Earnings Call Transcript - TMHC Q2 2021

Operator, Operator

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.

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. 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.

Sheryl Palmer, Chairman and Chief Executive Officer

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 a 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. Lastly, we continue to make progress towards further streamlining 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.

Dave Cone, Executive Vice President and Chief Financial Officer

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, six 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.

Sheryl Palmer, Chairman and Chief Executive Officer

Thank you, Dave. I will wrap up by saying that we continue to expect 2021 to mark an important inflection point in a multi-year 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 six 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 teen 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.

Operator, Operator

Our first question comes from Carl Reichardt with BTIG.

Carl Reichardt, Analyst

The 22% gross margin forecast for next year indicates that your backlog, which consists of around 1,000 to 1,500 units, will carry over into next year. Can you clarify what your land costs will be and what average selling price trends you are anticipating? Are you suggesting that prices will remain stable as similar communities open next year, allowing for the 22% margin? Or is there an expectation of price growth next year included in that margin forecast?

Sheryl Palmer, Chairman and Chief Executive Officer

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 six to eight 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.

Dave Cone, Executive Vice President and Chief Financial Officer

From a cost perspective, we are currently evaluating everything as equal. If prices increase, it's beneficial, and if costs decrease, that's also advantageous. This is reflected in our backlog today, as it aligns with the current trends we are observing in pricing and costs.

Carl Reichardt, Analyst

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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 double 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 double 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.

Operator, Operator

Our next question comes from Matthew Bouley with Barclays.

Ashley Kim, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

Repeat the last part.

Sheryl Palmer, Chairman and Chief Executive Officer

It isn't embedding the lumber.

Dave Cone, Executive Vice President and Chief Financial Officer

No, no.

Sheryl Palmer, Chairman and Chief Executive Officer

It's really not. Some moderation.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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 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.

Dave Cone, Executive Vice President and Chief Financial Officer

But 22% is something that we believe we can achieve despite some changes in the market. Of course, there are still six months until the Q4 call to confirm this, and we can provide more information at that time.

Ashley Kim, Analyst

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

Sheryl Palmer, Chairman and Chief Executive Officer

Ashley, I missed part of the question. Can we give a read on what?

Ashley Kim, Analyst

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

Sheryl Palmer, Chairman and Chief Executive Officer

Yes, we're managing our sales programs in about 75% to 80% of our communities. Demand remains very strong by historical standards. Earlier this year, it was quite frantic, but today, we have a very healthy market with significant momentum. However, it’s challenging to generalize across the U.S. as we must consider different regions and consumer groups in our sales strategy, community by community. For the quarter, we've noticed an increase in pace across all consumer groups despite various dynamics in the marketplace. There has been some seasonality, but it isn’t typical; demand is stronger than usual for summer months. We are also experiencing considerable summer travel as people are eager to get out after feeling confined. Consumers appear to be a bit weary after enduring fluctuating prices in the market. Nevertheless, as we move into July, we continue to see strong momentum. Although attendance might be lower at lotteries, the demand remains high. Overall, I would characterize the current market as healthier and more sustainable for consumers, our company, and our trades, allowing for a positive customer experience.

Operator, Operator

Our next question comes from Truman Patterson with Wolfe Research.

Paul Przybylski, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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

Paul Przybylski, Analyst

Actually both, if you could.

Dave Cone, Executive Vice President and Chief Financial Officer

For Q2, the improvement is primarily due to the pricing power of the spec homes we successfully sold and closed during the quarter. Additionally, some of the synergies from William Lyon started to take effect. However, most of the benefits will be seen more in Q3, and we've adjusted our guidance for the year as this is progressing a bit faster than we initially anticipated. The true inflection point for us regarding these synergies and the various actions we implemented will occur in Q4. The synergies from William Lyon have led to an improved cost structure, and we focused on floor-plan rationalization and value engineering, particularly with the William Lyon plans. This approach has allowed us to cut costs without affecting the appearance of the homes while also expanding our standard design package. This reduces cycle time, which is significant, and enhances our purchasing power on a limited range of SKUs. Simplifying floor plans has enabled us to concentrate on high-profit homes. Moreover, our new community openings are increasingly located in markets that yield some of our highest margins, positioning us well for Q4. However, we'll truly realize the full benefits as we move into 2022.

Sheryl Palmer, Chairman and Chief Executive Officer

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. 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 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.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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

Paul Przybylski, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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-nine percent 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.

Sheryl Palmer, Chairman and Chief Executive Officer

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 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.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Operator, Operator

Our next question comes from Jay McCanless with Wedbush.

Jay McCanless, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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

Jay McCanless, Analyst

Yes, for '22.

Dave Cone, Executive Vice President and Chief Financial Officer

We are focusing on operational enhancements, which will be the primary driver of our results. The initiatives I've mentioned are aimed at improving pricing and, notably, optimizing our costs to align with our size and scale. However, the land component tends to get more expensive each year, although it can vary depending on the mix. Generally, in a typical year, we manage this by adjusting pricing and striving for improved efficiency.

Sheryl Palmer, Chairman and Chief Executive Officer

If you consider the residual, there has been some improvement as prices for existing items have increased. I completely agree with Dave that there has been a modest uptick or savings, but that will not be the main factor.

Jay McCanless, Analyst

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

Sheryl Palmer, Chairman and Chief Executive Officer

Absolutely. We've announced seven markets and are planning two additional ones. We are currently recruiting a land leader in Houston and will also be expanding our operations in Florida. Each market is at a different stage; Phoenix is the furthest along with projects in various phases from design to construction, and leases are expected to start by the end of the year. Interestingly, Phoenix has integrated both VTR and SFR strategies, but we've seen limited progress with our Christopher Todd model outside Arizona. We're excited about having operations active in at least seven markets by the year's end. Currently, we have around 25 to 30 deals underway, from accepted letters of intent to owned land. These deals are more complex and will take time to entitle for our use, so you likely won't see financial impacts until we start selling assets, which is expected late next year. We will provide more specific guidance for 2022, as we look to optimize pricing. In 2021, I don't anticipate the rental income will be significant enough to have an impact.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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

Operator, Operator

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

Alex Rygiel, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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

Alex Rygiel, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

You get to our implied guidance, it's between 5,100 and 5,400 closings. 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.

Sheryl Palmer, Chairman and Chief Executive Officer

I want to emphasize that in previous years, we typically began house construction in August for year-end delivery. Currently, we have everything in place. However, Dave is right; supply constraints are a significant issue that our teams are actively managing. Based on our current understanding, we anticipate a strong fourth quarter. We just need to avoid any worsening conditions. It’s crucial that any impact from the COVID variant does not affect our workforce, as that could lead to further timing issues. Nevertheless, we are committed to meeting our goals.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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

Operator, Operator

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

Alan Ratner, Analyst

So I'd love to drill in a little bit on the uptick in starts, really impressive getting to almost five starts per community in the quarter. 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 have kind of caused you to 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?

Dave Cone, Executive Vice President and Chief Financial Officer

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 that we had to get started. So that was a little bit of a catch-up, coupled with the strong pace that we saw in 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 three 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.

Sheryl Palmer, Chairman and Chief Executive Officer

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, is probably high threes. 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 are others that we're releasing at the start. We really want 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 continue to be quite good.

Alan Ratner, Analyst

I have a question regarding your pricing strategy. Can you provide some clarity on where you anticipate your price point to be moving forward? I understand that the order price mentioned by Taylor may have been affected by the mix during the quarter, but it's currently almost $100,000 higher than your delivery price. Given your community count and projected growth, what do you expect the average price to be in the next one to one and a half years, assuming that price appreciation stabilizes as you foresee?

Sheryl Palmer, Chairman and Chief Executive Officer

As we mentioned, I believe that prices will increase next year compared to 2021. However, I think there will be a slight adjustment in '23 based on the new communities that will be introduced. So, I expect '22 to represent the peak. I've noted a couple of times that we are focusing buyers on lot premiums rather than base prices to avoid any decline in base prices. This approach has contributed to price appreciation, particularly in the selling price observed in Q2. As the market stabilizes, I anticipate that overall pricing will continue to adjust. We're planning to raise prices in some communities, but not to the same extent as earlier this year.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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.

Operator, Operator

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

Unidentified Analyst, Analyst

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 Q1. 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?

Sheryl Palmer, Chairman and Chief Executive Officer

If I look at July, the month isn’t over yet, but I expect it to be relatively consistent with the second quarter. Historically, we’ve had paces in the low to mid-2s, and I don’t anticipate returning to the 2 to 3 range. Instead, I believe a more realistic long-term forecast is in the low to mid-3s. Therefore, in the second half of the year, you should see a normalization mostly due to the managed paces we discussed, along with some seasonal effects.

Dave Cone, Executive Vice President and Chief Financial Officer

If you examine 2020, it was an unusual year due to the pandemic, starting off slow before gaining momentum. When comparing to 2019, it's important to recognize that we've evolved as a company following our acquisitions, particularly those that are more affordable and oriented towards higher growth, especially on the West Coast, which typically experiences faster growth. Therefore, you're also seeing the structural changes in the business.

Unidentified Analyst, Analyst

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?

Sheryl Palmer, Chairman and Chief Executive Officer

We're currently managing sales programs in 75% to 80% of our communities, and the demand remains quite strong. However, it has settled down from the intense pace we experienced in the early months of the year and moving into the second quarter. I believe we are now in a better position to enhance the experience for our customers. Today's environment has been challenging for consumers, who have been entering multiple lotteries for homes. Earlier this year, there was a notable amount of anxiety regarding their ability to secure a home. I feel positive about the direction of the business and appreciate that our pacing is aligned with our construction cycle, allowing us to improve the consumer experience. The demand is still significant because we are undersupplied as a country, with millions of units needed. I believe there is still potential for growth ahead.

Operator, Operator

Our next question comes from Deepa Raghavan with Wells Fargo.

Deepa Raghavan, Analyst

Sheryl, regarding the demand question, would you say that the traffic is slower but the demand remains strong and is not constrained like it was earlier in the year? Or do you think there have been some slight impacts, perhaps due to buyer fatigue or a shortage of affordable homes? How should we interpret the slowdown in the number of bids compared to the overall strong backdrop? Is this more about traffic versus demand, or is there something else at play?

Sheryl Palmer, Chairman and Chief Executive Officer

As I said, Deepa, I 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 see two 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 overall 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.

Deepa Raghavan, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Deepa Raghavan, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

Well, like I said, we're six months out 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.

Sheryl Palmer, Chairman and Chief Executive Officer

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, one-time costs for nearly three 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.

Operator, Operator

Our next question comes from Tyler Batory with Janney.

Tyler Batory, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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 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 expectations on both cost terms. I'm seeing some things out there that 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.

Operator, Operator

Our next question comes from Alex Barrón with Housing Research.

Alex Barrón, Analyst

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?

Sheryl Palmer, Chairman and Chief Executive Officer

We have continued to see traction. I'm checking to see if I can grab that schedule, and we might need to follow up with you for the specific details. However, as I mentioned in my prepared comments, we've seen a strong influx of California buyers in Texas, Arizona, and Colorado, and there is significant activity in Nevada. Additionally, we’ve noticed a considerable increase in interest from the northeast towards our Florida business, and potentially in the Carolinas as well. We're happy to discuss this further offline, as we have a wealth of information on our shoppers and buyers, and the growth of that out-of-state business is quite significant.

Alex Barrón, Analyst

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?

Dave Cone, Executive Vice President and Chief Financial Officer

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

Sheryl Palmer, Chairman and Chief Executive Officer

That depends on the market.

Dave Cone, Executive Vice President and Chief Financial Officer

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.

Sheryl Palmer, Chairman and Chief Executive Officer

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.

Dave Cone, Executive Vice President and Chief Financial Officer

Yes, true.

Sheryl Palmer, Chairman and Chief Executive Officer

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 are 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.

Operator, Operator

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

Sheryl Palmer, Chairman and Chief Executive Officer

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

Operator, Operator

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