In the latest sign that the U.S. home-building industry has finally found its footing, Toll Brothers Inc., the nation's largest builder of luxury homes, reported a 46% increase in quarterly earnings and posted a double-digit gain in revenue.
Toll's results follow strong earnings from other home builders and increasing confidence in the market for newly built homes. Across the sector, companies such as PulteGroup Inc., D.R. Horton Inc. and Meritage Homes Corp. have reported earnings jumps, and last week, the National Association of Home Builders said builder confidence had risen to its highest level since February 2007.
"It feels good to be making money again," said Martin Connor, Toll's chief financial officer, in a conference call with analysts Wednesday.
For the fiscal third quarter ended July 31, Toll Brothers reported a profit of $61.6 million, or 36 cents a share, up from $42.1 million, or 25 cents a share, a year earlier. Revenue rose 41% to $554.3 million. Analysts polled by Thomson Reuters had expected earnings of 18 cents a share on $510 million in revenue.
Orders of new homes—a crucial metric for builders—surged 57% to 1,119, a further sign the rebounding activity seen this year may be more than just a blip.
"Top to bottom, this result was easily the best we've seen in the industry this quarter. One must look hard to find a negative," wrote Stephen East, an analyst with ISI Homebuilding Research, in a client note. "The luxury market has been one of the best, if not the best segment in housing. Throw in lack of competition, and the recipe is there for [Toll's] continued outperformance."
Toll executives chalked up the strong results to low mortgage rates and renewed interest from consumers as the economy continues to improve.
"Why is demand up, in light of macro trends? People on the sidelines for seven years, incredible interest rates, homes more affordable than ever, families tired of waiting," Toll Chief Executive Douglas Yearley said during Wednesday's conference call. "Confidence is up, and people are coming back out."
Toll also has been able to increase profit margins by raising prices on its homes. Gross margin, excluding interest and write-downs, was 24.4%, compared with 23.4% a year earlier, and the average price on contracts signed for Toll homes was $603,000, up from $570,000 in the prior-year period.
These price increases can be attributed in part to the lack of competition from existing homes. Inventories of unsold, previously owned homes have been falling steadily for the past year, from 8.7 months' supply to six months' supply in July, the National Association of Realtors said Wednesday.
"With an industrywide shortage of inventory in many markets, we are enjoying some pricing power," Toll said in a written statement.
While Toll's contracts and home-building revenue rose in all four regions of the country in which it operates over the past nine months, the biggest gains were in the West.
That is partly because of an expansion on the West Coast over the past year. In November, Toll bought Seattle-based builder CamWest Development LLC, and this year began selling its first homes in the Pacific Northwest. In June, Toll expanded its presence in Orange County, Calif., by paying $110 million for a half-share of Baker Ranch, a large land parcel near Irvine, Calif., that is slated for 2,000 homes.
For the most recent quarter, revenue increased 66% from the North and 5.3% from the Mid-Atlantic region. The South was up 41%, and the West climbed 75%.
Toll's shares, which have more than doubled over the past year, rose 3.8% to $33.01 at 4 p.m. Wednesday in composite trading on the New York Stock Exchange.
by Robbie Whelan Wall Street Journal Aug 22, 2012
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