托爾兄弟 (TOL) 2010 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like the to welcome everyone to the Toll Brothers year end 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.

Mr.

Yearley, you may begin your conference.

Thanks, Jackie.

Welcome, and thank you for joining us.

I'm Doug Yearley, CEO.

With me today are Bob Toll, Executive Chairman; Marty Connor, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira, formerly McCarron, now Sterling, Chief Marketing Officer, congratulations, Kira; 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 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.

At the suggestion of several of you, we are going to reduce our prepared remarks to provide more time for color on our results and for Q&A.

Since our detailed release has been out since early this morning, and is posted on our website, I'm sure you have all read it.

So I won't reread it for you.

The key to sustained and substantial profitability is the return of normalized demand.

The persistent drag of high unemployment, reduced home equity, weak consumer confidence and frustration with the nation's economic and political climate has outweighed the appeal of historic low interest rates and tremendous home affordability.

Even though the unemployment rate among our buyers is about half that of the national average, many of our clients remain on the sidelines waiting for clearer signs that the economy is on the road to recovery.

In this environment, fiscal year 2010 was another challenging year for our Company and our industry.

Nevertheless, we had solid improvement over last year.

Even with our business in Q4 off 76% from the 2005 peak, we are proving we can operate efficiently at or near break-even.

Pre-tax and pre-write-downs, we were basically breakeven for fiscal year 2010 and pre-tax and pre-write-downs we were profitable for the second consecutive quarter in our Q4 2010.

For the fourth quarter, our contracts were down 27% in both dollars and units versus last year, and roughly 17% on a per-community basis.

For the full year, they were up 13% on a gross basis in dollars and 6% in units.

Our year end backlog was basically flat to last year's.

Impairments for the year declined from $477 million in fiscal year 2009 to $115 million in fiscal year 2010.

Our balance sheet remains very strong with a net debt-to-cap of 13.6% and cash of over $1.2 billion.

With our new $885 million bank revolver, we have reliable four-year committed capital which is in addition to our demonstrated ability to access the public debt markets in even challenging times.

As the first new unsecured facility in our industry in several years, we believe it reflects the strong reputation we have among the banking community and their confidence in our future.

We continue to see some strength throughout the year in the quarter from Raleigh and Charlotte, North Carolina to Metro Boston where fortunately most of our business is located.

Urban New York City continues to thrive.

The first month of our fiscal year 2011 has remained in line with the first month last year.

Traffic is up about 5% compared to a year ago, and deposits have ticked up slightly.

November is typically not a strong month for sales, but certain well-located communities have sold well.

A few examples.

Regency at Yardley, an active-adult community in Bucks County, Pennsylvania, an affluent suburb of Philadelphia, has taken 17 deposits since opening seven weeks ago at an average price of $500,000.

The Enclave at Providence in Charlotte, North Carolina, a distressed acquisition opportunity, has taken 10 deposits in five weeks at an average price in the mid-$600,000.

Regency at Monroe, our premier active-adult community in central New Jersey has taken 13 agreements in eight weeks at an average price of $500,000.

And 303 East 33rd, a high rise joint venture in Manhattan, continues to sell well.

We settled 75 units over the last 12 months at an average price of about $1 million.

This is a situation where we wrote off our entire investment and have now started to recognize profits because the market has improved and the project has performed better than we had assumed in our impairment analysis.

In fiscal year 2010, our land position grew for the first time since 2005.

Our community count should also grow in 2011, from 195 communities at October 31, 2010, to between 215 and 225 communities by the end of fiscal year 2011.

This is the first growth in community count in four years.

75% of the net new community count will increase from the newly purchased land while the remaining 25% of the net community count increase is from our mothballed communities.

At the end of fiscal year 2010, we had 114 mothballed communities that could be opened if the market improves.

More recently, we closed on two deals purchased from WCI in early November.

We purchased Rivington, a master-planned community located in Danbury, Connecticut, where we plan to build about 800 new homes.

We also purchased Parkland Golf and Country Club in South Florida where we plan to build 350 homes ranging in price from $400,000 to over $1.5 million.

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

Thanks, Doug.

Our fourth quarter home building gross margin before interest and write-downs was 20.6% of revenues compared to 18.4% in 2009's fourth quarter.

The improvement was principally a result of lower incentives.

2010's third quarter margin was 21.4%.

The change in the fourth quarter from the third quarter was predominantly due to mix.

Fourth quarter interest expense including cost of sales was 5.1% of revenues, consistent with 2010's third quarter, and above the 4.8% from 2009's fourth quarter.

With the slowed pace of deliveries, inventory has absorbed interest for a longer period of time.

The fourth quarter pre-tax write-downs of approximately $27 million included $20.9 million attributable to land and operating communities, of which approximately half was attributable to communities in Illinois.

Approximately $3.8 million of the write-downs were attributable to options while none were attributable to JVs.

Approximately $2.3 million of the write-downs were attributable to dispositions of non-strategic assets as we'll discuss later.

Fourth quarter SG&A of approximately $69.2 million was higher than the $67.2 million in the third quarter for 2010, but down from the $79.3 million in the fourth quarter of 2009.

The increase compared to the third quarter was predominantly attributable to the impact of changes in reserves and severance accruals.

Fourth quarter other income and income from JVs was $29 million, and included approximately $11 million associated with the reversal of an accrual no longer needed for a joint venture.

Our unconsolidated joint ventures delivered $67.9 million of homes in the fourth quarter of 2010 compared to $11.8 million in the fourth quarter of 2009.

As Doug mentioned, our New York urban projects performed very well and are the largest component of this volume.

In November 2009, the law passed allowing a one-time five-year tax loss carryback.

Therefore, in 2010, we undertook some initiatives to recognize some losses for tax which had previously been recognized for book.

The most visible of these was the fourth quarter disposition of 13 communities consisting of 787 lots via bulk sales.

This generated $18.3 million in sales proceeds and $89.4 million in tax losses, resulting in $31.3 million in tax benefit and a net book loss of only $1.7 million or approximately 2% of the original value.

We believe this relatively small book loss on disposition of 13 communities validates the quality of our write-down process.

We also generated tax losses through the routine sale of homes on land that had previously been impaired, the abandonment of options and through miscellaneous other planning opportunities.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for 2011.

As noted in the release, we expect to deliver between 2,100 and 2,900 homes and we estimate the average delivered price per home will be between $540,000 and $565,000.

With continued choppiness as we head into the spring selling season, it is difficult to provide guidance on margins or SG&A levels other than to refer to the year just completed as a pretty good benchmark.

We do expect to deliver fewer homes in the first and second quarters than in the third and fourth which is typical for our business.

We also expect that the average price of homes delivered in our first fiscal quarter of fiscal year 2011 will be greater than the average price in the subsequent quarters due to geographic mix.

In 2011, our income statement tax line will generally consist of expense accruals for interest and penalties on unrecognized tax positions, offset by reversals upon statute expiration.

Any pretax income or loss will generally be offset by a takedown or establishment of a reserve on our deferred tax asset.

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

Thanks, Marty.

The recent macroeconomic signs are favorable.

But they have rolled over in the past.

But in the past, the well blew out.

But, the (inaudible) could blow up now or the euro could crash.

Third quarter GDP estimates were revised higher last week.

Personal incomes improved solidly in October and according to ISI, four-week unemployment claims dropped to another new recovery low this week.

On Tuesday, the Conference Board's Consumer Confidence Index reached its highest level in five months and on Wednesday the AVP employment report for November showed a net increase of 93,000 jobs, the biggest jump in three years.

In addition, job numbers for October were revised up from an increase of 43,000 to an increase of 82,000.

And the National Association of Realtors released a 10% increase in pending existing home sales with strength in the Mid-East, Midwest, Northeast and South this morning.

On November 24, the Census release said seasonally adjusted new home sales were 283,000 in October.

Additionally, the release said that there was an 8.6-month supply on the market.

This calculation, of course, is based on the current anemic sales pace.

Should demand for new homes increase even slightly, then there is little in the pipeline.

If demand picks up to 500,000, which historically has been half of the normal demand, supply would drop to four to five months, well within the normal range.

This is the longest and most severe housing downturn since the Great Depression.

It is very different than the housing downturn and subsequent recovery in the last recession.

The previous downturn was caused by macroeconomic issues that caused housing to go bad.

The current mortgage and housing plunge led the economy to sour, and it swept quite quickly this time across the US versus last downturn's rolling recession.

However, as in the last recession, we believe the recovery will occur regionally.

Some markets are better than others.

The bigger they were the harder they fell, and the slower they will get up.

With a shortage of approved lots in these markets, prices could strengthen quickly when demand improves, although when remains the big question.

The other major public homebuilders are primarily focused on the lower priced segment of the market.

Our main competitors are small and mid-sized local and regional private builders.

We believe we have competitive advantage over them because of our brand, quality, access to capital and purchasing power.

We, therefore, see opportunity for market share gains for Toll Brothers when the market recovers.

Now let me turn it back to Doug to do the Q&A.

Thanks, Bob.

Jackie, let's open it up.

Thank you.

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

Thanks, good afternoon, everybody.

Hi, David.

First question, Doug, wondered if you could give us -- I should say everybody -- maybe some thoughts on what's going on in the land market right now, kind of the opportunities that you're seeing and maybe how that's changed in, let's say, the last -- kind of throughout the quarter and the last month [kind of subsequently.]

Did you say in the last month?

Well, in the last three or four months, whatever, seeing more opportunities, fewer opportunities, kind of where pricing is and everything.

Well, we're seeing more opportunities now than we saw a year ago.

I'd say in the last -- to answer your question, in the last three or four months, it's probably about the same.

This is certainly not the mid-1990s.

We're not seeing as many steals.

There's more competitors.

There's more builders.

There's more Wall Street money.

But there's good deal flow.

We're just being very selective.

Pricing hasn't changed.

I think pricing is pretty flat in the last year.

So you've got to be real careful.

So there's good flow but in many cases things are getting bid up to retail and the key is to be selective, and we're trying to do that.

I think for us, we've been seeing more recently than we saw a year ago, but oddly our take from it has been less than it was in the last nine months to a year, say.

But just like they say in the marketing business, spell l my name right, give me more deal flow and sooner or later I think you'll see more action.

Got it.

The follow-up question was just about Gibraltar, not to mention of it in the release, but just trying to see kind of how that's progressed since the original announcement, maybe what kind of deal flow you're seeing there and expectations for where that's headed?

Yes, the only deal we've done so far is the FDIC AmTrust portfolio which we announced at the last call or right before the last call.

Deal flow has picked up significantly with Gibraltar in the last 30 days.

Nothing to report, but we are excited about the new opportunities that are coming in.

Do you think we'll see some benefit from it in fiscal 2011 results?

I mean, is it going to be significant enough at that point?

Fiscal 2011 results?

Unlikely.

I think we'll announce deals in fiscal 2011.

But as you know, these tend to be large, bulk sales, distressed loans, a lot of workout issues and so to convert that to results I think will take a little longer.

Got it.

Thanks much.

Sounds like the great Lebowski, lots of ins and outs, but we're encouraged by the FDIC, for instance, and we just bought from not to rush and to take fast profits to hold because they've got a significant stake with us.

They want to maximize the return as we do.

So maximizing return probably means you wait as opposed to jumping at the first offer.

Jackie?

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

Good afternoon, guys.

Hi, Josh.

Hey, so over the last quarter as you look across the total portfolio of all your communities, how would you say prices and incentives have changed?

Incentives are down $25,000 year-over-year.

Lately, incentives are flat.

The market is not strong enough for us to be reducing incentives in most locations.

At the same time, we believe demand is very inelastic and we do not believe increasing incentives will lead to more sales, so they are flat.

Okay.

Just so I understand Marty's comments, you're basically suggesting that if the market stays the same as it is right now we should expect gross margin in 2011 to resemble gross margin in 2010?

Yes, I think based on the range of closings and the range of price of closings, it's a similar revenue number and your assumption is accurate.

Thank you very much.

You're welcome.

Jackie?

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

Good afternoon, guys, it's actually Alan on for Ivy.

I'm disappointed.

She always complains that she's not first up in line.

Here you are, first up in line, and Ivy's not here.

There you go.

Well, I'm sure she's going to be upset she missed out.

She would have gotten on early.

My first question has to do with, I guess, the proposal out of the deficit reduction committee in the paper this morning about potentially reducing the mortgage interest deduction and, obviously, it seems like that would have the greatest impact on your typical buyer who would tend to have a higher income and obviously a higher price point.

So was curious if you have any thoughts on that and also I know you guys have in the past been pretty active on Capitol Hill and just wondering if you want to kind of handicap the odds of something like that getting passed?

I'd say the odds of that getting passed are about zero to a minus five.

Reminds me of my old F report.

I don't think it stands a chance.

And I think it's wrong-headed.

Housing, mortgage failures led us into this crisis.

Pretty much everybody believes that we're not going to really feel better until housing has recovered and at least considered by overwhelming majority to be a positive investment.

It's a shame that -- it seems as though you have selfishness, though I don't accuse our political leaders of being selfish because I know we're all patriots, but it would appear to be selfish to look for the cancellation of a mortgage deduction down to a certain amount as opposed to taxing -- going back to the Clinton tax rates on the dollars earned over $250,000.

To absorb another 4.9% which would yield about $800 billion a year right off the bat to the country, would seem to be a much more progressive and fair way of reducing the deficit.

Technically speaking, with respect to mortgage amounts below $500,000, Don Salmon, what percentage are we over $500,000 in mortgages?

Don runs our mortgage department.

Last I looked, Bob, it was about 20%.

About 20%.

Thank you.

So that gives you an idea of where we are.

Oh, here I have it.

Your mortgage rate was 93% for conforming and FHA and only 7% jumbo.

Right, remember, conforming in many areas goes to $725,000.

Oh, good.

But bad if they do pass it down to $500,000.

That's really helpful.

I appreciate it.

It sounds like it's not something you're overly concerned with at this point.

Second, unrelated question, just on the community openings.

Doug, I appreciated that color in terms of 75% coming from new acquisition.

Just curious if there's any type of gross margin differential on the communities you're opening from new acquisition versus mothballed?

And then, I guess, bigger picture what type of gross margin threshold or any other way you might think about it are you putting on mothballed communities in order to get them reopened?

Is it the current gross margin has to be above that or some other threshold?

Well, the first half of your question, with 75% of the new openings being newly acquired land, remember, we underwrite all new acquisitions in today's market.

It has to make sense at today's sales pace, today's sales price, so those deals are being bought and coming on market as soon as we can get permits in place and they are satisfying the traditional historic Toll Brothers margin threshold.

The mothballed communities, they're all over the country.

Some are in markets that have a ways to go.

Others are in markets that are returning and it's really an analysis market by market, community by community.

But I think it's fair to say that we would have to achieve at least today's margin or higher for us to even consider opening it because at today's gross margin our Company's breaking even and we're certainly not interested in bringing a mothballed community on line to break even.

Great, I appreciate it.

Thanks, guys.

You're welcome.

Jackie?

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

Thank you.

First question, just about land.

Do you have a breakdown for the quarter how many lots under control were optioned versus direct purchase and then just a related question, you talked about the deal pipeline, based on what you see in the pipeline today, would you expect land spend to be higher, lower, or in line with 2010 levels in 2011?

Greg, why don't you answer the first one.

So lots under option for the quarter were 1,059, and lots purchased in the quarter were 1,276.

And with respect to 2011 spend, I think 2010 is a good indication of where we'll be.

It was an active year for us.

We're seeing good deal flow now.

We're not buying as much, but based on the deal flow we're seeing I wouldn't be surprised if 2011 was better than 2010.

We spent more than 2010.

We'll have so see how the year plays out.

We have the same appetite, that's for sure.

Okay.

That's helpful.

And then just my second question on the community openings, any guidance you can provide on the timing, more front end loaded or back end loaded during the year and sort of a related question is how quickly would you expect those communities to come on line to get up to an absorption pace that's comparable to your existing communities?

I think it's fair to assume that most of that increase will happen in the back end of fiscal year 2011 and thus the deliveries from those newer communities will be in the first half of 2012.

We're optimistic that we get up to a solid pace in three to nine months from opening.

But the market will dictate that.

Okay.

Great.

Thanks, guys.

You're welcome.

Your next question --

Jackie?

Sorry.

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

Hey, it's actually Rob Hansen on for Nishu.

We appreciate the guidance that you guys have given us and a lot of other builders have been willing to just say, look, we think we're going to be profitable in 2011.

I just wanted to get your thoughts on that and whether you think you can be profitable in next year?

Marty?

Well, I think, as we said earlier, based on the volumes we have right now for 2010 and what we project for 2011, our 2010 year is not a bad indicator of how we expect 2011 to turn out.

And that's excluding impairments?

Correct.

And then about your -- the closings guidance, in terms of, compared to last year you had similar -- you've got a similar backlog heading into the year.

But you've got kind of a slightly higher cap on the closings guidance.

Basically, are you saying that you're going to have -- you think the spring's going to be a little better or is it --

I think it's a function of the increased community count.

Okay.

It's also a function of the market.

If the holiday season is an indication of what the normalized market is going to be in January and February then we're going to see up times.

If we see up times, which has to come from increased demand, it's going to bump into, as I said earlier, a decreased supply because you've got an 8.6 months supply of spec inventory, but that 8.6 months is based on 283,000 sales rate for new [single] families.

If you get a bump up in sales rate, supply goes down, demand bumps against lack of supply, you get increased price.

If you get increased price you'll get fence sitters jumping off.

Perhaps the reason we've seen better action than we expected, for instance, in the last two weeks is because in the last two weeks interest rates have been going up.

So finally there is no longer a reason to sit and wait.

It's not going to bring you a better house purchase.

So we'll have to see what the spring selling season, which starts in January, really, brings us.

Thanks, guys.

You're welcome.

Jackie?

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

Thanks very much.

Was wondering if you could talk a bit regionally.

You had mentioned the business from the Carolinas to Boston as being the key for the business right now.

You exited from Atlanta and from West Virginia.

Are there any other markets you're thinking about exiting where you're not happy with sort of long-term prospects there, and also West Coast used to be a much larger part of the business, what's the thought in terms of priority and getting -- having a more significant presence there?

I think we're going to do our best to beef up on the West Coast.

We saw a lot of silly deals that we couldn't take and we ran down our opportunities in the West Coast.

Okay.

And then in terms of the trends, Doug, you commented earlier in terms of November, up slightly in terms of contracts versus November 2009.

Bob, with your comment there, it seems as though it might have been an issue in just the past couple weeks.

Was it just the past two weeks and what were the trends, I guess, over the three months of the quarter?

I'm sorry, trends for three -- trends in the fourth quarter?

Sorry, trends during the fourth quarter, yes, sorry, during the three months of the quarter.

Mike?

You mean in the last 12 weeks?

Dan, you're asking how we did in the first four weeks compared to the second four weeks compared to the third four weeks of the quarter?

If there's any consistency or just how that went overall?

Well, for the last four weeks, which is the beginning of November 1 forward through this week, deposits are up 10% year-over-year.

Right.

And with respect to the trends within the fourth quarter, I don't think we're going to share that.

I think what's important is what's happened in the last four weeks.

Mike, you don't go back that far, do you?

We do -- there was an inconsistency with a major sales event.

This year, we were up 53% for that four-week back period but we had a significant sales event this year which we did not have last year.

Right, we ran a national fall sales event in early October, ten days in early October, which we did not do last year so that comparison is skewed.

If you take that out, you're basically flat and you're better in the last four weeks by 10%.

Okay.

The most important thing to take from it, as I said in our last conference call, was that we're fairly well convinced that the market is there because when we run an event, and the importance of an event is not the special deal for the client as much as a new reason for our salespeople to get geared up and call the client and to offer the client something different.

It's not really better but it's different than we have in the past, try and bring them out and they do come out and they do deposit in large numbers so we get an indication that there's a market there.

There's oil down in that hole.

We've just got to get to it.

Thank you.

Thanks, Dan.

Jackie?

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

Hi, good afternoon.

This is actually Ryan O'Steen on for Bose George.

Just a couple questions on your New York urban infill market.

One, did you have the percent of sales from this market during the quarter?

And, two, could you give us an indication of the gross margins being generated on those high rise developments?

Greg and Marty.

I don't think we go into that level of detail.

No, we don't go -- some of it is joint venture versus (inaudible ) --

Some of our New York stuff is in a JV or a series of JVs and some of it is wholly owned so it's very difficult to gather that kind of information.

Okay.

Fair enough.

Then just switching gears, just to follow up on Gibraltar, you'd mentioned the significant pickup in deal flow.

Besides FDIC opportunities, what type of distressed debt [ops] are you looking at and where is most of this deal know coming from?

Thank you.

Well, we're looking at everything from one-off non-performing loan purchases, significant loans, to pools and the pools are being generated by investment bankers, real estate brokers, directly by banks.

We are contacting banks to help them create pools that are attractive to us.

So it's really all over the place and at all different levels.

Thanks, guys.

You're welcome.

Jackie?

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

Hi, this is Rodny on for Ken Zener.

Hi, Rodney.

Hi.

So looking at profitability across segments, the Mid-Atlantic region's operating margins have been increasing from 5% in the 1Q to 8% in 2Q and 11% in 3Q.

How did 4Q margins compare in that region to the prior three quarters?

Do you have that one, Greg?

No.

Greg -- (laughter)

He's paging through, Rodney.

Excuse me?

He's paging through his book.

He's got it.

Okay.

Just another question in the meantime.

Just going back to the ASP and the geographic mix kind of affecting pricing in the last three quarters of 2011, would you expect prices up quarter-over-quarter in the 1Q and then trailing off from there or are you expecting a flat or gradual decrease from here?

We expect the first quarter of 2011 to be up, the second quarter to be down, and then the third and fourth quarter to be slightly below this year's average.

Okay.

As I look at the Mid-Atlantic for gross margins this quarter versus the other three quarters in this year, there is not a meaningful difference among the major states there.

It's pretty consistent across Virginia, Maryland, Pennsylvania.

Okay.

All right.

Thanks, guys.

You're welcome.

Jackie?

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

This is Joshua Pollard on for Joshua Pollard.

(laughter) Hi, Josh.

Good to talk to you guys.

I've got a quick question around your margins, you made the comment that 2010 is a good guidepost.

Are you guys inherently explicitly, implicitly, expecting to take another $100 million plus of write-downs or is all your commentary excluding write-downs?

And if it is excluding write-downs, could you give some commentary around what you guys are planning for in 2011?

Thank you.

Josh, the way the accounting laws, regs, et cetera, work, I believe, is that if we are aware of an impairment we're supposed to take it.

Therefore, the incident in question has to be that we think as of the close of this quarter that we impaired everything that we had to impair.

Nevertheless, as has empirically been shown over the years, fresh impairments pop up, but certainly we don't expect it, otherwise we would have taken them.

So we can't give you any guidance on impairments for the future.

The accountant in the room agrees with Bob.

My model never agrees with Bob, though, unfortunately.

(laughter) My other question is around SG&A.

Are you guys -- when you give that guidance, is that around margins or is that around dollars?

I know you guys are expecting roughly similar or calling for roughly similar revenues, but I guess the question is are you guys comfortable with your SG&A levels where they are?

I think they're starting to be a pretty large bifurcation among the builders with those that are comfortable where they are and those that want to cut further.

I don't think we want to cut further.

If it becomes apparent to us that that's a mistake and that we should cut, then we will.

What did we do this year?

We cut --

$50 million reduction.

Right.

And we think that puts us at a level that we're comfortable with, that we want to be at.

We're not just concerned when trying to squeeze out more profit and more margin.

We are concerned with having the machine apparatus, experience and abilities in place to be able to greet the market, the new market, better market, when it returns.

So being optimistic about the return of the market, hoping that all these favorable stats we've seen recently, for instance, continue and yield a benefit, we're comfortable where we are.

And if I could sneak one more in, I would love to know or if you guys could give just any more color on mix.

I'd love to know whether it's geographic or product mix that's driving it and what is actually driving the quarter-by-quarter difference, why would 4Q and 1Q be stand-outs from a mix standpoint on the negative side or 4Q be negative, 1Q be positive, I'm just trying to understand and get some numbers around how mix is affecting your margins?

Thanks, guys.

Hold on one second.

I think this is for the full year or for the --

For the full year 2011 versus 2010.

All right.

For the full year we just completed 51% of our homes were single families, of settlements.

Next year we expect that to be a little higher.

Multi-family deliveries were 28%.

Next year we expect that to be a few percentage points lower.

Age restricted is pretty flat year-over-year and high rise deliveries next year will be a couple points lower than the high rise deliveries this year.

In terms of percentage of total.

What were they this year?

8.6% this year.

Good.

That answers the question that was asked that we couldn't dig out.

Right.

And maybe --

The reason it changes from quarter-to-quarter, to complete his answer, is simply the mix of when these segments deliver.

For example, a multi-family building may sell for two years, may be built for two years and then when it delivers it all delivers.

And then maybe you don't have another delivery in multi-family for some time.

So I think that's what happens quarter-to-quarter.

Jackie?

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

Hi, guys.

Just had a quick question on your spec count, if you had mentioned it, at the end of the quarter, both total specs and finished?

Our spec count at the end of the fourth quarter, for single families, was 168.

That's right at our average of about 1.1, 1.2 per community that we like to run at.

Multi-families was at 194 for a total of 362.

Our high density product was 375.

375.

And just the year-over-year decline in the West orders, obviously year before that they were up a lot.

And then they're obviously down a lot this year.

Was that any mix or any reason on community count being changing over the last two years in the West?

Yes, it was a reduction in community count.

California has been a fair market for us, some towns do well, other towns do not do as well.

We just had a hard time reloading the land.

It's very competitive out there for ground and we have taken a pass on a number of opportunities that we thought got priced too high, but a the moment we have some pretty good deal flow coming out of California.

We have some new openings that are beginning, that will occur, in particular in San Diego County, and we look to regrow California but it is very expensive.

So we're being very careful.

All right.

Thanks a lot, guys.

You're welcome.

Jackie?

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

Good afternoon, thanks for taking my question.

First thing, on the SG&A, you had mentioned in the press release, you kind of singled out that you had reduced some costs by centralizing more of your purchasing, and obviously over the last few years you've done a lot of cutting, as have most builders or all builders, but where we stand right now, do you see any incremental benefits all else equal from any of the actions you've taken in 2010 that might spill over incrementally in 2011?

And if you could quantify that?

I think just to clarify a little bit of that, the efficiencies we're getting through centralizing purchasing impacts our house costs, not so much our SG&A.

And I'll let Doug talk about the impact they're having on our house costs.

I think it's just beginning to come through.

We are now launching nationwide regional contracting with all subcontractors and suppliers.

We are realizing significant savings.

It will continue for the next year or two until we're fully ramped up in all markets and have hit all trades.

We're, of course, starting with the larger trades, the concrete, the framing, et cetera.

But we're working our way through the house line and working our way through the country and so I think there will be continued reduction in house costs over the next couple years.

And any type of numbers that we can -- you can give us so like we can better put our heads around that?

Yes, to date we're seeing about 4% off the construction costs of the home.

Correct, that's in the backlog.

Okay.

But that wouldn't necessarily help out gross margins vis-a-vis your earlier comments about margins being similar 2011 versus 2010?

I think it could help margins a bit, but it depends on how quickly we roll it out and how widely we roll it out and whether we see the same success around the country that we've seen in the select markets we've done it already.

Okay.

Fair enough.

Second question, more of a capital allocation question, ending the year around $1.3 billion in debt, obviously the debt-to-cap very, very low.

And you just highlighted the credit facility.

So with land spend being equal to year-over-year and the cash flow, operating cash flow minimally negative, I guess, for the year, any thoughts in terms of share buyback at this point?

Again, given that excess cash position, given the fact that the land spend, even if it's a little bit more year-over-year, you're still going to have a tremendous amount of excess cash on the balance sheet?

I think it's currently and has been and projects to be our intention to remain conservative in the cash balance we hold, to use the cash balance prudently to reload land and buy land for the future.

To selectively and opportunistically buy back some debt when the opportunities present themselves, and there are no plans for a stock buyback of any significant size.

We had stated our policy is to keep our stock as a percentage where it is.

Right.

So it depends.

If the stock goes up, then the options start getting counted in and we have to buy -- we don't have to, but we probably will buy more, if the stock count stays at approximately 165 million, 166 million shares.

All right.

Thank you.

You're welcome.

Jackie?

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

Hey, guys, how are you?

Great, Carl.

Good to hear.

Doug, you mentioned earlier in your commentary that you felt that demand was broadly inelastic but you run a sales event that had helped orders relatively recently.

Are there particular, maybe, one or two cities that you would consider especially inelastic or especially elastic on a relative basis?

I'm kind of curious if there's a difference across your markets that you can talk about?

Well, I can give you some examples of where the guys beat on us long enough that we agreed to allow them to add some incentives because they were convinced that would work and in fact it didn't.

And those markets were Arizona, is one that certainly comes to mind, Nevada is another that comes to mind, Washington, D.C.

We let them try it in Northern Virginia.

Today's buyer is not the buyer of two years ago where they're coming into the office and they're haggling and they're haggling and they don't give up until they get the best deal.

Today's buyer, I think, recognizes that the builders have gone as low as they're going to go and they're just afraid.

They're just -- they have other issues that they have to become comfortable with before they buy but it's not price.

And so we don't think dropping the price is going to lead to more sales.

The fall sales event was the repackaging of options.

We had our vendors contribute or suppliers contribute some upgrades.

Kohler contributed upgraded faucets.

Our kitchen cabinet company contributed second, third, fourth upgrade of kitchen cabinets.

Things like that were played with so that we could repackage the incentive and that's the reason it was successful.

But we're pretty convinced that we're in a market where adding incentives is not going to lead to more sales in most markets.

Okay.

I appreciate that color.

Thanks.

You're welcome.

Speaking of suppliers, I'm curious, sticks are relatively flat but a lot of other building materials makers have talked about more aggressive price increases, have been trying to push them through to their broad base of customers and I'm curious as to thinking about your margins for next year as you build out, are you thinking about material inflation, how to fight it, what would be your strategy for attempting to get those increases through to your customers in such a tough environment?

I think from the question you assumed that we're going to pay more and I'm unwilling to accept that.

We just went through some significant repricing and extensions of contracts.

I don't want to mention the supplier or the manufacturer because it's not my business to talk about what they're doing for us, but we're coming into better prices for longer periods guaranteed, signing bonuses, et cetera, so it hardly seems to me that we're seeing from the manufactured supply product a push.

What you may be seeing is a push in marketing for you to spook me.

But we don't see that coming through here.

Okay.

Thanks, Bob.

You're welcome.

Jackie?

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

Good afternoon.

I think most of my quarter-related questions have been answered, so trying to maybe ask a longer-term question and interpret your responses on some of the questions around SG&A and 2011.

It seems as if you are -- I don't know what the right word is, okay with, or resigned to the fact that 2011 may be a break-even year.

Does that mean -- is it fair to interpret that you think that the recovery, once it comes, is going to be fairly fast and aggressive?

Otherwise, if it's a slow recovery, why not cut a little bit of SG&A to try to at least make a little money next year?

What's your sort of long-term thoughts around why keeping it flat at this level?

Well, the way you ask is rhetorical, I think, if that you're suggesting that if the recovery is going to be slow rather than fast, why not cut a little to make a little.

Does it matter that much if we make a nickel or lose a nickel?

Is it worthwhile for us to cut in order to show positive versus negative but only a very slight negative?

I don't think we can fine-tune it that closely.

We make a determination that, look, the market's going to recover by 10%, let's -- because we've got overhead that can certainly absorb a few more houses, each one of the super tenants, each one of the project managers eliminate a regional president and take that territory and divide it among other presidents, is it worth it doing all of that in order to make the extra nickel?

I don't think so.

I think it's more important to be ready for a more rapid recovery than you're suggesting we could react to and make a few pennies.

Does that answer your question?

I think it does, yes.

And somewhat related to that, I think earlier this year or late last year you guys kind of came on and reminded us that your building cycle's a little longer than everyone else's and to be aware of that when we're modeling.

Does that mean that by the end of next quarter we should have a much better idea of what your 2011 is going to look like or do we still have to kind of wait until the end of the spring selling season to really feel a lot better about what the closings are going to be?

Basically, you've got it.

If it takes us an extra month and a half to produce versus our competition, that pushes us out to six to nine month deliveries.

So we're already selling, that means product that can't be delivered for six to nine months.

So there's -- after, when we get to the end of this first quarter, you're looking at relatively slight changes that can occur before the end of the year in terms of earnings, in terms of settlements.

That's a little different now, Bob, because of the high density and multi-family mix where we have a number of specs.

That's true.

And active-adult.

And the fact that active-adult is built a little quicker than the traditional single families.

There are many locations where we can sell through the spring season, through March, through the first half of April, where we can still deliver by October.

Right.

Okay?

Okay.

That helps, thanks.

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

Hi.

Thanks for taking the question.

First question, around the $18.7 million, on the JV line, I'm assuming that relates to the East 33rd property where you wrote it down to zero and then you're starting to see some benefits there.

Is that correct?

That's a component of it.

Okay.

When I think about -- are there other JVs in New York, given the relative strength of the market, where you've similarly written down to zero or can you talk about how much of that property has been now sold down?

Trying to get a sense of is there more of this $18 million type number, it's a meaningful number to the earnings, is there more of that to come?

How do we think about that?

I think the first thing I want to do is reset expectations from that $18 million down to $7 million because as we mentioned in the release, there was an $11 million reversal of a reserve that was no longer needed for a joint venture, not necessarily in New York.

Okay, Jack?

Okay.

$7 million, we're talking sort of the run rate.

Yes.

Okay.

And we still have product to deliver and product in backlog in New York and in our joint ventures and we believe we'll continue to generate profits from those joint ventures next year.

Okay.

So safe to assume there's more of that to come, although maybe not of the same magnitude?

Yes.

Okay.

And then, Bob, sort of a stream of consciousness question on the macro side.

In your supply/demand commentary earlier, just curious as your thoughts on the held-off market component, obviously we could argue that the higher velocity of sales certainly helps Toll, helps probably everybody, but it certainly helps Toll given the higher price point, but then what are your thoughts around risk of more -- of those folks that are sitting on the sidelines waiting to sell their property as rates rise and the environment strengthens and potentially more supply hitting the market, just kind of offset and debate those two points.

I don't get the question.

Is there a question?

Yes, the question is presumably there's a large number of -- well, a number, and it's a building number as time goes on, of people that would like to sell but haven't given the environment and I think you had -- your supply/demand commentary earlier looked at to find out what's on the market.

But I'm wondering what you think about what's not on the market that could come to market as soon as we see pricing stabilize and the environment get a little bit better for people who have been waiting to sell a home and trade up in recent years?

It's maybe safe to say you don't have --

If we get a lot more demand because a lot more people -- I think by the way you're basically right that there's a large portion of the market, the pent-up demand, that is sitting on a used home that may have had it for sale and withdrew it from sale, pulled it back off the market because they saw a terrible market.

If they see the opportunity to sell their home at a slightly higher price that then justifies them taking those proceeds and moving into a new home, I don't think that that translates into new home sales somehow being prohibited because more inventory is hitting the market on a used sale basis.

Yes, that's kind of what I'm getting at.

No, I don't think that bothers us.

Otherwise, in the past when you got an increasing market, an increased demand, you also got increased supply of used homes but that didn't seem to hurt.

I think more important is to finally ascertain, to experience the beginning of the end of foreclosure and short-sale supply which is a third element.

There's been much talk about we're going to be hit by a second wave of foreclosure and short sale and it has not materialized.

In fact, it seems to be going the other way.

So as that goes down, I think you have a more important influence on what the market is going to look like in the next couple of months.

Okay.

Great, thank you.

You're welcome.

And I wanted to circle back to the backlog we have in our joint ventures.

We have approximately $91.2 million of backlog in the joint ventures with the large component of that being in the New York urban.

So safe to say that's a pretty reliable, sort of ongoing recovering benefit as you sell down those units?

Until we sell down all those units.

Right.

Right.

Okay.

Thanks, guys.

You're welcome.

Jackie?

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

Hey, good afternoon, guys.

Most of the questions have been asked but just wanted to ask a couple follow-ups, particularly, first, let me just start on the land impairment and sort of valuation charges.

Bob, understand your comments and agree that if you knew there were impairment's coming you would take them now.

But just curious, in your assessment of the impairments and your assessment going forward, what's your expectation for home prices?

I mean, have we bottomed here?

Are we trending downward?

What's embedded in kind of how you look at the impairments?

Marty.

That's the guy with the stripes on.

(laughter) Not yet.

We are blessed with the obligation of having to look at impairments on a community-by-community basis and so we make the pace and price assumptions on a community-by-community basis.

It's not done by region.

It's not done globally.

So it is very difficult to give you any particular characteristic.

I will say that in general, we don't project much improvement in pace or price in the near term when we look at those impairments and we used the last four to 12 weeks as a pretty solid basis of our assumptions running forward.

Okay.

Now, I guess if I just follow up on that, I mean, if you look at your last four to 12 weeks on a community-by-community basis, and you throw in the trends in activity and pricing and incentives that you're throwing in, wouldn't it sort of suggest that a downward trend?

Not necessarily.

Okay.

As we just mentioned, the last four weeks have been up quite a few percent, 10%.

Traffic's up 5%, deposits are up 10% for the last four weeks year-over-year.

In total.

Right.

That doesn't necessarily mean it's been that way.

It certainly hasn't been that way in every community.

Right.

Well, yes, I mean, I'm not -- I mean, frankly, when it comes to sort of home pricing trends, I'm not quite sure that I would look at the year-over-year as much as -- granted, it's a difficult process to seasonally adjust it, but home prices peaked several months ago and are now clearly trending down across just about any geography and just about any segment of the market that we look at.

So I guess that's what I was sort of getting at with the question about over the last few months do you view you guys as immune to that, which I guess would be surprising to me, or is that sort of embedded in your forecast or am I just asking too detailed a question?

Well, I think you need to understand that just because a home price goes down a dollar or a percent doesn't mean I have an impairment.

No, absolutely.

And I certainly wouldn't mean to suggest that.

But, really, just going back to the overall question, if you ask nearly any analyst on the Street or economist out there there's an expectation that we're going to see at least 5% home price declines between now and the spring selling season and some will say it's going to be 15%, some will say it's 3%.

But unambiguously, if we look across home price indices they have been falling for the past several months and everyone expects them to continue.

And so I'm just really trying to ask a roundabout question, if the world is right, if the trends continue probably through the spring, is that baked into your assessment that we've already taken all the impairments we will or is that a worse outcome than is kind of baked into what your expectations are right now?

I think there's a couple points to make on that.

First, we've taken all the impairments we think it's appropriate to take.

We never said we've taken all the impairments we will.

I think the other thing, as it relates to the home price statistics, that can't be discounted, is the percentage of short sales and distressed sales and foreclosure sales that are components of that number which we don't necessarily compete with head-on in a lot of our markets.

I think what Marty said in a very sweet way is we're unwilling to accept either what our assumptions or information you've been given that does not [G] with our own experience.

Go back to Doug's explanation of inelastic pricing.

We don't believe that you're going to see 5% or 15% drop in pricing of new home sales over the next months or year.

We think you've seen the bottom and we think we've come off the bottom.

In fact, with respect to that pricing.

Okay.

I mean, that's precisely the answer to the question I was looking for.

And then, I guess, if you could reconcile that, I was surprised at your guidance for average sales prices for 2011, and particularly kind of seeing the highest in the early quarter and then running a bit lower, flattening out in the second half of the year.

I just would have -- being reasonably pessimistic on housing, I actually assumed you guys would see increases in the second half of next year as the economy does pick up steam and the job market comes back and all sorts of other things.

Clearly, there must be a mix issue in there.

That's what it is.

That's exactly what it is.

So what is that?

You guys are just tending to open lower-priced communities these days and that's the stuff that will be selling in the second half of next year?

Not open.

It's in the backlog.

You've got to remember that it's six to nine months on average from when you meet a client, say howdy do, press firmly, this is in triplicate, take a deposit, call the township, get a permit, dig a foundation.

Six to nine months later, you see the guy at the closing table.

So it's not a business where you can say people have caught a cold in December so we better go buy more nose drops in November.

It doesn't work that way.

It's too great a lag.

I certainly wouldn't expect that.

But I mean, like you said, it's in the backlog and actually I think the guidance you gave is actually below your current backlog, which is why I'm curious what the implication is for the communities you're planning on opening.

I think you answered it.

It's mix and I guess we can do the rest of the work from there.

Right.

Well, thanks, guys.

I'll let you move on.

You're welcome.

Jackie?

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

Thank you.

Good afternoon, guys.

We'll make this a little bit simpler.

If you look at your 2011 land spend, how much of that will you be spending on development versus purchases, do you think?

Marty?

Greg?

Marty?

Greg?

Answer man?

(laughter)

If you -- based on where we're at today, but, again, we're very opportunistic on our land purchases so this is subject to change so I'll caution you on that.

But where we're looking at today is half and half, half on land spend, half on development.

Okay.

Fair enough.

And then, Doug, if you look at your cost structure, I know you've had a lot of questions on SG&A, but I want to move it over to the gross margin a little bit and you talked about what you're doing on the purchasing.

If you look at your cycle times, they've come down some, but I think that the entire industry has collapsed dramatically and since you're building generally smaller footprint houses, do you still have a lot of other things you can attack on the construction side, on the cycle time, on techniques, et cetera, other than purchasing that you think you can pull some meaningful gross margin dollars for?

Well, purchasing is by far the number one focus for us.

We're always looking at cycle time.

We're always looking at more efficiencies.

We're always trying to simplify our architecture.

We're partnering with vendors.

We're doing everything that every other builder talks about and every other builder has been talking about for decades.

This business is relatively simple.

The subcontractor base is a lot of family run local businesses that we have long-term relationships with.

And we're beginning to move, as we said, to this regional purchasing which has seen some great savings and I think that will continue and I think the architecture will probably become a little more refined.

But I think most of it's in the purchasing.

In fact, some of the architecture goes the other way.

Right.

Certain locations.

Yes.

Hasentree.

In Hasentree, where we've seen all sorts of new elevations, complicated roof structures.

But the buyer wants it.

They're paying the price for it.

That's as much our business as trying to squeeze out a dime from a contractor.

I got you.

Okay.

Just along those lines, as you -- Doug, very early on you talked about the land environment, et cetera.

As you phase in some of these new communities that you've got going, what do you think your progression on land costs will go?

I'm not asking for actual dollars, but should we see -- should we expect that you're going to get some bump in the gross margin from that and if so, about how much do you think is playing between the old and the new?

Well, as we said, 75% of the new openings projected for 2011 are new buys and those new buys were purchased on today's pace, today's price, at a margin that is obviously better than our existing gross margin because we're looking to make money.

And our existing gross margin is a break-even gross margin.

So you should see an improvement in margin as the new communities come on line.

All right.

Thanks.

But that will be on the back end of 2011 and the front end of 2012 for the communities that we're opening in 2011.

Right.

And also, so you understand geographic mix, which is important because as we said the North and Mid-Atlantic is stronger for us.

Of a total of 30 communities projected to come on line, 22 of those are located in the Northeast or Mid-Atlantic.

Okay.

Did you have any concerns, Doug, that given what's going on in Washington with, one, with the election, two, with Obama talking about freezing and then cutting outside contractors, et cetera, concerns about that market cooling meaningfully as we go through 2011 and 2012?

This is Bob instead of Doug.

One thing that's certain, in good times and bad times, in different times or different times, your government grows.

Therefore, we are not fearful that Washington, D.C.

(laughter) I was hoping you would give me a different -- I was hoping you would give me a different answer, Bob, but I agree with you.

All right, thanks.

You're welcome.

There's little chance of it.

Perhaps, there's one area which is defense which has not been talked about that much but the conversation's beginning over the last six months from Gates trying to cut $100 billion out of the defense budget which certainly it could.

That could impact demand in some areas in Northern Virginia but probably, however, it would be made up in other areas.

Look at BRAC.

Yes, BRAC has, of course, brought business to Northern Virginia.

Right, right.

Thanks, Steve.

Thank you.

Jackie?

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

Hi, guys.

How are you?

Good, how are you?

I'm all right.

Thanks.

Good.

I wanted to ask you regarding, I guess, a lot of the points you touched on on the call, you kind of said you expect revenues to be plus or minus the same as this year, margins to be plus or minus, no change in SG&A.

So if I look at my numbers for 2010, I get about gross income before interest of about $300 million, SG&A of about $260 million, and your total interest incurred of a little over $100 million.

So is there any plan to maybe cut, pay down debt further to lower the interest expense?

I think, the first point I want to make is that we would not expect to have any directly expensed interest next year, unlike the $22.5 million we had this year, because with the fourth quarter paydown of our term loan, our inventory and our outstanding debt is now in balance.

Okay.

And we will selectively and opportunistically look for debt to buy back but right now it's pretty expensive.

Okay.

That's fair.

The other question I had was regarding the couple of deals, the WCI deals you did in Florida, maybe those aren't typical of everywhere around the country, I realize that, but they are a pretty large number of lots and your overall sales pace is a little over one sale a month.

You guys expect to -- first of all, are those lots all finished?

And second of all, are they going to be broken out into smaller size communities or are you guys going to sell part of that land to other builders, or how are you going to work through that a little faster?

Well, we purchased two properties from WCI in Florida.

One is Juno Beach, right on the West Palm border, it's on the intercoastal waterway.

That is a raw piece of ground that we are improving.

It has three product lines and we do not intend to sell any of that ground to other builders.

We may sell some of the large custom lots right on the intercoastal to custom builders on a one-off basis.

Parkland is a multi-product line community.

It is primarily improved.

We will have multiple product lines in there and right now we do not intend to sell any of it off.

Rivington?

Rivington -- he's talking about Florida -- Rivington is a third WCI property we bought in Danbury, Connecticut, 800 remaining lots.

Multiple product lines.

We intend to keep all of it.

Got it.

And so are the product lines that are on there already -- you guys going to continue that or are you going to lower the price point somewhat?

It's a mix.

We're sticking with some product lines.

We're modifying others.

Rivington is going through a fairly significant change.

There was some podium buildings there that we don't care to build and we're moving to town homes.

For the most part we're sticking with the lot size.

The price of the home is dependent upon the market.

But we've underwritten those purchases at today's price and today's pace, so we're pretty comfortable with where we are.

Got it.

Okay, thanks a lot.

Thank you.

That was our final question.

I'll now turn the floor back over to Mr.

Yearley for any closing remarks.

Thanks, Jackie.

I do have one Web question that came in from Steve Percoco of Lark Research.

"In what markets is your net community count increasing?

Mostly in Northeast corridor or elsewhere?

Any net decreases?

How is the Florida market and what is your current strategy there?"

With respect to the community count increase, we already mentioned that 22 of the 30 projected new openings will be in the Northeast, Mid-Atlantic.

Net decreases, no.

And the Florida market is soft.

We like it long term.

But right now it's soft.

Our strategy is to take advantage of some great land opportunities, like the two we just mentioned, to set up the future because the sunshine is not going away in Florida.

The baby boomers are right in that sweet spot in the Northeast and the Midwest, waiting to move down there.

And so in the long term we like Florida a lot.

Thanks, Jackie.

Appreciate it.

Thanks, everyone.

Thank you.

This concludes today's conference call.

You may now disconnect.