托爾兄弟 (TOL) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Toll Brothers first quarter 2006 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 calling over to Mr. Robert Toll, Chairman and Chief Executive Officer.

Please go ahead, sir.

Thank you, Stacy.

Welcome and thank you for joining us.

With me today are Joel Rassman, Chief Financial Officer;

Fred Cooper, Senior Vice President of Finance and Investor Relations;

Joe Sicree, Chief Accounting Officer; and Kira McCarron, Chief Marketing Officer.

Before I begin, I ask you to read the statement on forward-looking information in today's release and on our 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 obviously 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 many as possible.

Today we reported results for our first quarter ended January 31, 2006.

Net income rose 49% to $163.9 million and earnings per share rose 48% to $0.98 per share.

Revenues rose 35% to $1.34 billion.

As we announced back on February 7, first quarter end backlog rose 22% to $5.95 billion.

And signed contracts of $1.14 billion declined 21% compared to fiscal year '05's record first quarter results.

The earnings, revenue, and backlog totals were first quarter records, while contracts were our second highest for a first quarter.

Based on strong demographics, restrictive land approval regulations, and our 87,000 lot supply, we believe Toll Brothers is well positioned for growth.

Over the next couple of quarters, however, we will continue to face tough comparisons with last year.

Last year's first quarter contracts were up 60% over fiscal year '04.

In 2005 demand for new homes in many markets was propelled to unsustainable levels by speculative buying.

We are now on the other side of that slope.

Speculative demand has ceased.

Speculators are now putting their homes back on the market.

The result has been more supply than demand in some regions.

Markets such as Metro Washington DC, which are sound economically and showing healthy job growth, will need to work through their excess supply before the imbalance once again tips in our favor.

Then we believe builders such as Toll Brothers, who control the largest share of well-located approved sites, should prosper.

Although we ended the quarter with a record 258 selling communities, sales remain constrained at many communities -- at the many communities we have with backlogs of 12 months or more.

We believe that as these backlogs are reduced and new communities are opened, sales should improve.

Based on our current projections, fiscal year '06 should either be the best or the second best year in our history, with net income of between 790 and $870 million, earnings per share of between $4.77 and $5.26, and return on beginning equity of about 30%.

Our primary goal is to grow our earnings and revenues as we have for the past fifteen years, by fining great land deals, broadening our product lines, expanding geographically, and building our brand.

One of the ways we create value is by continually deploying our expertise in taking land located in affluent neighborhoods through the approval process.

As an example, we contracted to acquire a piece in Scottsdale in June 2002.

Many developers wouldn't touch it because the town of Scottsdale wanted to acquire half the ground through condemnation.

Builders didn't want to get into legal battles related to the condemnation, especially while at the same time they had to take the property through the approval process in the town of Scottsdale.

We were willing and able to work it through.

Even now, four years later, the dust hasn't completely settled with the legal proceedings, but we are moving dirt on the first section of what will be at least 600 homes and could be up to 1100 homes.

We will be opening for sale in our first section of approximately 185 lots next month.

We believe we've increased the value of the ground six-fold and our community should be a tremendous success.

We have similar stories in many locations around the country.

Although organic growth is our main strategy, we remain open to share repurchases and other opportunities to increase shareholder value.

Since February 1st 2006, the start of our second quarter, we have repurchased about 1 million shares.

This is in addition to the 2.6 million shares we acquired in the previous two quarters.

Now let me turn it over to Joel for the numbers.

Joel?

Thank you, Bob.

During the quarter we delivered 1879 homes at 681,000 per house, resulting in home building revenues of $1.28 billion.

First quarter cost of sales at 69.14% without interest was slightly better than the top of our ratings at 69.3% of our prior guidance, as we benefited from lower write-offs and slightly richer mix of closings.

Write-offs for this first quarter were $1.13 million compared to our budget of 3 million and last year's first quarter write-offs of $2,343,000.

We recognized $57.6 million of percentage of completion revenues, with an 82.2% cost of sales and land sales of $4.7 million with a cost of sales of 82%.

This resulted in net profit from both land sales and percentage of completion revenues approximately equal to our guidance.

Interest expense of 2.1% was also equal to our guidance.

SG&A at 10.4% as a percentage of revenues was lower, which means better than the guidance of 10.8% that we gave you in December, as we benefited from lower marketing expense and a lower bonus approval than previously estimated.

Other income of $11.3 million was $4 million better than estimated, as we had more cash invested during the quarter because of delayed land closings and higher earnings from our ancillary businesses.

In addition, joint venture income at 16.6 million was slightly higher than the $15 million of guidance we gave you.

The effective tax rate for the first quarter was 38.3%, reflecting a higher than normal amount of tax-free income and the initial estimated benefit from the new manufacturing tax credit.

For purposes of the diluted earnings per share, the number of average shares for the first quarter was 167,027,000.

The results of all of the above is that after-tax earnings of 163.8 million was approximately in the middle of the range of earnings guidance, as was the earnings per share at $0.98.

We have filed an 8-K and put it on our website, the detailed guidance for the remainder of 2006.

We suggest you access that guidance to assist you in modeling.

We will continue to review our guidance throughout the year and adjust guidance as necessary in future conference calls.

We caution you that quarterly guidance is subject to even more vagaries and uncertainties than annual guidance.

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

We expect deliveries in the second quarter to be between 1,950 and 2,150 homes; in the third quarter to be between 2,350 and 2,575 homes; and in the fourth quarter to increase to between 3,000 and 3,300 homes.

These quarterly delivery estimates are lower than our December guidance but are consistent in total with the revised yearly guidance we gave you on February 7th of 9,200 to 9,900 deliveries for the year.

We believe the average delivered price for the second quarter will be between 670 and $680,000; the average delivered price for the third quarter, between 665,000 and $675,000; and the average delivered price for the fourth quarter will increase to between 675 and $685,000, resulting in an average for the year of between 670 and $680,000.

Based on the expected delivery mix, we expect cost of sales for traditional housing as a percentage of revenues without interest to be between 68.9 and 69.1% for the second quarter.

This is an increase over our previous guidance.

Between 69 and 69.2% for the third quarter.

This is an increase over our previous guidance.

And between 69.3 and 69.5% -- excuse me.

For the fourth quarter, which is an improvement over our previous guidance, the average for the year will be between 69.1 and 69.3, which overall for the year is an improvement of guidance.

We project interest expense at 2.1% of revenues in the remaining quarters.

This is a slight increase over the previous guidance.

We expect land sales of 4 million in the second quarter, 5 million in the third quarter, and 7.5 million in the fourth quarter, with cost of sales in the first -- the second and third quarter of 80% and in the fourth quarter of 60%.

We expect revenues from percentage of completion communities for the second quarter to be between 55 million and 60 million; for the third quarter to be between 65 and 70 million; and between 100 and 115 million for the fourth quarter.

And that -- cost of sales for these communities will be 81.5% for the second quarter, and 80% for the third and fourth quarters.

SG&A normally varies quarter to quarter as a percentage of revenues due to many reasons.

Generally, we expend more advertising and marketing costs during the second quarter than in the third and fourth quarters, yet have a smaller revenue base.

In addition, there can be significant swings as a result of costs of community openings.

We estimate that SG&A as a percentage of revenues for the second quarter will be 10.3 to 10.4%; for the third quarter, 9.2 to 9.3%; and for the fourth quarter, 8 to 8.1%.

These estimates reflect the changes in estimated expenditures for the remainder of the year as well as the effects of reduced unit deliveries.

However, as you know, the SG&A estimate for the total year remained consistent with our previous guidance of 9.3 to 9.4%.

We currently estimate that other income will decrease to approximately 5.5 in the second quarter, 6.5 million in the third quarter, 7 million in the fourth quarter.

And these are small changes from our previous guidance.

We estimate that joint venture income will be approximately 6.5 million in the second quarter, increase to 21 million in the third quarter as profits from our land sale partnerships kick in, and will be approximately 16 million in the fourth quarter.

Although the total estimate of income for the year from joint ventures did not change, we have significantly adjusted how we anticipate they will be recognized in each quarter.

We expect to realize some benefit this year from the manufacturing tax credit.

Although the full extent of this benefit is not yet determined, we currently estimate that our tax rate should reduce to 38.6% for the remainder of the year.

The last component of EPS is share count.

For purposes of EPS we are using 166 million shares for the year, 165.4 million for the second quarter, 165.9 million for the third quarter, and 166.3 million shares for the fourth quarter.

Bob, I'll turn it back to you for questions.

Thanks, Joel.

Stacy?

Yes.

My first question came over the internet from Mike Steinberg of Fact Investors, and he questions: can Toll Brothers adjust to lower priced homes with cost of land and inventory?

Well, Mike, we can because we have enough cushion between the price of the land and the price of the homes that we plan to sell on that land and are currently selling on that land to build lower priced homes, but that's not our interest.

Our interest is to adjust to higher priced homes if we can.

Thanks, Mike.

Stacy, do you have any questions out there?

Yes. [OPERATOR INSTRUCTIONS] We'll take our first question from Larry Horan from Janney Montgomery Scott.

I realize it is kind of early to address '07, but I just would like to have your thoughts in extremely general terms.

If we are having tough comparisons in the first three quarters here on orders, meaning there will probably be negative unit comparisons and prices kind of flattening out, it is pretty hard to imagine '07 being an up year relative to '05.

Not for me, but, Joel, how about you?

We think that as the year progresses, as communities open, and as we sell out some of the older communities and bring down backlogs on some of the communities that have large backlogs in them, that we will be able to increase the sales count, particularly in the last quarter, and still have a pretty good [inaudible] for 2007.

See, I think the key part of the answer that Joel gave, Larry, was the opening of the new communities.

As the community count expands, especially in markets that are still pretty good if not in, "A" condition, the sales will increase.

I'm trying to remember where you expect to be at year end on community count.

265 communities.

Okay.

That's what I thought.

So you're at 258 now.

Obviously there is a lot of churn in there.

Yes.

See, that's the key to it.

You just don't go from 258 to 263.

It is not just adding eight communities, you may be adding 50 communities and dropping 42.

For the year we're adding 140 communities and dropping 100, I think, for the whole year.

There you go.

Real numbers.

That's great.

That's the number that kind of sheds a great deal of light on this.

So, 140 new communities -- or openings, I should say, right?

I believe 140 openings and 100 closings.

Joe?

Kira?

Is that right?

Okay.

Thanks.

Thank you, Larry.

We'll take our next question from Margaret Whelan from UBS.

Hi, guys.

Hi.

How are you doing, Margaret.

I'm super.

Bobbie, I missed your kind of -- you A, B, C update that you used to give us by market.

Can you give us one of those, maybe?

Why not?

Why not.

Do you have everything?

Why not?

I'm here.

Arizona, for us -- I am sorry, it's just -- the Phoenix market, we're all over the Phoenix market.

For us it is an A community.

I mean an A region.

Thank you, Kira.

Even though there is the speculative selling that I spoke about in the monologue, it is still coming up A, so I hate to see it when they burn through all of the speculative reselling that's out there.

Palm Springs is a B territory for us.

Don't have quite the same -- a B doesn't have quite the same pricing power as an A. In an A community we're raising prices.

I meant region.

Northern California I rate as a C. We're making sales but nowhere near the sales that we made in the past.

If A means you're raising prices, does C mean you're cutting them, or they're flat?

No, we're not cutting prices in northern California.

They're flat.

We don't have the pricing power.

That's because we don't have the demand and therefore we don't have the volume that we had before.

Southern California, I really don't have enough information to judge the territory for you in terms of high priced luxury homes.

We have, in terms of real communities, only three really cooking right now.

We're winding up three others.

What we've got with stuff to sell is pretty much in an A position in southern California.

Colorado -- well, for us is just Denver -- pretty much an A for the last four weeks with some pricing power.

Connecticut, a solid B. Actually, I recall specifically that we've been raising prices the last couple of weeks, but I've been complaining about it.

Generally I'm in the loop there.

I think we went off the reservation and got too excited.

But there is definitely pricing power.

Delaware is about a C-plus for us right now, and the seashore communities on the Maryland/Delaware shore are -- for the last four weeks running at about a D for dog for us.

Central Florida, this past week was an A. But -- as a matter of fact, an A-plus -- but over the last four weeks I would rate it as a C. That's the Orlando market, yes.

East Coast, east Gold Coast, Florida, this week looked like an A. For the past four weeks I would average it out at about a B, and it has some pricing power in it.

North Florida, Jacksonville, I would rate that -- this week was a good week, but over the past four weeks was a dog.

That's a D.

West Gold Coast, Florida, cooled down.

Up to about four weeks ago it was still a very hot market.

I would rate it now as about a C, and that's down from a B in the last couple weeks and an A about four or five weeks ago, so that market is going backwards.

Chicago looks like a pretty solid market for us.

That's a B. And we did raise some prices there in the last few weeks.

Michigan, the Detroit suburban market, I am very pleased to say that it rates as a C, which is remarkable to us because that it seemed to us at this point it would be an F.

Minnesota is a D-plus to a C for us.

We only have two communities there.

Las Vegas rates as a B market for us right now, without much pricing power, but no going backwards, no incentives, except on one community out of about eleven.

Reno rates as a C territory for us.

Massachusetts rates as a C territory for us.

Rhode Island, we only have one community open, and that's a C.

New Jersey, in the suburbs, rates as a C-plus only, which is surprising.

No real pricing power there, but we're not backsliding either.

Urban infill, Hoboken specifically, is an A-plus, and lots of pricing power.

Exurb in New York, Peekskill, Fishkill, all of those kinds of way-out places, ranks as a C territory for us in the last four weeks.

Charlotte ranks as a A-minus, B-plus territory.

Raleigh is a solid B.

Pennsylvania, the four counties surrounding Philadelphia, W C fields was wrong: First prize, we would like to stay there forever.

It is a solid B-plus.

Hilton Head -- well, it is really way off-island Hilton Head, Bluffton is the area -- rates as a B for us over the last four weeks, which is excellent for this time of the year in off-island Hilton Head.

Austin, still ranks as a D. I thought we were coming back about five weeks ago, but we're back down to wishing that we had fewer communities there.

San Antonio recently is an A, and has been a B. We -- thank you, Fred.

We only have two communities there.

Dallas has been real strong for the last four weeks and even going back further, and I would rate that as a B-plus territory.

Not a tremendous amount of pricing power, it is price sensitive, but you can make a good dollar and you can pump out good volume.

Washington DC/Maryland market ranks as a B, and even exhibited pricing power, while the northern Virginia/Washington DC market ranks as a D for dog for the last four weeks.

Prince George's County, Maryland, to the right of Washington DC, recently we're taking reservation deposits on some communities that we'll be opening there, is ranked as an A. So you can see how varied the volumes and demand are in Metro DC, depending upon which county you're in.

That's it for me, Margaret.

And so it seems like -- thank you for that.

If we go back and forth, I know it's kind of squishy, but it seems about the same as the last update you gave us.

And so, at what point do you think your cancelation rate is going to plateau?

Oh, gee, I hope it's plateaued now.

But 8.8, do you think that's -- is it coming down a little at all in the last couple of weeks?

We don't strike it weekly.

You can't do that in the way we do things.

I would think it is probably plateaued.

I agree with Bob.

Around the, kind of the 8.8 or the 6.5 minus --

I think the 8.8 may have been a little high because we had cancellations associated with some legal --

In Vegas.

-- issues, yes, in a couple areas.

Also the cancelation rate includes for us attorney review periods, so the people have given money and they have the right to rescind for three days or five days, and that's counted within the cancelation rate.

So cancelation rate, the reason I can't give you the answer is I don't hear about it.

If I had heard about it, I would tell you.

So, I don't think it's an issue.

Okay.

So, the last question I have, then, the share count that Joel gave us in his projections is kind of flat.

I am wondering why you don't keep buying a million shares a month.

Why don't we keep buying a million shares a month.

Joel?

The answer is we're doing about what we think we ought to do.

I think Bob covered it.

Our business is to grow the Company.

That's where we think we have to concentrate on.

Okay.

Thank you, guys.

You're welcome.

Yes, we did buy a million in February, though --

But she says, why aren't we buying a million a month, was her question.

Well, for the rest of the year.

For the rest of the year, I will let you know as soon as I make a move.

All right.

Okay.

Thank you.

You're welcome.

We'll take our next question from Karl Reichardt from Wachovia Securities.

Good morning, guys.

How are you?

Karl Reichardt!

How are you, Karl?

I'm well, Bob.

Just two questions.

One, Joel, just on the community count assumptions for the year, opening 140, closing 100: is there a concentration of either openings or closings in any of the next three quarters or is it generally evenly spread through the year?

We had some significant, in the first part of the year, openings in California, as we told you we would have last year.

So that for the year, we'll probably have a pretty good California count for part of the year, which is something we did not have last year.

We also have a significant number of Florida as a result of our Landstar acquisition.

Right.

I was just going to pull that off the --

You're right.

You have to keep your hand on the mic.

We'll pull out the schedule and see if there is anything else that pops out.

Okay.

And then just, Bob, the second question, just maybe the one or two markets where your sense is that the competition with speculative inventory coming back is most significant for you as you see it right now?

That the competition -- oh, I understand what you're saying.

Washington, D.C., perhaps Las Vegas, even though we're doing very well, I think we can feel the effect of the product coming back.

Orlando, in the single-family, not in the multi-family.

We can feel the impact of speculative play coming back into the market.

Okay.

Terrific.

See you next week, guys.

Thank you.

See you.

Thank you, Karl.

We'll take our next question from Ivy Zelman from Credit Suisse.

Good afternoon, guys -- [inaudible].

Ivy, your voice is so low.

Just a quick clarification, Bob, when you were running through the markets, are you primarily looking at absorption rates or some sort of sales pace for a community when you're opening the market there?

I am sorry, could you say that a little louder?

Sure.

When you're looking at the grades in a market, are you primarily looking at a sales pace over the last few weeks?

Yes.

Okay.

Any sense, if we were to look at the sales pace in a lot of your major markets versus, let's say, '04 or '03, are those rate of sales better than we would have had a couple years ago?

I don't have -- they're not better than they were, I am guessing, in '05 or '04.

Might be better than '03, but I can't be sure.

I just don't carry it in my head.

I am just theorizing.

That's fire.

Maybe this is a question for Joel, but if we think about your land position right now, do you have any sense of how much of the land was purchased prior to, let's say 2000, 2001?

Or any period you want to kind of throw out there, let's say, four years ago?

We don't have -- I don't have an age.

But the average community lasts five years in sales and takes anyplace from three to six years to get approved, so you can figure it out from that.

But I don't have an aging of the communities that are open and when we put them under contract.

Okay.

How about a similar question as to how much of the land that you buy you would buy free entitlement and how much would already have the entitlement.

Almost all the land we buy, like 99 or 95%, is fully entitled.

We enter into contracts without it being entitled and we employ our expertise in going through the approval process.

That's where we create, we believe, a tremendous amount of the value for the Company, through the -- taking the land through the tough approval process.

Because many of the sites that we buy are in pretty billed out neighborhoods, where the opposition to what we're going to do -- because we're taking away a visual amenity from the neighborhood, whether it is in a city even or in a very close-in a suburb or not is not relevant.

We still get the same number of complaints.

People come to the meetings screaming and hollering how bad it is that we're going to build these homes on this beautiful piece of ground, and it takes four or five years to go through the approval process on average in a great many of the states.

Yes, such evil people.

No, that's just human nature.

I don't think there is any of us that wants to see a forest or a corn field turned into a housing community, no matter how luxurious the houses are going to be.

Okay.

Thank you.

And I guess kind of the same question on the development side, most of that you would view the development on as well?

I'm sorry?

On the ground, once you do have -- you've officially purchased it, you would be responsible for the development?

Yes.

Yes.

We are the developer and the builder.

Okay.

Thanks a lot.

Stacy, I have another question from Mike Steinberg of Fact Investors: Please explain how Toll uses its size and volume to automate the building process.

About '86, I think, we opened our first plant.

We became our own lumber distributor, mill work distributor, window distributor.

We make our own -- we actually manufacture our own mill work.

We manufacture trusses, we manufacture panels, and stock hardware and distribute it to ourselves, and we have another plant in southern Virginia, right on the border with Carolina, and we have another plant we're just opening in Indiana right now.

Your second question I think I've answered, which is do we own any factories to pre-build structural components, and the answer is yes.

Is Toll moving to increase the energy efficiency of its homes?

No, not really.

I think we got there.

We concentrated on this back in '73, back in -- I think it was '76 or '77 there was a tremendous push in the late 70's, remember Jimmie Carter was wearing sweaters and telling us of our malaise, and since then I think we've had it pretty well down.

Most of the ceilings I think are 30s and the walls are, I'm guessing, 16 to 20 now.

So I think we're pretty well there on the energy efficiency.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Michael Rehaut from J.P. Morgan.

Hi.

Good afternoon.

Hi.

I was wondering if you could comment on cost of materials and labor, what you have seen in those trends year-over-year, if they're up or down and what you've built into your guidance for '06, and if there could be any upside there?

If they're down we're in trouble.

Materials have gone up for the quarter between 2 and $5,000 per region.

Is that year-over-year or sequential?

Just for the quarter, on average per house.

On average per house.

Do you have -- I don't think we have any labor information.

Because they tell me it is not that big, but I don't have the --

No, because we buy it on a piecework basis.

The 2 to 5,000 is up from 4Q '05 to 1Q '06?

That's correct.

Okay.

And as you get through some of the backlogs in some of your oversold communities and those markets moderate, would you be -- would you expect to see some of the crunch in materials and labor to ease a little bit?

Or -- how do you think about that?

We're not feeling a crunch.

If by crunch, you mean difficult to acquire.

Right.

I mean, that's what other builders have talked about in Phoenix or some tight markets.

In Phoenix, there is a tight labor market.

I am sorry, I thought you were talking just material.

No, there is definitely a tight labor market in Phoenix.

There is a tight labor market in Nevada.

I don't feel a tight labor market anywhere else.

Anybody else know?

No, we don't have it in California.

We produce very -- oh, yes, we have -- in those regions where the utilities are still -- but I think that's backed off pretty much -- utilities went over to the Gulf, to help out with the territories impacted by Katrina, we felt for quite a long time.

We might still have a residual of that in Florida for the utility people that went from Florida over to the Gulf Coast to help.

Okay.

And lastly, where did you end the quarter in terms of fully diluted shares?

Joel?

Hold on.

I'll get it.

A lot of paper here flying around.

We're actually consulting our release now. 167.027.

So that was the average for the quarter.

That's correct.

All right.

So the 165.4 for the second quarter, that is basically -- reflects the million shares repurchased up until now, but nothing in addition?

And it reflects the million shares and the fact that the stock price is lower today than it was on average for the quarter.

Okay.

Very good.

Thank you.

You're welcome.

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

Hi, guys.

Hi, Myron.

A little light [inaudible] -- good quarter.

Thank you.

Could you give us a little more color on your high-rise operations?

Sure.

We're building two towers in Singer Island in Florida.

One is half sold out.

One is completely sold out.

We have high density -- not a tower, but an urban five-story in Providence, Rhode Island, and that's completely sold out.

Recently opened a high-density in Chicago, tremendous demand, doing very well.

Just completed sales in another high-density railroad station urban infill thing in Chicago.

In Hoboken we're having a field day.

We're converting 525 units in joint venture, and we sell as fast as we can gain occupancy.

We completed the sales of our first tower in Maxwell House, which approximately looks across -- it is on the water as one of the 525 conversion, looks across at about 34* street.

Very well there.

Great pricing power.

We began our second tower at Maxwell, doing very well, great pricing powers.

Generally we sell five or six a week.

We have 270 units at the border of Jersey City with Hoboken.

We have about 100 left and ten months to go, so we're right on schedule, and we've been metering it out by raising prices.

We have great waiting lists for the other -- I think it is five towers that we're going to put up behind the Hudson Tea buildings that are right on the water.

Pretty great reservation list, that.

So -- is that it for -- oh, I'm sorry.

Wait a minute.

We haven't brought the sale yet, so I can't tell you how the sales are doing, but we look forward to pretty strong demand in Manhattan, in Brooklyn, in Long Island City, Queens, just over the border from Brooklyn, so we're pretty involved with towers now, and it feels pretty good.

Main Street in Arizona, yes, Residences on Main in Arizona, sales picked up there.

That's a tower.

No, we haven't started that.

I haven't put it out for reservations so I have no indication.

These markets are much stronger than most, aren't they?

Oh, yes.

Why would you theorize that they are?

Well, I think it is an issue of pent-up demand.

We always hear -- it's been forgotten about now -- but right now for instance there is tremendous pent-up demand building slowly, a tremendous amount of the market is sitting on the fence, waiting for the bubble to either let all its air out and finally burst or for the market to indicate that this is the bottom and to come back and then there will be articles written about how the fence sitters fall off.

In urban infill tower, especially in places like Hoboken, it just hasn't been done.

There has been no product forever built there, and there is a changing demographic.

Whereas ten years ago only one couple out of 1,000 would have thought to move back to a city with kids, today there is quite a few who are opting to move to an urban environment, get a larger apartment -- I'm sorry, they're condos now -- and stay in the city with a kid.

Furthermore, ten, fifteen years ago -- no, ten years ago, perhaps even five, very few people thought of an option of moving to a city instead of moving to Boca or Scottsdale or San Diego.

Today very many are opting for the urban environment instead of or alongside of going to West Palm Beach, et cetera.

So I think you've got a changing demographic which is pushing the tower business very strongly in the right location.

Don't you have to cope with the speculators there as well?

Yes.

You certainly do.

It is not as scary because you deliver the whole building at once.

You forbid the speculation of contracts, but as opposed to a housing community where you don't want a speculator to come in because the housing community will go on for five or six years, buy the home, not occupy it, and then go to market with it, and you've got competition against you in the job, the difference is when you're finished with a high-rise, you deliver them all at once.

So the speculator isn't as great a threat.

But the way we overcome the situation that we've seen others, and you learn from others' experience, suffer is that you make the deposit high enough so that the people can't walk away, in effect.

And we try and do that in our towers.

Okay.

Thank you, Myron.

Hope you get better.

Somebody wanted to know the average share price repurchased.

It was $30.17 in February.

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

Hi, Bobby.

How are you, Tim.

I'm doing fine.

Thank you.

Good, good.

A couple of questions.

Did you say that you said that -- you just said it really quick.

Did you say you saw some speculators coming back into the Orlando market?

No.

I'm sorry.

I misspoke if that's what I said, Tim.

What I said was in the Orlando markets, speculators are bringing their product back to the market.

Okay.

They bought homes, they were holding them, they're now dumping them.

Okay.

That seems more reasonable.

Okay.

Secondly, how much trouble -- obviously, I live in Boca.

It's nine months to a year to get a house re-roofed, an existing home.

How much trouble are you having getting roofing tile?

We're not.

You're not?

No.

Just a matter of price, Tim.

Okay.

And thirdly, I am just -- I sort of just feel, looking at your first quarter, that you're being quite conservative and just maybe Joel would want to go through this.

You've got 300 homes.

You got 300 homes to the positive in your first quarter and a 23% increase in earnings and higher margins.

You should have a fairly good second quarter just because you're backlogged.

You have 900 homes in addition into your backlog.

So you've got 900 plus 300.

So if everything stays flat, you should be up about 1200 homes, and I don't think your margins are going to be -- if they're down they're going to be down in the second half.

I think they will be up in the first half.

Why are you sort of suggesting the bottom end of your guidance could be a flat earnings per share?

Let me turn this over to Joel.

But Tim, I want to point out to both you and Joel that this must be round 47 in the heavyweight battle between you and Joel.

Joel, go ahead.

It's about 25 years.

We have estimated that delivered units will be between 9,200 and 9,900.

That's up from 8,769 last year.

We have a mix difference, as we settle in more homes in places like Florida which have lower profits than in less homes in California which have higher profits, so that has a reduction effect or -- on the gross profits from a home building business.

And our backlogs are longer on average than they were a year ago in terms of the ability for us to deliver our homes, so we're delivering slowly out of backlog because we sold further out.

Okay.

But now, Joel, let's go through this again.

Let's just take the middle of that, roughly 9,550, okay?

Which is up 800 units from last year, and yet you're up 900 units in backlog and you got 300 to the good in deliveries in the first quarter.

I mean, I understand this mix and you and I have gone through this many a time.

But it just -- I just don't see that much of a dramatic change, given the fact that you don't have that many spec units.

I would buy it if you had a lot of spec units.

Thank you, Tim.

Stacy?

We lost Stacy too.

I have received questions from Steve and Kim.

Am I still working here?

I apologize.

We'll take our next question from --

Hey, Stacy.

I just want to make sure that I'm still --

Yes, sir, you're still there.

Live here, as you say.

Welcome back.

Steven asks Bob two questions: Your guidance on deliveries in fiscal year '06 seem to suggest considerably more deliveries than orders, which is reasonable since conversion rates should rise as order pace weakens.

My question relates to fiscal year '07, however.

Do you believe that deliveries in fiscal year '07 could again meaningfully outplace orders in fiscal year '07?

I wouldn't think so.

I think we haven't yet addressed where we're going to be in '07.

We want to see how the community is opening up and how long a delivery time we have on those homes as communities open up.

I would think as we're starting up communities, unless we're in an area that's labor constrained, we should be able to deliver more homes out of a start-up community once we start to deliver, because we don't have the constraint to the backlog.

But that remains to be seen.

But I don't see it as -- not only meaningfully, I don't see it as outpacing orders in fiscal year '07.

And then Kim goes -- I am sorry, Steven -- it's Kim-apostrophe-Steven in this internet world.

I apologize, Steven.

It says: if not, this would seem to imply that deliveries in fiscal year '07 will be noticeably lower than fiscal year '06, yet the consensus estimate seems to incorporate higher revenues in fiscal year '07 than in '06, which seems too optimistic.

What is my opinion -- what is your opinion, Steven writes.

Is it very likely that fiscal year '07 revenues will be lower than fiscal year '06, even if demand merely recovers modestly later this year?

Thanks, Steve.

And my answer is, we think '07 should be better than '06 in terms of a whole bunch of things.

I hope that answers it, Steven.

Stacy?

Our next question comes from Alex Barron from JMP Securities.

Thank you very much.

Wanted to ask you, on the unit guidance I am assuming that doesn't include percentage of completion units?

It's just the straight, regular homes, is that correct?

That is correct.

Okay.

And then I wanted to ask about the gross margins and the towers.

It seemed that you were guiding towards about 20% gross margins.

Just kind of wondering why those margins are lower than your overall --

You have to build into your estimates inflation through the entire building process, and as required, because it takes 18 months to 2 years to build a building.

And if you end up with lower inflation than you've estimated, then the margins go up at the end of the delivery cycle, and so you will see, we hope, that margins will increase as we get closer and closer to delivery on a unit -- on a building by building basis.

But at the beginning we have to do some estimate of inflation for the whole job.

I see.

So we should see improving trends as each building comes to a close.

We hope so, yes.

Okay.

And the last question I wanted to ask was, you mentioned you're opening up a number of new communities in California.

And just kind of wanted to get a sense for where you think the average price is going to go in the orders as you open up those new communities.

I'm sorry.

You spoke and so did the question at the same time.

I apologize -- Northern California, Dublin, I believe.

He wants to know price.

I'm just trying to get a sense of the direction of the average price of orders in California going forward, given all those new community openings.

I think the average price probably goes down a little bit because of the mix, because we're opening many more multi-family units, very dense product, about -- anywhere from 30 to 60 to the acre.

Okay.

Got it.

Thank you.

You're very welcome.

We'll take our next question from the phone from Todd Vencil from BB&T Capital Markets.

Thanks very much, guys.

You said earlier and in the press release that -- in talking about the Washington, D.C. market and other similar ones, that they need to work through their excess supply before the supply demand imbalance once again tips in your favor.

That's right.

Do you have a feeling as to what the time frame on that working through might be?

Wish I did.

I really don't.

Sorry.

Okay.

That's fine.

And this one I guess is for Joel.

In terms of -- thanks for giving the guidance, as usual, on the percentage of completion and on the joint venture income.

But specifically with regard to the percentage of completion, is that -- the seasonality that we see or at least the changes that we see, quarter to quarter, in this year in your guidance, is that what we should take to be reflective of what you think the seasonality of the business going forward in '07 and beyond will be?

Or is that being unduly influenced by the growth in that business this year?

I think it is being influenced by how many -- we just started the business.

So as we open up new buildings they start slower and then as you get towards the end you get more dollars spent on the building and you get faster absorption.

So we have -- it's a result of the mix of how many buildings you have and what status those buildings are.

Okay.

So going forward, do you expect it to be a relatively -- will there be any visible seasonality or will it be sort of flat or will it just be unpredictable in terms of seasonality?

At this point I don't have any better guidance than I've given you.

Okay.

Thanks.

You're welcome.

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

Thanks very much.

I was wondering if you can talk a little bit more about your expectations that the cancelation rate has plateaued, given what we've seen in terms of the inventory of homes for sale up there.

It seems to be increasing still.

That would suggest that we may see more cancellations from people unable to sell their current homes.

So what is it that you're looking at to think that it's plateaued at this point?

What we're looking at is our experience of the past month, and we don't see an increase.

It's all I can say, Dan.

The facts you mentioned may indicate our future better than the experience we've had in the last month, but I can only speak to our experience.

Sure.

Okay.

Thanks very much.

You're welcome.

Then one follow-up-up.

Wondering about the margins in terms of the regional mix shift, you talked about sort of lower profits per home.

Is that a function of just lower average selling price or is -- what's the expectations for the impact on the percentage margin from the mix shift?

Joel?

There are certain -- the more difficult it is to get approvals, generally, the higher the margins are.

Florida is an easier state to get approvals, there's a lot more competition.

The margins tend to be lower than California.

We've had a switch where California has increased significantly and -- I mean, California has decreased in terms of our available product, therefore our deliveries, and Florida has increased significantly as a result of our acquisition and our expansion.

Thank you.

Thanks.

We'll take our next question from Joel Locker from Carlin Financial.

Hi, guys.

Hi, Joel.

Just wanted to get the orders.

You have a deposit, a reservation deposit of high single digits, I think?

Or -- just what exactly was it in the first quarter, if you have that?

We have to go through the nomenclature.

For us, a reservation deposit which runs anywhere from 1,000 to $5,000 generally is not a deposit on a contract.

A deposit on a contract runs $40,000.

So when you say reservation deposit, I am not sure which one of the two you're talking about.

So, just on the new orders, though, it's around 40,000, which is something like --

Yes.

-- 7 or 8% of the total purchase price.

Yes, that's the base deposit.

Then we go through options and take some more money.

And that's one of the reasons why you keep your cancelation rates a lot lower than the rest of the builders?

I'm sure of it.

Right.

And I was wondering, with weaker order numbers have you thought about maybe dropping that down to, say, a mid single-digits from a high single-digits to get more people in the door?

Rejected.

We would rather not be building houses on hope certificates and carrying the land that we think is going to be very good as soon as the imbalance, if there is one in the market, shifts our way.

Right.

And I guess California has a 3% maximum, or is that for the reservation or is that for the --

No, California is different than the rest of the country.

They have this 3% limit.

We take more than the 3% anyway, but we can't keep it without a significant fight in court.

But still, if you ask for more and get more, there is more reluctance to walk away.

Right, right.

Just going to be a fight.

But we're going to lose the fight in California.

Right.

And just on the [inaudible] for the 8% of the cancelation rate in the first quarter.

What percentage of that 8% did you recoup or retain the entire deposit?

Vast majority.

Joel spoke.

The vast majority.

The vast majority of it?

Yes.

All right.

Thanks a lot.

We'll take our next question from Greg Gieber from A.G. Edwards.

Hi, Bob.

Hi, Greg.

How are you doing?

Pretty good.

I want to dig into some of your assumptions on the percentage completion accounting.

Looks to me that -- you're assuming just a 20% gross margin.

Why are you assuming such a low margin?

Joel?

I tried --

I thought you answered that.

I will try again.

When you do percentage of completion buildings, you have to build into your assumptions of costs inflation for the two or three years that you have going forward before you deliver your building.

And so when you start out you have -- two years, Bob points out -- when you start out, you have what you hope is a comfortable inflation number built in, and then as you get closer to the actual delivery date, if you have an excess inflation number built in, you get to release that inflation number as you get closer and closer to delivery dates.

So we would expect that if we were right we would have higher margins later.

My understanding of percentage completion, having dealt with it in other industries, is supposed to be your projected forward revenues based on what you think inflation and on costs, so it should work on both sides, and if you think you can do a little better than 20% gross margins, maybe get up to 25, that strikes me as a rather poor investment to what you're doing in single family housing, because you have a much higher -- usually would have a higher amount of invested capital.

Joel?

You want to --

We have -- a house, the inflation on the sales price is for -- is units that are unsold.

So you're not picking those up because you haven't sold them yet.

And you're only picking up on the ones you've frozen the price by picking a contract that's binding.

To the extent you sell houses later on, that you have not yet sold, and you -- that you will maybe get higher margins on those units if the price goes up.

But you can't anticipate those on the basis of contracts you've already sold.

Well, that still leaves the question of the low margins and other companies on percentage completion do differently.

But is it just possible that you're keeping that low so you have a nice reserve down the track?

J'accuse, I think!

Joel, do you want to answer the accusation?

We give the best estimates we can, and some of it is a result of when people bought the land, if I bought the land 100 years ago, then obviously I have a very large land inflation.

We are newer into the business and so our land acquisition position is newer and we don't have as many years of land profits built into that number as maybe one of our competitors does.

Now, on the funds you receive are from the customers.

Usually, in many cases in high-rise half the total costs can be completed once the building towers out or at some pointed you make progress payments.

Do you have contracts structured that way?

I have no idea.

In Florida we get more deposits later on as the contract -- as the houses being built in New Jersey.

That is not the norm.

Not the norm to take progress payments.

Okay.

That's correct.

Okay.

The last question I have is on the southeast.

You said you had two structures there on Singer Island, but I noticed only 72 units in backlog.

If it is three quarters sold out that sounds awfully small.

And I notice you didn't sell anything in Florida.

Or is Singer Island off in a joint venture?

No.

Singer Island is not in a joint venture.

The first building is - they're both small buildings.

Okay.

So that's probably correct.

Thank you very much.

I have a question from Bob Guigliomi, and I am sorry if I miss pronounced.

Guigliomi.

Are towers counted as communities?

Yes.

What is your estimate for contracts in '06?

Do we give an estimate?

I don't think we go out on that limb.

No.

Thank you, Bob.

If I can, Bob, the joint venture contracts, the joint ventures on that counted as communities.

Okay.

Thank you.

I have a question from Gabe Kim: Hi, Bob.

Broadly speaking, can you elaborate on the "other opportunities to increase shareholder value" that we're referenced in your press release?

One thing that comes to mind is buying other builders.

We've done that about four or five times, very small acquisitions for the most part.

So, thank you Gabe.

Stacy?

Yes.

We'll take our final phone question from Rick Murray from Raymond James.

Hey, good afternoon, guys.

Just one question.

Bob, I wanted to make sure I understood your earlier comments.

When you were referencing kind of current levels of business, I am assuming you were referring to absorption rates when you commented about comparable to 2003, 2004 levels; is that right?

I am not sure what you mean by absorption rates.

Well, per community absorption rates in terms of orders per community?

Yeah, I was talking about just orders per community.

Okay.

And I guess in that context I am having trouble understanding your comments about your expectations for 2007 being up, if the current absorption rates are where they are, even if you grow your communities significantly and absorption rates stay where they are and don't deteriorate, I would seem to think you would have a much lower number of closings in '07.

I think what you're saying, simply, is that if we don't get moving with sales, with orders, then we won't have the homes to complete and collect the money on in '07.

Is that what you're asking?

That is correct.

I think you're right.

If we don't have the orders pick up, then we won't have the success in '07 that we think we're going to have.

Okay.

Thank you.

Thanks.

You're very welcome.

Stacy, are there any other questions?

No more questions from the phone at this time.

Great.

Thank you very much, everybody.

I appreciate your interest.

Good bye.

That does conclude today's conference.

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

Thanks, Stacy.

Bye bye.