托爾兄弟 (TOL) 2003 Q4 法說會逐字稿

Good afternoon and welcome ladies and gentlemen to the Toll Brothers, Inc. fiscal 2003 year end 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 now like to turn the conference over to Mr. Robert I. Toll, Chief Executive Officer and Chairman of the Board.

Please go ahead, sir.

Thank you, Heather, welcome everybody.

We've got approximately 140 people signed up for the call today.

I'm pleased to see that there's so much interest.

With me are Joel Rassman, Chief Financial Officer, Fred Cooper, Vice President of Finance, Joe Sicree, Chief Accounting Officer.

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 whose performance is uncertain, and which could significantly affect future results.

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

For those of us sitting on the Web, you can e-mail questions to rtoll@tollbrothersinc.com.

That's rtoll@tollbrothersinc.com and we'll try to answer as many as possible.

Before I get started, after noticing -- noting what happened in today's stock market with the home builders and yesterday's, after Hovnanian release, we say around here that we're pleased that we only went up, what was it, 19%?

Thirty-five percent for the quarter.

Thirty-five percent for the quarter and how much for the year?

Eighteen percent.

Eighteen percent for the year?

I'm glad we didn't go up double that.

The stock would be down at 25, perhaps.

We thought Hovnanian did pretty well with his earnings increase also.

So we're in one of those markets where apparently right now the bad guys are winning over the good guys, but I assure you we will be back and we will prevail.

Buyer appetite for luxury homes remains extremely strong, and we are doing our best to satisfy this tremendous demand.

Today, we announced our 11th consecutive year of record earnings, our 12th consecutive year of record revenues and our 13th consecutive year of record contracts for our fiscal year ended October 31st, 2003.

Net income of $259.8 million grew 18%, and earnings per share of $3.44 per share diluted also grew 18% versus the prior-year record in 2002.

Our 2003 earnings included a pre-tax expense of $7.2 million for early retirement of debt, $3.9 million in the first quarter and $3.3 million in the fourth quarter.

Total impact of the expense was six cents per share, diluted after tax.

There was no such charge in fiscal year 2002's results.

Fiscal year 2003 revenues of $2.78 billion grew 19% -- 2002 and fiscal year 2003 homebuilding revenues grew (ph) 19% over 2002, and fiscal year 2003 homebuilding revenues of $2.73 billion grew 20% versus the prior-year record in 2002.

Fiscal year 2003 contracts of $3.49 billion grew 27% versus the prior-year record in 2002.

We ended the year with strong momentum.

We set our best quarterly results ever in our fourth quarter for earnings, revenues, contracts and backlog.

Fourth quarter contracts of $1.02 billion rose 55% over 2002's fourth quarter, which was a record.

Fourth quarter backlog of $2.64 billion grew 41% over 2002's fourth quarter, which was then a record.

Fourth quarter revenues of $903.4 million increased 28% versus 2002's fourth quarter, which was also a record.

And fourth quarter homebuilding revenues of $893.7 million rose 29%.

Fourth quarter net income of $93.4 million increased 35% versus 2002's record fourth quarter then.

And fourth quarter earnings of $1.19 -- that's $1.19 per share, diluted, rose 28% over 2002's quarter, which was a record then.

Two-thousand-and-three's fourth quarter results included a 2.6 cent per share after-tax charge for early debt retirement.

With an average home price for 2003 of $556,000, we are serving the sweet spot in the luxury market.

As the only major builder primarily targeting the upscale niche, we compete mainly with small and mid-size private builders who don't have our capital, land acquisition and approval expertise or management systems or our national buying power.

This gives us significant advantage.

Our homes are affordable to the 15.7 million households with $100,000-plus incomes.

In constant 2002 dollars, this affluent group has grown over 220% since 1980, compared to 35% growth for U.S. households in total for that period.

With unemployment rate among college graduates, a pretty good proxy for our customers, holding at half the rate of the nation in general since 1990, it appears that our buyers are less affected by the economy's volatility.

Strong demographics, improving consumer confidence and lots applied (ph) constraints induced by no-growth politics favor those with the capital and the expertise to achieve the governmental approvals required to permit development and construction.

We ended fiscal 2003 with a high for us of 200 selling communities, and we expect to reach approximately 225 by fiscal year end 2004.

We now control more than 48,000 lots, a five to six year supply based on our current pace of expansion, and thus should be able to continue our growth in the future.

In fiscal 2003, we strengthened our balance sheet and capital base in preparation for future expansion.

We raised $550 million in the investment-grade senior debt market and retired $200 million of more expensive, shorter-term debt, thus lengthening the average maturity of our debt outstanding to seven years.

We increased shareholders' equity by more than $347 million, or 31%, to $1.48 billion, including by an $86 million equity offering.

We believe we're in the strongest financial position in our history.

We acquired Richard Dostie, Incorporated, the premier homebuilder in the Jacksonville, Florida market, and the Manhattan building company now known as City Living by Toll Brothers, an innovative developer of luxury mid and high-rise condominiums on the affluent northern New Jersey waterfront.

City Living by Toll Brothers represents a major expansion of our latest product diversification, urban development.

With the opening this year of our first two communities in Providence, Rhode Island and the metro Chicago market, we are already having success in the urban infield low-rise market.

City Living should jumpstart us in the urban high-rise condo market, as well as help us expand rapidly on low-rise urban development.

Our initial focus is on northern New Jersey, where we already have a very significant brand name in the luxury residential market.

We control about 1,500 units for mid and high-rise residences along north Jersey's affluent waterfront with its spectacular views of Manhattan.

We will aggressively pursue similar opportunities in other growing urban markets.

We see great demand from affluent buyers for dramatic residences and exciting urban locations.

Many young professionals are drawn to the appeal of city lights, and many maturing baby boomers are electing urban lifestyles instead of, or as well as, Sunbelt living.

We view the urban development market as one with tremendous opportunity.

By expanding our presence geographically and by diversifying our product offerings, we are positioned to meet the needs of the growing wave of affluent baby boomers.

We expect to produce over $3.3 billion in homebuilding revenues and deliver over 6,000 homes in our fiscal year 2004.

With an expanding community account and lot supply, we believe we are on track for 20%-plus growth in net income in 2004, and similar growth in fiscal year 2005.

This growth would be consistent with our historical performance.

Since going public in '86, we've produced compound average annual growth in earnings and revenues of 20% and increased our community count every year.

We have proven we can grow when interest rates are rising, as we did in 1995, '97, and 2000.

More recently, nearly three years into the worst employment slump since World War II, we've proven we can grow through a period of economic recession and global political uncertainty.

The economy finally appears to be improving.

With our land supply, our financial strength, and our brand name, we are very optimistic as we look to the future.

The following is an overview of current activity in our various markets.

I always get asked the question, so I'll answer it before asked.

In Massachusetts, we have four communities and the market is good.

Rhode Island, we have two communities.

The market is good.

New Hampshire, we have one community, and it's poor.

New York, we have currently three communities -- it's good.

We have four more there by the way that we plan to open this year that are pretty exciting -- large ones.

Connecticut, where we have six communities, the market is good.

New Jersey, where we have 17 communities, it's excellent.

Pennsylvania and Delaware, we have 20 communities.

That market is also excellent.

Metro D.C., which includes Northern Virginia and Maryland as well as suburban Baltimore is our largest market, with 35 communities.

As I like to say, in good times and bad times, your government grows.

It is excellent in that market.

In North Carolina, we have six communities in Raleigh, which has been good.

We have one community in Charlotte with two more in the pipeline.

Our one-community market has not been good, it's been poor.

In the Hilton Head area of South Carolina, we have two communities.

The market has been poor, but we are finding our way.

In Florida on the southeast coast, we have nine very high-end communities.

The market is good.

On the southwest coast, we have seven communities and a lower price point.

The market is excellent.

We have seven communities from Richard Dostie in Jacksonville, where things have been good.

In Michigan, where we have 16 communities, the market is good, but was a bit slower in the last few weeks.

In the Chicago suburbs where we have eight communities, the market is good.

In Columbus, Ohio, where we have three communities, the market is fair to poor.

In Texas, we now have six communities in Austin, where our market has been poor, excepting this past week, which was excellent.

We have four in Dallas, which is a fair market for us.

In San Antonio, we have one community, and that market is good for us.

In Colorado, we have two communities south of Denver.

The market has been good, but recently in the last three weeks was slower.

Arizona, we have 17 communities, which are excellent.

Nevada, we have five communities in Las Vegas with four more in the pipeline, one in Reno, and both of the markets have been excellent.

In California, we now have 18 communities in three regions -- Palm Springs, four communities, good -- northern California, which is the Bay area for us, we have 10 communities and the market is very good.

In southern California with four communities, mostly in the metro L.A. market, the market has been excellent.

Thank you for your interest and continued support.

We think that for Toll Brothers, the best is yet to come.

Now let me turn it over to Joel Rassman, our CFO, for the numbers.

Joel?

Thanks, Bob.

As Bob noted, we just completed a record year.

Homebuilding revenues for the fourth quarter and the full year of $894 million and $2.73 billion, respectively, were both at the approximate midpoints of our guidance we gave you at the beginning of the year and again reiterated at the end of the third-quarter conference call.

Fourth quarter and full-year land sales of $6.4 million and $27.4 million respectively were a little higher than our previous guidance in August.

Fourth quarter and full-year other income of $3.1 million and 15 point (ph) respectively were in line with the previous guidance we gave you.

Homebuilding gross margins in the fourth quarter of 28.1% were better than the previous guidance we gave you, in part because inventory writeoffs were $1.3 million compared to our budget of $2.5 million, and last year's fourth-quarter writeoffs of $2.7 million, and in part because of mix issues and price increases which exceeded estimated cost increases.

Fourth quarter land sales gross margins at 30% were slightly higher than our guidance in August.

SG&A at 9.1% of revenues was slightly better than our previous guidance of 9.2%.

Interest expense at 2.6% of revenues, and the expense in connection with early retirement of our 7 3/4 subordinated notes were both in line with the previous guidance.

The average number of shares used to calculate earnings per share were approximately 78.7 million shares for the quarter and 75.5 million for the year, also both in line with the guidance we previously provided.

In order to prepare the 2004 annual and quarterly projections, we analyzed each community separately.

Our projections are a roll-up of all of these individual community estimates.

The age of a community's backlog, the community's ability to deliver those homes, including historical delivery times, the ability to increase production while maximizing profits based on available trades and the approvals and inspections required during construction and their effect on delivery times are all factors we analyze.

Because we signed so many new contracts during the fourth quarter of 2003, our contracts were up 55% over the 2002 previous year's quarter, and because many community delivery times of 10 to 12 months are significantly longer than normal, we believe some of the traditional relationships between closings by quarter and backlog will differ for 2004, skewing deliveries more towards the later half of the year.

As Bob indicated, projections are subject to many uncertainties and can change for many reasons, including weather.

However, as a result of our record backlog, the number of communities selling homes, the projected number of net community openings and the current sales pace per community, we expect to deliver between 6,000 and 6,400 homes with an average delivered sales price of between $545,000 and $555,000.

This breaks out as 5,800 to 6,200 home deliveries for Toll in our traditional markets without the Dostie acquisition, and approximately 200 homes for the Dostie division.

The average price of our homes delivered reflect the impact of the lower sales price of the Dostie homes, as well as mix changes.

This estimate reflects a small increase in the average estimated delivery price from our previous guidance we gave you in August.

Based upon the mix of expected deliveries, both by product and geography, we anticipate that gross margins will be approximately the same to slightly higher than last year, even after factoring in the adjustments for acquisition accounting related to Dostie.

This represents a significant improvement to the estimated margins in our previous guidance.

We currently project land sales at about $16 million.

This is a decrease in the previous guidance of $20 million, and down from the $27 million for 2003.

Gross margins on these land sales should be approximately 28%.

Other income should be about $15 million, down a little from the $15.8 million in 2003.

This is a decrease from our previous guidance of $18 million.

Income from joint ventures should be approximately $5 million, which is no change from the previous guidance and up from the $1 million we recorded in 2003, as we expect to see settlements from some of our new joint ventures rolling in at the end of the year.

We estimate operating SG&A for 2004 will be 10 to 20 basis points higher as a percentage of total revenues than last year, as we continue to expand the company to prepare for our growth in 2004 and 2005 and give effect (ph) to the City Living and Dostie acquisitions.

This is slightly higher than the previous guidance we gave you, which was before the two recent acquisitions.

We estimate interest expense at 2.6% of revenues and a tax expense of roughly 37%, consistent with the previous guidance.

In order to assist you in preparing quarterly models, I will highlight some of the quarterly information we think you should consider.

Please remember that information on a quarterly basis is subject to even more variances than annual information and can include large swings which may be caused by weather.

We expect to deliver between 1,125 and 1,225 homes in the first quarter, at an average price between $535,000 and $545,000.

It appears that first quarter deliveries will be more heavily weighted to smaller homes, townhomes, and active add-out deliveries than our normal mixes.

We estimate that deliveries in the second quarter will between 1,300 and 1,450 homes, with an average price between $540,000 and $550,000.

Home deliveries should accelerate in the third quarter to between 1,550 and 1,700 homes, and average delivered prices should increase between $550,000 and $560,000.

We estimate that deliveries will increase again in the fourth quarter to between 1,950 and 2,100 homes, with an average delivery price roughly the same as the third quarter, $550,000 to $560,000.

Land sales will vary by quarter.

However, we believe approximately $5 million will occur in the first quarter, with about $7 million in the second quarter, and approximately $2 million each in the last two quarters.

Gross margins on these land sales should be approximately 25% in the first quarter and approximately 30% in the last three quarters.

We estimate that other income will be approximately $1.5 million in the first quarter, increasing to $2.5 million in the second quarter, $4.5 million in the third quarter, and $6.5 million in the fourth quarter.

We expect that income from joint ventures should be approximately $500,000 in both the first and second quarters, increasing to approximately $2 million per quarter for the third and fourth quarters, as our new joint ventures start to see settlements.

Remember, cost of sale varies significantly quarter to quarter, and is affected by weather.

We deliver fewer homes per community in the first and second quarters, and more homes in the third and fourth quarters.

This variance in deliveries by quarter affects job overheads per home.

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

We currently expect homebuilding margins in the first quarter to be approximately the same as last year's first quarter, 30 to 60 basis points higher in the second quarter than last year's second quarter, 25 to 35 basis points higher in the third quarter than last year's third quarter, and approximately the same in the fourth quarter as this year's -- 2003's fourth quarter.

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

In addition, this year's number will improve the impact of our acquisitions.

Accordingly, we would expect SG&A as a percentage of total revenues to be approximately 70 to 80 basis points in the first quarter of 2004 than in last year's first quarter, 10 to 20 basis points higher in the second quarter versus last year's second quarter, approximately the same in the third quarter as last year's quarter, and slightly higher in the fourth quarter than last year's fourth quarter.

The last component of earnings per share is share count.

Obviously, share price has an effect on the average number of shares we use to calculate earnings per share in the projections.

Based upon what we believe will be increasing share prices during the year, as our estimates for 2004 become reality and as investors start to focus on our expected growth in 2005 of approximately 20%, we have used 81.7 million average outstanding shares for the year, starting at 81 million in the first quarter, increasing to 82.2 million in the fourth quarter.

At this point, I'd like to hand it back to Bob for questions.

Of course, in light of today's action, you're not so certain that the price of the shares are going to go up, so maybe the number of shares will go down, and we would then earn more money per share.

It's perverse that you earn more money per share as your share count goes down on the basis of the market's recognition, but there you have it.

Heather, any questions?

Thank you, sir.

The question and answer session will begin at this time.

If you are using a speakerphone, please pick up the handset 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 Michael Rehaut with J.P. Morgan.

Please state your question.

Good afternoon.

It's John Barlow, speaking for Mike.

Hi, John.

Just wondered if you could talk about the impact of the price increases on your gross margins as well as mix.

If you could just give us a rough idea of which influenced the margin expansion more?

Joel?

I think it's price increases.

I think the mix was relatively consistent with what we had projected, and we had better price increases as a result of the demand than we had projected.

And do you have a basis point estimate that you could give us?

No, I do not.

Sorry.

Also wanted to ask a question on lumber prices.

Do you expect any impact in '04, and if so, when would that show up in your results?

We don't expect any impact from increase in lumber prices.

Most of our lumber, because we have a couple of plants, we are our own distributor, we take our lumber directly all the way from the timber cutters and the same suppliers that supply the majors on long-term contracts.

So our prices are pretty well set into the six to nine-month range, so we don't expect it to be of any impact.

OK, thank you.

You're welcome.

Thank you.

Our next question comes from Myron Kaplan (ph) with Kaplan, Mason & Company (ph) .

Yes, hi, gents (ph) .

Hi, Myron (ph) .

I'd like to say that they're great numbers, but as you can say, it seems like there's some kind of inverse causality here.

Now, according to the media that the interest rates have begun to rise so that they're going to destroy the affordability -- totally destroy the affordability of starter homes, would this destroy as well the viability of the entire trade up-chain of housing conveyance.

No, I don't think so, and I don't even agree with the conclusion that the immediate increase in mortgage rates, which has been nominal, is going to that greatly impact the starter market.

I think what's going to happen, as the rates move up -- and I think we can all agree that mortgage rates are going to move up.

You're going to see less price appreciation in the lower rungs of the housing food chain, but I don't think you're going to see an abating of demand to such an extent that these guys are going to go into a very slow-motion program in their businesses.

You've got almost 2 million immigrants a year coming into the company -- 1 million you said?

I thought it was two.

About one?

Thanks.

You've got the ordinary growth, internal growth in the population.

You've got housing supply falling out of use, what is that, 300,000, 400,000?

Right.

You've got all of that demand stacked up against a supply that according to the Commerce Department runs anywhere from 1 million to 1.5 million.

But remember that a third of that is second homes.

That people have two homes, you really can't count that as meeting the demand that I outlined above with immigrants and internal growth and housing deterioration being taken -- housing stock coming out of the market.

So it's going to be awful tough with the no-growth politics that exist in the country to see supply overbalance demand.

So I think what you're going to see is a slowdown in the price appreciation at the lower rungs, but I don't think you're going to see enough of a slowdown to impact the daisy chain which is necessary, of course, for the upper rung, and we're the leaders of that group, of that class, to be impacted.

But what you're saying ...

It did not impact us in '85 -- I'm sorry, '95, '97, 2000, so I don't expect it's going to impact us this time.

Right, in your segment, since the profitability is going to diminish in the lower, let's say in the entry-level segment, do you see more competition as some of the other national builders try to turn their product mix so that they can complete more in this very lucrative segment that you've staked out?

Yes, I do, Myron (ph) , but I think it's on a long-term basis, not a short-term.

The lead time to gain approvals for this market is so significant -- like four or five yearsthat you would have to have said four or five years ago that's a market that I really want to get into.

Because it follows logically that the more pricey product sells in the more desirable neighborhood, which is generally in the tighter-in suburbs as opposed to the exurbs.

It is those areas that are regulated more stringently, making the approval process more difficult, because you're up against, frankly, heavier hitters who will go to the planning and zoning meetings and help to control the politics in the local municipality that are constraining the lot supply.

I don't denigrate it, by the way, it's just a ...

The fact.

It's just a fact of human nature.

And so this human nature, when it has power to constrict supply, is going to do it.

So I don't think we're going to see competition in the next four or five years.

Now, I may see it -- we may see it four or five years from now.

Right.

I think the second important factor to take into consideration is there's a completely different culture, really, in the systems that you would have to have in the company to supply the $560,000 average price versus a $250,000 average price.

I mean, we don't build this out in front, excuse me.

We build it to order, and you have to be willing to accommodate changes while you're under construction.

You need pretty sophisticated systems and it takes some time for the other guys to develop.

But I do think in time, five, seven years from now, you are going to see more upper-end development from the other nationals.

Well, you're making marvelous progress on the P&L and balance sheet.

The only thing I think for the stock is if maybe you could send a couple of your carpenters with some studs and plywood.

I'm not worried about the stock price.

My mother, [Inaudible] used to say, "Bob, why is the stock going down today?"

And I used to say, "Mom, there's more sellers than buyers."

And tomorrow there may be more buyers than sellers.

Well, beautiful year and hope the next one will follow.

Thank you

Thank you.

Thank you, our next question comes from Ivy Zelman with CSFB.

Please state your question.

Good afternoon, guys.

Dennis on behalf of Ivy.

Just a couple of quick questions.

Hi, Dennis, and say hello to Ivy for us.

Will do.

Firstly, just with the community roll-out that you're expecting for the year, is there any one reason that we may see more of than another?

I don't know.

Fred, go ahead?

The biggest growth in communities, we're going to have a net increase in Pennsylvania of five, in New Jersey of three, in Delaware of four.

In Las Vegas of six.

And then in northern California we're going to add three additional ones.

In New York, we're going to add four additional, and those are really the areas where the biggest growth.

OK.

That was a net.

Sure, yes.

And what was the average price of the Dostie product?

Three-twenty-five.

Three-twenty-five, OK.

Which, by the way, Dennis for Jacksonville probably equates to our $560,000 average nationwide.

OK, sure.

Do you happen to track whether a buyer is an investor versus actually buying it for personal reasons.

Very definitely.

Is it ...

I would say almost all of our buyers are buying to live in the home.

There are some buyers of the multi-family product that buy to lease the product.

But all of our buyers are going to hold those homes for a year because we put into our contract an anti-flip provision.

The last thing I want to have in a community, if things, God forbid, do slow down, is to be competing with my own clients.

Sure.

So what we put into the contract is if you sell the home within a year, the profit comes to us.

So, in effect, nobody buys our homes with the thought that they're going to flip them.

OK.

But we do permit investors in some of the multi-family product who want to rent out -- especially such as the Naples market.

And that provision wouldn't be there for those multi-families.

Yes, the provision is there, but they are -- because you asked the question, investors versus live-ins.

They are investors who are in some cases not live-ins.

Very often they are, by the way, they live for a month but then they like to lease for the other 11 months.

Do you have a ballpark figure of what those non-living buyers would represent?

Yes, probably less than 1% or 2% of the total business?

OK.

It's insignificant.

Not material.

Plus, we don't do, unfortunately, that many 19-plexes and eight-plexes where you could get that kind of price and product that could afford the opportunity to rent.

Thanks very much, guys.

You're welcome.

Thank you.

Our next question comes from Anthony Campbell (ph) with Mount (ph) Partners.

Sir, please state your question.

Good afternoon.

Actually, I've got a couple of questions, if I might.

I just want to -- everybody seems to be concerned about these land price increases, and I want to just -- have you seen any deceleration in the fourth quarter in terms of pricing either in land or homes, and then how many spec homes now have you got per division if you might just ...

Unfortunately, we have less spec homes than we'd like to have.

We are so sold out in our single-family detached product, which is easily 95% of the product that we build, we're in many cases 11 and 12 months in backlog that we can't get a spec into the line.

When we build multi-family products, such as three or four attached, if we sell three, we'll start the building.

And then for sure you have one spec.

So the spec inventory is immaterial and insignificant in our business.

Good.

The other part of your question was price increases or decreases in land in the last quarter.

The acceleration or deceleration, I mean, in the quarter.

We don't -- it's not a commodity that's that fundable (ph) that permits you to see that kind of thing on a quarterly basis.

You would see it on a year over year basis, perhaps, but you can't judge land acquisition on a quarter to quarter basis.

It generally takes you six months to get into a land deal, and therefore we can't feel price changes in that finite a period that you've outlined.

Answering a question that you didn't ask, which is year to year, we have actually seen better bargains coming to us in land in the last year than we had in the prior year, but I think that's because we're seeing larger parcels that we are acquiring.

Bob, if I ...

Sure, go ahead, Joel.

You have to remember that most of our land that we'll be delivering homes in the next three to five years has already been tied up and we've taken it through the approval process years ago and we'll not -- even if you did see a price increases today, which we are not seeing, it would not affect earnings for four or five or six years.

OK.

I mean, I guess the question was, the guys at Hovnanian, sort of -- that whole call got kind of misinterpreted about acceleration or de-acceleration in terms of pricing.

And I guess the takeaway, correct me if I'm wrong, is if anything you've probably seen an acceleration on a de-acceleration of home prices of ...

Oh, definitely.

Home prices have been accelerating.

Now, I only spoke to land, I'm sorry.

I missed that third part of your question, which was home prices.

There is no doubt that home prices are going up faster now than they ever have -- well not ever, but going all the way back into the '80s.

I mean, you've got pretty good acceleration, and it's only based on the lack of supply.

It's not -- I don't think the demand is through the roof.

People aren't clamoring for houses because they're going to make money in them.

Rather, the number of people continues to increase every year that want the product and there is no greater availability this year than last year, or than 10 years ago, or than 20 years ago.

If you go look at housing start statistics, you'll see that they haven't changed in 20 years, but for sure, population growth has changed in 20 years.

So all you're seeing is a phenomena of an oligopoly being run by the government -- not the federal government, but by the various state governments.

And so we are the beneficiary of nimby (ph) politics.

Thank you, very much.

You're welcome.

Thank you.

A little music?

Thank you, our next question comes from Sam Lieber with Alpine Funds.

Please state your question.

Needless to say, another good year, gentlemen.

Thank you.

Your comments regarding the overall condition of the markets was interesting.

You had 106 marked communities that you rated excellent out of your roughly 200 communities.

Is that fair to say then that you think over 50% of the markets or communities that you're building in now are really that strong?

Yes.

There is no doubt -- all you've got to do is sit here with us Monday morning and take a look at the number of home sales that are made -- the number of non-binding reservation deposits that come in for those various communities

Sam, I think those were communities that were rated excellent.

We also had a lot of communities that were rated good ...

No, I realize that 7% were poor -- that's it.

Fair to poor.

Now, remember that what we're talking about should not be taken as our opinion or as an indication of the state of the market for everybody.

It's just the market for us.

Now, you could fairly interpolate to meaning that you're getting a good indication of what the luxury homebuilding market is in those markets.

And I cannot say that Austin is dead other than for last week, which is very good.

I cannot say that the Austin market is dead -- it's just been dead for us.

Fair enough.

I guess as we look forward, I mean, clearly you're -- I guess next you're going to learn that you won't have your conference call right after Washington Mutual's call.

What can I say?

As a shareholder of WaMu, I'm slightly distressed, but I'm going to stick with it.

I think they're going to make out OK.

Well, they've done well over time.

Took advantage of the mortgage refi boom while it was running.

Well, I guess, more specifically here, the market selling off in anticipation that obviously things are -- the share prices are going deteriorate and guys won't make their money because they won't sell that many homes next year ...

You know what?

It's hard for me to believe that, but I don't know what to believe as to why the market is selling off.

But it just is hard for me on a common-sense basis to believe that because of the backlogs that have been announced by all of the homebuilders.

You haven't got the final year-end score for some of the nationals -- it'll be coming up within a month.

But I know that their backlogs have grown.

And look at where our backlog is.

I mean, we've almost got all of '04 in the bag.

So it's hard for me to believe that people are drawing a conclusion, but I don't know what to make of it other than for the fact that maybe the shorts are having a picnic and there'll be a week or two before the longs get back on top.

I guess my question I'm getting to is, do you see that there's a prospect that home sales could be down 5% next year, let's say, or 3% or whatever the numbers?

Do you have an internal guesstimate?

All right, when you talk home sales, you're meaning?

Aggregate market.

You're not meaning settlements.

That's correct.

OK.

It doesn't seem possible, because of the tremendous demand that we feel now that you're going to see a decrease in the sale of our product.

It just seems impossible other than for a macro event or events crushing the market.

I mean, you know, if the dollar continues to fall and all of a sudden, foreigners call for their money in yen, [Inaudible] and euros instead of in dollars, that could impact us all.

But rather than some kind of macro catastrophe, I don't see it.

So in terms of the demand picture, you don't see that with perhaps that with low interest rates over the past year or so, that the future demand has essentially been brought forward to some degree.

Remember, Sam, the housing starts in the U.S. dropped in '95, '97 and 2000, and we still grew.

And we grew by gaining market share, and we gained market share because of the offerings that we could bring to market that have always been in demand.

I believe you live in Westchester, New York.

That's right.

If I could get my hands on 100 acres in Westchester, New York, and bring out 100 homes, I don't care what the market looks like.

I'm going to sell them and have a picnic.

And that is the state of the market in most of the markets in the U.S.

Fair enough.

And that gets me to my last question for you.

What is the average age of your land bank now?

The average age of the land bank?

How old is the land that you've got in place now?

I don't know what the average age is.

I can take a guess, because I know what the average length of the approval process is, and that would probably be four to 4.5 years.

OK.

But it could be -- I could be giving you misinformation.

It's just a guess, so take it as such.

OK, fair enough.

You're welcome.

That's helpful.

Thank you, gentlemen.

And good luck for next year.

It's certainly been a fabulous one this year.

Thank you, Sam.

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 Margaret Whelan with UBS.

Please state your question.

Good morning, guys.

Hi, Margaret.

Good morning, where are you?

You know something, it's not even the morning.

It's been a tough few days.

It's what happens when you're in those rooms with no windows and watching screens all day.

Then when you're having fun, time flies.

Well, it's not much fun at the moment [Inaudible]that must be it .

OK, so some of the questions are answered, and in your prepared comments, you gave us very good detail on your regional markets.

Can you talk a little bit about whether or not there's been the rate of change in those markets, whether anything is getting better, stabilizing, getting worse?

I think those markets have been the same for quite some time.

Let me go through a list of the markets, maybe I can pick something up that's changed, but I don't think so.

Not by that sheet, Fred.

Take a look at my Sunday night sales report, that's always good.

Let me see -- Phoenix has been fabulous, Palm Springs has been fabulous.

Northern California got better in the last year.

Southern California is off the charts.

Colorado was up and down, but it's really anecdotal info that I gave you.

Connecticut got better in the last year.

Delaware has been fabulous.

East coast of Florida got a little softer in the last two years.

Still, doing real well, making a lot of money, but it's a little softer.

When you said you have nine high-end on the east coast of Florida, what's high-end, what price point?

Eight-hundred-thousand on average, $850,000 -- probably higher than that.

Probably about $900,000 on average.

That's what I call high end.

It's high end for me, anyway.

North Florida, I don't know enough.

West coast of Florida, no change, been fabulous.

Chicago got better in the last year, but I think it's just me reflecting my experience in the Chicago market.

We opened up some tremendous product, golf course community, and it was like a school of blues flying through all sorts of delicious bait that they hadn't seen before, and you couldn't get them in the boat fast enough.

How about that?

And I haven't been blue fishing in the last 10 years.

Michigan got a little softer in the last year.

That's Detroit market.

Vegas, strength after strength.

Unbelievable -- who would have ever thought that you could sell $1 million houses in Las Vegas.

I always thought it was for $125,000 buyers who wanted to escape California taxes and eat at the all you can eat buffet for three bucks.

No more.

That is a fabulous market.

Reno, we just have brand-new experience, so I can't tell you.

Massachusetts has gotten stronger.

New Hampshire still stinks -- still suffering from the tech implosion.

Rhode Island has remained constant.

It's very good.

So there's no one market that's really improving or deteriorating.

No, Jersey, great.

New York, great.

Charlotte still stinks.

Raleigh, Ohio, same.

Pennsylvania, still excellent.

Now -- nope.

I think the rest of the markets are as they were for the last several years.

I'm going to ask a question about spec.

You said you're not too worried about your own spec or anybody else's in your market, right?.

I can't understand the word you're saying.

Spec building.

Speculative building?

Oh, spec.

It wasn't that I wasn't worried about it.

It's that I can't get it built.

Demand is so strong that I can't put a spec on the line.

Remember, we build to order, so if I were to start a home on lot 106 and the buyer perceived that that was not a home that had been bought before hers, buyer would come into the office and raise a ruckus and say, "What's going on?

Why is my home not being started and a home next door is being started and it was bought after mine?"

God forbid she found out that it was a spec home.

She'd go nuts.

All right.

So you just can't get them in the line.

Do you have an idea of the average size of your home now versus a couple of years ago.

I know you said your average price is going up, but in terms of the size, is that going up too?

Yes, got to do something to justify these prices increases.

Do you have that data, Joel?

I can follow up with you ...

I can give you a good ...

Don't have it in front of me, but I can give you the same guess.

Yes, it went from 3,300 to 3,500.

It might even be up to 3,600 now on our average home in the last two years.

OK, and then the last question I have is just on financing.

I know you don't break it out for us, but just in your experience of these cycles, as rates start to go up, how aggressive do the mortgage banks get once refi has dried up for them in trying to take the financing business from the builders and can the capture rate change you think for the builders as an industry from here?

I don't think it would be much in terms of an evaluation of our particular business.

We have such strong client relationship because we're doing so much for the client that it's hard to perceive that the ABC Mortgage Company, or GMAC is going to be able to come in and scarf up our clients from us.

And I can't give you an evaluation of the Sentex/Pulti (ph) business because I don't know it.

I just know our business.

But in the industry as a whole -- or I'm sorry, in your business as a whole in the last couple of cycles, your capture rate has not declined?

No, not a bit.

OK, all right.

Good job.

Thank you guys.

You're welcome.

Thank you for your interest.

Thank you, our next question comes from Joe Sroka with Merrill Lynch.

Please state your question.

Good afternoon, everyone.

Hi, Joe.

Bob or Joel, you made the comment that you still thought the '05 growth could be 20% net income, I assume you were talking about.

Yes.

Do you have any rough metrics, either community count target, delivery range, any rough metrics that lead you to that conclusion?

Yes, we do.

Whether we're going to pass them out or not, I don't know.

Go ahead.

Would you share those with us please?

Joel?

We do.

I'm not going to do it by region, but we do do a projection by community with expected community openings next year.

And based on that projection, we should be able to achieve approximately 20% growth in 2005 over what we have in 2004 and it -- obviously subject to all the vagaries that take place on approvals, but we also build in some cushions for those numbers, and we've been pretty close to our estimates each year in terms of our ability to achieve two years out numbers.

So a sort of community cash fee 20% higher in '05, deliveries should be 20% higher in '05, roughly.

Deliveries will.

Community counts may not be because it depends on when the community opens up and whether it gets a whole year or a half a year in it.

So community counts we give you at a specific point in time, but the average delivering units will probably be up roughly 20%.

OK, great.

Thanks.

Thank you, our next question comes from William Nobla (ph) with Atlanta Softna (ph) .

Please state your question.

Thanks very much.

You mentioned that you assume that your stock will go up during the year, and therefore the average shares will go up I guess about 3 million shares. could you give us what price assumptions you made in your stock to reach that conclusion?

We used the starting price at the beginning of this year, which was roughly where it is now, I guess.

And our fiscal year -- and we assumed that it would go up to roughly $50 at the end of the year based on the fact that people will start looking at 2005's numbers at the end of the year.

You said our price at the beginning of the year was where it is now?

November 1st.

Beginning of this year.

Beginning of this year.

Well, you assume the price is what the price is.

Joel, did I do that right?

Fifty bucks, is that what we ...

You know, I -- in all humility, I would suggest that since you give all this detail, you should just use the shares you have rather than project prices, because as we all know, there are a lot of variables that occur.

And to tell everyone that you think the stock will go to $50, and therefore the shares will increase by 3 million doesn't really -- you know, I think you can do a better job building houses.

William, you're probably right, but if we don't make a projection with respect to the number of shares, if we just assume the same number of shares will be out at the end of the year that are out at the beginning of the year, then we would be projecting higher per share earnings, and we could be disappointing you by not giving you our best opinion.

Because if the share price does increase, then you have more shares and you have lower earnings per share and we would be -- we think we would be misguiding you.

So you're probably right.

I'm sure we can do better with hammers than by predicting the stock market.

And if we could predict the stock market accurately, we wouldn't be on this phone call.

Neither would we be building houses.

But we are obligated to take a guess.

Otherwise, we haven't done as good a job as we can for our shareholders and potential investors.

A second question I have is have you noticed any change of late in the way your purchasers are buying in terms of fixed versus variable mortgages and/ are more or less of the purchase price in cash?

No, because there hasn't been any serious fluctuation in the mortgage rates.

Remember all that we are concerned with is the talk of where things are going to go, but not where things are now.

Things have been pretty steady, so you've got approximately the same percentages of cash, variables and fixed.

And what percent of your prices are, let's say, for cash, of your sales price?

Anybody here know?

Percent that are all cash buyers?

Yes, all cash.

Yes, that's what I would have said -- 5% to 7% cash.

Thanks very much.

You're welcome.

Thank you.

Thank you.

Our next question comes from Rick Murray with Raymond James.

Please state your question.

Good afternoon, guys.

Great quarter.

Thank you.

I just wanted to touch on your comments earlier, Bob, regarding your view that the recent strength of kind of the home price environment was more related to supply constraints as opposed to being demand driven.

That's it.

And that being said, I was just curious for your outlook given the historically very high correlation between employment and housing activity as far as it relates to what you think we might see in prices going forward.

Well, if you take a look at the way the markets have reacted in the other areas with good record-keeping that are somewhat similar, such as Australia or the U.K., the house prices are going off the charts.

The increases are 20% a year.

And I think you're going to see that here in the United States.

We are nowhere near a blow-off.

This is not a bubble.

I feel like Nixon.

I am not a crook.

This is not a bubble, and the demand is growing.

It's not abating.

It can't be sated, because we can't get our hands on the product as a nation.

And therefore there's no reason to believe that home prices won't continue to increase at an increasing rate as opposed to just staying static.

Thanks, great quarter.

Thank you, our next question comes from Carl Reichardt with Wachovia Securities.

Please state your question.

Hi, guys.

Hey, Carl, how are you hitting them?

I don't know.

I have a couple of questions.

Just, Joel, especially on the guidance for Q1, for SG&A up 70 to 80 bips (ph) over Q1 '03, I would assume.

Can you go over again the core reasons for that?

I mean, you're halfway through the quarter, so I'm guessing you're already seeing the expenditures come up.

Is it more related to new communities or acquisition oriented or are there other things in there?

We have a growth of new communities, plus we'll see less than normal Dostie revenue.

Remember, all of our expenses for SG&A are expensed.

The revenues that we're going to generate out of the Dostie acquisition really won't hit until later in the year.

So we have an acceleration of expenses on the SG&A line for Dostie and the same is true for City Living.

We won't see any revenues other than joint venture income from City Living until 2005.

And yet we have a whole year's worth of SG&A that I have to pay for the people there that will be expensed.

So those two items had a major impact, particularly in the first quarter.

And that's all going to -- mostly going to load in Q1 it looks like ...

Percentage-wise it will load in Q1.

I have a little bit more Dostie revenues in Q2, et cetera, et cetera, et cetera.

Was it Carl that wrote that piece recently -- good, good piece, Carl.

Thanks.

What a nice guy.

I appreciate that, Bob.

I want to also ask just about attached/detached mix.

What are you guys running right now townhome mid-rises versus single-family detached, and are you expecting that to change in any significant way over the next couple of years as you're leveraging off of land that obviously with a higher return on it you could put higher density or with city or et cetera.

How are you looking at that?

No to the latter question.

We don't expect there'll be a change.

Running about 10% to 15%.

We've had a little higher than traditionally because of this -- how many units is it, it's about 1,300 units that we're building in San Francisco.

Right.

Some are as dense as 55 to the acre.

So a pretty spectacular job.

Podium parking, two-story concrete garage and then we stick frame on top of that.

Other than the urban infill business accelerating, which would naturally impact the answer that I just gave you.

That is to say, I just double-thought and gave you the wrong answer, yes, we'll probably be doing 400 or 500 units, possibly even in a year, but not this year.

Next year.

And that's not cranked into the numbers.

So you'll have more multi mix because of the high-rise, mid-rise.

And that will affect ASPs as a downside, too, I would assume?

Don't bet on that.

all right.

Don't rush to the window.

[Inaudible] .

I would bet a show ticket on that -- a win ticket.

Depends on the show.

I have two other questions.

One, can you guys just remind us where you are on your share buyback authorization right now?

At 9 million and change left on the share buyback authorization.

OK, all right.

And then just on the -- on an earlier question about lumber prices, given the factory and the fact that you guys have I guess what we call partial vertical integration backwards in making ...

that’s right.

... a lot of your own products.

Yes, we make our own mill work, assemble our own windows, do our own (ph) doors.

My recollection is originally that was more to assure a stable supply as opposed to being a way to get gross margins up.

Absolutely true.

Excuse me.

You have to add the quality to it.

It wasn't just stable supply, but it was quality of supply.

Is that particular operation contributing to gross margin in any way right now?

My recollection, again, is that you guys were running, basically -- it was a zero-sum game for you in the end, it was not ...

I hate to hear it described as a zero-sum game.

Rather, I would have you state that we went into the business to guarantee supply and to guarantee quality, not to increase margin.

I think we have picked up some margin from it, because since we're shipping panels and trusses, you have a lot less waste on the job.

And since waste removal has increased so much, you save a significant portion of that and that adds to margin.

The primary purpose after the supply factor was the quality.

It may be increasing to the margin because the quality is so much better, and that gets us more demand.

It also decreases some warranty work, I imagine, but we haven't got that quantified, so i can't give you a BPs answer to margin that's appropriate to the plants and the distribution centers.

OK, I appreciate it.

Thanks very much, Bob.

Thank you, Carl.

Thank you.

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

Thank you, Heather.

Closing comments are everybody should have a great holiday, good health and happiness in the coming year.

Adios.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051, or 973-709-2089 with an ID number of 317-504.

This concludes our conference for today.

Thank you all for participating and have a great day.

All parties may now disconnect.

Heather, thanks very much.