Q2 2023 Taylor Morrison Home Corporation Earnings Call
Thank you for your patience this morning's call will begin in approximately two minutes time.
[music].
Okay.
Good morning, and welcome to Taylor Morrison's second quarter 2023 earnings Conference call. Currently all participants are in a listen only mode.
We will conduct a question and answer session and instructions will be given at that time. That's a reminder, this conference call is being recorded.
Now I'd like to introduce Mackenzie, Ireland, Vice President of Investor Relations.
Thank you and good morning, everyone. We appreciate you joining us today before we begin let me remind you that this call, including the question and answer session will include forward looking statements that are subject to the safe Harbor statement for forward looking information that you can review in our earnings release on the Investor Relations.
Our web site at Taylor Morrison Dotcom. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the SEC and we do not undertake any obligation to update our forward looking statements.
In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our release.
Now 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 Curt Van Hefty, our Chief Financial Officer, and Erik user our chief corporate operations Officer.
As you may have seen in this morning's earnings release, our board of directors has appointed Curt as our EVP and Chief Financial Officer.
Kurt has been serving as our interim CFO since may and has been with the company since 2020, when he joined by way up the William Lyon acquisition.
He has held numerous homebuilding field in finance leadership roles throughout his nearly 30 year career and I couldnt be more pleased to have them in the rule.
Now diving into our call as usual I will begin with our quarterly highlights an update on the market and our strategic priorities.
After my remarks, Eric will discuss our strong land portfolio and investment strategy, while Kurt will review, our financial results and guidance metrics.
Our second quarter results once again outperformed our expectations across all key metrics as we continue to realize the benefits of our scale streamline operations and balanced portfolio, along with improved market conditions.
Among the highlights we delivered 3125 homes at a home closings gross margin of 20, 452% and an SG&A ratio of nine 2%, resulting in diluted earnings per share of $2 12 per cent, coupled with nearly $400 million in share repurchases over the last 18.
10 months this performance drove a 30% year over year increase in our book value per share to almost $46 and our return on equity of 22%.
Our focus on the operational efficiencies that generated these earnings has been equally matched by our balance sheet stewardship.
As a result, we have never been in a stronger position to support future growth as we ended the quarter with an all time high liquidity position of $2 3 billion and a homebuilding net debt to capital ratio of just 15, 4%, which was down 2100 basis points from a year ago.
On the demand front sales and shopper activity remained healthy throughout the quarter, maintaining the momentum that began in the early spring selling season.
In total our net sales orders increased 6% sequentially and 18% year over year, driven by a monthly absorption pace of $3 one per community as compared to two nine in the first quarter and $2 six a year ago.
It's worth noting that one of the many ways in which we are driving a more efficient faster turning business is by targeting an annualized absorption rate in the low three range as compared to our historical low to mid twos.
This increase reflects the intentional shift in our community mix and geographic footprint in recent years.
At the same time, we have increased the average size of our newly underwritten communities by approximately 50% over the same period, which will also improve our sales velocity and cost leverage as we drive enhance long term returns on our invested capital.
When I look across our portfolio sales momentum was evident once again across nearly all our markets.
Strength was most pronounced in our west region led by Sacramento, Seattle, and Phoenix, Our Central region also improved meaningfully most notably in Dallas, and Houston, which was encouraging given a slower start to the year and lastly in the east nearly all our markets continued to see healthy trends.
Raleigh, and Charlotte standing out most positively.
By consumer group, our second quarter net sales orders were comprised of our move up category at 39% our entry level segment at 33% and our resort lifestyle communities at 28%.
Compared to a year ago, our entry level and resort lifestyle sales have recovered strongly while our core move up segment has remained the most stable in recent quarters at healthy paces.
Alongside the improvement in demand, we raised pricing or reduced incentives sequentially and the majority of our communities during the second quarter. These.
And these pricing adjustments have generally been modest as we continued to balance affordability with pricing power on a community by community basis.
Most importantly, this renewed stability has reinforced shopper sense of urgency and further solidified the value of our backlog, which is also secured by average deposits of 62000 or just over 9% per home, while also partially offsetting any cost pressures.
Thus far in July activity has been consistent with seasonal norms, while leading indicators, including web and foot traffic mortgage prequalification and digital home reservations are stable at healthy levels.
On the ladder its worth sharing that are online home reservation system contributed 16% of our second quarter gross sales with an all time outsized conversion rate of 47%.
Since the Federal reserve began its aggressive fight against inflation, a little over one year ago.
The equilibrium has emerged where consumers have reset their expectations and our industry has recalibrated its pricing incentives and product offerings to align with today's higher interest rate environment.
At the same time consumers have been met with a historic lack of poor sell inventory in the existing home market, where approximately two thirds of homeowners hold interest rates below 4%. This has driven meaningful share gains for new construction, but the percentage of new home listings more.
Than doubling from long term norms to over 30% of the market.
Further compounding these dynamics our research indicate that homebuyers are increasingly preferring new construction to existing homes for ease of living customization or cultural preferences.
While affordability remains top of mind and a true challenge for some consumers, especially those in the most entry level price points, who require more support to achieve manageable monthly payment the lack of inventory coupled with underlying demographics trends have supported resilient demand for new.
Homes.
At Taylor Morrison, we are well positioned to continue to serve that need across our balanced portfolio of entry level move up and resort lifestyle communities.
And each of those segments, we primarily invest in well located prime core Submarkets, where performance has proven to be the most durable throughout housing cycles.
It's been the case over the last 18 months as pricing pressures were felt most acutely in non core areas, where we have little exposure.
In addition, the strategy allows us to attract a relatively well qualified consumer even among our first time home buyers, who are generally better equipped to carry higher housing costs if needed for.
For example of our buyers financed by Taylor Morrison home funding in the second quarter, 41% were first time buyers and by age group, 51% were millennials and another 4% or Gen Z.
Across all of these borrowers credit metrics were excellent with an average credit score of 753 and average down payment of 24% and an average household income above 180000.
Also underscoring the strength of our typical buyer the average square footage of those choosing a to be built homes has increased year to date, despite the interest rate environment.
As you have heard me emphasize on prior earnings calls we are committed to leveraging the power of finance as a sales tool to overcome interest rate volatility and offer various personalized incentive solutions.
Driving an all time high mortgage capture rate of 86%. This finance first strategy reinforces the compelling value and confidence we can offer our customers. While also minimizing the gross margin headwind, we would otherwise experience from outsized pricing adjustments.
As evidenced by the strength of our second quarter home closings gross margin of 24, 2%.
On the construction side of the business, we remain focused on driving faster inventory turns tighter protection schedules and lower costs through simplification and streamlining.
While we have made substantial progress in reducing the breath of our option offerings and floor plans to drive critical efficiencies for our trade partners and builders without sacrificing consumer appeal the opportunity is ongoing.
Critical to those efforts our canvas option packages have achieved strong utilization rates across all price points as buyers are responding to the value.
And design aesthetics of our well curated offerings.
In addition to the time savings and operational ease of use nationally managed packages our canvas year to date option margins have exceeded those in our design studios.
Driven in part by these initiatives improving cycle times, including approximately two weeks sequentially in the second quarter and more expected going forward will allow us to reduce the amount of work in progress inventory on our balance sheet improve our inventory turns and increase our overall production.
<unk> potential.
Before I wrap up while this week's federal reserve actions have once again reinforce the need for a highly dynamic approach to managing our business as we navigate continued interest rate volatility and macroeconomic uncertainty we are well equipped to continue to do so.
The tools, we have put in place over the last year and the exceptional cohesion between our homebuilding and financial services team.
We will allow us to remain strongly focused on operating efficiently and investing for future growth and serving our customers well we.
We have gained critical advantages by achieving greater scale, simplifying our operations and embracing innovation to drive both growth opportunity and enhanced bottom line results and we will continue to leverage those trends as we move forward now.
Now, let me turn the call to Eric to share more on our land strategy.
Thanks, Cheryl and good morning.
In the second quarter, we accelerated our pace of homebuilding land acquisition and development investments sequentially to $397 million of which 54% was development related.
Our land investment approach is focused on achieving capital efficient accretive growth in markets that are well positioned to benefit from long term demand drivers and meet the needs and preferences of our well balanced consumer sets.
As we have discussed in prior earnings calls, we moderated our land spend as housing market conditions slowed over the last year.
Doubling down on what was already an opportunistic stance afforded by well timed M&A transaction that meaningfully bolstered our pipeline of owned and controlled lots.
This prudent approach allowed us to manage our portfolio risk preserve strong cash generation and position ourselves for potential growth opportunities. Our longstanding playbook that we have successfully employed throughout our company's history.
As we evaluate the market today, we are encouraged by the resilient demand trends driving renewed pricing stability Sheryl described while land values have been relatively stable.
While we will maintain our highly scrutinizing loans, we are beginning to see increased opportunities to deploy our strong capital base and two accretive deals.
At this time, we now expect our total land spend this year to be approximately one 8 billion.
Still favoring the development of existing assets with anticipated further growth in 2024 as today's deal flow converts into closings in the months ahead.
At quarter end, we owned and control just over 72000 homebuilding watch. This represented five eight years of total supply.
With 43% of these lots controlled via options and other off balance sheet structures. Our supply of on lots was just three three years.
Each of these metrics, we remain within our targeted ranges and our future mix will be based on a determination of the optimal financing vehicle for each land deal to maximize expected returns. It's also worth sharing that approximately 52% of our owned lot supply was negotiated in 2020 or earlier, providing an attractive.
Our cost basis.
Let me also offer a brief update on our growing build to rent business Yardley.
As of the second quarter, we owned or controlled approximately 7200 lots across approximately 30 projects of which about half are already under some phase of development.
These are monetized horizontal apartment communities meet a unique void in the rental market and remain highly differentiated compared to other builders around concepts, we expect growth in 2024 and beyond as projects underway today reached stabilized leasing levels.
With that I will turn the call to Kurt.
Thanks, Eric and good morning, everyone.
I am excited for the opportunity and grateful for the support of our talented finance teams over the last three months in the interim role.
This time has reinforced my excitement about the potential we have as a company to continue to grow and drive meaningful results.
I look forward to working closely with our teams and also meeting many of you in the months ahead.
Diving into the details of our second quarter, we generated earnings of $235 million or $2 12 per diluted share.
Total revenue was approximately $2 1 billion, including nearly $2 billion from our homebuilding operations.
The latter was driven by 3125 home closings.
At an average closing price of $639000.
Compared to our prior guidance, our closing volume benefited from a number of factors, including more spec homes sold and closed during the quarter stronger closing conversions and improvement in cycle times.
Well cycle times remain longer than historical norms, due primarily to the backend of the construction schedule.
We did see sequential improvement of about two weeks for our second quarter closings.
As older backlog homes complete we expect average cycle times to continue to normalize.
Given the encouraging trends on this year's new starts.
We expect at least another two week improvement by year end and further declines into 2024.
During the quarter, we successfully accelerated our start volume by 36% sequentially and 6% year over year to approximately 3500 homes.
This equaled three six starts per community per month up from $2 six in the prior quarter and three four year ago.
As a result at quarter end.
<unk> 8000 homes under production, including approximately 2600 specs of which less than 150 were finished.
Remaining well below our target of one finished spec per community.
Based on these units under production and the various dynamics impacting cycle times, we now expect to deliver approximately 11000 homes for the full year as compared to our prior guidance range of 10000 to 11000 homes.
This includes approximately 2600 homes in the third quarter with a sequential decline, reflecting the impact of last year's lower starts volume and weather related delays earlier this year.
As we look into 2024, we expect this year's higher starts activity and normalization in construction timelines to drive a meaningful reacceleration in growth.
We continue to expect the average closing price of these deliveries to be around $625000 for the full year <unk>.
Including approximately $615000 in the third quarter, reflecting a higher share of spec home closings in the back half of the year.
During the quarter, our home closings gross margin was 24, 2%.
While this was down from the near record level of 26, 6% a year ago. It was still among the highest levels in our company's history.
We believe this performance highlights the structural enhancements in our homebuilding operations since achieving greater scale and strategic efficiencies in recent years.
As well as the benefit of our balanced mix of to be built and spec homes.
Looking ahead, we now anticipate our home closings gross margin to be around 23, 5% for the full year as compared to approximately 23% previously.
This includes approximately 23% in the third quarter.
Consistent with our anticipated decline in average closing prices.
This gross margin outlook reflects a greater second half share of spec home closings, which have returned to a normalized lower margin profile compared to to be built homes.
This margin performance captures the benefit of our finance first incentive strategy as the cost of such incentives has moderated in recent months.
The pricing would stabilize as Phil described.
With an all time high in mortgage capture rate of 86%.
Our financial services team produced revenue of $42 million as compared to $35 million a year ago.
At a gross margin of 39, 5%.
SG&A as a percentage of home closings revenue was nine 2%.
This was up 40 basis points from eight 8% a year ago, we have adjusted to market issues.
It remains among the lowest most efficient levels in our history.
For the year, we are forecasting an SG&A ratio in the high 9% range.
Shifting to sales our net orders in the quarter increased 18% year over year to 3023 homes.
By a 17% improvement in our monthly absorption pace the three one per community.
1% increase in our ending.
Now the 327 outlets.
Our cancellation rate was consistent with historical norms of 11, 2% of gross orders.
As we look ahead, we continue to expect our ending outlets to remain flattish between 320.
325 for both the third quarter and full year.
To wrap up we generated $260 million of cash flow from operations during the quarter and ended with a record total liquidity position of approximately $2 3 billion.
This included $1 2 billion.
Unrestricted cash and $1 1 billion.
Of available capacity on our revolving credit facilities, which remained undrawn outside of normal course letters of credit.
Our homebuilding net debt to capitalization ratio declined to another all time low of 15, 4% as compared to 36, 4% a year ago.
We have a $350 million debt maturity upcoming in March 2020 for which we have ample cash on hand to address.
To which our next maturity will be in 2027.
During the quarter. We are pleased to have received an upgraded credit rating from Moody's to <unk> with a stable outlook in recognition of our strong liquidity profile and proactive approach to debt reduction.
Going forward, we expect to maintain our disciplined and opportunistic capital allocation framework.
As we evaluate growth opportunities debt management and share repurchases.
Now I will turn the call back over to Sheryl.
Thank you Kurt we recently published our fifth annual environmental social and governance report, which showcases our organization's dedication to ESG progress.
In this year's report I am proud to share that we have made several key advancements, including the introduction of our inaugural greenhouse gas emissions inventory covering our scope one two and three emissions as well as our first ever climate risk management analysis in line with the task force on climate related finance.
Disclosures.
By establishing these baselines, we will be better able to refine our long term environmental strategy, which emphasizes the energy efficiency and live ability of the homes, we deliver to our customers and the bio diversity and stewardship of the land we develop across the country.
We also doubled down on our commitment to diversity and inclusion with expanded disclosures for our Workforces racial and ethnic composition, demonstrating our commitment to transparency and accountability as we aim for meaningful change to ensure we are best able to serve our evolving customer base.
Because of these long standing commitments to integrating ESG principles across all aspects of our business. We are proud to have been recently named as one of America's most responsible companies by Newsweek.
Before we wrap up I'd like to thank each of our dedicated team members for another outstanding quarter.
With our customers top of mind, they work tirelessly each day to overcome the obstacles facing our industry and I am deeply appreciative of their efforts.
That lets open the call to your questions. Operator, please provide our participants with instructions.
Of course, if you'd like to ask a question today. Please press star followed by one telephone keypads or into the queue from parents ask you. A question. Please ensure your headsets fully booked and then on mute locally.
Philip I wanted to ask a question today.
And our first question comes from Michael Rehaut from Jpmorgan. Your line is open. Please go ahead.
Hi, good morning.
Mike.
Quick question on how you are looking at seasonality and if you think sales pace moving forward will be roughly in line.
With normal seasonality or something.
From the historical patterns.
Yes, good morning.
Thank you.
The question when I think about seasonality.
If we look at more historic times I would tell you that Q1 Q2 is kind of the peak.
And are generally flat with each other and then we would generally see a moderation as we go into the back half of the year.
Try to take the Covid 2021 period out.
Kind of the seasonal trends and when we do that generally will see paces in the back half of the year drop you know.
10, 20% as we kind of get into the late summer and.
Holiday season.
And it feels like we are going back to a more kind of normalized pre COVID-19 environment.
Right now we have our sales team is focused on really managing paces and as I said in my prepared remarks looking at something.
That low three range certainly in the season.
And probably with a little bit of modest.
Moderation as you get into the back half of the year.
Great. Thank you again.
Secondly, just.
The margin guidance.
Where do you guys are expecting.
Construction costs and incentives to go and sort.
The rest of the year and I guess moving into 2024 as well.
Yes, Hello, and thanks for the question I think your first comment was construction costs relative to construction costs.
They've been pretty sticky.
<unk> been riding the tail winds of lumber.
For the year, so far but the recent start pick up kind of what's going on nationally.
We are going to put that under some pressure.
And the rest of the items.
Relative to the other components of the house still remained to be pretty sticky.
That's kind of what we're expecting for the rest of the year.
We do expect potentially as we look forward.
With new starts.
Seeing some improvements if you will.
Look at across some of our divisions based on what we're looking at for Q2.
From a start standpoint, we do see some savings in some of our divisions on a go forward basis.
But overall for the year, we still think there'll be still pretty sticky do you think it's fair Kurt that.
We're seeing some benefit in some markets on the material side, but labor is still very strain and so we're not really seeing any relief there.
It's kind of interesting its almost like are higher the markets that did so well over the past couple of years and had significant kind of gains in both price and pace feeling a little bit more pressure and that's where we're seeing a little better relief, but to curts point. If you look across the portfolio. It's not what we had initially.
I would agree.
And then I think the second component of your question was on the incentive Trump.
Just anecdotally or just from what we're seeing we did see our incentives on new orders drop sequentially from Q1 to Q2.
And I think on a go forward basis, I think a lot of that will be determined based on what the interest rate environment does.
We're very pleased with the reduction.
And our incentives from Q1 to Q2 on a sequential basis.
Great. Thank you.
Thank you.
The next question comes from Colorado from BTG Tong. Your line is open. Please go ahead.
Thanks, Good morning, everybody and welcome permanently Kurt.
I had a question just on the on this particular quarter and the delivery volume.
Well ahead of the midpoint of the guidance range, I think 18% or so.
Or can you can you walk through <unk>.
When you when you gave that guide in April what changed.
And the next two months to get that number so much higher we've seen it from other builders, but yours.
Particularly strong relative to the guide.
Yeah, It's a fair question.
I think it's I'd say, it's a couple of things.
One we just had better ability to get the stuff that was in the last I would say two three weeks of the quarter across the finish line.
In the past year, Carl we would generally have expectations for certain closings in the labor market is just so constrained that we just couldnt.
Couldnt quite get them across the finish line in this quarter, we were able to and we really have set ourselves up to make sure that some of the woes of the past couple of years aren't continued on that houses we're going to get complete. So we gave ourselves at the time, but with the improvement in cycle time.
It just helped and I think that combined with great success in the spring selling season with our spec sales or inventory sales. They were even stronger than we had anticipated really one of the strongest quarters, we've seen on an inventory front.
The two together and Youre right, we did have a really nice quarter and a big beat but it did put a little pressure on our third quarter.
Got you. Thank you Joe and then a bigger picture question, you've talked a lot in the last few years about growing scale and you bought a couple of large public companies to help to tough to add to that so youre now at this level, where you've got 11000 deliveries this year with some growth coming next year. It sounds like how are you thinking about.
Scale optimization now are you as large as you want or need to be in the markets that you want to be or are acquisitions or additional sort of stair step growth for you still on the table Cheryl as you look at the company today.
Another great question.
We are very focused as an organization on maximizing kind of the scale of each of our markets.
So I would tell you and you know what does that look like Carl it's a little different market by market, but certainly I think a top five position in some markets. The top three but we all know the benefits of scale when it comes to kind of land acquisition people.
Kind of construction cadence. So do I think there is room to run actually quite a bit I would say some markets we're at scale, but he.
What I would take good scale today, but when I look across the portfolio I think there's a couple of significant opportunities. One is additional scale in a number of our markets I think there's only one or two that I would call sub scale.
But I think there's many others that have just a lot of room to run if we are in the top six or seven.
And then I think Theres complementary markets you know we have to look at those opportunities as they present themselves as we've talked about before Carl theres going to have to be a good strategic fit.
They're gonna have to be accretive to the portfolio. So we will see if those opportunities, but I think certainly we're most focused on organic growth, but we will continue to look at the opportunities that I think will present ourselves in the coming year given.
The stress at the private building communities feeling.
I appreciate that thanks, so much.
Thank you thanks Carl.
The next question comes from Matthew Bouley from Barclays. Matthew Your line is that can you. Please go ahead.
Good morning, you have Elizabeth lingered on for Matt today.
So I just kind of wanted to touch a little bit on the margin differential I know that you said that the <unk> are two second half margin.
Be lower on account.
The greater portion of spec closings would you mind kind of refreshing what that the margin differential is between the built to order and spec homes.
Yes.
Yes, Hi, Elizabeth Yes, just to reiterate.
The margin.
<unk> for the back half of the year for Q3.
Really impacted by mix, we've got a higher percentage.
I guess, our west coast markets closings contributing to the overall closing profile for Q3, and then on top of that it's just a mix of product relative to communities, probably more what I would call more affordable price points. So.
And as you mentioned, we are seeing that our differential or spread between to be built and our spec homes is returning to what we would call more normalized levels.
That's right right around three 400 basis points.
Roughly speaking some are a little bit higher somewhere a little bit more but overall its kind of rounding out into that kind of area.
Okay. Thank you that's that's helpful.
And then kind of <unk>.
Going into the pricing a little bit more would you mind touching on the regional trends, maybe where youre seeing pricing.
<unk> move higher.
If there are any markets, where youre seeing I know that you said the incentives had stepped lower kind of where youre seeing that if it's more widespread or if there are particular markets that are seeing that.
Yeah, I think a follow up on Kurt.
Because I think they do go hand in hand, when we look at the back half of the year and where we have what I would call most affordable inventory.
That would be in some of our markets like Orlando Houston, Austin, even southern California, when we look at our specs when we look at the pricing in those markets.
I look across second quarter as I mentioned I think in my prepared remarks, we raised prices and more than half of the communities across the organization.
Some of those are modest some of those are a little bit more meaningful we're actually seeing those opportunities.
Really across all markets I would probably say that the exception might be Portland, where I think it's been a little bit more difficult to get some real pricing traction there.
But when I look at markets like.
Florida, we're seeing nice pricing opportunities certainly parts of Texas, Dallas, just had its best quarter of sales and more than two years and we've really just begun the growth in that marketplace.
We're seeing opportunities with the active adult buyer across the country with pricing strength.
And then another probably call out for me would be Sacramento, where we really are offering minimalist incentives in that market. So we're getting that pricing power in different ways based on the market.
But we're really seeing it across the entire portfolio.
Okay. Thank you very much I appreciate it.
You bet.
Yeah.
The next question is from Truman Patterson from Wolfe Research. Your line is open. Please go ahead.
Hey, good morning, everyone and thanks for taking my questions.
First I believe last quarter.
You all mentioned that specs, where about 60% of your orders during the quarter.
Could you give an update on how that trended in <unk> and I'm really trying to understand.
Are you comfortable running in that kind of 60% level for the foreseeable future.
Which seems a little bit elevated versus history.
Hey, <unk> how are you.
Yes for Q2, our spec and to be built mix was pretty consistent with Q1.
We're in the upper 50% from <unk> standpoint are stuck standpoint.
And then of course, the reciprocal of that would be in that kind of low 40 kind of range, so pretty consistent quarter over quarter.
Kind of on a go forward I guess to your point.
We like kind of our balanced approach between spec and to be built I think it offers the best of both to us we.
We think that will hover anywhere one way or the other 60 40 40 60 over time.
And we continue to like that balanced approach.
We have our strong to be built business on a resort lifestyle kind of communities in our move up communities and then.
Then we attack.
More spec business from an entry level standpoint, and we also it doesn't mean to say, we don't have specs in our move up but.
We kind of attack it more so from the entry level standpoint, but we continue to appreciate the balanced approach, it's really going to come down to sub portfolio. That's open for sale.
To Curts point, I don't think its going to move.
Materially off the 50, 50, maybe 10% each way, but I think the key point is generally put the majority of our specs in the more affordable communities as you said those tend to be.
Lower margin communities as well.
But we will continue.
Keep them in the market Truman, but I don't think were going to manage to a specific ratio. It's more about having the right inventory based on what's available in our communities.
Okay.
Got you understood and.
Big picture pre.
Pre COVID-19 Urals gross margin had been running we'll call it in kind of the 18% range and clearly you've done a lot of work on integrating the prior acquisitions and the streamlining your business model.
Hoping you might be able to discuss where you think.
Normalized gross margins are today, given all the work that you've done the past few years.
Realize theres a lot of moving parts with the robust pricing over the past few years and costs et cetera, but hoping to see if you have like a baseline.
You know I don't think I can really change the answer I've given in the past we're.
Not prepared to task of half a good try.
But the same that we talked about last quarter and that is.
I think that margins are going to stabilize at certainly let's talk industry Truman at levels higher than what we saw pre COVID-19 I mean, the infrastructure is different in the industry certainly when I look at our company we are quite different.
One from a scale standpoint to just the.
The discussions we've had about what we've done in our plan library, our simplification on the specs. It's made a meaningful difference when you look at the scale of the builders versus the retail all of those things are making a difference. So I think generally what was the old high teens low twenties move that.
As we get into next quarter, we will be able to say how far.
I think you can see in the you know the traction that we've had.
Moving from 18, 19, and ours wasn't only the work of that.
That we've talked about on the simplification front and there was also when you think about the integration of those builders their baseline with something that was even lower than ours. So we had we had a catch up to do but it was clearly the right thing for US is it gave us a new scale and a new opportunity.
I look forward to kind of a reset for us.
And it's I think it's at a much higher level than anything you saw in the prior organization.
Perfect. Thank you all and good luck in the upcoming quarters.
Thanks, Raymond Thanks Sherman.
The next question comes from Jay Mccanless from Wedbush. Your line is please go ahead.
Hey, good morning, everyone. So Cheryl I wanted to ask first I think you said in the prepared comments that online leads are converting at 47%. This quarter is that correct and maybe could you frame where that might've been a year ago, and where you think that number could go.
Yeah. Thanks for the question the conversion was at 40%, 47%. The overall participation of our reservations to our sales was at 16% and I can complicate it just a little bit more.
Jay because when I look at folks at partially reserved but then stopped processing came in that moves up to 20%.
That up more than 50% year over year, so it's a very meaningful number.
If I were to give you a little color on it because it's been just an interesting trend.
I think our highest percentage of reservations are coming out of Texas, which to me is unique I would've expected that is in places like the bay, but highest overall reservations are coming out of Texas. As you know earlier. This year. We also introduced our to be built reservations and those have tripled.
Actually since we introduced some really the end of last year. So that's been interesting the to be built reservations are actually converting at the highest rate only to be followed by our spec reservations.
And another interesting stat. Jay is we're seeing the majority of folks that are making reservations are doing it before they come into our community.
And they're finding the reservation system relatively organically just because of the convenience that it provides to them.
And then maybe the last stat that I think is equally exciting and I think this goes to your second part of your question on where do we go from here.
It's pretty well divided between all of our consumer groups I mean, millennials are leading the way at about 40%, but gen. Xs are low thirties, and boomers are high twenty's. So we're seeing kind of a take up across all consumer groups, which I think just talks to the overall kind of change in the way that consume.
<unk> engages.
With brands today.
Okay, great. Thank you Shar I appreciate all the detail on that.
And my second question I think.
You talked about.
Potential opportunities in the land market.
I guess it.
Is that something that maybe could start to move the community count on a net basis higher as we go into fiscal 'twenty four or maybe just what are you seeing in the land market and what types of opportunities for net community growth do you see out there.
Hi, Hi, Jay it's Eric.
Yes, we are seeing opportunities that is definitely the expectation.
With kind of our growth expectations in taking up our land spend will ultimately generate future.
Community count growth with regard to opportunities and kind of maybe I'll just give you a little bit of color on the land market is competitive out there what's been a little bit surprising to us. We saw this kind of huge increase in land prices in 'twenty, one and 'twenty two and we were as you know a little bit more shy during those times as the market is kind of a.
Paul and the consumers come back stronger than it was kind of garner.
Confidence, that's that's kind of leading us to increasing our land spend expectations.
The land market has gotten competitive, but we're not seeing huge increases in price that's necessarily where we are seeing is competitiveness on speeds. So.
Being able to move quickly really hasnt become a competitive advantage as we see it across the landscape followed with.
Kind of the starting to go away.
Terms on deals so that's kind of dissipating a little bit, but we're not seeing the huge lift in pricing on land that we've seen in prior cycles, so far and that's really showing up in our.
When you look at the residual right yes.
From an underwriting standpoint, we've been able to prices for land are up.
We have been able to consistently hold our gross margin expectations, which really falls into kind of that land residual ratio. So we're comfortable with the way that our deals are flowing with regard to those expectations.
Okay, Great and then if I could sneak one more in Sheryl I was.
Surprised encouraged to hear you say that Phoenix is starting to get a little bit better maybe could you touch on some of those markets like a Phoenix Austin and Denver.
We're really problem markets last year and how those are faring now.
Yeah Phoenix.
And I think I neglected. So thank you for asking the question Jay because I think I neglected in my last comment to mentioned Phoenix is doing really really well when I look at kind of their their budget and expectations in both pace and kind of new openings I'm just across the board, we've seen really nice strength in the Phoenix market.
So that's been very very encouraging I mentioned Dallas.
Where we've seen the best quarter of sales you know sometime last year Dallas was was struggling.
Often would be another market that would be worthy of mention because it certainly had one of the greatest peaks, along with Phoenix and <unk>.
Both in price and pace balance been interesting.
I think paces gross paces have continued relatively strong.
The market has been plagued with a few more accounts than I would say many of the other markets. The nets holding in there and I think it's finally, the cancellations have started to dissipate, but it took longer than we may have expected, but we're continuing to see good strength there.
I can't forget to mention the Carolinas I mean, some of our highest paces in the country came out of Charlotte I think only to be followed by Orlando.
And interestingly enough Seattle was our third highest pace in the country.
So without being redone that we're we're seeing good strength really across the market as it's been it's been a nice first half of the year.
Okay, great. Thank you for taking my questions.
You bet.
The next question comes from Alan Ratner from Zelman Allen. Your line is open. Please go ahead.
Thanks, a lot hey, good morning.
Thanks for the time, Kurt Congratulations maybe I'll throw a question your way first.
Great.
You guys were very active re purchasers the last few years and have taken a little bit of a pause here year to date.
I'm just curious if you can give some updated thoughts I know you mentioned share repurchases are still a part of your capital allocation strategy, but is there any specific reason why you havent been active year to date, obviously the stock is up a lot maybe that's the reason, but any color you can give along with how we should think about the pace going forward.
Yeah, Hi, Allen nice talking to you.
Yes share repurchase will continue to be part of our capital allocation framework, along with investing in the business and just overall debt management.
Specific to share repurchase yes, we haven't bought as much here in the recent quarter or so.
But from an opportunistic standpoint, if you think about it again more long term, we bought back over 50% of our stocks since going public.
And then in the last 18 months, we bought nearly $400 million worth of our stock back at roughly $26 a share.
And I would say that we're going to continue to be opportunistic from a share repurchase standpoint, as you know our sector is somewhat volatile.
And.
We've been really good at taken advantages of that when it has slipped down and have been very aggressive relative to that and so we'll continue to be what I'll say opportunistic.
Our approach from a share repurchase standpoint.
And how much do we have left on our authorization, we have $276 million left on our authorization. So we're in good shape there.
As I said, it's going to be a staple of our platform.
We will continue to kind of be opportunistic as we move through the rest of the year.
Okay perfect. Thanks for the thoughts there and update.
Second question Sheryl you brought up your ESG efforts in the prepared remarks, and I have a question somewhat related to that somewhat strategic related.
Based on kind of some of your geographic exposure.
It seems like the last several months there have been.
More headlines surrounding certain local issues such as the the water issue.
Arizona, Florida has been dealing with some issues around property insurance and related to storms. There I mean, we've been hearing things in Carolinas related too.
Inventory is on sewer hookups and things like that that could potentially impact growth going forward.
How does all of this affect your strategic planning going forward I mean in terms of where you allocate investment dollars, how youre thinking about the risks associated with that going forward in your footprint any any thoughts on that front.
Okay, Yes, Alan Hey, it's Eric I'll start.
Yes from an underwriting standpoint, those are all factors that have to play into account right.
Some of it is by way of just risk mitigation and kind of cost expectation so youre.
Youre right to ask the question, it's a factor in kind of our expected future projects for sure maybe just to touch on one of them with regard to one you raised which is the Phoenix water issue.
We are here subject to a little bit more stickiness with regard to the.
The measuring stick, that's a 100 year supply bar that we need to reach in the market.
The governments put in place a water council to help address the issue the expectation is that they'll come up with the solution over the next three years I guess.
The good news or the favorable part of it is that Scott about.
80000 lots that are available in the market.
That are already kind of pre estimates and all of our lives and we've got a pretty good percentage of that so there is none of our projects that are subject to the risks. We've got about 10000 lots that are all kind of in that pre approved so.
It's an issue, it's something that needs to be solved over the coming years, but it's not as of today kind of a desktop one it feels like and you won't go deep here Allen, but until some of this some of these issues that you've mentioned are real I mean, we've had hurricanes, we've got insurance tissues, but nothing that's impacting the business. We're all over kind of building code just wanted to think about.
Florida to Eric's point about.
Arizona It feels a little political when you look at the average across the country being a 50 year supply and versus 100, we're in a really good place here and there are still thousands of lots that are available that have designated water.
So as we move through the Cubs, great to Eric's point. These are all things that our teams are all over.
When we think about the sewer and Charlotte I feel like we've been talking about that for almost two years now.
To make sure that our growth patterns are appropriate. So there is nothing here that stopping our kind of growth plans across the organization.
Got it and just to put a finer point on that Sheryl. There's nothing that you see out there that is causing you to think about.
Materially changing the geographic mix of your business in other words, you don't see any of these risks as being one being more significant than the other and causing you to defer capital from one market to another.
No not on any of the issues, we've talked about at all and in fact, I think it's just making sure we have the right people on the ground that are well ahead of them and that actually allows us to have a strategic advantage in the market because we're better planners.
It's fair to say, it's not easy and I appreciate all the thoughts on I guess.
Okay.
The next question is from Mike Dahl from RBC. Your line is open. Please go ahead.
Mike Your line is open please ask your question.
Alright can you hear me now.
We sure can make.
Okay. Thanks for squeezing me or Im sorry about that.
One more question on the mix of kind of spec versus to be built.
In the quarter, what percentage of your closings with spec represent in your guidance for the second half of the year.
Whats the assumption in terms of mix of spec closings. Please.
Yeah.
Yes, Hi, Mike.
Our mix for Q2 from a closing standpoint included 60% spec and of course, 40% to be built.
And right now from a Q3 Q4 standpoint, we're not really guiding to that but it's contemplated within the mix within the margin that we're kind of showing relative for the year, but you could probably assume that our percentage of specs will probably be kind of on that higher end as well.
And obviously, Mike everything that's going to make it in the year has to be a stack everything from a to be built is already in backlog and started.
Great I guess, just as a follow up since the sequential decline in margin is being attributed to spec mix. When we think about kind of the higher end is it also is it a function of not necessarily a higher.
Percentage of spec closings, but that normalization and the underlying spec margin. That's the bigger driver of the sequential decline in margins.
It's three my I think okay percentage of spec closings I think it's just the difference between spec and to be built and I think the most important point that Kurt really doubled down on is the geographic mix of where those specs are so a lot of them are in our west coast those tend to operate at a slightly lower margin as well and it's the most afford.
All of our products. So it's not just one factor, but it's it's a it's a combination of all of this.
Got it got it okay. That's it for me Thanks, Joe.
Thank you.
The next question is from Dan Oppenheim from Credit Suisse. Your line is open. Please go ahead.
Great. Thanks very much.
Was wondering if you've talked about that in terms of the.
The margins on the specs versus to be built and then looking at the <unk>.
West where you had some better trends in terms of the absorption.
Given some of the gaps that we see.
And in terms of the west in terms of margins, how do you with the absorption do you see the the margins getting back closer to.
Closer in terms of where they are relative to some other regions or how much more and we can make on that.
Yes, good question Dan.
We are as well.
The margins on our West coast are lower and that's one of the things that we're working on.
Overall as trying to improve that margin profile of our west JV communities.
But that will come this time, it's not going to happen necessarily overnight.
And.
We will continue to work on that and like I said, we saw some decrease in our incentives quarter over quarter on our orders.
So we'll look to kind of pursue and see what we can do through either price additional price escalation and our cost because as I mentioned earlier our cost on our.
New builds.
We probably have the most kind of upside from that standpoint on our new starts probably on our west coast markets, because they probably got into the fray so to speak earliest and so they probably gotten some benefit from our house cost standpoint earlier than some of our other markets. So we'll continue to monitor that and kind of.
The house cost side and on the incentive side and just price elasticity on those because we do know we're going to have to kind of keep pushing that up and the only thing I would add from a historic perspective, Kurt as you know to your point. This is a journey and we will continue but I think the expectation given some of the master planned and the participation.
Is the margin, we'll never probably be the same as you see in the rest of the country the margin percent, but the dollars tend to be much higher but from a percentage it will probably trail, but we need to we need to bridge the gap.
The next question comes from Ken Zenner from Seaport Research. Your line is open. Please go ahead.
Good morning, everybody congratulations.
Could you talk about your.
Certainly if you could talk to your option land.
Portfolio what percent of that is expected to be finished.
And can you talk about the logic thinking motivation you have or that kind of.
Taking that down raw or finished first of all thank you.
Yes, I'll give that a shot Ken this is Eric.
Then feel free to chime in Kurt.
We will always have a preference for kind of finished lots as part of the mix. Those are good to have it as part of the portfolio, but the fact of the matter is with kind of the cycle evolving a lot of the developers a step to the sidelines. They are coming back now in terms of the land acquisition. So I think that'll change favorably in the future but.
Currently we've got the development engine and we're good at it. So we have seen most of our land coming through about 70% come through on a raw condition.
By way of underwriting and so that's something that I think will persist in the in the future going forward. So.
We've seen.
Seen it we're certainly hunting for finished lots, but the availability of it has been somewhat.
Diminished.
Thank you very much and then you mentioned Sacramento in Northern California, Our research really going back to the early 16 shows a secular decline in inventory when what as the secular rise in rates, which.
The duration I think it's a fair point to observe that right now.
Can you talk to.
Given weakness in jobs in CAC et cetera that in California, and the strength in Sacramento, Despite it being.
Affected by Tech.
Could you talk to.
What that buying pool is looking like.
Are they in market, because obviously people are leaving California, as well, but more detail there would be appreciated. Thank you.
Yeah, you bet.
You know I think Sacramento has always been an interesting maxx and Curt jump in here if I could.
Miss something but I think Sacramento has always been an interesting mix Ken of end market kind of movement, and depending where we are kind of on the pricing cycle, we get a lot of inbound from the bay.
And sometimes that can be a very high percentage of total sales.
And such.
Sometimes it completely dissipate.
We've added our active adult or resort lifestyle penetration into the market and once again interesting that's really been kind of an in-state buyer as I understand it some movement from the bay as people are approaching retirement.
But when I look at you know I think we have just continued opportunity here for outlet crowd when I look at our paces in the first half of the year they were 50% higher than we saw in.
And you know kind of historically low cancellation rates. The margin has just been really really healthy for us.
So we're excited about the penetration and I think youll see us continue to grow them I know that with the second active adult position and I think the family buyer as well.
Thank you.
That.
The next question is from Alex Barron from housing Research Center. Alex. Please go ahead. Your line is open.
Yes, thanks for fitting me in here.
I'm not sure if you answered this or if I missed it but.
Given how much you guys beat on the deliveries versus your guidance and then your guidance is back down to 2600, I'm just trying to understand.
What what affected that such a big banks and why it wouldn't continue at a similar pace.
Is it as it related to your build time or does it just accelerated a bunch of closings for some reason.
It has been.
Third quarter.
Yes, as we said Alex we certainly were able to bring some in from Q3 to Q2. So that was a small piece of it but I think what really is the driver correct me if I'm wrong, Kurt but I think it's a two part I think it does.
That we slow down start at the back end of the year, given what we saw happened to interest rates and the demand fall off and then that Unfortunately got compound. It in early in the year, especially in the West Coast, where we saw significant rain and we lost a few weeks of start.
So you put all three of those factors together in our universe.
It's just not as large you know hopeful we'll see something about what we gave but we just don't have the same universe in Q3 that we did in Q2.
But as you see I'll conclude guided up for the year. So this is just strictly a timing piece for Q3.
This concludes today's Q&A session. So I'll hand, the call back to Cheryl Palmer for any closing remarks.
Well. Thank you all for joining us on this very busy earnings day, and we will look forward to talking to you next quarter.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
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