12.04.12

Toll Brothers Rings Up Profits in Housing Comeback

Luxury homebuilder Toll Brothers is riding the housing comeback, Matthew Zeitlin looks at the McMansion company’s earnings.

For months, we’ve been saying that housing is back. Now we can declare that McMansions are back. Big time. Toll Brothers, the Pennsylvania-based luxury homebuilder, Tuesday morning reported a blow-out fourth quarter.

The company hasn’t figured out some amazing new way to build houses more efficiently and get more money out of every house built; instead, it is just building more. A lot more. Compared with a year ago, revenues were up 48 percent, and the number of homes built rose 44 percent to 1,088. Toll Brothers’ gross margin—which measures revenue from sales—was 24.6 percent in this quarter compared with 24.2 percent in the fourth quarter of 2011.

The full year was successful for the company as well. Its net income was $478.1 million compared with $39.8 million last year. Pre-tax net income shows a more stark story of decline and recovery: for this year it came in at $112.9 million versus a pre-tax loss of $29.4 million in 2011.

One figure that most directly shows this significant increase in building activity is the company’s “net contracts per community,” which is comparable to what retailers report as “same-store sales.” This measure shows how much Toll Brothers is building in the areas in which it already operates. As such, it directly reflects the increasing demand for homes, as opposed to the company’s expansion into new markets. Net contracts per community were up 33 percent from the fourth quarter of last year and 60 percent from this fiscal year to last, the highest yearly gain for the company since 2006 and the highest quarterly increase since 2005.

In a statement accompanying the earnings, Toll Brothers CEO Douglas C. Yearley Jr. said that "pent-up demand, rising home prices, low interest rates, and improving consumer confidence motivated buyers to return to the housing market in FY 2012.”

Yearley Jr. is right. Prices are up, the Federal Reserve is deliberately trying to bring down mortgage rates to spur housing activity, and consumers are more and more optimistic about the economy and willing to spend. Toll Brothers is just a smaller part of a larger story of a resurgent housing market in 2012.

In October new home sales came in at an annual rate of 368,000, a 17 percent jump from October 2011’s 314,000. As the chart below shows, every month this year has seen a year-over-year jump in new home sales. A similar story can be told about most other parts of the housing market—October’s annualized rate of total home sales was up almost 11 percent from a year before, 4.79 million from 4.32 million. Housing starts, which is a direct measure of home building, are up almost 30 percent from last year.

zetilin-chart-single-family-homes-sold

Although the market is still well off its housing-boom peaks—in February 2005, the annualized rate of new home sales was 1,319, more than 3.5 times this October’s figure—the direction is clearly positive, and the positive results from one of the biggest participants in the industry is just another sign that this trend is very real.