Taylor Morrison Home Corp (TMHC) Q3 2021 Earnings Call Transcript

Image source: The Motley Fool.

Taylor Morrison Home Corp (TMHC 0.61%)
Q3 2021 Earnings Call
Oct 27, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Taylor Morrison's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce McKenzie Aron, Vice President of Investor Relations.

Mackenzie Aron -- Vice President of Investor Relations

Thank you, and good morning. I am joined today by Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will provide an overview of our performance and strategic priorities, while Dave will share the highlights of our financial results, after which we will be happy to take your questions. In the interest of time, we ask that you please limit yourself to one question and one follow-up. 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 earnings release, which is available on the Investor Relations portion of our website at www.taylormorrison.com.

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 SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release.

Now, let me turn the call over to Sheryl.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you, Mackenzie, and good morning, everyone. We appreciate you joining us today. I will begin today's call with the highlights of our third quarter performance and the market environment and then provide an update on our strategic focus on operational and capital efficiency. I am pleased to share that our team has delivered a strong quarter that met or exceeded our expectations across each of our key operating metrics as they overcame the intense supply side challenges facing our industry. Most notably, we delivered 3,327 homes, which was within our prior guidance range at a significantly stronger than anticipated home closings, gross margin of 21.2%. This margin improvement of 400 basis points year-over-year and 210 basis points sequentially is largely a reflection of revenue and cost synergies from our William Lyon acquisition that we had indicated would begin to materialize at this stage of our integration.

These advantages helped to more than offset the timing and cost pressure from material and labor constraints that intensified during the quarter and are unlikely to abate in the foreseeable future.

With these bottlenecks introducing a much greater than normal degree of uncertainty into near-term production schedules and delaying our construction timelines by two to four weeks, we are adjusting our prior full year home closings guidance by approximately 5% to around 14,000 units. However, despite these delays, we are increasing our home closings gross margin expectations to the low 20% range this year, followed by at least 200 basis points of improvement to a margin in excess of 22% in 2022 based on our confidence and continued synergy realization, operational enhancements, and the strength of our sold backlog.

As you would expect, we are proactively working to stay ahead of further supply chain challenges by communicating closely with our trade partners and suppliers to ensure visibility into our vertical and horizontal development cycles, control costs, and maintain our commitment to delivering an exceptional customer experience, and fully complete houses for our homebuyers.

In addition, during the quarter, we started 3.5 new homes per community per month, made further progress in rebuilding our inventory of spec homes and continue to align our sales pace with production. Because of this disciplined approach, and our attractive land pipeline and product portfolio, we are in a strong position to capitalize on favorable market tailwinds while also navigating supply related disruptions. From a demand perspective, activity was healthy across each of our consumer groups and geographies, albeit at a more normalized and sustainable level of activity compared to earlier in the year, notably in contrast to typical seasonality, we experienced accelerating month-over-month sales momentum in both order volume and absorption pace as the quarter progressed and October is on track to post similarly strong results.

A positive demand backdrop, we continue to strategically limit sales releases and approximately 70% of our communities to manage our backlog and balance pace versus price to maximize our return potential. Among our consumer groups, the 55 plus active lifestyle segment once again experienced the strongest trends with year-over-year growth in both orders and absorption pace as these buyers have the financial resources and motivation to move ahead with their purchase decisions. Representing over a quarter of our year-to-date net sales, we believe the 55 plus active lifestyle demand is poised to continue to outperform as demographic household growth is forecasted to be more than two times the overall market rate over the next five years within our footprint and the $73 million strong baby boomer generation progresses through peak retirement ages.

The national expansion of our premier lifestyle brand Esplanade is well-timed to meet this growth with a consistent strategy that continues to perform well in its core Florida markets and has exceeded expectations today in its newest West Coast communities. Across the business forward-looking indicators such as community traffic, conversion rates, and consumer credit metrics suggest demand and buyer interest remained healthy and supportive of further pricing power. However, as I indicated last quarter, we're cognizant of the impact of higher prices on consumer sentiment and affordability and expect market dynamics, including the pace of price inflation to stabilize at more sustainable levels, which we are already beginning to see evidence of. This outlook is reflected in our pricing strategies, which are calibrated at a community level to optimize performance and in our disciplined land underwriting assumptions, which have may remain grounded in long-term market fundamentals and a preference from prime core locations. In addition, our well-balanced consumer diversification and the relative strength of our buyer profile provide additional layers of risk mitigation.

Specific to our consumers' financial health, our homebuyers financed by Taylor Morrison Home Funding, which helped in 83% capture rate had credit scores, income, debt ratios, and down payments that were stable or improved from the prior quarter and a year ago. Because of this trend, our buyers' ability to absorb higher pricing remains significant with the estimated buffer between their average actual interest rate and the maximum rate allowed for qualification purposes after considering compensating factors remaining at roughly 700 basis points for conventional borrowers and 500 basis point for government borrowers, both of which were more favorable than historic norms by approximately 5,200 basis points.

This is not to suggest that our buyers would want to or be willing to absorb a rate shock of that magnitude but rather indicates that the financial durability of our consumer set is strong in both absolute and historical terms. In addition, we continue to see our diverse consumer groups are spending more on higher square footage floor plans and the home side of their choice as well as enhanced design specifications to meet their needs and preferences, which have clearly evolved post-COVID.

This ongoing strength can be partially attributed to migration trends as we continue to see a growing share of out-of-state buyers, particularly from higher cost markets such as California, New York, and New Jersey to Texas, Nevada, and Florida. It is also we're sharing that when we parse our consumer survey data, we have seen a growing trend of home shoppers expecting to pay more of their income toward housing with the greatest impact among first-time buy homebuyers.

With low interest rates, enabling this trend today, we are monitoring these metrics closely and taking proactive steps to ensure continued affordability and design flexibility such as intentionally increasing lower square footage floor plans within our spec home inventory.

From an operational perspective, our priority remains to streamline and simplify our business to effectively leverage our scale and improved construction efficiency. As you have heard me discuss in recent quarters, we are focused on operational strategies designed to create a more efficient predictable and profitable business now that we are past the integration phase of our transformative multi-year acquisition journey. This strategic focus is already delivering strong results as evidenced by the 400 basis points year-over-year improvement in our third quarter home closings gross margin.

Let me now provide an update on the work underway to continue this positive momentum going forward. First, our teams are working closely to optimize our product portfolio by evaluating our floor plan and option offerings for value engineering, cost rationalization, and consumer appeal with the greatest runway for improvement still within our William Lyon impacted markets. To frame the financial opportunity from such efforts, our Florida operations are a compelling example from which to start. Without the operational complexities inherent in other market where we have been more acquisitive, Florida is furthest along in leveraging the power of shared architecture, floor plan repetition, and option rationalization. This contributed to an average year-to-date home closings gross margin advantage of nearly 300 basis points and cycle time benefits of about one month compared to our markets on the West Coast that have the most opportunity for product and process consolidation due to more recent acquisition impacts. As we achieved similar operational efficiency across the country, we expect comparable results to drive meaningful margin and return accretion in the coming quarters.

Second, our purchasing departments are driving further skew rationalization to improve our procurement processes, control costs, and manage production timelines, and effort that has become even more critical and helping us overcome material shortages. Over the last three quarters, we have reduced our option count by nearly a third exceeding our goal for this year and expect to achieve further gains in utilization rates as we roll out enhanced national specifications. This progress is supported by the success of our Canvas standardized design packages, which have gained swift traction in our entry level communities and increasingly in our move-up price points. These curated option pallets offer a more consumer-friendly design experience that removes complexity of a traditional design center approach. The average revenue of these packages is aligned with the historical range of options spend and our design centers by consumer group had an improved margin and more efficient production timeline.

And lastly, but certainly not least, from a sales and marketing perspective, we are continuing to lead the industry in the digitalization of home buying to empower consumers to complete their home shopping journey with the same ease and flexibility they have come to expect from the world of e-commerce. Over the last year-and-a-half, we have introduced industry-leading capabilities to reserve inventory homes online, which was then expanded to enable consumers to select a home site and floor plan and design a to-be-built home online. Building on these advancements, we recently launched a first of its kind digital community that empowers consumers to schedule a visit online independently tours and virtually design and reserve a home. Because of the functionality of these tools, we eliminated the need for a traditional on-site sales team by designing our model homes with Amazon's Alexa to seamlessly guide home shoppers through their visit with informative and interactive touch screens and QR codes. They can then reserve home as Canvas design package online either immediately on-site or later from the comfort of their couch.

Please take a look at the new slide added to our third quarter investor deck once it is posted later today for more details. Since our model opening in this groundbreaking community on October 1st, we have already enjoyed an overwhelming positive response with an interest list of more than 1,300 prospective buyers and a reservation to sales conversion rate that is 2.5 times higher than our company average. Despite no in-person sales team and lower than normal external broker participation rates. With similar results across each of our virtual capabilities, we have meaningful opportunity to leverage these tools for a more cost-effective sales strategy. Following this community's early success, we have two additional digital communities expected to open under our new venture brand in the coming months and look forward to continuing to expand this promising new chapter of our virtual evolution that provides a seamless and on-demand home buying experience that we believe is unparalleled in our industry.

I am proud that we achieved these milestones because of our team's forward-looking approach to technological innovation and serving our homebuyers on their terms that predates the pandemic-driven acceleration in consumer adoption. Our focus on these operational strategies to drive stronger earnings are matched by an equal commitment to enhancing our capital efficiency to greater balance sheet and cash flow optimization. The new land financing vehicles that I announced last quarter are an important element of this strategy by enabling us to meaningfully decrease the upfront capital intensity of our investments in land acquisition and development and accelerate our pivot to an asset lighter balance sheet. We have quickly operationalize these new vehicles with the initial asset slated to close this year, representing total expected balance sheet release of approximately $850 million over the life of these projects. These and other arrangements that enable us to cost-effectively increased the control percentage of our land portfolio are accretive to our long-term return expectations and importantly mitigate cyclical risk.

We have also been active in returning excess capital to our shareholders with approximately 8.6 million shares repurchased year-to-date, while also remaining committed to reducing our net debt leverage to targeted levels below 30% next year. Collectively, these operational and capital initiatives are expected to drive our return on equity to the high-teens range this year, followed by further improvement to over 20% in 2022. These return expectations will mark new company highs and meaningful accretion over the historical results as the enhanced scale and operational advantages that we achieved through our strategic journey have transformed our ability to sustainably generate long-term value for our shareholders.

Now, let me turn the call over to Dave for his financial review.

David Cone -- Executive Vice President and Chief Financial Officer

Thanks Sheryl, and good morning everyone. In the third quarter, we generated net income of $168 million or $1.34 per diluted share, marking a 54% year-over-year increase. Net sales orders totaled 3,372 while our monthly absorption pace was a healthy 3.3 net sales orders per community with notable month-over-month strength throughout the quarter that persisted into October. Despite continued sales restrictions in the majority of our communities. In addition, our cancellation rate remain below historical averages at 6.7%.

Among our consumer groups, we experienced the greatest strength within our 55 plus active lifestyle segment, which increased 700 basis points to 27% of our total net sales orders with above-average lot premiums and design spend compared to our entry-level and move-up consumer groups. This mix impact combined with ongoing market strength drove a 31% increase in our average net order price to 641,000.

At quarter end, our backlog was 10,273 homes, representing a sales value of $6.1 billion, up 63% year-over-year. Our community count averaged 338, which was ahead of our prior guidance range. We expect our community count to remain in line with this level in the fourth quarter, driving full year average guidance range, slightly higher to 335 to 340. With approximately 78,000 lots under control, we have a strong land pipeline to support future community growth, particularly as we reach 2023. However, supply side challenges have also extended into horizontal land development and if these issues persist or worsen, it could delay the timing of some community openings in the back half of 2022.

Turning to closings. We delivered 3,327 homes, which was within our prior guidance range. However, as Sheryl noted earlier, because of the unpredictability of material availability, elongating construction timelines and severe labor constraints, we now expect to deliver about 4,600 homes in the fourth quarter and around 14,000 homes for the full year. This represents a 5% reduction from our prior full-year guidance range and attempts to fully account for the fluid day-to-day operating environment that our construction and purchasing teams are navigating in the field.

Each market is experiencing challenges at different stages of the construction process, and generally speaking bottlenecks are more severe as we move east along our coast-to-coast footprint with the least amount of pressure in our California markets. As our teams work to stay ahead of these challenges to deliver sold homes to our homebuyers in a timely manner, we have also rebuilt our inventory of spec homes to more normalized levels in advance of the upcoming spring selling season.

At quarter end, our total spec inventory equal 5.3 homes per community nearly all of which were under construction. This was up from 4.7 homes per community at the end of the second quarter. Our home closings gross margin improved 400 basis points year-over-year to 21.2%, this exceeded our prior guidance of approximately 20% due primarily to stronger than expected pricing and volume of inventory homes sold and closed during the quarter.

In the fourth quarter, we expect a home closings gross margin of about 21% given favorable pricing and operational leverage that is expected to more than offset higher construction costs. This drove an increase in our full year home closings gross margin guidance to the low 20% range.

Following the strength, we now expect at least 200 basis points of year-over-year improvement to a home closings gross margin in excess of 22% in 2022. This positive trend reflects the sustainable structural changes in our scale and production efficiency that we have achieved throughout our strategic growth and operational enhancements. Our SG&A has a percentage of home closings revenue was 9.5% and we continue to anticipate a full year SG&A ratio in the mid 9% range. Despite the reduction in our home closings guidance.

Turning now to our land portfolio, we invested approximately $478 million in land acquisition and development during the quarter and continue to expect our total land investment to be approximately $2 billion this year. Our total lot supply increased to approximately 70,000 home sites representing 6.2 years of total supply and 4 years of owned lots. At quarter end, 36% of our lots were controlled via options and other arrangements, which was up approximately 700 basis points year-over-year. Going forward, we expect to expand this year further as we utilize the new land vehicles that were announced last quarter as well as our traditional asset light land strategies such as joint ventures and seller or project financing.

We expect these tools to enable us to cost-effectively increase our optioned land position to at least 40% within the next year, thereby improving the capital efficiency of our land portfolio, reducing long-term risk, and enhancing our returns.

Shifting to our balance sheet. We ended the quarter with $1.1 billion of total liquidity, including $373 million of unrestricted cash and $722 million of available capacity on our revolving credit facilities. Our net debt-to-capital ratio equaled 41.1%, deleveraging our balance sheet remains a top capital allocation priority and we continue to expect our net debt-to-capital ratio to reach the low 30% range by year-end, followed by further decline to below 30% in 2022. In recognition of our [Technical Issues] to date, and improving our leverage since our acquisition of William Lyon, I am pleased that S&P Global recently revised its outlook to stable and affirmed its credit rating.

Lastly, during the quarter, we repurchased 3.3 million shares outstanding for $92 million, bringing our year-to-date total to 8.6 million shares for $237 million. We have repurchased just over half of the shares issued in connection with our William Lyon transaction and more than a third of our total shares outstanding since 2015. Going forward, we expect to continue to utilize share repurchases opportunistically to return excess capital to our shareholders.

Now, I'll turn the call back over to Sheryl.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you, Dave. To recap, our strong third quarter performance reflected the strategic and operational focus our teams have been driving toward since our acquisition of William Lyon homes a little over 18 months ago. We have communicated that milestone has a critical pivot point from which we would begin to meaningfully benefit from the synergy and scale opportunities that could became available to us after integrating into one company.

Going forward, our focus is squarely on operational execution to fully take advantage of our scale product and geographic positioning and balance sheet strength. While the unprecedented level of supply chain disruptions has added complexity and timing delays into the current operating environment, market fundamentals remain positive and our fourth quarter is still expected to mark a significant inflection in our growth and profitability that will carry into 2022 and beyond. As we enter this exciting next phase, I'm thrilled to announce that after an exhaustive search of both internal and external candidates to identify the best qualified person to succeed Dave following his retirement at year-end. We have appointed Lou Steffens as our next Chief Financial Officer. Lou is one of Taylor Morrison's most tenured and proven leaders with over 30 years of home building operational and financial experience, and is uniquely qualified to lead our company in the next leg of its strategic journey. From his role as President of Mergers and Acquisitions, in which he led and executed each of our 6 acquisitions and integrations and his background in finance and operations as an area and Divisional President in various markets across the country, he brings an invaluable depth of knowledge and expertise to our finance team that we can -- that we expect will expedite the execution of our strategic plan and elevate the level of cohesion between our finance and field operations.

Since gaining the scale and diversification, we set out to achieve with our M&A strategy, Lou has most recently shifted focus to lead our results management office, where he has spearheaded the rationalization of our operations and other initiatives that are contributing to our enhanced margin and returns. He has been instrumental in deploying strategies to enhance the profitability and resiliency of our business and is deeply familiar with our capital markets, accounting and financial planning processes, making him well-suited to seamlessly step into this new role effective January 1st, after a collaborative transition with Dave.

With this announcement, it's equally bittersweet to approach the end of Dave decade long history of Taylor Morrison, in which he oversaw our transformation from nearly a 5,000 unit homebuilder at the time of our initial public offering in 2013 into one that is on track to deliver approximately 14,000 units this year, with further momentum ahead.

Along this journey, he has been a true partner for me, an effective leader to our teams, and a key contributor to our company's culture that will be missed dearly by all. However, we are excited that he'll be able to spend more time with his family after achieving so much in his professional career. And I wish him all the best in his next chapter.

And lastly, I want to end with my deepest appreciation to our teams across the country who are working tirelessly to deliver our largest year-end ever, during this unprecedented operating environment, all while maintaining their commitment and passion to delivering an unmatched customer experience for our home buyers, to our construction sales and mortgage teams that are on the frontlines making this happen day in and day out. I sincerely, truly thank you.

Now, I'd like to open the call to your questions. Operator, please provide our participants with instructions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Matthew Bouley with Barclays.

Ashley Kim -- Barclays -- Analyst

Hi, this is Ashley Kim on from Matt this morning. So really nice gross margin result now look here, can you just quantify any pressure on gross margins you're experiencing from supply chain constraints? Whether that's outright cost inflation, or the lost leverage on delayed closings anything on those lines?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah, Ashley. I'd say on the direct bill costs, we saw, call it low single digits increased sequentially from Q2, that excludes the lumber, though, I mean lumbers actually working in our favor now as you know. Pricing power is more than covered cross cost increases year-to-date. To quantify, it's hard because there are so many moving pieces though, what we're seeing right now and we're definitely seeing increased costs, some balance, but again pricing power is there to help offset that. We're working closely with our trade partners to ease some of that burden as well.

Ashley Kim -- Barclays -- Analyst

Thanks, that's helpful. And then just on the sales pace. Are you finding that you're still kind of capping sales to the same extent that you were throughout this year?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Hi, Ashley. I mean, as we said in the prepared remarks, it's about 70% of our communities. But you really have to deep dive into that because they look different. Some of those that might be that we're releasing a certain number of lots on a monthly basis and we provide kind of notice to the public. And then do lotteries, we certainly aren't seeing the level of [Indecipherable], I'd say there's only a handful across the country. Mostly, it's really to just align with production. We're not holding back specs, we're pretty much releasing those at the start of construction. So I'd say it's a very healthy market, but it's normalized from where we were earlier in the year.

Ashley Kim -- Barclays -- Analyst

That's helpful color. I'll leave it there. Thank you.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you, Ashley.

Operator

Our next question comes from the line of Mike Rehaut with JPMorgan. Your line is now open.

Unidentified Participant

Hi. I'm Doug [Indecipherable] from Mike Rehaut. In terms of incentives, where you guys currently versions around three months ago?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah. So from an incentive standpoint, if you look at the Q3 deliveries, they're down meaningfully year-over-year and also down sequentially from Q2. In our backlogs, we do have reduced incentives on a go-forward basis. I would tell you that out in the market in general, are they starting to come back a little bit? I would say we're seeing it probably more in the periphery probably more than anything, but it's still very, very modest.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah, I think as we look across our portfolio, Dave, really our incentives, continue to be focused on the mortgage. And beyond that they're very, very sparse anywhere in the country.

Operator

Our next question comes from the line of Truman Patterson with Wolfe Research. Your line is now open.

Paul Sadowski -- Wolfe Research -- Analyst

Thanks! This is actually Paul Sadowski. I guess starting off with your 4Q closing guide, it implies an increase year-over-year conversion rate, which hasn't really happened I guess for the past four quarters or so. What gives you the confidence that you're going to be able to get those homes across the finish line given the supply constraints, the boundaries of our whole industry making the year-end push?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah, Paul, I want to be clear, you're talking about backlog conversion. When you're saying conversion rate?

Paul Sadowski -- Wolfe Research -- Analyst

Yes, I am.

David Cone -- Executive Vice President and Chief Financial Officer

Okay. So maybe just a minute on kind of how we got here. The material shortages. They've been an issue for some time. We're watching closely. It's been difficult to predict given the unprecedented challenges that we are faced with, as an industry as well as, as a country. Based on what we do 90 days ago, and I would say even 30 days ago, we expected to deliver on our original guidance. However, we saw delivery date for material slide more meaningfully over the last month and even if all the material that we need worry before year-end, we think that we would struggle to get the labor there to install it. So we adjusted our guidance to take that into consideration in that shift material deliveries and probably those labor challenges that are there, it's still a big quarter for us. Our teams, our trade partners, we're all poised to deliver. I mean this is effectively just a little bit of a timing push of what we're seeing, what we thought would be in Q4, just going into early 2022.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

And Paul, the only thing I'd add is, you know your point's well taken. It's a big quarter it's going to be a big December for us will be the company's largest. We're having the pull lots of different levers to make sure we're ready. But we've been working on that for some time that will include weekend signings to get through mortgage inclosing. We believe we've taken all of that in the account, the challenges you've seen across the industry, there are some that become very unpredictable until the day they happen, but we think we have the universe to do this, but it's a unique environment and something we've not seen before, but the teams have done really a masterful job even getting into our closing range in Q3. So it's a big push back. We're planning on getting there.

Paul Sadowski -- Wolfe Research -- Analyst

Okay. And then on your 4Q gross margin guidance, it's flat quarter-over-quarter and you got elevated closings. Is there higher lumber costs or what's kind of the swing there? Because I would have thought you would have been up a little bit, just from a leverage perspective?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah, I mean, when you look at kind of Q3, Q4 for us, Paul, we've talked about that being more of the inflection point from a margin perspective, but you are seeing it in lumber. The biggest pressure is coming from lumber. We actually anticipate lumber the cost peak here in Q4 and then it will start to step down a little bit in Q1, Q2, but more meaningfully step down in the second half of next year.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

The only other thing worth mentioning, Paul, it is at the end of the day, it's going to come down to mix.

Paul Sadowski -- Wolfe Research -- Analyst

Okay.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

If you look at what we pushed into next year, those generally tend to be the bigger, more complicated ounces some of those carry higher margins, if we could bring any of those over the finish line this year could have an impact, but it's the pressure of lumber and then it's really it's good news for '22, right, Dave?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

But it does keep us kind of flat for the year.

Paul Sadowski -- Wolfe Research -- Analyst

Okay. I appreciate it. Thank you.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you.

Operator

Our next question comes from the line of Carl Reichardt with BTIG. Your line is now open.

Unidentified Participant

Thanks, good morning everybody, it's Carl on for Carl.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Hi. Good to hear your voice Carl.

David Cone -- Executive Vice President and Chief Financial Officer

Good morning, Carl.

Unidentified Participant

It is [Indecipherable]. So I want to go back to the comment you made about the 70% sales, [Indecipherable] or Dave or anyone, what are the -- are there specific guide posts we should be looking forward to then conclude that it's now time to remove those restrictions? I mean what, what do we need to see or you need to see in order to feel comfortable that now you can start reducing those restrictions. And I think just because I think this is a part of it. Can you tell me, of the 3.5 homes per community per month that you started in 3Q, what percentage of those were specs versus pre-sold?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

You bet. We'll tag team this. I wish I could tell you that there's just one thing that we need to look at here. This is a decision that's got to be made community-by-community. One of the big areas is really the production capacity in the marketplace because as you've heard, I think us and everybody else talk about, Carl, it's really about trying to align production and sales. And as you can see, we've put our start a little bit ahead of our sales to make sure that we're bringing more inventory into the business and we've made had some good movement this year and will continue to grow that to get us ready for the spring selling season. And so even though we're managing sales in a number of our communities. I still think it's a more normalized environment because it's not like we're seeing these massive waitlist. We're still seeing some, we are generally selling through them. If we weren't able to sell what we were releasing that would probably be a signal that we would be more just open and we are open and like I said, about 30% of our communities. So I think it's the production capacity. I actually expect Carl that as we move into the spring selling season, we're going to see a very strong spring and that could put us back in a more managed sales program again. So it's going to be supply chain generally, market conditions generally, supply and demand in the individual local markets that will really drive that. And then Dave, you want to talk about the kind of the spec starts in total?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah, I mean we've been increasing our percentage of specs relative to where it was a year ago. As you know, we kind of got that down a little bit lower. We are focused on to be built. But as we've kind of move through the year, we've been able to put more specs in the ground and you can see that just based on our spec level and our inventory, we're about 5.2 specs as a total company per community. Again, which is a pretty good chunk. So we're still running more to be built in specs and that will continue to be the case going forward. But we like the position that we're in, from a spec perspective.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah. Because I would say looking historically, Carl, I mean, being it should be built business has always been something that's been very favorable over the years for me. It certainly wasn't the first couple of quarters this year, but now I think that trend reverses, and you'll see that as we pull-through. So I think we have a healthy number of specs today's point, we want to get probably closer to that 6 to 7, especially in our more affordable business. But we're delighted now that the to-be-built I think will be a more advantageous mix for us.

Unidentified Participant

Okay. Thank you, both. I appreciate that. And then Sheryl, another comment you made in the prepared remarks was about out-of-state hires and it was -- I want to expand on that if you can you talk about the percentage of your deliveries that are two out-of-state buyers, how that's changed and what the impact in your mind, what impact that's had on your sales prices? In other words, is it an arbitrage opportunity folks coming from expensive places to cheap places? What does that do to the local buyer who may be looking at prices saying this is due in these are too expensive? It seems like an important dynamic and so I'd just like to just expand and give us some more color on how you look at that. Thanks very much.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Now, you bet Carl, you actually -- it's a savvy point that you bring up because in some of our markets I think our teams with specifically outline that with the price moves from that we've seen, it's much more difficult for the local consumer to adjust to that pricing. And as I mentioned in the prepared remarks, we're seeing a strong influx from really what I would call high-cost markets and that would be your California, that would be your kind of Northeast market, and they come to the markets let's talk about the Northeast coming into Florida with a very different expectation on what they can -- what they're selling their house from, what they can afford to buy. So they're able to spend more and buy up. And that's why I think we're seeing what we are, I mean, once again I'll use Florida. When I look at what we have in backlog, an example would be, Carl, what these folks are able to spend on lot premiums and options. If I look at our third quarter lot premiums and I compare those to my whole 2020 year, they're up about 40%. When I look at the '22 backlog, they are again a similar amount. The options also very telling they're putting more money into the house are up about 10% over 2020 and when I look at 2022, they're up about another 20% that is really the power of the migration trend that we're seeing. If I look at our Californian, we're seeing probably two times the penetration that we've seen historically in places like, Nevada, Arizona, Texas, Colorado from California. And I think that's why we continue to see the pricing power that we have.

Unidentified Participant

Thanks for that. I appreciate it.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

You bet.

Operator

Our next question comes from the line of Alex Rygiel with B Riley. Your line is open.

Alex Rygiel -- B. Riley -- Analyst

Thank you. And very nice quarter. First question here. So I'm very confident in capturing 200 basis points of margin growth for 2022 and that would be fantastic. Can you break that down a little bit between lumber price mix so on and so forth?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah, Alex, it's hard to break down all the moving pieces just because of all the activity that we're seeing out there from a pricing from a cost, but yeah, to reiterate, we expect homebuilding closing margin in excess of 22% for next year, which is up from our prior comments are confident on the margin improvement is evident in our 2022 backlog we've built so far. And you might recall we came out six months earlier than we normally would to talk about the '22 margin just given that level of confidence. We do anticipate seeing margin improvement sequentially over the next several quarters. We're excited that we're at this inflection point after being focused in the last few years on integration activities we talked a little bit about it earlier, but we expect lumber impact on deliveries to start to increase in Q1 and Q2 will be more meaningful in the second half but we've also left a little bit of room in our 2018 margin guidance for any upside if lumber were to go above kind of the current level. So we create a little bit of buffer there in case that were to happen, but we're going to be back to you and 90 days, a little bit more specific margin guidance for 2022.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah. And I would just add a couple of things I think Dave is exactly right, it's hard to break it apart Alex, because there are so many moving parts and pieces. So I probably simplify it and say all the work that we've been talking about on these operational enhancements are really coming through. That's number 1. Number 2, we didn't have any spec inventory at the beginning of last year. And so what we had was the drag of these lumber impacts on our to-be-built. Now, you've got all that benefit working for you. The pricing because we had contracts locked in in 2020 and they got the down, they got the negative impact of the lumber. Now, what you have is our pricing is kind of the market with our new contracts and you've got specs that are real-time along with the operational enhancements on the 200 basis points that Dave is describing We are extremely confident about and I think we'll be able to give you more detail around that next quarter.

Alex Rygiel -- B. Riley -- Analyst

And you've been progressing down the path of digitizing the home buying process for some time now, where do you think we are in this number 1 process from your standpoint. Number 2, consumer adoption of it?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

I think that's the exciting part, Alex, is the consumer is asking for it. And so I think as an industry, we've probably talked in the past that we've been somewhat antiquated in adopting kind of this whole world of e-commerce in this demand environment we said housing was different. Well, the consumer doesn't feel that way. Certainly, COVID I think change the perspective of our industry, but what's been really interesting as we've been talking to the consumers that have been describing and when I look at train of the all of the virtual tools and I look at the conversion rate. And I look at what we're hearing from the consumer, I'll give you a couple examples. Our conversion rate on inventory homes that are being reserved is about 17%. Our conversion rate on to-be-built homes that are being reserved is about 19%. These are two times general industry conversion rate. When I look at our reservations just in the last 30 days, nearly 800 reservations came through our system. And then when we talk, and by the way, those generally tend to come with the lower realtor. But then when we talk to the consumers, so with our new project venture, we have been interviewing every consumer to see why they -- how they enjoyed it? Why they did it? And the biggest takeaway from all of the exit surveys is that people enjoy having the freedom to do this on their own. And that's kind of the way with all on-demand services. So I think the adoption is really strong and we are in such early days. I think when this becomes more of the norm, you'll see continued efficiency that can be built from here.

Alex Rygiel -- B. Riley -- Analyst

Thank you.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you.

Operator

Our next question comes from the line of comes from Jay McCanless with Wedbush. Your line is open.

Jay McCanless -- Wedbush -- Analyst

Hey, good morning everyone. Thank you for taking my questions. The first one on the active adult, the growth that you're seeing there is the growth there being driven across the board by some of the legacy communities you acquired a few years ago, as well as the newer communities or is most of the growth weighted to those newer communities?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Hi, Jay. I would tell you it's both, I really would we have some new communities in California, but we also have a number of new communities throughout Florida and I think they're all doing quite well. I think really the brand acceptance of Esplanade and the brand growth of Esplanade has also helped. I also think you have to just think about the change in attitude that's come with this consumer, having been through COVID. I think there is a real urgency in their buying decision. I think social interaction and all the things that come with an Esplanade are of key importance to this consumer group. We talk about the migration from some of these high cost markets, the Midwest. I think that's also playing into it. And then in all fairness, I think it's important to say when you look year-over-year, they didn't come back to the market as quick as other consumer groups. So when I look at the pace and total absorption, I mean improvement, some of that I think is because last year wasn't as strong as it could have been. I think it really start picking up in Q3, if I'd say there was kind of half of a quarter lag there but I think it's all of it.

Jay McCanless -- Wedbush -- Analyst

Okay, that's great. Thank you. Sheryl. And then my second question on the fully automated communities. I guess maybe where does that go as a percentage of total community count and the homes, presumably these buyers are picking up package, etc. I mean, these homes that should have a shorter cycle time even then your traditional entry-level product where you have a salesperson in there? I just wanted to more depth around where does this go as part of the business, but then also does this help shrink down your overall cycle time because these homes are I guess very low option level etc?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah, it's a great question and I don't want to get over my ski tips. I love the question I'm quite excited about the new venture brands. So if I look at our first community in Orlando, what I would tell you is, those are all pre-panelist houses. So just back to simplification of the product, absolutely drives efficiency and reduces cycle time. When you have the buyer in the mix and you've got different options being selected, you just can't help elongate that. So I'd say yes, we will get greater efficiency. I think you'll see this move to other consumer groups. But I think our first few pilot communities will be at the more affordable fully penalized product, which will absolutely to your point, reduce cycle time. Where do we go from here, it's really early days. I think we're very excited for these communities this year, I think the consumer will tell us, I have great expectations that as we move into 2022, we'll continue to introduce new venture communities. It's probably a little early for me to tell you what it will be as a percentage of the portfolio, but I think as we bring new communities to market, it gives us the opportunity to say what's the best way, I'm not sure we're prepared to do it in the active adult environment yet because that a consumer that probably need a little bit more interaction. I think it's also we know it's a consumer that enjoys the design center experience and spend a lot of money there. So we'll look at the portfolio and understand the best places, but I think you'll continue to see growth through the portfolio.

Jay McCanless -- Wedbush -- Analyst

That's great, thanks for taking my questions.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you.

Operator

Our next question comes from the line of Alan Ratner with Zelman & Associates. Your line is open.

Alan Ratner -- Zelman & Associates -- Equity Research Associate

Hey, good morning.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Good morning.

Alan Ratner -- Zelman & Associates -- Equity Research Associate

Hey, good morning. Nice quarter. And congrats to Lou and today it's exciting.

David Cone -- Executive Vice President and Chief Financial Officer

Thanks Alan.

Alan Ratner -- Zelman & Associates -- Equity Research Associate

So my first question, hoping you can give a little bit of forward-looking kind of thoughts into the mix of your business and you obviously flagged the active adult share going up. When I look at your pricing, obviously pricing in the markets at the ton but your pricing is increased well in excess of peers, I look at your order price, it's up almost $200,000 over the last year-and-a-half, 2 years and it's running over $100,000 above what you delivered this quarter and I'm trying to figure out going forward, what's the right mix of your business to think about, because obviously if your price is going to be going up $100 plus next year on deliveries that's pretty impactful to the model. At the same time, if you're selling more kind of higher-end move up homes even active adult homes. I would guess, there is probably a down shift in absorptions over time at those higher price point. So can you give a little bit of clarity in terms of where you see the business going and try to strip out some of the quarterly volatility here?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah, I think we'll tag team this one now and but good question, when you look at the mix this quarter of sales, I think it will give you a pretty good indication of what kind of the next 12 months look like. So I think when we come back next quarter, you'll probably see an ASP, no surprise given the backlog numbers that will be higher, certainly the quarter is highly influenced by the high percentage of active adult sales in the quarter for all the reasons we've talked about. I want to be careful, though because active adult is not always the active adult brand doesn't have to be exclusively the higher price point. We have some of our active adult offerings that are much more affordable price points. But when I look at the introduction of the new communities that really impacted the quarter. I look at the Sacramento price point. I look at the Temecula in California, you have just higher price point active adult positions, but well as some of the Country Club offerings in Florida, I think you'll see active adult to be healthier blend of the total portfolio. But we have a lot of new affordable positions coming to market in late '22 that I think will probably bring down the overall company ASP as we move into '23, even though...

David Cone -- Executive Vice President and Chief Financial Officer

That's yeah. I think based on what you're seeing ASP orders, Alan, obviously it's going to trend is something higher for an ASP in '22 versus '21 but I'm with Sheryl. As we look out in the business in the growing affordable segment, I think you're going to see that revert back starting in '23 and we'll see some moderation.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah.

Alan Ratner -- Zelman & Associates -- Equity Research Associate

Okay. That's really helpful. Just to talk through that and then I guess the second part of that question was just kind of thinking through absorptions in the mix of the business because a few years ago before you did Lyon, if I remember correctly, you were thinking about like a $2.5 per month absorption pace behind the target and obviously the markets improve the time since then. But you're running probably closer to $3.5 this year. So putting aside, whatever the market is going to do is there kind of a right absorption rate that you're underwriting land deals to today that you think about as a sustainable run rate?

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

And once again, Dave, let's say what we both feel about this, but certainly we saw peak absorptions early in the year and I think we all know that those were not sustainable, especially as you look kind of globally outside of just Taylor Morrison and the number of new communities that will come back into the marketplace, I think you should have expected to see absorption rates grow given kind of across the country, Alan, we're probably down about 20% communities as those come back to market over the next 12 to 24 months, I think you'll see just absorptions across the industry stabilize the math would suggest if demand stays where it is today. We don't write -- underwrite to a target rate. We really look at each piece of land, but I think your general view on something higher than what our historical number was in the low twos, the mid twos that takes you over through probably makes more sense as you look long-term.

David Cone -- Executive Vice President and Chief Financial Officer

Right. And I would just add, I mean if you look at the strategic acquisitions we've done over the last couple of years, Alan, some of that was designed around pace and increasing turns so something with a three-handle on it, it seems more likely on a go-forward basis.

Alan Ratner -- Zelman & Associates -- Equity Research Associate

Got it. That's very helpful. I appreciate all the insights there. So good luck.

Operator

Our next question comes from Mike Dahl with RBC Capital Markets. Your line is open.

Ryan Frank -- RBC Capital Markets -- Equity Research Associate

Hey. This is Ryan Frank on for Mike. Thanks for squeezing me in here. And then also just wanted to say Congrats for Mike and myself Dave to you and your retirement and Lou also. Looking forward to working with you.

David Cone -- Executive Vice President and Chief Financial Officer

Appreciate that Ryan. Thank you.

Lou Steffens -- President Acquisitions

Thank you. Appriciate it.

Ryan Frank -- RBC Capital Markets -- Equity Research Associate

So in the interest of time, I'll just ask one here is a little bit of a two-parter but last quarter starts were roughly 5 per community in this quarter is closer to 3.5. So can you just piece out kind of what was driving that, whether it's seasonality or supply constraints? And then given those dynamics how confident are you in the '22 and '23 community count targets that you guys laid out last quarter?

David Cone -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I'll -- from a community count perspective, that is by far the toughest thing for us to predict. There are so many moving pieces from availability of the trades to the municipality approvals, the good news is we have the land ahead of us to grow the communities, but we're currently seeing the challenges on the horizontal side of the business. Labor is always a challenge, and I would tell you that's been magnified in this environment. Material shortages are also hitting the horizontal side. One of the largest shortages is coming from pipe to support community infrastructure especially sewer pipe. We've seen shortages of labor, materials across all aspects of homebuilding but we're definitely seeing the bottleneck here in the horizontal side. I mentioned in the prepared remarks if the challenges persist or worsen on the horizontal side, we could see some delays but we're constantly evaluating our cadence of community openings taken the necessary actions to bring the communities online, we'll have better insight in the '22 around the community count on our next call. So we'll give you an update on that about 90 days.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Yeah, you know, it's interesting because I think everyone's to fully up to speed on the supply chain challenges that have hit the vertical side of our business, 90 -- 60, 90 days ago pipe was an issue, you've come from 0 to now types probably 3, 4 months delays. So what we really have to dig through honestly is the stuff that was scheduled to open the back half of the year. And we have virtual tools that will assist us even pre-opening, but that's the color we really want to dig into, so we give you an accurate view on the '22 community count. As Dave said, we have all the land. So we're in a good place, '22 is fully subscribed and '23 is actually quite strong as well. Dave, you also want to talk about the start because we did see a peak start in Q2.

David Cone -- Executive Vice President and Chief Financial Officer

We did. I mean, I would argue that we are well above 4 and that was a level that is very difficult to sustain. A lot of that was, we saw some of the higher demand. We're trying to meet that. We were trying to put specs on the ground, but also us, and I think a lot of folks in the industry were dealing with weather challenges. So there is a little bit of a catch-up. We ran in Q3 from the orders perspective a 3-3 pace, our starts pace was about 3-5 per community, I would tell you that's a little bit of a healthier spot for us where we'd like to be. And we'll hopefully be somewhere in that kind of mid threes from a start perspective going forward as well.

Ryan Frank -- RBC Capital Markets -- Equity Research Associate

Got it. Thank you very much for the time.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thank you.

Operator

Our last question comes from the line of Alex Barron with Housing Research. Your line is now open.

Alex Barron -- Housing Research -- Analyst

Thank you, and good job on the quarter.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Thanks Alex.

Alex Barron -- Housing Research -- Analyst

I wanted to ask about share repurchases. I know you guys stepped up, there is little left on the authorization. So can you guys comment generally on your thoughts around share repurchases going forward?

David Cone -- Executive Vice President and Chief Financial Officer

Sure, Alex. Yeah. We have a $100 million remaining on our current authorization. We're going to continue to be opportunistic and kind of way our investment options from there. I'd tell you the focus continues to be on share repurchase and probably so in the foreseeable future. I mean, we -- first of all, we strongly feel that we're undervalued and reinvesting through share repurchase is going to be accretive to us and driver from ROE. Also with that we have a strong focus to bring down our debt. But we're a little bit of handcuffs right now because of the premiums to kind of refi and pay down some of that debt, but every quarter that goes by those premiums come down the math, it looks a little bit better. But short of paying down some of that you're going to see us continue to focus on share repurchase. Once we get through this authorization, we will -- like we always do go back to our Board and talk about potentially putting another one in place and we'll give you an update when and if that happens.

Alex Barron -- Housing Research -- Analyst

Okay, thanks. And also along those lines. Any thoughts on starting a dividend?

David Cone -- Executive Vice President and Chief Financial Officer

It's a good question. It's actually one that we debate I would say a couple of times a year, both of the management team and our Board. I would tell you right now, our priorities are, as I said focused on paying down debt and then taking advantage of our stock, given that we feel it's so undervalued. We're probably a couple of years from a dividend, but that's something that we'll continue to address going forward.

Alex Barron -- Housing Research -- Analyst

Great, thank you very much.

Operator

Thank you. There are no further questions. I will now turn the call back to Sheryl Palmer for closing remarks.

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

Well, thank you very much for joining us today. We are excited to share our Q3 results and look forward to speaking to you in the New Year. Take care.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Mackenzie Aron -- Vice President of Investor Relations

Sheryl D. Palmer -- Chairman, President and Chief Executive Officer E

David Cone -- Executive Vice President and Chief Financial Officer

Lou Steffens -- President Acquisitions

Ashley Kim -- Barclays -- Analyst

Unidentified Participant

Paul Sadowski -- Wolfe Research -- Analyst

Alex Rygiel -- B. Riley -- Analyst

Jay McCanless -- Wedbush -- Analyst

Alan Ratner -- Zelman & Associates -- Equity Research Associate

Ryan Frank -- RBC Capital Markets -- Equity Research Associate

Alex Barron -- Housing Research -- Analyst

More TMHC analysis

All earnings call transcripts