Luxury homebuilder Toll Bros.: Sales rise, tax overhaul 'a wash' for upscale buyers

Toll Bros., the Horsham-based luxury-home builder that has been growing fastest in California and other Western states, on Tuesday posted higher sales and profits for fiscal 2017 and for its fourth quarter, which ended Oct. 31.

Despite the best sales numbers since before the late 2000s recession, Toll's shares closed down 3.73, or 7.36 percent, Tuesday to $46.93. The stock had been rising steadily this year, from the low $30s last winter, on expectation of higher profits.

Investors had expected Toll to post fatter profit margins, analyst Buck Horne told clients at brokerage Raymond James & Associates on Tuesday. Toll officials blamed higher U.S. labor costs, delayed sales of Toll homes in New York City, and defective lumber from Weyerhauser Co., which is being replaced, for trimming profitability. CEO Douglas Yearley said he expected sales would rise again in 2018.

Corporate tax cuts being negotiated in Congress will likely boost Toll Bros. profits. The company has been among U.S. firms paying an average of more than 35 percent a year in taxes, close to the top U.S. corporate rate. Republican plans have called for cutting the top rate to 22 percent or lower.

"What would you do with that extra $100 million to $150 million" from lower U.S. income taxes? stock analyst Alan Ratner, of Zelman & Co., asked Yearley in an investor conference call after the earnings were posted.

The CEO responded that Toll Bros. estimated the savings more conservatively at $80 million to $100 million next year. "We don't have any particular direction for that cash," Yearley said.

Toll officials said the company plans to keep growing but also will be paying more to investors and top executives by repurchasing more shares to drive the price up, and by continuing the dividend that Toll started paying shareholders last year.

Stephen East, an analyst at Wells Fargo & Co., asked if the end of state and local tax breaks would depress sales among buyers in New York, California, New Jersey, and other high-tax states.

It's too early to tell, executives said. They noted that small-business owners, investors, and other well-off Toll home buyers were likely to see their taxes drop, which might help them buy bigger houses. In any event, the company says, it sees little evidence tax rates will affect home sales.

The fourth quarter of fiscal 2017 marked "our highest annual contracts and revenues in over a decade" — since the late 2000s recession — and "demand has remained healthy" across Toll's urban and suburban markets, Yearley said.

But growth and sales came in "a little slower than expected," chief financial officer Martin Connor acknowledged, noting that some projects slated to come on line in 2017 will boost 2018 results.

In part, Yearley credited Toll's growth to acquiring builders in California and other Western states over the last six years, as well as land purchases that have proven ripe for construction.

Net income for the company's fourth quarter totaled $192 million, or $1.17 per share (diluted), on sales of $2.03 billion. That's up from $114 million and 67 cents a share in the same quarter last year, a 9 percent increase. Last year's profits were reduced by a one-time warranty charge.

Signed home-sale contracts for the quarter were worth a total of $1.75 billion, a 20 percent increase, after the company sold 1,979 homes, a 15 percent rise. The company said it has a backlog of more than 5,800 homes, worth more than $5 billion, a 27 percent dollar-volume increase. Toll's gross-profits margin was over 22 percent.

Like many profitable companies that see their shares as a lucrative investment, Toll spent $200 million in the last quarter buying back shares at an average price of $38.48.

For the full year, net income totaled $535.5 million, or $3.17 a share, up from $381 million and $2.18 a share the year earlier. Annual revenues topped $5.8 billion, a 12 percent increase, while the company delivered 7,151 housing units to buyers, up 17 percent.

Besides developing large single-family homes and townhouses, Toll has been investing in city apartments and joint-venture land investments. The company also has refinanced debt in hopes of locking in low rates before the Federal Reserve's long-threatened rate increases.

Looking to fiscal 2018, which began Nov. 11, Toll projected sales of more than $6.2 billion and "deliveries" of at least 7,700 completed homes at an average price of at least $810,000.

In a statement, executive chairman and cofounder Robert I. Toll credited the company's rising U.S. home sales at a time when the overall number of homes available for sale is "well below historic norms." He said he hopes to be able to exploit "this shortage," given Toll's "multi-year supply of well-located" homes in popular markets.

Toll also credited "low unemployment, income growth, a strong stock market and attractive mortgage rates," which he said benefit the "upscale" home buyers who are his company's biggest target.

With its increased focus on apartments, the company also is trying to win over young millennials, whose "growing families" will eventually buy homes too, he said. The company has also expanded its interest in "active-adult" communities for aging baby boomers.

Earlier this year, Toll marked its 50th anniversary in the home-building business.