Toll Brothers, Inc.

Good morning and welcome to the Toll Brothers fourth quarter fiscal year 2025 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. The company is planning to end the call at 9.30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. 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 Parahouse, President and Chief Operating Officer, Wendy Marlette, Chief Marketing Officer, and Greg Ziegler. our new Chief Financial Officer. While Greg has been on these calls for many years, this is his first as our CFO. Congratulations, Greg. 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 percent, an SG&A margin of 9.5 percent, and earnings of $13.49 per diluted share. We grew our community count by 9 percent, 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 home building 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 of 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 two 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, six weeks ago, our per community deposit activity has been almost identical to the same six weeks last year, which is somewhat encouraging since last year's period was up 22 percent from the prior year. Deposit activity in these first six 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 home 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 one in five 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 buy-downs 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 crack 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 percent 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 percent 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 one half 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 home building business and return capital to stockholders.

With that, I will turn it over to Greg. Thanks, Doug. Our fourth quarter capped off Another strong year for Toll Brothers as we beat guidance across all our core home building 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 one 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 one 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 one 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 one 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 pre-tax impairments that were primarily related to three 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 one community in Oregon, compared to $24.1 million in the prior year period. We continued 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 a 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 percent and for the full year to be approximately 26.0 percent. We expect interest and cost of sales to be approximately 1.1 percent 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 sale 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.