Gleanings From Toll Brothers FQ3'08 Outlook Conference Call [Housing Tracker]

From Seeking Alpha’s Toll Brothers F3Q08 Outlook Conference Call Transcript  

On outlook: 

Robert I. Toll - Chairman of the Board, CEO: “We believe there is growing pent-up demand from those who have postponed buying during the past almost three years. When we run promotions and work the phones for an area, our rate of deposits improves significantly… Although the rate of cancellations as a percentage of our backlog remain quite elevated… total cancellations during Q3 of 195 were the lowest quarterly total in over two years. We believe this reduction in cancellations is a positive indication for our industry as perhaps more buyers in our backlogs are willing and able to get to the finish line…Traffic, it’s still dismal… It’s consistent, however. It has not gotten any worse for the last three quarters, so we feel as though we’ve stabilized but I don’t want to give you the indication that that makes us feel good. It’s as though we walked into the tar pits, sunk up to our nose, our feet are touching a ledge and we are not going down any further but that sure doesn’t make us feel that comfortable." 

Robert Toll’s famous quarterly ‘F Report’:

“It is believed that I am not helping to restore confidence in the market by rating markets as F-minus, F, or F-plus. For my review of the markets, therefore, I shall be more circumspect than in the past. Please refer to the last report for decoding this review. Starting with the Northwest, Massachusetts remains unchanged, while Connecticut is currently the best market we have in the country. The New York suburbs are about the same as they were last time. Most recently, we’ve had a little more interest in the New York City urban markets of Brooklyn, Jersey City, and Hoboken than in the past few months. The Jersey suburbs are a hair better than in the last report. In the Midwest, unfortunately it’s about the same for the Detroit, Chicago, and Minneapolis markets. In the mid-Atlantic region, things are also pretty much unchanged in Northern Virginia and Maryland. In the South, Raleigh has slipped a little, so has Charlotte. Unfortunately, South Carolina, Georgia, most of Florida, are pretty much the same as they were in our last report, except Naples, which is doing better than the rest of Florida. Texas also is about the same as the last report, except that we had a little softening in the Dallas market. In the West, unfortunately, California, Arizona, and Nevada are all pretty much as they were. Denver is doing a little better.”

On buying other homebuilders or their land:

 

Dan Oppenheim - Credit Suisse: “As you look at some of the opportunities out there with some of the privately held builders who are challenged financially, just given your balance sheet, what is your appetite for that…?

RIT: “We will not hesitate to buy assets if we think they are a steal. We’re not looking to buy the builders. I don’t think we’d be able to because most of their assets probably are under water and nobody is going to shoot themselves, so they are not going to give us a price that puts them under water. But we are more than happy to talk to those who are financing the unfortunates… Every week we are seeing more and more offerings from banks, from hedge funds and the other side of that coin is a bank or a hedge fund is offering it as opposed to a builder, somebody has gone out of the business…  [Prices] are not stabilizing, land prices are dropping… In the last month or so we are starting to see some deals that are good enough for us… to think about whether we should make an offer or not. So I would say the land market is finally opening up.”

On construction employment:

RIT: “More and more are turning away from the business, or having the business unfortunately turn them away and therefore the labor pools are shrinking. And when the market turns, it will be difficult to find subs to keep up with production, I predict, and you will see shortfalls in supply because of that.”

On mortgages:

RIT: "...You have conforming jumbos that were… 7.29%, and that 7.29% will be reduced after the end of the year; the jumbo limit drops to 6.25% -- Congress in its wisdom took the 7.29% that they had given earlier in the year back down to 6.25%, so those jumbos only have an eighth spread over the old conforming, which was 4.17%, and we’re not subsidizing any of this."

Timothy Jones - Wasserman & Associates: "You said there’s a three quarter point difference between the conventional, the conforming and non-conforming jumbos. Is that correct?"

RIT: "Yeah, that was for those that were not within the Fannie Mae, Freddie Mac limits. Those are jumbos that exceed the 7.29% today."

Don Salmon, President of TBI Mortgage: "Roughly 20% of our TBI mortgages production was true [non-conforming] jumbo, 80% was saleable to Fannie Mae, including that jumbo, the conforming jumbo piece. Our average down payment, our average LTV for the quarter was about 67%... Conforming jumbos, the definition of conforming jumbo is an A paper loan. It would be saleable to Fannie Mae for any reason other than loan amount."

On lending standards:

DS: “What we are seeing is some LTV buckets tightening up. We’re not seeing a lot of tightening in the debt-to-income ratio type measures but it’s really mostly in LTV, in loan-to-value type measures. In terms of documentation, that’s already taken place."

RIT: “[Also,] people that want to rent their old home are now up against specific regulation as opposed to negotiation with a bank saying look, the old home is easily covered. It doesn’t -- it’s not that material. They can easily handle it. Now the regs say that you have to have 30% equity in the old home, that you need six months of rent receipts --"

DS: “That’s a Fannie Mae regulation, by the way. That has not been adopted by everybody in the industry yet.”

On elimination of the Down Payment Assistance program:

RIT: “Does the company expect move up volumes to decline as a result of the DPA elimination? Yes and no. We would expect that the whole daisy chain of the market will be impacted to some extent by those who started the chain by buying homes with nothing down, in effect, because the down payment was given to them. You eliminate a certain amount of buyers at the beginning of the chain and the whole chain slows down, so it doesn’t immediately impact us because we don’t use it but it will impact the daisy chain of home sales to some extent.”

On first time buyers:

RIT: “Anecdotally, I know we have a surprising number of people who are not coming from old or from used homes in the New York suburban market. That could be in other markets too but I just know that because I discussed that with our regional president who handles the New York suburban market. It was something like almost 50%. And some of those homes are $700,000 that we are selling in the New York suburban market… Not necessarily first-time buyers but they are not coming out of an old home now. They may have sold their old home, moved into an apartment and now want to go back into a home, or they could be first-time buyers, don’t know.”

On incentives:

RIT: “[We’re] taking incentives that exist and changing them. If you had a $30,000 incentive ordinarily packaged on the home, drop the 30 to 25 and put 5 in specific incentives that you are now calling about, you’ve decided to spend the money, as it were, for the client to be in a particular area. But we also get for the promotions additional help from our material suppliers and sub-contractors. We’ll go to the subs and say all right, we’re going to throw in a garden room off the kitchen this week. We want you to put your labor in for nothing. We’ll go to the greenhouse window supplier and ask him to supply us at cost for the week and the subs and material men have been very cooperative. They throw everything in that they can and so you’ve got a little more coming at the customer’s way sometimes, and that helps to get people off the fence.”

On baby boomers: 

RIT: "Naples is doing better than the rest of Florida… We were pleasantly surprised… Naples was perhaps the worst market that we had for some time and we were very happy to see it come back. It remains an anomaly though because the rest of Florida hasn’t followed, as many other markets have not followed as well."

Josh Levan – Citigroup: “Are [the Naples buyers] buying the homes as their primary residence or as secondary homes?"

RIT: “I believe it’s mostly secondary but there is a fair percentage that are making it their only home… They are buying a secondary home that is their primary home. In other words, they are older and retiring and moving down permanently.”

 

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