Earnings Call Transcript - TOL Q2 2025

Operator, Operator

Good morning, everyone, and welcome to the Toll Brothers Second Quarter Fiscal Year 2025 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please limit yourselves to one question and one follow-up. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Douglas Yearley, CEO. Please go ahead.

Douglas Yearley, CEO

Thank you, Jamie. Good morning. Welcome, and thank you all for joining us. With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP, Treasurer and Head of Investor Relations. As usual, I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the availability of labor and materials, inflation and many other factors beyond our control that could significantly affect future results. Please read our statement on forward-looking information in our earnings release of last night, and on our website to better understand the risks associated with our forward-looking statements. I am pleased with our performance in the second quarter. In what proved to be a challenging environment, we met or exceeded our guidance across all key metrics. We delivered 2,899 homes at an average price of approximately $934,000, generating record second-quarter home sales revenue of $2.71 billion, or $236 million better than the midpoint of our guidance. We posted an adjusted gross margin of 27.5% and an SG&A margin of 9.5%, which were 25 and 80 basis points better than guidance, respectively, and earned $352.4 million, or $3.50 per diluted share. Adjusting for the $175 million pretax land sale gain we recorded last year, our second quarter earnings per share were a record. We believe these results highlight the strength of our broadly diversified luxury product offerings, our balanced portfolio of build-to-order and spec homes, and our strategy of prioritizing sales base and margin in the current environment as we seek to maximize returns. They also reflect the financial strength of our customers. Our results and the strength of our backlog also provide us the confidence to reaffirm all of our guidance for fiscal 2025, including home sales revenue of $10.9 billion at the midpoint, an adjusted gross margin of 27.25%, and earnings of approximately $14 per diluted share. Turning to market conditions. In the second quarter, we signed 2,650 net agreements for $2.6 billion, down approximately 13% in units and 11% in dollars compared to last year's strong second quarter. We experienced softer demand in the second quarter due to a decline in consumer confidence driven by increased economic uncertainty. These conditions have continued into our third quarter. In this environment, we believe prioritizing price and margin over pace makes the most strategic sense. We are confident that our balanced approach will allow us to continue successfully navigating this market. Our average sales price in the quarter was approximately $983,000 compared to $1 million in our first quarter and $967,000 in the second quarter of fiscal 2024. Given the softer demand environment, we modestly increased incentives in the quarter. Overall, incentives were approximately 7% of the average sales price, up from our recent average of 5% to 6%. As we discussed last quarter, we have been reducing our spec starts to match local market conditions. Our spec strategy is calibrated to effectively balance the need to add quick moving homes available to meet buyer demand while protecting margins. Over the past decade, we have worked hard to build a nationwide platform with operations in over 60 markets in 24 states. We now serve all buyer groups with the broadest home offerings in the industry and prices that range from $300,000 to over $5 million. We have entered new markets and expanded our offerings while enhancing all that sets us apart as America's luxury homebuilder: an exceptional brand, our affluent customer base, prestigious locations, distinctive architecture, unrivaled choice, and an extraordinary customer experience. We've executed this growth strategy while derisking our balance sheet, improving capital efficiency, and returning capital to stockholders. Our performance in the second quarter and over the past many years has demonstrated the competitive advantages of our business and brand in driving high returns, as well as our ability to navigate through challenging markets. And while the near-term outlook for the housing market remains cloudy due to well-known affordability pressures and the volatile macro environment, we continue to believe the long-term outlook for the new home market remains positive, particularly for our luxury niche. With many entry-level buyers struggling with affordability challenges, we are pleased to be serving an affluent consumer. Over 70% of our business serves the move-up and empty nester 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 serves the more affluent, older, first-time buyer. The financial strength of our customer base is highlighted by our industry-low cancellation rate, high percentage of all cash buyers, and low LTVs for those who take a mortgage. Consistent with the past several quarters, approximately 24% of our buyers paid all cash in the second quarter, up from our long-term average of around 20%. The LTVs of buyers who took a mortgage in the quarter were approximately 70%, and our contract cancellation rate was 2.8% of beginning backlog. In addition, the average spend on design studio selections, structural options, and lot premiums was approximately $200,000 per home in Q2 and consistent with our first quarter. These upgrades benefit our margins as they tend to be highly accretive. We continue to expect community count growth to help drive results in fiscal 2025 and beyond. We remain on target to reach our year-end guidance of approximately 440 to 450 communities, which would represent an 8% to 10% increase versus fiscal year-end 2024. We project similar community count growth in fiscal 2026. We also continue to see modest improvements in our construction cycle times as we focus on increasing production efficiency. We have not yet seen any impact from potential tariffs on building costs or product availability. While it is difficult to predict where tariffs will land and the precise impact on our business, we do not believe we will see any significant impact in fiscal 2025. Turning to land at our second quarter end, we controlled approximately 78,600 lots, 58% of which were optioned. Over the past year, we have increased our percentage of option lots from 48% to 58% of our total lot count consistent with our focus on structuring land deals in more capital-efficient ways to enhance returns. Our land position allows us to continue to be highly selective and disciplined as we approach new opportunities. In today's environment, we have tightened our underwriting standards and are reducing land spend on new deals, which we expect to primarily impact fiscal 2026 land spend. At quarter end, we held approximately $686 million of cash and cash equivalents, and our net debt-to-capital ratio was 19.8%. We continue to generate strong operating cash flows. This provides us plenty of opportunity to both grow our business and return capital to stockholders. During the quarter, we repurchased $177 million of our common stock. Given our strong financial position, healthy projected cash flow, and our focus on returning capital to stockholders, we are increasing our projected share repurchases in fiscal 2025 from $500 million to $600 million. With that, I will turn it over to Marty.

Marty Connor, CFO

Thanks, Doug. And congrats on today being the 35th anniversary of your first day at Toll and your 60th conference call. We had a strong second quarter, beating our guidance for deliveries, homebuilding revenue, adjusted gross margin, SG&A, and earnings. In the quarter, we delivered 2,899 homes and generated home sales revenues of $2.71 billion, up nearly 10% in units and 2.3% in dollars compared to last year. Both were second quarter records. At the midpoint, we delivered nearly 300 more homes than our guidance, or $236 million of home sales revenue. The average price of homes delivered in the quarter was approximately $934,000, a bit below the low end of our guidance as we delivered more homes in our Mountain and Mid-Atlantic regions than anticipated. We signed 2,650 net agreements for $2.6 billion in the quarter, down 13% in units and 11% in dollars compared to the second quarter of fiscal year 2024. The average price of contracts signed in the quarter was approximately $983,000, up 1.6% compared to last year. At second quarter end, our backlog still stood at $6.84 billion and 6,063 homes, down 7% in dollars and 15% in units compared to a year ago. The average price of the homes in our backlog was $113 million, a company record. Our second quarter adjusted gross margin was 27.5%, which was 25 basis points better than guidance. Our Q2 gross margin exceeded guidance primarily due to positive mix, strong cost control, and increased leverage from higher-than-projected revenues. Write-offs in our home sales gross margin totaled $9.8 million in the quarter, compared to $28.4 million in the second quarter of 2024. SG&A as a percentage of home sales revenue was 9.5% in the second quarter and 80 basis points better than guidance. Again, reflecting our focus on cost controls and leverage from higher-than-expected home sales revenue. Second quarter JV land sales and other income was $29 million versus our breakeven guidance. Approximately $15 million of this gain was attributable to the sale of a stabilized asset in one of our Apartment Living joint ventures, with the remainder primarily attributable to interest income and income from our mortgage title and City Living operations. Our tax rate in the second quarter was approximately 26.2%. Our balance sheet is very healthy. At the second quarter end, we had $2.8 billion of liquidity, including approximately $686 million of cash, and our net debt-to-capital ratio was 19.8%. In addition, we are generating strong cash flows with approximately $1 billion of cash flows from operations projected for fiscal 2025. As previously reported, during the quarter, we extended the maturities of our credit facilities to February 2030 and upsized our revolver to $2.35 billion, and we increased our quarterly dividend by 9% to $0.25 per share. We repurchased $177 million of our common stock, bringing full year repurchases to approximately $200 million, and we bought 2,073 lots for $362 million. As Doug mentioned, as a result of our strong financial position and healthy cash flows, we are increasing our projected share repurchases in fiscal '25 from $500 million to $600 million. Turning to guidance. Our outlook is subject to the usual caveats regarding forward-looking information and the assumptions, risks, and uncertainties inherent to projections. Based on our backlog, recent sales activity, and the number of homes currently under construction or completed, we expect to deliver between 2,800 and 3,000 homes in the third quarter, and we continue to expect to deliver between 11,200 and 11,600 homes for the full year. Our projected second half delivery cadence is consistent with what it has been over the past several years. On average, we delivered approximately 58% of full-year deliveries in the second half with 26% of the total delivered in the third quarter and 32% in the fourth quarter. We are projecting essentially the same percentages this year. The average price of deliveries in the third quarter is expected to be between $965,000 and $985,000. We are maintaining our full-year projection of $945,000 to $965,000 for our average price of deliveries. As Doug mentioned, in today's softer demand environment we believe it makes the most strategic sense to prioritize price and margin over pace. This strategy, combined with the gross margin embedded in our backlog, gives us confidence in maintaining our full-year projected adjusted gross margin of 27.5%. For the third quarter, we also expect adjusted gross margin to be 27.25%. We expect interest and cost of sales to be approximately 1.2% of home sales revenues in the third quarter and also for the full year. Third quarter SG&A as a percentage of home sales revenue is expected to be approximately 9.2%. For the full year, we continue to expect it to be between 9.4% and 9.5%. Other income, income from unconsolidated entities, and land sales gross profit in the third quarter is expected to break even. We continue to project $110 million for the full year, much of which is projected to come from fourth quarter sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the third quarter tax rate to be approximately 26% and the full-year rate to be approximately 25.5%. Our community count at quarter end was 421 compared to our guide of 415. We expect 430 at the end of the third quarter and reaffirm 440 to 450 communities by the end of the fiscal year. Our weighted average share count is expected to be approximately 99 million for the third quarter and 100 million for the full year. This assumes we repurchased $400 million of common stock in the second half on top of the $200 million we bought back so far this year, which would be consistent with the greater operating cash flow we typically generate in the second half. All of our guidance for fiscal 2025 translates to approximately $14 per diluted share. This would result in a full-year return on beginning equity of approximately 18%, and we put our year-end book value per share at approximately $90. We believe these results will once again reinforce the strength and resiliency of our business model as well as our ability to successfully navigate changing market conditions while still delivering attractive returns to stockholders. Now let me turn it back to Doug.

Douglas Yearley, CEO

Thank you, Marty. Before I open it up for questions, I'd like to thank our Toll Brothers employees for their hard work in the first half of 2025. I am proud of your commitment to our customers and dedication to our business, which are key drivers to our long-term success. Now let's open it up to your questions. Jamie, we're ready to go.

Operator, Operator

Our first question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.

Stephen Kim, Analyst

Appreciate all the color as usual. My first question actually has a bit of a housekeeping element to it. We didn't see your spec data and your homes under completed and under construction information. So, I was wondering if you could kind of give us an update on where your specs stand, both completed as well as under construction? And my overarching question with respect to that is, you've talked about 11,500 closings, give or take. I'm kind of wondering, like how many units do you want to have under construction or completed at any point in time, given a run rate of about 11,000 closings? And where do we stand relative to that?

Douglas Yearley, CEO

So, I'll let Marty provide the details on the spec count, and then I’ll be happy to answer your question.

Marty Connor, CFO

Sure. So, Steve, we have just over 1,000 fully completed spec units right now. And we have a number…

Stephen Kim, Analyst

Can we get a specific number, do you mind? Marty?

Marty Connor, CFO

1,028. We have approximately 2,400 or so in progress, and we have permits available for another 1,000 or 2,000 behind those that we have not commenced construction on.

Douglas Yearley, CEO

The 2,400 in progress indicates that we've authorized fieldwork. This could mean that the survey crew is preparing the site for a foundation installation. The decision to proceed has been made by the company, so while you might not see any visible activity on the site yet, we have the necessary permits and are ready to move forward. It's a broad definition. Does this provide the information you needed?

Stephen Kim, Analyst

Yes. Will follow cleanup later on, but sure that gets us close.

Marty Connor, CFO

I think the other aspect that may be along the lines of what you're looking for, this is about the highest concentration of work in progress and completed specs that we will have at any particular point in time during the year.

Douglas Yearley, CEO

So, you asked about our comfort level. We are comfortable with where we are in the spec business; we had gotten it up to 55% a few quarters ago. As you heard us say today, we are slowing the start of new specs. So many of those permits we talked about are sitting at permit without a go issue. And I think that is a smart way to run this business in the current environment. We are very pleased with how well we did in the second quarter in terms of the sale of specs without larger incentives. And one of the reasons we had a revenue beat in Q2 is because we call it same quarter, sell and sell, right? So, it's not a spec we sold in a prior quarter to settle now, but how many sell and settles do we have intra-quarter? And we were very pleased in with that activity and that incentive levels that were manageable. And so, as we move forward, we continue to be very comfortable with Q3 and Q4 number of specs that we believe will sell and settle and we believe, based on current market conditions, we have conservatively budgeted incentives. Those incentives are consistent with what we achieved with our spec sales in Q2. And that's why we have comfort in the guide understanding that we have 1,000 completed spec homes that we intended to sell and settle. And then beyond that, of course, some of these homes in progress, many of these homes of progress would be ready to deliver by the end of October, the end of our fiscal year. We have projected that some of those will, in fact, sell over the next 5.5 months and settle, but there'll be another bunch of those that while they could settle by the end of Q4. We are not budgeting for that. We are conservatively assuming that they roll into 2026 and set up that year. But in terms of the incentive front, which I know is question out there. We've read it overnight. We're very comfortable with how we budgeted. Yes, there's more incentive needed to move spec right now in this market than build to order. We are very pleased with build-to-order margin. It actually is coming in higher than we have budgeted, particularly for the more luxury homes; the more expensive homes. Those margins are coming in even higher. So, while the spec margin is a little bit lower, it all blends out to 27.25%, 27.5% as we did in this past quarter, and we are assuming no improvement in the market over the next 5.5 months to deliver the returns and the guidance that we have presented.

Operator, Operator

Our next question comes from John Lovallo from UBS. Please go ahead with your question.

John Lovallo, Analyst

First one is, I mean, obviously, you did a really nice job managing the business. And as you talked about prioritizing price and margin over pace in the quarter. The third quarter gross margin outlook of 27% in the quarter implies pretty flat quarter-over-quarter margin in the fourth quarter. Just curious kind of what are the moving pieces impacting the second half gross margin. Any thoughts on sort of the sustainability of this into next year?

Douglas Yearley, CEO

Sure, that's a great question. Yes, your calculations are correct that we expect the fourth quarter margin to remain about the same as the third quarter at $272 million. While there will be some downward pressure due to spec cell and settles, as I mentioned, we have some positive factors supporting gross margin from our mix. We anticipate more luxury products being delivered in the second half of the year, which carry higher margins, along with increased contributions from the Pacific and Mid-Atlantic regions, both of which enhance gross margin. Therefore, while blending in more spec, we believe it will have a slightly higher incentive alongside the factors I just mentioned about the mix from the Pacific and Mid-Atlantic, as well as more luxury products across the country. All of this aligns with the guidance we've provided.

John Lovallo, Analyst

Understood. And then you guys beat the top end of the delivery guide by about 200 homes. What drove the beat? Was this product mix, maybe a little bit more spec? Was it regional mix? And does it imply that you're incrementally less optimistic on the full year given the maintained outlook?

Marty Connor, CFO

I don't think it necessarily changes our optimism for the whole year. What we did in the second quarter is simply we outperformed by selling and settling more spec homes than we had projected, and we still had a gross margin beat. And I think that provides some evidence to the conservatism that we have in our guidance.

Operator, Operator

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

Mike Dahl, Analyst

Just keep attacking the back half a little bit. I think when we look at it, historically, your point about the cadence being consistent. The flip side is, this is the first year that we can see looking back where your current backlog didn't actually fully cover second half deliveries, meaning you need more deliveries in the second half than their current backlog. So, I know like Doug, Marty, you talked about you expect to sell and settle some of the completed some of the under progress. Can you just give us a little more granularity on that opportunity like of the number of homes in progress or complete what is obviously complete can close, what percentage of that 2,400 you think could actually settle by year-end? And then just given the lack of visibility on margins for homes that you have to get sold, a little more detail on how that pet margin progressed through the quarter would help, I think.

Marty Connor, CFO

We have about 6,400 units remaining to deliver this year to reach the 11,400 midpoint, with approximately 4,500 expected to come from our backlog of around 6,050 homes. These homes are already sold, so the revenue is secured and the building costs are fixed, minimizing any risk of cost fluctuations. This leaves us with about 1,900 homes that will need to come from our unsold spec inventory. Out of those, 1,028 are completed, eliminating any build cost risk. The rest are under construction, and in fact, more than the 900 needed for sales are also under construction. Consequently, there is minimal cost risk on these homes as they are contracted for construction. The only potential risk lies in the selling prices of the 1,900 homes, but we believe we have considered this risk based on recent comparable sales. In the second quarter, we outperformed our earlier guidance, selling and settling 250 to 300 more spec homes than anticipated, and we still achieved strong gross margins. I hope this provides some clarity on our expectations for the next six months.

Douglas Yearley, CEO

In those 900, we have 1,000 completed and then we need 900 more that are under construction. We have significantly more than the 900 that could deliver by October 31. So, we are not being aggressive in assuming that, oh boy, we need to sell and settle everything we're building to hit that number. There will be plenty that will be setting up 2026 that do not sell and settle by the end of this fiscal year. It's also safe to assume that as we manage our spec production, where we have a green light for specs is probably where we're doing best.

Operator, Operator

Okay. That's perfect. Yes, very helpful. My follow-up question, maybe just on similar lines, you talked about the stronger margins on built-to-order luxury, presumably a lot of that is in your backlog. So, you talked about your backlog gross margin. Can you give us a sense of where your current backlog gross margin stands?

Marty Connor, CFO

I think that's inherent in the guidance we've given you.

Douglas Yearley, CEO

I mean the build-to-order business runs several hundred basis points above the midpoint, and the spec business runs several hundred below. Lately, that range has widened a little bit on both ends, but it still comes out in the middle. And that's why we like the business. I think we're doing a really good job of balancing our spec business with our build-to-order business. And remember, we don't hold spec off until the end where the client has no choice. We sell a lot of our spec earlier where the buyer can still go to our design studios, pick all the finishes that allow them to have a home that really fits their lifestyle. And that design studio is highly accretive in margin to the Company's margin. So when we're able to sell a spec a bit earlier, even if it's incentivized a little more, there can be some residual margin left after they get to that design studio.

Operator, Operator

Our next question comes from Trevor Allinson from Wolfe Research. Please go ahead with your question.

Trevor Allinson, Analyst

You talked about demand slowing throughout the quarter. I think that's not very surprising given what we've heard from other builders in the stock market volatility in April. So the question would be then, as we got into May here, the stock market obviously got a lot better. You had a pause on tariffs. Did you see demand get better as we went into May? And if so, could you put any numbers around that perhaps either relative to April or relative to 2Q, however you want to frame it?

Douglas Yearley, CEO

February was our worst month, with sales of 1.7 homes. In March and April, sales were more stable at 2.4 and 2.3 homes, and May is following that trend. Typically, May has lower sales compared to those months, but historically, June and July tend to perform better than May. We're currently seeing trends in May similar to March and April, which were stronger than February. We've all recognized that the market has softened more than we expected back in January, due to factors like low consumer confidence and economic volatility. Many potential buyers are sitting on the sidelines. We prefer focusing on sales pace rather than lowering prices significantly since the market doesn’t respond well to small incentives. Although I am pleased with our performance in the second quarter and the start of the third, given the overall economic environment, over 70% of our customers are move-up buyers or empty nesters who are generally more affluent. A quarter of our buyers pay in cash, and those financing their homes have a loan-to-value ratio of 70. They are making moves in their lives and have equity in their homes. We're well-positioned in this market segment despite the softness. To summarize, we were surprised that February was poorer than expected. May is aligning with our outlook based on March and April trends, and we anticipate June and July being slightly better. However, we are not expecting significant improvements in market conditions based on our current guidance, and we believe we have sufficiently budgeted for the necessary incentives to sell our spec inventory.

Trevor Allinson, Analyst

As a second question, I guess it would be more of a follow-up on that and kind of double-clicking on some of the comments you just made there because it sounds like your April trends were pretty different from what we've heard from some other builders. A lot of other builders have suggested that April was much softer. So, do you think that is just purely for you guys, just a different profile for your consumer as you were just talking about? And then if that's the case, you mentioned earlier that you guys build across a pretty wide range of price points. Are you seeing big differences here more recently in demand relative to what you were seeing earlier in the year across those price points?

Douglas Yearley, CEO

I apologize if my earlier comments were unclear. Overall, the results are still below our expectations. I was comparing sales in March and April to February. We are not pleased with the sales figures of 2.4 and 2.3 per month for March and April. However, that reflects the overall market conditions that others have also described. I wanted to clarify that we view February as the strongest month, followed by March, and then April as the weakest, largely due to the ongoing tariff discussions and macroeconomic factors. March saw a leveling off, and we maintained that position. I want to emphasize that the housing market is soft, which is a common understanding, and we are performing reasonably well within that context. I believe we are managing the business exceptionally well.

Operator, Operator

Our next question comes from Sam Reid from Wells Fargo. Please go ahead with your question.

Sam Reid, Analyst

Wanted to drill down a bit on SG&A. Just looking at the implied Q4 guide, the math would suggest some fairly nice leverage. I'd estimate anywhere from 30 to 40 basis points year-over-year, which is really great kind of on the back of a few deleverage quarters. So just talk to kind of what's driving that leverage? Just any nuances with regard to kind of your community openings, marketing spend, would just love some more perspective on kind of how you're going to exit the year on SG&A.

Marty Connor, CFO

So, I think the biggest issue, Sam, is that we're going to have a lot more revenue. We're going to have $235 million more revenue than last year, and that's really what's driving a lot of the leverage.

Douglas Yearley, CEO

In Q4.

Marty Connor, CFO

Yes. We are very focused on SG&A. We're growing community count pretty significantly, particularly in that fourth quarter. And so there are pressures, but we've done a really nice job of managing costs. We're not immune from some of the inflationary pressures. I'll say, particularly on the healthcare front, it seems like something that's grown a little bit more than we'd like, but we're managing it very actively, and we have the flexibility to continue to manage it actively as the market evolves.

Douglas Yearley, CEO

And in addition to leverage, Sam, our variable sales costs component of SG&A came down a little bit. It was a little bit below what we expected in this quarter. In this past quarter, which was a little bit of a tailwind for us.

Operator, Operator

Okay. Thank you. And then maybe just switching gears here. I realize you guys are not offering up a '26 outlook today. You're probably not going in for another, let's call it, two quarters other than to say it does sound like community count is going to be up year-over-year in 2026. I said, I wanted to maybe double-click a little bit on what delivery in 2026 could look like? And the basis for that is the backlog is a little smaller this year than it was last year. I would love to kind of get your sense as to sort of what a good base case assumption for 2026 deliveries could be in the context of that backlog back?

Douglas Yearley, CEO

I appreciate your question about guidance for 2026, but we are not ready to share that at the moment. Typically, we address this during the December call. However, I can say that the average price of homes in 2026 is expected to increase, which is evident from recent sales trends. We understand the importance of having a solid backlog as we approach 2026. Our strategy will continue to involve speculation, which we recognize is crucial. As we move forward, we will pay attention to local market conditions to determine where to initiate spec builds and where to proceed with caution. We acknowledge the significance of our speculative strategy. Additionally, as mentioned in my earlier comments, we anticipate around 10% growth in community count for 2026. While I'm not providing specific numbers, I hope this insight gives you a clearer picture.

Marty Connor, CFO

When we open communities, we often get kind of a boost to sales as there's some pent-up demand for those communities. And we can moderate that if we want or let it run if we want. So that's part of the strategy we would deploy to.

Operator, Operator

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

Alan Ratner, Analyst

Good morning, great quarter, and thank you for the details. I appreciate the monthly cadence data and would like to hear more about how things are progressing with the various elements of your business. Your buyers are likely more affected by stock market volatility compared to other builders, and April was a particularly tough month for the stock market. Recently, however, the markets have rebounded. I'm curious if your order rates have substantially increased, but have you noticed any positive signs in traffic or feedback from your sales team suggesting that the stabilization in the stock market is positively influencing your potential buyers?

Douglas Yearley, CEO

Yes, Alan, it's modest. It's too early to tell. There's no question confidence, consumer confidence, I think it's the number one leading indicator at least for toll's business at the more affluent end, do rates matter, of course, they do. We celebrate a five, seven, eight, 30-year no-point mortgage, of course, we will. But a little tick in mortgage rate doesn't affect our client as much for the reasons we've talked about: 25% all cash, those that get a mortgage are at 70%. We know a good part of the 30% of first-time buyers we sell to are getting some help from mom and dad with generational wealth transfer. And so that's going to take a mortgage payment down because they're probably getting able to put a bigger down payment on the house thanks to mom and dad. So, while interest rates are important, you're right that the stock market overall confidence, some positive news out of DC about resolving some of the tariff conflict, all of that matters, and it can matter in a big way. And we have significant under supply of homes in this country. We have terrific demographics that are a tailwind for future growth. And we've all seen it. I've been doing this 35 years. When this turns...but we're all aware the timing is key.

Marty Connor, CFO

Exactly 35.

Douglas Yearley, CEO

Thank you, Martin. I realize it’s my 60th call, and I wasn't aware that today marks my 35th anniversary. We've all observed that when the market shifts with favorable conditions and so many people are just waiting to feel more optimistic to move forward in their lives, it’s going to happen. However, I can’t mention anything definitive in the past two to four weeks as the stock market has stabilized. There have been some modest conversations and insights from sales, with increased traffic and quality of visitors. We recently had a few openings of new communities that attracted significant interest. In some cases, we've returned to a best and final offer process for several homes due to heightened interest. While that's noteworthy, I don’t need it to be a central focus right now. We’re entering the summer season, which is slightly different. It’s a good time to sell completed homes, as buyers aim to settle in before the school year to avoid disrupting their children. Therefore, purchasing needs to happen in the next couple of months to ensure closing by the end of August. We’ve planned accordingly, knowing that it’s essential to introduce completed homes to the market when buyers are looking, specifically during the summer months. So, to reiterate, while I don’t see anything definitive yet, it wouldn't surprise me if we see a change with further stabilization in the broader market.

Trevor Allinson, Analyst

Got it. Appreciate the other commentary there. Second question, there's obviously a lot of headlines associated with immigration and what's going on there. And I was hoping you could just refresh my memory, what percentage of your buyers are foreign national, I guess, specifically kind of H1B Visa holders? And have you seen any changes in demand among that cohort of buyers year-to-date?

Douglas Yearley, CEO

It's less than 5% of the first part of your question. And no, we haven't seen any change since the new year. The Chinese buyer, whether a Chinese national or Chinese American, remains very strong for us in California.

Operator, Operator

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

Alex Barron, Analyst

Yes. I wanted to focus in on your comments about having more than enough specs to hit your numbers in the fourth quarter. I was kind of going back several years now. It looks like your deliveries have exceeded your orders by quite a bit as your backlog has been coming down from a peak of 11,700 or so to 5,000 now. So, can you explain that dynamic? I mean how many total homes, I guess, are sort of not in the backlog that are under construction, I guess, back to help us kind of understand that dynamic a little bit better.

Marty Connor, CFO

Sure. Alex, I think over that period of time, you've seen us move from a 90% build-to-order business to a 50%, 55% spec business where we sit currently. So the backlog coming down is not unplanned. We opened the call mentioning that we had 1,028 completed specs that could be sold and settled in the next six months. We have another what was the number, 2,400 specs at various stages of construction. And so we will have more than enough completed specs by the end of the year to deliver the roughly 900 additional sell and settle specs on top of 1,000 sell and settle specs to hit our delivery guidance factoring in roughly of 4,500 homes coming out of backlog as well.

Douglas Yearley, CEO

And that's the bucket that we have slowed and are making very local decisions based on market conditions.

Alex Barron, Analyst

Got it. And then those...

Marty Connor, CFO

2,000, we have another 2,000 pre-footing permits pulled homes that we will begin production of a certain percentage of depending on how the market evolves.

Douglas Yearley, CEO

With the slowdown in speculative starts, it’s hard to say if it’s the end of the year exactly, but there will be a point where we will see an increase. This is driven by market conditions. Recently, we’ve noticed a trend toward a preference for build-to-order homes rather than the quicker delivery of speculative homes. There are a couple of reasons for this. In a softer market with higher interest rates, some buyers express their desire for a dream home and want to customize it to their taste, even if it means waiting longer. They may take more time to sell their current home and are hopeful that interest rates will decrease before they need to lock in a mortgage 60 days prior to the completion of their new home. The appeal of waiting for 12 months to create their dream home feels more comfortable compared to the quicker timelines of two to four months for speculative inventory. We are seeing hints of this shift now, which we find encouraging because our unique strength lies in providing choice, and we’ve highlighted the higher margins associated with build-to-order. Although it’s not a drastic change, we are beginning to observe a slight preference for build-to-order over speculative homes in the field.

Operator, Operator

And our next question comes from Buck Horne from Raymond James. Please go ahead with your question.

Buck Horne, Analyst

I wanted to ask a little bit about the land spend in the quarter. It seemed like it was one of the higher quarterly amounts you guys have spent in recent memory, added some additional lots. Was there any particular land deal or anything noticeable that kind of drove the surge? And should we have any other takeaways in terms of what does that mean about your confidence about the land market?

Marty Connor, CFO

Yes. So our land spend in the second quarter was $362 million compared to $360 million in the first quarter. So we have spent $763 million for the full halves. I think it may ratchet up in the back end of the year, but a lot of that depends on the timing of deals as they closed. There was nothing in particular in the second quarter that drove the number to be consistent with the first quarter.

Douglas Yearley, CEO

Yes. I think for us to move forward and close on the ground in this environment means it still pencils. We may have been able to renegotiate price or take down terms. We're land banking more than we ever have, new deals coming in. I think we're at 40%, guys. Is that sort of number?

Marty Connor, CFO

Of the new deals.

Douglas Yearley, CEO

The new deals coming in are being land banks. But our comments about due to softer market conditions, we're being more cautious, and we expect land spend to probably come down to 2026. I wouldn't read anything into the last few quarters or the next few quarters in terms of land spend because those deals are baked and they still work. And so we're moving forward maybe on the same terms or maybe on modified terms but it's really the next deal contracted for, which may have two or three years of entitlements ahead of it or it may have a closing in six months. It all depends on what the land deal is. But those are the ones that over time, at least at the moment, the land spend may come down a bit. But if this market improves, then that may also change, and we may find ourselves buying more ground. But we're very happy to have the 80,000 plus or minus lots that we own and control. We're very proud of moving more and more lots to the option category, and that gives us great flexibility and conservatism when it comes to the next deal because our land bank is in such great shape.

Buck Horne, Analyst

Got it. Got it. Very helpful clarification. And just with a little bit of timing, can you just walk us through geographically how the markets were shaping up versus your expectations? Any standout surprises to you in terms of how things progressed during the quarter, either with economic sensitivity, either strength or downside or upside?

Douglas Yearley, CEO

Sure. So the better markets were New Jersey, Pennsylvania, and New York. It did well, D.C. Metro, Charlotte, and Atlanta. So that's just the Eastern Seaboard did well. Out West, Las Vegas, Denver, Boise, Idaho did well, and all of California did well. Softer spots are the Pacific Northwest for us, that's Greater Seattle and Portland, Oregon; most of Florida; parts of Texas; and Phoenix continue to be on the softer side of our business.

Operator, Operator

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. At this point, I'd like to turn the floor back over to management for any closing remarks.

Douglas Yearley, CEO

Jamie, thank you very much. You've been terrific. Thanks, everybody, for your interest and support. We are always here to answer any follow-up questions you may have. Have a wonderful Memorial Day weekend and summer. And we'll see you soon. Thanks much. Take care.

Operator, Operator

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.