Toll Brothers Inc. (NYSE: TOL) reported third-quarter fiscal 2018 results before markets opened Tuesday. The luxury homebuilder reported quarterly diluted earnings per share (EPS) of $1.26 on revenues of $1.91 billion. In the same period a year ago, Toll Brothers reported EPS of $0.87 on revenue of $1.5 billion. Third-quarter results also compare to consensus estimates for EPS of $1.03 and $1.81 billion in revenue.

The company’s average price for a delivered home increased from $791,400 in the third quarter a year ago to $851,900. The average price of net signed contracts rose year-over-year from $837,300 to $877,400. Toll Brothers delivered 2,246 units in the quarter and reported 7,100 units in its backlog with an average price per home of $912,600.

Pretax income for the quarter totaled $253.1 million, compared with income of $203.6 million in the year-ago quarter. Toll Brothers wrote down $11.1 million in inventory this year, compared with a write-down of $2.4 million in the year-ago quarter.

Gross margin slipped from 21.7% in the year-ago quarter to 21.1%. Adjusted gross margin for the quarter was 24.3%, down from 25% in 2017.

CEO Douglas Yearley said:

We had an outstanding quarter with earnings per share, net income, pre-tax income and income from operations rising 45%, 30%, 24% and 33%, respectively, compared to one year ago. Revenues of $1.91 billion were up 27%, our highest third quarter ever, driven by strong revenue growth in our California, West, South, Mid-Atlantic and North regions. … Our double-digit growth in revenues, contracts and backlog and our strong earnings reflect the health of the new home industry in general and our unique position in the luxury market. Through our customization program, our buyers are adding, on average, $165,000 in lot premiums and structural and designer options to their homes.

In its guidance for fiscal year 2018, Toll Brothers said it expects annual deliveries of 8,100 to 8,400 new homes, with an average price of $835,000 to $860,000. Full-year adjusted gross margins are forecast at 24%.

For the fourth quarter, deliveries are pegged at 2,550 to 2,850 new homes, with an average selling price of $840,000 to $870,000.

Analysts estimate fourth-quarter EPS at $1.88 on sales of $2.42 billion. For the full year, the consensus estimates call for EPS of $4.44 and sales of $7 billion.

According to the Census Bureau’s July report on new home sales, in the quarter ended in June, sales of homes priced at $500,000 or more totaled 32,000. Toll Brothers sold about 7% of those homes. The company’s executive chairman, Robert Toll, commented:

[E]xisting home values have increased, providing potential move-up and empty nester customers with more equity that they can put toward a new home purchase. We believe these two groups, along with the growing number of millennials starting to buy homes, are all sources of potential new demand in the coming years.

Lower-priced new homes are becoming scarcer as materials cost rise and builders like Toll Brothers build bigger, more expensive homes because their profit margins are higher. Adding a second floor to a 1,200-square foot home yields a 2,400-square foot home that may cost an extra 20% to build but will sell for a significant premium. The same math applies to a 2,400-square foot one-story home and a 4,800-square foot two-story home.

Toll Brothers stock was up about 11% in Tuesday’s premarket trading to $38.55, in a 52-week range of $33.47 to $52.73. The consensus 12-month price target on the stock is $48.36.

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