Toll Brothers on Monday announced the creation of an asset acquisition and management unit designed to profit from distressed real estate.
Named Gibraltar Capital and Asset Management LLC, the new unit is a wholly owned subsidiary of Toll Brothers. It is similar, but not identical to Lennar Corp.'s Rialto unit, in that this new Toll subsidiary intends to acquire and hold some assets that are not directly related to home building.
"We intend to leverage Toll Brothers' relationships, nationwide presence, and well-known brand name, as well as our capital access, land acquisition and development strength, and experience in distressed acquisitions and workouts, to pursue opportunities that have synergies with, but may fall outside, our core home building operations," said Douglas C. Yearley Jr., Toll Brothers' CEO. "These opportunities may include the acquisition and disposition of loan and property portfolios; the development of sites for sale to other builders; providing assistance to banks and developers in the workout of troubled real estate; and a myriad of other potential investments where our capabilities and capital access can add value."
Yearley said the new unit would be directed by Roger A. Brush, a 17-year Toll veteran who has worked with distressed real estate in the past, and Michael L. LaPat, a senior manager in Toll's finance group. LaPat has more than 10 years with the company working on mergers and acquisitions, due diligence, valuations, and the structuring and financing of complex ventures.
The new subsidiary does not yet have anything in its portfolio. So far, Gibraltar is an “empty vessel,” said Frederick Cooper, Toll’s senior vice president of finance. “It hasn’t made any investments yet. We’re looking at a lot of good opportunities.”
Toll has been working on the Gibraltar plan for four to six months “in a formal way,” said Cooper. “But Toll Brothers has been looking at distressed opportunities for the past several years."
He said Gibraltar has a core team of about six employees who will also draw upon Toll's own experts in its 50 markets for market-specific knowledge and land development wisdom. “We had the expertise on workouts in house,” he said. “We rehired some people who have land development and deal evaluation experience to complement the talent we already have.”
That includes CEO Yearley who, along with Brush , worked in the troubled asset realm during the real estate meltdown in the late ’80s, early ’90s. “Roger Brush cut his teeth during that season of stress,” Cooper said of the man who will be managing Gibraltar.
The early read on Wall Street was positive regarding the venture. Josh Levin, home building analyst for Citigroup Global Markets, issued a note to investors saying he viewed the creation of the unit as a "clear positive for the stock. Gibraltar offers TOL the opportunity to supplement its net income (or lack of in the near term) from home building operations with net income from distressed investments. As such, Gibraltar could function as a buffer against book value destruction in the near term. In the longer term, Gibraltar also affords TOL the potential to earn outsize returns as the housing cycle turns."
Levin also pointed out that while Toll's Gibraltar and Lennar's Rialto share similarities, Rialto is a joint venture that is well along as a going concern and is already contributing to Lennar's bottom line. Gibraltar, on the other hand, is wholly owned and will likely take some time before it begins contributing to Toll's balance sheet.
While Toll’s home building operation has not returned to profitability, it has low leverage and roughly $1.5 billion in cash on hand. That is a considerable amount for a company of its size and allows it to take a strong position in distressed assets. “We have a lot of cash that we can use to invest, some in Gibraltar, some in growing the core business,” said Cooper. “We see this as a great complementary opportunity.”
Cooper would not comment on last week's reports that Toll had become a winning bidder, in partnership with Oaktree Capital Management, on a $1.7 billion asset portfolio auctioned by the Federal Deposit Insurance Corp. (FDIC). The FDIC has not issued a notice of the auction results either.