Q3 2020 Toll Brothers Inc Earnings Call
[music].
Good day and welcome to the toll brothers third quarter 2020 earnings Conference call. All participants will be in listen only mode continuously please ignore corporate especially with my personal starkey.
After todays presentation, there will be an opportunity to ask question to ask your question. They press Star then one on your Touchtone phone.
Your question. Please press Star then too.
No. This event is being recorded.
I like your turned the corner interpret your Douglas Yearley, Chairman and Chief Executive Officer. Please go ahead.
Thank you coal welcome and thank you for Germany, though.
I Hope you your families in your key things are staying well.
With me on the call today are Marty Conor Chief Financial Officer, [laughter] Cooper, Senior VP of finance and Investor Relations.
Wendy 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 on our earnings release and on our website.
I caution you that many statements on this call are forward looking based on assumptions about the economy world events housing in financial markets. The current and long term impact of the covert 19 pandemic than many other factors beyond our control that could significantly affect future results.
It was let's say a lab can email questions to Investor relations at toll brothers Dot com.
Now let's begin.
We're very pleased with our overall performance in our third quarter ended July 31st.
I will focus on the current sales environment, and then turn it over to Marty to address the numbers.
Our third quarter net sign contracts for 2833 homes and $2.2 billion were up 26% in unit.
And 18% in dollars compared to one year ago, the highest third quarter ever in both units and Dollarss.
Our contracts per community in the third quarter at 8.5 were the highest third quarter and 15 years.
As for a monthly cadence.
Amaze contracts were down 21%.
June's were up 76%.
And july's were up 31% versus one year ago.
Demand in June was not stronger than July it just hasn't had an easier comp to 2019.
In fact, one June contracts with the highest June in our history.
Our July contracts were the highest for any month in our history, including the spring selling on.
February March and April when we historically sell the most homes.
The strong demand has continued so far into August.
With deposits trending even better than July.
And also significantly compared to the same three weeks last August.
We remind you that for toll brothers nonbinding reservation deposits are an indicator of current market conditions as they generally pretty seed or binding contracts by about three weeks.
With the strength in demand we increased prices in most of our communities this quarter.
If this strength continues we expect to keep raising crisis.
Our traffic to deposit ratio.
Of 11.3%.
And our traffic to agreement ratio of 7.1%.
Were by far our highest conversion ratios ever.
Customers, who visited our communities whether in person or online.
We are intent on buying.
We believe it there are many reasons why demand for homes has surged summer positives for the entire industry, but importantly, some are very specific to our luxury build to order business model.
Historically low interest rates are an undeniable benefit to buyers across all segments of the market.
30 year mortgage rates at or below 33% are fueling tremendous affordability.
Example, with a 3% versus 4% mortgage rate.
Hey person can afford a 900000 dollar home versus an 800000 dollar home with the same monthly payment.
Now more than ever our customers view their home has the most important place in the world.
Sanctuary for their family and a place to work remotely.
Additionally, many buyers want to new home and will only look at new homes.
And with the importance of the home growing.
They want to personalize their home more than ever by selecting their home site.
There are architectural home design.
And the options and the finishes.
Our build to order model is ideally suited to meet these growing trend.
With the ability to add structural options our buyers can choose those elements that are best suited for their lifestyle.
Our homes include desirable does site design features such as multiple high Tech home offices, where family members can work efficiently in private.
Multi generational suites for it and parents or adult kids still living at home.
Open floor plans with indoor outdoor living and many other intelligent options for today's lifestyles.
This quarter, our buyers added on average $181000 or 23% and upgrades to the base price of their homes.
Favorable supply demand dynamics are also fueling the housing market.
With limited resale inventory pushing more demand into new homes.
With existing single family home inventory at 3.0 months.
Versus a 20 year average of 5.7 months.
We are well positioned to capture a portion of the incremental demand driven by this tight supply.
Limited resale inventory also means that our buyers who have a home to sell feel confident in their ability to transact.
Our primary customer demographic college educated professionals is working from home much more and we believe this will continue long term.
The unemployment rate for college graduates is lower than that of the population in general.
Their job prospects appear to be holding up well.
Which gives them confidence to buy a new home.
In addition, they are more likely to have to have accumulated wealth.
From the strong stock market.
Another factor, we see driving demand is millennial demographics.
Millennials, many of whom are now under Thirtys and forming families are buying homes. They have wealth from a combined 20 to 30 years of work generated savings, which can enable them to afford a first home that is bigger and higher priced.
Then the typical starter home.
We are capturing an increasing share of these buyers with our more affordable luxury homes.
About 25% of our sales involve a first time buyer.
On the flip side this new nesting phenomenon is causing many baby baby boomers to accelerate their plans for downsizing in anticipation of retirement.
As that end of our business has also improved.
We're also benefiting from our attractive land holdings and desirable suburbs of major coastal cities.
In these markets, we believe a desire for more spacious living while still remaining near to friends family and the office.
Is driving suburban demand for our homes.
With a long term increase in remote working many people are now choosing to live where they want.
Rather than where their job previously required.
We've seen a significant increase in relocation traffic to our communities in Boise Salt Lake City, Las Vegas and Reno.
Metro Phoenix, Denver, often and of course, Florida as people Chase the Sun.
In summary, we believe we are well positioned to take advantage of the resurgent housing market, which is being fueled by historically low mortgage rates a paradigm shift in the way people view and use their home a favorable supply demand imbalance and the positive long term demographic and geographic trends.
With our diversified offering of homes across a wide variety of price points.
Our broad geographic footprint, our build to order customization model and our reputation for quality value in service.
We look forward to continued growth in fiscal 2021 and beyond.
Now, let me turn it over to Marty.
Thanks, Doug.
In fiscal year, 2023rd quarter, we delivered 2022 homes and generated revenues of $1.63 billion.
Which were up 1.4 per cent in units and down 7.4% in dollars from one year ago.
Third quarter net income was $114.8 million or 90 cents per share diluted.
Compared to $146.3 million and a dollar per share diluted one year ago.
Our third quarter.
And our third quarter end backlog of 70, 239 homes and $6.09 billion was up 6% in units and 4% in dollars.
Our third quarter adjusted gross margin was 21.9% of homebuilding revenues compared to 21% in the fiscal 2022nd quarter.
We attribute the sequential improvement to the mix of product deliveries and solid execution by our teams in the field.
Our average delivered price per home was $805000 in the quarter.
Compared to $881000 in the prior year period.
During the quarter, we delivered more homes in lower priced markets, which reflects our strategic expansion into more affordable luxury homes and attractive high growth markets.
Additionally, while our business model is primarily build to order.
We also start some homes, a spec and market them as quick delivery homes.
Approximately 18% of our Q3 deliveries were quick delivery homes.
As Doug mentioned, we increased prices in most of our communities during the third quarter.
Should the current strong demand continue we will keep raising prices. We expect these price increases to help offset rising lumber costs and expected pressures on labor and other costs driven by the strong housing market.
SGN, a as a percentage of homebuilding revenues was 9.9% in the quarter compared to 10.6% in the quarter one year ago.
SGN a was lower this year and this quarter due primarily to reduced head count and marketing spend.
As we started to benefit from the actions, we took to reduce costs last quarter.
As we discussed last quarter.
We strategically delayed selling several of our completed apartment communities and other assets to allow market conditions to settle.
As a result joint venture land sales and other income was $4 million during the third quarter.
We don't expect to go to the market to sell any significant assets until the first half of fiscal 2021.
Our balance sheet remains strong.
During the quarter, we fully repaid all borrowings that were outstanding under our bank revolving credit line.
We ended our third quarter with $2.34 billion of liquidity, including $559 million of cash and $1.78 billion available under our 1.9 billion dollar revolving bank credit facility.
Which does not mature until November 2024.
In fact, we have no significant debt maturities until 2022.
During the quarter, we increased our liquidity by $335 million and reduced our net debt to capital ratio by 270 basis points.
Looking forward, we are projecting fourth quarter, new home deliveries of between 20, 420, 550 homes with an average price of between 815008 hundred $35000.
Our Q4 delivery guidance reflects the fact that our backlog is a bit less mature than usual.
Because approximately a third of it was just sold in June and July.
Spect adjusted Homesale gross margin in our fourth quarter.
To be approximately 21.5% of homebuilding revenues.
And interest in cost of sales to be approximately 2.6%.
We project fourth quarter SDMA as a percentage of homebuilding revenues to be approximately 9%.
Fourth quarter other income income from unconsolidated entities and land sales gross profit is expected to be approximately 5 million.
We project the fourth quarter tax rate of approximately 26%.
Our fourth quarter weighted average share count is expected to be approximately $130 million with a weighted average diluted share count of $131.5 million for the full year.
Now, let me turn it back to Doug.
Thank you Marty.
We are laser focused on improving our return on equity.
A key element of this is our land buying strategy.
We are increasingly taken advantage of land banking joint ventures, and other ways to optioned land.
We improved our option to to owned land ratio at quarter end to 43% option and 57% owned versus 40% optioned and 60% owned at last quarter end.
We also reduced our total lots owned and controlled by approximately 1000 lots.
And we're also focusing on lower priced higher volume communities, which generate higher ROI.
With 61440 lots owned or optioned 17100 of which are already improved.
We remain selective and investing in new land acquisitions and land development.
In the third quarter, we limited our spending on new land acquisitions to $51 million. This is partly due to our solid existing land position.
As well as to the hold we put on land spend at the start of the pandemic.
More importantly, we've built more rigorous underwriting thresholds for both higher gross margin and return on investment into our project budgets for new land deals.
This is reflected in our impairments during the quarter, which were all associated with decisions to walk away from or sell land that did not meet our new underwriting thresholds.
We project a 2020 fiscal year end community count of approximately 320 communities.
This is due to a faster than expected sellout of existing communities and the intentional slowdown of new openings in March through mid may during the early and uncertain days of the pandemic.
However, we believe fiscal year 2021 will be a year of significant growth for us.
Based on the land, we currently own or control, we expect to grow community count by at least 10% by the end of fiscal 2021.
Before I open it up for questions I want to thank the entire toll brothers team for the results we produced this quarter.
We are driving our great culture to even higher standards.
We all wakeup everyday striving to be the best and our performance this quarter attest to this competitive spirit that is ingrained in our culture.
The tremendous performance is a direct result of our commitment to providing our customers with the highest quality value in service.
This is the cornerstone of our reputation ended the heart of our brand.
Now call, let me open it up for questions.
And we will now begin my question and answer session to ask your question you may put those in one on your Touchtone phone.
If you are using a speakerphone please pick up your historical footprint in the key.
This is Joe Your question. Please press Star then too.
My first question today will come from Alan Ratner with Zelman and Associates. Please go ahead.
Hey, guys Hi, guys. Good morning, Congrats on the great results and glad to hear you guys are all doing well there.
Excellent. Thanks.
Doug in Marty I guess first I'll, just kind of throw a question just kind of thinking about the volume focused strategy here that the community Count guide for 21 is very encouraging it sounds like you're not seeing a ton of your big delays on the development side.
Lingering from from the and the early days of the pandemic, which is great. So I guess just as we think about the next 12 months or so I'm assuming demand does stay strong.
Is it reasonable to expect that you would be kind of willing and able to let the volume the absorption paces, Ron a little bit hotter than perhaps you traditionally have given that that large supply of communities you've got coming online.
Or are there constraints in the system, whether its labor or whether it's something in the supply chain that you think you just kind of you're bumping up against a point, where perhaps the absorption pace might have to add to flat line a little bit here just to kind of what the system catch up.
Oh, it's a great question, yes, we have the land.
As I just described.
Next year, we expect to open north of 150 new communities.
And I know the question will come up so I will answer now that they are spread.
Pretty well across the country every region for us have at least 25 projected new openings in 2021.
There are also reasonably consistent across the year correct backend loaded or front end right. Thanks, Thanks, Marty that that is correct.
And so yes, the land entitlement the land improve all process is back on track and we are really excited about our growth opportunities in 2021.
More specifically to your exact question I think we always do a good job of balancing pace and price.
And as our backlogs grow in certain locations and as we become concerned as the industry will with labor because of the very strong sales that toll and others are experiencing.
We will be closely monitoring our ability to deliver houses and time frames that are acceptable to us and if if the production schedules extend.
Because of those issues and we will more aggressively raised the price to manage those backlogs and manage.
The delivery dates and is very local it has community by community based on our sales pace by based on the complexity of our homes and how long they take it to build when we don't have labor issues.
But that is something that we are very keen to and if demand continues which right now it sure feels like it will I think you will see f. continue to raise price.
And balance price with pace.
Got it very very helpful. Thank you for that Doug.
Second question, probably more for Marty you guys mentioned the focus on our are we in a big pillar of that you pre pandemic was the share repurchase program, which obviously has been put on hold here, but just curious if you could give us an updated you thought in terms of when you guys might be back in the market there because that obviously is probably the big.
I guess lever you could pull to get that return backup to be as kind of mid teens level you were running at previously.
Alan it's something that we're studying I'm on a daily basis now as to what the landscape looks like for our future land spend our cash generation and the pricing of the stock we've used the tool before it's not unreasonable to expect us to use the tool in the future.
Okay. Thanks, a lot good luck guys.
Thank you very much.
And our next question will come from Stephen Kim with Evercore ISI. Please go ahead.
Oh.
Hello, Mr., Ken Your line is open.
Thanks, very much policies for that congratulations on a strong results.
My first question relates to it I an interesting comment you made about 23% and upgrades just wanted to make sure I got exactly what the wording was around that 23% wanted to see if you could provide some historical perspective around that number on the last time, we saw number.
That level or greater and is that am I right and remembering that generally speaking on the upgrade you get more of them more on the margin or a higher margin on those upgrades then your company average.
Okay. So so that 23% was on closings.
So you have to go back.
Not for every not for every sale, but for many sales you go back three pandemic.
Although people maybe in the design studio from a home they bought in January February they may be in that design studio process post pandemic. They may have been in that design studio product process, when the rates came down which which makes them.
Field, certainly that they can afford more home or they're going to spend it on the beautiful finishes, we generally run about 20%. So yes, it has spiked a little bit.
I think we'll just have to see how that plays out there is no question.
That.
With the home.
Being so important today with the nesting phenomenon that I, just firmly believe in and I'm watching play out.
There's no question with that occurring and with rates where they are.
People are putting more into their house, they want to customize it they're spending more time there it is more important to them.
And I think it bodes really well for our business model.
Yeah no doubt.
Just as a follow on to it I was curious if you give us a sense for what looks like the highest level, we've seen on that ratio.
Yes, if we go back through history.
And how how did it ever get just as a point or curiosity.
That would be August 26, 2020, [laughter]. We are we are at.
We are at the high watermark [laughter].
[laughter] knife okay.
You talked also about the the August deposits being better than they were in July and better than year ago August, but I didn't hear any figures maybe I missed it could you give out can you give us more clarity around what that number percent increase was in August maybe what it was in July.
And what that an easy comp.
In July it was in the high 40% range for deposits.
We have exceeded that.
In August.
It's only three weeks.
We we we've always given you guys I think good commentary I know last quarter, when we were right in the midst.
Some of the most troubling times of the pandemic and everybody was craving daily weekly information, we got more specific for you because things were changing rapidly right in front of us.
But I'm I'm comfortable with what we said in the prepared comments on what I just added.
And let's let's leave it at that the market is very strong we aren't seeing a terrific and to the summer.
Yeah, no doubt mall that that should be good enough. Thanks, a lot guys and good luck, but the next quarter.
You are very welcome. Thank you.
And our next question will come from Jack might think through with Sig. Please go ahead.
Hi, guys good morning.
That thinking about next year, so community count growth and the ongoing strategy to remix both geographically and on price point, you know how do we feel like you do a five day SP this quarter down about 9% year over year, the bigger step down.
Last quarter end of year to year, just thinking about you know we're going to 21 and you opened these 150 new communities. You know do we see further reduction and I must be overall or are we kind of at a.
Somewhat of a terminal philosophy in terms of where that might be going based on the full would be.
Jack I think the mix of our offerings in the mix of our geographies.
He is driving that number down a bit and will continue to do so in 2021.
Oh, we're expanding the affordable luxury offerings.
We're seeing great success in some of the acquisition.
Builders that we have added to the fold and those are all lower price markets in lower price products.
And our.
Product mix in some of our higher priced markets.
Is shifting.
To a bit lower average delivered price, including in southern California.
We're seeing great success in L.A. County.
And good success in Orange County, but not comparable to where it was a few years. We just have less yeah. We have we ever a lot less an orange County.
But you know jaquith.
With our range of homes from 300000 to 3 million.
As is the number can float quarter to quarter, because it's just such a dramatic range of pricing.
I mean as an example next quarter you know we guided the 815 to 835.
Which is up but longer term based on the expansion and as.
The market's Marty mentioned in some of the builder acquisitions.
It longer term, we think it should trend down a little bit.
Okay, great. Thanks.
And then on the expense side I think last quarter, you talk about a 50 million.
Annualized run rate well I'm gonna, there's some variable in the gating, obviously with what we're going to but.
So we think about expense dollars <unk>, we fully now implemented in that efficiency program.
From last quarter, who is there still more.
You know dollars to come out maybe ended the year.
I think we.
We are reflecting in this quarter most of the initiatives, we took last quarter.
What that does not mean that we have stopped initiatives.
Right. So we continue to study ways to reduce costs further and we think.
From a gene a perspective, the dollars should be relatively stable.
Okay, great. Thank you guys.
And our next question will come from Truman Patterson with Wells Fargo.
Ahead.
Hi, Good morning, guys. Thanks for taking my question and a really nice quarter overall.
First just wanted to touch back on community Count you know could you just discuss your level of confidence and you know the 2021 guidance of growth up 10% plus I mean, that's pretty strong and no. We've been hearing that there's delays with zoning Board City Council me meetings permitting itself.
Her own also.
You know some issues with them a horizontal development front as well I guess could you just discuss some of these challenges or what you're seeing in the industry today.
And you know just that the level of confidence of you being able to hit that kinda, 10% plus growth guidance.
Sure.
Remember.
We we shut down land development.
A municipality isn't counties shut down.
Meeting.
From mid March until.
Mid may.
And then they figured out how to go to zero meetings, and we decided to start spending money on land development when the market.
You know that showed signs of improvement, which was right around the week or two before our may call and so let's just call. It a two month delay.
Either.
Strategically on our part where we stop putting roads in.
Or where towns and counties just weren't ready to continue processing permits and having public hearings on.
On you know approvals.
But now that's all back in action. The the towns are either either open or they have fully figure it out.
Much like our children, who have fully figured out how to go to school from their bedroom.
Had a whole meetings that had a work film and Webex and so the good news and what I'm, telling you is that there are many communities that.
No, we're not hoping to get into the second half of 2021 that we were hoping to open in the fourth quarter. A 20 and are now just naturally being pushed into the early parts of 2021, so that gives us great confidence on a you know a significant portion of what our future community openings look like.
As for the balance.
There can always be issues with that last permit that you think you're getting that is delayed for one reason or another there could possibly be some.
Modest land development delays as the land development companies that moved the dirt and put the roads and find themselves with more work. That's all part of the business. We we evaluate that we factor that in.
And I am quite confident that the guidance, we're giving you.
As a we are able to hit or exceed it also remember my words. It is based upon land that today, we own or control.
There are more opportunities to buy land that we'll have roads in that will allow us to open.
There are always opportunities for M&A.
You know last year, we acquired several builders.
That added lots immediately so.
Long answer to your question is.
I can't tell you, what's an absolute definite I can't tell you that there are no potential issues, but overall when I look at the guidance.
And I look at our book.
I feel really good about our ability to head or be it it.
Okay, Okay, perfect and then a two part question on demand.
Seems like every price point is working right, but could you just rank order more affordable luxury luxury active adult in terms of relative performance.
In mid Atlantic, specifically, I mean, 60% order growth.
What are you seeing there Oh are you all getting a bit more traction with your community count I know that's been.
No one issue in the past just keeping everything that's occurring in the mid Atlantic currently.
Sure. So let me let me first of all at the mid Atlantic <unk> last for you.
Affordable luxury and every market that's a different price.
But generally let's call it.
Toll brothers high threes to 600.
Is the strongest.
Oh luxury.
Let's let's call. It again its market specific but north of 600 would rank number two.
Age targeted.
And age restricted and we put those in together because it's the same demographic.
Whether they're buying in a community whether they're buying in the community, where 43 year olds can live or whether they're buying into community, where everybody is 55 and over its still.
It's still the move down empty nester home.
That group has been slower to recover until recently, but we're seeing strong growth of late.
And it makes sense that group has been more cautious.
Getting back out in the world, because they're a bit more exposed or at risk.
With the pandemic.
And.
Many of our age targeted age restricted communities our destination communities.
It chasing the Sun in Florida.
Going out the Scottsdale.
Et cetera, and they're just not true lean as much what's interesting we have a lot of active adult age targeted activity in Reno.
And Reno is unbelievably hot.
And people can make the drive from the Bay area to Reno, They don't have to jump on the airplane. They can take a nice will easily drive over the mountains.
You know through Tahoe into Reno, and I guess, what guys about three hours and so they're able to access it and it's been very strong so while age targeted age restricted has been behind.
Affordable luxury and luxury of late we are very encouraged city living as you would expect.
Is not doing well thankfully we have our smallest.
A number of buildings and number of units in New York Urban.
Which is Jersey city, Hoboken and Manhattan.
As we have had in the last decade.
There has been some activity lately, but it is slow when we expected it to be slow.
Counterbalances, the suburbs of New Jersey, New York, Connecticut.
Our extremely hot.
So in terms of.
The the mix of our product that there's my answer with respect to.
Mid Atlantic mid Atlantic Go ahead, Mark I think most of that story Truman is Atlanta, and our acquisition there last year, we closed the sharp acquisition in late May So call. It two thirds of a corridor compared to a full quarter. This year.
And the Atlanta market has been.
Spectacular force were up 300% in Atlanta in agreements this year versus last year, Virginia is also very strong for gesture Northern I was going to say in addition to.
Oh, The addition of Atlanta.
Northern Virginia is showing.
Great strength.
Really exciting what what's going on there.
Alright. Thank you guys appreciate it.
Very welcome trim and take care.
Our next question will come from Jay Mccanless with Wedbush Securities. Please go ahead.
Hey, good morning, Congrats on a great quarter. The the first question I had dog is just what are you guys seeing from competitors are they able to push price like you guys or.
How I guess are you seeing any of the land deals you may have walked away from earlier in the year come back to you.
I'll start with land yes.
We are seeing some land deals come back.
We didnt walk away from all that many because it wasn't.
We just weren't sure in mid March early April what August would look like we never thought it would look like that but we just weren't sure. It. So it was really a question of extending with our sellers.
Extending due diligence extending closings restructuring deals to be more capital efficient.
And so I'd say, there's many less than were walked away from as there were that were restructured to make better sense not only in terms of what the world looked like in April but make better sense in terms of our you know real laser focus on capital efficiency.
So I'm pleased with the land environment.
And I'm very pleased with our ability to structured deals today.
With this.
Really strong focus on ROI or our away competitor in it that the land market now that the.
How does the market looks good has become more competitive there's no question.
We end the others are looking for growth opportunities and our.
Continuing to pay up for good land in terms of pricing.
Oh, yes.
With with the.
Lack of supply on the resale market.
With interest rates, where they are.
With that very strong demanded that we are seeing.
We have been aggressively raising prices our competition.
As best I know is doing the same.
I can't comment as much on the lower price range.
Because we're just not down there all that much are affordable luxury still.
As a notch above.
The most part where many of the other at least publics play so I can't comment as much on that but in our business.
We and others are raising prices.
Great and then just the other question I have is on cycle times can you talk about where they are now and and your comfort level is being able to so all these homes and get them delivered in a timely fashion.
Cycle times have extended a little bit.
Some of that is front end permitting.
It may be taken it had another week or 10 days to turn around the building permit application.
There could be a little bit of extension on the instant many infections that go into.
Inspecting at home by the end of the township officials.
There are limited.
Delays on the job site from Covidien, 19, health and safety protocols.
Requires some social distant saying and less workers in homes, but I think we're managing that pretty well I think what we need to watch.
His house potential label labor shortages.
As these homes that have sold get to the stage of.
Needing the attention of the plumber.
For the electrician or the drywall hangar the painter.
We'll have to manage that down the road, we are expecting there to be some modest delays.
And we have lighting properly budgeted for that and properly communicated.
All of our trade partners. So they are fully aware of what's coming and they too can prepare.
Got it it's Greg Thanks, again for taking questions.
Thanks, Jay Thanks.
Your next question will come from John Lovallo with Bank of America Merrill Lynch. Please go ahead.
Hey, guys. Thank you for taking my questions. The first one you know as you alluded to be lumber prices are clearly up very significantly.
Structural panels are up pretty significantly as well are there other materials in the bucket that you're seeing.
Rise pretty meaningfully and along those same lines would be what do you anticipate sort of is the magnitude of price increases needed to to offset what you're seeing a seed input costs today.
As for other materials.
Any increases have been very modest.
And I I think.
Obviously, the big focus is lumber.
It is that.
Number one material.
It goes into.
The construction of a home.
If we can manage it too.
Raise prices a couple thousand dollars a corridor.
Call it.
$8000, a year, which would be 1%.
On our average house of 800.
We would feel like we are in good shape.
In terms of managing or offsetting.
Those increases.
And you know with the strength of the market through the last couple of months.
And what I believe will be continued strength.
I'm very confident that we will be in very good shape.
With what we are achieving with price increases versus.
The building costs increases.
Okay. That's helpful and then in terms of expanding the affordable luxury offering that you have you guys mentioned.
Acquisitions, a couple of times in the call today, just curious I mean does that acquisition initiative potentially include smaller public deals are you focused exclusively on not on private.
To date, we're focused on the small local private builder that gives us an entry into a new market.
Or adds to an existing operation.
And one of our current markets.
There was a couple deals were playing with.
Before.
The pandemic hit.
That we put on hold.
We are back in some discussions and you know we have a group that focuses focus exclusively on M&A.
You know last year was a big year for US it's worked out very well.
And we will continue for the moment to look at those small.
Add on acquisitions.
It's not to say something bigger could come along but it's not on the radar screen at the moment.
Thank you guys.
You are very welcome. Thank you.
Our next question will come from Matthew Bouley with Barclays. Please go ahead.
Hi, Thank you for taking the questions I wanted to ask about the gross margin guidance for the fourth quarter I guess, just firstly what factors are driving the step down sequentially. I believe is about 40 basis points and just secondly, you talked about lumber prices I mean to what extent.
The lumber factored into that or is that more of a 2021 event like.
I think most of the lumber situation will be a 2021 event is.
We are delivering homes with lumber purchased nine to 12 months ago in them right now in the fourth quarter.
The biggest driver of gross margin in the fourth quarter compared to the third quarter.
He is our mix or mix in the third quarter was more positive.
Then it will be or than it is anticipated to be in the fourth quarter and that's that's the biggest aspect of the 40 basis point change.
We had.
Good profitability out of the quick deliveries that I mentioned in the third quarter.
It was greater than we normally get out of our quick deliveries.
And it's probably not appropriate for us to forecast that continuing into the fourth.
Okay. Thank you for that Marty and then secondly, the purchase of 600 lots, obviously little lighter than usual you mentioned.
I'm kind of the existing healthy land position and maybe some lingering effects so that the pause from from from Q2.
But you also mentioned lifting your underwriting hurdles I guess, what are those hurdle rates now versus prior and I guess, how does that play into it to rising land prices and competition for land here, there's kind of an implication that land investment rate might run a a little lower than average for for a longer period here. Thank you.
I'm sure, so I'm not going to get into that specific numbers behind.
The underwriting it would it would take a.
It wouldn't be a semester course in college.
Yes, well online, we could probably be pretty efficient with it but.
No. We we as I mentioned with our 60000, plus lots owned or controlled.
With our focus on and 17000 of those improved.
It gives us great comfort and flexibility to be selective.
We recognize foley.
The need to be more capital efficient.
We recognize the need to drive or away.
There are opportunities to be very competitive in land buying.
The are are we goes more to structure.
Hi, good sometimes it doesn't have to involve the actual land seller I can involve a land banker can involve a joint venture opportunity.
With a financial partner it can involve joint venture opportunity with another builder.
So we're seeing really good deal flow.
We're able to structured deals that are driving ROI, we hire we know that will take some time.
To prove out.
Because there's a long time between contracting for the land and delivering your first home.
We're focused on more affordable luxury which by its nature has quicker turns.
Smaller homes less upgrade faster construction cycle time.
And that naturally naturally leads to higher or are we.
And there are good land opportunities.
In the affordable luxury end of our business so.
We are very active on the land side, but these new underwriting standards, we mean it.
It is important to us.
We are unwavering.
And our commitment to focus on our OE and capital efficiency.
And we will continue to buy land intelligently, but I'm delighted to have.
60017 thousand improved.
To work off of.
Got it thanks for the color Doug.
Very welcome thank you.
And our next question will come from.
Susan Maklari with Goldman Sachs. Please.
Please go ahead.
Thank you good morning, everyone.
Good morning morning.
My first question is why did you.
You get a little more color on the commentary that you made in terms of the dispersion in margin between your quick delivery homes, and you're more traditional kind of core product. How has that been I know you mentioned that discount and narrower more recently, but can you give us a sense of the and more standardized gap that we should be expecting marriage and maybe how that.
Come together over time.
Well, it's definitely coming together, there's not as much a gap as they're used to be.
And.
I don't think it's as big a deal is the commentary would imply it was we're talking about it impacts the 10 to 30 basis points from one quarter to another from call. It 20% of the sales 18% of sales so.
It was just a good quarter with respect to that.
Impact and while we hope it continues.
It's a little premature to say it will.
But I will say at the quick deliveries that we had.
In early May.
Our at a higher price today than they were then.
<unk>.
Okay. All right. That's that's encouraging that's good to hear.
On can you also perhaps give us a little color on what you're seeing out in California, maybe how that market trended over the quarter and what you've been seeing as we get into the fourth quarter there.
I think she asked California, what are you seeing California, Yeah I just.
Flipped out.
California.
As yeah has.
Greg Greg is saying positive, which I know thank you [laughter], California has been positive [laughter].
You know we as we mentioned there has been a shift for we used to have a much more of southern Cal and Orange County to L.A. County that has now shifted where we have more in L.A. County to Orange County, It's it's still significantly above our above our company average price, but it's lower than than what it had been when.
In Orange County dominated.
And I'm encouraged.
By the sales that's that we see out there.
I'll put it in perspective for.
You know we gave you the cadence for the company.
I've agreements, so, let's just get into the weeds and I'll give you the cadence.
For California, but I'm not going to do it for every state.
So may was down 44% this is.
Contract.
June was up 63%.
July was up.
42%.
And remember we already mentioned don't read anything into the June to July because the comp back to June of 19 was easier June of 19 was this a slower month.
Then the comps of July 2020 back to July of 19, so the cadence of improvement.
It's good that is continuing into.
Ah August.
Okay that color is very helpful. Thank you and good luck with everything.
Thank you. Thank you.
Our next question will come from Mike Dahl with RBC capital markets. Please go ahead.
Hi, Thanks for taking my questions nice results.
[laughter] Doug.
Doug and maybe Marty also I wanted to go back to the discussion about returns and you've obviously highlighted a number of things that you're doing too.
Drive returns higher over the next few years. One thing is that I wanted to ask about was really how you're thinking about city living and the apartment.
Rental business in the context of your return focused obviously profits notwithstanding the current slowdown profits can.
Always be a bit bumpy, they're not.
Good profitability not necessarily always returned friendly so any any thoughts on different structures are ownerships for either your existing portfolio or or as you look at new deals in the next few years.
Sure so and they.
Toll brothers apartment living front.
It's holding up well our.
Our occupancy there is still very strong where were we like our locations remember these buildings or new.
There's a big big difference between a 10 year old apartment building and a brand new one.
In terms of amenities and and the you know the finishes of the units.
And so.
I'm very comfortable with the portfolio.
We are being cautious with expansion.
You know the underwriting is definitely up when it comes as a multifamily business.
And you know that is all done off balance sheet with partners that will continue to be the business model, but we are being careful.
And I think they the growth.
For the next six to 12 months until we have better visibility longer term.
We'll be slower.
But in terms of what we have in our strategy on what we will hold versus what we will sell is still intact.
And.
You know nicely through through the last four months.
We have been able to find equity partners, we have been able to find competitive debt.
For the buildings that were in process and they are continuing on terms very similar to pre pandemic.
And I think Thats, a testament to toll brothers as a partner and it's a testament to the quality.
The landed the location and the way we execute but.
We recognize that.
The right strategy now is to.
Be cautious.
On city living.
I mentioned that.
We have the lowest investment in New York that we've had in a decade, we are selling out of several buildings that are built and partially occupied so we just have inventory units that we will continue to sell.
And we have a few buildings that are in later stages of construction, but also have.
And in most cases plenty of sales.
With very few cancellations and we will complete those buildings and we will sell them out some of those are in joint venture. So they are also there are already very capital efficient, where we have minimized or reduced our risk.
We do have a couple of land holdings.
Where we had not started construction.
That we will continue and wait.
To evaluate the market before we go vertical.
And in terms of future acquisitions.
Got it Okay. That's helpful. Thank you My second question just back on on the lumber Thanks, Mike.
But back on those lumber side.
The $8000 needed to cover I, just wanted to ask a clarification there because I know you framed might be cut.
So you cut out for a minute there you said $80000 I heard.
Oh, sorry, so I'm on the lumber comments around the thousand dollars to cover the cost I just wanted to clarify on that because obviously you're on a higher price home you might scale you're framing package.
A bit compared to average, but I still would have thought that your total package for what might be 30000.
Dollar range and you know spot lumber and panels are more than doubled year on year. So how much of that is just kind of the lag nature of you guys, obviously, having a very long delivery cycle. So that just not being an impact until late next year versus something different that you'd be I think HM.
Yeah.
When you look at lumber you can't just take the spot rate, where it was in the spot rate today.
Because we contract.
In our panel plants for lumber.
Based on our judgment.
Often times for more than we need for the next quarter.
Or we have inventory on site for future demand.
Similarly in our non panel plant markets, we make price a home with the framer or the lumber supplier.
For the next quarter or too.
So we protect ourselves.
With some excess.
Inventory or or forward pricing from rapid movement.
And I think.
Most of the industry has seen.
Lumber prices spike and contract.
As mills add capacity to capture revenue.
I think many in the industry are optimistic that that will happen.
This year as well.
Got it okay. Thanks Marty.
Your next question will come from Jade Rahmani with KBW. Please go ahead.
Thanks, very much I was wondering if you could provide a view as to whether you'd believes the increase in new home demand that we're seeing is sustainable on a multi year basis or represents a pull forward I one factor that could support the long term argument is perhaps how far out the average toll buyer is willing to contract terms advantage.
Paid at closing could you give any on thoughts around that.
Sure.
Just remember that before.
The pandemic.
Our first quarter orders were up 31%.
So we were seen.
Yeah, the beginnings of a really good spring selling season.
The housing market was strong.
That was of course, it higher interest rates and I already talked at the story about the 900 versus 800000 dollar house in this incredible.
Feeling of there's no place like home.
And next thing.
I believe rates are going to stay low for some time.
I believe this housing market.
Well have strength.
Long term.
We do not feel.
Pull forward demand.
And so.
I'm optimistic.
I think.
Jade theirs.
If you kind of look at some of the factors that we talked about at the outset of our call.
Low rates it feels like they're gonna be around a long time.
The demographics associated with the millennials.
Years to run.
The desirability of a home as a place a safety and sanctuary.
Is high right now and I'm not sure what's going to.
Reduce it in the future.
And then another aspect.
Particularly at our price point is this work place flexibility in the work from home in the desire to have say more space, where appropriate space to accommodate that.
I think second homes as we see in many of our markets are also something that people are gravitating to particularly those who might have been.
Caught in a circumstance they didn't want to be and during this pandemic new.
There isn't.
I can't overstate.
The move to new news always been.
On People's mind, many people only looked at new.
I think that's stronger than ever nobody lived in the house.
They can design it the way they want to design it.
You can buy used home and try to renovate it to create.
A suite for mom and dad to try to create a home office.
Out of that out of the fifth bedroom in the basement in the attic.
Well with new.
It's been thought out an advanced by us by Great Architects, we have home offices that can handle multiple workers with private workstations with the highest technology.
The fastest Wi Fi and connect ability.
The in law suite that has the exterior entrant, so mom or dad can feel like they have their own little home within their kids home. They can come in from the outside but then the sleep connects back into the main house the indoor outdoor living.
With that sliding glass Oh.
On the back of the house that opens the outdoors into the indoors. There's so much about the new home.
In addition to the energy efficiency in the health and then the health of no one ever living in it.
That.
I think.
I think we're just sell well positioned to take advantage of what I think has a longer term trends I know here a toll brothers, we're going to have great flexibility in the long term for remote working.
I have so many friends that talk about their companies are going to have great flexibility long term for remote working.
That brings the home.
In addition to the emotional connection now nesting with the family with what we've all been through that brings the important to that home so whole another level.
And that requires some level of customization and personalization.
That is exactly what we do.
And when you look at the resale market.
The more expensive move up homes.
Our doing really really well in terms of pace of sales and pricing.
Our buyers are able to sell their homes and move up in the hours.
They want.
To design the home themselves for their lifestyle and that can be at 500000 that doesn't have to be at 2 million.
And now that we do more and more affordable luxury we're offering that opportunity even at or lower price point and.
And these millennials in their mid Thirtys that are now buying homes.
They have more well.
Their first home will look different it can be the affordable luxury toll brothers home that they can still customized.
Sorry for being on the soap box.
I am passionate about this I love, how we're positioned.
And the market is moving right into what we do and that is what we're seeing with these tremendous results.
Thanks for that just a follow up on the a city living in apartment living can you remind us how much capital is tied up in both those business I think Alaska update I had I'm guessing realogys, yeah. When you cut out, but I think you want to know how much we have invested so we'll take a chance and answered that so in city living.
We have approximately $400 million invested which is a low point for us over the last decade or so.
Let's say 200 million or that is in a near complete buildings and 50 million of it is in Jvs and 150 years, but isn't paused pieces of grounds for future projects, but we didn't have nearly completed buildings. There our inventory units that are completed yes that are on the mark.
Good for sale, yes.
And then in toll brothers apartment living.
Our stabilized projects.
Because there's five of them, we have a total of $7 million of net investment, which gets to the capital efficiency long term. These buildings in development.
We have.
And Oh, sorry in development, we have approximately $700 million of land or projects, representing our piece of the equity or in some cases, 100% of the actually is we have not yet gone to mark.
Or outside but that comes down as we bring in equity right. When it comes back to recoup [noise].
$350 million are so JV formation within the next 24 month.
[noise] [noise] [noise], thank you very much.
Our next question will come from Michael Rehaut with JP Morgan Securities [noise].
Thanks, Good morning, and we're good afternoon now used for taking my question.
Wanted to circle back to a couple of items you hit on earlier.
Firstly, you kind of hit on some of the trends throughout the quarter and the strength continuing to August, which obviously sounds great in.
Consistent with what we're hearing out there as well broadly speaking.
You referred to you know June and July be neck in months.
Yeah, I was hoping to get a little bit of a breaks down around sales pace or kind of get little bit him, a better sense or context of how that trended during the quarter. Obviously, there's seasonality that comes into play as you get into the back half of the year.
You know, but hopefully you know.
If you could kind of walk through you know the average.
Monthly orders.
Monthly or you know orders per month per community throughout the quarter May June July and into August I'd be really helpful.
So Mike I think when we gave you the monthly cadence.
Of year over year agreement.
And then on what I, what I hope was helpful.
Commentary on August.
We answered your question if I'm mistaken.
<unk>. Please please help me, but I I feel like we.
Answered it in pretty good detail I don't think there was enough variability in our number of communities through the course of the quarter.
The incremental to the data we gave you on a top side, though.
There you go.
Okay, well, yeah, maybe we can follow up offline on that if you have time. This afternoon, then but the after you're saying that the community count was pretty steady.
Yeah. That's that's done is helping solve for that I guess since so thanks for that.
I guess, maybe just a couple of others I know kind of towards the end of the call. So these can be pretty quick you just wanted to clarify I appreciate the commentary around pricing and obviously, that's kind of a new or the.
Second derivative focus that people have right now you know in terms of all the robust demand and how that's translating into price and you. Doug you mentioned that you're you're raising prices across most year communities currently used the word aggressively raising prices.
When you talk about Im trying to cover the lumber costs that you would you if its 2000 a quarter that would do it for for what you're seeing currently over the next year, let's say.
<unk> 8000 for home, a 1% doesn't seem to be too aggressive. So I was I was hoping to get a sense.
You know what your Korean price increase cadences, you're not to do you get too granular if you prefer not to just kind of a sense of <unk>.
You know what.
On average you raising your price by quarter or by months today, you know and how that might extrapolate into a full year annualized.
<unk>.
Sure So <unk>.
Oh my.
[noise] my reference too aggressive in it and if it wasn't clear I apologize was intended and I and I hope I did it correctly.
To certain communities that have had extremely strong demand.
You know when we when we sell eight eight homes in a weekend.
We raised the price on Monday, and if we sell five more than next week, we're going to raise the price again, the next Monday and I called out aggressive that is not across the board I'm not suggesting.
We were selling eight homes and every community one week in five the next week, but there are some locations that have seen that type of demand and Lee.
React appropriately generally we raised the price at individual communities.
Not in markets.
In total based on the.
The results in a given week at that local community so I want to.
I want to make sure the word aggressive doesn't get taken out of contacts with that said.
Most of our communities.
Have had at least.
And 1% price increase.
Over the last.
Two months.
I'm very very few of had less than that.
And there are.
Many.
That have more than that so I'm going to go to most of that at least one.
Very few of at less than one wasn't any you have had more than one and Mike I'm, that's about as far as I think I've Gotta go with it.
So that's really helpful. Doug I appreciate that one last quick one if I could.
You mentioned are are we in the focus on improvement there and you had a lot of great progress. What's your lot option me now were 43%.
You know where could you see that going obviously, you're kind of holding back a little but right now in terms of land purchases.
And you want to see good, though I mean in micro cut out I think.
I'm, sorry, if you're cutting out a little bit I.
Since you're not the only one that cut out I hope, it's not our line right, but apologies if there's a problem on our end <unk> <unk>.
I've had the goal of of getting to 50 50, and we're heading there.
And once we get to 50 50, maybe I'll have the goal of the old days, where we went the other way to 40 60, there right now I think it's a good goal they get the 50 50, we're making great progress we are restructuring many existing deals.
To make them more capital efficient whether that be through land banking joint ventures, or <unk>, you know just different if different terms with a seller and new deals that come in.
We are extremely focused on.
The capital efficiency. So it is moving in the right direction and that will continue in that direction. It may not be linear correct may bounce around depending on that particular timing of.
Acquisition of land right with the intent is to move in that direction.
Perfect. Thank you.
You're very welcome. Thank you.
Our next question will come from and then there with Keybanc. Please go ahead.
[noise] afternoon all.
Yeah, I'm Ken afternoon.
Hi, I've two questions I'll just go back to back so its first ones related to backlog cadence with year end, usually your year end backlog given yet to be longer construction cycle, usually about 75% of your four year delivery is there anything operationally that youre seeing whos Kobe, you talked about a younger backlog that.
Would you.
You know.
Lead you to think that that pattern would change that's my first question.
And the second one just a little more specific I think it's the agents backlog that got into our guidance as I mentioned, a third of the backlog was sold within the last couple of months.
And then do.
Do you extended cycle times that Doug talked about.
Which are associated with social distancing on the job site and Ah.
We think we've been prudent in the guidance, we've given and those are the main drivers right.
The good news is that they do.
The good news is as we do a bit more affordable luxury as that grows that I mentioned, that's the that's the hottest segment for us those houses turn faster.
It.
Great that and then my second question a bit more west coast oriented, but you know in December given weather delayed Soc cancellations from what had been metro card crossing over a rather large project, where you know.
Now, it's a very different environment can you kind of maybe update how let's say that as opposed to New York how the tech.
Industry, which is very work from home oriented and would have benefited I guess metric crossing in fact that perhaps the suburban demand on the east Bay as opposed to Metro and then in Portland, where there's been a lot of unwrap sure relatively mild yeah I apologize.
I apologize if you cut out a little bit there, but I I know where you're headed.
There's no question that.
The benefits of Reno out as an example in Boise, which is.
Doing extremely well for us.
As to a large extent from the out migration from California.
And we're seeing more and more a higher percentage of our traffic.
Into Reno into Boise end into some other markets.
Austin, Texas as an example.
It is from California.
But overall I'm pleased with the suburban Bay area sales.
Not everybody is leaving.
Somar and we have the right markets and the right communities.
But there are still many.
That our stain and so we're seeing I'm pleased with.
The sales that were seen in.
Suburban.
San Francisco I already mentioned suburban New York.
Same phenomenon, L.A. County, which is not city for us, but its suburban they're all doing very well.
You know, we have ROI on San Francisco for sure because the tech companies.
Seem to have.
Now so there'll be a bit more liberal with longer term remote working but that doesn't mean everybody runs that may just mean, they're going to work from their home, but they're going to stay in the area because it.
There is a pretty cool place to live it's expensive, but it's a pretty cool place to live. So overall I'm pleased with what's going on in the Bay area and I'm very pleased with how we position ourselves in those other markets for those that do want to leave California.
Thank you.
Thanks, Ken.
Your next question will come from Alex Barron with housing Research Center. Please go ahead.
Yes. Thank you.
For taking my question.
So you know last year. The other income joint venture land sales category was a pretty big driver of earnings.
This year I guess, it took a step backward, especially in the quarter next quarter.
Some of that was delays and sales of your.
Apartment communities and stuff like that so you have any.
Guidance or at least Directionally. What you think next you will not will look like.
Well Alex.
We've intentionally chosen not to market some noncore assets and some apartments here in the back six months of fiscal year quantity.
So as we think the market conditions are a bit on certain oh, it wouldn't be favorable to price.
We expect to put those on the market as things settle a bit in 2021, but we're not gonna give.
Guidance on 21 at this point.
Because we think there's too much uncertainty out there.
Got it.
My second question is regarding the active adults segment or or population.
Can you guys given you know what what percentage of your businesses that represent today what was it last year and you feel it's it's trending up you know at this point or not.
Yeah, I mentioned that earlier that.
Active adult empty nester, whether you call it age targeted or or legally age restricted.
Was slower.
To return as that buyer is being more cautious.
And getting back out in the world and travel is restricted and some of our locations our destinations, but I'm very pleased with recent activity August is up.
As I think because act that crowd gets back out and so I'm encouraged for where it's headed.
No sense of what percentages.
I I don't have that I'm sorry.
Okay. Thanks.
You're welcome.
And this concludes our question and answer session I'd like to turn the conference back over to Doug Yearley for any closing remarks.
Coal. Thank you very much thanks, everyone for your time today.
Oh, please stay safe stay healthy and enjoy.
The last few weeks, we have of summer of 2020.
Which has certainly been <unk>.
A unique so [laughter].
Take care everyone. Thanks very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines. This time.