托爾兄弟 (TOL) 2011 Q3 法說會逐字稿

Good afternoon.

My name is Tamika, and I will be your conference Operator today.

At this time I would like to welcome everyone to the third quarter 2011 earnings conference call hosted by Doug Yearley.

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

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

(Operator Instructions)Thank you.

I'll now turn the conference over to Mr.

Doug Yearley, CEO.

Sir, you may begin.

Thank you, Tamika.

Welcome, and thank you for joining us.

I'm Doug Yearley, CEO.

And with me today are Bob Toll, Executive Chairman; Marty Connor, CFO; Fred Cooper, Senior VP of Finance, International Development and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira Sterling, Chief marketing Officer; Mike Snyder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Company; and Greg Ziegler, Senior VP, Treasury.

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 the future results.

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

As has become our regular practice, we are going to limit our prepared remarks to provide more time 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 to you.

The past quarter's results indicate some continued stabilization in the upscale housing market, albeit at a level dramatically below historical levels.

For the 5th consecutive quarter we achieved modest pre-tax profitability on a pre-impairment basis.

In fact, this quarter we also achieved modest pre-tax profit after impairments, as well.

We reported fiscal year 2011 third quarter net income of $42.1 million, or $0.25 per share.

Fiscal year '11 third quarter included a net tax benefit of $38.2 million due to the reversal of previously-accrued state and federal taxes.

Fiscal year 2011 third quarter pre-tax income was $3.9 million.

Excluding write-downs and debt retirement charges of $20.2 million, fiscal year '11's third quarter pre-tax income was $24.1 million.

These were all improvements over our results of 1 year ago.

Fiscal year 2011 third quarter revenues and homebuilding deliveries, decreased 13% in dollars and 14% in units compared to fiscal year 2010 third quarter results.

Fiscal year 2011 third quarter net signed contracts rose 2% in dollars and units, compared to 2010's third quarter.

However, they were still well below our historical third quarter paces.

The average price of net signed contracts was $570,000, approximately the same as 2010's third quarter.

Fiscal year 2011's third quarter and backlog increased 8% in dollars and 9% in units compared to fiscal year 2010's third quarter and backlog.

We end the quarter with nearly $2 billion of liquidity, including $1.18 billion of cash and marketable securities and $778 million available under our $885 million 12-bank credit facility which matures in October of 2014.

Our net debt-to-capital at third quarter end was 13.9%.

Our strong financial position and the value of our brand distinguishes us in the luxury market as nervous buyers are exhibiting a flight to quality and dependability.

Our large presence in the metro DC to Boston corridor, and our high-rise business in Metro New York City region, give us a strong position in some of the most promising US markets.

Our buyers generally have very strong financial profiles which have enabled them to secure mortgage financing.

We closed on about $75 million of land this quarter, nearly half of which was for a great site at 22nd Street in the Gramercy Park area of Manhattan, which we bought at a bankruptcy auction.

We are seeing some attractive land, loan and portfolio buying opportunities.

However the flow of deals is not occurring at the pace we would have expected this long into a down cycle.

On the portfolio side, Gibraltar Capital and Asset Management, our subsidiary focused on acquiring the managing portfolios of distressed real estate loans and properties, produced $4 million of profits this quarter.

It is really too soon to assess the ramifications of the financial volatility of the past few weeks on the housing market.

While late summer is generally not the best time to sell homes, in the short run, the stock markets gyrations, the budget impasse and the US government bond rating downgrade are certainly not helping consumer confidence.

Surprisingly, gross agreements for the first 3 weeks of August were basically flat to last year, while traffic was actually up about 5%.

Gross deposits have been down about 18% for the most recent 3 weeks but these were likely reduced in part by the very successful summer sales event we held over the last weeks in July which pulled some activity forward.

There is no question our buyers' confidence at the moment has been shaken and they may be waiting to see what the next weeks or months hold.

Maybe that family with the now 80-pound yellow lab -- remember that dog was a puppy in 2006 -- will continue to delay their move to a bigger Toll Brothers home.

But they, like many others, are becoming more and more anxious to buy when the market settles down.

Looking forward, historic low interest rates and the growing imbalance between housing production and demographics-driven demand bode well for the industry sooner or later.

The key question, of course, is when.

Now, let me turn it over to Marty.

Thanks, Doug.

Third quarter homebuilding cost of sales as a percentage of homebuilding revenues before interest and write-downs was 76.6% compared to 77% in the second quarter and 77.9% in last year's third quarter.

The year-over-year improvement was principally a result of cost savings driven by our trade purchasing initiatives and by our reduced incentives.

Third quarter interest expense included in cost of sales was 5.3% of revenues, about 10 basis points lower than the last quarter, principally a result of mix.

We had no directly expensed interest.

Of the third quarter write-downs of $16.8 million, $14 million was attributable to land owned for a future community in South Carolina.

Third quarter SG&A was 16.4% of revenues compared to 21% in the second quarter.

This reduction was a result of higher revenues in the quarter compared to the previous quarter, ongoing benefits of cost reduction initiatives and insurance reversals and recoveries.

The increase in joint venture and other income was principally a result of our joint ventures in the New York metropolitan area and, as Doug mentioned, approximately $4 million in income from our Gibraltar operations.

In the third quarter, we recognized a tax benefit of $38.2 million related primarily to the release of reserves associated with completed tax audits or statute expirations.

We do not expect the benefit of this size or nature in our fourth quarter.

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 620 and 820 homes, bringing total deliveries in 2011 to between 2,475 and 2,675 homes.

We also estimate the average delivered price per home for the fourth quarter will be between $555,000 and $570,000.

At this point I'll turn it back to Bob.

Thanks, Marty.

Research shows that home ownership remains a goal of most Americans.

With historically low mortgage rates, home affordability remains tremendous.

And studies are showing that it is now cheaper in most cities to buy a home than to rent.

Rents have been climbing quickly in the past year.

And new home prices, according to ISI, are trending positive.

Per a report they just issued today, new home prices through July are up 8% since the recent lows in March 2009.

The data on the S&P/Case-Shiller index website goes back to January 3, 2000.

A person who invested $500,000 in the Dow Jones on that day would have made a profit of $125,000 including dividends in the nearly 11 years since.

If they had invested that amount in the S&P 500, they would have lost $22,000, even including dividends.

According to the Case-Shiller 20-city composite, if on that same day in 2000 that person has instead bought a home for $500,000, that house would be worth $700,000 today.

That's a gain of $200,000 despite the worst housing market since the Great Depression.

And that is without the advantage of using leverage, also known as a mortgage in our business.

Consumer confidence is still weak and the housing sector remains in a fragile state.

The nation's economy continues to suffer from a lack of jobs in housing construction and the related manufacturing and service sectors that a decent new home market would typically generate.

Housing construction is a primary job creator for those Americans who are now suffering among the highest levels of unemployment in the current recession.

We all know that housing got us into the mess and most of us recognize that only new construction will get us out of the mess.

Many people that work in new construction, unfortunately, are not fungible with the rest of the economy.

They do not fit easily into other parts of the job market.

Our sales have gained some traction but are terribly inhibited by the negative feeling coming out of the budget crisis and now the stock market gyrations.

Most of all, however, confidence in new housing takes a hit from the uncertainty of loan limits, mortgage deductions, Fannie, Freddie, et cetera.

We hope that our elected representatives will proceed cautiously with housing as they review options to address the deficit by insuring that liquidity remains available to the sector.

And that the foundations of our system that support home ownership are not dismantled.

Doug?

Thank you, Bob.

Tamika, we are ready for Q&A.

(Operator Instructions) Josh Levin with Citigroup.

Doug, you talked about, you gave us good color on the first 3 weeks of August, about gross agreements, traffic, and deposits.

But what do you think about net agreements?

Have you seen an uptick in cancellations at all the first 3 weeks of August?

We have not.

Okay.

And second, given the volatility and the negative consumer sentiment, how are you thinking about your pricing and incentive strategy as you head into the fall?

There's no change.

We still believe that pricing is very inelastic, the few times we've tested it, as we've talked about on prior calls.

By adding incentives, we have not seen more sales.

I think buyers understand that our pricing is fabulous, our locations are great.

They just have lost confidence right now.

So, they're not in haggling the way they were a few years ago.

I think they recognize the great prices.

We do have incentives in most places but they are flat or going down and we intend to continue that through the fall.

Ivy Zelman with Zelman & Associates.

Just talking a little bit about the weakness, specifically in DC.

Orders were down about 14% year-over-year in the Mid Atlantic and looking at 20% quarter-over-quarter.

If you look at that weakness, do you think it's just more of the close to the Beltway and the lawmakers and a little more jitters are coming off of what had been a stronger market?

And then just secondly if you can comment on mortgage funding, what's happening in the jumbo market?

Have you seen rates moving higher?

Have you seen a reluctancy of banks to fund?

And lastly, stock buyback, with the weakness in your shares, would you strategically consider using your significant liquidity to be a buyer of your stock right now?

Thank you.

Okay, Virginia, the Mid Atlantic, the slowdown is primarily coming out of Maryland and Virginia.

And I think it's indicative of what happened through our third quarter in Washington DC.

If there's anybody that should be nervous, it should be the guys in Washington.

Right.

Don?

Don Salmon is here of TBI Mortgage.

Let's talk about jumbos.

In terms of jumbo, actually, quite the opposite.

We're seeing more opportunities for jumbo, rates are very competitive.

We have more banks than ever willing to lend jumbo.

In fact, we have increased liquidity now for some of our self-employed buyers that we didn't have 6 months ago.

We have a phone call today and meetings going on right now with another bank that we think is going to be a terrific source for us.

We're very optimistic about the jumbo coming back pretty strongly actually.

Thank you, Don.

Ivy, your last question was stock buyback.

Like many other companies, we're watching our stock price very closely and have been over the last few weeks, even more closely.

And we plan to evaluate our options as soon as our trading window opens in a couple of days.

David Goldberg with UBS.

My first question, I actually want to follow-up on Josh's question on cancellation rates.

And what I want to get an idea about is, how you feel about the strength of the backlog.

And given everything that's happened in the last month in the broader economy, how solid do you think the backlog is?

And how much work do you do to solidify and make sure the backlog, we're not going to see a wave of cancellations in the next month or 2?

We feel good.

There's no question it's taking a little bit longer to get a client from deposit to binding agreement.

And we have to work a little harder and we have to be a little more patient and not put quite the pressure on them that we have in the past.

But they've put a lot of money down and I think they're going into this right now with eyes wide open.

We've had very stabilized cancellation rates now for a couple of years.

And what's going on in the stock market in the last couple of weeks, we don't think will affect that.

So, we're quite confident with the amount of money that's been put down and the time we're giving our clients to make that final decision.

We feel pretty good and as I mentioned before, we really haven't seen anything fall out in the last few weeks.

And then my follow-up question, you've talked the last couple quarters about buying some units for development in New York in more the high-rise business.

And I'm wondering if you can tell us, who do you compete against when you're bidding this land?

And maybe you can talk about just the competitive bidding process and who else is in the business and how competitive that process is for you guys.

And what you think gives Toll an edge versus some of your competitors.

The simple answer is cash.

For example, we mentioned that this last quarter we were successful at a bankruptcy auction in the courthouse for a great property down by Gramercy Park.

And that was the ability to write a pretty big check -- you can figure it out since we said it's about half of what we spent for the quarter -- within 10 days.

So, that gives us a huge advantage, and we're hungry.

We've seen great success in New York and Hoboken.

And we are aggressively looking for opportunities.

Most of what we look for is under the radar screen.

We tend to focus on the more boutique buildings that you can get in and out of a little quicker, in fabulous locations.

We have sold out of 7 buildings in City Living New York.

We have 5 right now that are open for sale.

We have 2 that will be opening this coming fall.

And we have 7 more that we own, properties that we own, that are still going through stages of approvals.

So, we love the land we have tied up and the buildings we are going to be opening, not to mention those that are already open.

The competition, it's all over the place.

Occasionally we run into the real big guys but it tends to be smaller New York investors.

And right now, they just don't have the capital so we're taking advantage of that.

Bob Wetenhall with RBC.

Can I just get your view on impairments going forward?

And if we should expect anymore writedowns associated with that South Carolina community that you referenced?

Bob, we evaluate impairments each quarter, and we take the impairments that are appropriate and that are known in that quarter.

And looking forward, if we thought there were impairments to be taken we would have already taken them this quarter.

In terms of the South Carolina community, we have very limited bases left in that particular community after this impairment.

Got it.

And can you give a little bit more color?

You had some nice gross margin expansion this quarter.

Can you give us a little idea of what's driving that?

Our margin improvement this quarter over last quarter was predominantly a result of some of our centralized trade purchasing initiatives running through the deliveries.

Year-over-year, it was a combination of reduced incentives running through the deliveries, and the start, if you will, of those trade purchasing initiatives.

Joel Locker with FBN Securities.

Did you say what your spec count was at the end of the third quarter?

Our spec count is flat versus last quarter.

Last quarter we had 357 traditional homebuilding specs and this quarter it's 355.

And just a question on, your West orders were down 23% year-over-year.

Was that just weakness or was it a matter of community count being down?

Primarily community count in California.

What was community count on a percentage basis down there in the West, just trying to get a comparison?

It's 17 out of 207.

Joshua Pollard with Goldman Sachs.

You all are closer to the rental business than your competitors.

First, because you have the multi-family condo business but also through some of the things you guys do in your JVs.

Could you talk about any ideas that you guys are looking at as far as getting deeper into the rental business?

Do you guys feel like that's outside of your wheelhouse or is that something you guys are looking at intimately at this point?

When we do the rental business, we do it off balance, JV, and it's done under the REIT.

So, we do our best to move it away from Toll Brothers, which is an earnings Company as opposed to building equity cash flow from the rental business.

You're right, we do compete with the rental business through condos and multi-family product for sale.

And our experience has been good, as we said, in the trial log.

Rents have been going up so rapidly, that they've passed what it costs to own 1 of these units on a fee simple basis.

The question then, Bob, would really be what would it take for you guys to go deeper into that business?

Or is the rental business not something that you guys are interested on for what I would call the balance sheet portion of Toll Brothers?

We're interested in it but we're interested in it off balance sheet.

My second question is, on the margin expansion, centralized trade purchasing initiatives, are you guys done with that?

Should we see any further benefit?

And then my last question is around Gibraltar, the gain you guys saw there.

Should we expect Gibraltar to be earning that much income each quarter for the foreseeable future or were there 1-time items there?

There were not 1-time items and we expect Gibraltar to continue to grow based on the deal flow we're now seeing.

With respect to centralized purchasing, we have launched this initiative in most of our markets, certainly in all of our core markets.

There is still some savings to come through but I think most of it has already hit.

The low-hanging fruit's been picked.

Definitely we'll get more because there's guys that are working at it and if they don't get more, woe for them.

So, we'll definitely see some but the main benefits are probably already achieved.

Besides the purchasing initiatives, is there anything else out there that you guys are doing to drive further margin expansion?

Or is it all about pricing from here?

Josh, I think it's predominantly all about pricing from here.

There may be some small items that come to bear but nothing that we could point to.

We're looking at it every day and we may find a nugget here and a nugget there.

But for the most part, as we said on the last call, true margin expansion is going to come from volume and pricing power, which go hand in hand.

Stephen East with Ticonderoga Securities.

Doug, when you talked about the trends in August, could you give us some color about the trends as we move through the quarter, the monthly sequential trends?

And then also geographically, whether you are seeing anything unique, your South was much stronger than the rest of it.

Was that just community growth or were you seeing better demand there?

As we worked through the quarter, we actually saw great improvement in July.

But that was driven by a big national sales event that we launched the last 2.5 weeks of July.

Now, some of those contracts came through in early August, which is why I mentioned earlier that our agreements were flat for the first 3 weeks of August.

But some of that hit in late July.

And that was in partnership with our vendors who were offering upgrades to our clients.

So, the added incentives were not out of Toll Brothers' pocket but they were out of our partner vendors' pockets.

We've been doing this now for 1.5, 2 years very successfully.

So it's hard, Stephen, because of that event, it's hard for me to tell you what normalized demand would have been through the quarter but for us July was significantly better.

And geographically on that, with the South?

Texas has done very well through the quarter.

It's a bright spot in our Company along with, of course, we talk about City Living.

Florida East grew primarily because of a new community that we brought online which had good sales through the spring.

But again, the best action still tends to be Washington DC., up through Boston, with the exception for us of what we call New York Metro which is not City Living.

And sadly, it's not Westchester County but it's up in Fishkill.

So, it's a little bit of a tougher market.

And that has not performed as well as the other markets from Virginia up through Boston.

And as we mentioned before, Maryland and Virginia have softened a bit, primarily because of what's going on in Washington DC.

And then when you get out of the Mid-Atlantic, Northeast, I mentioned Texas as being the other bright spot.

And we've also been pretty happy with Charlotte, although it's very small.

And Raleigh, at times through the quarter, has done well.

That's pretty much it for the round up.

The New York ex urban, Fishkill, Poughkeepsie, et cetera, was very strong for us.

It's just recently going more quiet.

That's right.

Okay, great round up, I appreciate that.

And then on your cash spend, you talked about several different things.

Gibraltar.

Where do you think you allocate your cash when you talk about how fast you may want to grow Gibraltar, whether you want to do some debt repurchase like you did in the quarter or share repurchase?

And then also, you talked about the South Carolina project.

Are you getting more into development or are you still, when you're doing your land spend, is it primarily for new properties versus development?

In terms of allocation of capital to start, we're very opportunistic.

We do not plan our allocation.

We think that's a big mistake.

As we've been mentioning now for a year, we're frustrated with the deal flow we're seeing for this deep into a cycle.

It doesn't mean we're not seeing opportunities.

It doesn't mean we're not doing deals.

But we certainly had hoped that we would be spending more of our $1.2 billion of cash and bank line on great opportunities.

And the banks are just not that motivated right now to be out in the market moving product.

Gibraltar, on the other hand, is seeing very good deal flow.

We have about $75 million invested through Gibraltar.

There's nothing new to report but they've got balls up in the air, they've got offers out.

And again it's just opportunistic use of our capital, and if there's good deals through Gibraltar, we will not be shy.

I wouldn't be surprised if that $75 million investment doubled.

We'll just have to see how it plays out.

With respect to stock repurchase I've already talked about it with Ivy.

With respect to debt, we've spent $45 million in the third quarter on some debt buyback.

So, we will continue to be opportunistic in all fronts, Stephen.

I think it's the best way I can answer it.

And your final point was whether we're spending our money on new land deals or developing old.

It's a blend.

There's a number of great properties that we're just now closing on because the entitlements have been completed.

And we will be starting land development to bring communities online.

And those I would call very old but we bought them at a time when the pricing was right and we're not closing until we have all approvals, which in most of our markets takes many years.

So, I think you'll see the capital spend on both new and old.

Jade Rahmani with KBW.

Going back to the jumbo mortgage market, I wanted to ask if the decline in conforming loan limits in September is what you think is driving the increased interest from originators?

Or is it the stickiness of jumbo mortgage rates which appear to have held in there despite the stark decline in treasuries?

I think that the banks have a lot of liquidity right now and they are looking for places to put it.

With the credit quality, especially the credit quality that comes out of the Toll Brothers communities, it's a terrific asset to put on the books.

A lot of the jumbos these days are ARMs and that's a great asset for the banks to have and I think that's what's driving it.

If, and when, the rates drop, we'll see what happens.

My guess is that the same jumbo product will be available to those folks but I don't think the banks are saying the maximum loan limit is going to drop, therefore we'll come out with jumbo.

I don't think that's what drives it.

I think what drives it is their appetite for their balance sheet.

And can you just give an indication of what rates are currently quoting?

Sure.

Conforming rates today are about 4%, which is just about an all-time low.

We actually hit 3.875% for a nano second.

No points.

These are zero point loans and for highly qualified buyers in good markets.

Agency jumbo, which is what we just talked about, is about 4.125%.

You talked about the stickiness of jumbo.

Right now that's about 4.75%, so that spread has widened a little bit.

And I think that's because it is going into portfolio.

There is still no active secondary market for jumbo, although there are rumors that they are really trying to kickstart 1.

You probably know that Ranieri invested a bunch of money in a company, as did Wilbur Ross.

So, hopefully those guys are smart enough to get it going for us.

Washington has not determined to lower the limits of Fannie, Freddie, FHA.

And don't be surprised to see them extended, is the word that I get from many of my contacts in DC.

To be clear about that, the reduction in the high balance conforming really is going to affect those folks who need loan to values over 80%, more than anyone else.

It will be a price issue for those folks who are 80% and below, but it won't be an availability issue because the availability is there today.

And just to put that in perspective, in the third quarter, we had 8 houses settle that had agency jumbo loans over 80% LTV.

So, we think we can overcome the price objection 1 way or another.

And I think the availability will be there.

And again, of those 8 folks that closed, 4 of them were conventional.

1 was an FHA.

That 1 probably wouldn't get financing.

Of the 4 conventionals, 3 of them could have gone to 80% LTV.

They had the assets to put more money down.

They just chose to get the higher leverage for whatever their own personal investment in cash allocation reasons were.

Probably the intelligence that these rates are as low as they've been in the history of man.

(multiple speakers)

And then a follow-up on City Living, if I may.

I just wanted to ask if you could give the percentage of revenues that came from that business.

And also if you're comfortable with the investment pipeline, being able to hold that same ratio for, say, the next couple of years.

Thanks.

City Living accounted for 15% of sales in the third quarter and 23% of revenue.

And yes, we think we can easily sustain that.

Megan McGrath with MKM Partners.

Just a quick follow-up on your comments around the land market and it being slower than you had hoped at this point in the cycle.

Any thoughts given the recent volatility in the market and the pressure the banks are facing, based on past experience if that's going to perhaps help you or hurt you in the sense that the banks are going to be more willing to do deals?

Or are they too distracted now to concentrate on that part of their business?

Far from being distracted, if you're going to take 1 of your better lines, like credit cards in Canada, and off it, then maybe you're going to start to direct some attention to shedding some of the real estate troubled loans that you have.

But so far, we don't see any indication of a pick up in volume from the banks to disgorge troubled real estate loans.

Which seems to us to be an anomaly because when we compare it to all of the past recessions that we've been through, we had much better deal flow.

So, I can't give you an answer as to why we would expect to see more in the near term because nothing's changed basically from this quarter to this quarter from the last and the quarters before.

And then you talked a lot about the New York metro market and City Living and how happy you are with that business.

Does it get you interested any other urban markets, given your success in New York?

Anything that you're thinking about entering or expanding into?

Certainly.

Yes, we're studying Washington DC and Boston at the moment.

And 1 small expansion in Philadelphia.

Yes, that's right.

Thank you.

Michael Rehaut with JPMorgan.

Hi, this is actually Jason Marcus in for Mike.

Just a couple housekeeping items.

The first was what was the value of your deferred tax asset at the end of the quarter?

It was $403.8 million.

And then the next is, just regarding the mortgage mix during quarter.

Can you give the break out of conforming jumbo and cash?

Sure.

Conforming and FHA, VA was 66%, jumbo was 11%, true cash was 23%.

That represents the mix for Toll Brothers through TBI Mortgage in which we had a 73% capture rate.

So, I think that's a representative sample of the universe.

That's the DBI.

That is the Toll Brothers.

Yes, but not the DBI.

No, Toll Brothers.

Just so we're clear, of 99%, 1,180 of the loans were prime.

There were 13 Alt-A loans, high quality Alt-A, which is reflective of the liquidity starting to open up for the self-employed people that wasn't there before.

So, that's a good thing.

Ken Zener with KeyBanc.

Could you comment, obviously I think you're talking about pricing being somewhat elastic.

Your gross margins are obviously showing sequential improvement for a variety of reasons.

Could you comment on your thoughts of what would have to happen for your current impairment levels to increase if we saw flat demand in 2012 related to both your mothballed units and your active inventory, please?

If you see flat demand, you shouldn't see impairments.

If you see negative demand, demand slackening, then you have perhaps some communities that will have to be impaired.

And you've commented a couple times on Gibraltar in terms of the deal flow not being what perhaps you would have expected, as well as the fact having cash is clearly an advantage.

Perhaps at a level down, can you talk about your bidding process?

I know in the past when you started your activity in Gibraltar, you might have been on a bit of a learning curve, which might have given you a bit more conservative posture or forecast than others.

Have the deals, while there's fewer deals, have the deals you've been losing, can you talk about the dynamics there?

And did you increase your risk profile or does it appear that the competitors are getting more aggressive?

No, we haven't changed our profile.

We didn't pay a [dump] tax on this 1.

We have great guys that came over from the homebuilding business that really know how to organize, manage, and evaluate the properties that are in these pools and the notes that are in these pools.

And our comment is, we pity the [fools] that are paying all that money when we lose.

Nishu Sood with Deutsche Bank.

Hi, this is Rob Hanson on for Nishu.

Earlier this year it seems like some of the other public builders were starting to get into the move up market and potentially more development type opportunities.

So throughout the year, have you seen an increased competition from some of the other publics in the land market?

Not really.

We haven't seen any change.

And then you guys decreased your community count guidance by a very small amount.

So, I just wanted to see if you could talk about what's impacting that.

Is it faster close outs or expecting slower growth or something else?

No, it's primarily due to land entitlements taking longer than we had hoped.

Adam Rudiger with Wells Fargo Securities.

My first question, Doug, was, you mentioned earlier on that there was some inelasticity towards pricing.

And you addressed, and I was going to ask you about, then what the elasticity was for your July promotion.

You commented on that but could you elaborate on that a little bit more?

If there is some elasticity towards your partnerships with your suppliers and stuff, does it only work because it's a temporary thing?

Or is there a way you could permanently try to do that?

And I think those companies aren't making money hand over fist these days either, so it could be a win-all situation.

So why can't you do that on a more sustainable basis now if there is elasticity towards that?

It's absolutely urgency.

We will not be selling homes like Joseph Banks sells suits with a deal every week that's repackaged.

What happens is the client understands that it's good for a couple of weeks.

They also understand that it's not the local project manager making it up but it's Kohler and Anderson Windows and our flooring company and Whirlpool appliances and everybody else.

And it's out of our control.

It goes away.

And that helps us greatly in terms of creating that urgency.

And we've been successful now for a couple of years in doing that.

The gross margin question has been asked a few times but can you quantify the change in incentives year-over-year?

And then can you quantify what the impact of the insurance reversal was in the SG&A this quarter too?

The change in incentives year-over-year was very nominal, $3,000 to $5,000.

The change in the insurance recoveries really goes through SG&A.

The SG&A move year-over-year was about one-third due to the volume, one-third due to the recoveries, and then one-third due to the ongoing benefits of the cost reduction initiatives.

Is that about $1 million, then, would be the insurance?

I'd go slightly higher than that.

$1 million to $2 million.

And the incentive we're offering today is $35,000 per house which is 6%.

That's on average, of course.

And the incentive in the third quarter contracts is at $39,000 on average which is 6.75%.

Dan Oppenheim with Credit Suisse.

Wondering about the comments earlier in terms of the trends in traffic and deposit.

Traffic up, deposits down, which indicates it's getting tougher to get people to convert and to make that deposit to commit to it.

The last comment there seems to indicate that you're reducing the incentives you're currently offering.

In some ways, don't you offer a dog a bone and try to get them to sign a contract or put a deposit down there?

The agreements are generally late July deposits.

There's a lag there between deposit and agreement, so the deposits, of course, are more indicative of where we're headed in terms of agreements for the next few weeks.

And we just don't think added incentives are going to get those people to buy.

We have tried it and tried it and tried it and that's not what the market is about right now.

Our pricing is great.

They know it.

It's just that they're scared.

They have their own issues.

And they need to get some confidence back to step up and buy.

So we're not going to throw more money at it.

We think that's wasting money.

It's not the smart way to run the business.

And we'll leave it at that.

Okay, and then just to follow-up, you're talking about being hungry in terms of landing specifically in New York.

But how is that overall, when you think about this, when you look at your land inventory, how much would sales activity influence the appetite there?

In New York City?

No, overall.

I'm sorry, I'm not following the question.

Just wondering how much your land buying, the hunger for the land would be influenced in terms of just looking at the sales activity.

100%.

Right.

We underwrite land in today' market.

That's always been the way the Company's been run.

And so, if we're in a better market, then the comps support a higher selling price of a home, which supports the higher land price.

If we're in a worse market, it's going to go the other way.

So, we are constantly adjusting our land buying to the market.

In fact, we ask for columns of current price and current pace on our project profitability and analysis sheets.

And because it frustrates the land buyers to have to deal with the reality of current price and current pace, we invite them also to put in another column that shows an inflation of 2% in price and 2% in pace.

Now, we don't go by those columns but we have them there so the guys feel as though there's a greater possibility, on being reviewed, that their project will be chosen.

But the reality around here is, heaven is now.

We don't buy on the basis of things are going to get better.

And we don't stay away on the basis of things are going to get worse.

We analyze on the basis of what is.

Michael Smith with JMP Securities.

So, most of my questions by now have been asked and answered.

But just real quick, you did mention earlier that stuff coming to market, land-wise more slowly than in previous cycles, and more slowly than you would have expected at this point.

Does that give you any thoughts of seriously entertaining some M&A ideas?

Is there anything out there?

And would you guys be willing to deploy some of your capital if land remains sparse into buying operators?

Or is that something that you, this early in the recovery cycle, want to stay away from?

We would always consider it, but right now we are focused on distressed land.

So, if there's a distressed builder that has great land, and we can pick the land up at a distressed price, then there's a play.

But unless we're talking about expansion into a new market, which historically is the reason we've done M&A, we would not be out there looking to buy a builder because, again, it's a deal at a time from the banks at distressed prices.

And we would rather be very selective in terms of what we're buying than pick up a portfolio of ground from a builder, some of which we like, some of which we don't.

So, I think that's why you're not seeing any real M&A in today's market because those builders with capital are focused on the individual assets that they can buy inexpensively.

Any thoughts on geographic expansion, since you brought it up?

I'm sorry -- your question was geographic expansion?

We continue to consider the Pacific Northwest.

We continue to explore a couple of international opportunities.

Right now there's nothing to report.

Alex Barron with Housing Research Center.

My first question was, I imagine it's probably hard to think about the market could slow down anymore than it already has.

But in case it does, I'm wondering what you guys are prepared to do in terms of SG&A or buying down debt?

We'll continue to be opportunistic in our buying down of debt and evaluating stock repurchases.

In terms of SG&A, I think Bob has said it in the past.

We're in this for the long term, not to make a couple nickels next year.

And that is our current mentality and probably would be our mentality in any kind of modest reduction in demand.

And my other question was, can you help me understand a little bit more the Gibraltar income that you reported?

Is that based on the sale of a property?

Or is that more that you're earning interest on loans that we're not performing that are now performing?

Or what's the nature of those earnings?

And are they cash earnings or they just accounting earnings?

(laughter)

We don't believe in accounting earnings around here.

There is some interest income and accretable yield income that Gibraltar recognizes.

And that was, maybe, about 25% of the earnings this quarter.

And then, as we settle loans in excess of what our expected settlement amount was when we purchased them, we recognize almost capital gain types income.

And that was about 75% of the revenue and net profits we recognized from Gibraltar.

Now, the first portfolio we executed was with the FDIC.

And so in that situation, there is a defeasance of the 50% financing we got from the FDIC that has to happen before there's a return of our investment or cash earnings, if you will.

But this is all cash.

We've defeased about half of that debt in that structure.

On our second transaction, we don't have to wait to defease any debt.

It's unlevered.

We are excited about Gibraltar.

And if we could put an advertisement out there at the moment for any distressed debt and the ability to work with banks and investors as they have AD&C situations, we're going to take advantage of it right here.

So, if you know anybody who's got some troubled loans we have the capital and we have the skills to work them out.

Bring us your tired and your poor.

(laughter)

(Operator Instructions) Jay McCanless with Guggenheim.

First question, just wanted to get an idea, if I could, on what you're thinking on fiscal '12 community growth given the comments you made about being more difficult to find deals that meet your hurdles.

I think we're going to punt on that until our next call.

My second question is for Don.

And talking about more people coming into the jumbo space, sounds like more people are wanting to lend.

Can you give us a sense of what down payment trends are doing right now?

And also if you're expecting the rates, the spread between conforming and jumbo, to narrow any further?

I think you said it widened out recently.

Do you expect that to come back in?

First question about LTVs.

Typically, we're still at 80% LTVs.

Although we have a conversation right now, we hope to announce in the near future, 85% LTVs, up to $1 million and perhaps to $1.5 million.

And that's without private mortgage insurance.

So, that will be a terrific loan, if we could.

We do have a source for 90% combined loan to value being an 80% first and a 10% second on a jumbo, up to over $1 million -- up to $1.25 million.

So, that's terrific.

And we're having more and more conversations with people every day.

So, it is starting to loosen up.

PMI companies, some of the liquidity issues notwithstanding with some of the companies that we all publicized here recently, PMI companies are loosening their guidelines, as well.

Most of them are reducing or eliminating their challenged markets and opening up more and more opportunities for us there.

In terms of spreads, if there's 1 thing I know about spreads, I know they are going to go up, they're going to go down, or going to stay the same.

I just can't tell you which 1 it's going to be.

(laughter) And I can't tell you when or by how much.

But if you think about it, if the banks really are putting them in portfolio, they are going to have a return hurdle that they want.

Right now it appears to be, probably a floor in that 4.5% to 4.75% range on the fixed rate.

Interesting on the 5/1 ARMs, on a jumbo right now, zero points, good buyers, good markets, we're at 3%.

Which is just about free.

So, to the extent that conforming fixed rates continue to drop, my expectation would be that the spread between conforming and jumbo would widen.

If conforming rates start to go up a little bit, my expectation would be, that spread starts to narrow a little bit.

But don't take that to the bank because I really am clueless as to what's going to happen in the future.

Jay, I think our average down payment still is at the 29% or 30% as it's been for the past so many quarters.

And our borrower is still in the mid 750s in terms of FICO score.

Yes, average LTV including FHA which is at 96%, average LTV across-the-board is 72% and the average FICO score is 754, so still very strong buyers.

Tamika, 1 second.

I have an e-mail question and since Don has the floor, it will be for him.

This is from Steve Sullivan at Horizon Financial.

What if anything can home builders do to mitigate the negative effect appraisals are having on the housing market?

We do not have a material appraisal issue.

I would say that there are some spotty appraisal issues out there but nothing that comes across our desk as a--

We used to.

At 1-time we did, yes.

Right, in the west, but the problem seems to have abated substantially.

(multiple speakers)

Yes, and I think part of it is we've gotten a little smarter and a little better at it.

And we just don't see appraisals being a major impairment to closing houses.

Okay, second part which you've answered in part.

Also, are you seeing any signs of lenders loosening up credit standards for mortgage apps?

Yes, absolutely.

On jumbo and conforming.

In fact today, and the reason I keep saying today, we just had our managers meeting, we evaluated a lender who will actually go down to 560 credit scores.

And we're looking at that.

We will not deploy TBI capital for that.

If we do it, we'll refer it out to them and let them close the loan because it's not how we want to deploy our capital.

But the question of availability, there's absolutely companies out there that will do those loans.

That opportunity was not there a few months ago and we're seeing multiple companies now with those kind of criteria.

And there are no further questions at this time.

I'll turn the conference back over to Mr.

Doug Yearley for any closing remarks.

Thank you, Tamika.

Thank you, everybody, and have a great day.

Have a great Labor Day.

And let's keep our fingers crossed.

Thanks.

Thank you for participating in today's conference call.