Q2 2020 Earnings Call
[music].
Good morning.
And welcome the toll brothers second quarter earnings Conference call.
All participants will be in listen only mode.
Sure need assistance.
Lisa ignore conference specialist by personal Starkey, followed by zero.
After todays presentation will be an opportunity to ask questions.
Please note this what that is being recorded.
Not like depend a conference over to Mr. Douglas Yearley, Chairman and CEO. Please go ahead.
[noise] Hi, Nick This is Doug are we ready to go.
[noise] [noise], Yes go ahead Sir.
Thank you very much.
Welcome and thank you for joining us today I Hope you your families in colleagues are staying safe and healthy.
With me today, our Marty Cotter, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations. When do you Marlette, Chief marketing Officer, and Greg Ziegler 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.
I caution you that many statements on this call our forward looking based on assumptions about the economy world events housing in financial markets. The current and long term impact of the cobot 19 pandemic and many other factors beyond our control that could significantly affect future results.
As noted in our May six press release due to the uncertainty surrounding covered 19 and its impact we have withdrawn our second quarter and fiscal year 2020 guidance.
Now let's begin.
We're pleased with our performance in the second quarter under complex and challenging circumstances.
Our teams delivered 1923 homes.
And produced revenues of $1.52 billion.
Our second quarter adjusted gross margin of 21%.
And our net income of $75.7 million or 59 cents per share diluted.
Our second quarter, and a backlog of 6428 units and $5.49 billion was down just 1% in units and 3% in dollars and our net sign contracts of $1.55 billion and 1886 units were down.
22% each from one year ago.
Our second quarter was essentially bifurcated by the impact of covert 19.
Fueled by strong demand a healthy economy, low mortgage rates and a limited supply of new and existing homes nationwide. Our net signed contracts were up 43%.
Through the six weeks ended March 15, compared to the prior year same period.
With approximately 40% of our selling communities and 50% of the dollar value of our backlog concentrated in a highly impacted markets.
Putting in Pennsylvania, New Jersey, New York City ended suburb, Connecticut, Massachusetts, Michigan Metro, Seattle, and California government stay at home and business closure orders made it, especially challenging to sell construct and deliver homes.
In these markets during these restricted during this restricted period most of our sales centers were required to be physically closed and operating virtually or open by appointment only.
As a result from March 16 through April 30, our net sign contracts declined to 64% year over year.
Net signed contracts declined to 79% in these highly impacted markets over the same period versus 52% and our other markets.
Fortunately government restrictions at east and sales in construction operations have resumed in almost all of our markets.
Well that's sign contracts in the first four weeks of May were down 37% year over year, we're very encouraged by recent deposit activity.
Our deposits, which represent a leading indicator of current market demand or up 13% over the past three weeks versus the same three week period last year.
Year over year deposits from last week.
Were the highest since 2005 on both a same store and gross basis.
As a reminder, our customers first posted refundable deposit that reserves of home site and affords them time to make final decisions on architectural design and structural options to personalize their home before signing a binding contract.
This process from deposit to contract typically takes about three weeks.
Importantly, our recent deposit the contract conversion ratio has remained consistent with pre code at 19 levels.
Web traffic has also steadily improved from the lows we experienced in mid March and has returned to the same strong level of activity, we enjoyed pre cobot 19.
With web traffic in this most recent week actually exceeding pre cobot levels for each week of February and March.
Foot traffic through our sales centers has also increased significantly.
These early trends suggest the housing market may be more resilient than anticipated just two months ago.
During the lock down our teams quickly adapted to new operating environment and transition to a combination of remote ways of working virtual communications with our customers and save construction practices. Our focus was on keeping our employees trade partners and customers safe and our business running.
The online and community sales teams engaged home shoppers in person by phone and online.
Design studio appointment moved forward in person and virtually.
Closings continue to occur often by remote and paperless practices.
For customers eager to move into their new toll brothers homes.
Through creativity and virtual tools, we were able to continue to provide the high quality homebuying experience that defines our trusted brand.
As we prepare for a further reopening of the economy, we continue to develop new ways of running our business to meet the many challenges presented by the pandemic and its impact on the economy.
We have learned to operate more efficiently, which will make us better now end in the future.
We also intend to continue pursuing our strategy of diversifying our product mix and geographic presence with a focus on more affordable luxury home communities and expansion into higher growth southern and western markets.
We believe this strategy will enable us to reach a larger segment of the affluent homebuying market.
Now, let me turn it over to Marty.
Thanks, Doug.
Our adjusted gross margin of 21% was better than we expected this quarter.
We attribute this to a combination of pre cobot 19 pricing power.
Stronger cost controls and a favorable mix of deliveries.
The average delivered price of our homes in the second quarter was $789000 compared to the midpoint of our expectations of $810000.
Due primarily to more deliveries of affordable luxury homes in Idaho and delays in deliveries in higher priced markets, such as California that were heavily impacted by shutdowns.
Our balance sheet remains strong.
We ended our second quarter was $2 billion of liquidity, including $741 million of cash and $1.3 billion available under our 1.9 billion dollar revolving bank credit facility, which does not mature until November of 2024.
The weighted average maturity of our debt is more than five years, and we have no significant debt maturities until 2022.
During the quarter, we paid 11 cents in dividends and repurchased 4.3 million shares of our common stock for $157.5 million. These repurchases all occurred prior to the onset over the pandemic in mid March.
At the end of our first.
Excuse me at the end of our fiscal second quarter book value per share was $36.34.
During the second quarter, we took a number of actions to reduce spending maximize liquidity and maintaining financial flexibility in order to deal with current challenges and be prepared for potential opportunities that may arise during the recovery.
One of our initial steps in mid March was a sizable draw on our bank revolving credit facility due to initial concerns regarding potential bank liquidity and capital market accessibility.
All of this draw has been repaid as those concerns have abated and the capital markets have been open for homebuilders and many other sectors.
We're very focused on converting our backlog, which should generate significant cash.
Backlog at the end of April stood at 60, 428 homes and $5.5 billion, providing us with good visibility on cash inflows for the next few quarters as cancellations have remained below.
Another major step that we took to preserve liquidity was to significantly reduce spending on new land acquisitions and land development.
We evaluated all pending land deals in our pipeline and requested additional time on deals with near term cash outlays.
Most of our sellers were receptive, although we did have one sizeable deal in Virginia, where we could not come to terms with the seller.
We therefore wrote off $10.7 million in sunk costs, which constituted most of our second quarter impairment charge.
Land acquisition spend drop from February to March It was essentially zero in April.
Land development spend was also significantly for sale.
With 37100 on lots of which 17200 are already improved.
We can and will choose to selectively invest in new land acquisitions based on local market conditions.
We believe that are attractively located land pipeline in the most desirable markets will position us for growth as the economy recovers with our strong balance sheet, we will continue to be opportunistic as land and other growth opportunities become available.
In light of the uncertainties presented by the pandemic. We also acted quickly to accelerate our efforts to improve efficiencies and rationalize overhead expenses by reducing gionee spend.
These actions included among other things hiring freeze and reductions to pay roll through a combination of job eliminations and employee furloughs.
While these decisions were difficult to make.
We believe they will help our business in the near term and make us more efficient over the long term.
We anticipate that these actions will decrease overhead expenses by approximately $50 million on an annualized basis going forward.
And we expect to realize approximately $25 million of savings over the remainder of fiscal 2020.
Included in our second quarter SGN ebay is approximately $8 million in severance costs.
Offset by the reversal of an 8 million dollar accrual for discretionary benefit plan contributions that will not be me.
We will continue to review our cost structure as we further refine operating efficiencies and as market conditions evolve.
As we look to the third quarter, we expect some delivery times to remain challenged due to the several weeks of lost or limited construction activity in certain shutdown markets in our second quarter as well as evolving construction practices.
We also expect our JV land sales and other income in the next few quarters to be lower due to market conditions.
We will delay selling several of our completed apartment communities and other assets until the market for those sales improve.
Nonetheless during the second quarter, we did complete the previously contracted sale of our golf course operations, which generated approximately $13 million and gains in other income.
Now, let me turn it over to Greg Ziglar.
Thank you Marty we have continued to see ample mortgage availability for our customers.
Approximately 20% are all cash buyers and take no mortgage excuse me and only 25% hi, good jumbo mortgage.
Our customers, who take a mortgage borrow on average 70% of the home price and contribute to rest and equity.
With average FICO credit scores above seven six day, our buyers have had little trouble getting mortgages.
Also we do not retained servicing rights to these loans.
Marty mentioned the size of our backlog and the cash flow is expected to generate our contracts are back on average by nonrefundable down payment of $70000.
Obviously this represents a significant financial commitments.
Our customers also become emotionally committed for their new home as a personalize it with structural options and in turn and interior design selections through our design studio process.
Byron's also tend to be more financially secure with better long term job prospects and accumulated well.
We believe that these factors have contributed to our relatively low cancellation rates as a percentage of backlog our cancellation rate was 3.1% and our fiscal second quarter.
Compared to 3.0% and the first quarter.
And as a percentage of growth contract signed.
9.7%, our second quarter.
Versus 9.4% in the first quarter.
Our apartment living business has been healthy.
Across our stable across our stabilized properties, we're 96% leased.
Rent collections have remained stable with April delinquency is only down 1%.
Above the average for January through March.
And made up approximately 3% compared to the first few months of this calendar year.
We continue to have access to the capital markets for new apartment project construction debt and equity financing.
In mid April we closed on a new toll brothers apartment living joint venture excuse me to develop a 289 unit rental community.
And Bostons Walburn summer, we received various debt and equity term sheet since mid March for other projects.
Expected club several additional joint ventures for apartment living projects and the second half of fiscal 2020.
Now, let me turn the call back over to Doug.
Thank you Greg Thank you Marty.
We are encouraged by the pickup in deposits in may, but we remain cautious as to the long term impact of the pandemic on the economy and the housing market. We expect to have a clear view of the long term implications.
Of this later this summer and fall as the economy reopens and people return to the workforce.
We believe Americans now more than ever appreciate the comforts at home.
Our marketing efforts are focused on your home is your sanctuary and your home is the most important place in the world.
With our trusted brand experienced management team diversified product offerings strong liquidity and high quality landholdings, we believe we're well prepared for the immediate challenges ahead.
We also believe we are well positioned to take advantage of the favorable long term demographic and supply demand trends that underlie the housing industry and which we expect to continue as the economy recovers.
Before opening it up to questions I would like to thank all of our toll brothers team members, whether it's our operation teams, who are able to deliver over 1900 homes this quarter and extremely difficult conditions or our sales teams, who guide our customers through the home buying process, where the rest of the toll brothers family.
I'm so proud of how they have responded to the challenges we have faced during this time.
We have seen firsthand their creative thinking how hard they are working and they're incredibly positive spirit.
They are completely dedicated to moving our great company forward, while taking care of our customers every step of the way.
Next let's open it up the questions.
Thank you I'll begin my question answer session. That's good question. You May proceed Star then one on your Touchtone phone.
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Withdraw your question. Please press Star then too.
Please limit yourself to one question and one follow up.
Well pause momentarily they'll sell more roster.
First question is from John Lovallo Bank of America Merrill Lynch. Please go ahead.
Thank you for taking my questions and I hope everybody is well on the team.
First first question is I think he was in the third quarter of 17, maybe in the fourth quarter you guys got out of the business of providing kind of that nonbinding deposit results because we just for an indicative of a full quarter sign contracts. So just curious why you think that this might be a more reliable indicator now.
Thanks, John.
We several years ago, when before that we used to give fairly detailed information about the three or four weeks.
Between the end of a quarter and the earnings call and.
We recognize that it was.
Better to just give a general commentary such as.
The prior three or four weeks have been similar to the prior quarter.
We feel good about market conditions in the last few weeks.
But we believe on this call for this time.
Market the investors the analysts are looking for as much detail as we can possibly give.
And that's exactly what we've done I think thats exactly what the other builders have done we have tried to be fully transparent and giving you agreement information not only pre and post coded by giving you agreement information for the month of May but also giving you. What we believe is the best indication of today's market that is.
Not in any way trying to suggest that that will continue through the quarter.
I I cannot comment on that but today's market over the last three weeks, our best indicator is our deposits because of the process. We have described.
As to how we take a deposit and that it converts to an agreement.
And about three weeks and by the way I know I mentioned and it's important.
That our conversion ratio from deposit to agreement has stayed the same.
Since March 15, as it was pre March February January last fall and just I know the question will come up that ratio runs about 65% for us.
Got it that's really helpful.
Then maybe just taking a step back is clearly uncertainty in the marketed in the direction of things, but you in your gut Doug I mean, how confident are you in sort of the sustainability of the of the current activity and the what would you need to see to begin kind of buying land.
More consistently across your markets.
I can't comment on.
What's coming.
Over the next.
A few months I'm very encouraged by the last three weeks, we had a really top geographic footprint.
In terms of the markets that we are active in and how shut down they work and it wasnt just that the government closed construction that the government close sales that the government had shelter in place. It was that these markets were also hot spots. So that we had you know a clientele that was.
More vigilant and staying home and being more careful and so as that has lifted and the last lifting was around the ninth of may the only market. We have left that has not opened up constructions or sales in New York and at least suburban New York is coming shortly I think the city will be a little bit law.
Longer but as that has lifted since early may I feel a lot better than I felt in mid April then I felt in mid March because we are now seen significant increases in traffic. Obviously the deposits are up significantly I mentioned that this past week was the highest deposit number both grow.
Gross and on a same store basis since 2005, but thats, the extent to which I'm, commenting I'm not going to project forward because of the uncertainties of the market. We are in but I certainly feel very good right now based upon the last three weeks activities as almost all.
Of our markets have reopened.
Got it thank you very much.
You are very welcome. Thank you.
Thank you. Our next question comes from Alan Ratner of Zelman <unk> Associates. Please go ahead.
Hey, guys. Good morning had glad to hear you guys are all doing okay and thanks for all the the color you've given so far on May.
Doug I'm just curious.
With that improvement you've seen the last three weeks you can you can you extrapolate or expand on that a little bit more.
Curious if theres been any kind of pricing actions that you guys took maybe at the end of April that would've spurred some of that activity. I know you were offering I think at an interest rate incentive for awhile, but just curious if you've taken any any steps on the pricing front and then just more broadly you are you seeing any.
Kind of unique nuances with where that demand is coming from is there a specific price point or perhaps region, where activity is bounce back sharper than others or is it fairly widespread across the footprint.
Sure I'll now my pleasure to answer your two questions on pricing no we're not incentivizing.
The only.
The only the only special Weve Ron is on a quick delivery home. So we call our spec homes.
That will deliver by mid summer for a while we are offering a 299% 30 year mortgage.
It's interesting that the rate got down to 299. So there was no cost us by the end of even marketing to nine nine.
So that was the extent of any incentivizing anywhere.
I'm actually pleased that in a couple of locations.
Let's call it 10 to 20.
Around the country, we've had some modest price increases over the last three to four weeks a few have been new grand openings that had been very successful and others have been established communities that have had very strong demand, but in terms of running any special to drive the last three weeks of strong activity apps.
Surely not and I am not inclined to incentivize right now at all.
I think we need to and I don't think this is the time to do that.
In terms of market.
Strength recently.
We continue to see very strong activity in Boise, Idaho in Northern Virginia in Orlando.
Seattle was very hot before March 15, and then of course slowed dramatically because the state was shut down to both construction and sales and now that Seattle has reopened that market is back to being very very strong.
So we're encouraged there the Texas markets of Houston, Dallas, and Austin are all doing very well Denver, Colorado has been extremely strong.
And then South Carolina, three new markets for Us and Atlanta, and new market for US have also been quite strong so.
That that footprint is southeast.
Over through Texas.
Mistakes.
And and Seattle, I think is sort of the ring I'd say has been.
The strongest for us.
That's really helpful. I appreciate that and I'm, just I guess on on the price point and I guess, a little bit more of a strategic question. I think initially we were hearing from builders that entry level and spec products, specifically was really most in demand and anybody that kind of had to leave an apartment. They were looking for something pretty quick to move into some curious within.
Your price point band are you seeing relatively stronger activity at those more affordable offerings could you provide and has there been any thought about maybe adding a few more specs on the ground just to kind of satisfy that demand with resale inventory as tight as it's been.
Sure so our affordable luxury business, which we've been talking about a lot.
Increased year over year in the second quarter.
As we would've had expected for the reasons you gave our luxury business was flat.
And our what we call age targeted.
And empty nester.
The move down market of the baby Boomers was down.
And we also expected that as that that client was more inclined to shelter and be careful and also some of our.
Active adult communities are in destination locations that require travel and obviously there hasn't been a whole lot of travel in the last few months. So affordable is up luxurious flat age targeted empty nester has been down in terms of quick delivery.
[music].
Right now we have about 15% to 17%.
Of our homes are in various stages of construction and we define a quick delivery as having come out of the ground.
And we target that quick delivery product.
Based on understanding that this ship it should be more heavily loaded towards affordable luxury it should be more heavily loaded towards town homes and attached product.
And we and less less loaded towards empty nester.
And age targeted that was even true pre covered 19, because we know that buyer it being generally.
One of their last major home purchases they want to customize that home. So we've always had the strategy to have less spec inventory in that niche and we will continue I'm very comfortable with that 15% to 18% quick delivery range. It will continue to.
To focus more on the lower priced and attached communities.
As we have strategically planted in the past I don't think that'll change.
Appreciate it thanks, a lot and good luck and say.
Thanks, you too so.
Thank you next questions from Matthew Bouley Barclays. Please go ahead.
Hey, good morning, Thanks for taking the questions hope everyone's doing while I'm on on the gross margin and mix I think Marty you mentioned that that that favorable mix was part of the strength in the second quarter I guess.
My question is number one is that a comment I guess on just the overall decline in the North region closings, which obviously runs a little bit lower margin or is there something more specific than that and number two I guess should we assume that there's I guess, a continued tailwind to gross margins and in the second half perhaps for the same reason like it.
Well with respect to the margin performance in the second quarter.
The order in which I gave the rationale is is the weighting relatively of the reasons. So it was a price increases that we had in the past.
It was cost control and then too much lesser extent, just some positive mix and it's it's tough to get into the specifics or whether that was the north or otherwise so I won't with respect to.
The future.
I'm, sorry, but as we've noted earlier and in our release, we're just not going to give any guidance. There are just too many variables in these uncertain times to to go in that direction.
Okay Fair enough and then I guess, secondly, I guess at a higher level. When you think about your exposure to these regions, which have been more severely impacted by the lockdowns theres the narrative.
That I'm sure. We've all heard just around sort of that urban flight from from some of these cities. Just curious if your sales folks have started to see any traffic from that specifically just anything notable or or needle moving yet.
Oh I'm not yet.
Again trade you know travel is highly restricted we are encouraged.
I've mentioned by the significant increase in traffic.
Okay and deposits in those markets that were close.
Through April.
Okay. Thanks appreciate it.
You're welcome thank you.
Thank you next question from Stephen Kim ever score ISI. Please go ahead.
Yeah. Thanks, a lot guys are really encouraging a commentary here.
I just wanted to right up front just addressed the question of deposits because actually a year ago. You made some commentary about may deposit activity I believe.
At around this time and you indicated that you were seeing encouraging trends on the deposits and then ultimately your contracts were up for the month of May So it Doesnt look to me like your deposit space to particularly easy comp.
In this in this first three weeks of May So I'll just comment just a correct me if I'm wrong on that.
My question related to relates to the age of your buyers I was curious if you knew what percent roughly of your buyers are older than 60 years old.
Has its and has this changed much in a sort of the deposit activity or the contract activity that you've been seeing recently.
Stephen will.
I have three people here looking fill a bunch of paper.
Good thing, where the good thing where together for this one but Uh huh.
I think we'll probably gonna have to get back to you with the answer on the on the percentage that are over 60, I will say that generally our active adult communities.
Our marketed to a younger.
Active adult.
It went with the you know with the amenities the healthy lifestyle.
Our marketing campaigns.
We'd like to find you know 55 year olds that may look a little bit younger and our super healthy and a that's our clientele. So we'll get you that number but it is is either sorry, Greg I see this is helpful. We we don't do it at 60, we looked at it.
50, and older we looked at our settlements and so for this quarter, 52% of our settlements had a buyer that was 50 or older and if we want to reference at from a year ago Q2, 19. It was 49% so seems relatively consistent but there's a lot. It there's a lot of families young fit.
These mid Fiftys that are still buying the move up half shorten what's what's Stephens getting that is the true active adult empty nester market, which really starts at 55 and goes from there, but well I'm trying to buy time here and I'm not getting an answer so well.
[laughter] well get back to you and in terms of your first question about.
The comp.
And I I don't yes, it's a bit of a difficult comp, particularly the first week of May last year and for those who had been falling toll for a long time, you'll recall that every April for many years, we've run a national sales event.
And.
We generally get our vendors to participate and contribute upgrades at discounts.
We market the heck out of it nationwide and that event occurred last year 2019 and ran through the first week of May.
And the last week of the van is always the biggest week for deposits because people know, what's expiring and they got to get out.
This year, we suspended that event.
We did not run it in April we are contemplating.
When we may run it I'm feeling pretty good about the market right now so stay tuned, but thats certainly impacted.
The month of April even more you know it magnified the impact of Kogan 19, and that that impact continued pretty dramatically into the first week of may but since then as I mentioned not only did we have all of our markets reopening but for New York.
But but we had as we mentioned in these three really strong weeks.
Of deposits.
Yeah. So yeah. That's that's really helpful. So you didn't know what that 13% number is not really benefiting from a particularly easy comp in April with anything out there, particularly difficult comp.
I guess when in fact, even I'm sorry.
My Paul just just a complete it for the month of May to expand our three weeks.
From up 13% for three weeks, we are flat on deposits for the month.
Which goes to my commentary about the difficult comp of the first week, both because we were closed in certain places and because it was up against last year's final week of our sales of it.
Got it yeah that that's really helpful. Okay. So I guess, where I was trying to go with ER with my question. Both in terms of calling out this dramatic difference between your contract and your deposits as well as the question on the age is [noise].
It feels to me like what people are really wrestling with with your business.
Is are we.
The higher into the market in the market you serve the cost when you serve a geographically as well as price point. It has it been slower to respond but he's going to eventually a mirror what we are seeing elsewhere in the housing market or is there anything structurally different about the market and the customer.
Thank you Sir are which would.
Make it make your business unable to express the same kind of recovery that we've seen in many other places outside.
For many other builders and certainly this contract inflection would seem to be suggested that you can see your markets fully participate just like every other segment the market and geography. So let me ask a broader question do you is there something that you see in the marketplace and in your customer base.
That we need to be cognizant of that will be somewhat semi permanently.
Impairing your ability to see the kind of recovery, we would see elsewhere in the housing market.
My strong answer is no I feel very good about our business.
Listen coming coming right out of.
The March 16, or the March 14.
Nationwide emergency shut down.
Yeah, we we understand that for the first month the first six weeks.
While everybody was sheltering in place. It was those that were living in an apartment, who still felt comfortable with their job security that jumped at the opportunity to buy a very affordable completed new spec home.
And we understand that and we all saw that play out in the very short term and that's not our business right that that's not what we do but.
Our average house now is around $800000. We are focused on more and more affordable luxury we're very focused on the south we're focused on the mountain States. We are focused on the west you can see how you know the Westin excuse me the mountain states in the South have held up.
And our business is evolving we have been talking about that.
I feel strongly that people are nesting and this is not short term there is no place like home their home is your sanctuary today. It is the most important place in the world.
And the opportunity for us to continue to build on our brand the way we do it.
Offering the opportunity to customize the house through an organized.
Upgrade process design studio process, not everybody has to move in the next month or two that absolutely occurred quickly. After this pandemic for the crowd I mentioned that was in the apartments, but people are still thinking about I want a new home and I wanted to design it my way and I want it to be agree.
Value.
And that's what toll brothers is about today and I love, our geographic footprint I Love have we've we've expanded our market segments I Love, our brand and I truly believe that our business is primed to take advantage of all I've described.
And not just a short term as we're seeing now in may but longer term as more and more people want to move into the new home and do with their way.
Great Yeah that extension tend to be on the watch thanks, a lot guys.
Thank you Stephen.
Thank you. The next question from Michael Rehaut JP Morgan Securities. Please go ahead.
Thanks, Good morning, everyone hope everyone's a safe and healthy out there.
Yeah. First question you know I just wanted to circle back for a moment, there's been a lot of focus on on some of the the May data points, you gave which is obviously very helpful and appreciated and you know given the different.
You know levels of of disclosure you've had around deposits.
Just want to be clear and and and obviously somewhat forward looking but you referred in your comments your press release to the a deposit to contract ratio remaining constant. So you know are we to take it that you know the recent strength in deposits to the extent.
It continues the 13% growth over the last few weeks.
Our are we to take it that you are in effect anticipating you know positive order growth for for the month of June based on these conversion ratios are holding steady.
Mike I I don't have that Crystal ball.
I've, we were being fully transparent and giving you.
Detailed data week by week.
You understand our business you understand our conversion ratios I think we've been crystal clear on what has happened over the last three weeks and then I just I just answered Stephen's question on.
The first week of May So you know us today were basically flat for the month of May and outstanding deposits.
And you can take it from there.
Okay Fair enough, Doug I did you know starting to direct question, but obviously I think there's lot of focus on the data points so trying to.
Yeah to drill in a little bit there.
I guess secondly, there's also been a lot of focus around you know a different parts of the country and spec versus build to order and obviously makes a lot of sense that you guys are sticking to your knitting and also pivoting to to a more moderate degree.
And in different markets towards the affordable product.
You know as you.
Look at your different markets.
And and perhaps certain markets are showing better strength and others is there any ability that you have to perhaps.
Telerate the development spend.
Or the land spend in those markets that you know because of Cobot 19, you think might actually have some increased demand or you know that somebody that you're kind of thinking about right now.
Or is it more just going to be <unk>.
You know I'm kind of take that as it comes and see how the.
Things emerge over the next couple of quarters and go from there.
Hey, Mike It's Marty Thanks for your question.
In terms of.
Specs and where we stand.
I think a frame of reference as we've moved into more affordable luxury price points in certain geographies, where spec building is appropriate might be the following a year ago.
We had around 1300 specs.
And right now we have close to 1600 specs.
So we have developed a few more specs and as we went through the darkest days of mid March.
We evaluate it whether to stop specs or continue and candidly we did stop for a couple of weeks.
And then said get at it and finished the ones that we had started and we are selectively starting new ones well in light of the fact, the factors that you mentioned right.
Yes, I think early on if we had.
<unk> call late March early April if we had a quick delivery home that was that foundation.
We kept it at foundation, if it was being framed we at least got it to the point, where it was weather tight, but then we waited and now fast forward to early may.
We told everyone.
Continue with all spec inventory that has been started whether it's that foundation, whether tight or whatever stage, we certainly feel better about the market lets keep let's keep the specs rolling and in selected locations.
Authority was granted with very senior level approval to build new spec inventory, but we're going to be very careful about its going to be very very market specific and it's going to be price point specific.
Mike One clarification I just missed spoken to one again, we're trying to give you all the data points we can.
I I talked about the entire month of May with deposits being flat and then I said outstanding deposits are flat that is inaccurate outstanding deposit means anybody who is still under deposit and we're working with who has not either asked for their deposit back, which again is about 35% or gone for.
Ward with an agreement, which is 65% and today, we are up 15% in outstanding deposits and I incorrectly said, we were flat. So that's the pile of deposits that future rent. We are will come from that we're working with yeah right.
Alright.
Thank you appreciate it.
You're welcome thank you.
Thank you next question from Mike Dahl RBC capital markets. Please go ahead.
Good morning, Thanks for taking my questions up a few follow ups on on May and Doug you gave the.
Actual order agreements between split out between your highly impacted markets and and the other markets from mid March through end of April I was curious if you could give the same relative to the minus 37% for for the total business do you do you have the split out.
For your highly impacted versus other and as part of that maybe if I could just wrap in.
You had a small acquisition.
In there just you know because you could you help us quantified what thrive add it to both orders and deposits.
Sure. So let's start with now remember met the may agreements reflect.
Generally April deposits.
Those highly affected markets were still close.
I can try to help you with your question, which is how did the deposits look in may from those markets that have reopened but it but let me give you.
What what well you asked to then I'll help you with the other part.
From May 16 to April 30.
The most highly impacted markets for agreements.
Or New York City living.
Down 96%.
New Jersey suburban down 94% it was closed.
New York suburban.
Down 88% it was basically closed.
California, where northern California was completely closed in L.A. County was closed Orange County was somewhat open.
Was down 81%, Pennsylvania down 77%.
Also closed.
Now when you get into the May agreements, which we said to date are down 37%.
All of those numbers improve a little bit.
Because they reflect call it mid April deposits, which were certainly better than late March deposits. The late March deposits reflect the.
The April agreements right, if you're following a three week lag.
So for example, New York City living wasn't down the 96% I mentioned it was down 86, New Jersey suburban wasn't down the 94 I mentioned for April it was down 73.
California wasn't down 81, it was down 63, Pennsylvania had a nice rebound it was being down 77% in April it went the only down 42% for those agreements in may.
But now let's fast forward to the deposits in may when those markets reopened.
And with the exception city living which had stayed close we're not allowed to show a unit even in a finished building in New York City, you can't get by the doorman. The residents of the building you know just don't want people in the building without exception.
All of those other markets.
Have clawed back.
More than half of those of those reductions.
And agreement activity with.
May deposits.
Got it did that answer it I think it did here, especially on thrive as well, yes. So do I have already thrive did not any did not add any contracts in may.
It had one deposit in May there is one community open for sale associated with thrive at this point remember it it closed during Q2.
Okay, but that's really helpful. Thank you for all of the color.
Around both the deposits and and the agreements. So and then then just follow up and this isn't I'm trying to get guidance more just your thoughts yeah. We're obviously in a unique period with some of it with so many of your large markets, having gone from kind of full shutdown to various stages of partially open and so even if.
There's been some demand destruction, you're still you know trying to cram in a month in half for two months worth of demand potentially into a shorter time period. So in your seat I guess the question is.
You know when do you think you'll you'll have sufficient visibility.
On whether this is.
Some combination of push out or pull forward versus whether this is something more sustainable.
Well I think.
By mid summer.
That's just that's just me.
I you know I I said it in my prepared comments.
That I'm very encouraged but I'm still cautious.
Uh huh.
Is this.
Pent up demand that came out quick.
Or is there something more to it right now it feels like there's something more to it but it's going to take some time.
The fully appreciate and I think.
The July August September timeframe.
When most states have moved from the red yellow to green.
And we know how many furloughs are coming back to work around the country and we know what different parts of the economy look like.
Well all have a much better idea.
Ah but.
So that's where that's where my head is on it.
Okay. Thanks, Doug.
It is important to remember the long term importance.
Of owning a home and that's why I go back to.
The way, we do it our brand our opportunity to give you great value, but you can design it yourself and customize it yourself.
And we are going to continue to focus on our marketing campaigns that are all about your home is your sanctuary, there's such a huge nesting going on in this country. We all feel it were all living it.
And once we get through this.
And the World is back to normal I'm really excited about where we're headed.
Thank you next question from Susan Mcclary Goldman Sachs. Please go ahead.
Hi, Thank you good morning, everyone.
Hi, Susan My first question is just around input prices can you talk about what you've seen there. We've obviously seen lumber spike more recently, how sustainable are you thinking that is then how are you thinking about the outlook for some of the material.
Cost has been flat.
And we are.
Hopeful.
But at least in the short term there will be some opportunities.
To.
Save a bit more we'll see how that plays out long term that that of course is tied to.
To my earlier comments about whether this is a short term.
Increase in demand or longer term, but we have been encouraged over the last year with.
Costs being relatively flat.
You're right lumber is up a little bit.
But labor is down a little bit so overall.
I'm looking at some numbers, Greg just gave me.
We're up for Q2 costs.
We're up just under $2000 a house.
Which for US is fairly nominal since our houses are big and.
A little more complicated.
And as we've talked about with gross margin, we were able to push the selling prices at home.
Quite a bit more than that.
Okay. That's helpful.
And following up on that can you just talk to any supply chain disruptions that you've seen no has any of that mitigated as things have come back and maybe especially just given how shut down sort of your markets are how should we think about the impact is that I know Marty you mentioned some delays on some fiscal third quarter deliveries in there but he.
Just give us some sense of the supply chain and how things are working there.
Sure.
Let's start from the beginning the permitting.
Pulling a building permit getting the how started.
Has had some delays in some markets as building departments have close.
Now there was some workarounds with some towns that allowed us to.
Go digital.
The inspections of the home by building inspectors in some cases was delayed there was also some workarounds, where we actually were able to do some skyk inspections with building inspectors.
So from a municipality or governmental perspective.
We have experienced some delays and some of that in certain markets may continue a bit.
But we're encouraged that potentially some of those Skype inspection long term some of those digital permitting may help us long term absolute what's a bit of a cumbersome process. There's no question that we are all as an industry going to see.
More efficiency in permitting and inspections in closings going to digital closings with title in mortgage companies.
You know.
I I Didnt know that.
That you could notifies through Docusign right I thought you had to put yourself in front of a notary and they had to watch your signature go down well you know that that's something that can now happening is gonna be whether it's for a long time so.
On the material front.
In certain markets. We we've absolutely lost a couple of weeks here and there we have a cabinet company in Pennsylvania.
That that was closed for the better part of two months.
They were able to.
Manufacture their components to their kitchen cabinets, but they tend to assemble them.
I couldn't put the they couldn't put the door on the box of the kitchen cabinet because it was too fat two plants in the second plant was closed by government regulation. So.
We all as an industry have have stories like that.
Thankfully, it's easy, but it will cause some stress in the shorter term as Marty Marty pointed out for the next quarter. The because of some of the backlog that was built up that has to be worked through labor availability no impact.
Labor is still good social distant seen on the job site.
That will have a little bit of an impact.
We have to spread our trades out we have to be more vigilant.
Most trades are naturally spread out.
There are no certain times during one the houses built particularly when you get into the finishes the finishing trades warehouse can get a bit crowded and we're gonna have to be a bit careful there we may lose a little bit of time through that part of the process. So overall, we're managing it it's going to get better I think.
The impact is more short term than long term, but it is present.
Okay. Thanks for all that color and good luck with everything.
Thank you too.
Thank you next question Truman Patterson of Wells Fargo. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question first just wanted to follow up on on labor, a little bit housing slowed but it seems like its rebounded recently at the same time, we're seeing some massive layoffs across the U.S. are you actually seeing labor availability improve as energy as workers and her from from us.
Other industries.
And you know you mentioned that your labor costs were down I would imagine that's probably occurred in the past two to three months is that correct that you've been able to renegotiate the labor wage rates.
Hi trip in the first half your question no we have not seen labor move from other industries.
Into homebuilding.
And yes flavor my reference the labor being down is over the last few months.
Okay. Great is there anyway, you could put a magnitude on that.
Uh Huh [noise].
Pretty small it's yeah. It's it's.
It looks like it's under a thousand dollars a house right now.
Okay. Okay. Thanks for that and just a bigger picture question you know the international Asian buyers is one of the drivers of coastal California demand I realize you guys is a you know reposition some of your product in California, as well so it might not 100% apply to you, but you know give.
In the issues with Covance, the Chinese economy. The U.S. economy, you know all these moving parts. How do you think this really plays out over the next couple of years do you expect that buyer to.
You know come back to the market or you know really remain absent for awhile.
So you're right, we've repositioned ourselves in California, most of the Asian buyers or Orange County.
And we have just a smaller presence right now in Orange County.
In Southern California.
We sell 22% of our homes to foreign.
Buyers that is not Asian.
But that is a lot of that only a lot of that on Asian studies concentrated Asian, but it's not all Asian and I think.
Oh, I think over the longer term.
We will be fine I think in the short term <unk>, obviously, there are travel restrictions and and other issues affecting Chinese American relations.
That you know that that will have an impact.
You know some of that was it affects before coated.
As we know the Chinese government was tidy not tightening up on a U.S. investment.
So we have felt that earlier on we had already read repositioned ourselves a bit.
But yes, I think short term it it's a it's definitely an issue, but I think longer term or we should be fine a we have learned for many many years that Chinese love owning real estate.
In California, and in the U.S. and I'm optimistic as things settle out we will be back to.
Fairly normal times with.
Selling you know some of our homes to primarily Chinese.
Okay. Thank you.
Welcome.
Thank you. The next question comes.
Comes from Jack must cycle, that's why Ji. Please go ahead.
Hi, good afternoon everybody.
It's kinda got close to one of that strategically.
<unk> cost I guess, two two and half months you know change your view I mean, the company has been in transition geographically in product likewise for.
Sometime now, but wondering if the last two months maybe has made me think more about accelerating.
We're increasing the magnitude of that that shifted either geographically or by product type.
Oh, no Jack I don't think.
It hasn't changed.
Our mindset that already exist it to continue to move South move west.
And diversify the product offerings.
With a bigger focus on affordable luxury so I think that was in play and we will continue to execute on that strategy.
Okay and then.
Different time different plays within you were talking about a 10% community count growth number this year.
[noise] curious you know.
That number is probably not going to be achievable, but how much of the shortfall will be you know.
Balance sheet conservatism on slowing growth in preserving cash and how much. He means you can't build if you're not allowed to and we'll see where the local market and what does that look like sort of in the out year.
We do we see that kind of pushed out into 2021 or is this year was was a pretty nice growth rate plans for community count and just wondering how much of that as sort of environment. While much of that is your own sort of plot brakes coming out it looks a little bit mark.
That's a good question, we had planned 32 community openings in Q2.
And we opened 21.
And and the mix of 11 was primarily.
Ah associated with communities that were scheduled to open in the second half of the quarter.
That.
We froze because of the pandemic.
The good news is.
We have the land a we started the process of getting the marketing materials ready and.
The decision as to when they open will be hours in terms of how we feel about market conditions.
Pent up demand.
We we pre market through our online web site Concierge service many months in advance and get a very good indication of the amount of interest and a lot of that drives our strategy on you know when we open and so we're not prepared to guide right now to what the full year community count will be.
We just have to wait and see how the market conditions evolve, but we have the land and the communities ready.
When the market is ready.
Yeah, Jack I think <unk> for communities, we would have planned to open the back half of this year, there's two buckets, those where we already own the lands.
So those will be is not open this.
This period they'd be open subsequent year or those where we are contracted to buy finished lots and open up community as we mentioned the many of those types of deals we put on pause until the market settles out.
And we will kind of we underwrite those once we get closer to the revised timing as to whether we want to move forward or not.
Or change the pricing of that land deal and move forward.
If we can't.
Okay.
Good luck.
Thank you.
Next question from Jay Mccanless Wedbush Securities. Please go ahead.
Thanks. Good afternoon. Thanks for taking my questions. So the deposits that you've taken so far and my could you talk about how many of those are going to to be built homes versus a quick move homes.
And how and how does that ratio compare to your historical mix.
[music].
[noise], it's around 20%.
Quick delivery, which is fairly consistent with the 15% to 18% of quick delivery inventory.
We have in again remember our when I say inventory those aren't completed homes as her home some foundation all the way through to finish so it's it's tracking.
Fairly close to the mix, we have a quick delivery versus build to order.
I just I asked that question because you were talking earlier about signs of a potential to me and holding up I would have.
Frankly bought that mix of quick delivery would have been a little bit higher so.
It seems to be a positive read that your build orders are holding up well.
What about I think I think that's I think that's right.
What about your cycle times, how much youre, having to push those out because of those rules et cetera.
Yeah, I try to answer that a few questions ago.
When I went through the you know the permitting issues in the inspection issues in the social distancing on the job site.
I mean, the good news is we're not seeing any labor issues.
We are having here and there are few scattered.
Material supply issues, but that's that's improving I gave the example of the Pennsylvania Cabinet company.
I think you know our best guess right now is probably one to two weeks.
Added construction cycle time, because of social distant seen on the job site and maybe you added another week or two of contingency or security for any issues that may come up with permitting inspections.
Or material supply so, let's just round that off to two to four weeks.
Is what we've sort of conservative Philly built in a as added time for construction.
And that should improve over time.
As we.
Get further from you know the closures we experienced in certain states.
Got it yeah. Thank you I apologize for missing that Werent. One other quick one other quick question I was encouraged to hear you guys are not doing.
Incentives above and beyond the 299 offer the emailed out but what are you seeing from your competitors, how how aggressive are you seeing.
Cross the three different buckets, you outlined earlier, what kind of incentives and pricing deals are you seeing your competitors out there.
Oh I'm pleased with.
That most of our competitors or not.
Incentivizing.
I do think.
At a lower price point with sums finished spec inventory.
You know if a house is completed it needs to close it needs to move and I think in that environment.
You may see a bit more incentivizing.
But but where we build.
At our price point I'm I'm pleased that I'm not seen much of it.
Great. Thanks for taking my questions.
Thank you very welcome.
Next question.
I'm from Jade Rahmani KBW. Please go ahead.
Good afternoon, everyone. This is Ryan Thomas Allen for Jade.
So regarding apartments and city living.
You gave some color in your prepared remarks on on the former but can you speak a bit more about how you're thinking about the outlook for those businesses.
Post the dust settling.
Can you remind us how much equity you currently have allocate any in each of those segments and you mentioned you will be closing a few apartment jvs and the second half of the year was wondering how much capital got relates to and what the intention is to do with those proceeds if you expect to reinvest those back into the apartment business.
Sure I think with respect to.
The apartment business, we have around $700 million invested in that business and we hope to recoup 400 million through the balance of the next 12 months or so through JV formations are with respect to city living we're actually had a good time in terms of where we have.
Investments, we have around $170 million net invested in.
Existing inventory active.
Communities Oh, we have another 30 million in or a couple off balance sheet joint ventures, and then we have some land inventory for projects that we have chosen not to start in this environment.
And just in terms of you know the outlook you know, particularly in city to city living a post this environment, becoming a bit more certain.
If you expect city living demand to be a you know a big <unk> continued to be a driver for the business.
Yeah, I think short term.
We were going to be very cautious right now we only have five buildings.
In city living three are completed.
And the other two are nearing completion.
Oh, we do have some land for future buildings that where we have not started any construction and right. Now we were just sitting on the land. It's not just in New York, We have some land in Seattle and Philadelphia as two examples.
So as Marty said I think we're at a good time in terms of our city living business, which had been shrinking significantly and in those five buildings that I mentioned, which are in a tour in New Jersey, Hoboken, New Jersey City and the other three or in Manhattan.
They are all positions sorta midmarket.
We talked about kind of $2000 a foot $1800 afoot in new Jersey, they're down it a thousand dollars a foot and so they had been performing fairly well for us through what we all know has been a difficult you know few years in New York and.
No short term I think we're very realistic and that it will take some time to see you know to see where New York, New York City Falls out on this and then longer term I'm comforted by what I, just described which was limited inventory in and these five buildings that are all kind of mid market.
But longer term, we will be very cautious.
With our expansion.
Of city living in and around New York City.
Until we.
You know until we have more clarity on where where it went a long term market stands today only about 3% of our business.
Isn't a toll brothers city living.
Okay, and then just in terms of the land market was wondering if you're seeing any noticeable adjustments in in prices there either positive or negative in your major markets.
Over the past few months with the current environment.
Not yet a land sellers with the Marty gave the one exception in Washington, DC or did northern Virginia, we.
We walked away from a significant deal because we couldn't.
Reach new terms with the land seller.
But virtually every other land sellers nationwide has understood and agreed to extensions whether that be an extension of a due diligence period before deposit money goes hard or whether that be extension of closing or extension of a.
I refer to non refundable, you know payment that's necessary.
But there really hasn't been re trading of price yet. So I think sellers are understanding that we need more time.
But they're not yet willing to talk discount.
On the underlying price and they're also not yet feeling distress.
We had a couple of isolated opportunities to chase some distress.
But but nothing of significance yet.
So right now.
We are just extending and amending.
Well not a bank term.
You're not a good ones right [laughter] and the old days [laughter].
[laughter] I knew I I know I didn't get it exactly right [laughter] [laughter].
Okay.
<unk>.
Thank you next question comes from call Reichert BTI Ji. Please go ahead. Thanks, Hi, guys uptime on buybacks you've had a couple of years pretty explicit about suspending buybacks.
He stopped in mid March, but I'm more encouraged about business the cash flow coming to light. It's fine what's your perspective, now and where you are with share repurchases.
I still suspended.
I don't think right now is.
No we don't have enough clarity yet.
As Marty went through our you know focused on our liquidity certainly in late March and early April.
You know we drew the line we repaid the line when it was clear that our banks were going to remain liquid with the help of the federal government and the federal reserve, but.
I think we'd like to it.
Continue to make sure that we have.
Ample liquidity, a very strong balance sheet.
To take advantage of land opportunities that may come along if if if the markets feel more pain and if the markets continue to improve then we'll be you know carefully back in the land buying business.
And then maybe at that point you know, we we focus on buybacks, but right now I think it's smart business to continue to suspend that.
That initiative.
Thanks, and then why do you or Doug on on the cost cuts obscene never easy to lose team. They can you give us a little more detail on the on the 50 million annualized like where that's coming from.
Where the reductions were staffed wise or the other things like the late I T spend travel where you're getting those those cuts from thanks sure. So.
Before.
March 15.
Oh, and I think we even mentioned that a bit on our last call. We we have been focused.
On efficiencies.
Tightening up the shop.
And we had already.
Begun serious conversations about.
I'm companywide.
Overhead cuts a employee costs and then when covert 19 hit that conversation not only accelerated but we expanded.
You know the the individuals in the initiatives.
And.
We've had we permanently laid off about 600 employees, we have about 5000 employees in the company.
And we furloughed about the same number another another 600.
I'd say three quarters of the 50 million is associated with.
The lay offs.
And another quarter or will be associated with other initiatives.
That will make us more efficient you know Carl you mentioned, a few I.T. travel, but there's many other things were focused on you know I think division offices around the country, you will probably be smaller going forward as we become knows as we've learned how to effectively you know work a bit more remotely so there's men.
Any other initiatives like that.
Todd our permanent.
Even when the market returns.
We are learning.
How to be more efficient and those are permanent and I know Marty mentioned in his comments that were continuing to look.
At how we're going to become even more efficient.
And that may lead to more opportunities.
For additional overhead cuts.
Thanks very much done.
You're welcome Carl Thanks.
Thank you next question comes from Alex Barron Housing Research Center. Please go ahead.
Hey, guys. Thanks for taking the questions I wanted to ask about focus on but cancellations.
I imagine you cancellation rate was pretty low before the pandemic started and I imagine that cancellations increase.
In March and April period.
Oh I'm curious you guys.
That's the key.
You know what were some of the reason that you've got more for the cancellations with a job lots related was it just lots of confidence people wanting.
To wait.
Let's see what happens.
You know and in those instances you guys keep the money or do you responded.
So as we've talked about throughout this call or increase in cancellations was very modest.
We we gave the reasons why.
The average down payment is $70000.
Buyers become very emotionally attached to their home because they'd customized it.
Generally our buyers are more affluent.
And do they have better prospects for job security.
And they also have a you know other other well so even through the 2007 to 2011 time frame our cancellation rate stayed much lower.
The other builders for for those reasons I just gave.
So so we are encouraged.
Do we keep the money, yes, we keep the money short of a tragedy.
You know were I think we're very compassionate company. So there's always circumstances, where we returned the money.
But.
We are building your home to your specifications with a lot of custom changes.
And Oh.
We are entitled to keep that $70000.
Or for that custom home and that that holds up.
We have lots of experience.
And that is our position.
Okay, and if I can that's another one have you guys seem.
In improvement I guess in the last three weeks like lower cancellation rate cycles sneak another one what percentage of those highly impacted markets you signed in New York, New Jersey, Pennsylvania et cetera, what percentage of your business did that represent you know before it gets this whole thing started.
[music].
So the cancellation rate, it's the same and again I have to emphasize again it has stayed low.
And we gave that information as to the percentage. So why do you go ahead I think it was a 40% of.
Contracts and 50% of backlog.
<unk>, 40% of community communities communities. So they'll goes highly impacted the states that word that stayed close until early may represented 40% of our communities that were open for sale and 50% of the value of our backlog.
Okay, sorry, I missed that okay, guys. Thanks, Oh no no problem at all then I'll spend a long call.
This concludes our question answer session.
I like to turn the conference over to Mr. Douglas Yearley for closing remarks. Please go ahead.
Nick I. Thank you very much I thank everyone.
For your interest and support have a great summer and stay well. Thank you.
[noise] conferences now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].