Toll Brothers (TOL) rules the luxury home industry. Yet Toll does not build custom homes, but rather customizes homes that share many uniform features. This way, the company combines the individualized features upscale buyers prefer with the cost inefficiencies of mass building.
Toll Brothers designs, builds, and markets customized single family and attached move-up homes in luxury communities. It also does luxury condominium conversions that re-purpose existing structures, and builds condo developments from scratch. Its target demographic includes empty nest couples as well as second home buyers and active-adult seniors. Companies like mid-range Lennar (LEN) also build planned communities, but Toll communities often include golf courses and country clubs managed by Toll.
Many builders were forced out of business in the real estate slump in 1989, but Toll Brothers emerged as a leading luxury home builder. It purchased land at distressed prices during the downturn, and was able to sell homes at recovery prices. Also, it often waited to build homes until they were sold, thus safeguarding its capital.
Another reason for Toll’s success is its niche. Its luxury buyers have money for homes in spite of downturns. Also, the buyers targeted by Toll can usually afford large down payments, making it easier to finance a home. Toll has a subsidiary devoted to home finance.
In fact, the company is vertically integrated, with subsidiaries specializing in lumber, land acquisition, insurance, home component manufacturing, and even fiber optics lines for computer and television service, its Advanced Broadband L.P.
Though Toll prides itself on quality, at least one of its joint projects faced severe criticism. Homeowners at the Northside Piers, luxury view condominiums on the Brooklyn waterfront, accused the builder of shoddy workmanship and potential fraud. Toll actually cut prices in Northside Piers at the height of the slump.
Like all the home builders, Toll Brothers faced tough times in the Great Recession. The five-year bad market depressed its earnings. Every home builder has faced similar problems though, and it’s possible that TOL is better equipped to deal with a choppy market than builders like KB Homes (KBH), huge D.R. Horton (DHI), and Ryland Homes (RYL), which sell many of their houses to first time buyers. Upscale-oriented Toll came out of the last housing slump with a roar.
At the Q4 conference call on December 6, 2011, CEO Douglas C. Yearley, Jr. talked about the way Toll Brothers is again buying land. “Our strong balance sheet gives us the financial flexibility…During fiscal year 2011, we spent approximately $281 million on land…purchasing approximately 3,400 lots and optioning another 5,800. This resulted in a net increase to 37,500 lots owned and controlled at fiscal year end 2011…Nearly 60 percent of our lots are concentrated in the…Washington DC to metro Boston corridor, which enjoys lower unemployment and greater affluence than many other regions.”
He also mentioned the acquisition of CamWest, a luxury Seattle builder, intended to give Toll entry into another growing area. Toll’s Gibraltar subsidiary has been buying distressed mortgages as well. Toll is preparing for recovery, as they did in 1989.
Executive Chairman Robert B. Toll said, “Unemployment nationally among college graduates is well below five percent; we therefore believe that our customers have the ability to buy.” He added that he sees significant pent-up demand and that, “Our solid land position and limited competition in the upscale market should give us a head start as markets recover.”
The next conference call is scheduled for February 22, 2012. Investors who listen in or read the transcript will get a chance to see if the company is meeting its goals.
Investors already believe in Toll. Over the past year, Toll Brothers stock is up 9%, double the rise in the S&P 500. The move could leave it overpriced at the moment. On the other hand, if the housing industry continues to improve, Toll Brothers is well placed to take full advantage.