Five years off its peak financial performance and an economic downturn later, Toll Brothers came out of its fiscal 2010 at nearly break-even, logging a net loss of $3.4 million, or 2 cents per share, in its fourth quarter. CEO Doug Yearley dubbed it a "solid" performance, considering the business was off 75% from its 2005 peak. (Read full financial results here.)
But even with some encouraging signs of economic recovery beginning to appear, there is still enough uncertainty in the market that, when asked about the year ahead during a conference call Thursday, Toll executives would go no further out on a limb than to say they expected fiscal 2011 to be on par with 2010. With that said, guidance for the year ahead was limited to company deliveries of between 2,100 and 2,900 homes with an average delivery price of between $540,000 and $565,000.
However, there were a number of things happening in the market that Toll executives appeared positive about as the company finished out its fiscal fourth quarter, from more positive macroeconomic trends to strong demand for its luxury homes in the mid-Atlantic.
An improved job picture was first and foremost, said executives, even though unemployment among Toll's target market was 50% lower than the national figure. Both unemployment abating and job creation beginning to resume would go far in shoring up buyers' confidence, which in turn would help buyers get off sidelines.
After all, said Toll chairman and founder Bob Toll, there is still a market for the company's high-end homes. His proof was the uptick in deposits during its fiscal fourth quarter following a 10-day national fall sales event in October. And that trend has continued, he said; in the past four weeks, deposits have increased 10% year-over-year.
"There's oil down in that hole; we've just got to get to it," Toll said.
For that reason, company executives said they were moving ahead with opening new communities, still pursuing land opportunities, and keeping its current overhead structure in place, all in an effort to capture as much as whatever market might realize in the year ahead.
Executives said the company's community count would grow for the first time in four years, from 195 communities at the end of its most recent quarter to between 215 and 225 communities in fiscal 2011. Three-quarters of that growth would come from newly acquired land while the remaining 25% would be from the 114 projects that Toll currently counts as mothballed.
Moreover, Yearley indicated the company was still on the prowl for new acquisitions, so he anticipated land spend would be about the same for fiscal 2011 as 2010. He said there was "good deal flow" in the land market, and although there was more opportunity for deals today versus a year ago, management was proceeding with caution. For example, he said he's been seeing good deal flow out of California, San Diego County specifically, but management's holding off some on pulling the trigger on deals despite its need to reload on land in the area.
"We will regrow California, but it's very expensive, so we're being careful," he said.
And although it would take the smallest increase in new-home demand to significantly move the needle on supply in the market, benefiting builders like Toll, another leg down in the market would certainly have negative balance-sheet repercussions. Although company executives stated the company had taken all necessary impairments to date, it was clear that the company could be susceptible to future impairment charges, which would further crimp profitability, if the market takes a step backward rather than forward.