Toll Share Rise Leads Builders After Surprise Profit

Bloomberg

 

Toll Brothers Inc., the largest U.S. luxury homebuilder, rose the most in three months after unexpectedly reporting its first quarterly profit since 2007.

Net income for the third quarter through July was $27.3 million, or 16 cents a share, compared with a loss of $472.3 million, or $2.93, a year earlier, the Horsham, Pennsylvania- based company said in a statement today. Analysts predicted a loss of 16 cents a share, according to the average of 12 estimates in a Bloomberg survey.

“This was clearly a better quarter than we had anticipated,” Megan McGrath, an analyst with Barclays Plc, wrote in a note to investors today. She had estimated Toll Brothers would lose 10 cents a share for the quarter.

Toll Brothers climbed 5.8 percent to $17.13 at 4:02 p.m. in New York Stock Exchange composite trading, the biggest advance since May 10. The 12-member Standard & Poor’s Supercomposite Homebuilding Index rose 3.7 percent. D.R. Horton Inc. gained 4.6 percent to $10.43 after analyst Stephen East of Ticonderoga Securities LLC raised the stock to “buy” from “neutral.”

Homebuilder shares rose even as a Commerce Department report today showed that new home sales plunged 12 percent in July to an annual pace of 276,000, the lowest in records dating to 1963. Sales of existing homes slid 27 percent in July to the slowest annual pace in records dating to 1999, the National Association of Realtors said yesterday.

Ending Streak

Toll Brothers recorded a $26.5 million gain from a tax benefit. That helped the company end a streak of 11 straight quarterly losses as housing demand slumped. Homebuilder orders have plunged since a federal tax credit of as much as $8,000 for buyers expired April 30.

Pretax writedowns for the period shrank to $12.5 million from $115 million a year earlier, the company said. Gross margins, a measure of profitability, improved to 16.4 percent from 12.9 percent a year earlier before writedowns.

“The improving operating margin is imperative,” East, who is based in New York, wrote in an e-mail. “It’s not stellar, but it’s a step in the right direction.”

Toll spent $104 million buying land in the quarter and now has 35,800 plots owned or under option, compared with 31,700 six months earlier.

The company, which had $1.64 billion in cash and equivalents at the end of the quarter, isn’t currently looking to merge with or acquire another large builder, Chief Executive Officer Douglas Yearley Jr. said in a conference call today.

‘Fragmented’ Industry

“We’ve always maintained there’ll be consolidation in the industry,” Yearley said. “The industry is fragmented so you’d think it would happen over time.”

The builder raised its estimate for the number of homes it will deliver by the end of the fiscal year on Oct. 31 to at least 2,500 units from a minimum estimate of 2,200 homes made three months ago.

The average selling price in the fourth quarter will probably be $560,000 to $570,000, Chief Financial Officer Joel Rassman said in the statement. In May, Rassman estimated average selling prices in the fiscal second half would be $540,000 to $560,000.

Buyers signed contracts for 701 Toll Brothers homes with a total value of $400.1 million in the quarter. A year earlier it sold 837 homes valued at $447.7 million. Revenue fell 1.6 percent to $454 million.

Toll Brothers Forms Distressed Real Estate Business

Bloomberg

 

Toll Brothers Inc., the largest U.S. luxury-home builder, formed a unit to invest in distressed real estate as demand for new houses slumps.

Toll created Gibraltar Capital & Asset Management LLC to “pursue a broad range of real estate acquisition and investment opportunities,” the Horsham, Pennsylvania-based company said in a statement today. Those may include buying loan and property portfolios, developing sites for other builders and assisting in the workout of troubled real estate, the company said.

Toll, led by new Chief Executive Officer Douglas Yearley Jr., joins Lennar Corp. in seeking to make money from distressed real estate and move beyond its traditional homebuilding business. Sales of new U.S. homes slid 33 percent in May to a record low annual rate after the end of a federal tax credit, according to a Commerce Department report last month.

“This announcement is consistent with our thesis that Toll needs to gain exposure to other revenue streams within the sector as the housing industry remains weak for potentially another two to three years,” Jack Micenko, an analyst with Susquehanna Financial Group in New York, said in a note to investors today. “We view the move as incrementally positive.”

Micenko has a “neutral” rating on Toll shares.

Falling Confidence

Builders in the U.S. turned more pessimistic in July. An index of homebuilder confidence fell more than economists forecast to the lowest level since April 2009, the National Association of Home Builders said today from Washington.

Toll fell 1.7 percent to $16.15 at 11:42 a.m. in New York Stock Exchange composite trading after the NAHB report. Goldman Sachs Group Inc. cut U.S. homebuilders to “neutral” from “attractive” last week on prospects for sluggish sales.

Toll last year began increasing its land position for the first time since 2006, including purchases of distressed lots. The company spent $143 million in the fiscal second quarter on buying or optioning land.

“I’d say half of our deals are distressed,” Yearley said at a June 24 conference sponsored by Deutsche Bank AG. He took over as CEO last month and replaced co-founder Robert Toll, who remains chairman.

The Financial Times reported last week that Toll partnered with Oaktree Capital Management to buy a portfolio of distressed loans with a face value of $1.7 billion from the Federal Deposit Insurance Corp. Kira McCarron, a Toll spokeswoman, declined to comment on the report, as did John Frank, a spokesman for Los Angeles-based Oaktree.

In February, Miami-based Lennar bought part of a $3.05 billion loan portfolio acquired by the FDIC from failed banks.

Toll also faces competition from buyout firms in distressed investing. Private-equity real estate funds have a record $104 billion of equity available for U.S. deals, London-based research firm Preqin Ltd. reported in June.