Doug Yearley, the first non-Toll brother to lead Toll Brothers, has a plaque on his desk with a warning: “You can buy more land in an afternoon than you can get rid of in a lifetime.”
Yearley, 50, looks to balance that maxim with his desire to cut deals as he seeks to end three years of losses at the largest U.S. luxury-home builder. After becoming chief executive officer two months ago, he’s pressing on with a strategy to buy land at sunken values even as demand for new homes is sluggish.
“Our shareholders will be better served by this company growing through acquiring more land at today’s prices,” Yearley said at his office in Horsham, Pa. “When you get it, it’s gold.”
Toll Brothers is facing shrinking revenue and falling demand for its upscale homes, which averaged about $565,000 as of April. The company missed out on the benefit of a tax credit for more frugal first-time buyers, putting it behind competitors in returning to profitability after the U.S. housing crash.
Yearley was promoted as the industry comes “out of the tunnel,” said former CEO Robert Toll, who founded the company with his brother, Bruce, 43 years ago and remains chairman.
Toll said he wanted to hand over the reins one or two years earlier, “but it wouldn’t have been right when things were so terrible.”
The housing market is still struggling. New-home sales are near the lowest rate on record after the April 30 expiration of the tax credit for buyers, and a homebuilder confidence index sank this month to the lowest level since the depths of the U.S. recession in March 2009.
Since January, Toll Brothers has spent $250 million on land, adding to holdings for the first time since 2006. Yearley, who said the company looks at a half-dozen land deals a week, wants to add a net 20 communities by the end of October.
During the housing slump, Toll Brothers slashed its community count to 190 from 335 and whittled the number of lots under control to 33,600 from 91,000.
Cheaper land helps homebuilders boost margins when houses are sold, allowing them to improve profitability amid slumping demand. The 12 largest homebuilders by market value added 14,214 lots to their control over their two most recent quarters, according to data compiled by Bloomberg.
Toll Brothers has the biggest backlog of land – about 15 years’ worth of lots at its current sales rate.
New strategies
Investors haven’t rewarded the company. The shares have fallen 29 percent in the past 12 months, worse than the 25 percent decline in the Standard Poor’s Supercomposite Homebuilding Index.
Toll Brothers should spend some of its cash repurchasing stock to boost its share price, said Ivy Zelman, an independent homebuilding industry analyst in Cleveland.
“They’re sitting on a lot of cash, and there’s not a lot of opportunities out there with respect to land buys that are, arguably, at depressed prices,” said Zelman, who rates Toll Brothers a “hold.”
Yearley wants to expand development of highrise urban projects beyond the New York area to Boston and Washington. He started the City Living division that now accounts for 12 percent of the company’s units. Multifamily homes make up 28 percent, while “active adult” and empty-nester communities represent 12 percent.
Less than half of Toll Brothers’ homes sold are the large, single-family houses that built the company’s brand.
Toll Brothers’ best option for growth is to acquire a company that specializes in lower-cost homes for first-time buyers, such as Ryland Group, said Jack Micenko, an analyst with Susquehanna International Group.
“Low-priced, entry-level housing is the only sign of life in the near term,” Micenko said. “The problem with Toll is you have to sell a house to buy a Toll house.”
The average Toll Brothers house is about 3,200 square feet, said Chief Marketing Officer Kira McCarron. Only 9 percent of Americans want to own a home that size or larger, according to a survey released last month by Trulia Inc., a San Francisco-based real estate search company.
“Americans are veering away from McMansions,” said Pete Flint, Trulia’s CEO. “This will be the first decade when homes are built smaller.”
Demand for large houses will recover along with the economy, as it has after every slowdown, Yearley said.
“The suburban home on the one acre of land in the best school district, that’s the American dream,” he said. “That’s not going away.”
