Real Estate

Toll Brothers can't stay in black

Luxury home builder posts first loss in more than 20 years after getting hit by property writedown, rising cancellations and falling prices.

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By Chris Isidore, CNNMoney.com senior writer

Luxury home builder Toll Brothers reported its first loss of the current housing slump Thursday.
Luxury home builder Toll Brothers reported its first loss in more than 20 years Thursday.

NEW YORK (CNNMoney.com) -- Luxury home builder Toll Brothers, which thus far had been able to avoid the losses plaguing its rivals, posted its first loss as a public company early Thursday and said it couldn't give any guidance on when conditions will improve.

Toll Brothers (Charts, Fortune 500), the No. 7 builder in terms of revenue, posted a loss of $81.8 million, or 52 cents a share, in its fiscal fourth quarter that ended Oct. 31. That was down from the net income of $173.8 million, or $1.07 a share, it earned a year earlier. Still the results were better than the 77 cents a share loss analysts surveyed by earnings tracker Thomson First Call had expected.

Toll had posted 85 straight quarters of profit since going public in 1986 before Thursday's report. But it could not stay in the black in the face of plunging home prices, rising cancellations by buyers and a decline in new orders.

The red ink stemmed from a $200 million after-tax writedown on the value of its land. Without that writedown, the company would have posted a profit of 72 cents a share. Analysts have generally not been excluding such charges when comparing results to their forecasts.

The company could not rule out further writedowns, saying the risk of such charges, coupled with the uncertainty in the housing market, made it impossible to give earnings guidance for 2008.

It did say it expects further declines in sales volume, revenue and sales price in its current fiscal year, and that as a result of continuing incentives and slower sales, its cost of sales as a percent of revenue will continue to rise.

"By many measures, fiscal 2007 was the most challenging of the 40 years that Toll Brothers has been in business," Chairman Robert Toll said in a statement. "1974 was perhaps rougher, but the difficult times only lasted one year."

Overall revenue fell 35 percent from a year ago to $1.17 billion, which was roughly in line with forecasts. The number of homes Toll sold and delivered in the quarter fell 34 percent in the fourth quarter from a year ago. That decline, coupled with a 3 percent drop in the average sales price, resulted in a 36 percent drop in revenue from completed home sales.

The backlog of home orders at the end of the fiscal year fell 37 percent from a year earlier, and was down 20 percent from the end of the third quarter. The company expects fiscal year 2008 deliveries of between 3,900 and 5,100 homes, which would represent a decline of 24 to 42 percent from the just completed fiscal year. It sees an average delivered price of between $630,000 and $650,000 a home, which would mark a decline of 3 to 6 percent from the 2007 level.

The one area where Toll saw a jump in revenue in the latest quarter was land sales, as the company paired back on its holdings to just under 60,000 lots, down more than a third from a peak in April 2006. Besides having land sales increase more than eight-fold from a year earlier to $2 million, the company said it has continued to renegotiate, and in some cases, reduce its optioned land positions.

The home builder said it does not believe it was directly affected by the problems in the mortgage market, which made it more difficult and expensive for many buyers to obtain a home loan, particularly for the so-called jumbo loans of more than $417,000. But it said even with a more wealthy client base than other builders, it didn't escape the mortgage problems completely.

"An inability to obtain mortgages does not appear to be a problem for our buyers, but probably is a problem for our buyers' buyers," Toll said.

The decline in the value of builders' land and home inventory was further demonstrated a week ago when Lennar (Charts, Fortune 500), the No. 1 home builder by revenue, reported that it was selling 11,000 properties, including some completed homes, to the real estate arm of Wall Street firm Morgan Stanley (Charts, Fortune 500) for only 40 percent of its previously stated value.

Charges due to reduced land and home valuations have caused many builders to report larger-than-expected losses recently. D.R. Horton (Charts, Fortune 500), the No. 3 builder, reported a smaller-than-expected loss Nov. 20, but that followed a quarter with a loss that was wider than forecast.

In October, credit rating agency Moody's downgraded the debt of Lennar, No. 2 builder Centex (Charts, Fortune 500) and No. 4 Pulte Homes (Charts, Fortune 500) to junk bond status.

Last month Hovnanian Enterprises (Charts, Fortune 500), the nation's No. 6 builder by revenue, reported that the pace of sales in October "significantly deteriorated" in most of its markets. It also said preliminary results showed a sharp rise in cancellations. To top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.