Climbing the Ladder with Doug Yearley, Toll Brothers
Willy Walker: Thanks, Susan. Good afternoon, everybody, and welcome to another episode of the Walker Webcast. It's a real joy for me to have Toll Brothers Chairman and CEO Doug Yearley joining me today. I'm very thankful to our mutual friend Ivy Zelman for putting the two of us in touch. And, Doug, you had earnings this morning. I know it's a super busy time, so I'm extremely appreciative of you taking the time to join me to talk about your business. As you can imagine, I'm not going to focus too much on earnings. You get plenty of those questions from analysts and investors.
I want to talk about how you have led your company so successfully in some of the, if you will, leadership, qualities that you have instilled in Toll Brothers throughout your lengthy career at the company. Let me back up first, Doug, and just do a quick, intro and bio. And then, we'll dive into my first question. Toll Brothers was founded in 1967. It went public interestingly in 1986. When I saw that, Doug, I was like, Wow, Bob took the company public early. I would imagine that it was due to just the need for capital. But going public in 1986, that was the heydays. Doug joined the company in 1990, became CEO in 2012, and Chairman in 2018. He's led Toll Brothers through expansive growth and Toll Brothers stock price has moved from $29 a share when Doug took over as CEO to $109 as of today, a 275% increase. Doug went to Cornell and got his law degree from Rutgers.
So, Doug, let me back up a little bit. Your favorite course in middle school was woodworking. And you weren't liking your job as a litigator and doing a lot of work on your 100-year-old home outside of Philadelphia. When you saw a “help wanted” ad to be the personal assistant to the CEO of a home builder. Is it fair to say that home building is in your blood?
Doug Yearley: That's funny that you found that woodworking clip. My dad was handy. I used to hang out in the basement at his wood shop with him and do whatever he was doing. I was handy. We had this old house in Haddonfield, New Jersey, a suburb of Philly. When I was a young lawyer, hating being a litigator, I hated billing time. I hated being in the fight. Litigators, whether you're on the right side or the wrong side, your job is to represent your client to the best you can. And it's always a fight. And I was a super fun lawyer doing these huge environmental cases that never went away. I worked on the same case for five years. And I spent all my free time renovating an old house, and I thought about, at the age of 30, turning it all in and just buying old homes and putting my own sweat equity, hard work into them, flipping them. And that would have been a disaster, of course.
Willy Walker: Because you would have to compete against Toll Brothers.
Doug Yearley: Well, I don't think Bob ever wanted to do that, so I guess it was in my blood without really knowing it. I just wanted to do something that felt more productive. At the end of a day when you paint a room, or you wallpaper a room, or you sand a floor, in the end, when you go to bed at night, you take a look back at what you did and you feel pretty darn good about it. You accomplished something and that part was definitely in my blood. I didn't know Toll Brothers because I wasn't from Philly. I was raised in North Jersey. I was just down in Philly for four years working as a lawyer. And so I didn't know Toll. There was an ad in the paper for an executive assistant to the CEO of a publicly traded, Philadelphia-based home builder. Most people would know that's Toll Brothers. I didn't even know who Toll was. I threw a resumé together. So what the heck? This may be a secretarial job, I don't know. I met Bob Toll on my 30th birthday. And I just got lucky. He went to Cornell. I went to Cornell. He loved that. The old color of Toll Brothers, our logo branded color was the exact Cornell red. He has our CMO call up Ithaca and got the PMS color wheel, the exact number for Cornell's red color. And that became Toll Brothers when they were founded. So he loved that I went to Cornell. He went to law school, rewired his brain. And he hated the practice. He lasted nine months. Law school. I love law school. Rewired my brain. I lasted four and a half years. And I just got lucky. He said, “What are you making as a fourth-year associate?” I said, “I'm making $71,000.” He said, “I'll give you $71,000. How many weeks of vacation?” I said, “Bob, I need three.” I get three. “I'll give you two.” “So can I have three?” And he looked at me and said, “My boy, you're going to be having so much fun. You will not find the time to take two. I promise you.”
Willy Walker: Has that been the case for the last 30 years?
Doug Yearley: Well, no. I have had a lot of fun, but I certainly take my vacation, and we start employees today with three weeks. But he reached his hand across the table. I shook it, I went home, I told my wife I was leaving the practice of law, and I didn't come here as a lawyer. I just came here to follow him around. I was in a construction trailer. I ran around buying land, so luck got me into the company. Bob Toll is an amazing guy who passed away last year at 82, and he taught me the business inside and out at every level. It's been a lot of fun.
Willy Walker: Talk about Monday nights with Bob.
Doug Yearley: So Bob was very proud of Monday. It was Toll University. All the employees stayed in, pizza was brought in, and the phone stopped ringing, and we just worked through the night on land deals, on strategy, on sales. Our business is weekend-driven. We sell most of our homes over the weekend. So Monday was a day to digest results and make decisions. And just kind of run the company. Not knowing this company, on my first Monday, I met with Bob at 11 at night. I walked out of his office at midnight. I went down the wrong hallway where the CFO was located, who invited me in to give me a short education on the company. On my first day of work at Toll, I walked out at 2:30 in the morning, thinking I had made the biggest mistake possible. And it was part of the fun culture. On Sunday night, we kind of bummed out that normal was coming. Tuesday morning, were you a little bit tired? With what had just happened, sure. But I spent over 900 Monday nights with Bob Toll in my 30 years until he passed. And I remember at one point, like ten years in, asking if I could move up in the night because I was the last guy every Monday at 11:00. And these other people were done at 7:00, done at 8:00, done at 9:00, and I had some seniority at that point. I said, “Bob, could I move up a little bit?” And his comment to me, which I took as a great compliment, was, “My boy, you and I will turn the lights out every single Monday night until the end of time.” And it was fun. We just wrapped the night up together. So over 900 Monday nights with an amazing guy, taught me the business and built this culture that I have tried hard to continue. We're hard driving. We're competitive. There's a lot of smart people in this firm. And that's what Bob hired. We wore suits to work every day. We dressed for battle. Bob would say we're dressing for battle. Once every four months, he'd come in on a Friday and we'd be casual. And you walk around saying, “What happened? What's going on? Where are the suits?” And that's how we approached it. It is pretty rare to have suits around here anymore, but we're definitely in battle every day.
Willy Walker: So when you first joined, you focused on land acquisitions. Is there one land deal that Bob loved or hated, that sticks out in your mind, that taught you something about what to do as it relates to land acquisitions?
Doug Yearley: So here's one of his favorite lines: Some of the best deals he ever did where those you don't do. You have to stay disciplined. And you got to know when to walk away. Even if the next guy overpaid. But the market bailed them out and they still made a lot of money, you couldn't look back on it as making a mistake. The two biggest deals that stand out to me that we were aligned on is when we decided to move into urban and build high-rise in New York City, which was a bold move for a suburban homebuilder, and the other public national homebuilders weren't doing it. It's a different business that involves commercial construction. You have to build an entire building before the first one delivers. So there's an incredible amount of upfront costs that you don't get back until the building is completed. A half-acre of land in New York City could be $100 million. And in 2004, we went into high-rise in a big way in New York City. We have now built 40 towers between Manhattan, Brooklyn, and Hoboken in Jersey City. He and I did that together. I was senior enough in the company that we were working very close on strategy with expansion, and we were both scared because it was such a different business line. Bob knew New York really well. He had an apartment up there. His wife was from New York, so there was some confidence there, but that was the big one. And then the biggest deal we ever did was $1.6 billion to buy Chappelle Homes out of California, which was a very large private home builder we bought in 2013. It gave us 5,500 of the best lots in coastal California, transformed this company. So we were certainly aligned on that. But over the years, sure, there's been deals we disagreed on. And what's great about him and I try to keep it going now, we put it to a vote of the senior team, and I was overruled yesterday on a deal that I didn't want to do. But there's four people in the room that all felt passionate about it. There are good reasons to feel passionate about it. And I said, “Okay, I hope I don't have an I-told-you-so moment.”
Willy Walker: For a moment, let's back up to the GFC because I think there's a lot that you've done with the company to make the company what it is today. Reflecting on going through the GFC, I pulled up the opening of an article out of Forbes from 2011, Doug, which starts out, “Put yourself in Doug Yearley's shoes in November 2009. You've just been named EVP. On the way to becoming CEO of luxury homebuilder, Toll Brothers, a company that lost $750 million in the year that just ended due to accounting write downs. You're entering the fifth year of a recession in the housing market. Your core revenues are down 44% versus the prior year and 75% versus the peak a few years ago. If there was ever an organization that required significant change, this was it. Right? Wrong.” Go back to that moment and when that was written and what you'd come through in the GFC and the very clear leadership that you showed as it relates to focusing on what Toll Brothers was known for, what it’s gonna stand for going forward, and how you were going to move through those challenging times.
Doug Yearley: A great point. It was crazy times. I became CEO and in 2010, Bob was 70, maybe 71. He had told me later that he was ready to give it to me in 2008, but he would never do that to me because of how bad the market was in ‘08. And by the summer of ‘10, we were beginning to see some green shoots. We had already taken our $2.5 billion of impairments, which was all the big builders, had written down their balance sheets, the land on their balance sheets pretty dramatically. We were beginning to see some signs that things were improving. Bob wasn't going anywhere. He became executive chairman, which meant he still had a management role. He was still in the Monday meetings. He was still reading every land package. So it felt like the right time. And I had confidence because of what I had been through, how we saw things beginning to improve. And I knew that Bob and the other senior leaders, by the way, our president, our CFO, were still at my side. So it wasn't as bad as it sounds. And it was only three years later, in 2013, that we stroked a $1.6 million check for Chappelle. So we were still in action. We had a lot of cash.
Willy Walker: You had like $1,000,000,003 of cash on the balance sheet in 2010, right?
Doug Yearley: When builders stop buying land and stop putting roads in, they become cash machines from the delivery of all the homes that they have on the old land that they'd already paid for and the old roads that they'd already put in. So actually, through down cycles, we generate a lot of cash. And we've always been opportunistic in taking advantage of land buying at the bottom, whether it be through banks or whether it be through distressed landowners. That's just something that we've been good at. We build up the land bank in the softer times, anticipating or seeing some green shoots of things improving. So I think, it just got to the point again. Bob was 70. He was ready to move into this next role. He believed that I was ready.
Willy Walker: He not only believes you’re ready, let me jump in here. He not only believed you were ready, but in an interview that I saw on Bloomberg, he said you could do the job better than he could. And I watched that. And I thought, first of all, what an incredible statement by a stepping-down CEO. But the other thing was, as I've heard you say numerous times, Bob was always the smartest guy in the room. Bob was a legendary figure in the homebuilding world. And so when you heard that, did it excite you or intimidate you?
Doug Yearley: It excited me and it's because of my relationship with Bob. We were so close. I'd learned so much. He had always shown so much confidence in me. I knew he wasn't going to turn on me. A lot of people had complimented the company, and I've had CEOs, even in homebuilding who were ready to step into an executive chair role who came to see me because they wanted to learn about what we did to make the transition so smooth because it's hard to follow an iconic founder with a big personality and a pretty unique way of operating, which is what I had to do. And Bob made it happen. He stepped back. I ran the conference calls. I did the media. He trusted me on decisions about strategic moves, land buying, and new markets we wanted to enter, builders we were acquiring. I changed the Cornell red to blue. It was funny. That sounds silly.
Willy Walker: That’s close to heretical. That's unbelievable. So you said you did the branding. I know he gave you marketing the brand and how important marketing is to you now as chairman and CEO.
Doug Yearley: I felt very lucky at 35 years old that he turned over the CMO to me. We have 150 people in our marketing group. We do everything in-house; our website design, our brochure design, our community sales centers, everything is inside. Our brand is so important to us. It's cultural within the company. We talk about it all the time. And Bob used to say, "We're a marketing company that just happens to build houses." And my first week on the job with him at 30 years old, in 1990, he took me out to the Philadelphia suburbs to show me communities. And this is Bob Toll. I watched him screech on the breaks, entering our communities to get out of the car to pull a weed out of the entrance feature, screech on the brakes to pick up a trash bag in the street, straighten the easel signs, directional signs as you enter the model, fluff pillows in the family room of the model decorated home. He taught us that all these little things individually don't make a difference. When you put them all together, that's brand. And that's the attention to detail that matters. And I'm a marketing guy first. I didn't grow up as a builder. I was a lawyer. He sent me out and taught me how to be a builder. I spent a few years in a construction trailer, but many people in this company can run circles around me when it comes to pure construction. But when it comes to marketing, branding, image, architecture, I work hard at it. I think I'm good at it. I think the company respects my opinions, and I've been lucky in that I've been doing it now for 30 years. And I said when I took the job in 2010 as CEO, I would never give marketing up. Our incredibly talented CMO, Wendy Marlette, will always report to me. It's so important. It distinguishes us in an industry that frankly doesn't have a lot of brands. We build on average houses for $1 million. We build 10,000 of these houses nationwide. We better be a brand at that price point. We better do things differently. And I'm proud of it. The whole company has bought in. One of the reasons people love working here, I think, is because they're proud of Toll Brothers homes. They're proud of working for the company that builds these beautiful communities. So it's front and center for me all the time.
Willy Walker: You talked about architecture there, Doug. A huge number of your homes are customized. How can you build 10,000 homes and yet allow the buyer to have so much customization of the home?
Doug Yearley: It's part of the special sauce. So you can't walk in with an architect and let them start changing our home. But what we do offer on the build-to-order side of the business, as opposed to the spec side of the business - and most of our business is still build-to-order - is any given floor plan may have 20, 30, or 40 structural changes to that house: adding rooms, moving walls, finishing a basement, putting western window glass, nanowalls to the back of the home, whatever it may be. And then after you pick those structural changes, you go to one of our 35 design studios that are located in all of our markets around the country. And you pick all of your finishes: the flooring, the countertops, the kitchen cabinets, the stair rail, on and on and on. Our average buyer spends about $150,000 in upgrades per house to design their home to their personal taste and their lifestyle. But it is a curated collection, and we are trying to streamline it more and more. But while we're offering a custom experience to the client, it is a production home builder mentality. Everything is pre-bought. Everything is on SKUs. We will not let custom changes. If you have to go outside of what we offer between the structural changes and the design studio changes, we're not your builder, and we are not afraid to cut it off. So choice is a big part of Toll Brothers. It's what we're known for, and it is what I call semi-custom, but it is managed very tightly. The margins we make on the upgrades is accretive to the company's margins. So it's an important part of our business as we build more and more spec with the tight resale market, opening up the opportunity to build more spec because there's nothing available on the resale market, so we need some more available inventory. If you buy that house by drywall, you can still go to the design center and pick your finishes. And many of our specs we sell early enough that the choice advantage of Toll Brothers still applies, at least to the finishes, it can’t apply to the structural changes. I get it. The other big builders don't want any part of our business because it's tedious. It extends cycle time. Mistakes can be made. But we've been doing it for 55 years. We're really good at it. It drives margin, we control the client, and it’s one of our special sauces. You never perfect anything, but we're good at it.
Willy Walker: So there's like 15 directions I want to go in your response to that question, just because there are so many interesting pieces to your business model, what you do. As I hear you talk about the customization on your website, Kohler is identified as one of your preferred partners. You talk about efficiency in HVAC, and control systems. Control4 is one of your partners as it relates to the controls that run the media, the shades, and everything else in the house. Sounds like you've taken a strategy to partner rather than vertically integrate into those home furnishings and home controls. Have you looked at vertically integrating, or do you just like to partner with best-in-class providers?
Doug Yearley: We've looked– we don't think it's efficient. You can put a Kohler faucet in any house in the country, in any house in the world. We build in 24 states and don't have that sort of bandwidth. It just wouldn't make sense for us. We would much rather align ourselves with great brands and Kohler is your perfect example. Every single Toll Brothers home for the last 25 years has been loaded with Kohler. They are an amazing company. They speak highly of us and we speak highly of them. It is two great brands that have aligned. We are their national home-building partner, as we should be, at our price point with our brand. We should be using Kohler and I could never vertically integrate or have any product that could ever come close to that Kohler brand with how hard they've worked at it and as deserving as they are. So we'll give them the profit, and we'll co-brand with them, and we'll avoid all the issues that come with trying to vertically integrate. And that's just one example. And for the industry, for the most part, it hasn't migrated into any sort of vertical integration. It's tough. And there are great companies out there that are good partners with all of us that are reliable, that have good products. Our customers know that product. They connect to that product. You go to our design studios and there's a whole Kohler display. They have come in and they've custom-designed just for us. And I don't think we could ever get the value if we did it ourselves.
Willy Walker: All right. So you talked about supply constraints. One of the interesting things I saw was an interview you did back in 2016 where you were just talking about the fact that 20% of your home buyers were buying all cash. And I believe last year that number moved up to 26%, which is counterintuitive for a $1 million home that 26% of the sales were all cash. But you also in highlighting that pointed out that there are just such supply constraints because so many existing homeowners are holding onto their homes right now. Because they've got these low mortgages on them. And therefore, in the past, it's been 90% resale and 10% new. And right now we're at a 70% resale and 30% new market, which just plays into the strength of both Toll Brothers and other home builders in today's market. As you look at that sort of split right now, more on the custom, more on the spec in the sense that we're so supply-constrained on single-family housing that pretty much anything you're building right now is being bought.
Doug Yearley: It's a very unique time. Who would have thought the builders would have had the success they've had over the last two years with 7% to 8% mortgage rates. And it's being driven by a historically tight resale market because of the lock-in effect of those who’d own a home are sitting on a 3.5% rate that can't be transferred, and they don't want to give it up.
Willy Walker: Do you think that the big drivers of the health of the economy, in the sense that, we all talk about people going to Walmart and Home Depot and spending money and that the US consumer has been driving this great GDP growth. I'm just curious, do you think that a lot of that has to do with so many people having a locked-in fixed-rate mortgage, and therefore they have disposable income that you wouldn't have in other times?
Doug Yearley: I hadn't thought of it that way. Remember 35% of the country rents. Yes, I guess there's some truth to that. But I don't know if that's the driver of it. It may be helping a bit. The other thing to point out is the average age of a resale home of an existing home in this country is now 45 years. I was talking to some of the younger, the millennials that I work with here in the office, who have been looking for a home with their new families that they formed in their 30s. They described to me how bad the quality is of the few homes that are on the market. And they're just taking a pause. So even as rates come down and the resale market opens up, the quality of a lot of those resales are pretty tired, and they're getting older and older. So more and more people are moving towards new, even beyond this lock-in effect. And I think we're going to benefit for a longer period. But there's no question that we're all doing well because there are no resales. And you're right. To go from 10% of all houses sold in this country being new to 30%, it's just incredible. And so the answer to your question was, is there more of a move towards build to order or spec? We used to be less than 10% spec. We're now 45%.
Willy Walker: And they're selling?
Doug Yearley: Yes, we are filling a hole left by the tight resale market. But we think longer term, we will continue to spec in that range for a number of reasons. The resale market homes are older. There's more of a desire to own new because of how these homes are being built and the design of these new homes. We have an opportunity to build houses faster, but still let people go to design studios and customize those homes. We’ll come down in price around the country, which was intentional. We didn't want to wait for the millennials to become move-up buyers– which is our traditional business– but grab those millennials in their mid-30s when they could still afford a Toll home. And so when you come down in price a bit, you always seem to spec more because those buyers want to get in a bit faster. So the tight resale market changed our business to build more spec but now that it's here and we're doing well, we think it's going to stay.
Willy Walker: I was looking at 2020, your average home price was down closer to $800,000, Doug, and now it's back up at a million. But then you're projecting that it comes back down into the nine hundred. So I heard you in an interview talking about not the luxury but the affordable luxury market there was. Are you there right now, given the economics behind the business and your gross margins and how well you're doing in that luxury space, is the strategy to stay at that high-end or to come down and migrate down to that affordable luxury a little bit more?
Doug Yearley: So we're going to continue to stay at the high-end. We're going to continue to do the active adult at the middle price, but we're also going to do more of what I call the affordable luxury. So my analogy is, Toll grew up building 5 and 7 (Series) BMWs. We now build a lot of 3’s (Series). Do we drop into the Mini Cooper? I don't know yet. Lennar Horton and the other guys are really good down there at that price range. But there are 75 million millennials who are now settling down and buying their first house at 35 years old. I had my first house at 26. They're wealthier at 35. By the way, we're having an incredible generational wealth transfer going on, with mom and dad that want to help their 35-year-olds out and not just have them wait for an inheritance but help with a down payment. There's a lot of 35-year-old couples making $200,000 between them that can afford a $650,000 Toll Brothers home, and we're going after that crowd. And now 40% of our business is that more affluent first-time homebuyers.
Willy Walker: And so I think you have 70,000 lots right now in inventory. Of those 70,000, 50,000 are for luxury, and the other 20,000, do you look out at that and sort of sit there and say, “Okay, that's the price point, about 5s and 7 Series BMW and then the 3 Series?” How much of that 70,000 lots of three series versus seven series?
Doug Yearley: I'd say 40%, 3 Series, 35% 5 and 7 Series. And then what's left, 25%, Baby boomer active adult, empty nester move down, which can still be a five series, of course, but it's a different market profile.
Willy Walker: Super interesting. Talk for a moment about the company. You talked a little bit about community. Your tagline is Toll Brothers does more than just build homes, we build communities. You've been rewarded and awarded numerous times for being a really great place to work. Best Home Builder in the World by Forbes Magazine eight years in a row. But I thought one of the more interesting ones you got was, I think you were the sixth-ranked best product in the world by Forbes, behind Amazon, Apple, Nordstrom, and a couple of other companies, as far as just the best product. And it's one thing to be the best home builder. And that's great. And I know you and your team take great pride in that. But to be number six on the worldwide list of best products, it says something unbelievable about the quality of the I mean, you're ahead of BMW. Going back to your example, I mean, BMW is an incredible brand, an incredible product. And Toll Brothers is ahead of them in that ranking.
Doug Yearley: So it's on my wall. I'm looking at it right here. Fortune Magazine's most admired homebuilder. We've been on that list ten years in a row. We've been number one on that list. I think it's eight of those ten years. But about 5 or 6 years ago, out of nowhere, after being named the number one homebuilder, they did a roll-up of all companies worldwide. And I'm looking at it, the world's most admired companies for the quality of products or services offered. Number one, Apple. Number two, Walt Disney. Number three, Amazon. Number four, Google Alphabet. Number five, Nordstrom. Number six, Toll Brothers. Number seven, Netflix. Number eight, Facebook. I'm looking at it down on the list here. Like what? And I told everyone we're going to market that until the end of time.
Willy Walker: I'm sure.
Doug Yearley: Those are iconic international brands that everybody knows. And all of a sudden, Toll Brothers drops in as number six in the middle of that list. Obviously, that was a very proud moment for the company. It rewarded us for the hard work that we put in. And I talked about the brand it helped to hire, of course. It makes everybody really proud. It's just when hard work pays off like that and you get recognized on a list with those companies, it just makes you proud. So yes, that did happen about five years ago.
Willy Walker: When I was taking notes on this, Doug, I purposefully in my note left Nordstrom in there. Only in that as you look at all those companies, there's always that Jeff Bezos comment that says that Amazon one day will go out of business. And we all sit there and say Amazon will never go out of business. It was for a long period of time, the most valuable company on the face of the planet. And then you think about someone like Nordstrom, this iconic brand, right in the midst of that. And Nordstrom today is a fraction of what it used to be in the brands holding on to literally survive. And just as I read that as a CEO, I sit there and say, “You might be really good at what you're doing today, but never forget that unless you're innovating and growing and moving to the future, you could end up like Nordstrom.”
Doug Yearley: Right. Absolutely.
Willy Walker: You talked about using that for hiring. I had a quote from you and I was listening to a podcast where you said, “But I want somebody smarter than me. I want competitive people. I want people who hate to lose. And I want nice and fun people. We have fun together. We laugh together. We have a lot of fun. And it's people that are real.” Talk for a moment about what it takes to get hired by Toll Brothers. It seems like you all do an immense amount of investment upfront to make sure that you're hiring the right people.
Doug Yearley: Yeah, people stay here. And our senior team. For me, at 34 years, our president is at 38 years. I can go down the list. And it's always hard to put your finger on what makes a culture special. But it's working here. We do put a lot of effort into the front end, no question about it. I was here for a long time. I was here for 20 years before I became CEO with all sorts of jobs in the company. And I know where the bullies were. Every company has a bully. We have 5,000 employees. The first thing I did was get rid of all the bullies. I just sniffed them out, or I knew them and we cleaned it out. We're competitive. I'm competitive. I don't like to lose at ping pong. Our company is built that way. We're really smart. You've heard it before. Somebody said to me that a B-quality employee wants to hire a B minus to work for them, and an A-quality employee wants to hire an A-plus. And I hope we have a lot more A's and B's that are looking to hire people who are better than them. Bob made that kind comment about me succeeding him, that he thought I would do better. And I absolutely believe the people we have targeted to take over my job and the other C-suite jobs will do a better job than we do.
We work hard. We fight every day. We're not dressed for battle anymore, but we come in with that attitude. But we can go home. We can put work behind us. We can enjoy our families. We can have fun. It's a healthy culture that believes in the brand and wants to work hard. They feel respected. There are opportunities here to take on more responsibility. We build in 24 states. You can move. We encourage you to move. We have salespeople who become construction people. We have construction people who become salespeople. And people stick around. They just seem to like it. Like I said before, what we build– our office, we have this cool new headquarters we built that is worthy of a Fortune 500 brand. And it's just loaded up with not only cool technology but great photography of all these houses that we build around the country. Our Philadelphia design studio we moved into the corner of our headquarters so I could walk over and say hi to customers when they were making selections. We had bankers in here this morning, and we took them over there to give them a tour. All of our employees take tours. We have buses every couple of weeks that go out to our local communities. So everybody, if you're an accountant here, we want you to go see the community. If you're on the assembly line building the BMW, you deserve to go drive it. You deserve to go to a sales office and see how they sell it. And that's what we do. We get people out so they can see firsthand what we're all about. And I think that helps. I think having people not only feel like they're well paid and they're treated well, and like who they work with, but also believe in the company's mission and loving the product and be proud to tell people I work for Toll and talk about it. This weekend, my husband and I went and visited a community and we were blown away. I think that all just resonates and that's really helped us.
Willy Walker: Your comment about competitiveness and you not liking to lose at Ping Pong. I just taped a Walker Webcast with Jeff Wright, who's the actor, the lead in American Fiction, and who's up for an Academy Award. Jeff was a college lacrosse player. And in talking to him, he said, “My career as a goalie changed the day that I realized that I hated losing more than I hated the sting of the ball hitting me.” And it was such an interesting moment where all of a sudden, he threw his body in front of the ball all the time. I'm thinking about you and your competitive nature when things weren't going as well as they are today. In other words, back in 2010 and 2011, when you wanted so much to get back on the winning track and drive things forward, but you had a macro environment that quite honestly just wasn't in place to do so. How did you, if you will, temper that competitive drive to get to the numbers that you both wanted to and knew that Toll could get to, but you had a macro environment that didn't allow you to get to them?
Doug Yearley: I think you just have to stay disciplined. In the underwriting, you do for new land. You have to be patient. You have to accept that it's going to take some time. But when it comes, you need to be ready. So it was preparation. Do we go into a new market at a softer time to be ready and have paid the dumb tax for a year or two that you always pay when you enter a new market? I'd rather pay a dumb tax in a soft time than pay a dumb tax when things are rocking and rolling. We looked in China, we looked in Brazil. If we went to Europe, we thought about whether it was time to expand the company outside of the US when the US housing market was so soft. And I'm glad, by the way, we didn't do any of that because that wouldn't have worked out for us in the U.S. housing market came back nicely, but it was mainly just keeping the morale up as we were going through cuts, which is always tough because we were shedding overhead pretty rapidly and keeping, a positive. I had to be a cheerleader through those times. That was part of the job that I think was most important but staying really disciplined. We were sitting on a lot of cash, but we're not going to go spend it until we had better signs that the time was right to jump back in. So yeah, homebuilding is very cyclical and you're roaring and then it off. I hope we don't have what we had back then again. But it's hard when you go from selling 10,000 houses to 6,000 houses a year or year and a half later and keeping it and keeping things together. But I think that's what I just kept very disciplined and positive. The company was always financially sound. We had a very strong balance sheet, lots of cash, and very low debt. So we weren't scrambling. Some builders were in a bit more survival mode. We were in a bit more of an opportunity mode because we had the dry powder to take advantage of those opportunities. So that at least made it fun, even though we weren't selling more houses. We were setting the company up for future opportunities.
Willy Walker: And looking ahead. When you think about modular, I'm still to this day sort of shocked and surprised that Katara met its end. There was a lot of hype about Katerra and SoftBank's investment in them, and the opportunity to do modular housing on a large scale across the country. We both know and many listeners know how that all ended, but there appear to be sort of pockets of modular that are trying to do various new technologies clearly at the price point that you're building to, you're very well insulated. But just for a moment, as you think about where the industry goes you all are either getting significant component parts, modular built, or building homes for Toll Brothers using modular, or prefab construction. When are we going to have that?
Doug Yearley: It's been frustrating. We build houses today just about the same as we did 30 years ago. Thirty different contractors hit a job site. From the plumbers and on that build these houses. It's almost all field built. We do have panels and trust factories. We're one of the few builders that have our own panel and trust factories. But they're not closed walls. They're just panels and trusses. We keep a close eye on it. We have investments in some of these tech companies. Nothing yet has made sense to us. And we've had the opportunity. We've done some of it. We've tested some of it, but it's been more expensive in some cases and has taken longer. Transportation is a big problem. It's hard to move wall panels, trusses, and components of houses from a factory to a job site. It's just tricky. And I complimented when Lennar was on your podcast a few months ago. They have been the most active in investing in and experimenting with innovation that is coming to our industry. And I think it's great. We keep a close eye on all of it. I think it's a ways off because it doesn't make sense. Yet economically, we can still frame houses in the field cheaper than anything that's yet been presented that's going to come prefab or out of a factory.
Willy Walker: It's fascinating, I think, about Elon Musk in 2015 saying that we'd have autonomous vehicles in the United States by 2020. And the last surviving autonomous vehicle pilot study out in San Francisco looks like it's potentially given, the car that was set on fire a couple of weeks ago, might be crashing and burning. It's just unbelievable how I thought Katerra was going to transform the industry. And it hasn't.
I talked at the top, Doug, about the great success you've had in running Toll Brothers and then the great appreciation you've seen in your stock. And yet it's still trading at 8 to 9 times earnings. And I've heard you say it's sort of time for a rerating of the industry. And I look at the dynamic growth that you've had, and also the other homebuilders, and you look at 8.8 times multiple, I think is what I saw this morning on yours. And that was just on my Apple phone. So that might not be exactly what it is off of Bloomberg. But I sat there and looked at the growth and I said to myself, boy, it is time for a rerating of this industry. And it's quite something that there's this hangover effect that came out of the GFC that has sat in all the financials even as you've watched Toll Brothers become an almost $12 billion market cap company. Over the period that you've been at the helm. What does it take to rerate it? Because you talk extensively about a lighter balance sheet. You talk extensively about not holding a lot of land on your balance sheet and making sure that you're just getting options contracts. You talk about SG&A expenses coming down. Your gross margins are up 29%. What does it take other than literally talking about it and getting people to sort of say this is a different industry than when people invested in 2006 heading into 2008?
Doug Yearley: As you heard me say, I'm frustrated. I did jump on my soapbox on our last earnings call in December and talk about it. I left it alone today. I've talked about it with Jim Cramer on his show. Some of the other CEOs are also speaking about to it. There's an NYU Stern Report that comes out a couple of times a year that ranks the PE and the multiple of book of all industries in the U.S. I think there are 100 industries, home buildings like 98. And it seems like we're still paying the price for those massive impairments that occurred from 2007 to 2009. We're a very cyclical industry. The old trade that you were taught out a business school was when the 10-year goes up, sell the builders. When the 10-year comes down by the builders. In the last couple of years, we proved that not to be the case. The industry's only major impairments that have occurred since World War two, well since we are all public, was from ‘07 to ‘09. We all take modest impairments here or there for land deals that don't work. I was told a few years ago, “Well, you're not going to get a rerating until you get through another downturn and prove that you can manage your companies without writing off a bunch of your books and still do well.”
Willy Walker: That looks like 2022 to me.
Doug Yearley: And in 2017, we had a little bit of a downturn. You can go through nothing like 2007, but there have been enough. There have been enough blips here and there that I think there's enough data now to show that we deserve it. Our net debt to caps now in the 20s for almost all companies or less, the big guys are zero. We're all land light or getting land lighter. We're not buying a lot of land. We're optioning land. We had record years in a 7 and 8% interest rate environment. And these companies are now being professionally run. There aren't that many founders left. It's a very different business model. It is safer. The public, by the way, had a 33% market share. The public has a 50% market share. So because we're buying land, we have access to capital that the smaller builders don't have because they're dependent upon regional banks that are in trouble. And so, there are a lot of compelling arguments. There's also a tension. We have big investors. I'm getting off this and jumping on with one of our big investors, who is a big advocate of rerating. There are analysts talking about “now’s the time to rerate. Oh boy.” The S&P without the magnificent seven is at 18 PE. And builders are in it.
Willy Walker: Do you go back to your playbook from 2016 and buy back what you bought back 7% of the stock in 2016?
Doug Yearley: Bought back over 40% of our stock in the last 6 or 7 years. We just increased our guide. We've guided to buy back $500 million worth of stock back this year. We're a cash machine. Because we're buying land more efficiently where we don't have to write the big check, but we can option the land. We've become a bigger cash machine. We're going to return it to the shareholders.
Willy Walker: Final thing. As you look ahead, ten years, what's different about the housing market and what's different about Toll Brothers a decade from now?
Doug Yearley: Wow. Well, I'm looking forward to watching it. Toll, I think in ten years there's a possibility we could be international. I don't know. We're doing nothing now. But in the past, we've always snooped around a little bit. I think our brand is worthy of going international. So I think that's a possibility. I do think you'll have technology into the industry. I do hope, and I do think we will be building houses differently, and more efficiently. I think you will see us going from the Mini Cooper all the way through that seven series, and we'll probably have a Rivian here and there. And we'll just continue to widen the price point and the product offerings. We're in apartments now. We like the apartment business. It's a side business for us, but we have about $700 million invested in it under the Toll Brothers apartment living brand. I think that grows. We have a student housing arm, Toll Brothers Campus Living. That's part of the apartment group. I hope that grows. So I just think anything you think of in real estate or in housing, you'll be able to find Toll at all different price points. That's my hope in terms of culture. I hope we still have a great culture. I think we will. The people that are going to succeed, me and others in leadership are in this company already. They've been identified. They've been here for decades. They're younger, they're smarter, they get it. And so I'm very optimistic. I think housing, we have 6 million too few houses right now because of what hasn't been built in the last 15 years. And we're not catching up. And there are huge limitations on the ability to catch up because you can't find land. So it's not like we can turn a switch here and all of a sudden build 3 million houses a year because the land is not out there, and that's not going to change. It's very hard to get land entitled. So, I think we could be heading into a longer-term strong housing market because of these fundamentals. And the demographics are that of the 75 million millennials, there's 80 or 85 million kids behind them that are coming. So, I feel great. I'm very optimistic.
Willy Walker: It's terrific. Well, I'm sure that you and your colleagues in your headquarters also hope that in the next ten years, the Philadelphia Eagles win a Super Bowl. Not to throw any salt in the wound there. But anyway, Doug, I'm super appreciative of your time. Congrats on a great quarter and a great career, at Toll Brothers and all your leadership, the CEO. It’s been super engaging to hear how you've done it. And appreciate you taking the time.
Doug Yearley: Thanks, Willy. It’s a lot of fun, I appreciate it.
Willy Walker: Take care.
