By Orlando Lee Rodriguez
Not many developers can boast that their liquid capital position is so strong that their almost billion dollar credit line can be considered ‘optional’.
Not many, that is, that focus solely on residential.
In New York, where space is always at a premium, commercial real estate, at least mixed use spaces, are king. And there are giants in this kingdom: The Rudin Management Company, Tishman Speyer and the Related Companies, as well as tons of foreign buyers looking for a safe haven for their capital.
But what makes Toll Brothers Inc. (NYSE:TOL) unique in the ever changing city space is not that they have expanded their holdings here, but that they have done it so quickly during a financial crisis with all cash.
“We have $750 million in cash on hand, $850 to $950 million in lines of credit available for new acquisitions across the country — it’s basically free money,” said Alan Silver, acquisition manager for Toll Brothers City Living. “Typically we don’t even access that line of credit. We usually have enough cash to make acquisitions.”
It is this cash position that has given Toll Brothers the leverage to make land acquisition an integral part of their New York strategy. They don’t just buy and develop land; they purchase and wait for the market to mature.
Between 2008 and 2012, Toll Brothers spent $81 million in cash on land acquisitions in Manhattan and Brooklyn alone. That is not counting what they spent in Jersey City and Hoboken. Some sites in New York proper have yet to be developed. During the first week and a half of 2013, the company spent more than in the previous four years — $120.5 million in cash for two development sites in Manhattan, one which isn’t even zoned for residential development yet.
“We are very excited to have purchased such prominent sites,” said Douglas C. Yearley, Jr., the company’s chief executive officer in a statement. “We have continued to expand in order to take advantage of the strong dynamics of this market. With abundant liquidity and one of the strongest balance sheets in the industry, sellers know we have the resources and capital to reliably close quickly on large projects of this nature.”
And an abundance of cash they do have.
In the fourth quarter of 2012 alone, Toll’s net income was $411.4 million, or $2.35 per share. In total, the company ended the year holding $1.2 billion in cash, with no major debt obligations until 2014.
Mr. Yearly makes a point to say that the company’s philosophy is one where always acquiring ‘excellent located sites’ is paramount. The ability the company has to close deals quickly, has given it a competitive advantage to acquire stalled sites from owners who cannot resist Toll’s ability to close a deal without outside financing.
Some of the sites Toll has purchased for condominium development are not located in prime areas, including 110 Third Avenue near Union Square, 303 East 33rd in Murray Hill, the north side of Williamsburg and DUMBO in Brooklyn.
But the Horsham, PA, company has hedged its bets that the extension of residential territory currently underway will expand New Yorkers’ viewpoints on what neighborhoods are worthy of luxury status.
For example, one of Toll’s condo developments, The Touraine on East 65th Street, sits on the corner of traffic-clogged Lexington Avenue. Long the diving line between the ritzy Upper East Side and the working class neighborhood of Yorkville, the avenue was once a road to tie up horses.
Today it hosts the overcrowded number 6 train and four bus lines, not exactly prime residential real estate.
Yet at $4 million per unit and no full certificate of occupancy, almost all of the units in The Touraine have sold. This, without utilizing any of the city’s established real estate firms. Units are shown and sold through a handful of marketing agents based out of Toll City Living’s Wall Street office.
“We expect all the currently sold … units to [be] delivered in the second quarter,” said Marty Connor, Toll Brothers chief financial officer. “We have one left to sell and that’s the penthouse.”
Like its land acquisitions, the company prefers to market its properties well before they are even built.
Some sales brokers however, are skeptical on the company’s location strategy over the long haul. Traditional high-priced areas they say will continue to garner the bulk of sales returns. They add that Toll’s acquisition and sales strategy may pay short term dividends, but will in time will fade.
“They have changed the complexion of Lexington where very few would bet on it,” said veteran sales broker Reba Miller, senior managing director of Sales at the CORE Group. “What does it say about the market and what will it mean? Well, there are only so many opportunities to create high-performing returns.”
Others don’t share Ms. Millers’ doubts on limited returns due to excess supply in areas not considered desirable. They agree with Toll’s strategy of expanding the market.
“New York City’s luxury market is diverse, competitive and far from oversaturated,” said Karen Mansour, executive vice president of DE Development Marketing, the exclusive marketing agent for 400 Fifth Avenue, a luxury condominium built well outside any of the city’s upscale neighborhoods.
“The majority of new developments coming on the market are smaller, boutique buildings with anywhere from approximately 20 to 70 units. The fact that reputable developers like Toll Brothers want to build here in New York City speaks to the strength of the real estate market overall,” she said.
It is harder to argue with Toll’s strategy when looking at investor confidence.
In the past year, the builder has seen its stock price rise more nearly 62 percent to $37 per share. Since hitting its low of $14.26 on March 6, 2009 the stock has rebounded 134 percent. It has still not matched its all-time high of $57 per share in July 2005, but that rapid rise took place only after a 2:1 stock split, the second in its history. By mid-2006, the stock had returned to $22 a share before slightly rising again until 2008.
Now, for the last three quarters, Toll’s earnings have continued to beat analysts’ estimates. Fourth quarter 2012 earnings were well above what analysts had predicted because of a slowdown in mortgage originations.
In the past, Toll’s earnings performance would have been heavily based on its suburban products. But over the past year, more than half of its $487.1 million in total net income – $275 million worth – was derived from its Toll Brothers City Living product in the New York metro area and Philadelphia.
“City Living and the higher end product they produce carries a cache in the industry and investors are willing to pay more for the earnings,” said senior equity research analyst David Neil Williams, who follows Toll Brothers for the Williams Financial Group. “They tend to do a little better even in down times. They are leveraged nicely and they are better positioned in terms of debt to equity position. We’ll look out to see how their acquisition strategy works out going through the year.”
Williams currently has a 12 month hold rating on Toll Brothers and said he is confident that barring disaster, the rating will unlikely change for the worse. According to Bloomberg LP, 9 of the top 10 rated Toll Brothers analysts rate the stock a buy or a hold – ironically mimicking Toll’s buy and hold strategy.
Now with 23 cash purchases and counting, and enough cash on hand to continue to make an impact in the New York market, Toll Brothers has hedged its bets that its capital investments will pay dividends as New York’s newest fashionable areas continue to evolve.
The company may have history on its side. The city has, in its 400 years of existence, seen its share of emerging upscale areas. All it takes CEO Douglass Yearly says, is having the vision and the capital.
“When you get a hot job, that’s the beauty,” said Mr. Yearly. “We think of the business we are in, we can hit home runs. The other guys can hit singles and doubles perhaps, but they can’t hit it out of the park.”
