Taylor Morrison Home Corp (TMHC) 2023 Q1 法說會逐字稿

Hello, everyone. Good morning, and welcome to Taylor Morrison's First Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce Mackenzie Aron, Vice President of Investor Relations.

Thank you, and good morning, everyone. We appreciate you joining us today.

Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements that are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website, at taylormorrison.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 the release.

Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Lou Steffens, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. Also with us is Curt VanHyfte, our West Area President.

And as you may have seen in this morning's earnings release, Lou 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 precludes him from continuing with the demanding requirements of the CFO position, Lou 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 1. Curt currently oversees our West region and has nearly 30 years of homebuilding experience as both a finance leader and field operator from roles in corporate finance and as a division and regional president for several national homebuilders, an ideal background that maintains the strong operational and finance cohesion that we specifically look for and have benefited from under Lou's 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 team. We are also thankful for Lou's meaningful contributions as CFO during his time in Arizona and look forward to his continued leadership while, most importantly, wishing his family all the best.

Now let's dive into our call. As always, I will share our quarterly highlights, an update on the market and our strategic priorities. After my remarks, Erik will discuss our land portfolio and investment approach, while Lou 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 2,541 homes, at a strong home closings gross margin of 23.9% and an efficient SG&A ratio of just 9.9%. 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 3.4 per community, the highest level since the third quarter of 2021, while our cancellation rate declined to more normalized levels, at a 14% of gross orders. This drove our monthly net sales pace to 2.9 per community, as compared to 1.9 in the fourth quarter and 3.1 a year ago.

This momentum has carried through the first 3 weeks of April, with our sales running at a pace of approximately 3.1 net orders per community. Meanwhile, leading indicators including sales traffic, mortgage prequalifications and digital home reservations, which remain 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 am 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. The strength of our buyers is also evident in the size of our deposits, which averaged $66,000, or about 10% per home, for our customers in backlog, helping to minimize our cancellation risk.

When I look across our portfolio, the first quarter stabilization was evident across nearly all of our markets. 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 elements 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 amongst move-up buyers, which accounted for nearly half of our net orders, led by our second-time move-up category, where both sales and pace were up firmly year-over-year. This was followed by our entry-level segment, where first-time buyer demand for spec homes stabilized with use of our strategic incentive programs, while our resort lifestyle segment experienced a pickup as we moved 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. 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 raised pricing in some, 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 group and price point, and have been averaging around 60% spec and 40% to-be-built gross sales in recent quarters. Beginning in the fourth quarter of 2022, the gross margin differential between the two has reverted to historical norms in 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 build their dream home and higher incentives typically required when selling spec inventory.

In the first quarter, this spread amounted to nearly 400 basis points, reversing the temporary margin outperformance on spec sales in much of 2021 and 2022 when demand for move-in ready homes significantly outpaced supply.

While quick move-in homes remain attractive, especially in lower price points, only about 30% of our shoppers in the first quarter said 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 2 years has more recently normalized back to historic averages based on our comprehensive survey data, while our actual mix of spec sales has been running roughly 2x higher, at about 60%, given our intentional shift to more spec sales to better manage production. We believe these insights continue 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 23.5% 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 experiencing 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, the back end of the construction cycle remains constrained, as 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 floor plan library by more than 50% in the last 2 years and realized a roughly 50-day savings from sale to construction start for homes utilizing our popular option packages compared to traditional design studio starts. These are just 2 ways in which we are driving reduced costs 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 uncertainty 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 Erik to share more on our land strategy.

Thanks, Sheryl, 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 and 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 remaining highly uncertain, we continue to be prudent and patient in our investment decisions. This includes re-underwriting every phase of land development, lot (inaudible) down and deal closing to ensure each dollar invested continues to reflect market conditions and our 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 was down from $394 million in the first quarter of 2022, when just over 50% of spend was dedicated to development. Also of note, we incurred a modest $1 million in walk-away 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 quarter-end, we owned and controlled approximately 73,000 homebuilding lots. This represented 5.9 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 3.4 years. 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 lot portfolio that is concentrated in prime core submarkets. 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, Erik, and good morning, everyone. I will review our financial results and provide detailed guidance for the second quarter and introduce our expanded outlook for the full year.

Before I dive in, I'll first address this morning's announcement. I'm incredibly grateful for Sheryl and the board's understanding as I transition into this new role, which provides me with the flexibility I need 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 Curt and know he will be a terrific leader and advocate for our teams in the CFO seat. 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 2,541 homes, at an average closing price of $635,000, 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 2,500 homes given the improvement in sales activity and our focus on rebuilding inventory levels to maintain approximately one finished spec home per community. This equaled 2.6 starts per community per month, up from 1.6 in the prior quarter, but still below 4.2 a year ago.

As a result, at quarter-end we had approximately 7,700 homes under production, including approximately 2,200 specs, of which only about 230, or still less than 1 per community, were finished.

Based on our homes under construction and assuming no meaningful change in cycle times, we currently expect to deliver between 2,600 to 2,700 homes in the second quarter and between 10,000 to 11,000 homes for the full year.

From a pricing perspective, we expect the average closing price of our deliveries to be between $630,000 to $635,000 in the second quarter and around $625,000 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 a 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 9.9%, from last year's record first quarter low of 9.6%, despite the decline in revenue and 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 2,854 homes. The decline was driven by a 7% reduction in our monthly net sales pace to 2.9 per community, as higher cancellations offset year-over-year improvement in our gross sales pace to 3.4 per community, while our ending community count was flat at 324 outlets.

As Sheryl noted, demand trends improved throughout the quarter, and sales have been running at a pace of approximately 3.1 net orders per community in the first 3 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 2024, 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 continue to evolve as younger, more racially diverse cohorts enter the prime homebuying years.

With multicultural population growth reshaping homebuying 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.

(Operator Instructions) Our first question comes from Truman Patterson from Wolfe Research.

Actually, this is Paul Przybylski. I guess the first question, what percent of your communities have seen pricing come off the bottom? And then what percent of your communities would you actually be seeing incremental incentives? And in what markets would those really be in?

As far as the number of the communities that we've seen adjustment, and I would say those adjustments would be both a pricing adjustment as well as a reduction in incentives, it's just over 50% of our communities.

And the second question, I missed part of what you said. Do you mind repeating?

I guess, what markets are you seeing, continuing to see incremental incentives?

Incremental incentives. So when I look across the organization, probably the place that we've seen the greatest incentives have been Portland, 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. Dallas had its best quarter in more than 2 years. And we've seen some nice recovery from places like Austin and Phoenix that I think you know were fairly stressed last year.

Okay. I appreciate the spec/build-to-order margin color. Is that in any way being colored by, let's call it, second half of last year cancellations of customized homes that you may have to be discounting more than you would a normal spec? Hence, it's just kind of a temporary differential?

No, I don't think so, Paul. In fact, I would tell you that we are returning to what I would say the old norms. I mean, late '20, '21, early '22, I think that was the exception. And that was really because we continued to see, as you know, back then something like 1% a month of price appreciation and builders were holding back sales until those homes were next to complete. Where the to-be-built homes didn't get the benefit of that price appreciation because they may have been in backlog 8 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 closings were down over 500. That's more the historic norm.

Okay. Okay. And 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 sideline? Forward prospects, I should say.

It's interesting. I would say that there's a -- consumers are behaving a little different across the country, Paul. In 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. Because when buyers believe that prices are continuing to drop, there's 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 is that we aren't seeing continued price deterioration, interest rates have settled. And I think we're actually, in many places, [we use] that as a sales tool to our advantage when 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 or ability, and most of our cancellations have been on the first-time buyer side. So not real different than what 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.

Our next question comes from Carl Reichardt from BTIG.

Lou, best of luck in your new role, too. So Sheryl, following on Paul's question, so the narrative out there for a while has been, oh, gosh, move-up customers, they're rate-locked, they're likely to stay in their spot, but you're seeing a substantial improvement there. So I'm curious, what are you hearing or thinking about the narrative that rate lock is keeping people out? And then have you started to see a change in buyers? We saw lots of in-migration state to state post COVID. Are we starting to see more local customers now stay within their markets and move up? And so 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.

It's such an important topic. I appreciate the question, Carl. You're 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 at some point actually got to 8%, along with what had happened on the pricing appreciation side, that was a tough (inaudible).

Now that rates have settled, and I know we've seen some movement week-over-week, but now that rates have settled, I would say, in that low 6% range, the ability for a consumer to buy down their rate to something that is more consistent with what they've had I think is very different than what we saw last year.

Another stat that I think is just so interesting is that when we look at our current backlog, 45% of them own a home today and are buying a new one. The number of folks that actually owned a home but have probably already sold their home and sitting waiting for their next home to be complete is probably significantly higher than that. And of that 45%, probably 65% or so will be listing and closing on their home before they buy the new one, and 30% to 40% of those folks will retain the option of keeping that home, maybe using it as a rental, before purchasing.

So I think because of where rates have settled a lot of that narrative is honestly going away.

And maybe, Sheryl, just on the migration point, maybe 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 400,000 of kind of in-migration; Texas, at 350,000; North Carolina, over 100,000; [Denver], over 100,000; and Arizona, at about 100,000. So I think that's kind of from a macro point.

From a micro point, if you look at a market like Naples in which we operate, surveying a lot of age-targeted buyers, about 56% of our buyers there are coming from out of state. So kind of a -- if you think about that consumer group and then you think about a like consumer group in Sacramento, for example, in California, 96% of those buyers are coming from in-state. And so kind of a similar consumer, but a terribly different migratory pattern.

So the post-COVID in-migration activity has waned but the traditional in-migration activity that we've historically seen in this business continues, I guess is the best way to summarize that. Okay.

And then the second question is on community count. So post the Lyon deal, the community count, I think, has wavered a little bit but generally been relatively flat, and sell-through is part of that. But I'm 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, is '24 more an inflection year? Or is that something we should -- we'll wait for longer?

Good question, Carl. 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 in master plans on the same lot size as 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 when models and entrances are complete.

And then 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 73,000 lots currently that we own and control will provide us an opportunity for future outlet growth. It's just, I'd say, a bit of timing based on some of those items I mentioned.

And then maybe lastly, a 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 those factors, some of that got pushed into next year.

So the simple answer, Carl, is you'll start to see a ramp-up as we move through next year. But this year, we'll probably -- and the sales, like you said, we've also sold through a number of more communities than we had anticipated. But you'll start to see that ramp up as we move into next year.

Our next question is from Mike Rehaut from JPMorgan.

Doug Wardlaw on for Mike. To the extent that demand continues on its trend, how does your land strategy change, and also in the event that the macro environment stabilizes and demand stays robust going into 2024. Do you anticipate a material change in your land strategy long term?

It's a good question, Doug. And maybe just as a reminder, we have been investing prudently. We continue to invest. As Lou suggested, we've got 73,000 lots, 5.9 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 if 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 in the event that demand stays where it is and there's not a drop-off at any point throughout the year, in some of the areas where there is more so increased incentives or more base price cuts, how are you guys planning to approach that? Is it going to be a community-by-community basis? Or just kind of a national strategy there?

And then in addition to that, regionally has demand kind of surprised you anywhere, I guess, recovery-wise, based on kind of like the lows we've seen recently?

I would tell you, Doug, 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 resort 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 ratio is 3 or 4 to 1. So it's very meaningful. There absolutely were some markets 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 too often.

And the second part of the question is where we're seeing greater strength, is that correct?

More so areas where there's been strong recovery from kind of the bottoms we've seen towards the end of 2022.

I would really point to Phoenix and Austin, probably because they ramped up the fastest and the most on the pricing curve. In Austin, the growth continues to be really quite strong, but (inaudible) continue to be a little higher than, I would say, the company average. In Phoenix, the gross and the net, we're seeing that pull-through, and we're also seeing pricing strength.

Florida continues to be strong.

Maybe the other call out is Charlotte. We've seen great strength in Charlotte pace one of the leading.

And maybe the very last one that I would say has 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.

I don't know how you feel, Sheryl, but one of the nice surprises is there was a lot of concern last year about excess inventory getting absorbed, and builders have done a nice job absorbing that. I think going back to showing the demographics and being undersupplied in the industry.

I think that's so key because we didn't -- we haven't -- we were quite worried, I think, on the new homes because of what was happening with cancellations and the amount of starts, and we certainly haven't seen it on the resale market. So continue to be undersupplied.

Nice tailwind.

Our next question comes from Alan Ratner from Zelman and Associates.

I thought the spec/to-be-built commentary in margins was really interesting, and I just want to 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 higher spec closings. But I'm just curious if you could kind of detail specifically what's embedded in that guidance as far as pricing and costs specifically.

Really good question, Alan. I would tell you a couple of things. One, we still have a lot of our strong backlog closings that we sold earlier last year. That is starting to come down. As we've 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 home sales in the last couple of quarters, those generally have a little bit longer cycle time. So you'll see some of those benefits through the remainder of the year, but they're 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 as to-be-builts moving into early next year, which will give us some pricing strength starting at the beginning of next year.

And so I'd 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 back end, but you'd expect after a couple of quarters of lower starts in the industry that will give us some opportunities later in the year, which we're 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.

Got it. But just on that point, you're not embedding any additional incentives or anything needed to move those specs or any meaningful cost changes. It's really just kind of flowing through the current environment, and any upside or downside is going to be more timing related to the cycle times?

A little. (inaudible) on the units that we sold in the middle of last or early last year, there's probably still a little bit embedded.

Yes, there's probably a little bit, but that was the 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 backlog and discount as much to get them to the finish line. So that, to me, is a sign of strength of the market improving. So from that standpoint, we've been very pleased. And I'd say the rest of it, the specs, we're showing what we think we need to sell them today. So if the market continues to firm up, we hope there's 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 as much as it was a couple of quarters ago to help customers get their mortgage in place. So we'll have to see if we maintain that spread. So there's probably a -- I think we've assumed lower and not going back to where we were, but we do have to see what happens to interest rates.

Got it. That's helpful. And 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, ramped your spec starts, and I think that strategy is paying dividends here just based on how tight the resell market is and kind of where the demand has trended. You're 60% specs right now, which is higher than you've historically been. It sounds like you're seeing improving demand on to-be-built, and the margin differential is 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 through them? Or are you looking to, over the course of this year, get back to a more historical mix of to-be-built and spec, which I would imagine would require starting fewer spec homes.

Yes, I would say definitely want to replace our specs as we sell them. I think in the last couple of quarters we've said we wanted to get our starts back to our sales pace. This quarter was a little bit short at the 2.6%, but part of that is, as you mentioned, that we've sold a few more to-be-builts. We went up 500 basis points on our to-be-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. It's been a good balance for us more recently.

I think the key for us, Alan, is going to be aligning our specs to consumer demand. I mean, I know that sounds so obvious, but we're seeing the majority of that demand at the first-time buyer. Interesting, as we're looking through some of the research for the quarter, 1 in 4 of our shoppers said they would prefer a spec, that they can be motivated by a spec (inaudible) high incentives. So I think the macro environment is going to continue to impact our strategy. Obviously, if we can have to-be-builts where we're getting that kind of margin enhancement, we're going to do that.

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 like Lou said, we're going to continue to start specs as we replace them. But at the same time, we want to ramp up our production and continue to grow our to-be-built business.

And 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 our trade base perspective in terms of having visibility and consistency.

Our next question comes from Matthew Bouley from Barclays.

You have Elizabeth on for Matt today. I know that rate lock-ins have 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 of interest rate where you're seeing people if they're particularly responsive to it?

Good questions. I would say the buydowns are absolutely the preference for most of our buyers across the country. A second, certainly for our active adult buyers, Elizabeth, would be maybe option incentives, where some of those buyers tend to use more cash or take smaller loans or don't plan on holding the loan 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 3% or 4%. And when you look at our note rate for the quarter, I think it was something around 5.5%, and that's generally where I think the consumer has gotten quite comfortable. We were at 5.65% for Q1, which was a little, 2 basis points lower than Q4.

And then kind of switching over to the construction cycle, I know that you mentioned that there's still some pain points in the back end. 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 you're seeing any declines.

No problem, Elizabeth. Good question. This quarter, we've seen some stabilization in our costs, as we've talked about the last several quarters. Lumber is finally starting to come through the P&L in the first quarter and then throughout the remainder of this year. So our costs have, 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's a lot of insurance work, we see our teams in Florida having to pay some premiums to get drywall completed in 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 optimistic as we had been when the starts had been lower for a while.

And 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, I'm going back to your first question, Elizabeth. One of the other programs that we introduced early this year is our (inaudible). So it's a 12-month lock 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 -- buy today and know what their rate is going to be 12 months from now.

Our next question comes from Jay McCanless from Wedbush.

One of your competitors yesterday characterized 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 backlog is in the same position. But any color you could provide there and how much more potentially you might have to, maybe from a percentage terms, have to do some discounting to get people across the fence.

I would agree with that completely. We're seeing that the consumer really is getting very comfortable in that 5.5% range. I think we have some very strategic low-5% or 4.99% money that we very rarely use. But I would say, generally, the customer is locking somewhere between 5.25%, 5.75%. And in many of our forward commitments and buy-down programs, if rates continue to drop they will have the opportunity for a onetime float-down.

But they're -- we're not hearing. So it's kind of like a double win, Jay, because we're not hearing that people need to get back into the 4% or 3.99%. And our 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. And then the other question I had, I think you said during the prepared comments that roughly 50% of the current land lots that you have were bought pre-2020. Just wondering when you think that ratio starts to shift and what type of impact it might have on the gross margin as that shift occurs.

Jay, it's Erik. It's a stat that we've been kind of throwing out over the last number of quarters, and it does come down, I don't know, 5% or so 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're negotiating today at current market rates for margins that kind of approximate where we're gravitating to in terms of identifying what's 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 happens 2, 3 years from now as that land may (inaudible).

Got it. And then just sticking on land for a minute, I guess, what have land prices done? Have you seen any opportunities to rebid some deals? Or the seller is holding fast on where pricing is now?

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 and terms of deals, not necessarily creating or (inaudible) land prices. I would say that given our prudence and patience we were able to get some surgically attractive deals, but certainly not a tidal wave of those coming through.

As we sit here today, I think consistent with some of the things you're hearing from us and others, confidence is kind of gaining and, as I suggested, up a bit more. So I do think you'll 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 figuring a way through. But I think you're going to start seeing some more activity.

Our next question comes from Mike Dahl from RBC Capital Markets.

This is Ryan Frank on for Mike Dahl. I wanted 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 do you think you will kind of over time drift back down to being maybe more BTO heavy, given the margin spread?

I think Sheryl mentioned we're going to -- we'll monitor it based on demand. We have an 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 spec business, as it provides that balance to our closing cadence and really helps us drive some of the returns.

So I think we'll just follow what demand is. 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 short period of time where the market was a little different, we were always somewhere between 60/40, one way or the other. So it could be 60% to-be-built, 60% specs or somewhere in between. But once again, to Lou's 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.

The other thing that I think is interesting is, as we look at our square footage over, like, the quarter and over the last couple of years, no matter what happens with that mix, our square footage hasn't moved. I mean, this quarter it was about 2,500 square feet. It was up about 40 or 50 square feet, both on the to-be-built and 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're buying on a to-be-built.

Got it. And 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? Is it higher gross margin because they're BTO? Or is it SG&A savings from lower commissions?

Well, they're actually a combination. So you're right, 13%, depends how we look at it, 13% were an absolute. They completed the entire process, and they put a deposit online to secure the lot. If we look at they got all the way through but they didn't put the money down and then they called and did the (inaudible) and went to contract, that would be closer to 18%.

But that's a combination of our inventory reservations as well as our build-to-order reservations. We have our build-to-order program in probably 30%, 40% of the communities across the country. So that's continuing to build. 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 [CoBro] tends to be pretty high in Texas. So we haven't seen the same kind of benefit we will when I think we're distributed across the country.

What we are seeing improvement on is days to contract from when they start the process to when they complete.

And it's interesting, the last data point I'll give you is when these programs started, they were highly targeted -- not targeted, but the participation was really around millennials leading them. Now we're seeing a good balance across all consumer groups. About 40% are millennials, 30% are GenX, 20% are boomers. So that's going to continue, I think, to fare well for us.

Our next question comes from Dan Oppenheim from Credit Suisse.

Just a quick question. I was wondering in terms of the community count where you're talking about sort of essentially flat over the course of the year, but given that we'll have many communities closing out, then opening up new ones to replace them, where do you see the communities coming online, I guess, over the past year as you've decided to hold off some openings until the models are ready and such? Is this a point where you'll be replenishing what's in the East and Central, holding off in the West? How do you think about the mix as we move through the year?

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 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 and majority of the new openings as a percentage would be going forward for the remainder of the year.

Got it. Okay. (inaudible). So it's thinking more in terms of the new openings because I imagine some of the West is just slower closeouts there, which is sort of keeping that elevated in terms of the growth at this point.

They actually did see outlet growth as well.

Our next question comes from Alex Barrón from Housing Research Center.

Sheryl, 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. And thankfully, you were right. But I'm wondering today, is there still room left? Or not as much?

Well, thank you for that question, Alex. I love it. It's my favorite spreadsheet every quarter. When I look at our backlog, I look at what we closed, it's interesting. In Q1, the conventional buyer got just a little bit more room. There's close to about 450 basis points of rate cushion. Now that's down from early '22, where it was 600, but certainly up from what we saw kind of at the end of the year when rates have really peaked. Unfortunately, our FHA buyer, they got a little tighter. So they have about 170 bps of room before they would have a challenge qualifying.

Okay. That's helpful. The other question is, I think a couple of quarters ago, or maybe it's a little bit longer, you guys were talking about rationalizing number of floor plans, reducing SKUs, going more to, I think, paletes and stuff like that. How far along is that process? And how much more opportunity do you still have there?

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 was due to finalizing our work with William Lyon, but it's part of our process in all our divisions now. So it's getting through the first pass, and we'll continue to review it, making sure we have the most popular floor plans, 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 gives us an opportunity to get better cost from our trades when they don't have to bid as many of those options that aren't selling.

I think somebody on the team said it was similar to painting the Golden Gate Bridge. 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 can just -- it will get stale if you don't really continue to understand the consumer needs and how they're evolving.

We currently have no further questions. I would like to turn the call back to Sheryl 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. Be safe.

Ladies and gentlemen, this concludes today's call. You may now disconnect your lines. Thank you.