A combination of strong demand and a focused spec home strategy contributed to fiscal second quarter results that “well exceeded” expectations for Toll Brothers, the 10th largest company on the 2023 BUILDER 100 list.
“There continues to be a substantial shortage of homes for sale in the U.S., as housing starts have not kept up with population growth for at least the past 15 years,” said chairman and CEO Douglas Yearley. “We believe the resulting supply-demand imbalance will continue well into the future, adding to the long-term tailwinds that have supported the housing industry in recent years. These include favorable demographics, migration trends, and more flexible work arrangements.”
Yearley said mortgage rate stabilization, improved buyer confidence, and a tight resale market contributed to favorable demand conditions that began in January and have continued through the spring. He said the profile of the typical Toll Brothers home buyer—one that is affluent with significant equity built up in their existing home that insulates them from affordability concerns—is “well suited for the current market.” Twenty-three percent of the company’s buyers in the second quarter made all-cash purchases.
The strong headwinds contributed to quarterly revenue of $2.5 billion and profits per share of $2.85, both of which significantly outperformed analyst projections. According to Zacks Investment Research, the home builder has outperformed profits per share projections in each of the past four quarters.
“A key part of our strategy heading into the spring selling season was to focus on increasing the supply of our spec homes to support deliveries in the second half of fiscal 2023 and throughout 2024. With demand better than expected this spring, this strategy is paying off,” Yearley said during the Toll Brothers earnings call. “Demand for our spec homes in the second quarter remained strong, representing approximately 40% of our orders in the quarter. We believe that, in this market, our spec strategy continues to make sense. We expect that specs will continue to comprise between 30% to 40% of our sales for the foreseeable future.”
During the second quarter, Toll Brothers delivered 2,492 homes, a 4% increase compared with the second quarter of 2022, at an average price of nearly $1 million. The builder’s revenue of $2.5 billion represents a 14% improvement from the same period last year.
Deliveries, average price, and revenue all represented second-quarter records for Toll Brothers, according to Yearley. He said the company “continued to benefit” from cost reduction initiatives, which made operations more efficient and contributed to improvement in gross margin performance.
The home builder reported a net signed contract value of $2.3 billion on 2,333 contracted homes, decreases of 26% and 19% on a year-over-year basis, respectively. Net signed contracts per community decreased from 9.0 in the second quarter of 2022 to 7.0 in the second quarter of 2023.
At the end of the quarter, Toll Brothers had 7,574 homes in backlog, a 36% decrease from the second quarter of 2022, with a backlog value of $8.4 billion, a 28% year-over-year decrease. Cancellations as a percentage of signed contracts increased to 11.5% in the quarter from 3.8% in the same period in 2022.
The company ended the second quarter with approximately 71,300 lots owned and optioned, level with the first quarter but lower than the 85,800 in the second quarter of 2022. Approximately 51% of the 71,300 lots were owned. The builder ended the quarter with 350 selling communities, an increase from both the first quarter of 2023 (328 selling communities) and the second quarter of 2022 (328 selling communities). Toll Brothers spent $227 million purchasing 1,700 lots in the second quarter.
“With 71,300 lots owned or controlled, we continue to have sufficient land under control to increase community count in fiscal year 2023 and beyond,” Yearley said. “Our financial position and liquidity remain very strong, and we expect to generate significant cash flow from operations in fiscal year 2023.”
