Toll Brothers' Yearley Sees Land as `Gold' in Path to Profit
Stock Chart for Toll Brothers Inc (TOL)
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 during an Aug. 11 interview at his office in Horsham, Pennsylvania. “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. Analysts estimate the builder will report its 12th straight quarterly loss tomorrow.
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.”
Falling Sales, Confidence
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. Existing-home sales plunged 27.2 percent in July, more than analysts forecast, the National Association of Realtors reported today.
Yearley “can do, at this stage of the game, better than I,” Toll, 69, said in a telephone interview from his vacation home in Otisfield, Maine. “He’s young, he’s energetic and ready to roll. And I do not have as much vigor as he has.”
Bob Toll hired his eventual successor two decades ago. Yearley, the son of the former CEO of Phelps Dodge Corp., had been a lawyer specializing in corporate litigation. He was considering starting a business fixing and flipping homes, when he answered a help-wanted advertisement for an assistant to the chief executive at a New York Stock Exchange-listed company.
The interview took place March 1, 1990, Yearley’s 30th birthday. He was offered the job at the same pay as the law firm and two weeks of vacation instead of the law firm’s three weeks. Yearley recalled Bob Toll saying: “You’re going to be having so much fun, you’re not even going to take the two.”
Yearley, an outdoorsman who climbed Mount Rainier in Washington and attempted Mount Denali in Alaska, said Toll was right about skipping vacation -- his first couple of years on the job.
One of Yearley’s first assignments was to ask banks if they had land to sell at distressed prices in the aftermath of the savings and loan crisis.
“Bob said, ‘here’s a book with the names of banks A through Z,” Yearley recalled, sitting in his third-floor office in front of a wall of photos of his wife and five children. “Start dialing for dollars.”
Meeting at Top
Yearley impressed the CEO by suggesting they learn about distressed real estate by going to the top. He arranged a meeting with William Seidman, then chairman of the Resolution Trust Corp., which oversaw the sale of failed bank assets.
“It was Doug’s suggestion, let’s go meet the guy,” Bob Toll said. “It helped tremendously.”
Yearley climbed the ranks through managing acquisitions and expansions, becoming one of eight regional presidents in 2005. He was named executive vice president in November.
Bob Toll said he knew from the beginning that his hire would eventually become CEO.
Yearley was “smart, affable, amiable, perceptive, a lawyer and a good balanced personality,” Toll said. He “proved his capability over the past 20 years.”
While not “dialing for dollars,” Yearley has resumed land purchases -- and again buying troubled assets. Toll Brothers’ new distressed investing unit, Gibraltar Capital & Asset Management LLC, partnered with Oaktree Capital Management LP and Milestone Merchant Partners LLC to acquire a $1.7 billion loan and land portfolio in a Federal Deposit Insurance Corp. auction from the failed Amtrust Bank. The companies announced the completion of the deal last week.
The group paid $137.1 million for a 40 percent share of the portfolio, or about 40 cents on the dollar when including FDIC financing. Toll Brothers’ stake cost about $27 million, according to Michael Rehaut, a JPMorgan Chase & Co. analyst in New York. The deal is “a modest positive” for the company, he wrote in an Aug. 17 note to investors.
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. It had $1.55 billion in cash and short-term investments as of April 30, down from $1.96 billion a year earlier, as it resumed land purchases.
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.
Investors haven’t rewarded the company. The shares have fallen 26 percent in the past 12 months, worse than the 24 percent decline in the Standard & Poor’s Supercomposite Homebuilding Index. NVR Inc., Lennar Corp. and D.R. Horton Inc. have all performed better than Toll after returning to profits.
Toll Brothers shares fell 1 cent to $16.19 as of 4:11 p.m. in New York Stock Exchange composite trading. The S&P homebuilders index rose 0.2 percent.
In its fiscal third-quarter report tomorrow, the first since Yearley became CEO June 16, Toll Brothers probably will report a loss of $17.9 million, based on the average estimate of eight analysts in a Bloomberg survey. That would add to the cumulative $1.22 billion of losses since 2007.
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,” Zelman, who rates Toll Brothers a “hold,” said in a telephone interview.
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 Inc., said Jack Micenko, an analyst with Susquehanna International Group LLP.
“Low-priced, entry-level housing is the only sign of life in the near term,” Micenko said in a telephone interview from New York. “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 (297 square meters), 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 Aug. 18 by Trulia Inc., a San Francisco-based real estate search company.
“Americans are veering away from McMansions,” Pete Flint, Trulia’s CEO, said in a conference call with reporters, referring to a term for oversized homes. “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.”
Yearley has made modest changes since taking over as CEO. From June through August, he allowed workers to leave the office at 1 p.m. two Fridays a month, expecting them to make up the time “when they’re actually thinking about work and they’re productive.” He eliminated 16 parking spaces reserved for top executives.
“If you get in early, park near the building,” said Yearley, who takes his hour-plus daily ride from home in Westfield, New Jersey, to the office in a company chauffeured car. “If you get in late, get a little exercise.”
Yearley continues Bob Toll’s Monday tradition of gathering executives at the Horsham headquarters to evaluate weekend sales from the company’s 50 markets, meetings fueled by pizza that often run past midnight. He estimates that he spent 800 Mondays with the former CEO.
Bob Toll owned 19 million shares of Toll Brothers as of March, according to the company’s proxy statement, making him the largest shareholder after Fidelity Investments. Yearley owned 310,000 shares, so he doesn’t have as much to lose. He has a lot to gain, if his strategy succeeds in driving expansion and returning the company to profitability.
“In the bad times, we take advantage of the land,” he said. “Buying the land is feeding the machine in the good times.”
Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.