Taylor Morrison delivered solid second-quarter results after factoring out IPO-related expenses and settlement of tax matters. The home builder reported adjusted earnings per share of $0.27 on revenue of $509 million (up 60% year over year). Higher mortgages rates’ impact on home buyer activity unsurprisingly dominated the conference call discussion, and the company was emphatic that it has not seen an impact to date. Investors were encouraged by this commentary and believe this speaks to the company’s higher-end customer base (its U.S. average selling price was $381,000 versus $252,000 for D.R. Horton), which is less sensitive to higher rates than first-time home buyers.
Taylor Morrison continues to benefit from a relatively attractive land position. Approximately 88% of land was purchased since 2008, which implies the company has a favorable land cost basis since its peers have a mix that is closer to half purchased before 2008, when land prices were more elevated. Land purchases, in addition to a write-down of land to fair market value in 2011, support the company’s 22.8% adjusted home sale gross margins. Second-quarter gross margins rose 120 basis points year over year, but we estimate they would have risen about 300 basis points if not for purchase accounting items related to its Darling acquisition and fewer high-end, high-margin community closings this quarter in Canada. The company controls a 9.7- year supply of lots, well about the average peer of around 6 years.
Taylor Morrison drove home the point that higher mortgage interest rates have not had a material impact on demand. For buyers under backlog, the firm believes its customers are more financially invested than any time in recent history since presumed equity has increased (higher housing prices over the past few months) and cash deposits increased. For prospective buyers, the company witnessed newfound buyer urgency as there is a prevailing fear that rates will continue to rise.
Additionally, the firm cited the historically still-strong affordability and historically still-low interest rates, as well as rates’ having a larger impact on first-time buyers versus the move-up buyer it primarily targets. Analysts agree with Taylor Morrison’s assessment that the company will be relatively less affected by rates, and we expect strong demand and favorable land inventory to propel strong, industry-beating volume growth in the years ahead in the context of recovering household formations, low existing and for-sale inventories, and historically strong affordability.
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