Toll Brothers' Q4 2025: Contradictions Emerge on Lot Ownership, Margins, and SG&A Strategies

Date of Call: None provided

Financials Results

• Revenue: $3.4B home sales revenue in Q4 (flat in units, up 5% YOY); record $10.8B home sales revenue for fiscal 2025, up ~2.6% YOY
• EPS: $4.58 per diluted share in Q4, down from $4.63 a year ago; full year $13.49 per diluted share, down from $15.01 prior year (2024 included ~$1.19/share one-time gain)
• Gross Margin: Adjusted gross margin 27.1% in Q4 and 27.3% full year; company guiding ~26.25% for Q1 and ~26.0% for FY2026 (attributed to higher average incentives: ~$80k vs ~$68k prior year)
• Operating Margin: 15.7% operating margin for fiscal 2025 (full year)

Guidance:

• Q1 FY2026 deliveries 1,800–1,900 with avg price $985k–$995k
• FY2026 deliveries 10,300–10,700 with avg price $970k–$990k
• Adjusted gross margin: Q1 ~26.25%, FY ~26.0% (assumes ~$80k incentives)
• SG&A: Q1 ~14.2% (includes ~$14M accelerated stock comp), FY ~10.25%
• Interest & cost of sales ~1.1% (Q1 & FY); Other income $70M Q1, $130M FY
• Tax rate Q1 ~23.2%, FY ~25.5%
• Share repurchases planned ~$650M in FY2026; target community count 480–490 (+8–10%)

Business Commentary:

* Strong Financial Performance in Challenging Market: - Toll Brothers delivered 11,292 homes at an average price of $960,000, generating $10.8 billion in home sales revenues. - The company posted earnings of $13.49 per diluted share, with an adjusted gross margin of 27.3%. - The resilience in performance was attributed to their luxury business model, serving a more affluent customer less impacted by affordability pressures.

• Conservative Guidance for Fiscal 2026:
• For fiscal 2026, the company is guiding for between 10,300 to 10,700 homes with an average price between $970,000 to $$990,000.
• The guidance assumes no market improvement and no changes in incentives.

• The conservative approach reflects the company's experience in navigating softer markets and its focus on maintaining a strong financial position.

• Impact of Apartment Living Business Sale:

• The sale of half of Toll Brothers' Apartment Living business to Kennedy Wilson is expected to close in Q1, with a purchase price now at $380 million.
• The transaction is expected to complete by the end of Q1, with the plan to exit the multifamily business over the next few years.

• The focus on exiting this business is to grow the core homebuilding business and return capital to shareholders.

• Spec Home Strategy Contribution:

• Approximately 54% of Toll Brothers' deliveries in fiscal 2025 were from spec homes, with a similar ratio expected for fiscal 2026.
• This strategy allows for quicker move-ins, appealing to buyers looking for immediate availability, and benefits margins due to upgrades.
• The spec strategy also allows for selling early in construction, providing customers with the opportunity to choose finishes and make upgrades.
  

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted a record $10.8B of home sales revenue, strong operating cash flow of ~$1.1B and ROE of 17.6%: "I am pleased with our performance in fiscal 2025...record $10.8 billion." Guidance described as conservative but confident in business resilience: "the guidance...is conservative."

Q&A:

• Question from Stephen Kim (Evercore): Can you quantify active-adult and move-down buyers and what trends you factor into land purchases today given long lead times?
  Response: Active-adult comprises ~17% of revenue; >70% of sales are move-up/move-down buyers who are older and wealthier; land buying is disciplined with conservative underwriting, good deal flow, and most current land sets up 2027–2028 revenue.

• Question from Stephen Kim (Evercore): Could owned lot counts stay flat or decline by year-end and what cash-flow conversion should we expect for FY2026?
  Response: Owned lots likely flat to modestly down as optioned lots grow; expect cash-flow conversion modestly lower than 2025, roughly in the ~60% range.

• Question from John Lovallo (UBS): Given past outperformance vs. guidance, are you leaving cushion in your FY2026 outlook?
  Response: Yes — guidance is deliberately conservative; management did not assume market improvement or lower incentives when setting targets.

• Question from John Lovallo (UBS): Why does implied gross margin moderate across FY2026 (Q1 26.25% vs full-year 26%)?
  Response: Management expects more spec deliveries later in the year that will require higher incentives, so gross margin is conservatively modeled lower in mid/late year.

• Question from Stephen Mea (on behalf of Mike Dahl): What gives you confidence in the FY2026 delivery ramp and how much is driven by spec strategy?
  Response: Confidence is driven by the portfolio math: 4,500 backlog + 3,000 spec under construction + 1,500 build-to-order + 1,500 selected spec-permit starts = ~10,500 deliveries at midpoint.

• Question from Stephen Mea (on behalf of Mike Dahl): Why are you exiting the multifamily business and how will proceeds be used?
  Response: Toll is exiting to be a pure-play public homebuilder; proceeds will be used to grow core homebuilding and return capital to shareholders.

• Question from Trevor Allinson (Wolfe Research): What drove the strong sequential order outperformance in Q4 and what do you expect for Q1 seasonality?
  Response: Q4 outperformance was broad-based across geographies (notably the North); management declined to provide forward order commentary beyond deposit trends observed in November.

• Question from Trevor Allinson (Wolfe Research): Is new-home inventory/overbuilding concentrated at entry-level or across price points?
  Response: Overbuilding is concentrated at entry level; Toll's ~$1M+ price-point markets (East corridor and coastal CA) have tight resale and limited competition, performing well.

• Question from Richard Reid (Wells Fargo): Can you bucket the drivers of higher SG&A dollars for FY2026?
  Response: SG&A guide is ~75 bps above last year: ~50 bps from lower revenue leverage and ~25 bps from wage/healthcare inflation and modestly higher internal/third-party sales commissions.

• Question from Richard Reid (Wells Fargo): What is the outlook for lot cost inflation embedded in the guide?
  Response: Lot costs are essentially flat exiting 2025 and the guide assumes flat lot cost; management is renegotiating some land deals where possible.

• Question from Michael Rehaut (JPMorgan): Is the FY2026 decline in closings driven mainly by lower beginning backlog vs. other factors?
  Response: Yes — the decline is primarily driven by a lower starting backlog; management assumed the same sales pace (~2 contracts/community/month) and did not bake in pace improvement.

• Question from Michael Rehaut (JPMorgan): What drives the sequential decline in gross margin into Q1 and FY2026 overall if incentives are flat?
  Response: The primary driver is higher average incentives (from ~$68k to ~$80k per house), which largely explains the margin reduction to ~26%.

• Question from Alan Ratner (Zelman & Associates): Are you seeing changes in consumer confidence or willingness to list homes to enable moves?
  Response: Management sees modestly encouraging early-season activity but no decisive data; affordability and lock-in remain headwinds, so they remain cautious despite tailwinds from demographics and time.

• Question from Alan Ratner (Zelman & Associates): Why guide $650M for share repurchases rather than a higher level given cash generation and apartment sale proceeds?
  Response: The $650M is a prudent launch figure; management would like to be higher but will evaluate repurchases throughout the year.

• Question from Victoria Piskarev (Bank of America): What are your expectations for stick/brick and labor costs in 2026 and what's embedded in guidance?
  Response: Construction costs are modestly down or flat in most regions (roughly $2–$3/sqft lower currently); no further construction-cost reductions were assumed in the guidance.

Contradiction Point 1

Lot Ownership Trends

It involves the company's strategic approach to land acquisition and ownership, which directly impacts cash flow, future delivery capabilities, and market positioning.

Could you clarify the move-down buyer trends, buyer demographics, and the trends influencing land purchasing decisions? - Stephen Kim (Evercore)

20251209-2025 Q4: Owned lots are expected to be flat or modestly down, with a goal to reduce option ratios. - [Douglas Yearley](CEO)

What factors are affecting SG&A expenses? - Richard Reid (Wells Fargo)

2025Q3: We have further reduced our average option ratio to 2.5 years as of December 31, 2024, down from 2.7 years one year prior. - [Martin P. Connor](CFO)

Contradiction Point 2

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

Can you explain the decline in gross margin this year? - John Lovallo (UBS)

20251209-2025 Q4: Gross margins are being conservative due to more spec deliveries in the later part of the year, which may require higher incentives. - [Douglas Yearley](CEO)

How will recent supply chain adjustments affect long-term cost structure and operational efficiency? - Michael Jason Rehaut (JPMorgan Chase & Co, Research Division)

2025Q3: Gross margin has already seen erosion, with fourth-quarter guidance at 27% compared to last year's 28.8%. - [Martin P. Connor](CFO)

Contradiction Point 3

Market and Sales Expectations

It involves the company's outlook on the housing market, sales expectations, and strategic positioning, which impacts investor confidence and operational planning.

Could you clarify the move-down buyer trends, buyer age distribution, and the trends that influence land purchasing decisions? - Stephen Kim (Evercore)

20251209-2025 Q4: Our guidance is conservative, not assuming any market improvement or incentive reduction. - [Douglas Yearley](CEO)

Concern about Toll Brothers' growth next year and whether 2 homes per community per month can be achieved in fiscal year '26? - John Lovallo (UBS Investment Bank, Research Division)

2025Q3: Toll Brothers is focused on fiscal year '26 and excited about community count growth. - [Douglas Yearley](CEO)

Contradiction Point 4

Spec Inventory and Strategy

It involves changes in the company's approach to spec inventory, which impacts sales, delivery, and inventory management strategies.

What gives you confidence in your fiscal '26 delivery ramp? - Stephen Mea (RBC Capital Markets)

20251209-2025 Q4: We expect to sell and settle another 1,500 spec permits in '26. The total gets us to the targeted 10,500 deliveries. The ramp is driven by spec starts that will deliver in prime summer months. - [Douglas Yearley](CEO)

Can you update us on your spec data and your comfort with current spec inventory? - Stephen Kim (Evercore ISI)

2025Q2: We are budgeting incentives conservatively and expect some inventory to roll into 2026. - [Douglas Yearley](CEO)

Contradiction Point 5

SG&A Expenses Management

It involves changes in the company's ability to manage SG&A expenses efficiently, which directly impacts operational costs and profitability.

What factors are affecting SG&A expenses? - Richard Reid (Wells Fargo)

20251209-2025 Q4: SG&A is up 75 basis points due to leverage on lower revenue and modest increases in internal and third-party commissions. We're focused on reducing overhead and expect a lower SG&A ratio by year-end. - [Douglas Yearley](CEO)

What's driving SG&A leverage, and what are your Q4 SG&A expectations? - Sam Reid (Wells Fargo)

2025Q2: We are confident in our ability to manage SG&A, and we expect continued efficiency in our operations. - [Douglas Yearley](CEO)