Thursday, August 23, 2007

The Boogie Continues with Bob Toll


Yesterday, Toll Brothers (NYSE:TOL) reported Q3 earnings results confirming an additional $147.3 million of pretax write-downs that helped to depress their net income by an astounding 84.82% as compared to Q3 2006.

Also, it's important to note that the company has now announced a total of $363.9 million in pretax write-downs thus far in 2007 in a year that, in December of 2006, they had anticipated at most $60 million.

During the conference call, CEO Bob Toll appeared to offer very little optimistic sentiment pointing out that “horrible” buyer traffic is and setting new lows, handily surpassing the lows of prior downturns.

Additionally, Doug “The Bear” Kass of Seebreze Partners Management, Inc. makes an interesting appearance toward the end of the call.

The following are excerpts from yesterday’s conference call:

When asked about his “F- -“ rating for the Las Vegas housing market Toll replied:

“You might add another minus to that… What does it mean? It means you’ve flunked and what are we doing about it? We’re out there with the rest of the builders in Vegas praying. There’s not much you can do… You can’t advertise your way out of that situation. You just have to wait for a market to come back.”

Then referring to the results of the entire operations in Las Vegas, Toll reported:

“This week we took no deposits… we did take one agreement. Last week we took five deposits… the week before that we took none. The week before that we took six… The preceding four weeks before that we took twelve. These are deposits… I would guess about two thirds go to agreement. Then some of the agreements don’t stick. In the last eight weeks we’ve taken seven agreements. So, that’s what we consider real bad.”

When asked about whether buyer traffic was down in August as the mortgage-credit meltdown issue heated up Toll responded:

“Very simply, traffic is horrible. This past week was the lowest traffic for this particular week ever in our history. And that condition has existed, pretty much, for the last nine weeks. And then prior to that, there was a little hiatus where we did a little better that the worst in our history… then going back a little further, once again we are doing the worst in our history. So, our history includes ’87, ’88, ’89, ’90 so traffic is pretty stinky out there. ”

The final “piece de resistance” of the conference call was delivered by none other than Doug “The Bear” Kass of Seabreeze Partners Management, Inc.

Kass asked “This is a much broader question than has been asked on the conference call…(Toll: It’s great to be a short by the way… Kass: chuckles…) If the administration came to you to resolve the housing crisis, what remedies would you recommend Bob to bring supply and demand back into balance over a reasonable period of time?”

“Well, I think the most important thing is to immediately address the mortgage concerns. Giuliani was asked in an interview with Kudlow recently… would he bring in any regulation and he said that it was up to the market to straighten things out and it will. In my opinion, that’s probably what the guys said in ’29 that were running the Fed.

I was castigated recently for suggesting a few weeks ago that some government regulation would not be a bad thing. The average reaction was, the minute you let the government in, you’re begging for disaster. I can generally agree with that, look at whats happened with wetland regulations for instance… you need a team of lawyers to fill a puddle in your back yard.

On the other hand, where would we be without anti-trust legislation? We would probably have one oil company known as the United States of American Standard…. (chuckles about the slipup… American standard is a toilet manufacturer Toll was referring to Standard Oil)

I think a little regulation wouldn’t be a bad thing. I wouldn’t rule out 100% or 90% LTV but if you’re seeking that kind of thing, you have to pledge additional assets or at least prove additional assets so that so if the home price goes down and you want to walk, the mortgage lender has got a note that he can apply not only to the home but that he can apply to other assets that are obviously sufficient to take care of the loss.

What happened was, for a hundred years we had S&L’s as the backbone of the mortgage system and then they went bad and we tossed the baby out with the bathwater. And went to another system, that I don’t suggest that we try to break away from which is the securitization.

The problem is, everybody is working on commission today, nobody is a portfolio lender.

The guy that wants to get you the mortgage is a commission fella, and he’s handing it over to guys that are working commission to package it. The brokers are working on commission in order to sell the goods. And the guys buying the goods are not really paying attention to what they’re buying. And I think it’s reasonable to have standards imposed that you can’t lend above these lines and that should, to some extent, protect us from ourselves.

But I’m getting so many ‘cut the throats’ around here… guys are signaling to me to please stop this… and remember this is a Toll Brothers call and not a Bob Toll call so I’m off, I’m going back to Toll Brothers.”

Listen to the complete Q3 conference call here.

Here are some of the interesting data points from the Q3 release:

Third Quarter Results:

  • Net income was $26.5 million down 84.82% compared to Q3 2006.
  • Pre-tax land write-downs totaled $147.3 million up 516.31% compared to Q3 2006.
  • Earnings per share declined 85.04% as compared to Q3 2006.
  • Total revenues were $1.21 billion down 20.91% compared to Q3 2006.
  • Net signed contracts were $727 million down 30.76% compared to Q3 2006.
  • Quarter end backlog was $3.67 billion down 34.34% compared to Q3 2006.
  • Signed contracts (after cancellations) was 1110 down 23% compared to Q3 2006.
Current 2007 Projections:

CANCELLED!... Your now on your own.