Luxury home builder Toll Brothers reported fiscal second quarter results today, and Mr. Market was not amused. Toll Brothers net income declined for the latest quarter as did income from operations. Income from operations fell from 10.1 percent of revenues last year to 8.4 percent of revenues in Q2 2018. Perhaps more concerning was the jump in Toll’s cancellation rate, rising from 3.5 percent last year to 5.2 percent in the second quarter of 2018.
While the absolute percentage may seem small, this is actually a significant development when you consider that Toll can be extremely sticky with their customer deposits. If you want to back out of a Toll Brothers new home construction contract, there’s a good chance you are stranding some serious money. For context, the average price of homes in backlog for Toll in the second quarter was over $900,000.
It wasn’t all bad news for Toll. Apparently Toll is getting on board with the whole landlord nation theme…
“We now control a pipeline of approximately 16,000 units in projects completed, in construction, under development or in approvals. We are expanding this operation beyond our metro Boston to Washington, D.C. base and now have teams in San Francisco, Los Angeles, Atlanta, Dallas and Phoenix.”
Despite impressive job growth in the DFW area, the luxury housing market is not performing nearly as well as the lower priced segments of the housing market. This should not be surprising, and anybody who has been reading this website knows why the market is shifting. New home prices are stretching the limits of prospective home buyers, and now those record high prices are running headlong into the face of a Federal Reserve rate-hike cycle. Job growth is welcome news, but job growth with corresponding wage growth is what’s really needed right now.
The real irony of today’s Toll Brothers second quarter results lies in the company’s share repurchase program (aka executive bonus stimulus plan). Apparently Toll repurchased 1.8 million shares of its own stock at an average price of $45.44 per share during Q2. YTD in fiscal 2018 Toll has reportedly repurchased 6.2 million shares of its common stock at an average price of $46.86. Toll Brothers stock (TOL) is trading at just over $40 this morning, down about 16 percent year-to-date.
It would appear that even luxury home buyers are not immune from the home buyer’s conundrum…