托爾兄弟 (TOL) 2004 Q2 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the Toll Brothers second quarter 2004 earnings release conference call.

At this time I would like to inform you that this conference call is being recorded and all participants are in a listen-only mode.

At the request of the company we'll open the conference up for questions and answers following the presentation.

I will now turn the conference over to Bob Toll, Chairman of the Board and Chief Executive Officer.

Please go ahead, sir.

Jennifer, thank you.

Welcome, everybody.

Thanks for joining us.

Today with me, Joel Rassman, Chief Financial Officer, Fred Cooper, Senior VP, Finance and Investor Relations, Joe Sicree, Chief Accounting Officer and Kira McCarron, Chief Marketing Officer, also known as The Keeper, my keeper.

Before I begin I ask you to read the statement on forward-looking information in today's release and on our website.

I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, whether or not a factor who's performance is uncertain and could significantly affect future results.

Those listening on the web can e-mail questions to rtoll@TollBrothersInc.com, one word, TollBrothersInc.com.

We'll try to answer as many as possible.

We are pleased to report record second quarter and six month results for earnings, revenues, contracts and backlog.

For the second quarter net income rose 37% compared to last year's second quarter.

Earnings per share rose 24% compared to last year's record second quarter.

Revenues grew 35% compared to last year's record second quarter.

Contracts and backlog, both the highest in our history, rose 73% and 69% respectively compared to last year's which was also record second quarter information last year.

For the six-month period net income rose 25% compared to last year's six-month record.

Earnings per share rose 14% compared to last year's six-month record.

Revenues grew 20% compared to last year's six-month record.

And contracts increased 66% compared to last year's six-month record.

Demand remains tremendous.

Our backlog of 3.7 billion contains most of our revenues through second quarter, 2005.

In May we've enjoyed record traffic and deposits, which means we are already beginning to sign contracts for Toll Brothers Homes to be delivered in the third quarter of '05.

With this backlog and strong demand we believe that we are on track for record results and at least 20% net income growth in both '04 and '05.

We don't expect much impact from interest rate fluctuations because we believe the strengthening economy and job growth will far outweigh the effect of rising interest rates.

We've proven that we can grow when rates are rising before.

In recent years there have been three significant interest rate increases.

In '95 mortgage rates rose to 9.4.

In '97 they rose to 8.1 and in 2000 to 8.75.

Business was excellent in all of those periods.

Today's rates are a lot lower than they were through the entire 90s which was a very strong decade for home building.

Despite interest rate volatility we produced 11 consecutive years of record earnings with our 12 and our 13th on the horizon.

We are building upon our well-established brand name in Move Up, Empty-Nester and Master Plan Resort Style communities by diversifying into other upscale product lines.

We have established a strong presence in the luxury active adult market and are rapidly expanding our offerings of low, mid and high-rise communities in urban and suburban infill locations.

By broadening our offerings within the luxury market we are increasing our opportunities for growth and profit; at least we hope so.

We are also continuing to grow because we are able to gain control of and win approvals for land in desirable markets using our strong balance sheet, access to capital and approvals expertise.

These skills enable us to gain market share whether or not interest rates rise.

With less than 3% market share in most of our territories we have lots of room to grow.

This quarter we increased the lots we control to 58,000, which is a five to six-year supply based on current pace of growth.

With increasing lot shortages, growing numbers of affluent households and maturing baby boomers entering their peak earning years we believe our land position and ability to expand our land supply in lot constrained affluent markets positions us for sustainable long-term growth.

Now let me give you a quick overview of our current markets.

Excuse me while I look for that information.

We ended the quarter with 205 selling communities.

In alphabetical order, Arizona, where we have 13 communities, the market is A plus.

California, Palm Springs with three communities, up til this past weekend for the last two months the market was A plus.

This weekend, somebody put something nasty in the water and the market went to D. Northern California, which is the bay area for us and surrounding counties, we have 13 communities, and the market is A plus.

Southern California, six communities, mostly in the metro Los Angeles and surrounding counties, the market is A. It was A plus up to this weekend.

Maybe there's some connection between Southern California and Palm Desert Palm Springs.

I'm sure there is.

In Colorado where we have two communities, the market has been very good, so that's a good plus, and continues to surprise and it appears to rebound.

In Connecticut where we have five communities, the market is an A. In Delaware where we have seven communities, the market is A to A plus over the last several months.

In Florida we have 16 total communities, on the East Coast, the market has been an A minus for the past several months.

In Jacksonville, where we bought the Dousty(ph) Company, the market has been a B for the past several months.

And on the West Coast the market has been A plus and we pretty much have run ourselves out of product there but we've got a bunch coming on line within the next month.

In Illinois, which for us is the metro Chicago market, we have seven communities and the market has been A plus for us.

But I think that's anecdotal for you who are judging the Chicago market.

I think that's based upon the projects, the communities that we opened which seem to be fairly spectacular, golf course community and something that just seems to be located perfectly.

In Michigan's Detroit suburbs we have 16 communities and the market has been a B. In Vegas, seven communities, it is A plus plus.

We just can't satisfy the demand in the market.

It seems no matter how much we raise prices we still sell out what we bring to market every week.

In Reno we have two communities and the market has been A. In New England we have four communities, Massachusetts we are down to one community, temporarily, and the market in Massachusetts has been an A. I wish we had more product.

New Hampshire, by the way, we still can't make work for the luxury product so that's a flunk, an F, and Rhode Island is up until this week, past two months has been a B, B plus but this week was an A plus.

In New Jersey we have 17 communities and the market is an A. In New York we have three communities and the market has been A. North Carolina, Charlotte, we have three communities, the market is up until this weekend been a C. This weekend it turned into an A.

Maybe we are finally getting the marketing right.

Ohio, oh, I'm sorry, I didn't give you Raleigh, I just gave you Charlotte for three communities.

Raleigh we have six communities and Raleigh has been a solid B plus for us.

Ohio, which is Columbus for us, we have three communities and the market is a C. Pennsylvania we have 21 communities, the market is an A. Hilton Head, South Carolina, we have two communities and the market is a C plus to a B minus.

Texas we have six communities in Austin.

Austin has been a C minus.

Recently, however, it has gotten better and I would say we are up to a B right now in Austin.

We have four communities in Dallas and Dallas has been a B plus to A for us last several months and still rolling.

San Antonio, we only have one community and the market has been B. Metro Washington, D.C., Northern Virginia, Maryland and suburbs of Baltimore is our largest market, we have 38 communities and the market is A plus plus.

And now I'll turn it over to Joel for the numbers.

Thank you, Bob.

As Bob noted we just completed a record second quarter.

We delivered 1463 homes with a $556,000 average sales price which was both in number and in average sales price above the guidance we gave you.

Through the diligent efforts of our Toll Associates we made up some of the delays caused by the difficult weather conditions.

Accordingly home building revenues at $814 million exceeded our previous guidance given in our February 26th conference call.

Gross profit from land sales at $508,000 was slightly better than our guidance because land sales revenues were higher but margins were lower.

Other income at $2.4 million was slightly below our guidance while joint venture income at $729,000 was slightly above guidance.

Second quarter home building cost of sales at 71.8% of revenues was approximately 30 basis points lower or better than the guidance we had given you as write-offs at 328,000 were lower than budgeted amounts and lower than last year's $2 million number.

SG&A for 2004 second quarter was 11% of total revenues, slightly better than 11.1% last year.

This was 60 basis points lower or better than the guidance we provided you in February, caused by slightly higher actual costs more than offset by the much greater revenues.

Interest expense at 2.6% of total home building and land sales revenue was as we projected.

Interest expense will vary for many reasons on a quarterly basis.

We expect interest expense to be approximately 2.6% of revenues for both the third and fourth quarters.

That's slightly higher than the 2.5% guidance we previously gave you.

The number of diluted shares used in the calculating of EPS was approximately 81,426,000 shares, which was close to the 81,600,000 shares we had estimated in February.

Although we bought back only 3,000 shares in the second quarter we have bought back approximately 297,000 shares in May at an average price of a little under $37 per share bringing our year-to-date buybacks to 537,000 shares.

In order to assist you in creating your own annual and quarterly models I will highlight some of the information I think you should consider.

If you miss any of the details you can find them on our website and in the 8(K) we filed earlier today.

We expect total deliveries for the year to between 6,050, and 6250 homes.

This guidance is 150 homes more at the bottom end of the range and 50 more homes at the top end of the range than the previous guidance we gave you in February.

To arrive at our projections we estimate our closings on a community by community basis, evaluating each communities ability to deliver specific homes.

We believe that the average delivered price for the year will be between $555,000, and $565,000.

This is an increase of $5,000 per home over the previous range we gave you.

On a quarterly basis we estimate third quarter deliveries to be between 1525 and 1625 homes.

This is an increase of 50 homes over the prior guidance of 1475 to 1575 range we gave you previously.

We estimate the average delivery price of the homes to be between 560 and $570,000 which is an increase of $10,000 over the previous range we gave you.

We estimate the fourth quarter deliveries to be between 1975 and 2075 homes, which is a change from the previous estimates of 1950 to 2150 home.

The average estimated delivery price we expect in the fourth quarter will be between 565 and $575,000, which is the same as our previous guidance.

We believe land sales will be approximately $15 million for the year, $2 million less than our previous guidance, and expect $5 million in land sales in the third quarter and $2 million of land sales in the fourth quarter.

We expect that land cost of sales will be approximately 85%, which is slightly higher than our previous guidance.

We estimate that other income for the year will be approximately $13 million, approximately $2 million less than the full year guidance we gave you in February, and 4 million of that will be in the third quarter and 5 million of that in the fourth quarter.

As we now expect our joint ventures to see settlements earlier than originally estimated we project joint venture income for the year to be approximately $12 million, which is approximately $5.5 million higher than our previous guidance.

We expect it to be $4.5 million in our third quarter and approximately $6 million in our fourth quarter.

Home building gross margins can vary significantly quarter to quarter affected by seasons, weather, mix of deliveries, geography and product.

After reviewing estimated deliveries on a community by community basis we expect that home building gross margins will be 40 to 60 basis points higher than last year's gross margins.

This is an improvement of ten basis points over our previous guidance.

We expect gross margins will be 30 to 50 basis points higher in this year's third quarter versus last year's third quarter, also an increase of ten basis points from our previous guidance.

And we expect that it will be approximately flat to 20 basis points higher in the fourth quarter compared to last year's fourth quarter, also a small increase in our previous guidance.

Based on higher estimated costs partially offset by higher revenues, we estimate that for the full year SG&A as a percentage of revenues will be 25 to 45 basis points higher than last year's, which is about the same guidance we gave you in February.

As a percentage of revenues SG&A will be flat to 30 basis points higher in the third quarter than last year's, which is better than our previous guidance.

And approximately 20 to 40 basis points higher in the fourth quarter compared to last year's fourth quarter, which is slightly higher than our previous guidance.

We still expect tax rates to be 37%.

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

We project that we well average for the year about 81.5 million shares, increasing quarterly from the 81.4 million shares of the second quarter to approximately 82.2 million shares for the fourth quarter.

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

Thanks, Joel.

A lot of that reminded me of the crop report issued in trading places.

And now for the crop report.

The first question, oh, Jennifer?

Yes, sir.

I have a question here that came over the Internet from Michael Novak of Frontier Capital Management.

Michael says, or questions, as follows: The share count increased over 10% in the second quarter year-over-year and 8% in the first quarter.

Michael says, how does the company think about its equity?

I think I understand that question.

And then, please give a view on our philosophy on the use of stock options, what should we expect for share count growth going forward.

Michael, we issued 3 million shares last August to make sure that leverage was in balance with equity as we went to the market with a bond deal.

And that explains most of the increase in share count.

Our philosophy on share options, on stock options, is to continue to issue those as long as it, on an accounting basis, makes sense.

Right now we issue options fairly widely in the company to clerks, secretaries, construction managers, some salespeople, all the way up in the organization.

We try to buyback every year approximately the same number of shares that we are issuing in options so that we don't have dilution from this stock option issuance.

And what should we expect for share count growth going forward?

Joel?

I think as we continue to see share prices increase we'll see some increase in the number of shares and I gave you 82.2 million as my estimate of share count for the end of the year.

Okay.

Thank you, Joel.

Thank you, Michael.

Jennifer, any other questions?

Yes, sir.

At this time if I could just take a moment, [Caller Instructions].

Our first question comes from Wayne Cooperman of Cobalt Capital.

Please pose your question.

Hi, guys, how are your doing?

Hi, Wayne, very well, thank you.

I read this morning that April was a very bad month for home sales.

I read that, too.

Not for Toll Brothers, though.

I know that you had a good month and I guess everybody else had a good month, too, so I can't quite, do you understand how they come up with that number and where it came from?

No.

I'm afraid that we had the same impression that you have.

Either the numbers are wrong, that commerce and census departments don't get it right.

Or the public home builders have more than 25% of the market.

We have 50% of the market which I don't believe is so.

It seemed like there was particular weakness - .

I have no answer for it since our April was not just better than last year's April but better on average than any April going all the way back to when we went public.

And it's confirmed, it's not just an anomaly that we have more contracts because the buying public has increased demand, we have more traffic as well.

So the traffic is coincident with the deposits.

The number looked pretty a weak in the south region.

I don't know if there was anything particular in the south weather-wise in the month.

And secondly have you guys ever just analyzed how they calculate the numbers and figure out maybe if there was some kind of an anomaly at all?

The south appears to be pretty strong for us relative to where it was last year, the south is not as strong as the Washington, D.C. market is, the Phoenix market is, the California market, the Vegas market.

We have tried to analyze in the past and found some amazing dislocations of information that were being used as statistics by the Commerce Department.

For instance, when the Commerce Department reported inventory we found out that everything that had an agreement of sale but that had not been delivered was being counted as inventory as opposed to a home sold to be delivered there by giving a miss impression to speculative housing.

I remember this investigation we did was for the northeast because we couldn't get a spec into our line if we wanted to because the orders are so thick that the people who already are on order would scream bloody murder if they saw a spec house being put in the line.

So we found that to be so for all the other builders, private and public in the northeast.

And the problem was a lack of communication or definition.

All right.

I'm kind of confused.

I can't help you.

Joel?

One of the things that you should note on the government statistics that it was up 6.4% April over April, which is another way of looking at the data.

I know that PEBA picked it up as down on the March over April seasonally adjusted but we are up pretty strong April over April and when you consider how strong the housing market has been, in fact inventory may be becoming constrained in some areas.

You're right, Joel, I thought of that but April for contracts, mind you, we are not talking thousand dollars deposits and I'll be back to sign an agreement, we are talking the actual signing of agreements, at least we hope we are because we ask for that clarification by definition of the Commerce Department and Census Bureau.

April, since you're talking of signing of contracts, should have been as strong as March because it takes about, oh, two weeks to a month, to expect a contract to be signed.

And that means that April statistics are coming off of March and the beginning of April sales.

And that's traditionally a very strong period for the home building industry.

The same as late January, February and March, April for contracts should have been strong.

So I have no idea how it could have been down 11%.

I guess it really doesn't matter.

Yeah, it matters because it gives the wrong impression perhaps and hurts our stock, what do you mean it doesn't matter?

It really matters what your orders were.

Thank you, yes.

Our next question comes from Margaret Whelan of UBS.

Please pose your question.

Hello.

Hello?

Can you hear me?

Can hear you beautifully.

I nearly fell asleep there.

You know they revived three years of data, I think there was a bust, I think that was the problem.

Thanks for that information.

That makes us feel better.

The conversion ratio, why is it coming down so much?

Maybe the shorts are producing some of this information.

Possibly.

There are no shorts.

Four days to cover.

Where are what, Margaret?

Why is your conversion ratio coming down so much, the closing versus your backlog and units?

It's not that it's coming down, I choose to view it as not going up as fast as sales are going up.

We are raising the bar and production is increasing.

But it's obviously not keeping pace with the increased in the pace of sales.

And I think the answer is that we are going further out.

When you are sold out across the board at ten months you are now selling 11 and 12 months out.

It all comes to one number, which is contracts, one number, which is backlog, but comes to 12 different numbers if you are looking at production.

And you are looking at the sales in the 11th and the 12th month.

And we will speed up production but I do not expect to catch up to the 73% number.

There is no way that we can sell 73% more than we sold last year in the second quarter.

And then a year from now give you 73% more in production.

We hope to be able to raise production to 40 or 50%.

That would be tremendous.

How do you do that?

given the growing backlog, I'm sorry, Margaret?

How would you do that.

You'd do that by putting on more superintendents, construction managers, more project managers, more bricklayers and more carpenters.

Are those people available to you fully trained and ready to go?

They are indeed.

That's just a matter of money.

If you're increasing your backlog and stretching out your production time, you can bet that whether it's Toll Brothers or any of the other major public home building companies that this stretch out in backlog and production is occurring at the same time that prices are increasing more than the manager believes he will have to increase prices to raise production.

So that that's taken into consideration.

And, yes, the labor pool is available.

The material is available.

Obviously, if you are going to ask the horse to run faster you are going to have to feed him more oats.

As we have discussed previously we have in training a significant number of managers and have put people in training for a number of years to anticipate the growth that we are now seeing.

In anticipation of the growth, yes.

Margaret's question is, how many of those guys are picking up hammers and the answer is, not many.

Not enough.

So we are going to have to increase the incentives to increase the production per community.

When the growth is coming by increase of community count that's easier kind of growth.

The new land that you're buying as you're buying it are you looking at the opportunity to bring on talent?

Oh, absolutely.

Is it there?

You can't do one without the other.

You don't bring on land and expect the same management to handle it with the same ability and efficiency.

You've got to increase management.

We know that.

In terms of the new land purchases, are they concentrated in any one market?

On a dollar basis I would say that the expansion in California has been greatest.

And intercity, urban infill in New Jersey.

And Phoenix has had a high concentration of growth, Chicago has had a lot of growth.

Washington, D.C. has had a lot of growth.

So basically we are putting our money where our best growth has been and our highest profits have been in the past.

Okay.

Thank you.

Thank you for your attention.

Appreciate it.

Sorry for putting you to sleep.

I will talk to Joel about the crop report.

Jennifer, before you go I have a question here, this is a comment?

Okay.

Thank you.

Jennifer.

Okay, our next question or comment comes from Ivy Zelman of CSFB.

Please pose your question.

Good afternoon, guys, Dennis McGill on behalf of Ivy.

Just a couple clean up questions.

The community count, I think you mentioned at the end of the second, was 205.

Is that right?

That's the number that we are using for comparative purposes.

What was that in the first quarter?

Guys, first quarter?

I had that info.

It was the same number?

205, okay.

Are you still feel like you are on track to hit 225 by the end of the year?

220.

220, okay.

My other question focuses on your gross margin relative to your peers.

When I think of you guys as competing less against the other publics has been at the entry level point that you have a somewhat of a niche product, differentiated customer, you certainly have a longer land supply and theoretically would have more imbedded value there and you also generate more of your average price in options than most of the other large publics.

Is it fair to say that we should expect more upside in your margins or more room to improve versus your peers than where you are currently at which is 2 to 300 basis points above them?

You know, I can't say.

I'm not trying to be terribly cute, just a little cute.

I have a hard enough time keeping track of ours that I don't want to be responsible for keeping track of others, public companies.

So I can't give you an answer to that question.

Well, if we peg the other companies at say 26% and you're currently at rounding 28% is there a reason why you shouldn't be marketably higher given the amount of appreciation on your land and the other things I mentioned?

Joel?

We try to give you the guidance the best we can going out a year approximately, what rolls through.

We have diversified our products and some of the areas we diversified into have lower margins and we have continued to increase our net margins as a company even though we've diversified into some lower margin regions.

And we think that our margins on a community by community basis have shown significant growth and it's just slightly diluted by the fact that we continue to grow in some of the newer regions that have lower margins.

I guess maybe framing the question another way.

If we were to look at it from a return on capital standpoint given the amount of land investment that you do make and it is more than some of the other publics, you would effect some what of a better margin on the top line to be able to drive similar returns as the asset turns are slower.

Is that not fair?

I think it's fair, yes.

Yes

That's it, thanks again, guys.

Thank you very much.

We thank Ramona Persode(ph), I hope I have that pronunciation right, from Fidelity Management for your comments.

That was very kind of you, Ramona.

Jennifer?

Thank you, sir, our next question comes from Steve Fockens of Lehman Brothers.

Please pose your question.

Just a quick question.

Following up on actually a question from the call earlier in the month regarding your trying to prevent speculative or investment purchasing of Toll Homes versus actual families moving in.

I think you said that you put language in the contract that says if you flip it in a year you have to turn over the excess profits.

I'm just wondering how often you come across that, how easy it is to enforce that and if you think that anyone who has tried to do it has been adequately incentivized not to do it based on enforcing some of this contract language?

Well, I don't want to give away trade secrets, we are on the air, but you've asked so I will do my best to honestly answer.

With regard to is it enforceable?

I don't know.

I don't see why it couldn't be.

Would we chase somebody and sue them on it?

I don't want to ruin the value of the cause but the reality is probably not unless I believe that we needed the chase as a prophylactic.

Win, lose or draw, the fact that you have to go through a battle will serve as a prophylactic to the next person that disregards it.

The reality is that the very existence of the clause we believe has protected us against any, which is a significant statement, flipping within a year.

Because we would know it if homes are being flipped and we don't see it.

The reason we believe it's effective is that we receive every week quite a few comments from would be buyers who have put down deposits and are about to go to contract but who balk and say, listen, I'm signing this contract but I am not going to sign it with this clause in there and we say, very sorry, we are not going to take the cause out.

I may want to sell within a year.

Well, then you have to go by from somebody else and that's the end of that.

I think the clause serves its purpose.

Almost all the builders now have, and I'm not going to list the companies for you, I know which ones have and which ones don't have of the major publics, these kind of clauses in their agreements, and we all agree that it works because no matter what it says, whether you are disallowed or you are allowed but we get the profits, or we have a right of first refusal, no matter what they say, they just inhibit people buying homes to flip them which is the entire purpose of the clause.

So in practical terms you just really haven't seen that much actual occurrence of it from what you can tell?

We haven't seen any.

Okay, great.

Thank you so much.

You're welcome.

Our next question comes from Tom Dahoutie of MTB Investment Advisors.

Please pose your question.

Good afternoon.

Hi, Tom.

Can you give us a better sense of how many lots you're likely to be purchasing over the next few quarters because you've really ramped that up over the last year or so?

No, we can give you, if you guys got to track, by the way, what is purchased mean?

Entered into agreement?

Which is where we put them on the control?

Yes, either or.

The way we should view it is not settled but entered into contracts and control.

Guys, do you have the number of how many, well, the number would be 58, it would be just as you've seen.

So what you're asking is, what was asked is how many do we actually intend to put under control, to enter into contracts for in the next quarter or the next two quarters.

And the answer is, I don't know.

Because we are very opportunistic.

It depends on the deals that come across the desk.

If they don't meet the criteria, we won't put any under control.

And if a bunch meet the criteria, well put a bunch under control.

So, I'm sorry, but that's the best answer I can give you.

So you don't have a sense of, from a base of 58,000 that over the next three quarters you want to add another 20% to that?

No.

I'd love to have a sense of what I'd like to do and like to have but why stop there.

I'd like to have money just keep dropping through the ceiling on this desk and we don't have to worry about anything else.

So my likes and the real thoughts of what will happen is just not there.

I can't help you any more than I have.

Joel?

Just as a reminder we underwrite every community individually to determine whether it makes economic sense and if it doesn't make economic sense we don't put it under contract.

It's not done with a corporate goal.

Thank you.

Our next question comes from Stephen Kim of Smith Barney.

Please pose your question.

Hi, it's Jed Barron for Steve Kim.

A couple of housekeeping related items.

Given that you guys have done, I guess, a little bit more in the past year or so in terms of if you look at the Manhattan Building Company or Pinnacle or things of that nature, if you, right, if you look forward, I know you've given guidance this year for the unconsolidated earnings contribution, if you look forward out to '05, '06, whatever, any idea where that number could essentially go to?

Joel?

Witness is shaking his head in a horizontal motion indicating that he has not an idea.

I have no idea.

Okay.

All right.

And lastly, Joel, I apologize, I missed the number for write-offs this quarter?

328,000.

328,000.

Perfect.

Thanks very much.

Thank you very much.

Ladies and gentlemen, [Caller Instructions].

Anything else, Jennifer?

Yes, sir.

Our next question comes from Myron Kaplan.

Please pose your question.

Hello?

Hi Myron.

Hi, Bob, terrific quarter.

Thank you.

In regard to the new home sales figure I hope that in any event that with all the bureaucrats that are living around the beltway I hope you get to sell them some homes so they can do their numbers.

There is a good thought, thank you.

I'd like to ask you to update the percentages that you're selling, this year in '04 and hopefully in '05, in the active adult and townhouse categories, urban townhouse or semi urban townhouse compared to '03, what the progress is in these relatively smaller, newer products?

Joe Sicree feverishly fanning through information.

Joe, have you got an answer?

We are not good enough to have differentiated between urban towns and suburban towns but we may be able to give you attached information, which is town, carriageville, or whatever.

And I guess the selling prices for those kind of product are probably 20 to 30% less?

Than singles?

Yes.

Very much so.

But they've been going up at probably a faster percentage basis than the detached, the single detached product.

Joe, do you have the information, active (inaudible) or attached?

Multi-family we sold 255 million in the second quarter of '04 versus 147 million.

147 to 255 and that's just for the quarter, '03 quarter to '04.

Now hold on.

It's up 60 odd percent.

Now multi-family is a term of Art used by the Commerce Department to mean apartments.

When we say multi-family we don't mean apartments, so we'll have to learn to speak Commerce Department speak and to say attached, attached, for some reason they call it attached single-family housing as opposed to detached single-family housing as though there is a stat out there for housing that two families live in that is not apartments.

I haven't found it but that's the way they speak.

So now, Joe on -.

Average selling prices for that product was 442,000 versus 366,000 in the prior year.

Could you hear Joe?

Yes.

Okay.

Thank you.

And age restricted?

It's 109 million in the '04 quarter versus 66 million in the '03 quarter.

So it's down?

He read it backwards.

Oh, 66 against 109.

Do you have any guidance for, lets say, what you think this kind of similar growth in the year to come?

We expect in the next couple of years and after that it will represent 15% of our business, so.

I don't think think growth, why should I speak?

I have no idea.

I was going to say I don't think it will be as great, Myron, but I really don't have any idea.

I can go get the idea but it's going to take me a couple of hours and I'm going to let these fellows do it for you.

All right.

Well, terrific quarter.

Thank you.

Keep adding the way you are.

Thanks.

Our next question comes from Jan van Bergen of United States Growth Company.

Please pose your question.

Thank you.

Nice quarter.

I would just like to revisit the dilution of the shares outstanding.

Sure.

If my math is correct the between the two periods for the year is about 7.5 million shares.

You issued 3 million so I'm assuming for stock options you issued between 6 and 8% per year in stock options?

No.

Am I too high?

We issued about 1.3 million in stock options.

You have the fact that the stock price rose over the period of time which affects the dilution calculation.

If you looked at prior years you will find out that we bought back stock so in prior year we benefit from having bought back stock and had a lower stock price.

If basically all your stock outstanding was converted, let's say your price rises very substantially to make us all happy, what would that take the share count to.

That is a good question.

The question, Joe, was, let's assume the price goes to the moon so that every share you've issued, every option you've issued is converted or has to be counted how many shares would you have out?

You'd have an additional 9 million shares.

Sorry. could you repeat that.

9 million shares.

9 million shares.

That would take you up to about 90 mil.

Yes, that's correct.

Yes, 90 mil.

Great.

Okay, thank you very much.

You're very welcome.

We have here from the Internet another question, oh, this is Michael Novak again.

Michael asks for to us speak on our conversion ratio, is there a certain ratio that you feel is ideal?

Now when Margaret Whelan talked about conversion she was talking about building faster.

I guess that's what you're talking about as opposed to conversion of deposits to agreements to settlements, how many months out for delivery.

Do you manage to a certain number of wait time until delivery?

Well, what we manage, Michael, is that we will continue to sell homes until we get to about 12 months out on the current pace of delivery at that particular community.

And once we get to the 12th month then we'll just stop selling until production brings that amount of backlog time down and then we'll put a number of homes into the list to be sold that will bring it back up to 12.

So to that extent we manage.

And what we try to do is, of course, increase production so that we have more to sell.

You note that the industry-wide conversion ratio appears to be coming down.

Do I feel it's intentional?

Are they saving up for a rainy day or is it merely a function of demand exceeding the ability to supply?

And, of course, the latter, I believe, is the truth.

It's just a matter of being unprepared to, well, actually it's not unprepared, I don't want to denigrate our efforts or our peers efforts.

You can't speed up the production line and slow it down in our business the way you can in the automobile business, it's just not that flexible.

So what you are witnessing in our part and on the other home building company's part is tremendous demand which makes us all shake our heads and wonder if there's such visibility, which you've recognized and you see how far out our backlogs are, you almost know, therefore, what our incomes will be, what the growth will be over the next year to year and a half.

Why that's not being recognized and why because the long bond goes from 4 to 4.6 with concomitant increase in 30-year mortgage but not concomitant increase in 7/1 arm which is what the people shift to.

Why that takes the stocks down as though there is a prediction that we are going to run out of work is a surprise to me.

Thank you, Mike.

Jennifer.

Our next question comes from Greg Geiber of A.G. Edwards.

Please pose your question.

Bob, just on that last point on backlog conversions.

A falling conversion rate is nothing more than what I saw when I was doing tech stocks as a rising book-to-bill and rising book-to-bill usually gave my stocks, in those days, a good move, just a comment.

The question I really had was going back to the 58,000 lots that you have under control.

If you said, I didn't catch it, what percentage do you own versus option?

60 percent, 60% is owned.

Okay.

I'm sorry, new number. 56%.

56% owned.

I thank you for that.

If I just play quickly with some numbers you are now closing at about a 6,000 unit a year rate.

Right.

The 58,000 than equals kind of for 5 years that's about a 23% growth rate, for 6 years a 14% growth rate, is that sort of what you're thinking your unit growth rate is going to be over the next out 5 or so years, 14 to 23%, in that range?

At 20% growth.

Not 14.

14 is the six-year number, so you are saying it's closer to a five-year supply.

Yeah, let's hope so.

Okay.

I just wanted to - .

I guess the best way to judge it is just to go back and look at the history of the company over the past five years.

In our business the future is not always the same as the history.

That's for sure, in anybody's business and that goes for politics and science as well.

Okay.

Now the question as you grow the capacity, what's happening to your capacity to do as you expand both geographically and in size to provide materials through off-site manufacturing operations?

That hasn't been impacted because it's easily transportable.

You've got the technology already developed which is the hard part of the manufacturing process.

So that we will be starting up in Minneapolis.

We are obviously not going to open a plant in Minneapolis for our first community.

But we can transport the technology that we have to the lumber panel trust millwork suppliers in Minneapolis and we go to them and say , here is the number of studs that you need to purchase for panel A, for panel B, here's are the plates you need to purchase for panel C, here are the fasteners that you need to purchase for your trust manufacturing and here's the engineered configuration for the trust manufacturing.

Here's what it will take you in roll lumber to produce x-number of feet of our signature mill work.

Here is how to set up the jigs for the mill work, et cetera, et cetera.

So what we hand somebody in Minneapolis is a blueprint on how to produce.

We also tell them how much to charge and we tell him what profit he should make.

So the software or technology, if you will, is fairly transportable.

So we are not inhibited by not having the plant there ahead of production.

You just have two plants now.

Is that correct?

Right now we only have two plants but as I've just described many, many plants producing for us.

The difference is those people who are producing for us are making approximately 10% more and it's costing us 10% more than it would if we had a plant there.

And the plant had gone through it's dumb tax stage.

Would you think of opening plants in other markets where you are active, West Coast?

Yes, we well.

Okay.

Can you finally make some comments about when you replace land in a community like New Jersey or Washington, how much appreciation there's been from the land, the house that you just sold that you are replacing?

Actually the appreciation, and I don't believe it's fortuitous but is due to very rational explanation, has been going up not down, and the reason is the land that we are using now went through an approval process time period that was shorter than what we anticipate the approval process time period will be for the next go around.

The approval process, entitlement process, environmental satisfaction process continues to lengthen.

Nothing is getting easier with one exception in the country that I can think of.

So, actually, it's not the problem that you would think of.

Okay.

Thank you.

Thank you.

Our next question comes from Roger Norberg of (inaudible) & Capital.

Please pose your question.

Hi, good afternoon.

Mr Toll, could you just talk a little bit about what's going on in the land market in your more core high-end northeast corridor there where you've been active for the longest time.

What's going on with availability, land pricing and the rate of change of land prices right now.

Do you see that accelerating from previous trends?

Can you just give me a little color on what's really happening in the - ?

Sure.

Land is becoming more scarce.

This is driving the price up logically more than it has because it is a continuing depleting resource of the house prices, depleting not because the land is going away but because the approval process is taking certain land out of the possibility of being approved and improved, the house prices are chasing ahead of the increase in land prices.

To give you some flavor on it, Massachusetts is next to impossible.

Rhode Island, we see more possibility, more potential, but not a lot.

New York, we see quite a bit of availability but it's in places that you never would have considered as being part of the New York Metropolitan world and it certainly is now, all of Duchess County now serves practically the office parks down toward New York City and even into New York City.

Westchester is pretty much used up.

We just, well, we didn't just, we will very shortly open up another community in Westchester which is like gold because there are very few of them, just open up the New York Times and take a look.

Jersey is shrinking rapidly in availability.

The urban infill is replacing it.

The high-rise and mid-rise town home development that we will do along what was blighted shore which is now gold coast, for instance, and Weehawken and Hoboken and Jersey City and Bayonne will have to replace the suburban half acre, quarter acre and acre lots as the government is withdrawing those from the game of development and saying, thou shalt not create any more communities.

What impact this will have on the economy in other areas of New Jersey yet to be seen but my prediction is that you'll see an awful lot of office movement down south.

In the very busy area of Baltimore/Washington corridor and going considerably south of Washington, there has been a change in politics that has made it possible for more land to come on and be developed.

So prices have gone up, again not as fast as house prices have gone up, but there will be continuing expansion there.

And I think you will see a lot of corporate and office movement down to the area because of it.

There seems to be a plentiful supply still in Phoenix and, remarkably, in California and both north and south.

What Kera?

Just talking about the northeast?

I'm done.

Thank you.

Our next question comes from Michael Rehaut of JP Morgan.

Please pose your question.

Hi, it's Jon Barlow on behalf of Mike.

Just wondered if you could quantify the growth in deposits and traffic that you've experienced so far in May?

Growth on a same store basis in May.

Traffic going back to the first week, ending May 02, up 15%, 09 up 14%, 16 up 13% and May 23rd, these are all Sundays, up 17% over the last year.

And eyeballing quickly, every one of these stats is a record going back to, per community record, this sheet only goes back to 91 that I have in front of me.

So you are seeing more traffic per community, thank you, than we have seen since '91.

On a gross basis, I don't have the percentages but, for May the 23rd last year, was 6257 people actually signed visitors cards, and this week 8,543.

So there's a great increase but you'd have to go back and compare it to the communities, you had 176 communities last year versus the 205 this year.

So does that give you?

Yeah, that's great.

Thanks.

You're very welcome.

My second question was just related to a topic that was brought up on the last call.

You talked about holding some auctions in, I believe, four of your communities.

Yes.

I was just wondering if you could give us an update on that and let us know how those have done.

We have two winners and we have reset prices according to the auctions.

We had one that was a dud.

We picked up an extra thousand or two but it wasn't worth the brain damage and aggravation and one community devotes all (inaudible), yet.

We are refining the process.

We are learning from it.

We are trying to replicate what the realtor market does but of course they are always selling one home.

So what we've recognized is instead of offering five and asking for bid packages as it were with qualification questionnaires filled out so that the mortgage uncertainty is taken out of the equation, we are simplifying the process and we will continue to use it to gain information as to how we should price our homes because in some communities, as we said in the last conference call, some areas, we apparently, after 40 years of business, don't know how to price our homes.

This, too , will pass, of course.

Do you expect to roll-out this process in other markets any time soon?

Yes, we definitely will.

Okay.

Thank you.

Thank you.

Our next question comes from Scott O'Shea of Deutsche Bank.

Please pose your question.

Good afternoon.

If I look at your backlog it looks like the average selling price per home is roughly 601,000, up about 8% from your second quarter deliveries.

Do you think this has positive connotations for forward margins or do you think a lot of that gets absorbed in cost increases?

Any thoughts there?

I have thoughts but I would rather have Joel answer the question.

For the next six months we've given you what we think those prices were will roll-out at.

After six-months we will give you guidance in three more months.

But I would expect we've had very good luck in increasing our margins on a community over same community basis and I would expect that that will continue going forward.

Okay, thank you.

Thank you.

Jennifer, let's make this the last question.

Okay, sir.

Our last question comes from Rick Murray of Raymond James.

Please pose your question.

Great quarter, guys, my question was already answered, thank you.

Thank you, Rick, that's the kind of question we like.

Thanks to all for listening to the conference, I appreciate it.

Anybody that has additional questions that we haven't gotten to, please call into Joel Rassman or Fred Cooper and they will be glad to do the best to answer them.

Thank you.

Bye.

Ladies and gentlemen this concludes the conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.

Thank, Jennifer.

You're welcome, sir.