Earnings Call Transcript - TOL Q3 2021

Operator, Operator

Good morning and welcome to the Toll Brothers Third Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. The company is planning to end the call at 9:30 when the market opens. I would now like to turn the conference over to Douglas Yearley, Chairman and CEO. Please go ahead.

Douglas Yearley, Chairman and CEO

Welcome and thank you for joining us. With me today are Martin 'Marty' Connor, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior Vice President and Treasurer. Before I begin I ask you to read the statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, the impact of the pandemic, interest rates, inflation and many other factors beyond our control, that could significantly affect the true results. I'm very pleased with our performance in the third quarter. Demand continues to be very strong. We are benefiting from our strategy of expanding our product lines, price point and geographies as we continue to grow the business, drive price, expand margins and improve our capital efficiency. Home sales revenues of $2.23 billion were up 37% compared to the prior year period. Adjusted gross margin of 25.6% was up 170 basis points compared to last year. Both our pretax income of $303.4 million and our EPS of $1.87 more than doubled compared to last year. We signed 3,154 net contracts for approximately $2.98 billion, up 11% in units and 35% in dollars compared to the prior year period. These were third quarter records in both units and in dollars. In addition, our contracts per community at 10.2 were 20% above last year and our highest third quarter ever. Our average selling price in the quarter was approximately $945,000, up $70,000 compared to the second quarter and up $163,000 year-over-year. This increase in ASP shows the pricing power of our luxury business. This strong demand has continued into our fourth quarter. We've averaged over 300 nonbinding deposits per week in the first three weeks of August, a pace that is consistent with May through July. Not surprisingly, our deposits were down 15% compared to the same three weeks last August when demand surged following a lifting of COVID lockdowns. However, compared to the same three weeks of August 2019, deposits were up 29%. In some markets demand still far outpaced the supply and we are limiting lot releases. In other markets we are seeing demand return to seasonal patterns. I want to remind you that in summer and fall of 2020 we along with the rest of the industry experienced a historic surge in demand and sales. From August 1 to September 15, 2020, the first half of our fiscal 2020 fourth quarter net signed contracts were up 110% in units and for the full quarter they were up 68%. We knew these growth rates would be unsustainable and as a result we expect our fourth quarter contracts to be down compared to last year. While year-over-year order declines may make headlines, they don't reflect the current state of this housing market which remains very strong. In the near-term our biggest challenge is managing industry-wide supply and labor constraints that are extending delivery times. In our third quarter cycle times grew by about two weeks, pushing some anticipated third quarter deliveries into our fourth quarter. This same pressure will apply to our fourth quarter. During the third quarter and into the start of our fourth quarter, we raised prices in most of our communities. Just this past Monday, we rolled out another nationwide price increase. These increases have more than offset cost pressures we've experienced this year. In light of the pricing embedded in our backlog and our focus on managing costs, we are confident that our gross margin in fiscal 2022 will significantly exceed the 25.6% margin we project for fiscal 2021's fourth quarter. It is important to note that our customers are generally better positioned to absorb price increases due to their higher incomes, investment portfolios, and a benefit of increased values in their existing homes. In terms of demand across our markets, strength in the quarter was broad based across both geography and product type with especially strong demand in our affordable luxury and active adult communities. With our strategic expansion in the Sunbelts and Mountain States we continue to benefit from migration out of higher cost markets into more affordable markets, lessening the impact of affordability as prices have risen. Our backlog at quarter end was a record in both units and dollars. Backlog was $9.4 billion on 10,661 units, up 55% in dollars and 40% in units compared to last year. As we noted last quarter, we expect meaningful growth in revenue, gross margins, earnings and ROE in fiscal year 2022. We reaffirm these expectations, including a return on beginning equity for fiscal 2022 well above 20%. These expectations are driven not just by the strength of the housing market and our backlog, but also by the structural and permanent changes we have made to many aspects of our business, especially to how we acquire and develop land in a more capital efficient manner. We remain bullish on the long-term prospects for the housing market, which is supported by many factors, including a significant imbalance between the supply and demand of homes. On the supply side, this imbalance is the result of a decade of underproduction of new homes. On the demand side, millennials who make up the largest generation of Americans are forming families and entering their prime home buying years. We have also seen baby boomers and other active adults reenter the market. Many older workers are accelerating their plans, moving now and working virtually in places they might have planned to move to a few years later. Interest rates remain low. The resale market is tight. Americans have a much greater appreciation of home and the overall economy is improving. We believe that all these factors will continue to contribute to strong and sustained demand for new homes in the years to come and we are well positioned to capitalize on the opportunities this market presents. At quarter end we owned or optioned approximately 79,500 lots. Our optioned lots represented 53% of our total lots controlled at third quarter end compared to 49% one quarter earlier and 43% one year ago. We have already made significant progress in moving towards the 60% optioned and 40% owned goal we set last quarter. This shift to more optioned land is a key part of our capital efficiency initiatives. This land position provides the foundation for growth over the next several years, and we are currently benefiting from the significant percentage of our land that we acquired at lower, pre-pandemic prices. At quarter end we were selling some 314 active communities. We continue to project growth at 340 communities at fiscal year end and an additional 10% community count growth in fiscal 2022. This guidance is based solely on land we already control today. We also have the land under control today for meaningful further community count growth in fiscal year 2023. Our strategic expansion into new markets, new product lines, new price points, and especially the affordable luxury niche has positioned us well for growth and contributing to improvement in both our gross margin and our ROE. In fact our affordable luxury homes are generating gross margins comparable to our luxury homes. Affordable luxury comprised 44% deliveries in the quarter ended July 31, up from 40% last year. First time homebuyers who were the primary buyers in our affordable luxury segment accounted for 29% of our deliveries this quarter compared to 27% one year ago. Our affordable luxury product enables us to move into new markets and expand our presence in markets where we are already established. These homes appeal to many millennials who are making their first home purchase and can be built more quickly and efficiently and on less expensive land. Just last week we announced the acquisition of StoryBook Homes in Las Vegas with about 550 owned and controlled lots; this acquisition allows us to quickly expand our affordable luxury offering in the Las Vegas market. StoryBook is a remarkably efficient builder and we look forward to sharing lessons learned from its operations throughout the rest of our organization. We continue to focus on additional ways to improve capital efficiency to bolster ROE. Yesterday we announced a new strategic partnership with Equity Residential, a world-class S&P 500 company focused on luxury apartment rentals, to jointly acquire and develop sites for new rental apartment communities in key U.S. markets of Metro Boston, Atlanta, Austin, Denver, Orange County, Seattle and Dallas. Over the next three years we expect Equity Residential to invest 75% of the equity for each selected project with our Apartment Living unit investing the remaining 25%. We expect each project to be financed with approximately 60% leverage. We are targeting an initial minimum co-investment of approximately $750 million in combined equity between the companies. We are nearly $1.9 billion in total capacity assuming the 60% leverage. We will act as managing member of each project overseeing approvals, design and construction, and will receive development, construction management and financing fees as well as a promoted interest upon the sale of each property. Equity Residential will receive fees for property management, leasing and marketing services, as well as construction oversight. We have identified three land parcels that we already own to jumpstart the venture. The total anticipated cost of these three projects is approximately $242 million. The venture should allow us to develop more apartments with less capital, improving the capital efficiency of the Apartment Living business. We also expect this venture to produce a more predictable stream of earnings from our Apartment Living business as we expect to sell each developed property at stabilization, in most cases to Equity Residential. We are very excited about this partnership with Equity Residential and we hope we can expand on this relationship. We are also looking at forming one or more additional programmatic relationships in markets and products that are not covered by our agreement with Equity Residential. We expect that such a partnership will provide a similar capital efficient platform for the balance of the Apartment Living business. Now I'll turn it over to Marty.

Martin Connor, Chief Financial Officer

Thanks Doug and good morning everyone. Thanks for joining us. Operationally we had another great quarter. Our production teams continued their solid performance as we managed through the labor and supply chain issues that have impacted homebuilders this year. We thank them for their efforts and accomplishments. We delivered 2,597 homes at an average price of approximately $860,000, generating third quarter homebuilding revenue of $2.23 billion. Deliveries were up 28% in units and 37% in dollars compared to one year ago. We met our revenue projections due to our higher average price of deliveries than anticipated. Our third quarter pre-tax income was $303.4 million compared to $151.9 million in the third quarter of 2020. Net income was $234.9 million or $1.87 per share diluted compared to $114.8 million and $0.90 per share diluted one year ago. Third quarter adjusted gross margin was 25.6% of revenues compared to 23.9% in fiscal year 2020 third quarter and 80 basis points better than projected. The outperformance was due primarily to our improved pricing power and favorable mix. SG&A as a percentage of home sales revenue in the quarter was 10.5% or 110 basis points better than our guidance. We attribute this primarily to lower-than-expected selling and marketing expenses, as well as continuing permanent overhead cost controls. Joint venture, land sales and other income was $29 million in the third quarter compared to $3.6 million in the same quarter last year. Our projection was approximately $20 million. The outperformance was driven by better-than-expected results from our mortgage operations and our Apartment Living operations. Our balance sheet remained strong. We ended our third quarter with approximately $2.7 billion of liquidity, including $946 million of cash and approximately $1.8 billion available under our $1.9 billion revolving bank credit facility. In the third quarter we invested approximately $200 million in land acquisition and another $230 million in land development due primarily to our focus on acquiring land more efficiently. Our land and development spend is projected to be slightly lower in fiscal 2021 than what we spent two years ago in fiscal 2019 despite our significant growth since then. These structural changes in how we acquire land are also permanent and are contributing to our significant increase in return on equity in 2022 and beyond. We expect to generate $750 million in cash from our operating activities in fiscal year 2021. We will continue to use our cash to invest in the growth of our business, return cash to shareholders, and further reduce our debt, including retiring $410 million of our 5.875% public notes that are due in February 2022. We intend to call these bonds in our fourth quarter and retire them at par in mid-November 2021. Our net debt to capital ratio stands at 33.1% at third quarter end and we expect it to drop to the mid upper 20% range at fiscal year end. During the quarter we continued our program of returning capital to shareholders through share repurchases and dividends. In our third quarter we repurchased approximately 1.7 million shares at an average price of $57.66 for an aggregate amount of $95.4 million. We expect to repurchase a similar amount in our fiscal fourth quarter. In April, we increased our quarterly dividend by 55% to $0.17 per share. These actions reflect our confidence in our business and in the sustainability of our substantial cash flows moving forward. Turning to fourth quarter and full-year guidance, due to the production delays impacting our industry, we now expect full year deliveries of approximately 10,100 homes, compared to the midpoint of our previous guide of 10,300 homes. These 200 deliveries which are sold and have substantial deposits from our buyers are now projected to sell in the first quarter of fiscal 2022. So we now project our fourth quarter deliveries to be approximately 3,450 homes. We estimate an average delivered price for the fourth quarter of approximately $840,000 per home, and approximately $830,000 for the full year. This is an increase of $15,000 per home, compared to our previous fiscal year guidance. We are projecting our fourth quarter adjusted gross margin of 25.6% of revenues and a full fiscal year 2021 adjusted gross margin of 24.9%. This is an increase of 30 basis points compared to our previous full-year guidance. Based on the composition of our backlog, we are confident that our full-year fiscal 2022 adjusted gross margin will significantly exceed the 25.6% margin we are projecting for the fourth quarter of fiscal 2021. Our confidence is based on several factors; the most significant of which is the higher prices that are embedded in our backlog, which is the result of the steady and significant price increases we've achieved over the year. Demand is allowing us to continue to push price in most of our markets. In addition, we are intensely focused on our construction budgets and managing building cost. Like the entire industry, we are seeing cost pressures on material and labor. We enjoy stronger relationships with our trade partners, and have tremendous operating scale, which helps us to manage these costs. We also continue to benefit from our long land position. The land for most of the communities that we'll be delivering homes in fiscal 2022 was put under control prior to the pandemic at lower prices. Turning back to guidance, we expect interest in cost of sales to be approximately 2.3% of home sales revenues for the fourth quarter and full year. This full-year guidance is 20 basis points better year-over-year and reflects the impact of debt reductions made earlier this year. We expect our interest expense to continue to decline in fiscal 2022 as we further reduce our leverage. We expect SG&A as a percentage of revenue to be approximately 9.8% in the fourth quarter and 11.3% for the full year. This full-year guidance is 50 basis points better than previously projected. As Doug mentioned, we expect community count to be 340 at fiscal year end with 10% growth from there by fiscal year 2022. Full year guidance for fiscal year 2021 other income, income from unconsolidated entities and land sales is now $140 million for the full year, with approximately $40 million projected for the fourth quarter. This is a $30 million increase from our projection last quarter, and is driven by more sales projected in our Apartment Living division. Our third quarter tax rate was 22.6%, which includes approximately $12 million in energy tax credits. Our fourth quarter effective tax rate is projected to be approximately 26% and our full-year guidance is 24.6%, 90 basis points better than our previous full-year guidance. Taking this all into account, we have increased our projected return on beginning equity for fiscal year 2021 to 15.9%, over 700 basis points better than fiscal 2020. As Doug noted, we expected to exceed 20% in fiscal year 2022 and we believe our capital efficiency initiatives and the structural changes in our land acquisition strategy will keep it above 20% long-term. Now let me turn the call back to Doug.

Douglas Yearley, Chairman and CEO

Thank you, Marty. I would like to take this opportunity to extend my sincere thanks to the tremendous effort from all of our Toll Brothers team members. They continue to demonstrate their dedication to taking care of each other and our customers and for that I am very grateful. Now let me open it up to questions. Andrea, we're ready to go.

Operator, Operator

And the first question comes from Deepa Raghavan of Wells Fargo. Please go ahead.

Deepa Raghavan, Analyst - Wells Fargo

Hi, good morning, Doug, Marty, thanks for taking my questions. Doug, based on your comments on that 20% plus ROE growth target, the emphasis on the 'plus' appears to be slightly stronger than what we heard on your prior call. Is that a fair observation?

Douglas Yearley, Chairman and CEO

Yes, and we will obviously give more detailed guidance on our fourth quarter call in three months, but yes, you picked that up correctly.

Deepa Raghavan, Analyst - Wells Fargo

Okay, and I'm assuming that's driven by the gross margin predominantly, or is there anything else driving that?

Douglas Yearley, Chairman and CEO

It is driven predominantly by the gross margin, also the increase in sales and our land buying strategies that we've been talking about for the last couple years, that will continue to push that ROE up permanently.

Deepa Raghavan, Analyst - Wells Fargo

All right, well, my follow up question is on more recent trends. Are there any trends in July and August that may have stood out for you or are worth calling out? I'm particularly looking for trends and nuances that the other June quarter ending peers haven't pointed to so far.

Douglas Yearley, Chairman and CEO

Yes, the sales and the demand throughout the third quarter were pretty consistent month-to-month, as I mentioned in my prepared comments. In many markets we still see demand that exceeds supply, exceeds our ability to deliver, and in those communities we're either still on allocation, we're more aggressively driving price, or we're running processes that include best and final offers to interested and pre-qualified buyers. I think the one thing we have noticed in some markets, and they are primarily markets that I would describe in the Northeast and the Midwest (for us the Midwest is really just Detroit, because we're down to one community in Chicago), is that we're seeing some more of the typical summer seasonal trends. Traffic is up, web traffic is up. We continue to raise prices as we mentioned. This past Monday we had a price increase nationwide, so I don't think there's anything significantly different in July and August, except that in some markets—primarily those I mentioned in the Northeast—we're feeling some more seasonal trends and I expected that as the world opened up and people hit the Jersey Shore or did whatever they normally do in their summer months and now prepare to take kids back to school. We're seeing in those markets more traditional seasonal trends. But that doesn't mean a slowing overall. That's why I caution about the year-over-year comp: it's still a very good market, just there's some of those seasonal trends occurring. In our markets out west and in the South—Carolinas, Georgia (for us that's Atlanta), South Carolina and Florida—we are still seeing most of those markets with more demand than we can satisfy.

Deepa Raghavan, Analyst - Wells Fargo

That's great color, thanks very much, great quarter, thanks.

Operator, Operator

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

Bryan Adams, Analyst - Evercore (on behalf of Stephen Kim)

Hey guys, this is actually Bryan Adams on for Stephen Kim. Thanks for taking my questions here. I wanted to talk about the 4Q pricing guide a little bit quickly. You saw really strong price on your deliveries this quarter, I think sequentially up 6% or so, and given your comments it sounds like what you're seeing on the ground is still very strong pricing. If I look at a typical 4Q, where you often have some of your highest ASPs, the sequential decline that you're guiding for into next quarter— is there anything unusual, maybe from a mix perspective, that can explain that dip?

Martin Connor, Chief Financial Officer

Yes, I think the biggest aspect is our City Living business. It represented about 8% of our third quarter deliveries. We expect it to represent 3% of our fourth quarter deliveries and be less than that in 2022. That is higher margin, higher average price business and that is influencing both the margin progression as well as the average price that we reflect in the fourth quarter.

Douglas Yearley, Chairman and CEO

Yes, and there will be a little bit more coming out of the Pacific in the fourth quarter, which is also higher priced, higher margins, so that will have some offsetting effect on a bit of the City Living mix. But as we look forward to 2022, pay attention to the sales prices that we achieved—the $945,000 average sales price you saw in the third quarter—because that is really nationwide. We've had pricing ability everywhere and that's what's going to be driving the higher prices in 2022.

Bryan Adams, Analyst - Evercore (on behalf of Stephen Kim)

Great, I have one follow up on margins actually and specifically wanted to talk about costs and maybe some of this dovetails with what you just said, but you're implying margins are going to be flat in 4Q; did that assume higher lumber costs in 4Q than in 3Q? And I also just wanted to get a sense of, if you think about the peak, like peak lumber being this past spring coming to a head in May, when you're expecting that to make its way into your reported results? Thanks guys.

Douglas Yearley, Chairman and CEO

Yes, lumber costs for the homes we are building will peak through Q4 2021 and Q1 2022. Then starting in Q2 and accelerating through the balance of 2022 we will see a significant drop in lumber. Right now with the size of our homes and the amount of lumber we put in them, when lumber falls it will be meaningful. The homes sold today, when they need lumber, could be down as much as $40,000 in lumber which will have a nice benefit in the back half of 2022.

Bryan Adams, Analyst - Evercore (on behalf of Stephen Kim)

Awesome, thanks guys, great quarter.

Operator, Operator

The next question comes from Buck Horne of Raymond James and Associates, please go ahead.

Buck Horne, Analyst - Raymond James

Hey thanks, good morning. I just wanted to get a follow up a little bit more on the Equity Residential deal. Number one, very capital efficient, so great use of resources, but how do you determine the pricing on those assets at stabilization? Is there some sort of implied cap rate you go into a predetermined construction with Equity Residential or is it kind of a right of first offer but they don't have the obligation to buy? How does that work?

Douglas Yearley, Chairman and CEO

Sure, Buck. We're really excited about the Equity Residential deal; it's great to be aligned with the leading luxury apartment owner and manager in the country. We have a track record with them. The key to us was driving capital efficiency through the apartment business. They will help us cover pre-development costs before we buy the land, they will invest at land closing with us and then we are committed to sell all of the assets at stabilization. We're not going to hold apartments long-term anymore. We understand the need to recycle the investment to show investors regular predictable, sustainable earnings. To your specific question about exit price, it's a very thoughtful, pragmatic approach that allows Equity Residential, without a complicated marketing process but with appraisers involved, to buy us out. Remember, they have 75% of the investment. They only have to buy out the 25% of Toll. So they're going to get the benefit with their 75% investment of any uptick in value. If we're unable to agree or for some reason they don't want the assets, then we're going to sell. We're not going to hold it; we're still going to sell it, and we'll get our money back at stabilization, but they have to pay fair value. They know they're not going to be taking advantage by getting a price that's under market. We also understand we're saving marketing dollars and time by avoiding a broad brokered process and due diligence delays. Those are the basic parameters around how it works.

Martin Connor, Chief Financial Officer

I think they can bring some operating efficiencies to the projects through their property management, which will enhance value. They have a relatively inexpensive cost of capital, so we know we're selling to an efficient capital source. As Doug mentioned, they'll typically buy in at fair value and they will have most of the upside through their larger ownership stake.

Douglas Yearley, Chairman and CEO

This is a win-win. Equity Residential wanted a strong development partner to feed them new opportunities and we wanted a capital efficient platform. There are markets not covered by this agreement—our student housing business, for example, is not something Equity Residential currently wants. We are actively talking to other private equity players we've worked with to find one or more structural, permanent long-term partners to complete the business model similar to what we've done with Equity Residential in their markets.

Buck Horne, Analyst - Raymond James

That is great color. Thank you so much. That's a really fantastic deal. I really liked the platform there, so congrats on that. Second, I guess I'll follow up in a different direction. There is some new legislation that seems to be percolating through Washington—Senator Wyden has a housing proposal as part of the infrastructure plan that includes things like a $15,000 first-time buyer tax credit and a developer tax credit to stimulate new homebuilding supply in lower-income areas or outlying areas. I'm wondering if you guys have had any time to look at those proposals or have any general thoughts about how a first-time buyer tax credit could impact a market like it is today or any other thoughts on that potential legislation?

Douglas Yearley, Chairman and CEO

We haven't had a lot of time to study it. Anything Washington does to promote and stimulate homeownership, even if it's a bit below our typical price point, is good for the industry and for Toll Brothers as we move down in price through our affordable luxury offerings. There have been tax credits in the past that have been effective in stimulating demand. There is a significant housing shortage in this country and in certain states—California being an obvious example—there is an affordability issue that needs to be addressed. As this develops, we as Toll Brothers and the industry, working through our trade groups, will be actively engaged and are likely to be supportive of continued focus on promoting homeownership.

Martin Connor, Chief Financial Officer

As we mentioned in the prepared remarks, nearly 30% of our buyers right now are first-time homebuyers, at least one person on the deed. We'll need to see the specifics of any legislation, whether there are income limits or other criteria. We are active in our apartment business and opportunity zone areas, and in many situations we have affordable housing components in developments, so we'll study whether proposed provisions would be beneficial to us.

Buck Horne, Analyst - Raymond James

Great, thanks for the color, guys. Great quarter.

Operator, Operator

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

Michael Dahl, Analyst - RBC Capital Markets

Good morning, thanks for taking my questions. The EQR deal is really interesting. I want to start with a two-part question. You've got the 25% interest, but you also have these fee structures in place, plus the promote on sale. Should we think of it as on an ultimate sale that your return on investment is greater than that 25%, given the fee structures that are in place? And then the second part is just on the initial three assets—how should we think about that, and whether that's embedded in terms of some of the other income guidance for Q4?

Douglas Yearley, Chairman and CEO

Yes, on your first question, we do expect to receive more than 25% of the economic benefit on sale when you factor in fees and promote. That's how a promote works and we've had similar structures with multiple private equity partners. Marty, do you want to cover the three assets?

Martin Connor, Chief Financial Officer

The three assets we identified are parcels we already own and have not yet commenced construction on. They are relatively inexpensive pieces of land, but they'll be part of our initiative to reduce the capital that we have in Apartment Living. Our Apartment Living investment has gone down from $770 million at the beginning of the year to $650 million. These three assets still need to be developed and leased up, so they're a 2023–2024 income event. We did sell an asset in our third quarter to Equity Residential, and we've already sold an asset in our fourth quarter to them that weren't developed under this program but were marketed in the general marketplace. That fourth quarter gain is embedded in our $40 million guidance for the fourth quarter.

Michael Dahl, Analyst - RBC Capital Markets

Okay, that's very helpful. And then my second question is really on the returns and capital efficiency, because clearly you're trying to articulate this to the investment community. It seems like it's potentially one of the more underappreciated areas. Margins in the near term contribute to ROE next year, but it looks like your actions on capital efficiency are hitting an inflection point in 2022. Are there certain quantitative targets you're going to set out—not just saying returns above 20% but things like asset turns—how are you thinking about potential improvement in asset turns over the next year or two?

Douglas Yearley, Chairman and CEO

On the call in three months we will give more detail on 2022 in terms of margin and ROE. 2022's ROE is being driven by the price increases embedded in our backlog and the new land buying and capital efficiency strategies we started a couple of years ago. We're confident long-term ROE will be north of 20% because of the disciplined land underwriting we now require for each deal. Each land deal must pass a much higher internal hurdle. As that portfolio comes through into 2023 and beyond, the company is structurally changed. We have many different ways to buy land now and continue to grow—land banking, joint ventures, purchase-money mortgages with land sellers, and longer-term payment terms with land sellers—all of which are working their way through the communities we'll open and deliver.

Martin Connor, Chief Financial Officer

You already see some of these initiatives in our balance sheet: owned land is down to 47% of total when it was 75–80% five years ago. We've made great progress and seen growth in our JV and other lines where we've placed larger communities into joint ventures. You see it in cash flow generation this year and last year, which gives us flexibility to buy back stock, pay down debt and increase dividends. All of those actions are driven by our ROE initiatives. It's an inherent change in how we think about the business.

Michael Dahl, Analyst - RBC Capital Markets

It's great to see it coming through or starting to come through. Thanks for taking my questions.

Operator, Operator

The next question comes from Alan Ratner of Zelman and Associates. Please go ahead.

Alan Ratner, Analyst - Zelman & Associates

Hey, guys, good morning. Thanks for taking my questions and I appreciate all the color so far. I'd love to ask an additional question on the ROE topic. When you think about the sustainability of those options and land banking availability, we've seen over time that tends to be somewhat cyclical. Option share got as high as 60% in the last cycle too. Generally that capital tends to dry up a bit if the market moves sideways or we enter a recession. So beyond 2022, do you think it's different this time such that longer-term capital will stick with this space through a potential downturn? I'll stop there and have a follow up, thanks.

Martin Connor, Chief Financial Officer

Alan, I think some of the growth in owned land from the last cycle was a function of the ability to walk from options and the risk profile the option concentration gives you. It wasn't necessarily driven as much by a lack of capital sources, although it was a function of choosing not to move forward with some deals, which is a positive side benefit of the ROE initiatives here. I think there are much more significant pools of capital interested in this business now as builders have fundamentally changed the way we look at our business to be more ROE-focused and are providing solid returns to these capital-efficient partners.

Alan Ratner, Analyst - Zelman & Associates

I appreciate that, Marty. Maybe we can follow up offline, but moving back to fundamentals: Doug, on the nationwide price increase on Monday, can you talk a little bit about the magnitude of that increase and what the trend has been lately? Have you been maintaining the same pace of price increases, have you moderated the rate a little, and what's the thinking going forward? A few builders have said they're not expecting to see the same type of pricing power going forward; it doesn't sound like you guys see it the same way.

Douglas Yearley, Chairman and CEO

Monday's price increase was not large; it was about 1%. It's an opportunity to get sales excited, create urgency and encourage buyers to act. We use these price increases locally and sometimes nationwide to drive urgency and they're effective as a sales tool. We won't disagree with other builders that some markets are showing more traditional seasonal patterns. In markets where demand far exceeds supply we continue to raise prices. In markets where demand is good but not 'frothy' we are more cautious. So it's a market-by-market approach.

Alan Ratner, Analyst - Zelman & Associates

Got it. That makes sense. I appreciate it. Thanks a lot.

Douglas Yearley, Chairman and CEO

We also do national sales events which are another tool to get salespeople to reach out and create urgency. Often it's a modest promotion like a kitchen upgrade that drives action. We did not have a national sales event in the third quarter; we took a quarter off and were encouraged by the sales activity in Q3 without it.

Operator, Operator

The next question comes from Susan Maklari of Goldman Sachs. Please go ahead.

Susan Maklari, Analyst - Goldman Sachs

Thank you. Good morning, everyone. My first question is, can you talk a little bit about the StoryBook deal? What is the M&A pipeline looking like today? How are you thinking about the ability to get future deals done and what brought StoryBook to you and helped you get over the finish line with that?

Douglas Yearley, Chairman and CEO

Sure. StoryBook is a small, lower-priced home builder in Las Vegas, incredibly efficient, and remarkably high margin for their price point. We started conversations with them pre-COVID but put them on hold in the spring and summer of 2020. We kept the relationship moving and closed the deal a few weeks ago. Five years ago we wouldn't have looked at StoryBook because we wouldn't have gone down in price like that, but as we expand our affordable luxury footprint we are acquiring efficient builders and learning from them—Sabal Homes in South Carolina and Coleman Homes in Boise are examples. While StoryBook is a small deal, it's a good strategic fit for Las Vegas and for teaching us to be better at lower-price homebuilding. On the M&A front, deal flow is heating up with smaller builders across the country. Many local builders had terrific 2021 numbers and some have engaged brokers to explore options, so our M&A group is seeing more opportunities than it has in a long time.

Susan Maklari, Analyst - Goldman Sachs

Okay, that's great color. My follow up question is on SG&A. That obviously came in over 100 basis points better than expected for this quarter, and you guided it a bit lower for the fourth quarter. What really drove those reductions, and how sustainable are those actions especially as we look to fiscal 2022?

Martin Connor, Chief Financial Officer

A lot of the SG&A improvement is associated with lower marketing spend, better control of model home cost, and reduced commission expense. From a true overhead perspective we are very tight on corporate costs and expect many of these controls to be permanent. Our employee count dropped significantly a year ago and we are keeping a tight rein on additions. The teams are doing great jobs with fewer people.

Susan Maklari, Analyst - Goldman Sachs

Okay, good. All right, good luck with everything.

Operator, Operator

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

Douglas Yearley, Chairman and CEO

Thanks, Andrea. Thanks, everyone, for listening in and for your interest. Hope you have a safe and healthy and happy few final weeks of summer. We look forward to speaking with you over the next few months and of course giving you more detailed updates on 2022 in December. Be well, thanks.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.