Q3 2021 Toll Brothers Inc Earnings Call

[music].

Good morning, and welcome to the toll brothers third quarter earnings Conference.

All participants will be in 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 then one on your telephone keypad to withdraw your question.

This call. Please press Star then two.

Please note. This event is being recorded the company is planning to end the call at 930, when the market opens I would now like to turn the conference over to Douglas yearly Chairman and CEO. Please go ahead.

Welcome and thank you for joining us with me.

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 begin I ask you to read the statement on forward looking information in our earnings release 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 interest rates inflation and many other factors beyond our control that could significantly affect future results.

I'm very pleased.

Me today and performance in the third quarter demand continues to be very strong we are benefiting from our strategy of expanding our product lines price points and geographies as we continue to grow the business drive price expand margins and improve our capital efficiency.

Home sales.

<unk> revenues of two point to $3 billion were up 37% compared to the prior year period. Adjusted gross margin of 25, 6% was up 170 basis points compared to last year.

Both our pre tax income of $303.4 million.

And our EPS of $1.87.

More than doubled compared to last year.

We signed 3154 net contracts for approximately $2.98 billion up 11% in units and 35% in dollars.

Compared to the prior year period.

These were third quarter records in both units and dollars. In addition, our contracts per community at 10, two or 20% above last year, and our highest third quarter ever.

Our average selling price in the quarter was.

<unk> $945000.

Up 70000, compared to the second quarter and up $163000 year over year.

This increase in ASP shows the pricing power of our luxury business.

This strong demand has continued.

Continued into our fourth quarter.

We've averaged over 300 non binding deposits per week in the first three weeks of August a pace that is consistent with may through July.

Not surprisingly our deposits were down 15% compared to the same three weeks last.

Last August when demand surged following the lifting of Covid Lockdowns, however, compared to the same three weeks of August 2019 deposits were up 29%.

In some markets demand still far outpaces supply and we are limiting lot releases.

Other markets, we are seeing demand return to seasonal patterns.

I want to remind you that a summer or fall of 2020.

We along with the rest of the industry experienced a historic surge in demand and sales.

From August one to September 15.

<unk> 2020.

First half of our fiscal 2024th quarter net signed contracts were up 110% in units and for the full quarter they were up 68%.

New these growth rates would be unsustainable and as a result, we expect our fourth.

Quarter contracts to be down compared to last year.

While year over year order declines may make headlines they don't reflect the current state of this housing market, which remains very strong.

In the near term our biggest challenge is managing industry wide supply and labor constraints.

Traits that are extending delivery times.

In our third quarter cycle times grew by about two weeks pushing some anticipated third quarter deliveries into our fourth quarter.

The same pressure will apply to our fourth quarter.

During the third quarter and into the start of our fourth.

We raised prices in most of our communities just this past Monday, we rolled out another nationwide price increase.

These increases have more than offset cost pressures we've experienced this year.

In light of the pricing embedded in our backlog and our focus on managing cost.

Costs, we are confident that our gross margin in fiscal 2022 will significantly exceed the 25, 6% margin we projected for fiscal 2020 one's fourth quarter.

It is important to note that our customers are generally better positioned.

So absorb price increases due to their higher incomes investment portfolios and the benefit of increased values in their existing homes.

In terms of demand across our markets strength in the quarter was broad based across both geography and product type with especially strong demand in our.

Affordable luxury and active adult communities.

With our strategic expansion in the Sunbelt and mountain States, we continue to benefit from migration and have higher cost markets into more affordable markets lessening the impact of affordability as prices have risen.

Our backlog at quarter end was a record in both units and dollars backlog was $9.4 billion on 10661 units up 55% in dollars and 40% in units compared to last year.

As we noted last quarter, we expect meaningful growth in revenue.

Revenue gross margins earnings and ROE in fiscal year 2022.

We reaffirm these expectations, including a return on beginning equity for fiscal 2022, well above 20%.

These expectations are driven not just by the strength of the housing market.

And our backlog, but also by the structural and permanent changes we have made to many aspects of our business, especially to how we acquire and develop land in a more capital efficient manner.

We remain bullish on the long term prospects for the housing market, which is supported by many factors.

<unk>, including a significant imbalance between the supply and demand of homes on.

On the supply side. This imbalance is the result of a decade of underproduction of new homes on the demand side millennials, who make up the largest generation of Americans are forming families and entering their prime home buying years.

We have also seen baby boomers and other active adults reenter the market. Many older workers are accelerating their plans moving now in working virtually and places they might have planned to move to.

A few years later.

Interest rates remain low the resale market is tight.

Americans.

Have a much greater appreciation of home and the overall economy is improving.

We believe that all of these factors will continue to contribute to strong and sustained demand for new homes in the years to come.

And we are well positioned to capitalize on the opportunities this market.

At quarter end, we owned or optioned approximately 79500 lots.

Our option lots represented 53% of our total lots controlled at third quarter end compared to 49% one quarter earlier and 43% one year ago.

We have already made significant progress in moving towards the 60% optioned and 40% owned goal we set last quarter.

This shift to more option land is a key part of our capital efficiency initiatives.

This land position provides the foundation for growth.

Over the next several years and we are currently benefiting from the significant percentage of our land that we acquired at lower pre pandemic prices.

At quarter end, we were selling from 314 active communities.

We continue to project growth to 340 communities.

At fiscal year end.

And an additional 10% community count growth in fiscal 2022 <unk>.

This guidance is based solely on land, we already control today.

We also have the land under control today for meaningful further community count growth and physical.

<unk> fiscal year 2023.

Our strategic expansion into new markets.

New product lines.

New price points, and especially the affordable luxury niche has positioned us well for growth and is contributing to improvements in both our gross margin and.

And our ROE.

In fact, our affordable luxury homes are generating gross margins that are comparable to our luxury homes.

Affordable luxury comprised 44% of deliveries in the quarter ended July 31 up from 40% last year.

First time homebuyer.

Who are the primary buyers in our affordable luxury segment.

Canada for 29% of our delivery this quarter compared to 27% one year ago.

Our affordable luxury product enables us to move into new markets and expand our presence in markets, where we are already established.

These homes.

Appeal to many millennials, who are making their first home purchase and can be built more quickly and efficiently and on less expensive land.

Just last week, we announced the acquisition of story book homes in Las Vegas, with about 550 owned and controlled lots. This acquisition allows us to quickly expand.

And our affordable luxury offerings in the Las Vegas market.

Storage book has a remarkably efficient builder and we look forward to sharing lessons learned from its operations throughout the rest of our organization.

We continue to focus on additional ways to improve capital efficiency to bolster Roe.

Yesterday, we announced a new strategic partnership with equity residential a world class S&P 500 company focused on luxury apartment rentals to jointly acquire and developed sites and the new rental apartment communities in key U S markets, a metro Boston Atlanta.

Austin, Denver, Orange County, Seattle and Dallas.

Over the next three years, we expect equity residential to invest 75% of the equity for each selected project with our apartment living unit investing the remaining 25% we.

We expect these projects to be financed with approximately 60% leverage we are targeting an initial minimums co investment of approximately $750 million and combined equity between the companies or.

Or nearly $1.9 billion and total capacity.

Assuming the 60% leverage.

We will access managing member of each project overseeing approvals design and construction.

And we will receive development construction management and financing fees as well as a promoted interest upon the sale of each property <unk>.

Equity residential receive fees for property.

<unk> leasing and marketing services as well as construction oversight.

We have identified three land parcels that we already own to jumpstart debenture.

Total anticipated cost of these three projects is approximately $242 million.

The ventures should allow us to develop.

<unk> more apartment with less capital improving the capital efficiency of the apartment living business.

We also expect this venture to produce a more predictable stream of earnings from our apartment living business as we expect to sell each developed property at stabilization in most cases.

Mrs to EUR.

We are very excited about this partnership with <unk> and we hope we can expand on this relationship. We are also looking at forming one or more additional programmatic relationships in markets and for products that are not covered by our agreement with EQM.

We expect that such.

It would provide a similar capital efficient platform for the balance of the apartment living business.

Now I'll turn it over to Marty.

Thanks, Doug and good morning, everyone. Thanks for joining us.

Operationally, we had another great quarter.

Our production team.

<unk> continued their solid performance as we manage through the labor and supply chain issues that have impacted homebuilders this year.

We thank them for their efforts and accomplishments.

We delivered 2500.97 homes.

At an average price of approximately $860000.

Generating third quarter homebuilding revenue of $2 billion to $3 billion.

Deliveries were up 28% units and 37% in dollars compared to one year ago.

We met our revenue projections due to a higher average price of deliveries.

<unk> paid.

Our third quarter pretax income was $303.4 million.

Compared to a $151.9 million in the third quarter of 2020.

Net income was $234.9 million were $1.87 per share diluted.

This compared to $114.8 million and 90 per share diluted one year ago.

Third quarter adjusted gross margin was 25, 6%.

Of revenues compared to 23, 9% in fiscal year 2023rd quarter.

And 80 basis points better than projected.

The outperformance was due primarily to improved pricing power and favorable mix.

SG&A as a percentage of home sales revenue in the quarter was 10, 5% or.

We're a 100.

Third 10 basis points better than our guidance.

We attribute this primarily to lower than expected selling and marketing expenses as well as continuing and permanent overhead cost controls.

Joint venture land sales and other income was 29 million.

In the third quarter.

Impaired to $3.6 million in the same quarter last year.

Our projection was approximately $20 million.

The outperformance was driven by better than expected results.

From our mortgage operations and our apartment living operations.

Our balance sheet remains strong we ended our third quarter with approximately $2.7 billion of liquidity, including $946 million of cash and approximately $1.8 billion available under our $1.9 billion revolving bank credit facility.

In the third quarter, we invested approximately $200 million in land acquisition, and another $230 million and land development.

Primarily to our focus on acquiring land more efficiently.

Our land and development spend is projected to be slightly lower than fiscal 2020.

'twenty one than what we spent two years ago in fiscal 2019, despite our significant growth since then.

These structural changes in how we acquire land are also permanent and are contributing to our significant increase in return on equity in 2022.

Beyond.

We expect to generate $750 million in cash from operating activities in fiscal year 2021.

We will continue to use our cash to invest in the growth of our business return cash to shareholders and further reduce our debt.

Including retiring.

$410 million of our five and seven 8% public notes that are due in February 2022.

We intend to call these bonds and our fourth quarter and retire them at par in mid November 2021.

Our net debt to capital ratio stands.

And 33, 1% in the third quarter end.

And we expect it to drop to the mid to upper 20% range at fiscal year end.

During the quarter, we continued our program of returning capital to shareholders through share repurchases and dividends.

Our third quarter, we repurchased.

Approximately one 7 million shares at an average price of $57.66.

For an aggregate amount of $95.4 million.

We expect to repurchase a similar amount in our fiscal fourth quarter.

In April we increased our quarterly dividend.

Dividend by 55% to.

To <unk> 17 per share.

These actions reflect our confidence in our business and in the sustainability of our substantial cash flows moving forward.

Yeah.

Turning to fourth quarter and full year guidance.

Due to the production delays.

As impacting our industry, we now expect full year deliveries of approximately 10100 homes compared to the midpoint of our previous guide of 10300 homes.

These 200 deliveries, which are sold and have substantial deposits from our buyers are now projected to settle in.

First quarter of fiscal 2022.

So we now project, our fourth quarter deliveries to be approximately 3450 homes. We estimate an average delivered price for the fourth quarter of approximately $840000 per home and approximately $830000 for the full year.

In the FERC. This is an increase of $15000 per home compared to our previous fiscal year guidance.

We are projecting a fourth quarter adjusted gross margin of 25, 6% of revenues and our full fiscal year 2021, adjusted gross margin of 24, 9%.

This is an increase of 30 basis points compared to our previous full year guidance.

Based on the composition of our backlog, we are confident that our full year fiscal 2022, adjusted gross margin will significantly exceed the $25 six margin.

We.

Affecting for the fourth quarter of fiscal 2021.

Our confidence is based on several factors the most significant of which is the higher prices that are embedded in our backlog, which is the result of the steady and significant price increases we've achieved over the year.

Demand.

For joining us to continue to push price in most of our markets.

In addition, we are intensely focused on our construction budgets and managing building costs.

Like the entire industry, we are seeing cost pressures on material and labor.

We enjoy strong relationships with our trade partners.

And have tremendous operating scale, which helps us to manage these costs.

We also continue to benefit from our long land positions.

The land for most of the communities that will be delivering homes in fiscal 2022 was put under control prior to the pandemic.

Lower prices.

Turning back to guidance, we expect interest and cost of sales to be approximately two 3% of home sales revenues for the fourth quarter and full year.

This full year guidance is 20 basis points better year over year and reflects the impact of debt reductions made earlier this.

And we expect our interest expense to continue to decline.

In fiscal 2022, as we further reduce our leverage.

We expect SG&A as a percentage of revenue to be approximately nine 8% in the fourth quarter and 11, 3% for the full year.

Year full year guidance is 50 basis points better than previously projected.

As Doug mentioned, we expect community count to be 340 at fiscal year end with 10% growth from there by fiscal year 2022.

For full year guidance for fiscal year 2000.

'twenty one other income income from unconsolidated unconsolidated entities and land sales is now a $140 million for the full year.

With approximately $40 million projected for the fourth quarter.

This is a $30 million increase from our projection last quarter.

And is driven by more sales projected in our apartment living division.

Our third quarter tax rate was 22, 6%, which includes approximately $12 million in energy tax credits.

Our fourth quarter effective tax rate is projected to be approximately 26%.

And our full year guidance is 24, 6%.

90 basis points better than our previous full year guidance.

Taking this all into account we have increased our projected return on beginning equity for fiscal year 2021 to 15, 9% over 700 basis.

<unk> points better than fiscal 2020.

As Doug noted.

We expect it to exceed 20% in fiscal year 2022.

We believe our capital efficiency initiatives and the structural changes in our land acquisition strategy will keep it above 20% long term.

Now, let me turn the.

The call back to Doug Thank.

Thank you Marty.

I'd like to take this opportunity to extend my sincere thanks to the tremendous effort from all of our toll brothers' team members. They continue to demonstrate their dedication to taking care of each other and our customers and for that I am very grateful.

Now, let me open it up to questions.

Andre ready to go.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

We.

If you please limit yourself to one question and one follow up.

If you have further questions you may reenter the question queue.

As a reminder, the company is planning to end the call at 930, when the market opens at.

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

Yes.

And the first question comes from Deepa Raghavan of Wells Fargo. Please go ahead.

Hi, Good morning, Dave Marty Thanks.

Thanks for taking my question.

Oh, they based on your comments on the 20% plus our OE growth target that the emphasis.

On the plus appears to be slightly stronger than what we had on your prior call.

Is that a fair observation.

Yes.

And we will.

Obviously give more detailed guidance on our fourth quarter call in three months, but yes, you pick that up correctly.

<unk>.

And I'm, assuming that's driven by the gross margin predominantly is that or is there anything else driving that.

Yep.

It is driven by.

Predominantly the gross margin.

Also the increase in sales.

And our land.

Specific strategies that we've been talking about for the last couple of years.

That will continue.

Two to push that Roe.

Permanently.

Alright, well my follow up question is on the more recent trends.

Are there any trends.

July and August that maybe stood out for you or what calling out.

Im, particularly looking for trends and nuances that the other June quarter, ending peers haven't pointed to so far.

Yes.

<unk>.

The sales and the demand throughout.

In order words, the third quarter were pretty consistent month to month.

As I mentioned in my prepared comments.

And in many markets, we still see demand.

That exceeds supply exceeds our ability to deliver and in.

And those markets in those communities.

We are either still on allocation.

We're more aggressively driving price.

We're running processes that include best and final offer too interested in pre qualified buyers and so that really hasnt changed.

I think the one thing we have noticed in some markets and they are primarily markets that I would describe in the northeast.

In the Midwest or the Metro West for US is really just Detroit.

Because we're down to one community in Chicago.

We're seeing some more of the typical summer seasonal.

No.

Trends.

Traffic is up.

Web traffic is up.

We continue to raise prices as we mentioned this past Monday, we had a price increase nationwide. So I don't think theres anything.

<unk> significantly different in July.

Hi on August <unk>.

Except that in some markets, primarily those I mentioned in the northeast.

We're feeling some more seasonal trends.

We expected that as the world opened up as people hit the Jersey shore.

Or.

Or did whatever they normally do on.

Their summer months.

And now they are preparing their kids back to school, we are seeing in those markets.

More traditional seasonal trends, but that doesn't mean, a slowing and thats why I caution with the year over year comp, it's still a very good market.

There is some of those seasonal trends.

The lorene out west.

And for US of course, we call that Denver West.

Down south and for that I'd say, the Carolinas, Georgia for US is Atlanta, South Carolina, and Florida, We are still seeing most of those markets with more demand.

And we can satisfy.

That's great color, thanks, very much great quarter. Thanks.

Thank you.

The next question comes from Stephen Kim of Evercore ISI. Please go ahead.

Hey, guys. This is actually Brian items on for Stephen Kim Thanks for taking.

Two questions here.

I wanted to talk about the <unk> pricing guide a little bit quickly.

You saw really strong pressure on your deliveries this quarter, I think sequentially up 6% or so and given your comments it sounds like what youre seeing on the ground is still very strong pricing.

I look.

In a typical <unk>, where you often have somebody you actually have some of your highest ASP.

So the sequential decline that you're guiding for into next quarter is there anything unusual maybe from a mix perspective that can explain that debt.

Yes, I think the biggest aspect.

Taking Mike is our city living business.

It represented about 8% of our third quarter deliveries, we expect it to represent 3% of our fourth quarter deliveries and be less than that in 2022.

So that is a higher margin higher average.

Back to business and that is influencing both the margin progression as well as the.

<unk>.

Average price that we reflect in the fourth quarter.

We'll have a little bit more of hey, Margaret.

In Q4 as well.

Yes, I think right.

He just finished there.

You got cut.

It off a little bit is going to be a little bit more coming out of the Pacific in the fourth quarter, which is also higher priced higher margin. So that will have some offsetting effect.

On a bit less of the city living.

But then as we look forward to 'twenty two.

I think you really need to pay.

Prior to the sales prices that the $945000 sales price that you saw in the third quarter because that is really nationwide, we've had pricing ability everywhere and that's what's going to be driving the higher price.

In.

2002.

Great I have one follow up on margins actually and specifically I wanted to talk about costs.

And maybe some of it dovetails with what you just said, but you're implying margins are going to be flat in <unk> does that assume higher.

Attention to costs in <unk> than in <unk> and I also just wanted to get a sense of if we think about the peak peak lumber being this past spring coming to a head in may when youre expecting that to make its way into your reported results. Thanks guys. Yes.

Lumber costs.

Lumber the homes, we are building.

Well, we'll peak.

Through Q4, 'twenty, one and Q1 'twenty two.

And then starting in Q2 and accelerating through the balance of 'twenty two.

We will see what is the.

<unk> drop.

And lumber right now with the size of our homes and the amount of lumber we put in them.

Our average house is down in the future again, the homes sold today, when they need lumber will be down as much as $40000.

And lumber, which will will will.

We will have a nice benefit.

In the back half of 'twenty two.

Awesome, Thanks, guys great quarter.

Thank you very much.

The next question comes from Buck Horne of Raymond James and Associates. Please go ahead.

Hey, Thanks, Good morning, I was wondering.

To follow up a little bit more on the equity residential deal just you know.

Number one very capital efficient so great use of our resources, but how do you determine the pricing on those assets at stabilization I'm. Just curious is there some sort of implied cap rate you go into.

With pre determined.

Wondering if you construction with equity residential or is it kind of a right of first offer but they don't have the obligation to buy or how does that work.

Sure Buck.

Great Shout out to Charlie Watts last night that was cool.

Okay.

Yeah.

I'm the old Guy in the room.

I am not guidance.

And to tell you how many times I've seen the rolling stones certain high school.

That was a king <unk>.

We're really excited about the ECR deal.

So nice to be aligned and in partnership with.

The leading luxury apartment.

Owner manager.

Yes.

In the country.

Such a fantastic.

A company that we have we have a track record where we built a very large complicated high rise with EQ are 10, or 15 years ago in New York City bottom half as rental top half was luxury.

<unk> that we sold.

<unk>.

And so we've really it's such a pleasure to have a relationship with a company that talks are talk walks our work gets the business, they're going to help us.

Because they have so much intelligence and so many of these markets we are operating with them.

The key to us was dry.

Driving capital efficiency through the apartment business. They will now come in and help us cover pre development costs before we buy the land they will invest that land closing with US and then we are committed to sell all of the assets at stabilization, we're not going to hold apartments.

Long term anymore, we understand the need to recycle the investment to show investors.

Regular predictable sustainable earnings.

And how.

To your specific question after my sales pitch here, how you how we come up with an axe.

Is it price.

It's a very thoughtful.

Pragmatic approach that allows <unk> without a complicated marketing process, but with appraisers involved.

To buy us out now remember they have 75% of the investment they only have to.

The buyout to 25% of toll.

So theyre going to get the benefit with their 75% investment.

Any.

Uptick in value.

If were unable to agree.

Or if for some reason they don't want the asset.

Then we're going to sell it.

To hold it we're still going to sell it so we're going to get our money back at stabilization, but.

They have to pay for fair value.

They know, they're not going to be taking advantage of us by getting.

A price that's under market, but we also understand that we're saving marketing dollars with brokers.

We're not in a process and the delay that's involved in running those processes in a due diligence process with a third party that youre not sure how it works out in the end and so that's the basic.

Parameters around how it works Marty anything you want to add to that I think they can bring some operating efficiencies to the.

And running X through their property management that will enhance the value. They have a relatively inexpensive cost of capital. So we know we're selling to a <unk>.

Efficient capital source and as Doug mentioned.

They are really only buying a quarter the asset at fair value. They have the other three quarters of it at cost.

And so again.

This is a win win.

QR.

They wanted a strong development partner to feed them new opportunities and we wanted.

A capital efficient platform.

And we've gotten it through the best in the industry.

Now there are markets not covered.

There are some properties that won't be covered for example, our student housing business is not something that EQM <unk> at the moment is interested in.

They can't take advantage of opportunity zone assets.

Others may be able to and so we are actively.

Talking to the other private equity players that we have built this business with.

To find one or more.

Structural permanent long term partners.

To complete.

Complete the business model.

Very similar to what we've done with EQ are under their markets.

That is great color. Thank you so much.

A really fantastic deal I really like the platform there.

So congrats on that second I guess I'll follow up in a different direction.

There is some new legislation that seem to be percolating through Washington, I guess Senator Wyden, Scott a new housing bill.

Our proposed.

It was part of the new infrastructure plan that includes things like $15000 first time buyer tax credit also.

It looks like a developer tax credit to kind of stimulate new homebuilding supply in.

Lower income market areas or maybe more outlying areas and I'm. Just wondering if you guys have had any tie.

Posen.

Look at those proposals.

Any general thoughts or impressions about how a first time buyer tax credit could impact a market like it is today or any other thoughts on that potential legislation.

Yes, we havent had a lot of time to study it.

Any.

<unk> doing that Washington does to promote stimulate homeownership.

Even if it's a bit below our typical price point is good for the industry. It's good for for toll brothers. We're we're as you know coming down in price through affordable luxury.

<unk>.

There have been tax credits in the past that have been effective in stimulating demand.

There is a significant housing shortage in this country and in certain states. The obvious one is California.

There's an affordability issue that has to be addressed.

We are we in the industry would be fully supportive of Washington continued focus on on this housing crisis on promotion promoting homeownership and so as this develops and of course, we don't know where its going to go it is impossible to predict right now.

Will we.

We as toll brothers and of course, as an industry and working through our lobbying group, leading builders of America will be all over it and I'm sure will be supportive.

And as we mentioned in the prepared remarks, nearly 30% of our buyers right. Now are first time homebuyers at least one person on the deed, we need to see what the.

The legislation might.

It might entail, whether it's one or both and whether there's income limits. There. We are active in our apartment business in opportunity zones. So we do.

Served some.

Areas that are.

There may be enveloped by some of these other provisions and in many situations we have affordable.

Housing components of some of the developments we do so we'll have to study, whether that's beneficial to us or not.

Great. Thanks for the color guys great quarter.

Well, thank you Bob.

The next question comes from Mike Dahl of RBC capital markets. Please go ahead.

Good morning, Thanks for taking my questions.

<unk>.

Yes, the AQR deals it's really interesting.

I wanted to start with a question.

On that I guess, a two part question you've got the 25% interest, but you also have these fee structures in place.

Plus the promote on sale.

Should we think of it as.

On an ultimate sale of that your your return on investment is greater than that 25% given the fee structures that are in place or any other.

Or are there on quantifying that and then the second part is just on the initial three assets just how to think about that and whether that's.

Embedded in terms of some of the other income guide for <unk>.

So on your first question yes.

We expect to.

Received more than 25%.

The sale proceeds.

That's how even forgetting fees that's.

Promote works.

And we have that now with our existing more fragmented.

Business model, where we have multiple private equity partners, but now this all consolidates it.

And we'll just make it a lot more efficient.

Marty you want to talk about the three assets.

The three assets, we already owned that land we have not.

Minced any construction they are relatively inexpensive pieces of land, but it'll be part of our initiative to reduce the capital that we have an apartment living our apartment living investment has gone down from $770 million.

At the beginning of the year to $650 million right now to drop a little bit further as a result of that those three assets still need to be developed they need to be leased up.

And so that's a 2023.2024 sort of income event.

But we did sell an asset in our third quarter.

Equity residential and we've already sold an asset in our fourth quarter to them.

That werent developed under this program, but were marketed in the in the general marketplace. If you will and that fourth quarter gain is embedded in our $40 million guidance for the fourth quarter.

Okay. That's very helpful and then Mike.

My second.

Second question is really on the returns.

Capital efficiency, because clearly you are trying to do.

Do your best to articulate to the investment community. It seems like it's potentially one of the more underappreciated areas.

And obviously margins in the near term sales to your point Doug.

It does contribute to the return on equity next year, but.

It looks like you're you're at the point, where all of the actions on capital efficiency are hitting an inflection point in 'twenty, two or more of an inflection.

In 'twenty two so I guess the question is are there certain quantitative.

<unk> targets that you are going to be setting out not just.

Saying that returns are in excess of 20%, but something like asset turns for example, where thats been kind of the main area that you may have not performed as well as some peers that looks at the change.

How are you thinking about.

That or how should we be thinking about potential for.

Improvement in asset turns over the next year or two.

Yes.

On the call in three months, we will give a lot more detail.

On 22 in terms of margin in terms of ROE.

But youre right 20, twos ROE right now.

Is partially due to new land buying and other.

Efficiency strategies that we started a couple of years ago, but it's primarily being driven by.

Hi, this beautiful wave overall.

A lot of driving price.

Having high high sales numbers and.

Having high gross margins, but beyond that.

The reason, we're so confident in the sustainability of the higher <unk> that will be north of 20 long term.

Is because of the land we've been buying.

We are so disciplined now on internally, we call it IRR, but that translates easily to.

Our macro ROE for the company.

Each land deal has to pass such a higher hurdle.

That adds that comes through.

And delivers into 'twenty, three and beyond it's just a new company, it's a new business and its structurally changed and.

If the market doesn't get it that's not for us for a lack of us trying to explain it I think we understand that we.

We have to prove it out and.

I am very confident it's coming we have so many different.

Ways, we can buy land now and continue to grow this company.

Whether it be through land banking or through joint ventures received purchase money mortgages with land sellers are getting longer term.

On payment terms with land sellers and that is all working its way through.

The new communities that will be opening.

And that will be delivering homes.

I think you see a bunch of these initiatives already reflected in our balance sheet.

There.

Our owned land is down to 47%.

When it was 75%, 80% five years ago of total.

We've made great progress on that recently seen a little bit of these initiatives in our JV and other line thats grown a little bit as we put some of our.

Our larger communities into joint venture.

See it in our cash flow, that's being generated significant cash flow. This year last year and projected for next year that allows us the flexibility to buy some stock back pay down some debt increased our dividend all of those things are driven by some of the ROE initiatives.

Not just how we do things.

It's how we inherently think about things now too that's influenced with our Ro mentality.

It's great to see it coming through.

Come through thanks for taking my questions.

Very welcome thank you.

The next question comes from Alan.

Isn't there of Zelman and associates. Please go ahead.

Hey, guys. Good morning, Thanks for taking my questions and.

I appreciate all the color so far.

So I'd love to.

Maybe an additional question on the ROE topic.

Obviously, the the asset efficiencies.

It's huge and we could see that filtering through over the next couple of years.

I guess my question is when you when you think about the sustainability of those options and land banking availability, we've seen over time that tends to be somewhat cyclical I mean, youre option share guidance high at 60% in the last cycle too.

<unk>.

Generally that capital tends to dry up a little bit if the market.

Move sideways or we enter a recession, so I guess beyond 'twenty two the confidence there.

You think it's different this time and that there is longer term capital being attracted to this space that will kind of stick with it through a potential downturn in the future and.

And I have a follow up thanks.

Alan I think some of the growth in owned land from the last cycle was a function of.

Yes.

<unk> ability to walk from options and the risk profile of the option concentration gives.

I'll start so it wasn't necessarily driven as much by a lack of capital sources, although I'll admit that it was it was a function of choosing not to move forward with those deals which is.

On a positive side benefit of the return on equity initiatives here in.

Hugh stances that arent as great as they are today so.

I think there are much more significant.

<unk> of capital interested in this business as all of Us builders.

Fundamentally changed the way, we look at our business to be more return on equity focused.

And.

Certainly.

Are providing solid returns to these capital efficient.

Structure supporters, while also improving our own capital efficiency.

Got it I appreciate that Marty maybe we can follow up a little bit more on that offline, but.

Maybe moving back to fundamentals for a second.

Doug on the nationwide price increase on Monday can you talk a little bit about the magnitude of that increase and kind of what the trend has been there lately.

<unk> been kind of maintaining the same pace of price increases have they moderated a little bit and whats the thinking going forward I know a few builders have said they are not.

Expecting to see the same type.

It's in power going forward it doesn't sound like that you guys see it the same way.

Monday's price increase.

Was not all that big it was 1%.

It's an opportunity.

To get sales excited kit.

Type of rank some phone calls and say.

Hey, you got to get in this weekend because the boss tells me Monday I'm going to have a new price sheet in my hand, and so we use these price increases locally and on occasion with a nationwide.

Program like Monday to drive urgency and it's very effective.

<unk>.

So to me what happened Monday is less about the 1% I'll take it I like it but it's really about putting another tool in the toolbox of the sales team to go.

Make a phone call and create that urgency.

We I'm.

I disagree with some of the other builders and it goes back to my earlier comments that in some markets, we're seeing more traditional seasonal patterns of sales activity.

So.

In those markets that I described out west and down South.

We're.

Im not going to have demand far exceeding.

Our ability to supply.

We are raising prices as we were through last winter and spring and.

And in other markets, where we have seen good but what I'll say is not great or not fraud.

Demand that we saw last year were being more careful.

I think that that's the best.

The way that I can describe it to you Alan.

Got it that makes sense I appreciate it thanks, a lot and I'll also just add that.

We do these national sales events, which.

<unk> and its another REIT. It said, it's another tool in the toolbox to get salespeople to make phone calls and say hey for the next three weeks.

You got to come and we're having a national sales event, it's usually a modest.

Maybe the maybe the cabinet company has agreed to give us a second or third upgrade to the kitchen cabinets.

Which again that doesn't cost us anything but get some action cooking, we did not have a national sales event in the third quarter.

We did have one in the third quarter of 2020.

But we decided to take take a quarter off so.

We were encouraged to further encouraged by.

The activity of Q3 without having that national sales event occur.

Sure.

The next question comes from Susan Mcclary of Goldman Sachs. Please go ahead.

Thank you good morning, everyone.

Susan.

My first question is can you talk a little bit about the story book deal.

Is the M&A pipeline looking like today, how are you thinking about the ability to get future deals done and maybe kind of what brought story book to you and what helped you to get over the finish line with that.

Sure story book is small.

Lower priced homebuilder in Las Vegas incredibly efficient.

Remarkably high margins.

For the price point of their homes.

We started conversations with them.

Pre COVID-19.

We then put those conversations on hold.

In the spring and summer of 'twenty.

When we were all pretty scared by Covid, and we were able to keep the relationship moving and get the deal closed a few weeks ago.

Yeah.

Five years ago, we wouldn't have looked at story book.

Because we wouldn't have gone down in price that way now as we have as.

As we're doing more and more affordable luxury as we have acquired a couple of different affordable luxury.

Price point builders say.

<unk> home as an.

Full and South Carolina Coleman homes, an example in Boise.

We're learning from these builders that are super efficient in their field construction methodologies.

So.

While a small deal.

It's a good deal for us not just for Vega.

Example, we think to teach to continue to teach us to be better lower priced homebuilders in terms of deal flow things are heating up quickly on the M&A front, just with the smaller builders I'm not I'm not talking big Big Big Big demand I'm talking it just seems like.

<unk> are more and more opportunities in markets throughout the country.

For the small local builder.

Who has decided to take their terrific 2021 numbers.

And.

And higher broker and hit the market and so we're.

They will talk about more active our M&A group is seeing more deal flow than they've seen in a long time.

Okay.

Great color.

Follow up question is on the SG&A, yes that obviously came in over 100 basis points lower than.

Nothing expecting for this quarter you guided down.

Little bit more for the fourth quarter can you talk to what really drove those actions that you've been putting in place in terms of reducing the overhead to come through this quarter and the sustainability of that especially as we look to fiscal 'twenty two.

I think a lot of the initiatives there Susan are associated with a bit less marketing spend.

Better control on our model home cost some.

Some reduction in commission expense that we are seeing and then from a true overhead perspective, we are very tight.

Cost controls.

Around the organization and here at corporate and we think most of those things will be.

Permanent.

Our employee count.

Dropped pretty significantly.

A year ago.

And we are keeping a tight rein on.

Any additions to the employee count.

Seems are doing great jobs with fewer people.

Okay. Good alright, good luck with everything.

Thanks, Susan.

This concludes our question and answer session I would like to turn the conference back over to Doug yearly for any closing remarks.

Thanks, Andrea and thanks, everyone for listening in and for year three.

Your interest.

Hope you have a safe and healthy and happy you final weeks of summer.

Summer and.

And we look forward to.

Speaking with you over the next few months and of course, giving you a more detailed updates on 2020.

92 in December.

Well thanks.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

[music].

[music].

Yeah.

[music].

Yeah.

[music].

Good morning, and welcome to the toll brothers third quarter earnings.

Earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

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

To withdraw your question. Please press Star then two please.

Please note. This event is being recorded the company is planning to end the call at 931, the market opens I would now like to turn the conference over to Douglas yearly Chairman and CEO. Please go ahead.

Welcome and thank you.

You for joining us 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 begin I ask you to read the statement on forward looking information in our earnings release 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 interest rates inflation and many other factors beyond our control that could significantly affect future results.

I'm very pleased with our performance in the third quarter.

<unk> continues to be very strong we are benefiting from our strategy of expanding our product lines price points and geographies as we continue to grow the business drive price expand margins and improve our capital efficiency.

Home sales revenues of $2 billion to $3 billion were up 37% compared to the prior year period. Adjusted gross margin of 25, 6% was up 170 basis points compared to last year.

Both our pre tax income of $303.4 million.

Yeah.

And our EPS of $1.87.

More than doubled compared to last year.

We signed 3154 net contracts for approximately $2.98 billion up 11% in units and 35%.

In dollars compared to the prior year period.

These were third quarter records in both units and dollars. In addition, our contracts per community at 10 two <unk>.

We're 20% above last year, and our highest third quarter ever.

Our average selling price in.

<unk> was approximately $945000.

70000, compared to the second quarter and up $163000 year over year.

This increase in ASP shows the pricing power of our luxury business.

This strong.

The core demand has continued into our fourth quarter, we've averaged over 300 non binding deposits per week in the first three weeks of August a pace that is consistent with may through July.

Not surprisingly our deposits were down 15% compared to the same three.

Strong last August when demand surged following the lifting of Covid Lockdowns, however, compared to the same three weeks of August 2019 deposits were up 29%.

In some markets demand still far outpaces supply and we are limiting lot releases.

Three weeks in other markets, we are seeing demand return to.

The seasonal patterns.

I want to remind you that a summer or fall of 2020, we along with the rest of the industry experienced a historic surge in demand and sales from August one to September 15.

<unk> 2020, the first half of our fiscal 2024th quarter net signed contracts were up 110% in units and for the full quarter they were up 68%.

We knew these growth rates would be unsustainable and as a result, we expect.

Our fourth quarter contracts to be down compared to last year.

While year over year order declines may make headlines they don't reflect the current state of this housing market, which remains very strong.

In the near term our biggest challenge is managing industrywide supply and Les.

Ever constraints that are extending delivery times, and our third quarter cycle times grew by about two weeks pushing some anticipated third quarter deliveries into our fourth quarter.

The same pressure will apply to our fourth quarter.

During the third quarter and into the start of.

Our fourth quarter, we raised prices in most of our communities.

Just this past Monday, we rolled out another nationwide price increase these.

These increases have more than offset cost pressures we've experienced this year.

In light of the pricing embedded in our backlog and our focus on <unk>.

Managing costs, we are confident that our gross margin in fiscal 2022 will significantly exceed the 25, 6% margin we project for fiscal 2021's fourth quarter.

It is important to note that our customers are generally better positioned.

<unk> to absorb price increases due to their higher incomes investment portfolios and the benefit of increased values in their existing homes.

In terms of demand across our markets strength in the quarter was broad based across both geography and product type with especially strong demand.

And our affordable luxury and active adult communities.

With our strategic expansion in the Sunbelt and mountain States, we continue to benefit from migration out of higher cost markets into more affordable markets lessening the impact of affordability as prices have risen.

Our backlog at quarter end was a record in both units and dollars backlog was $9.4 billion on 10661 units up 55% in dollars and 40% in units compared to last year.

As we noted last quarter, we expect.

<unk> meaningful growth in revenue gross margins earnings and ROE in fiscal year 2022.

We reaffirm these expectations, including a return on beginning equity for fiscal 2022, well above 20%.

These expectations are driven not just.

Just by the strength of the housing market and our backlog, but also by the structural and permanent changes we have made to many aspects of our business, especially to how we acquire and develop land in a more capital efficient manner.

We remain bullish on the long term prospects for the housing market, which.

Which is supported by many factors, including a significant imbalance between the supply and demand of homes.

On the supply side. This imbalance is the result of a decade of under production of new homes on the demand side millennials, who make up the largest generation of Americans are forming families and entering their prime.

Buying years.

We have also seen baby boomers and other active adults reenter the market. Many older workers are accelerating their plans moving now in working virtually and places they might have planned to move to a.

A few years later.

Interest rates remain low the resale market.

Homesite.

Americans have a much greater appreciation of home and the overall economy is improving.

We believe that all of these factors will continue to contribute to strong and sustained demand for new homes in the years to come.

And we are well positioned to capitalize on the offer.

Opportunities this market presents at.

At quarter end, we owned or optioned approximately 79500 lots.

Our option lots represented 53% of our total lots controlled at third quarter end compared to 49% one quarter earlier and 40.

3% one year ago.

We have already made significant progress in moving towards the 60% optioned and 40% owned goal we set last quarter.

This shift to more option land is a key part of our capital efficiency initiatives.

It's land position provides the foundation for growth over the next several years and we are currently benefiting from the significant percentage of our land that we acquired at lower pre pandemic prices.

At quarter end, we were selling from 314 active communities.

We continue to project growth to 340 communities at fiscal year end.

And an additional 10% community count growth in fiscal 2022. This.

This guidance is based solely on land, we already control today.

We also have the land under control today.

For meaningful further community count growth in fiscal year 2023.

Our strategic expansion into new markets.

New product lines.

New price points, and especially the affordable luxury niche has positioned us well for growth and is contributing.

To improvements in both our gross margin and our ROE.

In fact, our affordable luxury homes are generating gross margins that are comparable to our luxury homes.

Affordable luxury comprised 44% of deliveries in the quarter ended July 31 up from.

<unk> percent last year.

First time homebuyers, who are the primary buyers in our affordable luxury segment accounted for 29% of our delivery this quarter compared to 27% one year ago.

Our affordable luxury product enables us to move into new markets and expand our presence in markets.

40, but we are already established.

These homes appeal to many millennials, who are making their first home purchase and can be built more quickly and efficiently and on less expensive land.

Just last week, we announced the acquisition of story book homes in Las Vegas, with about 550 owned and controlled.

That's where.

This acquisition allows us to quickly expand our affordable luxury offerings in the Las Vegas market.

Story book has a remarkably efficient builder and we look forward to sharing lessons learned from its operations throughout the rest of our organization.

We continue to focus on additional.

<unk> also improved capital efficiency to bolster ROE yeah.

Yesterday, we announced a new strategic partnership with equity residential a world class S&P 500 company focused on luxury apartment rentals to jointly acquire and develop sites and the new rental apartment communities.

In a way a key U S markets of Metro Boston, Atlanta, Austin, Denver, Orange County, Seattle and Dallas.

Over the next three years, we expect equity residential to invest 75% of the equity for each selected project with our apartment living unit.

In testing the remaining 25% we.

We expect each project to be financed with approximately 60% leverage.

We are targeting an initial minimum co investment of approximately $750 million and combined equity between the companies.

Or nearly one.

<unk> and <unk> $9 billion in total capacity, assuming the 60% leverage.

We will access managing member of each project overseeing approvals design and construction.

And we will receive development construction management and financing fees as well as a promoted interest upon the sale of each property.

Pretty equity residential received fees for property management leasing and marketing services as well as construction oversight.

We have identified three land parcels that we already own to jumpstart the venture.

Total anticipated cost of these three projects is approximately $242 million.

The ventures should allow us to develop more apartment with less capital improving the capital efficiency of the apartment living business. We also expect this venture to produce a more predictable stream of earnings from our apartment living business as we expect to sell each developed property at stabilized.

<unk> in most cases to EUR.

We are very excited about this partnership with <unk> and we hope we can expand on this relationship. We are also looking at forming one or more additional programmatic relationships in markets and for products that are not covered by our agreement with EQM.

We expect that such a partnership would provide a similar capital efficient platform for the balance of the apartment living business.

Now I'll turn it over to Marty.

Thanks, Doug and good morning, everyone. Thanks for joining us.

Operationally, we had another great quarter.

Our production teams continued their solid performance as we manage through the labor and supply chain issues that have impacted homebuilders this year.

We thank them for their efforts and accomplishments.

We delivered 2500.97 homes.

At an average price of approximately 806.

$60000 generating third quarter homebuilding revenue of $2 billion to $3 billion.

Deliveries were up 28% in units and 37% in dollars compared to one year ago.

We met our revenue projections due to a higher average price.

Deliveries than anticipated.

Our third quarter pretax income was $303.4 million.

Compared to a $151.9 million in the third quarter of 2020.

Net income was $234.9 million.

<unk> 80.

This per share diluted.

Compared to $114.8 million and 90 per share diluted one year ago.

Third quarter adjusted gross margin was 25, 6%.

Of revenues compared to 23, 9% in fiscal year 2000.

Seven years third quarter.

And 80 basis points better than projected.

The outperformance was due primarily to improved pricing power and favorable mix.

SG&A as a percentage of home sales revenue in the quarter was 10, 5%.

'twenty one.

We're 110 basis points better than our guidance we.

We attribute this primarily to lower than expected selling and marketing expenses as well as continuing and permanent overhead cost controls.

Joint venture land sales and other income.

<unk> was $29 million in the third quarter.

Compared to $3.6 million in the same quarter last year.

Our projection was approximately $20 million.

The outperformance was driven by better than expected results.

From our mortgage operations and our apartment.

Operations.

Our balance sheet remains strong we ended our third quarter with approximately $2.7 billion of liquidity, including $946 million of cash and approximately $1.8 billion available under our $1.9 billion.

<unk> Bank.

Bank credit facilities.

In the third quarter, we invested approximately $200 million in land acquisition, and another $230 million and land development.

Due primarily to our focus on acquiring land more efficiently our land and development spend is projected.

<unk> slightly lower than fiscal 2021 than what we spent two years ago in fiscal 2019, despite our significant growth since then.

These structural changes in how we acquire land are also permanent and are contributing to our significant increase in return on.

The equity in 2022 and beyond.

We expect to generate $750 million in cash from operating activities in fiscal year 2021.

We will continue to use our cash to invest in the growth of our business.

Return cash to shareholders and further reduce our debt.

That <unk>.

Including retiring $410 million of our five and seven 8% public notes that are due in February 2022.

We intend to call these bonds and our fourth quarter and retire them at par in mid November 2021.

Net debt to capital ratio stands at 33, 1% at third quarter end and.

And we expect it to drop to the mid to upper 20% range at fiscal year end.

During the quarter, we continued our program of returning capital to shareholders through share repurchases and dividends.

On our third quarter, we repurchased approximately one 7 million shares at an average price of $57.66.

For an aggregate amount of $95.4 million.

We expect to repurchase a similar amount in our fiscal fourth quarter.

And in April.

We increased our quarterly dividend by 55% to.

To <unk> 17 per share.

These actions reflect our confidence in our business and in the sustainability of our substantial cash flows moving forward.

Yeah.

Turning to fourth quarter and full year guidance.

April due to the production delays impacting our industry. We now expect full year deliveries of approximately 10100 homes.

Compared to the midpoint of our previous guide of 10300 homes.

These 200 deliveries, which are sold and have substantial deposits for our buyers are now.

Projected to settle in the first quarter of fiscal 2022.

So we now project, our fourth quarter deliveries to be approximately 3450 homes. We estimate an average delivered price for the fourth quarter of approximately $840000 per home and approximately 800.

<unk> thousand dollars for the full year.

This is an increase of $15000 per home compared to our previous fiscal year guidance.

We are projecting a fourth quarter adjusted gross margin of 25, 6% of revenues and our full fiscal year 2021, adjusted gross margin of 20.

39%.

This is an increase of 30 basis points compared to our previous full year guidance.

Based on the composition of our backlog we are confident.

Our full year fiscal 2022, adjusted gross margin will significantly exceed the 25.

$5 six margin.

We are projecting for the fourth quarter of fiscal 2021.

Our confidence is based on several factors the most significant of which is the higher prices that are embedded in our backlog, which is the result of the steady and significant price increases we've achieved.

Over the year.

Demand is allowing us to continue to push price in most of our markets.

In addition, we are intensely focused on our construction budgets and managing building costs.

Like the entire industry, we are seeing cost pressures on material and labor.

We enjoy strong.

Longer relationships with our trade partners and have tremendous operating scale, which helps us to manage these costs.

We also continue to benefit from our long land positions.

The land for most of the communities that will be delivering homes in fiscal 2022 was put under.

Control prior to the pandemic at lower prices.

Turning back to guidance, we expect interest and cost of sales to be approximately two 3% of home sales revenues for the fourth quarter and full year.

This full year guidance is 20 basis points better year over year and reflects the impact of.

Debt reductions made earlier this year.

We expect our interest expense to continue to decline in fiscal 2022, as we further reduce our leverage.

We expect SG&A as a percentage of revenue to be approximately nine 8% in the fourth quarter.

And 11, 3% for the full year.

This full year guidance is 50 basis points better than previously projected.

As Doug mentioned, we expect community count to be 340 at fiscal year end.

With 10% growth from there by fiscal year 2022.

Our full year guidance for fiscal year 2021, other income income from unconsolidated unconsolidated entities and land sales is now a $140 million for the full year with.

With approximately $40 million projected for the fourth quarter.

This is a $30 million increase.

<unk> from our projection last quarter and is driven by more sales projected in our apartment living division.

Our third quarter tax rate was 22, 6%, which includes approximately $12 million in energy tax credits.

Our fourth quarter effective tax rate is projected.

<unk> to be approximately 26%.

And our full year guidance is 24, 6%.

90 basis points better than our previous full year guidance.

Taking this all into account we have increased our projected return on beginning equity for fiscal year 2021 to 15.

9% over 700 basis points better than fiscal 2020.

As Doug noted.

We expect it to exceed 20% in fiscal year 2022.

And we believe our capital efficiency initiatives and the structural changes in our land acquisition strategy will keep it above 20%.

<unk> long term.

Now, let me turn the call back to Doug. Thank.

Thank you Marty.

I'd like to take this opportunity to extend my sincere thanks to the tremendous effort from all of our toll brothers' team members. They continue to demonstrate their dedication to taking care of each other and our customers and for that I am very grateful.

Now, let me open it up to questions.

Andre ready to go.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Youre using a speakerphone please pick up your handset before pressing the keys.

Withdraw your question.

<unk>. Please press Star then two.

We ask could you please limit yourself to one question and one follow up.

If you have further questions you may reenter the question queue.

As a reminder, the company is planning to end the call at 930, when the market opens.

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

And the first question comes from Deepa Raghavan of Wells Fargo. Please go ahead.

Hi, Good morning, Dave Marty.

Thanks for taking my questions.

Based on your comments on the 20% plus ROE growth target.

The emphasis.

With us on the plus appears to be slightly stronger than what we heard on your prior call.

Is that a fair observation.

Yes.

And we will.

Obviously give more detailed guidance on our fourth quarter call in three months, but yes, you pick that up correctly.

<unk>.

And I'm, assuming that's driven by the gross margin predominantly is that or is there anything else driving that.

Right.

It is driven by.

Predominantly the gross margin.

Also the increase in sales.

And our land.

Buying strategies that we've been talking about for the last couple of years.

That will continue.

Two to push that Roe.

Permanently.

Alright, My follow up question is on more recent trends.

Are there any trends.

In July and August that maybe stood out for you or what calling out.

I'm, particularly looking for trends or nuances that the other June quarter, ending peers haven't pointed to so far.

Yes.

Sure.

The sales and the demand throughout.

Quarter, where the third quarter were pretty consistent month to month.

As I mentioned in my prepared comments.

And in many markets, we still see demand there.

Net income.

Seats supply.

<unk>, our ability to deliver in <unk>.

And those markets in those communities.

We are either still on allocation.

We're more aggressively driving price.

We're running our processes that include best and final offer too interested in pre qualified buyers and so that really hasnt changed.

I think the one thing we have noticed in some markets.

And they are primarily markets that I would describe in the northeast.

In the Midwest of the Metro West for US is really just Detroit.

We're down to one community in Chicago, where we're seeing some more of the typical summer seasonal.

Trends.

Traffic is up.

Web traffic is up.

We continue to raise prices as we mentioned this past Monday, we had a price increase nationwide. So I don't think theres anything.

Significantly different in July.

Hi in August.

Except that in some markets, primarily those I mentioned in the northeast.

We're feeling some more seasonal trends.

We expected that as the world opened up as people hit the Jersey shore.

Or.

Or did whatever they normally do on.

The lower months.

And now they are preparing their kids back to school, we are seeing in those markets.

More traditional seasonal trends, but that doesn't mean, a slowing and thats why I caution with the year over year comp, it's still a very good market.

There is just some of those seasonal trends.

Theyre summary out west.

And for US of course, we call that Denver West.

Down south and for that I'd say, the Carolinas, Georgia crosses Atlanta, South Carolina, and Florida, We are still seeing most of those markets with more demand.

And we can satisfy.

That's great color, thanks, very much great quarter. Thanks.

Thank you.

The next question comes from Stephen Kim of Evercore ISI. Please go ahead.

Hey, guys. This is actually Brian items on for Stephen Kim Thanks for taking.

Taking my questions here.

I wanted to talk about the <unk> pricing guide a little bit quickly.

You saw really strong price on your deliveries this quarter, I think sequentially up 6% or so and given your comments it sounds like what youre seeing on the ground is still very strong pricing.

I look.

But golf <unk>, where you often have somebody you actually have some of your highest ASP.

So the sequential decline that you're guiding for into next quarter is there anything unusual maybe from a mix perspective.

That can explain that dip.

Yes, I think the biggest ASP.

Spect is.

Our city living business.

It represented about 8% of our third quarter deliveries, we expect it to represent 3% of our fourth quarter deliveries and be less than that in 2022.

So that is a higher margin higher average.

Price business and that is influencing both the margin progression as well as the.

The average price that we reflect in the fourth quarter.

We will have a little bit more hey, Margaret.

Q4 as well.

I think right.

You just finished there.

You got cut.

It off a little bit there's going to be a little bit more coming out of the Pacific in the fourth quarter, which is also higher priced higher margin. So that will have some offsetting effect.

On a bit less of the city living.

But then as we look forward to 'twenty two.

I think you really need to pay.

In.

Yes.

Yeah.

[noise], great I have one follow up on margins actually.

Specifically I wanted to talk about costs and maybe some of this dovetails with what you just said, but you're implying margins are going to be flat in <unk> does that assume higher.

Lumber costs in <unk> than in <unk> and I also just wanted to get a sense of if we think about the peak peak lumber being this past spring coming to a head in may when youre expecting that to make its way into your reported results. Thanks guys. Yes.

Lumber costs.

For the homes, we are building.

Well, we'll peak.

Through Q4, 'twenty, one and Q1 'twenty two.

And then starting in Q2 and accelerating through the balance of 'twenty two.

We will see what is the.

<unk> drop.

And lumber right now with the size of our homes and the amount of lumber we put in them.

Our average house is down in the future again, the homes sold today, when they need lumber will be down as much as $40000.

And lumber, which will we.

We will have a nice benefit.

In the back half of 'twenty two.

Awesome, Thanks, guys great quarter.

Thank you very much.

The next question comes from Buck Horne of Raymond James and Associates. Please go ahead.

Hey, Thanks, Good morning, I was wondering.

Wondering if you could follow up a little bit more on the equity residential deal just.

Number one very capital efficient so great use of our resources, but how do you determine the pricing on those assets at stabilization I'm. Just curious is there some sort of implied cap rate you go into.

Pre determined.

And two construction with equity residential or is it kind of a right of first offer but they don't have the obligation to buy or how does that work.

Sure Buck.

Great Shout out to Charlie Watts last night that was cool.

Okay.

Yeah.

I'm the old Guy in the room.

Okay.

I'm not going to tell you how many times I've seen the rolling stones, starting in high school.

Cusack.

We're really excited about ECR deal.

So nice to be aligned and in partnership with.

The leading luxury apartment.

Owner manager.

In the country.

Such a fantastic company.

Company that we have we have a track record where we built a very large complicated high rise with EQ are 10, or 15 years ago in New York City bottom half as rental top half was luxury.

Condos that we sold.

And so we really it's such a pleasure to have a relationship with a company that talks are talk walks our work gets the business, they're going to help us.

Because they have so much intelligence and so many of these markets we are operating with them.

The key to us was drawn.

Driving capital efficiency through the apartment business. They will now come in and help us cover pre development costs before we buy the land they will invest that land closing with US and then we are committed to sell all of the assets at the stabilization, we're not going to hold apartments.

Long term anymore, we understand the need to recycle the investment to show investors.

Regular predictable sustainable earnings.

And how.

To your specific question after my sales pitch here, how you how we come up with an <unk>.

It's a very thoughtful.

<unk> approach that allows the QR without a complicated marketing process, but with appraisers involved.

To buy us out now remember they have 75% of the investment they only have to.

Proud to 25% of toll.

So theyre going to get the benefit with their 75% investment.

Any.

Uptick in value.

If were unable to agree.

Or if for some reason they don't want the asset.

Then we're going to sell it.

The buy and hold it we're still going to sell it so we're going to get our money back at stabilization, but.

They have to pay for fair value.

They know, they're not going to be taken advantage of us by getting.

A price that's under market, but we also understand that we're saving marketing dollars with brokers.

We're not in a process and the delay that's involved in running those processes in a due diligence process with a third party that youre not sure how it works out in the end and so that's the basic.

Parameters around how it works Marty anything you want to add to that I think they can bring some operating efficiencies to the.

And <unk> through their property management that will enhance the value, but they have a relatively inexpensive cost of capital. So we know we're selling to a <unk>.

Fishing capital source and as Doug mentioned, they are really only buying a quarter the asset at fair value. They have the other three quarters of it.

Right.

And so again.

This is a win win.

You are.

They wanted a strong development partner to feed them new opportunities and we wanted.

A capital efficient platform.

And we've gotten it through the best in the industry.

And there are markets not covered.

There are some properties that won't be covered for example, our student housing business is not something that <unk> at the moment is interested in.

They can't take advantage of opportunity zone assets.

Others may be able to and so we are actively.

Now talking to the other private equity players that we have built this business with.

To find one or more.

Structural permanent long term partners.

Two two.

Complete the business model.

Very similar to what we've done with EQ are on their markets.

That is great color. Thank you so much.

A really fantastic deal I really like the platform there.

So congrats on that second I guess I'll follow up in a different direction.

There is some new legislation that seem to be percolating through Washington, I guess Senator Wyden, Scott a new housing bill.

Our proposed.

It was part of the new infrastructure plan that includes things like $15000 first time buyer tax credit also.

It looks like a developer tax credit to kind of stimulate new homebuilding supply in.

Lower income market areas or maybe more outlying areas and I'm. Just wondering if you guys have had any tie.

<unk> to look at those proposals.

Any general thoughts or impressions about how a first time buyer tax credit could impact a market like it is today or any other thoughts on that potential legislation.

Yes, we havent had a lot of time to study it.

Any.

Anything that Washington does to promote stimulate homeownership.

Even if it's a bit below our typical price point is good for the industry. It's good for toll brothers. We're we're as you know coming down in price the affordable luxury.

There have been tax credits in the past that have been effective in stimulating demand.

There is a significant housing shortage in this country and in certain states. The obvious one is California.

There's an affordability issue that has to be addressed.

So we are we in the industry would be fully supportive of Washington continued focus.

On on this housing crisis on promotion promoting homeownership and so as this develops and of course, we don't know where its going to go it's impossible to predict right now.

Will we.

We as toll brothers and of course, as an industry and working through our lobbying group, leading builders of America will be all over it and I'm sure will be supportive.

As we mentioned in the prepared remarks, nearly 30% of our buyers right. Now are first time homebuyers at least one person on the deed, we need to see what the specifics.

Effects of the legislation.

Might entail, whether it's one or both and whether there's income limits. There. We are active in our apartment business in opportunity zones. So we do.

Served some.

Areas that are.

There may be enveloped by some of these other provisions and in many situations we have afford.

<unk> components of some of the developments we do so we'll have to study, whether that's beneficial to us or not.

Great. Thanks for the color guys great quarter.

Thank you Bob.

The next question comes from Mike Dahl of RBC capital markets. Please go ahead.

Good morning, Thanks for taking my question.

Portable.

Yes, the AQR deals, it's really interesting I wanted to start with a question.

On that I guess, a two part question you've got the 25% interest, but you also have these fee structures in place.

The promote on on sale.

Should we think of it as.

Question on an ultimate sale a bit your your return on investment is greater than that 25% given the fee structures that are in place or any other.

Color there on quantifying that and then the second part is just on the initial three assets just how to think about that and whether thats.

Embedded in terms of some of the other income guide for <unk>.

So on your first question yes.

We expect to.

Received more than 25%.

The sale proceeds.

That's how even forgetting fees that's.

Promote works.

And we have that now with our existing more fragmented.

Business model, where we have multiple private equity partners, but now this all consolidates it and we'll just make it a lot more efficient.

Martin you want to talk about the three assets.

Hello.

The three assets, we already own that land, we have not commenced any construction. They are relatively inexpensive pieces of land, but it will be part of our initiative to reduce the capital that we have an apartment living our apartment living investment has gone down from $770 million.

So many of the year to $650 million right now it'll drop a little bit further as a result of that those three assets still need to be developed they needed to be leased up and so that's a 2023.2024 sort of income event.

But we did sell an asset in our third quarter.

The <unk> residential and we've already sold an asset in our fourth quarter to them.

That werent developed under this program, but were marketed in the general marketplace. If you will and that fourth quarter gain is embedded in our $40 million guidance for the fourth quarter.

Okay, that's very helpful.

My second.

The equity is really on the return.

Capital efficiency, because clearly you are trying to do.

Do your best to articulate to the investment community. It seems like it's potentially one of the more underappreciated areas.

And obviously margins in the near term sales to your point Doug.

It does contribute to the return on equity next year, but.

It looks like you're you're at the point, where all of the actions on capital efficiency are hitting an inflection point in 'twenty, two or more of an inflection point in 'twenty. Two so I guess the question is are there certain quantitative.

<unk> targets that you are going to be setting out not just.

Saying that returns are in excess of 20%, but something like asset turns for example, where thats been kind of the main area that you may have not performed as well as some peers.

It looks at the change.

How are you thinking about.

About that or how should we be thinking about potential for.

Improvement in asset turns over the next year or two.

Yes.

On the call in three months, we will give a lot more detail.

On 22 in terms of margin in terms of ROE.

But youre right 20, twos ROE right now.

Is partially due to the new land buying and other.

Efficiency strategies that we started a couple of years ago, but it's primarily being driven by.

This beautiful wave world.

A lot of driving price.

Having high high sales numbers and.

Having high gross margins, but beyond that.

The reason, we're so confident in the sustainability of.

The higher ROE that will be north of 20 long term.

It is because of the land we've been buying.

We are so disciplined now on internally, we call it IRR, but that translates easily too.

Macro Roe for the company.

Each land deal has to pass such a higher hurdle.

That adds that comes through and delivers into 'twenty three and beyond it's just a new company, it's a new business and its structurally changed and.

If the market doesn't get it that's not for us for a lack of us trying to explain it I think we understand that we.

Prove it out and.

I'm very confident it's coming we have so many different ways.

Ways, we can buy land now and continue to grow this company.

Whether it be through land banking or through joint ventures, with a purchase money mortgages with land sellers are getting longer term.

We have to prompt payment terms with land sellers and that is all working its way through.

The new communities that will be opening.

And that will be delivering homes.

I think you see a bunch of these initiatives already reflected in our balance sheet.

Sure.

Owned land is down to 47%.

When it was 75%, 80% five years ago of total.

We've made great progress on that recently seen a little bit of these initiatives in our JV and other line thats grown a little bit as we put some of our.

Arthur communities into joint venture.

See it in our cash flow, that's being generated significant cash flow. This year last year and projected for next year that allows us the flexibility to buy some stock back pay down some debt increase our dividend all of those things are driven by some of the ROE initiatives.

Our Lord not just how we do things.

It's how we inherently think about things now too that's influenced with Aro <unk> mentality right.

It's great to see it coming through or storms come through thanks for taking my questions.

Welcome. Thank you.

The next question comes from Alan.

Is there Zelman and associates. Please go ahead.

Hey, guys. Good morning, Thanks for taking my questions and I appreciate all the color so far.

So I'd love to.

Maybe an additional question on the ROE topic.

Obviously.

The asset efficiencies.

Lynn.

We could see that filtering through over the next couple of years I guess my question is when you. When you think about the sustainability of those options and land banking availability, we've seen over time that tends to be somewhat cyclical I mean, youre option share got as high as 60% in the last cycle too.

<unk>.

Generally that capital tends to dry up a little bit if the market.

Move sideways or we enter a recession, so I guess beyond 'twenty two the confidence there.

You think it's different this time and that there's longer term capital being attracted to this space that will kind of stick with it through a potential downturn in the future and.

I'll stop there and I have a follow up thanks.

Alan I think some of the growth in owned land from the last cycle was a function of.

The.

Ability to walk from options and the risk profile the option concentration gives.

So it wasn't necessarily driven as much by a lack of capital sources, although I'll admit that it was it was a function of choosing not to move forward with those deals which is.

On a positive side benefit of the return on equity initiatives here in.

Circumstances that arent as great as they are today so.

I think there are much more significant.

<unk> of capital interested in this business as all of Us builders.

Fundamentally change the way, we look at our business to be more return on equity focused.

<unk>.

<unk>.

Are providing solid returns to these capital efficient.

Structure supporters, while also improving our own capital efficiency.

Got it I appreciate that Marty maybe we can follow up a little bit more on that offline, but maybe.

Maybe moving back to the fundamentals for a second.

Doug on a nationwide price increase on Monday.

Can you talk a little bit about the magnitude of that increase and kind of what the trend has been there lately I'm. You know have you been kind of maintaining the same pace of price increases have they moderated a little bit and whats the thinking going forward I know a few builders have said, they're not expecting to see the same type.

It's in power going forward it doesn't sound like that you guys see it the same way.

Monday's price increase.

Was not all that big it was 1%.

It's an opportunity.

To get sales excited kit.

Type of prank, some phone calls and say.

Hey, you got to get in this weekend because the boss tells me Monday I'm going to have a new price sheet in my hand, and so we use these price increases locally and on occasion with a nationwide.

Program like Monday to drive urgency and it's very effective.

<unk>.

So to me what happened Monday is less about the 1% I'll take it I like it but it's really about putting another tool in the toolbox of the sales team to go.

Make a phone call and creates that urgency.

We.

<unk> disagree with some of the other builders and it goes back to my earlier comments that in some markets, we're seeing more traditional seasonal patterns of sales activity.

So.

In those markets that I described out west and down South.

We're.

I'm not going to have demand far exceeding.

Our ability to supply.

We are raising prices as we were.

Through last winter and spring.

And in other markets, where we have seen good but what I'll say is not great or not frothy.

Demand that we saw last year were being more careful.

I think that that's the best.

The way that I can describe it to you Alan.

Got it that makes sense I appreciate it thanks, a lot and I'll also just add that.

We do these national sales events, which.

Fee and it's another REIT it said.

It's another tool in the toolbox to get salespeople to make phone calls and say hey for the next three weeks.

You got to come in and we're having a national sales event, it's usually a modest.

Maybe the maybe the cabinet company has agreed to give us a second or third upgrade to the kitchen cabinets.

Which again that doesn't cost us anything but get some action cooking, we did not have a national sales event in the third quarter.

We did have one in the third quarter of 2020.

But we decided to take take a quarter off so.

We were encouraged to further encouraged by.

The activity of Q3 without having that national sales event occur.

Sure.

The next question comes from Susan Mcclary of Goldman Sachs. Please go ahead.

Thank you good morning, everyone.

The sales Susan.

My first question is can you talk a little bit about the story book deal.

The M&A pipeline looking like today, how are you thinking about the ability to get future deals done and maybe kind of what brought story book to you and what helps you to get over the finish line with that.

Sure story Brook book is small.

Lower priced homebuilder in Las Vegas incredibly efficient REIT.

Markedly high margins.

For the price point of their homes.

We started conversations with them.

Pre COVID-19.

We then put those conversations on hold.

In the spring and summer of 'twenty.

When we were all pretty scared by Covid.

And we were able to keep the relationship moving and get the deal closed a few weeks ago.

Yeah.

Five years ago, we wouldn't have looked at storey park.

Because we wouldn't have gone down in price that way now as we have as.

As we're doing more and more affordable luxury as we have acquired a couple of different affordable luxury.

Price point builders say.

Sable home as an.

Example, in South Carolina Coleman homes as an example in Boise.

We're learning from these builders that are super efficient in their field construction methodologies.

So.

While a small deal.

It's a good deal for us not just for Vega.

<unk>, but we think the teach to continue to teach us to be better lower priced homebuilders in terms of deal flow things are heating up quickly on the M&A front, just with the smaller builders I'm not I'm not talking big Big Big Big demand I'm talking it just seems like.

There are more and more opportunities in markets throughout the country.

For the small local builder.

Who has decided to take their terrific 2021 numbers.

And.

And higher broker and hit the market and so we're.

Nothing to talk about more active our M&A group is seeing more deal flow than they've seen in a long time.

Okay, that's great color.

My question is on the SG&A, yes that obviously came in over 100 basis points lower than.

We're expecting for this quarter you guided it down.

A little bit more for the fourth quarter can you talk to you know what really drove those actions that you've been putting in place in terms of reducing the overhead to come through this quarter and the sustainability of that especially as we look to fiscal 'twenty two.

I think a lot of the initiatives there Susan are associated with a bit less marketing spend.

Better control on our model home cost.

Some reduction in commission expense that we are seeing.

Then from a true overhead perspective, we are very tight.

Great.

Around the organization and here at corporate and we think most of those things will be.

Permanent.

Our employee count.

Dropped pretty significantly.

A year ago.

And we are keeping a tight rein on.

On conditions.

Employee count.

Teams are doing great jobs with fewer people.

Okay. Good alright, good luck with everything.

Thanks, Susan.

This concludes our question and answer session I would like to turn the conference back over to Doug yearly for any closing remarks.

Thanks, Andrea and thanks, everyone for listening in and for your for your interest.

Hope you have a say.

Safe and healthy and happy few final weeks of summer.

Summer and.

And we look forward to.

Speaking with you over the next few months and of course, giving you a more detailed updates on 2020.

So in December.

Well thanks.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.