托爾兄弟 (TOL) 2002 Q4 法說會逐字稿

Good afternoon, and welcome, ladies and gentlemen, to Toll Brothers fiscal 2002 fourth quarter earnings conference call.

This conference is being recorded and all participants are in a listen-only mode.

At the request of the company we will open up the conference for questions and answers after the presentation.

I would now like to turn the conference over to Mr. Robert Toll, Chairman of the Board and Chief Executive Officer.

Please go ahead, sir.

Welcome, everybody.

Thanks for joining us.

With me today are Joel Rassman, Chief Financial Officer, Fred Cooper, Vice President of Finance and Karen McKiren, Vice President of Marketing.

Before I begin, please read the statement on forward-looking information in today's release or on our website.

I caution you that many statements on this call are based on assumption about the economy, world events, housing and financial markets, weather and other factors whose performance is uncertain and could significantly affect future results.

Those listening on the web can e-mail questions to Rtoll@TollBrothersInc.com.

We will try to answer as many as possible.

We understand there are several representatives of the news wires on the air.

Please feel free to wire your questions, also, on the web as I just mentioned.

For a fiscal year that began under the shadow of September 11th, we were very pleased with our 2002 record results.

Despite an economy mired in recession, we produced our 10th consecutive year of record earnings, our 11th consecutive year of record revenues and our 12th consecutive particular year of record contracts.

We ended the year on 10/31 with our highest year-end backlog ever.

As the year progressed, we continued to build momentum.

In our fourth quarter we produced the highest earnings and revenues for any quarter in our history.

Our fourth quarter record contracts were up 34% and fourth quarter record backlog was up 32% versus 2001.

With the impact of the post-September 11th slowdown in demand still working its way through our earnings, record fourth quarter earnings per share of 93 cents and record net income of 69.4 million each rose 1 percent versus 2001.

Record fiscal year 2002 EPS of $2.91 and record net income of $219.9 million grew 5% and 3% respectively versus 2001.

The company's record fourth quarter revenues rose 8% to 705.6 million.

And fiscal year 2002 record revenues grew 4% to 2.33 billion dollars.

Record fourth quarter 2002 contracts of 656.6 million were up 34%.

And fiscal 2002 contracts of 2.75 billion increased 26% versus fiscal year 2001.

Our year-end backlog reached 1.87 billion, an increase of 32%, versus 2001.

Despite a down stock market for most of the year and a continuing weak economy, the luxury market has remained strong in most of our regions.

With renewed interest in hearth and home and faced with poor alternatives on alternate investments and very low returns on cash, we believe our customers bought new homes to enhance their lifestyles as well as for a reliable and stable investment.

Investor concerns of a so-called housing bubble have contributed to the drop in our stock prices and the prices of the stocks of the other public homebuilding companies.

An investor can buy stock in Toll Brothers, a company with nine months of revenue visibility approximately in its backlog and a track record of 20% compound average annual earnings and revenue growth since going public in 1986 for six times projected 2003 earnings.

We think that is quite a bargain.

We believe rising home prices are not due to a speculative bubble.

Rather, they result from strong demographic-driven demand colliding with a shortage of building lots.

Governmental regulation and no-growth politics are constricting the pipeline of homesites on which we can build as an industry.

These constraints have wrung much of the cyclicality out of our industry.

In contracts to the 1980s when our industry could and did overbuild in sponges to strong demand, homebuilding companies could not and did not do so this time.

As a result, the supply of available new unsold spec homes remains near all-tile record lows.

In the last five years we have faced rising interest rates in 1999 and 2000, the stock market crash, a reception, the tragedies of September 11th and several international financial crises.

Despite these challenges, Toll Brothers has doubled its revenues, tripled its earnings.

These results speak to the strength of other industry and of our company's ability to navigate in difficult economic times.

Experts project that the combination of new household formation, demand for new second homes and the need to replace obsolete housing stock will propel demand for new housing to 1.7 million units per year during this decade.

With homesite supplies constrained, we believe home prices will continue to rise and that large homebuilding companies that can win approvals and control large numbers of homesites will continue to gain market share.

We control nearly 41,000 home sites and have demonstrated our ability to gain approvals to open new communities, to diversify geographically and to expand our move up, empty nester and active adult product lines in some of the nation's most difficult markets for approvals.

We enter fiscal 2003 with 170 selling communities, the most in our history, and our largest year-ends backlog ever.

At 1.87 billion our backlog equals 82% of fiscal year 2002's homebuilding revenues.

We believe this pipeline totaling nearly 3400 homes positions us to produce record home building revenues -- I'm sorry.

We believe this pipeline totaling nearly 3400 homes positions us to produce record homebuilding revenues of over 2.6 billion, 5,000 home deliveries in 2003.

Excuse me.

Let Me repeat that because I've been told there were some -- there was some slight confusion about this on one of the morning TV business news shows.

We project home building revenues of over 2.6 billion.

This does not include other income, land sales or any other revenues.

This is not a reduction in guidance.

It is consistent with the guidance we gave at our last conference call.

In fact, we are increasing our range of guidance, which Joel will elaborate on in a few minutes.

With a projected community count of approximately 185 by fiscal year-end 2003, we believe we can produce homebuilding revenues of approximately $3 billion, 6,000 home deliveries in 2004, assuming current demand.

Homebuilding remains an oasis of growth in an otherwise weak economy.

Although a reviving economy should lead to higher interest rates, we believe the benefits to our industry of improved consumer confidence and renewed job growth would far outweigh the impact of rising rates.

Trends show Americans want larger and more highly amenitized homes.

As growing waves of mature baby boomers reach their peak earning years and immigrants seek to participate in the American dream, we believe the demand for luxury homes will increase.

The only homebuilding company focused on the luxury niche, Toll Brothers is positioned to prosper as we expand in a luxury market.

Now let me introduce Joel Rassman, our CFO, to discuss the numbers.

Joel?

Thank you, Bob.

As Bob noted, we just completed a record year with results significantly better than our initial estimates as fiscal 2002 began and even as the fourth quarter we did better than our expectations as we delivered 1272 homes at an average price of $544,000 for homebuildings revenues of 692 million.

Fourth quarter land sales of 4.7 million and other income of 3.8 million were in line with the guidance we previously provided.

Homebuilding gross margins at 26.9% of revenues for the fourth quarter were slightly better than our guidance, result being from slightly higher seams prices and a little richer mix of closings.

Write-offs in the fourth quarter included in cost of sales was approximately $2.7 million, down from the $6.4 million in last year's fourth quarter.

About half of the write-offs were attributable to predevelopment costs and half attributable to our decision to sell off lots in other communities.

Lands sales margins at 21.6% of revenues were lower than the guidance of 25% we had previously provided.

SG&A at 8.9% of revenue was had 20 basis points higher than last year but slightly better than the lower ends of our previous guidance.

This was caused by slightly higher revenues and a lower bonus expense.

Interest expense at 2.7% of revenues was approximately equal to our guidance, as was the tax rate.

For now -- and now on for guidance for 2003.

As a result of our record backlog, the number of communities we have selling homes, our projected number of net new community opens and current sales pace per community, we expect to deliver between 4900 and 5200 homes with an average delivered sales price of between 530,000 and 540 thousand dollars.

This is an increase in the a little estimated delivery price over the previous guidance we gave you.

Based upon the mix of expected deliveries, both by product Angie graphically, we anticipate the gross margins will be between 50 and 100 basis points lower than last year.

As we discussed in our previous call, we have a significant number of new communities delivering revenues for the first time in fiscal 2003.

Many of these newer communities are in newer areas, some of which historically have had lower margins.

Although we are still anticipating increasing margins on a same store basis, the mix will offset the margin increases resulting in lower 2003 margins.

We currently project land sales at about $20 million with a 25% average margin for the year.

Other income should be about $12 million, and income from joint ventures should be about $4 million as we start settlements from these joint ventures in the latter part of the year.

We estimate operating SG&A for 2003 to be up 10 to 40 basis points higher as a percentage of revenues than last year as we continue to expand the company to prepare for our expected deliveries of approximately 6,000 units in fiscal 2004.

This is slightly higher than our previous guidance.

In addition in the first quarter we will record an expense of approximately $4 million associated with the early retirement of our 8.75% subordinated don't.

Effective for fiscal 2003 losses from early extinguishment of debt are no longer considered extraordinary.

Over time the impact of refinancing this debt at nearly a 2% lower interest rate will improve future results.

But because of the capitalization rules, its effects will not start to phase in until fiscal 2004.

We estimate interest intense at 2.8% of revenues and a tax rate of approximately 37%.

In order to gentleman sits you in preparing your individual models, I will attempt to highlight some quarterly data we think you should consider.

We expect that the average delivery price will be roughly the same in each quarter except for the third quarter, which may be a little lower.

Remember, weather can have a significant impact on deliveries in any winter quarter.

We expect that the first quarter deliveries should range between 10,020 and 1100 homes.

We expected second quarter deliveries to be up slightly from the first quarter and be between 1080 and 1160 homes.

Again, weather may play a part in the timing of these settle also.

Third quarter deliveries should be between 1250 and 1350 homes with the fourth quarter deliveries between 1450 and 1650 homes.

When you add up the lows and the highs, you won't exactly agree to the total overall range that I gave you because we don't expect to be east the lowest of each quarter or the highest of each quarter that will be offsets.

Lands sales will total $20 million and we expect half these of occur in the third quarter.

The rest will be spread pretty evenly over the first, second and fourth quarter.

Land sales gross margins, which will average 25%, will be a little lower in the first quarter, about 20%.

Other income should be roughly equal, approximately $3 million each quarter.

And more than half of the joint income or approximately 12 -- joint venture income or approximately 2.5 million dollars will fall into the fourth quarter with most of the battle falling in the third quarter.

Remember, cost of sales can are significantly affected by seasons and weather.

In general we deliver fewer homes per community in the first and second quarters and more homes in the third and fourth quarters.

Last year's relationships were a little skewed because of September 11th and because of an extremely mild winter.

Also, the geographic mix of homes delivered can have a significant effect on margins by quarter.

We currently expect home building margins in the first quarter to be 50 to 100 basis points lower than last year's first quarter, 100 to 150 basis points lower in the second quarter than last year's second quarter, 50 to 100 basis points lower in the third quarter than last year's third quarter, and that the fourth quarter will be approximately flat to this last year's fourth quarter.

SG&A also varied significantly season to season with more selling and advertising costs expended in the first and second quarter than in the third and fourth quarters.

Here again, last year's ratios were skewed as refuse influences were more evenly balanced in the first three quarters and selling and advertising expenses were significantly reduced as a result of September 11th.

Accordingly, we would expect SG&A as a percentage of revenues of approximately 50 to 100 basis points in the first quarter of 2000 as compared to last year's. 30 to 70 basis points higher in the second quarter versus last year's.

And in the third and fourth quarters to be approximately the same to slightly higher, maybe 10 to 20 basis points.

The last component of earnings per share is share count.

Obviously share price has an effect on the average number of shares we use in our projections.

Based on what we believe will be increasing prices during the year, as our estimates for 2003 become reality and as investors start to Focus on our estimated 6,000 deliveries in the following year, we have used 76.3 million average shares outstanding for the year.

And for the fourth quarter we started at about 75 million, increasing to the fourth quarter to 77 million shares.

At this point I guess we should open for questions.

Joel, you read this as 2000.

And I think you meant 2003.

2003.

Yeah.

We would expect higher SG&A as a percentage of revenues of approximately 50 to 100 basis points in the first quarter of 2003 as compared to last year's first quarter.

Sorry for the mistake.

Okay.

We're pleased to take questions.

And would you check to see if there's any coming over the Internet?

Thank you.

The question and answer session will begin at this time.

If you're using a speakerphone, please pick up the hand set before pressing any numbers.

Should you have a question, please press star 1 on your push button telephone.

If you wish to withdraw your question, please press star 2.

Your questions will be taken in the order they are received.

Please stand by for our first question.

Our first question comes from Ira Zellman with credit Suisse Boston.

j good afternoon, Bob.

Just a few housekeeping items, Joel.

You talked about the mix and relative to your new communities.

What type of apples to apples price increases do you expect on the projected 185 communities that you have?

j we've continued to increase prices throughout 2002 with the exception of a few -- the agreements taken at the beginning of 2002.

And they will continue to flow through out of the backlog into 2003.

So, on a same store basis, we would expect that each individual community that was opened in 2002 and is open in 2003 will do better than they did in the prior year.

But we have a mix change that's taking place, which is affecting overall weighted average of margins.

j no, I realize that.

j ivy, the demand that you feel post-September 11th, there were certainly no price increases for several months.

By January of 2002 we were into some pretty serious price increasing as the market was making up for lost time in the post September 11th environment.

And price increases remain very strong throughout the summer and almost right into the middle of November.

Since the middle of November, 'tis the season to be jolly and not run out and buy homes primarily, so you don't see as much demand.

And your natural manager's inclination is to not raise prices.

So, in the last three or four weeks prices haven't been rising.

But it will very much depend on what demand we see come back in in January.

If it does come in as we expect, just on the basis of what we've said above in this monologue, in this show, I would expect you'll see some pretty significant price increases coming back in.

Can you give us, Bob, like you usually do a sort of market by market sense of how traffic and business has been the last several weeks?

Some anecdotes?

Sure, I can.

Why not?

If I find the right piece of paper.

In the last several weeks Arizona has been -- I'm sorry.

Let's call it Phoenix has been a little slow.

Now, that's a seasonal expectation.

We were surprised that over the summer and into the early fall the Phoenix market was quite strong.

And this was very surprising.

It was hot as the blazes, and the market had been so strong in the past five years we would have expected it to take a break.

It did not take a break this summer.

But lately it has.

Palm desert surprisingly a strong market and continuing right into this past weekend.

California northern market was very strong over the summer and into the fall, and then I would say in November and December has even -- no, no, October was strong.

November and December has been choppy.

It's been an okay market, but it's been a choppy market.

Southern California has been very strong throughout the year and right into the last two weeks.

For the last two weeks Southern California has slowed down.

It may be consistent with the shopping season of Christmas and maybe something else.

Maybe true softness.

Denver, we can only give you anecdotal information.

We've opened up two communities.

We're very pleased with how they're doing.

We understand Denver is a bad market.

If these two communities are an indication of the future for us in the Denver market, I'll make a deal with the devil.

Let it stay the way it is.

Our communities are doing well.

Connecticut has been pretty strong, again up until the last couple of weeks, and then it's gotten softer.

Delaware has been consistently strong throughout.

Florida on the East Coast has been a little on the soft side from the middle of the summer right up to the present.

We felt pretty good strength the last couple of weeks.

And this past week we saw a lot of strength.

And I think that's all seasonal.

And we would expect Florida to continue to build on the East Coast.

On the West Coast it's been gangbusters for us right up to the last two weeks.

The last two weeks have been soft on the West Coast.

Chicago, we only have one community.

We had two.

We're down to one.

We hope to have several more opening this year.

It's been a consistent market for us.

Michigan -- I'm sorry.

Detroit, really, but all the regions around Detroit, just been great, strong throughout the year and continuing strong right into this weekend.

And that's surprising because you would have thought they would have taken a break.

Las Vegas continues to beat expectations.

These people have been strong in demand post-September 11th, notwithstanding the travel industry going into the trash can.

And you would have thought hotels emptying and business banking down, it's been super strong.

And it has remained strong right through this present weekend.

It's just a great market.

Massachusetts, you know, it's funny.

We hear a lot about Massachusetts being one of the poster boy examples of the housing bubble with price increase creases.

I think that the reason for that may be that everyone wants to live in Newton or Brookline outside of Massachusetts.

But on the 495 ring we haven't had tremendous demand.

It's been okay, but basically a choppy market throughout the fall and right into this past weekend.

New Hampshire has been for the luxury homes, 500,000, fairly dead, as we think the tech implosion wreaked havoc on route 93 going up into New Hampshire.

Rhode Island has been a good market for us up to the last couple of weeks, and that has banked down.

New Jersey has been a consistently good market for us throughout the year and even, you know, right into this weekend, seasonally adjusted, of course.

New York, we have been unfortunately run out of Westchester as we have sold all of our offerings in the Westchester market.

We're up into Dutchess County and we've got two communities there where we're doing very well.

Charlotte has been soft throughout the year and has not picked up yet.

Raleigh, which was soft earlier in the year, fiscal year, has been gaining strength and is doing very well.

And in the past few weeks has done even wetter.

Columbus, Ohio has been choppy.

It was okay up till about a month and a half, month and a quarter ago, and then has gotten choppy or soft.

The Philadelphia market, the suburbs around Philly have done very well right to the present.

It's a fabulous market for us.

Tennessee, we're in Nashville.

We only have a few communities.

It's doing okay.

It's not been a great market.

Austin has been very soft.

It seems to be most hit by the tech implosion, has come back a little bit in the last month, but not enough to bring it back to where it was before the tech implosion by any means.

Dallas had been soft, seems to be gaining strength again.

We did very well there this past weekend.

The weekend before, the weekend before.

So, Dallas is coming back.

Washington, D.C., northern Virginia, Maryland, in good times and bad times your government grows.

That is a terrific market and it's terrific right to the present.

And that's it, Ivy. j that's a great overview, Bob.

I really appreciate it.

If I could ask one final question, Joel, given the new FAS D rules, or I guess being enacted --

I can't hear you, ivy.

I seem to have lost you.

There's a new FASB coming out in January '03.

And I want to know what Joel expects with joint ventures, off balance sheet items, what kind of impact it would have on Toll Brothers, if at all.

Go ahead, Joel.

We don't really have anything that on the face of it would be affected.

Our joint ventures are as real as they are.

Other people allow the land.

We were allowed in them as an investor and partner in the deals.

And I don't expect they'll have any material effect on Toll Brothers.

Thanks a lot, guys.

Our next question comes from Chelsea Intonido with Merrill Lynch.

Hello.

Great quarter.

Thank you very much.

First, with the margin you said there was some mix issue.

Could you discuss a little more about that mix and maybe what you had more of and less of of your product?

Are you asking the question for the fourth quarter or for next year?

For the fourth quarter.

We had a little bit more in deliveries in the newer regions than the older regions than we did last year.

That's the primary difference.

So, then, the start-up costs would be a factor?

It's not a start-up cost.

There are certain regions of the country which have historically lower margins than others.

New Jersey, and New York, for example, have traditional high other margins.

And Las Vegas and Florida and Texas have traditionally lower margins.

Okay.

So, from a product perspective, also, was it a mix issue there?

I'm sorry?

From a product perspective.

Like, I know when you have a number of master plan communities and you have different types of homes within it.

So, is it a product mix, also, in addition to geographic?

Yeah, but it didn't have as much an impact.

Generally our master plan communities make the same or higher margins as our average communities, as does our active adult.

Is it possible to get communities by geography for the fourth quarter?

We gave that in our 10-K, didn't we, Joel?

By quarter, not by year.

For the year we give it to you.

I don't have it here by quarter.

That's fine.

It will be for the same stand of the year in the quarter.

And you mentioned community count of 185.

How many openings will there be?

That's a net number, correct?

That's correct.

I don't know.

There will be 70-some-odd new communities opened.

So, net-net, we'll close 185.

That's a lot of brochures!

Will there be any mix that you expect there in geography where any communities will be opening up in specific geographies than in others?

We had in our previous conference call indicate thanked the communities opening up in the fourth quarter and first quarter would be more heavily weighted towards our newer geographic regions, thereby affecting the deliveries somewhat in 2003.

Did you mean fourth quarter of 2002 and first quarter of 2003?

Yes, fourth quarter of 2002 and first quarter of 2003.

Thank you, Joel.

Okay.

Great.

And are there any communities in particular you're excited about that you'd like to discuss that you'll be having a lot of openings in in this year, in '03?

I'm sorry, Kyra?

No.

I like to mention the communities when they're opened.

So, yea, I'm excited about a bunch of them, but I don't care to discuss them now.

I'll wait till it's -- till it's time.

Okay.

Great.

Well, thank you so much.

Thank you.

Our next question comes from Myron Kaplan with Kaplan, Neeson & Company.

Please state your question.

Hi, guys.

Good quarter.

Thank you.

My other question has been answered, so just the one thing I would ask is is there any change in the pattern of, let's say, duration of entitlement that's in response to the increasing [INAUDIBLE] of supply that you talk about?

Is it getting easier, is it getting harder, or does it vary in different regions?

It varies by region, but it follows the same pattern in all regions.

Its's continually getting more and more difficult, which is why you see the continuing constriction in the supply.

Pennsylvania five years ago the average approval time was two and a half to three years.

Today it's four and a half to five years.

The counties in northern Virginia used to be a year, are now three years.

In southern Maryland -- not southern Maryland, but in the Maryland counties that feed into the Washington, D.C. market, used to be two years, are now four years.

And so on and so forth.

Florida used to be a year.

Now three years.

So, you see the same pattern everywhere.

Even the Texas market you see approval times lengthening.

But they're not -- they're not marked.

There's no real difference in Texas.

Texas, still under a year it can be done.

But most of the markets, it just continues to get worse and worse from our point of view for approvals.

I guess I should say better and better from our point of view as a oligopoly, as an industry, because when you've got finally approved lots, you've got a franchise that's been given by the government in reverse.

And that's why you see -- the same pattern has run in Britain.

They got started a lot earlier, and have reached a point of constriction a lot earlier.

And that's why you see price increases in England in my opinion reaching 25% a year as opposed to the average price increase in this country, which has really not gone up that much.

It's gone from about 5%, to 6, 6.5%.

Mm-hmm.

So, we ought to see some more consolidation because the possibility of entry into a -- de novo into a market is virtually nil? j I think what you'll also see in addition to conglomeration or aggregation of the major homebuilding companies, I think you'll see a pretty significant increase in share of the market by the major homebuilding companies because you need lawyers for environmental, lawyers for the search for antiquities for the arrowheads, lawyers for the sedimentation/erosion control, lawyers for the three-legged frog, lawyers for traffic, and it goes on and on.

And this takes a significant bankroll.

And while it used to cost you a hundred thousand for an approval, today it costs you in 500,000 to a million for your average approval.

And you've got to control the land.

Land sellers are expecting to have their land off the market but not to be paid for a year or two used to take a significantly less down payment, smaller down payment than they want today because they know their land is going to be off the market for four or five years while you're going through the approval process.

They want to know they're dealing with somebody that's got the wherewithal to fight this significant approval process.

And so, your deposits on these lands, even though they're refundable,s are still very significant, several millions of dollars.

What this means is that only the larger players can play.

And that's why I think you're going to see a significant increase in market share going to the major homebuilding companies.

Right.

Well, keep on playing.

We like the way your batting stands.

Thank you very much.

Thank you.

Our next question comes from Larry Horan with Parker, Hunter.

Please state your question.

Thanks.

All my questions have been answered.

Good job.

Thank you, Larry.

Our next question comes from Carl Reichert with Banc of America Securities.

Please state your question.

Hi, guys.

Good afternoon to you.

Bob, you said net opening 70 new, closing 55.

Is that a fairly high degree of velocity for you guys?

Let's get the number first of all, guys.

There's 70 openings.

Approximately 70 openings.

Closings would have to be 55.

And that's about the average proceed portions for us.

Is there a --

Excuse me.

Is that wrong, Joel?

Yeah.

It two be an average if you just use those numbers.

But if you looked at it as we deliver revenues into the year, we will have more communities between the opening of the tail end of this year and the communities the beginning of next year because there's proportionately more communities delivering revenues next year than normal.

Delivering revenues next year.

Okay.

But delivering orders, do you expect that the new communities will be -- let's put it this way: are they going to be open during the spring selling season, the bulk of them, or are they not, or is it pretty evenly split throughout the year for new openings?

Does anybody know?

We don't know.

Haven't got the info.

And I recall last year we had some issues with opening new communities on time due to last minute constraints from local municipal soar sorry regulatory authorities.

You've got a good memory.

We did miss our target dates due to new creative regulations that hadn't existed before.

Will that occur again?

We've cross-examined all of our senior managers responsible for the major divisions.

With regard to these openings, as recently as a couple of weeks ago, and we think we've got it right, but that very much depends upon the municipalities.

If they come up with a new reg at the last minute and put something in between an opening and a filing, for instance, of a record plat, it can occur.

We don't think so, though.

Okay.

Just a couple of quick follow-ups, too.

On the 41,000 under control, what's optioned; what's owned?

25 and 16. 25 roughly owned. 16 roughly optioned.

That's about it.

I thought it was 26, but who cares?

I think it's 26.

Okay.

You've got it pretty bracketed.

And finally just on share count, Bob, just for this quarter it was down, if I recall correctly, quite a bit lower than you had originally thought.

Was that just due to stock price fall and non-conversion of options, or was there something else in terms of a buyback that was done?

And the follow-up is what was the buyback for the full year?

The buyback for the full year was 1.3 million shares roughly.

And I'm sorry.

I missed first part of the question.

In terms of the lower share count this quarter.

We had buybacks during the year and we offset a drop in share price.

Okay.

And then what's left on the authorization?

We have 4.6 million shares roughly still authorized.

Perfect.

Great.

Thanks a lot, guys.

You're welcome.

Thank you for your interest, Carl.

Chris Wittum sends over the Internet a question.

Could we speak to cancellation rates and land prices?

Cancellation rates are running at about the same as they have been for the last 20 years.

There's no market difference in them.

They're right on average.

And what is that average?

It was 7% for the last 10 years.

We ran 6.7% this year.

I thought it was 6.7% this year.

Land prices continue to go up, Chris, but fortunately for our industry they're not going up as much as the -- I shouldn't say this in case any of my sellers are listening, prospective sellers, but they're not going up as much as our prices are going up.

So, the margin should be increasing a little bit.

Thank you for that question, Chris Winnham of SAC capital.

Our next question comes from Charles Grohn.

Where do you guys see your average selling price trending relative to the past two years?

And second, what was your lands as a percentage of inventory over the last year?

You guys have approximated about 34% of land as a percent of inventory.

Thanks.

You're welcome.

We did it the other way.

Let me [INAUDIBLE] it.

I think land is about $700 million and our inventory is about 2.6 billion.

You have that number in the balance sheet, I think.

The land is not market to market.

That land is cost.

Cost for land.

Okay.

And the first question?

Average selling price --

Trending up to '04?

I don't know what '04 is.

It looks like it's relatively consistent in '03 to where we've been in the past.

I would -- not speculate, but predict that you'll see the same kinds much increases that you've seen in the past.

Okay.

Thank you.

You're welcome.

As a reminder, ladies and gentlemen, should you have any further questions, please press star 1 at this time.

Actually, you know, I'm sorry, but to amend the last answer, I would think you'll see faster price appreciation than you have in the past because the industry has been an oasis, about the only pillar of strength at a pretty problemy economy.

And I think when this economy gets better, as surely it will and must in time, but I think it will occur before '04 for political reasons, if for nothing else, such as the ordinary cycles, I think you'll see pretty significant price increases, more than you've seen in the last year or two.

Sorry.

Go ahead, Lela.

Our next question comes from Paul Perrier with Raymond James.

Please state your question.

Thank you.

Joel, I guess could you tell us how many exercise and options you had outstanding at the end of the quarter and the average strike price?

Not off the top.

But as we're doing it, we'll look it up.

Okay.

Another question.

Just on the Midwest region as it's reported in your press release, the performance there is down quite a bit.

Is that community count?

Can you just speak to that?

I'm sorry.

We lost part of your question.

Could you repeat it?

As it relates to the contracts and really the sales performance for the Midwest region in the press release.

Yeah, we did deal with that in the previous conference call.

We had a significant number of -- a lower number of communities this year than last year.

I think the number was, like, 25% lower, which counts for part of it.

And part of it is a switch in product in Detroit from a lower-priced product to a higher-priced product.

So, it affects units even though revenues didn't change that much proportionately.

But that's not related to any strategy change with respect to those markets?

No.

Our strategy is to grow in those markets.

What Joel was saying $when bought the cap silverman homebuilding company, which primarily did homes of a lower price than we wanted to do.

So, as we rolled out of the Silverman product into the Toll product, you have a drop in units without much drop in dollar volume in Detroit.

In Chicago we have communities that shut down without communities opening up to continue to grow to fill the void.

We will get there.

There's just a hiatus.

So, you will see the growth.

The same is true of Columbus.

Yes, in Columbus we continue to grow, as well.

But again, you had these gaps.

Going back to your question of options --

Exercisable is 9.8 million.

And a strike price of average 10.64.

Average strike price 10.64.

Very good.

Thanks.

You're welcome.

Thank you.

Our next question comes from Todd vote with Cliffwood Partners.

Please state your question.

Good afternoon.

This is a question for Joel.

In the 2.7 million write-off, you said part of that was due to accelerated sales of your developments.

I was wondering how does that accounting work?

What's the asset that's being written down?

We write down the land asset to reflect its fair value you as defined under the FAS.

Because if you tried to close the job earlier and you incentivize people to get through that inventory, it's absorbing management.

And you'd rather use that management in a more profitable location.

In order to do that, you may put in incentives which would lower the net realizable calculation or fair value calculation.

And that was roughly half of the write-off, that plus the lot sales.

Okay.

So, it's a function of having less people working there or working harder to get it through?

Incentivizing people to get rid of the lot inventory that isn't as profitable.

You could elongate the process and make more money, but you'd rather shorten the sales cycle and take that management and deploy them elsewhere in a more profitable job.

And we had a community we wanted to do that on, which was requested.

Okay.

That makes sense.

I'm just trying to understand what you say.

Are you incentivizing the buyer or the guy at your community selling the house?

The buyer.

But sometimes both.

Okay.

All right.

That makes sense.

Thank you.

You're welcome.

Thank you.

Our next question comes from Esther Chow with Wavemark Partners.

The person just hung up.

Okay.

Thank you.

Our next question comes from Steve Fockens with Lehman Brothers.

Please state your question.

Hi.

Good afternoon, guys.

In terms of regional pricing trends, maybe you already addressed this, but I just noticed, if I look at year-over-year change in the price coming through orders in your West Coast region, they were down 7% last year in the fourth quarter and they're down again 2% this year in the fourth quarter.

Is that a mix issue?

Yes, it's a mix issue.

Okay.

Because I think you --

I imagine it has to be a mix issue.

Especially because you had said earlier southern California is doing pretty well.

Yes, that's very true.

We are not dropping prices for a fourth quarter home sale phenomena.

We don't do that.

Okay.

So, it's a mix issue?

Yeah.

Okay.

That was it.

Thank you very much.

You're welcome.

Thank you.

Our next question comes from Alex Barone with Franklin Templeton.

Please state your question.

Good afternoon, and a great quarter, gentlemen.

Thank you, Alex.

Just a quick question.

On your revenue guidance, I took the revenues divided by the deliveries for the next two years, and it seems that the average sales price is going down.

Is that a change in mix?

Because you said that you expected home prices to actually go up.

I think we delivered an average sales price of 515 for the year.

And the middle of the range next year will be between 530 and 540.

So, the middle of the range will be 535.

So, we would expect that the average delivered price will go up.

What you're seeing, if you're looking at the backlog versus the delivered price, is that smaller houses tend to be delivered quicker.

And so, in general your average backlog price is higher than your average delivery price.

Okay.

But then in '04 it goes to 500,000.

We didn't give you any revenue number.

We just said over $3 billion.

It's not intended for you to take from that that it will be 3 billion exactly.

It will be 3 billion-plus because it will be 500,000-plus dollars.

We just don't know what it is yet.

Okay.

Great.

That represents good work on your part.

Okay.

Thank you very much.

Thank you.

We have a question from Brian Qrug.

He says, if you were to mark to market your land, what would your estimate fair value of your land be?

I'm not sure I want to go on the hook for that one, Brian.

I'll say more than several hundred million and let it go at that.

Sorry.

I don't want to get more specific than that, bribe, only because of the new rules for the last five years.

Any other questions?

Lela?

Thank you.

Our next question comes again from Esther Chow with Wavemark Partners.

Please state your question. j hi, good average.

With the likely modest rise in mortgage rates over the next year and with the Focus on luxury homes, I was just wondering what was responsible for actually driving your housing sales growth, the estimated 13% for next year?

I'm sorry.

I couldn't understand the question.

Can I?

Yeah, go ahead, Joel.

The driving force in our increased number of deliveries is because we have more communities opening up and demand is very strong.

And without any increase in sales per community over the normal sales per community, we expect to be able to see that kind of growth in deliveries and -- in both 2003 and 2004.

Our buyers tend to be much more insulated from mortgage rate increases.

And in fact, we did a survey of 579 of the buyers who bought our homes using mortgage programs for the six-month period ending June of 2002.

And if I had a 200 basis points plus increase from that price point, which was at 6.75, much higher than it is today, that would have been an 8.75% price.

For mortgage we wouldn't have really lost anybody.

And how many more communities are you increasing next year?

We're going from 170 to 185net.

And as we have discussed at length, we have approximately 70 opening and 55 closing.

I would add to Joel's statement, though, that the ream reason for the expected growth is the demographics.

You have approximately 35 million more people every 10 years, and when you look at the new housing sales, you'll see they're flat.

And therefore, demand is greater than supply.

And if you've got the goods, the buying public will come to you.

So, that's why in general it's quite that simple.

We think we'll be expanding as rapidly as we believe we will be.

Okay.

Thanks.

Thank you.

Thank you.

Our next question comes from David Jarret.

Please state your question.

I just wondered if you have a more detailed breakdown of inventory than would be found in the 10-K?

Inventory of land development costs, construction progress, model homes, costs of future development and deferred marketing cost.

Land and land development costs will be approximately $770 million.

Construction in progress approximately 1 billion 490 million dollars.

Sample homes and sales offices approximately $163 million.

Land and deposits and cost of future developments approximately 115 million and other approximately 9 million for attempt of approximately [inaudible].

Great.

Thanks a lot.

Our next question comes from Todd vote with Cliffwood Partners.

Please state your question.

Just a quick follow-up.

The write-off for the acceleration of sales at that one community, what part of the income statement is that in?

It's in cost of sales.

Thank you.

Our final question comes from Steve Fockens with Lehman Brothers.

Just one follow-up, as well.

So, therefore, when you had said this morning in the press release, you talked about 2.6 billion in guidance for revenues, homebuilding revenues in this quarter.

That's --

Wait a minute.

A quarter?

No, I'm sorry.

For '03.

Sorry.

That's okay.

If I take the 4900 homes and the 530,000, that's your 2.6 billion.

And it just has upside from there?

That's correct.

Okay.

Thank you very much.

Thank you very much.

Thanks to all for taking the time to show this degree of interest in our company and in our industry.

I appreciate your following us.

Good-bye.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.