托爾兄弟 (TOL) 2008 Q2 法說會逐字稿

Good afternoon.

My name is Tiera and I will be your conference operator today.

At this time I would like to welcome everyone to the second quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Thank you.

Mr.

Toll, you may begin your conference.

Thanks, Tiera.

Welcome, everybody.

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; Kira McCarron, Chief Marketing Officer; Don Salmon, President of TBI Mortgage Company; and Greg Ziegler, Vice President of Finance.

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, and many other factors beyond our control that could significantly affect future results.

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

We'll try to answer as many as possible.

Today we announced final results for our second quarter ending April 10, '08.

I assume you've seen the release, which we put out this morning and is on our website at tollbrothers.com, therefore I'll try and hit the highlights, make a few comments, and then go to Q&A.

In fiscal-year '08 second quarter we generated a net loss of $93.7 million, or $0.59 per share diluted.

This included pretax write-downs of $288.1 million, $85 million of which was attributable to joint ventures.

After-tax write-downs totaled -- after-tax write-downs totaled $174.6 million, or $1.06 per share diluted.

Excluding write-downs '08 second quarter earnings were $81.3 million, or $0.49 per share diluted.

For comparison, fiscal-year '07 second quarter net income was $36.7 million, or $0.22 per share diluted, including pretax write-downs of $119.7 million, $72.9 million, or $0.44 per share diluted after tax.

Excluding write-downs '07 second quarter earnings were $109.6 million, or $0.66 per share diluted.

In fiscal-year '08 second quarter total revenues of $818.8 million were 30% lower than fiscal-year '07's.

Fiscal-year '08's backlog at second quarter end of $2.08 billion was 50% lower than fiscal-year '07's and 13% lower than fiscal-year '08's first quarter end backlog.

Fiscal-year '08 second quarter gross contracts of $730.5 million and 1,237 homes were 49% and 39% lower respectively than fiscal-year '07's.

In fiscal-year '08's second quarter we had 308 cancellations totally $234.1 million, compared to 384 cancellations totaling $274.7 million in fiscal-year '07's second quarter.

Fiscal-year '08's second quarter net contracts after cancellations totaled 929 homes, or $496.5 million, which were lower by 44% in units and 58% in dollars than fiscal-year '07's.

The average price per unit of gross contracts signed in '08 second quarter was $590,000, compared to $711,000 in '07's second quarter and $634,000 in fiscal-year '08's first quarter.

The lower average price was due to a combination of factors: Higher incentives; a product mix, which included a higher percentage of contracts from active adult and other lower-priced communities; and fewer sales in high-price markets, such as California, where the market has slowed significantly and Manhattan, where we are temporarily sold out of available inventory.

The average price per unit of the second-quarter '08's cancellations was $760,000.

The effect of these cancellations, coupled with factors above, was to reduce the average price of net contracts in fiscal-year '08's second quarter to $534,000 per unit.

This compared to $580,000 and $557,000 respectively in fiscal-year '08's first quarter and fiscal-year '07's fourth quarter, and $710,000 on year ago in fiscal-year '07's second quarter.

We ended fiscal-year '08's second quarter with 51,800 lots owned and optioned compared to 91,200 at our peak at the end of the second quarter of fiscal-year '06.

We ended '08's second quarter with 300 selling communities compared to 315 at '08's first quarter end and our peak of 325 at fiscal-year '07's second quarter end.

We expect to be selling from 290 communities by fiscal year-end '08.

Maintaining a strong balance sheet is among our top priorities as we persevere through these tough times.

We hope to position ourselves for opportunities that should arise from the continuing severe down cycle.

We finished the second quarter with a 22.7% net debt-to-capital ratio, a record low, and over $2.5 billion of available capital, comprised of over $1.23 billion of cash, plus over $1.27 billion available under our bank credit facility, which expires in 2011.

Demand continues to be weak in most markets, as our clients worry about selling their existing homes or entering the market before prices stabilize.

In this difficult market we continue to develop incentive strategies, when appropriate, on a community-by-community basis, which has enabled us to continue to generate prewrite-off profits.

Although this strategy is a result of the slower sales, we believe it has helped sustain the reputation of our communities and value for our home buyers.

Now, Joel, please do the numbers.

Thank you, Bob.

Second quarter home building cost of sales as a percentage of traditional home building revenues before interest and write-downs was 75.2%.

This was higher than 2007's second quarter costs of sales of 73.1%, and higher than 2008's first quarter at 74.6%.

The decrease in margins -- or the increase in cost of sales from the first quarter was principally a result of higher incentives and product mix.

Second quarter interest expense was 2.8% of revenues, which is 30 basis points higher than 2008's first quarter and principally a result of inventory turning less quickly while there is less inventory under construction over which to spread all of the interest costs.

Interest expense as a percentage of revenues will probably continue to trend up slightly for the rest of the year.

The second quarter pretax write-downs were $288.1 million, which included $85 million of write-downs attributable to joint ventures and $7.2 million attributable to options, as we continue to re-evaluate, renegotiate, and in some cases walk away from options.

Approximately two-thirds of the second quarter write-downs, or $194 million, were in Nevada, Florida and California.

Second quarter SG&A was $108.7 million, approximately 13.3% of revenues, down from the $121.3 million, or approximately 14.4% of revenue we expensed in the first quarter of 2008, and the $130.4 million, approximately 11.1% of revenues expensed in the second quarter of '07.

Second quarter other income was $60.1 million, including approximately $40.2 million attributable to the proceeds of a condemnation judgment, $9.7 million of retained deposits and $7 million of interest income.

Given the lower investment rates available I would expect interest income to be lower in the next few quarters.

The effective tax benefit rate was approximately 20% -- 38% for the first six months and 39% for the second quarter.

The average number of shares used to calculate earnings per share was approximately $158.5 million for the first three months and $158.1 million for the six months.

The creation of projections is difficult at any time.

In the current climate it is particularly difficult to provide guidance given the numerous uncertainties related to items such as sales paces, sales prices, mortgage markets, cancellations, consumer confidence, and the potential for and the size of future improvements.

As a result we will continue not to provide earnings guidance.

However, subject to our normal caveats regarding forward-looking statements in today's release and in our SEC filings, as well as the caveats discussed above, we estimate that deliveries for the year will be between 4,200 and 4,800 homes.

The average delivered price for the year will be between $630,000 and $650,000 per home, which implies that the average delivered price for the rest of the year will probably be between $625,000 and $635,000 per home.

We believe that due primarily to incentives and slower sales paces -- sales per community, our cost of sales as a percentage of revenues before taking write-downs into account will be higher for the entire fiscal 2008 compared to 2007 and the third and fourth quarters, as well, and will probably increase in each successive quarter.

Additionally, we believe, based on 2008's lower projected revenues, our SG&A, which we expect will be lower in absolute dollars in each quarter of '08 versus '07 will be higher as a percentage of revenues, and because revenues may be more evenly distributed throughout the year may not show the normal decline in the fourth quarter as a percentage of revenues.

At this point I'll turn it back to Bob.

Thanks, Joel.

Now let me turn to my lobbying efforts.

As we all know Congress is considering many iterations of a housing stimulus and economy stimulus bill.

We believe Congress should try and jump start demand for new homes with an initiative that will bring buyers off the side lines and into the market, and thereby stop the downward spiral of home prices.

As we have said before, we favor a tax incentive for all those who buy homes within nine months of the bill's passage.

The reason for the nine months is that we think it's important to create a sense of urgency.

Interest rates are now low, supply is abundant, and a buyer's market clearly prevails.

With a little motivation the new home market could turn around quickly.

This would have a very positive impact on bank's, bond prices most importantly, and many other areas of the economy.

Once home prices stabilized Congress could then, in our opinion, more successfully address mortgage issues.

However, without stabilization of home prices, trying to address mortgage issues may be a waste of effort and money.

Just one man's opinion.

Now let us turn it over for questions.

Tiera?

(OPERATOR INSTRUCTIONS).

Your first question comes from David Goldberg.

Good afternoon.

Bob, I was wondering if you could give us your thoughts on what the competitive dynamics are at the high end of the market, what you're seeing from your competitors, smaller private builders, if you're seeing more distress and if you're seeing the banks start to act to possibly reclaim those assets or do forced sales or something like that?

We're seeing a little bit of bank activity.

Not much.

But we're not seeing much change from the competitors, private small builders.

They're still hanging in there.

As a matter of fact, they're forced to hang in even more than the public well-financed builders because they keep themselves going by building and drawing down, so we haven't seen them step back from the market.

We have seen in certain cases some negative impact from foreclosure bus tours.

Realtors offering a bus ride for those would-be investors or new home buyers take a tour through neighborhoods where there are foreclosures, and while the impact of that has been very, very slight so far, we'd like not to see it increase, of course, and we fear that it probably will.

So I guess my follow-up question is you guys obviously have a lot of cash now.

There's a lot of liquidity.

What gives you the confidence that there's going to be land that comes on the market that you're going to be able to buy the lots cheaply, relative to some other money that's out there.

There's obviously been a lot of money raised to try to buy dirt and if you don't find those opportunities come from increased bank pressure, whether it be on the small builders or it be on land developers, land sellers, what are the priorities for cash as you move past that?

Well, I'm not going to give priorities for cash past that.

The obvious answers you're aware of,.

but certainly at this point in time we wouldn't consider doing anything with the cash other than sitting there with it, waiting for the opportunities, or waiting to make sure that we have the ability to the extent possible to weather the storm.

The general -- generally accepted knowledge, if you call it, I guess guesstimate, is that this down cycle isn't going to go on for more than one year more or one-and-a-half, but it could go on for two-and-a-half or three, and we're going to make sure that no matter how long it goes, to the extent possible, that we're still here.

With respect to what will become available, I recall that you really didn't start to see a lot of stuff in '80 or '81.

It took until '82 or '83, oddly enough, which was when the market was getting healthy, for the stuff to be discorged by the banks.

The same phenomenon took place -- the market went bad the latter part of '87 with that 25% drop in the Dow on one day and '88, '89 really didn't see a lot of product.

We didn't see the product coming to us until '90, '91, '92.

On that measure we've only been into this for about two-and-a-half years, so we may not see the product -- a lot of the product coming forward for another year-and-a-half or two and we want to be there.

The banks are definitely tightening the credit but that's not what brings the product forward.

What brings the product forward is when the banks are instructed, as we believe they are now, by the regulators to take the assets back and put them on the block.

With respect to competing with funds that have been created specifically for the purpose, we think that we may, because of that, actually be able to do more than we would have before, because we believe that, from experience, from phone calls and conversations and meetings, a lot of these funds are trying to line themselves up with knowledgeable players.

They'd like us to put skin in the game, say 10%, 20%, they'll put 80% or 90% of skin in the game, but that gives us an opportunity to even leverage further the funds that we have available.

Thank you.

Thank you.

Your next question comes from Michael Rehaut with JPMorgan.

(Inaudible) for Mike.

A couple questions.

Number one on the JVs, it looks like your investment in unconsolidated entities actually went up by $40 million, but you guys also took an $85 million charge to the JVs.

Just wondering if you could provide some color to why that balance went up this quarter?

A, I can't -- I couldn't hear your question well.

B, even though I could hear it, I think it's a question for Joel.

Joel?

I'm not sure I have the answer to that question yet.

What's the question?

The question was, although we wrote off -- we had losses on our investment in joint ventures through write-offs it looked like the net impact was to an increase and that's because we've accrued some exposure for land purchases through the investment that we're going to make out of the joint venture as part of our investment rather than wait for the future.

It's a little bit of technical, but I don't think it's a material item.

So it's part of just the take-down schedule for --?

Yes, just a part of the joint ventures and it's sitting in one place versus another.

Okay.

Is the $85 million part of the [Inspirada] joint venture?

No comment as to which joint ventures had write-downs.

Okay.

Then, a second question.

On the SG&A, looks like you guys brought that down pretty nicely on a dollar basis.

Was that mostly just headcount reductions or are you guys doing some other initiatives right now in terms of cost cutting?

We're significantly, as you characterized it, being guided by other issues.

That is a very strong desire to survive, so we're trying to keep our production and management capabilities in line with what we think we'll need for the next year or two.

We're also being prudent --

Dropping headcount.

-- in other areas such as marketing and SG&A and advertising and other areas where we're being careful how we spend our money.

Okay, and then I guess I have a follow-up to that.

On the other cost side are you doing anything with your supply chain or any type of supplier initiatives that reduce that part of the business in terms of costs?

Well, the obvious answer you can state.

The funny answer ism yes, we're making trips to Saudi Arabia to try to get them to cut down the price of oil so that every other product that we use doesn't go up, but unfortunately, they haven't listened to us.

But with respect to the real answer, which is with respect to the subs, subs are pretty well back against it now.

They've been lowered for the last two years.

And the material men had been pretty cooperative, but they're at an inflection point where they haven't got a lot of room.

Subcontractors also have an additional burden of getting to and from the job sites.

Their vehicles, trucks, et cetera, are not high efficiency and it's I think going to be very tough from here on out to expect any lowering of square foot costs.

If anything, unfortunately, I think we'll be caught in a squeeze and those costs will go up a little bit, if not more than a little bit.

Certainly, that's the case with asphalt-based products, et cetera.

Thank you.

Okay.

Thank you.

Your next question comes from Ivy Zelman with Zelman & Associates.

Good afternoon, guys.

Can you hear me okay.

Hey, Ivy, the real deal.

How are you?

Good, thank you.

You know, I think that you're definitely in an enviable position because of your cash.

Yes, I'd like to --

-- overall balance.

-- so enviable, but go ahead.

One of the interesting things is, looking at some builders that have liquidated a lot of assets and sitting on a lot of cash and waiting for the market to get better and capitalize on all the opportunities everybody thinks are going to be prevalent, many might be in a difficult position to ramp back up if they don't have a lot of land.

So although you're criticized by some for having 14 years worth of land over the next 12 months, assuming closings in that 4,000 to 5,000 range, how much of that is finished lots, roughly, and how much is undeveloped?

And then I'll have a follow up on that related to the ability to ramp up.

Joel, do you know?

We own, what, 39,000?

Ivy didn't ask you what --

(inaudible) but then from the 39,000, out of the 51,000, you go to -- 35,000?

34,000 owned, but Ivy's question I feel was --

How much of it's improved.

How much it is improved.

We'll look that up in a minute.

I know we've got that because we give to it the board.

So let's just assume the question that -- let me ask you the question and then you can decide if -- and hopefully you can answer it with detail behind it, but let's assume that a portion of that is undeveloped.

One of the issues today is that improvement costs in some markets are actually higher than the cost of finished lots and we're trying to understand, as finished lot supply is coming to a diminishing level in some markets, like Las Vegas and/or Southern California, realizing what builders will do as a big conundrum of having undeveloped land that in order to develop it it would actually exceed the cost of finished lots and wondering if you're in a position where maybe the undeveloped land you can impair it to zero where other land sellers are not willing to lower prices.

I'm just trying to understand how it's going to all unfold because it seems as if it's a very difficult position for those that own the undeveloped land to be in when the improvement costs cost more than the finished lots are being bid for.

Yes, it's a conundrum all right.

With respect to how many lots that we have improve --

About 15,000 lots primarily improved.

So you have mostly --

I think the answer --

-- (inaudible) would be the unimproved stuff?

I'm sorry.

If I understood the numbers correctly 15,000 would be the improved finished lots as a percent of the total?

Prime -- we call them primarily improved.

They may not have top coats on or some other things but primarily improved, yes.

Okay, great.

So what do you do with all this undeveloped land, Bob?

Well, it's a simple mathematical problem.

It's not a philosophical or tactical problem.

You put your pencil to paper and obviously if you can buy lots for less than you can improve the lot you would probably buy the lots, but right now, we're not in that position.

We have plenty of improved lots, so we haven't reached a problem yet.

But you're absolutely right, if it costs you more to improve than it does to buy improved, why the hell would you improve a lot?

Even if you would --

I guess I'm trying to think of the way for you to beat it.

If you're in an advantage, I understand like in Las Vegas finished lots are definitely trading well below what improvement costs are and sellers are unwilling to lower the costs of the undeveloped land.

But if you're in a position where you own undeveloped land and you have it in your books on zero --

Right.

-- would it be still impaired because the improvement costs are still below finished lots or with a zero basis you actually can make the numbers pencil?

I don't know the answer to that yet with respect to some of the sites that we're on.

I know some of the sites definitely we still -- even improving at cut rate prices, you can -- it doesn't get you the value -- the low value that you could still go out and buy at.

Got it.

So with Las Vegas --

it's a big --

Las Vegas is definitely in a world of hurt and we're just going to have to muddle through that and sit and wait for people to want to go to Vegas again.

Bob, just a second area of discussion and I think you were always famous for your big checkbook post the RTC having taken control of all the troubled assets from the S&L crisis and you were able to really capitalize on that and drive returns for the next decade and many are sitting today, especially Wall Street, with private equity at unprecedented levels of liquidity available to do just what you did back then.

Right.

How does this unfold?

Everybody wants to buy the distressed assets and clearly the level of bids today are at fractions on the dollar and everybody's got pencilling the same numbers.

Like you said it's math.

It's pretty simple how you get there.

How do you see this unfolding with Wall Street just drooling to pick up these assets, competing with you?

Well, we've seen a couple of them where we've been outbid by the players that have raised the funds for this specific purpose and I hope everything works out for them because (inaudible) super well for me and what I've got left in the same territory.

But if it doesn't, you may see that this prolongs for quite a bit of time the problems that we've got, because if there's guys jumping in at $100 million, when we've assessed $60 million, and if we're right and you don't make a real living until you write it down to $60 million, then the guys who have bought it for $100 million who then have to go hire the expertise to develop and build and sell in order to get out of it, may prolong the problem.

So I don't know.

This is very philosophical speculation.

We're going to have to wait and see how it plays out.

Great.

Well, thanks for the thoughts.

I appreciate it.

You're welcome.

Thanks, Ivy.

Your next question comes from [Megan McGrath] with Lehman Brothers.

Hi, guys.

Hi.

Couple of questions.

Bob, I wanted to see if we could get any more color from you.

You mentioned the success of some promotions in the last couple of calls and when you have them, they work.

Just wondering if you can give us any more detail.

Have you changed the type of promotions?

We've seen some builders offer more financing incentives lately.

And as a follow up, is there any type of promotion that seems to be working in particular geographies but not in others?

No to the latter and there's many and various kinds of promotions.

The financing promotions don't seem to work best for us.

We offer them.

They're fairly inexpensive because you're at a mortgage rate of 5.875%, I think.

6%.

We're 6% today -- oops -- but the jumbos -- talking to Don Salmon -- as I understand it are at the same rate.

The agency jumbo loans, those in certain markets go up to 729, are at the same rate as the regular conforming loans today, on fixed rate -- on 30-year fixed rate.

Which is pretty terrific.

Is this the first day that that's happened or the second day?

Yesterday afternoon is when that --

Yesterday afternoon we reached -- what's the fancy word?

Equilibrium.

Equilibrium.

Parity.

Parity, right, between jumbos and what were known as conformings.

Because the jumbos up to 729 are now conforming so you can get a jumbo at 6% today, yesterday 5.875%, in certain counties and certain locations, right, as easily as you can get the 5 -- the limit used to be what, 419?

417.

417.

But I don't think the mortgage packages really do it.

I think the clients, especially our kind of clients, primarily are still looking for the personal satisfaction of buying a life's dream, making a statement with that home, and I don't think financing does it.

We had been able to motivate most effectively by combining exposition kinds of days where the builders, the project managers, the vice presidents, the mortgage people, the sales people are there to answer any of your questions with respect to anything, and while we're doing that we also offer for this week only a special of you get an elite room attached to your home for either your pool table or your swimming pool.

There's a garden room that you can have attached to your kitchen for no extra costs.

The subs have thrown in their labor for nothing, by the way, to help with these kinds of promotions.

Material men are giving us the product at their cost without even charging for delivery.

But as I've said in the past, you can drum up an awful lot of business but then the people go home and think about it and not as much sticks as we would ordinarily expect through ordinary conversion rates.

Okay, thanks.

That's helpful.

You're welcome.

And then just another quick one, if I could.

Just curious, a broader question, given where we are in the cycle have you seen any changes from governments or municipalities in your ability to get land approvals or entitlements when you want them or any movement in terms of things like impact fees?

No, we haven't.

Give me an opportunity for an advertisement here.

The local municipalities that govern zoning and planning in the northeast are just as stringent as they always were.

They didn't want to bend.

They don't want you now, not in my backyard still prevails.

On a county-wide and state-wide basis we've seen a change.

Those territories that are being driven by the larger -- what do you -- the larger areas of population especially have become more interested in working with in order to create some business.

There is talk in New Jersey, for instance, that the legislature may extend the permit times because generally when you secure an approval it's good for five years and if you don't start in five years, then you lose your approvals.

In the last recession Jersey extended those time periods and it appears as though they'd be willing to do it again.

They're discussing it anyway in their legislature and that's all I can say about that.

Thanks very much.

Okay.

Tiera, I have a question from Barton -- not Barton, I'm sorry.

From Philip Springs or Briggs Phillips.

I'm sorry for messing it up if I have.

In your first quarter fiscal '08 10-Q -- I can tell this is heading towards your direction, Joel -- you used the wording impairment charges and write-offs to describe the losses you generated during the quarter, although in your most recent second quarter '08 press release, you chose to use the wording write-downs to describe the losses you generated.

Can you please explain the difference between impairment charges and write-offs and write-downs?

Yes, I would say basically we're sloppy, not thinking as a good lawyer should, and there's probably on our part no difference between impairments, write-offs and write-downs.

There is no difference.

Okay.

I have a question -- oh, the second question from Briggs.

You exited first quarter '08 with capitalized interest of $227.7 million, which translates to approximately $83,600 a backlog unit.

Is this an appropriate way to assign the value of your capitalized interest?

If not, what is the most appropriate way to assign this value?

Joel?

It really is lot related, not house related alone.

Interest gets capitalized, all land in production as well as to houses in production, so land that's in production also bears its fair value and that's a little hard to get because then we'd have to break out the amount of land that's in production versus the amount of land that's not in production and we don't really do it that way.

So the right way is not -- you can't look at it backlog per backlog unit.

That would be misleading.

All right.

Briggs has other questions, which I don't think it's fair to address now.

Two to a customer is pretty good.

So Fred, if you'll call Briggs back afterward you can get to additionally, A, B and C.

Next question comes in --

No person.

We don't have any.

-- from Carol Fromus.

Bob, wanted to correct, though -- the question, where is that -- can you update us on the New York City market?

Yes.

Since we spoke last, which is about three weeks ago, I'm happy to report that Brooklyn may have demonstrated the fastest comeback in the real estate business and we're doing rather better there.

Hoboken and Jersey City, the six boroughs, are doing very well.

They were doing very well three weeks ago and they're still doing very well.

So the New York urban market is having a pretty good time of it right now.

Tiera?

Yes, sir.

Your next question comes from Joel Walker with FBN Securities.

Just on the deposit rate, I see it's up to about 9.8% of backlog versus only 6.4% at the end of the fiscal year.

Just wondering if there was something in the numbers or you're just significantly increasing the deposit percentage?

We're increasing the deposit percentage.

You'd have to be foolish not to.

So it's running like -- you're of demand of 10% versus maybe it used to be 6% or 7% or -- ?

No, that comes from California, which in -- California has laws on the books which limit you in liquidated damages.

Right.

However, there's a caveat that if you can prove your damage is greater than the amount that the California law provides, which I think is 3%, well, then you can collect it.

Well, obviously, in this market as opposed to a market where it was hard to prove damage because we were selling every house for more money, in this market we feel that we can charge a much greater down payment and there's other situations like that.

So we've just -- well, in Calif -- in Florida, for instance, where everybody was charges $10,000 or $20,000 we were being hit by our managers saying, if you want to be competitive you've got to get down there with these guys.

We didn't get quite down there, but we did go down below what we considered ordinary risk but what the hey, we were having such a good time you didn't really feel the risk.

All you did was slobber over the reward.

So as things go the other way, say, now let's right that.

We go back to our formulas for down payments and people come by and say, well, we're not going to buy from you because you're insisting on 7% or 8% down plus 50% of extras and the guy next door will take only $10,000 down, we say go buy from the guy next door.

Right, got you.

And just to follow up on the SG&A, it decreased around $13 million sequentially and what was the greatest decrease?

Was it the selling expenses or just the decrease in overhead?

Joel, do you know?

I think it's a combination of things.

Count of overhead people was part of the --

Compensation cost.

Thank you, Joel.

Compensation costs were the biggest savings.

Savings is a harsh word for that.

Reason for the decrease.

All right.

Thanks a lot.

You're welcome.

Tiera?

Your next question comes from Nishu Sood with Deutsche Bank.

Thanks.

First question I wanted to ask you was there's obviously been a lot of discussion about your pricing strategy in existing communities and your preference for a tailored community-by-community incentive approach.

I wanted to ask how you have been approaching recently your pricing on new communities that you're opening.

I imagine there's not as many as you had planned but are you saying like this was -- X was the price that we had originally penciled in but we're going to come in much lower than that to reflect the market conditions, so how are you thinking about that and approaching it?

A two-part question.

The first part, community by community is what we say on our releases.

I don't want to get into any more detail than that for a release, but the reality is the incentive-based programs that we put in place are house by house as opposed to community by community.

We go over it pretty thoroughly.

We are almost totally sold out of our speculative inventory on the single-family, multi-family townhome communities now.

We still have more than we would like on the larger density projects, but for the backbone of the business, we're way down to what we would have in good times for product that's built without being sold, one or two per community.

When we analyze the to-be-built for new communities or in existing communities we're satisfied taking less than we ordinarily would take in a good market, so we've got the product priced closer to costs than we had.

For instance, we may have been -- ordinarily have been expecting to make $60,000.

We'll settle to try and make $40,000 on that product.

So we're pricing it a little closer.

With respect to communities that are set to open, well, the answer I just gave you is the way we view how to set the prices.

We obviously want to create some decent demand to give the community a kick off and then be able to raise prices, although that's a tough thing in this market because people are so fearful.

Thank you.

Your next question comes from Carl Reichardt with Wachovia Securities.

Hey, Carl.

Actually [Niraj].

Thanks.

I did want to -- I've been canvassing some of the builders about their concept on foreclosures, although a lot of folks ask us questions about how foreclosures will impact your business and some CEOs have said that there's a disconnect given the transaction cost and time required to buy a foreclosure, relative to a new house.

Now you're building in a different price point --

These guys must be selling houses after two weeks.

Well, I'm curious at to your perspective --

I don't see that disconnect.

Yes, sure, you got to go through falderal to buy a foreclosed home as opposed to dealing with a sweet agent that -- sales people we have on site but I wouldn't say that's an overriding factor.

I'm not buying that.

Okay.

And from a -- when you're not moving spec units and you're selling from the ground up has there been a significant change in the options as percentage of the sales price that buyers are asking for or is that relatively (inaudible)?

That's maintained itself.

Those who want it pretty much at the same level.

Joel wrinkled his nose at me.

Go ahead, Joel.

I think that they're -- when we look at it a little further down, since we're including more free options as part -- Joe disagrees with me.

I just don't know.

He doesn't know.

It looked like it was slightly down because we have more free options included in some of the houses.

I forget about that.

Yes, that would be right.

So there was probably a small change.

Okay, great.

Thanks, guys, appreciate it.

Welcome.

Your next question comes from Timothy Jones with Wasserman & Associates.

Hi, Bobby.

Hello, Tim.

How are you?

I'm well, thank you.

Okay.

All things considered, that is.

(LAUGHTER).

First question, on the $40 million condemnation, how did that result and why wasn't it considered as an extraordinary item?

How did it result?

Yes,.

It resulted from a judge and jury's opinion -- actually, from a jury's opinion.

It's not the definition of --

Why isn't it extraordinary, Joel.

It's not a definition of an extraordinary.

If anything maybe I could have called it land sale but I thought it would be misleading to call it land sale.

So what did you call it?

We called it other income rather than call it land sale.

Why wouldn't it be -- it's a non-recurring item.

It sure is.

But it's not -- we have lots of non-recurring items that are not considered for accounting purposes extraordinary.

The definition for extraordinary is changed significantly.

Okay.

Well, this month is my 40th year as being a -- following the building industry and I've only heard this question once before, following up on Ivy.

In 1991 I asked [Chad Lier] when he was at KB how much his raw land was worth and he said it was worth nothing in those days because he couldn't pay the taxes.

You have this raw land and where you've talked about that you can't even -- you can't build on it just for the development costs, which probably in your case are 40% of the cost because you have high-priced land, but normally it's 50%, but the point is, if the land is -- have you actually written down land -- the raw land to below zero?

No, wouldn't that be silly, Tim?

Then what are you -- okay, then what is your -- no, it isn't silly because what's your alternative if you can't sell it?

Well, Tim, if I call you and say I've got 1,000 lots, would you like to buy them for $1 apiece, don't you think I'd get some interest here.

Let's not be silly.

The land is worth something.

It's not zero.

I'll make a standing offer right now.

You did find me the land that I can buy for zero, I'm a buyer.

So also, we're talking about very unique situations here.

Ivy was talking about Las Vegas.

I don't want to imply that that's a situation in most of our other territories.

Vegas has been pretty hard hit, but still you don't take the land to zero.

But it was a way of examining the philosophical questions that were being asked.

What if the land were zero and the improvements cost more than you could buy a replacement, what then, and the answer was, I don't know, what then.

Okay.

All right.

Well, thank you very much.

You're welcome, Tim.

Thank you.

Your next question comes from Alex Barron from [Agenson] Trading Group.

Thanks, Bob.

Thanks, Joel.

Hi, Alex.

Hi.

Wanted to ask you if you have some kind of a running count or a total of how many communities as a percent of your total have been impaired to date, whether it's once or twice, doesn't matter?

About a third.

Because some communities two years ago are no longer in existence I tried to do this number in total over the two year period of time.

About a third of our total population of potential communities have some kind of impairment, either to speculative homes that were in the -- that we had to mark down or to the land.

Some have had two write-downs.

And about a third of the third has had two write-downs.

Got it.

That's great.

The other question I wanted to ask you was --

you must be a short seller.

(LAUGHTER) Go ahead.

No, I mean that's a good answer is what I meant.

Okay, thank you.

Anyway, what I wanted to ask you, though, as a result of these previous impairments I guess your gross margins are probably a little bit higher than they would be otherwise.

So the question is, what would the gross margins have been if you hadn't had any impairment?

It hasn't been material and we didn't look at it yet this quarter.

In the previous quarters it ran between $10 million and $20 million maximum additional gross margins on the turnarounds but I don't have ask number for this quarter.

Okay.

(inaudible) thing about the impairment business is that you think you've impaired it so that now you can make 10%.

Well, unfortunately when you finally get around to selling the homes and making it doesn't come in at the 10% because you're impairing the stinking -- the stinky communities, the ones that -- actually they're not stinky communities but they're ones that are stuck in a rough place.

And 10% is Bob's non-GAAP language.

Yes, I'm sorry.

I'm sorry.

Okay.

Right.

My last question, Bob, was you mentioned in your prepared comments you thought it would be a good idea for Congress to stimulate demand of new housing?

Well, they're definitely on the case.

They want to stimulate the economy and they definitely want to do something for housing.

What I'm trying to suggest, Alex, is that going about it by trying to give money to FHA, a very brilliant man, Barney Frank, has authored and pushed through, it seems, legislation that gives FHA $300 billion of backing to go into the market to do its business.

All that I'm suggesting is that we're attacking it backwards, to try and attack the credit and mortgage problem first I think is the same as trying to get rid of strep throat with lozenges as opposed to antibiotics.

The problem is the down price in homes and if home prices go down, doesn't matter if you've given the guy a new mortgage and that mortgage is now dropped the price of the home by 20% and now you've given the guy a 90% mortgage so the guy's in at 72%.

If the house drops more than 28% from its original price, if it goes down 30% or 35%, which is not unrealistic in some of our markets, you've got the same problem back.

So what I'm suggesting is the way to attack this is to try and increase the price of homes and that only would come with demand.

It was done in '75.

Gerald Ford got together with a democratic Congress and passed a tax incentive where you got $2,000 right off your income tax bill if you bought a new home in a very short period of time and this got the economy spurred and going again and then you got out of the credit market problems.

So that's all I was trying to suggest.

But don't you think the problem is that there's excess supply and this would in turn cause more builders to start throwing more supply at an already over-supplied market?

No, I don't.

There definitely is excess supply.

(inaudible) If there weren't more supply than there was demand we wouldn't have downward price spiral.

We would have upward price mobility.

So obviously you've got more supply right now than you've got demand.

What I'm trying to suggest is that by giving a tax break you create demand that more than offsets the supply that you currently have.

It would not -- it will not take a lot for us to get into the same problem that we had before where supply couldn't meet demand.

I don't think it's as bad as it's scored up to be, because only so many lots have been going through the approval meat grinder in the last -- certainly in the last couple of years you haven't seen anything go through.

Right.

Okay, thanks.

You're welcome.

Your next question comes from Jay McCanless with FTN Midwest.

Hey, good afternoon, got two questions for you.

On -- the first one I wanted to jump back to the JVs and if I understood the 10-Q from the first quarter correctly, there's approximately $350 million potential additional investments that you might have to make into the joint ventures you participate in.

Did the flow of funds -- with the $40 million increase from last quarter to this quarter and then $85 million write-off, did any of that reduce that potential $350 million investment you might have to make?

The three -- the biggest portions of the $350 million were commitments we made to our partners -- Joe, correct me if I'm wrong -- commitments we made to our partners that if we were to do certain things -- for example, we have a joint venture in New Jersey where it's right now just raw land and we can give it back to the land seller, get our money back plus interest, if we go forward and if we can't find financing and we agree to go forward without financing, we've agreed to fund our -- both partners have to agree to that.

We've each agreed, if we both agree, to fund our share of those funds, which would be roughly $145 million for Toll on that community I think was the number of.

We don't expect that will ever happen, but as a legal responsibility we have made a commitment to our partner that if both of us agree at some time in the future we will fund that.

So you can't just look at that number and assume it is an absolute liability to fund.

It is not.

Okay.

But the potential, even though it may never happen there's still roughly $350 million until could be at play at some point?

It could be but it would require both us and our partner to agree to it and it's unlikely that we would agree to fund something that's under water.

Okay.

It's not a bank decision.

Okay.

And then my second question is a bit more hypothetical.

I know a couple other people have discussed what the intrinsic value [will end] and I think that's what a lot of people are trying to figure out now is, if you had to go back and repermit the 51,000 lots that you have on the books now, have you all ever thought about or could you give us an idea of what the cost magnitude over what you originally paid to do that is and how much more difficult would it be now to go back in and get that land back up to spec where you could start building homes on it.

Could you all maybe address that a little bit?

Yes, it would be very difficult.

The process ever year becomes more and more difficult, so I'm not -- I would guess that you couldn't replace some portion of it.

You couldn't repermit it.

But I have no numbers.

In New Jersey, as an example, it may take six or seven years on average to get an approval.

It would take a lot longer than that if you're in the high lands, if you're in the low lands, if you're in the pine lands.

There's one spot somewhere that's been designated for a permit but nobody can find it, so -- the permits in Jersey are pretty valuable.

The same thing is true of Pennsylvania and New York, Massachusetts, and it's gotten a lot tougher in Virginia.

Maryland is very tough.

Okay, great.

Thank you.

You're welcome.

I have a question from Doug Weiss.

At the beginning of the call you suggested markets could rebound quickly under the right circumstances.

Is a quick recovery possible in Florida?

Probably not because of the extent of the inventory, but still a lot quicker than people believe.

And California?

Again, a ton of inventory in California but not as much as Florida in terms of already approved ground.

In my opinion California could turn more quickly.

Given inventory levels and ongoing foreclosures?

Yes, same answer.

Tiera.

Your next question comes from Eric Landry with Morningstar.

Hi, fellows, thanks.

Hi.

I understand the gain was some land in Scottsdale, am I correct in assuming you received $82 million bucks for that land?

Not counting interest.

With interest it was $91 million, something like that.

Okay.

And have you received the cash for that?

Roger.

Okay.

We had received a significant portion of that cash many years ago in the first condemnation process, part of the process.

Okay.

So then do you have any preliminary number for cash flow, excluding the payment for that land in the quarter?

No, you can work it out.

We don't do it that way so you could back into it.

Okay.

And then last question on the JVs, am I understanding correctly that you did not have any remargin payments or loan-to-value payments or anything like that in the quarter?

That is correct.

Our JVs do not include remargining.

Okay, okay.

And Bob, real quick, just philosophically, these JVs have been sort of a problem for the industry for the past year or two.

Was wondering if I could get your thoughts on how these JVs may look in the future or how the industry may resolve -- the industry as a whole may resolve this whole JV thing going forward?

I think the JVs are, from your question, being looked at in the wrong light with a wrong analysis.

JVs are not something different than the ordinary play of the home building business.

You put money down, you take ground through an approval process, you close on the ground and you build models, you build -- you hope to get orders, you build homes, you settle homes, you make a living.

The JVs came about because there were large tracts of land that were greater than we wanted to invest in by ourselves and that was true also for all the major players.

We all know one another.

We're all bidding on the same piece.

A fellow comes to you, one of the guys -- it wasn't me, but it could have been -- oh, it was me in another case -- and says hey, do you want to take 15% or 20% of this deal?

I'll take 15% or 20%.

Another guy will take 15% or 20%.

Let's get five or six of us together and then we can do this multi-hundreds of millions, almost $1 billion residential development that can't miss -- Phoenix and Vegas or whatever, growing at -- we bought our own BS, but it seemed at the time to be a good idea.

That's all the JVs represent is buying more than you would have bought if you were on your own.

So what do you think about the leverage aspects of these things right now, currently?

They were leveraged -- if you bought on your own -- when Toll Brothers went to buy they were leveraged, in effect, through our individual borrowing.

Here you went out and borrowed on the deal, which made it more attractive because that was off balance sheet.

Everybody's got 15%, you've got six guys, nobody's got the on balance sheet tally so it makes your balance sheet look a little better.

That was another incentive, which surely will be remembered as not something to be thought of again as an advantage.

Right.

Although wait until we get to the top of the next up cycle and we'll make the same mistakes.

At any rate it's not going to be back for a while, I mean, it's something --?

No, it would appear for a while, but --

Yes,I agree.

-- how long is a while?

I don't know whether we're talking three years, five years or ten years.

If it doesn't --

That is the tricky question and nobody's got the answer.

Okay.

Thanks.

You're welcome.

TIera?

Your next question comes from Jim Wilson with JMP Securities.

Sorry.

Good morning, guys -- or afternoon.

Hi.

I just had one little follow up and I might have missed it at the beginning of the call.

I missed the first couple minutes.

But Joel, your margins [ex] impairments, both what they looked like in the quarter and what they're shaped up to be in the backlog, could you give a little color on that?

We didn't give backlog, we just indicated that margins for the next two quarters probably higher than -- probably higher than they were last year and sequentially higher than they were this year -- for this second quarter and they were up -- margins will be higher -- lower, rather, I'm sorry, costs will be higher.

It's the other higher.

Yes, the other higher, okay.

Costs will be higher -- sorry, thank you -- and we don't give estimated margins on the backlog.

When we get delivery we'll give you the margins.

Until we get it we don't count it.

Okay.

And so what did the margins ex impairments relative to gross margins, because -- look like for Q2 then?

75 -- 24.4?

24.4.

24.4, great.

Okay, thanks, that's all I have.

You're welcome.

Nice speaking with you again, Jim.

You have a --

Tiera?

You have a-follow-up question from Ivy Zelman with Zelman & Associates.

Here comes the tough stuff.

Hey, guys, it's actually Alan on, so don't sweat too much.

Just a quick follow up.

I think you were talking a little bit about the COGS breakdown in terms of some of the material costs your seeing and labor, just wondering if you can give some year-over-year numbers on -- in terms of what different materials and labor are up or down versus a year ago?

I'm not equipped to do that.

Anybody here.

Yes, we have it.

We do, good.

Wow, I'm im --

We have -- total overall costs are down.

Lumber costs, it'll vary place to place, but lumber costs look like they're down $3,000, $4,000 a house year over year and for the second quarter the average price of a house for materials and labor looks like they went down a couple grand.

Not much.

Couple grand just for the second quarter.

Oh, for the second quarter, okay.

But as I suggested, I think that's going to come to an end.

We may be at the bottom of something and it's a decreasing price -- costs for home building.

So if lumber is down $3,000 to $4,000 and the total costs are down a couple grand, which components are up to offset that?

I think Bob indicated things that are --

Asphalt?

Asphal -- petroleum related.

Okay.

Sure.

And also probably copper and concrete.

Copper, steel, concrete, where's drywall?

Next quarter we expect it to be up.

Next quarter up but for the past quarter it was -- down a couple hundred dollars a house.

That makes sense.

Great, thank you.

You're welcome.

Tiera?

Next question comes from Timothy Jones with Wasserman & Associates.

Hey, I heard this guy before.

Tim?

See I was right, Tiera, he left.

Tiera?

Yes.

Timothy, your line is open.

I'm here.

Can't you hear me?

Yes, I can hear you well.

Oh, okay.

Just a question, you may have covered it in the first ten minutes of your call and I missed.

Of the $85 million of JVs, obviously all your JVs around the New York City area are doing well.

Where were these write-downs?

Where do they take place?

We did not specify.

We don't talk about individuals write-downs of JVs.

Joel, come on.

Well, I tell you what.

Call Joel, cross-examine him and do what you want to do with him, Tim, but there it is.

Okay.

Thank you.

You're welcome, Tim.

Tiera, I think we're going to sign off.

Is there one more question?

There are no further audio questions at this time.

That is great.

How'd I pick that?

How do you like that?

Well, thanks everybody.

Appreciate it.

Tiera thank you very much, too.

Thank you, sir.

This concludes today's second quarter earnings conference call.

You may now disconnect.

Thanks, Tiera, bye-bye.

Good-bye.