Luxury Home Builder Profits Reduced, Housing Markets Given Failing Grades
Toll Brothers Inc., the largest U.S. luxury home builder, said second-quarter profit was lower than earlier forecast and blamed a lack of home mortgage loan borrower confidence for thwarting a housing recovery.
Profit will be less than the $71.4 million previously projected, Horsham, Pennsylvania-based Toll said today in a statement. Sales slid 19 percent to $1.17 billion and the company will write down as much as $130 million for land, more than double an earlier estimate.
Chief Executive Officer Robert Toll was asked on a conference call if the increased number of “F” grades he gave to the company’s markets implied that business was slipping. He answered “yes.”
Five of the largest U.S. builders have reported profit declines or losses in the last quarter as the housing slump cuts demand. The failure of at least 50 subprime lenders, who make bad credit mortgages to consumers with poor or limited credit history, is also curbing sales and has made the spring selling season a disappointment, executives said.
“Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets,” Toll said in the statement. “Given the current state of the market, we no longer expect to achieve the most recent quarterly and annual guidance we provided.”
Toll said that while fewer than two percent of its buyers use subprime loans, stricter lending standards following the collapse of several mortgage companies are making houses at all price levels less affordable.
Buyer Confidence Wanes: “This, in turn, can impact the entire housing food chain, including some of our potential customers’ ability to sell their existing homes,” Toll said in the statement. “This, coupled with a lack of buyer confidence, may have served to impede the glimmers of a rebound we had started to see in early February.”
Shares of the home builder fell 16 cents to $29.05 in New York Stock Exchange composite trading. The stock lost 9.9 percent this year through yesterday, compared with a 14 percent drop for a Standard & Poor’s measure of homebuilding stocks.
Robert Toll said on a conference call today that demand didn’t improve as the quarter progressed.
“It seemed to us that we were not getting better,” he said. He gave grades to some of the company’s markets: Orlando, Tampa and the west coast of the Florida housing market earned an “F”, as did the New Jersey suburbs and Chicago.
Low Grades: The Michigan mortgage market also failed with an “F,” said Toll. “Blessedly, we sell three or four homes a week” there, he said.
New York City’s urban markets earned a “B+,” along with the city’s far suburbs and nearby Connecticut. Minnesota was a “C-” market, “a whole lot better than it was,” Robert Toll said.
Toll Bros. said it still expects to report a fiscal second-quarter profit. It didn’t provide a net income figure in today’s preliminary earnings statement. The building and mortgage company will report full second-quarter earnings on May 24.
“The magnitude of the writedowns was kind of surprising,” John Tomlinson, an analyst at Majestic Research in New York, said in an interview. “You have to wonder how much more is coming the rest of the year.”