Toll Brothers Inc.

250 Gibraltar Road
Horsham, Pennsylvania 19044
U.S.A.
Telephone: (215) 938-8000
Fax: (215) 938-8010
Web site: http://www.tollbrothers.com

Public Company
Incorporated: 1986 as Toll Brothers Inc.
Employees: 4,655
Sales: $3.86 billion
Stock Exchanges: New York Pacific
Ticker Symbol: TOL
NAIC: 236110 Residential Building Construction; 236115 New Single-Family Housing Construction (Except Operative Builders); 236116 New Multifamily Housing Construction (Except Operative Builders); 236117 New Housing Operative Builders; 237210 Land Subdivision; 522310 Mortgage and Nonmortgage Loan Brokers; 524127 Direct Title Insurance Carriers; 561621 Security Systems Services (Except Locksmiths)

Toll Brothers Inc. is a leading U.S. homebuilder, constructing some 8,000 homes annually. Most are single-family luxury residences. Toll is distinguished in its industry by a long record of profitability and revenue growth. Subsidiaries produce homebuilding supplies such as lumber products and offer a variety of consumer services ranging from insurance to cable television. Toll is active in about 300 communities in 20 states and is strongest in the Mid-Atlantic.

1967 Origins

Toll Brothers was founded in 1967 by brothers Robert I. (Bob) and Bruce E. Toll. Bob Toll was only 26 years old at the time and had received his B.A. from Cornell University as well as a law degree from the University of Pennsylvania. Bob served a brief stint as an attorney at a firm called Wolf, Block, Shorr and Solis before determining that his future didn't lie in the legal profession. Both Bob and Bruce had been exposed to the construction business by their father, Albert, who built homes, and Bob believed that industry had more to offer.

In 1967 Bob teamed up with his brother to start building houses. Bruce, who had an accounting degree from the University of Miami, was 24 years old at the time. Their educational backgrounds were a comfortable fit; Bob had a good foundation in principles related to buying land and conducting legal transactions, while Bruce held a firm grip on the basics of the financial side of the business. They started out buying land and building homes in southeastern Pennsylvania—their first deal was the sale of two colonial-style houses—and would continue to build solely in that territory for more than a decade. The brothers built about 30 homes annually during the start-up years, and gradually increased that number throughout the 1970s to become a dominant homebuilder in Pennsylvania. (According to Newsweek, their first houses sold for $17,990 each.)

The Toll brothers' success during the 1970s was the result of several factors. From the start, they emphasized quality construction and customer satisfaction. Their efforts would eventually earn them a reputation as the "dream house" builder in their markets. Just as importantly, the brothers determined early on that they were going to pursue a conservative financial strategy that would allow them to evade the homebuilding cycles that so commonly wreaked havoc on the industry. To that end, they tried to keep construction costs to a minimum and were careful not to invest heavily in land that might become overpriced when the economy soured.

1980s Expansion

By the end of the 1970s the Toll brothers' annual home sales were approaching the $50-million mark. After spending nearly 15 years constructing houses only in southern Pennsylvania, they decided that it was time to branch out geographically. In 1982 they began building homes in central New Jersey. Success in that region augmented ongoing gains in their core Pennsylvania market. By the mid-1980s Toll Brothers had become a respected builder in the upscale central New Jersey housing market. Revenues climbed rapidly, growing nearly 300 percent between 1982 and 1987 to more than $137 million.

The Toll brothers' gains during the mid-1980s resulted from factors other than geographic expansion. Indeed, a serious decline in earnings in 1984 convinced the pair that they were going to have to make some radical changes in their management style if they were going to succeed in the evolving and increasingly competitive homebuilding industry. They instituted tighter operating and financial controls and began hiring top-flight managers to handle individual projects. Each development was run by a manager who operated largely autonomously. Most of the recruits were quite young and often sported advanced degrees in law, engineering, or business.

Besides top-flight management and strict controls, Toll benefited from a savvy marketing strategy during the mid-1980s. Toll billed itself as a designer of luxury homes, but it did not build custom homes. Instead, it offered customers a variety of floor plans with customized options. Thus, Toll effectively brought the efficiencies of the mass homebuilding sector to the luxury segment. Toll was able to build the luxury homes for less money than custom builders because of its high-volume purchasing power and computerized construction cost controls. To cut costs further and to ensure quality, Toll also operated its own lumber and panel plant that supplied trusses and other prefabricated units for its homes. The company also maintained a separate mortgage affiliate to serve its clients.

In May 1986 the Tolls incorporated a successor company in Delaware as Toll Brothers, Inc., and went public for the first time with an offering on the New York Stock Exchange that raised about $40 million. They used that money to begin branching into other regions of the Northeast. In 1987 they expanded into northern Delaware and Massachusetts and in 1988 tapped the Maryland market. They typically entered new markets by building their mid-range homes, called "Executive" models. The Executive homes were priced from $170,000 to about $300,000, sported 2,400 to 3,000 square feet, and were located on lots ranging from one-quarter to three-quarters of an acre in size.

Once the brothers established the Toll Brothers name in an area with their Executive homes, the company would start building its lower-end and high-end models. Its low-end line of houses, were also considered move-up homes with 1,700 to 2,000 square feet of space and usually situated on lots of about 10,000 square feet or less. Dubbed the Glen line, they were priced from $120,000 to $170,000. In contrast, the high-end, or Estate, line of homes were often priced around half a million dollars and ranged in size from 3,000 to 4,500 square feet. They were located on three-quarters to three acres of land and offered such features as two-story foyer entries, curved staircases, walk-in closets, and whirlpool master baths.

As a result of geographic expansion and some of the highest profit margins in the industry, Toll Brothers managed to boost sales from about $76 million in 1985 to more than $200 million in 1988, while net income climbed from less than $4 million to more than $24 million during the same period. Toll Brothers even received Professional Builder magazine's coveted "Builder of the Year" award in 1988. Going into 1989 the company was in the process of building hundreds of homes throughout much of the Northeast.

Unfortunately, the housing boom of the mid-1980s went bust in 1989. Many homebuilders were forced out of business, while even the most financially conservative companies experienced severe slumps. Toll Brothers was not exempt from the shakeout. For the first time in its 22-year history the company failed to show a rise in net income. In fact, profits slumped to about $13 million for the year as sales slipped to $177 million.

Although Toll was hurt by the downturn, it was recognized as one of the healthiest survivors. It continued to post a profit and even managed to secure several new building contracts. In fact, Toll used the slump as an opportunity to invest its excess cash in land that stressed developers and banks were trying to unload at significantly depressed prices. Toll would later be praised for this savvy strategy. It loaded up on land when other companies were trying to get rid of it at low prices, and it developed and sold the properties at inflated prices when housing markets recovered. The company was able to execute the tactic because, unlike many other builders, it only built homes after they were sold and it refused to pay too much for a property.

Indeed, following the late 1980s and early 1990s housing slump, Toll further tightened its controls and became even more conservative in its building strategy. The company's land buyers perused literally hundreds of properties and purchased only a small fraction of them. Its pursuit of devalued properties allowed it to expand into other regions in the Northeast and Mid-Atlantic.

Booming in the 1990s

In 1992 Toll began building in Connecticut and Virginia before cracking into New York in 1993. In addition to its land and building interests, Toll began operating a subsidiary called Toll Advisors in 1990. That company was set up as a consulting firm to help other financiers and developers work out their problem development projects.

Toll's ability to profit throughout the recession was partly attributable to the health of its market niche. By the early 1990s Toll had become the largest homebuilder in the nation that specialized in luxury homes. During the slump in homebuilding, the segment least fazed was the upscale housing market. Toll geared its homes to high-income move-up buyers between the ages of 35 and 55. That segment of the population continued to post household income gains and was increasing its proportion of the national wealth going into the mid-1990s. Furthermore, those buyers were less affected by interest rate volatility because they typically had large amounts of money to put down on a new home (from equity in their previous home). That cash also made it easier for them to qualify for a new mortgage loan.

The overall result was that demand for upscale housing stayed strong, and Toll was positioned to benefit. Furthermore, housing markets strengthened going into the mid-1990s and Toll Brothers started developing many of the properties it had purchased a few years earlier. Revenues bounced up to a record $281 million in 1992 before jumping to $395 million in 1993 and then to $504 million in 1994. Meanwhile, net income rose from a low of $5 million in 1991 to more than $36 million in 1994.

Encouraged by gains in its core markets, Toll made plans in 1994 to expand out of the Northeast and into Orange County, California, and Raleigh, North Carolina. In early 1995, moreover, Toll announced its intent to expand into Palm Beach County, Florida; Charlotte, North Carolina; and Dallas, Texas. Furthermore, Toll Brothers reached an agreement to acquire its first company in 1995, announcing plans to purchase Geoffrey
H. Edmunds & Associates, Inc., a Scottsdale, Arizona-based builder of luxury homes.

Despite a decline in housing starts, Toll managed to boost construction activity during 1995 and increase sales and profits. It accomplished that feat by pursuing the same basic strategy that it had followed for several years: build large numbers of high-quality, upscale homes at the lowest prices and keep a close eye on costs. By 1995 the average cost of Toll's move-up home line had increased to a range of $175,000 to about $400,000, while its mid-range Executive homes were going from about $230,000 to $425,000. Its high-end Estate homes sold for as much as $665,000, or more in some instances. The company was also constructing some attached homes, including townhouses, "carriage homes," and "villas" priced from $100,000 to more than $400,000.

Threatening Toll Brothers' dominance of the upscale housing segment in several regions in the mid-1990s were several other national and regional homebuilders that were mimicking its operating and marketing strategy. Furthermore, industry insiders wondered whether Toll would be able to recreate in other regions the success it had achieved in the Northeast, where the company's inventory of land and low cost structure provided a benefit less attainable in some other regions. Despite critics' doubts, Bruce and Bob Toll, who were still running the company and remained the primary stockholders, expected to expand successfully in their existing markets and to branch out into new regions.

Toll's web site, launched in 1996, would become an important marketing tool. The company added a "Design Your Home Feature" to engage prospective buyers. Toll sold 2,109 homes worth $759 million during the 1996 fiscal year.

The geographic progression of the company's activities continued into the late-1990s. Toll was becoming a truly national company. Las Vegas and Nashville markets were entered in 1997. The next year, the Toll Brothers Realty Trust was formed to back commercial development. Toll also launched its own insurance company in the late 1990s.

Toll was also moving into different types of residences. It began its first homes for active senior communities in New Jersey in 1998. The next year, it partnered with Marriott Senior Living Services in developing an assisted-living community in Reston, Virginia.

In its fiscal 1999 annual report, Toll announced the creation of a new broadband venture, Advanced Broadband, L.P. This unit was formed to install fiber optic lines in Toll communities to supply Internet and cable service. Income was $101.5 million on sales of $1.46 billion in 1999.

Sustained Growth After 2000

In 2000 and 2001, Toll entered the Rhode Island, New Hampshire, and Colorado markets. A country club community was begun in 2002 near Hilton Head, South Carolina—another new territory.

During this time, mortgage rates were reaching unprecedented lows, prompting a boom in housing starts. At the same time, the bust in tech stocks made real estate seem like an even better investment. Toll's business was expanding, but CEO Robert Toll lamented to CNNfn the difficulty of finding new property to develop in certain states in the Mid-Atlantic and in California. Toll's $2.2 billion in 2001 gross home sales made it the eighth largest builder in the United States at the time, according to Builder magazine.

Toll bought Richard R. Dostie, Inc., a builder in Jacksonville, Florida, in 2003. The Manhattan Building Company was also acquired, marking Toll's interest in urban development.

Sales surged 40 percent to $3.9 billion in the fiscal year ended October 2004. Net income rose 58 percent to $409 million. During the year, the company partnered with Pinnacle Ltd. to begin developing waterfront condominiums in Hoboken, New Jersey, at the site of the former Maxwell House coffee plant. Similar developments were soon underway in Philadelphia, San Francisco, San Jose, and South Florida (Singer Island).

A slight rise in interest rates in late 2004 would not be considered good news for homebuilders, CEO Robert Toll told Investor's Business Daily. However, he noted that Toll Brothers had thrived in 1995 as mortgage rates reached 9 percent. Investor's Business Daily noted that Toll's upscale dwellings, priced at an average of $650,000, were less sensitive to interest rate swings. Toll told the paper that, percentage-wise, twice as many families (15 percent) were making more than $100,000 a year in the United States than had been true two decades earlier.

While it continued to build for affluent baby boomers and empty nesters, the company was also returning to the multifamily market after a 20-year absence. Toll was building about 8,000 homes a year. With 30-year mortgage rates under 6 percent in early 2005, the housing industry continued to surge—and Toll Brothers continued to ride the crest of the wave.

Principal Subsidiaries

Advanced Broadband L.P.; Westminster Insurance Agency, Inc.; Westminster Mortgage Corporation; Westminster Title Company, Inc.

Principal Competitors

Centex Corporation; D.R. Horton, Inc.; KB Home; Lennar Corporation; Pulte Homes Inc.; Ryland Group Inc.

Further Reading

Alva, Marilyn, "Toll Bros., Huntingdon Valley, Pennsylvania; CEO of Home Builder Has Heard It All Before," Investor's Business Daily, December 22, 2004, p. A10.

Bady, Susan, "Reach Out: Connecting with Anxious Buyers Will Get Trickier in the Year Ahead," Builder, December 2001, p. S24.

Butler, Betsy, "Large Firms Find a Home in Unique Local Market," Business First—Columbus, June 8, 2001, p. 12.

"CEO Portrait: Robert I. Toll," Philadelphia Business Journal, July 2, 1999, p. 12.

Covaleski, John, "Toll Brothers Jumps in on the Business of S&L Crisis," Philadelphia Business Journal, September 10, 1990, Sec. 2, p. 7B.

——, "Toll Takes Some Lumps, Looks for Opportunity," Philadelphia Business Journal, May 28, 1990, Sec. 2, p. 17B.

Croghan, Lore, "The Careful Carpenter: Why Home Builder Toll Brothers Thrives when Most Others Don't," Financial World, August 29, 1995, p. 36.

Donohue, Gerry, "Toll Brothers (America's Best Builders & the Lee Evan's Award for Business Management Excellence)," Builder, January 1996, p. 308.

Ellman, Steve, "Covenant Keepers: Developer Challenges Subdivision Review Panel," Miami Daily Business Review, December 27, 2002, p. A1.

Goodspeed, Linda, "New England Tastes Mean a Tough Market for Homebuilders," Boston Business Journal, September 22, 1995, Sec. 2, p. 4.

Kostelni, Natalie, "Toll Brothers Spawns Multimedia Subsidiary," Philadelphia Business Journal, February 11, 2000, p. 12.

——, "Toll Out to Steer Group Into Path of Investors," Philadelphia Business Journal, September 1, 2000, p. 10.

Lelen, Kenneth, "Looking for Profits in the Old Pumpkin Patch," Business for Central New Jersey, June 12, 1989, p. 10.

Lurz, William H., "How Toll Makes Money on Luxury Homes," Professional Builder, January 1997, p. 72.

——, "Robert I. Toll: The 'Sky's the Limit' as Toll Brothers Targets Baby Boomers Moving Up to Bigger and Better Homes," Professional Builder, February 1998, p. 52.

Maynard, Roberta, "Who Will Build Tomorrow's Homes?," Builder, January 2000, p. 193.

McGinn, Daniel, "Betting Against a Housing Bust," Newsweek, August 26, 2002, p. 38.

Moore, Paula, "Pa. Home Builder Scouts Denver Market," Denver Business Journal, October 7, 1994, p. 17.

Murdock, James, "All in the Family: Detached-Home Giants Expanding Their MH Presence," Multi-Housing News, November 2004, p. 1.

Orrin, Spellman, "Toll Brothers Broadens Market in Northeast," Focus, March 2, 1988, p. 38.

Ostrowski, Jeff, "New Breed of Home Builders Mix Luxury and High

Volume," South Florida Business Journal, July 25, 1997, p. 10.

Phillipidis, Alex, "Toll Brothers on Building Spree," Westchester County Business Journal, August 21, 1995, p. 1.

Richmond, Iris, "The Producers: A Bullish, High-Profile Performance by the Public Builders Positions Them to Pull Away from the Pack," Builder, May 2002, p. 33.

Romans, Christine, "Toll Brothers—CEO, CNNfn," CEOWire, September 17, 2003.

"Toll Brothers Announces Record Sales Level," Delaware Business Review, May 25, 1992, p. 18.

"Toll Brothers Dominates Philadelphia," Professional Builder, December 30, 2004, p. 71.

"Toll Brothers Emerges as Luxury Builder," Mercer Business, May 1988, p. 72.

"Toll Brothers Expansion Will Tap Into Urban Development Boom," Real Estate Weekly, November 5, 2003, p. C9.

Varney, Stuart, "Toll Brothers—Chmn. & CEO Interview," CEOWire, February 23, 2005.

Walsh, Thomas J., "Toll: Stock Price Drop Just 'Herd Mentality'," Philadelphia Business Journal, October 9, 1998, p. 4.

—Dave Mote —update: Frederick C. Ingram