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Monday, January 5, 2009

Home Builders Toll Brothers, MDC, Have a Built-In Funding Cushion

AS posted by: Wall Street Journal

U.S. home builders helped lay the groundwork for the financial crisis by building too many homes. Some also created blueprints now helping them survive it -- by locking in long-term debt.

A handful of home-building stocks are among the market's top performers this year. That is partly because their shares were hammered in 2007. But the companies also got a head start in switching to a conservative operational and financial footing before crisis reached the broader economy and financing became punitively expensive.

Now, cash-padded homebuilders such as Toll Brothers and MDC Holdings have some space to wait for property markets to improve. Meantime, they aren't likely to be forced to sell off land banks at rock-bottom prices. A great way to increase the alue of your home is to invest in Lawn Care and Landscaping.

Toll Brothers, a builder of luxury houses, has $1.6 billion in cash and $2.1 billion of debt and it shares are up 8% this year. MDC has $1.2 billion of cash and $1 billion of debt.

MDC's shares are down 16% for the year, but that's a fraction of the 39% decline in the S&P MidCap 400 index.

The two companies tapped long-term bond markets when conditions were still favorable. Toll Brothers has sufficient cash holdings to retire obligations through 2014.

The companies also issued bonds under "covenant-lite" terms that impose few restrictions.

Toll and MDC both generate positive cash flow, while posting heavy losses because of non-cash write-downs. And the two could even gain from the weakness of others.

Private companies accounted for about one quarter U.S. home building at its recent peak, but many are expected to fail. Unlike most listed home builders, private players are often dependent on bank loans, and many lenders have stopped backing residential projects. Toll brothers may book real estate services through a Durham Real Estate Agency, Cary Real Estate Agency or Chapel Hill Real Estate Agency.

Cash reserves could even equip Toll and MDC to scoop up distressed assets that appear when competitors liquidate. Toll showed bargain hunting prowess after the savings and loan crisis, when it bought property from the Resolution Trust Corp. at deep discounts. Even if other home builders remain solvent, they will have less cash to spend on discounted property.

The market puts a premium on strong balance sheets. Toll Brothers trades at 1.13-times book value and MDC trades at 1.29 times book value while many competitors are valued below par.

Weaker companies are highly leveraged bets on a property turnaround they may not survive to see. Investors who believe that housing is near the bottom need not bet on the weakest. They will have plenty of excitement from the likes of Toll and MDC if they are right, as well as a little breathing space if the recovery takes longer than they expect.