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The
best is yet to come
Construction
Services
Capital Goods
NYSE: TOL
Toll Brothers, Inc.
3103 Philmont Avenue
Huntingdon Valley, PA 19006
Phone: 215-938-8000
Joel H. Rassman
Executive Vice President
Chief Financial Officer and Treasurer
Interview conducted by:
Diane Reynolds, Co Publisher
CEO/CFOinterviews.com
August 2002
Bio of Executive Vice President/Chief Financial Officer/Treasurer
Joel H. Rassman
Since 1984, Mr. Rassman has been
responsible for and has overseen the financial, accounting and tax operations for Toll
Brothers. In this capacity, he was
instrumental in the strategic repositioning of the Company for future growth in
anticipation of the initial public offering in 1986.
Mr. Rassman has guided the company through three bank consortiums and six
renewals, and ten public subordinated debt offerings, one convertible subordinated debt
and two equity offerings.
Prior to joining Toll Brothers, Mr.
Rassman was a partner in the international accounting firm of Ernst & Young, based in
the New York City office. In addition to normal accounting assignments, he was involved in
a number of major judicial and non-judicial reorganizations representing both debtors and
creditors and he was engaged as a consultant to a number of major banks.
Mr. Rassman is a graduate of Bernard
Baruch College of the City College of New York.
Mr.
Rassman has a Certified Public Accountant license and holds professional memberships in
the American Institute of Certified Public Accountants and the New York State Society of
Certified Public Accountants.
Company Profile:
Toll Brothers, Inc. is the nation's leading builder of luxury homes. The Company generated $2.2 billion in revenues and
$214 million in net income in fiscal 2001. Toll Brothers has produced over 23% compound
average annual growth in revenues and earnings for the last one, three, five, seven and
ten year periods.
Toll Brothers began business in 1967
and became a public company in 1986. Its
common stock is listed on the New York Stock Exchange and the Pacific Exchange under the
symbol "TOL". The Company serves
move-up, empty-nester and active-adult home buyers and operates in 22 states: Arizona,
California, Colorado, Connecticut, Delaware, Florida, Illinois, Massachusetts, Maryland,
Michigan, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina, Tennessee, Texas, and Virginia.
Toll
Brothers builds luxury single-family detached and attached home communities and
master-planned luxury multi-product residential golf course communities principally on
land it develops and improves. The Company operates its own architectural, engineering,
mortgage, title, land development and land sale, golf course development and management,
home security, landscape, cable T.V. and broadband Internet delivery subsidiaries.
The Company also operates its own lumber distribution, and house component assembly and
manufacturing operations.
Toll
Brothers is the only publicly traded national homebuilder to have won all three of the
industry's highest honors: America's Best Builder from the National Association of
Homebuilders, the National Housing Quality Award and Builder of the Year.
CEOCFOinterviews: Can you please give my readers a brief
description of how this company stands today?
Mr. Rassman:
We have been public and traded on the New York Stock Exchange since 1986. We are the
eighth largest homebuilder (by revenues) in the United States and the largest builder
focused primarily on luxury homes. We serve
move-up buyers, which are typically growing families.
We build luxury homes for empty nesters - people in their late 40’s and
50’s with children no longer at home - and we build active adult homes for people in
their late 50’s and 60’s who are retired or starting to plan for retirement. We have other products as well - second home communities in Arizona, Florida,
California and mountain and seaside communities in the Northeast and Mid-Atlantic and
urban infill communities – but our three largest products are move-up, empty nesters
and active adult homes.
With our focus on the luxury market,
we have been consistently profitable. Whether you look at our results of the past 1,3,5, 7
or ten year periods, we have produced compound average annual growth of at least 23% in
revenues and 25% in earnings per share.
CEOCFOinterviews: The turmoil with the economy, has this affected
your company in any way?
Mr. Rassman:
Well, we started to see some slowness late last summer, prior to the 9/11 tragedies, due
to the economic recession. Obviously the
events of 9/11 impacted people’s desires to buy homes, at least for a period of time.
But the impact of the economy’ and the impact of September 11th seemed to
have disappeared by January of 2002.
We are doing wonderfully now. I think
this is attributable, in part, to some of the economic turmoil and to the individual
homebuyer who keeps looking at his or her investment portfolio. While the portfolio goes up and it goes down in
value, it has mostly been going down in recent months.
The customer thinks, “if I put some of that money into a house instead,
I can enjoy it, live in it, and also have a sound investment with tax advantages.”
CEOCFOinterviews: Do you build strictly in communities and are they
your own?
Mr. Rassman:
Generally, we build our own communities, which are located in 22 states and 42 regions
around the country. We tend to acquire
control of land then get the approvals ourselves, after which we take title to the land,
then sell and build homes. While most of our
communities average about one hundred homes and are a single product type, we also build
master planned communities that have multiple product offerings – as many as nine or
ten different products: town homes, carriage homes, smaller singles homes, larger
executive homes, all the way up to our largest estate homes. Often these communities have golf courses and
other major recreational amenities. In some geographic regions, we also
purchase lots in other builders’ master planned communities.
CEOCFOinterviews: Right now the demand is very high for new
construction; I see it all around me. How are
you able to fill that demand and still hold on to the quality that this company is known
for?
Mr. Rassman:
We won’t allow ourselves to expand
faster than our ability to manage that expansion – whether it relates to land
development, home construction or any other facet of our business. Much of the demand for development and new homes
in the U.S. is the result of new household formations.
With total population and households numbers increasing, and with more of
these households becoming more affluent, there are more people who desire and can afford a
luxury home. As the population matures, as the baby boomers get older and more affluent,
and as wealth starts to be transferred from the depression era generation to the baby boom
generation, housing demand is stimulated.
At the same time, we have a very
constricted supply of lots on which to build new homes in this country. If you drive around many of the suburban
neighborhoods of major cities, you will see lots of development taking place, driven by
people who have moved to suburban areas for the quality of life. Now, once they have moved in, they usually want
to restrict future new development to preserve the quality of life that drew them there in
the first place. There are more and more
“not-in-my-backyard” rules and regulations that slow down the approval process
for new land development. This ultimately is
very beneficial to the larger, well-capitalized builders who have the expertise, time and
money to get these approvals - one of the main beneficiaries is Toll Brothers because we
compete primarily with small, privately owned builders.
The more difficult approval processes reduces competition and increases
barriers to entry. For the customer, there is less product available and fewer communities
to choose from.
We operate each community as a
separate business, run by a project manager who is in charge of that separate business.
This person operates as a small builder - an entrepreneur whose responsibility is to
maintain the quality and financial viability of that community. As long as we are able to keep up the high quality
of our project managers, we can keep opening up more communities and still maintain our
very high quality standards.
CEOCFOinterviews: Back in March I believe Robert Toll made a
comment that “the best is yet to come”. What
is it that this company is doing that the future seems brighter?
Mr. Rassman: In this environment of increased regulation, we
have the expertise to get land approved and we have access to capital to fund the approval
costs. Compared to our competitors, the
small private builders, this positions us to gain control of additional land that we
believe will enable us to grow 15% or 20% on average for the next few years. We are
constantly securing land for the future so we believe we can continue a growth pace of at
least 15% on average in the future or, even better, replicate the kind of growth that we
have had in the past.
Another
factor making the future look bright is the growth in affluent households. In constant
2000 dollars, the number of households earning $100,000 or more has grown at 8 times the
pace of growth of U.S. households in general for the past twenty years. That is a
tremendous statistic for us since we focus on the luxury market.
CEOCFOinterviews: When you go out to acquire a large parcel of land
for your own development, how much acreage are you looking for and what are the
requirements that would best accommodate the kind of homes that you will be putting up?
Mr. Rassman:
It varies because we have so many different product types. If we are in a very densely
populated area, where we already have many communities and a brand name reputation from
being in a market for many years, we can profitably develop a community of 25 or 30 homes,
which most large builders would think was too small. Generally we would love to find sites
where we could put up at least 100 homes.
The size of the site and the zoning,
as well as the market, determines whether we will offer ¼ acre lots or one-acre lots.
With ¼ acre home sites, if we wanted to build 100 homes, we would need about 30 acres. We would need 130 acres to build 100 homes with
1-acre lots, because we lose some area to roads and detention basins, sewers and other
things. We also have master planned
communities with space for a golf course, a clubhouse or a marina if the community is on a
lake or near an ocean. We have had a
community with an equestrian center in Massachusetts.
So it also depends on amenities. We
will build communities of as few as 25 home sites, all the way up to thousands of homes.
CEOCFOinterviews: What are the responsibilities of Toll Brothers
once the homes are completed?
Mr. Rassman:
All of our houses are sold with a warranty program. In general we have a 1-2 year
warranty, which is very extensive, and a structural warranty covering 10 years. We have a reputation to maintain so we want to
make sure our customers remain happy. Therefore,
in general, we provide more service than is required legally. We don’t think our obligation is just to
build the home then run away; it’s much more.
Remember, the best advertisement for us is a successful community and
happy homeowners because we have created something that people can admire and say,
“Gee, I would like to live in a Toll Brothers community.” Referrals are very
important to our business so happy homeowners are often our best sales people.
CEOCFOinterviews: Do the new owners pay some kind of dues to
maintain the road maintenance, the trash pick up and to use the amenities?
Mr. Rassman: That depends on the community. In those
communities with private amenities and private roads, a homeowners association can collect
dues to fund maintenance costs. Ultimately this becomes the responsibility of the
people who live in those communities. If there is a recreation center, for example, that
has been turned over to the homeowners association rather than being operated by us, it is
the homeowners’ responsibility to pay dues to maintain it. In some cases there may be
a country club, which we may continue to own, in which case we would continue to operate
it and collect dues, etc… In the smaller communities, we may have what are
called dedicated amenities, which belong to a county or state, in which case the state or
county takes over the maintenance of the roads.
CEOCFOinterviews: That is as long as they are built to their
requirements.
Mr. Rassman: Yes - we have to do the engineering of the roads
to meet municipal requirements. During construction they are periodically inspected
and then they are inspected again before we dedicate them to the town or county.
CEOCFOinterviews: As far as the interest rates, do you foresee them
going up and will it affect the company?
Mr. Rassman: It’s been a great time to buy homes from an
interest rate standpoint. Interest rates are at or near historical lows and it has
been that way for a while now. We offer a very large range of mortgage products. Since
Toll Brothers generally sells to a more affluent customer, they are less impacted by
mortgage rate changes. Our customer in general can absorb more than a 20% increase,
without it affecting their home buying ability. Today’s mortgage rate is about
6.75%, so our buyers could handle 8.75% with no problem, an if interest rates went up, we
could offset some of the impact with adjustable rate mortgages. From a financial
standpoint buyers may not like it, but certainly they can still afford the house.
That is not true necessarily for the “affordable home” or starter home market,
which is not our market. In that niche there is more sensitivity to price increases and
mortgage rate increases because there is only so much money the starter homebuyer can
pay. In general, our customers are more than qualified financially to buy our house.
CEOCFOinterviews: Do you see a rise in new construction over
resale?
Mr. Rassman: Yes. People who have previously purchased
“used” homes may not want to compromise on their next home in terms of amenities
and the ability to access the latest technologies such as the Internet. A home buyer with
a growing family who is moving out of a starter home that they bought “used” may
want all the latest bells and whistles and a more open and contemporary floor plan in
their next home. Empty nesters who compromised on their home as they were raising their
children and when they were earning less money – now want what they want. As people
move higher and higher up in terms of their affluence they are willing to spend more for a
home, and are less willing to compromise on size and amenities; accordingly there is an
inclination to buy new.
There is also
growing demand in the second home market, which is becoming more and more important in
this country. We haven’t heard as much about second homes in the past decade as
we have in the last year.
Part of that is
due to buying patterns of people wanting to take vacations closer to home and part is a
desire of the more affluent buyer to divide their living time between two or more
locations. When boomers enter their late 40’s or early 50’s, instead of
selling their home, they may buy a second home in a different location or, they may sell
their existing home and buy another home near where they raised their family and where
their children are as well as another home in a Sunbelt area where they will spend some
time. It’s not uncommon to find folks in Florida or Arizona who also live in
the Northeast or Mid West part of the time, or Californians who buy second homes in Palm
Springs.
CEOCFOinterviews: Do you get involved at all with the second home
sales?
Mr. Rassman: Yes we do, and it is becoming an increasingly larger
part of our business. We started out selling second homes in some of our Florida and
Arizona communities; then in Las Vegas and Palm Springs California. Most recently,
we’ve opened up in The Pocono Mountains of Pennsylvania and in Bethany Beach
Delaware. Soon we will be opening up in Ocean City Maryland. The second home market is
expected to boom with second home ownership rising from about 6.4 million to 10 million
homes this decade – that’s about 360,000 new second homes per year. It is
becoming a more and more significant part of the home buying market.
CEOCFOinterviews: Will your growth be generated internally or
through acquisitions?
Mr. Rassman: We constantly look at acquisitions and have acquired
three companies since 1995. We are not afraid to go into a new geographical location on
our own and start slowly and grow our presence “de novo”, but we have
successfully been able to use acquisitions as a way of accelerating that growth process.
Our first acquisition was in the Phoenix market; we bought a company that did about
$30 million dollars a year and we’ve grown it to $180 million dollars annually in
just a few years. We did an acquisition in Las Vegas where we’ve doubled the
size of the company we acquired. We’ve also done an acquisition in suburban Detroit.
That company built a lower priced product than ours, but had a very strong organization
and culture. We introduced our products and brought their price point up and focused them
more on the luxury market. It has worked out very well.
We have
tremendous opportunity to grow just by buying land and building homes. If we enter a new
market from scratch, it takes about ten years for us to reach our potential. We just
hit ten years in Northern Virginia, and have achieved a 3% (of housing starts) penetration
in the markets where we operate. That contrasts to about an average 6% in the areas where
we have been in more than ten years, such as metro Philadelphia and Central New Jersey.
If we reach just 3% penetration in all our newer markets, we could double or
triple the size of the company. In addition, we are selling empty nester product in
only about a third of our markets. Expanding that niche could double the size of the
company again. Then, with the active adult market, which we entered about two years
ago, we believe we could reach $1 to $2 billion annually as we migrate that product into
our 22 states. That would double the size of the Company again. Further, there are another
two dozen markets with attractive demographics we could enter which give us the potential
to again double.
CEOCFOinterviews: Any closing comments?
Mr. Rassman:
We think that people who look at the home building industry, and who look at Toll Brothers
particularly, will see a company that has proven it’s resiliency and it’s
ability to perform. We are a simple business in this time when everyone is concerned about
accounting problems; we don’t count revenues until we receive cash at the time of
home closing. We think as people become more
confident in the strength of the industry and Toll Brothers, we will see our P/E ratios
increase and our valuations improve.
disclaimers
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