The industry has reached a point in this down cycle where surviving it means more than just cutting costs and preserving cash. Home builder executives, even those whose companies are marginally profitable, have to figure out how to reinvest in their companies to improve and maintain profitability if current market conditions are the new normal.
For Toll Brothers executives, getting to an answer as to where to begin to park some of the $1.18 billion in cash and marketable securities the company has sitting on its balance sheet is really about seizing opportunities rather than planning for them. "We continue to be opportunistic on all fronts," said CEO Doug Yearley during an earnings call earlier this week. "We don't plan our allocations."
But increasingly it appears the company could do well to use some of its liquid assets in a handful of ways: a debt repurchase; a share repurchase; bigger investment in its Gibraltar distressed asset venture; land acquisition and development; or something that would fall into the category of "other," such as another type of off-balance sheet venture.
Although the company's relative debt load could be considered light by some builders' standards--the company's net debt to capital ratio at the end of its fiscal third quarter was 13.9%, executives told analysts that additional debt repurchases could be in the future. During its most recent quarter, the company spent $48.7 million in the quarter to retire $45.1 million of its senior notes due November 2012. Following that transaction, the company's next major maturity, aside from two debts of less than $20 million a piece due in 2011 and 2012, respectively, is a $348.7 million debt due in 2013.
Given that dealing with its debt may not exactly be at the very top of Toll executives urgent-care list, it could be that the company would be better off buying back shares rather than debt, especially given the company's stock, at press time, closed at $15.63. When asked if management was considering such a move, Yearley answered, "We plan to evaluate options when the trading window opens in a couple of days."
According to the company's most recent 10-Q filed with the Securities and Exchange Commission, during its quarter ending April 30, the company repurchased 11,000 shares at an average price per share of $20.83 and had a remaining authorization of roughly 11.8 million shares.
But with Toll's distressed asset venture doing well--it contributed $4 million in profit to company earnings during the most recent quarter--little more than a year since its inception, that may be an even better place to park some investment dollars. Toll's investment in the venture, which buys large portfolios of distressed loans from banks and the federal government, currently tops $75 million, but Yearley told analysts that he "wouldn't be surprised if that $75 million doubled."
Yearley also said management was hungry to dole out dollars for good land deals but has been "frustrated" by the apparent unwillingness of banks to dispose of real estate assets with any urgency. "We're hungry," he said, adding that the company has been an aggressive competitor for the deals that are out there, given its ability to pay cash on the spot. During its most recent quarter, management spent $75 million on land acquisition, roughly half of that for a prime site at 3rd Avenue and 22nd Street in the Gramercy Park area of Manhattan.
While the Texas markets continue to be a so-called bright spot for the company, the company is seeing some success in other markets as well. East Florida has improved thanks to a new community opening, and executives said they were "happy" with Charlotte, N.C., and "at times" with Raleigh, N.C. But despite some slowdown in the metro Washington, D.C., market tied to government goings-on related to the nation's debt downgrade and budget crisis, executives said the "best action" was in the Mid-Atlantic corridor, from D.C. to Boston.
However, during the quarter, its super urban City Living operation performed quite well. During the quarter, 15% of the company's sales and 23% of its revenues traced to the business unit. Executives said the company could "easily sustain that" rate of contribution and were looking for possible expansion into the Washington, D.C., and Boston markets.
Given the company's success with urban product and continued weakness in demand for for-sale housing, analysts questioned whether management was considering entering the rental market in any significant way. The company has a history in dabbling in rental, often times partnering with a multifamily REIT on a fee simple basis, but the transactions have always been off balance sheet.
Executive chairman of the board Bob Toll said, "We're interested in it, but we're interested in it off balance sheet."