Q4 2023 Toll Brothers Inc Earnings Call

[music].

Good morning, and welcome to the toll brothers fourth quarter fiscal year 2023 conference calls.

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The company is planning to end the call at 931 of the market opens.

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

Thank you Rocco.

Good morning.

Welcome and thank all of you for joining us before I begin I ask you to read our 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.

Events housing and financial markets interest rates, the availability of labor and materials inflation and many other factors beyond our control that could significantly affect future results.

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

Fiscal 2023, and the fourth quarter were terrific for toll brothers.

Our income and earnings per share for the full year were all time highs and we ended the year with a 72% increase in fourth quarter signed contracts compared to Q4 2022.

We delivered 2000, and $705 55 homes and generated $2 $95 billion in home sales revenues in the fourth quarter.

$211 million above the midpoint of our guidance.

Our adjusted gross margin was 29, 1%.

And our SG&A expense as a percentage of home sales revenues was eight 2%.

Each beating guidance by 60 basis points.

The combination of top line outperformance and improved operating efficiency resulted in net income of $445.5 million or $4.11 per diluted share.

Our second best fourth quarter ever behind only last year's fourth quarter.

For the full year, we delivered 9597 homes at an average price of approximately $1 million $30000.

Generating record homebuilding revenues of $9 $9 billion.

Our full year adjusted gross margin was 28, 7%.

120 basis point increase.

For 2022.

And 20 basis points better than guidance.

SG&A expense as a percentage of home sales revenues was nine 2% an.

An improvement of 90 basis points compared to last year, and also 20 basis points better than guidance.

Earnings in fiscal year, 2023, or one $4 billion or $12.36 per diluted share both company records.

Our book value per share was <unk> 65.

$40 $65.49, a year end and a return on beginning equity was 22, 8%.

We accomplished these results despite mortgage rates, reaching generational highs global unrest gridlock in Washington, and fears of a recession.

Our success was due in large part to our strategies of not chasing sales at a lower margin in the second half of 2022.

Increasing our supply of spec homes and focusing on operational efficiency.

Yeah.

Turning to market conditions, we continued to see solid demand for our homes in the fourth quarter is it tight resale market continued to drive buyers to new homes.

We signed 2038 net contracts.

At an average price of $989000.

72% in units compared to Q4 2022.

The average price was down 11% year over year, but essentially flat over the prior three quarters of 2023.

The decline in ISP was due primarily to mix.

In fact, we raised our average net price after incentives by $16000 in the quarter.

Remember that our mix shifts and lower Asps.

Should not be a surprise.

It means our strategy of broadening our product offerings to include lower price points and capture greater market share and growth opportunities is working.

Along these lines, our affordable luxury and active adult communities were our strongest performers in the quarter.

Unit sales of affordable luxury homes were up 109% in Q4 2023 compared to Q4 2022 and active adult was up 82%.

In Q4 affordable luxury accounted for approximately 46% of our unit sales luxury was 31% and.

And active adult was 23%.

On a dollar basis affordable luxury was 38% luxury was 43% and.

And active adult was 19%.

Geographically, our Pacific region was up nearly 250% and agreements in the fourth quarter versus the prior year, followed by our mountain region, which saw a 127% increase in the south.

Of the 87%.

Our strongest markets in the quarter were Denver, Boise, Southern California, all of Texas.

In the mid Atlantic from Atlanta up the eastern Seaboard to Boston.

In terms of cadence for the corner.

Demand followed the typical seasonal pattern with September being the strongest for deposits.

October was stronger than expected given the rise in mortgage rates and we were encouraged that we did not have to increase incentives to drive sales.

In that month.

As I mentioned, we actually raised our average price by $16000 in the quarter.

Broken down as a $12000 increase in base price and a $4000 decrease in incentives.

Demand has remained solid into the start of our first quarter and is consistent with normal seasonality.

As a reminder, historically net orders decline about 20% from our fourth to first quarter, primarily because of the holiday months of November and December fall on our first quarter.

We are anticipating a modestly better trend this year as.

As we are encouraged by the recent 75 basis point decline in mortgage rates.

With inflation easing over the past few quarters, we believe rates may drop further.

And the timing of the rate decline is setting up nicely for the upcoming spring selling season.

This timing also plays well into our strategy of increasing our spec supply and growing our community count.

In the fourth quarter spec homes represented approximately 42% of our orders and 33% of our deliveries.

We expect that spec sold in fiscal 'twenty 'twenty four will account for approximately 35% of deliveries in 2024.

Remember that we define as back as any home without a buyer that has a foundation poured.

We sell our specs at various stages of construction.

Which allows many of our buyers the opportunity to still personalize their homes with finishes that match their tastes.

Specs allow us to buy it out in mortgage rates and we also benefit from a faster more efficient construction schedule.

The other 65% of our projected 2024 deliveries are either in our backlog.

Which stood at nearly 6600 homes.

And $6 $95 billion at fiscal year end.

Where our build to order homes that have already sold or will be sold in this first quarter.

This provides a solid base of high margin homes to drive 2024 results.

We expect community Count growth also helped drive results in fiscal 'twenty 'twenty four we plan to increase community count by 10%. This year and are targeting 410 operating communities.

At year end.

Importantly, we control sufficient land for community count growth beyond 2024.

Fiscal year end 2023, we controlled approximately 70700 lots.

49% of which were optioned.

Excluding the 6578 loss committing to homebuyers in our backlog.

Our option land represented.

54%.

Lots.

We continue to target an overall mix of 60% optioned and 40% owned over the longer term.

We also continue to be selective and disciplined in our approach to buying land, we assess all land deals whether they involve new land opportunities or take downs under existing options with underwriting standards focused on both margins and returns.

This approach and our overall focus on capital efficiency has helped drive our are we over 20% for the past two years.

And our fourth quarter, we repurchased $326 million of our common stock.

Bringing our full year repurchases to 556 million at an average price of $72 per share.

During fiscal 2023, we repurchased approximately 7% of our diluted shares outstanding at the beginning of the year.

We also paid $91 million in dividends in fiscal 2023.

Buybacks and dividends will remain an important part of our capital allocation priorities well into the future.

We have budgeted another $400 million of share repurchases.

Fiscal 'twenty 'twenty four.

With that I'll turn it over to Marty.

Thanks, Doug.

As Doug mentioned, we are very pleased with our fourth quarter and full year results. Our revenue net income and earnings per share were all full year records.

In fiscal year 2023 fourth quarter, we delivered 20, 755 homes and generated home sales revenues of $2 $95 billion down 27% in homes and 18% in dollars from one year ago.

Selecting the challenging sales environment from back then.

The average price of homes delivered was up 13% to $1.071 million.

Fourth quarter, net income was $445 $5 million or $4 11 per diluted share compared to $645 million and $5 63 per diluted share one year ago.

Remember that last years net income included a net after tax benefit of approximately $103 million related to the proceeds from the settlement of a legal claim.

Our fourth quarter, adjusted gross margin, which excludes interest and inventory write downs was 29, 1%.

In 2023 up 10 basis points compared to 29.0% in the fourth quarter of 2022.

Reflecting our strategy from over a year ago not to aggressively chase sales at the expense of margin when the market was softer.

SG&A as a percentage of revenues was eight 2% in the quarter compared.

Compared to seven 7% in the same quarter one year ago.

The year over year percentage increase in SG&A.

Merrily related to less revenue leverage.

<unk> 2022, total SG&A dollars were actually down $33 million in the quarter and $68 million for the year.

Despite inflationary pressures.

Joint venture land sales and other income was $36 million in the fourth quarter compared to $152 $5 million in the fourth quarter of fiscal year 2022.

Again included the aforementioned litigation recovery of 140 $341 million on a pretax basis.

Joint venture land sales and other income in Q4 2023 included approximately $32 million of gains from the sale of stabilized apartment communities developed by toll brothers apartment living and held in joint venture.

Despite very challenging market conditions, we were able to sell two apartment communities at reasonable prices in the quarter.

Which is a testament to the quality of our apartment living communities.

We expect to sell additional apartment communities this year.

Write offs included in home sales cost of revenues totaled $8 $3 million in the quarter compared to $22 1 million in the prior year period.

Landfill write offs were $12 9 million.

Related to the planned sale of our city living land parcel into a joint venture.

In the fourth quarter, 26% of our buyers paid all cash.

<unk> with the 25% in the third quarter.

And up from our long term average of 20%.

Ours, who did take a mortgage averaged an LTV of 69% in the quarter.

Our cancellation rate as a percentage of backlog was three 4% in the fourth quarter.

Consistent with where this rate has been for all of 2023.

We continued to generate strong cash flow in fiscal 2023 with $1 $3 billion of cash flow from operations.

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

<unk>, one $3 billion of cash and $1 $8 billion available under our revolving bank credit facility, which has more than four years of duration remaining.

In fiscal year 2023, we invested $2 $3 billion in land acquisition and land development.

We also returned $653 million to shareholders through share repurchases and dividends.

<unk> reduced our senior debt by $400 million.

Over the past two years, we've returned $1 $3 billion to shareholders by repurchasing $18 9 million shares.

Our net debt to capital ratio was 17, 7% in fiscal year end and we have no significant debt maturities until fiscal 2026 or.

Our balance sheet is in great shape.

Turning to our guidance.

I'd like to remind you of the usual caveat regarding forward looking statements.

We are projecting first quarter deliveries of approximately 1800 to 1900 homes with an average price of between 985000 and $1 million and $5000.

Consistent with normal seasonal patterns first quarter deliveries are expected to be the low point of the year.

With deliveries for the full fiscal year weighted to the second half.

For full fiscal year of 2024, we are projecting new home deliveries of between 90, 850, and 10350 homes with an average price between 940009 hundred $60000.

We expect our adjusted gross margin in the first quarter of fiscal 2024 to be 28% and for the full year to be approximately 27, 9%.

The slight decline in our projected gross margin for Q1 from Q4.

It reflects the impact of the slower sales environment in the second half of fiscal 'twenty two.

In the first quarter of fiscal 'twenty three as more sales from that period, we'll be delivering in Q1 and delivered in Q4.

We expect interest in cost of sales to be approximately one 4% in the first quarter and for the full year.

This reflects the continuing benefit of our lower leverage.

We project first quarter SG&A as a percentage of home sales revenues to be approximately 12, 4% versus 12, 1% one year ago.

Included in first quarter SG&A is about $12 million of our annual accelerated stock compensation expense.

Should not recur in the remainder of the year's quarters.

For the full year, we project SG&A as a percentage of home sales revenues to be approximately nine 9%.

The year over year projected increases in SG&A margin is due primarily to the impacts of lower revenue leverage.

Immunity count growth.

And cost inflation.

We continue to focus on cost control and operating efficiency. We've made a lot of progress, but we are not done and we're working to achieve additional cost savings in fiscal 2024 and beyond.

Other income income from unconsolidated entities and land sales gross profit is expected to be a loss of $10 million in the first quarter.

But a gain of $125 million for the full year.

Which includes the sale of stabilized apartment communities, we do not expect any sales in the first quarter, but expect to sell a number of our communities by the end of the year.

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

Our weighted average share count is expected to be approximately $106 million for the first quarter and one <unk>.

Third and $4 million for the full year.

This assumes we repurchased a targeted $400 million of common stock this year with most of that occurring later in the year aligned with our anticipated higher cash flow.

Based on land, we currently own or control, we expect to grow community count by 10%.

By the end of fiscal 2024.

What do you mean us altogether.

Project, approximately $12 to $12 50.

Earnings per share for the full year.

Which would move our book value to approximately $78 per share at fiscal year end 2024.

With that I'll turn it back over to Doug.

Thanks Marty.

Two years ago in December 2021.

30 year mortgage rate was around 3%.

It doubled to 6% in December 2022.

And a little over a month ago it broke through 8%.

It's extraordinary to think that mortgage rates have moved from 3% to 8% in two years.

And yet during that time, we produced two consecutive years of record revenues and earnings with ROE above 20%.

We also increased our adjusted gross margin by 370 basis points decreased our SG&A margin by 170 basis points.

And today, we are projecting another year of earnings above $12 per share.

And we are not the only ones to have achieved strong results in the face of rising rates.

It is clear the business model of the public builders has fundamentally changed.

We have grown revenues.

<unk> gained market share lowered leverage derisk balance sheets with a focus on capital efficiency cash flows in a row.

And returned a substantial amount of capital to our investors.

Today toll brothers trades at approximately seven times earnings and one three times book value.

The average P multiple for the equally weighted S&P 500 is about 16 times.

In my opinion are valuations deserve a fresh look.

Before we open it up to questions.

Like to thank the entire toll brothers team for staying focused on our customers adapting to market conditions and consistently executing on our core strategies.

Most importantly, you have helped position the company for continued success in 2024 and beyond.

For that I am truly grateful.

Now, let's open it up to questions.

<unk>, we're ready to go yes, Sir we will now begin the question and answer session.

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

The Q&A please limit yourself to one question and one follow up.

To ask a question you May Press Star then one on your Touchtone phone.

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

To withdraw your question. Please press Star then two.

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

And today's first question comes from Stephen Kim with Evercore. Please go ahead.

Yeah. Thanks, very much guys. Appreciate all the color congrats on the good results.

I guess my first question is related to your ongoing product mix shift.

Affordable luxury in particular I was curious if you could give us a sense for how long do you think this this process of sort of adjusting your mix.

It's going to take is this something that we could see stabilize by year end 'twenty. Four do you think youll have gotten your mix sort of where you want it or is it going to be something that's going to be a multiyear process and can you help us understand what an expected range of absorptions should be sales per community per month. Once your mix does stabilize at.

The levels that you're at the sort of percentages that you want.

Sure.

It's a fluid process, Steve we're really proud of.

Of this move we made in this into some lower price still affordable and he says to me still luxury product you know as I've talked about.

With 75 million millennials out there we were not going to wait for them to hit their forties and either move up home, which is what toll brothers has always been about and I'm really proud of how we brought the three series BMW in and we went after the more affluent first time buyer.

I think it will stabilize around 45%.

Of our business on a unit basis.

Now remember.

Cause the prices a bit lower on a dollar value that may be down five points or so from that 45, and you know based on the numbers. We just gave you for where we are right now.

Get them pretty close to that in the fourth quarter, we were spot on with affordable luxury being 40%, 46% of our unit sales and it reflected about 38% of our dollar value. So.

It's fluid we continue to focus on more and more of those opportunities, but we're getting close to what I think is a good mix.

Quarter by quarter, It may vary a little bit but.

We're we're about there and as I also mentioned.

The affordable luxury.

And the active adult empty nester, which also tends to be a bit lower priced naturally.

They they lead in and and order growth.

Fourth quarter 23 over 'twenty two so.

The strategy is paying off those segments are performing well and they should right at 75 million millennials and 75 million boomers are driving the most action in those two segments for us. So we're getting close to where we want to be.

With a little bit of you know.

Fluidity is has it moves quarter to quarter, but most of the hard work is behind us.

And absorptions.

Thank you. So the last couple of years, we've been running at 24 25 sales per community per year for the company I think heading into 'twenty four particularly with.

Rates moving down.

Economic outlooks, beginning to improve our sense that the fed is don or very close to being done.

We believe we're going to do better than that 24% to 25 overall for the company and of course, we have higher absorptions.

Envos affordable luxury.

And active adult move down.

Because the price point is lower there is more buyers with those demographics.

Let's just say if the average is 26 for the company.

Maybe affordable luxury active adult is pushing up to 30 <unk>.

And move up is in call. It the 22 to 24 age.

Okay. That's helpful. Appreciate it.

Our next question is related to inventory I was curious if you could give us a sense.

Maybe Marty what your expectations are for inventory dollars.

Either either for the average of full year 'twenty four or by year end 'twenty for May.

Maybe you could put it in terms of inventory turns if you like or in just the dollar change.

And at year end.

At the end of fourth quarter, what was your sticks and bricks number.

I'll, let the team.

Granville to find that sticks and bricks number in terms of our.

Inventory turns it's a focus of ours are.

Our spec strategy should improve that our mix shift to more affordable luxury and more active adult which are easier to.

To help with that turns the they are quicker to build should it should be.

For us.

We do have a number of specs that are already in our inventory balance right. Now so I don't think youre going to see our inventory balance grow dramatically this year compared to where it is right now.

And right now what do we got for our construction in progress VIP is $5 $5 billion $5 $5 billion as our construction in progress that includes the backlog.

And it includes around 40% of that is land and improvements.

Thank you and our next question today comes from Mike Dahl with RBC capital markets. Please go ahead.

Hi, Thanks for thanks for taking my question.

Follow up on that Marty I think it's interesting the inventory dynamic because you know as you're kind of shifting towards spec in projecting this increase in deliveries how your backlog still down in your construction in progress.

Is actually down both sequentially and.

Year on year, maybe some of that is the mix shift to lower priced homes, but it does seem to imply or your expectations for a pretty significant increase in inventory turns our improvement in cycle times.

Can you just.

Aberrate, a little bit on that more and give us a sense maybe up.

Where you're at in terms of current homes under production in <unk>.

Net terms for prospects and how you expect that stage that through the spring.

Sure. So in addition to the 6600 or so of homes that are in backlog.

We have.

Roughly another 20 <unk>.

700, 2800 homes in various stages of construction that we define as quick move in our spec homes around 4% to 500 of those are in CLO or beyond.

And I think we're very comfortable at that level.

As it relates to the inventory balance our backlog came down rather significantly from the end of last year to the beginning of this year and.

It's been replaced if you will in the inventory with the spec homes that I just mentioned.

And then Marty just to help clarify that also.

The what we call the finished specs which are those that.

Client can move in in the next couple of months.

It's only one five homes per community.

That are.

Specs that are at or very close to C. O and we can offer up to the client.

Has that great alternative to a.

Resale home.

Is not on the market at the moment.

And remember we define a spec as a home that Hasnt Foundation poured I'm not all specs are full go to completion. Many of them are sold in the construction progress process at various stages of completion and we very actively manage the stages of go no go in advancing the construction on those.

<unk>.

Thank you and our next question today comes from Michael Rehaut with J P. Morgan. Please go ahead.

Thanks.

Everyone and congrats on the results.

Thanks, Mike.

First question I, just wanted to circle back to some of the commentary around the more recent trends in the the outlook for first quarter or is being a little better than <unk>.

<unk> seasonality.

And importantly, kind of highlighted that you didn't really have to raise incentives in October.

And I believe you raised pricing during the quarter past quarter about <unk>.

<unk> percent and a half.

You know given where we are today and you know maybe some of the more recent trends that we've seen going into.

The current quarter and in some of the optimism I guess that you talked about around the recent decline in rates into the spring.

How should we think about like for like pricing in 'twenty, four, particularly as you're still seeing pockets of of Uh huh of inflation here or there across the.

Construction construction cost spectrum.

Great question Mike.

We certainly don't have a crystal ball as to.

As to where the spring we'll end up.

But I will tell you that I am a lot more encourage sitting here.

In the middle of December.

And then I was a year ago.

On October the 19th.

We had 8.25%.

For 30 year no point mortgage.

And I checked the rate sheet. This morning before I walked in here and today, we're at <unk>.

7.25%.

So we're down 100 basis points and the 30 year mortgage.

In six weeks.

It's December.

I can't sit here and tell you that that's translating immediately in the last couple of weeks results because of seasonality.

But.

It sure feels good.

Heading into the spring season, and boy the timing couldn't be better.

For rate to drop like that in December setting up that mid January launch.

The spring season, when most homes are sold.

10 years at $4 17, remember that historic spread from the 10 year to the 30 is 170 basis points.

That historic spread was in play today.

That's a five and seven eights mortgage offer this tenure.

I think we all believe the 10 year is still has moved in the room to move south and at some point when there's more confidence in the longer term macroeconomic outlook.

The spread is going to come down from where it is now to something closer to that 170.

So again I don't have the crystal ball on rates, but it sure feels good and there's reason to believe that this seven in a corner we sit at today.

It may even get better and that just sets up really well for for this spring season.

Where we have the most pricing power you know that'll be market by market, we make those decisions on a very local.

Community by community basis, we have many many communities opening.

During the spring season.

Are we talking about 10% community count growth, but that's a net number.

We're going to have many community sell out and we're going to have over 100.

Two a week new communities opening in 2024.

And over the last few years, there's been a lot of heightened with the launches of these new communities because of the pent up demand as people wait.

For that new community to open up so I know, it's a soft answer for you, but that's the best I can give you.

Sitting here today.

With with where rates stand with where sentiment stands with how the company is positioned with new openings and with the spec strategy that will be adding more homes available to purchase at various stages of completion as we roll through this coming spring.

We have optimism.

And therefore, we think we will be able to raise prices and we will be able to continue to manage and hopefully continue to modestly decline the incentives reduced the incentives.

Right No no no that's.

That all makes sense, Doug and I appreciate the answer.

Maybe secondly.

You know just kind of looking at some of the broad strokes.

Around order trends.

You talked about sales pace, maybe being potentially around 26 versus maybe that's up about 10% or so versus the last year or two you know talking about community count also of about 10% So you're talking about.

Roughly a 20% growth in orders.

If those numbers kind of flow through.

That would still kind of trail the mid point of your closings for the year.

So you'd actually end up with a backlog down year over year once again in 'twenty four.

As a result in order to have closings growth in 'twenty five you would actually have to further turn you are.

Beginning your backlog faster.

You know maybe something.

One eight times or something around that if you're having a moderate level of.

Closings growth is that something you're comfortable with and that type of scenario. Obviously, you talked about spec increasing as a percent of sales I don't know if that would continue to increase in <unk> over the next year or two.

You have turned.

Your beginning backlog.

In that one five to two times range in the past so is that a scenario that that is a reasonable in your view.

Yes.

We are committed to the new spec strategy.

I think in the industry were on the on the low end for sure for the percentage of our homes and our spec.

We're very careful in that strategy, but as we've come strategically come down in price point, there are more opportunities.

For us to build more spec, we also know theres, a void with the tight resale market.

For those buyers that want to move in faster because maybe they went to market and we're looking for a resale they couldn't find what they wanted.

Had in their mind, a an earlier move in date than than the typical 12 month build to order construction cycle time, and so yes. The strategy is working we are committed to it.

And as Marty said earlier, you know many builders to find spec as a home that's much further along and there is no opportunity for choice.

We put many of our specs on the market when they are being framed.

And on occasion.

More than on occasion regularly we may slow down construction.

Has dry wall is being hung so that the buyer has that opportunity.

Pick their flooring and pick their kitchen cabinets Victor countertops picked.

Pick their koehler plumbing fixtures et cetera, et cetera, and that still offers the buyer of the opportunity to go through the design studio process have a comb that they feel is custom to their lifestyle, but it's still a much quicker delivery.

I started fresh.

Before we'd even pull the building permit so this strategy.

Is now in its second full year.

It is working.

And it will continue to drive growth in the future.

Thank you and our next question today comes from Alan Ratner with Zelman and Associates. Please go ahead.

Hey, guys. Good morning, Congrats on a great year.

Right.

A couple of questions.

I know you're still somewhat early on in the spec shift, but I'm curious if you can give a little bit of color in terms of how specs kind of just performed in comparison to build to order. Obviously margin is probably that the main focal point, but do you see any differences in kind of how spec buyers behave when rates are <unk>.

A little in either direction, either up or down or any other kind of interesting observations.

Kind of taken as you've grown that part of your business.

Sure. So let me first start on the numbers are.

Our specs.

Sell for about $200000 less than build order.

And that's because of two things.

We generally don't build a spec.

On the high lot premium lots, we saved the best lots for those clients, who want to go build the order because we know the build to order crowd when they get into our design studio.

Got a lot more money.

And so.

Part of that $200000 lower price is a more average lot premium.

And it's less upgrades.

We make sure the specs are fully curated with great finishes, we bring in nationally acclaimed designers that do the interior design of our model homes to come up with great packages.

But we don't go wild and.

And we don't overdo it.

And so naturally that price is a couple of hundred thousand dollars lower we also tend to build more specs and less expensive communities.

Because you have more buyers lower you go on price the biggest the bigger of the market you have generally.

<unk> gross margin.

Is about 250 basis points.

Lower than build to order.

Right now at this moment in time right now.

We are encouraged that that.

Spread is tightening a bit.

But as part of our new business model.

We've accepted that we're not disappointed by that at all we're happy with that because when you blend.

The build to order model.

And by the way.

Another stat that's related to this.

Yeah.

We are now at 26, 5%.

Reflecting locked premium plus upgrades for the build to order client.

That used to be 21%.

So those that are going build the order.

They're taken the best lots with a higher premiums and they're spending more money on.

On both structural and finished upgrades.

And therefore, because as we've talked about our gross margin coming out of our design studios.

Is up at 40%.

The build to order business model is driving terrific margins.

We are happy to weigh into that to blend into that.

Expect margin, that's two five points lower.

Because the overall package as you can see is pretty darn good and we're driving a nice high margin so that.

I hope that helped you Alan with the breakdown of the price point of the stack.

And the margin of this bank.

That's all really helpful definitely gives us good insight into how that mix will unfold. So appreciate all the detail there.

Second question I had is on the land side I know, there's been a few questions on inventory turns and things like that.

You guys are making great progress towards the 60% option goal I'm curious if you have a goal or a target or maybe your content where it is today in terms of where you are your supply of owned lots can go obviously as you option will land that has some impact but your supply of owned lots.

It's been pretty steady in the four year range, maybe plus or minus over the last several years.

Even as the option share has moved higher and I would think that that would be one lever you could pull.

To further improve those turns so is there a target in mind, how low could that number go with your business model. Obviously, one of your peers are closer to two years, but you have a bit of a different model. There. So any color you can get there would be great.

Sure Alan I think a long term goal for us is to get down to two to two and a half years of owned land.

Yes.

Almost a year's worth of that owned land, having a backlog home or a spec home on it.

In various stages of construction.

Thank you and our next question today comes from Rafi Judger sits with Bank of America. Please go ahead.

Hi, Good morning, it's Rafe thanks for taking my question.

Just following up on the last question on the difference between spec and bto.

Can you talk a little bit about the return on inventory on spec or current equity on spec versus.

The built to order.

Yes.

Sure.

The spec homes.

On average take about two months.

Less.

To build and deliver.

Okay.

So so so.

The return on equity.

From the spec homes is a little higher than the return on equity for the build to order homes.

And the <unk>.

Inverse relationship of the gross margin.

Is the balance we're trying to play there.

Got it that makes sense, it's very helpful. And then just on the order commentary for the for the first quarter sort of what you're seeing quarter to date.

The comment that it sort of generally in line with normal seasonality or a little maybe a little bit better.

You do have more communities right now and then mortgage rates as you said have come down.

It would be better than normal seasonality is that just because October didn't actually really slow that much or is it just a slow period in December or is there a community timing.

How come it's not better than normal seasonality just given you have.

Some incremental tailwind this quarter to date.

Well it is seasonality.

November and December.

Historically.

Our slower months, you've got obviously, we know the holidays you have from Thanksgiving through new years.

And.

I'm actually pleased that you know.

Where we're.

Trending where we are we've already said that historically.

Q1 is down 20% because in Q1 you have this November and December.

But we're hopeful and it's a combination of.

The sales we've had to date to start the first quarter.

Plus these pretty dramatic drop in rates over the last few weeks.

Setting up what we think not from now through new year's but in early January.

We have I think very solid legitimate reasons.

To believe that the market is going to we're going to have a good start to the spring season in January and we're going to do better than that historic.

2020% down.

Right when we talk about seasonal trends, we're talking about on a per community basis as well. So we've kind of already adjusted for a little bit more communities and one week doesn't make a trend.

But.

Last week was a really good week.

And I'm not going to read too much into that but we're going to stay where we are which is.

It feels seasonal the enormous down 20, we think we'll do a little better.

Thank you and our next question today comes from Alex Barron with housing Research Center. Please go ahead.

Yeah, Thanks, guys and great job I wanted to ask in terms of.

Incentives, particularly.

Great incentives you know what.

What seems to be working for you guys better or what are you offering that clients are that's causing them to come in.

Alex It's a great question, it's very interesting for us and this may be a bit different from the other builders.

We have all the programs the other builders have.

We've got the two one by that we've got the 321 by down we will take your 30 year rate from now seven and a quarter two five and five eights.

You want we will call our mortgage company and we'll figure it out.

And.

It's a great front end marketing tool, it's all over our website, it's all over the email.

You know marketing campaigns, we have with our clients.

It drives traffic.

Into our communities.

Very few taken.

And the reason is if we're buying your rate down we're looking at a 30 year time frame.

And most clients think to themselves.

I'm going to be in this house five to seven years, which is the average amount of time that you're in a home.

Or are they think.

I think I can refi at some point before that five to seven years.

And the incentive that toll brothers is wrapping into this rate buy down.

They have offered me as an alternative incentive.

Go have fun at the design studio.

And have you know.

A discount or credit and that design studio and I'd, rather upgrade my house on them.

And take advantage of a rate buy down so it's driving traffic it's conversation, but we are not seeing the stickiness.

That maybe others are.

Part of it is.

26% of our buyers are all cash and those that get a mortgage have a <unk> 60.

69% LTV.

And I think maybe they're obviously more affluent.

Maybe they take a little lower mortgage than they would otherwise have that's particularly true in active adult with LTV is probably closer to 50%.

Because they have more equity coming out of their existing home.

And they are thinking to themselves.

I'd rather use the money.

To upgrade my home.

And refi.

Earlier than maybe.

The formula shows.

And so.

We market the heck out of it.

Well, we don't see a lot of takers.

Yeah.

Okay, well I appreciate that answer its very great.

Many other builders have been using forward commitments to push.

Most two completion specs.

Are you guys doing any of that.

Yes.

Yes, and the further along the home is.

A less expensive to buy down is because.

You know you can lock in lower rates for 60 days.

For less cost than locking in that range, <unk> 90 or 120.

So yes.

<unk> got cheaper over the last month as well <unk> definitely got cheaper youre youre buying down from seven out of the corner instead of eight and eight.

Thank you Marty that's exactly right.

The other the other nice piece of news here, then I'll throw in.

The loan limit on a on a conforming Fannie Freddie.

Is up.

$313000 since 2018.

Yeah, just went up again.

And that.

So that helps the business.

Thank you Andrew.

Next question today comes from John Lovallo with UBS. Please go ahead.

Hey, guys. Thank you first for squeezing me in here just a couple quick ones.

The first one just following up on <unk> question. The comment that you guys made about.

A little bit better than normal seasonality was that specific to absorption or was that for the total orders in the first quarter.

Order growth absorption.

Measured by deposits as measured right now by deposits for our community because when we.

Whenever we give you guys some flavor on what's happened since the end of the quarter to the call.

It's usually three or four weeks, but because its fiscal year end, it's five weeks.

That information is always based on deposit activity because as you know we take a deposit that can then take two or three sometimes we hope not but sometimes for weeks.

To convert.

From deposit two agreement.

On that subject another good stat.

Historically.

We run about 68% of our deposits conferred to agreement.

In the fourth quarter, 79%.

Of the deposits converted two agreement.

So when the people go through the process they pick their lot.

Give us the deposit they start the process of finalizing their lot choice our home design their upgrades.

It's sticky it's now up to 79% of those deposits move forward.

Okay.

Okay.

Really helpful and then a quick follow up here.

In your outlook.

How are you guys sort of thinking about mortgage rates I mean, I guess the question is if rates were to stay at a similar level than they were today, how much risk is there, but what you guys are talking about today.

Little.

We sold a lot of houses at eight.

We will sell more houses at seven and a quarter.

And if my long monologue about where the tenure is and where the 170 spread typically is and where we think things are common.

Right, we can break through.

At seven into six land.

Yeah.

Every time, there is a drop in rates our business should get better that's proven true over the past couple of years.

So we are optimistic.

Thank you and our final question today comes from Truman Patterson with Wolfe. Please go ahead.

Hey, good morning.

Hi, guys and thanks for squeezing me in first just wanted to make sure for clarity when you were talking about 24 inventory dollars overall.

Kind of being flattish is the expectation that included homes under construction and land as well correct.

Yes, I mean, the land spend is a little.

Tough to really project.

This early compared to the end of the year.

Yes.

Yeah, Yeah understood.

Just two quick ones for me you all rely pretty heavily on realtors given your your consumer base. So I'm, hoping you can remind us what portion of your sales have a realtor associated with them. What's your kind of typical broker commission and just any any thoughts on the preliminary.

NAR ruling.

The impact on your business.

Sure. So two thirds of our sales involve a outside reorder representing.

Our client.

On average we pay that reorder, 2.25%.

Of.

The delivered price of the home.

When you do the math that comes out to one 5% of total revenue of the company.

As with third party Reorders.

It's too early to comment on.

The NAR litigation, obviously, there's appeals and Theres other litigation.

That.

Has popped up since that case.

But I think <unk>.

Longer term.

The industry, we are all encouraged to believe that.

That's the third party commissions will be coming down.

Okay, perfect and then.

Doug you mentioned eventually getting to 60% option land I'm just trying to understand do you think that could potentially take a pause in 'twenty four on that progression. We've just been hearing that <unk>.

Developer cost of capital and availability is tightening so it might make it or a little more expensive option those deals perhaps.

And better.

Raw land one.

On deals that you could possibly bring on your balance sheet, just trying to understand how you're thinking about opportunities in 'twenty four there.

Yes, I think it's a fair comment Sherman.

We land banking got more expensive.

So we probably did a little bit less land banking, which is one of the reasons that we didn't option as much land. However, we are even though we're.

We're at 50% owned 50% optioned.

And the progression to 60 40 may take a bit more time.

That doesn't change our obsession with capital efficiency with driving IRR is and therefore our Roe.

Because if we're not going to land banking, which may keep it off our books and keep it option longer we're going to get terms from our land sellers to purchase money mortgages, where even though we own the land we don't pay for it.

Until some date in the future through a purchase money mortgage format. So they are the IRR is are still being driven and are still very much focused on as we underwrite land, even if it's taking a bit longer to move the option bucket higher.

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

Okay.

Thank you Rocco you've been terrific.

Thank you everyone for your interest and support of our Great Company and we wish all of you a wonderful holiday season.

Thank you. The conference has now concluded that the only thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

[music].

Good morning, and welcome to the toll brothers first quarter fiscal year 2023 conference calls.

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.

To ask a question you May press Star then one on your telephone keypad.

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The company is planning to end the call at 931 of the market opens.

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

Please also note this event is being recorded.

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

Thank you Rocco and good morning.

Welcome and thank all of you for joining us.

Before I begin I ask you to read our statement on forward looking information in our earnings release last night and on our website.

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 availability of labor and materials inflation and many other factors beyond our control that could significantly affect future results.

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

Fiscal 2023, and the fourth quarter were terrific for toll brothers.

Our income and earnings per share for the full year were all time highs and we ended the year with a 72% increase in fourth quarter signed contracts compared to Q4 2022.

We delivered $2750 55 homes and generated $2 $95 billion in home sales revenues in the fourth quarter.

$211 million above the midpoint of our guidance.

Our adjusted gross margin was 29, 1%.

And our SG&A expense as a percentage of home sales revenues was eight 2%.

Each beating guidance by 60 basis points.

The combination of top line outperformance and improved operating efficiency resulted in net income of $445 $5 million or $4 11 per diluted share.

Our second best fourth quarter ever behind only last year's fourth quarter.

For the full year, we delivered 9597 homes.

At an average price of approximately $1 million $30000 generating record homebuilding revenues of $9 $9 billion.

Our full year adjusted gross margin was 28, 7%.

120 basis point increase.

However, 2022.

And 20 basis points better than guidance.

SG&A expense as a percentage of home sales revenues was nine 2% an.

An improvement of 90 basis points compared to last year, and also 20 basis points better than guidance.

Earnings in fiscal year, 2023 were $1 $4 billion or $12 36.

Per diluted share both company records.

Our book value per share was <unk> 65.

<unk> $40 $65 49.

At year end and our return on beginning equity was 22, 8%.

We accomplished these results despite mortgage rates, reaching generational highs global unrest gridlock in Washington, and fears of a recession.

Our success was due in large part to our strategies of not chasing sales at a lower margin in the second half of 2022.

Increasing our supply of spec homes and focusing on operational efficiency.

Turning to market conditions, we continued to see solid demand for our homes in the fourth quarter as a tight resale market continued to drive buyers to new homes.

We signed 2038 net contracts.

At an average price of $989000.

Up 72% in units compared to Q4 2022.

The average price was down 11% year over year, but essentially flat over the prior three quarters of 2023.

The decline in ASP was due primarily to mix.

In fact, we raised our average net price after incentives by $16000 in the quarter.

Remember that our mix shifts and lower Asps.

Should not be a surprise it means our strategy of broadening our product offerings to include lower price points and capture greater market share and growth opportunities is working.

Along these lines, our affordable luxury and active adult communities were our strongest performers in the quarter.

Unit sales of affordable luxury homes or up 109% in Q4 2023 compared to Q4 2022 and active adult was up 82%.

In Q4, affordable luxury accounted for approximately 46% of our unit sales.

Luxury was 31%.

And active adult was 23%.

On a dollar basis affordable luxury was 38% luxury was 43% and active adult was 19%.

Geographically, our Pacific region was up nearly 250% and agreements in the fourth quarter versus the prior year, followed by our mountain region, which saw a 127% increase in the south.

Of the 87%.

Our strongest markets in the quarter were Denver, Boise, Southern California, all of Texas.

In the mid Atlantic from Atlanta up the eastern Seaboard to Boston.

In terms of cadence for the quarter.

Demand followed the typical seasonal pattern with September being the strongest for deposits.

October was stronger than expected given the rise in mortgage rates.

And we were encouraged that we did not have to increase incentives to drive sales.

In that month.

As I mentioned, we actually raised our average price by $16000 in the quarter.

Broken down as a $12000 increase in base price and a $4000 decrease in incentives.

Demand has remained solid into the start of our first quarter and is consistent with normal seasonality.

As a reminder, historically net orders decline about 20%.

From our fourth to first quarter, primarily because of the holiday months of November and December fall on our first quarter.

We are anticipating a modestly better trend this year as.

As we are encouraged by the recent 75 basis point decline in mortgage rates.

With inflation easing over the past few quarters, we believe rates may drop further.

And the timing of the rate decline is setting up nicely for the upcoming spring selling season.

This timing also plays well into our strategy of increasing our spec supply and growing our community count.

Yes.

In the fourth quarter spec homes represented approximately 42% of our orders and 33% of our deliveries.

We expect that spec sold in fiscal 2024 will account for approximately 35% of deliveries in 2024.

Remember that we define as back as any home without a buyer that has a foundation poured.

We sell our specs at various stages of construction.

Which allows many of our buyers the opportunity to still personalize their homes with finishes that match their tastes.

Specs allow us to buy down mortgage rates and we also benefit from a faster more efficient construction schedule.

The other 65% of our projected 2024 deliveries are either in our backlog.

Which stood at nearly 6600 homes.

$6 $95 billion at fiscal year end.

Our build to order homes that have already sold or will be sold in this first quarter.

This provides a solid base of high margin homes to drive 2024 results.

We expect community Count growth also helped drive results in fiscal 2024, we plan to increase community count by 10%. This year and are targeting 410 operating communities.

At year end.

Importantly, we control sufficient land for community count growth beyond 2024.

In fiscal year end 2023, we controlled approximately 70700 lots, 49% of which were optioned.

Excluding the 6578 lots committed to homebuyers in our backlog.

Our option land represented.

54%.

Lots.

We continue to target an overall mix of 60% optioned and 40% owned over the longer term.

We also continue to be selective and disciplined in our approach to buying land, we assess all land deals whether they involve new land opportunities or take downs under existing options with underwriting standards focused on both margins and returns.

This approach and our overall focus on capital efficiency has helped drive our are we over 20% for the past two years.

And our fourth quarter, we repurchased $326 million of our common stock.

Bringing our full year repurchases to 556 million at an average price of $72 per share.

During fiscal 2023, we repurchased approximately 7% of our diluted shares outstanding at the beginning of the year.

We also paid $91 million in dividends in fiscal 2023.

Buybacks and dividends will remain an important part of our capital allocation priorities well into the future.

We are budgeting it in another $400 million of share repurchases.

Fiscal 2024.

With that I'll turn it over to Marty.

Thanks, Doug.

As Doug mentioned, we are very pleased with our fourth quarter and full year results. Our revenue net income and earnings per share were all full year records.

In fiscal year 2020, Three's fourth quarter, we delivered 20, 755 homes and generated home sales revenues of $2 95 billion down 27% in homes and 18% in dollars from one year ago.

Selecting the challenging sales environment from back then.

The average price of homes delivered was up 13% to $1.071 million.

Fourth quarter net income was $445 $5 million were $4 11 per diluted share compared to $645 million and $5 63 per diluted share one year ago.

Remember that last years net income included a net after tax benefit of approximately $103 million related to the proceeds from the settlement of a legal claim.

Our fourth quarter, adjusted gross margin, which excludes interest and inventory write downs was 29, 1%.

In 2023 up 10 basis points compared to 29.0% in the fourth quarter of 2022.

Reflecting our strategy from over a year ago not to aggressively chase sales at the expense of margin when the market was softer.

SG&A as a percentage of revenues was eight 2% in the quarter comps.

Compared to seven 7% in the same quarter one year ago.

The year over year percentage increase in SG&A was primarily related to less revenue leverage.

Compared to 2022 total SG&A dollars were actually down $33 million in the quarter and $68 million for the year Despite inflationary pressures.

Joint venture land sales and other income was $36 million in the fourth quarter.

Compared to $152 $5 million in the fourth quarter of fiscal year 2022, which again included the aforementioned litigation recovery of 143 $141 million on a pre tax basis.

Joint venture land sales and other income in Q4 2023 included approximately $32 million of gains from the sale of stabilized apartment communities developed by toll brothers apartment living and held in joint venture.

Despite very challenging market conditions, we were able to sell two apartment communities at reasonable prices in the quarter.

Which is a testament to the quality of our apartment living communities.

We expect to sell additional apartment communities this year.

Write offs included in home sales cost of revenues totaled $8 3 million in the quarter compared to $22 1 million in the prior year period.

Landfill write offs were $12 $9 million related to the planned sale of our city living land parcel into a joint venture.

In the fourth quarter, 26% of our buyers paid all cash.

<unk> with the 25% in the third quarter and up from our long term average of 20%.

Whereas who did take a mortgage averaged an LTV of 69% in the quarter.

Our cancellation rate as a percentage of backlog was three 4% in the fourth quarter.

Consistent with where this rate has been for all of 2023.

We continued to generate strong cash flow in fiscal 2023 with $1 $3 billion of cash flow from operations.

We ended the fiscal year with over $3 billion of liquidity, including $1 3 billion of cash and $1 8 billion available under our revolving bank credit facility, which has more than four years of duration remaining.

In fiscal year 2023, we invested $2 $3 billion in land acquisition and land development.

We also returned $653 million to shareholders through share repurchases and dividends.

And reduced our senior debt by $400 million.

Over the past two years, we've returned $1 $3 billion to shareholders by repurchasing $18 9 million shares.

Our net debt to capital ratio was 17, 7% in fiscal year end.

We have no significant debt maturities until fiscal 2026.

Our balance sheet using right shape.

Turning to our guidance.

Like to remind you of the usual caveat regarding forward looking statements.

We are projecting first quarter deliveries of approximately 800 to 1900 homes with an average price of between 985000 and $1 million and $5000.

Consistent with normal seasonal patterns first quarter deliveries are expected to be the low point of the year.

With deliveries for the full fiscal year weighted to the second half.

For full fiscal year of 2024, we are projecting new home deliveries of between 90, 850, and 10350 homes with an average price between 949.

$960000.

We expect our adjusted gross margin in the first quarter of fiscal 2024 to be 28% and for the full year to be approximately 27, 9%.

The slight decline in our projected gross margin for Q1 from Q4.

It reflects the impact of the slower sales environment in the second half of fiscal 'twenty two.

In the first quarter of fiscal 'twenty three as more sales from that period, we'll be delivering in Q1 and delivered in Q4.

We expect interest in cost of sales to be approximately one 4% in the first quarter and for the full year.

This reflects the continuing benefit of our lower leverage.

We project first quarter SG&A as a percentage of home sales revenues to be approximately 12, 4% versus 12, 1% one year ago.

Included in first quarter SG&A is about $12 million of our annual accelerated stock compensation expense that should not recur in the remainder of the year's quarters.

For the full year, we project SG&A as a percentage of home sales revenues to be approximately nine 9%.

The year over year projected increases in SG&A margin is due primarily to the impacts of lower revenue leverage <unk>.

<unk> count growth.

And cost inflation.

We continue to focus on cost control and operating efficiency. We've made a lot of progress, but we are not done and are working to achieve additional cost savings in fiscal 2024 and beyond.

Other income income from unconsolidated entities and land sales gross profit is expected to be a loss of $10 million in the first quarter.

But a gain of $125 million for the full year, which includes the sale of stabilized apartment communities.

Do not expect any sales in the first quarter, but expect to sell a number of our communities by the end of the year.

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

Our weighted average share count is expected to be approximately $106 million for the first quarter and $104 million for the full year.

This assumes we repurchased a targeted $400 million of common stock this year with most of that occurring later in the year aligned with our anticipated higher cash flow.

Based on land, we currently own or control, we expect to grow community count by 10% by the end of fiscal 2024.

Would it be this altogether.

We project approximately $12 to $12 50.

Earnings per share for the full year.

Which would move our book value to approximately $78 per share at fiscal year end 2024.

With that I'll turn it back over to Doug.

Thanks Marty.

Two years ago in December 2021.

30 year mortgage rate was around 3%.

It doubled to 6% in December 2022.

And a little over a month ago it broke through 8%.

It's extraordinary to think that mortgage rates have moved from 3% to 8% in two years.

And yet during that time, we produced two consecutive years of record revenues and earnings with ROE above 20%.

We also increased our adjusted gross margin by 370 basis points decreased our SG&A margin by 170 basis points.

And today, we are projecting another year of earnings above $12 per share.

And we are not the only ones to have achieved strong results in the face of rising rates.

It is clear the business model of the public builders has fundamentally changed.

We have grown revenues and gained market share lowered leverage.

The risk balance sheets with a focus on capital efficiency cash flows and ROE.

And returned a substantial amount of capital to our investors.

Today toll brothers trades at approximately seven times earnings and one three times book value.

The average P. Multiple for the equally weighted S&P 500 is about 16 times in.

In my opinion are valuations deserve a fresh look.

Before we open it up to questions I'd like to thank the entire toll brothers team for staying focused on our customers.

<unk> seen the market conditions and consistently executing on our core strategies.

Importantly, <unk> helped position the company for continued success in 2024 and beyond.

For that I am truly grateful.

Now, let's open it up to questions.

Rocco we're ready to go yes, Sir 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 opens.

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

To ask a question you May Press Star then one on your Touchtone phone.

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

To withdraw your question. Please press Star then two.

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

And today's first question comes from Stephen Kim with Evercore. Please go ahead.

Yes, thanks, very much guys I appreciate all the color congrats on the good results.

I guess my first question is related to your ongoing product mix shift.

Portable luxury in particular I was curious if you could give us a sense for how long do you think this this process of sort of adjusting your mix.

It's going to take is this something that we could see stabilize by year end 'twenty. Four do you think youll have gotten your mix sort of where you want it or is it going to be something thats going to be a multiyear process.

Can you help us understand what an expected range of absorptions should be sales per community per month. Once your mix does stabilize at the levels that you're at the sort of percentages that you want.

Sure.

It's a fluid process Steve.

We're really proud of.

This move we made in this into some lower price still affordable to be still luxury product.

As I've talked about.

With 75 million millennials out there we were not going to wait for them to hit their <unk> and buy their move up home, which is what's over others has always been about.

And I'm really proud of how we brought the three series BMW and we went after the more affluent first time buyer.

I think it will stabilize around 45%.

Of our business on a unit basis.

Now remember.

Because the price is a bit lower on a dollar value that may be down five points or so from that 45% and based on the numbers. We just gave you for where we are right now.

Getting pretty close to that in the fourth quarter, we were spot on with affordable luxury being 40%, 46% of our unit sales and it reflected about 38% of our dollar value. So.

It's fluid we continue to focus on more and more of those opportunities, but we're getting close to what I think is a good mix.

Quarter by quarter, It may vary a little bit but.

We're about there and as I also mentioned.

The affordable luxury.

And the active adult empty nester, which also tends to be a bit lower priced naturally.

They lead in order growth.

Fourth quarter 'twenty three over 'twenty two so on.

The strategy is paying off those segments are performing well.

They should write 75 million millennials and $75 million boomers are driving the most action in those two segments for us. So we're getting close to where we want to be.

With a little bit of fluidity, as hasnt moves quarter to quarter, but most of the hard work is behind us.

And absorptions.

Thank you so.

The last couple of years, we've been running at 24 25 sales per community.

For year for the company.

Heading into 'twenty, four particularly with.

Rates moving down.

Economic outlooks, beginning to improve our sense that the fed is don or very close to being done.

We believe we're going to do better than that 24% to 25 overall for the company and of course, we have higher absorptions.

Envos affordable luxury.

And active adult move down.

Our price point is lower there is more buyers with those demographics.

Let's just say if the average is 26 for the company.

Maybe affordable luxury active adult is pushing up to 30.

And <unk>.

Move up is in call. It the 22 to 24 age.

Okay. That's helpful. I appreciate it.

Next question is related to inventory I was curious if you could give us a sense.

Maybe Marty what your expectations are for inventory dollars.

Either either for the average of full year 'twenty four or by year end 'twenty four.

Maybe you could put it in terms of inventory turns if you like or in just the dollar change.

At year end.

At the end of fourth quarter, what was your sticks and bricks number.

I'll, let the team scramble to find that sticks and bricks number in terms of.

Inventory turns it's a focus of ours.

Our spec strategy should improve that our mix shift to more affordable luxury and more active adult which are easier to.

To help with that turns they are quicker.

Quicker to build should it should be.

Important for us.

We do have a number of specs that are already in our inventory balance right. Now so I don't think youre going to see our inventory balance grow dramatically this year compared to where it is right now.

And right now what do we got through construction in progress VIP is $5 5 billion five 5 billion.

Our construction in progress that includes the backlog.

And it includes around 40% of that is land and improvements.

Thank you and our next question today comes from Mike Dahl with RBC capital markets. Please go ahead.

Thanks for taking my question.

A follow up on that Marty I think it's interesting the inventory dynamic because as you're kind of shifting.

Spec in projecting this increase in deliveries backlog still down in your construction in progress.

Is actually down both sequentially and year.

Year on year, maybe some of that is the mix shift to lower priced homes, but it does seem to imply or your expectations for a pretty significant increase in inventory turns our improvement in cycle times. So.

Can you just.

Elaborate a little bit on that more and give us a sense maybe up.

Where youre at in terms of current homes under production in unit terms for prospects and how you expect that stage that through the spring.

Sure. So in addition to the 6600 or so homes that are in backlog.

We have.

Roughly another 20.

700, 2800 homes in various stages of construction that we define as quick move in our spec homes.

Around 4% to 500 of those are at cielo or beyond.

And I think we're very comfortable at that level.

As it relates to the inventory balance our backlog came down rather significantly from the end of last year to the beginning of this year.

Yes.

It's been replaced if you will in the inventory with the spec homes that I just mentioned.

And then Marty just to help clarify that also.

What we call the finished specs which are those that.

Client can move in in the next couple of months.

It's only one 5%.

<unk> per community.

That are.

Specs that are at or very close to Seo and we can offer up to the client.

Has that great alternative to a.

Resale home.

It is not on the market at the moment.

And remember we define a spec as a home that Hasnt Foundation poured.

Not all specs are full go to completion many of them are sold in the construction progress process at various stages of completion and we very actively manage the stages of go no go in advancing the construction on those homes.

Thank you and our next question today comes from Michael Rehaut with Jpmorgan. Please go ahead.

Thanks.

Morning, everyone and congrats on the results.

Yes, Michael.

First question I, just wanted to circle back to some of the commentary around the more recent trends in the.

The outlook for first quarter or is being a little better than.

Historical seasonality.

And importantly, kind of highlighted that you didn't really have to raise incentives in October.

And I believe you raised.

Pricing during the quarter past quarter about.

<unk> percent and a half.

Given where we are today and maybe some of the more recent trends that we've seen going into.

The current quarter.

And some of the optimism I guess that you talked about around the recent decline in rates into the spring.

How should we think about.

For like pricing in 'twenty, four, particularly as you're still seeing.

Pockets of.

<unk> of inflation here, they're across the <unk>.

Construction construction cost spectrum.

Great question Mike.

We certainly don't have a crystal ball as to.

As to where this spring we'll end up.

But I will tell you that I am a lot more encourage sitting here in the middle of December then I was a year ago.

On October the 19th.

We hit 8.25%.

We're a 30 year no point mortgage.

Can I check the rate sheet. This morning before I walked in here and today, we're at 7.25%.

So we're down 100 basis points and the 30 year mortgage.

And six weeks.

It's December.

I can't sit here and tell you that thats translating immediately in the last couple of weeks results because of seasonality.

But.

It sure feels good.

Heading into the spring season, and the timing couldn't be better for rates have dropped like that in December setting up that mid January launch.

Of the spring season, when most homes are sold.

10 years at $4 17.

Remember the historic spread.

On the 10 year to the 30 is 170 basis points.

Is that historic spread was in play today.

Five and seven eights mortgage offer this tenure.

I think we all believe the 10 year is still has moved in the room to move south and at some point when there is more confidence in the longer term macroeconomic outlook.

The spreads going to come down from where it is now to something closer to that 170.

So again I don't have the crystal ball on rates, but it sure feels good and there's reason to believe that this seven in a corner we sit at today.

May even get better and that just sets up really well for for this spring season.

Where we have the most pricing power that'll.

That will be market by market, we make those decisions on a very local community by community basis, we have many many communities opening.

During the spring season.

Talking about 10% community count growth, but thats a net number.

We're going to have many community sell out and we're going to have over 100.

Two a week new communities opening in 2024.

And over the last few years, there's been a lot of hype with the launches of these new communities because of the pent up demand as people wait.

For that new community to open up so I know, it's a soft answer for you, but that's the best I can give you.

Sitting here today.

With with where rates stand with where sentiment stands with how the company is positioned with new openings and with the spec strategy that will be adding more homes available to purchase at various stages of completion as we roll through this coming spring.

We have optimism.

And therefore, we think we will be able to raise prices and we will be able to continue to manage and hopefully continue to modestly decline the incentives reduced the incentives.

Right.

All makes sense, Doug and I appreciate the answer.

Maybe secondly.

Just kind of looking at some of the broad strokes around order trends.

You talked about sales pace, maybe being potentially around 26 versus maybe that's up about 10% or so versus the last year or two youre talking about community count also of about 10% So you're talking about.

We're roughly a 20% growth in orders.

If those numbers kind of flow through.

That would still kind of trail the mid point of your closings for the year.

And so you would actually end up with a backlog down year over year once again in 'twenty four.

As a result in order to have <unk>.

Closings growth in 'twenty, five you'd actually have to further turn your.

Beginning year backlog faster.

Maybe something.

One eight times or something around that if you're having a.

A moderate level of.

The closings growth is that something you're comfortable with and that type of scenario. Obviously, you talked about spec increasing as a percent of sales I don't know if that would continue to increase.

And over the next year or two.

Have turned your beginning backlog.

In that one five to two times range in the past so is that a scenario that that is reasonable in your view.

Yes.

We are committed to the new spec strategy.

I think in the industry. We are on the on the low end for sure for the percentage of our homes that are spec.

We're very careful in that strategy, but as we've come strategically come down in price point, there are more opportunities.

For up for us to build more spec. We also know theres, a void with the tight resale market.

For those buyers that want to move in faster because maybe they went to market and we're looking for a resale they couldn't find what they wanted but they had in their mind a <unk>.

Earlier move in date than than the typical 12 month build to order construction cycle time, and so yes. The strategy is working we are committed to it.

And as Marty said earlier, many billings defined spec as a home that's much further along and there is no opportunity for choice.

We put many of our specs on the market when theyre being framed.

And on occasion.

More than on occasion regularly we may slow down construction.

Has dry wall is being hung so that the buyer has that opportunity to pick their flooring and pick their kitchen cabinets Victor countertops picked.

Pick their color plumbing fixtures et cetera, et cetera, and that still offers the buyer the opportunity to go through the design studio process have a comb that they feel is custom to their lifestyle, but it's still a much quicker deliveries.

And if they started fresh.

Before we'd even pull the building permit so this strategy.

Is now in its second full year.

It is working.

And it will continue to drive growth in the future.

Thank you and our next question today comes from Alan Ratner with Zelman <unk> Associates. Please go ahead.

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

A couple of questions.

I know you are still somewhat early on in the spec shift, but I'm curious if you can give a little bit of color in terms of how specs kind of just performed in comparison to build to order. Obviously margin is probably that the main focal point, but do you see any differences in kind of how spec buyers behave when rates are.

It'll in either direction, either up or down or any other kind of interesting observations that you've kind of taken as <unk> grown that part of your business.

Sure. So let me first start on the numbers.

Our specs.

Sell for about $200000 less than build order.

And thats because of two things.

We generally don't build a spec.

On the high lot premium lots.

We saved the best lots for those clients, who want to go build the order because we know the build to order crowd when they get into our design studio.

He spent a lot more money.

And so.

Part of that $200000 lower price is a more average lot premium.

And it's less upgrades.

We make sure the specs are fully curated with great finishes, we bring in nationally acclaimed designers that do the interior design of our model homes to come up with great packages.

But we don't go wild.

And we don't overdo it.

And so naturally that price is a couple of hundred thousand dollars lower we also tend to build more specs and less expensive communities.

As you have more buyers lower you go on price the biggest the bigger of the market.

<unk>.

Generally.

<unk> gross margin.

Is about 250 basis points lower than build to order.

Right now at this moment in time right now.

We are encouraged that that.

Spread is tightening a bit.

But as part of our new business model.

We've accepted that we're not disappointed by that at all we're happy with that because when you blend.

The build to order model.

And by the way.

Another stat that's related to this.

We are now at 26, 5%.

Reflecting locked premium plus upgrades for the build to order client.

That used to be 21%.

So those that are going build the order.

They're taken the best lots with a higher premiums and they're spending more money on.

On both structural and finished upgrades.

And therefore, because as we've talked about our gross margin coming out of our design studios.

Is up at 40%.

The build to order business model is driving terrific margins.

We are happy to weigh into that to blend into that.

Expect margin, that's two five points lower.

Because the overall package as you can see is pretty darn good and we're driving a nice high margin so that.

I hope that helped you Alan with the breakdown of the price point of the stack.

And the margin of this bank.

That's all really helpful definitely gives us good insight into how that mix will unfold. So appreciate all the detail there.

Second question I had is on the land side I know, there's been a few questions on inventory turns and things like that.

You guys are making great progress towards the 60% option goal I am curious if you have a goal or a target or maybe your content where it is today in terms of where you are your supply of owned lots can go obviously as you option land that has some impact but your year supply of owned lots.

It's been pretty steady in the four year range, maybe plus or minus over the last several years.

Even as the option share has moved higher and I would think that that would be one lever you could pull.

To further improve those turns so is there a target in mind, how low could that number go with your business model. Obviously, one of your peers are closer to two years, but you are.

A bit of a different model there. So any color you can get there would be great.

Sure Alan I think think of long term goal for us is to get down to two to two and a half years of owned land.

With.

Almost a year's worth of that owned land having a.

Backlog hall, or a spec home on it.

In various stages of construction.

Thank you and our next question today comes from Ralph <unk> with Bank of America. Please go ahead.

Hi, Good morning, it's Rafe thanks for taking my question.

Just following up on the last question on the difference between spec and bto.

Can you talk a little bit about the return on inventory on spec or current equity on spec versus.

The built to order.

Yes.

Sure.

The spectrum.

On average take about two months.

Less.

To build and deliver.

Okay.

So so so.

The return on equity.

From the spec homes is a little higher than the return on equity for the build to order homes.

And the <unk>.

Inverse relationship of the gross margin.

Is the balance we're trying to play there.

Got it that makes sense, it's very helpful.

And then just on the order commentary for the for the first quarter sort of what you're seeing quarter to date.

The comment that it sort of generally in line with normal seasonality or a little maybe a little bit better.

You do have more communities right now and then mortgage rates as you said have come down.

Wouldn't it be better than normal seasonality is that just because October didn't actually really slow that much or is it just a slow period in December their community timing.

How come it's not better than normal seasonality just given you have some.

Some incremental tailwind quarter to date.

Well its seasonality.

November and December.

Historically.

Our slower months.

<unk> got obviously, we know the holidays you have from Thanksgiving through the years.

And.

I'm actually pleased that.

<unk>.

Sure.

Trending where we are we've already said that historically.

Q1 is down 20% because in Q1 you have this November and December.

But we're hopeful and it's a combination of.

Sales, we've had to date to start the first quarter.

Plus these pretty dramatic drop in rates over the last few weeks.

Setting up what we think.

Not from now through new year's but in early January.

We have I think very solid legitimate reasons.

To believe that the market is going to we're going to have a good start to the spring season in January and we're going to do better than that historic.

2020% down.

When we talk about seasonal trends, we're talking about on a per community basis as well. So we've kind of already adjusted for a little bit more communities and one week doesn't make a trend.

But.

Last week was a really good week.

And I'm not going to read too much into that but we're going to stay where we are which is.

It feels seasonal that enormous down 20, we think we'll do a little better.

Thank you and our next question today comes from Alex Barron with housing Research Center. Please go ahead.

Yes, thanks, guys and great job.

Wanted to ask in terms of.

Incentives, particularly.

Right incentives.

What seems to be working for you guys better or what are you offering that clients are that's causing them to come in.

Alex It's a great question, it's very interesting for us and this may be a bit different from the other builders.

We have all the programs the other builders have.

Got to two one by that we've got the 321 by down we will take your 30 year rate from now seven and a quarter to five and five eights.

You want we will call our mortgage company and we'll figure it out.

And.

It's a great front end marketing tool, it's all over our website, it's all over the email.

Marketing campaigns, we have with our clients.

It drives traffic in.

Into our communities.

Very few taken.

And the reason is.

If we're buying your rate down we're looking at a 30 year time frame.

And most clients think to themselves.

I am going to be in this house five to seven years, which is the average amount of time that you're in a home.

Or are they think.

I think I can refi at some point before that five to seven years.

And the incentive that toll brothers is wrapping into this rate buy down.

They have offered me as an alternative incentive.

Have funded the design studio.

And have.

A discount or credit and that design studio and I'd, rather upgrade my house on them.

And take advantage of a rate buy down so it's driving traffic it's conversation, but we are not seeing the stickiness.

That maybe others are.

Part of it is.

26% of our buyers are all cash and those that get a mortgage have a <unk> 60.

69% LTV.

And I think maybe they're obviously more affluent.

Maybe they take a little lower mortgage than they would otherwise have that's particularly true in active adult with LTV is probably closer to 50%.

Because they have more equity coming out of their existing home.

And they are thinking to themselves.

I'd rather use the money.

To upgrade my home.

And refi.

Earlier than maybe.

The formula shows.

And so.

We market the heck out of it.

But we don't see a lot of takers.

Okay, well I appreciate that answer its very great.

Many other builders have been using forward commitments to push.

Two completion specs.

Are you guys doing any of that.

Yes.

Yes on the further along the home is.

Less expensive to buy down is because.

You can lock in lower rates for 60 days.

Or less cost than locking that rayford 90 or 120.

So, yes, <unk> got cheaper over the last month as well.

<unk> definitely got cheaper.

You are buying down from 7% a quarter instead of $8 eight.

Thank you Marty Thats exactly right.

The other the other nice piece of news here, then I'll throw in.

The loan limit on a on a conforming Fannie Freddie.

Is up.

$313000 since 2018.

Just went up again.

And that.

So that helps the business.

Thank you and our next question today comes from John Lovallo with UBS. Please go ahead.

Hey, guys. Thank you first for squeezing me in here just a couple quick ones.

The first one just following up on <unk> question. The comment that you guys made about <unk>.

Little bit better than normal seasonality was that specific to absorption or was that for the total orders in the first quarter.

Our order growth absorption.

By deposits as measured right now by deposits for our community because when we.

Whenever we give you guys some flavor on what's happened since the end of the quarter to the call.

It's usually three or four weeks, but because its fiscal year end, it's five weeks.

That information is always based on deposit activity because as you know we take a deposit that can then take two or three sometimes we hope not but sometimes for weeks to convert.

From deposit two agreement.

On that subject another good stat.

Historically.

We run about 68% of our deposits conferred to agreement.

In the fourth quarter, 79%.

Of the deposits converted two agreement.

So when the people go through the process they pick their lot.

Give us the deposit they start the process of finalizing their lot choice their home design their upgrades.

It's sticky it's now up to 79% of those deposits move forward.

Okay.

Okay.

Really helpful and then quick follow up here.

In your outlook.

How are you guys sort of thinking about mortgage rates I mean, I guess the question is if rates were to stay at a similar level than they were today how much risk is there to what you guys are talking about today.

Little.

We sold a lot of houses at eight.

We will sell more houses at seven and a quarter.

And if my long monologue about where the tenure is and where the 170 spread typically is and.

Where we think things are common.

If I'm right, we can break through.

That 7% to six land.

Yeah.

Every time, there is a drop in rates our business should get better that's proven true over the past couple of years.

So we are optimistic.

Thank you and our final question today comes from Truman Patterson with Wolfe. Please go ahead.

Hey, good morning.

Hi, guys and thanks for squeezing me in first just wanted to make sure for clarity when you were talking about 2004 inventory dollars overall.

Kind of being flattish is the expectation that included homes under construction and land as well correct.

Yes, I mean, the land spend is a little.

Tough to really project.

This early compared to the end of the year.

Yes.

Yes, yes understood.

Just two quick ones for me you all rely pretty heavily on realtors given your consumer base. So I'm, hoping you can remind us what portion of your sales have a realtor associated with them. What's your kind of typical broker commission and just any any thoughts on the preliminary.

NAR ruling.

The impact on your business.

Sure. So two thirds of our sales involve a outside reorder representing.

Our client.

On average, we pay that reorder to two 5%.

Of.

The delivered price of the home.

When you do the math that comes out to one 5% of total revenue of the company.

As with third party Reorders.

It's too early to comment on.

The NAR litigation, obviously, there's appeals and Theres other litigation.

That.

Has popped up since that case.

But I think <unk>.

Longer term.

The industry, we are all encouraged to believe that.

That the third party commissions will be coming down.

Okay, perfect and then.

Doug you mentioned eventually getting to 60% option land I'm just trying to understand do you think that could potentially take a pause in 'twenty four on that progression. We've just been hearing that <unk>.

Our cost of capital and availability is tightening so it might make it or a little more expensive option those deals perhaps.

Find better.

Raw land one owned deals that you could possibly bring on your balance sheet, just trying to understand how youre thinking about opportunities in 'twenty four there.

Yes, I think it's a fair comment Sherman.

Land banking got more expensive.

And so we probably did a little bit less land banking, which is one of the reasons that we didn't option as much land. However, we are even though.

We're at 50% owned 50% optioned.

And the progression to 60 40 may take a bit more time.

That doesn't change our obsession with capital efficiency with driving IRR is and therefore.

Yes.

We're not going to land banking, which may keep it off our books and keep an option longer we're going to get terms from our land sellers to purchase money mortgages, where even though we own the land we don't pay for it.

Until some date in the future through a purchase money mortgage format. So.

The IRR is are still being driven and are still very much focused on as we underwrite land, even if it's taking a bit longer to move the option bucket higher.

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

Thank you Rocco you've been terrific.

Thank you everyone for your interest and support of our Great Company and we wish all of you a wonderful holiday season.

Thank you. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.