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No Spring Bounce for Housing, Toll CEO Says: Key Selling Season 'Quite Weak' with Buyers Still Reluctant to Step in

By John Spence
Published: May 13, 2008

The chief executive of Toll Brothers, the nation’s largest builder of luxury homes, on Tuesday said buyers didn’t materialize this spring as sales and prices continued to plunge in the company’s latest quarter.

Before the opening bell, Toll Brothers Inc. said home-building revenue in the quarter ended April 30 slipped 30% from the year-earlier period to $817.9 million. Net contracts for new homes, after cancellations, dropped 44% to 929 homes.

“The just-completed spring selling season was quite weak in most markets as buyers remained on the sidelines,” said Robert Toll, chief executive, in a statement. He said buyers are afraid to buy a home, only to see it fall in value.

The results were preliminary and unaudited. The Horsham, Pa.-based company is scheduled to report full fiscal second-quarter results on June 3. Considered a bellwether among home builders, Toll is the first to provide a glimpse into the housing market for the quarter ended in April.

Toll’s early second-quarter numbers “brought further confirmation that this year’s spring selling season has again been a letdown,” wrote Deutsche Bank analysts in an investor note Tuesday.

The average price of a home sold in the second quarter was $534,000, versus $580,000 in the first quarter. Toll blamed the decline on higher incentives and a shift in the product mix to cheaper homes. It said it saw fewer sales in high-end markets such as California, but noted its new condo development in Manhattan is sold out.

“When we have held promotions, buyers have come out to play and put down deposits. Often, however, a lack of confidence in the direction of home prices overcomes their enthusiasm and they don’t take the next step of going to contract,” said Toll, the CEO. “They, like all of us, read the papers and watch TV, both of which keep advising them that home prices are declining.”

Meanwhile, Toll continues to scale back its land position and isn’t buying any more at the moment.
“We are looking for deals in most markets but have yet to see any opportunities that fit our parameters of high-end communities at bargain prices,” the CEO said. “More offerings have come to market recently, but nothing has excited us yet.”

Joel Rassman, chief financial officer, said Toll Brothers has yet to complete its analysis of second-quarter impairment charges, but estimated them in the range of $225 million to $375 million. Home builders have been forced to write down the value of land and inventory on their books.

Analysts polled by Thomson Reuters are forecasting Toll to post a second-quarter loss of 15 cents a share, on average.

Toll has scheduled a conference call for Tuesday afternoon to discuss its preliminary quarterly results. The stock was down more than 2% in premarket trading.

“Despite falling cancellation rates, Toll’s growth in speculative inventory and weakening order trends are troublesome trends within the quarter,” wrote Majestic Research analyst John Tomlinson in a research note this week.

He said weak sales may force further pricing concessions if Toll wants to move homes.

“Overall, gross demand seems to be fundamentally weaker this spring selling season for Toll, which could be an indication that many move-up buyers (Toll Brothers’ primary demographic) are either having trouble selling their previous home in this environment or are simply choosing to remain on the sidelines until prices stabilize,” Tomlinson wrote.

On Monday, shares of Standard Pacific Corp fell more than 20% after the home builder reported a wider quarterly loss as the company continues to face questions about its liquidity.