托爾兄弟 (TOL) 2004 Q4 法說會逐字稿

Good day everyone, and welcome to Toll Brothers 2004 fourth-quarter earnings release conference call.

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

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

I will now turn the call over to Mr. Robert Toll, Chairman and CEO.

Please go ahead, sir.

Thanks, Keith.

Thanks everybody for joining us.

Welcome.

With me are Joel Rassman, Chief Financial Officer;

Fred Cooper, Senior Vice President, Finance and Investor Relations.

Joe Sicree, Chief Accounting Officer, Kiera McCarran (ph) Chief Marketing Officer.

Before I begin I ask you to read the statement of 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, financial markets, weather and other factors obviously beyond our control and that could significantly affect future results.

Those listening on the Web can e-mail questions to art toll (ph) at TollBrothersInc.com.

We will try to answer as many as possible.

What can I say?

Demand for our luxury homes remained tremendous in fiscal 2004 and has continued to this day.

With the most communities and the most product lines we have ever offered, we produced records across the board.

In our fourth-quarter record earnings per share of $2.22 rose 87 percent, and record net income of 180.6 million rose 93 percent over the fourth quarter of '03.

Record revenues of 1.46 billion rose 62 percent, and the average price per home delivered was 603,000 versus 566,000 in fourth quarter '03.

Record contracts of 1.53 billion rose 50 percent, and the average price of contracts signed was $682,000 per home versus $582,000 in the fourth quarter of '03.

For the full fiscal year record earnings per share of $5.04 grew 47 percent.

Record net income increased 57 percent to 409.1 million.

Record revenues of 3.89 billion grew 41 percent.

Record contracts of 5.64 billion grew 62 percent.

And a record fiscal yearend backlog of 4.43 billion grew 68 percent, all versus fiscal 2003.

The average price of homes in backlog was 661,000 versus 566,000 in the fourth quarter of '03.

Through the first five weeks of fiscal '05 on nonbinding reservation deposits were either the highest or the second highest on a per community basis at the same-store basis for that week since 1990.

This continues the pattern we saw in our fourth-quarter when twelve of that quarter's 13 weeks achieved the same level.

Since deposits are precursors to contracts a month later on average, and revenues 9 to 12 months thereafter, we already had strong visibility through '05 and into the first quarter of '06.

Based on our backlog and the robust demand we are enjoying, we are increasing our projection for net income growth to more than 40 percent in fiscal year '05, on revenues of between 5 and 5.35 billion.

This is higher than our previous guidance and Joel Rassman will be walking you through our reasoning in a few minutes.

Our community count at fiscal year end '04 was a record 220, and we project it to reach about 240 communities by fiscal year end 2005.

Why has demand for our luxury residences remained unabated and unsated?

Because the supply of new housing in the U.S. has not kept pace with the growth in population and wealth.

Since 1970 population has increased by 85 million, yet we are producing less new housing now than we did in the '70s.

Much of the population growth has come from immigrants who want to own the American dream even more than the natives as soon as possible and arrive in the U.S. with the skills to achieve it.

According to the Census Bureau 25 percent of immigrants hold managerial and professional jobs.

The luxury buyers are the fastest-growing group.

Households earning 100,000 or more have grown at a pace six times faster than U.S. households in general.

Today there are 16.9 million households earning 100,000 or more in constant '03 dollars.

That is 15 percent of all U.S. households compared to 6 million and 7 percent just 20 years ago.

Logically based on these demographics more new housing should have been built, but supply has been constrained by governmental regulation and no growth politics.

While demand has been spurred by increasing numbers of affluent households and maturing baby boomers entering their peak earning years.

The result has been rising home prices and an appetite for luxury homes that we believe should remain strong in the foreseeable future.

For at least the past five or six years it has been argued that a housing bubble has been created which is about to pop.

We disagree.

Demand is being driven by fundamental demographics, and home prices are rising due to the imbalance between supply and demand.

In this increasingly lot constrained environment we believe that demand for our products will remain strong and that those builders with approved home sites in desirable locations will be the winners.

With our strong land position we have grown even in years when industrywide housing production has slowed.

We continue to increase our holdings.

This year we expanded our lot position to 60,000 home sites from 48,000 at fiscal year end '03.

Several recent articles have once again painted a darkening picture of the U.S. housing market.

These are consistent with a pattern of articles over the past five or six years predicting our industry's demise.

The New York Times on Monday bemoaned the fact that the housing market was losing steam.

According to the office of federal housing enterprise oversight I think that is the agency that looks over Freddie Mac and Fannie Mae, home prices have risen 12.97 percent from the third calendar quarter of '03 to the third calendar quarter of '04.

The article said that going forward home prices would not match that 12.97 rate of increase and will instead be more in the range of 5.3 percent in '05.

This is truly a matter of viewing the glass half empty rather than half full.

I will take 5.3 percent annual price increases forever.

I am sure most of the other U.S. industries, whether it's beer or diapers would love to do the same.

However, with our focus on the luxury market we think our prices will rise faster than the national average.

We control sites in lot constrained metropolitan markets where there is strong demand.

We benefit from exceptional pricing power because we have greater ability to raise prices than those builders who target less affluent buyers on tight budgets have.

In our price bracket it is much easier to hit doubles and triples and home runs selling luxury buyers than it is if you're selling starter buyers because even though they may want it, once the price goes up a certain percentage amount, their budget takes them out of the buy.

Barons last week once again predicted the housing markets demise.

The lead article noted a disproportionate number of buyers are choosing ARMs these days compared to in the past.

The article quotes one economist's concern about "an uncomfortable fixation on the monthly payments" among home buyers.

Perhaps economists are the only ones not concerned about their monthly payments but don't forget that most ARMs don't adjust annually from day one.

A 7 1 ARM is locked for 7 years, and a 5 1 ARM is locked which is the most popular one we do, by the way, is locked for 5 years.

Since most people don't stay in their homes for as long as 10 years and those that do, plan a refinance somewhere down the line, these decisions may be more pure commonsense, a bird in the hand for savings than in the bush is better than anything else.

Currently the 5 1 ARM is approximately three-quarters of a point lower than a comparable thirty-year fixed.

On a $500,000 mortgage that equates to a monthly pretax savings of $236 or $14,000 plus a little bit over the first 5 years, and it can be prepaid at anytime.

Tuesday's Wall Street Journal had article on increases in incentives that large builders are using to move homes.

In general sales incentives for us are at historically low levels.

We still offer small incentives in some Texas and Michigan communities, but they have been there forever.

Mostly we only offer small incentives when we are closing out a community and want to move the last few lots and get the management on to a new community.

They are way too small to affect our margins.

In Las Vegas we introduced incentives in two communities that are located close to a spot where other builders had to drop their prices.

We have increased our prices in other Las Vegas neighborhoods.

In most markets price increases are the rule.

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

Thanks, Bob.

As Bob noted, we just completed a tremendous year.

Home-building revenues for the fourth quarter and full year were 1.44 billion and 3.84 billion, respectively as we delivered more homes at a higher average price than estimated.

And the fourth quarter and full year land sales at 1.55 million and 22.5 million, respectively were just slightly lower than our guidance.

Fourth quarter and full year other income of 7.9 million and 15.4 million, respectively were higher than our guidance that we gave you in August.

As we had more interest income, higher income from our ancillary businesses, more management fees than expected and some operating income from the T building and acquisition of a 525 unit luxury apartment complex in Hoboken.

Joint venture income for the fourth quarter and full year at 8.8 million and 15.7 million, respectively were approximately what we had estimated.

Home-building gross margins in the fourth quarter of 28.6 percent were better than the previous guidance we gave you as we realized more profits from price increases and had a richer mix of closings than projected offset in part by higher write-offs.

Inventory write-offs for the quarter were $5 million compared to $3 million in our budget and last year's write-offs of 1.3 million.

As we had alluded to in our November conference call, SG&A in the fourth quarter at 7.6 percent of revenues was significantly lower as a percentage of revenues than our August guidance.

As we had slightly lower absolute costs than anticipated and significantly larger revenues.

Interest expense at 2.3 percent of revenues was slightly lower than our previous estimate of 2.4 percent.

The average number of shares used in the calculation of earnings per share were approximately 81.5 million shares for the quarter and 81.2 million shares for the year, both in line with the guidance we gave you in November.

Because we signed so many new contracts during the fourth quarter, contracts were up 51 percent in dollars and 29 percent in units over the prior year.

And because many of our communities have delivery times of 10 to 12 months, which are significantly longer than normal, we believe that some of the traditional relationships between closings by quarter and backlog will differ for 2005 results compared to prior years.

As Bob indicated, projections are subject to many uncertainties that can change for many reasons.

However, as a result of our record backlog the number of communities selling homes, the projected number of net new community openings and the current sales pace per community we expect to deliver between 7900 and 8300 hundred homes with an average sales delivery price of between $635,000 and $645,000 each.

This is an increase in both the range of home deliveries and the average price of delivered homes from our last guidance.

Based upon the mix of expected deliveries both by product and geography, and the significant increases in the average sales price during the year we anticipate that gross margins will be approximately 205 to 230 basis points higher than last year's gross margins.

That is 2004 gross margins.

We currently project land sales at about $17 million, down from last year's 22.5 million.

And we estimate that gross margins on these land sales will be approximately 30 percent.

Other income should be about 18 million, a little higher than the 15.4 million we achieved in 2004.

Income from joint ventures at $15 million will be approximately the same as the 15.7 we achieved in 2004.

We estimate SG&A as a percentage of revenues for 2005 will be approximately the same as a percentage of total revenues as we achieved in 2004 as we continue to expand the company to prepare for our growth in 2005 and 2006.

However, the quarterly variances will differ significantly, which I shall discuss in a few minutes.

We estimate interest expense at 2.3 percent of revenues, which is slightly better than 2004.

And a tax rate of approximately 37 percent.

In order to assist you in preparing quarterly models I will highlight some quarterly information I 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 (inaudible) between cost by many factors.

We expect to deliver between 1475 and 1575 homes in the first quarter at an average price of between $620 and $625,000.

We estimate the deliveries in our second quarter will be between 1900 and 2000 homes with an average price of between $630 and $640,000.

We believe homes and deliveries in third quarter will be between 2000 and 2100 homes with an average delivered price between 640 and $650,000.

We estimate that deliveries will increase again in the fourth quarter to between 2525 homes and 2625 homes with an average delivery price between $650,000 and $660,000.

Land sales will vary by quarter as well.

We expect $1 million of land sales in the first, third and fourth quarters with a gross margin of about 15 percent, and a $14 million of land sales in the second quarter with a gross margin of about 35 percent.

We estimate that other income will be approximately 3 million in the first quarter and in the second quarter, increasing to 4.5 million for the third quarter and to $7.5 million in the fourth quarter.

The expected income from joint ventures should be about 1.5 million in the first quarter, 2.5 in the second quarter, approximately 8 million in the third quarter and about 3.5 million in the fourth quarter.

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

This variance of deliveries by quarter can affect job overheads per home.

And also geographic mix and product mix of deliveries will have a significant impact on margins by quarter.

We currently expect home-building gross margins in the first quarter to be approximately 50 to 65 basis points better than last year's first quarter, 130 to 160 basis points better in the second quarter than last year's second quarter, 215 to 245 basis points better in the third quarter than last year's third quarter, and approximately 315 to 350 basis points better in the fourth quarter than 2004's fourth quarter.

SG&A also will vary very much by quarter, including the effects of funding costs of future growth as well as the number of master plan communities and after (indiscernible) communities we have in any given quarter which are in the startup phase.

We would expect SG&A as a percentage of total revenues to be approximately 100 to 110 basis points better, or lower, in the first quarter of 2005 than in 2004's first quarter; 100 to 120 basis points lower in the second quarter versus last year's second quarter; approximately 35 to 50 basis points lower in the third quarter compared to last year's third quarter; and approximately 100 basis points higher in the fourth quarter compared to last year's fourth quarter.

Remember, the fourth quarter of 2004, we enjoyed relatively flat SG&A and much higher sales, which affected the SG&A as a percentage of sales for that quarter.

The last component needed to calculate earnings per share is share count.

Obviously, share price has an effect on the average shares we use.

Based on what we believe will be increasing share price during the year, as our earnings estimates for 2005 become a reality, and as an objective (ph) start to focus on our expected growth in 2006, we have used 83.8 million average outstanding shares for the year to calculate earnings per share, starting at 82.4 million in the first quarter and increasing to 84.9 million in the fourth quarter.

At this point, I turn it back to Bob.

Thanks, Joel.

We are ready to take questions.

(OPERATOR INSTRUCTIONS)

I've had two questions sent to me over the Internet.

The first one is from Mike -- and I hope I pronounce it right -- Mike Milnier (ph), who says, fantastic results.

Do you believe that your managers will be able to continue to execute, stay humble, do the things to ensure future success -- do the little things to ensure future success?

Often, large companies do not handle their success well and struggle as the favorable conditions change.

Great quarter.

Mike.

Mike, thank you very much for your kind comments, and I believe that your question is right on point.

I believe that we will be able to execute.

I believe we will stay on top of the little things, and I believe that our managers will continue to mind themselves of the watchwords of our house, which is, it is a wise man who knows what he doesn't know.

And we are already rich if the idea is not to die poor.

So we are very much tuned in to what your question implies, and we will do our best to stay on top of it.

The second question I got was from Christopher Schuer (ph), and Christopher asks, on average, what percent of a given home sales gross profit comes from the land gain?

The answer to that, Chris, is, first, you tell me or let's estimate together what is a builder entitled to make if he were buying his land at the last minute, right before he went into production.

My guess is probably somewhere between 5 and 6 percent on a non-GAAP accounting basis.

Joel --

18 percent.

18 percent on a GAAP basis.

And all the profits that we make above that are probably ascribable -- most of it is ascribable to the increase in the value of the land.

To a certain extent, we make a little more, because I believe -- forgive me for the ad -- we are more accommodating of our clients in that we offer so many more permutations and combinations of options and extras and custom features that we probably, even on the base product, gain a little more because of the customer realizing we will do that.

Also, I think our brand now makes us an additional 5 percent contribution toward the bottom line.

Stephen Kim with Smith Barney.

Heck of a quarter and very strong performance all year.

Congratulations, guys.

Basically, I didn't have a lot in the way of specific questions as it relates to the numbers, but I did have a few bigger picture questions.

I guess, first of all, I wanted to understand the backlog conversion ratio trends that we've been seeing for the last few years.

And it looks like you are looking for backlog conversion ratios to be, if anything, a little bit down from where they were in '04 in your projections for '05, or at least no better, really.

Can you walk us through what specifically are the kinds of things that are occurring on the ground that are creating a lower backlog conversion ratio over the last few years?

What is a backlog conversion ratio, Joel?

I'm not sure how he's defining it.

How I --.

Stephen, I'm sorry.

What do you mean by backlog conversion?

Basically how much of your beginning backlog are you delivering in each quarter?

Sure.

Certain of the markets are of -- I don't want to say packed (ph) out, but they are so busy that is hard to increase production on a community-to-community basis because of the limited subcontractor pool of available labor.

So the reason you have static backlog conversion or slightly down backlog conversion, as I now understand it, is because in those markets, you are limited in your ability to increase production.

We are fighting with that right now, doing everything we can to pick up production in Vegas, where we have tremendous backlog; in Phoenix, where we have tremendous backlog.

We pretty much have whipped the problem in Southern and Northern California, where we are able to produce tremendous numbers.

We are fighting with the problem in the Washington, D.C., Northern Virginia, and Maryland market.

We are making strides.

It's getting better, but it is a long, slow fight, because we have to, in effect, train subcontractors and have them train more.

We've got increased management we put on site.

But we don't want to sacrifice quality.

So before we make a delivery of a home, we still insist on the two-step pre-settlement inspection process, where we have our buyers walk the homes, give us a punch list.

We punch it out, then we have a second walk-through before we go to settlement.

And if it takes longer to produce a quality home between the first and the second walk-through, because you're educating new subcontractors, so be it.

We are not going to deliver a home without the quality, because that's how we maintain our brand and continue to make greater profits.

It sounds like what we've got here is -- it looks like -- what I visualize here is basically that your conversion ratios have dropped by about 30 percent from where they were, let's say, five years ago, which means that you've extended the delivery times on your homes by probably a good couple of months.

That's probably right.

Three years ago, we were 9 months, and today, we are 11 months.

Okay.

And obviously, that is not because you've reduced spec building or anything like that, because you guys have never done spec building.

So this is truly either your -- this is basically you're attributing it to labor creating an inefficiency in the market.

Correct?

Yes, I think that probably is correct.

Yes, the houses take -- thank you, Joel -- the houses grow every year, as well.

They get bigger, so they take a little longer to produce.

And the assortment of options.

It used to take a 5-man crew five days to bang out our typical single-family home.

It now takes them about 2.5 to 3 weeks to put together the lumber.

And that is with panels and trusses and other components that we are giving them to make it easier.

I guess where I was going with that is typically when people see something like that in an industry, they think that's a red flag.

But in this industry, I guess the way I was sort of thinking about it, it sounds like (multiple speakers) --.

(multiple speakers) in our industry, I believe.

Yes, I was going to say, in this industry, it almost sounds like for those people who are concerned that margins are at an absolute peak and maybe margins can only go down and they're going to go down dramatically, this is actually a phenomenon that probably if anything has been causing your margins to be a little lower than they might otherwise have been.

Which would, you would think, would provide a little bit of insulation if things actually get a little bit worse.

Your conversion ratios would probably drop.

I would think that margins (multiple speakers) have to get better in '05.

I hope I'm right, because the '05 deliveries are going to come off of the '04 sales -- I'm sorry, sales is a very specific term.

Let me scratch that and go to contracts and settlements instead of sales.

So the '05 deliveries are going to come off of '04 contracts.

And throughout '04, we had significant price increases, as you had tremendous demand in the market.

We still have that, but I think the deliveries in the first quarter of '06 are also going to witness tremendous increases in prices -- in settlements.

Now, where we are going to go for the last three quarters of '06 in terms of price increase, well, you've got different projections.

Toll projected 10 percent, roughly, and the OFEO projected 5.5.

Either one would be okay, but naturally we would rather have 10 -- and that's what we think we will have -- than 5.

But we will still be doing better with pricing and margins, I think, in '06, even with a smaller increase in prices.

Sure.

By final question related to the use of panelizations.

You guys are probably one of a first builders to really get involved in that in a fairly large way with your total integrated system, which has been there for at least 15 years.

I don't know how long you have been doing that -- I think since near your inception.

Recently, we've not been hearing you talk so much about that, but we have heard a lot of your competitors talking about the opportunity to get into things like opening up panelization plants.

Can you talk to us about how vital you think that is in terms of supporting your operations and driving the margins that you enjoy, and perhaps why you think that your competitors have been much more aggressive in talking about it, perhaps, than you have been as of the last several years?

Well, taking an inverse order why my competitors are talking about it more than we have, I don't have an answer.

With respect to why do we do it and what do I think about it and how important is it to us, it saves us I think a ton of money in millwork.

We make our own millwork.

It saves us a tremendous question in doubt about quality.

We buy our own lumber directly from Weyerhauser, Bush, Cascade and other producers on the West Coast, British Columbia, Washington and Oregon.

We have our lumber shipped to our site by rail and instead of by boat, so when we buy kiln dried lumber we know it's going to come to us dry because it's coming by rail instead of taking a boat ride through the Panama Canal, through the Gulf, around Florida and up to the ports in the East Coast especially.

By the time that lumber comes to you if weren't kiln dried when it left the port by the time you get it is a sponge.

So our lumber is of a higher quality, and you get much fewer nail pops.

And your drywall looks better, and your home looks better and the quality is better.

When you build your own panels and trusses you get a higher quality product.

So I am not sure you save that much although you do in millwork as I said earlier, but you assure yourself much greater quality.

You also assure yourself of a very accurate line of supply.

You don't get the phone call or look out your window the truck is on its way, the lumber will be pulling up, the trusses are coming.

You know when your product is going to be delivered because we are doing our own trucking.

So I think the main points are to control your destiny, control your line of supply, control your quality.

I think an added benefit is it does make you additional money.

You don't give the profit away for the lumber distribution, you don't give the profit away for the manufacturer of trusses, and wall panels.

So all in all I think it's a pretty good thing.

But I don't think it is as important to dwell on that as it is to dwell on the main themes of the major home-building companies, which is the ability to increase market share within a volatile, erratic and shrinking in terms of delivery to overall population delivery.

We are growing tremendously within pretty static parameters.

That is our deliveries, the major public home-building companies, and I think that is what has been missed the most by not analysts, but by the market that is analyzing who are the major public home-building companies and what can they deliver next year and the year thereafter.

I agree.

Thanks very much, guys.

Margaret Whelan from UBS.

I had a couple of questions.

I guess to follow up on Steve's first, my concern would be that as the backlog gets higher and higher that your costs are rising while the price obviously (technical difficulty) once you've taken the order.

So how do you, maybe it's a better question for Bill, but have you factored that in when you have given us the guidance?

Yes.

All of our guidance, Margaret, is done on a community by community basis.

And then we role it up to give you the numbers we have given you.

So we analyze each community's ability to deliver based on their individual management in place, their product they are delivering, the subcontractors they have and the cost they are incurring and by doing it on a community by community basis we think we get more accurate information, not done on a top side basis, but this is what they should do, it is done on a -- and what is actually happening.

Margaret, we have varying by community contingencies to cover price increases that we may suffer from labor.

Most of the material is fixed.

We buy our lumber, as I said earlier, directly.

And we've got six and nine-month delivery protection.

Now that may mean that we're going to pay more for lumber than somebody that takes it if lumber is dropped six months from now because we are stuck with our contracts but we know what our costs are.

So I think Joel is very accurate in his prediction of margins for the next 12 months.

Where is most of the supplies coming from and in this quarter.

Margaret, could you say that again?

We couldn't hear you.

Where, and given the fact you are looking at your estimates and reconciling them by community, where is most of the supplies coming from?

For instance, my model your SG&A was lower but what was it versus your own?

I don't think we got surprised but you can speak to where we delivered 225 units more in -- 227 units more in the fourth quarter than we originally had budgeted for the first quarter of 2005.

We moved up production and that is why the SG&A was significantly lower.

And in on November conference call I alluded to the fact that was going to be an impact of at least 100 basis points, it turned out to be more than that.

And because we didn't even have a cost increase, our costs were even a little bit lower than we expected.

So we had a double benefit of that.

What happened, was we recognized the stretching of the delivery with the growth of the backlog and Zvi Barzilay, our Chief Operating Officer and President emphasized to all the Senior Vice Presidents that really run the company, that we've just got to do better at coaching and teaching our subcontractors and putting on more construction managers in order to step up deliveries.

Otherwise we are just going to keep on stretching our back log forever and not producing anymore.

So we had a little contest of deliver more in '04.

It was so successful that they now have strive in '05.

They rejected my motto which is shuck and jive in '05.

What were they doing?

Can you give us some specific examples of (indiscernible) process?

I cannot, I would have to get Zvi down here but I can't imagine it is since once upon a time I had that job and was out there and it is no more difficult than at the end of the day, you grab the head of your plumbing unit or you grab the head of your electrical unit or you grab your HVAC contractor, and you take them to the local bar and you sit down with them and you have a couple of beers and say hey look, I really got to have more production here.

We've got the foundations laid out in front of you.

We've got the contracts.

I can do two different thing, I can go get another plumber and we can have two plumbers on the job or you can increase the production for us.

I am begging you, make it easy.

Please, please come to us with more men.

And give us the ability to produce more.

That is what it comes down to?

Sure.

And the second question I have is on these estimates Zvi provided to us on a community by community basis is there any market in which you believe that your pricing will be down in '05 versus '04 on an apples-to-apples basis of the same type of product?

No, but I do believe that every market -- with the exception perhaps of Boston -- I believe every market will see increased pricing in '05.

(indiscernible) you expect to sell the same size house for less?

No.

I expect to sell the same size house for the same money I am selling it for now.

Okay.

Although if you believe Intel that computers over the next three years are going to increase speed ten times, that means Michael Bell is going to have to sell us all brand-new computers.

If that happens in Austin ought to get on fire.

I can't wait.

And the last question I have which is relative to the update you gave us a couple weeks ago.

Is there any one market or region that is accelerating or decelerating?

Yes.

I'd have to run through every market, but many of our markets are accelerating.

And none of them are decelerating.

And even Austin, which is a very small market for us, is I don't know how many communities we have in Austin, about 5 I think, 5 or 6.

All of our markets are getting larger.

Let me see.

I'm sorry we have 7 communities in Austen.

Lorraine Maikis with Merrill Lynch.

You've given us 20 percent net income growth guidance for 2006.

Can you just walk us through what that is based on and what type of visibility you have into -- we know you have great visibility over the next 12 months, but months 12 to 24, how do come up with the 20 percent?

Good question.

Joel?

We've looked at the projected communities coming through the pipeline, that is community by community basis.

When they are opening up, what we expect their capabilities to produce is and when those units will come through.

We've also tried to project out our other income in the same way.

Lorraine, and that is how we come to the number.

Lorraine, what it is based on, as Joel just said, if you got a community that's got almost all its approvals, but needs the last (indiscernible) encroachment or sedimentation erosion control permit or wetland permit or whatever it is, but you can fairly well predict when you are going to get that last approval and be able to put a shovel in the ground, go to sales and start production.

And then you can see delivery nine months down the line on that.

So what we are doing is basing the community flow, using the community flow as the basis for the predictions for the last three quarters of '06.

And then you are doing a similar bottoms up type projection based on the communities that you expect to open over the next 12 months?

That's right.

Thank you.

Myron Kaplan with Kaplan Nathan Co.

Congratulations on stellar results for '04.

Thank you very much.

(multiple speakers) has to be said, I guess you can say that the home-building industry is still alive for '05.

Oh, that's good.

I like that -- stay alive in '05.

Analytically, you've explained that because of attractive land prices, which have remained relatively attractive, you have been buying at a pretty good clip -- close to 25 percent rate -- add on (ph) for stock of, we'll say, prospective communities.

Well, ultimately that's the basis for growth in home-building companies.

Because you have to have it.

Right.

So the question is is that you have this aggressive rate, which takes a lot of cash and a lot of investment flow, obviously.

Can you anticipate when this kind of aggressive rate of making deals will begin to slow down?

It does go in waves.

A couple of years ago, we were struggling to increase our lab (ph) count in relation to production.

And then for the last year, year and a half, two years even, I think we've been doing real well at expanding the raw product, the basis of the business, and therefore, the ultimate expansion of the Company.

So it goes in cycles.

Right now, it looks pretty good.

We've got a lot of land offerings that we are working on, a lot of contracts that are still in due diligence that we are analyzing.

So I can only predict what I can see for the next six to nine months, and it looks pretty strong for continued expansion.

But what happens after that, I don't know.

It would appear because the offerings are getting larger, the competition is less.

A lot of land out West is being acquired through the auction process from the states.

It appears as though that's going to continue.

So it seems like there's not only still but there is continuing a really big spread between we will call it the raw land price and the value as a home site, as a finished or entitled home site.

And as long as that continues and you have got some reasonable confidence in the overall business, which is apparent, then you will just continue to stockpile this kind of valuable inventory, which you can eventually convert into very, very high-yielding product.

Let's hope so.

And our pace of growth, our 60,000 lots, give us a five to six year supply.

Yes.

And also, it seems like it is very, very difficult in some of these constrained markets for someone -- even they can't open up across the street from you or down the block or whatever, because there is no -- it's not like having a bunch of tracts that are just sitting out there as in the late period, let's say, a generation ago.

That's absolutely right.

To a large extent, the "not in my backyard" politics, which has translated into very stringent governmental regulation of entitlements, has created an oligopoly for the major public home-building companies.

Because if you want to get in competition with us in Boston, Rhode Island, New Jersey, New York, Connecticut, Pennsylvania, Washington, D.C., north and south Virginia, etc. -- I sound like a train conductor;

I apologize -- but you would have had to have started at a minimum of three to seven years ago.

So if you want to get in the competition, it takes a pretty significant lead time to do that.

There's no question that you are definitely -- in this sector of the business, you are definitely the man.

Well done.

Thank you very much.

Steve Fockens with Lehman Brothers.

Good afternoon.

Bob, if you look at the census data over the last year, which says that close to 100,000 homes have been sold over the price of $500,000, which has certainly moved up a lot over the last two years, and let's just keep it simple and assume that number is consistent five years from now, so that in five years in the U.S., 100,000 homes over the price of 500,000 will be sold.

What percentage of that do you think could be your own?

I don't know.

What are we planning to do in '05, gang?

79 to 8300.

I don't want to say the wrong number. 79 to 8300.

So I can't even speak to whether it is 500,000 or 600,000 or what the number of homes over 500,000 will be.

But I can only speak to the predictions that Joel has already given you with respect to our ability to grow as a percentage of that number, well, you need a calculator, put one number to another.

I think our Company has the ability to double itself without entering any markets just by increasing its production in the various markets that we are in in short order.

And in fact, I guess we've given you that prediction because we've said income growth of more than 40 percent in '05 and 20 percent in '06.

And remember, 20 on (ph) 40 picks up another few points from compounding.

So that brings it up to 68 percent.

That's pretty significant growth.

And I would guess that we could do that certainly within a three-year period.

I don't see any reason for us not to be able to hit 20 percent a year minimum; at least all signs seem to point in that direction.

The information with respect to the sales price of houses, many of the geographic areas around this country are really not posted and not posted timely.

So where you got your source from may not, in fact, be 100 percent accurate.

Fair enough.

I guess what I'm trying to get at is, and if I'm remembering correctly, a year and a half ago or even more, you guys had some charts that said 12 or 13,000 units based on the current size of the population of households that buy your product is eminently doable.

And I'm just wondering if, given that the luxury market has grown so nicely over the last few years, if that number is a little stale and that there is no reason you couldn't be a 20 or 30,000-unit company.

We definitely can be.

It is just a matter of continuing to slug away at it and to expand.

Thank you.

Keith, I have a question that came on the Internet from Drew Torbin (ph), a research analyst at Richfield (ph) Capital Group.

Drew asks, what percent of land owned, controlled is currently entitled.

I haven't got the answer, but every site we are working on is currently entitled, and no sites that are currently entitled are not being worked on.

As soon as we get the last permit to permit it to put a shovel in the ground, we go.

How far along the expected entitlement process (halfway done, one-third of the way done, etc.) is the remaining land.

I haven't got an answer for you.

We do it on a community-by-community or tract of land-by-tract of land basis.

We have reviews three times a year to examine exactly where we stand in the entitlement process to discuss what the next steps shall be -- whether we should sue or not sue, whether we should put on more engineers or less.

And unfortunately I don't have a record of what the percentage of completion of the entitlement process exists for each one of those tracts.

So I can't give you the answer.

What is the price differential between non-entitled land and entitled land, holding all else equal or average?

That depends very much on whether there is a silly buyer out there or not.

Every once in a while, somebody will buy a non-entitled piece.

He may get lucky or she may get lucky and grab the entitlement within a reasonable period of time.

That person may become very unlucky and find out they hold cattle ground instead of development ground.

As far as Toll is concerned, we don't buy it until we can use it, with few exceptions.

And those exceptions are where we've been through the entitlement process to such a stage that we know that within the next year, we're going to be able to put a shovel in the ground or we're going to be able to sue successfully and collect damages as well as be awarded our entitlement.

So what the price differential should be -- it should be about 5 to 7000 an acres for unentitled ground and entitled ground is worth -- the sky's the limit, depending upon whether you are right on top of a city, in the city or right outside the city.

The ground can be worth one million an acre, depending upon the density -- or even two.

Thank you, Drew.

Keith.

Michael Rehaut with J.P. Morgan.

It's John Barlowe (ph) on Mike's behalf.

Congratulations on the quarter.

Just a quick question.

I wanted to know if you're planning on entering any new markets during 2005.

We may get something cooking in Minneapolis/St.

Paul.

We've got a team there.

We've been looking.

We've made several land deals that did not pan out during the due diligence period, while you examine the chances and the basics of the offering we have blown out.

So even if we secure a couple of land deals and go into the entitlement process, although Minneapolis/St.

Paul is fairly short in terms of the approval of time period necessary to gather all the entitlements, it's unlikely that you will see any settlements.

We may go -- it's unlikely that you would even see us go into production.

So Winston Churchill said, it's not the beginning of the beginning.

We're probably at the end of the beginning of our Minneapolis/St.

Paul foray.

Joel Locker (ph) with Carlin (ph) Financial.

Just wanted to get the ARM ratio this quarter compared to last quarter and the loan to value (multiple speakers)

Does anybody know what the ratio of ARMs are?

I don't know, I know it was selectively about 65 or 70 percent of our buyers selected ARM.

That's about the same as it was last quarter.

They don't really close on the ARM.

What the ARM through our mortgage company anyway and through most is a cheap way of locking protection.

You can buy protection for a lot less if you're going for a 5 1 ARM than if you're going for a 30.

And then when you get to the settlement, if you see that the price of a 30 hasn't gone up and in fact has gone down and makes you comfortable, then you drop the ARM and put yourself into a 30.

We don't recommend it to most of our clients because although in doing the monologue I said it was a three-quarter point, I just happened to look at our latest mortgage sheet and I note that 30-year with one point which is a typical kind of deal is 5 and 3/4 now for a jumbo, which is our typical clients' mortgage.

And a 5 1 ARM is 4 and 3/4.

So you save a full point every year for 5 years.

That adds up to some pretty significant dough and it is probably the smartest way to go in today's market.

And just to close out actually to purchase the ARM, do you have any idea what percentage it is?

Anybody know what the closing is on ARMs?

I may have it.

(indiscernible) That is higher than the application rate we just gave. (multiple speakers) According to Joe Sicree which means I'm not sure about this, 73 percent are closing on ARMs.

Percent on the loan to value, have any idea?

Oh, with loan to value we're about 70 percent.

Timothy Jones with Wasserman Associates.

Two things.

Your Eastern division, you had much slower growth both in orders and backlog and especially orders and backlog in the other divisions.

Was that the lack of being able to get lots entitled or was there a slowdown somewhere?

When you say the Eastern division, I don't know --.

Northeast.

Northeast, the Northeast is just due to available product.

You sell out to a 12-month period and then you cut it off and you say I'm not going to take any more sales until I get production down to 11 months and then I will take some more.

So, if we could get our hands on the entitled ground in the Northeast, Tim, there is no end to the market.

We could double it.

But it's got to do with getting the entitled ground.

The second question.

I would like to hear a comment on this eco-terrorism that is going on.

Obviously it was in a place where you build.

Do you have any comments on that?

You bake the bear when you ask me questions like that.

I understand that.

I want the bear baited because I'm ready to lock and load.

I appreciate the environment as much as any -- our family still goes camping every year, but there is no way that you can respond to four or five-year approval process that has evaluated and weighed all the various viewpoints on whether the ground is capable to support housing and should support housing being rather than being spayed and safe from development and used to support the ecosystems.

There's no way that you can react to that in a violent way.

It is the same thing as those who feel very strongly about right to life, and I make no comment about which side is right or wrong.

I think it is an impossible kind of problem to question to figure out, but you have people shooting people going into clinics.

I mean it is the same kind of reaction.

It is -- what can I say uncivilized and ridiculous.

Any suggestions you have how to curb this other than hanging these people?

I would rather not get into the sentence.

First you have to catch the perpetrators.

And then I'd rather leave it to the courts.

WE have a pretty neat system of justice, and certainly after expounding as I just have I wouldn't propose that we take justice into our own hands.

Let's just let the courts take care of it.

Very good answer.

Thank you, Tim.

Happy holidays.

This does conclude today's question-and-answer session.

At this time I would like to turn the conference back to Mr. Toll for any additional or closing remarks.

Thank you very much, and thank you all for participating in this call.

It was obviously a pleasure for us.

We hope to be able to bring you and us more pleasure in the future.

Thanks.

And goodbye.

Thank you.

Ladies and gentlemen, this does conclude today's question-and-answer session.

You may disconnect your phone lines at this time.