What Does Robert Toll Know That the Rest of Us Don't?

Though executives at high-flying luxury home builder Toll Brothers Incorporated insist the so-called housing bubble is not ready to burst, the recent actions of company co-founder and chief executive Robert Toll could be interpreted to indicate otherwise. He and his brother, Bruce, sold $241 million worth of Toll Brothers stock when the shares hit an all-time high last month. The company's chief financial officer insisted to The New York Sun that the shares sold were part of Robert Toll's estate planning and portfolio diversification plans and that he still has almost $1.1 billion in company stock.

Many investors, who argue that senior corporate executives use their superior company knowledge to make profitable stock purchases and sales, closely watch these trades. This scrutiny often becomes acute when a company's stock price has a year-long run like Toll Brothers, as the stock went to over $91 from $36. Robert Toll's sales were made at $87.74 and $88.60; the stock closed Friday at $77.13.

Toll Brothers CFO Joel Rassman said that Mr. Toll sold the shares for several reasons, including repaying lines of credit that he used to pay his 2004 tax bill. He said the stock sold included a sale of 500,000 shares by his adult children from a trust that bore his name, but over which he had no control. Mr. Toll, as the owner of about 18% of the stock outstanding, also "felt a need to diversify his assets slightly," said Mr. Rassman. Moreover, Mr. Toll has taken his bonus in company stock for the past nine years, he said, and hadn't sold a share. Finally, Mr. Toll, according to Mr. Rassman, approached the board of directors and renegotiated his 2004 total compensation down to $30.4 million from the $49.8 million he was originally entitled to under the board's executive compensation plan. "It was too much money. We take appearances seriously, plus, he didn't really need the extra $20 million."

The company, seen by many investors as a bellwether for the fortunes of publicly traded homebuilders, had an epic 2004, with its net income doubling as low mortgage rates fueled consumer demand for the company's high-end homes. However, as the Federal Reserve continues to hike interest rates and housing prices continue to rise, short-sellers - who borrow stock and sell it, on the view that they can make money buying the stock back at a lower price - have been betting aggressively that Toll Brothers' customers are going to get squeezed, hurting company sales. An unusually large amount of money has been bet by short-sellers, with nearly 15% of the company's available stock sold short, according to Yahoo! Finance.

Mr. Toll dismissed the short-sellers, declaring in a February 21 CNBC interview, "They will get crushed," just days before his stock was sold. Mr. Rassman took a more conciliatory tone, and said of Mr. Toll's comments, "They were off the cuff." Still, he added, "When we give investors guidance that we are looking at around 60% income growth for next year and the short position grows, you wonder what's going on."

One short-seller of the company, as well as other home builders, Seabreeze Partners founder Doug Kass, said he had none of the traditional short-seller concerns about unethical corporate management or hidden losses about Toll Brothers. "They are a great company, but the stock is too high and the home builders have economic fundamentals against them at this point," he said. He said these include the fact that the company depends on sales to higher-income buyers, which are going to decrease in number as the economy slows down. "Look at the stock's drop since the bond market started selling off. Think of higher mortgage costs and less disposable income. That's why I'm short."

Mr. Kass, who posts his inter-day trading observations at TheStreet.com Web site, said he took the large insider sales as a sign Mr. Toll knew the stock price had peaked. When given Mr. Rassman's explanations for Mr. Toll's sales, Mr. Kass was emphatic in his dismissal: "B.S."

For its part, Toll Brother's Mr. Rassman points to the company's backlog of $4.89 billion worth of contracts, or 7,292 homes, to illustrate that the company's earning power won't diminish in 2005.