Toll Brothers, Inc. (NYSE: TOL) Q1 2022 earnings call dated Feb. 23, 2022
Corporate Participants:
Douglas C. Yearley — Chairman and Chief Executive Officer
Martin P. Connor — Chief Financial Officer
Analysts:
Unidentified Participant — — Analyst
Stephen Kim — Evercore ISI — Analyst
Alan Ratner — Zelman & Associates — Analyst
Deepa Raghavan — Wells Fargo Securities — Analyst
Truman Patterson — Wolfe Research — Analyst
John Lovallo — UBS — Analyst
Alex Barron — Housing Research Center — Analyst
Susan Maklari — Goldman Sachs — Analyst
Presentation:
Operator
Good morning and welcome to the Toll Brothers First Quarter Earnings Conference Call. [Operator Instructions] The company is planning to end the call at 9:30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. Please note this event is being recorded.
I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead.
Douglas C. Yearley — Chairman and Chief Executive Officer
Thank you, Jason. Good morning. Welcome and thank you for joining us. With me today are Marty Connor, Chief Financial Officer; Rob Parahus, President and Chief Operating Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Wendy Marlett; Chief Marketing Officer; and Gregg Ziegler, Senior VP and Treasurer.
Before I begin I ask you to read the statement on forward-looking information in our earnings release of last night and on our website. I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets, interest rates, the impact of the pandemic, the availability of labor and material, inflation, and many other factors beyond our control that could significantly affect future results.
I will begin by sharing some thoughts on current market conditions and sales, along with the challenges we are seeing on the production side and how we are addressing them. I will then turn it over to Marty to discuss the numbers and guidance in more detail.
Our first-quarter results were solid, net income and earnings per share rose 57% and 63%, respectively, and home sales revenues grew 20% in dollars and 9% in units compared to last year’s first quarter. Our adjusted gross margin of 25.6% in the quarter was 270 basis points better than last year’s first quarter. And our SG&A expense as a percentage of home sales revenue improved 150 basis points over last year. At first-quarter end, our backlog stood at a record $10.8 billion and 11,302 homes. There is a strong demand we continue to see in the market and the good visibility that our backlog provides. We are reaffirming all of our full-year guidance.
We are pleased with our sales results in the first quarter, as we saw broad strength across all of our buyer segments and geographies. We signed 2,929 net contracts for approximately $3 billion, up 2% in units and 19% in dollars over last year’s extremely strong first quarter when orders were up 59% in units compared to fiscal Q1 of 2020. Our contracts per community at 8.8 for the quarter remained well above historical averages. This was our best first-quarter sales ever.
The average selling price of signed contracts in the quarter, once again, exceeded $1 million and was up approximately $149,000 compared to last year’s first quarter. Favorable demand dynamics allowed us to continue raising prices in nearly all of our communities throughout the first quarter. While demand has remained strong, we continue to face challenges on the production side from supply chain disruptions, labor shortages, and municipal delays. These challenges were compounded by additional pressure from the Omicron wave as it spread across the country, especially in January when it peaked. It is taking us approximately two months longer to deliver a home today versus one year ago.
It’s important to point out that these delayed deliveries are not lost. We continue to enjoy historically low cancellation rates and our contracts are supported by an average non-refundable down payment of $71,000. It is simply a timing issue. With demand and pricing as strong as they have been and with construction schedules that continue to extend due to supply chain, labor, and similar issues, we believe the right strategy for us at this time is to limit sales and continue to focus on production. Over the past six weeks, we increased the number of communities on allocation from 25% to today over 50%. In many communities, we are using the traditional resale process of best and final sealed bid to maximize price. In addition, we are starting more specs in the second quarter than we typically would to replenish inventory sold last year. As a reminder spec homes normally represent about 20% of our settlements.
It is important to note that this increase in spec starts and purposefully metering sales should not impact the timing of future revenues, as we expect the spec homes started in Q2 to be sold later in the construction process and still be delivered in the first half of 2023. So we expect to start more homes than we sell in Q2 and we expect our sales pace in the second quarter to be similar to the 8.8 contracts per community that we booked in the first quarter. Our non-binding deposits in the first three weeks of February were consistent with the pace of the past nine months, which was approximately 325 deposits per week. We could have taken more deposits these past three weeks, but we chose not to in order to focus on production and manage build times.
In order to further streamline our operations and mitigate potential production bottlenecks, we also continue to optimize the number of available floor plans and options we make available in a given community. Offering buyers better choices by focusing on those that are most popular and more readily available. And we continue to work closely with our subcontractors and national suppliers, so we can anticipate supply chain issues and labor delays and make any necessary adjustments. While we do not anticipate any meaningful improvement in supply chain and labor shortages in the near term, we are encouraged by the recent steep drop in COVID cases and the relaxing of many pandemic restrictions.
Turning back to the demand side of the equation. The housing market and demand for our homes, in particular, is being propelled by strong demographics from both the millennial and boomer generations. The substantial imbalance between the tight supply of homes and continued pent-up demand. The wealth effect of rising existing home equity, migration trends, and the greater appreciation for home. We believe these long-term tailwinds will continue to support demand for our homes well into the future.
We continue to see people move from states where home values, taxes, and cost of living are higher to less expensive regions. This dynamic is spurring demand in markets across the country and particularly in the Sunbelt and Mountain states where we have expanded in recent years, for these buyers affordability is less of an issue. We have also not seen an impact on demand from the recent increase in mortgage rates. I remind you that our customers are generally better insulated from affordability concerns compared to buyers in the entry-level market. Our buyers tend to have higher incomes and they benefited from multiple years of appreciation in their investment portfolios and their existing homes. They also understand that when they contract with us today, their interest rate will not lock until they are much closer to settlement. So we don’t believe that demand for our homes is being pulled forward by buyers who were focused on beating a rise in rates.
Also keep in mind that rates have no impact on monthly payments for about 15% to 20% of our customers who pay all cash. And then another approximately 30% of our buyers with jumbo rates, which are currently five eights of a point lower than conforming for our clients. And overall, our customers average less than 70% loan to value in their mortgages. In fact, we’ve analyzed our backlog and estimate that rates would have to increase to approximately 5.25% before just 10% of our backlog would need to consider an arm, a higher down payment or other alternative mortgage. This speaks to the creditworthiness and healthy balance sheets of our customers.
As I mentioned earlier, we are reaffirming all of our guidance, including a return on beginning equity in fiscal 2022 of approximately 20%. We also expect to generate substantial cash flow in 2022. Our highest capital allocation priority continues to be investment in the growth of the business, including through disciplined and capital-efficient land buying. Of the approximately 86,500 lots we owned and controlled at January 31, 54% were optioned and 46% were owned compared to 46% optioned one year ago. Our shift to more optioned lots is an important part of our capital efficiency strategy and our focus on returns. This lot position also provides us with all the land we need for our projected community count growth in fiscal year 2022 and beyond.
We continue to expect approximately 10% community count growth by the end of fiscal ’22 from the 340 communities we were operating at the end of fiscal 2021. We continue to use excess cash to further reduce leverage and return capital to shareholders. In the first quarter, we repaid $410 million of our senior notes. We also repurchased $185 million of our stock, which reduced our outstanding share count by approximately 5% and we paid dividends of approximately $21 million.
Our balance sheet remain strong with ample liquidity, strong expected cash flow generation and declining leverage. These factors, along with the positive fundamentals underlying our business contributed to Moody’s upgrading us to an investment-grade credit rating last month.
With that, I will turn it over to Marty.
Martin P. Connor — Chief Financial Officer
Thanks, Doug. In our first quarter, we delivered 1,929 homes at an average price of approximately $875,000, generating homebuilding revenues of $1.69 billion, which was up 9% in units and 20% in dollars from one year ago. Settlements came in 71 units below our expectation, due to the supply chain disruptions, labor shortages, and municipal delays that Doug mentioned. We felt the greatest impact in January, the last month of our quarter as the effects of the spread of our Omicron were most acute. Fortunately, Omicron and that pandemic now seems to be waning.
Our first quarter pre-tax and net income were $200.8 million and $151.9 million, respectively, both up approximately 57% compared to $127.4 million and $96.5 million, respectively, in the first quarter of 2021. Earnings per share in the first quarter were $1.24 per share diluted, up 63% compared to the $0.76 per share diluted that we earned one year ago. The net income and earnings per share growth percentages were approximately triple our revenue growth percentage growth.
Our first-quarter adjusted gross margin was 25.6% compared to 22.9% in the first quarter of 2021. The 270 basis point improvement reflects the strong pricing environment over the last year. It also includes the impact of elevated lumber prices from last spring in this quarter’s closings. We continue to project an adjusted gross margin of approximately 27.5% for the full year. We expect adjusted gross margin of 25.5% for the second quarter of fiscal year ’22, as the impact of elevated lumber prices from last spring continues. This will be followed by a ramp up in our gross margin in the third quarter and a greater ramp in our fourth quarter. SG&A as a percentage of revenue was 13.4% in the first quarter compared to 14.9% in Q1 of last year and 70 basis points better than projected. Joint venture, land sales, and other income met our guidance at approximately $30 million in the first quarter. Impairments and write-offs were $2.2 million in the quarter. Our tax rate in the quarter was 24.4% compared to guidance of 26%.
Turning to future guidance, we are projecting fiscal year 2022 second-quarter deliveries of 2,350 homes, with an average price between $865,000 and $885,000. We are maintaining our full-year delivery guidance of between 11,250 and 12,000 homes, with an average price between $875,000 and $895,000. Deliveries will be back-half weighted and will be consistent with seasonal patterns. We expect interest and cost of sales to be approximately 2.1% in the second quarter. We project second quarter SG&A as a percentage of home sales revenues to be approximately 11.9%. For the full year, we continue to project SG&A as a percentage of home sales revenues to be approximately 10.5%. We expect community count to be approximately 330 at the end of the second quarter and 375 by fiscal year-end.
Other income, income from unconsolidated entities and land sales gross profit is expected to be approximately $5 million in the second quarter and $100 million for the full year. We project the tax rate of approximately 26% for the second quarter and 25.8% for the year. Our weighted average share count is expected to be $121.5 million for the full year and $122 million for the second quarter. Based on all these factors, we continue to project approximately $10 per share in full-year earnings per share and a return on beginning equity of approximately 23%.
Now, let me hand it back to Doug.
Douglas C. Yearley — Chairman and Chief Executive Officer
Thanks, Marty. This month Fortune Magazine named us the Number 1, World’s Most Admired homebuilding company. This is the seventh time, we have received this high honor. I would like to thank all of our Toll Brothers team members for achieving this tremendous recognition. They continue to demonstrate their dedication to our brand and to our customers. And for that, I am very proud and very grateful. As Toll Brothers enters its 55th year in business, I am excited about the current market and the long-term prospects for our company.
Now let me turn it over to Jason for questions.
Questions and Answers:
Operator
[Operator Instructions] As a reminder, the company is planning to end the call at 9:30 when the market opens. During the Q&A, please limit yourself to one question and one follow-up. [Operator Instructions] Our first question comes from Anthony Pettinari from Citi. Please go ahead.
Unidentified Participant — — Analyst
Hi, this is Ashley Sonet [Phonetic] on for Anthony. And thanks for taking my question. I guess my question is, the last time we saw rates rising in 2018 timeframe. You sales did slow down meaningfully. So I was just wondering what were maybe some of the early warning signs in 2018-2019 timeframe that were showing a demand, I mean, we should be looking for around now? And then I know you haven’t seen any impact on demand yet, but have any of those warning sign metrics started to weaken for you at all?
Douglas C. Yearley — Chairman and Chief Executive Officer
Very good question. The warning signs are web traffic, foot traffic and right now web traffic and foot traffic is up significantly.
Unidentified Participant — — Analyst
Okay, thanks. As a follow-up, I just want to see thinking about your sales pace in 2021, you sold maybe a little over three homes per community per month in the quarter similar to that and then I think for 2Q you expect to do the same. So I am just wondering, looking out to the rest of the year and then maybe even beyond that, is that sales pace sustainable maybe like a new normal or should we think about that 10% growth in community count coming more maybe at the cost of a little bit more of a normalization in sales pace?
Douglas C. Yearley — Chairman and Chief Executive Officer
So right now we are selling at about a pace of 37 homes per community per year and we are selling at a pace of about 35 homes per community because of all everything that — all the builders have talked about. And what we talked about in our prepared comments earlier, we can and we will get the settlement pace higher as supply chain, labor issues improve over, I think, it’s going to be the later part of this year. As I talked about, we are going to be focused on more starts this quarter. There is about six — we’re about 600 spec or what we call quick move-in homes behind because so many of those were sold over the last year and a half through the heat of the market. And we are committed to get many more homes started in the second quarter and that’s why we put over 50% of our communities on allocation. And so longer term, we are very comfortable being in the high 30s in both a sales cadence and a delivery cadence. And so community count will certainly contribute to our growth, but there are opportunities as supply chain, labor settles down for us to, we believe of both sell and deliver more home.
Unidentified Participant — — Analyst
Okay, that’s very helpful. Thanks. I will turn it over.
Operator
The next question comes from Stephen Kim from Evercore ISI. Please go ahead.
Stephen Kim — Evercore ISI — Analyst
Yeah, thanks very much guys. Really great info regarding the buyers and all the factors you ran through about demand not being put forward. So, thanks for that. One of the things that I wanted to — that our model is spitting out, but I thought what’s interesting is your — we have your net debt based on what we see here easily moving back down into the low 20s. And my — I guess my question was, in your outlook for a return on equity are about 23%. Can you give us a sense for what kind of range of net debt to cap you are expecting at the end of the year? In addition, you have talked about specs here a little bit more, you are one of the few builders that doesn’t actually give us a detailed breakdown of the number of home you have under construction at any point in time. I was wondering if you could give us that number, what it was this quarter and what it was in the year-ago period?
Martin P. Connor — Chief Financial Officer
So, Stephen, with respect to the debt question, I think you are directionally accurate. I think we are interested and operating in the low to mid-20s, but the timing of land opportunities or builder acquisition opportunities can always impact that from quarter-to-quarter or from year-end to the year-end. We are encouraged by the fact that our plans have been shared with Moody’s and they moved this up to investment grade. And so we feel very comfortable operating in those levels with the liquidity we have, the cash generation we foresee, and the growth opportunity we have on balance sheet or in process.
With respect to your second question, which is the number of starts, I don’t know if we have that with us this morning. As Doug mentioned a lot of our starts in the second quarter will be to replenish our depleted spec inventory. So we expect to start in the second quarter in the neighborhood of 3,400 to 3,600 units.
Douglas C. Yearley — Chairman and Chief Executive Officer
And Stephen in the first quarter, we did start about as many homes as we sold. But last year when we were selling a bit more homes than we were starting and that again is one of the main reasons that we have increased allocations for the moment, we are going to replenish the spec count. And so this quarter, as Marty said, we will be starting more homes than we sell, but those homes will — in fact, they should have a shorter construction cycle time because at least in the early stages of the home, we don’t have a client and we are able to move faster. But they will, we believe deliver in the same timeframe as if they had been sold and if this market continues, we are hopeful that maybe there is even more margin in those houses because they are sold a bit later in the cycle time.
Stephen Kim — Evercore ISI — Analyst
Yeah, no doubt, one of the interesting things that times like this brings is the higher margin on hunchbacks. Second question I had for you relates to the fact that you are trading pretty darn close to your book value, which as I have thought about that, one of the things that we have analyzed is how much of your land that you own, how many the lots you own likely reflect pre-pandemic pricing? The analysis that we have run suggests that easily all of it could theoretically have been — have had prices that were negotiated pre-pandemic. But there’s two assumptions in there I was wondering if you could comment on those. One is, that your land values rise more significantly even than the rate of home price appreciation, that land values rise I have heard 2x or whatever of home price appreciation, I wanted to sort of check that. The second thing is, you have options and my understanding is that some of those options have some form of escalator, but the escalator usually is sort of capped out, right. So when you have this period where land values have risen radically since the last two years, your escalators don’t move up at the same rate. So you really do have an embedded arbitrage on anything that you had as an option at the time of the pandemic. Are those two assumptions roughly correct?
Douglas C. Yearley — Chairman and Chief Executive Officer
It’s a very, very complicated answer. And I don’t want to bog down. But let me start with the land that we own that was contracted for pre-pandemic. That number is 77% of the land we own was tied up pre-pandemic. With respect to the deal structures, most of our deals have what we call kickers, no kickers. So we pay for the land, we may not pay all upfront with our obsession with capital efficiency, we may be paying it over time, there may be a interest rate associated with paying over time certainly with a land banker. There is an interest rate associated with taking that land down later, but most of our deals don’t have a kicker, which means a land seller is participating on the back-end with our success.
However, there are some deals that do have a kicker where they are either having a revenue share on the back-end based on a small percentage of the price the home ultimately sells for or in a very, very, very limited case there may be a profit participation where they have to get into our books and understand how we calculate profit and we have some arm wrestling over accounting and they actually get to participate on the profit side.
So one is revenue, which is a percentage of the home price itself and the other would be a share of the profit made, but those are the exceptions. Most cases do not have that. But to your point, when they do have a revenue or profit participation, we have the outsized component of that. So we are benefiting far more than our seller as our prices or our profitability goes up.
Stephen Kim — Evercore ISI — Analyst
Yeah. Makes sense. Thanks very much, guys.
Douglas C. Yearley — Chairman and Chief Executive Officer
You are very welcome.
Operator
The next question comes from Alan Ratner from Zelman and Associates. Please go ahead.
Alan Ratner — Zelman & Associates — Analyst
Hey, guys. Good morning. Thanks for taking my questions. Doug, I would love to follow-up, I think, on a comment you made to a prior question about the supply chain. And I think you kind of made a hopeful comment that as the year goes on, maybe things well at least stabilize or maybe even improve a bit. And I am just curious of your thoughts because you guys seem to be following a similar playbook that a lot of the industry is right now in terms of limiting sales, ramping spec starts, obviously community count is going to be growing a lot. So I guess, where I struggle a little bit is, and I would love to hear what your thoughts are, why would the supply chain stabilize if the industry is all kind of trying to ramp up the volume of specs over the next three months, six months, community count is going to be growing double digits for just about everybody over the next nine months, what is the catalyst that would actually cause the supply chain to stabilize or even improve?
Douglas C. Yearley — Chairman and Chief Executive Officer
Yeah, it’s a great question and I just want to start by explaining that we haven’t modeled for any improvement. We — the guidance we have given, in fact, we have increased our contingencies in our building costs recently to be more careful. So all the guidance we are providing and the way we are running this business is assuming that there will continue to be significant stress and there will be — continue to be a significant pricing pressure. With that said, and returning to my comment I made a few minutes ago, I am just looking at the world today, my January 9 million Americans called in sick. That’s off the chart, off the chart to the normal, I don’t know 2 million or 3 million pre-COVID. I think the prior peak to that was a year ago when it was 6 million. January was a really, really tough month. We felt we couldn’t get building inspections because the inspector was home. We couldn’t get COs because the town clerk who processes the CO was home. Our employees were home, truck drivers were home. I thought my kids school. We saw in our personal lives with friends and family and that is changing dramatically.
Mask came off my kids last week, going to school. There’s a lot that’s changing rapidly that just gives me some optimism that things will be more normal, the LA, Long Beach Port, you don’t have a 100 freighter sitting in the harbor, you don’t have thousands of containers sitting on the dock. I have heard the big suppliers are now beginning to talk about some improvements they are seeing in their opportunities to run their factories full speed, to get the truckers to transport. And so I don’t know the extent of it. I mean, I agree with you. The builders are growing, there is a lot of action out there, the market continues to be really strong. And so, of course, that’s the other side of the equation, but I am hopeful and cautiously optimistic using an old term that as this year progresses, we are going to see a bit of a more normal, although still somewhat stressed production environment.
Martin P. Connor — Chief Financial Officer
I think just to follow on to that a little Alan. We are offering products that we know is available. We are choosing product in these spec homes that we are building that we know is available. And we are narrowing to the most popular items, what is offered in our design studios and that actually marries with what the manufacturers are producing, they have narrowed how much they produce to drive efficiency.
Alan Ratner — Zelman & Associates — Analyst
Got it. Appreciate the comments there. I know it’s a tough environment to predict here. So it’s helpful to hear how you are thinking about it. Second question would love to just dig in a little bit in terms of the mix of your business. I think one of the areas that perhaps there were some optimism on in terms of navigating some of the extending cycle times was the growth in affordable luxury and the growth in newer markets where perhaps cycle times historically have not been quite as extended as the coast. So I am curious if I look at your average price growth, it’s been very strong kind of consistent with the broader industry. So it doesn’t seem like there’s really been much of a mix towards more affordable product or kind of more affordable market. Your cycle times obviously have not yet stabilized. So should I interpret that that you are actually just seeing incrementally stronger demand from the luxury higher end price point or is that not the correct interpretation and there is something else going on underneath the surface there?
Douglas C. Yearley — Chairman and Chief Executive Officer
No, we are committed to the affordable luxury business, we are committed to these new markets that tend — as you point out, tend to be a bit lower priced. There is a lot less City Living in ’22, there is almost no City Living deliveries in ’22 because of timing of buildings and our intentional decision to slow that business down as COVID hit. And the move out of City Living has ramped into active adult age restricted, primarily, but we are raising prices everywhere. So don’t read into this million-dollar plus sales price of the last two quarters to suggest that it’s coastal, it’s very expensive places.
We entered Boise four years ago selling houses at $325,000 and our average house in Boise now is $650,000 guys plus or minus. We — and I can tell a kind of story to many markets around the country, there’s — I guess there’s a bit of a new definition to affordable and many of these markets are seeing equal or higher percentage increase in sales price to some coastal regions. And then when you mix it all together, the price is coming out over $1 million, but we like the mix, we — much of the land we’re buying continues to be in these new lower-priced markets where we will be able to offer more affordable homes. But as I said, those homes are going up just as fast or faster than other areas. So it’s no change in strategy, it’s just prices going up everywhere.
Alan Ratner — Zelman & Associates — Analyst
All right. Appreciate the thoughts. Thanks a lot.
Douglas C. Yearley — Chairman and Chief Executive Officer
You are very welcome. Thank you.
Operator
The next question comes from Deepa Raghavan from Wells Fargo. Please go ahead.
Deepa Raghavan — Wells Fargo Securities — Analyst
Hi, good morning, everyone. Thanks for taking my question. A pretty broad one from me. If your 2022 is more or less locked in at this time, just given your backlog visibility, etc. What’s driving that wide range in guide? Is that — are you waiting for spring selling season or supply chain still the governor to the high-end, low end, any thoughts there?
Douglas C. Yearley — Chairman and Chief Executive Officer
Yes, go ahead Marty.
Martin P. Connor — Chief Financial Officer
So I think our guide for deliveries is a width 725 units. 11,250 to 12,000 with roughly 10,000 of those to go. I think that’s a prudent guide in this operating environment.
Douglas C. Yearley — Chairman and Chief Executive Officer
Right. 10,000 to go. I misunderstood, sorry.
Martin P. Connor — Chief Financial Officer
So we delivered 1,929 in the first quarter.
Douglas C. Yearley — Chairman and Chief Executive Officer
Got it. 10,000 to go to deliver. Got it. Yes, I think that the reason for that range, it’s not sales, we are selling in 2023 and we are very — I said last quarter that the next home sold by us in December had the highest margin we have seen in this cycle. I can repeat that comment now three months later, that the next homes sold today has the highest margin we have seen in this quarter because we continue to raise prices more than costs are going up, but that’s a ’23 comment. As to ’22, its supply chain, we missed deliveries in the first quarter, we have given you guidance in the second quarter on deliveries, obviously, we have a lot to do in the second half.
If we hit our delivery guidance in Q2, 63% of our full-year deliveries to hit the midpoint of guidance would occur in the second half. Our 10-year average for second-half deliveries is right at 60%. And we have studied the construction status of the backlog and it is further along than it has been historically. So we are comfortable that we can get to that 63% for the — for those reasons, but we think it’s prudent right now to keep that 750 unit window because of the environment we are building it. There are some quick move-in spec homes that will still need to be sold, but with the market conditions, I think, that’s a very, very low risk of impacting the ultimate delivery number. I think that conservatism right now is simply based upon the production environment we are living in.
Deepa Raghavan — Wells Fargo Securities — Analyst
Thanks for that. That’s helpful color. Another broad one from me. You addressed a little bit in your prepared remarks, Doug, there is a bad narrative out there that luxury builders are a little bit more price elastic. And the first move down usually happens in that portfolio resulting in luxury builders perhaps moving buyers to other categories as the buyers trade down in this high interest rate environment. How would you address that?
Douglas C. Yearley — Chairman and Chief Executive Officer
We disagree. I think our buyers are much more financially sound. I went through the numbers on their credit-worthiness. I went through the numbers on the average LTV at 70%. Yes, a luxury home is a discretionary buy, we understand that. But when we look at prior cycles, we have been the darling of the industry. At times when rates have gone up because the buyers can still afford our homes. It is not a monthly payment decision, our buyers don’t think. Maybe except in Detroit when they lease a lot of automobile, they don’t think about monthly payment, they think about moving up in their lives.
They think about getting that larger home as the kids hit middle school, buying that second half, moving down as boomers into that luxury community and they have the bread, they have the ability, they can afford it. They don’t max out the mortgage their — 50% of our buyers or more today are move up and the percentage that have a home to sell is 70%. And look at the equity that’s been generated in those existing homes for 70% of our client that allows them to move up. So that little tick in rate up 25, 50, 75 basis points, even 100 basis points historically, we are not 100% immune, but we have been in a better place than the starter home business where it comes straight down the monthly payment and affordability.
Deepa Raghavan — Wells Fargo Securities — Analyst
All right, that’s great color. Thanks very much. I will pass it on.
Douglas C. Yearley — Chairman and Chief Executive Officer
You are very welcome. Thank you.
Operator
The next question comes from Truman Patterson from Wolfe Research. Please go ahead.
Truman Patterson — Wolfe Research — Analyst
Hey, good morning, everyone. Thanks for taking my questions.
Douglas C. Yearley — Chairman and Chief Executive Officer
Hi, Truman.
Truman Patterson — Wolfe Research — Analyst
Hey, First, just wanted to hop back to one of the questions on the early warning signs and as a portion of your orders your cancellation rate ticked up about a point year-over-year, just seeing if you had any more clarity from the field. Is this just simply cancellations in the normal course of business or are you beginning to see the higher mortgage rates impact some buyers’ ability to qualify for the mortgage?
Martin P. Connor — Chief Financial Officer
Truman, I think the cancellation rate is low by our historical standards. I am looking back at the last 10 years and 6% looks like our long-term average. It was extra low last year, it’s ticked up a little bit this year. A lot of that tick-ups a function of how large the backlog is right now. If you look at cancellations as a percentage of backlog rather than as a percentage of current quarter sales, they have hardly moved it at all. And we are not seeing an early warning sign, if you will in cancellations. So I think that’s a bit of a red herring as it relates to having gone from high 3s to high 4s as a percentage of new contracts. It’s 1.3% — 1.4% of backlog, it was 1.3% of backlog a year ago.
Truman Patterson — Wolfe Research — Analyst
Perfect, thank you. And then second…
Martin P. Connor — Chief Financial Officer
And in a rising price environment cancellations are an opportunity for us right now because we get to sell the home at a higher price.
Truman Patterson — Wolfe Research — Analyst
Okay. So cancellations are still beneficial for the gross margin, okay.
Martin P. Connor — Chief Financial Officer
That is not a strategy.
Truman Patterson — Wolfe Research — Analyst
Fair enough. And then second question on rate locks, are you seeing consumers beginning to use rate locks more frequently, are they using a longer rate locks? And if so, how should we think about the cost associated to Toll and where it might impact the income statement?
Martin P. Connor — Chief Financial Officer
We have not yet seen extended period of time rate locks be asked for by our customers. They can lock a mortgage generally in a normal course within 60 to 90 days of closing and we are seeing them take advantage of that opportunity.
Douglas C. Yearley — Chairman and Chief Executive Officer
Great. And I want to reiterate, 80% of the homes that we are selling are build to order. That’s Toll’s — that’s our special sauce at our price point and those homes today will take 9 to 14 months to deliver based on where they are located, how much backlog and production issues. And so the commentary I hear that there is this pull-forward of demand because buyers are trying to grab a rate today before it goes up, it’s just not the case. Our buyers are not able to lock on our homes until 60 maybe 90 days before that home delivers. And we are seeing tremendous demand and tremendous pricing power in the last month as rates have risen and buyers know that they are not running in to lock a lower rate when they buy a home from Toll Brothers.
Truman Patterson — Wolfe Research — Analyst
Yes, it’s interesting when you say that, if you actually look at the data historically you are exactly correct that it kind of dispels the pull forward narrative. So, thanks for taking my questions. I appreciate it.
Martin P. Connor — Chief Financial Officer
Very welcome. Thank you, Truman.
Operator
The next question comes from John Lovallo from UBS. Please go ahead.
John Lovallo — UBS — Analyst
Good morning, guys and thank you for taking my questions as well. The first one is, I am curious how many communities you are implementing that best in final sealed bid in? And along those lines, how do customers tend to react to that process? And do you risk pushing some buyers away that maybe chose to purchase a new home to sort of avoid this process?
Douglas C. Yearley — Chairman and Chief Executive Officer
So about 90 of our 330 plus or minus communities are currently using the best and final offer program. That may not be for every lot. Sometimes we do it for special home sites where we know we have outsized demand. I know on my last call, I gave some great detail on how that process works and how you can do it in a build-to-order environment because we are not generally bidding a finished spec home although we do that — we also do that. And if you recall, we do it through the lot premium. And then if you are successful in bidding up the lot premium, you can then pick your house and go through the process of customizing the home to your lifestyle.
Buyers, it’s how you manage the process and sales has been really well trained in how they manage the process. If there are 30 people that want a home site, those that are 25, 26, 27 on the list are pretty happy. We are running this process because at least they have an opportunity. Not everybody is happy just like not everybody is happy on a resale when it goes to final and best, but that is the environment that we are in at the moment. Buyers are used to it through the resale market. We now have a really cool app where you can bid through a Toll app that makes it totally transparent.
And so, I think, we have done a really good job of explaining it, it’s a bit of a new normal in the industry. But yes, is everybody’s happy with it? No. People want to walk in and buy a house of a price sheet. But that’s not the environment we are working in at the moment and I am proud of how we are handling it. I think most buyers are understanding of it.
John Lovallo — UBS — Analyst
Yeah, that makes a lot of sense. And then maybe going back to Steve’s question from before just about where the stock is trading today, curious how this impacts your capital allocation decisions. I mean, if you guys are as confident as you sound in the sustainability of the cycle, which we would agree with, I mean, would your stock be a great investment right now and even more positive signal to the market?
Douglas C. Yearley — Chairman and Chief Executive Officer
Well, we bought $185 million worth of stock back at $61 guys. So I think that gives you the answer.
John Lovallo — UBS — Analyst
Okay. Thanks, guys.
Operator
The next question comes from Alex Barron from Housing Research Center. Please go ahead.
Alex Barron — Housing Research Center — Analyst
Yes, thank you gentlemen and great job. I wanted to focus on the trend in the gross margins this year. Clearly, in the first half, you guys were in the mid 25% and in the back half, it looks like you will be in the high 20% range. So I know you are probably not going to give us 2023 guidance, but I am more curious to see how you guys see margins unfolding as we move into next year, is it more likely to stay at the higher level or trend back towards kind of where margins are currently?
Douglas C. Yearley — Chairman and Chief Executive Officer
Yeah. Alex, I mentioned earlier that the next home sold by Toll Brothers has the highest margin we have seen in this cycle. So I think that bodes very well for 2023.
Alex Barron — Housing Research Center — Analyst
Got it. Okay, great. And then my other question has to do with expectations on orders, you guys obviously only had one negative growth quarter in October and then went back to positive this quarter. I guess related to that and your comment about 50% of your buyers are I think you said are move up. I am curious what percentage of the buyers are you guys seeing that are moving across state lines and what percentage of your buyers are first-time buyers? I am trying to get a sense of your mix and what’s really driving the strength here.
Douglas C. Yearley — Chairman and Chief Executive Officer
Sure. And just to clarify, because we are now restricting sales significantly, focusing on production and getting specs started Q2, as I think we made very clear there will also be a quarter where sales will be down. 40% of our sales are to those moving to a different market to migration.
Alex Barron — Housing Research Center — Analyst
Got it. And how — what percentage are first-time guys?
Douglas C. Yearley — Chairman and Chief Executive Officer
30% are first time homebuyers.
Alex Barron — Housing Research Center — Analyst
Okay. Thanks and best of luck.
Douglas C. Yearley — Chairman and Chief Executive Officer
Thank you very much.
Operator
The next question comes from Susan Maklari from Goldman Sachs. Please go ahead.
Susan Maklari — Goldman Sachs — Analyst
Thank you. Good morning, everyone.
Douglas C. Yearley — Chairman and Chief Executive Officer
Good morning.
Susan Maklari — Goldman Sachs — Analyst
My first question is you made a comment, Doug, that the web traffic remains high and that you haven’t really seen any changes in that. I am just wondering if you could give us any more details in terms of what you are seeing online? Are people looking at different products, is there any options that they are keeping an eye on, are they spending more or less time, any details around what you are seeing there?
Douglas C. Yearley — Chairman and Chief Executive Officer
Sure. So we have about 9 million visitors to our website per quarter. And our foot traffic as I mentioned is also up. Even though they all can’t buy because of allocations and — but they are still coming out. I am very proud of our website. We have an amazing web team, we better have the best website in the industry being America’s luxury homebuilder. I think we do, we track the amount of time they spend on the website, the stickiness. You get on our website and how longer you want it. That’s a big one.
We also have online sales consultants now that represent every single community and every market where they engage with clients through web, texting, through phone calls. Not only before communities open to set up the grand opening, but even as communities are open and selling and we call them Online Concierge Service and they are very, very engaged now with the web visitors. It’s very easy to see how you can click the button and start to chat with the online concierges and they set it up. They tee up that client for the sales manager at the local community.
The one thing we like to see is when they click on the directions page because that means that they are thinking about getting in their car and running out to the community. But the opportunity to look at videos now, to do walk-throughs of homes, to do some design of your home custom design, to fiddle with colors and products, all of that is available. And I am not going to bog down on the percentages they spend on each different page, but we track it very closely.
We also change the experience, so different pictures come up, different pages come up and we see what the client seems to like. And when you have 9 million visitors in the quarter, you get some pretty good trends that allow us to figure out the most efficient, most optimal web experience. And so our website is very fluid and constantly changing. Does that help?
Susan Maklari — Goldman Sachs — Analyst
Yes. But I guess are you seeing any changes in the stickiness to the website or what they are looking at, anything that’s been different in the last couple of weeks as we have seen rates rise relative to where we were a couple of months ago or a couple of quarters ago or has it been consistent?
Douglas C. Yearley — Chairman and Chief Executive Officer
It’s been consistent. Yeah, I don’t think — I am not aware of anything in the last month or two that has changed sort of the buyer experience on the website. We track web leads where they start on the web and ultimately go to agreement, which in today’s world, I think, I would be shocked if there’s a buyer that hasn’t spend a little bit of time on our website. But I don’t — Susan, I don’t think anything has changed recently because rates have gone up or for any other reason.
Susan Maklari — Goldman Sachs — Analyst
Okay. Okay, that’s helpful. And then my next question is just around when we think about where the business is today holistically, you focused a lot on growing the affordable luxury piece in the last several years. When you think about the business going into a rising rate environment with the affordable luxury piece of it today, which you didn’t have in the past, how do you think about the mix shift that we could see, the potential to sort of grow, the luxury versus the affordable luxury pieces of things and any changes there that could be coming?
Douglas C. Yearley — Chairman and Chief Executive Officer
Yes, I am very happy with the progress we have made over the last three years in widening the price point, the product offering, and of course, the geographies. We are not done. There will be more affordable luxury in the mix. Right now it’s about 40% and I think it could probably get up to maybe 45%, maybe 50% over a bit of a longer-term. But we are not giving up on luxury, there is still a lot of opportunity at the higher price points for us and we are seeing that success.
But as I look longer-term at that mix, we are beginning to approach what I think is optimal but we are not quite there, but we have come a long way. I would say, we are probably 80% on our way towards the long-term strategic mix set that we want. By the way, when I say 40%, that’s on the dollar value. So the actual number of homes would be higher since those homes are less expensive.
Susan Maklari — Goldman Sachs — Analyst
Got you. Okay, thank you very much for all that color and good luck.
Douglas C. Yearley — Chairman and Chief Executive Officer
Thank you.
Martin P. Connor — Chief Financial Officer
Thanks, Susan.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Douglas C. Yearley — Chairman and Chief Executive Officer
Thank you, Jason. Thanks, everyone. We really appreciate your interest and support. And happy spring, it’s on its way, almost March 1. Take care. Thanks.
Operator
[Operator Closing Remarks]