On the surface of it, Toll Brothers' acquisition of Boise-based Coleman Homes reflects a straightforward strategic land asset pick-up, tied to a longstanding, solid-track record relationship with the sellers--the father and son Thomas Colemans--that dates back 19 years to a prior deal in another market.
Then, in 1997, the Colemans sold Toll the 400 home sites and trusted reputation that gave Toll Brothers its entree into Las Vegas, which has become a solid part of the Toll footprint. Now, Toll Brothers' expansion into a new, economically vibrant city that's attracting people and businesses migrating away from more expensive, intensive, and forbidding metro areas to the west (Northern California) and south (Denver) comes through an all-cash deal for Coleman's 1,400 or so owned lots, and 350 more sites controlled.
Boise's a bright spot market, with both economic fundamentals, natural beauty, and popular buzz as a "livable" city. Our Metrostudy regional director for Boise, Eric Allen, summed up the second quarter market dynamics as follows:
- 2Q16 Quarterly New Home Starts up 28% & Quarterly Closings up 73% QoQ
- Total inventory for new Single Family Detached homes increased 28% and under construction inventory was up 40% over 2Q15, but 1H16 lot deliveries were down 14% compared to last year.
- Based on a strong 2Q16, the Boise/Treasure Valley housing market should have one of the strongest years since prior to the recession
Now, Coleman ranks No. 3 in its share of the Boise market, per our Local Leaders data, and No. 146 in our top 200 count of the Builder 100 rankings. In 2015, Coleman reported revenue of $57 million on closings of 203 units, a growth of 27% in revenue over the prior year and 10% in unit volume.
Now, here's the interesting thing. Toll Brothers average selling price in its non-California "west" region, including the up-to-now very hot Colorado market was over $700,000 for the three-months ended July 31, 2016. Do the math on Coleman for 2015 and you wind up with an average selling price of about $281,000.
That's a big delta.
Have a look at one of Toll Brothers ceo Doug Yearley's statements in connection with the deal, and you'll see more insight into a point we should make about the "turn" in the market to a slower, more normalized demand for higher-end new home product, toward communities and homes that are attainable relative to household income and jobs growth trends. Here's what Yearley says:
“The acquisition of Coleman Homes will enable us to expand our new initiative of serving a slightly lower price point niche in the upscale market. We are already doing this successfully in Jacksonville and Orlando Florida, in certain communities in Northern Virginia, and in other local markets. With 22% of our homes already sold to households with at least one buyer 35 years or younger, we see this as an important strategic step in broadening our outreach to affluent millennials, as well as many other potential customers.”
Now, as Yearley notes, some percentage of millennial adults are highly paid, affluent professionals, but that designation means different things in different markets. In the San Francisco Bay area, nothing less than seven figures would come anywhere close to qualifying as "luxury," whereas in Boise, increasingly noted as a Millennial Magnet city, affluence comes at a lower cost.
What the Coleman platform means for Toll Brothers is that it can apply its business model to the 13 current communities, and very likely, put more value per home site into its holdings there--and all the future communities--than what the lots had yielded previously. So, hypothetically, if the land-base figured at about $70,000 on a $280,000 sale price, Toll's program typically raises both the land-base value and stretches upward average selling prices.
So, a year from now, Toll's average selling price in Boise might be some order of magnitude greater than Coleman is getting now, but buyers would perceive the value as greater as well. What the market will bear with an absorption rate that meets plan is the elasticity point Toll will test as it implements its program.
Meanwhile, Toll gets a platform and a learning ramp-way that could easily port southward into the red-hot Denver market, as well as into Arizona, Nevada, and even to non-coastal California, where Toll's sole domain is the upscale and empty-nester discretionary buyer. We'd written yesterday about the expanding appeal of "entry-level plus" as a product and pricing position that builders are amping up in their land and design programs. Toll, by virtue of its position as luxury builder and its land-buying, development, place-making, and marketing process mastery, could be starting to push the confines of "luxury" to open up its universe, "broaden our outreach," as Yearley says, and possibly roadmap luxury as a lifelong journey with Toll Brothers.
So, while most of the other big builders are hastily getting their entry-level plus programs in order, Toll Brothers is tooling for an entry-level premium level that dovetails with its Toll Brothers Campus Living, Apartment Living, and City Living programs.
That lower, more attainable price-point for well-heeled first time buyers is an important area for Toll to find a zone of comfort, scalability, strong operational processes.
What started out as a relatively quiet year in mergers and acquisitions--after a rock-and-rolling prior two or three years--has quickly picked up the pace. We believe there's more action ahead as big builders jockey for incremental volume and overhead savings opportunity, and smaller players hedge ever more daunting business conditions as the cycle moves from middle to latter innings.