托爾兄弟 (TOL) 2005 Q2 法說會逐字稿

Welcome to this Toll Brothers 2005 second 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 the conference up for questions and answers after the presentation. [Operator Instructions].

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

Please go ahead , sir.

Thanks, Patty.

Welcome.

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 website.

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 beyond our control that could significantly effect future results.

Those listening on the web can e-mail questions to rtoll@tollbrotherinc.com.

We will try to answer as many as possible.

We've just completed -- excuse me, we've just completed the best second quarter in our history.

Second quarter net income rose 135% to 170.1 million.

And second quarter earnings per share rose 126% to $2.01 per share diluted.

Second quarter revenues rose 52% to 125 billion -- make that 1.25 billion, that would be nice the other way.

Second quarter home building revenues rose 51% to 1.23 billion.

The average price per home delivered was 641,000, versus 557,000 in second quarter '04.

Excuse me again.

Second quarter contracts rose 38% to 2.2 billion, which was the highest for any quarter in our history.

The average price of contracts signed was 693,000 per home versus 617,000 in second quarter '04.

Second quarter end backlog rose 57% to 5.87 billion, which was the highest of any quarter in our history.

The average price of homes in backlog was 685,000, versus 601,000 in second quarter '04.

Six month numbers were also records and that income rose 129% to 280 million.

Earnings per share rose 121% to $3.34 per share diluted.

Revenues rose 59% to 2.25 billion.

And contracts rose 46% to 3.65 billion.

We expect to end fiscal '05 with approximately 240 selling communities, compared to 220 at fiscal year end 2004.

We believe our expertise in securing land and opening communities in the highly regulated upscale markets gives us a competitive advantage, both today and in the future.

We now control approximately 68,000 home sites, compared to 58,000 one year ago.

About 56% of these are optioned and 44% are owned.

These sites, which are in communities currently open for sale, or wending their way through the approval process, represent a 5 to 6 year supply based on our historic pace of growth.

This gives us strong visibility as we plan for future growth.

With increasing numbers of communities in lot constrained markets, our growing brand name and our broadening diversity of luxury new home product lines, we continue to increase our opportunities for growth and profits.

Urban and suburban high density and high rise communities are our newest additions, which augment our brand name in the move up, empty nester, active adult, second home and country club golf resort style new home niches.

According to the Census Bureau, in the past 20 years the number of households earning 100,000 or more has grown about 6 times faster than the U.S. households in general.

Which is a positive long term demographic trend for our business.

Yesterday the Wall Street Journal noted the record number of millionaire households in the U.S.

There are now about 7.5 million households with net worth of 1 million or more in the U.S. and that excludes the value of their primary homes.

With the number of affluent households in the U.S. continuing to grow, we believe the luxury market remains the sweetest spot in the home building industry.

When the economy is weak, luxury buyers are more likely to hold their jobs and see their incomes continue to grow.

When the economy is strong, there is much more upside at the luxury end.

Affluent buyers are generally not as constrained by personal budgets, so home prices can rise dramatically.

This may not be as true for the lower price niches where buyers are limited by their budgets no matter how strong the economy or their desire to buy.

This month S&P raised their outlook to positive from stable on Toll Brothers and our senior debt.

This reflects their recognition of our success at balancing strong growth and conservative fiscal and operational management.

For example, we take a substantial non-refundable down payment before we start a customer's home.

Because of that, we have the lowest backlog drop out rate, currently under 5%, in our industry.

That's why our backlog gives investors great visibility into our next 10 to 12 months of revenues.

Even with our conservative approach to managing risk, we have been able to grow earnings and revenue at a 20% plus average annual compound rate over the past 1, 3, 5, and 10 years and dating back 19 years to when we went public in '86.

Based on our land supply, our management team, the demographics that are supporting our luxury niche in the industry and the growth opportunities we see ahead, we hope to achieve that sort of growth in the forseable future.

The economists at ISI put out an interesting piece yesterday that noted that the average home price in the U.S. is roughly 3.5 times the average income.

ISI says that this is relatively cheap compared to other countries.

Professor Susan Wachter of the Real Estate program at the Wharton School at the University of Pennsylvania informs us that across 13 European countries that she surveyed, the mean ration of average home prices to average income was about 7 times, which is nearly double the U.S.

Further, in the U.S. we average about 650 square feet per person, while in Europe they get about 325 square feet.

So they are spending more and getting about 60% less in Europe.

That may be the trend that we are headed for in the United States.

Before I end, I want to thank all of our Toll Brothers associates.

We owe these results to the terrific people whose efforts and intensity make this all possible.

No one in our industry is a harder-working more dedicated team.

Thanks.

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

Joel.

Thank you, Bob.

As -- as Bob Toll noted we just completed a terrific second quarter.

Everything except unit deliveries seemed to fall perfectly in place.

Gross profits from land sales were approximately 2 million higher than the previous guidance provided in our February 23, 2005 conference call.

Other income was $4 million higher than guidance resulting from higher interest income, higher fee income, and higher ancillary business income.

Joint venture income was higher than previous guidance by $1.4 million, as we settled more homes and lots in the joint ventures than we expected.

Second-quarter home-building cost of sales as a percentage of revenues at 67.8% was approximately 1.2% better than projected caused by the following- Approximately 0.3 as a result of write-offs lower than budgeted, write-offs for the quarter were approximately $200,000 compared to our budget of $4 million; 0.3 of a percent as a result of the better mix of closings than projected, and about 0.6 of a percent as a result of lower cost than budgeted.

Second-quarter SG&A at 9.3% of revenues was significantly better than guidance principally as a result of lower absolute spending for advertising and marketing costs and lower absolute expenditures for G&A than estimated.

Interest of expense at 2.3% of revenues was in line with our guidance.

Based upon current accounting rules, estimated tax rates can change quarter to quarter, which has the effect of increasing or decreasing previously accrued taxes and current year's taxes in the quarter of which the estimate changes.

After reflecting the change in our estimated accrual tax rate and some tax-free income, the tax rate for the quarter was approximately 36.5%.

However, the normalized rate for the quarter was approximately 38%, which was also the estimate normalized rate for the third and fourth quarters.

The number of diluted shares used in the calculation of earnings per share for the second quarter was approximately $84,676,000.

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

If you miss any of details, you can find them on our web site and in the 8-K we filed today.

Yesterday, we announced a $300 million senior note offering.

We will use the proceeds along with additional cash to retire early our $222.5 million bank term loan which is due in July and our 8% senior subordinated note due in 2009.

This will result in a charge of approximately $4 million, $2.7 million after tax, or $0.03 of a share in the third quarter.

Even though we delivered fewer homes in the second quarter than estimated we still expect deliveries for year to be between 8,100 and 8,400 homes an increase of 50 homes at the bottom end of the range.

We believe deliveries for the third quarter will be between 2,100 and 2,200 homes and deliveries for the fourth quarter will be between 2,500 and 2,700 homes.

These are both increases in the range of deliveries.

Based upon the review of expected units to be delivered on a community-by-community basis, we expect the average delivered home price for the year will be between $645,000 and $655,000.

This is an increase over our previous guidance of $640,000 to $645,000 per home.

We would expect the average delivered price in the third quarter to be between $655,000 and $665,000, and this is an increase in the previous guidance.

We would expect the average deliver price in the fourth quarter to be between $660,000 and $670,000, and this, too, is an increase over the previous guidance.

We currently estimate that land sales for the year will be approximately $29 million. $13 million in the third quarter and $5 million in the fourth quarter.

With cost of sales as a percentage of revenues of 72% for the year, 80% in the third quarter, and 90% for the fourth quarter.

The net effect of these changes is that land gross profits for the year will be approximately $8 million.

We estimate that other income will be approximately $33 million for the year, $8 million in the third quarter, $9 million for the fourth quarter.

These are all increases over our previous guidance.

We now expect joint venture income to be $13 million for the year, $3 million in the third quarter and $4 million in the fourth quarter.

After reviewing estimated deliveries on a community-by-community basis, we estimate that home building costs of sales for 2005 as percentage of home-building revenues will be 330 to 355 basis points better than last year.

This is an improvement over our guidance -- previous guidance, 375 to 405 basis points for the third quarter over last year, which is also an improvement, and 310 to 360 basis points over last year fourth quarter.

Based on the year-to-date results and revised budgets, we would expect SG&A as a percentage of total revenues for 2005 to be between 40 and 55 basis points better than last year.

The third-quarter SG&A as a percentage of revenues to be 100 to 125 basis points better than last year, and the fourth-quarter will be 90 to 115 basis points worse than last year's fourth quarter.

As you may remember, last year's fourth quarter SG&A as a percentage of sales was unusually low.

These are all improvements over our previous guidance.

Based upon yesterday's stock price of $86, our estimated earnings for the rest of 2005 and expected records for 2006 as well, we believe that the stock price will continue to increase during the year.

Accordingly, we are using $84,500,000 diluted shares for the year, 84,800,000 shares for third quarter and 85,400,000 shares for the fourth quarter for purposes of calculating earnings per share.

We believe that based upon our record backlogs and current estimates for the remainder of the year, that even with our increase in guidance for fiscal 2005, we can achieve approximately 20%, which we define as between 17 and 23% growth in net income in 2006.

At this point I would like to turn it back to Bob for questions.

Thanks Joel.

Patty?

Thank you. [Operator Instructions] We will pause for just a moment to give everyone an opportunity to signal for questions.

Our first question today is from Ivy Zelman from CS First Boston.

Hi guys, this is Justin on for Ivy.

How are you guys doing today?

Good, thank you.

I had a quick question in regard to your SG&A.

I know that last time you guys came on, you were expecting to be closer to 10% of sales and you obviously did a lot better.

Is there anything going forward that is in the bag that maybe that is potentially going to give upside to that number you just gave us in the back half of the year?

Joel?

We had a lot less of absolute expenditures in the quarter than we expected primarily for advertising and marketing overheads, and I think that that's what represents -- that has been reflected in the estimates I have given you for the rest of the year.

So I hope that I am accurate in those estimates.

Next question.

Basically I know you guys -- budgeting going forward for your capital allocation for land acquisition.

Are there any particular geographies where you are expecting to focus more of your spending?

Sheesh, that's a hard question.

I am trying to recall what we've done in the last two or three weeks, let alone the last two or three months.

We will close on -- in the rest of the year on -- and open up for sale rather, more communities in Arizona.

That's probably the biggest piece.

And in --

You've got a huge piece in San Francisco.

The Dublin Ranch addition.

That is huge that we haven't closed on yet.

But that's not what the question is.

The question is where am I currently -- where am I currently looking to expand.

I can't give you an answer because we are so opportunistically -- and also because I don't remember.

Driven that -- when it comes in if it is a good deal, we take it.

I'll tell you this, we don't focus -- we don't care whether it comes in Massachusetts, Rhode Island, New York, New Jersey, or California, or Arizona, or Nevada, or Illinois, et cetera.

Okay.

And on -- just -- the parcels of land that you are seeing in places like Florida, are they comparable in size to what they were a year ago?

And just in pricing, is the -- the pricing on lots, particularly in Florida, is it trending in line with, below, above order pricing trends?

The parcels in general were larger -- excuse me.

In Florida got smaller.

Now we are getting larger again.

And the second part of of the question I didn't understand.

I am sorry.

Land prices going up faster than sales prices?

No, no.

As a matter of fact, it seems to be the other way, though.

I hate to make an ad for those selling land.

Thank you very much.

You are welcome.

Our next question is from Lorraine Maikis from Merrill Lynch.

Thank you.

Good afternoon.

Hi.

When you did your orders call, it sounded like you guys were talking down margin expectations a little bit because of the lower level of deliveries.

Just wondering what changed between then and this dramatic outperformance that you actually posted for the quarter.

I will take responsibility.

I was going to say, Joel? [ LAUGHTER ]

This is Joel, I'll take responsibility.

What I talked about in the -- in the preliminary conference call was normalized trends.

I didn't have any real numbers at that point of absolute expenditures, and when the absolute dollars expended came in, they were so much better than our budgets, I guess, because we had such strong sales we didn't have to advertise as much example that they were much better than we had expected.

Okay.

How long is your financial close?

How long does it take us to close the books?

Yes.

We don't use standard course so it takes us about three weeks.

Okay.

All right.

That's what we weren't getting.

And then can you just give us an update on some of your joint venture activity in the Hoboken area and how that condominium conversion has been going?

The condominium conversion is going beautifully.

Unfortunately, we are waiting for DCA, an agency of New Jersey, to give us clearance to take binding contracts.

They have to take a look at the offering statement, and it takes them nine months generally until that is completed.

We took non-binding reservations from the tenants and cut that off at a date, and about half of the building gave us non-binding reservations for that conversion.

So we're pretty excited and anxious to be able to get out there and take real contracts.

And I guess we expect that to come through within the next month or two.

The other joint venture we have in Hoboken is with the Pinnacle Group, and that's on the Maxwell House property, and we have recently stopped sales there because things have been so strong.

We don't want to get too far out ahead of ourselves.

And we also want to save the best for last and take advantage of the price appreciation that we witness.

We don't want to sell out and then say, darn, we wish we had a few more units to sell.

So on -- that's those.

Sky Club --

the Sky Club is completed, all done.

And is the money in?

We have some more closings to take place.

Okay.

That one is all sold out, all finished.

We just have to close a few more, and that's done.

Thank you.

You are welcome

We will take a question from Greg Gieber from A.G. Edwards.

I wanted to follow up on some of this pricing stuff.

I find it interesting that you referenced Susan Wachter's research on the housing industry.

She is one of best economic economists in this area.

But yesterday --

I will tell her you said so, that's great to hear.

she's done --

I meant it seriously.

Okay.

But here is my problem I have.

Is that it is kind of discontenting to hear her say yesterday on NPR that she thought we were in a housing bubble and talked about a lot of risks out there.

Now I don't really want to get into the bubble question, because that's long and complex, what I really want to focus in is what is really happening to your pace of land buying as you look at these -- at deals that are brought to you that are, of course, stuff that is opportunistic.

Are you finding more of them or less?

Are you finding your pace slowing down some?

What markets are you still buying at a good pace in?

What markets might you be kind of pulling back saying I am worried about the basic land price?

We are buying in all the markets that we see good deals in.

I am sorry.

That's the best answer I can give you.

We are not afraid to buy in the hotter markets which are Scottsdale, Phoenix, and Nevada, Vegas and L.A. and San Francisco and Florida.

We are not afraid to buy in the hot markets, but it just depends upon the price.

It has got to meet our criteria that fits within the model.

Then it is opportunistic by definition by our model and we take the opportunity.

This year, I think we found more land than we found last year, but I am not certain.

If not last year, the year before that.

So it's gone -- it's gone up and down.

Was it last year we were slow?

We were slower last year.

Last year we couldn't find as many good deals as we are finding this year.

That might be just us.

We don't know where to look, and then this year we have been better at it.

I think you know where to look.

You have done pretty well in it.

I want to -- another question on pricing.

If you took kind of the identical home -- we are talking about the base price here.

You know in -- how much has the price gone up over the past year if you take the same home selling the same community or nearby community.

Do you have any idea what the average price increase on just the base?

Yeah, I have a rough idea for the hotter markets because -- and it was in the journal this morning.

The -- I think it was the Commerce Department said that year-over-year new home sales for single detached went up 3.8%.

And I got called by a reporter, and I said that was absolutely ridiculous, and I gave him some examples I know in Las Vegas and in -- I think it was Phoenix, we were up between 30% and 40%.

Same house.

I am answering your question for the hot markets.

Other markets, Joel, have you got a chart there?

Yeah, these are the prices as best we can same store.

Fiscal year change looks like Florida, 20%.

That was East Coast.

This is a change.

Well, this is a change also Joel.

Right.

I'm sorry.

That' '05.

Right.

Year-over-year, '05 over '04, it looks like it went up 20% on the East Coast of Florida.

The West Coast says 12.7, but I find that hard to believe because we were raising prices so fast there.

Palm springs is 11%.

That sounds about right.

It says that we are 9% in Arizona, but I don't think that's right.

So I am --

That was actual closings versus actual closings.

Oh, closings.

I am answering in the last year how much have we raised prices.

Anything we sold in the last year -- anything we sold within the last year, remember, will be delivered next year or next quarter and the quarter after.

So I would guess on average we are probably up about 20%.

That's --

There are some markets I know that are not great.

Detroit, we've raised prices but probably only 5%.

Austin, San Antonio, and Dallas, probably only up about 5% on average.

I am guessing, but I am giving you the ideas of the softer markets.

All of our other markets are really strong.

Okay.

One last question.

It appears to me at least in my field tours that a lot of the agents I talk to or salespeople are saying people are spending more on upgrades this year than they had in previous years, despite your high price increases and everybody's high price increases.

Do you know how much -- what's happened to the percentage of your base -- your price that is upgrades now versus a year ago?

Well our settlement information belies that and says that they are pretty constant in their expenditures for the upgrades.

However, our recent sale experience coincides more to what you are suggesting, which is people are starting to upgrade more.

I think the reason is that we are getting better at the merchandising.

We have now special stores as opposed to doing it in the model home where we can really show you a whole cast of granite, different granites and different moldings, and it's better merchandising, better marketing, I think we sell a little more in the upgrades and options because of it.

Sounds good.

Thank you much.

You are welcome

We will take a question from Margaret Whelan from UBS.

Hello?

Hi, Margaret.

Can you hear me?

I can hear you perfectly.

Can you hear me?

Super.

I can hear you loud and clear.

This is like a Verizon ad.

Let me just walk a few steps.

My question is about the Midwest.

Some of our channel checks have been suggesting that it is deteriorating pretty quickly in the last two months or so.

Would you just talk about the market that you are in and what you are seeing at your price points.

Yeah, let me go get the Midwest out.

And while you are looking for that, have you thought about buying in some stock to offset the creep?

I am sorry --

We acquired 400,000 shares during the quarter, Margaret, which we had indicated that we had done the last conference call.

Yeah, but are you going to do any more than that?

Because it is still creeping up from last year.

We were, Margaret, when the stock was trading at 74, 75.

We bought up to, what, 78.

Its a steal at 90.

We were buying back, but -- at this price we will have to wait and see.

We are opportunistic in that as we are in land ac.

Remember Margaret, if I can, we underwrite each deal and talking are talking about IRRs north of -- on a leverage basis of 30%.

So for every dollar of equity we buy back, that's $2 of land we can buy, et cetera.

So in general, land for us is a better addition in the long term.

Okay.

Now going through the paper.

By the way, I apologize.

Do you hear the background noise of the jets flying?

No.

Good.

Where are you?

We are -- we are right next to Willow Grove Air Force Base it would seem and because they have been noted for closure, I think they have every jet up flying today in protest.

Let's see here.

Illinois, which is the Chicago market.

For us has been pretty good.

I'll make a deal with the devil if this is -- if this is -- if this is not good, I will take it forever.

Detroit is okay.

I would rate the Detroit market suburbs of Detroit to be about a "B" market this week.

We took 14 deposits.

These are non-binding reservations until we get the agreement of sale to them out of 3, 6, 9, 12 -- out of 15 communities.

Are you seeing any cancellations or lower prices or higher incentives?

Anything like that?

No, no.

Not in -- not in Chicago, not in Detroit.

It is not a big market for us.

I am just giving you the entire midwest for -- for us.

Okay?

That's it?

Yes, that --

Detroit and Chicago?

Yes, just Detroit and Chicago.

Okay.

Just the last question I had was about the land transaction in Florida.

Will you give us some details around that?

Yes.

Parcel 19.

Parcel 19 here and after known as Jupiter Country Club, please.

We paid $100 million.

Yes.

And we are -- how many units do we have?

About 370 towns and about 260 singles.

266.

266, pardon me. 266 singles.

And we'll build a -- the Shark.

What is his real name?

Greg Norman.

Greg Norman Golf Course and put up a club hose and tennis courts and swimming pools and have a good time.

The question I had was more around the transaction itself.

You bought it through a land banker, right?

Yes.

Whereas typically you develop the land yourself, so I was just trying to get an idea of how you thought about that.

We are still -- we are still developing the land ourselves.

Okay.

We just -- because that was such a large transaction, we used a land banker.

Would you expect to keep doing that going forward?

As our -- as our leverage goes down, we would use less, less land banking.

If our leverage went up -- which right now even though we have bought a lot of land and we are expanding fairly well, it still doesn't appear that the leverage won't continue to go down, so probably would use less land banking.

Would you just give us a sense for what you think the margins -- the gross margin will be there?

Because the seller has much lower gross margins than you have, and since you didn't develop it, what do you think it might be.

What is your pro forma at?

I would just say I expect it to be fairly exciting, and I don't want to go any further than that, because I haven't put the roads in.

We are just working the dirt now, and I haven't sold any homes, so I don't have enough experience.

So maybe you can tell us what your pro forma to that?

I am sorry?

When you were actually doing the -- doing the math to try to figure out whether or not you wanted to buy it --

Oh, how did we pro form it?

Yes.

It was pretty exciting.

Okay.

I will call you later.

Thank you.

Okay.

You're welcome.

Oh, my -- my guys are telling me to tell you that we are the developer in there.

You are the developer.

Oh, yeah.

Okay.

It is just entitled?

Yeah, but that's just -- that is a land bank transaction, so I had nothing to do with developing the ground.

Okay.

Thank you.

You are very welcome.

We will go next to Myron Kaplan from Kaplan Nathan & Company.

Hi, guys.

Hi, Myron.

Congratulations on more outstanding progress.

Thank you very much.

You truly -- you are really in the sweet spot of a huge trend.

I appreciate those kind words.

Yes.

I just wanted to ask you if you would be able to expand on the development of the -- I know you touched on it already, the development of the Hoboken and Jersey City properties.

Yes.

We bought the T buildings about a year ago, I guess, a little less than that.

Been very lucky because of the spectacular -- and I think that is an accurate adjective -- increase in the values for apartments and condos in Hoboken in the past nine months.

And the Maxwell -- the Maxwell Place, which -- well, the Hoboken T buildings are 525 units.

And because its converted old loft, warehouse and office, it is where Commodore Lipton actually sat and saw his boats in the harbor outside.

The floor -- the floor to ceiling height is about, what, 14 feet.

13 feet.

13 feet for each one of these units and almost every one has a sparkling view of New York and the Hudson.

And then Maxwell Place will be 800 units and that's a JV with the Pinnacle Group, and that also is right on the Hudson and has spectacular views.

The Grove is --

700 Grove its called.

700 Grove.

How many units are in there, about -- 230 units.

That's all ours.

And the T building space detached.

Oh, yeah, that's right, 700 more units to start, to put into the ground that are next to the T.

Second tower?

Second, third, and fourth.

Oh, I see.

One of them is a shell that will be exactly as these 525.

And then we have several more towers to build.

What kind of per foot do you anticipate you will do for the -- be able to receive further conversion, pricing basis?

I don't remember that.

Oh, that's right.

We can't answer the question because DCA would fine --

I withdraw the question.

Thank you very much.

Its got to do with the regulations in New Jersey.

I would be glad to say otherwise.

So you have started construction at Maxwell Place?

Oh yes, very much.

We are out of the ground.

We cleaned up the site, tremendous amount of dirt moving there.

When do you anticipate the first towers that you are going to deliver will be completed?

About a year and a half, a little less perhaps in Maxwell.

So those are really going mostly into '08 or something like that or '07 -- '07 or '08.

I think we start to settle in '07.

'07 right, well sounds like a nice -- it is a nice act 2 or act 3, yes.

Thanks very much.

You are very welcome.

Oh, Hudson T will start delivering we believe in a couple of months.

Because that's a conversion.

The others are construction.

I have just been handed a paper that says that Maxwell is supposed to be able to deliver in the Fall of '06.

But you know builders, they are always optimistic.

Always take -- it takes longer anyway because you have to sign -- you have to sign all the papers and the DCA or whatever will get into the act and so forth.

That's right.

Thank you, Myron.

Thank you.

We will go next to John Kim from Mack Capital.

Hi, great quarter guys.

Just a couple of questions.

Thank you.

First one, the ARM percentage, IO percentage and LTV?

67% was the ARM's percentages, so people of our customers who selected ARMs, and the average ARM percentage is roughly the same as the average fixed rate percentages which were roughly 70% for our customers.

The interest-only portion and LTV?

The interest -- how many are interest only?

About 34% of our closings and about 30% of our new contracts signed last quarter were interest only.

And the loan to value ratio?

I think they are the same.

The loan-to-value doesn't change.

It stays about 70%.

Joel said 67, but historically it has been running about 70%.

Okay.

The second part is, we have seen sort of an increase in the Las Vegas market in terms of homes listed.

I think they said about over 10,000 homes are available in the Las Vegas market.

It seems like about a quarter of those were built between '03 and '05.

Could you just -- do you have some comments on the Las Vegas market and how -- how strong it is for you folks?

Las Vegas market is very strong.

I read an article yesterday that said either 13,000 or 14,000 available homes in Las Vegas.

I forget which.

I remember articles when the market did crack about nine months ago in Las Vegas and stayed dormant for about three months and when prices backed down by about 20%, that the market came back within three months.

During that time, the article said there were 17,000 homes overhanging the market.

I don't think the information we get is accurate at all because if there were that kind of overhang, it would be impossible for a market to come back in three months, reach all-time highs.

So all I can say is that by our experience, the market is -- the market is excellent.

So you haven't really seen any change in the past month or so in the Vegas market?

I am sorry?

There has been no real change for you folks in terms of closings and buyer interest in the past month in Vegas?

In the past -- actually -- in the past month, we have not -- not been able to sell as much as -- as we were a year ago.

We didn't -- we don't have as much demand, but it is hard for us to judge it, because we've been sold out.

Half our communities, all we can do it take your name and get back to you when we open up some more lots.

Okay.

Great.

Okay.

Thank you.

Thank you.

We will take a question from Dan Oppenheim from Banc of America Securities.

Great.

Thanks very much.

Wondering if you can talk a little bit some more about market conditions in different regions and what you are seeing.

Certainly there is talk about Vegas, a little bit about the Midwest, but as you look at California, other parts of Florida, and the Northeast, you know, how are you thinking about the market conditions now?

Every one of those markets -- I can do that real easily.

Every one of those markets is terrific.

Our experience is super-strong market, A-plus, Phoenix.

A-plus, southern Cal.

A-plus northern Cal.

They are terrific markets.

Okay.

In terms of --

Excuse me , I should characterize it rather they are terrific markets for us.

I can't comment on how the market is for somebody else.

Sure.

In terms of the -- the land that you control right now.

It seems there has really been -- there has been great success in increasing in the percentage of land controled through options rather than ownership.

Have you done anything differently with incentives for those who are looking at land for you, or what is really driving that and how do you think you have had the success?

I am sorry, guys, what --

Higher percentage.

Higher percentage of options?

That's -- that's just time.

Timing.

Exactly, just timing.

Okay.

Once we -- once we get through the approval, then we generally -- it becomes an owned piece of property.

Right.

What happens is all the land is bought on option.

We don't say hi and this is a great piece in three months we will see you at the table and we've got -- come with a title and come with a check.

All the land we buy, or almost all the land we buy, is with some form of option or another, so I think the change in numbers just reflects the land coming through the approval process.

I guess if we look at it -- looked at it a year ago, the numbers would have been different and certainly more would have been controlled through ownership?

Right.

We had two-thirds -- about 60% a year ago that was owned and what's happened is we have a bunch of things that are going to close, and they will become our own in the next year.

But you know what it also is?

We bought more land this year than we did last year and this would make it more on option in comparison because we haven't had enough time to take it through the approval process.

Correct.

Okay.

Got it.

All right, thanks very much.

My pleasure.

Our next question is from Joel Locker [ph] from Carlyn Financial.

Hi guys.

Great quarter, just want to say that first.

Thank you.

Getting some visibility into the first quarter of '06 with your backlog conversion being about 10 or 11 months now.

Are you still seeing the same kind of gross margins like the 32 -- low 32% range.

Or do you see them even higher in the first quarter of '06?

We will start to give you quarter-by-quarter guidance in the next conference call, but at the present time, we are comfortable to give you year guidance, which is that net income will go up approximately 20%, and as we go through and analyze the backlog and the timing of that backlog, we will update that guidance.

Thanks.

And one follow-up on the question about the buyback.

I know you guys have almost doubled your cash on hand compared to a year ago and was just wondering if you already had substantial land amounts, if you were more willing to maybe even start small dividend or increase the buyback?

Are we going to issue a dividend.

We have no plan for that currently.

We can, you know, we reserve the right to change our mind.

With respect to buyback, we are opportunistic.

We do have the cash to buy back, so if we -- if we feel like it, we will, but --

Right, it just seems like you --

Right now we don't.

You guys have so much cash on hand it is kind of a good problem to have or you may have already covered all your Cap Ex for land where you have the extra money to do what you want with.

Go ahead, Joel.

We have a lot of land deals that have gone through the -- that are at the end -- tail end of their approval process that will be coming to become owned and development work will start coming up very shortly.

We knew that and that is the reason we have some extra cash put away.

Thanks a lot

We will take a question from Michael Rehaut from JP Morgan.

Hi.

This is Jennifer Console [ph] for Mike Rehaut.

My question deals with raw material cost increases.

I was wondering if you could provide some color by region around that.

I know that there is a concrete shortage, so could you go a little bit more in-depth into that?

Joel, do you want to talk about concrete?

We haven't seen any cost increases of significance during the quarter as a result of material shortages, and I -- they probably -- there are material shortages of concrete and other things periodically across the country, but as you -- if you plan well enough, and if you -- contract as long as you can on things like lumber, you try to keep those contracts and costs and stuff under control.

And there hasn't been a material impact on us.

In fact, if you saw the -- what happened in this quarter, our costs went up less in this quarter than we had budgeted for as a result of all these shortages we thought we would see and we didn't get impact in this quarter on the margin standpoint.

So you don't foresee anything further the remainder of the year going into next quarter either?

We have -- in our guidance, we have included what we think is the impact of price increases or shortages to the best of our ability.

Okay, thank you.

We will go next to Steve Fockens from Lehman Brothers.

Hi, good afternoon.

If you -- first question.

If you look at the 400 basis point year-over-year increase in gross margin, were there any particular regions that were on a year-over-year basis well above that or well below that?

Joel?

The stronger margins -- the stronger geographic regions that Bob talked about have all stronger than average margin increases.

Places like Arizona and Las Vegas and Florida and New Jersey and Virginia are all very strong areas and they have all had very significant margin increases as a result.

The numbers that Bob was going through off of my schedule before was the year-to-date price increases.

That is a six-month price increase, and that should give you a pretty good idea what is going to happen in the future because those are the kind of margins increases we saw.

So those were the price increases on the sales so far this year?

Yes.

Okay.

And then secondly, if you are buying more land this year than last, has there been any major geographic shift in what you are buying this year versus last?

Or I should say where you are buying this year versus last?

We made some pretty decent buys in Jersey, Connecticut --

We had two big deals in --

New York.

We had two big deals in Las Vegas.

Washington, we bought -- the Washington D.C. area, we bought a bunch.

Florida east and west we bought a lot.

Jacksonville we bought.

Yeah, Arizona we bought a tremendous amount, and then Las Vegas market we bought a lot.

Northern California we bought a lot.

Southern California we've been slow to buy.

Chicago, we have been expanding pretty rapidly.

Detroit, not as rapidly.

That gives you a rough idea.

Okay.

Thank you very much.

You are welcome.

We will take a question from Alex Barron from JMP Securities.

Excellent quarter.

Thanks, Alex.

Just wanted to ask you as you look over the next few quarters.

Is there any region -- as you go region by region, is there any regions where your mix would cause your average sales prices to drop substantially, not from a drop in prices just from a change in mix?

Maybe in Northern California.

We have a few places.

California --

The mix will go down --

Will the prices go down?

More attached multifamily products, the price will go down.

New Jersey and Connecticut we had some blips.

We reviewed in the last conference call as a result of change -- high percentage of active adult.

Virginia has had some changes over the last year on mix that potentially can change the average price.

And in the next year, we've talked about it, based on communities opening up in the rest of this year and deliveries we expect to come from those communities next year, we would expect to see some lower-priced units in a number of geographic regions being sold which -- which will change the -- the average price.

Okay.

How about in terms of -- in terms of number of communities open, like what you guys sort of happened to you in California this quarter, where your community count dropped because -- delays or whatever.

Is there any other region where something like that might -- might happen in the next couple of quarters?

We --

Fred?

This is more related to the California.

Let me get back up to -- We will be over -- our California community count will be higher than it was at the beginning of this year by the end of next year.

So sometime during 2006, our California community count will increase, but it wasn't necessarily because -- just because of approval delays.

Some of it is we sold faster and we weren't able to find and bring on communities.

But I mean in the rest of the regions, you don't expect any drop due to just a gap in opening and closing communities?

West Coast of Florida, you say, Fred?

We bought a lot recently, but -- there may be a gap in terms of delivery.

I have a list of expected communities for the area.

Not really, no.

Okay.

Good.

All right, thank you.

You are welcome, thank you.

We will take a question from Damian Augustine [ph] from George Ways Associates.

Hi, guys.

With the record backlog what are you doing to fill out your communities faster and get more units built?

Do you find yourself turning more and more to outsourcing, some of the construction or --

No, we outsourced only one community, and that was in Phoenix you because it was a very dense kind of multifamily attached.

We have a -- a GM building.

No, in Florida Kira, the high-rises are CMed or GCed, but that is a standard method of operation.

No, I don't think so.

Other than we've doubled up superintendents and doubled up project managers to try and increase the production where we have such demand that we wish to take advantage of.

Damian, though, just to make clear, we don't have on our staff the plumbers and the painters or any of those.

Those are all sub-contracted.

We are generally like the general contractor.

Okay.

And can you give me an idea what percentage of the average selling price is allocated to the land costs?

I can't.

And it is not because I don't want to, I just don't have that info in my head.

It varies pretty tremendously from the less expensive to the more expensive product.

The more expensive the product, the more is allocated to the land -- not allocated -- the more is the land, because if you build a 4,000 square foot fully amenitized granite, marble, hard woods, a couple of ovens, couple of dishwashers, love tubs, whirlpools, that 4,000-square-foot home costs the same if it sits on a $200,000 lot as if it sits on a $500,000 lot.

The difference is, when you -- when you take that and center on a $500,000 lot you may get a million and a half.

When you set it on a $200,000 lot, you may get $750,000.

So I really can't answer the question.

It doesn't work that way.

Rule of thumb that we have in our business approximately 25% of sale price is alicable to the land, but I wouldn't use that rule of thumb for anything other than ruling your thumb.

Okay.

Okay.

Thanks, no other questions.

You are welcome

We will go next to Gabriel Kim from Basswood Partners.

I am just wondering your long term debt to cap targets, have they come down a bit since we last spoke?

I have sort of like a 48% sort of a number in my head.

Yeah, they are coming down.

Okay.

To, like, what, 43%ish?

We use long -- we use debt -- net debt to capital that has come down significantly.

We are in the 30s of net debt to capital, that is debt reduced by cash.

Okay.

And that's sort of the new lower level?

Yes, the lowest level it has been at.

But that's sort of what you are thinking about plus or minus a couple percent?

We have -- that's what the result is of our profits.

That's what we expect.

We don't have a goal that says we have to be at 30 or 35% and if we can find enough land to grow and be in the 40s, we will be in the 40s.

Okay.

Thank you.

Should I comment upon -- no, I shouldn't comment upon?

Then I won't.

I have a question from the Internet from Greg Scott.

Bob, congrats on another great quarter.

Keep up the good work.

As a fellow shareholder I am interested in learning if you have considered eliminating the stock options and or salary that you receive for your work at Toll Brothers.

You can see I don't read these ahead of time before I read them over the air.

Warren Buffertt, Richard Kinder and other successful manager investors take little or no salary and depend on stock-priced appreciation or dividends for their compensation.

In my opinion a similar action on your part would send a strong message to investors.

I am interested on your thoughts on the subject.

Well, Greg, thank you very much.

And I -- I like the way it is now, and those are my thoughts on that subject.

At this time, there are no other questions in the phone queues.

I would like to turn the call back over to our speakers for any additional or closing remarks.

Well Patty, thank you very much.

And thank you everybody for listening, and have a great day.

Bye.

That does conclude today's conference call.

Thank you for your participation.

You may now disconnect.