2011 Reese Fund Presentation - Toll Brothers

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  • 17 of approx. 200 communities are “age qualified”1,548 of units delivered were single family detached.
  • C-S shows continued weakness is home prices, but FHFA data shows 1% gain QoQ.FHFA takes all transactions into account, including refinances
  • Reduced debt by $600mm, increased cash by $600mmNearly $2 billion in impairments since 2006Taken valuation allowance against entire deferred tax asset2010 land buys: $411 million….first time in 3 years land position has shown gain
  • At the current pace, production and sales of new housing is unsustainably low. As of 12/31, the annual run rate of new home sales was 290,000 new single family homes. Typically, 350,000 homes are lost per year through destruction or demolition. Given that, 60,000 homes were subtracted from the housing supply in 2010. This is what housing demand would be under normal circumstances….
  • While there’s currently a significant supply of distressed inventory on the market, as that volume is reduced, new homes need to fill the void. I’ve made modest assumptions demonstrating a slow recovery in the housing market.First, at 1.25mm households per year you have 121 million by 2012Second I’ve increased the ratios NHI/HH to 2.25-times and lowered months supply to 6.3This yields total new homes sales of 519,000. This is actually lower than industry projections, which are forecasting over 600,000 homes sold by 2012
  • If the housing market is primed for a rebound, why buy a company that has a very small piece of the housing market? Moderate housing recovery translates to improvement for TOL
  • While the model makes Toll Brothers look appealing, the story surrounding the company supports the thesis. The demographics of Toll’s customers base support its business.
  • Toll Brothers also has an effective monopoly in the homebuilding space. Toll Brothers is the only builder competing in its price point. This gives Toll pricing power and margin support….Talk about consolidation – in PA area, a couple years ago there were 10 builders in the luxury space, now two including TOLMention discussion w/Lennar re:adding green features to homes as example of margin pressure at the low-end
  • Toll Brothers customer base is stable and growing….its position in the luxury space gives it an advantage over the low and mid-level builders who are going to increasingly be forced to compete on price and features. Historically, Toll has outperformed the other builders on both Gross and Operating Margins by 200 basis points. This margin advantage should lead to free cash flow that the company can use to solidify its strategic position. Toll Brothers is already one of two investment grade credits in the space and has been aggressively reducing its debt level. It will be able to continue.The company has made acquisitions of distressed land and will be able to do so when other builders are capital constrained. Toll will be able to eventually return value to shareholders through share repurchases.
  • With 519,000 homes in the market, I assumed a 0.75% market share for Toll. Typically, a builder’s backlog is used to estimate future production, but I used market share as a proxy for backlog. Toll’s sales for 2012 would be 3,890. I expect average selling price, net of incentives, to decline slightly this year, but return to positive growth beginning in 2012. I’m also projecting inventory impairments to return to historical levels by 2012 as Toll Brothers should follow the industry trends.
  • Putting the projections from my model into the DCF valuation, I arrived at a price of $42 per share. This was calculated using a 7% market risk premium to take the riskiness of the housing market into account. $42 implies a 2.2-times multiple of 2012 book value. Using a more conservative valuation, 2-times 2012 book value yields $38, the target price.
  • From a valuation standpoint, Toll is the only homebuilder currently trading at such a discount to its historical book value. The market hasn’t yet priced in the advantages Toll has in the housing market and its ability to benefit from the upcoming recovery.
  • Rework the risk slides.
  • I do not own the stock personally, or have any other beneficial relationship.
  • Questions……?
  • ~$94mm in loans payable resulting from government issued bonds that are meant for infrastructure
  • Add into about margins….
  • Unemployment: North 9%, Mid 8%, South 10%, West 11%
  • Average income: $190,000Median Income: $150,00044% of buyers have at least one person >55 in the house
  • Information on liability and amounts guaranteed in 10-K, waiting on more detail from mgmt
  • Call to be held Monday
  • REITS? Names, valuations, tax consequences…..Just know something about them in case…
  • Summary of methodology from report

Transcript

  • 1. Toll Brothers, Inc. Paul Goncalves Jr. pgoncalv@indiana.edu Reese Fund 2011
  • 2. Toll Brothers: Target Price $38 Market Stats Investment Thesis• Current Price: $21.72 • 2-Year investment story• Market Cap: $3.49 billion • The housing market is• 2010 Sales: $1.494 billion operating at unsustainably low levels• 2010 Net Income: ($3 million) • A modest return to historical• P/B: 1.36x norms implies significant upside for homebuilders • Toll Brothers offers the best risk/reward profile in the sector 2
  • 3. Company Profile• Founded in 1968• Single-family detached homes, townhomes, and urban condo projects• High-end customizations• Serves move-up, empty nest, and active adult buyers• Operates in 19 states• 2010 ASP $565,000 3
  • 4. Difficult backdrop for homebuilders• New home sales 76% since 2005• 25% of American homeowners underwater• “Shadow Inventory” could add several years of excess supply• 9% (headline) unemployment• New Home Sales at generational lows• Market projections vary among industry analysts 4
  • 5. Toll Brothers not immune to …but will exit a stronger housing downturn… company Homes Delivered Revenue Net Income 2005 2006 2007 2008 2009 2010 • Increased 8769 8601 $10,000 cash, decreased debt 6687 6629 $8,000 • Conservative asset $5,759 $6,117 $6,000 valuation • Land acquisitions at $4,649 $4,000 $3,149 2965 $1,755 2642 distressed prices $1,495 $2,000 • Strategic uses of cash – Gibraltar $0 $806 $687 $36 -$3 -$298 -$756 -$2,000 ($ millions) 5
  • 6. Current Housing Production is Unsustainable Annual Household Formation 1,250,000 Ownership Rate 67% +Annual Removals 350,000 - Manufactured Housing 100,000 - Homes build on private lots 25% Total Demand 815,625• Distressed inventory is currently drawing demand away from new homes• New Home Inventory/Household Ratio o 30-Year Average: 3.42x o Current: 1.60x• CURRENT PACE WILL NOT SUPPORT FUTURE HOUSING DEMAND 6
  • 7. Forecasting a modest recovery by 2012… Assumptions New Home Sales New home Households NHI/HH NHS/NHI Inventory• Excess inventory will Year (thousands) (thousands) (millions) (per mm HH) 2008 377 353 117.18 3.01x 1.07x be worked off due to historic affordability 2009 356 231 117.54 1.97x 1.54x• Total U.S. Households 2010 290 190 118.79 1.60x 1.53x = 121million 2011 410 234 120.04 1.95x 1.75x• NHI/HH: 2.25x 2012 519 273 121.29 2.25x 1.90x• 6.3 Months Supply 2013 657 337 122.54 2.75x 1.95x• U.S. New Homes Sales = 519,000 units 7
  • 8. Why Toll?• Demographics support demand for high-end housing• Monopoly power in its segment• Margin and cash flow advantage• Impending housing recovery is not yet priced into stock 8
  • 9. Favorable demographics support thesis • Unemployment among households earningUnemployment >$150,000 only 3% • Households earning >$100,000 +176% since Households 1980 (vs. 43% increase in total households) • Mortgage borrowing contracting Credit • Industry professionals indicate credit available, but standards high 9
  • 10. Monopoly Power $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0• Toll Brothers has an effective monopoly in high-end housing among publicly-traded homebuilders• Other homebuilders will be forced to compete on price and suffer margin pressure• TOL has already returned to single-digit cancelation rate, while competitors elevated 10
  • 11. Toll Brothers Should Generate Superior Margins and FCF Favorable Demographics Support Demand Pricing Power Intense competition among low/mid-level Low-end competes with foreclosures builders for constrained buyers Margin Outperformance TOL historical 200+bp advantage in margin Free Cash Flow Advantage Strategic acquisition of landContinued reduction of debt Share repurchase and distressed assets 11
  • 12. The Housing Recovery’s Effect on TOLToll Brothers 2009 2010 2011 2012 2013 2014Revenue & Expense ProjectionsU.S. Home Sales U.S. New Home Sales (thousands) 356 290 410 519 657 743 TOL Mkt Share 0.83% 0.91% 0.70% 0.75% 0.90% 0.90% TOL Homes Sold (thousands) 2.97 2.64 2.87 3.89 5.91 6.68 YoY Growth -55.3% -10.9% 8.5% 35.6% 52.1% 13.0% Average Selling Price (thousands) $592.0 $565.8 $551.6 $557.1 $568.3 $579.6Revenue (millions) $1,755.3 $1,494.8 $1,581.7 $2,166.6 $3,360.7 $3,874.6Cost of Revenue COR (ex impairment charges) $1,020.5 $1,152.5 $1,265.4 $1,657.4 $2,554.2 $2,944.7 Inventory Impairment Charges $465.4 $115.3 $41.7 $5.3 $3.8 $4.0 % of inventory 14.6% 3.6% 1.3% 0.2% 0.1% 0.1% GM (ex impairment charges) 41.9% 22.9% 20.0% 23.5% 24.0% 24.0% Total COR $1,485.9 $1,267.8 $1,307.1 $1,662.7 $2,558.0 $2,948.7 Total Gross Margin 15.3% 15.2% 17.4% 23.3% 23.9% 23.9% 12
  • 13. Toll Brothers Inc. - DCF Valuation Valuation Analysis ($ in millions) Recent Price $20.72 PV of FCF $8,527 Beta 1.38 -Debt $1,412• 2012E Equity: Risk Free 3.32% Equity Value $7,115 $3.15b Mkt. Risk Prem Cost of Equity 7.0% 12.98% Shares Outstanding Implied Price 168 $42.42 Mkt. Val. of Equity $3,475 Current Price $20.72• DCF: $42 (2.2x Debt Tax Rate $1,412 35% Potential Upside Implied 2012E P/B 105% 2.26x 2012P/B) Cost of Debt 6.09% WACC 10.37% LT Growth Rate 3.00%• Conservative FY2011E FY2012E FY2013E FY2014E Terminal valuation of 2.0x Net Income $46.4 $299.5 $510.4 $614.3 $632.8 2012E BV yields +Dep. & Amort $10.2 $8.8 $10.1 $12.8 $13.2 + After Tax Int $18.4 $15.1 $11.6 $10.7 $11.1 $38, +83% upside -Chg Working Cap -$158.6 -$159.9 -$188.8 -$157.2 -$161.9 -CapEx $10.3 $21.7 $33.6 $38.7 $39.9 FCF $223.3 $461.6 $687.3 $756.3 $779.0 $10,564.3 Price/BV Valuation Equity P/B Price Upside 2011 $3,161.7 1.50x $28.28 36% 2012 $3,150.5 2.02x $37.93 83% 13
  • 14. Comparison Valuation Long-Term Average Current PremiumTicker Mkt. Cap. Price/Book Price/Book (Discount) DHI $4,256.06 2.07x 1.55x -25% LEN $3,681.36 0.84x 1.44x 71%PHM $3,268.05 1.14x 1.37x 20%MDC $1,490.06 0.76x 1.40x 83% KBH $1,189.61 1.59x 1.80x 13% RYL $834.33 1.12x 1.48x 33%MTH $779.70 1.37x 1.47x 7% SPF $514.47 1.00x 1.06x 6% BZH $450.72 0.98x 1.03x 5%HOV $366.67 1.22x Neg. Neg. TOL $3,490.01 2.02x 1.32x -35% TOL beta of 1.32 – will add beta to portfolio with limited downside risk 14
  • 15. Risks2-Year investment horizonLingering shadow inventory could depressprices and dampen demand for new homesRecession – unemployment and creditconstraintsAdditional inventory write-downs 15
  • 16. Conclusion• Only a modest housing recovery is needed in order to make the story work• Demographics, market position, margin and cash flow give Toll Brothers an edge over other homebuilders• Cheap valuation provides attractive entry point for TOL 16
  • 17. Analyst Conflicts Analyst Ownership • NO Family • NOOther Beneficial Relationship • NO 17
  • 18. AppendixCompany Information Housing Market DataDebt Profile Existing Home Sales vs. New HomeLand & Cancellation Data SalesGeographic Mix Existing Home Inventory vs. NewBalance Sheet Home Inventory-1Income Statement Existing Home Inventory vs. NewCash Flow Home Inventory-2Sensitivity Analysis Affordability IndexRegional Presence 30-Year Mortgage HistoricalBuyer Profile Industry ImpairmentsManagement Profiles Harvard JCHS StudyTop Shareholders Mortgage BorrowingGibraltar Details DelinquenciesHighlights from Company Call What a housing recovery might lookInventory Breakdown like?Land Purchased 2010 Case-ShillerAlternative Housing Stocks New Home SalesHistorical P/B & Recessions 18
  • 19. Debt Profile Total Company Debt/Equity Credit Rating• No major maturities DR Horton 83% BB- before 2013 Lennar 147% B+• Least leverage among publicly-traded PulteGroup 190% BB- homebuilders MDC Holdings 123% BBB-• 1 of 2 investment grade credits in comp KB Home 281% B+ set Ryland Group 169% BB- Meritage Homes 121% B+ Maturity Schedule ($mm) Standard Pacific 282% B 2011 $102.9 Beazer Homes 305% CCC 2012 $15.7 2013 $346.4 Hovnanian Neg. CCC- 2014 $270.0 Toll Brothers 67% BBB- 2015 $300.7 Return to Appendix 19
  • 20. Comparison among homebuilders Land Held for FutureCompany ASP FY2010 Development Cancellation RateDR Horton Inc. $206,100 $2,155.40 26%Lennar Corp. $243,000 $1,990.43 18%PulteGroup, Inc. $258,000 $1,135.20 23%MDC Holdings Inc. $277,800 $262.86 24%KB Home $214,500 $1,696.00 25%Ryland Group Inc. $240,000 $62.10 22%Meritage Homes Corporation $238,400 $449.20 24%Standard Pacific Corp. $306,000 $564.52 18%Beazer Homes USA Inc. $221,700 $419.10 26%Hovnanian Enterprises Inc. $280,715 $348.50 21%Toll Brothers $565,773 $924.0 7% TOL has already returned to historical cancellation rates Return to Appendix 20
  • 21. Toll Brothers 2009 2010 2011 2012 2013 2014Revenue & Expense ProjectionsRevenue by Region North Units Delivered (thousands) % of total 0.98 33.2% 0.77 29.3% 0.86 30.0% 1.17 30.0% 1.77 30.0% 2.01 30.0% Projected Average Selling Price (thousands) YoY Growth Total North Revenue (mil) $595.5 -13.4% $585.40 $526.7 -11.5% $407.70 $500.4 -5.0% $430.46 $505.4 1.0% $589.63 $515.5 2.0% $914.63 $525.8 2.0% $1,054.48 Geographic Mix Mid-Atlantic Units Delivered (thousands) 0.86 0.88 0.95 1.28 1.95 2.21 • Mix favors North and % of total 29.1% 33.2% 33.0% 33.0% 33.0% 33.0% Average Selling Price (thousands) $571.6 $557.6 $540.9 $546.3 $557.3 $568.4 Mid-Atlantic Regions YoY Growth -6.1% -2.4% -3.0% 1.0% 2.0% 2.0% Total Mid-Atlantic Revenue (mil) $492.70 $488.50 $511.84 $701.10 $1,087.55 $1,253.83 South Units Delivered (thousands) 0.54 0.50 0.52 0.70 1.06 1.20 % of total 18.3% 18.8% 18.0% 18.0% 18.0% 18.0% Average Selling Price (thousands) $529.8 $530.7 $528.1 $533.4 $544.0 $554.9 YoY Growth 4.2% 0.2% -0.5% 1.0% 2.0% 2.0% Total South Revenue (mil) $288.20 $264.30 $272.55 $373.34 $579.12 $667.66 West Units Delivered (thousands) 0.58 0.49 0.54 0.74 1.12 1.27 % of total 19.4% 18.7% 19.0% 19.0% 19.0% 19.0% Average Selling Price (thousands) $675.3 $676.7 $673.3 $680.1 $693.7 $707.5 YoY Growth -21.3% 0.2% -0.5% 1.0% 2.0% 2.0% Total West Revenue (mil) $389.00 $334.30 $366.84 $502.48 $779.45 $898.63Total Units 2.97 2.64 2.87 3.89 5.91 6.68Average Selling Price $592.0 $565.8 $551.6 $557.1 $568.3 $579.6Total Revenue $1,755.3 $1,494.8 $1,581.7 $2,166.6 $3,360.7 $3,874.6 North 33% 27% 27% 27% 27% 27% Mid-Atlantic 28% 33% 32% 32% 32% 32% Based on current proportion of South 16% 18% 17% 17% 17% 17% inventory by region West 22% 22% 23% 23% 23% 23% 21 Return to Appendix
  • 22. TOL – Balance SheetToll Brothers Inc. - Balance Sheet($ in millions) FY 2008 FY 2009 FQ1 2010 FQ2 2010 FQ3 2010 FQ4 2010 FY 2010 FQ1 2011E FQ2 2011E FQ3 2011E FQ4 2011E FY 2011E FY 2012EAssetsCash & Near Cash Items $1,633.5 $1,807.7 $1,568.0 $1,362.0 $1,434.6 $1,039.0 $1,039.0 $906.0 $622.7 $1,037.5 $810.2 $810.2 $716.6Restricted Cash $0.0 $0.0 $0.0 $0.0 $0.0 $60.9 $60.9 $61.0 $61.0 $61.0 $61.0 $61.0 $0.0Short-Term Investments $0.0 $101.0 $186.5 $186.0 $206.0 $197.9 $197.9 $150.6 $132.9 $229.7 $243.6 $243.6 $195.0Receivables $163.0 $301.0 $305.5 $338.9 $203.3 $332.2 $332.2 $134.4 $131.8 $290.0 $369.1 $369.1 $166.2Inventories $4,127.5 $3,183.6 $3,223.9 $3,321.0 $3,256.6 $3,241.7 $3,241.7 $3,128.2 $3,163.4 $3,198.5 $3,339.1 $3,339.1 $3,541.9Customer Deposits Held in Escrow $18.9 $17.7 $15.0 $28.9 $24.6 $21.4 $21.4 $21.5 $28.5 $41.8 $44.3 $44.3 $32.5Total Current Assets $5,942.9 $5,411.0 $5,298.9 $5,236.8 $5,125.2 $4,893.1 $4,893.1 $4,401.8 $4,140.3 $4,858.5 $4,867.3 $4,867.3 $4,652.2Long-Term Investments $151.8 $152.8 $154.3 $170.5 $193.5 $198.4 $198.4 $118.3 $123.4 $229.7 $310.0 $310.0 $151.7Net Fixed Assets $86.5 $70.4 $66.6 $82.2 $79.5 $79.9 $79.9 $79.4 $76.4 $78.3 $80.0 $80.0 $92.9Deferred Tax Assets $405.7 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $392.9 $392.9 $288.1Total Long-Term Assets $643.9 $223.3 $221.0 $252.7 $273.0 $278.4 $278.4 $197.7 $199.8 $307.9 $783.0 $783.0 $532.7Total Assets $6,586.8 $5,634.3 $5,519.9 $5,489.5 $5,398.2 $5,171.5 $5,171.5 $4,599.5 $4,340.0 $5,166.4 $5,650.3 $5,650.3 $5,184.8LiabilitiesLoans Payable $613.6 $472.9 $468.2 $433.2 $410.4 $94.5 $94.5 $116.2 $87.1 $130.7 $101.7 $101.7 $92.4Accounts Payable $134.8 $79.1 $77.9 $97.2 $89.2 $91.7 $91.7 $63.9 $47.9 $95.9 $111.8 $111.8 $129.3Accrued Expenses $738.6 $640.2 $626.2 $618.9 $576.2 $570.3 $570.3 $418.3 $352.9 $549.0 $549.0 $549.0 $415.7Income Taxes Payable $202.2 $174.6 $175.8 $179.7 $133.4 $162.4 $162.4 $75.3 $66.4 $146.1 $155.0 $155.0 $108.3Total Current Liabilities $1,689.3 $1,366.8 $1,348.2 $1,329.0 $1,209.2 $918.9 $918.9 $673.6 $554.4 $921.7 $917.5 $917.5 $745.7Senior Notes $1,143.4 $1,587.6 $1,588.1 $1,588.6 $1,553.6 $1,544.1 $1,544.1 $1,411.7 $1,411.7 $1,411.7 $1,411.7 $1,411.7 $1,163.9Senior Subordinated Notes $343.0 $47.9 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0Mortgage Company Warehouse Loan $37.9 $27.0 $15.5 $30.0 $47.3 $72.4 $72.4 $41.8 $23.5 $47.1 $54.9 $54.9 $41.6Customer Deposits $135.6 $88.6 $82.2 $93.5 $85.9 $77.2 $77.2 $104.6 $52.3 $156.9 $104.6 $104.6 $83.1Total Long-Term Liabilities $1,659.9 $1,751.2 $1,685.9 $1,712.1 $1,686.7 $1,693.6 $1,693.6 $1,558.1 $1,487.5 $1,615.6 $1,571.1 $1,571.1 $1,288.6Total Liabilities $3,349.2 $3,118.0 $3,034.0 $3,041.1 $2,895.9 $2,612.5 $2,612.5 $2,231.7 $2,041.9 $2,537.3 $2,488.6 $2,488.6 $2,034.3Shareholders Equity $3,237.7 $2,516.3 $2,485.9 $2,448.4 $2,502.3 $2,558.9 $2,558.9 $2,367.8 $2,298.1 $2,629.1 $3,161.7 $3,161.7 $3,150.5 Return to Appendix 22
  • 23. TOL – Income StatementToll Brothers Inc.- Income Statement FQ1 FQ2 FQ4 FQ1 FQ2 FQ3 FQ4($ in millions) FY 2008 FY 2009 2010 2010 FQ3 2010 2010 FY 2010 2011E 2011E 2011E 2011E FY 2011E FY 2012ERevenue $3,148.2 $1,755.3 $326.7 $311.3 $454.2 $402.6 $1,494.8 $268.9 $237.3 $522.0 $553.6 $1,581.7 $2,166.6Cost of Goods Sold $3,119.8 $1,951.3 $317.8 $305.7 $392.4 $367.2 $1,383.1 $261.4 $196.1 $392.1 $457.5 $1,307.1 $1,662.7 Gross Margin 0.9% -11.2% 2.7% 1.8% 13.6% 8.8% 7.5% 2.8% 17.4% 24.9% 17.4% 17.4% 23.3%Selling, General & AdminExpense $429.9 $313.2 $67.3 $59.5 $67.2 $69.2 $263.2 $94.9 $71.2 $47.5 $23.7 $237.3 $216.7 SG&A as % of Revenue 13.7% 17.8% 20.6% 19.1% 14.8% 17.2% 17.6% 35.3% 30.0% 9.1% 4.3% 15.0% 10.0%Interest Expense $0.0 $7.9 $7.3 $6.2 $5.1 $4.2 $22.8 $7.1 $7.1 $7.1 $7.1 $28.2 $23.3 Int. Exp as % of revenue 0.0% 0.5% 2.2% 2.0% 1.1% 1.0% 1.5% 2.6% 3.0% 1.4% 1.3% 2.0% 2.0%Goodwill Impairment $3.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0Operating Income -$404.8 -$517.2 -$65.6 -$60.2 -$10.5 -$37.9 -$174.3 -$94.5 -$37.0 $75.3 $65.3 $9.1 $263.9 Operating Margin -12.9% -29.5% -20.1% -19.3% -2.3% -9.4% -11.7% -35.1% -15.6% 14.4% 11.8% 0.6% 12.2%Income (Loss) from Unconsol.Ent. -$186.4 -$7.5 $0.4 $1.3 $3.2 $18.7 $23.5 $6.0 $6.0 $6.0 $6.0 $24.2 $25.4Interest and Other Inc. $124.4 $41.9 $8.5 $7.2 $8.8 $10.3 $34.8 $4.0 $4.0 $4.0 $4.0 $15.8 $15.2Expenses for Early Debt Ret. $0.0 -$13.7 $0.0 $0.0 -$0.7 -$0.5 -$1.2 -$0.7 -$0.7 -$0.7 -$0.7 -$2.6 -$5.0Pretax Income -$466.8 -$496.5 -$56.8 -$51.8 $0.8 -$9.5 -$117.2 -$85.2 -$27.7 $84.7 $74.7 $46.4 $299.5Income Tax Expense (Benefit) -$169.0 $259.4 -$16.0 -$11.4 -$26.5 -$59.9 -$113.8 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Tax Rate 36.2% -52.2% 28.2% 22.0% -3219.9% 633.3% 97.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Net Income -$297.8 -$755.9 -$40.8 -$40.4 $27.3 $50.5 -$3.3 -$85.2 -$27.7 $84.7 $74.7 $46.4 $299.5Basic Weighted Avg Shares 158.7 161.5 165.2 165.4 165.8 166.3 165.7 $166.1 $166.1 $166.0 $166.0 $166.0 $166.1as % of Diluted Shares 100% 100% 100% 100% 99% 99% 99% 99.0% 99.0% 99.0% 99.0% 99.0% 99.0%Basic EPS -$1.88 -$4.68 -$0.25 -$0.24 $0.16 $0.30 -$0.02 -$0.51 -$0.17 $0.51 $0.45 $0.28 $1.80Diluted Weighted Avg Shares 158.7 161.5 165.2 165.4 167.7 167.8 166.5 $167.8 $167.7 $167.7 $167.7 $167.7 $167.8Diluted EPS -$1.88 -$4.68 -$0.25 -$0.24 $0.16 $0.30 -$0.02 -$0.51 -$0.17 $0.50 $0.45 $0.28 $1.78 23 Return to Appendix
  • 24. TOL – Cash Flow Toll Brothers Inc.- Statement of Cash Flows ($ in millions) FY 2010 FQ1 2011E FQ2 2011E FQ3 2011E FQ4 2011E FY 2011E FY 2012E Net Income -$3.3 -$85.2 -$27.7 $84.7 $74.7 $46.4 $299.5 Depreciation & Amortization $20.0 $2.4 $4.0 $2.3 $1.6 $10.2 $8.8 Inventory Impairment $115.3 $10.4 $10.4 $10.4 $10.4 $41.7 $5.3 Changes in Working Capital Receivables -$31.2 $197.8 $2.6 -$158.2 -$79.1 -$36.8 $202.9 Inventories -$58.1 $113.5 -$35.1 -$35.1 -$140.6 -$97.4 -$202.7 Customer Deposits held in Escrow -$3.7 -$0.1 -$7.0 -$13.3 -$2.5 -$22.9 $11.8 Payables -$365.7 -$6.1 -$45.0 $91.5 -$13.1 $27.3 $8.2 Other ST Liabilities -$82.2 -$239.1 -$74.2 $275.8 $8.9 -$28.7 -$180.0 Other Non-Cash Adjustments $262.8 Cash From Operations -$146.3 -$6.4 -$172.0 $258.1 -$139.8 -$60.2 $153.7 Disposal of Fixed Assets $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Capital Expenditures -$4.9 -$1.9 -$0.9 -$4.2 -$3.3 -$10.3 -$21.7 Change in Investments $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Other Investing Activities -$146.6 -$11.4 -$11.4 -$11.4 -$11.4 -$45.7 $48.6 Cash From Investing Activities -$151.4 -$13.3 -$12.4 -$15.6 -$14.8 -$56.0 $26.9 Dividends Paid $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Annual Dividend $0.0 $0.0 $0.0 Change in Short-Term Borrowings -$389.3 $21.7 -$29.0 $43.6 -$29.0 $7.2 -$9.3 Change in Long-Term Borrowings -$94.0 -$132.4 $0.0 $0.0 $0.0 -$132.4 -$247.8 Shares Issued $12.5 $3.5 $3.5 $3.5 $3.5 $14.0 $15.2 Shares Repurchased -$0.6 -$2.8 -$2.8 -$2.8 -$2.8 -$11.2 -$7.6 Other Financing Activities $0.3 -$3.1 -$70.6 $128.1 -$44.4 $9.9 -$24.8 Cash from Financing Activities -$471.0 -$113.2 -$98.9 $172.4 -$72.8 -$112.5 -$274.3 Beginning Cash Balance $1,807.7 $1,039.0 $906.0 $622.7 $1,037.5 $1,039.0 $810.2 Ending Cash Balance $1,039.0 $906.0 $622.7 $1,037.5 $810.2 $810.2 $716.6 24 Return to Appendix
  • 25. Valuation Sensitivity WACC-LTG Sensitivity WACC $42.42 7.00% 8.00% 9.00% 10.00% 11.00% 1.00% $59.38 $49.12 $41.44 $35.48 $30.71LT Growth 2.00% $70.88 $57.05 $47.17 $39.78 $34.04 Rate 3.00% $88.12 $68.12 $54.81 $45.31 $38.19 4.00% $116.82 $84.73 $65.49 $52.67 $43.52 5.00% $174.18 $112.38 $81.49 $62.96 $50.62 Price/Book Value Sensitivity Book Value $37.93 $2,500 $3,500 $4,000 $4,500 $5,000 1.0x $14.90 $20.86 $23.84 $26.82 $29.80 Price/Book 1.5x $22.35 $31.29 $35.76 $40.23 $44.70 Multiple 2.0x $29.80 $41.72 $47.68 $53.64 $59.60 2.5x $37.25 $52.15 $59.60 $67.05 $74.50 3.0x $44.70 $62.58 $71.52 $80.46 $89.40 3.5x $52.15 $73.01 $83.44 $93.87 $104.31 25 Return to Appendix
  • 26. Toll Brothers’ Housing PresenceNorth Mid-Atlantic South WestMassachusetts Pennsylvania Texas CaliforniaConnecticut Virginia Florida NevadaNew York Delaware South Carolina ArizonaNew Jersey Maryland North Carolina ColoradoMinnesotaIllinoisMichigan Return to Appendix 26
  • 27. Home Price and Buyer Distribution Distribution of Home Prices Buyer Financing 7% 10% 7% 14% 30%<$300,000$300,000-699,999 63%$700,000- 69% Jumbo$999,999 Conforming>$1,000,000 Cash Return to Appendix 27
  • 28. Mortgage Financing• $433 million of mortgage commitments as of October 31, 2010• Agreements with investors to acquire full amount• 750 FICO scores and 30% equity low risk of put-back Return to Appendix 28
  • 29. ManagementRobert Toll• Chairman and founder• Started firm in 1968Douglas Yearley• CEO• Joined firm in 1990Zvi Barzilay• President, COO• Joined firm in 1980Martin Connor• CFO, Treasurer• Joined in 2008 after 20 years at E&Y Return to Appendix 29
  • 30. Top Shareholders Holder Percentage OwnedFidelity Management Co. 14.87%Robert I. Toll 8.45%Wellington MgmtCo. 4.65%Franklin Mutual Advisers 3.24%Keybank 3.16%Vanguard Group 3.11%Bruce E. Toll 3.01% •Insiders own 17% of company Return to Appendix 30
  • 31. Gibraltar Capital and Asset Management LLP• Formed July 2010 to invest in distressed real estate properties and assets• AmTrust Portfolio Acquisition: $1.7b of distressed loans and REO o 50% FDIC interest-free 7 year loan o 30% FDIC equity o 20% Private Equity  Oaktree Asset Mgmt (79%)  Toll Brothers (20%) – Co-Manager  Milestone (1%) – Co-Manager• Toll does not expect meaningful contribution to earnings until post- 2011 Return to Appendix 31
  • 32. Highlights from Call with Management• Gross margin ex-incentives increased due to additional throughput per community• Company is actively seeking more properties along the Boston-D.C. corridor• Company believes it is picking up market share in the markets in which it operates• Company has contracts in place on raw materials, but believes it can contract labor on as-needed basis• Current overhead can support production gains of 15-20% without adding to cost structure Return to Appendix 32
  • 33. Inventory Breakdown 2010 2009Land Controlled $31,899 $60,611Land Owned $923,972 $775,083Operating $2,285,854 $2,347,872CommunitiesTotal $3,241,745 $3,183,566 Return to Appendix 33
  • 34. Land Purchases in 2010Region Number of Purchased Lots Dollars Spent CommunitiesNorth 14 1,649 $96,000,000Mid-Atlantic 11 1,467 $110,000,000South 48 1,676 $123,000,000West 16 1,411 $89,000,000Total 89 6,203 $418,000,000 Return to Appendix 34
  • 35. Alternative Housing Plays Home Depot Lowe’s (LOW) NVR (NVR) (HD)• 2011 P/E: 19 • 2011 P/E: 18 • 2.6x P/B• Avg. P/E: 15 • Avg. P/E: 15 • 2011 P/E: 25• 1.07 Beta • 1.15 Beta • +25% gain since 12/1/10 None offer same upside potential as TOL Return to Appendix 35
  • 36. Historical Book Value and Recessions 1985-2010 4 3.5 3 2.5 2 Recession TOL Book Value 1.5 1 0.5 0 Return to Appendix 36
  • 37. 0 1000 2000 3000 4000 5000 6000 7000 8000 3/1/2000 8/1/2000 1/1/2001 6/1/2001 11/1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/2003 12/1/2003 5/1/2004 10/1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/2006 11/1/200637 4/1/2007 9/1/2007 2/1/2008 7/1/2008 12/1/2008 5/1/2009 10/1/2009 3/1/2010 8/1/2010 0 200 400 600 800 1000 1200 1400 Existing vs. New Home Sales SAAR Existing New Home Sales SAAR Home Sales Return to Appendix
  • 38. 10.00x 15.00x 20.00x 25.00x 0.00x 5.00x Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-0538 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Existing home inventory/New Home Inventory Return to Appendix
  • 39. 100 200 300 400 500 700 600 0 1/1/1999 5/1/1999 9/1/1999 1/1/2000 5/1/2000 9/1/2000 1/1/2001 5/1/2001 9/1/2001 1/1/2002 5/1/2002 9/1/2002 1/1/2003 5/1/2003 9/1/2003 1/1/2004 5/1/2004 9/1/2004 1/1/2005 5/1/2005 9/1/200539 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 9/1/2010 0 1 2 3 4 5 0.5 2.5 3.5 4.5 1.5 Return to Appendix Home Existing Inventory Inventory Existing Home Inventory vs. New Home Inventory New Home
  • 40. Housing is at its cheapest level in 30 years Housing Affordability Index 200 180 160 140 120 100 80 Return to Appendix 40
  • 41. 30-Year Mortgage Rate9876543210Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Return to Appendix 41
  • 42. Industry-wide impairment charges declining$12,000 $10,959$10,000 $8,000 $6,507 $6,000 $4,000 $2,298 $2,115 $2,000 $514 $232 $11 $13 $0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 TOL $5.6 $7.5 $5.1 $152.0 $619.5 $645.0 $465.4 $115.3 ($ in millions) Return to Appendix 42
  • 43. Harvard JCHS Study• 1.2-1.8 million new households created per year• Oldest “baby-boomers” just turning 65, many in mid-50’s• “Echo-boom” generation already larger than “baby boom”• 2005-2009: homeownership rates fell twice as much for low-income households compared to high-income households• Low-end homes experienced price drops 50% greater than high-end homes Return to Appendix 43
  • 44. 400000 600000 800000 1000000 1200000 1400000 200000 -600000 -400000 -200000 0 3/1/1980 1/1/1981 11/1/1981 9/1/1982 7/1/1983 5/1/1984 3/1/1985 1/1/1986 11/1/1986 9/1/1987 7/1/1988 5/1/1989 3/1/1990 1/1/1991 11/1/1991 9/1/1992 7/1/199344 5/1/1994 3/1/1995 1/1/1996 11/1/1996 9/1/1997 Still Negative 7/1/1998 5/1/1999 3/1/2000 1/1/2001 11/1/2001 9/1/2002 7/1/2003 Change in Mortgage Borrowing 1980-2010 5/1/2004 3/1/2005 1/1/2006 11/1/2006 9/1/2007 7/1/2008 5/1/2009 3/1/2010 Return to Appendix Decline in Mortgage Borrowing Moderating, But
  • 45. 0 1 2 3 4 5 6 7 8 3/1/1998 7/1/1998 11/1/1998 3/1/1999 7/1/1999 11/1/1999 3/1/2000 7/1/2000 11/1/2000 3/1/2001 7/1/2001 11/1/2001 3/1/2002 7/1/2002 11/1/2002 3/1/2003 7/1/2003 11/1/2003 3/1/200445 7/1/2004 11/1/2004 3/1/2005 7/1/2005 11/1/2005 3/1/2006 7/1/2006 11/1/2006 Prime Delinquencies as % of Total 3/1/2007 7/1/2007 11/1/2007 3/1/2008 7/1/2008 11/1/2008 3/1/2009 7/1/2009 11/1/2009 3/1/2010 Return to Appendix Prime Delinquencies High, but Declining 7/1/2010
  • 46. 0.5 1.5 3.5 4.5 2.5 0 1 2 3 4 5 1/1/1999 10/1/1999 7/1/2000 4/1/2001 1/1/2002 10/1/2002 7/1/2003 4/1/2004 1/1/2005 10/1/2005 7/1/2006 4/1/2007 1/1/2008 10/1/2008 7/1/2009 4/1/2010 1/1/2011 10/1/2011 7/1/2012 4/1/201346 1/1/2014 10/1/2014 7/1/2015 4/1/2016 1/1/2017 10/1/2017 7/1/2018 4/1/2019 1/1/2020 10/1/2020 0 100 200 300 400 500 600 700 New Home Inventory Return to Appendix Existing Home Inventory What a Housing Recovery Might Look Like…
  • 47. 100 150 200 250 50 0 1/1/2000 5/1/2000 9/1/2000 1/1/2001 5/1/2001 9/1/2001 1/1/2002 5/1/2002 9/1/2002 1/1/2003 5/1/2003 9/1/2003 1/1/2004 5/1/2004 9/1/2004 1/1/200547 5/1/2005 9/1/2005 2000-Present 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 S&P/Case-Shiller Home Price Index 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 Return to Appendix
  • 48. 1000 1200 1400 200 400 600 800 0 3/1/2000 7/1/2000 11/1/2000 3/1/2001 7/1/2001 11/1/2001 3/1/2002 7/1/2002 11/1/2002 3/1/2003 7/1/2003 11/1/2003 3/1/2004 7/1/2004 11/1/2004 3/1/200548 7/1/2005 11/1/2005 3/1/2006 2000-Present 7/1/2006 New Home Sales 11/1/2006 3/1/2007 7/1/2007 11/1/2007 3/1/2008 7/1/2008 11/1/2008 3/1/2009 7/1/2009 11/1/2009 3/1/2010 7/1/2010 11/1/2010 Return to Appendix