Cancellations Hurt Luxury Home Builder As Profit Sinks

Toll Brothers, the nation's largest luxury home builder, yesterday reported an 85 percent drop in profit for the third quarter as it continued to experience hundreds of housing cancellations.

Robert I. Toll, chairman and chief executive, said in delivering the news that the latest housing downturn had created a "much higher rate of cancellations than any time in our 21-year history as a public company. While our cancellation rates are at the very low end of the range compared to other major public builders, they are still, for us, quite elevated."

The financial report was the latest in a stream of bad news in a housing market plagued by cancellations, anemic demand, hefty write-downs and lending problems.

The news came after the nation's top five home builders, which does not include Toll Brothers, reported combined losses of more than $1.7 billion.

"This has been a period of profuse bleeding by the home builders, and I think it is going to continue to get worse because of what's happening the mortgage market," said Greg Gieber, an analyst at A.G Edwards & Sons. "It knocks out or eliminates a significant pool of home buyers at a time when the industry faces a huge inventory glut."

Toll Brothers said its earnings for three months ended in July plunged to $26.5 million, or 16 cents a share, compared with $174.6 million ($1.07) during the comparable period last year.

The Horsham, Pa., company, which operates in 22 states, was also forced to write down property at a pretax cost of $147.3 million and reported the cancellation of 347 units, compared with 384 the previous quarter and 436 the quarter before.

"We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets," Toll said. "So far, nearly two years into the current housing slowdown, we have continued to remain profitable."

In a conference call with financial analysts, Toll said the company would continue its policy of building to order and collecting nonrefundable down payments.

He said large chunks of its business in California, Florida and Nevada were not doing well, but certain markets were, such as northern New Jersey's urban waterfront.

Toll said most luxury home customers have had access to loans, particularly those of more than $417,000, known as jumbo loans. "With few exceptions, the investors who provide our customers with mortgages continue to issue new commitments. . . . Nevertheless, tightening credit standards will likely shrink the pool of potential home buyers.

"We believe that reducing new home production until the current oversupply is absorbed is a key step to bringing housing markets back into equilibrium."

Frederick N. Cooper, a Toll spokesman, said that the Washington market was soft, but that the company had confidence it would turn around based on the demographics in the region.

Mike Larson, an analyst with Weiss Research in Jupiter, Fla., said he did not foresee any turnaround in the housing market until at least the latter part of next year and suggested a protracted downturn could force some big builders out of business.

"It's an extremely tough market," he said.