The release of preliminary financial results for the quarter ended Oct. 31 from Toll Brothers, Inc. (NYSE:TOL) Tuesday morning confirmed what many in the business have been saying: October was the worst of months for home builders.
Toll reported a 41% decline in revenues for the quarter, its fiscal fourth, to $691 million as units in completed contract communities (closings) fell 34.6% to 1,079. Net signed contracts fell 18% to 539 units with a sales value of $266.7 million, a 27% decline, both compared to last year's fiscal fourth quarter.
"Until the last month, our FY 2008 fourth quarter net contract total was shaping up to be about the same as FY 2007's fourth quarter total," said Robert I. Toll, said chairman and CEO in a prepared statement."Unfortunately, the preliminary signs of stability we had discussed in early September, during our 2008 third quarter earnings call, were upended by the past month's financial crisis."
As negative as the preliminary results were, they came ostensibly in line with expectations at Raymond James, J.P. Morgan and Wachovia Securities. Carl Reichardt at Wachovia wrote in a note to investors, "While core metrics came in about as we expected, we note that on a per store basis, TOL's orders remain the weakest in our coverage universe at 0.15 orders/community/week." But, he added, "TOL's cash balance is among the highest in our coverage universe."
Fourth-quarter cancellations totaled 233, a rate of 30.2%, up from 19.4% in the fiscal third quarter but below the 38.9% rate posted in last year's fiscal fourth quarter. As a percentage of beginning-quarter backlog, FY 2008's fourth-quarter cancellation rate was 9.0%, up from 6.4% in the previous quarter.
Average prices fell 14.5% to $495,000, owing to a higher average price($785,000) of cancelled units this quarter compared to the fiscal third quarter ($606,000).
Fourth-quarter-end backlog value decreased 54% from last year's fourth quarter to approximately $1.33 billion, with units down 48.2% to 2,046.
The company cut its community count to 273 selling communities at the end of the 2008 fiscal year, down from 315 at the end of fiscal 2007. Its land holdings at quarter's end was approximately 46,000 lots owned and optioned, compared to approximately 91,200 at peak at the end of second quarter of 2006. Approximately 14,000 lots are already improved, the company said, although they are not spread proportionately across all regions.
"This means we can conserve cash in many markets where we don't need to continue to improve lots to get them to market," said Toll. He added, "We continue to renegotiate, and in other cases reduce, our optioned land positions."
Twelve-month net contracts of approximately $1.61 billion (2,927 units) declined by 47% from FY 2007's twelve-month net contracts total of $3.01 billion (4,440 units) and unconsolidated entities in which the Company had an interest signed contracts of approximately $52.6 million.
The company ended the quarter, and the fiscal year, with $1.63 billion of cash and another $1.32 billion available under its 33-bank credit facility, which matures in March 2011. It said it has no public debt maturities until 2011.
The company said it expects to record between $120 million and $220 million in pre-tax write downs for the quarter when it reports earnings on Dec. 4.It also said that given the uncertain state of the economy, it could not provide earnings or operational results guidance for the coming fiscal year.
Analysts took the impairment estimates relatively positively. Buck Horne, home building analyst with Raymond James, said in a research note, "The midpoint of this range is slightly higher than our previous estimate for $150 million of land-related charges during F4Q08 but, we believe, could likely come as a relief to some investors speculating that a larger year-end impairment would have been necessary."
Given the significant uncertainty surrounding sales paces, cancellation rates, market direction, unemployment trends and numerous other aspects of the overall economy, we are not comfortable offering delivery, revenue or earnings guidance for the coming year."
In the statement, Robert Toll urged Congress to act to directly stimulate the moribund housing market. "Congress has allocated hundreds of billions of dollars to reset mortgages, help people who are in foreclosure, and protect those who have been the victims of rapacious lending practices," he said."We believe that, if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers' money will have been wasted. We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes."
Toll also forecast a further shakeout in the home building business. "As we look to the future, we see reduced competition from the small and mid-sized private builders, whose access to capital is very constrained. We believe this less crowded playing field, combined with attractive long-term demographics, will reward those well-capitalized builders who can persevere through the current challenging environment."