Through the Roof with Robert Toll

This is a partial transcript from Your World with Neil Cavuto, December 10, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: Profits at luxury homebuilder Toll Brothers is going through the roof but the stock getting hammered on worries that rising interest rates could make this performance a one-time event. So, while profits were up 35 percent in the latest quarter and that easily moved past estimates the stock actually dropped by four percent.

With us now from Pennsylvania probably scratching his head at Wall Street reaction is Robert Toll, Toll Brothers’ Chairman and CEO. Robert, good to have you.

ROBERT TOLL, TOLL BROTHERS CHAIRMAN AND CEO (TOL): Nice to be here. Thanks.

CAVUTO: What happened today on Wall Street?

TOLL: You know my mother used to ask me the same question as I was riding to work. Tell me, son, why did the stock drop yesterday and I used to say, mom, more sellers than buyers.

CAVUTO: All right that’s one way to explain it. Well, it’s interesting and we have (unintelligible) on here not too long ago there is something about housing stocks that just sort of defies typical market multiples.

You trade a steep discount to it and it’s been this way for better than a decade now. Even though your business has boomed throughout that decade now your stock has appreciably run up but even allowing for that you trade at a discount to the market. What’s the deal?

TOLL: Just one man’s opinion, Neil. I think what we’re fighting as homebuilding companies is the phenomena of the average person’s perception of what a homebuilder is.

If I say home builder you think of a guy in a flannel shirt in a pickup truck with a gun rack behind him who’s going to deliver 90 percent of a new home, take 100 percent of the money and give you a hammer and screwdriver to punch out the home.

Today the average that the top ten homebuilders does probably $3 billion to $4 billion a year. It’s very sophisticated management. Leverage is under 50 percent I think for all of the top ten.

Then it’s a completely different ballgame but somehow we haven’t sunk yet through the typical image of a homebuilder so as to get respect, as Rodney Dangerfield would say, but it’s not too long in coming. We’re almost there now.

CAVUTO: I’m still having this image of you in a flannel shirt but I’ll move on. Let me get your sense of what Alan Greenspan did this week by not moving on rates and hinting that for a considerable period he won’t move on rates. Is that to say that this housing boom continues unabated for at least another year? What do you think?

TOLL: Oh, I think it definitely does. I think the housing boom continues until there’s some macroeconomic event and I don’t think it’s got that much to do with interest rates.

Greenspan said he was going to be accommodative, I think those were his words, which means he’s going to keep the interest rates below where they ought to be on an inflationary basis in order to keep the economy stimulated because although he says he’s no longer worried about going into a deflationary spiral that’s a deep, black hole that’s tough to pull out of.

Check in Japan. And I think what Greenspan is saying he’s going to keep on priming the pump until he’s satisfied that we have no risk of going into that downward spiral. He’s not concerned with inflation.

CAVUTO: What would the threshold level - I’m sorry, Bob. What would the threshold level be at which you think there might be a hiccup in housing, is it eight percent for a 30-year mortgage? What would it be?

TOLL: I think it would be about eight and a half percent.

CAVUTO: Yes.

TOLL: And we’re far from it and I don’t think we have anything to worry about. We got up to eight percent in ‘95, ‘97 and 2000 and we kept, Toll Brothers anyway, kept right on blowing and rolling and having a great time.

Our revenues and our earnings kept on increasing so I don’t think we’re going to be impacted by an increase in mortgage rates when it comes and surely it must come sooner or later.

CAVUTO: All right, Bob Toll your mother is a very wise woman. Thank you very much. Robert Toll, the man who runs Toll Brothers.

TOLL: Thanks.

CAVUTO: Good having you, sir.

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