Toll Brothers, Inc. (NYSE: TOL) early Tuesday reported net income for its fourth fiscal quarter ended Oct. 31 of $311 million, or $2.08 per share, up 62% and 78% respectively. Wall Street was expecting a gain of $1.83.

Revenue was up 21% to $2.46 billion as home building deliveries rose 12% to 2,710. The average price of homes delivered was $906,000, compared to $836,600 one year ago. On a per-community basis, FY 2018’s fourth-quarter net signed contracts were 5.6, compared to fourth-quarter totals of 6.3 in FY 2017, 5.8 units in FY 2016, and 5.2 in FY 2015. The company ended fiscal 2018 with 315 selling communities, compared to 301 at fiscal 2018’s third-quarter end and 305 at fiscal 2017. The company is targeting modest community count growth in fiscal 2019.

Orders, however, fell 13% TO 1,715 and net signed contract value was $1.50 billion, down 15%.

Toll's Aldrich model in Pipers Glenn, Bothell, WA.
Toll's Aldrich model in Pipers Glenn, Bothell, WA.

Backlog value at fiscal yearend rose to $5.52 billion, up 9%; units totaled 6,105, up 4%.

The Company ended fiscal 2018 with approximately 53,400 lots owned and optioned, compared to 53,600 one quarter earlier, and 48,300 one year earlier. At the end of fiscal 2018, approximately 60% of these lots were owned, of which approximately 16,900 lots, including those in backlog, were substantially improved. In fiscal 2018, the company spent approximately $1.0 billion on land to purchase approximately 9,600 lots.

Gross margin was 21.4%; Adjusted Gross Margin, which excludes interest and inventory write-downs (“Adjusted Gross Margin”), was 24.1%. SG&A, as a percentage of revenues, was 7.6%.

FY 2018 net income and earnings per share rose 40% and 53%, respectively, to $748.2 million, or $4.85 per share diluted, compared to net income of $535.5 million, or $3.17 per share diluted, in FY 2017. Revenues was $7.14 billion, up 23%; home building deliveries were 8,265 units, up 16%. Net signed contract value was $7.60 billion, up 11%; contract units were 8,519, up 4%. Gross margin was 20.6%; Adjusted Gross Margin was 23.7% SG&A, as a percentage of revenues, was 9.6%.

The company ended FY 2018 with $1.18 billion of cash and marketable securities, compared to $522.2 million at FY 2018’s third-quarter end and $712.8 million at FYE 2017. At FYE 2018, the company also had $1.13 billion available under its $1.295 billion 20-bank revolving credit facility, which matures in May 2021. The company ended fiscal 2018 with a debt-to-capital ratio of 43.7%, compared to 44.5% at FY 2018’s third-quarter end, and 41.5% a year ealrier.

For the first fiscal quater of 2019, the company is projecting deliveries of between 1,350 and 1,550 units with an average price of between $850,000 and $880,000, adjusted Gross Margin of approximately 23.5%, and SG&A, as a percentage of first quarter revenues, of approximately 13.1%.

Douglas C. Yearley, Jr., Toll Brothers’ chairman and chief executive officer, issued a long statement commenting on the results and the slowdown in the market: “In FY 2018, we produced the highest revenues, contract value, and earnings per share in our 51-year history. In addition, our net income, home deliveries, contracts (in units) and year-end backlog (in dollars and units) were the highest in over a decade. Our return on beginning equity grew from 12.7% in FY 2017 to 16.5% in FY 2018. And our fourth quarter revenues, net income and earnings per share were the highest for any quarter in our history."

Yearley continued, “In our fourth quarter, despite a healthy economy, we saw a moderation in demand. Fourth quarter contracts declined 15% in dollars and 13% in units compared to a difficult comp from one year ago. Fourth quarter demand slowed to a per community pace more consistent with FY 2016’s fourth quarter, which was still strong. In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown. We saw similar consumer behavior beginning in late 2013, when a rapid rise in interest rates temporarily tempered buyer demand before the market regained momentum."

“California has seen the biggest decline. Significant price appreciation over the past few years, fewer foreign buyers in certain communities, and the impact of rising interest rates all contributed to this slowdown. But California is the world’s fifth largest economy with diverse, job-creating industries, including vibrant technology companies, a large concentration of wealth, and desirable lifestyle options. With our attractive coastal California land, our leading brand, and the state’s constrained supply of housing, we continue to believe in our long-term position in the California market.

“There are many positive factors underpinning the economy that we believe are supportive of the housing sector longer-term, and our affluent markets particularly. Household formations are increasing. The nation is experiencing the lowest unemployment rate in many decades. In the past few years, many of our customers have enjoyed wealth creation through the stock market, home price appreciation, and salary increases. The industry’s fundamentals remain solid, the economy remains strong and consumer confidence is near record levels.

“Moreover, equity in existing homes is at an all-time high, providing significant liquidity for current home owners who want to upgrade to a new home. The average age of the stock of existing homes in the U.S. is nearly 40 years, its oldest ever. As the only national home builder focused on the upscale market, Toll Brothers’ homes stand out against these older homes. We offer designs for today’s lifestyle, extensive opportunities to customize, integrated technology, energy efficiency, and ease of maintenance.

“Toll Brothers is well-positioned to take advantage of this strong economy, improving demographics and the financial health of our affluent customer base. We enter FY 2019 with a tremendous brand, a broad geographic footprint and diverse product offerings, a well-located land portfolio in high-quality markets, and a strong balance sheet. Most importantly, we have a tremendous team of Toll Brothers associates who made FY 2018’s record results possible and are preparing us for a bright future.”

Robert I. Toll, founder and chairman emeritus, stated: “New home production this cycle has not yet reached even the annual average, dating back nearly 40 years. With the broader economy healthy, we plan to continue to pursue growth as we expand and diversify our products.”