托爾兄弟 (TOL) 2009 Q3 法說會逐字稿

Good afternoon.

I will be your conference operator today.

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

All lines have been placed 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.

Angelia, thank you very much.

Welcome and thank you for joining us.

With me today are -- Joel Rassman, Chief Financial Officer; Marty Conner, Assistant CFO; Fred Cooper, Senior VP of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira McCarron, Chief Marketing Officer; Doug Yearley, Regional President and Head of M&A; Don Salmon, President of TBI Mortgage Co; and Greg Zeigler, Vice President of Finance.

Before -- we forgot Mike Snyder, also known as Dr.

Doom, who keeps track of everything.

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

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

Such as our accountants.

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

Today we reported earnings results for our third quarter ended July 31, 2009.

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

In fiscal '09 third quarter, we reported a net loss of $472.3 million or $2.93 per share diluted.

Our results were impacted by both noncash federal and state deferred tax asset valuation allowances of $439.4 million and noncash pretax write-downs totaling $115 million.

Excluding write-downs, our pretax earnings were $3.7 million.

Our fiscal '09 third quarter deliveries and revenues were down 36% and 42% respectively versus '08's third quarter.

Fiscal '09 third quarter net signed contracts rose 3% in units and declined 5% in dollars compared to '08's third quarter.

Our fiscal '09 third quarter backlog declined 37% in units and 47% in dollars compared to fiscal year '08's third quarter.

We continue to focus on maintaining a strong balance sheet and liquidity.

We ended fiscal '09 third quarter with a net debt-to-cap ratio of 14.5% compared to 18% at fiscal year '08's third quarter end.

At fiscal year '09 third quarter end, we had $1.66 billion in cash and $1.35 billion available under our $1.89 billion 30 bank credit facility which matures in March, 2011.

While our fiscal year '09 third quarter earnings results reflect tough housing market conditions, things sure feel better than they did six months ago.

For the first time since our fiscal year '05 fourth quarter, our third quarter total net signed contracts were ahead in units compared to one year ago.

With 22% fewer selling communities during the quarter, that translated to a 32% improvement in per community same store net signed contracts in our third quarter.

Also fiscal '09 third quarter end backlog was up 3% in units compared to fiscal year 2009's second quarter end backlog, marking the first time that backlog units had increased from one quarter to the next in 12 quarters.

And four weeks into our fourth quarter, our per community deposits, the nonbinding precursor to signed contracts, are running 26% ahead of last year's comparable period.

Our fiscal year '09 third quarter cancellation rate, current quarter cancellations divided by current quarter signed contracts, of 8.5% was the lowest since fiscal year '06's second quarter.

As a percentage of beginning quarter backlog, fiscal year '09's third quarter cancellation rate was 4.9%, the lowest in three years.

We believe declining cancellations and more solid demand indicate that the housing market is stabilizing.

We are reducing incentives and raising prices in selected communities.

We believe that customers are recognizing that now is the time to get into the market to take advantage of near record affordability and what is still, for now, a buyers' market.

Our cautious optimism is coincident with encouraging data released this week from several sources related to housing and consumer confidence.

On Tuesday, the S&P Shiller index reported that, quote, home prices are on an upswing, close quote.

The index rose 1.4% in June from the previous month, which was the second consecutive month over month gain and the largest gain since June, 2005.

Home prices rose in 18 of 20 metropolitan areas.

That same day the conference board announced that its Consumer Confidence Index had shown a significant rebound, particularly the longer term expectations index, which improved considerably and is now at its highest level since December, 2007.

And yesterday the US Commerce Department reported that new home sales in July had their biggest increase since February, '05, and that the number of months supply of new homes on the market, 7.5 months, was the lowest since April of '07.

These are encouraging signs.

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

Joel?

Thanks, Bob.

Third quarter home building cost of sales as a percentage of home building revenues before interest and write-downs was 82%.

2009 second quarter was 78.2%.

Although cost of sales has many moving parts, we believe a little less than one-half of the increase in cost of sales was attributable to mix issues, while a little more than one-half was attributable to higher incentives.

Third quarter interest expense included in cost of sales was 5.1% of revenues, 1% higher than 2009's second quarter, principally a result of inventory turning less quickly, less average inventory under construction over which to spread costs, and the same mix issue.

The third quarter pretax write-downs of approximately $115 million included $95.4 million attributable to land and operating communities of which approximately one-half was associated with planned dispositions of nonstrategic assets.

Write-downs also included 14.3% -- $14.3 million attributable to options and $5.3 million attributable to joint ventures.

Excluding interest, third quarter SG&A at $72.1 million was down 6.2% compared to the $76.9 million in the second quarter of 2009 and down 30% from the $103.1 million in the third quarter of 2008.

In the third quarter, average qualifying inventory for the purpose of capitalizing interest was lower than average debt, so we directly expensed about $1.2 million of interest.

Based upon a review of the methodology of determining qualifying inventory, we determined that $4.6 million of interest expensed in the first and second quarters should have been capitalized and this adjustment was made in the third quarter.

Third quarter other income was $11.3 million, including $5.4 million of retained deposits.

During the third quarter, the Company determined that for accounting purposes $416.8 million federal and a $22.6 million state deferred tax asset allowance was needed.

For federal tax purposes, the Company has 20 years in which to utilize any losses from the time the loss is recognized.

Since the significant majority of this asset was attributable to impairments taken only for book purposes, this 20 year period has not yet commenced.

The Company currently anticipates that the remaining unreserved asset of $151 million will be recovered through the filing of our 2009 tax return.

Obviously, the effective tax rate for the third quarter was significantly affected by the establishment of this deferred tax allowance.

In addition, it was positively impacted by the release of approximately $44.2 million of tax accruals no longer needed because of audit settlements or statute expirations.

In the future, if the Company reports income in any period, a portion of the valuation allowance will reverse, which will eliminate some of the tax expense.

Accordingly, at least for a while, if we have income future affected tax rates will be attributable principally to the state taxes and adjustments to previously accrued taxes.

In accordance with SFAS 109, when sufficient evidence exists that a deferred tax asset will be recovered, for example, as a result of continuing quarterly profits and an improved economic climate, the applicable tax -- the applicable allowance will be reversed.

The average number of shares used to calculate earnings per share was 161.2 million for the three months and 161 million for the nine months.

Creation and projections is difficult at any time.

In the current climate it's particularly difficult.

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

However, subject to the caveats we normally give in the release and in our SEC filings, we'll give you the following.

We estimate that deliveries for 2009's fourth quarter will be between 475 and 725 homes, resulting in deliveries for the year of between 2580 and 2830 homes.

We estimate the average delivered price for the fourth quarter will be between $550,000 and $575,000 per home.

We believe that primarily due to higher incentives and fewer deliveries per community, our cost of sales before interest and write-downs as a percentage of revenues will be higher in 2009's fourth quarter than in 2008's fourth quarter.

Excluding directly expensed interest and continued estimated significant reduction in absolute dollars expended for SG&A in the fourth quarter of 2009 compared to the fourth quarter of 2008.

However, we currently expect lower revenues in 2009's fourth quarter than in 2008's fourth quarter and accordingly we expect that SG&A as a percentage of revenues will be higher in the fourth quarter of '09 than in the fourth quarter of '08.

I'll turn it back to Bob.

Thanks, Joel.

Angelia, any questions.

(Operator Instructions).

Our first question is from the line of David Goldberg from UBS.

Good afternoon, it's actually Susan for David.

Wondering if you could just talk a little bit about -- give us some sense of what percent of deliveries you had this quarter were of homes that had been cancelled maybe in previous quarters and were then sold through over the last few weeks or so?

About 35%, 35% of our deliveries were from quick delivery homes.

Okay.

And can you give us some sense of how that compares to the last few quarters or how we should be thinking about it for the next several quarters too?

I can't answer the question for the next several quarters, but that is higher than it has been for a while.

I think last quarter we were 29%.

We were -- in the first quarter we were 23%.

In the fourth quarter we were 23%.

And then in the third quarter of 2008 we were 31%.

Okay.

Perfect.

Thank you.

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

Good afternoon.

Hi.

Just wanted to ask, you talked about your -- your rates being up 26% and that's on your deposit.

Can you give some sense of what that was in July or what it was for the second quarter just to get a sense of if things are getting incrementally better into August versus where they were earlier in the summer.

Anybody here have that?

We may.

Since the four week is better than the eight week.

Yes, my feeling is that it is getting better, but I would like to be able to give stats.

Actually, as of the last call, two weeks later into the period we were 19% ahead at the first call.

Okay.

And now we are 26% ahead.

19% for the four weeks?

For the four weeks.

Right.

19% for the four weeks previous at your call two weeks ago and now it's 26 for the -- ?

Right.

So -- so things are getting stronger.

Got it.

Thank you for that.

The other question was on -- on the land side of things.

We continue to hear that there's a lot of competition for finished lots, especially in areas where there hasn't been a ton of development.

But can you talk about whether or not you're seeing more competition for raw or partially finished land?

I agree with the statement that there appears to be more competition.

It's mostly in the west.

Very, I think, very little of it is in the east, northeast and Mid-Atlantic states.

There is some available in Florida, but I don't see that much competition for it.

Does that answer your question?

Your comments were around the raw land, that there's -- there's more competition for raw land or partially finished land in the west now?

I was saying that there is not -- there are not a lot of finished lots in the east -- in the northeast or Mid-Atlantic states, so there's not a lot of competition for them.

There's not a lot of lots.

Florida there are a lot of lots of -- there aren't a lot of finished lots.

I don't see a lot of competition for them in Florida.

There is some competition out in the west, California and Arizona for some finished lots.

I guess that -- I guess that the premise behind my question is a lot of builders have gotten away from the land development business as things have gotten tough and they sort of sworn it off almost, saying that they -- they weren't particularly good at it.

But as you see builders get more confident about an up cycle, the first step is let's get some finished lots.

The next step is going to be moving into partially finished and raw land.

And I'm wondering if -- that's been somewhere where Toll Brothers has always played but I am wondering if competition is moving -- willing to move a step down the spectrum.

If you're asking are there -- is there going to be more development, it's a speculative question.

I believe there will be.

I disagree with your comment that they -- my brothers weren't that good at it.

I think they were good at it.

The market just stunk.

And so it didn't matter whether you were good at it or not, you were stuck holding the bag if you were improving for increasing volumes, which not only didn't increase, but decreased so substantially that you were, of course, of a mind to get rid of all the development capabilities for some time.

There is -- there is no doubt that there are among the other -- the other builders a need for additional lots as we hadn't put anything into the tube starting three years ago or actually four years ago, so there's very little that can come out at this point.

And I do think you'll see an increase in competition for good land.

Thanks for the color, Bob.

You're welcome.

Angelia, I have a question from Steve Sullivan.

By the way, did we invite people to call in?

Did I do that as part of the monologue?

I think I skipped it.

I think you did.

It was there?

Didn't even know it.

Okay.

There has -- there has been some concern in the market that the federal first time home buyer tax credit will expire later this year and not be extended.

Yes.

Do you share this concern?

No.

If you feel it will be extended, will it be enhanced?

I don't know whether it will be extended.

The cash for clunkers has not been extended.

That sets a neat pattern, I think, for the rest of the stimulus ideas that go along that line.

I don't think it will be extended, personally, but it's not a big deal to us.

Will it be enhanced?

Well, if it's not going to be extended, it's not going to be enhanced.

I think it's a mistake, by the way, not to extend it and enhance it and announce that right now.

I think -- I think we're on the verge of saving the economy.

There's lot of talk of a double dip out there.

I have no idea whether that will occur or not, but one of the ways to put the lid on the potential for a double dip is to extend the credit for a short time, to enhance it so that it's not just for first time home buyers but for all home buyers.

You would put more people to work so quickly that it wouldn't be funny.

The auto industry and collateral industries of course employ a lot of people.

I don't think it comes even close to what the home building industry employs.

Sorry for the long monologue, but thanks for the opportunity, Steve.

Angelia, take the next question, please.

Our next question is from the line of Stephen Kim from Alpine wood.

Hey, Bob and Joel.

Hi, Steve.

Hi.

Well, sounds encouraging.

I wanted to ask you about a detail that was in your release and apologize, I didn't run the specific numbers but it looked like -- it looked like your average price of cancellations was materially higher than the average price of gross contracts signed and net contracts signed and I wanted to understand that a little bit.

It also seemed like the degree to which the cancellations were higher priced was more dramatic or more noticeable than in -- in the previous quarters that you cited in your release.

What I wanted to know is is that reflecting a geographic skew to your cancellations towards, maybe let's say, California or the Mid-Atlantic or is that a function of in all regions just higher priced homes are cancelling more or is it a function of some other technical way the number's computed?

Well, are we talking cancellations that took place that are now coming through the numbers or are we talking about fresh cancellations?

Talking about cancellations for the quarter, I believe.

In the release.

In the release and the cancellations for the quarter for the last few quarters, probably going back to last year, have in fact been at a higher sales price than the agreements signed during that quarter.

We have had both mix changes and obviously to the extent that we had in backlog high priced homes that in markets like Arizona and Nevada, that had worth --

And California, sure.

They -- those people walked away and gave -- left us with quick delivery homes that we had to dispose of, sell.

You have to remember that a portion of the down payment that was given flows through in a different line item.

So it's a -- and in a different quarter potentially than the resale.

So in -- in the other income line, as I said, is $5.4 million of deposits that we expect that we keep as a result of cancellations that have not yet been processed through completely and that's been going on for a while.

So you don't get to see that number and that partially affects what you see.

However, Doug, speak to the cancellations at Maxwell.

We had them and now we don't.

Yes, Maxwell Place in Hoboken, the building was completed in the last year and -- and we had significant cancellations at very high prices there which was a direct result of the financial crisis, the Wall Street crisis, and those are pretty much behind us now.

But we did have significant cancellations.

In most cases we kept deposits, but we have had to resell the units and at the moment, at least the last four to eight weeks, we've seen pretty significant increase in interest and we've had good sales and we're beginning to reduce incentives.

Okay.

So --

Excuse me one second.

We've also seen in the last six weeks, thereabouts, for the first time again, people demanding $1 million plus units in Hoboken, as opposed to earlier they just wanted the cheap stuff.

That's correct.

The -- .

Less expensive, forgive me.

The $1 million plus market is returning and that was not for the last, from the fall until the late spring that -- that market was not there.

But in the summer, it has returned, this summer it's returned.

Would you say that general commentary about the higher end of your product range looking noticeably better is a commentary that you could extend to other regions outside of Hoboken, particularly let's say in California or DC.

I think so.

I think we see a difference in the city.

In California, that's not clear at all.

I don't by memory see that.

Has anybody got the stats to back this up?

You'll have to do with my feeling.

Northern California saw an uptick in the higher priced sales this last quarter.

You'll have to raise your voice.

Northern California did see an uptick in the higher price units, but I can't tell you if that's an anomaly or not.

Okay.

Great, thanks very much, guys.

You're welcome.

Angelia?

Our next question is from the line of Nishu Sood from Deutsche Bank.

Hi, this is actually Rob Hansen on for Nishu.

Hi.

Hi.

So your SG&A levels were really pretty low this quarter and so just wanted to get some color on how your -- how you cut your SG&A so dramatically this late in the cycle, especially when you had an increase in sales?

Joel?

A portion of SG&A are fixed costs and a portion are variable costs.

So a portion of them go up as more units get closed.

From a fixed cost standpoint, we have been reducing fixed costs now for a three year period of time, up through pretty much, I think, most of the fixed costs have been taken out last quarter, this last quarter, and so we would expect to see the expenditure for total SG&A exclusive of advertising to basically flatten out except for the variable cost portion which is attributable to units.

Okay.

And -- and on a different subject, across your 215 or so communities, what kind of an approximate percentage are active adult and the tower business and then the traditional single family and given the kind of better sales environment, what -- what of those three types have been performing better?

Guys?

Greg.

I'm trying to -- I don't know if I have the communities broken down into the -- all communities open for sale broken down to the three categories.

We have a higher mix, so part of it is a mix issue.

We have a higher mix of active adult sales and a low mix of single family sales in both agreements signed and in deliveries in this past quarter.

Tower business is not a large business for us, but it has been doing better recently than it did in the past.

The active adult has been doing well for a year and a half or even more.

And the traditional single family in the northeast Mid -- in northeast has been doing okay, has been coming back in Mid-Atlantic, but I don't think it's been coming back in Midwest, for instance, or in the west, Arizona and California, to any great extent.

I hope that answers.

No, that's -- that's good.

Thank you.

You're welcome.

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

Hi, thanks.

Wanted to follow-up on the gross margin.

Took a pretty significant hit this quarter sequentially as well as year-over-year.

You talked a little bit about interest expense, but curious if you can size the impact potentially of selling more quick delivery homes and if, assuming the ASPs at least for the next couple of quarters stay kind of flat, is this 12% to 13% gross margin level including interest kind of where the new normal is for you?

Joel?

Can't answer the question exactly like you said it because I don't have the statistics that way.

But we had a higher percentage of quick delivery homes with higher incentives in this quarter.

I think the effect of that compared to the second quarter was probably around 40, 50 basis points.

And -- and it is an estimate, because it's not a precise science to get that number.

And that the rest of the difference, as I said, a little bit more than half were increased incentives, some of which took -- increased incentives, some of which took place and were in backlog for a period of time.

They took place after the Lehman problems and the financial crisis problems and came out of backlog this quarter.

Okay.

Thanks.

That's helpful.

And then a quick follow-up on your guidance.

The low end of your guidance range in terms of closings would have you, I think, somewhere in the high 20% range for backlog conversion, which would be pretty low for your fourth quarter, I think, even kind of historically.

So just curious what would lead you potentially to get to that lower end of the range versus the higher end?

It's a very -- Robert, I'm sorry.

Please, Joel.

This is a very imprecise art.

It really is going to depend on what cancellations are and how many specs we end up or quick delivery homes we end up closing and selling within the quarter.

I have not assumed that we'd be at 35% and obviously if we're going to have a lot more quick delivery homes signed and closed in the quarter, then closings will be higher.

But I believe that this is our best guess.

We go back historically to look at conversion rates and if you look at the middle of the range, that's roughly where we have been historically in these quarters.

Is that impressionist art or more classical?

That's impressionist art, yes.

Thank you.

Thank you.

Angelia, I have a question from James Meyer.

Hi ya, Jim.

You talk of selective price increases and decreases in incentives.

Of your 215 selling communities, approximately how many or what percentage are seeing price increases?

I would guess that was about 40%, although I wouldn't call it an art.

I'd call it a guess.

How many are seeing price stability?

All the rest.

And how many are still experiencing price pressure?

None, because we're fairly well convinced that the bottom has been turned and, therefore, we are not increasing incentives or lowering prices anywhere.

So there you go, Jim.

No, thank you, Joel.

Angelia, back to you.

Next question is from the line of Ivy Zelman from Zelman & Associates.

Good afternoon, everybody.

Good afternoon, Bob.

Hi, Ivy.

How are you guys?

I -- looks like you -- you're feeling better, Bob, and realizing that your overall trends have shown improvement.

I sense a little optimism with, I don't want to call it Kool-Aid, but a little concern about the increase in foreclosures at the higher end that are in process right now with option ARMs and Alt-A and overall foreclosures in process up about 90% today year-over-year and just wondering, you mentioned the talk of a double dip but there was certainly views that the high end has been showing activity with more jumbo as a percent of the mix in northern Cal, like you mentioned, Joel, but realistically a lot of those houses are trading at significantly lower than where they were purchased and consumers are under water and there is lots of concerns that are not playing out at the moment, but arguably could be major headwinds and I'm just wondering if your views of stabilization might be a little bit premature and how much risk do you think is out there and are you concerned at all as I am?

I am concerned, probably not as much as you are.

There is no doubt the stats are what they are and they are ominous with respect to the increase in foreclosures for prime borrowers and for some of what used to be the higher priced product.

Logically you've got to be concerned as to what the impact of that is on our new home -- our new home luxury home market, but in the face of these stats, at the same time, we see increased demand and that makes us feel a whole lot better.

Don, do you want to talk to the issues of the mortgages that Ivy made reference to.

Well, just to keep in mind, Bob, keep in mind before you go there, these are foreclosures in process so they're not yet hitting the real estate for sale side market, so they are ominous statistics and I think that we have seen false recoveries before, like in the fall of '06 where there was a perception things were getting better and what looks like good activity right now and apparently getting better, I'm just wondering what kind of risk are you incorporating into your expectations and concerns as it relates to this subject.

But also you're benefiting to some extent, I wonder what percent the market is really incentivized to use the tax credit, because the tax credit right now is pulling forward demand.

If fact, I don't know if you guys provided it, I apologize already, but did you say what percent of your business would be using the tax credit?

Knowing you are at over $500,000 ASP, you still have some people getting the tax credit, I would presume.

We have some people getting the tax credit, but it's a very small amount.

Obviously, it's only where we have the less expensive product.

It's got to be pretty far down the food chain for us, but we do use the tax credit wherever we have that less expensive product.

Speak to the mortgages, Don, about our mix between conforming and jumbo, especially.

We can --we can speak for the TBI Mortgage portfolio and the delinquency performance of that.

Currently, of our entire portfolio, 1.23% is in foreclosure and that of our top six investors over the last ten years, really.

And I know your point, Ivy, saying that there are more foreclosures coming.

Typically what you look at when you look at the foreclosures that are on the horizon would be delinquencies greater than 60 days.

In our book of business that is 2.58%.

So it is a little bit hard to know -- .

Don, I certainly appreciate Toll is relative to the market.

I guess what I'm just trying to point out and make sure that Toll Brothers is thinking about as well is the headwind that might be fourth quarter 2009, macro fourth quarter headwind or first quarter 2010, not to mention all the unemployment.

It just sounded like you guys are very optimistic and I just don't understand why this is not being taken into more consideration and maybe you are thinking about it.

So maybe that's one of the reasons you're not projecting 2010 earnings and revenues or revenues and earnings, but it seems like the market is very excited and wondering what your perspective is, generally, if you think the worst is behind us, how do you thing about this in that outlook?

So I think I got where you guys are, so I appreciate it.

Well, the other side of the answer that I gave you is that, notwithstanding our optimism, we haven't changed any of the thresholds with respect to the land that we're willing to buy and we haven't bought much at all, yet, and that's -- and we've been beaten out and that's probably because we are maintaining threshold.

So while we're optimistic, we are also -- we're also unwilling to make bets on the future being much different than the current market, which is how we analyzed the land that we purchased.

Well, that's very helpful.

Thanks, Bob.

Appreciate it.

Good quarter, guys.

Thank you.

Our next question is from the line of Susan Berliner from JPMorgan.

Hi, good afternoon.

Hi, Susie.

Two questions.

Hi.

Joel, specifically for you, I was wondering if you could help me with this whole allowance.

I seem to be still a little bit confused.

I know a lot of your peers have taken much bigger numbers, but it seems to have died down and I know you were earning money later than them.

But I was just wondering if you could help a little bit more how you came up with this number and exactly what you went through to -- to kind of arrive at it.

You're talking about the deferred tax?

Yes.

Yes.

From active, okay.

We had on our books an asset, a portion of deferred taxes sit in current, a portion of deferred taxes sit in deferred on the balance sheet and when you look through it, when have you to make up -- when you have determined that you can't project current future profits in the short period of time sufficient to use up all of the book losses that you have booked, you have to think about whether you need to reserve and we've been looking at that every quarter.

We believe that based on the current quarter there is still $100 million of write-offs that we can't at this point say that we can use up from an accounting standpoint under SFAS 109 in the short-term based on projected short-term profit, the $2 billion worth of write-offs we've taken over the last four years and the $1 billion plus that have not been utilized against other profits and so that we had to reserve against it from an accounting standpoint.

From a tax standpoint, those -- those have not been realized yet.

These are only book losses.

Okay?

And the only thing that's left on a deferred tax asset basis is what we expect to get back from a refund we expect to file.

So everything else has basically been reserved against and we would expect that when we get -- when we book profits we will not have any taxes that will be booked other than state taxes on those profits and then some adjustments where statutes of limitations expire.

Okay, great.

And my second question was, and I know you answered this a little bit in terms of talking about land deals, but the press has certainly gone kind of hog wild over last few weeks in terms of writing about builders' appetite for land.

And I was wondering if there -- there's any sort of change recently, if there's bigger plots of land coming on the market, if the banks are coughing up or I was just kind of surprised at all the news lately.

There definitely are more and bigger plots, as you call it, huge parcels of ground coming on to the market and we are very much on those that are in the markets that we think are desirable.

And I guess is the timing, because you guys have kind of talked about six months out, now is it a little bit more potentially imminent or it's hard to say?

What is the it that you're referring to in that sentence?

In terms of you guys actually securing one of these parcels, whether it be big or small?

It seems like you guys have been relatively conservative thus far, considering your liquidity.

So far we don't have -- we don't have an agreement on any of them and we're not in first place on any of them.

So I can't predict that a purchase is imminent.

I would like to buy some.

We think we have some excellent offers in there.

The banks are very, very different this period than they were in '89, '90, '91.

They're not being forced to disgorge as they were then and so they're being more careful as to what prices they take and we're in negotiations.

Okay.

Thanks so much.

You're welcome.

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

Thanks very much.

I was wondering if you could talk a little bit more in terms of the confidence in this.

As you look towards 2010, what are you thinking about in terms of the -- the mothballed communities or delayed communities, how many of those do you think you will bring on.

I don't want to ask for a community count for the year, because obviously it depends on what closes.

But of the what you have out there right now, what do you plan to open?

How much capital do you plan to put into that?

I know we just discussed this Monday night with several of the regional presidents.

I try to encourage opening up a few of the communities that I felt were ready and the team said no, they weren't ready to open them.

They want to wait for -- for a better market because they're still concerned that this market, although we've seen more interest and demand and less concern with just how much of an incentive can I get as opposed to can I get a greenhouse or can I get an elite addition, a music room, et cetera, that the market is not strong enough to take a chance because in order to open up communities there's considerable -- considerable dollars involved.

You've got to get your samples up and furnish them.

You've got to -- got to put your roads in.

The improvement budget can be pretty high.

So right -- right now we've got 103 communities on hold.

We've got 1600 lots improved.

And we haven't got anybody yet volunteering to open new communities in the next quarter.

You've asked me about 2010 and you know as much as I know.

If the market picks up substantially between now and 2010, I'm sure we'll be opening up a number of these communities.

That's all I can say.

Terrific.

Thanks very much.

You're welcome.

Our next question comes from the line of Michael Rehaut from JPMorgan.

Hi, thanks.

Good afternoon, everyone.

Hi.

First question just actually to clarify on the number you gave just before, Don, that you said there were 103 communities on hold or that I guess you had mothballed over the last year or two.

But community count -- .

That was Bob Toll not Don.

And yes, that's a number I said, there's 103 on hold.

Right.

Thanks.

Sorry, Bob.

That was you.

I gave the wrong name.

But, a year ago you had -- .

That's okay.

you had 315 communities, now you're at 215.

So are most of those as a result of the mothballing or how many also did you close out or were there any new communities that you opened as well?

I'm not -- I'm not sure I understand the question.

I think Mike is giving it to you now.

We shut down 37 previously selling communities.

The rest, the other 66, we've never opened.

But the 215 is down by 37 that we've shut down since the market downturn.

And the others are closed out communities.

Sold out and have not opened a new community.

Okay.

And at this point are -- are you planning to open up any new communities and, again, this is aside from the mothballing that you've done, in the next 12 months?

Oh, yes we do have new communities opening in the next 12 months.

Does anybody have a number?

Greg?

You don't want to give that number, Joel.

I think we will give that on -- we'll kind of talk about where we expect to be in the next conference call.

I think we would like to look at that information in light of the sales paces and whatever conversations you are having with the regionals, because right now -- .

No, I'll defer to you, Joel, certainly.

Joel's advising me to shut my mouth on that so -- .

Right.

Ultimately I'm just interested in a year-end community count and also a year-end 2010, I know that is looking pretty far into the future, but given that you're at a pretty low number right now and demand is picking up and as well as sales pace, I was just interested in your thoughts.

Well, sorry, you've got the response.

I'm sorry I can't do better for you.

We disclosed that we expect do be around 205 at the end of this year.

That was, I think, in the release.

Right.

Okay.

Lastly, just going back to the gross margins, was that a greater than expected sequential decline, Joel?

And with regards to what's in backlog, what are you expecting over the next -- a similar type of a drop or where do you think margins can be in the next quarter or two for -- on the gross margin level?

I'm not projecting margins, but I think I gave you enough information that you can do your own projections if you choose to.

I've said that a portion was mix.

I think the mix portion may just be temporary.

We won't know that until we look back with hindsight.

And a portion came from higher incentives and the higher incentives will probably be around for a while.

Okay.

Because they're already in backlog.

One last one, if I could.

The 40% of the communities, Bob, that you had mentioned that you're roughly speaking 40% that you had thought you're getting a little bit of price or less incentives, can you give us a sense of -- of is that amounting to 1% of the sales price, 2% in terms of less incentives as a percentage of sales.

Or how are we to think about the magnitude when you say -- because a 40% number is a pretty strong number.

Yes.

We generally do less in them in approximately 1% jumps.

Actually -- actually, if it's a $700,000 house, we may drop an incentive by $5,000 this week and $5,000 next week.

So it is done in $5,000 increments.

If it's a $450,000 or $500,000 house we do it also in $5,000 increments.

If it's a $350,000 house, then we would do it in a $3,000 increment.

That's the best color I can give you on that.

Okay.

Thanks.

You're welcome.

Our next question is from the line of Bose George from KBW.

Good afternoon.

Hi.

Had a question on your net debt-to-capital remains very low, 14.5%.

What's a reasonable ratio assuming you start getting good opportunities to deploy your cash?

Basically, how much cash could you deploy if you found good opportunities?

A reasonable ratio in those glorious days of yesteryear when the masked man rode the plains was probably 50%.

A reasonable ratio today is probably 10%.

So I think the answer to the question -- I think another way to state the question is where do you think we're going to be in the next year, two, three, four, and until you see the lights of their eyes and things are still apparently rolling that anybody could make a prediction.

You don't want to be pushing up your debt-to-cap.

Once you feel somewhat secure, then you -- then you can push on your debt-to-cap and start to leverage up again.

Okay.

And then just actually one follow-up on the price issue.

The 40% of the communities where you saw the increases, can you just give us a feel for the geographies where that was.

You're definitely stronger in the Mid-Atlantic and northeastern territories.

We've had some increases in Florida on the West Coast especially.

Pushed - we pushed prices in California, both north and south recently.

Any markets I'm missing, guys?

No, I think that about covers it.

Mike?

That's about it.

Great, thanks a lot.

You're welcome.

Our next question comes from the line of Timothy Jones from Wasserman & Associates.

Hi, Bobby.

Hi, Tim, how you doing?

I'm doing fine, thank you.

Good.

Just a house cleaning question.

When you talked about one-half of your margin decline coming from incentives, 50 basis point from specs and probably the rest is mix and everything, are you comparing this year's margin with last year's?

Joel?

No and the incentives that I gave you of roughly a little more than half included that which came from -- from quick delivery homes.

So it's a little bit more than half, including quick delivery homes, was associated with increased incentives and about half, little less than half was associated with mix and then you've got a lot of other variables that seem to have washed out.

And is that compared to last year or to last quarter?

Last quarter.

Last quarter.

Okay, thank you.

Now my questions are as follows.

The first one is a simple one.

What was that $70 million tax payment related to that you did this quarter?

Joel?

We settled a couple of IRS and state tax audits.

That's what I thought it was.

Okay.

The second one is your impairments for the last three quarters have been basically quite consistent.

Going out for the next several upcoming quarters, do you -- could we interpret that they would decline because of the improved sales pace or increase due to the deferred taxes taken.

We didn't speak to that, Tim.

We take all the impairments that we think should be taken at the time.

If we thought that we should have more, we would have taken them already.

So you really can't speak to it.

Okay.

Thank you very much.

If I can.

Go ahead, Joel.

The comment that you made that the write-offs have been consistent is not necessarily true.

A $47.7 million has to do with disposal of land.

So if you take that out, write-offs for this quarter were lower than they've been in the last few quarters.

Okay.

Thank you.

Thank you, Joel.

Angelia.

Your next question is from the line of Buck Horne from Raymond James.

Hi, good afternoon.

Most of my questions have been answered.

So I just have a couple housekeeping items.

Wondering if you could provide the inventory balances in terms of dollars of the construction in progress, as well as land owned in operating communities and land held for future communities.

The 10-Q will be out in about 10 days.

Okay.

Will those line items be included, because they weren't in the last 10-Q.

They are included in the new for -- in the new format.

In the format -- Joe Sicree tells me that in the format of -- that is required now it is.

So it should be there.

Okay.

Do you have the spec count that you ended July with and maybe also an update on your finished lot count.

We have that somewhere.

Guys?

We've got 12,300 finished lots and --

In multi-family and single family.

Single family specs.

Single family specs are 204 -- 213.

213 single family specs.

By the way, everybody counts specs a little differently.

We count a spec once lumber has been dropped.

So we don't draw the line at completion.

We draw the line at lumber being dropped, which is, I think, more conservative.

Compare it to a year ago.

Compared to a year ago.

At July 31st we were 306 in single family.

306, July.

31st of '08.

Of '08.

Okay.

I'm sorry, 306.

What did I say?

Close enough, Joel.

306, 308.

Okay, thank you, guys.

You're very welcome.

Angelia.

Okay, your next question comes from the line of Alex Barron from Agency Trading Group.

Hello, can you hear me okay?

Barely.

If you speak slowly it will help.

Okay.

Sorry about that.

I wanted to ask do you guys have a breakdown of the orders by month this quarter and compared to last year as well?

We don't have that, I'm sorry.

Okay.

Can you tell us then if July was higher or lower than June?

Deposits in --

You mean --you mean in business?

Is that the question you asked?

Yes.

Yes, we did -- yes, I think we did better business in July than we did in June.

Okay.

My other question was what's happening for you guys in Vegas?

How are you guys seeing that market and how did you do this quarter in terms of sales and prices and incentives?

Death takes a holiday is the general description of the Las Vegas economy, but I don't have any more answer than the color I just gave you.

I mean, I know from -- from direct memory that it picked up ever so slightly, but I don't think it's -- it's so slight that I don't think it's worth going into.

We're -- we're still sitting and waiting for an economy to recover.

Okay.

Thanks, Bob.

You're very welcome.

Your next question is from the line of Eric Landry from Morningstar.

Bob, real quick.

I get the impression that there is less land now available than many builders had anticipated would be available at this point in the cycle.

First of all, is that an accurate statement in your opinion?

I think so.

Okay.

Yes.

So maybe a comment or two or three or however many it would take to sort of frame why it is that that's happening.

I think the reason is because of the tremendous, horrific problem that our economy found itself in over the past couple of years.

I think all of us would admit that we were near a depression.

The government, I think, responded pretty well in that it did everything it could to first remove the fear of a banking crisis.

And unless you're really have a rotten bank, the government has done what it could to help you through the crisis, to help the bank through the crisis.

So when you've got those Blues Brothers looking guys with the black suits and the white socks in there as regulators saying this hasn't -- you haven't had interest paid on this in three quarters, it's time to declare this a nonperforming asset and you've got to get it off your books, the guy that came into the office just after the blues boys was a neat looking guy who said, we're willing to give you $2 billion to hold you through this crisis, please just make sure that you play it clean.

Then along comes the builder and says we understand you've got some ground, how about getting rid of it and the bank doesn't feel the pressure any longer.

He's got the regulators pushing at him on the one side, but on the other side he's got Treasury, Fed, et cetera, who are throwing money at him to just do the best he can, keep the doors open and try and straighten itself -- straighten themselves out by earning capital the old way.

So that's why you don't see as much ground as you used to.

The ground came from busted builders who gave it to banks who wanted to off it.

But now you've got the help coming to the banks, so they're not offing it the way they did in '89, '90, '91.

So if -- if I read you correctly, you're sort of implying here that the land that everyone was expecting to come back is not likely to come back at the prices people are expecting?

I can't speak to the future.

You just said not likely, indicating the future and I don't know.

Recently, there's been a couple of nice parcels that have hit the market.

The banks have bought them back in because nobody was willing to hit the -- hit the strike price of the face value of the loans.

And now it remains to be seen whether these banks are going to be forced to, but unless they're being forced to, they probably won't flood the market with this ground.

They'll probably be more careful.

So why would they be forced to now if they weren't forced to a few months ago?

Cash for clunkers is done and by analogy, at a certain point Treasury and the Fed are going to be done and they're going to say, all right, those who have gotten themselves healthy, well and good and congratulations.

And those that haven't gotten themselves healthy, maybe you've had enough of a -- enough of a time of it and it's time to move this stuff off your books or else it may be time to shut your doors and get rid of your stuff.

Thanks a lot, Bob.

You're welcome.

Our final question is from the line of Michael Rehaut from JPMorgan.

Hi, thanks.

Hi.

Just -- thanks, Bob.

On the sales pace in the third quarter, you hit a number that we haven't seen in the last six, seven quarters.

Certainly well below, obviously, '05, '06, but getting in the vicinity of 2007, which like you said is a nice improvement, where are you -- where do you think that can go over the next couple of quarters?

Do you think that we could still see a little bit of improvement sequentially or as the fourth quarter typically is a sequential drop off, would you expect things to ease off a little bit in the fourth quarter or the first quarter as it is typically in a seasonal pattern?

On a seasonal basis, things tend to go down.

Business tends to shrink in the fourth quarter.

Things traditionally, seasonally pick up in the first quarter.

January, February, March are generally the tops of the housing market.

ISI's house price survey through Aug 21 suggests that the Case-Shiller Index is going to continue to improve in July and August.

Single housing starts, says ISI, have increased more than 35%.

Sales have also surged, so the inventory of new homes for sale has continued to decline making multi-year lows.

It depends how this is felt by the public.

If you have been in the market for a home and there's four years when you haven't acted and that might amount to as many as a 1 million or 2 million people, I mean family units, if you are more worried about being shut out than you are about getting the best price or about losing your job, if you're more worried about getting shut out, it could result in a V recovery.

If you're missy micey you can't tell, then you're going to have a flat line or a U recovery.

If people all of a sudden for some reason feel a fresh fear and are scared as they were, as we all were, I shouldn't say they, we were nine months ago, well, then you're going back into the ash can.

So -- .

Well, I mean, I guess aside from the -- I mean, aside from those macro comments, I mean, as you guys were kind enough to give some color on deposits in the last four weeks, I mean, what does that in and of itself suggest in terms of what let's say fourth quarter '09 sales pace could be?

Could it be at or higher than the 3.9 roughly that you posted in 3Q or -- ?

You've got the answers as well as -- as well as me.

You've got the same stats I've got.

I -- I can't guess any better than you can.

I guess what I'm asking is does it give you confidence?

As a matter of fact, I can probably guess less better than you can because I don't get paid for guessing, I get paid for operating.

You get paid for guessing so you're probably in a better place than I am to offer an opinion.

And we'd like to have it.

That's why I am asking you so I can -- I would rather take your opinion than mine, based off of the data.

All right.

Thanks, Bob.

Thank you very much.

Angelia.

(Operator Instructions).

There are no further questions at this time.

That's great.

That's great, Angelia.

Thank you very much for your help and thank you, everybody, for listening.

We appreciate it.

Have a good afternoon.

Thank you.

Good-bye.

This concludes today's conference call.

You may now disconnect.