Taylor Morrison's record levels of profitability and operational performance were highlights of a strong fourth quarter and a “historic year,” chairman and CEO Sheryl Palmer shared during the home builder’s latest earnings call.

“Having expanded our market footprint and product position in recent years through our acquisitions and smart organic growth, we serve a broad range of customers in the entry-level, first and second move-up, and resort lifestyle segments across the country,” Palmer told investors.

“We have a dynamic and flexible operating strategy that allows us to best serve each of these segments and respond quickly to market conditions community by community to maximize our performance.”

Taylor Morrison’s flexible strategic approach allowed the company to adjust its pricing strategies, starts volume, and land investments to minimize risk throughout 2022 as interest rates began to rise, according to Palmer.

The firm—ranked No. 5 on the 2022 Builder 100 list—reported home closings revenue declined less than 1% on a year-over-year basis to $2.4 billion in the fiscal fourth quarter, driven by an 11% decrease in home closings and offset by a 12% increase in the average closing price. For the full fiscal year, home closings revenue was $7.9 billion, a 10% increase on a year-over-year basis compared with the 2021 fiscal year.

The average net sales order price for Taylor Morrison decreased 11% to $578,000 in the fourth quarter, driven by an increase in the percentage of spec home sales and entry-level home sales compared with the fourth quarter of 2021. During the quarter, net sales orders declined 42% year over year to 1,810, representing a monthly absorption pace of 1.9 per community.

Cancellations during the quarter increased to 7.3% of beginning backlog from 4.3% in the prior quarter and 2.7% a year ago, although the builder said the cancellation rate was “roughly in line” with its long-term average. As a percentage of gross orders, cancellations increased from 15.6% in the third quarter to 24.4% in the fourth quarter.

However, Palmer noted during the first six weeks of 2023, the gross sales orders have improved “to a more normalized pace” of three per month and the cancellation rate has “trended into the mid-teens, driving our net sales space to 2.5 as compared to 1.9 in the fourth quarter.”

"We are in the early days of the spring selling season and typical seasonality has been anything but typical in recent years, but so far we have been pleased with the positive momentum in sales activity and shopper sentiment since mid-January," said said.

Incentive Offering Shifts
Palmer said Taylor Morrison’s entry-level communities have responded most favorably to mortgage-related incentives and base price adjustments, while move-up and resort lifestyle communities have emphasized reduced lot premiums, design center concessions, and mortgage incentives.

The company recently launched a “Buy Build Secure” program that offers customers a below-market rate for one year extended for to-be-built homes, which “protects the values of our communities” while improving customer confidence in the home purchasing process.

Palmer said the builder is already seeing “some reduction” in incentives, and the company has “been very selective” in where base price adjustments have been offered.

“I don’t think we’re seeing many adjustments, further reductions in base pricing. Reductions in base pricing is the last place we go,” Palmer said.

“Certainly we’ve done that in some markets in a percentage of our communities, but we have some markets that we’ve honestly never reduced base. We’ve really used incentives to lead the way. We continue to believe that if you use smart finance incentives to create the most value for our buyers rather than just simply reducing the base price, it allows us to get additional capture and improve their experience, but it’s a much more cost-effective way for us to stabilize the business.”

Spec Sales and Starts Volume
Palmer said 64% of the builder’s gross sales orders in the fourth quarter were for spec homes, a significant increase from 47% in 2021 and 28% in 2020. Of the builder’s 7,700 homes under production at the end of the fourth quarter, 2,300 were spec homes, executive vice president and chief financial officer Lou Steffens said.

“Given our roughly 60/40 split of spec and to-be-built home sales, we manage our construction start pace by aligning with sales to maintain targeted levels of homes in production, including a healthy level of finished inventory,” Steffens said. “This allows us to meet consumer demand and maintain efficient production schedules for our trade partners, resulting in improved asset turns.”

Steffens said, because of positive momentum in sales and the low number of finished spec homes per community at the end of the fourth quarter, Taylor Morrison anticipates ramping up its start pace in the coming months. The builder expects to deliver between 2,300 and 2,400 homes in the first quarter and between 10,000 and 11,000 homes for the full year.

Land Development Investment Preferred to Land Acquisition
At the end of the 2022 fiscal year, Taylor Morrison owned and controlled approximately 75,000 home building lots comprising 5.9 years of total supply, of which 3.5 years is owned, according to executive vice president and chief corporate operations officer Erik Heuser.

Heuser said the builder is selectively targeting its land-lighter investment approach to balance the cost of capital, risk mitigation, and expected returns.

"As a result of the company’s thorough review and re-underwriting process, Taylor Morrison incurred $25 million of pre-acquisition abandonment charges in the fourth quarter related to land deals that “no longer met our underwriting requirements,” Heuser said.

In 2022, home building and land acquisition and development expenditures totaled $1.6 billion for Taylor Morrison, with approximately 60% allocated to development-related spending.

“We took early action to reduce our land spend as the housing market softened last year and were already in a highly opportunistic stance given our strong lot position,” Heuser said. “As we look ahead to 2023, we expect our full year land spend to be similar to 2022, although the ultimate investment will be dependent on market conditions and opportunities that arise.”

Build-to-Rent Update
During the fourth quarter, Taylor Morrison closed on its first project sale for its build-to-rent (BTR) operations in Phoenix and launched its BTR brand Yardly.

“Unlike traditional multifamily housing, our BTR concept specializes on cottage-style for-rent homes in branded lifestyle-oriented communities developed in single lot parcels,” Hesuer said. “At year-end, we owned 16 rental projects in six markets, 10 of which are under active development, and we have more than 40 prospective land deals under review in our pipeline.”