托爾兄弟 (TOL) 2003 Q3 法說會逐字稿

Good afternoon.

Welcome, ladies and gentlemen, to the Toll Brothers third quarter earnings conference call.

At this time, I would like to inform that you this conference 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 now like to turn the conference over to Mr. Robert I. Toll, Chairman of the Board and Chief Executive Officer.

Please go ahead, sir.

Thank you, Heather.

Welcome and thank you, everybody, for joining us.

With me today are Joel Rassman,CFO, Fred Cooper, Vice President of Finance, Joe Sicree, Chief Accounting Officer, and Kier McCarron, Vice President of Marketing.

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

I caution you that many statements on this call are based on assumptions about the economy, world events, housing, and financial markets, weather and other factors.

Those performances are uncertain and could significantly affect future results.

We will hold the Q&A session after our presentation.

For those listening on the web, you can e-mail questions to rtoll@tollbrothersinc.com.

We'll try to answer as many as possible.

For those listening on the Internet, with the uncertainty of roving computer viruses, if you are experiencing any difficulties with the Internet, you can visit an alternative web site, which is www.companyboardroom.com.

Then type in tol, our stock symbol, which will allow you to access our web cast through another site.

Based on our record third quarter and nine-month results, we are on track for our 11th consecutive year of record earnings.

Based on our growing pipeline of new communities and lots, we see continued growth through at least 2006.

Third quarter 2003 earnings of 90 cents per share diluted rose 29%, versus third quarter 2002, and third quarter 2003 net income of $68.2 million increased 27%.

Nine month 2003 earnings of $2.23 per share diluted increased 12%, and 9-month 2003 net income of $166.4 million rose 11%.

Third quarter 2003 revenues of 6,933.7 grew 19%.

Did I say 6 million?

I meant $693.7 million, sorry, grew 19%, and nine-month 2003 revenues of $1.87 billion grew 15%.

Third quarter contracts of $952.7 million, the highest for any quarter in our history, increased 35% versus 2002, and nine-month contracts of $2.47 billion rose 18%.

Our third quarter backlog of $2.49 billion, the highest for any quarter in our history, increased 31% over 2002.

We believe the luxury new home market will continue to strengthen, given reports of an improving economy and the strength of current demand.

In 15 of the past 16 weeks, our reservation deposits have set same-store highs dating back 15 years.

The 16th week was the second highest total.

In the third quarter, we increased the lots we now control by more than 3500.

This raises our total to approximately 46,500 home sites.

Our growing pipeline of lots has enabled us to more aggressively take advantage of the strength of current demand.

We have been signing more contracts than we might have in the past when instead we might have slowed sales to ration our supply of lots.

This has translated into the record third quarter contracts that will fuel what we believe will be record 2004 earnings.

In fiscal 2004, we project a rise of approximately 20% in our new home deliveries, and we plan to increase our selling communities from 185 today to approximately 205.

With our expanding community count and lot supply, we believe we are already positioned for a significant growth for the next several years.

In order to support our growth program on August 13th, we raised an additional $86.4 million through a stock offering of 3 million shares.

By adding to our equity, we believe we now have the flexibility to increase our debt to continue to fund our growing land position as well as other opportunities, while still maintaining our investment grade ratings.

It was not an easy decision to raise equity with our p.e. multiple in the single digits and the stock prices of all public home builders apparently significantly undervalued, at least to us.

However, we believe that to postpone or forgo the numerous attractive opportunities we have in front of us right now would mean missing the chance to accelerate earnings growth in 2005 and 2006.

Now, everybody generally likes me to review the markets so I'll give you a quick overview of what I see in our markets. n New England, where we have seven communities, Massachusetts is excellent, Rhode Island is good to excellent, and New Hampshire is remarkably okay.

That's a recent phenomena for the past several years.

New York, we only have three communities right now.

They're excellent and we think the market is excellent.

Connecticut, where we have six communities, has been good to excellent.

New Jersey, where we have 15 communities, has been excellent although we're facing temporary inventory constraints in opening new communities.

Pennsylvania and Delaware, where we have 17 communities, have been excellent.

Metro DC., which includes northern Virginia and Maryland as well as suburban Baltimore is our largest market with 38 communities, and it has been excellent.

In North Carolina, we have six communities, in Raleigh, which has been good and two communities in Charlotte where we're not doing well, but I think it's our fault and not the market's.

So I can't give you a read on that market because I don't believe our experience is indicative, and we do hope to have that corrected within a few months.

In the Hilton head area of South Carolina, we have one community.

No models open yet.

Since we're new to the market, I can't give you absolute judgment.

We believe it's been soft.

And we believe things will pick up when our models open in late 2003.

In Florida, we have 16 communities, 8 on the southeast coast and 8 on the southwest coast.

Both coasts have been very good throughout this summer, which is unusual for this time of the year for that market.

In Michigan, we have 16 communities.

The market has been very good.

The Chicago market, I really don't have enough experience to tell you how, in our opinion, the market is doing.

We're too small to judge.

We have an urban in-fill job, which is good to excellent, and we have one suburban single condo job, which is just fair.

Columbus, Ohio, we have four communities, and we judge that market from our experience just to be fair.

In Texas, we have five communities in Austin, which is recovering, but still weak.

We have four in Dallas, which have been good, and one in San Antonio, where things are okay.

In Colorado, we only have two communities south of Denver, and the market in the last few months has been pretty good and appears to be getting better.

In Arizona, our community count just recently jumped this past week from 8 to 14, with the opening of our master plan Aviano at Desert Ridge.

The market has been excellent.

In Nevada, we have four communities and that has been excellent.

In California, we have 22 communities in three regions.

Palm Springs, six communities.

It has been excellent, which is saying a lot because summer is kind of uncomfortable in Palm Springs.

In northern California, which is the Bay Area for us, we have 10 communities and the market has been excellent.

Southern California, with six communities mostly in the metro Los Angeles area, also has been excellent.

Now, Joel, would you please do the numbers?

Thank you, Bob.

Our third quarter results were terrific.

Home building revenues were a record $679 million, as we delivered 1188 homes at an average price of $571,000.

The mix of units was slightly richer than estimated, resulting in gross margins of approximately 27.4%, which included write downs of about $2m.

Last year's third quarter write downs were approximately $1.6m.

Land sales were approximately $7.6m with a very high gross margin of 64%.

As we discussed in our last conference call on August 6th, this quarter's third quarter's land sales benefited from two very profitable parcels which were sold, while some of the lower margin land sales originally anticipated to occur in the third quarter have been delayed and will take place in the fourth quarter.

Other income of approximately $7m was higher than our guidance of $6m.

Other income included $3.5m of profits attributable to the sale of a small shopping center attached to one of our Florida communities.

Joint venture income benefited from the profit participation arrangements in our land sale venture from Era Energy in California.

SG&A, at approximately 10.5% of revenues, was 10 basis points lower than last year's third quarter and in line with the revised estimates we provided on August 6 of flat to slightly better than last year.

This quarter's SG&A benefited from the increased revenues we recorded.

Interest expense at 2.5% of revenues was lower than estimated, as more units delivered this quarter were on land which was in inventory on average for a shorter period of time than normal.

We would expect that fourth quarter interest expense will revert back to approximately 2.8% on average, as it has been for the last few years.

For the fourth quarter, we expect the range of home deliveries to be between 1,500 and 1,650 homes.

This would result in deliveries for the year between 480033 and 490088 homes.

We are raising our average delivered price in the fourth quarter to between 550 and $555,000, making our estimate for the average delivery price for the full year approximately $550,000.

We expect land sales to be approximately $4 million and other income to be approximately $3 million.

This is an increase from a previous guidance of other income of approximately $2 million.

We still believe joint venture income will be approximately $500,000.

Giving recognition to our better margins in the third quarter than originally estimated, we now believe gross margins will be 25 to 50 basis points higher than last year's fourth quarter, compared to the previous guidance of flat to 25 basis points higher.

We expect land sale margins to be approximately 20%.

We estimate that SG&A will be 20 to 30 basis points higher as a percentage of sales than last year's fourth quarter, which is the same guidance we previously provided you.

As I stated, we believe interest expense as a percentage of sales should be approximately 2.8%, consistent with what we've seen in the last few years.

As we talk, we have just launched a $250m senior debt transaction in a private placement.

The proceeds will be used to retire $100 million of our 7.75% senior subordinated debt due 2007 and for general working capital needs.

There will be approximately $3.3m of capitalized costs associated with the senior subordinated debt written off in the fourth quarter, which will result in a charge to earnings of approximately 3 cents.

The last component of earnings per share is obviously share count.

Based on yesterday's closing price of 2962, and what we believe will be an increase in share price for the rest of the year as investors focus not only on 2003 records but on last year's estimated record results, we expect that the average number of outstanding shares will be approximately 78.9m in the fourth quarter and 75.6m for the full year.

As promised, I will now provide some guidance for 2004 and beyond.

We will update this guidance again in our year end conference call in December.

In 2004, we estimate we will deliver between 5800 and 6200 homes with a midpoint of about 6,000 deliveries.

We estimate that the average delivery price will be approximately the same as this year's, between $545,000 and $555,000 dollars per home, although there may be some large variations from quarter to quarter.

We believe land sales will be approximately $20 million with gross margins of about 25%.

We estimate other income at about $18 million.

Based on projected lot sales and our joint ventures with Era Energy in California and our Hilton Head joint venture, we expect to earn about $5 million in joint venture income from sales of lots to other builders.

Based upon the mix of projected closings, it appears that gross margins will be flat to 35 basis points lower than this year.

We believe SG&A as a percentage of sales will be flat to 20 basis points lower in 2004 as compared to 2003.

We estimate that interest expense will be approximately 2.7%, a slight improvement of revenues, a slight improvement from 2003, and with a tax rate of approximately 37% for the year.

We believe that in 2004, investors will start focusing on what we expect will be our continuing growth in 2005 and beyond, and anticipate that the average share price shall increase, making the average outstanding shares for the calculation of earnings per share in 2004 about 82 million shares.

We believe we will continue to see growth in 2005 and beyond.

Based upon the communities' open, communities in our pipeline and based upon current economic factors, we think we can achieve 20% growth in deliveries in 2005.

And over the next several years, growth of at least 15%, if not equal to the 20% plus growth we've enjoyed on average since going public in 1986.

At this point, I'd like to turn it over to Bob.

Thanks, Joel.

Heather, I'll take any questions.

Thank you, sir.

The question and answer session will begin at this time.

If you are using a speaker phone, please pick up the hand set before pressing any numbers.

Should you have a question, please press star followed by one on your push button telephone.

If you wish to withdraw your question, please press star followed by two.

Your question will be taken in the order it is received.

Please stand by for your first question .

Our first question comes from Joseph Sroka with Merrill Lynch.

Please state your question.

Hi, good afternoon, everyone.

Can you kind of, Bob or Joel, go over what your strategic thought is in deployment of cash flow?

Certainly, end of last year and earlier this year you have been repurchasing stock.

Certainly, you went over why you felt you needed to do the equity issue.

Would it be fair to assume that the bulk or all of free cash flow from here on out is going to be directed towards land purchases to develop new communities, or do you still feel it will be a balance to some other areas?

Well, I think you're going to see a balance.

We will have a significant buildup in cash if we don't direct that cash to the acquisition and development of new communities.

And we always want to operate with a significant cushion of available cash in case a great deal comes along, which is why we have done these financings in the last couple of weeks.

We do not have this new money earmarked for deals that are under contract.

Rather, we have this money in case we come across some deals that we think are spectacular and we want to take them, or in case we haven't taken deals and the market goes to hell.

So the cash that will be developed through the ordinary cash flow, we would just add to the cash we've raised and just build up a larger nest egg, which we will use if we see the right kind of deal.

Okay.

And then Joel, did I hear you say you were estimating 82m shares for the year in 2004?

Yes.

What type of stock price appreciation would cause your share count to be that high?

We would like to believe that based on the projections, we just basically gave you would see share prices in the $40-plus-dollar range, maybe $45 or 50.

So $45 to 50 with your Black Shoals method is going to get you the 82 million on the diluted share?

An average of 40 -- an average of 40 for the year would get us there.

Okay, thank you.

You're welcome, Joe.

Thank you.

Our next question comes from Ivy Zelman with Credit Suisse First Boston.

Please state your question.

Good afternoon, guys.

Just to touch on what you were mentioning there when you say you'd like to have the cash there in case an attractive deal comes along.

Are you looking solely at land deals here or is -- when you say that, do you also include acquisitions as a possibility?

Acquisitions are always a possibility.

I'm not earmarking this money for acquisitions or for land deals, but both are possibilities.

Did you get the sense before doing the equity deal that- you probably had this bond deal in mind, that if you had done the bond deal without the equity deal that you would have looked at a downgrade, or is that- was that your opinion?

My opinion was that our leverage was at a point where one of the rating agencies might have looked at putting us on a negative watch.

The other agency was talking to us about going on a positive watch.

So I didn't want to take the chance of having any one of the agencies move us to negative, so I thought we would sell the stock to increase our equity and make it easier to -- on the rating agency so that we didn't have to risk anything.

Fair enough.

Could you just walk us through, to make sure we're on the same page, the way that you calculate the same-store orders that you've talked about, in setting the records week in and week out?

Sure.

Oh, I'm sorry, I thought you wanted me to listen to you.

No, no, I just want to make sure we are looking at it the same way you are.

Okay.

What I'm looking at are reservation deposits, not agreements of sale.

We feel at Toll Brothers that agreements of sale are kind of chancy one week to the next - three couples have a fight, somebody is transferred, that affects your agreement of sale count and a community for the week.

We think the market is a better judge by the reservation deposits that are put down.

Our fallout from agreements is about 7% traditionally and right now running a little lower than that.

Our fallout from reservation deposits is about a third, 40%.

When you say deposits, are you referring to contracts?

There's a refundable $1,000 to $5,000 deposits that are expressions of interest, more than interest because that's a lot of dough.

Then we draw the contract and they sign the contract and approximately 10% goes down, so the reservation deposits are a lot less.

But they are a better indicator of the market.

And what we do to develop same-store info is we look at our community count now and our deposits now, and we have a pretty set method of what counts as a community.

If there's only two or three lots left in the community, we don't count that as an active community.

So we have a method of arriving at the community count for the year, and then we divide, of course, the deposits by the community count and we go back and we do the same thing going backwards all the way to 1990.

And in that method, we can then judge how many homes we're selling per community.

Okay, so you are really looking at basically deposits per community?

Right.

Is there a reason why you wouldn't look at orders when orders is kind of the final step or contract?

Yeah.

Orders are too flaky, orders being agreements of sale.

So more people back out of orders than deposits?

No.

I said that earlier, too.

I apologize.

We lose about 7% of our contracts.

We lose about- contracts are orders.

Right.

We lose about 40% of our deposits.

But the deposits are a firmer -- are a more definite expression, in our opinion, of the market.

Okay.

Whereas, contracts are an indication of how many people had a good meal and decided to go through with what their initial impulse was, as opposed to those who got cold feet.

Okay.

And that can vary week to week pretty strongly.

That's why we go by reservation deposits.

Okay.

Just lastly, can you break out for the quarter what the breakout was between cash financing, fixed rate and adjustable rate?

No, I can't.

I'm sorry.

I don't have that.

Do you, Joel?

We were told -- my information is probably a month old, but we were told we were running about 30 to 35% ARMS before the interest rate spike.

Excuse me, would you guys ask Chris to call Don Sammon?

We can get an update on that information right now.

Would you do that?

Do you know what the question is, Joe?

Thanks.

I'm sorry.

Go ahead.

No problem.

Let's just assume 35% is the number.

How high have you ever experienced that, being in maybe a rising rate environment?

I don't know.

Okay.

Well if you can get that to us, that would be great.

It's the recollection that when interest rates were very high, that I thought we were doing numbers of 40 or 50% of ARMs.

In fact, we had some great programs, but I'm not sure.

Let me see if I can get the head of our mortgage company on the phone and he can tell you.

I appreciate that, guys, thank you.

You're welcome.

Thank you.

Your next question comes from Michael Relot with J.P. Morgan.

Please state your question.

I just wanted to make sure I understood right on Joe's question earlier on the share count assumptions.

You said for 2004, your assumption was an average, to get to the share count that you discussed, was a $40 share price.

Average.

That means it's --

Average?

Okay.

Maybe a little bullish, but then again may not be.

You never know.

Never know.

For the fourth quarter, the average share price?

$32, I think.

$32, okay.

And if you can just refresh us.

There's been some questions on cost structure of the builders, and just generally, given your dependence on raw materials, what the change in lumber prices, how that might affect you and what -- I guess the first part, you know, what percent of your cost is on the raw materials and specifically lumber, and second, if you do any hedging or other things to insulate you from changes in prices?

Hedging, once upon a time we were the largest buyers of lumber futures in the whole country.

I got a call once from whoever runs that business from the federal government's point of view, who wanted to make sure that I was aware that if I didn't close out a position I was going to have railroad cars all the way from California to Philadelphia dumping lumber in my yard.

I said, no, I'm aware of it.

We're just taking it down to the wire.

For the last, oh, I guess, couple of years, we have not significantly hedged because we run our own lumber distribution facilities, and we make long-term contracts from the suppliers on the west coast, both Canada and the United States, to supply us with lumber and we ship our lumber directly to our yards in the east by rail as opposed to by boat.

This helps to keep the lumber dry.

And it gives us better quality material.

Joel?

Most of the -- most of our production for the next six months is substantially hedged with our long-term contracts with hedges, and the price increases would have very little effect on us.

And could you give us an idea, you know, roughly, you know, in terms of the cost structure, what is, you know, total raw materials in terms of percent of sales?

And even more specifically, lumber?

Is that something you could help us with?

Mike, I can't give you that, but on- I asked about lumber this morning.

You know, lumber is in a lot of things that you don't think about lumber because it's in windows, doors, and it's in press board that you use in OSB and a lot of other things, that if you added everything together, you'd probably get a number between 20 and 30,000, maybe $35,000.

But not all of those products have been affected by price increases, so we wouldn't expect them to --

I was talking to Tom about this lumber business.

I wanted to make sure that we were covered.

He said, the funny thing is, that the structural lumber hasn't been going up as rapidly or in a meaningful fashion, even, compared to the OSB and the plywood.

OSB is a strand board made up of a lot of glue and stuff that falls on the plant floor.

Particle board.

Yeah, particle board.

It's funny that the trees are plentiful but the plywood and the strand board are in short supply.

When I asked the question why, I was told by my supply people that because the federal government bought up a bunch of car loads of this product, they shipped it to the Middle East.

It created a temporary shortage.

Don't know if that's true.

I doubt that.

Thank you.

You're welcome.

Thank you.

Our next question comes from Myron Kaplan with Kaplan, Nathan and Company.

Please state your question.

Hi, guys.

Hi.

Another really good quarter job well done.

Thank you.

I'd like to refer to a sentence that you have in this morning's release, especially since, in the light that the industry's attracted a lot of the negative attention since the rates have begun to rise precipitously.

That "we believe the luxury home market, new home market will continue to strengthen, given the reports of the improving economy and the strength of current demand."

Right.

The question is since the strengthening economy has been the enemy of bond prices and rates have risen, and, according to the consensus, the demand has been artificially fed by artificially low rates, how can you be sure that this improving -- so-called improving economy is going to be beneficial to the luxury home markets?

That's a good question or statement, of course.

We can't be sure of anything other than death and taxes as the man said.

It's just our prognosis.

We believe that a 6% interest rate, that you - common sense would tell one, could only be secured in times of a slower economy with higher unemployment, and [diminous] or inflation or even deflation is not as good a time for our business as an 8% mortgage with greater job count and a decent reasonable amount of inflation that spurs the desire to purchase.

So it's just a common sense conclusion.

It may not be common to all but it's common us.

It's our conclusion that we're better off with a higher interest rate but a better economy.

Evidently, you're also enough convinced of this to be able to take a step to add significantly to your capital investment in home sites and potential home sites.

That's right.

We added 3500 home sites while we were delivering a lot of home sites.

So our net additional home site count has gone up.

You're absolutely right.

But I'd like to just finish this off and just say, well, what's your opinion of what level of mortgage rates would it take, in your opinion, to substantially muffle or suppress, let's say, to quote, the new home demand for your product?

Because we're coming from low numbers, we're going low to high, I would think that you'd have to stay probably in the eights.

And when you hit nines, you'll probably get a market that would say, wait a minute, we're not going to sign up for that, let's hold off and wait for things to return.

Just as all the bond buyers, when they could get 8% on a muni (ph), stopped buying bonds and, you know, the bond market languished.

Finally, they came back in at three, four and five.

In reverse, you have the same thing with the mortgage market.

There will be a period where the market will abate in demand tremendously when you hit a number that probably is nine.

And if it stays at nine for six months, then I think the market will come back in, because when we hit nine, coming from 16 in mortgage rates, as a matter of fact, 16 and three quarters as I recall, in this glorious stage of yesteryear, when we hit nine, we were doing a land of office business.

It was tremendous.

So I think it depends very much where you are coming from because we are coming from very low rates.

We'll probably be able to sustain this demand in the eights, but I see a temporary shutoff in the nines if it hangs there.

You also show moxie by predicting that you're going sustain growth compounding for three years.

This is really bold.

Well, we feel- you know, of course, we can be wrong.

As a matter of fact, we definitely can be wrong, but we feel pretty secure, recognizing the demand in the areas where we are accumulating these lots.

May not be able to raise the price every week, but you give me a couple hundred acres outside of Chicago, L.A., New York, Boston, Baltimore, Washington, etcetera, and I don't care how bad the economy gets or how high the interest rates go, we're going to be able to sell those lots.

Although, as I said, we may not be able to raise the price every week.

We're still going to have a good time of it.

And the reason goes to the demographics.

It's somewhat funny that the papers quoted yesterday and the day before that we had the highest home sales going all the way back to 1975.

You know, we have 60m people at least, probably many more than we had in 1975, and they go back to a 1975 quote.

If you looked at home sales per capita, I think you would see that there is a tremendous constraint on supply, which is why demand appears to be so great.

Well, keep it up.

It makes wonderful reading.

Thank you.

Our next question comes from Greg Nashville with Deutsche Banc.

Please state your question.

Good afternoon, Bob and team.

Bob, I'm just curious.

I want to go back to the equity market for a moment.

Sure.

Obviously, your earnings and retained earnings and, therefore, your equity capital base, are advancing at a rapid rate, $68m in the quarter.

And I just want to understand. given that condition and, therefore, your greater borrowing capacity associated with that condition --

Right.

Of the, you know, the reason for the equity issuance at this time?

Unless there were some opportunities which are, you know, very meaningful and request that you have a lot of dry powder.

No, Greg.

The answer is that we had availed ourselves of the opportunities already and wanted to refill the gun so that if all the bird leapt out of the bush, that we wouldn't be pointing an empty gun at it.

You follow me?

Mm-hmm.

That's the explanation.

I understand what you are saying.

If you are bringing in $68 million, why go do an equity deal for another $87 million?

Why not just wait a couple quarters?

Right.

The answer is because I want to make sure that, to the best of our ability, at any given time, we keep enough dry powder around here that we don't get caught short.

Mm-hmm.

And so that's why we raised the equity and that's why we did the bond financing that we did today.

Okay.

Second question, Bob.

If memory serves me, you guys haven't had a down year, nor have many of your peer companies, had a down year since '94, '95.

And so you've had tremendous growth, You've had that growth, you know in 2001 through a variety of challenges - 9/11, equity market meltdown, so forth.

I'm just wondering, this is the first time in my memory that you've actually extended your earnings visibility thesis, you know, beyond the next 12 to 18 months.

And I'm just wondering, with respect to the, you know, the timing of that statement after years of phenomenal growth, what gives rise to that higher conviction level today as opposed to 12 months ago or 24 months ago, given the growth that you demonstrated during those intervals as well?

Joel?

Don't you love that, Joel?

We constantly monitor where we think we're going to be in the next year and the year after that and the year after that.

We do internal projections, we make projections to the board.

We monitor how good we are against those projections and we monitor the status of the approval process going through.

We're pretty comfortable that we have a pretty good handle based on today's economy and the communities we currently have open.

We have a lot of communities just opened and a lot of communities just getting ready to open that we can get some greater visibility for 2005 because of the master plan communities, and the longer lead times of those master plan communities provide us than we may have had in the past.

We've been ramping out master plan communities now for the last three years.

We've now got a pretty good number of master plan communities out there.

It gives us a chance to be a little more comfortable in that visibility.

I guess one other related question to that is, and I guess I'll borrow from the semiconductor industry.

If you sort of look at the book to bill ratio, and here I'll use book as a new perspective buyers of Toll Homes, luxury buyers and I'll use bill as those who have already purchased the homes who are no longer in the game.

You seem to be implying here that the rate at which new entrants are entering your target market are advancing at a much faster pace than the pace people are falling off because they recently purchased homes.

I mean, the incremental change is widening.

That's correct.

Rather than narrowing.

Am I --

That's right.

It's the demographics.

That's what we believe.

I mean, 30 in the last ten years, $30 to 35, additions to the U.S. population.

Two-thirds are immigrants.

So we're not depending on babies for purchasing these homes.

These are people that if they could, would purchase a home now and they're going to work very hard and diligently, the record shows, in order to be able to get their piece of the dream.

And that gets that daisy chain moving up to us.

The end of the food chain, we hope.

And we believe that that will not only continue but will expand.

So, Bob, and I might have asked you this on the last call as well, if you look at each sub-segment of the market that you serve, and if, you know, Phoenix is doing 30,000 permits, if your price point and/or product profile had, five years ago, been 1% of that market or 2% of that market, is it now 3% or 4% of that market or 5% of that market?

I mean, the market itself isn't really expanding appreciably.

It's been a strong market but it's also been a static market level.

I can't give you, unfortunately, a mathematical answer to your question.

I can only state in generality, In general firms, that the thesis that you briefly described is our thesis.

And we think can you prove it by going out and looking at - an outstanding example would be Las Vegas.

I mean, you would be hard pressed to five, ten years ago, have given a house away for $250,000.

Today we're selling $1 million homes in Las Vegas, and a bunch of them.

We're currently sold out in two communities.

Not because we don't have more lots, but we have a 13-month backlog on $800,000 and million-dollar homes in two different communities in Las Vegas, which was, as a stated earlier, known for its $125,000 houses.

I think this is taking place in Phoenix and in all other markets as well.

In addition, I think we're taking market share.

If you use the example that you gave, which was Phoenix seven years ago, which is 30 some odd million dollars and last year $150 million, assuming that --

And you ain't seen nothing yet.

Right.

And we don't have all of the offerings open yet in Phoenix.

So I think we are continuing to see the demographics.

The increasing affluence of the $100,000 households eight times quicker than average household growth, and the aging of the baby boomers all favor us and all end up giving us the opportunity to grow in the newer geographic area as well as our existing geographic areas, and new ones we've identified.

So it well may be that in the simple target example I gave, you are hypothetically 2% to 3% of your target market is in any given MSA. .

It may well be that, number one that assumption is low.

Maybe it's closer to 7, 8, the 9, maybe even as high as 10 percent, and it's growing at a rapid rate?

It's definitely growing at a rapid rate.

And I don't know all of the answer to the questions as to what% of a particular market is the $500,000 buyer.

I know in the Philadelphia market, it's got to be 7% or 8%, at least.

I only know that because I live here.

And I lived in the New York area sometimes and that's definitely the case in the New York area.

I don't know what the percent percentage is in Phoenixm but it's definitely increased.

Great.

Thanks.

Thank you, Greg.

Thank you.

Our next question comes from Chris Akian with Slesser and Associates.

Please state your question.

Gentlemen, could you address your dividend policy, especially in light of the recent tax law change that puts dividends in capital gains on favorable -- comparable footing, and also vis-a-vis your own cash flow?

Sure.

Since we just sold equity and floated bonds, we would think that we could do more with the money inside the company than our shareholders, of course, we're making a judgment for our shareholders could do with the money outside of our company.

So our policy is, at least in the short run, for the next year, it would appear not to issue dividends.

On a theoretical basis, of course, a new tax policy makes dividends a lot more attractive than they have been since taxes were put in.

So that's just a theoretical answer.

I think dividends certainly make as much sense now, almost as much sense, perhaps, as buying back stock, whereas that wasn't so earlier.

I mean, I guess wouldn't you think that it would give you a little bit better imprimatur in the market in terms of, you know, going concern nature of the company?

I don't think so.

I think most people are pretty hip on this stuff.

And if we're to do a nickel dividend, I don't think it would make much of a difference.

This may make a difference the wrong way.

Okay.

Thank you.

You're welcome.

Our next question comes from Timothy Jones with Glassman Associates.

Please state your question.

Afternoon.

Hi, Tim.

How are you?

Two questions.

I don't know how many years but five, six years you guys have sort of, you know, every beginning of the year you've warned on gross margins and the same story every time.

A greater proportion of the new areas which you weren't quite sure of the margins and also perhaps going more into a new product line.

Every time I don't think you've headed down the gross margin year in those six years, if I can remember.

Why are you saying flat to down this year?

Joel?

We do community by community projections, mixes change a little bit.

We have raised our guidance for the fourth quarter.

We have taken into consideration the results of the third quarter and fourth quarter into looking at next year, and this is our best guess.

That's the exact same thing you said for the last six years, Joel.

I can't answer whether it was six years or four years.

Well, you know what it is.

It's at least four.

This is our best guess.

Slightly flat to slightly down margin.

Okay, Joel.

Let's go another time --

Have you seen the cowboy movie where the guy says, are you calling me a liar? [ laughter ] Joel's doing the best he can.

There's plenty of acorns in those cheeks and I know it and you know it.

Anyway, the second question.

You know, two weeks ago, three weeks you said our estimate for next year, I think, was 6,000 units, 3.1b of sales which came to 520,000 per unit which I know, you said plus.

If you are now to 550, that's another roughly $200m.

That's correct.

Right?

That's correct.

It's 180 for government work.

We raised the guidance on the sales price of our houses.

By about 200m.

By about 20,000 a house.

Okay now.

Secondly, your incremental margin after taxes is roughly 10%.

Would you agree with that?

Incremental?

I guess if you say it is, it is.

What's your margin?

I don't know how to define --

Anyway it comes out to 20 cents more, Joel.

What am I doing wrong per share?

We'll bring it down to the bottom line.

Oh, I see what you are saying.

If you are going to do 200m more and you do roughly 10% incremental you say your margin was 7% or something.

You make 10%.

That's that.

What am I doing wrong?

I think that we would make more money net on the incremental.

What am I wrong with the 20 cents?

As compared to what?

Compared to the 3.1.

And 3.3b.

The street estimates were roughly $3.60 per share for next year.

I believe if you do your current guidance you'll be substantially higher than that.

Of course.

So I think it's been --

You do 20% on what you are going to make this year, it's over four bucks.

It doesn't take a rocket scientist.

Your estimate.

We want to you do your own estimate.

All right, Joel.

I'll let you off the hook.

Thank you, Tim.

We had a call from Alex Bron.

The fist question was, what is the breakdown of lots owned and controlled?

Approximately 28,000 lots are owned and about 18,500 lots are optioned.

We answered the question about gross margins already.

We just did it, and we do not have the breakdown between inventory, work in progress, model tomorrows and land owned.

We give that out when we do a filing of 10 q.

We don't have all of the data of that yet.

Thank you, Joel.

And thank you Alex Baron.

Thank you.

Our next question comes from Tom Geharty with NTBInvestment Advisors.

Please state your question.

I as was amongst the many people surprised by the equity offering.

Given that you don't seem to have something hot on the burner that you need to use the money for, can you give us some insight into the 20 or -- excuse me, the 3500 lots you acquired in terms of where they are and why it is that you purchased such a large amount of land in the quarter?

Well, that, remember, is a large amount of land.

That's net land.

If you deliver homes and replace them, you would have no more additional lots in dry powder, so to speak.

So it's more than the 3500 that we purchased.

We just have the number of lots in -- I mean, available to us go up.

Do you follow what I'm saying?

Yeah.

So you purchased -- so you purchased even more than that?

Right.

But what was the opportunity that created?

I mean this is a lot more land --

I don't have an answer for that.

I have it on my desk but I can do a little from recollection.

It was spread around the country.

We have some in California, some in Florida, some in Philadelphia suburbs and some in New Jersey.

It's spread well throughout the country.

It was just a lot of very good opportunities that we saw that we thought we should avail ourselves of. and in some cases have a quicker turn around into the market and some of the other jobs we may have done.

Is there any breakdown between what master plan communities would be as a part of that versus smaller developments?

I don't have it.

We do have it someplace but I don't have it.

Thank you.

You're welcome.

As a reminder, ladies and gentlemen, should you have a question, please press star followed by one at this time.

Our next question comes from Jim Wilson with J & P Securities.

Please state your question.

Good morning, gentlemen.

Bob.

Hi, Jim.

A couple of quick things, because you've answered a lot of questions already.

As you look forward in the mix of business, and even, Joel, going back to the average price comment, is there any material change looking, you know, much farther out than the next three to six months in terms of expectations of geographic mix of deliveries, or even geographic rollout of communities?

Did you look into next year and into '05?

I can see some additions from additional work coming in from urban infill.

We'll probably get involved in some high rise stuff as well both in Florida and in urban areas.

So that would be new.

Otherwise, nothing that I can think of.

We have a little bit more, as we alluded to in the conference call, of opportunity in Arizona.

We have a net opening already of communities.

We haven't seen any revenues of those yet, but they will hit next year.

In general, we think, as we look at it, the mix between areas we've been in over more than ten years and areas we've been in less than ten years will roughly be the same.

But we'll have some mixed differences between states.

Okay.

And then, secondly, is, as you sort of think of capital deployment going forward in your current land supply, would you expect the base of lots as you look toward the end of next year and the following year to either stay relatively steady or grow less than it has in the last two to three years, given how large the inventory you currently have is, and some of the changes in local community development?

Or are you still planning on investing just as much as you have been in the last two, three, four years?

I don't know that the amount of lots as a percentage of the business done has really changed that much.

As your revenue line grows, if you are going to stay in the same proportion of available lots, your available lot count would have to go up.

I would see it staying approximately the same on a percentage basis.

Okay.

All right.

Fair enough.

Thanks.

Thank you.

Our next question comes from Steve Fockens with Lehman Brothers.

Please state your question.

Good afternoon, guys.

Just a quick follow-up, maybe, on Greg's question earlier.

Maybe look at it a little differently.

If you guys do 15% closings through '06, you are at like 8,000 units.

And I think today, the market above $300,000 in the U.S. is about 200,000 homes or more.

So if you assume by '06 that the market's only half as big and you are at 8000 units, you are still only 8% of the, call it, higher end home market.

Is there any reason you couldn't have said maybe 2008, 2009, that you thought you'd keep growing?

That would have been --

Just hypothetically?

That would have been too hypothetical.

What we're basing our prediction on is deals in pipeline, plus a little more that we feel was very reasonable to assume.

But we didn't want to speak theoretically, because if we did, we could say forever, and nothing's forever.

So not to harp too much on theoretically, but have you guys ever thought about is there a certain size you could get before you really could not get any bigger ,or is that too far beyond where we are now to even want to think about?

No.

What we have thought about, how big can we get, and if we infiltrate - I guess that's the wrong word - but if we do as much business in our new territories as we do in our more mature territories, this company would grow about 2 1/2 times what it is.

That's without expanding to cities that are good cities that we are not in yet, such as Minneapolis.

Is that 2 and a half times based on roughly 6, 4 or 5 this year?

Either way--

I'm sorry, Fred?

3% of market share.

Fred says if we did 3% of market share and all of the territories that we are in, markets we are now in, we'd be doing 13,000 home sites.

No matter how you slice it it's a lot bigger than that.

And that's just growing with the product that we currently offer.

If we start -- if we expand our product to include high rise, inner city, completely different markets, there's room for a lot more expansion.

Okay.

13,000.

Great.

Thank you very much.

You're welcome.

Our next question comes from Bill Mapler of Atlanta south.

Please state your question.

Hi.

First of all, congratulations on a very good quarter and a very good outlook.

I, like everyone else, you know, have difficulty grasping why you would sell equity at this point.

One of the questions I have is, you gave a very detailed forecast for 2004, at least to some extent.

And, you know, you used 82m shares and when questioned, you said that assumes the price of $40.

Now, why would you, you know, make the assumption of 3m more shares on a $40 price target if you are willing to sell stock at $27.5?

28 and a half plus, I believe.

Okay.

Who's counting?

Joel?

I think that we looked at it in a way of fueling off the continued growth at higher rates in the future and positioning ourselves with the additional amount of money set aside for additional opportunities.

We've increased guidance to you today by taking you up with our visibility into 2005, based on the communities, partially of the 3500 home sites that we have under control, but in 2005 at 20% growth in 2005, and we've given you visibility into 2006, also part of the 3500 lots are in 2006.

And we think that we were doing a service to our shareholders by growing the earnings at a faster rate and that the earnings per share will be higher as a result than if we passed those opportunities by.

Well, you know, continuing on that subject, in terms of your so-called dry powder, I believe with the stock you sold, you have almost $250m in cash, and in addition, you mentioned that you're doing this private placement debt offering?

That's correct.

250 and calling in or retiring 100m.

Right.

So I guess your dry powder has now increased to almost 400 million, let alone other borrowing means.

That's correct.

Right.

That's a lot of powder.

Yeah.

It really feels like you would like to make an acquisition, not just purchase lots.

I can answer you with no fear of losing sleep that we do not have any major acquisition on the horizon.

We have, you know, probably will have a couple of small acquisitions, but we have nothing major on the horizon.

Joel?

Yeah.

I think that what you're losing is, we have some of that money had already been before the 3500 lots and the new opportunities we see would be allocated to existing drops that are opening up.

So --

So we get your point, and maybe you would have done it differently and maybe would you have been right, but this is the best guess that we could take.

Well, considering everything, I certainly would have done it differently, considering the low valuation, the price to book, the land you control.

It strikes me that it was not an opportune time.

But I hope you make all your numbers.

Thank you very much.

Thanks.

Appreciate it.

Thank you.

Our next question comes from Rick Murray with Raymond James.

Please state your question.

Good afternoon, guys.

Great quarter.

Thank you, Rick.

I was just curious if you could clarify for me the 20% growth rate anticipated in 2005, or if possible, I should say, in the 15% growth there after.

Is that in reference to deliveries or is that earnings?

That's revenue deliveries.

We don't have a handle on--

Revenue growth?

Yes, revenue growth.

I don't think we limited ourselves to 15% there after.

We said at least 15%.

Okay.

And would there be any reason to think that earnings wouldn't be able to grow commensurately with those growth rates?

No.

Okay.

Excellent.

Thank you.

There'd be no reason to think that it would have to, either.

You know, both sides are true.

Thank you.

Our next question comes from John Kasprzak with BB&T.

Please state your question.

Thanks.

Good afternoon.

Can you tell us the inventory of homes for the company at the end of the quarter?

If you have that number.

Do you have that number, Joel?

We have a backlog of homes of 4400 homes in backlog and we have very few unsold homes, if that's what you're asking.

Right.

Unsold inventory.

Unsold inventory?

We have limited.

Other than the multi-family communities, we really don't have homes that are completed.

With 12 and 13-month backlogs of homes sold, we would like to get more spec inventory, as it's known into the line, but we can't.

We're having enough fun delivering what we've already got sold.

Okay.

And secondly, the growth in lots that's been discussed in the call here, were any of those lots in new markets in which you currently don't operate?

Let me see.

Yes.

Reno we have two communities that will be kicked off shortly.

There's no other market that I can think of.

No.

Okay.

No, no other markets.

Great.

Thanks a lot.

You're welcome.

Thank you.

Our last question is a follow-up from Chris Akian with Slesser and associates.

Please state your question.

Yeah.

I had a question, you know, in the footnotes of your stockholders equity section, you talk about there's an agreement with the company to repurchase stock from in the event of the death of either Robert Toll or Bruce Toll.

It references that the agreements expire in October 2005.

Is there any consideration being given to extending those agreements at all or where do you guys stand on that?

Does that go back to the $10m life insurance business?

Yeah.

That's a long time ago in a distant galaxy when we practically got started, I think.

Well, we had been in business enough years to be talking about $10 million.

Bruce and I agreed to take out life insurance policies on each other, and to use proceeds to buy stock back so that one of us didn't end up in partnership with our wives and the other's wife.

That was long before we were a public company.

The last we did a deal, if I may.

There was another?

Yeah, we changed it, Bob, if I may.

Go ahead.

There was some concern expressed by some investors which we responded to, that if something should happen and one of them had to -- one of the families had to sell some stock, that there would be a lot of stock dumped on the market when we were very small capitalization.

So we put in insurance to protect the shareholders from shares being dumped on the market.

Oh, yes.

In case of somebody's death in order to pay death taxes.

Obviously we've become a much bigger company and the amount of stock we'd be talking about is much less.

I don't believe currently there is a need to keep the policy into place, but a year from now or two years from now when it comes close to having to look at it again, we'll look at it.

I think you should.

I've dealt with a lot of private companies and I can certainly understand the need for that, or even when you are a small public company, but now that you are a major corporation, you kind of read through that and it looks as if, you know, you guys have kind of a, you know, one deal that's good for you and, you know, nobody else, obviously, you know, has that deal.

If they were, like, a big institution or something.

I think it would be wise to, you know, maybe reconsider that when it expires.

Well, thank you very much.

Thanks, everybody.

I appreciate your continuing interest, good, bad or indifferent.

We still very much appreciate your following us.

Thanks.

Heather?

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating and have a great day.

All parties may now disconnect.