Toll Brothers' Revenue Declines
As Contracts Fall in Shaky Market

Luxury-home builder Toll Brothers Inc.'s home-building revenue fell 21% in its fiscal third quarter, as contract signings continue to drop.

For the quarter ended June 30, the Horsham, Pa., firm said home-building revenue decreased to about $1.21 billion from $1.53 billion a year earlier, as net signed contracts declined 31% to $727.1 million from $1.05 billion during the year-earlier quarter.

Toll Brothers said the fiscal third-quarter cancellation rate was 24%, compared with 19% in the fiscal second quarter. Third-quarter cancellations were 347, the lowest in a year. Backlog for the quarter fell to about $3.67 billion, down 34% from $5.59 billion in the year-ago period. And Toll Brothers signed 1,457 gross contracts in the quarter, a 17% decrease from 1,760 gross contracts signed a year ago.

"We believe significant pent-up demand is building, based on solid demographics, a decent economy and still-strong employment," Chairman and Chief Executive Robert I. Toll said in a written statement. "However, we caution that, with the uncertainties roiling the mortgage markets right now, the pace of home sales could slow further until the credit market settles down."

"In the near term, tightening credit standards for borrowers should reduce the pool of potential buyers: liquidity and affordability issues may impede some customers from closing, while others may find it more difficult to sell their existing homes," Mr. Toll said.

Toll Brothers estimates pretax writedowns related to operating communities, land and land options in the third quarter will be between $125 million and $175 million. "Given the current state of the market, we are not comfortable giving earnings guidance," the company said in the written statement. The company is slated to release its complete results for the fiscal third quarter on Aug. 22.

As problems in the subprime mortgage sector force lenders to tighten credits, housing analysts are fretting that banks will also clamp down on lending to some builders -- squeezing them of cash just when they might need it. Last week, Beazer Homes USA Inc. was beset by rumors that it might be filing for bankruptcy-law protection after banks cut the company's credit line in half. Beazer firmly denied the rumors.

The stricter lending standards will also likely weaken the housing market further by reducing demand for homes and nudging some people who can't refinance toward foreclosure. Higher foreclosures add to a glut of homes on the market in most of the country. Last week, the National Association of Realtors said inventories of unsold homes stood at about 4.2 million, along with more than 500,000 new homes on the market. That is enough to last about 8 1/2 months at the recent sales rate; a supply of five to six months generally is considered balanced.

Email your comments to rjeditor@dowjones.com.