Toll Bros. Trading ‘Close To Liquidation’ : Barrons
Barron’s has an article on Toll Bros. today. “With Wall Street fearful about a bursting of the housing bubble, home-building stocks have been crunched, and none as hard as Toll Brothers, the country’s top producer of luxury homes. In just seven months, Toll has gone from being the Street’s favorite major builder to the least-liked. Toll shares, at around 30, are down nearly 50% from their peak of 58 last July.”
“The backdrop for builders has worsened in recent months as Toll has warned of weakening orders, rising cancellation rates and greater discounting. ‘Toll’s stock is discounting Armageddon,’ says Matthew Lindenbaum, co-chief of a New York investment firm that holds Toll shares. He values Toll at more than $50 a share and says downside risk probably is limited to the low 20s, providing a favorable risk/reward situation.”
“Toll’s rising book value should underpin the stock, Lindenbaum adds. Book stood at about $16.50 a share at the end of Toll’s fiscal 2005 in October. Home builders have rarely traded below book value if they are profitable. Book value, meanwhile, probably understates Toll’s asset value. Why? Toll holds land, carried for $1.7 billion, that mostly was purchased several years ago at below-market prices. Lindenbaum believes Toll probably is trading close to liquidation value now.”
At the end of the October 2005 quarter, Yahoo has Toll reporting inventory of over $5 billion. Hmmm.
“Robert Toll, the company’s outspoken co-founder and chief executive, doesn’t buy the bearish talk. ‘We don’t see any doomsday scenario,’ Toll told Barron’s last week. ‘Some of our markets are doing well, but none are as outstanding as during the summer of 2005. There’s definitely an overhang of supply in certain markets.’”
“Toll rattled the home-building group when it reported earlier this month that new orders had fallen 21% in the quarter ended January and that cancellations had risen to 8% from 5% a year earlier. The big questions for Toll are demand for new homes in the critical spring selling season and the profit outlook for its fiscal 2007. Toll has yet to give any guidance about its fiscal year ending Oct. 31 2007.”
“A hot topic on Wall Street is whether home builders should be buying land or their shares, given currently low P/Es. The buyback argument is that the stocks are cheap and land is expensive. Bob Toll is in the land camp. ‘Our business is not to shrink the company and buy back capital, but to expand,’ he says.”
Current assets reported by Yahoo strangely include the inventory. Excluding that line item, Tolls’ Current Assets are less than half the Current Liabilities.
What does the NAR see ahead? “Pending home sales continue to decline but are expected to recover in the months ahead. David Lereah, NAR’s chief economist, said ‘We’re going through a period of adjustment. As home sellers recognize a return to more normal rates of price growth, some that have been holding out for higher prices will be more willing to negotiate terms that are acceptable to buyers but still provide them a solid return on their investment.’”
“Regionally, the PHSI in the Northeast, the index was 11.1 percent below December 2004. The index in the West fell 8.1 percent in December and was 11.8 percent lower than a year ago. The index in the Midwest dropped 9.3 percent to a level of 105.8 and was 11.0 below December 2004.”
“Toll Brothers, Inc. engages in the development, construction, financing, and sale of residential homes in Arizona, California, Florida, Delaware, Florida, Maryland, Nevada, Pennsylvania, and South Carolina.”
This is the first time I’ve seen Tolls land put at $1.7 billion. What is the rest, granite countertops?
It would be very interesting to know if they are capitalizing the interest.
If the land is in the development stage, interest on the related notes/bonds is capitalized to the development. Being in the development stage requires very few criteria to be met. If you look at most homebuilders’ income statements, very little interest expense is left uncapitalized.
Ben - Quick comment - TOll is trading at 30 times its 1991 price, split adjusted. So, if you bought the shares at the bottom of the last homebuilding bust, you’ve still got a 30-bagger. The company is essentially a service provider, not much different from, say, H&R Block, except they’ve got tons of land, and debt, on the books. As the land begins to depreciate, look out below! This thing is no where near “liquidation price.”
DC,
The guy who said it was near liquidation is trying to get people to buy the stock. When people realize the ‘inventory’ is full of interest expenses, then we’ll see a liquidation. BTW, H&R is largely a mortgage funder these days.
A mortgage funder? I had no idea - but hey, everyone’s in the game these days, right?
These clowns will stop at nothing to try and talk the stock up.
It’s a pump and dump. I’m going to grab some more puts at 32-33.
Breaking news:
THE ANGEL IS BACK! Barron’s extremely bullish article on TOL probably was the cause for the HBs opening up pretty much across the board this morning. But as has happened so often recently, they started sliding, sliding. But guess what? At 11:20 the angel arrived. Waved her magic wand and every one of them turned up. It is like the Thunderbirds or a women’s choreographed swim team. They all moved up! At exactly the same time.
Here is the link to Marketwatch where I monitor 11 HBs and a few subprime lenders.
http://www.marketwatch.com/tools/quotes/quotes.asp?addsymb=LEND+WU++FED++WLS&symb=bzh+ctx+dhi+hov+len+phm+ryl+spf+tol+fnm+kbh+WCI&siteid=mktw&vc=1&x=10&y=10
Look at the charts. Look at the trading patterns leading up to 11:20 and then after 11:20. See any difference? Now look at the sub-prime lenders charts. Nothing happened to them at 11:20. Hmmm…
Life is just one big mystery, isn’t it?
haha. i can look to buy cheap new houses again in december. the wife is bitching for a new house. hehe.
December of 09 or 10 I hope.
“Robert Toll, the company’s outspoken co-founder and chief executive, doesn’t buy the bearish talk. ‘We don’t see any doomsday scenario,’ Toll told Barron’s last week. ‘Some of our markets are doing well, but none are as outstanding as during the summer of 2005. There’s definitely an overhang of supply in certain markets.’”
It must be great to always have such a bullish attitude. I bet its much easier to sleep at night. I don’t consider myself a pesimist, but eventually the fundamentals have to take hold. We can’t all own 3 houses. Each of which exceed the next 15 years of pre-tax income. I hardly consider myself an enconomist, but right now I would opt to buy back some of the shares.
Then again bridge loans could still give Toll another good year.
-beantownbubble
But don’t bulls usually buy stock, not sell it? Somebody commented once that there are many reasons for insiders to sell company stock, and expeciting its value to increase is not one of them.
INSIDER TRANSACTIONS
12/21/2005 ROBERT I TOLL
Chief Executive Officer 480,164 TOL Exercise of Stock Options at cost of $16,964,194.12
08/29/2005 ROBERT I TOLL Chief Executive Officer 292,000 TOL Exercise of Stock Options
at cost of $1,284,450.39
07/25/2005 ROBERT I TOLL
Chief Executive Officer 1,000,000 TOL Open Market Sale
proceeds of $57,050,507.60
07/21/2005 ROBERT I TOLL
Chief Executive Officer 1,000,000 TOL Proposed Sale (Form 144) estimated proceeds of $56,330,000.00
07/08/2005 ROBERT I TOLL
Chief Executive Officer 265,080 TOL Open Market Sale
proceeds of $27,432,068.87
06/28/2005 ROBERT I TOLL
Chief Executive Officer 119,200 TOL Open Market Sale
proceeds of $12,171,512.00
06/21/2005 ROBERT I TOLL
Chief Executive Officer 750,000 TOL Proposed Sale (Form 144) estimated proceeds of $75,375,000.00
02/25/2005 ROBERT I TOLL
Chief Executive Officer 472,500 TOL Open Market Sale
proceeds of $41,863,027.50
02/24/2005 ROBERT I TOLL
Chief Executive Officer 777,500 TOL Open Market Sale
proceeds of $68,219,249.50
But maybe he also believes his own press releases. Look at that last transaction;
12/21/2005 ROBERT I TOLL
Chief Executive Officer 480,164 TOL Exercise of Stock Options at cost of $16,964,194.12
That’s $35.33 a share he’s exercising at just before Christmas.
Even CEOs need to eat. Those sales account for a decent but still small portion of Robert Toll’s total position. Maybe 5-10%. I would assume he lives a rather lavish lifestyle Wouldn’t you take some off the table at a 52 week high ?
If he was as bearish as most of us, he would be selling much more then he has over the last 12 months.
I am actually suprised there has not been more insider selling.
more insider selling would be widely noted and would crash the stock price…Bob’s reputedly pulled out over 40 mill - no doubt neeeded to buy a few groceries and such…
I’m liking this soft landing.
I still like the fact that Lereah thinks that buyers will still get a solid return on their “investment.” What about those who have bought at the top and financed with an I/O or an ARM? What about them? Or what about the speculator/investor or has 10 homes and has no liquidity? What about the family that took out a HELOC to pay for housing renovations? What about rising interest rates? What about the PTA moms who all got together to invest in Condos and took out all their Hubby’s 401k money in the form of loans to do so?
And they are saying this thing will take off again? I guess it better or else all the people mentioned above are screwed along wirh David Lereah’s credibility. I don’t think you WILL EVER EVER see an economist employed by the NAR say that we are in for a severe correction. Otherwise he would lose his job and they would hire someone else. Does this sound familiar to real estate appraisers?
Doh! Ben, you gotta get that edit thing fixed lol. I really WILL proofread next time… promise… just as Lereah says housing will keep appreciating : )
A bigger text entry/edit box would be nice, too!
Wow! Dang! I just had an insight! What do you think the big thing(s) to invest in right now might be? Companies that make things or are related to the psychiatric business! Manufacturers of safety trampolins (for jumpers), straightjackets for suicide attempts, medications, uniforms for orderlies and patients, building and padding materials for “safe rooms,” coffins, etc. Funeral homes and cemetaries might get a cut as well.
Stephanie the contrarian investor
The big money will be in antidepresents and booze.
I’m heavily into alchohol already, but it seems I keep pissing away my investments.
I don’t know if you guys NOTICED. But David just used the “I” word!!!
Investment! Return on investment??? what investment? I thought we all needed houses for real, you know…to live in them. No?
I seem to remember a lot of insiders were dumping their stock at Toll last summer. These guys could see what was coming, even as they issued bullish statements. Watch what they do, not what they say.
Bobby R…
You got it.
And you LURKERS, Flipper SMIRKERS, REALTORS and anyone else related to the industry that has MILKED this market for about 3 months too long… hoping/praying/coaxing/convincing the AMERICAN PEOPLE…
Take a look around- Things are a CHANGIN’ FAST and your credibility is also changing fast.
Even the AMERICAN SHEOPLE can be convinced to trot in a new direction if they are fed enough hard evidence of a major turn in the market. Ben’s blog is doing a fabulous job of this, and the USA PRESS is starting to get in on the ACTION too.
Not to sound like a skeptic, but we all know how “trustworthy” public companies are in their reporting of numbers, right? I wonder why no one has asked Mr. Toll WHY he dumped so many shares of stock right around the market top if he “Robert Toll, the company’s outspoken co-founder and chief executive, doesn’t buy the bearish talk.” Why isn’t he BUYING the stock if it is so cheap?
See my post above for a bit of numerical evidence to support your claim that he “dumped so many shares.”
he has already answered this question. He says he is “diversifying his portfolio.” wouldn’t want all your $$ tied up in one asset class, wouldya?
If you read the insider sale tranaction posted above, it is easy to understand the sales. Mr. Toll is given a stock bonus in the form of an exercisable option to purchase the stock at a set price. This price appears to be $4.40 per share. I would sell it for that profit as would any reasonable person. The company’s history has been to reward with exercisable stock options. Blasting Toll because of the quality, size appearance of their product is OK!! But relative to the rest of the industry their financial reports are for the most part reliable and they did give a lowering of sales report. How many other HBs have done that?
Here is some straight take on why Toll stock has tumbled disproportionately relative to other HB stocks as of late. We all know that homebuilders are building like there is no tomorrow in a desparation effort to monetize their huge land inventory before all the air leaves the bubble. Since Toll has based their business model on marketing McMansions to McMillionaires, their situation is all the more desparate; we are not running out of land, but we are running out of McMillionaires, as all their home equity wealth will deflate with the bubble, and even more so since they spent themselves underwater buying toys from China and Japan. Toll Bros luxury homes are the face of the economic imbalances which AG warned about.
Keep in mind what GM and Ford did to move inventory.
The difference is the HB’s have plenty of Margins to continue to reduce prices and they will. They do know that time is of the essence and they have to build fast to sell at the higher prices and keep people from cancelling. They also need to keep building while subprime lending and exotic mortgages are still offered. Once the credit cycle turns, they can kiss their sales goodbye. That is the best way to protect their margins. They will keep building until they begin to lose money. This looks really bad for those who did buy at the top and for those who took a gamble and bought something to flip. 90-95% of all new purchases are negative cashflow. Not too many will be able to hold out if the market tanks.
It’s not a matter of if, but a matter of when.
“Once the credit cycle turns, they can kiss their sales goodbye.”
ONCE IT TURNS? Last I checked (maybe this morning), the yield curve was nearly as flat as a pancake. The only reason it was not flatter than Kansas is that the long end of the curve is sagging under a weight of bond market pessimism about the economic outlook for the next 5-10 or more years. What incentive do lenders have to incur the risk inherent in making long-term loans (like home mortgages) under these conditions?
GetStucco, the Yield Curve is one end where the lenders are being squeezed and it will get worse. I was referring to the other end of massive defaults, BK’s, repos, and foreclosures. The actuaries will have to create some new deriviative or hell let’s invent something called an integral while we are at it. The point being, rates will rise as defaults increase to make up for the losses. You couple this with the pressures that are already pressing them on the Yield side and you have one flat hamburger. Where’s the beef? Many of these operations will go bellyup and all the 401k’s and hedge funds tied to such a stable industry will hemorage massive losses. Can you say ENRON to the ^50th power.
I believe the phenomena is known as “widing credit spreads” (aka rising risk premiums).
FINALLY
Well said GetStucco and Tom.
I learned a new word today.
McMillionaire.
Can’t believe I haven’t heard that one before.
“A hot topic on Wall Street is whether home builders should be buying land or their shares, given currently low P/Es. The buyback argument is that the stocks are cheap and land is expensive. Bob Toll is in the land camp. ‘Our business is not to shrink the company and buy back capital, but to expand,’ he says.”
Why not buy expensive land, as long as you are using other people’s money to do so. (See above for evidence on why Robert Toll doesn’t personally need to worry if purchases of land at all-time record high prices end up sinking his company into bankruptcy.)
Just for fun I took a look at TOL’s 10K for Oct ‘05.
TOL’s “Inventory” is a strange animal. It includes homes under contract, homes in construction but not under contract, all land investments, and a “significant number of land purchase agreements”. They don’t give a break-out of these but the last one caught my eye.
If the market slows and they “option” not to complete the purchase (of land they over paid for when they have no customers to buy) then this Inventory Asset get written off entirely. They used debt to pay for the “options”, so that part (the debt) stays.
This is a leverage play works great when land prices are rising and sales of new homes are strong. But it can be very damaging otherwise.
Maybe this is why Bob Toll’s been so aggressive in selling his own shares.
Good thing for Bob Toll that like home prices, land prices always go UP!
The Japanese that was once the richest person in the world and owned the biggest home builder and the most valuable lands in Japan has lost almost all his money and is currently in jail for frauds. Most buildable lands are liabilities with negative cash flow. Holding lands that are going to lose value is going to be one of the best ways to lose money.
The debt-equity ratio is less important than cash flow. Many a company has gone belly-up not from negative equity, but from the inability to manage the cash flow. That current assets are so low relative to current liabilities means that Toll may actually have to run “fire sales” in the near future. Also, booked “accounts receivable” may not actually be that if more people cancel or walk away from deposits. That is the more likely reason why people are down on the stock.
Great point!
You are right on. The risk of becoming illiquid and being forced into bankruptcy is substantial. For those old enough to remember the investment banking firm Drexel Burnham, be reminded that it had the strongest balance sheet on Wall Street when it went under. Purely a matter of running out of liquidity.
Before the end of 2007, I will be surprised if not at least one and probably more of the HBs are bankrupt. It doesn’t do a bit of good to own billions of land if you don’t have the cash to pay the bills. TOL’s aggressive attititude makes it a prime candidate.
This was posted earlier by Nicholas Weaver.It’s a staggering example of just how bad its getting for these HB’s.
http://newspaperads.mercurynews.com/ROP/ads.aspx?advid=128467&adid=2613016&cat=3461
The 30% price drop of the new homes means buyers can expect 50% correction from the peak by the end of this year. If it’s so difficult to sell new homes, good luck with existing homes.
RE: 50% correction from peak…right on the money. Just go ask John Templeton.
Hmm… Cutting the price from 434,000 to 300,000! Horton is hurting!
Horton Hears the Hiss
Thanks Happy,
Just showed that ad to my wife, we (she, I told her it was to much, but if she wanted it) passed on a 300k home a couple years ago. The smallest in that add is 1000ft larger and new too boot.
She finally is turning down the “lets buy” heat.
Happy Renter -
Thanks for that link. Holy Crap!!!!!!!!!!
That’s some serious price cuts for DR Horton in the Sac area. More evidence of HBs knowing the gig is up and they are trying to beat everyone else to the exits.
I anticipate 100K+ price reductions later this year in the Phoenix area, especially as these inventory numbers for MLS and spec homes continue to rocket up.
Even though historical presidence pretty much says that RE prices are sticky as they go down, this bubble was so unusual as it rocketed up (e.g. flat or non-performing stock market money being thrown at RE, historically low mortgage rates, low short-term rates, exotic loans, so many speculators/investors, etc). Just as so many of were so surprised at how quickly prices went up, I think the same type of surprise is happening (at least for me) is ocurring on the other side of this bubble as far as the speed and quickness of this bubble as it continues to burst.
Anyone else have any thoughts at the speed of this correction and its only February?
waiting_for_road_kill_in_PHX
“Even though historical presidence pretty much says that RE prices are sticky as they go down, this bubble was so unusual as it rocketed up (e.g. flat or non-performing stock market money being thrown at RE,”
Stock market money was NOT being thrown at RE at all. The really unusual thing about this bubble and a substantial part of what makes this bubble so dangerous is that in many cases NO money was being thrown at RE, just huge amounts of credit or debt, depending on which side of the equation you are looking at.
As far as speed of the correction goes I think there will be a rapid correction that will be pretty severe in the worst markets, but felt to some extent in all markets and taking perhaps a year or so, and then another slower round of lowering prices as the economy worsens from the effects of the first round, with a chance of a small rise in prices between the rounds and going on for several years until the prices in the worst bubble areas are considerably lower than anyone ever thought they could be, probably around 20% or less of the top prices and even more of a drop for some land prices.
First, I’m no fan of Toll Bros. but saying “Toll Bros. Trading ‘Close To Liquidation’ isn’t the same as the article actually saying their stock was trading close to the companies’ liquidation value. The quotation marks and missing word in the title; “value” could easily be misconstrued. The housing bubble has most certainly popped and most HB stocks are most certainly toxic but those of us who see the truth have a special obligation to not do what was done in the past and caused and/or obscured the bubble. TOL is nowhere “close to liquidation.”
Well said.
wanna bet?
I agree, leading people to take excessive short positions could result in devastation should an (inevitable?) dead-cat bounce occur.
Yes, it would be their fault, but I would prefer not to exacerbate the situation.
happy renter: thanks for the re-post. Great stuff!
I’m going to forward it to a few people…logic is dandy, but there’s nothing like seeing prices slashed to convince some that it’s over….
they overbuilt and will pay. so will folks living in parts of the country where toll brothers was active. mainly the exurbs.
http://www.dcbubble.blogspot.com
just another lid in the coffin of the ponzi scheme that’s coming to a close due to lack of more suckers to ante up crazy amounts of loot to get in. if you haven’t bought yet and feel like you are missing out and not building equity, now isn’t the time. the market is teetering on the edge of a knife. give it another 12 months and reassess. this spring is NOT the time to buy. in another year you’ll pay off almost no principal and do you really think prices will be higher than the nosebleed levels today?
Dear fellow bloggers:
I need your help. I live in the Los Angeles area, Glendale to be more precise. I am renting a nice condo style apartment for $1400. I just found out from the manager that the building is about to close escrow and that the owner is consider a condo conversion but nothing done yet with the city. Does anyone know, in case he was to do the conversion, how much time I have to kill before I have to move out?
Any insight would greatly be appreciated. A neighbor told me that it will be at least 1 year if he was to start the process today. Is he correct?
Nick
In CA, you get a 90 day first right of refusal, and a 60 day notice to move after that.
At least thats what we are getting on our condo conversion. We could be nice and say “No Way In Hell Are We Going To Buy This 1980s Era Draftbox on Bay Fill for $400k”, but why make it easier on Lennar Emerald?
Wait. Don’t panick yet. You have plenty of time.
Given the fact thatyou have at least a 60-day period, and that he still didn’t even arrange things with the city, it’s all good.
Sit back and relax, by the time the city approves of everything (which I’m not sure they’ll do) prices will probably be down enough that you’ll be able to afford it. (Or at least that you’ll be able to afford some really fancy rental somewhere else for the same 1400 that your’re paying today.
You know what guys? I hate to burst your bubble but I just thought about something regarding the DR Horton reduction in price. In as much as there is probably a real reduction there, the actual amount of the reduction may be different from what they are advertising. They may just *want* us to think it’s a really big drop. I remember when I was in retail (TOO many years ago), when we had a big sale coming up, the merchandise that came in for the sale had to be re-tagged with the “before” price lined out and sale price showing. The “before” price was always higher than the “actual” price that we had to cut off the tag.
We all know that that’s a technique that REs use so why wouldn’t the builders do the same? And maybe the same thing is happening with the Centex deals? I don’t know…perhaps it’s just late and I’m thinking too hard. Am I thinking too hard??
BayQT~
Maybe be so, but at the least, it’ll crush whatever confidence flippers have left. This is not a drill like last Spring’s dip but the start of a full scale crash. HB and speculators are going to undercut each other and who in their right mind are buying? The $480K 3000+ sf home is down to $350K and will likely fall to $120K in a few years. For buyers, it’s a lot of money you can save if you wait a few years. For sellers, the sooner they sell, the less they will lose. The fear is there.
But Hey, “it’s free equity”
Goleta is correct. The psychological impact of the huge price drops shown in that ad is far more important than any re-pricing monkey business going on out of sight of the newspaper reader. It’s hard to believe how far we have come from last spring, when people were still camping outside sales offices the night before new phase releases!
Most people do not return to the store, check the price on the sweater they purchased last month, and use that to make further economic decisions.
A carry-out retailer can play those games, and most people know they do. A homebuilder generally cannot, and when people realize they are it will add another brick of wariness to the worry wall.
Ok…thanks guys. Your in-depth analysis was very helpful and makes a lot of sense. No matter what game they are playing, or if indeed they are playing a game, the fact that the drop is there for all to see speaks volumes.
My headache is gone now…I *was* thinking too hard on that.
BayQT~
Published 2:15 am PST Saturday, January 28, 2006
Story appeared in Homes section, Page L2
Here’s a rundown of new-home builders and their communities in Yuba and Sutter counties:
D.R. Horton
D.R. Horton has two developments in Olivehurst - Prairie Meadows and Prairie Trails, both at Wheeler Ranch - that are priced from the mid-to high-$300,000 range.
Both communities opened in mid-November. Thirty-one of the 148 total planned have sold in Prairie Meadows, which offers four models ranging from 1,980 square feet to 3,308 square feet, with three to five bedrooms and two-and-a-half bathrrooms.
Of the 92 lots at Prairie Trails, 27 have sold. The three model homes range from 1,857 square feet to 2,925 square feet. They have three to four bedrooms and two to two-and-a-half bathrooms.
http://www.sacbee.com/content/homes/weekend_real_estate/story/14121122p-14950209c.html