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CHICAGO, Illinois, and FORT WASHINGTON, Pennsylvania— Equity Residential (NYSE: EQR), an S&P 500 company focused on the acquisition, development, and management of residential rental properties in and around dynamic cities, and Toll Brothers, Inc. (NYSE: TOL), the nation’s largest builder of luxury homes, announced today the formation of a strategic partnership to develop new rental apartments. The parties intend to initially focus on selectively acquiring and developing apartment rental community sites in six metro markets where each party has a significant or growing presence: Atlanta; Austin; Boston; Denver; Orange County/San Diego; and Seattle, as well as in Dallas-Fort Worth, a market into which Equity Residential recently re-entered.
Equity Residential will invest 75% of the equity in each selected property over the following three years, while Toll Brothers will spend 25%. Additionally, each project is intended to be financed with around 60% leverage.
After stabilization, Equity Residential will have the opportunity to acquire each property. The parties intend to co-invest a minimum of approximately $750 million in combined equity, or almost $1.9 billion in capacity, assuming 60% leverage. These aims, which are contingent upon the identification of mutually acceptable attributes, may be increased if further opportunities are discovered. Three sites now owned by Toll Brothers are scheduled to kick-start the partnership, with a total estimated project cost of around $242 million.
Toll Brothers will serve as managing member of each project, supervising approvals, design, and construction, for which it will receive development, construction management, and financing fees, as well as a promoted interest in each property upon sale, and has agreed to develop apartment projects exclusively with Equity Residential in the designated metro markets, with limited exceptions. Equity Residential will be compensated for property management, leasing, marketing, and construction control services.
“We are delighted to be working again with Toll Brothers and their experienced apartment development team, with whom we’ve had a long and successful business relationship,” said Mark J. Parrell, President and CEO of Equity Residential. “This venture will marry Equity Residential’s market knowledge and balance sheet strength with Toll Brothers’ existing deep development capability to produce high quality apartment properties in our expansion markets and predominantly suburban locations in our existing markets that appeal to our affluent renter demographic. We expect this venture to create significant value for our shareholders, to accelerate our diversification efforts and to allow us to efficiently scale up our development efforts.”
“We are thrilled to join with Equity Residential in this exciting partnership which offers tremendous benefit to both of our organizations,” said Douglas C. Yearley, Jr., Chairman and CEO of Toll Brothers. “This venture will increase the capital efficiency of our Toll Brothers Apartment Living platform, allowing us to develop more apartments with less capital. Having Equity Residential co-investing with us at initial site acquisition and being the likely purchaser of developed properties at stabilization will enable our Apartment Living business to improve return on equity and to generate a higher and more predictable income stream through consistent and recurring fees and property sales.”
Toll Brothers FY 2021’s Third Quarter Financial Highlights (Compared to FY 2020’s Third Quarter):
- Net income and earnings per share were $234.9 million and $1.87 per share diluted, compared to net income of $114.8 million and $0.90 per share diluted in FY 2020’s third quarter.
- Pre-tax income was $303.4 million, compared to $151.9 million in FY 2020’s third quarter.
- Home sales revenues were $2.23 billion, up 37% compared to FY 2020’s third quarter; delivered homes were 2,597, up 28%.
- Net signed contract value was $2.98 billion, up 35% compared to FY 2020’s third quarter; contracted homes were 3,154, up 11%. Net signed contracts, in both dollars and units, were third quarter records.
- Backlog value was $9.44 billion at third quarter end, up 55% compared to FY 2020’s third quarter; homes in backlog were 10,661, up 47%. Quarter-end backlog, in both dollars and units, were all-time records.
- Home sales gross margin was 22.7%, compared to FY 2020’s third quarter home sales gross margin of 21.0%.
- Adjusted home sales gross margin, which excludes interest and inventory write-downs, was 25.6%, compared to FY 2020’s third quarter adjusted home sales gross margin of 23.9%.
- SG&A, as a percentage of home sales revenues, was 10.5%, compared to 11.9% in FY 2020’s third quarter.
- Income from operations was $276.7 million.
- Other income, income from unconsolidated entities, and gross margin from land sales and other was $29.1 million.
“We are very pleased with our third quarter performance. Home sales revenues were up 37%,and pre-tax income and earnings per share more than doubled compared to one year ago. We are benefiting from our strategy of broadening our product lines, price points and geographies as we continue to grow our business, drive price, expand margins and improve our capital efficiency.
“Demand continues to be very strong. Net signed contracts were up 35% in dollars to approximately $3 billion compared to the prior year period. The housing market is being driven by many strong fundamentals, including low mortgage rates, favorable millennial-driven demographics, a decade of pent-up demand, low new home supply, and a tight resale market. We expect strong and sustainable demand for our homes in the years to come.
“Our deep land position provides a solid foundation for growth, with 340 communities projected by FYE 2021 and an additional 10% community count growth in fiscal 2022. Our record backlog, our focus on capital and operating efficiency, and the continued strength of the housing market give us confidence that our full FY 2022 margins will significantly exceed the strong margins we project for our FY 2021 fourth quarter and that our return on beginning equity will exceed 20% in FY 2022 and beyond.”