Toll Brothers, Inc. (TOL) Earnings Call Transcript & Summary

Hi, everybody. Welcome to the Toll Brothers 2021 Analyst and Investor Day. We're really glad to have you here. My name is Fred Cooper. And for the past nearly 28 years, I've run Toll Brothers, Finance and Investor Relations operations. We've got nearly 600 people registered for today. So we're very excited to show you what we've been up to for the past 1.5 years. It's been over a year since we've met any of you in person or had you tour our communities. So today, our goal is to go deep and go wide and introduce you to a broad range of people at the company and show you what we've been up to. We've got, as you know, have been putting out strong earnings results, including last week, including record backlog and contracts. But today, we're going to show you what's behind that, not only the people, but the strategies that are leading to these results and also giving us such excitement for the future. A couple of housekeeping items. One, forward-looking statement. As you might imagine, some of the things that we're going to be talking about today are forward-looking and based on assumptions about global affairs, the housing market, the economy and other things. This forward-looking statement is not only on our website, but it's in the company overview that we've included in the materials here and in our SEC filings. We urge you to read it and recognize that some of the assumptions that are based -- that we're making are based on things that may turn out differently. Secondly, there's -- people have been submitting questions. [Operator Instructions] With that, please sit back and enjoy, and let's get started. [Presentation]

Welcome, everybody. Doug Yearley here with Marty Connor. We welcome you to our Investor and Analyst Day from our spectacular new headquarters in the suburbs of Philadelphia. We're really looking forward to the next 3 hours. We think it will be very impactful. And just delighted to be with you even if it is virtually. So we opened this headquarters about 6 months ago with very few people. We spent a couple of years working hard on it. We realized a few years ago, after we had a pretty beat-up old headquarters for 15 years that as a Fortune 500 luxury brand, we were really deserving of a great headquarters that was worthy of what we know and more and more people are coming in every day. So about -- we're about half full right now, which is great. It's just -- it's a great space. And for those of you worried about G&A, as we try to do with everything we buy. We bought it right. Or in this case, we leased it right. It was an old abandoned suburban convention center with 22-foot high ceilings, empty. It was a blank canvas for us. But long term, the rent is pretty cheap, and we're just thrilled to be here. And I had a friend come in last week who worked for the company for 15 years, and he walked through the front door into the lobby. He wanted to get a tour, and he said, "wow." And he said, "Doug, somewhere in this building, there must be some reference to Main and Main because you always talk about Toll Brothers land at Main and Main. We build homes at Main and Main." And sure enough, the intersection of our 2 main corridors where the fireplace is, where Fred Cooper was, one of our many employee lounges is designated as Main and Main, and we tell people, we'll meet you at the fireplace at Main and Main. It just resonates because that's what we all think and talk about. So for the next 3 hours, we're going to take a deep dive into Toll Brothers. You're going to learn a lot more about our people. You're going to learn about our passion, our brand, what makes us truly unique, what is driving our results today and in the future and many of the strategic initiatives that we're putting in place to continue to be successful and to see what we believe and we will explain today should be outsized growth within this industry. We're going to have Q&A sessions today. There will be 3 separate Q&A sessions that will go live with many of the leaders nationwide that you're going to see from today. And please get your questions in. We'll do our best to answer as many as possible, and we're really looking forward to that. So real fast on me, I've been with this company for 31 years. I interviewed with Bob Toll for the first time on my 30th birthday. I was a very unhappy lawyer. My dad taught me to be handy as a kid. I spent all my free time renovating my old house. And I wanted to get out of the practice of law and somehow get myself into construction, home building, renovating something. And I came in to meet Bob on my 30th birthday, and you know what, I just got lucky because we connected, I went to Cornell. Bob went to Cornell. He loved that. I love the practice of law. It rewired my brain. I just didn't care for the practice itself, and Bob loved law school. He also loved how his brain was rewired in law school. He lasted 9 months in the practice. But even more than me go into Cornell, he loved that I appreciated so much the legal education and how I rewired my brain, and he gave me a shot. He gave me a shot to come here, and I just got lucky. My first day of work, 31 years ago, my first Monday, Bob threw me in an office and said, "wait around, I want to meet with you tonight." And I waited around with the very little to do. And at 10:00 at night, I got the call to go in and see Bob. And we spent about an hour together. We didn't have a lot to talk about. It was day 1, and I walked down the hall out of the building, thinking, all right, this is a little odd. Day 1, 11:00. And I made the mistake of walking down the hallway, where Joel Rassman, our pretty much iconic old CFO officed. Joel sees me. He calls me into his office and from 11 p.m. until 2 in the morning, he teaches me the history of Toll Brothers and talks to me about my career. I walked out that night thinking that I had surrounded myself and my new job was with a bunch of crazy people, but I hung in there. And I started in land acquisition, and then I moved into a construction trailer as a project manager, learning the business from the ground up. I got involved in running a number of homebuilding divisions around the country. I got involved in new market expansion, builder M&A. And at a young age, Bob tasked me with managing the marketing department, which I will never give up. And so I think I've seen it all. I know I probably worked on everything that you could work on in this industry, and it's been a fascinating ride for me. For the last 25 years, I have calculated that I have spent 900 Monday nights one-on-one with Bob Toll. He is the leader in this industry for many, many decades for a generation. And some of the most inspiring, most fun moments I've had are those crazy Monday nights when I stumbled out of this office at midnight. I wouldn't have it any other way. Bob just turned 80, and we celebrate all he has done for Toll Brothers. We are a boots-on-the-ground company. We teach and learn on the job. All of us grew up in the field. Almost everybody you'll meet today will have worked out of a construction trailer or worked out of a sales center. It's just the way we are. We build the bench in the field, and it's just so important to this culture of the company. So quickly going back to that first week, as crazy as day 1 was, on day 2, Bob says, "let's jump in the car, I want to show you our Philadelphia communities." And off we went, and I watched Bob pull into the entrance of these Toll Brothers communities around Philadelphia, screech on the brakes, get out of his car, go over to the flower bed that was at the entrance feature and pull a couple of weeds. We get to the model home, we'd walk up the model way. He'd straightened out a marketing easel sign. And God forbid if there was a light bulb dead in the model because he would embarrass the sales manager and anyone else that had come to see him by asking for a step stool and getting up and changing out a dead light bulb. And what he taught us and what we know today through him, it's those details that make a good brand into a great brand. And that resonates throughout all levels of this company. As I travel today, I find myself at every community, pulling weeds, straightening marketing signs, hopefully not changing light bulbs, but I may fluff a pillow or two on a sofa, and I will certainly straighten art work on the wall. It is these details that nobody is above, and it makes this good brand into a great brand. We have a culture of perfection. And that's just how this company has always been run, and it's how I am determined to continue to run it. And I'm confident today that you're going to see that. It's going to resonate through with all the people that you meet and all the products that you see. So quickly, I want to look at macroeconomic trends. I'm not going to bog down on this because we talked about it last week, and all of you, I'm sure, are aware of much of it. But it's very interesting because in January and February of 2020, before the pandemic, we were pretty pleased with where the market stood. Interest rates were low, the millennial generation was beginning to come out and buy. But even then, we weren't seeing a market that is strong enough for what the fundamentals suggested. The 2011 to 2020 market should have been stronger. Yes, it was recovering from the great housing recession of '07 to '11, but it wasn't as strong as it should have been. And lo and behold, who would have thought that a pandemic of all things an unforeseen pandemic would have taken -- would have ignited this market to a level that we thought all along, the fundamentals had supported. So where we are today. And I'm going to quickly hit on these fundamentals. And what's really encouraging is they feel like they're here for a long term. And that is something that really encourages us with our business strategy. So first of all, let's look at pent-up demand, okay? We know we've talked about it over the last decade, 6 million less houses were built than in the prior 4 decades going back to the 1970s. Population growth, if you look at this graph, has doubled, has doubled from the 1970 until today, yet look at housing starts. Are they beginning to recover? They certainly are. But 6 million less people bought a home in the last decade than each of the prior 4 decades when there was a lot less population, which means it's going to take a long time for this pent-up demand to be satisfied. We think it's going to take years before we ever get back to anything close to the equilibrium that we had seen in a bunch of the prior decades. Next up is demographics. We've talked about it. I talked about it last week. There are 73 million millennials who are now entering their 30s, and they're buying homes. And this will drive the housing market for an extended period of time. And as we're going to talk about today, what's great for Toll is that these millennials, when they buy, when they're forming families are older. I had my first house at 26. My kids will probably have their first house in their mid-30s. They're wealthier. The more and more affordable luxury that we do from the high 3s to the mid-6s and will be in the wheelhouse of the millennials. A millennial can buy a Toll Brother's home. That was out of reach before we pivoted, and we're really excited about where that's heading. Next, and also, we think, longer term, the pandemic accelerated migration. U-Haul has it right. They have surge pricing. They price their roots based on the amount of demand. And this chart gives you an example. Look how much it costs to take a U-Haul out of California to another market or out of the Northeast down south versus what it costs to return that U-Haul back to where they came from. We are seeing right now out-of-state traffic patterns, migration patterns like we have never seen in this company's history. People are moving to where they want to live, not where their job had tethered them. That may mean that they have remote working opportunities or it may mean that they're going to go find another job in a market that they want to live in. The pandemic scenes who have accelerated what we knew was coming, and it's one of the reasons this company moved aggressively into the western states and the southern states some years ago is because we certainly saw these patterns coming. And then finally, the home. My home is my sanctuary. We say it. We believe it. There is an emotional attachment to the home that is beyond finances. It's beyond record low interest rates. Not everybody, in fact, most people, Marty and I sometimes disagree, he's the finance guy. And -- but I've never bought a home because of the -- a lot of financial investment, if that worked out great. A home is an emotional purchase. Today, after this pandemic, people are putting much more interest in the home. They're emotionally connected. They want to design it. They want to design it the way they live. Whatever that means for them with home offices, with gyms with indoor/outdoor living, Toll Brothers offers choice. This plays right into our business strategy. And right now, it is significantly paying off. So how is Toll positioned as we move forward as a company with this backdrop of where the macroeconomic world stands. Here's the map. We have moved from what I saw 31 years ago as a regional builder in the Northeast to a national powerhouse, 24 states, over 50 markets. We moved aggressively, as I said, into the west and the south. We are positioned on both coasts, where there's still a lot of good action, but we're positioned in a lot of these other feeder markets that people are moving into, and it's really, really encouraging. And the migration patterns, by the way, are generally from more expensive markets to less expensive markets, which means affordability is not as big of an issue. Next, our land position. We are a long land homebuilder. We hear about it all the time. Right now, we have 74,000 lots under ownership or control. We've successfully moved it to 50-50, and we've talked about it going to 60% controlled or optioned and 40% that is owned. Most of this land, the vast majority of this land was acquired pre-COVID, was contracted for it. We may not have closed on it, but it's under our control pre-COVID when land prices were lower. We can be selective today in how we grow because of this great land position we have at very, very favorable prices. Next, and this is a major driver of outsized growth. We have -- people don't think of this, but we have the widest, widest product diversity in the industry. 350 to 5 million Toll Brothers today brings it to you: urban, suburban, infill, nationwide, we build all of this on the screen. This gives us the opportunity with that land position that we have with our geographic footprint and with this product diversity and the price point diversity, we have positioned ourselves to have outsized growth. And finally, affordable luxury. This is the move down to grab those millennials. 42% of our communities today are what we term internally affordable luxury. That's not a marketing term in the field. Our clients are buying a Toll Brothers home at no matter what price point. We use that term to help explain it to the investment community, to all of you and internally into how we market and how we operate. But today, 42% of our communities are affordable luxury. So that number will continue to grow as we expand and widen what we offer. Most importantly, as we drive this growth, we are focused on number -- on one priority. We have one priority, and that is to drive capital efficiency and how we buy land, how we operate the company to continue to improve on our ROE, and it will be permanent. We've talked a little bit about where it's headed next year. Next year is primarily headed because of the great sales we've had and the great pricing power. A lot of these land buys, Marty is going to talk about in a little bit, won't even come until 2023 when we're going to have even more permanent sustainable improved ROE. So we're really confident in our ability to drive ROE over 20 permanently, and affordable luxury is part of the story, but the biggest part of the story is our land buying and how we're going about it, and Marty is going to certainly get into that. So finally, I just want to hit on the 4 marketing Toll advantage -- Toll advantage, as we call them, of the company, and these are all over our website. And #1 is location, Main and Main. We buy land, we deliver homes. We build communities, at the corner of Main and Main. Could affordable luxury be a block off Main and Main? Yes, I'll give you that. But it's still right there at Main and Main. Number two, architecture, you're going to see it all day today. The exteriors, the interiors, the merchandising of our models. It is a major Toll advantage. There is nobody in this industry that puts the attention and the passion into the architecture as Toll Brothers. And number three, I talked about it before is choice. Buyers today want choice. We are a production homebuilder, but we have figured out how to offer choice within the umbrella of production homebuilding. You can make structural changes to your home at the sales office. And then you go to 1 of our 35 design studios to all of your finishes. Choice today is a major Toll advantage. And finally, we believe we treat the customer to a better customer experience than anyone else in this industry. We have to. We provide a luxury product. We are a high-touch homebuilder. And we are so proud of how we treat our customer and the experience that they have when they sign on with Toll Brothers. And I am certain that these 4 Toll advantages will resonate with you throughout the day. So we're going to move into our first segment. It's going to include both Jim Boyd and Rob Parahus. They are our 2 co-COOS. Rob runs the eastern half of the country. Jim runs the western half of the country. Combined, they have 60 years of experience at Toll Brothers. And just like me in the early days, they were living in construction trailers. So here we go to Jim and Rob.

Hi, I'm Jim Boyd. I share the COO role with Rob Parahus and oversee the Mountain and Pacific regions in the West. These regions include California, Washington, Oregon, Nevada, Idaho, Colorado, Arizona and Utah. 30 years ago, I started Toll's first community west of the Mississippi in Yorba Linda, California. Since that time, we've come a long way. Today, our sales in the west represent 50% of the company's sales nationwide. And we believe we are perfectly positioned to take advantage of market trends we see occurring in the West. California's coastal markets with their favorable demographics, job growth and supply constraints have been and continue to be a prime economic driver for us. We are operating metropolitan communities in all the major metropolitan areas throughout California, like here at Porter Ranch just outside of L.A. These markets all continue to show strong demand and with supply. Our expertise in entitlements and land development have enabled us to maintain a good pipeline of prime home sites in great locations.

I'm Rob Parahus, Co-Chief Operating Officer with Jim, and I'd like to tell you about the other half of the country. Today, I'm in Northern New Jersey and one of our newest communities, The Grove at Upper Saddle River. I oversee the Northeast, Midwest, Mid-Atlantic and south. This includes Pennsylvania up to Massachusetts, plus Michigan and Illinois, Maryland down to Georgia along with Florida and Texas. I'm proud to say that this year, we expect to deliver close to 6,000 homes across these markets. Since my father was a trim carpenter and cabinet maker, I grew up with a passion to work in homebuilding. Straight out of college, I joined Toll Brothers, and I'm grateful to be one of only a handful of employees that started before the company went public in July of 1986. Over the past 2 years, Toll Brothers has expanded its footprint in the east and entered several new markets as we follow the growth of the country to the south and the west. In 2019, through the acquisitions of Sharp Residential and Sabal Homes, we first expanded into the suburbs north of Atlanta, Georgia and then enter Charleston, Greenville and Myrtle Beach markets in South Carolina. Then through the acquisition of Thrive Residential in February 2020, we expanded even further, entering the urban markets of Atlanta, Georgia and Nashville, Tennessee. We are now looking to develop our core product in the Nashville suburbs. Overall, these new markets will contribute close to $400 million in revenue to Toll Brothers in fiscal year 2021. And while we've had a nice operating footprint throughout Florida since the early 1990s, we have recently increased our presence to include the Tampa, Sarasota market. We are also currently analyzing opportunities in the Panhandle as we continue to see significant growth potential within all the Florida markets, where we build traditional luxury, affordable luxury, and active-adult communities. With that, let's head back to Jim, so you can hear more about our product diversification efforts that support our growth across the country.

During the past 24 months, we've seen a shift in our buyer profile as we've begun attracting more buyers aged 25 to 45. To meet this demand, we pivoted and started offering more affordable homes. Homes would still include many of the luxury features in our move-up product, 10-foot ceilings, 8-foot doors, 42-inch cabinets. During the pandemic, we've seen this trend accelerate. And today, we sell almost 30% of our homes to these millennial buyers. Our product has evolved over the past decade to meet today's lifestyles. Began in Southern California, we started by removing a lot of the interior walls to create a more open casual feeling. Next, we remove the rear walls, replacing them with large sliding glass doors, bringing the outdoors in. And finally, we created transitional rooms which are both indoor and outdoor, creating a fully integrated experience from the moment you walk through the front door to when you reach the rear yard. We've taken these designs to other western markets and now to the east. We've included them in all our product offerings from affordable luxury, to move-up product to active-adult product. Our design team and architectural team are second to none, and our designs are the best in the business. Our locations and our customer service are aspirational and give us an advantage over the competition. And is this Toll Advantage that enables our homes to sell at premiums.

Good morning. Thanks for being with us. My name is Marty Connor, and I'm privileged to be the Chief Financial Officer here at Toll Brothers. I've been at Toll for 12.5 years. I've been CFO for 11. I love what I do and especially the people I get to do it with. I'm so proud to be able to show you some of them through the course of the day. Hopefully, you feel how much pride we have at Toll Brothers as being part of a company that delivers the American dream more than 10,000 times this year. I'm not going to talk about our results. We talked about those last week. Suffice it to say, our business is firing on all cylinders. I'm here to talk to you about different things. We want to talk about our land position. I'm going to talk about some of our ROE efforts. I'm going to talk about some of the ways we've fundamentally changed our approach to land. One thing we have not changed is that every piece of land is still approved at corporate. Doug, me, Jim and Rob look at every piece of land as it comes through the e-mail chains every weekend. Long Sunday nights, great Mondays. And then the last thing I want to talk about is our capital allocation strategies and what some of these structural changes to land buying allow us to do. First, land. We had set a 50-50 target a number of years ago, 50% owned, 50% optioned. We're there. We have 74,000 lots, about half are owned and half are optioned. We have a new target 60% optioned, 40% owned. And this is a far cry from the 80% owned, 20% optioned we were at a number of years ago. I think we can do better than 60-40, but we're going to set the target there for the meantime. In the past, we didn't focus too much on ROE. We focused on gross margin, and we focused on earnings per share. We bought the land early. We watched it appreciate, and that led to great gross margins. But that didn't work as well in the decade of 2010 to 2020. The market was not as traditional as it had been in prior decades. They were great in the '70s, '80s, '90s and 2000s. At the same time, the investor community became laser-focused on return on equity, and now so have we. We've taken a number of steps to improve our return on equity. We are controlling costs with a fine-tooth comb in the G&A area. We are reducing the spend for broker commissions and for advertising and marketing. We are increasingly moving to quicker turn land positions, lower up-front cost land positions as we'll talk about in our affordable luxury. We have rationalized our product, and you'll hear more about that today. We've taken some cost out of the building of those homes. The other thing we've done is fundamentally changed the way we look at land. A few years ago, we created a deal scorecard. 12 different metrics, IRR, gross margin, risk profiles, land development. We gave it to our land acquisition teams around the country and said, "the standards have been raised. You now have the scorecard you have to fill out. And we're not going to do a deal unless it meets these standards". And those teams have risen to the challenge. They've been able to find deals that meet those thresholds, and we've been able to grow our land position. We've grown from 63,000 lots at the beginning of this year to 74,000 as of the end of the second quarter. Occasionally, they can't find a deal that fits without a little structuring. So we've given them a few different structures to deploy. Our preferred structure is seller financing. And we should have a slide here that shows that. In all of these different structures, you'll see that we are improving the IRR compared to a bulk purchase. We are reducing the peak amount of capital that's out at the top of the role, as we say. And we're giving up a marginal amount of gross margin. So what is seller financing or seller terms? That's where we tell the seller, we're not going to buy all the land on day 1. We'll buy 1/4, 1/4, 1/4, 1/4 over 4 years. We'll pay you for some of the land upfront, we'll pay you for more of the land when we get to third-party home closing with their homebuyers. Maybe you'll take back a low interest rate mortgage as the land seller, or maybe we'll give you a profit participation on how that community does. So that's one method of structuring land deals. But not every seller is going to give you terms. So every once in a while, we need to deploy our land banking strategy. Land bankers are a sophisticated fund they are in the business of land. And as you can see, here, we really dramatically change the IRR, and we dramatically reduced the peak capital. So we'll contract for the land, we'll assign that contract to the land banker. The land banker will close on the land and simultaneously execute an option contract with us. Generally, those option contracts result in a 15% deposit from us and then a 10% or so annual payment for the balance of the land that we haven't bought, an interest payment, if you will, although it goes through the land in our cost of sales. We've seen the terms from these land bankers get stronger and stronger for us. More and more entrants are going into this field. So we're excited about the future of what we can do with land banking. Land banking deals work best if we're dealing with an 18- to 48-month duration of the land. The last one I'm going to talk about is -- excuse me, is joint ventures. Now in a joint venture situation, the land is too much for us. It's too much dollars, it's too much time, and so we will share it with another homebuilder. And hopefully, they'll share a few deals with us. Right now, we have deals with TRI Pointe, Taylor Morrison, Pulte, Lennar, and one more -- it escapes me at the moment. Sorry about that.

NVR.

NVR, there it is. And we give up half the size of the deal. Occasionally, we'll get a Wall Street fund to come in as well. We have a deal with GTIS. But we'll cut the cost that we put out to nearly 1/4. And so generally, they're structured with an up-front land purchase of 25% funded by us, 25% funded by the other builder, and then we get a land loan from a bank for the other 50%. So these structures all reduce our capital deployed, they improve our IRR, and they also transfer the risk to the counterparties. And so that's a great combination, and we're willing to take that combination for a little trade-off on the gross margin. So what do we do with this excess capital that we generate? Well, we've been able to do anything we want. We've grown our land position. Land acquisition and builders are our primary focus. We've also been able to increase our dividend. Earlier this quarter, we announced a 55% increase in our dividend from $0.11 to $0.17 a quarter. We have bought back stock. We bought back $180 million of stock in the first quarter, and we expect to be programmatic in the third, fourth and future quarters with stock buybacks. We've also been able to pay down debt. We paid off $150 million of our term loan in the first quarter we paid off $250 million of bonds in our second quarter. Those were 5.625% bonds. So we're happy to put those behind us, and we're positioned to pay off $410 million of bonds in our first fiscal quarter next year, mid-November, they're callable at par. And those are at nearly 6%. So we're thrilled to put those behind us. We're targeting a mid-20s percent net debt-to-capital ratio as a result of these actions. That's where we hope to operate long term. Hopefully, the rating agencies are paying attention to that. And as Doug mentioned, we set expectations for 20%-plus return on equity next year. A lot of that driven by the market, but staying there is going to be driven by all these initiatives I just talked about. So thanks again for listening. I'm going to turn it back to Doug, who's going to lead us into the next section.

Great. Thank you, Marty. That was terrific, and thank you to Jim and Rob for your presentations. Both Jim and Rob will be on the first segment of Q&A, which is coming up in a moment. [Operator Instructions] So next up are Karl Mistry and Seth Ring. They are both regional presidents for the company. Karl runs the Mid-Atlantic region and Seth runs the Pacific region. These 2 are both on our Strategic Planning Committee, and they are the next-generation of leadership here at Toll Brothers over the last 3 or 4 years. I've introduced many of you to both Seth and Karl, as I do bring them to industry conferences, and I'm sure you'll be seeing more and more of them in the future as they get more and more exposed to Wall Street. To steal from Hamilton on Broadway, these 2 are always in the room where it happens. So here we go.

Hi, I'm Karl Mistry. This July will mark my 17th anniversary with Toll Brothers. I started with the company in Texas and have had the opportunity to work in both Dallas and Houston. In 2016, Doug gave me a call and asked what I thought about moving to Northern Virginia. Now 5 years later, I serve as our regional President in the Mid-Atlantic, which includes Maryland, Virginia, North Carolina, Georgia and Tennessee. As Doug mentioned earlier, one of our greatest strengths is our focus on the best locations. It's synonymous with Toll Brothers, its great schools. Access to shopping, employment and incredible amenities. When your focus is squarely on those locations at Main and Main, you must be disciplined. Discipline not only in where you're buying land, but how you're buying it and being sure that you've thought through all of the important facets of the new community that leads to success. It's a little bit of both art and science. Today, I'm at Union Park in Tysons, Virginia. This community is a great representation of that focus on Main and Main. This infill location is the redevelopment of an old apartment community. And while opportunities like this one aren't easy, when it all comes together, the end result is amazing. When complete, Union Park will be home to over 200 families. We are walking distance to the center of it all. The McClean Metro Station, Capital One new headquarters and all that Tysons has to offer. All of this with highly rated schools, just a 15-minute drive to our nation's capital. For years, I've had the privilege to be a part of our Monday land meetings. Our leadership team, including Doug, review sales for the week and then each land opportunity is up for a discussion. We spent a couple of hours working to understand the customer, the great attributes, the competition and the potential pitfalls of every opportunity. We learn from each other and the decades of experience in that room. This collaborative and honest discussion is without doubt, one of the greatest strengths and enables us to push each community to be its best. One of the greatest rewards of working in this industry and specifically at Toll Brothers, is you get to see tangibly the efforts of your work. In 2016, several of us traveled west to visit our colleagues in California and Seattle. We came back and started to challenge some of our own ideas on architecture. Within 2 years, we had completely reinvented ourselves. I can say confidently that we have the most innovative, beautiful and functional offering in the Mid-Atlantic. I'm so proud of the evolution our team has made in designing and building these incredible homes.

Hi. My name is Nimita Shah, and I'm a vice President with the Community Planning team for the D.C. Metro division. I started working with Toll Brothers in 2005 with the New York City living team, there, I learned the importance of having a vision and telling a story with each community we create. Throughout my career here, I have been fortunate to apply that idea to multiple product lines in different regions. In D.C. Metro and all over Toll Brothers, each day, we work to evolve our home designs to ensure that they serve the story or scripting. I love that not only do we deliver homes that meet the changing needs of our homeowners, but we also work hard to meet the changing demands of the industry. I'll admit, it is not always easy balancing the two, but we're able to get advice from other divisions on design trends, and we worked across our teams to review our homes during the predevelopment process often. Doing this helps to ensure that our homes support the vision of the community and our internal metrics. What I've learned is that by having a thorough design review process in place, our teams can innovate and improve every day. We've created an alternate plan for our stack Town homes to meet the needs of our buyers in higher density markets. We've pivoted our product line at an existing master-planned community to capture homeowners' desires for new elevation trends, refined choices and more attainable price points. As a result of the pandemic, we've seen the need to provide more flexibility with our floor plans and designed third floor office spaces. One of my favorite examples of this evolution is our new outdoor living space offering. After traveling out to California, our leadership team came back and decided to take a look at how we could create outdoor spaces that our homeowners could enjoy during more of a year. Here at Arden, we designed large stacking doors into our living rooms that could seamlessly connect to our covered outdoor spaces, and we design them with finishes that you might find in the interiors of our homes. These outdoor living rooms have become a huge favorite of our buyers. It's rare to think the less can be more in a home. But in the case of our parker collection at lean a mill, it seemed that it was just what our buyers want it. Mena Mill is an ongoing master-planned community that has been selling for a number of years. And as we approach one of our final phases, our leadership team recognized the changing desires of our buyers and designed new more streamlined plans with new elevations. While we all anticipated a lower price point for these simpler homes, we also knew that we'd be able to sell at a faster pace. What we didn't anticipate was the desire for this product would be so strong that we'd be able to sell at our desired pace and increase revenues steadily throughout the base. No matter what the future holds, we'll continue to create new stories and new homes so that we're always ready to make it our time.

Another exciting part of my day today is being a member of our strategic planning committee. A couple of years ago, Doug asked 4 of us to put our heads together as we think about the future of the company. He's tasked us with improving our processes and systems, but also taking a step back, looking at new geographies, better ways of working and upcoming technology. This has been a truly rewarding experience for me, and we've been able to make some great improvements to the way we work, and we are clearly riding ourselves to be the industry leader for years to come. It's not just because of one, but for all of these reasons, an amazing team, its unrelenting focus on disciplined land buying in the very best locations. Innovative architecture and a thoughtful approach to our strategy that makes me confident about our future and proud of where I get to come to work every day.

Everybody, I'm Seth Ring. I am the Regional President for Toll Brothers covering the Pacific region, which is Oregon, Washington and California, and I've been with the company for 18 years. One of the things I remember about my childhood was seeing those plans rolled out in the kitchen table and how much every little detailed mattered to my father as he was designing custom homes. I also saw how close he worked with the customer and how much that relationship mattered. I see a lot of the same things in Toll Brothers. Design matters, the customer matters. And when we have those two things collide, you get America's luxury homebuilder. Every day, thousands of home shoppers make their way sales center and model parks. And we get to hear what they like most about our home designs, then we can take that feedback and give it over to our nearly 100-person in-house architecture and design firm, and we can apply what they like most to the next rate design. Frequently, people ask me, what's the best feature about a Toll Brothers home? I think you have to ask my team.

The expanded kitchens.

And [indiscernible] kitchen.

the walk-in pantries.

Quality craftsmanship and attention to detail.

The magnificent walk-in closets.

Luxury outdoor living and entertaining spaces.

The grand entrance.

The backyard.

The Multigen living features.

The volume spaces.

Flex space that fit your family's needs, whether that's a home theater or home gym.

The beautiful staircases.

The home offices and cupboard workspaces.

Beautiful on-suite baths for my teenage girls to spend hours in.

Primary bedrooms and treatment.

A new home warranty plus customer care members to manage your services.

My favorite part of the Toll home design, teamwork, collaboration, camaraderie. I love seeing how it all comes together to do all of this. I have to admit, there's some friendly competition among my colleagues at Toll Brothers to see who can build the best home design for our customer. Every time I see a beautiful home, out of places like Arizona or Texas or the southeast or the Mid-Atlantic or the Northeast or the Pacific Northwest, it inspires our team to raise the bar. At Toll Brothers, we're not only raising the bar in home design, but we're finding ways to optimize that design and bring it to the market. What is optimization? Like any fine brand, we're streamlining our home design process so that only the best plans make it to the market.

Our homebuyers are seeking out floor plans that trade formal spaces for a more informal and comfortable design. This means our latest plans highlight features like beautiful volume ceilings straight and stairs with modernized railings and spans open floor plans with a greater connectivity to the outdoors. These design trends have also proven to be more cost-effective than legacy designs, means we can design plans more desirable to our homeowners while also saving construction costs and reducing cycle time. Our optimized approach to design also enhances Toll Brothers option program, which allows homeowners to more easily personalize their homes. For example, a standard downstairs bedroom and office can efficiently convert to a generous first floor suite or multigenerational living space. Through thousands of homeowner interactions and Toll's careful monitoring of design trends across the country, Toll homes feature the most innovative designs, mixed with construction efficiency to deliver our new homes at a lower cost. California is the laboratory for energy-efficient homes, and Toll Brothers is leading the charge. Almost every new Toll Brothers home in California comes with a distinct list of energy-efficient features, including Radiant Barrier Roof heating, continuous installation with 1 coat stucco, 2 by 6 mandatory exterior walls, window glazing to the deflect heat improved efficiencies in heating and cooling equipment, reduced water flow rates, insulated plumbing pipes to reduce temperature loss. And perhaps most importantly, solar. Solar is great. Solar allows the Toll homeowners to have a cost-effective energy source for their new homes. It cuts their power bill into 1/3 or even up to half depending on usage. It also provides a clean alternative for energy for a new Toll Brothers homes. The latest features in solar are that we can actually store some of the energy produced from the panels into a battery that we place in a garage. This allows the buyer to use store energy during peak operating hours and also in the case of a blackout, they can power their homes. In California, when we're about ready to open a new community, we mapped the entire community for solar. We look at the most efficient places on the roof to put a solar system. We determine the right size for the home designs, and then we provide solar to every single homeowner in the community. It saves the buyer money. It creates a cleaner source of energy. It's good for the environment, and it's cost effective. Working for Toll Brothers is awesome. Not only can you be proud of the product you build or the whole design, it's the people. It's the collaboration that comes together to produce these amazing communities. It's the home one who walks into the model and says, wow, 3 or 4 times. It's all of that stuff. It just makes you feel great. And you know what they say, if you love what you do, you never have to work a day in your life.

Wow, thanks, Karl and Seth. They focus on 2 of the pillars of the Toll Advantage that we talked about, which, of course, is prestigious locations and distinctive architecture. So now we're going to move on to the other 2 pillars, which is unrivaled choice. And the customer experience. And we have Lisa McClelland. She runs our $700 million design studio business, 35 design studios around this country that are run by Lisa, and you're going to love her story because we brought a retailer in and got it out of the hands of the local management team as we realize what an important business this is. And then you're going to meet Group President, Mark Bailey, who runs both our Colorado division and our Boise, Idaho operation.

I'm Lisa McClelland, Vice President of Design Studios. I've been with Toll Brothers for 4 years and spent most of my career previously as a retail leader with the Home Depot and Nordstrom. I'm here joining you today from our newest studio in Austin, Texas, which we just opened a few weeks ago. We operate 35 design studios across the country. And this is the exciting and fun part where customers come to personalize their new home after signing an agreement. Our Toll Brothers design studios are really a business within the business, and they play an important role within the company. The focus of the design studios is multifaceted. Most importantly, the role of the design studio is to provide an exceptional customer experience. We offer unrivaled choice and thousands of selections to choose from top brands. It also serves as a powerful marketing tool for our sales teams. We are the design store within the division, providing a high-touch experience and a point of difference from other builders. Our design studios help streamline operation with an efficient selection process that helps support our production time lines. Buyers typically spend about 10 hours, finalizing their decisions, over 3 appointments. And they can do that either virtually or in person at the design studio. And very importantly, one of the roles of the design studio is to drive meaningful profit and revenue for our company. We find that over 90% of our buyers choose to invest in upgrades for their finishes within their interior portion of their home. Cabinetry and flooring are amongst the top categories with which we find buyers investing the most. Our design studio gross margin productivity is strong and above the company average. In fact, we've had the highest revenue per home and total revenue in our company's history this past year. We spent time in-sourcing 7 of our 13 outsourced studios. We have found that the outcome of that has been an 8-point improvement in our margin. We're focused on the productivity of our assortments and what we offer to our buyers. We spent some time really going through what sells and what our buyer preferences are. And the result of that has been a 30% reduction on things that just aren't chosen. And then this has given us better visibility into what really is selling. By focusing our assortments on really what is selling, it allows us to address trends and new requests. We're focused on our design studios as a retail core business. Rather than historically, what had been known as a sidelight homebuilding operation run by divisional leadership differently across the country, we've learned a lot in how to adapt to how we interact with our buyers, including offering virtual experiences and appointments, which our buyers find really convenient based on either their schedule or their physical location. It's genuinely a pleasure to be able to offer a highly differentiated experience for buyers to personalize their selections for their home.

Hi, my name is Mark Bailey. I'm the Group President of Colorado and Idaho Regions, now including Colorado Springs with the recent acquisition of Keller Homes. Having a presence in Colorado Springs market is not only exciting for me, but for the entire Toll Brothers team. Expansion of growth is what drives Brothers. And we look forward to expanding our presence in Colorado springs with Keller Homes. I have a lot of great stories about our people business and the 10,000 home sites control in the group. But I'm going to talk about something that is important to all divisions and all Toll Brothers' employees. And that's customer satisfaction. I started with Toll Brothers 20 years ago, and the importance of customer satisfaction stemmed from our founders, Bob and Bruce Toll. Our history and our core values help guide employees to achieve customer satisfaction. We're not perfect, and we make but we care about our customers, and we will always make it right. There's one other secret to our success, and that is happy employees build happy homes. More on that in a bit. The typical customer journey begins here and one of our beautiful models. Who doesn't want to live in a home like this? But getting from here to the finished home that the customer envisioned and they dreamed up that's where Toll Brothers is special. At Toll Brothers, we offer customers the ability to personalize their home, whether it's an affordable luxury home or an ultra luxury home. So when many customers choose Toll Brothers over other builders. Our professional sales consultants guide customers through configuring their home to fit the customers' needs in the way they live, all starting with their home site, we identify what is important to the customer. It might be an oversized home site, a multi-gen suite or dual home offices. Then each customer meets with a design consultant at our studio where they get to fine-tune the details of their new home. Our designers help them select the perfect flooring, countertops, cabinets and even add electrical or low-vol options, whether they are retirees in an active-adult community, a young family or a multigen family, they can personalize the home to fit their needs and the way they live. Once the home is designed, it's time to build. That starts with the kickoff meeting, where we review every detail with the customer. This ensures that we have incorporated all their selections. It is also where we begin to earn the customer's trust. Customers see how much detail coordination and care goes into the construction of their home. Our team wants to make sure we are building the dream home they envisioned. During construction, our construction managers monitor every detail of the house to make sure it's being built to Toll Brothers standards. Every week, we call every customer with an update to let them know what is happening in their home. When the home gets framed, the team walks the customer through the home so they can see what is behind the walls, ask questions and understand how the home is built. Occasionally, we even measure furniture for them. The more communication, the better. When the home is complete, we have 2 orientation meetings with the customer, to teach them about the operation, care and maintenance of their new Toll Brothers home. Even after closing, we're still engaged with our customers. We have 1- and 11-month follow-ups, and we have a 10-year warranty. At every step of the process, our team is going above and beyond to care for the customer in their new home. The process we go through is only half of what's special about building a home at Toll Brothers. The other half and probably most important part are the people. It's the Toll Brothers team. Remember when I said happy employees build happy homes, we hike mountains, we bowl, we ski, we barbecue, we do things together to make it fun. When employees love what they do and the team they do it with, they take pride in the communities and the homes they build. There's a lot of companies that build houses. But to Toll Brothers, we build homes for our customers.

Thanks, Lisa and Mark. Our final segment, before we go to our first Q&A session comes from Wendy Marlett, our Senior VP and Chief Marketing Officer. Wendy has over 25 years of experience in the homebuilding business, and she's going to talk to us about the Toll Brothers brand.

Hello. I'm Wendy Marlett, Chief Marketing Officer. It takes a lot of hard work and a lot of passion to create a great brand and then continue to grow it. You have to know what you stand for and deliver on it over and over again. When you stop and consider, how Toll Brothers more than 50 years ago and you look at where we are today, you can see how the seed of one really incredible idea grew into something truly remarkable. The idea to build exceptional homes on the corner of Main and Main, as Bob Toll puts it, set Toll Brothers apart from other builders at its start and continues to do so today. Over the years, we've received lots of awards for our homes, for our communities and even for our people. But what we care most about is what our customers say about us. Reputation is everything. At the heart of managing the brand is the marketing and sales teams, along with all of our other customer-facing departments. To ensure consistency and quality, we have detailed internal playbooks for everything, from brand standards, the merchandising of our models and sales centers, design studio protocols and our efforts in public relations to drive traffic and provide thought leadership. This makes it efficient to scale our business while still creating distinct sub branding for each of our communities to showcase what's really special about each one of them. The combination of great talent and detailed processes allows us to be very agile to meet the market's changing dynamics, to not miss a beat, and continue to always move forward.

We believe what makes the brand successful is precise attention to detail. It's in those details at any touch point, marketing messages, model homes and product, even interactions with a construction manager. It all matters. We generate constantly evolving digital-centric approaches to connecting with consumers. This is all in response to the changing world around us. Our marketing is deliberate and our positioning is elevated. We work to generate creative that drives quality and consistency. It could be signage at our sales centers and model homes or brochures and campaigns, even producing broadcast quality spots on a national level like this, spot about our customers' obsession with their new homes. [Presentation]

We look beyond homebuilding to other luxury brands as our contemporaries. They're in other industries where our customers shop, it can be fashion, automotive or high-end hospitality, all of this results in aspirational marketing that resonates. One of the most compelling parts of the Toll Brothers luxury brand experience is the imagery. This photography sparks the imagination of our buyers to what's possible to create in their new Toll Brothers home. Whether we are adopting new technology, introducing new products, new price points or expanding into new geographies, we take great care to do it thoughtfully for our customers and for the brand.

The same care and attention to detail carries through into the home purchase experience. This high-touch experience starts with our online sales consultants. They're available by text, chat and by phone, daily. These experts live local in their markets to best assist customers when selecting a community and answering detailed questions all about the aspects of living in that area. They are the link of scheduling appointments for our on-site and virtual visits. Some speak multiple languages to assist customers with a wide variety of backgrounds. Our on-site sales team is made up of 650 sales professionals. They build strong relationships with their home buyers. We support our sales teams with internal networking opportunities to share best practices across the company. And we also have a robust internal sales resource center that includes ongoing training and development opportunities. And of course, at the center of all of what we do is our customer. That's why we make it a point to share a customer story at the beginning or end of every meeting. This keeps us grounded in what matters most as we preserve our legacy and remain the leading luxury homebuilder nationwide.

Okay thank you there, Wendy. That was terrific. A quick comment as we head into Q&A. So you heard from Mark Bailey. He was the one that got to dress in blue jeans hanging out in the Colorado Mountains and runs a fabulous Denver division. We came up with a division report card a couple of years ago, which has a number of criteria on it as we judge and compare the performance of divisions. It includes return on assets, gross margin, SG&A, growth, customer satisfaction. And Mark and his Denver division have been for the last 2 years, #1, on that division report card. And not only are they #1 overall, but they are #1 in both customer satisfaction and employee engagement. And he made the comment that happy employees build happy houses. Well, not only do they build happy houses, but they tend to drive more growth and they tend to drive more profitability. And everyone shooting for Mark. He's got a special culture, as you could see, and we're just so honored and thankful for what he is teaching all of us about how to be better all the time. So with that, we are going to move into the first session of Q&A. You can see now we have on the screen. And Marty and I will stay on all of these, but it's really an opportunity for you to ask the questions of those you just heard from. So we have Wendy Marlett, Jim Boyd, of course, Rob Parahus, Karl Mistry, Seth Ring and there's Mark. And we're getting a lot of questions. I've just been advised. So if we can't get to everything today, our IR group is going to be very busy over the next couple of days because we will get your questions answered. We've also tried -- some questions are very similar. So we try to consolidate them maybe. So you may not hear your exact words. But we're trying to consolidate some questions down to what several people are asking. So Frederick, if you have the latest for us, we will thank you very much. Let's jump in.

All right. Before we get to that, it's amazing what that report card on the divisions did to the competitive spirit of our various division presidents. They're coming after you, Mark, be on to look at. Our first question, as we anticipated it might be, is about cost increases for building materials and labor. What impact is that having on us? And how about the availability of materials and labor? Are you able to start homes and deliver them on time? And why don't we give this one to Rob Parahus, up in the upper right corner of your screen.

Thanks, Marty. So let me start by just letting everybody know that we adjust our budgets constantly to reflect today's lumber pricing, building costs, building material costs, and we build in a contingency to hedge against any future increases as well. But most importantly, our national purchasing team has done a terrific job aligning us with manufacturers that are willing to lock in pricing for 1, 2, 3, even as much as 4 years. So in doing that, we've protected the cost of the homes we build. But more importantly, if there is a commodity price change and a manufacturer does need to come in, they're required to give us anywhere from 60 to 120-days' notice. And during that time frame, we can place orders for the materials that we need to build, the homes that we've sold. And in effect, that locks in the pricing for those homes and the cost increase is applied to the next home we sell. Our national purchasing teams work in lockstep with our division teams as well to ensure that this happens. And that same philosophy is applied across our trade partners when they come in at the local level and a plumber wants to increase his pricing, we do our best to lock it in for the homes we have in backlog and to pass that increase along to the next home that we sell. I will say that from the labor side, we have not seen a lot of cost pressure there. I know I've seen it in Austin. I believe Jim has seen it in Phoenix and in Boise. But most of the markets, we really haven't seen those labor cost pressures. You heard Seth mention optimization. Certainly, that's another way that we've controlled our building costs between optimizing and simplifying our homes, taking the complexity out while still providing our buyers with tons of choice. We've been able to control our costs that way as well. As it relates to material and labor availability, again, our national purchasing teams have done a great job. We get priority for the products that we've contracted for. They are our partners in every sense of the word. And if we run-up against a specific model number that we can't get, of an appliance or a hot water heater, these partners either upgrade that appliance at no extra cost to us or they'll provide us with a temporary appliance that we can install, knowing that when the upgraded dishwasher, I'll call it, they're going to come in and switch it out for our customers and make it right. So we're in a great place with those partners. We've also streamlined some of our product offerings. So as an example, if we had 8 to 10 colors of roof shingles that we offered a couple of years ago, and the manufacturers today are really producing 4 or 5 colors, more so than others. We've narrowed the selections for our homebuyers during this peak time, where they're struggling with production. As far as lead time goes, have we seen increased lead time requirements? Absolutely. That's been communicated very well through our national team and our division teams and we've taken advantage of that. So they've been able to deliver the products that we need, when we need them for the most part. And that has enabled us over the last 2 quarters to continue to reduce our cycle time across most of the divisions. Now some of that's related to, as Doug mentioned, the affordable luxury and that being a higher percentage of the homes that we're building today, which ultimately has a reduced cycle time built in. So mix may play a little bit into those cycle time savings. But for the most part, our partners have done a great job providing us with what we need to produce the homes we're building, on time.

Great. Thanks, Rob. Jim Boyd. Here's a good one. With so much anticipated growth, how do you plan to scale your business?

Doug, thanks. That's a great question. We're in a terrific market right now, but if you don't have the team in place, and if you don't have the organizational structure, you really can't take advantage of it. To address the growth, we've pivoted. We've transitioned our management structure from our traditional project management structure to a more functional structure. For those of you who have been with us for many years, you'll know that Toll Brothers was built on the project management system, and it's been successful. Rob, Doug and I are all products of it. So are our younger leaders, Karl, Seth, Mark. Under that system, basically, each community is run by a generalist, you could call them as kind of a COO for that community. That handled everything from site work to models, to sales, construction and profit and loss. But today, we're a much bigger company. Today, we have over 300 communities, and we plan to close over 10,000 homes. What we learned over the years was that scaling that project management system, finding those 300 generalists was becoming more difficult to grow. Our new structure relies on specialists and functional leaders. Operating more consistently nationwide, enabled a plan for growth on a regional basis. So in each division, we'll have a leader of sales, a leader of purchasing, a leader of construction. And we also have national leaders like Lisa, who you just heard from running our design studios. By directing resources, both trade partners and materials throughout the division rather than focusing on each of those on a community-by-community basis, we have successfully scaled our business to become, today, the largest residential builder in Reno. After only 5 years, we've become the second largest builder in Boise, and we're poised to deliver over 1,000 homes in the Phoenix metro market next year. Back to you, Doug.

Thank you, Jim. Seth, now this one came in earlier. We -- full disclosure here. So we -- and we knew it was appropriate for Seth because it had to do with optimization, which we talked about last week at length. And so Seth, I think, was able to maybe pull a slide or 2 together to help as examples of what we're talking about. So the specific question is how do you cut costs on designing your floor plans without compromising quality and the risk of blending in with all the other builders as you continue to optimize and rationalize all your plans?

We think about that every day. And as much as we want to control costs. And we know that the battle on cost management is one loss at the design stage. We can't forget about our ultimate commitment to the buyer, and that's to deliver a luxury home. So it's a balancing act. We have determined -- it'll be used internally called optimization. You've seen it in the slides. What it really means is to capitalize on current buyer trends for more open floor plans, for comfortable and formal spaces. Maybe a large volume entry ceiling and a better connectivity to indoor/outdoor spaces. I think we might have touched on that earlier. So we have a number of different things we're doing, which actually deliver on a promise for a better superior plan but also a lower cost to build. I wanted to bring in Karl Mistry to walk us through an example on the East Coast, and I'll show you one on the West Coast because I think it's best just to show you in an illustration of what it looks like, Karl?

Yes. Thanks, Seth. So I guess I'd start by saying, thanks for allowing so many of us to come out and visit. I think we came in December to get out of some cold weather and visit you in SoCal but we went up to Seattle as well. It was a great trip. I think it was collaborative, sort of speaks to this ongoing innovation that we talk about a lot, internally. But this slide, I think is how it manifested itself here in the East, we came back from that trip, impressed by the floor plans, but also the process that Seth and his team went through. The floor plan at the top is the legacy floor plan that's here for context, the Columbia 2, which was a great seller for a very long time. But as we continue to offer it, we had to continue to offer more options to modify that floor plan. After a while, it just simply became cumbersome. And so coming back from that trip sort of invigorated, we hired a local architect here in the D.C. area and developed a Rosslyn, along with a few other plans that are certainly optimized. And what we were able to do is actually reduce the option offering considerably and put a lot of the options that customers were buying in the home standard. We were nervous what that would do to our option revenue but we're actually surprised in the end, customers are actually spending more at piece of studios and then our structural options. Additionally, what you can see here is we're able to save money on a price per square foot basis. So the net savings on this home as a contrast is right around $20,000. So you have the benefit of a better sales experience, easier for our sales teams to sell these homes and the cost savings. And I know, Seth, you had an example of West you shared with, I think, an even larger home. So I'll pass it back to you.

Yes. I think we share a lot of the same characteristics in terms of our change to optimizing. Again, the cleaner, sleeker, home designs, fewer exterior corners. fewer arches, bump outs, things that cost us a lot of money that we didn't always get the return on. So we're delivering a better design. And like Karl said, it costs less. So this is a big opportunity for Toll. As good as we've been in home design for the many years, we've been out there selling homes, there's opportunity to improve and get even better, and it's a boost to the bottom line. So in this case, in Southern California, 2 beautiful homes. One on the top was built around 2015. Its predecessor on the bottom was built here recently and was about $17 a foot less, which is about $70,000 a home. So we're not talking about insignificant savings. So Doug, we're out here. You see it -- there's hundreds of plans sitting in the market that are just like this. As you know, senior management is hot on this. There isn't a new community that opens that doesn't have optimized product. And so I think there's big opportunity in the future to improve the design and continue to cut costs. And I think everybody will see examples of this in the coming months and years.

Great guys. Thank you very much.

So our next question, let's direct it to Karl. It's about land buying discipline. And Karl can answer this because all of our regional presidents sit through all of our Monday meetings. The East Coast sits with the other 2 regional presence, the West Coast sits with their counterparts. With the company so large, and every market is so different, how do you maintain discipline in your land buying?

Got it. Thanks, Marty. I think you and Doug both touched on it. I've had the perspective of working in a lot of different markets for the company. And certainly, land acquisition has its local nuance. Real estate is a local business. But the tools that we use, the way that we evaluate, and as you've mentioned, even the people that evaluate these opportunities are consistent. So no division is exempt from that process or these return thresholds that we've mentioned. I think a simple way to state it, when you talk about capital efficiency in the context of land acquisition, is what we're trying to do is buy land no sooner than when we need it, right? That's a real simple way to think about it. And the deal structure, as you mentioned, Marty, at the top of the call, for how we do that. Your corporate finance team, a big shout out to them. They help pair the opportunity with the right deal structure. And that's a large part of that. The other thing is, along with Seth and some others, we were able to develop this land deal scorecard. And the way to think about that is it sort of -- it gives our operators an objective way and a qualitative way to think about the next opportunity. Outside of the financial returns, is there a supply demand imbalance? Is there approval risk? Does the land development have a complexity that we should look into? And all of this is in an effort to sort of make those returns more predictable, more stable. And then it all comes together on these -- on Monday, right? We're no longer up at 2:00 a.m., like Doug mentioned, but Monday is still a very important part of our day. Every opportunity is discussed and there's spirited conversation. We don't approve every opportunity. Some have to go back and get reworked. And look, at a time like now, where we have a lot of inventory we have, so much of it, which we control pre-pandemic. It gives us a chance to grow in the near term, and it allows us to be selective and discerning. So even for my chair, gives us a chance to really filter those deals for the very best ones. And we do that no matter what division is, every single Monday.

Great. I think we're going to take one more because we're -- the time slot is wrapping up here. So Wendy Marlett, there's a question about advertising spend. Can you quantify, please, the reduction in advertising spend that is contributing to the lower end of SG&A today and going forward?

Sure, Doug. Let me give some color to that. So when you think about it, the demand has been huge. So we wanted to take advantage of that and really look at our advertising spend and be smart about it. So right now, we have this huge opportunity to dial back media spend. And for the most part, that's in anything related to digital. So it could be paid search, display ads. And really dial it back, but at the same time, carefully watching traffic, both online traffic and foot traffic and making sure that customers are finding us easily, they can get to our communities. So being thoughtful about our cost cutting. At the same time, we're looking at opportunities on the ground. So our models, which are arguably our best marketing asset, they're also very expensive. We put a lot into them to make them so beautiful and so compelling and exciting for our customers. So we're looking at sort of everything that maybe the customer wouldn't even notice. So let me give you an example of a cost-cutting measure. So our beautiful sales centers have this glass front of really luxury retail experience. Well, just by designing that a little bit differently, we can cut a few thousand dollars here and there. And when you multiply it at times, all the communities that we're opening, can make a really big difference. So we're looking at everything. And I think at the end of the day, a lot of these measures will go forward. It's not just about today, but we'll bake them into our practices for the future as well to really support driving down SG&A.

Great. Thanks, everyone. Really appreciate it. And if you have any questions, by the way, of this panel, again, after today, just feed them through Fred and the IR group, and we'll make sure to get you on the phone with anybody you meet today. We really want you to get to know our team, not just this afternoon, but permanently. So I'm looking forward to that. Our next segment will showcase 2 of our business units that do differentiate us from most of the other builders, and that is our City Living and our Apartment Living businesses. So we have David Von Spreckelsen, who's our division President of City Living, followed by Charles Elliott, who is our President of Toll Brothers Apartment Living.

Hello. I'm David Von Spreckelsen, Group President of Toll Brothers City Living, our urban condominium division. I've been with City Living since its New York City inception in 2004. Since then, we've completed 35 condominium buildings, totaling 5,400 residences and 1 hotel. Coincidentally, it's called 1 Hotel Brooklyn Bridge. We developed the hotel with Starwood Capital Group and 0.5 million square foot mixed-use development, which includes 106 condominium residences called Pierhouse. We were attracted to the site because of its location in Brooklyn's premier neighborhood, Brooklyn Heights and the tremendous views that it affords. We designed Pierhouse with a single loaded corridor so that every residents would have a view of the world class Brooklyn Bridge Park, the East River and the Manhattan skyline. This is just one of a number of very successful waterfront communities we've created over the years. City Living got it started a decade before Pierhouse on the Hoboken waterfront that was once a Maxwell House coffee plant and a Lipton Tea facility. We redeveloped these sites into 10 condominium buildings totaling 1,946 residences and over 1 million square feet of commercial and parking space, transforming this once dormant area into a vibrant waterfront neighborhood. With our success in coffee and tea, we turn next to matzo balls, converting the former Manischewitz's matzo factory in Jersey City into a new community called Provost Square. The first tower there is a rental building developed with Toll Brothers Apartment Living from whom you will hear much more about shortly. The second tower is a condominium building with 242 residences which recently sold out, and I'm happy to say that we are about to break ground on the third tower, which will include 250 noncondominium residences and a theater for the performing arts. But many of our most recent buildings have been in Manhattan. We have had the good fortune to be able to develop in some of Manhattan's finest residential neighborhoods, including the Upper East Side, Sutton Place, Chelsea, Flatiron, Gramercy, Upper West Side and Tribeca. And we have worked with world-famous architects, including the Pritzker winners, Christian de Portzamparc and Rem Koolhaas. To all of these buildings, we bring our keen focus on outstanding architecture, fine interior finishes and thoughtful amenity offerings. What sets us apart from other condominium developers is our vertical integration. We generally build our communities with in-house teams and always sell our residences with our own sales teams. In addition, we have strong development and financial partnerships, which can leverage our operational capabilities. This gives us tremendous flexibility in rapidly changing environments and provides us with complete control of our brand and our message. And our latest building, 77 Charlton, is in the burgeoning Hudson Square neighborhood of Manhattan. And I'm pleased to say condominium sales in New York City are back. We're currently selling at a pace we haven't seen in years, and that certainly makes Florence and Samantha happy.

I'm Florence Clutch, and I'm the senior sales consultant for 77 Charlton. I've been with City Living since 2007. And to date, I have sold more than 500 homes at 9 buildings in Brooklyn, Queens and Manhattan totaling more than $600 million. David is right. Samantha and I are ecstatic about the way sales are going right now. And we're thrilled that our first homebuyers are moving into the building. We eagerly anticipate working on future City Living communities.

That's right, Florence. Hi, my name is Samantha Philemond and I've been with the City Living division since 2010, where I started as a Sales Manager at our Northside Piers development in Williamsburg, Brooklyn. 77 Charlton is the sixth building I've done with City Living, and now I'm a sales consultant here. As with our previous buildings, our exquisite architecture, great interior finishes and great amenities really resonate with our buyers. Like Florence, I look forward to the next one.

Given this encouraging news, in addition to commencing with the third tower of Provost Square, we have a number of other exciting projects in the pipeline that we're preparing for development, and we continue to monitor land prices and look at acquisition opportunities. Thank you for allowing me to show you all the great things we're doing at Toll Brothers City Living.

I am Charles Elliott, this is Apartment Living. The company and its founders have a long history of multifamily and commercial development. We initially focused the apartment business in the Northeast in Toll's core markets from Washington, D.C. to Boston. Since then, we developed over a dozen properties in those markets. It made sense to start our growth in the Northeast. It enabled us to leverage Toll Brothers brand and benefit from the synergies between the home building business and the apartment business. Through our focus on our people and our shared values of delivering on our promise of being thoughtfully designed and uniquely elevated, we enhanced the living experience of our residents. We have a very disciplined approach to growth. When we grow into any new market or to any new project, we do extensive due diligence and very conservative underwriting before we move forward. Today, we're a national platform, diversified across 14 states. Our focus is on developing in high barrier entry markets with limited land as well as in high-growth markets with strong job growth and diverse employment. Currently, we control land for over 18,000 apartment homes, primarily in suburban infill locations. The market for rental housing continues to be large and growing. We see tremendous opportunities for growth in the Sunbelt, Southwest and Mountain Markets. We combine the premier locations of where renters want to live and a luxury product. Our vision for growth is based on exceeding our customers' expectations and expanding to where our residents want to live. The demographic of an apartment living resume is someone in their early to mid-30s, with a household income of $160,000. A few years go by, that resident gets married, has kids and they become the target market of homebuilding. Our residents become accustomed to our quality, our brand, our service. They become Toll Brothers customers for life. Our primary strategy is centered on developing institutional quality product and selling at stabilization for outsized returns. As a result of these strategies, we deliver consistent income for our investors through the sale and recapitalizations of the projects we developed. Apartment Living projects are capitalized through joint ventures where Toll Brothers is typically the minority investor. These joint venture structures benefit our shareholders by increasing capital efficiency through fees and promotes. We have a strong track record of creating value for our investors. Our depth of investors speaks to this with 18 equity partners and 24 debt partners. We partnered with blue-chip institutional investors, including public companies, pension funds and private equity. We've also established strategic partnerships that have enabled us to maximize returns while minimizing economic risk and reducing the use of shareholder equity.

Thanks, David. Thanks, Charles. We love these businesses, but we do recognize that at times, they can be capital Inefficient. And so we are studying in great detail. We're pretty far along in studying some strategies that will permanently reduce the investment in these businesses as we're able to continue to grow them. And also drive permanent improvement in the ROI and the ROE. So we'll probably have something to report on that over the next coming months, but it's something that we're working hard on with both City Living and with the Apartment Living business. So moving on, we're going to now highlight 4 leaders from some of our dynamic regions around the country. First up, we've Bob Flaherty. Bob Flaherty is the group President overseeing both Arizona and Utah, followed by Greg Netro, the Group President for Florida; Rob Paul, Group President for Texas; and Kelley Moldstad, who is a Group President for the Pacific Northwest. The way we operate, we have, of course, 2 co-COOs, and then we have 5 regional presidents that handle the entire country and then under the regional presidents, we have a handful of group presidents that have multiple markets within an area. And then, of course, we have the DPs. So right now, you're going to hear from 4 of the group presidents.

I always knew I wanted to be a homebuilder but wasn't sure what that meant. And so after college, I went to school in L.A., graduated from UCLA with degree in economics. And I moved to Arizona and I picked up a hammer and I worked as a carpenter for 1.5 years. And then I found my way after a couple of years as a superintendent to Toll Brothers. But it also gave me an appreciation for who builds our homes, the physical workers that are out there building homes every day for us. And I think it helped me a lot in my career with Toll Brothers. So I certainly -- while I enjoyed it, it was incredibly beneficial for what I do today. Arizona is a fantastic place to live and raise a family and retire. We've got an incredible food and scene, a great weather. We're a very mature cosmopolitan area, and it's a very easy living. With all the growth occurring in Metropolitan Phoenix It only makes sense for our division in Arizona, for Toll Brothers division to grow. We traditionally served the luxury move-up second home market. Several years ago, our senior management team asked us to look into expanding our market share. And that will come from 3 places. The active adult age-restricted age-targeted lifestyle community, our traditional move-up high-end luxury market and then our affordable luxury, which is a lower price point. That affordable luxury can be built throughout all of metropolitan Phoenix. So we can go into cities like Goodyear and Surprise and Buckeye and Queen Creek, where we previously couldn't go because it didn't support the price point. So these 3 markets now allow us to move from doing just 250 to 350 homes a year, but instead doing from 1,000 to 1,500 or more. The Sterling Grove is our lifestyle, active adult community, and it feels like a place that you want to go to spend a vacation. You want to relax with your family or friends. Everyone knows what it's like to go on vacation, and you're just this sense of relaxation and the desire to own there. How many people go on vacation, end up buying a second home. There's no reason to leave the gate actually. Once you come in, everything you want is here. There're restaurants, golf course. It's a Jack Nicklaus golf course, there's the spa, 3 resort pools, fitness, pickleball, tennis, bocce ball, a pudding course. You can even have your groceries delivered here. So you really don't need to leave. You name it, we've got it here. In all of our models today, specifically the model we're in, Boulder Ranch, which is award-winning, you'll see indoor-outdoor connectivity throughout the entire home. There are many private courtyard spaces, meditative gardens, large gathering areas, pools, spas, we're building private resorts for our customer because we know who our customer is. We salvage and save most of the vegetation when we come on to a parcel of land and develop it. We keep that vegetation so that we can put it back into the community into some of the homes that we build. It's very important to us. It really helps with the maturity of the neighborhood, the feel of the neighborhood and preserves that meditative quality that the desert brings to so many people, which is really important. It's why we have so much indoor-outdoor living here. We build more than homes, we build lifestyle, and we've done that for 25-plus years. It's also what's allowed us to open other buyer segments go to affordable luxury and age-restricted lifestyle communities because of the reputation that we've got and the luxury that we build into all of our communities, all of our neighborhoods. The affordable luxury product line will account for about 50% of our sales this year and 50% of our settlements next year and it has a projected growth rate of 20% year-over-year. So this is a big market segment for us at Toll Brothers and specifically here in Arizona. And when you tour an affordable luxury community, you only think of it as luxury. high ceilings indoor outdoor living, multi slide pocketing doors, beautiful elevations that are on trend. It also allowed us to open up additional geographic areas in Metropolitan Phoenix, places we really couldn't offer our high-end luxury product. So today, we're selling homes to first-time homeowners, millennials, first move-up buyers because we're in a price point that is affordable for that segment. As a result of that, we are creating lifelong Toll Brothers customers, whereas in the past, the first Toll Brothers homes, someone may be an empty nester, retiree or buying a second home. Today, they can buy their first home. So we expect to sell our customers quite a few homes over there, home buying lifetime. And that's a real benefit and a real advantage to the growth of Toll Brothers. We may move people from an affordable luxury into a luxury and intuit lifestyle age-targeted community. Wouldn't that be great.

Hi. I'm Greg Netro, Group President for the state of Florida. And I'm here to talk about the expansion of growth and success that we're seeing all across the state. I've been with Toll for over 20 years. What's going on here right now in Florida is absolutely incredible. And I say that because 3 years ago, we're only building a little over 400 homes a year. Today, we're at 1,200. And in another 2 years, it will be over 2,400 homes. That's a significant amount of growth in a short period of time. Now in addition to building our tried and true luxury estate homes in a select few markets, we're developing new products across a wider range of price points, which allowed us to reach into new market segments across the entire state of Florida. Now Let's hear how this strategic move to diversify has helped Andrew out.

Hi, I'm Andrew Colavito. I've been with Toll Brothers for 13 years. I first started selling luxury estate homes, and I really enjoyed making dreams come true. And this was great for us. But what we were able to offer our homebuyers was a very limited segment of the market. Now in addition to luxury estate homes, we offer low maintenance lifestyle villas and talent homes an age-targeted and active adult living opportunities with price points from $300,000 to over $3 million. The possibilities are endless, and we take pride in knowing that we can help every homebuyer that chooses us to build their home.

You know another thing that's helped us grow over the last few years. The world has decided to move to Florida. In the last year alone, the population has grown by over 300,000 people. There's over 1,000 people a day moving to Florida right now. These are people who want to live in the luxury home and luxury community, full of the Florida lifestyle everyone is seeking. And one of those individuals that has decided to move here is our very own Kristen Hill, who comes to us from South Florida.

I've been with Toll Brothers for 15 years, and I recently relocated to Southeast Florida, not only to take advantage of my growth with the company but also for the affordability and the opportunity to live in the Sunshine State. Here at Azure, we created a vision we call the Azure experience. This vision included a unique luxury branding approach to make the overall community appealing to our lifestyle homebuyers. Azure is located in the highly sought-after area of Naples, which features our luxury gated master plan community with an award-winning clubhouse with state-of-the-art fitness center. Azure is just one of our many communities that provides a place for an active lifestyle, a variety of entertainment, relaxation and most importantly, a vacation lifestyle all year long.

So we need to continue to execute on our proven strategy of diversification, just like we did in 2019 when we expanded into the Tampa market. Tampa will provide us with an additional 500 sales a year while adding double-digit community count to our business plan. Over the next 2 years, we'll continue to do the same thing across Florida, entering even more markets such as the Gold Coast, the Space Coast and Emerald Coast as well as expanding more in our existing markets with further diversification of product and price point. There is still so much opportunity for us to grow all around the state of Florida and increase market share for years to come.

Hello. My name is Rob Paul, the Group President for the great State of Texas. On June 18 of this year, I'll be celebrating my 20th anniversary with Toll Brothers. When I began my career in the Dallas division, we had 4 selling communities, and we're working really hard to sell 100 homes. Today, I oversee our 3 markets of Houston, Austin and Dallas, where combined, we should sell almost 900 homes in our beautiful master plan communities and other locations across this great state. One of our greatest strengths is our focus on unrivaled choice. This choice is not just about the type of home you dream of owning. But in Texas, this choice is extended to where you'd like to live, whether that be the master planned community of Travisso in the Texas Hill Country in Austin, the Urban Vibe of Somerset, Green in Houston or a large home site at Town Lake and Flower Mound in the Dallas area in which to raise your family. This unrivaled choice also now spans diverse price points and product types. We currently offer affordable luxury communities with prices starting in the 300s to estate homes priced over $2 million. Texas is welcoming almost 1,600 new residents each and every day. This population growth and in-migration teamed with a pro-business attitude, tax friendly policy, warm weather, quality education and affordable housing are bringing relocation buyers from across the country. As companies keep announcing their movement to the great state of Texas, that demand will continue to fuel our success for the foreseeable future. Let's start our tour with Austin, Texas. Who does not love Austin. This seems to be the first stop for most people contemplating a move to the Lone Star state. We entered Austin in 2014 and have organically grown to over 250 sales per year. Boston offers a world-class music and food scene, great recreational lakes and Hill Country views that you just can't find in the other major markets. Or crown jewel in Austin is our Travisso master plan community, where over 3,200 homes will eventually be built by us and our JV partner. Community count is expected to increase by 35% through 2022, and our footprint will expand from dripping springs all the way to Georgetown. I'm especially excited to announce the 1,079 home sites active adult community of regency at Santa Rita Ranch coming later this year. Santa Rita Ranch is a top 25 national master plan and will be home to our first age-qualified community in the state of Texas. Moving to the land of the master plan. Houston, Texas. After entering the Houston market in 2009, we purchased 3 master plan communities, Siena, Woodson's Reserve and NorthGrove, not only building homes, but selling lots to many other builders. This master plan team based in Houston is headed by Jimmy Jenkins and now helps our operations in Florida, South Carolina and beyond. Houston is also the birthplace of Texas affordable luxury products. The pioneering spear and attention to detail by our Vice President, Brian Murray, paved the way for this growth category to spread across the city with fast build times, great design, attainable price points and a fantastic gross margin. This division proved that Toll Brothers can be much more than a typical large family home. Our last stop is the Dallas division. Dallas is our largest division in Texas and began in 1995 as our first entry into the state. Since that time, we've completed almost 5,000 homes. Our large home suburban move-up model has transformed to now include affordable luxury, smaller lots and locations spanning from West Fort Worth to the Northeast suburbs of Dallas. As a matter of fact, we now refer to our group as the Dallas Fort Worth division since expanding our market area. DFW continues to be the destination of choice for corporate relocations, and we're growing our land position to take advantage of that relocation market in addition to the high demand from local residents choosing to move up or downsize. I'd like to conclude with the exciting announcement that we are entering the San Antonio market. We have recently secured a 535-home site age-restricted community in Bernie, Texas. It's located within the beautiful master plan of Esperanza and will serve as the base for our future San Antonio operation. I hope this gives you a greater appreciation for Toll Brothers Texas operation.

There are so many benefits to living in the Pacific Northwest and a lot of reasons why people want to come here to retire. So we have the very mild climate year-round here, beautiful summers. And then we also have such a beautiful scenery. I mean the mountains, the water and access to all kinds of outdoor recreation.

Toll Brothers came into the region in 2011 through an acquisition of a small builder. One of the keys to our division is that we start from raw land, we entitle the land, we developed the land and then we sell the homes. Some of the biggest changes we've seen in our market really surrounds the job growth and the economy with the home of quite a few world headquarters and secondary headquarters the likes of Microsoft, Amazon, Google, Facebook, Expedia, T-Mobile and on and on. It really has driven the economy here. Some of the communities that I'm very proud of and are really the flagship of our Eastside and Kirkland area is one called Belvedere, was 81 homes up on the top of Lakemont, and that was really our first flagship Toll community that we built in the Seattle area. At McGraw Square, we really wanted to blend in with the neighborhood, and that means architecture that blends in. So what we did was we actually made architecture on each street a little bit different. The Street down on the lower side of McGraw is more of a contemporary and that matches the rest of The street up and down the corridor there. And then on the top, we have more traditional brick townhomes that actually match the houses across the street, so it really blends in nice, with the whole community.

When Toll first entered into this market, we're really focused in the Greater Seattle area, in Bellevue, Redmond, Sammamish, since then, we've been able to expand our footprint outside of that core, areas to the north, moving to the east to areas like we're at here, where we're at the base of the Cascade Mountains and south towards Tacoma. And by expanding into these areas, we've been able to increase our pipeline and we currently sit at 1,350 lots in the pipeline, which is a great improvement, and we're bullish on the future where that can go in expanding that pipeline further.