of forward looking kind of thoughts into the mix of your business and you obviously flagged the active adult share going up.
When I look at your pricing, obviously pricing in the markets up a ton, but your pricing is.
Increased well in excess of peers, you know I look at your order price, it's up almost $200000 over the last year and a half two years and it's running over 100000 above what you delivered this quarter.
And I'm trying to figure out going forward, what's the right mix of your business to think about because obviously if your price is going to be going up 100, plus thousand dollars next year on deliveries, that's pretty impactful to the model at the same time, if you're selling more kind of higher end move up homes, even active adult homes I would I would guess, there's probably a down shift in absorptions.
Over time.
Higher price points. So can you give a little bit of clarity in terms of where you see the business going and try to strip out some of the quarterly volatility here.
Yeah, I think we'll tag team. This one Alan but good question you know when you look at the mix this quarter.
Sales I think it will give you a pretty good indication of what kind of the next 12 months look like so I think when we come back next quarter, you'll probably see in a S. P. No surprise given the backlog numbers that will be higher.
Certainly the quarter is highly influenced by the high percentage of active adult sales in the quarter for all the reasons we've talked about.
I want to be careful though because active adult is not always.
The active adult brand doesn't have to be exclusive Lee the higher price point, we have some of our active adult offerings that are much more affordable price points, but when I look at the introduction of the new communities that really impacted the quarter I look at the Sacramento price point I look at the Temecula in California, you have just higher.
Your price point active adult positions as well as some of the country club offerings in Florida.
I think you'll see active adult to be healthier.
<unk> of the total portfolio, but we have a lot of new affordable positions coming into 'twenty coming to market in late 'twenty two that I think will.
Probably.
Going down the overall company ESP as we move into 'twenty, three even though yeah.
They probably 30 days based on what Youre seeing.
ASP orders Allen, obviously, its going to trend to something higher for an ASP in 'twenty two versus 'twenty, one, but I'm with Sheryl as we look out into the business and the growing affordable segment.
I think youre going to see that revert back starting in 'twenty, three and we will see some moderation yep.
Okay. That's really helpful. Just to talk through that and then I guess the second part of the third part of that question was just kind of thinking through absorptions in the mix of the business could see a few years ago before he did Lyon. If I remember correctly, you were thinking about like a two and a half per month absorption pace.
The target and.
Obviously, the market's improved a ton since then but youre running probably closer to three and a half this year. So.
Putting aside whatever the market's going to do is there kind of a REIT absorption rate that you're underwriting land deals to today that you think about us as a sustainable run rate.
You know and once again Dave.
Yes.
We both feel about this but.
Certainly we saw peak.
The options early in the year and I think we all know that those were not sustainable, especially as you look kind of globally outside of just Taylor Morrison the number of new communities that will come back into the marketplace. I think you should have expected to see absorption rate grow given kind of across the country, Alan we're probably down about 20% communities as those.
Come back to market over the next 12 to 24 months I think you'll see just absorptions across the industry stabilize the math would suggest if demand stays where it is today.
We don't write underwrite to a target rate, we rarely look at each piece of land.
But I think your general view on something higher than what our historical number was in the low to the mid twos that takes you over three probably makes more sense as you look long term right and I would just add I mean, if you look at the strategic acquisitions, we've done over the last couple of years Alan some of that was designed around.
Pes and increasing turns.
Something with a three handle on it seems more likely on a go forward basis.
Got it that's very helpful. I appreciate.
I'll be in touch there so good luck.
Our next question comes from the line of Mike Dahl with RBC capital markets. Your line is open.
Hey, This is Ryan Frank on for Mike. Thanks for squeezing me in here and then also just wanted to say congrats from Mike and myself, Dave to you on your retirement.
On the new role so looking forward to working with you.
I appreciate that I really appreciate it.
So in the interest of time I'll just ask one here, it's a little bit of a two parter, but last quarter starts were roughly five per community. This quarter is closer to three and half or.
So can you just pizza is kind of.
What was driving that whether it's seasonality or supply constraints, and then kind of given those dynamics. How confident are you in the 22 and 'twenty three community kind of targets that you guys laid out last quarter.
Yes.
From a community count perspective that is by far the toughest thing for us to predict.
There are so many moving pieces from availability of the trades to the municipality approvals.
The good news is we have the land are ahead of us to grow the communities.
But we're currently seeing the challenges on the horizontal horizontal side of the business.
Labor is always a challenge and I would tell you that's being magnified in this environment.
Material shortages are also hitting the horizontal side.
One of the largest shortages is coming from pipe to support community infrastructure, especially sewer pipe.
We've seen shortages of labor and materials across all aspects of the homebuilding, but we're definitely seeing the bottleneck here in the in the horizontal side.
I mentioned in the prepared remarks that the challenges persist or worsen on the horizontal side, we could see some delays.
But we're constantly evaluating our cadence of community openings and taken the necessary actions to bring the communities online well have better insight into 'twenty two around the community count on our next call. So we'll give you an update on that in about 90 days. Yeah. You know it's interesting because I think everyone fully up to speed on the supply chain challenges that have hit the vertical side.
Of our business.
90, 60, 90 days ago pipe was it an issue you've gone from zero to now pipes are probably three or four months delays. So what we really have to dig through honestly is the stuff that was scheduled to open in the back half of the year.
And you know we have virtual tools that will assist us even preopening, but that's the color. We really wanted to dig into so we can give you an accurate view on the.
The 22 community count as Dave said, we have all the land. So we're in a good place 22 is fully subscribed in 'twenty three is actually quite quite strong as well.
David I, just want to talk about the starch because we did you know we did see a peak start in Q2, we did I mean I would argue that we were well above four and that was a level that is very difficult to sustain.
A lot of that was we saw some of the higher demands. We're trying to meet that we were trying to put specs on the ground, but also us in I think a lot of folks in the industry. We're dealing with weather challenges. So there was a little bit of a catch up we ran in Q3 from an orders perspective, a three three pace. Our starts pace was about three five per community.
I would tell you that it's a little bit of a healthier spot for us where we'd like to be and we will hopefully be somewhere in that kind of mid threes from a start perspective going forward as well.
Got it. Thank you. Thank you very much for the time.
Thank you.
<unk>.
Our last question comes from the line of Alex Barron with housing Research. Your line is now open.
Thank you and good job on the quarter.
I wanted to ask about <unk>.
Share repurchases I know you.
You guys.
Uh huh.
But there's little left on the authorization. So can you guys comment generally on your thoughts around share repurchases going forward.
Sure Alex Yes, we have a $100 million remaining on our current authorization, we're going to continue to be opportunistic.
The way our investment options from there I would tell you the focus continues to be on share repurchase.
And probably so in the foreseeable future I mean, we first of all we strongly feel that we're undervalued and reinvesting.
Reinvesting through share repurchase is going to be accretive to us in ROE driver for Roe.
Also with that.
We have a strong focus to bring down our debt, but we're a little bit handcuffed right now because of the premiums.
<unk> kind of refi and pay down some of that debt.
But every quarter that goes by those premiums come down the math, it looks a little bit better, but short of paying down some of that that youre going to see us continue to focus on share repurchase once we get through this authorization.
We will like we always do go back to our board and talk about potentially putting another one in place and we'll give you an update.
Date, when and if that happens.
Okay. Thanks, and also along those lines any thoughts on starting a dividend.
It's a good question, it's actually one that we debate.
I would say a couple of times a year.
Both of the management team and our board I would tell you right now our priorities are as I said focused on paying down debt and then taking advantage of our stock given that we feel it's so undervalued.
You know, we're probably a couple of years from from a dividend.
But that's something that we'll continue to address going forward.
Great. Thank you very much.
Thank you there are no further questions I will now turn the call back to Sheryl Palmer for closing remarks.
Well. Thank you very much for joining us today, we were excited to share our Q3 results and look forward to speaking to you in the new year.
Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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