Senior Vice President & Chief Financial Officer, TOLL BROTHERS INC
Toll's Connor Says U.S. Should Let Housing `Heal Itself'
March 30 (Bloomberg) -- Martin Connor, chief financial officer of Toll Brothers Inc., talks about the state of the housing market.
About Martin Connor
Martin Connor, Senior Vice President and Chief Financial Officer of Toll Brothers, stated in 2011 and 2012 that the housing market was recovering. He said in 2012 that general economic news was trending upward, which he said boded well for housing, and that the spring selling season would be telling. Connor described the New York metro area as the company's hottest market, with high-rise communities in Hoboken, Manhattan, and Brooklyn performing well. He also said Toll Brothers was actively seeking land opportunities in California. Connor said in 2011 that the government should "step back and let housing heal itself," arguing that a previous tax credit had not helped and may have muddied the picture. He noted that Toll Brothers had plenty of capital and was seeking places to deploy it, and that the company was pleased to be at a break-even basis after the downturn. Connor described Toll Brothers' buyers as having solid credit, with average FICO scores in the mid-650s and 30% down payments, and said 18% of buyers paid cash.
Transcript (13 segments)
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Interviewer0:00
Folks, we look at residential housing this entire hour. Okay, CEO like Ken Campbell, great. How about the guy that looks at the math, the numbers, the ratio with Toll Brothers for years? We welcome Martin Connor. Horan, Pennsylvania, how are you, sir?
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Martin Connor0:15
I'm doing well, thanks for having me on.
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Interviewer0:17
You guys are iconic, you've been around forever. Forbes magazine gives you love and kisses. What's your biggest headache as a Chief Financial Officer right now? Is it land prices going up too fast? Is it you're worried about Washington? What's your number one headache right now?
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Martin Connor0:32
I think it's a good headache to have. We have plenty of capital and we need to find the right places to deploy it. On top of that, we're trying to get back to profitability. We're pleased to be at a break-even basis based on where we've come from and what we've gone through, but long term we've got to get the profitability.
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Interviewer0:54
Absolutely remarkable. Everybody's managing for cash flow today. You were at Ernst & Young for a zillion years and now with Toll Brothers. You've been in a depression business. What financial metric should the sell side focus on with you? Should they look at organic revenue growth, should they look at unit growth? Is it a margin issue where you're developing better margins?
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Martin Connor1:13
I think we've improved our margins. They moved up 400 points year-over-year for the period ended at 13.1%, so we're pleased about that. But real margin improvements are going to come from unit sales growth, which will also come with some pricing power and resulting average sales price.
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Interviewer1:37
Interesting, I like that statement. Marty, when you look at the public, you've got to get traffic in the door. This is a great chart, folks. We eliminate a decade's debt. By that I mean debt payments. There's a normal cyclical debt payment stream. There's debt payments to personal disposable income up like a moonshot. And Marty, as you know, it's rolled over. Is your Toll Brothers public? Are they in better financial condition now to consider the mortgages on your bigger houses?
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Martin Connor2:07
I think we've been relatively unscathed in terms of affordability with our buyer throughout the downturn and even before the downturn. Our buyers have great credit scores, they're in the 750 to 760 FICO range, they put 30% down. That's the people who take a mortgage. 18% of our buyers, and it's been a relatively consistent 18%, pay cash. So I think our buyers continue to have access to mortgages at unheard of pricing right now. These are historically low rates and a number of people are taking advantage of them. There are some issues associated with the equity you have in your home, and traditionally that equity has been rolled into the next purchase, and we haven't seen that growth like we've seen in prior situations.
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Interviewer2:55
When somebody buys cash in Toll Brothers houses, aren't cheap. Do you give them a price discount? Do they come in and say we'll give you cash in 72 days on an existing home or you build one for them? Do you give them a discount?
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Martin Connor3:11
All our buyers actually pay cash. Some of them just finance that cash with a mortgage. So from our perspective, cash is cash. While the particular asset that we're selling, the home that we're selling, if it is freestanding inventory, a quick delivery home as we call it, that might be discounted a little bit more so that we move it off our balance sheet than a to-be-built home. But a to-be-built home is one that's built exactly to your catered specifications.
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Interviewer3:46
These pictures, Marty, that we're looking at here with Victor. I mean, this bedroom is bigger than my first three apartments. You got to be kidding me. Look at this elegant chart over here. This is great. It's an elegant chart. Horan, Pennsylvania does better out of the CR. The orange line is Toll Brothers, nicely doing better than the S&P Home Builders Index out of there. What government policy, Marty, would you like to see from Washington? Or would you just like to see them get out of the way?
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Martin Connor4:13
I think get out of the way is part of the equation. They tried the tax credit last year. I don't think it hurt, but I'm not sure it helped, and it may have muddied the picture a little bit by moving demand around and it didn't create jobs. I know Ken Campbell was on earlier talking about how many jobs are housing related and how depressed housing is right now, and as a result how many people that used to serve the housing industry, whether they're building the homes, financing the homes, furnishing the homes, making the furniture, they're out of work. And we need the government to step back and let housing heal itself. I know there's a lot of noise out there right now on mortgage finance reform that creates an overhang until people figure out what ultimately is going to shake out.
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Interviewer4:59
Martin Connor, thank you so much. He's Chief Financial Officer, Toll Brothers.