UPDATED Wednesday August 21, 2019, 4:07 p.m.: Amid a softening luxury market, homebuilder Toll Brothers is developing lower-priced properties as it reaches out to higher-earning millennials. But the company is still enduring a difficult period, and its third quarter results released Wednesday saw a nearly 25 percent drop in net income year over year.
The company reported a net income and earnings per share of $146 million and $1 respectively, down from a net income $193.million and $1.26 over the same period last year.
While the value of its signed contracts had ticked up to $1.87 billion, contracts were still down 3 percent from the same period in 2018, disappointing analysts and causing the stock to sink more than 6 percent.
Toll Brothers’ chairman and CEO Douglas Yearley pointed to positive “tailwinds” in the form of low mortgage rates, limited supply and strong employment.
“While our third quarter contracts were down modestly, we are off to a good start in our fourth quarter,” he said in a statement.
Toll Brothers’ City Living segment, which includes the New York City and Chicago metro areas, saw contracts down as well. The company reported 40 contracts totaling $63.5 million with an average price per unit of $1.58 million. That was down from 49 contracts of $80.7 million at $1.6 million per unit.
The results were an improvement on the second quarter, however, which saw net income of $129 million and $0.87 earnings per share.
Meanwhile, the company’s first quarter results were its worst since 2010, with home contracts plummeting 24 percent year over year with a net value of $1.16 billion.
Building off last quarter’s increased demand, Yearley said Toll Brothers has expanded its buyer segment, pricing homes between $275,000 and $3 million.
“We are carefully and slowly expanding the price point,” he said during the company’s Wednesday earnings call. He said Toll Brothers is aiming to capture first-time millennial homebuyers with larger budgets.
Yearley added that move will speed up the pace of sales, though it will take some time for those results to show in the company’s reports.
Toll Brothers continues to focus on projects where the company knows it can build immediately, he said. Earlier this month, the firm bought its first New York City property in years for $44 million. It was the site of a controversial hotel on the controversial Marrakech Hotel on the Upper West Side. When asked about it, and the company’s outlook on New York City’s struggling condo market, Yearley declined to comment.
“New York has felt better this summer,” he said vaguely. The city accounts for “only 3 percent of our business at the moment, but it feels better this summer.”
Barclays’ analyst Matthew Bouley noted that Toll Brothers has generally been “pulling back” in New York, and City Living’s business has been shifting into joint ventures outside of Manhattan. “It’s a pullback from NYC on-balance sheet exposure to off-balance sheet joint ventures in other regions,” he wrote in an email.
In June, the penthouse at the Toll Brothers’ condo at 1110 Park Avenue finally sold at half its original price, meanwhile, the firm completed its 140-unit condo at 121 East 22nd Street in Gramercy Park, which is aiming for a $450 million sellout.
Clarification: A quote from Bouley was added to clarify his point.