托爾兄弟 (TOL) 2008 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Toll Brothers fourth 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.

I would now like to turn the call over to Mr.

Robert Toll, Chairman and CEO of Toll Brothers.

Please go

Thank you, Vonda.

Welcome, everybody, and thank you for joining us.

With me today are -- Joel Rassman, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer [Karen MacCarren], Chief Marketing Officer; Don Salmon, President of TBI M, our mortgage Company; and Gregg 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.

You only have to read it once.

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 and answer as many as we can.

Today we reported final results for our fourth quarter and fiscal year ended October 31, '08.

Since the release has been posted on our website, I will just touch on the key results.

In fiscal year '08's fourth quarter we had a net loss of $78.8 million or $0.49 per share diluted, which included pretax write-downs totaling $175.9 million.

This compared to fiscal year '07's fourth quarter net loss of $81.8 million or $0.52 per share diluted, which included pretax write-downs totaling $314.9 million.

Excluding write-downs, fiscal year '08's fourth quarter earnings were $38.5 million, or $0.23 per share diluted, compared to fiscal year '07's fourth quarter earnings of $118.2 million, or $0.72 per share diluted.

For the full fiscal year 2008, we reported a net loss of $297.8 million or $1.88 per share diluted, which included pretax write-downs totaling $848.9 million.

This compared to fiscal year '07's full year net income of $35.7 million or $0.22 per share diluted, which included pretax write-downs of $687.7 million.

Excluding write-downs, fiscal year '08's 12-month earnings were $232 million or $1.41 per share diluted, compared to fiscal year '07's 12-month earnings of $464.6 million or $2.83 per share diluted.

Fiscal year '08's fourth quarter total revenues were $698.9 million, compared to fiscal year '07's fourth quarter total revenues of $1.17 billion.

Fiscal year '08's 12-month total revenues were $3.16 billion, compared to fiscal year '07's 12-month total revenues of $4.65 billion.

Fiscal year '08's fourth quarter net signed contracts were $266.7 million, compared to fiscal year '07's fourth quarter total of $365.3 million.

Fiscal year '08's 12-month net signed contracts were $1.61 billion, compared to fiscal year '07's 12-month total of $3.01 billion.

Fiscal year '08's year-end backlog was $1.33 billion, compared to fiscal year '07's year-end backlog of $2.85 billion.

Although we were one of just two public home building companies in our industry to be profitable before write-downs and although we ended fiscal year '08 with the highest market cap among the public home builders, these milestones were little consolation.

They were little stones.

Obviously, there are enormous challenges in our industry, but the current turmoil will create opportunities.

We are beginning to see some deals that are appealing in terms of quality, but not price.

We believe our strong capital position will give us an advantage in competing for them at the appropriate time when the price is right.

We ended fiscal year '08 with over $1.63 billion in cash and more than $1.32 billion available under our 32 bank credit facility, which matures in March 2011.

We have no public debt maturing until our second quarter of 2011.

Our net debt-to-cap ratio at October 31, '08 stood at 12.6%, our lowest level ever and this compared to 26.8% at October 31, '07.

Our stockholder equity at fiscal year '08 end was $3.24 billion, compared to $3.53 billion at fiscal year-end '07.

The most frustrating aspect of fiscal year '08 was that the longer it went, the worse it got.

This, no doubt, was due largely to the financial crisis, which deepened over the course of the year, especially since mid-september.

Until the last month of fiscal year '08, fourth quarter net contracts were shaping up to be about the same in units and dollars as fiscal year '07's.

However, the preliminary signs of stability we had seen and discussed with the public in early September were upended by the worsening financial crisis.

The turmoil that ensued accelerated concerns of all kinds among potential buyers and precipitated a large decline in consumer spending, a significant capital crunch, increased credit market disruption, and plummeting stock market values.

It also drove down home buyer confidence and demand.

With slower sales paces, we have been cutting back on our number of communities.

We ended fiscal year '08 with 273 selling communities, down from 315 at fiscal year-end '07.

We expect to end fiscal year '09 with approximately 255 or fewer communities, which is down 22% from 325 communities at our peak at fiscal year '07's second quarter end.

We've also reduced our land position by 33% to 39,800 lots owned and controlled, compared to 59,250 at fiscal year-end '07.

We are focused on managing our investments in land and improvements and our overheads as well as we can to match our reduced demand and projected pace of production.

Opening fewer new communities enables us to slow our land development expenditures and conserve cash for future opportunities.

Although not spread proportionately across all our regions, approximately 14,000 of our lots are substantially improved.

This means we don't need to continue to spend as much money as we otherwise would to bring these lots to market.

On the national level, new single family housing starts have sunk to the lowest level since October, 1981.

Although builders have essentially eliminated spec production, the supply of unsold inventory still stands near record levels, as new and existing home sales remain mired near historic lows while foreclosures add to available inventory.

Many experts have suggested that falling home prices are at the root of the current financial crisis and that stabilization of home prices will help stem foreclosures, shore up the value of mortgage backed securities, and ultimately therefore stabilize the balance sheets of the world's financial institutions.

Two days before Thanksgiving, '08, the US Government announced a plan to aid the housing market by stating its willingness to pump hundreds of billions of dollars into the mortgage market, an action that significantly lowered mortgage rates immediately.

Perhaps this initiative, which is a positive first step, combined with already dramatically improved affordability, will be a catalyst to stimulate customer demand, stop the decline in the house prices, and restore confidence in the new home market.

Obviously, the treasury and the Fed are not in the marketing business.

Announcing a program as dramatic as this two days before Thanksgiving is not exactly great timing.

I would have waited a few days and included a tax credit of up to $20,000 for new home contracts entered into before April 15, 2009.

I believe this would build momentum and get buyers off the fence and into the market so we can start to stabilize home prices, reduce inventory, put a floor under the mortgage bond market.

This would strengthen the balance sheets of global financial institutions.

There are other glimmers of hope.

Dan Oppenheim, of Credit Suisse, just published a report noting that quote affordability is significantly improved and better than at any time in the past several decades.

The mortgage payment on the median priced home now equates to 16.7% of median household income, an improvement of a 430 basis points since this past summer.

That's down from 25.1% when affordability was at its worst in July '06 and well below the long-term average of 23% from 1982 to 2007.

Close quote.

That's a compelling reason for buyers to get into the housing market, due in part to the Fed's new program and its impact on mortgage rates.

Today, there were articles in both the Journal and New York Times, probably a lot of other papers, about a further initiative to provide mortgage loans with rates of 4.5% to people buying homes, but not for re-fi.

A program like that would go a long way to soaking up excess inventories, assuming buyers had the equity to meet program parameters.

Low interest rates clearly help price affordability.

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

Joel?

Thank you, Bob.

Fourth quarter home building cost of sales, as a percentage of traditional home building revenues before interest and write-downs, was 76.6%, slightly higher than 2008's third quarter of 76.5%.

Fourth quarter interest expense was 3.1% of revenues, 20 basis points higher than 2008's third quarter, principally a result of inventory turning less quickly and less average inventory under construction over which to spread those interest costs, a trend which is likely to continue.

Fourth quarter pretax write-downs were -- $175.9 million, which included $106.2 million attributable to communities or land owned; $54.4 million attributable to joint ventures; $12.1 million attributable to options, as we continue to re-evaluate, renegotiate and in other ways reduce option costs; and $3.2 million attributable to writing off the remaining goodwill associated with two prior acquisitions.

More than 80% of the fourth quarter write-downs were in the north and the west.

Fourth quarter SG&A was $96.8 million, approximately 13.9% of revenues, compared to $103.1 million, approximately 12.9% of revenues in the third quarter, and $120.5 million, approximately $10.3 million(sic) of revenues in the fourth quarter of 2007.

Fourth quarter other income was $19.9 million, including approximately $7 million of retained deposits and $7.5 million of interest income.

The effective tax benefit rate was 25.7% for the fourth quarter and 36.2% for the year.

With income as negative in the quarter, small changes in state allocations or small changes in estimated audit settlements can have a disproportionate effect on the effective tax rates.

The average number of shares used to calculate earnings per share was approximately 159.7 million shares for the three months and 158.7 million shares for the year.

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 the entire economy, employment, and to the items such as sales prices, sales paces, mortgage markets, cancellations, consumer confidence and the potential for future impairments.

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

However, subject to the caveats above and those contained in our statement of forward-looking information included in today's press release and in other public filings, we offer the following guidance.

We do not expect to have any percentage of completion revenues for 2009.

We currently estimate that we will deliver between 2,000 and 3,000 homes in fiscal 2009.

We estimate that the average delivered price for the year will be between $600,000 and $625,000 per home.

For those of you who model quarterly, we expect that the average delivered price will decrease sequentially each quarter over the year, so that the average delivered price in the first quarter may be higher than the range and the average delivered price in the fourth quarter may be lower than the range.

We believe, primarily due to continuing incentives and slower sales per community, our cost of sales as a percentage of revenues before taking into consideration write-downs, will be higher in fiscal 2009 than in 2008.

Additionally, we believe based on fiscal 2009's lower projected revenues, our SG&A, although expected to be lower in absolute dollars in fiscal 2009 versus 2008, will be higher as a percentage of revenues.

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

Thanks, Joel.

As we look to the future, we see reduced competition from the small and mid-sized private builders for our primary competitors in the luxury market.

Their access to capital already appears to be severely constrained.

We envision that in the future there will be fewer and more selective lenders serving our industry.

Those lenders will likely gravitate to the home building companies that offer them the greatest security, the strongest balance sheets and the broadest array of potential business opportunities.

We believe a less crowded playing field combined with attractive long-term demographics will reward those well-capitalized builders who can persevere through the current challenging environment.

We thank our shareholders, suppliers, and contractors who have been along side us during this difficult year.

Most of all we thank our co-workers, the tremendously hard working and dedicated Toll Brothers team across the United States for their great efforts.

Vonda, at this point we turn it over for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of David Goldberg with UBS.

Thanks.

Good afternoon, everybody.

Howdy.

The first question, Bob, in the press release and in your comments you talked about seeing some high quality land come back on the market and not yet at attractive prices.

I guess the question is, who are the sellers of the land that you're seeing and what would have to happen either to home prices or to the offering prices on that land to make it more attractive to you?

The offerers are banks in both cases.

I have two deals in mind that came recently.

I think we're not that far apart on price.

We need some terms, which will make it less risky for us and of course with the terms, it will be less expensive as well.

Great.

And then I guess my follow-up question would really be about at the pace that you guys are selling now and with the expectation of 2,000 to 3,000 deliveries in fiscal '09, do you think you can continue to be free cash flow positive and if so, how much sensitivity is there within that, should the sales pace fall, should you not be able to hit the 2,000 delivery mark?

Joel?

It's a hard question to answer, as we've talked about in the past.

When we do our modeling, we always end up starting the year saying we're not going to be cash flow positive and end up the year over the last few years being cash flow positive.

We continually change our business plan during the year as we match production and sales.

So we would think that absence write-downs, we have a good chance of being cash flow positive because we have in the last few years, but at this point I can't tell you for sure.

Great, thanks so much.

Your next question comes from the line of Rob Stevenson with Fox-Pitt Kelton.

Good afternoon, guys.

Can you talk a little bit about the jumbo mortgage market and what you're being able to offer your buyers these days?

And what you're expecting, given that the 10 year treasury is down around 2.6 and the 30 year for conventional is down under 5.5?

Well, way down under 5.5, but I want to give an opportunity to Don Salmon, the head of TBI Mortgage, to answer these questions.

Don?

The good news is we see real glimmers of hope on the jumbo market.

We just struck a deal with a major bank to supply jumbo financing for some of our condo products.

We're having terrific conversations with banks.

We're about to, we think, consummate a deal with a major life insurance company and we see liquidity is coming back into the market, slowly but surely, but it sure is coming back.

You want to give the rates on the jumbos, Don, and on the conform..

Today on a conforming, we're at 5% and zero points.

On the jumbo, we are at 5.875 and zero points and we think those are terrific rates for consumers today.

Those are on fixed rate product, by the way.

And that's the rate that you're able to give to buyers without having Toll Brothers absorb any cost as a concession?

There are no concessions going on.

The HUD one for those rates, those are the rates that we're offering to buyers as a regular course of business.

Okay.

Great.

And then -- .

However, rest assured that I've told the sales staff that for this weekend, we don't want to go quoting 0.5%, we'll quote 4.95, we'll buy it down five bps.

It'd be idiotic not to for marketing purposes.

Right.

We're putting the final touches on that right now.

That should cost us virtually nothing.

Okay.

And then follow-up question, Bob, last time we saw unemployment hitting into the high single digits into the low double digits was the early '80s.

If we're going towards that level, what from an operating standpoint do you wind up changing in the business model versus where you're sitting today?

Well, implicit, I think, in the question is an assumption that home sales go south.

So stop me if I'm wrong, but I think what you just said is if business continues to get worse, how do you change your operations?

And I think the answer is you continue to cut overhead, continue to renegotiate options, you continue to shrink the number of communities, you continue to shrink the amount of improvements that you would put into your land.

You hunker down and wait for the storm to blow over.

But there's no fundamental difference in how you would operate if I told you unemployment was going to peak at 8% versus unemployment was going to peak at 10% during this recession?

No, I think you just go with the flow.

At 8% I would assume we would do less business than we're doing at 6.5% or 7%, wherever the number is today, and you would shrink your overheads and conserve your cash accordingly.

The deals that you would take would be tougher for you to take.

I said that wrong.

The deals that you would take would be of a higher threshold too.

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Good afternoon, guys.

Hi, Ivy.

Maybe we could just chat a little bit more on the mortgage front.

Down payment, FICO scores on the 5% and the 5.875s, can you give us those too, please, for any differential between FICO and down payment for the standard jumbo that's getting 5.875.

Can I get it if I'm a 580 credit score or obviously it is going to be 700 plus.

We can do, on the conforming side, the 5% hopefully soon to be 4.95%, we can do 95% financing for most buyers.

There are some areas where that's a little constrained in declining markets.

That credit score generally would be in the 640, maybe 650 range, so we think that fits most buyers, certainly most of our buyers.

On the jumbo side it's typically 10% down, again in declining markets it might be a little bit constrained from there and again, credit scores in the 660 to 680 range.

What about the condo market, which is jumbo condo?

Jumbo condos, we just opened up 90% jumbo condos for New York City and for Hoboken and we think we're about to open up 90% jumbo condos across the board.

The average delivered credit score right now is 753, Ivy.

Our average LTV is 68.72%.

Our prime loans -- .

So people are not putting down 10, they're putting down 30, you're saying.

That's been our history too.

Our average LTV for years has been in the 70% range.

Okay.

So one other question on the mortgage front.

You have this new required use rule that is going into effect in January that HUD just passed on November 14th, which would limit the use of the mortgage Company's ability to incentivize and also control the mortgage process and there's obviously some concern on that.

Your comments and thoughts, please?

We don't think it's going to affect us to any great degree.

We don't tie incentives as a general rule now.

We have about two communities in the country where we're doing it today.

We don't think it's going to have a major impact on the way we do business.

Okay.

And then just switching gears, Bob, you guys are in again always the enviable position with such a great capitalized balance sheet.

Yet you sit on so much land and I realize that you're in -- .

Want me to give it back, Ivy?

You were going to give it back to the guys in Vegas, remember?

That's true.

Let's just assume that there's a lot , a lot of land and that land, we know you haven't written it to zero.

At some point there will be value there again some day.

I guess I'm just trying to understand how do you monetize that land in an efficient, friendly, shareholder way when you're now looking to accumulate new land and the question is if you are trying to buy land you are trying to reload at pennies on the dollar and get great returns, but you're going to be just plagued with this large amount of land that's going to hurt your returns.

Used to be Toll Brothers in '90, '91, you wrote all these big checks.

And you said you went in the RTC and it was a lot of fun.

You and Doug and all the boys had a great time because you were the only game in town and you were able to buy and reload.

But now you've got maybe the ability to reload but you're sitting on this burden of huge amount of land that so your returns are going to be negatively impacted for a long period of time.

So if I'm a shareholder and I'm looking at your stock and say, okay, the book is $20, do I put an ROE of what on that because maybe Toll won't see an ROE better than 10% because they have all this land they are

All the land that we have, and I'll remove the epithet of plagued with, all the land that we have we certainly examine every quarter very closely.

If it's operating land, we have to write it down so as to permit us to make 10% on a GAAP basis.

That's not true.

It ends up with having a GAAP margin of much more than 10%.

It is (multiple speakers) it's economic thinking.

My contribution to G&A, right.

So we have to write it down in order to permit ourselves to make, I don't know what the number is.

(multiple speakers) work that way.

It's a discounted cash flow.

I don't give out what the -- because it runs all over the place.

Okay.

The number (inaudible).

Land that we are not operating on, we also examine every quarter and in effect do our best to mark it to market, bring it down.

Unfortunately, we never get to bring it up, but we bring it down according to GAAP accounting principles.

Right.

I realize -- .

Does that answer?

No, no, no, I realize you're writing land down, but you're certainly not writing it down to levels that in many cases -- as you told me, we've talked about it, there's undeveloped land out there that's theoretically got negative residual value and you laughed and you said there's no such thing as negative residual values.

Land has got value and I'll buy it myself for 10 G's.

That's right.

The point is is that at some point you're going to have to put improvements in the ground and bring those lots to finished lots.

So that's going to negatively impact the returns when you have to do that, even if you've written it down to $0.50 on the dollar, or you've written it down to $0.30 on the dollar, I'm just trying to understand -- .

You may be right, Ivy.

I can't follow it.

In fact, I found three deals that we did write down to zero.

The ground is certainly worth more than zero.

And when we improve it, if we haven't already and I don't recall how many were improved of the three and how many weren't improved, but when we improve it, we hope that we're improving it to get ourselves our normalized return.

Otherwise, we'll continue to let it sit, especially since it's paid for.

Okay.

Great.

Thanks, guys.

You're welcome, thank you.

Your next question comes from the line of Dan Oppenheim with Credit Suisse.

Thanks very much.

I was wondering if you could --

Welcome, Dan.

Was wondering if you can talk a little bit about the northeast market or 42% of the backlog seems to be in the north.

How much of that is the New York, New Jersey Metro area and can you give us a little bit of color on that?

Most of it is, Massachusetts, not much.

Connecticut is for this market doing okay.

The rest of the market I would say is pretty much for slow.

The backlog is broken out in detail in the releases and in the 10-K.

I think you would be better off looking at that.

It tells you by region what we have.

We know it's 42% in the north.

Wondering how much of that specifically is the New York Metro of that 42%.

You want to know how much is New York Metro?

Yes.

(multiple speakers) cap details more than we do in public filings.

Thanks, Joel, I'll go with that.

Okay.

Thanks.

You're welcome, Dan.

Your next question comes from the line of Ken Zener with Macquarie.

Afternoon.

Hi.

I'm interested, guess it's related also to the regional exposure of backlog given the broad operating margin differences where the north and the mid-Atlantic is roughly in the mid-15% currently and the south and west is about 3%.

How much of your kind of profit view this or in '09 is really defined by the mix that you guys have, because obviously if you shut down your business in the south and west, you would be a lot more profitable even though you have stale assets in the other segments.

Don't think I can answer the question because I haven't broken it out that way and we don't give out detailed projections, but in general the mid-Atlantic area and the northeast area have been more profitable than the south and the midwest.

But with write-downs, taken in (inaudible) effect that may no longer be true.

The west is --

It's rough right now.

It stinks now but when it's hot, it gets real hot.

At least it has in the past.

All right.

Another angle is if the federal program, the latest federal action actually reduces mortgage rates down to, it seems to be a 4.5% range, how would that, as a real estate buyer, how would that change your valuation of land deals?

Because obviously to the extent it is a better market, it's more valuable assets.

Could you perhaps kind of quantify how that improves (multiple speakers)?

You don't value land on a ticker tape kind of experience, because 10 year treasuries have gone from 4 down to 2.6, land doesn't go up concomitantly.

It would be very foolish to do that.

The way you value land stays the same, which is you take a valuation off what you think you can sell homes for.

Now, to the extent that we stayed at a 4.5% mortgage rate for a long period of time, which would, A, create demand and B, create therefore rise in prices, the builder developer would have to make a judgment as to whether he thought this was it permanently and value land as worth more because obviously everything is cheaper if it's being purchased at a 4.5% rate versus a 7% rate.

Or the developer builder would sit on the sideline and say I'm not going to buy land based upon what I'm able to sell houses at with a 4%, 4.5% rate, because I expect the rate will go back to the norm of the last 20, 25 years, which has been I think about 8.5%.

Yes and the reason I ask that is although equity investors don't treat -- are making a direct call on the land, they obviously seem to be somewhat positively responding to these actions out of the government.

It seems to be that there's perhaps a disconnect in your view based on (multiple speakers)?

I don't know, if the equity purchaser you're talking about is a home buyer, I think it makes a lot of sense.

If the equity purchaser is a land fund, call them.

I can't help you.

Or a home builder.

Thank you.

Home builders I can help you with.

(LAUGHTER).

Your next question comes from the line of Nishu Sood with Deutsche Bank.

Hi, this is actually Rob Hansen on for Nishu.

Hi.

Just wanted to see since the announcement that the original plans for TARP are off the table a couple weeks ago, have you found that this has brought any of the banks back to the bargaining table?

No, we don't see any connection.

I don't think the REO departments operate in connection with announcements of the treasury or the Fed to help troubled banks as opposed to troubled assets.

I don't think you're going to see a direct connection there.

All right.

And then just wanted to circle back with those two land deals you mentioned.

How close are you to actually completing those two deals?

As close as the sellers want us to be.

Not close until they say yes.

All right..

And then one last more of a housekeeping question was what was the benefit to COGS from (inaudible) this quarter.

I'm sorry, could you say that again.

He wants [Pryer & Pims].

You know, Joe?

$29 million.

All right, thank you.

Our best guess.

What was the question?

How much was (multiple speakers).

(multiple speakers) I got it.

Okay.

I'm sorry, Vonda.

Yes, sir.

Your next question comes from -- .

Excuse me, Vonda.

I have a question from [Michael Kessler] at Barclays Bank.

I wonder if it's any relation, Mark.

Barclays Capital, I'm sorry, not Barclays Bank.

Can you tell me how many specs you currently have and if possible the breakdown between finished and unfinished specs.

We count a spec at the point where we drop lumber and we don't differ -- we don't keep track of them differentiating between those that just have lumber, those that have a roof, those that are closed in and those that are finished, so I can't give you that.

On our specs, on the ordinary communities, on single family jobs we have 527 specs, which means homes with lumber.

I would say probably all but 10 or 11 of those became specs when people walked away from their contracts and since we have about -- how many communities operating now?

About 275?

So you're about two per community, on average, for those singles.

Thank you.

Vonda?

Your next question comes from the line of Josh Levin with Citi.

Hi, good afternoon.

Hi.

I'm curious, over the past few months have you run specials where you've sponsored a material buy down of mortgage rates and if so, how much have those buy down specials had on bringing on additional buyers.

I didn't understand the second part, I'm sorry.

The first part is no, we haven't had special buy down mortgage promotions.

When we buy down a mortgage, we pretty much permanently put into, well, not permanently, but we put it into play for a period of time that is generally a couple of months.

We don't buy down a mortgage for a weekend.

We haven't done any recently, no, because the rates -- the rates have been fairly low recently so there's been no reason to buy down.

I'm sorry, I didn't hear the second part of your question.

You answered it.

Let me ask my next question.

Who is the marginal buyer of a Toll home those days?

Is it somebody who has to move because of personal circumstances or is it somebody who voluntarily wants to trade up into a Toll home.

For the most part it's the latter.

I remember speaking to one of our sales managers.

I said, Yvonne, you don't seem to have the traffic necessary to develop the deposits.

What can I project out of the community?

And Yvonne said well, that's the case, she said, but I'm working on two people and it's not a matter of whether they're going to buy, they definitely are going to buy, it's just a matter of how long it takes me to push them over the line.

So that pretty much sums up the average Toll Brothers, the most numerous Toll Brothers kind of client and the answer, short answer was the latter.

My final question, if the treasury comes out and actually officially adopts this plan and rates were lowered to 4.5%, I know this is hard to answer, but what would be your guess best before how long it would take for the lower rates to translate to increased traffic and sales?

You know what, I think that it depends on the marketing of those rates by the government.

The builders, of course, will jump up and down and logically will argue the greatest rates since the second World War, which they would be.

But I think you still have to overcome the lack of confidence.

I mean, if I come to you and that's what has the entire economy seized right now, not just for home buyers but for stock analysts, hedge fund operators, mutual fund operators, et cetera.

I mean, we are all under the log right now.

We're scared.

So I think it very much depends on how it's marketed, which is why I emphasized, if the government came forward with an increased tax credit program in conjunction with this lowered mortgage rate and said we are clearly calling the bottom.

If you have the inclination to buy a new home, have the credit rating to enable yourself to do it, and have the capital for a down payment to permit you to do it, if you don't do it now, you are crazy.

If they call the bottom, there is a good chance that we get this economy rolling again, because I believe the economy is stopped, clogged due to the non-ability to price all the mortgage backed securities and CMBSs that are out there.

But unfortunately, I can't give you a direct answer to the question.

I can only give you what I've just done.

That's great.

Thank you very much.

You're welcome.

Your next question comes from the line of Michael Rehaut with JPMorgan.

Hi, thanks, good afternoon, everyone.

Good afternoon.

First question, this might be tough to answer, but I do know that you monitor traffic and orders pretty frequent, I believe weekly.

That's correct.

If you have in fact seen any type of pickup in traffic and orders in the past week, Thanksgiving weekend, I guess, long weekend, given that the rate started to come down a couple days before Thanksgiving.

No.

So no noticeable difference there?

Correct.

I mean, is Thanksgiving a weekend that you would get some level of traffic?

No, Thanksgiving is traditionally one of the deadest weekends of the year.

It's up there with Christmas and New Years.

There's three dead weeks.

Okay.

Thanksgiving, Christmas, and New Years.

Okay.

And this was true to form.

The second question I had, and maybe for Bob Salmon, I forgot his first name, I apologize, head of TBI, you had mentioned that you started to see a little bit of liquidity coming back into the market and that you were getting close to signing a deal or two and one was with a life insurance Company.

No, I didn't say.

You did.

You said.

Oh, you're talking about mortgages.

I thought he was talking about land buys.

Yes, yes, you're right.

Go ahead.

So my question was more that that doesn't necessarily seem a traditional route in terms of securing financing.

I would assume that more traditionally it might come from the banks and money centers and just wondering if that is the case and you're saying some liquidity is coming back but what are your level of discussions, I guess, with the more traditional banks?

Are they just not as much a part of the picture right now in terms of participating in some of these facilities?

With the banks, we're seeing more targeted and localized activity.

Banks are getting smarter about their business policies and actually going after customers as opposed to going after assets.

And that's one of the real advantages that we have, that our customer is highly attractive to these banks because, for the most part, they're affluent people.

In terms of more traditional, life companies have traditionally been buyers of mortgage backed securities and mortgage bonds.

This particular Company, I think, is getting smarter because they're buying directly from the high quality producers so they know exactly what's in the assets that they're buying as opposed to the nebulous MBSs that were out there in the past.

Okay.

Thanks for that.

And then just one last one.

When you had answered a question earlier about FICO scores and LTVs, that you were able to offer a conforming at only 5% down and a 640, 650 FICO.

That doesn't jive as much as what we've generally been hearing in terms of the availability of credit, particularly at those types of rates and I was wondering if -- and certainly your average customer doesn't necessarily fit that type of profile.

I was wondering how often that actually occurs, that you do have that situation where a 650 or 640 FICO needs only to put 5% down to get that type of rate for your type of home?

Generally, it's the first time home buyers who are looking for the higher leverage and often they're also the ones with the lower credit scores.

So if you look at some of the entry level condo communities, for example, those would be the ones that are looking for that type of financing.

And the fact is that FHA is very attracted to those folks, because it's only 3.5% down and their credit parameters are much more relaxed than those of the MIs.

Okay.

I mean, how much of FHA do you do, actually?

We're just beginning to do a fair amount of FHA.

I think in the end of the year we have eight or ten FHA loans closing.

And if you look at over the last five years, we might have closed three in those entire five years.

This year for the entire fiscal year we might close 20 of them, but we expect that piece of the business to grow next year.

Okay.

So growing but still -- you're talking about 1% or something in that order?

It helps us move some marginal units to people who couldn't get in under the current conventional parameters and we're thrilled to have it, but it's not something that we think is going to be a major part of our business going forward.

Okay.

Great.

Thank you.

You're welcome.

Thanks, Don.

Vonda, I have a question from Jim Meyer.

Is this the [Jim Meyer], an old buddy.

It is, good.

Hi, Jim.

Bob, over the next several years as your business hopefully returns to normal, how will the structure of your balance sheet differ from what it was in the early '90s?

Who remembers what the balance sheet was in the early '90s?

Do you, Joel.

We probably had leverage around 45%.

That's all?

Maybe 50%.

Oh, yes, because we were coming out of bad times.

Will you still buy and develop land in the same manner you did in the past?

The answer is yes, but we have to selectively pick that period of the past.

We hope it isn't the recent past.

Or will you change the way you handle land?

Again, we hope to handle land the way we did when we were enjoying profits as opposed to getting kicked, as we are recently.

Will your future leverage ratios be different?

I hope that they go up, nothing the matter with 40%, that would mean I'm back in business.

Than what they were five years ago?

Yes, I would think that would be about where we want to be, about where we were five years ago.

What was that rate?

Well, the high point was 53 when we were booming and growing at 100% a year.

So we'd be, I guess, 40.

In the 40s, right.

That would make the most sense.

Maybe the question should be have you learned any long-term lessons through this housing crisis?

Surely you jest, Jim.

Yes, of course, we've learned some lessons.

Although I swore we learned these lessons in '88, '89, '90, but apparently they didn't sink in.

We hope that this time they do.

Thank you, Jim.

Vonda, I have questions from [James Gross].

Please answer one or more of the following, if you could.

That's good.

Like a multiple choice exam.

Why would you imply that Toll is looking to acquire assets, but they are priced too high?

And yet Toll hasn't devalued its own assets?

Well, we have devalued our own assets.

What, Joel?

$1.676 billion.

(multiple speakers) since the start of the bit write-offs, $1.676 billion.

So we have in fact (multiple speakers).

Now that includes, however, predevelopment costs.

That includes everything.

Everything.

So that we haven't devalued our assets $1.676 billion, but I'll bet it's like $1.5 billion and the rest are options walked away from or predevelopments.

And why buy more when your own future is so unclear?

Well, we didn't -- we hoped our future wasn't so unclear and we hope you're wrong about that.

but if you're right, then we're wrong and I can't say more than that.

And then question two, clearly the government does want to make cheap mortgage money available to folks buying homes over $500,000.

That's not clear to me.

How would this program benefit Toll?

Incentive our buyers, our jumbo conforming to a conforming, so -- .

Obviously, if they make the mortgage cheaper and they make the mortgage money higher, that's going to benefit America's luxury home builder.

With rising unemployment

So our buyers sell homes to buy our homes.

Yes, our buyers have to sell their own homes, so that helps them buy our homes.

With rising unemployment, slowing economy, tighter lending restrictions, and the government playing every card and then some to prop up the economy, where are the new Toll buyers going to come from?

We've been in this down market for three and a third years.

The difference this time is that this has been a much more severe downturn, so much so that we are at risk of entering a depression and I think the government and the Congress and most out there recognize that.

And if we're going to make a mistake, we're certainly going to make it on the side of over priming the pump rather than under priming it, because when a pump is under primed you get no water out of the pump.

If it is over primed, you just get the water that much faster with more volume.

Our buyers are going to come from where they've always come from, the demographics haven't stopped.

People haven't stopped moving to the United States.

Quite a bit of wealth has been accumulated over the last five, ten years and still is, although we've all gotten slaughtered in the last ten weeks.

So we're going to need some return of that equity to the market.

And some return of confidence to our clients.

Thank you, James.

Vonda, have you got a question.

Your next question comes from the line of Stephen East with Pali Capital.

Good afternoon.

Hi, Stephen.

Don, one quick question going back to mortgages again.

What percentage of your total deliveries are Fannie, Freddie, conforming in all ways, not just jumbo conforming but below the cutoff.

A little over 80% of total deliveries qualify for sale to Fannie Mae.

He wants it without agency jumbos.

Your question was combined, right?

No, without the jumbos.

I don't have the number in front of me, but I'm going to speculate it at over 75%.

Okay.

And then along those lines, I know we haven't seen all the details of the treasury plan, but is it your interpretation that jumbo conforming would probably fit the program and get the low 4.5% rate?

I don't know the answer to that.

There hasn't been anything that I've read that's addressed that.

Okay.

There is nothing printed, but I would think it would.

Logic tells you that they will probably do what they've done in the past, which is buy what the GSEs put out.

So to the extent that GSEs put out 625s as agency jumbos, they'll back these -- back the rate up to 620, they'll back the mortgage up to 625.

I hope the logic holds, because so far it seems to confound them on that.

If we look at land spend for '09 I know, Joel, in last conference call you said we have a lot of, we don't know what the number's going to be because there may be some opportunistic purchases and Bob, you just talked about a couple of them.

If we ignore that and what you need to take down and what you need to develop to get between 2,000 and 3,000 units delivered in 255 communities, what do you think your land and development spend in '09 would be.

The land for those deliveries we already own and there will be some improvement costs that may have to go in for the deliveries at the last half of the year on some communities.

I don't know what the number is.

But for the 2,000 to 3,000 range, we already own that land and it's primarily improved.

Okay.

All right.

Then the last thing, Bob, earlier the conversation about you have a significant amount of land and if you go and take advantage of these opportunities that you see, your returns could really be depressed for a long time.

I guess I want to come back and revisit that, because I think the fear out on the street is is that you have a significant amount of land that's enough to last you for years, even in a good growth scenario.

The more you bring on something has to give, either you delay bringing the current land that you own to market or the land that you just bought is very far out into the future before you monetize it.

No, there's a third possibility.

Okay.

The third possibility is that we've evaluated that we can sell in the current market, depressed as it is, at enough of a price, at enough of a pace to make a very good or acceptable return on that new land acquired.

Okay.

And when you look at potential big purchases that are coming along, do you look at it from the perspective of, hey, we already have this land, if we bring this on we will have issues with running this off and it will really compress our returns or do you not look at it that way?

We look at it every way that we can, of course.

Okay.

Thanks a lot.

You're very welcome.

Your next question comes from the line of Carl Reichardt with Wachovia.

Hi, Carl.

It's actually Adam Rudiger on for Carl.

I had two questions for you.

One was just housekeeping, if you could breakout the owned versus optioned lots?

About 80% is owned and 20% is optioned, so about 32,000 or so.

And then my second question is I wanted to ask you your thoughts about the entry level market and how that recovery will relate to the recovery in the move-up luxury markets.

Do you think that those segments can all recover at the same time or do you think that you need, we'd like to see a recovery in the entry level market before we can really see the move-up in the luxury market recover.

We hope the latter is not the case, but there's a good, logical argument for it.

Certainly, there will be a concentration on the entry level markets by the Congress, treasury and the Fed to a certain extent.

There always is.

In the past, if it's any indication of the future, the luxury market has recovered right along with the entry level market and we would think that will be the case this time as well.

Okay.

Thank you.

You're very welcome.

Vonda?

Yes, sir.

Your next question comes from the line of [Josh Hamby] with Artemis.

Good afternoon, guys.

I was hoping we could revisit the undeveloped land that you're currently not operating on.

Can you discuss a little bit your methodology for how you're marking those assets?

I'm assuming you're not marking them as if you were going to just going to blow them out as tracks to other developers.

Well, that's correct.

Joel?

We do the same process.

Right.

That we do for operating communities, which is that we look to see when the -- those communities will be open for sale.

We estimate the selling price of those units and the pace based on today's information, with whatever changes we think need to be made to that and then we, if it doesn't recover its costs, we then present value its cash flows down to a write-off.

Obviously, the longer out it is for a job to start and finish, the bigger the potential write-down is on that piece of ground and when you then start selling it, a potentially bigger margin you would have when you start to sell.

That's really the night, my really, my question, because obviously there's a lot of sensitivity to when you develop and sell and I wanted to know, do you guys -- are these conservative assumptions in your view as to when -- basically the plugs that you're using to calculate the values of this undeveloped land?

Are you guys feeling you're conservative or realistic or -- ?

We believe we're reasonably conservative, but within reason, so you don't want to take write-downs to zero when it is worth more.

Now say Q1 since the end of Q4, can you discuss a little bit your pace of sales and signed contracts and expected profit margins on those deals based on what you're seeing?

I don't think so.

Joel?

No.

I didn't think so.

Final question is I'm not sure if you guys comment at all on share price or not, but can you -- if you do, I'd love to hear if you feel the market is fairly valuing your shares and if not, if you're planning on any selling during -- ?

I don't think we do care to answer that question.

We don't opine on whether we think the price of the stock is fair.

Or if you're selling.

Thank you.

Thanks, guys.

Thank you.

Your next question comes from the line of James McCanless with FTN Midwest.

Good afternoon.

Wanted to ask if the mortgage liquidity that we're seeing right now is not a flash in the pan and that rates stay down, et cetera, is there any thought to potentially expanding the product mix, making a little bit richer mix, i.e.

more higher end single family units rather than attached or anything of that nature.

No, not really.

We look at every opportunity opportunistically and try and set the track up, the land up for the highest and best use for the highest return and that wouldn't vary on a planned basis, strategic basis.

It varies on the basis of what we think is the best opportunity for the land.

Okay.

And then also wanted to find out, I think you made reference to it in the commentary or on the release about more competitors falling out.

Are you still seeing the competitive field, the small and mid-sized builders, continue to see people falling out in that market?

Is it getting to be more clear?

Yes.

Yes, unfortunately, yes, and fortunately, that is the case.

Okay.

Great.

Thank you.

You're welcome.

Vonda?

Your next question comes from the line of Alex Barron with Agency Trading Group.

Hi, Bob, hi, Joel.

Alex.

I wanted to ask you about your impairments.

I think about a quarter or so ago you guys said you had about 15,000 or so finished lots and I was just wondering how many of those lots have been impaired and how many of the, I guess, undeveloped lots have been impaired, have been impaired yet.

Haven't got that info for you, I'm sorry.

We don't do it that way.

Each community is looked at separately.

In some communities you have both finished and, improved and unimproved lots and they would both be impaired and we don't break it out that way.

Sorry.

How about if you just tell me then how many -- what percent of your communities have been impaired at least once?

185 communities have been impaired at least once.

My second question has to do with joint ventures.

So I guess this quarter you guys took a $54 million or so write-down, but your investment and the balance sheet seem to have gone up sequentially, so can you elaborate on what's happening there and where you took those JV impairments this quarter?

We won't elaborate other than the region where we took write-offs, but we did have a new joint venture that we entered into where we own some land and a land bank owned some land and we combined the two together into a joint venture.

So that land came from land owned and went into a joint venture as compared to just stated land owned.

There was no new cash that went out, it was just an asset removed to a different classification.

It was owned and then it went to a JV?

That's correct.

Right.

You said you could or couldn't elaborate on the geography where you took the write-down.

We gave you that it was the north and the west, I don't think we ought to go into individual states.

We've made a determination to keep our disclosure to what's public in that area.

Okay.

And if I could ask one last one.

What was the benefit from impairment to gross margins this quarter?

We just said about $29 million was for the estimate that we recovered into the gross margin line that were previous impairments.

Right.

Okay.

All right.

Thanks.

You're very welcome.

Vonda?

Your next question comes from the line of Doug Sass with Seabreeze Partners .

Hi, Bob, how are you?

Great, how about you?

Good, thanks.

I have two quick questions.

I was stuck by a number in the release, the average selling price of your cancelled units in the fourth quarter rose from $606,000 in the third quarter to $785,000.

My question was, was there any concentration with regard to community exposure or regional exposure in those high price cancelled units?

And the second one, as you used the word[feshlook].

That was [fishlook].

My grandma Colfax would say that you probably either meant [verkac] or [verstuken].

It could have been [fermished] and [verchoten] is where we are right now.

So I think we are back to [fishlook].

That is clear.

Thanks for clarifying it.

You're very welcome.

The question?

Where is that question?

Oh, yes, he wanted to know, the question is is there any specific region.

Community or region of the country that community is at the higher average price.

Community given towards the higher cancellation, higher price cancellation.

If you looked in the disclosure, I think you'll see it's in the north, the higher priced communities in the north and the west that caused this.

That is what I thought.

I would remember it as being the west.

Thanks, Bob.

We had some northerns, that's right.

I remember where they came from.

Had this question apparently three or four times and all those gentlemen said we don't have to waste our time on the conference call since we've had it four times now.

We probably should.

I'm sorry.

We have to address this.

You didn't want to waste time on the call, but looking at fourth quarter '08 preliminary release of 11/11 you guys said you had 46,000 lots owned and optioned at fiscal year 2008.

Today's release puts the same at 39,800.

What is the difference between these numbers?

Very good, guys.

You are on the ball.

And the difference in these numbers is --

We had thought we had renegotiated a number of options to a levels that we would be willing to keep, stay in the options.

It is now our estimate that it's less probable that we will ever close on those deals that are still under option.

We may.

But I thought it was at a point where we would tell ourselves and those who were negotiating with us that these are not our lots.

We paid our price and we default our deposits and these lots are no longer ours and we made that evaluation, obviously, between the last release and this release.

Correct.

And should negotiations dictate a change, then we'd have to go about putting them on in a different way.

But for now, these lots are, as far as we're concerned, gone.

Vonda?

Your next question comes from the line of [Lynn Savage] with KBW Management.

Thanks, guys.

Just hoping you can reconcile the guidance for '09 as an average delivery price of 600, 625.

The fourth quarter you had the net signed was 495.

Could you just talk me to how we get back to the higher average price.

You have got to look at gross signed, not net signed.

Can you give me an apples-to-apples comparison.

Do you remember the gross signed?

It is like 600,000?

582.

So you've got a backlog of about 647 and you have gross signed to 582.

When you blend them all together we think we'll be in the 600 to 625 range and the reason we gave you the guidance which says it is going to start higher is becomes that's going to come more from the backlog and the stuff at the end of the year will come more from the closings that were signed in the fourth quarter.

Your average cancelled price this year was -- this quarter was a lot higher at 785.

Is there an assumption in that 600, 625 number that we stop seeing that dynamic where the average price has a higher cancellation.

It is assuming that cancellations will be historically spread among the Company in normal proportions and --

(inaudible) answer is yes, to a certain extent, yes.

Can you just talk through that?

Why are we seeing the higher price -- ?

Yes, fluctuation from quarter-to-quarter.

Sometimes some quarters it's been very close to the same number and some quarters it's been higher.

As the average product point that we offer goes down and the backlog is higher, you would expect that some cancellation is coming from the backlog, the average cancellation has a higher price than the average (inaudible).

So just say this quarter is just sort of random fluctuation or is there something else going on, another sort of dynamic(multiple speakers).

It is not random, but there are communities that are higher priced that have lost agreements.

And is that -- I'm trying to understand.

Could the higher price can't get the mortgage do you think or is it just sort of -- I just trying to figure out why (multiple speakers)?

For the most part it's not the mortgage, it's that they've decided that the market is going south and they don't want to go with it.

More so than the lower price.

You know what I am asking?

Like more sort of -- ?

But it's not.

It's older deals that had chances the market change in the deal that are the people who have had that problem.

Got you.

Okay, thanks, guys.

Thank you.

Next question comes from the line of Daniel Greenberger with Gem Realty.

Hi, guys, thanks.

This is sort of just echoing the last call.

Can you speak a little bit to the different trends you've seen at your various product types and different price points?

I'm sorry.

Could you be more specific?

I know that your cancellation rate was much higher during the last quarter with regard to your higher end luxury units, but could you talk a little bit more about the can rate at some of your lower end community types?

Anybody here have grasp of can rate for lower price product?

No, other than it seems that the [active adle] cancelled last.

I think we had very little cancellation in the [active adle], which happens to be the lower priced product as well, traditionally.

It was like a 10% (inaudible) product to battle for the quarter.

10% for [active adle]?

Yes.

On a net basis, not out of backlog.

Out of contracts taken.

So it's very small.

And I know that you expect --

Small these days, not small for normal times.

Normal times the Company used to run at 7%.

I'm sorry, go ahead.

I know that you expect DC to illustrate stabilization sort of relatively sooner than other regions.

Have you seen any traction in this yet this fall?

I do expect that to be the case and no, I haven't seen any backup to my thesis yet.

It's logical, but it hasn't occurred.

Okay.

Thanks.

You're welcome.

What, Don?

It's early, you say.

Early for you.

I'm a little older than you are, so it's not as early.

Vonda?

At this time, there are no further questions.

That's wonderful, Vonda.

Thank you very much.

You've done a great job.

Everybody, have a terrific holiday and a very healthy and a happy New Year.

Vonda, thank you.

Good bye.

You're welcome.

This concludes today's Toll Brothers fourth quarter earnings conference call.

You may now disconnect.

Good-bye, Vonda.

Thank you.

You're welcome.