Good morning, and thank you for joining Taylor Morrison's Conference Call to discuss the acquisition of William Lyon Homes. At this time, all participants are in the listen-only mode. A question-and-answer session will follow the formal presentation, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jason Lenderman, Vice President, Investor Relations and Treasury. Thank you. Please go ahead.
Thank you. Welcome, everyone, and thank you for joining our conference call this morning. Today, we will be discussing the company's intent to acquire William Lyon Homes, which was announced by press release earlier this morning. With me is Sheryl Palmer, Chairman and Chief Executive Officer, and Dave Cone, Executive Vice President and Chief Financial Officer. As part of today's conference call, Sheryl and Dave will reference a slide presentation that will provide key highlights about today's announcement before opening the call for questions. Today's presentation can be found on the investor page of the Taylor Morrison website. Before I turn the call over to Sheryl, let me remind you that 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 news release.
These statements reflect the current views of Taylor Morrison Management and 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 Securities and Exchange Commission, and we do not undertake any obligation to update our forward-looking statements. With that, let me turn the call over to Sheryl.
Thank you, Jason, and good morning, everyone, and thank you for joining us. Today's a historic day for Taylor Morrison, and I'm thrilled to be with you to share more about our intent to acquire William Lyon Homes, one of the nation's largest homebuilders in the Western United States. This strategic combination creates the nation's fifth-largest homebuilder based on the last 12 months of closings and firmly places us in a top five position in 16 of our combined 23 markets, with entry into three new markets: Seattle, Portland, and Las Vegas. With the exit of our equity sponsors in early 2018, we outlined our strategic priorities as a fully floated company, first of them being smart and meaningful growth, along with diversification across price points and consumer segments in the top U.S. housing markets.
And with more than one year under our belt since the AV Homes acquisition, this is the next transformative step in that journey. But make no mistake, this isn't just about being bigger. Taylor Morrison, combined with the rich legacy, reputation, solid land positions, and experience the William Lyon team members bring to the equation, make us a stronger, better organization for the long term. As outlined in our press release this morning, and as shown on slide four, we have agreed to acquire William Lyon Homes for per share consideration of $2.50 in cash and 0.80 shares of Taylor Morrison Common Stock, implying a company value for William Lyon Homes of $2.4 billion, including assumption of debt, yielding an attractive purchase price multiple of about one times book. The transaction consideration mix consists of approximately 90% Taylor Morrison stock and 10% cash.
The Lyon family shareholders have agreed to vote their 42% voting interest in favor of this transaction. As a result, Taylor Morrison shareholders will own approximately 77% of the combined company, while William Lyon shareholders will own approximately 23%. This transaction, which is subject to customary closing conditions, including an affirmative vote of shareholders from both parties, provides significant opportunities to drive shareholder value through cost synergies and operational efficiencies once combined. Upon closing, likely in the latter part of the first quarter or early in the second quarter, we anticipate an annual run rate of $80 million in synergies, of which we'll recognize a considerable portion in the first year following the acquisition. We expect the synergies to offset the initial dilution, excluding one-time costs, while enhancing profitability and returns in line with our large-cap peers.
On a pro forma basis, the combined company would have generated more than $6.7 billion in revenue, as shown on slide five, with more than 14,200 closings based on the last 12 months. We anticipate our ASP will be relatively flat, and our average community count would be approximately 460, up from our 346, with about 83,000 lots owned and controlled, improving our lots controlled from roughly 19% as of September 30th to about 25% on a pro forma basis.
Before I take a deep dive into the strategic merits of the transaction, I thought I'd take a moment to reflect back on the past few years, which I think strongly illustrates our ability to complete this transaction and become a larger, more profitable, and effective company for the long term, as demonstrated by our unwavering commitment to smart growth, given our disciplined but aggressive acquisition strategy, recognizing the benefits from scale, driving up our top line, and enhancing our bottom line earnings. As many of you know, our company is rich in decades of history, but as shown on slide six, our real growth began six years ago in 2013, when our IPO represented the largest in homebuilding history. That year signaled the first of several strategic acquisitions, beginning with the addition of our Darling Homes brand in the Houston and Dallas markets.
Then, in 2015, we sold our Canadian operations and embarked on two acquisitions, JEH Homes and Orleans Homes, bringing Taylor Morrison into four new markets. A few months later, we deepened our market share in Atlanta by acquiring Acadia Homes. All of these deals positioned us for our first acquisition of a publicly traded builder, AV Homes, in 2018, which expanded our presence in Orlando, Phoenix, Charlotte, Raleigh, and Dallas-Fort Worth, and marked our entry into Jacksonville. I'm looking forward to leading this combined organization, and we are already deep in the evaluation process with executive and regional leadership, and will shortly begin with the division management teams as well. We look forward to welcoming many of the skilled and highly tenured team members from William Lyon to the Taylor Morrison family.
From a governance perspective, we will expand our current board of directors from seven to nine, adding two board members from the current William Lyon board. In fact, we're very pleased to share that William H. Lyon, their current chairman, has agreed to join the board of the combined company and is eager to play an impactful role in the larger company's future success. This transaction demonstrates our belief in the strength of William Lyon's current positions and offerings and solidifies our positive outlook from the sector overall. As shared in our most recent earnings call, we believe the housing market has a long run ahead of it, with a significantly constrained lot supply across the U.S. and anemic new and existing inventory in most markets.
The good news is we are just now seeing the strength of the favorable demographic tailwinds, particularly the aging millennial population, just beginning to enjoy homeownership. Consumers are feeling better than ever about their income, their personal balance sheets, the current interest rate environment, and the economy as a whole. We see new orders, closings, and margins continuing to be in line with or above expectations. In fact, our October 2019 sales were up more than 40% year- over- year, with a pace of 2.5. This positive outlook, combined with an attractive acquisition price, provided the unique opportunity to gain increased local scale within six of our major markets while establishing Taylor Morrison in the Pacific Northwest and Nevada, as illustrated on page eight.
To illustrate just how significantly this deal will impact our local scale, I'll provide a bit more color, which can also be found on slides nine and 10. Let's begin with the new William Lyon markets, where they hold the number three market share position in Seattle, number two in Portland, and number 12 in Las Vegas. We've had our eye on Washington and Oregon for some time now and knew that the entrance into these markets would depend solely on finding the right opportunity at the right time and at the right price, which is precisely what this is. Our view has always been that the best time to enter a new market is after they've reset, which is what we've seen in both Seattle and Portland over the last 12 months, confirming our belief that the timing of this deal works keenly in our favor.
Turning to Las Vegas, this market continues to be very strong, with increasing demand for entry-level product and one that's been missing from our portfolio. As many of you know, it's a market I'm very familiar with after spending many years of my career there, and I'm delighted to bring the Taylor Morrison brand to Las Vegas. Turning to our combined markets, in Phoenix, with the increase in community count and consumer research reach, excuse me, we expect around 2,200 closings for the market on a pro forma basis, an increase from an anticipated 1,450 closings in 2019, ensuring a top three position in the market. In Southern California, we'll secure a top three position in L.A. and Orange County, and number five in Riverside and the Inland Empire.
What's most exciting about the added volume in Southern California is that it gives Taylor Morrison the opportunity to expand our scale into the Inland Empire and adds more entry-level price points. Turning to the Bay, the acquisition is projected to increase closings in the area by approximately 40% in key sub-markets that complement our existing portfolio, ultimately moving us from number nine to number four. In many cases, this additional volume will be generated with product and pricing that will attract buyers that have been priced out of many of the other core Bay Area sub-markets. William Lyon's recent entrance into the Houston market will bring strong value to our expansive Taylor Morrison land portfolio in the market as their early assets in highly desirable core locations.
In Austin, it will take us from the eighth position to the fifth and will add to our core locations, as well as diversify us into emerging markets, adding several entry-level communities and product lines to the business. And in Denver, we will become a significant player, moving from 14th to third, where the improved scale will be invaluable in securing key land positions in a very lot-constrained market, where entitlement and development timelines have been steadily growing and will allow us to drive greater operational efficiencies. The added scale into each of these markets will reduce cycle times, enhancing our inventory turns, and allow for greater leverage in all areas of our P&L. All said, this deal will move Taylor Morrison into the top three or greater position in six of the nine overlapping new markets.
As we look to their product mix and consumer segments, which is illustrated on slide 11, it's important to first acknowledge the depth of William Lyon's entry-level buyer group, which represents nearly 54% of their closings. Following our AV Homes transaction, which greatly expanded our entry-level offerings, we're thrilled to continue to improve our reach for this important buyer segment. After completing this transaction and with a key focus on quality and core locations, we'll increase our current makeup of entry-level buyers by a third. While William Lyon primarily serves entry-level and first-time move-up buyers, they also have a growing active adult business, all of which fits squarely within our wheelhouse. Ultimately, this expands our offerings and allows us to provide more affordable options to customers in markets where there is a strong demand.
Our product and customer segmentation are different enough to allow us to serve more buyers without competing with our current operations. Great example is our Denver business, where Taylor Morrison has been successfully serving the active adult and move-up buyer, and William Lyon has been delivering tremendous sales paces through its high-density affordable product lineup. We expect that the combined business will create tremendous opportunity through a well-rounded, complementary product catalog on a highly efficient business platform. When we look to their active adult focus, which is concentrated in Southern California, Arizona, Nevada, and Washington, we believe it balances our predominant weight of active lifestyle communities in the East and feel it's a natural complement to our consumer barbell strategy that we've been talking about for some time now. Excuse me.
Similar to our added AV active adult holdings, William Lyon's 55+ lifestyle communities tend to also serve the more affordable consumers, yet again adding to and balancing the Taylor Morrison suite of offerings. All in all, their strong presence across the Pacific Northwest, West, and Central areas is a true complement to our current footprint, resulting in a balanced national platform position for continued success. The concentrated scale across existing markets and product types will enable the highest levels of efficiency and effectiveness, allowing Taylor Morrison greater leverage in a constrained land and labor environment. As we were able to quickly prove out the added scale with AV, that combination put us in a better position to capture efficiency with the local trades along with our national purchasing power, ultimately increasing our synergies and efficiencies above our original estimations.
Following today's announcement, we'll continue to work to identify added local, regional, and national synergies to take advantage of. This morning, you likely received the press release from William Lyon announcing their third quarter results. As we've been working through this deal, we've had a skilled team in place running a thorough due diligence process, which included a review of every asset within their portfolio, along with a deep dive on many of their largest land holdings. Our review was enhanced due to their cooperation and transparency, and based on our due diligence, William Lyon's third quarter performance was in line with our expectations. Over the course of our journey for smart, meaningful growth, we have built up an institutional muscle for M&A. They say the hardest part of any deal is the integration, not the acquisition, and we do believe this to be true.
We get better at integrating teams and systems each time, taking lessons learned from the last acquisition into the next and having the humility needed to reflect on areas where we can improve. When I think about our many milestones, I'm so proud. I'm proud of our growing business from roughly 47 homes in 2013 to more than 14,200 homes on a pro forma basis with this deal. Proud of growing our tremendously talented employee base with every step and proud of becoming an industry-leading consolidator. William Lyon will represent our sixth acquisition in seven years, and as the slide shows, it will be our largest yet, and we are ready for it.
Every step our organization has taken the past few years has prepared us for this day: the announcement of a transformational transaction representing the culmination of a multi-year strategy to build a large-scale, best-in-class organization focused on maximizing shareholder value at every turn while creating a reputation of quality construction and holdings with an unparalleled customer experience. And with that, let me turn the call over to Dave for the transaction details.
Thank you, Sheryl. Looking at slide 12 of today's presentation, you'll see a summary of the significant value creation generated from this transaction. On an annualized basis, we expect to deliver at least $80 million in total cost synergies.
This will be driven by savings in multiple areas, including, but not limited to, overhead optimization, local and national purchasing leverage, and combined offerings and financial services to include Taylor Morrison Home Funding, Inspired Title, and our Taylor Morrison Insurance Services. We anticipate achieving an annualized synergy run rate within 12-18 months from close, providing for significant EPS accretion in the out years. On an adjusted home building margin basis, excluding capitalized interest, William Lyon will be accretive, and that would generate a pro forma rate of over 20% on a combined business. This does assume a portion of the $80 million in estimated synergies running through the margin line, which is consistent with what we've seen since our AV acquisition last year.
Similarly, with the Adjusted EBITDA margin, William Lyon will be accretive to the combined business, and once we factor in the projected synergies for that metric, it would be at least 11% on a pro forma basis. The projected goodwill from this transaction will be approximately $300 million, which equates to around 12% and is relatively in line with other meaningful transactions in the industry. As Sheryl mentioned earlier, total home sites owned and controlled for the combined business would be about 83,000, and the percent of controlled lots would be around 25%, which represents an increase from the Taylor Morrison current levels. As discussed over the past many quarters, this continues to be a focus. The consolidated backlog would be more than $3 billion, an increase of approximately 25% from the current levels at Taylor Morrison.
As seen on slides 13 and 14, we further illustrated the financial benefits of this transaction with the pro forma closings moving us into the top five position. And as you can see, both our pre-tax margin and return on equity will be accretive with this deal. On slide 15, you'll see the pro forma capitalization summary. We'll use cash on hand to fund the cash portion of this transaction and use the revolver where needed to fund ongoing working capital needs. From a leverage standpoint, Taylor Morrison intends to assume the home building debt on the William Lyon balance sheet, which includes approximately $1.1 billion in senior notes. We anticipate this to be a credit-positive event for existing William Lyon bondholders based on Taylor Morrison's credit ratings and the increased scale of the combined company.
The combined company will opportunistically access the debt markets to strengthen the balance sheet by taking advantage of the rate environment when it makes sense, as we have done so in the past. We're projecting the pro forma net debt-to-capitalization ratio to be about 50%, and as we've said in the past, we'd be willing to go to 50% for the right strategic acquisition, and we've also said we'd work down to below 50% within 12 months of closing, and we anticipate being in the mid-40% range in 2021. At the current valuation levels, we typically would be repurchasing stock, but given today's announcement during the pendency of the transaction, we are restricted from repurchasing our stock at this time. At the close of this transaction, we intend to seek a share repurchase authorization from our board.
From a liquidity perspective, we're currently evaluating the combined company's need for increasing capacity on a revolving credit facility, which, as you recall, is something we did when acquiring AV in 2018. Thanks, and I'll now turn the call back over to Sheryl.
Thanks, Dave. I believe with any combination of this magnitude, a proper understanding of the two company cultures and how they'll fit together as one is vital. After spending many months with the William Lyon management team and members of the Lyon family, I can confidently say that the two company cultures will align beautifully. At Taylor Morrison, we have put forth a lot of time and energy to create a company culture that we're immensely proud of and widely recognized for, and I'm thrilled to build on that with the William Lyon values and traditions.
Earlier, I touched on the institutional muscle we've built in regard to M&A. Now, I'd like to turn to discussing our expertise when it comes to integration. The acquisition of AV brought with it many learnings that we have been building upon in preparation for today's announcement. First and foremost, during the AV acquisition, we implemented an integration management office, or IMO. This office was comprised of our president of M&A, our vice president of integration, and workstream leaders from every overlapping division and every function of our business. With this acquisition, we'll continue the use of our IMO and improve its effectiveness by naming a senior representative from the William Lyon team to join the team as soon as possible. This person will be instrumental leading up to the close and ensuring that come day one, all team members are feeling informed, connected, and rowing in the same direction.
Another tool in our integration toolkit is rooted in communications. Following the AV acquisition, we instituted a daily communication vehicle that includes every single team member across the company gathering with their department or division every morning for 15 minutes. These conversations are centered around discussing the behaviors that keep Taylor Morrison's well-known culture strong, but they also allow us to share important business updates in real time and provide a wonderful opportunity for teams to discuss key priorities, progress toward goals and projects, and wins on a local level. We're excited about how much faster William Lyon team members will feel onboarded and integrated into one team by participating in our daily huddle with their new colleagues and how effective we'll be at moving through key integration activities.
As we look at the integration roadmap shown on slide 16, we're laser-focused on a number of key activities between now and the closing in the first quarter. During that time, we will complete our analysis of all potential synergies and finalize our brand and marketing strategy for the new William Lyon assets. We expect to continue the William Lyon Signature Series in key communities to pay tribute to the brand General William Lyon has dedicated his life to building. We will complete our review of the brands that have joined the William Lyon family over the years, including Polygon Northwest, and develop a thoughtful strategy and timeframe for if, how, and when we'll convert these communities to the Taylor Morrison brand. Before opening the call for questions, I want to reiterate the key takeaways from today's announcement and the significant strategic and financial merits behind it.
These include the advantage of increasing our entry-level positioning, the benefits of the increased concentrated scale in key markets, and our commitment to remaining good stewards of our balance sheet, along with our expectation to quickly return to optimal debt levels. This is an extremely exciting day for Taylor Morrison's shareholders, team members, trade partners, and customers, and we feel very good about our future as the nation's fifth-largest home builder and developer. I'd quickly like to thank the teams who have worked tirelessly day and night to get us to this day. Thank you to Bill Lyon, Matt Zaist, and the rest of the Lyon leadership team. I simply couldn't be more pleased with the quality of people I've met within their organization and can't wait to meet the rest of the teams.
And of course, an enormous and heartfelt thank you to the Taylor Morrison team led by our President of M&A, Lou Steffens. I'm very proud of their work and the depth of the due diligence completed, allowing us to confidently move forward with this transaction and at the right price. Their dedication to our organization and future is unmatched, and I'm eternally grateful. With that, I'd like to open the call to questions. Operator, please provide our participants with instructions.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Ivy Zelman from Zelman & Associates. Please go ahead.
Good morning and congratulations. Appreciate your questions. And special shout-out to Lou.
I know this is a big part of what he does every day. Sheryl, maybe you can help us. Absolutely. Maybe you help us understand. First, you said you've been with the William Lyon team for months. When did you actually start talking with them, and how many of their DPs throughout the company where there's overlap have you made decisions already on who will be retained and, unfortunately, who will be taken out with the integration? So I'll stop there, but I have another question.
No problem. I appreciate it, Ivy. Certainly, I've known the William Lyon team over the years just like I would know any and all builders, but the conversations around this started in the last few months, and we began a deep dive just a few weeks back or many weeks back.
But as you can imagine, these things are kept very, very quiet, and so we had more team members probably working on it on the Taylor Morrison side, but it was kept very quiet within William Lyon. What I can tell you is there's tremendous talent in both organizations, and we have a playbook about how we identify the best talent for each role. Communication will be a very key part of how we do that, how we go through the interview process, but we have not started interviewing any of the division presidents yet. But we will quickly get to work on that. We were focused on getting the transaction to announcement today, and we have a lot of decisions still to make, but we will be doing those in quick order and then announcing the structure and the go-forward teams.
Got it.
And really, to one housekeeping or the fact that William Lyon just actually hired Brian Hale to run the mortgage business and to have an integrated mortgage operation, I'm assuming they'll be moving to your mortgage funding through your organization. Is that a correct assumption?
Yeah. Tawn Kelley, who you know leads our mortgage financial services operation, has just been able to make contact with Brian over the last 48 hours, and we'll start that process. And yeah, we will talk through an integration plan under Taylor Morrison Home Funding similar to what we'll do on the home building side.
Okay. One last one for me. Looking at scale and opportunities for growth and driving returns, thinking that obviously we believe, as many do, that there is real benefit to scale. Can you talk about your returns on equity and capital?
Because that's really what drives the valuation of companies higher, multiple expansion. Today, your returns in William Lyon combined with the deal, what's your path, and how quickly can you get to some of the better peer levels? Do you see yourself getting to a mid-to-high-teens return, or is that something that maybe won't happen for several, if anything, in the next 3-5 years? Because that's how you'll get multiple expansion.
Yeah, Ivy, it's Dave. It's going to take a couple of years. It's really going to come down to, obviously, the synergies and being able to deliver on that. We talked about the $80 million of synergies, which will take us about 12- 18 months to bring that through the system. And then the other component that I think is really important is just our ability to generate free cash flow.
On a standalone basis, we're generating at least $400 million a year. With this transaction, it's probably going to add another $200 million, and it's about how we put that cash to work, and we put it always towards the best use. We'll continue to look at reinvesting back into the business, give consideration to M&A, however, not likely in the near term given this transaction, but then putting the funds toward delivering the balance sheet and, of course, through opportunistic share repurchases as we've done in the past. I mean, in fact, we've pulled on all these strategies multiple times over the last few years. I think you can expect this pattern to continue, but scale is going to be kind of the chief architect behind that.
And Ivy, I would take a page from your scale playbook that you published not too long ago.
I know you understand the importance and how we can really derive significant benefits through that local, regional, national scale. And when I look at these overlapping markets, when I looked at what we can do from an improved cycle time, in this labor-constrained market, how it can improve inventory turns, there's not one magic pill here, but all these things at scale will be what make the difference for us. Certainly, I think everyone on the call understands that volumes really do matter, and the more we buy, the better our cost, and that's going to help us drive these returns in a much more expeditious fashion.
It's very exciting, and I look forward to your success and watching the progress. Kudos to you guys. Thanks.
Thank you, Ivy.
Thank you, Ivy.
Thank you. Our next question comes from Mike Bell from RBC Capital Markets.
Please go ahead.
Morning. Thanks for taking my questions and congrats on this announcement.
Thank you.
I wanted to, I guess, press a little bit on the transaction, and it certainly seems like a reasonable, if not attractive, purchase price multiple, but by the same token, you're issuing your own stock at close to book value, which we would argue is undervalued already. So just given you're issuing stock close to book and this is still going to take you to a leveraged position north of 50%, talk through just the rationale of why this was compelling and why now, given where your stock and your balance sheet is.
Yeah. I'll just kick it off and then let Dave jump in. But yes, you're looking at our stock today, Mike, or what's the last few days. Obviously, this is a long-term strategic partnership.
We believe the combination is crucial in the next step of expanding our footprint nationally and creating one of the largest builders. It's never the perfect time, but we believe in the market fundamentals and the runway ahead, as I think I said in my prepared remarks. And I think it's important to look at the diversification of our portfolio across price points, consumers, geographies. If we didn't believe in the runway and the market, obviously, we wouldn't be doing this deal. But D ave, why don't you pick up on the transaction?
Yeah. On the leverage side, Mike, I believe we've been pretty transparent that for the right strategic transaction, we'd be willing to hit the 50% mark on the net debt to cap.
We believe through a combination of optimal capital management, the synergy realization will be below 50% within 12 months of closing, and we anticipate to be in the mid-40% range in 2021. I think we went through something similar with the AV transaction where the net debt number increased, but we've always been very diligent around managing the balance sheet, and I expect that to happen again, and I'm confident we'll be able to work this number down.
Okay. Got it. That's helpful. My second question, and I understand it's early, but just if you can provide any more detail around a couple of things on synergies and purchase accounting. I guess synergies, you listed out a few things that are contributing to the $80 million, but is there any way to quantify kind of what's cost of goods versus the SG&A savings?
And then on the purchase accounting side, I think you had what seemed to be a somewhat unique experience with AVHI where it was actually a positive contributor given where the legacy margins had been. And I think the margins for William Lyon on a gross margin basis have also profiled kind of lower than what we typically view as normal. So given where the purchase price is and where the margins on the legacy Lyon business are, any initial thoughts around how we should be factoring in purchase accounting on margins?
Sure. Let me hit the synergy one first. So where we are in the process right now, we're continuing to work on identifying the local, regional, and national synergies to take advantage of before we get to closing.
I'd say at this time, we anticipate about 75% of the synergies to come from overhead through a consolidation of our division and corporate operations. Over time, we anticipate that we'll deliver additional savings through efficiencies with local trades and our national purchasing power, and I'll touch more on that in a minute, but as we said, we expect the synergies to be around $80 million and it'd take us 12- 18 months. I think said more directly, we hope to deliver something greater than the $80 million, and where you're going to see that is really on kind of the cost and production side, so we do expect to see benefit from national and regional purchasing rebates. We expect those to be enhanced, and we still haven't scratched the surface on a local level.
So we anticipate some soft and hard cost savings throughout the construction process from access to trades to production cadence. This takes a little bit longer to get through, but I think it's also important to note that some of the market positions being acquired are larger than our existing businesses, so we expect to get gains on both sides. For purchase accounting, this is currently a core focus for us as we continue through the integration process, Mike. We're going to provide some updates on purchase accounting at the time of closing, but as you said, it's a 1x multiple. We're looking at goodwill around $300 million, so we'll just need to work through that, and we'll be able to give you more detail the next time we're together.
Okay. Great. Thank you.
Thanks, Michael.
Thank you. Our next question comes from Michael Rehaut from J.P. Morgan.
Please go ahead.
Thanks. Good morning, everyone, and congrats on the transaction.
Thanks a lot, Michael.
First question, I guess more of a clarification point, and again, appreciate it's early in the process. But Dave, when you were mentioning the 75% of $80 million cost savings from overhead and then 25% from basically rebates and purchasing, just want to make sure that I understand that correctly, that the 75% is something that would be more in the, let's say, next 6 to 12 months as that's more of a mechanical integration and clear-cut savings. And then the 25% is something that would kind of flow into the organization over time through rebates and purchasing power. And then the access to trades and production cadence and that type of thing would be maybe what just drives better efficiencies over a longer period, but not necessarily included in the $80 million.
Is that the right way to think about it?
Yeah. It's going to be very similar to how we saw it in the AV transaction, so from an overhead perspective, we're going to run dual costs for a little while. That takes some time because you just can't cut it all off on day one. There are minor costs such as costs of being a publicly traded company that go away relatively quickly, but we have to stair-step our way towards the SG&A, and that's why we say overall it's 12-18. So really, we're looking at 2020. We are going to get some synergies in 2020, but the magnitude of that will not come until 2021. When we break it out, 75% towards the overhead, kind of 25% more on the operational side of the production, that's where I think we have the opportunity going forward.
Like you said, that one takes a little bit of time. There's things that we're going to be able to put in place today, but you really start to get the benefit once you start those homes, which is a little bit down the road, and it doesn't obviously come through the P&L until you start delivering on those. So that one does take some time, and that's actually what gets us kind of to the 12-18 months, more in the 18-month timeframe.
Yeah. I mean, if you think about it, Michael, when we close this, ideally sometime in the latter part of the first quarter, they'll have everything in the ground probably through third-quarter deliveries.
Your ability to pull that through the first year is somewhat modest, but it will stair-step, and we'll be able to point to the savings and certainly point to the success for 2021.
I appreciate that. I guess secondly, more of a balance sheet cash flow question, but as was alluded to earlier, driving returns higher is one of the key metrics that allows for or one of the key metrics that drives valuations and multiples in the group, and return on equity, a key metric, free cash flow generation, and you had mentioned your desire to reduce your leverage by 2021. From another perspective, making sure that your land position is right-sized so that you're not taking up too much capital or tying up too much capital in inventory is often an important way to allow for that better return on equity to come through.
Obviously, again, you're still in the early stages of assessing the combined company and what you need to do over the next months and the next year or two. But maybe you could talk to the combined land position. William Lyon obviously had some deep positions in some markets that represented five, 10+ years of land supply. As part of the integration process, perhaps you could speak to how you're going to go about thinking about your land position to the extent that there are areas to prune and make that inventory investment as efficient as possible to keep your balance sheet as capital-efficient as possible.
Yeah. Good question, Michael. Certainly, I agree that maintaining somewhat of a landlight model is crucial from a returns and multiples standpoint.
However, I'd say with this transaction, we're acquiring a meaningful land position at an attractive price point in some of the most land-constrained markets in the United States. We think this translates into an opportunity to deliver the scale synergies that we're talking about. Specifically, I think Lyon has done a really nice job working with partners to control land and not put it all on their balance sheet. I also think that you'll see with this buyer group and the lower price points that we can achieve greater returns with higher absorptions in both the legacy and the new combined business. As we said in the prepared remarks, pro forma, we're actually going to improve our controlled position as of 9/30 from 19% in Taylor Morrison today to about 25%. So our controlled lots are going up about a half a year, and our owned is coming down.
Similar to what we did with AV, the first thing we'll do is rationalize the lot positions in every market. We'll look at how much is on the balance sheet. Are there opportunities to pull some off? Are there opportunities to sell positions? Are there opportunities to move through paces quicker? So that exercise will be one that really starts within our Integration Management Office over these next few weeks. But we understand the opportunity there, and we'll be all over it.
Great. Thanks so much.
Thank you. Thank you.
Our next question comes from Carl Reichardt from BTIG. Please go ahead.
Thanks. Good morning, all. You actually just answered the question I was going to ask, Sheryl, on rationalization of lot. Can I ask what you see in Lyon from a construction strategy standpoint?
Is your expectation that the overall Taylor Morrison business will move, say, more towards a spec business? Or maybe talk just a little bit about how Lyon approaches construction ahead of sale or vice versa and how that might change?
It's a really good question, Carl. It's an area we've been spending a lot of time on because I think there are things to be learned in every. I mean, you look at a business for what you can do to improve it. You look for what you can learn. And they have a very high percentage of their business being spec sales. And at that price point, it makes a lot of sense. So we would look to continue.
First, we'll rationalize the product and make sure as we go through the product profiles in both Taylor Morrison and Lyon that we have the best product to market and that we're properly addressing each consumer group. And some of the simplification efforts, they've done really, really well at that entry-level buyer. I'd also say that their spec strategy is a little different than ours. One's not good. One's not bad. They're just a little different. And I think we can take advantage of some of their methodologies. I think their development and start process is also a little different. So it's an area that we're very focused on. And what we don't want to do is convert what's a good process to something in the Taylor Morrison portfolio at a different product. So I think you'll see some integration going both ways.
There are things where maybe on the startup, we might look at one approach. On the spec strategy, we might look at something they're doing. So we're going to get the best out of both operations.
And as you know, we do like specs. Our focus has always been on controlling the amount that are completed. But we do like the specs. We like the turn and how that enhances returns.
All right. Great. Thanks, Dave. And then just to talk a little bit about the Pacific Northwest, Sheryl, and you're saying you've looked at this market for a long time. For a production home builder, the Pacific Northwest is, in general, sort of an unusual market compared to Texas, Arizona, and other places where land is easier to get and sites flatter.
How do you sort of look at those markets given the constraints as a place where you can really leverage scale, become a large player? Are the economies of scale in markets like Portland and Seattle the same at different levels of production as they would be in a place like Dallas or Denver or Phoenix?
Yeah. It's another great question, Carl. I admire the transaction that Lyon did many years ago when they acquired the Polygon portfolio. And as any market, it's about understanding, having local folks in the market that understand the municipalities, are deeply entrenched into the land market. And I think they've done a tremendous job. When you look at the scale that they have in both Seattle and Portland and the breadth of product they've been able to deliver to the market in both of those areas, we're quite excited.
Portland is absolutely known as one of the most difficult places to buy product, but that's why you have to have a deep strategy and people that understand the market and have the relationships. So I think from a scale standpoint, at the numbers that they've been delivering, absolutely. We still have a lot to learn there, but I'm excited about the ability to progress the portfolio. And once again, I think our entry point is really good given the fact that the market's gone through a slight reset over the last 12 months.
Thank you, Sheryl. Thanks, Dave.
Thank you.
Thanks, Sheryl.
Thank you. Our next question comes from Truman Patterson from Wells Fargo. Please go ahead.
Hi. Good morning, everybody. Thanks for taking my questions. First, wanted to touch on William Lyon's absorptions. They're in the right price points, entry-level, first move-up.
Their absorptions have fallen, I believe, about 20% so far this year. Could you maybe discuss the opportunities? Not just you've already discussed the construction synergies and efficiencies you might be able to get out of it, but possibly taking some of the legacy AV product and putting on William Lyon land or communities and hopefully get those absorptions up?
Yeah. I think that opportunity is absolutely out there for us. Truman, I really do. We're excited about that. The devil's always in the detail, right? So when you look at their portfolio, when you look at where those paces were coming from last year, they've done a tremendous job with some very high-volume communities.
But unfortunately, when you burn through those maybe a little quicker than you initially hope, it doesn't mean that you have the ability to bring new stuff on into the portfolio any sooner or getting communities open. So I think that's part of why you've seen the overall drop in their paces year- over- year. The other part that I think Matt's articulated over the last few quarters is just some of the absorptions in the Pacific Northwest as that market kind of moderated.
Okay. And just kind of a big-picture question. I think there have been a handful of companies that have looked at William Lyon over the past couple of years at least. What makes Taylor Morrison a good fit for William Lyon and vice versa? Culturally, you've gone over some of the geographical overlap.
But if you could just kind of run us through more on the cultural side, why it's a good fit, that'd be great.
Yeah. I love that question, Truman. I mean, I look at the two companies. And once again, within the industry, you get to know your competitors very well, and you can see a lot from the outside. And then we've had the opportunity to look even deeper once we've been allowed in. But when I look at the two companies kind of share kind of a storied history of developing high-quality products for customers at good price points. And once again, working through the due diligence, I think we have a greater appreciation for the skill and knowledge of their operators and their management team.
There are certain things that I truly respect that when you can see the way they treat their customers, you can see the culture they have. It's all about the people. Their leadership in the markets have really allowed them to have a best-to-market approach. I'm also very excited about bringing Bill Lyon onto our board. When I think about the overall fit, certainly all the strategic things we've talked about, and that's generally the easy part to underwrite. What we've really had the opportunity to do in looking at each of their communities, understanding their levels of service, getting to look a little bit into their cultural kind of attributes, it's allowed us to underwrite the people even without meeting all of them because of the way they go to market. That's the piece that sends most acquisitions the wrong direction.
And I feel very good about the overlap of bringing these two cultures together.
Okay. And hopefully, just one more for clarity on your net debt to total capital being 50%. I know you guys are attempting to pay that down over the next couple of years. But is there any chance that you can refi any of William Lyon's legacy debt kind of near-term and get some near-term interest savings?
Yeah. It's a great question. And it's something that we're looking at all the options for us right now. Obviously, we have a little bit of time until we can actually act on that. But obviously, where rates are currently, it's probably more attractive to potentially go down some of those paths. But like I said, over the next couple of months, we'll just see how the market unfolds.
And we'll seek to go through or seek to tackle the best path around working down that debt over time.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Soham Bhonsle from SIG. Please go ahead.
Hey. Good morning, everyone.
Good morning.
Good morning. So it sounds like the deal's really being driven by wanting to get deeper on the first-time buyer, which should help sales pace and scale. But you're also going into a segment that has greater competition today. So how are you thinking about maybe positioning the company to be differentiated against all the other builders that are going for the same buyer group without necessarily competing on price or incentives going forward?
Yeah. Fair question. I think, like I said in my prepared remarks, it's not just about the entry level, but it's about addressing the entry level in the right submarkets.
And with the relationship that William Lyon has had and the quality of their land bank, I think the differentiator is, one, where you start from a core location standpoint. And they have very successfully been able to appeal to the entry-level at the right price point in the right locations as compared to just continuing to go further out to the fringe markets. I think the second place where we will continue to differentiate ourselves with all consumer groups, not just the entry-level, is the customer experience and how we put that at the forefront of everything we do. So the competition's there. The competition's there at all price points, but it's about the right product on the right land in the right locations at the right price point, delivering the right experience. And I feel very good about our ability to compete.
Okay.
Just looking at gross margins going forward, their margins sort of lag your core 18% range. I mean, what steps are you thinking that can be taken to improve those and bring them up to company averages? Or should we expect more leverage to come from the SG&A side rather than margins going forward?
It's kind of what I was talking about earlier. We're going to be focused on getting better costs. That's going to come through rebates as well as getting scale from our trade. We do expect that to come over time. Some of that, if you're looking at a gap basis, is just a bit of the pressure from capitalized interest. Just given the debt level that William Lyon has had historically, it's just a little bit higher as a percent relative to where we are.
Again, putting that scale together and looking at improving the strength of our balance sheet will help to bring that down in time as well.
All right. Thank you, guys.
Thank you.
Thank you. Our next question comes from Matthew Bouley from Barclays. Please go ahead.
Good morning. Thanks for taking my questions. I'll extend my congratulations as well. So I guess at a high level, Sheryl, I think Taylor Morrison's really made kind of customer connectivity and deep consumer research a real hallmark. Can you discuss a bit maybe how your consumer research led you to find William Lyon's product offering and footprint attractive? And then really, what are some of the areas where you guys think you can sort of augment how they've gone about their own consumer research? Thank you.
Yeah. No, I appreciate the question. And it's not real different than what I've already discussed.
But when I look at their track record with addressing the first-time buyer and the quality of their locations, I think they've done a really nice job addressing this consumer group. It's no surprise that the millennial buyer is an emerging market that's going to be here for quite some time. So as you've seen within the Taylor Morrison portfolio over the last few years, and I think shown in the presentation, we've continued to grow our position in the entry-level first-time move-up. So this is actually quite in the sweet spot when I look at the synergies you get with the market overlaps, and then I look at their product focus. And we focused on the entry level, but I'm actually equally excited about their active adult positions and the fact that we have not been deep in the 55+ market in the west side of the United States.
Most of our focus has been, or the overlying share of our focus has been, in the Eastern U.S. So now we're going to have that complement across the portfolio. So when I look at the synergies around the branding, around the product profiles, where I really do believe 1+1 is hopefully a little more than two, I'm pretty excited.
Got it. And that's actually a great lead into what I wanted to ask about next. And so obviously, you're sort of moving to more of that balanced customer segment mix between the entry level, the first move-up, and adding some active adult there. So I guess sort of through cycle, do you think that this is kind of the current mix that you would consider ideal?
Or do you still plan to sort of invest more heavily or lightly in any one particular customer segment category going forward? Thank you.
Yeah. No, thank you. This is squarely in the strategy that we've been articulating for quite some time. It's hard for me to pinpoint the actual percentages if they'll move a few points. But when I look at 75% of our overall business being first-time and move-up, and then I look at the high complement of active adult, I think that's about right. Will active adult continue to move a couple of percentage points? I think what you're continuing to see is that barbell effect. And then you'll also have a little bit of the second-time move-up, maybe some urban, maybe some coastal in the mix. But that will continue to be a minority of the overall business.
And I think you'll see the concentration to continue as we have it today.
All right. Perfect. Thank you. And congrats again.
Thank you.
Thank you. Our next question comes from Jay McCanless from Wedbush. Please go ahead.
Hey. Good morning. Congratulations, everyone.
Thanks, Jay.
The first question I had, and I know you guys are still in the early stages with the single-family build-to-rent, is there going to be down the road potentially some integration with the Lyon land into what you were looking to do? I think Christopher Todd is the name of the company you are working with. How is that going to fit in with this acquisition of Lyon?
I think there's going to be tremendous opportunities. I think, one, it expands our portfolio as we look at the rollout of the build-to-rent. So it brings new markets to the forefront for us.
I think it starts there. I'm also very excited on their urban core business. I think over time, we'll look at what opportunities in bringing those two together. As you know, we just hired a new lead, Darin Rowe, for our build-to-rent business. Over the next few months through the kind of today to close, we'll really be vetting out the strategy of how those two businesses work together.
Great. The second question I had in terms of the orders, and I don't know if you guys are going to comment on this or not, but the orders that Lyon posted this morning were certainly a little bit weaker than what we were looking for. It's been no secret that William Lyon was up for sale. Could we attribute some of the weakness to maybe sales floor attrition or some things like that ahead of the deal?
It's hard for me to comment on what's going on in their business. But I think at a more spatial level, I'd agree with you, Jay. When you're going through something like this, people do lose a little focus. But as I said earlier, we expected through our diligence process, we really do have confidence in kind of the positions and the risks and the opportunities in their business plan. But we're quite excited about the communities that are coming forward. So once again, I think part of it is just the speed in which they sold earlier. I think part of it is bringing new communities to market. And certainly, there could be some overarching effect of when you go through a transaction like this, it does take folks off center for a bit.
Got it. Thank you.
Thank you.
Thank you.
Our last question comes from Alex Barron from Housing Research Center. Please go ahead.
Yes. Thank you. Congratulations. I know the William Lyon team very well, and I think you acquired a great asset. I wanted to ask you about.
Thank you.
You mentioned Bill Lyon is coming on the board, but I thought I heard you say the board is growing by two positions. Who else is coming on board?
That is correct. And so we've already got a commitment from Bill Lyon. But we will, very similar to what we've talked about on the home building side, we haven't had the opportunity to bring the two boards together and have those meet and greets. So that's next step, Alex. We'll be making that announcement in due time.
Okay. Great.
And then in terms of modeling purposes, would I be correct to assume the central region is going to expand to include the Colorado and Texas that William Lyon is bringing, and the rest would go into the west region?
I'd say for now, that's probably okay to do. But we're still in the early throes of all this. And like we said, in probably another 90 days, we can give you an update as to where we are.
What the overall structure looks like, any potential changes to segments, all that's under review right now.
But anything we do, if we were to make a change out, like we've done in the past, we'll update that information on a historical basis so you'll have an apples-to-apples comparison.
Okay. And in terms of timing, why would the deal potentially take as long as second quarter to close?
We don't think it will. We're just giving ourselves some cushion. Obviously, as you know, Alex, there's things way out of our control here. So we'll be ready to get into the SEC quickly. The team's already working on it. But when I look at the timing in the AV transaction, I think that was about three months and a week. And when I look at this, you do have a little disruption with the holidays. And so I don't know what that does to slow down the SEC. If it doesn't, believe me, we're going to push to close this as quick as we can. We also have to get two shareholder votes. We're just giving ourselves a little opportunity in case the SEC slows down.
Okay. And what was the goodwill amount again, Dave?
Right now, we're projecting around $300 million or 12%.
But obviously, we'll refine that as we work through kind of the purchase accounting and the fair value assessment as we get closer to the closing timeframe.
And closing price, yeah.
Okay. Congrats again. Thank you.
Thank you.
Thank you. This concludes our Q&A session. At this time, I'd like to turn the call over to Sheryl Palmer, Chairman and CEO, for closing remarks.
Well, thank all of you for joining us today. It's a very big day in the life of Taylor Morrison and William Lyon, and we're very excited to share it with all of you. So thanks for so quickly jumping on the phone. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Good day.