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Toll Brothers Takes More Hits

The homebuilder backs away from its guidance and says a housing rebound isn't near.

Updated from 11:57 a.m. EDT

Toll Brothers

(TOL) - Get Toll Brothers, Inc. Report

predicted a second-quarter profit despite a big drop in revenue, but the homebuilder also backed away from its full-year guidance and signaled the housing market isn't yet near a rebound.

The Horsham, Pa., luxury builder said Wednesday that homebuilding revenue for the second quarter ended April 30 dropped 19% from a year ago to $1.17 billion, while new orders fell 24% to 1,647 units.

"Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets," said CEO Robert Toll in a statement.

Toll expects to take $90 million to $130 million in writedowns tied to land purchases made in previous years that are no longer profitable. The charges come as the drop in housing prices nationwide continues to hammer away at homebuilders' profit margins.

The company said that even at the upper end of its projected second-quarter writedowns, it anticipates a profit for our second quarter. Analysts polled by Thomson Financial project earnings of 40 cents a share.

Back in February, Toll lowered its full-year earnings forecast to a range of $1.46 to $1.85 a share from its previous guidance of $1.58 to $2.08 per share. The company said Wednesday that "given the current state of the market, we no longer expect to achieve the most recent quarterly and annual guidance."

Toll blamed some of the pressure on the ongoing troubles plaguing buyers with weaker credit histories. Even though fewer than 2% of Toll's buyers are these so-called subprime borrowers, the overall impact of stricter lending standards resulting from the subprime mortgage debacle is "negatively affecting affordability at lower price points," Toll said.

"This, in turn, can impact the entire 'housing food chain,' including some of our potential customers' ability to sell their existing homes," Toll added. "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."

Toll's second-quarter cancellation rate, which is calculated as a percentage of signed contracts, fell to 19% from 30% in the first quarter. However, 70% of the second-quarter cancellations occurred on contracts written at least nine months earlier.

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"This means that buyers are typically cancelling closer to closing, likely due to price or inability to sell their existing home, instead of financing issues that typically occur earlier in the process," Bank of America analyst Daniel Oppenheim wrote in a research note Wednesday morning.

On its conference call after its release, Toll said 17% of its cancellations in the quarter were due to buyers not being able to sell their existing homes.

Although much of the country's housing market is mired in a funk, Toll said bright spots include New York City and the neighboring Hoboken and Jersey City, N.J.; Dutchess County, N.Y. and southeastern Connecticut; metro Philadelphia; Raleigh, N.C.; Dallas and Austin; and portions of Northern California.

Areas that remain particularly weak are Florida, the Maryland shore, Las Vegas, Michigan, and Arizona, Toll said on the call.

Toll said there are probably some good land deals around the country, but there is a danger in buying land too soon. "Sometimes half price ends up being twice price," he said.

Southern California, however, remains a market where Toll would buy land if it found the right deal, he added.

Toll shares fell 31 cents, or 1.1% to $28.90 in afternoon trading. Other builders fell slightly on the news, with

Ryland

(RYL)

down 38 cents to $43.36 and

Pulte Homes

(PHM) - Get PulteGroup, Inc. Report

slipping 22 cents to $25.93.