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HORSHAM, PA-The value of signed contracts for locally based Toll Brothers Inc.'s luxury homes fell 45% to below $1.1 billion in the company's fiscal third quarter, compared with slightly above $1.9 billion for the same quarter a year ago. During a conference call, Robert Toll, president and CEO, called the slowdown, "somewhat unique," and attributed it to an "oversupply of inventory and a decline in confidence.
"This is the first downturn in the 40 years since we've been in business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors," he said. "Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs, and nervous buyers are canceling homes already under construction."
He identified Orlando, Northern California, Palm Springs, Las Vegas and Phoenix as areas where the company's cancellation rates have increased. While the cancellation rate is "significantly higher" than historical levels, Toll said he believed it was "the lowest in the industry," because in all but multifamily communities, the company calls for a substantial, non-refundable down payment and builds few houses on spec.
"Because much of the overhang of finished and near-finished product [throughout the industry] is being marketed using advertised price reductions and increased sales incentives," Toll continued, "many anxious consumers are delaying their purchases as they wonder about the direction of home prices." He said Toll is taking a reduction in volume rather than aggressive discounts, although he acknowledged that incentives in some markets have increased.
In light of the fiscal third-quarter financials, which are preliminary and unaudited, the company has trimmed its forecast of fourth-quarter deliveries to between 2,500 and 2,800 homes, down from the previous guidance of between 2,900 and 3,300. He expressed confidence that "once the over supply of homes is absorbed and buyers become confident that home prices have stabilized, the market will return to firm footing."
He also acknowledged that he could not predict when that would occur. Pressed by Wall Street analysts, he said, "I'd guess we are pretty much at the bottom, but it's a guess. I don't know. The market isn't dead."
By midday following the conference call on Aug. 9, TOL stock was trading at $24.78 a share, down nearly 6.8% for the day. This is less than half the 52-week high of $51.72 a share, which occurred on Aug. 25, 2005, but up from the 52-week low of $22.22 a share, struck this July 18.
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