Fare Share: Public Home Builders General Counsel Salary Rankings

We’re concluding our analysis of public home builders’ “named executive” compensation packages for the moment. That is, until we see additional SEC proxies filed by the likes of Comstock, Meritage, M/I, Pulte, and Standard Pacific. Once all those filings are in, we’ll do a retake, with complete rankings of CEOs, CFOs, COOs, and other top executives.

The list below features several executives who, in light of some of the sticky legal situations certain home building companies have found themselves in, have been earning their keep in a big way.

During the months ahead, as the economy, financial institutions, companies, and households continue to undergo forced recapitalization, attorneys of many stripes will be in demand. Whether it’s to deal with federal or state investigators who come a calling, aggrieved home buyer groups, organized labor, litigious lenders, or grouchy stockholders, a strong general counsel is a virtual necessity for the present and foreseeable future.

Here’s a ranking of comp packages for five companies whose corporate general counsels have risen to the ranks of “named executives.”  Note that a number of companies that have filed their proxies, such as D.R. Horton, Lennar, NVR, Ryland, and Toll Brothers, do not have general counsel who rank up there at the C-level.

Click on this chart twice to see an enlarged image.

March 24, 2010 | Filed Under Earnings, Home Builders | Leave a Comment 

Among Public Home Builders, C-Level Pay Adjusts Downward

We continue to put focus on executive pay at a number of public home builders (10)–the ones who have already posted proxy filings among their annual financial performance reports.

So far, we’ve learned that for CEOs  and CFOs — whose average total compensation packages took an aggregate hit of 26%, primarily in the bonus and long-term incentive areas of their deals–managing a balance sheet, downsizing operations by 65% or more, and flashing hints of a product and land position portfolio that can make some hay with a big assist from Uncle Sam is tantamount to good company performance.

Now that the government-fueled taxpayer tailwinds are due to taper off to zero in the coming weeks, the heat on chief operators, by title or function, will rise a notch or two. It was finance folks who got lots of the credit for their effectiveness in retrieving tax bounty from the government against losses on tranactions in the past 60 months. And it’s been the CEO and the CFO who’ve applied the screws to cost plans in an effort to right-sized headcounts, market presence, and land pipeline to a reality whose ferocity may only now be coming clear.

Now, and for the next 18 to 24 months, it’s operator time. People, product, process, and performance, must each and all outdo prior measures of best practice for a company to remain in the ranks of the healthy for the next two years.  What’s interesting to note about this amalgam of executives below is what’s missing as much as what’s there.

In more than a few cases–Beazer, Brookfield, D.R. Horton, Hovnanian, KB Home, Ryland, and, big surprise, NVR–the firms have managed, at least for the moment, to go it altogether without a COO. In a couple of cases, like KB and Ryland, a former COO has taken the top job, leaving the title vacant. In at least two, the former COO is out in the field, running a division; the corporate budget can’t support the position.

The top three on the list–David Mandarich of M.D.C., Zvi Barzilay of Toll Brothers, and Jonathan Jaffee at Lennar–reflect a strategy’s reliance on a strong, strategic, decision-maker with broad sway over their respective enterprises. In many cases, companies are turning to division and regional presidents to run their business units toward improved gross margin and business unit profitability.

In a sense, this list illustrates the many hats a corporate executive wears these days, as finance, operations, marketing, and real estate tactics meld into fewer discrete functional areas in a reduced-capacity home building landscape. In this group, the aggregate average pay fell just over 13% to an annual total compensation package of $2.6 million from $3 million in 2008.

Here’s the latest ranking (click twice on the table for an enlarged image):

Source: Big Builder analysis of company proxy filings.

While we’re at it, we thought it might be fun to do a comparison ranking of the 10 companies’ C-level comp packages, year on year. Since “named executive officers” do not each have to have the same title and function, and in some cases, we’ve seen a bit of turnover in the ranks, this is not intended as a precise-dollar apples to apples comparison.

You’ll need to note as well, that when companies benchmark executive comp from among their peers, they tend to look at separate buckets for “base,” vs. “bonus,” vs. “long-term incentive” in order to compare their own C-level compensation with companies like theirs. So, the aggregate number doesn’t tell you much beyond a company’s wherewithal and its relative loyalty to tenured executives.

NVR, it shoud be said, draws attention to the home building peer company benchmarks only to mostly disguard them in much greater favor of reflecting the performance of the organization insofar as its alignment with shareholders’ and stakeholders’ interests.

Anyway, it’s an interesting scorecard, which illustrates that, in total, the “Three Cs” annual total comp (the total packages of the three named executives) averaged $9.7 million in 2009, down 8.9% from $10.7 million in 2008. (click twice on the chart for an enlarged image.)

March 22, 2010 | Filed Under Earnings, Financial Crisis, Home Builders | 1 Comment 

Public Home Building CEO Pay — Comp and Circumstance

Compensation committees of public company industry sectors in the cross hairs of the economic crisis–housing being one of them–had their work cut out for them in 2009.

Home building company comp panels were no exception. With all but two of the companies in the sector losing money last year–NVR and M.D.C. Holdings recorded profits–what score card could be used to fairly and appropriately pay chief executives for the job they’re doing?

The “tally sheets” for chief executives among home building enterprises continued last year’s trend, for the most part, of greater emphasis on pay for individual vs. company performance. Comp committees needed to tread a fine line on CEO packages: 1) they needed to reality check them against a broader backdrop of industry decline and shareholder disillusionment; 2) they needed to reward leaders for steadying the course for the previous year; and 3) they needed to “incentivize” chief strategists to do what’s needed to position his company and stakeholders for recovery in the months ahead.

Few companies met earnings criteria to trigger targeted or maximum incentives; but in most cases, individual hurdles that recognized CEO’s capacity to improve balance sheets, retain talent, stabilize operations, and set the tone for recovery were eclipsed.

By and large, our sampling of 10 home building company company executive packages (some of the companies’ proxies post later in the year due to varying fiscal year dates), saw total comp down by 26% versus the same metric last year.

It should be noted that totals in many cases factor in stock and options awards whose face value may be at risk depending on stock price performance during the respective vesting periods, ranging in most cases from three to five years.

Bonuses, per se, were scarce,  as only one–well deserving, we may add–CEO got a cash bonus to bring his lowest-of-class base pay up a bit. Interestingly, Paul Saville, CEO of the world-beating NVR, came in with the lowest total comp package, which may explain how NVR stays profitable no matter what.

“Negative discretion” was a term that came up more than once in comp committee comments. In these cases, a CEO either fully or partially validated an incentive or bonus, but, given the broader conditions and micro company performance, had his extra cash either axed or reexpressed in future payouts.

The comp committee goals for 2010 focus increasingly on business unit profitability benchmarks torward  restoring total corporate earnings and shareholder return on equity.

Here’s the ranking for 2009 among the 10 home building chieftains whose proxies have posted so far (notes on each individual’s performance follow the chart). . We’ve included three company data points to show the respective peformance on cash generation, debt reduction, and return on beginning year equity from a change in basis points from 2008 to 2009:

Source: Big Builder analysis of company proxy data

Here are some “notes” we compiled regarding each CEO’s tally sheet guidelines:

Ian McCarthy, Beazer
• Base salary freeze, … no base salary increase since 2005… remain frozen in 2010
• Incentive compensation, “2006 Bonus Plan” invoked for Merrill & Khoury, but not Ian, altho Comp Committee lauded “McCarthy’s leadership and decisive action, during an extraordinarily tough business environment”
• $4.6 million stock & option comp at risk, tied to stock performance
• McCarthy elected not to receive equity-based longterm incentive
• 2010… balance sheet improvement & economic profit account

Ian Cockwell, Brookfield
• Brookfield pegs lower-than-peers base salary, and less difference between Cockwell comp and his management team
• Key performance: generated net cash from operating activity of $137 million, acquired 3,200 lots, completed entitlements for 1061 lots, completed $250 million equity rights offering and ended year with net debt to cap ratio of 42% vs 71% at dec 31, 2008
• Awarded 1 million options, Feb. 2, 2009 with a grant date fair value of $1.6 million… Options vest at 20% per year over a five year period.

Don Tomnitz, D.R. Horton
• Performance noted includes top of class market cap, leadership in home closings, cash flow generation of $1.1 billion in 09, reduction of $471 million in debt, and reduction of $269 million in SG&A expense
• Due for a big bump in 2010 base salary from $300,00 to $900,000, first salary increase since 2001
• $2.3 million in non-equity annual incentive based on meeting partial pre-tax income and full operating cash flow and SG&A containment hurdles
• SG&A was tier one – 14.5%… “negative discretion” tempered bonus from possible $4 million to $2 million
• For long term comp… Tomnitz gets “performance units” based on stock price, return on investment, and net sales gains percentage relative to peer group performance…

Ara Hovnanian, Hovnanian Enterprises
• Potential bonus – pegged to net debt amount component – limited to less than 50% of fiscal 2008 bonus…Ara met criterium for max $699,500 bonus, based on HOV net debt being $1.8 billion or less.
• 750,000 stock option grant, representing 10% increase in grant date fair value from stock option award in 2008 ($1,380,000 vs. $1,256,250)
• $250k perqs in the “All Other”
• Pearl Meyer & Partners – comp analysts — $2,059,121 is total comp, less at-risk stock price performance based grants…

Jeffrey Mezger, KB Home
• Comp committee says of Mezger: “Unique and critical role in setting and directly overseeing the implementation of our overall operating strategy and significant related strategic initiatives, his broader responsibilities for driving our overall financial and operational performance, and his wide-ranging internal and external duties across all areas of our business.”
• Performance metrics: 09 pretax loss, excluding inventory impairments and other non-recurring items, of $67.2 million and 09 operating cash flow of $349.9 million. i.e. Maximum payout… Mezger’s $4 million reduced to $2,750,000.
• Rolled out Open Series, improved profit margins, maintained balance sheet strength and flexibility, positioned KB to achieve future growth.
• Stock and option awards are stock price performance based, $4.4 million.

Stuart Miller, Lennar
• Achievement metrics: reduced number of associates by more than 70%, reduced Company’s maximum recourse exposure related to indebtedness of unconsolidated JVs by more than 80%, changed product to reduce cost, accumulated more than $1.3 billion of cash.
• Stuart got 500,000 restricted stock awards, 25% of which were vested, worth $1.6 million in 2009 cash.

Larry Mizel, M.D.C. Holdings
• Missed on lofty Stockholders’ Equity Goal, but easily achieved performance goal, achieving a positive EBITDA for the fiscal year ending Dec. 31, 2009, netting a $2.5 million cash bonus and 60,000 shares of restricted common shares (with a grant date fair value of $1,996,800.
• Other performance-based metrics included: minimum operating revenues or sales of homes of $950 million, establishing a land options and/or purchase program with 3rd parties, net operating profit for HomeAmerican Mortgage Corp., and cumulative positive cash flow.

Paul Saville, NVR
• Froze his own base salary at 2006 level for third year running
• Sees “retention risk” as a possibility, so seeks new equity incentive plan
• Annual $400,000 bonus based 80% on consolidated pre-tax profit, and 20% on new orders (net of cancellations)… 50% of his base salary.

Larry Nicholson, Ryland
• Promotion from president to CEO worth $150,000 base salary raise
• Met annual bonus incentive program hurdle of $200 million or greater in net cash provided by operating activities in 2009, worth $1,500,000
• Received 116,482 shares of restricted stock at promotion, and 106,000 stock options at promotion
• Met long-term incentive goal relative to home builder peer group stock price performance.

Bob Toll, Toll Brothers
• Met condition for full “plan year individual performance” bonus at full $5.2 million amount—which was hitting greater than $1.2 billion in consolidated revenue for 2009—but comp committee nixed bonus in favor of long-term incentive compensation.
• Other performance notes: increase in net contracts during 2nd half 2009, maintenance of strong balance sheet, selection by Institutional Investor as top CEO in the home building industry
• Stay tuned for a Toll compensation recovery in 2010 and beyond.

March 15, 2010 | Filed Under Earnings, Home Builders | Leave a Comment 

KB’s Mezger Emerges from the Shadow of His Former Boss

KB Home chief executive officer Jeff Mezger is a cautionary tale incarnate, in a positive sense. He succeeded the larger-than-life Bruce Karatz as KB chief, just as 2006 shut its eyes on all that was home building’s halcyon era three years and a life-time ago. Almost like an understudy thrust suddenly into a lead role on Broadway, the limelight was all Mezger’s.

What a tough act Mezger had to follow in terms of the legend Karatz had become. If there were doubts about Mezger’s ability to step out of the shadow of his former boss, they should be fading memories by now.

Inside of a year, Mezger–who’d gotten credit for developing an internally vaunted KB Next program for transforming construction operation management, product offerings, and overhead costs inertias around a streamlined organization–was retooling KB’s skill set. Gone was the strategic prong focused on elevating KB Home’s average selling price from the bottom of the cellar among its peers. Gone was the have-it-anyway-you-want-it infinitude of choices, options, and upgrades, in favor of a manageable spectrum of choices based more on monthly-payment reality vs. constant house price appreciation fantasy.

KB Home bee-lined for its roots in entry level, and having picked up word that at least some home builders in some markets were reshaping product offerings down to the square foot based on real money monthly payments–Meritage, for example–KB swung for the fences in its value engineered offering. The Open Series was born.

What Mezger did earlier on than most of his CEO peers was to act rather than to watch. If one was a spectator for too long into 2007–believing that a tide of worldwide liquidity was due to reinforce demand the way it had again and again from 2003 to 2006, one got stuck in the financial maelstrom that became the global economic crisis of 2008.

If you were Jeff Mezger, you got ahead of the curve. You were looking at the same data he was in 2006 and 2007–foreclosures were a wave that was rising, the economy was weakening, and credit and jobs were going to come under severe stress.

To cut his land losses, keep the company focus on moving inventory, and do what he knew how to do well from his time in KB’s far-flung trenches, he ratcheted up emphasis on construction speed and lowering cost. He wanted to own the new-home alternative to foreclosures, and he knew his boys in the field could get KB there if they had to. And they did.

For more than a year–mostly in 2008–Mezger took a fair amount of grief on orders, overheads, and financial performance decline. About the only positive piece of the KB Home story from an outsider’s perspective was the sale of KB Home’s French unit, the one-time benefit of which saved a quarter’s worth of profitability and became KB’s dry powder for times ahead.

Right out of the gate as KB launched its Open Series, it found success.

At least one or two of every 10 prospective home buyers who were looking to move into homeownership for the first time wanted a new home, vs. a financially distressed home.  The Open Series not only did well in its own right, it attracted copy-cats–low-cost, simplified, reduced square footage homes that would be built to fend off foreclosure sales from complete domination of the landscape.

Of course, privately funded home building companies found it unfair. The terms of their bank loans prevent them from writing down their land costs, lowering the direct construction costs and price of the home, and pressing “unload.” The same impairment that hits public companies’ shareholder equity can take away everything a private home builder owns 10 times over.

But what Mezger and those others who’ve come into the market with me-too low-cost models for entry-level price points have done is to create a niche opportunity just above that price level for public and privates where they can fight more expensive foreclosures. That might mean that a positive story at the lowest end for publics could soon provide a price point haven for privates to offer more at a great value–but they still have to build fast.

We were talking with some younger professionals recently who more or less affirmed Mezger’s bet that, tax credit or no, entry level buyers are the stepping stones to recovery.

One such young professional said, “Put it this way, the Social Security system will be shot by the time we retire; 401ks have proven they’re not the answer to a secure post-career life, and companies are certainly not going to take care of us through pensions. So we’re on our own, and real estate is the only asset we can depend on to build up enough value to be able to retire some day.”

Now, it may be that further analysis of personal investment strategic alternatives could reveal that a more diversified program might be wise for this young professional. But homeownership seems to have solidified itself as an anchor to the plan.

So, it’s arguable, given who is keeping their jobs and driving households toward lifestage changes and adjustments at the most accelerated pace, that the $8,000 tax credit for first-time home buyers “pulled forward” buyers enough to deplete demand among them.

Birth rates during the Generation Y years ranged from the mid-3 millions to the mid-4 millions per year. There’s a lot of demand in the pipeline for first-time home buyers, especially when they’re the most-well educated generation in history and are bound for the most part to weather even double-digit unemployment rates with a mission to self-ensure their future.

Point is, the only strategy for right now–whether you’re a multi-regional public executive or a private entrepreneurial firm–is a foreclosure-fighter strategy. Competing against other new-home sellers is still, of course, a given. But the real race is to build fast enough and low-cost enough, at every price point, to compete with a foreclosure or a distressed sale that is 30% below your best sticker price.

You can get at it with your monthly cost-of-ownership story. When younger decision-makers hear that story clearly, they’ll get it.

September 28, 2009 | Filed Under Earnings, Financial Crisis, Home Builders | Leave a Comment 

Lennar Q3 in Subject Line Tidings

In home building, it still may be a misnomer to call quarterly financial reports an earnings report.

Still, the tone of the latest call with analysts, and their take on the most recent performance, is refreshing.

Here’s Subject Lines from several key equity analysts’ post-ups on the Lennar report.

Added up, the analysts have struck a positive chord we haven’t seen in a couple of years… with caveats, of course.

September 22, 2009 | Filed Under Earnings, Home Builders | Leave a Comment 

Hovnanian May be Behind the Drywall Curve

Hovnanian Enterprises has a balance sheet bull by the horns, not to mention the rest of the housing crisis to navigate through. What it doesn’t need is a distraction, or worse, an expensive series of defect remediations from building that date back to the halcyon days of home building yore.

But proof that the present is the past minus the worst of the future, the Wall Street Journal walks up to KHov’s 3Q financials with a story, not about how it’s begun to find a stride with a bit of the tail wind of lowered price, low interest rates, and the first-time buyer tax credit, but about Hovnanian’s as-yet undeclared exposure to fallout from Chinese drywall liability.

A snarky comment from analyst Stephen Kim anchors the piece.

“With a number of builders having announced charges [to earnings from drywall] and indicating that a majority of their cases occurred in Fort Myers, it would be surprising if Hovnanian could have completely avoided exposure,” said Stephen Kim, associate portfolio manager at Alpine Woods Capital Investors LLC. “This is definitely an issue that I will be watching when they report earnings.”

Kim, it should be remembered, essentially called a housing turnaround in mid-2008, so it’s heartening to see at least that he’s got his eye on the ball now.

September 2, 2009 | Filed Under Earnings, Financial Crisis, Home Builders | Leave a Comment 

NVR is Home Building’s Curve Buster

The really smart or studious kid in the class always ruined it for the rest of us who lived off the bounty of the teacher’s grading curve. Magically, a mediocre test score or term performance could shine, providing that everybody else did varying degrees of worse than us.

The smartie always foiled that as a grade-management strategy. He or she excelled, and blew the grade curve off the map.

That’s what DC-metro-based home builder NVR ($554.34, down .65, NYSE) does to its peers. They’re sucking wind, and hoping nobody takes note of the fact that in the same headwinds, one of their rivals is actually profitable.

Reports Big Builder:

The company’s merchant builder strategy again paid off. There were no impairments or write-downs for the quarter, but instead the company booked$4.5 million in recovery of land deposits it previously thought uncollectable. It was the company’s second profitable quarter following a loss of $30.5 million in last year’s fourth quarter.

Here’s a blast from NVR’s 2nd quarter earnings announcement, which notes income of $41.4 million for the period:

New orders in the second quarter of 2009 increased 2% to 2,728 units, when compared to 2,670 units in the second quarter of 2008. The cancellation rate in the quarter ended June 30, 2009 was 14% compared to 19% in the second quarter of 2008 and 15% in the first quarter of 2009. Settlements decreased in the second quarter of 2009 to 2,048 units, 26% less than the same period of 2008. The Company’s backlog of homes sold but not settled at the end of the 2009 quarter decreased on a unit basis by 16% to 4,497 units and on a dollar basis by 27% to $1,332,056,000 when compared to the same period last year.

Homebuilding revenues for the three months ended June 30, 2009 totaled $612,488,000, 35% lower than the year earlier period. Gross profit margins increased to 19.3% in the 2009 second quarter compared to 17.9% for the same period in 2008. The 2009 second quarter gross profit margin was favorably impacted by the recovery of approximately $4,500,000 of land deposits previously determined to be uncollectible. In the second quarter of 2008, the Company had recorded a $5,800,000 land deposit impairment charge. Income before tax from the homebuilding segment totaled $62,872,000 in the 2009 second quarter, a decrease of 21% when compared to the second quarter of the previous year.

NVR has cash and equivalents of $1.24 billion. It manages a finite  but challenged geographical footprint, and takes no prisoners on competing for every potential buyer prospect in the market. NVR is a win machine; other home builders simply try to copy it.

NVR was in Chapter 11 about 15 years ago. Its rules and its board won’t let it go there again.

July 22, 2009 | Filed Under Earnings, Home Builders | Leave a Comment 

At What Price, Couch Time?

The Housing Crisis has its many forms.

You can find this data and more in the American Time Use Survey, just released by the United States Bureau of Labor Statistics.

Housing Crisis’s takeaway. Males cede 90% + of household decisions to women for a little over a half hour of leisure? That’s just lazy.

Seriously, more people are working at home–employed and self-employed–so home office and work space should not be an extravagance or an afterthought for new home building.

Of course, the Wall Street Journal analysis was all about changes in the way we work.

People in professional, production and service jobs worked less in 2008 than a year earlier. People in management and sales jobs worked quite a bit more in 2008 than in 2007, an increase was much larger than for the general working population.

The BLS isn’t big on explanations, but you don’t need the federal government to tell you that workers at companies that have just had layoffs often end up doing more with less — and work harder for fear that they might be next in the unemployment line. Or that sales calls are a whole lot harder when nobody is spending money.

Average Weekday Hours Worked

Class of Worker 2008 2007
All Wage and salary workers 7.58 7.51
Management, business, and financial operations 7.85 7.66
Professional and related 7.16 7.27
Services 6.84 6.92
Sales and related 7.59 7.15
Office and administrative support 7.18 7.34
Construction and extraction 8.05 7.99
Installation, maintenance, and repair 8.38 8.11
Production 7.94 8.32
Transportation and material moving 8.19 7.81

June 30, 2009 | Filed Under Earnings, Financial Crisis | Leave a Comment 

Fannie Kicked in Q1; Mission Position to Blame

Just about six of every $10 Fannie Mae suffered in credit losses in the first quarter of 2009 come from a four-state real estate cataclysm–Arizona, California, Florida, and Nevada.

The Wall Street Journal reports the reason for Fannie’s Q1 woes as follows:

Fannie’s loss was mainly due to a provision of $20.3 billion for future credit losses stemming from the biggest wave of foreclosures since the 1930s. The company also had $5.7 billion of write-downs on mortgage securities created by Wall Street firms and lenders during the housing boom. These securities are backed by subprime and Alt-A mortgages. Subprime mortgages are those to people with poor bill-paying records or high debt in relation to their income, while Alt-A loans typically allowed borrowers to avoid documenting their income or assets.

Subprime and Alt-A loans have been by far the worst performers. But Fannie said its entire loan-guarantee business, including prime loans, is suffering from rising defaults as house prices fall and unemployment climbs.

Fannie and Freddie, which buy home loans from banks and turn most of them into securities for sale to other investors, are suffering huge losses largely because their only businesses are investing in or guaranteeing mortgages. Big banks, even ones with large mortgage exposures, are more diversified and benefited in the first quarter from a surge in mortgage refinancing, which helped offset credit losses.

The Calculated Risk blog digs deeper into Fannie’s 10-Q filing with the SEC, which points up a maze of self-cancelling strategic objectives that would reduce even the most illuminated of organizations to paralysis.

CNBC’s David Faber got out ahead of Fannie Mae’s earnings reporting with this analysis this morning.

Freddie reports next week.

May 8, 2009 | Filed Under Earnings, Financial Crisis | 1 Comment 

As Toll Rolls, Others May Follow

There are bigger public home builders than Toll Brothers, and there are certainly ones with more mainstream product offerings and conventional business models. Why is it, then, that the financial markets and the media regard Toll as the canary in the coal mine among home builders?

For one, it’s arguably the best known brand name in home building. And if that point is debatable from a national perspective, it’s hardly in question when one shrinks the geography to the northeast corridor of the United States. There’s likely to be a significant correlation between owners of Toll Brothers homes and denizens of Wall Street. It’s a name that simply means home building for many of the investor breed. The world may be Freidman flat, but many of its residents are parochially focused, which still means that West of the Hudson is that wide unknown expanse that is like a foreign concept to many Wall Street players. Which makes Toll the go-to home builder. 

What’s more, it has a fiscal year that gets out of the gate Oct. 1, so its financials always seem to be a step ahead of most of the rest of the class. Not to mention Bob Toll, the patriarch of the 42 year old company. Bob opens his mouth, and people listen. Why? He’s funny, and intellectual, and doesn’t seem to be afraid to say what’s really going on. So people listen.

This morning Toll Brothers first quarter financials are out.

The financial media, The Wall Street Journal and CNBC, each sounded the theme that Toll’s performance comped better year on year than the same period in 2008, which echoes the language of the company’s Q1 press release.

HORSHAM, Pa., March 4, 2009 — Toll Brothers, Inc. (NYSE:TOL) (www.tollbrothers.com), the nation’s leading builder of luxury homes, today reported a FY 2009 first quarter net loss of $88.9 million, or $0.55 per share diluted, which included pre-tax write-downs totaling $156.6 million. This compared to FY 2008’s first quarter net loss of $96.0 million, or $0.61 per share diluted, which included pre-tax write-downs totaling $245.5 million.

Excluding write-downs, FY 2009’s first quarter earnings were $9.6 million ($9.55 million of which resulted from the net reversal of a prior tax provision), or $0.06 per share diluted, compared to $57.3 million, or $0.35 per share diluted for FY 2008’s first quarter.

In FY 2009’s first quarter, revenues were $409.0 million, backlog was $1.04 billion and net (after cancellations) signed contracts were $127.8 million. These totals represented declines of 51%, 56%, and 66%, respectively, in dollars, and 45%, 51% and 59%, respectively, in units, compared to FY 2008’s first-quarter results.

The Company ended FY 2009’s first quarter with $1.53 billion in cash, compared to $956.6 million at FY 2008’s first-quarter-end. The Company’s cash position was down slightly from $1.63 billion at FY 2008’s fourth-quarter-end, principally due to the payment in 2009’s first quarter of previously accrued taxes and the retirement of purchase money mortgages and other debt. In addition, the Company had $1.32 billion available under its bank credit facility, which matures in March 2011.

The Company ended 2009’s first quarter with a net-debt-to-capital ratio(1) of 14.5%, its lowest level ever at first-quarter-end, compared to 26.8% at 2008’s first-quarter-end. Stockholders’ Equity at FY 2009’s first-quarter-end of $3.16 billion was down 2% compared to $3.24 billion at FYE 2008 and 7% compared to $3.41 billion at FY 2008’s first-quarter-end.

Big Builder offers a brief post-up of Q1 earnings, quoting the quotable CEO Robert I. Toll in his observation of the primary culprit for continued concern.

“We believe weak buyer confidence still impedes the market,” said Robert I.Toll, chairman and CEO. “We have not yet seen a pick-up in activity at our communities other than ordinary seasonal increases for this time of year.”

In UBS equity research analysis of the sector, analysts Eric Crawford and David Goldberg, note faint silver-lining observations in the data and explication from senior management.

As reported on 2/11, net unit orders -59% YOY, averaging just 1 per community for the Q. Despite this, we are encouraged to hear that mgmt is seeing early indications that pricing on land is becoming increasingly attractive, as we continue to believe this is an early indicator of a trough in housing. With its robust liquidity (the co’s net debt-to-cap was 15% at the end of F1Q), we believe Toll is well positioned to take advantage of these opportunities and gain market share from more capital constrained peers.

Michael Rehaut, executive director for JP Morgan equity research on home building punches the data into his Toll model, and out comes this topline take:

Following its 2/11 release of orders, can rate, closings, backlog, and a charges range of $100-200 mil., TOL reported a 1Q (Jan.-end) loss of -$0.55/share, below the Street’s -$0.41 and our $0.47E, featuring land-related charges of $157 mil., which we note was roughly at the midpoint of guidance, as well as core operating margin of only 1.0%, solidly below our 4.7%E and down sharply from the prior four quarters’ 9-11% range. Additionally, TOL noted that the recent pickup in activity was largely seasonal, which we point out is consistent with our view and most other builders’ view of the recent improvement in activity, and therefore is not indicative of a positive trend in the market, in our opinion. Lastly, it also reiterated limited FY09 guidance featuring ranges for closings (2K to 3K) and ASPs ($600 to $625K). Positively, we do note that TOL continues to maintain a strong balance sheet with strong liquidity. None theless, we continue to look for orders and pricing to remain highly challenged, and given our outlook for continued overall difficult conditions in the housing market well into 2009, we continue to expect large impairment charges for the company and the overall industry. Accordingly, we maintain our Neutral rating on TOL amidst our negative sector stance.

Independent housing and economic analyst, Calculated Risk, has a more stark assessment.

In summary: More losses. More write-downs. More cancellations. No guidance. No pick-up in activity.

Statements from Bob Toll himself focus investors on the company’s balance sheet management strength amid continuing headwinds. But he also took a swing for the political fences with remarks that indicate home building leadership has not by any means abandoned its goal for more decisive government policy intervention aimed at spurring demand for new residential housing.

Click on image for access to Big Builder profile.

Click on image for access to Big Builder profile.

“Many experts continue to believe we must first stem home price declines before we can resolve the nation’s economic and financial crisis. The recent stimulus bill shows that Washington is paying greater attention to our industry; however, we think more is needed. We advocate a buyer tax credit of $15,000 to be made available to all buyers of homes, not just first-time buyers: We must motivate the entire food chain of home buyers to stop the decline of home prices. Creating a sense of urgency is necessary to motivate buyers to act now; therefore the credit should only be available for a limited period of time.

“If home prices are stabilized, financial institutions, which today cannot value the mortgage-backed securities on their balance sheets, will once again be able to trade these securities; this, in turn, will help stabilize the financial system.

“Housing starts are at their lowest level since measurement began fifty years ago and the resulting job losses have been brutally damaging to the U.S. economy. The new home industry, combined with the related service, building products and home furnishings industries, are together, perhaps, the largest employer in the United States. If Congress and the Administration can effectively call the bottom and thereby put a floor under home prices, we believe the housing market will recover sooner, jobs will be created, bank balance sheets will improve, and millions of people will be able to return to the workforce.”

No doubt, we’ll hear a similar refrain from home building’s CEO breed as Spring financial results surface in the weeks ahead.

March 4, 2009 | Filed Under Earnings, Financial Crisis | Leave a Comment 

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