Toll Brothers Ekes Out Profit, Plans to Buy Distressed Properties

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Leading home builder Toll Brothers showed a small profit in the third quarter of 2010 for the first time since 2007, thanks to tax breaks and smaller writedowns. Toll Brothers' strong cash position will allow it to take advantage of distressed property sales and be ready for quick growth as the market stabilizes. The company's announcement may indicate that the housing market is skidding along a bottom, a significant milestone for homebuyers, particularly those looking for a new house.

Analysts were expecting Toll Brothers to report a loss in the third quarter, but instead it reported a profit of $27.3 million or 16 cents per share. A year earlier its loss was $472.3 million or $2.93 per share.

The primary reason for this huge difference is that Toll Brothers aggressively wrote down the value of its land holdings last year. In 2009, its writedowns totaled $115 million for the same quarter, but writedowns in the third quarter of 2010 were only $12.5 million. Its pretax income in the third quarter was $13.3 million versus $3.7 million in the third quarter of 2009.

"Due to our very low leverage and significant cash position, we have the flexibility to opportunistically pursue transactions that are arising from the current distress in the real estate industry," CEO Douglas C. Yearley Jr. said in a statement released with the earnings report. In fact Toll Brothers announced the formation of Gibraltar Capital and Asset Management Corp. so that it can scoop up distressed assets at bargain prices.
Toll Brothers believes there is pent-up demand for new homes, and it is getting ready to move as soon as employment improves. But the time is not yet ripe. "Although the unemployment rate among our buyer profile remains at half the national unemployment rate, recent economic and political news continues to dampen our customers' confidence," Yearley said.

But he does see bright skies ahead: "We believe the combination of potential buyers postponing their purchase 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."

Signs that Toll Brothers has reached the bottom and is starting to edge up the hill to recovery include:

  • Its third-quarter net signed contracts of 3.69 is higher than the third quarter in the three previous years, but still well below the company's historical third quarter average dating back to 1990.
  • Its contract cancellations were 6.2 percent in the third quarter versus 8.5 percent in 2009's third quarter. The 2010 cancellation percentage is consistent with historic norms and better than the 12 previous quarters.
  • Turnaround is already being seen in Toll Brothers high-rise projects in New York City being built under the Toll Brothers City Living Brand. The third quarter produced $38.5 million of contracts versus $17.7 million in the previous year.

So, yes, there are bright spots in the housing market, but Toll Brothers is not totally in the clear, Like everyone else in real estate, nothing will move until the employment situation improves. It might not yet be the exact right time to buy a new home, but if you're an investor, Toll Brothers is well-positioned to take advantage of the recovery when it comes.

Lita Epstein has written more than 25 books including"Reading Financial Reports for Dummies" and "Trading for Dummies."

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