托爾兄弟 (TOL) 2005 Q1 法說會逐字稿

Welcome to the Toll Brothers 2005 first-quarter earnings release conference call.

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

At the request of the Company, we will open up the conference up for questions and answers after the presentation.

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

Please go ahead, sir.

Thank you, Patty.

Welcome and thank you for joining us.

With me today are Joel Rassman, Chief Financial Officer, Fred Cooper, Senior Vice President of Finance and Investor Relations, Joe Sicree, Chief Accounting Officer, and Kira McCarron, Chief Marketing Officer.

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

I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, weather and other factors obviously beyond our control that could significantly affect future results.

Those listening on the Internet can e-mail in questions to rtoll@TollBrothersInc.com.

We will do our best to answer as many as we can.

We're pleased to report a great first quarter with records across the board.

Net income rose 120 percent to 110.2 million versus the first quarter of '04, and earnings per share rose 115 percent to $1.33 per share.

Revenues rose 67 percent to 999.1 million.

I promise next time, we will strive for that next .9.

Contracts grew 60 percent to 1.44 billion and our backlog, the highest for any quarter in our history, increased 66 percent to 4.89 billion.

With this backlog, which already contains most of fiscal year '05 deliveries, we are increasing our guidance for revenues and earnings, which Joel will go over with you in detail in a moment.

We are enjoying strong pricing power and increasing profit margins as demand for luxury homes continues to outpace supply.

Due to this demand, a recovering economy and our growing portfolio of well-positioned communities in affluent markets, we believe fiscal 2006 will be another record year.

Increasing numbers of high-income households are competing for a constrained supply of homesites.

As we have discussed many times, gaining approvals to build in affluent, well-located neighborhoods is a complex, expensive and lengthy undertaking.

We believe that because we at Toll Brothers have the expertise and capital to control land, win approvals and improve properties successfully, we will continue to gain share from the smaller builders who populate the luxury end of the market.

By expanding our product lines in the luxury market, we are broadening our potential customer base.

We now build move-up, empty-nester, active-adult, resort-style golf and lake communities, urban infill, high-density suburban, beach towers and most recently urban tower residences.

In response to the widening gap between tight supply and growing demand, we have continued to increase our land position.

We now control over 63,000 homesites, which is about a 5 to 6-year supply, based on our historic base of expansion.

With this land, attractive demographics and our diversity of products mentioned above and our highly respected brand name in the luxury market, we believe we're well positioned for continued growth in the years ahead.

Joel?

Thank you, Bob.

As Bob noted, we just completed another record quarter.

We delivered to 1,590 homes at an average delivery price of approximately $622,000, putting home building revenues for our first quarter at the top of the range of our guidance.

Other income of 6.9 million was higher than our guidance of $3 million, as we enjoyed higher interest income and more net income from ancillary businesses.

First-quarter home building cost of sales, at 69.3 percent, was approximately 170 basis points better than our guidance.

We benefited from a richer mix of settlements, slightly lower job overheads as a percentage of sales price, as we spread our overheads over these higher revenues, and the effect of price increases.

SG&A as a percentage of total revenues for the first quarter was 10.7 percent of sales and approximately 100 basis points better than our guidance, as we benefited from revenues at the given range -- or the top of a given range and the absolute expenses lower than estimated.

Interest at 2.2 percent was slightly lower than the 2.3 percent estimated.

You probably noted that our tax rate increased to 40 percent for the first quarter.

We expect that the real tax rate, exclusive of the deferred tax adjustment for the year, will be approximately 38.5 percent.

Based upon accounting rules, when a company changes its estimated tax rate, the cumulative effect on all of the previously deferred tax items gets recognized in that quarter.

The effect of the change of that estimate and tax rate was to raise the effective rate for the quarter from 38.5 to 40 percent.

The increased tax rate reflects this change in various state tax regulations, a change in geographic mix of revenues expected for the current year.

Based on applying current accounting rules, it is possible for effective tax rates to differ from quarter to quarter.

As a result of Toll's increased stock price, the average shares used for the calculation of earnings per share was 83,042,000, which was more than the 82,400,000 we had estimated.

We have filed an 8-K and put on our Web site detailed guidance by quarter for the rest of 2005.

We will continue to review our guidance throughout the year and adjust the guidance if necessary on each conference call.

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

We are raising our estimated deliveries from a range of 7900 to 8300 homes up to a range of 8050 to 8400 homes, reflecting the continued improvement we've seen in our ability to deliver homes out of backlog.

We would expect that homes delivered in the second quarter will be between 1925 and 2025 and that homes in the third quarter will be between 2035 and 2160, and homes delivered in the fourth quarter between 2500 and 2625 homes.

These are increases in estimated deliveries for the second and third quarters, while the guidance for the fourth-quarter deliveries remains approximately the same.

We believe the average delivered price for the year will be between 640,000 and $645,000 per home with an average delivered price of between 635 and 640,000 in the second quarter, 645,000 655,000 in the third quarter, and 650,000 660,000 in the fourth quarter.

This is a small increase from our previous guidance.

We expect that land sales for the year will be approximately $21 million.

This is an increase of approximately 4 million from our previous guidance.

Based upon currently estimated closing dates, we expect land sales to be approximately 5 million in the second quarter, 14 million in the third quarter and 1 million in the fourth quarter.

We expect margins on land sales will be approximately 35 percent for the year and approximately 50 percent in the second quarter and 30 percent in the fourth -- third and fourth quarters.

We estimate that Other Income for the year will be approximately $28 million, which is an increase of about $10 million over our previous guidance.

We estimated that Other Income will be 5 million in the second quarter, 7 million in the third quarter, and 9 million in the fourth quarter.

Our joint ventures are doing very well, although there have been some delays in getting the approvals.

We project income from joint ventures at approximately $12 million.

This is a decrease of $3 million from our previous guidance.

We currently estimate that joint venture income will be 2 million in the second quarter, 3 million in the third quarter, and 5 million in the fourth quarter.

We expect that cost of sales for the year will be 275 to 315 basis points lower or better this year than last year.

This is an improvement from the previous guidance and reflects improvement in margins we saw in the first quarter.

Home building cost of sales vary significantly quarter to quarter, affected by geographic and product mix, seasonality and weather.

We expect cost of sales for the second quarter to be approximately 230 to 280 basis points lower or better than last year's second quarter and to be 310 to 350 basis points better in the third quarter and fourth quarter compared to last year's third and fourth quarters.

These are significant improvements to our previous guidance.

SG&A also varies significantly by quarter, as we incur more advertising and selling costs in the first and second quarter than in the third and fourth quarters.

SG&A can also vary as we have new community openings.

Based on our improved SG&A results for the first quarter, we would expect SG&A for the year as a percentage of sales to be slightly lower or better than last year.

We estimate the SG&A will be lower in the second quarter by approximately 100 to 120 basis points, lower in the third quarter by 75 to 100 basis points, and approximately 115 to 144 basis points higher in the fourth quarter compared to the respective quarters last year.

We estimate that interest expenses will be approximately 2.3 percent of home building revenues for the year and for each of the remaining quarters.

The last component of earnings per share is share count.

Based on our current stock price and the expected continued increase in stock prices as investors start to focus on 2006 earnings, we estimate that outstanding shares for the purposes of calculating diluted EPS will be approximately 85.1 million for the year, approximately 84 -- 800,000 average shares outstanding for the second quarter, increasing to 86.7 million shares for the fourth quarter.

At this time, I will turn it back to Bob.

Thanks, Joel.

A couple of questions and comments came in over the Internet.

The first one from Mike Novak (ph).

Wow!

Great quarter.

Thank you, Mike.

Question -- it appears that market share gains by the public builders are accelerating from 1 to 1.5 percentage points a year, in the '90s, to 500-plus basis points in 2004.

Clearly, the home building market is not growing 25 to 40 percent in units like you and several other large builders are growing.

Do you believe market share gains can continue at this rate?

What would cause the market share gains to accelerate and to decelerate?

Mike thanks us.

It's a very intelligent and excellent question.

I have maintained for quite some time, several years, that new home sales are not a true guide to the fortunes of public homebuilders.

If they were, we would be selling at the same market caps with the same revenues that we had 20 years ago.

In fact, the new primary home sales are primarily down approximately 20 percent from where they were in the '70s.

That was about 20 percent of the current new home sales are for second home buyers, and that was not the case in the '70s.

What has happened is that the dedicated and determined associates at Toll Brothers, with the experience that they have gained over the past 5, 10 and 20 years in securing governmental approvals, also known as entitlements, has made the significant difference between the fortunes of the home building market and the fortunes of this particular public homebuilder, Toll Brothers.

I forgot -- a third significant factor is the capital that we have to see our way through the very difficult entitlement process.

The entitlement process in most of the luxury markets now takes 4, 5 or even 6 years on average.

That's a lot of battling, a lot of arguing, a lot of permits.

I think we have to get about 156 permits in New Jersey, and that's not an exaggeration.

Only the well-capitalized, experienced and truly determined and dedicated have the ability to do this.

Once you have the entitlements, once you have the lots for sale, the demand is there.

Even if the demand goes down, you still have enough excess demand overlaid against the amount of lots coming to market that you're going to continue to do good business.

So, as you expand your entitled lots, you expand your business.

Now the question is, how far can this go?

Well, I can't predict, on a time basis, but it appears reasonable to me to expect that fully 50 percent in the not-too-distant future will be delivered to the home buyers by the major public homebuilders.

That won't be just because of consolidation, though there will be some consolidation, but it will be because that only the experienced and well-capitalized can get their hands on the lots.

I'm sorry for the long answer.

Next comes from Scott Morrison at Morgan Stanley.

Scott asks, is the CEO's attitude appropriate as he spoke on CNBC Today concerning shortselling?

Well, I think my attitude is appropriate!

I hope it was taken as an opinion and not a guarantee, because Scott asks the next question -- does the Company have legal exposure to his comments?

Gee, I hope not!

Time will tell, Scott.

Now, I'm ready for any other questions.

Thank you.

Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Lorraine Maikis from Merrill Lynch.

Thank you, good afternoon.

I just wanted to talk for a minute about 2006.

I didn't see anything in the press release about reaffirming the 20 percent EPS growth.

Is that still the case?

Lorraine, I believe that we will certainly do, as we have said before, 20 percent on top of 40 percent.

Now that we are 60 percent, I'm not certain that we will do 20 percent on 60 percent.

My best guess currently is we will do somewhere between 18 and 22, so approximately 20, but in the last press release, I said at least 20, so I'm not as certain that I will do at least 20, but I believe it will do approximately 20.

Thanks.

Then you gave some good disclosure in the 10-K about the lots owned and controlled by geographic regions, so I assume that you have a pretty good idea about pricing over the next couple of years.

Can you just talk directionally about where you expect that to trend, based on your product mix that you've had permitted and also your geographic location of these communities?

When we buy, we do not put any inflation factor into our models that we use to help us decide what land to buy, what deals to make and what deals not to make.

So, I don't make predictions for myself and we don't make predictions for ourselves on what the pricing is going to be in the future.

We just based our buys on the basis of prices today without inflation.

Joel?

Yes, with respect to the product coming out, without giving any inflation into the numbers, it appears that next year's mix of deliveries will be more multis and active-adults and some lower-priced singles, so that we would expect, just like we saw in the contracting number for the first quarter where the prices of the average contract went down slightly over the fourth, that we would see potentially some average price stability rather than increases, or maybe even a small decrease.

We are in the process of trying to evaluate that.

But we the houses delivered next year will be smaller and more active adults and multi-family.

Thank you very much.

Ivy Zelman from CSFB.

Good afternoon, guys.

Congratulations on a great quarter.

I'm looking at a pretty picture in a magazine with a project called the Maxwell House Coffee warehouse -- (Multiple Speakers) -- noticing that you're going to be partnered with Pinnacle there across the river from New York City working across on the Hudson.

I see a lot more builders getting into urban infill and kind of in the big picture with a lot of opportunity longer-term.

Can you talk about what the model for that business is relative to maybe some of the capital commitments and the timing of how you would account for projects like that?

Because many of us and me especially know the single-family business, or at least I think I know it, but I don't know this business that well and I see a lot of the builders expanding aggressively into this area.

Is it similar to WCI, where you would do percentage of completion?

Maybe you can just kind of elaborate on your thoughts longer-term and then a little more specifics on the differences between the business models.

Okay, I'd like Joel to answer this, Ivy.

With respect to whether we use percentage of completion or completed contract, we're still in the process of determining it, so at this point, I don't know the answer to that.

Many builders use percentage of completion because it matches the earnings effort the expense effort, but we think that maybe a modified version of that is the appropriate answer but at this time, we don't know for sure.

With respect to the products, I think she asks whether the start-up is different from -- (Multiple Speakers).

Well, the reason we're going into the business of course is that we have tremendous demand for it.

We opened up, for non-binding reservations, 77 slots at The Grove, which is at the end of Hoboken, and sold them all within an hour and a half or 2 hours.

We opened approximately the same number on the first building at Maxwell and sold them within the first half an hour or hour.

We have a humongous waiting list on the T building, 525 units, next to -- practically next to Maxwell House, also on the river.

We were in a partnership with two towers called the Sky Club in Hoboken, and they sold out like a year before we thought they would.

So the reason for moving into the business is that there is a great demand.

Mostly, we feel we have 2 different markets, the younger set, mostly without kids, and the older set, the 50-year-olds, who don't necessarily want to go to Phoenix or Boca Raton but are selecting a second home.

Some we find are selecting a primary home, moving back into the city, selling the suburban home and then picking up another home in a warmer climate.

So we're pretty excited about the business.

But Bob, if I may, it looks -- (Multiple Speakers) -- from sort of a longer-term basis, I mean is this something that really would move the needle, these types of ancillary or new segments that you're expanding into, with respect to changing the mix from a single-family?

It would be a lot more type projects like this.

Why should you do it through joint venture and share the profits if you can sell them out in an hour and a half?

Why would you give Pinnacle any of the money or any partner for that matter?

I guess looking at it longer-term, do you expect the (indiscernible) Toll Brothers?

Okay.

We expected to be a core part of Toll Brothers.

I don't know that it will get to more than 10 or 20 percent of our business.

With respect to the suggestion that we did it for the money, it was quite the opposite;

Pinnacle was the developer that secured the rights to the ground and put it under contract, and they were kind enough to bring us into the deal, so it was our pleasure.

We didn't bring Pinnacle in; they brought us in, I'd like to believe for our expertise and our money.

(LAUGHTER).

Some of the other deals that are humongous we are joint venturing and because of the humongous, large capital requirement.

But as we grow and we become richer, obviously we will cut back on joint ventures proportionately.

One more just a follow-up on the same topic and then I will let other people ask -- with respect to these types of projects, can you talk about where the risks are and whether you think this is a better business longer-term with respect to return on invested capital versus the single-family business, and with that said, looking at I guess another project we have been reading about in the same scheme of things is something called TOD, these metro lines (indiscernible) project in Vienna, Virginia.

Are you doing any of those?

So what are the differences between business models and which has the better return and then are you doing any TODs?

Yes, we are doing projects infill by transit lines.

The models give you a greater rate of return on money invested and a greater profit, and a greater total margin, as they should, because they are riskier projects.

But with a housing community, you put up a couple of model homes and then you build -- at least Toll Brothers -- then builds after it sells.

Here, you go to market or you try to pre-sell.

We have a rule where we won't start the building until it's 50 percent presold.

In fact, it appears so far as though every building, including the beach tower business, has been 100 percent presold.

But you still have a higher risk, Ivy, because God forbid tragedy strikes, the economy tanks and people say you know what?

Keep my $50,000 deposit or my $100,000 deposits;

I've changed my mind!

Well, you're stuck with -- you know, once you go to the first floor, you're going to the 20th floor, so I think -- (Multiple Speakers) -- higher margin because it's a higher risk business.

Bob, how would you respond to critics that would say that when a building Company or any company in any sector is leaving its core business, it implies that there's not enough growth within the core business, so that's why they're looking at other opportunities, especially other opportunities that inherently have more risk?

How would you -- (multiple speakers)?

I would reply that we are not leaving the core business.

I think I answered 10 or 20 percent we saw for this business.

The reason to do this business is to expand business.

It's the same reason that any manufacturing company or product-development company brings additional products to the market -- just to expand your top line and your bottom line.

We believe this will do that.

Great.

Thanks a lot, guys!

Stephen Kim from Smith Barney.

Strong quarter, as usual. 2 questions I had -- number 1, this is probably more for Joel -- but Joel, did you say your tax rate you expect to be 38 or 38.5?

Was that for each of the next 3 quarters or was that for the year?

Can you set me straight here on the tax rate?

Yes, we expect it to be 38.5 approximately for each of the next 3 quarters.

Based on the new way taxes are calculated, you could have more variability, we think, quarter-to-quarter than you previously had, and so I can't tell you that every quarter will be 38.5 percent but that is our current belief.

Okay, I should obviously expense (ph) those next 2, right?

Right now based on our mix of where deliveries are.

The second question relates to this comment you made about perhaps pricing, the prices that we see, being more stable, going forward, instead of the rapid growth that you've seen, due to a mix shift of perhaps smaller footprint and multi-family.

Is that going to have a similar or a simultaneous impact on your backlog conversion ratios?

Do you perhaps deliver those more quickly?

Could we therefore expect to see your backlog conversion ratios improve?

We've built that into the delivery increases and as we go through the year and we understand exactly the particular products, we will be adjusting our estimates based on the continued performance of those deliveries.

But part of the reason for the increased number of units is that expectation.

That's very intelligent, Stephen.

The answer is yes and no.

No, because we might sell out a 68-unit building, and we're certainly not going to deliver the 68 unit building in 6 months or 8 months; it may take us 10 or 11 months, so it's going to come all at once so in that quarter, you'll have a lot but leading up to that, the backlog will be stretched a little bit.

But basically, for most of the less-expensive products, for the town homes and for the smaller singles, you can expect faster delivery because they are much less complicated.

I guess the reason why I was asking the question is because if you assume, for the next 3 quarters, your backlog conversion ratios are pretty much equivalent to what they were last year, so no better, in other words, than last year, and you assume sales growth of a fairly mundane 5 percent, which you've blown out of the water, over the next few quarters, you arrive at a total delivery figure for the year of 8700 units.

You guys I think are talk top-end 8400 units.

So with this issue of potentially improving conversion ratios due to mix shift, I'm just trying to figure out is this the typical conservatism on your part?

Because it seemed a little more than usual.

Joel?

Well, there's a little bit of skewing for the stuff in Singer Island, which is 2 years away.

There is -- most of the cheaper products, the less-expensive products, will be delivered in next year, not this year so that we don't expect to see the significant amount.

And we always tend to be conservative, so we think it's our best guess on a conservative side.

Margaret Whelan from UBS.

Hi.

Tough quarter.

So Bob, you said Mike's question you thought was very intelligent and excellent but you didn't actually answer it because what he asked you is whether or not you think that the top 10 builders are going to continue to accelerate or decelerate in terms of consolidating the market.

I'm sorry, I thought I had.

My answer is I do think that the top 10 builders are going to continue to accelerate their growth as a percentage of the entire market.

They are going to continue to grow at the expense of the rest of the market.

Okay.

How do you tie that in, then, with the fact that you're actually managing down your expectations for your JV income because of delays with approvals?

Joel?

I think we have very few joint ventures and we've been delayed a couple of months in getting certain certificates to start the construction.

That flows by pushing out the income until the next year.

That happens all the time.

It's just -- (technical difficulty) -- number of communities here so one community delayed shows up more than it would when we have 220 or 230 -- (technical difficulty) -- in production.

But as a percent of the total years, it is the same as the big guys everyone is (inaudible)?

I'm sorry, say that again?

I know that you're smaller than some of the others, but even as a percent of the total, that Toll and all of your peers are feeling the same delays and pressures.

I'm sorry, I wasn't clear; my answer wasn't clear.

We have only 3 or 4 JVs and therefore, if 1 of the 3 gets delayed, it's 33 percent of our total JVs, where as we, on average, have 220 communities, so historically, we always have some of it being delayed; it's built into our projections.

The ups and the downs are sometimes a little fast, sometimes a little slower -- average out over time.

But if I only have 3, the opportunity for 1 of the 3 to slip and therefore change the estimates with respect to joint ventures to a greater percentage than a slippage in a regular community is much greater.

Okay.

The second question I have for you, Joel, is regarding land as a percent of your cost of sales or even as a percent of the sales price itself, where do you think it's averaging right now?

It's 20s.

It's still around that level?

Yes.

Because I'm trying to figure out what the breakdown is.

Say it's 20 or 25, whatever the number is.

What is the split between the dirt at one, the approval, two, and then the improvement process, number three.

How does that -- (multiple speakers)?

Listen, I think it's about half and half.

Improvements and dirt are roughly half and half; it depends on the geographic region.

Improvements including the approval process?

Yes.

I mean if you break it into the 3, the first one being dirt, the second being the approval and the third the improvement -- (multiple speakers) -- being 2525?

You know, it's so difficult because it really -- and I hate to give you a cliché but it's true.

Each job is unique; each community, each project is unique.

I haven't got the average in my head.

Joe Sicree -- (Multiple Speakers).

The preapproval is -- (Multiple Speakers) -- preapproval aren't anywhere near as large as improvement costs.

Right.

okay, so it maybe only be 2 or 3 or 4 percent because the rest is

So preapproval is what? (Multiple Speakers) -- permits and the entitlements?

The entire entitlement process -- I just went over a stack of them yesterday.

I need a project profitability -- typical project profitability package, if you guys have it.

I'll go get it brought in and I'll tell you what -- you know, ask Mike, who I think is in the conference room doing a land review, and we will get the answer for you, Margaret.

Can I ask another quickie while we are waiting?

Why not.

The SG&A leverage that you're seeing, is that just the fact that your sales volume (indiscernible) so much, were you managing that more effectively?

Have you changed your commission structure or anything?

Not to former.

(Multiple Speakers) -- a little bit of changing mix because of maturing master plan communities.

Okay.

Then the last one that I had was just about Florida -- the percent of your land that's there right now and the percent of your capital that you're going to commit to Florida going forward.

I don't know the answer of the percent of my capital that I'm going to allocate to Florida.

I know -- (multiple speakers) -- we're going to continue to expand.

The lots you have -- it gets (inaudible) (indiscernible) we are doing the land reviews today and we concluded about 8 more deals in Florida in the other room (LAUGHTER).

8 of how many deals?

I don't know.

How many have I got cooking now in Florida?

I don't know, about 30 I guess.

About how many in the U.S.?

(indiscernible) is 10 percent land, 10 percent improvements, 1 percent predevelopment.

I would say that is low for -- on sales.

That's a GAAP number and I don't think the number that Margaret is looking for because I know predevelopment runs me a lot more on a typical lot than that of the sale price.

That would be 5,000 for a $500,000 house, and that's not even close.

That's maybe the snail darters expert costs me that!

So you think that the (indiscernible) is the same as the improvement and then the balance is just the development itself?

Well, that's what you got from Joel.

I would have guessed that the improvement is more than the dirt today.

Okay.

I will follow-up with you then on that.

Okay, or if I remember, I will give it to you as soon as it comes back into the room.

Alex Burn (ph) from JMP Securities.

Alex, are you out there?

Patty?

His line is open.

We will go ahead and go to Myron Kaplan from Kaplan, Nathan -- (Multiple Speakers).

I apologize.

Alex?

Yes.

Can you hear me?

Yes, I can hear you now, Alex.

Sorry about that.

I was saying great quarter!

I wanted to ask you about your SG&A in the fourth quarter.

What is the reason that you're guiding for it to be up higher than last year?

Last year's fourth quarter was -- as a percentage of sales was unusually low, based on a very significant volume increase in the fourth quarter and lower-than-expected expenses.

We don't expect that to be duplicative -- duplicated.

Then my second question has to do with what are your margin expectations for 06?

I mean, in '05, you seem to be guiding for quite pretty steep increases -- (Multiple Speakers).

We have not come out for '06 guidance for margins at this point.

It's too early for us.

Okay.

Lastly, I'm wondering.

You've been averaging -- in the West, your pricing and orders have been about $1 million.

I'm wondering if -- what we can expect going forward.

I mean, based on mix or based on just pure pricing, do you think you will stay at that level or -- (Multiple Speakers)?

We will probably go down in the West Coast in the short term on new agreements signed because we've sold out of -- in San Francisco market all of our very high-priced product and are selling much more moderate priced product.

We have more of that moderate-priced product, so I think that will bring the average price down.

Okay, I -- (Multiple Speakers).

I think we saw a little of that in the agreements (ph) price -- the first start of that effect in the agreements price.

Myron Kaplan from Kaplan, Nathan & Company.

Top quarter!

Just one question on these joint ventures -- you delivered 63 homes compared to 5 (inaudible) last year, so is this all from these 3 joint ventures?

Because it seems like you have more.

It's basically 1 joint venture; it's basically Sky Club in Hoboken.

The other joint ventures have not delivered any units -- (multiple speakers) -- Hoboken have not delivered any units and we may only have one or two units in the Detroit joint venture.

I see.

So really, in the past, you had virtually -- your production from joint ventures was virtually nil?

We had a little bit coming out of --.

That's about right.

Okay, so just going back to competitive situations, do you see any increase in the intensity in which other public homebuilders are trying to develop luxury products so they can start to let's say enjoy a part of the place in the sun, this niche that you've successfully staked out for yourself?

Yes!

I note that most of the majors are starting to do expensive to luxury housing, not on a real meaningful scale yet, but the question I think that -- the way you stated it, had the answer, which is in the sun.

I think they will continue to recognize that this is a good place to be.

It's tough to get from here to there, though.

It requires a pretty different culture.

When you are doing standard-type housing, even though you may offer all the flooring types and all the tile types and the colors, a great many variations of kitchen cabinet and faucets, that stuff is easy because you check a box and the manufacturer ships it.

But when you get into varying the footprint of a home, putting on the music room or the elite addition, the sun room, the garden room, putting a mother-in-law suite on, this requires a pretty different culture.

You can't run a community with just a construction Vice President and a superintendent; you need the builder or the clone of the builder continually on-site dealing with subcontractors and superintendents.

So it's going to take awhile for the other builders to get into that line of business, which I think we have pretty well staked out.

I guess you're morphing.

It's kind of returning tit for a tat because you have morphed down into some certain amount of $400,000 product, which is closer to their niches in a sense and is smaller units, and I guess you might say they are trying to trade up as well.

I guess that's right.

We haven't actively sought a lesser price.

I think what we are involved in -- other than for the active adult, which started out at a lower price and we're taking it up into the mid-400s now with all sorts of options and changes -- is that we come across a townhome, multi-family communities (sic), we are keeping the price high per square foot but still, because it's a much smaller unit, it delivers for a smaller price.

Excuse me, Myron.

It looks like the total pre-development budget per unit is -- on this one that was handed to me, about 1 percent.

So Joe Sicree is right.

I still think it's wrong, and we have to look at more than this one community.

Well, thank you.

Thank you very much.

It was a marvelous -- continues to be a marvelous performance.

(OPERATOR INSTRUCTIONS).

Paul Przybylski from A.G. Edwards.

Good quarter, guys.

I'm calling in for Greg Gieber.

The first question is, could we get the average income of your buyer then maybe some sort of distribution of that regionally?

Thank you.

That was a question we would answer because that was a question that was open from last quarter we promised we would give you.

We did go back and look at it.

Both the medium and midpoint of our average buyer is about $150,000 (inaudible).

Do you have any breakdown of how that would vary across -- (multiple speakers)?

I haven't done that.

Okay.

Also, I'm looking at your average sales price on contracts for the Midwest.

I know they were up 17 percent, yet on a unit basis, they were down.

Do you think maybe you have kind of hit the envelope there on pricing and that's what's caused the softness -- (multiple speakers)?

That was a product mix difference.

Product mix?

Okay.

On the third question, have you seen any change in the amount of options as a percent of the sales price?

(Multiple Speakers) -- no.

As to the years Fred says, it's about the same, 19 to 20 percent.

As long as we had it, we had one other open question and that was the percentage of optioned lots versus owned lots as of January 31.

That was open from the last conference call, and it's roughly 50-50.

Joe Logger (ph) from Carlin Financial.

Great quarter.

I just wanted to get to -- I guess the gross margins came in a lot better than everybody thought, I think, and most -- I guess the improvement in the ST (ph) from 622 from 543 was a large part of it but it seems most of that was profits.

I know material prices don't affect you as much as the lower-priced builders but at the same time, I was wondering, on a land price on that concept, if you're building on smaller lots this year compared to -- versus last year when you closed at 543.

Joe shakes his head no -- (multiple speakers) -- I shake my head yes because I think -- (multiple speakers).

Excuse me, Joe.

If you have a mix of (indiscernible)-only families, then you're going to have an average of smaller lots.

That's not a purpose -- not a goal of Toll Brothers; it's just a way the communities came through the approval process this year.

Next year, you may see the opposite.

We had a little bit more delivers in the mid Atlantic states, which are essentially higher margins this year for this quarter, which is part of the reason.

That's why I talked about mix issues and that is what's happened.

Right.

Going forward, would say you are -- you know, I'm just saying the detached single-family and not any attached product but just for the single-family lots, would you say that the lots are the similar size going forward, say in backlog right now compared to a year ago?

I would, yes.

Dan Oppenheim from Banc of America Securities.

Thanks very much.

I wanted to ask a couple of questions.

First, in recent calls, you've been talking about the order patterns that you've been seeing at the start of different periods and now they've been at the sort of record levels on a same-store basis.

Can you comment on where you are at the start of the second quarter?

Sure.

Let me get the paper that gives me that information.

It looks as though, start of the second quarter, first week ending February 6 was the best in our history on a same-store basis.

The second week ending Feb. 13 was the best in our history -- I correct history, by the way.

It says (ph) going back to '92, because that's what I've got in front of me.

I haven't got the information from '86 to '92.

This past week was the second-best in our history on a same-store basis.

However, we have an excuse.

We were up against Presidents' weekend last year, because the Monday of Presidents' weekend falls into the week of Feb. 27, which we don't have the results for obviously.

So, we are cooking!

I don't think it's just we;

I think it's the market that's cooking.

Great.

Then in terms of land (indiscernible), other homebuilders have tried to build at higher price points and they've tried to expand their land inventories.

Have you seen much pressure on land prices in your markets?

No.

As a matter of fact, land prices have stayed fairly stable as a percentage of the price of homes but with the price of homes going up, you have land prices going up, maintaining the same percentage.

So I'm sorry to give you a two-handed answer there, but there it is.

Okay.

Then finally, I'm just wondering, in terms of the kind of markets, (indiscernible) great time to convert rentals to condos given the bifurcation in the rental and the for-sale market.

How much of this do you think is a secular change versus a cyclical change?

I don't know what secular means;

I know what cyclical means.

It's definitely not cyclical; it's got to do with interest rates.

When you can take somebody in an apartment and sell them their apartment and have them after-tax deducts -- because the A&P (ph) doesn't kick in against apartment buyers, generally -- sell them their apartment and have them be in that apartment for less cost of carry than they were in as a renter, you've got a natural business.

You also have a natural end of that business at such time as the interest rates go up enough so that it's no longer and arbitrage for a tenant to own rather than to rent.

I think you will see continued conversion of upscale apartments into condos, for instance along the Jersey Coast, in Hoboken and New York City and L.A., and you'll see a continued increase in production of luxury condominiums in most of the municipal markets that have luxury housing attended.

Patty, I have an Internet question from Rick Kronovich (ph).

Bob, actually terrific results for you and your entire team at Toll Brothers over the last several years, and congratulations!

Well, thank you very much!

Questions -- do you ever anticipate that investment banking companies will ever raise the price/earnings ratio to the mid-20 PE range for homebuilders?

Rick, let me guess.

Are you an investor here in Toll Brothers?

Do I anticipate that?

Yes, I and most homebuilders are eternal optimists.

Two, why haven't the publicly held homebuilder CEOs created a fire under investment banking companies to demand far better investment-grade evaluations to counter the phrase "cyclical" as currently Toll Brothers' intrinsic value is -- you know, Rick, you and I will have to go for a drink later, but this is great.

Does part of your strategic plan include acquisitions of other publicly held homebuilders to obtain available land options?

We are, from time to time, in discussion with all of the public homebuilders and we do kibitz with one another about what about this and what about that but there is no serious effort at this time.

That's the most honest answer I can give.

Thank you very much for this, Rick.

Patty?

Susan Berliner from Bear Stearns.

Good afternoon.

I hate to ask a question after that one, but I will attempt a few.

One is, can you go over your strategy for second homes and what percentage that is of your portfolio right now and what you anticipate that will reach?

Okay.

Fred, do you know?

Joe, do you know what percentage?

I would guess 10 to 15 percent.

10 to 15 percent is Fred's guess.

We're trying to get as much of it as we can.

We are also trying to get as much of the luxury move-up as we can, and we're trying to get as many beach towers well-located as we can and we are trying to get as much active-adult and urban mid-rise and high-rises as we can.

So, we're not going to be able to predict.

We don't even have a percentage goal because we are opportunistic and we are deal-oriented.

If, in the next 6 months, we get more opportunities at second-home communities than luxury move-up home communities, we will take them, which would take the average or percentage of the business up.

If we get more of the luxury move-up offered to us, we will take those.

So, I'm sorry, you know, we are guided by the opportunity.

I appreciate that.

One housekeeping question -- do you have the gross interest expense number, or the capitalized interest number for the quarter?

(indiscernible).

We don't have that yet?

We have incurred.

That's what she wants.

Yes, incurred is exactly what I want.

Incurred for the quarter was 29,150,000.

Okay, thank you.

One last question, just in terms of I guess issuance in the corporate bond market.

I know you have 1 $100 million bond that's callable currently and the call steps down in May.

Do you have any thoughts on issuance for this year?

Joel, do you want to answer that?

Oh, issuance as opposed to call.

I thought you were going to ask -- (Multiple Speakers).

Well, both!

Why not?

We always look at both the opportunity to call and the opportunity to issue, and so when we think the timing is right, we will issue, and when we think the timing is right, we will call.

Steve Fockens from Lehman Brothers.

Good afternoon, and I'm guessing this is a question for Joel.

If you guys look at your operating margin from '92 to '03, it was primarily in the 13 to 17 percent range.

Then looking at last year and what you're guiding to this year, you are more in the 19 to sort of 21 percent range.

As you look out the next 3 or 4 years and recognizing that's a long kind of forecast and its inherent potential for error, what would make you feel comfortable that Toll as a company stays in that 19 to 21 percent operating margin range?

Joel, go ahead!

No, I think we give you guidance out one year.

I think that's as far as we can go.

But historically, if you look at us since we've been public, we've been higher than this and lower than this.

So, in the mid-1980s, we hit operating margins -- I haven't looked at that -- I don't use an operating margin statistic but because my gross margins and my net margins were higher in the mid-80s than they are today, you get operating margins I assume higher in the mid-80s than we have today.

So I think they at times go up and at times go down, and it will be a matter of supply and demand and how quickly you can move prices, but I'm not uncomfortable with the range that we are in, that we can do as well and we've given you that kind of guidance by talking about approximately give or take 20 percent increase in earnings next year.

A question from Carl Reichardt from Wachovia Securities.

I had just a question on raw materials prices.

We got off a call just before yours, where a large producer was talking about pushing prices to its customers to cover raw material price increases that it incurred.

I'm curious what you guys are seeing right now.

Given the long cycle times that Toll inherently has, do you contract even on the attached stuff, 6, 9 months forward with your subcontractors, or is it longer than that or shorter than that?

How do you offset what could be higher material prices the next quarter or two or do you already have that built into your forecast?

With respect to the subcontract part of the question, we contract by the building or by the section, so that if we are 11 months in backlog on the large multi-family projects, we are covered on our subcontract because we've contracted the building in advance, or the section in a single-family subdivision, or even attached subdivision.

With respect to material costs, we can't protect ourselves on steel or concrete.

We do protect ourselves on the largest component by far, which is lumber, because we have our own lumber distribution facilities for most of our company, and we buy the lumber on very long-term contracts directly from the mills in the American West and the Canadian West.

By very long-term contracts, what do you mean?

9 months, a year.

Okay.

When you say sections for a single-family, you're talking about phases so -- (multiple speakers)?

Yes (indiscernible).

Out of the 400 community, you'll do 50 at a time, and you contract for that section.

It's fair for the subcontractor and fair for ourselves.

He wants to know he's got the work for the next year and we want to know that we've got a price for the next year.

Perfect.

Thanks a lot, Bob.

A follow-up question from Alex Burn (ph) from JMP Securities.

Yes, thank you.

I'm kind of looking here at your deliveries in a couple of your regions, relative to the orders you've booked for the last 3 quarters.

In particular, I'm looking at the Southeast and Southwest and hoping you can help me understand I guess why they are so much lower than the numbers you've posted for orders in the last 3 quarters.

That's real simple; we ran out of product!

Our backlogs ran up.

We couldn't sell -- once we are at a 12-month backlog in a community, we take non-binding reservations, which we don't report as a deposit because a contract is something that is binding.

On the East, I know we just flat ran out of product, as well as running into backlog.

That has to do with the entitlement process.

If the lots don't come through the governmental approval process smoothly, then you have a hiatus, which is what we have in the East Coast, and that will be rectified -- in the east coast of Florida.

That will be rectified shortly, I assure you.

So I guess in the next couple of quarters you'll be catching up then on deliveries, relative to what you've been booking?

I don't know if we will be catching up on deliveries;

I know we will be catching up on sales.

Deliveries on average take us 10 or 11 months to turn around.

Okay, all right.

Thank you.

Edward Fein (ph) from Investment Research (ph).

Thank you.

Joel, what about equity financing?

At $83 a share, have you thought about it or where might you think about equity financing?

You are raising equity -- (Multiple Speakers).

We are very -- at this point, we have tremendous cash flow; we have the opportunity to grow with our existing cash flow to go out and raise equity.

It doesn't appear to be the right answer.

Even though we still believe our stock is probably cheap at $83 prices, if we can continue to grow the way we are without raising the equity, we will continue to do that.

Thank you.

Joe, do you have any answer on the interest?

I know that, as of the last quarter, which I guess as of year end, we were 4.5 percent.

This had to do with the question of capitalized interest.

Our capitalized interest is -- I think it's the lowest it's ever been in the Company's history.

We're down to 4.5 percent as a percent of inventory for capitalized interest.

But I don't have this quarter yet.

Joe, we can send them the answer when you figure it out.

So thank you very much, Patty.

I appreciate it.

We do have a question from Rick Murray.

Oh, you do?

Okay.

Good afternoon, guys.

Just one question real quick -- Bob, I wanted to follow-up on your response to a couple of questions ago with regard to your expectations for orders to catch up.

Did I hear that correctly, that you would expect to see orders accelerate in the near term?

That would -- somebody asked me, with respect to I thought the Southeast, meaning Florida, market.

I addressed that, and I expected orders to accelerate.

Remember what I said when I delivered the monologue, that the order flow, pretty much for almost all the builders but especially in the luxury home building market, especially for Toll Brothers, is determined not by demand but it's determined by our ability to provide the supply.

So, what I was predicting was our ability to get through the governmental approval process to be able to bring lots -- homes to market.

I was predicting that we would once again be expanding and increasing our entitled lot supply in Southeast Florida, and that would naturally result in increased orders.

Our orders are governed by supply, not by demand, currently.

Okay, thanks.

Okay, thank you.

Joe, thanks very much for struggling through the math, and we are now at 4.4 percent for capitalized interest on inventory.

Thanks.

Patty, does that do it?

That does conclude the question-and-answer session.

I would like to turn it back over to you for any closing remarks.

Well, thank you all very much.

I appreciate you taking the time to be with us.

Goodbye.

That does conclude today's conference call.

Thank you for your participation; you may now disconnect.

Thanks, Patty.