Toll Brothers has taken its hits this year like every other big builder. But the Horsham, Pa.-based company, which operates in 50 markets and 22 states, has been able to survive the housing downturn better than many of its competitors because it targets a segment of buyers that is growing exponentially faster than buyers as a whole.
Toll's CFO, Joel Rassman, and senior vice president of finance, Fred Cooper, told investors at JPMorgan's Homebuilding and Building Product Conference in Las Vegas this afternoon, that Toll's sales for its fiscal year would be down 24 percent to $4.63 billion, and that its contracts and backlog would be off 33 percent and 30 percent, respectively. (Toll will announce its earnings performance on Thursday, Dec. 6.) The company will also write down between $250 million and $450 million in impairments, as it has reduced its lot position to 59,300 from 91,000 at its peak in the second quarter of 2006.
But Cooper laid out a scenario that he believed would play in Toll's favor: As builders sell off their inventory overhangs, relatively few new homes are going through the approval process. Consequently, the industry could find itself with a shortage of homes "when the customer is less resistant." This shortage will lead to a "flight to quality," especially among affluent buyers that Toll targets as its primary customer. The average Toll Brothers' home sells for $672,000, and buyers typically add another $121,000 in options, "so affordability is not generally an issue with our customers," said Rassman. And the affluent segment of America's population grew, between 1980 and 2006, at 213 percent, or five times the 41 percent increase in the general population over that same period.
Toll Brothers also has $2.1 billion in available capital it could use for acquisition purposes. (Investment guru Jim Cramer this week said that Toll Brothers was the only home building stock he recommends as a "Buy" because it's the only builder in the sector whose balance sheet "is intact," he says.) Rassman said that his company is already looking at "opportunities" where it might be able to acquire other companies' distressed debt and expand its market share. However, he has not seen land prices coming down to levels "that make sense to us" yet.