Toll Brothers benefited from a “meaningful uptick in demand” that helped deliver positive results in the home builder’s fiscal first quarter.
In the fiscal first quarter, ended Jan. 31, Toll Brothers delivered 1,826 homes and generated revenue of $1.75 billion, a 3.7% increase on a year-over-year basis. Chief financial officer Martin Connor said the net earnings results represented a first quarter record for Toll Brothers.
The home builder’s adjusted gross margin in the first quarter, 27.5%, outperformed guidance by 50 basis points and represented a 190-bp improvement compared with the prior-year period.
CEO Douglas Yearley said while Toll Brothers experienced order declines by over 50% on a unit basis over the past three quarters, backlog value is only down 21% in dollars on a year-over-year basis. Additionally, Connor said January net agreements exceeded both November and December levels combined, signaling positive demand momentum.
“We’re encouraged by what we have seen across our footprint over the past one-and-a-half months. Beginning in the first week of January, demand has picked up beyond the normal seasonality that we typically see at the start of the spring selling season and has continued into February,” Yearley said on the company’s first quarter earnings call.
Demand has improved for Toll Brothers in a majority of the builder’s markets and has even shown signs of improving in markets that “struggled the most in the second half of 2022,” including Austin, Texas; Boise, Idaho; Las Vegas and Reno, Nevada; and Phoenix. Toll Brothers attributed the increase in demand to improved buyer sentiment and a more positive overall economic outlook compared with the past several months.
While demand was inelastic in the second half of 2022, Toll Brothers found its prospective buyers were not responding strongly to price concessions. Instead of “chasing the market,” Yearley said the company focused on delivering its “high-margin” backlog while taking a more patient approach to new sales and waiting for the projected strong spring selling season.
“The most telling sign that these [positive] fundamentals are real and meaningful is the fact that rates didn’t have to go back to 3.5% or 5.5% for buyers to come back out,” Yearley said. “In fact, this past week, we had the most deposits we have seen in a month even though rates had moved back up over 6.5%.”
Cooling Incentives
Toll Brothers reported a $117,000 sequential decline in the average sales price of new contracts in the first quarter to $995,000. Approximately two-thirds of the decline was attributable to a change in product mix, and the remaining third was due to increased incentives, according to Yearley. Incentives averaged 8% for the builder in the first quarter but have reduced to 6.5% quarter to date. Yearley said the company anticipates further reductions in incentives in select communities due to recent market strength. As a percentage of backlog, cancellations were 3% in the first quarter; as a percentage of signed contracts, cancellations were 14.3% in the quarter.
In response to buyers eager to lock in mortgages and move in more quickly, Toll Brothers experienced a strong increase in spec home demand in the first quarter. For the past several quarters, approximately half of orders were for spec homes, according to the company.
“Considering current market conditions, we are strategically starting more spec homes in select markets, but most will be sold early enough in the construction cycle so the buyer will still have the opportunity to personalize their finishes, which is very important to our luxury buyers,” Yearley said.
Disciplined Land Approach
Toll Brothers plans to remain “prudent” and “disciplined” in regard to its land strategy, according to Yearley. At the end of the first quarter of the 2023 fiscal year, the home builder owned or controlled approximately 71,300 lots, compared with 86,500 lots in the first quarter of the 2022 fiscal year.
“We have sufficient land in our existing portfolio to support community count growth in both fiscal 2023 and 2024, which allows us to be highly selective as we assess new land opportunities and takedowns under existing options,” Yearley said.
Head Count Reductions
Connor said total selling, general, and administrative expenses declined $15 million in the first quarter compared with the prior-year period, primarily due to head count reductions within the company.
“We’re learning how to be more efficient with less people. As we have retirements, we’re replacing from within, we’re promoting from within, without needing another person,” Yearley said. “We’ve gone through a very difficult, thoughtful round of cuts in the last 30 days. We have a plan to become even more efficient with head count and some other initiatives in the firm.”
