My old friends at Toll Brothers don’t realize it yet, but their business model is dead man walking.
They reported another loss today. I worked there for two years at the height of the housing boom. They hired me to help them better forecast sales. I developed a model that I thought was a good predictive model for the next 1 to 2 years. They were selling 8,500 houses per year at an average price of $700,000 at the peak in 2006. My model was showing a decline to 5,500 houses, while Bobby Toll was telling the troops that sales would be 8,000 houses. Quite a discrepancy. I decided to exit stage left before the shit hit the fan.
Fast forward 5 years and their annual sales are now 2,300 houses per year at an average price of $570,000. Ouch!!! How about a revenue decline from $6 billion to $1.3 billion? That’s the good news. The McMansion market is dying and will continue to die off. Boomers are aging rapidly and are much poorer than they thought they would be. There will be no more moving up to McMansions. Boomers are trying to unload these anchors around their necks. No buyers. The future McMansion neighborhoods will look like this:
Toll Brothers signed a total of 879 contracts in the quarter. This is the quarter when they do 50% of their business. They are now pacing at annual sales of 1,760 homes or $1 billion in sales per year. That is ONLY down 83% from their peak. Sounds like a viable long term business.
They used to treat Bob Toll like a genius. Well, this genius bought $2 billion of land at the exact top of the market. They still have 35,900 housing lots on their books. That means at current sales levels, they will use up their land in 20 years. I’d be willing to bet bankruptcy will come first.
I still have friends at Toll Brothers. I would strongly recommend that they polish up those resumes. The bell is ringing. McMansions are dead. Peak oil, Peak Boomers, and Peak debt will combine to destroy this antiquated business model that was built on delusion.
Toll Reports Second-Quarter Net Loss After ‘Disappointing’ Selling Season
By John Gittelsohn – May 25, 2011 6:54 AM ET
March and April are usually busy months for home orders as families seek to arrange moves before the school year starts in September. Photographer: Jim R. Bounds/Bloomberg
Toll Brothers Inc. (TOL), the largest U.S. luxury-home builder, reported a second-quarter loss that was bigger than analysts predicted as sales remained low during one of the industry’s busiest periods of the year.
The net loss was $20.8 million, or 12 cents a share, for the second fiscal quarter ended April 30, the Horsham, Pennsylvania-based company said in a statement today. Analysts expected a loss of 4 cents a share, the average of 16 estimates in a Bloomberg survey. Toll had a loss of $40.4 million, or 24 cents a share, a year earlier.
March and April are usually busy months for home orders as families seek to arrange moves before the school year starts in September. Bad weather on top of a sluggish economy reduced demand this year, said Jack Micenko, an analyst with Susquehanna International Group LLP in New York.
“Wet weather in the Northeast has likely been an issue for builders over the past two months,” Micenko, who has a “neutral” rating on Toll Brothers and projected a loss of 3 cents a share, wrote in a May 23 note. “It has more than likely stymied traffic and sales at communities and slowed the pace of construction of existing orders.”
U.S. homebuilders have struggled as foreclosures, which sell at a discount, flood the market and make previously owned homes more affordable than new properties. New homes sold at an annual pace of 323,000 in April, up from 278,000 in February, a low in records dating to 1963, the Commerce Department reported yesterday. The average pace for the past 10 years was 823,000.
‘That’s Disappointing’
“The spring selling season has continued to be similar to last year,” Toll Brothers Chief Executive Officer Douglas Yearley Jr. said at a May 11 investor conference in New York. “To me, that’s disappointing.”
Contracts signed for Toll Brothers homes rose to 879 from 866 a year earlier. The average price for the new orders rose to $570,000 from $565,000 a year earlier. Revenue rose 8 percent to $319.7 million.
“As consumers better understand that prices are firming, we believe they will gain confidence, which will help release some of the pent-up demand that must be building in the market,” Executive Chairman Robert Toll said in the statement.
Toll forecast sales of 2,300 to 2,800 homes in fiscal 2012 at an average price of $540,000 to $560,000. Three months ago the company predicted a price range of $540,000 to $565,000.
Urban High-Rises
The builder reported a profit for the three previous quarters as it cut costs and reduced losses from impairments on land acquired before real estate prices plunged. Toll, which sells in 20 states, has diversified from suburban, single-family homes by building urban high-rises and investing in distressed real estate deals through its Gibraltar Capital and Asset Management division.
The results were published before the start of regular U.S. trading. Toll Brothers rose 7 cents to $20.27 yesterday in New York Stock Exchange composite trading. The shares were up 6.7 percent this year, the largest gain in the 12-member Standard & Poor’s Supercomposite Homebuilding Index.
