Toll Brothers Warns
Of Risk Tied to Ventures

Home builder Toll Brothers Inc. warned that it could suffer "significant" losses if its joint-venture partners don't honor their obligations to certain development projects amid the housing downturn.

The company disclosed the warning in a filing with the Securities and Exchange Commission yesterday, but Toll officials wouldn't elaborate on which joint ventures might be in trouble, citing confidentiality reasons.

"We have had a number of partners who have had visible financial stress," said Toll's chief financial officer, Joel Rassman. "But that's all I can disclose."

During the housing boom, builders often entered into joint-venture deals to share the cost of buying expensive land. The ventures typically allowed the builders to keep such highly leveraged land off their balance sheets.

One of Toll's partners is Kimball Hill Homes, a privately held builder based in Illinois. Toll Brothers and Kimball Hill and several other large builders teamed up to develop a 2,000-acre community in Las Vegas named Inspirada that was expected to give rise to 13,500 homes, according to Inspirada's Web site.

Kimball Hill said in recent SEC filings that it had hired a restructuring officer and warned it was considering whether to restructure under Chapter 11 bankruptcy-court protection. A Kimball Hill spokesman declined to comment. Another partner in that development -- closely held Focus Property Group, a Las Vegas-based real-estate-investment and -development firm -- recently hired Blackstone Group to help it restructure its debt. A Focus spokeswoman declined to comment on its project with Toll. According to the Inspirada Web site, KB Home and Beazer Homes USA Inc. are also among the builders involved in the project. A Beazer spokeswoman says the project, of which Beazer owns a 2.6% stake, presents no significant risk to the company. KB Home couldn't be reached for comment.

Toll's disclosure comes as investors worry about the lack of disclosure of joint-venture deals and the liabilities they could pose to home builders. If partners fail, builders like Toll could be on the hook for additional equity contributions and loan obligations.

As home and land values fall, banks are starting to require more builders to contribute more equity to troubled real-estate developments, including joint ventures.

"We believe these JVs are under a lot of stress," says Buck Horne, an analyst at Raymond James & Associates. "That's why you are seeing these disclosures."

Toll has fewer joint ventures than many other builders. Under the worst-case scenario, in which all of its joint ventures failed, Toll would have to make a total of $352 million in additional equity contributions in addition to $140 million in guaranteed debt obligations. Toll, of Horsham, Pa., had a loss of $96 million, or 61 cents a share, for its fiscal first quarter ended Jan. 31, on total revenue of $843 million.

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