Good morning, and welcome to Taylor Morrison's Second Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations. Please go ahead..

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.

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..

Thank you, Mackenzie, and good morning, everyone. We appreciate you joining us today, and I sincerely hope each of you are doing well.

I will start today's call with a brief overview of our second quarter results and then spend some time discussing our strategic focus on driving long-term sustainable improvement in our earnings potential into 2022 as well as our view on the market.

During the quarter, we delivered 3,268 homes, at an average sales price of $503,000, driving a 12% year-over-year increase in our home closings revenue to $1.6 billion.

While a few of our second quarter closings were slightly delayed by weather and supply chain interruptions in some of our markets, we remain committed to our prior full year guidance of 14,500 to 15,000 closed homes.

Our home closing's gross margin improved 370 basis points year-over-year to 19.1%, exceeding our prior guidance and setting the stage for further improvement in the quarters ahead. From a demand perspective, the market remained favorable, particularly in April and May, with some normalization in June.

This drove strong pricing power across our markets and 23% year-over-year increase in our monthly absorption pace to 3.4 net sales per community.

Each of our consumer groups experienced year-over-year growth in sales paces led by outperformance among active adult buyers who are notably reengaged in the market and responding well to the recent national expansion of our premier lifestyle brand, Esplanade.

However, we intentionally limited our sales releases and delayed the release of spec homes until later in the construction cycle to maximize our gross margin and navigate the tight supply side governors on housing as we build through our record backlog of over 10,200 sold homes.

In anticipation of elongating cycle times and constrained labor and material availability, we intentionally accelerated our construction cadence and successfully increased our monthly production pace by 140%, year-over-year, and 17% sequentially to a record 4.8 starts per community during the quarter.

This left us with all the starts in the ground necessary for our full year closings target, and we are proactively working to stay ahead of further supply challenges through the remainder of the year.

And lastly, we continue to make progress towards further streamlining of our operations, leveraging our leading market position and expanding our land financing tools.

To the latter point, I'm pleased that we recently finalized new land financing vehicles that will enable us to cost effectively increase our option land position to at least 40% within the next 18 months.

These arrangements improve the capital efficiency of our land portfolio and reduce risk while enhancing our returns without any meaningful change to our long-term gross margin opportunity..

Thanks, Sheryl, and good morning, everyone. Before diving into this quarter's financial performance, I want to take a moment to address the recent announcement about my upcoming retirement.

After nearly a decade at Taylor Morrison, which has included our IPO, 6 homebuilder acquisitions, the exit of our Canadian operations, and so much more, not the least of which has been the lasting relationships and friendships I have been fortunate to develop with our team members, partners, colleagues in the industry and investors.

I'm at a position to step back from my professional career to spend more time with my family and on philanthropic interests.

While I will greatly miss the people and culture at Taylor Morrison, which are second to none, I am confident I will be leaving the company well positioned for future success, and I'm committed to ensuring a seamless transition to my successor.

The search process is well underway as we seek the strongest candidate to help lead the company in its next chapter. Until then, I will be here working closely with Sheryl and our teams as we head into the second half of the year, which I believe will deliver the strong financial results we have been striving toward..

Thank you, Dave. I will wrap up by saying that we continue to expect 2021 to mark an important inflection point in a multiyear journey to realize the operational and financial advantages of our significant growth.

As I look ahead to the second half of the year, I'm energized by our team's strong focus on achieving our operational priorities and delivering a record year of home closings to our buyers.

Our disciplined focus on managing sales paces controlling costs and ramping production is expected to drive strong improvement in our home closings and gross margins in the coming quarters and into 2022.

To summarize our outlook, in the next 6 months, we expect to realize a significant pivot in our financial results, highlighted by our expectation for a home closings gross margin of approximately 22% in 2022.

This performance is expected to drive new record high returns on equity in the high teens percent range in 2021, followed by further accretion to over 20% in 2022, all while deleveraging our balance sheet with our strong cash flow.

We firmly expect these results to set the stage for meaningful multiple expansion from our stock's current discounted levels.

As we have described, this strong improvement is a function of the sustainable realization of operational synergies from our multiple acquisitions and our focus on maximizing profitability through strategic selling and cost management strategies as we successfully execute our business plan.

In addition to our company-specific opportunity, the housing market is supported by a long-running mismatch between limited new construction supply and growing household formations and evolving consumer needs.

We believe the size and breadth of our portfolio, serving first-time buyers through luxury lifestyle consumers is well positioned to meet this demand in the coming years. Lastly, I want to thank all our team members and trade partners for their commitment to serving our organization and customers during today's unique market conditions.

It is their effort and collaboration that will allow us to achieve our goals, and I am endlessly thankful for their dedication. Now I'd like to open the call for your questions. Operator, please provide our participants with instructions..

Our first question comes from Carl Reichardt with BTIG..

So the 22% gross margin guide for next year, Obviously, your guidance -- right now, your backlog is like 1,000, 1,500 units of your backlog would flow into next year.

So as I can understand what your land costs are going to be, your stores are going to be -- what are you assuming on average selling price in terms of trend? Are you basically saying prices kind of flat today as similar communities open next year, we can get to this 22%? Or is there an assumption of price growth next year that's embedded in that margin guide?.

No, there would be no assumed price appreciation in our forward guidance. The market will determine price. And I would tell you, Carl, that as we look to the next few months, I would expect that we'll still see some pockets of opportunity to continue to move prices probably not as aggressively as you've seen over the last 6, 8 months.

But I think you'll see some movement at more modest levels. But there's absolutely no appreciation assumed in the forward guide. It's really a function of all the things that we talked about in our prepared remarks..

And the same could be said, Carl, from a cost perspective. We're kind of looking at things -- everything being equal right now. Obviously, if there's movement on price up, that helps. If it's cost down, that helps. That's what's embedded in our backlog right now because it's what we're seeing from a price and cost perspective today..

And then on average order price for this quarter, which was near $600,000, I think, Sheryl, you mentioned there was a product mix shift towards active adult to some degree.

Could you expand on that? I'm also assuming that because the orders in the Central region fell that excess is less of a contributor, which also sort of raised the average order price. So maybe just a little more detail on that..

I think it's a bit of both. You do have some mix shift, obviously, with the central order volume. But when you look at our active adult, our 55-plus lifestyle buyer, and you see the strength that we've seen. If you look at the mix in the quarter, I think the sales were something like 25%. So that would be up a few hundred basis points, Carl.

And generally, what we see with this buyer is higher lot premiums. I think I mentioned that in my prepared remarks, the options are generally 2x what we would see in the company average.

And as I look out in the backlog next year, within our lifestyle communities, their premiums are 2x what -- their lot premiums are 2x what we've seen this year or historically. We have an active adult President, operating team that's working with all of our markets.

The Barron's acceptance that we've seen in the Esplanades is really taking hold, and we're really seeing great value creation. So excited about this consumer set and as it continues to grow as a portion of our portfolio..

Our next question comes from Matthew Bouley with Barclays..

This is Ashley Kim on for Matt today. My first question is just on the 22% gross margin guide for next year.

Just on lumber specifically, is that embedding a lumber tailwind? Or would lower leverage be flat?.

Repeat the last part..

It isn't embedding the lumber..

No, no..

It's really not. Some moderation..

Right now, we still have costs that are flowing in, call it, 50% above where it's trading in the market today. I think we're going to see lumber peak Q3, Q4. It will hopefully start to come down in 2022, but we're not embedding that in there yet..

Actually, to Dave's point, we're certainly not expecting the peak that we've seen, but it's kind of early to be 100% where those prices go where the cost goes next year. What we're really trying to do is lean in and give visibility of what we're showing in our backlog, certainly through the first quarter and the opportunity that we see beyond that..

But 22% is something that we feel we can deliver despite some market movements. Obviously, we'll see -- you've got 6 more months to get to, call it, the Q4 call to firm it up, and we can give you a little bit more information at that point..

And then can you comment on what else you're seeing that's giving a read on fire demand, just given that the restriction in sales pace is, obviously, not telling the whole picture?.

Ashley, I missed part of the question.

Can we give a read on what?.

Just what you're seeing in buyer demand, just given that the restriction in sales pace, isn't telling the whole picture?.

Yes, absolutely. Ashley, we're managing our sales programs probably in 75% to 80% of our communities. Demand is still very strong by any historical standards. I would actually call early in the year somewhat frenzied and today, a very healthy market with tremendous momentum. But it is very difficult to paint a single brush across the U.S.

You need to look at the geographies and consumer groups as we plan our sales strategy community by community. We saw pace is up with all consumer groups for the quarter despite the number of dynamics that we've seen in the marketplace. We've seen a little seasonality. I wouldn't say it's typical.

Demand is stronger than generally what you would see in the summer months. But obviously we're seeing tremendous summer travel given everyone has felt somewhat caged up. I would tell you that consumer is a bit fatigued after levels of lotteries and that have been in the market, the , absorbing some of the price appreciation.

But looking forward, and certainly, as we've entered into July, we continue to see very strong momentum. You might say you might not have -- on a lottery, you might not have 50 people, you might have 20 people, but still tremendous demand.

I would describe today as a healthier place and a more sustainable environment for the consumer, for the company, certainly for our trades to be able to deliver a good customer experience..

Our next question comes from Truman Patterson with Wolfe Research..

This is actually Paul Przybylski. I was wondering, on your gross margin improvement, can you slice that a little bit further and maybe break out how much is coming from the William Lyon synergies? How much is coming from current pricing dynamics and then how much is coming from the shifting or more efficient construction processes, i.e., Canvas..

So are you talking about the quarter margin or the guidance?.

Actually both, if you could..

I'd say for Q2, that's really more around pricing power of the spec homes that we were able to sell and close during the quarter. And then obviously, there definitely was a component of that where some of the William Lyon synergies were starting to take hold, Paul.

And the vast majority of that, though, is really going to -- we'll see a little bit more in Q3, and we were able to take our guidance up for the year just because we're seeing that coming in a little bit maybe faster than we thought initially.

But it's really going to be more so in Q4 as kind of that true inflection point for us around the synergies truly taking hold plus the various actions that we've taken that we talked about in the prepared remarks.

That's the synergies from William Lyon being at that improved cost structure looking at floor-plan rationalization and value engineering, which was especially focused on the William Lyon plans. That allowed us to reduce costs without impacting the home's aesthetics, expanding our standard design package.

That helps to reduce cycle time, which is big while also expanding our buying power on a concentrated set of SKUs. And then floor plan simplification, that puts more emphasis on narrowing our offering to the high-profit homes.

And then I also mentioned in the prepared remarks just our mix of new community openings, they're more weighted to markets that deliver some of our highest margins. So that's setting us up well for Q4. But definitely, we start seeing that full benefit when we get into 2022..

And maybe I would just add to that, Dave. To your point, Paul. Canvas, we expect that to be more of a contributor as we look forward. In these are early days. We've rolled out across the country, as we said in our prepared remarks. But when we look at the margin trajectory in our -- early in pilot markets and just what we're seeing is we like it.

And without overstating the obvious, part of the pickup you're seeing, Paul, is we came into the year with a tremendous backlog. And unfortunately, that backlog took a great deal of pressure on lumber as we saw peak numbers early in the year.

So being able to lap that and move into some of the spec inventory as well as the price movement from our newest sales. That also gives us a great deal of confidence as we look forward..

And as Sheryl said, we're leaning in a little bit more on 2022 earlier than we normally would. And I don't want to get too much further out there, but a lot of the things that we're putting in place now that will impact next year, we actually think the accretion will carry beyond 2022 and into 2023. All things being equal.

And then when you couple that with kind of that inflection around the community count growth that we expect to see at the end of 2022, it bodes well for gross margin dollars..

In '22 and really strong '23. Good point..

I guess the second question, your SG&A ticked up a little bit in the quarter. What was the driver of that? And along those lines, with the strong demand out there, we know a lot of builders are actually cutting external broker commissions.

Are you doing that? Are you cutting external or internal sales commissions? And if so, what would be the timing and magnitude of impact we could think of?.

We'll probably tag team this one a little bit. From an SG&A, I mean, we were down sequentially up a little bit year-over-year. remember in Q2 of last year, we leaned pretty heavily on the William Lyon specs. So I would argue we pushed a little bit more closings through.

When I look at this Q2, we were able to meet our guidance on closings, but be it at the lower end of the range. So I think if we were a little bit more there in the middle, that obviously would have helped. So a lot of it is just around timing Paul, if you go back to our full year guidance, we haven't come off of that. We're still in that mid 9% range.

So it really is just timing. You're going to see some stronger leverage, obviously, in Q3 and Q4, just given the overall level of closings coming through..

And then I'll pick up, Dave, on the broker piece. Paul, we have made some adjustments in the markets across the U.S. It's everything from adjusted on the actual fee to we've gone to a national program of just paying commissions on the base price. Once again, we came into the year with a very strong backlog.

You've seen very little of that traction actually hit because that was all done early this year. And so it really would have only impacted a small percentage of our spec closings. The other thing that deserves an honorable mention, Paul, would be our virtual environment as those closings start to come through the system.

And we've had hundreds of closings that are completely virtually -- are completely virtual, excuse me, and they generally carry a lower broker participation, so you've got a lower participation and a lower fee that we get to look forward to..

And we are seeing leverage on the selling line. It's really the G&A and the timing of expenses. And then relative to the top line, which is impacting that deleverage..

Our next question comes from Jay McCanless with Wedbush..

So on the fiscal '22 guide, just to be clear, the price cost benefit that's expected is coming from the land side.

If I'm hearing you correctly, it's going to be less, I'm assuming lots that were acquired in the William Lyon deal and probably more legacy Taylor Morrison land?.

You're talking about the margin guidance? No, this is the actions....

Yes, for '22..

This is the action that we're taking on operational enhancements. That's going to be the bulk of the driver. All the things that I just kind of went through they're all designed to either help enhance price, but just as much probably even more so is on the cost side, sharpening our costs to get them reflective of our overall size and scale.

But the land component of it, I mean, it varies based on mix, but all things being equal, that gets a little bit more expensive every year. So you're typically -- on a typical year, you're setting that off with price and hopefully better efficiency..

And if you think about the residual, obviously, there's actually been some pickup in the residual as prices have moved up on the existing. But I would -- I completely concur with Dave that I would say generally same, a modest pickup or modest savings, but that won't be the driver..

The second question I had, just any update on Christopher Todd and your single-family to-rent efforts?.

Absolutely. Jay, we've announced seven markets already and have in the process of planning two new markets, we're actually recruiting a land leader in Houston right now, and we'll be expanding our Florida operations as well. Each market is in a slightly different place.

Phoenix is the most advanced with projects at multiple stages, Jay, from design to development to under construction and leases are expected to start by year-end. It is interesting, Phoenix has been somewhat of the melting pot of both VTR and SFR strategies, but there's been very little traction in our Christopher Todd model outside of Arizona.

So we're pretty excited about the operations that will be active in certainly at least 7 markets by the end of the year. Right now, we have approximately 25 to 30 deals at some stage from accepted LOI through owned land. Recognizing these deals are a little bit more complex and they take some time to entitle for our use.

You won't really see an impact on the financials until we begin to sell assets, likely late next year. So as we think about '22 guidance, we'll get much more specific with you. And as we optimize, explore the best way to optimize the price. In '21, Dave, I don't even think there'll be -- the rental income would be so modest.

I don't think it'll move -- you'll see anything..

And that's going to go in our amenity and other revenue line, as Sheryl said, it will be minimal. You won't really notice much of an impact this year. But as we move through the next couple of years, it becomes more meaningful..

Yes, I actually think you'll be pre-leasing this year, Jay, and then you'll really start to see the income next year..

Our next question comes from Alex Rygiel with B. Riley..

Quick question to follow up there on that last one as it relates to builds-to-rent.

How much capital have you invested into that business to date? And how should we think about sort of capital allocation into that business on an annual basis going forward?.

Yes. The gross number, Alex, is probably $130 million, of which we've done some financing around that just to help from a return perspective, call it, 60% of that number. Going forward, it will be a few hundred million, but that's built in our overall land and development budgets.

And still, even with that, we're going to throw off operating cash flow of $600 million or more each year..

And once again, each of these projects will be individually project financed..

Yes..

And then coming back to your guidance, Clearly, your guidance suggests an incredibly strong fourth quarter for closings.

Can you discuss sort of your confidence level on that and the visibility on this? And where there are risks and where there are opportunities for that?.

You get to our implied guidance, it's between 5,100 and 5,400 closing. And we're still early in the construction cycle for many of the fourth quarter deliveries. But our team, they know what's ahead. It's a big fourth quarter. We know what is ahead.

We're working with our teams daily on it, and we're discussing the obstacles and opportunities around the construction cycle every day to help deliver here in the second half. Our priority, though, is always going to be delivering a complete home.

Some of the biggest challenges, and I don't think it's anything new that you haven't already heard is really around the material shortages that are out there. Some of the biggest pain points right now are windows. We've seen lead times almost double there.

Other things, just to name a couple more, roof trusses and bricks, that continues to be a challenge. But things come up every day around shortages. We work to kind of knock it out by the end of the day, only to wake up the next day and see yet another challenge. But it's the reality for us right now.

And so far, we've been able to overcome many of those, and we're going to continue to push to the end of the year..

The only thing I'd add is, if you look at the past years, we would actually start houses probably well into August to deliver in the year. We have everything in the ground. But Dave's spot on, the supply constraints are real. Our teams are managing them every day. So with what we know today, we have a very big fourth quarter.

We need conditions not to worsen. Hopefully, there's no impact from this COVID variant dropping crews because if -- that would create some more timing issues. But as we sit here today, we plan to get there..

And we're ordering materials a lot sooner than we typically would. And we're also stockpiling some materials where it makes sense as well..

Yes, it'll be a record quarter for the company..

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

So I'd love to drill in a little bit on the uptick in starts, really impressive getting to almost 5 starts per community in the quarter per month. I'm guessing that's not something you would tell us is kind of a new target run rate or is necessarily sustainable.

But I'm curious if the current market conditions and strength has kind of caused you to kind of rethink that steady run rate in terms of starts per community or sales per community like you've talked about in the past.

And given that success in the growth in starts, are you starting to pull back on some of those limitations on sales that you've been kind of putting in place over the vast majority of your communities?.

Yes. I'll jump in on the starts, maybe Sheryl will hit the sales side. So Alan, we continue to align our starts with the order pace. Our Q2 starts, they were probably a bit inflated, and we had significant weather challenges in Q1. Not to mention, we had a large backlog from last year and that we had to get started.

So that was a little bit of a catch-up, coupled with the strong pace that we saw Q1 and most of Q2. As Sheryl just mentioned, it's a big quarter for us to get everything into the ground to help us deliver for the year. And that's what took us to that cadence of about 4.8 starts per community.

This should normalize probably somewhere in the high 3 range for starts per community. I would argue this is probably a healthier start pace for us, especially given the supply chain challenges that are out there right now..

So I wouldn't take it, Alan, as a read on the market that we're slowing it down. We're just going to try to get to a normal sustainable pace, which, to Dave's point, probably high 3s. Q2 was unique on a lot of different levels. As far as the sales front looking forward, we'll continue to deploy different strategies by community, Alan.

I would expect some communities will go back to more traditional releases. Some will continue to still be managed. We are still holding specs in some communities until they get further into the construction cycle. Having said that, there's others that we're releasing at start.

We -- really important to understand the existing market conditions and the strategy of the other builders and potentially get ahead of any sort of glut of inventory that's being held back today. A lot of folks have mentioned not wanting to keep a customer in backlog any longer than you have to. So that certainly plays into it.

So there's a number of things the teams are managing. But the momentum and the strength continues to be quite good..

Second question, I know this is tough, but I was hoping you can maybe provide a little bit of clarity just on where we should think about your price point going, order price that you mentioned, Taylor was maybe impacted a little bit by mix in the quarter. But it's almost $100,000 above your delivery price right now.

And I know that's been kind of moving around here.

So where do you see, as you look at your community count and some of the growth coming through the pike, where do you see that price -- average price going over the next one year, one and half year assuming price appreciation kind of normalizes as you anticipate?.

As we mentioned, I certainly think you're going to see price up next year over 2021. My instinct is, given the mix of the communities in '23, you'll see it settle back a bit just as I look at the new communities that are coming online. So I think '22 probably provides the peak, Alan.

I mentioned, I think, a couple of times that what we're seeing in lot premiums, all of -- any of the competitive environment that we've been, we've really steered the buyers to lot premiums versus base price because I think we've all been to a place where you don't want to see any movement backwards on base price.

So that's feeding some of the price appreciation, certainly a great deal of what you saw in the selling price in Q2. As that levels out, I would expect that overall pricing -- once again, we're taking price in some communities. We're just not taking it at the level that we took it earlier in the year..

On our overall ASP from an order perspective, I mean it's largely rate, not a lot of mix. I think you get into 2022, we might see mix play a little bit more of a factor as well..

Alan, I'm going to mention one other thing that I think does play into price. As we look at the consumers' behavior today, and we look at our backlog, square footages are still going up. They're spending more in the design center. So it's not just on lot premiums.

They're buying a bigger house on a home site that meets their needs, which I think says a lot about their ability to qualify and what's important to them. When we look at our spec inventory that we're putting into market, we're actually reducing square footage a little bit to try to continue to serve that more affordable consumer.

So that's why I think you'll get this kind of blurring of our mix in overall price, and I think you'll see it settle back a bit..

Our next question comes from Mike Dahl with RBC Capital Markets..

This is actually Chris on for Mike. I just want to go back to the selling pace outlook for the back half of the year. When can we see absorptions kind of return back to your more normal 2- to 3-month level? Clearly, at 3.4 per month we saw a sizable step down from 1Q.

So I mean, based on what you're seeing in July, do you think this is going to continue into next quarter? Or do you see more of a structural improvement in your selling pace?.

I think -- if I look at July -- let me start there. If we look at July, certainly, the month is not done yet, but I expect that July will be relatively consistent with Q2. When we look at our historical paces of low to mid-2s, I don't think we'll go back to the 2 to 3.

But I do think that something more in the low to mid-3s becomes more realistic long term. So I think in the back half, you'll see kind of that normalization, mostly because of the managed paces we're talking about, but I think you'll also get some seasonality in there..

And if you look at 2020, a bit of an anomaly year with the pandemic and what -- where it was slow, then it picked up. If you compare back to 2019, you also have to remember we're a different company with the acquisitions, especially more affordable, higher paces, more West Coast geared and some aspects as well, which typically have a higher pace.

So I think there you're also seeing just the structural shift of the business..

And for my follow-up, I was wondering if you guys are seeing if you have a way of tracking whether there could be any kind of overestimation in the current breadth of demand out there. I mean, for example, you gave the example of seeing 20 bids in the lottery system instead of the 50 prior.

Is that a dynamic at all of buyers kind of hedging their odds and placing bids across multiple communities.

Is that something that you're hearing or seeing out there or contemplating at all in your outlook?.

As I mentioned, I -- we're managing the sales programs in 75% to 80% of our community and the demand is quite strong by any standards.

But it has normalized from the frenzied pace that we saw, I would say, in the first quarter and moving into the second quarter, I actually think we're in a much better place to provide a better experience for our customers. It's been very difficult for the consumer in today's environment. They have been participating in multiple lotteries.

There's actually -- I would tell you, early in the year, a decent amount of fear about being able to secure a home. So I like where the business is going. I like the fact that we're managing our pace to match our construction cycle so we can provide a better experience to the consumer.

There is still a tremendous amount of demand because I think what continues to feed this is we are undersupplied as a country. I mean millions of units. So I think we've got some runway ahead..

Our next question comes from Deepa Raghavan with Wells Fargo..

Sheryl, I'm going to tag on that demand question that got asked. Would you say it's the traffic that is now slower, not the demand and that demand is still as strong and not necessarily gated versus early in the year? Or would you say there have been some marginal impacts for whatever reason as in maybe this buyer fatigue.

There's a lack of availability of affordable houses, et cetera. So how would you -- how do we think about this slowdown in the number of bids, et cetera, that you get, but then the backdrop is still pretty strong.

So is it more like a traffic versus demand dynamic or is there something more happening?.

As I said, Deepa, I think I do think it remains very strong. We just have to understand what we're holding ourselves up against. And if we consider the frenzied environment, we know that's not a sustainable environment. Traffic per community is actually up. I think year over year somewhere around 10%. Our conversion rates are up.

When I look at our web traffic for our divisions, really all indicators are strong. Our web traffic is up. And now when our web conversions are up tremendously, which really surprises me considering that all communities are open and they weren't a year ago. So I think you have all the things we talked about. I think you do have a little bit of fatigue.

I think you do have a little bit of seasonality. And so we have -- we see 2 weeks where people pull back, then they're right back at it. So I think this is just a good strong normalization. When you think about affordability, we've actually seen sequential strength in our buyers.

The way I try to look at it, Deepa, is if I take a $400,000 house a year ago, and that's up 20%, just using the generic numbers that have been posted, the buyer's overall payment is modestly higher today because it's a buyer that's able to put more down and their over credit profile is strong or their ratios are better, their incomes are up.

So their overall monthly expense is relatively unchanged, so they're able to absorb the price movement. In fact, when I look at our backlog, they really are absorbing these increases.

And today's buyer has even a greater spread between the qualifying income, that would be the income we use to qualify them and their total household income from what they had a year ago. And then as I said, they're buying bigger houses, putting more money into it. So I think the buyer is in pretty good shape. The FHA buyer might be slightly different.

We haven't seen the same lift in income. The ratios might be a little tighter, but they still are in a better place than they were a year ago with 500 basis points of room. So I think I would caution us not to point to one thing because I think we have a very strong, high demand market.

But obviously, you're going to see movement from month-to-month and quarter-to-quarter. And I think using last year's kind of peak paces. I think about our June last year, I think, was our peak the company has ever seen, that's 4.7%. If we try to qualify that as a normal, I think we'll disappoint ourselves..

My follow-up is on gross margin. You raised the 2021 guide on gross margins towards the 20% upper end, 19.5%, et cetera.

Does that already incorporate some of the cost action benefits that actually play much stronger into 2022? Or is that raise -- the current raise more just from pricing actions this year, et cetera?.

Deepa, it's both. I mean, on the cost side and the enhancements that we're making, yes, it's in there. I would describe it as kind of early innings as it's coming through in Q3 and Q4. Relative to our expectations, it's coming in a little bit faster, a little bit more meaningful than we thought. So that's the great news of it.

But also pricing is playing a factor, the prices have been staying ahead of cost to date, which is also a very favorable thing..

But would you say that 22% that you're giving for next year, is that the full run rate of all your cost actions or what is the run rate of all of that?.

Well, like I said, we're six months out, Deepa, from finishing this year. We'll give you more color over the next couple of quarters as we kind of firm things up. But we will be at a run rate around the synergies sometime in Q4 on an annualized basis, really more taking hold in Q1.

But we think that there's additional enhancements that we're going to be able to make in '22 that will also benefit 2023. But like I said, give us some time, we'll firm that up..

Deepa, we would not typically give this type of forward guidance. But based on the stock price, we just believe there's a true misunderstanding of the trajectory of the business. I have an appreciation that we haven't provided a quarter without real acquisition or integration noise, onetime costs for nearly 3 years.

But we've always said this is the pivot point at 18 months after an acquisition. And now that we're approaching that time period, it probably feels a little longer with how the pandemic distorted everything. But we believe it's just time to put that stake in the ground and give everyone better visibility.

But we're really leaning in because it's pretty early. So as we get greater visibility in the coming quarters, we'll continue to update..

Our next question comes from Tyler Batory with Janney..

Just one multipart question for me. In terms of the new land financing vehicles.

Are the return profiles or the underwriting metrics, are the hurdles different than what you were using before? And then perhaps more broadly on the land market generally interested in what you're seeing on the price side of things? And then also, there are a number of builders that are really trying to ramp up their land position.

There are some others that are a little bit longer in terms of their land position. I mean how comfortable are you with where you are right now looking towards 2023.

Would you expect a substantial step up in your spending into next year to really ramp the business in 2023 and beyond?.

So I'll pick up on your land hurdle question relative to the financing, Tyler. So have our hurdles changed? No, we're still underwriting in the same way. Obviously, it's a unique demand. Sure, we'll talk a little bit about the land pricing here in a minute. But obviously, ASPs are different, costs are different.

We incorporate a lot of sensitivities to help us understand what is a good deal. The financing vehicles themselves, those are designed to actually enhance the overall return of a project, thus enhancing the overall return for the company. There is a little bit of a gross margin drag that comes with that. That's the trade-off to get the better return.

But we've been talking a lot today around all the various operational enhancements that we're putting in place. We feel they're going to more than offset that drag there. So this is really a way to lighten the balance sheet, increase our option lots and really enhance returns over the next many years..

So there's two vehicles, as we mentioned. One will kind of act like a land banking vehicle and the rates that we've been able to put in place, honestly, are as competitive as anything we've ever seen before. The other one is more of a venture. It kind of acts like a JV, and that will be for our larger assets.

Each deal will be underwritten individually by both parties. So kind of consider a capital allocation tool for us, and we'll -- that will be available when it makes sense. It will allow us to capitalize on additional growth opportunities while importantly mitigating risk at this point in the cycle.

In the first 30 days of putting these vehicles in place, we expect to put something between $250 million and $260 million of L&D spend. I don't think this will be a monthly run rate for us, but we've actually been waiting to get to the first closing.

So we're delighted, to Dave's point, on what this will do kind of the long-term return trajectory of the business. As far as land pricing and the competition in the market, I would tell you it's about as fierce as any time I recall. The sellers are seeing the price movement in housing today, and I think they have higher expectation on both cost terms.

I'm seeing some things out there that are -- we need to continue to retain our kind of underwriting standards. We're seeing things that are getting closed very quickly without maybe proper due diligence, maybe closing earlier in the entitlement.

I would tell you that we're going to retain our cadence and approval regimens, not adding appreciation but really hedging with sensitivities on cost and pace. So it's tight, but it's always tight. And the teams are actually putting some very good deals on the books.

So when I look at some of the stuff in the pipeline today, actually across the business, it's high quality..

Our next question comes from Alex Barrón with Housing Research..

I think last quarter, you discussed the increased amount of out-of-state buyers.

I was curious if you guys have measured what it was this quarter versus last quarter?.

Alex, we have and -- we have continued to see traction. I'm seeing if I can actually grab that schedule. We might have to get back to you with the real specifics. But as I said in my prepared comments, we've really seen a strong surge of California buyers in both Texas, in Arizona, in Colorado, really strong in Nevada.

And then we've seen a tremendous surge of kind of northeast into our Florida business, maybe even the Carolinas when I -- I mean we're happy to get offline with you because we have a tremendous amount of detail both on our shoppers and buyers and the trajectory of that out-of-state business is pretty meaningful..

The other thing I was curious about is, what do you feel is a greater concern or shortage at this point, the material side of things or labor to get the homes built?.

Yes, you can't have one without the other..

That depends on the market..

Yes. It depends on the market. It depends on where they are in the construction cycle. I would say it this way, Alex. I think we're more accustomed to dealing with the labor shortage as an industry. I think the level of material shortage, that's new for us.

That's something that we don't typically deal with, and it's been a change but they do still go somewhat hand-in-hand..

I'd almost say it like this, Alex, Dave, I don't know if you agree. If we had the materials that were needed across the industry to meet the supply that's being brought to market, you'd probably have more of a labor shortage..

Yes, true..

Because we just trade-by-trade, they're not able to meet the demand because of some of the shortfalls. And logistics, you've got this issue with commodities. You've got a tremendous issue with logistics, and that's everything from containers at the ports that are creating some of the pain points, to trucking and drivers.

So there's a lot of things that are making the material side of it, very difficult and the labor is trying to keep up with what they're getting..

There are no further questions. Please proceed with any closing remarks..

Thank you very much for joining us for our Q2 call today. Have a great day, and look forward to talking to you next quarter..

This does conclude the conference. You may now disconnect. Everyone, have a great day..