Cash Flow

How One CFO Used Cash to Survive the Downturn

The economic recession hit the real estate industry hard, but Toll Brothers hung on by keeping cash close.
Kathy HoffelderMarch 5, 2013

ORLANDO—Not many firms can suffer a two-thirds drop in sales during the recession and live to talk about it. But luxury-home builder Toll Brothers is not just living, it’s thriving.

In 2005 Toll Brothers reported full-year net income of $806.1 million. Fast-forward to the depths of the recession in 2008, when the firm’s revenue fell from about $6 billion to about $2 billion. During the crisis, Toll Brothers sank to a net loss of $297.8 million for the fiscal year ending October 31, 2008.

This past December, however, Toll Brothers reported full fiscal-year 2012 net income of $487.1 million on revenues of $1.9 billion. The firm initiated deep layoffs and made other cost-cutting moves to keep afloat during the downturn. And while its revenues are still a touch off from recessionary levels, it hopes to turn them around soon.

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One saving grace for the firm then, and now, is that it always had cash on hand, even during the financial crisis. “We lost a lot of money, but we had $2 billion in cash. People still felt comfortable lending to us,” said Martin P. Connor, CFO of Toll Brothers, at the CFO Rising East Conference here yesterday.

By 2009 Toll Brothers had $1.9 billion in cash, which compares with about $700 million in cash before the recession in 2005. At year-end 2012, it had $1.2 billion in cash after making some strategic distressed-debt purchases, according to Connor.

That need to protect cash still permeates Connor’s current business strategies, too. When considering land for purchase, he said the urban developer never builds a home without already having a buyer for it. “It takes 9 to 12 months to turn that contract into revenue,” said Connor at the conference.

Connor also values his firm’s cash when he looks at where to build properties. We like to “buy land at the corner of Main and Main,” he said. That way, in bad times, the homes still hold value.

That may seem obvious, but it’s a principle that many real estate developers lost sight of during the financial crisis. Instead, they ventured too far from traditional, core real estate that average buyers might want. Even Toll Brothers, said Connor, lost money on housing projects that veered too far away from the “main” residential areas in towns, betting that people might be willing to travel more to get to work.

The developer also doesn’t easily part with its cash just to tap into new markets. Toll Brothers bought property in Seattle for the first time in 2011, for example, but that was after studying the market for 11 years.

The same goes for overseas buying. After looking at the Chinese market for about four years, Toll Brothers cancelled its initiatives there. The reason? “We were uncomfortable with the market,” said Connor, finding some business relationships there questionable. (Toll Brothers would still like to get some kind of minority venture started in Brazil, however, but it is only just considering the idea.)

Similarly, Connor prefers having a longer take on the company’s debt maturities. He prefers to keep his refinancing at bay for at least a few years by favoring weighted average debt maturities above 3.5 to 4 years in duration.