Q4 2021 Taylor Morrison Home Corp Earnings Call

Hello, Good morning, and thank you for joining today's call. The call will begin in approximately 10 minutes. Thank you for your patience.

[music].

Good morning, and welcome to the Taylor Morrison with the 2021 earnings Conference call. My name is John and I'll be the upright today currently all participants on this.

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.

I would like to introduce Mackenzie Arndt, Vice President of Investor Relations. Please go ahead. Thank you.

Thank you and good morning, before we get started let me remind you that todays call, including the question and answer session includes forward looking statements that are subject to the safe Harbor statement for forward looking information that you will find in todays earnings release, which is available on the Investor relations portion of our website.

At Www Dot Taylor Morrison dotcom.

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 our release now.

Now, let me turn the call over to Sheryl.

Thank you Mackenzie and good morning, everyone. I am pleased to also be joined today by Lou Steffens, our new Chief Financial Officer.

Eric user our chief of corporate operations Officer.

Lew officially stepped into the CFO role January 1st after several years spearheading our transformational M&A strategy and integration execution.

In his nearly 15 years with the company Lou also held a number of regional and area president roles and I am thrilled to be kicking off 2022 with him in this new capacity.

Eric leads our strategic direction and overseas, our land investments as well as our sales marketing and research teams. He joins US. This morning to provide an update on our strategic partnerships with a focus on our build to rent business.

Before we dive in I want to begin by acknowledging the extraordinary efforts of our homebuilding and financial services team members throughout 2021, and especially in the fourth quarter their dedication and resiliency allowed us to end the year on a high note to deliver record breaking results for our organization.

And while serving our homebuyers with an uncompromising commitment to construction quality and customer service. Despite the severe supply chain disruptions felt across the industry.

Our customer centric approach is key to our long term success and I believe has become even more differentiated in this challenging operating environment. As we recently earned the coveted distinction of America's most trusted homebuilder for the seventh consecutive year.

With our highest trust index score yet this special recognition is a testament to our tremendous team members across the organization.

Let me review just some of the other highlights of the past year in 2021, we increased our home closings by 9% to 13699 homes expanded our home closings revenue by 22% to nearly $7 2 billion and improved our home closing gross margin.

<unk> by 370 basis points to 23%.

We also realized meaningful cost leverage and benefited from the strong performance in our financial services business.

As a result, our pre tax margin improved by over 600 basis points and we grew diluted earnings per share by 176% each to new company highs.

These strong results were achieved even with the unpredictable labor and material constraints that added significant complexity extended construction timelines and pressured costs throughout the year.

While some anticipated fourth quarter closings and community openings were delayed because of these challenges we are well positioned heading into 2022 to realize another year of significant growth in revenue and profitability as we continue to navigate the supply headwind and benefit from our strategic focus on.

Operational and capital efficiencies.

This year, we expect to deliver between 14000 to 15000 homes at a home closings gross margin of at least 23.5%.

It strengthened margin outlook implies more than 300 basis points of year over year improvement and nearly 700 basis points over the last two years.

Combined with our focus on optimizing our balance sheet and cash flows through Lamb lighter investment and disciplined capital allocation. We also now expect to generate a new company high return on equity in the mid 20% range.

As I have shared before since reaching the critical inflection point in our integration of William Lyon homes last year, the largest and most transformative of our six acquisitions since 2013.

This phase of our strategic journey is focused entirely on capturing the many advantages of our enhanced scale and portfolio diversification that has transformed our ability to generate long term value.

From an operational perspective, while we have made significant progress in rolling out enhanced processes, we still have meaningful opportunity ahead to further enhance gross margins and improve asset efficiency.

For example, we rationalized our floor plans in 2021 and are targeting additional reductions this year, even as we opened more communities. We are also eliminating option variation within the planned rebuild which is even more beneficial to our construction efficiencies.

In 2021, our option library was reduced by more than 30% and will benefit further with the introduction of new National design specifications in the coming quarters.

This strategic simplification allows us to streamline production and leverage our supplier relationships, while ensuring we are offering only the most profitable and consumer desired plans.

These efforts are supported by the growing share of our start under our new curated option program known as canvas, which represented approximately 15% of our second half net sales.

Will steadily ramp higher through throughout 2022.

In fact, approximately 70% of our existing communities now offer canvas.

We will all new community openings going forward.

With a simplified design process and faster cycle times. This program is driving greater production efficiency improved profitability and a better customer experience.

This focus on operational performance is matched by our focus on capital efficiency to drive greater cash flows.

This includes strengthening our balance sheet and executing on new capital efficient land financing tools.

After increasing the control percentage of our land portfolio by approximately 700 basis points to 38% last year, we now expect to grow our controlled share to approximately 45% by the end of 2022 as the new land financing vehicles that we established last year with Vardy partners.

Have accelerated our land lighter balance sheet strategy.

These cost effective arrangement improve our ability to finance new land investments reduced the amount of inventory held on our balance sheet minimize long term risk and meaningfully improve expected returns.

As Eric will discuss I am pleased to share that we expect to add additional financing capacity specific to build to rent projects that will enable us to cost effectively scale. This growing segment of our business.

From a demand perspective during the fourth quarter, we continued to benefit from favorable trends across each of our consumer groups and geographies strength was most notable within our move up segment, which experienced year over year growth in both net orders and absorption pace and represented represented slightly more than half of our two.

Total sales versus 44% figure earlier.

Our 55, plus active lifestyle segment also continued to enjoy strong momentum.

Thus far into the new year consumer engagement across our portfolio has remained healthy and our monthly sales pace has been consistent with the $3 two pace experienced in the fourth quarter.

Well this is down from the record breaking activity experienced in the first quarter of 2020 to more sustainable levels.

We believe underlying demand is strong and supported by demographics at both ends of the buyer spectrum.

<unk>, all been consumer needs and preferences migration trends and limited availability of new and resale supply.

However, given the significant tightness in the supply chain. We have remained disciplined in our sales strategy to align net orders with construction capacity.

As a result.

Currently 75% of our communities metered sales activity during the fourth quarter and a similar share raised based pricing, which helped drive a 23% increase in our average net order price.

By prioritizing production ahead of sales and carefully balancing price and pace at the community level. We successfully increased new starts per community by 7% year over year to $3 four during the quarter and more than doubled our inventory of spec homes to fixed spec homes per community at.

Quarter end from just two eight homes at the end of 2020.

Only a handful of those homes were completed.

In today's supply constrained market. This disciplined approach is providing greater visibility into our cost improved efficiencies and a better customer experience by releasing the homes for sale as they progressed through the building cycle.

Before I turn the call over I want to spend a moment discussing our buyers financial position and affordability considerations.

As I share every quarter, one way we gauge affordability is by tracking the interest rate qualification buffer of our home buyers financed by Taylor Morrison home funding, which had a capture rate of 82% in the fourth quarter we.

We test the strength of these buyers by determining the maximum allowable interest rate. They could have qualified for after considering compensating factors versus our actual interest rate.

For our conventional borrowers, which accounted for 84% of fourth quarter mortgage closings. This spread was stable at roughly 700 basis points.

For our government FHA and VA borrowers the spread compress slightly on a sequential basis, but remained healthy at 400 basis points said differently because our buyers generally have strong credit profiles with an average credit score of 752 and debt to income ratio of 36.

Percentage in the fourth quarter, they have many levers to pull to offset higher rate or prices if necessary.

Even more meaningfully we estimated our customers in backlog could absorb similar increase in interest rates before adjusting their loan terms.

However, as you would expect first time homebuyers have experienced slightly more affordability compression than our overall portfolio.

In addition, our backlog is secured by substantial deposits and nearly eight 5% and more than $53000 per unit on average collectively these favorable trends supported below average cancellation rate of eight 2% in the fourth quarter and a company low six 6% in <unk>.

2021. Nevertheless, we are mindful of the significant movement in home prices and interest rates, most recently and have taken proactive steps and our product design and spec inventory choices to ensure continued affordability, particularly in our entry level communities.

Lastly, before turning the call over to Eric I want to highlight that we recently were recognized as the only homebuilder on Bloomberg's gender equality index for the fourth consecutive year for our long held dedication to supporting diversity at all levels of our organization.

This commitment to quality and transparency was recently strengthened further when we welcomed Christopher yet to our board of directors, making the majority of our board's diverse we expect his significant experience in real estate technology to complement our focus on digital innovation.

Now Eric will update us on our expanding build to rent operations, which is well on its way to becoming a meaningful and accretive portion of our overall business.

Thanks, Sheryl and good morning, everyone since first announcing our entry into the build to rent arena in 2019 by way of a strategic relationship with our brand partner Christopher Todd communities. The long term opportunity to serve both the renter by choice demographic.

And those impacted by rising home prices has only strengthened further this business enables us to leverage our core production homebuilder strength of land acquisition development and construction to deliver innovative rental communities that we believe fill a void in the market.

Unlike many other single family rental offerings are gated Villa style communities offer residents well appointed amenities social programming and generally one or two bedroom single story homes that are equipped with smart technology put friendly features and private backyards.

Average size of these communities is approximately 175 homes with an average rental rate of 17 $100 per month for a typical 1000 square foot average unit.

Aching them, a compelling affordable option for many perspective customers.

In addition to the demand opportunity these communities, which generally offer two floor plans provide new ways to capitalize on streamlined construction processes. This supports accelerated cycle times with roughly 20 starts targeted per community per month. We also expect to garner benefits associated with organically growing cost effective customer leads that will live.

Centrally benefit our for sale business.

As we continue to scale. This segment our priority has been to develop an efficient operating playbook and capital infrastructure to support return accretive growth over the last few years, we have strategically expanded our market penetration and establish a robust land pipeline that will fuel accelerating community growth in the coming years.

We now have an active BTR programs in nine of our 19 markets of operation with a handful of additional markets being evaluated for entry opportunities in 2022, while each of these markets are at a different stage of scaling we have approved approximately 20 land deals that represent a portfolio of over 4000 control lot.

With an additional 20 to 25 deals planned for 2022, we expect to roughly double our controlled lot count by the end of the year.

One plant is controlled and entitled the horizontal and vertical construction process requires roughly two years before our community is ready to begin leasing and an additional year for stabilization and prospective disposition.

With our first community in Phoenix, having recently begun leasing we expect to evaluate exit strategies. Once it has reached our stabilization expectations. Later this year and are targeting an asset sale by year end.

Just on the timing of other projects under development, we expect to have several additional communities fully leased and ready for disposition in 2023, followed by strong growth in 2024 and beyond.

With an extremely favorable investment environment for such a yield based horizontal apartment communities, we expect exit optionality to be high with.

With buyers ranging from financial partners to private equity family offices and others.

Given the production efficiencies no need for commission expenses and overall market strength expected margins are modestly accretive to our traditional business. While levered returns are targeted to exceed 30% given the ability to finance the projects in a capital efficient manner.

As Sheryl noted we continue to progress the expansion of our land financing arrangements and expect to complete a vehicle targeted specifically to BTR projects in the near future.

Before the benefits of contemplated leverage we expect to dedicate 40% of the capital to such a venture and look forward to sharing more details in subsequent quarters.

And lastly, it is also worth sharing that we intend to further leverage our BTR strength in the traditional single family rental sector by developing and building rental homes and full communities targeted for disposition to FSFR investors.

In fact, we have recently approved our first bulk of our project.

This is yet another channel to maximize our operational scale and capitalize on market demand for rental assets and enhance our long term returns.

With that I will turn the call dilutive discuss the Companys financial review and outlook. Thanks, Eric and good morning, everyone. I am excited for the opportunity to speak to you all today and look forward to getting to know you in this new role.

I will provide an overview of our strong fourth quarter earnings result, and our detailed financial guidance for the first quarter and full year.

To begin we generated fourth quarter net income of $273 million or $2 19 per diluted share, which was up 204% year over year.

On a pre tax basis, our income margin equaled 13, 7% up 610 basis points from the prior year.

Turning to our operations, we delivered 4200 83 homes during the quarter at an average selling price of $558000, which drove a 61% year over year increase in our home closing revenue to $2 4 billion.

Homes closed were slightly below our prior guidance due to extended construction cycle times.

As we navigate these supply constraints our teams continue to be diligent and creative in finding solutions and most importantly, delivering high quality homes to our customers.

This includes implementing enhanced scheduling processes streamlining operations and simplifying production through plan and option rationalization.

And expanding and leveraging our strong trade and vendor relationships while.

While we are hopeful these strategies will help stabilize construction schedules as we move through the year, we're not projecting any change in supply chain conditions in our guidance.

We currently expect to deliver between 2600 2900 close homes in the first quarter and between 14 and 15000 closed homes for the full year.

Given favorable pricing trends and ongoing market strength, we expect the average sales price of our closed homes in 2022 to be at least $600000 versus $524000 in 2021.

This strong price growth is expected to drive a meaningful improvement in our home closing revenue for the year from.

From a gross margin perspective, our teams disciplined focus on managing costs and optimizing our production processes has allowed us to achieve a significant improvement in our profitability. We have also benefited from the realization of acquisition synergies in line or better than expectations. Since we closed on William Lyon homes in early 2020, as well as robust pricing.

Power across each of our markets. This execution is evident in the 330 basis point year over year improvement in our fourth quarter home closing gross margin to 21, 6%. Following this strength, we expect to generate a home closing gross margin of approximately 22% in the first quarter and for the full year, we now expect to deliver a home closing.

Gross margin of at least 23, 5% in 2022.

This would be up from 23% in 2021 and is stronger than our prior guidance provided in October of at least 22% given further visibility into the strength of our backlog of over 9100 sold homes. These homes reflect a number of favorable trends, including strong pricing power acquisition synergies the ongoing implementation.

<unk> of operational enhancements improved lumber costs and normalization in the mix of our spec versus to be built homes SG&A as a percentage of home closing revenue was seven 8% in the fourth quarter down 180 basis points year over year in 2022, we expect our SG&A to be in the high 8% range. This would represent.

Meaningful leverage over 93% in 2021, given strong top line growth disciplined cost management and the early benefits of our virtual sales tools. It is worth noting that these tools contributed to a 30 basis point improvement in external broker commissions in 2021, and we anticipate our commission expense will continue to decline.

As we expand the reach of our digital capabilities, including the use of our online reservation system for both spec and to be built homes to nearly all of our communities turning now to our land portfolio. We ended the year with a robust pipeline of approximately 77000 owned and controlled homebuilding lots, which represented five six years of total supply.

This attractive land portfolio will support community count growth as we move through 'twenty, two and into 2023.

However, given supply chain constraints extended land development timelines are expected to delay some of our community openings. We expect to end the first quarter with approximately 310 to 315 communities as Closeouts outpaced new openings.

Sequential growth each subsequent quarter is expected to bring ending community count to around $3 50 by the end of the year based on our existing land pipeline and current development timelines, we still expect substantial growth in 2023.

I want to point out that going forward, we will provide a guide to ending community count rather than average which is more consistent with how we manage the business and better reflects the selling and development environment.

Before leaving the topic of community count It is worth noting that one of the ways in which we are driving improved returns is by targeting multi outlet self developed communities because of this shift our approved land deals in 2021 had nearly 25% more lots than a trailing three year average yet lower expected durations due to a significant number of them having more than one.

Outlet per project.

Because of these efficiencies these communities drive greater margins and overhead synergies by allowing us to better leverage our field personnel and fixed costs and compete more effectively in the land market.

And lastly, I will provide a brief overview of our capital position and allocation priorities and.

In 2021, we've made significant progress in strengthening our balance sheet and executing on new asset lighter land investment strategies.

During the year, we invested $2 billion in land acquisition and development to support our future growth repurchased nine 9 million shares outstanding for $281 million.

And deleverage our balance sheet by nearly 500 basis points to our net debt to capital ratio of 34, 1%.

In 2022, we expect another strong year of cash flow generation and are targeting homebuilding land acquisition and development of approximately two three to $2 $4 billion. This year.

We also expect to further reduce our net debt to capital ratio to the mid 20% range by year end and we will continue to be opportunistic in returning excess capital to shareholders via share repurchases. These actions combined with our strong earnings outlook is expected to drive a return on equity to a new company high in the mid 20% range this year and close.

I want to thank our teams for all their hard work in 2021 I am excited about all we have planned in 2022 and look forward to updating you on our progress again next quarter.

With that let's open the call to your questions. Operator, please provide our participants with instructions.

Thank you very much and if you would like to ask a question. Please press star followed by one intensifying keypad and if you change your mind. Please press star followed by Chase.

We have our first question from Carl Reichardt of V. P. I G called your line is now now I think please go ahead with your question. Thank you.

Thanks, Good morning, everybody. Thank you for the time today and all the detail.

Hey, Sheryl.

I wanted to ask just on mix and going forward mix with the with the move upside being 51% of total orders as you look at the community count openings, including the sort of multi outlet thing that we're all talking about in 'twenty, two and even beyond that how do you see your mix.

Adjusting over over time do you expect it to go lower and then is there any kind of a regional alteration that youre expecting over the next year or two.

Good question Karl a couple of things when I look at the mix of the quarter. You saw that we were slightly slanted more than we had been to that move up.

Per second time move up and active adult when I look at the new communities Carl that will be coming on board over the next many quarters I think youll see a little bit more pick up in the first time buyer I think as we look over time, you will see our average sales price moderate a bit as a result of that.

When I look at regionally, probably not significant chefs I mean, Florida will continue to prioritize the active adult certainly the Sarasota and Naples area.

When we look at the you know Carolinas, Georgia, I think youll see a much greater penetration in the first time buyer as you will in our California business one of the most recent shifts in the California business is actually the complement of the active adult positions that we've added and they have as we've expanded.

The Esplanade brand across the country. They have continued they have performed quite well.

Great. Thanks, Sheryl and then my follow up is on the improvement.

The canvas and I guess I'm trying to think about the right way to ask this.

If you look at what your ultimate goal on say build cycle time is from the improvements that youre, making to your efficiencies and you compare it to what your cycle time was before the pandemic. So we the pandemic sort of muddying the waters here, what kind of improvement.

Let's say build time do you expect ultimately to achieve from these initiatives.

Thank you Carl.

It's interesting because we don't have a tremendous amount of data yet on the canvas, even though we saw about 13% 14% of our sales in 2021, what I would tell you. The early read is an interesting Karl I Havent gone back and compared it against pre pandemic, but if I look at it in real time.

Impaired to the cycle times, we are seeing and what I would call our more typical design center built.

We've seen a benefit of about 20 days in cycle time on our canvas packages. So even though the entire kind of portfolio is a little out of whack across you know in Taylor Morrison and in the industry given the dynamics, we have out in the marketplace. We are absolutely seeing a.

Benefits in the canvas build I would expect that as that matures through the organization.

And obviously, we'll see.

Considerable ramp up in 2022, we should be able to build on that and then as.

As we get to a more normalized environment again, I would expect that we should retain at least a couple of week cycle time enhancement.

And Karl this is Louis good morning, Justin.

One thing to add to that another big area that we believe we're going to see significant benefits as the sale to start timeframe with canvas. So that's another added benefit we will see coming through the pipeline as we continue to roll that out.

Thanks, Luke Thank you Sheryl I appreciate it.

Yeah, you bet and I just might even add one last comment.

Two it because Lou you're so right and when we look at the fourth quarter and we look at some of the closings. We lost we generally lock them in our active adult business, specifically, Florida is where we saw the greatest chefs, but when you compare canvas or even our normal design center appointment you know as.

As we look across the portfolio our options I know, we've chatted about this in the past, but our options in a market like Naples, and Sarasota, which is generally all our esplanade brand or a high majority.

That's about two times the company average so when you take that level of complexity out of the build with the canvas packages. Once again I think it's just a tremendous opportunity for us.

Great. Thank you.

Thank you thanks Carl.

Our next question comes from Matthew <unk> of Barclays.

Please go ahead with your question.

Hey, Good morning, this is actually Tim on for Matt today.

Congrats on the nice results here, if I could just cut about what's giving you incremental confidence to kind of put out that 20 352025 gross margin versus that 22% plus so you kind of alluded to prior was that simply kind of just conservatism until you've built out more of that backlog or.

Anything in the pricing or cost outlook that has contributed to that.

I'll start then yes sure Ashley good morning.

Our confidence I would say, having 9100 9100 sold homes in our backlog, we have strong visibility to the future margin profile and in that our teams I believe have built in.

Correct amount of contingency to get us through with cost increases we are seeing today.

And then combine that with the specs that we have under production, which we've increased significantly year over year.

Strong visibility to where we think today pricing on those is going to end up being so we have overall between our specs and our backlog quite a large portion of our total years closings some visibility on today, yeah and to your point look compared to last year. Like you said, we've doubled our spec inventory and given that those have gotten the true benefit of real price.

<unk>, we're in a very different position than we were last year. If you think about the 22% we shared last quarter I mean, the backlog was in a different place lumber is moving I mean, a lot of the units are secured for the year already.

Yes.

Okay. Thanks for that and then.

Then just on my second question I appreciate that kind of extra color on affordability.

Even up top if I could just kind of expand on that topic.

Have there been any changes in buyer preferences that youre seeing any kind of lower square footages are less options and premiums.

Response to that.

Stretching affordability.

Not yet to be quite honest about it you know we've continued to see strength in our buyers.

And their behaviors have not really moved.

As we discussed in the prepared remarks, you know the favorable characteristics, we've seen with our close customers quarter after quarter just didn't meaningfully change in Q4.

As I mentioned, we did see some compression with that first time buyer and where we've seen probably a little bit more resistance.

And probably a larger percentage of folks that prequalify and have challenges would be with that first time buyer.

And then when we looked at our entire backlog you know our conventional buyers mirror our close buyers their credit scores are high they're DTI back ratios are almost right on top of our closed buyers and they have very strong qualifying incomes.

We then went ahead and look and say what would happen if rates move up you know two four and a half and you know.

Honestly, there back ratios still stay very healthy under 40% and even if we move rates up to five 5%. They barely go over 40% a little bit different with FHA buyers as I mentioned, you know they would their backend ratios would move into the low fifty's.

But now generally if theres been any push on kind of rate its really more backlog because those are the folks that maybe.

Maybe when they entered into a purchase agreement with us rates may have been something around 3% so watching that movement.

But I think most notably is we've done a great deal of surveys with our shoppers to understand how they feel about the moving rate environment.

We did a very similar survey back in 2018, and we started comparing the two.

We've learned a few things one.

The percentage of shoppers I'd expect to pay cash is significantly higher and that aligns with what we're seeing in our closings in our backlog I mean, its moved up our cash buyers have moved up more than 50%.

The baseline question, we asked our shoppers as well how would you feel if rates moved to 5%.

And the most interesting stat is only 5% of the hundreds of buy shoppers that we've surveyed said that they would stop looking at 5% that is much less than half of the response, we got in 2018, they feel like they have a number of different strategies they can deploy.

I, you know a larger down payment a smaller offering the type of loan.

And I think the most surprising stat was.

The high point of interest rates that would affect their search was very healthy until you got to 7%.

I think what we have to remember is with the migration patterns, we're seeing.

From California, and New York, New Jersey.

The optics on affordability is very very different and then when you look at what the average consumer today has an equity in their existing home. This is an advantage for the move up buyer our active adult buyers.

I think we saw that yesterday that John Burns quoted that the average equity is 300 <unk> thousand per household.

So when you can bring that to the table. It really helps you offset any increase in interest rates.

As you said Sheryl and those high cost savings people are migrating these homes are a really cheap to them from some of the places are relocating that theyre not there and its the local buyers right sorry.

So I hope that helps Ashley.

Yeah, all fair points there.

And I guess, thanks for thanks for taking my questions and I'll leave it there good luck for especially.

Yes.

Jay Mccanless from Wedbush you have the next question. Please go ahead.

Hey, good morning, Thanks for taking my questions.

I guess the first question I had going to the build for rent and thank you for all the detail there, but I was just wondering at the end of the prepared comments you guys talked about doing some bulk sales or the bulk sales going to be on balance sheet for Taylor Morrison.

Is that going to be part of the Christopher Todd joint venture.

Morning, Jay Yes, that's really a licensing agreement and kind of leveraging the brand that exists for Christopher Todd, but those will be on balance sheet, those will be Taylor Morrison assets and will be.

Kind of in control of those disposition decisions for build to rent for built to run forget the FSFR really won't be engaged with the build to rent process that correct. Yes, yes, I think Jay the right way to think about it is the way we're defining build to rent is really the Christopher Todd model, which was the horizontal apartments kind of a one planted are monetized.

Communities in the single family rental is just leveraging our core business to be able to produce homes that ultimately we'd be disposed of two of our players in the space and that might take the.

That might look like individual homes that might look like specs that might look like dedicated communities that might looks like dedicated phases within our master plan. So a lot of optionality that we're excited about exploring.

Okay.

That's what I was kind of getting to is I didn't know if it was.

Model, where you just built an entire community and sold it but it sounds like you guys are using it basically there's kind of a tactical play more than anything else I guess, that's the best way to think about it.

My next question is on the cancellation rate, 8% sounds great could you tell us what it was last year and where it wasn't third quarter.

Yes sure.

Jay This is Lew last year, our fourth quarter, we were at seven 9%.

Lot of US would argue that that may be even too low where we're at today, our financial services team does such a great job of pre quality our buyers.

Which makes it a lot easier for us that we don't have to worry about ton of cancellations in our business but.

I would almost argue we could take some more risks out there, but we're very proud of how loaded.

Yeah, that's great and then just my last question.

I think and correct me on this I think you said in the prepared comments. So your average lot count inside the communities that you are putting under contract it's up about 25%.

And I'm just wondering.

How far out are you having to go to get that extra 25% or were you able are you able to stay closer into town I guess kind of thinking about.

How much you having to give up in terms of.

Potential profit or anything like that to get the extra lots or is it. There are these still locations that are fairly close to the metro core of the metro areas.

Yes, Jack I would suggest that we're at.

I'll focus on core locations I always look at the land opportunities in context of our portfolio. So to the extent, we need to expand 10%.

Until those areas to get exposure I would say, we're comfortable with that but by and large we're focused on core locations I wouldn't say that we're needing to do those size deals to reach out I would say, it's a function of the deals that are available to us and frankly in some cases to benefit because we have multiple outlets within those communities.

That's the only thing I'm sorry, the only thing I was going to add is if you think about our active adult business.

Generally those are larger communities, so as those come into the portfolio they will.

We have some effect on the overall size of each asset, but that that would be another strategy, where you know that we have probably three to five positions within an active adult community and just lastly, I'd say that it's part of having the scale that we have a lot of builders couldnt take down larger projects. So we're able to get into.

Core locations as Eric said and get the synergies of having more than one outlet, but many players just aren't willing to do that bigger project and cant yeah exactly.

Airplane sounds great. Thanks for taking my questions.

Okay.

The next question. The question comes from Mike Rehaut Jpmorgan, Mike. Please go ahead with your question.

Great. Thanks, good morning, everyone.

Hey, Mike first I wanted to just good morning.

Wanted to circle back to.

The gross margin.

Guidance, and obviously very encouraging on the full year raise.

You know in terms of cadence I was just wondering you obviously laid out the 22% for the first quarter and the 'twenty three and a half for the full year.

Just trying to get a sense if possible you know.

In terms of the step up into the back half and obviously it implies.

Ending the year.

Over the 23 and a half.

But should we be expecting kind of.

Like more of a ratable.

Kris.

Over the.

The next three quarters.

<unk> or could we see another pretty pretty significant step up.

In <unk> and the reason I'm asking that because obviously you have the 99000 plus homes in backlog that all else equal would probably get you somewhere to the second or third quarter. So it would seem that.

With that type of visibility.

I'm kind of thinking you'd see a pretty notable increase in the second quarter.

Off the bat.

Yeah, Mike It's a great question I'd say youre looking at it right Q2, we had the favorable benefits of lumber reductions. So we will see some fairly strong margins in Q2, and then as we continue to move through the year, we've been able to stay in front of cost increases going forward.

Getting to that where we expect to exit the exit rate at the end of the year just based on the averages you'll probably in the low 20 fours mid low to mid 20 fours I mean, the one thing we don't have visibility on Mike in the fourth quarter is probably the newest round of <unk>.

Locks on the lumber because this next lock will really determine your fourth quarter deliveries, but to lose point absent that theyre just going to continue to see that ramp up yes.

Right.

Sense.

I guess secondly, one thing that.

The whole industry is going through right now or or investors looking at the industry is trying to.

Gauge over the next two or three years, what a quote unquote normalized gross margin could be because obviously you've had.

Massive amount of gross margin expansion earnings have doubled and tripled than people are trying to triangulate what's normal.

For Taylor Morrison, you know theres been a lot of structural change on top of.

The improving.

Improving.

Housing market and the stronger housing market and positive price cost.

I was hoping if you could give a little bit of insight in terms of.

When you're underwriting land deals today.

What type of gross margin.

As part of that.

And also when you look back at.

Gross margins that you.

Generated from <unk>.

2015 to 2019, it averaged about 18%.

And that was obviously a period, where you were going through a lot of acquisition integration and so forth.

I guess, it's sort of a two parter one.

What would that 18% look like today.

With the <unk>.

Roofing and cost structure post acquisition integration and secondly.

From a land underwriting standpoint.

What would the new baseline b so to speak.

So Mike a couple of things you know obviously, we're not in a position yet to give margin.

Margin guidance out beyond 2022, but you said it correctly when you look at our kind of rearview mirror and you look at the margin profile, we've seen for the last what five six years Lew we've really had a great deal of noise, you know with purchase accounting and things like that.

So you know you know as well as I do kind of the long term run rate.

Of margin profiles on our industry for the last 20 years and kind of normalized times has been in the Twenty's due I think structurally it's going to be a little higher than that for the foreseeable future given the supply demand disconnect I think so hard to nail that down anything else and then we can talk a little bit about the underwriting I would say Mike.

Finally going to be the beneficiaries of all the hard work our teams have done on the acquisition front from simplification to the various other synergies and the scale that we've achieved through this most recent M&A on top of that between a V. In Lyon, we acquired a lot of lots at fairly strong really good prices. So high time I think we're really pleased.

<unk>, where our lot position is today and our five six years of supply it feels really good based on when those lots were secured and contracted.

And Mike I would add just from an underwriting one's perspective look I've been doing this since 2004 so.

I would tell you with full admission in the last couple of years have been really interesting.

With land, if it's gone up 30% you need 10% lift in Asps to cover it and we've experienced that so.

We would say that.

Been able to hold our land residual ratios.

We're performing well relative to our underwriting.

And we're underwriting at current market prices, where we've been more conservative really is on the paces because that has felt a little bit of a unique environment. Because we think about the last couple of years, we've actually engaged in a pretty robust third party study that has helped us understand really what is a normalization expectation for each one of our markets as we think about historic pesos as we think.

About land coming online as you think about our positions and so spent a lot of time on that a lot of time on scenarios and how do we think about some different things playing out relative to your underwriting.

It's hard to ignore Eric the kind of generally 20% to 25% reduction in community count in most markets right. So as those come online you're going to we're going to expect to see paces moderate. So we're really trying to make sure. We're ahead of that Mike.

Great. Thanks, so much.

Thank you.

Our next question on the line comes from Alan Ratner of Zelman Associates.

Please go ahead Alan.

Hey, good morning, Thanks for taking my questions.

So the first one.

And nice to hear you are on the call Lou welcome aboard on the ER on the air.

Facing side.

So just on the spec count the doubling that you referenced there obviously that that's those are homes under construction and then you mentioned the complete number remains very low can you talk a little bit about your strategy with those specs in terms of when you're actually releasing those for sale or are you holding them back until completion or close to <unk>.

<unk> and just curious because we're hearing similar numbers and similar strategies from other builders as far as kind of holding specs back and I'm. Just curious if you've given any thought to the competitive landscape as the year unfolds as you look at specs on the ground today versus potentially available for sale at some point in the future.

Yeah.

Yeah, Alan maybe I'll take the first shot at that I would say our markets each market based on the supply chain environment, probably releases them at a slightly different timeframe, depending on when they have better visibility on the costs.

So one division may release, some more slack after slab another baby closer to frame, our close to dry wall. So it probably varies a little bit against across the portfolio, but more importantly, as they feel they have strong visibility on one the cycle time and to the cost structure, Yeah, I think that's right.

And to Lee's point, Alan I mean, it is pretty varied, but I would tell you that there is an overarching company view and working with our division that Theres a lot of inventory being built and we want to make sure that we get it out to market as quick as we can.

And where it really makes sense the supply environment is different in each of our markets. There are some where there's not a lot of inventory under construction across you know the new homebuilders and Theres somewhere it it's pretty heavy so there's a lot of considerations and that we.

We feel really good we're not carrying any completed inventory to speak of I don't think it's 2025 units across the portfolio today, which I would tell you is much leaner than we'd like.

So we're not going to let these things age, but if we can get them to at least frame drops or lumber dropped it gives us strong visibility.

The most significant cost component of the house, yeah, and as it relates to our backlog. It's interesting from 2020, we've seen a 66% increase in the number of our backlog homes that were sold at spec. So youre starting to see it really come through the portfolio. At this point in time is we've continued to increase our spec.

Yeah, and probably the most significant piece that's worth mentioning.

Alan is with that pivot if you think about last year.

Had very few specs everything was a to be built you saw our sales rates. So in some of our markets, where we've really moved up our spec inventory.

Low down sales so that's a little bit of what you saw in Q4 and honestly what youll see in Q1 as we let those things at least get slabs in the ground, where we've pivoted from really holding back any to be built lot.

At the more affordable level, specifically to specs. So that's it's both it's impacting our sales pace as as well as anything.

Yeah, that's that's kind of what I was getting at Sheryl. So thank you for that and that sounds like a lot of builders are doing the same thing talking about first quarter orders, maybe not seeing that typical seasonal lift that you otherwise would given kind of the timing.

Those specs, a little bit and getting further along in the construction process.

Exactly the second question.

On the mortgage side and thank you for all of the information on the surveys et cetera, I'm curious now that the move up piece of your business has grown as a piece of the pie.

At least at least for the time being.

When you look at your either buyers or perspective buyers and I think the biggest difference now perhaps versus earlier on in the cycle when rates were hopping around us.

The vast majority of homebuyers at this point have refinanced at a much lower mortgage rate and if you look at the overall universe of mortgage holders, 70% are locked in below a 4% rate. So while affordability might still be attractive you know just thinking about turnover. There is that risk that a buyer is going to be less willing or perhaps you know.

A pill to swallow the give up a low rate when when the newer rate is going to be above that so have you looked at that at all it surveyed that at all in terms of the the willingness for the buyer to give up that low rate. If if the newer rate is well above kind of where they are locked in it.

Yeah. That's the survey that I mentioned, Alan we've actually spent a great deal of time understanding kind of our shoppers views on what's what's motivating them to relocate we obviously saw a different level of motivation.

Back right. After the pandemic started than what we're seeing today and Youre right people have very low interest rates, but you can't forget that 300000 on average.

And generally when we think about the reasons theyre moving they have a whole different set of motivations. Today you know when you look at the move up buyer.

The house isn't exactly they need additional.

Flex spaces added bedroom count moving closer to grandchildren, Theres, all kinds of motivation, but honestly.

We are seeing even in our move up buyers the first inventory to go.

Is generally the largest so it's been quite interesting now the motivation on the first time buyer a little bit different and that's where we're seeing like I said some compression. So we're really making sure that the the specifications on those houses is really targeted to market. So it doesn't take people out of the buying opportunity.

But.

Interestingly enough when you look at what they are locked in today. It is really being offset by the amount of equity they have in their home.

Got it alright, I appreciate that it'll it'll be interesting to watch unfold here.

Thanks, a lot sure.

Yeah.

Jamie <unk> from Wolfe Research you have the next question. Please go ahead.

This is actually close your books.

Sure I guess, just touching you mentioned that you really haven't seen any trade down in square footage that you just said that did move up buyer is trending towards the.

Higher square footage is but as you look across.

Spectrum.

Four plans, where exactly does the consumer stand I E. How much room do they have to trade down before you would have to go back to the drawing board and then deer, lower square footage or plans carry the same margins as the higher ones.

Yeah. They do let me I'll go in reverse order there Paul generally its square footage is not what shifting the margin a lot of it has to do with you know wanted to land was acquired.

So if I look holistically at the portfolio, we are seeing some reduction with the add of specs in square footage because of what we're putting out to market is generally our specs tend to be the more affordable plans.

You know, we cant run from what we've seen happen in both pricing and.

Rate movement, we've done a great deal of testing to look at the buyers that bought you know 12 months ago and look at those same plans today.

And as you know potentially 4% interest rate and of course, there's real movement. The interesting thing is when we pass that on our backlog.

They are their capability to absorb that without really any significant movement in their backend ratios some of it's being overcome because they've got higher down payments there.

Their financial picture has improved over the last year, so once again and I hate to be redundant but.

When you when you look across our backlog and the shoppers that are coming in today. They are not yet in a position, making those trade off on the move up we are seeing a slight compression, but even with that compression.

Even our first time buyers are in a position that you know the.

The rates are moving them to the higher end of let's say backend ratios, but still well within the range of what they can afford to do what I have found most interesting is when you when we kind of parse apart our backlog.

The.

Average loan amount for our government FHA buyers is actually higher than our conventional buyers because one of the tools. They do have is the ability to put a higher you know it is to be able to do a you know.

3% down payment.

And that's why we're keeping such a close watch on that first time buyer because their incomes arent moving at the level that the combined.

Right and price appreciation house.

Yeah.

Okay.

Okay.

Then I guess.

As rates have moved higher this year have you seen any conservatism into the land market from either you or your peers.

You know as Eric mentioned.

We have been and Eric when I speak to it we have been very discerning in our acquisition strategy.

It all comes around to scenarios right. So what if home prices taken a step backward was that due to our underwriting what does that mean relative to the affordability of that land what does it mean toward metrics. So yes, I can tell you. It's a conversation as part of every land that we underwrite.

And it really comes by way of the scenarios.

But we're certainly not thank you appreciate it.

Yes, theres, usually there's usually a drag of six to nine month drag on planning for sure and I think as I mentioned earlier, we're in a good position, where we don't have to chase a lot of land because we do have a strong land back in front of us. So we're not chasing those deals that look to us a little bit too high and costs were walking from zero.

And we are seeing some some transactions that we wouldn't participate in yeah.

Alright I appreciate it thank you.

Thank you.

Our next question comes from Mike Dahl of RBC capital.

Your line is now open.

Hey, This is Ryan Frank on for Mike. Thanks for taking my question.

Alright.

In the <unk> or in the interest of time I'm, just going to squeeze one quick one in here.

So there's been a lot of talk about the mix shift over the past couple of years I was just wondering is there any notable margin difference between your entry level your move up in your active adult products.

You know I'd say, there surprisingly fairly consistent across all of those some of it may be an affordable stuff that we bought from the acquisitions at a great rate, but overall the half despite.

Despite the mix there is a relatively consistent the only the only probably real difference. We may see if you agree is on the active adult once again, if we look at what they're spending on lot premiums and what they're spending on options lot premiums basically doubled last year most of that came through the active.

<unk> business.

Our options once again I think on average might have been 70000 on the portfolio, including active adult.

And.

Our active adult position us to tie in to that so it is it is certainly helping the margin profile of that consumer group I think as you said Sheryl the strength that we've been seeing there has been really amazing.

Yeah.

We're not even into the selling season, yet right yeah.

Got it helpful. And then I guess, you did mentioned kind of the acquisitions again, so as there.

Is there any notable difference between kind of your legacy Taylor Morrison land in the a V and the William Lyon land.

Again on the margin front.

Yeah, I would say.

We've been very pleased again, you know how those deals have performed in terms of the acquisitions.

It doesn't take away I think our team is also over the last several years have acquired some amazing pieces. So overall in the blend they seem to be very close to round. The same today as when we first did the acquisitions. Obviously, we had to work through integration and so we started out of the gates with a little bit lower margins, but.

We've integrated and worked in some of those simplification items, we're starting to see a lot of compression between the two you know we just showed our board and this last board meeting kind of a chart that I think said at all but it really talk kind of our legacy divisions that have never done an acquisition and looked at their margin profile and then we layered on top.

The divisions that had a combined business and then the stand alone and what became very clear is everything we've been sharing for the last few years about two years, you start to really see pull through and buy three years. It's all the same was true so when I look back to our a V or divisions that were formed through the acquisition those margins.

<unk> are consistent with the Standalone divisions based generally sell and when you look at the movement in William Lyon, we're not quite there yet, but the year over year movement has been tremendous and give us. Another 12 months. So by the third year, where it's a full poll through and you'll see alignment across the portfolio and adding to that we're seeing some of the divisions from the.

<unk> are having the highest margins across the company so.

I have a particular level of pricing.

Atlanta, our teams have done an awesome job yeah, Yeah mhm.

Awesome. Thank you very much.

Thank you.

Our next question comes from Ken Zenner.

Of Keybanc. Please go ahead with your question.

Good morning, everybody.

Good morning.

Okay.

If you could talk to.

You mentioned starts really appreciate that can you talk to the start in order relationship that we saw in the second half of 'twenty one.

As we enter.

The first half of 'twenty, two and second little housekeeping I guess, but do you have.

What the whip inventory close this year out at I think it was about 1.7 last year the whip value.

Mr. Robert community last year.

Alright, So maybe tell me if I Miss any of these.

Ken, but maybe starting off with starts we finished the year with around 16000 starts for the year. Our whip inventory ended at about $1 $3 billion at the end of 'twenty, one and we're really pleased our total units under construction were up 30% year over year. So.

We had obviously a tough finish and were a bit disappointed where we ended up in terms of closings, but our teams have done a great job positioning us even better for this year with 30% more units under construction to achieve our closings. This year as of the end of January we had about 75% of our total units under construction for this year's closings. So.

Yeah.

In today's supply chain environment, nothing is easy, but it's definitely trying to set ourselves up for better success. This year and in the back half Lou I think sales ran ahead of starch.

But you saw that we've tried to show that kind of turned on a tad in Q1.

As we're trying to get more specs in the ground last year with the backlog we had a to be built that just wasn't an option for us.

But youre going to see those align we'd like to get starts ahead of sales really for the next quarter or so.

Because when you look at cycle times, we need that I mean, we used to be able to start houses through may and June for the year. If I were to take your pre 'twenty. One that's just not the case in this environment. This.

This year, you know planned to have.

<unk> majority of everything started by the end of April .

Really appreciate your operating comments thank you.

Thanks again.

Our final question today comes from Alex Barron with housing Research Center.

Please go ahead with your question Alex Your line is open.

Yeah. Thanks, Good morning, just to jump on that last question.

You gave 15000 starts for the year what was it for the.

The last quarter and along those lines.

How many total homes under construction do you guys have because you mentioned that Youre specced had gone up significantly double but I wasn't sure you quantified.

Im not sure Youre talking about there.

Sure Alex Good morning, So with your first question. When we started almost 3400 starts in Q4 and I don't know if I heard you correctly, but we started 16000 homes in 'twenty. One I think you may have said 15, but I could have heard you wrong.

And then total units under construction at the end of 'twenty, one we're at close to 10000.

Of that we have almost 2000 of those were specs.

It isn't like under a thousand like 985.

I'd like a little over 820.

Yeah.

Okay, Great that's helpful.

The other question I had was.

You guys have mentioned this initiative to move towards designed pallets and simplify the number of Skus.

But is that a strategy that you guys are employing on specs.

Now where you're starting homes with these design pellets. Some people just pick out one of them or is that something you're giving people on.

Dirt jobs, as well, where they get to pick that which which one is it or is it both.

Yeah, it's a little bit of both Alex when we started you may recall that we talked about kind of the five different packages in the range of prices trying to keep the spend generally similar to what they would have spent in the design center, but making the process just simpler for the buyer we started out our rollout last year.

Her with inventory homes to make sure that they were aligned with market. Then we moved into model homes to make sure. The consumer can see what those look like and it just helped them visually kind of let it all come together.

Then we started doing to be built with buyers, especially at the more affordable or I would say the first time move up price point.

Now as I look at it it's really.

Definitely all of our specs and I would say a large percentage of our move up where they will have the choice to do a canvas package or are they will be able to go into a you know a typical one day, we've got a new program, which is a one day design center appointment you know when I look at the <unk>.

Demographics of who is selecting the canvas program. So far it is very skewed to what we call our demographic profiles of these baby maybe as I said. These are folks that are just starting out in your family or kind of a home at last they've been aspiring to get a new home and that.

Is the large majority, we're starting to see a little bit more take up in the active adult.

But once again those will that will primarily be on specs with that consumer group because they really do enjoy the opportunity to specify test their their wishes and maybe just adding to that Alex we transitioned to a national spec program near the end of the year for bolt to rebuild and specs.

Just a couple of examples.

SKU reductions appliances were down over 80% from what we had offered before similarly over 80% in paint and then flooring selections down over 30% so trying to continue to improve.

R.

Our possibilities in terms of achieving our closing goals based on ensuring we have more availability of the products that we're putting into our homes and that simplification carries over into the so far in vitro our conversations to clients for sure and that's where I mean, it's it's canvas.

Minus [laughter].

Well, that's a great answer and it's very.

Very good in terms of the way you guys have approached it.

My final question has to do with your share count the share count guidance of $124 million. It doesn't seem to imply a lot of share buybacks. I mean, you guys kind of engaged more than that this year. So is that kind of implying you're going to step back from share buybacks or youre just not really.

Why are you planning any significant activity at this point, but you're still open to doing so.

Yes, I would say, we're always looking at that as an option on our capital allocation priorities. So first we want to invest in the business secondly.

Secondly, we want to continue to strengthen our balance sheet as time goes on and then lastly, with excess capital we definitely will look at share repurchases.

But we would never include that in our forward looking guidance and update you on it okay.

Awesome, all right well, great great job and good luck for this year. Thanks.

Thanks, Alex Thank you.

Thank you all for joining us today.

Look forward to updating you at.

At the end of the first quarter.

Yeah.

Thank you very much.

Your lines have a good rest of your day.

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