Toll Brothers Lowers Outlook, But Sales Beat Forecasts
Toll Brothers said it expects to report a decline in quarterly home-building revenue as the U.S. housing crisis deepens, and the company's CEO said sales might have further to fall.
But the luxury builder's sales were higher than forecast, pushing its shares up sharply.
Based on preliminary results, Toll Brothers said its home-building revenue fell 21% to about $1.21 billion in the third quarter.
Analysts had expected $1.11 billion. In May, Toll had forecast $990 million to $1.28 billion.
The company said the net number of signed contracts for the third quarter ended July 31 -- a key predictor of future revenue -- was down 31% from a year earlier to $727.1
million, and cancellation rates rose.
The decline in contracts was worse than expected, said real estate analyst Mike Larson of Weiss Research in Jupiter, Florida.
"What happened in subprime, the tightening of lending standards, is starting to a lesser extent to spread to jumbos, so that could be an obstacle for Toll," Larson said.
Jumbo mortgages are loans for purchases of large or luxury homes, which are the core of Toll's business.
"We are now in the 23rd month of a down housing market," Chief Executive Robert Toll said in a statement. "With the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit markets settle down."
On the other hand, pent-up demand may be building among potential home buyers, since the U.S. economy and employment are still strong, and demographic trends are lending support,
the Horsham, Pennsylvania-based company said.
Weiss Research's Larson said a recovery in the home-building sector was not likely before the second half of 2008.
"We have too many homes for sale, too many mortgage lenders going under or curtailing their loan programs, and despite a slight decline in prices, they're still high compared to
income," he said.
Toll said that under current market conditions, it was not comfortable giving an earnings outlook.
The company plans to report its third-quarter results on Aug. 22. Because of its fiscal calendar, Toll is the first major home builder to report a quarter that will contain July.
Investors use it as an indicator of the performance of other home builders.
For more than a year, home construction has fallen sharply on weakening demand and rising interest rates. Problems in subprime lending -- loans to those with sketchy credit histories -- have made it even more difficult for potential buyers, even those with good credit, to get a mortgage.
Pending completion of an impairment analysis, Toll estimates its pretax write-down for operating communities, land and land options for the quarter at $125 million to $175
The company's third-quarter backlog of homes on order fell 34% from a year earlier to about $3.67 billion.
The third-quarter cancellation rate was 23.8%, compared with 18.9% in the previous quarter.
The stock is down about 4% over the past year, a smaller loss than the 18% drop in the Dow Jones Home Construction index.
The higher end of the home building market has been more resilient than the overall industry, reflecting the financial strength of its richer customers, real estate analyst Larson said.