Conditions tough for Toll Brothers

LONDON (MarketWatch) -- Financial results reported Wednesday by Toll Brothers Inc. and WCI Communities showed business conditions remain tough for home builders, hurt by a housing market that has led both companies to mark down the value of land they own.

Toll Brothers (TOL) , the luxury-home builder, said third-quarter net earnings dropped to $26.5 million, or 16 cents a share, down 85% from $174.6 million, or $1.07 a share, earned in the third quarter of fiscal 2006.

Most of the profit decline came from writing down the value of land and communities it owns. In all, Toll Brothers took $88.5 million, or 54 cents a share, in writedowns.

Revenue for the three months ended July 31 fell to $1.21 billion from $1.53 billion a year ago, as net signed contracts dropped to $727 million from $1.05 billion. Contract cancellations increased as a percentage of current-quarter contracts, rising to 23.8% from the prior year's 18.9%.

"We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets," said Robert Toll, chairman and chief executive of the Horsham, Pa.-based company.

Meanwhile, WCI Communities (WCI) , the Bonita Springs, Fla.-based builder of multi-family houses, high rises and retirement homes, said it swung to a second-quarter loss of $33.2 million.

The company's per-share loss amounted to 79 cents, even after recording a gain of 27 cents a share from selling a recreation facility.

WCI earned $22.7 million in the year-ago quarter.

Total revenue dropped 54% to $241.8 million from $527.7 million, as homebuilding revenue fell 62% and the number of unit orders plunged 83%. WCI wrote off $17.5 million on lower anticipated selling prices and the utilization of significant discounts and incentives to sell finished inventory.

After dropping 35% this year, Toll's shares advanced in early trading, climbing $1.12, or 5.3%, to $22.21.

WCI Communities also edged higher, up 5 cents at $8 a share.

No respite

CEO Toll said he didn't see any respite on the immediate horizon.

"Tightening credit standards will likely shrink the pool of potential home buyers," he said in a statement. "Mortgage market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes.

"We believe that reducing new home production until the current oversupply is absorbed is a key step in bringing housing markets back into equilibrium," Toll said, adding that U.S. data on housing starts reported last week "implied that this is beginning to occur."

Toll didn't provide a forecast for the current quarter, leading Daniel Oppenheim, analyst at Banc of America Securities, to forecast another $200 million, or 72 cents a share, in impairments for the fourth quarter.

Nor were there encouraging words to be heard from WCI, on whose board three nominees backed by billionaire Carl Icahn are due to sit after a deal struck earlier this week.

"We believe the slowdown in new unit orders is attributable to a national softening in demand for new homes as well as an oversupply of homes available for sale, particularly in our Florida market," WCI said, adding it has "little or no visibility on when market conditions are likely to improve."

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