TAYLOR MORRISON HOME CORPORATION For purposes of this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "the Company," "we," "us," or "our" refer toTaylor Morrison Home Corporation ("TMHC") and its subsidiaries. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements included elsewhere in this quarterly report.
Forward-Looking Statements
This quarterly report includes certain forward-looking statements within the meaning of the federal securities laws regarding, among other things, our or management's intentions, plans, beliefs, expectations or predictions of future events, which are considered forward-looking statements. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business and operations strategy. These statements often include words such as "may," "will," "should," "believe," "expect," "anticipate," "intend," "plan," "estimate," "can," "could," "might," "project" or similar expressions. These statements are based upon assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read this quarterly report, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 ("Annual Report") and in our subsequent filings with theU.S. Securities and Exchange Commission (the "SEC"). Although we believe that these forward-looking statements are based upon reasonable assumptions and currently available information, you should be aware that many factors, including those described under the heading "Risk Factors" in the Annual Report and in our subsequent filings with theSEC , could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Our forward-looking statements made herein are made only as of the date of this quarterly report. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based, except as required by applicable law. Business Overview Our principal business is residential homebuilding and the development of lifestyle communities with operations geographically focused inArizona ,California ,Colorado ,Florida ,Georgia ,Nevada , North andSouth Carolina ,Oregon ,Texas , andWashington . We serve a wide array of consumer groups from coast to coast, including entry-level, move-up, and resort lifestyle (formerly referred to as 55-plus active lifestyle) buyers, building single and multi-family attached and detached homes. Our homebuilding company operates under our Taylor Morrison, Darling Homes Collection by Taylor Morrison, and Esplanade brand names. We operate a "Build-to-Rent" homebuilding business where we serve as a land acquirer, developer, and homebuilder. We also operateUrban Form Development, LLC ("Urban Form"), which primarily develops and constructs multi-use properties consisting of commercial space, retail, and multi-family units. We have operations which provide financial services to customers through our wholly owned mortgage subsidiary, Taylor Morrison Home Funding, INC ("TMHF"), title services through our wholly owned title services subsidiary,Inspired Title Services, LLC ("Inspired Title"), and homeowner's insurance policies through our insurance agency,Taylor Morrison Insurance Services, LLC ("TMIS"). Our business as ofSeptember 30, 2022 is organized into multiple homebuilding operating components, and a financial services component, all of which are managed as four reportable segments: East, Central, West and Financial Services, as follows: EastAtlanta ,Charlotte ,Jacksonville ,Naples ,
Tampa CentralAustin ,Dallas ,Denver , andHouston WestBay Area ,Las Vegas ,Phoenix ,Portland ,
California Financial Services Taylor Morrison Home Funding, Inspired Title Services, and TaylorMorrison Insurance Services Community development includes the acquisition and development of land, which may include obtaining significant planning and entitlement approvals and completing construction of off-site and on-site utilities and infrastructure. We generally operate as community developers, but in some communities we operate solely as merchant builders, in which case we acquire fully entitled and developed lots. We remain disciplined in our underwriting to acquire land where we see opportunities to drive 24
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Table of Contents profitable growth over the full cycle, with the land acquisitions we are approving today largely expected to impact deliveries in the next 24 to 48 months.
In our homebuilding operations, we either directly, or indirectly through our subcontractors, purchase the significant materials necessary to construct a home such as drywall, cement, steel, lumber, insulation and the other building materials. While these materials are generally widely available from a variety of sources, from time to time we experience material shortages on a localized basis which can substantially increase the price for such materials and our construction process can be slowed. As ofSeptember 30, 2022 , we employed approximately 3,000 full-time equivalent persons. Of these, approximately 2,550 were engaged in corporate and homebuilding operations, and the remaining approximately 450 were engaged in financial services.
Factors Affecting Comparability of Results
For the three and nine months endedSeptember 30, 2022 , we recognized a$0.8 million and$14.5 million gain on land transfers relating to our unconsolidated joint ventures, respectively, which is included in Other expense/(income), net on the unaudited Condensed Consolidated Statements of Operations. In addition, for the three and nine months endedSeptember 30, 2022 , we recognized a$71 thousand and$13.5 million net gain on extinguishment of debt relating to our partial redemption of our 6.625% Senior Notes due 2027 which is included in Gain on extinguishment of debt, net on our unaudited Condensed Consolidated Statements of Operations. We did not incur such costs for the three or nine months endedSeptember 30, 2021 .
Third Quarter 2022 Highlights (all comparisons are of the current quarter to the prior year quarter, unless otherwise indicated):
•Home closings revenue increased 12 percent to$2.0 billion . •Home closings gross margin improved 630 basis points to 27.5 percent. •SG&A as a percentage of home closings revenue improved 210 basis points to 7.4 percent. •Homebuilding lot supply increased three percent to approximately 80,000 owned and controlled homesites. •Controlled lots as a percentage of total lot supply increased approximately 600 basis points to 42 percent. •Repurchased 4.2 million shares outstanding for$105 million . •Return on equity improved 1,300 basis points to 25.8 percent. 25
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Results of Operations
The following table sets forth our results of operations for the periods
presented:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2022 2021 2022 2021
Statements of Operations Data:
Home closings revenue, net $ 1,983,775
14,225 42,228 66,651 79,174
Financial services revenue 27,749 38,046 98,419 119,503
Amenity and other revenue 8,895 5,982 56,517 16,862
Total revenue 2,034,644 1,858,751 5,732,791 4,995,843
Cost of home closings 1,438,164 1,397,319 4,084,748 3,838,602
Cost of land closings 11,571 36,439 50,139 68,604
Financial services expenses 20,395 26,202 66,092 76,136
Amenity and other expenses 6,574 6,341 39,264 16,907
Gross margin 557,940 392,450 1,492,548 995,594
Sales, commissions and other marketing costs 94,692 97,185 279,950 280,697
General and administrative expenses 52,357 70,425 189,905 201,975
Net loss/(income) from unconsolidated entities 1,180 (1,482) 2,986 (9,269)
Interest expense, net 4,382 710 13,823 594
Other expense/(income), net 5,751 47 (4,720) 1,067
Gain on extinguishment of debt, net (71) - (13,542) -
Income before income taxes 399,649 225,565 1,024,146 520,530
Income tax provision 90,418 53,098 243,300 120,865
Net income before allocation to non-controlling
interests 309,231 172,467 780,846 399,665
Net loss/(income) attributable to non-controlling
interests - joint ventures 548 (4,333) (3,377) (9,363)
Net income available to Taylor Morrison Home
Corporation $ 309,779
27.5 % 21.2 % 25.9 % 19.7 %
Sales, commissions and other marketing costs as a
percentage of home closings revenue, net 4.8 % 5.5 % 5.1 % 5.9 %
General and administrative expenses as a
percentage of home closings revenue, net 2.6 % 4.0 % 3.4 % 4.2 %
Non-GAAP Measures
In addition to the results reported in accordance with accounting principles
generally accepted in the United States ("GAAP"), we have provided information
in this quarterly report relating to: (i) adjusted net income and adjusted
earnings per common share, (ii) adjusted income before income taxes and related
margin, (iii) EBITDA and adjusted EBITDA and (iv) net homebuilding debt to
capitalization ratio.
Adjusted net income, adjusted earnings per common share and adjusted income
before income taxes and related margin are non-GAAP financial measures that
reflect the net income/(loss) available to the Company excluding the impact of
gains on land transfers and extinguishment of debt, net, and in the case of
adjusted net income and adjusted earnings per common share, the tax impact due
to such items. EBITDA and Adjusted EBITDA are non-GAAP financial measures that
measure performance by adjusting net income before allocation to non-controlling
interests to exclude interest expense/(income), net, amortization of capitalized
interest, income taxes, depreciation and amortization (EBITDA), non-cash
compensation expense, if any, gains on land transfers and extinguishment of
debt, net. Net homebuilding debt to capitalization ratio is a non-GAAP financial
measure we calculate by dividing (i) total debt, plus unamortized debt issuance
cost/(premium), net, and less mortgage warehouse borrowings, net of unrestricted
cash and cash equivalents, by (ii) total capitalization (the sum of net
homebuilding debt and total stockholders' equity).
Management uses these non-GAAP financial measures to evaluate our performance on a consolidated basis, as well as the performance of our regions, and to set targets for performance-based compensation. We also use the ratio of net homebuilding
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debt to total capitalization as an indicator of overall leverage and to evaluate
our performance against other companies in the homebuilding industry. In the
future, we may include additional adjustments in the above-described non-GAAP
financial measures to the extent we deem them appropriate and useful to
management and investors.
We believe that adjusted net income, adjusted earnings per common share,
adjusted income before income taxes and related margin, as well as EBITDA and
adjusted EBITDA, are useful for investors in order to allow them to evaluate our
operations without the effects of various items we do not believe are
characteristic of our ongoing operations or performance and also because such
metrics assist both investors and management in analyzing and benchmarking the
performance and value of our business. Adjusted EBITDA also provides an
indicator of general economic performance that is not affected by fluctuations
in interest rates or effective tax rates, levels of depreciation or
amortization, or unusual items. Because we use the ratio of net homebuilding
debt to total capitalization to evaluate our performance against other companies
in the homebuilding industry, we believe this measure is also relevant and
useful to investors for that reason.
These non-GAAP financial measures should be considered in addition to, rather
than as a substitute for, the comparable U.S. GAAP financial measures of our
operating performance or liquidity. Although other companies in the homebuilding
industry may report similar information, their definitions may differ. We urge
investors to understand the methods used by other companies to calculate
similarly-titled non-GAAP financial measures before comparing their measures to
ours.
Adjusted Net Income and Adjusted Earnings Per Common Share
Three Months Ended September 30,
(Dollars in thousands, except per share data) 2022 2021
Net income available to TMHC $
309,779
Gain on land transfers (808) - Gain on extinguishment of debt, net (71) - Tax impact due to above non-GAAP reconciling items 205 - Adjusted net income $
309,105
Basic weighted average number of shares 112,701 124,378 Adjusted earnings per common share - Basic $
2.74
Diluted weighted average number of shares 113,780 125,770 Adjusted earnings per common share - Diluted $
2.72
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Adjusted Income Before Income Taxes and Related Margin
Three Months Ended September 30,
(Dollars in thousands) 2022 2021
Income before income taxes $ 399,649 $ 225,565
Gain on land transfers (808) -
Gain on extinguishment of debt, net (71) -
Adjusted income before income taxes $ 398,770 $ 225,565
Total revenue $ 2,034,644 $ 1,858,751
Income before income taxes margin 19.6 % 12.1 %
Adjusted income before income taxes margin 19.6 % 12.1 %
EBITDA and Adjusted EBITDA Reconciliation
Three Months Ended September 30,
(Dollars in thousands) 2022 2021
Net income before allocation to non-controlling interests $ 309,231 $ 172,467
Interest expense, net 4,382 710
Amortization of capitalized interest 33,774 37,951
Income tax provision 90,418 53,098
Depreciation and amortization 1,484 2,164
EBITDA $ 439,289 $ 266,390
Non-cash compensation expense 5,333 4,793
Gain on land transfers (808) -
Gain on extinguishment of debt, net (71) -
Adjusted EBITDA $ 443,743 $ 271,183
Total revenue $ 2,034,644 $ 1,858,751 Net income before allocation to non-controlling interests as a percentage of total revenue
15.2 % 9.3 %
EBITDA as a percentage of total revenue 21.6 % 14.3 %
Adjusted EBITDA as a percentage of total revenue 21.8 % 14.6 %
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Net Homebuilding Debt to Capitalization Ratio Reconciliation
As of As of As of
(Dollars in thousands) September 30, 2022 June 30, 2022 September 30, 2021
Total debt $ 2,729,924 $ 2,950,744 $ 3,221,569
Plus: unamortized debt issuance
cost/(premium), net 11,242 11,891 (2,333)
Less: mortgage warehouse borrowings (146,335) (179,555) (235,685)
Total homebuilding debt $ 2,594,831 $ 2,783,080 $ 2,983,551
Less: cash and cash equivalents (329,244) (378,340) (373,407)
Net homebuilding debt $ 2,265,587 $ 2,404,740 $ 2,610,144
Total equity 4,403,466 4,193,895 3,745,896
Total capitalization $ 6,669,053 $ 6,598,635 $ 6,356,040
Net homebuilding debt to capitalization ratio 34.0 % 36.4 % 41.1 %
Three and nine months ended
The results for the three and nine months endedSeptember 30, 2022 and 2021 were impacted by various macro economic conditions. From the second half of 2020 through the first quarter of 2022, demand for housing increased nationwide. Subsequently, multiple increases in mortgage interest rates beginning inMarch 2022 have caused buyer apprehension and affordability concerns, resulting in an increase in cancellations. We believe these have impacted us throughout the year, however the multiple increases in interest rates by theFederal Reserve in recent months impacted our net sales orders and cancellations, for the three months endedSeptember 30, 2022 in particular. The overall strong demand for housing in the prior year and first half of 2022 allowed us to utilize pricing strategies that mitigated increases in costs. The average sales price for 2022 net sales orders, backlog, and homes closed all increased compared to the prior year. We continue to experience market-wide supply chain disruptions, trade labor shortages, and high costs related to materials due to inflationary impacts. However, these supply chain delays and labor shortages have extended our build cycle times. To combat this, several markets have shifted to a strategy of selling spec homes, which allows the homes to be further along the cycle time before releasing them to be sold. Operational information related to each period is presented below:
Ending Active Selling Communities
As of As of
September 30, 2022 June 30, 2022 Change
East 118 117 0.9 %
Central 105 104 1.0
West 103 102 1.0
Total 326 323 0.9 %
Net Sales Orders
Three Months Ended September 30,
Net Sales Orders (1) Sales Value (1) Average Selling Price
(Dollars in thousands) 2022 2021 Change 2022 2021 Change 2022 2021 Change
East 1,041 1,279 (18.6) % $ 640,093 $ 742,449 (13.8) % $ 615 $ 580 6.0 %
Central 450 921 (51.1) 267,681 577,477 (53.6) 595 627 (5.1)
West 578 1,172 (50.7) 372,223 840,963 (55.7) 644 718 (10.3)
Total 2,069 3,372 (38.6) % $ 1,279,997 $ 2,160,889 (40.8) % $ 619 $ 641 (3.4) %
(1) Net sales orders and sales value represent the number and dollar value, respectively, of new sales contracts executed with customers, net of cancellations.
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Nine Months Ended September 30,
Net Sales Orders (1) Sales Value (1) Average Selling Price(Dollars in thousands) 2022 2021 Change 2022 2021 Change 2022 2021 Change East 3,189 4,358 (26.8) %$ 1,976,798 $ 2,334,431 (15.3) %$ 620 $ 536 15.7 % Central 1,979 2,843 (30.4) 1,294,106 1,661,934 (22.1) 654 585 11.8 West 2,509 4,085 (38.6) 1,878,886 2,680,460 (29.9) 749 656 14.2 Total 7,677 11,286 (32.0) %$ 5,149,790 $ 6,676,825 (22.9) %$ 671 $ 592 13.3 % Net sales orders and sales value decreased by 38.6% and 40.8%, for the three months endedSeptember 30, 2022 , and 32.0% and 22.9%, for the nine months endedSeptember 30, 2022 , respectively, compared to the same periods in the prior year. We believe the decreases were primarily the result of the change in economic conditions and home buyer apprehensions due to rising mortgage interest rates and inflationary pressures. We experienced sales price appreciation over recent quarters driving an increase in average selling price for the nine months endedSeptember 30, 2022 compared to the same period in the prior year. However, during the three months endedSeptember 30, 2022 we began offering pricing incentives or discounts in certain markets which caused the overall average selling price to decrease for the quarter compared to the same quarter in the prior year. Sales Order Cancellations Cancellation Rate(1) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 East 9.2 % 5.6 % 7.3 % 5.5 % Central 22.5 % 7.5 % 12.8 % 6.7 % West 20.2 % 7.4 % 12.7 % 6.4 %Total Company 15.6 % 6.7 % 10.6 % 6.1 %
(1) Cancellation rate represents the number of canceled sales orders divided by gross sales orders.
The total company cancellation rate increased for the three and nine months endedSeptember 30, 2022 compared to the same periods in the prior year. This increase in cancellations is due to increases in mortgage interest rates, buyer apprehensions, and other macro economic conditions such as inflation. Sales Order Backlog As of September 30, Sold Homes in Backlog (1) Sales Value Average Selling Price
(Dollars in thousands) 2022 2021 Change 2022 2021 Change 2022 2021 Change East 3,256 3,729 (12.7) %$ 2,121,673 $ 2,090,661 1.5 %$ 652 $ 561 16.2 % Central 2,489 2,995 (16.9) 1,694,111 1,760,401 (3.8) 681 588 15.8 West 2,196 3,549 (38.1) 1,579,937 2,272,904 (30.5) 719 640 12.3 Total 7,941 10,273 (22.7) %$ 5,395,721 $ 6,123,966 (11.9) %$ 679 $ 596 13.9 % (1) Sales order backlog represents homes under contract for which revenue has not yet been recognized at the end of the period (including homes sold but not yet started). Some of the contracts in our sales order backlog are subject to contingencies including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. Total sold homes in backlog and total sales value decreased by 22.7% and 11.9% atSeptember 30, 2022 andSeptember 30, 2021 , respectively. The decrease in sold homes in backlog is primarily the result of a decrease in net sales as well as an increase in cancellations. Despite a lower number of sold homes in backlog and total sales value, the average selling price of homes in backlog increased by 13.9% as a result of sales price appreciation over the past several quarters. 30
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Home Closings Revenue
Three Months Ended September 30,
Homes Closed Home Closings Revenue, Net Average Selling Price
(Dollars in thousands) 2022 2021 Change 2022 2021 Change 2022 2021 Change
East 1,118 1,167 (4.2) % $ 638,270 $ 554,995 15.0 % $ 571 $ 476 20.0 %
Central 835 764 9.3 522,247 398,762 31.0 625 522 19.7
West 1,097 1,396 (21.4) 823,258 818,738 0.6 750 586 28.0
Total 3,050 3,327 (8.3) % $ 1,983,775 $ 1,772,495 11.9 % $ 650 $ 533 22.0 %
Nine Months Ended September 30,
Homes Closed Home Closings Revenue, Net Average Selling Price
(Dollars in thousands) 2022 2021 Change 2022 2021 Change 2022 2021 Change
East 3,152 3,464 (9.0) % $ 1,757,444 $ 1,564,206 12.4 % $ 558 $ 452 23.5 %
Central 2,277 2,246 1.4 1,347,828 1,101,681 22.3 592 491 20.6
West 3,421 3,706 (7.7) 2,405,932 2,114,417 13.8 703 571 23.1
Total 8,850 9,416 (6.0) % $ 5,511,204 $ 4,780,304 15.3 % $ 623 $ 508 22.6 %
The number of homes closed decreased by 8.3% and 6.0%, for the three and nine
months ended September 30, 2022 , respectively, while home closings revenue, net
increased by 11.9% and 15.3%, for the three and nine months ended September 30,
2022 , respectively, compared to the same periods in the prior year. The decrease
in the number of homes closed is primarily due to an increase in cancellations
in the current year periods compared to the prior year periods. The increase in
home closings revenue, net is a result of sales price appreciation which caused
average selling prices to increase by 22.0% and 22.6% for the three and nine
months ended September 30, 2022 , respectively.
Land Closings Revenue
Three Months Ended September 30,
(Dollars in thousands) 2022 2021 Change
East $ 5,732 $ 11,987 $ (6,255)
Central 599 3,186 (2,587)
West 7,894 27,055 (19,161)
Total $ 14,225 $ 42,228 $ (28,003)
Nine Months Ended September 30,
(Dollars in thousands) 2022 2021 Change
East $ 36,482 $ 27,643 $ 8,839
Central 3,265 8,718 (5,453)
West 26,904 42,813 (15,909)
Total $ 66,651 $ 79,174 $ (12,523)
We generally purchase land and lots with the intent to build and sell homes.
However, in some locations where we act as a developer, we occasionally purchase
land that includes commercially zoned parcels or areas designated for school or
government use, which we typically sell to commercial developers or
municipalities, as applicable. We also sell residential lots or land parcels to
manage our land and lot supply on larger tracts of land. Land and lot sales
occur at various intervals and
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varying degrees of profitability. Therefore, the revenue and gross margin from
land closings will fluctuate from period to period, depending upon market
opportunities and our land management strategy. The land closings revenue in the
East for the
nine months ended September 30, 2022 was due to the sale of certain commercial
assets as well as the sale of residential lots in our Florida market. In the
prior year, the land closings revenue in the West for the three months ended
September 30, 2021 was due to the sale of certain projects in our Oregon market
while the land closings revenue for the nine months ended September 30, 2021
also includes project sales in our Washington and Arizona markets.
Amenity and Other Revenue
Three Months Ended
(Dollars in thousands) 2022 2021 Change
East $ 5,056 $ 4,897 $ 159
Central - - -
West 257 289 (32)
Corporate 3,582 796 2,786
Total $ 8,895 $ 5,982 $ 2,913
Nine Months Ended
(Dollars in thousands) 2022 2021 Change
East $ 16,115 $ 14,754 $ 1,361
Central - - -
West 1,057 1,021 36
Corporate 39,345 1,087 38,258
Total $ 56,517 $ 16,862 $ 39,655
Several of our communities operate amenities such as golf courses, club houses,
and fitness centers. We provide club members access to the amenity facilities
and other services in exchange for club dues and fees. Our Corporate region also
includes the activity relating to our Build-To-Rent and Urban Form operations.
The increase in amenity and other revenue in Corporate for the nine months ended
September 30, 2022 is due to the sale of an asset relating to our Urban Form
operations.
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