Toll Brothers Sees a Future With Less Dependence on California

(Bloomberg) -- Toll Brothers Inc., the largest luxury-home builder in the U.S., says it is expanding to new areas as sales in its core California markets shrink.

Some California residents are leaving for cheaper locations because of federal tax changes that reduced deductions for state and local levies, Chief Executive Officer Doug Yearley said on a conference call with investors. The company’s orders in the state, hit hard by an affordability crisis, plunged 46% in its most recent quarter from a year earlier.

California will make up a smaller part of the company’s income statement toward “the back end of 2020 than it was in ’19 unless we see a significant change in the marketplace,” Chief Financial Officer Marty Connor said on the call. “We feel good about California, it’s still a top-10 market, but as we’ve said a few times here, it’s not quite as strong or as significant as it was.”

Across the U.S., the company said it’s now offering some slightly cheaper options, partly to appeal to wealthier millennials. A third of communities have some homes that sell for less than $500,000, Yearley said. On Monday, Toll announced its expansion into Atlanta through an acquisition of a small builder.

Read More: Toll Brothers Home Signings Dragged Down by California

California accounted for 31% of Toll’s revenue in 2018, according to Megan McGrath, an analyst with the Buckingham Research Group. In the fiscal second quarter, 17% of the company’s sales backlog -- homes that are under contract but not yet built -- was in the state, down from 20% a year earlier, she said.

“California has been the weakest market over the past six months,” McGrath said in a phone interview. “So, while it could bounce back, I think the company is reacting to the fact that perhaps California’s glory days are over.”

To contact the reporter on this story: Prashant Gopal in Boston at pgopal2@bloomberg.net

To contact the editors responsible for this story: Debarati Roy at droy5@bloomberg.net, Christine Maurus

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