托爾兄弟 (TOL) 2003 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to Toll Brothers Inc. 2003 second quarter earnings conference call.

At this time, I would like to inform you that this conference is being recorded.

And that 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 like to turn the conference over to Mr. Robert Toll, Chairman of the Board and CEO.

Please go ahead, sir.

Thanks.

Hi everybody, thanks for joining us.

Today we have at this time more than 100 people signed up so I'll try and be brief with this session since we anticipate more than the usual number of questions.

With me on the call or Joel Rassman, Chief Financial Officer, Fred Cooper, Vice President of Finance, [Joe Secrie], Chief Accounting Officer and [Kir McKaren] VP in Marketing.

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

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

The Q&A will be after this presentation.

For those listening on the web, please e-mail us to RTOLL at www.tollbrothersinc.com.

We will try to answer as many questions as possible.

Demand for luxury homes is strong.

The selling season which started slowly due to concerns about war and the impact of weather has gained momentum.

February was slow, April was better than March, and May has been tremendous.

The past four weeks have been among the best in our history for traffic and reservation deposits.

These typically are leading indicators for future contracts, and ultimately tend 10 to 12 months down the line for deliveries and revenues.

If the economy improves, notwithstanding an increase in interest rates, we believe our prospects will be even brighter.

Remember, during the past decade we have grown through three periods of interest rate hikes, '95, '97 and 2000.

And in that time, we produced 10 consecutive years of record earnings on an average return on equity of well over 20%.

Based on our backlog and our record first six month results, we believe we will produce record earnings in both the third and fourth quarters and our 11th consecutive year of record earnings for the full year 2003.

Record second quarter 2003 earnings of 72 cents per share diluted rose 4% versus second quarter 2002, and record second quarter 2003 net income of 52.9 million, increased 1%.

Record six months 2003 earnings of $1.33 per share diluted increased 3% versus 2002, and record six-month 2003 net income of 98.3 million rose 1%.

Record second quarter 2003 revenues of 607.9 million grew 10% versus second quarter 2002.

Record second quarter home building revenues rose 11%, to 601 million.

For the second quarter we delivered 1109 homes, an increase of 2% over 2002.

Record six months 2003 revenues of 1.18 billion grew 13% versus 2002, and record six-month home building revenues of 1.6 billion -- 1.16 billion grew 13%.

For the six months we delivered 2,145 homes, an increase of 4% versus 2002.

Second quarter contracts of 926.5 million, the highest for any quarter in our history, increased 3% versus second quarter 2002.

Record six-month contracts of 1.51 billion, rose 9%.

The number of contracts signed in the second quarter, 1,667 homes, declined by 39 homes or 2% compared to second quarter 2002 while the number of contracts signed for the six-month period 2,733 homes, rose 4%.

Our record second quarter backlog of 2.21 billion increased 25% versus 2002, a number of -- and the number of homes in backlog rose 20% to 3,937.

These totals were the highest for any quarter in our history.

Our expansion program continues.

We have a record 176 selling communities today, and project reaching approximately 185 by fiscal year-end 2003.

Our record backlog already contains a large portion of first quarter 2004 deliveries, and with current traffic and deposit trends, we have great visibility into the next fiscal year.

If the market remains as it is now, we believe we'll have another record year in 2004.

Let's review our markets since our last conference call in early May.

In New England, where we have eight communities, Massachusetts is good to excellent, Rhode Island is good, and New Hampshire is not good.

In New York and Connecticut where we have seven communities, the market is very good.

New Jersey, where we have 16 communities, the market is excellent.

Land approvals remain challenging but overall the market is great.

Pennsylvania and Delaware where we have 18 communities has been excellent.

Have been excellent, excuse me.

Metro DC which includes Northern Virginia and Maryland, is our largest market with 36 communities.

It remains tremendous.

In Raleigh, North Carolina we have six communities which have been good to excellent.

In Charlotte, we have two communities where things have been fair.

We've just opened up Wolf Island and Hilton Head, South Carolina to at best unappreciative reviews.

We don't have our models open yet so there is an excuse to be tendered, but the reality is that market is slow.

In Florida, we have 16 communities, eight on the southeast coast and eight on the southwest coast.

The East Coast was slower than the West but last week it was fabulous.

The West Coast of Florida has been very good although we're looking to replace some communities that are wrapping up with new inventory.

In Michigan where we have 15 communities, the market has been quite good.

In the Chicago market, we have two communities and urban infill site and a more typical high end suburban community which is fair.

Columbus, Ohio with four communities has been fair.

In Texas, four communities in Austin, which has been fair to not good, five in Dallas, which has shown improvement recently, and one in San Antonio which is also not good.

In Colorado, where we have two communities south of Denver, we're doing very well, especially given what we hear from others.

Arizona, Phoenix market, with eight communities, has been very good, Nevada with five communities has been excellent, although both markets took a break this past holiday weekend.

In California, we have 20 communities in three regions, Palm Springs with six communities has been very strong.

Northern California, which is the Bay Area for us, we have nine communities and the market has been excellent, Southern California, with five communities, mostly in the metro Los Angeles area, and that has been excellent.

Since most of the homes we are now selling will be delivered in fiscal 2004, overall, despite the weak economy, we're very optimistic as we look forward.

On that note, let me turn it over to Joel Rassman to do the numbers.

Joel?

Thank you, Bob.

Our unit deliveries of 1,109 was slightly above the middle of the range of 1,040 to 1,140 units we discussed in the last earnings call in late February.

The average delivery price of approximately $542,000 was higher than expected, and was principally caused by a result in mixed differences in units delivered.

The effect of both of these combined was that total home building revenues for the quarter at $601 million was at the higher end of the range we gave you.

Land sales at approximately $4 million was lower than the estimate of approximately $8 million we had provided as one of the parcels we had expected to close in the second quarter will now be closed on in the third quarter.

Gross margins on land sales are 21.5% were lower than anticipated as the closing of the more profitable piece of ground was the one that was delayed.

Other income of $3.1 million was on mark with our guidance of approximately $3 million.

Gross margin on home building revenues was slightly better than estimated.

We had expected a decline of 100 basis points plus compared to prior year second quarter, however, gross margins came in at 70 basis points lower.

This was caused by a favorable mix and partly by slightly lower write-offs than we had included in our guidance.

Write-offs for the quarter were just over $2 million, and as you -- most of you know, our internal models include about $2.5 million a quarter.

Last year's comparable write-off figure was 500,000.

SG&A was 40 basis points higher as a percentage of revenues than last year's second quarter, and slightly better than our guidance of 50 to 80 points higher.

This was primarily a result of higher gross revenues.

Interest at 2.7% of revenues was slightly better than our 2.8% of revenues estimate.

The net effect of all of the differences was another record quarter with a strong 72 cents per share in earnings.

Looking forward to the rest of the year, we still believe we will close between 4800 and 5100 homes.

We are raising the average price per home closed to between 535,000 and 540,000 from the previous guidance of 525 to 535,000.

We still believe the range of settlements to the third quarter 1,150 units to 1,250 and we have slightly reduced our range of settlements for the fourth quarter to between 1,500 and 1,700.

The average delivery price in the third quarter should be between 535,000 and 540,000, and we estimate the average delivered price in the fourth quarter will be the same or slightly lower than the third.

In the third quarter, we would expect gross margins to be 40 to 60 basis points lower than last year.

And this is an improvement from our previous guidance where we thought it would be 50 to 100 basis points lower.

We expect the fourth quarter gross margins to be flat to 25 basis points higher than last year's fourth quarter.

This also was an improvement to our previous guidance where we thought it was going to be flat to 25 basis points lower than last year's fourth quarter.

We expect land sales for 2003 to be $26 million.

Again, this is slightly higher than our previous estimate of $24 million.

Approximately $10 million of the land sales should occur in the third quarter, and $3 million in the fourth quarter.

Gross margins on these land sales should be better than 25%.

We now estimate that other income for the entire year will be approximately $14 million, up from the $12 million previously estimated.

We expect that there will be $6 million of other income in the third quarter, and about $2 million in the fourth quarter.

We are lowering our estimate of joint venture income to approximately 500,000 from the previous guidance of $2 million.

This joint venture income should occur in the fourth quarter.

As the expected start of income from our joint ventures will be delayed.

SG&A is a percentage of total revenues for the third quarter, estimated to be flat to slightly higher than last year's third quarter, which is the same guidance we previously gave you.

SG&A for the fourth quarter is estimated at 20 to 30 basis points higher than last year's fourth quarter, which is slightly higher than the previous guidance of flat to 25 basis points higher.

Interest is still expected to be 2.8% of revenues and our tax rate at 37% is what we expect.

The last component of earnings per share is share cap.

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

Based upon yesterday's closing price of $27.50 and today's price.

We believe we will have an ever-increasing share price for the rest of the year and we expect that the average outstanding shares for the entire year will be about 75 million, with 75.5 million shares in the third quarter, and an average of 76.4 million shares outstanding in the fourth quarter.

Based on our projected community openings, record backlog, traffic, and deposit trends, we reiterate our guidance that we expect 2004 will be another record year with deliveries of approximately 6,000 homes, and home building revenues of 3 billion plus.

At this point, I'll turn it back to Bob.

Thanks, Joel.

Heather, questions, please.

Fred, you've got some?

Thank you, sir.

The question-and-answer session will begin at this time.

If you use a speaker phone, 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 question will be taken in the order received.

Please stand by for the first question.

Our first question comes from Steve Kim with Smith Barney.

Please state your question.

Thanks very much, congratulations, guys.

Thanks, Steve.

Well, I guess I basically wanted to get a sense from you as to, you know, sort of if you felt comfortable quantifying for us in any way, you know, how good things have been and maybe if you could give us a little more color on what kind of surge in demand you've seen recently over the last four weeks, whether there's any pattern at all to it whatsoever.

Sure.

I'll give you what I know.

Last week, was the highest reservation deposit per community count that we have ever had.

The week before last, was the highest reservation deposit per community count that we have ever had.

The week before that, was the highest per community reservation deposit count that we have ever had.

The week before that was just terrific, but it didn't set the record.

The record was set for that particular week back in 1999.

So for four weeks, you've got tremendous demand showing up.

Now, these are on a same-store basis comparisons and on a same-week comparison year-over-year.

On a traffic basis, we have gone from slightly negative traffic per community counts during February, March and April, to about a 10% average up traffic count on a per-community same-store basis.

So what you see is the consumer has shook off the lethargy and probably despondency caused by the prospect and actuality of war, then the harsh winter weather, and has gotten back out there in force.

We can talk about the reasons why, but I think that gives you the best view I can give you of just the most recent time.

Well, that's very helpful.

I would assume that, you know, given the strength here, that you guys have probably at least in the last few weeks, been eyeing your prices here a little bit more for an opportunity to sort of take them up.

I noticed in your guidance for the year, and your closing price obviously it doesn't reflect too much of that yet but I guess might we feel more optimistic, we can see some continued price escalation next year?

Well, sure.

Whenever you sell five in a weekend, recognizing that you can't deliver five in a weekend, even 12 months down the line, you take a look at what your backlog is.

If your backlog is at a normal state in that community, then you would pile another $5,000 or $10,000 onto the price so that if you do get the same kind of demand next week, some of it will shake out because of the price increase, some of it will take the price increase and more will drop to the bottom line.

Because we have quite a few communities now that have high volume -- not high volume -- that have high number of lots coming online, as opposed to the average community, which is about 60 or 70 homes, we have quite a few communities now with 175 or 200 lots.

Instead of maintaining -- instead of raising prices on those communities as fast as we would if we only had 50 left to go in a community, we're going to increase some production to push through higher volumes and higher profits, higher earnings for our shareholders.

Okay.

It's -- you mix it depending upon how many lots are left to go in the community and how fast you have to replace and how fast your approvals are coming on line with the other factors that I've just mentioned.

Sure.

I guess what I was getting at was in the third quarter, you were still looking for gross margins to be down year-over-year, it looks like that's going to sort of reverse in the fourth quarter.

I think you said flat to up 50, did you say flat to up 50 or 25?

I think I said flat to up 25.

Okay, to up 25.

Now I guess the question I was getting to, was like when we look forward into '04 I see many people are taking a conservative tact, might we reasonably expect to see gross margins at least flat to up for the full year '04 over '03?

On a same-community basis, we would agree with you that that's likely outcome.

Remember, we're impacted by mix issues.

And we do not have yet the mix for 2004 set.

We're still working on it.

So it's logical to assume per community however it will go up.

Okay.

And lastly, your inventory, can you provide a breakout of your inventory by construction progress, sample homes, land and development, et cetera, and sort of how much you anticipate the biggest parcel of that, which is construction in progress and land land development to be up over the next, let's say, several quarters?

The relationship should be roughly the same.

We haven't finalized the reclassifications we normally do for the full-blown financial statement yet.

But the relationship will be roughly the same as last quarter and we would expect with the increased backlog we have, that we will continue to see construction in progress go up and because we have so many communities getting ready to start, we would expect to see land inventory go up based on our projections.

How much land inventory?

I don't have that number by quarter, I don't know, it will be hundred a couple hundred million dollars.

Okay, that's fine.

Thank you very much, congratulations.

Thank you, Steve.

Heather we have a question from Ray French of Strongbow Capital: "Do you have any plans to enter housing markets overseas, particularly the UK?

And if so, would you consider buying a UK home builder?"

The answer is: We did examine several years ago some UK home builders, and decided that there was so much opportunity for expansion in this continent that we would skip the six-hour time difference and -- or five-hour time difference for the UK and the increased management necessary to watch ourselves on -- across the ocean.

So we're going to stay right here for the time being.

The second question from Ray French was: "Do you expense stock options if not, why not?"

And the answer is: We do not expense stock options and, Joel, why don't you say why not?

We have said in our footnote, we do not believe that the black shoals formula used currently as the most used method accurately affects the value of stock options and the FASB has apparently agreed with that and is in the process of relooking at other valuation techniques.

I would expect, based on what I've read, that stock options will be expensed by everyone including us coming up at some other evaluation method, and when we hear it, we'll be able to comment on whether it's fair.

Thank you, Joel and thank you, Ray.

Heather?

Our next question is from Joseph Sroka from Merrill Lynch.

Please state your question.

Hi good afternoon everyone.

Hi, Joe.

Joel, with respect to for the third and fourth quarter, better gross margins maybe than some previous expectation, and higher delivery prices, those homes have already been contracted so what's really happening there?

Is that people coming back and adding upgrades from where they contracted?

Anything else that's going on?

When we start we go in with estimates as to what we think incentives will be and what we think options will be.

And as we get closer to delivery times, those estimates become reality and what I'm giving you now is what we -- a much better view of the shorter term horizon because we have more information in house.

And we have, in fact, had less incentives, more prices and more options.

And you made comment about the charge-offs in this quarter.

Do you anticipate the charge-offs are going to be lower is that a contributing factor too?

No, we have estimated charge-offs for every quarter and we have told you that we use it in all of our projections to be in previously $10 million a year $2.5 million a quarter, and that's still what we're using.

Okay.

And I think you said this when you did the update call earlier in the month, but how much stock did you repurchase in the quarter?

1,079,000 shares.

Thank you.

Our next question is from Myron Kaplan with Kaplan, Nathan & Company.

Please state your question.

Hi guys, nice quarter.

I just wanted to ask you if you will kindly elaborate on opportunities that you have to redevelop urban, semiurban properties generally with high density town home-type structures and what do you believe in the future the margins for such projects will turn out to be?

Well, currently we're doing a project, as I spoke about earlier, in Chicago, in Palantine at the train station. he reception has been excellent for that community.

We have an opening for invited important people of the countryside in Providence, Rhode Island, of an urban project called the Eastside Commons if I didn't say, that will take place this weekend.

We are fighting our way through historic committees to redevelop a Naval home in Philadelphia which will be anywhere from 700 to 1,000 units.

We have quite a few communities or projects on the drawing board for the New Jersey/New York Coast, that part of New Jersey that looks at the Manhattan coast line.

We hope to have some pretty major announcements soon on some of those projects and they're pretty large and exciting.

Last night, we decided to make a bid on an urban renewal project in Maryland.

So we see this as an increasing market and an excellent opportunity for us.

There is no doubt that it will be a much larger factor for the society population as a whole, over the next four or five, ten years, that much I can't predict, how long it will go on.

But for right now and for the foreseeable future, it looks like this is going to be a good place for us to expand.

And you think that margins will be comparable to --

Oh, definitely.

I think the margins will be greater.

There's much greater barrier to entry in this business, takes more capital than the home-building business does if you're doing your average home-building community.

There's a tremendous barrier in entry as well in the master plan communities that we have expanded to, mainly because there is that barrier of entry and we can take advantage of lesson composition to create better margin.

But your average community in the country is probably 10, 20 homes.

And you can have quite a few people get the capital together and who have the expertise to perform on that scale.

When it comes to urban renewal, the larger projects, again, have a higher barrier to entry because of the capital and the expertise required.

And so you have higher margins on those projects than you do on the onesie/twosie which are done also in urban renewal but generally have much lower margins than a larger project.

Hopefully you have some ad hoc support from municipalities instead of the kind of resistance that you experience in the suburban areas.

It has been easier in -- so far in all of the instances, with the exception of this historical renewal project in Philadelphia, but that's understandable because we're dealing with an historical monument and we have all the associations and committees that want to make sure that it is preserved as best as it can be.

Next this coming year in '04, what will still be I assume a very small percentage of the total units, hopefully getting more important?

Yeah. will not be very significant, but depending upon the way the deals go, and it looks like they're going to come to fruition, it will be much more significant than it has been in the past.

Right, thank you.

Oh, it's not urban renewal, but we've claimed, I guess, I don't know, a thousand acres or more brown fields in California for about 2,000 homesites.

But that doesn't fall under the urban renewal.

Right.

Suburban renewal, I guess.

Uhm-hmm.

Okay, thank you.

Thank you.

Our next question comes from Timothy Jones with Waserman & Associates.

Please state your question.

Good morning or afternoon.

Hi, good afternoon, Tim.

A couple of things.

One, can you give us the flavor of March -- February, March and May.

You said that the traffic was down in those quarters, and I can understand February being down because of the war and the weather and March catch-up from that up modestly.

I want to concentrate on the May being terrific.

Was it across the board and what --

In March, yeah.

And what, with the traffic still down, what do you account --

No, no, I'm sorry, traffic was up for May.

Oh, it was up for May.

Yes.

What -- do you think it was sort of a panic demand, once all the problems got -- everybody came out or do you have any --

Yeah, that's -- I think that's what it is.

When you say terrific, are you talking --

War has gone away as a concern, and the terrible winter weather that we had in the great part of the country has been cured.

Now, we're just left with dismal rain, but that's actually good for the market.

Because you can't go out and plant your flowers and play with your lawn and play tennis and golf, you might as well -- you can either go to a movie, there's not too many good ones out there right now, so the cheapest form of entertainment is drop into a sample home and look at some decorating.

If you quantify May, would you say that was up double digits?

Yeah, I think so.

Hold on.

As you -- you were relatively --

Definitely up double digits.

I think I said that on average, the traffic was up about 10%, on a same-store basis to last year, in terms of reservation deposits, just eyeballing this, they're up about 30% on average.

And this is right across the board?

This is pretty much across the board, right?

Yes.

It's a phenomenon that's taking place everywhere.

I'm hearing that, too, not to the magnitude you've spoken about, but I've certainly heard that.

Second question, you said that your average prices for the quarter came in a little bit of a mix, I'm a little confused on that.

Is this because you obviously know your average price of the homes coming in and if anyone -- if you're going to do anything faster, it's going to be the lower-priced homes.

Is this a surprise that you had on the amount of amenities being added?

No.

No.

The amount of the amenities are standard.

The amount of custom features that are being put on a home are not a surprise at all.

Where does --

Primarily a mix issue.

You have some houses you expected to settle that get delayed and some houses that didn't expect to settle get advanced and primarily for this quarter, it was a mix issue for the future quarters that we talked about, it's our change in expectations as to options that they've ordered and to incentives that we gave away.

Okay, thank you, guys.

Thank you, Tim.

Our next question comes from Michael Rehaut with JP Morgan.

Hi.

Good afternoon.

Hi, Michael.

A point of clarification first on the threat of 10% traffic in May and deposits up maybe 30%.

How does that translate or how has orders also kind of fared during May?

And then I had a follow-up.

Those are orders.

When I give you reservation deposits, that's beginning an order.

Okay.

And will February through April --

Say you have a good definition, a reservation deposit is a nonbinding, non-contractual expression of not interest, but willingness to enter into a contract.

Uhm-hmm.

Then you get a contract and then you get a settlement.

So those are the three stages in the life of a home.

Okay.

I guess I forgot the -- to reconcile to the terminology in the orders, closings and backlog, but okay.

And similarly with -- did the order trends follow traffic in the earlier part of the quarter in terms of being slightly negative?

Do you have slightly negative order trends February through April as well?

Reservation deposits in February, March and April, we were down in February, and traffic was also down, we were up and down in March and we were almost all down in March with one exception for traffic.

And in April, we were up -- up and down, in same-store comparisons of orders, and we were down in traffic.

So overall in April, you were slightly up?

No, overall in April we were --

In terms of orders?

Slightly down in reservation deposits and in traffic.

Okay.

And also, could you just remind us the year ago 2Q '02 community count and what it was at the beginning of fiscal '03?

And also comment on your going-forward for fiscal '04, what you expect communities to grow by and how that might affect gross margins?

Okay.

Let's see. '02, Joel?

April '02 was 166 communities.

All right.

Did you hear that? 166 communities.

Uh-huh.

In '02, April quarter.

And you wanted to know the beginning of the year?

Right.

170.

Okay.

At the beginning of fiscal '03.

Which is November 1.

176 now?

That we did.

And you wanted to know -- something about margins.

Right.

Well, you've given the guidance in terms of what you expect communities to get to by the end of this year.

And I was just wondering, in '04, you know, Steve before talked about margin expectations overall, and I was interested in that if you have a continued community growth in '04, if that would also have its effect on margins for '04, what are your expectations with regard to further community growth on margins in fiscal '04?

We have an expected continuing community growth, we better if we're going to produce all those extra units.

And as I stated previously, it will depend on the mix of deliveries.

We don't have a handle on the mix of deliveries yet going forward but we believe that each community will probably be more profitable than this year, but that the mix of communities will affect the overall margins for the company.

We've gone through this a couple times in the past but I will restate it, you obviously have some states and some geographic regions which are more profitable than others, so as you change your mix between states, you end up with an overall change in the gross profits of the company.

And we do not yet have guidance for you as to the mix of those units for 2004.

Okay.

Thanks very much.

You're welcome.

As a reminder, should you have a question, please press "star 1" on your push button telephones at this time.

Our next question comes from Richard Ferry with Delphi Management.

Please state your question.

Good afternoon.

Dick, how you been?

I've been pretty well.

Just looking at your closings, contracts and backlogs in the units column for the quarter, in the closings, the Northeast and Midwest were down, contracts in the Mid-Atlantic and Southeast were down, and the backlog for Southeast is down.

I'm wondering if you're seeing weakness in any of those areas in those categories or if this is a one-time thing and maybe you closed some communities and didn't open others?

I think that's more what it is, Richard.

If you give them to me one at a time, I'll give you my off the top of my head impression of the markets.

The closings in the northeast and the midwest.

The northeast is only lot-constrained.

The market is spectacular, it's a matter of getting the product to market but going through the regulatory process.

The Midwest, did you say?

Yes.

The Midwest, we've only got two communities in Chicago so it's anecdotal if it goes up or down by one or two.

We've only got two in Denver, if you count that as Midwest, I don't know if they do.

No that's the mountain.

Ohio, right, the Columbus market, eh, nothing great.

The Detroit, Michigan market has been very good.

Has been excellent.

All right.

And then contracts in the Mid-Atlantic and Southeast were down.

Contracts in the Mid-Atlantic were down.

If that's -- if that's down, it's only because of available product.

Joel, have you got another opinion?

Because that market is spectacular.

Yeah, it's not down by much.

Contracts were down 2% in units and 3% in dollars and it's a result of the winter weather in the Mid-Atlantic states in February, which really affected PA in Maryland the most.

And if I can, just interject, number of units were down in the Northeast, which is why you had settlements down in the northeast and it's an inventory issue.

But is Richard talking about contracts?

Contracts in the Mid-Atlantic were down because of the weather-related issues.

The Mid-Atlantic is -- is a spectacular market.

All right.

And the backlog in the Southeast was also down in terms of units.

That makes sense, it was a little slower.

It's down pretty substantially, it looks like it's down about 25%.

A little to me might be 25%.

Doesn't seem as though it's down that much off the top of my head, but it has been slower this past winter.

All right.

Thank you very much.

You're very welcome.

Our next question is from Tom Marsico from Marsico Capital Management.

Please state you question.

Hi.

Can you tell me about the loan-to-value you're seeing from new buyers this year versus last?

About 70% no movement from last.

Thank you.

You're welcome, Tom.

Our next question comes from Bill Nobler with [Inaudible].

Please state your question.

Thank you.

On the May 6 call, there was a question about your land holdings and I'm trying to get a feel as to how long your land holdings might be, are you or have you increased them in the last year or so?

Yeah, we've increased them a little bit in the last year or so, not as much as I would have liked to.

Does that answer your question?

Well, I've heard you have eight-year land holdings.

Is that true?

No, it's only true if, A you assume our deliveries will remain static and, B, you assume that you can divide the 41,000 lots approximately that we have by 5,000 and that every year is going to be even.

But that is not the case.

In some cases, we have much higher volumes expected to go out of the communities.

In some cases we have many more years.

And in some cases we have much fewer years.

And the 41,000 lots, is that -- how much of that is owned and how much is optioned?

Two-thirds owned, one-third controlled.

Okay.

One-third.

And I guess last question on the land, did you indicate that the values could be 400 million above your stated book?

Did I?

Where did I do that?

On the last call.

That was Tim Jones who you surmised it was between 4 and 500 million, the mathematics in the last conference call.

That was not us.

Wait a minute.

You put -- that's hearsay, that's Joel Rassman hearsay saying that somebody else said.

I can only say what I said and I don't think I said that.

Okay.

Are acquisitions a part of your philosophy going forward?

Well, we've only acquired three very small builders since our inception, and we're always looking.

We always run second or third.

Right now, we are talking to a couple of mid to small-size builders, and we'd like to acquire them.

I don't think we'd be terribly meaningful immediately.

It's not going to impact our earnings or lot availability.

We would do it more for entry into another market than starting denovo.

And also in the share count that you gave us in the third and fourth quarters, I assume that you are not reflecting or assuming any further buybacks in that forecast?

That is correct.

Right.

Thanks a lot.

You're very welcome.

Another question comes from the Internet.

Oh, it's Ray French at Strongbow.

Thank you, Ray. "Are you concerned that U.S. federal, state and cities' budget deficits -- I think that sums up the government, federal, state and cities -- will ultimately lead to higher interest rates?

Do you believe that the current market would be particularly sensitive to interest rates?"

Those are very good questions.

Yes, I am concerned about the macro economic picture, the budget deficits that are being run by all governments.

We, in the short run, will find this to be stimulating to the economy.

Money will be pumped in.

In the long run, these deficits have to be paid off.

And I think we are going to be forcing -- we will be forced to view some very major decisions and will be forced to, at some crossroads in the future -- now, I don't think it will be within a year but within two or three years, this is going to come home to us.

And surely if we keep on as a government, local and federal, borrowing, more and more, that there is going to be a higher interest rate.

That's what demand will do.

Right now, supply is keeping up with that demand for borrowing, but at a certain point if it just keeps up without any road map, to borrow a foreign policy phrase, as to how we get out of it, then the dollar would be, you know, less in demand and the interest rates would go up.

And how do I believe the current markets would be impacted by interest rate increases?

We did tremendous business at 8% and we did tremendous business at 10%.

But coming from, I think a seven-one arm today on a jumbo is four and seven-eighths, on a conforming is four and five-eighths.

If you bump that up, which I can see happening easily to seven or eight, I think it's going to take a bunch of people out of the market that would otherwise have been in the market.

And I do think that when you have interest rate increases that significant, you'll have a slowdown in the home-building business.

Were it not for the fact that demand so far exceeds supply, that it appears as though all that would happen is you might have a slow down in the increase in prices of homes.

In general, I think what will happen, and this is just one man raving, is that the economy will definitely be stimulated by the current tax program, and by the fed.

I think that stimulation will go through to the economy, I think you will have the pick up in demand in business, I think the consumer confidence will continue to increase, and you ain't see nothing yet, as Al Jolson used to say.

I think you're going to see tremendous price increase in housing in the short run in the next year or two because the supply is so constrained.

Then when the macro economic picture starts to slow us down again, as surely it will unless we correct these budget deficits, I don't think you're going to see a slowdown in housing, you'll see a slowdown in house appreciation, you won't get as rapid an increase but you will still have strong demand vis-a-vis the supply because the supply is so constrained.

Your housing delivery that was spoken of on Friday that you got that write up in the Times about and the Journal, remember, they're focusing on 1% or 2% increases.

We went up 2% over the last month.

We are selling at a rate that hasn't been seen since December.

Well, December isn't a decade ago.

Big deal.

If you take a look at housing starts, they're basically flat.

But they are bumping up against tremendous population increase and the increase is in immigration not in babies.

So I think the prognosis for the housing market is a very positive one.

Now, we at the higher prices being a luxury home builder, are going to be less impacted, but -- than those who are selling less expensive homes to people who are more constrained by their budgets.

But still it would have some impact because it's got to impact the daisy chain.

Because if you sell a little home to buy a big home, then you are impacted by the smaller, less expensive home market.

I'm sorry for giving you typical economist kind of evaluation there on the one hand.

On the other hand, but there it is.

Thank you, Ray.

Our next question comes from Carlos Riviera with Credit Suisse First Boston.

Please state your question.

Good afternoon, gentlemen, congratulations on a good quarter.

Thank you, Carlos.

Joel, just a quick question on the gross margin, if you adjust the margin for the right down, it looks like the margin was down about 30 to 40 basis points, was that more mix-related or was there anything else in there?

We had projected margins down 100 basis points for the quarter as I told you, we were very pleased with fact -- that was a mix issue.

And we were pleased by our ability to perform better than that.

But it was purely mix.

Yes.

Can you give me an update on what you have left on your share repurchase authorization.

9,800,000 shares.

We just refreshed it in March, the end of March.

Okay.

And just lastly, your guiding for about a target of 6,000 deliveries in '04.

What community count growth are you expecting in '04?

We don't have the total number of community count but the deliveries will be off of the community count basically at the end of '03 and we would expect to have roughly 185 communities at the end of '03.

Okay.

Thanks, guys.

You're welcome.

The next question comes from Alex Brown with Franklin Templeton.

Please state your question.

Good afternoon and great job once again.

Thank you.

Just a quick question regarding average sales prices in your Southwest division.

Okay.

I guess there were about 613,000, which is quite a bit more than you showed in the previous four quarters.

I'm just wondering if that's sustainable rate and is it just due to mix?

Yes is the answer to both I believe.

Okay.

And then in the West Coast, should we expect the average sales price to, I guess, come down a bit given that you were selling kind of lower-priced homes there as well?

Yes.

Yes, I think that's so.

Okay, great.

Thank you very much.

Thank you.

Our next question comes again from Timothy Jones with Waserman & Associates.

Yes, I said 400 million.

I couldn't stand being out on a line.

All right, I mean, I'm going to ask you again, five or six years ago, you said your land was understated by 200 million.

Then I went out of that business.

No, your lots have gone from 25 to 40,000 or something in the last five or six years, you got more approvals, which have increased the land dramatically, your prices are up 50% per home, you got 40,000 lots, if you put $10,000 appreciation, many of your lots are well over 100,000.

Would come out to the 400 million.

What am I doing wrong, Bobby?

Tim, your logic is impeccable, but it's your logic, not mine.

Logic is impeccable, indeed logic is either impeccable or wrong.

Well, in your case, I think your logic is excellent, but I want to reiterate that it is your logic and not mine.

You don't want to say --

You're regulated by Mrs. Jones and I'm regulated by all sorts of things, a couple of them are [Inaudible], I want to make sure I don't make any statements that I am not prepared to answer under congressional investigation.

So there you have it.

I've made my statement and you've made yours.

Who has a gun to your head?

Put some more statements.

I took the blame on it, it was my estimate.

Thank you, Tim.

If there are no further questions, I will now turn the conference back to Mr. Toll for closing comments.

Heather, thank you very much.

Thanks to all for listening.

Have a good day.

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.