Toll Brothers 4Q16 Earnings Call Notes

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Douglas C. Yearley

California continues to be hot

“California continues to be hot. At Baker Ranch in Lake Forrest in the LA suburbs, we signed 66 agreements in the first quarter, double last year’s first quarter total. And we have taken 30 additional deposits in the last three weeks, all at an average price of over $1.2 million.”‘

Strong stock market helping to increase demand for our homes

“Home buyers are beginning to realize gains on the sales of their homes, which gives them the confidence, flexibility and down payment money to trade up into one of our homes. This increased home equity, gains in the stock market, the prospects of potentially lower tax rates and less sensitivity towards mortgage interest rates, due to generally larger down payments and stronger personal balance sheets, seems to be contributing to increased demand for our homes.’

Hot is the right word for CA

“With respect to California, yes, hot is the right word to describe it. Our numbers in Southern Cal doubled. Our sales doubled in the quarter. I referenced Baker Ranch, which is a flagship community of ours in Orange County. Northern Cal was only flat because of a lack of inventory. We have a number of communities opening in the second half of 2017, but both Northern and Southern Coastal California, where we are located, are hot.”

Buyers not levering up

“we’re also very comfortable with the general luxury market. Our buyers are well-positioned for all the reasons we gave in the prepared comments. 20% are all cash. Those that get a mortgage only lever up 70% LTV. They put 30% down. The resale market is firming up. They have equity in their homes. The stock market is roaring. They have money in the markets. Tax rates may be coming down. And it’s a very fragmented business that we tend to dominate, and the competition is small. It’s local. It doesn’t have our horsepower. It can’t buy the land the way we do. Doesn’t have our balance sheet. It doesn’t have our brand. It doesn’t do it the way we do it.”

Millenials buying their first homes later than boomers

“The number one reason for now is millennials. This is a generation that is approaching the size of the boomers. And they will be buying their first home. Many of them a little bit later in life than the boomers did, so they will be wealthier, more established. And we think there’s a huge opportunity that their first home can be the 3 Series BMW, brought to you by Toll Brothers. And so that is what, in the last few years, drove the initial thought and the strategy. ”

Most value of a builder is its land

“Remember that most value of a builder is its land. So we always have to weigh, do we want to buy a builder that has some really good land, some above average land, and then maybe some average or below average land and blend that together in a market we’re already in where we don’t need the brand and the relationship with contractors and somebody to explain the architecture to us and how to buy land, et cetera? And we have to then weigh whether it’s worth it to buy a portfolio that is a blend of different quality land with just chasing the best land deal in the market?”

Mortgage buyers putting 30% down

“Megan, we have not. We still have 20% all cash buyers. A lot of those come out of the Active Adult category. And those that get a mortgage are still on average putting 30% down and only mortgaging 70%. Rates today, the jumbo is about a quarter point below a conforming Fannie Freddie loan. It’s about a 4.125% loan and a conforming is about 4.375%. And as you know, we have more jumbo buyers than the other builders. So the mortgage side of our business is good and the buyers are really doing nothing different than they had in the past.”

Bob Toll

Housing outlook remains favorable

“With home price appreciation strengthening personal balance sheets, the Dow Jones Industrial Average surpassing 20,000 for the first time, low unemployment, we believe the housing outlook for 2017 remains favorable. The pent up demand of the past seven years may be starting to release, bringing more buyers into the market, especially in the move-up segment where rising home values are giving buyers more equity when they sell their homes in order to move up.”

Millenials forming families

“The leading edge of the millennial generation has begun to form families, have children and buy homes. The maturing baby boomers continue to demonstrate strong demand for our Active Adult homes. With supplies of new and existing homes still tight, we believe that a rise in demand could push home prices higher.’