Q1 2021 Toll Brothers Inc Earnings Call

[music].

Good morning, everyone and welcome to the toll brothers first quarter earnings Conference call.

All participants will be in a listen only mode.

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After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one on your telephone keypad.

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Please note today's event is also being recorded and at this time I'd like to turn the conference call over to Douglas yearly CEO. Please go ahead.

Thank you Jamie welcome and thank you for joining us I Hope you your families and your colleagues are doing well.

With me today are Marty Connor, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Gregg Ziegler senior VP and treasurer.

Before I start I ask you to read the statement on forward looking information in our earnings release of last night 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 and financial markets, the impact of the pandemic and many other factors beyond our control that could significantly affect future results.

I hope you've had a chance to read our earnings release from last night.

We are very pleased with our first quarter results, we achieved record first quarter order growth and exceeded our guidance on nearly every metric as we continued to benefit from a market that is playing to our strength.

Our business is performing at a very high level.

Pretax income rose, 93% and earnings per share rose, 85% in the quarter compared to one year ago.

We are increasing gross margin leveraging SG&A with higher revenues and greater cost control and improving our return on equity.

We are raising full fiscal year guidance across nearly all of our key metrics and expect to deliver the most homes on our history.

Fiscal 2021.

Demand for new homes remains incredibly strong and we are enjoying pricing power in nearly all of our markets.

And our first quarter net signed contracts rose, 68% in dollars and 59% in units against the tough comparison in fiscal year 2000, Twenty's first quarter on orders grew 31% over Q1 of fiscal 2019.

Three weeks into our second quarter, our non binding reservation deposits are up approximately 34% overall and 38% same store over another difficult comp to last year and despite the cold and snowy weather impacting about one third of our markets over the past.

Few weeks.

Our backlog, which is up 37% in dollars and 38% of units provides visibility into the significant gross margin expansion. We project this year, especially in our third and fourth quarters as we deliver home sold after last may.

As a reminder, most of our homes take nine to 12 months to deliver.

Based on this backlog in the current market dynamics, where we continue to experience strong pricing power. We expect further gross margin expansion into fiscal year 2022.

Our results reflect a robust housing market that continues to benefit from favorable demographic trends, a very tight supply of for sale homes stemming from a decade of underproduction low.

Low mortgage rates and a renewed appreciation for the importance of home.

Home supply remains tight.

According to data released by the National Association of Realtors last week. There is just 1.9 month's supply of homes on the market.

Record low.

According to redfin nearly half of all resale homes on the market or placed under contract in less than two weeks.

With one third of all re sales selling above the asking price.

Low mortgage rates continue to support the housing market and are driving affordability for more upscale homes and more upgrades and.

Interest rates have remained low for an extended period of time, Inc.

The new administration and the fed are both signaling a continuation of accommodative policy.

These trends clearly favor us for the following reasons.

Approximately three quarters of our buyers of the home to sell.

Rising home prices and limited supply means our buyers can sell of their existing homes quickly and at appreciated values.

The limited supply of existing homes has also pushing buyers frustrated with the unpredictability and frantic pace of the resale market to the.

The more systematic process of new home sales.

In addition at toll brothers, our build to order model offers buyers the opportunity to design their homes from the ground up allowing them to customize their homes to match their evolving lifestyle.

This is the number one toll brothers advantage choice.

And it has never been more important to our home buyers.

Our customers increasingly want the ability to personalize their homes and they have the means to do it.

Tend to enjoy greater job stability of.

The more flexibility to work from home and have wealth accumulated from rising home prices and the stock market.

This quarter, our buyers added on average $170000 or approximately 26% of the base price and lot premiums options and upgrades.

This is up from about 22% on the first quarter of fiscal year, 2020, and our long time average of 21%.

Our customers are spending more as they customize their homes, which is generally accretive to our gross margin.

We are also seeing a positive impact from demographic and migration trends.

Over the past several years, we have expanded our geographic footprint in home offerings.

We now operate in over 50 markets in 24 states and have communities in both high growth and of high barrier to entry markets, where a tremendous brand.

Wide range of price points enables us to serve a broad spectrum of buyers.

As the 72 million millennials transitioned to homeownership are growing affordable luxury product lines are designed to appeal to these buyers.

This quarter of approximately 25% of our customers were first time buyers.

While we are eagerly looking forward to the end of this pandemic. We believe it has cemented the value of homeownership in the minds of a large portion of the U S population.

The pandemic has made the consumer appreciate the home more and has made work from home a more widespread and permanent option.

<unk> among our consumer base.

These trends combined with the significant on new supply of homes for sale support long term sustained growth in the new home market.

And we are well positioned for this growth.

Our deep land position provides the foundation to grow our business at.

At the end of our first fiscal year.

We owned or controlled approximately 67700 lots and we're selling from 309 communities.

Even though we are selling out of communities faster than anticipated, we expect to grow community count to approximately $3 20 at the end of Q2 and $3 40 by fiscal year end, which is an 8% full year increase.

From the end of fiscal year 2020.

Based on the land, we already own or control. We are confident that we can continue to grow community count.

At a similar pace.

In fiscal year 2022.

We continue to pursue profitable and sustainable growth.

While remaining laser focused on improving capital efficiency and return on equity.

Over the past year, we have completely revamped our land underwriting standards and are beginning to reap the benefits of this focus on capital efficient returns.

We are structuring land acquisitions, much more efficiently laying out less cash upfront on negotiating deferred payment terms with sellers and using more third party land banking joint venture an option arrangements in short we are controlling more of the land with fewer dollars.

Which we expect to lead to higher returns.

Our increased focus on more affordable luxury home should also result in shorten building cycle times improved inventory turns lower building costs and higher margins over time.

Our expansion into geographies and price points with lower upfront land costs.

Should also benefit return on equity long term.

We believe the combination of these positive market conditions, and our relentless focus on return on equity and internal operational efficiencies will pay off in the short and long term with sustainable improved results.

In summary, we expect fiscal year 2021 to be a tremendous year for toll brothers and we are laying the foundation for an even better 2022.

Now, let me turn it over to Marty.

Thanks, Doug.

Our business is really firing on all cylinders sale.

Sales are strong and margins are expanding.

SG&A is well controlled and being leverage.

We are generating significant cash flow and this quarter, we bought back stock pay down debt and grow our land holdings.

And we are improving our return on equity.

It is our number one priority.

We expect to grow our return on beginning of equity by approximately 425 basis points in fiscal year 2021.

We see further improvement in fiscal year 2022.

Improve our ROE.

We are buying land more efficiently expanding.

Expanding our affordable luxury offerings.

Trolling cost and driving towards higher gross margins.

We have streamlined and optimized much of our product offerings.

It should allow us to reduce cost and cycle times without sacrificing the high quality customization process the distinguishes our home buying experience.

Our efforts in this area of continue as we seek the further refined and streamlined our products and processes.

In addition to these operational initiatives to improve our capital efficiency, we are taking steps to improve our balance sheet and reduce interest expense.

In fiscal year 2020, we generated over $1 billion of net cash from operating activities of record.

In fiscal 2021, we are forecasting approximately $750 million of operating cash flow.

Our strong cash generation in fiscal 2020 enabled us to balance land and building acquisitions with returning cash to our stockholders, while prudently managing our debt.

That will continue in fiscal year of 2021.

Our first quarter of fiscal year, 2021, we repurchased $179 $4 million of our stock.

Of roughly 3% of outstanding shares.

At an average price of approximately $44 54 per share.

Since fiscal 2016, we have bought back nearly a third of our outstanding shares.

This quarter, we also repaid approximately $190 million of debt by paying down $150 million of our floating rate bank term loan.

And reducing purchase money mortgages on some of our owned land by about $30 million among some other things.

We also just announced the redemption of the $250 million of five and five 8% notes that were due in 2024.

These notes will be retired in early March and we expect to incur a charge for the early extinguishment of debt of approximately $33 million in our second fiscal quarter.

Please remember this charge as you model of our second quarter.

As a result.

We expect to have retired approximately $440 million of outstanding debt in our first two quarters of fiscal year 2021.

And for a net debt to capital ratio to be in the mid 30% range at the end of the second quarter.

In fiscal year, and we expect this ratio to be in the mid to high 20% range.

Uphold with the planned retirement of our $410 million of five and seven <unk> percent notes scheduled to mature in February 2022.

We expect to reduce our capitalized interest incurred on approximately $40 million annually.

This should result in lower interest expense released to our income statement over time.

These adjustments and spend on our balance sheet have not impacted our ability to acquire land.

In fact, we took the steps while simultaneously expanding our land position.

From approximately 63200 lots.

At fiscal year end 2020 to approximately 67700 at the end of our first quarter.

We are acquiring land through more capital efficient structures.

As part of this focus we have continued to shift more of our land buys to option versus owned.

Option land was up to 46% of the total land at the end of our first quarter versus 43% at fiscal year end and 40% one year ago.

Although this ratio may fluctuate from quarter to quarter, we are targeting targeting a ratio of 50 50 in the near term.

It is important to note that approximately 11000 of our 36400 owned lots as of January 31.

We're already contracted for and in our backlog of.

Or have model or unsold spec homes on the.

Taking this into account our option land moves from 46% the 56 percentage of total.

And our supply of owned land moving from three six.

The two six years.

As Doug mentioned most of our homes take nine to 12 months the delivery. So we have strong visibility into the first half of fiscal year 2022.

The pricing power, we have experienced over the past six months is continuing.

And our backlog now stands at its highest ever in both units and dollars.

This adds to our confidence that we can significantly expand margins in the back half of fiscal year 2021.

And into the first half of fiscal year of 2022.

And that backlog is solid.

Our cancellation rate in the first quarter was one 4% of backlog and three 7% this quarter's contracts.

The units in backlog.

Are supported by an average non refundable deposits of approximately $66000.

As Doug mentioned, we are also increasing our guidance on nearly all of our key metrics for the full fiscal year.

We now expect full year deliveries of between 10000 and 10400 units or.

Our highest total ever.

With approximately 20 175 in the second quarter.

Delivery guidance for the second quarter reflects the slower COVID-19 impacted sales environment of.

Mid March through May 2020.

The second quarter delivery guidance is consistent with guidance on our fourth quarter earnings call in December where we guidance of 40% of the deliveries in the first half of fiscal year 'twenty one.

60% in the second half.

Our average delivered price for the full year.

Estimated to be between 790000 in the $810000 per home.

Average delivered price for the second quarter is expected to be between $785 and $805000.

We have increased our projected adjusted gross margin for the full fiscal year by 20 basis points the 24, 3%.

We expect adjusted gross margin to be approximately 23, 4% in the second quarter.

This implies a 25% gross margin in the second half of fiscal year 2021.

And we expect even higher gross margin in the first half of fiscal year 2022.

We expect full year interest and cost of sales to be approximately two 4%.

It is also what we expect in the second quarter versus two 5% in fiscal 2020.

As a result of the debt reductions I discussed earlier.

We expect this interest expense to continue to decline.

In fiscal 2022 and beyond.

Yeah.

The improved our SG&A guidance as a percentage of revenue for the full year by 30 basis points to approximately 11, 9%.

Our estimate for the second fiscal quarter is 13%.

We continue to look for ways, the obsolete optimize our cost structure to achieve permanent cost savings.

Including more effective marketing spend while increasing buyer engagement.

We have also reviewed our broker commission structure across all our markets.

Lowered overall costs.

In total we are projecting our full year operating margin before impairments.

<unk> by 60 basis points compared to prior guidance.

With further improvement of inspect expected in fiscal year 2022.

Yes.

We expect community count to be 320 at the end of our second quarter and 340 in fiscal year end with similar growth in fiscal year 2022.

Turning to other sources of income and cash flow.

During the first quarter.

We were able to close sales of a parking garage and two sets of retail shops associated with our Hoboken, New Jersey condo projects sooner than originally expected.

Which generated cash of $79 million on a pre tax gain.

Of approximately $38 million.

Our guidance a quarter ago anticipated one of the sales to close in Q1 and the others later in the year.

In addition, during the quarter, we generated $75 million of cash price.

By selling land, we owned in the two newly formed toll brothers apartment living joint ventures.

The partnerships in which we retained 25% of the equity.

We have now seen in the market for stabilized department strengthened.

We expect we will be able to complete additional asset sales this year.

As a result of our full year guidance for other income income from unconsolidated entities and land sales.

<unk> up $15 million to approximately $80 million for the full year with approximately $7 million projected for the second quarter.

Now, let me turn the call back to Doug.

Thank you Marty.

Simply put.

This is our time.

The actions we've taken the diversify our business over the past several years have positioned us to meet the incredible demand. We are seeing in every segment of the market.

The growing importance of home and the desire for choice are clearly aligned with our strength as a homebuilder.

And we are working hard to take additional actions to ensure continued growth.

For the future.

Before we open it up to questions.

I want to sincerely. Thank the entire toll brothers team and our trade partners for the extraordinary results we.

Produced this quarter.

Jamie let's open it up for questions.

Ladies and gentlemen, we will now begin the question and answer session.

The company is planning to end the call at 930 Eastern time, when the market open.

During the Q&A, we ask that you please limit yourself to one question and one follow up.

The ask a question you May press Star and then one using of Touchtone telephone.

If you are using a speaker phone we do ask you. Please pick up the handset before pressing the keys.

To withdraw your question you May press Star two.

At this time, we will pause momentarily to assemble the roster.

And our first question today comes from Stephen Kim from Evercore ISI. Please go ahead with your question.

Steven Mr. Mr. Kim. Please go ahead with your question.

Is it possible of your phone device.

Yes, sorry about that thank you can you hear me.

We can good morning, good morning, Yeah. So I guess, what we're hearing is all very consistent across the board.

Not terribly surprising you guys are in a really great position, obviously one.

Whats obviously.

On People's Minds. These days of though is the moving rates and you guys have a very unique niche in the market and you cater to a particular kind of buyer my general sense would be that your buyer is not going to be nearly as a phase by arise in rates if that were the transplant into the markets right.

As folks that may be a little bit lower down on the price point curve, but I would love to hear you articulate what you anticipate.

It would be the.

The hypothetical.

Or the demand response, if you were to hypothetically see.

Mortgage rates jumped lets say 50 basis points over the course of interest.

The rapidly like within a month or two.

How.

What kind of reaction.

What kind of timeframe to that reaction do you think we would say.

Sure.

More than happy to answer that question I know, it's on everyone's minds.

A quarter point move in rate on a 50.

Two of the $500000 mortgage.

The $67 a month.

I'm not worried I think chair Powell made it clear yesterday I think the administration has made it clear.

Of that they find home ownership to be extremely important to be a priority.

They've talked about of $15000 first time home owner tax credit.

I think you will continue to see relatively low rates and the move of a quarter point.

Even a half point, if we get to the mid threes.

We get to the high threes in this market I'm just not worried.

The impact to our buyer.

Is just not that significant there are so many other factors.

Now take priority.

Over a modest taking rate.

And it's the things we talked about the tightness of the resale market the.

Importance of home.

On the desire for choice.

Our buyers have a very low LTV of 69%.

17% of our buyers are all cash.

We're benefiting from tremendous equity in their existing home I mentioned, 75% of our buyers of a home to sell eight.

<unk> never thought they'd have the equity they have now.

When I went through the stats about the number of homes that are trading within two weeks on trading over asking price and theyre investing in markets that have performed well there.

They're wealthier.

And we've always seen that while I'm new.

I'm going to minimize rates I know it's.

It's one of the levers it's important but.

I'm just not worried right now from the messaging on here out of the fed from where I think the by the administration stands on home ownership and from the makeup of our buyer.

I think we're okay now with rate the same.

Moving to the floors or above.

That could be a different conversation certainly, but right now with the rate that was two and three quarters and has moved the three.

Even on.

I feel good and I think there's so many other things in our favor.

That.

We're in really good shape.

Yes, Indeed, there is always something to worry about after all but.

I agree with you you do your buyer certainly seems well equipped to handle the move like that in range I wanted to talk a little bit more about the if you could.

Segment your typical buyer for us.

I'm curious as to what Youre seeing in terms of if you could just I know we've talked about it in the past, but if you could just give us a sense for how the younger portion of your buyer pool has responded over the course of the last let's say six months versus the older portion of your buyer pool.

Whether they are processing, the pandemic and their life choices around housing differently in your view and different in a way that you think is going to be.

Different going forward, but something that's a little bit more permanent in their thinking for example, the older buyer had been we had been hearing more interested in.

Coming in closer to the city have amenities access to amenities and so forth.

And we had been hearing that the younger buyer in this as you know on previous years was sort of deferring, making the move out to the Permian I would imagine a lot of that has changed that so just love to hear you articulate what youre seeing at the heart at the older end versus at the younger end of your buyer of spectrum.

Sure so affordable luxury which is primarily focused on the.

The millennials is the fastest growing and best performing part of our business.

Whenever you come down in price you have more buyers and as we have more offerings at lower prices.

This is what we predicted.

And returning those houses faster and they are generating very high on ROE and actually.

Our exceeding our gross margin.

Underwriting significantly so that that buyer pool of 70 to 75 million millennials.

With I think the number one birth year being the 30 year old is absolutely.

In the market.

And we are benefiting from that because as we've talked about.

They are buying later in life than the boomers and they're therefore wealthier and.

And so affordable luxury.

Is there are three series BMW that can be their first home and that has a tremendous growth opportunity for our company is on.

Move up buyer, which of course is our bread and butter on what built the company is performing very very well the.

The resale markets as we talked about are so hot.

If they can sell their house quickly from more than they ever thought giving them the opportunity to move up.

The active adult 55 on over fire has been slower as they have been more careful to venture out during the pandemic.

They've been a bit more at risk as.

As the vaccine is being offered to that demographic first we are seeing that.

<unk> pick up significantly.

Our next question comes from Alan Ratner from Zelman and Associates. Please go ahead with your question.

Hey, guys. Good morning, Congrats on the great results.

Good morning. Thanks.

Thanks for all of the Great day information and color I'd Love to first talk a little bit about.

Taking a little bit more about the the land underwriting strategy in standard I think you guys kind of walk through how youre thinking about that part of the business a bit differently and certainly makes sense.

One of the things we've heard from a lot of builders is.

There you are.

Tying up larger land deals with the strength in demand. Obviously, you don't want to end up with the community that you burn through in six months or 12 months and others.

Moving further out and that's obviously not your bread and butter, but.

Within the context of the more of the off balance sheet. How are you thinking about the other components of land the theory.

Absorption rates for example, Youre pretty close to the company peak absorptions. So what are you assuming on land you are buying today going forward and gross margin. How do you think about that part of it as well taking into account all together.

Variable.

Sure so.

We tightened our underwriting significantly well.

We look at gross margin and we look at internally we call it on IRR, but it's obviously connected to ROE.

And.

About a year before the pandemic, we started focusing on it and then during the pandemic, we increased the underwriting standard even higher I am comforted that we continue to see good deal flow.

We are just restructuring.

The deal terms, either with the seller or there's less cash out front and we pay over time, we're doing significantly more third party land banking.

Where we assign the contract to a professional land banker, who then feeds us land back on an as needed basis.

And then we're doing joint ventures, with either Wall Street, private equity or with our.

Our friends in the homebuilding industry of the other builders so.

We loved the larger deals and in the old days, we would have grabbed on entire 1000 lot Master planned community at the corner of Maine, and Maine, and we understand that's how we built the company and good markets rewarded us.

And we now recognize that the smarter way to go is the call off one of our friends and split it.

And put it off balance sheet in the joint venture get project level financing and yes, we could have the lots. We had 500 instead of 1000, but we are comfortable that theyre going to have our partners going to have another opportunity like the one we offered them that they will offer back to us and here's the good news.

All of the other builders want toll brothers to be the partner we are the whole foods of the shopping center, we take the price higher.

And they certainly like that and they like the way, we market and our model homes and the action that we get so.

We are in favor and that really helps us with deal flow. So it's really all of those components the most important of which.

Is an unrelenting absolute focus on these new underwriting returns that I will not waver from.

Alan I would add the.

There is more capital coming into the space.

To land bank.

Or land to the joint ventures, we formed with the other builders.

And those other builders are.

Also focused on return on equity.

Looking for chances to share as Doug mentioned.

No that's.

Thats very helpful. I appreciate that and I think it makes a ton of sense, especially with your price point that you would be a logical partner for a lot of companies I guess, what I'm trying to figure out though is as these new land deals that you're tying up ultimately turn on turn it to the communities that youre selling homes and in delivering homes.

How was the performance of this community is going to look different based on.

The composition of the underwriting so are these going to come in at the lower gross margin because they are more capital efficient are they going to absorb at a higher pace, perhaps the cost for one reason or another based on where you are underwriting at R. R.

Is it still going to deliver on a pretty similar performance that the wholly owned deals you've been doing for decades generate as well on just curious if there's any notable differences that we should be thinking about.

There are not notable differences except.

The ROE will be higher than some of the legacy land and when you land Bank and you pay of land banker 910, 11% to carry of the land.

That could certainly have some pressure on gross margin.

The generally the bank financing is not much different in terms of cost and the public bond financing. We've enjoyed so it's really just the land banking deals that show a little pressure on the gross right I think that the joint venture deals should not the.

The better terms with the land seller should not the land banking deals will have some pressure.

But again, we have increased the underwriting metrics the.

Take a lot of that into account because I'm not going to I'm not going to compromise margin by that much do you have a rough split of the break out of land you're tying up today.

What's land bank of Whats JV, what's traditional option just curious if you can give us a rough splits there.

I don't think we are prepared to share that at this point, Alan I think I'm pretty pleased with the significant progress we've made.

Moving on.

Our optioned land up to 46%.

Over the past couple of years.

We have land bank 17 deals.

Which is nearly $800 million of A&D.

85% of which is shifted to the land banker of until we need the lots just in time and as we look into 'twenty one.

There is another half dozen deals for $150 million, 85% of which is deferred.

Got it.

Very helpful I'm going to try to sneak in one one quick one before I go.

Marty in the past you've been somewhat value conscious on the buyback very opportunistic when the stock has gotten kind of in the lower one times book range and you stepped it up quite a bit this quarter as well.

Should we expect that that same approach going forward or is it going to be a little bit more programmatic now it sounds like maybe just the return focus perhaps this is something that is going to be a little bit more agnostic devaluation or am I thinking about that wrong.

I think it's going to be more <unk>.

Grammatically.

The hope not to have the opportunity to be opportunistic.

Got it.

Yeah.

Thanks, a lot guys. Good luck. Thanks.

Thanks.

Our next question comes from Mike Dahl from RBC Capital markets. Please go ahead with your question.

Okay. Thanks for taking my questions.

Good stuff there.

I wanted to follow up on.

On the environment from a mortgage standpoint, though less about rate and.

And more about the appraisal side and just given how rapid some of the price increases of Ben on the new home side.

And the existing home side just curious.

Are you starting to hear anything about <unk>.

Phrasal issues in the.

The old or do you think by and large appraisal given the.

The tightness in the market and the strength that's broad based.

Kept pace with what's happening on the price side.

A great question I, just asked the ops team nationwide yesterday.

And the.

We are not having any appraisal issues.

Around the country, we do list.

We get our we get our.

Homes offered for sale and our closings into the MLS rapidly. So the appraisers have an opportunity to see comps pretty quickly that that are that are in the MLS obviously, the strength of the resale market.

And the.

The increase in prices of the resale market is helping us.

So far were okay.

Our mortgage group does a nice job of working through any of those sorts of issues kind of before they arise too it's nice to be our own comps and to control of the mortgage process.

Got it and just a quick follow up on that.

The similar in terms of your customers that have a home to sell no appraisal issues on their end either in terms of getting the solid comp.

We have not heard that.

Okay. My second question.

Because I think.

Potentially.

B of a little sensitivity seems to your earlier comments talking about the non binding.

And I just wanted to kind of frame frame.

Frame that up by the you obviously highlighted some of the weather issues that have been widespread but also I think the comps.

Throughout your fiscal second quarter Theres quite a dramatic.

Different in terms of the first half of the quarter versus the second half of the quarter, which was down I think by two thirds of year on.

Yes, so when.

When we're thinking about sales pace for the for the quarter. You just did kind of of three months in fiscal <unk> you'd normally be up sequentially.

<unk>.

Which would imply obviously well north of that of course.

Mid <unk> range.

New you quoted for non binding is that is that a fair way to think about kind of sequential pace and what youre seeing right. Now is maybe just a function of cash.

Comps on weather.

Well on I'm delighted.

With 34% deposit growth of 37% same store.

The light we have one third of our communities on allocation.

We have.

Effectively closed.

For a month and then we reopened the two homes two home sites on the first Saturday of a month and half of 30 people interested and raise the price.

Two by 11 in the morning, and shutter back down so.

And we're doing that to drive price, we're doing that to make sure. We have roads in front of lots, we're doing that to manage extended backlogs where we're at.

So.

Considering.

The business right now our ability to drive price on.

Our price was up.

Significantly in Q4, and even more in Q1 of 2021.

We have great pricing power, we're taking advantage of it we're managing our backlogs.

And we had horrible weather for two weeks in.

In many parts of the country, where we operate so.

I am.

That's one of the best metrics I've looked at as being up 37% true.

For these past three weeks and remember.

From mid March until mid May.

We really got hurt by Covid last year.

We didn't have the starter houses at the other builders had finished specs where the renter could move into a finished home in a month or two.

For the same monthly payment so.

Just remember the second quarter comp is very easy for us as we move forward.

No that wasn't your question, but I'm, just reminding everyone of that.

But in terms of.

Your question is how I should look at the last three weeks.

Very very pleased.

Okay, Okay that makes sense and yes.

The comps.

Certainly sir.

The only cognizant of that that was actually what.

More of what I was what I was asking all of that makes sense and track.

The market.

Any kind of.

Deceleration versus what you just put up but I think.

Yes.

The tracking towards an incredibly strong quarter. So thanks and good luck.

Thank you.

Our next question comes from Susan Macquarie from Goldman Sachs. Please go ahead with your question.

Thank you good morning, everyone.

Good morning, Susan.

On my first question is just you commented on some of the work you're doing around the cost structure of looking at the broker policy standard. There can you give us a little more color on that and maybe how we should be thinking about that flowing through over time.

Sure so traditionally.

Third party.

Sure.

Brokers represented about 60%, 65% of our sales the client comes in with the reorder.

And we paid between two and a half in between two and 3% depending upon the local market to that third party reorder.

We have kept an eye on our competition what the other new homebuilders are doing.

We have kept an eye on the number of clients that now come in without of broker.

And where appropriate we're not a pioneer in this regard we're certainly not going to lead the way are appropriate based upon what other builders are doing on what local market.

Conditions are we are lowering net third party broker Commission.

And that of course drops right to the bottom line.

Sometimes the lowering is.

What it's applied to it may be applied just to the base House went in the past it was applied to the total sale price.

The cases, it may be based sales plus structural options, but not interior options. So we're getting more standardized around the country and it being applied to the base sales price.

Gotcha, Okay and then.

<unk> is the other big topic that people have been talking about of course is inflation.

Especially as we've seen of lumber prices rising over the last couple of weeks on hitting record levels. There can you give us some color around.

Around how you're thinking about inflation. This year I know on the last call. You mentioned, you expect EBITDA to be up about 5% between labor and materials.

Has that changed at all.

So can you just talk to some of the.

From there.

Sure so.

Yes.

Number is up.

And we.

We expect labor to also be up a bit more modestly because of labor went up fairly significantly pre COVID-19 and so we really just haven't seen.

The labor number go up all of that much more.

But we are very confident that we have properly budgeted.

And our backlog and in our future sales.

For additional contingency to.

The cover.

On the lumber prices were seen plus increases in labor and other materials. So when we talk about our gross margin in the second half of the year and then even higher gross margin in 'twenty two because of the nine to 12 month build time and the higher pricing power we've had recently.

That is also building in.

But we think are proper contingencies.

To the cost side.

Gotcha, Okay, alright, so it sounds like generally speaking, maybe a little higher than that 5% or so but nothing that you can offset with the pricing.

Yes.

Nice increases have been able to offset what we've seen and what we expect to see in lumber labor and materials.

Okay Alright, Thank you guys. Good luck.

Actually more than offset Susan sorry about that more than offset which is why we're showing the gross margin improvement.

Okay that makes sense alrighty.

Once again, if you would like to ask a question. Please press star and then one once again, we are planning to end the call at 930, when the market opens and we do ask you. Please limit yourself to one question and one follow up.

Our next question comes from Jade Rahmani from <unk>. Please go ahead with your question.

Thank you very much.

Seeing the pick up on the New York on the sales side it seems like the city living.

That's true, but not sure how that plays out in terms of the number of joint ventures that you have.

What totally on.

We are.

We have 33 agreements in the first quarter coming out of New York City.

Five buildings.

That includes Jersey city Hoboken in Manhattan.

On that.

That's similar to the sales we had a year ago pre COVID-19, so I'm I'm very pleased.

With the improvement we've seen in New York recently.

Thank you and then just as a follow up can you remind us how much capital is currently invested in each of the city living in apartments.

The businesses and what you expect over the next 12 months just trying to keep track of all of the joint venture announcements that have been made recently it seems like you're continuing to make a lot of progress there.

Sure in city living.

Half of approximately $377 million invested.

$31 million of that is in joint venture of 144 is on balance sheet deals.

They're essentially fully completed and we're just in the sell on phase and 200 million is for land that we own for future projects.

Hartman living business at $700 million.

<unk>.

Made up of around $6 million in stabilized apartment projects that actually have an unrealized gain it's somewhere between $75 million of $100 million.

There is $122 million in projects that are in lease up and we will refinance out quite a bit of that when it gets to a stabilized level and then there is $557 million in deals where we are soliciting other joint venture partners and we believe that $700 million comes down to 400 to 400.

Third 50 million as we sell stabilized properties.

And as we put it we put land in the joint ventures with third parties, where we only keep 25% of the equity and when we refinance other properties that should happen over the next 12 months to 24 months.

Thank you very much.

Welcome. Thank you. Our next question comes from Nishu Sood from UBS. Please go ahead with your question.

Thanks.

Wanted to ask about the cash flow generation in the 'twenty, one after generating $1 billion last year understandable, just given the volatility $750 million is an impressive number for 'twenty, one, especially considering how much backlog you have to build out.

Just how strong your demand is generally running and obviously the land investments increasing as well can you just walk us through.

The kind of components there of land inventory flow of that would get you to that $750 million.

Well I think it's really a function of.

The income we're generating some of the liquidations, we talked about of some of the non core assets and then the restructuring of the way we are buying land to buy it later and just in time.

So all of those things.

Is the confidence for that kind of projection, we're still going to spend of 1 billion won to buy land, we're still going to spend of 1 billion. One 2 billion two to develop that land, but even after all of that will have $750 million of positive cash flow.

Got you got you and the.

Second question was just on the.

Doug you mentioned earlier, a third of your communities on allocation.

Obviously, a good a good a good issue to have.

Given that the communities, they're selling out.

Faster than expected.

Does that increase as the year goes on here I mean, obviously the sales pace continues to just run run very very strong.

And how much of a governor does that the comp on your on your absorption pace as we go through the next couple of quarters.

We're just.

We're just focused on bringing demand down to the right level to be able to build through it and.

Our backlog is up 38% were comfortable that that that can be built to right now we're at a low 30 per year.

Average community settlement taste.

This company has been in the high Thirty's historically, so we have the capacity.

To manage this growth by building it efficiently and delivering homes within the timeframe that we have represented to the client.

But we certainly recognize that this.

It's 50 60, 80% order growth.

We'll come down part of that is through allocation part of that is through continued price increases so I'm very confident.

Again, the second quarter of the very easy comp. So that number is going to be distorted that order growth will be distorted, but as we get into the back.

The latter part of the year Youre going to see that order growth come down on.

To the level that we're extremely comfortable.

With we have some new operations that.

I've opened recently in some new markets, where since the basis. So low because we just opened you can show pretty significant order growth and still build to it.

Because it's a bit of of startup or it's only a couple of years old and so that factors into some of these numbers.

<unk>.

Overall, we keep a keen eye on it and I think we're doing exactly the right thing with certain communities being allocated.

And we will continue to focus as we move forward balancing price with pace and I will mention that the community count growth we have mentioned.

The assumes this continued strong pace. So we have the land even with selling out faster than we had anticipated.

To grow this company by the numbers that we represented both in 2021 and we have the land.

And we know we will buy more land and we may even buy a builder or two as we've done on the path to grow 22, more but we have the land today.

To match that growth that.

So we talked about from the balance of 'twenty, one through 'twenty two.

Got you that's helpful. Thanks, so much.

Youre welcome. Thank you.

Our next question comes from Jack from Banco from Sig. Please go ahead with your question.

Hey, guys. Thanks for fitting me in.

Wanted to the conversation to the to the inventory outside.

You talk about.

So, let's talk about traditional toll versus the more lifestyle of affordable luxury or new toll or however, you want to classify it.

What's the mix of communities today.

Where does that go in 'twenty, one 'twenty two how.

How much shorter cycle time is there between the traditional toll product.

And more of the affordable luxury can we use the 25% first time buyers of proxy for that mix I mean, I imagine you probably have some empty nester move downs into that productivity just trying to because it is part of the ROE conversation just understanding the actual mix of inventory, where it's been where it's headed.

And how to think about that.

Sure. So Marty is going to give the mix, but I'll quickly answer your question on cycle time affordable luxury is running about 35 days faster shorter cycle time.

Than our traditional business and thats getting even better as we get better at that business, but I will also say even with the traditional luxury business the bigger homes.

<unk> of this optimization rationalization of plans we've talked about in.

And streamlining some systems in the field, even with the tighter market. We are continuing to see our cycle time come down in that business. We mentioned last quarter. It was down and it's down even more today.

Good morning can you give the mix sure so.

Affordable luxury.

On.

This year is around 42% of communities.

It should grow to 46 next year.

Luxury is around 37%.

Of communities this year and we will go down the 30% next year.

And active adult.

Is it 21% this year and 24% next year.

And I want to point out of affordable luxury still has choice and <unk>.

Total advantage, we're so proud of of choice still applies to affordable luxury.

Got it I'll leave it there because we're at 930 I'll catch you offline. Thanks guys.

Thank you thanks, Jeff.

And our next question comes from Jay Mccanless from Wedbush Securities. Please go ahead with your question.

Just quickly if lumber prices were to fall instead of continue to move higher how quickly could you all realized some of those savings in the gross margin.

Very quickly.

Okay.

I think it's I think it's six to nine months out the we'd start to see the benefit because of the houses that are in production of already of the lumber contracted before.

I meant I meant on the net sales of of course if the.

It's the framers are out there.

The lumber has been bought obviously not but in terms of.

The next home sold.

Youre going to see it right away in the margin because that.

That number doesn't hit for a number of months, yes, you'll see it.

Our projections in our budgets almost immediately.

So nine to 12 months later is when it gets through the income statement of course, because it takes that long to build but.

But if the lumber has not yet been contracted for.

And then we're going to obviously take advantage of it quickly we use the contract long term for lumber the tie it up in the old days and now we're working off of the shortest possible contract. We can so that we can be nimble and take advantage of lower pricing. When it comes we also have our panel on truss plants that handle the Midwest.

The northeast and mid Atlantic operations.

Those plants are all on rail lines, where we're buying lumber direct by the railcar out of the Pacific Northwest and out of the southern States of the U S M.

And.

I think we were able to beat.

Because we're in that business, we have I think of little bit more visibility and the opportunity to manage manage those markets even better.

Okay, great. Thanks from me and I appreciate it.

And ladies and gentlemen, with that we will end today's question and answer session I would like to turn the conference call back over to management for any closing remarks.

Amy Thank you very much thanks, everyone.

We appreciate very much your interest.

<unk>.

Yes.

Stay warm for those of you that are in places like Philadelphia.

Great great. Thanks take care.

And ladies and gentlemen, with that we'll conclude today's conference call. What are your thank you for attending you may now disconnect your lines.

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Good morning, everyone and welcome to the toll brothers.

First quarter earnings conference call.

All participants will be in a listen only mode.

Need assistance, please signal our conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Ask the question you May Press Star and then one on your telephone keypad.

The all of your questions you May press Star two.

Please note today's event is also being recorded and at this time I'd like to turn the conference call over to Douglas yearly CEO. Please go ahead.

Thank you Jamie welcome and thank you for joining us I Hope you your families and your colleagues are doing well.

With me today are Marty Connor, Chief Financial Officer, Fred Cooper, Senior VP of Finance and Investor Relations, Wendy Marlett, Chief Marketing Officer, and Gregg Ziegler senior VP and treasurer.

Before I start I ask you to read the statement on forward looking information in our earnings release of last night 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 and financial markets, the impact of the pandemic and many other factors beyond our control that could significantly affect future results.

I hope you've had a chance to read our earnings release from last night.

We are very pleased with our first quarter results, we achieved record first quarter order growth and exceeded our guidance on nearly every metric as we continued to benefit from a market that is playing to our strength.

Our business is performing at a very high level.

Pretax income rose, 93% and earnings per share rose, 85% in the quarter compared to one year ago.

We are increasing gross margin leveraging SG&A with higher revenues and greater cost control and improving our return on equity.

We are raising full fiscal year guidance across nearly all of our key metrics and expect to deliver the most homes on our history and fiscal 2021.

Demand for new homes remains incredibly strong and we are enjoying pricing power in nearly all of our markets.

And our first quarter net signed contracts rose, 68% in dollars and 59% on units against the tough comparison in fiscal year 2000, Twenty's first quarter on orders grew 31% over Q1 of fiscal 2019.

Three weeks into our second quarter, our non binding reservation deposits are up approximately 34% overall and 38% same store over another difficult comp to last year and despite the cold and snowy weather impacting about one third of our markets over the past.

Few weeks.

Our backlog, which is up 37% of $1, 38% in units provides the visibility and as the significant gross margin expansion. We project this year, especially in our third and fourth quarters as we deliver homes sold after last may.

As a reminder, most of our homes take nine to 12 months to deliver <unk>.

<unk> on this backlog in the current market dynamics.

Where we continue to experience strong pricing power, we expect further gross margin expansion into fiscal year 2022.

Our results reflect a robust housing market that continues to benefit from favorable demographic trends, a very tight supply of for sale of homes stemming from a decade of underproduction.

Low mortgage rates and a renewed appreciation for the importance of home.

On the supply remains tight okay.

According to data released by the National Association of Realtors last week. There is just 1.9 month's supply of homes on the market.

The record low.

According to redfin nearly half of all resale homes on the market or placed under contract in less than two weeks.

With one third of all re sales selling above the asking price.

Low mortgage rates continue to support the housing market and are driving affordability for more upscale homes and more upgrades.

Interest rates have remained low for an extended period of time the.

The new administration and the fed are both signaling a continuation of accommodative policy.

These trends clearly favor us for the following reasons.

Approximately three quarters of our buyers of of home to sell.

The rising home prices and limited supply means our buyers can sell of their existing homes quickly and at appreciated values.

A limited supply of existing homes has also pushing buyers frustrated with the unpredictability and frantic pace of the resale market to the.

The more systematic process of new home sales.

In addition at toll brothers, our build to order model offers buyers the opportunity to design their homes from the ground up allowing them to customize their homes to match their evolving lifestyle.

This is the number one toll brothers advantage choice.

And it has never been more important to our homebuyers.

Our customers increasingly want the ability to personalize their homes and they have the means to do it.

Tend to enjoy greater job stability of.

More flexibility to work from home and have wealth accumulated from rising home prices and the stock market.

This quarter, our buyers added on average $170000 or approximately 26% of the base price and lot premiums options and upgrades.

This is up from about 22% on the first quarter of fiscal year, 2020, and our long time average of 21%.

Our customers are spending more as they customize their homes, which is generally accretive to our gross margin.

We are also seeing a positive impact from demographic and migration trends.

Over the past several years, we have expanded our geographic footprint and home offerings.

We now operate in over 50 markets in 24 states and have communities in both high growth and of high barrier to entry markets, where on a tremendous brand and wide range of price points enables us to serve a broad spectrum of buyers.

As the 72 million millennials transitioned to homeownership are growing of affordable luxury product lines are designed to appeal to these buyers the.

This quarter of approximately 25% of our customers were first time buyers.

While we are eagerly looking forward to the end of this pandemic. We believe it has cemented the value of homeownership in the minds of a large portion of the U S population.

The pandemic has made the consumer appreciate the home more and has made work from home a more widespread and permanent option, especially among our consumer base.

These trends combined with the significant on new supply of homes for sale.

The point long term sustained growth in the new home market.

And we are well positioned for this growth.

Our deep land position provides the foundation to grow our business.

At the end of our first fiscal year.

We owned or controlled approximately 67700 lots and we're selling from 309 communities.

Even though we are selling out of communities faster than anticipated, we expect to grow community count to approximately $3 20 at the end of Q2 and $3 40 by fiscal year end, which is an 8% full year increase from.

From the end of fiscal year 2020.

Based on the land, we already own or control. We are confident that we can continue to grow community count.

At a similar pace.

In fiscal year 2022.

We continue to pursue profitable and sustainable growth.

While remaining laser focused on improving capital efficiency and return on equity.

Over the past year, we have completely revamped our land underwriting standards and are beginning to reap the benefits of this focus on capital efficient returns we.

We are structuring land acquisitions much more efficiently.

Paying out less cash upfront on negotiating deferred payment terms with salaries and using more third party land banking joint venture an option arrangements in short we are controlling more of the land with fewer dollars, which we expect to lead to higher returns.

Our increased focus on more affordable luxury home should also result in shorten building cycle times improved.

<unk> inventory turns lower building costs and higher margins over time.

Our expansion into new geographies and price points with lower upfront land costs.

It also benefit return on equity long term.

We believe the combination of these positive market conditions, and our relentless focus on return on equity and internal operational efficiencies will pay off in the short and long term with sustainable improved results.

In summary, we expect fiscal year 2021 to be a tremendous year for toll brothers and we are laying the foundation for an even better 2022.

Now, let me turn it over to Marty.

Thanks, Doug.

Our business is really firing on all cylinders.

<unk> are strong and margins are expanding.

G&A is well controlled and being leverage.

We are generating significant cash flow and this quarter, we bought back stock pay down debt and grew our land holdings.

And we are improving our return on equity.

It is our number one priority.

We expect to grow our return on beginning of equity by approximately 425 basis points in fiscal year 2021 and.

And we see further improvement in fiscal year 2022.

The improve our ROE.

We are buying land more efficiently expanding our affordable luxury offerings controlling cost and driving towards higher gross margins.

We have streamlined and optimized much of our product offerings, which should allow us to reduce cost and cycle times without sacrificing the high quality customization process. This distinguishes our home buying experience.

Our efforts in this area continue as we seek the further refined and streamlined our products and processes.

In addition to these operational initiatives to improve our capital efficiency, we are taking steps to improve our balance sheet and reduce interest expense.

In fiscal year of 2020, we generated over $1 billion of net cash from operating activities of record.

In fiscal 2021, we are forecasting approximately $750 million of operating cash flow.

Our strong cash generation in fiscal 2020 enabled us to balance land and builder acquisitions with returning cash to our stockholders, while prudently managing our debt.

That will continue in fiscal year 2021.

And our first quarter of fiscal year, 2021, we repurchased $179 $4 million of our stock or roughly 3% of outstanding shares.

On an average price of approximately $44 54 per share.

Since fiscal 2016.

<unk> bought back nearly a third of our outstanding shares.

This quarter, we also repaid approximately $190 million of debt by paying down of $150 million of our floating rate bank term loan and.

And reducing purchase money mortgages on some of our own land by about $30 million among some other cities.

We also just announced the redemption of the $250 million.

Of five and five 8% notes that were due in 2024.

These notes will be retired in early March and we expect to incur a charge for the early extinguishment of debt of approximately $33 million in our second fiscal quarter.

Please remember this charge as you model of our second quarter.

As a result.

We expect to have retired approximately $440 million of outstanding debt in our first two quarters of fiscal year 2021.

And for a net debt to capital ratio to be in the mid 30% range at the end of the second quarter.

In fiscal year, and we expect this ratio to be in the mid to high 20% range.

Coupled with the planned retirement of our $410 million of five and seven <unk> percent notes scheduled to mature in February 2022.

We expect to reduce our capitalized interest incurred on.

On approximately $40 million annually.

This should result in lower interest expense released to our income statement over time.

These adjustments and spend on our balance sheet have not impacted our ability to acquire land.

In fact, we took the steps while simultaneously expanding our land position.

From approximately 63200 lots.

At fiscal year end 2020 to approximately 67700 at the end of our first quarter.

We are acquiring land through more capital efficient structures.

As part of this focus we have continued to shift more of our land buys to option versus owned.

Option land was up to 46% of the total land at the end of our first quarter versus 43% and fiscal year end and 40% one year ago.

Although this ratio may fluctuate from quarter to quarter, we are targeting targeting a ratio of 50 50 in the near term.

It is important to note that approximately 11000 of our.

Our 36400 owned lots as of January 31.

We're already contracted for and in our backlog of.

Or have model or unsold spec homes on the.

Taking this into account our option land moves from 46% the 56% of total.

On our supply of owned land moving from three six standard.

The two six years.

As Doug mentioned most of our homes take nine to 12 months the delivery. So we have strong visibility into the first half of fiscal year of 2022.

The pricing power, we have experienced over the past six months is continuing.

And our backlog now stands at its highest ever in both units and dollars.

This adds to our confidence that we can significantly expand margins in the back half of fiscal year 2021.

And into the first half of fiscal year of 2022.

And that backlog is solid.

Our cancellation rate in the first quarter was one 4% of backlog and three 7% this quarter's contracts.

The units in backlog.

Are supported by an average nonrefundable deposit of approximately $66000.

And as Doug mentioned, we are also increasing our guidance on nearly all of our key metrics for the full fiscal year.

We now expect full year deliveries of between 10000 and 10400 units are.

Our highest total ever.

With approximately 20 175 in the second quarter.

Delivery guidance for the second quarter reflects the slower COVID-19 impacted sales environment.

The mid March through May 2020.

The second quarter delivery guidance is consistent with guidance on our fourth quarter earnings call in December where we guidance of 40% of deliveries in the first half of fiscal year 'twenty one.

And 60% in the second half.

Our average delivered price for the full year.

It is estimated to be between 790000 in the $810000 per home.

Average delivered price for the second quarter is expected to be between $785 and $805000.

We have increased our projected adjusted gross margin for the full fiscal year by 20 basis points to 24, 3%.

We expect adjusted gross margin to be approximately 23, 4% in the second quarter.

This implies a 25% gross margin in the second half of fiscal year 2021.

And we expect even higher gross margin in the first half of fiscal year 2022.

We expect full year interest and cost of sales to be approximately two 4%.

This is also what we expect in the second quarter versus two 5% in fiscal 2020.

As a result of the debt reductions I discussed earlier.

We expect this interest expense to continue to decline.

In fiscal 2022 and beyond.

The improved our SG&A guidance as a percentage of revenue for the full year by 30 basis points.

Approximately 11, 9%.

Our estimate for the second fiscal quarter is 13%.

We continue to look for ways to also optimize our cost structure to achieve permanent cost savings.

Including more effective marketing spend while increasing buyer engagement.

We have also reviewed our broker commission structure across all our markets and lowered overall costs.

In total we are projecting our full year operating margin before impairments improved by 60 basis points compared to prior guidance.

With further improvement of inspect expected in fiscal year of 2022.

We expect community count to be 320 at the end of our second quarter and 340 in fiscal year end with similar growth in fiscal year 2022.

Turning to other sources of income and cash flow.

During the first quarter.

We were able to close sales of the parking garage and two sets of retail shops associated with our Hoboken, New Jersey condo projects sooner than originally expected.

Which generated cash of $79 million on a pre tax gain of.

Of approximately $38 million.

Our guidance a quarter ago anticipated one of the sales to close in Q1 and the others later in the year.

In addition, during the quarter, we generated $75 million of cash by.

By selling land, we owned in the two newly formed toll brothers apartment living joint ventures.

The partnerships in which we retained 25% of the equity.

We have now seen the market for stabilized department strength.

We expect we will be able to complete additional asset sales this year.

As a result of our full year guidance for other income income from unconsolidated entities and land sales.

Moves up $15 million to approximately $80 million for the full year with approximately $7 million projected for the second quarter.

Now, let me turn the call back to Doug.

Thank you Marty.

Simply put this is our time.

The actions we've taken the diversify our business over the past several years have positioned us to meet the incredible demand. We are seeing in every segment of the market.

The growing importance of home and the desire for choice are clearly aligned with our strength as a homebuilder.

And we are working hard to take additional actions to ensure continued growth.

For the future.

Before we open it up to questions.

I want to sincerely. Thank the entire toll brothers team and our trade partners for the extraordinary results.

We produced this quarter.

Jamie let's open it up for questions.

Ladies and gentlemen, we will now begin the question and answer session.

The company is planning to end the call at 930 Eastern time on the market open.

During the Q&A, we ask that you please limit yourself to one question and one follow up.

The ask a question in the press Star and then one using of Touchtone telephone.

If you are using a speaker phone we do ask you. Please pick up the handset before pressing the keys.

To withdraw your question you May press Star two.

At this time, we will pause momentarily to assemble the roster.

And our first question today comes from Stephen Kim from Evercore ISI. Please go ahead with your question.

David Mr. Mr. Kim. Please go ahead with your question.

Is it possible your phone device.

Yes, sorry about that thank you can you hear me.

We can good morning, good morning, Yeah. So I guess, what we're hearing is all very.

Consistent across the board.

Not terribly surprising you guys are in a really great position, obviously one the.

Whats obviously on.

On People's Minds. These days, though is the moving rates and you guys have a very unique niche in the market and you kind of you.

Cater to a particular kind of buyer.

General sense would be that your buyer is not going to be nearly as phased by arise in rate, but where the transplant into the mortgage rate.

As folks that may be a little bit lower down on the price point curve, but I would love to hear you articulate what you anticipate.

Would be the.

Hypothetical.

Our the demand response, if you were to hypothetically see.

Mortgage rates jumped lets say 50 basis points over the course of of just really rapidly like within a month or two.

How.

What kind of reaction.

Would it.

What kind of timeframe to that reaction do you think we would say.

Sure.

More than happy to answer that question I know, it's on everyone's minds.

A quarter point move in rate on a 50000.

Three of the $500000 mortgage.

The $67 a month.

I'm not worried.

Sure Paul made it clear yesterday I think the administration has made it clear.

That's a fine home ownership to be extremely important to be a priority.

They've talked about of $15000 first time home owner tax credit.

I think you will continue to see relatively low rates and the move of a quarter point.

Even a half point, if we get to the mid threes.

If we get to the high threes in this market.

Just not worried.

The.

The impact to our buyer.

It's just not that significant there are so many other factors that new.

Now take priority over a modest taking rate.

The things we talked about the <unk>.

Tightness of the resale market the importance of home.

On the desire for choice.

Our buyers have a very low LTV, 69%.

17% of our buyers are all cash.

Theyre benefiting from tremendous equity in their existing home I mentioned, 75% of our buyers of of home to sell eight net result, they'd have the equity they have now.

When I went through the stats about the number of homes that are trading within two weeks on trading over asking price.

They are invested in markets that have performed well.

They are wealthier.

And we've always seen that while I'm not going to minimize rates I know it's the it's.

It's one of the levers it's important but on.

I'm just not worried right now from the messaging on here out of the fed from where I think the by the administration stands on home ownership and from the makeup of our buyer.

I think we're okay now with rates the same.

Move into the floors or above.

That could be a different conversation certainly, but right now with the rate that was two and three quarters and has moved to three.

Stephen on.

I feel good and I think there's so many other things in our favor.

That.

We're in really good shape.

Yes, Indeed, there is always something to worry about after all but yes I agree with you you do your buyer certainly seems well equipped to handle the move like that in range I wanted to talk a little bit more about the second.

Segment your typical buyer for us.

Curious as to what Youre seeing in terms of if you could just I know we've talked about it in the past, but if you could just give us a sense for how the younger portion of your buyer pool has responded over the course of the last let's say six months versus the older portion of your buyer pool.

Whether they are processing, the pandemic and their life choices around housing differently in your view and the upfront in a way that you think is going to be.

Different going forward, but something thats, a little bit more permanent.

Theyre thinking for example, the older buyer had been we had been hearing more interested in.

Coming in closer to the city have amenities access to amenities and so forth.

And we had been hearing that the younger buyer in this as you know on previous years was sort of deferring, making the move out to the Permian I would imagine a lot of that has changed at all just love to hear you articulate what youre seeing at the heart at the older end versus the younger end of your buyer of spectrum.

Sure so affordable luxury which is primarily focused on the.

The millennials is the fastest growing and best performing part of our business.

Whenever you come down in price you have more buyers and as we have more offerings at lower prices and this is what we predicted.

And returning those houses faster and they are generating.

Very high on ROE and actually.

Our exceeding our gross margin on.

Underwriting significantly so that that buyer pool of 70 to 75 million millennials.

With I think the number one birth year being the 30 year old is absolutely.

In the market.

And we are benefiting from that because as we've talked about.

They are buying later in life than the boomers and they're therefore wealthier and.

And so of affordable luxury is the.

There are three series BMW that can be their first home and that has a tremendous growth opportunity for our company. The move up buyer, which of course is our bread and butter and what built the company is performing very very well.

The resale markets as we talked about are so hot that they can sell their house quickly from more than they ever thought giving them the opportunity to move up.

The active adult 55 and over fire has been slower as they have been more careful to venture out during the pandemic because they've been a bit more at risk as the vaccine is being offered to that demographics first we are seen.

That.

Action pick up significantly.

Our next question comes from Alan Ratner from Zelman and Associates. Please go ahead with your question.

Hey, guys. Good morning, Congrats on the great results.

Good morning.

Thanks for all of the Great information and color I'd Love to first talk a little bit about.

<unk> taken a little bit more about the the land underwriting strategy in standard of I think you guys kind of walk through how youre thinking about that part of the business a bit differently.

Makes sense.

One of the things we've heard from a lot of builders is.

There you are tying up larger land deals with the strength in demand. Obviously, you don't want to end up with the community that you burned through in six months or 12 months and others are moving further out and that's obviously not your bread and butter, but.

Within the context of the more of the off balance sheet. How are you thinking about the other components of land the.

Absorption rate for example, Youre pretty close the company peak absorption. So what are you assuming on land you are buying today going forward and gross margin. How do you think about that part of it as well taking into account all the other variables.

Sure so.

We tightened our underwriting significantly.

We look at gross margin and we look at internally we call it on IRR, but it's obviously connected to ROE.

And.

About a year before the pandemic, we started focusing on it and then during the pandemic, we increase the underwriting standard even higher.

Im comforted that we continue to see good deal flow.

We are just restructuring.

The deal terms, either with the seller or theres less cash out front and we pay over time, we're doing significantly more third party land banking.

Where we assign the contract to a professional land banker, who then feeds us land back on an as needed basis.

And then we're doing joint ventures, with either Wall Street, private equity or with our.

Our friends in the homebuilding industry of the other builders. So we love the larger deals and in the old days, we would have grabbed on entire 1000 lot Master planned community at the corner of Maine, and Maine, and we understand that's how we built the company and good markets rewarded us.

And we now recognize that the smarter way to go is the call off one of our friends and split it.

And put it off balance sheet in the joint venture get project level financing and yes, we could have the lots. We had 500 instead of 1000, but we are comfortable that theyre going to have our partners going to have another opportunity like the one we offered them that they will offer back to us and here's the good news.

All of the other builders want toll brothers to be the partner we are the whole foods of the shopping center, we take the price higher.

And they certainly like that and they like the way, we market and our model homes and the action that we get so on.

We are in favor and that really helps us with deal flow. So it's really all of those components the most important of which.

Is an unrelenting absolute focus on these new underwriting returns that I will not waver from.

Alan I would add that.

There is more capital coming into the space.

To land bank or <unk>.

Land to the joint ventures, we form with the other builders.

And those other builders are also focused on return on equity.

Looking for chances to share as Doug mentioned.

No.

Helpful. I appreciate that and I think it makes a ton of sense, especially with your your price point that you would be a logical partner for a lot of companies I guess, what I'm trying to figure out though is as these new land deals that you're tying up ultimately turn on turn it to the communities that youre selling homes and in delivering homes and how was the performance of this community is going to look different.

Just on the.

The composition of the underwriting so are these going to come in at the lower gross margin because they are more capital efficient are they going to absorb at a higher pace, perhaps because for one reason or another based on where you are underwriting at R. R.

Is it still going to deliver on a pretty similar performance that the wholly owned deals you've been doing for decades generate as well on just curious if there's any notable differences that we should be thinking about.

There are not notable differences except.

The ROE will be higher.

On some of the legacy land and when you land Bank and you pay of land banker 910, 11% to carry of the land on.

Of that could certainly have some pressure on gross margin.

The generally the bank financing is not much different in terms of cost and the public bond financing. We've enjoyed so it's really just the land banking deals that show a little pressure on the gross right I think that the joint venture deals should not the better terms with the land seller should not.

The land banking deals will have some pressure.

But again, we have increased the underwriting metrics.

It takes a lot of that into account because I'm not going to comment I'm not going to compromise margin. How much do you have a rough split of the break out of land you're tying of today.

What's land bank of Whats JV, what's traditional option just curious if you can give us a rough splits there.

I don't think we are prepared to share that at this point, Alan I think I'm pretty pleased with the significant progress we've made.

Moving on.

Our optioned land up to 46%.

Over the past couple of years.

We of land Bank 17 deals.

Which is nearly $800 million of A&D.

85% of which is shifted to the land banker until we need the lots just in time as we look into 'twenty one.

There is another half dozen deals for $150 million, 85% of which is deferred.

Got it.

Very helpful I'm going to try to sneak in one one quick one before I go.

Marty in the past you've been somewhat value conscious on the buyback very opportunistic when the stock has gotten kind of in the lower one times book range and you stepped it up quite a bit this quarter as well.

Should we expect that that same approach going forward or is it going to be a little bit more programmatic now it sounds like maybe just the return focus perhaps this is something that is going to be a little bit more agnostic devaluation or am I thinking about that wrong.

I think it's going to be more.

Programmatic.

We hope not to have the opportunity to be opportunistic.

Got it.

Yeah.

Thanks, a lot guys and good luck.

Thanks.

Our next question comes from Mike Dahl from RBC Capital markets. Please go ahead with your question.

Okay. Thanks for taking my questions.

The good stuff there.

I wanted to follow up on.

On the environment from a mortgage standpoint, though less about rate and more about the appraisal side and just given how rapid some of the price increases have been on the new home side.

And the existing home side just curious.

Are you starting to hear anything about.

Appraisal issues in the field or do you think by and large appraisals given the.

On the tightness in the market and the strength Thats broad based.

Kept pace with what's happening on the price side.

A great question I, just asked the ops team nationwide yesterday.

And.

We are not having any appraisal issues.

Around the country, we do list.

We get our we get our our homes offered for sale and our closings into the MLS rapidly.

So the appraisers have an opportunity to see comps pretty quickly that that are that are in the MLS obviously, the strength of the resale market.

And the.

The increase in prices in the resale market is helping us.

So far were okay.

Our mortgage group does a nice job of working through any of those sorts of issues kind of before they arise too it's nice to be our own comps and to control of the mortgage process.

Got it and just a quick follow up on that.

It's similar in terms of your customers that have a home to sell.

<unk> appraisal issues on their end of either in terms of getting the solid comp.

We have not heard that.

Okay. My second question.

I think.

Potentially.

Might be a little sensitivity to your earlier comments talking about the non binding.

And I just wanted to kind of frame.

M that up by the you obviously highlighted some of the weather issues that have been widespread but also I think the comps.

Throughout your fiscal second quarter Theres quite a dramatic.

The difference in terms of the first half of the quarter versus the second half of the quarter, which was down I think by two thirds of year on.

Yes, so when.

When we're thinking about sales pace for the for the quarter. You just did kind of of three months in fiscal <unk> you'd normally the up sequentially.

The <unk>.

Which would imply obviously well north of that of course.

On a mid <unk> range.

You quoted for non binding is that is that a fair way to think about kind of sequential pace and what youre seeing right. Now is maybe just a function of comps on weather.

Well on I'm delighted.

With 34% deposit growth.

37% same store sales.

Lighted we have one third of our communities on allocation.

We have.

Secondly closed.

For a month and then we reopened the two homes two home sites on the first Saturday of of months, then have 30 people interested and raise the price and take two by 11 in the morning and shutter back down so.

And we're doing that to drive price, we're doing that to make sure. We have roads in front of lots, we're doing that to manage extended backlogs where we're at.

So.

Considering.

The business right now our ability to drive price on.

Our price was up.

Significantly in Q4, and even more in Q1 of 2021.

We have great pricing power, we're taking advantage of it we are managing our backlogs.

And we had horrible weather for two weeks.

In many parts of the country, where we operate so.

I am.

That's one of the best metrics I've looked at as being up 37% true.

For these past three weeks and remember.

From mid March until mid May.

We really got hurt by Covid last year.

We didn't have the starter houses of the other builders that finished specs, where the renter could move into a finished home in a month or two.

For the St monthly payments so on.

Just remember the second quarter comp is very easy for us as we move forward.

No that wasn't your question, but I'm, just reminding everyone of that.

But in terms of.

On your question is how I should look at the last three weeks.

Very very pleased.

Okay, Okay that makes sense and yet.

The comps.

Certainly.

The only cognizant of that that was actually of what.

More of what I was what I was asking all of that makes sense and track.

The market.

Any kind of.

Deceleration versus what you just put up but I think.

Yes.

The attracting tourists that incredibly strong quarter. So thanks and good luck.

You.

Our next question comes from Susan Macquarie from Goldman Sachs. Please go ahead with your question.

Thank you good morning, everyone.

Good morning, Susan.

My first question is just you commented on some of the work you're doing around the cost structure of looking at the broker policy sand in there can you give us a little more color on that.

And maybe how we should be thinking about that flowing through over time.

Sure so traditionally.

Third party.

Brokers represented about 60%, 65% of our sales the client comes in with the reorder.

And we paid between two five and between two and 3% depending upon the local market to the third party reorder.

We have kept an eye on our competition what.

The other new homebuilders are doing.

We have kept an eye on the number of clients that now come in without of broker.

And where appropriate we're not a pioneer in this regard, we're certainly not going to lead of where appropriate based upon what other builders are doing on what local market.

The conditions are we are lowering net third party broker Commission.

And that of course drops right to the bottom line.

Sometimes the lowering is.

What it's applied to it may be applied just to the base house within the fast it was applied to the total sales price in other cases, it may be based sales plus structural options, but not interior options. So we're getting more standardized around the country and it being applied to the base sales price.

Gotcha, Okay, and then my follow up.

Question is the <unk>.

Other big topic that people have been talking about of course is inflation and especially as we've seen of lumber prices rising over the last couple of weeks on hitting record levels. There can you give us some color around.

Around how you're thinking about inflation. This year I know on the last call. You mentioned you expected it to be up about 5% between labor and materials.

Has that changed at all.

So can you just talk to some of the the movement from there.

Sure so.

Yes.

<unk>.

<unk> is up.

And we.

We expect labor to also be up a bit more modestly because of labor went up fairly significantly pre COVID-19 and so we really just haven't seen.

The labor number go up all of that much more.

But we are very confident that we have properly budgeted.

And our backlog and in our future sales.

For additional contingency to.

The cover.

These lumber prices were seen plus increases in labor and other materials. So when we talk about our gross margin in the second half of the year and then even higher gross margin in 'twenty two because of the nine to 12 month build time and the higher pricing power we've had recently.

That is also building in.

While we think are proper contingencies.

To the cost side.

Gotcha, Okay, alright, so it sounds like generally speaking, maybe a little higher than that 5% or so but nothing that you can offset with the pricing.

Price increases have been able to offset what we've seen and what we expect to see in lumber labor and materials.

Okay Alright, Thank you guys. Good luck.

Actually more than offset Susan sorry about that more than offset which is why we're showing the gross margin improvement.

Yeah, Okay that makes sense alrighty.

Yeah.

Once again, if you would like to ask a question. Please press star and then one once again, we are planning to end the call at 930, when the market opens when we do ask you. Please limit yourself to one question and one follow up.

Our next question comes from Jade Rahmani from <unk>. Please go ahead with your question.

Thank you very much.

Are you seeing the pick up on the New York on the sales side it seems like the city living.

Approved but not sure how that plays out in terms of the number of joint ventures that you have versus what totally out.

We are.

We have 33 agreements in the first quarter coming out of New York City.

Five buildings and that includes Jersey city, Hoboken in Manhattan and that.

That's similar to the sales we had a year ago pre COVID-19, so I'm I'm very pleased.

With the improvement we've seen in New York recently.

Thank you and then just as a follow up can you remind us how much capital is currently invested in each of the city living in an apartment living businesses and what you expect over the next 12 months just trying to keep track of all of the joint venture announcements that have been made recently it seems like you're continuing to make a lot of progress there.

Sure in city living.

We have approximately $377 million invested.

The $31 million of that is in joint venture of 144 is on balance sheet deals.

They are essentially fully completed and we're just in the sell on phase and 200 million is for land that we own for future projects in our apartment living business at $700 million.

That's the.

Made up of around $6 million in stabilized apartment projects that actually have an unrealized gain it's somewhere between $75 million of $100 million.

There is $122 million in projects that are in lease up and we will refinance out quite a bit of that when it gets to a stabilized level and then there is $557 million in deals where we are soliciting other joint venture partners and we believe that $700 million comes down to 400 to 400.

<unk> 50 million as we sell stabilized properties and as we put it we put land in the joint ventures.

With third parties, where we only keep 25% of the equity and when we refinance of.

The properties that should happen over the next 12 months to 24 months.

Thank you very much.

Welcome. Thank you. Our next question comes from Nishu Sood from UBS. Please go ahead with your question.

Thanks.

I wanted to ask about.

The cash flow generation in the 'twenty, one after generating $1 billion last year of understandable just given the volatility $750 million is an impressive number for 'twenty, one, especially considering how much backlog you have to build out.

Just how strong your demand is generally running and obviously the land investments increasing as well can you just walk us through.

On the kind of components there of land inventory flow of that would get you to that $750 million.

Well I think it's really a function of.

The income were generating some of the liquidations, we talked about of some of the non core assets and then the restructuring of the way we are buying land to buy it later and just in time.

So all of those things give us the confidence for that kind of projection, we're still going to spend $1 billion one to buy land, we're still going to spend of 1 billion. One 2 billion two to develop that land, but even after all of that will have $750 million of positive cash flow.

Got you got you and the.

Second question was just on the.

Doug you mentioned earlier, a third of your communities on allocation of.

Obviously, a good a good a good issue to have.

Given that the communities, they're selling out.

Faster than expected.

Does that increase as the year goes on here I mean, obviously the sales pace continues to just run run very very strong.

How much of a governor does that become on your on your absorption pace as we go through the next couple of quarters.

Yes, we're just.

Just focus on bringing demand down to the right level.

To be able to build through it and our.

Our backlog is up 38% were comfortable.

Net that can be built to right now we're at a low 30 per year.

On average community settlement taste.

This company has been in the high Thirty's historically, so we have the capacity.

To manage this growth by building it efficiently and delivering homes within the timeframe that we have represented to the client.

We certainly recognize that this.

50, 60, 80% order growth.

We'll come down part of that is true allocation part of that is through continued price increases so I'm very confident.

Again, the second quarter of the very easy comp. So that number is going to be distorted that order growth will be distorted, but as we get into the back.

The latter part of the year Youre going to see that order growth come down.

To the level that we're extremely comfortable.

With we have some new operations that.

I have opened recently in some new markets, where since the basis. So low because we just opened you can show pretty significant order growth and still build to it.

Because it's a bit of of startup or it's only a couple of years old and so that factors into some of these numbers but.

Overall, we keep a keen eye on it and I think we're doing exactly the right thing with certain communities being allocated.

And we will continue to focus as we move forward balancing price with pace and I will mention that the community count growth we have mentioned.

Assumes this continued strong pace. So we have the land even with selling out faster than we had anticipated.

To grow this company by the numbers that we represented both in 2021 and we have the land.

And we know we will buy more land and we may even via a builder of too as we've done on the path.

To grow 22, more but we have the land today.

The match that growth that we talked about for the balance of 'twenty one through 'twenty two.

Got you that's helpful. Thanks, so much.

You're welcome thank you.

Our next question comes from Jack from Cinco from Sig. Please go ahead with your question.

Hey, guys. Thanks for fitting me in one.

I wanted to the conversation to the to the inventory outside.

You talk about.

So, let's talk about traditional toll versus the more lifestyle of affordable luxury or new toll or however, you want to classify it.

What's the mix of communities today, where does that go in 'twenty, one 'twenty two how much shorter cycle time is there between the traditional toll product in.

And more of the affordable luxury can we use the 25%.

First time buyers of proxy for that mix I mean, I imagine you probably have some empty nester move downs into that product too I'm just trying to because it is part of the ROE conversation just understanding the actual mix of inventory, where it's been where it's headed and how to think about that.

Sure so.

He is going to give the mix, but I'll quickly answer your question on cycle time affordable luxury is running about 35 days faster shorter cycle time.

On our traditional business and thats getting even better.

As we get better at that business, but I will also say even with the traditional.

Luxury business the bigger homes.

Of this optimization rationalization of plans we've talked about.

And streamlining of some systems in the field, even with the tighter market. We are continuing to see our cycle time come down in that business. We mentioned last quarter. It was down and it's down even more today.

Are you can you give the mix sure so.

Affordable luxury.

This year is around 42% of communities.

It should grow to 46 next year.

Luxury is around 37%.

Of communities this year, and we will go down to 30% next year.

And active adult.

Is it 21% this year and 24% next year.

And I want to point out of affordable luxury still has choice.

That total advantage, we're so proud of of choice still applies to affordable luxury.

Got it I'll leave it there because we're at 930 I'll catch you offline. Thanks guys.

Thank you thanks, Jeff.

And our next question comes from Jay Mccanless from Wedbush Securities. Please go ahead with your question.

Hey, Jim.

Quickly if lumber prices were to fall instead of continue to move higher.

Quickly could you all realize some of those savings on the gross margin.

Very quickly.

Okay.

I think it's I think it's six to nine months out the we'd start to see the benefit because of the houses that are in production already of the lumber contracted before.

I meant I meant on the net sales of of course of that.

It's the framers are out there.

It's the lumber has been bought obviously not but in terms of.

The next home sold.

Youre going to see it right away in the margin because.

Does that that lumber doesn't hit for a number of months, yes, you'll see it.

Our projections in our budgets almost immediately but.

And the 12 months later is when it gets through the income statement of course since it takes that long to build.

But if the lumber has not yet been contracted for.

And then we're going to obviously take advantage of it quickly we use the contract long term for lumber the tie it up in the old days and now we're working off of the shortest possible contracts. We can so that we can be nimble and take advantage of lower pricing. When it comes we also have our panel on truss plants that handle the Midwest.

Northeast and mid Atlantic operations.

Those plants are on rail lines, where we're buying lumber direct buy of the railcar out of the Pacific northwest and out of the southern states of the U S M.

And.

I think we were able to beat.

Because we're in that business, we have I think of little bit more visibility and the opportunity to manage manage those markets even better.

Okay, great. Thanks, Brittany on I appreciate it.

Yes.

And ladies and gentlemen, with that we will end today's question and answer session I would like to turn the conference call back over to management for any closing remarks.

Amy Thank you very much thanks, everyone.

We appreciate very much your interest in.

<unk>.

Stay warm for those of you that are in places like Philadelphia.

Alright, great. Thanks take care.

And ladies and gentlemen, with that we'll conclude today's conference call. What are your thank you for attending you may now disconnect your lines.