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HORSHAM — A huge tax hit wiped out Toll Brothers' profits for the third fiscal quarter, but the luxury builder saw housing markets improve in many parts of the country.
Toll posted its first annual increase in new home contracts since 2005. Its cancellation rate was the lowest in three years. Better still, the current quarter is off to a good start with 26 percent more buyers putting down deposits than a year ago.
It's still tough out there, but "things sure feel better than they did six months ago," Robert Toll, chairman and CEO, told analysts. "We believe declining cancellations and more solid demand indicate that the housing market is stabilizing."
While home sales continue to be hampered by job losses and tighter mortgage lending standards, recent housing data and reports from major homebuilders like Toll Brothers Inc. suggest the worst of the housing market slide may be over. Nationally, new home sales have risen for four months in a row, and prices have edged up for the past two months.
Turning a profit, however, remains a challenge for the sector, and Toll Brothers is no exception.
The company lost $472.3 million, or $2.93 a share, in the three months ended July 31. That compares with a loss of $29.3 million, or 18 cents a share, the same period last year.
Toll took a $439.4 million non-cash deferred tax allowance and write-downs totaling $115 million in the quarter. Excluding those charges, the company would have earned $3.7 million.
Analysts polled by Thomson Reuters were expecting a loss of $1.79 a share on revenue of about $460.2 million. And investors seemed disappointed in the builder's results, sending shares down 27 cents to $22.87.
"We believe customers are recognizing that now is the time to get into the market to take advantage of near-record affordability in what is still, for now, a buyers' market," Toll said.
The builder sold 792 homes with revenue totaling $461.4 million. Those results were down 36 percent and 42 percent, respectively, from the third fiscal quarter last year.
Demand is strong enough that Toll is reducing incentives and raising its prices in select communities.
But not by much, according to Robert Stevenson, an analyst with Fox-Pitt Kelton. He suggested that Toll could still be slashing prices on unsold homes to get them off its books.
"That's the big issue with a lot of the discounting," Stevenson said. "When you're sitting there on a bunch of (speculative) inventory that's not moving ... you feel the need to discount that asset more heavily in order to get it sold."
Toll projects it will have up to 725 completed home sales by the end of the next quarter at an average price of up to $575,000. It expects to finish fiscal 2009 with up to 2,830 completed home sales.
Management also said it anticipates revenue in the next quarter to be lower than in the same period last year.
On Wednesday, the Commerce Department reported sales of new U.S. homes surged almost 10 percent in July, another sign the housing market is climbing back from the historic bottom it reached early this year.
In a kind of Cash for Clunkers effect, homebuyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify.
Builders and real estate agents are pressing Congress for that credit to be extended. If it isn't, there is a risk sales could reverse their upward trend.
Toll said extending the credit would help lift the economy and create jobs.
"You would put more people to work so quickly that it wouldn't be funny," he said.
Toll Brothers, based in Horsham, Pa., has operations in 21 states and was ranked the 14th largest homebuilder in the U.S. last year by Builder magazine.
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On the Net:
Toll Brothers: http://www.tollbrothers.com
