Friday, February 23, 2007

Homebuilder Blues

Yesterday’s conference call with Toll Brothers (NYSE:TOL) CEO Robert Toll elaborated a bit more on the details published in their Q1 release.

Firstly, it appears that Bob Toll is already a bit disappointed about the market activity he has seen thus far this year, especially with respect to the “bump up” in sales normally seen during and just after Presidents day weekend.

Additionally, Toll seems to be following the lead of Ara Hovnanian who recently pointed out the builder cancellation rates should begin to come down as an inherent result of making fresh agreements.

According to Toll, 55% of Q1 2007 cancellations were made to contracts entered into from one year to over one and a half years ago when the market was peaking.

The assumption is that now that buyers know that the market has peaked, the agreements they enter into will be less likely to result in a cancellation.

It’s interesting though to hear Toll admit that many of the buyers they were selling to during the run-up were in fact actually “investors” but I don’t buy his asserting that they didn’t know this was so until closing.

Toll also backed away and strongly constrained his strangely contrived analogy (published in the Q1 release) of the supposed recent health of the New York City market as possibly being an indicator of the health of the nations housing market.

The entire conference call can be listened to here.

The following is a series of interesting questions and responses from yesterday’s conference call:

When asked by Steven Kim of Citigroup about the outlook for cancellation rates Toll responded:

"About the only indication that I can give you Steven is that we had a total of 55% of out 'can' rates [in Q1 2007] from agreements that are more than a year old... 173 that were from one year to one and a half years and 53 from agreements that were more than one and a half years old so that, presumably, as we catch up with production and have shaken out those agreements that were entered into during the absolute top of the cycle or near there too, the 'can' rates should go down... of course, read your prospectus carefully, you know, no representation is made here, but that’s just and observation that I think will not only to Toll but to most. I think basically what happened was we all were fooled by the great number of investors that we weren’t selling to that showed up when it came time to close and who walked instead of closing."

When asked by Dave Golberg from UBS about a shift in the tone of today's quarterly release as compared to the pre-conference release two weeks ago Toll responded:

"I would say we are a little more disappointed than we were two weeks ago because the top selling weeks of the year for the new home business are the weekend that runs into Presidents day week and then following weekend which we have coming and for presidents day weekend, we had good sales but we didn’t have anywhere near the bump up that we normally see... so that’s disappointing."

When asked about the analogy Bob Toll made in the Q1 release between the health of the New York City market and the health of the overall market Toll replied:

"What I implied in the monologue [and the Q1 release] is that here was a market that admittedly had not gone down to the extent that the average markets have.. other average markets have in the United States, but that did go soft to some extent in the second half of 2006 that now is roaring back... and by implication what I am saying is that you may find that traditional luxury markets come back faster than is expected though I don’t mean to imply at all that it will be as rapid as the New York market's recovery was from it's decline that was minimal. But I’m making a statement that pent-up demand is such that when confidence returns I think it will return possibly with a vengeance."