托爾兄弟 (TOL) 2010 Q1 法說會逐字稿

Good afternoon.

I'll be your conference operator today.

At this time, I'd like to welcome everyone to the Toll Brothers first quarter 2010 earnings conference call.

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

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

(Operator Instructions).

Thank you, Mr.

Toll, you may begin your conference.

Thank you, Christie.

Welcome everybody, and thank you for joining us.

With me today are Joel Rassman, Chief Financial Officer; Doug Yearley, Executive Vice President; Marty Connor, Assistant CFO; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira McCarron, Chief Marketing Officer; Mike Snyder, Chief Planning Officer; Don Salmon, President of PBI Mortgage Co; and Greg Zeigler, Vice President of Finance, who's really the one who knows what's going on.

Before I begin, I ask you to read the statement on forward-looking information on 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, financial markets, and many other factors beyond our control that could significantly affect future results.

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

Since our detailed release has been announced this morning and was posted on our website, I will just hit certain highlights.

Today we reported a fiscal year 2010 first quarter net loss of $40.8 million or $0.25 per share diluted compared to fiscal year 2009's first quarter net loss of $88.9 million or $0.55 per share diluted.

This quarter's results included pretax writedowns of $33.4 million versus fiscal year 2009, pretax writedowns of $156.6 million.

Excluding writedowns, fiscal year 2010's first quarter pretax loss was $23.4 million compared to pretax earnings of $0.1 million for fiscal year 2009's first quarter.

Our 2010 first quarter revenues in home building deliveries declined 20% in dollars and 10% in units compared to 2009.

Our 2010 first quarter net signed contracts rose 129% in dollars and 98% in units compared to 2009.

Our 2010 first quarter contract cancellation rate was 6.7% compared to 37.1% in 2009's first quarter.

On a per community basis, our first quarter net signed contracts of 2.63 units exceeded fiscal year 2009's first quarter by 166% and exceeded fiscal year 2008's first quarter by 28%.

However, it was still about 55% of the Company's first quarter average, dating back to 1990.

We signed gross contracts of $313.2 million, 564 units, in the 2010 first quarter, an increase of 29% and 33% respectively in dollars and units compared to 2009.

We ended quarter one with 190 selling communities, 26% fewer than the 258 communities at fiscal year 2009's first quarter-end.

We expect to finish 2010 with 200 to 210 selling communities.

We ended the first quarter with approximately 31,700 lots owned and optioned compared to approximately 37,900 one year ago.

Our first quarter backlog of $840.2 million or 1,461 units declined 20% in dollars and 11% in units compared to fiscal year 2009's first quarter.

Backlog was down 4% in dollars and 5% in units compared to fiscal year 2009's year-end.

We ended fiscal year 2010's first quarter with a net debt to cap ratio of 10.8% compared to 14.5% a year-ago.

We ended the quarter with $1.75 billion of cash and marketable Treasury securities compared to $1.53 billion at fiscal year 2009's first quarter-end.

We had $1.38 billion available under our $1.89 billion 30 bank credit facility, which matures in March 2011.

I'm sure you all saw today's weak January new home sales number.

The annualized pace was 309,000 homes, the lowest ever, down 6% from last year's January number of 329,000.

We definitely did not experience that type of drop in our business.

An article today in the Wall Street Journal discussed how banks, especially the smaller ones, have cut back their lending dramatically.

In general, the private builders in our industry are the ones most dependent on local and regional banks.

Perhaps we are seeing the market share gains we've been talking about by financially strong builders.

Logically, we believe that buyers are gravitating to those firms with brand names and access to capital who can be relied upon to complete their communities and deliver their homes on time.

On the positive side, yesterday, which seems eons ago, the Case-Shiller index reported home prices were up for the seventh month in a row.

Meanwhile the Wall Street Journal said, "House Priced Bargains Are Drying Up." At this point in the housing and economic cycle, which I believe ware closely aligned, I feel like Punxsutawney Phil.

Everybody wants to know whether I've seen my shadow, are we in for three more years of winter, or will spring soon arrive?

A year ago at this time, we feared for the stability of the nation's economic system.

That worry seems to be behind us.

The housing market took several years to recover, following the downturn of the late 80s and early 90s.

As I said before, we expect this recovery to follow a similar pattern.

We believe the housing market is still in choppy waters, but that the seas are getting calmer.

This quarter's total net signed contracts were up significantly compared to 2009's first quarter, but last year's results were posted in the midst of the financial crisis.

Our per community net signed contracts exceeded both 2009's and 2008's first quarter per community average.

However, our results were approximately half the average of all previous first quarters dating back to 1990.

The US housing market is really many local housing markets.

We expect the housing recovery to occur region by region.

The unevenness in demand we have observed since Labor Day impacted recently by the miserable weather has made it hard to discern the pace of recovery.

However, we have seen some improvement in the last four weeks and more so in the last week.

This past week, we launched our annual national winter sales event, which produced the highest per community deposits for any week in February since 2006.

The traffic, which had been consistently weak, began to show some evidence of recovery.

In some of our healthier markets, we've recently observed the return to more normalized paces of deposits per community based on our five and ten year averages.

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

Thanks, Bob.

First quarter home building cost of sales before interest and writedowns, as a percentage of home building revenues, was 81.8% compared to 81.6% in 2009's fourth quarter.

The difference is principally a result of mix.

The first quarter interest expense included in this course of sales was 5.3% of revenues, about 50 basis points higher than 2009's fourth quarter, caused by inventory being held longer and mix.

The first quarter pretax writedowns was approximately $33.4 million and included $31.8 million attributable to land and operating communities and $1.6 million attributable to options, with none attributable to joint ventures.

First quarter SG&A at $67.3 million was 15% lower than the $79.3 million in the fourth quarter of 2009 and down 20.8% from the $85 million in the first quarter of 2009 as we continue to try to control costs in this difficult market.

In the first quarter, average qualifying inventory for the purpose of capitalizing interest was lower than our average debt, resulting in direct expenses about $7.3 million of interest, in addition to the interest expense which is included in cost of sales.

First quarter other income and income from joint ventures was $8.8 million, including about $4.4 million of retained deposits.

I want to remind you that because we are in a position of reserving any new deferred tax assets created, we do not get the benefit in our income statement.

However, on November 6th, 2009, the President signed a new law which allows for a one-time carry back of taxable loss for up to five years instead of two.

We expect that we will carry any 2010 taxable losses against taxable income in 2005 and 2006.

At each quarter end in 2010, we will estimate our taxable loss for that quarter to date and reverse the corresponding portion of previously reserved deferred tax assets, which will trigger income.

Additionally, we will continue to establish and reserve against deferred tax asset on book losses, adjusted for normal provisions for interest and penalties, the lease of exposures under [1040A], and adjusting the previously approved taxes.

In the first quarter, we recognized a net tax benefit of $18.3 million related to the 2010 taxable losses we expect to carry back, offset by approximately $2.3 million of new tax reserves, resulting in a tax benefit of $16 million.

The average number of shares used to calculate earnings per share was approximately $165.2 million for the first quarter.

Subject to our normal caveats regarding forward-looking statements in today's release and our SEC filings, we offer the following limited guidance.

We ended the first quarter of 2010 with a backlog of 1,461 homes, $840.3 million, which was 11% lower in units, 20% lower in dollars than 2009.

Since it takes us approximately nine months on average to obtain permits and build a home after a contract is signed, we expect deliveries in 2010 will be between 2,100 and 2,750 homes.

We estimate the average delivered price per home between $540,000 and $560,000.

We believe primarily due to incentives, fewer deliveries, and lower average sales prices, our portion of sales before interest and writedowns as a percentage of revenues for the remainder of fiscal 2010 will be higher than in 2009.

We continue to estimate a reduction in absolute dollars expended for SG&A in the remainder of 2010 compared to 2009.

However, since we currently expect lower revenues in 2010 than in 2009, we expect SG&A without interest, as a percentage of revenues, will be higher in 2010.

Until we either have approximately $500 million more of qualifying inventory, or reduce debt by $500 million, or a combination thereof, we'd expect that qualifying inventory will exceed debt, and therefore we'll continue to have directly expensed interest.

Although we are not providing quarterly guidance, we normally deliver fewer homes in the second quarter than in the third quarter, and we expect this trend will continue in 2010.

At this point, I'll turn it over to Doug.

Thanks, Joel.

For the past 43 years, we've maintained a business model of building spec homes.

Generally, we start a home after a buyer is pre-qualified and provides a substantial non-refundable down payment.

We intend to continue to adhere to this philosophy, which has served us well for decades.

We continue to review numerous land opportunities.

Since November 1, 2009, the start of our new fiscal year, we have stepped up our purchases, acquiring or placing under control approximately 3,000 lots via mortgage net purchases and direct acquisitions from financial institutions, builders, and land developers.

With more finished lot land deals among those being offered for sale, if our pace of acquisitions accelerates, our year-end community count could prove higher than the 200 to 210 currently projected.

With experienced land teams in nearly all our markets, a strong cash position, and low leverage, we have the capital and ability to respond to opportunities very quickly.

We have already taken key steps to prepare for the future while building a large cash position and extending our public debt maturity well into the future.

We believe that more opportunities exist today than in any previous time in the four plus years of this recession.

Back to Bob.

Thanks, Doug.

Christie, we're ready to take questions.

(Operator Instructions).

Your first question comes from Dan Oppenheim with Credit Suisse.

Thanks very much.

I was wondering if you could give color in terms of the trends you're seeing in February?

And also if you could quantify how it was in the mid-Atlantic area given that some people were snow-bound for a time there?

Can you talk about how it was Company-wide?

Can we talk about February, and can we talk specifically about the mid-Atlantic area?

We got slaughtered, of course, as we've seen on the TV sets, in Washington DC, Virginia, Maryland markets due to the snowstorms, but when we look at our top 11 markets -- who picked 11 as opposed to 10?

Oh, we had 5%, so you made it 11.

Okay, top 11 markets, remarkably Washington DC and Virginia market, even fighting its way through the snowstorms, turned out to be our 10th highest, best market.

Our best market was New York City living, highrise.

Our second best market was New Jersey city living.

Our third best market was Connecticut, our fourth best market was Texas, Houston.

Fifth was Texas, Dallas.

Sixth was West Gold Coast in Florida.

Seventh was back up to the New York area, but in the suburbs.

Eighth was Massachusetts.

Nine was back to Texas in Austin.

And 10, as I mentioned was Virginia, tied with southern California, which came in -- you made that 10B instead of 10A, so Mike, you thought it was just a hair less, not an even tie with Virginia.

Does that do it?

Was wondering more in terms of, just the comments about this past week being the best week in February since 2006, how's that look in terms of trends on a year-over-year basis or what you're seeing in terms of positive traffic?

It's about double.

The trend that we've, the numbers that we've been seeing.

We had huge number of deposits for (inaudible) for this time in the economic cycle in the Great Recession, and we'll keep our fingers crossed, hope that [Centrus] doesn't know what he's talking about, and see what the follow through is this weekend and and in the weekends to come before we're out of the spring selling season.

Great, thanks very much.

You're welcome.

Your next question comes from Joshua Pollard of Goldman Sachs.

Great, thanks for taking my question.

First -- can you talk a little bit about how incentives have been trending for your business?

In addition, could you talk about the timing of gross margin improvement that you would expect sequentially across your markets?

I know you guys have a little bit of a longer lag time than the rest of the group, with respect to yourselves.

So a lot of the group had been seeing gross margin improvement over the last two quarters.

Wondering should we expect that from you in the next quarter or two?

The incentives, naturally, just reflect the demand in the market, recognizing that there's about a nine-month delay.

If the market stinks, incentives get larger.

If the market improves, the incentives get smaller.

That's just obvious.

The reporting takes nine months for the pig to work its way through the snake and with respect to the specifics --

We went down in incentives being offered this quarter versus last quarter end.

As of the end of the quarter, we were $70,000 of incentives on average expected to be offered for the next 12 months going forward.

Now we are $63,000 expected to be offered for the next 12 months going forward.

The peak at the end of the third quarter, as we talked about in the third quarter conference call.

All right.

I go over almost every week with every regional, every community, and it's hard for me to believe that the incentives will be that high on the basis of just last four weeks worth of review, because I know we've been paring back the incentive numbers.

As of January 31.

Oh, you're January 31.

All the changes we've done since that, they're not reflected.

That was eons ago, in January.

Thank you -- if you don't mind for a moment, could you just talk about the monthly trends?

Sales or traffic or deposits, I think a lot of folks were a little surprised by the census data as you guys have alluded to.

Would you mind talking about what you saw month over month in January versus December and December over November, in as much detail as you'd be able to give on February?

Thanks a lot.

Sure.

You don't expect to see much, in the season to be jolly from Thanksgiving through Christmas, and you don't expect a lot on the weekend of January 1st.

You expect the market to pick up in January.

In fact, as I said in the monologue that -- since Labor Day, things went down, and were not as good as we expected.

We were slightly encouraged before Labor Day.

We had a good summer and we expected to see some follow through.

In truth, the market acted just as it did in 1991.

Our first recovery week was, I remember, the last weekend in January of 1991, Desert Storm, and we started doing significant business through January and then -- and thank you, for pointing to the microphone.

I'm talking through the ear piece.

And then we were disappointed -- just when we felt we were going to hit it, it went back under cover.

What we had this past three or four months, we had no follow through of the seller sales.

Things didn't crash and burn, but they just waddled around in the water and got choppier.

We expected to see things come back in January because they normally do.

So we were all feeling low, and February we started to see some improvement, and this past week, which was the kick-off of the national sales our winter sales event, exceeded our expectations by 50% to 60%.

We had a pretty significant number.

I can't give you any more color than that.

We'll have to wait for next week and the week after to see.

My bet is, we're going to recover as we did in 1991, 1992, 1993, and 1994.

It was choppy water for a couple years.

We slowly worked our way up the stairs until we became happy and euphoric.

Christie?

Your next question comes from Michael Rehaut with JPMorgan.

Hey, this is Ray Huang on for Mike.

First question on the land acquisitions.

Wondering if you can give some detail on other geographic locations of that, and also if you guys have any -- what your IR thresholds and what gross margins you're expecting on those land parcels?

Don, do you got the info?

Sure, the 3,000 -- approximately 3,000 lots I mentioned earlier were geographically diverse.

California, Florida, New York metro, Colorado, Texas, North Carolina, Pennsylvania -- were very opportunistic.

The deals are coming in nationwide.

Was that California north or south?

One in each.

One in each?

There you go.

That is commercial.

In terms of IR, mid to high 20s.

We underwrite it with today's pace, today's price.

We had to look at it a second time with modest improvement in price over the long-term, and we consider both worst case and better case when we make the decision.

And then just a follow-up question on the gross margins, the Company -- you're going to talk about gross margins being down in 2010, but given where you guys ended the quarter, about 18.2% ex charges.

Despite basically backlog, sequentially that's improved from 18.2% or more flattish around 18?

Joel?

I don't think we're capable of giving you that yet for the rest of the year.

I think we're just going to leave it at it's going to be worse than last year.

I don't think we'll get into disclosure, but if you look at the trend in backlog, you'd think it's [awful better].

You'd see that probably will go through most of this year before you'd see improvement.

Remember, cost of sales is also affected significantly by pace per community, and we're not expecting -- because pace per community would be higher this year than last year.

We're in effect giving you a range which is lower than last year's total.

For the number of units, we'd expect the overheads per home to be higher for the rest of the year too, which negatively impact margins, and we look at both incentives and overheads.

What were the incentives this past quarter?

Offered at the end of this quarter, from January 31st, the offering, which is what we estimate ourselves for the next year, at a point in time, it looks like we will end up with $63,000 of incentives per home.

On average.

On average.

And last quarter in the fourth quarter we did the same analysis, it looked like it'd be $70,000.

There has been an improvement.

That will not hit if it happens until 2011.

Okay, great.

Christie, I have a question from Steve Sullivan over the web.

It says Bob, can you talk about any changes, improvements, you're seeing in the appraisal process over the last three months?

Additionally, are you seeing any changes in banks and other landholders' willingness to release land off the market?

We are definitely seeing changes in banks and other land holders willingness to release land onto the market, euphemism all for dumping or selling or getting out from under.

We definitely see that increasing, the offering of land.

With respect to the appraisal process, Don Salmon, PBI Mortgage Co.?

Our profits haven't changed, but the results have.

We've seen few significant appraisal problems in the last quarter as opposed to last year when we saw many more.

I would say that almost none are coming across my desk these times, which is really good news.

That is good news.

Reflecting that we're no longer selling houses where it's doomsday.

How are they doing in California?

Those are the areas where we had problems, Las Vegas.

I think in California, there are very, very few problems, especially in the north now.

We've virtually none that I know of.

I haven't heard any problems except in Las Vegas, and that's been about a month since I heard the last tale of woe.

There are older sales in Vegas that might be affected, but they're pretty much through the system now.

There might be some spotty ones in Vegas and Phoenix, but I don't think it's material that we'd be concerned about overall.

Assuming that's reflective of -- reflecting the other guys markets, that's good news, because one of the most serious impediments we had last quarter and the quarter before were appraisal problems.

Appraisers are straightening themselves finally out.

We've come to a conclusion when we sell a house for $500,000, it's worth $500,000, not an appraiser with $400,000.

That'll make a difference to us and the other guys.

The issue, Bob, is we're no longer in declining markets, now the markets have declined.

We're not bouncing along the bottom.

I think that we're seeing support in those markets now.

That's also reflected with the -- a lot of the mortgage insurance companies have reduced their number of troubled markets or declining markets, which makes getting financing easier.

That's done.

Christie?

Your next question comes from David Goldberg of UBS.

Thanks, good afternoon, guys.

Hi, David.

First question is about -- if I understood the opening comments properly, if I interpreted them right, I think you talked about gaining market share from private builders, the limited amount of financing out there for a lot of your competition.

And I think that's definitely happening, but the question really is, given your background and given your experiences historically, how long do you think the banks continue to limit capital if they're willing to commit to private builders?

Especially if we start to see a rebound where the industry started to get increasingly more profitable?

It's something I'm not qualified to speak to.

You aren't either, but go ahead.

I'm being told two things, that there are more and more banks on the FDIC watch list.

We read that in the paper.

Which means they are undisputedly less likely to lag, and that the bigger banks are not in the mood currently or in the short term in the near future to want a bank loan.

Most of the bigger firms have gotten out of the market, smaller builders.

The regional firms, banks are still in that business, but they've been more reluctant to do it recently, and when I speak to them, they do not indicate a current desire to change that perspective.

I would say we're 1.5 years away from seeing things reverse at the earliest.

That's as far out as the crystal ball can see.

I know that speaking of human nature, there's only one thing people hate more than losing money, that's when the next guy is making money and you're alongside him and you're not.

I suspect what will happen is when the loans start to be made and start to make money, then you'll see the same patterns you've seen over the last many cycles.

The banks will come back in.

But I'd say that's not likely for 1.5 years.

Christie, I have a question from [Brom Setav].

Based on signed contracts for quarter one, it appears that home prices have picked up.

Can you please discuss any trends you're seeing in home prices?

Yes, Brom, I agree with you home prices are going up, and that was reflected by Case-Shiller numbers.

We have the real info, our Sunday night sales report, and we do see prices going up because we're raising them whenever we get a chance to.

Your second part of your question was in incentives as well as what you expect in these areas if the home buyer tax credits expire.

Incentives we've already spoken to, tax credit expiring seems has to have an impact.

For us, I believe it's small, but it's not immaterial because in the beginning of the daisy chain leads to ultimately our offerings, our products, and that daisy chain is helped by the tax credit.

As small and seemingly irrelevant as it is, it gets things started.

Two, you say projections are for decline in SG&A.

Yes.

However, community count appears to be expected to grow.

Are you doing more with less?

That's absolutely true.

What are you doing in terms of headcount?

Higher or lower on trended quarterly basis.

We've held pretty steady on the headcount and I choose not to address that for the next for the next several months.

I don't want to put in expectations of advance or expectations of doom to my Company, so I think we'll just sit on that and not answer it for the current term.

Christie?

Hello, Christie?

Yes, your next question comes from Ivy Zelman of Zelman and Associates.

Ivy, your line is open.

I'm here, sorry.

I'm sorry about that.

Hi, Ivy.

I don't know what was wrong with my technology.

Not my best point.

Bob, with respect to two things, you have historically been a very opportunistic buyer of land.

You had a big check book in the last downturn, and were able to acquire a lot of land.

I know you guys have looked in, continue to look for opportunities.

With Lennar recently purchasing the two pools from the FDIC, and recognizing that they bought notes -- I know you talked about -- at least Joel has mentioned you looked at non-performing loans.

Is this something you can see maybe opportunities as well in maybe capitalizing on some of the distress as these banks are taking over, suggesting as we did that the lists continue to grow, that the banks are on the watch list?

Secondly, separately, as you open new communities and recognizing there's a low level of new level of construction out there right now, record levels of inventory, what are some of the due diligent steps you take to deal with or mitigate the risks that there'll be foreclosures coming, even though the government keeps leveling with the foreclosures in process and many of those aren't coming to market and aren't listed for sale?

What can you do as a firm to minimize the risks associated with those, that potential [saddle] inventory that competitively pressured you as you contemplate new openings?

With respect to the latter part of the two questions, open your eyes and be aware of what's in the neighborhood.

The business as you know is a business of -- I said regions and localities in the monologue, but the reality is, it's neighborhoods.

You have to be very much aware of what the foreclosure patterns are in the neighborhoods that you're considering going into before you commit to go into those neighborhoods.

We evaluate that carefully.

With respect to taking advantage of opportunities, as banks disgorge and large pools are disgorged, we're definitely on it.

So far we've been probably -- I wouldn't say the least aggressive, but the least willing to accept the prices that are out there.

We're now seeing things come into balance we think.

We hope we're not ahead of the market.

We hope we're with the market and we expect to see quite a bit more in the coming quarters.

Bob, separately again, one more question related to your buyers -- typically your buyer has to sell a home to buy a home.

And recognizing that many people have a lot of challenge right now not having as much equity, can you talk a little about the buyer that's coming in the door, New York, New Jersey, Connecticut -- are they putting a lot of cash down?

Maybe getting big bonuses?

Tell us about your buyer profile and the contingencies of selling an existing home?

We don't give contingencies to selling an existing home.

Obviously the buyer has to -- when they buy one if they own one, feel as though they've got a pretty good estimate of what time it will take for them to sell the home they've got.

That has produced tremendous fear over the period of the Great Recession, which is one of the reasons sales fell so precipitously.

To a certain extent, that has to be changing.

Otherwise we wouldn't be seeing the increase in deposits that we're seeing.

We're aware of the problems and have programs to help them, but none are contingencies.

What we have sold with -- what's the nickname for the program, Peace and Comfort?

Peace Of Mind, where we give a longer delivery date.

Work an arrangement out with the buyer where, when we get to a certain point in the home, we give the buyer a call.

If he or she asks for an extra three months to settle the home, we stop work on the home, extend delivery to work with and accommodate that buyer.

But as I said at the beginning, we see less concern -- not slight, but a lessened concern for people about getting rid of their homes.

With respect to how much true cash business are we doing now, doing 18% of our transactions for true cash.

Doug, do you want to speak to what's going on?

Bob, how much money are they putting down when they're not using total cash, but leveraging?

Are they putting 30% down?

Do you have the stats?

LPV is 70%.

They're putting down 30% on our average transaction.

If you back that --

The total cash buyers are 18%, you said?

Yes.

Okay, great, guys.

Thank you.

Total cash buyers are 18%.

Okay, thank you Ivy.

Your next question comes from Joel Locker of FBN Securities.

Just on your total spec count, what was it at the end of the quarter?

I don't know if you already mentioned it.

Single family specs are 165 in 137 communities, and 1.2 houses have been started that have not sold per community.

Spec isn't a completed home necessarily.

It can be.

But when we drop lumber, we count the home as -- that's not sold, but a spec.

So you have little less than one per single family home community.

What was it about a year ago?

503?

Is that correct?

In January?

Do you have it, Mike?

The single families were 274.

Okay, so that's double what we have now.

It wasn't that we planned specs.

People walked away and we got deposits on houses that were now specs.

The breakdown of the $93 million you said you purchased in land or land related notes, how much of that -- how many millions of that was land-related notes?

Notes versus land?

We bought a pool of four mortgage notes in Texas and the amount was $7 million.

So it was mostly just sprawl, or land [finished line].

In various stages.

$86 million in land, instead -- so it was a majority of land.

Your question was purchase of notes.

And that's all of the $93 million that we purchased.

All right, thanks a lot, guys.

You're welcome.

Your next question comes from Nishu Sood of Deutsche Bank.

Wanted to ask about the lots you've been tying up, the 3,000 lots that Doug mentioned.

You mentioned a lot of the opportunities that are available are finished lots.

I wanted to get a sense of the 3,000 lots you took under control for purchase and option.

What proportion are finished, what still are in a fairly raw state, and do you have any general thoughts or strategies on what you're pursuing raw versus finished in the future?

Well, Doug is researching the numbers We like to, we like to buy opportunistically and we don't have a strong desire to buy raw lots, nor do we have a strong desire to buy improved lots.

We're just looking for deals that pencil out to make us above a certain threshold.

It looks like we have about 50% of the 3,000 lots were raw.

By raw they're in some stage of entitlement, but the horizontal site improvements haven't begun yet.

And the balance of 50% is in some stage of improvement in the ground.

Most of that is closer to fully improved than just beginning.

Got it.

Go ahead.

And maybe if I could just get some -- that's helpful, maybe if I could just get some color, Bob, on your comments in terms of your strategy.

If you think about the typical Toll Brothers experience, the typical Toll Brothers community, and a lot of the value is in how you brought the community together, so it's in the development, the land development, the land of the community, amenities obviously for buying finished lots.

Obviously that opportunity for value accretion isn't there, so -- ?

I got to stop you there.

That's not true.

I'm thinking of a beautiful tract that we bought in east Gold Coast Florida a couple weeks ago.

Beautiful amenity-pack -- yes, in Boca Raton, beautiful amenity pack, beautiful lots, large lots, beautiful landscaping, magnificent entrance.

Busted builder and bank very much wanted to get rid of it.

It was our perfect type of product.

It wasn't well-suited to the other major builders.

We made, we think, a good buy and there we are with our product and we're selling.

So I guess where I was going with that was -- just kind of answering my own question here, it sounds like you wouldn't be targeting lower margins or IRRs on the finished deals versus -- ?

No, absolutely not.

If you're going to logically target a lower number, you'd take that on something in the future.

So you would buy, entitled, missing one or two snail darter permits, and subject to securing your snail darter permit.

And that would be a raw piece that you would have to improve.

Therefore it's unlikely that you would be putting houses in the ground for a couple years and settling houses for a couple years plus nine months.

There you might take a little lower return, because you're going out 2.5 years on today's basis.

So you would -- I think it's the opposite of what you suggest.

Okay, interesting.

Thanks a lot.

You're welcome.

Your next question comes from Kenneth Zener of Macquarie.

Good afternoon.

I think, Doug, you talked about potentially community counts, and the guidance of 200 to 210 that actually could be exceeded.

Could you or Bob talk about the catalyst that could unleash some of those mothballed communities as it relates to order pace, pricing?

And I know maybe three months ago, you talked, Bob, about your interest in opening this up, but you were pushed back generally by the regional guys.

Can you expand on that process, please?

We have about 100 mothballed communities.

We evaluate them weekly.

The decision to open those communities is based upon the local market, the market comps and some of those communities I think will open and already projected to open this year.

And other communities are in locations where we think it'll take quite a bit longer for things to firm up where they're ready to go.

I think the other piece that could add community count, as I mentioned, is it's the deals we are seeing through [facts] continue at this pace or accelerate, which we think may be happening, there'll be an opportunity to bring on more and more communities, because again much of what the bank has, started by another builder, failed.

And therefore you have land that's partially or fully improved.

And I think relatively quick charge to be able to close and then open.

How would you think is the best way for us to look at the paradox, seeing if there's greater demand?

You'll be closing out your legacy communities as you're potentially having the opportunity to buy more.

It could actually be the same number, but we'd be seeing in reality, a much different dynamic.

Is it going to be better absorption rates on orders and rising confidence in gross margins, or how would you guys paint that roadmap?

I don't understand the question, do you?

Doug or Joel?

Go ahead, Joel.

We're underwriting two standards that are relatively profitable under any standard.

We're underwriting them in today's conditions, we would expect acquisitions we get today when we acquire them will be profitable.

When we take rundowns on land, we're writing them down, because there's a profit.

It may not be as much as the profit is in new ground, which is what some people surmise in some cases.

It may be more in the written down community.

Depending on how the present value and the payments -- maybe if it's another community, those communities have a bigger margin.

If you see it in terms of pace and the ability to raise prices, they all may be profitable.

I think you can't make the assumption one will be more profitable than the other, which I think was your question.

Is that relevant to the question?

Yes, that's a fair response.

My point was if you could actually be at the same community count because you closed out legacy communities faster as you're bringing on communities.

So it's -- that's it.

It was fairly answered, thank you.

You're welcome.

Your next question comes from Megan McGrath of Barclays Capital.

Hi, thanks.

Just wanted to follow up a little bit on your guidance.

If I take the mid point of your new closing guidance range, it implies about an 18% decline in closings for the full year, which implies at some point a worsening in pace.

Is that partially because you are selling more quick delivery homes now and your backlog conversion should be higher?

Could you talk us through what might get you to the midpoint of that range?

I think that we have more spec homes than we used to have.

More multi family homes, which by nature have to be delivered quicker if they're completed.

Right.

And we also have been able to sell in the last few quarters more of those than we were in previous quarters.

So it includes a significant amount of estimates for future, for the sale of homes that are not currently backlog to be delivered.

If you look at 1,461 homes in backlog and add it to the 600 that we've already closed, on average it takes nine months, on average I'm done and it should only be 2,000 units, and fine with my range of 2,100.

You get a pretty good feel that we're expecting to have.

I think what highlights that, Joel, is that the number one market right now is New York City city living, number two market is New Jersey city living.

These are high-rise and mid-rise markets, and by definition, once we get through presale and we've put those, we put these buildings up -- while nobody may have settled and we have 50% sold, when we are ready to settle, all 50% can move in within a month.

And so you get a much-faster turn on your backlog.

But just, if you look at 2,000 versus the midpoint, you get an idea what I said, be able to sell and not backlog.

Not all the things I have in backlog will deliver by the end of October.

It's a higher number.

Okay, thanks, that's helpful.

And just a quick follow-up in terms of lot count.

Given your acquisition activity in the quarter, and your rise of community count, is it safe to say that perhaps your total lot count is probably pretty much approaching a bottom?

I hope so.

I would hope so.

Okay, thanks.

You're very welcome.

Christie?

Your next question comes from Carl Reichardt with Wells Fargo Securities.

Hey, guys, how are you?

Doing well.

Glad to hear it.

Doug, curious on the deals that you're looking at now, you said current pace, current price for your pro formas to get to your IRRs.

What are you looking at in terms of materials labor, just direct construction costs?

No change.

So just flat with price?

Yes.

Even though the land as a percentage of the sales is likely to be less than it used to be, right?

So wouldn't it make sense, with what's happening in raw materials to start pushing one or both of those?

is your experience -- ?

Well, we build 3% cushion into our construction costs when we underwrite all deals, and in fact that's in the existing communities that we're building, that's in the pro forma.

So there's a modest cushion built in, but when we look at new land deals, we're not assuming changes in building costs.

Super, that's all I got, thanks.

Building costs are coming down, Carl.

As soon as this market feels decent about itself -- and we're not there yet, don't have enough confidence in the market -- but as soon as we do, that's going to be the next problem.

You'll have a reversal.

Because right now subs are still going down in price.

Christie?

Your next question comes from Alex Barron from Housing Research Center.

Can you hear me okay?

No, Alex, I think the strings between our Dixie cups aren't waxed.

Bob, I wanted to ask you, based on my rough calculations of your land supply, it seems like you guys have anywhere from a 10 to 15 year land supply.

I'm curious, as opposed to other builders who maybe have one or two years left, and therefore they have to buy to stay alive -- why do you feel the need to buy, at this time, as opposed to just wait until maybe conditions get a little bit better?

Are you just considering -- is it just specific shortages in certain markets?

Can you give us maybe a breakdown of on how your lots are by region or something, to better understand how that supply breaks down?

Are you guys looking at the future shadow inventory when you're making these decisions?

What we're doing is thinking of taking advantage, we hope, of the market.

We're opportunistic.

We are not buying strategically because we're out of lots, as you've implied, in one region or another.

We're not buying in one region or another because strategically we feel that region needs more lots, and needs further expansion.

Solely we are determining our buys on the basis of the opportunity.

And we don't believe that we should wait -- we think that heaven is now.

And in fact, we expect that within a year or two, you'll find it much more difficult if in fact the economy and the housing economy, which are very much tied together, continue to improve.

Joel?

Your 10 to 15 years is based on a 2,500 unit sales pace, roughly.

We would expect that our sales pace, as competition disappears and you go from 300,000 units a year to 1 million units a year, we'd increase significantly the sales pace and therefore you'd need more lots than that to get it.

If I'm doing 8,000 lots a year, it's less than four years apart.

Okay.

My other question was, are you guys changing strategy in certain markets in terms of the product you guys are building?

Like I saw in Vegas, in one community, it seemed like you guys were trying to shift to a lower price point.

Is that something that's just a one off or more general?

It's not more general.

It is one off.

We have switched to a lower priced product in Las Vegas.

In some of the communities, we've gone from fancier razzle dazzle kind of offering to more conventional, straight single home on a lot offering.

We have the same finishes inside the homes and granite, and [millwork] and appliances, but the floor plan is more straightforward as that market collapses.

We saw that the buyer of the more esoteric product leave the market.

So we have changed the offering in Las Vegas.

I think it's pretty much limited to Las Vegas.

We have a lot of land in Reno, and we'll probably do the same thing in Reno, but Reno has been so quiet that we haven't felt the need to do anything but just sit.

Thank you.

Christie?

Your next question comes from Mike Widner of Stifel Nicholas.

Good afternoon, guys.

Hi, thank you.

Bob, your crystal ball is more tenured than many of ours, and you're always fairly forthright in your read of it.

I'm forthright.

Crystal ball, I'm not sure though.

You've talked about your parallels between coming out of this housing downturn and the last one in the 1990s, and you've been through a number of them -- the family's been through a number of them.

I guess I'm wondering if you could comment on as well, how they might also impact whether the recovery for housing coming out of this downturn is better or worse than last.

Just some things -- employment is certainly a lot worse at this point in the cycle than it was in, certainly in 1991.

The excess vacancy problem seems high today.

Wonder if you could talk about that in a historical context, and foreclosures and the shadow inventory still an issue.

On top of all that, we have a consumer still at an all time high debt leverage on consumer balance sheets.

Wonder if you could talk about your expectations on those and if those factor in your crystal ball when you're thinking about this recovery versus say 1991 or any of the prior cycles.

It would seem to me that the recovery is going to be choppier and perhaps slower.

Because, as you pointed out, you've got to overcome deterrents to good times that didn't exist the last time around.

And you've got record foreclosures, you have record short sales that we have to combat.

As you said, we have higher unemployment.

In 1991, finished Desert Storm, the whole thing took a couple of days and we were done.

I think we're in our seventh or eighth year now in Iraq and have now gone into Iran and we've taken a boatload of money out of our economy and turned it into bullets and bombs.

That's got to make recovery slower.

I think your question was as much rhetorical as it was real question.

But as they say, this too shall pass.

The foreclosures will be sucked up.

So will the short sales.

Unemployment will slowly drop.

The economy will slowly recover.

And the housing market will possibly lead as opposed to follow.

And so, as we've said, we think it'll be several years for full recovery, but we think we're on our way.

I appreciate that.

It wasn't so much as rhetorical as much as looking for other perspectives on someone who might have more cross route.

You guys are on the front lines every day and seeing the buyers.

Most of us are sitting in our offices looking for wisdom and guidance from you.

Thanks, and appreciate the comments and color as always.

You're welcome.

Your next question comes from Jonathan Ellis with Bank of America.

Thank you.

Wanted to first ask about you mentioned incentives declining in terms of what you're expecting over the next 12 months.

Can you just talk a little about mix?

Has the mix of backlog changed much that would potentially influence the rate of incentives?

As of 1/31, quarter-end, the mix in our backlog is relatively stable with where it was at year-end.

There hasn't been much of a change.

Thanks, Greg.

Thank you.

Christie, I've got a question from Evan Fox.

Past five or so quarters, I've seen margins decline sequentially versus many other builders who have shown some sequential improvement at various times.

Do you attribute this more to taking lower amount of impairments versus other builders?

No, I don't think so.

Or to mix?

No.

When would you expect the sequential margin decline to trough?

I don't know, do you, Joel?

No.

Sorry.

We do build --

Evan, sorry, I wish we had more of an answer.

We sell first and then build, so we technically trail by nine months.

We don't (inaudible) responds immediately with changes in the market.

Right.

Thank you, Joel.

Christie?

Your next question comes from Bose George of KBW.

Good afternoon, a couple things.

One, wanted to get an update on your mix of sales by mortgage size, conforming jumbo.

You already gave the cash number.

Just wanted the others, and the rate differential between jumbo and conforming?

Don Salmon, we rehearsed this.

We did?

Today there's -- I'll answer the second part of the question first.

There's about 0.125 point difference between the conforming load and what we call an agency or high balanced conforming load, which is over 4.17%.

4.875% versus 5%.

Typical Jumbo loan, true jumbo loan today, is about 5.975%, which is about 1 point difference between a true conforming and a true jumbo loan.

And the percentage of mix?

In terms of mix of Toll Brothers, 75% is conforming NFHA, about 7% of sales were jumbo -- ?

Not conforming and FHA.

Conforming or FHA.

A combination of the two.

About 7% of total sales were true jumbo category and 18% of the people paid cash.

Actually this is 75%, can you give the breakdown between the agency conformed, the old conforming limit and the agency jumbo?

I don't have that number.

Okay, great.

And actually, I had a question on the deferred tax valuation allowance.

Just wondered where does it stand at the end of the quarter?

I just wanted to clarify something on the allowance.

If you turn profitable but never realized losses on your earlier impairments, is it possible you end up not reversing that valuation allowance?

If we turn profitable -- oh, when we turn profitable?

When you turn profitable, if you don't actually realize those earlier impairments?

You have two different issues.

Book and tax numbers.

Your book numbers are primarily write-offs taken for accounting purposes that haven't materialized to tax purposes.

When we turn profitable and we're in the progression of trying to understand this with our accountants Ernst and Young, exactly when that will be, that will picked up.

But when we turn profitable, after some time of being profitable, it'll be completely reversed.

Deferred tax assets, [tax is] conservative, will be completely reversed.

In the meantime, to the extent that we have losses for tax purposes this year that we can carry back that will turn out to be real cash, [tax the] Company in a year and will also relieve the deferred tax assets with cash.

Okay, great, thanks very much for that.

Got that?

Yes.

Okay.

Christie?

Your next question comes from Eric Landry of Morningstar.

Did you say we're going into Iran?

Did I say that?

I did.

Oh.

As they say about a [certain country], it's don't cry for Venezuela.

No inside information on going into Iran.

Okay, good, I checked stocks and they were still up.

I was about ready to sell.

Sorry about that.

I want to ask you -- it looks, I see you're a little bit more optimistic now in the deals out there, given the commentary, but at the same time there's about $13 billion of cash sitting there in all the top builders I was wondering -- ?

$13 billion of cash flow -- ?

All combined.

All combined with top builders.

Right.

So what's sort of your opinion as to how this recovery compares to 1991 in regards to the amount of cash chasing the deals out there?

I think you've just summed it up.

There was nowhere near this kind of cash in 1991 in my opinion.

We had a bunch.

But the other builders did not.

I think there's more cash-chasing deals.

The second phenomena, which I haven't mentioned, is the hedge funds didn't exist in 1991 to chase ground to the extent that they are now.

I remember that we've been on a couple of deals in 1991 to 1992 and we came up against Cargill.

We had no idea what Cargill was.

We had never heard of Cargill, since having learned it the largest private Company in the world, and they were, they were a very strange phenomenon.

There was almost no just money people chasing land deals.

Today you have hedge funds.

So there's definitely more complication and the difference between now and then.

Safe to say it's going to play out differently, we just don't know how.

I think we have a good idea of how and and why and when and where.

I don't think it's a mystery.

Is this a five-year process?

A three-year process?

Apparently it's a much-longer process than it was.

You had a different position being taken by the government in 1991.

Regulators came in and kicked banks in the pants and said you have to disgorge this stuff or we'll change your capital requirements and shut the doors.

Whereas this time around, we weren't sure that it was just a Great Recession -- there was a good chance it was the Great Depression all over again.

So instead of regulators just kicking banks in the pants, you had guys walking around with suitcases full of money saying $1 billion for sale, $1 billion for sale, no money down, no interest, pay me later, but take this money and stay healthy.

Which is a very different environment than we had in 1990 to 1991.

Thank you.

You're welcome.

Christie?

Your final question comes from David Goldberg of UBS.

Thank you for letting me requeue here.

I had one other quick question.

I think it's probably for Don Salmon.

It is about reps and warranties, and if you're seeing reps and warranties issues at all from the mortgage business getting put back to you guys, if you think that's a serious problem as you look forward.

We are seeing people ask for extra warranties.

We have been very diligent in --

Define people.

The listeners may not know who you're talking about.

The conduits to which we saw loans are asking for reps and warranties.

We've been able to avoid additional reps and warranties for the most part.

Our historical performance on our loans is very very strong.

We have no material buybacks, no material at Toll Brothers, anyway.

I think you see some of our competitors reporting very large numbers in terms of reserves for potential mortgage buybacks.

We haven't done that and we don't anticipate doing that.

I think we're in a very strong position that way.

Christie?

You have one final question from Bose George of KBW.

Christie, you said final question with David.

I was just asking for a good-bye.

It's my pleasure.

Go ahead.

A quick one.

I just wanted to get the DTA valuation allowance number at quarter-end.

DTA allowance number -- what is DTA?

Deferred tax asset.

$486 million.

Okay, great, thanks a lot.

You're welcome.

Christie?

There are no further questions.

Are there any closing remarks?

Yes, thank you very much, Christie.

Thank you, everybody.

Good-bye.

Thank you.

This does conclude today's conference call.

You may now disconnect.

Thanks.