Toll Brothers (TOL) designs, builds, and markets luxury attached and detached homes in luxury residential communities. They also build and convert existing apartment buildings into high, mid, and low-rise luxury homes and are developing a luxury condominium/for-rent high rise apartment complex. Toll caters to move-up, empty-nest, active adult, age-qualified and second home buyers in the U.S. They currently operate in 19 states.
They generally are located around large cities and the suburbs and have a largely coastal presence. Toll develops golf courses and country clubs in conjunction with their master communities. In addition, Toll started a distressed real estate arm in 2010.
Highlights from the quarter
Second quarter earnings were $24.7 million, an increase of 46% from the second quarter 2012. Revenues increased 38% while deliveries increased 33%. Average selling prices increased 3.6% from a year ago, but signed contracts increased 16% to $678,000.
Backlog was $2.53 billion and 3,655 units, an increase of 69% in dollars and 52% in units year-over-year. Gross margins increased only slightly to 23.3% from 23.2% a year earlier.
The theme of the quarter was returning demand. A year ago, Toll was reluctant to raise prices for fear of crimping demand. Now they note a “sense of urgency” and increasing demand. They have raised prices by approximately $26,000 this quarter. The company noted the depressed housing starts of 853,000 on average in April, which is well below the historical average of 1.5 million units. They believe that demographics, increased household formation and pent-up demand will drive business going forward.
Read-across to the other home builders
Toll was pretty much the last home builder to report this cycle. Most builders, with the exception of NVR, reported better than expected earnings. Toll is pretty much exclusively focused on the luxury sector, while most other home builders have a mix. Toll’s average price of $557,000 is much higher than competitors NVR, with an average price of $317,000 and Meritage (MTH), which builds homes averaging $280,000.
One of the characteristics of quantitative easing has been the fact that it has driven up asset prices while modestly affecting jobs. For entry-level focused builders, like Lennar (LEN) and KB Homes (KBH), their results will be driven by job creation and the overall economy. For the luxury end of the market, asset price inflation will matter more. Toll is the sort of company that benefits most from record levels in the stock market.
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