Housing slump hammers Toll Brothers; revenue drops 21%

HORSHAM, Pa. -- Luxury home builder Toll Brothers tol reported a 21% decline in preliminary home-building revenues for the third quarter and said the housing market is so volatile, it won't give earnings guidance.

The sales nonetheless beat analysts expectations and the stock rose Wednesday.

Robert Toll, the home builder's usually ebullient and candid chief executive, remains cautious. Nearly two years into the housing slump, which started with defaults by subprime borrowers, most markets remain weak, he 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," he said.

Analysts said Toll Brothers, which has a mortgage-lending business, isn't as directly affected by subprime borrower problems, but it does have greater exposure to buyers with jumbo loans and those stretching for loans larger than their incomes justify.

Toll, the nation's largest building of luxury homes, expects to report third-quarter home-building revenue of $1.21 billion for the quarter, down from $1.5 billion for the same quarter last year, when it releases earnings on Aug. 22.

Analysts surveyed by Thomson Financial on average were expecting revenue of $1.08 billion.

"Things could have been worse," said Greg Gieber, an analyst with A.G. Edwards. "Orders have fallen back to where they were before the boom."

Net signed contracts or orders, a measure of future activity, fell 31% to $727.1 million. Cancellations rose to 23.8% in the quarter, compared with 18% in the prior year.

The backlog, a sign of past activity, fell by 34% to $3.67 billion.

Toll Brothers said it's taking pretax write-downs in the quarter ranging from $125 million to $175 million on homes it can't sell for a profit, as well as land options the company is abandoning.

Third-quarter cancellations increased to 347 from 317 in the prior year.

In the third quarter, Toll Brothers said revenues in its Western region — Arizona, California, Colorado and Nevada — were hit the hardest, down 24% to $321.7 million.

The North, comprising Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, New York and Rhode Island, was down 22% to $293.4 million. Close behind is the Mid-Atlantic states of Pennsylvania, Delaware, Maryland, Virginia and West Virginia, down 21.6% to $350.7 million.

The South — Florida, the Carolinas and Texas — fell 14% to $242.2 million.

The West could continue to struggle going forward, with signed contracts down 41%, followed by the South by 37%, the Mid-Atlantic by 28% and the North by 19%.

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.

The company said it is not comfortable providing an earnings outlook because of the current market conditions.