托爾兄弟 (TOL) 2010 Q2 法說會逐字稿

Good afternoon, my name is Lynn and I will be your conference Operator today.

At this time, I would like to welcome everyone to the Toll Brothers Second Quarter 2010 Earnings Conference Call.

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

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

(Operator Instructions) Thank you.

I'd now like to turn the call over to Mr.

Robert Toll to begin.

Thanks, Lynn.

Welcome, everybody, and thank you for joining us.

With me today are Doug Yearley, Executive Vice President and soon to be CEO, yahoo; Joel Rassman, Chief Financial Officer; 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 TBI Mortgage Co; and Gregg Ziegler, Vice President of Finance who really is the one who knows what's going on.

If I gave each one of them a hammer and an assignment we would probably make some progress here.

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

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

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

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

Joel will review the numbers in more detail.

Today we reported fiscal year 2010 second quarter net loss of $40.4 million or $0.24 per share diluted compared to fiscal year '09 second quarter net loss of $83.2 million or $0.52 per share diluted.

Fiscal year 2010 second quarter results included pre-tax write-downs totaling $42.3 million compared to '09's pre-tax write-down totaling $119.6 million.

Excluding write-downs fiscal year 2010 second quarter pre-tax loss was $9.5 million compared to a pre-tax loss of $2.3 million in fiscal year '09.

Fiscal year 2010 second quarter revenues and homebuilding deliveries declined 22% in dollars and 16% in units versus fiscal year '09's.

Fiscal year 2010 second quarter net signed contracts rose 56% in dollars and 41% in units versus '09's, even though we had 21% fewer communities.

On a per community basis, 2010 second quarter net signed contracts of 4.32 units per community exceeded '09's by 85%.

They also exceeded fiscal year '08 by 46%.

However, they were still well below our historical second quarter average dating back to 1990 of 8.05 units per community.

Our contract cancellation rate, current quarter cancellations divided by current quarter gross signed contracts, was 5.3% in second quarter 2010 versus 21.7% in '09.

After three consecutive quarters under 7%, it appears to us that our cancellation rates have returned to historic norms.

2010's second quarter end backlog of $993.5 million or 1,738 units increased 5% in dollars and 10% in units versus '09.

This was the Company's first quarter to prior year quarterback log increase in dollars or units in four years.

It was also the first sequential increase in backlog in three years.

We ended fiscal year 2010's second quarter with 190 selling communities compared to 240 at fiscal year 2009 second quarter end.

We expect to finish fiscal year 2010 with between 200 and 210 selling communities.

We ended fiscal year 2010 second quarter with approximately 33,600 lots owned and optioned compared to approximately 31,700 in the previous quarter.

This was the first quarterly sequential lot count increase since fiscal year '06's second quarter.

We ended fiscal year 2010 second quarter with a net debt-to-cap ratio of 16.2% and $1.55 billion of cash and US creditary securities.

We also had $1.4 billion available under our $1.89 billion 30 bank Credit Facility which matures in March 2011.

It appears how business has finally emerged from the tunnel and into a bit of daylight.

For the third consecutive quarter our signed contracts per community exceeded both of the previous two years comparable quarter totals.

It struck me driving in this morning that I should quote with Churchill.

He said after the battle of El Alamein, "now this is not the end, it is not even the beginning of the end, but it is perhaps the end of the beginning".

I think this is appropriate apropos to us and to the rest of the builders as well.

Deposits and traffic per community have been trending positively for the last four, eight, and 12 week periods.

And our conversion percentage rate from traffic to deposits, non-binding reservations, was the highest second quarter total since we began tracking the data in 1994.

In the three weeks since the start of our third quarter on May 1st, which coincided with the exploration of the home buyer tax credit, our per community deposits and traffic were up 23% and 11% respectively over last year's comparable period.

May's activities suggest that for us the tax credit wasn't the determinate factor.

Rather, we believe the past few months activity has been driven by an increase in confidence among our buyers in their job security, their ability to sell their existing homes, and general trends in home prices in some regions.

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

Joel?

Thanks, Bob.

Second quarter homebuilding cost of sales before interest and write-downs as a percentage of homebuilding revenues was 79.8% compared to the 81.8% in the first quarter and second quarter interest expense included in cost of sales was 4.9%, about 40 basis points lower than the first quarter's.

Both of these improvements were principally a result of the mix.

Of the second quarter write-downs, $41.7 million was attributable to land and operating communities and 600,000 to options.

The quarter write-downs included some unusual items -- $10.1 million of write-downs attributable to two Toll Brothers communities located in the master plan community in Las Vegas, which was developed by a third party in which the major amenities have recently been shut down; $5.3 million attributable to a property adjacent to a newly designated super fun site; and $8.5 million attributable to an anticipated closing and potential sale of the community.

Second quarter SG&A at approximately $59.5 million was lower than the $67.3 million in the first quarter and benefited from approximately $5 million related predominantly to non-recurring settlements of litigation for less than what we had accrued.

In the second quarter, average qualifying inventory for the purpose of capitalizing interest was lower than our average debt resulting in the direct expense of about $6.2 million of interest.

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

The tax benefit in our financial statements if we have losses.

However, as we've discussed in our previous Conference Call, we expect that we will carryback any 2010 taxable losses against taxable income in 2005 and 2006.

At each quarter end in 2010, we estimate our taxable loss year-to-date and reverse the corresponding portion of previously reserved deferred tax assets triggering income in the form of a tax benefit.

In the second quarter we recognize tax benefit of $16.3 million related to the 2010 taxable loss offset by $4.9 million of new book tax reserves and other adjustments.

This resulted in a tax benefit for financial purposes of $11.4 million.

Subject to our normal caveats regarding forward-looking information and in today's release and the SEC filings, we offer the following limited guidance -- we expect that deliveries in 2010 will be between 2200 and 2750 homes.

For those who do quarterly models, our third quarter backlog conversion rate averaged 34% over the last ten years and 38% since we went public.

Given that we have some spec units we would expect that this will be a little higher in this third quarter this year.

Further we normally deliver more homes in the fourth quarter than the third and we would expect this will continue in 2010.

We estimate the average delivered price per home for the rest of the year will be between $540,000 and $560,000 resulting in the average price of the full year being between $550,000 and $560,000.

Because of the mix in the second quarter the average delivered price was $573,000.

We believe that our cost of sales before interest and write-downs as a percentage of revenues for the remainder of Fiscal 2010 will be approximately equal or lower than 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 are currently expecting lower revenues for the remainder of this year compared to 2009 we expect SG&A without interest as a percentage of revenues will be higher for the remainder of the year.

Until we either have $430 million more of qualifying inventory or reduced debt by approximately $430 million or a combination thereof, we would expect that qualifying inventory will exceed debt and therefore we will continue to have directly expensed interest.

At this point I turn it over to Doug.

Thank you, Joel.

We are seeing solid activity in many markets.

The urban metro New York City market and most of the suburban corridors from Metro Washington D.C.

to Metro Boston are doing better.

We have also seen notable improvement in parts of California and North Carolina.

With demand increasing in many areas, we are very focused on our growth.

In our second quarter our lot count increased for the first time in four years.

We are seeing better land deals from financial institutions and traditional sellers than last year.

Our land development expertise enables us to pursue earlier stage complex opportunities that many builders avoid.

Our balance sheet is in excellent shape.

Competition in our luxury segment is significantly reduced and our land teams are hunting for ground in nearly all of our markets.

Therefore we believe we are well positioned for future growth.

We believe many markets are turning the corner and housing in general is beginning its recovery.

We don't expect housing to roar back, the high rate of unemployment coupled with volatility in the financial markets continues to weigh on the nations psyche.

We are encouraged by the volume of business we've done recently in light of the gyrations in the financial markets.

We believe that as the unemployment rates come down and confidence improves, pent-up demand will be released and gradually more buyers will step into the market.

Now let me turn it back to Bob.

Thanks, Doug.

We were pleased to rank Number 1 among homebuilding companies in Fortune Magazine's recently released list of the 2010 World's Most Admired Companies.

As well as this week, the Number 1 Management rankings in our sector in Institutional Investors similar survey of the investment community.

This is a tribute to the hard work of our associates and the quality of our brand and our products.

We thank our associates for their diligence, committment and determination to be the best in the industry.

Now, Lynn, let me take questions, please.

(Operator Instructions) Your first question comes from the line of Dave Goldberg with UBS.

Thanks, good morning, everybody.

Hi.

The first question I have, Bob, I guess it's a little bit theoretical, maybe it is (inaudible) there, but the question that I had was it seems pretty clear to me that you guys are taking share from private builders and your competition on the luxury side of the market, but what I'm trying to understand is how do you think you're competing against existing homes that are out there.

I mean do you think that there are buyers out there right now who feel like the existing home stock maybe isn't very competitive and that new home builders can build them something that's price-wise more competitive to what they're looking for, such that you're kind of carving out some of the existing home market too?

No, I don't think so.

I think there's always been a differentiation in the markets desire for used home or new home and I don't think there's as much flexibility as your question implies between fulfilling demand with used home or with new home.

Traditionally, you can get a better buy for the square footage by buying a used home, but there's a whole sector that doesn't want a home that's been-lived in by somebody else and especially wants to, especially in the luxury end of the business, designate what square footage adjustments they would like to make, what options and extras they would like to put in, and not only to deal with Corinthian bound leather option manual, but to talk to a project manager and make custom changes.

Does that help?

Yes, very much so.

Thank you.

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

Hi, this is actually Rob Hansen on for Nishu.

Hi.

So it seems like things have picked up a little bit here and in the past you've done the market grading reports and just wanted to know has the markets turned enough where you could do one of these reports and if so could you grace us with one last one?

Doug?

He wants to be graced with your last report, he said.

I don't think we're quite--

What do you mean my last report?

Wait he's not going anywhere.

I don't think we're there yet.

The old F report died and we were going to come back with a report that hopefully ranges from A to D and we're not quite there yet, but we have mentioned that we've seen improvement in the Washington, D.C.

to Boston corridor including and most significantly urban New York and Gold Coast New Jersey and so that's encouraging because half our business is in that corridor.

We've also seen improvement in parts of California and parts of Carolina, specifically Raleigh for Carolina and Southern Cal, and I think right now that's all we're going to comment on.

We want to tell you all about Michigan because it's improved, but it's not significant enough for us to give any great details except it is encouraging that the newspapers now in Michigan are talking about profitability of auto companies and there's reloads into the market and I think that's a good sign for what may be happened nationally, but I think those markets I've identified right now are the ones that we're comfortable to speak to and we do hope soon to be back to a report card.

All right, thank you.

You're welcome.

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

Hi, thanks, good afternoon and congrats again, Doug.

Thank you.

Just wanted to focus on the gross margins.

You kind of went back a little bit above 20% after three quarters of the low 18s and said in your forward guidance that you expect to equal or be slightly better than year ago numbers in the back half of the year.

What do you think could keep it at 20%?

Do you expect it to remain at those levels and how do you think about what are the primary factors that are driving the direction of gross margins over the next few quarters?

Joel?

There are two major factors that affect gross margins.

One is price and the other is pace.

We have seen a reduction.

Now this is our, I guess, our third quarter of reductions where we've seen the incentives go down.

So we would start, expect to start to see it the last half of this year, which is now in my guidance, some margin improvement from that.

And as incentives continue to go down and as we deliver from the sales of current stock that's available, which has less incentives than they did nine months ago, I would expect 2011 margins would probably go up.

Yes, but Joel it's not just price and pace, it's also overhead that's being hired and we had a meeting just Monday about Empire Building again.

Well to some extent you have to put on overhead that is non-productive because we're starting up new communities.

It's driven mostly by pace, Bob.

If you have 20 homes per community and then you go to 30 homes per community even if you increase overhead slightly--

No, I'm talking about don't you have to count new communities that are yielding nothing, but are getting started.

We have overhead going in there.

You do, but some of that overhead gets capitalized.

I guess the question, though, is what would make it fall off from the 20% that we just saw in the second quarter.

Well the 20%, as I said, was a little richer than we had expected because we had a little bit better mix.

Okay.

So for whatever reason this quarter had a higher sales price and less interest capitalized to those particular lots and a little better gross margin.

Gregg, do you agree with all that?

That's exactly right.

That's exactly right.

Well if Greg says so let's move on.

Thank you.

You're welcome.

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

Thank you and my congratulations to both Doug and Bob.

Thank you, Ivy.

I wish you guys the best.

One of the things clients ask us all the time when they look at the land holdings of Toll is why is Toll buying land when they have so much land and I think we try to explain that the Company is being opportunistic and trying to average down and a lot of their land they don't want to put into the machine yet that might not be from an economic standpoint yet usually -- yet the best use of funds to put sewers, rows and pipes, etc.

But with all the cash you guys have why not buyback stock if your opportunities are as significant as they are longer term, why not use a sort of balanced approach, buy some land where you can opportunistically, as well as buyback shares and show the support for your growth prospects?

Yes, I have to smile at the question because for ten years, Joel and I have battled one another on this issue and strangely, I think we've switched positions after a ten year battle.

Joel?

I think we're in a growth period where we're looking forward to growing.

The lot positions, about 28,000 owned I think, is a high percentage against today's volumes, but we expect to be up at 8,000 plus units again and it's not a high percentage for that, so I think we need the cash to grow the Company's base and to grow the Company's business and that would be my recommendation to Bob-- When do you get to 8000?

Yes, but Ivy would say why not buy $100 million worth of shares.

I'm just wondering when you get to 8,000 that's quite a big number.

Depends on -- .

I'm trying to walk away from that statement.

Get back to the question of buying.

I think several communities we have opened, Ivy, times throughput to community.

We're now at 4.32 units per for the quarter.

Traditionally in this quarter we do eight units, which would be -- and traditionally for a year we do someplace around 25 units per community and we're operating at a much lower level now.

If I get back to 20 plus units per community, I get my community count up, back up to 300 plus communities, I am at 8000, over 8000 units and that's where I expect that we will be as this economy improves.

Now, I'm not saying it will be there tomorrow but it takes time in places like New Jersey to build land.

We're getting too far away from the question.

These are areas that I'll answer the question, which is can't say for now.

But about buying shares, I think that --

I don't think when you're in a growth period when you want to buy land opportunistically you should be out buying shares because you are just going to go back out to the capital markets again.

Right.

Traditionally Joel and I argued about this and I would say it is time to buy shares.

I want to keep our share count fairly constant.

I don't want to see it creep up as the options are exercised.

My feeling, Ivy, is still pretty much the same, that as long as we're able to carry our share count reasonably tight, no need to buy shares.

But if we see ourselves starting to increase number of shares for the statistics that we have to crank through the pipe here, well then we might consider it but right now, no.

Well I think that's a fair response and I appreciate it.

I guess the only thing as a shareholder that you consider is that your returns on your overall capital are going to be depressed because you've got a lot of land that's not being utilized and you've mothballed quite a bit and I know you're bringing on new communities and slowly and surely you can go from four or five homes a quarter back to the normal level, but that might take several years.

So if you really want to get your returns up, which provides the shareholder a rational reason to buy your shares, you're going to have to think of alternatives, because that land sitting on the books is not generating the returns and it's going to take a lot of utilization to get those returns back up.

So thinking from a shareholders' perspective it's not just about what kind of units you deliver and how opportunistic.

It's about returns.

Well I appreciate your comments.

Perhaps I should have chosen you instead of Doug, but I think we've got the right formula here and we're going to march forward to our own little private drum.

Ivy, thank you very much.

Thank you.

You're welcome.

Lynn?

Yes, sir.

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

Hi, guys, how are you?

We're doing well, Carl, how about you?

I'm fine, thank you, Bob.

Good.

I'm curious about the 143 unplanned that you bought during the quarter.

Can you give me a sense as to how much of that expenditure is related to what we consider finished or nearly finished lots versus land that you expect that you're going to have to develop and if you could maybe give me a sense as you look out, how long do you think it will take you to deliver that $143 million of land through homes to customers?

I'm curious how long a position that is.

Gregg, do you have any idea about this?

We didn't break it out versus finished.

Mumble louder please.

We could (inaudible) one of these into their status.

Doug, if you want to do that or not.

That's the list.

Well, the list is about 25 communities and just eying it, I would say 25% or less is improved, so which is fairly typical of how we do business.

We take advantage of distressed opportunities that may be earlier on in the entitlement process and have some more problems associated with them, so the length of time to get through the pipeline, some of these will be open and delivering within 12 to 18 months and others probably won't even be starting for two to three years.

So some of this ground will probably still be around in five to seven years.

Okay, thank you.

That's, the mix not dissimilar to what you're doing.

And then you've mentioned and obviously this has been a focus of the Company for years developing your own land, but as you know, other builders who are large and public who have been struggling to find finished lot supply in enough volume for their taste has started to vertically integrate into the development business.

I'm curious if you can comment on whether or not you're seeing your peers actually do that and whether or not that's providing additional competition for lots that aren't finished?

Yes and yes.

In reverse order.

The competition hasn't gotten intense or been determinative of our ability to succeed, but we do notice, just as you have said, that competition is willing now to develop, but it hasn't had a major impact on us.

Okay, thanks, Bob and congrats again, Doug.

Thank you.

Thank you.

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

Thanks very much.

Was wondering you talked about it's the end of the beginning.

Can you, along those lines can you talk about any of the mothballed communities coming back online and if they haven't come back online (multiple speakers).

Oh, definitely.

We've brought back quite a few communities.

I'm thinking in the Washington corridor at Dominion, as a matter of fact.

Loudoun Valley we brought back as well, right, but Joel points out to me that I remember each job as a child that has been in my family for a long time and therefore it's a big deal to me when they're back up and running.

The reality is we haven't taken that many out of mothballs yet, Joel?

That's correct.

Correct?

If Mike says it, it must be so.

Got it.

Okay thanks very much.

You're welcome.

Lynn?

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

Hi, good afternoon, gentlemen.

Hi.

This is probably more for Doug.

I was kind of wondering bigger picture, Doug, what your five year vision for Toll Brothers might be in terms of its competitive position, either geographically or product design or sales initiatives, just basically where do you see taking Toll Brothers in the next five years and maybe what are some specific things you can think of to do to increase Toll's market share in a housing recovery.

Wow.

Well the last downturn we expanded nationally.

We entered markets throughout the country and we bought builders primarily for the purpose of entering a new market.

I think we're pretty happy right now with our footprint and so what we see this time around is gaining market share in our existing markets.

There will be some modifications.

There could be a few markets we close.

There could be a few we open, but this time around it's primarily gaining market share.

We're going to do that through, as we've done it last time around, the cash, taking advantage of opportunities.

We're not afraid of land development.

We're not afraid of deals that are difficult that other builders wouldn't go near.

The example is Hasentree in North Raleigh that we publicly announced, which is a very exciting but very difficult deal and I think when it comes to product, we've really mixed it up pretty well in the last five years between urban and active adult and resort and suburban multi-family, so I think we like the mix.

Baby boomers are between the age of 44 and 56 years old, so you'll see more active adult and empty nester certainly as they mature.

We're very focused on our brand.

We're very proud of our brand.

We do everything we can to protect and enhance the brand and I've been working with Kira overseeing the marketing department now for a decade, so I'm keenly aware of the brand and that's something that I'm determined to build.

International opportunities, we're searching.

We've been back to China now three or four times and we may do something over there.

If we do it will be with very little capital and with a great local joint venture partner.

There may be opportunities outside of traditional homebuilding.

We've entertained chasing some large portfolios of loans where maybe the outcome is not to feed Toll Brothers lots, but just to service those loans and make money.

So we're certainly considering that.

But it's a great time for me to have this opportunity because we're back to growing and that's exciting and there's great opportunities coming along, so I think I'm not sure I gave you a full answer on five years but--

That's great.

That's very helpful.

One last one I had for you guys.

You guys gave the May comparisons for deposits and traffic.

I was wondering if you had the year-over-year comparisons from March and maybe April just to try to get a sense if those comparison are decelerating or accelerating in terms of, again, deposits and traffic.

We have that information.

Joel?

Well, I just want to point out that we had a very strong growth last year in March, so starting year-over-year the comparison was more difficult in March on deposits, it's my guess, so when you looked at it, that may show up in the statistics.

Go ahead, Mike.

Have you got it?

Well, the statistic we quoted as being the highest on traffic conversion to deposits was a ramp up from the first quarter.

We exceeded it by almost 1% on our traffic conversion.

Mike, the question was the first three weeks of May we quoted increased traffic and deposits compared to the last year's first three weeks of May, so how do March and April compare?

Yes.

We've got that info.

We saw certainly in April the strongest ramp up we had seen.

In the last four weeks of April we saw the ramp up starting and we had another ramp up in mid March, so we have been trending up in the last two months as well.

How about that?

You thought it was a tough comparison Joel.

I thought March would have been a tough comparison.

Well, shut my mouth.

Lynn?

Thank you, sir.

Your next question comes from the line of Bose George with KBW.

Yes, hi, this is Jade Rahmani on for Bose George.

I was wondering if you could provide us with the number of communities you're currently preparing to open for sale and the number that are temporarily closed but expected to open within the next 12 months.

Mike, you have that info buried somewhere?

Well the communities we have shut down at the moment we're tracking at about 50 communities.

I don't have a detail of when those specific 50 will reopen, but for the third quarter, we are looking at opening 13 new communities in Q3 and actually in the next six months we're projecting opening between somewhere between 30 to 40 communities, which gets us to our 200-210 projected count at the end of the year.

Of course communities will be rolling off.

Right.

They'll be closed down but brand new communities were in the 30 to 40 range prox.

Okay, thank you, Mike.

Thank you, Greg, and thank you I'm sorry, I forgot.

Jade.

Yes, thanks a lot.

You're welcome.

By the way, do we have any internet web questions?

I haven't seen any come in.

No, okay, cool.

Lynn?

Yes, sir.

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

Hi, good afternoon, guys, and congrats on a very solid quarter.

Thank you.

Let me just go back and see if I can get a little more detail on the question that was right before Jade's on the traffic.

Specifically I think the question then was the same one I was wondering is the 23% year-over-year growth in May, I mean what was the year-over-year number in April, if you have that, because I think we're just looking for a sense of whether that's decelerating or accelerating.

Do you guys have it?

The May number, I think, for traffic was 11%.

No, he want to know April.

I know but he said 23%.

But that was deposits.

The 23% was for deposit.

I know.

I was correcting him.

Oh, I'm sorry, I didn't know (multiple speakers).

Yes.

April was stronger than May.

May was stronger than March.

Year-over-year, Fred.

Yes.

I think he wants that.

That's what I'm giving him.

You are?

I just wonder the 11% you gave for April, was that 5% or sorry for May, was that 5% or 50% in April?

In April it was about 25% to 30% in April and it was about 3% in March.

Okay, and just comparing, you're down somewhere around 20% on community count so I'm just wondering if my math here is right.

If I extrapolate -- you had plus 23% on the deposits in May, plus 11% year-over-year--

In traffic.

In traffic on a per community basis and if I look at community count being down somewhere on the order of 20% year-over-year, I mean should we put that math together and say that on a total buyer basis or total people walking into the communities and putting down deposits that you're close to flat on a total number?

I don't know if it will hold.

I understand exactly what you're saying.

I understand exactly and it's good work and we can't refute it.

Well in the deposits, in the last four weeks in gross deposits year-over-year even with the declined community count we're up 24% in the last four weeks.

Traffic is down a little, it's about 6% down in gross traffic but the deposits are up.

Okay, well that's certainly encouraging and those are all my questions and just want to say Bob, I'm looking forward to catching up at the retirement party, thanks.

Come on down.

Your next question comes from the line of Jonathan Ellis with Banc of America Merrill Lynch.

Hi actually this is [Jay Chatburn] for Jonathan.

Hi, Jay.

Hi.

As you continue to buy and put more land under options, is there a potential for the community count to be higher than 210 by end of year and what might need to happen in the market for the count to be higher?

It's possible but unlikely because we would have to find improved deals to make a difference.

So we could buy a whole lot of communities between now and the end of the year, but to get them into production and have them make a difference, unless we're buying ready to go stuff which pretty much depends upon the hardship or lack thereof for the banks in the marketplace and for investors or builders who are feeling squeezed.

So I would say that would be pretty difficult.

Mike, can you add to what I said?

The only other comment I would add, especially for our brand, is we like to wait to also build our model, even if we built, bought a finished lot job we may want to get our model up for our branding and that will also take us outside the next six-month window.

And in general we just don't build spec homes, so we don't have a whole cadre of homes ready.

Thank you.

You're welcome.

Your next question comes from the line of Joel Locker with FBN Securities.

Hi guys.

Just on your spec count, what did you end the quarter with?

We were down 14%.

We're down about 14% in specs and we ended up with 294 for traditional single-family multi-specs.

294, got you.

And the one thing about backlog conversion is the first quarter--

I'm sorry we were down 18%.

Oh, down 18%.

The first is the first quarter where backlog conversion fell year-over-year and I think like 15 or so and I was wondering if are you going to go trend back to kind of the low 30% backlog conversion, which you saw before in '02, '03?

And if you are, when do you think that will happen or get back to that level?

It takes us nine months on average today with today's production capability from the time a person comes in to the time we deliver a house.

So it would be unlikely that we would be if more than some odd 30% in any quarter other than some kind of crazy mix issue seasonally, but we have the advantage of having both multi-family houses and buildings that are complete or almost complete delivered and some spec units and so that brings our count up.

So I would think and there's some seasonality to that, by the way.

Right right.

So if you -- we keep very detailed track records of conversions, which is why I gave you the conversion rate for the third quarter because I had noticed in conversations with people that they were using some numbers that were not achievable, and--

But you'd say cycle time on average is down from say 11 months back in '03, '04?

Well, in the hay day we were over 12 months.

Look, it's very simple.

It's got to do with production capability versus backlog.

And if your backlogged up the bazoo, it's going to take you 11 months to deliver a product and if you're sitting there waiting for the client to walk in, we can do it on average in about nine months.

Right.

So as absorptions or sales per community pick up then that cycle time might go to ten or 11 months?

That's right.

That's correct.

That's right.

It takes us on average, because we're building in the more regulated communities because they are closer in and more sought after and more organized and so it can take us on average three months to get our permit, whereas in the further out communities it can take you three days to get your permit.

Right.

So our build time might be six months for our 4000 square foot home, but it's three months to get a permit.

That doesn't vary no matter what we do.

And there is some seasonality because we sell more homes in the second quarter in general.

Right.

So you do get some seasonality in the backlog conversion.

Right.

All right, thanks a lot guys.

You're welcome.

Lynn?

Yes.

(Operator Instructions)

Lynn.

Yes, sir.

I'm not soliciting business here.

Okay.

All I want to know is are there anymore questions and if not I'll thank everybody very much.

No sir, yes, sir, you do still have questions.

Okay, go ahead.

All right.

Your next question is from Alex Barron with Housing Research Center.

Hi, Bob, hi guys.

Hi, Alex, what's up?

I wanted to find out, most of the -- as pertaining to your impairments this quarter most of the other builders have reported very little or none and have started to, I guess, show some profit so I'm kind of wondering what's the difference you think in the way you guys impair the land versus what those guys are doing?

It may not be a difference in the way we impair the land.

May be a difference in the way we bought the land.

Are you cutting prices in the quarter?

No.

The reality is we are not cutting prices in general in the quarter.

We may have cut one or two communities, but I don't think we -- well go ahead, Joel, I don't think we impaired those.

There were about $16 million of the $42 million was in Las Vegas, which is a market which has not yet fully -- has not yet stabilized and was hit with the problems at Lake Las Vegas where all the amenities got closed.

So that was (multiple speakers).

The golf courses went brown, the hotel, the Ritz, closed down.

Off a bankruptcy.

I think they still have the boat.

Everybody filed for bankruptcy out there.

And we ended up with an unusual item on a super fun site and we made a decision to probably sell a piece of ground that we were operating and those were the major portions.

That was like 77% of the write-offs, so we think that in general our write-offs are probably trending down and will continue to do that.

Yes, but I don't want to make it sound as though we're asking for forgiveness if these are just extraordinary things that we're not responsible for.

Of course we're responsible for them.

Okay.

The other thing is most of the other builders have said they are going to be profitable in 2010 or some have already started showing small profits.

I'm kind of wondering if that is something that you guys are comfortable forecasting or when you expect that to happen and what's it going to take to get there.

Is it going to be more SG&A cuts or just more revenue increases?

Anybody here answers that other than with mumbo jumbo, I'm going to be disappointed because we would have put that in the release, but go ahead, Joel.

We're not projecting going forward and we aren't going to do that on this conference call and we tend to trail because we sell first and then deliver.

We don't have spec units and so we'll trail a little bit.

Okay, my last question is Bob, just kind of wondering how is your role going to be different going forward?

Are you just going to be a lot less involved?

Let me see.

Last Monday night I got out of here at 9:00 instead of 11.

I came in a half an hour late this morning.

I'll send you a complete report card.

I hope to have more spare time or free time.

I'd like to participate in the Boards that I've accepted positions on more than I do.

I expect to be here to look over the land deals and for significant personnel changes and policy changes.

So, unfortunately, I'm not looking forward to retirement, as was said earlier, but I am looking for a cutback in my time and then of course it will depend upon Doug's wishes and feelings.

Doug will be the CEO and if he tells me to stay home Tuesday, Wednesday and Thursday, that will be my pleasure, so I don't see this going into retirement.

I do think I'll be here for the major decisions and I'm looking forward to continuing to have fun in the building business for some time to come.

All right, well Doug, congrats and thanks, Bob.

Thank you.

Thank you.

Lynn?

Do we have anymore questions?

We do, sir.

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

Good afternoon.

Hi.

Just wondered perhaps another more refined question on the one prior, which is one earns money, obviously, by having gross profits flow through to earnings and to that extent if one focuses on SG&A and assuming the S is variable at just under 5% of sales, it looks like your fixed costs are running near $50 million a quarter.

Obviously you guys are talking about potentially adding people and stripping out the perhaps capitalized piece of that, which Joel mentioned.

How do you expect your fixed dollar G&A to trend over the next year?

Joel?

Talking about in terms of a dollar rather than a percentage.

I think we have ability to expand production without expanding a lot of people, initially, and then as we open new jobs, the job overheads on the particular job will go up, because you have a new job you need new people in that job.

Much of that gets capitalized in normal accounting (inaudible) it doesn't flow through until the job has revenues.

There's a cash expenditure but not an accounting expenditure.

And I don't have a projection for next year.

I would expect that for at least the next quarter or two we'll be roughly the same where we were in the guidance I just gave you.

Okay.

So what that means is you basically drive, absorption rates will drive overhead costs down on the same person in the community, but as you actually buildout those communities as those being are being capitalized?

Initially capitalized and then expensed as revenue as units get delivered.

Correct, okay.

Second question, you've mentioned success in the Gold Coast or, I think, broadly in the Hoboken area.

Right.

Are you guys nearing a point of developing the remaining owned land that you have given the improvement in the market, given that you do have long lead times and high development, cement is low, steel is low and what is your thought process around what kind of the thresholds are you looking at?

Is it really selling out everything you have now or how do you balance that versus the future delivery time?

Thank you?

No, we -- that was a huge debate about six months ago.

We had to watch the market very closely and when we saw the market pick up enough to indicate to us that we weren't putting ourselves at risk, we hit the button and moved ahead.

Doug?

Yes, we think we bought trades at the bottom or close to the bottom and we have one new building that's beginning in Hoboken and we have a second building that will be coming on shortly after the first one gets up.

So and it's all -- you're right.

Your question is a good one.

It's all about buying trades and we think we timed it pretty well.

So you guys contracted the cement and the steel and the labor for all of those buildings or how much of the futures part cost have you locked down.

Through super structure?

You don't get into contracting drywall and trim and paint, but you certainly contract your super structure.

Thank you very much.

When will these buildings be ready for marketing?

Our first building -- .

Say a few words that will make us money here, please.

Yes, our next building is at Hudson Tee in Hoboken.

Construction begins now, we open for sale in the fall and we will deliver in the fall of '11.

Okay.

Thank you.

And your next question, would you like anymore questions, sir?

Yes, if you've got them.

We do.

Your next question comes from the line of Timothy Jones with Maloney Security.

No, I didn't mean that one.

But Tim, how have you been?

I've been fine.

It's been a great ride since you went public.

Thank you.

Best of luck to you, really.

Thank you very much.

First question, you had quite a rise, you gave your March, April, and May contracts and the April and May were dramatically higher than March.

Have you done anything different, like have you had any major marketing programs or anything else to stimulate sales so much in this period?

Well, that's a yes and no answer.

We have found, as the automobile people found ten years ago, that by having events of one kind or another that it stimulates traffic and stimulates deposits and stimulates contracts and so from a year ago, let alone from previous March, just this previous March, we have had special events every month, every month and a half.

National sales contests, special kitchen and bath exposition, special design, design your own home, 50% off on this, on options.

So we've been running specials every month, month and a half in order to stimulate the business and it's worked.

Worked to an extent where we've been able to raise prices.

We have for the first time in a long time some pretty decent pricing power in the New England, Mid-Atlantic corridor and that's the answer, Tim.

Tim, I think one important fact that we're excited about is the specials we ran 18 months ago, which we required additional $50,000 this weekend only and would have modest success.

Today's specials are this weekend only you can get an upgraded Koehler faucet and you can get a second grade or third grade kitchen cabinet and that's it and they've been very successful.

What's been working recently is the price will advance by $5,000 on May 30th, so get your deposits in because the price has gone up and that spooks action.

There's nothing like the other side of that hill.

Once people get the idea that they are going to miss out, you get the same kind of reaction as we got in reverse when people thought that they could lose money.

People are not as scared any longer that a house is a lousy investment.

The focus is starting to change.

When a change is in the majority of the markets, which it clearly hasn't done yet, then you'll see a new paradigm for the business.

We'll get there, but it's not going to happen overnight.

Sounds like the good old days.

Second question is of the 30 to 40 new projects you intend to bring on in the next six months, can you give me some flavor either is there any specific geography or the type, are they going to be adult, are they going to be traditional or any kind of flavor on what -- and how many of them will be absolute new projects and projects coming on from your mothball?

That's quite a question.

Let me see if you guys want to throw some stats in there to Tim or take a pass.

Gregg?

Yes, Pennsylvania is one that I remembered.

Texas.

(multiple speakers)

Pennsylvania and Texas were the ones that I remembered.

Now I know that --

And New York?

Well the Texas deals are mostly singles, luxury stuff.

The Pennsylvania stuff is all singles luxury stuff and luxury through the nose and I'm very excited about some of those projects.

Florida, I don't recall whether it's mostly single or not.

I believe it is.

Raleigh would be ones that I'm thinking of that are very luxury in singles.

Mike?

Doug?

You've got it covered.

Okay.

The Florida, could you tell me where the Florida ones are?

Do you guys have the info?

Tim is from Florida and would like to rush out and put a deposit down, so if you could detail it?

I've got a lot of--

Orlando.

Orlando, okay.

Thanks again and best of luck.

Thank you, Tim.

Lynn, anymore questions?

Yes, sir.

You have a follow-up from the line of Michael Rehaut with JPMorgan.

Hi, again, Mike.

Hi, Bob.

Just actually it is more of a clarification.

Just want to make sure I understood the numbers before when referring to the per community year-over-year deposit growth by month because I heard a couple different numbers.

Was it March up 3% year-over-year, April up 25% to 30% and then May up 23%?

I know that May is up 23%.

Fred, have you got the other info?

We want March and April.

He's eyeballing this, guys, so remember those are estimates.

We were talking about traffic before, but you're asking about deposits?

Deposits, yes.

Yes, the 23% was deposits.

For May.

For May, that's correct.

We were up 23%.

It was up about I'd say 35% to 40% in April.

Per community.

Per community and you're talking deposits.

And then for March it was up a little bit, just a little bit, under 10%.

Okay.

And it was bumpy.

Because it started March 21st.

I want you to understand that the answer is couched with a little davening going on back here.

The guys are shocking, rocking back and forth as they are trying to estimate their numbers, so please forgive us if it's not exact.

All right, thank you.

You're welcome.

And your final question comes from the line of Bose George with KBW.

George?

Yes, hi, this is Jade Rahmani again.

Oh, Jade, yes, sorry.

Just on your lot count you indicated that 10,700 are substantially improved.

Can you provide any color on how many of those improved lots are owned and how many finished lots you owned and then lastly, raw lots?

They are primarily all owned.

They're all owned.

We don't improve lots that aren't owned.

We can have options, we get rolling options, but-- (multiple speakers).

Okay and then--

Primarily -- .

How would you just characterize the number of finished lots versus raw lots?

That just the 10,700 would you say those are --

Primarily improved.

That means I think--

Excuse me, Joel.

Have you got that info, Mike?

The definition is the roads have base course, first layer of blacktop.

Is that what you wanted to know, Jade, how improved they were?

(multiple speakers)

Yes.

When they are improved they are improved.

Get in your car drive down the street and wave to your neighbor.

Okay and is there a number for raw lots?

I think roughly it's 17,000 difference.

No, they have different stages of improvements in them.

If the 10 are improved and we own 28 relatively the rest --

Well but they are at different stages.

There's 17 or 18 that are not completely improved.

How many of those have been boxed, how many have had storm sewer, sanitary, water, detention basin, I can't say.

We haven't got that stat.

Okay.

Okay?

Great.

Thank you.

Thank you, Jade.

Lynn, thank you very much and thank you all for joining us.

I appreciate the time and effort.

Have a good day, guys.

Thank you.

This does conclude today's conference call.

You may now disconnect.