Demand remained resilient in the third quarter for Taylor Morrison, helping the home builder deliver strong core financial results and margins above historical norms. However, the seventh largest company on the 2023 BUILDER 100 noted that the spike in interest rates in September began to take a toll on buyers.
“We acknowledge that the rapid reacceleration in interest rates in September has once again injected some hesitation into the market and drove a moderation in sales momentum that has continued into October alongside typical seasonal slowing,” Taylor Morrison chairman and CEO Sheryl Palmer said on the home builder’s earnings call.
Despite the headwinds, Taylor Morrison delivered third quarter profits of $171 million, or $1.54 per share, and revenue of $1.6 billion. While both results were lower on a year-over-year basis, profits per share and revenue results surpassed analyst expectations for the third quarter.
“It is important to recognize that this quarter reflected the temporary impact of last year’s slower starts and sales activity and compared to record profitability achieved this time last year,” Palmer said.
In the third quarter and moving forward, Palmer said Taylor Morrison’s diversified consumer strategy equips the company to manage coming headwinds from high rates, affordability challenges, and uncertainty surrounding the Federal Reserve.
“The resiliency of our business is a function of our diversification across buyer groups, emphasis on high-quality community locations, and return-focused investment strategy that has been years in the making,” Palmer said.
Sales Orders and Home Closings
Revenue from home closings represented an 18.7% decrease on a year-over-year basis. Taylor Morrison said the decline was driven by a 14% decrease in home closings to 2,639 and a 6% decrease in average closing price to $611,000.
However, net sales orders climbed 25% year over year to 2,592, driven by a 26% increase in the monthly absorption pace to 2.7 per community. Average net sales order price increased 1% to $623,000. As a percentage of gross orders, cancellations equalled 11.4%, essentially flat sequentially and an improvement from 15.6% during the third quarter of 2022.
Palmer said the “healthy demand” trend in the quarter allowed Taylor Morrison to raise prices in approximately 60% of its communities. The builder also continued to realize benefits of its online presence: 15% of third quarter sales originated from online reservations at a conversion rate of 45%.
By consumer group, move-up buyers comprised 43% of net sales orders, entry-level buyers accounted for 35% of orders, and resort lifestyle buyers accounted for 22% of orders.
At the end of the quarter, Taylor Morrison had a backlog of 6,118 homes with a sales value of $4.1 billion.
Palmer highlighted that the spread of orders and communities for move-up, entry-level, and resort lifestyle buyers allows Taylor Morrison to employ both a spec and to-be-built operating model. In the third quarter, 55% of sales were for spec homes and 45% were for to-be-built homes, similar with trends from recent quarters.
“Our spec production offers cost efficiency, consistency, and repeatability that drives affordable, just-in-time offerings for our entry-level buyers, while our to-be-built businesses generates outsized, high-margin revenue when buyers pay a premium to personalize their home on their desired lot,” Palmer said. “These buyer groups also respond differently to changes in interest rates, allowing us to calibrate our sales strategy to optimize our performance.”
The vast majority of 55-plus buyers for Taylor Morrison pay all cash, at a rate that is three times higher than younger buyers, according to Palmer. The financial flexibility or resort lifestyle and second move-up buyers means both cohorts respond more favorably to closing cost assistance and other concession incentives to minimize upfront cash out of pocket.
Conversely, first-time or first move-up buyers have responded more favorably to Taylor Morrison’s offerings of mortgage rate buydowns or forward commitments. While only 18% of closings in the third quarter utilized a forward commitment in the third quarter, 50% of those forward commitments were first-time home buyers, according to Palmer.
“The benefit of an incentive outweighs a price reduction for buyers at a nearly 4 to 1 [rate] for our typical home,” Palmer said. “While we will also adjust pricing and other incentives as necessary to maintain an appropriate sales pace in each of our communities, this finance-first strategy better protects our gross margins, community values, and consumer confidence, while reinforcing our value versus resale homes in today’s inventory-constrained market.”
Cycle Times and Land Update
Home building land acquisition and development spend totaled $552 million in the third quarter for Taylor Morrison, with development-related investments accounting for 42% of the total spend. Year to date, the home builder has spent approximately $1.3 billion on land acquisition and development and is on track to spend $1.8 billion for the full year, according to executive vice president and chief corporate operations officer Erik Heuser.
“At quarter end, we owned and controlled approximately 74,000 home building lots. This represented 6.1 years of total supply, with 42% of these lots controlled via options and other off-balance sheet structures. Our supply of owned lots is three and a half years,” Heuser said.
Heuser said Taylor Morrison expects to increase land spend in 2024, with a primary focus on providing homes closing for 2027 and beyond.
Executive vice president and chief financial officer Curt VanHyfte says the builder’s cycle time for homes closed “improved meaningfully in the third quarter.” The eight week sequential reduction was driven by a clearing of older backlog homes and an improvement in several trade categories.