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Toll Brothers Buys Land as Quarterly Home Orders Rise

Toll Brothers increased its land holdings
A new Toll Brothers Inc. home is constructed in Raleigh, North Carolina. Photographer: Jim R. Bounds/Bloomberg

Toll Brothers Inc., the largest U.S. luxury homebuilder, increased its land holdings for the first time in four years in anticipation of a recovery in the market.

The number of houses under contract but not yet sold rose in the three months ended April 30 for the first time on a year-over-year basis since 2006, the Horsham, Pennsylvania-based company said in an earnings statement today.

“People are not as scared any longer that a house is a lousy investment,” Chairman Robert Toll said on a conference call today. “The focus is starting to change. When a change is in the majority of the markets, which it clearly hasn’t done yet, then you’ll see a new paradigm for the business.”

After almost five years of falling sales and prices, homebuilders are looking to see if the nation’s fledgling economic recovery can sustain the real estate market as government subsidies end. Sales of new homes in the U.S. jumped 15 percent in April to an annual pace of 504,000, the highest level in two years, the Commerce Department said today.

Toll gained 17 cents, or 0.8 percent, to $20.78 at 4:08 p.m. in New York Stock exchange composite trading. The shares have climbed 10 percent this year, compared with a 7.7 percent rise in the Standard & Poor’s Supercomposite Homebuilding Index.

Narrower Loss

The company’s second-quarter loss narrowed to $40.4 million, or 24 cents a share, from $83.2 million, or 52 cents, a year earlier. The average estimate was for a loss of 20 cents, according to a Bloomberg survey of eight analysts.

Revenue fell 22 percent from a year earlier to $311.3 million, less than the average estimate of $324.8 million. Pretax writedowns declined to $42.3 million from $119.6 million.

Toll spent $143 million buying land in the fiscal second quarter and ended the period with about 33,600 lots either owned or under option, a 6 percent increase by lots on the previous three months. The company had about 91,000 lots four years ago before the slump started.

The land spending may delay profitability, Stephen East, an analyst with Ticonderoga Securities LLC in New York, wrote in a note to investors.

Toll ”has purchased roughly two years worth of land to go with their bloated 10 years already controlled,” he wrote.

U.S. Recovery

D.R. Horton Inc., Lennar Corp. and Meritage Homes Corp. -- all Toll Brothers competitors -- have said they expect to be profitable this year.

“We’re not projecting going forward,” Toll Chief Financial Officer Joel Rassman said during the conference call.

Housing starts climbed to an annual rate of 672,000 in April, the fastest pace since October 2008, the Commerce Department said May 18.

U.S. home sales rose in March and April as shoppers rushed to sign contracts to meet an April 30 deadline for federal tax credits of up to $8,000. The houses must be occupied by June 30.

Toll Brothers may benefit less from the credit than other builders because the company takes an of average nine months to obtain permits and build a home after contracts are signed, David Goldberg, an analyst with UBS AG in New York, wrote in a note to investors today.

Toll may gain market share as smaller private builders of luxury homes have gone out of business, Goldberg said.

“Toll’s positioning at the higher end is driving share gains,” Goldberg wrote. “In turn, profitability improvements should outpace peers driven by better operating leverage and its greater control over pricing.”


Robert Toll, the company’s 69-year-old co-founder, will step down as chief executive officer on June 16 while continuing as chairman, the company said May 17. Douglas C. Yearley Jr., 50, will become CEO. He’s currently executive vice president.

The company, which sells homes in 20 states, plans to focus on growth in its current markets in the next five years, Yearley said during the conference call. It also is exploring selling homes with a joint venture partner in China and becoming a loan servicer, he said.

“We’ve entertained chasing some large portfolios of loans where maybe the outcome is not to see Toll Brothers lots but just to service those loans and make money,” he said.

Sales improved in southern California; Raleigh, North Carolina; and the urban metro New York market, Yearley said. Most of the suburban markets in the corridor from Washington to Boston were doing better, he said.

The second-quarter backlog, or homes under contract but not yet sold, rose 5 percent by value to $993.5 million and the number of units increased 10 percent to 1,738 homes, the company said.

Selling homes that cost more than $1 million remains difficult in most markets, with the exception of New York City, Toll said during an interview on CNBC.

“There’s no doubt over $1 million is slower coming back,” he said.

The company expects to deliver 2,200 to 2,750 homes in fiscal 2010, Rassman said in the statement. The average selling price in the third and fourth quarters will be $540,000 to $560,000 per home.

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