Toll Brothers this morning (August 8) reported that it expects third-quarter, 2007 home-building revenue to fall 21% from last year's third quarter to $1.21 billion on a 31% decline in revenue from net signed contracts, which totaled $727.1 million. Total contracts declined 17% from year-ago levels to 1,457. New single-family home orders (excluding towers and joint ventures) were 1,107 homes, a decline of 23% from last year's third quarter.
The company estimated that it will be taking between $125 million and $175 million in write-downs related to operating communities, land and land options when it announces its audited results on August 22.
The order numbers surprised analysts, particularly since they were up against a favorable comparison in last year's third quarter. Michael Rehaut and the home building and building products analyst team for J.P Morgan Securites said in a research note, "While 3Q's order decline of 23% (ex-JVs) was roughly in-line with 2Q's -24%, we note this was against an easier -48% year-ago comp vs. 2Q's -32% comp. We note this is similar to other builders, with our universe's orders down 23% in the latest quarter against a -26% year-ago comp vs. 1Q's -25% against a -12% year-ago comp. Also, while absolute cancellations remain low at 347 vs. 2Q's 384, TOL's can rate rose to 24% from 2Q's 19%, reflective of the tough demand environment."
Backlog at the end of the quarter was down 34% to $3.67 billion, and the company's cancellation rate increased to 23.8% from 18.9% in the previous quarter but down from a high of 36.7% in fourth quarter, 2006. For the first nine months of the 2007 fiscal year, home-building revenues were approximately $3.47 billion, down 19%, and net signed contracts $2.64 billion, a decline of 30%, versus the same period in 2006.
"We are now in the twenty-third month of a down housing market," said Toll CEO Robert I. Toll. "Hesitant customers remain on the sidelines, unsure of whether home prices have bottomed."
In a prepared statement, Toll took aim at the media for "warning people every day to beware" of the housing market. "We believe significant pent-up demand is building, based on solid demographics, a decent economy and still-strong employment," he said. "However, we caution that, with the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down."
The company said it remained strong financially, with $700 million in cash on hand at quarter's end and $1.1 billion available under its credit facilities, with no major debt due before 2011. It has cut its community count to 315 selling communities, down from 325 at the end of the second quarter. The company expects to cut that number further to 305 by the end of the fiscal year. Lot count, both owned and controlled, has been cut from a peak of 91,200 at the end of second quarter, 2006, to 63,000 at the end of July, 2007.
Toll warned that the market may worsen before it gets better. "Excess supply exists in most markets and there is concern that additional inventory will emerge due to mortgage defaults," he said. "Although some markets have remained strong and some appear to be stabilizing, albeit at much lower activity levels, most markets remain weak.'"
Toll CFO Joel H. Rassman said, "Given the current state of the market," the company was not "comfortable giving earnings guidance."
Wachovia Securities said in a research note that Toll's total impairments were below those of other big builders, totaling $519 million since October, 2005, representing 11.6% of year-end 2005 book value, versus an average of 14.2% for the builder group. J.P. Morgan took a similar view, though using a different time frame, stating, "Positively, we note [the anticipated impairments] represents only 2.6% of 2Q07 equity (after-tax), well below the 6.8% average for our universe. This brings its cumulative charges to date to 10.4% of 2Q06 (Apr-end) equity, also below its peers' 16.1% average as a percent of 1Q06 (Mar-end) equity. We believe this is a reflection of TOL's older, more valuable land positions, with its total lot supply at 13 years vs. its peers' 7 years."
Toll stock rose on the report, up nearly 4.5% in early trading on the New York Stock Exchange.