News: Analysis & Commentary: REAL ESTATE
TOLL HOUSE NATION?
Gables are big this year. In the exurban frontiers of eastern Pennsylvania and western New Jersey, gables perch atop dozens of new look-alike $400,000 houses on look-alike plots. They are unique--in a suitably standard way. They are American. They are the stuff of Toll Brothers Inc.
The brothers--that's Robert, 54, and Bruce, 52--have made a fair bit of money over 28 years selling "semi-custom" homes for the well-to-do. The formula is right: They combine cheap land with borrowed, proven designs and all the bells and whistles they can muster. And the market is right: Expensive houses continue to move well, even as the broader market cools off. Since 1991, the Huntingdon Valley (Pa.) company has nearly tripled its sales, to $504.1 million last year, boosting its net income sevenfold, to $36.2 million.
Toll Brothers is, in fact, the biggest builder of luxury homes in the U.S. Now, the brothers have begun expanding well beyond their East Coast stronghold by building a modest number of homes in North Carolina, Southern California, and Florida. Texas is next.
Why mess with success by poking around unfamiliar ground? It could be that Toll Brothers is running short of room to grow. Given that new-home sales nationwide fell 2.7% in April, the Tolls are posting respectable results. But after 1993's 44% gain in backlogged orders, their backlog rose just 15% in fiscal 1994. This year, analysts at Montgomery Securities expect it to grow less than 6%--and Chief Executive Robert Toll says traffic and sales are down some 5% in many of his developments.
On its side, Toll has baby boomers--in large quantity. Crows Robert Toll: "The demographics are great for our business." The typical Toll customer, between 35 and 54 years old, comes to the table with a household income of at least $90,000. Like Reginald D. Boone, a 50-year-old self-employed benefits consultant who paid $513,000 in April for a four-bedroom Toll house outside Rockville, Md., such customers haven't backed off big housing buys. "So far, the economy for those people is still fairly strong," says Matthew V. Roswell, a housing analyst at Legg Mason Inc.
CATHEDRAL CEILINGS. The growth of Toll Brothers has a lot to do with sharp, conservative management, too. It scouts out cheap land parcels being unloaded by distressed developers, banks, or other motivated sellers. With low initial outlays, the company can make money on developments of 10 houses or 100. Toll architects borrow ideas from other upscale developments, then incorporate what sells best into a few standard designs. Customers can choose from the basic Federal, the Provincial, or the Chateau, among others, then customize with brick, stucco, or stone facing and a host of add-ons. An additional fireplace goes for $3,400; a master bath complete with a cathedral ceiling and whirlpool costs about $8,500.
Wall Street thinks the Tolls can make their formula work west of the Allegheny River and south of the Chesapeake Bay. With interest rates down again, in fact, Toll shares are up 65% since early December. But finding sites in California isn't as easy as the old days, when the brothers could scoop up parcels just by motoring around New Jersey. Monitoring work a continent away may not be as simple as keeping an eye on the project across town. And gables may not fly in L.A.By Joseph Weber in Huntingdon Valley, Pa.