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Toll Brothers Loss Knocks Wind out of Housing Hopes

Wednesday, 22 February 2012 05:29 PM

Toll Brothers Inc, the largest luxury homebuilder in the United States, reported a surprise loss as more buyers cancelled contracts, stunning investors who had piled into housing stocks on hopes a recovery was imminent.

Toll shares closed down more than 5 percent. Other homebuilders also fell sharply on the news.

It was an unexpected development for Toll, whose stock, along with the rest of the sector, had nearly doubled since October on expectations ultra-low interest rates and record-low prices would push more consumers to trade up to the lavish homes and swank urban condos the company builds. Toll's homes average about a half a million dollars each.

But the hoped-for surge in homebuying has yet to materialize. Some analysts say Toll's results prove a housing recovery is not yet fully underway, with fears about high unemployment, rising gasoline prices and the strength of the overall U.S. economy scaring off potential customers.

"The whole group of homebuilding stocks was priced as if there were a return to normal that was going to happen by the end of this year," said Michael Widner, an analyst at Stifel Nicolaus, who has a "sell" rating on Toll's stock. "But normal is not 12 months away, it's more like five years away. And it's not going to be linear."

Between a bottom on Oct. 3 and Tuesday's close, Toll shares had risen 72 percent, while the broader sector was up nearly 67 percent. Over the same period the S&P500 managed gains of around 24 percent.

Homebuilder shares normally appreciate at this time of year in anticipation of the spring home buying season, which is the equivalent of Christmas for the sector. In a statement, Toll Chief Executive Douglas Yearley Jr. said the market "feels healthier" than it did a year ago.

But that feeling has not changed the fact that the housing market is still stuck in its worst slump since the Depression.

It is now generally cheaper to own a home than it is to rent, with interest rates at record lows, inventories at record highs and prices in most markets down at least 30 percent from the peak. But the bulk of consumers continue to be shut out of the market altogether.

Nearly half of homeowners are either in foreclosure, delinquent on their mortgage payments, owe more on their mortgage than their house is worth or have less than 20 percent equity.



Against that backdrop, Horsham, Pennsylvania-based Toll said its contract cancellation rate for its fiscal first quarter ended Jan. 31 was about 6.2 percent, compared with 5.7 percent a year earlier.

Chairman Robert Toll pointed to the recent rise in housing starts as a cause for optimism. A U.S. Commerce Department report last week said housing starts rose 1.5 percent to an annual rate of 699,000 units in January, beating economists' expectations for a 675,000-unit pace.

But the rise in starts - a key indicator of the strength of the housing market - mostly stems from construction of apartment buildings, which are drawing families who have been foreclosed on, as well as those who can only afford to rent.

Toll indicated it has seen some positive developments, though.

It recorded a 25 percent increase in non-binding deposits for new homes in the first three weeks of February, driven by the company's President's Day sales drive that included a bonanza of free upgrades on everything from flooring to faucets. Normally, half of deposits translate into actual house closings.

It has also benefited from brisk sales of hip condos that cater to aspiring one-percenters who dwell in urban centers. Toll's customers typically make at least $100,000 and have spotless credit.

In places such as New York City, which may be the hottest housing market in the world, Toll is doing well. For example, sixteen of the 22 condos at the company's boutique building on Manhattan's Upper East Side, The Touraine, have sold swiftly -despite Wall Street's lower bonus season. The average contract price on the units was a hefty $4.1 million.

Still, Toll Brothers reported a fourth-quarter net loss of $2.8 million, or 2 cents a share, compared with a year-earlier profit of $3.4 million, or 2 cents a share.

Analysts on average were expecting earnings of 2 cents a share, according to Thomson Reuters I/B/E/S.

Toll's revenue for the quarter fell 4 percent to $322 million, below Wall Street expectations of $360.8 million, while home building deliveries fell 1 percent to 564 units.

Administrative expenses were also unexpectedly high, at 21.6 percent of revenues compared with the 16 percent analysts had forecast. Some of those costs were due to Toll's recent acquisition of Seattle homebuilder CamWest Development.

Toll shares closed down 5.1 percent at $22.48. The Dow Jones home construction index was down 2.5 percent, with all seven index components lower.

© 2018 Thomson/Reuters. All rights reserved.

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Wednesday, 22 February 2012 05:29 PM
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