Toll Brothers CEO Robert Toll reported some positive signs in the company's fiscal third quarter conference call Thursday afternoon, but he stopped short of calling a bottom in the housing market.
Toll Brothers on Thursday morning reported a net loss of $29.3 million ($0.18 per share diluted) for its fiscal third quarter, including pre-tax write-downs of $139.4 million, $33.4 million of which was attributable to joint ventures. After-tax write-downs totaled $84.3 million, or $0.53 per share diluted. Excluding write-downs, earnings were $55.0 million, or $0.35 per share diluted.
The loss was half what analysts on Wall Street were expecting. Toll shares were down marginally in late day trading on a day of major losses among the broad market indicators.
In the earnings release, Toll reported having seen signs of stabilization, though he said the company could not yet predict a turnaround in the moribund housing market. Said Toll, "It appears that per-community traffic and deposits at our sites over the past several months have been stabilizing, albeit at historic lows. We also note that our number of cancellations this quarter, although still greatly elevated from our historic norms, is the lowest in nine quarters."
During the afternoon conference call with analysts, however, Toll added, "I don't mean to suggest that things can't get worse."
Toll said the stabilization the company has seen has been in traffic levels and in the rate that down-payments turn into actual contracts. He declined to give his traditional market report cards as he has in the past, but he noted that Connecticut is performing very well, New York and New Jersey a bit less well, and Massachusetts to an even lesser extent. When asked by an analyst if he thought that some of the hardest-hit markets in California were stabilizing, he said he did not. Regarding the Inland Empire specifically, Toll said, "We don't operate in the Inland Empire," then added, "My heart goes out to Ara [Hovnanian] for having to operate in it." Southern California in general, he said, was "whiffty," meaning that one week it looked better, the next week it was "back in the tar pits."
Toll also said that the company has met with three banks over the past two weeks looking at distressed inventory. "It's starting to come out of the woodwork," said Toll. "It's starting to loosen up. We're starting to see some product."
The CEO also said he was disappointed in the housing bill recently passed by Congress and signed into law by President Bush. "We had an opportunity," he said. "I think it was blown in that they didn't follow the example of Gerald Ford and the Congress in 1975." He was referring to a temporary one-time tax credit on all home purchases passed at that time (unlike the first-time-buyer only credit that has to be paid back passed by this Congress) that turned around the ailing housing market back then in two years. "It would have been, potentially, Congress calling the bottom," he said.
The fiscal third quarter financial results reflected the continuing impact of the housing downturn. Third-quarter revenues were off 34 percent from last year's to $797.7 million as completed contract community units fell 30.4 percent to 1,244. Gross contracts fell by 31 percent to 1,007 with an aggregate value of $588.1 million, down 40 percent from last year's fiscal third quarter. The cancellation rate fell to 19.4 percent from 24.9 percent in the fiscal second quarter, 28.4 percent in the first and 38.9 percent in last year's fiscal fourth quarter. Third-quarter-end backlog of $1.75 billion was 52 percent lower than FY 2007's third-quarter-end backlog of $3.67 billion.
Toll ended the quarter with $1.5 billion in cash and more than $1.3 billion available under its 33-member bank credit facility, which matures in March 2011. Its net-debt-to-capital ratio at July 31, 2008 reached 18.0 percent, its lowest level ever. Toll had approximately 48,500 lots owned and optioned on its books at quarter's end, down approximately 47 percent from 91,200 lots at its peak at FY 2006's second-quarter-end. There were 290 selling communities on July 31, down from a peak of 325 at FY 2007's second quarter-end. The company expects to cut that number to 275 communities by 2008's fiscal-year-end.
Toll again declined to provide future earnings guidance, but it disclosed that it expects revenues to fall from third-quarter levels in the fourth quarter as it projects deliveries of between 850 homes and 1,050 homes with an average price of between $640,000 and $650,000 per home. It also said it expects cost of sales, and SG&A, before write-downs to be higher as a percentage of revenues in the fourth quarter due to higher incentives and slower delivery paces.
Said Toll in a statement, "We are now completing the third year of the worst housing market since we started in 1967. Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers' market. Tightened mortgage lending standards have sidelined others. Single-family housing starts have decreased by approximately 65 percent from their peak in January 2006: Starts now stand at their lowest level since January 1991. We believe that most big public builders have sold off most of their spec inventory, which eventually should help stabilize home prices. However, we currently have to contend with foreclosures as the new low-priced competition."
He continued: "Once the supply of foreclosed inventory is exhausted, we believe that favorable demographics will kick in and the housing market in general will begin to recover."
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