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Toll Brothers Buys Sabal Homes, Sets Foot In South Carolina

Zacks Equity Research

Toll Brothers, Inc. TOL continues its geographical expansion spree with the recent acquisition of Sabal Homes, one of the top private homebuilders in South Carolina. With the acquisition, the company expanded its footprint in the markets of Charleston, Greenville and Myrtle Beach, SC. However, the terms of the deal have been kept under wraps.

What Toll Brothers Will Gain From Sabal Homes

Founded in 2005, Sabal Homes —  serving first-time, move-up and move-down buyers —  has built more than 1,375 homes in South Carolina since its inception. It had approximately $30 million in backlog, consisting of 80 homes, with an average price of $380,000, as of the date of the acquisition.

With this backlog, Toll Brothers acquired approximately 1,600 lots owned and controlled throughout Charleston, Greenville and Myrtle Beach. The acquisition will boost Toll Brothers' selling community count by approximately 11 as of the closing date.

Expansion Efforts to Drive Revenues

Notably, the company’s revenues in the last reported quarter declined 7.7% year over year due to lower deliveries, partly offset by higher average selling prices. Toll Brothers mostly offers luxury homes. Demand in the high-end housing market has been declining in recent times, thanks to reduced activity of wealthy overseas purchasers, many of whom seek out amenity-rich, full-service communities with on-site property management.

This is mostly affecting California, which typically accounts for more than one-third of purchases by China buyers, and products that are sold at a high price point in New York. Again, reduced SALT deductions — particularly in high-tax states like California, New York, New Jersey and Connecticut — have been impacting higher-end real estate markets.

In order to overcome this situation, Toll Brothers has been expanding geographically, having different price points. In May, the company acquired Sharp Residential, one of the largest private homebuilding companies in Atlanta, to expand presence in the market in Atlanta, GA. Now, the Sabal Homes buyout is consistent with Toll Brothers’ strategy to broaden its product lines and price points.

In 2019, Toll Brothers entered markets in Atlanta, Salt Lake City and Portland, OR. It is expanding northward on Florida's west coast into Tampa. Meanwhile, the company has been serving urban and suburban renters. As of third-quarter fiscal 2019, through Toll Brothers Apartment Living, it had a pipeline of 19,000 units in various stages of approval and development across the country.

The company’s solid land position places it well to meet the growing demand in these regions, thus giving it a competitive edge over its peers, who are presently facing land availability constraints.

Shares of Toll Brothers have gained 16.6% year to date, comparing unfavorably with its industry's 37.8% rally. Softness in the homebuying demand, thanks to affordability challenges and general market uncertainty, is hurting its performance. Nonetheless, Toll Brothers remains well-positioned to benefit from improving demographics and financial health of its affluent customer base.

 


Zacks Rank & Stocks to Consider

Toll Brothers currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space are NVR, Inc. NVR, D.R. Horton, Inc. DHI and M.D.C. Holdings, Inc. MDC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

NVR’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 20.4%.

Shares of D.R. Horton and M.D.C Holdings have gained 42.7% and 51.6%, respectively, year to date.

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