Toll Brothers surge bodes well for U.S. luxury market
Toll Brothers surged after the biggest U.S. luxuryhome builder reported rising orders, revenue and backlog, a sign to investors that wealthy buyers are feeling confident enough to make purchases despite talk of a housing slowdown.
The company reported a 27 percent increase in quarterly revenue and an 18 percent gain in signed contracts per Toll housing community. The value of the builder’s backlog at the end of last month was $6.48 billion, up 22 percent and “the highest at third-quarter end in a dozen years,” Toll Chief Financial Officer Marty Connor said in a statement.
The Horsham, Pa.-based homebuilder is among companies benefiting from a U.S. unemployment rate of 3.9 percent and an aging millennial population moving from renting to owning. Wealthy Americans are feeling positive, and that is a big boost to Toll, said Alex Barron, an analyst with the Housing Research Center in El Paso, Texas.
“Do you see any signs that the economy is slowing?” Barron said in an interview. “So why would wealthy people be scared to buy?”
U.S. homebuyers in general are at risk of rising borrowing costs, with the average rate for 30-year mortgages at 4.53 percent, up more than a percentage point from a year ago, giving shoppers impetus to purchase before they go higher. Wealthy buyers are less sensitive to rate increases, according to Drew Reading, an analyst with Bloomberg Intelligence.
“What you’re seeing in the stock is a relief rally because it’s been hammered so much in the last year or so,” Reading said in an interview. “Investors are relieved that it’s not a broad-based slowing of demand at the high end.”
More customers are paying with cash or purchasing with bigger down payments, Toll executives said on a conference call with analysts. The share of cash buyers was 24 percent, compared with the typical 20 percent.
Toll’s strong deliveries were based on contracts often signed a year or more earlier, long before the increase in mortgage rates. While completed sales jumped 18 percent from a year earlier, orders were up 7 percent.
Surging prices have cut into affordability in pricey markets such as California, where Toll reported a 4 percent decline in net contracts, Reading said.
“It’s important to pay attention to California — it has become an increasingly big part of their business,” Reading said. “Affordability constraints crimped demand there a little bit.”
The company reported net income of $193.3 million in the third quarter, up from $148.6 million a year earlier. That beat the average estimate of 18 analysts surveyed, according to data compiled by Bloomberg.
“Our double-digit growth in revenues, contracts and backlog and our strong earnings reflect the health of the new-home industry in general and our unique position in the luxury market,” Toll CEO Doug Yearley said in the statement. The company’s community count rose to 301 at the end of the third quarter, and is on track to reach 315 by end of the fiscal year, he said.