Wednesday, December 06, 2006

OH YEAAHH?

First, a major hat-tip goes to CalculatedRisk for posting the audio stream to yesterday's Toll Brothers conference call as well as SeekingAlpha who has posted the complete transcript.

After listening to the call, it’s remarkable to review the traditional media reports and see the shallow depth at which they covered CEO Robert Toll's outlook for the housing market.

It was widely reported yesterday that Toll was essentially calling a bottom in the new home market, particularly for a couple areas of Washington DC and Maryland.

But upon further questioning by analysts during the conference call, Toll backed way off his optimistic outlook suggesting that he was not forecasting optimism but rather simply reporting the market conditions that he seemed to be observing in the last few weeks.

“I don’t think I put my neck out. I think I made a statement with regard to what I witnessed and I thought I should make that statement because that I witnessed it, just as I made the statement many moon ago that things stink and that we were getting chopped but I don’t think that I made a statement with respect to the future.”

“I didn’t mean to project optimism... I only meant to project what I had seen in the past...”

Furthermore, when Toll elaborated on what he had been witnessing in the Washington DC and Maryland markets, he recounted that for some undisclosed number of communities, on average, two non-binding contracts were signed per community.

“… this past weekend for instance we had quite a few communities take non-binding deposits. These are the deposits before we go into the real deposits for the agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that markets are responding better than it had in the past.”

Toll then further digressed on the Washington DC market and seemed to really be stretching for legitimate footing while justifying his optimism.

“Let’s just take the DC market as an example. Sales have fallen in the DC market. The DC market probably has an unemployment rate of about 0. And come to think of it, I think every committee in Congress, both houses, is going to change its staff entirely not to mention that there are 40 or 50 odd people that have not been in Washington that will be soon so there’s some minor demand coming from switching politics.”

It was surprising to hear a CEO of a leading national home builder that, in general, builds roughly 8000+ homes a year justify future demand in and around a major city by citing the possibility that 40 or 50 new federal legislators may want to buy a luxury home.

Not to mention that there are 40 or 50 federal legislators leaving DC as well the fact that many federal staff members are probably not exactly luxury home buyers in the first place.

Additionally, when asked about activity other areas around the country Toll seemed to get overly excited by recent results in Detroit.

“You know actually we commented this weekend… we sold 5 homes in Detroit.. that… that’s fabulous..”

Eventually though, Toll admitted that there was little to no margin being made on home sold in the Detroit area.

Possibly the best question was asked by Credit Suisse's Ivy Zellman who asked:

“… Here you are Mr. ‘much more bullish’, talking about big pent up demand and clearly you were surprised on the spiral downward. And for the first time in 15 years you are going to be down versus 06 and I think that you seemed like a very broken man last time you were on the call, and here you are a new man and I’m wondering which Kool-Aid your drinking because I want some…”

Toll obviously seemed a bit flustered by this line of questioning responding:

“I’ve just told the market what we have witnessed so that they have that information to deal with. I’m not making a prediction... “

In a follow up question Zellman asks:

“…you said the stock would continue to surge why only buy 12,000 shares of your stock why not buy a boat load of stock back if you really believe the stocks were headed north here?”

Toll responds oddly:

“… The answer is that I believe that I could make more money with my cash buying land and expanding the business than I believe that I could make by buying my stock. Buying stock is kind of a one time thing I think...”

To that Zellman concludes:

“I think a lot of people, if they ever follow you Bob, and you’re buying and selling, personally would have made a lot of money. And ill leave it at that.”

The following is a transcript of some of the better questions asked in yesterday’s conference call:

Q: Elaborate on you reports of stabilization...

TOLL: Sure, this past weekend for instance we had quite a few communities take non-binding deposits. These are the deposits before we go into the real deposits for the agreement of sale which are not returnable. We had taken two deposits per community and that would give us heart to believe that markets are responding better than it had in the past. And we saw this kind of pickup over the past month approximately so it would appear to us that whereas as I said in the monologue dancing along the bottom for a couple of months recently last month it appears that we are now off the bottom, a level above it and that heartens us. We also noticed approximately the same thing in Maryland though Maryland never went down as deeply, didn’t go into the ashcan as the northern Virginia market probably because there was much less speculation, there were fewer lots available for construction in the Maryland market it was a tighter market so there we are now at a level which is pretty acceptable. Florida picked up a little bit on the east gold coast on primary markets and I think it picked up in Jacksonville... one moment while I search for that... (flips pages) no not really it didn’t really pick up in Jacksonville. I guess that’s about it.

Q: With the glut of recently constructed used and investor homes on the market what differentiating features is Toll Brothers now including in its houses that did not exist a year or so ago.

TOLL: That’s actually a good question. What we’ve done, where we see that we have... I choose not to use the word glut thank you Michael… but where we have more specs than we ever excepted or wanted we have changed appliance packages so that when you walk into the home you see Bosch, Miele, Viking, Wolf and Sub-Zero instead of the great stuff that we have been using. Its just as good, looks just as good but just doesn’t have that brand recognition. So that’s an example of one of the tings we are doing to move.

Q: Realizing its the beginning of December which is typically a time where most builders we talk to are not willing to make a stand one way or the other on what the next several months or even a year will bring with respect to the outlook especially because most builders are waiting till post-super bowl to make a stand based on how the spring selling season actually pans out and Here you are Mr. ‘much more bullish’ talking about big pent up demand and clearly you were surprised on the spiral downward and for the first time in 15 years you are going to be down Vs 06 and I think that you seemed like a very broken man last time you were on the call and here you are a new man and I’m wondering which Kool-Aid your drinking because I want some because that not what we are hearing from a lot of the other.. no one else in the industry is willing to stick their neck out and a lot of people got burned so I’m wondering what do you see in the data because your numbers certainly don’t show it today and there’s clearly a lot of risk that 07 wont bring the optimism to reality that your seeing so why stick your neck out now Bob?

TOLL: I don’t think I put my neck out. I think I made a statement with regard to what I witnessed and I thought I should make that statement because that I witnessed it just as I made the statement many moon ago that things stink and that were getting chopped but I don’t think that I made a statement with respect to the future. I don’t think that I’ve said that because of what we have witnessed that we are going to. I’ve just told the market what we have witnessed so that they have that information to deal with. I’m not making a prediction... the pent up demand statement I believe is accurate and I think it falls logically. Lets just take the DC market as an example. Sales have fallen in the DC market. The DC market probably has an unemployment rate of about 0. and come to think of it I think every committee in Congress, both houses is going to change its staff entirely not to mention that there’s 40 or 50 odd people that have not been in Washington that will be soon so there some minor demand coming from switching politics. but with the unemployment in DC being near 0 and with sales going down and with more people moving into the district with business going up in the district it would logically not definitely but it would logically follow that demand is increasing in the DC market and yet sales were going down until we saw them recently coming off the bottom and dancing above the bottom and therefore we don’t thin that its illogical to assume that pent up demand is building using that market as an example but that is all that we are saying.

Q: I would wonder then why If your as optimistic as you seem...

TOLL: I didn’t mean to project optimism... I only meant to project what I had seen in the past...

Q: OK, well just say that you read an analyst’s work that you said the stock would continue to surge why only buy 12000 shares of your stock why not buy a boat load of stock back if you really believe the stocks were headed north here?

TOLL: Well, I referred to somebody else’s belief but let us say that I believed, which I’m unwilling to make a statement on... let us assume your proposition that I believe, which I don’t necessarily, but let us assume that I do.. Your question of why wouldn’t I buy stock. The answer is that I believe that I could make more money with my cash buying land and expanding the business than I believe that I could make by buying my stock. Buying stock is kind of a one time thing I think...

Q: I think a lot of people if they ever follow you Bob and you’re buying and selling personally would have made a lot of money. And ill leave it at that.

Q: What are the worst markets out there that you guys are operating in today?

TOLL: Las Vegas market in comparison to what it had been doing qualifies for a rotten market and most recently the Phoenix market which did well for us long after everybody else said poor things about it has turned sour for us. Reminding me of Detroit… You know actually we commented this weekend we sold 5 homes in Detroit... that that’s fabulous.. who knows what’s going on in Michigan but we’ve been doing that for a couple of weeks now.. and Minnesota is definitely an F market for us.

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