托爾兄弟 (TOL) 2005 Q4 法說會逐字稿

Good day and welcome to this Toll Brothers 2005 fourth 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.

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

Please go ahead, sir.

Thank you.

Welcome and thank you for joining us.

With me today are Joel Rassman, Chief Financial Officer, Fred Cooper, Senior VP Finance and Investor Relations, Joe Sicree, Chief Accounting Officer, Karen McCaren, Chief Marketing Officer and General Counsel, Don Lou.

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

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

Those listening on the Web can e-mail questions to RToll at tollbrothersinc, all one word,.com.

We'll try to answer as many as possible.

We've just completed the best fourth quarter and fiscal year in our history with records across the board for earnings, revenues, contracts and backlog.

Fiscal year '05's fourth quarter net income of $310.3 million, the highest quarter in our history, grew 72% versus fiscal year '04's fourth quarter net income of $180.6 million.

Fiscal year '05's fourth quarter earnings of $1.84 per share diluted grew 66% over fiscal year '04's fourth quarter, the previous single quarter record.

Fiscal year '05's 12-month net income of $806.1 million grew 97% versus fiscal year '04's 12-month net income and fiscal year '05's 12-month earnings of $4.78 per share.

Diluted grew 90% over fiscal years '04's.

This was the Company's 13th consecutive year of record earnings.

Fiscal year '05's fourth quarter revenues of $2.02 billion, the highest quarter for the Company's history, grew 40% over fiscal year '04's fourth quarter.

Fourth quarter home building revenues of $2.01 billion, also the highest quarter in our history, increased 39% over fiscal year '04's fourth quarter home building revenues, the previous fourth quarter record.

Fiscal year '05's full-year revenues of $5.79 billion were our 14th consecutive year of record revenues and were 50% over fiscal year '04's record revenues.

Fiscal year '05's home building revenues of 5.76 billion increased 50% over fiscal year '04's.

Fiscal year '05's fourth quarter contracts of 1.59 billion grew by 4% over fiscal year '04's, the previous fourth quarter record.

Fiscal year '05's 12-month contracts of $7.15 billion, the Company's 15th consecutive year of record contracts, grew by 27% over fiscal year '04's record total.

Fiscal year '05's year-end backlog of $6.01 billion increased 36% over fiscal year '04's, the previous year-end record.

During the fourth quarter of fiscal year '05 we bought back 1.97 million shares of our stock at an average price of $44.27.

For the full fiscal year the Company bought back 2.8 million shares of its stock at an average price of $42.27.

Since the start of our new fiscal year, we have bought back an additional 220,000 shares at an average price of $33.73.

Since 10/31, our year-end, we've been in a blackout period for all but four days.

As stated before, our fiscal year '05's net income rose 97% to 806 million this year on top of fiscal year '04's net income growth of 57% over '03.

This growth is on top of 17 years of more than 20% average annual net income growth after 1986 when we went public.

Our results have been achieved primarily through organic growth rather than through acquisition.

This strategy has served our shareholders well and created tremendous value over the nearly 20 years we've been a public company.

While demographics-driven demand has been a significant factor in our growth, so has our organization.

The great team that we have today has enabled to us dramatically increase our market share.

Our nationwide expansion, our team's ability to find and entitle well located land in highly regulated markets, our brand name and our skill at delivering the expanding variety of suburban and urban homes we offer all have enabled us to significantly broaden our customer base.

This has led to the growth in size and profitability of our Company.

As we have previously discussed, it appears that the housing market is not as robust today as it was throughout '04 and through the summer of '05, although there is wide variation in local markets.

Many believe de deceleration of price growth was inevitable as the increases of 2004 and most of '05 were not sustainable and were fueled in part by speculation.

Our sales results indicate that housing demand is returning to the more normalized levels of the decade from '94 to mid 2003 before home prices really took off in quite a few markets.

If this is as tough as it gets I'll make a deal with the devil.

I'll keep it.

The period from '94 through '03 was an excellent one for Toll Brothers as our revenues rose five-fold and our earnings grew seven-fold.

We grew despite the NASDAQ implosion, a terrorist attack, a national recession, several global financial crisis and three periods of Fed initiated interest rate hikes in '95, '97 and 2000, which drove rates as high as 9.2, 8.2 and 8.6 respectively in those years compared to the six and an eighth that we enjoy today.

To some extent the temporary swelling in our growth arises from our own success and the accelerated growth we achieved in fiscal year '04 and '05.

We delivered 670 more homes in fiscal year '05 than the midpoint of our projection at the start of '05.

And with backlogs out 12 months or more we had shut down sales of 35 communities at the end of the fourth quarter of fiscal year '05.

We also closed out more communities than we had expected during the year and due to regulatory delays we're not able to open as many new ones in order to grow our sales.

We expect to remain at around 230 selling communities through the first quarter of fiscal year '06, the same total with which we ended fiscal year '05.

But our community count should begin to increase in the second quarter of '06 and we estimate ending '06 with approximately 265 selling communities.

These 265 communities actually result from our closing out 108 communities where we've completed sales and opening approximately 143 new ones.

Typically when we open new communities we experience greater sales because we're not constrained by backlog already in place and because of the pent up demand generally awaiting the opening of a new community.

440 new communities that are already in our pipeline will drive our growth.

We expect, beginning in the second quarter of fiscal year '06, to start benefiting from the opening of new communities at an accelerating pace, first through contracts and then through revenues starting in mid '07 and into at least fiscal year '08.

Now, Joel, would you do the numbers, please?

Thank you Bob.

As Bob noted we just completed a tremendous year.

Home building revenues for the fourth quarter and full-year were 2 billion and $5.8 billion respectively as we delivered more homes than we had originally estimated.

Some of our profits, however, came at the expense of 2006 earnings.

Fourth quarter and full-year land sales at 12.5 million and $34.1 million respectively were just slightly higher than our guidance.

Fourth quarter and full-year other income of 14.6 million and 37.1 million respectively were higher than our guidance in August as we had higher ancillary business income, more management fees and higher interest income.

The full-year other incoming was reduced by $4.1 million of expense attributable to the early retirement of our bond, 8% bonds and our bank term alone during the third period.

Joint venture income for the fourth quarter and full-year at 18.2 million and $27.7 million respectively were also higher than our previous guidance as we delivered more units from our joint ventures than previously estimated.

All of the public homebuilders either historically included interest expense as a cost of sales item or had switched in the last few years to this presentation.

In order to be consistent with the other builders we have reclassified interest expense to a cost of sales item for both the quarter and the full-year.

In order to help you understand the impact of this change and prepare your models we have included interest as a separate line item within cost of sales.

After adjusting for the reclassification of interest, home building gross margins in the fourth quarter of 30.1% was slightly better than the previous guidance we gave you of 29.7% as we had a richer mix of closings, lower write-offs, a lower interest expense than projected and this was offset in part by higher material and labor costs.

Inventory write-offs for the fourth quarter of 1.4 million compared to our budget of $4 million and last years fourth quarter write-ups of $5 million.

SG&A in the fourth quarter at 6.6% of revenues was significantly lower as a percentage of revenues than our August guidance as we had both lower costs than anticipated and larger revenues.

The number of shares used to calculate earnings per share were approximately 169 million shares for the quarter and 168.6 million shares for the year, both in line with the updated guidance we gave you in November but lower than the share count we gave you in August.

Projections are subject to many uncertainties which can change for many reasons.

We believe 2006 will be our 14th consecutive year of record earnings.

We are projecting net income of between 810 million and $890 million and earnings per share of between $4.79 and $5.27.

Net income and earnings per share projections include an after-tax expense of approximately $18 million, or $0.11per share for expensing of options.

Previously we did not expense options.

We project our return on beginning year equity to approach or exceed 30%.

Our earnings estimates assume 2006 revenues of between 6.65 billion and $7.25 billion and deliveries of between 9500 and 10,200 homes for the year.

Our projected deliveries are expected to be at an average price of between $670,000 and $680,000 per home, and are based on our 2005 year-end backlog of $6 billion and 8,805 homes, as well as the anticipated signing of additional contracts for homes to be delivered during 2006.

In addition, we project 280 to $300 million of revenues from our first four high-rise towers which are now going vertical.

They will be accounted for using the percentage of completion method as required under the criteria of FAS 66.

Based upon the mix of expected deliveries by both product and geography, the anticipated cost increases and the effect of the acquisition accounting for the land start deliveries, we estimate that gross margins will be approximately 30.5 to 30.7%, i.e., cost of sales between 69.3 and 69.5% of revenues, before deducting interest expense of approximately 2.1%.

We currently estimate that the percentage of completion margins for the year will be approximately 22.5%.

We project land sales at about $9 million which is down from last year's $34 million, and we estimate that gross margins on these sales will be about 10%.

Other income should be about $28 million which is lower than the $37 million we did last year.

Income from joint ventures is estimated at $60 million and significantly higher than the $27.7 million in 2005 as we expect to deliver a significant number of homes from our Hudson Tea building in Hoboken and enjoy additional profits from our other joint ventures.

We estimate that SG&A as a percentage of revenue for 2006 will be between 9.3 and 9.4% of total revenues as we continue to expand the Company to prepare for our growth in 2007 and 2008 without the concomitant increasing 2006 revenues and as we expense options for the first time.

Option expense is expected to add $27 million before tax effect to our SG&A in 2006.

In order to assist you in preparing quarterly models, I will highlight some quarterly information I think you should consider.

Please remember that information on a quarterly basis is subject to even more variances than the annual information and can include large swings which may be caused by many items including weather, approvals, contractor or material shortages.

We expect to deliver in the first quarter between 1925 and 2,025 homes with an average price between 680 and $690,000.

We estimate that in our second quarter we will deliver between 2,000 and 2150 homes with an average price of between 660,000 and $670,000 per home.

We believe homes in the third quarter, home deliveries in the third quarter will be between 2425 and 2625 homes with an average price of 670 to $680,000.

We estimate that deliveries will increase in the fourth quarter to between 3150 and 3400 homes and the average price will be between 670 and $680,000.

Based upon our estimated construction activity, we currently estimate that percentage of completion revenues will be between 50 and 55 million in the first quarter, 75 and 80 million in the second quarter, 90 and 95 million in the third quarter and between 65 and 70 million in the fourth quarter.

We expect the cost of sales to be about, gross margins on these to be about 20% in the first quarter, 20% in the second quarter, 22.5% in the third and 27.5% in the fourth quarter.

We estimate approximately $3 million in land sales in the first quarter and $2 million of land sales in each of the remaining quarters.

We estimate that other income will be approximately 7 million in the first quarter, six in the second quarter, seven in the third quarter, and eight in the fourth quarter.

We currently estimate that income from joint ventures will be about $15 million in each quarter, however, we believe that this estimate will change.

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

The variance in deliveries by quarter can affect job overheads per home.

Also, the geographic mix and product mix of homes delivered will have a significant effect on margins by quarter.

All of 2005 will be affected by purchase accounting for the Landstar acquisition, however, the first quarter will see the greatest impact on margins followed by a little less in the second quarter and a little less in each of the remaining quarters.

We expect all quarters to be affected as a result of mix issues and cost increases.

We currently expect home building costs before interest in the first quarter to be approximately 69.3 to 69.5%.

The 68.6 to 68.8% in the second quarter to be 68.8 to 69% in the third quarter and to be between 70% and 70.2% in the fourth quarter.

In addition, we expect interest cost of sales to be about 2.1% of revenue.

SG&A varies significantly quarter-to-quarter as we generally incur more selling and advertising costs as a percentage of revenues in the first and second quarters than in the third and fourth quarters.

We expect selling costs as a percentage of revenues to increase as we increase advertising and marketing costs and increase deliveries per community and fund personnel costs for future growth.

We would expect SG&A as a percentage of revenues to be between 10.8 and 10.9% in the first quarter, 10.3 and 10.4% in the second quarter, 9 and 9.1% in the third quarter and 8 and 8.1% in the fourth quarter.

Remember the fourth quarter 2005 SG&A as a percentage of revenues was positively impacted by the lower than anticipated cost and delivery of more homes than we estimated.

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

We have used and estimate of 169 million of shares outstanding for the year and 167.5 for the first quarter increasing to 170.5 in the fourth quarter.

Bob?

Thanks, Joel.

We look to the future with cautious optimism.

We believe demand for our luxury homes relies in large measure on consumer confidence which suffered both Katrina.

We also believe that the fundamental imbalance between supply and demand will reassert itself.

A strong baby boomer driven demographics and the growth in high income households should continue to bolster demand for luxury homes.

The challenging regulatory process is exacerbated by anti-growth NIMBY politics constricts the land approval pipeline and thus the supply of available building lots, especially in the affluent markets where we build.

The positive aspect of these restrictions is that with supplies so constrained we are enriched when we finally complete our approvals and get to market.

Given this land-constrained environment we believe we have positioned ourselves to prosper.

We now control more than 83,000 lots, 43% of which are owned and 57% of which are optioned compared to 61,000 at fiscal year-end '04.

These home sites represent a five to six-year supply based on our historic 20% annual rate of growth.

We have increased our land position without compromising our balance sheet with the profitability standards for land acquisitions that we have maintained for nearly 20 years since we've been public.

We ended our fiscal year with a debt to capital ratio of 39%, our lowest ever.

We believe that fundamentals remain healthy for our new home market.

The economy is much stronger than during the last recession which did not impair our ability to set records each year.

Affluent household continue to grow in wealth and numbers.

The Fed appears to be approaching the end of a period of interest rate increases with mortgage rates still quite attractive by historical standards.

Household growth is projected to accelerate and supplies of land remain constrained.

Based on these factors, our proven management team, our projected community count growth, our land position, our diversity of product offerings, our strong brand and our financial base, we look forward to future growth.

Thanks.

And now let me open it for questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Michael Rehaut.

Hi, good afternoon.

I was wondering if you could just go into a little bit more on the SG&A?

Given that you are expecting increases in ASP and in closings in '06, what's driving the higher percentage of sales?

Joel?

We have a significant number of communities opening by the end of the year.

All of those expenses associated with the selling, advertising and personnel required for those communities before they start open for sale are expensed in the period in which we open.

We don't have concomitant revenue increase to offset it and therefore it has a negative impact on SG&A.

In addition we expect some advertising costs to increase in the existing market compared to last year.

Okay.

And Bob, if you would be so kind as to go over sort of the regional color?

I think you had mentioned in the media earlier today about some markets like Phoenix and Vegas and DC, what you're seeing in terms of demand and also level of incentives and price gains?

Price gains, level of incentives and how's the market.

Well, I did speak earlier today on the incentives and I said as of this point the incentives that I'm aware of that we're giving are not that great.

There's spiffs, you know, special kitchen, a special mortgage deal, and primarily in Detroit and Chicago.

With respect to state of the markets, Connecticut's good, Massachusetts and Rhode Island is good, New Jersey is good, New York is fair.

That's Westchester and Duchess.

Delaware, the state of Delaware is fine.

The shore area of Delaware and Maryland, Bethany Beach for instance, Ocean City, et cetera, that's a fair market now.

The Pocono's is fair.

Pennsylvania is fair.

Maryland is excellent, Northern Virginia is poor.

Central Florida, Orlando market is good, Florida East Coast, Gold Coast for the last four to five weeks has been poor primarily we believe impacted still by hurricanes.

The last week or two, a little better.

Florida North, Jacksonville, good.

Florida West, very good even, excellent, I'm sorry I didn't say that to start with.

Charlotte, good, Raleigh, fair.

South Carolina, we only have one pretty large master planned community with about 1,000 homes in it and that's very good.

Illinois, Chicago as I stated is poor.

Michigan, poor people, that is a poor market.

Minnesota, we just opened three weeks ago, two product lines we've taken 11 deposits.

So you would characterize it as excellent on that basis but it's always like that when you open a new community so it's too soon to tell.

Arizona is good.

Primarily we're impacted there by lot availability.

Colorado is fair.

Reno is good.

Las Vegas is excellent.

Boston is fair.

Dallas we rate as good.

San Antonio is good but we only have one community cooking there right now.

Northern California is fair.

Palm Springs, fair.

And Southern California, good, but we shouldn't be the judge of that market because we have five communities, four of them for the time being are all sold out so we only have one community that we're really operating in for the moment.

And that, I think, gives you a recap of our markets.

Thank you.

Cindy?

Yes, our next question comes from Lorraine Maikis with Merrill Lynch.

Good morning.

This is Ken Deener.

Afternoon.

It's the morning someplace.

Don't worry about it,

Could you discuss the factors contributing to the gross margin forecast?

Is it product mix, rising cost, conservatism?

I'm sorry, say that again, please?

Could you discuss the factors that are contributing to the forecast for gross margins, the change as well as the trend that we see from the first quarter to the fourth quarter?

We expect that the price increases that we saw in the last quarter and the cost increases that we saw in the last quarter and the first quarter of this year will affect deliveries in the third and fourth quarter of 2006 so we have a little bit of cost increases built in.

The second and most important part of the change is a mix change.

We had talked previously about we had been selling out of the communities in California and we had large amounts of growth that was coming out of Florida.

California is a much higher profit margin state than Florida is and that mix issue accounts for a significant portion of the difference.

In the second half of '06 is what you're saying?

Primarily in the second half of '06, correct.

So going forward into end of '06, '07, it would really be the fourth quarter would be kind of your going forward trend?

We expect during '06 to start opening up additional communities in California so some of that will be offset for '07 but I can't tell which quarter it starts to hit.

And then a second question.

Have you made adjustments to your bottom of the forecast to reflect the more conservative outlook in '06 compared to '05 in terms of units or pricing or gross margin from your divisional businesses?

Well, we're a bottoms up company and all of our projections are done on the basis of the individual communities projecting adjusted for the views of the individual and divisional president's and so the answer would have to be we believe so.

Okay.

Thank you very much.

Our next question will come from Carl Reichardt with Wachovia Securities.

Good morning, guys.

Hi, Carl.

I just had clarification, I'm sorry to be so dense.

The 27 million option expense, is that included or excluded from the SG&A to sales guidance, Joel?

It's included in our guidance and we didn't have it last year.

Included in the SG&A to sales percentage guidance.

That's correct.

And then, Bob, if I look back at your history, has there been a, you [inaudible] 143 new communities opening this year to replace 108 that you're getting rid of, that's a fairly high percentage of the total community base.

Has there been a time in the past when you've opened that many, closed that many that we can look back to as sort of a guide for your ability to do it and what sales per community might end up being given that we know the, we'll probably see a higher rate?

Bob and I may not 100% agree on this, but I think that this year, this year we opened a high percentage of communities and closed a high percentage of communities as well, so.

Earlier in the year.

Earlier in the year.

So for the whole year percentage-wise it's probably roughly the same, but obviously we have 35 net new communities opening so there are slightly more communities opening as a percentage.

I believe it's more than we've every done before and hopefully it will continue that way.

If it goes the other way then the Company's going backwards instead of forwards.

Fair enough.

Thank, guys.

Now we'll move on to Margaret Whelan with UBS.

Hi, guys.

I actually had the same question that Carl had about the community count, it just seems like a big rate of change.

And can I ask a little [differently], can you tell us which markets that you're more comfortable in getting them in?

I think you said in the press release you have about 400 that are in the approve or development process.

Where do you know they're [inaudible] come out versus where you might have delays?

And the second question I had is just the 35 that were down in the fourth quarter are they back up again now?

The 35 that were closed at the end of the fourth quarter are not back up yet.

Are they going to be any time soon?

If I believe the projected delivery times where we are out 12 months, if we wait a month we'll be at 11 and then we should be in time for sale.

But unfortunately what happens is the guys believe they're at 12, sell another five believing by the time they get them to contract they'll be down at 11 and therefore back up at 12 but then it turns out they're really at 13 and so on and so forth.

So I would guesstimate that it will take a month or two to work off the backlog so that we can back to sales in those communities that are shuttered temporarily.

And then where would the ones that you're sure will open this year, which markets are they concentrated in?

I haven't got that info.

Have you guys got it?

I'm going to give you the big changes because every community in every state has changed, but of the 35 markets, the large changes will be an increase in California of five, which is what we talked about earlier, an increase in Florida of 10 net, a decrease in Delaware of four --

Excuse me, do you have that broken down in Florida?

I don't have it broken down.

And a decrease in North Caroline of 5, an increase in Nevada of 3, an increase in Pennsylvania of 9.

Again, in Nevada do you have it broken down between Reno and Vegas?

I don't.

And a decrease in Texas of 5.

Those are the bigger items.

Okay.

And can I ask just the second part of that question?

Given that you're getting more conservative in '06 and definitely on '07, why are you building your lot count so much because I've got to think that if your turns are low you won't be compensated as much?

Why are we building our lot count?

We have 83,000 lots owned and controlled.

Yeah, which is up 36%.

Well that's from a year plus ago.

And we also increased deliveries in the last year significantly.

So when you look at projected growth for the next five or six years, if we do plus or minus 20% growth that represents, including the stuff under control, five or six years worth of lots and we think that given the fact that many of our markets take you five, six or seven years to get approvals that's the appropriate number for us.

You're saying plus or minus 20% unit sales growth?

On average.

Why wouldn't you be, if you're comfortable in that and you're investing to meet that, why aren't you comfortable [inaudible]?

We don't know what the market conditions are going to be in the next year and we're not willing to go out for 2007 yet, Margaret.

Okay.

Thanks.

And now we'll move on to Daniel Oppenheim with Banc of America Securities.

Thanks very much.

Was wondering if you can talk about the trends as you're describing the demand trends on a market-by-market basis?

It was very helpful.

As you look forward, what will the goals be in terms of, as we look to order trends, are you going to be focused on sort of the absorption pace or maintaining margins where you can, and if more on orders what do you think the impact on margins could be as we potentially think about '07 initially in an environment with less price depreciation?

I have no idea, Joel.

We run every community as a separate business and in running every community as a separate business we look to maximize the profits considering demand, supply demand issues.

And so if it makes more sense to increase production, if we can, then we will do so.

If it makes more sense to not increase production because we have step overheads then we will not increase production if we have a choice.

Many communities because production is tight we don't have that choice.

I understand the question now.

The answer is that we view the sales in each community every Sunday night in our homes and together every Monday morning.

So every community is analyzed.

If we sell three this week but we sold none last week, we'll just put a "Y" next to that community which means yea.

If we sold three this week and we sold three last week, then we'll go look at the backlog in that community and let us say the backlog in that community is 35 and we had ballparked that community for selling 35 in a year, then we're obviously getting ahead what we had ballparked so we think there's strong enough demand we would bang that community up five or up ten and that's basically the way we run the Company.

Every community, every week is up for re-evaluation for price increase.

Obviously if the community is going in the other direction and you've got zeros for three weeks, then first thing you do is inquire about the sales traffic, the sales management, the representation on site, and then finally, if you're satisfied that everything's as good as you could make it and you're still not making sales, then something's wrong with your price and the first thing you would do is turn to a minor incentive and the second thing would you do is turn to a mortgage program.

Do you understand?

Yes.

Thanks very much.

We'll move on to Myron Kaplan with Kaplan Nathan.

Hi, guys.

That was a great conclusion to a great year.

Thank you.

I would ask how do you feel about now that you purchased a bunch of shares last quarter at higher prices how do you feel about repurchase at this general level?

Well, it's a very logical and reasonable question.

We wish we had bought them at this level, extended at that level, obviously, and we believe that we'll buy them at this level since we were buying them at that level.

Now we're not in the business to be buying shares to take ourselves private.

And we're not in the business of buying shares to lessen share count to an extent that we start to raise earnings on the basis of the divisor, but we are opportunistically driven.

We'd like to cover the dilution that takes place through options which we think is a very meaningful method of incenting our senior management and junior management as well.

So we definitely want to cover that.

And while we're on the way if we think that the price is, market has got the price wrong then we'll probably buy some more.

That's as much as I can say.

Right.

And operationally will you please review the status or the conditions of the high-rise product that you have on the Hoboken waterfront?

Sure.

Hoboken The Grove, 270 units.

Sales are right on pace.

Raised our prices substantially as we went along and does anybody know what floor we're up to now?

I think we're about seven, eight floors but I'm not sure.

I didn't think it was that high at October 31.

Well, not as of October 31.

I happened to be in December the 8th land, but I don't remember what floor we're at.

Maxwell, right on the water, probably midway through the floors so we're getting near, a couple of weeks I would think we'd be able to top out.

That's roughly about 140 units and there's about 300 units behind that and we've only reached, I think, about the first floor if that.

So that will be that will be an '07 contributor?

All the Maxwell House will be '07 except the percentage of completion.

I'm sorry?

Because of '07completion we'll get some in '06 and some in '07.

Right.

I'm sorry.

And Maxwell House will go out for many years so it will be '08 and '09.

We will begin, we're already all the way up because the shell is completed on the second Hudson Tea building so that will go into production probably in April or May.

In Florida we have two towers that are out of the ground.

One tower was halfway done and we lost a floor during the hurricane.

We were unfortunately one of two had a crane come down on the building.

But it's all cleaned up and we're back ahead of where we were and we have another building that's just coming out of the ground.

Sounds good.

Thank you.

Thank you.

Now we'll move on to Dana Richardson with Argus Research.

Good afternoon.

You've indicated that the consumer confidence which took a hit as a result of the hurricanes has negatively impacted your outlook and you also indicated --

Excuse me, it didn't negatively impact our outlook.

What I said was it negatively impacted consumer confidence and that negatively impacts the demand as people go under the log for protection and aren't as eager to buy as they were.

But it doesn't negatively influence our outlook because we don't expect the consumer confidence, a lack of consumer confidence to continue for the high priced spread anyway.

I'm sorry, go ahead.

Okay.

So what you're saying is that the decline in consumer confidence had nothing to do with your lowering your delivery estimate for 2006?

No, I don't think it did.

We think the decline in consumer confidence lowered the number of agreements that got signed where there was inventory to sell and that rolled over to, and we don't think that's necessarily a permanent lowering, we think that's a delay in many cases, a elongation of the process, and that will make it such that we have less units being delivered in 2006.

I don't think that was a major factor in 2006's numbers.

The major item in dealing with 2006 is that we accelerated how many homes in ['05] that we didn't think would be there?

From the beginning of the year 670 homes, at the end of the year, 200 homes.

Okay.

But you did mention the loss of consumer confidence a couple of times and now you're saying it's a relatively minor factor.

Is that correct?

Geez, I hope not, no.

I don't mean to say that.

Our loss in consumer confidence is a major factor for the home, for our home buying public.

Okay.

You also mentioned that at the time that you felt that this was affecting the high-end of the market more than the low-end.

Am I correct?

That's right, that's what I thought.

And I was wondering why that was the case, one would assume that the effects of, say, Hurricane Katrina, which increased energy prices, would have a less impact on your affluent clientele than lower income clientele.

I was wondering what your thoughts were on that?

Well, I think it's because our clientele are more affluent, that they're less impacted by those items that are budgetary constraints to a less affluent household.

If you've got larger income then you're, I think, less impacted by a move in interest rates or by a move in gasoline prices.

You're more impacted by what your own emotional and psychological outlook is on the state of affairs or the state of the country or the state of the economy and on your feeling about the future.

So --

That's just my feeling.

Okay.

I don't want to belabor that subject, but it just seemed to me an apparent contradiction that the more affluent clientele, which would seemingly be less responsive to higher gas prices, were apparently more affected by the hurricanes in terms of their consumer confidence.

Prices went up before Katrina.

The impact on pricing --

It was way up afterwards.

Right.

But the consumer confidence is what got affected when the government didn't respond as well as the public felt that they could have, it was kind of like the straw that broke the camel's back in terms of consumer confidence for the more affluent.

There was an interesting article done, that was printed up either in the Wall Street Journal or the New York Times, I believe, that talked just about that issue that the consumer confidence for the more affluent person in this country was significantly lower than the, declined more than the consumer confidence in the general public and we think that that impacted our, the buying of the client.

Okay.

That's interesting.

Just a technical question if I could real quickly.

Now the percentage of completion revenue, that's not included in terms of your delivery numbers?

That's extra revenue added on top of that?

That is correct.

Because you're not delivering the units you're picking it up as a percentage of completion, it doesn't get picked up in deliveries, it gets picked up as revenues, a separate line item, and you'll see the way we disclose it when we disclose the first quarter.

Thanks a lot.

That's really helpful.

You're very welcome.

Cindy, I have a Web Internet question from John Kim.

He wants to know, what's the cancellation rate for the quarter?

I think it was about 6.5%.

6.5%.

Any significant change quarter-to-quarter in any of the regions?

I don't track the regions cancellation rates so I don't think there is because if it was meaningful it would have come to my attention.

Cindy?

Sure.

Our next question comes from Joel Locker with Carlin Financial.

Hi, guys.

I was just curious about the November order trend and absorption rates in November '05 versus November '04, if you can comment on that.

I'm sorry, the absorption rate?

Per community for the orders, I mean.

Bob gave you an outlook on the state of the, our view of the state of the strength of individual markets.

We do not comment on monthly state-by-state or region-by-region orders.

Right.

Just on an apples-to-apples basis then what would you say the price increases were in like Southern California and Northern California on the orders that you just took, let's say October quarter?

We don't know.

We don't track it that way.

All right.

Thanks a lot.

I mean I do have, we do track every week what we raise but we're not going to get into that.

Thank you.

I forgot to say, by the way, that John Kim was with Mack Capital.

Cindy, go ahead.

Okay.

Our next question comes from Michael Shoul with Oscar Garuse.

I had another question about cancellation rate.

You answered the first part which it's at 6.5% and you don't have any information on regions.

I just wanted to understand in which markets your consumers have a statutory right to cancel purchases without penalties?

I believe it's a number of them.

I know in New Jersey, and I believe in Massachusetts as well, you have the right to cancel for the first and I don't remember 15 or 30 days after you sign the contract.

I thought New Jersey was three to five.

I don't know what the other states are.

You think it's three to five days as opposed to 30 days?

You may be right.

California has a restriction on deposits we can keep, but.

That's not a restriction on cancellation, I mean that they still, they forfeit when they cancel.

I'm sorry, I don't have the answer to the question.

Right.

And you're saying that you really don't have, you don't keep sort of accurate ongoing data about cancellations in different markets?

No, we don't.

And even in the markets in which perhaps sales aren't going so well you're not seeing that cancellations are increasing in those situations?

I'm not.

You're not.

Okay.

And then one final--

We're definitely not seeing specific regions with cancellation rates that are noticeable.

And then just one final technical question.

If you're using a percentage of completion accounting and you have a late cancellation, and this is just a hypothetical question, so you have a cancellation, say, when your project is 80, 90% completed how would you have to account for that?

Well, in theory you've built it into a number of different ways where you've cushioned the numbers.

But if you had no other changes you would, you could theoretically have negative revenues in that quarter if that were the only change and you had no additional construction during the quarter, you theoretically have a change but it doesn't work that way.

The question's then for that number is we assume a drop out rate.

We assume cost increases.

We do a lot of things to make sure we're comfortable.

But if you had a very sudden deterioration in the market and an unlikely but unanticipated significant increase in cancellations, you could have negative revenue in that quarter, just hypothetically.

It's hypothetical but we would be keeping large deposits.

No, but the answer is logically, yes.

Okay.

No, it's purely technical.

Thank you very much.

You're very welcome.

And our next question will come from Larry Horan with Janney Montgomery Scott.

Hi, great quarter.

Just one question.

You characterized Pennsylvania as fair and the Pocono's as fair and that's largely Eastern Pennsylvania, correct?

It's totally Eastern Pennsylvania.

We're in four counties surrounding Philadelphia.

Oh, wait a minute, we're also North Hampton and Allegheny counties, which are the extensions in New Jersey down 78 and 80.

Okay.

To me it was a little curious and maybe you could shed some light on that.

You have a large number of net community openings in Pennsylvania.

You have about nine if I got the number correct from Joel.

What's the thinking behind that?

If the markets, well, you know, it seems like a lot of the markets are currently better off or better characterized in terms of demands like good or fine or?

Well, let me see.

We opened a community in October and this week we signed six, that's six contracts with 10% approx, we took 13 new deposits.

Last week we took four, the week before we took 38.

This is obviously a high volume community.

So the theory behind it is that we expect to do good business.

So maybe it's fair but it improving.

That's all I'm trying to get at, Bob.

The reason it's fair is, the Philadelphia market is, as W.C.

Fields characterized, the first week, one week first price, two weeks second price, it's not, it just keeps on plodding along.

It's a great market in our opinion to be in because it's consistent.

It just keeps on going.

So it's always fair.

It's never Vegas or Phoenix or Northern California and it doesn't go up and down either.

It sounds like in the new openings you're doing really well with them.

Yeah.

Okay.

Thanks a lot.

And our next question comes from Michael Molnar with Goldman Sachs.

Hey, guys, how are you?

Great, Michael.

Thank you.

Just a couple of questions.

The first on the towers you mentioned 280 to 300 million in revenues.

Do you have any or did you mention how many units and what the average selling price of that would be approximately?

I gave you revenues by quarter and the average selling price for those units tend to be slower except for Singer Island, Florida which is much higher.

Okay.

And just to be clear, are those units at average selling price included in the 9500 and 10,200 in units or this 670 to 680k.

Is that already included or is that--

No, that's separate.

And then the second question would be, what markets, if any, are you guys facing any pressure from investors reselling homes?

I believe there is some pressure in the Northern Virginia, Washington, D.C. market.

And I believe there is some pressure against the singles in the Orlando market.

But that's just a thought.

I don't have much empirical data to back that up with.

It's just a thought.

Does anybody else have any?

That's a general area.

Well we don't, but it impacts a neighborhood.

We don't sell to speculators.

We have a clause that pretty much chases them away from the agreement but it can impact the market which is what your question was.

That's right, yeah.

I'm trying to think.

Mostly the speculators were chased out some time ago in Las Vegas.

Excepting from the high-rise but we're not in that business in Las Vegas, in the housing market.

And Phoenix, as a matter of fact, we just, we're discussing it this past week and we believe the speculators were chased out of Phoenix pretty much about three or four months ago.

So I don't see it at this point any serious impact on any of the markets except Northern Virginia.

Great.

Thanks a lot.

That was our final question at this time.

I'd like to turn the conference back over to you, Mr. Toll, for any closing or additional remarks, sir.

Cindy, you're kidding?

No more questions?

That's terrific.

Thank you all very much.

I appreciate your attention.

Have a great holiday, everybody.

Bye.

And that does conclude today's conference.

Thank you for your participation.