Q4 2021 Toll Brothers Inc Earnings Call

December 8, 2021

[music].

Good morning, and welcome to the toll brothers fourth quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

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

You ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

The company is planning to end the call at 930, when the market events during the Q&A. Please limit yourself to one question and one follow up please.

Please also note this event is being recorded.

I would now like to turn the conference over to Douglas yearly CEO. Please go ahead.

Thank you Tom Good morning, welcome and thank 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.

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 interest rates the impact of the pandemic the availability of labor and materials inflation and many other factors beyond our control.

That could significantly affect future results.

I'm incredibly proud of our company's performance this year as we executed on our strategic goals of driving growth, increasing profitability and improving capital efficiency.

In fiscal 2021, we delivered nearly 10000 homes. The most in our history and we grew homebuilding revenue by 20% to a record $8 $4 billion.

We continue to expand our margins our full fiscal year 2021, adjusted gross margin was 25%.

150 basis point improvement over fiscal 2020, and we reduced our SG&A expense as a percentage of revenue by 160 basis points year over year to 10, 9%.

We nearly doubled our pre tax income to $1 $1 billion achieved our highest net income ever of $833 $6 million and we grew earnings per share from $3 40 last year to $6 63.

In fiscal 2021.

And we delivered on our strategy of improving returns with an increase in return on beginning equity of 830 basis points to 17, 1% for the full year.

These results reflect the strength of the housing market. The benefits we are realizing from our strategic expansion into new product lines price points and geographies and our focus on driving operating efficiencies and improving the capital efficiency of our land acquisition strategy and.

Fourth quarter and option lots represented 55% of our total loans up from 43% one year ago.

And while we're pleased with our performance in fiscal 2021, we expect even better results in 2022.

At fiscal year end, our backlog stood at a record $9 $5 billion and 10302 homes.

It is supported by substantial nonrefundable deposits and our cancellation rate as a percentage of beginning quarter backlog was a very low one 3% in the fourth quarter.

Just on this solid backlog, we expect to grow homebuilding revenues by an additional 20% in fiscal year 2022.

We also expect to increase our full year adjusted gross margin by 250 basis points due primarily to the strong pricing in our backlog.

Which reflects the significant price increases that we've implemented over the past year.

Plus the operating efficiencies that we continue to gain to optimize floor plans curated options in our design studios and streamlined operations.

And we projected return on beginning equity well above 20% in fiscal year 2022, driven by our permanent pivot to a more capital efficient land strategy and to our improved profitability.

In the fourth quarter demand for homes remained very strong we signed 2957 net contracts for approximately $3 billion up 18% in dollars due to a 26% increase in the average selling price of our whole year over year.

As we start fiscal 2022 demand continues to be very healthy.

We have averaged over 300 nonbinding reservation deposits per week.

In the first five weeks of our fiscal first quarter. The same pace, we have run at for many months now.

On a per community basis. This pace is also consistent with the pace that we saw over the comparable five week period last year.

We are very encouraged by this considering how strong the first quarter of fiscal 2021 was.

Demand strength is broad based across both geographies and product types. We are benefiting from the wide variety of homes and price points that we now offer in more than 60 markets in 24 states.

In the fourth quarter, we raised prices in nearly all markets and limited lot releases in about 20% of our communities. This.

This has allowed us to capture price appreciation and also to manage production schedules.

As discussed last quarter in certain markets more normal seasonal demand patterns have returned.

Our ability to continue raising prices illustrates the deep strength of this housing market as well as the advantages we enjoy as America's luxury homebuilder.

This week, we raised prices again in all of our markets nationwide.

The housing market is being driven by solid fundamentals, including favorable demographics pent up demand from over a decade of underproduction of new homes, low mortgage rates and a tight resale market.

According to a rent can report from last week and the last full week of November the number of homes for sale nationwide hit an all time low and a third of homes sold in one week or less during the month of November.

Additionally, many Americans have fundamentally shifted their lifestyles, and reevaluated, where and how they want to work and live. This is driving migration patterns to the Sunbelt and mountain States, where we have significantly expanded our presence in recent years.

Our build to order model appeals to an affluent customer base that is placing more importance on their homes and gravitating to the personalization, we offer and designing and finishing homes.

We're not maxing out their mortgages and they are less susceptible to affordability issues. They.

I've enjoyed years of price appreciation in their current homes and in the stock market.

Since most of our move up and active adult customers have a home to sell.

Tight resale market gives them confidence that they can sell their home quickly and that an appreciated value that can be reinvested in their new home.

And we continue to realize the benefits of our strategic expansion into the affordable luxury segment in the fourth quarter approximately 42% of our new contracts were in this segment.

Over the past two years nearly half of the lots, we placed under contract or for our affordable luxury communities.

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

While the environment for homebuilders remains healthy this market is not without its challenges consistent with other builders in nearly every other company in the broader economy, we continue to face supply chain disruptions and labor constraints.

These issues extend beyond just construction cycle times and impact land development and municipal approvals and inspections as well.

While we have been able to more than offset cost pressures with price increases. These production constraints continue to extend the cycle times and put pressure on deliveries and our fourth quarter. We saw average cycle times increased by about two weeks compared to the third quarter.

On average it is now taking us about six to eight weeks longer to deliver a home than it took one year ago.

We do not anticipate these labor and supply chain conditions will improve in the near term or.

Our delivery projections for full fiscal 2022 are based on production schedules that reflect current.

Labor and supply chain conditions.

They are not based on any assumption that labour where supply chain conditions improve.

Similarly, our projected 250 basis point increase in adjusted gross margin does not assume any improvement.

And labor or material markets.

Given the high degree of uncertainty regarding when supply chain and the labor markets will normalize we believe these assumptions are prudent.

Our land strategy continues to serve us well in this market. We are poised for significant growth in 2022 and beyond with a pipeline of owned and controlled land that will feed our projected 10% community count growth by the end of fiscal 2022.

This projection is based solely on land, we own or control today.

We also have land under control today for meaningful further community count growth in fiscal year 2023.

We continue to generate strong cash flow and have a healthy balance sheet with ample liquidity. This gives us the flexibility to continue to invest in the growth of our business, while returning capital to our shareholders and reducing debt.

In fiscal 2020, one we returned approximately $455 million to shareholders through dividends and buybacks and reduced debt by approximately $400 million.

We intend to continue to prioritize growth with a balanced approach to capital return and leverage we.

We are targeting buybacks of approximately $100 million per quarter in fiscal year 2022.

With that let me turn it over to Marty.

Thanks, Doug.

In fiscal year 2021 fourth quarter, we delivered 3341 homes and generated revenues of $2 $95 billion, which were up 13, 6% in homes.

18% in dollars from one year ago.

The average price of homes delivered was $883000 benefiting from more city living in specific deliveries than had been anticipated.

Fourth quarter net income was $374 3 million or $3 <unk> per share dilutive.

Compared to a $199 $3 million and $1.55 per share diluted one year ago.

Our fourth quarter adjusted gross margin was 25, 9%.

3rd% to 24% in the fourth quarter of 2020.

This 190 basis point increase in our adjusted gross margin was due primarily to our ability to raise prices.

As well as favorable mix coming a quarter earlier than expected on the Pacific region in city living.

SG&A as a percentage of revenues was eight 8% in the quarter compared to nine 9% in the same quarter one year ago.

This year over year reduction in SG&A is due to both the leverage from increased revenues and tighter cost controls on items, such as head count advertising model home expenses and broker commissions.

Joint venture land sales and other income was $63 $5 million during the fourth quarter compared to $11 $2 million in the fourth quarter of fiscal year 2020.

And approximately $20 million better than projected.

The outperformance was primarily due to an asset sale and our apartment living business that occurred sooner and at a better cap rates than expected.

As well as better than expected performance in our mortgage and title operations.

Our apartment living business had an active and productive year in fiscal year 2021.

In addition to starting in about a dozen new projects across the country. We sold five projects during the year with a total of 1400 20 units that generated cash at toll brothers of approximately $106 million.

And resulted in $75 million of income from unconsolidated entities.

We expect a steady flow of projects, reaching stabilization and being sold each year going forward.

Last quarter.

We announced the strategic partnership between our apartment living unit and AQR.

Under this arrangement, we expect to be able to improve the capital efficiency of our apartment living business.

We continue to explore similar programmatic relationships for markets that are not covered by our joint venture with EUR.

Impairments and write offs totaled $10 $5 million in the quarter.

Concentrated in our northern segment.

We continue to generate strong cash flow with $1 $3 billion of cash flows from operations. This year.

We ended the fiscal year with approximately $3 $45 billion of liquidity.

Including $164 billion of cash and $1 eight $1 billion available under our revolving bank credit facility.

During the year, we invested $1 $9 billion in land acquisition and development returned $455 million to shareholders through share repurchases and dividends and reduced debt by approximately $400 million lowering our net debt to capital ratio to $25.

1% at fiscal year end.

Last month, we received all $410 million of five and seven eights notes that were due in February of 2022 at par.

At fiscal year end, we also extended the maturity of both our $1 9 billion revolving credit facility and our $650 million term loan.

Each of these facilities is now scheduled to mature on November one 2026 five years out.

Our next significant public debt maturity is not until April 2023 on $400 million of senior notes becomes due and after that another $350 million of notes are due in November of 2025.

Looking forward.

We are projecting fiscal year 'twenty, two first quarter deliveries of approximately 2000 homes with an average price of between 865000 and $885000.

Consistent with normal seasonal patterns.

First quarter deliveries are expected to be the low point of the year.

Deliveries for the full fiscal year weighted to the second half.

Also consistent.

With seasonal patterns.

For full fiscal year 2022, we.

We are projecting new home deliveries of between 11250, and 12000 homes with an average price between 875008 hundred $95000.

In light of the challenges caused by labor shortages and supply chain disruptions and related issues with the municipalities. It is important to note that our delivery projections for the first quarter and full year are based on a lower backlog conversion ratios and historical trends would suggest.

We hope the construction environment improves in fiscal year 2022, but we are not factoring improvement into our guidance.

We expect adjusted Homegrown home sales gross margin in fiscal year 2022 to be approximately 27, 5% for the full fiscal year.

This is 250 basis points higher than 2021.

We steadily increased prices over the course of fiscal 2021, we expect those price increases to flow through our gross margin over the course of fiscal year 2022.

In addition, we expect peak lumber prices from last year to be reflected in our first half deliveries.

Therefore, we expect adjusted gross margin in the first quarter to be the low point of the year at approximately 25, 5% with a modest increase in Q2, followed by significant growth in margin in the second half of the year.

We expect interest and cost of sales to be approximately two 2% in the first quarter and two 1% for the full year.

The lower expected interest expense and our cost of sales is due in large parts of the debt reduction actions that we've taken over the past 12 months.

We project first quarter SG&A as a percentage of home sales revenues.

Approximately 14, 1% versus 14, 9% one year ago.

Included in first quarter, SG&A was about $11 million or 63 basis points.

Yeah.

Normal annual accelerated stock compensation expense that will not recur in the remainder of the year.

For the full year, we project SG&A as a percentage of home sales revenues to be approximately 10, 5%.

Doug mentioned that we project community count growth of 10% by fiscal year end 2022.

Based on the high number of community Closeouts that we project for the first quarter.

The typical seasonality of fewer community openings in November and December.

We expect community count dipped to 325 at the end of the first quarter before steadily rising over the remaining course of the year to $3 75.

Again this projected projection is based on land, we already own or control.

Other income income from unconsolidated entities and land sales gross profit.

As expected to be approximately $30 million in the first quarter and $100 million for the full year.

We projected first quarter and full year tax rate of approximately 26%.

Our weighted average share count is expected to be approximately 123 million shares for the first quarter and $121 5 million for the full year.

With this all together using our mid points and we are guiding to fiscal year 2022 earnings per share of approximately $10.

This represents a 50% increase in earnings per share over 2021.

Now, let me turn it back to Doug.

Thank you Marty.

Before I open it up for questions I would like to thank the toll brothers team for their determination and creativity and commitment to make this a record year.

These are very exciting times for toll brothers.

Tom Let's open it up.

We will now begin the question and answer session. As a reminder, the company is planning to end the call at 930, when the market open. So during the Q&A. Please limit yourself to one question and one follow up if.

Thank you I'd like to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

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

Yeah.

Hi, Good morning, everyone. Thanks for taking my question.

Good morning, great quarter, it looks like Q1 ton of not pretty nice.

Well.

But just looking at the guide for 2022.

And looking at the gross margin, especially in the second half you are talking about roughly 29, 30% ex cap gross margins exiting the year.

I'm just curious does it bake in the recent lift in lumber.

Do you think that hits, you by Ben and I'm curious you know how do we.

Is that how sustainable is that if let's just say commodities don't move from theory is that what we should be expecting in 2023, I mean hypothetical question, but is that what we should be expecting 2023, if things were to stay here at this.

Commodities don't move from here.

Deepa. So yes, we have we believe we have properly budgeted and built in contingencies.

We're not just us.

The relatively modest compared to a year ago.

An increase in lumber prices recently.

We have increased our contingencies on our building costs that are within our budgets.

However, lumber to cover some labor pressure cover some of the supply chain issues. We've talked about so yes. We are comfortable I think we made it clear in our prepared comments we.

We believe we are very comfortable and we are being prudent in our guidance.

That this market.

The labor and supply market does not improve and in fact, we have proper contingencies and to protect ourselves to lumber continue to go offer should there be any other pressure.

With respect to 2023.

We're just not going to get out that far all I'll say is as I mentioned a moment ago.

We're continuing to raise prices. This is a very strong market nationwide, we had another price increase.

This week and to date.

Through this this recent cycle, we have been able to more than offset price increases cost increases.

Our home price increases.

Well, thanks, al and sticking on that pricing.

For my second question. Your other pricing is up 26% of your backlog pricing is higher it's in the teens, but you're calling for a clothing JSP of up 5%.

What what what sort of conservatism is baked in that is it primarily some production issues or is there some slippage and you just talked about and a.

Deposits being almost you know.

Non refundable deposit so just curious how do I and you had another price increase that's when you can just pointed out so just curious how do I.

Reconcile the strong pricing trends.

We are witnessing.

Sure. It's a great question and it's a pretty simple answer.

Historically, we do not normally deliver.

The price per home in the backlog because of the more expensive houses take longer to build.

So as you saw the fourth quarter's sales price break through $1 million.

Those more expensive homes are bigger they're more complicated they have more upgrades and options and they just take a bit longer to build so theres a lag on the upper end of the sales price and I think that the.

That is the answer the faster turn comes from the affordable luxury and the less expensive homes and so while we're really proud of the price increases that are coming in the future revenue.

That's the reason why it doesn't perfectly match.

What you see in our more recent sales ended up and on our year end backlog.

Okay, sorry, if I can just one more part on the pricing.

Clothing, ESP is strong considering that you're mixing more towards affordable luxury so.

So within that price per farm and are you able to provide color on how much is price versus mix.

Okay.

Yeah.

Well, we had a.

Very strong quarter in our luxury.

Segment this year.

And that has influenced the average price of sales in the fourth quarter.

We expect moving forward more affordable luxury as a percentage of total based on our community count and our land purchases.

Yes.

Great. Thanks, so much I'll pass it on a great quarter.

Thank you very much.

The next question comes from Truman Patterson with Wolfe Research. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions.

Marty.

Hey, Mark.

Arty.

Very strong 21 operating cash flow of $1 3 billion I'm, hoping you can help us think through 'twenty two operating cash flow you should see a nice jump in net income.

You're transitioning more towards option land, improving multifamily capital efficiency, but youre likely going to.

Continue to build backlog as well as a cash usage. So I'm, hoping you can help us think through 'twenty two and then also.

A little bit of clarity on what you plan to do with the cash and I know, Doug mentioned about $100 million and share repo.

Per quarter, but any debt reduction et cetera.

Alright, let me start with the second half of the question first and then I'll move back to cash flow from operations.

We paid off $410 million that already in the first quarter.

Back in mid November.

We guided to a $100 million of buybacks per quarter moving forward.

We have a dividend commitment of the $60 million to $70 million range.

So that's let's call it $850 million of cash usage that's approximately.

<unk>.

What we might generate this year at.

It all depends on the land spend which.

Is variable based on the deals we are going to put into <unk>.

Land banking arrangements and the deals that we have in the pipeline that may or may not close so it will be another strong year of cash flow from operations.

As we currently project.

It may not be quite as strong as the previous year.

Okay, Okay, no no fair enough.

And then Doug I'm, hoping on.

The material supply chain, you know it still remains tight.

Ted your cycle times were up two weeks sequentially in fiscal <unk>, but.

Post quarter November December have you seen any improvement in the availability of any.

Key materials categories.

Or.

Now have you started to see construction cycle times.

Babelize.

Chairman and the answer is no we're not seeing an improvement.

It's tough.

Yes.

Here's a story out of Boise for months, we Couldnt get trusses.

We get that and they were they were delayed and it really hurt construction. We've recently saw the trust problem in Boise only to find out our HVAC contractor again can't get flexible docked.

To do the rocks on the houses so you solve one problem and another one pops up and every market has a different story.

I have spoken with the Ceos of some of our largest partners.

Some companies bigger than toll brothers and they have been somewhat encouraged by what they believe is you always have.

Hope for them.

On solving their problems and speeding up some deliveries and having more consistency in what the what can be delivered but overall.

The short answer is no it is not improving.

Don't see cycle time.

Roy.

Dramatically I talked about six to eight weeks longer now than it was a year ago, but as we said, we think we're being very prudent and not assuming that that gets better for the full year I'm hopeful.

I think by the second half of the year you know there is some reason to hope.

We're going to see some improvement, but we're not building it into how we're running this company or how we're guiding the street.

Absolutely Thanks, guys for taking my questions and good luck on the upcoming quarter.

Thanks, Kevin.

Okay.

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

Oh, great. Thanks, guys.

Great job, obviously, encouraging comments and particularly I guess, Doug you used the word contingency that you've baked in that sounds a lot to me like conservatism.

But well take it I think that's a really encouraging.

My first question relates to the supply chain issues and answer to Truman's question, you said, you're not seeing them grow dramatically, but are you actually seeing them grow.

Continuing from end of October we've been hearing for instance that subcontractors have been willing to sort of warehouse parts when they become available so that if in the future they become unavailable, they're still able to service their largest customers such as you guys. So im wondering if youre seeing that kind of stuff and whether in fact.

Cycle times are stabilizing and maybe that's the way to think about what's happening in <unk> sorry in.

Currently.

Yeah.

Uh huh.

Cycle times were up two weeks as I said from the.

Fourth quarter over third quarter.

You are right. There is a lot of meetings going on and a lot of creative ways that builders and major contractors and suppliers are trying to figure this out.

<unk> pilot is one very good example, we're getting tired of having to go to the home depot to try to find something that you know as to fill a gap for a week and so everybody is on it.

And I think I'm not going to go so far Stephen is to use the word stabilize but I also don't believe we're going to see a continued sharp as ive mentioned another two weeks.

And you know Q1 versus Q Q4, 'twenty, one I think by adding by adding two months six to eight weeks to our delivery cycle and in a year.

Obviously, that's a lot and it is the most acute in the most the biggest issue that every builder is focusing on so yes. I think we are all finding ways to try to if not solve these problems and I'll use your words stabilize them. So yes.

Fairly confident that.

It's not going to get significantly worse.

But I and less encouraged that it's going to get better for some time.

Sorry for being a bank, but that's.

That's a straight as I can give you know this is a very fluid situation and every market is different.

There are certain markets, where they do the teams arent as concerned and there's other markets where it's acute.

Yeah, No I appreciate it I know, it's a crazy.

Time out there.

We're still related to supply chain and your reaction to it we've got a couple.

A few questions kind of all around that I was curious if you could give us a sense for how many start home do you started in the quarter and how that compares with what do you expect to do in the first quarter and what you did maybe in the third quarter same thing with how many unsold units under construction.

Do you have at year end and do you think that's going to increase <unk> 22.

And then lastly, do you think your backlog can continue to rise from its current level over the next few quarters.

Sure so.

About 12%.

Of our homes or spec.

Which means that they are starting without a buyer.

That was higher a few quarters ago, we talked about and approaching 20%.

We've sold through those facts, we have huge backlogs of homes that you.

You now have been.

I have been.

Contracted with a buyer that you know.

Obviously has to take some priority because we have a contract on on that lot, but we are absolutely committed to increase our spec.

Inventory to increase our starts.

Of spec homes over the next couple of quarters and as we begin to solve or at least stabilize.

Some of the backlog turn some of the construction issues you will see ups.

Increase the number of starts and we will in most cases hold off on the sale of the spec starts until the houses are much further along and closer to completion.

So that is absolutely a strategy that is in place.

I am pushing to get that 12% spec number up.

Closer to.

To the 20%.

We were at a few months ago.

Yes.

Stephen I'm, sorry did you have a second half of that or we get.

Last one was just simply about your backlog your backlog has a very high in many ways. It that yes, yes.

So right now we're selling at a better pace of 40 per community and we're building at about a pace of 36, historically, we've been able to build higher than 36 approaching $40.

With the supply and labor issues out there.

It's tougher right now, but are we able to grow backlog yes.

Yes.

Absolutely.

What does that do to cycle times and delivery dates that we quote.

That's dependent upon.

What's going on in the field and how quickly we can get houses built but.

We're open for business as I mentioned, 20% of our communities are on allocation, 80% are open.

And we arent seeing terrific.

Terrific demand and sales activity in all of our markets nationwide and.

All of our product segments.

Cordoba luxury luxury and active adult and so we are we are raising prices or on allocation, where we need to be.

Because you know the quota delivery date is pushed out but we.

We sit today in a very strong housing market.

Yeah. Good times, thanks, very much guys.

Thank you take care.

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

Good morning.

Thanks, Doug Marty for taking the questions.

I wanted to follow up on pricing I think.

Last call you mentioned some of the normalization in and how maybe the national increase that turned into as much a marketing tool is something to cover costs or expand margin I'm wondering.

As you have seen some stability or strength come back to the market.

This fall how would you characterize the price increase that youre putting out there.

This week in terms of magnitude or signaling effect.

So so please understand that communities are free to raise prices.

Whenever they want subjective.

I, usually put my eyes on it but we don't wait for what I described this week.

And there are many communities that are regularly raising prices.

<unk>.

234 times a year, we do have a national price increase which helps with sales or you sell into it. We also three times a year have a national sales event.

A couple of week long sales event and.

And we can also sell onto that this week prices went up between one and 5% in our communities and all of our markets nationwide.

Okay, great understood and thanks, Doug.

My second question just on the cadence of margins I mean, it makes sense given the moving pieces just in terms of what that implies for the second half I think it's.

I guess it depends on your definition of modest insignificant.

Youre talking <unk> versus <unk>, but maybe something in the neighborhood of 29%.

In the second half of the year as Marty and any further color on how should we should we be thinking about kind of the exit rate.

For gross margin and your guidance for 'twenty two.

Yes, I think.

Directionally you're on track there.

I think.

25, and a half for the first quarter, a modest increase for the second quarter and then we get up into those two upper twenty's for the last two quarters more so in the fourth quarter.

And would you say that your fourth quarter guidance, I guess, given the deliveries or the constraints that you've outlined.

Would you say I know you don't want to get into 'twenty, three but the pricing that you've already put into effect that's in your backlog.

That is not yet fully coming through by the end of this.

By the end of 'twenty two is that fair.

And it's fair that's fair to say, yeah, there's certainly some homes, we're selling today.

That will not be delivering until 2023 and some homes in the year end backlog that's right.

Sure.

Okay, great. Thank you.

Okay.

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

Hey, guys. Good morning, Nice first of all my congrats.

First question.

<unk>.

The lot count and land acquisition environment.

I know this is not necessarily representative of what youre seeing or doing today, but the sequential increase in your lot count was a lot more modest than we've seen in the last several quarters and I'm. Just curious if you could kind of talk about what your appetite is for land right now what the environment looks like in terms of price depreciation on the lot side. Obviously you guys are you have a lot of land.

It's a great position to be in this market. So are you maybe starting to pull back a little bit on the gas pedal or is this should I not read into that.

Sure.

Yes, I wouldn't read into it.

We're very opportunistic.

As I think everyone now understands we're obsessive we focused on how we're buying the land and driving our return on investment return on equity.

And I.

I'm very proud that we're now at 55% optioned weed.

We've set a goal of 45% option, we blew through that we set a goal of 50% optioned.

Blue through that we're going to set a goal of 60% optioned I suspect, we'll blow through that and so.

It's <unk>.

Q4.

What was one of the biggest land spend that we had in some time and that was just sort of coincidental with when certain land that we tied up.

In prior times closed and would require to check so I wouldn't I wouldn't read.

I wouldn't read much into it.

What youre seeing there we're going to continue to be opportunistic our footprint is bigger where now we werent 50 markets were down 60 markets and the way we have expanded in some of these smaller bolt on.

Builder acquisitions, we've done of late and so there's more opportunity and as we expand affordable luxury theres more opportunity, we mentioned that almost half of our land buys in the last couple of years go to the affordable luxury segment. So.

We're not.

We're not shutting it down we're not changing the underwriting it's still it's still very disciplined.

So I wouldn't read much into that one quarter I think youre going to see us continue to increase the optioned land.

It drives a higher return on equity.

Growth.

Yeah.

I wanted to take this opportunity to.

Kind of pointed out that all of our 36000 or so owned lots.

10000 of them are sold and are in backlog.

So compared to.

Other builders with the size of our backlog our use of land supply needs to be evaluated with that sort of mentality right because we're not a spec builder right.

I appreciate that guys.

Thank you second question it might be a two parter here, but.

First one.

Thinking about Boise as an example, you guys. Obviously were very early to us to take advantage of the strength of that market and it seems like in the last six or so months a number of other publics have entered that market in general it kind of feels like builders are back in expansion mode. You know they haven't necessarily been entering new markets as much as they had been over the last six or nine months.

Just thinking about your your observations in the market like Boise for example, but does that create any type of.

Competitiveness or incentives or any change in market dynamics. When you have a number of builders entering.

It seems like a fairly hot market over a short period of time.

Well Boise is a good example.

We couldn't keep it a secret any longer in fact, I didn't do a good job I've ever keeping it a secret.

Because we were doing so well and so proud of it but theres no question.

You prefer when the other big publics onto the market and you have a dominant position we have a huge head start there and we have many thousands of high quality inexpensive lots.

So their island as an example, where we can be a bit more conservative in our land buying because of the land position we have built.

But yes as some of these markets.

Become a bit more competitive with larger players in the market.

You have to find your niche.

And I think we're really good at that.

We're going to come in at a little bit higher price, even even our affordable luxury is a little bit higher price, we're not going to be all spec, we're going to offer people choice people today, even at a lower price. They want some level of choice. The home is so important but they want some opportunity to design it to their lifestyle and so we work hard.

<unk>, even in really competitive markets.

Finding that niche and I think thats distinct to toll brothers and we're going to continue to take advantage of it but youre right as markets get loaded up with bigger builders. They come more they become more competitive and you have to be more careful and you have to find the right opportunities that fit your business plan.

Makes sense, Doug in your response to that kind of segways into that third question I wanted to ask was just that.

With the cycle times, becoming so elongated for you guys and the fact that even though you are trying to put up a few more specs on the ground youre never going to be a spec focused as a number of other builders have you seen any sign of consumer pushback in the sense that especially at that affordable luxury price point, where maybe you are getting more renters coming to those.

Homes that need to move fairly quickly that that that extended cycle times that would turn off to them and they are they are not willing to move forward and theyre looking for something that they can be in a little bit quicker or is it not at that pinpoint yet.

Well run.

<unk> are up dramatically.

Interest rates are still very low so we're not I'm not hearing that.

People come in and say boy I'm really disappointed it's not 12 months to get that house that last year I could've gotten from you and nine and a half and I'm going to go rent.

Maybe they'll rent while they wait for the 12 months did you got a 12 month lease they'll wait until our assets completed but.

So I don't think were feeling it, particularly at our price point, even an affordable luxury of the rent decision versus the one but.

There is a I think it is.

A small part of the market that has delivery dates get pushed out.

They become a bit concerned as to whether they want to wait that long and they may go look for other opportunities now the resale market is so incredibly tight that im not sure theyre going to find it there and all the other builders in the market are pretty busy so I'm not sure you're going to find it there could be some spec inventory new homes back inventory, possibly but again the question is.

So I want to spec that is not exactly what I want, but I want to wait a bit and get exactly what I want because I can.

Modified a bit with toll so.

There is some modest pressure, but we're not feeling it too.

To any extent, that's affecting demand are affecting pricing power or affecting our sales pace.

Got it okay, great. Thanks, a lot I appreciate the responses.

Very welcoming I'll take care.

Yeah.

The next question comes from Michael Rehaut with Jpmorgan Securities. Please go ahead.

Hi.

Thanks, very much for taking my question good morning, and congrats on all the progress and the great results.

Thanks, Mike.

First question I, just wanted to circle back and I don't want to beat a dead horse and it's not easy to talk about $2023 24, but you've had a couple of questions about the exit rate on the gross margins and you know.

I think one of the big concerns for the sector overall, not just toll is the.

The sustainability of those margins as they are approaching prior peaks.

And.

What potential trajectory you might see in the <unk>.

Out years in the next couple of years.

Given the still very strong pricing power that you have in the market.

That's continued as you've as you've noted.

How are you thinking about the.

Potential tailwind than headwind.

If you think about 2023 24.

And.

Yeah.

Relative to the sustainability of that exit rate that youre looking at in 'twenty two.

Mike All I can say to that because we're not going to get out that far.

All of our geographies.

And all of our different product segments.

Yeah.

Are seeing gross margin expansion today.

And that is with.

Contingencies, we put in place.

The cover.

Certain levels.

Cost increases are uncertainties that are out in the market I am not going to predict.

As far as you talked about how that gross margin compares to industry historic highs.

I can't even predict how it compares to today.

What I just said all geographies all product types are seeing gross margin expansion on the next homes sold at this moment in time.

Okay.

Appreciate that.

I guess secondly, you.

You mentioned.

Your.

I believe it was non binding deposits for the first five weeks.

Kind of continuing to pace over the last few months and in similar to what you saw last year.

Your absorption rate on.

On average for.

Fiscal 'twenty one was in the low threes per month 33233.

Yeah.

Is that a good way to think about the business.

During the upcoming year assuming.

Current demand trends persist and would you expect to see.

Within the year.

Higher rate.

Almost four per month in the second quarter, obviously, that's strong.

Quarter, but given the fact that now.

Now only 20% of your communities are on allocation.

Which means that you're kind of selling at a.

Perhaps closer to market, let's say.

I would think.

Is that has that type of a sales pace.

Kind of how we should think about the business.

Over the next 12 months.

Well.

As I said, we were delighted.

That are five weeks of deposits equaled the same five weeks.

At the end of calendar 2020.

First first month of Q1 fiscal 2021.

Remember.

Q1.

Of 2021 sales were up 59%.

Q1 19.

We were hot.

Okay.

Sorry, my apologies 'twenty so.

For us to achieve its only five weeks, but for us to achieve deposit.

Match.

A year ago.

When that quarter, a year ago was up 59% over the prior year.

Very encouraged the cadence for the year as you described you know our cadence.

Generally.

Number.

In January are not the strongest months for sales and then February this spring season kicks in and then off we go with the spring selling season.

I've mentioned that Theres, some signs of seasonality in some of our markets and many other markets there arent signs of seasonality.

Last year, there was no seasonality.

Or what week of the year once we just kept selling so.

All I can say to that Mike is because we're not going to predict our sales going forward. We have the land we have community count growth I mean, we have an incredibly wide net now with geographies in price point and we've had a terrific start.

Q1.

Great. Thanks, so much good luck.

Thank you bye take care.

Yes.

And our last question comes from Ross <unk> with Bank of America. Please go ahead.

Hi, Good morning, it's Rick Thanks for taking my question.

Yes.

You mentioned in lifestyle changes and migration shifts.

Prepared remarks, I just wanted to ask what kind of what are you seeing that gives you a pumpkin.

This is a sustainable trend and it's not just not just temporary and then within that can you just talk about the demand you're seeing for <unk>.

Holmes.

Yes, I'm, sorry, I misunderstood the first half's consistency of migration patterns. Thank you was it long term.

Sure so.

We look at the U haul pricing charts.

They obviously have surge pricing if you want to if you want to move loads from New York City.

Two.

Palm Beach, Youre going to pay $4000 do you want to get that you hold back to New York for another load. They may pay you to drive it north and those trends exist from California to Austin.

California to Reno Vegas, and Phoenix in the north to <unk>.

Charles said in Florida, and I think.

<unk>.

Those trends are real I mean before COVID-19.

People were leaving.

Northeast.

Chase in the Sunshine chasing the jobs chasing the lifestyle chasing affordability.

And the same thing from the west the expensive state of California, We're doing really well in California, It's 40 million people and it's a half a million decided to leave we still got ourselves $39 5 million and want to stay there and pay the price to enjoy that Pacific Ocean, but those migration trends existed before COVID-19.

And they have accelerated.

And I think our firmed up longer term.

When Covid is long gone.

Mentality of people.

The live where they want to live to take a job that allows them to have flexibility in where they can work at least part of the time to design the home.

To their lifestyles.

Early on we were marketing.

My home is the most important thing in the world by home as my sanctuary.

This is real people care more about their home they are spending more time, there and they are concentrating on how they can design it and theyre moving to where they are allowed to move to enjoy their life versus where the job had tethered them.

And so I feel strongly these migration patterns.

Bell Mountain States.

Existing before Covid and will long outlive.

At this moment that we are in.

I just look at.

No we have states like Idaho, Florida, Texas, North Carolina, Nevada, Arizona, Colorado.

40%.

Some cases of our buyers coming in are coming from a different state.

And that's going to continue.

Thank you and then just to follow up on this.

Spoke a little bit about how you're affluent customer less.

Less concerned about affordability.

Mortgage rates have stayed stable and low but if they do move up how do you think about the willingness of your kind of core up one buyer to trade up.

Yes, it's a great question, we ran the math if rates go up by 150 basis points.

Call it.

Irina quarter to four and three quarters.

5% of our backlog.

We'd have to figure out either.

Mortgage lapse or go to an adjustable product only 5% and that's because.

20% of all cash and doesn't get a mortgage or an average LTV of 69%. They have a lot of equity coming out of their existing home they've done well in the stock market.

So that's the backlog your bigger question about.

How are the buyers react to it.

I'm not I can't sit here and tell you that toll brothers is immune to affordability and immune to higher interest rates, but we are in a much better position because of the nature of our buyer that's relevant for all the reasons that we have Kevin the other thing as we have.

Yeah.

Loan limits have gone up on conforming loans.

They've gone up by $100000.

And Thats moved about 6% of our backlog.

From a jumbo down into a conforming.

And that's also very encouraging $100000 average move.

And the loan limit of conforming and so I think that that's it.

It's a nice tailwind.

For our business.

Great. Thanks for all the color.

You're very welcome.

This concludes our question and answer session I will turn the conference back over to management for any closing remarks.

Thank you Tom and thanks, everyone for your continued interest and support.

We wish everybody a wonderful holiday season, and a healthy and happy 2022.

Thanks.

Yes.

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

Okay.

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Sure.

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

You asked a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Company is planning to end the call at 930, when the market events during the Q&A. Please limit yourself to one question and one follow up.

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I would now like to turn the conference over to Douglas yearly CEO. Please go ahead.

That could significantly affect future results.

I'm incredibly proud of our company's performance this year as we executed on our strategic goals of driving growth, increasing profitability and improving capital efficiency and.

In fiscal 2021, we delivered nearly 10000 homes than most in our history and we grew homebuilding revenue by 20% to a record $8 $4 billion.

We continue to expand our margins our full fiscal year 2021, adjusted gross margin was 25% a 150 basis point improvement over fiscal 2020, and we reduced our SG&A expense as a percentage of revenue by 160 basis points.

Year over year to 10, 9%.