Key Highlights

● Fewer home deliveries and lower Earnings came alongside higher net signed contracts.

● Net earnings were about $280 million, or $2.97 per diluted share.

● Management raised prices in roughly three tenths of its communities, favoring Margin over pace.

● Planned stock acquisitions for the fiscal year rose from $650 million to $700 million.

Toll Brothers (NYSE:TOL), the luxury homebuilder, reported fewer deliveries and lower earnings in its most recent quarterly report, yet orders rose, its community count kept growing and management left full-year guidance unchanged. The report covered the three months ended in late July and was released in mid-August, with a conference call the following morning.

Net earnings were about $280 million, or $2.97 per diluted share, compared with roughly $370 million, or $3.73, a year earlier. Home sales Revenue was about $2.65 billion, down from nearly $2.9 billion. Chief executive Karl Mistry called the results solid in a challenging market.

What were the main numbers in the latest report?

Deliveries came to 2,662 homes, down from 2,959, at an average price of about $996,000, up modestly from a year earlier. Home sales revenue fell to about $2.65 billion. Pre-tax earnings were about $375 million, compared with roughly $500 million a year ago.

Gross margin on home sales was about 24% as reported and about 25.5% on the adjusted basis the company prefers, which strips out interest and inventory write-downs. A year earlier those figures were about 25.5% and 27.5%. Overhead rose to 10% of home sales revenue from 8.8%.

Over nine months, net earnings were about $752 million, or $7.87 per share, versus about $900 million, or $8.95, in the prior-year period. Home sales revenue for nine months was about $7 billion on just over 7,000 deliveries.

Did orders improve even as deliveries fell?

Yes. Net signed contracts were worth about $2.52 billion on 2,508 homes, compared with about $2.41 billion on 2,388 homes a year earlier. Coverage of the call described unit orders as up about 5%.

Backlog at the end of July was about $6.24 billion on 5,312 homes, slightly below a year earlier. The average price of homes in the Backlog was around $1.17 million, higher than the average price of homes delivered, which points to a mix of more expensive homes coming through in later quarters.

Cancellations stayed low. They equaled about 2.6% of beginning backlog and about 5.5% of new signed contracts, both lower than a year earlier. Lower cancellations are a sign that customers with signed contracts are still closing, a point management stressed as evidence of the strength of its customer base.

What does price over pace mean in practice?

Executives told listeners that they prioritize pricing and margin over how quickly homes move. In the quarter the company raised prices in roughly three tenths of its communities. Incentives on new contracts averaged about 7.5% of the gross sales price, a little below the roughly 8% average of the past year.

Finished unsold homes, which builders often discount to move, were down to about one and nine-tenths per community, from two a quarter earlier and nearly three at the start of the fiscal year. Having fewer completed spec homes reduces pressure to cut prices.

Customers also spent heavily on customization. Upgrades, structural Options and lot premiums averaged about $207,000, or about 24% of the average base price, which supports margins. The trade-off is that some customers may wait for better financing conditions.

Who is choosing a Toll home right now?

According to call coverage, luxury move-up customers made up about 61% of home sales revenue in the quarter, luxury first-time customers about 23% and move-down customers about 16%. The average luxury move-up home was priced at about $1.35 million, and that segment is the largest contributor to revenue and the highest in margin.

About a quarter of customers paid cash. Customers who did finance had an average loan-to-value ratio of roughly 69%, meaning a large down payment or Equity from a prior home. Executives said the luxury customer base stayed relatively resilient even though broader Demand remained difficult.

Mortgage rates were described as elevated and consumer confidence as weak. That is the backdrop for the argument that a wealthier, less rate-sensitive customer can support a builder's margins when entry-level customers are stretched, a pattern the company has described in earlier reports.

The mix also shows why the average price of homes delivered stays near $1 million even as the company reports a soft market. Its homes sit at the upper end of the market, where about a quarter of customers pay cash and financed customers put down large amounts, so the customer base differs from that of builders focused on first-time customers of lower-priced homes. Readers should treat that comparison as general context, since the company did not make it in the release.

Which regions are strong and which are weak?

Management named Florida, the corridor from Boston through the Carolinas, Boise, Las Vegas, Reno and Denver among the strongest markets. The more challenging markets were Atlanta, Seattle, Portland, San Francisco and Texas.

Communities planned for next year are more concentrated in the South and Mountain regions. The company also entered Northwest Arkansas in May with the Acquisition of substantially all the Assets of Buffington Homes of Arkansas, including inventory for nine communities and about 1,500 home sites. The company said the deal was not material.

The geographic spread matters for the fourth-quarter margin. Management attributed the expected fourth-quarter margin to the mix of deliveries from its northern and Pacific regions, more luxury move-up homes and spec homes closed earlier in construction.

How is the community count changing?

Toll ended July with 471 active communities, up from 459 in the prior quarter and 420 a year earlier. It expects between 480 and 490 by fiscal year-end, growth of 8 to 10% over the end of the last fiscal year.

Management expects a similar rate of community growth in the next fiscal year. More communities give a builder more places to market homes, which tends to lift orders when demand is steady, though each new community needs time to open, build models and reach full sales pace.

Land spending in the quarter was about $452 million for about 2,800 lots. The company controlled around 75.5 thousand lots, with a bit less than half owned outright and the remainder under option, a structure that limits Capital tied up in land.

What did Toll say about its Balance Sheet and stock acquisitions?

Cash at the end of July was about $1.06 billion, with about $2.24 billion available under a $2.38 billion revolving Credit facility. Debt to capital was about 24.5%, and net debt to capital about 15.5%, down from nearly 19.5% a year earlier according to call coverage.

The company acquired about 1.4 million of its own shares in the quarter for roughly $207 million, at an average price near $149. Together with the Dividend of $0.26 per share, it paid out about $231 million in the quarter and $506 million so far this year.

Mistry said management is raising its planned stock acquisitions for the fiscal year from $650 million to $700 million. Book Value per share was about $92.36, up from about $87.25 at the end of the previous fiscal year.

What guidance did the company reaffirm?

For the fourth quarter, Toll guided to between 3,450 and 3,550 deliveries at an average price of between about 995,001.005 million dollars. It expects an adjusted gross margin of about 26% and overhead of about 8% of home sales revenue.

For the full fiscal year, deliveries were narrowed to between 10,500 and 10,600 homes, and the average delivered price to between about $995,001 million. Management reaffirmed home sales revenue of about $10.5 billion and an adjusted gross margin of about 26.1%.

Third-party coverage of the print estimated that the fourth-quarter margin must approach 26.5% for the full-year number to be met. That calculation is the writer's, not the company's, but it shows how much the year's margin depends on the final quarter.

What other items appear in the filings?

The company's quarterly filing shows inventory write-downs of about $18 million in the quarter and about $62 million over nine months, compared with about $23 million and $50 million a year earlier. Land earmarked for disposal was written down by about $10 million in the quarter.

The filing also describes the sale of about half of the company's apartment living portfolio and its operating platform to Kennedy Wilson for net cash proceeds of roughly $330 million. The company expects to dispose of its remaining interests in that portfolio over time.

The company noted that the third-quarter information in the press release remained subject to finalization of regulatory filings and external auditor procedures, a standard note that readers should keep in mind when comparing the release with the filed report.

How do inventory write-downs and land decisions fit together?

Builders record write-downs when the expected value of homes or land in a community falls below its carrying cost. Toll's charges this quarter were modest next to its revenue, and a little lower than a year earlier for the quarter, though higher for the nine-month period. The company did not attribute them to any single market.

Land strategy is the longer-term counterpart. About 70% of the year-to-date land spending went to the core luxury segment, according to call coverage, and the company keeps a majority of its lot pipeline in the form of options, which lets it walk away from a site if conditions change.

The combination of write-downs, option-heavy land and a growing community count gives a picture of a builder trying to expand without tying up too much capital. Whether that approach pays off will depend on how demand develops in the markets management has flagged as challenging.

How should the lower earnings be read against the higher orders?

Lower earnings reflect fewer deliveries, a lower gross margin and higher overhead as a share of revenue. Deliveries in a given quarter come from homes contracted earlier and built over many months, so they do not move in step with the orders signed in the same quarter. A quarter in which orders rise and closings fall is therefore not contradictory.

Higher orders matter for later closings, but timing depends on construction schedules and on how many homes are started before contracts are signed. The company said it has reduced finished spec inventory, which means a larger share of homes coming through will already be under contract when completed.

Margin also reflects what is delivered. Management pointed to the mix of regions, more luxury move-up homes and spec homes closed earlier in construction as reasons for its guided fourth-quarter margin. The release does not quantify how much each Factor contributes, so the guided figure is best read as management's own estimate, which the next report will test.

What did the chief executive say in the release?

Karl Mistry, the chief executive, said Toll Brothers delivered solid third-quarter results in a challenging market. He added that the results position the company for another year of healthy earnings, and he announced the larger plan for acquiring the company's own stock.

The language is measured. It acknowledges the difficult housing market, points to resilience in the luxury segment and ties the stock acquisition plan to the company's cash generation and balance sheet. It does not promise a recovery in demand.

The release also notes that the company paid a quarterly dividend of $0.26 per share in late July. Together, the dividend and the stock acquisitions make up the payouts to stock owners that the company described for the quarter and the year to date.

What should readers watch next for Toll Brothers?

The next scheduled report covers the fiscal fourth quarter and full year, which ended in October. It will show whether deliveries land within the narrowed range, whether the adjusted gross margin reaches the guided level and how orders performed during the autumn season.

Other indicators include incentive levels, the share of communities with price increases, cancellation rates and the speed at which new communities open. Mortgage rates and consumer confidence, which management described as unfavorable, will shape how many customers commit.

The company is a member of the S&P MidCap 400, and readers following Midcap Stocks will notice that homebuilders react quickly to changes in rates and confidence. Updates on stock acquisitions and land spending will appear in the company's regular filings and press releases.