Good morning, and welcome to Taylor Morrison's First Quarter 2024 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. Please go ahead.

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.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. Today, I will share the highlights from our first quarter as well as an overview of the competitive differentiators driving our strong performance. After my remarks, Erik will review our land portfolio and returns-focused investment strategy, while Curt will detail our financial results and guidance metrics. In the first quarter, our team delivered a strong start to the year, including better-than-expected sales activity, upside to our gross margin expectations, and efficient construction progress that has set the stage for continued success through the remainder of the year. We delivered 2,731 homes at a better-than-expected home closings gross margin of 24%, driving earnings per diluted share of $1.75 and 14% growth in our book value per share to $50. With consistent activity throughout the quarter, our net sales orders increased 29% year-over-year, driven by a monthly sales pace of 3.7% per community, putting us firmly on track to meet our annual sales pace goal in the low 3 range. Following this positive first quarter momentum, we are raising our full year guidance and now expect to deliver approximately 12,500 homes at a home closings gross margin between 23.5% and 24% at an average price of $600,000 to $610,000. This improved outlook is reinforced by our healthy backlog of over 6,200 homes and includes the expected contribution from our entry into Indianapolis that I will share more on in just a moment. Our strategic emphasis on broad consumer reach, quality locations and a flexible production model is grounded in a through-the-cycle playbook that aims to deliver sustainable long-term profitability and cash flow generation, while minimizing our exposure to housing cyclical forces. The success of this strategy is demonstrated…

Thanks, Sheryl, and good morning. Our owned and controlled lot inventory was 74,182 homebuilding lots at quarter end. Based on trailing 12-month closings, this represented 6.5 years of supply, of which 3.1 years was owned. Controlled lots represented 53% of our total supply. The specific vehicles and structures used to achieve this off-balance sheet control include joint ventures with like-minded homebuilders, seller notes and financing, option takedowns and land banking arrangements. With each of these tools offering different risk return and cost trade-offs, we aim to match each deal with the ideal financing structure with a focus on generating optimal returns for each investment opportunity. As we look ahead, we expect to continue to gradually increase our control block percentage to 60% to 65% with the timing of achieving this multiyear target dependent on the cost and availability of such tools. During the quarter, we invested $367 million in homebuilding land acquisition and $221 million in development of existing assets for a total of $588 million, up from a total of $321 million a year ago. For the full year, we continue to expect our land investment to be between $2.3 billion and $2.5 billion, with approximately 40% allocated to development. The total investment amount will ultimately be dependent in part on our deployment of land deferral tools throughout the year. As Sheryl noted, we already own or control over 90% of the lots needed to fulfill our growth plans through 2026, providing flexibility when evaluating lot acquisitions that are primarily targeted for deliveries in 2027 and beyond. On the development front, we are focused on bringing our existing lot positions to market with well over 200 new community openings planned through the end of 2025. As a reminder, we have gradually increased our average underwritten community size to approximately…

Thanks, Erik, and good morning, everyone. As you've heard this morning, we are pleased with our first quarter results and the momentum we have built for the remainder of the year. For the quarter, our net income was $190 million or $1.75 per diluted share. We delivered 2,731 home closings at an average price of $599,000, which produced total homebuilding revenue of $1.6 billion, consistent with our prior guidance. Our average cycle times improved by about one week sequentially, driven by our team's focus on operational efficiency and normalization of supply chain dynamics. By year-end, we are targeting another 3 to 4 weeks of improvement, which would bring our average cycle time back to pre-pandemic norms of approximately 5 to 7 months, depending on the product profile. In addition to driving these cycle time savings, our teams have ramped up our start volume over the past several quarters to manage appropriate inventory levels and meet our closing goals. In the first quarter, we started 3,442 homes or 3.5 per community per month, up 35% from 2,549 homes or 2.6 per community per month a year ago. Including these starts, we had 8,578 homes under production at quarter end. Of these homes, 38% or 3,299 were spec homes, of which only 415 were finished with a skew towards our entry-level communities, where first-time buyers prefer quick move-in homes. Based on these homes under production, we expect to deliver approximately 3,000 homes in the second quarter. And for the full year, we now expect to deliver approximately 12,500 homes, up from at least 12,000 homes previously. This includes around 175 homes in Indianapolis for the remainder of the year. We expect the average price of our home closings to be approximately $605,000 for the second quarter and now anticipate a range of…

Thank you, Curt. As we wrap up, let me once again reiterate that as you have heard us discuss today, our priority is driving growth and returns for our shareholders. To do so, our strategy is grounded in diversification across consumer groups and geographies with a focus on financially secure buyers in core locations. We continue to expect first-time buyers to represent a meaningful portion of our sales and closings, but appreciate how the array of our consumer groups help mask the pressures today's home buyer is facing. We believe that our diversification is truly a differentiator in our ability to compete in the marketplace. It improves our resiliency against interest rate and affordability pressures, makes us better, more efficient purchasers of land, and ultimately, our opportunity to sustain attractive long-term returns for our shareholders. We have achieved this diversification over years of intentionally broadening our consumer segmentation, geographic footprint, and strengthening of our operational capabilities. Given the associated financial benefits that we have discussed this morning, we expect our business to deliver meaningfully stronger results than our legacy operations allowed, as reflected in our long-term targets for sales pace, gross margin and returns. In addition to exceeding our historic performance, we are also striving to drive top-tier results within our industry. We're excited about the opportunities ahead of us and look forward to continuing to update you on our progress. And most importantly, let me share my deepest appreciation to all our talented team members across the country. To each of you, thank you so much for your dedication to our organization and customers. I am truly proud to share the results of all of your efforts. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

[Operator Instructions] Our first question today comes from the line of Mike Dahl with RBC Capital Markets.

Certainly appreciate the diversification and the benefits that that's provided you. I wanted to drill down first on, Sheryl, the comments about the first-time buyer exhibiting maybe a little more sensitivity as the quarter progressed and rates went up. Can you drill down a little bit more on the kind of the pace that you are seeing kind of intra-quarter with your first-time buyers and then maybe zoom out and give us a flavor for what April has looked like in accurate for your company?

Yes, absolutely. Thanks for the question, Michael. As far as pace, we saw a good strong pace, actually up significantly year-over-year with our first-time buyers. Our highest pace was with our move-up buyers. But pretty close, honestly, when I compare the 2. When I talk about the affordability of the first-time buyer, I don't think, given what's happened to pricing, interest rates, just general inflation, that this should be a surprise. I think it's very consistent with what we're hearing from others. There's a number of different stats I could share that really show the meaningful difference. When I look at Q1, we generally saw rates down, as you know, and then they started moving up a little bit as we moved into the end of the quarter and into April. When I look at our backlog, it's kind of a proxy for the impact to a first-time buyer. And I look at what if rates were compared to our closing interest rate, average closing interest rates, if we look at our backlog, as of the end of the quarter and rates moved to 7.5%, the impact to a conventional buyer is modest. I mean, they move from a DTI of just over 39% to just over 40%. And their payment moves modestly to, let's say, $275, but their average income is $17,600. If I compare that to an FHA buyer, where their average income is $11,200, and rates moved to 7.5%, their payment would go up $468, and that's on a lower loan amount. And their DTIs would be somewhat stressed, going from 46% to 51%. So obviously, with this large pool of affordable buyers and first-time buyers, that gives us the opportunity to work with lots of different customers to get them to that place, but it just takes a little more dollars, because they just don't have another lever to pull. They don't have more dollars they can bring in for a down payment. They are highly dependent on gift funds compared to our overall buyer group. So just a couple of examples.

Yes. That's really helpful. And I guess just to dovetail on that for my second question. With respect to incentives, I think Curt made the comment that your guidance assumes kind of your conviction that this will be manageable, just kind of thought sort of staying stable, and the theoretic cushion for some of your buyers, but in practice, we have seen the market kind of fluctuate up and down with incentives pretty directionally correlated with rates. So again, maybe just a little more specificity on where your incentives were on closings and orders in the quarter? And maybe what specifically you're assuming in terms of the cadence for the balance of the year on incentives?

Yes. Year-over-year, I would tell you, our incentives are down actually fairly meaningfully. Quarter-over-quarter, they were just modestly up. You're exactly right, Michael, they do travel with interest rates. We're not chasing the lowest rate. When we look at the average rate, I mean, we've been marketing generally about [ 5.49% ] for conventional buyers. Our FHA buyers, we might have had some [ 4.99% ]. We might have had some [ 5.25% ]. That cost moved quarter-to-quarter. But it was about 1/3 of our buyers, as I said, but most of those were -- at least half of those were our first-time buyers. So when I look forward, obviously, it's so dependent on what happens to rate. But when I look at the overall portfolio, I actually don't expect a significant move. If rates drop, I would expect that number to drop fairly meaningfully. But I actually think, given where rates are today, with what we saw in first quarter, we should be in a generally good position.

Our next question comes from Matthew Bouley with Barclays.

Maybe just -- I want to pick up on one of the higher-level points you made, Sheryl, around gross margins. I think I heard you say that over the past 4 years, your underwritten gross margins had exceeded the prior 4 years by 200 basis points. I mean, I think that's a big step up. I'm curious if you could elaborate a little on what's really allowed you to improve your underwriting to that degree? Is it scale? I mean, is there like a market-driven aspect to that, where the land counterparties are also seeing a better return? It seems kind of meaningful as we think about your go-forward gross margin. So curious if you can expand on that a little bit.

Matt, it's Erik. I'll take a quick shot at that and let Sheryl fill in any blanks. But yes, it's something that's noticeable and we track it pretty closely over time. I would say it's a function of a number of things. One of them is related into the type of land we're buying. We've mentioned that we're self-developing a lot more land, albeit off balance sheet in every circumstance we can. And so that self-development, we expect a higher gross margin for. And so we've seen that flow through the system gradually over time. I would also say that our general scale and kind of the operational benefits that we've spoken about have also flowing through the system. And lastly, just the general efficiency in the land market, as we know, there have been more builders kind of gaining market share. And so I think that's created some degree of efficiency generally in the market. So those would be the 3 things I would point to.

And then, Curt, I would assume just our overall balance sheet, paying down the debt, that's also going to pay.

Yes. I mean, as we highlighted, I guess, last year, Matt, we paid down $350 million of debt last year. We paid off a significant amount in '22 as well. So just our overall infrastructure from a debt and interest kind of capacity is down over that period of time as well.

Got it. Yes, absolutely, the cap interest for sure. That makes sense. Okay. And then maybe we'll just stick on that long-term gross margin outlook. I think you said in the release sort of thinking about low to mid-20%. The second part of the margin question would be, what are lot costs doing in the gross margin today? And is there a period where kind of as you deplete that sort of pre-COVID lower-cost land, should we expect that there's kind of a correction in the margin, like a onetime correction, as you see kind of newer cost land flow through? How would that sort of play through into that longer-term margin guide?

Yes, Matt, this is Erik. I'll take a stab at that again and then Curt can fill in some blanks. Yes, to your point, we do still have some pre-COVID land. It's still about 1/3 of our land. And so we'll continue to see that flow through. And it's been very consistent. We've seen that percentage kind of decrease 3%, 4%, 5% per quarter over time. And so we won't see a material falloff or cliff in that regard. So we do still have some. Our average vintage of our land portfolio today is about 3.8 years, and it really hasn't changed that much over the last number of years. So that's not terribly different from history either. So that's kind of the rearview mirror. In terms of today and current, taking a look at surveys and peers, I would say that land is increasing, both raw dirt as well as the development side of the equation, kind of 8%, 9%, 10%. And that really is somewhat normal. And obviously, you need about 2.5%, 3% of ASP lift to cover that over time. And so that seems somewhat balanced in "normal" as we've seen over time. And then lastly, and Curt can elaborate on this, in terms of our flow through the P&L, we are seeing a little bit of increase, but it's not terribly meaningful. It's kind of floating in that 3%, 4% range as we think about the average lot cost coming through the P&L. And then very lastly, I would say we track very closely our expected gross margin and land residual ratio in our underwriting. And I could tell you that our most recent land residual ratio was the same as it has been over the last 9 years on average. And so that, coupled with kind of our gross margin consistency in underwriting gives us confidence that we're going to see kind of that somewhat normalized land appreciation and being able to cover it.

Yes. And Matt, just to kind of double down on that. As Erik alluded to, year-over-year, '23 to '24, we've got assumed in our guide about a mid-single-digit kind of appreciation factor or inflation in our lot cost. So right around that mid-single-digit kind of threshold.

Next question comes from Carl Reichardt with BTIG.

Just following up on those last couple of questions. The increase in margin, at least in part, is a function too of growing your lots per community by, what, 50% over what they used to be, right? So you've got some better fixed cost spread in the stores, I'm assuming. But I'm curious about the price and availability of off-balance sheet capital today. Well, you have talked about self-developing, helping your margin, but self-develop off-balance sheet is going to cost you something. So can you guys elaborate a little bit on what you're seeing in terms of availability of capital and the price of that capital today, whatever off-balance sheet structure you're choosing?

Yes. Carl, it's Erik. Yes, it's a good question. I'll start kind of on the cost side of the equation. When we have joint ventures, which we do have a fair number of, you've got alignment with kind of like-minded builders. And so the cost of that really is nominal, because you're kind of off-balance sheeting that in a separate vehicle. Land banking, to your point, I think, has gotten more expensive. We do still have a decent amount of our lots in land bank at 6,000 or 7,000 lots. And that was a single-digit number. And so that is something that we found great comfort in. We're continuing those negotiations today and think we'll find something that's attractive as an ongoing vehicle with regard to land banking. Seller financing is actually our largest bucket. I could tell you, from an average cost of that capital, it's about 4.5% to 5% across the portfolio. And lastly, it's just general takedown structures. And that, when we've got escalators, they tend to gravitate to about 7%. So you put that all in a blender, and it's actually a pretty attractive cost of capital for the deferral vehicles we've used.

Okay. That's very helpful. I appreciate that. Okay. And then just to go back to the current trends. Can you, Sheryl, drill down a little bit on how Florida is performing across the price points, especially during this particular quarter? And what your outlook is given that, obviously, we've begun to see a bit of an increase in existing home inventory and some whispers of the slowing market there, at least in the existing site. So just curious as to your perspective on that market now.

Yes, I appreciate the question, Carl. I know it's gotten a lot of airtime lately, but we had a very strong quarter in Florida. As we 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.

Our next question comes from Alan Ratner with Zelman & Associates.

First question, I guess just in the context of the improving cycle times and kind of normalization there. I 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 to kind of combat some of those challenges. And are you seeing more of an opportunity to kind of shift back towards more BTO? And just any color you can kind of give in general about margin differential and kind of demand for spec versus build-to-order at this point would be great.

This is Curt, by the way. I'll just kind of tackle that and if 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 us 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. But as we sit here today, I think we like our balanced approach relative to our spec and our to-be-built business.

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 balance comments are spot on. But when I look at the square footage, that's really where we see a difference in what we're putting out in the market. I mean, our specs are generally a few hundred square feet less than our to-be-built buyers. So 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 tune 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 2 different stories.

Got it. That's interesting. Second question just on the Pyatt acquisition. First off, I think it makes kind of sense, obviously, given the cash balance that has been building on the balance sheet. I'm just curious, 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 coast. 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 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?

No, 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 25 homebuilding market, kind of the immediate generation of outlets, and 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 unbelievable respectable historic financial position the company has 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 out like we do with every other market.

And maybe just to double-click on a couple of things, Sheryl. Alan, a few of the other things that we like about 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 the affordability measuring stick 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 on my role is actually relatively low risk here. And so we like that quite a bit. And then to your point, I think in terms of market share, I think that of the top 10 builders here, only 5 of them are public. And so from a competitive standpoint, that just leads us to believe that there's one way here.

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.

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 acquisitions. Is that correct?

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

The next question comes from Ken Zener with Seaport Research Partners.

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?

Let's see. Hold on.

Are you talking about one that we would have acquired asset...

Exactly. I'm just trying to see how that mix has kind of run through your balance sheet recently.

Yes. Over time, it has come down, right? I would say it's come down over the last few years from 1/3 to something like 15%. And so as a result of that, obviously, 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.

Right. And I don't know, could you -- you guys disclosed, I think, about 8,600 inventory units, 8,575 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?

Yes, Ken. I have it right here. It's about [ $1.05 billion ] at the end of Q1.

Our next question comes from Jay McCanless with Wedbush.

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?

Yes. I can talk on that, Jay, a little bit. Just sequentially, I think -- did you say sequentially or...

Yes. Q2 coming down to just approximately 23.5%.

Maybe I'll just talk a little bit about the Q1 beat. We had 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, guide 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. We'll continue to use our incentive loads for entry-level buyers based on the number of specs we're going to sell to close here in Q2.

Okay. All right. That's great. 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 1/3, 1/3, 1/3, like you've always said the company tends to trend in terms of the buyer segmentation?

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 area.

Our next question comes from Alex Barron with Housing Research Center. Alex Barrón: Yes. I just wanted to ask about the ASP and orders, particularly in Central. Was that just mainly more people buying more entry-level homes? Or are you guys building smaller homes or what drove the price decrease there?

Yes. 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.

And to kind of go 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 going to bring down that ASP. Alex Barrón: Got it. Okay. Great. So would you expect the ASP to continue trending lower then?

In Central specifically? Alex Barrón: Yes.

Consistent. What do you think, Curt?

Yes, I would say, Alex, it would be more consistent, because I think the transformation of this has kind of, I guess, gone its course -- has run its course in Houston. So I think it will be pretty consistent from here on out. Alex Barrón: 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?

Yes and yes. It's an asset purchase, but we are retaining the entire team, and I'm very excited about it.

We have no further questions, so I hand the call back to Sheryl Palmer for closing remarks.

Well, thank you very much for joining us for our Q1 call. Wish you the best, and we look forward to talking to you next quarter. Take care.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.