Luxury homebuilder Toll Brothers, based in Horsham, PA, tried mightily to make lemonade from lemons during their conference call Tuesday– but ended up with Kool-aid.instead. First the lemons:
The quarter’s numbers were decidedly dreary for Toll compared with a year ago: net income down more than 40%, revenue off 10%, asset writedowns up to $115 million from just $1.4 million, mostly for its real estate holdings. Profits fell 44%, to $173.8 million, or $1.07 per share, from $310.3 million, or $1.84 per share in 2005. The latest period’s results included the pretax property writedowns. Toll, the nation’s biggest builder in the luxury-home category, has been taking losses on properties, and its customers have grown nervous and far more likely to abandon new contracts on houses as prices retreat. Toll signed only $706 million of contracts during the quarter, compared with a record $1.59 billion in the same period of 2005.
Bob Toll, CEO, was tossing in the sugar and mixing, but it wasn’t very convincing. [Thank you to Seeking Alpha, for the transcript of the TOL conference call.}
We may be seeing a floor in some markets where deposits and traffic although erratic from week-to-week, seem to be dancing on the bottom or slightly above that. For us the northern Virginia, Washington DC market was the first to slowdown. It now seems to have stabilized, although at levels much lower than those we have enjoyed over the past few years. The Maryland DC market also seems to have stabilized, though at higher levels than northern Virginia as that market never went down as much as northern Virginia.
It just so happens that the Northern Virginia Association of Realtors has some very nice graphs of this "stabilization.": Check out any of these.
Those of us who can actually read graphs are having a hard time detecting this "stabilization." When questioned as to why he believed things were stabilizing, Toll responded:
Sure, this past weekend, for instance, we had quite a few communities sell to — take non- reservation — non-binding deposits. These are the deposits before we go into the real deposits within agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that the market is responding better than it had in the past. And we saw this kind of pickup over the past month approximately. So, what appeared to us that whereas we had been, — as I said in the monologue dancing along the bottom for couple of months, but recently last month it appears that we are now off the bottom a level above it and that heartens us.
I thought John Maycall said it best in a comment on Yahoo Finance:
I know… four families make REFUNDABLE deposits two weeks ago and it turns into a sound byte heard 100 times Wednesday that implies the housing market hit bottom. Do we even know if they were having a promotion? Incentives?The crazy part is that because Bob was so negative last report, it gives his call of a bottom more legitimacy (to some). It was at best a reckless statement.
When asked about the "big jump" in cancellation rates, Toll had an interesting theory:
About 50% and 50% even worse. Yeah, we precipitated it by shaking the tree and saying all right, now common guys, come clear here, are you going to come to table or not? If not, let’s get it over with it at this point in time. So, we gave charge to our management to proactively go do this and ask them to stop horsing around with would-be buyers who were indicating that they were probably not going to come to the closing table but they didn’t want to say they were out. Why should they? Their deposit is up at stake; the longer they can keep an option cooking, the more contraction we put into the home perhaps the better deal they can expect on a reconsideration; when we get to complete the home. And so we proactively said to management; go out, talk to these people and say, hey look, if you are not intending to come to the table, let’s call it quits now and understand it. And so, I think that had impact and that’s why you had a jump in the number.
It was not clear from his comments what kind of "tree shaking" leverage his management was able to use to convince buyers to walk away early, or if, in fact, many buyers were pursuaded.
The Best Line From an Analyst Award goes to Ivy Zelman of Credit Suisse who said:
Here you are Mr., it seems much more bullish talking about big pent-up demand and clearly you were surprised on the spiral downward and for the first time in 15 years your earnings are going to be down versus ’06 and I think that you seem like a very I guess broken man last time you were on the call and here you are in Newland and I’m wondering which Kool-aid you are drinking because I want some.
The best line from Bob Toll?
Well, I referred to somebody else’s belief, but let us say that I believed, which I am unwilling to make a statement on; let us assume your proposition that I believe, which I don’t necessarily, but let us assume that I do; your question of why wouldn’t I buy stock; and the answer is I believe I can make more money with my powder cash on buying land and expanding the business than I believe I could make by buying my stock. Buying a stock is kind of a one time thing, I think.
Zelman was right about that Kool-aid– here’s hoping Bob Toll had a designated driver for the ride home.
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Toll Brothers was without a doubt the most rude of all companies during the boom. They never had time for anybody, now they have news conferences and have all the time in the world to answer questions, what comes around goes around?
chuck7 -
I think it’s the other way around, but not sure. Fannie kept me up way too late last night.
Chuck7-
It’s too bad Toll didn’t take a little more time to give sensible answers- he had a bad case blah, blah, blah throughout the conference call. He was especially inarticulate about rating the different markets. It was somewhat reminiscent of Lereah’s “But sales are still strong in Alaska!” comment to show the housing market is still humming along.
We got more information from Mish than from Toll:
Ramsey Su totaled them all up, came up with 612, and noted “That seems to be a lot for a builder who says they do not build specs.” Here are the totals by state.
AZ 42, CA 42, CO 9, CT 5, DE 7, FL 114, IL 18, MA 9, MD 24, MI 32
MN 3, NC 29, NJ 38, NV 63, NY 13, PA 37, RI 2, SC 12, TX 35, VA 78
612
Ignoring the current cancellation rate, ignoring the spec homes, and assuming the optimistic projection of 7,300 home sales comes in, Toll is still sitting on a 10 year’s supply of land with 74,000 lots. That makes his comment to Ivy about buying more land seem more than a bit disingenuous. All things considered, the odds of Toll “dancing on the bottom” seem rather remote.
http://www.globaleconomicanalysis.blogspot.com/
Toll Brothers- When Life Gives You Lemons, Make Kool-aid
Best. Headline. Ever.
Made me LOL.
I am still having trouble with a vision of “dancing on the bottom”! Seems like that would hurt. If they are looking for land, I think Fountain Hills has an auction coming up soon, and prices have been reduced.
Most of what I say is anecdotal, that being said; I’ve heard a lot of grumblings from a few of my custom home builder friends here in Tucson. They are a lot more realistic about the current trends; “It’s going to get a lot worse before it gets better.”
Many have begun laying people off, and they absolutely cringe doing it around the holidays. A good friend of mine runs a stucco company, and he had to lay off 60% of his crews. In 12 years of business he has never laid anyone off before the holidays.
Toll will soon hear a very loud *pop* and that will be the sound of his head coming out of his ***. Then, and only then, will he be able to absorb the harsh reality of the western housing market. Down, Down, Down for the foreseeable future.