The market for upscale homes remains depressed, according to preliminary fiscal second quarter 2009 results reported by Toll Brothers (NYSE:TOL), Horsham, Pa., Wednesday morning. CEO Robert Toll, however, said in a statement that increased sales activity in recent weeks has given the company cause for optimism.

Toll's revenues for the quarter were down 51% to $398.3 million as homes closed fell 47% from last year's fiscal second quarter to 648 units. Net signed contracts fell 37% to 582 with an aggregate value $298.3 million, a decline of 40%. Cancellations were at a rate of 21.7%, down from 37.1% in the fiscal 2009 first quarter and 24.9% in the second quarter of fiscal 2008. But the value of cancelled contracts ticked upward to $746,000 from $733,000 in the previous quarter. As a percentage of beginning-quarter backlog, the rate rose to 9.8% compared to 7.7% in the previous quarter and 9.2% a year ago.

The company said it expects to take between $90 million and $160 million in impairments and charges when it reports earnings on June 3. It also said it would not be providing guidance for coming quarters due to the continued uncertainty in the housing and financial markets.

Signed contracts were up 119% in units and 133% in dollars compared to the first-quarter, despite a 7% sequential decrease in selling communities. The company attributed the sales increase, which is more than double recent historical norms, to seasonality and the depth of the housing slump late last year, which created favorable comparison. Toll's fiscal second quarter ended April 30; the previous fiscal quarter included November and December of 2008.

Still, Robert I. Toll, chairman and CEO, said in a statement, "Despite a weak economic and employment landscape, which was reflected in fiscal 2009's second-quarter contracts, we have a few reasons for cautious optimism. The most encouraging is our recent deposit activity. Beginning with the week ended March 22, 2009, our per-community (same-store) deposits have exceeded FY 2008's same-store deposits in seven of the past nine weeks."

Average prices per unit of gross contracts signed continued falling, with the average price at $563,000 for the quarter compared to $575,000 in the previous quarter and $591,000 a year earlier. On a net contracts signed basis, however, the average price increased to $513,000 from $481,000 in the fiscal first quarter but still was down versus $534,000 during the comparable period last year.

Toll drew down its homes in backlog by 48% to 1,581 units worth $944.3 million, a 51% drop from last year's second quarter. Selling communities totaled 240 at quarter's end, down 20% from 300 at the same time last year.Toll expects to end the fiscal year with 225 or fewer active selling communities.

Toll ended the quarter with approximately 36,600 lots owned and optioned, compared to approximately 37,900 at prior-quarter-end and approximately 55,000 at FY 2008's second-quarter-end. Lot total peaked at approximately 91,200 at FY 2006's second-quarter-end.

The company, having completed a $400 million offering of senior notes, ended the quarter with $1.96 billion in cash, up from $1.53 billion at first-quarter-end and $1.24 billion at 2008's second-quarter-end. It also had $1.34 billion available under its $1.89 billion 31-bank credit facility, which matures in March 2011. Toll said it intended to use $304 in cash to redeem all of the remaining $193 million outstanding of its Toll Corp. 8 1/4% senior subordinated notes due February 2011 and $100 million of the approximately $150 million outstanding of its Toll Corp. 8.25% senior subordinated notes due December 2011. Once that is completed, the company's average maturity on public debt will be approximately 5.6 years; with only$50 million of December 2011 notes not redeemed, the Company will have no public debt maturing until early in fiscal 2013.

Said CEO Toll, "Although the housing industry clearly is not yet out of the woods, we believe the U.S. Government's forceful intervention in the capital markets has begun to restore some confidence that the financial system is on the road to stabilization. We believe many upscale-home buyers have postponed their buying decision over the past three years due to weak consumer confidence and concerns about the economy; a renewal of confidence is the key to releasing this pent-up demand. With interest rates at an historic low, home price affordability at an historic high and consumer confidence starting to improve, we believe that more buyers are beginning to enter the housing market."

Analyst reaction to the preliminary report was mixed. Carl Reichardt of Wachovia Capital Markets said in a note to investors that orders fell below his expectations due largely to the lower community count. He wrote, "Toll continues to report the weakest orders per community per week among its peer group with 0.18 this quarter versus 0.51 on average for peers recently reporting March quarterly results which we attribute to its preference for holding price in favor of margin preservation and also a bias in demand towards more entry level homes." He also said that while most builders have been reporting lower-than-expected impairments, the midpoint in Toll's impairment guidance is higher than he expected.

Dan Oppenheim at Credit Suisse put out a research note stating that Toll's orders exceeded his expectations and that the impairment guidance came in less than he forecast. He wrote, however, "We think second quarter orders were boosted by spec sales (which will likely hurt margins), as orders in the North region fell just 13% yr/yr following a 70% decline last quarter. Orders fell 49% in the South, 40% in the West and 39% in Mid-Atlantic." Oppenheim revised his earnings estimate for the quarter up to a loss of $0.59 per share from a loss of $0.63 per share.

Toll shares were up nearly 3% at $20.07 in morning trading amid a up market for most of the builder group.