Toll Brothers Reports Unexpected Profit on Tax Benefit, Lower Writedowns

Toll Brothers Inc., the largest U.S. luxury-home builder, reported an unexpected fourth-quarter profit after a tax benefit and decline in writedowns.

Net income in the three months through October was $50.5 million, or 30 cents a share, compared with a loss of $111.4 million, or 68 cents, a year earlier, the Horsham, Pennsylvania- based company said in a statement today. Analysts projected a loss of 7 cents a share, the average of 17 estimates in a Bloomberg survey.

The company had its second straight quarterly profit after three years of losses as it recorded a $59.9 million benefit from a tax-law change. U.S. homebuilders have struggled to maintain profitability on an operating basis as foreclosures and an unemployment rate near 10 percent stifle demand.

“The company remains, in our view, among the higher quality homebuilders,” Vincent Foley and Cedric Morris, credit analysts with Barclays Capital Inc. in New York, said in a note to investors today. “However, the quarter’s results did include a bevy of favorable and unfavorable items.”

Revenue fell to $402.6 million from $486.6 million a year earlier, Toll Brothers said. The loss from operations, which excludes the tax gain, narrowed to $37.9 million from $105 million a year earlier.

Contracts Decline

Toll Brothers signed contracts for 558 homes worth $315.3 million in the quarter, down 27 percent in units and dollars from a year earlier. Average sales per community fell 17 percent to 2.94 units. Since 1990, the company averaged sales of six units per community during the quarter.

Sales and orders were a “bit below” the estimates of Stephen East, a New York-based analyst with Ticonderoga Securities LLC, who had anticipated weak demand following the expiration of a tax credit that stimulated home buying earlier this year.

“We expected very little from this post-tax credit quarter and we got it,” East wrote.

Toll Brothers completed sales of 700 homes for an average net price of about $565,000, compared with 860 properties at about $563,000 a year earlier, the company said.

It expects to sell between 2,100 and 2,900 homes in fiscal 2011 at an average price of $540,000 to $565,000. The company sold 2,642 units in the recently ended year, down 11 percent from fiscal 2009.

Buying Land

Toll Brothers probably will add 20 to 30 selling communities next year after ending fiscal 2010 with 195, Chief Executive Officer Douglas Yearley Jr. said in the statement. The company added 3,000 lots during the year, the first annual increase since 2005, to bring its total to 34,900.

The company’s available land, access to capital and focus on luxury homes will benefit it “when the market recovers,” Chairman Robert Toll said. “The key word is ‘when.’ ”

Purchases of new U.S. homes unexpectedly dropped 8.1 percent to an annual rate of 283,000 in October, the Commerce Department reported Nov. 24. Sales reached a 275,000 pace in August, the lowest on records dating to 1963, after tax credits for buyers expired.

Even if sales rebound, Toll Brothers may be hurt by weaker demand for larger homes since the recession, Vicki Bryan, an analyst at Gimme Credit LLC in New York, wrote in a note to investors yesterday.

Smaller Homes

“A rebound in demand, when it does occur, will likely prove less profitable as most of the homes that sell could be much smaller versus the ‘McMansions’ that dominated the market before the crash,” she wrote.

Toll Brothers’ results included $27 million of inventory writedowns, compared with $85.5 million a year earlier. The tax credit, stemming from a U.S. law allowing builders to carry back losses from land sales for five years, helped Toll post its second straight quarterly profit, after 11 consecutive losses.

The company’s shares slipped 29 cents, or 1.6 percent, to $18.17 at 9:38 a.m. in New York Stock Exchange composite trading. Toll Brothers dropped 1.9 percent this year through yesterday, compared with an 8.6 percent decline for the 12- member Standard & Poor’s Supercomposite Homebuilding Index.

-- Editors: Kara Wetzel, Larry Edelman

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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