Good morning, and welcome to the Toll Brothers Q3 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. The company's planning to end the call at 9:30 A.M. 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'd now like to turn the conference over to Douglas Yearley, CEO. Please go ahead. 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 Greg 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 availability of labor and materials, inflation, pandemic impacts, and many other factors beyond our control that could significantly affect future results. In our fiscal Q3 ending July 31, we reported earnings of $2.35 per share, up 26% compared to the Q3 of 2021, and driven by continued gross margin expansion. Our Q3 adjusted gross margin was 27.9%, an improvement of 230 basis points compared to last year, and 90 basis points better than guidance. SG&A expense was 10.3% of home building revenues, which was 20 basis points better than both our guidance and last year's Q3. We delivered 2,414 homes in the quarter at an average price of approximately $935,000, generating $2.3 billion in home building revenue. Although we achieved record Q3 revenues, net income and DPS, and our revenues were lower than anticipated due to fewer deliveries than projected. The shortfall resulted from the combined impact of unforeseen delays with municipal inspections, continued labor shortages, ongoing supply chain disruptions, and a softer demand environment. We missed our deliveries guidance by 336 homes. Most of these deliveries were concentrated in a handful of communities and markets. For example, in California, we had 200 homes that were completed at quarter end, but due to delays with city inspectors and with utility companies, we simply could not get the final inspections or the electricity needed to obtain certificate of occupancy. The change in the demand environment also impacted Q3 deliveries. The combination of fewer spec sales, outside lender delays, a modest uptick in cancellations, and customers taking more time to sell their existing homes all resulted in fewer deliveries. Due to these challenges, we are lowering our deliveries guidance. We now expect to deliver between 3,250 and 3,550 homes in our Q4 and between 10,000 and 10,300 homes for the full year. Our adjusted gross margin in the Q3 at 27.9% was ninety basis points better than projected, primarily due to favorable mix and effective management of costs. We ended the quarter with a solid backlog of 10,725 homes worth $11.2 billion. We had a total of 190 cancellations in the Q3 equal to just 1.6% of the 11,768 homes in backlog at the beginning of the quarter, and comparable to our cancellation rate of 1.2% in the first half of 2022. For context, since 2010, our average cancellation rate as a percentage of backlog has been 2.3%. Yes, we think looking at cancellations as a percentage of backlog is much better than as a percentage of current orders. We have not seen any change in cancellation rates in the first few weeks of August. We have consistently had the lowest cancellation rate in the industry for many decades, which speaks to the financial strength of our customers and our build-to-order model, where buyers personalize their homes and become emotionally invested. They make a non-refundable down payment averaging $80,000, so they are also financially invested. As our low backlog cancellation rate in the Q3 attests, our buyers have remained committed to their new homes, even in this uncertain environment. Our backlog consists of homes sold in the very strong pricing environment of the past year, which puts us in a great position to continue to expand our gross margin in the Q4 and into fiscal year 2023. We project an adjusted gross margin of 29.2% for the Q4, and we are reaffirming our full year guidance of 27.5%. Turning to market conditions. As our Q3 progressed, we saw a significant decline in demand as many prospective buyers stepped to the sidelines in the face of steep increases in mortgage rates, significantly higher home prices, a volatile stock market, and rising inflation. Buyer confidence was also impacted by the nonstop headlines about a softening housing market and by a general sense of uncertainty regarding the future direction of the economy. All of these factors led to a market change in psychology, and buyers remained cautious through the summer months. As a result, our net signed contracts were down approximately 60% in units compared to last year's historically strong Q3. On a dollar basis, signed contracts were down 44% year over year as contracts in the Q3 benefited from price increases we had steadily applied throughout the year. For most of the Q3, we purposely did not chase buyers with incentives as we felt demand was very inelastic. Buyers were on the sidelines. They were not looking for a better deal. On average, incentives in our Q3 contracts were approximately $16,000 per home, up only $5,000 from the average over the first half of 2022. In more recent weeks, we have seen signs of increased demand as sentiment appears to be improving and buyers are returning to the market. With higher quality traffic, we have also started to modestly increase incentives, which buyers are responding to. August sales included an average incentive of about $30,000. In the first three weeks of August, our average weekly non-binding deposits were up 25% compared to July. We have also seen digital leads and foot traffic to our model homes increase. Our sales teams are reporting higher quality traffic, and in several recently opened new communities, we have seen great deposit activity. Although we are only talking about a few weeks, these are encouraging signs, and we are cautiously optimistic that the housing market is settling into a more normal seasonal cadence. Despite the near-term uncertainty, we believe that many fundamental drivers that have supported the housing market in recent years remain firmly in place. These include favorable demographics, with more and more millennials reaching their prime home buying years and baby boomers relocating as they embrace new lifestyles, the undersupply of new homes over the past decade, which has led to a large deficit and tight supply of homes for sale, migration trends driven by more workplace flexibility, and the greater appreciation for home that Americans have embraced in the past few years. We believe these long-term secular trends will continue to support demand for home ownership well into the future. In the current environment, we believe it is important, excuse me, more important than ever to remain disciplined and capital efficient in our operations and our land acquisition strategy. We are even more focused on controlling SG&A costs and becoming more efficient as we manage headcount and reduce SG&A expenditures. We have also become more conservative in our underwriting of new land deals and will continue to renegotiate or terminate optioned land if a project no longer meets our stricter underwriting standards. At the end of the Q3, we owned or controlled approximately 82,100 lots, 3,700 fewer lots than at the end of the Q2. Approximately 51% of these lots were optioned, a decline from 53% at Q2 end, due in part to our terminating options of over 3,000 lots in the quarter. Longer term, we continue to target an overall mix of 60% optioned and 40% owned lots. As a reminder, nearly 11,000 of our total owned lots are committed to buyers in our backlog. When you exclude these lots, 59% of our land is controlled through options. We also remain focused on our return on equity. In the Q3, we repurchased $92 million of our common stock. Since the beginning of the fiscal year, we have repurchased approximately $385 million or 5.8% of our diluted share count at the end of fiscal year 2021. We have also paid $67 million in dividends year to date, and we retired $410 million of long-term debt in our Q1. We expect share repurchases to remain an important part of our capital allocation priorities for the foreseeable future. Additionally, we continue to employ capital efficient strategies in our land buy. Last week, we announced a new joint venture between our City Living division and Sculptor Real Estate to develop two luxury condominium communities in the New York City market. Including the latest addition to our Provost Square development in Jersey City, where we have sold 60 units at an average price of $1.1 million over the past three months. We will act as the managing member and development lead, overseeing approvals, design, construction, and sales. We hope to add future properties to this venture. The structure of these transactions and our strategic partnership with the seasoned team at Sculptor demonstrate our commitment to maximizing the capital efficiency of our City Living operation. With that, I'll turn it over to Marty. Thanks, Doug. Before we jump into the income statement, let me address the average sales price for our new signed contracts in the quarter. The average selling price attributed to contracts signed in fiscal year 2022's Q3 was $1.3 million. It's important to point out that this average contract value was skewed higher this quarter due to the lower number of contracts we signed. Consistent with our normal practice, our total contract value for the quarter includes both the dollar value of new contracts signed in the quarter and the dollar value of option sales that occurred in the quarter on homes sold in prior quarters. Remember, it's not unusual for our buyers to select finishing options a quarter or two after they sign the initial contract of sale. While this practice typically does not skew the quoted average sale price for new orders, it did this quarter because of the much smaller denominator from fewer contracts in Q3 versus Q2 and Q1. On a normalized basis, we estimate that the Q3 contract's average selling price was closer to $1.15 million, which was still up approximately 7% compared to Q2. This 7% increase was attributable to our pricing strategy throughout the previous year, including our decision not to incentivize through much of the Q3, and also by positive mix. In our Q3, we generated home building revenues of $2.3 billion, down 7% in units and up 1% in dollars from one year ago. We reported pre-tax income of $366 million compared to $303 million in the Q3 of fiscal 2021. Net income was $273.5 million or $2.35 per share diluted compared to $235 million and $1.87 per share diluted one year ago. The increase in pre-tax and net income compared to last year was primarily driven by the significant year-over-year expansion in gross margin. Our Q3 adjusted gross margin was 27.9% compared to 25.6% in the Q3 of 2021 and ninety basis points better than projected. As Douglas mentioned, the outperformance relative to our guide was due primarily to favorable mix and effective management of costs. We expect adjusted gross margin to be 29.2% in the Q4, and therefore, we continue to project 27.5% gross margin for the full year. The estimated gross margin of homes in our backlog is high, reflecting the strong and improving price environment that held through most of our Q3. With 10,725 homes in backlog and approximately 3,400 deliveries projected for our Q4 at our midpoint, we have more than 7,000 homes in backlog that will form the foundation of our deliveries in fiscal year 2023. The estimated gross margin that is embedded in these deliveries is better than our projected full-year 2022 margin. SG&A, as a percentage of revenue in our Q3, was 10.3%, compared to 10.5% in Q3 of last year, and 20 basis points better than projected despite lower than projected revenue. This was primarily due to lower than anticipated selling and marketing expenses. Q3 joint venture, land sales, and other income was $13.2 million, exceeding our break-even guidance, mostly due to gains on land sold into joint ventures that we had originally projected would occur later in the year. We had previously expected to sell several of our stabilized apartment living and student housing properties in our Q4, which were projected to generate approximately $50 million in income from unconsolidated entities. However, we are pushing these sales into fiscal year 2023, when we expect to see better pricing from buyers. As a result, we are lowering our 2022 full-year joint venture, land sale, and other income to $60 million. Overall, our total investment in Apartment Living at the end of our fiscal Q3 was $565 million. It consisted of $133 million in 18 properties that were either stabilized or in lease-up, where we believe we have unrealized gains of approximately $400 million. In addition to the $133 million, we have $289 million invested in 23 properties that are currently in joint venture and under construction, and another $143 million in land and projects, 28 in total, that are 100% on our balance sheet, but slated for future development in joint ventures. This pipeline should allow us to produce a consistent series of gains from apartment sales in future years. We expect the earnings from these gains on apartment sales will continue to be a nice complement to our core homebuilding business. Turning back to our results, impairments and write-offs were $6.2 million in the quarter, primarily reflecting sunk due diligence cost or lost deposits on land that we are no longer pursuing because it doesn't meet our stricter underwriting standards. Our tax rate in the Q3 was 25.3%, 70 basis points better than projected. We now project a tax rate of approximately 24.8% for the Q4 and 25% for the full year. This is a slight improvement over our prior guide, as we now expect approximately $10 million in Section 45L energy tax credits that were reinstated in the recently signed Inflation Reduction Act. We finished the quarter with a net debt to capital ratio of 34.3%. We had $316.5 million in cash and equivalents and $1.8 billion available under our $1.9 billion revolving bank credit facility, which doesn't mature for over four years. This provides us with ample flexibility to both grow and return capital to our shareholders. At quarter end, our book value per share was $48.74. We expect this to be approximately $52.50 at fiscal year-end. Let me cover the additional items in our guidance that we have not already touched on. Based on the strong pricing in our backlog, we expect our Q4 average delivered price to be between $935,000 and $955,000. We have increased the full year average to $920,000 at the midpoint. We expect interest and cost of sales to be approximately 1.8% of home sales revenues in the Q4 and for the full year, representing a 40 basis point decline compared to full year 2021. This decline is primarily due to the retirement of higher interest rate debt over the past few years, which has also decreased leverage. We expect to further reduce interest in cost of sales in fiscal year 2023. We project SG&A as a percentage of home sale revenues to be approximately 8.7% in our Q4 and 10.5% for the full year. Our weighted average share count is expected to be 118.5 million for the full year. We expect community count to be approximately 350 at fiscal year-end. We've lowered this community count projection due to the impact of entitlement delays and supply chain disruptions impacting land development and our strategy to intentionally defer the opening of some communities until 2023. Over the past two years, we were able to open communities earlier than normal without models and out of sale trailers or even off-site due to frenzied buyer demand. We do not see that continuing into the near future, and we will shift back to our normal practice of opening communities with finished model homes and sale centers that are fully complete. Importantly, we own or control sufficient land for a significant increase in community count in fiscal year 2023. Now let me turn it back to Douglas. Thank you, Marty. I want to take this opportunity to thank our incredible Toll Brothers team members who continue to work tirelessly on behalf of our clients in these unprecedented times. It is their dedication and passion for our business that make us all so excited for the future. Jason, now let's open it up for questions. Thank you. We'll now begin the question and answer session. As a reminder, the company is planning to end the call at 9:30 A.M. when the market opens. During the Q&A, please limit yourself to one question and one follow-up. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Alan Ratner from Zelman & Associates. Please go ahead. Hey, guys. Good morning. Thanks for taking the questions and all the color. Appreciate it. So I guess first question just on, you know, the delivery guidance. I think you reduced it by about 1,000 homes for the year. You know, I'm curious if you're able to give a rough split. You know, how much of that is the supply chain, you know, challenges you guys referenced just in terms of, you know, hey, these homes are not gonna get delivered or completed before year-end like we previously thought? Versus how much of that is maybe just more of a conservative view on demand for, you know, you guys had been building more specs, and I assume there had been some assumption that you would sell and deliver some of those homes before year-end. How much of the reduction is just conservatism around not having those homes sold or delivered in time for year-end? Thanks. Good question. Yeah. Our model is about 80% build-to-order, 20% spec. The reduced guidance is probably, Alan, around 10%-15% due to less spec sales that we'll sell and deliver, you know, what I call in the same quarter or in a short period of time since that's not, you know, the primary part of our business model. The balance of, let's call it 85%-90%, is primarily, I'd say two-thirds of that balance is being driven by supply chain. You know, we've recently, and the industry has recently run into these incredible problems with getting transformers from utility companies so we can get houses fired up with electricity that are completed. Getting electric meters that you put on the outside of the house and, you know, things that, this is a new one for us, but it can be significant, as I mentioned, with the issues in California. And then the balance of a third, I'd say, is a combination of township issues with the inability to get inspections and to get certificates of occupancy, and then some buyer delays, right? There's more mortgage issues we have today as the mortgage rates are a bit higher, and there may be some, you know, more time for qualification. There could be, you know, a longer timeframe because buyers, now find it a bit harder to sell their existing home. And then we've had this modest increase in cancellations, which, you know, we have certainly budgeted in. I said that August cancellations are not up. You know, historically our cancellations are still low, but, you know, they have moved up a little bit. When you combine all of it, very little is due to the sell and deliver spec strategy since that's not our primary business, and more of it is just that bucket of items I just described, which really goes to, you know, primarily, production and municipality-related production issues and utility company production issues. That's the bulk of it. Got it. No, that's really helpful. Thanks for walking through all that, Douglas. Second on the incentive environment, I think, you know, appreciate your comments there just in terms of the, you know, the inelasticity of demand through the quarter. You know, is the easiest way to think about the incentives that you're offering in August, $30,000, so that's, you know, roughly double from where you were before, pretty modest overall. You know, it's about 1.5%, I guess, in terms of, I guess, a potential margin impact. When you're talking about your margin and backlog and the expectation for improvement in 2023, recognizing that these incentives are on new orders today, what are the conversations like in terms of your buyers and backlog? Are they coming to you expecting a similar incentive? Are you prepared to offer that type of incentive to a buyer to keep them in backlog? Ultimately, how aggressive are you willing to get on the incentive front, you know, before just taking a back seat and letting other builders compete in that area? Traditionally, you have not been very aggressive there. Sure. I'm gonna give a little bit of a longer answer here because I know it's on everybody's mind. Our Q2 incentive was $11,000, which on a $1.1 million house, let's call that 1%. May it was $12,000. June it was $15,000. July it was $22,000. In August it was $30,000. At $30,000 on a $1.1 million house, we're still below 3% incentive, which historically, through good times, is a very low incentive. When you sell a $1.1 million house, even in a great market, you tend to give the buyer, you know, $10,000, $15,000, $20,000, $30,000 to spend at our Design Studio or to finish their basement or help them with closing costs. It's just, it's a normal incentive, and we're still in that range. We saw early on in May and June, and I talked about it a bit on the May call, that we expected a slow summer. We think buyers with not only the rise in home prices but, you know, the doubling of mortgage rates, all the chatter about inflation, the headlines were starting to hit about a softening market. We knew they were headed to the sidelines. They were going to take the summer off, and we were not going to chase those buyers down with incentives. We have $11 billion in backlog. We're gonna focus on that backlog. It just wasn't smart business for us with our business model to do that. You know, we didn't have finished spec inventory that we had to move out, and we made the business decision, I think correctly, to not chase that buyer down. It was inelastic. They were on the sidelines. They were not coming in asking, you know, "What is this week's deal?" They weren't negotiating. From the Fourth of July forward, we started seeing signs of better traffic. You know, we survey our 350 sales teams around the country every week. I'm involved in calls every Monday for hours, and we started hearing the traffic is better. They're interested. They're back. They've absorbed the new market. Summer is moving on. They're starting to think through, you know, their plans. We felt demand was getting a bit more elastic, meaning that buyers were interested. They knew it was more of a buyer's market than it had been, but they were at the negotiating table interested in buying. We moved the incentive up modestly, and we've seen, you know, some pretty good results from that. Does that mean we're done with incentivizing? It's community by community. We will continue to react to what we hear from the sales teams. I think as summer is winding down, we're going to continue to see better traffic, higher quality traffic. We recognize it is certainly more of a buyer's market, and we will act accordingly. I'm not suggesting that, you know, the $30,000 of August. I'm not calling the bottom here. We don't know what lies ahead, but we certainly do feel better, and we will act accordingly. We're not gonna chase the incentives to a big number, and we don't think we need to do that with our business model. With respect to the backlog, which was another one of your questions, no, we do not negotiate with a backlog. We have about $80,000 in down payment. Do not underestimate the emotional connection our client has to the home. 80% of our buyers are custom-designing the home out of the gate. It is their lot, it is their architecture, it is their structural changes. Then they go to our Design Studio, and they spend another $100,000, $200,000 dollars on all the finishes. They have become emotionally attached. It is a move-up family primarily. This is about lifestyle changes for them. The kids are moving into a new school. This is the dream house. Historically, we have not seen cancellation rate anything close to the industry for all of those reasons. Right now, the rates are low. We do not negotiate with the backlog. We work with them, you know. If they need a little bit more time because of a house to sell, if we need to help them with different mortgage programs, you know, there's lots of different things we can do to help. Our backlog right now is secure and, you know, we are not, you know, going back and negotiating with that backlog. They are committed for the most part and moving forward. Sorry for the long answer, but I know it's on everyone's mind. No, I appreciate that. Thanks again. The next question comes from Michael Rehaut from J.P. Morgan. Please go ahead. Great. Thanks. Good morning, and thanks for taking my questions. Sure, Michael. Good morning, Douglas. First, just wanted to hit on to see if I could get a little more clarity on the statistic around average weekly deposits for the first three weeks of August, up 25% from July. It's a very helpful number and obviously around the narrative of the improvement that you're starting to see. I was just curious for context, you know, if we could get that number on a year-over-year basis. In other words, August, first three weeks, average weekly deposits versus, you know, first three weeks or roughly, let's say, August of 2021, as well as, you know, what the year-over-year was for July. Sure. Yes, and again, it's only three weeks, so I'm not, you know. While I say we're cautiously optimistic, I'm gonna, you know, the disclaimer here is we're talking about three weeks. It's a short window of time, but we are encouraged that deposits are up about 25% over July. When you look year-over-year, the three weeks of this July are down about 45% to the three- This August. Excuse me, August. My apologies. Thank you, Marty. The three weeks of this August are down about 45% to the same three weeks of last August. In terms of cadence, we took about the same contracts in each month of May, June, July this year, which was about 420 agreements or orders per month. Now, when you look at last year, July was elevated significantly over last 2021's May and June. This year, you know, it was more level. If you consider the deposits being up 25%, you know, it'd be fair to say if for the next week or so, until this month is over, you know, that 420 sales that we saw, you know, in July would be about 500, if you do that math. I'm not gonna, you know, guess at all as to what September and October may hold, except that I think we are encouraged by what we see, and we've certainly loosened the strings, as I just mentioned to Alan, you know, in terms of the incentives, and we're getting out of the summer doldrums. You know, we're, again, have that cautious optimism as to where we're headed. Does that answer your questions? Yeah. The second part of that was what was July down year-over-year, but you know, you may or may not have that in front of you. I guess the second question I had was just drilling into the comments around gross margins. You know, last couple of calls, you talked about an expectation for fiscal 2023 gross margins to be up over fiscal 2022. I'm not sure if I heard it slightly different, but this call so far, what you've said is, you know, the gross margins in backlog are above what you expect for the overall fiscal 2022, and you expect expansion into fiscal 2023. I was wondering if you still feel, you know, what your level of confidence is that as you look at overall fiscal 2023, that might still be up over fiscal 2022? I do have the answer to your July. July 2022 deposits were down 56% over July 2021 deposits, and July 2022 agreements were down 66% against July 2021 agreements. With respect to 2023's gross margin, you know, I think, you know, Marty laid it out in really good detail, which is we have over 7,000 homes in backlog that we project will deliver in 2023. That's just taking the math of the total backlog, what we think we'll deliver in this Q4, and the balance of it, or almost the entire balance of it is projected to deliver next year. That, of course, is not our full year deliveries because we still have homes we can sell in the Q4 and even into early 2023 that will still deliver by October 31 of 2023, and that includes build to orders, and that, of course, includes, you know, many of those 20% spec homes that I talked about, which is part of our strategy. It is that bucket that I can't, and I'm not prepared right now on this call to give any guidance on. You know, we usually do that in December. That is still our intention. Our point was simply that a significant portion of 2023's deliveries are in backlog with very high margins. That part of the year is pretty well baked. As for the balance that needs to be sold, we'll have to see how the market evolves, and we'll give more updates in December. Right. Perfect. Thanks so much. Appreciate it. You're very welcome. The next question comes from Dan Oppenheim from Credit Suisse. Please go ahead. Thanks very much. Was wondering in terms of the timing of community openings, you talked about delaying some openings to have them fully set. Given that some of the new communities when they come online can have strong orders, does that impact what you would think about in terms of overall order trends for the Q4 of the year? Dan, we're pretty well split with new community openings, you know, quarter by quarter. If we see the market improving or if we have a specific location where we have a lot of pent-up demand, we may go back to the COVID style, you know, open out of the back of a station wagon on a farm field. But that is not our intention right now. This company has always white-gloved every opening. We are the Ritz-Carlton. We don't open until everything is perfect. And that's how we like to launch. But when you get into a hot market, when you have a lot of pent-up demand, if we can get roads in and get houses built, right, which is the other part of it. We don't wanna be opening if we can't pull permits and start construction. If all that falls together in certain locations, there will certainly be exceptions to our, you know, older and now current strategy of get the entrance in, get the flowers planted, get the model home perfect, and off we go. In terms of the cadence. Go ahead, Marty. Dan, we opened 20-25 communities in each of the first three quarters of this year, and we project to open 35-40 in the Q4 of this year. Now, while that number is down compared to what we had previously thought, it is still up significantly over the first three quarters. We do expect a boost in the Q4 from new community openings compared to the most recent quarters. Right. Next year, as we mentioned in our prepared comments, we are in a great position in that we have the land controlled for significant community count growth next year. We will open those communities for all when and for the reasons I have described. Again, it'll be somewhat market dependent. I am very encouraged that based on the, you know, the openings that we continue to have and those that we've had over the last month, we have had significant success at the initial launch, with a lot of pent-up demand, and in some cases, we've sold, you know, 5, 10, 15, 20 homes in the first couple of weeks of a new launch. You know, the buyers are out there, and if you have the right offerings in the right locations, you know, we are seeing success. I mentioned 60 sales in 3 months in New York City at $1.1 million. You know, New York didn't get as soft as other markets, excuse me, wasn't as hot as other markets over the last couple of years as people, you know, left the cities. there wasn't quite the sticker shock, and the community has continued to be very successful with hundreds of qualified buyers on a list that we're just working through to continue to sell there. There are certainly bright spots around the country with new openings, which we're encouraged by. Great. Thanks. Just a quick follow-up. You'd mentioned the expectation of book value at year-endings. Wondering how you're thinking about allocating capital, given the discount to book relative to this environment where you're reassessing, putting more into land and such. Well, Dan, we've demonstrated a commitment to returning shareholder capital to shareholders through the dividends that we've paid this year as well as the buybacks. We've done that as we've grown the company. I think we would continue to look at balancing buybacks. We'll pay the dividends and we will continue to pursue new land deals. Many of those new land purchases are from old land contracts, and they still work. It is increasingly difficult for new land deals to meet our underwriting standards. So the balance will continue to exist. We will see what the opportunity set is and what the cash flow is. Great. Thank you. The next question comes from John Lovallo from UBS. Please go ahead. Hey, guys. Good morning. This is actually Spencer Kaufman on for John. Thank you for the questions. Maybe just piggybacking off of some of the comments from the last question, can you just talk about what you're seeing across your various markets? You know, which markets are more challenged today? Which markets are, you know, hanging in better than most? Are you seeing any difference in buyer activity between your affordable luxury product and your more traditional homes? Sure. The move-up and the active adults have performed better than affordable luxury, and I think that's because the buyers are wealthier and, you know, mortgage rates aren't quite as important to them. It's not a monthly payment affordability issue as you move up in price. We've seen that in the past in times like this, and it's proving to be the case again. The best markets for us right now are our home turf here in Philadelphia, New Jersey, Southern California. I mentioned New York City, Atlanta, Denver, Dallas, the southeast coast of Florida, Raleigh. The weakest markets, which happens every cycle, are those that were the hottest because when the price goes up a lot, those markets tend to take a little longer to adjust. That would include Phoenix, Austin, Texas, Boise, Idaho, and Reno. I think, again, it's just an adjustment that's occurring because of the you know, the prices being higher and the affordability. Those locations also tend to be a little bit lower priced for us in many cases. I think they probably fit a little bit more into that affordable luxury group that I mentioned, where you know, as rates have gone up, there's a bit more pressure. Okay. That's helpful. Appreciate the color. Maybe can you just talk a little bit as to what would need to happen in order for you guys to see widespread impairments? I'm sorry. I didn't- Widespread impairment. Oh. Yeah, I think things would have to go a lot worse than they're going right now for widespread impairments. Just to reiterate the breakdown of our inventory that I gave last quarter, it hasn't moved too much. We have about $9.4 billion of inventory. Six and a quarter billion of that is construction in progress associated with our backlog. There shouldn't be much concern at all about that backlog. The backlog has upper 20s% gross margin to it. We're seeing very low cancellation rates. So there's not too much to that. About two and a half billion dollars of our inventory is owned land that also has strong margins associated with it. Around $450 million of our inventory is land deposits, and about $80 million of that is refundable, and those are for pieces of land that we have not acquired, that we have under option. With a close to 30% gross margin, and a 20% operating margin from home sales, we'd have to see dramatic reductions in price for impairments to be of concern. As you have that dramatic reduction in volume or price, you're also gonna have reductions in costs. It would have to be much more significant than a 25% or 30% decline in price to trigger Any impairments, and those impairments would be associated with those smaller buckets of inventory, land and deposits, not so much associated with our homes under construction and backlog. Thanks, Marty. The next question comes from Matthew Bouley from Barclays. Please go ahead. Hey, good morning, everyone. Thanks for taking the questions and for all the detail. Just a question on ASP and pricing power in light of all these communities you've got coming online. You know, appreciate that detail you gave around the order ASP in Q3, so that's helpful. You know, as we think about these future community openings, I mean, how should we think about the opening price points and margins on that? Is that an area where you might flex a little bit, given current market conditions? Thank you. Again, it's very, very specific to the location and the interest. We hope not to flex. You know, we like a 30% gross margin, but if we have to flex, we will. That decision is made very locally. We are very confident and comfortable with the underwriting we have in place now for these new openings that continue to show significant outsized gross margins. So it, again, it'll you know, we go through a pricing analysis before every community opens, and that analysis is based on detailed market comps, the number of VIP buyers we have that are interested in buying, and we do a full analysis and make decisions on where to open. Of course, we have a keen eye on what those returns are when we do that. Right now, I'm very comfortable that, you know, the communities we have slated to open over the next year will all perform well. Got it. No, thank you for that. Just second one on, I guess, sales pace and underwriting. Just presumably, if the sales pace, you know, at this level is maybe a little bit less than what you would, you know, underwrote to in the past. I guess, the question is how do you balance the, you know, where you want inventory turns to get or to be, you know, versus just that, you know, potential pressure on returns? Or is the result of all that, you know, simply just reducing your, you know, acquisition of owned land? Like, how do you balance those points? Thank you. Well, we're, you know, as we've been talking about for a few years, it's not just profit margin, it's also capital efficiency and ROE. We are absolutely balancing price with pace. The fact that we had a very slow quarter, you know, does not mean that our head is in the sand and we're not going to sell because we're trying to maintain a margin. We recognize there is a balance. The reason we didn't have sales is what I described. That in May, June, and into the early summer, the buyers were on the sidelines, and we didn't think it was about price unless you wanted to, you know, really drop the price to go grab those few buyers that might have been out there. As that is changing, you know, I think we will do a good job of balancing the incentive necessary to drive an absorption that will still have an eye on ROE and being capital efficient. We recognize the need, and it's part of our strategy to focus on driving strong margins, but also being capital efficient and having good returns. With respect to the land, our underwriting has gotten even tighter. You know, I talked on the last call that we are now up to 60% combined gross margin and what we call internally IRR. If you had a 30% gross margin, you needed a 30% IRR, you know, that's now 65%. On top of it being 65%, we are building in today's sales paces and today's pricing. That's a bit of a double whammy because, you know, sales pace is down a bit, and price, you know, with more incentives, is down a bit. On top of that, you've layered in, you know, the higher threshold that you have to hit. You know, we're gonna continue to be disciplined. By the way, when we exit due diligence, we're doing that new analysis and deciding whether we wanna go forward, and we're going back to land sellers to renegotiate. If they don't come around, then we will drop deals. The only reason our option lots went down modestly this quarter is because we dropped 3,000 option lots because they no longer penciled with our tighter underwriting. The quarter before that, you know, we dropped a couple thousand lots for the same reason. I'm very happy with the discipline we're bringing to land buying. We have a great land portfolio that allows us to grow community count significantly next year, and we will continue operating this way into the future. Great. Thanks for all the detail, Douglas. You're very welcome. Thank you. The next question comes from Susan Maklari from Goldman Sachs. Please go ahead. Thank you. Good morning, everyone. Good morning. My first question is, can you just talk a little bit about the supply chain and build times? You know, as we are seeing the market shift, how you're thinking about the forward trajectory for the construction cycles as we go into the back half of this year and then into next year? Sure. Right now, our cycle time from agreement is about 13 months on average, 380 days. That's not pure construction because the front end, you know, takes a while for the client to pick their finishes, their options, and for us to get a building permit. The actual build cycle time is, you know, not that full 380. Affordable luxury is about 60 days less than that because the houses are smaller and a bit simpler. It is up. It continues to climb. Right now, the stress I mentioned is on things we took for granted, like transformer boxes. You guys have all seen those green boxes in the front yard of houses that generally handle about 4-6 homes on a street. You have to put a transformer down, which gives the electricity to those 4-6 houses, and utility companies have apparently run out of them at the moment or are having a hard time finding them. This is just the whack-a-mole, you know, issues that the industry is dealing with. Finish trades right now, you know, our houses are a bit more complicated. When you get beyond Toll Brothers. When you get beyond drywall with a Toll Brothers home, you know, there's a lot more that goes into those finishes with tile and millwork and cabinets and things like that. On the finish end right now, we're feeling a bit of pressure with trades. I think that's pushed out. You know, if you look at drywall to delivery, you know, we've added a couple weeks from what we used to have. That's the latest issue that we are addressing. There are some encouraging signs that I have for next year when it comes to supply chain. We are on the phone regularly with our biggest suppliers, and I'm hearing some encouraging words in that regard, but we're not building that into any of the projections we're making internally or to you. Okay, that's helpful. Following up, understanding that spec is only about 20% of the business, but can you talk about where you are in terms of the spec inventory and how you're thinking about adding to that as we go forward? Yeah. We're in really good shape right now with spec. We have about 1,800 what we define as spec, which means the homes have a footing, which is a foundation in the ground. So spec doesn't mean it's finished. Internally, it means we have started a home, we have poured concrete, we have a footing in place for a home that has not yet sold. Sometimes we'll sell that house at frame because now you can get it in 5 months instead of getting it in 13 months, and sometimes we'll hold that house until finishes. So we are in very good shape. Now, not every one of those specs that sits at footing is moving forward right now. You know, we are making some decisions to move houses forward on a full cadence, and we're making decisions in other locations to sit and wait to see where the market goes. Behind those 1,800, we have many houses that have permits in place, and in some municipalities, that can be a couple months to get a permit. We will decide when that permit gets a go, which means we're gonna move forward with footings and build the house. You know, last year, our spec inventory was depleted because the market was so hot, we were selling very rapidly, and I'm very happy now to have the 1,800 at footing or beyond with more at permit behind that, because now we can pull levers in certain locations based on market conditions as to, you know, when and how quickly we move forward with those. Overall, the strategy we think is the right one at our price point to be 80% build-to-order, which is what most people want with Toll Brothers, but then 20% are houses that are available in a quicker turn time. Now many of these specs we do, you are allowed to have finishes, you know, because we'll put the house on the market, let's say, at drywall, so you can still pick your kitchen cabinets, your countertops, your flooring, which our clients want. Okay. That's very helpful color. Thank you. We have time for one last question. That's from Mike Dahl from RBC Capital Markets. Please go ahead. Thanks for squeezing me in last minute. Sure, Mike. Just quick, Doug, on the just going back to the deposits and the orders in August. You know, when you make that comment on all else equal tracking to about 500 orders in August if you just look at deposit trends, how have the conversion rates from deposit to contract been trending the last couple of months? What does that comment imply for conversion in order to hit, let's say, a 500 order number in August? Sure. We're trending at about 70% of our deposits convert to agreement. It's consistent with what we've had over the last, you know, couple of quarters. In fact, Gregg Ziegler just sent me a piece of paper that says our five-year average conversion ratio is 71%, and we're right on that now, last month, last quarter, last year. Okay. That's very helpful. My follow-up just, you know, given what you articulated around the build cycle or the order-to-close cycle, what are you finding is the right balance of incentives for your buyer right now? I don't mean magnitude, but I mean type, 'cause it's easy to see where if there's something that's quicker close or financing incentive where you could have visibility on cost of locking and buying down a rate that could be effective. You know. Yeah. With your long cycle, what's making the most sense for you or your buyers? Right. Mortgage buydowns would be number one. You know, we have programs that allow our clients to get the mortgage rate under 5%. Now that may not apply to long term. You know, we can't lock a sub 5% for 13 months. There are opportunities as the house gets closer to delivery, you know, that we have that opportunity. Closing costs always help people. We recently ran a kitchen and bath weekend where there were upgrades to your kitchen and your master bathroom, which is, you know, that's where people wanna put the money. You can get second, third level cabinets, countertops, appliances, and that's always very effective. We move the incentives around regularly. You know, this weekend it's a finished basement. Next weekend it's $25,000 credit at our beautiful Design Studio when you go do finishes. There's not one thing, but, you know, in today's market where rates are on everybody's mind, that's generally where the incentive starts. We do have, you know, 20% cash buyers, right? There's an example right away where we're gonna give money at the Design Studio or we're gonna lure them into the kitchen and bath sales event. It's constantly moving on purpose. We do not touch the price sheet. We try to, you know, the local teams have the authority to try to adapt their incentive that they've been given to what they think will be most effective for their clients. Okay. Thanks, Douglas. Really helpful. You're very welcome. Thank you. Okay, Jason, I think the time is up. Thanks everyone. To Jason, thank you, and thanks everyone for your interest and your support. We are always here to answer any questions you may have offline, and have a wonderful end of summer. Take care. Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.