Defensive mind-set keeps Toll Bros. going

HORSHAM, Pa. -- Robert Toll's father, Albert, was a multimillionaire investor by age 24, then lost it all in the 1929 stock market crash. To support his family through the Depression, Albert delivered laundry and sold used cars. Gradually, he rebuilt his fortune by buying discounted real estate bonds. By the end of World War II, he owned several office and retail buildings.

Robert, 67, who goes by Bob, remembers the hard-learned lessons his father taught him and his younger brother, Bruce. "Be careful, be wary," he recites. "You make a mistake, it could be your last."

Since Bob and Bruce founded Toll Bros. tol in 1967, they've used the same defensive mind-set to survive the ups and downs of the real estate cycles. The current housing recession is the worst his company has seen since 1974, Bob Toll says, and the bottom of this one is still at least half a year away, according to a majority of 51 economists surveyed by USA TODAY.gci Yet so far, Toll Bros. is holding up better than many of its national rivals.

Toll built 6,687 luxury homes in 22 states last year, down nearly one-quarter from its peak two years ago. In the fourth quarter, orders for new homes fell a staggering 35%, and the company posted an $82 million loss — its first ever. Even so, Toll still commands one of the strongest positions in the industry, in part because the company's up-market buyers are less affected than most by the turmoil in the financial markets.

A company strategy

Toll describes a builder's survival strategy: "You concentrate on what's necessary to hold your business steady and prepare yourself to ride out the storm and take advantage of opportunities that must come.

"Then, as fast as you can, you go to concentrating on liquidity … (because) when you're out of money, you're out of Schlitz, you're out of beer, you're done. You must recognize that very fast," says Toll, whose company has $900 million in the bank.

At the end of October, the company had a debt-to-capital ratio of 27%, its lowest ever, compared with 32% the year before.

The hardest task now, he says, is handing out hundreds of pink slips. Toll Bros. has laid off about one out of every three employees from its peak in summer 2006. For some other builders, the cuts have been even deeper.

Toll didn't see it coming. Just before the market peaked in 2005, Toll predicted that boom-and-bust real estate cycles were over and that housing would continue a smooth upward climb. "Prices will keep going up in double digits for years," he told Fortune magazine.

In hindsight, he says, "We miscalculated the extent of the speculation that was taking place in the market."

Toll and other builders tried to protect themselves from house-flipping investors. They made buyers sign contracts, promising they'd live in the home and not resell it for a year or two.

But industrywide, these contracts were handled by a mortgage sales force paid largely on commission. Salespeople thus had a financial incentive to overlook suspect buyers. (Toll caters to move-up buyers, typically with good credit and large down payments. Its mortgage unit made few subprime loans.)

Toll also wrongly predicted at the end of 2006 that the industry's excess number of newly built homes sitting on the market would all be bought up in the spring selling season of 2007.

"I said that?" he asks. "So foolish."

Still, during Toll's career, his major decisions have proved right more often than not. He made a strategic decision in the late 1980s to expand beyond the Northeast and moved into the Washington, D.C., region and then to California in the mid-1990s.

He also made an early and lucrative move into the luxury market, to focus on homes that cost an average of $560,000. But his key decisions, he says, aren't made alone.

"The best CEOs try to make sure that those people who are in the main (executive) team … that every one of those people is smarter than you are," he says. "The idea is not to hire somebody who will listen to you. The idea is to hire somebody who you will listen to."

One of them has been his brother, Bruce. When they started out, Bruce did the books, and Bob, who graduated from the University of Pennsylvania Law School, would review contracts.

"He is good at looking at purchases of ground (and) contracts," says Bruce, 64, who is vice chairman of the board but hasn't been involved in daily operations since 1998. "And even though we have a lot of people who do it for us at this point in life, his expertise, having lived through it and done it ourselves, he knows what to look for and things that could go wrong."

To Jeff Orleans, CEO of Orleans Home ohb builders in Philadelphia, Bob Toll is a rival, a partner and a friend. The two grew up in the same area of Pennsylvania, and Orleans says he began selling more upscale homes because of Toll's success.

The two haven't played tennis in a while, but Orleans recalls: "He's not a great tennis player, but he's a terrific competitor. That's what makes Bob Toll Bob Toll."

The two men had joint-venture development deals together and, Orleans says, "His handshake is his word, and his word is good. That's one of the things I like about him."

David Kulig has a very different view of Toll's word.

As a township supervisor in Upper Makefield, Pa., Kulig voted against a 2005 land deal between Toll Bros. and the Department of Veterans Affairs for a cemetery. Toll originally said it would sell the department 200 acres for a bargain price of $7 million. In exchange, Toll would be granted zoning changes on the remaining adjacent land it owned (plus an additional parcel) to build three times more homes than originally allowed on the property.

Late last year, after zoning permission had been granted, Toll struck a new deal to sell the property to the department for $10.5 million, rather than $7 million. But the Department of Veterans Affairs said it offered to pay the higher price to avoid legal entanglements still threatening Toll's side of the deal.

Still, Kulig says, "From his actions and decisions on cases I've been involved in with him, he is strictly profit-driven. Anything he might do that looks like a community benefit always has strings attached to it related to Toll's (company) profitability."

Charitable donations

Toll declined to respond directly to that assertion, but the company counters that it's raised millions of dollars for the American Cancer Society and the American Red Cross and donated to victims of the Sept. 11 terrorist attacks and Hurricane Katrina.

Toll divides his time among homes in New York, Maine, Telluride, Colo. (because he's a black-diamond skier), but spends most of his time at the family's 18th-century farmhouse on 20 acres in Solebury, Pa. That house, he concedes, is nothing like the homes he builds. The kitchen and the breakfast room aren't connected to "rooms you would play in." The bedrooms and closets are small.

Toll, who earned about $25 million in 2006, says he likes the big kitchen with a fireplace, the manicured gardens and the lake in back.

In the house, among the books on his bedside table is Churchill: A Life by Martin Gilbert. Churchill, who retired at 70, spent much of his time at his country estate, Chartwell, in Kent, England, more secluded than Toll's farmhouse but with a little lake and serene gardens.

Asked when he will retire, Toll says, "a couple" of years and then adds jokingly, "It will be easy to step down because there a lot of guys who would like to kick me in the can."