Last updated: February 20, 2013 9:56 pm

Toll Brothers earnings miss hits shares

Toll Brothers announced worse than expected first-quarter earnings, hampered by fewer deliveries and lower selling prices, sending the US luxury home builder’s shares down more than 9 per cent.

Net income for the three months to January 31 rose to $4.4m, or 3 cents a share, from a net loss of $2.8m, or 2 cents, in the same period in 2012. Revenue rose 32 per cent to $424.6m.

Even as the company, which caters largely for affluent move-up buyers, swung to a profit on the back of a nascent US housing market rebound, the results fell short of expectations of earnings of 10 cents per share on revenue of $502.2m.

“This was an earnings miss on most metrics. Deliveries, prices and margins were all weaker than anticipated,” said Megan McGrath, analyst at MKM Partners. “While this was not a horrible quarter – the company did improve year-over-year and order growth is still solid – there were very high expectations for Toll going into the quarter.”

After seven years of holding back, homebuyers are re-entering the market, driven by slow and steady job growth, an uptick in consumer confidence and record low mortgage interest rates. Low inventories of homes for sale have driven prices higher, making more consumers willing to sell and spurring homebuilder demand.

But shares in Toll – which jumped 55 per cent in 2012 – fell 9.1 per cent in New York trading on Wednesday to $33.53. The company like other homebuilding stocks was further brought down by economic data that showed a disappointing headline number for new home construction because of a decline in apartment building.

Toll delivered 746 units in the last quarter. Although a 32 per cent increase from a year earlier, the number came below consensus forecasts of 850 and below 1,088 in the fourth quarter.

The company said it expected to complete up to 4,300 homes in the first nine months of 2013, down from the 4,400 it had forecast.

New orders jumped 49 per cent to 973 homes, but the average selling price for those properties fell 7.5 per cent to $631,000 from a year ago. Although competitors DR Horton and PulteGroup took advantage of the renewed demand for homes by raising selling prices in their last quarter, some analysts have said not to read too much into this as Toll’s average price of deliveries tend to be volatile.

Gross margin rose to 23.4 per cent from 23.2 per cent a year earlier and below expectations of about 24 per cent. Input costs advanced 27 per cent.

In spite of the earnings disappointment the company remained upbeat. Douglas Yearly Jr, chief executive, said “momentum is building” and noted strengthening demand with net signed contracts up 49 per cent in units from a year ago. Toll has benefited over credit-constrained smaller merchant builders.

“We are continuing to gain market share and see little competition from local private builders. As the spring selling season kicks off, we are also enjoying increasing pricing power due to the release of pent-up demand colliding with limited supply in the affluent markets where we operate,” he said.

Toll’s backlog was $1.86bn and 2,796 units, up 66 per cent in dollars and 57 per cent in units compared with a year ago.

Aside from building luxury houses, Toll has branched out into the condominium market, made a push into student housing and, like rival Lennar, invested in its apartment rental business to take advantage of rising rents and dwindling supplies.

Luxury apartment rentals have caught the eye of both domestic and foreign buyers who view these properties as sturdy investments particularly in hotspots such as New York and Washington. Also spurring demand have been baby boomers who are looking to move away from big sprawling houses, urban dwellers who tend to be more mobile as well as homebuyers who are still not convinced now is the right time to buy a home.

Toll said it had assembled sites for about 4,000 rental apartment units and that it expected this business to start making money from 2015.

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