Toll Brothers, Inc.
Q3 2008 Earnings Call Transcript

Published: 4 Sep 2008

[Operator:]

Good afternoon. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers' Third Quarter Earnings Call. (Operator Instructions). Thank you. Mr. Toll you may begin your conference.

[Robert Toll:]

Thank you, Nicole. Welcome everybody. Thank you for joining us. With me today are Joel Rassman, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Don Salmon, President of TBI Mortgage Co.; and Greg Zeigler, Vice President of Finance. Before I begin, I ask you to read the statement on forward-looking information in today's release and on our website. I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect future results. Those listening on the web can e-mail questions to [e-mail]. Today we reported final results revenue for our third quarter ended July 31, '08. Since our release is posted on the internet I will just touch on the key results. In the third quarter '08, we generated a net loss of $29.3 million or $0.18 a share diluted. This included pre tax write downs of a $139.4 million excluding write downs. Fiscal year '08's third quarter earnings were $55 million or $0.35 per share diluted. In fiscal year '08's third quarter revenues of $797.7 million were down 34%. Third quarter backlog of $1.75 billion was down 52%, and net contracts of $469.9 million were down 35% versus fiscal year '07's third quarter. We ended our third quarter with over $1.5 billion in cash and over $1.3 billion available under our bank credit facility, which matures in March 2011. Our net debt-to-capital ratio at third quarter end was 18%, our lowest level. We have trimmed land position by 47% to 48,500 lots owned and auctioned compared to 91,200 lots in our peak at fiscal year '06's second at quarter end. It appears that per community traffic and deposits at our sites over the past several months have been stabilizing, albeit at historical lows. It also appears that conversion rates from non-binding deposits to signed contracts have returned to more normal historical ranges this quarter, although absolute deposits are still very low. We also note that our 195 cancellations this quarter, although greatly elevated from our historic norms were the lowest in nine quarters. I do not mean to suggest that things can get worst, but it is worth noting some sunlight during otherwise stormy conditions. We observe that these indicators have occurred in the face of a particularly difficult year that has included explosive energy price increases, rising unemployment and sever mortgage and credit conditions. Even so, we believe that there is pent-up demand, when we have had held promotions, many more buyers than usually have come out and put down deposits. We are now completing the third year of the worst housing market since we started the business in 1967. Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers market. Tightened mortgage lending standards have sidelined others. Single family housing starts have decreased by approximately 65% from their peak in January '06. Starts now stand at their lowest level since January 1991. We believe that most public builders have sold off most of their spec inventory, which eventually should help stabilize home prices. However, we currently have to contend with foreclosures as the new low price competition. Once the supply of foreclosed inventory is exhausted, we believe that favorable demographics will kick in and the housing market in general will begin to recover. Unfortunately, we can not predict when that will occur. These beneficial demographics include a projected continuing increase in household formations and the number of affluent households, baby-boomer demographics should provide a basis for greater demand for second homes. A maturing generation of echo boomers will be positioned to seek the American dream of home ownership, and continuing growth in immigration should contribute to the demand for housing. Now let me turn it over to Joel Rassman to do the numbers. Joel!

[Joel Rassman:]

Thanks Bob. Third quarter home building cost of sales as a percentage of traditional home building revenues before interest and write-downs was 76.5%. This was higher than 2008's second quarter of 75.2%. The increased in costs or decrease in margins from the second quarter was principally a result of higher incentives and product mix changes. Third quarter interest expense was 2.9% of revenues, 10 basis points higher than 2008's second quarter, principally a result of inventory turning less quickly and less average inventory under construction over which this spread costs. The third quarter pre-tax write-downs were $139.4 million which included $33.4 million of write-downs attributable to joint ventures; $9.7 million attributable to options as we continue to reevaluate, renegotiate and another way to reduce options. More than half of our first quarter write-downs, approximately $75 million were in the west. Third quarter SG&A of $103.1 million, approximately 12.9% of revenues compared to $108.7 million, approximately 13.3% of revenues expensed in the second quarter of 2008, and $131.7 million, approximately 10.9% of revenues expensed in third quarter of 2007. Third quarter other income of $20.6 million, including approximately $9 million of retained earnings of paying deposits in the $8 million of interest expense. Given the current low interest rates available and lower cancellations in the third quarter and the expected lower ancillary business income, we expect of that fourth quarter other income would be lower than the third quarter. Effective tax benefit rate was approximately 39.3% for the first nine months and 46.5% for the third quarter. The average number of shares used to calculate earnings per share was approximately $158.8 million for the three months, and $158.4 million for the nine months. The creation of projections is difficult in anytime. In the current climate, it is particularly difficult to provide guidance given the numerous uncertainties related to items such as sales prices, sales spaces, mortgage markets, cancellations, consumer confidence and the potential for future impairments. As a result, we will continue not providing full earnings guidance. However, subject to our normal caveats, regarding forward-looking statements in today's release, in our SEC filings as well as the caveats above or before. Deliveries for the fourth quarter are estimated to be between 850 and 1,050 homes resulting in deliveries for the year to be between 4500 and 4700 hundred homes. The average delivered price per home for the fourth quarter is estimated to be between $640,000 and $650,000 per home. We believe that due primarily to higher incentives and slow deliveries per community, our pre-write-down cost of sales as a percentage of revenues will be higher in 2008's fourth quarter, than in 2008's third quarter. Normally, SG&A as a percentage of revenue in the fourth quarter is significantly lower because the fourth quarter revenues are generally higher than other quarters. However, as described before, we are estimating that fourth quarter revenues will be lower than the third quarter revenues, and accordingly, we expect SG&A as a percentage of revenues to be higher in fiscal 2008's fourth quarter than in the third quarter. At this point, I would turn it to Bob.

[Robert Toll:]

Thanks, Joel. With our land teams intact and significant capital available, we believe we are prepared, as in prior downturns, to take advantage of opportunities that will arise from the industry's distress. We believe these resources, combined with our experienced management team, our diverse product lines, our brand name and the tremendous dedication of our associates, position us well as we plan for the future. Now Nicole let's open it up for questions, please.

[Operator:]

(Operator Instructions). Your first question is from Michael Rehaut of JPMorgan.

[Michael Rehaut:]

Hi, thanks. Good morning everyone or good afternoon.

[Robert Toll:]

Good morning, Michael. How are you?

[Michael Rehaut:]

I am alright. First question just on the, you mentioned towards the end of your talk, Bob about obviously still being in a good balance sheet position to ultimately take advantage of good deals. Last time you spoke on a conference call, I believe you had said that you still not there yet by and large. I was wondering if you could give us a feel for, if that is still the case in terms of, if there is still a paucity of...

[Robert Toll:]

No, it is not the case, Michael. It is starting to come out of the woodwork. We have had meetings in the last two weeks with three major banks with their REO teams, workout squads. We are getting lists of properties. We are getting list of notes. So, it is starting to loosen up. It is not yet where it was in 91. I would suggest that it is probably equal to where it was in '90. So we are starting to see some product.

[Michael Rehaut:]

Would you say these deals are smaller in nature, if these are just closing on home-by-home or asset-by-asset?

[Robert Toll:]

Obviously they are home-by-home. We are not looking at opportunities. I do not think the deals are smaller than usual, as a matter of fact; they may be even a little larger.

[Michael Rehaut:]

Geographically, where are you seeing it?

[Robert Toll:]

More so in the West and the South, than the Northeast, the Northeast, we have not seen a lot - some, but not a lot. The Midwest, we have not seen a lot yet, so primarily west and south.

[Michael Rehaut:]

So you are looking at deals in the hundreds, in terms of units? Is that fair to say that?

[Robert Toll:]

We will look at it, depending upon where that deal is. If it is in the neighborhood where we are, we will be down to 24 to 25, if their prices are normal products price, which is 700,000, and anywhere up from there.

[Michael Rehaut:]

Thank you.

[Robert Toll:]

You are welcome Michael.

[Operator:]

Your next question is from Ken Zener of Macquarie.

[Kenneth Zener:]

Good afternoon.

[Robert Toll:]

Hi.

[Kenneth Zener:]

Two questions; one, your implied closing in 4Q suggests that out of 36% conversion rate of backlog, which is down a bit from the 48% we had in the third quarter. Two, if you talk about the rising conversion rate related to subs working quicker. Can you describe the anomaly, or what makes the conversion rate drop so much in the fourth quarter, and is that the range we could expect in that? A 36% to 45% range, normally?

[Robert Toll:]

Joel?

[Joel Rassman:]

I think it varies significantly quarter-to-quarter, and the 48% would imply a six month delivery time and that is a little tight rather than spec units. So I would think that, you probably are talking in the range that we reported this quarter is being normal. The big difference comes, whether we have a lot of high density product coming on board, where you make a lot of deliveries quickly in a high density community. You have to use our guidance to be able to estimate, you are not going to be able to do that on it.

[Kenneth Zener:]

Right. So, okay, so that range is just what we have to expect. All right. The second question, not looking at a rating card here, but can you dig into two different markets being Philadelphia and DC, which are in your mid Atlantic. Focus on the traffic and absorption trends, absorption margins that you have seen because the Philly market is much more established, much more in sale, relative to the DC market that had been perhaps over build. So can you talk about how those two markets that are your largest, differ from each other?

[Robert Toll:]

Yes. DC by far is our largest market and is not doing as well as the Philadelphia suburbs. Philadelphia suburbs are like that old WC fields joke, first prize one week, second prize two weeks. It is slow and steady, but since it did not see the tremendous ups, the Washington DC saw, it does not see the downs that Washington DC experienced. So, in general, things looked better in the Philadelphia suburbs and they are in the suburbs of Washington DC.

[Kenneth Zener:]

That reflected in broad price margin differentials?

[Robert Toll:]

Joel?

[Joel Rassman:]

No, I think historically we have done better in Virginia or as well as Virginia, because we have been able to buy large tracks of land at better pricing. We generally buy smaller tracks of land in Philadelphia. However, I think right now that is probably right, Philadelphia probably is good or better than Virginia.

[Robert Toll:]

For margins, yes we give away less in order to make the sale. The election kick that is coming up should help the DC market, since both parties are as pals and need for change that means change in people. Traditionally everybody is just changed out, becomes a consultant and stays, and a host come in and there is a need for more housing. So, we look forward to getting through the election and seeing what result comes to the DC market. Nicole I have a question from Briggs Philips on the approximately $48,500 lots owned and auctioned at the end of third quarter '08? How many do you own? The answer is 32,900. What percentage of your currently owned lots were purchased during or after 2005? Good question, I do not know, does anybody here know?

[Joel Rassman:]

No, but I think the question was probably meant to be to put on the contract after 2005.

[Robert Toll:]

Yes, I am sure that is what he meant.

[Joel Rassman:]

However, we do not know. I do not think it is a lie. 2005 is 2006, but in the contract date it is 2006.

[Robert Toll:]

After 2006. Yes you are right after 2006. We did not put a lot on the contract in 2006. Well that we have not shared anyway. So, thank you Briggs. Nicole?

[Operator:]

Your next question is from Nishu Sood of Deutsche Bank.

[Nishu Sood:]

Thanks. Hi every one.

[Robert Toll:]

Hi.

[Nishu Sood:]

I wanted to ask about foreign buyers. Your product more than I would say the other public builders sit into a foreign buyer, and so I was wondering if you could help us understand how much a tailwind benefit you might have earned from foreign buyers in the last 12 months or so, and whether you have seen any drop off as the dollar stayed derailed here.

[Robert Toll:]

Not much referring to last year for foreign buyers, and therefore no noticeable drop-off because of the change in currency ratios.

[Nishu Sood:]

Percentage wise where do you think it'd be in a 5%-10% or so?

[Robert Toll:]

I do not know. Anybody?

[Don Salmon:]

I do not think 5% would be lot.

[Robert Toll:]

Will you think foreign buyers 5% is high, says the head of our Mortgage Co., who has more likely a good touch and feel for this than the rest of us.

[Don Salmon:]

It is higher than this…

[Robert Toll:]

Yes Florida is higher naturally. It is still not high in Florida for us.

[Nishu Sood:]

Yes I got it. The second question I wanted to ask was...

[Robert Toll:]

Not that we have not tried. We sent advertising dollars over to England, Germany and France. We hooked up with some realtors, but we do not see that much success. Go ahead.

[Nishu Sood:]

Yes, second question. A lot of people compare the opportunities that might arise. You were mentioning as to the early 90s, the RTC days and certainly that benefited you a lot last time around.

[Robert Toll:]

Right.

[Nishu Sood:]

What I am thinking of here is that, it is a totally different landscape from a buyer perspective. I mean just so many people lined up on the sidelines, ready to deploy capital, just chopping it a bit really, and do you think that means that you might have even more opportunities this time around, but the pricing I mean, it just might not end up being as compelling as it was last time around, just because of the greater competition?

[Robert Toll:]

I think you make a good point, that the last turnaround there were not a bunch hedge funds stooped up with mucho dollars waiting to jump on deals. Today that does exist. However, hedge funds do not have the power and experience to go do the development if development is needed, and certainly to enter into the home building business to deploy marketing in sample homes and then to complete the product and deliver and especially take care of the warranty. So, yes, we have more competition, a lot more competition than we had in 1991, '92, but that competition we have got still can not execute without teaming up with our builder. I expect we will see some of that teaming up occur in the next six months.

[Nishu Sood:]

Okay. The same way you were describing…

[Joel Rassman:]

I think the point that you should think about is there has been a lot less land probably in the last couple of years, put into the supply part, the approval portion and the hedge funds are not really going to be able to get those new approvals up any quicker than we could, probably a lot slower than we could going forward. So there is likely to be opportunity for companies like us to take advantage of.

[Robert Toll:]

However, that is stuff to go through the approval process. I think what is being referred to, is the stuff that is ready to go.

[Joel Rassman:]

Go ahead.

[Robert Toll:]

Done? Nicole?

[Operator:]

The next question is from David Goldberg of UBS.

[David Goldberg:]

Thanks. Good afternoon.

[Robert Toll:]

Hi.

[David Goldberg:]

Bob, I was wondering if you could give us some more color around this idea of the stability that you are seeing in your markets from a down payment perspective and from a traffic perspective. Is that at a constant price or are you finding that incentives and price discounting through the quarter had to keep increasing to keep the sales pace consistent?

[Robert Toll:]

It is a constant incentive, the specials that we run, we run a lot more frequently than we used to. We used have a Toll Advantage Day once a year. Now we run specials to the same regions probably once every three weeks on average, because that has shown itself to be the best way for us to get deposits.

[David Goldberg:]

So do you think it is an issue more of you taking market share, maybe from competitors who are increasingly not able to get financing, some smaller private builders or is it really a bigger wave of demand in general then?

[Robert Toll:]

I do not know.

[Joel Fassler:]

It goes in about increased activity, because of that level activity. So we are not doing better than we did last year.

[Robert Toll:]

Oh, yes.

[Joel Fassler:]

We are just…

[Robert Toll:]

We are not even doing equal last year.

[David Goldberg:]

Well, right, but if it is not deteriorating demand anymore. That is my point.

[Robert Toll:]

Albeit, as I said, at very low levels. Over the last several months we have the period steady in deposits, and we have appeared steady in traffic again at abysmal levels. Our conversion ratio on our deposits to agreements of sale and meaningful deposits that we keep if you back away has returned to normal rates and that is encouraging. However I do not mean to imply to anyone that this little bit of sunshine that we are seeing indicates that you can expect a good time soon. So there is no indication of that.

[David Goldberg:]

Got you. The follow-up question was what kind of foreclosure activity you are seeing around your price points in the pressure that is causing for you?

[Robert Toll:]

Especially in the markets that are most be set with problems. Lets take Las Vegas for instance, but Phoenix most of the South West, the West Coast California. We are seeing this is meaningful competition. We are able to beat it to some extent in that; it is a used home for most part. There is a differentiation between new and used there is a substantial market out there that just wants a new home. Nevertheless, where as you can beat that used home on the basis of 12% to 15% and if it turns out to be 35% or 40%. You got a pretty tough road to hope and I think we have to fight our way through a bunch foreclosure before we come out the other side of the storm.

[David Goldberg:]

Great, thank you.

[Robert Toll:]

You are welcome.

[Operator:]

Your next question is from Ivy Zelman of Zelman & Associates.

[Robert Toll:]

This is Ivy?

[Ivy Zelman:]

This is Ivy. How are you doing, Bob?

[Robert Toll:]

How are you feeling? How are you Ivy?

[Ivy Zelman:]

I am good. Thank you. Just a quick housekeeping item if you could tell us your land spend for this year versus last year?

[Joel Rassman:]

No, it will come (inaudible) know it before the queue.

[Robert Toll:]

Sorry, we do not have it.

[Ivy Zelman:]

Okay. Well, that was easy. Let me ask more difficult question. You indicated that you saw stabilization throughout last few months, which actually quite contradicts quite a bit from what we had seen at least relative to the surveys that we do with June, lets just say the first five months of the year holding steady and then June, July stepping down for absorptions per sub division in many parts of the countries specifically out west and even in some markets that formally were in very bad for presence in Charlotte and just curious if you can give us a typical, Bob overview because we certainly in aggregate surprise to hear you say stabilization. Then secondly, more recently in some of the survey work we have doing, we have heard that appraisals are becoming a bit problem for builders because there is so much distressed for closure activity. They are the comps and we hear about builders having people sitting at the closing table and appraisals are coming in below contract price, which is obviously forcing prices down and/or a loss sale. So, wondering if you dig deeper into the Toll operations if you are seeing any of that or if you are fortunate and not really experiencing the same impact?

[Robert Toll:]

In reverse order, we are unfortunate and fortunate.

[Ivy Zelman:]

Okay.

[Robert Toll:]

The unfortunate is that we are also witnessing in the more depressed markets, such as California and Nevada, the appraisal problem. We have got a deal for 500,000, as an instance, client is ready to go to the table, purchased a home at $500,000 has a $400,000, 80% LTV mortgage. Everybody is happy and the appraiser shows up and says this home is worth $390,000. Obviously, we have got to buzz that session, that settlement table meeting run around, hey you get yourself more appraisals be you might have to throw some money in order to complete the sale. So, that is very bothersome in a very bad market. Again, I do not think we have seen a lot of that in the South. Florida is not as big as Cali or Las Vegas. The Northeast we are not seeing a much of the renewal. I do not think we are seeing much of it in the DC market either. With respect to the first part of your question, what can I tell you? We have been experiencing since the beginning of May pretty much the same traffic. Now it is not good, but it has not gotten worse. Does not mean it can not get worse, but it appears to be a little ray of sunshine for us. Does not make us feel all that good, because it is in such a low level except when we compare the devil that we know to the devil that we do not know, and we feel good about it not going further down. We do feel good. There is a positive note on the conversions of the interest deposits, which are give us $5000, and then we will throw out the contract, and we get the real $60,000, $70,000 deposit. The conversions from the interest deposits to the real agreement deposits, has gone back to historic norms, and that is encouraging.

[Ivy Zelman:]

Again I hear, still it is one of the better markets in the country, and actually activity there has been saying that those who have been saying they have seen an improvement, what are the interesting things about the foreclosures? Bob, it is an unprecedented level of foreclosures nationally and a lot of those foreclosures are being bought by investors and we could be looking at, call it investors gone wild part two, but?

[Robert Toll:]

You are very right, could be.

[Ivy Zelman:]

It certainly is undermining the prices for Ivy and Bob told trying to sell our homes and making it more challenging for people because those becoming the cobs, so your buyers are very contingent on, I am sorry, your sales are very contingent on those buyers or those sellers able to sell, and with more foreclosures in the pipeline, some saying two to three times on what is already out there. I am just wondering, where do you see direction for you, for margins? I mean, you have done an excellent job with the highest margins I think, behind NVR and obviously, you are going to be one of the few builders, ex-impairments still profitable, but obviously, there is concern that prices again, you have to go a lot lower to clear not only existing fore sale inventory, but all the inventory that is coming, that is foreclosure, as well as me and the primary buyer, seller who can not sell necessarily, because their houses are under water.

[Robert Toll:]

You know, well I do not think you are going to see the prices go lower on the new home product, because having cleared the inventory, the only way the prices will go lower, is somebody shows up and says I am buying that, but not at 500, I will buy it at 400, and you take a look at your books and you say, I do not have that room here. The lot days were something, and we are not willing to put up the sticks and bricks at a cost of 100 and let you buy this sticks and bricks at 80, that will be, we are better off, sitting on our hands. So, I think what you are going to see reflected of your commentary, if it comes true, and I believe that there is no reason for it not to come true for sometime. As you will see volume go down on new home even further, as foreclosures become the competition. The problem comes not just from the comp, but the problem comes from the foreclosure up the street, resetting the mind of the fellow down the street. The fellow up the street may have been a wild speculator and went way over his head. Or he may have been the victim of rapacious lending practices. It is not really important, his $500,000 house is now on a market for a 400 to 350. The guy down the street, who fully intended always to pay and honor his obligations and redeem himself, because it is ethically and morally wrong not to pay what you have borrowed, what you owe. On the other hand, he comes home and is told that he has a dope for continuing to pay on this mortgage, because the guy at the street walked away and that house is now 350, and that is the problem that we have to think of now. How many of those are there still out there, that are going to say you know what, take these keys, take this house. My $500,000 house is now 350. I am paying $400,000 on a mortgage. I am going to go up to street by the 350, get myself a 275 mortgages and start over again. We do not know how much of that there will be to work through the chain. It is discouraging to think about it. On the other hand, we seem to have stabilized. We will have to wait and see what the next chapter writes.

[Ivy Zelman:]

You know being a politically minded person I know that you got an opinion. So if I can be so bold to ask you, that is assuming a new administration coming in office, and we certainly will make history either way. Can you tell us if you were sitting in the Oval Office, what you would do to solve the housing problem because clearly it is a big mess, and I do not think that the government's silver bullet with the last bill passed is going to work?

[Robert Toll:]

I think it is unfortunate. We had an opportunity. Everyone has got their own ideas. For the most part, they are all well meaning and they are trying to do the best by the country. One guy wants to go left and the other guy wants to go right, and you get that camel built by Committee. Unfortunately that is the system, but fortunately it is the best system that we have figured out so far in the history of the world. I think that it was blown and that they did not follow the example. This Congress and President did not follow the example of Gerald Ford in the Congress back in '75. It was a very simple program; the program that is been issued lately is very difficult to comprehend and to follow through on. The one in '75 in today’s dollars would have been a $15,000 housing credit for new homes purchased within a short period of time. That would have been potentially Congress calling the bottom and saying, hey you get out there in the next six to eight months buy a new home, we are going to give you $15,000 of your taxes. This time around it was $7500, but only for new home buyers. Then you owe it back etcetera, etcetera. I do not know whether that would be enough to make a difference. I noticed that yesterday the UK which is in a terrible housing slump as well, lowered the transfer taxes. I do not know what those transfer taxes are in the UK, but for the whole government to have recognized a problem and to have changed the cost in effect of new home purchases or home purchases in that case is reflective of a government in action. So I do not know what we will be. If I were top have an option for directing policy, I would definitely have the Congress issue a credit and see if that can start us. In '75 it worked, I mean in '74 you could not give away a home, '75 we were back in business, by '76 we were rolling. Things changed very rapidly.

[Ivy Zelman:]

Right. Thanks a lot Bob, appreciate it.

[Robert Toll:]

You are welcome. Nicole I have a question from John Blainey. Have you considered calling the eight in a quarter sub-notes next year? We will let you know when we are ready to call it. Obviously, we consider our debt if we do not go to sleep without being aware of it. Nicole!

[Operator:]

Your next question is from Douglas Kass of Seabreeze Partners.

[Douglas Kass:]

Good afternoon.

[Robert Toll:]

Hi Doug.

[Douglas Kass:]

I want to follow-up with Ivy's question, with another question regarding the challenge to this slope of the housing recovery. Yesterday morning, when I sent this to you by email this morning

[Robert Toll:]

I got it, I read it.

[Douglas Kass:]

Yes, I received the…

[Robert Toll:]

That is how we should do it here instead of doing it privately.

[Douglas Kass:]

Okay, cool. So, just to explain to the people, it is a recent report prepared the structure team at Fitch ratings, which basically addresses the issue of the recast of 200 billion of option arms in the next three years. So this 29 billion to be recast in '09 and an additional 67 billion next year in 2010 and about 59 billion in 2011, and the potential average payment increase on this recasting population is like 65% representing over a $1000 to each month on top of the current average payment of $1,700. So the question is this. We all hope for stability in the housing market and a recovery in '09, but I really like your reaction to the report since you have read it as to how it will effect the housing market and should not we really be resetting our expectations for housing a bit lower even in the next two years?

[Robert Toll:]

Well, I think we should be resetting expectations to be lower in light of what you were mentioning now and in light of what the Ivy you referred to reference before which is the foreclosures, since this is just another form that got you to foreclosure. This is no different than the 100% no amortization. This is worst for us, this is negative to a great extent and we will just have to slog our way through it. Although the sums are gigantic, so is the market. In terms of…

[Joel Rassman:]

That was lower rate.

[Robert Toll:]

The average mortgage 100,000, 20 billion represents a 100,000 homes.

[Douglas Kass:]

Right.

[Robert Toll:]

Of the same thing it was $300,000 mortgage, 30 billion is still a 100,000 homes, used home market is, because these are used homes. Used home market is about 5 million a year. So, yes, this is a significant increase to supply on the used home market, but it is a 100,000 on 5 million. Yes, it will come every year. So, 2%, 3%, 4%, I do not think this specific problem is what is going to so, have such an impact, but I do think you are going to have an impact from the normal market which is much, much large than this negative, lets call it negative amortization option market that has existed.

[Douglas Kass:]

Yes, thank you, Bob.

[Robert Toll:]

It will not exist again for a while, I am certain. You are welcome, Doug. Nicole!

[Operator:]

Your next question is from Stephen East of Pali Capital.

[Stephen East:]

Good afternoon.

[Robert Toll:]

Hi, Stephen.

[Stephen East:]

If you look at, you are talking about your gross margin moving down to some degree in the fourth quarter. If you look at your orders that occurred in the third quarter, are your gross margins embedded in that sub-segment, the same or higher lower than once you are expecting in the fourth quarter, in other words I am just trying to get a feel for.

[Don Salmon:]

[We were added].

[Joel Rassman:]

I will not answer the question, the way you just asked that, but I would tell you that incentives in the sales in the third quarter were roughly equivalent to incentives in the sales that were booked in the second quarter.

[Stephen East:]

Okay, all right.

[Joel Rassman:]

He wants to know what is in backlog and when is it coming out?

[Don Salmon:]

Right

[Joel Rassman:]

I am not giving the guidance.

[Don Salmon:]

I know.

[Stephen East:]

Yes, and I am not looking for.

[Don Salmon:]

That is okay.

[Stephen East:]

Specific numbers what I am trying to understand is your trends basically incentives and cost as you are moving through the income statement over the next few quarters.

[Joel Rassman:]

Cost went up about $500 a house for the quarter.

[Stephen East:]

Okay.

[Don Salmon:]

We raised prices in the last quarter on three or four communities. I can not remember which, out of 300, and it is a fair statement that we lowered prices probably in double that number. So, we are still not headed in the favorable direction.

[Stephen East:]

Okay. Bob, more strategically if two different issues, if you look first, do you have a preference as to how you acquire land

[Robert Toll:]

Yes, I sure would do for less.

[Stephen East:]

Other than cheaper is better, but do you have it as far as acquiring on your own taking the options and bringing on to your balance sheet or teaming up with a partner either a financial partner a strategic partner etcetera.

[Robert Toll:]

They are all interchangeable. It is just a matter of running the numbers.

[Stephen East:]

Okay. Then the last thing, looking at Las Vegas and Inspirado it looks like we now have another one of the partners they will file for bankruptcy.

[Robert Toll:]

Which one is that?

[Stephen East:]

How do you

[Robert Toll:]

They already filed, did not they?

[Stephen East:]

I thought they hadn’t. I am assuming would side did not they have into 16th or whatever to file.

[Robert Toll:]

I thought they filed.

[Stephen East:]

Okay. Do they actually, all right, assuming that we now have to that have, how do you…?

[Robert Toll:]

Are they denying their file? I am sorry, In referencing the wrong material, I read that they filed and Don Salmon head of our Mortgage Co says they denied that they filed, it want to be fairly simple fact that that is not our business so.

[Stephen East:]

How do you look at from your perspective? How JV like this ultimately unwinds, do you think that the players have to bring each little section on to their own balance sheet, as it get recapitalized, however the banks looking at it, the whole main yard is associated with it?

[Robert Toll:]

I think, I going to pass to you Joel. I can do this, but I am not sure that I am qualified to do it to the public. You do not want to.

[Joel Rassman:]

I think that they are going to be ongoing negotiations between lenders and some of which are banks and some of which institutions or some of which hedge funds and the various players and they maybe new money coming in as in the past we have seen a few of the hedge funds come in and buy assets at distress prices from the people, who had currently have loans and you have seen a lot of the loans to some of these ventures trade at large discounts. I think there will be, every one of the deals is a little different and we will end up with a slightly different answer to the question. So, it is hard to generalize and I do not think I will go into a specific on each any of the deals.

[Stephen East:]

Okay. Thanks a lot.

[Robert Toll:]

You are welcome.

[Operator:]

Your next question is from Josh Levan of Citi.

[Josh Levan:]

So, relative to, we heard from the other public and private homebuilders about traffic and pent-up demand, you sounded like you are striking a bit more of a positive note, at least on a relative basis. Do you have any sense, if there may be a bifurcation between what is going-on in the luxury home market versus what is going-on in the first time or first time move-up home markets?

[Robert Toll:]

No, I do not. That could be an answer. My first guess would not have been that it was the answer. Then again, what you may be feeling or receiving in these differences in reports, put on a relative scale, may not be as great as you perceive. It got to a point, I said last conference call that I wanted to get away from, for a while anyway, but giving a recap of my markets, because it became the F report. There was F+, F, F-, F, so the whole scale had changed, and what we may be talking about might not be worth much, because we may be just down near the bottom. If we are at stabilization in traffic and deposits, and actually increasing in conversions of deposit to agreements, they may be off 10%, and have a different perception, but it may not be as great as the differentiation that you perceive.

[Josh Levan:]

Okay. Then, going back to the question about possibly buying land, as you think about buying land, what timeframe are you incorporating into your assumptions about how long you would need to own the land before you could monetize it with a house on top.

[Robert Toll:]

Well you can monetize it as you say, you can turn that land into action and into profits, hopefully, if you have got buyers. At anytime in the cycle depending upon the assumptions and then you could be right and you could also be very wrong.

[Josh Levan:]

Relative to that, I mean see when you are talking to the banks, maybe there is some preliminary price discussions, so when you calculate your hurdle rates, you have to assume obviously a timeframe to …. ?

[Robert Toll:]

Sure we do, some pieces we look at, and say let's assume that we are not going to offer anything for delivery on this till 2011. That is about as far out as we look. Some pieces we look at and say I believe we can start samples in the marketing right away, and that we can deliver on this side in a year, which is third quarter for us of fiscal '09.

[Josh Levan:]

Okay and if I may, just a modeling question. Joel in the second quarter call you indicated that the average delivered price for the rest of '08 would be between 625 and 635. So, the third quarter looks like your delivered price was around 636, but now you are saying that for the fourth quarter, you are guiding to an average delivered price of between 640 and 650. I was just curious as to what has changed since that you now expect a?

[Robert Toll:]

Our estimated mix of geographic deliveries has changed.

[Josh Levan:]

Fair enough, thank you very much.

[Robert Toll:]

You are very welcome

[Operator:]

Your next question is from Dan Oppenheim of Credit Suisse.

[Dan Oppenheim:]

Thank you very much. I was wondering if you can talk about you are plans, as we look to 2009 in terms of SG&A. You have been somewhat focused on really trying to sell the homes pricing without cutting pricing too much as compared to other builders. Should we expect to see SG&A come down to low revenue base in '09?

[Robert Toll:]

No. Who wants to know if SG&A is coming down in '09?

[Joel Rassman:]

We hope to bring SG&A's down, we expect it will go down in '09.

[Robert Toll:]

Pretty sure it will, because of what makes up SG&A now.

[Joel Rassman:]

Right.

[Robert Toll:]

You are right. So we will run…

[Joel Rassman:]

So as a percentage of revenues it may now go down as revenues go down, because revenues go down quicker than costs go down.

[Dan Oppenheim:]

Then secondly, just wanted to ask in terms of prioritization in terms of looking at your cash. There is been a lot of talk here, you talked about looking at land, and you talked about some stabilization in terms of trafficking conversions. As you think about using cash for either land or focus on the balance sheet. Clearly if you expect things to remain difficult for a longer period of time let's focus on the balance sheet, if you expect a rebound in short-term, you would want the land. How would you weigh those two things right now, in terms of where your mind is in terms of the use of cash?

[Robert Toll:]

Let me just it another way, you are asking do we have a feeling, threshold, model with respect to the time for recovery. The answer is no, we do not. We look at the deal as to how great an opportunity it is, and how that deal models out as compared to our expectations currently in the market. If we can not make it work currently, it is got to be pretty spectacular to suggest that we will take it now and hope that things get better, and we will make the purchase a good purchase. We are not doing that kind of business for the most part, or looking for that kind of business even for the most part. So what we really look for is something that works now that certainly will work a lot better, if things getter better.

[Joel Rassman:]

We do not earmark the cash for future use. We have it there to make a determination opportunistically. Sorry.

[Robert Toll:]

Right. There is no great plan.

[Dan Oppenheim:]

Alright. Thanks much.

[Robert Toll:]

No strategic map on that.

[Joel Rassman:]

I think those questions (inaudible).

[Robert Toll:]

Right. Okay. Nichole?

[Operator:]

Your next question is from Chris Hussey of Goldman Sachs.

[Chris Hussey:]

Good afternoon. Questions on your customers, as you look at them. What you think is holding them back? Do you find financing is holding them back as much as their inability to sell their house or trepidation about the home market? How would you rate those various things right now in terms of what is holding your customers back from buying?

[Robert Toll:]

Trepidation with respect to selling their older home, their used home, the home they have got, I would say that is number one. Number two is the fear that they are going to look awful stupid if prices keep on going down. I think those are the main ones. Number three very much exists. Guy shows up with a little credit card debt and does not want to declare, does not want to say that he is making as much as he is making, because he is in a private business. That guy is in trouble for credit, for a mortgage, and that impacts our business as well.

[Chris Hussey:]

Okay. Then, I know you do not want to rank your markets. However, are there any markets that are doing particularly well for you, or better than others, that you would like to talk about?

[Robert Toll:]

Yes, yes. Been a little bit of a come back in Massachusetts, not enough to get excited about. Connecticut there has been a big comeback and that is been a shock to us and very welcome surprise. We would be happy to do the business we are doing at Connecticut, back in '04, and '05, it is a good market. We also had pretty hard times recently in New Jersey, which has been deader than a doornail except for around Princeton. However, that was because we ran it very cleverly. It turned out that management deserves our accolades and we give it to them. They ran a very clever private sale event, where they called people and said the company is opening its pocket book, this is a onetime thing. Believe me, this will not be here again. They were able to produce about four times the average number of deposits they can get for a week. Anybody else with good news that they can remember off the top of their head? New York. Yes. That is a continuation story. We have been doing well in Duchess and Tottenham, but the well is relative to a normalized market of lets say '02, it is about there or just a year less. Hoboken Jersey City, have continued to do well for us. We would be happy with what we are doing there, this year or five years ago.

[Chris Hussey:]

Another builder located not too far from you, earlier they I would mention that there were parts of the California market, inland that were starting to show some stabilization. Are you seeing anything like that?

[Robert Toll:]

Not really. We are not in the English Empire, thank God! My heart goes out to Aaron for having to operate in it. I am glad to hear that it is coming back. We have not experienced Northern California market coming back much, a little bit, but not much. Southern California is [wifty?] and in one week it seems as though you are on your way back. You sit around and say, we are back! The next week, we are back in the tar pit. So, we can not say that California is on the way back yet. However, I am glad to hear that Iowa is experiencing better times. It is good.

[Chris Hussey:]

Thank you. I appreciate it again.

[Robert Toll:]

You are welcome.

[Operator:]

Your next question is from Buck Horn of Raymond James.

[Robert Toll:]

Hey Buck.

[Buck Horn:]

Hey. I just wondered if you could talk about your soft cost with your current owned land position, just what your annualized maintenance property taxes, HOA obligations. What that would be on the owned lots that do not have any vertical instruction ongoing right now?

[Robert Toll:]

No, I am looking at everybody around the table. Anybody here who have an answer to this?

[Joel Rassman:]

We do not have any answer to it.

[Buck Horn:]

No?

[Robert Toll:]

That is a simple answer. Unfortunately, it is not the one you wanted.

[Buck Horn:]

Okay. Second, are you anticipating a tax refund any time next year?

[Joel Rassman:]

Maybe.

[Robert Toll:]

That is what you can do, maybe? Okay.

[Joel Rassman:]

We did not file the tax return, we do not know.

[Robert Toll:]

You do not know.

[Buck Horn:]

Okay. Thank you.

[Robert Toll:]

You are welcome.

[Operator:]

Your next question is from Alex Barron of Agency Trading

[Alex Barron:]

Hi Bob, hi Joel.

[Robert Toll:]

Hi

[Joel Rassman:]

Hi.

[Alex Barron:]

I wanted to know if you have percent or number of how many of your lots or communities have been impaired of these wants so far.

[Robert Toll:]

That is a decent question. We do have an answer, good. We are flipping through pages, Greg Zeigler, brains behind the shelter will get you the answer.

[Robert Toll:]

We have impaired 164 communities.

[Robert Toll:]

164 communities impaired. A third of those have been impaired more than once.

[Alex Barron:]

Go it. My other question was, do you have some way to quantify what the benefit from previous impairments was to your gross margins this quarter.

[Robert Toll:]

That is a detailed question. It was small says, Joe Sicree.

[Joe Sicree:]

It was more than in other quarters, but small.

[Alex Barron:]

I am sorry?

[Joe Sicree:]

It was more than in other quarters, but it was small.

[Alex Barron:]

Okay.

[Robert Toll:]

This answer satisfies you?

[Joe Sicree:]

I do not have the number, but I do know I had asked the question and I am giving a range the number it was $20 million, $30 million again.

[Robert Toll:]

$25 million, $30 million, there you go.

[Alex Barron:]

Okay. My other question was, a lot of the other builders have reported gross margins that are now like in the mid or low single-digits, and your margins are still at the top. I am just wondering what you think accounts for the difference.

[Robert Toll:]

Well, this is not the top. That is for sure.

[Alex Barron:]

That is the top of all the builders today.

[Robert Toll:]

You mean top of the builders as opposed to the top of where we were. Where were our gross margins today?

[Joel Rassman:]

23.5?

[Robert Toll:]

23.5. That is before writes-off so they do not count. That is which you are referring to.

[Alex Barron:]

Thanks. Other firms are reporting in the single-digits, which would be comparable to your 23.5 I think. So, I am just wondering, if you would attribute that to maybe have you cut prices less you think than people, who are at the lower end or what do you think accounts for the difference?

[Robert Toll:]

That is a first most obvious logical conclusion. Our sales pace is slower than theirs that you are saying Greg?

[Greg Ziegler:]

I am saying we trade off.

[Robert Toll:]

Yes, we trade off the volume for the price. We are not willing to cut land to zero just to keep an operation open. I am not suggesting that you are, but I am suggesting they are. However, that is only on the basis of what you were talking about. So, I think I am going to exit this conversation.

[Greg Ziegler:]

Our margin, what historically better?

[Robert Toll:]

Yes, historically they have been better. Sorry, we can not answer.

[Alex Barron:]

Okay, thanks.

[Robert Toll:]

Alright, Nicole I have a question from Samuel Attias. What is your view of the Manhattan condo market? It appears to us we have an opening in Manhattan by the way in couple of weeks at 33rd and 2nd in the hospital area. We are looking forward to the opening. The condo market in New York is one of the stronger markets in the world. It is not as strong as it was that is for sure. So, it has felt some of the storms, its come at the residential real estate market in the country, but it is still pretty exciting and there is a pretty strong demand. Its now price sensitive, where previously it was just available sensitive. The supply was limited compared to the demand. You are back to more equal market of being that high prices an average decent offering in Manhattan at 1400, 1500 a foot is quite acceptable, whereas five years ago, I think it was five years ago, we had great expectations when we went through thousand of foot. So you are pretty high priced, and you got pretty decent volume. I would say that is a pretty exciting market. Are we scared? You bet, financial industry being beset as it is and representing a good bit of population of Manhattan, especially those types that are spending on these condos. It means that if we sense any slowdown, we will pick the money and run instead of hanging around and waiting.

[Joel Rassman:]

Our, the Manhattan project we are opening is right across the NYU Medical Center which is, gives it a less dependence on Wall Street.

[Robert Toll:]

From your mouth, I got you. Nicole?

[Operator:]

Next question is from [Joel Locker] of SBN Securities

[Joel Locker:]

Hi. I was curious about the entitlements. Some of these run out in five or seven years, and may be some of these permanence you got back in ’02 or ’03 that you thought were going to be delivered in ’06, but now being pushed out, so now, I was wondering if you are starting to see an elevation of more of the permanence actually starting to expire?

[Robert Toll:]

Well, we are on top of it. We are tracking it. We had seen it in couple of instances, where we had to make decisions, as to go further, move there, build the foundation, do something in order to keep a permanent life and sometimes, we make a determination, to tell no. This is too far away at this point, let it lapse, and we will start over again. Some of the legislatures have tried to aid the industry recognizing that transfer taxes for real estate for instance are one of the primary ways that the states fill their coffers. New Jersey passed an act about a month ago or even more, and I think Governor Corzine, is still walking around with it. I do not know whether he signed it yet or not, it has been long overdue. We hope that it is signed, because Jersey is one of the hottest places on earth to get a permit. So, we are very much on top of it.

[Joel Locker:]

Do you have a, can you quantify the permitting expense as a percentage of inventories? Say you have the $4.5 billion or so inventories, how much dollar was, is through getting permits on the channels?

[Joel Rassman:]

I think it is around 3% of, on average on our inventory now and approvals, but we could double check that. I think we have that. Its pre-developments, typical predevelopment course, as a percentage of having the cash flows, historic cash flows.

[Robert Toll:]

Well, I have to get back at you for, yes…

[Joel Locker:]

All right, I will just give you a call back after the conference call.

[Robert Toll:]

Please do, and sorry. Nicole?

[Operator:]

Your next question is from Andrew Fenton of Cliffwood.

[Robert Toll:]

Andrew?

[Andrew Fenton:]

I know you said traffic has been stable, but would you mind giving the year-over-year percentage change by month if possible?

[Robert Toll:]

I have it, and it is terrible. We were in traffic; I do not have a year-over-year in terms of per community. I should, oh here I do. No these are traffic units. The percentage chain, yes, we are down 20. I will just go back to last five weeks for you.

[Andrew Fenton:]

Okay.

[Robert Toll:]

Down 23%, down 19%, down 19%, down 28%, down 34%. So that gives you an idea of where it is compared to last year. What heartens us ever so slightly is that we are running the same, we are actually even running a little better more recently on a per community basis, and we have been going all the way back through May. So May, June, July we are getting slightly better numbers or just the same numbers as compared to last year so…

[Andrew Fenton:]

Okay, thank you.

[Robert Toll:]

Lower levels, but stabilized. We will take it. Nicole?

[Operator:]

(Operator Instructions).

[Robert Toll:]

Well Nicole we are not looking for business, so if you have not got any…

[Operator:]

Your final question sir, it is from Harper Phillips from [Inner Grid].

[Harper Phillips:]

Hello.

[Robert Toll:]

Yes, right here.

[Harper Phillips:]

I just wanted to follow-up on the e-mail question that we gave you. Just regarding, we are trying to get a sense for of the approximately 30,000 lots that you bought over the period of 2005 and 2006, what year those prices were negotiated in?

[Robert Toll:]

You must be referring to settled.

[Joel Rassman:]

Settled yes, I do not….

[Robert Toll:]

I do not know. Anybody? I am sorry the information is really tough to gather because, again if there were stuff that we settled in New Jersey, if it were New Jersey again, that might have been negotiated eight years previously. As a matter of fact, one comes to mind, New York, I just asked my colleagues last night; we are in our ninth year, and we have not closed the one yet. So it depends on the territory, if it is Florida, its probably only two or three years old before and max before we closed it. Northeast, five to 10 years; California, probably four years. So that is why I can not answer.

[Harper Phillips:]

Just looking for an average vintage if you say, on average vintage for 2005 and 2006?

[Joel Rassman:]

We do not have it and we do not collect it that way, because it would be misleading. Some land is bought or contracted for, where approvals are paid by us; we create value in the approval process, and other land is, maybe someone else got the approvals. We may not get as good a buy on that as we did before, but our underwriting characteristics are very strict. We then have to break it out, did we get our approvals, did we not get out own approvals, which geographic region it is perhaps to be meaningful for you, so we do not give it to you.

[Harper Phillips:]

Okay, thank you.

[Robert Toll:]

You are welcome. Nicole any other questions?

[Operator:]

There are no further questions at this time sir.

[Robert Toll:]

That is great. Thank you very much Nicole and thank you everybody. Have a good weekend, and have a good rest of the week. Bye-bye.

[Operator:]

This concludes today’s conference, you may now disconnect.

[Robert Toll:]

Thanks Nicole, bye-bye.