Taylor Morrison Home Corporation
Q2 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Good morning, and welcome to Taylor Morrison's Third Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.

[Jason Lenderman:]

Thank you, and welcome everyone to Taylor Morrison's third quarter 2017 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results, along with our guidance for the full year. Then Sheryl will conclude with the outlook for the business, after which we will be happy to take your questions. Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today's news release. 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 Securities and Exchange Commission. And we do not undertake any obligation to update our forward-looking statements. Now, let me turn the call over to Sheryl Palmer.

[Sheryl Palmer:]

Thank you, Jason, and good morning everyone. We appreciate you joining us today as we share our 2017 third quarter results. It was a quarter that we will not soon forget for many reasons. The size, power and impact of Hurricane's Harvey and Irma were on the scale that thankfully the nation has rarely seen. During and in the immediate aftermath of both hurricanes, our focus was squarely on the safety and well-being of our team members and homeowners. The way our organization came together to support one another and the communities made me so very proud. It was remarkable to witness and one of the great examples of compassion for others that I have ever experienced and I am pleased to share that all of our team members managed to pull-through these storms safely. As the saying goes, adversity doesn’t build character, it reveals it. And I can say with confidence that this company's character was pure in spirit and unbelievably kind in practice. As I've shared with the press in recent weeks, less than 1% of our homes under construction at the time the hurricane hit were in any way impacted. In large part, the physical damage was isolated primarily to landscaping in Florida, while our inventory underproduction was left largely unharmed. After we expected we did experience operational disruption as more than 40% of our communities were closed for at least a week and that's before any consideration of secondary disruption in Atlanta and Caroline. In fact, our production was affected for a few weeks on considering the preparation and the days leading up to the hurricane and through the recovery before being fully operational. Also it's worth mentioning that certain communities are operating with reduced trade personnel as the industry shared its labor in the impacted markets to support the rebuilding effort. Before discussing more of the specific impacts from the storms, I'm pleased to highlight some of the results from the quarter despite the unusual events that transpired. Our performance generated $0.45 of EPS and $79 million in EBT driven by our closings for the quarter which were 1,842 or an increase of 6% over the prior-year. As a result of the hurricanes, we currently estimate that 130 closings were pushed out of the third quarter. This was a temporary shift in our production schedule and we do plan to absorb the ripple effect of these delayed closings beginning in the fourth quarter of 2017 and into early 2018. Dave will discuss some of the details associated with impact from these delayed closings in his financial review. In reality, our industry has faced with all types of uncontrollable event and disruption from economic and housing market fluctuations, mortgage regulatory changes, natural disasters just to name a few. At Taylor Morrison we've aimed to design our platform to be nimble and responsive to absorb these occurrences while continuing to deliver on our commitments to our customers, employees and shareholders. One example of our continued focus on our production cadence by scheduling and planning activity in a way that promotes a more efficient delivery model across the organization. As it turns out, pulling sales into the front half of 2017 not only helps to create a better production cadence and what we all know is a very constrained labor environment, but we believe it also put us in a better position to accommodate the disruption these markets experienced with the hurricanes. As each of the cities start to rebuilding effort, we expanded our focus from our teams and communities to the market at large in an effort to determine the broader effects of the storms on the housing market. From a demand perspective, so far the impacts in market have proven to be generally resilient. In fact as a response to demand, we opened our doors for business much sooner than we originally thought possible in the immediate aftermath of the storms. While we just shared our estimated closings impact from the storms, the reality is that it won't fully play-out for months as the markets rebuild the devastated areas. We anticipate additional pressures in the fourth quarter as labor become significantly more constrained specifically in Houston with year-end pressures on heightened rebuilding efforts. Still our initial assessment has provided us with enough confidence to leave our annual closings guidance unchanged albeit with an expectation that we will land on the lower end of the guided range. And as you recall, we increased that range in last quarter's call before receiving any indication of the storms. Over the next many weeks, we will determine any resultant land development delays and the impact of community openings on our 2018 guidance. We finished the quarter with 1,761 sales and as we discussed in our last call we were comparing against the growth rate from the same period last year of about 20%. From a year-to-date perspective, we have sold 6,562 homes which represent an increase of more than 13% compared to the same period at the prior-year. This is our highest sales growth rate through three quarters since 2013. Our absorption pace for the quarter was 2.0 which was down just slightly relative to last year. This is truly remarkable knowing we had four markets and five divisions directly impacted by the hurricanes with sales offices closed and in some instances inaccessible for weeks. If we exclude the communities affected, our absorption pace for the quarter would have been at least 2.3% or 10% increase over the last year. Our year-to-date absorption pace without making any adjustment is 2.5 and is almost 20% higher than the prior year. As we look at the sales environment moving forward, we feel strongly that any short-term impact felt on the demand side for the Houston and Florida markets was a simple push in timing and not permanently suppressed. This is based on the feedback we are hearing from our employees, our trade partners and more importantly our customers. Our average community count during the quarter was 293. This number continues to be a function of solid demand and our strategy to pull sales into the earlier parts of the year. Something I mentioned last quarter is still pertinent today, our ability to balance price versus pace. This is evaded as our discounts are still being used in moderation which were down sequentially and are not being relied upon as a significant part of our selling strategy. In addition, I appreciate the teams work with spec inventory with less than one completed spec per community at the end of the third quarter. Similar to last year, we have begun ramping up our inventory production in anticipation of another strong spring selling season. Our average sales price of homes closed was 481,000 for the quarter and represents an increase of 3% compared to the same quarter last year. Overall I'm extremely proud of how we performed for the quarter given the unprecedented disruptions faced. And while we are proud of our results, they fail in comparison to the countless examples of unity and compassions that I witnessed across our organization this quarter. As always, I'm confident Taylor Morrison will be able to navigate the ebbs and flows of our industry while being driven to put the company in a position to deliver the year and set us up for a strong 2018. With that, I will turn the call over to Dave for the financial review.

[Dave Cone:]

Thanks Sheryl, and hello everyone. I like to quickly echo Sheryl's sentiments about the teams unity and big heartedness in a time where parts of our nation were facing true devastation. It was a remarkable thing to see our team members come together to help each other and the broader communities. With that I'd like to share with you our Q3 results and expectations for the full year. For the third quarter, net income was $54.3 million and earnings per share was $0.45. Total revenues were $908 million for the quarter including homebuilding revenues of over $886 million. As Sheryl mentioned, we estimate 130 closings were pushed into the fourth quarter and early 2018. We estimate these delayed closings equated to about $0.04 in EPS. Our business was very fortunate, a combination of well-planned communities and the chosen path of the hurricanes we experienced minimal expenses related to the storms to-date. There may be more cost associated with the storms and we're working through that with an expectation most of it will be recovered through insurance. Home closings gross margin inclusive of capitalized interest was 18.6% representing a sequential improvement from the second quarter. Margins would've been roughly 10 basis points higher if not for the movement of closings given that Houston and Florida are amongst our highest margin businesses. On a go-forward basis, we do anticipate some lingering cost increases from the hurricanes on lumber, drywall and labor which I have incorporated in our margin guidance. Our expectation remains that are full year home closings margin will be accretive year-over-year. On a gross margin basis, we came in at 18.9% which was down year-over-year primarily driven by higher margin land sales that happened in the third quarter of 2016. As you may recall, we sold these long-term strategic assets as the tax holding period expired allowing for favorable monetization. Moving to financial services, I first want to acknowledge Taylor Morrison Home Funding's determination as Hurricane Irma impacted their home base in Orlando. In preparation for the storm, our mortgage management team developed an action plan that deployed people across the organization and away from the storm in order to ensure our mortgage business could continue supporting our entire operation in those few days following the hurricane. From a financial perspective, we generated nearly 17.5 million of financial services revenue in the quarter. Representing growth of more than 26% over the prior-year, gross profit was about $5.4 million with a margin rate slightly above 30%. Our capture rate for the quarter came in at 76%. We continue to be committed to driving our capture rate higher because of the many benefits it affords us such as increased visibility to our backlog, confidence in setting our expectations, and the outsized profitability it delivers when looking at this line of business relative to other players in the space. Our mortgage teams consistently deliver which strengthens our overall business. SG&A as a percentage of home closings revenue came in at 10.7% or 20 basis points better than the same quarter last year. Even though we leveraged relative to last year, this line was negatively impacted by the hurricanes through closings being pushed out of the quarter. In total we think those delayed closings equated to just over 20 basis points of deleverage and as SG&A was adjusted to reflect the impact, our rate would have been 10.5% or 40 basis points better than the third quarter of 2016. We've spoken about the investments we made back into the business over the last 12 to 18 months in people, processes and tools and we continue to see benefits from those decisions. We remain focused on prudent cost management in all aspects of our business to produce the optimal operational balance and generate the most value for stakeholders. Our expectation continues to be that we will drive year-over-year leverage in 2017 despite the hurricanes, as well as driving leverage in 2018 and beyond. Our earnings before income taxes were $79 million in the third quarter. Income taxes totaled about $24 million for the quarter representing an effective rate of 30.7% which is lower than the third quarter of 2016. The lower rate includes timing of certain deductions, as well as energy credits recognized during the quarter but related to earlier years. We've now maximized our ability to recover energy credits from the prior year's which will result in a more normalized tax rate in the fourth quarter. For the quarter, we spent roughly $240 million in land purchases and development with the majority of our land acquisition activity happening in California, Charlotte and Dallas. At the end of the quarter we had approximately 40,000 lots owned and controlled. The percentage of lots owned was about 68% with the remainder under control. It's important to remember that just two years ago we owned about 76% of our land. This movement has further assisted in the strengthening of our balance sheet. On average, our land bank had approximately five years of supply at quarter end based on a trailing 12 months of closings. Our strategy of core only assets continues to be the focus throughout the organization and it generates high levels of confidence in the valuation process from market-to-market which helps us determine capital allocation. At quarter end, we had 4,359 units in our backlog with a sales value of over 2.1 billion. In addition, we had 1,344 total specs which includes 249 finished specs. On a per community basis, we had under five total specs and less than one finished spec per community. We continue to deploy spec strategically within communities where quick move and demand exists. We ended the quarter with $265 million of cash and our net debt to capital ratio was 33.1%. We do not have any outstanding borrowings on our $500 million unsecured revolving credit facility and we don't expect to use it for the remainder of the year. Our balance sheet continues to be a point of significant strength and a tool that provides flexibility when developing our near-term and long-term strategies. As I said before, it is the foundation of our financial health and a true indicator of our bright future. The strength of our balance sheet is driven by our improvement in inventory management. This feeds directly into our focus on enhancing returns. Through specific actions such as driving pace earlier in the year and greater efficiency with our spec inventory, we have improved overall performance. For the third quarter, our asset turns improved 11% when compared to the same quarter last year which represents the seventh quarter of year-over-year improvement. The goal is simple, drive consistent year-over-year accretion to ROE. We fully expect that to happen in 2017 and beyond. We recently announced an extension of our stock repurchase program through December 31, 2018. In addition, the overall programs purchasing capacity increased to 100 million. This program has been and will continue to be a complementary piece to our broader capital allocation strategy. We'll be opportunistic in our execution within this program and later that evaluation and all future strategic decisions around investment. In the third quarter, we purchased just under 200,000 shares. We believe in the role that stock repurchases play in the market and how it illustrates our desire to keep our options open with capital deployment as a way to maximize shareholder returns. Despite the challenges we faced, we are focused on delivering within the ranges of our guidance. So let me wrap up by sharing our guidance. For fiscal 2017, we anticipate closings to be on the lower end of our range at 78.50. Our average community count will be about 300 and we continue to expect our 2017 average monthly absorption pace to be at least 2.3 per outlet. Our GAAP home closings margin guidance including capitalized interest is expected to be accretive to 2016 and in the mid 18% range. We anticipate increased costs in Houston and Florida but we hope to manage through this with opportunities in other markets. Our SG&A as a percentage of homebuilding revenue is expected to be in the low to mid 10% range. JV income is expected to be about $10 million and we anticipate an effective tax rate between 34% and 35%. Land and development spend is expected to be approximately $1 billion for the year. Thanks. And I will now turn the call back over to Sheryl.

[Sheryl Palmer:]

Thank you, Dave. From a macroeconomic standpoint, most indicators remains stable to encouraging. Consumer confidence is still healthy with short term perspective continuing to trend positively. This speaks to our current economic conditions, the overall business environment and increasing stability around jobs. Employments levels are good with the unemployment rate well below 5% and personal balance sheet continues to strengthen with real estate values increasing by more than 10% nationally from the same period last year. Specific to our industry, we still believe we are in advantageous part of this cycle and are excited about the potential moving forward. Supply levels are still low in both and new existing homes and that has created a favorable demand proposition from which we've been operating for some time now. The supply of existing homes has been relatively flat year-over-year, and the supply of new home has seen just a moderate uptick as of late. We think that uptick is a result of homebuilders trying to fill the void left by low level in existing homes. The current landing environment continues to provide customers with attractive terms to finance their individual home purchases. Rates are still hovering in the 4% range for conventional 30 year mortgages which is well below historical averages. Dave mentioned our mortgage operations in his remarks and I’ll take a minute to touch on them as well. As I've mentioned before, they are a critical part of our connection to the customer. TMHF provides tremendous insight based on their commitment to align financial services from the beginning of the buying process and throughout the construction of our homes to deliver the best product and experience to our home buyers. As we look at customers in our pipeline we continue to see a very strong borrower profile with an average credit score in the mid-740s. Our average borrower had an LTV of 74% with a debt to income ratio of 36% on a loan amount of about 340,000. I also think it's worth mentioning that Taylor Morrison Home Funding recently introduced a complimentary one-year membership of LifeLock Identity Theft Protection services to all of our Taylor Morrison and Darling home customers who purchase their home before the end of the year in close with financing originated by Taylor Morrison Home Funding. We have found that today's customer appreciate the added level of comfort and protection of their personal information and this program further enhances the importance we place on our quality customer service experience. As I did last quarter, I want to update you on the latest installment of our consumer survey results and the learnings we've been able to glean. We recently published findings that suggest our customers are becoming more and more willing to sacrifice indoor space for outdoor space. In fact more than 50% of the respondent said they would be willing to do just that. The survey also found the most important exterior feature of our home is distance from neighboring homes. This notion was represented in about 50% of respondents and with almost equally distributed between Millennials and non-Millennials. This braving room is key and its of course higher than any other pivotal elements such as siding, driveway styles, exterior, paint color and roofing. At a time when land prices are escalating and local approvals can force smaller lot sizes, our company is creatively maximizing limited areas especially in urban locations making the entire living experience that much more enjoyable. Interest in more outdoor space is stronger among women than it is than it is men, with roughly two in three preferring less home square footage and larger margin yards compared to a little more than half of men. Taylor Morrison shopper surveys also revealed an increasing desire for enjoying the backyard. When asked that home shoppers would spend an extra 10,000 to 15,000 on in their new homes, outdoor living items topped the list over features such as upgraded cabinets and kitchen islands. These little pieces of knowledge adds the mosaic of understandingly we already have related to our customers knowing they are evolving need and want and more importantly incorporating our consumers feedback timely into our product offering is critical for us to remain one of the industry leaders in customer experience. Let me close by saying one last time, how very proud I am of our Taylor Morrison team and the resilience they've showed this past few months. The hurricanes are just the latest in a series of disruptions we've experienced since the recovery began and yet the team still finds a way to deliver on its promise to our customers, to our shareholders and to each other. We will continue to have the courage not to overreact and to stay true to our strategy all in concerted effort to drive value for all of our stakeholders. With that I'd like to open the call to questions. Operator, please provide our participants with instructions.

[Operator:]

[Operator Instructions] Our first question comes from Stephen East with Wells Fargo.

[Paul Przybylski:]

This is actually Paul Przybylski on for Stephen. Sheryl I guess first off, could we get your thoughts on the recent Lennar/CalAtlantic combination from a strategic and competitive perspective. And then does that alter your view on M&A going forward?

[Sheryl Palmer:]

I don’t know that anything has changed from prior conversations that we've had regarding just M&A. When we look at M&A as we've always said it's really about the best use of cash and as I have said I think Dave and I talked about it on the road a lot along with our senior management and board, we are always reviewing opportunities around acquisitions, value around acquisitions being acquired, who should we acquire. I think that’s kind of our fiduciary. Looking at new markets and should we go wider depth in market. When I look at the M&A in total I don't think anything has changed. When I look at this particular M&A that was just announced, I probably have a couple thoughts. I think it told us very clear that there was a strong vote of confidence in the cycle and we’ve talked about for some time our feelings about longevity of this cycle and that we have some runway ahead and I saw this as kind of a very strong message. I believe the macro fundamentals, how the consumer’s feelings to jobs income growth to the building on the production deficit to generational tailwinds provide pretty strong catalysts for this opportunity. I think the other thing it demonstrate is the importance of scale and I think scale is often debated does it really matter, what matters most local, regional, national I think they all provide something different but they matter. If you think about it, the top 25 builders represent about 45% of the new home market and the other 55% is divided by hundreds of homebuilders. If you think about the market cap of our industry and that Home Depot on its own is something like three times greater what is that really do from an efficiency standpoint. So all in all you put all that in the blender and not to even mention the trade environment, I think the top 10 builders really have an advantage to get consistency and predictability with scale and I think this kind of once again underscores the importance of that.

[Paul Przybylski:]

And switching gears a little bit, some of your competitors have recently mentioned and other saying and some price resistance - new opportunities, I was wondering if you're seeing that and if so are there any markets where that’s become more prominent?

[Sheryl Palmer:]

When I look at the quarter, we continue to rate prices and probably nearly half of our community.

[Paul Przybylski:]

About 40%.

[Sheryl Palmer:]

Okay, so almost half excuse me, very similar to last quarter I won’t tell you there is anything meaningful market-by-market you always have a certain asset or community that's in close out that maybe you get a little bit more resistance. Generally it’s going to around your offering. We're not seeing it particularly just across the market. If I would tell you there is a market that I think the higher price point you’re seeing just resistance in general, more as a result of the amount of inventory that's building up at the higher price point that would be Dallas. And we've been talking about that for the last couple quarters. So there is a little more price sensitivity and a little bit more inventory at that over 500,000 price point than we've seen. I think the last quarter we talked about the Bay and that there had been some price hesitation but that would be like over $3 million price point so not something we really play in there.

[Operator:]

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

[Alan Ratner:]

Congrats on a good quarter given all the challenges you guys faced, glad to hear that your team members all made it through the difficult period there. So my question is kind of an elaboration on Paul's first question, I think it feels like last few months we've heard builders talking about various strategy shifts or areas of focus I guess at this point in the cycle and you touched on the scale side and M&A. But we've heard others talking about shifting towards more asset light, we've heard others talking about a shift in price points may be more entry-level, maybe more active adult. We've also heard some increased chatter about investments in technology and automation and maybe changing the way we go about building homes in this country which is pretty much been the same for the last century. So I was just curious maybe to take a step back Sheryl if you could kind of give us a little bit of insight where are you spending your time when you think about the multiyear outlook for Taylor Morrison for the industry maybe something that we as investors and analysts don't necessarily see in the numbers but curious where you're focusing a lot of your attention and efforts these days.

[Sheryl Palmer:]

I think there is a lot of questions packed in there, so hopefully I’ll get them all. Once again I think from a strategic standpoint what we've articulated over the last 12 to 24 months around our operational cadence to make sure we got that where we need and to prepare the company for additional growth at the right time has been a great zeal of focus. We’re not looking to grow for the sake of it. I believe that scale enhances the business and generates financial return that are productive for our shareholders. There is a number of strategies that are deployed to get us there and you mentioned a couple of them. When I look at our consumer kind of segmentation and the third of our business being to that first time buyer, and you can slice that first time buyer of a couple different ways that's taken a great deal of focus of the business and we think it’s been well suited. That third in that first second time move up and that third in the active adult is really how we like to see the business play out over the next few years. Once again that could move a few percentage points one way or the other, but when I look at just a generational tailwinds we have coming to the sector, I'm actually very excited strategically about how our land portfolio is lined up to address the needs of the buying consumers. When we look at the land portfolio specifically to your point on asset light, we've moved our land holdings from about a 10 year supply of less than five years ago to half of that today. We think that’s about right. When we think about what makes sense in the full cycle, I think we’ve said somewhere around five to seven years what I’m most pleased on with the business right now is really the way we’re using our balance sheet and going a little lighter getting little bit more seller control or carry back and as Dave talked about in his prepared remarks moving our controlled number fairly substantially. And then lastly when I think about another focus of the business you kind of get the operational piece, you have to have your land platform, it really is the overall consumer experience. All the things that you talked about Alan and all the things that we’re hearing if its technology within the homes, if its home design, if its marketing it's really I put that all in the overall customer experience. And I think the bar in our industry has been too low. I think the opportunity to make sure that our experience with that customer from the time they first see us and drive by a sign or that first web experience they have all the way to the post closing is an area that the organization is spending a great deal of time on but that's something we'll share a little bit more in the coming quarters with the street on.

[Operator:]

Our next question comes from Mike Dahl with Barclays.

[Mike Dahl:]

Wanted to ask around some of the sales activity and Sheryl I think you mentioned that outside of the storm impacted regions absorptions were up 10%. So I'm curious just as you've got in through the month of October if you could give us a little color on how the storm affected regions Florida and Houston have potentially rebounded from an absorption pace because I think that suggest ballpark that they were down 20ish percent 20%, 25% in the third quarter. So anything you can give us on how those markets have evolved over the past month or six weeks would be great?

[Sheryl Palmer:]

You bet Mike given my best, realized the month ended a few hours ago. So what I will tell you is for October and I haven’t been able to - not that I would but exactly hard at the numbers but we saw a pace of about 2.1 for October which was flat year-over-year which candidly I am quite pleased on especially with all the things we've been sharing with you around our pull forward. So when I look at the sales and throughout the third quarter, at that ’20, I couldn’t be more delighted. I think we were set up to do a very nice quarter. We came much better than I would've ever expected with the sales disruption. And once again in recognizing the sales pull forward and the amount closeout communities that we had in inventory. You know I think I said in my prepared remarks that our pace is at 20% year-to-date and that’s even with the effect, Michael of the closed sites during the hurricanes. And primarily in Houston, Florida we were, it was difficult to access the site. And we were also probably close for maybe a weekend in Atlanta, Austin and Charlotte. I think we have seen a return in all of those as we've moved into the first few weeks of October. I think lastly I had mentioned that I think the street estimates without consideration of the storms had us at two one for Q3 and we came in at 2. So like I said I'm delighted. But maybe more specifically to your point, let me take the opportunity to do quick tour around the market. Where we were really down the greatest in the quarter and on maybe as well in October like I said, I haven't been able to get through the detail of the October sales yet, was in the West. And now was really driven by reduced community count we were down 16 communities in the quarter and that was really around us selling out much sooner than we had planned because our pace was at 22% for the year in the West for the first three quarters. Phoenix and the Bay, they operated at a pace nearly of 5 year-to-date until once again that was really the driver in the West and that was also as we watched our ASP move up and thus those markets have similar over 400 and 900 in Phoenix and the Bay. I think also in the West if I would rounded it out, Sac was very stable. I think it was slightly impacted by community mix and Southern Cal community count was the other place we were down because of the pull forward and some opening delays. In Central you know I'm amazed that our year-to-date, our pace is stronger than last year with the impact that we saw in Texas. And for the quarter it was negligibly down. I think which underscores the strength of the markets that we’ve seen in Texas since kind of the energy recovery. I want to spend much more time in Texas, I think I made, I said this in my prepared remarks with the exception of maybe Austin, where I would tell you, it remains very strong on both paces and units meaningfully year-over-year. Lastly to round out the country for you, total, the East was flat year-over-year even with the impacts of Irma in Florida and this slight impact in Carolinas and Georgia. So all-in-all once we get through the October numbers we will be able to see how it cuts but given the 2.18 pace in October, I just can't be more pleased.

[Mike Dahl:]

I guess some of those, some of that dovetails into the next question which is really just, you know if you think some of the accelerated closeouts and some kind of gaping in certain markets plus potentially some of the delays you're experiencing on the ground in Florida or in Houston. I know you kept the community count guide at about 300, but just if we could get a bit of a forward look like as you look out over the next two or three quarters. How should we expect the community count to trend?

[Dave Cone:]

So maybe I’ll just pick up with the fourth quarter and for the year. We are expecting to be somewhere around an average of 300 but in all honesty we’ve got some work to do obviously in the hurricane impacted markets, there were some delay there. So we are fighting to get them open and as you know we routinely deal with delays around. You know municipalities, sometimes from the development perspective. You know as we move into next year, we still have some work to do. Again we are kind of in the process of rolling our plans now. But I think you are going to see somewhat of a stable, probably community count as we move into Q1 to Q2 relative to Q4, against more work to do, more so in Florida and Houston to see if we’re going to get any kind of incremental delays but we will get more to you here in our next call.

[Operator:]

Our next question comes from Michael Rehault with JPMorgan.

[Michael Rehault:]

Good morning and glad to hear that everyone is safe and the performance around the challenging weather. First question I had was on our gross margin, you were good enough to give some very good detail around, what you estimated was the impact in 3Q from the delayed closings in terms of gross margins and SG&A, in addition to the closing themselves. You also kind of highlighted that you do expect labor, some labor pressure, U.S. labor and materials in some of the key affected areas. You reiterated your full-year guidance which is obviously very encouraging. I was hoping to get a little more detail on 4Q itself because it can still be a little bit of a range when you talk about mid-18% for the full year. There is a little bit of playing room for 4Q. I was curious, if you expect 4Q gross margins to be down sequentially? A touch perhaps and if you have any sense of just what the higher labor material impact might be on 18, if you just isolated that impact?

[Dave Cone:]

I’ll hit the margin for Q4 first. So you know we have good visibility in the backlog for the Q4 margins but as we've been talking about we do anticipate some additional cost pressures from the hurricanes. It’s a little bit different outcome between the two markets. So you know Florida, they've seen some nice recovery, not a lot of impact from a trade perspective. Still a bit stress given some loss to reduce weeks of productivity that we had there. But really the cost pressure that we've seen is more on replacement landscaping, so not as much on actual construction site. As the norm in this industry we’re going to have to deal with the yearend push to get some homes closed there. But we anticipate probably a quicker recovery here maybe than compared to Houston. And Houston, the cruise, they are not at full capacity and they are definitely stressed more so given the amount of work that they have ahead of them. We don't think we have seen the insurance companies or FEMA fully engaged the trade yet. So we’re probably still little bit cautious there from a cost perspective but most of that pressure is coming through the labor side and in Houston, really in drywall and some of the finishing trades. So we’re going to pay more to get the homes built in Houston versus kind of the pre-hurricane time. But we are managing through that and we believe we've captured the increased cost and our margin guidance. Some of it is going to come down to, Michael, just around the geographic penetration to how many homes we can get closed in Houston. That's one of our highest margin markets that we have even with the impacts of the hurricanes there. So as we move forward I think we are going to be somewhere near what our rate has been here, probably year-to-date we are about 18 for Q2 with 18.6, I would put us again kind of somewhere probably in that range. And then as we look to ’18 again there will be more work to do there. The question is how long will these labor pressure stay? We are going to have to work through this recovery aspect of it and then we’ll see some reduction in the cost going forward. But we will give you guys some more detail on the next call.

[Sheryl Palmer:]

I think the real interesting thing, I am not as you at ‘18 Michael, is all the programs that we've been working and you heard Dave articulate once again in his prepared remarks. We see a of lot of benefits and we are hoping to build, to pull those through compared to absorbing some of these cost increases given the constrained labor environment.

[Michael Rehault:]

I guess secondly also kind of little bit focus on 4Q, you know the community count guidance of about 300 average communities for the full year would point to a pretty strong step up in 4Q and understand granted, there is still a lot of moving pieces and you kind of alluded to some of the challenges there but if you just hit 300 on the nose it would point to a average community count for 4Q of around little over 310 311 something like that which seems pretty challenging. So I just want to make sure that I’m thinking about that correctly as well I think if you had some level of improvement maybe closer to 300 it would be closer to like 295 or so is it still about or around 300 I just don’t want to get overly aggressive giving some of the challenges and obviously there a lot of different potential delays with community openings as we all know?

[Dave Cone:]

You’re thinking about it the right way and like I said we were saying about 300 and it’s not going more than 300 just say it a different way just given the kind of amount of work that we have to do. So those communities are coming the question really is can you get and in place before 12/31 if not they’re going to come in Q1.

[Sheryl Palmer:]

So I could be a couple units on a couple communities probably not either side of them and as Dave said that’s the highest but I think the other thing that we really don't have full visibility as we get into the fourth quarter is two areas one you have a lot of communities that are moving into close out mode and the question will be will those get close out before the end of the year and then as you said Michael we have a lot better coming on in Q4 and will head November, December. And then the impact we haven’t talked much about it one of the other areas of focus that we’re going to assume we’re going to get these things open is the impact of utility on getting new communities energize in California primarily given the wildfires so that’s kind of where we’re hedging our battle notch so if get those or not.

[Operator:]

Our next question comes from Nishu Sood with Deutsche Bank.

[Nishu Sood:]

I wanted to dig into just the closing impact a little bit the kind of two numbers I am thinking about is 130 closings that were affected in the 3Q and your guidance so you’re going to come in closer to the 78.50 at the end of the range. If I look at those two numbers together the 3Q impact to loan probably would have pushed us closer to the bottom of your yearly closings guidance range. So how should I think about 4Q one thought is that the closing delay, the impact might have been even greater in 4Q than in 3Q or alternatively perhaps 4Q is when you begin to make up ground given some of the shift from 3Q to 4Q helped to offset as well. So how should I think about that what is the number of closing that would be pushed from 4Q into 2018 on a net basis and our things is 4Q is going to be quarter of making things up or is it still going to be a quarter where it delays are built?

[Dave Cone:]

It's going to be a little bit of both Nishu it's a good question so we we’re seeing the low end of our guidance mainly due to the uncertainty around the trade labor primarily in Houston and then of course trying to make up some of that lost production in Florida as well. So the missed closings from Q3 will likely come through in Q4 but some portion of the deliveries originally scheduled for Q4 those are likely going to slide into next year. So there's definitely a bit of a cascading effect we have the homes and backlog it's just a matter of getting them built. So from our perspective we’re focused on delivering the quality homes and hitting that low end of our range we expect to be there.

[Sheryl Palmer:]

And I don’t want to be redundant Nishu but I do want to underscore again that even though today point the greatest impact for Houston and Florida and these cushion production. We don't fully appreciate how the utility will get caught up in Northern California. And we have a number of multifamily building that will be delivering in December that we’re assuming will get energized. I would tell you some will some won’t and so that’s why there is still some legal room right now.

[Dave Cone:]

Maybe the last thing I would add and we’re watching this but today we haven't seen any real impacts in the surrounding markets. But we are hearing some noise around trades heading to Houston as the wage opportunity is pretty significant. So that might have some impact but again like I said we’re watching this closely.

[Nishu Sood:]

And following up Sheryl your comments about October were very helpful the 2.1 absorption pace flat year-over-year. I wanted to dig into that a little bit more how does that compare let's say versus what you were you were kind of forecasting or budgeting based on what you've seen early in the year and anecdotally if you think about the 40% of your community that were affected does that 2.1 pace does that represent things being fully back to kind of normal against budget et cetera or you know is there still some catch up maybe also just along those lines like any kind of anecdotal commentary you have about like how people are reacting in the wake of these events would be helpful please?

[Sheryl Palmer:]

So let me start with last one first Nishu how people are reacting as I think we been surprised how quickly it got back business I mean we were opening communities direct on contract before we really had access to site in Houston. So I think the demand has been there and let me start with Houston. We were quite surprised on how quickly we were getting calls as we couldn’t get communities open and we closed a solid seven days and that was a minimum. And I think every we had seen that pickup and we have been remarkably delighted. Florida the state acted a little different I mean we definitely had more of an impact on access to the site and neighbors and Feds in Tampa, Naples - but now that I look at the state in totally maybe with a couple exceptions in Naples I think it’s kind of back to norm. The only thing that probably be worth calling out Nishu would be may be the winter visitors are took a little bit longer to come into the market that we would normally start seeing in October. And I think they start coming back just a little bit later than we would have expected but all in all I just couldn't be more pleased. When I look at the 21 and I compare that to budget expectations and once again this is more of a global comment as I haven't been able to dig into the detail yet. I’d say that’s pretty much in line if I go back to our budget earlier in the year we might have had an expectation closer 22 but when we look at what we did from pull forward and just our inventory the impact of kind of close out communities its actually right in line or on the high side of our expectation to get us to what we shared with you at least a 23 annualized payment.

[Operator:]

Our next question comes from Will Randow with Citigroup.

[Will Randow:]

Good morning and congrats on having getting those challenges for holding guidance. As you guys mentioned improving the home buying experience and I was hoping you could elaborate on that as well as potentially quantified the financial benefits through the traffic conversion reducing external brokerage commissions as a percentage of closings. And also could you mention the underlying driver for the LifeLock promotion was it to take advantage of what's happened with potentially another company out there or any detail will be great?

[Sheryl Palmer:]

So let me start with Life - let me go and reverse with you. LifeLock, the reason we did that Will is as some of the cyber security breaches happened to the consumers and certainly just about every consumer in the U.S. was impacted, we saw a hesitancy and the kind of prequalification process and as to be expected people wonder God when I give out myself a security number and I go through that process what happens, and we just found to be a really nice way for them to understand how important that process is to us and how seriously we take their personal credit information. And it's been very, very well received at the sales floor. With respect to the customer overall experience in synergies and marketing, like I said before well I think it’s everything - it’s the marketing dollars obviously the efficiency comes through increased referrals reducing your broker commissions, having a more efficient national advertising platform where it makes sense and one of the things I'm quite pleased with is when I look at our activity on the website and our conversion one of the stats I probably shared in the past and it continues for us as we convert Millennials at a rate 3 to 1 of all other consumer groups. So the relationship that we’re building with those Millennials, with the introduction to Taylor Morrison on the Internet through mobile app is giving them the ability to do the diligent they need and come in as more qualified buyer so that customer relationship is the relationship they are marketing and most importantly it's that relationship once they come in to our communities and through the transaction and post the transaction because the best way to leverage our marketing dollars is to increase our referrals. And that's through a like I said an outsized customer experience. And once again when I look at the way how important the home buying experience is for consumer 95% of the time it most significant purchase in their lifetime. They deserve and outsized experience and so that’s how we’re quite focused on.

[Will Randow:]

And you guys have been inquisitive in the past rather considering your net debt to cap leverages is 32% of your room balance sheet capacity to be inquisitive. How you're thinking about the deal pipeline you're saying the day versus what it look like last quarter and the year ago. And similarly you guys did put out the incremental stock repurchase plan should we assume that if nothing makes sense the best use of funds is to buy your own stock.

[Sheryl Palmer:]

So maybe I’ll start with the M&A and then Dave can wrap on the stock repurchase. We've talked about for a number of quarters the importance of getting our balance sheet in the right condition having to drive harder to do what’s right for the business. As I said earlier well we are very inquisitive we look at a number of opportunities we target what are the things that we feel are void in our platform, are there opportunities in our existing market we should be looking at new markets. Having said all of that, we’re not going to do deals just for the sake of it. We’re going to make sure they’re enhancing accretive to the overall business. And we do have the balance sheet to support that with the right opportunity.

[Dave Cone:]

And then on the share repurchase side, Will we’re very focused on driving free cash flow but first and foremost we’re focused on growing a profitable business so from there becomes just a balance capital allocation strategy based on current market conditions we’re going to be opportunistic after considering the growth opportunities in our debt leverage. So we’re going to continue to assess it week by week based on our deal flow and what we see coming ahead of us and where the stock price is trading. And like we've done in the past, we’ll look for times if there are dips will be opportunistic and try to reverse some stock. Overall though the strategy is just to deploy capital what we believe it drives the best long-term returns for the shareholders.

[Operator:]

Our next question comes from Carl Reichardt with BTIG.

[Carl Reichardt:]

I wanted to ask about over the next year or two your community mix from a regional perspective. The West obviously shifted down year-on-year quite a bit. As you look out a year or two looking at the land purchases you made investments you made, how do you expect that regional mix to move?

[Sheryl Palmer:]

Yes, I don’t know that we’re prepared to give you a whole lot of detail as I look two or three years out. I would tell you that we’ve been very active in our land acquisition across the business but I don't have community counts out to 19 or 20 as I sit here today for you.

[Dave Cone:]

What we can tell you if you look at what we've invested here and the markets that we've acquired over the last two years, we’re very focused on increasing those positions and creating scale. So some of our dollars probably flowed there slightly more disproportionally to the rest of the organization, but as Sheryl said we'll need a little more time to kind of layout the next couple years and we can give you guys some color about that in the Q4 call.

[Sheryl Palmer:]

And maybe the last thing if I want to talk in kind of present time for you, if I look at our year-to-date land spend and the lots approved, we've actually approved more in the first three quarters to 2017 than we did in all of 2016 and that increase was really across the business.

[Carl Reichardt:]

And then just going back to the fires in California, you mentioned trade pulls are potential for that in Texas. Are you seeing or hearing about trade pull from Sacramento or the Bay Area recognizing your kind of in East Sacramento, but any trade pull up to Napa, Sonoma?

[Sheryl Palmer:]

I haven’t heard a great deal yet but I think it's early days. I mean that’s very condition that’s very different condition then what we would have experienced in Houston and Florida because obviously without stating the obvious the homes that were burned down its going to take a long time before we see those get redesigned and rebuilt. So I don’t think we should expect it to see a real trade impact the real exception here is utilities.

[Operator:]

Our last question comes from Jack Micenko with SIG.

[Jack Micenko:]

Sheryl it seems like you've weaved ROE into the prepared commentary the last couple of quarters and I guess the two-part question, have you set a internal maybe goal for what you could may produce in coming years. And then you know understanding it's both and R and E discussion. You brought your land, booked down your pace is running pretty good. What are the levers to move that number higher as we look in 2018 and 2019 that you see today?

[Dave Cone:]

So yes, we are definitely focused on ROE and I think we've been talking about it for a couple years now and we're very focused on driving both the numerator and the denominator. So you seen the focus with our pull forward this year around driving higher paces and then tighter inventory management and balance sheet efficiency. In my prepared remarks and Sheryl touched on in the Q&A here just the percentage of owned where we've actually been able to drive that down a little bit. And then of course just prudent cost management managing SG&A. Our strategy is to drive year-over-year accretion to ROE in 2017 even despite the hurricanes and we expect to do that obviously in the years beyond. From an internal perspective, yes we do have return hurdles around compensation. That's something that we feel is very important and it gets a team aligned around driving the same value that our shareholders expect.

[Operator:]

Ladies and gentlemen, this does concludes today's Q&A portion. I would now like to turn the call back over to the host for closing comments.

[Sheryl Palmer:]

Well thank you very much for joining us for our Q3 call. We appreciate you being with us today. Have a wonderful day.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.