Paul Przybylski

Paul Przybylski asked for color on how January traffic and deposits broke out among Toll Brothers' consumer groups (move-up, move-down, first-time) and age-targeted segments. He also inquired about the weakness in the Pacific Northwest and trends in ethnic homebuyer demand following the H-1B controversy.

Answer

Executive Vice President Karl Mistry stated that activity was consistent across all three consumer segments and between spec and build-to-order homes. He also noted that general uncertainty around visa status has created a modest, non-concentrated pause from customers across the country, including the Pacific Northwest.

Paul Przybylski asked for a breakdown of the January traffic and deposit trends among Toll Brothers' consumer groups (luxury move-up, move-down, and first-time buyers) and how the age-targeted/snowbird season was starting. He also sought color on the weakness in the Pacific Northwest market and any observed impact of the H-1B controversy on ethnic homebuyer demand.

Answer

Executive Vice President Karl Mistry reported that activity was pretty consistent across all three consumer segments (move-up, move-down, and first-time) and between spec and build-to-order homes, with no segment showing outsized or undersized sales. Regarding the Pacific Northwest and broader ethnic homebuyer demand, Mr. Mistry noted that uncertainty around visa status has created a modest pause from customers across the country, though not concentrated solely in the Pacific Northwest.

Paul Przybylski of Wolfe Research asked about the expected profitability, including gross and operating margins, for the 480 wholesale orders in LGI Homes' backlog, and whether these sales would be recorded through the 'other income' line. He also inquired about the distribution of LGI Homes' community count growth expectations for 2026 and if new communities are experiencing higher absorption rates.

Answer

Eric Lipar, Chairman and CEO of LGI Homes, stated that the operating margin for wholesale business is similar to retail, though gross margin is typically lower. Charles Merdian, CFO, clarified that these wholesale units would be recognized through the top-line 'Home sales revenue,' with only previously or currently leased units flowing through 'other income.' Eric Lipar indicated that new community openings for 2026 would be more weighted towards the back half of the year and not necessarily seeing higher absorption rates compared to existing projects. Regarding SG&A, Charles Merdian stated Q4 was bonus-driven, but the annual run rate should be similar. Eric Lipar added that at three absorptions per month, they would continue to push for higher volumes.

Paul Przybylski inquired about the expected profitability, both gross and operating margin, for the 480 wholesale orders LGI Homes has, and whether these would flow through the 'other income' line. He also asked about the distribution of community count growth throughout 2026 and if new communities are experiencing higher absorption rates than legacy projects.

Answer

Eric Lipar, Chairman and CEO, stated that operating margins for wholesale business are similar to retail, though gross margins are typically lower. Charles Merdian, CFO and Treasurer, clarified that these wholesale units would be recorded under home sales revenue, not 'other income,' which is reserved for previously leased units. Mr. Lipar noted that new community openings for 2026 would be more weighted towards the back half of the year, and he does not necessarily see higher absorptions in new communities compared to legacy ones. Regarding SG&A, Mr. Merdian indicated Q4 2025 was bonus-driven, but the annual run rate for 2026 should be similar to 2025. Mr. Lipar added that if LGI Homes achieves a three-a-month sales pace, they would continue to push for higher volumes.

Paul Przybylski asked for a bridge of the sequential gross margin decline for Q1, considering factors like leverage, incentives, land inflation mix, and whether Q2 gross margin would be similar to Q1 if incentives remained stable.

Answer

CFO Curt VanHyfte attributed the Q1 margin decline to a mix shift, with higher ASP and margin homes pulled into Q4 2025, leading to more entry-level and tertiary community closings in Q1 2026, along with elevated incentives. Chairman and CEO Sheryl Palmer added that they would take price when the market allows and expect Q1 to be the low point for margins. Paul Przybylski also inquired about the performance of absorptions in new communities relative to legacy communities, specifically if the historical spread is still observed. Sheryl Palmer expressed optimism about new communities, citing strong sales in a new Phoenix community and high interest lists for Esplanade pre-opening events, noting a general pickup in traffic and web activity.

Paul Przybylski asked for a detailed explanation of the sequential gross margin decline expected for Q1, including factors like leverage, incentives, land inflation mix, and whether a stable incentive environment in Q1 would lead to similar gross margins in Q2. He also questioned how absorptions in new communities are performing relative to legacy communities and if the historical spread is still evident.

Answer

Curt VanHyfte (CFO, Taylor Morrison) attributed the Q4 to Q1 margin decline primarily to a mix shift towards more entry-level and tertiary community closings, noting that incentives remained elevated from Q4 into Q1. Sheryl Palmer (Chairman and CEO, Taylor Morrison) added that the company expects Q1 to be the low point for margins, with anticipated improvements driven by price increases and incentive reductions as market conditions allow. Sheryl Palmer also expressed optimism about new communities, citing strong sales in a Phoenix master plan and high interest lists for Esplanade communities, noting generally improved traffic and web traffic year-over-year.

Paul Przybylski asked for color on demand changes in Texas and Florida markets, as well as the company's perspective on M&A and the Indianapolis integration.

Answer

Sheryl Palmer, Chairman and CEO, detailed market performance, noting Florida's year-over-year strength led by Orlando and the Esplanade brand. In Texas, she highlighted Austin's recovery, Dallas's high-margin growth, and Houston's successful repositioning. Erik Heuser, Chief Corporate Operations Officer, added that resale inventory in Florida had improved. Regarding M&A, Palmer noted an increase in deal flow from smaller privates but said valuation expectations have not fully recalibrated. She confirmed the Indianapolis integration is largely complete and performing well.

Paul Przybylski inquired about the monthly cadence of orders and incentives during the third quarter, and whether there's an absolute floor for sales pace that would trigger increased incentives.

Answer

CFO Glenn Keeler stated that the monthly cadence for orders and incentives was consistent throughout the quarter, with September slightly outperforming August, and incentives on deliveries at 8.2%. CEO Doug Bauer noted the industry is currently experiencing a sales pace between 2 and 2.5 absorptions, emphasizing a focus on strong community count growth for 2026 rather than setting an absolute floor for sales pace.

Paul Przybylski inquired about the monthly cadence of Tri Pointe Homes' orders and incentives throughout the quarter, and whether there's a floor on sales pace that would trigger increased incentives.

Answer

Glenn Keeler, CFO, indicated that the monthly order cadence and incentives were consistent, with September slightly outperforming August, and incentives on deliveries at 8.2%. Doug Bauer, CEO, acknowledged the challenging market with absorptions around 2 to 2.5, emphasizing a focus on strong community count growth for 2026 rather than setting an absolute floor for sales pace with incentives.

Paul Przybylski inquired about the drivers behind the sequential increase in average sales price for orders, asking if it was due to mix or pricing power. He also asked about the potential impact of tariffs, political uncertainty in the Mid-Atlantic, and insurance issues in California on the business.

Answer

CEO Douglas Bauer and CFO Glenn Keeler clarified that the ASP increase was due to mix. Bauer noted that pricing power varies by submarket from 1% to 5%. Regarding external factors, he stated there has been no negative business impact in the D.C. Metro area and that the company is managing California insurance issues for entry-level buyers through its Tri Pointe Assurance program and targeted incentives.

Paul Przybylski from Wolfe Research asked for an update on the M&A environment, any changes to land underwriting standards, and trends in land financing costs.

Answer

EVP and CFO Russell Devendorf stated that while M&A opportunities exist, the company is comfortable with its proven greenfield model, which preserves culture and utilizes internal talent. President and CEO Gregory Bennett added that there have been no significant changes to overall underwriting standards or land financing terms, with the company remaining conservative and focused on maintaining pace.

Paul Przybylski of Wolfe Research, LLC asked about the elasticity of incentives across different consumer segments and requested color on incentive levels for each segment relative to the 8.7% average. He also inquired about any order impact from the FHA eligibility change for non-resident buyers.

Answer

President & CEO Ryan Marshall noted there is actually price inelasticity, meaning that higher incentives do not necessarily drive justifiable incremental volume. He explained that incentives are used across all buyer groups but differ in form: rate buydowns for first-time buyers, and price discounts or option incentives for move-up and active adult buyers. EVP & CFO James Ossowski stated that the FHA rule change had no real impact as it affects a very small portion of their business.

Paul Przybylski, on behalf of Trevor Young, inquired about the specific contributions of the slower Repair & Remodel (R&R) market versus builder inventory reductions to the company's reduced guidance. He also asked if the company has seen any positive business impact from recent hurricanes or wildfires.

Answer

Executive M. Culbreth confirmed that both softer R&R demand and new construction inventory reductions were key drivers of the quarterly performance and the revised full-year outlook, expecting a similar environment in Q4. Culbreth added that while there were some positive, non-material impacts in Florida from hurricanes, there was no specific impact observed from the fires in Southern California.