Q1 2023 Taylor Morrison Home Corporation Earnings Call
Yeah.
Hello, everyone. Good morning, and welcome to Taylor Morrison's first quarter 2023 earnings Conference call.
Currently all participants are in listen mode only.
Later, we will conduct a question and answer session and instructions will be given at that time.
As a reminder, this conference call is being recorded.
I would now like to introduce Mckinsey Hern, Vice President of Investor Relations. Please.
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 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.
Now I will turn the call over to our chairman and Chief Executive Officer, Cheryl Palmer.
Thank you Mackenzie and good morning, everyone. Joining me as Lou Steffens, our Chief Financial Officer, and Eric Hughes, Our Chief Corporate operations Officer.
Also with US is Curt van hefty, our west area precedent and as you may have seen in this morning's earning release, we will be stepping down from his CFO responsibilities in order to attend to family matters that require him to relocate out of Arizona.
While this move preclude him from continuing with the demanding requirements of the CFO position.
It will remain an important member of our leadership team as he shifts into the role of EVP of strategic and operational initiatives, where he will drive our continuous focus on enhanced processes and performance.
In his place Curt will step into the role of interim CFO effective this Monday may 1st.
Currently oversees our west region and has nearly 30 years at homebuilding experience as both a finance leader Anfield operator from roles in corporate finance and as a division and regional President for several national Homebuilders and ideal background that maintained the strong operational and finance cohesion.
That we specifically look for and have benefited from under Luiz tenure.
At the same time, we are commencing a search for a permanent successor, we are incredibly grateful and confident in curt's willingness and ability to lead our finance teams. We are also thankful for lose meaningful contributions as CFO . During his time in Arizona and look forward to his continued leadership, while most importantly wishing him.
Family all the best.
Now, let's dive into our call and as always I will share our quarterly highlights an update on the market and our strategic priorities.
After my remarks, Eric will discuss our land portfolio and investment approach, while we will review our financial results and guidance metrics.
In the first quarter I am pleased to report that our results outperformed our expectations across all key metrics due to our team's strong execution and stabilizing market dynamics, we delivered 2541 homes at a strong home closings gross margin of $23 nine.
<unk> got an efficient SG&A ratio of just nine 9%.
Most notably this gross margin was up 80 basis points year over year due to our ongoing focus on operational enhancements and our balanced approach to to be built and spec home sales.
In total despite the modest reduction in total revenue our focus on improving operating margins through strategic efficiencies allowed us to deliver a more than 20% increase in diluted earnings to $1 74 per share and a 32% growth in our book value to $44 per share.
These strong results drove a nearly 500 basis point increase in our return on equity to 24%.
And lastly, we ended the quarter with approximately $2 billion in total liquidity, while our homebuilding net debt to capital ratio declined further to an all time low of 21%, leaving us with significant financial flexibility to invest in our business to drive returns as we move forward.
As I shared on our last call in February we experienced a rebound in sales activity and shopper sentiment during the early weeks of the spring selling season.
As the quarter progressed, the positive trends accelerated further in March following typical seasonal patterns. Despite the uncertainties facing the market in total during the quarter. Our gross sales orders improved to a healthy monthly pace of three four per community the highest level since the third quarter of 2021.
Our cancellation rate decline to more normalized levels at a 14% of gross orders.
This drove our monthly net sales pace to two nine per community as compared to one nine in the fourth quarter and three one a year ago.
This momentum has carried through the first three weeks of April with our sales running at a pace of approximately three one net orders per community.
Meanwhile, leading indicators, including sales traffic mortgage prequalification and digital home reservations, which remained our top conversion source at a rate of 40% in the first quarter are also encouraging.
Recognizing the interest rate volatility as well as the banking sector turmoil that unfolded during the latter part of the quarter I'm very pleased with the resiliency of our sales trends with the strength once again, highlighting the significant need for new construction in our markets as well as the financial health of our diverse consumer groups.
To that point, our buyers financed by Taylor Morrison home funding, whose capture rate improved to 82% had an average credit score of 756 and provided an average down payment of 25% in the first quarter. Both of these metrics were stronger than a year ago and above industry averages.
Even with 38% of those consumers being first time homebuyers.
Strength of our buyers is also evident in the size of our deposits, which averaged 66000 or about 10% per home for our customers and backlog, helping to minimize our cancellation risk.
When I look across our portfolio. The first quarter stabilization was evident across nearly all of our market strength was most pronounced in our east region led by all of our markets in Florida and Charlotte.
Our central region was somewhat mixed as strong improvement in Dallas was supported by stabilization in Phoenix and Austin, While Houston was a notable outlier although April trends have improved there as well.
And lastly in the West all of our markets showed positive signs during the quarter with the exception of Portland.
Across the country, we benefit from the diversification of our buyer groups quality of our locations and financial health of our consumers each of which are intentional element of our strategy that we believe enable us to produce long term value through the ebbs and flows of housing cycles.
Parsing the trends by consumer group sales were strongest among move up buyers, which accounted for nearly half of our neck orders led by our second time move up category, where both sales and pace, we're up firmly year over year.
This was followed by our entry level segment, where first time buyer demand for spec count stabilized with use of our strategic incentive programs, while our resort lifestyle segment experienced a pick up as we move through the quarter.
Driving our sales our teams continue to leverage our various pricing tools and emphasize the value of finance as a sales tool with targeted incentive programs, including the ability to lock in interest rates for up to 12 months on to be built homes and take advantage of below market interest rates for spec homes.
Yeah.
Equipped with these compelling mortgage offers as well as our innovative digital sales capabilities and other marketing tools. Our teams are continually adjusting to market conditions to drive optimal community performance as demand has improved we have begun to pull back on incentives in many of our communities and even raise price.
In sum reinforcing shopper sense of urgency and further solidifying the value of our backlog.
The success of this strategic approach is evident in the strength of our recent gross margin trends, which have outperformed on both an absolute and year over year basis. We believe this outperformance reflects a number of factors, including our ongoing focus on capturing operational enhancements across our business.
The underlying value of our prime land portfolio, and our favorable mix of to be built and spec home sales.
To the latter point, we adjust our mix on a community by community basis, depending mainly on the targeted consumer groups and price point and have been averaging around 60% back end, 40% to be built to grow sales in recent quarters.
Beginning in the fourth quarter of 2022, the gross margin differential between the two has reverted to historical norms and which to be built margins have exceeded spec margins by at least several hundred basis points due to greater high margin option and lot premium revenue earned when discerning buyers bill.
Their dream home and higher incentives typically required when selling spec inventory.
In the first quarter this spread amounted to nearly 400 basis points.
First thing the temporary margin outperformance on spec sales and much of 2021 and 2022 when demand for move in ready home significantly outpaced supply.
Well quick move in homes remain attractive, especially in lower price points only about 30% of our shoppers in the first quarter. So they are looking for a home available within 30 to 60 days, while the remaining vast majority indicated a quick closing is either not an important consideration or that they prefer.
To fully personalize their home.
This is consistent with preferences in 2020 and prior as the increase in quick move in demand over the last two years has more recently normalized back to historic averages based on our comprehensive survey data.
Our actual mix of spec sales has been running roughly two times higher at about 60% given our intentional shift to more spec sales to better manage protection. We believe these insights continued to support the balanced mix of our overall portfolio.
As we look ahead from a margin perspective based on the mix of deliveries, we expect our home closings gross margin to be between 23 to 23 and a half in the second quarter and approximately 23% for the full year.
This assumes a greater proportion of spec home closings in the second half.
On the construction side of the business, we remain focused on driving tighter production schedules pushing ahead on cost rationalization with our suppliers and trade partners and continuing to refine our product and option offerings for ongoing value engineering and cycle time efficiencies in many of our markets. We are.
We're seeing some relief in the early stages of the construction cycle driven by a return to normalized product lead times and improved labor availability in some categories. However.
However, the back end of the construction cycle remains constrained and still tight labor capacity. Among those trades continues to pressure the industry. This mirrors the cost side of the equation, where the realization of aggregate savings will be gradual.
Despite the headwinds we are driving efficiencies through a number of initiatives, which will ultimately allow us to carry less work in process inventory on our balance sheet, thereby driving enhanced inventory turns increased production potential and improved returns.
For example, we have streamlined our Floorplan library by more than 50% in the last two years and realized a roughly 50 days savings from sales to construction start for homes utilizing our popular option packages compared to traditional design studio start.
These are just two ways in which we are driving reduced cost and improved revenue opportunities.
To wrap up let me say, while we are greatly encouraged by the recent improvement in sales and consumer sentiment. We also recognize the uncertainties surrounding interest rates and economic conditions.
Given our balanced portfolio.
Scale and financial strength.
We believe we are well positioned to navigate the near term market volatility while remaining grounded in our long term approach to disciplined capital allocation and market positioning.
Our leadership and field teams are accustomed to operating within these dynamic conditions and our playbook will continue to emphasize smart growth operational efficiencies and an exceptional customer experience now let me turn the call to Eric to share more on our land strategy.
Thanks, Cheryl and good morning, everyone I will share an update on our attractive land bank and our disciplined investment approach, which remains highly opportunistic.
Last year, we quickly moderated our land spend as housing market conditions began to turn sharpening our already stringent approach to underwriting and capital allocation.
With a strong pipeline of lots already owned and controlled we were in the fortunate position of being able to reduce our pace of investment while still maintaining strong market positioning.
Today with housing showing some signs of stabilization, but the macroeconomic outlook remains highly uncertain, we continue to be prudent and patient in our investment decisions. This includes re underwriting every phase of land development lot takedown and deal closing to ensure each dollar invested continues to reflect the market.
Conditions are stress tested return thresholds.
In the first quarter, we spent $321 million on homebuilding land acquisition and development of which 68% was development related this.
This was down from $394 million in the first quarter of 2022, when just over 50% of the spend was dedicated to development.
Also of note, we incurred a modest $1 million and walkaway expenses related to deals that no longer met our requirements during the quarter.
As we look ahead, we have significant financial flexibility to take advantage of market opportunities. At this time, we continue to expect our total land spend this year to be similar to 2022 at around $1 $6 billion driven mainly by development.
Although our ultimate investment will be dependent on market conditions and deal flow at.
At quarter end, we owned and controlled approximately 73000 homebuilding lot.
This represented five nine years of total supply.
With 42% of these lots controlled via options and other off balance sheet structures. Our supply of owned lots was just three four years each.
Each of these metrics remain within our targeted ranges.
When underwriting new deals, we evaluate cost of capital risk mitigation and expected returns to determine the optimal financing structure for each project driving a balanced portfolio that we believe optimizes long term performance.
Overall, we remain pleased with the composition and basis of our well underwritten capital efficient.
Portfolio that is concentrated in prime core sub markets approximately 55% of our owned lot supply was negotiated in 2020 or earlier, providing an attractive historic cost basis that we expect will enhance our relative gross margin profile going forward with that I will turn the call to Lou.
Thanks, Eric and good morning, everyone I'll review, our financial results and provide detailed guidance for the second quarter and to introduce our expanded outlook for the full year.
Sure I dive in I will first address this morning's announcement I'm incredibly grateful for Cheryl and the board's understanding as I transition into this new role, which provides me with the flexibility needed to address personal family matters. The team at Taylor Morrison has been my extended family for the last 16 years and I'm deeply committed to our continued success.
By focusing on our strategic and operational initiatives I will remain engaged in the areas of the business, where we can continue to have a significant opportunity to further capitalize on enhanced scale and integration successes.
I will also closely support Kurt and know he will be a terrific leader and advocate for our teams in the CFO seat. Thank.
Thank you all for your understanding and your support of Taylor Morrison.
With that let's turn to the exceptional performance our teams delivered in the first quarter.
We generated $1 74 of earnings per diluted share compared to the first quarter of 2022. This was up 21% driven primarily by improvement in our home closings gross margin greater financial services profitability, and a 10% lower diluted share count.
We delivered 20 541 homes at an average closing price of $635000, which generated home closings revenue of $1 6 billion.
Compared to our guidance closings benefited from greater spec homes sold and closed during the quarter, while the average sales price was as expected.
During the quarter, we accelerated our starts volume to approximately 2500 homes given the improvement in sales activity and our focus on rebuilding inventory levels to maintain approximately one finished spec homes per community.
This equaled to six starts per community per month up from one six in the prior quarter, but still below $4 two a year ago.
As a result at quarter end, we had approximately 7700 homes under production, including approximately 2200 specs.
Of which only about 230 are still less than one per community were finished.
Based on our homes under construction and assuming no meaningful change in cycle times. We currently expect to deliver between 2600 2700 homes in the second quarter and between 10 to 11000 homes for the full year.
From a pricing perspective, we expect the average closing price of our deliveries to be between 630 to 635000 in the second quarter and around 625000 for the full year.
Turning to margins our home closing gross margin improved 80 basis points to 23, 9% from 23, 1% a year ago.
This was ahead of our prior guidance due primarily to stronger net pricing and fewer concessions on homes sold in prior quarters than originally expected.
As Sheryl described based on the mix of expected deliveries and strength of our to be built margins. We expect our second quarter home closing gross margin to between 23 to 23, 5%.
With a greater percentage of spec home deliveries anticipated in the second half, we anticipate home closings gross margin to be approximately 23% for the full year.
SG&A as a percentage of home closings revenue increased 30 basis points to nine 9% from last year's record first quarter low of nine 6%. Despite the decline in revenue in closings.
We are increasingly benefiting from the efficiencies and cost savings from our innovative digital sales capabilities and other sales and marketing initiatives that we expect will further improve our cost structure compared to historic norms.
For the year, we are forecasting an SG&A ratio to be in the high 9% range.
Shifting to sales our net orders in the quarter were down 7% year over year to 2800 54 homes the.
The decline was driven by a 7% reduction in our monthly net sales pace to two nine per community as higher cancellations offset year over year improvement in our gross sales pace to three four per community, while our ending community count was flat at 324 outlets.
As Cheryl noted demand trends improved throughout the quarter and sales have been running at a pace of approximately $3. One net orders per community in the first three weeks of April .
From a community count perspective, we expect our ending outlets to be roughly flat from the first quarter between 320% to 325% in the second quarter and for the full year.
To wrap up we generated $348 million of cash flow from operations during the quarter and ended with total liquidity of approximately $2 billion.
This included $878 million of unrestricted cash and $1 1 billion of available capacity on our revolving credit facilities, which were undrawn outside of normal letters of credit.
Our net debt to capitalization ratio declined to an all time low of 21% as compared to 24% in the prior quarter and 35, 7% a year ago.
As a reminder, we lowered our gross debt outstanding by $710 million in 2022, which reduced our annual capitalized interest burden by approximately $40 million to the benefit of our future gross margins.
Our next debt maturity is in March of 2020 for which we have ample cash on hand to address after which our next maturity will be in 2027.
Overall, our strong capital position leaves us well equipped to take advantage of investment opportunities as they arise while also remaining balanced in our approach to share repurchases and debt management, all with a focus on driving optimal long term returns for our shareholders now I'll turn the call back over to Sheryl.
Thank you Lou.
Before ending today's call I want to briefly elaborate on one of the critical long term trends driving our focus as an organization in 2022 ethnically diverse consumers increased to 61% of our homebuyers from just 45% in 2020, a significant shift that we expect will.
<unk> to evolve as younger.
More racially diverse cohorts enter the prime home buying years.
With multicultural population growth reshaping home buying demographics, we are responding to the needs of these communities with our land strategy and by incorporating diverse design principles increased pricing and sales transparency and functional and aesthetic preferences of our growth audiences.
I shared more of our focus on these important shifts in my recent shareholder letter, which you can find on our website and look forward to continuing to update you on our evolving strategy to thoughtfully cater to our consumer base.
In closing I'd like to thank our Taylor Morrison team for another impressive quarter. The team is second to none and I am so appreciative of their teamwork and commitment. Thank you all with that let's open the call to your questions. Operator, please provide our participants with instructions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Star followed by one on your telephone keypad.
Two we drilled a question you press star followed by two and.
And when is your turn to speak please make sure you are muted locally.
Okay.
Our first question comes from Truman Patterson from Wolfe Research. Your line is now open. Please go ahead.
Good morning, actually this is a possible ski.
I guess the first question.
Percent of your communities have seen pricing come off the bottom.
And then.
What percent of your communities would you actually be seeing incremental.
And what markets would those really began.
Hi, Paul how are you.
As far as the number of its good as far as the number of the communities that we have seen adjustment and I would say those adjustments would be both.
Pricing adjustment as well as a reduction in incentives.
Just about just over 50% of our community.
And the second question I missed part of what you said do you mind repeating it.
I guess, what what markets are you seeing.
To see incremental incentives.
Incremental incentives and when I look across the organization, probably the place that we've seen the greatest incentives have been Portland.
Yeah.
Houston earlier in the quarter Denver earlier in the quarter.
I would tell you besides that we have seen strength across really the rest of the portfolio. When I look at our sales in the quarter, we saw Charlotte Tampa Sarasota up year over year in sales.
<unk> had its best quarter within two years and we've seen some nice recovery from places like Austin and Phoenix that I think are.
Fairly stressed last year.
Okay.
I appreciate the spec build to order margin color.
That in any way being.
Colored by let's call. It second half of last year cancellations or customized homes that you may have to be.
Discounting more than you would have normal spec.
Just kind of a temporary.
Mitchell.
No I don't think so call in fact, I would tell you that we are returning.
Two what I would say the old norms.
'twenty late 2021 early 'twenty two.
The exception and that was really because we continue to see as you know back then something like a percent a month of price appreciation and builders were holding back sales until those homes were next to complete.
The to be built homes didn't get the benefit.
That price appreciation because they may have been in backlog eight to 12 months. They also unfortunately got the added cost, but interestingly enough. If I look at Q1, Paul our to be built margins were up about 480 basis points year over year and our quick Mike a quick closings were.
Down over 500.
That's more of the historic norm.
Okay.
Finally demand is obviously better than expected in the first quarter, but what are you hearing from the field for buyers that are qualified what is actually keeping them on the sidelines.
Per our prospects I should say.
You know it's interesting I would say that there is the consumers are behaving a little different across the country.
Paul.
One of our markets.
Actually a couple of our markets.
We heard the narrative from the field that.
As builders were getting more aggressive with pricing and discounts. It actually is an unsettling feeling for the consumer.
Yeah.
Because when buyers believe that prices are continuing to drop there is not a strong motivation to jump in I think we saw the same thing with interest rates I think part of the continued momentum we've seen that we aren't seeing price deterioration interest rates have settled.
And I think we're actually in many places using that as a sales tool to us on a twin consumers recognize that next weekend, we might be raising prices.
So when I look at cancellations compared to sales, it's really around financial capacity, our ability and most of our cancellations have been on the first time buyer side.
So not real different than what you know to answer your question on what's stopping them on the sidelines, but once again I think the demand and the momentum that we saw and you look at our gross sales up year over year I think it gives you the confidence of how we've really seen those folks return off the sidelines.
Thank you I appreciate it.
Yeah.
Our next question comes from Carl Reichardt from <unk>. Carl Your line is now open. Please go ahead.
Thanks, Good morning, everybody best of luck in your new role.
So Cheryl following Paul's.
Paul's question.
Youre welcome.
So.
The narrative out there for a while has been Oh gosh move up customers, whether theyre rate locked there, they're likely to stay in there and their spot, but youre seeing a substantial improvement there. So I'm curious what are you hearing or thinking about the narrowed a bit rate lock is keeping people out and then have you started to see a change in buyers we saw a lot.
In migration state to state post Covid or are we starting to see more local customers now stay within their markets and move up.
So I'm just I'm interested in how the move up world is working so well in the face of the narratives that we've all been chatting about for a couple of years.
Yeah, it's such an important topic I. Appreciate the question. Karl you are right. The narrative has been something like 85% of the mortgages across the country are sitting there with a rate less than 5% and so where rates have been.
Certainly the back half of last year, where they were some point actually got to 8%.
Along with what had happened on the pricing appreciation side that was a tough hutch.
Now that rates have settled and I know we've seen some movement.
But week over week, but now that rates have settled I would say in that loan.
6% range.
The ability for a consumer to buy down their rate to something that is more consistent with what they've had.
Very different than what we saw by tier another stat that I think is just so interesting is that when we look at our current backlog.
45% of them all go home today and are buying a new one.
Number of folks that actually owned a home, but it probably falls.
And sitting waiting for their next home to be complete is probably significantly higher than that.
That 45%, probably 65% or so will be lifting and closing on their home before they buy the new one.
30%, 40% of those folks will retain the option of keeping that home may be using it as a rental before purchasing so I think because of where rates have settled a lot of that narrative.
Honestly going away.
And maybe shareholders on the migration.
From a macro point and then a micro point.
Carl if you look at the we like our footprint a lot. So as you think about migration happening across the country in terms of states.
Florida right now as I understand is the winner capturing over 400000 of kind of in migration taxes of 350000, North Carolina over 100000 volt over 100000 in Arizona at about 100000, So I think thats kind of a micro point from a macro point from a micro point.
If you look at a market like Naples in which we operate.
Serving a lot of <unk>.
<unk> targeted buyers.
About 56% of our buyers that are coming from out of state. So kind of if you think about that consumer group and then you think about it.
Consumer group in Sacramento for example in California.
96% of those buyers are coming from in states and so kind of a similar <unk>.
Tumor, but a terribly different migratory patterns.
So the post COVID-19.
It migration activity has waned, but to traditional in migration activity that we've historically seen in this business.
It continues I guess, that's the best way to summarize that.
Okay.
Thank you and then.
The second question is on community count so.
Posted the Lion deal community Count I think is wavering, a little bit but generally been.
Relatively flat.
And sell through as part of that but I am curious when you look at your land portfolio now when you would expect the community count to begin to ramp more meaningfully if it's not going to be 23 years 24, more an inflection year.
Or is that something we should wait for longer.
Yes, good question, Karl and maybe a couple of things affecting our outlets.
Post William Lyon, and some strategic initiatives one we've talked about the last few quarters that Texas is in the middle of a strategic change, where we had a large percentage of our outlets that were asked.
On the same lot sizes. Many other builders, so slowly they've been reducing our exposure to those master plans and have more wholly owned communities that drive a little bit higher pace. So that transition has impacted negatively our outlets a bit we've talked also about especially when Q4, we had the tougher sales environment.
Our teams have made a shift to open our communities one models and entrances are complete.
And probably a handful of outlets later this year that we had expected are being impacted by our Q3 and Q4 Walkaways.
But we are still pleased with the land portfolio, having the 73000 lots.
Currently that we own and control will provide us an opportunity for future outlet growth.
I would say a bit of timing based on some of those items I mentioned and then maybe lastly, a small small amount the weather we've seen in California, and then the Hurricanes in Florida have delayed some of our more recent outlets opening due to transformers and other things that have been delayed.
So I guess in total Lou I mean, obviously, we had planned on some more growth this year, but given all of those factors some of that got pushed into next year. So the simple answer Carl if youll start to see a ramp up as we move through next year.
But this year will probably and the sales like you said, we have also sold through a number of more communities than we had anticipated, but youll start to see that ramp up as we move into next year.
I know all about the weather in California, I appreciate it all thanks so much.
Thanks Dara.
Yeah.
Our next question is from Mike Rehaut from Jpmorgan, Mike. Your line is now open. Please go ahead.
Hi, Good morning, Doug Wardlaw on for Mike.
To extent that demand continues on its trend, but how does your land strategy change and also in the event that the macro environment stabilizes and demand stays robust going into 2024.
Dissipate a material change in your land strategy long term.
Yes, it's a good question, Doug and maybe just as a reminder, we have been investing prudently. We continue to invest as Lou suggests that we've got 73000 lots five nine years. So we feel real good about where we sit today.
And we've used the word opportunistic quite a bit in the last number of quarters, but to your point I think as the environment stabilizes, we will be looking to lean in a bit more.
We're really focused on where we can add positions that are accretive to the near term community count growth. So I do think to your point as things continue to stabilize as our confidence grows and as the Crystal ball gets a little clearer, we will start leaning in a bit more.
Got it great and then I guess switching gears a little bit.
I guess kind of going back to the incentive pricing question.
Your strategy moving forward again.
That demand stays where it is and there's not a drop off at any point throughout the year.
Some of the areas, where there is more so increase incentives are more base price cuts. How are you guys playing to our approach that is it going to be a community by community basis or just kind of.
Hum.
National strategy there.
And then in addition to that.
Regionally.
<unk> demand kind of surprised you anywhere.
I guess recovery wise based on kind of like the moves we've seen recently.
Yeah, I would tell you guys on the pricing side those decisions really do need to happen locally because you really have to understand the competitive environment the supply environment.
But I think as we've also shared price cuts become our last.
Strategic resorts, because we are able to help the consumers in such a greater way by putting those dollars towards finance incentives and I think about 88% of our closings in the first quarter had assistance with discount points to help them get to that closing table.
And the ratios you know three or four to one so it's very meaningful for absolutely where some markets flat late last year that we had to do some repricing, but I'd say today that is actually not one of the tools, we're using to Austin.
And the second part of the question is where we're seeing.
Greater strength.
Is that correct.
Also you know areas, where there has been.
Strong recovery.
The bottom as we've seen towards the independent entity.
Yes, I would really point to Phoenix.
And often probably because they ramped up.
<unk> test and the most on the pricing curve.
And often the growth continues to be really quite strong, but we can continue to.
To be a little higher than I would take the company average in Phoenix, the gross and the net we're seeing that pull through and we're also seeing seeing pricing strength.
Florida continues to be strong maybe the other callout is Charlotte.
We've seen great strength in Charlotte pace, one of the leading edge.
Okay.
Last one.
I'd say its been a little surprising is the bay one of our strongest paces in the country in the first quarter.
So almost across the board I mean, you're seeing some in pockets across most of our markets.
How do you feel Cheryl book on it.
Nice surprises there was a lot of concern last year about excess inventory getting absorbed.
Nice job of absorbing that I think going back to showing the demographics and being underserved under supplied in the industry. No I think that's a key because we didn't we haven't we were quite worried I think on the new home because of what was happening with cancellations and the amount of starch and we certainly havent seen it on the retail market. So.
Continue to be underserved nice tailwind.
Great. Thank you guys.
Thank you.
Our next question comes from Alan Ratner from Zelman and Associates. Your line is now open. Please go ahead.
Hey, guys. Good morning, Thanks, as always for all the great information so far.
I thought the spec to be built commentary in margins was really interesting.
Dig into that a little bit more because your guidance on margin for the remainder of the year implies a bit of a drift lower and I think you kind of alluded to that's more of a mix impact from from higher spec closings, but I'm. Just curious if you could kind of detail specifically, what what's embedded in that guidance as far as pricing and cost.
Typically.
Yes.
Good question, Neil and good morning.
I would tell you a couple of things one we still have a lot of our strong backlog closed sold earlier last year that is starting to come down.
As we have increased our spec percentage, you'll see more of those coming through in the latter part of the year that generally are a little bit lower price, where we've had very strong to be built homes sales in the last couple of quarters. Those generally have a little bit longer cycle time, so youll see some of those benefits through the remainder of the year, but theyre generally.
Taking a little bit longer than the average spec that we build so we're starting to see some of those already after we start them has to be built moving into early next year, which will give us some pricing strength starting at the beginning of next year.
And so I would really wrap it all up that some of this is going to come down to what we see with cycle times for the remainder of the year, we had our calls with our teams last week and generally overall very positive, but so far we've just seen from days to a couple of weeks on the front end not seeing that still come through the backend, but you'd expect after.
A couple of quarters of lower starts in the industry that that will give us some opportunities later in the year, which were not counting on so if we can pull some of that higher margin backlog into this year.
We may have some opportunities, but we're not counting on that today.
Okay.
Got it but just on that point, you're not embedding any additional incentives or anything needed to move those specs already meaningful cost changes, it's really just kind of flowing through the current environment.
The upside or downside is going to be more timing related to the.
The cycle times.
Thank you.
Well on the units that we sold in the middle of last early last year, it's probably still a little bit embedded yes, theres, probably a little bit but that was a nice thing this quarter on our order revenues.
We didn't have the noise that we've had the last couple of quarters, because we haven't had to go back to previous disc cafe previous backlog and discount as much to get them to the finish line. So that to me is a sign of strength of the marketing approved market improving so from that standpoint.
We've been very pleased and I would say the rest of it the specs, where we're showing what we think we need to sell them today. So if the market continues to firm up we hope theres opportunities. There and then I think on the interest rate question or the cost side of the interest rate Alan It's just not costing us is.
Much as it was.
A couple of quarters ago to help customers get.
Get their mortgages in place so.
We'll have to see if we maintain that spread.
So theres probably.
We've assumed lower and not going back to where we were but we.
We just have to see what happens to interest rates.
Got it that's helpful and then on a similar note I just want to make sure I'm understanding the strategy correctly here. So you as well as a lot of other builders last year ramp your spec starts and I think that strategy is paying dividends here just based on how tight the resale market is and kind of where the demand has trended.
You're 60% specs right now which is higher than you've historically been at.
Sounds like Youre seeing improving demand on to be built.
And the margin differentials returning to historical norms. So as you think about your start pace here going forward are you.
Replacing spec starts at the pace, you're selling selling through them or are you looking to over the course of this year get back to a more historical mix of to be built expect which I would imagine would require starting fewer spec homes.
Yeah.
Yes, I would say definitely want to replace our specs as we saw them I think in the last couple of quarters. We've said we've wanted to get our starts back to our sales pace. This quarter was a little bit short at the two six but part of that is as you mentioned that we've sold a few more to be belts. We went up from 500 basis points on our <unk>.
We built sales this quarter from Q4, so it takes a little bit longer from the sale to start of those although we have also made pretty significant progress in reducing our sale to start times as more of our homes go through our canvas program.
So overall I think that we're still in the ramp up process of getting a few more starts in the ground than we've been tracking.
But we still like specs.
And a good balance for us more recently I think the key for US Allen, who is going to be aligning our specs to consumer demand I mean, I know that sounds so rvs, but we're seeing the majority of that demand at the first time buyer.
Interesting is were looking through some of the research for the quarter.
One in four of our shoppers said they would prefer a spec that they can be motivated by our specs and high centered so I think the macro environment is going to continue to impact our strategy. Obviously, if we can have to be built where we're getting that kind of March.
<unk> enhancement, we're going to do that.
Yeah.
But having said that even though kind of historically something like 7% to 10% of our consumers bought a spec due to incentives today that number is closer to 40% because of the environment. We've been operating in but likely said, we're going to continue to start specs as we replaced.
But at the same time, we want to ramp up our production and continuing to be built business, maybe just worth mentioning I think our teams have made huge strides in trying to improve our closing cadence and having those specs available has really helped so based on our guidance. We hope to have close to half of our year closed in the first half which is the best we've done since.
Before 2000, and it really helps from a.
From our trade base perspective in terms of having visibility and consistency.
Okay, Great really appreciate all the commentary.
Thank you.
Our next question comes from Matthew Bouley from Barclays. Matthew Your line is now open. Please go ahead.
Good morning, you have Elizabeth on for Matt today.
I know that rate lock ins has been a focus for your incentive strategy is that still what people are the most responsive to or are there any other types of incentives that have been getting people over the finish line.
And generally is there a clearing rate or a specific number that.
Interest rate, where you are seeing people.
If there are particular, REIT, particularly responsive to it.
Yeah. Good question I would say the buy downs are absolutely.
The preference.
For most of our buyers across the country. Our second certainly for our active adult buyers Elizabeth would be maybe option incentives.
Are some of those buyers tend to use more cash or it takes smaller loans or don't plan on holding alone as long.
As far as the clearing price I think that's actually the best part of the news is the consumer has really adjusted to this new rate environment. They no longer believe that rates are going to return to three or 4%.
When you look at our note rate for the quarter I think it was something around five 5% and that's generally where I think the consumer has gotten quite comfortable.
And we were at 565 for Q1.
Which was a little thank you. Thank you basis points lowered Q4.
Thank you.
And then kind of switching over to the construction cycle I know that you mentioned that there's still some pain points in the backend I was wondering if you could maybe dig in on that a little bit and touch on if there are any construction costs that you're seeing.
Maybe they're a little bit more resilient or if youre seeing any declines.
Yes, no problem Elizabeth good question.
Definitely this quarter, we've seen some stabilization in our cost as we've talked about the last several quarters lumber is finally starting to come through.
P&L.
In the first quarter and then throughout the remainder of this year so our costs.
<unk>.
Like I said, probably down just slightly on a square foot basis, probably the pressure points. We've seen more recently are on the concrete side, especially where we see large commercial volumes in our markets concrete has gone up a bit and then more specifically to going back to Florida with the Hurricanes as there is a lot of insurers.
It's work, we see our teams in Florida, having to pay some premiums to get drywall.
<unk> and several of their jobs, but otherwise I'd say pretty stable and we've seen some small opportunities on the front end, but with the ramp up in starts again, probably not as opportunistic optimistic as we have done.
When this starts had been lower for a while.
And I'm.
I'm going to jump back in because I neglected and I should have especially since we've been talking about our to be built.
Going back to your first question.
One of the other programs that we introduced early this year as our buy last six years. So it's a 12 month.
Mark for our customers that are doing to be built homes and that has continued to increase in its overall demand and I think it's just giving folks confidence that they can lock by each day and know what the rate's going to be 12 months from now.
Thank you.
Thank you.
Our next question comes from Jay Mccanless from Wedbush. Your line is now open. Please go ahead.
Hey, good morning, everyone.
One of your competitors yesterday characterize their backlog as the people in it now are comfortable with this new rate environment I think based on a couple of answers that you've given it sounds like your backlogs in the same position but.
Any color you could provide there and how much more potentially might have to maybe from a percentage terms.
Have to do some discounting to get people across.
No I would agree with that completely we're seeing that the consumer really is getting very comfortable in that five and a half range.
I think we have some very strategic low five or 499 money that we very rarely is but I would say generally the customer is locking somewhere between five and a quarter five and three quarters and in many of our forward commitments and buy down programs if rates continue to drop they will have the opportunity.
For a onetime slowdown.
But there were not hearing so it's kind of like a double win J because we're not hearing.
That people need to get back into the 4% or 399.
Cost is a lot less and we're not having to buy them down as far so I think the consumer has really adjusted to today's environment.
That's great. Thank you Sheryl.
And then the other question I had.
I think you said during the prepared comments.
Roughly 50% of the current win.
<unk> that you have.
Bought pre 2020 just wondering.
When do you think that ratio starts to shift and what type of impact it might have on the gross margin.
As that shift occurs.
Yeah, Hey, Jay it's Eric Yes.
Step that we've been kind of thrown out over the last number of quarters and it does come down I don't know, 5% or so every every quarter. So it will continue to come down and it's really the percent of deals land that we negotiated in 2020 or prior.
So again it does point to margin strength going forward and we are negotiating today at current market rates that.
For margins that kind of approximate where we're gravitating to in terms of identifying.
What is a normalized market and so we're reloading at deals that we find attractive at current market. It's very hard to give you forward guidance on what happened two three years from now is that land bank continues.
Got it and then just sticking on land for a minute.
I guess what happened when prices don't have you seen any opportunities to rebid some deals or those sellers holding fast one on where pricing is now.
Yes, I think Jay fourth quarter, and maybe even just into the very first part of the year I think there was a little bit of a stall in the land market and that did create a little bit of capitulation, mostly in terms of timelines in terms on deals not necessarily creating recovery on land prices.
I would say that given our prudence in patients we were able to get some surgically attractive.
<unk>.
But certainly not a tidal wave of those coming through.
As we sit here today I think.
Consistent with some of the things Youre hearing from us and others.
Confidence is kind of gaining and as I suggested.
Bit more so.
I do think Youll see stabilization in the land market. It certainly didn't fall a lot, but it did hesitate a bit with a lot of land sellers and buyers looking at each other and really not figured not figuring our way through but I think youre going to start seeing some more activity.
Okay, great. Thanks for taking my questions.
You bet.
Our next question comes from Mike Dahl from RBC capital markets. Mike. Your line is now open. Please go ahead.
Hey, This is Ryan Frank on for Mike Dahl, Thanks for squeezing me in here.
And to follow up on the spec and bto commentary it sounds like near term the 60 40.
Is kind of the right run rate, but as we kind of look out I mean is that a more.
Normalized.
Area for Taylor Morrison to operate in or as or do you think youll kind of overtime drift back down some being maybe more bto heavy given the margin spread.
And I think Cheryl mentioned, we're going to continue we will monitor it based on demand.
Have an option opportunity to do both depending on what demand is the last few years. It has been more elevated from a spec perspective, but as we mentioned we like the speck business as it provides that balance to our closing cadence and.
It really helps us drive some of the returns. So I think we will just follow up demand as we like the built to orders as well because of the premium margins we see so.
It's sort of a good balance today and we'll just see what the market does and if you look over the last few years you take out that you know.
Short period of time in the market, but a little.
Different.
We're always in somewhere between 60, 41 way or the ethane.
<unk>.
It could be 60% to be built 60, percents backs or somewhere in between but once again until this point, we just have to watch the market and it's also going to really depend on the mix of our communities because.
If we have more first time buyer communities to the market, we're going to have a higher spec percentage.
But I think is interesting is as we look at our square footage over the quarter and over the last couple of years no matter, what happens with that with that mix, Chris square footage Hasnt moved I mean this quarter. It was about 2500 square feet. It was up about 40 or 50 square feet. Both on the to be built on the specs.
So where we are putting inventory in the ground for that first time move up or the active adult we're making sure that we mirror what they are buying on a to be built.
Yeah.
Got it thank you.
Then last one I think 12, 13% of your sales at this point come from your digital reservations.
Can you just talk about the margin profile difference in there or is it.
Higher gross margin, because they're bto or is it <unk>.
SG&A savings from lower commissions.
Okay.
Well they are actually a combination. So you are right, 13% it depends how we look at at 13%.
We're an absolute they completed the entire process and they put a deposit.
On line two secure at the lot.
If we look at they got all the way through but they didn't put the money down and then they called into the reservoir and went to contract that would be closer to 18%.
But that's a combination of our inventory reservations as well as our built to order reservations, we have our built to order program in probably 30% 40% of the communities across the country. So that's continuing to build and honestly, it's our highest conversion.
Depending on which parts of the country those reservations come from depends on the improvement we're seeing in the broker participation.
Where we see today, our highest reservations have been Houston, Austin and Orlando.
And Cobra tends to be pretty high in Texas. So we haven't seen the same kind of benefit we will and I think were distributed across the country. While we are seeing improvement on his days to contract.
From when they start the process too when they complete.
And it's interesting the last data point I'll give you is this one when these programs started.
We're highly.
Targeted are not targeted but the participation was really around millennials, leaving them now we're seeing a good balance across all consumer groups about 40% of millennials, 30% or <unk>, 20% of tumors. So that's going to continue I think to fare well for us.
Thank you very helpful.
Okay.
You bet.
Our next question comes from Dan Oppenheim from Credit Suisse. Your line is now open. Please go ahead.
Thanks, very much just a quick question was wondering in terms of the community counts, where youre talking about essentially flat over the course of the year, but.
Given that we will have many communities.
Clothing, and then opening up new ones.
Where do you see the communities coming online I guess as you over the past year as you've decided to hold off some openings until.
The models already in such as this is a point, where youll be replenishing whats in the eastern central holding off in the West how do you think about the mix as we move through the year.
Yes, as you've seen we had some strong outlet growth in the west and I would say, what we're seeing more for the remainder of the year Southeast, Florida, and Texas that are going to have a higher percentage of the new openings than what we had earlier so that would be where I would say the mix that maturity.
Any of the new openings as a percentage would be going forward for the remainder of the year.
Got it okay and most of that thinking.
Thinking more in terms of the new openings and some of the west is just slower closeouts, there, which is sort of keeping that elevated in terms of the group at this point.
They actually did see outlet growth as well.
Okay.
Okay.
Thank you very much.
Thank you.
Our next question comes from Alex Barron from housing Research Center, Alex. Your line is now open. Please go ahead.
Yes. Thank you.
I remember a couple of years ago, or so you used to talk about.
The flexibility and how much room, the consumer had for rates going up.
Thankfully you were right.
But im wondering today.
Theres still room left or not not as much.
Well. Thank you for that question, Alex I Love It and it's my favorite spreadsheet every quarter.
When I look at our back, but I look at our backlog and look at what we've closed its interesting in Q1, the conventional buyer got just a little bit more.
Close to about 450 basis points of rate cushion now thats down from early 'twenty, two where it was 600, but certainly up from what we saw kind of at the end of your grades had really peaked.
Unfortunately, our FHA buyer they they got a little tighter so they have about 170 bps of ground beef.
Before.
Challenge qualifying.
Okay.
Helpful.
The other question is.
I think a couple of quarters ago, maybe it's a little bit longer you guys were talking about Russia.
Rationalizing.
A number of floor plans reducing.
Skus going more to working.
And stuff like that how far along is that.
Process and how much more opportunity do you still have good.
Yes, Alex I mean, it's a continuous process for us we actually have somebody leading that charge from the plan perspective, and I think we mentioned a lot of it.
Due to finalizing our work with William Lyon, but as part of our process and all of our divisions now so it's getting through the first pass and we will continue to review it making sure we have the <unk>.
Most popular floor plans value engineering and value engineering as it goes along with it.
And then our purchasing teams are very involved in looking at the frequency of our option sales as well and what they do is if we're not seeing the take up we eliminate them because it complicates really our bidding process and mix.
It gives us an opportunity to get better cost of our trades when they don't have to bid as many of those options that aren't selling.
I think somebody on the team.
I said it was similar to painting the Golden Gate Bridge that you just get done and you have to start again and I think that's true, especially if you think about some of our closing comments around some of the shifts we're seeing with the consumer we can never just assume that the plan library, Justin and I will get stale. If you don't really continue to understand the consumer needs and how they are evolving.
Got it okay, well best of luck. Thank you.
Thanks, Alex.
We currently have no further questions I would like to turn the call back to Charles for closing remarks. Please go ahead.
Well. Thank you all for joining us to share our Q1 results. We look forward to talking to you next quarter take care.
Okay.
Ladies and gentlemen. This concludes today's call you may now disconnect your lines. Thank you.
[music].
Okay.
Yeah.