托爾兄弟 (TOL) 2009 Q2 法說會逐字稿

Good afternoon.

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

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

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

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

(Operator Instructions) Mr.

Toll, you may begin your conference.

Thanks, Phyllis.

Welcome, everybody.

Thank you for joining us.

With me today are Joel Rassman, Chief Financial Officer, Marty Connors, Assistant CFO, Fred Cooper Senior Vice President of Finance and Investor Relations, Joe Sicree, Chief Accounting Officer, Kira McCarron, Chief Marketing Officer, and Doug Yearly, Regional President.

Doug runs M&A and distressed land purchase efforts as well as our Midwest region, most of New Jersey including City Living, our urban waterfront division, several other markets in our marketing department.

Also with us today are Don Salmon, President of TBI Mortgage Company, and Greg Ziegler, Vice President of Finance.

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

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

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

Today, we reported final results for our second quarter ended April 30, 2009.

Since our detailed release has been out since 5:00 AM and is posted on our website, I will just hit certain highlights.

In fiscal year '09 second quarter, we had a net loss of $83.2 million or $0.52 per share diluted which included pre-tax writedowns totaling $119.6 million or $0.48 per share diluted.

This compared to fiscal year '08 second quarter net loss of $93.7 million or $0.59 per share diluted which included pre-tax writedowns totally $288.1 million or $1.06 per share diluted.

Fiscal year '08 second quarter also included $40.2 million pre-tax or $0.15 per share diluted of other income attributable to net proceeds received from a condemnation judgment.

Excluding writedowns, fiscal year '09 second quarter loss was $5.2 million or $0.03 per share diluted.

This compared to fiscal year '08 second quarter earnings of $56.5 million or $0.32 per share diluted, excluding writedowns and the benefit of the condemnation proceeds.

Fiscal year '09 second quarter revenues of $398.3 million, 648 units, backlog of $944.3 million, 1,581 units, and net signed contracts of $298.3 million, 582 units, were down 51%, 55%, and 40%, respectively in dollars, and 47%, 48%, and 37% respectively in units, compared to fiscal year '08 second quarter results.

We ended fiscal year '09 second quarter with approximately $1.96 billion of cash.

Excluding approximately $389 million of net proceeds from our April '09 debt issuance, our cash increased by $40 million from fiscal year '09's first quarter end and by $338 million from fiscal year '08's second quarter end.

At fiscal year '09 second quarter end, we also had $1.34 billion available under our $1.89 billion 31 bank credit facility which matures in March, 2011.

In May '09, we used $304 million of our cash to redeem all but $50 million of our public debt maturing through December '11.

Other than the approximately $50 million remaining of public debt outstanding due in December '11, we will have no public debt maturing until early in our fiscal year 2013.

We ended fiscal year '09 second quarter with a net debt-to-cap ratio of 13.1%, compared to 22.7% at '08 second quarter end.

Stockholders' equity of $3.08 billion at fiscal year '09 second quarter end was down 2.6% compared to $3.16 billion at fiscal year '09's first quarter end.

Our fiscal year '09 second quarter cancellations totaled 161 compared to 157 in fiscal year '09's first quarter and 308 in fiscal year '08's second quarter.

Fiscal year '09's second quarter cancellation rate -- current quarter cancellations divided by current quarter signed contracts -- was 21.7%, compared to 37.1% in fiscal year '09's first quarter and 24.9% in fiscal year '08's second quarter.

We ended fiscal year '09 second quarter with 240 communities, down from 300 at fiscal year '08 second quarter quarter end.

With interest rates still near historic lows and housing affordability near historic highs, it appears that some buyers are beginning to reenter the new home market.

The recently reported strong rise in consumer confidence was consistent with our recent experience.

We've experienced positive same week year-over-year refundable deposits per community comparisons in nine of the past 11 weeks.

Although cancellations appear to be leveling off, we believe that concerns about job security, the economy -- continue to inhibit traffic and the conversion ratio of deposits to contracts.

Housing starts are down nearly 80% from their historic peak in '05.

While purchases of existing distressed homes continue to dominate the published data, there are some local markets where foreclosures are limited and available supply is less abundant.

We believe affluent buyers continue to have an appetite for higher end homes while still demanding value and quality.

When we have run promotions offering reduced mortgage rates or other special savings, many customers instead have elected to convert the special savings to upgrades on their homes.

On average, buyers selected options which were approximately 18.5% or almost $100,000 per home above the base house price on the new homes we have delivered so far in fiscal year '09.

We believe the generally strong financial profiles of our buyers is facilitating their ability to obtain mortgages as selective financial institutions seek out broader relationships with affluent customers.

On average, our buyers are putting over 30% equity into the purchase of their new homes, and the FICO scores so far in fiscal year '09 of TBI Mortgage customers has averaged about 755.

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

Thank you, Bob.

Second quarter home building costs of sales as a percentage of traditional home building revenues before interest and writedowns was 78.2%.

This was approximately the same as 2009's first quarter of 78.3% but higher than 2008's second quarter cost of sales of 75.2%.

Second quarter interest expense was 4.1% of revenues, 40 basis points higher than 2009's first quarter, principally as a result of inventory turning less quickly, less inventory under construction over which to spread the costs and inventory being held longer.

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

In addition, since qualifying inventory for the purposes of capitalizing interest is lower than our debt, in 2009's second quarter, we had $4.4 million of interest expense included in G&A.

Of this $4.4 million, approximately $1 million was attributable to the new $400 million senior note issued which closed on April 20, 2009.

We expect this new issuance will have an effect on interest expense in the third quarter and thereafter, but the effect will be reduced after the retirement of the total of $293 million of 8.25% notes which took place on May 28, 2009.

In connection with the early retirement of this debt, we recorded $2.1 million of expense in the second quarter.

In the second quarter, pre-tax writedowns were $119.6 million which included $116.8 million attributable to communities or land owned and $2.8 million attributable to options.

Excuse me, Joel, would you go back and read that?

In connection with the early retirement of this $293 million of debt, that's the $193 million plus the $100 million, we recorded $2.1 million of interest expense in the second quarter.

Thank you.

Approximately 64% of the second quarter writedowns, or about $76 million, were in the western region -- mostly related to communities in Nevada and Arizona -- areas of the country which continue to have very slow sales.

Our second quarter SG&A, excluding interest, was down 9.5% to $76.9 million, approximately 19.3% of revenues, compared to $85 million, approximately 20.8% of revenues which we expensed in the first quarter of 2009 and down 29% from the $108.7 million, which was approximately 13.3% of revenues, which was expensed in the second quarter of 2008.

Fiscal 2009 second quarter other income was $10.5 million and included approximately $6.4 million of retained deposits.

2008's second quarter other income had benefited from $40.2 million attributable to the proceeds from that condemnation judgment we talked about earlier.

The effective tax rate was approximately 38.2% for the first six months and 31.8% for the second quarter.

As we discussed in the first quarter, when income or loss in a quarter is small, small changes in state allocation or estimated audit settlements or the exploration of the statute of limitations of previously accrued taxes or interest on previously accrued taxes can have a disproportionate effect on tax rates.

The average number of shares used to calculate earning per share was approximately 161.1 for the three months and 160.9 for the six months.

The creation of projections is difficult at any time.

In the current climate, it is particularly difficult to provide guidance given the numerous uncertainties related to our business.

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

However, subject to the caveats contained in our statements of forward-looking information included in today's release and our other public filings, we offer the guidance as follows.

We currently estimate that we will deliver between 2,200 and 2,800 homes in fiscal 2009.

We currently estimate that the average delivered price for the rest of the year -- that's the last two quarters -- will be between $580,000 and $600,000 bringing the average delivered price for the entire year to between $590,000 and $620,000.

This is slightly lower than our previous guidance, which was $600,000 to $625,000 for the entire year, but reflects the sales prices in closings in the first and second quarter, as well as the expected closings for the rest of the year.

For those of you who model quarterly, we expect the average delivered price for the third quarter will be higher than the midpoint of the range for the rest of the year -- which was the $580,000 to $600,000 number.

And the average price will decrease in the fourth quarter.

We still believe, primarily due to continuing incentives, slower deliveries -- and slower deliveries per community that our cost of sales as a percentage of revenue before taking writedowns into account will be higher in 2009 than it was in 2008.

Additionally, based on 2009's lower projected revenues for the third and fourth quarters as compared to 2008, we believe our SG&A without interest -- although expected to be lower in absolute dollars in each the third and fourth quarter compared to 2008 -- will be higher as a percentage of revenues.

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

Thanks, Joel.

When Joel read the average number of shares used to calculate earnings per share, he meant to say it was approximately 161.1 million shares for the three months, and 160.9 million shares for the six months.

We are pleased that after many years of looking in the Houston market that we are finally entering that market with a community in the Woodlands which we feel is the most successful, master planned community in the Houston market.

We plan to open for pre-sales in August of this year.

In general, we have begun to see more offerings in the land market as sellers who are individuals, companies, and financial institutions appear to be more motivated.

Although we continue to proceed cautiously, with our solid capital base, we believe we are well positioned to take advantage of these opportunities.

We believe that under current challenging conditions, buyers will be drawn to those builders who can provide value, quality, and service to their customers.

We believe our brand name, reputation, and financial strength positions us well as the market begins to recover.

Phyllis and everybody else, thank you very much.

And now we will open it for questions.

Thank you.

(Operator Instructions) Your first question come from the line of David Goldberg with UBS.

Good afternoon, everybody.

Bob, first question is about what the competitive landscape looks like on the high-end, and how much attrition you're seeing maybe from your competitors now?

Versus where we were at the end of last year, and if you see that continuing?

Guys -- have you got any impression here?

Doug?

I think there continues to be attrition out of the high-end which will benefit us.

Many small regional builders are closing up their shop, and I think our market share will grow because of that.

And there will be some great land opportunities that come out of that.

How about currently?

Do you see and feel this currently?

I don't when I think of the Company as a whole, but you may in your territories.

I think it's continuing.

It is.

Yes.

Is it accelerating at all, or -- ?

No, I don't think it's accelerating.

I think there was a lot of pain felt in the last six to 12 months, but I don't see it accelerating.

I think it's pretty stable.

Joel, go ahead.

In my conversations with banks, I think that up until recently they have been trying to keep alive many of the companies -- in all parts of the home building industry where they could.

I think that they have are failing at a greater rate today than they did before, and so I would expect based on those conversations to see more of those companies of those smaller and regional builders to go out of business.

Got it.

And then just as a quick follow-up, I'm wondering -- in the release you mentioned options and your buyers adding options to the house.

And that being about 18.3% of the base house price.

How does that compare to where that's been historically, and maybe you can give us some more color on profitability on options on housing versus the base product?

Sure, let's compare to -- not last year which is a stinky year also -- but in a more normalized -- .

It was 20% to 25%, wasn't

The high was 21% to 22%.

So the average was running 20%- 21%, and now we are running at 18.5% approximately.

So your buyers are a little more frugal.

But the point we were making is that it demonstrates that there are luxury high-end buyers out there because when offered the opportunity to get a lower mortgage rate they say, fine, what does that cost you?

And we say that will cost us $15,000.

They say, good, I want to buy $15,000 worth of options instead of having my mortgage bought down, and I will take the rate without the buy down.

So it's encouraging to us that the buyers are out there taking that much in options.

There's also been a product mix change.

We have more of our houses which are active adult and have less -- .

That would account for lower -- .

Lower percentage of options.

And less of our houses are the very large singles that we were offering, and that also accounts for part of the difference.

Right.

Got it.

Thanks so much.

You're very welcome.

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

Good afternoon.

Thank you for taking the question.

I want to understand on -- .

Ivy, I forgot to tell them you were supposed to go first.

I apologize.

Thanks, Bob, you're so sweet.

I am definitely happy to be second.

I guess my question for you relates to your profitability.

Not only have you maintained profitability throughout this tough downturn at least on the EBIT line.

It's before impairments.

What we want to understand is one, what do the margins look like in backlog?

Is it pretty much the same story on gross margins?

And when you think about the trajectory, Bob, everybody has now shifted to housing bottom.

What's the recovery going to look like?

Realizing that many would like to think it's going to be V -- discussion of V, a U, a boat, a canoe, you name it.

What do you think?

And how long it takes to get back to what would be normalized margins given what you are seeing in the marketplace?

First, the question that goes back of the curtain and under the hood as to what is the margin in the backlog, Joel is flopping his head violently from side to side indicating that there's no way we are going to try and estimate that because it can only get us in trouble and can't get us any friends.

Alright.

The seconds part is, do I think this is [lateen]-rigged or [yole] or catch?

Are we a U-boat?

Or are we a torpedo boat?.

I don't know.

The last recovery was very slow.

We got out of it in the East in '90 -- .

First, last week in January of '91.

And then we went up and down and didn't really know we were in a recovery for all of '92, and some of the best land buys were made in '92.

When we look back upon it, that was a period of recovery.

But it was so tepid that we weren't sure of it, and it wasn't really until '94 that we were out of the woods and feeling good about things.

So you had a very slow recovery.

This time around we are told by the experts that we may be experiencing a V recovery.

Though so far, we don't see it.

But we do see in the last couple of weeks -- which on a seasonal basis should stink -- we do see less cans coming in than we would have normally expected.

And we do see slightly higher, just in the last couple of weeks, conversion ratio of deposits to contracts.

So, it's impossible for us to tell until we get out of the glass and look backward at it or get out of the cup and look backward at it.

I can't tell you whether we are half-full or half-empty yet.

Sorry for not being more

No, it's okay.

It's very helpful though to hear how you think about it.

I think what we realize now as you said in hindsight, that these land deals that were great land deals today -- back then, you may not have thought it at the time.

But you were making those investments.

When you are buying land right now, assuming you are buying finished lots where you can go vertical immediately.

I'm assuming you are not buying developed ground -- I could be wrong.

But if you are buying finished lots -- .

You are wrong.

You are buying undeveloped ground?

Yes.

Just made a deal for undeveloped ground in two instances today.

We are in pretty decent shape with respect to improved lots.

We had 33 shut -- we have, as of May 17th, which is when I got the info.

We had 33 shut down communities, 3,444 lots.

Now, obviously if we want to bring those to market, we can get on the market real fast.

We have, on hold, never open communities that were headed for opening of 76 communities.

I'm going to assume that probably one half of those we could open real fast that have improved lots on them.

We have got approximately 11,000 lots on hold in that category.

If I'm right in assuming about half of them can get to market, we've got about 5,500 of those that we can bring to market pretty rapidly.

We are looking in many of the territories only for improved ground, but in those communities where foreclosure is not as big an issue, and there's not a lot of competition.

We are -- .

Bob, would you say that appetite for improved ground though is greater than A&D?

And assuming it is for developed ground, when you are looking at your ASP -- your average selling price -- you are saying, okay, it's a great deal because I could by the lot (inaudible) 20% of average selling price.

Can you give us some framework that you and Doug and the rest of your team think what creates a great investment opportunity beyond just, of course, good locations.

I think you just gave an outline of it.

If you can by an improved lot for 15% to 20% of what you think you are going to sell your house for.

If you're right, you are going to sell your house.

And you are going to be in pretty good shape.

Okay.

Great.

Thank you.

You're welcome, Ivy.

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

Hello, this is actually Ray [Hwong] on for Mike.

Hello.

Just a couple of questions.

From the press release, you mentioned that deposits are up in the last 11 weeks.

That was versus seven of the last nine weeks in the prior release you did a couple weeks ago.

Has that pace accelerated or decelerated over the last two weeks?

Especially given the recent rise in mortgage rates?

Anybody know whether we've accelerated the rate of increase in the last couple of weeks over the past 11?

No.

Joel says no.

Fred, you can give it to us on a four-week and eleven-week per community basis.

That will give us some indication.

The four-week is up 13% per community.

The eight-week, it's up only 9%.

It appears to have accelerated in the last four weeks over the last total of eight weeks.

That's right.

We have got that four, eight and 12 stat every Sunday.

Okay.

A follow-up.

This morning, one of your competitors noted a pretty large impairment in its New Jersey-New York City metro area projects.

I knows you have similar projects in pretty much the same area.

Was wondering if you could give us a sense for how your projects or land positions there differ from [Hovnanian's] that prevented you from taking large writedowns in that area this quarter?

We have a tough enough trying to run the Company here concentrating just on the facts at hand and the personnel we have got to manage.

I think it's your job and not mine to get into evaluating how Hov is doing.

Ara is a great guy, and [Kevork] is, too, and they are both very competent.

I am not going to comment on their impairments and their communities.

Obviously, we have given the information that we think is accurate with respect to impairments on our communities.

And we think we've got great locations, great buildings and with respect to the market, Doug?

Doug runs that area.

The market responded nicely to a spring sales event we had, which shows that if you price right, the buyers are out there.

It has certainly been affected since October by Lehman Brothers and other issues.

It was the last market for us in the country to go soft, and therefore, we are hopeful it will be the first one to come back.

Right now, it's stable.

There are sales, but they are certainly off from where they were a year ago.

I visited the job about a week or two ago, and we raised the price on several units.

I was happier to hold them than to sell them at a discount and think that I will be borne out by that decision.

Okay.

Just for context, how much have you impaired those projects to date?

We don't talk about individual projects.

I think we are still making a bushel of money.

We don't.

I know we don't, but I can't resist.

We are still making a lot of money on these projects.

Okay.

I appreciate it.

Thanks.

You're very welcome.

Your next question comes from Nishu Sood with Deutsche Bank.

Bob, I wanted to ask you about the jumbo mortgage market -- the government efforts in that regard.

The realtors are now pushing for some relief on the jumbo market side of things, using TALF and PPIP, and eliminating the conforming loan caps, thing like that.

I just wanted to get your thoughts on that.

Obviously, something of keen interest to you.

These are all great ideas.

Why don't we go further?

Let Don Salmon address these issues.

Don is head of TBI Mortgage Corp.

Don?

We are seeing increased liquidity in the jumbo market.

In fact just today, we rolled out a new jumbo investor that is -- has some pretty terrific rates for us.

For example, in Florida which was one of the very, very difficult markets to get jumbo financing.

We are going to be at 6% with 1% to the consumer.

We just think that's terrific.

We can do -- in some of the non-declining markets -- we can go up to 80% LTV to $1.5 million in that some 6% and in some cases, sub 6% rate range.

So that is really, really good news for us.

We are introducing another investor -- actually, reintroducing an investor that had gone dormant on us.

We are doing that next week, and we are going to be able to address a 10-1ARM.

Now this one is conforming at 4.75%, which we think will help offset some of the rise in the 30-year fixed rate which is now in the 5.375% range.

And we think when there's a half a point or more difference people will opt for a 10-1 ARM over a thirty-year fixed rate.

We are still going to be able to -- at no cost to the Company-- be able to offer sub 5% rates.

So we are seeing actually really positive things happening in the market.

So from your perspective, the backing up in the conforming rates has compressed the spreads on the jumbo product you are offering.

No doubt.

Okay, great.

Another question I wanted to ask -- in terms of your cash balance.

Obviously an impressive nearly $2 billion balance.

As you look forward over the next couple of quarters, does bigger continue to be better?

Or do you reach a limit at some stage in terms of carrying costs?

Or just simply having too much money that you could deploy in a reasonable amount of time?

I don't want to make a smart comment like you can never be too rich or have too much money, or any of those things.

Because it's just not true.

You are absolutely right.

At a certain point, it's just a display that you don't know what to do with your money.

And so you are just sitting on it.

We are very happy with the position that we are in.

And we are seeing some decent deals as I mentioned just a few moments ago, and we are starting to spend some money.

So I don't expect to see the money continue to grow.

We spent $350 million of the $400 million of the recent finance in calling bonds.

We have another $50 million to go.

That we let hang out there so that we could just a take advantage of the $400 million offering and have $50 million more to spend.

I think we have got the balance sheet pretty well managed right where it is.

Okay.

Great.

Thanks a lot.

You're welcome.

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

Good morning.

Or afternoon.

Quick question on land.

Can you talk about some of the larger size deals that you're looking at?

What are the size of some of these bigger land portfolios?

And have you seen a shift in the bank's attitudes looking closer toward profit maximization as opposed to pure liquidation of land over the last month or so as the banks have had the opportunity to raise capital?

We've gotten lists of opportunities from several of the large institutions within the last month which -- since we hadn't gotten that same information over the past three years indicate that things are starting to loosen up.

I'm not going to go into the name of the institutions, or where the offerings were.

With respect to size, we've seen from 24 lots to several thousand lots.

And again, I'm not going to get into where they are because our information comes after we sign a confidentiality agreements.

So we are definitely not going to talk about it.

It seems to me that as I said during the monologue, that stuff is finally working its way through the pipe.

Doug, any more recent experience than I've got.

I agree completely.

I think in the last couple of months we've seen a lot more deal flow.

We have seen better quality properties, and the banks seem much more realistic in pricing.

I think they are also offering the ability not to buy a whole portfolio, but to pick those properties which is a change in the way they were marketing their assets.

That's true.

That's absolutely right.

What a year ago was $1 billion or nothing.

Now it's -- you can have 80 lots, 400 lots, 200 lots.

That's pretty consistent with what I've been hearing.

I guess the other question on land is -- PPIP seems to be having a tough going since the banks have been able to raise the capital.

Bob, you haven't really given details about what your thoughts are on PPIP, or how you plan to be involved.

But the question is, has that changed since it doesn't look like that program is picking up as quickly?

And does that change your strategy for Toll Brothers at all?

No, I don't think it changes the strategy except that I would like to get into the game.

Joel points out that in the contraction of our G&A over the past three years that I have limited the fiscal finance accounting departments to do the work that they should be doing in order to get us into this.

So I will keep badgering them, and he will keep badgering his guys.

And maybe we will find something out there in PPIP land, and maybe we won't.

We've talked to two major potential joint venture partners in that area.

Because it has lost momentum, although we continue to have conversations, I think they are less intense than they were before.

I like the whole idea of the program from our side of the ledger.

I don't know if the government is as keen on it as it once was.

I love the 90% (inaudible).

Heads I win, tails you lose.

That's perfect.

Very last question is, on the SG&A side.

The SG&A as a percent of revenue continues to creep, and you put that into your guidance for the back half of the year.

Is revenue just coming in lighter than you are expecting, or do you think about a portion of your SG&A like Capex and, in other words -- is there certain level of SG&A that you are keeping there in thinking about as a future investment into the business?

I think you've rhetorically asked the question and stated the answer in the same breath.

So yes is the answer.

Thank you,.

Phyllis, I have got one from the Internet.

Bob, with a Federal tax credit of $8,000 set to expire in November, coupled with California's $10,000 credit probably running out in mid-July.

Do you foresee any changes in the Federal state programs near-term?

That depends on where the market is as we get closer to the end date of the special programs.

California, we all know has a budget crisis.

And I would be surprised if California extended the $10,000 credit above the amount they were willing to put into it.

The Federal Government, I would not be surprised to see it either extended or changed.

But that very much depends upon the market.

If the market continues to get stronger, the government is going to back away.

Try and help the taxpayer.

If the market stays soft or gets softer -- God forbid -- then you are definitely going to see the federal government chase the good times again and extend these programs or change them for the -- to be more beneficial to home buyers and sellers.

Phyllis?

I should have said that's from Steve Sullivan at Horizon Financial Group.

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

Hello, Josh.

You talked about the jumbo mortgage market actually improving a little bit.

But just hypothetically, if rates were to increase say 50 basis points from here and stay there.

How much do you think that actually would change demand for homes?

It's got to bring down demand because it's got to be eliminating a bunch of people from the market.

I think it will more -- it will hurt more to the starter market than it will the luxury market.

But it has to be remembered that we depend upon a chain that starts down at the starter market or shortly thereafter.

So as rates go up, demand has got to go down because less is affordable.

There's always the opportunity to buy down these mortgages, but that goes to your profit margin and what you are willing to give up in order to get your revenues cooking.

Up until recently, foreclosures have largely been a sub-prime phenomena.

Now we are seeing increasing delinquencies in the prime mortgage category.

So we read.

Yes.

Do you think this is a big headwind if we continue to see prime delinquencies pick up?

I think it's got to be.

But so far, it hasn't impacted because we appear to have been going up instead of down very recently.

So we'll have to wait and see.

But logic would tell you that if that expands -- that being foreclosures of prime mortgages -- then you are going to have a tougher time.

Can't have too much tougher a time.

Although you have got to watch what you say or watch what you wish for because you'll get it.

We are down to about 350,000 single-family sales, annualized according to Census and Commerce.

And remember, they do not take cans into consideration.

If you put a can rate of 20 on a 350 you are down 70.

It brings you up to a -- now you have 280 in single-family sales.

I haven't got a long way to go.

And ISI put out today that judging by pending home sales, existing house sales probably made an upside breakout in May.

So apparently, the prime foreclosures aren't impacting us yet.

Thanks, Bob.

You're welcome.

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

Good afternoon.

Hello.

I wonder if you could give us some detail around your gross margins, which was basically flat sequentially in terms of pricing, incentives, the regional mix that we would have seen in the gross margins and-or the community closings that are occurring.

Joel?

I think you saw exactly what it is, they are roughly flat.

We probably had a little bit more in quick delivery homes in the quarter than we had anticipated which probably affected negatively the margins a little bit.

But you are only talking one tenth of a basis point for that.

We've -- there's been an increase in incentives over a period of time.

In the last year, those incentives have probably increased about 3% of sales price of a house.

And so, as we deliver, obviously, that's what's causing part of the difference between the 75 point something and 78 point something we had in this quarter versus last year.

And we hope that with this increased sales pace, we will see a decrease in incentives which will show up six, nine, 12 months from now in additional profits.

You have to remember that part of the equation for profits or cost of sales is the throughput per community.

That has a very large effect on margins because it spreads overheads over a lot more houses, and we are at a very low throughput per community.

We would hope that this increased volume that we are seeing will end up helping us in the year ahead.

I guess related to that margin.

I'm just looking back historically on the gross margins that you had done kind of in the mid 90s that were in that 22%, 23% range.

Does it strike you as odd that you are able to -- if margins were to stabilize here.

Gross margins, pre-interest, at this range that you would be able hold them at levels that you saw in the mid-90s when by your own admission, it was actually a good recovery period?

What changed structurally about your business because obviously the industry is still very cyclical -- that keeps your margins there, do you think?

First, the mid-90s?

The unwillingness to reduce prices and the willingness to instead to hold and take the current hit with more overheads per home as compared to just building for fun.

And since much of our land is -- we believe is -- in areas that can't be replicated.

We are willing to take that position, in general.

I guess because your land is clearly differentiated from other builders.

I wonder when you are looking at buying land if you think there is perhaps a less efficient market.

Or there are less bidders because of the luxury component, and that would perhaps give you a greater profit or profit potential versus other builders buying more commoditized land.

I'm sorry, I'm not sure I understood the question.

Did you get it, Joel?

I think so.

There are a couple of components to the question.

First of all, I think that as we talked about earlier.

As there is less competition, we think we are benefiting more from decreased competition.

So with the land that's available out there that's currently going to be, we hope, excessed by the holders of that land, we will have less competition for.

And we can buy it, we hope, at better prices.

We also believe that we will be able to sell into a market with less competitors when this market recovers.

That will help us.

And if the projections that we hear about are correct which is more than half of the builders are going to be out of business.

And since most of those -- many of those -- many more of those builders as a percentage compete with us and compete with a lower priced product, we would think that helps us significantly more.

I won't bother to ask you what the question was.

It had to do with our long-term profitability based on the availability of land, and I added to it the competition.

Because I think you to deal with that.

Alright.

Thank you.

Phyllis?

Your next question coming from the line of Megan McGrath with Barclays Capital.

Hi, thanks.

As another follow-up to the land opportunities conversation.

Given that the number of attractive, new land opportunities seems to be increasing, does it make you rethink at all the land that you already have on your books?

Should we expect to see actually more land mothballed that you have as new opportunities come up?

Or is it really in different markets that you are looking at new land?

Well, obviously what we did in '05-'06, should be at a much higher price, and we can buy that same land available in '09 and 2010.

I don't foresee us mothballing more communities.

I think we have gotten past that tipping point.

But please don't take that as anything other than a belief because it depends on so many factors.

Many of which have been mentioned in this conference call already.

I think that there are opportunities that are in great locations that we will be seeing on the financial wellbeing of the institutions, or individuals who have got that land.

Okay.

And then as a quick follow-up to that, given your strong balance sheet positioning.

How attractive is the thought of partnering with someone else for any land deals?

It depends upon the size of the deal and the velocity.

If you're talking a couple of hundred homes, we are quite able to handle that ourselves, perhaps even 500.

If you are talking about 1,000 or 2,000 -- if it's a great deal, we can handle that also by ourselves.

So there's a give and take.

If it's a good deal, and it's 1,000 lots, we may go looking for a partner.

Sometimes, these partnerships are developed by getting into a deal that somebody else is stuck in.

Once -- that they had a partner that has been shed or has gone broke, and they are looking for a new partner.

So there's many different ways of getting into JVs or staying away from them.

Great.

Thanks very much.

You're very welcome.

Phyllis, I have got a question from [Bram Septoff] of Toronto, Ontario, Canada.

Okay.

Wondering your thoughts on the current inventory overhang that exists.

With existing home inventories still at approximately 4 million homes and new homes at just under 300,000.

Nouriel Roubini, who is an NYU economics finance department professor, thinks home prices still have another 15% to 20% downside from here.

What do you think in terms of pricing over the next year?

And specifically, when do you think the market will work through the overhang so the industry achieves price stability.

ISI on June 1st said the number of existing houses for sale has declined by 18%.

The number of new houses for sale has declined by 48%.

So, that I think, is at odds with the implication that the existing inventory is going to continue to imperil the price stability of the market.

There is no doubt that the biggest problem with residential real estate market has been to perhaps a month or two ago that people were not confident that they weren't buying a pig in a poke as it were, and that they were going to see their equity dwindle and decrease that they put into a new home.

And so everybody was sitting on the sidelines waiting for the homes to bottom, it doesn't appear as though that is the case any more.

Again, this is just a belief based upon empirical -- anecdotal data that we are receiving in here.

And yet, it feels a lot better now than it felt four weeks or six weeks ago.

So you pays your money, and you takes your chances.

Obviously if you believe that you have got another 15% or 20% to go on a downside that we certainly shouldn't be talking about buying anything, and perhaps we should have another round of cuts out of SG&A.

But I don't believe that's the case right now.

Thank you, Bram.

Phyllis?

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

Hi, how are you?

Hi, Carl.

I had a couple of questions.

One, when we are talking again about looking at new deals, Bob.

What kind of absorption rates might you be pro forming if you really can get deals where a finished lot costs just 15% to 20% of the purchase price?

Are these absorption rates higher than what you've traditionally seen quick-returning?

Or about what you are seeing, or where should we be thinking -- ?

I understand.

Good question, Carl.

I think you are foolish to jump into a piece that's ready to go and to say, we are so good that whereas the comps indicate that you could do 15 a year, we are going to do 20 or 25.

Anybody buying on that basis is making a mistake, I believe.

On the other hand, I can see jumping into to-be-approved and developed sites that can't get to market for three years.

And that don't have to be paid for for three years other than downpayments and predevelopment costs.

I think that we are at a point where if the comp market right now shows that you are doing 15 a year, that you can take a guess and say, well, I believe that when I bring this to market in three years that I am going to be able to do 18, and that I believe the year after that I am going to be able to do 20 or 21.

I believe the year after that I will be able to get to 24.

So it depends upon whether the job is out in the future, or whether the job is right now.

If the job is right now, I think you would be foolish to say that because we are so good that we are going to be able to up the comp-indicated paces by more than very little.

If you are buying a larger site, you can say that three years out, I think I am going to increase my pace from 15 today to three years out up to 18.

Same as we've done before in talking about to-be-developed land.

That's very helpful.

Thank you, Bob.

My second question was, the National Association of Homebuilders had talked last week a little about some changes in some cities in California and other parts of the country where impact fees had begun to be reduced.

The permitting process and building permits costs were going down.

Are you, in any of your supply-constrained markets, seeing anything like that where cities are actually trying to welcome reconstruction?

Yes, we have seen it in some places.

Few and far between.

In most of the places, they are free -- as a matter of fact, ebullient, in transferring the thought to you that they didn't want you then.

They don't want you now.

They don't want you ever.

It's like green eggs and ham.

And these people certainly are not going to lower their permit fees, et cetera.

But we have seen it in some places and some cases.

Specifically where?

Can you tell me?

California and down in Florida.

Okay.

Thanks so much.

You're welcome.

Your next question comes from the line of Mike Weidner with Stifel Nicolaus.

Good afternoon.

Most of my questions have been answered.

Was just wondering, if you could elaborate a little more on what you thought about the conversion rate of nonrefundable deposits.

I think you indicated earlier that over the last couple weeks the trends seemed better, but you mentioned now on this call and on the earlier call that over -- the statistic was seven out of the last 11 weeks or something?

It was nine out of 11.

Nine out of 11 weeks.

The numbers are up from last year.

I was wondering if you could talk about the cancellation rates -- the conversion rates of those to actual contracts over the past year.

So rather than just how it's been over the past couple weeks.

Are we seeing a momentum trend where not only are you getting more, but they are also converting more than last year?

I don't want to go any further than the last couple of weeks because I haven't seen anything other than the last couple of weeks.

We are in the very beginning of this upside.

If in fact, we are seeing an upside.

I don't want to go out any further on a limb than I already have.

Bearing in mind that there are people who make a living from me misstating things, okay?

Well, speaking of that, I think your math on the new homes sales number is a little wrong regarding the can rate.

But one other quick follow-up, if I can as well.

On the land purchases you talked about, we've heard some mixed things on the quality of land out there.

The things you're looking at today, I'm wondering if you can talk about them in terms of -- the things you entertaining the notion of purchasing at least, are we talk about A+ quality stuff or more A minus or B quality stuff that just happens to be very cheap.

And how does it compare to the quality of some of the mothballed stuff that you have got out there?

We are not looking at anything on the basis of being very cheap.

If they give it to us, sometimes it doesn't make a difference.

Let alone a 10,000 improved lot.

We are not interested in that.

We have seen some A+ stuff, and we've been looking at some A stuff as well.

That about sums it up.

Okay, well, thanks for the additional color, and I hope you're right.

I hope we are seeing a market improvement.

We might see that V-shaped rebound.

Okay.

Phyllis?

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

Hi, Bob, how are you doing?

I had a question I guess about the deferred tax assets.

It seems like every one of your competitors has had to take a valuation allowance again the deferred tax assets.

I guess you haven't because you've been profitable to date, but I'm just kind of wondering, is that something that we can expect in the next quarter or two?

Or how does the calculation work?

I can't wait to see how Joel answers this.

We look at the deferred tax asset every quarter.

And the standard of the need to take a deferred tax asset allowance is that it's more probable than not.

After you've got cumulative losses over a period of time that you will not recover.

So you have to be -- the evidence has to be more than 51% against you.

And we look at it every quarter depending on the issues, and we determine whether it is needed.

At the present time, we do not believe it's needed.

And that's all I can respond to because for the future will tell what the future tells.

Okay.

I guess my other question is your prices.

I was looking back historically over the last since the peak, I guess.

And your prices are only down about 13% from fourth quarter of '06 which I think was the peak pricing.

Are you bracing for more price declines as perhaps there's more foreclosures, and when you look at the month supply of homes at the higher end it seems like it's much higher than at the lower end.

Are you -- or, is that already built into the impairments you have taken to date?

Well, we are always bracing.

That's after the 3.5 years that we've been through.

You would be foolish not to be.

I have a recollection of a difference of opinion with respect to the pricing.

I thought our average pricing at one point was like $730,000, and we are now down to $600,000.

Average contracts signed last quarter was $563,000.

$563,000 last quarter.

So depending on how you do the math, and take $170,000 on $560,000 or whether you take $170,000 off of $700,000 gives you difference percentages.

But in all cases you are more than 20% down.

But part of that is product, Bob.

We had a significant change of product over that time, too.

I'm not sure where he gets -- where Alex gets his numbers from, so -- .

I'm just betting that if we had a $750,000 single three years ago, that that single is going to be like $600,000 today.

No.

No, not that bad?

On a same store basis, it's not that bad.

From the same product, same store basis we do monitor that, and it's not that bad.

Okay.

Thank you.

Okay.

Thanks.

You're welcome.

Your next question comes from the line of Eric Landry with Morningstar.

Thanks.

Hi.

I wanted to follow up on Alex's question real quick.

I believe you are audited by E&Y, is that correct?

That's correct.

They typically have used a three-year loss period for the DTA evaluation allowance.

It looks to me unless you make about $400 million over the next two quarters, you will be in a three-year loss.

I think E&Y's position is that you have to do a probable-than-not that you can't recover.

You look at a lot of tests, including their cumulative loss period before you make that determination.

Okay.

So there's -- .

In any event, it sounds like a question for E&Y.

Give them a call.

Here's a question for you, Bob.

Okay.

It's pretty evident that things are heating up.

There are more deals coming to market, we are hearing that from everybody.

As you look at these deals, what are you thinking about Toll Brothers' asset turns over the next few years?

You are at 160% inventory to sales right now, and you've always been at the higher end.

But you've been a lot more profitable than everybody else, so you can afford to have less asset turns.

How are you thinking about that going forward?

Pretty much the way we thought about it in the past.

If you get the right stuff, and it's in the right location.

You've got the right product.

You are better off sitting on it than you are just trying to make revenues and hold G&A together.

Unless of course, you've got G&A so far that you are not willing to go any further.

If I can.

Yes.

Sure, Joel.

A forward-looking question.

I think that we look at each community that we buy as a separate opportunity.

Some of the communities that have very large amount of lots will have a longer inventory turn or a much bigger inventory turn by the nature of having more lots in them.

And if those opportunities pencil out and meet our hurdle rates of profitability, we will buy those.

I think if we have a job that's very small and has lower inventory turn, we will buy -- I mean, a faster inventory turn, we will buy that, too, as long as it meets our profitability hurdles which include both a margin concept and a return on invested capital concept.

But you haven't disclosed what those metrics are.

That's correct.

Okay.

Alright.

Thank you.

Take care.

You're welcome.

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

Hi, this is actually Mike Dahl on for Dan.

I had a follow-up on the deposits question.

Asking a bit different way, you've mentioned that the conversion rates have been lower than your average rates have been, but deposits are up year-over-year.

Have the -- ?

That's on a per community basis, not on a gross basis.

Right.

So are deposits up enough to offset the lower conversion so that we are seeing contracts up year-over-year?

Yes, just what we were saying is -- just in the past, well actually that's not the nine of 11 -- but, we did look at it this morning.

In the past eight weeks which is, yes, we have reversed and do have on a same store per community basis, better numbers recently.

And that was Doug's comment about contract activity, or -- ?

I don't know.

I thought it was mine.

But I'm happy to give it to Doug and go play golf.

Just a follow-up.

Cancellations had been at higher price points the last couple of quarters.

Have you seen any change in the price point of cancellations in the recent weeks with better consumer confidence numbers?

We haven't got any info on analyzing cans on the basis of price of product.

So it's not a bad question, but I haven't got the answer.

Okay.

Thank you.

Have we ever had that answer?

No.

We don't monitor it into quarters.

Never looked at that.

We do at the end of the quarter but not during the quarter.

We do it on a per community basis.

Whether it's a $300,000 community or a $700,000 community average price per unit, we look at the can rates on each one of those communities and not on the basis of price.

Thank you.

You're welcome.

Phyllis, are you out there?

Yes, your next question comes from the line of Jim Wilson with JMP Securities.

Good afternoon, Bob.

Hi, Jim.

Just one question left.

And I think, Joel, you're getting to it a little bit on mix.

But if you could color this a little bit, as I'm calculating your average order price -- price on orders was about $512,000.

Your average closing price was $615,000.

Has there has there been some reasonable amount of consumer decision to buy a smaller houses that's a big part of this, or am I missing geography mix?

Or how would you characterize it?

About 12% of our current sales are roughly active adult.

We traditionally ran at 7% of our sales as being active adult in earlier years.

So active adults tend to be a much lower priced product.

But it also has to do with the [tourist] product and the [college] product.

Then we had a mix of product within the geographic regions.

Remember, the communities we have open is a result of decisions we made three, four, five, six, seven years ago when we put (inaudible) under contract.

Sure, what happened, Jim, is that in fabulous times, a guy comes to you and says, look, I haven't got any singles.

I haven't even got any twins or duplexes.

I don't even have townhomes, but I've got 20 to the building podium parking flats.

But the market will buy those things for $400,000 a piece.

And you look around and say, well, I haven't seen a lot of action in this neighborhood.

Stuff is going left and right but not to me, so we will take this.

And what happens during very good times, you tend to take product in volume that is riskier that you wouldn't have taken before.

But when you are convinced that the good times are going to roll for another couple of years at least always, then you, in my opinion make the misstep, which we certainly did in the past and took more dense, lower priced, but still luxury product.

And when the market falls apart, you have got that product to unwind versus having your good single-family product unwind.

So I think that's the prime reason.

The active adult, I'm very happy we were driven into that.

That's been a great business for us.

We talked about the price decline now for three years.

We've been telling our investors for over three years that that price decline was happening.

It had nothing to do with the market.

It had to do with product mix.

I know that I just wanted to get some color on how the product keeps shifting.

So.

Okay.

That's good.

Thanks.

Got to get Madden into the booth here for color.

At this time, there are no further questions.

We are glad to hear that.

Phyllis, thank you very much.

Thank you, everybody.

Appreciate your time.

Goodbye.

This concludes today's conference.

You may now disconnect.