托爾兄弟 (TOL) 2005 Q3 法說會逐字稿

Welcome to this Toll Brothers 2005 third quarter earnings release conference call.

This call is being recorded.

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.

I will now like to turn the conference over to Mr. Robert Toll, Chairman and Chief Executive Officer.

Please go ahead, sir.

Lisa, thank you very much.

Welcome and thank you, everybody, for joining me.

With us today by phone are Joel Rassman, Chief Financial Officer, Fred Cooper, Senior Vice President of Finance and Investor Relations, and Joe Sicree, Chief Accounting 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 affect future results.

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

We'll try to answer as men as possible.

We are very pleased with this quarter's results and with our prospects for the future.

Record third quarter earnings were the highest quarter were in our history, net income of $215.5 million rose 103%, and third quarter earnings per share of $1.27 rose 92% versus fiscal year '04.

Revenues rose 54% to $1.56 billion, the highest quarter in our history.

Home building revenues of $1.54 billion rose 55%, and the average price per home delivered was $665,000, versus $589,000 in the third quarter '04.

Record third quarter contracts rose 19% to $1.92 billion.

The average price of contracts signed was $698,000 per home, versus $690,000 per home in third quarter '04.

Third quarter and backlog rose 48% to approximately $6.43 billion, also the highest quarter in our history.

The average price of homes in backlog was $678,000, versus $634,000 in third quarter '04.

Our earnings in the first nine months of fiscal year '05 of $495.9 million have already surpassed our record 12 months results in fiscal year '04, and we're up 117% versus nine months of fiscal year '04.

Nine months earnings per share of $2.94 has also exceeded fiscal year '04's 12 month results of $2.52, and was up 100% versus fiscal year '04's nine months of fiscal year '04.

Nine month revenues of $3.81 billion were 57% ahead of last year's nine month record.

Nine month home building revenues of $3.75 billion were up 57% versus fiscal year '04's nine month record.

And nine month contracts of $5.56 billion rose 35% versus fiscal year '04's nine month record.

We attribute these tremendous results to our team's diligence, a strong land position, and the pricing power we enjoy in our affluent markets.

While the supply of buildable lots seems increasingly to be constrained by governmental regulation, demographics-driven demand continues to grow.

These dynamics have put us on track for our 13th consecutive year of record earnings in fiscal year '05 and assuming continued healthy demand, we believe approximately 20% net income growth in both fiscal year '06 and '07.

We ended this quarter with 230 selling communities and expect to end fiscal '05 with approximately 237 selling communities, compared to 220 at fiscal year end '04.

We project to reach about 265 selling communities by fiscal year end '06.

Few Fortune 500 companies have both provided their shareholders with such a consistent string of record earnings and can also look toward projected 20% net income growth in each of the next two years.

We believe that our size and financial strength, our consistent record of performance, our record backlog, and our continuing community growth should give confidence to investors that our results and prospects are not as cyclical as the market seems to be anticipating.

In recent weeks, bubble-mania and reports of a strengthening employment picture with associated interest rate fears have rattled investors.

We believe strong job numbers and an improving economy are positive factors for the housing industry in general and for our luxury niche in particular.

Mortgage rates remain low, and the projected fed funds target of about 4.5% is below its peak in 1994, '95, '96, '97, '98, '99, and 2000, which were all years of record home sales for Toll Brothers.

We believe our success is determined more by our brand name and our well located communities than by fluctuations in the mortgage market.

In the past decade, there have been several periods of mortgage rate hikes, three years in which national housing starts dropped, a recession, a major stock market decline.

None of these have stifled our ability to expand and produce record results.

We've watched some markets go from overheated to warm and back to hot.

On the flip side, we've seen solid improvement in Denver and Austin and even better improvement in Hilton Head where demand of our communities has previously been cool to lukewarm at best.

Metro Washington D.C. has received lots of attention in the past few weeks.

Some may have misinterpreted my recent comments on metro D.C.

I believe I said it was an overheated market that went to hot, and that's where it is today.

Hot.

In D.C. we continue to find attractive land opportunities to expand our leading position in the luxury niche.

It appears to us that the basic fundamentals of wealth accumulation, constrained lot supplies, and growing demand should continue to support our business model, with approximately 79,500 lots under control, we believe we can continue on a path of growth for many years to come.

Thanks, and now let me turn it over to Joel Rassman to do the numbers.

Joel?

Thank you, Bob.

As Bob said, this was a great quarter.

Home building revenues were approximately $1.54 billion as we delivered 2,310 homes at an average price of approximately $665,000.

The mix of deliveries was slightly richer than we estimated as we delivered more homes from higher margin communities than previously projected.

Gross home building margins at 33.4% were 500 basis points better than last year's third quarter and approximately 90 basis points better than guidance. 40% of this improvement, i.e. 36 basis points, was the result of this better mix I discussed. 40% was the result of the lower direct costs and lower overheads per home and 20% was attributable to lower write-offs than budgeted.

Write-offs this quarter at $1.2 million were the same as last year but lower than our budgeted guidance of $4 million.

Land sales at $10.6 million and gross margins at 9% were both lower than our guidance as some of the land transactions originally scheduled for this quarter were delayed.

Other income and joint venture income combined of $15 million were $4 million higher than guidance as we settled more lots and more condo units in our joint ventures and at slightly higher margins than we had originally estimated, and we also had higher interest income.

SG&A at approximately 8.1% of total revenues was 100 basis points lower or better than the previous guidance as we benefited from the effect of higher revenues, that was about half the difference, and lower level of spending.

That was the other half.

Interest expense is based on the specific lots closed and 2.3% of revenues with slightly higher than the 2.2% guidance.

As you probably noted, our effective tax rate for the quarter increased to 40.6%.

We expect that the tax rate for the fourth quarter will be approximately 39%.

As we've discussed in previous conference calls, based on accounting rules, when a company changes its estimate of tax rate the cumulative effect on all previously deferred tax items and the effect on all previously reported income for the year gets recognize in the quarter that the estimate changes, i.e. for us, the third quarter.

This change reflects the effects of the changes in state regulations effective for us year, our current estimate of geographic mix, and the information we were able to derive after we filed our 2004 returns which were just finalized and filed.

The last component of EPS is the average number of shares which at 169,843,000 was slightly higher than our estimate of 169,600,000.

Looking forward to the fourth quarter, we expect to deliver between 2,750 and 2,850 homes, bringing deliveries for the years to between 8,550 and 8,650.

This is an increase of 150 homes which includes approximately 100 homes from our Landstar acquisition in Orlando.

We expect the average delivered price to be between $675,000 and $685,000 although there is a chance it may be slightly higher.

This is an increase of about $15,000 per home from our previous guidance in May as a result of an unusual number of expensive homes projected to be delivered this quarter partially offset by the additional lower price Landstar delivers.

We estimate that land sales will be approximately $10 million with 20% gross margin, and that other income will be approximately $9 million, the same as our previous guidance.

We also estimate joint venture income will be approximately $10 million.

This is an increase of $5 million from our previous guidance.

We estimate that gross margins will be approximately 310 to 335 basis points better than last year's fourth quarter, which is a slightly lower guidance and reflects the effect of the Landstar acquisition.

Landstar deliveries will produce very little in gross margins because we purchased construction in progress which is written up as a result of purchase accounting.

We now project that SG&A as a percentage of total revenues in the fourth quarter will be approximately the same to slightly higher than last year's fourth quarter.

This is a significant improvement over the previous guidance of 90 to 115 basis points higher than last year's fourth quarter.

We reduced our estimates of SG&A expenditures for the fourth quarter to reflect recent reductions in actual expenditures that we saw in the second and third quarter and the delayed implementation of FASB 123R on stock options.

We estimate that interest expense will be approximately 2.3% of revenue.

The last component of earnings per share is share count.

Based on what we believe our share price should be at the end of this year, as investors focus not only on 2005 records but also on the projected results for 2006, and giving effect to the 726,000 shares we bought back so far this quarter, we expect the number of -- the average number of shares to be approximately 171 million for the fourth quarter and the average share count for the year to be approximately 169,100,000.

As we discussed in our last conference call, as a result of longer delivery times and the introduction of some high-rise products, some of our traditional relationships between backlog and projected quarterly deliveries for the next year may change.

At July 31st, we have approximately 500 homes in backlog where delivery is projected to be more than one year out.

Accordingly, based upon our record backlog and current pace of traffic and deposits, expected community openings and the current economic conditions, we estimate we will deliver between 10,200 and 10,600 homes in 2006, and that the average delivered price will be approximately $665,000.

This estimated average delivery price reflects the significant change in mix in 2006 versus 2005, as we expect 21% of our deliveries in 2006 will be multis compared to our estimate of 17% in 2005.

We also expect that there will be a significant increase in the deliveries from our newer lower priced single-family communities we discussed in the last conference call.

This change in mix will have a significant effect on the averaged delivered price in some quarters.

For example, we expect to deliver between 1,900 and 2,100 homes in the first quarter which includes 300 smaller singles for newer communities in Florida at an average price of approximately $400,000.

Accordingly, expect the average price for the Company's total deliveries for the first quarter will be approximately $640,000.

Obviously, since we expect the average price of $665,000 for the full year, the delivered prices in the last three quarters should be higher.

Even with the increased projection for 2005, based upon all our current estimates, we still believe we will achieve approximately 20% net income growth in fiscal 2006.

We are still working on our detailed quarterly projection for 2006 including cost of sales and SG&A estimates and expect that they will be updated in our November contracts and backlog conference call and again in our December earnings conference call.

Based upon the current economic conditions and increased community count, we believe we can achieve approximately 20% in net income growth in 2007 as well.

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

Thanks, Joel.

Lisa?

Thank you, Mr. Toll.

[OPERATOR INSTRUCTIONS]

Bob, would you like me to try a call from the Internet while we're waiting?

Sure.

This comes from Drew Torbin.

Your EPS looked to take a hit of about $0.05 this quarter due to higher than anticipated tax rate.

So absent that number, our numbers would have even been more impressive.

Was this difference due to geographic mix shift?

And what was your feeling on the tax rate going to be going forward?

Go ahead, Joel.

Part of it was a shift mix in geography.

Part is a result of a bunch of changes in state tax regulations and rules that will affect us for the first time this year, and part of it is that when you change your estimates based on those items you've got to go back and change all the previously deferred taxes.

We think that 39% is the right number to use for the fourth quarter, and we're in the process of evaluating next year's tax rate.

It should go down very slightly, we think, based on mix shifts that are taking place for 2006, and the beginning of our ability to implement the change of a new federal tax rules which will slightly reduce our tax -- effective tax rate we believe in 2006.

Thanks, Joel.

And we'll take our first phone question from Ivy Zelman with Credit Suisse First Boston.

This is Justin [Speron] for Ivy.

Quick question on your accrued expenses.

They were up about 75%.

Just wondering if could you give us some color on what's going on there.

I don't know if they're up 35%.

I'll take your word for it.

I don't have it in front of me.

But accrued expenses are very, very seasonal.

We have lots of additional construction in progress during the summer.

It's normal for accrued expenses to go up during the summer as construction goes up.

We also have the payment of interest on our various debt deals which gets paid different times during the year.

It's normal for that to fluctuate quarter to quarter.

What was the percentage that you two guys mentioned?

Were they the same?

It was 75%.

It's been up meaningfully for the past few quarters, and just wondering --

We're bigger every quarter, and as we get bigger and bigger each quarter, we will expect that our accrued expenses will go up because inventory goes up, work in process goes up.

Thank you, Joel.

Quick question on your market color.

Specifically, Vegas, metro D.C., and Jersey.

Sure.

You mentioned in the press release you said that you've watched some markets go from overheated to warm and back to hot.

Right.

Just in reference to a few weeks ago, is that being made there in regard to those markets that you mentioned cooled slightly, or is that just a general statement?

I would characterize, of the markets you mentioned, that that is true for the Las Vegas market, and I don't think it's going back to hot in Jersey, I think it's -- I think it's just where it was.

And in D.C., I gave you in the monologue my idea of where that market was, where it went from super-hot, or overheated to just plain hot, which is pretty terrific.

Okay?

Okay.

And then your Denver, Austin, Hilton Head, you mentioned improvements.

Yes.

Is there any number or quantification you can give us there?

I haven't got it.

I just -- I'm giving you my impression from reading our weekly non-binding reservation deposits that come in as a precursor to the binding contracts that we are into.

I noticed in the last several weeks that Austin has gotten a lot healthier, Denver's gotten a lot healthier, and Hilton Head has just been off the charts.

That's reflected in what we're seeing so far in the average sales price, the new agreements coming in.

Thanks a lot.

You're welcome.

We'll take our next question from Michael Rehaut with JP Morgan.

Hi.

Good afternoon.

I appreciate the color that you gave in terms of the ASP for the first quarter.

The question that I have surrounds -- for the full year guidance of the $665,000, certainly right now you have a backlog of, you know, on a dollar basis, up 48%.

On an ASP basis, most recently you're at $678,000.

Wouldn't the lower -- some of the mix shift that you talked about in terms of the $665,000 already be largely in the backlog to this point, and, you know, is perhaps some of the $665,000 being perhaps disproportionately influenced by the first quarter and some conservatism there?

How -- as that you have this buildout period of nine to 12 months, I'm wondering if you could comment -- the degree of conservatism that still may be in that number.

Joel?

This echoes another e-mail from Randall McMillon which has turned into a question, so I'll use that to answer your question.

We use the same methodology all the time to estimate our average delivery price.

If you took at a look at the last two quarters, that methodology yielded an estimate for delivery prices for the second quarter between $635,000 and $645,000 actual delivered price came in at $641,000 right in the middle.

In the third quarter that just ended, we had estimated average delivery price between $655,000 and $665,000 and our average delivery price came in at $665,000, the top end of the rake.

I'm using the same methodology which is looking at every specific house scheduled to close.

We have, as I said, 300 homes coming from newer, small, single-family communities with an average sales price of under $400,000.

Those homes are already in backlog and they will disproportionately affect the first quarter.

It's the reverse effect of what I said was happening in the fourth quarter, which is we have a lot of very large singles, some of which were originally scheduled to close in the first quarter but whose production looked like it was faster, which were closing the fourth quarter and they effected our upside on the 2005 fourth quarter by increasing the average sales price there.

The reverse is happening in the first quarter.

I'm taking the high units out and I have all these newer communities and I don't have the high units to replace them with.

It just happened to be coming through the production cycle in the first quarter.

So we would expect that the average for the last three quarters, obviously, would be higher than $665,000 if we have a first quarter at $640,000.

Okay.

Thank you, Joel.

And just following up on that, the mix shift that you're having right now into multi and some more -- lower priced single-family homes, I was wondering from a strategic perspective if you could give us an idea of the rationale, the drivers behind there.

Is this just that you see new market opportunities?

Or is it that perhaps in some of your mark you're just getting too high up the affordability curve and you want to make sure that you have product that, on an overall basis, you can be hitting the better spot of your affordability curve for your customers?

We're pretty opportunistically driven.

It depends on the deals that we're shown.

We are in the Jacksonville market and the east and the west gold coast markets in Florida.

We weren't in the central market, Orlando specifically, so we went shopping for a builder.

Landstar was available.

We thought it was a fabulous company with a great opportunity.

They primarily deal in the $350,000 to $450,000 market; because we're dealing at $650,000 that doesn't mean that we would walk away from a great opportunity to get into the market.

Their margins are pretty terrific, and we think we've made them even greater if the last couple of months.

So that gives you an explanation about the less expensive single-family homes.

There's no shift in our model or our philosophy of how to run our business.

With respect to the multifamily, we've got a bunch of high-rise going, as well as very large complex mid and low-rise attached and multifamily housing.

And that takes a much longer time to deliver, as Joel referenced.

We historically we've been as high -- in 1986, I think, we were 35% of our deliveries were multifamily, and we've been as low as 12% in some years being multifamily.

Last year -- 2005, we expect it to be 17% for the year.

And as I said, in 2006 we expect it to be 21%.

We are very opportunistic and it changes from year to year.

Great.

Thank you.

One last question if I might.

On the gross margins, looks like for the '06 guidance you're getting most of your net income growth from the top line.

I would assume in that case largely the gross margins, the operating margins, you're looking for roughly an equal number versus fiscal '06.

I was wondering if that's the right way to think about that and -- ?

I think so.

Isn't it, Joel?

We have some geographic shifts in product that's being delivered which will have a downward pressure on margins.

We will also be impacted by 123R which will have increased SG&A for 2006.

Rolling them all together we think that's a pretty good result to have a 20% up guidance.

Okay.

So you're saying margin slightly down, everything else equal at this point?

I haven't given you the margin, the difference between the two.

I'm just saying --

I don't think Joel said margins down.

I think I said --

The way he started out, margins are not going up.

I think that's where we are.

Right.

Thanks.

You're very welcome.

We'll go next to Margaret Whelan with UBS.

Actually Dave Goldberg on for Margaret.

Hi, guys.

Just want to get an idea what the pace of option purchases was by buyers and how that's changing quarter to quarter and how you expect that to change, and should we see rates kind of rise higher?

Say that again.

Upgrades by buyers, add-ons to the homes.

Oh, how that's changed.

Yes.

Very slightly.

In those markets where we're opening the central option sales center in malls or in high traffic shopping center areas, we're seeing more use of the centers and more selection of upgrades, so our option count is running higher where we have those centers, and we're doing our best to open those center everywhere in the country.

Where we don't yet have those centers we think the options are pretty much running the same.

I think to the extent we have more multifamily homes, that will reduce the option selections possible to be selected, and that will have a little bit downward pressure but on the same-store basis, I would think there was no material change that I've seen in option selection.

When you look forward, the guidance for '06 that kind of assumes there's really no change from where we are now?

Right.

In option selection, right.

Okay.

Could I get a quick follow-up to it?

Sure.

Just kind of wondering, when you guys lack at new product that you're going to build, now that you're doing some more of the attached product, how do you decide when you pursue the land what you're going to pursue?

What's the kind of --

It's pretty much not up to us, Dave.

It's the local municipality that runs much of the zoning and planning in the country.

They tell new land is available for 61 to the acre.

You'll do 61 to the acre.

If they tell you this is available for two to the acre or one to the acre or four acres to the one, that's what you'll do.

There's not really different focus in terms of what land you pursue to buy between between the multifamily and the single family kind of unit?

No.

Again, we're opportunistically driven.

The deal comes and it's a good deal, we don't care whether it's attached or a single, though we see many more singles than we see attached, but that's just a statement, along the general proclivity for zoning and planning boards and the voting public throughout the United States.

Thank you very much.

You're very welcome.

Bob, I have a bunch of questions from the Internet if you'd like me to intermingle it.

Sure.

Could you please address the issue -- this comes from Amar Maita.

Could you please address the issues of why your earnings growth is not only more sustainable relative to your competitors, but also the fact that your business is not as highly correlated to interest rates as the mark appears to be brainwashed into believing.

Furthermore, could you also provide more color on your superior margins and their achievement and the fact that your guidance appears to be conservative.

I'd like to thank Mr. Maita very much.

It appears as though he's already a shareholder and I take those as advertisements rather than questions and I do appreciate it.

I don't think I have a whole lot to say other than the obvious about the price range that we're in.

In the past, it's been less impacted by an increase in mortgage rates than the other price ranges because people are less constrained by budgets for the year.

So we do believe we're a little more protected in that regard.

We've got two questions asking the same -- two e-mails asking the same question.

They say -- they want to talk about the decrease in contracts being signed.

The last quarter versus the second quarter.

We have some seasonality that takes place all the time.

Our strongest selling season tends to be the season, April quarter, and accordingly what we had is very strong selling season, for this quarter compared to prior July quarters, and you can see that in our historical results and the comparisons we give you.

Right.

The best season is always right after the holidays, things get cooking again and that's when you have your best sales running in January, February, March, generally tail off a little in April and May and June go quiet generally, then you pick back up again after July 4th, surprisingly.

Thank you.

Joel?

We had one more.

Did I hear correctly that you bought back 726,000 shares in this quarter?

We bought it back after the end of the call but before the conference call. 726,000 most of them were bought back after the end of the quarter but before the conference call.

Thank you Joel.

Lisa?

We'll take our next phone question from Douglas Kass with Seabreeze Partners.

Hey, Bob and Joel.

How are you guys?

How are you doing, Doug?

Very well.

Thank you.

Two-parter.

Can you describe your current anti-flipping policies?

For example, are your flipping prohibitions included in every single contract, every region that you serve?

Secondly, how many of these anti-flipping infractions have you enforced to date?

Describe them?

The latest addition is a two-page addendum or exhibit to the agreement of sale where we've asked the buyers to sign in about 8 different places to emphasize that thou shalt not flip.

With respect to enforcement, we have not taken anybody to court.

This is pretty much like the doom's day bomb.

There's no point in taking it to court to prove its enforcement potential.

We believe, rather, its primary goal is to discourage.

After someone signs eight different times, if they want to flip, and we've found that to be rare, so be it.

We don't want to test the weapon to see whether it actually works.

Rather it's very existence is its purpose.

Thank you very much, Bob.

Keep up the good work.

You're welcome.

Thanks, Doug.

We'll go next to Lorraine Maikis with Merrill Lynch.

Thank you.

Good afternoon.

Hi.

Just a follow-up on Mike's question.

Could you talk a little bit about the margin profile of your low, mid, and high-rise products and how that differs from single family?

How it differs from single family.

Or if it differs from single family.

It doesn't.

Sometimes the low-rise, mid-rise, and high-rise bring you spectacular profits, and sometimes they just bring you pro forma profits, very much the same as the single family community.

Lately we have seen in the high-rise what we believe -- what I believe is fairly tremendous profits, but I'm a builder, what do I know?

Joel, do you have more information?

I think it depends on the geographic area.

We've seen some significant increases in our pricing in the --

Well, I know about the increases in pricing but when we started off I was wondering whether Singer Island, for instance, the first building that we sold out, is that going to bring high higher margins than the average margins in Toll Brothers?

We underwrote Singer Island because it was our first act --

How about Hoboken?

My impression is in Hoboken we're not going to be dead.

They are not higher margins than the Company average.

They are not higher margins.

There you go.

So I would have bit my --

Maybe in the last units but I don't think in the first units.

So I'm being influenced by the last pricing increases.

With respect to the mid-rise and low-rise, they're the same as the single family.

Sometimes you get lucky and you can take the margin way up and sometimes it's another day, another dollar.

Do you have an estimate of what percentage of your deliveries will be attached product in 2006?

Joel?

The multi-attached product would be roughly 21% of our deliveries in revenues in 2006 compared to roughly 17% in 2005.

Okay.

That's not numbers of units, that's, Joel said, dollars.

Okay.

Then finally can you just comment on traffic levels overall or on a regional basis?

Sure.

I have the old traffic sheet right here.

With respect to traffic, on a per-community basis, traffic has been down from last year, and on average, it just -- just eye-balling this, it seems to me as though it has been down 10% to 20% per community going back for almost a quarter and a half.

With respect to sales, however, that being non-binding reservation deposits, it pretty much looks like we're setting records for the last month and a half, with a couple of weeks excepted.

Maybe a little longer than that.

Bob, wouldn't the traffic be affected by the fact that we have a lot of communities with waiting lists?

And people don't really --

I hadn't thought of that.

You're absolutely right.

I thought it was surprising compared to what we've been doing.

That's a well taken point.

A lot of our communities are now on an invitation-only basis.

You phone in your interest, and send in a deposit, a reservation deposit, and then we call you within which -- within the order that we receive the reservation deposits.

So the community is basically closed, and we'll open it up, bring in five people only by appointment, sell them, then it's closed again, so that's probably a good explanation as to the imbalance between traffic and deposits.

Thanks, Joel.

Thank you.

You're welcome.

We'll go next to Rick Murray with Raymond James.

Hey, good afternoon, guys.

Hi, Rick.

Just a couple of questions.

Bob, can you talk about -- I guess maybe clarify a little bit your previous comment with regard to non-binding deposits?

Can you give us a sense quantitatively to kind of how that number has been trending the last month and a half?

Yes, it's been trending up, which is really astounding.

Every day I get the New York Times and The Wall Street Journal, and I don't think they've missed a bad article in our regard in the last two to three weeks.

And it's amazing to me that we're doing the business that we're doing, which is tremendous, in the face of this bad press.

I mean, if there's anybody left in the U.S. that hasn't read an article that this is the absolute peak, I'd like to meet them.

So who are all these people that are buying at the absolute peak, according to the newspaper?

They're people who want the move up home, whether it be attached, multifamily, or single, and aren't willing to play the market according to the press.

It's really astounding to me that we've been doing the business that we've been doing.

I think you have to look at that I know terms of the supply and demand imbalance and recognize that it appears that there's so much more demand than there is supply, and that's the reason we keep on selling homes.

So not withstanding the articles, I think the average person is looking at the real product out there compared to what they can buy and finding out --

We've been asked to comment upon the fact that it's going up, and it appears to be still going up in general.

When I take a look at the non-binding deposits per community, we are either at or near all-time highs for the last month and a half.

Okay.

Great.

Thanks.

You're welcome.

Another question I had, Joel, could you clarify with regard to the '06 guidance and the impact of JV revenues?

Is that incorporated into your revenue guidance, or is that just traditional detached?

No, joint venture income falls as one line so I've only given you guidance with respect to revenues from home building, which is the stuff that we own 100% of.

And that -- all the other business income, other income and joint venture income, we will give you guidance on either in the November or December conference call.

Wait a minute.

Isn't that plugged into the 20%?

It's in the 20% but it's not in the revenue guidance we've given.

Okay.

Okay.

Great.

One last question, if I could.

Bob, what percentage of your sales contracts is a situation where your buyer is contingent upon the sale of their existing home?

To the extent that a mortgage contingency also includes a contingency on the sale of previously owned home, then for a short while, the percentage is probably close to the same percentage of mortgage contingencies that we have.

However, we have our own mortgage company.

Once you get your mortgage commitment, even though the mortgage commitment is contingent upon you having one home at the time of settlement and not two, that removes the mortgage contingency from our agreement.

So the answer is by the time you get near settlement, there is no contingency for the sale of your old home.

Sorry for the complicated answer.

But there you have it.

Do you follow me?

Not really?

I'll do it again.

Well, I mean, I guess --

The simple and short answer is we don't have contingencies, we don't give contingencies upon the sale of your old home.

Alright.

I got you.

In the mortgage, when a guy gets a mortgage commitment, the mortgage commitment says that it's contingent upon the sale of your old home, but that does not carry through to a contingency in our agreement.

Once you get -- our contracts are not contingent upon you getting a mortgage.

They are contingent upon you getting a mortgage commitment.

Now, it's your job to live up to that mortgage commitment.

Bob, I have a couple of questions, and more questions from the Internet.

Do you accrue bonuses throughout the year or at the end of the year based on actual results?

And we do bonuses accruals all throughout the entire year in proportion to what we think the results will be. in the field and quarterly.

And then we were asked to talk about ARMs and adjustable rate and interest-only mortgages.

The percentages are roughly the same as they were in the previous two quarters, but a little bit lower ARM selection this quarter than last year at this time, about 50% of -- 8% of our people are settling with ARMs, 42% with fixed.

Of the 58% settling with ARMs, 38% are settling with interest-only mortgages.

Thank you, Joel.

We'll take our next phone question from Dan Oppenheim with Banc of America Securities.

Thanks.

Just wondering if you can talk about the recent sales trends.

We were talking about them being at or near record levels for the past month and a half.

Should we interpret the pace of sales activity accelerated through the quarter and into August?

I would say so.

Okay.

And then secondly --

You want to correct me?

No.

Okay.

And then secondly, just wanted to ask about the communities in terms of what you're doing with land in California, how you're thinking about more communities coming on there and the timing of that.

We're thinking about wouldn't it be nice to get more land in California and bring communities on the.

I'm sorry.

Just in terms of a lower community count in California.

We have a lower community count.

We expect by the end of next year to have a higher community count than we had at the beginning of this year.

So you're looking at a hiatus.

You have a period of time for a year roughly in which the community count will be decreasing or has decreased, then it will start inching up towards the end of next year.

Great.

Thanks.

You're welcome.

We'll take our next phone question from Myron Kaplan with Kaplan, Nathan, and Company.

Hi, guys.

Hi, Myron.

Great, great, great numbers.

Thank you.

Because of a recent report that pointed to a significant slow down in condo sales --

Yes, I read that one.

Yes.

I'd like to ask for an update on the Hoboken condo projects and also any of the others that seem relevant.

They're all on fire.

The article has been written by somebody who is not looking at our markets.

Alright.

The other question I have for, just kind of a peripatetic question, now that the quite spectacular growth rate, which has been in the -- let's say above 50% for some time, for a number of quarters, it seems set to subside to -- through just merely -- really impressive and impressive level, let's say, of 20% or thereabouts, so what are the inducements for the -- let's say for the average investor to stick around since the rate, the growth rate, is dropping, and the media, as you've pointed out is replete with examples of disaster?

I'll tell you what.

I'll make a deal with the devil.

If could I find a place to get 20% compounded annually for a couple of years, I'd be happy.

I don't know that there's that many companies out there that can project such growth.

It's quite -- obviously it's quite impressive, but --

I'd just like to remind everyone that we -- two years ago predicted accelerate growth rate, which is why we went out to the capital markets to raise equity, so that we would have the additional equity to fuel a couple of years of accelerated growth rates, and two years ago, we said after we did a couple of years of accelerated growth rates we'd come back to the 20% plus or minus growth for a while and we implemented that strait gears and that's exactly what we did.

So it is where we thought it would be when we look back -- look back two years ago to what we thought would happen.

I guess in that light, I mean, that means that you bought back stock, that's in a sense taking back some of the additional capital that the capital markets, the Wall Street market furnished, since the shares you bought back weren't in this past quarter, we won't see it until the next balance sheet is out.

Can you tell us how much you paid for the shares?

I think we averaged somewhere around $49.

Well, keep up the good work.

Even 20% is pretty amazing in this state of the economy.

Thank you.

We have another Internet question.

Gross margins on home sales was over 33% this quarter.

This comes from Jimmy Myers.

Not long ago they were below 25%.

Recognizing that you are a better run company today, some of the increase might relate to sharply improved pricing environments in recent years.

If pricing reverts to normal trends, do gross margins revert to normal levels?

My guess is that, yes, you'd have a reduction in margins if you had a reduction in demand.

Go ahead, Joel.

I think that the question is really from this point where do margins go?

If we have increased -- demand the same and prices stale relatively equal to cost increases, then we will have margins that stay relatively -- close to the 33%, and if we have price increases going faster than cost increases, we will see improvement in margins.

And in the mid 80s we enjoyed margins of 38% and 40%.

That's probably the top of our margins.

Today we're about 33%.

I'd be happy to stay just where we are.

We'll take our next phone question from Lawrence Horan from Janney Montgomery Scott.

Just a quick question.

I didn't get your guidance on tax rate for next year.

What are your thoughts on tax rate for next year?

I would use 39% in the model, but I think it will be slightly lower than that, but not a lot.

You're doing a great job.

Ignore the stock price.

Thank you, Lawrence.

What do you mean, ignore the stock price?

Look what you did with your IPO.

Ignoring and yet you had three or four years sometimes where stock didn't get back to its prior high.

Year one stock proves that long-term investors really do win in a huge way.

Thank you, Larry.

Take care.

We have a couple of other quick questions.

Comment generally on the pricing supply demand imbalance trends in the D.C. market.

You've talked about the D.C. market being hot, Bob.

I think they're looking at what competitive product is out there, the way I read this comes from John Matis.

What competitive product to our product?

Yes, what's the competitive environment?

What's the supply/demand imbalance?

I think there's plenty of competition, but obviously it's not impacting price.

I think all the competition together with ourselves are all pretty much sold out.

But that gives you a fast answer.

Lisa?

We'll take our next phone question from John [Madisich] with HCAM.

I'm all set, guys.

Thank you.

Lisa?

We'll go next to Carl Reichardt with Wachovia Securities.

Hey, Carl!

Hey, Bob.

How are you?

Alright.

How are you doing?

I'm well.

I just want to follow up on Mike's question from earlier, make sure I understood it.

The mix shift towards more affordable product, ex the geographic change in it, is it part of longer term strategy shift for you?

No, it's --

Is it really more opportunistic for timing now?

Exactly.

I don't want to imply toward a more affordable product.

We're not trying to build more affordable, we're trying to make more money.

I recall Silverman back in Detroit, if I recall right, it was an entry-level builder that you converted over to higher end product over time.

That is exactly right.

Is that your same sense of what you're going do with Landstar?

Every chance we get.

Okay.

Fair enough.

And one final just on SG&A, Joel, you mentioned the change relative to what you expected, half the leverage then half lower spending.

Can you give me just a little more detail on lower spending?

I'm assuming it's kind of advertising marketing related.

Most of it was advertising/marketing.

The predominance of that lower spending was in advertising and marketing.

But we could expect that, let's say the market continued to be very good, that you could continue to see that -- I've already said the numeric leverage.

I've built into it the fourth quarter projection already.

That's one of the reasons I changed guidance, and to a degree into the 2006 numbers.

Beautiful.

Thanks, guys.

Thank you.

Carl, just to follow up, you asked about converting lower priced builder to higher.

We also did in that Las Vegas where we bought a builder who was doing under $200,000 average price and they're now in the six's plus.

Edmonds in Phoenix?

No, it was Coleman in Vegas.

Edmonds was in Phoenix.

And they were high to begin with.

Right?

Yeah, Edmonds is the cream of the crop, great guy, built very high class products, still does, we just took them from two or three subdivisions up to I don't know how many we have now, 15 and a lot more on the boards coming through.

Thanks, guys.

Another Internet question.

Are customers beginning to request more energy efficient homes?

They talk the talk, but they don't walk.

People will still spend the money on the moldings and the flooring and the extra room and when you offer them even an at-cost option on energy conservation, you don't get a lot of interest.

So it's good for cocktails, but it's not good for real sales.

I made that up.

Lisa?

Bob, we have a lot of callers apparently in the call looking for questions, so we should try to keep keep answers as short as we can.

That goes to me, too.

We'll go next to Gabriel Kim with Basswood partners.

Hi.

Did you mention what the value was of those 500 units that have a build time of greater than a year?

I didn't, and I don't know it off the top of my head.

I know there are --

They're probably higher priced.

No, they're a mix, Bob.

The Grove is a little lower, Singer Island is a little higher.

Than our average price?

Singer Island is lot higher than our average price, but the grove is $500,000 or $600,000 I think.

I think you're right.

And our average price is $657,000.

Then we have the stuff at Wildpool and we have some stuff in California so they're probably higher priced.

Joe thinks that the 500 units are about -- a little over $700,000 average price.

Thanks.

And then just on your capital structure I'm just wondering if we think about, you know, an environment where things continue to cook, versus an environment where we may potentially see a soft landing, what are your thoughts there on how you would manage your debt-to-cap ratio in those two scenarios?

Is it different?

Joel?

When we don't see good opportunities to invest our cash in land, we have -- we become a tremendous cash machine and in general that means our leverage goes down, and when the markets for land becomes a little softer and opportunities become very good, we tend to then redeploy capital into the land portion of our business, and then -- the key then becomes what do we do with that excess cash, do we use that excess cash during that period of time to reduce stock, which we have periodically done, buy back stock or do we use to the reduce debt, which we've also periodically done.

I don't know where we would be.

I think that would depend on what kind of opportunities we see ahead of ourselves when and if that kind of market comes back.

Okay.

All right.

Thank you.

We'll go next to Alex Barron with JMP Securities.

Yes, great, great job.

Thanks, Alex.

Wanted to ask you about your SG&A as we look into next year.

It seems that most of the quarters, I think the expected revenue should be higher than what you booked this quarter.

So what would maybe not allow you to achieve the same SG&A as a percent of revenue that you achieved this quarter next year?

Joel?

Part of that we've addressed.

We have implementation of 123R on stock options which will impact SG&A next year.

That's a negative.

The rest is based on our projections of what we expect to happen in payroll and people and job openings and when we open a lot of new jobs, which we are currently doing, a disproportionate number of new jobs that ends up increasing SG&A because you have expenses but you don't have the revenues coming through.

So on balance we've built it through the 20% projection, and when I give you additional guidance we'll try to give you more detailed breakout.

Quickly on Landstar, can you comment on how their margins compare to your average margins?

Also you mentioned you had improved them recently.

What are some of the things you've done there?

Raised the price, without touching the product, and it appears to me that recently the margins at Landstar should be pretty close to the margins if not even above the rest of the company.

That's --

However, that's before purchase accounting.

Right.

And what was the backlog in terms of months when you purchased that?

I'm trying to remember.

I think most of the jobs are nine or ten months back but I'm not sure.

Do you remember, Joel?

I would think they're a little less than a year, Bob, you're right.

They were nine to ten month backlog.

Thanks.

They're now about 12 months backlog.

We'll take our next question from Steve Fockens with Lehman Brothers.

Good afternoon.

Two quick questions.

Can you remind us what roughly percentage of your home sales are -- you think to be second homes?

What percentage?

Joel, do you have a guess?

I would guess something like 20% or 25%, but I'm not --

That's what Fred's previous guess had been. 15% to 20% is the number that we've been using internally but I'm not sure that's the right number.

Okay.

Take, for example, that 15% is something along those lines, in the past, and I'm sure this is looking a ways back, but what were the kind of factors in a local market that would have caused severe hit to whatever homes you would have thought would be second homes?

What are the kind of local economic or, you know, whatever factors, if any, that would have made your second homes sales hurt more than others?

I would guess -- this is from logic and common sense, I hope, but not empirical data, because I don't remember it, but I would guess that second home sales ought to be more impacted by the general economic conditions than by such things as mortgage rates or local items, local items, local business economy.

That's because nobody needs a second home, of course, nobody needs the luxury large home that we sell, anyway, but it being primary, it has more chance of being sold even in a down economic market than a second home.

On a second home, I would imagine that the buyer is not as driven to get the home, and, therefore, if you have a tremendous drop in the stock market, for instance, or in the economy in general, the second homebuyer says, well, you know, I don't need this right now, I'm going to wait until next year, and we'll look again.

So I would think the general economy impacts.

Just along those lines, did you see any evidence of that in San Francisco in '01 and '02?

No.

San Francisco, that's not a second home market.

That's a primary home market.

We're not selling resort homes in San Francisco.

And we -- excuse me.

We had tremendous drop in sales and there was a drop in price right after the tech implosion, and within ten months we were astounded to see that we had gone back to an all-time high for pricing in San Francisco, which says something about the general demographics that exist in the country.

I just want to point out one other demographic trend that may impact the answer to the question, and that is as the population ages, the 40 and 50 year old buyers who may already have had significant amounts of wealth accumulated may view the decrease in economy differently in terms of the desire to have a second home, and as they get older they may want to buy second homes more than they wanted before.

Fair enough.

Thanks for the comment.

Lisa?

We'll go next to Sam Lieber with Alpine Funds.

Hi, gentlemen.

Hi.

Nice press by you, by the way.

Thank you very much.

The only voice out there.

Yes, well, you gentlemen are giving a lot of excellent information and facts, not only about your company, but the market, so we appreciate that as well.

Thanks, Sam.

I'm curious, though, in terms of land prices, whether the constant flood of information regarding potential doom and gloom in the sector has actually impacted the land sellers and whether you're finding land coming a little bit cheaper or at least the rate of appreciation is slowing.

No, no, I don't see that at all.

I don't think the land sellers are impacted by the latest article in the New York Times or in the Wall Street Journal.

The psychology is not changing?

No.

This morning's article where Reynolds are doing better as homes are falling off, you think the guy that's got single-family land for sale wakes up and says, hey, maybe I'll drop my price a little bit?

I doubt that.

The whole thing is supply and demand driven, as everything else is.

You got a piece for sale, put it up, see what happens.

There's enough competition out there, I don't see prices dropping.

What is your pace of acquisitions been over the past couple of quarters?

It's picked up, which is surprising, because the market has been so good, you would think that prices had gone up enough to close us out, because we're not going to break form with our model if it doesn't meet our model's threshold, then we're not going to buy it.

We won't listen to an argument that, oh, but you have to this have because it's going to be so much greater a year from now.

We don't do that.

But surprisingly, we've bought a lot of land this past quarter, optioned, or put under control.

More lots, or finished lots?

More lots.

No, not finished lots.

Almost all of the stuff that we buy, 95% of it is land that we are going to secure to final approvals on and develop ourselves.

Bob, the terminology used to control it and what you're talking about is current land deals we're entering into, I assume.

That's right.

That's what we were talking about.

So out of the -- your inventory of 4.8 billion in July, what portion of that is land, would you say?

Joel, do you know?

About 1.2 billion -- excuse me, 1.2 billion is land that we have that's been reclassed, Joe.

One second.

I'll give you exact number.

My recollection is 1.2 billion is land that won't go under a house in the next 18 months.

1.3 billion.

Thank you guys.

How does that compare with the prior quarter?

It's up a little as we grow but proportionately, it's not up significantly.

In fact, it's probably down a little bit.

Really.

I would have thought it was up.

We haven't closed on a lot of land, Bob.

I'm thinking of land that we've put under contract than we haven't closed yet.

It so that doesn't count as land in inventory, of course, because we haven't paid for it yet.

The end of the year I would expect that number will go up as a percentage.

Thank you, gentlemen.

And again, obviously, a great quarter.

Sam, thank you.

We'll go next to William [Nobler] with [Atlantis Ausnoff].

Hi.

What percent of your lots are controlled versus owned?

We thought it was 50/50.

I think that's what we said.

More controlled than that.

Do you have that number?

I don't know.

Hold on a second.

Okay.

As of 7/31, we are 40% owned and 60% controlled.

That's a little bit lower in the owned than I expect that we traditionally averaged and is lower than I expect that we'll be at the end of the year.

And did I understand that your projection is that you expect to increase your community count by year end '06 by 11% or 12% versus a community count increase of 7% or 8% in '05?

We think we'll be at 267 and we're currently expect to be at 237 at the end of this year, and the end of the next year we expect to be at 265.

And is much of that increase in community count in the Sun Belt markets of Arizona, California, or Nevada?

Eight of those are in California, seven of those are in Maryland.

And seven of those are in Nevada, and obviously you've got some things going the other direction but those are the big increases.

I'm sorry?

Those are rough estimates.

Right.

And last question, you bought back 726,000 shares in the quarter.

We bought back 726,000 after the quarter.

After the quarter, right.

But before this call.

Yes, yes.

I understood that.

Do you have an authorization that you expect to continue, or is this a opportunistic one-time event?

We have an authorization to continue.

16 million shares I think are remaining on authorization, roughly.

16 million shares.

I'm not going to answer whether we expect to buy or not other than to say it depends on the price.

And opportunities to buy land.

If we think it the's a good buy, we'll be in there buying.

Thanks very much.

You're welcome.

We'll take our next question from Timothy Jones with Wasserman and Associates.

Hey, Bobby.

Hey, Tim, missed you on the last call.

Sorry.

I missed the first 20 minutes because I was sending the kids off to college.

That's all right.

This is a very important statement that I think you made, and I'm sorry if I am going over it again.

When you said we've watched the market go from overheated to warm and back to hot, which is what I might against all conventional wisdom, what the numbers on new home sales have shown, did you -- one, were you talking about price or, as you said later on the call, you were talking also about demand, or what's the -- ?

Price and demand go exactly hand in hand, Tim, as you know.

If you've got the demand, the price goes up.

If you haven't got the demand, the price stays where it is.

If you've got lousy demand, the price goes backwards, although it's not reflected in the nominal price, it's done with an increase in incentives which we haven't seen for a long, long time.

And can you tell me, which markets will you say you were specifically thinking of when you made that statement?

Oh --

They had that in mind, you know.

Some markets.

I think the New York market fit that bill, I think that the Philadelphia market fit that bill, the Maryland market fit that bill.

Florida?

Vegas market fit that.

Oh, the Chicago market fit that as well.

Not Naples?

Oh, Naples, just -- it's never been turned off, Tim.

Naples has just been overheated, super hot for quite some time, and it didn't turn down.

The East Coast went down a little bit and came back, so did Palm Springs.

We're selling houses right now in Palm Springs.

You can't even stand out there, it's so hot.

I got it.

Quickly, just as a sort of rough guess what would you talk about in terms of price appreciation and unit appreciation?

Just a rough guess.

I know I don't know.

I just don't have that stuff in my head.

I'm sorry.

Okay.

Well, listen, thank you.

You're welcome, Tim.

We'll go next to Tom Marsico with Marsico Capital.

Hi.

I had a question.

You made reference to interest-only mortgages as a percent of your total.

Right.

Can you tell us how those figures have moved over the last several quarters?

I thought you said that the most recent was 31%.

38% of our buyers in this quarter that closed had interest-only mortgages, and a year ago that number was a little -- 34%.

Right. 34%.

Are you primarily seeing --

Remember, our buyer is significantly over qualified to buy the house and it's not a reflection of their need to stretch to buy the house, but probably more a reflection of the fact that they view the interest rates as being inexpensive, and, therefore, why reduce the amount of the principal of the loan as compared to --

Excuse me --

They're more financially savvy than your other buyers?

Yes, and no.

I honestly think it's a reflection on the skill of the mortgage originator.

I think he first takes a guy with a straight 30 year, then he works them to an ARM, then he takes them to an interest-only because every time he takes one of those steps, he gets cheaper, so he gets them to take more mortgage so that the payment remains the same, it helps us in that it steps up the purchase of the home, he buys a bigger and more expensive home.

So I think it the's primarily due to just a guess to, not primarily, but quite a bit due to mortgage origination skills on the part of the people pushing the stuff out there in the market.

I think our interest-only buyers have the same percentage, but I'm not sure that a LTV, which about 70% -- Joel, do you have any number?

Interest-only buyers were at 69% and 70% LTV in the last year.

Thanks.

So, Tom, you see that they're quite able to do whatever they want.

They're only 70% mortgages.

But you're kind of making an argument about getting into a bigger home and a more expensive home based upon a cheaper payment.

That's right.

If the interest rate changes, then his ability, given his income level, becomes stretched, if rates move.

Tom, I don't think that that's our buyer, our typical buyer.

It's --

-- what Bob said about buying a bigger house.

It's absolutely logical, what you're saying.

But with the 70% LTV, what we're saying is that he still has the wherewithal easily to buy the house that -- maybe one step below the house that he's buying.

But I'm arguing, yes, I do think that they're buying bigger, more house than they would have were they to have had a principal payment.

In my review, when I do the review of the closings that took place, I still find that the average buyer is 38% over qualified based on the income they give to us buy the house.

I'm not sure it has an effect.

Different opinion.

Okay.

Thanks very much.

You're very welcome.

We'll go next to Joel Locker with Carlin Financial.

Just wanted to get the cancellations rates in the third quarter versus last year's third quarter.

Sure.

Under 4% this quarter versus about 4% last quarter, I think.

Year ago, Joel?

Yes.

Hold on.

Exact numbers.

Cancellation rates were under 4% this third quarter and under --

I thought it was like 5 last year.

Almost exactly the same cancellation rate last two quarters.

And where would you say the small amount of cancellations come from?

Which regions?

I would have no idea.

Joel?

Is there any particular region that --

I don't know, but there are some regions that have a week or two weeks where the lawyers can get out, and I would assume the cancellations come more in those regions than others, but I don't know.

Thanks a lot.

You're welcome.

Lisa?

And this concludes our question-and-answer session.

I'd like to turn the conference back to you, Mr. Toll, for concluding remarks.

Well, everybody, thank you very much for your interest.

We appreciate it, and have a good day.

Bye.

Ladies and gentlemen, this concludes today's conference call.

We thank you for your participation, and you may disconnect your phone lines at this time.