The Toll Brothers Inc. has a new, non-Toll brother chief executive officer. And he believes that land is what will save the company when the housing market finally picks up.
Two months ago, CEO Robert Toll – who founded the company 43 years ago, together with his brother Bruce – handed the control to 50-year old Douglas Yearly Jr. And now Yearley, who has a warning on his desk saying “You can buy more land in an afternoon than you can get rid of in a lifetime,” is facing the challenge of balancing the warning and closing housing deals. He is dead-set on ending the three year slump of the Toll Brothers.
Considered the largest U.S. luxury house builder, the company sells houses with an average of 3,200 square feet (297 square meters), selling at $565,000. Since only 9% of Americans would opt to get houses that big (or bigger) – says San Francisco-based real estate search company Trulia Inc. – it is understandable that their home sales are down.
This year, the company has seen less and less revenue and demand for upscale homes. Since most first-time home-buyers opted to spend their money on more modest homes, thanks to the tax credit, Toll Brothers was left behind by the competition. In the next few days, the company might file for the 12th straight quarterly slump.
This is why Yearley is making it his priority to acquire land instead of building homes. He says in an interview last August 11, “Our shareholders will be better served by this company growing through acquiring more land at today’s prices. When you get it, it’s gold”
Yearley, son of a former Phelps Dodge Corporation CEO and former corporate litigation lawyer, started with Toll Brothers when he was 30 years old. One of his first assignments was inquiring about lands selling at distressed prices. From this, he got the idea of learning about distressed real estate and using that to make it to the top.
After making that suggestion, Yearley met with then Resolution Trust Corporation chairman’s William Seidman. Resolution Trust Corporation oversees sales of failed bank assets.
With the new-home sales at its all-time low after the cancellation of the buyers’ tax credit and home builder confidence at its lowest since recession in March 2009, home builders are looking at how profits can be maximized. One way of doing this is by buying lands while they are at its cheapest. In the last two quarters, 12 of the largest home builders acquired 14,214 lots – Toll Brothers has the largest land reserve, amounting to at least 15 years’ worth based on sales rate.
Investors, however, have not paid heed to the company’s actions. Whereas NVR Inc., Lennar Corp., and D.R. Horton Inc. are performing well in the stock market, Toll Brothers shares have been falling by 26% in the past 12 months.
The company best bet for growth is by buying a company that specializes in lower-cost homes. In this way, the Toll Brothers will be able to target those who are looking at upgrading to luxury homes and those who are new to the market; this will greatly expand their market base.