Taylor Morrison Home Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

A leading national homebuilder and land developer in the United States, focused on building and selling single-family homes in a variety of communities and offering financial services such as mortgage lending.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Taylor Morrison Home Corporation (TMHC) is a prominent player in the U.S. homebuilding market. They are involved in the entire lifecycle of home construction, from land acquisition and development to marketing, sales, and financial services for their customers.

The company operates in a wide array of regions, across the States of Arizona, California, Colorado, Florida, Georgia, Nevada, North and South Carolina, Oregon, and Texas. These are fast-growing and diverse housing markets where Taylor Morrison has a solid footprint.

The homebuilding division is their core offering and constitutes 93.2% of the total revenues, while the rest is financial services (4.7%) and other operations (2.1%). They build single family detached homes, attached homes, and also provide design and build-to-suit homes to suit different needs of clients. They operate under several brand names and have a first-time home buyer strategy.

Recent Financial Performance and Trends

Market Conditions: The housing market has been challenging, experiencing volatility, as inflation increased mortgage rates which made affordability difficult, therefore impacting sales. However, there are signs the market is slowly recovering from the lows.
Revenue Generation: Taylor Morrison generates revenue from home sales, land sales, and financial services provided to customers. Their core revenue generator is home sales and has generated above 90% of total revenue in recent years.
Decreasing Earnings: The recent reports revealed some challenges to the company, particularly in the last quarter where net income has declined significantly compared to the prior period. The decrease is mainly attributed to the high mortgage rates and unfavorable market conditions.
Revenue Growth in 2023: 2023 revenue was 5.8 Billion compared to 7.2 billion in the same period in the previous year.
Adjusted Gross Margin Adjusted home closing gross margin declined from 27.7 to 24.6% year over year.
Home Closings: 1866 homes were closed in 3Q 2023 compared to 3038 in 3Q 2022. This decline of approximately 40% indicates weak demand due to the higher mortgage interest rates.
New Home Orders: Taylor Morrison reported a 40% decline in new orders in 3Q 2023.
Backlog: The value of backlog was 10.7 billion with 14220 homes backlog with an average sales price of $750,000.
Shift in Demand: It’s important to note that in recent years, there has been a noticeable shift in home buying trends, with a rise in demand for entry-level and build-to-rent properties. The high-end market is experiencing a slowdown in sales.

Competition and Competitive Landscape

Highly Competitive Market: The homebuilding industry is highly competitive, with numerous companies vying for market share. This makes it difficult to maintain strong returns on capital unless a company can either compete on price or provide a highly differentiated product.
Fragmented Market: The industry is very fragmented, however, the largest players have an advantage of scale that is difficult for new entrants or small competitors to replicate quickly.
Pricing Power: Companies are limited in their ability to raise prices because they are in a competitive industry and must compete with many other providers. This puts heavy pressure on margins.
Industry Consolidation: There has been increased consolidation in the home building industry over the last few years.
Regional Variations The market operates very differently in different areas of the country. Market structure can be different from region to region.

Moat Assessment: 2/5 (Narrow, with potential vulnerabilities): While Taylor Morrison operates in a sector with inherent regional moats, its competitive advantage is not particularly wide, rather it’s more akin to a narrow moat that could erode faster than wide moats. Here’s a breakdown of the moat:

Limited Brand Moat: While Taylor Morrison has a strong brand presence in several markets, brand strength alone isn’t usually enough to constitute a wide moat in homebuilding as consumers are not particularly loyal to one single brand. This brand could help them attract customers, but would likely not allow them to charge a price premium above their competitors. Also many home buyers do not prioritize the builder but look at community, area, and price first.
Geographic Scale: While the geographic scale does help them, as a national home builder, they have a more expansive network, which allows them to gain some efficiencies and also benefit from different markets that are at different points in the cycle. However, these local mini-monopolies are not exclusive.
Intangible Assets: They do not have patents and or exclusive licences that provide a defensible moat.
Low Customer Switching Costs: The switching costs for customers are low, as switching from one home builder to another doesn’t have many additional costs. This also prevents any sort of premium pricing power due to lack of stickiness. Therefore this aspect doesn’t contribute to creating a moat.
Cost Advantage: Since the core offering is in homebuilding, having some type of cost advantage is very important. However, since other competitors might build in the same area, having access to land, and construction materials they do not have a durable cost advantage. Some regional cost advantages can exist in the short to medium run.
Network Effects: Since the company is not a tech business, network effects play a small role in their market, so it does not contribute to any competitive advantage.

Therefore, Taylor Morrison’s moat is narrow and faces real risks of erosion if its brand, cost structure, and capital management don’t deliver consistent returns.

Risks to the Moat and Business Resilience:

Cyclicality of the Housing Market: The company is exposed to the cyclical nature of the homebuilding industry. Economic downturns, changes in interest rates, and consumer confidence can have a significant impact on their sales and profitability, which makes financial performance hard to forecast.
Economic Uncertainty: High-interest rates and persistent inflation can make potential buyers to hold back on purchases.
Interest Rate Sensitivity: Given the reliance on mortgages in the home-buying process, rising interest rates directly impact housing affordability and consumer demand, which is what happened in 2022-2023. This could result in significantly decreased revenue.
Supply Chain Disruptions: Disruptions to the supply chain can lead to increased material and labor costs. The company, like others in the market, is exposed to price pressures due to supply and logistics issues.
Mortgage Rates: An increase in mortgage rates could cause defaults in the existing inventory of mortgaged homes.
Land Development Risk: The development process is complex and has the potential for cost overruns. It can also take a lot of time from the initial purchase to the sale of a finished product. This exposes the company to the long-term uncertainty about prices and interest rates.
Competition: The competitive landscape is always evolving, with new entrants into a particular market, and competition between competitors is only becoming more and more aggressive. The company needs to keep adapting and making adjustments to survive and maintain relevance.
Government Policy: Changes to governmental policy including zoning laws, code regulations, and tax incentives, can materially affect the business
Inability to Retain or Recruit Key Personnel: A company like this relies heavily on the talent of its management to help it navigate difficult times and come out ahead of its competitors. Therefore any disruption to the leadership can be detrimental.
Limited Brand Loyalty: There is little to no brand loyalty in the space, as most consumers focus on the area, type of community, or price first.
Customer Acquisition Cost Customer acquisition costs are high as the company has to maintain various sales channels.

Despite these risks, a company such as TMHC with a robust balance sheet can survive and rebound quicker than companies with a weaker financial structure, which we discuss later.

Financial Analysis:

Reorganized balance sheet: When a company’s balance sheet is reorganized by separating operating vs non-operating items, it provides a clearer picture for investors to understand the business more precisely.
Cash Position: The company has a total cash position of 898M. They have been generating positive cash from operations for the past years, but in the recent report, the cash from operations decreased compared to the prior period due to a lower home sales.
Debt Levels: As of September 2023, the company has $5.6 Billion in debt. The company has been trying to maintain a moderate debt level, especially in such a capital-intensive industry. They are trying to pay down debt to manage risk and improve solvency.
Leverage: They do utilize debt to fund operations and are vulnerable to economic changes that put them under pressure.
Liquidity: Since their business is closely tied to real estate, they tend to hold low cash, and high amounts of inventory.

Understandability Rating: 2 / 5 (Somewhat Complex): The company’s business model is not overly complex; however, there are aspects that require a strong understanding of the real estate market, financial services, and how housing market cycles impact revenue and profitability.

Moderate Complexity: The business model revolves around land acquisition, home construction, sales, and financial services and does require a deep understanding of these factors. There are nuances within the sector such as the cyclical nature of housing, and how government policy impacts their operations. Furthermore, understanding mortgage debt and how this ties into their bottom line is paramount in understanding the business.
Financial Reporting Complexity: The way accounting for revenue, profits, and loss is done in home-building companies adds some complexity. Understanding their financial statement and metrics such as gross margin, debt-to-equity ratios is an important aspect of fully understanding the business.

Balance Sheet Health Rating: 3 / 5 (Fair): Taylor Morrison’s balance sheet could be improved in the sense of having a lower debt load, but it’s not horrible and the company maintains reasonable solvency.

Debt Management: The company has a total debt of $5.6 Billion with a debt-to-equity ratio of .43 (debt to market value of equity), which can be considered moderate and healthy, as other players in the industry can have as much as 1.3 debt to equity ratios.
Short and Long-Term Debt: There is a good mix of short-term and long-term debt and management has been actively working on reducing the debt. As a result, some debt that matures in the short term may be easier to repay, or refinance.
Asset-to-Liabilities Ratio: Although the overall asset to liability ratio is good, but much of their assets is in real estate inventory which can change in value depending on the markets, and demand. This increases business risk.
Cash Holdings: They have about $900 Million in cash which is enough to cover many of their expenses.

Recent Concerns and Management Response:

Market Slowdown: The high-interest rate environment and higher inflation have contributed to the recent slowdown in the housing market, therefore, impacting the company’s sales and profitability. Management believes that this is a normal part of the cycle, and that things will improve.
Supply Chain Challenges: The company, like many in the industry, is experiencing supply chain constraints and has been working with suppliers to control costs and ensure timely deliveries.
Stock Buybacks and Dividends: The company has stopped share repurchases in 3Q 2023, and also reduced dividends in 3Q 2023. However, management mentioned that they do plan on resuming these with more clarity in the business outlook.
Profitability Decline Management has started to implement several initiatives to cut costs and increase profitability in the company. It is worth looking at how these initiatives help the company improve profits and returns over the next few quarters.

Overall, the key is to keep focusing on ROIC, cost structure, and customer satisfaction, to create an enduring value for its shareholders.