Toll Brothers : Annual Report

ANNUAL REPORT | 2022

ROBERT I. TOLL

1940-2022

An Incredible Legacy

A true innovator and visionary leader. A family man with a passion for giving. Robert I. Toll's extraordinary character and enduring impact can be described in countless ways, but they are immeasurable.

Bob was a practicing lawyer for just one year before founding Toll Brothers with his younger brother Bruce in the suburbs of Philadelphia in 1967. Toll Brothers later expanded to multiple states and went public on the New York Stock Exchange in 1986, ultimately becoming a Fortune 500 company with nearly $10 billion in annual home building revenues and a presence that now spans over 60 markets in 24 states. Today, over 150,000 families across the United States live in a Toll Brothers home.

Beyond his incredible legacy in shaping the home building industry, Bob had a strong commitment to philanthropy and social justice. Alongside his beloved wife Jane, Bob made significant contributions of his time and resources to nonprofit organizations ranging from Seeds of Peace, an organization dedicated to bringing together youth and educators from areas of conflict to create more just and inclusive societies, to Say Yes to Education, for which Bob and Jane sponsored the higher education of 58 third-graders from an inner-city school in Philadelphia, to making the largest gift in history devoted entirely to the training and support of public interest lawyers at the University of Pennsylvania Law School. Bob and Jane were also avid supporters of the American Cancer Society, the American Red Cross, and The Metropolitan Opera.

"Bob had such a profound impact on so many of us in so many unique ways," said Douglas C. Yearley, Jr., Chairman and CEO of Toll Brothers. "He lived an incredible life and leaves behind a tremendous legacy in his family, business, and philanthropy."

To learn more about Bob's incredible life and legacy, please visit Bob.TollBrothers.com.

TOLL BROTHERS

COMPANY OVERVIEW

FINANCIAL SUMMARY

INDUSTRY-LEADING COMPANY AND BRAND

America's Luxury Home Builder

Founded in 1967

NYSE-listed (TOL) since 1986

Fortune 500 Company

5th largest U.S. home builder by revenues

National Builder of the Year,

Builder magazine

Two-time Builder of the Year,

Professional Builder magazine

For the 7th time, named #1 World's Most Admired Home Builder in FORTUNE magazine's 2022 survey*

REVENUES

For Home Sales in FY ($ in millions)

LUXURY HOMES AND COMMUNITIES

EARNINGS PER SHARE

In FY ($)

National presence in over 60 markets in 24 states and Washington, DC

Selling from 348 communities

Delivered over 10,500 homes in FY 2022

Average delivered home price of $923,600; average price in backlog of $1,095,800

Control 76,000 home sites

High-volume production of highly personalized homes

Build-to-order model: home buyers added an average of approximately $190,000 in lot premiums and structural and design options to their homes in FY 2022

33 Design Studio locations nationwide

Diverse Product Lines:

Luxury move-up homes

Millennial-focused affordable luxury homes

Active-adult and second homes

Master-planned communities; resort-style golf and country club living

Toll Brothers City Living: luxury mid- and high-rise urban for-sale communities

Toll Brothers Apartment Living and Toll Brothers Campus Living: luxury for-rent urban, suburban, and student housing communities

FINANCIAL AND MANAGEMENT STRENGTH

CONTRACTS

In FY ($ in millions)

BACKLOG

At FYE ($ in millions)

Liquidity of $3.1 billion: $1.3 billion in cash and $1.8 billion available under our $1.9 billion, 24-bank,4-year revolving credit facility

$650 million, 12-bank,4-year term loan

Over $18 billion in corporate and joint venture financing transactions completed in the last 5 years

Debt-to-capital ratio of 35.7%; net debt-to-capital ratio† of 23.4%

Focus on driving return on equity through more capital-efficient land buying, product optimization, and other strategies

Seasoned executive management team: average 17-year tenure with Toll Brothers

Information for and as of FYE October 31, 2022, unless otherwise noted.

*©2022 Fortune Media IP Limited. All rights reserved. Used under license. Fortune and Fortune Media IP Limited are not affiliated with, and do not endorse the products or services of, Toll Brothers.

†See "Reconciliation of Non-GAAP Measures" at the end of this report for more information on the calculation of the company's net debt-to-capital ratio.

DECEMBER 2022

DEAR SHAREHOLDER

The past few years have presented an unprecedented mix of challenges and opportunities, and 2022 was no exception. We are pleased to report that, once again, our Toll Brothers teams have delivered outstanding results.

In a year filled with supply chain disruptions, labor shortages, and many other operational challenges, we delivered over 10,500 homes, the most in our history, and grew homebuilding revenues by over 15% to a record $9.7 billion. Net income was also a record $1.3 billion, or $10.90 per share diluted, and our return on beginning equity rose 720 basis points to 24.3%.

Our record 2022 fiscal year was also notable for the sheer contrast between the incredible demand for new homes we saw in the first half of the year, and the decline in demand experienced as inflation and interest rates rose sharply in the second half.

While we enter the new year in a softer market, we are still projecting another year of solid results in fiscal 2023 as we focus on delivering our $8.9 billion backlog of nearly 8,100 luxury homes. Even more important, we continue to believe the long-term prospects for the housing market remain positive despite the recent demand weakness.

As we meet today's challenges and prepare for the future, we will be doing so for the first time without our founder, mentor, and friend, Bob Toll. Bob was an unparalleled leader who shaped this company and our industry. Bob's passing has made this year especially reflective for all of us at Toll Brothers, and the example he set and the lessons he taught us over the decades have become all the more relevant.

ONE YEAR, TWO DISTINCT MARKETS

Our fiscal year 2022 was a tale of two halves-a year that was divided into two very distinct demand environments. The first half of the year saw the continuation of the historic demand frenzy of 2021, driven by a strong economy and stock market, low interest rates, favorable demographics, tight housing supply, and continued migration. These factors drove robust demand for our new homes across the country.

Then, beginning in March, the Federal Reserve embarked on a rapid course of interest rate increases that raised the 30-year

home mortgage rate from under 3% to over 7% in a matter of months. The impact of this sharp rise in interest rates on our customers and our industry had a chilling effect on demand, as home buyers were already absorbing higher home prices. Combined with the rising inflation that continues to spur Fed action and the resulting economic uncertainty, many potential home buyers simply moved to the sidelines, and we saw our net signed contracts decline 60% in the second half of fiscal 2022 compared to the prior year period.

It is worth noting that both our website and foot traffic did not see the same level of decline, suggesting that while many potential home buyers are taking a pause, they remain interested and may just be waiting for more clarity on the direction of mortgage rates and the overall economy before making their purchase decision.

OUR STRATEGY: PATIENT, NOT PANICKED

The strength of our backlog has allowed us to be patient, not panicked, in the current market-and we remain focused on efficiently delivering these homes. Although our backlog cancellation rates have increased slightly, they are still among the lowest in the industry. With our build-to-order model, our buyers are both emotionally and financially committed to their new Toll Brothers homes, having made substantial nonrefundable deposits averaging $83,000 and personalized their homes with both structural and Design Studio finishing selections. Underscoring the financial strength and higher incomes of our buyers, one in five of our customers pays all cash for their home.

We are also protecting our backlog and our luxury brand by avoiding drastic price reductions and instead focusing on what sets our homes apart in the market and offering highly targeted incentives. Price, incentive, and product offering decisions are based on an assessment of local market dynamics for each of our communities, including the elasticity of demand, the size of our backlog, and our land holdings in the market. As we continue to deliver our large backlog, we expect to have even more flexibility to more aggressively price our homes to the market as needed. We intend to grow our community count by 10% in 2023, as well as replenish our spec home inventory in select locations so