With residential real estate in the doldrums for the past few years, what are homebuilding companies doing to survive?
Answer: looking for different areas for growth. And what the residential sector is doing to smooth out the down economic cycles might have applications for other real estate segments that could monetize their expertise.
Take Toll Brothers, a national homebuilder. The company believes there are many potential investments arising from the distress in the real estate industry. As such, it is pursuing opportunities that have synergies with, but may fall outside of, its core homebuilding operations—for example, golf and country clubs.
Toll Brothers, which formed a wholly owned subsidiary—Gibraltar Capital and Asset Management, LLC—to pursue and provide a broad range of real estate acquisition and investment opportunities and services, is using its two decades of experience building luxury homes with country clubs and golf courses and seeking country clubs to purchase and operate. The company is betting that operating stand-alone country clubs and golf courses will help even out the peaks and valleys of homebuilding.
“Toll’s golf operations have been a driver for home sales for nearly 20 years,” says Dave Richey, head of Toll Brothers’ golf division. “We’ve developed country clubs, managed them, and owned [them] for decades. We’re not new to this. We have all the support staff and marketing and HR and agronomics experts, and all the other components to operate a successful country club. We’ve put together an impressive team and now are looking to put that expertise to use.”
Many of Toll’s master-planned communities feature golf courses. “As homebuilding slowed, it seemed like a good idea to look into buying some stand-alone country clubs that could use seasoned management,” he adds.
Currently, Richey’s unit operates 11 clubs around the country. “We’re not a giant operator with 200 locations,” he explains. “Each of our clubs gets more attention and parental care. We’re focusing on medium- to high-end country clubs. If we could purchase two to three clubs a year, that would be great. The idea is to take our business expertise and look at other operations from a turnaround perspective—taking a struggling country club from, maybe, almost profitable to a more lucrative operation.
“We’re a boutique operation,” he continues. “We’ve purchased two clubs so far—one in the north Raleigh, North Carolina, market, and the other in Parkland, Florida. One of the challenges today is having the capital to make purchases. Because we have the cash, sellers listen to us.”
Other firms are branching out, too. Miami, Florida–based Lennar Corporation is buying millions of dollars of loans and real estate from the Federal Deposit Insurance Corporation (FDIC) and financial institutions through its subsidiary, Rialto Capital—a real estate investment management company focused on distressed real estate asset investment, management, and workouts.
Stuart Miller, president and chief executive officer of Lennar, says that acquiring and working out distressed real estate loans was a large and extremely profitable part of Lennar’s business during the last major real estate down cycle in the early 1990s. “We are pleased to return to this business and honored to partner with the FDIC to manage, work through, and add value to these portfolios of real estate loans,” he says. “We take great pride in understanding market cycles and identifying the opportune point of entry. Our company is in a great position to invest capital and engage our asset management engine to add earnings through these opportunities,” he adds.
For those looking to branch out—even if they are not in the homebuilding sector—Toll Brothers’ Richey offers the following advice:
- “Look at your revenue streams—not only financial capital, but also how to put human capital to work in other areas that will generate cash.”
- Repurpose whatever expertise you may have in-house, in a different way. “Monetize the expertise you already have,” he says. “At Toll Brothers, as always, the goal is to best utilize our existing resources and provide a return for our shareholders.”