Q2 2022 Taylor Morrison Home Corp Earnings Call
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Thank you for your patience, ladies and gentlemen, the Taylor Morrison Home Corporation call will start shortly.
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Yes.
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Good morning, everyone and welcome to the Taylor Morrison's second quarter 2022 earnings Conference call. Currently all participants are in a listen only mode. Later, we will conduct a question answer session to ask a question.
Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two.
Remind us the conference call is being recorded I would now like to hand over to Mackenzie Aron Vice President of Investor Relations.
Thank you and good morning, everyone. We appreciate you joining us today.
Before we begin let me remind you that this call, including the question and answer session will include forward looking statements that are subject to the safe Harbor statement.
Looking information that you can review in our earnings release on the Investor Relations portion of our website at Www 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.
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 I will turn the call over to our chairman and Chief Executive Officer, Cheryl Palmer.
Thank you Mackenzie and good morning.
I am pleased to also be joined today by Luke Stephens, Our Chief Financial Officer inherits user our chief corporate operations Officer.
I will share our second quarter highlights and then provide an update on the market environment and.
How we are positioned to navigate the headwinds facing our industry today.
After my remarks, Eric will discuss our strong land position and why we feel confident in the long term earnings power of our portfolio.
After which we will provide a detailed review of our results and updated financial guidance.
In the second quarter, we generated record levels of profitability and hearing most notably our home closings gross margin of 26, 6% was up 750 basis points from 19, 1% a year ago and more than 1100 basis points from 15, 4%.
Two years ago.
This improvement reflects strong pricing power as well as the benefit of operational enhancement and acquisition synergies that have transformed our business effectiveness.
At the same time, our SG&A percentage improved 140 basis points to eight 8% of home closings revenue allowance second quarter levels in our history as we have leveraged our scale and unique virtual capabilities to operate with greater flexibility and resiliency.
These results drove our earnings per diluted share to a new company high of $2 45 said.
In addition, we deployed our strong cash flow to reduce debt and repurchase of $172 million of our shares outstanding.
Combined with the effective execution of our asset lighter approach to land investment or return on equity improved more than a 1000 basis points year over year suggest over 23%.
This record performance demonstrates the strength of our scale team strategy land portfolio and well qualified consumer set and it is a culmination of our years long acquisition journey.
As we go forward I am confident these trends will continue to serve as well as we adapt to today's market reality.
During the quarter higher interest rates collided with home price appreciation stock market volatility and geopolitical tensions.
The rapid deterioration in affordability and consumer confidence called home buying demand quickly as shoppers face significant uncertainty related as much to the shock of higher class as to the sheer speed of change.
We were still managing sales releases in most of our communities in April .
So in May and almost not at all in June as these headwinds became more pronounced in the latter weeks of the quarter.
In total our monthly sales absorption pace moderated to $2 six net orders per community, which was down from the record levels experienced during last year's frenzy, but consistent with our second quarter norm prior to 2021.
The impact has been felt across our wide range of price points geographies and consumer groups, albeit to varying degrees.
Our move up and active lifestyle segments have displayed greater resiliency from a traffic sales pricing and cancellation perspective compared to our entry level segment.
Our homebuilding and mortgage teams have acted quickly to reestablish sales momentum maintain the quality of our backlog and manage production and inventory levels.
Given the diversity of our price points and product portfolio, our approach to managing pace and price is calibrated at the community level, which is even more critical in today's highly fluid market that has required a nimble and strategic response. So we are fine tuning by the day.
We have deployed a number of mortgage financing programs to a wholly owned mortgage company to customize solutions, depending on customer needs and maximize the benefit of our targeted incentive dollars.
By using finance as a sales tool we are helping our customers address their greatest concern whether that be monthly payment cash to close or some combination of both.
Our strategic allocation of incentive dollars is often far more beneficial to the homebuyer than the typical industry playbook of price adjustments as those dollars go further to reduce buyers payments and secure mortgage qualification well also better protecting our profitability as well as the law.
Long term value of our communities.
This approach extends to our backlog of over 8900 homes, where the vast majority of our buyers continue to be strongly committed to their home purchases. These.
These customers have average deposits of nearly 10% embedded equity solid financial position backed by the confidence of a pre qualification with our mortgage company and lastly, the attachment are to be built customers have to the home they have design to meet their individualized lifestyle.
Phil.
For these reasons, while our second quarter cancellation rate increased sequentially to 10, 8% of gross orders and just over 3% of our opening backlog from historic lows. It remains well below our long term run rate.
As I always share our buyers tend to be highly qualified and financially secure in.
In the second quarter Borrower's average credit scores were among all time highs at 755 average household income increased 13% from a year ago and average down payments increased 300 basis points to 23% despite larger loan amounts.
As a result, our buyers continue to have the flexibility to absorb higher mortgage rates from a qualification perspective.
For our second quarter mortgage closings, a buffer between actual contract interest free and the estimated maximum rate allowed for qualification for our typical buyer.
Approximately 530 basis points for conventional boards, which account for more than 80% of our volume and 270 basis points for the smaller mid teen share of our customers that utilize government back FHA or VA financing.
However, while most of our buyers can qualify at higher rates.
We do recognize the emotional element of the equation will likely take some time to reset.
As the market continues to search for its new equilibrium. We have seen continued pressure on sales activity. Thus far in July as well as an expected increase in cancellations. However in many of our markets are beginning to see signs that our new sales programs and adjustments have begun to provide necessary confident to shop.
To cautiously Reengage, our web traffic is trending higher once again mortgage Prequalification volume has also inflected positively since mid June and weekly sales conversion rates have been improving over the last few weeks, including a conversion rate of nearly 30% thus far in July .
For our online sales tool, which are a small but growing piece of our overall volume.
Additionally, since the rollout of our National Summer marketing event early survey feedback has revealed a growing share of our shoppers are looking to purchase as soon as possible, indicating healthy demand elasticity.
Our recent consumer research also shows that our shoppers are more optimistic about their household income and personal financial situation over the next 12 months compared to a national survey benchmark, which we believe once again reflects the overall strength of our buyers let me end by saying.
We remain constructive on the long term underlying drivers of demand in our markets and consumer groups and are confident in heart teams ability to navigate any uncertainty ahead.
We will be diligent in protecting our strong balance sheet and maintaining disciplined guardrails on land investment.
With a well vintage land pipeline of 82000 home sites, we are well positioned to drive future growth.
Patients with investment spend and whether any changing market condition.
And most importantly, we will continue to take a consumer centric dynamic approach to managing our business for the long term has housing signs he knew fitting in the months ahead now.
Now I will turn the call over to Eric to discuss our land strategy.
Thanks, Cheryl and good morning, everyone.
Starting with our current land position and as Sheryl mentioned, we owned and control a robust land pipeline of approximately 82000 homebuilding lots at quarter end, which represented a strong foundation of six one years of total supply.
Of these lots, we controlled 41% via options and other off balance sheet structures that enhance the capital efficiency and reduce risk.
This control the share is up from 35% a year ago, and 28% two years ago and.
In addition to our ongoing use of seller financing and joint ventures. This meaningful shift has been facilitated in part via the land banking agreements, we established with Vardy partners last year.
Since inception this off balance sheet vehicles has closed on 6800 lots across 11 markets.
We evaluate each land deal through our portfolio investment committee to determine the optimal financing vehicle by when cost of capital duration and underwriting assumptions to maximize our long term risk adjusted the expected returns.
Going forward.
Further expansion in our controlled share will be dependent on market dynamics. As we are pleased with the current balanced mix of our portfolio.
It is also worth highlighting that's still more than 60% of our own lots were contracted in 2020 or earlier.
These lots are booked on our balance sheet at an attractive historic basis, considering today's land pricing, which is a meaningful source of embedded value.
During the quarter, our homebuilding land investment totaled $451 million.
Of which 52% was spent on development versus 45% a year ago as we are working to monetize our well vintage land and drive the community count growth.
On the acquisition front, we are closely reviewing our deal pipeline to stress test every transaction before closing to ensure each deal still meets our underwriting thresholds.
Testably renegotiating terms, when appropriate and positioning ourselves to be opportunistic as the market evolves.
With nearly all lots already owned or controlled for targeted home closings through 2024, we're looking out to 2025 and beyond as we evaluate new land opportunities, providing us with valuable flexibility to be patient in today's fluid market.
As a result, we now expect to invest a total of about $2 billion in homebuilding land acquisition and development. This year down from our prior expectation as we are taking a more opportunistic stance through the remainder of the year.
Now, let me share a brief update on our build to run operations.
Since finalizing our new $850 million build to rent joint venture with Vardy partners last quarter. We have already closed on 11 assets in Texas, Florida, North Carolina, and Arizona totaling nearly 2400 lots in this vehicle with a majority of these deals negotiated more than.
One year ago.
We are pleased with the quick progress we have made to efficiently scale the partnership to fuel our growth in the attractive horizontal rental arena.
We believe has become even more compelling in today's higher interest rate environment.
These are monetized communities are intentionally and transparently zoned as multifamily communities that contribute to the affordable housing options available in our markets.
In addition to allowing us to meet the needs of rental households, we also expect some portion of these leasing customers to ultimately evolve to buyers of our for sale homes over time.
And lastly, we continue to expect to monetize our first asset later this year as it approaches stabilized leasing levels.
With that I will turn the call Duluth to discuss the Companys financial review and outlook.
Thanks, Eric and good morning, everyone.
To begin we generated second quarter net income of $291 million or $2 45 per diluted share.
During the quarter, we recorded non recurring gains on the extinguishment of debt and land transfers to unconsolidated joint ventures.
Excluding these items, our adjusted net income was $271 million.
Our adjusted earnings per share was $2 27.
This adjusted EPS is up 139% from the second quarter of 2021 due to strong top line growth significant improvement in our home closings gross margin.
SG&A leverage and a lower share count.
Turning to the details of the quarter, we delivered 3032 homes at an average selling price of $621000, which generated home closings revenue of $1 9 billion.
This is up 15% year over year.
Supply chain challenges remain persistent across various points of the development and construction process driving a modest extension and our cycle times.
Most notably we experienced increased delays amongst some municipalities for inspections, and permitting which offset stabilization at the front end of the construction timeline were material and labor availability is beginning to show some signs of improvement as we head into the second half of the year, we expect a significant volume of home closings across the industry.
To further pressure supply chain dynamics.
Combined with the overall level of uncertainty in the market. We now expect our full year home closings to be around 13500 deliveries. This includes approximately 3200 to 3400 homes in the third quarter from.
From a pricing perspective, we still expect the average price of our closed homes this year to be at least $625000.
Our home closing gross margin for the quarter was 26, 6%, which was up 750 basis points from a year ago and more than 1100 basis points from two years ago.
This improvement reflects strong pricing power.
Operational enhancements and acquisition synergies.
Based on the composition of our sold homes in backlog, we expect our third quarter gross margin to be consistent with the second quarter and.
And for the full year, we are once again, raising our outlook and now expect to generate a full year homes closings gross margin of 25% to 26% versus at least 24, 5% previously.
During the quarter SG&A as a percentage of home closings revenue was eight 8%, which represented 140 basis points of year over year leverage.
We continue to expect our SG&A ratio to be in the mid to high 8% range. This year versus nine 3% in 2021 now.
Now to community Count we ended the quarter with 323 communities, which was similar to the prior quarter.
This was above our prior guidance range, given fewer than expected community closeouts related to the moderation in sales.
Looking ahead, we expect to end the third quarter with approximately 315 to 325 communities and continue to anticipate ending the year with around 350 communities.
Road by further growth in 2023.
Now turning to our balance sheet.
Our capital position is strong with almost $1 $1 billion of total liquidity at quarter end, including $378 million of unrestricted cash and $684 million of undrawn capacity on our revolving credit facilities.
During the quarter, we retired $265 million of our debt outstanding through a successful tender of our six and five eighths 2027 senior notes.
This will enhance future gross margins by reducing capitalized interest and brought our gross debt closer to targeted levels at a gross debt to capitalization ratio of just below 40%.
Our net debt to capitalization ratio equaled 36, 4% and we continue to expect to reduce our net leverage to the mid 20% range by year end.
From an inventory perspective, we ended the quarter with approximately 3000 spec homes across the country, which only about 60 were completed.
To manage inventory levels, we moderated our monthly start pace to three four homes per community during the quarter as intended following the strategic acceleration in the first quarter.
Going forward our starts pace will closely align with sales while our to be built mix will normalize to more traditional levels.
And lastly, we repurchased six 8 million shares outstanding for $172 million at an average share price of $25 43.
This represented approximately five 5% of our prior quarter's diluted share count and marked our highest level of repurchase activity since 2018, which we believe was an attractive use of our capital, giving our undervalued stock price.
At quarter end, we had $425 million remaining on our repurchase authorization, which our board of directors increased to $500 million in may because of these actions and the strong expected growth in our earnings we continue to expect to drive mid to high 20% return on our equity this year.
Now, let me turn the call back over to Sheryl.
Thank you Leo.
To wrap up I would like to share some more detailed market color to give you a pulse of what we're experiencing across the country. While no market has been spared from the slowdown in shoppers broadly or in a waiting pattern until interest rate and economic uncertainty fades. The degree of moderation has varied across geographies and even more so among buyer groups in la.
Patient quality.
Beginning in Florida typical seasonality during the slow summer months is evident across the state, although our large active lifestyle portfolio and Naples, Sarasota and Orlando are still seeing traffic. However, these savvy often that is take consumers are generally in a wait and see mode.
These buyers are less concerned about price and more focused on selling their current home.
Our entry level offerings in this space have slowed with Jacksonville being a positive outlier given healthy non local demand for its affordable product in mind.
Relocation buyers.
In the southeast Charlotte, Raleigh, and Atlanta, where more consistent quarter over quarter than most other parts of the country.
Raleigh delivered the company's strongest year over year improvement in second quarter sales pace.
Largely first and second move up portfolio showed strong resiliency as well as the strongest year over year gain in home closings gross margin.
Moving to taxes, we have begun to see a pickup in traffic sales center appointments and mortgage prequalification to in Austin and Houston.
Despite cost and experiencing some of the most robust pricing increases in sales and traffic per outlet were strongest in the state and its cancellation rate was below average as buyers are well qualified and determined to move ahead.
Houston and Austin continue to see interest in their active lifestyle communities, which tend to be more dependent on in state buyers compare to our Florida active lifestyle business.
And our largest division by volume Phoenix has experienced a steep decline in both traffic and orders, although its conversion rate and cancellation rates were both healthier than the company average.
Move in ready inventory homes remain in strong demand in both Las Vegas, and Denver, we have seen a pickup in prequalification activity from the June load and Las Vegas is still benefiting from strong relocation buyers, particularly from California.
And lastly, moving to the West Coast, Southern California, and the Bay held up relatively better than Sacramento in Seattle.
Similar to other geographies our entry level communities soften in cancellation rates increased although this consumer group, particularly in the inland Empire is the most eager to work with mortgage incentives to reduce their monthly payments and cover closing costs in.
In Sacramento activity and its first active lifestyle community slowed a bit that is still up year over year as the recent grand opening type its amenity center has spurred some more interest and sales.
Across the country, our dedicated and talented team members are working tirelessly.
Their effort delivered a record second quarter for our company. Despite the obstacles and will allow us to continue to perform as we adapt going forward to each of you I offer my most sincere appreciation for all we're showing up with resiliency empathy and creativity to serve our customer.
And each other.
With that let's open the call to your questions. Operator, please provide our participants with instructions.
Okay.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two on Wednesday to ask a question. He didn't show you'll find is a muted likely our next question comes from Matthew Bouley from Barclays. Matthew Your line is now open.
Good morning, you have Elizabeth weighing in on for Matt Today, I was just wondering could you give us an idea of how your current and sample.
That level compares historically and do you expect you'll be able to continue to achieve the targeted financing incentives given with Jeff on affordability or do you think that youll eventually niche pricing adjustments.
Hi, Elizabeth Good morning, Thank you for the question.
With respect to the incentives when we look over year over year actually Q2 was lower than Q1, and certainly all of last year. Obviously, there is a little bit more out in the market from a sales standpoint today.
When we think about continuing to use financing as an incentive certainly I hope so because when you look at the impacts of using finance comparing to reducing.
The overall price base price, even lots options for the consumer and make some marked difference I mean those dollars work for you for to one I mean $10000 of incentive would be like reducing the price by 40000, so to the extent I can make more of a differ.
For that consumer with respect to their overall qualifying power.
There.
Absolutely their monthly mortgage payments.
Our buyer group is gonna be.
Hundreds and hundreds of dollars less when I look at the overall entrust to serve hanging over the life is alone.
Lot of its going to depend on lizabeth on really the market reaction.
As we're protecting kind of values for our customers and their communities by using finance.
That would be the preferred approach if we see tremendous reductions in price from our competitors, we would have to reevaluate.
Okay. Thank you that's really helpful.
It would also be helpful. If you could talk a little bit.
The different trends that you're seeing between the different buyer groups I know you've got you've said that move up and after the adult with Morgan Stanley Good questions. The first time buyer.
Can you talk a little bit more about that.
Yes, certainly.
So.
I think there's been a lot of discussion around the different consumer groups and how they are each performing.
So let me walk through them when I look at kind of the year over year or even the two year trends. We are seeing the greatest reduction in sales and pace from the entry level buyer.
That's where we saw in Q2 quarter over quarter year over year. The most significant reductions there still by the way our strongest pace that the greatest reduction from period to period.
Not really surprising if you think about how interesting is the combination of interest rate and price appreciation has affected them from a true affordability standpoint.
And I'm talking true demand I'm not sure you know some of the numbers could be masked by selling to that consumer to institutional investors, but when I'm looking at true consumer demand.
Which is what our quarter is showing there clearly the most.
<unk>.
The most affected we tend to serve a more financially secure kind of first time, maybe even first time first time move up buyers that theyre doing a little bit better, but when I look at the cans and I look at the greatest reduction in their ability to.
Qualify it certainly that consumer.
Yeah. It makes sense, they don't really have the equity to bring to the table. We know cash to close is the greatest the second greatest challenge for the consumer right behind monthly mortgage payments.
And then when I look at their over call. It there are overall qualification criteria.
And both the conventional and the FHA first time buyer.
As I said in my prepared remarks, they're just a little bit tighter right now when I look at our backlog.
That consumer the first time buyer.
They still have some room in their backend ratios, but honestly if they were paying higher interest rate that would change for them. They don't have as much cash to bring to the table or equity from a prior purchase.
So once again, probably the greatest unpack when I then look at our I'll go to the active adult let me go to the other side.
That's probably the most sophisticated buyer group. So they are behaving in a couple of different ways and honestly it really depends on where you are in the country I think back to the Covid days and they were they pulled back the furthest at the beginning of Covid and then they were the most aggressive.
Changing their lifestyle wants.
Well, what I have found interesting is the.
Out of the greatest out of state penetrations, we have for that consumer like Sarasota, and Naples, which is primarily an active adult business.
That's why our as we've moved into the late spring and early summer we've seen that pull back.
Where we see a more local active adult buyer and that would be in our California that would be in our southeast or Texas.
That buyer has actually provided the greatest strength.
As you know they spend the most on lot premiums option. So they have a lot more room to kind of maneuver and not affected by interest rates, because we see such a high penetration of our cash buyers. There. So just not as affected by rates, but at the same time, a more savvy buyer that in today's environment.
Just gonna make sure they understand what's really happening from a macro standpoint.
And then I would take the middle slides quickly and say we've seen great strength in that first move up.
Once again, there is some blurring of the lines between that entry level in that first time move up buyer and when I look at the paces overall that person move up has held up actually pre.
Pretty darn well, maybe even basketball.
The luxury has held up very well, but that secondly, about this where we've probably seen a little bit more.
Same for that consumer.
Thank you.
You bet.
Thank you. Our next question comes from call Rachel from BT I E call. It your line is not like that.
Thanks, Good morning, everybody.
Can you talk about the percentage of your orders this quarter that were on build to order versus specs, regardless of the consumer segment.
What's changed over the last couple of three quarters.
Yeah, what is that yes.
Good question Carl It definitely we've actually seen some strength in the to be built this month to date, it's actually picked up through what we've seen earlier in the year and as we've talked in the prepared remarks, we're starting to see some of that normalization.
As these buyers are choosing what they want in their homes.
It's small uptick, but it's five to 600 basis points higher than we've seen the last couple of quarters and if you were to kind of dissect that do you agree Lou that where we're seeing the real strength of that to be built is the active adult it's the move up luxury luxurious and where we're really focused on <unk>.
Price would be in that entry level buyer.
Sure It is.
So roughly what's the what's the split between the two if you add that too sure month to date, we're about 45% to be built and last quarter was set 37.
Okay, great back closer to our historical averages correct. Okay. Thank you.
And then sort of the same question on cancellations.
Again theyre not.
In terms of the unit increase but is there a differentiation between cancellations on <unk> versus <unk> versus.
Pre started.
Good question.
Thank the most interesting stat Karl is really that when I look at our cans for Q2, 75% of those cans.
Were written this year.
So what does that really say it says the folks that probably pay toward the peak or at the peak or the ones that fad.
We're gonna.
We're going to take that kind of wait and see.
I would say generally it's a little bit more heavily weighted toward those spec sales because when you just look at the percentage of specs, we were selling that would it would align there.
But there absolutely is some to be belts once again for the consumer that bought early this year and generally on the spec sales, we don't take as larger deposits. If theyre quick closes so see a little bit more movement on cancellations there yeah sure lowest okay great.
Okay I appreciate it I'll get back thanks. Thank.
Thank you Carl.
Our next question comes from Jay Mccanless from Liebig, Daniel J. Your line is not licensed.
Hey, good morning, Thanks for taking my questions.
So we're excited to see the land banking, so moving forward I guess with the potential for more interest rate hikes on the way and kind of an uncertain consumer what are you hearing from those land bankers around terms and.
Just any kind of color you can give us there because I like the strategy, but just wondering if it's going to get more expensive and potentially weigh on gross margins out in the future.
Hi, Jay This is Eric I'll take a crack at that.
Yes, I think as the market evolves.
I think it's natural for that conversation to kind of have a china or the <unk>.
Balls with a little bit north.
With regard to interest rate expectations that said I would tell you as far as our facility is concerned we feel real good about it.
So it really depends on I think the partner that's selected as well as the terms associated with the land bank deal. So there's really as far as ours is concerned there is really no unusual terms in there.
And from a cost standpoint, our facility was really negotiated at a really attractive point in time. So I think we feel real good about our facility, we still have about 25% room in there too.
To grow it and we'll just kind of address that as the market evolves. It's a lever that we have any coal that's not the only one so we think it's one.
One that we can continue to hold them to deliver for us and we expect that land sellers will evolve as the market's evolving too. So our priority will always be to go back to kind of land seller financing JV. So like you said, it's just one of many of our love and typically the land sellers the cheapest way to go.
Havent controlled lots.
I agree completely you start to see that in the softening in that early.
That's good to hear.
The second question I had.
Luke and I apologize I didn't catch all of this but I think you were saying that in your prepared comments.
You guys are still seeing a lot of municipal issues I'm, assuming on the backend in the last 60 days of the build but the front end of the build is getting better.
Hear that correctly.
Yes, definitely definitely remains tight on the backend probably for the quarter. We saw our cycle times increase one to two weeks seeing a lot of municipality delays a lot longer from the time you get your final inspections to them issuance Ceos meet.
Neither delays from the utility companies, but are seeing some signs of life on the front end and a lot more inbound calls from people looking for work as starts to started to soften across the sector.
Yeah, a little fearful of you agree Lou that it's not going to have a great impact on the deliveries for this year. It got that bottleneck, but it's really nice to see the kind of forward visibility.
And I think the one that's really up for grabs the most is the municipalities.
Of evolution, because we haven't seen any relief there at all.
Hmm.
From a staffing standpoint and back to work. So we'll see how that one can use to move yes totally and when you really look at the overall lengthening of cycle time from the beginning of Covid as well.
Where we saw the biggest increases frame start to insulation.
And that's the area that will start to see in the middle of that we get some relief on the cycle time and start returning back to more normal long term cycle time averages.
That's great. Thank you and then just one other quick follow up the cans that you are getting.
How much luck or you're having reselling, those and or maybe getting a little bit higher price on them.
Yeah, a lot of it's going to depend.
How old the can is like I said most of those cans were written early this year. So I would say pricing is relatively neutral maybe you have some additional financing incentives. If they were written in the first quarter versus the second quarter, but we still have a very very low finished inventory. So we're able to move through that.
Great. Thanks, again for taking my questions.
Thank you.
Our next question comes from Alan Ratner from Zelman and Associates. Your line is now open.
Hey, good morning, guys. Thanks, as always for the great commentary and information.
I guess first off I'd love to expand.
Expand upon maybe Sheryl some of your July commentary, which on the surface sounds pretty encouraging given what we've seen kind of in June and early July .
Is there any way you can help quantify some of the trends you highlighted for US I think you mentioned.
Sales programs were responsible maybe for some of the renewed activity or.
What exactly does that mean, how those incentives on orders, maybe compared to where you were running at in the second quarter and any.
Quantification of where your actual absorption rate is in July versus June .
Yeah.
I can give it a shot Allen.
I think we have to keep these last many weeks and perspective is where I'd start.
Because I think.
Some of this we really you have to almost go back to the end of the first quarter when the fed really made their move but there was so much momentum still that they didn't really.
And really show up in communities I would say till sometime in early June because there was like I said, just so much momentum in the consumer just had to catch up with everything they were feel.
Feeling and seeing in the economy.
So we start feeling it I would say in early June .
If I kind of dissect Q2 April was good may was better that was actually our peak sales month and then we saw it.
Move the other direction in June and I would say.
As you got to the fourth of July that probably was the trough now it's hard to call peak to trough fall in 30 days, but if I'm going to just use the last 60 to 90 days.
That's absolutely the case since the fourth of July week, what we've seen week over week I think are encouraging signs, but that's three weeks out and we need some more time under our belt, but we've seen pre calls move backup on a week to week basis, we've seen web traffic significantly move up I would say foot.
Traffic fairly similar and I think you have to look at both sales and retaining the backlog at the same time. We've also our financial services team has spent quite a bit of time, making sure that we're in touch with our backlog closings month by month, we're in a tremendous position right now and I look at.
How much of our backlog, we've got locked for the balance of the air.
150% up from what you would typically see.
So I feel good on the programs that our sales team have in front of them using finance as a sales tool and I also feel good on the work that's being done and the backlog we will see what the next many weeks hold but the consumer it's almost like you had to refill the pipeline Alan because the folks that were there in the first.
Second quarter, there was a lot of fatigue.
And you know going from high Bose in lotteries to not being able to get lot.
To then moving into a new environment of finance incentives. So it's great to see the pipelines getting back fall and we'll see how the coming weeks.
Perform.
Yes.
Great that's really helpful. Sheryl thanks for walking through the.
Chronological <unk>.
Developments there.
Second question I guess, just on the land spend guidance reduction for the full year I think obviously it makes sense given the uncertainty and given your strong land position.
Can you talk a little bit about specifically, what's driving that reduction is that you're assuming that you're going to maybe walk away from some option deals as they come come up for take down because you don't need that many lots or is it.
Mothballing development on raw land that is currently sitting on your balance sheet, but what specifically is driving that reduction in land spend expectations for the back half of the year.
Hey, Alan it's Erik again.
So I wouldn't say mothballing as part of the equation that is not I would say, it's really more of an opportunistic stance.
Maybe to take one step backwards and just kind of repaint the backdrop.
We actually did add among the least of land for a portfolio of since second quarter of 'twenty and that's for a good reason because 60% of our own land was negotiated in 2020 and prior so we feel real good about the land, we have and the associated balance associated with it.
As we search for to today.
We're really focused on core locations as you know that's been kind of a <unk>.
Key mantra of ours over time and that will consistently be the case and so.
<unk> kind of that forcing ourselves to be focused on core locations is somewhat related to that that moderation and spend.
And then again I think just feeling good about where we are with six one years.
We also said that 'twenty three 'twenty four is very secures, we've kind of earn the right to be very selective.
We do like our balance of 41% control and we do have all of those levers to pull 52% of our spend is being dedicated.
So good development.
So we've got a lot of flexibility there in terms of pulling that lever and so that kind of puts us again in that kind of selective position.
As Louis data that we've got a really strong cash position and so that really sets us up to be opportunistic as we think about.
Spend going forward, so we're seeing a little bit of capitulation on the market and not a lot there hasn't been any.
Systemic resets in the market, but we're seeing a little bit of cracks and we're prepared to take advantage of that and when do you agree Eric.
Sure.
Very transparent 2020, we pulled back because of a little bit of Covid and we just closed on a very large acquisition. We felt we felt the portfolio quite nice 21, Alan as you saw prices move fairly meaningfully on land you know I think the number was about 30% when things start to get that.
Frenzy, that's the time that you really should pull back and if we kind of pull on our old playback from priors.
Playbook from prior cycles, it's really the timing becomes very selective last year, which is why we added such a little amount to the portfolio and you really keep your dry powder for another day and I think that's what we're doing we don't have to go buy land today. So we will be prepared to be very opportunistic to eric's point on <unk>.
As we see any capitulation in the market.
Really hard to be a day trader and the land game, but I think we engaged our first normalization study in third quarter of last year. So we really have been kind of looking forward to this kind of transpiring at some point not knowing exactly when and what duration and magnitude, but really an eye on it and that's why we're spending so much time today from an underwriting.
Endpoint really stress testing with deals and making sure they're filling the right pieces of the business plan and not being afraid to modify deals I would say a high percentage of the deals coming through we are modifying in some way.
If we move forward.
Great I appreciate that guys. Thanks a lot.
Thanks Alan.
Our next question comes from Truman Patterson from Wolfe Research. Your line is now open.
Yes actually this is a partial bill good morning, everyone.
I appreciate the color you gave on the out of state.
Active adult buyer trends I was wondering if you could provide some color on.
The mix relative mix of inter and intra demand trends across the greater portfolio or is that migratory bar slowing at the same pace or slowing faster than that.
<unk> market bar.
Yeah.
You know, it's really interesting if I'm understanding your question correctly, Paul but as we look at kind of the migration patterns.
We are continuing market by market to see some pretty significant kind of out of state migration.
If I look at Florida for example, I mean more than half of our business is coming from out of state. If I look at Nevada more than half of our business is coming from out of state. So as as we look really over the last I'm going to say three four years, we continue and I could you know I won't bore you by selling markets.
Market, but we continue to see some very significant movement and it's not it's not really different between our shoppers and our buyers as you would expect I think ive pointed the most meaningful.
And.
You know, it's really across consumer groups, because when I think about a market like Las Vegas.
Like I said more than half of our buyers are coming from out of state and that is not necessarily an active adult market for us it's really a first time market.
Look at Florida, I'm seeing it both in Sarasota, and Naples, where you would expect to see it but that active adult consumer but I'm also seeing those same penetrations in Orlando and Tampa, which has a very high first time buyer.
Segment, so truly continuing to see the same trends we've been talking about.
Okay. Okay.
And then I'm just curious how is your virtual community how was the performance of that holding up in this new sales environment.
Yeah.
Been really strong if we started as you probably remember Paul our virtual kind of very slowly back in the spring of 2020 I think the weeks after the Covid shutdown in April late April 2020, we started reservations when I look at what happened.
Between 2020, one and I compare it to the first six months of 'twenty two.
Our sales from a virtual standpoint has doubled on a monthly basis actually a little bit more than that the actual penetration of our total sales has doubled as well.
Our inventory homes virtual sales have been in play for a while.
Our to be built is just now really starting to take hold across the portfolio are to be billed for.
Virtual sales have our highest conversion.
Followed closely by our spinnaker virtual sales.
I'm actually pretty excited given that the consumer this is not COVID-19 related right. When I look at this doubling of sales from a penetration standpoint, albeit a small piece of the business still in total and.
And now we really put it through the whole portfolio. This is the consumer saying meet me, where I Wanna be Matt.
On.
Theyre showing up.
So it's pretty exciting I think as we continue to roll this forward.
Okay. Okay.
You had some really nice SG&A control in the quarter flat basically year over year were there any one times or timing benefits et cetera that we need to be aware of.
No. It was just our revenue leverage I'd say and the growth we've experienced over the years.
Okay. Thank you.
Thank you.
Our next question comes from Mike Rehaut from Jpmorgan. Your line is not like that.
Okay.
Hi, Good morning, guys, Doug Boardwalk on for Mike.
I was just wondering if you could give a little bit more color. I know you talked about you gave great color on market by market. I was wondering if you could talk more about incentives and some of the hotter markets.
Before that a little bit of a slowdown so have you seen less incentives being used in.
In Texas for example, Austin in markets in Florida, then.
The other markets you operate in and it's so moving forward do you anticipate that remaining the same.
Yeah interesting good question.
You know I know nobody loves this answer, but it's the honest one and I would be very careful to paint a incentive brush over a market.
Because within our markets I would tell you there are some very.
Very few communities that we might still be doing.
Controlled.
You know controlled sales floor.
Theres absolutely no incentives.
That would generally be on the luxury side, where we're still seeing that kind of activity, but then I can move to a different consumer group in that same market and we could be offering strong finance incentives. So.
I wouldn't look at it by market I would look at it by community and I think we're seeing a range of those finance incentives.
In each of our markets from very little to 5%.
Interesting. Thank you and then in time.
You guys have kind of seen a pick up from the June lows and you kind of gave a little bit of color on that earlier.
Are there any particular markets that have had improved performance from June that you can see now obviously you have a few more weeks to go but has there been any where that surprised you in terms of their performance from last month.
Okay.
Yeah, I don't know that there's anything that's really surprised I think as we have found kind of the right programs by consumer group.
We've gotten setting I think socal is probably a good one if you think about the inland Empire a lot of competition.
I'm really being able to get in front of that consume our letting know how these finance tools can work for them to really tailor excuse the pun, but kind of tailor our program to their very need be that you know helping them on a buy down maybe its a two one or seven one arm one that's been very.
Success for our consumers to really help monthly payments is paying.
Paying down the mortgage insurance so.
Being able to customize the program for them and helping them understand the as we've gotten that message out across the markets I think that's what's giving us the strength.
But I don't know that I would point out one market over another.
Okay interesting. Thank you.
You bet.
Our next question comes from Dan Oppenheim from Credit Suisse. Your line is not licensed.
Thanks, very much and just given the comments you talked about some of the inflection or some improvement since the fourth of July .
With an environment, where buyers have a bit more choices out there are you seeing some of the better conversion based on what you've done in terms of looking for community having communities in the more established areas interesting that's helping in terms of both traffic and conversion.
Yeah locations always always a matter. So I would say you're you know you're very well located communities. Good transportation. Good school, absolutely, that's where you're going to continue to have the greatest strength.
There's a there's a direct correlation Dan to the further you go out that tends to be the more affordable buyer and that's where we're seeing the greatest pain.
So I'd say, yes.
Yes.
Our larger master plans I'd say it would be the other thing I would point to that continued to perform very well.
Great and then I guess secondly, just wondering in terms of the.
The spec homes, which is still obviously very modest relative to the community count.
Of those 3000.
Where would you say there are so generally in terms of construction cycle, given sort of buyers shifting closer to our near term close in touch.
Yeah, No that's a great question.
Most of our specs are still.
More in the earlier stages before drywall and that's I think one of our opportunities as the year progresses. As you saw we only have 60 finished specs and so what we're hearing from our sales teams are as those get closer to completion, we're having a lot more interest and so as we did that pivot or late last year early this year to start more.
As those are progressing through the process. We hope to also get some more sales activity Adenosis does get a little closer to dry wall.
Great. Thanks very much.
Thank you.
Our next question comes from Mike Dahl from RBC capital markets. Your line is now open.
Hey, guys, it's Ryan.
Mike Thanks for taking my question today.
So I wanted to get back to the.
The monthly cadence a little bit if we could because to us. It seems like June might have been down 40 or 50%.
So is that the right magnitude then.
<unk>.
Color with the week over week improvements in July, but I mean does that mean, we're exiting July around 40% or is that more like 25% like you were in the quarter.
Yeah.
Yeah, I would tell you from a monthly cadence.
Although we don't generally give the individual details.
<unk>.
Absolutely may was our peak.
And Yeah June certainly was two times April .
And July I think it's a little too early to say, we still got another week to go here, but.
So.
It's hard to tell you where July is going to finish up but once again I think what we're seeing is all the green shoots so.
Far in July and those early indicators around pre qual around.
Our web traffic kind of even sales and the pending pipeline.
Would put us kind of at a two year of probably down.
Mid twenties thirties, and we'll have to see how the one year finishes out.
Okay got it. Thank you that's helpful. There and then.
But the follow up to that is if your pace is currently closer to two a month and three a month.
It might be pretty expensive to kind of incentivize back to that three month range. So how are you guys thinking about what the right paces to target today.
And then our incentives kind of impacting that.
Yeah. Good question you know once again, we do this kind of supply demand analysis on a community by community basis, and there are some you know where the competition might say that you support a strategy of you've got a couple of positions.
That neighbors that are selling out and being very aggressive so youll probably deal with a lower pace for a short time and there's others, where now you got to find market and make sure you're selling so our paces across the board probably to your point range from anywhere in that to maybe even under.
The mid threes.
Depending on the position so.
Not going to manage to a specific pace across the portfolio, we're going to manage the paces by community and really what the intent for our teams are is to get to their underwriting numbers.
You also community by community really understand what kind of elasticity you find with those incentive.
And where you can get that paid through once again looking at your overall offering on financial incentives recognizing that so much of the pricing over the last year has come through lot premiums looking at those do you have a number of different tools in your toolbox to pull out.
Okay.
Got it. Thank you that's very helpful. Thanks for taking the questions.
Thank you.
Our next question comes from Alex <unk> from B Riley. Your line is now open Alex.
Yeah, what percentage of homes are all cash and how has that changed over the last couple of quarters to help made a change in the new environment.
I think it was about 16% in Q2.
That's fair.
Real quick.
Hum.
That a bit I think to that 16% I think we were probably more historically and that low teens, 13% to 14% if I'm not mistaken and yet we were 16% in the quarter last year that was 12%.
Hard to say what happens like in court, but when I look at the overall kind of mortgage and I look at.
On a higher price like I said in my prepared comments on overall ltvs.
<unk>.
To go down I mean, we're seeing what 70, 77% a year ago. It was 80%. So we're seeing more all cash and we are seeing higher cash down payments.
And once again, we're seeing higher incomes as well so very supportive of that which is I think why in total even the comments I made about our buyer and the research we're doing both our shoppers and buyers, believing today about their financial picture is better than it was a year ago and when they look for.
Forward to the next year, they expect it to even be stronger compared to national averages.
That's why you continue to see the strength in our cans and things like that.
Okay.
Thank you very much.
Thank you.
Our next question comes from data Raki Haven and from Wells Fargo Securities. Your line is now with it.
Hi, good morning, Thanks for taking my question.
When you provided the initial soft guide for 2022 gross margins of 20% plus this was roughly a year ago did you have in mind, a 25, 26% number.
That you've currently guided to or was it less healthy than this.
My question I'm trying to ask is what does the post integration gross margin.
This is the margin benefit that was driven by the pandemic lifts.
And how sustainable is just post integration gross margin in a moderating environment.
So Lou and I will tag team. This one Korea deepa.
When we when we guided to something I think to 'twenty two a year ago, you always give yourself a little room, but you also we also clearly recognize the pressures that we were seeing.
From the supply chain.
And you have to account for that so <unk> had a number of things kind of assist you. One has been I think we've done a much better job than we would have initially planned on getting some of those synergies to actually hold into the business. We've certainly had nice pricing power.
And the efficiencies the teams have recognized and our national purchasing and starting off of kind of increases have all served us well and then I'm sure Lou there's some lumber specific if you can talk to as well yeah, Deepa I'd say, the simplification, which we've talked about after acquisition of our options and floor plans I think is added.
Lift.
Our vintage slots, while Vince as slots I think also is the strength that we've had.
And we will continue to be and the fact that we've focused more in core markets has really helped us through the pandemic in terms of.
Strong market strength in terms of pricing. So all of those combined I think helped us do a little bit better than we expected and the last thing I'd throw on is as you parse apart the portfolio Deepa.
Now.
Once again, the entry level buyer, which was certainly primarily lifted in our portfolio from the last two big acquisitions those have an embedded lower margin when we look at them.
Our margin from kind of the more his vintage Taylor Morrison land, that's the active adult move up the luxury we're seeing margins that are obviously much higher so there's a little bit of a mixed penetration issue as well there.
That's helpful. Thanks very much.
Water industry question from me.
Given the moderating housing outlooks are.
Are you seeing any aggressive pricing from builders in your markets.
And also any markets you would expect to see the most right.
<unk> pricing should we head into a down cycle.
Deep I think I think that as we've heard and you have on these calls the builders are generally trying to look at the use of kind of financial incentives because of the greater impact that that has on the consumer and protecting valuation.
No.
When you're in everyone's also managing through kind of backlogs and making sure that we do everything we can to protect the pricing in those communities when you're bringing new communities to market and you don't have the backlogs and Tao I would tell you. The builders are doing exactly what they should do and that's pricing to market.
So you can play this game two ways right you can say, how higher incentives and what is our you're right priced at market. So I think it's a healthy combination.
And once again I would not point holistic market Deepa I would point to certain positions. Once again as you get more fringe kind of on the outskirts I would expect that's where you'll see more pricing pressure.
And Thats, where theyre, just going to if theres big positions out there, that's where you'd likely see your greatest adjustments alright. Thanks Charlotte.
That was partially informed by the retail market too right because that's part of our competition. So I think we're keeping our key I.
Kind of listings and any trends there. So that's something that would be Michael so true.
That's fair, thanks, very much and good luck.
Thank you.
Our next question comes from Alan Barron from housing Research Center. Your line is now open.
Yes. Thank you.
Not sure if I missed it but.
If you already gave it or if not can you provide what the starts were in the quarter.
What how are you thinking about.
Over the third quarter.
Sure Alex this is Lew.
We had 3200 83 starts in the quarter and as we've talked about in our prepared remarks, we will probably be more closely aligned with our go forward sales pace.
As we've got as we ramped up our spec starts.
More desired levels and as well the last few quarters, we've really made a lot of progress reducing our sold not started.
Okay, Great and then I think you mentioned that Youre getting more inbound calls from the running trades.
I guess given the lower volumes are they are you guys also getting better pricing.
Yeah, I would say it depends by market a little bit.
For sure we've been able to push off increases and we're starting to hear.
By market opportunities in terms of the initial slab or framing crews actually even making adjustments downward expect more of that to come.
Okay.
Great.
I think that's it for me thank you.
Thanks, Alex.
Thank you everyone that concludes the Q&A session for today I will now refer you back to Mackenzie Aron for further remarks.
Thank you for joining us on today's call and we look forward to speaking to you next quarter.
That concludes the Taylor Morrison Home Corporation second quarter 2020 earnings cool. Thank you for your participation you may now disconnect your lines.
Yeah.