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Investor's Business Daily
Oh, It's A Beautiful Day For A Neighborhood
Monday July 11, 7:00 pm ET
Steve Watkins
Plenty of people want new houses, but hardly anyone wants a new housing development in his neighborhood.
Call it what you want -- slow growth, no growth, not in my backyard -- the environment these days isn't conducive to building houses.
It might sound odd, but that actually helps many of the big home builders, and Toll Bros. (NYSE:TOL - News) tops the list.
"There's a significant imbalance between supply and demand," said Toll Chief Financial Officer Joel Rassman. "Those of us who are more adept at getting land approvals will grow, and those who can't will shrink and disappear."
His company is one of the best at getting those approvals. The process now takes five to six years in some parts of the country -- twice what it was a decade ago.
Toll has spent years learning how to work its way through the approval muck. It got its start in Pennsylvania and built homes there and in New Jersey -- two of the nation's more restrictive areas. The company earned its chops on how to get land approved and developed.
"That gives us a competitive advantage all over the country," Rassman said. "We can get approvals faster than others can."
'Dominant Player'
Toll's focus on the luxury home market gives it another edge. Its average home sales price was $650,000 during the second fiscal quarter ended in April.
That's by far the highest of any publicly traded home builder, and it's twice what most of the other big builders charge.
"Within the luxury market, they're the dominant player," said analyst Jim Wilson of JMP Securities.
Toll primarily targets households with annual income over $100,000. The number of those households has grown six times faster than the overall population in the past two decades. With the population growing older, even more people are shifting into Toll's target market.
Toll's focus on the luxury segment means it battles mainly small builders in each of its markets. It has a big advantage over the small firms in buying land and getting it approved, Rassman says.
The company's size helps it save money on labor and materials, too.
Thanks in part to its pricing power, Toll boasts one of the industry's highest profit margins, says Arthur Oduma, analyst at Morningstar Inc. Current operating margins are 18% -- about 50% higher than most peers.
The company posted fiscal second-quarter earnings of $2.01 a share, up from 89 cents the prior year. Sales gained 52% to $1.25 billion.
Analysts polled by First Call expect full-year earnings to rise 70% to $8.56 a share, then gain 23% to $10.57 in fiscal 2006.
Toll operates in 47 markets in 21 states. Most are on the coasts and in the Sun Belt. It also entered Chicago and Detroit in the past six years and is eyeing operations in other areas as well.
"We've identified about 25 to 30 areas we'd like to be in one day, but it might take two or three years and it might take 10," Rassman said. "We're very patient."
One source of growth is active adult communities that target new retirees or those approaching retirement age.
Toll introduced its line of active adult homes in 1999. The line already makes up 10% of sales, and it should grow to 15% of sales in the next few years, Rassman says.
Toll has a five- to six-year supply of home sites after boosting the sites it controls from 58,000 a year ago to 68,000 at the end of this year's fiscal second quarter.
That puts it in good shape to keep building well into the future.
"Anyone who owns a lot of land has a ... competitive advantage because land is getting more difficult to obtain," Oduma said.
There is a risk that the market will hit the brakes before Toll can put that land to use, though Rassman doesn't sound too worried about it.
"You have to underwrite each community right," he said.
Another potential risk is rising mortgage rates. On July 7, rates on 30-year, fixed-rate mortgages climbed to 5.62%, up from 5.52% the prior week.
Rassman downplays that problem, too, because many of Toll's clients are wealthy and typically don't make a buying decision based on mortgage rates.
"We're not an affordability play," Rassman said. "That doesn't mean a (2%) increase wouldn't have a psychological impact. But we sold a lot of houses in the '80s, when rates were 8, 10 or 12%."
Interest rates are just one factor affecting affordability and consumers' desire to buy a house, analyst Oduma says.
He sees rising competition as a bigger issue. If home prices take a dip, that could hurt. A pullback would hit Toll harder than most, because luxury prices have risen the fastest.
"Prices are up so much, particularly in the luxury market, that they've just got to slow down," Wilson said.
Still, Rassman sees no evidence of a housing bubble that's about to pop.
"I think the supply-demand imbalance is protecting us," he said.
Oh, It's A Beautiful Day For A Neighborhood
Monday July 11, 7:00 pm ET
Steve Watkins
Plenty of people want new houses, but hardly anyone wants a new housing development in his neighborhood.
Call it what you want -- slow growth, no growth, not in my backyard -- the environment these days isn't conducive to building houses.
It might sound odd, but that actually helps many of the big home builders, and Toll Bros. (NYSE:TOL - News) tops the list.
"There's a significant imbalance between supply and demand," said Toll Chief Financial Officer Joel Rassman. "Those of us who are more adept at getting land approvals will grow, and those who can't will shrink and disappear."
His company is one of the best at getting those approvals. The process now takes five to six years in some parts of the country -- twice what it was a decade ago.
Toll has spent years learning how to work its way through the approval muck. It got its start in Pennsylvania and built homes there and in New Jersey -- two of the nation's more restrictive areas. The company earned its chops on how to get land approved and developed.
"That gives us a competitive advantage all over the country," Rassman said. "We can get approvals faster than others can."
'Dominant Player'
Toll's focus on the luxury home market gives it another edge. Its average home sales price was $650,000 during the second fiscal quarter ended in April.
That's by far the highest of any publicly traded home builder, and it's twice what most of the other big builders charge.
"Within the luxury market, they're the dominant player," said analyst Jim Wilson of JMP Securities.
Toll primarily targets households with annual income over $100,000. The number of those households has grown six times faster than the overall population in the past two decades. With the population growing older, even more people are shifting into Toll's target market.
Toll's focus on the luxury segment means it battles mainly small builders in each of its markets. It has a big advantage over the small firms in buying land and getting it approved, Rassman says.
The company's size helps it save money on labor and materials, too.
Thanks in part to its pricing power, Toll boasts one of the industry's highest profit margins, says Arthur Oduma, analyst at Morningstar Inc. Current operating margins are 18% -- about 50% higher than most peers.
The company posted fiscal second-quarter earnings of $2.01 a share, up from 89 cents the prior year. Sales gained 52% to $1.25 billion.
Analysts polled by First Call expect full-year earnings to rise 70% to $8.56 a share, then gain 23% to $10.57 in fiscal 2006.
Toll operates in 47 markets in 21 states. Most are on the coasts and in the Sun Belt. It also entered Chicago and Detroit in the past six years and is eyeing operations in other areas as well.
"We've identified about 25 to 30 areas we'd like to be in one day, but it might take two or three years and it might take 10," Rassman said. "We're very patient."
One source of growth is active adult communities that target new retirees or those approaching retirement age.
Toll introduced its line of active adult homes in 1999. The line already makes up 10% of sales, and it should grow to 15% of sales in the next few years, Rassman says.
Toll has a five- to six-year supply of home sites after boosting the sites it controls from 58,000 a year ago to 68,000 at the end of this year's fiscal second quarter.
That puts it in good shape to keep building well into the future.
"Anyone who owns a lot of land has a ... competitive advantage because land is getting more difficult to obtain," Oduma said.
There is a risk that the market will hit the brakes before Toll can put that land to use, though Rassman doesn't sound too worried about it.
"You have to underwrite each community right," he said.
Another potential risk is rising mortgage rates. On July 7, rates on 30-year, fixed-rate mortgages climbed to 5.62%, up from 5.52% the prior week.
Rassman downplays that problem, too, because many of Toll's clients are wealthy and typically don't make a buying decision based on mortgage rates.
"We're not an affordability play," Rassman said. "That doesn't mean a (2%) increase wouldn't have a psychological impact. But we sold a lot of houses in the '80s, when rates were 8, 10 or 12%."
Interest rates are just one factor affecting affordability and consumers' desire to buy a house, analyst Oduma says.
He sees rising competition as a bigger issue. If home prices take a dip, that could hurt. A pullback would hit Toll harder than most, because luxury prices have risen the fastest.
"Prices are up so much, particularly in the luxury market, that they've just got to slow down," Wilson said.
Still, Rassman sees no evidence of a housing bubble that's about to pop.
"I think the supply-demand imbalance is protecting us," he said.
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