Taylor Morrison Home Corporation (NYSE:TMHC) Q1 2024 Earnings Call Transcript

Sheryl Palmer: Yes, I appreciate the question, Carl. I know it’s gotten a lot of — a lot of airtime lately, but we had a very strong quarter in Florida. As we’ve moved into April, as you heard in our comments, things have continued pretty well. I would say it’s actually consistent with what I already articulated that where we’re seeing the more affordable buyers, we’re probably working a little harder. That would be like our Orlando market. We’re actually working a little harder for each of those deals. But all in all, when I look at traffic, when I look at web traffic, when I look at conversions, the market, pretty consistent, pretty healthy.

Carl Reichardt: Appreciate the color. Thanks all.

Sheryl Palmer: Thank you.

Operator: Our next question comes from Alan Ratner with Zelman & Associates. Alan, please go ahead.

Alan Ratner: Hey, good morning. Thanks as always for all the great info so far. It’s greatly appreciated. First question, I guess just in the context of the improving cycle times and kind of normalization there, was just curious how you’re thinking about the spec mix of your business now. I know you, as well as others kind of ramp spec production, yes to kind of combat some of those challenges. And are you seeing more of an opportunity to kind of shift back towards more BTO, or and just any color you can kind of give in general about margin differential and kind of demand for spec versus built order at this point would be great?

Curt VanHyfte: Sure. Hey, Alan. How are you?

Alan Ratner: Great.

Curt VanHyfte: Good. Hey. This is Curt, by the way. I’ll just kind of tackle that and kind of have Sheryl, let her chime in along the way. But overall, I think we’re pleased with where we’re at with our balance between spec and to-be-built. I think we’re right around 54% for the quarter from a sales standpoint, and we think that’s in a pretty good spot. As we’ve said in the past, we will mirror that to kind of where the market is and with our blended and diverse kind of platform that we have. As you know, we do more spec in our entry level. And then as we move through the scale up to resort lifestyle, it becomes more of a to-be-built kind of mantra. So, we’re very happy with that. I see it’s kind of hovering in that same kind of threshold, over time.

And to your point from a cycle time standpoint, we’re very pleased with the results we’ve seen and, what we expect to come over the course of the rest of the year. So but as we sit here today, I think we like our balanced approach relative to our spec and our to-be-built business.

Sheryl Palmer: Yes. And the only thing I’d add, taking it a little different place, Alan, just because I think it’s an important data point. Curt’s balanced, comments are spot on. But when I look at the square footage, that’s going to be where we see a difference in what we’re putting out in the market. I mean, our specs are generally a few 100 square feet less than our to-be-built buyers. So it’s — to me, it’s an interesting kind of journey, because our to-be-built buyers are continuing to go with larger houses, still spending lots of money on options, high lot premiums. But when we look at our square footage, we’re trying to push kind of more affordable product into the market to the churn of about 400 square foot difference on average. And so when you look at our kind of average numbers, it really is the tale of two different stories.

Alan Ratner: Got it. No. That’s interesting. Thank you for that, Sheryl. Second question, just on the Pyatt acquisition. First off, I think it makes a ton of sense, obviously, given the cash balance that has been building on the balance sheet. I’m just curious to know because Indianapolis is the first Midwestern market you guys have entered into. And, it seems like the Midwest for one reason or the other is kind of one part of the country where the public market share isn’t quite as large as the coasts. So it would seem like there’s a potential opportunity there to even expand the footprint further if that’s the direction you guys are interested in going. So I’m just curious. Was Indianapolis kind of unique in terms of market attributes that that made you guys focus on that one versus some other Midwest markets, or would you say this could potentially be a stepping stone for further growth throughout the region?

Sheryl Palmer: It’s a really good question. And as we’ve talked about for quite some time, probably the last year or so, Alan, for us to go back into any sort of M&A transaction, it would really have to be strategically appropriate accretive to the business, right? And so when we look at Indianapolis and we look at kind of top homebuilding top 25 homebuilding market, kind of the immediate generation of outlets, the access to finished lots along with other pipeline deals in that market, and the percentage of control being kind of consistent with Taylor Morrison, a veteran management team, and just a very, I mean, unbelievable respectable historic financial position the company’s had. It’s just a really wonderful aligned for us.

When we look at the Midwest, we’ve been looking at Indianapolis for honestly years, but it had to be we’ve been very patient. It had to be the right deal, the right management team, the right strategy. So today, our focus is that, and to get the business integrated, which we think given Todd Pyatt’s leadership, it’s going to happen relatively quickly. We’ll see what happens from there. Anything we did from here, from an M&A standpoint would have to meet those high thresholds as we’ve talked about. But is there additional growth organically coming from Indianapolis? Certainly, that would be something we look like — look out like we do with every other market.

Erik Heuser: And maybe just to double click on a couple of things, Sheryl. Alan, a few of the other things that just we like about in Indianapolis as we think about managing the portfolio was just watching it over time in terms of that affordability measure that we highlighted really hasn’t changed very much. It’s been really high on affordability measuring stick for going back to the downturn. And as a result of that, it’s been a relatively low volatile market. So we think that’s an accretive part of the portfolio for us, as we just think about managing the overall business. The land development, my role was actually very relatively low risk here, and so we like that quite a bit. And so and then to your point, I think in terms of market share, I think that of the top 10 builders here, only five of them are publics. And so from a competitive standpoint, that just leads us to believe that there’s one way here.

Sheryl Palmer: Yes. And then just to pile on to your pile on, Erik. I think the last thing, that obviously I should reiterate Alan, is that obviously we still took up our margin guidance. The initial expectations are there is no goodwill in the transaction and that this will be accretive to Taylor Morrison’s portfolio effective today. We’re very excited.

Alan Ratner: Good. That’s great. And just to be clear, and then I’ll hop off. The 10% closing guidance annually, that’s not assuming any additional market expansion either organic or through acquisition. Is that correct?

Sheryl Palmer: That’s correct. I mean, at some point, dollars are fungible, right? And so if you — like, to your point, if you grow the Indianapolis footprint or you grow into kind of fringe markets that evolving markets, emerging markets, I mean to me, that’s all on the same, but generally, yes. That’s an organic expectation.

Alan Ratner: Great. Understood. Thanks, guys. Appreciate it.

Sheryl Palmer: Thank you.

Operator: The next question comes from Ken Zenner with Seaport Research Partners. Please go ahead.

Ken Zenner: Good morning, everybody.

Sheryl Palmer: Good morning.

Ken Zenner: Could you talk to how many of your closings came from lots. You actually acquired finished either this quarter or kind of LTM where that trend line is? If you have that?

Sheryl Palmer: Let’s see. Hold on.

Erik Heuser: And, Ken, are you talking about the ones that we would have acquired at — I’m sorry, acquired as finished?

Ken Zenner: Exactly. I’m trying to see exactly. I’m just trying to see how that mix is kind of run through your balance sheet recently?

Erik Heuser: Yes. Over time, it has come down, right? I would say it’s come down from over the last few years from a third to something like 15%. And so as a result of that, obviously, and we believe there’s benefits in terms of the margin profile, but we’ve pivoted to more self-development in a balance sheet friendly way.

Ken Zenner: Right. And then, Curt, I don’t know. Could you guys disclosed, I think about 86,100 inventory units 85%, 75% or something like that. Do you have the actual work in progress of the vertical construction costs on your balance sheet as well as land associated with that amount?

Curt VanHyfte: Yes. Ken, I have it right here. It’s about a $1.5 billion at the end of Q1.

Ken Zenner: Excellent. Thank you guys so much.

Curt VanHyfte: You got it.

Operator: Thank you. Our next question comes from Jay McCanless with Wedbush. Please go ahead.

Jay McCanless: Hey. Good morning, everyone. Thanks for taking my questions. The first one I had, and I apologize I jumped on a little late, but could you talk about why the gross margin was up year-on-year and why you’re thinking there might be a sequential decline in the gross margin going into 2Q?

Curt VanHyfte: Yes. Hi. How’s it going? I can talk on that, Jay, a little bit. Just, your — sequentially, I think did you say sequentially? Or you…

Sheryl Palmer: Yes. Q2 coming down to just approximately 23.5.

Curt VanHyfte: Yes. I can — maybe I’ll just talk a little bit about the Q1 beat. We had a real good Q1 beat. We saw some house cost savings come through there. We experienced on average about $2 a square foot. We had some mix come through. We saw a little bit of some lower incentives throughout kind of the country as well. But relative to the margin, guides from Q1 to Q2, we are pulling it down a little bit. Some of that is of course mix. We’ve got higher revenue concentration in some of our lower margin divisions offset or coupled with the fact that we’ve got lower revenue coming from our higher margin division, so there’s a mix factor going on there. And then, of course, incentives will continue. We’ll continue to use our incentive loads for our entry level buyers, based on the number of specs we’re going to sell to close here in Q2.

Jay McCanless: Okay. All right. That’s great. Thank you. And then the next question I had, kind of building off what Carl asked regarding the East. Does the East segment over index to entry level and affordable communities, or is it still kind of a third, a third, a third like the — like you’ve always said, the company tends to trend in terms of the buyer segmentation?

Sheryl Palmer: Yes. The East is an interesting mix, because I would tell you that our Orlando and our Tampa business, very different than our Sarasota. And our Naples business is primarily first time. So when I compare that to Central, Austin would be our largest first time buyer market, and second to, or next in line would be Houston, and Dallas would be a small piece. And then when I get to the West, it’s a pretty good mix of first time and move up. But first time in parts of the West like the bay is still at an average sales price of $800,000. So generally, I think that’s a fair comment, Jay, given the penetration of Tampa and Orlando in the East in the East area.

Jay McCanless: Okay. Great. That’s all I had. Thank you.

Sheryl Palmer: Thank you.

Operator: Our next question comes from Alex Barron with Housing Research Center. Please go ahead.

Alex Barron: Yes. Thanks for squeezing me in. I just wanted to ask about the ASP and orders, particularly in Central. Was that just anything more people buying, more entry level homes? Or are you guys building smaller homes? Or what drove the price decrease there?

Curt VanHyfte: Yes. Hi, Alex. That’s a function of more affordable entry level products in our Houston and Austin divisions. Houston, we’ve been talking a lot about that marketplace kind of evolving here over the last couple of years of being heavily reliant on master plan communities in the past, and now it’s doing more self-developed, itself in a balance sheet friendly manner. And so they’ve introduced more entry level and first move up, type of communities, which is what you’re seeing in their kind of transformation over the last couple of years.

Sheryl Palmer: And it kind of goes to earlier comment we made as well, Alex, where to Curt’s point with Austin and Houston being first time, our spec inventory is about 400 square feet less than our to-be-built. And so when we talk about a higher spec penetration, just the overall square footage is just going to bring down that ASP.

Alex Barron: Got it. Okay. Great. So would you expect the ASP to continue trending lower then?

Sheryl Palmer: In Central specifically?

Alex Barron: Yes. Consistent. What you think, Curt?

Curt VanHyfte: Yes. I would say it would be more consistent, because I think the transformation it says kind of — I guess, gone its course. It’s run its course in Houston. So I think it’ll be pretty consistent from here on out.

Alex Barron: Got it. And as far as the Indianapolis deal, was that more of an asset purchase, or did you guys bring in the whole team and you just structured it more like that?