Toll Brothers, Inc. (TOL) Q3 2026 Earnings Call Transcript

Good morning, and welcome to the Toll Brothers 3rd Quarter Fiscal Year 2026 Conference Call. All participants will be in a 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 2. The company is planning to end the call at 9.30 when the markets open. During the question and answer, 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 Doug Yearley, Executive Chairman. Please go ahead.

Thank you, Betsy. Good morning. Welcome and thank you all for joining us. With me today are Carl Mistry, Chief Executive Officer, Greg Ziegler, Chief Financial Officer, and Seth Ring, President and Chief Operating Officer. During today's call, I will provide a brief overview of our third quarter results and current market conditions. Carl will discuss our operating performance and trends across our markets, and Greg will review our financial results and our outlook. Before we begin, please note 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 pleased with our third quarter performance. In a challenging housing market, we continue to produce solid results. We delivered 2,662 homes and generated $2.6 billion of home sales revenue, exceeding the midpoint of our guidance in both units and dollars. Adjusted gross margin was 25.6 percent, or 35 basis points better than guidance, and we generated 280.1 million dollars of earnings, or $2.97 per diluted share, which also beat guidance. Net signed contracts increased 5 percent compared to the third quarter of last year. Demand from luxury buyers remained relatively resilient, and we continue to benefit from the expansion of our community count. While orders improved, the overall sales environment remained subdued, with low consumer confidence and elevated mortgage rates continuing to weigh on demand. Consistent with our longstanding approach, we continue to prioritize price discipline, and margin performance over sales pace, a strategy that we believe is particularly important in the current environment. We also remain focused on our luxury move-up customer and build-to-order business, where as the nation's leading builder of luxury homes, we are uniquely positioned to serve affluent buyers across a wide range of markets and product offerings. Over our nearly 60-year history, we have built a tremendous brand and a differentiated business model with advantages that include highly desirable community locations, distinctive home designs, extensive personalization opportunities, and exceptional customer experiences. These strengths have helped us attract a customer base with greater financial resilience, one that is less affected by affordability challenges due to higher income levels, substantial existing home equity, and sizable stock portfolios. Our third quarter results further demonstrate the strength of our business model. Our strategy is durable precisely because it is built on differentiated capabilities that enable us to create value even when market conditions are less favorable. And while we remain focused on executing in the current environment, we are well-positioned to accelerate growth, margins, and returns when market conditions eventually improve. During the quarter, we returned approximately $231 million to stockholders through dividends and share repurchases while continuing to invest in the growth of our business through disciplined investments in new land. We continue to project significant operating cash flow in 2026 and are increasing our projected stock repurchases for the year to $700 million, up from our previous projection of $650 million. We remain on track to deliver 8% to 10% community count growth in fiscal 2026, which will be our third consecutive year of 8% to 10% growth. Our existing land position supports similar community count growth in fiscal 27 and beyond. Finally, I note that our balance sheet remains very strong with ample liquidity, low leverage, and substantial operating cash flows. Our financial strength will enable us to continue investing in growth while returning capital to our stockholders. With that, I will turn the call over to Carl. all.

Thank you, Doug, and good morning, everyone. As Doug mentioned, our third quarter, we beat on both the top and bottom lines and positioned the company to deliver another year of healthy profitability and returns in fiscal 20. Our adjusted gross margin was 25.5 basis points disciplined execution of our sales strategy and our more efficient operations. We signed 2,508 net agreements in the quarter for 2.5% in units. This increase was once again driven by the successful execution of our growth strategy. At quarter end, we were selling from 471 communities to 420 at the end of the third quarter. We remain focused on opening new communities across the country and continue to expect to end the year with 480 to 490 selling year-to-date performance. We are reaffirming all of our full year, including an adjusted gross margin of 26.1% and home sales revenues of approximately 10.5. In addition, we now expect to be between $995,000 and $1 million. At the midpoint of our salary, we generate approximately $53 million of additional revenue. The demand environment remained challenging. These conditions have continued through the first two and a half weeks of our fourth quarter. Against this back percent year over year, modestly reduce incentives and maintain our margins in the quarter. However, geographically, stronger markets included Florida, Idaho, Las Vegas, and Reno markets included Atlanta, Francisco, and our luxury move-up business continue to perform the best. And as Doug mentioned, we are leaning into this core segment where we see great deal flow that meets our high. Our move-up business accounted for approximately 61% of home sales revenues, and our luxury first-time and move-down businesses represented approximately 23% and 16%. Not only does our luxury move-up business remain the largest contributor to revenue, the highest margin among our buyer segments. Importantly, in this market, the higher the price of our homes, the lower the incentive as a continued strength of our luxury business reflects the resiliency of our affluent customer base, communities, and product offerings, and the appeal of the We also continue to carefully manage specs on a community-by-community basis, while actively managing the composition of our spec inventory. During the third quarter, we continue to reduce our inventory of spec homes. Average 1.9 homes per community, down from two at the end of the second quarter, and 2.8 is significantly higher than the margin on finished specs. Our objective is to sell spec homes as early as possible in the construction cycle. When incentives are typically low. Personalization remains an important competitive advantage for Toll Brothers as design studio upgrades are highly accretive. As Doug mentioned, during the quarter, we continued to carefully balance sales pace, pricing, and incentives, approximately 8% over the past year, and consistent with our strategy of selling specs, buyers can sell personally. Approximately 25% of our buyers paid all cash. Buyers who financed their purchase, the average loan-to-value was approximately 69 percent, highlighting the financial strain. We continued to realize the benefits of our homes remain stable at approximately nine months. It's generally about one month shorter. All our building costs remain relatively flat in the quarter, even as the cost. We owned or controlled approximately 75,500 lots, 58 percent of which were optioned, $152 million on land acquisition. We remain focused on securing high-quality land at attractive returns, with a continued emphasis on capital efficiency.

As mentioned in the third quarter, we delivered 2,662 homes and generated home sales revenue of $2.65 billion. We earned $374.8 million before taxes and $280.1 million after $0.07. The average delivered price of homes in the quarter was approximately $996,000, above the high end of our guidance range, and driven primarily by mix of luxury move-up. We signed 2,508 net agreements for $2.5 billion in the quarter, up 5% in units. The average price of contract was $1,003,000 versus $1,010,000 in fiscal 2025. The cost margin was 25.6%, or 35 basis points better than our guidance of 20. The outperformance was also driven by mix across the business. home sales gross margin totaled $17.7 million in the quarter. Approximately $5 million of these related to pre-development costs and option write-offs on deals we dropped that no longer met our underwriting standard 0% in the third quarter in line with our guidance. $15 million in the... Our cancellation rate was 2.6% of beginning quarter backlogs as compared to 3.2% in the prior year period in last year's third quarter. We are pleased with our industry low cancellation rate. It highlights the attachment our buyers develop while personalizing their new homes in our design studios, as well as the financial commitment they make in the form of a significant down payment. Our tax rate in the third quarter was 25.3% compared to guidance of 26.3%. We ended the third quarter with approximately $3.3 billion of liquidity, including $1.1 billion of cash and $2.2 billion of availability under a revolving bank credit. Our net debt-to-capital ratio was 15.6% at third-quarter end, compared to 19.3% one year ago. Turning to our guidance, I will remind you that our projections are subject to all of the caveats regarding forward-looking statements included in our earnings release. We are projecting fiscal 2026 fourth-quarter deliveries of $3,450 to $3,550 and $95,000 and $1,005,000. For the full year, we are narrowing our settlement range and increasing our average delivered price range. We now project between $10,500 and $10,600 delivered homes at an average price between $995,000 and $1 million, which equates to an approximate $53 million increase as a revenue guidance. We continue to expect a full-year adjusted gross margin of 26.1%, and of 26.0%. We expect interest and cost of sales to be approximately 1.1% in the fourth quarter and for the full year. We project fourth-scale revenues to be approximately 8.1%. For the full year, we continue to project an SG&A margin of 10.1%. data identities and profit in the fourth quarter is expected to be approximately $30 million and approximately, we project the fourth quarter, approximately 26.0%, and the full year rate to be approximately 25.10, to be between 480 and 490, a 10% increase versus the 446 at fiscal year-end 2025. Unweighted average share count is expected to be approximately $94 million for the fourth quarter and $95 million for the full year. These amounts reflect our increased projection of $700 million of share repurchases for the full year. Through the end of our third quarter, we have already completed $433 million.

Now, last month, we marked an exciting milestone for Toll Roaders, celebrating our 40th anniversary as a publicly traded company on the New York Stock Exchange. I'd like to thank all of our toll employees for their contributions, their passion for our business, dedication to our luxury brand, and commitment to our continued success. Let's see. I think with that, we can open it up to questions.

We will now begin the question and answer session. As a reminder, the company is planning to end the call at 930 when the market opens. During the question and answer, please limit yourself to one question and one follow-up. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. The first question today comes from John Lovallo with UBS. Please go ahead.

Morning, guys. Thanks for taking my questions. The first one is, you know, your outlook implies a 30 percent plus quarter over quarter increase in deliveries at the midpoint. And that's going to drive about a 40 basis point increase in gross margin sequentially. Now, understanding that you've exceeded your gross margin outlook in 15 consecutive quarters by an average of 65 basis points on average. I mean, how much conservatism is baked in here, given just the uncertainty in the macro?

Hey, John, good morning. It's Carl. Carl, let us talk a little bit about Q4 and how we're going to get to the number. I'll let Greg talk about the margin. 2,700 of our projected 3,500 homes for the midpoint of the quarter and already in our backlog, which leaves 800 homes that need to sell and settle. About 900 finished specs. Many of those will be part of that 800. And then nearly 1,000 are closed by the end of Q4. So we feel great about the $3,500. But, Craig, do you want to talk about the margin?

Yeah, John, thanks for asking about Q4 gross margin. The dynamics at play there are that we think we're going to have a little positive mix coming out of certain regions, to be specific, our north and our Pacific region. And the buyer segment side, it looks like we'll have a little bit more luxury move-up settlements. Also, we talked about this last quarter, but the specs that are going to deliver in Q4, we sold them at an earlier stage of construction. And as Carl mentioned in his prepared remarks, that is helpful to gross margin. So those are the dynamics at play for Q4.

Okay, understood. And then on the 8% to 10% community account growth expected in this year, but also now it's a fiscal year 27 and beyond. I mean, I guess the question is what would sort of derail this expected growth? I mean, in other words, if the market were to remain soft next year, which is not our expectation, would you pull back on community account growth at all, or is that plan pretty much in place?

No, John. We feel very good about the 8% to 10%. Many of those communities are well underway in a lot of cases, model homes under construction. The current market environment would not lead us to modify that, even a softening market. We're committed to getting these communities.

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

Yeah, thanks very much, guys. Appreciate all the color so far. I guess my first question relates to your land supply. Your owned lot count has continued its steady decline on a year-over-year basis, even as your community count has continued to grow. So I'm curious, how much lower do you think you can take that owned lot count given your continued growth plans?

Thanks for the question, Steve. Yeah, we're happy with the progress that we've moved that back. Our own land after backlog is sort of in this one and a half to two. And I think the reason we've been able to execute this way is we have been land banking now for a few years, still carefully and modestly. But as you know, that contributes to more in the option to control a bucket versus owned. Oftentimes at a less competitive table, acquiring land, we're able to get sellers more efficient.

So in other words, I assume you're saying basically you think you can continue to take it down. I just want to be clear on an absolute lot basis.

Yeah, I think that's right. As the company grows on an absolute lot basis, it may turn the other way. But the one and a half to two year.

The next question comes from Alan Ratner with Sellman. Please go ahead.

Hey, guys. Nice quarter. So, you know, obviously, given your commentary, it sounds like luxury move up is still an outperformer for you guys. You know, the last month or two, it seems like there's been a few headlines out there suggesting the K-shape economy might be coming to an end and talking to some move up builders. You know, anecdotally, we're hearing a little bit more chatter about buyers either having difficulties selling an existing house or just concerns about equity embedded in their existing home. So I'm just curious, you know, over the last month or two, have you seen any, you know, even incremental shifts suggesting that, you know, outperformance we've been seeing for the last several years at luxury might be coming to an end or at least softening a little bit?

Thanks, Alan. It's Carl again. The short answer is no. We haven't seen any sort of material change. As we outlined, 25% of the buyers still paying cash, 70% loan-to-value is extremely sticky. We've actually been able to use prices. We feel really good about how to build an infrastructure in these unique locations. Choice and architecture and the customer experience give us that differentiated edge, even over the custom builder community.

That's great to hear. Can you just refresh my memory how you guys handle contingent sales? So if a buyer has an existing home to sell, how you treat that, both from an accounting standpoint and whether you refund deposits if they ultimately can't sell their house?

Yeah, we do not offer the traditional home sale contingencies you're referencing. We don't do that at all. So if we have a finished spec and a customer puts money down on a home that might close in 30 days, internally we look at that as a contingency, even though that money is not refundable. but from an accounting perspective, it is not an agreement in our system until that.

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

Hi, thanks for taking my question. Just to delve in a little bit more on the current dynamics, you mentioned the challenging market conditions and the first couple weeks of the quarter have remained challenging. Can you just give us a flavor for maybe some quantification around that through the quarter in August, and especially, you know, the last couple of years, you've had kind of an abnormal sequential uptick in your sales pace in 4Q versus 3Q, and I think normally it's down more like low double digits sequentially, so just, you know, if you could help us a little bit more on how we're supposed to interpret that, that would be great.

Yeah, hey, Mike, it's Carl again. So I'll give you a little bit on Q3. We saw the typical step up within the quarter. So May to June was better, June to July. You know, after the 4th, there's generally a little bit more muted. Certainly the mortgage rates ticking higher in July, consumer confidence going the other direction and political uncertainty. We had greater expectations for July. And that has, We've sort of continued on so far in Q4, but I'd caution you to draw too much of a conclusion there. We're two, two-and-a-half weeks into August, and so it's just too early.

Understood. And then just shifting gears to the margin side, I appreciate the efforts in terms of the mix of specs and then the overall mix dynamics and the incentives seem to be suggesting that there's some momentum some momentum there um when you think about kind of the i guess two parts the the beat in the quarter and then for a few guys it's slightly light of where you previously expected how much of that is a mixed dynamic in terms of kind of pulling forward some stuff into 3q and how much is you know potentially in light of um the past month or so maybe a bit more of a reduction in expectations on what those spec margins may provide in fourth quarter.

Hey, Mike, it's Greg. Thanks for that question. It's the former. It's really just timing of settlements. All the dynamics we laid out for you 90 days ago and how we thought the second half of fiscal 2026 would play out remain intact. It's just that we had some timing differences in terms of when some of the, whether it was geographic or buyer segment or spec settlements actually hit in Q3 or now expect to hit in you for. That's good.

The next question comes from Rafe Jadrosic with Bank of America. Please go ahead.

Hi, good morning. Thanks for taking my questions. First, can you just talk about the impact from Buffington in the quarter and what's expected in the fiscal fourth quarter? I think you had some communities that opened. I'm not sure if there are any sales and if there's any impact from absorption from that. And is there any purchase accounting in the gross margin?

Hey, Rafe. We are super excited about Buffington. They joined our team in May. We've had a typical summer. They have contributed with about half a dozen open communities. The guides are confirming. I think it was around 30 sales.

First accounting, yes, first accounting will have that drag on the gross margin. It's factored into the guidance.

Okay, thank you. That's helpful. And then on the starts outlook, it looked like the fiscal third quarter, at least pre-footing was up, I think, over 30% year-over-year. This is pretty big acceleration. Can you just talk about what's driving that, like why you accelerated, and then what's expected for the fiscal fourth quarter?

Rafe, you know, as we outlined, we still manage this on a community-by-community basis and week-to-week. And I think over time we continue to improve and refine our process here. So, you know, we outlined we have reduced finished specs, which we're now down to 1.9 towards the end of the selling season and the end of the summer. And so you begin building specs again to get ready for a spring. As you know, our spring selling season starts in mid-January and is going to go through Memorial Day. So some of that is timing to meet seasonality of demand.

The next question comes from Sam Reed with Wells Fargo. Please go ahead.

Thanks so much, guys. I wanted to drill down a little bit more on some margin topics. You mentioned that there was a bit of a pullback, it sounds like, in incentives. Some of that sounds like it's mixed. So could you also talk to perhaps any tweaks in your incentive buckets that might also be influencing that?

Hey, Sam, it's Greg. And no real tweaks in the incentive bucket, meaning our buyers are not taking mortgage buy-downs with any greater velocity or anything like that. So So there's nothing, you know, really that changed there. Incentive that appears to us can be around mix of settlements and which home sites were sold with which incentive, but no big shift there.

That helps. And then maybe switching gears to lot costs, you know, just some early perspective on what lot costs could potentially look like into next year. Lot cost inflation, I guess I should say. You've got some good visibility based on some of the communities that you're opening, so we would just love some perspective on the type of lot inflation we should be potentially on the lookout for.

Yeah, Sam, I'll give you some detail here to help. About 70% of our land spend so far year-to-date has been in our sort of core luxury segment. And we like there. Those are the deals that are working. The land inflation question is a tough one for us because we don't buy a lot of commoditized land, nor do we buy too much land in master plan communities phase after phase after phase where we can point to prior year or prior year. Hard for us to say.

The next question comes from Trevor Allenson with Wolf Research. Please go ahead.

Hi, good morning. Thank you for taking my questions. SG&A has been hovering in the 9% to 10% range for the last several years. That's a bit better than where it was pre-COVID, but you also have some good community count growth coming online next year and then also in years after that, it sounds like. So how do you expect SG&A to trend over the next couple of years? Is 9% to 10% a good range for you, or what's the right level of SG&A moving forward?

Hey, Trevor. Yeah, I think that's right, 9% to 10%. And, you know, we built this company to build more homes than we are today with the infrastructure and people we have in place. So the 10% that you see today is in an environment where absorptions are below. In a more normal environment, I think we could be squarely in the nines. But I'm really pleased with the effort the team has put forward to get us to where we are.

Okay. Thanks for that color, Carl. And then second question on vertical costs, I think the general commentary from most builders have been able to push back on some of these building products' price increases. So maybe excluding lumber, have you all also been able to fend off the price increases? And for products that you have either annual or multi-year contracts for, is there a risk for a bigger step up in pricing once those contracts roll over, which potentially could drive some input cost inflation for you guys into 2027?

Hey, Trevor. This is Seth. Our build costs are flat, slightly up in a potential headwind, but those cost increases have been offset with other modest reductions. And so far, we've headed off other longer-term cost increases. So, build costs are flat is our response there, Trevor.

The next question comes from Jay McCandless with Citizens.

Please go ahead. hey good morning everyone um thinking about community count for next year anything from a geographic standpoint worth calling out you know either a little heavier mix on on luxury move up or or more focus on the pacific or the north segment uh yeah jay next year uh mountain regions uh where we've been investing for some time uh people have been moving and i do think the luxury segment that's great thank you and then um second question i had just thinking about development costs, higher diesel costs, et cetera, what are y'all starting to see there on the horizontal development side? Any type of cost increases, fuel surcharges, anything we need to think about from a gross margin perspective?

You know, Jay, it's surprisingly quiet. We have not heard too much about it from our land development teams.

The next question comes from Ryan Gilbert with BTIG. Please go ahead.

Hi, thanks. Good morning, guys. I wanted to ask about spec mix and apologize if I missed this, but I think generally you've been targeting around 50-50 spec versus built-to-order, but I heard more of a focus potentially on built-to-order. So should we expect that mix to shift more to built-to-order in the quarters ahead?

Ryan, we're about 52% of settlements in the quarter were spec that represented about 44% of revenues. You know, we've messaged before, we're happy with this 50-50 mix. It's going to flex up a few percent in either direction. Again, we build this up community by community. I don't think you can read too much into a longer-term change.

And then order growth in the north has been growing at a pretty substantial pace. It seemed like it decelerated a bit in the third quarter. Anything to call out in terms of, you know, why orders would be decelerating there?

No, nothing specifically. I think they're a victim of their outperformance. They're still the best-absorbing region by far. So it's still doing great. It's just, it's their relative performance when it's modestly.

The next question comes from Susan McLaurie with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. My first question, good morning. My first question is on the capital allocation side. It's nice to hear you incrementally raising the guide for the buybacks as we get into the end of this year. Can you just talk generally about how you're thinking of capital allocation and shareholder returns as we start to think about fiscal 27?

Sure, Susan. You know, first and foremost for us, we still have the opportunity, and you've seen that reflected in our community account growth now for several years and our guidance for next year, and we think beyond. So first and foremost, as we think about capital allocation, it is growth. It's smart growth. That will continue to be our focus where we know we have a lot of opportunity. I think after that, we've worked really hard. Balance sheet we're very proud of. And so our leverage is down materially over the last several years, and we're just in a very good place. And then operations that we generate, we've been able to repurchase shares, and this year fortunately been able to improve that guidance down to $700 million. And then our dividend, which has now been around for some time, is there and continues to grow on an annual basis. So that's how I think about the latter.

Okay, that's helpful. And then maybe thinking more broadly, one of the trends that we're seeing within the industry overall is more of your peers are moving into the bill to order and a relatively higher price point just given the macro and the state of the consumer. Can you talk about how you're able to leverage or establish presence in that kind of an operating strategy and what that means for toll as we think about the evolving landscape?

Hey, Susan, this is Doug. I'm going to take this one. I've enjoyed listening to these guys answer all the questions, and I guess it's a good one for me to step in on. You know, we've heard this in the past. The other builders that tend to focus on production at a lower price point and really think about merchant home building have, on occasion, when market conditions suggest they should, move up in price. And respectfully to my good friends in the industry, over time the tail goes between the legs and they run back down to entry. It is a very difficult business. We have spent 60 years differentiating ourselves. We have the brand in the industry. We have 45-plus design studios in every market that are spectacular where our clients go and are blown away by all the choices they have to customize their homes. We know how to buy land at the corner of Main and Main in very special locations. And so I totally understand it. I understand that our buyer is able to weather this more difficult market because of their affluence and their strength, but we have no concerns whatsoever. We will continue to differentiate ourselves and continue doing the business that we have always done and will continue to do.

The next question comes from Alex Barron with Housing Research Center. Please go ahead.

Yeah, thanks and good morning, guys. Yeah, I was hoping you could expand on Buffington and M&A in general. You know, how did you find this opportunity? And how do you think in general about M&A for Toll Brothers going forward?

Buffington, again, we're super excited. We got to spend some time there in the spring and understand Northwest Arkansas. I think we were a great fit for that team for a couple reasons. The luxury segment in the market, and that was certainly attractive to us. And so when the introduction was made, it felt right for them as well. We did not have an operation in Arkansas, so we were fortunately able to bring on all employees, now our colleagues. And so we like what we have done now for 30 years. I think we're up to 16 of these acquisitions that we've done. And we like that. It certainly seems as evidenced by some of the very large transactions and a few of our mid-cap friends moving to the private sector that consolidation in the industry is here and could continue. We like our playbook, both on opportunities with companies that you shouldn't see any difference from us as it relates to M&A. We like how we've been doing it.

And when it comes to the trend for incentives and margins, what's your outlook, I guess, as far as your crystal ball can tell you?

It's Doug again. You know, we're running at a 26 margin with an ROE that we're very proud of in what is a tough market, and we're now four years in to a tough market. Our incentives at 7.5% or 8% are elevated. Our sales pace per community is below historic norms and below the high 20s, even into low 30s that we've achieved in the past. So the move up and build-to-order business is at the moment running at a significantly lower incentive, but not as low as it was in a better market. And so I look at where we're operating today in this difficult market, achieving the ROE we're achieving, achieving the gross margin at 26. I know we're getting closer to the end of this cycle. I've been doing this for 36 years, and these cycles run, and time is on our side because four years in is long. I know every cycle has its own dynamics, but as I said to the guys yesterday, that light at the end of the tunnel, I am sure, is not a train coming at us anymore, but it is light. I just can't tell you when we're going to get there. But when we do, and when those incentives come back closer to historic norms and when those sales faces go back up higher to more historic norms, this margin and these returns are going to grow. So we are in a really good position. We have the land to show community account growth. We are operating so efficiently. um it is really an exciting time not for today selling the house necessarily but for where we are headed and how we are positioned and so i am not here to call the bottom but i am really proud of the returns we are generating a tough market and look out when things improve the next question comes from Matthew Booley with Barclays.

Please go ahead.

Morning, everyone. Thank you for taking the questions. I wanted to ask on the gross margins into 27 to the extent you're willing to outline some expectations. I mean, even without a hard guide, just any, I guess, detail on sort of the pluses and minuses across mix that we should consider into 27? I heard you earlier on the spec mix expectations, but whether it's regional mix, community mix, land, lot costs, and everything you just talked about on incentives, any kind of way to sort of point the direction into early 27? Thank you.

Hey, Matt, it's Carl. I don't think we're ready to do any sort of, I understand your question. You know, I pointed to what we've said before, maybe building on Doug's commentary there, we think in a normal environment, 26% to 28% gross margins is now how this company is built. We structurally changed how we started new land acquisition over 10 years ago that has now been in place and is contributing to our outperformance today. But as far as giving you specifics for next year, we're not ready to do that.

Okay, fair enough. And then secondly, just on ASP, obviously kind of looking at the backlog where it is, and it looked like obviously fairly stable, if not growing order price this quarter. But as you look out into 27, thinking the same similar type of question around the mix side of it, communities and regions, et cetera, is there a view that the order, or excuse me, the delivered ASP can continue to grow similar to the way it has in 2026?

Yeah, I think we will share that. I think it builds on what I said earlier about our located and with, we do think that 2027 could be up.

The next question comes from Jade Romani with KBW. Please go ahead.

Hi, this is Jason Sapshalam for Jade. Thanks for taking the questions. So just to hit on the 8-10% community count growth that you expect to continue into 2027. How much of that would you expect to translate to stronger delivery growth to review them in isolation or as correlated?

Hey, Jason, it's Greg. You know, that one's really hard because we're, you know, we can't give you guidance on what that throughput for community might look like. It's all back to the comments that Doug and Carl have mentioned on how excited we are for how well positioned the company is And as the market improves over time, then we'll see that through our results.

And then just on mix, as you continue to emphasize luxury move-up, it would be helpful to quantify, like, the differences in gross margin, the spread between the various segments and luxury move-up the first time and move down.

Yeah, Jason, I think we're going to have to get some homework and get back to you on that. What we will say, and I touched on this during the script, is price performing from a margin perspective, which is move-up, core move-up luxury. Actually, that we know to be the case, but we'll have to get back to you if you want to.

I think it's important to point out, and it goes back to my earlier question about other builders, focusing a little bit more on the move-up business. our average luxury move-up home is selling for $1.35 million, and that's 61% of our business. And that is the business that built this company, and we are seeing more and more land opportunities for that niche, which is so important to us. And more of that, of course, is build order than it is spec. While we do spec some move-up, of course, naturally more of the spec occurs at the low lower price point. So when the other builders talk about wanting to get in to move up, and I know many of them already do, some move up, I don't think they have in their minds 1.35 million as their average move up price. And so even as they move up or as they want to spend more of the pie in that part of the business, it's really not approaching, you know, the land that we are buying because it really comes down to who are we competing with for the land that we want to buy to grow our business. And so, you know, I think we are, our move-up is just a different business than the move-up that the others are even contemplating spending more time in. And that business is growing for us as we see more and more of those land opportunities. It is the highest margin. We are more and more focused on it. There's less competition for that land. Towns want us to build it because of how we operate. So we're a bit more accepted into difficult towns because we are told with our brand. And so I just think it's important to clarify that, you know, that's a big number, $1.35 million for 60% and a growing part of our business.

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

No, that's it, Bethy. Thank you, everybody, for an interest in our company. Have a great rest of your summer. We'll talk to you again at the end of the year.

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