Cancellations Thump Toll Brothers

Luxury-home builder Toll Brothers ( TOL) said revenue fell 36% in its latest quarter, as cancellations of home contracts continue to plague the company.

Toll reported preliminary revenue of $1.17 billion for its fiscal fourth quarter, down from $1.81 billion a year earlier. New contracts for the quarter ended Oct. 31 fell 35% to 656 units, including the impact of cancellations.

"We continue to believe that excess supply created by cancellations, speculative buyers, and overly ambitious builders; customer concerns about selling their existing homes; and a general lack of confidence are the primary impediments to our market's recovery," Robert Toll, the company's chairman and CEO, said in a statement.

Like other homebuilders, Toll said the market got worse in October.

Many builders have pointed to stricter mortgage-lending standards in the wake of this summer's credit market meltdown as a reason for the weakening climate. While Toll's wealthy customers don't face as much of a lending issue, it could have an indirect impact on its results.

"An inability to obtain mortgages does not appear to be a major factor for our buyers, although it may affect our buyers' buyers," Toll said.

As orders remain weak and housing prices come under pressure, inventory impairment charges continue to mount in the homebuilding industry. Toll said it expects pretax writedowns of $250 million to $450 million in the quarter.

The average price on new home contracts fell 3% to $646,000. Toll blamed the drop on a shift to more condos being sold, which carry lower prices than single-family homes.

The company's cancellation rate rose to 39%. This compares to 37% a year ago, and 24% in the third quarter of this year. Toll said the cancellations were heavily concentrated in high-priced markets and product lines.

Bank of America analyst Daniel Oppenheim said the order decline was steeper than he expected. He projected a 21% drop.

"We continue to think Toll needs to lower prices aggressively near-term to boost sales in order to maintain a minimal backlog and work through its long land supply," Oppenheim wrote in a research note Thursday morning.

According to Oppenheim, Toll controlled 59,300 lots at the quarter's end, a 9-year supply based on trailing closings, and 13 years based on the closings he expects over the next four quarters.

"In a declining market, selling at what appears to be a low price today is better than selling at an even lower price tomorrow," Oppenheim said.

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