Earnings Call Transcript
Toll Brothers, Inc. (TOL)
Earnings Call Transcript - TOL Q2 2023
Operator, Operator
Good morning everyone and welcome to the Toll Brothers Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. The company is planning to end the call at 9:30 when the market opens. During the Q&A we do ask that you please limit yourselves to one question and one follow-up. Please note, this event is being recorded. At this time, I would like to turn the floor over to Douglas Yearley, CEO. Please go ahead.
Douglas C. Yearley, Jr., CEO
Thank you, Jamie. Good morning. Welcome and thank you all for joining us. Before I begin, I ask you to read our statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the availability of labor and materials, inflation and many other factors beyond our control that could significantly affect future results. With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP and Treasurer. We are very pleased with our second quarter results. As mortgage rates have stabilized and buyer confidence has improved, the increase in demand that began in January has continued through our second quarter and into the start of our third quarter. This improvement in demand combined with our strategy of increasing our supply of spec homes into the spring selling season and our focus on operational efficiency has resulted in second quarter performance that well exceeded our guidance. As a result, we are raising our full year guidance across most metrics. We delivered 2,492 homes in the second quarter at an average price of $1 million generating home sales revenues of approximately $2.5 billion, each a second quarter record. Deliveries exceeded the mid-point of our guidance by nearly 400 units primarily due to cycle time improvements and an increase in the number of spec homes we settled in the quarter. Adjusted gross margin of 28.3% in the second quarter improved by 220 basis points compared to last year’s second quarter and was 130 basis points better than guidance. Our home building gross margin benefited from cost controls and greater leverage on fixed costs from higher home building revenues. Our SG&A expense in the second quarter was $16 million lower than Q2 of last year. We are benefiting from approximately $50 million of cost reductions that we have taken over the past year which we expect to be permanent savings. And we continue to target additional opportunities to become even more efficient. As a result of the significant beat on our top-line and improved margin performance, we generated second quarter pretax income of $430.6 million and earnings per share of $2.85, up 46% and 54% respectively, compared to last year’s second quarter. Both second quarter records. At second quarter end, our backlog stood at $8.4 billion and 7,574 homes. Our cancellation rate as a percentage of backlog was an industry low of 3.9% in the second quarter. As a reminder, our buyers are financially invested in their new homes as they make sizable non-refundable down payments that average approximately $85,000. They also become emotionally invested as they personalize their homes by selecting their home sites, adding structural options to match their lifestyles, and selecting finishes that reflect their tastes. In short, they stick. And the profile of our typical buyer is well suited for the current market. Our buyers are more affluent and tend to have significant equity built up in their existing homes, which better insulates them from affordability concerns and makes it easier for them to move. In the second quarter, 23% of our buyers paid all cash and those who took a mortgage averaged approximately 70% loan to value. In the second quarter, we signed 2,333 net contracts for $2.3 billion, down 19% in units and 26% in dollars compared to our very strong second quarter last year. Although our second quarter contracts were down on a year-over-year basis, demand has improved significantly compared to the previous three quarters. As I mentioned on our last call, we saw demand start to improve in January. I'm pleased to report that these more favorable conditions have continued through our second quarter and into the start of our third quarter. Physical traffic, web activity, and deposits in the first three weeks of May have all been very encouraging. Overall, buyers appear to be adjusting to mortgage rates that have stabilized in the 6% to 7% range. The shock of last year's abrupt spike in rates appears to be wearing off and buyers are moving on with their lives. As I pointed out in the past, there is a substantial shortage of homes for sale in the U.S. with housing starts failing to keep up with population growth for at least the past 15 years. Now, with 90% of outstanding mortgages under 5%, the market is seeing the further impact of a low interest rate lock-in effect. Existing homeowners are reluctant to give up their low-rate mortgages, which has led to historically tight resale inventories. In fact, according to recent reports, approximately 35% of homes currently for sale are new construction compared to the historical norm of between 10% and 15%. This phenomenon has become a boon for homebuilders, especially the larger, well-capitalized public builders who are more efficient and better positioned to take advantage of opportunities compared to smaller private builders. With such low levels of resale inventory on the market, buyers are gravitating to new homes. As they do, they benefit not just from the opportunity to buy new, but they can also take advantage of incentives like rate buy-downs that are generally not available on resale homes. In addition to the underproduction of new homes in this country and the low level of resale inventory, there are many other factors that continue to support the housing market. These include favorable demographics with millions of millennials and baby boomers on the move. Millennials, in particular, are buying their first home later in life when they have higher incomes and accumulated wealth. Migration trends are driving the population south and west, which not only increases demand in these markets but alleviates some of the affordability pressures as buyers move from high-cost to low-cost markets. More flexibility in the workplace also supports this migration and the housing market in general as buyers place a greater emphasis on their homes. These trends have staying power that we believe will continue to support housing demand for years to come. A key part of our strategy heading into the spring selling season was to focus on increasing our supply of spec homes to support deliveries in the second half of fiscal 2023 and throughout 2024. With demand better than expected this spring, this strategy is paying off. Demand for our spec homes in the second quarter remained strong, representing approximately 40% of our orders in the quarter. As a reminder, we define a spec home as any unsold home with at least a foundation in the ground. We sell our specs at various stages of construction which still allows many of our buyers the opportunity to personalize their finishes. For those who prefer an even quicker move in, when we do finish our homes, we include designer appointed features that reflect the luxury Toll brand. Specs also allow buyers to lock their mortgage rates at or near the time of contract. We believe that in this market, our spec strategy continues to make sense. With such limited resale inventory, specs fill a significant gap in supply. We expect the specs to continue to comprise between 30% and 40% of our sales for the foreseeable future. The more stable environment has allowed us to increase price in more than half of our communities. Factoring in base price increases and incentive reductions, we have increased price by an average of approximately $25,000 per home in the second quarter. We also saw modest improvements in our supply chain and some easing in labor constraints, especially at the front end of the construction process. As a result, we saw our cycle times improve by approximately two weeks on average across our communities during the second quarter. The improvement in cycle times, combined with a stronger demand environment and our focus on increasing spec production has led us to increase our full year deliveries guidance. We now expect to deliver between 8,900 and 9,500 homes, an increase of approximately 700 homes at the midpoint of our previous guidance. We are also increasing our guidance for our full year average delivery price to between $975,000 and $995,000. This translates to a homebuilding revenue projection of approximately $9.2 billion for the full year. We are also increasing our full year adjusted gross margin guidance from 27% to 27.8%. As I mentioned earlier, we expect to benefit from greater fixed cost leverage on higher revenues. We are also benefiting from being a more efficient builder with a streamlined portfolio of floor plans and option selections. On the land front, we remain committed to our disciplined and capital-efficient land acquisition strategy as well as our focus on returning capital to stakeholders. At the end of our fiscal second quarter, we owned or controlled 71,300 lots, of which 49% were controlled and 51% owned. Approximately 7,500 of these lots are already committed to buyers in our backlog. Excluding these, our controlled land represents 55% of lots. This provides us with sufficient land needed for significant growth well into the future. Therefore, we will continue to be very selective on new land deals as we apply our more rigorous underwriting standards. Our financial position and liquidity remain very strong. In the second quarter, we retired $400 million of senior notes and extended our term loan and revolving credit facilities out five years. At quarter end, our net debt to capital ratio was 23.5%. We also purchased $84 million of our common stock at the average price of approximately $58 in the second quarter and paid $46 million in dividends year-to-date. In March, our Board approved a 5% increase in our quarterly dividend. These actions reflect our confidence in the business and our commitment to delivering returns to shareholders. With that, I'll turn it over to Marty.
Martin P. Connor, CFO
Thanks, Doug. Good morning, everyone. As Doug mentioned, we had a terrific second quarter. We beat our guidance for homebuilding revenues, adjusted gross margin, SG&A, and earnings. Our quarter end backlog of 7,574 homes and $8.4 billion is strong with high embedded gross margins, and our cancellations have remained low. We believe we have the right strategy in place to replenish this backlog and support deliveries in the second half of fiscal year 2023 and throughout fiscal year 2024. Homebuilding revenue of $2.5 billion on 2,492 delivered homes was both second quarter records, increasing 14% in dollars and 4% in units compared to one year ago. We signed 2,333 net contracts in the second quarter for $2.3 billion. The average price of contracts signed in the quarter was approximately $975,000, down about 2.1% compared to the first quarter of fiscal year 2023. This decline was due to mix. As Doug mentioned, we actually raised price an average of $25,000 per home in the second quarter. Pretax income was $430.6 million compared to $295.8 million in the second quarter of fiscal 2022. Net income was $320.2 million or $2.85 per share diluted compared to $220.6 million and $1.85 per share diluted one year ago, leading to a book value per share of $58.67 at quarter end. Our second quarter adjusted gross margin was 28.3% compared to 26.1% in the second quarter of 2022, and that was 130 basis points better than projected. The improvement was due primarily to better cost control and fixed cost leverage on higher-than-expected homebuilding revenues. As Doug mentioned, we are raising our full year adjusted gross margin guidance from 27% to 27.8%. In our third quarter, we expect adjusted gross margin of 27.7%. During our most recent quarter, impairments and write-offs in homebuilding cost of revenues were approximately $11 million. About $6 million of this related to sunk predevelopment and walkaway costs with the remainder related to three operating communities. SG&A as a percentage of revenue was 9.1% in the second quarter compared to 11.1% in the second quarter of last year, and that was 210 basis points better than projected. SG&A expense was $16 million lower in Q2 of fiscal year 2023 compared to last year's second quarter. $13 million of this improvement was from lower G&A costs with selling and marketing expenses $3 million lower. As we enter the second half of the year, we expect our G&A cost to remain relatively flat on a dollar basis as we continue to benefit from previous cost reductions, with modest increases in selling and advertising costs as the homes we sold in the slower second half of fiscal year 2022 are being delivered over the next several quarters. Overall, we are projecting full year SG&A costs to be approximately 10% of homebuilding revenues, which would be about flat compared to fiscal year 2022 and which represents a 100 basis point improvement from our prior guidance. For the third quarter of fiscal year 2023, we expect SG&A to be approximately 9.7% of homebuilding revenue. Second quarter joint venture land sale and other income was approximately $1 million, in line with our breakeven guidance. We are maintaining our full year guidance for this item at $125 million. We expect third quarter joint venture land sales and other income to be approximately $25 million, with the balance in the fourth quarter coming primarily from several apartment projects we are working to sell before year-end. Our tax rate in the quarter was 25.6%, slightly better than guidance of 26%. We finished the quarter with a net debt-to-capital ratio of 23.5%, $762 million in cash and equivalents, and $1.8 billion available under our $1.9 billion revolving bank credit facility. During the quarter, we retired $400 million of 4 and 3/8 senior notes at maturity and extended the term loan and revolving bank credit facilities out five years. As a result, we have no significant bank or senior debt maturities until fiscal 2026. This financial position provides us with ample flexibility to both grow our business and return capital to our shareholders. We are projecting fiscal year 2023 third quarter deliveries of between 2,350 and 2,450 homes with an average price of $1,015 million. As Doug noted, we expect full year deliveries to be between 8,900 and 9,500. We have also increased our projected full year average delivered price to be between $975,000 and $995,000, which is $10,000 above our prior guidance at the midpoint. We expect interest in cost of sales to be approximately 1.5% in the third quarter and for the full year as we continue to benefit from our reduced leverage. We expect community count to be approximately 360 at the end of the third quarter and approximately 385 by fiscal year-end. We also expect continued community account growth in fiscal year 2024. We project a tax rate of approximately 26% for the third quarter and 25.7% for the full year. Our weighted average share count is expected to be 111 million for the full year and 110.5 million for the third quarter. Based on all these factors, we project earnings between $10 and $11 per diluted share for the full year, with the return on beginning equity approaching 20%. Now let me turn it back to Doug.
Douglas C. Yearley, Jr., CEO
Thank you, Marty. Before I open it up for questions, I'd like to once again thank all of our Toll employees for their hard work this quarter. Your dedication and commitment to our customers is key to our continued success. With that, Jamie, let's open it up for questions.
Operator, Operator
Our first question today comes from John Lovallo from UBS. Please go ahead with your question.
Spencer Kaufman, Analyst
Hey guys, good morning. This is actually Spencer Kaufman on for John. Thank you for the question and nice quarter. Apologies for starting off with a glass half-empty question here, but rates have certainly picked up over the last few weeks, and you guys kind of alluded to this, but have you seen any impact to demand thus far and if rates sort of stay at 7%, would you expect incentive activity and cancellation rates to pick back up again for the industry?
Douglas C. Yearley, Jr., CEO
Spencer, the answer is no. We have not seen any drop in activity over the last few weeks as rates have moved up a little bit. In fact, May, if we look back historically, just because of seasonality as the spring season begins to wind down may represent graduations and weddings and opening of summer homes, May generally is down historically for the company about 30%. It's off from April. And that's a historic number that goes back long before the COVID years. And we're only three weeks here in, but May right now is trending significantly better than being down about 30%. In fact, we look back to 2019, and this May so far, through three weeks is up fairly significantly over May of 2019 when rates were in the low 4s. So I don't have that crystal ball as to where this market goes. If the rates continue to sit at 7%, but so far, for the last couple of weeks, we're very pleased with the continued very strong activity with rates at that level.
Spencer Kaufman, Analyst
Okay. Yes, that's actually really encouraging and good to hear. Maybe just on I think you guys mentioned that you've been able to increase pricing by about $25,000 per home in the quarter. Just curious as to which markets you're finding an ability to do that or a little bit higher than that? And maybe which markets are being a little bit more stubborn right now?
Douglas C. Yearley, Jr., CEO
Sure. It varies across the country. We do not increase prices uniformly by market; instead, we adjust them based on community activity. The strongest markets for us include Atlanta, all of Texas, Florida, California, and Pennsylvania, New Jersey. We are witnessing significant pricing power and positive activity nationwide. However, the weakest markets at the moment are Seattle, and although Phoenix has seen some improvement, it has not yet returned to the levels we desire.
Spencer Kaufman, Analyst
Okay, got it. Thank you guys and good luck.
Douglas C. Yearley, Jr., CEO
You are very welcome. Thank you.
Operator, Operator
Our next question comes from Michael Rehaut from J.P. Morgan. Please go ahead with your question.
Michael Rehaut, Analyst
Thanks, good morning everyone and congrats on the results. First question, kind of thinking about gross margins in the back half, and it looks like the guide is for something a little less than the second quarter. And just trying to think about how the interplay of maybe prior incentives in a softer back half might be influencing that and given the improved pricing that you've seen in the second quarter, how to think about gross margins in the backlog? And if the back half of 2023, is any good way to think about kind of a launching point into next year, not necessarily talking about guidance for next year, but just some of the puts and takes as you see things playing out over the next few quarters?
Douglas C. Yearley, Jr., CEO
Sure. The second half of this year's deliveries are mainly related to the nine months from last May to the end of the year when our orders dropped significantly. During that period, we had to slightly increase our broker commissions and enhance our incentives. We remained patient and did not pursue aggressive discounts, which I believe has benefited us. However, we needed to offer more incentives then, which were around $70,000 per home and have now decreased to $50,000 and are still trending downward. Although this presents some challenges, it's not particularly severe, especially considering the advantage of lower lumber costs that will support us going forward. Regarding 2024, we’re not providing guidance at this moment, but we expect to benefit from continued lower lumber prices. Recently, lumber prices dipped below $400 per 1,000 board feet and are still decreasing. Over the past four and a half months, we’ve experienced strong sales and a reduction in incentives. Next year, we won’t be delivering many homes from those slow months at the end of 2022, but rather more in line with the sales from the past few months. While we won’t go into further specifics, this gives you a good sense of where we currently stand.
Martin P. Connor, CFO
I don't have much to add to that, Doug. I think I would just emphasize that we didn't chase the market nine months ago then some of these gross margins that we have just reported and that we are projecting are reflective of that.
Michael Rehaut, Analyst
Right. That makes sense. I appreciate that. I guess just shifting to the balance sheet and the share repurchase activity, just wanted to confirm, number one, that the share count guidance, and correct me if I'm wrong, I believe it had originally assumed $100 million of repurchase per quarter each quarter for this year, I wanted to know if that's still the case? And secondly, given the strength of the balance sheet, and you've been kind of on a pretty consistent share repurchase cadence for the last few years. If we could expect, if it's reasonable to expect something similar, if not even maybe slightly bigger, just given the strength in the balance sheet and the consistency here of growth potentially?
Martin P. Connor, CFO
Sure, we're about $100 million into share repurchases for this year. While we initially indicated a target of $100 million per quarter, our actual goal is closer to $400 million for the year. Our cash flow typically improves in the latter half of the year. Additionally, we have $400 million of debt to pay off in April, which will give us more flexibility with cash flow and usage in the second half of the year. So, we are still aiming for $400 million, which means we'll need to allocate $300 million over the next two quarters. As for plans beyond that, we won't get too specific, but repurchases, return on equity, and equity management are all integral to our capital allocation strategy.
Michael Rehaut, Analyst
Right, perfect, thanks so much.
Douglas C. Yearley, Jr., CEO
You are very welcome Mike, thank you.
Operator, Operator
Our next question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Stephen Kim, Analyst
Thank you very much, everyone. What you've shared so far is very encouraging. I wanted to discuss the comments on capital allocation, specifically regarding land spending. We are at a conference and there's a lot of discussion about tighter credit conditions impacting smaller builders, making it challenging for them and limiting their options for project development. Are you noticing this as well? Do you think it creates more opportunities for acquiring land and possibly smaller builders in the next year or two? Is this something you are considering more seriously? Additionally, regarding inventory, we generally believe that as cycle times decrease, there could be an opportunity to free up some funds in your construction in progress inventory. However, since you're also increasing specs, this could have the opposite effect. Can you share your thoughts on whether your overall construction in progress could benefit from releasing some funds, considering these two factors?
Douglas C. Yearley, Jr., CEO
So Marty, you take that one, and then I'll take the first one.
Martin P. Connor, CFO
Alright. I think between the growth in community count and the spec strategy, that will offset about equally the cash flow from quick returns. So I think I'd consider that a neutral, Stephen.
Douglas C. Yearley, Jr., CEO
We are observing that smaller builders are feeling pressure with their banking relationships, mergers and acquisitions, and land issues, which aligns with what you're hearing at the conference. More smaller builders are now becoming sellers rather than continuing to build, leading to an increase in land opportunities. Recently, we've noticed a rise in improved lots and ready-to-go land that can help enhance our pipeline, driven by builders willing to accept smaller profits to offload their properties. This trend seems likely to persist and accelerate as these builders aim to capitalize on the profits from their land given the pressures they face, particularly concerning regional and local banking relationships. Additionally, we're witnessing an uptick in potential mergers and acquisitions among small private companies, as they recognize the value of their titles by showcasing recent good sales and margins. This may prompt them to consider selling their businesses due to their current banking challenges, indicating increased activity in this area, which is expected to continue to evolve.
Stephen Kim, Analyst
I appreciate that. I believe this will be a significant emerging trend this year and into next year. Lastly, I want to mention the SG&A comment. You noted that marketing costs were somewhat elevated in the latter half of last year, and those will carry into the second half of this year. Mike already addressed the gross margin. However, regarding SG&A and marketing costs, I understand that you included agent bonuses in your marketing expenses. Is it fair to assume that these bonuses and overall external agent commissions increased during that challenging period and are now decreasing? Could you provide some insight into the magnitude of this dynamic?
Martin P. Connor, CFO
I think at this point, Stephen, the agent cost definitely did go up during that time. They haven't quite come down yet. I think the marketing spend has moderated a bit from what it was then. And I think the guidance we've given for the back end of the year, we're very comfortable with, and we'll leave it at that and see where the market goes from there.
Stephen Kim, Analyst
Alright, it was worth a try. Alright, thanks guys, great job.
Douglas C. Yearley, Jr., CEO
Thanks, Steve.
Operator, Operator
Our next question comes from Rafe Jadrosich from Bank of America. Please go ahead with your question.
Rafe Jadrosich, Analyst
Hi, good morning. Thank you for taking my question. You mentioned that the percentage of orders is at 40%. What percentage of deliveries are we expecting for the quarter? Can you also discuss the spec strategy for the future?
Douglas C. Yearley, Jr., CEO
Sure. So 25% of deliveries in Q2 were spec, and we are comfortable with 40% spec mix moving forward. We think the huge hole that's being left in the resale market due to the lock-in effect that I spoke of in my prepared remarks is here for some time. And the spec strategy fills that void. It's been very successful for us. And so 40% is a number that we are comfortable with.
Martin P. Connor, CFO
It's very actively managed at various stages of construction. Spec target is set for each community that's about to open, and the teams are very familiar with how to manage not getting over-specked and trying not to be under-specked.
Douglas C. Yearley, Jr., CEO
If we consider a community making 25 sales a year, we might identify this as a strong spec market. We could decide that 10 of those sales will be spec homes, which are gradually being released. We classify a spec home from the point of foundation, so there might be three or four homes between foundation and framing, followed by two or three between framing and drywall, and then another two or three nearing completion. If a buyer selects a home at an earlier stage, they can still go to the design studio and customize it to their preferences. However, if they require a quicker move-in, they might choose one that is further along with finishes already selected. The new home spring season typically extends from January to April, while the resale market operates from April through July. Currently, we are at the tail end of the new home spring season but starting the used home spring season. Buyers who initially intended to resell in order to move quickly and ensure their children can start the new school year without the hassle of moving are now discovering a lack of inventory. Consequently, they are shifting their focus to new homes, where we have spec options available that allow for quicker occupancy. This trend has contributed to strong results for us in May, and I believe there is potential for the new home market this year to extend into the traditional summer months of the resale market due to the gap we are filling in the empty resale market.
Rafe Jadrosich, Analyst
Thank you for that information. To follow up on previous comments about the gross margin trends, you mentioned that in the second half of the year, you'll be delivering homes that were sold during a period of lower market activity. For the orders you are currently receiving, are you observing an improvement in gross margin compared to earlier quarters due to reduced incentives and benefiting from lower lumber costs?
Douglas C. Yearley, Jr., CEO
So the gross margin today is definitely better than the gross margin for those homes that were sold between May of 2022 and December of 2022. And we are seeing a reduction in incentives or an increase in price, as we mentioned of about $25,000. So the answer there, of course, is yes. With the only what I'll call modest headwind to that being that spec margins have sort of reverted back to the pre-COVID margin, which is modestly lower than the to-be-built margin. Remember, through COVID, there was a premium margin. There's a premium price for specs because the market was so anxious to get into a new home and it was taking so long to build to be built because of the disruption in labor and supply. We have now, as an industry, and I think you've heard it from the others, reverted back to where the spec margin is modestly below to-be-built. So that is the only minor, what I'll call, a headwind to what I described as the other tailwinds of better market today than we saw last year, lower lumber costs and a reduction in incentives, an increase in pricing in more than half of our communities.
Operator, Operator
Our next question comes from Alex Barron from Housing Research Center. Please go ahead with your question.
Alex Barron, Analyst
Yes, thank you. In yesterday's new home sales report, it showed that the growth is starting to come back in year-over-year orders and it showed that it was mostly predominant in lower priced houses. So I was curious if these specs that you guys are starting, are they more focused on the affordable luxury segment or how are you guys thinking about that?
Douglas C. Yearley, Jr., CEO
Alex, they are not. We are building spec around the country. But of course, as we've gone down in price a bit with the affordable luxury initiative we've been talking about, and if you look at the new markets we've entered over the last three or four years, Atlanta, Tampa, Charleston, Greenville, Myrtle Beach, Hilton Head, Boise, Idaho, Salt Lake City, San Antonio, those are some of our more recent entries. They tend to be lower priced. So our footprint geographically and therefore by price has certainly come down. So we're building more spec in less expensive areas, not because of a strategy, but more because that's where we now build. About 45% of our sales right now are in what we call internally this affordable luxury price point. 35% are true luxury and 20% is age targeted. And so the mix of the company has now come down, which is making us even more confident in this spec strategy because obviously, at the lower prices, there's going to be more demand for the spec. But that does not mean in Southern Cal and in Northern Cal and in some of the Texas markets and in Denver and I can go on and on, higher price areas, we are not building spec. We're very deliberate, we're very thoughtful. I took you through before sort of the strategy of how the specs are cadenced out. So there are different stages of construction, but the spec strategy is nationwide. But because of our mix, it's now more naturally targeted to a bit lower than it would have been 5 to 10 years ago.
Martin P. Connor, CFO
Just to follow on that mix comment from Doug, the stats he gave of 45% affordable luxury are units based. If you were to do a dollar-based, it would be 35% affordable luxury and 45% luxury and 20% active adult. So swing 10 percentage points between units and dollars, between affordable luxury and luxury.
Douglas C. Yearley, Jr., CEO
So I'm a marketing guy. I talk units, and Marty is a finance guy, as he should, he talks dollars.
Alex Barron, Analyst
Got it, that's very helpful, guys. And then I thought your comment on the private builders selling land and that opening up M&A opportunities that seem very interesting. So if you guys were to consider some potential M&A with private builders, what would be the criteria? Is it more geography-based, is it more large increasing the size of an existing market, or more like entering a new market, or what is the way you guys would think about a potential M&A opportunity for you there?
Douglas C. Yearley, Jr., CEO
We are quite pleased with our geographic presence. While there might be an interesting builder in a market we have not yet entered, we believe that any mergers and acquisitions would more likely expand and diversify us within our existing markets. We will have to monitor how those deals develop. As I mentioned, it seems more plausible that these transactions will involve significant land deals since we already have established operations and a brand. We need to be cautious about not overpaying or relying on a builder to help us enter a new market. There are opportunities for deals, and we will keep an eye on them. If we proceed with one or two transactions, that could definitely enhance our deliveries in 2024, and we are mindful and focused on that. However, there is nothing to announce at this time, as we are not in the final stages of negotiations for any deals. That said, we've observed an uptick in activity over the past month.
Martin P. Connor, CFO
Yeah. And as it relates to kind of the one-off pieces of land that those builders may choose to sell, it is certainly in our eyesight's that deals that they take to market that can drive deliveries for us in 2024 are that much more attractive.
Operator, Operator
Our next question comes from Alan Ratner from Zelman & Associates. Please go ahead with your question.
Alan Ratner, Analyst
Hey, guys. Good morning. Really, really great quarter. Congratulations. Doug, first I'd love to drill in on a couple of disclosures you gave early on about your credit profile of buyers and then just some commentary about relocation. First, on the relocation side, do you track the percentage of your buyers that are moving across state lines and what does that trend look like over the last several years and more recently? And then second, on the down payment side, I think you mentioned your average LTV on loans is 30% or excuse me, 70%. Do you track your kind of down payment assistance from family, from parents, and how that metric has been tracking as well of late?
Douglas C. Yearley, Jr., CEO
As to the latter, no, we don't. And that's very hard to get your arms around.
Martin P. Connor, CFO
But it is a factor for sure. Anecdotally, it is a factor. Absolutely a positive factor.
Douglas C. Yearley, Jr., CEO
Wealth transfer is increasing, particularly with the demographic shift of the 75 million baby boomers who will be passing down their wealth. I recall when I was 26 and starting my first job; my parents didn’t give me money, but my father helped by cosigning my mortgage, which is another way of providing support. Regarding your question about relocation, during COVID, when many were moving to the beach or elsewhere, about 40% of our sales came from buyers in other states. We're now seeing that number at approximately 35%, which is an increase from pre-COVID levels but has understandably decreased as things return to normal. Concerning creditworthiness and loan-to-value ratios, we're currently seeing 23% of our buyers purchasing with all cash, up from 20%, which makes sense given the higher interest rates. People are opting to use more cash and take out smaller mortgages. This cash-heavy buyer demographic primarily consists of active adults and empty nesters who are downsizing, having built substantial equity and wealth. For affordable luxury properties, the loan-to-value ratio is about 75%, while for luxury properties, it stands at roughly 68%. Age-targeted and age-restricted communities, which typically have more cash buyers, are seeing a loan-to-value ratio of 59%.
Alan Ratner, Analyst
Very helpful. There's a lot of great data in there, so thank you. My other question is about the specifications and build to order. I was a bit surprised to hear you mention a small gross margin spread between the specs and build to order. I would have thought that given the margins you achieve on options, upgrades, and designs, there would be a bigger challenge for a spec product since you're not capturing as much of that. Is this mainly due to the timing of when you sell the specs? Are you still selling them relatively early in the construction process, which allows for more upgrades?
Douglas C. Yearley, Jr., CEO
So let's talk about small because I don't want to mislead. The historic difference between to be built and spec is about 200 basis points. And that's about what we're back to right now. Through COVID, it probably flipped the other way.
Martin P. Connor, CFO
The nuance is that 200 basis points is on a to be built sold today and a spec sold today. In reality, what runs through our income statement is a spec sold today and a to be built sold yesterday.
Douglas C. Yearley, Jr., CEO
12 months ago. More than yesterday.
Martin P. Connor, CFO
Right.
Douglas C. Yearley, Jr., CEO
So there's a big timing difference there. So, that is what we're showing right now, Alan…
Alan Ratner, Analyst
So to clarify that on that, Marty, so the 200 basis points spread today, given that timing nuance, if you were comparing apples to apples and homes sold today, spec versus BTO, it sounds like it would be greater than that?
Martin P. Connor, CFO
200 basis points.
Alan Ratner, Analyst
Got it. Okay, thank you.
Douglas C. Yearley, Jr., CEO
And remember, we don't hold a lot of finished inventory that needs significant discounting. As I mentioned earlier, in a community or spec scenario, many homes get sold early enough that buyers can choose their finishes, which is one of Toll's unique advantages. You can visit our design studios and customize your selection. This results in higher margins; our design studios are achieving gross margins in the high 30s. Even for some of those specs, there is potential to generate higher margins due to the timing of the sales.
Martin P. Connor, CFO
And our specs have a lot of designer appointed features, a lot of options in them already or in the price.
Douglas C. Yearley, Jr., CEO
Our designers and our national decorators that decorate our beautiful models, they get involved in the finishes that go into specs. When Toll is picking those finishes because the house is progressing further along before it's being sold. So they naturally have some margin built into what we have picked.
Martin P. Connor, CFO
Alan, for the deliveries this quarter, our option upgrades which includes a lot premiums, were $212,000. And remember, 25% of those deliveries were specs.
Alan Ratner, Analyst
Got it. Really great info, guys. Thanks a lot. Appreciate it.
Douglas C. Yearley, Jr., CEO
You're very welcome. Thank you.
Operator, Operator
And our next question comes from Mike Dahl from RBC Capital Market. Please go ahead with your question.
Michael Dahl, Analyst
Hi, thanks for taking my questions. Just a couple of follow ups here. Back on the price increases on the $25,000, is that kind of a gross base price number, is it net inclusive of incentives? And can you just help us understand of that $25,000 if it is kind of all in, what the split is in terms of rolling back incentives versus true base price increases?
Douglas C. Yearley, Jr., CEO
So, Mike, it's net. So it's the combination of price increases and drops in incentives. And I would say it's probably half price increases and half incentives. It just depends upon the community and the amount of demand. We love raising price because you can put that price sheet in front of the next buyer and say, this was last week's price, this is this week's price. And the boss just told me I may have a new sheet next week. Incentive is softer. Incentive is more cautious, of course, because once the price sheet goes up, we're not taking it backwards. But I think it's probably half and half. But that number, that $25,000 is net.
Michael Dahl, Analyst
Okay, that makes sense. My second question is about the tightness in the existing home market, which is a significant theme right now. You are primarily a builder catering to buyers who already own homes, and you are seeing strong demand. This suggests that your buyers are choosing to leave their existing homes and purchase yours, likely giving up low-rate mortgages in the process. Currently, the consensus is that many are opting in, yet every builder in a higher price range is still attracting these buyers to their communities. You might be somewhat unique due to your cash buyers and age-targeted approach, but could you elaborate on what you believe is driving the strong demand, especially considering the existing home market's tightness and the reluctance of people to give up those favorable mortgage rates?
Douglas C. Yearley, Jr., CEO
Sure. You got a number of factors that are at work here. Let's not forget 15 years of serious imbalance between homes built and demand population growth that is in play. Our buyers have equity in their homes. In fact, with a tight resale market, even at a 6.5%, 7% rate, a lot of these homes are selling at or above asking price because there's nothing out there. So when they do sell their house, they're confident they're going to have even more equity than you would normally think in this kind of rate environment. They're wealthier. They're a move up buyer that has had success in life. But most importantly, there's still buyers out there that want to move up with their life. They want to move the kids to the better school district. They want the more prestigious town. They want the bigger home. They want Toll Brothers, frankly. We're really good at what we do. Our communities are really special. We build plus or minus 10,000 houses a year. And so even though rates are higher, there's an affordability issue, there are still a lot of buyers out there that want to move up, that have waited long enough, and they see our offering. And yes, it's more expensive than it was because rates have gone up, but it is time to move on with their life. This is not a financial decision. Does finances play into it, of course it does. But this is a family decision. This is a lifestyle decision and we're it. People aspire to be in our communities and that's what we're offering and we're seeing great results because of it.
Martin P. Connor, CFO
Thanks, Mike.
Operator, Operator
And ladies and gentlemen, at this time, we'll turn the floor back over to management for any closing remarks.
Douglas C. Yearley, Jr., CEO
Thank you, Jamie. Thanks, everyone. We appreciate all the great questions and your interest and your support. And we hope you have a wonderful, wonderful summer and we will see you soon. Take care.
Operator, Operator
And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.