Toll: How the MBS Market Has Morphed

Key quotes from luxury homebuilder Toll Brothers' (TOL) FQ408 conference call:

Outlook:

We expect that the average delivered price will decrease sequentially each quarter over the year... Write-downs will be higher in fiscal 2009 then in 2008.

Wealthiest buyers are suffering more:

Q: the average selling price of your cancelled units in the fourth quarter rose from 606,000 in the third quarter to 785,000… The higher price can’t get the mortgage you think?

A: For the most part its not the mortgage, it’s that they’ve decided that the market has gone south and that they don’t want to go with it.

Q: But more so then the lower price.

A: Its not, it’s older deals… Chance is the market changed in the deal.

Weighed down by land holdings, even after massive writedowns:

Q: If you’re trying to buy land… at pennies on the dollar and get great returns, but you’re going to be just plagued with this large amount of land that’s going to hurt your returns… so if I’m a shareholder… I put an ROE of what on [your share price] because maybe Toll won’t see an ROE better then 10% because they have all this land their plagued with.

At some point you’re going to have to put improvements in the ground and bring those lots [you already own] to finished lots and so that’s going to negatively impact the returns when you have to do that even if you’ve written it down to $0.50 on the dollar or $0.30 on the dollar

A: We’ve evaluated, that we can sell in the current market, depressed as it is, at enough of a price, at enough of a pace, to make a very good or acceptable return on that new land acquired.

MBS market: Banks now buy direct:

With the banks we’re seeing more targeted and localized activity. Banks are getting smarter about their business policies and actually going after customers as opposed to going after assets and that’s one of the real advantages that we have that our customer is highly attractive to these banks because for the most part, they’re affluent people.

In terms of more traditional, life [insurance] companies have traditionally been buyers of mortgage-backed securities and mortgage bonds. This particular company I think is getting smarter because they are buying directly from the high quality producers so they know exactly what’s in the assets that they’re buying as opposed to the nebulous MBSs that were out there in the past.

Leverage:

I hope that [our leverage] goes up. Nothing the matter with 40%. That would mean I’m back in business. Yes, I would think that would be about where we want to be, about where we were five years ago.

Active adult (55+) communities:

We have very little cancellation of the active [inaudible] which happens to be the lower priced product as well traditionally.

Comments

[Pipo:]

Robert Toll, Toll Brothers CEO commented on the state of his company and its industry. The comments were rather bearish.

ceotalk.blogspot.com/2...

2008 Dec 08 08:07 AM

[Did U Think...:]

Toll has been selling the stock for some time now. I love these references to going back to the boom times 5 years ago. Tol Will be lucky not to BK in 2010.

2008 Dec 08 07:49 PM

[gordon:]

He didn't comment on the 5-YEAR LOSS CARRY-BACK coming to homebuilders, did he? Meaning, they will get back all the income taxes paid in "boom years", this massive drain on future tax revenues has been extended to banks, mortgage, and I believe (keep it quiet!) homebuilders, hasn't it? It amounts to about $4 Trillion in tax rebates, as losses in 2006-7 are all written against taxes paid starting in 2002. Builders are holding on, til they receive this massive tax refund I think.

2008 Dec 09 11:35 AM