With approximately $895 million in cash and more than $1.2 billion available under its bank credit facility (which matures in March of 2011), Horsham, Pa.-based Toll Brothers (NYSE:TOL) is in a much better financial position that many of its peers.
But with oversupply in the housing market bringing construction to a halt, the company isn't spending that money on land purchases or new construction. Restrictions on reborrowing and liquidity make paying down the debt unattractive as well.
"Liquidity is more important than reducing that line," said Robert I. Toll, Toll's chairman and CEO.
That begs the question: What's Toll going to do with that money? Right now, it's investing in conservative, short-term instruments. Although these investments are providing returns that are smaller than the interest on its debt, the builder is not looking to pay down those loans. "We're best advised to sit on our cash and wait for opportunity," Toll said.
The builder is eyeing less conventional investments down the road. In today's conference call, Toll acknowledged that the company has had discussions about entering overseas markets. "We've looked at some opportunities," he said.
Though the company has a good handle on the American luxury market, Toll said he doesn't have any misconceptions about the challenges of going into a place like China, Slovenia, or Romania. He knows he would have to do a joint venture in another country.
On the domestic front, Toll is looking to partner with groups that buy distressed debt. Toll only sees positive outcomes by buying such debt. Either the loan gets paid off and Toll makes money or Toll acquires the assets of the builder that can't pay its loans and then manages that entity.
Toll has also had discussions with some of its smaller, more troubled peers about their land. But so far, those discussions haven't led to many deals. Toll said the problem is that these builders bought their land in 2004 and 2005 and still expect to get those prices in any sale. "That's high for this market," he said.
As these builders face problems with their banks, Toll expects to see some deals down the road, but he doesn't expect to see a reasonable deal until there is "blood on the streets."
