Taylor Morrison (NYSE:) Home Corporation (NYSE: TMHC), a leading national homebuilder and developer, reported strong third-quarter results, overcoming market challenges and natural disasters. The company delivered 3,394 homes at an average price of $598,000, generating over $2 billion in revenue. Earnings per diluted share increased by 50% year-over-year to $2.37, and the book value per share also rose by 15% to approximately $54. Despite disruptions from hurricanes, net orders saw a 9% year-over-year increase. Taylor Morrison anticipates continued growth, projecting around 12,725 home closings for the year with a gross margin of approximately 24.3%.
Key Takeaways
- Taylor Morrison delivered 3,394 homes, generating over $2 billion in revenue with a 24.8% gross margin.
- Earnings per diluted share rose to $2.37, a 50% increase year-over-year.
- Net orders increased by 9% year-over-year, despite hurricane disruptions.
- The company’s resort lifestyle segment and insurance subsidiary both saw strong performance.
- Taylor Morrison projects approximately 12,725 home closings for the year with a gross margin of around 24.3%.
- The company has a healthy land inventory and plans to control 60%-65% of lot supply.
Company Outlook
- Taylor Morrison expects community count growth into 2025.
- The company aims to maintain strong returns despite market challenges.
- A new $1 billion land banking facility will help achieve targeted lot supply control.
- Management plans a detailed outlook during their Investor Day in Q1.
Bearish Highlights
- The company noted increased competition, particularly in Texas.
- There has been a modest increase in insurance costs in Florida due to storms.
- Land spend has increased by approximately 40% year-over-year due to competitive land markets.
Bullish Highlights
- Sales growth was strong in key markets, with Florida and Texas showing significant increases.
- The company has maintained or slightly reduced incentive levels.
- The consensus predicts mortgage rates will drop below 6% in 2025, potentially enhancing affordability.
Misses
- Average closing price declined by 2% to $598,000.
- There has been a marginal impact on margins from land banking due to higher interest rates.
Q&A Highlights
- The company clarified that about one-third of total closings utilize forward commitments.
- A two-week improvement in build times was reported compared to the previous quarter.
- Management addressed the potential buyer hesitance due to election-related concerns, which has not significantly impacted sales.
Taylor Morrison’s leadership, led by CEO Sheryl Palmer, remains optimistic about the company’s future, citing a balanced portfolio and strategic initiatives that cater to various consumer segments. With the company’s focus on operational efficiencies and anticipated improvements in mortgage rates, Taylor Morrison is poised to sustain its growth trajectory and leverage opportunities in the evolving housing market.
InvestingPro Insights
Taylor Morrison Home Corporation’s (NYSE: TMHC) strong third-quarter performance is reflected in its financial metrics and market position. According to InvestingPro data, the company boasts a market capitalization of $6.97 billion, indicating its significant presence in the homebuilding sector. The company’s P/E ratio of 9.75 suggests that it’s trading at a relatively attractive valuation compared to its earnings, which aligns with the reported 50% year-over-year increase in earnings per diluted share.
InvestingPro Tips highlight that TMHC has been highly profitable over the last twelve months, corroborating the company’s robust financial results. The stock has also demonstrated a high return over the last year, with InvestingPro data showing an impressive 64.69% price total return over the past year. This performance underscores the market’s positive reception of Taylor Morrison’s strategic initiatives and operational efficiencies.
Despite the company’s strong performance, InvestingPro Tips caution that stock price movements have been quite volatile. This volatility is evident in the recent 8.51% decline in the stock price over the past week, which investors should consider when evaluating the company’s short-term market dynamics.
It’s worth noting that Taylor Morrison does not pay a dividend to shareholders, as pointed out by InvestingPro Tips. This aligns with the company’s focus on growth and reinvestment, as evidenced by their plans for community count expansion and strategic land acquisitions.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. There are 5 more InvestingPro Tips available for TMHC, which could provide further valuable information for those looking to deepen their understanding of the company’s prospects and challenges in the current market environment.
Full transcript – Taylor Morrison Home (TMHC) Q3 2024:
Operator: Good morning, and welcome to the Taylor Morrison Third Quarter 2024 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at the time. As a reminder, this conference call is being recorded. I would now like to introduce to you, Mackenzie Aron, Vice President of Investor Relations. Mackenzie?
Mackenzie Aron: 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. These statements 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.
Sheryl Palmer: Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. As always, I will focus my remarks on an update on the market and our strategic priorities. While Erik will discuss our land portfolio and thoughts on the retail market, and Curt will provide our detailed financials and guidance. I am proud to share the outstanding results of our third quarter, which clearly demonstrates the benefits of our diversified consumer and geographic strategy, as well as our team’s execution and amid continued interest rate volatility, economic uncertainty and hurricane-related disruptions. To begin, in the third quarter, we delivered 3,394 homes at an average price of $598,000, producing over $2 billion of revenue with a home closings gross margin of 24.8%.
With strong SG&A leverage and improved financial services income, our earnings per diluted share grew over 50% year-over-year to $2.37, while our book value per share increased by 15% to approximately $54. Despite facing challenges such as hurricanes during the quarter, our closings volume and gross margin exceeded guidance. We implemented robust safety protocols, shutting down sales offices and construction sites in advance of the storms to ensure minimal damage. Although the storms caused disruptions, our communities fared well.
Our resort lifestyle communities made a significant contribution to revenue and margin, with third quarter closings and gross margin exceeding expectations. While the storms may cause temporary delays, the lasting impact may be related to the availability of homeowners insurance in coastal markets. Fortunately, we are able to offer competitively priced coverage through our subsidiary, Taylor Morrison Insurance Services.
Homebuyer demand remained solid in most markets, with net orders increasing by 9% year-over-year during the quarter. Orders were strongest in the resort lifestyle segment, despite hurricane-related disruptions in Florida. Mortgage rates have remained stable following the Federal Reserve’s rate reduction, and we continue to offer customizable finance incentives to meet individual buyer needs.
Our diversified approach, including to-be-built and spec homes, has supported strong gross margins. Online tools have been popular among home shoppers, with record high online reservation rates in the third quarter. We believe the housing market remains undersupplied, and our communities have not been significantly impacted by shifts in the market.
Overall, we believe that our ability to drive growth and returns has been strengthened by our scale and operational capabilities. Our long-term targets are more ambitious than ever, reflecting our confidence in the future of Taylor Morrison. Our company has set ambitious targets for growth, aiming for a 10% annual increase in home closings, low to mid-20% gross margins, and mid to high-teen return on equity. As we near the end of this year, we are on track to exceed these targets with double-digit closings growth and a gross margin of around 24.3%. Looking ahead to 2025, we are confident that our focus on capital-efficient growth will continue to drive strong performance.
In terms of competition, we are closely monitoring the resale market, which has seen an increase in listings in our operating areas. However, our analysis shows that only a small percentage of these listings are truly competitive with our product. We are also making strategic investments in land, with a goal of controlling at least 60% to 65% of our lot supply.
We are pleased to announce a new land banking facility that will provide $1 billion in off-balance sheet financing, further supporting our growth strategy. Additionally, our Yardly build-to-rent business continues to evolve, with upcoming dispositions expected to generate cash flow of around $85 million.
In the third quarter, our net income increased significantly, driven by growth in homebuilding revenue, improved gross margins, and leverage in SG&A expenses. We saw a 29% increase in closings volume, offsetting a slight decline in average closing price. These results exceed our expectations and demonstrate the strength of our business. Additionally, we successfully closed nearly 60 homes in the Bay Area during the quarter, ahead of schedule as the energy utility company resolved delays sooner than expected. We started construction on 2,864 homes, averaging 2.8 homes per community per month, in line with our sales pace. At the end of the quarter, we had 8,490 homes under production, including 3,349 spec homes, 623 of which were finished units. We anticipate delivering around 3,400 homes in the fourth quarter, bringing our total expected closings for the year to 12,725 homes, up from 11,495 homes in 2023. Our average closing price for the year is expected to be around $600,000, with approximately $610,000 in the fourth quarter.
On the margin front, our home closings gross margin increased to 24.8%, up from 23.8% in the prior quarter and 23.1% a year ago. We expect our fourth-quarter gross margin to remain healthy at around 24.5%, resulting in a full-year margin of approximately 24.3%. Looking ahead, we anticipate our gross margins to remain above historic averages in the low to mid-20% range due to increased production efficiencies and cost leverage from our scale.
Our net sales orders rose by 9% year-over-year to 2,830 homes, driven by an increase in community count and absorption pace. Our cancellations remain low at 9.3% of gross orders, below industry average. SG&A as a percentage of home closings revenue decreased to 9.8%, down from 10.4% a year ago. Financial Services revenue also saw growth, with a gross margin of 45%, up from 42.2% a year ago.
We ended the quarter with liquidity of approximately $1.2 billion and a net homebuilding debt to capitalization ratio of 22.5%. Our capital allocation priorities include investing in our business, maintaining liquidity, and returning excess capital to shareholders through share repurchases. Our Board of Directors recently authorized an increase in our share repurchase authorization up to $1 billion, reflecting our commitment to enhancing shareholder value. As previously mentioned, we are not facing significant competition from resale listings, and homeowners insurance is not posing a major obstacle for our buyers at this time. However, we will continue to monitor these factors closely and make any necessary adjustments. We have focused on investing in core locations with products and pricing strategies tailored to meet the needs of our customers, ensuring that our sales, pricing, and incentives are aligned to optimize our margins and returns.
As we near the end of 2024, our results are exceeding our expectations, with strong closings and gross margins. We are confident that this positive momentum will carry into 2025 and beyond, thanks to our land pipeline in quality locations that are positioned to perform well through housing cycles. We want to express our appreciation to our homebuilding and financial service teams for their outstanding performance this quarter.
During the Q&A session, an analyst from Wolfe Research and JPMorgan inquired about our competition and incentive levels, particularly in Florida and Texas. Our CEO, Sheryl Palmer, emphasized that despite some challenges in certain markets, we are still operating in an undersupplied environment, with strong demand for new homes over resale properties. She highlighted the success of our communities in Florida and Texas, where sales are exceeding expectations and margins are strong, even in competitive markets like Austin. And it has always been a strong market for us, even though it has gone through a reset. I anticipate that it will bounce back. Dallas is a new business for us with significant growth this year, and we expect that to continue in the coming years, nearly doubling in size year-over-year. The Dallas market’s size and strength excite me, as it allows us to compete at a higher level. Houston is also a great success story for us, with significant repositioning efforts leading to positive outcomes. Our sales paces have increased, and discounts have decreased by 50% year-over-year.
In the Southeast, Charlotte and Raleigh are performing exceptionally well, with strong margins and growth. Atlanta is also a strong market for us, with high community count and orders growth. The West has been a mixed bag, with Phoenix remaining strong and showing the strongest margins in years. California markets like the Bay Area and Sacramento are steady, while Southern California is more competitive. Denver and the Pacific Northwest are a bit more affected by inventory, but I am optimistic about their progress.
Vegas has shown steady improvement, with a significant repositioning of a large asset leading to positive results. Our newest market, ND, is showing promise after a slow start post-acquisition. We have a strong team there and see opportunities for growth.
Regarding incentives and rates, we have a personalized approach that caters to individual needs, which has positively impacted our margins. Our forward commitments have had a minimal impact on our business, about a point in the quarter, similar to past quarters.
In terms of lot optioning, our relationship with Kennedy Lewis has been beneficial, and we are focused on increasing our control over land to improve margins and returns. We are strategic in our land banking approach, focusing on the right deals that offer a balance between margin impact and returns. The cost of this is slightly higher due to the current interest rates. We anticipate a margin impact of under 2% for the assets being deployed, resulting in a return benefit of approximately 3.5x. This will primarily affect the land banking proportion of the business, which currently stands at 20% and is expected to increase slightly. Over time, this adjustment will blend into the business.
Regarding consumer segments, each group is expected to perform well for different reasons. First-time buyers will benefit from moderating rates, improving affordability. Move-up buyers will also benefit from lower rates, helping them sell their existing homes. Active adult buyers are more focused on lifestyle preferences and are less impacted by interest rates. The company is confident in the balanced portfolio’s ability to cater to all consumer segments.
In terms of completed inventory levels, with 623 completed specs representing about 1.8% per community, the company feels comfortable with this level. With a good balance between spec and to-be-built sales, and a focus on the entry-level market, the company expects to maintain a similar level of completed inventory moving forward. The shift towards more spec purchases, especially among first-time and active adult buyers, is seen as a positive trend, providing more choices for consumers. About half of the buyers say they chose their home without needing much incentive because they simply liked the location and the home itself. Our focus is on building the right thing for them, so we aim for that percentage to match our specifications.
Sheryl Palmer: That’s great to hear.
Trevor Allinson: Thank you for the insight. Good luck in the future.
Sheryl Palmer: Thank you.
Operator: Thank you. Our next question is from Matthew Bouley of Barclays. Matthew, go ahead.
Matthew Bouley: Good morning. I wanted to discuss incentives further, as your approach seems different from your competitors. Can you provide insight on new orders compared to previous closings and any potential incentives for early 2025?
Sheryl Palmer: Our incentives in the last quarter were the lowest in two years. We focus on individual buyer needs and credit metrics, which have remained healthy. Our personalized strategy allows us to use incentives effectively, leading to strong results and margins.
Matthew Bouley: Thank you for the explanation. Regarding SG&A, with revenue growth and community openings, can we expect improved leverage in the future?
Curt VanHyfte: With anticipated growth, we expect to see improved leverage over time. Stay tuned for more details on 2025 next quarter.
Matthew Bouley: Thank you. Good luck.
Sheryl Palmer: Thanks, Matt.
Operator: Our next question is from Mike Dahl of RBC. Mike, go ahead.
Mike Dahl: Can you provide more specifics on the sales pace in October, considering recent events and market conditions?
Sheryl Palmer: Despite challenges like power outages, we have seen a strong sales trajectory in October. Consumers are actively seeking information on rate opportunities, and our to-be-built homes offer an advantage in the market. In our active adult positions, particularly in markets like Phoenix, we are observing a high percentage of our business. The choice for consumers is maintaining our pace, aligning well with seasonal trends. Despite the impact of storms and lost market days, we are quite pleased with the results.
Regarding consumer sentiment and desirability in coastal markets, our research shows that insurance cost increases for buyers have not been a significant obstacle, with only a 5-6% year-over-year rise in new home insurance rates. Looking at historic population growth in Florida after major storms, there is a temporary dip in growth rate, but it still remains significantly higher than the U.S. average. We remain optimistic about the Florida market, especially in our resort lifestyle segment.
As for the competitive landscape versus resale homes, our unique locations and product offerings set us apart. While there may be some correlation in the new home market as a whole, we take pride in our core location selection. We have noticed that differentiation may be more challenging in the first-time buyer segment compared to our move-up and active adult communities. We have a strong level of variability in the 17% average, especially when considering competition from resales and other builders for smaller, lower-priced properties. Sheryl’s point about direct competition is valid. Looking at our balance sheet, inventory dollars have increased by almost 20% year-over-year, outpacing overall business growth. This is partly due to our pivot towards more spec homes. However, we aim to focus on asset efficiency and a more asset-light land portfolio in the future, which may moderate inventory growth. Our goal of mid- to high teens return on equity is on track, and with continued operational efficiencies, it’s possible that we could exceed this target. We will provide more clarity on our long-term goals and strategies at our upcoming Investor Day. I believe you’re approaching nearly a 40% year-over-year increase, which is quite impressive. How does this compare to the current trend in lot cost inflation? Are you expecting land prices to continue rising on a year-over-year basis? Additionally, when do you anticipate a significant acceleration in community count, possibly in 2025 or 2026?
Erik Heuser: The market is competitive, with demand often exceeding supply in the land market. We are seeing land and development costs appreciate around 10% plus or minus, which is manageable for us. As for community count growth, while we can’t provide guidance for 2025 yet, we anticipate strong growth in the coming years as the investments made now start to bear fruit.
Sheryl Palmer: Consumer behavior may be influenced by various factors, including the upcoming election, but our sales team is skilled at addressing these concerns and guiding potential buyers. While there might be some noise in the market, overall, we haven’t seen a significant impact on immediate sales due to the election.
Ken Zenner: Can you clarify the percentage of closings from third-party acquired finished lots and the margin and return differences in land banking structures?
Curt VanHyfte: Around 20% of our deals are currently from finished lots, and we are seeing a margin differential and return component of around 200 basis points in our land banking strategy. During the call, the discussion revolved around various tools and strategies used in acquiring land, such as land banking, joint ventures, joint development agreements, and seller financing. These tools are constantly evolving to address risk, return, and cost considerations. Seller financing has proven to be a successful and cost-effective tool for the company. In terms of cost and return trade-offs, the company aims for less than 2% of cost with a gross margin impact of 3 times or more in terms of return on investment.
When asked about build time improvements, it was mentioned that there was a two-week sequential improvement in build times quarter-over-quarter. The teams are focused on driving efficiency in cycle times, with most markets operating at pre-pandemic levels.
Regarding closings, about a third of the total closings in the quarter utilized forward commitments, with a focus on personalized solutions for individual customer needs. The company aims to provide a variety of tools and options to meet customer requirements.
Overall, the team expressed gratitude for the participation in the call and looks forward to sharing more updates in the upcoming year. Thank you to all participants for joining the call.