Thanks to the housing market recovery, many homebuilders
delivered solid financial gains last year. Now comes the tricky
part: sustaining that momentum in 2014, when the industry might
see a few more head winds.
Toll Bros. (
) figures to be one of the builders that keeps racking up robust
gains this year even as the prospect of rising mortgage rates,
tough prior-year comparisons and economic uncertainty rein in
growth at other companies.
Toll is expected to deliver 66% earnings growth and 48%
revenue growth for its 2014 fiscal year, which ends in October,
according to a consensus of analysts polled by Thomson
That compares favorably against the prospects of most other
publicly traded builders, including three --PulteGroup (
),Ryland Group (
) andMDC Holdings (
) -- that are expected to report lower earnings per share in
One of Toll's advantages, at least for now, is its focus on
high-end homes, analysts say. Compared to the midpriced and
first-time markets, the luxury market is less vulnerable to
rising mortgage rates, higher home prices and worries that jobs
and the economy aren't growing fast enough to significantly boost
"The more affluent customers have more confidence right now,"
said David Urani, analyst at Wall Street Strategies. "They're
likely to be less concerned about volatility in the mortgage
rate, or macro factors. These things don't hit Toll Bros. quite
as hard as other builders."
He says that while other builders are "waiting for first-time
buyers to come back to the marketplace" -- or for middle-class
Americans to gain more confidence -- Toll Bros. has pursued an
aggressive growth strategy aimed at filling high demand for
"Toll Bros. is the only real big public builder in the
high-end space -- they are by far the big fish in that market,"
Urani said. "They've worked to get inventory out there, and they
have the capital and resources to do so."
To get more inventory on the market, Toll has been busy buying
Its latest deal announcement came Wednesday, as Toll said that
in a joint venture with GTIS Partners, it has acquired Sienna
South -- the last major undeveloped parcel in what it calls one
of Houston's most successful master planned communities, Sienna
The 3,700-acre Sienna South site can accommodate up to 10,000
single-family homes. Toll said the joint venture will develop
about 6,500 home lots to be sold to local, regional and national
homebuilders. And Toll may acquire up to 1,750 of them for its
own homebuilding over the life of the community.
Home sales in Sienna South are expected to top $2.6 billion at
full buildout. Site development could begin in April and sales to
homebuyers in 2015. Toll already has three communities in Sienna
"Toll Brothers is using its strong liquidity position to
secure the most sought-after locations," analysts at Zacks Equity
Research noted in a report. "The housing market in Houston is
currently gaining momentum as demand escalates."
The Sienna South deal followed Toll's November purchase of the
homebuilding business of privately held Shapell Industries for
about $1.6 billion in cash. That deal gave Toll greater access to
affluent real estate markets in California.
Shapell's land portfolio consists of around 5,200 home sites
in affluent and high-growth markets such as the San Francisco Bay
area, metro Los Angeles, Orange County and Carlsbad.
"The acquisition of Shapell Homes significantly increases
Toll's exposure to key California markets," noted Peter Martin,
analyst at JMP Securities.
Meanwhile, Toll Bros. has also worked to increase its presence
in urban markets.
Tapping Urban Affluence
Last year it bought a pair of development sites in New York --
one in the the Midtown East area of Manhattan, and the second
farther downtown in SoHo.
Both sites are being developed into mixed-use spaces featuring
luxury condominium residences and retail. They are part of Toll's
growing portfolio of properties in and around the Big Apple.
"That's been a boost because many of these units are over $1
million, and they have generated extra sales in the near term,"
analyst Urani said.
In November, Toll began construction of River Parc, a 287-unit
luxury rental apartment project in the Capitol Riverfront area of
Washington, D.C. Toll has a long history of development in nearby
areas, but River Parc is the company's first project inside
As Toll has grabbed a bigger foothold in affluent markets, its
average home prices have risen as well. During its fiscal fourth
quarter, which ended in October, the average price of homes
delivered was $703,000 vs. $651,000 the prior quarter and
$582,000 the prior year.
On a fourth quarter conference call with analysts, Toll
Executive Chairman Robert Toll said a shortage of approved sites,
labor constraints in some markets and a lack of capital for small
and privately held builders have combined to create a shortage of
"This supply constraint could lead to a further escalation in
luxury home prices above and beyond normal trends until industry
production returns to historic equilibrium," Toll said.
His company expects to deliver between 5,100 and 6,100 homes
this fiscal year. The average delivered price per home should be
between $670,000 and $720,000.
In its fiscal 2013 Q4, Toll delivered 1,485 homes, a gain of
36% from the prior year. The increase was driven by higher demand
and low competition for luxury homes.
Quarterly revenue rose 65% to $1.045 billion, topping
estimates for $1.028 billion. It was the seventh straight quarter
of double-digit profit growth. Adjusted earnings came in at 54
cents a share, down from $2.35 the prior year, when Toll enjoyed
a much bigger tax benefit. Results were still well above
consensus estimates for 43 cents.
Gross margin in the quarter was 25.4%, up from 24.6% the prior
year. Operating margin rose to 12.3% from 8.3% a year earlier.
Price increases helped both figures.
Toll is expected to report fiscal Q1 results the week of Feb.
17-21. Analysts anticipate EPS of 19 cents, up from 3 cents a
year earlier. Full-year profit is seen rising 66% this fiscal
year and 40% in fiscal 2015.