Toll Brothers, Inc. Aktie

Good morning, and welcome to the Toll Brothers Second Quarter Fiscal Year 2026 Conference Call. [Operator Instructions] The company is planning to end the call at 9:30 when the market opens. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Doug Yearley, Executive Chairman. Please go ahead.

Thank you, Bailey. Good morning. Welcome, and thank you all for joining us. With me today are Karl Mistry, Chief Executive Officer; Gregg Ziegler, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; and Wendy Marlett, Chief Marketing Officer.

We are also joined today by Seth Ring, who will succeed Rob as President and Chief Operating Officer when Rob retires on June 30 and transitions to his new role as a Senior Adviser to the company. Rob has been an invaluable leader and contributor to the company's growth and transformation over the past 4 years, and I wish him well in his retirement. He has always done a great job of helping to mentor the next generation of leadership, working closely with that to [indiscernible] new role. Seth is a proven leader and industry veteran, so in his own right with over 20 years of experience with the company is just terrific. He is the perfect successor to Rob, and I'm excited to watch as he partners with Karl and Gregg to help lead this company into the future.

During today's call, I will provide a brief overview of our results in the quarter, discuss the market at a macro level and touch on our strategic initiatives. Karl will focus on our operational results and provide a deeper dive on conditions across our markets. And as usual, Gregg will provide a detailed review of our financial results in the quarter and discuss guidance for the balance of the year.

Before we start, however, I will provide the usual cautionary notice 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. Please read our statement on forward-looking information in our earnings release of last night and on our website to better understand the risks associated with our forward-looking statements.

We are very pleased with our second quarter results. We beat guidance on both the top and bottom lines and posted another quarter of strong margins. Based on our first half performance, we are raising our full year guidance across all key homebuilding metrics. Our results in the second quarter reflect our unique position as America's luxury homebuilder as well as the success of our strategies of expanding our geographies, product lines and price points. Our results all reflect the skills and experience of our teams, who continued to respond to a challenging demand environment with discipline, effectively balancing pace, price and incentives to drive sales while maximizing returns. We are quite simply a more efficient and less cyclical homebuilder. Even in a difficult market, our business continues to perform well.

In the second quarter, our orders were up 7% gross and flat on a per community basis. This trend has continued into the first 3 weeks of our third quarter where overall deposits are up modestly year-over-year and flat per community. In this environment, we are pleased to be serving a more affluent customer base, a segment of the housing market that has proven more resilient despite the challenges in the broader market. Overall, our buyers are less sensitive to affordability pressures as they benefited from years of income growth, stock market gains and home equity appreciation. Serving this market is in our DNA. We have spent nearly 60 years building and perfecting the business model required to meet the high standard of the luxury segment of the new home market. Through the desirable locations of our communities, the distinctive architecture of our homes, the unrivaled choice we provide in our design studios and the extraordinary customer experience we deliver, we have set our business apart. Our performance in the second quarter and over the past few years highlights the strength of our differentiated business.

Finally, I'd note that in our second quarter, we repurchased $175 million of our common stock, bringing our year-to-date total to approximately $226 million and we raised our quarterly dividend. We continue to target $650 million of share repurchases in fiscal 2026. Our balance sheet remains very healthy. We have ample liquidity, significant operating cash flows, low net debt and a strong investment-grade credit rating. Our solid financial position and healthy cash flows will enable us to continue investing in the future growth of our business while also returning capital to our stockholders.

With that, I will turn the call over to Karl.

Thank you, Doug, and good morning, everyone. I would also like to extend my congratulations to Rob and Seth. Rob has been an incredible mentor to both me and Seth. We've learned so much at his side, and we look forward to building on the strong foundation that Rob, along with Doug, Bob and many others have built at tollers.

As Doug mentioned, our second quarter results were quite strong. In the quarter, we delivered 2,491 homes at an average price of $1,009,000, generating $2.5 billion of homebuilding revenue or approximately $110 million above the midpoint of our guidance. Our adjusted gross margin was 26.2% in the quarter or 70 basis points better than guidance and our SG&A expense as a percentage of homebuilding revenues was 10.3% or 40 basis points better than guidance. We earned $260.6 million in the quarter, or $2.72 per diluted share and $0.18 beat relative to the midpoint of our guidance. In addition, we signed 2,834 net agreements in the quarter, for [ $2.8 billion ], up 7% in units and 8% in dollars. This increase was driven by the successful execution of our growth strategy over the past several years. At quarter end, we were selling from 459 communities versus 421 1 year earlier and 386 just 2 years ago. We remain focused on opening new communities across the country and expect to end the year with 480 to 490 selling communities, including the communities we acquired in the Buffington Homes transaction, which closed earlier this month.

We plan to grow community count at a similar 8% to 10% rate in fiscal 2027 and beyond. And we currently own or control sufficient land to do so. We are very excited to enter Northwest Arkansas with the acquisition of Buffington Homes. The home of Walmart and a host of terrific other companies the Fayetteville / Bentonville market is vibrant and growing. Buffington Homes is a leading builder of luxury homes in the area, and it is a great fit for Toll Brothers. We look forward to leveraging their local expertise and strong land position to scale their business well into the future.

Turning to market trends. As Doug mentioned, the demand environment remained challenging in the second quarter and through the first 3 weeks of our third quarter. Against this backdrop, we are pleased that we were able to increase sales by 7% year-over-year, keep our per community sales pace flat and maintain our margins in the quarter. Geographically, Florida was a bright spot in the quarter with improved demand in all our markets in the state. Boston, all the way down in South Carolina continued to perform well as did Boise and Las Vegas in our Mountain region, and Austin, Texas in the South. Weaker markets included Atlanta, San Antonio, Seattle, Portland and San Francisco. Among our buyer segments, our move-up business continued to perform the best. In the second quarter, our move-up business accounted for 62% of home sales revenues up from 59% in the first quarter. Luxury first time was 22% and moved down of 16%. Our luxury move-up business has the highest margin among our buyer segments. So we are very pleased that it remains the largest part of our business.

As Doug mentioned, in the quarter, we continued to operate with discipline, effectively balancing sales pace, price and incentives to drive sales while maximizing returns. We are pleased that our average incentive for new contracts in the second quarter remained flat at 8% of the gross sales price. The fourth consecutive quarter it has remained in this range. This is a testament to the immense appeal of our brand and the desirability of our homes and communities. It also speaks to the financial strength of our customers who continue to demonstrate their desire to invest in new homes. Consistent with the past several quarters, approximately 23% of our buyers paid all cash in the second quarter and the loan to value for buyers who took a mortgage was approximately 69%, also consistent with recent quarters.

We are also benefiting from the breadth of our offerings, which is the widest in the industry and includes a balanced mix of build-to-order and spec homes. In the quarter, Spec home represented approximately 51% of deliveries and 41% of home sales revenues, which is broadly consistent with the range we have targeted and maintained over the past few years. We are very comfortable with our delivery mix in this 50-50 range. It is important to remember that we sell our specs at various stages of construction. Although the mix can change from quarter-to-quarter, on average, approximately 1/3 of our specs sell before framing is completed. The margin profile for these homes is very similar to the 30% adjusted gross margin we routinely achieve on our build-to-order homes.

Our goal is to sell our specs as early in the construction cycle as possible. Incentives are generally lower on specs that are sold earlier, and there is greater opportunity for our customers to visit our design studios and personalize their homes with finishes that match their taste. The ability to customize remains an important competitive advantage for Toll Brothers as design studio upgrades tend to be highly accretive to our margins. In the second quarter, design studio upgrades structural options and lot premiums averaged $219,000 or 25% of our average base sales price. Given our focus on selling spec homes earlier in the construction process, I'm pleased to report that in the first half of fiscal 2026, we reduced the number of finished specs in our inventory by 28%. We held 2 finished specs per community at second quarter end versus 2.8 at the end of fiscal 2025.

In the second quarter, we also continued to benefit from improved production efficiencies. We for our build-to-order homes, our cycle time improved to approximately 9 months. The cycle time for our spec homes is generally about 1 month shorter than build-to-order homes. Overall, our building costs remained flat in the quarter, even with the cost of lumber rising in the period. Turning to land. At second quarter end, we owned or controlled approximately 76,800 lives, 58% of which were optioned. This existing law position allows us to maintain our highly disciplined approach to acquiring and developing land, including our rigorous underwriting standards. When buying land, we actively seek out acquisition and development opportunities that improve our capital efficiency while achieving prudent and balanced financing structures. Where possible, we favor seller financing, joint ventures and traditional option arrangements, but we also utilize land banking when it makes sense to do so.

I would also point out that because we are a luxury builder buying land at the corner of Main and Main, were not as many of the big public and private builders play. We often find there are fewer bidders at the table when we are pursuing deals. This is one of our competitive advantages. In many markets, we often compete for land in smaller custom builders who do not have the same financial strength or access to capital that we enjoy. In addition, for larger master planned communities, our recognized luxury brand search to elevate the community, which can present us with more opportunities. Combined, all of these factors put us in a favorable position when buying land, helping us improve returns.

With that, I'll turn it over to Gregg.

Thanks, Karl. As mentioned, in the second quarter, we delivered 2,491 homes at an average price of $1,009,000, generating home sales revenue of $2.5 billion. We earned $350.4 million before taxes and $260.6 million after or $2.72 per diluted share. We exceeded the midpoint of our guidance for both home delivery and average delivered price which was primarily due to favorable mix out of our Pacific region, better-than-expected performance in Florida and a greater contribution from our luxury move-up business.

We signed 2,834 net agreements for $2.8 billion in the quarter, up 7% in units and 8% in dollars compared to the second quarter of fiscal year 2025. The average price of contracts signed in the quarter was approximately [ $990,600 ], up 1% compared to the second quarter of fiscal 2025. Our second quarter adjusted gross margin was 26.2%, 70 basis points better than our guidance of 25.5%. Our gross margin benefited from the favorable mix from our Pacific region, Florida and our luxury move-up business that I mentioned earlier as well as continued improvement in operating efficiencies across our business. Write-offs in our home sales gross margin totaled $32.5 million in the quarter. Approximately, $20 million of these related to [indiscernible] costs and option write-offs on deals we dropped that no longer met our underwriting standards. The remainder was associated with a handful of operating communities in different markets around the country.

SG&A as a percentage of revenue was 10.3% in the second quarter compared to our guidance of 10.7%. The 40 basis point beat relative to our guidance was due primarily to greater fixed cost leverage from higher home sales revenues as well as moderately lower selling costs compared to forecast. Joint venture, land sales and other income was $9.3 million in the second quarter compared to $29.0 million in the second quarter of last year and our breakeven guidance. Our cancellation rate was 2.9% of beginning quarter backlog as compared to 2.8% in the prior year period. As a percentage of signed contracts in the second quarter cancellation rate was 4.8% versus 6.2% in last year's second quarter.

We are pleased with our industry low cancellation rate. It highlights the attachment our buyers develop while customizing their new homes in our design studios as well as the significant financial commitment they make in the form of a down payment. Our tax rate in the second quarter was 25.6%, which was 40 basis points better than our guidance. We ended the second quarter with approximately $3.3 billion of liquidity including $1.1 billion of cash and $2.2 billion of availability under our revolving bank credit facility. Our net debt-to-capital ratio was 15.4% at second quarter end compared to 19.8% 1 year ago.

Turning to our guidance. I will remind you that our projections are subject to all the caveats regarding forward-looking statements included in our earnings release. We are projecting fiscal 2026 third quarter deliveries of approximately 2,600 to 2,700 homes with an average delivered price between $965,000 and $985,000. For the full fiscal year, we are increasing the low end of our guidance range by 100 homes, and we are increasing the projected average delivered price by $12,500 at the midpoint. We now project deliveries of between 10,400 and 10,700 homes with an average price between $985,000 and $1 million.

We're also increasing our full year adjusted gross margin guidance by 10 basis points to 26.1%, reflecting our outperformance through the first half of the year. We projected third quarter margin of 25.25%. Our third quarter and full year adjusted gross margin guidance reflects the mix we now expect over the next 6 months and implies a fourth quarter adjusted gross margin of approximately 26.3%. We are confident in this projection. Embedded in our backlog is a greater concentration in our fourth quarter of higher-margin move-up luxury and spec homes sold earlier in the construction cycle relative to our third quarter. We expect interest in cost of sales to be approximately 1.1% in third quarter and for the full year.

We project third quarter SG&A as a percentage of home sales revenue to be approximately 10.0%. For the full year, we are improving our guidance by 15 basis points and now expect a full year SG&A margin of 10.1%. Other income. Income from unconsolidated entities and land sales gross profit in the third quarter is expected to be $5 million. We now project $120 million for the full year, of which we have already realized $81 million. Included in our second half projection is the sale of several stabilized apartment projects.

We project the third quarter tax rate to be approximately 26.0% and the full year rate to be approximately 25.5%. Based on land we currently own or control, we expect our community count of between 480 and 490 at fiscal year-end, an 8% to 10% increase versus the 446 at fiscal year-end 2025. We are projecting a community count of 475 communities at the end of the third quarter. Our weighted average share count is expected to be approximately 95 million for the third quarter and the full year. This assumes we repurchase our target of $650 million of common stock for the full year.

Now let me turn the call back to Karl.

Thank you, Gregg. Before we open it up for questions, I'd like to thank our Toll Brothers employees for their hard work in the first half of 2026. I'm proud of your commitment to our customers and dedication to our business, which are key drivers to our long-term success. Bailey, I think with that, we can open it up to questions.

[Operator Instructions] Our first question comes from Mike Dahl with RBC Capital Analyst.

Nice results in a tough environment, and congrats to all of you who are seeing your roles kind of shift and evolve. I wanted to get one of the obvious things kind of out of the way. I appreciate the details you gave on recent deposit trends. Just given everything is so fluid in rates and some of the macro dynamics, can you give a little more color on what you're seeing from traffic, what you're hearing from buyers. You mentioned the deposits, how are the conversion rates to orders. And then in the -- with your spec specifically, is there any difference in buyer behavior or trends you're seeing the ability to sell some of those specs at an earlier stage and over the past month or so?

Yes. Thanks, Mike. It's Karl. I appreciate the question. Let's just -- let's talk about the demand piece and what we're hearing. So demand was really consistent throughout the quarter. and has remained the same way in the first few weeks of May. April was our strongest month, but I think as we prepared in the script, sort of similar to last year on a per community basis.

And I think we're hearing the same thing on the floor that we've heard now for some time. Customers are still waiting to make a decision conversions are taking a little bit longer. I think we've shared in the past, it's tied a bit to consumer confidence at our price point. But overall, I think given the backdrop in the current environment, we're really happy to be flat, frankly, and again, consistent throughout the quarter and early in May.

Okay. I appreciate that, Karl. And then my follow-up question. In terms of kind of the margin dynamics, I appreciate you guys always have some big moving pieces in terms of mix. So maybe just, again, help us understand a little more in terms of kind of the maybe bucket out the mix impacts 2Q versus 3Q? And then that 4Q dynamic if you could go into any more detail on maybe quantifying that mix of kind of luxury or Pacific versus what you've previously seen and if there is any difference in incentives assumed? Or if you're just kind of assuming incentives on specs kind of hold flat through the balance of the year?

Okay. That's a good question, Mike. So I'm going to start and I'll let Gregg get into the Q3 and Q4. So as it relates to the margin dynamics in the buckets, as we outlined in the script, the QMI the spec business was just over 50% of deliveries, about 45% of revenue. And if you think about our gross margin or our full year call it around 26%, we're still -- it's several hundred basis points better on the build-to-order business and the spec mix when you take into account the different stages of construction in which we sell them. And we mentioned we still get a chance to sell a lot of them early enough to get our customers to the studio. But when you put all that together, the QMI mix is several hundred basis points lower, and that range ebbs and flows from quarter-to-quarter. And that's what unfolded in Q2.

Yes. Mike, it's Gregg. So as we roll forward to Q3, I think we'll see some changes in the mix. We probably have a little bit of negative mix from our Pacific -- I'll give you some regions like our Pacific region or Mid-Atlantic or south region or some geographic areas where we'll see that change. And then on the fire segment side, we probably have a little bit of our luxury move-up into the mix into Q3, and this is causing the lower outcome for our Q3 gross margin as well as some of the specs that we sold at a later stage they're actually going to deliver here in Q3. And so that's another impact on to Q3.

And then we had this dynamic between Q2 and Q3 that Karl just walked you through. There was just some timing associated with settlements, especially some of the higher-margin settlements coming out of the Pacific region. So then we have to roll it forward to Q4, right? So Q4, as I said earlier in the script is that we expect to rebound up to 26.3%. So that's about 110 basis points improvement over Q3. So here, we'll see a little bit of a reversal of some of that mix I just mentioned to you for Q3. That means areas like the Pacific or the North on the geographies will have some positive mix in Q4. And our luxury move-up business will also have some higher density of settlements in Q4. So that will be accretive to that Q4 gross margin.

And then lastly, I'll call out that from the spec standpoint, we have some specs that we sold at an earlier stage that we'll end up delivering in Q4. And so they tend to have a higher gross margin with the earlier we sell them. And so that will also help the gross margin in Q4. So I think that's the bridge to take you through the year.

Our next question comes from Stephen Kim with Evercore ISI.

If I could just follow up on a nice question there, the second one. So the setup, it sounds -- I'm particularly interested in what might happen sort of beyond just this year. It sounds like what you're saying is that the 3Q lower margin and the 4Q higher margin, it really reflects sort of a normalization that sounds like in 4Q. And I just want to make sure that, that was correct that you don't see 4Q as sort of benefiting unduly from maybe a higher mix of early specs or customized homes, but rather, it's more like those were factors that were negatively impacting 3Q and 4Q is normalization. So just as we think about what things are going to look like into the front part of '27, I just want to level set whether that 4Q number isn't that kind of what your -- you kind of a normalized mix for the company going forward.

Yes, Stephen, thanks for the question. Yes, we're not prepared to say that Q4 GM is an exit rate that you should expect as you roll into the first half of 2027. However, it is important to note that there's a certain seasonality to our spec strategy in terms of the timing of when they'll deliver the timing of when they tend to get sold. So you're seeing it here play out in fiscal 2026. So in Q2, you were sold a bunch of later-stage specs in the construction cycle, later state in the construction cycle. They then deliver in our Q3, which ends July 31, as our client looks to get into their home ahead of the school year.

And during Q3 and late Q2, we'll also see that we're selling some of the specs in earlier stage of construction that will then deliver in our Q4 through October 31. So there's a seasonality that will happen. As you roll forward into Q1 and Q2, I think we just have to look back to what you saw from us in fiscal 2026 in terms of expectations better.

Okay. So let me just clean that up -- cleanup my question a little bit, if I could then. Gregg, I understand that there are seasonal aspects, but there's obviously also changing changes in the market and selling conditions as we have in an unpredictable manner. And really, what I'm trying to figure out is, if you take out the seasonal, the normal seasonal kind of effects, I'm really trying to get at whether or not the 4Q number is in your view, sort of a sort of a normal 4Q kind of distribution of closings with the mix of BPO versus an early-stage specs and the geographic and all that. That's what I'm really trying to get a sense for is 4Q in your view, kind of a normalized 4Q kind of level, taking seasonality into account. Yes, so that's basically the question that I had.

Yes, Steve, I think you have it right.

Our next question will come from John Lovallo with UBS.

This is Spencer Kaufman on for John. I appreciate the questions. Maybe to start, most of the builders this earnings season ended up taking down their delivery out for the year, while you guys slightly raised yours. And I was just curious if you thought this was more of a function of your buyer being a little bit more insulated from some of the volatility in rates and not as concerned about their financial situation or were you just being a little bit conservative earlier in the year? How should we sort of think about the slight raise there?

Yes. Thanks for the question. I think you're right on this last point. It is definitely this luxury segment of the market, which we mentioned is about 60% of our revenue is doing better. So that feels better right now, our performance so far in the first half where we've done well and the visibility into our backlog for the back half, I think coupled with the acquisition of Buffington which was a modest improvement in units for the year gave us the confidence to raise our settlement guidance.

Okay. Understood. And maybe just thinking about the share repurchase target for this year, $650 million. What is your appetite to maybe do a little bit more than that, just given where the stock is currently trading and strength of your balance sheet?

It's Gregg. We're not prepared to change our guidance. We just reaffirmed it at $650 million. But of course, we tend to do more in the second half of the year. And so we will be paying close attention as we exit our blackout period in terms of how much we want to do.

Our next question comes from Rafe Jadrosich with Bank of America.

How many -- when you look at your backlog, how many of the homes that are in your backlog today do you expect to deliver in fiscal '26 versus what's going to fall in fiscal '27? And I guess that's sort of another way in the second half, delivery guide, what is yet to be sold?

Yes, Ray, thanks for the question. The answer is about 4,100 of our backlog of about 5,400 we expect to close in the back half of 2026. So that implies when you put together the updated full year guidance, you need about 2,000 specs to both sell and settle in the back half. That's what's informing our guide.

That's really helpful. And then you mentioned earlier that stick and brick costs were flattish sequentially even though there's been some increase in lumber, obviously, seeing a lot of price increases announcements and diesel costs are up. How are you thinking about sticking brick through the sort of balance of the year or even out into '27 were all the homes you're starting today are going to get actually delivered? What are you sort of expecting in terms of inflation and your ability to push back?

Yes, Rafe, I think the full year guide, we still -- we have a high level of confidence, the vast majority of those homes as we just outlined for you are well underway, and our teams have done a great job keeping our costs flat. And even as our commentary implied down in a lot of circumstances to offset some of the lumber prices. So we've seen very modest impacts, if any, from tariffs. We are hearing about some of the oil and fuel surcharges, but we have been able to find them off to this point. So too early to tell you how it's going to impact 2027, but we remain confident in our guide in '26.

Next question comes from Sam Reid with Wells Fargo.

I wanted to touch on the incentive bucket first. obviously done quite well, keeping that at 8% for the past 4 consecutive quarters. Just wanting to dig a little deeper on that. Are there any changes in the composition of those incentives within that One of your peers, I know, is doing more forward commitments on some of their move-up homes. Just curious if you're doing something similar on some of your later-stage specs. I just love some more context on that 8% incentive load.

Sam, it's Karl. Good question. On the forward commitment and the mortgage programs, I think we've outlined for this group before. We offer these programs. If you were to head to our website today, you would see a rate program. It's great for traffic. We don't see a lot of scale come from those programs. And I think it speaks to our customer, again, not necessarily being those programs to qualify to move into these homes. They're making this decision by choice. We're really proud that the incentive has remained consistent. Our build-to-order margin is meaningful lower, meaningfully lower than the 8%. It's -- over the years has been in that 3% to 5% range. And so our [ QMI ] business, and it evolves quarter-to-quarter depending on the mix of [ QMI ] what stage they're sold at, but they are a few basis points higher -- a few hundred basis points higher than the 8%, and it's allowed us to be consistent here.

All makes sense. I'm glad to hear the consistency. Maybe switching gears on the selling costs. I picked up in the prepared remarks that, that was one of the reasons why SG&A came in better than expected. Maybe just unpack that a little bit more any differences in terms of inside commissions, outside commissions, broker attach we should be mindful of?

Yes. Sam, it's Gregg. Yes, for Q2, our SG&A was a bit lower. We did call out our sales -- our SG&A is having some different factors in there. And generally, we'd say, on the advertising side, we showed a lot of discipline there to cut some costs. And then on the outside broker commissions, that rate came down just a little bit.

Our next question comes from Michael Rehaut with JPMorgan.

Congrats on the results. First, and I apologize if I missed this more broadly, but the Buffington acquisition, I was wondering if you could go through some of the key stats there about annual closings ASP and land position in terms of the lots that you were able to acquire or control additional lots. And I guess with the midpoint I believe, 50 clothings raise for the full year guidance if that kind of squares with Buffington contribution?

Yes. Thanks, Mike. I'll just say again, we're super happy to have met this team and worked with them to complete this acquisition. They are the luxury builder in Northwest Arkansas. So it's just a perfect fit for us. The acquisition, I'll give you some of the details. It's approximately 1,500 lots that are in their pipeline. This is a group that builds like us at quite a range from the $400 million up to over $1 million. As it relates to anticipated settlements I think 50 this year is probably a good number. That could vary, it could be a little less, could be a little more, but we felt good. Buffington was part of that decision to raise the full year settlement guide.

Great. No, that makes sense, and appreciate the details there. Secondly, the lower selling costs, I just wanted to follow up on that question. I guess, curious on 2 things. First, of the 40 bps beat, if I think of it roughly equally split between leverage and these less advertising and lower outside brokerage? And secondly, on slightly less advertising and lower outside brokerage, is that something that we could expect to continue or maybe even increase over the next 12 to 18 months? And specifically, I'm wondering if it's in some ways reflective of a market that's stabilizing in your view and maybe requires less dollars or resources to generate the same amount of incoming orders.

Mike, it's Doug. Here's an easy answer. Yes, in all regards, we are more efficient. And we're very encouraged by what our marketing group can do to continue to drive sales and what has been a bit of a difficult market. So yes, we're excited for where this is headed.

Our next question comes from Trevor Allinson with Wolfe Research.

I want to ask a follow-up on M&A following your purchase of [indiscernible] from Homes in Arkansas. What other markets rank high on your priority list for entry? And then can you talk broadly about your appetite for additional M&A and current environment?

Trevor, it's Karl. We've done an incredible job. I think with Doug's leadership over the last 10 years of dotting the map. We're very, very happy with our geography. And excited that we think we can be bigger and have a higher market ranking in a lot of these places, which we're doing every year with our community count growth.

To your question about the remaining spots on the map. There are parts of the Midwest where we don't have a footprint today, Indianapolis, Minneapolis or 2 spots that come to mind. And again, the places we can be much bigger than we are. I think we'll continue to do this type of acquisition like you saw with Buffington in Northwest Arkansas. We've now done 16 acquisitions over the last 32 years. They've all been buffer the exception of Chapel, which is a really incredible transformational acquisition. The rest have been about this size, these bolt-on good fit, strategic acquisitions, and that will remain our focus. I don't anticipate any transformative M&A in the near term.

Okay. Makes sense. And then second question is just following up on the commentary about selling specs earlier in the construction process. Does the volatility in mortgage rates we've seen recently impact your ability, just given the uncertainty that it creates for the consumer to continue to sell earlier in the construction cycle? Or are you still finding success in that initiative here over the last several weeks, even with rates moving around quite a bit?

Trevor, the rates have not had an impact in that regard at all. We really like how we've been able to build this business to offer these specs at various stages of construction and still offer choice. And at least for our consumer at our price point, we're not seeing the recent rate sensitivity changing those dynamics.

And Trevor, let me weigh in here, and it relates back to Steve Kim's question on margin and what we can read into that for '27 and beyond. As Karl mentioned earlier in his prepared comments, we have been working hard on reducing our finished spec count. We took it down 28% through a lot of hard work, and it did require some more incentives, as we've talked about, finished homes ready to deliver in this environment for all builders is requiring in many markets more incentives because of those market dynamics out there, not everywhere, but in many markets.

And we are delighted that we were able to bring the finished spec count down by 28%, taking it from 2.8 finished homes per community to 2. With those added incentives with that initiative, and still be gross margin guide. And I compliment the team for doing that. We are now in a much better position at 2 specs per community. And I think now we're very focused even if we have to incentivize a little more to sell a home early in construction, it's better to do to that, have enough time for the client to go to the design studio spend a bunch of money there, which is highly accretive. Our design studios run at a 40-plus gross margin. So it's better to throw a little more incentive early and wait for the house to get to the end to have a bigger incentive and not have the accretion coming out of the design studio. And we're in a really good place right now.

We also have more luxury move-up. Our entire business, of course, is luxury, even the first-time, our first-time homes are 700,000, 800,000. People do go even then and spend money in the design studio, but the move-up luxury, which is doing really well. We're seeing more and more deals for move up. We're focused more and more on move up. And when you combine that as a business in really good shape with high margin with good deal flow and less finished specs in our communities and more focus on selling them earlier, I think what you're seeing coming out of Q4, without any guide for '27 and beyond is somewhat indicative of where this business now sits longer term.

Our next question comes from Alan Ratner with Zelman.

Congrats on a really strong quarter in a tough environment. Karl, my question just on some of your market color. I would love to dig in a little bit more on a couple of callouts you made in Austin and Florida being some of your relative bright spots in the quarter. And those are 2 areas that I think have been more challenging over the last several years coming out of the pandemic. And I'm just curious if you feel like the relative strength you're seeing there is more company specific, maybe based on your product positioning or communities or pricing strategy, or do you feel like both Florida and Austin might have hit an inflection point from a broader market perspective and conditions seem to be stabilizing there across the board?

Yes. Thank you, Alan. I think the answer is maybe a little bit of both, but I want to talk to you about those 2 markets, and I'll be able to tell you some stories about what we do and why we think it's working well for us right now.

In Florida, you have heard, I think, from the group of builders that things have firmed up a bit. Inventories have come down. But we have some exceptional locations, and it's because we are willing to build luxury homes this move-up segment of our business at scale. And I touched about -- touched on it a little bit in the prepared remarks, that is a smaller table of bidders when that land is purchased because fewer builders want the business from $2 million to $3 million, as example, in West Palm Beach in Florida. We opened a community there late last year, selling homes at about $3 million on average at about 2 a month and we have gross margins there in the low 30s. And that's one of many examples like that today in Florida.

In Austin, I think it's maybe even a better story. That is a market where the headlines certainly would lead you to believe it's soft. And we've had an exceptional quarter and really first half in Austin, a credit to that team. We opened a community Allen in the Brushy Creek area, which is North Austin, almost $1.5 million average sales price. And this is a community that's opened up with almost no new home competition within the zip code and school district. Again, not a unique characteristic for what we do. And that is also producing gross margins in the low 30s. So I think both of those markets might be seeing green shoots from all builders. But specifically, what we do and what we do well is performing better, and it's creating this contrast from our peers.

That's really helpful color. I appreciate that. Second question on land banking. you brought that up in your prepared comments. And just looking at your share of control lots, 58%, obviously, up quite a bit over the last 4 or 5 years. Are you able to drill and deeper and quantify exactly what percentage of your portfolio is land banked? And has that been increasing significantly over the last 2 or 2? I guess there's obviously a lot of focus on whether the higher costs associated with land banking are going to start to filter through to build our margins. And I'm curious if you feel like there's any mix headwind associated with that coming up in the future.

Yes, Alan, about 20% of our revenue this year is going to come from communities that were land banked. As you look into our pipeline of lots about 30% of those are either optioned or land bank -- I'm sorry, 30% of the option lots are land bank. So it's likely to move up modestly. I think -- and again, we laid it out in the script because of the nature of the land that we buy, our first turn is to work with sellers to get seller financing or some other favorable structures instead of turning to the land banking market first.

This guy sitting next to me, Doug, has told us over the years the importance of balancing margin with returns. And so we continue to execute on that well. And with the deal flow we see and the opportunities to structure them with sellers this 20% to 30% for the future feels about right.

Our next question comes from Jay McCanless with Citizens.

Doug, if you could talk a little more about some of the deal flow you're seeing in luxury move-up and -- is that deal flow getting better as some of these smaller builders are either falling by the wayside or can't get the capital to take those deals down.

Yes. You described it exactly right. Our business was built on move-up luxury, and we did a great job in the last decade of widening geographies and widening price points and products. We talk about we go from 400 to 10 million. We have over 40 design studios that serve all of our clients, where they can go in and spend a couple of hundred thousand dollars on all the beautiful finishes. And so the core move-up business where the buyers are more affluent. They have equity in their homes. They've done well in the stock market. They have job security and wage growth. They are primed to continue to feed that core business, which, again, is about 60% of what we do. And so our land teams, while always focused on move-up have been charged in the last few years, okay, thanks, guys. You did a great job of finding luxury first time. You did a great job of finding luxury move down. Now let's double down on the core business, which is highly profitable, has a great demographic and affluent fire profile.

And so the combination of our internal effort to focus those teams even more than ever, with, as you described, good deal flow with less competition because the corner in Main in Main, they tend to be very nuanced deals and difficult towns that are complicated to get entitled the land planning, the creativity that may have to go into a piece, that is a unique piece and not the next farm down the road. These are all the pieces of expertise that we bring and we have the cash so we can distinguish ourselves in the land buying, and we're seeing more and more of those opportunities, and we're very excited about it.

Okay. That's great. And then the second question I had, we saw on Monday from the NHB, it looks like builder confidence had a nice jump. Traffic had a nice jump. I think you guys talked about it, what you've seen in May already. But I guess, is that -- with the builder confidence in the traffic numbers, is that in line with what you guys are seeing? And is it pretty well spread nationally?

Yes Jay, I think it's still too early to tell. I'd lean back into the commentary that we've seen May has looked a lot like April. April was the strongest month in the quarter, traffic, what web and foot traffic are up on a year-over-year basis, but in line with last or on a per community basis.

This concludes our question-and-answer session. I would like to turn it back over to management for any closing remarks.

Thank you, Bailey. You were terrific. Thanks, everyone, for your interest and great questions. Karl and Gregg and the entire team are always here to accommodate you with any individual questions or follow-up you may have. Have a wonderful Memorial Day weekend, and we look forward to continuing our dialogue about our great company. Thanks so much. Take care.

Thank you.

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

Good day, and welcome to the Toll Brothers First Quarter Fiscal Year 2026 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead, sir.

Thank you, Rocco. Good morning. Welcome, and thank you for joining us. With me today are Gregg Ziegler, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Wendy Marlett, Chief Marketing Officer; and Karl Mistry, who will be taking over as the third CEO in our company's history on March 30, when I will transition to the Executive Chairman role.

Karl is an outstanding leader who has been with Toll Brothers for over 20 years. He has run homebuilding operations in many of our key markets and currently heads all of our Eastern operations. He knows this company inside and out, and I'm very confident he is the right person to lead us through the next phase of growth.

During today's call, I will provide a brief overview of our results in the quarter, discuss the market at the macro level and touch on our strategic initiatives. Karl will focus on our operational results and provide a deeper dive on conditions across our markets and product lines. And as usual, Gregg will provide a detailed review of our financial results in the quarter and discuss guidance for the balance of the year.

Before we start, however, I need to provide the usual cautionary notice 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. Please read our statement on forward-looking information in our earnings release of last night and on our website to better understand the risks associated with our forward-looking statements.

I am pleased with our first quarter results as we met or exceeded guidance across nearly all metrics. We delivered 1,899 homes in the quarter and generated $1.85 billion of homebuilding revenue, approximately $24 million above the midpoint of our guidance. Both our adjusted gross margin and SG&A margin were also better than guidance by 25 and 30 points, respectively. We earned $2.19 per diluted share, a 25% increase compared to the $1.75 we earned in last year's first quarter and $0.05 above our implied guidance.

We are off to a good start in fiscal 2026. In the quarter, we signed 2,303 net contracts for $2.4 billion, flat in units, but up 3% in dollars compared to last year's first quarter as the average sales price increased to $1,033,000.

Since mid-January, we have seen an increase in overall traffic and sales consistent with the start of the spring selling season. While it is early, we are cautiously encouraged by the increase in activity over the past month. Our strategy of balancing price and pace worked well in the first quarter. Our overall incentive remained flat compared to the fourth quarter at 8% of sales price. This is the third consecutive quarter that incentives remained flat on a percentage basis. We are benefiting from a healthy mix of build-to-order and spec homes in our inventory, balancing the higher margin in our build-to-order business with the lower margin but faster turns in our spec business. Impressively, our average adjusted gross margin in our build-to-order business remained above 30% in the first quarter.

Overall, as we head into the heart of the spring selling season, we are very comfortable with the level of specs in our inventory and their stage of construction. Consistent with the strategy I discussed during our last call, we increased our spec production in our first quarter in order to have the right amount available for delivery in the summer when many buyers are looking to move into their new homes ahead of the start of the school year.

We expect to increase community count in the second quarter from 445 communities at the end of the first quarter to 455 at the end of the second. For the full year, we are targeting another 8% to 10% increase over the 9% we grew last year. We also have enough land under control to continue growing community count at this pace over the next several years.

At first quarter end, we owned or controlled approximately 75,000 lots, 55% of which were optioned. Our land is well located in desirable locations which allows us to be highly selective and disciplined as we evaluate new land opportunities. We also continue to structure land acquisition and development opportunities to be more capital efficient, including through option arrangements, land banks, joint ventures and similar structures that allow us to defer payments and lot takedowns.

I'd also point out that we continue to benefit from our more affluent customer base, which is less sensitive to the affordability pressures that continue to impact the entry-level buyer. Over 70% of our business is luxury move-up and luxury move-down, which serves a wealthy cohort that has benefited from growth in their home equity and stock market appreciation. The remaining 25% to 30% serves the more affluent first-time buyer who is less impacted by affordability pressures. Many of them are older millennials buying their first home later in life when they have higher incomes and are more financially secure. The average delivered price of our first-time buyer was approximately $670,000 in our first quarter.

Lastly, I will note that our balance sheet remains very healthy. We have ample liquidity, low net debt and a strong investment-grade credit rating. We recently extended the maturities of our revolving credit facility and most of our term loan facility to February 2031. We also continue to expect significant cash flow generation from operations this year. All of this enables us to continue investing in the growth of our business while also returning capital to our stockholders.

With that, I will turn it over to Karl.

Thank you, Doug. I'm excited for this opportunity and grateful for the trust that you and the Board have placed in me. I very much appreciate our investors and the analyst community, and I look forward to building on the great relationships that you and Bob before you have developed over the years.

We started the year off with a solid first quarter. We beat the midpoint of our homebuilding revenue guidance, exceeded margin expectations and increased our earnings per share by 25% over last year's first quarter. From a demand perspective, we saw the typical seasonal pattern unfold in the first quarter. Based on signed contracts on both an absolute and per community basis, November was the slowest month followed by December with a market uptick in January.

As Doug mentioned, we saw an increase in demand beginning in mid-January that is consistent with the start of the spring selling season. With our broadly diversified portfolio and affluent buyer profile, we are well positioned to capitalize on any further improvement in homebuyer demand.

Geographically, the Boston to South Carolina corridor has continued to perform well, as has Boise, Las Vegas and Reno in our mountain region and all of California. Most of Florida seems to have found its footing, although Tampa remains challenged, along with Atlanta, San Antonio and the Pacific Northwest.

Among our buyer segments, our luxury move-up business also continued to perform well. In the first quarter, luxury move-up accounted for 59% of homebuilding revenues. Luxury first time was 25% and luxury move-down was 16%. Our luxury move-up business has the highest margin among our buyer segments, so we are very pleased that it is the largest part of our business.

Turning now from buyer segments to our build-to-order and spec home strategy. I will note that we generate about 1/2 of our homebuilding revenues from specs and the other half from build-to-order. We believe we have achieved the right balance in our overall business with this healthy 50-50 mix of high-margin build-to-order homes with buyers who want to customize their dream home with specific layouts, designs and finishes alongside lower margin, but faster turning spec homes that appeal to buyers who want to move into their homes on a quicker schedule. I will also point out that we sell our specs at various stages of construction. Although the mix can change from quarter-to-quarter, on average, approximately 1/3 of our specs sell before framing is completed. And the risk profile and margin for these homes is not all that different from our build-to-order homes.

Our goal is to sell our specs as early in the construction cycle as possible. The earlier we sell our specs, the greater the opportunity for our customers to visit our design studio and personalize their homes with finishes that match their tastes. This ability to customize remains an important competitive advantage for Toll Brothers, and it benefits our margins as design studio upgrades tend to be highly accretive. In the first quarter, design studio upgrades, structural options and lot premiums averaged $212,000 or 25% of our average base sales price.

Doug mentioned the benefits of serving a more affluent customer base, consistent with the past several quarters, approximately 24% of our buyers paid all cash in the first quarter. And the loan-to-value for buyers who took a mortgage was approximately 70%, also consistent with recent quarters. Our contract cancellation rate in the first quarter remained low at 2.8% of beginning backlog. This industry low cancellation rate speaks to the financial strength of our buyers as well as the sizable deposits they make and how emotionally invested they become as they personalize their homes at our design studios.

We benefited from improved production efficiencies in our construction cycle times in the first quarter. For our build-to-order homes, the cycle time was approximately 9.5 months and was about 1 month shorter for spec homes. Additionally, our build costs in the first quarter were flat compared to the fourth quarter of 2025.

With that, I will turn it over to Gregg.

Thanks, Karl. In the first quarter, we delivered 1,899 homes at an average price of $977,000 and generated home sales revenues of $1.85 billion. While we exceeded the midpoint of our revenue guidance, the average delivered price was below our guidance due primarily to mix as we delivered more lower-priced finished spec homes in the quarter than projected.

As Doug mentioned, we signed 2,303 net agreements for $2.4 billion in the quarter, flat in units, but up 3% in dollars compared to the first quarter of fiscal 2025. The average price of contracts signed in the quarter was approximately $1,033,000, which was up 3% compared to the first quarter of fiscal 2025 and up 6% sequentially. The increase was primarily due to mix as we sold well in the North and Pacific regions, particularly in our luxury move-up business.

Our first quarter adjusted gross margin was 26.5%, 25 basis points better than our guidance of 26.25%. Q1 gross margin exceeded our guidance due primarily to operating efficiency. We are maintaining our full year adjusted gross margin guidance of 26.0% and project a second quarter margin of 25.5%. In the second half of the year and especially in the fourth quarter, we expect our adjusted gross margin to rise as our deliveries mix should include a greater contribution from our higher-margin North and Pacific regions.

Write-offs in our home sales gross margin totaled $11.7 million in the quarter, approximately $5 million of these related to predevelopment costs and option write-offs with the remainder associated with a handful of operating communities in different markets around the country.

SG&A as a percentage of revenue was 13.9% in the first quarter compared to our guidance of 14.2%, the 30 basis point beat relative to our guidance was due primarily to leverage from higher-than-anticipated homebuilding revenues. Note that our SG&A margin in the first quarter is higher as it generally is our lowest revenue quarter, and it includes accelerated employee stock-based compensation expense that only hit in the first quarter.

Joint venture, land sales and other income was $72 million in the first quarter compared to $2.5 million in the first quarter of fiscal 2025 and our guidance of $70 million.

During the quarter, we substantially completed our previously announced sale of about half of our Apartment Living portfolio for net cash proceeds of approximately $330 million. The $72 million of joint venture, land sales and other income includes the net gain associated with this sale. As we noted on our last call, we intend to fully exit the multifamily development business over the next several years.

Our tax rate in the first quarter was 22.9%, 30 basis points better than guidance. We ended the first quarter with approximately $3.4 billion of liquidity, including $1.2 billion of cash and $2.2 billion of availability under our revolving bank credit facility. Our net debt-to-capital ratio was 14.2% at first quarter end compared to 21.1% 1 year ago.

Turning to our guidance. I will remind you that our projections are subject to all the caveats regarding forward-looking statements included in our earnings release. We are projecting fiscal 2026 second quarter deliveries of approximately 2,400 to 2,500 homes with an average delivered price between $975,000 and $985,000. For full fiscal year 2026, we are maintaining our projected deliveries of between 10,300 and 10,700 homes with an average price between $970,000 and $990,000.

As I noted earlier, we expect adjusted gross margin to be 25.5% for the second quarter, and we continue to project 26.0% for the full year. We expect interest and cost of sales to be approximately 1.1% in the second quarter and for the full year. We project second quarter SG&A as a percentage of home sales revenues to be approximately 10.7%. For the full year, we continue to expect it to be 10.25%.

Other income, income from unconsolidated entities and land sales gross profit in the second quarter is expected to breakeven. We continue to expect $130 million for the full year, of which we have already realized $72 million. Included in our second half projection is the sale of several stabilized apartment projects.

We project the second quarter tax rate to be approximately 26% and for the full year rate to be approximately 25.5%. Based on land we currently own or control, we expect to grow community count by 8% to 10% by the end of fiscal 2026 and are targeting 480 to 490 communities. We expect to be selling from 455 communities at the end of the second quarter.

Our weighted average share count is expected to be approximately 96 million for the second quarter and 95 million for the full year. This assumes we repurchase a targeted $650 million of common stock for the full year, with most of that occurring later in the year, aligned with our anticipated higher cash flows.

Now, let me turn it back to Doug.

Thank you, Gregg. We remain positive on the long-term future of the U.S. housing market. Owning a home continues to be a key aspiration for tens of millions of American families. The market is supported by strong demographic tailwinds driven by the millennial generation reaching its peak home buying years and Gen Z following right behind. The baby boomers who have built up enormous wealth over their lifetimes are passing it down in the greatest generational wealth transfer in history. They are also in the market buying homes as they enter the next stage of their lives. Our country has also enjoyed years of stock market success. In addition, the vast majority of the 88 million American households that own a home have participated in significant home price appreciation over the past decade. These are powerful drivers of long-term demand.

On the supply side, the market continues to be underserved. Depending on the estimate, the market would need anywhere between an additional 3 million and 7 million new homes to reach a equilibrium based on population growth. So basic economic forces, strong underlying demand and low supply create a solid foundation for the housing market. We believe that over time, affordability pressures will recede and buyers who have been priced out will come back to the market, creating a much healthier housing ecosystem.

In the meantime, we are pleased to be serving a more affluent customer in our luxury business. We will continue to navigate this market with the goal of driving strong returns for our stockholders. I would like to thank our Toll Brothers' employees. Their hard work, talent, dedication and commitment to our customers is the reason we've once again been named the #1 Homebuilder on Fortune's list of the World's Most Admired Companies.

Rocco, let's open it up to questions.

[Operator Instructions] Today's first question comes from John Lovallo at UBS.

The first one is you've exceeded your gross margin outlook in each of the past 13 quarters by 65 basis points on average. So sort of with that as a backdrop, what's driving the 100 basis point sequential decline from 26.5% in 1Q to 25.5% in 2Q?

John, it's mix. Gregg touched on it. We will have less Pacific in the second quarter, which is for us, a very high margin region. That reverses itself as the year progresses, particularly in the fourth quarter when we will have a lot more coming out of both the North and the Pacific, which are our #1 and #2 margin areas.

Got you. Okay. And then curious on your thoughts of the Sumitomo acquisition of Tri Pointe. I mean, obviously, there's an effort to diversify away from an aging demographic in Japan. But the Japanese in general tend to be pretty big proponents of off-site construction. I mean, do you think that they have a bigger goal in mind here to bring more technology sort of like Toyota did in the 1980s in the automotive industry?

I don't know the answer to that. I'm not close enough to it. Doug Bauer could probably help you out on that one. I'm sure there have been conversations around how they intend to invest in his great company. They've obviously been aggressive in terms of getting into the U.S. housing market through the acquisition of a number of mid-cap-sized builders. That's between, of course, not -- it's Daiwa also, we put in that conversation with their MDC deal. So I don't know. The Japanese have always been innovative. We have had a very hard time as an industry, making that innovation, that technology lead to more efficient homebuilding operations. You've heard me say many times that in my 35.5 years here at Toll Brothers, it's -- the way we build houses has changed very little from when Bob Toll sent me out in the field with -- when he told me that go buy a pair of Timberland boots and get in a trailer. And so I am -- we are all anxiously awaiting more innovation and technology to the industry. Maybe the Japanese can help in that regard. I don't know. But it's been a tough nut to crack for all of us.

And our next question today comes from Stephen Kim at Evercore ISI.

This is Randa on for Stephen. First question, I kind of wanted to dig into your spec strategy. Today, you reiterated that you're comfortable with the spec ratio around 50% and that you would like to close your specs early in the construction process. Say that demand is insufficient to maybe support kind of both parts of your spec strategy, which would you prioritize? Would you either slow your spec starts but continue to sell them earlier under the construction process, or maybe sell later, but maintain that 50% spec ratio?

Randa, it's Karl. We are happy now with the 50-50 mix. You'll see that change quarter-to-quarter, may go up and may come down. To your question about a softening, we are very comfortable and as we outlined, execute well at a high margin on the build-to-order business. So we would pull back if there's more softening. We're not going to blindly build specs into a softening market. And we are working to sell them at an earlier stage. The trick for us is getting our customers into the design studio to make their selections. It's a unique process. We execute well there. So yes, we would lean into build-to-order if the market softened.

Got it. That makes sense. And then curious what kind of long-term net debt to cap are you targeting? And how do you think about cash? How much cash you want to hold going forward?

Randa, it's Gregg. Yes, long-term net debt to total cap, we think somewhere in the mid-teens makes a lot of sense for us. And then in terms of what our cash holdings need to be, you'll see they generally accelerate as you move into the second half of the year. But we probably have a minimum holding of a few hundred million just to meet normal operating expenses, including land purchases. But that's kind of the general cash flow cadence that we see throughout the year.

And our next question today comes from Sam Reid at Wells Fargo.

Karl, welcome to the call. I wanted to unpack the January to-date comments. And would you just characterize the traffic and sales that you're seeing as better, as potentially good relative to normal seasonality? Or is it just tracking in line with normal seasonality? Maybe just trying to parse through that difference there. And then we've heard some comments from peers that weather has been a little bit of a headwind year-to-date. It doesn't sound like that's been the case for you, but any comments on impacts from weather?

Sam, it's Doug. I'll take this one. There's 3 data points, right? We've got web traffic. We've got physical traffic visiting our communities, and we've got deposits because agreements lag 1 to 3 weeks behind deposits. When you look at the last month, the agreement number is not as relevant. And for all 3 of those, web traffic, physical traffic and most importantly, deposits, we are up modestly over last year, same period of time. It's modest. It's too early to be high-fiving around here, but it causes us to have what we call -- the industry likes to call cautious optimism, and that's where it is. But we're in mid-February. We'll have to see how it plays out, but we are -- we knew it would increase as mid-January hit, consistent with the beginning of what we call the spring selling season. And it did, of course, increase, but it is only up modestly over a year ago. But at the moment, we'll take it.

Sounds like a plan.

Weather, I'm sorry. Your question about weather my apologies. North Carolina, Raleigh and Charlotte got slammed. Nashville has been on the news. Kids didn't go to school for a week. Vanderbilt lost half of their beautiful trees. My friends tell me from kids being there. And Atlanta got hit. So that corridor, the Mid-Atlantic from North Carolina down to Georgia definitely had an impact, slowed us down for a week to 10 days. But outside of that, Philly, New York, Boston, Washington recovered pretty quickly. So I think it's just the Carolinas to Atlanta corridor that we felt it.

All helpful color there, Doug. And then maybe switching gears on the P&L to gross margins. You talked a little bit about gross margins improving sequentially in Q3 and Q4. It sounds like Q4 is going to be particularly strong just given the timing of some of those luxury closings. But would just love maybe a little bit more nuance around the cadence of margin in the third and fourth quarters.

Sam, it's Karl. Yes, we expect that the back half to be better. It's mix again. It's actually similar to the answer around the second quarter. So in the back half of the year, you'll see more revenue out of the Pacific and the North as well as more of that move-up luxury that I referenced in my remarks. And that's what's contributing to the improvement, and we see more of that even in Q4.

That's right. Yes. Karl, I can just add on to it for you, Sam. Yes, Q3 is probably slightly improved over Q2, and then we expect the benefit to accelerate a bit in Q4.

And our next question today comes from Mike Dahl at RBC Capital Markets.

This is Chris on for Mike. Just a follow-up on that 3Q, 4Q gross margin step-up. Outside of mix, I mean, could you just talk about how you guys are thinking about the pricing incentives, costs and some of the other financial impacting gross margin outside of mix?

Yes. So incentives, as you go throughout the year, we've maintained them at current levels. So there's no assumption that the market has a dramatic improvement or anything like that. So it should be -- we tried to underwrite for today's conditions throughout our projection, and that's where we left it.

And for building costs. Building costs are flat.

And building costs are flat.

We're beginning to see a little bit of downward pressure, downward move, downward improvement on building costs, but it's small. Lumber right now is a little bit of a headwind, but there's other costs that are coming down. But in terms of our projections, we're just going into it assuming they'll stay flat.

Understood. Appreciate that. And then just maybe if you guys can just touch on what you're seeing in the land market today, the outlook there as you progress through the year and how aggressive you guys plan on being investing in land this year?

Yes. Mike, it's Karl again. I think we're still seeing that low- to mid-single-digit inflation on land.

And our next question today comes from Michael Rehaut at JPMorgan.

Congrats, Doug and Karl, on your upcoming moves. First, I just wanted to dig in a little bit to the -- also on the comments around kind of year-to-date trends. And I think you mentioned just earlier that you're up modestly versus a year ago. I just wasn't sure if that was in terms of sales pace in particular or any other metrics? And more broadly, as you talked about incentives being consistent for, I think, 3 months in a row, that's not necessarily what we've heard from other builders. I think maybe perhaps they're more spec or first-time builder oriented -- but buyer oriented. But there has been a lot of movement around incentives over the last 3 months, I think, on a broader market basis. So just would love to understand, number one, again, the up modestly versus a year ago, what exact metrics are those, if it's sales pace? And number two, how your own incentive strategy is different from the market?

Sure. I'll take this one. All 3 metrics I mentioned, web traffic, foot traffic to our communities and deposits, all 3 of those -- each of those are up modestly over a year ago. With respect to incentives, we're comfortable with the guide around 8%. That's where we've been, as I mentioned, for the last 3 quarters. While -- we did focus in Q1 on leaning into our completed specs a little bit more because we did [indiscernible] down, and we have had success in doing that, where we are now very comfortable moving forward with our mix of the stage of construction of our specs. Some of those completed specs required a little bit more incentive to move them, but that was offset by a modestly lower incentive in our build-to-order business, which was very encouraging. And when you put it all together, it came out to the same 8%. And even though we did lean into selling a bit more of the finished inventory to get down to what we think is the right percentages, we were still able to beat margin.

So that was -- I'm very proud of that in today's environment. And we don't -- we think we have fully budgeted and have conservatism in our internal projections around the spec business, which is where the incentive can be a bit higher. And so we're very comfortable with that 8% number. We think it will stick right in that range, and we're very comfortable with full year guide around margin.

And our next question today comes from Alan Ratner at Zelman & Associates.

Nice quarter. And yes, congrats again to both Doug and Karl. I guess, first, I'll add on to the incentive trend. Personally, I think it's encouraging. I guess, I think you said 3 quarters in a row that incentives have been stable at 8% and it doesn't sound like you're expecting much movement from here in the near term. But I'm curious, as we head into the spring, which typically does have a little more pricing power than the winter. What would you need to see to try to take a stab at dialing back some of those incentives? Is it thinking about absorptions on a year-over-year basis? Is it thinking about what mortgage rates do? I'm just curious at what point you might get more aggressive in trying to dial some of those incentives back?

Yes. I think -- Alan, it's a great question. If the market improves, we're going to first lean into pace. Right now, we're running at a 24 pace per year per community to a month. We have the operation capacity in the field and the infrastructure, the organization out there to build into the low 30s per community per year. So the first thing you're going to see is for us to increase pace. But as that happens, price will probably also go up because it's just the nature of more and more people get in your sales office and there's more activity and the deposit starts popping up on the site plan and the sales center and urgency, it's an amazing thing what happens with urgency. And so that will not just drive pace, but it will also drive price, but we will first lean into pace.

Got it. That makes a lot of sense. And you mentioned having the infrastructure to build 30 homes a year per community. As you think about labor and cost in general, obviously, I think that was the big positive surprise in '25 in terms of the cost relief that builders were able to see in spite of the tariffs. I'm curious how you see the labor environment today? We have seen a little bit of an uptick in lumber prices to start the year. What's the flex in the supply chain right now where if we do see a strong spring, do we -- is there any risk that labor can become tight again, costs can begin creeping higher? Just curious what your thoughts there are.

Alan, we are not seeing the impact from tariffs. We -- on the good news, we're seeing plenty of availability of labor, more and more people showing up to the job site that want to work. I think our scale is going to continue to help us with suppliers and so I think it's too early to tell. If there's a really robust spring, which we'd be happy to see, it's hard to see if there's going to be pressure ahead. We'll continue to leverage our scale and the rationalization that we have done with our products over the last several years to minimize those impacts.

[Operator Instructions] Our next question comes from Jay McCanless with Citizens.

Just wanted to focus on the cost side a little bit. It sounds like labor and construction costs are moving in Toll's favor. Are you seeing any opportunities to maybe lean in on land purchases, especially since Toll seems to be doing better than a lot of other builders out there?

Jay, I think we're seeing -- because of who we are and what we build, I think the opportunity for us to structure land deals with seller financing over time more efficiently has always been a part of the playbook. I think we are -- to your question, we are seeing a little bit more of those opportunities of late, which is encouraging on the land side. But broadly speaking, we just have less competition. There are fewer and fewer builders that have capital and the desire to build luxury homes north of $1 million, and that plays right into what we do well. So we'll continue to watch it, and we are seeing a little bit of an opportunity for some well-structured land deals.

That's good news. Could you talk about the opportunity to raise prices? It sounds like Pacific and North are doing well, but maybe what percentage of your communities this quarter were you able to raise prices? And how is that outlook going forward?

30% to 40% of our communities saw a price increase in Q1. And you're right, the North is the strongest. Boston down to -- really Boston down to South Carolina, that full corridor. It's no longer Boston to Washington, D.C. It extends with Raleigh, Charlotte, our 4 South Carolina markets and Atlanta. Atlanta has been a bit softer lately, but certainly through South Carolina, we have done the best. We had a community in -- down in the Delray Boca Raton area that took 10 sales at $1.5 million in the quarter with a mid-30s gross margin. We have a community in Central New Jersey at the Beach took 12 sales in the quarter at $1 million to $1.2 million, north of 30% gross margin. Southern Cal, at the Great Park, everyone knows the Great Park right next to Irvine Ranch, took 23 sales in the quarter at a community that sold between $1.5 million and $3 million. So there is still action out there, and there's still pricing power. It's relatively limited. But I think what -- I think I fully described it. I think 30% to 40% is about the right range of where we saw some price increases. And by the way, that's -- I have been corrected. Those numbers I just gave you for sales was not in the quarter. It's in the last 8 weeks. So it's in the last 2 months.

And our next question today comes from Paul Przybylski with Wolfe Research.

Congratulations, Doug and Karl. I guess to start off, you mentioned your January traffic and deposits were up slightly. Can you add any color on how that breaks out among your consumer groups, especially with how the age targeted is starting off the snowbird season?

Yes. It was pretty consistent activity between our 3 consumer segments, move up, move down in first time. I don't -- and it was pretty consistent between spec and build-to-order. So there's nothing in those buyer segments that stood out as either outsized sales or undersized. So consistent across the business.

Okay. It's good to hear. And then you mentioned that the Pacific Northwest was one of your weaker markets. Can you give us any color on how the ethnic homebuyer demand trends have performed since we've had a little bit of settling since the H1B controversy?

Yes, Paul, we still hear -- even separate from the Pacific Northwest, I'll just say broadly, we do still hear about it a little bit. The uncertainty around Visa status has created a little bit of a pause from customers across the country. It's been modest, and I don't think it has been concentrated in the Pacific Northwest, but we still hear it on the sales floor.

And our next question today comes from Armando A Barrón with Housing Research Center.

You probably know me Alex. Anyways, I wanted to ask, so we saw Pulte sold their truss manufacturing plant, but you guys have a very expensive, I mean, not just trusses, but lots of stuff you guys do with those manufacturing plants on the East Coast. I'm just wondering what would it take for you guys to expand those more to, let's say, Texas or Phoenix or some markets where you guys have a bigger scale? Is it a matter of scale? Is it a matter of distance to communities? Like what would it take for you guys to start those types of operations in other markets that are not the East Coast?

Alex, it's Karl again. We we like the business, and we like its current footprint. It probably serves 20% to 30% of the revenue for the company nationwide, as you know, predominantly sort of Carolinas North. The limitation with expansion of those facilities is transportation costs are really significant. So it's had a sort of a fixed footprint for a very long time. We like the business. That vertical integration in this corridor has really helped us. But at least in the near term, we don't see a need or desire for expansion.

And our next question today comes from Ryan Gilbert of BTIG.

Congratulations to Doug and Karl. I wanted to go back to the North segment, really strong sales, and I understand that demand is strong in this area. I'm just wondering the extent to which there have been any changes in product mix that could be contributing to the improvement in orders and then also how the community pipeline looks and your ability to replace community closeouts given the strength of orders?

Yes, Ryan, it's a good question. There has been a planned shift and repositioning of product and our land acquisition strategy throughout the Northeast, particularly here in Pennsylvania, New Jersey, New York State, we're seeing a lot of opportunities for infill development, repositioning of old unoccupied or poorly occupied office buildings. These tend to be in very, very good locations, great school districts. And so it's helped us maintain better velocity and absorptions in these markets.

I think the other thing you have going on is that there's just less inventory. This corner of the country during the pandemic, it was not one of these markets that ran away. And so inventory has remained a bit muted. And so we -- yes, we are seeing a repositioning of our strategy here, much more attached product. And that's really the same on both coasts, both here in the Northeast and parts of California.

And we are also -- to your question about opportunities, we are -- I think, guys, we would all agree, we're seeing outsized land opportunities now in the North and the Mid-Atlantic, which is very exciting for us.

Yes, the pipeline in the North region is very strong.

Okay. Great. And then second question on the land bank. You've talked about having the lots controlled to continue growing community count in the years to come, but I think kind of flat to down lots controlled versus growing community count seem a bit at odds. So I'm hoping you can add some detail to what gives you the confidence that you can continue growing your community count given relatively flattish controlled lot count and then where you think your optimal years of land supply sits?

Ryan, it's Gregg. We're still very comfortable because we have 75 -- approximately 75,000 lots that we own or control. So the mix is still very favorable with 55% of those being optioned. It's -- when you net out our backlog, I think we have 2.7 years of owned land, so an attractive statistic as well. So we think we have the right land bank to support our continued community count growth, somewhere in that 7% to 10% each year as we look forward.

And our next question today comes from Susan Maklari with Goldman Sachs.

And I want to add my congrats to Karl and to Doug. My first question is on the design studios. You mentioned that you've still seen some really healthy activity there, especially as you're selling some of those specs a bit earlier. Have there been any notable trends in the spend there? Anything that has changed? And anything that we should be aware of as we're thinking about the outlook for future deliveries and margins?

Yes, Susan, it's remarkable. Over my 20-plus years at Toll Brothers in good markets and bad, the design studio upgrades as sort of a percentage of the home have been really consistent. And so what has improved is I think if you spend time in our studios, we have continued to professionalize them. We'll continue to do that and make the buying experience better and better. The margin has improved over time. But to your question on spend, it has been very consistent.

Okay. That's helpful. And then you mentioned some of those headcount reductions that you recently implemented. As you're thinking about balancing costs relative to current conditions, but still being able to flex once things do normalize and improve, can you talk a bit about how you're thinking about those 2 worlds? And what is your ability to eventually ramp the business as conditions improve?

Yes. Susan, we are constantly making sure that the business is structured to be efficient. And we've done that quarter after quarter. If we have a great spring, again, we're hopeful we do, and we see that absorption at 24-year climb. We see that on the front end of the business first. We see it in the sales offices. And we can begin to staff up, particularly with our field personnel, our construction teams and our sales teams. But our back office, our G&A, those folks are intact. They're here. And as Doug alluded to, we believe have capacity to produce a lot more revenue with the existing team.

And that concludes today's question-and-answer session. I'd like to turn the conference back over to Doug Yearley for any closing remarks.

Rocco, as always, you've been terrific. Thanks, everyone, for all your great questions, your interest and support of our great company. This is an exciting time here at Toll Brothers. And we appreciate all of you very much. And I hope you have a wonderful remaining winter and the spring comes early this year for all of us. Thank you. Take care.

Thank you, sir. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good morning, and welcome to the Toll Brothers Fourth Quarter Fiscal Year 2025 Conference Call. [Operator Instructions] The company is planning to end the call at 9:30 when the market opens. [Operator Instructions] Please note, this event is being recorded.

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

Thank you, Drew. Good morning. Welcome, and thank you all for joining us. With me today are Rob Parahus, President and Chief Operating Officer; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, our new Chief Financial Officer. While Gregg has been on these calls for many years, this is his first as our CFO. Congratulations, Gregg.

Thank you, Doug.

As usual, 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 availability of labor and materials, inflation and many other factors beyond our control that could significantly affect future results. Please read our statement on forward-looking information in our earnings release of last night and on our website to better understand the risks associated with our forward-looking statements.

Overall, I am pleased with our performance in fiscal 2025. We executed well and produced another year of strong results, notwithstanding a difficult sales environment. We delivered 11,292 homes at an average price of $960,000, generating a record $10.8 billion of home sales revenues. We posted an adjusted gross margin of 27.3%, an SG&A margin of 9.5% and earnings of $13.49 per diluted share. We grew our community count by 9%, continued to produce strong operating cash flows of $1.1 billion and returned approximately $750 million to stockholders through share repurchases and dividends and generated a return on beginning equity of 17.6%. These are the results that our entire team can be so proud of, and I'm grateful for the hard work and dedication that made these results possible.

In our fourth quarter, we met or exceeded guidance across all of our core homebuilding metrics, generating $3.4 billion in home sales revenue with an adjusted gross margin of 27.1% and an SG&A margin of 8.3%. We earned $4.58 per diluted share, which was modestly below guidance, primarily due to the delayed closing of the sale of our Apartment Living business that we announced back in September. We expect to complete this transaction by the end of the first quarter and to completely exit the multifamily business over the next few years.

Our fourth quarter and full year results demonstrate that our luxury business is differentiated as we serve a more affluent customer who is less impacted by the affordability pressures that continue to impact the broader housing market. These results also underscore the resilience of our business model. Our results over the past few years and especially this last year have proven that our business model and strategy can produce strong returns in good markets and bad.

To illustrate this point, we started fiscal 2025 with fewer than 6,000 homes and $6.5 billion in backlog, down 9% in units and 7% in dollars from the prior year. Yet in fiscal 2025, we delivered a record 11,292 homes and $10.8 billion in home sales revenues, up 4% in units and 3% in dollars despite a soft market throughout the year. We did this while maintaining an attractive adjusted gross margin of 27.3% and an operating margin of 15.7%.

Our business today is more nimble, thanks in large part to the broadening of our geographies, product lines and price points as well as our shift to a more balanced portfolio of build-to-order and spec homes, all of which have helped us bring down construction cycle times, improve inventory turns and gain efficiencies in the land development and construction processes. Our spec strategy has also allowed us to appeal to buyers looking for a quicker move-in, further widening our addressable market.

In addition, many of our specs are sold early in the construction process, which affords many of our customers the opportunity to choose their finishes and make upgrades, an important competitive advantage for Toll Brothers. Specs accounted for approximately 54% of our deliveries in fiscal 2025. Given our year-end backlog and our deliveries guidance for fiscal 2026, we expect a similar ratio this year.

In the fourth quarter, we signed 2,598 net agreements for $2.5 billion, down 2% in units and 5% in dollars compared to Q4 of last year. We sold at a pace of approximately 2 contracts per community per month. Sales modestly improved as the quarter progressed with October being our strongest month. Since the start of our fiscal 2026 6 weeks ago, our per community deposit activity has been almost identical to the same 6 weeks last year, which is somewhat encouraging since last year's period was up 22% from the prior year.

Deposit activity in these first 6 weeks is also about the same as it was in October. Based on historical seasonal trends, it should have been down. While this activity is positive, it is just one data point, and November and December are seasonally slow, so we are not reading too much into it.

The real tell for whether the housing market can accelerate will be the spring selling season, which starts in late January. We are encouraged that mortgage rates have stabilized in the low 6% range and may go lower. We also recognize that the underlying fundamentals that fuel housing demand in the long term have not changed. Demographics are favorable with millennials still in their prime home buying years and Gen Z right behind them. We also continue to have a structural undersupply of millions of homes in this country, and the average age of the home in the U.S. is now 40 years and growing. All of these trends support demand for new homes.

In terms of pricing in the quarter, we continue to take a measured approach to balancing pace and price. Our average incentive was the same as the third quarter at approximately 8% of delivered price, which is also the current incentive on the next homes sold. Our average sales price in the quarter was approximately $972,000, down from $1 million in Q4 of last year due to mix. Geographically, we continue to see relative strength in the East from Boston down to South Carolina as well as in Coastal California and Boise in the West.

Among our buyer segments, we saw little meaningful variation in demand. Given the cloudy near-term outlook for the overall housing market, which is being driven in large part by well-known affordability pressures, we are pleased to be serving an older, more affluent customer. According to data published by the National Association of REALTORS last month, the median age of a first-time homebuyer is at an all-time high of 40 years old and the median age of all buyers is now almost 60. And with just 1 in 5 sales to a first-time buyer, the vast majority of sales in the market are to move up or move down buyers. These trends play right into our strategy. Over 70% of our business serves the move-up and move-down segments. These buyers are wealthier, have greater financial flexibility and most have equity in their existing homes. The remaining 25% to 30% of our business is focused on the older, more affluent first-time buyer who is also feeling less affordability pressure.

While we actively market rate buydowns and they do drive traffic, we have a very low take rate as our buyers do not need a lower rate to qualify for a mortgage and they'd rather spend incentive dollars upgrading their homes through our design studios. In the fourth quarter, the average spend on design studio selections, structural options and lot premiums was approximately $206,000 per home or roughly 24% of base price. These upgrades benefit our margins as they tend to be highly accretive. The financial strength of our customers is also highlighted by our high percentage of all cash buyers, the low LTVs of those who do take a mortgage and our industry low cancellation rate. Consistent with the past several quarters, approximately 26% of our buyers paid all cash in the fourth quarter. The LTVs of buyers who took a mortgage in the quarter were approximately 69%, and our contract cancellation rate was 4.3% of beginning backlog.

Turning to land. At fiscal year-end, we controlled approximately 76,000 lots, 57% of which were optioned. We continue to target a mix of 60% optioned and 40% owned over the long term. Our land position allows us to continue being highly selective and disciplined as we assess new opportunities. It also facilitates our plans to continue growing community count over the next several years, including another 8% to 10% in fiscal 2026. In our fourth quarter, we repurchased $249 million of our common stock, bringing our full year repurchases to $652 million at an average price of $120.44 per share. During fiscal 2025, we repurchased 5% of our outstanding shares at the beginning of the year. We also paid $97 million in dividends. Dividends and buybacks have been and will continue to be an important part of our capital allocation strategy.

As I mentioned earlier, in September, we announced the sale of a significant portion of our Apartment Living business to Kennedy Wilson. The purchase price is now $380 million, reflecting ongoing investments since the September announcement. We thought it would close in Q4, it will now close this quarter. We closed on part of the transaction last week and expect to complete the balance by the end of January. When it is completed, Kennedy Wilson will acquire about 1/2 of our Apartment Living portfolio, including our operating platform and organization. We expect to sell our remaining interest in the retained properties over the next few years. As we exit the multifamily business, we anticipate using the significant cash proceeds from these transactions to both grow our core homebuilding business and return capital to stockholders.

With that, I will turn it over to Gregg.

Thanks, Doug. Our fourth quarter capped off another strong year for Toll Brothers as we beat guidance across all our core homebuilding metrics. We would have beat on earnings as well, except for the delay in the Apartment Living sale. In fiscal year 2025's fourth quarter, we delivered 3,443 homes and generated home sales revenue of $3.4 billion, flat in units and up 5% in dollars from 1 year ago. The average price of homes delivered increased 4% to approximately $992,000. Fourth quarter net income was $446.7 million or $4.58 per diluted share compared to $475.4 million and $4.63 per diluted share 1 year ago. For the full year, we delivered 11,292 homes, up 4% year-over-year and generated home sales revenue of $10.8 billion, up 2.6%. Full year net income was $1.35 billion and $13.49 per diluted share compared to $1.57 billion and $15.01 last year.

As a reminder, net income in 2024 included approximately $124 million or $1.19 per share of gains related to one parcel of land sold to a commercial developer for a data center. Excluding this gain, last year's net income would have been $1.45 billion or $13.82 per share. We signed 2,598 net contracts in the fourth quarter for $2.5 billion, down 2.3% in units and 5.0% in dollars from 1 year ago. The average price of contracts signed in the quarter was approximately $972,000, down 2.8% compared to last year's fourth quarter.

As Doug mentioned, the decrease in ASP was primarily due to mix as we had fewer sales in our Pacific region. At year-end, our backlog stood at $5.5 billion and 4,647 homes. Our cancellation rate as a percentage of backlog was 4.3% in the fourth quarter. Our fourth quarter adjusted gross margin at 27.1% was slightly better than guidance. In the quarter and throughout the year, we outperformed expectations in all regions and buyer segments, reflecting the ongoing benefits of our cost control efforts and improved efficiencies. SG&A as a percentage of revenue was 8.3% in the quarter, flat compared to the same quarter 1 year ago and in line with our guidance. Joint venture, land sales and other income was $6 million in the fourth quarter compared to $44.5 million in the fourth quarter of fiscal year 2024 and our guidance of $65 million. As we noted earlier, the miss was primarily because of the delay in the closing of the Apartment Living transaction.

In addition, we booked $24 million of pretax impairments that were primarily related to 3 land positions that we now intend to sell. Impairments included in home sales cost of revenue totaled $16.4 million in the quarter, almost half of which related to only 1 community in Oregon compared to $24.1 million in the prior year period. We continue to generate strong cash flow in fiscal 2025 with approximately $1.1 billion of cash flow from operations. We ended the fiscal year with over $3.5 billion of liquidity, including $1.3 billion of cash and $2.2 billion available under our revolving bank credit facility.

In fiscal 2025, we invested $2.9 billion in land acquisition and land development. We also returned approximately $750 million to stockholders through share repurchases and dividends. Our net debt-to-capital ratio was 15.3% at fiscal year-end, and we have no significant debt maturities until fiscal 2027. Our balance sheet is in great shape.

Turning to our first quarter and full year 2026 guidance. I want to emphasize that our assumptions and estimates are based on current market conditions, which, as Doug noted, are choppy. We have not assumed any market improvement in our forecast. We are projecting first quarter deliveries of 1,800 to 1,900 homes with an average price between $985,000 and $995,000. 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 year 2026, we are projecting new home deliveries of between 10,300 and 10,700 homes with an average price between $970,000 and $990,000. We expect our adjusted gross margin in the first quarter of fiscal 2026 to be approximately 26.25% and for the full year to be approximately 26.0%. We expect interest and cost of sales to be approximately 1.1% in the first quarter and for the full year. We project first quarter SG&A as a percentage of home sale revenues to be approximately 14.2%, reflecting lower fixed cost leverage as the first quarter tends to be our lowest revenue quarter. Also included in the first quarter SG&A is about $14 million of annual accelerated stock compensation expense that does not recur in the remainder of the year.

For the full year, we project SG&A as a percentage of home sale revenues to be approximately 10.25%. Other income, income from unconsolidated entities and land sales gross profit is expected to be $70 million in the first quarter and $130 million for the full year. Our first quarter guidance includes gains on the sale of our apartment living assets to Kennedy Wilson. I want to be clear that after we complete the Apartment Living transaction with Kennedy Wilson, we will retain about half our existing interest in Apartment Living assets, which will be managed by Kennedy Wilson in the future. We do not intend to commit any new capital and will exit the multifamily business as we sell off the retained properties.

We project a first quarter and full year tax rate of approximately 23.2% and 25.5%, respectively. We are budgeting $650 million of share repurchases in fiscal 2026, with most of that occurring later in the year, aligned with the higher operating cash flows we typically generate in the second half. We expect our weighted average share count to be approximately 97 million for the first quarter and 95 million for the full year. Based on land we currently own or control, we expect to grow community count by 8% to 10% by the end of fiscal 2026 and are targeting 480 to 490 communities.

With that, I will turn the call back over to Doug.

Thank you, Gregg. Before we open it up to questions, I'd like to thank the entire Toll Brothers team for staying focused on our customers and consistently executing on our core strategies. Most importantly, you've helped position the company for continued success in 2026 and beyond. For that, I am truly grateful.

Drew, let's open it up for questions. Drew?

Sure all of you right there can hear me, but we need to find our moderator. If everybody can hear me, my sincere apologies. We've apparently lost our moderator. We are being told that our prepared comments came through loud and clear. So if you could just hang in with us for hopefully just a second here, we're going to get Drew back. This may be Drew's last time working with Toll Brothers, but we'll enjoy him hopefully for the next half hour. And if we need to extend this beyond 9:30 because of this short delay, we will be more than happy to. So this is a first. It's not fair to Gregg Ziegler as he sits in the chair, but we will get through it. So please hang. Thank you.

[Technical Difficulty]

While we wait for our friend, Drew, we would ask that you e-mail questions in, and we will read them back to everybody and move through it. So why don't you send them...

If you want, you can send them to Drew Petri. He is e-mailing you all as well just in case you don't have his e-mail address, but [email protected].

So it's [email protected]. And we'll do this the old-fashioned way for the moment.

I apologize. It looks like our original operator may have disconnected. We'll go to our next question. Our next question comes from Stephen Kim at Evercore.

Just want to make sure our friend Drew is okay. Thank you again, apologies. And Stephen, let's get it rolling here.

All right. Sounds good. So thanks for all the help. I wanted to ask about your assumptions for the active adult buyer. I thought it was interesting you said the 70% of your sales are move up and move down. I was wondering if you could give us a sense of the move down. And any other kind of age breakdown of your buyer to the degree you can do it. And I'm curious what kind of trends you factor into your land purchasing decisions today? Because obviously, the stuff you're buying now or tying up, I should say, today isn't going to be used probably for another maybe 4 or 5 years. And so I'm curious as to what sort of potentially changing trends should we be cognizant about with respect to the move-down buyer in particular, in terms of what you're considering as well?

Sure. So active adult is doing well, as you would expect, older, more affluent buyer invested in the markets, equity in their existing homes. It's about 17% of our revenue. So the biggest part of that plus 70% we referenced being both move up and move down is our core move-up business, which is really doing well. Trends with that buyer, I think through these softer times, we continue to expect the active adult group to outperform, and we're seeing that.

With respect to the age of the different buyer segments, we don't have great data on that. I think it's pretty consistent with the numbers I gave that the first-time buyer is now approaching 40 and the average buyer is approaching 60. I'm quite confident that would be about where we are. Our first-time buyer is not $250,000 to $400,000, our first-time buyer is $450,000 to -- in California, we have first-time buyers at $1.5 million. They're older, they're more affluent, less impacted by affordability issues, not looking for rate buydown. And I'm sure our age breakdown is pretty consistent with the numbers I gave.

With respect to trends on land, we're seeing good deal flow. We are being very conservative. We are being very disciplined in our underwriting. We talk all the time about this combination score of gross margin and IRR. And we have a lot of great land. We have community count growth that's lined up at 8% to 10%, which will follow exactly 9% in '25, but we're seeing good deal flow. Part of that is some softer markets. Part of that is the other big builders with capital do not tend to compete with us for land. So we have a bit of an advantage. And so most of the land we're buying or contracting for now is setting up '27 and '28 revenue. So it's always forward-looking because we have to get entitlements and get roads in and get sales centers open. But we are being quite disciplined, but continuing to see good deal flow and gives us the opportunity to not just focus on returning capital to shareholders, but grow the company.

Okay. That's helpful. And it was -- I guess my next question is sort of related to that, kind of a continuation of your thought there. I'm curious as to whether or not you think the number of lots owned by the end of next year could stay flat or maybe even decline compared to where it is today. And related to that, cash flow conversion next year, Gregg, any thoughts on maybe a range of values that you would generally target for cash flow conversion?

I'll take the first half and turn it over to Gregg. We think owned lots will continue to come down a little bit. They came down a little bit through '25. We're doing more and more land banking, joint ventures with other builders. We're getting extended terms with land sellers where we can buy land over time. That's very important to us as we continue to focus on ROE. And so I think, Stephen, I'd say flat to modestly down on the owned option ratio. I've said before, while right now, 60-40 option to owned is a goal. I mean it's not going to take too long for us to blow through that and give you a new goal that's even better. Gregg?

Stephen, we think cash flow from operations will be modestly lower in '26 as it compares to 2025. So I think that the cash flow conversion, which is your original question, might be -- I'll throw out something in the 60% range.

And our next question today comes from John Lovallo with UBS.

The first one is that, look, you guys have exceeded your quarterly delivery outlook in 11 of the past 12 quarters by like 5% on average versus the midpoint. You beat the gross margin outlook in each of the past 12 consecutive quarters, I think, about 70 basis points on average. I understand that visibility is limited here. But do you believe you're leaving a little bit of room for cushion in your outlook, particularly if the market is at least slightly better in 2026 as we expect it might be?

John, I'm a conservative guy. I've run this company, and I think a very conservative way. And I think all I'll say is the guidance we're giving you for '26 is conservative. We are not assuming any improvement in market conditions. We are not assuming that 8% incentive comes down. We have a lot of communities opening in the first half of the year. We have 30 opening in Q1. We have 60 opening in Q2. We now have over 30% -- 35%, excuse me, of our communities that can deliver homes in less than 8 months because, frankly, we've become better and more efficient builders and are turning houses faster. So there is an opportunity to get further into the spring, not just with the communities we have, but with the new openings that can still have deliveries this year. And that's just internally on how we're running the business. That doesn't even go to what the market conditions look like, whether rates come down, whether affordability pressure eases a bit, whether there's overall consumer confidence that improves, none of that is built in.

So I'm not going to sit here and tell you that we're going to blow through our guidance, but we've approached it the right way. I've learned this for 35 years. When you're in a softer market that's a bit bumpy, that is the time to be conservative when you guide to the Street. And that's exactly what we've done setting up '26.

Yes, makes a lot of sense. Okay. The first quarter home sales gross margin guide is 26.25%. The full year guide is 26%, which would be seasonally sort of atypical given the normal cadence of sales. What's driving the implied moderation in the gross margin through the year in your view?

So we are starting more spec now to set up when people want to move into homes, right? Most people want to move into a home in June, July, August, September as the school year approaches or begins. And so you have to plan your spec strategy, in our opinion, not with an equal cadence month-to-month for spec starts, but begin homes focused on when they deliver and when the buyer wants them. And so in the later part of the year, we will have more spec deliveries. Some of those get sold early and they can go to that design studio and load it, but some of those don't get sold until the house is further along.

And so we all know right now, there is a bigger incentive on spec than there is on build-to-order. And in the later part of the year, we will have more specs delivering. So we are being conservative in the gross margin guide, assuming that those specs will require a bit of a higher incentive, and that's in the later part of the year. So that's the answer.

And our next question today comes from Mike Dahl at RBC Capital Markets.

Steven Mea on for Mike Dahl today. I wanted to kind of dive a little more into the fiscal '26 delivery guide. Like the company delivered around 11,300 homes from beginning backlog of around 6,000 last year, representing a little under 2x your beginning backlog, kind of what you closed out the year with kind of -- and going into next year, the guide at around 10,500 at the midpoint, you're aiming for a little more than 2x your beginning backlog. What kind of -- if you could give us some more color on kind of what gives you confidence in that ramp? I'm assuming spec plays a big part of that, but if there's anything else you could speak to and perhaps any more color you can give on the spec strategy side, that would be helpful.

Sure. I'll be happy to. So let's go through the numbers for you because I want to make it clear. We have 4,500 homes in backlog. We have 3,000 spec homes or as we call quick move-ins under construction. That takes you to 7,500. We have 1,500 build-to-order homes that we believe conservatively will be sold and settled in fiscal '26. I mentioned that 35% or more of our communities are now delivering homes in less than 8 months from when the buyer signs the agreement to the closing date. I mentioned the new communities that will be opening in the first half of the year, and we are very comfortable in that 1,500 number.

And then we have another 2,300 spec permits that have not started construction, but of those, we are selecting individually based on market conditions, 1,500 that we will start and will allow us to sell and settle by year-end. So when you add 4,500 backlog, 3,000 spec under construction, 1,500 build-to-order and 1,500 spec at permit that we are now selecting to start to have them done in those prime summer months, that gets you right to 10,500.

Got it. That's super helpful. I appreciate the quantitative walk there. And if I could squeeze one in on the exit of the -- of the announcement to exit the remaining in the multifamily business. If you could give us a bit more color on how you came to that decision? And if I could also ask how we should maybe think about the use of potential additional proceeds once you're able to fully exit the business?

Sure. It's been a business I've been very proud of for the last 15 years. If we were private, we would stay in it. But we recognize as a public homebuilder, we're not getting the full credit that we think we deserve for the earnings generated from that business. We understand that analysts, investors and Wall Street would prefer that we focus on core pure-play homebuilding. And so we have waived the white flag. We are selling the business. We will focus exclusively on our for-sale business. And we wish our team who is so talented to have a tremendous future under the Kennedy Wilson platform in terms of the money generated, the cash generated from the sale, not just to Kennedy Wilson, but then the subsequent sale of the retained assets, it's going to be used to grow the business and to return cash to shareholders.

And our next question today comes from Trevor Allinson with Wolfe Research.

First question on fourth quarter orders. Typically, they're down mid-single digits sequentially. This quarter, they were up 9%. I think ex COVID, that was the best sequential performance you guys have seen in a really long time. But you mentioned demand still remains soft. So what drove the outperformance in the quarter? Was that a desire to work down inventory? Or why did that outperform normal seasonality so significantly? And then with that in mind, how are you thinking about orders relative to normal seasonality here in your first quarter?

Trevor, it's Gregg. Fourth quarter '25 order growth there, I think that we saw it in quite a number of geographies across the country as well as most of our buyer segments. So I think that we did well, and you will notice in the results there that the North region was definitely above our expectations. So we're proud of the results that we had there. As you're asking about orders for our contracts for the rest of the year, especially into Q1, I think our comments around the November demand we saw in deposits is probably as far as we would like to comment publicly on orders as we move forward.

Okay. Fair enough. Second question then is around new home inventory kind of industry levels. There's been a lot of talk about that being extended, especially in some of the weaker markets such as Texas and Florida. But obviously, you guys operate at very different price points versus a lot of your peers. So can you talk about where you think new home inventory stands at your price points in some of those more challenged markets? Do you think some of the overbuilding that we've seen is more across price points? Or do you think that from what you guys can see is more concentrated at the entry level?

It's definitely more concentrated at the entry level. You look at the Boston to, I'll call it, Philadelphia or even Northern Virginia corridor, which most in this room live in. There's very little on the resale market. There's very little land. For the new homebuilders, we have a pretty unique positioning there. It's tough to come into those markets and find land that you can get entitled quickly and get the machine running. So this is our home corridor that we do well in. We know how difficult the entitlements are, and we're benefiting from it with very, very tight resale markets and very few builders to compete with.

That's also been true in Coastal California. We've done very well. I mentioned earlier, and it may surprise some, but while Sacramento and Palm Springs have been a bit off, both Northern Cal and Southern Cal, what we call our coastal markets, which is all the San Francisco suburbs and all the L.A. and Orange County communities are doing extremely well. There is limited resale at our price points. We don't have the other builders anywhere near our price points. And those markets have continued to perform well with limited competition.

Just a couple of examples out of both of those East and West Coast areas. We opened a community in Central New Jersey 8 weeks ago in what's seasonally not considered a great time of October and November, and we took 20 sales at $1.8 million. We have a community in Irvine Ranch in Orange County that opened about 6 months ago back in May, has 47 sales at over $6 million, including 14 of those 47 sales just in the past 8 weeks.

So those are just two examples. But yes, there are markets that have a lot of big publics that are building a lot of spec at lower prices. And we're in the food chain, right? So we have -- there is some impact on us, particularly because we have a lot of buyers that have homes to sell. But in our core business of $1 million homes, we're just not seeing it. We have a unique niche that we feel very lucky to be in.

And our next question today comes from Sam Reid at Wells Fargo.

Just wanted to dig a little deeper on SG&A. When I run the numbers, it looks like SG&A dollars might be up a little bit year-over-year. Could you just bucket some of the incremental dollar expenses that you're planning for, maybe things like third-party broker commissions, new community growth? Would just love some additional context on the SG&A piece.

So it's pain to me to give the guide I gave on SG&A. We're fighting hard every day to reduce overhead in this company, and that effort is elevating. We're more and more focused on it than ever. That's what soft markets do. It is a conservative guide. We're 75 basis points above last year's result. 50 of those 75 basis points is just leverage on less revenue. And that obviously could change if we do better in '26 with our sales and with our deliveries. And the balance of 25 basis points is inflation in wages, it's health care costs, and it's some modest elevated both internal and third-party sales commissions.

When you're in a softer market, per house, you pay your salespeople a little more because you don't want to take them backwards in their total comp. So if they're selling a few less houses, you give them a little more per house and you have to incent the third-party realtors a little bit more to get them to come to your community. So those numbers are modestly elevated, but that's the breakdown. 50 basis points leverage, 25 basis points, those other items. But we're fighting this fight every day, and I am determined to bring that number into all of you by the end of the year with a 9 in front of it.

All helpful context there. Maybe switching gears and talking lot costs. Would just love to hear some context as to where you exited 2025 on lot cost inflation? And then any sense in terms of what's embedded in guide for 2026 lot cost inflation based on what you plan to deliver?

The guys around me are telling me it's flat, and our guide is also flat. We're seeing, as I said, there's some opportunities now we're excited about, which sometimes happens in a softer market. We are renegotiating a lot of our land deals. The impairments were up modestly because we did sell out of a few of our deals. But that final sign-off by our land committee in here, there's a lot of conversations about going back and working to get a little better price because the market is a bit softer. So that's a longer answer to log cost land prices being flat.

And our next question today comes from Michael Rehaut with JPMorgan.

I wanted to first zero in a little bit and kind of hit the closings guidance. I know, Doug, you kind of walked through some of the math on how to get to the midpoint earlier. But on an overall level, given the fact also that you expect the spec mix to be similar in '26 versus '25, you kind of obviously walked through the community count growth. On kind of looking at it from a different angle, is the guidance for the percent decline in closings largely just driven by math from where you're starting out the year with the backlog being down as it is? Or is there some element of a timing of community openings throughout the year or even perhaps a slower sales pace that you're baking in to protect margins, maybe if you were to be a little more aggressive on deliveries, it might be more at the expense of gross margin. So just trying to look at it from a different angle and understand the decline in closings in '26.

Mike, it is the lower backlog to begin '26.

Okay. So all those other factors, obviously really not coming into play then.

Correct -- I'm sorry, we assume we're going to sell at the same pace. Right now, we're running at about 2 sales per month per community. We have not assumed that's going to improve. And so we're doing the math off of the beginning backlog with those other buckets that I laid out for you earlier in terms of spec under construction, build-to-order that we think can sell and settle and spec permits that we are intending to start to have summer deliveries. But it all starts with that 4,500 of beginning year backlog.

Right. That's fair...

And as you -- go ahead, please.

No, no. Why don't you finish your thought, and then I'll ask my second question.

If the 2 per month, which is a pretty low number in the company's history, does a bit better, then obviously, each of those other buckets can improve, but that's not how we're approaching the guidance for '26.

Right. Okay. Second question kind of on the gross margins. I think you've highlighted the fact that your incentives are roughly flattish, at least most recently. I think you just said you're [indiscernible] in '26 to be flat versus '25. So I just wanted to understand what's driving the sequential decline in gross margins into the first quarter and then more broadly in the full year, because I would have assumed if you are assuming incentives being flat, I would have thought land cost inflation would be the primary driver of that. But I'd love to understand what's -- what are kind of the impacts or what are the factors driving 1Q and '26 overall relative to '25?

Sure. The incentive a year ago on this call that was out there for us was $68,000 a house. The incentive today is $80,000 a house. That explains the full 27.3% down to 26% margin change. And we are projecting out the year again on that same $80,000.

And our next question today comes from Alan Ratner of Zelman & Associates.

Nice performance in a tough market. Gregg, great job on the first call. I won't hold the technical snafu against you. It's all up from here though.

That's all right. I can blame me for the technical snafu.

No, we're going to blame Marty Connor...

Yes. Exactly...

So a lot of my questions are on the guidance, but I think we beat that topic there pretty good. Doug, just thinking about the consumer and your buyer today. Obviously, there's a lot of cross currents. The stock market remains strong, but we're hearing confidence is challenging. We're seeing on the resale side a lot of delistings. So people that might have been putting their house up for sale, deciding not to move forward with the sale and maybe some of that's seasonal. But I heard your encouraging sales data through the first 6 weeks of the quarter, but are you sensing any change in your consumer confidence or their desire to sell their house because the data would seem to be a bit more alarming on that front.

Yes. No, we're not -- I can't -- that's why I caution that don't read too much into November and December just because of the seasonality of those months not being slower sales and not telling us a lot. So it's modestly encouraging that the last 6 weeks were flat to '24, and '24 was up 22% to 23%. And that those 6 weeks were also flat to October, which shouldn't be the case. They should be down. But no, there's nothing I can point to, to feel great about where the market is. Consumer confidence for us, for our client is the #1 driver. Affordability, mortgage rates, while I will celebrate a 5.5% rate it's just not as important to our buyer as we talked about with our buydowns. We market the heck out of buydowns. The drive traffic and very, very few people take it. And so there's issues around job growth, we still have a lock-in effect, of course, that with 70% of our homes requiring a client to sell their existing home, whether they're moving up or moving down, there's still some that are locked in and just don't want to give up that 3% rate. So those are all real headwinds.

The passage of time is a bit of a tailwind, right? It's just -- we're pretty far into this down cycle. If you look historically at housing down cycles, we should be on the other side of it and maybe coming out of it. But that's just looking at prior peaks and valleys. And as people stay in their beat up old house and always dreamed of moving those kids up to the pretty Toll Brothers house in a better school district and a bigger lot, join the fancy country club, whatever they want to do with their life, the passage of time has an amazing psychological effect on people finally saying, I've done well in the markets. I have equity in my house. I have a resale market that's pretty darn good, and we're going to bite that finger and move up.

Now Marty Connor may not do that because he's a finance geek, but a lot of people want to do that because they want to improve the lives of their kids and their family. And so the passage of time really helps in that regard. But Alan, that's a very soft comment I'm making, right? It's just kind of the psychology of the buyer. But we're getting closer. I think we're getting closer to when we see some light. And I'm excited about that, but I can't point to it. But if there's pressure on rates coming down with a couple more cuts, if confidence improves a bit, as time moves on and we're further along in this down cycle, I think there's a great opportunity because of those long-term tailwinds to see some improvement. But I can't point to any data point right now, and that is the main reason why we're staying conservative in our '26 guide.

Makes sense. No, understood. I appreciate the comments, even if you call them soft, I think it's helpful just to hear what you're seeing. Gregg, I'm going to put you on the spot and then hop off. Just on the share buyback guide for $650 million. So pretty flat with the past year. If I look at this past year, I think you did -- you generated $1.1 billion of cash. You're saying that maybe that's down a little bit, but you also have the sale of the apartment business in there in the first quarter. So it would seem like unless you're looking to, I don't know, build up cash or delever, which you don't have any debt coming due this year, that there should be an opportunity to drive that buyback number decently higher from '25. So what's holding you back there?

Sure, Alan. We would like to go higher, but we do think that $650 million is very prudent guide at this point to start the year. So we'll continue to evaluate it throughout the year, but this is where we want to launch.

We're going to extend for another question because of our friend, Drew.

Our next question comes from Rafe Jadrosich with Bank of America.

You have Victoria Piskarev on for Rafe Jadrosich. My first question is on what are you thinking about stick and brick costs and labor costs for 2026? And what is embedded in the guidance?

Great question. We're seeing a modest decrease in construction costs in most parts of the country. It's either flat or it's down slightly. And maybe $2, maybe $3 a square foot in reduction in building costs. It costs us plus or minus $100 a square foot to build our homes. When I started in this business, Rob Parahus is here with me. We're the old guys. We used to build for $55 a square foot. Remember, Rob? So that's a couple of points, right? A couple of percentage points down, which is encouraging. And I think that should continue. We have not built in any continued reduction in building costs for the balance of the year.

Thank you. That concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thanks, everyone. We appreciate all your interest, all your great questions. We're always here to answer any follow-up questions you may have. Have a wonderful, wonderful holiday season, and we look forward to seeing all of you soon. Thanks so much.

Thank you, sir. 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.

Good morning, and welcome to the Toll Brothers Third Quarter Fiscal Year 2025 Conference Call. [Operator Instructions] The company is planning to end the call at 9:30 when the market opens. [Operator Instructions] Please note, this event is being recorded.

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

Thank you, Drew. Good morning. Welcome, and thank you all for joining us. With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP, Treasurer and Head of Investor Relations.

As usual, 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 availability of labor and materials, inflation and many other factors beyond our control that could significantly affect future results. Please read our statement on forward-looking information in our earnings release of last night and on our website to better understand the risks associated with our forward-looking statements.

Before we jump into our quarterly results and our outlook for the remainder of fiscal 2025, I'd like to take a moment to thank Marty for the enormous contributions he has made to our company since he joined us in 2008. As we announced in July, Marty plans to retire from the CFO role at the end of our fiscal year in October. During his 17 years with Toll Brothers, Marty has been an outstanding leader, business partner, financial steward and good friend. He has played a central role in enhancing value for our stakeholders and helped shape the financial strategies that have been such a vital part of our success. Marty, your intelligence, wit and the spirit of fun you bring to the office every day will be missed by all of us. On behalf of the entire Toll Brothers team, thank you.

Of course, one of our responsibilities we take very seriously here is developing talent. We have a very deep bench in our finance group, which includes Gregg Ziegler, a familiar name to many of you on this call. I am pleased that Gregg will be stepping up in November to become our next CFO. He has a wealth of experience, including 23 years at Toll Brothers and an unmatched understanding of our business. I look forward to working with him in his new role, and I'm confident that he is the right leader to continue our track record of financial success. With that, let's turn to our third quarter results.

I'm very pleased with our performance in the quarter. In a difficult market, our balanced operating model, broadly diversified luxury business and strategy of prioritizing price and margin over pace continues to pay dividends. In the quarter, we delivered 2,959 homes at an average price of $974,000, generating record third quarter home sale revenues of $2.9 billion. Our adjusted gross margin of 27.5% exceeded guidance by 25 basis points, and our SG&A expense was 8.8% of home sales revenues or 40 basis points better than guidance. The outperformance on both our top line and in our margins contributed to third quarter earnings of $370 million or $3.73 per diluted share. We also returned approximately $226 million to stockholders through dividends and share repurchases in the quarter, positioning us to deliver another year of healthy profitability and solid returns in fiscal 2025.

In the quarter, we signed 2,388 net contracts for $2.4 billion. While units were down approximately 4% year-over-year, dollars were flat due to an increase in average sales price to just over $1 million. Our ASP was up 4.5% versus the third quarter of fiscal 2024 and up 3% versus last quarter. We are pleased with the resilience of our luxury business and more affluent customer base. While our contract ASP was up and our margin outperformed, our sales volumes have been impacted by the softer market. As a result, and given our strategy of balancing price and pace, we now expect deliveries to be approximately 11,200 homes for the full year at the lower end of our previous range. We are maintaining all other key guidance metrics, including a full year adjusted gross margin of 27.25%.

In this environment, we continue to actively manage our spec starts and inventory levels on a community-by-community basis to match local market conditions. In some markets, especially in the North region, where inventory remains low and demand is strongest, we have increased spec production. Overall, as local markets evolve in the coming months, we will be making decisions as to how many spec homes to start as we plan ahead for fiscal 2026. In addition to the 3,200 specs that are in various stages of construction, we have another 1,800 building permits ready to go. As we see market improvement, we have the ability to quickly ramp up our spec production.

Remember, our spec business model is differentiated. We sell our spec homes at various stages of construction, all the way from foundation poured to finished home. This offers some of our spec buyers the opportunity to personalize their homes with features and finishes that match their tastes as choice remains a key pillar in the Toll Brothers buying experience while also providing us a faster and more efficient construction schedule.

From a pricing perspective, we modestly increased incentives in the third quarter. The average incentive in new contracts was approximately 8%, up from approximately 7% in the second quarter. At third quarter end, our backlog stood at 5,492 homes valued at $6.376 billion with an average sales price in that backlog of $1.16 million. We are pleased with both the average sales price and the gross margin embedded in our backlog. We also have 3,200 spec homes at various stages of completion. Our cancellation rate was 3.2% of beginning backlog as compared to 2.4% in last year's third quarter and 2.8% in the second quarter. Our cancellation rate remains the lowest in the industry, continuing to reflect the financial strength of our buyers and demonstrating that they remain comfortable and confident in completing their home purchases.

About 26% of our buyers paid all cash in the third quarter, consistent with recent trends and well above our long-term average of 22%. The loan-to-value ratio for financed buyers was approximately 70%, highlighting the strong financial profiles of our customers. We continue to make progress improving construction cycle time. Overall, we have not seen any significant impact on build costs from tariffs, and we do not expect to see any this fiscal year. In fact, we are anticipating that build costs will come down modestly in the foreseeable future.

We ended the third quarter with 420 active selling communities. We remain on track to end the fiscal year with 440 to 450 communities, representing 8% to 10% year-over-year community count growth. Our land position remains strong, and we continue to prioritize capital-efficient deal structures that support long-term growth.

In the quarter, we spent $433 million on new land. We remain disciplined in our underwriting and focused on securing high-quality land at attractive returns with a continued emphasis on keeping land off balance sheet as long as practical to enhance capital efficiency. At quarter end, we owned or controlled 76,800 lots, 57% of which were controlled and 43% owned. This land position allows us to continue to be selective, disciplined and focused on efficiency when we assess new land opportunities.

With that, I'll turn it over to Marty.

Thanks, Doug. I appreciate the kind remarks at the outset and want to express my sincere gratitude for the opportunity afforded to me to be Toll's CFO for the past 15 years. It has been a real honor, and I'm proud of all that Toll Brothers has achieved over the past 1.5 decades. I would also like to express appreciation for the great teams I have here at Toll as well as at home. I'm proud and pleased that Gregg will be picking up the reins when I step down. Gregg and I have worked closely since my first day, and I have the utmost confidence that Gregg is the right person for the job.

Turning back to the numbers. It was a great third quarter. We significantly exceeded our guidance with earnings of $500 million before taxes and $370 million after or $3.73 per diluted share. As Doug mentioned, we delivered 2,959 homes, generating record third quarter home sales revenues of $2.9 billion. This was a 5% increase in units and a 6% increase in dollars compared to last year's third quarter. The average delivered price of $974,000 was in line with the midpoint of our guidance of $975,000 and included approximately $207,000 spent on lot premiums, structural options and design studio upgrades which are highly accretive to our margins.

We signed 2,388 net contracts for $2.4 billion in the quarter, a 4% decline in units, but flat in dollars compared to Q3 2024. The average price of contracts signed in the quarter was $1.010 million. The average price in our backlog is even higher at $1.16 million, which includes $234,000 of lot premiums, structural options and design studio upgrades. Our buyers continue to demonstrate their financial strength and the value they place on their homes with the significant investments they make.

Our third quarter adjusted gross margin was 27.5% or 25 basis points better than we had projected and guided. The outperformance was spread evenly across products and regions, and it was attributable to both greater efficiency in our homebuilding operations and favorable mix. SG&A as a percentage of revenue was 8.8% in the third quarter compared to 9.0% in the third quarter of 2024 and compared to our guidance of 9.2%. SG&A came in better than expected, primarily due to increased leverage from higher-than-forecast revenues as well as cost controls. We remain very focused on efficiency, and we continue to see the benefits flow through our results.

Third quarter joint venture, land sales and other income was $15 million, ahead of our breakeven guidance as we realized gains and income related to several joint ventures in the quarter and saw better-than-forecast earnings in our mortgage operations. Our tax rate in the quarter was 26%.

I'll turn it over to Gregg to review our balance sheet, financial position and liquidity.

Thanks, Marty. I'm honored to be the next CFO of Toll Brothers and appreciate the confidence you and Doug have shown to me. As we announced earlier this month, in the third quarter, we issued $500 million of 10-year senior notes at a 5.6% coupon. At the same time, we called $350 million of senior notes that were scheduled to mature this November. With the issuance and redemption, we extended the weighted average years to maturity of our senior notes from 2.5 to 4.8 years. This comes on top of the refinancing of our credit facilities in our second quarter, which pushed out a revolver and term loan by 5 years and increased the size of the revolver by nearly $400 million. We now have no significant bank or senior debt maturities until March of 2027.

We finished the third quarter with a net debt-to-capital ratio of 19.3%, $852 million in cash and equivalents and $2.2 billion available under our $2.35 billion revolving bank credit facility. This year, we expect to generate another $1 billion in cash flow from operations. In the quarter, we spent $433 million to acquire 2,755 lots. We paid a dividend of $24.2 million and repurchased $201.4 million of common stock at an average price of $112.40. For the full year, we've repurchased approximately $402 million of common stock at an average price of $111.08. We continue to project $600 million of share repurchases for the full year.

To summarize, our balance sheet, financial position and liquidity are as strong as they've ever been. They provide us ample flexibility to both invest in the future growth of our business while also returning capital to stockholders. This has been a pillar of our overall financial strategy for at least the past decade and will continue well into the future.

Marty, I'll turn it back to you to address guidance.

Thanks, Gregg. As usual, our outlook is subject to all the caveats regarding forward-looking information and the assumptions, risks and uncertainties inherent to projections. Based on our backlog, recent sales activity and the number of spec homes completed or currently under construction, we expect to deliver approximately 3,350 homes in our fourth quarter, which comes to approximately 11,200 homes for the full year. The average price of deliveries in the fourth quarter is expected to be between $970,000 and $980,000. We continue to expect the full year average delivered price between $950,000 and $960,000.

As Doug mentioned, we continue to balance price and margin with pace. This strategy, combined with the gross margin embedded in our backlog gives us confidence in maintaining our full year projected adjusted gross margin of 27.25%. For the quarter, we expect adjusted gross margin to be 27%. We expect interest and cost of sales to be approximately 1.1% of home sales revenues in the fourth quarter and for the full year. Fourth quarter SG&A as a percentage of home sales revenues is expected to be approximately 8.3%. For the full year, we continue to expect it to be between 9.4% and 9.5%.

Other income, income from unconsolidated entities and land sales gross profit for the full year is projected to be $110 million. For the fourth quarter, we expect it to be approximately $65 million. We project the fourth quarter tax rate to be approximately 25.5% and the full year rate to be approximately 25.1%. Our community count at quarter end was 420 compared to our guide of 430 as we move some openings into the fourth quarter. We continue to expect 440 to 450 communities open by the end of the fiscal year. Our weighted average share count is expected to be approximately 98 million for the fourth quarter and 100 million shares for the full year.

Putting this all together, we expect to earn approximately $13.75 per diluted share in fiscal 2025, achieve a full year return on beginning equity of approximately 18% and bring our book value to approximately $88 per share at year-end, which would cap off another great year for Toll Brothers.

Now let me turn it back to Doug.

Thank you, Marty. Our results in the third quarter and our projections for the full year reinforce the strength and resiliency of our business model. They prove out our ability to successfully navigate changing market conditions while still delivering attractive returns to stockholders. This is the result of the hard work of all of our Toll employees. It is their passion for our business, dedication to our luxury brand and commitment to our customers that will ensure our continued success.

With that, let's open it up for questions. Drew?

[Operator Instructions] As a reminder, the company is planning to end the call at 9:30 when the market opens. [Operator Instructions] The first question comes from Stephen Kim with Evercore ISI.

Congrats to Gregg and Marty. I guess let me just start off with a simple one. Your cash flow from operations, I think you guided to greater than $1 billion. What was it year-to-date because I didn't see that in the release. And then if I could also ask you, you mentioned construction costs you expect to decline in the near term. I was wondering if you could kind of give us a breakdown on what components you're expecting to get some betterment.

Sure. Gregg?

Yes. I was trying to find out 9 months to date. This is a little rough. It's probably somewhere in that $400-plus million. So we do expect to see a lot of that pickup happening in Q4 to get to that $1 billion for the year. Which is a result Q1 relatively negative, Q2 starts to even out, Q3 positive.

Right. Building costs, flat to modestly down in the short term. Steve, we're just beginning to see trades negotiate a bit more than they were. Suppliers. We're out in the market for some major material supply renewals, and we're making some progress there on good pricing. It's community and market specific. But -- and it's moderate, but building costs are beginning to come down across the board. I can't point to 1 or 2 things. It's a combination of both subcontractor contracts for our major trades and materials.

The next question comes from John Lovallo and UBS.

The first one is -- the only concern we're hearing out there really today is that the ability for you guys to grow next year. And maybe I'll frame the question this way. I mean, in the past, you've talked about achieving a sales pace of 2 communities -- sorry, 2 homes per community per month on average through the year. I just want to confirm that there's no change to the thinking there. And do you think that this is something that can be achieved in fiscal year '26 after what appears to be closer to maybe 1.8 in 2025?

Yes. So John, as you know, we're going to give all sorts of great details on '26 in December. We are very focused on '26. We are very -- excited by the community count growth we will see next year. In fact, we are expecting 20 to 30 openings in Q4 when you do the math off of the numbers we gave you of where community count stands at the end of Q3 and where we think it will be at the end of the year. We've had some terrific openings lately. We just opened a community this weekend in Philadelphia that took 21 deposits. We actually shut down the action that got so hot at $2 million in Bucks County, Pennsylvania. We have a community in Irvine Ranch, Southern Cal that has taken 24 contracts north of $6 million in the last month.

We are positioning ourselves with the communities that are opening and with the business we have to set up for next year. We have 3,200 spec homes in process. We have 1,800 spec permits that we are ready to start homes on as we see market improvement. And as I mentioned, we're already beginning to do that in the north. We have fewer shares right now, and we're going to have even fewer shares next year that helps drive some EPS. Average price is up. That $1.16 million average price in backlog, which right now is about 5,500 homes is significant. But even on the homes we're selling today, the average price is up to $1 million. Build time, cycle time has come down. We now have about 35% of our communities that can build houses in 8 months or less. That gives us more visibility more ability to sell homes into the early part of the spring selling season and still have those homes delivered by the end of the fiscal year.

One of the things we look at all the time is what do we think a local market will look like next summer when most people want to close on their home to get their kids into school and when do we have to start new specs to have those homes ready next summer. And those decisions are all dependent about how long it takes to build the specs in each given community and what the market demand looks like in that community. And we are evaluating those opportunities daily and making the appropriate decisions as we move through it.

On the macro level, rates have come down nicely. We're now at 6 3/8 here at Toll Brothers. It looks like short-term rates are going to be coming down for the balance of the year and hopefully into next year. While there's not a direct correlation between those short-term rates and the 30-year mortgage, it's certainly encouraging. There's pent-up demand building out there every day. There's still such an imbalance between supply and demand. And every day, we have buyers who have been on the sidelines who are waiting to come back in. And of course, the demographics are terrific. Our traffic is up, both web traffic and foot traffic in August. We're heading into the fall, which is a better time.

So I told you I wasn't going to give you any guide on '26 into December. And I don't think I've given you any guide except that we are positioned and very focused to have a good '26. We understand that we do need to drive activity through the community openings and through the spec strategy that we have employed. And we're ready to go. It's a big focus of us, and we're excited for the future year. We continue to have great leverage over SG&A. We're really proud of what we've done there. And as we continue to build spec, that leverage increases. And so there you have it.

Sorry for the long answer, but it gave me an opportunity to give you sort of my feeling about the market. I feel better today than I did a few months ago. I think the economy is starting to heal. I think the buyers are beginning to come back out. I think rates dropping a little bit. It's more psychological for our client than it is affordability wise because we have more of a luxury client that can afford our homes. They just have to feel good about the economy. So we'll have to see what the fall brings. But we are positioned, particularly with all these specs that permit to be nimble and react quickly. And I'm feeling -- certainly feeling better than I was a few months ago.

Yes. That's really helpful, Doug. And that's really what I was trying to get at is the backlog maybe being down a bit from where people would have thought it might be perhaps. You guys still feel comfortable with the community count growth in 2026 and the ability to drive orders to drive growth as we move into the next couple of years.

We do, very much so. And we're really excited about our land positions, and we haven't guided yet. But on the last call, I gave a soft guide that we have similar community count growth projected for '26. I can reaffirm that. We just have terrific land and terrific communities coming. So it's all good.

The next question comes from Mike Dahl with RBC Capital Markets.

Marty heck of a run, congrats. And congrats, Gregg. Just a follow-up. Can you help us walk through how sales pace trended through the quarter and maybe elaborate a little more on your August comments? And the follow-up question would be similarly, if you think about the incentive ending up at 8% versus 7%. I think a lot of your peers talked about sequentially increasing incentives through each month of the summer period. So if you could talk about how that shook out for you and whether we should be thinking the exit rate on incentives was higher than that 8%. Sorry, that's two questions in there, but those are my two.

We understand. So May was the worst month. June and July were better. August has been similar to what we saw throughout the quarter. No, the incentives are not up at the end of July from where they were in May or they're not up today from where they were in July or June. The increase in incentive from that 7% to 8% is primarily driven by a little bit more discounting we had to do with some finished spec. As we continue to explain, and I know you all understand our spec strategy is a bit different where we do sell a number of our specs earlier where the client can hit the design studio, buy a bunch of upgrades, feel like it is a custom home even though we started it, and that process is very accretive to us and the margin has been closer to build-to-order margin when we sell those specs earlier.

But we do have a number of finished specs in some markets that are under a bit of pressure, and that explains the little bit of an increase you see on the average incentive. I am a little bit encouraged. It's early, but over the last 3 weeks, we have seen the incentive in finished specs moderate a bit. So no, it's, in fact, not what you described, which is maybe going up a bit, but it's actually stabilized or come down a little bit. And again, it's only 3 weeks, so we'll have to see.

But we -- as I mentioned earlier, our web traffic in August is up. That exact number is around 5% to 10% and our foot traffic into our communities is up about 15%. It is taking people longer to deposit because they're more cautious, but our conversion ratio from deposit to agreement of sale is about the highest it's ever been around 80%. So 4 out of 5 people that go to deposit are several weeks later pressing firmly and moving forward with a binding agreement. I mean, historically, that number when I was a kid in this business was running like 60%. So it takes a bit longer to get them to the table to deposit, but then they stick. And so we haven't seen an immediate impact from the rates dropping from, call it, 6.75 or 6.58 down to 6.38.

It's only been a couple of weeks. I wouldn't have expected it to be that immediate, particularly for our client where it's not, oh my gosh, now I can afford that monthly payment. Let me jump in. It's -- our clients don't think that way. Plus it's August. We're closing up summer houses. We're getting kids back to school. I think people might be waiting to see if the rates come down a little bit more. We're going to know a lot more through the month of September. And I am anticipating as these rates settle into the market, we're going to see more demand coming out from all this pent-up demand that's been waiting on the sidelines.

And we have a follow-up from Stephen Kim with Evercore ISI.

Stephen, I'm sorry, Drew cut you off.

I'll get even with Drew later. So question, I guess, on the volumes that we saw the orders. I think last year, Doug, you had referred to the order cadence. I think you had sort of talked about how typically 4Q orders are down about 10% from third quarter. And you had said last year that, that was going to be different and all that. You kind of called that out, if I recall. Can you talk to us about what the order picture you think would look like this year as we move sequentially from 3Q to 4Q? Is there anything that would be helpful for us as we think about your near-term plans on absorptions?

So I'll take a shot at this, Steve. I think our community count growth in the fourth quarter is going to be outsized compared to other quarters this year and a year ago. So that gives us encouragement. We see rates have dropped 50 basis points as we head to our fourth quarter. That's got to be a positive. We've had some of these new openings that Doug mentioned that have really jump started right out of the gate for the fourth quarter. And as Doug mentioned, he's feeling better than he did a couple of months ago. So all that builds some optimism as we head to our fourth quarter here.

And, Steve, as you know, because you know the numbers so well, our fourth quarter is historically about 4% down from Q3. I've already mentioned that for 3 weeks of August, which is a very short glimpse into what's going to happen, we're about flat to Q3, but that's deposits. That's not even agreements. That's just a couple of weeks of taking the deposit checks. So we'll have to see. What Marty described is spot on. It gives us some optimism, but we'll just have to see how the balance of August and September and October play out. We are well positioned with the community openings we have, with the interest we have, the interest list we have and some of those openings that are coming. But we'll just have to see how it plays out. But historically, it's down 4% and first 3 weeks of August have been flat. So it's trending about where history would suggest it should, but we do have some reason to be optimistic that we could do better.

The next question comes from Trevor Allinson and Wolfe Research.

I'll echo congratulations to both Marty and Gregg as well. The first question, we've heard a few builders talk about seeing some relief on development costs. A couple of questions around that. Are you guys also seeing some softening on development? How widespread is that? And then if you are, what's the time line for when that starts to flow through your P&L? And how much benefit do you think you could perceive from that from what you're seeing currently?

Trevor, we have not seen much relief on land development costs. There may very well be some downward pressure if there is less activity for land developers and they become a bit more aggressive in their pricing. But I don't think we've experienced that yet.

Okay. Got you. Makes sense. And then the second question on the 4Q community count guide. It looks like a really nice jump here sequentially going from 420 to 445. How should we think about the timing of those? Do they come on pretty ratably throughout the course of the quarter? Or is there a good portion that's scheduled to open up near the end of the quarter? And then any regional concentration that we should be considering?

So it's spread throughout. There's no real concentration in terms of timing. And remember, that's a net number at 445. So there are some communities that are closing, selling out in the next 2.5 months. So the gross number of openings will actually be modestly more than that 25 that gets you from 420 to 445 because of sellouts. Regionally, it's pretty well spread, right, guys, around the country. So there's no -- I wouldn't call it any particular regional concentration.

I'm sorry. North Mid-Atlantic South seems to be a little bit of the concentration for Q4 openings.

I like that considering Boston to Washington, D.C. is our strongest corridor. Charlotte. Charlotte has been hot lately. So there you go. A little bit more in the North, Mid-Atlantic and South.

The next question comes from Sam Reid with Wells Fargo.

Congrats to Marty and Gregg. Gregg, looking forward to keeping it going. I wanted to talk cycle times. 35% of your communities can build in 8 months or less. It's a great, very helpful stat. Can you just talk to what cycle times look like across the remaining 65% of your communities? And then when we think about ways to improve that on the spec and build-to-order side, just talk through levers that you can pull to improve cycle times into next year.

So the balance of 65% would be 8 months in a day to probably 11 months. And the 11 months, we'll take the extreme is really big houses that have probably a lot of build-to-order with a lot of money spent in the design studio and maybe a lot of structural options that are being offered and the houses are more complicated. They may very well be in towns that have some difficult permitting and inspection processes that can slow you down a little bit. They could also be in locations where we have significant backlog because we've been hot, and it just takes a little bit longer to build. So every community has its own story, but that is generally the reason why we have some that are still stuck at 11 months.

And how do we get better? We just keep doing what we're doing, which is working really hard. We have teams out there that study every home we build, every day, why we lost a day here or there, what we can do to improve it how we make our floor plans and our architecture more efficient, more optimized, how we get people through the design studios faster. We track how many days it takes somebody to get through that design studio and sign off so we can get going. So we are all over it. I am so proud of the progress we've made, and there is more to come. The spec side of the business helps a lot, too.

Exactly.

As a 50% spec builder now, those homes don't have a customer yet in the early stages. So we don't have -- we're able to build them a lot faster because we pick the finishes, we pick the structural changes. We can go full speed without waiting for a design studio process, without reacting to a client's walk-through on Sunday afternoon as the house is under construction. And that certainly helped bring the overall cycle time down.

And on the front end, we have that permit sitting on a shelf. We don't have to spend incremental time to go get that permit for those spec homes.

No, that helps, guys. Really appreciate it. Maybe switching to another line item on the P&L. In the prepared remarks, you alluded to better cost controls behind the SG&A beat versus guide. Would just love a little bit of context in terms of what those cost controls were, how sustainable that is perhaps into 2026? And then thinking about Q4 specifically, you've got a step-up in community count quarter-over-quarter. Would just love to know any grand opening expenses that might be embedded in that guidance for SG&A.

Sure. So our cost controls span the gamut of cost. We've done a great job of maintaining pretty stable headcount despite growth in community count. We've maintained inside and outside sales commissions at a reasonable level despite the challenging market. And we continue to benefit from the technology investments we've made over the last 6 or 7 years in terms of our systems from a CRM and an ERP perspective and even in HR side. There is pressure on some costs. Insurance costs are pressured. And there are incremental costs associated with community count openings, but they're all baked into our guidance.

And just to remind everyone, one of the primary reason why the Q4 guide on SG&A is modestly higher is because of all these communities we are opening that have front-end expenses without the revenue coming in yet.

The next question comes from Alan Ratner with Zelman & Associates.

I'll add congrats to Marty and Gregg there. Looking forward to working with Gregg. So on the spec mix, Doug, I think you mentioned it's 50-50 today. Can you just refresh our memory what it was pre-COVID or kind of in more normal times? And what the margin differential currently is on your spec product maybe across the 3 buckets in terms of completion status versus the build-to-order home?

Sure. In the old days, 10% to 15% was our spec business. I remember when I was a kid and I was a project manager in the field, Bob Toll would give us one spec per community. And if we wanted to build a second spec, we had to go see him personally. So...

What answer would he give you?

And he would put you through the ringer is what he would do so that you wouldn't come back the next time. So yes, I'd say 10% to 15% up to where we are today. The margin delta between spec and build-to-order is consistent with what we've been talking about for the last few quarters. It has widened a little bit. We're really pleased that the build-to-order side of the business has gone up to north of 30%. And again, on the spec side, it depends a lot on when we sell the house in terms of the timing during the construction cycle. And of late, as I described, some of these finished specs we have, we've had to discount a bit more. But we love the business. And the combined margin in that 27% range, as we talked about, we think is the right way to run the business. There's tremendous capital efficiency that is brought to us by the spec business.

There's obviously opportunities to pivot as we've been talking about with all these spec permits we have to move pretty quickly if we want to, to try to fill that hole in the future when the time comes for people to want to move in. So we have a 27% average, as we talked about last quarter, we were just north of 30% -- around 30% or just north of 30% on build-to-order, call that 3 points plus or minus up. And so obviously, if it's 50-50, the math would tell you we're about 3 points plus or minus down for the spec business.

Got it. That's really helpful. And I guess my follow-up is a more difficult question, but presuming you don't maybe get back to 90% build-to-order, it sounds like if you can get that share a little bit higher, that would certainly be a positive for your margin and certainly for the visibility in your business. How do this Toll and the industry get back to a more normal build-to-order or spec mix? I mean it seems like everybody has kind of pivoted very hard towards spec. And during the early stages of the pandemic when resale inventory was so tight, that made a lot of sense. But now it almost feels like builders are kind of forced to keep the spec machine running if they want to maintain growth and have the volume ready to go. So I'm just curious how you see this playing out and what can be done to get back to a more normal build-to-order mix?

Alan, it's a good question, and I'm not sure what back to normal is going to mean in the future because I think the industry for some time now has been pretty committed to some level of spec construction. We, as I described, had very few spec, and we are very comfortable at 50-50 even in this somewhat softer environment. We're getting really good at it. Our construction teams are not picking the structural changes that go into spec. They're certainly not picking the finished choices that go into spec. We have national designers that decorate our model homes that have come up with different packages, and we market those. These are curated packages that have been picked by the designer that you're walking through a model home and you fall in love with the decorating, and we tell you that our -- the spec you're interested in was designed by that nationally acclaimed decorator who just decorated this model you love. And so we're selling them at different stages.

I like the business. I mean, will it move from 40% to 50%, maybe to 60% back to 40%? Sure. And a lot of that is market specific. But I don't think your thesis that when do we get back to the good old days of 90% build-to-order, I don't see it. And you're hearing that from the one company that did the least spec out there. So it's fluid. You have to really manage it closely.

But I -- the buyers today also, particularly the millennials that are coming along that are more affluent and are not just buying more expensive first homes at 38 years old, but they're now in their 40s moving up. They're not all that interested in waiting a year and designing their custom house. And if we can give them a home that they can move into in 90 days, 5 months, 7 months because it's under construction and still have the opportunity to pick finishes to make it feel like their own and live like their lifestyle and their decorating choices, it's a smart way to go. And we're going to keep at it within that range I talked about, I'd say, of, let's say, 40% to 60%.

We're generating great returns with this mix. We're maintaining high margins with this mix. I don't know why we would feel compelled at this moment to change this mix based on how we're doing. And I echo Doug's comments, I think there is a greater percentage of consumers that don't have the patience or the desire to wait and spend the time to design, particularly when they walk into some of our highly curated spec homes and say, wow, this is pretty good. Remember, we do this all day long. An individual does it 1, 2, 3 times in their lifetime. So we do it pretty well.

And the other thing, Alan, just to wrap it up, in many of our communities, we have some very special lots, home sites that generate very high lot premiums. We save those for the build-to-order business. We're not going to spec on the $400,000 lot premium lot because we know the buyer of that lot who's going to put a home on that lot, who's going to load it with structural changes and really load it with design studio changes, all of which are very accretive. And so part of our strategy is more of the vanilla generic lots, not all, but more of them get the spec house and we drive the margin. One of the reasons that margin is north of 30% is because we are saving the better lots for the client who we know will spend more money with the upgrades.

The next question comes from Michael Rehaut with JPMorgan.

Marty, it's been a pleasure. Best of luck in the future. Gregg, obviously, congrats and looking forward to working with you more.

I met Marty's grand baby Saturday night. And now I fully understand why he's retiring.

That's great. That's great. A couple of questions. I guess, first, just on the incentives. It's very helpful, Doug, kind of given the detail that a lot of that increase, 8% versus 7% related to finished spec and maybe that's come down slightly recently. But I think if I'm right, looking back a couple of quarters, your incentives as a percent of sales have increased maybe closer to 200 basis points year-to-date. Obviously, you're expecting a little bit of relief on some build costs, perhaps lot cost inflation would be an ongoing issue on the other side. But it would seem like, again, without pinning it down to '26 guidance, which I know you're not going to give, but is there any reason directionally why we shouldn't expect somewhat of a moderation in '26 versus '25 at this point?

Again, Mike, we're going to give all the details in December. You're right. It's in the numbers. Our incentive in the third quarter is higher than it was in the second quarter and higher than it was in the first quarter. That 5,500 homes in backlog that has an average price of $1.16 million is high margin, and that is very comforting for us. But I'm not in a position to start giving you some guide on where the gross margin will be in '26. We're going to -- we'll address that in December. And frankly, there's a lot of time between now and December, and there's a lot of market in front of us that is going to be evolving. And we talked about our ability to start all these specs and be ready for next summer when people want to move in. We're just going to have to see where this market is through the course of September, October and November before that December call to have a much better idea for you on where things are.

Because when you do sit on a lot of spec, current market conditions can really affect the amount of incentive on those specs. As you recall, through the COVID years, Toll was penalized a bit because we didn't have the spec and home prices were going up so rapidly, we sold the house at agreement of sale and the homebuyer got the benefit of home price appreciation during construction. And those builders that were spec builders got the benefit of the home price appreciation during construction because they didn't sell to the end. That was unusual. That doesn't usually happen. But we'll have to see what takes hold through the fall and stay tuned for December.

Mike, I'd also point out that our gross margin a year ago for the quarter ended a year ago was adjusted gross margin, 28.8%. And at the end of this year, our fourth quarter, it's projected at 27%. So we've seen a lot of that margin unfortunate erosion already over the course of the past 12 months and the next 3 months in our projections.

Right. No, that's definitely fair. And maybe just secondly, Doug, I think you alluded to earlier a little bit lower rates over the last -- maybe by, I want to say, 20, 30 bps, maybe on a broader market level. You talked about June and July being a little better from a sales pace perspective versus March versus May and obviously, the last few weeks. I'm wondering if you're trying to maybe parse out the increase in incentives maybe throughout the quarter to -- and maybe that was again to move the finished spec. You also have obviously some seasonality.

But I'm wondering between seasonality and maybe a little bit of a higher incentive, how do you think about that, let's say, 20, 30 bps decline in rates impact on demand relative to some of the other factors that perhaps are driving sales pace currently and into the fall?

Mike, as I mentioned, we haven't yet seen an immediate impact in sales from the lower rate. It will be coming. With every tick down in rate, you're going to have more buyers that step into the market. It's August. I think we just have to wait a little bit and see how it plays out. And we also have to see what the Fed does, and we have to see what the macroeconomic world looks like. There's a lot of moving parts here, and I am encouraged by where it feels like things are headed. But I have no empirical data for you as to what's happened since rates came down, and I'm certainly not going to give you the crystal ball projection on where things go. We'll wait and see. We love our positioning, and I'm feeling a bit better.

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

Drew, thank you very much. We appreciate it. Thanks, everyone, for all your great questions and all your interest. Have a wonderful end of the summer, and we'll see you all soon. Thanks. Take care.

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