Toll Brothers 1Q14 Earnings Call Notes

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A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Business has been a little better but mostly flat, May more of the same

“Demand over the past year has been solid although relatively flat compared to the strong growth we experienced beginning in 2011 coming off the bottom of this housing cycle. So far in May the story has been more of the same. Traffic and deposits are up a little and agreements are down a little. Business continues to be good but relatively flat.”

Comps get easier in July

“Comparisons do get easier in July which last year was when we saw the impact of rising interest rates.”

There was a similar pattern in the 90s real estate recovery

“We note that the last cycle’s recovery in the early 1990’s began with a period of rapid acceleration followed by leveling before further upward momentum. We believe that we are in a similar leveling period in the early stages of the housing recovery with significant pent up demand building.”

TOL argues that supply is tight

“ew home inventory stands at just 5.3 months’ supply, based on current sales paces. If demand and pace increase, the 5.3 months’ supply could quickly be drawn down. Current demographics seem to suggest that new home sales should pick up. If the tight supply bumps into increasing demand, prices could rapidly rise.”

Think you’re going to see increased price levels

“I can’t think of the existing homes, but I think of the new home market, you are going to see continued and even increased sales price levels.”

Home buyers from the early 00’s are not underwater and may be getting ready to move

“if they bought their home in ’02, ’03, ’04 most people stay in a home I think it’s seven years on average. They are back to even or in some markets they are back above water and they are looking to move their family on.”

Online shopping for homes leads to high conversion rate on visitors

“our conversion ratios of visitor to deposit and visitor to agreement, continue to run at all-time highs. So, the business has certainly changed in that. A lot of the work is done from the family room couch on the iPad and less is done in the sales office.”

A lot of people circling, bent up demand, but not buying at the rate we thought they would

“common sense tells me with this pent up demand that the level was at, you have got a lot of people circling. And since they are not buying at the level we thought they would be, they are spending more and more time contemplating and studying the decision.”

The conversation is much improved from ’08 ’09

“we can think back to ‘08 and ‘09 when virtually every visitor was in our sales center loving our decorating and our homes, but worried about their job security and the ability to sell their house and that conversation doesn’t occur anymore to any great extent. ”

Extremely high end is back with a vengeance

“I think if you look at what’s happening in the very extremely sought after markets, they are not only back, but they are back with a vengeance. And I think that just leads, because those people have the money and the ability to do what they want, when they want. I think that just leads the overall luxury market. And I think there is every reason to think that it’s going to kick in very soon.”

Inventory can get tight pretty quick, lead to price increases

“if you have got inventory at 5.3 months, that’s based on current sales, which are for new home sales something like 450,000 a year. If you get back to 700 which would not be any kind of real move because normally we did 1 million to 1.5 million…you don’t have any inventory. You don’t have any inventory but you got demand and you have price increases. You get price increases people are going to rush to try and beat the boat. So I think the best is yet to come”

A tight market for subcontractors, costs going up

“It’s an issue, it’s market by market. I think Texas for us is the worst. Our prices are up about $2,000 in this quarter. We are working through and it’s better now than it was earlier in the recovery because more workers have come back to the industry. But in hot markets where backlogs are big and we have lots of action and Texas is a good example. It’s a struggle. We are working through it. ”