Good morning and welcome to the Toll Brothers Fourth Quarter Earnings Conference Call. Operator provided instructions. Please also note this event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.

Thank you, Tom. Good morning. Welcome and thank you for joining us. With me today are Marty Connor, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior Vice President and Treasurer. Before I begin, I ask you to read the statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the impact of the pandemic, the availability of labor and materials, inflation, and many other factors beyond our control that could significantly affect future results. I am incredibly proud of our company’s performance this year as we executed on our strategic goals of driving growth, increasing profitability, and improving capital efficiency. In fiscal 2021, we delivered nearly 10,000 homes, the most in our history and we grew homebuilding revenue by 20% to a record $8.4 billion. We continued to expand our margins. Our full fiscal year 2021 adjusted gross margin was 25%, a 150 basis point improvement over fiscal 2020 and we reduced our SG&A expense as a percentage of revenue by 160 basis points year-over-year to 10.9%. We nearly doubled our pre-tax income to $1.1 billion, achieved our highest net income ever of $833.6 million, and we grew earnings per share from $3.40 last year to $6.63 in fiscal 2021. And we delivered on our strategy of improving returns with an increase in return on beginning equity of 830 basis points to 17.1% for the full year. These results reflect the strength of the housing market, the benefits we are realizing from our strategic expansion into new product lines, price points and geographies, and our focus on driving operating efficiencies and improving the capital efficiency of our land acquisition strategy. At fourth quarter end, option lots represented 55% of our total lots, up from 43% one year ago. And while we are pleased with our performance in fiscal 2021, we expect even better results in 2022. At fiscal year end, our backlog stood at a record $9.5 billion and 10,302 homes. It is supported by substantial non-refundable deposits and our cancellation rate as a percentage of beginning quarter backlog was a very low 1.3% in the fourth quarter. Based on this solid backlog, we expect to grow homebuilding revenues by an additional 20% in fiscal year 2022. We also expect to increase our full year adjusted gross margin by 250 basis points, due primarily to the strong pricing in our backlog, which reflects the significant price increases that we have implemented over the past year plus the operating efficiencies that we continue to gain to optimize floor plans, curated options in our design studios, and streamlined operations. And we project a return on beginning equity well above 20% in fiscal year 2022, driven by our permanent pivot to a more capital-efficient land strategy and our improved profitability. In the fourth quarter, demand for our homes remained very strong. We signed 2,957 net contracts for approximately $3 billion, up 18% in dollars due to a 26% increase in the average selling price of our homes year-over-year. As we start fiscal 2022, demand continues to be very healthy. We have averaged over 300 non-binding reservation deposits per week in the first five weeks of our fiscal first quarter, the same pace we have run at for many months now. On a per community basis, this pace is also consistent with the pace that we saw over the comparable five-week period last year. We are very encouraged by this considering how strong the first quarter of fiscal 2021 was. Demand strength is broad-based across both geographies and product types. We are benefiting from the wide variety of homes and price points that we now offer in more than 60 markets in 24 states. In the fourth quarter, we raised prices in nearly all markets and limited lot releases in about 20% of our communities. This has allowed us to capture price appreciation and also to manage production schedules. As discussed last quarter, in certain markets, more normal seasonal demand patterns have returned. Our ability to continue raising prices illustrates the deep strength of this housing market as well as the advantages we enjoy as America’s luxury homebuilder. This week, we raised prices again in all of our markets nationwide. The housing market is being driven by solid fundamentals, including favorable demographics, pent-up demand from over a decade of underproduction of new homes, low mortgage rates, and a tight resale market. According to a recent report, in the last full week of November, the number of homes for sale nationwide hit an all-time low and a third of homes sold in one week or less during the month of November. Additionally, many Americans have fundamentally shifted their lifestyles and reevaluated where and how they want to work and live. This is driving migration patterns to the Sunbelt and Mountain States where we have significantly expanded our presence in recent years. Our build-to-order model appeals to an affluent customer base that is placing more importance on their homes and gravitating to the personalization we offer in designing and finishing homes. They are not maxing out their mortgages and they are less susceptible to affordability issues. They have enjoyed years of price appreciation in their current homes and in the stock market. Since most of our move-up and active adult customers have a home to sell, the tight resale market gives them confidence that they can sell their home quickly and at an appreciated value that can be reinvested in their new home. And we continue to realize the benefits of our strategic expansion into the affordable luxury segment. In the fourth quarter, approximately 42% of our new contracts were in this segment. Over the past two years, nearly half of the lots we placed under contract were for our affordable luxury communities. We believe all of these factors will continue to contribute to strong and sustained demand for our homes in the years to come. While the environment for homebuilders remained healthy, this market is not without its challenges. Consistent with other builders and nearly every other company in the broader economy, we continue to face supply chain disruptions and labor constraints. These issues extend beyond just construction cycle times and impact land development and municipal approvals and inspections as well. While we have been able to more than offset cost pressures with price increases, these production constraints continue to extend cycle times and put pressure on deliveries. In our fourth quarter, we saw average cycle times increase by about two weeks compared to the third quarter. On average, it is now taking us about six to eight weeks longer to deliver a home than it took one year ago. We do not anticipate these labor and supply chain conditions will improve in the near term. Our delivery projections for full fiscal 2022 are based on production schedules that reflect current labor and supply chain conditions. They are not based on any assumption that labor or supply chain conditions improve. Similarly, our projected 250 basis point increase in adjusted gross margin does not assume any improvement in labor or material markets. Given the high degree of uncertainty regarding when supply chain and the labor markets will normalize, we believe these assumptions are prudent. Our land strategy continues to serve us well in this market. We are poised for significant growth in 2022 and beyond with a pipeline of owned and controlled land that will feed our projected 10% community count growth by the end of fiscal 2022. This projection is based solely on land we own or control today. We also have land under control today for meaningful further community count growth in fiscal year 2023. We continue to generate strong cash flow and have a healthy balance sheet with ample liquidity. This gives us the flexibility to continue to invest in the growth of our business while returning capital to our shareholders and reducing debt. In fiscal 2021, we returned approximately $455 million to shareholders through dividends and buybacks and reduced debt by approximately $400 million. We intend to continue to prioritize growth with a balanced approach to capital return and leverage. We are targeting buybacks of approximately $100 million per quarter in fiscal year 2022. With that, let me turn it over to Marty.

Thanks, Doug. In fiscal year 2021’s fourth quarter, we delivered 3,341 homes and generated revenues of $2.95 billion, which were up 13.6% in homes and 18% in dollars from one year ago. The average price of homes delivered was $883,000, benefiting from more city living and Pacific deliveries than had been anticipated. Fourth quarter net income was $374.3 million or $3.02 per share diluted compared to $199.3 million and $1.55 per share diluted one year ago. Our fourth quarter adjusted gross margin was 25.9% compared to 24% in the fourth quarter of 2020. This 190 basis point increase in our adjusted gross margin was due primarily to our ability to raise prices as well as favorable mix coming a quarter earlier than expected from the Pacific region and City Living noted above. SG&A as a percentage of revenues was 8.8% in the quarter compared to 9.9% in the same quarter one year ago. This year-over-year reduction in SG&A is due to both the leverage from increased revenues and tighter cost controls on items such as headcount, advertising, model home expenses and broker commissions. Joint venture, land sales and other income was $63.5 million during the fourth quarter compared to $11.2 million in the fourth quarter of fiscal year 2020 and approximately $20 million better than projected. The outperformance was primarily due to an asset sale in our Apartment Living business that occurred sooner and at a better cap rate than expected as well as better-than-expected performance in our mortgage and title operations. Our Apartment Living business had an active and productive year in fiscal year 2021. In addition to starting about a dozen new projects across the country, we sold five projects during the year with a total of 1,420 units that generated cash to Toll Brothers of approximately $106 million and resulted in $75 million of income from unconsolidated entities. We expect a steady flow of projects reaching stabilization and being sold each year going forward. Last quarter, we announced a strategic partnership between our Apartment Living unit and EQR. Under this arrangement, we expect to be able to improve the capital efficiency of our Apartment Living business. We continue to explore similar programmatic relationships for markets that are not covered by our joint venture with EQR. Impairments and write-offs totaled $10.5 million in the quarter concentrated in our north segment. We continue to generate strong cash flow with $1.3 billion of cash flow from operations this year. We ended the fiscal year with approximately $3.45 billion of liquidity, including $1.64 billion of cash and $1.81 billion available under our revolving bank credit facility. During the year, we invested $1.9 billion in land acquisition and development, returned $455 million to shareholders through share repurchases and dividends and reduced debt by approximately $400 million, lowering our net debt to capital ratio to 25.1% at fiscal year end. Last month, we repaid all $410 million of 5 and 7/8 notes that were due in February of 2022 at par. At fiscal year end, we also extended the maturity of both our $1.9 billion revolving credit facility and our $650 million term loan. Each of these facilities is now scheduled to mature on November 1, 2026, five years out. Our next significant public debt maturity is not until April 2023 when $400 million of senior notes becomes due. And after that, another $350 million of notes are due in November of 2025. Looking forward, we are projecting fiscal year 2022 first quarter deliveries of approximately 2,000 homes with an average price of between $865,000 and $885,000. 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, also consistent with seasonal patterns. For full fiscal year 2022, we are projecting new home deliveries of between 11,250 and 12,000 homes, with an average price between $875,000 and $895,000. In light of the challenges caused by labor shortages, supply chain disruptions and related issues with the municipalities, it is important to note that our delivery projections for the first quarter and full year are based on lower backlog conversion ratios than historical trends would suggest. We hope the construction environment improves in fiscal year 2022, but we are not factoring improvement into our guidance. We expect adjusted home sales gross margin in fiscal year 2022 to be approximately 27.5% for the full fiscal year. This is 250 basis points higher than 2021. We steadily increased prices over the course of fiscal 2021 and we expect those price increases to flow through our gross margin over the course of fiscal year 2022. In addition, we expect peak lumber prices from last year to be reflected in our first half deliveries. Therefore, we expect adjusted gross margin in the first quarter to be the low point of the year at approximately 25.5%, with a modest increase in Q2 followed by significant growth in margin in the second half of the year. We expect interest and cost of sales to be approximately 2.2% in the first quarter and 2.1% for the full year. The lower expected interest expense in our cost of sales is due in large part to the debt reduction actions that we have taken over the past 12 months. We project first quarter SG&A as a percentage of home sales revenues to be approximately 14.1% versus 14.9% one year ago. Included in first quarter SG&A is about $11 million or 63 basis points of our normal annual accelerated stock compensation expense that will not recur in the remainder of the year. For the full year, we project SG&A as a percentage of home sales revenues to be approximately 10.5%. Doug mentioned that we project community count growth of 10% by fiscal year end 2022. Based on the high number of community closeouts that we project for the first quarter and the typical seasonality of fewer community openings in November and December, we expect community count to dip to 325 at the end of the first quarter before steadily rising over the remaining course of the year to 375. Again, this projection is based on land we already own or control. Other income, income from unconsolidated entities and land sales gross profit is expected to be approximately $30 million in the first quarter and $100 million for the full year. We project the first quarter and full year tax rate of approximately 26%. Our weighted average share count is expected to be approximately 123 million shares for the first quarter and 121.5 million for the full year. With this all together using our midpoints we are guiding to fiscal year 2022 earnings per share of approximately $10. This represents a 50% increase in earnings per share over 2021. Now, let me turn it back to Doug.

Thank you, Marty. Before I open it up to questions, I’d like to thank the Toll Brothers team for their determination, creativity, and commitment to make this a record year. These are very exciting times for Toll Brothers. Tom, let’s open it up.

Great. Operator provided instructions. And the first question comes from Deepa Raghavan with Wells Fargo. Please go ahead.

Hi, good morning everyone. Thanks for taking my question. It’s a great quarter. It looks like Q1 is turning out pretty nice as well. But just looking at the guide for 2022 and looking at the gross margins, especially in the second half, you are talking about roughly 29%, 30% ex-cap gross margins exiting the year. Just curious, does it bake in the recent lift in lumber? Do you think that hits you by then? And I am curious how sustainable is that if, let’s just say, commodities don’t move from here. Is that what we should be expecting in 2023? I mean, it’s a hypothetical question, but is that what we should be expecting in 2023 if things were to stay here as these commodities don’t move from here?

Deepa, we believe we have properly budgeted and built in contingencies for the recent, relatively modest increase in lumber prices. We have increased our contingencies on our building costs that are within our budgets to cover lumber, to cover some labor pressure, and to cover some of the supply chain issues we have discussed. So yes, we are comfortable. I think we made it clear in our prepared comments that we believe we are very comfortable and we are being prudent in our guidance to assume that this market, the labor and supply market, does not improve. In fact, we have proper contingencies in to protect ourselves should lumber continue to go up or should there be any other pressure. With respect to 2023, we are just not going to get out that far. All I will say is, as I mentioned a moment ago, we are continuing to raise prices. This is a very strong market nationwide. We had another price increase this week. To date, through this recent cycle, we have been able to more than offset cost increases with our home price increases.

Thanks. Sticking on that pricing for my second question, your order pricing is up 26%. Your backlog pricing is higher. It’s in the teens, but you are calling for a closing ASP of up 5%. What sort of conservatism is baked in that? Is it primarily some production issues? Is there some slippage? I mean, you just talked about deposits being almost non-refundable deposits. So just curious, how do I reconcile the strong pricing trends we are witnessing?

Sure. It’s a great question and it’s a pretty simple answer. Historically, we do not normally deliver the price per home in the backlog, because the more expensive houses take longer to build. So as you saw, the fourth quarter’s sales price broke through $1 million; those more expensive homes are bigger. They are more complicated. They have more upgrades and options, and they just take a bit longer to build. So there is a lag on the upper end of the sales price. The faster turn comes from the affordable luxury and the less expensive homes. So while we are really proud of the price increases that are coming in the future revenue, that’s the reason why it doesn’t perfectly match what you see in our more recent sales and in our year-end backlog.

Okay. Sorry, if I can just one more part on the ASP. Closing ASP is strong considering that you’re mixing more towards affordable luxury. So within that price performance, are you able to provide color on how much is price versus mix?

We had a very strong quarter in our luxury segment this year and that has influenced the average price of sales in the fourth quarter. We expect moving forward more affordable luxury as a percentage of total, based on our community count and our land purchases.

Great. Thanks so much. I will pass it on. Great quarter.

Thank you very much.

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

Hey, good morning everyone. Thanks for taking my questions. Hey, Marty, very strong 2021 operating cash flow of $1.3 billion. I am hoping you can help us think through 2022 operating cash flow. You should see a nice jump in net income. You are transitioning more towards option lots and improving multifamily capital efficiency, but you are likely going to continue to build backlog as well as the cash usage. So, I’m hoping you can help us think through 2022 and then also a little bit of clarity on what you plan to do with the cash. I know Doug mentioned about $100 million in share repo per quarter, but any debt reduction, etc.?

So let me start with the second half of the question first, and then I’ll move back to cash flow from operations. We paid off $410 million of debt already in the first quarter back in mid-November. We have guided to $100 million of buybacks per quarter moving forward. We have a dividend commitment in the $60 million to $70 million range. So call that roughly $850 million of cash usage. That’s approximately what we might generate this year; it all depends on the land spend, which is variable based on the deals we are going to put into land banking arrangements and the deals that we have in the pipeline that may or may not close. So it will be another strong year of cash flow from operations. As we currently project, it may not be quite as strong as the previous year.

Okay. Okay. No, fair enough. And then, Doug, I am hoping on the material supply chain, it still remains tight. And you said your cycle times were up two weeks sequentially in fiscal 4Q. But post-quarter November, December, have you seen any improvement in the availability of any of key materials categories, or as of now have you started to see construction cycle times stabilize?

Truman, the answer is no, we’re not seeing an improvement. It’s tough. Here is the story: out of Boise for months we couldn’t get trusses. We got them, they were delayed and it really hurt construction. We have recently solved the truss problem in Boise only to find our HVAC contractor can’t give flexible duct to do the roofs on the houses. So you solve one problem and another one pops up. Every market has a different story. I have spoken with the CEOs of some of our largest partners, some companies bigger than Toll Brothers, and they have been somewhat encouraged by what they believe is some hope for them on solving their problems and speeding up some deliveries and having more consistency in what can be delivered. But overall, the short answer is no, it is not improving. We don’t see cycle time improving dramatically. I talked about six to eight weeks longer now than it was a year ago. But as we said, we think we’re being very prudent in not assuming that that gets better for the full year. I’m hopeful; I think by the second half of the year there is some reason to hope that we’ll see some improvement, but we are not building it into how we’re running this company or how we’re guiding the Street.

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

Thanks, Truman.

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

Great. Thanks, guys. Great job, obviously, encouraging comments and particularly, I guess, Doug, you used the word contingencies that you’ve baked in. That sounds a lot to me like conservatism but we will take it. I think that’s really encouraging. My first question relates to the supply chain issues. In answer to Truman’s question, you said you’re not seeing them grow dramatically, but are you actually seeing them grow continuing from end of October? We’ve been hearing for instance, that subcontractors have been willing to sort of warehouse parts when they become available so that if in the future they become unavailable they are still able to service their largest customers such as you guys. So wondering if you’re seeing that kind of stuff and whether, in fact, cycle times are stabilizing and maybe that’s the way to think about what’s happening currently?

Cycle times were up two weeks, as I said, from the fourth quarter over the third quarter. You are right. There are a lot of meetings going on and a lot of creative ways that builders and major contractors and suppliers are trying to figure this out. Stockpiling is one very good example. We’re getting tired of having to go to the Home Depot to try to find something that has to fill a gap for a week. Everybody is on it. I won’t go so far as to use the word stabilize, but I also don’t believe we’re going to see a continued jump, as I mentioned, of another two weeks in Q1 versus Q4 of 2021. Adding two months, six to eight weeks to our delivery cycle in a year is a lot, and it is the most acute issue that every builder is focusing on. So yes, I think we are all finding ways to try to, if not solve these problems, stabilize them. I’m fairly confident that it’s not going to get significantly worse. But I am less encouraged that it’s going to get better for some time. This is a very fluid situation, and every market is different. There are certain markets where the teams aren’t as concerned and other markets where it’s acute.

Yes. No, I appreciate it. I know it’s a crazy time out there. Related to supply chain and your reaction to it, I have a few questions. I was curious if you could give us a sense for how many start homes you started in the quarter? And how that compares with what you expect to do in the first quarter and what you did maybe in the third quarter? Same thing with how many unsold units under construction do you have at year-end? And do you think that’s going to increase in 1Q 2022? And then lastly, do you think your backlog can continue to rise from its current level over the next few quarters?

About 12% of our homes are spec, which means they are starting without a buyer. That was higher a few quarters ago when we talked about approaching 20%, but we’ve sold through those specs. We have huge backlogs of homes that have been contracted with a buyer that obviously have to take some priority because we have a contract on that lot. But we are absolutely committed to increase our spec inventory to increase our starts of spec homes over the next couple of quarters. As we begin to solve or at least stabilize some of the backlog turns and construction issues, you will see us increase the number of starts. In most cases, we will hold off on the sale of those spec starts until the houses are much further along and closer to completion. That is absolutely a strategy in place, and I am pushing to get that 12% spec number closer to the 20% we were at a few months ago. Right now, we’re selling about a pace of 40 per community, and we’re building at about a pace of 36. Historically, we’ve been able to build higher than 36, approaching 40; with the supply and labor issues, that’s tougher right now. But are we able to grow backlog? Yes, absolutely. What does that do to cycle times and delivery dates that we quote? That depends on what’s going on in the field and how quickly we can get houses built. We’re open for business. As I mentioned, 20% of our communities are on allocation, 80% are open, and we are seeing terrific demand and sales activity in all of our markets nationwide in all of our product segments: affordable luxury, luxury and active adult. We’re raising prices and on allocation where we need to be because the quota delivery date has pushed out. We sit today in a very strong housing market.

Good times. Thanks very much, guys.

Thank you, take care.

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

Good morning. Thanks, Doug, Marty for taking the questions. I wanted to follow-up on pricing. I think last call, you mentioned some of the normalization and how maybe the national increase had turned into as much a marketing tool as something to cover cost or expand margin. I’m wondering, as you’ve seen some stability or strength come back to the market this fall, how would you characterize the price increase that you’re putting out there this week in terms of magnitude or signaling effect?

Communities are free to raise prices whenever they want, subject to oversight. We don’t wait for a single national move. Many communities regularly raise prices. However, two, three, four times a year we do have a national price increase, which helps with sales. We also three times a year have a national sales event, which is a couple-week sales event and we can sell into that. This week, prices went up between one percent and five percent in our communities in all of our markets nationwide.

Okay. Great. Understood. Thanks for that. My second question, just on the cadence of margins, it makes sense given the moving pieces. Just in terms of what that implies for the second half, I think it depends on your definition of modest and significant when you’re talking Q2 versus Q3, Q4, but maybe something in the neighborhood of 29% in the second half of the year? Any further color on how should we be thinking about kind of the exit rate for gross margin in your guidance for 2022?

Directionally, you’re on track. Think 25.5% for the first quarter, a modest increase for the second quarter, then up into the upper 20s for the last two quarters, more so in the fourth quarter.

And would you say that your fourth quarter guidance, given the deliveries or the constraints that you’ve outlined, would you say the pricing that you’ve already put into effect that’s in your backlog is not yet fully coming through by the end of 2022? Is that fair?

That is fair. There are certainly some homes we’re selling today that will not be delivering until 2023.

Okay. Great, thank you.

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

Hey, guys. Good morning. Nice result, congrats. First question on the lot count and land acquisition environment: the sequential increase in your lot count was a lot more modest than we’ve seen in the last several quarters. I’m just curious if you could kind of talk about what your appetite is for land right now, what the environment looks like in terms of price appreciation on the lot side? Obviously, you guys have a lot of land, which is a great position to be in in this market. So are you maybe starting to pull back a little bit on the gas pedal? Or is this not something to read into?

I wouldn’t read into it. We’re very opportunistic. We’re obsessively focused on how we’re buying land and driving return on investment and return on equity. I’m proud that we’re now at 55% option. We set a goal of 45% option and we exceeded it. We set a goal of 50% option and we exceeded it. We’ll set a goal of 60% option and I suspect we’ll exceed that as well. Q4 was one of the biggest land spends we had in some time, and that coincided with when certain land we tied up previously closed and required a check. We’re going to continue to be opportunistic. Our footprint is bigger; we’re in more markets now. As we expand affordable luxury, there is more opportunity. We’re not shutting anything down. We’re not changing the underwriting. It’s still very disciplined. I wouldn’t read much into that one quarter. You’ll see us continue to increase option land, drive higher return on equity and grow.

And to add, of our roughly 36,000 owned lots, about 10,000 of them are sold and are in backlog. So compared to other builders with large backlogs, our years of land supply needs to be evaluated with that context.

Right, because we’re not a spec builder.

Appreciate that. Second question, thinking about Boise as an example: you were early to take advantage of that market and in the last six months several other public builders have entered. Does that create competitiveness or incentives that change market dynamics when you have a number of builders entering a hot market over a short period?

Boise is a good example. We couldn’t keep it a secret because we were doing so well. You prefer when other big publics aren’t in the market and you have a dominant position. We have a head start there and many thousands of high-quality inexpensive lots. There, we can be a bit more conservative in our land buying because of our land position. As markets become more competitive with larger players, you have to find your niche. We’re good at that. We’ll come in at a slightly higher price. Even our affordable luxury is a bit higher price. We won’t be all spec. We’ll offer choice. People want some level of choice, even at a lower price. We work hard in competitive markets to find the niche and I think that’s distinct to Toll Brothers. As markets get loaded up with bigger builders, they become more competitive, and you have to be more careful and find the right opportunities that fit your business plan.

Makes sense. Third question: with cycle times elongated and the fact you’re never going to be as spec-focused as other builders, have you seen any sign of consumer pushback, especially at the affordable luxury price point, where buyers needing to move quickly might be turned off by extended cycle times?

Rents are up dramatically and interest rates are still very low, so I’m not hearing many people say they’re disappointed by a longer delivery timeline and will instead rent. They may take a 12-month lease while waiting for their home to be completed. Some buyers do become concerned when delivery dates get pushed out and they may look elsewhere, but the resale market is so tight I’m not sure they’ll find a home there. Other builders are busy as well. Could there be some new-home spec inventory? Possibly. But would buyers choose to wait to get exactly what they want and modify it with Toll Brothers? Many do. So there is modest pressure, but we’re not seeing it to an extent that affects demand, pricing power, or our sales pace.

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

You’re very welcome. Take care.

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

Hi, thanks very much for taking my questions. Good morning and congrats on all the progress and the great results. First question, I just wanted to circle back: it’s not easy to talk about 2023 and 2024. But you’ve had a couple of questions about the exit rate on the gross margins. One of the big concerns for the sector overall is the sustainability of those margins as they approach prior peaks. How are you thinking about the potential tailwinds and headwinds as you think about 2023 and 2024 relative to the sustainability of that exit rate you’re looking at in 2022?

I can say that all of our geographies and product segments are seeing gross margin expansion today, and that is with contingencies we’ve put in place to cover a certain level of cost increases and uncertainties. I’m not going to predict out that far, but at this moment all geographies and product types are seeing gross margin expansion on the next home sold.

Okay. I appreciate that. Secondly, you mentioned your nonbinding deposits for the first five weeks continuing pace over the last few months and similar to what you saw last year. Your absorption rate on average for fiscal 2021 was in the low 3s per month. Is that a good way to think about the business during the upcoming year, assuming current demand trends persist? And would you expect to see within the year the higher rate approaching almost 4% per month in the spring? Given the fact only 20% of your communities are on allocation and the rest are open, is that the type of sales pace to think about over the next 12 months?

We were delighted that our five weeks of deposits equaled the same five weeks at the end of calendar 2020, which was a very strong period. It’s only five weeks, but matching a period a year ago when sales were up dramatically is encouraging. The cadence for the year: December and January are not the strongest months for sales, then February and the spring selling season kicks in. Last year there was little seasonality and we kept selling throughout. All I can say is we have the land, community count growth coming, a wide geography and price point mix, and we’ve had a terrific start to Q1.

Great, thanks so much. Good luck.

Thanks, Mike. Take care.

And our last question comes from Rafe Jadrosich with Bank of America. Please go ahead.

Hi, good morning. It’s Rafe. Thanks for taking my question. First, you mentioned lifestyle changes and migration shifts in your prepared remarks. I just wanted to ask what gives you confidence that this is a sustainable trend, and it’s not just temporary. And within that, can you talk about the demand you’re seeing for second homes?

I’m sorry, I misunderstood the first half of the question. Marty, can you clarify the consistency of the migration patterns and why they are long-term?

You’re asking why migration patterns that we’re seeing should be long-term and consistent.

We look at U-Haul pricing charts: they show real demand for moves from high-cost areas to lower-cost, sunny areas. Those trends existed before COVID and have accelerated and solidified. People now have more flexibility in where they work, and many want to live where they prefer rather than be tethered to a job location. Early in the pandemic we emphasized that the home became the most important place in people’s lives, and that is real. People are spending more time there and designing homes to their lifestyles. Migration trends to the Sunbelt and Mountain States existed before COVID and will likely outlast this moment. In some states like Idaho, Florida, Texas, North Carolina, Nevada, Arizona, Colorado, roughly 40% of our buyers are coming from another state, and that is likely to continue.

Thank you. And just to follow up: you spoke a little bit about how your affluent customer is less concerned about affordability. Mortgage rates have stayed stable and low, but if they do move up, how do you think about the willingness of your core affluent buyer to trade up?

We ran the math: if rates go up by 150 basis points, roughly five percent of our backlog would have to figure out either mortgage alternatives or go to adjustable products, and that’s because about 20% of our buyers are all cash. Buyers who will mortgage have an average LTV of about 69%; they have equity and have benefited from stock market gains. So while Toll Brothers is not immune to affordability issues or higher interest rates, we are in a much stronger position because of our buyer profile. Also, conforming loan limits have gone up, which moved about six percent of our backlog from jumbo to conforming, and that’s a helpful tailwind.

Great. Thanks for all the color.

You’re welcome.

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

Thank you, Tom, and thanks, everyone, for your continued interest and support. We wish everybody a wonderful holiday season and a healthy and happy 2022. Thanks.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.