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Toll Brothers, Inc. (NYSE:TOL)

F4Q11 Earnings Call

December 6, 2011 02:00 pm ET

Executives

Bob Toll – Executive Chairman

Doug Yearly – Chief Executive Officer

Marty Connor – Chief Financial officer

Fred Cooper – Senior Vice President Finance, International Development and Investor Relations

Joe Sicree – Chief Accounting Officer

Kira Sterling – Chief Marketing Officer

Mike Snyder – Chief Planning Officer

Don Salmon – President, TBI Mortgage Company

Gregg Ziegler – Senior Vice President Treasury

Analysts

Dan Oppenheim – Credit Suisse

Susan – UBS

David Goldberg – UBS

Stephen Kim – Barclays Capital

Adam Rudiger – Wells Fargo Securities

Ken Zener – Keybanc

Nishu Sood – Deutsche Bank

Stephen East – Ticonderoga

Jason Markinson – JP Morgan

Joel Locker – FBN Securities

Jade Rahmani – KBW

Susan Berlinger – JP Morgan

John Micenko – SIG

Operator

Good afternoon. My name is Dawn and I will be your conference operator today. At this time I would like to welcome everyone to the FQ4 and year-end F2011 conference call. (Operator instructions.) Thank you. Mr. Douglas Yearly, you may begin your conference, sir.

Douglas Yearly

Thank you, Dawn. Welcome and thank you for joining us. I’m Doug Yearly, CEO. With me today are Bob Toll, Executive Chairman; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance, International Development and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira Sterling, Chief Marketing Officer; Mike Snyder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Company; and Gregg Ziegler, Senior VP, Treasury.

Before I begin I ask you to read the statement on forward-looking information in today’s release and on our website. I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect future results. Those listening on the web can email questions to rtoll@tollbrothersinc.com.

As has become our regular practice we’re going to limit our prepared remarks to provide more time for Q&A. Since our detailed release has been up since early this morning and is posted on our website, I’m sure most have read it so I won’t reread it to you.

Against the backdrop of US government gridlock and persistently high unemployment rates at home, political and economic crises around the globe and dramatic volatility in the capital markets, we produced our second consecutive quarter of pre-tax profitability and our sixth consecutive quarter of pre-tax pre-impairment profitability. Although US housing starts remain down 60% from historical norms, we’ve had a solid improvement in most key metrics in F2011. Our pre-impairment homebuilding gross margin improved nearly 250 basis points in 2011 compared to 2010 and improved in each of the past four quarters compared to the prior year’s same period.

Our FQ4 2011 net income was $15 million or $0.09 per share diluted. On a pre-tax basis, FQ4 2011 net income was $15.3 million. Excluding inventory and joint venture write downs and debt retirement charges, FQ4 2011’s pre-tax income was $33.9 million. For the full F2011 net income was $39.8 million or $0.24 per share diluted. In F2011 we reported a pre-tax loss of $29.4 million as F2011’s inventory and joint venture write downs totaled $92.7 million, and charges related to early retirement of debts totaled $3.8 million. Excluding inventory and joint venture write downs and debt retirement charges, F2011’s pre-tax income was $67.1 million.

In FQ4 2011 revenues and homebuilding deliveries increased 6% in dollars and 8% in units compared to F2010. FQ4 net signed contracts rose 24% in dollars and 15% in units compared to F2010. The average price of FQ4 net signed contracts was $606,000 compared to $565,000 in FQ4 2010. For the full F2011, homebuilding revenues declined both 1% in both dollars and units compared to F2010. F2011 net signed contracts increased 9% in dollars and 7% in units compared to F2010. We ended F2011 with a backlog of $981.1 million and 1667 units, up 15% in dollars and 12% in units compared to F2010.

We ended F2011 with $1.14 billion of cash and marketable securities and $785 million available under our $885 million twelve-bank credit facility, which matures in October, 2014. Our F2011 year-end net debt to capital ratio was 15%.

Our strong balance sheet gives us the financial flexibility to invest in the future. During F2011 we spent approximately $281 million on land for our core traditional and urban new home business, purchasing approximately 3400 lots and optioning another 5800. This resulted in a net increase to 37,500 lots under control at F2011 year-end versus 34,900 at F2010 year-end. Nearly 60% of our lots are concentrated in the land-constrained metro Washington, D.C. to Boston corridor which enjoys lower unemployment and greater affluence than many other regions.

Two weeks ago we announced our entry into the Seattle market through the acquisition of CamWest which added approximately 1300 lots owned and 200 under option to our land position. During F2012 including Seattle, we project growing our community count by between 9% and 19% and reaching F2012 year-end with between 235 and 255 selling communities.

The urban metro New York City market remains a bright spot for us. In F2011 we opened for sale three new buildings under the Toll Brothers City Living brand. We launched 1450 Washington St., the fourth building in our successful Hudson T project at the northern tip of Hoboken, New Jersey. In Manhattan we opened the Terrain on the Upper East Side at 65th St. and Lexington Ave., a small boutique building with an average projected sales price of $5 million per unit. On the Brooklyn waterfront we opened 205 Water St. in the Dumbo neighborhood. Before opening for sale the Terrain and 205 Water, each had lists of over 3000 interested parties. In total, in the urban metro New York City market we have completed 13 buildings of approximately 2550 units, approximately 2430 of which have been sold. We are in construction on three buildings of 245 units and have eight more buildings of approximately 1600 units in planning.

Gibraltar Capital and Asset Management, our wholly-owned subsidiary formed to purchase distressed loans and assets, completed four transactions in F2011. The transactions involved the purchase of 121 nonperforming loans, the combined outstanding balance of which was approximately $272 million. With Gibraltar’s specialized skills and the valuation and management of distressed real estate development assets, we have now completed transactions totaling approximately $2 billion of nonperforming loans and real estate assets in partnerships and on our own. We currently have approximately $100 million invested in Gibraltar and continue to seek opportunities to leverage Gibraltar’s strengths with Toll Brothers’ expertise, relationships, well-known brand name, nationwide presence, and capital.

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

Marty Connor

Thanks, Doug. Our FQ4 homebuilding gross margin before interest and write downs was 24.2% of revenues compared to 21.4% in FQ4 2010. This improvement was principally a result of our regional trade purchasing initiatives and reduced incentives. FQ3 2011’s margin was 23.4%. The improvement from FQ3 was primarily due to a $2.1 million accrual reversal on a favorable legal ruling and also mix.

FQ4 interest expense included in cost of sales was 5% of revenues compared to 5.1% in FQ4 2010 and 5.3% from FQ3 2011. The improvement is a function of mix shift with more deliveries coming from newer communities. The FQ4 pre-tax write downs of approximately $18.2 million included $0.8 million attributable to operating communities and $0.9 million attributable to land owned for future communities. Approximately $15.3 million of the write downs were attributable to options including one $12 million write down in Arizona while a net $1.2 million was attributable to joint ventures.

FQ4 SG&A of approximately $68.4 million was higher than the $64.6 million than FQ3 2011 from down from the $69.2 million in FQ4 2010. The increase compared to FQ3 was primarily attributable to the increase in revenue and the lack of benefit from reductions and liabilities due to changes in estimates and resolution of issues; and insurance recoveries. As a percentage of homebuilding revenue, SG&A was 16.0% for FQ4 2011 compared to 16.4% in FQ3 and 17.2% in FQ4 2010. The improvement here is primarily due to increased revenue.

FQ4 other income and income from joint ventures was $18.9 million, much of that from our New York urban products. We expect our joint venture income in F2012 to decrease compared to F2011 as we have fewer units delivering from joint ventures in F2012 than F2011.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for F2012: we are excited about our entry into Seattle through the acquisition of CamWest in mid-November. While we are still refining our purchase accounting we do not believe the transaction will create any significant intangibles or goodwill. The acquisition does add 15 communities to our community count immediately and is anticipated to contribute 170 to 210 units to our delivery totals for F2012. Due to purchase accounting markups on backlog and quick-delivery homes in that purchase, we believe our home building gross margins may experience a slightly negative impact for the first three quarters of F2012. However, the transaction is expected to be accretive in F2012.

As noted in the release for F2012 including Seattle, we expect to deliver between 2400 and 3200 homes, and we estimate the average delivered price per home will be between $550,000 and $575,000. Our cash balance at the end of FQ1 2012 is projected to drop by more than $400 million due to the purchase of CamWest, the payoff of our [South Edge] accrual, investments in our high rise developments, and the purchase of other land opportunities. We are encouraged by the various investments we are making but remain inherently conservative in our balance sheet management.

Now let me turn it over to Bob Toll.

Bob Toll

Thanks, Marty. We believe that a strengthening of the housing market is key to an economic recovery. It will reduce unemployment which will improve consumer confidence and bring on more demand. Unemployment nationally among college graduates is well below 5%. We therefore believe that our customers have the ability to buy. They are aware of the tremendous affordability of homes and the record low interest rates; however, a lack of confidence in the direction of the economy is perhaps the biggest impediment to releasing what we believe is significant pent-up demand. The National Association of Realtors Housing Affordability Index is at an all-time high dating back to 1971, which certainly indicates to me that we could have greatly increased demand with just a slight increase in confidence.

As we look to the future we believe we are well positioned. Our national brand name as America’s luxury homebuilder, the breadth of products we offer, and the geographic diversity of the markets in which we operate afford us significant opportunities for growth. Our financial strength, which ranks us among the top two credit-related homebuilding companies provides us a competitive advantage in accessing capital and closing deals with sellers, and our solid land position and limited competition in the upscale market should give us a head start as markets recover.

Thanks for listening. Now, let me turn it back to Doug for questions.

Doug Yearly

Thanks, Bob. Dawn, we’re all set!

Question-and-Answer Session

Operator

(Operator instructions.) And your first question comes from the line of Dan Oppenheim with Credit Suisse.

Dan Oppenheim – Credit Suisse

Thanks very much. I was wondering if you could talk about the expected community growth during F2012. You talked about a fairly wide range there. What’s driving that? Just a little color there would be great.

Doug Yearly

CamWest is on top of the list, adding about 15 new communities. We closed that transaction two weeks ago so those are already online. The next highest state is Pennsylvania which I believe is adding about 10, and then after that it’s onesie, twosie – Connecticut’s four. So CamWest and Pennsylvania are the big two, Dan.

Dan Oppenheim – Credit Suisse

Right, I guess I meant more in terms of the range there. It seems like a fairly wide range. I was just wondering is it something in terms of if you see the market strong enough you’ll bring some online, or what is it in terms of not being certain of those?

Doug Yearly

Number one is the uncertainty of the entitlement process. We proved this out last year. It’s very, very difficult to predict with accuracy when we will have all permits and be able to open – that’s the major reason for the range. Number two is the market. We have 97 mothballed communities right now; we predict that only four of those will come out of mothball and be part of next year’s growth. That could change dramatically as the market changes.

Dan Oppenheim – Credit Suisse

Okay. And the second question, just wondering if you count on margins with CamWest, are you saying that that will have a negative impact the next couple quarters but that everywhere else will see some improvement so it still should be flat to up, or just want to get sort of an understanding there.

Bob Toll

No, I think as we said in the press release it’s tough to see much more improvement in our margins coming out of our core business without an improvement in demand and pricing power that results. So the expectation we were hoping to set here is that gross margins may go down a little bit because of the impact of CamWest purchase price accounting.

Dan Oppenheim – Credit Suisse

Great, thanks very much.

Operator

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

Susan – UBS

Good afternoon, it’s actually Susan for David. In terms of the CamWest acquisition, you guys have done a lot of work over the last few years in terms of procurement and cost controls, things like that. Can you talk about your ability to take that into the CamWest market and how quickly that will move and sort of your thoughts? And conversely, is there anything that they’ve been doing that you think you’ll sort of take back to your traditional Toll business?

Doug Yearly

Sure. On our side we obviously bring great economies when it comes to purchasing. We have a national purchasing group that is able to buy more appliances and buy more roof shingles, and kitchen cabinets and therefore get better pricing. We also think we have very efficient systems for value engineering homes and we’ll certainly bring that to them. On the land development side, and land development in Seattle can be tricky because of environmental laws and topography, we have a national footprint, we have 30 years of experience – a very, very accomplished land development team. I know CamWest has already been very impressed with the land development managers we’ve put in place. I think we’re going to add a lot of savings there.

On their side, they have very creative architecture because they tend to do in-fill locations where you can’t build the bigger homes out on the farm field. You have to be very creative in terms of what you’re offering because it’s in-filled. The good news with the in-fill is that when you get it entitled it’s gold because of its location. They’re also pioneers and out front in terms of green initiatives, which you can imagine would be the case in Seattle, and they’ll certainly add value back to us to what we’re doing nationwide with some green moves.

Susan – UBS

Okay, and then just one more question. Can you give us any update in terms of the kinds of options people have been choosing? Have you seen anything change meaningfully there over the last few quarters?

Doug Yearly

No. We continue to be happy and impressed that while it may take a buyer a little bit lover to press firmly and agree to buy, once they do they load the house up with just as many options as they did in those glorious days of ’03, ’04, ’05. We’re still selling about $110,000 per house in upgrades and so that’s good news through this downturn. The buyers may be a little more cautious but once they buy they still want all the bells and whistles and we make sure to offer all of that.

David Goldberg – UBS

You guys are saying 20% is the average?

Doug Yearly

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

Bob Toll

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

Sue – UBS

Okay, thank you.

Operator

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

Stephen Kim – Barclays Capital

Hey guys, thanks very much and congratulations on the quarter and the acquisition. I guess my first question relates to the land purchasing activity that you gave us some figures on. Can you give us an idea of in general what the competition is like for the parcels that you are acquiring? We know that competition in general for in-fill lots is usually pretty high, but I was curious as to if you could shed some light on maybe some competitive advantage you have that allows you to purchase these at the kind of valuations you did.

Doug Yearly

Steve, it’s a very, very local answer. There’s some markets we operate in where we don’t have much competition. We always talk about competing against a small, local builder but many of those are out of business and in that location with capital we have a huge advantage, and that is generally the case in I’ll say Maryland to Boston corridor. Northern Virginia is certainly more competitive with some bigger players and some developers who have survived and are doing quite well.

In New York City we tend to distinguish ourselves because we can close very quickly, so if there’s a bankruptcy sale or a short sale that requires a $10 million, $20 million, $30 million check in ten days we have it. Our competition there is well capitalized but in many cases they have to go out and find an equity partner, they can’t turn it around that quickly, we have a big advantage there. As we get out West we find California to be very competitive. We’re struggling to find good land deals at the right price, and that market is overheated on the land side when you consider where the housing market is out there.

So it’s a very local answer. The banks are still not freeing up a lot of land which is making it more difficult but again, it goes bank to bank and we just have to work harder than the next guy and be patient, not change our underwriting. And as you’ve seen our land buy has shrunk a little bit but we’ve been pretty happy with what we’ve been buying. We’re okay.

Stephen Kim – Barclays Capital

Sounds great.

Bob Toll

Excuse me, the biggest negative in land buying that I see is that we’ve got some stiff competition from funds that have [bouqu darjon], and are ready to step up at prices that are higher than we’re willing to go to in a belief that there’ll be a faster recovery than we believe by our methodology, our models as to how to buy land.

Stephen Kim – Barclays Capital

Appreciate that, thanks. So let’s talk about funds for a second. We just had lunch with Rialto and Jeff was talking about the opportunity that Rialto provides [Linar] in terms of getting a first look at land parcels that others won’t be able to see or make bids on. You, through your Gibraltar operation, I’m curious as to whether or not you have gained benefits in that way. Have you been able to acquire land through some inroads that Gibraltar has provided? Or is that not really something that’s happened so far?

Doug Yearly

So far, what Gibraltar has brought – the nonperforming loans that Gibraltar has bought have not made their way back into Toll Brothers for new communities. That’s not to say it won’t happen. There are some assets Gibraltar is working out that we think may become Toll Brothers communities. But I think your more general question is are we getting relationships into banks and others for Toll Brothers because Gibraltar started it, and the answer is yes.

Stephen Kim – Barclays Capital

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

Doug Yearly

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

Stephen Kim – Barclays Capital

Got it, thank you.

Bob Toll

Stephen, it’s really hard to say what’s culminated. Sometimes one of us from Toll Brothers and one of us from Gibraltar will go into the same bank, and in certain instances like that we have found a piece of land for Toll Brothers but it never really started with Gibraltar.

Stephen Kim – Barclays Capital

Got it, okay. Well thank you very much for that clarification, thanks guys.

Operator

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

Adam Rudiger – Wells Fargo Securities

Thank you. Can you talk about your scenarios with which you came up with in order to derive your closing guidance? I mean the low end to me seems pretty pessimistic considering the inclusion of the Seattle closings and the fact of where your backlog’s beginning from. So what’s kind of behind that guidance?

Bob Toll

We’ve got this guy here who runs budgeting called Dr. Doom. I think what we’ll do instead is pass this question on to Marty.

Marty Connor

Well, we’re certainly influenced by Dr. Doom with a historical and a consistent conservative bend. We start with our backlog, we put some factor in there for cancellations and in this case for Seattle, which does not have a lot of backlog we project based on how we’ve done the past few years what we expect to do in the next six months. And generally it’s the next six months of sales that we can hope to deliver by the end of the year.

Adam Rudiger – Wells Fargo Securities

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

Bob Toll

By order deterioration, are you talking cancellations or are you talking slowdowns or a slowdown in demand?

Adam Rudiger – Wells Fargo Securities

Just a slowdown in demand.

Bob Toll

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

Marty Connor

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

Adam Rudiger – Wells Fargo Securities

Okay. A second question then is can you just quantify if there’s going to be any SG&A impact or what it will be from the CamWest deal?

Doug Yearly

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

Adam Rudiger – Wells Fargo Securities

Okay, thanks very much.

Operator

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

Ken Zener – Keybanc

To clarify about the demand equation, it looks like… I mean all of you have been making fairly positive comments but obviously the [800 midpoint minus 180 leaves you kind of flat]. Can you really look to pull a few of the mothball units that you described as 97, which is pretty much where we were last year. Why do you think we’re not seeing greater enthusiasm on your part? Is that your absorptions per community are not happening in those locations or are you still concerned about cannibalizations if you opened it?

Doug Yearly

Ken, it was hard to hear you, you were pretty distorted but I think I heard it. The question is why aren’t more mothballs coming out and again, it’s the location of the mothball community, it’s the strength of that individual market. It’s rarely that we’re afraid of cannibalizing what we already have. It more goes to where those communities are located and a very conservative outlook for F2012.

Bob Toll

I think most significantly it’s also our appraisal of how to maximize the dollars including capitalized cost of carry imputed, so that for instance, if we think we can make ten by bringing them on this year but twenty if we wait a year then we’re likely to keep it mothballed and go for the higher dollar. Where we’ve got very plum pickings we’re not going to bring those to market where we feel that the market is not quite ready yet but is on its way back.

Ken Zener – Keybanc

Understood, you can clearly afford that. I hope my voice is clearer now.

Bob Toll

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

Ken Zener – Keybanc

Okay. I was wondering if we could talk a little bit about Seattle and what it means for other deals. Obviously Gibraltar’s out there. Seattle is a (inaudible) that a lot of builders have been slowing entering recently. But given the very high spec nature of Seattle and CamWest, what made you comfortable now versus last year? And with this spec model by definition, since you don’t do it obviously you’re following the local leadership a lot. Can you describe if you think that’ll change, the spec aspect, to Seattle in terms of the business model of spec that you need as you do that in other markets? Thank you.

Doug Yearly

Well, this year versus last year is CamWest. We’ve been studying Seattle for a decade. We’ve always been interested in Seattle. It’s an affluent market, it has excellent job growth. It has withstood this downturn over the last six years better than almost every market in the country so we’ve always been intrigued. Our concern has always been whether we could find enough land and withstand the very tedious and difficult entitlement process because of the environmental regulations and the growth barriers, and CamWest presented us with what we think is a great brand, a great organization, and most importantly 1500 lots that they own or control – 1300 of those are owned.

They are in in-fill locations that have held up much better than the outer ring of Seattle and so it was this opportunity that finally brought us into Seattle. Spec building does occur more in Seattle than many of our markets. CamWest builds more specs than we traditionally build. That is primarily because it is a relocation market with good job growth and so you need inventory for the relocating family that can be delivered within two, three, four months as opposed to six, eight, twelve months. And they also build in in-fill locations where because of the land planning you may have to build multiple units at one time because the homes are smaller and closer together and it’s a little bit trickier.

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

Ken Zener – Keybanc

Thank you.

Operator

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

Nishu Sood – Deutsche Bank

Thanks. I wanted to revisit the topic of the gross margins. You folks had a very nice year this year with 250 basis points I believe of gross margin improvement. But Marty, when you were talking earlier you said you wanted to speak to expectations that perhaps the margin growth wouldn’t be able to continue due to the pricing not getting better at a faster pace. So I just wanted to get some clarity on that because the 250 basis points that you managed this year was in an environment where pricing barely went anywhere and some people think it’s still going down; it certainly wasn’t going up robustly. So what’s the negative delta here? If you managed that kind of nice improvement this year without home price growth why wouldn’t you be able to do so next year as well?

Marty Connor

I think there’s two factors that we enjoyed this year that will not be as available for us going forward. The first factor is that our incentives have come down from in the 70s to in the 30s over the course of the last 18 months, most of which was reflected in this year. And additionally as we’ve discussed before, we’ve rolled out regional labor purchasing initiatives across the country, and most of the benefit of that has run through the income statement at this point in F2011. So we don’ t have as much room in F2012 to pick up improvement incentive benefits and we don’t have as much room to reduce costs on the labor front.

Bob Toll

Marty, what relationship between settlements this year in F2011 versus F2012 do you see for City Living product?

Marty Connor

City Living, actually in FQ4 was about 10% of our revenue and had been running at 20% to 22% prior to that, and it’s really a function of the availability of units in those products. The building in Williamsburg delivered a lot of units last year. As we go forward, deliveries for 2012 will not be out of the Terrain, they won’t be out of 205 Water – they’ll predominantly come out of what I’ll call the remnants of our existing buildings and 1450 Washington St.

Nishu Sood – Deutsche Bank

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

Bob Toll

I think it does, yes.

Nishu Sood – Deutsche Bank

Great, that’s very helpful. The second question I wanted to ask was regarding demand. As a general statement when the government ran the first time homebuyer tax credit, obviously the move up and luxury segment, the general idea was that it underperformed. Following that and the doldrums of the hangover effect from that the move up luxury market seemed to outperform. So I wanted to get you folks’ sense of in the housing recovery, what is your view on how the move up luxury segment will perform relative to the market? Now, I want to also put aside obviously you folks will probably be able to get some market share growth relative to your peers. I’m talking about your market segment as compared to the overall housing recovery.

Bob Toll

I’ll go first. It seems to me that the housing recovery in the luxury line is indicated to be hopefully fulfilling and significant when you look at what’s happening with other luxury goods, luxury products. But it ain’t necessarily so as [Fordham Life] said, and therefore we don’t put any of our projections on the basis of some expectation of a follow through from luxury goods to our line. Our model pretty much follows where we’ve been so we don’t crank in increase. But it would seem that we will slowly recover. What we’re on is a “muddling through” kind of recovery and it seems as though it’s going to continue on a straight line basis.

Doug Yearly

All I’d add to that is I think we have three things in our favor right now. The first is the college grad unemployment rate is half the nation – that’s our buyer. The second is the family earning over $100,000 in this country is growing five times all households – that’s our buyer, I think that helps a lot. And third, very importantly, we have not had a problem with mortgage money through this downturn because our clients put 30% down, have great credit ratings; and even in the jumbo market which was less than 10% of what we do, that mortgage money has been readily available. So I think all of that has helped us and will continue to help us as confidence comes back.

Bob Toll

You’ve got according to Housing & Urban Development Department and the Census Bureau released two weeks ago, sales of new single family homes in October annually adjusted comes out to 307,000 homes for the year. We were doing a million back in the ‘70s and the ‘80s and the ‘90s, and the first decade of 2000; and all you need is a little movement in that statistic in order to restore confidence.

I mentioned the impediment being lack of confidence in the economy; what I didn’t say which I implied, I thought, was that if you get confidence restored in the belief that housing prices will no longer go down but will in fact go up, if there is a distinction made between distressed pricing and new home pricing, then you can see greater demand which will bring you into higher prices. But all that is awaiting what the reality will be which depends on many other factors. Read your perspective carefully.

Nishu Sood – Deutsche Bank

Alright, great, thanks a lot.

Operator

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

Stephen East – Ticonderoga

Hi guys. The first, just a quick housekeeping. Marty, when you say the gross margin was down are you talking sequentially or are you talking year-over-year, because there’s over a 200 basis point swing from your performance in FQ1 2011 versus FQ4 2011.

Marty Connor

It would go down sequentially.

Stephen East – Ticonderoga

Okay, alright. Thanks. And then Doug, can you all help me out on the tower trends? Is this buying process for the consumer and the process that you all go through usefully different than what would happen in a single family master plan community or something like that? And the thought process I’m driving at is, is there a difference in the way you track what’s going on with acceleration or deceleration of demand for that product, etc.?

Doug Yearly

No, Stephen, we don’t track it any differently. The business, from a sales perspective runs the same: we take a deposit, they take a week or two to decide if they really want to buy. We work out the unit, the upgrades and off they go. What’s great now is there’s incredible urgency in New York so we are raising prices regularly which feeds upon itself and buyers see that, feel it and know they have to get in this week, not next week. And that is driving it for us.

Many of these buyers are buying 9, 12, maybe even 14 months out in some buildings upfront before we do open for sale generally before a building is topped out, which means it’s a year or so before it delivers. And then of course the deliveries are very lumpy because we can deliver one or two units per day once a building is completed. But in terms of the sales process it’s virtually the same as what we do out in the suburbs.

Stephen East – Ticonderoga

Okay, and what would be a typical down payment? I assume your down payment’s a little bit higher on this product which would sort of imply lower cancellations but that lead time you just talked about is so much longer. Do you see different cancellation rates with this product?

Doug Yearly

The deposit is in the 5% to 10% range. The lead time is really not that different from building a custom home with us in the suburbs which can take nine to twelve months. Cancellation rates right now are lower than the rest of the company because it’s hotter. The price is going up. I think people feel even better about the purchase.

Stephen East – Ticonderoga

I got you, okay, thanks. And just the last question – you took the impairment in Phoenix; I guess my question is we’re pretty far along in Phoenix. Why now versus earlier in the process?

Marty Connor

Well, I think based on the inputs we put into our model we thought now was the appropriate time. There’s no flexibility with the landholder in terms of a restructuring in the pricing of that contract. And the assumptions that we had at one point in terms of pricing and pace are no longer supportable so we have to back off.

Stephen East – Ticonderoga

Okay. Is that unique that the seller is not flexible in the Phoenix market? Is that unique?

Marty Connor

The nature of this particular seller makes that the case.

Stephen East – Ticonderoga

Okay, thanks a lot, guys.

Operator

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

Jason Markinson – JP Morgan

Hi, Jason Markinson in for Mike. I was wondering if you could possibly break out the year-over-year order [of] trends over the course of the quarter by month and then possibly give us a read on what November looks like?

Marty Connor

We’re going to see with what Gregg comes up with.

Gregg Ziegler

Go ahead and start with next year and we’ll see what turns up.

Marty Connor

Okay, so through the weekend ended December 4th, our agreement is up 20% net of cancellations.

Bob Toll

Cancellations were at 4%.

Marty Connor

Yes.

Bob Toll

No, I’m telling you to tell him. [laughter]

Marty Connor

I thought he could hear you.

Bob Toll

Maybe. Cancellations ran 4%.

Jason Markinson – JP Morgan

Okay.

Gregg Ziegler

For FQ4 2011 the order trends are very consistent week-to-week; there’s no major spike in any one month if you go through the three months of FQ4.

Jason Markinson – JP Morgan

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

Doug Yearly

Sure. We’re not quite ready to go back to the report card but it’s fairly consistent with what we said the last few calls: Washington, D.C. to Boston – 60% of our business – is doing well. New York City, which for us is Hoboken, Jersey City, Brooklyn and Manhattan is spectacular, by far the best in the company. When you get out of the Mid-Atlantic/Northeast we’ve had some success recently in Colorado; we’re very small there but excited by what we’re seeing lately and some of the land deals we’re putting together. Texas, we continue to look to Texas as a very good long-term place for us – that’ll be primarily Houston and Dallas. Florida is still generally soft but we have primarily second homes there. The Midwest is still soft and the West Coast is hit or miss; it really depends on the very local town or block that you are in.

Jason Markinson – JP Morgan

Great, thank you.

Operator

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

Joel Locker – FBN Securities

Yeah, I just wanted to get your take on buying shares back at current levels, or if that’s more price sensitive or you’re still open to the share buyback around where it is today at $21?

Marty Connor

We like buying it back at $16 or $15 like we did in FQ4 rather than at $21. I think buying back at $21 is off the table.

Joel Locker – FBN Securities

Right. And also, Bob, I wanted to get your take on… You talked about the ‘80s, ‘90s being around a million new home sales. With the pent-up demand, when do you think we’ll get back to even 800,000 new home sales?

Bob Toll

Ah, now isn’t that the question, my boy? And the answer is, which is always right, I don’t know.

Joel Locker – FBN Securities

Right. Alright and then the last one on your total specs, what were they in the quarter and how many of those were finished?

Gregg Ziegler

Specs on singles were 183 which is about one per community like it’s been for really the last two years at this point, and the townhouse product was 160 specs which is down 20 from last quarter. So the total is 343 and then the high rise, high density product had a decrease of around 50 specs so that’s down to 360. So your total spec count is at 703 but again, in FQ1 2012 you’re going to see the spec count go up a little bit because of Seattle.

Doug Yearly

And we count a spec when lumber hits the site, so you asked for finished. It is a significantly smaller number than what Gregg just gave you.

Bob Toll

We don’t track that – finished specs.

Joel Locker – FBN Securities

Right, okay. Thanks a lot, guys.

Doug Yearly

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

Bob Toll

Well, that’s for singles. For towns it’s a little higher but not much.

Joel Locker – FBN Securities

Alright, thanks a lot guys.

Operator

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

Jade Rahmani – KBW

A question: can you comment on the availability and pricing of true jumbo loans and whether defined and [GSE] loan limits has driven any increased interest from originators; and also whether you’re seeing any change in mortgage availability given the [access] of certain correspondent lenders?

Doug Yearly

We’re going to turn that over to Don Salmon, President of our mortgage company.

Don Salmon

The jumbo market has loosened up significantly in the last six to eight weeks. We’ve just added two new jumbo investors, both of whom are offering long-term lock at very competitive pricing up to a year. That was unheard of a year ago. In terms of the correspondent lenders going out of business, the big one is B of A. I think that’s been all over the place. We’ve been able to replace them without skipping a beat. We’ve added two major banks that we were not doing business with at this time six months ago and they have filled that void nicely, and we continue to enjoy a lot of local banks who see the value in the relationship with our consumer and we’re really not having a problem getting loans pretty much anywhere in the country. So we’re very fortunate that way.

Bob Toll

Don, while you have the floor, will you give him the mix of business – performing, jumbo through cash, our capture rates, what today’s mortgage rate is and your phone number in case anybody wants a mortgage? (laughter)

Don Salmon

Thanks, let me start with my phone number. I’m a very religious person; it’s (inaudible) 220. That’s Latin. But anyway, capture rate overall for the year was 75%; 78% on conforming. The Toll Brothers mix was 66% of the business and was conforming or FHVA, 13% jumbo and 21% true cash. Our conforming rates are still very, very competitive – 3 7/8 on a 30-year fixed rate jumbo with zero points and that’s an average throughout the country with a good buyer; some markets are slightly higher.

Agency jumbo or high balance conforming is 4%; virtually the same as conforming these days, and jumbo is about 5/8, and that margin I think has dropped just a little bit which is a good thing. Our mix of business – 98.9% was prime. We did 17 high-quality [all day] loans and two subprime loans. What else do you want, Bob? I think that gives a pretty good indication of where things are.

Bob Toll

Today’s conforming is 3 7/8?

Don Salmon

3 7/8, and if you tax assess that you’re probably at 2.5% after-tax cost of capital, which is free. That’s for thirty years. You’re below that obviously for a 15-year; you’re below that probably into a 2% to 2 1/8% range and if you look at it over the long term, what’s going to happen to the price of real estate in fifteen years? Probably, just my opinion, outstrip 2% a year. So overall it’s a great time to buy a home.

Jade Rahmani – KBW

And the City Living business, can you give some color on how the mortgage profile of your buyer varies? What percentage is all cash and what kind of mortgage products they’re using?

Don Salmon

I can tell you that there are more ARMs being used in City Living. The average down payment in the high rise business is slightly higher than the average down payment throughout the company. Our average LTV across all product lines is 71% - that includes the FHA. Our average LTV in the high rises was 69% - that excludes the true cash buyers. I don’t have a stat for you on how many of the high rise people were true cash. I don’t think it varies significantly from the standard, though, which is 21%.

Jade Rahmani – KBW

Great, thanks a lot.

Operator

Our next question comes from the line of Susan Berlinger with JP Morgan.

Susan Berlinger – JP Morgan

Hi, good afternoon. I just had one high-level question. I was wondering if you guys can talk about what’s going on with various government initiatives; whether increasing down payments or mortgage deductability or any changes at the agencies. Anything high-level would be helpful.

Bob Toll

We’re happy to say there’s been no change in the mortgage deductability and government policy seems to be fairly benign at the moment. I think the best we can hope for is that they go talk about something else, and just leave us alone and let us muddle through and we’ll get there. So policy is not affecting us much right now.

Susan Berlinger – JP Morgan

Okay great, thank you.

Operator

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

John Micenko – SIG

Hey thanks. In the press release you talk about eight City Living projects with about 1600 units in the planning stages. What’s your best guess on the earliest some of that product could come online? Then I’ve got a follow-up.

Doug Yearly

Some of that will open for sale the end of F2012. Remember, it can take 20, 24 months to build so you probably won’t see revenue out of that until F2013. In fact, most of it is within the next year to two coming online. Some of it is backed up in that it’s part of a larger project that has multiple buildings – one goes after the other, but for the most part it’s different locations. So we’re excited to be opening a few buildings this coming year.

John Micenko – SIG

Okay. And then I seem to remember when you had started in the business there was more JV and then you were moving towards more wholly-owned. Of those upcoming projects, is it fair to say more of those are wholly-owned than the JV structure?

Doug Yearly

All of them are wholly-owned.

John Micenko – SIG

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

Gregg Zeigler

Total size.

John Micenko – SIG

It would just be 245 across the three, alright. Thanks very much.

Operator

And there are no further questions at this time.

Bob Toll

Thank you, Dawn!

Doug Yearly

Thanks, Dawn. Thanks, everyone.

Operator

This concludes today’s FQ4 and F2011 year-end conference call. You may now disconnect.

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