Toll Brothers Comments on Lower-Priced Homes in a Soft Real Estate Market

On Toll Brother's (TOL) Fiscal Q3 conference call, executives discussed a partial shift towards inexpensive homes and smaller units:

Dave Bogart - UBS

On the lower-priced homes, the mix shift towards the lower-priced homes, and some smaller units, how do the margins on those compare to the margin on the more traditional homes that you're delivering now?

Joel Rassman, CFO

When we underwrote them, they were basically the same in each geographic region. I don't think that's significantly different.

Robert Toll, CEO

I would guess that the margin is going to be a little bit less.

Joel Rassman

Only because of geographic mixes.

Robert Toll

There's another factor, which is in the softer real estate market, multis, a fortiori force you to build specs, and with specs in a softer real estate market you'll have lessened margins because we're less likely to be bullish and hold, and we're more likely to give a good price to move product.

Dave Bogart - UBS

I guess on those same lines, do you have any idea what the cycle time, how they differ for the smaller and lower priced?

Joel Rassman

Smaller units get delivered much quicker. On average, a large single-family home gets delivered at about ten months of backlog and a small single-family unit probably six or seven and a multi probably five or six.

Robert Toll

Excepting the multi-family, where we do 60 to the acre where you get very dense; it's suburban, but it's like urban development. Those buildings can take you 18 months to deliver.

Dave Bogart - UBS

Do you think in general, though, the return on capital on the small single-family stuff is higher because it turns faster?

Joel Rassman

Probably...

Dan Oppenheim - Banc of America Securities

You made the comment in the press release about not focusing or not building more at affordable price points. I understand that if you were doing more in terms of condos in Manhattan where it's 1,000 square foot and you're building to suit as applied on square feet. You entered the Martinsburg, West Virginia market last year where there's some units there, single family or town homes in the upper ones and the twos.

Robert Toll

I think it was this year, wasn't it? Yes. But go ahead.

Dan Oppenheim - Banc of America Securities

That just seems to be more willingness to build at lower price points, where if we look at the absolute dollar --.

Robert Toll

That's true for that community, yes. We are very heavy in the north Virginia market and we thought it wise to balance by going out further. Obviously we couldn't be in the same location stay in and come in with a lower price because the land wouldn't permit it. But we could go out further and build the lower price because we see so many customers coming through all of our communities, and I'm guessing we must have 40 or 50 communities in the North Virginia, Maryland market.

When you get somebody to one of these communities who can't afford, you do the old Sid Stone thing, roll up your sleeves and say you want more for your money, you say you're not satisfied, I am going to give you a map to get to the Martinsburg communities of Toll Brothers. So we saw an opportunity to create some synergy by developing a little further out. That's what the Martinsburg operation represents.

Dan Oppenheim - Banc of America Securities

With the other land, would you say that's unique in terms of looking to build at lower price points?

Robert Toll

Yes, yes that's fairly unique.

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