Q1 2020 Earnings Call
[music].
Okay and welcome to the toll brothers first quarter conference call.
Participants will be any listen only mode. So do you need assistance. Please ignite conference specialist I pressing the star keep all the time zero.
After today's presentation, there will be an opportunity to ask questions.
Yes. Good question you made press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference over to Douglas Yearley Chairman and CEO. Please go ahead.
Thank you Melissa.
Welcome and thank you for joining up with me today or Bob Cole Chairman Emeritus.
He Conor Chief Financial Officer spread Cooper senior VP of finance and Investor Relations. When do you Marlette, Chief marketing Officer, and Greg Ziglar Senior VP and treasurer.
Before I begin I ask you to read the statement on forward looking information in our earnings release and on our website.
We caution you that many statements on this call our forward looking based on assumptions about the economy.
World events.
I mean in financial markets and many other factors beyond our control that could significantly affect future results.
I was listening on the web and email questions to Investor Relations at toll brothers Dot com.
Last night, we reported first quarter Twentytwenty home sales revenue of $1.3 billion with a 20.9% adjusted gross margin and net income of $56.9 million were 41 cents per share diluted.
First quarter backlog of 6461 units.
5.4, or $5 billion was up 9% in units and 2% in dollars versus last year.
First quarter deliveries revenue and earnings per share were lower than we had anticipated due to delayed closings in a few markets.
Instantly, Northern California, where we missed 60 closings valued at $67 million.
Most of these homes should deliver in our second quarter.
With strong buyer demand, our first quarter contracts were up 31% in units and 28% in dollars and our contracts per community were up 28% compared to one year ago.
California, which is now part of our Pacific region was up 32% in contracts and 10% in dollars and the first quarter.
This was the first quarterly year over year growth in contracts in California since fiscal 2018 second quarter.
Those two years ago.
Demand has remained strong through the start of our second quarter and we are experiencing pricing power in many of our markets.
We continue to look for opportunities to expand our luxury brand to new product lines and price points.
While we intend to maintain our leadership in the luxury segment.
We are also strategically adding more affordable luxury communities capitalize on demographic trends and to expand our footprint and customer base.
Nearly 40% of our current communities offer at home with the base price of $500000 or less.
These communities should turn inventory quicker and be more capital efficient.
We continue to expand our presence in new markets.
We have completed three acquisitions in the past nine month in the south Eastern United States.
These acquisitions brought us into five dynamic new markets, Atlanta, Nashville, Charleston, Greensborough and Myrtle Beach.
We've added three more markets with expansion into Portland, Oregon, Tampa, and Salt Lake City within the past 18 months.
Single family permits rose in January to the highest seasonally adjusted annual pace since June 2007.
Even so housing supply remains tight.
Interest rates remain historically low.
Consumer confidence is healthy.
Household formations are strong and unemployment is at or near record lows.
According to the January existing home sales report from the at eight for the National Association of Realtors.
The growth in existing home sales was strongest in the 500000 750000 dollar price range.
According to the just released census report.
New home sales were up 18.6% over last January.
With sales of homes priced above $400000, increasing more than 60% in the same period.
With this positive macro backdrop.
Market fundamentals remain supportive as we continue to expand our luxury brand the new price points product lines and geographies.
Now, let me turn it over to Marty.
Doug.
Before I address the specifics of this quarter I want to note that a reconciliation of the non-GAAP measures reference during todays discussion to their comparable GAAP measures can be found in the back of earnings release.
I also want to note that our guidance is subject to our normal caveats on forward looking statements.
Additionally, in the coming days, we will file an 8-K detailing historical segment reporting for contracts settlements and backlog based on our newly realigned reporting segments.
Our results for revenue and gross margin came in below expectations, driven by a combination of delayed deliveries unfavorable mix, an additional close out costs related to certain older communities.
These delayed deliveries, which Doug outlined and were concentrated in our higher dollar Northern California communities are expected to settle in our second quarter.
This lower delivery volume also impacted our SGN, a leverage but our SGN a in absolute dollars was generally in line with our expectations.
As background for our margin guidance for the balance of the year I want to remind you that orders declined for each quarter.
From October 30, Onest 18 to July 30, Onest 2019.
Due to the rapid rise in interest rates in the summer and fall of 2018.
This timeframe became a buyers market, where we had negative pricing power.
While orders did increase in Q4 2019.
Pricing power was modest.
Our newly formed Pacific region, which includes California, Portland and Seattle.
Contracts and dollars did not turn positive until this first quarter of 2020.
Orders were up in the Pacific region, 70% and units and 30% in dollars in this quarter.
This region, driven by California, Seattle carries above company average margins.
From a mix perspective.
Two thirds of our projected margin change from fiscal 19 to fiscal 20.
Is driven by the combination of less volume and lower margins out of that Pacific region.
It takes us nine to 12 months to deliver our homes.
So we do expect sales from the improving market that began in late 2019.
To benefit adjusted home sales gross margin in our second half by approximately 100 basis points compared to the first half of fiscal 2020.
Most of this recent strong demand environment.
Evidenced by our growth in contracts and absorption pace and our increase in pricing power.
Coupled with our projected 10% community count expansion.
Should also contribute to margin and earnings improvement in fiscal 2021.
With our focus on capital efficiency, we're committed to improving our return on equity.
In the first quarter fiscal year, 2020, we repurchased $476 million of stock at an average price of $40.73 per share.
This reduced our share count by 11.7 million shares or 8%.
We expect share repurchases to remain a significant component of our capital allocation strategy.
Our balance sheet remains strong we ended the first quarter with $520 million in cash and equivalents and had $1.59 billion available under our bank revolving credit facility.
We have no public or bank debt maturities in the next 24 months and our weighted average debt maturity is five and a half years.
Our strong balance sheet extended maturities and available liquidity allows us to grow our business through land purchases and selective homebuilder acquisitions.
We have increased our land owned and controlled by approximately 8000 lots since a year ago.
Our first quarter 2020 book value per share was $35.87.
And our net debt to capital ratio was 42.3%.
Looking forward, we are projecting second quarter deliveries of between 1800 50 in 2050 units with an average price of between 800000 and $820000.
We are projecting full fiscal year deliveries of between 80, 690, 100 units with an average price of between that same 800000 and $820000.
We expected adjusted home sales gross margin in our second quarter to be approximately 20.5%.
With full fiscal year adjusted home sales gross margin of approximately 21.25%.
This implies a 100 basis point improvement in the second half of fiscal 20 versus the first half.
We project second quarter SGN today, as a percentage of home sales revenues to be approximately 12.4% and full fiscal year SGN, a as a percentage of home sales revenues to be approximately 11.4%.
As we discussed on our fourth quarter conference call, our projected 10% growth in community count by fiscal year end 2020 involves investment in personnel and other costs in advance of revenue generation.
In addition, we continue to implement our I T system upgrades. This is causing SGN as a percentage of revenues to be higher this fiscal year.
Second quarter other income income from unconsolidated entities and land sales gross profit is expected to be approximately $5 million.
What we expect full fiscal year 2020, other income income from unconsolidated entities and land sales gross profit to be approximately $115 million.
We project the second quarter tax rate of approximately 26% in fiscal year tax rate of approximately 25%.
Our current Q1 fiscal year 2020 quarter tax rate was benefited by the reinstatement of the energy tax credits.
Our second quarter weighted average share count is expected to be approximately 132 million with a weighted average diluted share count of 133 million for the year.
Now, let me turn it back to Doug.
Thank you Marty.
At this point, let's say, let's open it up for questions.
Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone. If you are using speakerphone. Please pick up your handset pressing the keys to withdraw your question. Please press Star then too.
As a reminder, we ask that you. Please limit yourself to one question and one follow up if you have additional questions you may be answered the question Q.
The first question today comes from Ivy Zelman <unk> Associates. Please go ahead.
Good morning, I have several question maybe Doug if you can help us understand why when you indicated that one can you would be the low water mark.
Several months ago are we now see margins into Q.
That are going to be lower than one Q. That's my first question.
Sure.
[music].
Marty has got the lift so he's going to take it Ivy.
Well I think the northern California slippage that we saw is also coming with a bit lower margin than we had previously anticipated due to some production delays and production issues. That's the bulk of it the the rest of it is mix, including a little less Seattle and we had anticipated.
Yeah, when you say production issues and close out costs higher than expected and just operational management challenges, maybe you can elaborate for us what's going on under the Hood.
Sure the.
The issue in northern Cal, which we have talked of before is a very large high density condominium community all metro crossing in Fremont.
Got it.
It is.
It's about 600 units.
We had terrific sales.
It's a very very complicated.
Site.
With all condominium, which means that gets built in wants and delivered basically at once we ran into a significant weather issues last winter, where San Francisco had.
The worst rains I think on record or at least for decades, and we had a lot of not only delays, but we had cost overruns and we have been battling through that.
We are beginning to where we started delivering in the end of.
2019.
And we continue to struggle and we lost.
Most of those 60 units I referenced in Northern California has been pushed back came out of Metro crossing.
The margin.
When we open to that community and sold early on.
Ah certainly looked at better look better than the margin. We we have now that we are delivering.
And so the northern California problem is is pretty much isolated to one location.
That we have had major issues and.
Well not be a change in management given the poor performance.
However, who oversight of this community because it sounds like its execution problem and you're saying, it's specifically related to one community. So that's the division president.
Is not managing and properly.
No it's not.
Okay. Let me ask one other question on M&A could actually and I was really surprising on your guidance.
Just understanding the significance of your de leverage there is there any nonrecurring.
Expectations and included in that guidance nonrecurring items.
So we had previously mentioned about nonrecurring items in our first quarter that were compensation related they are nonrecurring in subsequent quarters, but there are components to that would that would recur in every first quarter.
In addition, we continue to spend on systems upgrades that.
Have a life that that should come to an end here in the next to 18 to 24 months.
Hi, real quick Marty can you quantify that in terms of the I.T. system upgrade the impact on unless you today.
It's in the neighborhood of $5 million to $8 million annually.
Okay. Thanks, guys.
The next <unk> sorry. The next question today comes from John Lovallo of Bank of America go ahead.
Hey, guys. Thank you for taking my questions. The first one Marty I think you mentioned that there were 60 closings that were delayed in the northern California market.
Closings were you know a little bit lighter than just said that 60, where else where are you seeing getaways.
[noise], John I'll take that one.
You know it's scattered I mean, obviously there are number of locations that beat the projection, but those that.
Missed by the most outside of northern Cal.
We Miss 14 closings in Reno.
For $12 million of revenue, we missed the 18 closings in Jacksonville for $11 million of revenue, we missed 13 closings in northern Virginia for $10 million. It revenue when we missed eight closings in Dallas for $10 million of revenue that would be that.
That would be the top of the left.
Okay, and then maybe just following up on that when we think about the delaying the closings. We was it related to labor materials or you know just time [laughter] excuse me pure timing or no.
Each of the backlog et cetera.
It's Uh huh.
It's timing.
We we you know labor is not worse than it was 369 months ago.
Materials.
Our our not worse for not you know the Chinese tariffs or are there other international issues are not affecting.
The supply of our labor.
In some cases its permitting in some cases that obtaining that final certificate of occupancy from the municipality.
You know subcontractors are stretched they have been stretched so that's been an issue that we as an industry and we had told have been.
Dealing with <unk> for some time, but.
Every quarter there our divisions that beat their numbers in there divisions that miss their numbers and I think when you take the.
That's 60 units and 60 plus million out of northern Cal at Metro crossing.
The rest of what happened around the country is fairly typical obviously there were more Mrs ingest Northern Cal So we had a little bit more.
On the downside then the upside and I just described you know the biggest offenders.
We are obviously examining everything that happened in those locations, but there's nothing.
In particular concerning labor or material.
That jumps out that is giving us more concern.
There were also if I knew more cancellations this quarter than we had anticipated and that shows up as missed school closings that aren't production related.
Got it and then lastly, how quickly can you guys get back in the market to start buying back stock.
Friday.
Okay. Thank you guys.
The next question today comes from Jack missing go up ESI G. Please go ahead.
Hi, good morning.
Marty what does that talk about the expenses if I kinda back in the envelope to the guide it looks like today is probably up 100 give or take a year to year. In 20, you gave us the five to 8 million on the systems conversion that's been ongoing.
How much of the balance is sort of normal inflationary I'm guessing probably.
I don't know three 5% and is there is the rest at all.
New communities and I'm trying to just thinking through what the DNA leveraged and looks like in 2021.
As we look this is it feels like you're sort of in the middle <unk>, but have a repositioning period here that should improve as time goes on.
I think we definitely look for improvement as time goes on the expansion in the number of communities.
Is around two thirds of the increase we look to see a year over year. Most of the rest is on a normal compensation increases.
And the I T would probably be next additionally, we've added a few builders, including a builder down in Atlanta, and Nashville, who expects to have deliveries I'm very late this year, but nothing in the interim because of the attach nature of their product.
Okay and then.
Thinking through the ASP and some of the mix shift both you know product and geography wise.
Zero flat up or down.
You know just big picture in 2021, meaning are we threw a lot of the repositioning by the end of this year or or does that kind of continue.
Into 2021.
[noise] It will continue.
As we said we are committed to expand.
Our price points.
Expand our buyer segments.
As I mentioned, 46% of our contracts had a base price under 500000 now remember our buyers.
I only have a lot premium they pay and then they pick options and they go to the design center and they picked finishes. So so the delivered price of those houses in some cases in most cases is probably over 500, but.
Recently, I, just got an update that 20%.
The new land we bought.
As for homes that will be sold under $500000.
I don't think you'll see.
A dramatic shift in 2021, but it will be progressive.
And we continue to see good deal flow at all price points. So it's it's gonna be one more segment.
Now, we're going to focus on but it will be gradual and and I think the diversity of our price points makes it.
Tough to say Directionally, where the average price is going to come out because it's so dependent on which regions are doing better than others from a market perspective, we're selling homes from low 300.
To $3 million and we've just seen the Pacific region, which is generally higher price point.
Come back a little bit delayed compared to many of the other regions. So if that continues it could have a meaningful impact on the average price.
Sure I didnt, presumably you're going to get some of that back on pace I would imagine as well as the product mix continues to shift.
Yes.
Hi, Thanks for taking my questions Yep.
The next question today comes from Truman Patterson of Wells Fargo. Please go ahead.
Hi, Good morning, guys and thanks for taking my question I appreciate it.
[noise] first in the northeast the mid Atlantic you know orders declined a little bit <unk> I'm, just hoping you could discuss.
Aid demand in those regions and also your brand positioning you know I know historically in the mid Atlantic you've had some battleship and larger master plan positions. There and then on the Didnt demand side could you just discuss a little bit of salt is really hitting those areas that geography.
[noise] short term in.
The the flat.
Orders in the mid Atlantic and the North.
Is.
Just a result of.
Not having community hit community growth.
Our community counts are flat.
You know as we've talked about it it it's our home.
We do very well here, we have a dominant position and it's very difficult to find new land opportunities because the entitlements are so hard and there's all the growth.
Oh, we recognize the growth in south and west and Weve positioned ourselves accordingly, without giving up on the mid Atlantic and the north.
You now being flat with flat community Count is I think what we anticipated.
And yeah, we're comfortable with where we're positioned there Virginia.
Is a top five national market for us.
Performing very well.
Philadelphia, Greater Philadelphia has seen strength.
Over the last year to year and a half.
And so I think I think that's the story, it's just a a lack of.
Opportunities to grow community count.
And a lack of a job growth.
And population growth.
In terms of the larger kind of legacy communities that you asked about Truman.
I think ER.
There's a active adult job in Central Jersey.
That is coming to the end and then we have Loudon valley still chugging along in a Virginia Yep.
Okay. Thank you for that and then.
What kind of the topic of the day is you know Corona virus concerns in California, clearly, California orders you know rebounded in the first quarter, but you know given the heavily Asian buyers in that market. Some investors are fearful that no book coastal and on demand could at least be impacted near term I guess.
What did you guys see near term it how do you guys think of this kinda playing out going forward.
So we believe 11.
Closings in California.
Have been pushed out.
We think and we hope to the second quarter.
Due to the virus.
That's the intelligence were receiving from our sales teams out in California.
We are much smaller in Orange County, right now than we were three years ago.
And.
Orange County has been where most.
The Chinese buyers have at least for toll brothers have purchased.
We don't see nearly as many.
We have foreign buyers throughout California, but the Chinese buyers.
We're really concentrated Orange County, we see very few in northern Cal or an L.A. county, or Northern San Diego County, where we also operate.
With respect to the supply side.
The only interruption that we're feeling right now in lighting.
Which is coming directly out of California.
And some of the small appliances, where either components or they are the full appliance or being manufactured.
And.
<unk> in China.
Longer term, there's some chatter about whether steel will become an issue, but we're not feeling that yet.
In the fourth quarter, our sales to foreign buyers was down to 7% and.
And it's approximately that percentage of our backlog right now.
Okay. Just one follow up on those arguments corridor I didn't mean, and our first quarter drum and excuse me.
Okay. Okay. Thank you just a follow up on on the lighting supply being impacted by China and the grown up Iris.
Do you have an alternative supply chain outside of China, you can source that from a it's my understanding that virtually all right, let's actually.
Yes, we do.
And you know if there's any one product.
That was to be head.
Lighting would probably be.
The least impactful because worst case.
You can always get a house lit up with you know temporary lights and make it through a little while until the you know the chandelier in the Scotts arrives.
Okay. Thank you.
Thank you.
The next question today comes from Matthew Bouley of Barclays. Please go ahead.
Hi, Thank you for taking my questions. So I wanted to ask around kind of that margin Delta in 2020 that you mentioned.
Specifically that the lower mix of Pacific a in the lower margins within Pacific. So that so the second part of that I guess do you expect that the Pacific margins as we move past Kinda you know they operational issues or challenges the weather challenges that you alluded to is the underlying profitability there.
Expected to actually turn higher sequentially in the second half or you know as he mentioned those margins are above the fleet average is there risk that the Pacific margins kind of continue to move towards the rest of the business. Thank you.
Sure. It's a good question so.
The margin coming out of the Pacific.
It's still higher than that company average.
However.
The California margin.
This projected fiscal year 2020.
Versus actual and fiscal 19.
In 80 basis points lower.
And in Seattle.
2020 to 19.
He is 20 basis points lower.
<unk> is it going to creep down to the company average no.
Well I think the other I'd agree with that but I think the other couple of points to make with respect to.
Mix shift.
In 19, the Pacific was around 34% of our total volume, we expected to be down around 5% in 20.
20.
And on our single family business.
Which generally has higher margins.
Which is also going to decline approximately 5% of total from 74%.
To 69%.
Got it understood. Thank you. Thank you for that color and then I guess, just a broader question about gross margins and visibility.
Because obviously you guys have the longer backlog and then Theres always a kind of a strong level are generally has been a strong level of visibility as result of that backlog margin. So you know as we move past you know again. These unforeseen we kind of issues at Metro crossing do you suspect to just you know as the business mix has changed the process.
Mix has changed geography is et cetera.
Is there any reason suspect that that kind of your level of margin visibility has also changed.
No I don't believe so Matthew I think we had some unique circumstances this quarter.
Another matter that we Didnt, even mentioned is that our specs as a percentage of total sales for this quarter for deliveries for this quarter was up two or four or 5% I'm, sorry, 17%, which is up four or 5% compared to our normal.
Units delivered this quarter and you know our specs generally have a little lower margin.
So a lot of moving pieces.
But I don't think we're going to see long term impact on our visibility.
As a result of this quarter.
Okay. Thank you for the details I appreciate it.
You're welcome thank you.
The next question today comes from Susan Maklari of Goldman Sachs. Please go ahead.
Hi, good morning.
Morning.
First question is just around you know you mention that you're not seeing any real change in in the labor or the availability of it but does look out and think about yourselves, having you know 31% order growth. This quarter a lot of your peers reporting similar kind of results probably are you anticipating that the labor will be.
The more constrained looking further out could your delivery time see further extended and what are you hearing from the trades in from your yeah. Okay on the ground.
Susan it's.
A great question as we.
As an industry continue to.
Post these robust order numbers.
Oh, the trades will be stretched.
And we would expect that in certain markets.
Are there will be pressure in certain trades.
And we need to manage that or are we feeling it yet no.
Oh, the field is not talking about it.
<unk> costs have.
Our going up less.
Than we have seen in some time.
But if if this spring season continues with the velocity, we've seen in the beginning of it.
And yes, I think there's going to be cost pressure.
Which also leads to construction cycle time pressure.
Okay Alright. Thank you for that and then can you just talk a little bit about how the integration is going with some of these more recent acquisitions that she's done you know anything there that has kind of maybe surprised you where it was unexpected and you know anything we should be aware of.
Hi, it's all going well.
There are all early so we're dealing with.
Purchase accounting rules that have compressed margins.
Below what they will really be once we.
What purchase accounting behind us and and have normal operations.
We one of the acquisitions was two weeks ago.
So that that obviously is very very early.
But so far so good with no surprises.
Okay all right. Thank you.
You're welcome thank you.
The next question today comes from Mike Dahl of RBC capital markets. Please go ahead.
Good morning, Thanks for taking my questions.
First question just on gross margin going back to comment you made in response to.
My last question I think some people might be a little surprised that the California margins are only projected down 80, bips in Seattle only done.
20, so I just wanted to again with respect to the first half versus second half dynamic.
Can you give us a little more color on.
You know what those margins are projected to be down in the first half of the year versus what's embedded in the second half and and I guess as part of that maybe broaden out talk a little bit more about your pricing power in our own research suggests that you took pricing up in the vast majority of communities, including and in California at the end of.
Thank you can you just give a sense of that and magnitude.
Hey, Mike its Greg I'll answer on the gross margin and I'll, let Doug answer on price increases well, we answered about gross margin for fiscal 2008, we're talking about with capital as it relates to California, Seattle, We were talking about where we would see an overall decline in company average gross margin for fiscal 21st.
As fiscal 19, and so California with it.
Decline overall mix has a negative 80 basis points impact on overall company gross margin same story for Seattle, only at 20 basis points.
And then I got on pricing so on price increases all that stuff. So yeah you.
You're right we had a we had a company wide price increase in mid January.
There is another company wide price increase coming on Monday.
Allowing sales to.
Sell through the weekend.
And in between those many communities on their own because of good sales.
Our our taking prices up it is.
Community by community decision.
Except when we go national with what I, just described as the January and.
What does that March one.
Price increase we have also.
Increase the prices and our design studios.
We have also increased the prices.
Of our structural options that are being purchased.
From the at the community before you move into the design studio.
We're also looking where possible to increase lot premiums. So there's a lot a different way and by the way. We're also looking to decrease incentives and so all of those tools are being used.
And I'm right now because of the strong demand.
They have been effective and I am hopeful.
They will continue to be effective through this frank.
But that's helpful dug in just a quick follow up on that one is is it fair to say that some of these changes are you may get some benefits in the second half, but a lot of them well be kind of carry over into fiscal 21.
Yeah from here forward most of what I'm talking about.
Is early 2021.
There are still some communities that.
We'll deliver homes this fiscal year with sales and have March or even April and of course, we have spec home inventory.
That.
Can be sold in August and September but for the most part.
What I just described is a benefit to early 2021.
Okay. Thanks, My my last question is really on the share count so it's or maybe a little confused by the the share count God given how much stock you purchased and and I think much of it was towards the end of the quarter. So wouldn't necessarily have been reflected in the first quarter. You know you say the buybacks.
On to remain a big part of capital deployment going forward, yet I'm trying to reconcile or.
Why the the second quarter share count as only a 132 and then yeah why the full year share account. Then is it is stepping up a little bit if you're gonna be progress for the buying back more shares.
It's Mike it's really just a function of the weighted average share count math in the first quarter.
It's just the 90 days from a November 1st to.
January 31st that the math it implies and then for the full year, it's the whole thing.
Well, what was your quarter and share count Marty.
Hold on a second.
<unk>.
We're going to find that we'll get that to you in a minute Mike.
Thanks.
[noise] [noise], although so while we look for that answer lets move onto the next question.
The next question comes from Stephen Kim of Evercore ISI. Please go ahead.
Thanks, very much guys I appreciate a lot of the color.
Just a touch base one last time on this gross margin.
Mentioned that the margin in the second half of 2020 was going to be up about 100 basis points versus I think the first half my I would just observe that you kind of did that in 2017 in 2018 as well this year seems to have more.
More dramatic things to call out and so I was curious as to why we aren't going to see maybe more of a striking difference between the back half of them upfront happen I'm wondering is that going to be because you know you still got this lingering effect of natural crossing deliveries that come in at a really low margin you want to account for that.
Or is it you know something else.
I really think gets the.
Cadence of the order growth.
In the prior year right.
Each quarter last year until our fourth quarter, we had a decline in orders.
Generally when you have a decline in orders you get a little bit more aggressive in you're discounting.
We didn't have a positive in orders until the fourth quarter 2019.
There's a tendency when you have a positive.
To take it rather than price into it.
And so most of the increases are not happening until after Weve first reported an increase in sales.
Okay got it sounds a little bit more of a lag effects are really weren't <unk> talking about here is kinda like what you were addressing I think with Mike about 2021 is really where we start to see the margin is more reflective of the housing and MEMP environment that we've been I'm enjoying here more recently really that's what's really 2021 for you.
<unk>.
Right right, Yes, that's correct that's right.
Okay and then.
Aspects to Youre, a pivot you know you're you're moving to somewhat lower prices priced homes.
Curious if you could talk about the likely impact of that on your backlog turnover ratios I think that we'd look at your closing guidance over the next several quarters.
Quarters or for the year it doesnt seem to imply a significant improvement in backlog turnover ratios and I was wondering whether or not or that was conservatism on your part or if there's an opportunity to see that actually pick up because typically I think smaller product you know lower by Tom's typically have a faster backlog turn.
I think I wouldn't consider additional conservatism.
In the numbers I think in periods, where we have increasing orders or backlog conversion tends to.
Or slow down and I think that's what you're seeing in the guidance we've given.
Right that's true okay.
Okay, but again 2021 would probably be set up to you know enjoy somewhat higher turnover ratios I would I would guess that's that that's the plan with respect to entire shift to some of the lower.
Price points and quicker velocity homes sure.
And then related to this pivot or this transition Bob I'm going our way back to 1995. When you bought Jeff had mentioned I think I remember you first talking about this dumb tax concept that you would you acknowledge they were going to absorb a bit of a dumb tax or pay a bit of done taxes, we move outside of the northeast corridor, which we know so.
Wow.
I'm wondering whether or not but that kind of thinking should apply.
As you move into somewhat lower price points, and if not why not.
I think it's still appropriate.
Two.
For the a dumb tax.
Your underwriting.
Otherwise, you're gonna be surprised and you'll end up with Tony.
So.
Things are pretty much the same.
We make these bodies.
With a significant.
On the right thing that we don't have once you have the machine rolling for you.
Great.
Even I think I'm, sorry, I I.
I think when we enter a new market than Novo, which is what I what I My I remember the conversation about dumb tax which was if we can buy a builder to enter a new market that has an operation at a machine at a Brandon architecture and.
Contractors.
You get a big head start over the organic.
Entry into the market, where you go through three or four division presidents and you have the wrong architecture and you have either on land and you have no contractors I want to work for you and is a huge dumb tax associated with the start up when it comes to.
A new product line that is.
Pretty similar to what we're doing and it really kind of resembles for example, active adult which is at a lower price point simpler houses less upgrade than selections absolutely. We're learning from it and we can't buy trades yet at the pricing that you know some of the other.
Low price builders, Ken I think we offset that through our brand and some of what we offer is a little bit better and we have examples of that so we're still learning, but I think we're further along.
And having our arms around that an understanding. It then you know what you kinda described as the old dumb tax definition when you enter the new market.
Yeah, Great. That's actually very helpful. Thanks for that guys last question for me is a question about rent or ship.
We've been very early and a forward thinking in terms of the relationship you made with BB living.
For the single family built to rent market and I'm curious about the issue of whether renters ship is losing its stigma and given that you have such a strong presence at the you know the Tony or price points of the market and you're also seeing up close and personal but the renter ship side of the market and the receptivity in markets when you're trying to get communities.
Hello.
Do you believe that that stigma from rent or ship is a declining can you give us a little bit of color. If you do believe that is so and what implications you think that has for the industry going forward.
Yes, I think it's declining.
And I think it's a function of the quality.
Of many of the new.
Multifamily apartment communities that we and others are building.
That.
Feel and live like condo living.
With the lobby they've there the residence club the Jim.
The golf simulation room.
The pool the pool on the roof.
The nine foot ceilings, the finishing up the unit.
The location.
The ability to lock it and leave it and travel the world There had to Florida in the winter or whatever you may want to do so we when we look at the demographic.
And the wealth.
Of our renters.
We are amazed at how how they would typically have been buyers who are now deciding not for financial reasons, but for lifestyle reasons.
That they want to rent.
And so yes, I think that stigma.
While it is there a little bit.
It is definitely declining.
And I think we're positioning ourselves to take advantage of that not only to be living.
But through the 20000 plus units we're developing.
Through our apartment living group.
And I think our study of the single family rental business.
Implies that there are people in those products because they have to be from a financial perspective, but there are many that choose to be in those products because they want to.
Maybe from a frictional cost of ownership and disposition.
Perspective.
And having seen.
Some challenges in the past in terms of liquidating their real estate.
So I would agree with the Doug.
And just to answer Mike Daus question from earlier, we have a 129.8 million shares outstanding as of the last day of the quarter.
Thanks, a lot guys.
Thanks, David.
Our next question comes from Jade Rahmani of KBW. Please go ahead.
Thank you very much on the apartment rental business I was wondering if you have an interest and creating a permanent capital vehicle in which to hold those read assets and my expansion. The reach set there you know valuations typically a maximize based on recurring earnings rather than on gain on sale type earnings which are more volatile on unpredictable.
To the market do you have any thoughts on.
Whether that makes any sense and also if there could be any combination potential with others in the homebuilding space like the airport and then when our that pursuing similar strategies.
Sure. So I think we continue to study a long term hold strategy for those assets those multifamily assets that we.
May choose to hold on whether that's.
Oh on balance sheet or in joint venture form or be a separate wreak like or read entity remains to be seen but certainly the multiples of cash flow from operations funds from operations that the reach get.
Oh, you that is very appealing to us as we grow that portfolio.
In terms of combinations with the other builders.
We are not have any any discussions along those lines at the moment.
And that can you just remind us the amount of equity capital invested in each of the apartment business the rental business as well as city living.
So the rental apartment business right now has an investment of $680 million, although we expect to reduce that by around $300 million. During the course of this year as we sell joint venture interest in future projects, where we have.
I've already purchased the land and city living is just under half a billion dollars.
Thank you.
Thank you.
The next question comes from Michael Rehaut of JP Morgan Securities. Please go ahead.
Hi, This is a lot at home and on for Mike.
Just first given the delays on the one key closings could you expand on what gives you confidence that they won't be delayed further and your level of confidence you'll be able to deliver most or all of these since closing to Q.
Both Metro crossing it then the other locations you mentioned.
Yeah, we've built in.
Conservatism in our numbers.
We are already seen a month into the second quarter.
Some of those delayed deliveries.
Now delivering.
We are far enough along at Metro crossing with units now delivering every day.
As opposed to.
You know 2346 months ago, when we were still waiting.
For inspections and certificates of occupancy to get started.
When things were more uncertain.
So for for those.
Those are the main reasons why we have we have more confidence.
The the Miss closings will occur in Q2.
We are very focused I assure you on getting metro crossing right.
And in those other markets I mentioned that have had Mrs fixing the problems we have.
Oh, I'm embarrassed by Metro crossing.
It is a huge lessons learned.
It is one isolated very large community.
What otherwise has been a terrifically performing division.
It should have been built more like a city living project.
Wallets stick.
It is more similar to a high rise in that it is all condo. It is four or five stories on top of podium.
It was incredibly complicated.
We have learned lessons.
And we are fixing it.
But it has been painful.
Okay. Thank you and going back to margins and just looking a little bit longer term, what do the right way to think about new normal for adjusted gross margins and kind of margin insisted like 21 should we expect it to be back with me, they 23, 24% level or closer to 22% level or is it.
More than that given the changing regional making that chance I spent the better pricing trends and also the next to lower margin that you have more affordable luxury.
We're not going up we're not going to get that far out with a crystal ball I think we'll leave it where we.
Our release wasn't what we said today, which is we're very encouraged by today selling environment and the pricing power we are experiencing right now.
Okay. Thank you.
Thank you.
Our next question comes from Jay Mccanless of Wedbush Securities. Please go ahead.
Good morning, Thanks for taking my questions. The first one I had this environment right now feels very similar to the beginnings of 2018 when builders were flexing prices higher and I was encouraged to hear you guys are raising prices, but were there any lessons learned from two years ago that you're implementing now so that you don't push.
Four to push push the affordability or push the pricing lever to or.
Yeah, I think back then.
Well, we don't feel like we pushed pricing too hard.
We got blindsided by significant rise in interest rates in the summer and fall of 2018.
It took the wind out of the sales or the industry.
I don't think it was our pricing power.
Or our price increases excuse me that caused sticker shock I think we were being fairly deliberate.
I look back to that period of time and with the exception of a few places, particularly out west.
We didn't we did not hit price.
All that aggressively prices were going up but it was measured.
But I think what took it down then was was the rates yeah, I think we underappreciated.
The.
Consumer psyche impact from the relative move in interest rates, the three and a half before and a half percent.
No change there affordability that much but it change their mentality and remember not only three and a half to four and a half.
But the fed messaging that over the next year, we're going up to five and a half because you can't lock your mortgage and until 60 days before you're closing.
When it takes nine to 12 months to build the house.
You're thinking forward to one I can lock and that could then be into the low fives. So it had it had a bigger impact than just that one point move it was a messaging around what more was coming.
Got it thank you for that.
Other question I had.
Could you could you just talk a little bit more about the demand issues that you're seeing in the northwest what's what's behind that and then also you know the close outs you. All had this quarter is is there the potential to maybe run the specs a little bit hotter and close out of some of this older Landon and get the gross margins up a little bit.
Faster than what you all the anticipated.
So for them the northwest I'll focus on Seattle, because the Portland is a bit of a start up and we're just very small they are just beginning to deliver.
Seattle's up 265%.
Contracts in the first quarter.
Seattle.
Was our our highest margins best market.
What Marty five six years ago, and then it was one of the first to slow down.
To your two to three years ago I believe.
And it.
Baffled us right because the job growth was wrong in the economy was roaring and I just think there was such sticker shock.
From all the pricing.
That that we had in the increases we put in place that.
It's a bit of a bubble effect.
That has now worked itself out and what has continued to be a very strong economic market.
There has been there's always limited supply in Seattle, because entitlements are so difficult.
And we are just now seen.
Tremendous new demand coming back.
That resembles.
Oh, what we saw four or five years ago.
And I just think it it's the passage of time.
From when.
The market got some sticker shock absorbed that settled in and now has come back.
In terms of.
The margin I'll give you Marty sure so that the close out issues that we referenced earlier with respect to margin aren't necessarily associated with selling the last three or four homes in a community. These are costs that happened 234 years. After we've left the community either because you municipality says.
They don't like the way, we paved the road or the community Association once some better trees or whatever it may take to to finally get ourselves off the bonds. There we estimate what those costs are going to be as part of our gross margin as we deliver homes and in this.
This particular quarter, we had a few costs that were higher than those estimates.
So I don't think Jay to.
Jay to answer your question that I'll say pushing through the last few homes in a community to burn through margin is gonna be something that we would look to do.
Okay, well. Thank you for closing the loop on that I didn't know if those two related so for shale taking my questions. Thanks.
Thank you.
Our next question today comes from Alex Barron Housing Research Center. Please go ahead.
Yeah, Hey, guys. Thanks, I wanted to understand the rationale for the switch in the regions was that reflecting.
Some changes and the way you're operating the business or what prompted that.
And then the second question was.
What motivated you to do the the most recent acquisitions you know what is it that you liked about those particular builders or that region.
So the region.
The new definition of regions is driven under I see see rules.
By who in management has responsibility for certain territories.
And we went through a bit of a reorganization here to better geographically aligned regions with our five regional presidents.
For example, Seth rang, who resides in southern California.
It was promoted to regional President and now has responsibility for California, Oregon and Seattle.
So the Pacific region.
Is tied to staff.
And that those same examples apply to all five regionals and because of FCC rules that is the reason why the the definitions changed.
With respect to the recent acquisitions.
HM we.
We are quite fond of the southeast we know these terrific growth coming into the southeast.
And our presence has been.
Two small down there we've been we at our eye in Atlanta, we found a great builder to acquire in Atlanta, We had our eye and on Charleston, and Greensboro, <unk> I'd Bill Let me start Greensville. Good Greensboro is in North Carolina, Greenville, sorry, [laughter] and we found a builder that built in Greenville Charles.
Then and they threw in Myrtle Beach, we also had our eye on Nashville, and we found an infill builder that builds more mid rise townhome higher density in both Atlanta, and Nashville and that's.
Our recent thrive acquisition of a few weeks ago. So.
They were all kind of strategic in terms of location and opportunistic in terms, where we're able to put deals together that we think makes sense for us.
That was the rational.
All right appreciate it thank you.
Thanks, Alex.
Your next question comes from Carl Reichardt, a P.T.I.T. Please go ahead.
Thanks, Hi, guys things just these minimal I'm Marty on that can rate you mentioned it was higher than you thought and I realize we're talking about relatively small number of units, but can you talk just a little bit about what was surprising indicator the rationale for the cans that surprised you.
Well I don't think there was necessarily anything in the rationale I think many of those elevated cans were concentrated in the metro crossing job, where the consumers of.
Ben patient, but maybe their patients is run out our can rate.
For years runs around 6% it was elevated a little bit over the past few.
Quarters. It remained elevated in this quarter, despite a better selling environment.
Big that's what surprised us that with when the markets tough.
You might expect cancellations to go up but when the market is good we generally don't see that up.
And calling we expand art as.
As we expand our price points and even some of these builders, we have acquired that build at lower price points.
There are some mark [noise].
Posit requirements are lower.
And it may be that in those markets there could be.
A little bit higher cancellation rate because.
There's not as much pain.
When you do choose to cancel on Metro crossing.
As Marty said the cancellation rate has been elevated because.
We have been unable to deliver many of those units within the timeframe.
That was required under the agreements with our buyers. So they had the right to get out.
And some did.
The only silver lining there is that most of those buyers who have cancelled.
Have either transferred with in Metro Cross into another unit.
Were they bought so early in the process that we have had significant price increases and the resale of those units has been higher than the underlying contract price.
Okay. Thank you I appreciate that and then just a strategic question just back on the Labor side did you know the narrative from a number of builder suit moved their mix to lower end and fast turns back has been we are said to love to do this Ah we don't offer as much in the way of options upgrades. So it's simpler to.
Build and we expect to capture more labor keep them busy your product even with the transition over time is still going to be more complex typically offering more options and upgrade so I am curious how in the markets, where you don't have a lot of of share or scale you feel that you can capture this this.
Labor pool. That's you know continues to be scarce is it different subs, even in markets, where you're in a master plan competing with other builders or what can you do or is it pricing what can you do to retain those subs given the complexity or your product relative to put some of the other guys are building on the low end.
Before we will.
Venture into.
Affordable luxury at a lower price point, we will make sure.
That we have access to the subs.
We will get plans in their hands early.
And make sure we have our arms around the pricing.
We have been successful in negotiating better prices because the houses are simpler they will be built down the street.
Every house will look more like than a typical toll community, where there's a lot more customization.
And so in some cases, it's the same trade base that we have in a market that is willing to work for last because of the efficiencies and in some cases, we go to new traits.
HM with a typical toll homes at the higher price I think the front end train trades are very similar to the other builders because the excavator and the concrete company in the and the framer and the mechanical trade.
You know they they they can handle the toll house just like they can handle the others, but when you get into the finishes the tile work the trim work, which is much more complicated and we believe of a higher quality. We tend to have a different trade base that has been working with us for a long time is loyalty.
Alex and we're confident you know there will be there and ER. So far you know we haven't seen those labor problems, but.
Long answer is really that we will do our diligence.
On the opportunity to find trades at the right price.
Four we will venture into.
A different market segment or price point in a market.
Great I appreciate that front end versus the finished trade as it is a good point I appreciate that thanks, a lot does.
Thanks, Carl Thanks.
Last question today comes from Mark Weintraub Seaport Global Please go ahead.
Thank you.
Yeah, obviously stepped up the share repurchase quite a bit in the fourth quarter I apologize. If you you alluded to this but what was the rationale for for increasing it as much as you did and were there any openings you had in January and did you buyback any stock in January yet.
So I think you mean February I'm sorry in February.
We are blacked out from mid January.
Until Friday as Doug mentioned.
We are keen on Friday of this week. So we have not bought any stock since mid January we do put a tenbfive one program in place during that period of time, but that's generally oh.
Much lower prices than we might choose to do in the open markets into kind of runs on our on its own our rationale for allocating capital to buybacks is with a focus on return on equity, it's as simple as that our stock.
When we bought all those shares was trading close to next years, beginning book value or we find ourselves in that same environment right now.
Okay, and I I mean, it's you were buying it at levels not dissimilar even somewhat higher than the prior few quarters. So I'm just trying to understand was just reflective of increased confidence in the outlook.
Or was there anything else that play.
Beyond <unk>.
I think in stages of 2000 in 19.
When we Didnt know where demand was going to be we were a little bit more conservative in holding onto our cash now.
As we've seen demand turn in our favor Oh, we're we've been a little bit more aggressive.
Okay. Thank you.
[noise], that's gonna give exact question and answer session I would like to turn the conference back over to Douglas Yearley for any closing remarks.
Alissa, Thank you very much.
Thanks, everybody.
For your questions today [noise].
I would like to conclude and wrap up by acknowledging.
All of our toll brothers colleagues, who have worked tirelessly.
To build the great homes in the prestige dislocations.
And provide what we think is exceptional customer service.
I'm very grateful for all of their passion and all of their dedication.
We like our strategy.
We like the market we're in right now we like how we are diversifying.
Oh, we understand we've taken our lumps right now with some guidance and some recent performance.
Thankfully it has been a bit isolated to the areas. We have talked about we're very focused on those.
And we will learn and we will move forward and we will continue to work hard to gain everybody's trust and support.
And I. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Mhm.
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