19 July 2010

Toll Brothers Forms Distressed Real Estate Business


Toll Brothers Inc., the largest U.S. luxury-home builder, formed a unit to invest in distressed real estate as demand for new houses slumps.

Toll created Gibraltar Capital & Asset Management LLC to “pursue a broad range of real estate acquisition and investment opportunities,” the Horsham, Pennsylvania-based company said in a statement today. Those may include buying loan and property portfolios, developing sites for other builders and assisting in the workout of troubled real estate, the company said.

Toll, led by new Chief Executive Officer Douglas Yearley Jr., joins Lennar Corp. in seeking to make money from distressed real estate and move beyond its traditional homebuilding business. Sales of new U.S. homes slid 33 percent in May to a record low annual rate after the end of a federal tax credit, according to a Commerce Department report last month.

“This announcement is consistent with our thesis that Toll needs to gain exposure to other revenue streams within the sector as the housing industry remains weak for potentially another two to three years,” Jack Micenko, an analyst with Susquehanna Financial Group in New York, said in a note to investors today. “We view the move as incrementally positive.”

Micenko has a “neutral” rating on Toll shares.

Falling Confidence

Builders in the U.S. turned more pessimistic in July. An index of homebuilder confidence fell more than economists forecast to the lowest level since April 2009, the National Association of Home Builders said today from Washington.

Toll fell 1.7 percent to $16.15 at 11:42 a.m. in New York Stock Exchange composite trading after the NAHB report. Goldman Sachs Group Inc. cut U.S. homebuilders to “neutral” from “attractive” last week on prospects for sluggish sales.

Toll last year began increasing its land position for the first time since 2006, including purchases of distressed lots. The company spent $143 million in the fiscal second quarter on buying or optioning land.

“I’d say half of our deals are distressed,” Yearley said at a June 24 conference sponsored by Deutsche Bank AG. He took over as CEO last month and replaced co-founder Robert Toll, who remains chairman.

The Financial Times reported last week that Toll partnered with Oaktree Capital Management to buy a portfolio of distressed loans with a face value of $1.7 billion from the Federal Deposit Insurance Corp. Kira McCarron, a Toll spokeswoman, declined to comment on the report, as did John Frank, a spokesman for Los Angeles-based Oaktree.

In February, Miami-based Lennar bought part of a $3.05 billion loan portfolio acquired by the FDIC from failed banks.

Toll also faces competition from buyout firms in distressed investing. Private-equity real estate funds have a record $104 billion of equity available for U.S. deals, London-based research firm Preqin Ltd. reported in June.

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