Luxury-home builder Toll Brothers Inc., in a preliminary earnings announcement today, reported net income of $26.5 million for the quarter ended July 31, with cancellations totaling 23.8 percent of contracts for the quarter.
The quarterly net income in the third quarter was down 84.8 percent compared with third-quarter 2006 net income of $174.6 million, the company reported. Third-quarter net income amounted to 16 cents per share diluted, compared with $1.07 per share diluted in third-quarter 2006.
The company reported 1,457 signed contracts before cancellations in the third quarter, down 17 percent compared to signed contracts in third-quarter 2006, with cancellations totaling 347 units in third-quarter 2007.
“During this downturn, we have experienced a much higher rate of cancellations than at any time in our 21-year history as a public company. While our cancellation rates are at the very low end of the range compared to the other major public builders, they are still, for us, quite elevated,” Robert I. Toll, Toll Brothers chairman and CEO, said in a statement.
He also commented about the problems in the mortgage market and with tightening credit standards.
“We, along with many others, are concerned about the dislocation in the secondary mortgage market. With few exceptions, the investors who provide our customers with mortgages continue to issue new commitments. Through our third-quarter-end, our buyers generally were able to obtain both conforming and jumbo loans (loans over $417,000),” he stated.
“Nevertheless, tightening credit standards will likely shrink the pool of potential home buyers: Mortgage market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes. However, we believe that our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles.”
Curbing new-home production until the oversupply can be absorbed “is a key step in bringing housing markets back into equilibrium,” Toll stated.
The company’s “build-to-order” operating model has helped, Toll said, as the company typically does not begin building homes in single-family communities until there are contracts in place “and a significant non-refundable down-payment.” The company also noted that it is generally “not feasible, nor desirable, to wait for 100 percent pre-sales before breaking ground.”
The company did not provide any guidance on fourth-quarter earnings.
For the first three quarters of the 2007 fiscal year, Toll Brothers reported net income of $117.5 million, or 72 cents per share diluted, down 77.1 percent compared with net income of $513.4 million, or $3.10 per share diluted for the same period in the 2006 fiscal year.
Total revenues in the third quarter were $1.21 billion, compared with $1.53 billion in third-quarter 2006. And for the first nine months of the 2007 fiscal year total revenues were $3.48 billion, compared with a nine-month record of $4.31 billion for the same period in the 2006 fiscal year.
The company’s third-quarter-end backlog was $3.67 billion compared with a third-quarter-end backlog of $5.59 billion in 2006. Third-quarter net signed contracts totaled $727 million, compared with $1.1 billion in third-quarter 2006.
The company ended its third quarter with about $770 million in cash and about $1.17 billion available under its bank credit facility, which matures in 2011, Toll Brothers reported. Its net debt-to-capital ratio at July 31, 2007, stood at 28.6 percent compared with 36.8 percent one year ago.
Toll Brothers “has continued to renegotiate, and in some cases, reduce its optioned land positions,” according to the earnings announcement, and ended the third quarter with about 63,000 lots owned and optioned compared with a peak of about 91,200 at the close of second-quarter 2006. The company ended the third quarter with 315 selling communities, down from 325 at the close of second-quarter 2007, and expects to be selling from approximately 305 communities by the end of this fiscal year.
The company will host a conference call today at 2 p.m. EDT to discuss these preliminary results and its outlook for the remainder of the fiscal year. To listen to the conference call online, the company recommends logging in through the investor relations section of the TollBrothers.com Web site at least 15 minutes prior to the start of the presentation. The call can be heard live with an online replay that will follow and continue through Sept. 30.
Toll Brothers began operations in 1967 and became a public company in 1986. The company operates in 22 states: Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia and West Virginia.
In addition to building homes, Toll Brothers also operates its own architectural, engineering, mortgage, title, land development and land sale, golf course development and management and landscape subsidiaries, and operates its own lumber distribution and house component assembly and manufacturing operations.
