Toll Brothers just had its worst quarter for contracts since 2010

California buyers couldn't be found, luxury homebuilder said in Q1 earnings report

Feb.February 27, 2019 03:30 PM

A Toll Brothers home in California and Toll Brothers CEO Doug Yearley (Credit: Getty Images and Facebook)

The disappearance of buyers in California and a tepid luxury market in New York helped send Toll Brothers’ new home orders down 24 percent in the first fiscal quarter of 2019, its worst showing since the throes of the Great Recession.

In the first quarter, the company’s revenue grew but contract volume dropped significantly due to broader market sluggishness. Home sales revenue was up 12 percent year-over-year to $1.32 billion, but at the same time, net signed contract value tumbled 31 percent to $1.16 billion — and units in contract fell 24 percent to 1,379.

In terms of new homes going into contract, it was was the worst quarter for Toll Brothers since a 27 percent year-over-year drop in the third quarter of 2010.

The company attributed the decline to “a lack of current inventory in certain locations and the industry-wide slowdown that began in the second half of 2018,” CEO Douglas Yearley said in the statement. “Although we experienced a year-over-year decline in contracts each month of this first quarter, the decline decreased as the quarter progressed.”

Overall in the quarter, net income was $112.1 million, compared with $132.1 million a year earlier. The decrease was due to the federal tax law change, Toll Brothers said. Pre-tax income was $151.4 million, a 15 percent increase.

Toll Brothers’ City Living segment, which primarily focuses on the New York City metro area, saw 23 contracts totaling $39.7 million. That was down from 47 units totaling $61.8 million a year earlier. The average price per unit rose to $1.72 million from $1.32 million, helping boost revenue.

“It’s okay,” Yearley said of the City Living market during the earnings call. “It’s not strong, but it’s okay.”

While Toll Brothers is still keeping an eye out for land deals, Yearley noted the markets in Hoboken and Jersey City have slowed — and many sellers remain unrealistic about land prices.

“It’s too risky a business with the price of land,” he said. “We’re going to be very disciplined.”

Meanwhile, the company also saw a large drop in California, with 149 contracts totaling $268.9 million. That’s down from 62 percent from the same period last year, when 388 contracts totaled $646 million. Yearley noted that last year was “unique” for California because of the number of communities the company opened and the pent-up demand that existing upon openings. Going forward, the backlog provides some visibility into the market, he said.

Toll Brothers also continues to look at mergers and acquisitions options, Yearley said. Last year the company looked at 30 potential deals, despite not following through — and Toll Brothers is on pace for the same level of interest this year. The company seeks to use M&A as a way to enter new product types or price points.

In the second quarter, Toll Brothers expects deliveries between 1,650 and 1,850 units with an average price between $860,000 and $890,000. Because the market is still in the early stages of spring selling season, the company said there are many possible results for full-year earnings — so it is holding off on providing guidance beyond the second quarter.

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