Toll Brothers - Earnings Call - Q2 2025
May 21, 2025
Executive Summary
- Record Q2 home sales revenue of $2.71B and diluted EPS of $3.50, beating Wall Street on both revenue ($2.49B est.) and EPS ($2.86 est.) as Toll delivered 2,899 homes and leveraged stronger-than-expected same-quarter sell-and-settle spec activity and cost control; adjusted home sales gross margin was 27.5% and SG&A 9.5%. Q2 2025 consensus: revenue $2.49B*, EPS $2.86*.
- Despite softer demand (net signed contracts down 13% units YoY), management reaffirmed full-year guidance, citing backlog strength ($6.84B; 6,063 homes) and a strategy prioritizing price/margin over pace; Q3 guide implies stable margins (27.25% adjusted) and 2,800–3,000 deliveries.
- Mix tailwinds (more luxury, Mid-Atlantic/Pacific), strict cost control, and higher-than-modeled spec sell-and-settle drove the beat; incentives averaged ~7% of ASP in Q2 as Toll calibrated pricing to conditions without sacrificing margin guidance.
- Capital returns stepped up: buyback target increased to $600M for FY25 (from $500M), and dividend was raised 9% to $0.25; liquidity stood at ~$2.8B and net debt-to-capital at 19.8% at quarter-end.
What Went Well and What Went Wrong
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What Went Well
- “We generated record second quarter home sales revenues of $2.71 billion, well above our guidance of $2.47 billion, and beat both our adjusted gross margin and SG&A guidance,” demonstrating execution in a softer demand backdrop.
- Adjusted home sales gross margin of 27.5% (+25 bps vs. guide) benefited from positive mix, cost control, and leverage; SG&A of 9.5% also beat, aided by higher revenue.
- Capital allocation: increased FY25 buyback plan to $600M and maintained strong balance sheet (cash $686M, net debt/cap 19.8%), reinforcing confidence and support for EPS.
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What Went Wrong
- Demand softness: net signed contracts fell 13% units and 11% dollars YoY; management cited lower consumer confidence and macro volatility; trend persisted into early Q3.
- ASP mix: delivered ASP (~$934K) was below guide low end due to more deliveries in Mountain and Mid-Atlantic; adjusted gross margin still held, but adj. home sales gross margin declined YoY (27.5% vs. 28.2%) as incentives ticked up.
- SG&A deleverage vs. prior year (9.5% vs. 9.0%) and lower “other income” vs. last year's land-sale-driven Q2 tough comp ($29M vs. $203.7M) pressured YoY operating metrics.
Transcript
Operator (participant)
Good morning, everyone, and welcome to the Toll Brothers Second Quarter Fiscal Year 2025 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a telephone keypad. To withdraw your question, you press star and two. The company is planning to end the call at 9:30 A.M. when the market opens. During the Q&A, please limit yourselves to one question and one follow-up. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Douglas Yearley, CEO. Please go ahead.
Douglas Yearley (CEO)
Thank you, Jamie. Good morning. Welcome, and thank you all for joining us. With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP, Treasurer, and Head of Investor Relations. As usual, I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the availability of labor and materials, inflation, and many other factors beyond our control that could significantly affect future results. Please read our statement on forward-looking information in our earnings release of last night and on our website to better understand the risks associated with our forward-looking statements. I am pleased with our performance in the second quarter. In what proved to be a challenging environment, we met or exceeded our guidance across all key metrics.
We delivered 2,899 homes at an average price of approximately $934,000, generating record second quarter home sales revenue of $2.71 billion, or $236 million better than the midpoint of our guidance. We posted an adjusted gross margin of 27.5% and an SG&A margin of 9.5%, 25 and 80 basis points better than guidance, respectively. We earned $352.4 million, or $3.50 per diluted share. Adjusting for the $175 million pre-tax land sale gain we recorded last year, our second quarter earnings per share were a record. We believe these results highlight the strength of our broadly diversified luxury product offerings, our balanced portfolio of build-to-order and spec homes, and our strategy of prioritizing sales pace and margin in the current environment as we seek to maximize returns. They also reflect the financial strength of our customers.
Our results and the strength of our backlog also provide us the confidence to reaffirm all of our guidance for fiscal 2025, including home sales revenue of $10.9 billion at the midpoint, an adjusted gross margin of 27.25%, and earnings of approximately $14 per diluted share. Turning to market conditions, in the second quarter, we signed 2,650 net agreements for $2.6 billion, down approximately 13% in units and 11% in dollars compared to last year's strong second quarter. We experienced softer demand in the second quarter due to a decline in consumer confidence driven by increased economic uncertainty. These conditions have continued into our third quarter. In this environment, we believe prioritizing price and margin over pace makes the most strategic sense. We are confident that our balanced approach will allow us to continue successfully navigating this market.
Our average sales price in the quarter was approximately $983,000 compared to $1 million in our first quarter and $967,000 in the second quarter of fiscal 2024. Given the softer demand environment, we modestly increased incentives in the quarter. Overall, incentives were approximately 7% of the average sales price, up from our recent average of 5-6%. As we discussed last quarter, we have been reducing our spec starts to match local market conditions. Our spec strategy is calibrated to effectively balance the need to have quick, move-in homes available to meet buyer demand while protecting margins. Over the past decade, we have worked hard to build a nationwide platform with operations in over 60 markets in 24 states. We now serve all buyer groups with the broadest home offerings in the industry and prices that range from the $300,000 to over $5 million.
We have entered new markets and expanded our offerings while enhancing all that sets us apart as America's luxury home builder: an exceptional brand, our affluent customer base, prestigious locations, distinctive architecture, unrivaled choice, and an extraordinary customer experience. We have executed this growth strategy while de-risking our balance sheet, improving capital efficiency, and returning capital to stockholders. Our performance in the second quarter and over the past many years has demonstrated the competitive advantages of our business and brand in driving high returns, as well as our ability to navigate through challenging markets. While the near-term outlook for the housing market remains cloudy due to the well-known affordability pressures and the volatile macro environment, we continue to believe the long-term outlook for the new home market remains positive, particularly for our luxury niche.
With many entry-level buyers struggling with affordability challenges, we are pleased to be serving an affluent consumer. Over 70% of our business serves the move-up and empty-nester segments. These buyers are wealthier, have greater financial flexibility, and most have equity in their existing homes. The remaining 25-30% of our business serves the more affluent, older first-time buyer. The financial strength of our customer base is highlighted by our industry low cancellation rate, high percentage of all-cash buyers, and low LTVs for those who take a mortgage. Consistent with the past several quarters, approximately 24% of our buyers paid all cash in the second quarter, up from our long-term average of approximately 20%. The LTVs of buyers who took a mortgage in the quarter was approximately 70%, and our contract cancellation rate was 2.8% of a beginning backlog.
In addition, the average spend on design studio selections, structural options, and lot premiums was approximately $200,000 per home in Q2, consistent with our first quarter. These upgrades benefit our margins as they tend to be highly accretive. We continue to expect community count growth to help drive results in fiscal 2025 and beyond. We remain on target to reach our year-end guidance of approximately 440-450 communities, which would represent an 8%-10% increase versus fiscal year-end 2024. We project similar community count growth in fiscal 2026. We also continue to see modest improvements in our construction cycle times as we focus on increasing production efficiency. We have not yet seen any impact from potential tariffs on building costs or product availability.
While it is difficult to predict where tariffs will land and the precise impact to our business, we do not believe we will see any significant impact in fiscal 2025. Turning to land at our second quarter end, we controlled approximately 78,600 lots, 58% of which were optioned. Over the past year, we have increased our percentage of option lots from 48% to 58% of our total lot count, consistent with our focus on structuring land deals in more capital-efficient ways in order to enhance returns. Our land position allows us to continue to be highly selective and disciplined as we approach new opportunities. In today's environment, we have tightened our underwriting standard and are reducing land spend on new deals, which we expect to primarily impact fiscal 2026 land spend.
At quarter end, we held approximately $686 million of cash and cash equivalents, and our net debt-to-capital ratio was 19.8%. We continue to generate strong operating cash flows. This provides us plenty of opportunity to both grow our business and return capital to stockholders. During the quarter, we repurchased $177 million of our common stock. Given our strong financial position, healthy projected cash flow, and our focus on returning capital to stockholders, we are increasing our projected share repurchases in fiscal 2025 from $500 million to $600 million. With that, I will turn it over to Marty.
Marty Connor (CFO)
Thanks, Doug. Congrats on today being the 35th anniversary of your first day at Toll and your 60th conference call.
Douglas Yearley (CEO)
Thank you, Marty.
Marty Connor (CFO)
We had a strong second quarter, beating our guidance for deliveries, home building revenue, adjusted gross margin, SG&A, and earnings. In the quarter, we delivered 2,899 homes and generated home sales revenues of $2.71 billion, up nearly 10% in units and 2.3% in dollars compared to last year. Both were second quarter records. At the midpoint, we delivered nearly 300 more homes than our guidance, or $236 million of home sales revenue. The average price of homes delivered in the quarter was approximately $934,000, a bit below the low end of our guidance as we delivered more homes in our mountain and mid-Atlantic regions than anticipated. We signed 2,650 net agreements for $2.6 billion in the quarter, down 13% in units and 11% in dollars compared to the second quarter of fiscal year 2024.
The average price of contracts signed in the quarter was approximately $983,000, up 1.6% compared to last year. At second quarter end, our backlog still stood at $6.84 billion and 6,063 homes, down 7% in dollars and 15% in units compared to a year ago. The average price of the homes in our backlog was $1,130,000, a company record. Our second quarter adjusted gross margin was 27.5%, which was 25 basis points better than guidance. Our Q2 gross margin exceeded guidance primarily due to positive mix, strong cost control, and increased leverage from higher-than-projected revenues. Write-offs in our home sales gross margin totaled $9.8 million in the quarter as compared to $28.4 million in the second quarter of 2024.
SG&A, as a percentage of home sales revenue, was 9.5% in the second quarter, and 80 basis points better than guidance, again reflecting our focus on cost controls and leverage from higher-than-expected home sales revenue. Second quarter JV land sales and other income was $29 million versus our break-even guidance. Approximately $15 million of this gain was attributable to the sale of a stabilized asset in one of our apartment living joint ventures, with the remainder primarily attributable to interest income and income from our mortgage, title, and city living operations. Our tax rate in the second quarter was approximately 26.2%. Our balance sheet is very healthy. At second quarter end, we had $2.8 billion of liquidity, including approximately $686 million of cash, and our net debt-to-capital ratio was 19.8%.
In addition, we are generating strong cash flows with approximately $1 billion of cash flows from operations projected for fiscal 2025. As previously reported, during the quarter, we extended the maturities of our credit facilities to February 2030 and upsized our revolver to $2.35 billion, and we increased our quarterly dividend by 9% to $0.25 per share. We repurchased $177 million of our common stock, bringing full-year repurchases to approximately $200 million, and we bought 2,073 lots for $362 million. As Doug mentioned, as a result of our strong financial position and healthy cash flows, we are increasing our projected share repurchases in fiscal 2025 from $500 million to $600 million. Turning to guidance, our outlook is subject to the usual caveats regarding forward-looking information and the assumptions, risks, and uncertainties inherent to projections.
Based on our backlog, recent sales activity, and the number of homes currently under construction or completed, we expect to deliver between 2,800 and 3,000 homes in the third quarter, and we continue to expect to deliver between 11,200 and 11,600 homes for the full year. Our projected second-half delivery cadence is consistent with what it has been over the past several years. On average, we deliver approximately 58% of full-year deliveries in the second half, with 26% of the total delivered in the third quarter and 32% in the fourth quarter. We are projecting essentially the same percentages this year. The average price of deliveries in the third quarter is expected to be between $965,000 and $985,000. We are maintaining our full-year projection of $945,000-$965,000 for our average price of deliveries.
As Doug mentioned, in today's softer demand environment, we believe it makes the most strategic sense to prioritize price and margin over pace. This strategy, combined with the gross margin embedded in our backlog, gives us confidence in maintaining our full-year projected adjusted gross margin of 27.25%. For the third quarter, we also expect adjusted gross margin to be 27.25%. We expect interest and cost of sales to be approximately 1.2% of home sales revenues in the third quarter and also for the full year. Third quarter SG&A, as a percentage of home sales revenue, is expected to be approximately 9.2%. For the full year, we continue to expect it to be between 9.4% and 9.5%. Other income, income from unconsolidated entities, and land sales gross profit in the third quarter is expected to break even.
We continue to project $110 million for the full year, much of which is projected to come from fourth quarter sales of our interest in certain stabilized apartment communities developed by Toll Brothers Apartment Living in joint venture with various partners. We project the third quarter tax rate to be approximately 26% and the full-year rate to be approximately 25.5%. Our community count at quarter end was 421 compared to our guide of 415. We expect 430 at the end of the third quarter and reaffirm 440-450 communities by the end of the fiscal year. Our weighted average share count is expected to be approximately $99 million for the third quarter and $100 million for the full year.
This assumes we repurchase $400 million of common stock in the second half on top of the $200 million we've bought back so far this year, which would be consistent with the greater operating cash flow we typically generate in the second half. All of our guidance for fiscal 2025 translates to approximately $14 per diluted share. This would result in a full-year return on beginning equity of approximately 18% and would put our year-end book value per share at approximately $90. We believe these results will once again reinforce the strength and resiliency of our business model, as well as our ability to successfully navigate changing market conditions while still delivering attractive returns to stockholders. Now, let me turn it back to Doug.
Douglas Yearley (CEO)
Thank you, Marty.
Marty Connor (CFO)
You're welcome.
Douglas Yearley (CEO)
Before I open it up for questions, I'd like to thank our Toll Brothers employees for their hard work in the first half of 2025. I am proud of your commitment to our customers and dedication to our business, which are key drivers to our long-term success. Now, let's open it up to your questions. Jamie, we're ready to go.
Operator (participant)
Ladies and gentlemen, at this time, we'll begin the question and answer session. As a reminder, the company is planning to end the call at 9:30 A.M. when the market opens. During the Q&A, we do ask that you please limit yourselves to one question and one follow-up. To ask a question, you may press star and then one. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Our first question comes from Stephen Kim from Evercore ISI. Please go ahead with your question.
Stephen Kim (Senior Managing Director)
Yeah, thanks very much, guys. Appreciate all the color as usual. My first question, actually, it has a bit of a housekeeping element to it. We did not see your spec data and your homes under completed and under construction information. I was wondering if you could kind of give us an update on where your specs stand, both completed as well as under construction. My overarching question with respect to that is, you have talked about 11,500 closings, give or take. I am kind of wondering, how many units do you want to have under construction or completed at any point in time, given a run rate of about 11,000 closings, and where do we stand relative to that?
Douglas Yearley (CEO)
I'll let Marty—hey, Steve. I'll let Marty give you the details on the spec count, and then I'll be happy to jump in and answer your question.
Marty Connor (CFO)
Sure. So Steve, we have just over 1,000 fully completed spec units right now, and we have another.
Stephen Kim (Senior Managing Director)
Can we get a specific number? Do you mind?
Marty Connor (CFO)
1,028. We have approximately 20.
Douglas Yearley (CEO)
I just got a text in the field. We sold one, Marty.
Marty Connor (CFO)
That is the number as of April 30. 2,400 or so in progress, and we have permits available for another 1,000 or 2,000 behind those that we have not commenced construction on.
Douglas Yearley (CEO)
Right. The 2,400 in progress means that we've issued a go-to-the-field, and in progress could mean the survey crew is staking out the lot to anticipate a foundation going in. It goes all the way back to the company's decision to go, but you may not visibly see anything on the site yet, but the permit's in hand, and we're ready to go. That's a very broad definition. With respect, does that give you what you need?
Stephen Kim (Senior Managing Director)
Yeah, we'll follow. We'll clean up later on, but sure, that catches us close.
Marty Connor (CFO)
I think the other aspect that may be along the lines of what you're looking for, this is about the highest concentration of work in progress and completed specs that we will have at any particular point in time during the year.
Douglas Yearley (CEO)
You asked about our comfort level. We are comfortable with where we are in the spec business. We had gotten it up to 55% a few quarters ago, as you heard us say today. We are slowing the start of new specs. Many of those permits we talked about are sitting at permit without a go-issued, and I think that is the smart way to run this business in the current environment. We are very pleased with how well we did in the second quarter in terms of the sale of specs without larger incentives. One of the reasons we had a revenue beat in Q2 is because we call it same quarter sell and settle, right? It is not a spec we sold in a prior quarter to settle now, but how many sell and settles do we have intra-quarter?
We were very pleased in Q2 with that activity and that incentive levels that were manageable. As we move forward, we continue to be very comfortable with Q3 and Q4 number of specs that we believe will sell and settle. We believe, based on current market conditions, we have conservatively budgeted incentives. Those incentives are consistent with what we achieved with our spec sales in Q2, and that is why we have comfort in the guide, understanding that we have 1,000 completed spec homes that we intended to sell and settle. Beyond that, of course, some of these homes in progress, many of these homes in progress, would be ready to deliver by the end of October, the end of our fiscal year.
We have projected that some of those will, in fact, sell over the next five and a half months and settle, but there will be another bunch of those that, while they could settle by the end of Q4, we are not budgeting for that. We are conservatively assuming that they roll into 2026 and set up that year. In terms of the incentive front, which I know is a question out there, we have read it overnight, we are very comfortable with how we budgeted. Yes, there is more incentive needed to move spec right now in this market than build-to-order. We are very pleased with build-to-order margin. It actually is coming in higher than we have budgeted, particularly for the more luxury homes, the more expensive homes. Those margins are coming in even higher.
While the spec margin is a little bit lower, it all blends out to 27.25-27.5%, as we did in this past quarter, and we are assuming no improvement in the market over the next five and a half months to deliver the returns and the guidance that we have presented.
Operator (participant)
Our next question comes from John Lovallo from UBS. Please go ahead with your question.
John Lovallo (Managing Director)
Good morning, guys. Thank you for taking my questions. First one is, I mean, obviously, you did a really nice job managing the business and, as you talked about, prioritizing price and margin over pace in the quarter. The third quarter gross margin outlook of 27% in the quarter implies a pretty flat quarter-over-quarter margin in the fourth quarter. Just curious kind of what are the moving pieces impacting the second half gross margin and any thoughts on sort of the sustainability of this into next year?
Douglas Yearley (CEO)
Sure. So it's a great question. Yes, you are right in your math that the fourth quarter margin we expect to be about the same as the third quarter at 27.25%. While there will be some downward pressure because of the spec sell and settles, as I discussed, we have some tailwind gross margin from mix. There's going to be more luxury delivering in the second half of the year, which is higher margin, and there's going to be more out of the Pacific and out of the Mid-Atlantic region, which both support higher gross margin. When you blend more spec that will have, we believe, a bit higher incentive with what I just described in the mix coming out of the Pacific and the Mid-Atlantic and more luxury nationwide, it all works out to the guidance we've given.
John Lovallo (Managing Director)
Understood. You guys beat the top end of the delivery guide by about 200 homes. What drove the beat? Was this product mix, maybe a little bit more spec? Was it regional mix? Does it imply that you're incrementally less optimistic on the full year given the maintained outlook?
Marty Connor (CFO)
I don't think it necessarily changes our optimism for the whole year. What we did in the second quarter is simply we outperformed by selling and settling more spec homes than we had projected, and we still had a gross margin beat. I think that provides some evidence to the conservatism that we have in our guidance.
Operator (participant)
Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead with your question.
Mike Dahl (Managing Director)
Good morning. Thanks for all the comments and taking my questions. I think just to keep attacking the back half a little bit, I think when we look at it, historically, I see your point about the cadence being consistent. The flip side is this is the first year that we can see looking back where your current backlog isn't actually fully covering second half deliveries, meaning you need more deliveries in the second half than their current backlog. I know, Doug, Marty, you talked about you expect to sell and settle some of the completed, some of the under progress. Can you just give us a little more granularity on that opportunity of the number of homes in progress or complete? Obviously, complete can close. What percentage of that 2,400 do you think could actually settle by year-end?
Just given the lack of visibility on margins for homes that you haven't yet sold, a little more detail on how that spec margin progressed through the quarter would help, I think.
Marty Connor (CFO)
All right, Mike. So we have roughly 6,400 units left to deliver this year to hit the 11,400 midpoint. Roughly 4,500 of them should deliver from our backlog. Remember, our backlog is 6,050 or so homes. So those homes are sold. We know the revenue. Their build costs are contracted, so we have limited risk on their cost growing or shrinking, and we think we have adequate builder reserves in those cost estimates. Let's take those 4,500 off the table. We have roughly 1,900 homes that will need to come from our spec inventory that have not been sold yet. We told you actually 1,028 of them are completed, so there is no build cost risk there.
The others are all under construction, in fact, more than the 900 we would need to sell and settle are under construction, so there's not much cost risk there because they're under contract for construction. It is really the selling price of those 1,900 where there is some potential risk, and we believe we've accounted for that in this market based on recent comparable sales, a lot of which I just mentioned in the second quarter still allowed us to outperform our guidance for the second quarter. We sold and settled 250-300 more specs in the second quarter than we thought when we entered the quarter, and we beat gross margins still. I hope that helps give some comfort and understanding of what we foresee in the next six months.
Douglas Yearley (CEO)
Of those 900, we have the 1,000 completed, and then we need 900 more that are under construction. We have significantly more than the 900 that could deliver by October 31. We are not being aggressive in assuming that, "Oh boy, we need to sell and settle everything we're building to hit that number." There will be plenty that will be setting up 2026 that do not sell and settle by the end of this fiscal year.
Marty Connor (CFO)
It's also safe to assume that as we manage our spec production, where we have a green light for specs is probably where we're doing best.
Mike Dahl (Managing Director)
Okay. That's perfect. Yes, very helpful. Thank you. My follow-up question, maybe just along similar lines, you talked about the stronger margins on build-to-order luxury. Presumably, a lot of that is in your backlog. You talked about your backlog gross margin. Can you give us a sense of where your current backlog gross margin stands?
Marty Connor (CFO)
I think it's inherent in the guidance we've given you. Yeah.
Douglas Yearley (CEO)
I mean, the build-to-order business runs several hundred basis points above the midpoint, and the spec business runs several hundred below. Lately, that range has widened a little bit on both ends, but it still comes out in the middle, and that's why we like the business. I think we're doing a really good job of balancing our spec business with our build-to-order business. Remember, we don't hold spec off until the end where the client has no choice. We sell a lot of our spec earlier where the buyer can still go to our design studios, pick all the finishes that allow them to have a home that really fits their lifestyle, and that design studio is highly accretive in margin to the company's margin.
When we're able to sell a spec a bit earlier, even if it's incentivized a little more, there can be some residual margin left after they get to that design studio.
Operator (participant)
Our next question comes from Trevor Allinson from Wolfe Research. Please go ahead with your question.
Trevor Allinson (Director)
Good morning. Thank you for taking my questions. You talked about demand slowing throughout the quarter. I think that's not very surprising given what we've heard from other builders and the stock market volatility in April. The question would be then, as we got into May here, the stock market obviously got a lot better. You had a pause on tariffs. Did you see demand get better as we went into May? If so, could you put any numbers around that, perhaps either relative to April or relative to Q2, however you want to frame it?
Douglas Yearley (CEO)
It's very interesting. February was our first worst month. We sold 1.7 homes in the month of February. March and April were pretty consistent at 2.4 and 2.3 sales in those months, and May is trending more like March and April. May seasonally has lower sales historically than March and April, but June and July, the next two months of this third quarter, have better sales historically than May. We seem to be trending right now into May consistent with what we saw in March and April, which were better than February. I think we and all the other builders have explained it well, and we all know it. The market is softer than we had all anticipated back in January.
There's a lot of good and understandable reasons for that, with consumer confidence being down, with macroeconomic volatility, with the stock market moving around quite a bit. There are buyers on the sidelines. One of the reasons we are favoring pace over price is because we believe this market is fairly inelastic, and to throw more incentive at home sales is going to hurt your margin a lot more than it's going to increase sales because the buyer is not responding over $5,000, $10,000, $15,000, $20,000 of more incentive. Many of them just happen to be on the sidelines. I am very pleased with the company's performance through the second quarter and into the beginning of the third quarter, considering the macro environment out there.
I think it has to do with what we said earlier, that over 70% of our business is move up and empty nester. Our buyer is more affluent. We have a quarter of our buyers paying all cash. Those who get a mortgage are at 70% LTV. They're moving up or they're moving down. They're moving on with their lives. They have equity in their homes. I think we're in a really good niche in the market, notwithstanding the fact that the market is a bit softer. That is a long answer to your cadence of the quarter, but we were surprised that February was worse, and May is where we thought it would be, which is consistent with what we've seen in March and April. June should be a bit better. July should be a bit better.
We are not anticipating an improvement in this market in any of the guidance we are giving. As I said, I think we have adequately and conservatively budgeted the incentives necessary for the sell and settle spec inventory we have.
Trevor Allinson (Director)
As a second question, I guess it would be more of a follow-up on that and kind of double-clicking on some of the comments you just made there because it sounds like your April trends were pretty different from what we've heard from some other builders. A lot of other builders have suggested that April was much softer. Do you think that is purely for you guys just a different profile for your consumer, as you were just talking about? If that's the case, you mentioned earlier that you guys build across a pretty wide range of price points. Are you seeing big differences here more recently in demand relative to what you were seeing earlier in the year across those price points? Thanks.
Douglas Yearley (CEO)
I apologize if I was misunderstood. Overall, the results are still softer than our expectations. I was comparing—you asked for a cadence—and I was comparing March and April to February. We are not happy with 2.4 and 2.3 sales per month in the months of March and April, but that's the market. What others are describing, I think we would be consistent with that, but I just wanted to explain that we did not see February being best, March being next best, and then April being the worst because of the cadence, what was going on with tariff conversations and macro issues. We sort of flattened out in March, and we stayed where we were. I just want you to understand that I want to put that perspective around it. It is a soft housing market.
We all know it, and we're doing pretty well in that market, and I think we're managing the business extraordinarily well.
Operator (participant)
Our next question comes from Sam Reed from Wells Fargo. Please go ahead with your question.
Sam Reid (Executive Director of Equity Research)
Awesome. Thanks so much. I wanted to drill down a bit on SG&A. Just looking at the implied Q4 guide, the math would suggest some fairly nice leverage. I get anywhere from 30 to 40 basis points year over year, which is really great kind of on the back of a few deleveraged quarters. Just talk through kind of what's driving that leverage, just any nuances with regard to kind of your community openings, marketing spend. We'd just love some more perspective on kind of how you're going to exit the year on SG&A.
Marty Connor (CFO)
Yeah. I think the biggest issue, Sam, is that we're going to have a lot more revenue. We're going to have $235 million more revenue than last year, and that's really what's driving a lot of the leverage.
Douglas Yearley (CEO)
That's in Q4.
Marty Connor (CFO)
In Q4. I'm talking about Q4. We are very focused on SG&A. We're growing community count pretty significantly, particularly in that fourth quarter. There are pressures, but we've done a really nice job of managing costs. We're not immune from some of the inflationary pressures. I'll say particularly on the healthcare front, seems like something that's grown a little bit more than we'd like, but we're managing it very actively, and we have the flexibility to continue to manage it actively as the market evolves.
Douglas Yearley (CEO)
In addition to leverage, Sam, our variable sales costs component of SG&A came down a little bit. It was a little bit below what we expected.
Marty Connor (CFO)
In this quarter.
Douglas Yearley (CEO)
In this past quarter, which was a little bit of a tailwind for us.
Sam Reid (Executive Director of Equity Research)
Yeah. Absolutely. No, that helps. Maybe just switching gears here, I realize you guys are not offering up a 2026 outlook today. You're probably not going to for another, let's call it, two quarters. Other than to say it does sound like community count is going to be up year over year in 2026. That said, I wanted to maybe double-click a little bit on what deliveries in 2026 could look like. The basis for that is the backlog is a little smaller this year than it was last year. I just would love to kind of get your sense as to sort of kind of what a good base case assumption for 2026 deliveries could be in the context of that backlog math.
Douglas Yearley (CEO)
I appreciate you asking and trying to get us to give some guide on 2026. We're not prepared to do that right now. That is usually the highlight of the December call. With that, I will say that the average price of homes in 2026 will be higher. That's obvious from the last couple of quarters of sales and where that average price is. We are focused and know we need a strong backlog heading into 2026. We will have a continuing spec strategy that we know is important. As we head into 2026, we will continue to be mindful of market conditions on a very local level as to where we start spec and where we are more cautious, but we are well aware and embrace the importance of our spec strategy.
We will have, as I said in my prepared comments, around 10% community count growth in 2026. I'm not giving you any numbers, but I will give you a bit of that background and flavor.
Marty Connor (CFO)
When we open communities, we often get kind of a boost to sales as there's some pent-up demand for those communities, and we can moderate that if we want or let it run if we want. That is part of the strategy we would deploy too.
Operator (participant)
Our next question comes from Alan Ratner from Zelman & Associates. Please go ahead with your question.
Alan Ratner (Managing Director)
Hey, guys. Good morning. Nice quarter and thanks for all the detail. Hey. I appreciate the monthly cadence data and was hoping just to get a little bit more qualitative kind of commentary on how do things progress for you guys with the moving pieces in your business. Obviously, your buyer is probably more tied to the stock market volatility than other builders, and April was obviously a very challenging month for the stock market. The last few weeks, the market's rebounded. I'm just curious, it doesn't sound like your order data has necessarily picked up meaningfully, but have you seen any green shoots either in traffic or just kind of the commentary from your salespeople that the stabilization in the stock market is having any positive leading indicators on your buyer pool?
Douglas Yearley (CEO)
Yeah, Alan, it's modest. It's too early to tell. There's no question. Confidence, consumer confidence, I think is the number one leading indicator, at least for Toll's business at the more affluent end. Do rates matter? Of course they do. Will we celebrate a 5 and 7/8, 30-year no-point mortgage? Of course we will. A little tick in mortgage rate doesn't affect our client as much for the reasons we've talked about. 25% all cash. Those that get a mortgage are at 70%. We know a good part of the 30% of first-time buyers we sell to are getting some help from mom and dad with generational wealth transfer. That is going to take a mortgage payment down because they're probably able to put a bigger down payment on the house thanks to mom and dad.
While interest rates are important, you're right that the stock market, overall confidence, some positive news out of DC about resolving some of the tariff conflict, all of that matters, and it can matter in a big way. We have significant undersupply of homes in this country. We have terrific demographics that are a tailwind for future growth. And we've all seen it. I've been doing this 35 years. When this turns, look at it.
Marty Connor (CFO)
Exactly 35 years.
Douglas Yearley (CEO)
Thank you, Marty. Apparently to the day, which I was like, "I knew it was my 60th call. I did not know it was my 35th anniversary today." We have all seen it. When this market turns with those tailwinds and with so many people on the sidelines just waiting to feel better so they can move on with their lives, look out because it is going to come. I cannot tell you in the last two, three, four weeks as the stock market has stabilized that we have seen anything definitive. There are just some modest conversations and color that we get out of sales that traffic is up, the quality of traffic is up. We have had a few openings lately of new communities with significant interest at the opening.
We've had a couple where we've gone back to best and final offer where we let people bid up the five houses that we're offering because there's so much interest. That's the exception. I don't need that to be a headline right now, but we'll keep an eye on it. We're not heading into the spring season. We're heading into the summer, so it's a little bit different time. It is a good time to sell finished spec because buyers want to get into their new home by the school year to not disrupt the kids. You need to buy a house in the next couple of months to get that house to close by the end of August. We have timed that appropriately.
We know that you want to bring finished spec into the market at the right time when buyers want it, which is generally the summer months. We will have to see. Again, another long answer that no, I do not see anything definitive yet, but I would not be surprised if it comes if there is more stabilization in the macro market.
Alan Ratner (Managing Director)
Got it. Appreciate the commentary there. Second question, there's obviously a lot of headlines associated with immigration and what's going on there. I was hoping you could just refresh my memory. What percentage of your buyers are foreign nationals, I guess specifically kind of H-1B visa holders? Have you seen any changes in demand among that cohort of buyers year to date?
Douglas Yearley (CEO)
It's less than 5% for the first part of your question. No, we haven't seen any change over the since the new year. The Chinese buyer in particular, and again, that may be a Chinese national, may be Chinese American, but that buyer in particular is still very strong for us in California.
Operator (participant)
Our next question comes from Alex Barron from Housing Research Center. Please go ahead with your question.
Alex Barron (President and Founder)
Yes, thank you. I wanted to focus in on your comments about having more than enough specs to hit your numbers in the fourth quarter. I was kind of going back several years now. It looks like your deliveries have exceeded your orders by quite a bit as your backlog has been coming down from a peak of 11,700 or so to 5,000 now. Can you explain that dynamic? I mean, how many total homes, I guess, are sort of not in the backlog that are under construction, I guess specs to help us kind of understand that dynamic a little bit better?
Marty Connor (CFO)
Sure. Alex, I think over that period of time, you've seen us move from a 90% build-to-order business to a 50-55% spec business where we sit currently. The backlog coming down is not unplanned. We opened the call mentioning that we had 1,028 completed specs that could be sold and settled in the next six months. We have another, what was the number, 2,400 specs at various stages of construction. We will have more than enough completed specs by the end of the year to deliver the roughly 900 additional sell and settle specs on top of the 1,000 sell and settle specs to hit our delivery guidance, factoring in roughly 4,500 homes coming out of backlog as well.
Alex Barron (President and Founder)
Got it.
Marty Connor (CFO)
Beside those 2,400, we have another 2,000 pre-footing permits pulled homes that we will begin production of a certain percentage of depending on how the market evolves.
Douglas Yearley (CEO)
That is the bucket that we have slowed and are making very local decisions on based on market conditions.
Alex Barron (President and Founder)
Got it. And so when would you expect, I guess, your backlog to sort of hit bottom in a sense and start trending back up? Is it kind of towards the end of this year?
Douglas Yearley (CEO)
With the slowing of spec starts, I do not know if it is the end of the year exactly, but yes, there will be a point where you should see that go up. Again, it is market conditions driven, right? We have recently seen a bit of a move back towards a desire for build-to-order versus faster delivery of a spec home. I think that is for a couple of reasons. When you have a bit of a softer market and higher rates, there are buyers that say, "This is my dream home. I want to design it to exactly my taste. I want to be able to customize it, and I am willing to wait. It may take me a little longer to sell my home.
Maybe the rates come down when I have to lock in 60 days before the home is delivered. I sort of like the idea and the comfort of this move occurring in 12 months to my dream home versus 2, 3, 4 months to spec inventory. We are feeling a bit of that now, which we are not encouraged by, frankly, because our special sauce is choice. We have talked about the higher margin and build-to-order. It is not a dramatic change, but we are beginning to see out in the field a bit of a leaning, a preference towards the build-to-order versus the spec.
Operator (participant)
Our next question comes from Buck Horne from Raymond James. Please go ahead with your question.
Buck Horne (Managing Director)
Hey, thanks, guys. Good morning. I wanted to ask a little bit about the—hey, I wanted to ask a little bit about the land spend in the quarter. It seemed like it was one of the higher quarterly amounts you guys have spent in recent memory, added some additional lots. Was there any particular land deal or anything noticeable that kind of drove the surge? Should we have any other takeaways in terms of what does that mean about your confidence about the land market?
Marty Connor (CFO)
Yeah. So our land spend in the second quarter was $362 million compared to $360 million in the first quarter. So we have spent $763 million for the full six months. I think it may ratchet up in the back end of the year, but a lot of that depends on the timing of deals as they close. There was nothing in particular in the second quarter that drove the number to be consistent with the first quarter.
Douglas Yearley (CEO)
Yeah. I think for us to move forward and close on the ground in this environment means it still pencils. We may have been able to renegotiate price or take down terms. We're land banking more than we ever have. New deals coming in. I think we're at 40%, guys. Is that the right number?
Marty Connor (CFO)
Yeah, of the new deals.
Douglas Yearley (CEO)
Of the new deals coming in are being land banked. Our comments about due to softer market conditions, we're being more cautious, and we expect land spend to probably come down in 2026. I would not read anything into the last few quarters or the next few quarters in terms of land spend because those deals are baked and they still work. We are moving forward maybe on the same terms or maybe on modified terms. It is really the next deal contracted for, which may have two or three years of entitlements ahead of it, or it may have a closing in six months. It all depends on what the land deal is. Those are the ones that over time, at least at the moment, the land spend may come down a bit.
If this market improves, then that may also change, and we may find ourselves buying more ground. We are very happy to have the 80,000 plus or minus lots that we own and control. We are very proud of moving more and more lots to the option category. That gives us great flexibility and conservatism when it comes to the next deal because our land bank is in such great shape.
Buck Horne (Managing Director)
Got it. Got it. Very helpful clarification. Thank you. With a little bit of time, can you just walk us through geographically how the markets were shaping up versus your expectations? Any standout surprises to you in terms of how things progressed during the quarter, either with economic sensitivity, either strength or downside or upside?
Douglas Yearley (CEO)
Sure. So the better markets were New Jersey, Pennsylvania, New York. It did well. DC Metro, Charlotte, Atlanta. That is just the Eastern Seaboard did well. Out west, Las Vegas, Denver, Boise, Idaho did well, and all of California did well. Softer spots, Pacific Northwest for us, that is greater Seattle and Portland, Oregon. Most of Florida, parts of Texas, and Phoenix continue to be on the softer side of our business.
Operator (participant)
Ladies and gentlemen, with that, we'll be concluding today's question and answer session. At this point, I'd like to turn the floor back over to management for any closing remarks.
Douglas Yearley (CEO)
Jamie, thank you very much. You've been terrific. Thanks, everybody, for your interest and support. We are always here to answer any follow-up questions you may have. Have a wonderful Memorial Day weekend and summer, and we'll see you soon. Thanks so much. Take care.
Operator (participant)
Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.