Toll Brothers and single-family rental community developer BB Living are close to an announcement of a large Toll strategic capital investment in BB.
Although Toll Brothers executives would not comment, an announcement could be coming within days as the two organizations clear final details to a deal, knowledgeable executives confirmed.
The venture--the first big marriage of its kind joining a top 10 single-family builder with a dynamic player in the fast-growing single-family built-to-rent category--runs consistent with luxury market leader Toll's increasing diversification of income streams, its growing joint venture income, and its wide array of building types, mostly aimed at high-end customers, from student housing to retirement.
For Scottsdale, AZ-based BB Living, a large capital infusion will supercharge growth potential and accelerate its strategy to expand its business and operational model nationally at a moment the current housing cycle has lost conviction among a barrage of headwinds. Rising interest rates, prices that have gone up faster than incomes, and a number of tax law changes that take away advantages long enjoyed by homeowners in expensive markets have buffeted buyer mojo amid growing broader economic uncertainty.
Currently, BB Living is building out and leasing up in six Phoenix-area communities, a portfolio of about 1,000 properties, built or planned. The intended strategy is to leverage an operational model that boasts lower operating expenses for renters, reduced turnover, and exit optionality into a national community development template, a la a multifamily REIT.
BB Living founding principals Matthew and Samuel Blank both hail from successful runs in real estate financial services, Matthew at Long Pond Capital, and Samuel at RCG Longview. Both are University of Pennsylvania grads, and both have professional ties that date back some years with Toll Brothers.
From 40,000 feet, this could be a tipping point moment for single-family for-rent--which has established a small but firm foothold among both investors as an asset class and consumers who want the trappings of living in a single family home community and the flexibility of a lease versus a mortgage--truly comes into its own beyond a handful of pilot communities in Arizona, California, Texas, and a few other locations.
Household demand for the format draws from a burgeoning rent-by-choice market of people who have the means to own, and like the tract housing community life, but don't want the bother or expense of homeownership. Perhaps equally significant, demand comes from would-be and one-day-will-be home buyers--a rent-by-necessity set who may not have the down payment or monthly payment power--who opt for single-family rental as an unavoidable staging ground as they gather the wherewithal for a purchase.
Just this week, National Association of Home Builders chief economist Robert Dietz released analysis of the Census Bureau’s Quarterly Starts and Completions by Purpose and Design that reflects strong growth--albeit off a low baseline--for the single-family-built-for-rent category. Dietz writes:
The number of single-family homes built-for-rent increased over the last four quarters. During this time period, construction starts of this type of housing totaled 43,000 homes, compared to 33,000 for the prior four quarters. There were 12,000 single-family built-for-rent starts for the third quarter of 2018.
According to data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design and NAHB analysis, the market share of single-family homes built-for-rent, as measured on a one-year moving average, stood at 4.8% of single-family starts as of the third quarter of 2018.
For Toll, the pairing is a strategic masterstroke in its particular near-term timing--as the housing recovery's longevity pitches into question--and its longterm implications. In the immediate timeframe, greater emphasis on rental cash flow and revenue streams from its residential rental properties can help insulate Toll from macro cyclical slippage or volatility. What's more single-family rental home construction--which may occur on an evened-out volume stream over months and years--can serve as a counter-cyclical source of business volume for Toll's four vertically integrated manufacturing, floor and roof truss, wall panel, interior and exterior trim, millwork, windows, and doors facilities.
Longer term, Toll--one of housing's rare meaningful brand names--can engage and empower its core top-decile customer base with yet another channel, another choice, another lifestyle option that removes friction from the way luxury households want to live. Single-family-for-rent communities, as part of a varied panoply of building typologies, locations, and lifestyles, reflect Toll's fanatic focus on achieving top-of-mind, passionate engagement among its customers, who are seen for their total lifetime value.
On a macro level, a Toll-BB Living venture would likely be only the first of such alliances, again reflecting the top 10 builders' near-term priorities around reducing cyclical risk in their business models, and longer-term needs to meet consumer households' expanding range of--and ever-higher--expectations of housing, not just as a consumer durable but as a life experience.
Stay tuned. Mergers and acquisitions activity on the eve of a 2019 that bodes intensifying challenge for those reliant on a rising-tide-lifting-all-ships may reveal a few surprises before New Year's Eve.