BUSINESS Toll Brothers Profit Jumps as Wealthy Americans Spend

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1 DJIA 0.25% U.S. 10 Yr 2.822% Euro 0.05% This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit BUSINESS Toll Brothers Profit Jumps as Wealthy Americans Spend Affluent Americans continue to show confidence in the economy, boosting spending on homes, designer clothing and other luxury products A Toll Brothers home under construction in Charlotte, N.C., in The luxury home builder said the number of homes completed and turned over to customers rose 18% in the latest quarter. PHOTO: LUKE SHARRETT/BLOOMBERG NEWS By Laura Kusisto and Harriet Torry Updated Aug. 21, :03 p.m. ET One of the nation s largest builders of high-end homes rode strong sales to a 30% jump in quarterly profit, bucking weakness in the broader U.S. housing market and bolstering evidence that the wealthiest Americans are spending big as the economy strengthens. Toll Brothers Inc. TOL 13.79% said the profit surge came as its revenue for the quarter ended July 31 climbed 27% to $1.91 billion. Customers of the Horsham, Pa., company added $165,000 Page 1 of 5

on average toward the customization and design of their houses in the period, Chief Executive Douglas Yearley Jr. said on a call with analysts.

said sales were up 7% in its most recent quarter, and Coach, which is owned by Tapestry Inc., Advertisement ADVERTISEMENT reported a 5% increase.

consumer sentiment slid in early August, it remains strong among top-earning households, said Richard Curtin, chief economist for the University of

2 on average toward the customization and design of their houses in the period, Chief Executive Douglas Yearley Jr. said on a call with analysts. High-end retailers also have reported robust results, another sign that many wealthier Americans feel flush. Nordstrom Inc. said sales were up 7% in its most recent quarter, and Coach, which is owned by Tapestry Inc., Advertisement ADVERTISEMENT reported a 5% increase. Analysts expect strong results from Tiﬀany & Co. when it reports earnings next week. Kering, owner of Gucci, Saint Laurent and other luxury brands, said first-half revenue in North America surged 45%. While U.S. consumer sentiment slid in early August, it remains strong among top-earning households, said Richard Curtin, chief economist for the University of Michigan s Surveys of Consumers. Households in the top third of income distribution who make up half of all retail spending are well positioned, he said. Those households reported greater income gains and believe their wealth will rise over the coming year. Top earners expect wage gains of 3% in the coming year, according to Mr. Curtin, while households in the bottom third of income distribution expect a pay raise of just 0.5%. Page 2 of 5

Advertisement Toll Brothers said it expects the average price for its homes in the current fiscal year to be $835,000 to $860,000, raising the low end of its previous guidance by $5,000.

Rising prices, higher mortgage rates and a lack of inventory have pushed many less wealthy buyers out of the market. Sales of previously owned homes fell 2.

3 Advertisement Toll Brothers said it expects the average price for its homes in the current fiscal year to be $835,000 to $860,000, raising the low end of its previous guidance by $5,000. Toll Brothers share price surged nearly 14% Tuesday. The builder s strong results contrast with weakness in the broader housing market. Rising prices, higher mortgage rates and a lack of inventory have pushed many less wealthy buyers out of the market. Sales of previously owned homes fell 2.2% in June from a year earlier, the fifth time in six months they declined on a year-over-year basis. Affluent buyers are more easily able to shrug off higher mortgage rates and home prices than middle-class purchasers, analysts said. U.S. household net worth passed $100 trillion in the first quarter, thanks in part to rising home values, according to a Federal Reserve report. Much of that is concentrated among high-end households. There s confidence in the economy, said Jack Micenko, a senior analyst at Susquehanna International Group. People having equity in their homes is a huge confidence driver. But weak wage increases combined with rising home prices, tight credit and a lack of lowerpriced houses has made for a rocky recovery for the starter-home market, despite strong demand from millennials who increasingly have been trying to buy homes. At the same time, the higher end of the market has generally recovered strongly since the recession and housingmarket crash. Page 3 of 5

At the same time, sales between $100,000 and $250,000 fell 7.1% further evidence that affordability poses a bigger challenge to middle-class buyers than higher-income ones.

4 Advertisement Sales of existing homes over $1 million rose 7.6% in June compared with a year earlier, while sales of homes from $750,000 to $1 million rose 6%, according to the National Association of Realtors. At the same time, sales between $100,000 and $250,000 fell 7.1% further evidence that affordability poses a bigger challenge to middle-class buyers than higher-income ones. Inflation also is edging up, which threatens to eat into wages of all Americans. But the more affluent tend to have much of their savings in stock and other financial instruments, which have been rising in recent years. U.S. stocks are on the verge of surpassing their longest-running rally, and on Tuesday the S&P 500 stock index rose to its first intraday record since January. This has given many wealthy consumers the confidence to spend on big-ticket items like homes, despite a number of developments that economists say could derail the long expansion. The prospect of a trade war between the U.S. and major trading partners such as China and Europe is already slowing some business spending, and rising interest rates could slow borrowing and growth. But executives at Toll said on an analyst call they see little evidence that rising rates are forcing their buyers to stretch financially. Buyers loan-to-value ratio in the company s fiscal third quarter dropped to 67% from a more typical level of 70%. All-cash buyers jumped to 24% of all customers this year from a more typical 20%. Both metrics indicate that Toll buyers aren t straining and taking on more debt to afford houses. Advertisement Page 4 of 5

5 Mr. Yearley said he isn t concerned that the slowdown in the existing-home market in California will hurt Toll Brothers. He said buyers are more willing to pay a bigger premium for a brand-new home than he has seen in his 28-year career. Meantime, the market for $5 million-plus homes in New York City has slowed. Sales of apartments in that category fell 31% in the year s first half, compared with the 2017 period, according to a report by real-estate firm Stribling. The top end of the market attracts foreign investors and ultra-high-net-worth individuals, and a slowdown doesn t necessarily portend trouble for Toll Brothers or less-wealthy buyers. On Wednesday, economists will be looking to data from the Realtors on July existing-home sales for more clues on the market s direction. Kimberly Chin contributed to this article. Corrections & Amplifications U.S. household net worth passed $100 trillion in the first quarter. An earlier version of this article incorrectly stated the time period was the second quarter. Aug. 21, 2018 Write to Laura Kusisto at laura.kusisto@wsj.com and Harriet Torry at harriet.torry@wsj.com Copyright 2017 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit Page 5 of 5

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