托爾兄弟 (TOL) 2011 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the fourth-quarter fiscal year-end 2011 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.

Douglas Yearley, you may begin your conference, sir.

Thank you, Dawn.

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 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 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 most have read it, so I won't reread it to you.

Against a backdrop of US government gridlock and persistently high unemployment rates at home, political and economic crises around the globe, and dramatic volatility in the capital markets, we produced our second consecutive quarter of pre-tax profitability and our sixth consecutive quarter of pre-tax, pre-impairment profitability.

Although US housing starts remain down 60% from historical norms, we produced solid improvement in most key metrics in fiscal year 2011.

Our pre-impairment home building gross margin improved nearly 250 basis points in 2011, compared to 2010, and improved in each of the past four quarters, compared to the prior year's same period.

Our fiscal year 2011 fourth-quarter net income was $15 million or $0.09 per share diluted.

On a pre-tax basis, 2011's fourth-quarter net income was $15.3 million.

Excluding inventory and joint venture write-downs and debt retirement charges, 2011's fourth quarter pretax income was $33.9 million.

For the full fiscal year, net income was $39.8 million, or $0.24 per share diluted.

In 2011, we reported a pre-tax loss of $29.4 million, as 2011's inventory and joint venture write-downs totaled $92.7 million, and charges related to early retirement of debt totaled $3.8 million.

Excluding inventory and joint venture write-downs, and debt retirement charges, 2011's pre-tax income was $67.1 million(Sic-see press release).

In fiscal year 2011's fourth quarter, revenues and home building deliveries increased 6% in dollars and 8% in units compared to 2010.

Fourth-quarter net signed contracts rose 24% in dollars and 15% in units, compared to 2010.

The average price of fourth-quarter net signed contracts was $606,000, compared to $565,000 in 2010's fourth quarter.

For the full fiscal year 2011, home building revenues declined 1% in both dollars and units, compared to 2010.

2011 net signed contracts increased 9% in dollars and 7% in units, compared to 2010.

We ended 2011 with a backlog of $981.1 million, and 1,667 units, up 15% in dollars and 12% in units compared to 2010.

We ended fiscal year 2011 with $1.14 billion of cash and marketable securities, and $785 million available under our $885 million 12-bank credit facility which matures in October 2014.

Our fiscal year-end net debt to capital ratio was 15%.

Our strong balance sheet gives us the financial flexibility to invest in the future.

During fiscal year 2011, we spent approximately $281 million on land for our core traditional and urban new home business, purchasing approximately 3,400 lots and optioning another 5,800.

This resulted in a net increase to 37,500 lots owned and controlled at fiscal year-end 2011, versus 34,900 at fiscal year-end 2010.

Nearly 60% of our lots are concentrated in the land-constrained Metro Washington, DC to Boston corridor, which enjoys lower unemployment and greater affluence than many other regions.

Two weeks ago, we announced our entry into the Seattle market through the acquisition of CamWest, which added approximately 1,300 lots owned, and 200 under option to our land position.

During fiscal year 2012, including Seattle, we project growing our community count by between 9% and 19%, and reaching fiscal year-end 2012 with between 235 and 255 selling communities.

The urban metro New York City market remains a bright spot for us.

In fiscal year 2011, we opened for sale three new buildings under the Toll Brothers City Living brand.

We launched 1450 Washington Street, the fourth building in our successful Hudson Tea project at the northern tip of Hoboken, New Jersey.

In Manhattan, we opened the Touraine on the Upper East Side at 65th Street and Lexington Avenue, a small boutique building with an average projected sales price of $5 million per unit.

On the Brooklyn waterfront we opened 205 Water Street in the DUMBO neighborhood.

Before opening for sale, the Touraine and 205 Water each had lists of over 3,000 interested parties.

In total, in the urban metro New York City market, we have completed 13 buildings of approximately 2,550 units, approximately 2,430 of which have been sold.

We are in construction on three buildings of 245 units, and have eight more buildings of approximately 1,600 units in planning.

Gibraltar Capital and Asset Management, our wholly-owned subsidiary formed to purchase distressed loans and assets, completed four transactions in fiscal year 2011.

The transactions involved the purchase of 121 non-performing loans, the combined outstanding balance of which was approximately $272 million.

With Gibraltar's specialized skills in the valuation and management of distressed real estate development assets, we have now completed transactions totaling approximately $2 billion of non-performing loans and real estate assets, in partnerships and on our own.

We currently have approximately $100 million invested in Gibraltar, and continue to seek opportunities to leverage Gibraltar's strengths with Toll Brothers' expertise, relationships, well-known brand name, nationwide presence, and capital.

Now let me turn it over to Marty Connor, CFO.

Thanks, Doug.

Our fourth-quarter home building gross margin before interest and write-downs was 24.2% of revenues, compared to 21.4% in 2010's fourth quarter.

This improvement was principally a result of our regional trade purchasing initiatives and reduced incentives.

2011's third-quarter margin was 23.4%.

The improvement from the third quarter was primarily due to a $2.1 million accrual reversal on a favorable legal ruling, and also mix.

Fourth-quarter interest expense included in cost of sales was 5% of revenues, compared to 5.1% from 2010's fourth quarter and 5.3% from 2011's third quarter.

The improvement is a function of mix shift, with more deliveries coming from newer communities.

The fourth quarter pre-tax write-downs of approximately $18.2 million included $0.8 million attributable to operating communities, and $0.9 million attributable to land owned for future communities.

Approximately $15.3 million of the write-downs were attributable to options, including one $12 million write-down in Arizona, while a net $1.2 million was attributable to joint ventures.

Fourth quarter SG&A of approximately $68.4 million was higher than the $64.6 million in the third quarter of 2011, but down from the $69.2 million in the fourth quarter of 2010.

The increase compared to the third quarter was primarily attributable to the increase in revenue and the lack of benefit from reductions in liabilities due to changes in estimates and resolution of issues, and insurance recoveries.

As a percentage of home building revenue, SG&A was 16.0% for Q4 of fiscal year 2011, compared to 16.4% in Q3, and 17.2% in Q4 of fiscal year 2010.

The improvement here is primarily due to increased revenue.

Fourth-quarter other income and income from joint ventures was $18.9 million.

Much of that from our New York urban products.

We expect our joint venture income in 2012 to decrease compared to 2011, as we have fewer units delivering from joint ventures in 2012 than 2011.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for fiscal year 2012.

We are excited about our entry into Seattle, through the acquisition of CamWest in mid-November.

While we are still refining our purchase accounting, we do not believe the transaction will create any significant intangibles or goodwill.

The acquisition does add 15 communities to our community count immediately, but is anticipated to contribute 170 to 210 units to our delivery totals for 2012.

Due to purchase accounting mark-ups on backlog and quick delivery homes in that purchase, we believe our home building gross margins may experience a slightly negative impact for the first three quarters of 2012.

However, the transaction is expected to be accretive in 2012.

As noted in the release for fiscal year 2012, including Seattle, we expect to deliver between 2,400 and 3,200 homes, and we estimate the average delivered price per home will be between $550,000 and $575,000.

Our cash balance at the end of fiscal 2012's first quarter is projected to drop by more than $400 million due to the purchase of CamWest, the payoff of our South Edge accrual, investments in our high rise developments and the purchase of other land opportunities.

We are encouraged by the various investments we are making, but remain inherently conservative in our balance sheet management.

Now let me turn it over to Bob Toll.

Thanks, Marty.

We believe that a strengthening of the housing market is key to an economic recovery.

It will reduce unemployment, which will improve consumer confidence, and bring on more demand.

Unemployment nationally among college graduates is well below 5%.

We therefore believe that our customers have the ability to buy.

They are aware of the tremendous affordability of homes, and the record low interest rates.

However, a lack of confidence in the direction of the economy is perhaps the biggest impediment to releasing what we believe is significant pent-up demand.

The National Association of Realtors' Housing Affordability Index is at an all-time high, dating back to 1971, which certainly indicates to me that we could have greatly increased demand with just a slight increase in confidence.

As we look to the future, we believe we are well-positioned.

Our national brand name as America's Luxury Home Builder, the breadth of products we offer, and the geographic diversity of the markets in which we operate afford us significant opportunities for growth.

Our financial strength, which ranks us among the top two credit-related home building companies provides us a competitive advantage in accessing capital and closing deals with sellers, and our solid land position and limited competition in the upscale market should give us a head start as markets recover.

Thanks for listening.

Now let me turn it back to Doug for questions.

Thanks, Bob.

Dawn, we're all set.

(Operator Instructions).

And your first question comes from the line of Dan Oppenheim with Credit Suisse.

Thanks very much.

Was wondering if you can talk about the thoughts on the community growth during 2012?

You talked about a fairly wide range there.

What's driving that?

Just a little color there would be great.

CamWest is on top of the list, adding about 15 new communities.

We closed that transaction two weeks ago, so those are already online.

The next highest state is Pennsylvania, which I believe is adding about 10.

And then after that it's onesy-twosy -- Connecticut's four, so CamWest and Pennsylvania are the big two, Dan.

I guess I meant more in terms of the range there.

Seems like a fairly wide range.

Just wondering, is this something in terms of just, if you see the market strong enough you would bring some online?

Is it just -- again, what's -- in terms of still that not being certain of those?

Number one is the uncertainty of the entitlement process.

We proved this out last year.

It's very, very difficult to predict with accuracy when we will have all permits and be able to open.

That's the major reason for the range.

Number two is the market.

We have 97 mothballed communities right now.

We predict that only four of those will come out of mothball and be part of next year's growth.

That could change dramatically as the market changes.

Got it.

Okay.

The second question -- just wondering, your comments on margins with CamWest.

Are you saying that will have a negative impact the next couple quarters, but that everywhere else will see some improvement, so it should still be flat to up?

Or, just want to get sort of an understanding there.

No, I think as we said in the press release, it's tough to see much more improvement in our margins coming out of our core business without an improvement in demand and pricing power that results.

So the expectation we were hoping to set here is that gross margins may go down a little bit, because of the impact of CamWest purchase price accounting.

Great.

Thanks very much.

Our next question comes from the line of David Goldberg with UBS.

Good afternoon.

It's actually Susan for David.

In terms of the CamWest acquisition, you guys have done a lot of work over the last few years in terms of procurement and cost controls, things like that.

Can you talk about your ability to take that into the CamWest market, and how quickly that will move, and sort of your thoughts?

And conversely, is there anything that they've been doing that you think you'll sort of take back to your traditional Toll business?

Sure.

On our side, we obviously bring great economies when it comes to purchasing.

We have a national purchasing group that is able to buy more appliances and buy more roof shingles and kitchen cabinets and therefore get better pricing.

We also think we have very efficient systems for value engineering homes, and will certainly bring that to them.

On the land development side -- and land development in Seattle can be tricky because of environmental laws and topography -- we have a national footprint.

We have 30 years' of experience; very, very accomplished land development team.

I know CamWest has already been very impressed with the land development managers we put in place.

I think we're going to add a lot of savings there on their side.

They have very creative architecture, because they tend to do in-fill locations.

When you can't build the bigger homes out on the farm field, you have to be very creative in terms of what you're offering because it's in-fill.

The good news of the in-fill is that when you get it entitled, it's gold, because of its location.

They're also pioneers and out front in terms of green initiatives, which you can imagine would be the case in Seattle, and they'll certainly add value back to us for what we're doing nationwide with some green moves.

Okay.

Thanks.

And then just one more question.

Can you give us any update in terms of the kind of options people have been choosing?

Have you seen anything change meaningfully there over the last few quarters?

No.

We continue to be happy and impressed that while it may take a buyer a little bit longer to press firmly, and agree to buy, once they do they load the house up with just as many options as they did in those glorious days of 2003, 2004, 2005.

We're still selling about $110,000 per house in upgrades, and so that's good news through this downturn.

The buyers may be a little more cautious, but once they buy, they still want all the bells and whistles and we make sure to offer all that.

You guys are saying 20% is the average?

18% to 20% is the average, historical average and the current average of option upgrades compared to our base price.

Which is amazing, because the base price gives you a home that's fully fitted and ready to go.

Okay.

Thank you.

Our next question comes from the line of Stephen Kim with Barclays Capital.

Thanks very much, and congratulations on the quarter and the acquisition.

I guess my first question relates to the land purchasing activity that you gave us some figures on.

Can you give us an idea of, in general, what the competition is like for the parcels that you are acquiring?

We know that competition in general for in-fill lots is usually pretty high, but I was curious as to, if you could shed some light on, maybe, some competitive advantage you have that allows you to purchase these at the kind of valuations you did.

Steve, it's a very, very local answer.

There's some markets we operate in where we don't have much competition.

We always talk about competing against the small, local builder.

Many of those are out of business, and in that location, with capital, we have a huge advantage.

And that is generally the case in the -- I'll say Maryland to Boston corridor, Northern Virginia is certainly more competitive, with some bigger players and some developers who have survived and are doing quite well.

In New York City, we tend to distinguish ourselves because we can close very quickly.

So if there's a bankruptcy sale or a short sale that requires a $10 million, $20 million, $30 million check in 10 days, we have it.

Our competition there is well-capitalized, but in many cases they have to go out and find an equity partner and they can't turn it around that quickly.

We have a big advantage there.

As we get out West, we find California to be very competitive.

We're struggling to find good land deals at the right price and that market is over-heated on the land side, when you consider where the housing market is out there.

So it's a very local answer.

The banks are still not freeing up a lot of land which is making it more difficult, but again, it goes bank-to-bank and we just have to work harder than the next guy and be patient, not change our underwriting.

As you've seen, our land buy has shrunk a little bit, but we're pretty happy with what we've been buying.

We're okay.

Sounds great.

Excuse me.

The biggest negative in land buying that I see is that we've got some stiff competition from funds that have beaucoup d'argent and are ready to step up at prices that are higher than we're willing to go to, in a belief that there will be a faster recovery than we believe by our methodology -- our models is the way to buy land.

Appreciate that.

Thanks.

So let's talk about funds for a second.

We just had a lunch with Rialto and Jeff was talking about the opportunity that Rialto provides Lennar, in terms of getting a first look at land parcels that others won't be able to see or make bids on.

You, through your Gibraltar operation -- I'm curious as to whether or not you have gained benefits in that way?

Have you been able to acquire land through some in-roads that Gibraltar has provided, or is that not really something that's happened so far?

So far what Gibraltar has bought -- the non-performing loans that Gibraltar has bought -- have not made their way back into Toll Brothers for new communities.

That's not to say it won't happen.

There are some assets Gibraltar is working out that we think may become Toll Brothers communities.

But I think your more general question is, are we getting relationships into banks and others for Toll Brothers because Gibraltar started it?

And the answer is yes.

Okay.

Have any of those culminated yet and can you give us some sense of any kind of geographic concentration there?

No, nothing has culminated yet and for the most part, it's back East.

Got it.

Thank you.

Stephen, it's tough to really say what's culminated.

Sometimes, one of us from Toll Brothers and one of us from Gibraltar will go into the same bank, and in certain instances like that, we have found a piece of land for Toll Brothers.

But it never really started with Gibraltar.

Got it.

Okay.

Well, thank you very much for that clarification.

Thanks, guys.

Our next question comes from the line of Adam Rudiger with Wells Fargo Securities.

Thank you.

Can you talk about your scenarios which you came up with in order to derive your closing guidance?

I mean, the low end to me seems pretty pessimistic, considering the inclusion of the Seattle closings and the fact where your backlog's beginning from.

What's kind of behind that guidance?

Got this guy here who runs budgeting, called Dr.

Doom.

I think what we'll do instead is pass this question on to Marty.

Well, we're certainly influenced by Dr.

Doom, with a historical and a consistent conservative bent.

We start with our backlog.

We put some factor in there for cancellations, and in this case for Seattle, which does not have a lot of backlog, and we project based on how we've done in the last few years what we expect to do in the next six months.

Generally, it's the next six months of sales that we can hope to deliver by the end of the year.

For you to -- given your backlog where it is, what kind of order deterioration have you included in starting, say, in the June period in order to get to that low end of the guidance?

By order deterioration, are you talking cancellations?

Are you talking slowdown in demand?

Just a slowdown in demand.

Oh.

What factor of slowdown in demand do you have for the low estimate?

I don't think we have any.

I think it's based on the historical demand we've seen over the last four or five years, which has not been great over those six months.

Okay.

Second question, then, is can you just quantify if there's going to be any SG&A impact or what it will be from the CamWest deal?

Sure.

Right now, our best estimate of CamWest SG&A increment is somewhere between $6 million to $8 million.

Okay.

Thanks very much.

Our next question comes from the line of Ken Zener with KeyBanc.

Just following on the demand equation.

Looks like you're making positive comments, but obviously the [800] midpoint minus the 180 left you kind of flat.

Are you looking to pull on a few of the mothballed units you described as 97, which is pretty much where we were last year.

Why do you think we're not seeing greater enthusiasm on your part?

Is that your absorptions per community are not happening in those locations?

Are you still concerned about cannibalizations if you opened it?

It was hard to hear you.

You were pretty distorted.

I think I heard it.

The question is why aren't more mothballs coming out, and again, it's the location of the mothballed community.

It's the strength of that individual market.

It's rarely that we're afraid of cannibalizing what we already have.

It's more -- it more goes to where those communities are located, and a very conservative outlook for 2012.

Most significantly, it's also our appraisal of how to maximize the dollars, including capitalized cost of carry imputed, so that, for instance, if we think we can make 10 by bringing it on this year but 20 if we wait a year, then we're likely to keep it mothballed, and go for the higher dollar.

Where we've got very plum pickings, we're not going to bring those to market where we feel that the market is not quite ready yet, but is on its way back.

Understood.

Clearly, afford that.

I hope my voice is clearer now.

It's a little bit like Yoda in Star Wars.

Okay.

I wonder if we could talk about Seattle and what it means for other deals.

Obviously Gibraltar is out there, Seattle is a market that a lot of builders have been slowly entering recently.

Given the very high spend nature of Seattle in CamWest, what made you comfortable now, versus last year, and with the spec model by definition, since you don't do it, obviously you're following local leadership a lot, can you describe if that's, A, if you think it will change the spec aspect.

Two, if Seattle, in terms of the business model of spec, is unique and why don't you do that in other markets?

Thank you.

Well, this year versus last year is CamWest.

We've been studying Seattle for a decade.

We've always been interested in Seattle.

It's an affluent market.

It has excellent job growth.

It has withstood this downturn over the last six years better than almost every market in the country, so we've always been intrigued.

Our concern has always been whether we could find enough land and withstand the very tedious and difficult entitlement process because of the environmental regulations and the growth barriers, and CamWest presented us with what we think is a great brand, a great organization, and most importantly, 1,500 lots that they own or control, 1,300 of those are owned.

That are in in-fill locations that have held up much better than the outer ring of Seattle, and so it was this opportunity that finally brought us in to Seattle.

Spec building does occur more in Seattle than many of our markets.

CamWest builds more specs than we traditionally build.

That is primarily because it is a relocation market with good job growth, and so you need inventory for the relocating family that can be delivered within two, three, four months as opposed to six, eight, 12 months.

And they also build in in-fill locations, where because of the land planning, you may have to build multiple units at one time because the homes are smaller and closer together, and it's a little bit trickier.

We are evaluating that business plan.

We will be very careful as we proceed, in terms of the number of specs that are built, but we recognize that there will be more specs there for us than in many of our markets.

Thank you.

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

Thanks.

I wanted to revisit the topic of the gross margins.

You folks had a very nice year this year with 250 basis points, I believe, of gross margin improvement.

But Marty, when you were talking earlier, you said you wanted to speak to expectations and that perhaps the margin growth wouldn't be able to continue due to the pricing not getting better at a faster pace.

So I just wanted to get some clarity on that.

Because the 250 basis points that you managed this year was in an environment where pricing barely went anywhere, some people still think it's going down.

It certainly wasn't going up robustly.

What's the negative delta here?

If you managed that kind of nice improvement this year without home price growth, why wouldn't you be able to do so next year as well?

I think there's two factors that we enjoyed this year that will not be as available for us going forward.

The first factor is that our incentives have come down from in the 70s to in the 30s over the course of the last 18 months, most of which was reflected in this year.

And additionally, as we've discussed before, we've rolled out regional labor purchasing initiatives around the country, and most of the benefit of that has run through the income statement at this point in 2011.

So we don't have as much room in 2012 to pick up improvement -- incentive benefits, and we don't have as much room to reduce costs on the labor front.

Marty, what relationship between settlements this year in fiscal 2011 versus fiscal 2012 do you see for City Living product?

City Living, actually in the fourth quarter, was about 10% of our revenue and had been running at 20% to 22% prior to that.

It's really a function of the availability of units --

Right.

-- in those products.

The building in Williamsburg delivered a lot of units last year.

As we go forward, deliveries for 2012 will not be out of the Touraine, they won't be out of 205 Water.

They'll predominantly come out of, what I'll call the remnants of our existing buildings and 1450 Washington Street.

So the implication of that is, that has a gross margin impact as well.

I think it does, yes.

Okay.

Great.

That's very helpful.

Second question I wanted to ask was regarding demand.

As a general statement, when the government ran the first-time buyer home tax credit, obviously the move-up luxury segment, the general idea was that it underperformed.

Following that, in the doldrums -- the hangover effect from that, the move-up luxury market seemed to outperform.

So I wanted to get your folks' sense of, in the housing recovery, what is your view on how the move-up luxury segment will perform relative to the market now?

I want to also put aside -- obviously you folks will probably be able to get some market share growth relative to your peers.

I'm talking about your market segment as compared to the overall housing recovery.

I'll go first.

It seems to me that the housing recovery in the luxury line is indicated to be hopefully fulfilling and significant, when you look at what's happening with other luxury goods, luxury products.

But it ain't necessarily so, as Sportin' Life said, and therefore, we don't put any of our projections on the basis of some expectation of a follow-through from luxury goods to our line.

Our model pretty much follows where we've been.

We don't crank in increase.

It would seem that we will slowly recover, muddle -- what we're on is a muddling-through kind of recovery and it seems as though it's going to continue on a straight-line basis.

All I'd add to that is I think we have three things in our favor right now.

The first is the college grad unemployment rate is half the nation.

That's our buyer.

The second is the family earning over $100,000 in this country is growing five times all households.

That's our buyer.

I think that helps a lot.

And the third, very importantly, we have not had a problem with mortgage money through this downturn because our clients put 30% down, have great credit ratings, and even in the jumbo market, which is less than 10% of what we do, that mortgage money has been readily available.

So I think all of that has helped us and will continue to help us, as confidence comes back.

You've got, according to Housing and Urban Development Department and the Census Bureau released last week -- two weeks ago, actually -- sales of new single family homes in October, annually adjusted, comes out to 307,000 homes for the year.

We were doing a million back in the 1970s and the 1980s and the 1990s and the first decade of 2000.

All you need is a little movement in that statistic in order to restore confidence.

I mentioned the impediment being lack of confidence in the economy.

What I didn't say, which I implied, I thought, was that if you get confidence restored in the belief that housing prices will no longer go down but will in fact go up, if there is a distinction made between distressed pricing and new home pricing, then you could see greater demand which will bring you into higher prices.

But all that is awaiting what the reality will be, which depends on many other factors.

Read your prospectus carefully.

All right.

Great.

Thanks a lot.

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

Hi, guys.

The first -- just a quick housekeeping.

Marty, when you say the gross margin was down, are you talking sequentially?

Are you talking year-over-year?

Because there's over a 200 basis point swing from your performance in the first quarter of 2011 versus the fourth quarter of 2011.

It would go down sequentially.

Okay.

All right.

Thanks.

And then Doug, could you all help me out on the tower trends?

Is this buying process for the consumer and the process that you all go through usefully different than what would happen in a single-family master planned community or something like that?

The thought process I'm driving at -- is there a difference in the way you track what's going on with acceleration or deceleration of demand for that product, et cetera?

No, Stephen, we don't track it any differently.

The business, from a sales perspective, runs the same.

We take a deposit.

They take a week or two to decide if they really want to buy.

We work out the unit, the upgrades, and off they go.

What's great now is there's incredible urgency in New York, so we are raising prices regularly, which feeds upon itself and buyers see that, feel it, and know they have to get in this week, not next week, and that is driving it for us.

Many of these buyers are buying nine, 12, maybe even 14 months in some buildings out front, because we do open for sale generally before a building is topped out, which means it's a year or so before it delivers.

Then of course, the deliveries are very lumpy because we can deliver one or two units per day once a building is completed.

But in terms of the sales process, it's virtually the same as what we do out in the suburbs.

Okay.

And what would be a typical down payment and, I guess I assume your down payment's a little bit higher on this product, which would sort of imply lower cancellations, but that lead time you just talked about is so much longer.

Do you see different cancellation rates with this product?

The deposit is in the 5% to 10% range.

The lead time is not that different from building a custom home with us in the suburbs which can take nine to 12 months.

Cancellation rates right now are lower than the rest of the Company because it's hotter.

The price is going up.

I think people feel even better about the purchase.

I got you.

Okay.

Thanks.

And just last question.

You took the impairment in Phoenix.

I guess my question is, we're pretty far along in Phoenix.

Why now, versus earlier in the process?

Well, I think based on the inputs we put into our model, we thought now was the appropriate time.

There's no flexibility with the land holder, in terms of a restructuring of the pricing of that contract, and the assumptions that we had at one point in terms of pricing and pace are no longer supportable, so we have to back off.

Okay.

Is that unique, that the seller is not flexible?

In the Phoenix market, is that unique?

The nature of this particular seller makes that the case.

Okay.

Thanks a lot, guys.

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

Jason Marcus in for Mike.

I was wondering if you could possibly break out the year-over-year order growth trends over the course of the quarter by month?

And then possibly give us a read on what November has looked like?

We're going to see what Gregg comes up with here.

So through the weekend ended December 4, our agreement count is up 20%.

Net of cancellations.

Cancellations ran 4%?

Yes.

No, I'm telling you to tell him.

I thought maybe he could hear you.

Cancellations ran 4%.

For all of -- for the quarter, the fourth quarter of 2011, the order trends are very consistent week-to-week.

There's no major spikes in any one month.

As we go through the three months of Q4.

Okay.

Great.

And then second question is from a regional perspective across your business, I was wondering if you could break down the puts and takes of what you're seeing.

Sure.

We're not quite ready to go back to the report card, but it's fairly consistent with what we said the last few calls.

Washington, DC to Boston; 60% of our business is doing well.

New York City, which for us is Hoboken, Jersey City, Brooklyn and Manhattan is spectacular, by far the best in the Company.

When you get out of the Mid-Atlantic Northeast, we've had some success recently in Colorado.

We're very small there but excited by what we're seeing lately in some of the land deals we're putting together.

Texas, we continue to look to Texas as a very good long-term place for us.

That will be primarily Houston and Dallas.

Florida is still generally soft, but we have primarily second home there.

The Midwest is still soft, and the West Coast is hit or miss.

It really depends upon the very local town or block that you are in.

Great.

Thank you.

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

Hi, guys.

Just wanted to get your take on buying shares back at current levels, or if that's more price-sensitive or you're still open to the share buyback around where it is today at $21.

We like buying it back at $16 or $15 like we did in the fourth quarter better than $21.

I think buying back at $21 is off the table.

Right.

And also, Bob, I wanted to get your take on -- you talked about the 1980s, 1990s being around a million new home sales.

With the pent up demand, when do you think we'll get back to even 800,000 new home sales?

Aah, now, isn't that the question?

(laughter) And the answer is, which is always right, I don't know.

All right.

Last one.

On your total specs, what were they for the end of quarter and how many of those were finished?

Specs on singles, guys?

Specs on singles were 183 which is about one per community, which is what it's been for really the last two years at this point.

The townhouse product was 160 specs, which was down 20 from last quarter.

So the total is 343.

And then the high-rise, high density product had a decrease of around 50 specs, so it's down to 360.

Your total spec count at 703, but again, in Q1 of 2012, you're going to see the spec count go up a little bit because of Seattle.

We count a spec when lumber hits the site.

You asked for finished.

It is a significantly smaller number than what Gregg just gave you.

We don't track that, finished specs.

We did tell you the -- we differentiated high rise.

It's one per community outside of multifamily, high rise.

That's for singles.

For towns, a little higher but not much.

Thanks a lot, guys.

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

Question.

Can you comment on the availability and pricing of true jumbo loans and whether decline in GSE loan limits has driven any increased interest from originators?

And also whether you're seeing any change in mortgage availability, given the exit of certain correspondent lenders?

We're going to turn that over to Don Salmon, President of our Mortgage Company.

The jumbo market has loosened up significantly in the last six to eight weeks.

We've just added two new jumbo investors, both of whom are offering long-term locks at very competitive pricing, up to a year.

That was unheard of a year ago.

In terms of the correspondent lenders going out of business, the big one is BofA.

That's been all over the place.

We've been able to replace them without skipping a beat.

We've added two major banks that we were not doing business with at this time six months ago, they have filled that void nicely.

And we continue to enjoy a lot of local banks who see the value in a relationship with our consumer, and we're really not having a problem getting loans pretty much anywhere in the country.

So we're very fortunate that way.

Don, would you give him, while you have the floor, the mix of business, conforming, jumbo, true cash, our capture rates, what today's mortgage rate is and your phone number in case anybody wants a mortgage.

Let me start with my phone number.

I'm a very religious person.

It's et cum spiritu tuo.

(laughter) That's Latin.

Capture rate overall for the year was 75%, 78% on conforming.

The Toll Brothers' mix was 66% of the business was conforming or FHA/VA, 13% jumbo and 21% true cash.

Conforming rates are still very, very competitive.

3.875% on a 30-year fixed rate jumbo with zero points.

That's an average throughout the country, with a good buyer, some markets are slightly higher.

Agency jumbo, or high-balance conforming, is 4%, virtually the same as conforming these days and jumbo is about 4.625% That margin has dropped a little bit, which I think is a good thing.

Our mix of business, 99%, 98.9% was prime.

We did 17 high quality Alt-A loans and two sub-prime loans.

What else do you want, Bob?

I think that gives a pretty indication of where things are.

Today, conforming 3.875%?

3.875, and if you tax effect that, you're probably at 2.5% after-tax cost of capital, which is free.

That's for 30 years.

That's for 30 years.

You're below that obviously for a 15 years, you're below that, probably in a 2% to 2.125% range.

If you look over the long term what's going to happen to the price of real estate in 15 years, probably, in my opinion, will outstrip 2% a year.

Overall, it's a great time to buy a home.

The City Living business, can you give some color on how the mortgage profile of your buyer varies?

What percentage is all cash and what kind of mortgage products they're using?

I can tell you that there are more ARMs being used in City Living.

The average down payment in the high rise business is slightly higher than the average down payment throughout the Company.

Our average LTV across all product lines is 71%.

That includes the FHA.

Our average LTV in the high rises was 69%.

That excludes the true cash buyers.

I don't have a stat for you on how many of the high rise people were true cash.

I don't think it varies significantly from the standard, though.

Which is 21%.

Great.

Thanks a lot.

Our next question comes from the line of Susan Berliner with JPMorgan.

Hi.

Good afternoon.

I just had one high-level question.

I was wondering if you guys can talk about what's going on with various government initiatives, whether increasing down payments or mortgage deductibility, or any changes at the agencies?

Any high level would be helpful.

We're happy to say there's been no change in the mortgage deductibility.

And government policy seems to be fairly benign at the moment.

I think the best we could hope for is go talk about something else, and just leave us alone and let us muddle through and we'll get there.

So policy is not affecting us much right now.

Okay.

Great.

Thank you.

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

Thanks.

In the press release, you talk about eight City Living projects, about 1,600 units in the planning stages.

What's your best guess on the soonest, the earliest some of that product could come online?

And then I've got a follow-up.

Some of that will open for sale the end of fiscal 2012.

Remember, it can take 20, 24 months to build, so you probably won't see revenue out of that until 2013.

In fact, most of it is within the next year to two coming online.

Some of it is backed up in that it's part of a larger project that has multiple buildings, one goes after the other.

But for the most part, it's different locations.

So we're excited to be opening a few buildings this coming year.

Okay.

And then, I seem to remember you had started in the business, it seemed like there was more JV and then you were moving toward more wholly-owned.

Of those coming projects, is it fair to say more of those are wholly-owned than the JV structure?

All of them are wholly-owned.

Okay.

Great.

And then the three buildings currently, you said 245 units, is that total size of the building or is that what's left available for sale?

Total size.

Total size of the building.

245 across the three.

Okay.

Thank you very much.

Our next question comes from the line of Bob Wetenhall with RBC.

Good afternoon.

Can you quantify the differences between your New York City projects versus your traditional sticks-and-bricks housing on a gross margin basis?

It's difficult to do that at this stage of the cycle because the basis in the New York City projects that are delivering right now has been impacted by impairments and thus, has elevated the gross margins in certain cases because the world came back so much more rapidly than we had thought 24 months ago.

That's in large case the JVs.

Generally, we look for a higher gross margin out of the high rises because they're a higher risk product than the farm fields, because all the cash has to go out before you get any of it back.

I understand that.

Could you just ballpark, from a margin standpoint, are we talking north of 20%?

Yes.

Substantially ahead of that?

Well, bigger than a bread box, smaller than an envelope.

I don't want to get too trapped here.

Okay.

20% will do for now.

Fair enough.

And could we qualify, this is like a new strategic shift, or should we expect a lot more emphasis on city in-fill the next two years, just given the better profitability of it?

We've been at the city business now for seven years.

Last quarter, Q3, they represented 23% of our revenue.

Q4, we just said it was down around 10% of our revenue.

It's a very lumpy business because of how these buildings deliver.

I think we're seeing good action in New York now, good deals, but no, I don't think it will become a bigger part of what we do.

It looks bigger now because the rest of the business is off.

That makes sense.

Just one final question.

Looking into 2012 directionally, what are your expectations for SG&A spending levels and do you think SG&A's going to be consistent with this year?

As we mentioned, the addition of Seattle should add $6 million to $8 million of SG&A and volume would add additional S if we get the volume increase we expect.

Away from that, we should expect very consistent with this year?

Yes.

Great.

Thanks very much.

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

Let's see.

A couple of quick questions.

First of all, you talked a lot about market share gains and obviously almost all, if not all, of your competitors are kind of struggling, private builders for the most part.

How much of that process has been completed by now?

I mean, how much of your competition has washed out and how much further does that process have to go over the next two or three years?

I think most has washed out.

It's the exception to have a builder go bust now.

If they made it to this point, they have banks that are committed; the market's a little better.

In terms of how long it takes those that are busted to get back in, it's years.

They've got to build back up their credibility.

The local regional banks have to lend again.

Most markets we build in, land is not laying there with roads in ready to build houses.

You've got to get it entitled, which can take many years.

So the advantage we have should be with us for two, three, four years.

And then a second question on some of the in-fill product that you guys are talking about, and that is selling well.

Can you give some color on how much -- how do I put this?

What made me think of this, is earlier when you said that New York City is doing very well for you guys; it's your best market.

How much of that is the geography and the economy in New York, versus how much is the location specifically within that geography?

You guys have good locations in New York and maybe your relative locations in New York are better than some other areas?

The former, not the latter.

Okay.

And then the final part of it is how much of that is specifically the product type, that people are looking for high rises versus living in the 'burbs.

Is any of it that kind of transition, or is it mostly just that it's a good product that's well located and so people are buying it.

It's not as you put it, that they're transferring demand from the 'burbs to the city in any great number.

I think that took place in the last decade, where it was recognized that you could raise a family urban, it doesn't have to be suburban.

But rather, I think New York City is unique.

It's practically a capital to the world.

And you've got such demand.

I dare say that 70% of the kids in the country coming out of college, coming out of Masters programs want to go to New York City.

You've got people from all over the world that want to be there in New York City.

I think that trickles down to -- give me high rise, give me mid-rise, give me low rise, give me this neighborhood, give me that neighborhood -- it's all doing pretty well right now.

Okay.

That's helpful.

I appreciate it, Bob, and thanks, guys.

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

Yes, thanks, guys.

I wanted to ask you regarding the interest that you guys are incurring, versus the interest that you're reporting through the cost of goods sold.

Should we expect those two numbers to be closer in line with each other over the next year or two, or are you guys going to start -- going to continue to see your capitalized interest grow?

Well, our capitalized interest -- every piece of interest we have currently gets capitalized, because we have more active projects than we have debt.

And then the pace at which that interest is released is dependent upon our pace of sales, our price of sales, and the age of the communities we're selling out of.

We expect our interest released as a percentage of sales to remain relatively flat to down in the next year, as a percentage of sales.

Thanks.

My other question was regarding the income that you guys are reporting from Gibraltar.

I know it's relatively small, but wondering if you could expound a little bit more on what are the sources of that income?

Is it interest you guys are incurring or what's the nature of it?

And do you have any guidance for next year, what it might be?

Or how to think about it?

Well, the Gibraltar currently runs at about $1 million -- $2 million a quarter in accretable yield interest income.

The gains on dispositions of loans are not projectable and so we won't choose to do that here.

Got it.

Okay.

Thanks.

Those are gross figures.

We have operating cost as well.

Got it.

Okay.

Thank you.

There are no further questions at this time.

Thank you, Dawn.

Thanks, Dawn.

Thanks, everyone.

This concludes today's fourth-quarter and fiscal year-end 2011 conference call.

You may now disconnect.