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Toll Brothers Returns to Profitability, First Time in Three Years

Source: Wall St. Journal

Posted on 26 Aug 2010

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Shares of luxury builder Toll Brothers Inc. increased by a modest 6% after an unexpected profit in its third-quarter, the first gain in almost three years, while revenue declines were less than analysts expected.

For the third quarter ended July 31, Toll Brothers reported a profit of $27.3 million, compared with a year-earlier loss of $472.3 million, including a $361.1 million income-tax provision. Write-downs fell sharply, and excluding them, pretax profit rose to $13.3 million from $3.7 million. Gross margin rose 3.5 percentage points minus write-downs.

"This return to profitability, modest as it is, likely exceeds investor expectations," said Josh Levin, a Citi home-builder analyst.

One bright spot was the company's high-rise projects in the New York City area. Chief Executive Doug Yearley said contract signing for those efforts was more than double year-earlier levels during the quarter, putting the backlog five times higher.

Like some other builders, Toll Brothers is using the ongoing weakness to increase land holdings. It spent $104 million on land acquisition during the quarter, putting the fiscal year-to-date figure at nearly $340 million. It had more lots owned and optioned for the second-straight quarter.

Chairman Robert Toll said despite the ongoing struggles in the home-building industry, the numbers are working in his company's favor longer term.

"The combination of potential buyers postponing their purchasing decisions, a lack of new home production over the past several years and a significant reduction in our competition in the luxury home niche could result in pent-up demand coupled with limited supply once a recovery takes hold," he said.

Toll Brothers is the first builder to report a full quarter of results since the federal government's first-time home-buyer tax credit expired April 30, though the deadline for closing a deal was extended 90 days to the end of September. Home-builders' results in recent quarters have been boosted by the credit.

Further impact of the credit was seen on Tuesday, when the National Association of Realtors said existing-home sales plunged to their lowest level in 15 years as inventories soared to the highest point in more than a decade.

Toll's home deliveries rose 1% on a unit basis and fell 2% by valuation. Net signed contracts fell 16% and 11%, respectively, as there were 19% fewer communities in which sales were taking place during the quarter. Per-community signings were higher than each of the three prior fiscal third quarters, but the builder noted the levels still pale in comparison to the 20-year historical average for the period.

The cancellation rate was 6.2%, compared with 8.5% a year earlier and 5.3% in the prior quarter. The latest period was the fifth straight quarter in which the rate, one of the sector's lowest, was near what Toll Brothers called historical norms, following three straight years of elevated rates as the housing bubble deflated.