Q3 2022 Taylor Morrison Home Corp Earnings Call
Yes.
Thank you for your patience, everyone. The Taylor Morrison I am Cool earnings webcast and conference call will begin shortly during the presentation. You will have the opportunity to ask a question by pressing star followed by one on your telephone keypad.
[music].
Welcome to today's Taylor Morrison Home Corp earnings webcast and conference call. My name is drew and I will be coordinating your call. Today. If you would like to ask a question. During the presentation. You may do say by pressing star one on your telephone.
Pat If you change your mind. Please press star followed by two now going to hand over to Mackenzie Aron, Vice President and Investor Relations to begin. Please go ahead. 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 for forward 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.
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.
Thank you Mackenzie and good morning, everyone.
<unk> me today is Louis Steffens, our Chief Financial Officer, and Erik Huber, our Chief corporate operations Officer.
As always I will share our quarterly highlights as well as an update on the market environment and how we are navigating and positioning the company for success.
After my remarks, Eric will discuss our healthy land portfolio that remains a source of long term value. While we will provide a detailed review of our financial results.
Hi, I'm pleased to share that our team once again delivered record profitability metrics this quarter, including new highs for home closings gross margin earnings per share and return on equity. We achieved these results. Despite the continued affordability and supply chain challenge.
Is facing our industry as well as the significant impacts from hurricane and.
Most importantly, our team members and residents came through the storm safely and most of our communities and homes under construction to not suffer any damage.
However, the abundance of preparation and our storm protocols as well as the recovery in cleanup needs. Following the storms reduced our volume of home closings and sales in our Florida and Carolina markets.
We expect the extensive damage and renovation needs will add further complexity to an already challenged supply chain and have impacts on both construction and development for the next many months, which Lou will discuss in greater detail.
Nevertheless, our teams delivered 3050 homes at a record home closings gross margin of 27.5% and an all time low SG&A ratio of seven 4%.
These results drove a more than 100% increase in our earnings per diluted share to a new company high of $2.72.
In addition, during the quarter, we strengthened our capital flexibility through a successful expansion of our corporate revolving credit facility to $1 billion and took steps to further reduce debt outstanding leaving us on track to reach a net debt to capitalization ratio in the mid 20.
That range by year end.
At the same time, we continued to invest in our shares outstanding with repurchases of $105 million during the quarter.
In total these strong earnings and our disciplined balance sheet management more than doubled our return on equity to 26% from 13% a year ago.
Turning to the market as I shared on last quarter's call. We had begun to see shoppers cautiously re engaging with our sales teams and online tools in July , albeit from abnormally low levels in June .
This translated into a sequential improvement in net sales orders in July and August how.
However activity slowed again in September alongside a reacceleration in interest rates.
In total we recorded 2069 net sales orders, which represented a monthly absorption pace of 2.1 net orders per community both of which were down sharply from a year ago.
The slowdown has been felt across a wide range of price points geographies and consumer groups.
Consistent with trends in the second quarter, our first and second move up segment, which accounted for a majority of the quarter's net sales has been the most resilient with particular strength in the southeast.
Within our resort lifestyle business, we experienced pull back in demand as these savvy consumers have taken a wait and see approach to their purchasing decisions and the market volatility. Although cancellations are the lowest in this segment due to their significant financial strength and emotional attachment to their homes.
It is also worth noting that our resort lifestyle business is highly concentrated in Florida. So it was most impacted from a sales perspective by hurricane and at the end of the quarter and into October .
And lastly, our entry level communities continued to face the most pressure as we would expect given the greatest affordability constraints among these buyers.
However, we are still seeing healthy traffic activity at these lower price points and are working diligently on qualification solutions.
And generally speaking higher mortgage rates and uncertainty surrounding the economy has pushed many potential homebuyers and all consumer cohorts to the sidelines and we continue to believe it will take some time for the market to find its new equilibrium as interest rates have most recently reached as high as 8%.
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This will require stabilization in pricing as much as an improvement in consumer confidence and buyer psychology.
Led by clarity in the federal Reserve's strategy.
Accordingly, our approach will remain grounded in our prudent and long term view of the business our playbook is simple.
To position ourselves to be opportunistic by balancing pace and price maintaining healthy inventory levels and preserving our capital let me share the guiding priorities we are focused on.
First as Eric and Lee will elaborate on we have adjusted our capital allocation to reflect the evolving market conditions by pulling back on land investment and prioritizing the health of our balance sheet, we control an attractive land portfolio. The majority of which was contracted more than two years ago.
We will prudently manage our starts pace as evidenced by the moderation in our monthly starts to one and a half homes per community during the quarter from three and a half a year ago at quarter end, our inventory remained healthy with just over 2500 unsold homes under construction of which 0.5 per community were.
Ernest.
Additionally, our teams are engaged with our suppliers and trade partners to reduce cost and rationalize expenses to current market conditions with success likely to be based on each market's total starts activity.
The rationalization of our operating structure option Skus and floor plans over the last couple of years has greatly streamlined our business for improved efficiency and we will continue to press ahead on production oriented opportunities and our teams are in a position with additional permits on hand should the market shift.
As we expect it will in time.
And lastly on the sales floor, we will responsibly respond to market pricing and competitive pressures to mean acceptable sales paces, while also protecting the value of our communities in backlog as.
As market conditions evolve, we are offering compelling incentives and adjusting pricing to recalibrate affordability and stimulate demand as needed on an asset by asset basis, appreciating each community's inventory duration competitive dynamics and targeted consumer groups.
In new communities and those with small backlogs, we have aggressively sought to find market with our pricing strategies, while taking a more conservative approach in longer dated existing communities.
Combined these pricing adjustments and incentives have averaged mid to high single digits.
As I emphasized on last quarter's call. We strongly believe in the value of using finance as a sales tool by offering generous marketing incentives versus simply reducing price as the benefit to the buyer is often much greater this includes a range of tools offered by Taylor Morrison home funding <unk>.
<unk> permanent and temporary interest rate buy downs extended rate locks and various financing programs.
For many borrowers the interest rates provided by Taylor Morrison home funding are more competitive than what is available probably in the market and our team provides solutions tailored to each of our unique buyers circumstances to maximize the monthly payment savings and overcome cash out of pocket obstacles.
In addition.
And to helping drive sales with new buyers our mortgage team has been diligent in working with our backlog customers to lock in their interest rates and secure mortgage qualification.
Let me share a little more about what we experienced with our backlog during the third quarter at quarter end, our backlog of over 7900 sold homes was backed by average deposits of nearly 10% or over $66000 per home.
Approximately 60% of our buyers in backlog purchased a to be built homes that they designed to meet their lifestyle need the.
The emotional attachment to these personalize home cannot be overstated as nearly 95% of our third quarter cancellations were for spec homes. The majority of which were sold earlier this year.
These factors have helped limit the extent of our cancellation, which increased modestly but remained historically low at four 3% of our opening backlog versus our long term average of approximately 7%.
These cancellations equated to 15, 6% of gross orders, although we believe this metric is less informative at current depressed sales levels.
As I always share our buyers tend to be highly qualified and financially secure in the third quarter, our homebuyers using Taylor Morrison home funding continued to display prime credit metrics, including an average credit score of 752, and a down payment of 23%.
Additionally, a high teen share of our buyers use all cash to purchase their home that's from a mid teen share a year ago.
The vast majority of our buyers have the financial flexibility to absorb higher monthly payments from a purely mortgage qualification perspective based on the meaningful interest rate cushion I have previously reported that once again remained relatively consistent at healthy levels in the third quarter.
As a result, it is not surprising that our recent consumer survey feedback indicate that many of our customers are waiting for visibility on pricing trends the economy or their own financial situations before moving forward with a desired home purchase.
On the topic of pricing and even more prevalent today transparency around pricing I'm delighted to share that we recently unveiled and enhance end to end digital reservation system for to be built homes in our first community in Florida you.
You may recall, we led the industry's pursuit of digital innovation by being the first homebuilder to launch a reservation system in March of 2021 and now have further cemented ourselves as the leader in this space by self developing technology that gives home shoppers the ability to build a new.
Home entirely online and then reserve the configuration with a small deposit.
Aligned with our commitment to help consumers make informed choices. The reservation system shows an estimated purchase price and monthly payment both of which update as each selection has made throughout the process.
Before placing the reservation on the home they digitally built customers can go into their shopping cart and review an itemized list totaling their selections and can adjust based on their desired budget <unk>.
During the third quarter, our spec and to be built online reservations had a tail conversion rate of approximately 40% and accounted for 13% of our company sales.
There is so much worth sharing as we look at the data trends of our last quarter reservations butter particular unexpected favorite is the consumer mix.
We would have expected to see high take up with our millennial shoppers and although they do have a slight lead in total reservations, we actually have a fairly consistent mix between millennials Gen Z and even baby boomers.
Innovation is core to Taylor Morrison, and we know that proactively responding to evolving customer behaviors and interests is simply good business.
Now I will turn the call over to Eric to discuss our healthy land portfolio and the conservative stance, we are taking for new land spend.
Thanks, Sheryl and good morning, everyone as.
As we have shared in our last several calls we have taken an opportunistic approach to land investment over the last two years as we intentionally and prudently dialed back our landsman following our well timed acquisition of William Lyon homes in 2020, which added significant depth and breadth to our portfolio prior to the significant run up in land pricing.
As a result, we have been highly selective new land spend and have remain disciplined to our long held mantra and investing in prime locations and core sub markets with proximity to job centers schools hospitals and other desirable amenities all of which are attributes that have historically contributed to more stable.
Values overtime.
This opportunistic approach became even more conservative over the last several quarters to ensure that each dollar invested meets our stress tested risk adjusted return thresholds.
As a result still over 60% of our own watch were contracted for in 2020 or earlier with a weighted average vintage of four years.
We began stress testing every deal in 2021 have recently reassessed every deal in our pipeline and our re reviewing each land transaction prior to final closing.
For deals in process, we are leveraging our strong relationships with land sellers to renegotiate timing terms and or price as appropriate.
In fact for the third quarter, 80% of our contemplated core business land spend progressing through the investment committee was restructured or terminated when underwriting no longer met our required thresholds. This.
This resulted in seven $4 million of pre acquisition walkaway expenses during the quarter.
This highly scrutinizing approach was evident in the nearly 70% year over year decline in our third quarter spend on new homebuilding land acquisitions to $102 million the lowest level since 2016.
On the other hand development related spend was up over 80% from a year ago and accounted for 73% of total Lana Grossman.
While we are closely scrutinizing development plans for both new and existing projects with an eye on managing overall lot inventory, we continue to have meaningful opportunity to monetize our well vintage land and maintain competitive scale and positioning across our markets.
As we prioritize our balance sheet and cash generation and the current market environment. We recently completed an exhaustive capital allocation review during which we closely evaluated each of our divisions land acquisition and development budgets and further reduced approve spend relative to our prior forecast in total we now expect to.
Spanned approximately one 8 billion and total Lana endorsement for the year with a strong bias towards development.
At quarter end, we owned and controlled approximately 80000 homebuilding lots, which represented six one years of total supply of <unk>.
These lots, we control, 42% via options and other off balance sheet structures that enhanced capital efficiency and reduce risk.
This all time high percentage was up from 36% a year ago.
Our years of owned lot supply appropriately moderated to three five years from 4.0 a year ago.
Our land lighter investment approach balances cost of capital with expected returns to determine the optimal financing structure for each investment and we are pleased with the mix of our land portfolio. Both from an owned and controlled perspective as well as the age and composition of our lots.
And finally, let me share a quick update on our built to run operations during the quarter. We contracted our first project sale horizontal apartment community in Phoenix secured by a meaningful deposit <unk>.
This transaction will mark an important milestone in the evolution of our build to rent business and we look forward to providing more details upon its closing.
With that I will turn the call to Lou to discuss the company's financial performance.
Thanks, Eric and good morning, everyone in the third quarter, we generated earnings per share of $2 70, Tusa. This was up 103% year over year due to strong revenue growth significant improvement in our home closings gross margin strong SG&A leverage and a 10% lower share count.
We delivered 3050 homes at an average selling price of $650000, which generated home closings revenue of $2 billion.
This was up 12% year over year, but was slightly below our guidance range due primarily to the impact on production and closings from hurricane yet.
During the quarter, our cycle times extended modestly with trade labor the most common can straight across the country.
Municipality inspections meters in Florida, and also continue to be challenges.
While beginning to see encouraging signs at the front end of the construction timeline, we do not expect to see back end construction cycle time improvements until later in 2023.
Additionally, based on our experience from Hurricane Harvey in 2017, it will take several months before regain visibility our construction and land development timelines in Florida, which accounted for nearly 25% of our closings in the first half of the year.
These impacts include disruptions in trade labor availability delays with construction and development timelines and limited availability on municipality inspections and approvals has repair and recovery efforts are prioritized over new construction.
Combined with ongoing supply chain challenges these uncertainties limit our near term visibility on closings and therefore, we are not providing fourth quarter operational guidance.
Turning to margins our home closings gross margin for the quarter was 27, 5%, which was up 630 basis points from a year ago, and 90 basis points sequentially.
This company record barge and highlights the operational enhancements, we have achieved since fully integrating and optimizing our acquisitions as well as robust pricing power captured in prior quarters, which more than offset cost inflation.
SG&A as a percentage of home closings revenue was seven 4%.
This was down 210 basis points year over year and marked the lowest level in our history.
Now to community Count we ended the quarter with 326 communities, which was just slightly ahead of our prior guidance range due to fewer community closeouts.
Turning to our balance sheet, our capital position remains strong with approximately $1 $4 billion of liquidity at quarter end, including $329 million of unrestricted cash and $1 1 billion of capacity in our revolving credit facilities, which were undrawn outside of normal letters of credit.
During the quarter, we increased the aggregate commitment available under our corporate revolving credit facility from $800 million to $1 billion.
In addition, we issued a notice of redemption out of five and 782023 senior notes, which will allow us to reduce our gross debt by the full outstanding principal amount of $350 million on October 31.
Following this transaction, we will have no debt maturities until 2024.
As a reminder, in the second quarter, we retired $265 million of our six and 582027 senior notes through a successful tender offer.
Collectively these actions will enhance future gross margins by reducing capitalized interest and align our gross debt closer to targeted levels.
Our net debt to capitalization ratio equaled, 34% down from 41, 1% a year ago, and we continue to expect to reduce our net debt leverage to the mid 20% range by year end.
And lastly, we repurchased four 2 million shares outstanding for $105 million at an average share price of $24 90 to set.
This represented approximately 4% of the prior quarter's diluted share count.
Year to date, we have repurchased a total of $12 9 million shares for $335 million offsetting our diluted share count by approximately 11% since year end, which we believe is an attractive and accretive use of our capital, giving our undervalued stock price that is significantly below our.
Current and expected book value.
At quarter end, we had $320 million remaining on our repurchase authorization.
To wrap up let me reiterate that we believe we are well positioned operationally and financially to navigate the current market environment and uncertainty ahead.
Our capital allocation priorities are based on a disciplined framework that balances our operational and growth objectives with the health of our balance sheet as we seek to generate attractive returns for our shareholders now.
Now, let me turn the call back over to Sheryl.
Thank you Lou let me emphasize that our strong third quarter and year to date results reflect the enhanced profitability and overall business effectiveness that we achieved through our unrelenting focus on operational excellence scale synergies and disciplined land investment these internal initiatives.
<unk> and our successful M&A strategy has positioned our company to be resilient and nimble and.
In addition, our land portfolio is comprised of well underwritten well located land parcels contracted at an attractive low cost basis.
Additionally, our gross margin bottom line earnings and returns are the highest levels in our company's history and our balance sheet is strong with significant liquidity.
And lastly, our seasoned leadership and skilled operators have navigated prior cycles and are well equipped to guide our company through today's market headwinds in short we have never been better positioned to weather the dynamics reshaping housing as the federal reserve continues its aggressive fight against inflation.
Yes.
To close I'd like to thank our homebuilding and mortgage teams across the country for another quarter of record performance. Despite the odd there.
They are laser focused on year end goals and actively working with our homebuyers in today's challenging environment and I am so appreciative of all of their efforts.
With that let's open the call to your questions. Operator, please provide our participants with instructions.
Okay.
Thank you we will now start today's Q&A session, if you'd 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.
One thing to ask your question. Please ensure your phone is on mute it likely.
First question today comes from call Rachel from BTG. Your line is now open.
Thanks, very much morning, everybody.
I wanted to ask a little bit about base price cuts Sheryl.
Are you going into your backlog on bto product, where you're cutting basis.
Giving them new price well how are you how are you managing your backlog, where you've got long dated communities bto product thats going to take awhile to get out the door, especially given the supply constraints you're seeing.
Good morning, Carl Thanks, Good question.
There's not one answer that you know with a span the entire portfolio I think as we discussed last quarter. We took very early action to proactively reach out to our backlog we had to make decisions community by community as you can imagine.
Given time in backlog the competitive and buyer men the deposits that we held we looked at it all differently generally I would say what we did with backlog I'd say you know the 95% rule would be that we assisted them with.
Financial incentives to help them lock alone that mitigated the change they've seen in the interest rate from when they had gone into contract.
When I look across the corridor, we spend somewhere around 15 or 16 basis points across the entire portfolio of three of Q3 closings to protect backlog.
It was generally around 2% of loan amount, maybe just over one 5% of sales price the deals that actually affected the backlog, but as I said very strategic in how we approached them.
Thank you if I look at the quarter and the ones that actually impacted the quarter was about 8% as we looked at all the characteristics of timing pricing deposits all of those things.
Yes.
Great. Thank you sure I really appreciate that detail and then just on <unk> impact and again I'm looking at what you produced versus your guide and it seems like 150 350 homes or so we're impacted if you. If you had gotten to your guidance range is that is that roughly right and then.
Can you talk a little bit about maybe how the how orders have worked in this important market in Florida.
And while you've tried to get homes built or are you seeing some return of traffic to those markets that were impacted by the hurricane and you expect maybe some some.
Opportunities to sell more houses than in Q4, because you had a gap where you couldnt sell thanks.
Thanks, Carl Yeah, you know I feel coming out of the Hurricane honestly, where we're quite fortunate. It was a it was a very difficult couple of weeks for the teams. Our protocols started you know probably late the week of the 20th and then obviously continued into the last week of the month.
So.
Generally shut down have a pretty good cadence around our storm protocols, which honestly protected our communities and our teams.
When I look at the damages Carl just to hit that as well you know we had just under 500 houses I wouldn't call. It damage, but I would say that were affected with insulation drywall house wrap you know landscaping.
Really just the tremendous impact of that kind of horizontal rain.
So we probably thought two weeks in the quarter the week of the 19th 20th in the following week, where we really were shut down for traffic.
Certainly that affected our our units our paces and probably the greatest impact as we mentioned on our active adult consumer because that's a good chunk of our Florida business, certainly in Naples, and Fort Myers, and Sarasota, where we were most impacted.
We have returned to a normal business cadence. It took the municipalities are while they get back I'd say it was late the second week before they really came back to real business.
So we are seeing a move up in traffic at the same time, we're starting to move into that shoulder season for the active adult. So I don't think that will keep them away and I think as you said, probably some new opportunities, but it's hard for me to.
Talk about the hurricane without Chester tremendous callout to our teams because what they were able to overcome helping not just our communities, but our homeowners and then our team members across the state the way they showed up.
In Naples, and Sarasota was just so impressive so.
Hope that helps Carl.
It does thanks, I really appreciate that Sheryl.
Thank you. Thank you.
Our next question today comes from Matthew Bouley from Barclays. Please go ahead.
Hello, you have Elizabeth weighing in on for Matt today. Thank you for taking the questions and just to kind of start off.
How should we be thinking about incentives going forward and.
What do you think the magnitude could be that they could reach and how does that kind of balanced with potential price cut.
Finding that equilibrium that spurs demand.
Okay.
Thank you Louis the best for the question. It's a good question.
There's a lot to unpack in there as you might expect when we think about incentives.
As we've talked about for the last couple of quarters, our priority is really about understanding what the consumer needs.
And I think this is a time honestly for our industry to really kind of kind of come together and say what's that common sense on how you really approach an environment like this because it's unsettling for everyone and how do we use the tools that are in the best interests of the individual consumer.
Our teams have really had to get into the trenches to understand what will help each individual consumer because you can't just blindly reduce prices I think the more you just reduce prices the more the consumer expects us to do so this is a time, where we're really going to sell value leverage the tools.
With that we will continue to prioritize finance as a sales tools.
Sales tool as we've talked in the past the two greatest needs our customers have I think the average consumer has us help on monthly payment.
And help with cash to close by.
By using finance as a sales tool it allows us to work two to three times.
In cost as it would if we just reduced sales prices.
Having said that as we see pricing pressures with inventory building in our market we have to respond in like.
So I think it's a combination as I said in my prepared remarks, when I prepared remarks is when I look at the impact of using finance as a sales tool potentially incentives on you know home of the week or option special.
Deals as well as any adjustments to base pricing at this point, we think that somewhere in the mid to high.
Single digit.
That will move community by community and many communities, it's taken a little bit more and many have taken less but are more moving to find the traction that we need to generate pace in each of our communities.
Thank you so much that's really helpful.
And kind of switching I guess touching on the affordability pressures.
Could you talk a little bit about what you're seeing in different regions like maybe specifically in Phoenix and Austin.
If those areas are seeing more pronounced price pressures relative to others.
Okay.
Yeah, we can talk about what we're seeing them across the business you know generally I'd say, Florida is holding up the best in South east along with them.
Obviously beyond that interruption, but the hurricane I think that's where we're seeing the highest paces lowest cans.
Having said that Florida is probably where we're also seeing the greatest production.
Alan Chez.
Maybe with the exception of Phoenix, I think Texas is doing okay, generally, but as you said it's.
It's slightly different by market often is seeing saw the greatest run up in prices and has significant inventory under production. It's also where we operate at some lower price points and I think those those lower price points are where we've seen the greatest number of cans as I said.
When I think about the west I think in totality, that's where we saw the pressures first once.
Once again, similar to Phoenix, and Austin, where we've seen some of the highest run up in prices.
And those higher valuations have put the pressure on cans.
You know I think the consumers are behaving a little differently in different parts of the country. It's interesting if I look at some markets active adult is our strong point and other markets like California, we're seeing active adult quite a bit weaker.
When I look at.
A market like Houston, that's where you know, we're seeing our affordable consumer actually the strongest but it's a lot of work to get them qualified.
And then when I look at I'll stand you know I think our paces are market, leading at higher prices because he affordable consumer there is really struggling.
So hopefully that gives you a little bit color probably.
Maybe a little also noteworthy is Charlotte and Atlanta, probably deserve a callout with those are the two markets, where we've actually seen improvement in year over year paces.
And I'd say all of our southeast markets. The can rate is well below the company average as well.
And I think it's fair to Sheryl for markets like Phoenix, and Austin that both have been driven affordability dynamics have changed over time, largely because of positive migrations on some positive things happening in the market relative to corporate reloads.
Some of the.
Possible to kinda migration that we've seen yeah, no I think that's right on Eric and I think bottom line is we cant paint even any market with a single brush right. It really does come down to sub market and community by community strategy to take a deep dive so that we can optimize those positions.
Thank you so much.
You bet.
Okay.
Our next question today comes from Alan Ratner from Zelman and Associates. Your line is now open.
Hey, guys. Good morning, Thanks, as always for the Great information I appreciate it.
The first question.
I don't think you guys touched on this in a ton of detail, yet, but pretty remarkable reduction in the G&A expense. This quarter. It had been running right around $70 million on a quarterly basis for as far back as I can see here in this quarter dropped down to the low <unk>. So I'm just wondering if there was any specific reason why you were able to to draw.
Give that lower this quarter and how sustainable that is going forward.
Hey, good morning, Alan This is Lew.
You know I'd say, our strong asps for the quarter, where it came in at 650000 really provided a strong leverage although I'd say as pricing comes down a bit over time, we'll start to see and start to see some increases in advertising and broker co op, we'll start to see that level go back up to more normalized levels.
So I'd say, there's really nothing specific to call out, but yeah, I think really the ASP dropping.
However.
The G&A piece, though wouldn't that wouldn't be the numbers youre describing flow through the SG&A line I'm, just looking more at the general and administrative which I think is typically more fixed in nature unless I'm mistaken.
It is but driven by the Asps youre going to see better leverage for the quarter. Yeah. So the percentages, obviously elaborate as far as the actual 50 I don't have that though there was one specific item there that it was really just.
Zinc cost controls across the board, yes, I'd say, yeah, nothing Super specific.
True ups of different accruals here and there but nothing.
<unk> got it.
Okay, well certainly if that's sustainable that would be yes, certainly very encouraging as revenue potentially comes lower.
Second question I'd love to jump in a little bit too.
Land disclosures that you guys have been providing just in terms of the vintage of your land and it sounds like you guys have taken a pretty pretty sharp pencil to your whole portfolio and kind of thinking through the future land spend there as well as what you currently control. So I think Sheryl you mentioned that 60% of your owned land our 2020.
Earlier vintage so.
As you kind of re underwrote all of your land and maybe look at the 40% that has been purchased over the last two years, what are the implied returns and margins on those assets today, given the new pricing that's down mid to high single digits. Some of that basis as you described.
I think I'll, let Eric run with that one Alan.
Hey, Alan how are you.
Hey, you got hurt.
Got it yes, so Jonathan.
We have been underwriting under recent reporting levels as you think about gross margin.
And as we've shared we've really done in deploying.
Normalized paces as we think about moving through an entire cycle, we engaged a pretty robust study.
China second third quarter of last year, just because we knew that it was.
Unusually attractive and good time in the market and so really it started deploying significant scenario is at that point in time and stress testing.
And really the process today and yesterday has been underwriting to truly what current market is telling us with really some downside stress testing so.
And as we shared reveal software we've been working really hard to solve the math equation for what does and.
And kind of renegotiating each of those and in some cases walking where we need to so hopefully that helps answer the question, but we've been underwriting to slightly where we've been reporting but also very sensitive to an evolving market.
And the good news Allen is we have a really good land bank. So we don't feel the pressure to get any deal to the finish line that doesn't make sense. So that's why I think it's to your point and taken a really sharp pencil to stop that kind of been processing contract and certainly any new deals. This is the time.
I kind of keep our dry powder, if there will be an opportunity to.
To invest at the right time, so yeah, what we're going to be we're going to stay very very aggressive in our expectations at this point.
Perfect I appreciate the extra insight there thanks a lot.
Thank you.
Yeah.
Our next question comes from Mike Rehaut from Jpmorgan. Please go ahead.
Hi, guys. Good morning, Doug Boardwalk on for Mike I, just wanted to know if you guys could give further insight into impairments is that something that you guys have been.
Extra alert for in <unk>.
You had you know Oklahoma called watch list of communities you feel are close to impairment.
And what metrics are you guys looking at that would kind of you know what.
A potential impairment and comments.
Sure. Good question in Q3, we only have one projects across the company that made it to our impairment list.
We'd expect to see more of those in the future as theres always going to be outliers on both sides of the bell curve. Yes. However, based on our improved margins, we really don't today see any systematic impairments ahead at this time as it relates to what gets done in the watch list once the projects.
These backlogs and a consistent level at 10% or below margins, we start to put it on the watch list.
In terms of write downs those would occur eventually if the book value exceeds the discounted cash flows the fair value of the discounted cash flows.
So we'll continue to monitor those quarter over quarter, but based on our margin profiles today other than an outlier in that bell curve, we really don't see anything material ahead of us.
Okay.
Got it thanks very helpful. And then lastly, just.
On construction costs I know you guys touched on it a little bit both for <unk>, where do you envision that I know.
They've been going down a little bit throughout the past few quarters and you know moving into 2023.
What are you guys anticipating for those calls.
Yeah sure sure we've continued to see pressure on costs.
Although as we start to see starts across the industry moderate we do believe based on all the calls we're starting to received on the front end of the cycle time that over time those costs will reduce I did want to point out however, that really Q4, and Q1 will still see some of the higher lumber costs.
That have cropped up during the year, it will probably really be acute to until we see material reductions in our average labor cost and.
However, Q4 and Q1.
Have those embedded higher lumber costs, but overall, we have really seen.
Cost slow down or stop we've been able to push back on any increases for the most part and eventually we will hopefully even see some backend reductions but.
That's just hasnt been into card yet as most builders are pushing so hard to get to their year end closings. Yeah. I expect we'll be back in a normal environment of bound to use by the end of this quarter and some of those things that.
We've seen all year, but.
That we should move on from that as we move into next year.
Great. Thank you guys.
Thank you Dirk.
Our next question comes from Alex <unk> from B Riley. Please go ahead.
Thank you.
Two kind of more general questions.
How do you see the weakness in this cycle different from them.
Past cycles and then.
In your opinion sort of what are the more important items.
That need to happen for demand to stabilize and therefore.
MACRA homebuilding space to reach sort of a new normal.
These higher interest rate levels.
Hey, Alex really good question.
I'd say, there's nothing about this cycle that mirrors prior cycles for a number of different reasons and I'm sure you're well aware of just you know as we look at what we saw coming out of the pandemic.
Before the pandemic I would say that demand was was good. It really was we were continuing to improve quarter over quarter year over year, but when the pandemic happened that changed everything and so when you look at what's happened over the last 24 30 months.
You know probably before this last four five months.
We've never seen this level of price appreciation, so that certainly would be one very significant different at the same time, we've never seen interest rates double in the course of actually more than double in the course of four or five months.
Even through that you know given the reduction in sales I would say with the level of price and interest movement demand has stayed somewhat resilient.
You know I think it's been choppy.
Week to week and that to me has been somewhat responsive to the most recent news and that most recent news could be fed news it could be media it could be the size of discounts that our customers are seeing in the local markets.
So I think it's a combination today have certainly we'd have to characterize affordability as being a real issue for many buyers, but I would say confidence is equally critical.
Why do we need to have happen I think there needs to be some.
Confirmation confidence on what's really going to happen with the fed clearly housing is in the cross hairs on this fight against inflation and I think he has been very clear about that but what that will take I think is still unknown.
There's a range of views out there that says you know he could he could aggressively continue for the next many meetings or are we could see.
Great start to back up as early as next year you know if you look at some of the projections for next years I think NIH be I think some of them are show rate somewhere in the 5.5% range. That's quite a difference from where we are today. So I think when the consumer can get.
I'm confident.
I think that really helps them when I start breaking apart our different segment you know our move up consumer or active adult. These are these are savvy consumers, who really want to make sure. You know the old phrase was you know this fear of missing out because of what what drove the market.
In last year and early this year I think that reverts today to the fear of not buying at the top.
And so I think once they understood we get some stability and consistency and a real view on the fed actions I think that will go a long way.
Anything else Eric Yes.
So a lot of that Sheryl I think the backdrop really is.
Comparing to prior cycles, a little bit of a tenuous affordability condition that we have that we're all sensitive too.
I think when you think about the speculation that it didn't really.
Wow.
<unk> levels.
Globally relatively light compared to prior.
Cycle and so those are kind of positive backdrop as we look at those compares and then yes as we look at confidence going forward, we want to see how the supplier levels kind of move through the system.
Right, you're going to see some.
That stabilization.
And then just general confidence and to your point. The good news today is we do see elasticity in the market and not a buildup of finished inventory like we saw last time right.
Very helpful. Thank you.
Thank you Alex.
Our next question today comes from Truman Patterson from Wolfe Research. Please go ahead.
Thanks, This is actually possible fee.
I appreciate the color on July August and September order trends I was wondering if you might be able to add anything on how October is going so far.
You know I'd say, a continuation Paul good morning of Q3.
It is a little bit different.
Think we just continue to see sensitivity to local factors you know mostly interest rates I mean, when we look at what happened to the 10 year last week and rates approaching 8% and make it makes its way around and it still is just some uncertainty in the marketplace.
They are comparing consumers are comparing incentives and price adjustments across the market, but you know you have a good weekend.
And generally I see those as rates stabilize and then when they shoot up.
Absolutely impacts traffic.
Okay. Thank you.
And then you mentioned that you had a $66000 average deposit how does that split do you have different deposit requirements between your build to order.
In spec sales and then if you could remind me what is your mix of build to order versus spec.
Okay.
Yes.
For Q3, our to be built versus spec was 42 big about 60% spec.
Which has started to we started to slowly see an increase in our to be built homes as a percentage yeah and I wouldn't say I mean, correct me live with people different I wouldn't say that we have a different.
Protocol for our deposit strategy, Paul I think we tried to get 10%.
In reality I would tell you if you're getting closer to a completed house and the more affordable that you won't see that full 10% for that could be anywhere between five 7%.
Certainly waiting on that 10% as we do see higher deposits in our active adult business and we see a higher percentage of overall cash.
But we don't you know the policy around across the country or the approach around the country for just for times like this it's just good business Paul as you want to have those deposits on hand, I, absolutely think it's played quite.
<unk>.
Quite a factor in our 15% can rate for the quarter compared to I think something much higher across the industry. We do see more of those cans coming across back. So I do think there's a correlation to lower deposits yes.
Our teams have done a great job using the deposit as part of the overall negotiation. So if were giving some additional incentives we've asked for more deposits, which I think is serving us well as Sheryl said.
Okay, if I could sneak one last one at Sheryl in prior cycles.
If pricing were to retrench, 10%, just using that as a number what would the relationship and the timing you could expect for cost savings from your from your trades do they give you back half of the price home price reduction or is it higher than that lower than that any good rule of thumb there.
Yeah.
Interesting question I don't know that I could quantify it specifically, there's just always this timing laps.
As you might imagine Paul I mean, right now you've got this lumber overhang so from a percentage standpoint, because we've never seen the run in lumber that we've seen this time youre going to get a higher percentage just there I mean.
You you haven't.
I'm still pretty strong tailwind on the multifamily star to a lot of its going to depend on how quick you know what really happens to start as we move into next year as you can see they havent come through the numbers I think that we may have imagined, but we already are seeing some impact at the front end of the schedule and are being very.
<unk> with our trade I would tell you to date given total starts it hasn't yielded the numbers that I expect that we'll see as we move into next year.
You would probably agree with cost have been much more stickier. This go around is the labor availability is so much lower in the supply chain challenges. We've seen so it may take us a little longer than historic norms. Yeah. So I think the backlogs with our suppliers manufacturers are still very strong through the first quarter of next year and labor.
There is still a challenge so it'll be interesting to see which comes first I think we will start to see labor on the front end come back down a bit then we will see the cost of goods come down and then followed by labor. If we really see continued depression in starch.
Okay. Appreciate it thank you very much.
Thank you.
Yes.
Our next question today comes from Mike Dahl from RBC capital markets. Please go ahead.
Hey, guys. This is Ryan Frank on for Mike. Thanks for taking my question.
I just wanted to follow up on that about the margins right. There given that lumber and trade are still going to be pretty high.
And you're starting to already decrease.
I know youre, not giving guidance, but can.
Can we get any sense for the magnitude of sequential margin declines maybe over the next quarter or two because.
It seems like the houses are selling at right now are probably a few hundred basis points lower on margin, but those obviously won't flow through so just the cadence to kind of getting there over the next quarter or two.
Yeah, you know as you know, obviously, we havent archiving on margin, but I'd say I'd look at it this way.
Last quarter, we guided margins between 25 and 26, we still believe we're going to be in that range, but probably likely more on the lower end, depending on what our market mix ends up being the number of specs we ended up delivering in Q4.
Yes, I would say our full year margins will move slightly in either direction, depending upon those items, but within that guidance.
But as you said as incentives increase over time, but we will start to see those margins creep down, but we do have a strong backlog going into our Q4. So.
That's why we feel comfortable at least being within the range for Q4, but over time, we'll start to see that dropdown into next year.
Okay, So you're not expecting any sharp step declines maybe in the immediate future it might be kind of a sequential or I mean gradual.
Consistent decline I should say.
I'd say consistent decline.
Is reasonable I think Sheryl mentioned earlier that we're seeing mid to high single digit combined incentives and reduction so far in our orders. Yeah. You know in a safe can is is as good or better than a new deal because if you think about the numbers I shared where you know we're spending.
Potentially you know 1.5% of hub asps to percent of loan amount to help some of our backlog compared to what that would take for a new sale.
You know and when you look at our backlog going into new year. So it's going to take to Louis point, some time to bleed in but the homes that are being sold today are certainly not at the margins that we've reported to date.
Yeah.
Got it helpful. And then last one for me just on the buyer qualification. So DTI they've crept up to 39% I think you said this quarter I don't know if thats, an average or if that's at the end of the quarter.
What are you seeing in terms of outright rejections or even fall out on the backlogs just due to natural inability to qualify it had sort of stepped up meaningfully yet.
Yeah, you know and you can tell from our can rate that it's it's not as.
<unk> as you would expect and once again, if you think about the numbers that I've been quoting every quarter, even though they stepped down this quarter, we still had our our average consumer still had a very nice cushion.
When we look at great denials from our shoppers.
I would tell you that's just a very very low single digit we don't see a lot of those but once again I think it's important to separate qualification and desire to so even though our buyers have the ability to qualify at a higher interest rate.
When you look at the cushion that we have you know it doesn't matter. If we're talking about 400 450 basis points for our conventional buyers or something probably closer to 275 basis points for our FHA buyers. It certainly tighter than it's been in prior quarters, but I think as <unk>.
Much as anything it's it's emotional it's interesting when I look at the average interest rate that we're closing are.
Customers that in the quarter it.
It was 5.29.
And our FHA buyer closed at 476, when I look at our backlog and everything that we have locked and I would tell you that we're in a pretty good place with 86% of November locked and December over half of our backlog is locked.
Our conventional buyers are locked at $5 seven so and our FHA buyers are locked at five three so there's still quite a difference from the par rates that we're seeing in the market, which is really assisting the affordability that you've mentioned.
Thank you that's very helpful. That's all from me.
Thank you.
Our next question comes from Alex Barron from housing Research Center. Please go ahead.
Yes, thank you very much.
I wanted to ask and I'm, sorry, if I missed some of these comments I was trying to take notes but on.
On build time have you guys seen.
Seen any improvement at all.
It's not.
Are you guys doing anything as far as trying to improve the.
The labor shortage situation I don't know by paying subs more than your competitors or something just to kind of attract people to come and work.
On the homes.
And.
Related to that.
What is your average build time and.
Are you seeing any cancellations because clients are saying well.
I'm still in backlog for too long and maybe I should go buy a house from somebody Who's got a quick move in or that type of thing.
Good morning, Alex.
Let me take a stab at that and May have some people out.
As we mentioned in the prepared remarks, our cycle times have extended slightly during the quarter, probably approximately about 10 days.
We have not to date seen any improvements on the backend and really expect Q4 to be very challenging as well as all the builders as I mentioned earlier are pushing to finish for years.
On the positive note on the front end, we're getting a lot more trade availability, which over time, who will start to see some improvements in cycle times, but as Sheryl mentioned earlier, I would say that depends a little bit market by market.
Where we've seen some very strong multifamily and asked if our activity. It's a lot more labor constrained in those markets.
But with lower builder starts over time, we will start to see some of that improve as well.
Overall, our cycle times. This year went up about 1.9 months and we're currently averaging nine four months and it varies pretty widely across the company from a low of six five in southern Cal to eye in somewhere like.
Yeah, Austin, that's coke getting close to a year or so.
Wide variety.
In terms of trying to get more labor into the market I know thats, an industry wide challenge and there are the L. B a is involved in bringing a lot lot more.
Trades to to the homebuilding industry over guiding talent Foundation more specifically right right. It's been sponsored by there'll be a that's going to take some some time Unfortunately.
Unfortunately, yes cycle times today until we really start to see the supply chain continued to normalize or are going to be elevated. However over time. We've averaged you know been able to turn our assets about two times a year. So obviously, we're not doing that today when that does come through.
The business over time, we'll start to see our ability to carry a lot less units at any given point in time.
Do you know it goes also Alex to some of the softer things I hate to say it but the trades have a lot of choices today, so they need to be treated with respect they need to know when they get to the job site.
Already for them. So they don't have any dead days I need to get paid on time all of those things matter, they always matter, but they really matter in today's environment.
I think we're certainly grabbing our share but.
And to Louis point feel really good about some of the programs that would be ancillary programs that we have for both internal talent as well as helping our trade secure new talent onboard train.
And it will continue to help us through the full cycle and I think the one question I Didnt answer is it potential cancellations win with the extended construction time lines I'd say overall, not seeing a huge amount, but there are definitely instances where people have to be in a home and we've seen some people.
Cancel over that.
And maybe lastly on the <unk> side.
<unk> seen some pressure there, but we're really seeing the benefits of simplicity and cadence.
The.
The efficiency of that model when you only have two or three floor plans you just can create that kind of cadence.
Okay very helpful.
If I could ask another one not sure. If he has mentioned what your starts were for the quarter and related to that you know what is your thoughts around.
Starting more specs some builders have said that customers want that can close within 30 to 90 days at the same time, we know there's a lot of homes under construction currently so.
Is there.
What's your thought around starting more specs versus just working on the ones you already.
But what what are the start yeah, Alex in the quarter.
Yes.
That's a good question our starts for the quarter were 14, and 146 or approximately 1.5 starts per outlet as we've really worked down or trying to work down our spec inventories or inventory levels lately.
Quarter over quarter, our spec units dropped 17%.
And went from $9 five average per outlet to seven eight which is really more in line, where we want to be going forward.
So we're pleased and more importantly, we are pleased to only have half of spec per outlet as the consumers have really absorb those inventory units completed right, yes that can happen.
Yes spec completed.
Our consumers are really absorb that inventory as it approaches completion.
So going forward I'd say, we'd expect that our starts will more closely match our sales base as we've reached more of a desired spec inventory level and the only thing I'd add to that.
Yes, you know as I said in my prepared remarks, 95% of our cans or on spec units.
So we really do believe in this balanced model of allowing a consumer to pick a lot pick a plan.
Put all the specifications in the house they want.
Prefer not to write deals or multiple times.
And if keep a nice balance of specs and certainly at the more affordable levels is where you'll see that the higher spec counts for us.
Yeah.
Thank you there are no further questions at this time I will now hand, you back over to Sheryl Palmer for closing remarks.
Okay.
Thank you for joining us today, and we appreciate the opportunity to share our third quarter results with you.
Wish you all a very good and healthy holiday season, and we'll look forward to talking to you in the new year.
That concludes today's Taylor Morrison home called earnings webcast and conference call. You May now disconnect your line.