托爾兄弟 (TOL) 2008 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Toll Brothers' third quarter earnings conference call.

All lines have been placed to 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.

Thank you, Nicole.

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; Don Salmon, President of TBI Mortgage Co ; 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 email questions to rtoll@tollbrothersinc.com.

Today, we reported final results for our third quarter ended July 31, '08.

Since our release is posted on the internet, I will just touch on the key results.

The third quarter '08, we generated a net loss of $29.3 million or $0.18 a share diluted.

This includes pre-tax writedowns of $139.4 million.

Excluding writedowns, fiscal year '08 third quarter earnings were $55 million or $0.35 per share diluted.

In fiscal year '08's third quarter revenues of $797.7 million were down 34%.

Third quarter backlog of $1.75 billion, was down 52%, and net contracts of $469.9 million were down 35%, versus fiscal year '07's third quarter.

We ended our third quarter with over $1.5 billion in cash and over $1.3 billion available under our bank credit facility, which matures in March 2011.

Our net debt to capital ratio at third quarter end was 18%, our lowest level.

We trimmed our land position by 47% to 48,500 lots owned and optioned compared to 91,200 lots at our peak at fiscal year '06's second quarter end.

It appears that per-community traffic and deposits at our sites over the past several months have been stabilizing, albeit at historic lows.

It also appears that conversion rates for nonbinding deposits to signed contracts have returned to more normal historical ranges this quarter, although absolute deposits are still very low.

We also note that our 195 cancellations this quarter, although greatly elevated from our historic norms, were the lowest in nine quarters.

I don't mean to suggest that things can't get worse, but it is worth noting some sunlight during otherwise stormy conditions.

We observed that these indicators have occurred in the face of a particularly difficult year that has included explosive energy price increases, rising unemployment, and severe mortgage and credit conditions.

Even so, we believe there is pent-up demand.

When we have held promotions, many more buyers than usual have come out and put down deposits.

We are now completing the third year of the worst housing market since we started the business in 1967.

Weak consumer confidence as kept many potential buyers from taking advantage of the current buyer's market.

Tightened mortgage lending standards have sidelined others.

Single family housing starts have decreased by approximately 65% from their peak in January '06, starts now stand at their lowest level since January 1991.

We believe that most public builders have sold off most of their spec inventory, which eventually should help stabilize home prices.

However, we currently have to contend with foreclosures as the new low-priced competition.

Once the supply of foreclosed inventory is exhausted, we believe that favorable demographics will kick in, and the housing market in general will begin to recover.

Unfortunately we can't predict when that will occur.

These beneficial demographics include a projected continuing increase in household formations and the number of affluent households.

Baby boomer demographics should provide a basis for greater demand for second homes.

A maturing generation of echo boomers will be positioned to seek the American dream of homeownership, and continuing growth in immigration should contribute to the demand for housing.

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

Joel?

Thanks, Bob.

Third quarter home building costs of sales as a percentage of traditional home-building revenues before interest and writedowns were 76.5%.

This was higher than 2008's second quarter of 75.2%, the increase in costs and decreasing margins from the second quarter was principally the result of higher incentives and product-mix changes.

Third quarter interest expense was 2.9% of revenues, 10 basis points higher than 2008 second quarter, principally a result of inventory turning less quickly, and less average inventory under construction over which to spread costs.

The third quarter pre-tax writedowns were $139.

4 million, which included $33.4 million of writedowns attributable to joint ventures, $9.7 million attributable to options as we continued to reevaluate, renegotiate, and in other ways reduce options.

More than half of our third quarter writedowns, approximately $75 million, were in the West.

Third quarter SG&A of $103.1 million, approximately 12.9% of revenues, compared to $108.7 million, approximately 13.3% of revenues expensed in the second quarter of 2008.

And $131.7 million, approximately 10.9% of revenues expensed in the third quarter of 2007.

Third quarter other income of $20.6 million, including approximately $9 million of retained deposits and $8 million of interest expense.

Given the current low interest rates available, and lower cancellations in the third quarter, and the expected lower ancillary business income, we expect that the fourth quarter other income will be lower than the third quarter's.

Effective tax benefit rate was approximately 39.3% for the first nine months and 46.5% for the third quarter.

The average number of shares used to calculate earnings per share was approximately $158,800,000 for the 3 months and $158.4 million for the nine months.

The creation of projections is difficult at any time.

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

As a result, we will continue not providing for earnings guidance.

However, subject to our normal caveats regarding forward-looking statements in today's release in our SEC filings as well as the caveats above -- or before, deliveries for the fourth quarter are estimated to be between 850 and 1,050 homes resulting in deliveries for the year to be between 4500 and 4700 homes.

The average delivered price per home for the fourth quarter is estimated to be between 640 and $650,000 per home.

We believe that due primarily to higher incentives and slower deliveries per community, our prewritedown cost of sales as a percentage of revenues will be higher in 2008's fourth quarter than in 2008's third quarter.

Normally, SG&A as a percentage of revenue in the fourth quarter is significantly lower because the fourth quarter revenues are generally higher than other quarters.

However, as I described before, we are estimating that fourth quarter revenues will be lower than the third quarter revenues, and accordingly, we expect SG&A as a percentage of revenues to be higher in fiscal -- if fiscal 2008's fourth quarter than in the third quarter.

At this point I turn it to Bob.

Thanks, Joel.

With our land teams intact and significant capital available, we believe we're prepared, as in prior downturns, to take advantage of opportunities that will arise from the industry's distress.

We believe these resources combined with our experience management team, our diverse product lines, our brand name, and the tremendous dedication of our associates position us well as we plan for the future.

Now Nicole, let's open it up for questions, please.

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question from Michael Rehaut of JPMorgan.

Hi, thanks, good morning, everyone -- or good afternoon, I guess.

It's morning, somewhere, Michael.

How are you?

I'm all right.

First question just on the -- you mentioned towards the end of your talk, Bob, about, obviously still being in a good balance sheet position to ultimately take advantage of good deals.

Last time we spoke -- or last time you have spoke on a conference call, I believe you had said that -- you know, you are still not there yet, by and large.

I was wondering if you could give us a feel for -- if that's still the case in terms of if there is still kind of a paucity of --

No, it's not the case.

It's starting to come out of the woodwork.

We have had meetings in the last two weeks with three major banks with their REO teams, workout squads.

We're getting lists of properties.

We're getting lists of notes, so it's starting to loosen up.

It's not yet where it was in '91.

I would suggest that it's probably equal to where it was in '90, so we're starting to see some product.

And would you say these deals are kind of smaller in nature?

If these guys are kind of just closing on home by home or asset by asset --

Obviously home by home.

We're not looking at -- not looking at opportunities, and I don't think the deals are smaller than usual.

As matter of fact, they may be even a little larger.

Geographically, where -- where are you seeing it?

More so in the West, and the South than in the Northeast.

The Northeast we haven't seen a lot, some, but not a lot.

The Midwest, we haven't seen a lot yet.

Primarily West and South.

And so you are look at deals in the hundreds, I guess in terms of units; is that fair to say?

Well, we'll look -- depending on where that deal is -- if it's in the neighborhood where we are, we'll go down to 24 or 25, if their prices -- our normal product is priced, which is $700,000, and anywhere up from there.

Thank you.

You're welcome, Michael.

Your next question is from Ken Zener of Macquarie.

Good afternoon.

Hi.

Two questions.

One, your implied closing in 4Q suggests out of 36% conversion rate of backlog, which is down a bit from the 48% we had in the third quarter.

And two weeks ago you kind of talked about the rising conversion rate related to subs working quicker.

Can you describe the anomaly or what makes the conversionary job so much in the third quarter?

Is that the range we expect in that tough 36 to 45% range normally?

Joel?

I think it varies significantly quarter-to-quarter, and the 48% would imply a six-month delivery time, and that's a little tight other than spec units, so I would think that you probably are talking in the -- kind of the range that we reported this quarter as being normal.

The big difference comes whether we have a lot of high density product coming on board, where you make a lot of deliveries quickly in a high-density community, and that -- you have to be you have to use our guidance to be able to estimate.

You are not going to be able to do that --

Right.

So that range is just what we have to accept.

All right.

The second question, not looking at rating card here.

But can you dig in to two different markets being Philadelphia and D.C.

which are in your midatlantic and kind of focus on the traffic and absorption trends as well as margins that you've seen?

Because the Philly market is much more established, much more infill relative to the D.C.

market that I had been, I think, overbuilt.

Can you talk about how those two markets which are your largest, differ from each other?

Yes, D.C.

by far is our largest market and is not doing as well as the Philadelphia suburbs.

Philadelphia suburbs is -- it's back to that old WC Fields joke.

First prize one week, second prize, two weeks.

It's slow and steady.

But since it didn't see the tremendous ups that Washington, D.C.

saw, it doesn't see the downs that Washington, D.C.

experienced.

So in general, things were better in the Philadelphia suburbs than they are in the suburbs of Washington, D.C..

Is that reflected in broad price -- margin differentials?

Joel?

No, I think historically, we have done better in Virginia -- or as well in Virginia, because we have been able to buy large tracts of land at better pricing.

You generally buy smaller tracks of land in Philadelphia.

Right now I think that's probably right.

Philadelphia is as good or better than Virginia.

As far as margins.

Yes.

Yes, we give away less in order to make the sale.

The election kick that's coming up should help the D.C.

market, since both parties espouse a need for change, that means change in people.

Traditionally, everybody that's changed out becomes a consultant and stays, and a host comes in and there's a need for more housing, so we -- we look forward to getting through the election and seeing what result comes to the D.C.

market.

Nicole, I have a question from Briggs Phillip.

Of the approximately 48,500 lots owned and optioned at the end of '08 -- third quarter '08, how many do you own?

The answer is 32,900.

What percentage of your currently owned lots were purchased during or after 2005?

Good question.

I don't know.

Does anybody here know?

No, but I think the question was probably meant to be put under contract after 2005?

Yes.

I'm sure that's what he meant.

And -- we don't know.

I don't think it's a lot, but we don't know.

Well, I wouldn't go out --

2005 and 2006.

After 2000 -- yes, you are right.

We didn't put a lot under contract in 2006.

Well, that we haven't shed anyway.

So thank you, Briggs.

Nicole?

Your next question from Nishu Sood of Deutsche Bank.

Thanks, hi, everyone.

Hi.

Wanted to ask about foreign buyers.

Your product more than I would say the other public builders suited to a foreign buyer.

So I was wondering if you could help us understand how much, tail wind benefit you might have gotten from foreign buyers in the last 12 months or so?

And if you have seen any drop off as the dollar staged a rally here?

Not much referring to last year for foreign buyers, and therefore, no noticeable drop-off because of the change in currency ratios.

Percentage wise where do you think it would be?

Anybody?

Low -- I would think 5% would be high.

You think foreign buyers 5% is high, says the head of our mortgage co, who is more likely a good touch and feel for this than the rest of us.

Yes, Florida is higher naturally.

But it is still not high in Florida for us.

Got it.

Second --

Not that we haven't tried.

We've sent advertising dollars over to England, Germany and France, we hooked up with some Realtors, but we don't see that much success.

Go ahead.

And, yes, second question, a lot of people compare the opportunities that might arise -- you were kind of mentioning this, to the early '90s, and RTC days, and certainly that benefited you a lot last time around.

Right.

I -- what I'm thinking of here is that there's -- it's a totally different landscape from a buyer perspective.

I mean just so many people lined up on the sidelines ready to deploy capital, just kind of chomping at the bit really.

And do you think that means that you might have any more opportunities this time around, but that the pricing -- it just might not end up being as compelling as it was last time around just because of the competition.

I think you made a good point.

The last time around there weren't a bunch of hedge funds stoked with mucho dollars waiting to jump on deals, and today that does exist.

However, hedge funds don't have the power and experience to go do the development if development is need, and certainly to enter in to the home-building business to, you know, deploy marketing in sample homes and then to complete the product and deliver and especially take care of the warranty.

Yes, we have more competition -- a lot more competition than we had in '90, '91, '92, but that competition we have got still can't execute without teaming up with a builder, and I expect we'll see some of that teaming up occur in the next six months.

I guess the same way --

Go ahead, Joel.

I think the point that you should think about is there has been a lot less land probably in the last couple of years put in to the supply pot, the approval portion, and the hedge funds aren't really going to be able to get those new approvals up any quicker than we could, in fact a lot slower than we could.

So there's likely an opportunity for guys like us to take advantage --

I think what is being referred to is the stuff that's ready to go.

Go ahead.

Don?

Nicole?

The next question is from David Goldberg of UBS.

Thanks, good afternoon, guys.

Hi.

Bob, I was wondering if you could give us some more color around this idea of the stability you are see in your markets from a down-payment perspective, and from a traffic perspective.

Is that a constant price?

You finding that incentives and price discounting through the quarter had to keep increasing to keep the sales pace?

No, that's a constant incentive.

The specials that we run, we run a lot more frequently than we used to.

Used to have a Toll advantage day once a year, now we run specials to the same regions, probably once every three weeks on average, because that has shown itself to be the best way for us to get deposits.

So do you think it's an issue more of you guys taking market share, maybe from competitors who are increasingly not able to get financing, some smaller private builders, or it is really kind of a bigger wave of demand in general then?

I don't know.

Increased activity because of that level of activity, so we're not doing better than we did last year.

Oh, yes.

But it's not deteriorating demand anymore?

That's my point.

Yes.

Albeit, as I said at very low levels.

Last several months we have appeared steady in deposits, and we have appeared steady in traffic, again at abysmal levels.

Our conversion ration on our deposits to agreements of sale and meaningful deposits that we keep if you back away, has returned to normal to -- to normal rates, and that's encouraging, but -- I don't mean to imply to anyone that this -- this little bit of sunshine that we're seeing indicates that you can expect a good time soon.

There's no indication of that.

Got you, and I guess the follow-up question was, what kind of foreclosure activity are you seeing around your price points and the pressure that's causing for you?

Especially in the markets that are most beset with problems, let's take Las Vegas for instance, but Phoenix, most of the Southwest, the West coast, California, we're seeing this as meaningful competition.

We're able to beat it to some extent in that it's a used home for the most part, and there is a differentiation between new and used.

There's a substantial market out there that just wants a new home.

Nevertheless, whereas you can beat that used home on the basis of 12 to 15%, if it turns out to be 35 or 40%, you got a pretty tough road to hoe, and I think we have to fight our way through a bunch of foreclosure before we come out the other side of this storm.

Great.

Thank you.

You're welcome.

Your next question is from Ivy Zelman of Zelman and Associates.

Is this Ivy?

This is Ivy.

How are you Ivy?

Good.

Thank you.

Just a quick housekeeping item.

If you could tell us your land spend for this year versus last year.

Joel?

It will come out in the Q.

You don't know it before the Q?

No, I don't --

Sorry, don't have it.

Okay.

That was easy.

But let me ask, I guess, a more difficult question.

You indicated you saw stabilization throughout the last few months which actually contradicts quite a bit from what we had seen, at least relative to the surveys there we do with June -- let's just say the first five months of the year holding steady, and then June, July stepping down for absorptions per subdivision in many parts of the country, especially out West and even former markets that formerly weren't that bad, for instance in Charlotte.

If you can give us the typical Bob overview, but we certainly are in aggregate are surprised to hear you say stabilization.

And then secondly, more recently in some of the survey work we're doing, we hear that appraisals are becoming a big problem for builders, because there is so much distressed foreclosure activity.

They are the comps, and we hear about builders having people sitting at the closing table and appraisals are coming in below contract pricing which is obviously forcing prices down and/or a lost sale.

Wondering if you dig deeper in to the Toll operations if you are seeing that, or if you are unfortunate and not seeing the same impact.

In reverse order we are unfortunate, and fortunate.

The unfortunate is that we are also witnessing in the more depressed markets, such as California and Nevada, the appraisal problem.

We have got a deal for $500,000 as an instance, client is ready to go to the table, purchased a home at $500,000, has a $400,000 -- 80% LTB mortgage, everybody is happy, and the appraiser shows up and says this home is worth $390,000.

Obviously we got to bust that settlement table meeting, run around, A, you get yourself more appraisers -- appraisals.

B, you might have to throw some money in in order to complete the sale.

So that is very bothersome in a very bad market.

So, again -- I don't think we have seen a lot of that in the South, Florida -- Florida is not as bad as Cali or as Las Vegas.

I don't think we're seeing much of it in the D.C.

market either.

With respect to the first part of your question, what can I tell you?

We have been experiencing, since the beginning of May pretty much the same traffic.

Now, it's not good, but it hasn't gotten worse.

Doesn't mean it can't get worse, but it appears to be a little ray of sunshine for us.

Doesn't make us feel all that good because it's at such a low level except when we compare the devil that we know to the devil that we don't know, we feel good about it not going further down.

We do feel good -- there is a positive note on the conversions of the interest deposits, which are -- give us $5,000, and then we'll throw up the contract, and we get the real 60, $70,000 deposit.

The conversions from the interest deposits to the real agreement deposits has gone back to historic norms, and that's -- that's encouraging.

Well, you know, I hear -- you know, Philly is one of the better markets in the country, and actually activity there has been saying -- the builders have been saying they have seen an improvement.

One of the interesting things about the foreclosures, Bob is the unprecedented level of foreclosures nationally, and a lot of those foreclosures are being bought by investors.

And we could call it Investors Gone Wild Part 2.

It could be.

It certainly is undermining the prices for Ivy and Bob Toll trying to sell our homes, and making it more challenging for people because those become the comps.

So your buyers are very contingent on -- sorry, your sales are very contingent on those buyers or those sellers able to sell, and with more foreclosure in the pipelines some saying two to three times on what is already out there, I'm just kind of wondering where do you see direction for you for margins?

I mean, you have done an excellent job with the highest margins I think behind NBR, but obviously one of the few builders, ex impairment still profitable, but obviously there's concern that prices are going to have to go a lot lower to clear not only existing for-sale inventory but all of the inventory that's coming that's foreclosure, as well as me and the primary seller who can't sell necessarily because their house are under water.

I don't think you're going to see the prices go higher on the new-home product, because having cleared the inventory, the only way the prices would go lower is somebody shows up and says I'll buy that but not at 500, and I'll buy it at 400, and you take a look at your books and say I don't have that room here.

The lot is worth something.

And we're not willing to but up the sticks and bricks at a cost of 100 and let you buy the sticks and bricks at 80.

We're better off sitting on our hands.

So I think what you are going to see reflected of your commentary if it comes true, and I believe there there's no reason for it not to come true for some time, is you'll see volume go down on no home even further.

As foreclosures become the competition.

The problem comes of not -- just from the comp, but the problem comes from the foreclosure up the street resetting the mind of the fellow down the street.

The fellow up the street may have been a wild speculator and went way over his head, or he may have -- may have been the victim of are rapacious lending practices.

It's not really important.

His $500,000 house is now on the market for 400 or 350.

The guy down the street who fully intended always to pay and honor his obligations and redeem himself because it's ethically and morally wrong not to -- not to pay what you -- what you have borrowed, what you owe.

On the other hand, he comes home and is told that he's a dope for continuing to pay on this mortgage because the guy up the street walked away, and that house is now 350, and that's the problem that we have to think of now.

How many of those are there still out there who are going to say, you know what, take these keys, take this house, my $500,000 house is now 350, I'm paying a $400,000 mortgage.

I'm going to go up the street, buy the 350, get myself a 275 mortgage and start over again.

We don't know how much of that there will be to work through the chain --

Bob --

It is discouraging to think about it.

But on the other hand, we seem to have stabilized.

We'll have to wait and see what the next chapter writes.

Being a politically minded person, I know you have got an opinion, so if I can be as bold as to ask you, assuming a new administration coming in office, and we certainly will make history either way, can you tell us if you are sitting in the -- in the Oval Office what you would do to solve the housing problem?

Because clearly it is a big mess, and I don't think the government's silver bullet with the last bill passed is going to work.

Yes, I think it was unfortunate.

We had an opportunity, I don't castigate the members of Congress.

Everyone has got their own ideas.

For the most part they are all well meaning and they're trying to their best by the country, but one guy wants to go left, and the other guy wants to go right, and you get that camel built by committee.

Unfortunately, that's the system, but fortunately it's the best system we have figured out so far this the history of the world.

I think it was balloon in that they didn't follow the example, this Congress and President -- didn't follow the example of Gerald Ford and the Congress back in '75.

It was a very simple program.

The program that's been issued lately is very difficult to comprehend and follow through on.

The 175 in today's dollars would have been a $15,000 housing credit for new homes purchased within a short period of time that would have been potentially Congress calling the bottom, and saying hey, you get out there in the next six to eight months, buy a new home, we're going to give you $15,000 off of your taxes.

This time around, it was $7500 but only for new home buyers, and you owe it back, et cetera, et cetera.

I don't know whether that would be enough to make it a difference.

I know -- I noticed that yesterday, the UK, which is in a terrible housing slump as well, lowered the transfer taxes.

I don't know what those transfer taxes are in the UK, but for the whole government to have recognized a problem and to have changed the cost, in effect of new-home purchases, or home purchases in that case, I guess, is reflective of government in action.

So I don't know -- I don't know what we'll be, but if I -- if I were to have an -- an option for directing policy, I would definitely have the Congress issue, you know, a credit, and see if that can't start us.

In '75, it worked.

I mean, in '74 you couldn't give away a home.

'75 we're back in business.

By '76 we were rolling.

Thanks changed very rapidly.

Great.

Thanks a lot, Bob.

You're welcome.

Nicole, I have a question from John Blanny.

Have you considered calling the 8.25 sub notes next year?

We'll let you know when we're ready to call it.

Obviously, we consider our debt -- we don't go to sleep without being aware of it.

Nicole?

Your next is from [Douglas Katz of Seabreeze Partners].

Hi, Doug.

I want to follow up with Ivy's question with another question regarding to the slope of the housing recovering.

Yesterday morning -- and I sent this to you via email this morning.

I got it.

I read it.

And I thought we should do it here instead of doing it privately.

Okay.

Cool.

So just to explain it to the people, it's a research report prepared by the structure team at Fitch Ratings, which basically addresses the issue of the recast of $200 billion of option ARMs in the next three years.

$29 billion to be recast in '09, an additional $67 billion next year in 2010 and about $59 billion in 2011.

And the potential average payment increase on this recasting population is like 65%, representing over $1,000 due each month on top of the current average payment of $1,700.

So the question is, in light -- I mean, we all hope for stability in the housing market and a recovery in '09, but I really like your reaction to the report since you have read it as to how it will affect the housing market, and shouldn't -- shouldn't we really be resetting our expectations for housing a bit lower even in the next two years?

I think we should be resetting expectations to be lower in light of what you're mentioning now, and in light of what Ivy referred to, referenced before, which is the foreclosures, and this is just another form that got you through foreclosure.

This is no different than the 100% no amortization.

This is worse, of course.

This is negative am to a great extent, and we'll just have to slug our way through it.

Although the sums are gigantic, so is the market.

In terms of --

About of course lower rates --

The average hundred thousand, 20 billion represents 100,000 homes.

Right.

Same thing if it's a $300,000 mortgage, 30 billion is still 100,000 homes.

Yes.

Used home market -- because these are used homes.

Used home market is about 5 billion a year, guys?

Yes, this is a significant increase to supply in the used-home market, but it's -- you know, 100,000 on 5m --

Over three years.

Yes, it will come every year, so 2%, 3%, 4%.

I don't think this specific problem is what's -- what's is going to be so -- have such an impact, but I do think you are going to have an impact from the normal market, which is much, much larger than this negative -- let's call it negative amortization option market that has existed.

Thank you, Bob.

It will not exist, again, for a while, I am certain.

Okay.

You're welcome, Doug.

Nicole?

Your next question is from Steven East of Pali Capital.

Good afternoon, guys.

Hi, Steven.

If you look at -- you're talking about your gross margin moving down to some degree in the fourth quarter.

If you look at your orders that occurred in the third quarter, are your gross margins embedded in that sub segment the same or higher or lower than what you are expecting in the fourth quarter?

In other words I'm just trying to get a feel for --

Where we're headed, up or down.

I won't answer the question the way you just asked it.

But I will tell you incentives in the sales in the third quarter were roughly equivalent to incentives to the sales that were booked in the second quarter.

Okay.

All right.

What is in backlog and what is coming out of, and it's not giving that guidance.

I know.

I'm not looking for --

That's okay.

-- specific numbers, what I'm trying to understand is your trends basically in incentives and costs as you are moving through the income statement over the next few quarters.

Costs went up about $500 a house for the quarter.

And we raised prices in the last quarter on three or four communities.

I can't remember which, out of 300.

And I'm -- it's a fair statement that we lowered prices probably in -- double that number, so we're still not headed in the favorable direction.

Okay.

And, Bob, more strategically, if -- two different issues, if you look first, do you have a preference as to how you acquire land --

Yes, I sure do.

For less money.

Other than cheaper is better, but do you have it as far as acquiring on your own, taking the options and bringing them on to your balance sheet, or teaming up with a partner either a financial partner, strategic partner, et cetera?

They are all interchangeable, it's just a matter of running the numbers.

Okay.

And then the last thing.

Looking out at Las Vegas and Inspirada, it looks like we now have another one of the partners that will file for bankruptcy.

Which one is that?

How do you?

They already filed, didn't say they?

Ask them to do that on the phone.

No, I don't mind.

I would like to know.

I'll assuming Wood Side -- didn't they have until the 16th or whatever to file --

I thought they filed.

Okay.

Assuming we now have two that -- how.

They denied they filed.

I'm sorry.

I read the -- I'm referencing the wrong material.

I read that they field and Don Salmon, head of our mortgage co said they denied that they filed.

But that's not our business, so .

How do you look at from your perspective how a JV like this ultimately unwinds?

Do you think that the players have to bring each little section on to their own balance sheet?

Does it get recapitalized?

How are the banks looking at it?

The whole nine yards associated with it?

I think I'm going to pass to you, Joel.

I could do this, but I'm not sure I'm qualified to do it to the public.

I'm not sure I want to.

I think there will be ongoing negotiation of lenders, some of which are banks and some of which are institutions and some of which are hedge funds, and the various players, and there may be new money coming in.

As in the past we have seen a few of the hedge funds come in and buy assets from distressed prices.

You have seen a lot of though loans to some of these ventures trade at large discounts, and I think they'll be -- every one of the deals is a little different, and we'll end up with a slightly different answer to the question, so it's hard to generalize.

I don't think I'll go in to a specific on each -- any of the deals.

Okay.

Thanks a lot, guys.

You're welcome.

Your next question is from Josh Levin of Citi.

So relative to -- relative to what we heard from the other public and private home builders about traffic and pent-up demand, you sound like you are striking a bit more of a positive note, at least on a relative basis.

Do you have any sense if there may be a bifurcation between what is going on in the luxury home market versus what's going on the first time, or first-time move-up home markets?

No, I don't.

That could be an answer.

My first guess wouldn't have been that it was the answer.

Then, again, what you may be -- may be feeling or receiving in these differences in reports put on a relative scale, may not be as great as you -- as you perceive.

I -- it got to a point that I said last conference call that I -- I wanted to get away from for a while anyway, but giving a recap of my markets because it became the F report.

It was F-plus, F, F-minus, F-minus-minus.

So the whole scale have changed.

We may be just down near the bottom, and if we're at stabilization in traffic and deposits, and actually increasing in conversions of deposits to agreements, they may be off 10%, and have a different -- different perception, but it may not be as great as the differentiation that you perceive.

Okay.

And then -- going back to the question about possibly buying land, as you think about buying land, what time frame are you incorporated into your assumptions about how long you would need to own the land before you could monetize it with a house on top?

Well, you can monetize it, as you say -- you can turn that land in to action and in to profits, hopefully, if you have got buyers, at any time in the cycle, depending upon the assumptions.

And then you could be right, and you could also be very wrong.

But relative to that -- I assume when you are talking to the banks, maybe there's some preliminary price discuss, so when you calculate your hurdle rates you have to assume a time frame --

Sure we do.

Some pieces we look at and say let's assume we're not going to offer anything for delivery on this until 2011, that's about as far out as we look.

Some pieces we look at and say I believe we can start samples and marketing right away and we can deliver on this site in a year, which is third quarter for us, fiscal '09.

Okay.

I guess -- if I may just a modelling question.

Joel, on the second quarter call you indicated that the average delivered price for the rest of '08 would be between 625 and 635 for the third quarter it looks like your builder price was around 636.

Now you are saying that for the fourth quarter you're guiding to an average delivered price of between 640 and 650.

Correct.

I was just curious as to what has changed --

Our estimated mix of geographic deliveries.

Okay.

Has changed.

Fair enough.

Thank you very much.

You're very welcome.

Your next question is from Dan Oppenheim of Credit Suisse.

Thank you very much.

Was wondering if you could talk about your plans in terms of SG&A?

You have been somewhat focused on really trying to sell the homes without cutting pricing too much.

Should we expect to see SG&A to come down to sort of match the revenue base in '09?

Joel?

I'm not sure I understood the question.

He wants to know if SG&A is commenting down in '09.

We expect it will go down in '09.

We're pretty sure it will, because of what makes up SG&A now.

Right.

Right.

So we'll run --

So, but -- as a percentage of revenues it may not go down as revenues good down.

If revenue goes down quicker, then costs go down.

And then secondly, I just wanted to ask in terms of prioritization in terms of looking at your cash, there has been a lot of talk here, you are talking about looking at land, and you talked about some -- some stabilization in terms of traffic and conversions.

As you think about using cash or using land versus the focus on the balance sheet, clearly, if you expect things to remain difficult for a longer period of time, it reflects on the balance sheet, if you expect a rebound in the short-term, you would want the land.

How do you weigh those two things now in terms of where your mind is in terms of use of cash.

I think just put another way, you are asking me do we have a feeling threshold model with respect to the time for recovery, and the answer is no, we don't.

And we -- we look at the deal as to how great an opportunity it is, and how that deal models out as compared to our expectations currently in the market.

It -- if -- if we can't make it work currently, it's got to be pretty spectacular to suggest that we'll take it now, and hope that things get better, and we'll make the purchase a good purchase.

We're not doing that kind of business for the most part.

So -- or looking for that kind of business, even for the most part.

So I guess what we really look for is something that works now that certainly will work a lot better if things get better.

And we don't earmark the cash for future use.

We have it there to make a determination opportunistically.

So.

Right.

There's no -- no great plan.

Right.

Okay.

Thanks, much.

No strategic map on that.

That's his question.

You answered it.

Right.

Okay.

Nicole.

Your next question system from Chris Hussey of Goldman Sachs.

Good afternoon, guys.

Question on your customers as you look at them.

What do you think is holding them back?

Do you find financing is holding them back as much as their inability to sell their house or trepidation about the home market?

How would you rate those various things right now in terms of what is holding your customers back from buying?

Trepidation with respect to selling their older home.

Their used home.

The home they have got.

I would say that's number 1.

Number 2 is the fear that they are going to look awful stupid if prices keep on going down.

I think that -- those are the main ones.

Number 3, very much exists -- guy shows up with a little credit card debt and doesn't want to declare -- doesn't want to say that he's making as much as he's making because he's in -- a private business.

That guy is -- is in trouble for credit for a mortgage, and that impacts our business as well.

Okay.

And then -- I know you don't want to rank your markets, but are there any markets that are doing particularly well for you, or better than others you would like to talk about?

Yes.

Been a little bit of come back in Massachusetts, not enough to get you excited about.

But Connecticut, there has been a big comeback, and that's been a shock to us, and a very welcomed surprise.

We would be happy to do the business we're doing in Connecticut back in '05 and '04 and '05.

It's a good market.

We also had pretty hot times recently in New Jersey, which has been deader than a door nail except for around Princeton.

And -- but that was because we ran a very clever, it turned out, management deserves our accolades, and we give it to them -- they ran a very clever private sale event where they called people and said, the company is opening its pocketbook.

This is a one-time thing.

Believe me this will not be here again, and they were able to produce about four times the average number of deposits they would get for a week.

But -- anybody else with good news that they can remember off the top of their head.

New York?

Yes.

There's a continuation story.

We have been doing well in Duchess and Putnam, but the well relative to a normalized market of let's say '02, it's about there or just a hair less.

Hoboken, Jersey City, have continued to do well for us.

We would be happy with what we're doing there this year or five years ago.

And -- and another builder, who -- located not too far from you guys earlier today has mentioned the California -- there was parts of the California market, Inland Empire even that were starting to show some stabilization.

Are you seeing anything like that?

Not really.

We're not in the Inland Empire, thank God, and my heart goes out to Harrah for having to operate in it, and I'm glad to hear that it's coming back.

We have not experienced the Northern California market coming back much.

A little bit, but not much.

Southern California is wifty.

One week it seems as though you are on your way back, and you say "We're back!" and the next week, oh, you know, we're back in the tar pit.

So we can't say that California is on the way back yet.

But I'm glad to here that Harrah is experiencing better times.

That's -- that's good.

Thank you.

I appreciate it, guys.

You're welcome.

Your next question is from Buck Horne of Raymond James.

Hey, Buck.

Hey, just wondered if you could talk about your soft costs with your current owned land position?

Just what your annualized kind of maintenance, property taxes, HOA obligations, what that would be on the owned lots that don't have any vertical construction going right now.

Anybody have an answer to this?

We don't have an answer.

It's a simple answer, unfortunately it's not the one you wanted.

Second, are you anticipating a tax refund any time next year.

Maybe.

That's the best you can do?

Maybe?

We didn't file the tax return.

We don't know.

We don't know.

Okay.

Guys.

Thank you.

You're welcome.

Your next question is from Alex Barron of Agency Trading.

Hey, Bob, hey, Joel.

Hi.

Wanted to know if you have a percent or number of how many of your lots or communities have been impaired at least once, so far?

That's a decent question.

We do have an answer?

Good.

We're flipping through pages.

Greg Ziegler, brains behind this outfit will get you the answer.

We have impaired 164 communities.

164 communities impaired.

And a third -- a third of them have been impaired more than once.

And a third of those have been impaired more than once.

Got it.

My other question was -- did you -- or do you guys have some way to quantify what the benefit from previous impairments was to your gross margins this quarter?

That's a detailed question.

I -- it was --

Small says Joel Rassman.

But it was more than in other quarters but it was still small.

I'm sorry, Joel?

It was more than in other quarters, but it was small.

Okay.

This answer satisfied you?

I do know, I had asked the --

Can you give a ballpark.

20, $30 million.

Yes.

25, $30 million.

There you go.

Okay.

My other question was, a lot of the other builders have reported gross margins, I guess that are now like in the mid-of low single digits, and your margins are still at the top.

I'm just kind of wondering what you think accounts for the difference?

Well, this is not the top, that's for sure.

It's the top of all of the builders today.

Oh you meant at the top of the builders as opposed to where we are.

Where are our gross margins today guys?

23.5, I think.

That's before write-offs as though they don't count.

Oh, that's what you are referring to.

Other guys are reporting in the single digits, which would be comparable to your 23.5, I think.

So I'm just kind of wondering if you would attribute that to maybe have you guys cut prices less than people who are at the lower end?

Or what do you think accounts for the difference?

That's the first most obvious logical conclusion.

Our sales pace is slower than theirs, you are saying, Fred?

Yes, we trade off the volume for the price.

We're not willing to -- to cut land to zero on -- just to move -- just to keep an operation open.

I'm not suggesting they are, but I guess I am suggesting they are.

But that's only on the basis of what you are talking about, so I think I'm going to exit this conversation.

Our margins are historically better.

Yes, historically they have been better.

Sorry, we can't answer.

Okay.

Thanks.

Nicole, I have question from Samuel Adias.

What is your view of the Manhattan condo market?

It appears to us -- we'll have an opening in Manhattan, by the way, in a couple of weeks, I guess at 33rd and 2nd, in the hospital area, and we're looking forward to the opening.

The condo market in New York is one of the stronger markets in the world.

It's not as strong as it was, that's for sure, so it has -- it has felt some of the -- some of the storm that's come to the real estate -- residential real estate market in the country, but it's still pretty exciting, and there's a pretty strong demand, but it's now price sensitive, whereas it was just available sensitive.

The supply was so limited compared to the demand.

You're back to a more equal market, albeit at high prices, an average decent offering in Manhattan at 14, 1500 a foot is quite acceptable, whereas five years ago, I think it was five years ago, we had great expectations when we went through a thousand a foot.

So you're pretty high priced and you got pretty decent volume.

I would say that's a pretty exciting market.

Are we squared?

You bet.

Financial industry being beset as it is, and representing a good bit of population of Manhattan, especially those types that are spending on these -- on these condos, means that you -- if we sense any slowdown, we'll take the money and run, instead of hanging around and waiting.

But our -- the Manhattan project we're opening is right across from NYU Medical Center, which gives it a less dependence on Wall Street.

From your mouths to God's ear.

Nicole?

Next question is from Joel Locker of FBN Securities.

Hi, guys.

Hi.

Was curious about the entitlements.

Some of these run out in five or seven years, and maybe some of the permits that you got back in '02 or '03 that you thought were going to be delivered in '06 have now been pushed out until now.

And was wondering if you are starting to see an elevation of more of the permits actually starting to expire?

Well, we're on top of it.

We're tracking it.

We have seen in a couple of instances where we have had to make decisions as to go further -- move dirt, build foundation, do something in order to keep a permit alive, and then sometimes we make a determination, hell no.

This is too far away at this point, let it lapse, and we'll start over again.

Some of the legislature's have tried to aid the industry, recognizing that transferred taxes for real estate, for instance, are one of the primary ways that the states fill their coffers.

New Jersey passed an act about a month ago, or even more, and I -- I think Governor Corzine is still walking around with it.

I don't know whether he signed it yet or not.

It has been long overdue.

We hope it is signed, because Jersey is one of the hardest places on earth to get a permit.

So we're very, very much on top of it.

And do you -- can you quantify the permitting expense as a percentage of inventories?

Say you have the $4.5 billion or so in inventories.

How much dollar wise is through getting permits and entitlements?

I think it's around 3% on average in our inventory now.

We can double check that.

It's predevelopment -- take a look at predevelopment cost as a percentage of -- I have it in the cash flows, the historic cash flows.

It's in --

We'll have to get back at you for that.

All right.

I'll just give you a call back.

Please do.

Nicole?

Your next question is from [Andrew Fenton of Chris Wedd].

Andrew?

I know you said traffic has been stable, but would you mind giving the year-over-year percentage change by month, if possible?

I have it, and it's terrible.

Year-over-year.

We were in traffic -- darn.

I don't have it year-over-year in terms of per community.

I should.

You do.

Oh, here I do, yes.

Well, no these are traffic units.

Here the percentage change -- yes, we're down 20 -- I'll just go back the last five weeks for you.

Okay.

Down 23%, down 19%, down 19%, down 28%, down 34%, and -- so that gives you an idea of whether it is compared to last year.

What heartens us ever so slightly, is that we're running the same -- we're actually even running a little better more recently on a per community basis, and we have been going all the way back through May, so May, June, July.

We're getting slightly better numbers or just same numbers as compared to last year, so --

Okay.

Thanks.

Lower levels but stabilized.

We'll take it.

Nicole?

(OPERATOR INSTRUCTIONS).

Nicole, we're not looking for business, so if you haven't got any --

Your final question, sir, is from [Harper Phillips of Venergrid.]

Hello.

Yes, right here.

Hi, yes.

Just wanted to follow-up on the email question we gave you just regarding -- we're trying to get a sense for -- of the approximately 30,000 lots that you bought over the period of 2005 and 2006, what year those prices were negotiated in?

By bought you must be referring to settled.

Settled, yes.

I don't know.

I don't know.

Anybody?

I'm sorry.

The information is really tough to gather because -- again, if there were -- if it was stuff that we settled in New Jersey, , that might been negotiated eight years previously.

Matter fact, one comes to mind, New York, I just asked the guys last night -- we're in our ninth year.

We haven't closed on it yet.

So it depends on the territory.

If it's Florida, it's probably only two or three years old at max before we closed it.

Northeast, five -- five to 10 years.

California, probably

Okay.

I'm sorry, I can't answer.

I'm just looking for an average vintage for 2005 and 2006.

We don't have any and we don't collect it that way, because it would be misleading.

Some land is bought or contracted for where approvals came by us.

We create value in the approval process.

And other land is -- maybe someone else got the approvals.

We may not get as good a buy on that as we did before.

But our underwriting characteristics are very strict.

I have to break it out -- which geographic region is -- for it to be meaningful for you.

So we don't give it to you.

Thank you.

You're welcome.

There are no further questions at this time.

That's great.

Thank you very much, Nicole.

And thank you everybody.

Have a good weekend, and have a good rest of the week.

Bye-bye.

This concludes today's conference.

You may now disconnect.

Thanks, Nicole.

Bye-bye