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| TOL > SEC Filings for TOL > Form 10-Q on 7-Jun-2012 | All Recent SEC Filings |
7-Jun-2012
Quarterly Report
This discussion and analysis is based on, should be read with, and is qualified
in its entirety by, the accompanying unaudited condensed consolidated financial
statements and related notes, as well as our consolidated financial statements
and the related Management's Discussion and Analysis of Financial Condition and
Results of Operations as contained in our Annual Report on Form 10-K for the
fiscal year ended October 31, 2011. It also should be read in conjunction with
the disclosure under "Statement on Forward-Looking Information" in this report.
Unless otherwise stated, net contracts signed represents a number or value equal
to the gross number or value of contracts signed during the relevant period,
less the number or value of contracts canceled during the relevant period, which
includes contracts that were signed during the relevant period and in prior
periods.
OVERVIEW
Financial Highlights
In the six-month period ended April 30, 2012, we recognized $695.6 million of
revenues and net income of $14.1 million, as compared to $653.8 million of
revenues and a net loss of $17.4 million in the six-month period ended April 30,
2011. Fiscal 2012 six-month income before income taxes included $10.1 million of
inventory impairments and write-offs and a recovery of $1.6 million of
previously accrued charges related to our investments in unconsolidated
entities. Fiscal 2011 six-month loss before income taxes included inventory
impairments and write-offs of $18.0 million and $39.6 million of impairment
charges related to our investments in unconsolidated entities. During the fiscal
2012 six-month period, we recognized an income tax benefit of $4.8 million, as
compared to an income tax benefit of $31.2 million in the fiscal 2011 period.
In the three-month period ended April 30, 2012, we recognized $373.7 million of
revenues and net income of $16.9 million, as compared to $319.7 million of
revenues and a net loss of $20.8 million in the three-month period ended 2011.
Fiscal 2012 second quarter income before income taxes included $2.0 million of
inventory impairments and a recovery of $1.6 million of previously accrued
charges related to our investments in unconsolidated entities. Fiscal 2011
second quarter loss before income taxes included $12.9 million of inventory
impairments and $19.6 million of impairment charges related to our investments
in unconsolidated entities. During the fiscal 2012 second quarter, we recognized
an income tax benefit of $1.2 million, as compared to an income tax benefit of
$10.7 million in the fiscal 2011 second quarter.
Our Challenging Business Environment and Current Outlook
The downturn in the U.S. housing market, which began in the fourth quarter of
our fiscal 2005, was the longest and most severe since the Great Depression. The
value of our net contracts signed in fiscal 2011 was $1.60 billion, a decline of
78% from the $7.15 billion of net contracts signed in fiscal 2005. The downturn,
which we believe started with a decline in consumer confidence, an overall
softening of demand for new homes and an oversupply of homes available for sale,
has been exacerbated by, among other things, a decline in the overall economy;
increased unemployment, fear of job loss; a decline in home prices and the
resulting reduction in home equity; the large number of homes that are vacant
and homes that are or will be available due to foreclosures; the inability of
some of our home buyers or some prospective buyers of their homes to sell their
current home; and the direct and indirect impact of the turmoil in the mortgage
loan market. In the early part of 2010, we saw many of our markets reach bottom,
although demand for our product has been choppy over the following two years.
According to the U.S. Census Bureau, during the period 1970 through 2007, total housing starts in the United States averaged approximately 1.26 million per year, while in the period 2008 through 2011, total housing starts averaged approximately 0.66 million per year. In addition, based on the trend of household formations in relation to population growth during the period 2000 through 2007, the number of households formations that would have been expected to be formed in the four year period of 2008 through 2011 was approximately 2.3 million less than would have been expected. Recently, it appears that the housing market has moved into a new and stronger phase of recovery as we are experiencing broad-based improvement across most of our regions. The spring selling season has been the most robust and sustained since the downturn began. We believe our brand name, our well-located communities and our demonstrated reliability during the downturn are enabling us to attract more buyers. We believe our target customers generally have remained employed during this downturn. We believe many deferred their home buying decisions, however, because of concerns over the direction of the economy and media headlines suggesting that home prices continue to decline. We continue to believe that, once the economy and consumer confidence improves, pent-up demand will be released.
We continue to believe that the key to a full recovery in our business depends
on these factors as well as a sustained stabilization of financial markets and
home prices.
We also believe that the medium and long-term futures for us and the
homebuilding industry are bright. A 2011 Harvard University study projects that
under both low- and high-growth scenarios, housing demand in the 2010-2020
period should exceed that of the previous three decades. In many markets, the
pipeline of approved and improved home sites has dwindled as builders and
developers have lacked both the capital and the economic benefit for bringing
sites through approvals. Therefore, we believe when demand picks up, builders
and developers with approved land in well-located markets will be poised to
benefit. We believe that this will be particularly true for us because our land
portfolio is heavily weighted in the metro-Washington, DC to metro-Boston
corridor where land is scarce, approvals are more difficult to obtain and
overbuilding has been relatively less prevalent than in the Southeast and
Western regions.
We continue to seek a balance between our short-term goal of selling homes in a
tough market and our long-term goal of maximizing the value of our communities.
We continue to believe that many of our communities are in desirable locations
that are difficult to replace and in markets where approvals have been
increasingly difficult to achieve. We believe that many of these communities
have substantial embedded value that may be realized in the future and that this
value should not necessarily be compromised in a soft market.
Competitive Landscape
Based on our experience during prior downturns in the housing industry, we
believe that attractive land acquisition opportunities arise in difficult times
for those builders that have the financial strength to take advantage of them.
In the current challenging environment, we believe our strong balance sheet,
liquidity, access to capital, broad geographic presence, diversified product
line, experienced personnel and national brand name all position us well for
such opportunities now and in the future.
We continue to see reduced competition from the small and mid-sized private
builders that had been our primary competitors in the luxury market. We believe
that many of these builders are no longer in business and that access to capital
by the surviving private builders is already severely constrained. We envision
that there will be fewer and more selective lenders serving our industry when
the market rebounds and that those lenders likely will gravitate to the
homebuilding companies that offer them the greatest security, the strongest
balance sheets and the broadest array of potential business opportunities. While
some builders may re-emerge with new capital, the scarcity of attractive land is
a further impediment to their re-emergence. We believe that this reduced
competition, combined with attractive long-term demographics, will reward those
well-capitalized builders that can persevere through the current challenging
environment.
As market conditions improve over time, we believe that geographic and product
diversification, access to lower-cost capital and strong demographics will
benefit those builders, like us, who can control land and persevere through the
increasingly difficult regulatory approval process. We believe that these
factors favor the large publicly traded homebuilding companies with the capital
and expertise to control home sites and gain market share. We also believe that
over the past five years, many builders and land developers reduced the number
of home sites that were taken through the approval process. The process
continues to be difficult and lengthy, and the political pressure from no-growth
proponents continues to increase, but we believe our expertise in taking land
through the approval process and our already-approved land positions will allow
us to grow in the years to come as market conditions improve.
Land Acquisition and Development
Because of the length of time that it takes to obtain the necessary approvals on
a property, complete the land improvements on it, and deliver a home after a
home buyer signs an agreement of sale, we are subject to many risks. In certain
cases, we attempt to reduce some of these risks by utilizing one or more of the
following methods: controlling land for future development through options (also
referred to herein as "land purchase contracts" or "option and purchase
agreements"), thus allowing the necessary governmental approvals to be obtained
before acquiring title to the land; generally commencing construction of a
detached home only after executing an agreement of sale and receiving a
substantial down payment from the buyer; and using subcontractors to perform
home construction and land development work on a fixed-price basis.
In response to the decline in market conditions over the past several years, we
have re-evaluated and renegotiated or canceled many of our land purchase
contracts. In addition, we have sold, and may continue to sell, certain parcels
of land that we have identified as non-strategic. As a result, we reduced our
land position from a high of approximately 91,200 home sites at April 30, 2006
to a low of approximately 31,700 home sites at January 31, 2010. Based on our
belief that the housing market has begun to recover, the increased
attractiveness of land available for purchase and the revival of demand in
certain areas, we have begun to increase our land positions. During fiscal 2011
and in the six-month period ended April 30, 2012, we acquired control
of approximately 5,300 home sites (net of options terminated) and 3,200 home
sites (net of options terminated), respectively. The 3,200 home sites acquired
in the six-month period of fiscal 2012 includes approximately 1,500 home sites
that were acquired in the CamWest asset purchase. At April 30, 2012, we
controlled approximately 39,500 home sites of which we owned approximately
32,300 of them. Of these 32,300 home sites, significant improvements were
completed on approximately 12,100 of them. At April 30, 2012 and 2011, we were
selling from 230 and 203 communities, respectively. At January 31, 2012 and
2011, we were selling from 228 and 200 communities, respectively. At October 31,
2011, we were selling from 215 communities, compared to 195 communities at
October 31, 2010. Our November 2011 acquisition of CamWest assets increased our
selling community count by 15.
We expect to be selling from 230 to 245 communities at October 31, 2012. At
April 30, 2012, we had 46 communities that were temporarily closed due to market
conditions and 50 communities that we had acquired the land for but have
temporarily decided not to open. We expect to reopen 13 communities by May 1,
2013.
Availability of Customer Mortgage Financing
We maintain relationships with a widely diversified group of mortgage financial
institutions, many of which are among the largest and, we believe, most reliable
in the industry. We believe that regional and community banks continue to
recognize the long-term value in creating relationships with high-quality,
affluent customers such as our home buyers, and these banks continue to provide
such customers with financing.
We believe that our home buyers generally are, and should continue to be, better
able to secure mortgages due to their typically lower loan-to-value ratios and
attractive credit profiles as compared to the average home buyer. Nevertheless,
in recent years, tightened credit standards have shrunk the pool of potential
home buyers and hindered accessibility of or eliminated certain loan products
previously available to our home buyers. Our home buyers continue to face
stricter mortgage underwriting guidelines, higher down payment requirements and
narrower appraisal guidelines than in the past. In addition, some of our home
buyers continue to find it more difficult to sell their existing homes as
prospective buyers of their homes may face difficulties obtaining a mortgage. In
addition, other potential buyers may have little or negative equity in their
existing homes and may not be able to or willing to purchase a larger or more
expensive home.
While the range of mortgage products available to a potential home buyer is not
what it was in 2005 - 2007, we have seen improvements over the past year.
Indications from industry participants, including commercial banks, mortgage
banks, mortgage REITS and mortgage insurance companies are that availability,
parameters and pricing of jumbo loans are all improving. We believe that
improvement should not only enhance financing alternatives for existing jumbo
buyers, but should help to offset the reduction in Fannie Mae/Freddie
Mac-eligible loan amounts in some markets. Based on the mortgages provided by
our mortgage subsidiary during the past 15 months, we do not expect the change
in the Fannie Mae/Freddie Mac-eligible loan amounts to have a significant impact
on our business.
There has been significant media attention given to mortgage put-backs, a
practice by which a buyer of a mortgage loan tries to recoup losses from the
loan originator. We do not believe this is a material issue for our mortgage
subsidiary. Of the approximately 14,640 loans sold by our mortgage subsidiary
since November 1, 2004, only 27 have been the subject of either actual
indemnification payments or take-backs or contingent liability loss provisions
related thereto. We believe that this is due to (i) our typical home buyer's
financial position and sophistication, (ii) on average, our home buyers who use
mortgage financing to purchase a home pay approximately 30% of the purchase
price in cash, (iii) our general practice of not originating certain loan types
such as option adjustable rate mortgages and down payment assistance products,
and our origination of very few sub-prime, high loan-to-value and no
documentation loans, (iv) our elimination of "early payment default" provisions
from each of our agreements with our mortgage investors several years ago, and
(v) the quality of our controls, processes and personnel in our mortgage
subsidiary.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for a
number of new requirements relating to residential mortgage lending practices,
many of which are subject to further rule making. These include, among others,
minimum standards for mortgages and related lender practices, the definitions
and parameters of a Qualified Mortgage and a Qualified Residential Mortgage,
future risk retention requirements, limitations on certain fees, prohibition of
certain tying arrangements, and remedies for borrowers in foreclosure
proceedings in the event that a lender violates fee limitations or minimum
standards. The ultimate effect of such provisions on lending institutions,
including our mortgage subsidiary, will depend on the rules that are ultimately
promulgated.
Gibraltar
We continue to look for distressed real estate opportunities through Gibraltar.
Gibraltar continues to selectively review a steady flow of new opportunities,
including bank portfolios and other distressed real estate investments. In
December 2011, Gibraltar
acquired three portfolios of non-performing loans consisting of 11 loans with an
unpaid principal balance of approximately $51.4 million. The portfolio included
non-performing loans secured by commercial land and buildings in various stages
of completion. The portfolios that Gibraltar previously acquired were primarily
residential acquisition, development, and construction loans secured by
properties in various stages of completion.
At April 30, 2012, Gibraltar had direct investments in loan portfolios, real
estate owned and a participation in a loan portfolio of approximately $95.9
million and an investment in a structured asset joint venture of $35.7 million.
At April 30, 2012, Gibraltar directly, through a loan participation and through
a joint venture, controlled 327 loans and properties with a net unpaid principal
or estimated fair value of approximately $1.3 billion.
During the six-month periods ended April 30, 2012 and 2011, we recognized income
of $6.9 million and $1.1 million from the Gibraltar operations, respectively,
including its equity in the earnings from its investment in a structured asset
joint venture. For the three-month periods ended April 30, 2012 and 2011, we
recognized income of $5.2 million and $0.9 million, respectively.
CONTRACTS AND BACKLOG
The aggregate value of gross sales contracts signed increased 46.8% in the
six-month period ended April 30, 2012, as compared to the six-month period ended
April 30, 2011. The value of gross sales contracts signed was $1.24 billion
(2,017 homes) and $847.0 million (1,496 homes) in the six-month periods ended
April 30, 2012 and 2011, respectively. The increase in the aggregate value of
gross contracts signed in the six-month period of fiscal 2012, as compared to
the comparable period of fiscal 2011 was the result of a 34.8% increase in the
number of gross contracts signed, and a 8.9% increase in the average value of
each contract signed. The increase in the number of gross contracts signed was
primarily due to an increase in demand for our homes and a 15% increase in the
number of selling communities in the fiscal 2012 period, as compared to the
fiscal 2011 period. Approximately one-half of the increase in the average value
of each contract signed was due to the sales contracts signed at one of our
luxury high-rise developments in the metro-New York market in the first quarter
of fiscal 2012 which averaged approximately $4.1 million each; the remaining
increase in the average price of the contracts signed was primarily attributable
to a change in mix to more expensive product and/or areas, reduced incentives
given on new contracts in the period and, in some of our communities, increased
prices.
The aggregate value of gross sales contracts signed increased 48.3% in the
three-month period ended April 30, 2012, as compared to the three-month period
ended April 30, 2011. The value of gross sales contracts signed was
$773.0 million (1,322 homes) and $521.1 million (915 homes) in the three-month
periods ended April 30, 2012 and 2011, respectively. The increase in the
aggregate value of gross contracts signed in the three-month period of fiscal
2012, as compared to the comparable period of fiscal 2011, was the result of a
44.5% increase in the number of gross contracts signed, and a 2.7% increase in
the average value of each contract signed. The increase in the number of gross
contracts signed was primarily due to increased demand and a 14% increase in the
number of selling communities in the fiscal 2012 period, as compared to the
fiscal 2011 period. The increase in the average price of the contracts signed
was primarily attributable to a change in mix to more expensive product and/or
areas, reduced incentives given on new contracts in the period and, in some of
our communities, increased prices.
The aggregate value of net contracts signed increased 48.4% in the six-month
period ended April 30, 2012, as compared to the six-month period ended April 30,
2011. The value of net contracts signed was $1.2 billion (1,942 homes) in the
fiscal 2012 period and $808.1 million (1,427 homes) in the fiscal 2011 period.
The increase in the fiscal 2012 period, as compared to the fiscal 2011 period,
was the result of a 36.1% increase in the number of net contracts signed, and a
9.1% increase in the average value of each contract signed. The increase in the
number of net contracts signed in the fiscal 2012 period, as compared to the
fiscal 2011 period, was the result of the higher number of gross contracts
signed in the fiscal 2012 period and the reduced rate of contract cancellations
in the fiscal 2012 period, as compared to the fiscal 2011 period.
The aggregate value of net contracts signed increased 50.7% in the three-month
period ended April 30, 2012, as compared to the three-month period ended
April 30, 2011. The value of net contracts signed was $754.7 million (1,290
homes) in the fiscal 2012 period and $500.9 million (879 homes) in the fiscal
2011 period. The increase in the fiscal 2012 period, as compared to the fiscal
2011 period, was the result of a 46.8% increase in the number of net contracts
signed, and a 2.7% increase in the average value of each contract signed. The
increase in the number of net contracts signed in the fiscal 2012 period, as
compared to the fiscal 2011 period, was the result of the higher number of gross
contracts signed in the fiscal 2012 period and the reduced rate of contract
cancellations in the fiscal 2012 period, as compared to the fiscal 2011 period.
In the six-month period ended April 30, 2012, home buyers canceled $43.9 million
(75 homes) of signed contracts, representing 3.5% of the gross value of
contracts signed and 3.7 % of the gross number of contracts signed. In the
six-month period ended April 30, 2011, home buyers canceled $38.9 million (69
homes) of signed contracts, representing 4.6% of both the gross value of
contracts signed and the gross number of contracts signed. The average value of
the contracts canceled in the six-month period of fiscal 2012 increased
approximately 3.7%, as compared to the six-month period of fiscal 2011.
In the three-month period ended April 30, 2012, home buyers canceled
$18.3 million (32 homes) of signed contracts, representing 2.4% of both the
gross value of contracts signed and the gross number of contracts signed. In the
three-month period ended April 30, 2011, home buyers canceled $20.2 million (36
homes) of signed contracts, representing 3.9% of both the gross value of
contracts signed and the gross number of contracts signed. The average value of
the contracts canceled in the three-month period of fiscal 2012 increased
approximately 1.9%, as compared to the three-month period of fiscal 2011.
Backlog consists of homes under contract but not yet delivered to our home
buyers. The value of our backlog at April 30, 2012 of $1.50 billion (2,403
homes) increased 48.9%, as compared to our backlog at April 30, 2011 of $1.01
billion (1,760 homes). Our backlog at October 31, 2011 and 2010 was
$981.1 million (1,667 homes) and $852.1 million (1,494 homes), respectively. The
increase in the value of backlog at April 30, 2012, as compared to the backlog
at April 30, 2011, was primarily attributable to the increase in the aggregate
value of net contracts signed in the six-month period ended April 30, 2012, as
compared to the six-month period ended April 30, 2011, and the higher backlog at
October 31, 2011, as compared to the backlog at October 31, 2010, offset, in
part, by the increase in the aggregate value of our deliveries in the six months
of fiscal 2012, as compared to the aggregate value of deliveries in the six
months of fiscal 2011.
For more information regarding revenues, gross contracts signed, contract
cancellations and net contracts signed by geographic segment, see "Geographic
Segments" in this MD&A.
CRITICAL ACCOUNTING POLICIES
As disclosed in our annual report on Form 10-K for the fiscal year ended October
31, 2011, our most critical accounting policies relate to inventory, income
taxes - valuation allowances and revenue and cost recognition. Since October 31,
2011, there have been no significant changes to those critical accounting
policies.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to various unconsolidated entities. At
April 30, 2012, we had investments in and advances to these entities, net of
impairment charges recognized, of $200.3 million, and were committed to invest
or advance $49.3 million to these entities if they require additional funding.
Our investments in these entities are accounted for using the equity method.
The trends, uncertainties or other factors that have negatively impacted our
business and the industry in general have also impacted the unconsolidated
entities in which we have investments. We review each of our investments on a
quarterly basis for indicators of impairment. A series of operating losses of an
investee, the inability to recover our invested capital, or other factors may
indicate that a loss in value of our investment in the unconsolidated entity has
occurred. If a loss exists, we further review to determine if the loss is other
than temporary, in which case we write down the investment to its fair value.
The evaluation of our investment in unconsolidated entities entails a detailed
cash flow analysis using many estimates including but not limited to expected
sales pace, expected sales prices, expected incentives, costs incurred and
anticipated, sufficiency of financing and capital, competition, market
conditions and anticipated cash receipts, in order to determine projected future
distributions. Each of the unconsolidated entities evaluates its inventory in a
similar manner as we do. See "Critical Accounting Policies - Inventory"
contained in the MD&A in our Annual Report on Form 10-K for the year ended
October 31, 2011 for more detailed disclosure on our evaluation of inventory. If
a valuation adjustment is recorded by an unconsolidated entity related to its
assets, our proportionate share is reflected in income (loss) from
unconsolidated entities with a corresponding decrease to our investment in
unconsolidated entities. During the six-month and three-month periods ended
April 30, 2012, based upon our evaluation of the fair value of our investments
in unconsolidated entities, we determined that there were no impairments of our
investments in these joint ventures. In the second quarter of fiscal 2012, we
recognized a $1.6 million recovery of previously accrued charges. During the
six-month and three-month periods ended April 30, 2011, based upon our
evaluation of the fair value of our investments in unconsolidated entities, we
determined that there was an impairment to our investment in a development joint
venture and recognized impairment charges of $39.6 million and $19.6 million,
respectively. See Note 4 - "Investments and Advances to Unconsolidated Entities
- Development Joint Ventures" in the condensed consolidated financial statements
for more information concerning these impairment charges.
On October 27, 2011, a bankruptcy court issued an order confirming a plan of
reorganization for South Edge, LLC ("South Edge"), a Nevada land development
joint venture which was the subject of an involuntary bankruptcy petition filed
in December 2010. Pursuant to the plan of reorganization, South Edge settled
litigation regarding a loan made by a syndicate of lenders to South Edge having
a principal balance of $327.9 million, for which we had executed certain
completion guarantees and conditional repayment guarantees. In November 2011, we
made a payment of $57.6 million as our share of the settlement. We believe we
have made adequate provision at April 30, 2012 for any remaining exposure to
lenders which are not parties to the agreement. Our carrying value of our
investment in Inspirada Builders, LLC is carried at nominal value. See Note 4 -
"Investments and Advances to Unconsolidated Entities - Development Joint
Ventures" in the condensed consolidated financial
. . .
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