Annual Report and Accounts 2009

North America Housing

Having achieved significant build and overhead cost savings over the last four years, our business in the US is well positioned for recovery. Our business in Canada continues to perform strongly.

Sheryl Palmer, President and CEO, Taylor Morrison

Photo: Sheryl Palmer

US housing market at a glance

Key drivers

  • Record levels of affordability in some markets
  • Levels of unsold inventory reducing and industry single-family housing starts continue to decline
  • Widespread geographical variation in house price trends

Market risk factors

  • Continuing restrictions on credit availability
  • Changing economic environment leading to increasing interest rates or unemployment
  • Increased levels of foreclosures
  • First Time Homebuyer tax credit d to be withdrawn in April 2010

Taylor Morrison operational highlights

  • 15% increase in order book volume
  • Achieved further build and overhead cost savings
  • 3,723 new lot purchase approvals

North America housing market

After a weak first quarter of 2009, the US housing market has shown continued stability.

The underlying demographics of our main markets remain good, with California, Florida and Texas being three of the four largest States by population in the US and Texas, Colorado and Arizona being amongst the fastest growing States by population over the last year.

Affordability in many markets is now at record levels. For instance, the affordability ratio (which represents the percentage households that can afford to buy the median priced home) now stands at 83.6% in Arizona. California, where house prices are amongst the highest in the US, has seen the affordability ratio increase from 19.9% in 2005 to 52.8% in 2009.

It is also encouraging that the number of months of supply have continued to fall during 2009. Florida, which was the worst affected of our markets, has seen the number of months of supply fall from 19.5 in December 2008 to 11.5 in December 2009. This has been assisted by a further sharp reduction in US single-family housing starts from 622,000 in 2008 to 443,500 in 2009.

The Case-Shiller Home Price Indices started to show improvement in early 2009, albeit there are still widespread variations between metropolitan areas. For example, markets in Texas and Colorado show small price increases year on year, with a mixture of small increases and decreases in California. Arizona and Florida show significant further year year declines in 2009, although the trend is more positive in recent months.

The more robust economic conditions in Canada are persisting. The conservative approach to lending by Canadian banks and the fact that, as in the UK, they have full recourse to customers in the event of default means that there are no significant foreclosure issues in our Canadian markets. House prices in Toronto and Ottowa continue to show growth, rising by 7.15% and 6.25% respectively in 2009. Volumes have declined by less than those in the US, with 20,186 detached freehold home starts in the urban centres of Ontario during 2009, down from 28,109 in 2008.

Strategy

We remain focused on cost reductions and cash management, whilst preserving the inherent value in our long term land positions.

We are ranked as the tenth largest homebuilder in the US by Professional Builder and rank in the top five in the majority of our markets in North America. This regional strength provides significant advantages in the form of lower build cost, greater access to land opportunities and customer brand awareness.

We have a good quality and well respected business in North America. Taylor Morrison won a series of design awards in 2009 and was inducted into the Best of American Living Award Hall of Fame for making a significant contribution to American design in January 2009.

Despite having already made significant build and overhead cost savings over the course of the US market downturn, we have achieved continued success in reducing costs in 2009. Having introduced a 'lean manufacturing' approach into three divisions in 2008, we have extended the roll-out to a further four divisions in 2009. This has achieved cost reductions in a number of areas, including joint initiatives with sub-contractors to reduce waste material and value engineer product plans to reduce the number of different materials and components used in our homes.

We have undertaken a thorough review of our sales and marketing costs, achieving savings through tailoring our staffing levels at each outlet closely to visitor levels, revising the number and specifications of showhomes and making greater use of internet-based marketing campaigns.

We have retained our focus on cash management and work in progress remains under tight control. We had 219 unsold completed homes at 31 December 2009, down from 455 at 31 December 2008 and 908 at 31 December 2007.

Financial review

North America Housing revenue was £824.3 million (2008: £981.6 million), primarily reflecting the reduced level of completions achieved in the year.

Operating profit* was £48.1 million (2008: £59.9 million), broadly in line with the decrease in revenue. The operating margin* for 2009 was 5.8%, a slight decline from the 6.1% achieved in 2008. Exceptional items were £79.8 million (2008: £76.6 million).

We conducted regular reviews of the carrying value of our land holdings during 2009. As a result of these reviews, we took land and work in progress write downs totalling £78.7 million during all of which were recorded at the half year (2008: £71.1 million).

Net operating assets in North America were £558.1 million at 31 December 2009 (2008: £677.8 million).

*Profit on ordinary activities before finance costs, exceptional items, brand amortisation and tax, after share of results of joint ventures.


North America Housing completions by region

Graph: North America Housing completions by region

Sales, completions and pricing

The business operated with an average of 172 outlets during 2009 (2008: 234), reflecting the closure of existing outlets.

For North America as a whole we achieved an average sales rate of 0.60 per outlet per week, 50% higher than the 0.40 sales per week recorded in 2008. The cancellation rate was 15% for 2009 as a whole, again a substantial improvement against the 2008 rate of 23%.

Total home completions were 4,755 (2008: 5,421), of which 3,347 were in the US (2008: 4,212) and 1,408 were in Canada (2008: 1,209).

The average selling price of our North American home completions in 2009 was £171k (2008: £175k), with the average selling price in the US being £161k (2008: £163k) and an average selling price in Canada of £195k (2008: £220k). The lower pricing in Canada reflects a higher proportion of high-rise completions during the year and also the weaker market conditions in the early part of 2009.

Our year-end order book increased to 3,216 homes (2008: 2,789 homes), with the US order book up 5% and the order book in Canada up by 19%.


Professional Builder Magazine US National Ranking for Taylor Morrison

10

Key customer trends

Focus on changing consumer demand patterns

  • Buyers compromising on preferences due to tough economic climate
  • Affordability, smaller units, change in specifications
  • Change in net foreign immigration patterns
  • Poor quality existing home stock offers opportunities in some markets
  • Multi-generational housing
  • Longer life expectancies and ageing ‘baby boomers’
  • Divorce rates increasing
  • Later childbearing
Photo: North America Housing

Product range

We continue to offer a wide range of homes to our customers in North America, ranging from entry level to luxury homes. Our product range includes high-rise condominiums, single family homes, townhomes and full service country club communities. At present our only active and upcoming high-rise projects are in the Canadian market.

Our US homebuilding operations trade under the Taylor Morrison brand and our Canadian business continues to operate as Monarch.

Photo: North America Housing

Quality and customers

2009 was another successful year for Taylor Morrison in terms of external recognition for our high standard of customer care. Taylor Morrison We Florida received the highly prestigious AVID Award for Best Customer Experience by a large homebuilder in the United States. The region scored 97 out of a possible 100 points with respect to homeowners who said that they would recommend Taylor Morrison to others.

Our North American operations also received accolades from market research specialists JD Power in 2009. Monarch Corporation was named the highest performing company in Ottowa in terms of customer satisfaction while Taylor Morrison was the highest ranked builder in Sacramento in the New Home Quality Survey.

Our customer surveys are undertaken by AVID Advisors, a customer loyalty management firm that works with hundreds of housebuilders across the United States and Canada. We have improved our already strong customer satisfaction scores during 2009. We achieved a score of 91.8 with respect to customers who would recommend us to their family and friends, a score w above the industry average of 88.8 and our 2008 score of 89.9. Our total homebuyer satisfaction score for 2009 was 86.6 out of a possible 100 points, up from 85.4 in 2008 and ahead of the 2009 industry average of 83.8.

Landbank

We have made good progress on rebalancing our land portfolio during 2009, to reduce exposure to less desirable submarkets, and as we continue to acquire land in the US and Canada where we identify good value opportunities. We have approved new land purchases totalling 3,723 plots during the second half of 2009, with purchases primarily in Arizona, California and Florida.

At the year end, we had a landbank of 29,062 owned and controlled plots (2008: 29,178 plots). Nearly 50% of our owned landbank is made up of finished lots, which have all of the required infrastructure in place to allow building of a home to commence, and therefore require a limited additional investment.

Health, safety and environment

Taylor Morrison has a company wide health and safety programme and was a runner up in the prestigious National Association of Home Builders 2009 Safety Award for Excellence.

Environmental legislation varies across the different regions in which we operate in North America, but we are working to introduce business-wide performance indicators in 2010. We are proud of the fact that Monarch was named low-rise Green Builder of the Year in the Building Industry and Land Development Awards for the Greater Toronto Area.

Current trading

We are encouraged by the prolonged stability of our North American markets, which now extends to almost 12 months. With the recent extension of the US Government's Homebuyer Tax Credit for sales to the end of April 2010 likely to continue to provide support to the market and affordability at extremely good levels, we are optimistic with regard to future prospects. We have seen hotspots of market activity develop on a regional basis. Based on improving consumer confidence and strong affordability, assuming employment continues to strengthen, we anticipate a broader based improvement in the market developing over the course of the next year.

Having achieved significant build and overhead cost savings over the last four years, our business in the US is well positioned for recovery. We will continue to evaluate new land acquisitions in the US and exercise appropriate discipline with all new investment.

Our business in Canada continues to perform strongly.