托爾兄弟 (TOL) 2010 Q3 法說會逐字稿

Good afternoon.

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

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

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

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

(Operator Instructions).

During the Q&A, please limit yourself to one question.

You may re-enter the queue to ask a follow-up if needed.

Thank you.

It is now my pleasure to turn the conference over to Robert Toll.

Please go ahead, sir.

Well, Christie.

We haven't changed the information that went to you.

I'm going to turn this call over to Doug Yearley, CEO of Toll Brothers.

Doug?

Thanks, Bob.

Welcome everybody, and thank you for joining us.

As Bob said, I'm Doug Yearley, CEO and of course I'm with Bob, Executive Chairman.

Also with us are Joel Rassman, Chief Financial Officer; Marty Connor, SVP and 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 Company and Greg Ziegler, Vice President of Finance.

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

I caution that many statements on this call are based on assumptions about the economy, world events, housing and finance a 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 highlight certain items and Joe will review the numbers in detail.

Today we reported fiscal year 2010 third quarter pretax income of $800,000, and net income of $27.3 million or $0.16 per share diluted.

This compared to a fiscal year 2009 third quarter pretax loss of $111.3 million, and a net loss of $472.3 million or $2.93 per share diluted.

2010's third quarter results included pretax write-downs totaling $12.5 million, compared to 2009 third quarter pretax write-downs totaling $115 million.

2010's third quarter included a tax benefit of $26.5 million, 2009's third quarter included non-cash federal and state deferred tax asset valuation allowances of $439.4 million.

Excluding write-downs, 2010's third quarter pretax income was $13.3 million, compared to pretax income of $3.7 million in 2009's third quarter.

Our 2010 third quarter revenues and home building deliveries of $454.2 million, and 803 units, declined 2% in dollars but rose 1% in units compared to 2009.

With 19% fewer selling communities during 2010's third quarter than during 2009, our 2010 third quarter net signed contracts of $400.1 million, and 701 units, declined 11% in dollars and 16% in units compared to 2009's third quarter.

On a per community basis, 2010's third quarter net signed contracts of 3.69 units per community were above 2009's, 2008's, and 2007's third quarter per community totals of 3.56 units, 2.71 units, and 3.42 units respectively.

However, they were still well below the Company's historical third quarter average, dating back to 1990, of 6.09 units per community.

Our contract cancellation rate, which we calculate as current quarter cancellations divided by current quarter gross signed contracts, was 6.2% in the third quarter of 2010, compared to 8.5% in 2009's third quarter.

This marked the fifth consecutive quarter in which cancellation rates were consistent with historic norms after 12 consecutive prior quarters of elevated cancellation rates.

Our 2010 third quarter backlog of $939.4 million and 1,636 units rose 1% in both dollars and units, compared to 2009's third quarter end backlog.

We ended 2009's third quarter with 190 selling communities --

Excuse me, that's 2010.

My apologies.

We ended 2010 third quarter with 190 selling communities compared with 215 at 2009's third quarter end.

We expect to finish 2010 with approximately 195 selling communities.

We ended 2010's third quarter with approximately 35,800 lots owned and optioned, compared to approximately 33,600 in the previous quarter, and 35,400 one year ago.

Our net debt to capital ratio at 2010's third quarter end was 11.5%, compared to 14.5% at 2009's third quarter end.

We ended 2010's third quarter with $1.64 billion of cash and marketable US Treasury and agency securities, compared to $1.55 billion the previous quarter, and $1.66 billion one year ago.

The increase in cash between 2010's second and third quarters was due primarily to cash generated from operations and to receipt of $152.5 million in tax refunds.

This was offset in part by the use of $63.1 million to retire debt, $104.1 million for the purchase of land, and $29.1 million for investment in a new joint venture.

At 2010's third quarter end, we also had $1.39 billion available under our $1.89 billion, 30 bank credit facility which matures in March of 2011.

We were pleased to return to profitability this quarter especially with volumes down 65% from our peak.

Although revenues and unit deliveries for the quarter were relatively flat compared to one year ago, our gross margin before write-offs improved by 350 basis points.

While much of this quarter's profitability was due to tax benefits, we are encouraged by the decline in impairments and our fifth consecutive quarter of more normalized cancellation rates after three years of elevated rates.

Another bright spot has been the performance of our high-rise projects in Metro New York City urban market built under the Toll Brothers City Living brand.

Among these were several 50% joint ventures, which in 2010's third quarter produced $38.5 million of contracts versus $17.7 million the previous year.

These JVs ended this third quarter with a backlog of $103 million versus $19.4 million in 2009's same quarter, and should continue to contribute profits over the next several quarters.

We are actively pursuing growth.

We are looking for attractive distressed land and debt acquisition opportunities.

This quarter our count of lots owned and optioned increased to 35,800 from our trough of 31,700 at 2010's first quarter end.

This was the second consecutive quarter of sequential growth in our land position.

We continue to find opportunities in most of our markets, and this quarter, spent approximately $104 million on land acquisitions, bringing our nine month total to approximately $340 million.

Due to our very low leverage and significant cash position, we have the flexibility to opportunistically pursue transactions that are arising from the distress in the current real estate industry.

This quarter we announced the formation of Gibraltar Capital and Asset Management Corporation, a wholly owned subsidiary.

Gibraltar will look to capitalize on Toll Brothers' expertise and nationwide presence to pursue real estate opportunities.

With a quick start out of the gate, we are pleased to announce that Gibraltar in joint venture with Oak Tree Capital Management and Milestone Merchant Partners, successfully completed a transaction to acquire approximately $1.7 billion face value of mainly distressed real estate loans and properties in partnership with the FDIC.

The primarily residential portfolio consists of approximately 200 loans, and 80 real estate properties averaging about $6.1 million per asset.

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

Thanks, Doug.

Third quarter home building gross margins before interest and write-downs as a percentage of home building revenues was 21.4%, compared to the 22.2% in the second quarter, and the 18% in last year's third quarter.

This improvement was principally a result of reduced incentives and mix changes.

Third quarter interest expense included in cost of sales was 5.1% of revenues, about 20 basis points higher than 2010's second quarter, principally a result of mix.

The third quarter write-downs of $12.5 million were principally attributable to land and operating communities.

Third quarter SG&A was 14.8% as a percentage of revenues, compared to the 19.1% in the second quarter.

This reduction was principally a result of significantly higher revenues in the quarter compared to the previous quarter.

In the third quarter, average qualifying inventory for the purposes of capitalizing interest was again lower than our average debt, resulting in direct expense of about $5.1 million of interest.

The increase in other and joint venture income was principally a result of settlements in our joint ventures in the New York metropolitan area and higher ancillary business income, principally our mortgage Company.

As we discussed in previous conference calls, we expect that we will carry back 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 the previously reserved deferred tax asset, triggering income in the form of a tax benefit.

In addition, as a result of statute expirations, certain previously established tax reserves were also reversed.

The third quarter tax benefit of $26.5 million is principally a result of these items.

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

We expect that deliveries in the fourth quarter, will be between 560 and 760 homes, bringing total deliveries in 2010 to between 2500 and 2700 homes.

We estimate the average delivered price per home in the fourth quarter will be between $560,000 and $570,000.

We believe that our gross margins before interest and write-downs as a percentage of revenues for the fourth quarter will be higher than 2009's fourth quarter.

We continue to estimate a reduction in absolute dollars expended for SG&A in this fourth quarter versus 2009.

However, since we currently expect lower revenues for 2010's fourth quarter compared to 2009, we would expect SG&A without interest as a percentage of revenues will be higher.

Since we also project lower settlements in the fourth quarter than our third quarter, we would expect SG&A as a percentage of revenues to be higher in the fourth quarter than in the third quarter.

Until we either have approximately $250 million of more qualifying inventory or reduced debt by approximately $250 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, turn it over to Bob.

Thanks, Joel.

The acceleration we saw in deposits and traffic through the first few weeks of May was not sustained during the remainder of the quarter, a trend we first noted in our press release on June 16th, 2010.

Our observations were subsequently borne out over the following weeks by data, showing declining consumer confidence and weaker housing activity.

Although the unemployment rate among our buyer profile remains at half the national unemployment rate, recent economic and political news continues to dampen our customers' confidence.

We see a combination of potential buyers postponing their purchasing decisions, a lack of new home production, and very little land having gone through the approval process over the past four years.

We believe this could result in pent-up demand bumping into limited supply once the recovery takes hold.

We are opportunistically looking to take advantage of the unfortunate disarray that exists in the market.

We have limited competition as our main competitors, as smaller, mid-sized privates are capital constrained.

We have a strong land position, particularly in the lot-constrained Northeast and Mid-Atlantic regions, and we have the best brand name in the industry.

Now, I'll turn it back to Doug.

Doug?

Thanks, Bob.

Christie, let's open it up to questions.

Thank you.

(Operator Instructions).

Your first question comes from the line of David Goldberg with UBS.

Good afternoon.

It's actually Susan for David.

Hi, Susan.

Wondering if you guys could give us a little bit more information regarding your gross margins.

They were impressive this quarter.

Can you give us some sense of how much of the improvement is maybe coming from mix shift or pricing or other significant factors that are in there?

The majority of it was principally from incentives being lower in the deliveries this quarter than they were in the previous year.

And there's a small change that happens every quarter based on mix, sometimes it's a little bigger as we had last quarter, but in general that change is smaller than the amount that was attributable to incentive changes.

Okay.

Thank you.

Thanks, Susan.

Christie?

Yes.

Would you like Susan's line to remain open?

No, I think it's the next question.

Okay.

Thank you.

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

Unlike your other peers, I guess many of your customers probably didn't qualify for the tax credit, but do you have any sense or do you care to hazard a guess, how much do you think Toll sales benefited directly or indirectly from the tax credit?

Very little.

We didn't see and hear about significant changes in buying patterns in March and April, as the other builders discussed.

$6,000 on a $600,000 home, which is what most of our buyers could possibly get if they even qualified with their income levels, was not enough for them to change their buying decision.

We didn't see sales drop off as we announced in early May.

So we don't think the tax credit had an impact on our business.

Okay.

Separate question.

I know that impairment tests are run, and impairments are taken on a community by community basis.

But broadly speaking, what does it take in terms of price drops, or declines in absorption, to get impairments to pick up in a really meaningful way?

Marty, why don't you take a shot at that one?

Well, I think impairments are very tough to predict.

I think it's a community by community type evaluation that we do, and the combination of both pace changes and price changes is individual on each community.

It's tough to quantify exactly how much it would move impairments dramatically.

If I can, to the extent that we may have taken impairment on a community already, we've written it down to a profit.

So we would have to have absorbed that profit by additional deterioration before that community would again be subject to a write-off.

So I can't answer your question exactly because every community has a different level of profit depending on the mathematical formula.

Josh?

Yes, Bob?

I wanted to give you a kudo.

Thanks for the piece you put out today.

I actually didn't realize that the net housing sales number is calculated by surveying a sample of building permit holders to determine if the builder has signed a contract for sale.

Which means, I take it, that customers that see a nice entrance, come up the road, go to a model home, pick a house, enter into a contract for a home for which no permit has been taken out yet, do not count in the government's -- according to the government methods, as a sale.

And according to your release, the proprietary private home builder survey that you guys take, showed that net housing sales were flat or up modestly in July relative to June.

Also all the public home builders indicated, according to you or your company, that their sales in July were flat to up month over month.

I don't mean to imply that things are great, and the stats are all terribly wrong, but I do mean to imply that much of the stats that we're getting are backwards.

I would point out that inventory of new houses, according to ISI, for sale July the 27th were at a 42 year low.

That same number of inventory of new homes for sale applies today.

So what you have is a divisor changing, because of the new home sales method of the government, which gives you a 12 month inventory according to the government now, as opposed to the six month inventory that we had last month.

But in truth, it's the same damn inventory.

So my hat's off to you.

Thanks.

Thank you, Bob.

Thanks, Josh.

Thank you.

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

Hi, Michael.

Thanks.

Hi, how are you?

Great.

First question on the trends during the quarter.

I was wondering if you could just give a little bit more color.

Obviously with the press release in June, the momentum that you had early had kind of reversed trend.

I was wondering if you could kind of give us an update on how things fared through the remainder of the quarter from an order perspective, if it was similar, more similar to the second three weeks that you had described in the press release.

And also with regards to incentives, if those rose at any material level during the quarter as well.

Sure.

Yes, I think the interim announcement we made in June of the second three weeks continued through the Summer.

Historically, July, after the Fourth, has been a pretty good time for us.

August tends to be a vacation month and get-back-to-school month.

And July was not so great this year.

In fact, it continued the pattern that we announced from the second half of May, through June.

So it's continued to be very bumpy, and relatively slow, and where we go from here, we don't know.

But for the moment, what we're seeing is fairly consistent with the announcement of June, and we don't blame our buyers.

They're skittish.

I think that's a New York Times word to describe them, and I think that's very accurate.

The news out there in the world is negative.

The headlines are negative.

Our buyers tend to be very tied to the stock market, to world events, to their confidence.

And right now they're on the sidelines.

So the trend of early in the quarter has continued.

Incentives, I can't tell you if they changed inter-quarter.

I can tell you what they were offered at the end of this quarter versus last quarter.

They're a little bit less on the expected next 12 month contracts right now than they were as of the end of the second quarter.

Okay.

And just one more question, if I could.

The slightly lowered guidance with regards to communities by the end of the year, is that more just you guys dialing it back a little bit given the lower level of demand, or more timing issues with regards to just getting the appropriate permits and development timelines in place?

Yes, I think it's a combination.

We have dialed it back.

We study every community that we could open, and we have 119 communities right now that are mothballed, which means they were either once opened and closed, or ready to open but never did.

And so as we study those, if the market is soft and we don't hit a minimum return threshold, then we choose not to open it.

That's one bunch.

The other bunch is the permitting process of many of our locations is difficult.

It's very hard to predict.

And in some cases, we may have lost a month or two or more in a permitting process, and that has pushed back the opening.

Great.

Thanks.

You're welcome.

Thank you.

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

Hi, Dan.

Hi.

This is actually Will Alexis on for Dan Oppenheim.

More on the land, recognizing that you have a strong balance sheet, and can handle more land, how does the recent slowing in demand impact your land buying plans, if at all?

Good question.

We don't run our business on week-to-week sales results.

We're very opportunistic on the land side.

That's always how it's been.

We've grown through recessions.

We're setting up our land basis for better times.

Sure, every Monday when we're in here studying land deals, if we've had a bad week of sales, that certainly has an impact on our appetite that day, but we haven't made a Company-wide change in the underwriting threshold, but it certainly has a softer effect on how we approach land deals.

But we're seeing a lot of good deals.

We're seeing a lot of distressed deals, and we're continuing to buy, as we showed from the numbers this quarter.

Okay.

Thank you.

And my next question is, you mentioned the strength of the City Living brand in New York, which is highly sensitive to the equity markets.

Just wondering how volatile the sales have been, given the changing markets over the past few months?

The sales over the last few months have been spectacular.

We've continued to reduce incentives.

We've continued to have very strong sales in Hoboken, Manhattan and Brooklyn.

Just by way of example, last week we took 13 agreements in four communities between Hoboken, Manhattan and Brooklyn.

That's in one week.

And the average price in those communities is at $1 million or more.

One community that we have in Manhattan, 303 East 33rd, has taken 75 agreements in the last year, 23 of those were in the third quarter, with an average price of $1 million.

So, what's happened in the last two months for us has been all positive.

Thank you very much.

Thank you.

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

Hi, Carl.

Hi, how are you, Doug?

How are you, guys?

Two questions, first, Doug, just on the mothballed stores, you mentioned looking at needing a target return to start to ramp those, but you're selling on an absorption rate basis like one a month or close to one a month per store now.

What kind of increase in absorptions, if you left margins sort of the same, would you need to see before you thought you could ramp those.

I know it's a broad question.

But is it like a two a month rate, or is it significantly less than that?

No, it's less than that.

Every community stands alone.

We have some communities that need to do two a month because maybe they're townhomes, and we have other communities that may be selling $1.5 million estate homes in Bucks County that are underwritten at 10 a year.

So, we're running as a Company at 15 sales per year per community, but your question really is a very localized individual question to that particular community.

Generally, if we see an improvement, it can be a modest improvement in sales pace.

That is probably being coupled with a reduction in incentives, because remember that goes together, and so if we can reduce incentives by $10,000, $20,000, $30,000 in the underwriting, that probably has as big of an impact if not more than the absorption.

Okay, that's helpful, thank you.

And then just on Gibraltar, as I look at what I think I know about the portfolio, which isn't that much, I'm interested in sort of your monetization strategy over time.

You have dirt.

You have loans.

Can you give me a sense of looking at the portfolio, how much you expect would be land you'd sell to other builders, land you'd build out yourself, and what the process is in terms of, are you planning on flipping these loans or bringing the assets onto your books, just a strategy for how you're going to monetize that portfolio.

Marty?

Marty Connor is heading up Gibraltar, so I'd like him to step in here.

Well, I think it's a little early to be very definitive on this.

I think as it relates to building out the land ourselves, right now there are some limitations on our ability to do that, imposed by our partner, the FDIC.

We hope to work through those, but right now this is an opportunity to maximize the value from the land, not from building homes on the land.

In some cases, we will accept payoffs of the loans.

In other cases we will look to sell the REO.

It remains to be seen.

We're getting our hands around the 280 wonderful assets we've been able to get access to.

And Carl, going forward beyond the AmTrust portfolio, the smaller deals we'll do with our own capital.

The larger deals we'll bring in partners.

Some of the land will be worked out.

We'll take title to it.

We'll feed it back to Toll Brothers.

Other opportunities will be negotiated with the underlying debtor, or the properties will be sold off to others.

So the business plan is wide open.

It's to opportunistically take advantage of distress in the real estate industry.

I appreciate the color.

Thanks much, guys.

Thank you.

Thank you.

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

Hi, Josh.

Hi, good afternoon to you guys.

First question, last year most of the public builders sold lots to monetize their tax credits with the NOL law change, because of how long Toll made money throughout the down cycle and the October year-end, you guys could potentially monetize a good deal of NOLs.

Could you give us a number for how much in taxes previously paid, you guys could actually get back from the government, if you were to take that strategy in this quarter?

And then also talk about your willingness to do so.

Marty?

I think the number is in the hundreds of millions of dollars, but we're not going to get into the hundreds of millions of dollars.

We -- as you mentioned, Josh, we took advantage of the opportunity to sell some non-core assets 12 months ago, when the two year carryback was expiring, so our inventory if you will of non-core assets is not as significant now as it was then.

That being said, we are looking at some non-core assets.

There may be some sales.

There may not be some sales, we need to see if they actually close or not.

And in other words, it's a strategy that you guys are looking at, but it wouldn't be -- you guys aren't selling the whole left side of the balance sheet to get more cash.

It is a strategy we're looking at, but we're not in a kind of cash generation mentality from this.

It's really a function of looking at the present value of the tax benefit today versus three or four or five years from now.

Would you be willing to outline roughly how much it could be, somewhere between zero and hundreds of millions, is there anywhere in there where you would sort of stick your foot in the sand and say there's a rough area?

I don't think we would be willing to say that, in large measure because in certain instances we're dependent upon a willing buyer.

That makes sense.

The other question is for Doug.

In your comments, you mentioned that Toll is aggressively looking for growth.

That was clear with your Gibraltar transaction this quarter, but then the sort of a bit of an offset was the lower guidance on community count.

So sort of two-part question.

Is your strategy for aggressive growth more weighted toward less traditional streams of revenue?

And second, what should I be assuming for community count in 2011?

To your first question, absolutely not.

We are 100% focused, eye on the ball with luxury home building.

That's our business.

We're in 50 markets, 20 states, we have teams on the field everywhere.

We have capital.

So we are taking advantage on a very limited basis with opportunities that may not feed Toll Brothers, but it is primarily focused on the home building operation, the luxury end of the business, and that's where it will stay.

And right, Kira just mentioned to me, which is absolutely correct, we have the widest range of product of all the home builders.

So whether it be 12% urban now or 12% active adult or the multi-family or the luxury single family home in the suburbs or the resort communities down south, we really serve all markets, and that's what we'll continue to focus on.

As to community count, we finished last year with about 200 communities.

We expect to have 195, so community count getting flatter, and maybe we'll be ahead of the first quarter by the end of the first quarter, but we don't know yet.

We're not projecting at the end of 2011 yet what we'll have.

We'll do that probably in the next conference call.

Thanks, guys.

Thanks, Josh.

Thank you.

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

Good afternoon.

Thanks.

Just a quick question around the third quarter.

I think from your updated guidance, and your results in the third quarter that 3Q closings did come in a little bit higher than your expectations.

And so I want to know if that's a fair statement, and was there anything in particular in terms of your backlog conversion, or incentives to your sales folks that allowed you to close more homes than expected this quarter?

We were pleasantly surprised at the, as you guys call it, the conversion rate.

It was much higher than we expected.

We think a lot -- some of that came out of the fourth quarter, which is why the guidance is probably less than maybe some you had for the fourth quarter, because we had said that we expected the fourth quarter to be higher than the third quarter previously.

So I don't think it was anything other than we have less backlog, and therefore, we could deliver faster, and we were further along in the process of building it than we thought.

Okay.

And then just if you could give us maybe a little bit, if there's any update on the mortgage or the lending environment for your customers.

We saw a little bit of easing in the Fed's lending survey, but I'm not sure if you guys saw that in your business.

Sure.

Don Salmon, who runs our mortgage company, is here, and he'll answer that.

The liquidity for the conforming and FHA market is still very strong.

Interest rates are extraordinarily low.

In some markets we're at 4% and 0 points today, which is almost free on an aftertax basis.

Liquidity in the jumbo side is improving every day.

We see the spreads between conforming and jumbo widening a little bit for the most part because banks don't want to put the very low rates on their books long-term.

But there are banks out there willing to lend, and there are banks out there that are aggressively going after our customers because our customers in general are highly profitable customers to the banks.

Just to clarify what Don said, we only have 7% of our customers in jumbo.

Right.

19% of our customers are in true cash.

And prime, 99.1%, and credit score average for the Company is 761, and LTV average for the Company is 69%.

Great.

Thank you.

Thank you.

Your next question comes from the line of Dennis McGill, Zelman and Associates.

Good afternoon, guys.

Thanks.

Doug, I just wanted to go back to your comment that you had around the tax credit, and realizing your buyer may not be incentivized to close for the monetary benefit of the tax credit, but don't you indirectly benefit from them being able to sell their homes to a more liquid market that was brought about by the tax credit?

Absolutely.

Okay, so you do see some benefit there, which is why you've probably seen some weakness in the sales, in addition to the confidence issues you talked about.

No, I answered the question before because we learned from our salespeople out in the field that they did not see a difference in March and April from early May.

Buyers weren't focused on the tax credit.

They didn't seem to be motivated by it, so we didn't feel the impact.

And we don't think the fall-off in business, in our opinion, for what we do, has anything to do with the tax credit.

We think it has to do with the confidence of our buyers.

Okay.

And then along those lines, the comments that you made about June and July, and it sounds like thus far in August, would you say that demand is decelerating or it's stabilized at a pace that you would say is expected for a typical July versus June, or July versus August pace?

Depends whether you interpret the actions as being indicative of total pool of demand.

I would say the demand is probably greater, but the action is a little less, and that translates to a build-up of pent-up demand, and the reason the action is a little less is we're all scared to death.

Why else would everybody be running into Treasury so that a 10-year pays 2.5%.

We expect that once the cup gets half full instead of being half empty, that you'll see a reversal of the stats, because we do think the supply is building, the demand, rather, is building.

But the action has been [nischkefaila].

Hi, Bob, it's Ivy.

Hi, guys, and Doug and everybody.

Just to jump in for a second.

I'm not sure I understand your statement, Bob, about actions and stuff.

So, if you could be more clear for us on what you're saying demand is up but actions, meaning actual signed sales contracts so far are weaker than July, and July was weaker than June.

Or were you sequentially -- can you give us sort of blow by blow the progression of the quarter, and what you've seen so far in August?

And then also what you're seeing on pricing.

Are you having to increase incentives, and are you willing to do so, or are you actually willing to cut prices to actually sell houses?

We haven't been increasing incentives.

And that means that we're able to live with the amount of sales that we have.

What I was positing was that we thought that demand was building, but it is pent-up, in that the action we are seeing has been down from May, and has been fairly flat from June, July and August.

Great, thank you.

Sorry, Dennis.

You're welcome.

Thank you.

Your next question comes from the line of Jack Micenko with SIG.

Hi.

Thanks for taking the question.

Sort of an open-ended question on the tower business.

I know that the land sourcing opportunities are different, and the return timing is certainly different, but to date those have mostly been JVs if we understand correctly.

Is there any, given your balance sheet health and upside potential leverage, is there any shot that you would do those on a stand-alone if the opportunity presented itself, given the returns you're seeing and the pace of sales you're seeing?

Yes, and we are.

The New York City property is a JV, the Brooklyn property is a JV, the two Hoboken properties are not JVs.

Each one has its own story.

In some cases, there's a land owner or a land purchaser who brings us in, in which case we have a partner because they control the land.

In other cases, it may be a large speculative deal where we want a partner.

But we are absolutely interested in doing them ourselves.

It's really a deal by deal analysis.

Is there any mix shift maximum, or any strategic size you would say, okay, this is enough deliveries from tower, or are we so far from that point that it's not really a discussion at this point?

I think we're far from it.

We're at 12% of our business now in towers.

Part of that is because that's been the best part of our business, so that stat is a little bit distorted because the rest of the business has been slower.

We're looking in Boston.

We're looking in Washington, D.C.

We're only going to do the tower business in very affluent markets because it's a riskier business.

The building costs are much higher, and I think we'll grow it, but I don't think it's ever going to get beyond 15% or so of our business.

Thank you.

Right now, if our business were normalized, we would have the same tower business that we're doing, 5% or 6% tower.

That's how far off we are in the normal luxury business.

Thank you.

Thank you.

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

Good afternoon, guys.

This is [Jay Chadbar] on for Jonathan Ellis.

Your land under options have gone up for the last couple of quarters, is this a change in strategy where you're hedging yourselves for uncertain outlook, or this is more about flexibility where you can add more land in certain regions through options?

No, it's not a change in strategy.

When we had 90,000 plus lots, two-thirds of those were optioned, one-third were owned.

So through this downturn, as we shed land, it was primarily shedding option ground.

So that threw the ratio out of whack with normalized times, and now that we're growing again, much of the land we're buying, we're putting under option or we have under control, we don't own yet.

So it's not a change of strategy at all.

Okay.

And then one more follow-up.

The land you recently put under control, is that geared more towards single family or multi-family?

Combination.

We've put under control a substantial piece in Connecticut, another substantial piece east coast of Florida.

The Florida piece is single family.

The Connecticut piece is a combination of single family and multi-family.

We have a new property coming online in Brooklyn.

And then the other ones I can think of right now, the larger transactions are really a mix.

We have a large piece in Bucks County, Pennsylvania, which is active adult, and it's a combination of multi-family and single family.

So I think the mix of what we're buying is relatively similar to the mix of what we're now selling.

All right.

Thank you.

Thank you.

Your next question comes from the line of Jade Rahmani with KBW.

Yes, hi, thanks for taking the question.

Just on your gross margin, can you provide an indication of how the highrise gross margins compare to the consolidated average?

The pro forma, when we go into it at higher gross margin, probably significantly higher.

Right now I would guess they're probably even, close to even, where we are, we were.

Depends on whether we've taken a hit to a particular property in our joint ventures.

We had reserves against our investment joint ventures.

So those margins are consistent on our joint ventures with the rest of the margins in the Company.

But I think on the ones we own directly, they're probably a little higher right now.

Okay.

And as far as how the accounting works, can you just characterize how much of the income from highrise projects flows through the unconsolidated entities line versus through the corporate gross margin?

It doesn't flow through because joint venture, it's in other joint venture income, it's a separate line item below the line.

It's one of the things that the analyst group has a difficulty, because we have a lot of stuff that's below our cost of sales that others have above.

For example, all our ancillary businesses also flow below the line, and they're not really like interest income, which is really not a home building item but rather an investment item.

These are really home building kinds of items that you show in a different section of the income statement.

They're not in gross margins.

Okay.

So the sequential improvement in the gross margin had nothing to do with more sales out of the highrise projects?

It may have in stuff we own directly, but not materially different.

I don't think it was enough in the fourth quarter to make a difference.

All right.

Thank you very much.

Thank you.

Your next question comes from the line of Stephen East with Ticonderoga Securities.

Thanks.

That's Ticonderoga.

Doug, could you talk a little bit more about the land.

You talked about where you were buying it, and could you talk a little bit about what stage it's in.

I think last quarter you gave us some clarity on that.

And then also whether you're seeing, this Summer, the land market changing, whether you're seeing competitors behave differently, land sellers behave differently, that type of thing.

The land, remember Stephen, we don't generally close on the land until it's fully permitted.

What we're seeing out there ranges from distressed property that road's in, maybe some houses up, ready to go, all the way to the typical retail deal with the farmer where there's an extensive permitting process ahead of us.

And it's all over the place.

It's really hard to characterize any change.

I don't think there has been any change.

When you buy a distressed property, that tends to be further along because a developer borrowed a bunch of money, got some approvals, put some roads in, maybe built some houses, and the pain occurred later in the process.

So on the distressed deals, they tend to be further along.

Okay, if you look at the non-distressed deals, were you buying then it sounds like -- last quarter you talked about you were buying a lot of the land was raw or just partially developed.

Similar type situation this quarter?

Yes.

Yes, again, it's all over the place.

Okay.

And then what you're seeing differently from competitors, sellers, that type of thing?

Well, when it's a big deal, the Wall Street money comes out.

Some of the larger builders may come out if it's at their price point.

And it can be a very competitive process.

The smaller deals, we don't have nearly as much competition.

We think as some of the other builders do chasing their land because, again, we're luxury.

Our competition is pretty much gone.

And that helps us tremendously when it comes to buying.

So again, it depends on location and size, and the price point of homes that the land will support, that really dictates the extent of the competition.

Okay.

The sellers holding their line on pricing?

It really depends, again.

Every deal is different, but the sellers are more motivated this Summer than they were in the Spring, than they were in the Winter.

We're seeing excellent deal flow right now.

Okay.

That's great.

Thank you.

Thank you.

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

Question about the cancellation rate.

You noted in your mid-June release that demand had obviously fallen off.

Now, through the downturn, whenever we've seen a sharp drop-off in demand, it normally led to a pick-up in cancellations.

What was different this time?

Why do you think the cancellation rate didn't pick up?

It was at a very good level.

Because I don't think the demand slackened as much as your question seems to indicate.

We were moving upward in May, moved back a little from May to June.

We were disappointed.

We thought we were going to continue to go up, but the oil spill together with some other unfortunate events like Greece threatening to go belly-up, and word that the entire euro market was going to fall apart had a dampening impact on the press and on ourselves.

But we didn't move back as far as you're indicating.

Instead of continuing to go up, we went back a little, and we stayed flat, which is where we are now.

So it's just not the kind of a market where people have said oh, my God, I made a mistake, I want my money back.

I can't get my money back, I'll walk away anyway.

We don't see that.

As a matter of fact, I think we're below the historic norm in cancellations.

Our cancellations this past quarter were what?

7% is normal, and we were at 6% something.

Pretty great.

The other issue is you didn't have a price decline accompanied by the change that took place in the last few years.

Where we may have 5% to 10% in cash, but prices of houses were down more than that, so people were willing to walk away from their deposit.

Housing prices basically stayed steady, and therefore you have less cancellations.

Got it, no, that's very helpful.

And the other aspect of the cancellations, you guys have been very helpful in giving the pricing on the units that are cancelled.

And earlier on in the downturn it was the higher -- and this is probably reflecting what you were talking about, Joel, it was the higher priced sales that were cancelling.

Now it seems to be actually below your kind of fleet average sales that are cancelling.

So what would explain that more recent trend?

We had a particular problem in highrise buildings where we had to give back money, where the average price was $1.2 million, because we couldn't deliver the house on time, so those were cancellations before, and therefore, the average price of the cancellation was very high for about a nine month period of time.

And now that that's gone, they're more like our average delivered price, average sale price, they're closer.

So I think you just had an anomaly a year ago.

Got it.

Okay.

Great.

Thanks a lot.

You're welcome.

Thank you.

Your next question comes from the line of Alex Barron with Housing Research.

Hi, guys.

How are you?

Good.

Hi, Al.

I had a question, I guess this is more kind of general, where you see things going in the next few years in terms of how you're thinking about the land you're buying.

I mean, in some ways you've answered some of this, but I'm just kind of wanting your take.

Generally I would assume that there's less people out there who want to or can afford to buy, say a $1 million home than, say a $500,000 home, and sequentially there's more people that can afford to buy a $300,000 condo than a $500,000 single family home.

So are you guys in general trying to position or buy land that maybe is more affordable, per se, in terms of the product you're going to build?

And are you also maybe not putting in all the granite countertops in every single home?

Are you kind of building homes with let's say more basic standard features to kind of bring the price down?

Short answer is no.

A little longer answer to expand on it is that yes, of course you've got more people that can afford $300,000 stuff than can afford $1 million products.

The guideline that we tend to use is profit.

We are opportunistic, as has been said several times this afternoon, and we're looking opportunistically at stuff that makes us the most profit.

So that's what guides us, not a plan to put in less granite top, and sell $300,000 instead of $500,000.

We are still looking the way we always did.

Okay.

My other question I guess is more on the balance sheet.

I was wondering, on your inventory line item, I don't think you guys broke it down.

So the $3.2 million of inventory, is it fair to say that that's basically roughly the backlog in terms of homes in progress, plus the rest of it would be land?

Or is there more that you can account for in terms of specs or something than the backlog value in that number?

It's a combination of land that's substantially improved, houses under construction, spec and model homes.

And so it's a combination.

And I think we give that in the 10-Q, Joel?

So when our 10-Q comes out in a couple of weeks, you'll be able to see the exact breakout of each of the components.

Okay, and just a quick follow-up.

When do you expect to receive the remaining $50 million on the tax refund?

We don't have a remaining $50 million.

The money that we've accrued this year -- I'm sorry.

The $50 million that you see on the balance sheet now is for the 2010 tax year filing that will happen sometime mid-Summer of 2011 with receipt of that cash 45 days after the filing, so long as the IRS agrees with what we file.

Okay.

Got it.

Thanks.

You're welcome.

Christie, I have a question that came into Bob's e-mail from Jim Meyer, Tower Bridge Advisors.

Don Salmon, this one is for you.

Are you finding bureaucracy, paperwork, time to close as an increasing burden that is hurting your sales, or is it about the same as it has been for the last year or so.

Any color would be appreciated.

There is more bureaucracy today with some of the new regulations that are put in place, but in my view it's not hurting sales at all.

It's hurting our people and the amount of work they have to do, but in terms of sales it's not hurting even a little bit.

And I don't know of any loans or closings that got delayed as a result of paper -- any material closings that got delayed as a result of paperwork.

There's just more of it, that's all.

Thank you.

You're welcome.

Christie?

Yes, sir?

We're ready for another question.

Okay, your next question comes from the line of Susan Berliner with JPMorgan.

Hi.

Thank you.

I had two questions.

The first question, I was wondering if you could give us kind of a range, since you guys have so much liquidity, and you're clearly looking at a number of opportunities.

What kind of maximum could we assume of your cash hoard right now could be directed in a year to those types of activities?

I'm sorry, those types of activities?

Meaning joint venture investment, something like this Gibraltar.

I'm sorry.

Yes.

We have not allocated capital to Gibraltar.

I know we keep using the word opportunistic.

But that's the answer.

We're opportunistic in buying land for Toll Brothers.

We will be opportunistic in buying assets through Gibraltar.

And so there really has not been an allocation.

At this point in time, we do not think it will be a significant amount of capital.

We're going to keep most of our cash for Toll Brothers acquisitions, but Gibraltar's there as a vehicle to take advantage of distress that's out there.

Great.

And my second question has to do with, I guess, the debt.

I know you guys bought back some debt, and I was wondering if you could give us any color on that, and also as it pertains to -- I know you have your revolver and your term loan coming due in March.

And I was wondering if you could update us on what you're thinking there.

Yes, we have a $331 million term loan that we will be paying off within the next couple of quarters.

We also spent $35.5 million buying our bonds in the third quarter.

We'll continue to evaluate that, just as we continue to evaluate stock buyback, and I think moving forward you'll see similar type activity.

With respect to our bank loan, we're in the process of trying to negotiate a new deal, and if we're successful we'll be the first in the industry in many years, and we're hoping.

Great.

Thanks very much.

You're welcome.

Thank you.

Your next question comes from the line of Michael Smith with JMP Securities.

Good morning, guys.

It is still morning, well, not barely.

My question is about impairments.

And you were talking earlier about when you write something down, you build in a sort of margin there, a profit margin.

Wondering if you could talk a little bit about how that works, and if it's -- I'm sure you won't give me numbers but I'm curious just who decides that, and I assume it's less than whatever you're getting on current stuff, but how you kind of go about deciding what that margin is.

And then, well, I have a follow-up after that.

It's principally a result of a discounted cash flow model, which results, depending on how long the deal is, a higher margin.

When you discount for a longer period of time, the margin goes up.

If you discount for a short period of time, the margin is lower.

So that's why it's different for every deal, because it's really how long a period of time you're discounting for, and so that's why there's no general answer to what you said.

There is no specifics, and it can run the gamut.

There's some judgment on your end as far as how long you think it will run?

Yes.

Do you guys kind of decide?

And that's up to you?

There are judgments.

They're reviewed by our accountants, and they have their own team that comes in and does their own verification to determine that we are on point.

So, in order to trigger another round of impairments, how far into that margin would you have to -- how far would the cash, the projected cash flows have to pierce into that margin?

Does that make sense?

What I'm asking, how much farther--?

It doesn't work that way.

As long as you have a $1 of profit under the new -- after you've written it down, as long as you have a $1 of profit, you don't have another write-down until you have a $1 of losses.

And when you have a $1 of losses, then you have a big write-down.

That's just the way the accounting works.

So, it's not an even number.

It's kind of like a step.

Once you step off of it, the number becomes big.

That's very helpful.

I appreciate it, guys.

Thanks.

You're welcome.

Thank you.

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

Thanks.

Just wanted to just make sure I understood from the previous question I had regarding incentives, and Joel, I think you had indicated that what you have in backlog today, just want to make sure I heard that correctly.

That what you have in backlog today has less incentives than what's come through the income statement so far, and that would I guess ostensibly point to gross margins being a little bit higher in 2011 than 2010?

I did not believe I said that.

I said that the -- what we gave you was the incentives being offered for sales we expect to take place in the next 12 months.

That number today is slightly lower than that number was at the end of the second quarter.

So I did not give you incentives in backlog.

We don't disclose that.

We do disclose in our Q the incentives that have run through the financial statements, and we kind of give you that this year in the release, but generally it's in the Q.

And so a feel for what happens to incentives during the quarter on deliveries.

But that is the offerings what I gave you, which means it's reflective of what we expect to happen for the next 12 months.

Great.

And did you actually give the amount of incentives in the press release?

If not, could you give that ahead of the Q?

Principally a result of, incentives and mix, and when I was asked the question earlier, I said the majority of it was incentive declines.

The average incentive we're offering today is $38,000 per home.

Okay.

Great.

Thanks very much, guys.

Thank you.

Your next question comes from the line of Stuart Hosansky with Vanguard.

Yes, thank you for taking my question.

I appreciate it.

I want to follow up on the average price per cancellation.

It's significantly lower than what it was in the last quarter and year-over-year, and I understand what you said about that there was a highrise that was a portion of that.

But even with that, you're talking well over $450,000 lower quarter-over-quarter, and it's also a lot lower than in your backlog and your closing.

So just curious, why this quarter are the prices so much lower?

When you have a $1.2 million units cancelling compared to an average price of $560,000, that has a huge swing in the average price of cancellations.

And that's what you had in the anomaly that I talked about earlier.

Doesn't take a lot of $1.2 million cancellations to get that number up, and we had a significant number of items that we had to give money back for, via this specific highrise.

Just to clarify, we had a building that ran into construction delays, and under state law, because we were unable to deliver units within a state-governed time frame, we had the legal obligation to return deposits.

And because the market had softened, many buyers took advantage of that.

We're now fortunate that it's in a location that has improved, and we're able to resell those units without all that much pain.

But there was a significant number of those units that came through with cancellations a year ago.

Okay.

And I appreciate that.

And that kind of explains the $704,000.

But for this past quarter, the press release indicated $488,000, which is significantly lower than in prior quarters, and than your average closing price, et cetera.

So I'm curious, what was different about the -- .

I don't have the answer.

Greg?

We did have one easy driver of this is that in the active adult which is our cheapest product effectively, we had more cancellations this quarter in active adult than we did last quarter, and those are at a lower price.

So that's driving an overall lower cancellation price.

But the cancellations were a very small number, so you have a very small number that's getting distorted.

This is anecdotal.

I'm thinking why would we have more cancellations in active adult.

The reason is probably very personal and very limited.

I mean --

We only had 46 cancellations in total.

Three people had a fight with their wife, and decided not to go through with the home sale.

That's all it comes down to.

We only had 46.

It's a very small sample.

Okay, that's fine.

I appreciate that.

And then my other question is, and this is more a broad picture, and you may choose not to answer it, is with the -- .

With that kind of an invitation, I wouldn't answer it no matter what.

I was afraid of that.

With the current market dynamics the way they are, seems as though the -- there may be more consolidation going on as we saw with Pulte and Centex.

What is Toll's overall view of that?

Are those actions that your firm would consider?

We've always maintained that there will be consolidation in our industry.

It's a very fragmented industry.

Crystal ball, if you look out five years, certainly it would seem that there will be some consolidation of the larger players.

You're not seeing consolidation with the smaller players right now because there's no point in buying an entire organization when you can pick off their ground in a distressed scenario.

But are we a player?

We acquired six small builders over 11 years.

We are one of the smaller players in that business.

We generally move into new markets through de novo operations.

On the larger side, we've had many conversations with many different builders over the last 15 years.

I'm sure those conversations will continue.

We are not actively looking for consolidation at this time.

But again, the industry is fragmented, so you'd think it would happen to some of us over time.

Okay.

Thanks.

Thank you.

Our final question comes from the line of Jade Rahmani with KBW.

Yes, hi, just a follow-up on the mothballed communities.

The 119 mothballed communities you indicated, does that include the planned 30 to 40 communities that you said last quarter, you had expected to open over the next six months?

Some but not all.

Most of those 30 to 40 were new communities that are not on the mothball list.

They either got their permitting process completed or they were new acquisitions.

If I'm not mistaken, only about five or so of those 30 to 40 came out of the mothball list, and the balance were new properties.

Okay, so, then what's remaining, they're not mothballed but they're not yet planned to be -- you don't have them in your current plans for community openings in the next six months?

Some are.

Okay.

Okay.

Great.

Thanks very much.

You're welcome.

Thank you, I will now turn the call back over to management for closing remarks.

Thanks, Christie.

Thanks, everyone.

Have a great week.

We appreciate your time.

Thank you.

This concludes today's conference call.

You may now disconnect.