Earnings Call Transcript - TOL Q4 2025

Operator, Operator

Good morning, and welcome to the Toll Brothers Fourth Quarter Fiscal Year 2025 Conference Call. The company is planning to end the call at 9:30 when the market opens. Please note, this event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.

Douglas Yearley, CEO

Thank you, Drew. Good morning. Welcome, and thank you all for joining us. With me today are Rob Parahus, President and Chief Operating Officer; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, our new Chief Financial Officer. While Gregg has been on these calls for many years, this is his first as our CFO. Congratulations, Gregg. 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 from last night and on our website to better understand the risks associated with our forward-looking statements. Overall, I am pleased with our performance in fiscal 2025. We executed well and produced another year of strong results, notwithstanding a difficult sales environment. We delivered 11,292 homes at an average price of $960,000, generating a record $10.8 billion of home sales revenues. We posted an adjusted gross margin of 27.3%, an SG&A margin of 9.5%, and earnings of $13.49 per diluted share. We grew our community count by 9%, continued to produce strong operating cash flows of $1.1 billion, and returned approximately $750 million to stockholders through share repurchases and dividends, and generated a return on beginning equity of 17.6%. These are the results that our entire team can be proud of, and I'm grateful for the hard work and dedication that made these results possible. In our fourth quarter, we met or exceeded guidance across all of our core homebuilding metrics, generating $3.4 billion in home sales revenue with an adjusted gross margin of 27.1% and an SG&A margin of 8.3%. We earned $4.58 per diluted share, which was modestly below guidance, primarily due to the delayed closing of the sale of our Apartment Living business that we announced back in September. We expect to complete this transaction by the end of the first quarter and to completely exit the multifamily business over the next few years. Our fourth quarter and full year results demonstrate that our luxury business is differentiated as we serve a more affluent customer who is less impacted by the affordability pressures that continue to impact the broader housing market. These results also underscore the resilience of our business model. Our results over the past few years, and especially this last year, have proven that our business model and strategy can produce strong returns in good markets and bad. To illustrate this point, we started fiscal 2025 with fewer than 6,000 homes and $6.5 billion in backlog, down 9% in units and 7% in dollars from the prior year. Yet in fiscal 2025, we delivered a record 11,292 homes and $10.8 billion in home sales revenues, up 4% in units and 3% in dollars despite a soft market throughout the year. We did this while maintaining an attractive adjusted gross margin of 27.3% and an operating margin of 15.7%. Our business today is more nimble, thanks in large part to the broadening of our geographies, product lines and price points, as well as our shift to a more balanced portfolio of build-to-order and spec homes, all of which have helped us bring down construction cycle times, improve inventory turns, and gain efficiencies in the land development and construction processes. Our spec strategy has also allowed us to appeal to buyers looking for a quicker move-in, further widening our addressable market. In addition, many of our specs are sold early in the construction process, which affords many of our customers the opportunity to choose their finishes and make upgrades, an important competitive advantage for Toll Brothers. Specs accounted for approximately 54% of our deliveries in fiscal 2025. Given our year-end backlog and our deliveries guidance for fiscal 2026, we expect a similar ratio this year. In the fourth quarter, we signed 2,598 net agreements for $2.5 billion, down 2% in units and 5% in dollars compared to Q4 of last year. We sold at a pace of approximately 2 contracts per community per month. Sales modestly improved as the quarter progressed, with October being our strongest month. Since the start of our fiscal 2026, 6 weeks ago, our per community deposit activity has been almost identical to the same 6 weeks last year, which is somewhat encouraging since last year's period was up 22% from the prior year. Deposit activity in these first 6 weeks is also about the same as it was in October. Based on historical seasonal trends, it should have been down. While this activity is positive, it is just one data point, and November and December are seasonally slow, so we are not reading too much into it. The real tell for whether the housing market can accelerate will be the spring selling season, which starts in late January. We are encouraged that mortgage rates have stabilized in the low 6% range and may go lower. We also recognize that the underlying fundamentals that fuel housing demand in the long term have not changed. Demographics are favorable with millennials still in their prime home buying years and Gen Z right behind them. We also continue to have a structural undersupply of millions of homes in this country, and the average age of a home in the U.S. is now 40 years and growing. All of these trends support demand for new homes. In terms of pricing in the quarter, we continue to take a measured approach to balancing pace and price. Our average incentive was the same as the third quarter at approximately 8% of the delivered price, which is also the current incentive on the next homes sold. Our average sales price in the quarter was approximately $972,000, down from $1 million in Q4 of last year due to mix. Geographically, we continue to see relative strength in the East from Boston down to South Carolina, as well as in Coastal California and Boise in the West. Among our buyer segments, we saw little meaningful variation in demand. Given the cloudy near-term outlook for the overall housing market, which is being driven in large part by well-known affordability pressures, we are pleased to be serving an older, more affluent customer. According to data published by the National Association of REALTORS last month, the median age of a first-time homebuyer is at an all-time high of 40 years old, and the median age of all buyers is now almost 60. And with just 1 in 5 sales to a first-time buyer, the vast majority of sales in the market are to move-up or move-down buyers. These trends play right into our strategy. Over 70% of our business serves the move-up and move-down segments. These buyers are wealthier, have greater financial flexibility, and most have equity in their existing homes. The remaining 25% to 30% of our business is focused on the older, more affluent first-time buyer who is also feeling less affordability pressure. While we actively market rate buydowns and they do drive traffic, we have a very low take rate as our buyers do not need a lower rate to qualify for a mortgage and they'd rather spend incentive dollars upgrading their homes through our design studios. In the fourth quarter, the average spend on design studio selections, structural options, and lot premiums was approximately $206,000 per home or roughly 24% of the base price. These upgrades benefit our margins as they tend to be highly accretive. The financial strength of our customers is also highlighted by our high percentage of all cash buyers, the low LTVs of those who do take a mortgage, and our industry-low cancellation rate. Consistent with the past several quarters, approximately 26% of our buyers paid all cash in the fourth quarter. The LTVs of buyers who took a mortgage in the quarter were approximately 69%, and our contract cancellation rate was 4.3% of beginning backlog. Turning to land. At fiscal year-end, we controlled approximately 76,000 lots, 57% of which were optioned. We continue to target a mix of 60% optioned and 40% owned over the long term. Our land position allows us to continue being highly selective and disciplined as we assess new opportunities. It also facilitates our plans to continue growing community count over the next several years, including another 8% to 10% in fiscal 2026. In our fourth quarter, we repurchased $249 million of our common stock, bringing our full year repurchases to $652 million at an average price of $120.44 per share. During fiscal 2025, we repurchased 5% of our outstanding shares at the beginning of the year. We also paid $97 million in dividends. Dividends and buybacks have been and will continue to be an important part of our capital allocation strategy. As I mentioned earlier, in September, we announced the sale of a significant portion of our Apartment Living business to Kennedy Wilson. The purchase price is now $380 million, reflecting ongoing investments since the September announcement. We thought it would close in Q4; it will now close this quarter. We closed on part of the transaction last week and expect to complete the balance by the end of January. When it is completed, Kennedy Wilson will acquire about half of our Apartment Living portfolio, including our operating platform and organization. We expect to sell our remaining interest in the retained properties over the next few years. As we exit the multifamily business, we anticipate using the significant cash proceeds from these transactions to both grow our core homebuilding business and return capital to stockholders. With that, I will turn it over to Gregg.

Gregg Ziegler, CFO

Thanks, Doug. Our fourth quarter capped off another strong year for Toll Brothers as we beat guidance across all our core homebuilding metrics. We would have beaten on earnings as well, except for the delay in the Apartment Living sale. In fiscal year 2025's fourth quarter, we delivered 3,443 homes and generated home sales revenue of $3.4 billion, flat in units and up 5% in dollars from 1 year ago. The average price of homes delivered increased 4% to approximately $992,000. Fourth quarter net income was $446.7 million or $4.58 per diluted share compared to $475.4 million and $4.63 per diluted share 1 year ago. For the full year, we delivered 11,292 homes, up 4% year-over-year and generated home sales revenue of $10.8 billion, up 2.6%. Full year net income was $1.35 billion and $13.49 per diluted share compared to $1.57 billion and $15.01 last year. As a reminder, net income in 2024 included approximately $124 million or $1.19 per share of gains related to one parcel of land sold to a commercial developer for a data center. Excluding this gain, last year's net income would have been $1.45 billion or $13.82 per share. We signed 2,598 net contracts in the fourth quarter for $2.5 billion, down 2.3% in units and 5.0% in dollars from 1 year ago. The average price of contracts signed in the quarter was approximately $972,000, down 2.8% compared to last year's fourth quarter. As Doug mentioned, the decrease in ASP was primarily due to mix as we had fewer sales in our Pacific region. At year-end, our backlog stood at $5.5 billion and 4,647 homes. Our cancellation rate as a percentage of backlog was 4.3% in the fourth quarter. Our fourth quarter adjusted gross margin at 27.1% was slightly better than guidance. In the quarter and throughout the year, we outperformed expectations in all regions and buyer segments, reflecting the ongoing benefits of our cost control efforts and improved efficiencies. SG&A as a percentage of revenue was 8.3% in the quarter, flat compared to the same quarter 1 year ago and in line with our guidance. Joint venture, land sales, and other income was $6 million in the fourth quarter compared to $44.5 million in the fourth quarter of fiscal year 2024 and our guidance of $65 million. As we noted earlier, the miss was primarily because of the delay in the closing of the Apartment Living transaction. In addition, we booked $24 million of pretax impairments that were primarily related to 3 land positions that we now intend to sell. Impairments included in home sales cost of revenue totaled $16.4 million in the quarter, almost half of which related to only 1 community in Oregon compared to $24.1 million in the prior year period. We continue to generate strong cash flow in fiscal 2025 with approximately $1.1 billion of cash flow from operations. We ended the fiscal year with over $3.5 billion of liquidity, including $1.3 billion of cash and $2.2 billion available under our revolving bank credit facility. In fiscal 2025, we invested $2.9 billion in land acquisition and land development. We also returned approximately $750 million to stockholders through share repurchases and dividends. Our net debt-to-capital ratio was 15.3% at fiscal year-end, and we have no significant debt maturities until fiscal 2027. Our balance sheet is in great shape. Turning to our first quarter and full year 2026 guidance. I want to emphasize that our assumptions and estimates are based on current market conditions, which, as Doug noted, are choppy. We have not assumed any market improvement in our forecast. We are projecting first quarter deliveries of 1,800 to 1,900 homes with an average price between $985,000 and $995,000. Consistent with normal seasonal patterns, first quarter deliveries are expected to be the low point of the year, with deliveries for the full fiscal year weighted to the second half. For full year 2026, we are projecting new home deliveries of between 10,300 and 10,700 homes, with an average price between $970,000 and $990,000. We expect our adjusted gross margin in the first quarter of fiscal 2026 to be approximately 26.25% and for the full year to be approximately 26.0%. We expect interest and cost of sales to be approximately 1.1% in the first quarter and for the full year. We project first quarter SG&A as a percentage of home sale revenues to be approximately 14.2%, reflecting lower fixed cost leverage as the first quarter tends to be our lowest revenue quarter. Also included in the first quarter SG&A is about $14 million of annual accelerated stock compensation expense that does not recur in the remainder of the year. For the full year, we project SG&A as a percentage of home sale revenues to be approximately 10.25%. Other income, income from unconsolidated entities and land sales gross profit is expected to be $70 million in the first quarter and $130 million for the full year. Our first quarter guidance includes gains on the sale of our apartment living assets to Kennedy Wilson. I want to be clear that after we complete the Apartment Living transaction with Kennedy Wilson, we will retain about half our existing interest in Apartment Living assets, which will be managed by Kennedy Wilson in the future. We do not intend to commit any new capital and will exit the multifamily business as we sell off the retained properties. We project a first quarter and full year tax rate of approximately 23.2% and 25.5%, respectively. We are budgeting $650 million of share repurchases in fiscal 2026, with most of that occurring later in the year, aligned with the higher operating cash flows we typically generate in the second half. We expect our weighted average share count to be approximately 97 million for the first quarter and 95 million for the full year. Based on land we currently own or control, we expect to grow community count by 8% to 10% by the end of fiscal 2026, and are targeting 480 to 490 communities. With that, I will turn the call back over to Doug.

Douglas Yearley, CEO

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

Operator, Operator

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

Stephen Kim, Analyst

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

Douglas Yearley, CEO

Sure. So active adult is doing well, as you would expect, older, more affluent buyers invested in the markets, equity in their existing homes. It's about 17% of our revenue. So the biggest part of that plus 70% we referenced being both move-up and move-down is our core move-up business, which is really doing well. Trends with that buyer, I think through these softer times, we continue to expect the active adult group to outperform, and we're seeing that. With respect to the age of the different buyer segments, we don't have great data on that. I think it's pretty consistent with the numbers I gave that the first-time buyer is now approaching 40 and the average buyer is approaching 60. I'm quite confident that would be about where we are. Our first-time buyer is not $250,000 to $400,000; our first-time buyer is $450,000 to $1.5 million, especially in California. They're older, they're more affluent, they're less impacted by affordability issues, and they're not looking for a rate buydown. And I'm sure our age breakdown is pretty consistent with the numbers I gave. With respect to trends on land, we're seeing good deal flow. We are being very conservative. We are being very disciplined in our underwriting. We talk all the time about this combination score of gross margin and IRR. And we have a lot of great land. We have community count growth that's lined up at 8% to 10%, which follows exactly 9% in fiscal 2025. We're seeing good deal flow, partly because of some softer markets and partly because the other big builders with capital do not tend to compete with us for land. So we have a bit of an advantage. And so most of the land we're buying or contracting for now is setting up revenue for 2027 and 2028. So it's always forward-looking because we have to get entitlements, get roads in, and get sales centers open. But we are being quite disciplined, but continue to see good deal flow which gives us the opportunity to not just focus on returning capital to shareholders, but to grow the company.

Stephen Kim, Analyst

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

Douglas Yearley, CEO

I'll take the first half and turn it over to Gregg. We think owned lots will continue to come down a little bit. They came down a little bit through 2025. We're doing more and more land banking through joint ventures with other builders. We're getting extended terms with land sellers where we can buy land over time. That's very important to us as we continue to focus on ROE. I would say, flat to modestly down on the owned option ratio. I've said before, while right now, a 60-40 optioned to owned ratio is a goal, it won't take long for us to blow through that and give you a new goal that's even better. Gregg?

Gregg Ziegler, CFO

Stephen, we expect cash flow from operations to be somewhat lower in 2026 compared to 2025. Therefore, the cash flow conversion, which addresses your original question, might be around 60%.

Operator, Operator

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

John Lovallo, Analyst

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

Douglas Yearley, CEO

John, I'm a conservative guy. I run this company in a very conservative way. All I'll say is the guidance we're giving you for 2026 is conservative. We are not assuming any improvement in market conditions. We are not assuming that the 8% incentive comes down. We have a lot of communities opening in the first half of the year. We have 30 opening in Q1 and 60 opening in Q2. We now have over 35% of our communities that can deliver homes in less than 8 months because we've become better and more efficient builders and are turning houses faster. There is an opportunity to get further into the spring, not just with the communities we have, but with the new openings that can still have deliveries this year. That doesn't even account for what market conditions look like, whether rates come down, whether affordability pressure eases a bit, or whether there’s overall consumer confidence that improves. None of that is built in. So I'm not going to say we're going to blow through our guidance, but we've approached it the right way. I've learned this for 35 years. When you're in a softer, bumpy market, that's the time to be conservative when you guide to the Street, and that's exactly what we've done setting up 2026.

John Lovallo, Analyst

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

Douglas Yearley, CEO

We are starting more spec now to set up when people want to move into homes, right? Most people want to move into a home in June, July, August, September as the school year approaches or begins. You have to plan your spec strategy, in our opinion, not with an equal cadence month-to-month for spec starts, but beginning homes focused on when they deliver and when the buyer wants them. In the later part of the year, we will have more spec deliveries. Some of those get sold early, and they can go to the design studio and get loaded, but some of those don't get sold until the house is further along. We all know right now, there is a bigger incentive on spec than there is on build-to-order. In the later part of the year, we will have more specs delivering, and that's being conservative in the gross margin guide, assuming that those specs will require a bit of a higher incentive in that part of the year.

Operator, Operator

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

Stephen Mea, Analyst

Steven Mea is replacing Mike Dahl today. I wanted to delve a bit deeper into the fiscal '26 delivery forecast. The company delivered approximately 11,300 homes from a starting backlog of around 6,000 last year, which is nearly twice your initial backlog. For next year, the forecast is about 10,500 homes at the midpoint, indicating you aim for a bit more than double your initial backlog. Can you provide more insight into what gives you confidence in that increase? I assume specifications play a significant role, but if you could elaborate on that and the spec strategy, it would be appreciated.

Douglas Yearley, CEO

Sure. I'll be happy to. So let's go through the numbers for you because I want to make it clear. We have 4,500 homes in backlog. We have 3,000 spec homes, or as we call them, quick move-ins, under construction. That takes you to 7,500. We have 1,500 build-to-order homes that we believe conservatively will be sold and settled in fiscal 2026. I mentioned that 35% or more of our communities are now delivering homes in less than 8 months from when the buyer signs the agreement to the closing date. I mentioned the new communities that will be opening in the first half of the year, and we are very comfortable in that 1,500 number. We also have another 2,300 spec permits that have not started construction, but of those, we are selecting individually based on market conditions, 1,500 that we will start to allow us to sell and settle by year-end. So when you add the 4,500 backlog, 3,000 specs under construction, 1,500 build-to-order, and 1,500 specs at permit that we are now selecting to start for prime summer deliveries, that gets you right to 10,500.

Stephen Mea, Analyst

Got it. That's very helpful. I appreciate the detailed explanation. If I could ask about the decision to exit the remaining multifamily business, could you provide more insight into how that decision was made? Additionally, how should we think about the potential use of any additional proceeds once you fully exit the business?

Douglas Yearley, CEO

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

Operator, Operator

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

Trevor Allinson, Analyst

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

Gregg Ziegler, CFO

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

Trevor Allinson, Analyst

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

Douglas Yearley, CEO

It's definitely more concentrated at the entry level. You look at the Boston to Philadelphia or even Northern Virginia corridor, which most in this room live in. There's very little on the resale market. There's very little land. For the new homebuilders, we have a pretty unique positioning there. It's tough to come into those markets and find land that you can get entitled quickly and get the machine running. So this is our home corridor that we do well in. We know how difficult the entitlements are, and we're benefiting from it with very tight resale markets and very few builders to compete with. That's also been true in Coastal California. We've done very well. I mentioned earlier, and it may surprise some, but while Sacramento and Palm Springs have been a bit off, both Northern California and Southern California, especially in our coastal markets, which encompasses all the San Francisco suburbs and all the L.A. and Orange County communities, are doing extremely well. There is limited resale at our price points. We don't have the other builders anywhere near our price points, and those markets have continued to perform well with limited competition. Just a couple of examples: we opened a community in Central New Jersey 8 weeks ago, which is seasonally not considered a great time, October and November, and we took 20 sales at $1.8 million. We have a community in Irvine Ranch in Orange County that opened back in May, has 47 sales at over $6 million, including 14 of those 47 sales just in the past 8 weeks. So there are markets that have a lot of big public builders that are building a lot of spec at lower prices. In our core business of $1 million homes, we're just not seeing it. We have a unique niche that we feel very lucky to be in.

Operator, Operator

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

Richard Reid, Analyst

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

Douglas Yearley, CEO

So it's painful to me to give the guide I gave on SG&A. We're fighting hard every day to reduce overhead in this company, and that effort is elevating. We're more focused on it than ever. That's what soft markets do. It is a conservative guide. We're 75 basis points above last year's result. 50 of those 75 basis points is just leverage on less revenue. That obviously could change if we do better in 2026 with our sales and deliveries. The balance of 25 basis points is inflation in wages, healthcare costs, and some modestly elevated internal and third-party sales commissions. When you're in a softer market, per house, you pay your salespeople a little more because you don't want to take them backwards in their total compensation. So if they're selling a few less houses, you give them a little more per house and have to incentivize the third-party realtors a little bit more to get them to come to your community. So those numbers are modestly elevated, but that's the breakdown. 50 basis points leverage, 25 basis points other items. But we're fighting this fight every day, and I am determined to bring that number down by the end of the year with a 9 in front of it.

Richard Reid, Analyst

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

Douglas Yearley, CEO

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

Operator, Operator

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

Michael Rehaut, Analyst

I wanted to first zero in on the closings guidance. I know, Doug, you kind of walked through some of the math on how to get to the midpoint earlier. But on an overall level, given the fact also that you expect the spec mix to be similar in 2026 versus 2025, you kind of obviously walked through the community count growth. On looking at it from a different angle, is the guidance for the percent decline in closings largely just driven by math from where you're starting out the year with the backlog being down as it is? Or is there some element of a timing of community openings throughout the year or even perhaps a slower sales pace that you're baking in to protect margins? Maybe if you were to be a little more aggressive on deliveries, you might be sacrificing gross margin. So just trying to look at it from a different angle and understand the decline in closings in 2026.

Douglas Yearley, CEO

Mike, it is the lower backlog to begin 2026.

Michael Rehaut, Analyst

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

Douglas Yearley, CEO

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

Michael Rehaut, Analyst

Right. That's fair.

Douglas Yearley, CEO

And as you go ahead, please.

Michael Rehaut, Analyst

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

Douglas Yearley, CEO

If the 2 per month, which is a pretty low number in the company's history, does a bit better, then obviously, each of those other buckets can improve, but that's not how we're approaching the guidance for 2026.

Michael Rehaut, Analyst

Right. Okay. Second question, kind of on the gross margins. I think you've highlighted the fact that your incentives are roughly flattish, at least most recently. I think you just said you're seeing them in 2026 to be flat versus 2025. So I just wanted to understand what's driving the sequential decline in gross margins into the first quarter and then more broadly in the full year, because I would have assumed if you are assuming incentives being flat, I would have thought land cost inflation would be the primary driver of that. But I'd love to understand what are the impacts or what are the factors driving 1Q and 2026 overall relative to 2025?

Douglas Yearley, CEO

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

Operator, Operator

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

Alan Ratner, Analyst

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

Gregg Ziegler, CFO

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

Douglas Yearley, CEO

No, we're going to blame Marty Connor.

Martin Connor, Analyst

Yes. Exactly.

Alan Ratner, Analyst

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

Douglas Yearley, CEO

Yes. We're not overly optimistic about November and December because the seasonal trends in those months don't significantly reflect sales. The sales data from the last six weeks has remained flat compared to 2024, which had seen increases of 22% to 23%. This is somewhat encouraging. Ongoing pressure on rates might result in a situation where about 70% of our homes necessitate clients to sell their current homes, whether they're looking to upgrade or downgrade. This situation is challenging and involves some psychological pressure, but we believe we are nearing a turnaround as time may encourage buyers to take action. However, I can't provide specific data at this moment, which is why we’re being cautious with our guidance for 2026.

Alan Ratner, Analyst

That makes sense. I understand your comments, even if you consider them soft. It's helpful to hear your perspective. Gregg, I'm going to ask you a question before I leave. Regarding the share buyback guidance of $650 million, which is pretty much flat compared to last year. In the past year, you generated $1.1 billion in cash. You mentioned that might decrease a bit, but the sale of the apartment business also contributed in the first quarter. It seems like unless you're looking to increase cash reserves or reduce debt, which you don't have any coming due this year, there should be a good opportunity to raise that buyback number significantly for 2025. What is holding you back?

Gregg Ziegler, CFO

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

Douglas Yearley, CEO

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

Operator, Operator

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

Victoria Piskarev, Analyst

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

Douglas Yearley, CEO

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

Operator, Operator

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

Douglas Yearley, CEO

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

Operator, Operator

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