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Executives

Robert Toll – Chairman, Chief Executive Officer

Joel Rassman – Chief Financial Officer

Greg Ziegler – Vice President Finance

Doug Yearly – Regional President, Head of M&A

Don Salmon – President, TBI Mortgage Co.

Analysts

Ray for Michael Rehaut – J.P. Morgan

Alan for Ivy Zelman – Zelman & Associates

Mike for Daniel Oppenheim – Credit Suisse

David Goldberg – UBS

Kenneth Zenner – Macquarie Capital

Mosji Sood – Deutsche Bank

Joshua Pollard – Goldman Sachs

Joshua Levin – Citi

Steve Sullivan – Banyan Securities

[Merrill Ross]

Megan McGrath – Barclays Capital

Rob Stevenson – Fox-Pitt Kelton

Stephen East – Pali Research

Buck Horn – Raymond James

James McCanless – FNT Equity

[Joel Locker – Ftn Securities]

Toll Brothers Inc. (TOL) Q3 2009 Outlook Call August 12, 2009 2:00 PM ET

Operator

I would like to welcome everyone to the Toll Brothers third quarter 2009 outlook conference call. (Operator Instructions) Mr. Toll, you may begin your conference.

Robert Toll

Welcome and thank you for joining us everybody. With me today are Joel Rassman, Chief Financial Officer, Marty Connor, Assistant CFO, Fred Cooper, Senior VP of Finance and Investor Relations, Joe Sicree, Chief Accounting Officer, Krya McCarron, Chief Marketing Officer, Doug Yearly, Regional President and Head of M&A, Don Salmon, President of TBI Mortgage Co., and Greg Zeigler, Vice President of Finance.

Before we 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 email questions to rtoll@tollbrothersinc.com.

Today we reported preliminary results for our third quarter ended July 31, 2009. We will announce final results when we announce earnings on October 27. Since our detailed release has been out since 5:00 am, and is posted on our website, I will just hit certain highlights.

In fiscal year '09 third quarter net signed contracts of 837 units and $447.7 million rose 3% in units and declined 5% in dollars compared to third quarter of fiscal year '08. Third quarter home building deliveries and revenues of 792 units and $461.3 million declined 36% in units, 42% in dollars. Third quarter backlog of 1,626 units and $930.7 million declined 37% in units and 47% in dollars compared to fiscal year '08 third quarter results.

Although our industry continues to face significant challenges, we are encouraged by the increase in number of net contracts signed this quarter. This marks the first time in sixteen quarters dating back to fiscal year '05's fourth quarter that our net contracts exceeded the prior year same quarter.

It also marked the first quarterly sequential unit increase in our backlog in more than three years. The increase in net contracts was generated despite our having approximately 22% fewer communities during fiscal year '09's third quarter than during fiscal year '08.

On a per community basis, our net contracts were up about 32%. Despite the 22% fewer selling communities, our fiscal year '09 third quarter gross signed contracts of 915 units were down just 9% from the fiscal year '08's third quarter compared to a 40% decline in fiscal year '09's second quarter versus fiscal year '08's second quarter.

And gross signed contracts were up 16% on a per community basis. This improvement coupled with our lowest cancellation rate in over three years drove the increase in net signed contracts. Typically we sign fewer contracts in our third fiscal quarter than in our second because the second quarter which runs from February 1 through April 30 encompasses a primary selling season.

This fiscal year however, third quarter net contracts exceeded second quarter net contracts by 44%. This has occurred three other times since we went public in '86 and each time it was less than a 10% increase.

Although some of our markets are still stuck in the mud, many are improving. While we have to work very hard for ourselves, it does feel as if the fence sitters are looking for reasons to jump in on the side of buying. Price is no longer the overwhelmingly dominant factor. It appears that those taking this step today have more confidence than one year ago. This is reflected in our third quarter rate of conversions of non binding deposits into signed contracts, the highest since fiscal year '05 and our declining contract cancellation rate.

Fiscal year '09's third quarter cancellation rate, current quarter cancellations divided by current quarter's signed contracts, was 8.5% versus 19.4% in fiscal year '08's third quarter. This was our lowest cancellation rate since the second quarter of fiscal year '06 and is approaching our historic average of approximately 7% since going public.

While the statistics above cannot be considered determinative of the luxury segments recovery, or that of the overall homebuilding industry, we believe they are more indicative than anecdotal. Many markets feel better than they did six months ago.

The consumer interest we saw in April and May leveled off a bit from June through mid July, but has regained momentum more recently. As the supply of unsold housing inventory shrinks nationwide, and if consumer confidence continues to improve, we should see stronger demands. It has already positively impacted our pricing power as we are reducing incentives in many markets.

We believe several factors could help Toll Brothers as the market improves. First, we have a strong presence in affluent markets in the Mid Atlantic and Northeast corridor. These markets have been relatively less impacted by foreclosures and overbuilding than other regions.

Second, much of our competition, the non public builders can't access the credit markets or the banks. Third, the unemployment rate among college graduates who are more into the upscale market, is still half that of the population in general. Fourth, we ended fiscal year '09's third quarter with approximately $1.65 billion of cash and $1.35 billion available under our $1.89 billion 31 bank credit facility which matures in 2011.

After retiring nearly $300 million of debt this quarter, we have no public debt maturing through fiscal 2011 and under $50 million maturing in fiscal year 2012.

Finally, we believe we have the best brand in the business. As housing recovers, we believe buyers and financial institutions will gravitate to the firms with the strongest brands and balance sheets.

Now, let's open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ray for Michael Rehaut – J.P. Morgan.

Ray for Michael Rehaut – J.P. Morgan

You talked about conversion rates this quarter. Could you give a sense of what those were? I think historically you talked about a 40% to 60% range and I think last quarter it was around 40%. I was wondering if you could give what that was this quarter.

Robert Toll

The conversion rate was 66% which is the highest deposit conversion for any quarter since 2005 and as I scan back through '94 on this paper, it's pretty much the average conversion ratio.

Ray for Michael Rehaut – J.P. Morgan

Was the 66% spread evenly across each month or was there fluctuation between the quarter?

Robert Toll

The quarter, the conversion ratio in the first quarter was 45%. In the second quarter it was 37%. Monthly, I don't have it.

Ray for Michael Rehaut – J.P. Morgan

I was wondering if you could give your regional market breakdown, any type of color on which markets were better or worse versus last quarter.

Robert Toll

I'm not going to give that. I haven't done a rating in about three years because I wanted to get away from what turned into the F report. But several of the markets have done better recently. Connecticut, New York suburbs, New Jersey city living is back, Hoboken and Jersey City, New Jersey has been a good market, and Virginia, the DC market in Virginia has been pretty good. Florida, West Gold Coast, that's Naples to Tampa, has done pretty well for us.

Ray for Michael Rehaut – J.P. Morgan

Which ones were worse than your expectations?

Robert Toll

I failed to read some others. Delaware is a little better. Raleigh is a little better. Central Florida has picked up recently, the Orlando market and the California northern picked up recently.

The rest of the markets are either stuck in the mud or just improved marginally and I want to let it go at that because I've had complaints by my salespeople in the field that say, Bob, you say it's a lousy market, we don't see anybody for the next two weeks. So we'll let it go at that.

Operator

Your next question comes from Allan for Ivy Zelman – Zelman & Associates.

Allan for Ivy Zelman – Zelman & Associates

I was hoping you could comment a little bit about the high end market in general. I think there's been a lot written out there that the entry level is performing pretty well given the tax credits that are out there and some other stimulus and the perception is that the high end has been performing much weaker and your results this quarter seem to refute that. So I'm curious if you attribute it more to share gains either from private builders that simply can't afford to compete or from publics that seem to have exited the high end market in general and made an exit to entry level or if you think this is more a sign of stabilization in high end.

Robert Toll

I think it's the latter. Instead of talking about it relative to the big builders or the smaller builders and talking about market share, I think it's more relevant to talk about the market in general.

The stock market has been going up. Most of the luxury up-scale homes is impacted one way or the other with the stock market. There's a better feeling about jobs, a better feeling about the economy. Six months ago, we were all, including me, maybe it goes all the way back to a year ago when Lehman crashed in September.

And since then up until a couple of months ago, we were all scared that the end was near. One of the sandwich signs in wall street, and I think that fear has gone away from the public which has taken the public for the luxury market especially from coming back six to nine times, continually asking the same question, do you have any additional incentives? Would you accept an offer of $425,000 for a home that we wanted to get $650,000 for?

I think the mood has changed and we're making our sales instead of six to nine, probably three to six visits. Our traffic still stinks compared to even those lousy days of 89, '90, '91, but those people that are coming in are more serious. They're not just fishing any longer, and there's now fear on both sides.

We fear not selling, and they fear missing. So I think we've just got a better market now and if things continue to improve, I think the market will continue to improve. Things being the economy in general.

Nothing's changed with human nature since the first condo was built, which I believe was someplace in Rome around year one. Many articles have been written about the shrinking home, how people are going to be downsizing, but I remember the same conversation in '73's energy crisis. I remember it in the recession of '80, '81 and '82 and the recession of '88, '89 and '90 which rolled to California in '92 and '93.

It just ain't so. And as people gain confidence and have a rosier outlook on the future, especially on their own jobs, I don't see people wanting smaller homes. So I think the luxury market is here to stay.

Allan for Ivy Zelman – Zelman & Associates

Just on your community count, it looks like you previously have been guiding to about 225 by year end and came in below that this quarter, and now you're looking at 205. Just kind of squaring your comments on some of the stabilization you've seen in the marketplace. When would you expect that to start ramping back up and why lower the guidance given the positive signs you're seeing in the market?

Robert Toll

I would think we'd start ramping up fairly soon. I don't know if that means next quarter or the quarter thereafter, but we've got our minds set to do that now. We've got a bunch of communities moth balled that we will be examining to take out of moth balls, shake out the sweater, get rid of the smell of the little camphor balls and go do it again.

Mike Snyder is not here. Greg, do you know if that's right? Are we predicting down at 205?

Greg Zeigler

Yes we are. Yes, but we haven't made it public yet. I think it's without any community opens; it affects any sell out communities. I don't think it's necessarily accurate.

Robert Toll

I don't know that they can hear you with the tenderness of this microphone.

Greg Zeigler

I said the projections that we've got internally where without any community openings of any size and build out of existing communities; I don’t think that would be representative necessarily of where we'll be a year from now.

Allan for Ivy Zelman – Zelman & Associates

It sounds from your comments at least the first part of 2010 you would expect that number to creep up.

Robert Toll

The witness just indicated he didn't know by shaking his head.

Operator

Your next question comes from Mike for Daniel Oppenheim – Credit Suisse.

Mike for Daniel Oppenheim – Credit Suisse

I was hoping to get your comments on traffic. When you say traffic leveled off in mid June to mid July and then regained momentum more recently, can you give some numbers around that, where we're seeing year over year down in July and then we're seeing up contracts and deposits again?

Robert Toll

Basically we see traffic as being very low consistently going back on Sundays from May 3 all the way to August 9, so I don't see any significant change. I don't see any change really in traffic. It just stinks. It's averaging 13 or 14 per community going all the way back to May 3 right into the present.

So it's about as low as we've ever experienced in terms of traffic, which I think is a good sign, because we get just one little blip in that and we could do a whole lot better. And I would guess this is representative of the whole market.

As I said before, this is certainly more than anecdotal information. You're getting these averages from 235 approximately communities, 250 communities, so that's a pretty good indicator of where the market is right now.

Mike for Daniel Oppenheim – Credit Suisse

Last quarter you gave the most recent four week and eight week deposit and contract numbers. Do you care to give those again for the most recent four and eight weeks?

Robert Toll

Per community the last four weeks we are plus 19%. The last eight weeks we were 12% so we're going in the right direction for deposits per community and the company total.

Mike for Daniel Oppenheim – Credit Suisse

You made the comment about seeing better confidence and reducing incentives in some markets. Have you seen the confidence pick up to a point where you're seeing buyers come in and pick up more options and upgrades?

Robert Toll

I don't know that. Do you guys know that in the last four, eight weeks, three months? Anybody have an idea whether we're selling more options?

I don't think there's a change. We've been very careful over the last couple of months to guide option selection down because if there's, well there's plenty of problems, but one of the more significant problems is the change in the appraisal game. And you add a lot of options, taking your house from $500,000 to $550,000 after the house starting at $450,000.

So in other words if you add $100,000 to $450,000 you get to $550,000 as opposed to adding $50,000. Whereas if you're at a $600,000 home and instead of adding $100,000 to $200,000 and make it $800,000, then the appraiser doesn't give full recognition for that, then you've got a problem with the appraisal. So if anything, we're guiding option selection down to make it easier on appraisals for ourselves.

Operator

Your next question comes from David Goldberg – UBS.

David Goldberg – UBS

What really makes you comfortable that this isn't just hanging on the ledge for awhile and that we don't have another leg down versus it seems like you think this is close to bottoming and things are getting better and that leaves you comfortable in opening new communities and putting some money towards the housing market? How you know this isn't just a blip on the radar at this point?

Robert Toll

We don't. We are as scared of a W recovery as the next man. However, the number of weeks of improvement that we have had as I said in the monologue, are certainly more than anecdotal. You're talking about a whole lot of communities in 40, 50 markets and 20, 22 states. So we're getting pretty deep information.

We're going to react not on the basis of a month or two but we've got about a quarter and a half so on that basis, we're going to turn the screws up a little bit. We unfortunately don't have the power to turn it up because this is a long lead time business. We're not baking loaves of bread here, and if you want to go sell you've got to put in improvements and dress up your models, etc.

But we believe it's the right thing to try and crank it up more than to sit and wait for the W if the W is going to come.

David Goldberg – UBS

The second question I had was about the comments on price not being the buyer's primary focus or not being as much the buyer's primary focus. Was that meant to say that buyers are not negotiating or trying to get lower prices as much or was it that buyers are not being enticed as much by price as a mechanism. And the reason I'm asking is because if we were to see rates go up and affordability suddenly come down from where it's been, the historic high's they've been at, how much do you think that affects your buyer?

Robert Toll

You've got two questions in there. The answer to the second question is somewhat quite a bit depending upon whether it's closer to the starter market or further away at the luxury end. At the luxury end you're not going to be impacted as much by change. I think this week were five and three on a confirming five one arm however, for four and an eighth points, but that 30 year which is what people look at was five eighths more than they could have gotten a couple of weeks ago, and it's got to impact the market.

The first question is answered by your former hypothesis rather than your later. What we meant to indicate is that more people would come in whether they made an offer or not, they would ask, where are you? What's your price? And they would come back and back and back seeking more incentive, seeking a better deal, and that seemed to be the only think that was driving them.

Whereas for the last ten weeks, it appears that they are concerned with other aspects of the sale such as the lots and the location and the general option situation, what can be built, when they can get into the home. It's no longer just a price kind of equation.

David Goldberg – UBS

But it's fair to say affordability is bringing them in the door.

Robert Toll

Affordability always brings people in the door, but when we fell off the cliff of course, affordability had nothing to do with it. You could fog up a knife and had any kind of desire, you were in. And I don't think people were concerned with affordability, otherwise we wouldn't have gotten into the trouble we got into. So right now, definitely its affordability, but it's other things as well.

Operator

Your next question comes from Kenneth Zenner – Macquarie Capital.

Kenneth Zenner – Macquarie Capital

How much would you attribute your higher order rates based on the perhaps more committed order base last year where obviously you had less marginal buyers which in turn made your comps actually easier?

Robert Toll

Excuse me, did anybody get that? It went in and out?

Kenneth Zenner – Macquarie Capital

I had a question about your order rates because obviously they're positive. On a gross basis they were down nine, but you still outpaced your peers. How much do you think had play the fact that you probably had less marginal buyers in your orders last year relative to higher deposit rates?

Robert Toll

I'm not sure I understand. Doug do you understand the question?

Doug Yearly

You mean like marginal buyers, people who were financially more marginal?

Kenneth Zenner – Macquarie Capital

No, you have higher deposit rates so people are less likely to come to you and put an order in last year. Therefore your comps would have been easier because you're already depressed relative to other builders who had more marginal buyers who were willing to walk away from the order they placed with you.

Robert Toll

I'm sorry; I'm going to ask you to call Joel Rassman.

Kenneth Zenner – Macquarie Capital

I will do that. In the south and west where the segments performed strongly, were the gross orders similar to the corporate number you provided?

Robert Toll

You're asking us if some territories were better or worse than other territories. Anybody got that?

Greg Zeigler

Yes there were differences, significant differences as there always are in different regions and a lot depends on cancellations. It often comes from the backlog but not necessarily reflective of the current period. And we have Nevada continues to be a problem and Arizona continues to be a problem. Some parts of Florida continue to be a problem and periodically even some of our good markets; you may have some fall out. Even though Connecticut was better, Connecticut had a slightly can rate than the company.

Kenneth Zenner – Macquarie Capital

Related to your comments about pricing being more stable and you're pulling back incentives, do those comments infer that you have a higher degree of confidence perspectively about your margins which historically are best tied to pricing?

Robert Toll

Yes. You take away from incentives, it's the same thing as raising your price.

Operator

Your next question comes from Mosji Sood – Deutsche Bank.

Mosji Sood – Deutsche Bank

In some of your past calls we've talked about the consensus wisdom out there that the housing recovery is going to be led by the first time buyers and that the entry level is where you want to be, so you've shared your thoughts with us on that before. Today, your good numbers relative to your peers kind of fly in the face of that as well, give some evidence in support of your view. So I kind of wanted to revisit that because not only does your out performance relative to your peers but just the anecdotes that you hear from the existing home market are generally that the high end of the market is still suffering but the low end is doing well.

And I wanted your general thoughts on that, but maybe if I could throw out a specific idea; could part of the reason explaining the dichotomy in terms of your numbers versus what we're hearing in the retail market be that when people talk about the luxury market, they generally kind of lump it together as one, but as your price points move down, your product mix shift changes, would it be fair to say that we're seeing some differentiation maybe between the kind of main stream luxury market that sort of product that you're selling as opposed to the super high end? Just your general thoughts on that.

Robert Toll

It's an excellent question. That's my response Doug, what's yours?

Doug Yearly

I think what you read in the paper about the luxury market suffering, you need to be careful because in many cases the example is the $30 million house in the Hamptons, and that's not our business. Our business is $600,000 to $700,000 housing, which while luxury to many people, has nothing to do with most of these articles you read.

And if you look at what's happened over the last couple of months, some of our highest prices communities are doing the best. One example is our flagship community in Hoboken, which has had tremendous sales in the last couple of months after being very slow last fall. So I don't think we're concerned about what we read and I think we have great information coming out of our sales over the last month that prove it's not the price point right now, it's the confidence of the buyer.

Robert Toll

I believe what I said before. My opinion hasn't changed, and I haven't got an answer other than to make an ad for my company and toot a horn for those people who bust themselves open trying to make the sale.

I don't want to say we just work harder for the buck and that we're trying harder because I'm sure that's not the case. I'm sure it's not the case because I know the other guys must be trying desperately as well.

But I would have thought the starter market would have done better than us and I don't have an explanation other than for the one that Doug gave which is a, we're not really in the highest end of the market and maybe the press is concerned with that, but the reality is, I don't have an answer.

Greg Zeigler

Competition and also the strength of the builder.

Robert Toll

That might have had more to do with it than we gave it credit for. The brand name may be working twice; once for the luxury move up. You want to move into a Toll Brothers home because that's your ultimate dream, but two, these guys are going to be around, the Toll Brothers. And I wanted to buy a home. I wanted to buy it from ABC Building Co., but I'm not sure they're going to be there and I do think that the Toll boys are going to be there, so that's where I want to go.

The other reasons of course have already been mentioned which are that unfortunately, our prime competition is the small and mid sized private builder who unfortunately is having a very tough time accessing any credit. Banks are shut down and certainly they can't go to the bond market. So that may make a significant difference. Maybe market share.

Mosji Sood – Deutsche Bank

I wanted to drill down into the forecast that's been falling for your community count at the end of the year. Clearly some of the drivers in your forecast are changing. I just wanted to understand what has continually fallen. I know earlier this year you mentioned that you were closing communities out at a faster pace than expected. So I just wanted to get an update on that. Is it just a continuation of closing out communities at a faster pace, or what keeps bringing the end of your community forecast down?

Robert Toll

It's not just closing of the communities as we sell them out, but the reluctance to open the new community that's ready to go that has all its approvals, but to open a store and our business, you're going to put in 20 or 30 lots on an average basis. They're going to cost you $70,000 each to approve.

You're going to put in a model park that's going to cost you $1 million to $1.5 million for your models, your entrance, your decorating, the music, the fountain, the video, the brochures, the cinnamon sticks and the bread that we have to bake for the weekends, etc. etc.

And you say to yourself, "Self, do I want to sit here and wait or is it time to go?" And very often, self says, "Let me sit here and wait. This ground is not really going to go down in value. We believe better times are coming, and instead of opening and dumping all that capital out there, let's sit there with the capital and see what the financial system has to offer next week or the next failure of the next bank, and in the meantime keep our powder dry instead of opening up and slugging for medium return instead of getting the outsized returns that we're used to."

So that might have something to do with it. And that kind of psychology will change in here if and as we see continued better returns from our Sunday night sales reports.

Mosji Sood – Deutsche Bank

So as you've gone along, even though things have become more predictable in the words of some builders, obviously they've improved in some markets as you've described, you've still become incrementally more cautious in terms of the cash outflows as you've gone along.

Robert Toll

Sure. Remember the question was asked not more than 20 minutes ago which is how do you know it's not a double recovery? It was an accusatory kind of question, but rationally and reasonably so. How do you know where we're going? You see 11 good weeks out of 13 and you see six good weeks out of eight, and what makes you think you're not going to go right into the trash can again?

And the answer is, I don't know. We are scared. So you've got conflicting pulls as to which way to take it, so we sit around on Monday night and discuss whether to go or no go. For instance, in Hoboken, that Doug mentioned earlier, we just decided last week, and I don't know whether Roger conveyed that to you because you were on vacation, to go get the CD's, the construction drawings cooking for the next building in Hoboken.

Now we've been ready to start that building for a year, and we refused to do it because even though the market seemed as though it was stronger than other markets, what's the point? The ground is not going anywhere. Let it sit there and hold our money and wait until we felt a little more confident.

So now we feel a little more confident and we hope we don't get trapped. You never can tell.

Operator

Your next question comes from Joshua Pollard – Goldman Sachs.

Joshua Pollard – Goldman Sachs

It's clear that you're in the market for new land and you just talked about opening or potentially opening communities if things get a little bit more clear for you, but only at the right price. This quarter you had a reduction on your lots of about 1,600. Half of those came from deliveries, but the other half are net land sales or net option contract walk aways. Could you tell us which it was and then on the land side, many comments from all around the country of you being out there bidding and other builders out there bidding. Are you seeing, what premium is getting paid to what Toll Brothers is willing to offer for some of the land out there that's moving?

Greg Zeigler

The first part of the question as I understand it was, the community count went down to 800 units. Roughly half of those were communities we expected not to have open in the near future or sell. They've been moved out way back in the future, mostly being sold or disposed of, so about half and half.

Joshua Pollard – Goldman Sachs

The second question is are you still out there bidding for land and if so, does it seem like you're bringing a ton of it on just yet. Are you being outbid by other folks and if so, by how much, if you can pontificate on that.

Robert Toll

We are bidding. We were outbid on the most recent one which was a huge one. I won't go into the particulars because the sellers are friends and the buyers are friends and they haven't got a contract yet, but they've got an LOI, letter of intent, and they were willing to go further than we were.

We're being stingier than the next guy and making an appraisal which is why we're not bringing as much on as we would like to bring on. We also like to make sure that it's at a good price.

Joshua Pollard – Goldman Sachs

In some old presentations you would break down the percentage of your homes that fall in the $300,000 to $400,000 or $400,000 to $500,000, $500,000 to $600,000 etc. Do you have an update on that and are you seeing particular strength at one price point versus another?

Robert Toll

We don't have it.

Greg Zeigler

Active adults tends to be a stronger portion of our business right now. We have more of those communities than historically we used to have.

Robert Toll

And they tend to be at a price point that's less than our average price point. They're more like $450,000 as opposed to $650,000 or $700,000. Did we collect information? You have to wait for a road show apparently to get that, and maybe we'll have the information on our next conference call, if we can get it done.

Joshua Pollard – Goldman Sachs

You do an incredible amount getting your buyers ahead of contracting which leads to your industry low cancellation rates. Can you talk just a little bit about what's making, what you call on the buyer side of the fence? Are they having easier times selling their existing homes? Is it easier to secure financing at your price points now versus six months ago and it would be interesting to hear Don's thoughts on the state of the financing market in particular.

Robert Toll

No I don't think it's greater affordability, greater ability to finance. I think it's as I said earlier, a better feeling about the present and the future of the economy. They as we were scared that we were all going into the toilet, and I think now the consideration is more toward, how does my job look and how does the future look, not just for me but for the economy in general.

Have houses stopped slowing in price? Am I going to be laughed at when I go to the cocktail party? I don't think you will anymore. Three months ago, you went to the cocktail party and said I just bought a new home, and it was, what are you, nuts? Just wait two weeks; you'll get it for less.

Now the question is, oh yeah, where'd you buy? Who'd you buy from? Did you get a pool? Did they give you the special kitchen? Did you get the elite room? Did you get a sun room? So I just think the mood in the market has changed.

Operator

Your next question comes from Joshua Levin – Citi.

Joshua Levin – Citi

There are a bunch of forecasts out there which suggest that because of Altay and option on delinquencies, foreclosures at the high end are going to increase materially in the next 12 to 24 months. As you run your business on a day to day basis, how do you think about that? Do you think about it? Is it a big problem, just a headwind or not much of a problem at all?

Robert Toll

I missed turning it over to Don to answer the second part of the question, and this is a segway right back into it so, Don Salmon, head of TBI Mortgage Co., speak.

Don Salmon

I think there are a couple of things that work in the jumbo market. One is, if you look at Toll Brothers mix globally, in the third quarter roughly 10% of our buyers got jumbo loans. The rest of them either paid cash or got conforming loans or government loans.

The other thing that's happening is we see the community banks are very active in the jumbo market, and we do that more regionally. But what really encouraging is there are a couple of big money center banks that are coming back in. In fact, we're in agreement with one very large bank right now that as soon as they ramp up their back office and are able to take deliveries, that we're going to start delivering jumbo's to them again, and I expect that to happen hopefully this quarter, by this quarter I mean this calendar quarter, the end of September. If not, it will certainly happen this year.

So I think the liquidity squeeze in jumbo is starting to ease and I think once one starts, then the others will. So I don't think the jumbo financing is going to be a major hurdle for us going forward, especially because Fanny Mae has announced that they're going to continue, there's a 99% change that they're going to continue the 729 high balance conforming which helps a lot.

Joshua Levin – Citi

I wasn't asking about the availability of jumbo credit, I was asking about people think there are going to be a lot more delinquencies among mortgages, so foreclosures at the high end of the housing market are going to increase, and that's where you're competing. So is that something that you think about, that there will be more foreclosures and more high end properties coming onto the market that you'll have to compete with in the next 12 to 24 months?

Don Salmon

We don't know what's going to happen to foreclosures in the high end of the market. I can tell you that empirically, when we look at our portion of the market and our buyers home statistically, our foreclosures are running less than a third of the market overall. So we think that's indicative that we have stronger buyers.

We think our stats over the years point out that our buyers are very strong. We run a quarterly analysis on our buyer's ability to get more housing and this last quarter, our average buyer could buy 50% more house if they wanted to. So it's not a question of whether or not they can buy the house. I think it really comes down to a question of whether or not they want to buy the house for most of our buyers.

I think when those people step in, they're going to look at the advantages that Toll Brothers offers which is a stable company that's going to be here for years and handle any problems that may come up, and I think that's going to help us.

Robert Toll

I've got some questions that came over the internet. Steve Sullivan - Banyan Securities.

Bob, could you give us your thoughts about any form of government rebates going forward given the federal levels rebate is set to expire in the fall.

Robert Toll

I sure can. My thought is that the government, which means we, are foolish for not following the example and lesson of cash for clunkers that's been made evident to us. You can feel, sense and smell that the market wants to turn in housing. If you took that 8,000 make it 15,000, did it just four months, and did it for new home construction, you'd put twice as many people to work, twice as fast as what's being done with the auto industry.

To me it's just a no brainer that increasing the incentive to new housing and putting the people to work should be jumped on immediately. As I think you've heard me say in the past, bridges and tunnels, infrastructure are the right idea, but not to immediately jump start the economy, the permanent process that you go through.

This isn't China. They decide to build a highway, two weeks later they're going to work. You decide to build a highway here, two years later, you're still talking to the audience about the repercussions of that highway on the neighborhood. It's just a shame we don't jump on this.

I don't know how many dining room sets and sets of curtains and garden tools are bought every time we build a tunnel, but I'll be they're very few. So the collateral impact on the economy from building homes is known to be tremendous and therefore I think the government, which again is we, ought to jump on it.

So send those cards and letters in folks to your local reps and to your senators. Maybe we could get it cooking.

With respect to the rebate expiring, I don't think it will for all of the reasons above.

We have another one from [Merrill Ross]. The question is regarding results. Question one, I think it would be most interesting to hear if there were any geographic concentrations of order activity or particular products, townhomes versus stand along units or move up for example. Are people responding to a specific value proposition?

Robert Toll

Concentrations of geographic, I think we've already given. Northeast, Mid Atlantic. Fred, anything to add to that? We've already spoken that we've done better in the over 55 market. Our concentration of townhomes versus stand alone units?

Frederick Cooper

We had more orders in the Northeast this quarter than we had in the last quarter as a percentage of our total overall, but I think that's just offerings.

Robert Toll

It's just consistent with the offerings. Question two, what is the off balance sheet value of your tax credits?

Robert Toll

According to Joel Rassman or EY? According to EY not much I think, but Joel?

Joel Rassman

I think that we'll eventually get all of the deferred tax assets returned to us as a reduction of tax to be paid or accrued on the books. At the present time we have not yet had a tax to us so there is no NOL per se for tax purposes, and we have 20 years from the time it starts running to be able to recover that.

I think that on the basis of what we're seeing now, we should start hopefully increased earnings and decreased write offs, but time will tell. And if that happens, we'll recover faster.

Robert Toll

Over what time frame will tax credits be recognized?

Joel Rassman

I would have to know the economy and how many communities we have open, and I don't have that.

Operator

Your next question comes from Megan McGrath – Barclays Capital.

Megan McGrath – Barclays Capital

The land that you've moved to the disposition category that you said is responsible for a portion of the expected write downs this quarter, any color on that? What in particular this quarter moved you to decide to sell that land? Anything in particular that went on in the quarter that made you think it was a good time to sell?

Joel Rassman

Some of it to cover tax losses where if I don't do it now I don't get the benefit of the additional revenue and some have been on the radar screen whereas we looked at the markets, there are places in the country we have more land than we could use in any reasonable time given today's market conditions, so we would put those away and sell them and harvest tax losses as a result.

Megan McGrath – Barclays Capital

On the West, it looks like the pricing on your closings went down pretty significantly year over year. I know there's always issues in looking at that ASP number. Was it more mix or was there areas in California where you made a conscious decision to be more aggressive on price?

Robert Toll

It's a mix thing.

Megan McGrath – Barclays Capital

The $100 million of cash from operations you mentioned in the release, is that before the $70 million in taxes you paid?

Joel Rassman

No, I think that's part of it. You'll have a balance sheet.

Megan McGrath – Barclays Capital

A quick follow up on the deferred tax, which you said you're likely to take a write down in the quarter, any sense initially of what the potential size could be of that write down?

Joel Rassman

We have to finish the quarter first to know what the deferred tax number is and then we have to analyze a lot of other things including tax strategies before we can make the evaluation and obviously it's like a cliff. Once you've made a determination a lot more gets written down than each quarter going forward will have because you have to go make up for all the quarters that you accrued these assets. So we don't have a feel for it at the present time or we would have given you a range.

Operator

Your next question comes from Rob Stevenson – Fox-Pitt Kelton.

Rob Stevenson – Fox-Pitt Kelton

Do you have what the concessions were as a percentage of ASP during the quarter and how that compares to the last couple?

Joel Rassman

Concessions are up about $5,000 quarter over quarter.

Rob Stevenson – Fox-Pitt Kelton

On the mortgages done during the quarter, what's been the average FICO score on that?

Frederick Cooper

FICO delivered for the quarter was about 755.

Operator

Your next question comes from Stephen East – Pali Research.

Stephen East – Pali Research

If we look at the land sales going back to Megan was asking, is there any shift in your thought process whether you want to roll out of some of that land more aggressively than maybe you had been looking at it over the last year or so, or is this just a normal course of business?

Robert Toll

I think that we looked at a two year look back on the NOL and decided that experience from the years shows that let's suggest we're doing 12 a year and we'll do that in our estimation for the foreseeable future, so we're looking at the present value of the NOL look back and saying, well if we sell these lots, and we've got 100 of them, we recapture in one day as opposed to recapturing over eight years.

So we had the present value of the tax loss and that brings us up to a dollar amount of X which is worth more than the dollar that we're getting of Y, so let's move out of it.

Stephen East – Pali Research

There's been a lot of questions regionally about your south and west. They were so strong. Last year you had a high conversion rate. I'm guessing that you've probably moved some of your standing inventory there. On the south, other than the consumer coming back, are you doing anything differently than maybe a different product, different communities coming open etc., than what you've been doing over the past four to eight quarters there?

Robert Toll

No. It's just been a dramatic change in some of the markets. A year and a half ago, you couldn't give a property away in the Naples market. You could have started with a $1 million home and put a sign in your model area this week only, $750,000. You're lucky day. And the buyer would come in and say, "It's a nice home. I'll give you $600,000 for it." and I could have said, "Okay, you've got a deal."

And they go, "I've reconsidered. Make it $400,000." There was just no price. You couldn't get rid of the home for zero. And about six months to eight months ago the market turned and today, a good bit if not all of the incentives are gone from that Naples market and people are there.

Now the east side of the Gold Coast is still where it was a year and a half ago. We're not seeing offers. We're not seeing traffic. We're not seeing many buyers. It's still very quiet. Orlando, eight months ago was dead and today Orlando is hot. I don't mean that of course, but Fahrenheit, although I'm sure it's exactly true.

The market's coming back. So I think it's just a general change in attitude and I think it makes sense. Once a mortgage turns it begets more turning. If you're the first or the second you get a great price, but you have much less impact in the tenth or the twentieth, because you get 20 people out there telling the story as opposed to one or two out there telling the story, word spreads a lot faster and momentum changes.

Stephen East – Pali Research

On units and average selling price, could you refresh us what the normalized absorption rate per community is as far as you are concerned and then two, if you're looking at your ASP's, if you looked at like product and like markets quarter over quarter and year over year, what type of trend are you seeing this latest quarter?

Robert Toll

Historically since we've been public, we've been in excess of 25. It depends on the type of community. Obviously multi-family communities deliver more. Single family communities that are very large sized homes deliver less. It's an annual per community.

Today, we are significantly below those numbers. I guess we're probably even very low double digits in some communities.

Stephen East – Pali Research

On the ASP, what you're seeing on like product quarter over quarter and year over year.

Robert Toll

It's just about the same I would say.

Greg Zeigler

We had a shift in mix. We had a significant shift in mix.

Robert Toll

But the question is do you know in the same type of product whether your price is going up or going down?

Joel Rassman

If you look year over year, it's down.

Robert Toll

So you gave more incentives?

Joel Rassman

Because we were heavily skewed toward specs.

Robert Toll

I see. So where you had specs, we gave more incentives to get rid of specs. By the way, we didn't spec anything. We got these though cancellations and we kept the deposits, but still keeping the deposits is recorded in a different place and you lower the price of the home to get rid of the spec house.

Joel Rassman

I don't have any numbers without specs in them.

Robert Toll

My sense is in the last three months, you've seen slight upticks in sale price because of the decrease in incentives.

Operator

Your next question comes from Buck Horn – Raymond James.

Buck Horn – Raymond James

I wonder if you could clarify the comment about the traffic and the recent momentum. It sounded like you said the traffic was slow through the early August period, but I guess that you're implying that the new contract signings are actually rising despite the slow traffic. Is that fair?

Doug Yearly

Traffic has not increased in numbers. The quality has increased significantly. The people are not coming in looking for a public restroom, asking the name of the decorator, asking the name of the deck builder. They're coming in asking good questions that show us that they're seriously interested in buying.

Buck Horn – Raymond James

Can you compare that to the absorption pace that you're seeing in recent weeks to what you saw in the April/May time frame? Better, worse or same?

Doug Yearly

I don't have a current track of deposit conversion.

Buck Horn – Raymond James

I know you don't have all the final numbers yet, but on the homes that did close in the quarter, should we expect some sort of sequential margin improvement or a little further deterioration?

Joel Rassman

It's too early to tell.

Operator

Your next question comes from James McCanless – FNT Equity.

James McCanless – FNT Equity

I wanted to dig down into the mortgage thing a little bit more. The comments that you made about jumbo availability, did that refer specifically to Toll customers or was that also for customers of Toll customers because in the past I believe you talked about potential buyers not being able to buy their home because the people who were going to buy their home could not obtain the mortgage.

Don Salmon

I think the liquidity in jumbo is opening up across the board. That said, I don't believe very many of our buyer's buyers need jumbo mortgages. Only 10% of Toll Brothers buyers are getting jumbo mortgages and they're moving up. It stands to reason not many of their buyers are getting jumbo loans.

But to answer your question, it's my belief that liquidity is opening up across the board.

James McCanless – FNT Equity

I wanted to ask if you do take the full allowance on your deferred tax assets, what should we expect for a tax rate going forward, roughly 5% or even lower than that.

Joel Rassman

It is the most complicated mathematical calculations I have ever seen. I've got two people working full time trying to figure out that answer right now. I don't know. The effective tax rate for a quarter is so difficult when you have very low income or losses, that any small change either in an assessment of probability of settlement with IRS or any other issues has a huge effect on effective tax rate.

Operator

Your next question comes from [Joel Locker – Ftn Securities]

[Joel Locker – Ftn Securities]

On the FHA, how many of the closings in the third quarter were FHA?

Joel Rassman

7% of our closings were FHA. FHA and VA combined.

[Joel Locker – Ftn Securities]

And what was it in the second quarter?

Joel Rassman

I don't have that number but it was fewer.

[Joel Locker – Ftn Securities]

And what percentage of your open communities right now qualify for a $600,000 FHA loan?

Joel Rassman

I don't know what percentage qualify, but it would be the same number that qualified for the expanded conforming. It's a significant number.

[Joel Locker – Ftn Securities]

More than 50 do you think?

Joel Rassman

It's most of our big markets. It's Virginia, California, New York, so yes I would say that it's most of our markets.

[Joel Locker – Ftn Securities]

On a ball park for impairments on the JV's, I guess it was $90 million to $160 million total. Do you have any range for what the JV impairments would be?

Joel Rassman

No. I haven't broken it out. I know there's been a lot of conversation of JV damage, but I don't think, but it's within that number and if there are any, it will be captured that way and we'll disclose it on August 27.

Operator

At this time we have no further questions.

Robert Toll

Everybody have a good afternoon. Thank you.

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Source: Toll Brothers Inc. Q3 2009 Outlook Call Transcript
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