Aug. 22 (Bloomberg) -- Toll Brothers Inc., the largest U.S. luxury homebuilder, said third-quarter profit fell 85 percent as the deepening housing slump cut sales, increased cancellations and forced the company to write down property.

Net income in the three months ended July 31 declined to $26.5 million, or 16 cents a share, from $174.6 million, or $1.07, a year earlier, the Horsham, Pennsylvania-based company said in a statement today. Toll rose as much as 6.7 percent after the results exceeded analysts' estimates.

Chief Executive Officer Robert Toll said the company had a higher rate of cancellations than at any time in its 21-year history as a public company. Five of the largest U.S. homebuilders reported combined losses of $1.85 billion and took charges of $2.9 billion to write down land values and walk away from property options in their most recent quarters.

``It's pretty ugly out there right now,' said Dave Crossman, senior research analyst at Kirr Marbach & Co. in Columbus, Indiana, which manages about $571 million in assets and owned about 380,000 shares of Toll as of July 31. ``They're doing about as well as they can.''

Toll gained $1.06, or 5 percent, to $22.15 in New York Stock Exchange composite trading. The average earnings estimate of analysts surveyed by Bloomberg was 2 cents a share.

Robert Toll said visits to its developments have been ``horrible.''

``Traffic is pretty stinky out there,'' Robert Toll said in a conference call with analysts.

WCI's Loss

Another homebuilder, WCI Communities Inc., reported a second- quarter loss after writing down $36 million in property and posting a decline in condominium sales. WCI rose as much as 10 percent after the company said it may sell up to $300 million worth of land. On Aug 20, WCI agreed to nominate Carl Icahn, its biggest investor, and his allies to the board.

Toll said today the housing market hasn't stabilized.

``We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,'' Robert Toll said on the call.

Profit included a pretax writedown of $147.3 million for land, developments and options. Toll's cancellation jumped to 24 percent from 18 percent a year earlier as customers canceled orders on 347 homes. Revenue dropped 21 percent to $1.21 billion.

Backlog Falls

The company refused to provide fourth-quarter earnings guidance citing uncertainties surrounding sales, mortgages and possible future charges.

Toll's backlog of houses under contract and not yet sold at the end of the quarter was $3.7 billion, down 34 percent from a year earlier. The backlog consisted of 4,997 homes, down 38 percent from a year earlier.

Toll said the company is concerned about the U.S. credit crunch. The limited availability of ``jumbo'' mortgages of more than $417,000 and higher interest rates is cutting the pool of buyers for Toll homes, which sell for an average of more than $600,000.

``Our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles,'' the CEO said in today's statement.

Banks and mortgage providers, including JPMorgan Chase & Co., Bank of America Corp., IndyMac Bancorp Inc., Countrywide Financial Corp. and Wells Fargo & Co. ``continue to issue new commitments to our buyers,'' Donald Salmon, the president of Toll Brothers' mortgage company, said in the conference call.

Mortgage Market `Gridlock'

Banc of America Securities analyst Daniel Oppenheim cut Toll's shares to ``sell'' from ``neutral'' this week because of the credit crisis. The company may see cancellations increase and sales margins narrow as the tighter credit crunch restricts potential buyers' access to mortgages, Oppenheim said. The analyst cut his price target on Toll shares to $19 from $29.

While Toll is weathering the slump better than other homebuilders, it may not be able to avoid further writedowns, Kathleen Shanley, an analyst at Gimme Credit, said in a report today.

``If the housing market remains depressed, however, and the gridlock in the mortgage markets is prolonged, Toll may be exposed to more writedowns of its land holdings in future quarters,'' Shanley said.

A credit crunch that began when subprime borrowers started defaulting has also spread to prospective buyers with even the best credit. Companies including jumbo mortgage specialist Thornburg Mortgage Inc. have stopped lending after investors in the $2.2 trillion U.S. commercial-paper market refused to buy the short-term debt that it used to finance loans.

Four-Year Low

U.S. home sales dropped to a four-year low in the second quarter as prices declined in a third of U.S. cities, according to the National Association of Realtors.

Like many homebuilders, Toll is struggling to sell off properties. Toll is advertising ``quick delivery homes'' for sale in many areas of the country. In Apollo Beach, Florida, south of Tampa, it's trying to sell a 3,883 square foot, five-bedroom, five-bath home with a three-car garage for $619,975.

Such homes include those that customers planned to buy, only to cancel their orders. Robert Toll graded the Tampa market an ``F-minus'' during the company's conference call on Aug. 8.

To contact the reporters on this story: Brian Louis in Chicago at blouis1@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

Last Updated: August 22, 2007 16:44 EDT