Toll Brothers Q4 Earnings Call Transcript

123jump.com Staff
10 Jan, 2009
New York City

The luxury home builder fourth quarter revenues declined to $698.9 million and net loss was $78.8 million or $0.49 a share including pre-tax write-downs of $175.9 million. The company ended fiscal year 2008 with 273 selling communities and estimates to deliver between 2,000 and 3,000 homes in fiscal 2009.

Toll Brothers, Inc. ((TOL))
Q4 2008 Earnings Call Transcript
December 4, 2008 2:00 p.m. ET

Executives

Robert Toll - Chairman and Chief Executive Officer
Joel Rassman – Chief Financial Officer
Donald Salmon - President and Chief Executive Officer of TBI Mortgage Co.

Analysts

David Goldberg – UBS Securities LLC
Robert Stevenson – Fox-Pitt Kelton
Ivy Zelman - Zelman & Associates
Daniel Oppenheim - Credit Suisse
Kenneth Zener - Macquarie Research Equities
Rob Hansen- Deutsche Bank
Josh Levin - Citigroup
Michael Rehaut - JPMorgan
Stephen East - Pali Capital, Inc.
Adam Rudiger – Wachovia Securities
Josh Hamby – Artemis Investment Partners
James McCanless – FTN Midwest Securities Corp.
Alex Barron - Agency Trading Group
Douglas Kass - Seabreeze Partners Management, Inc.
Lynn Savage – KBW Management
Daniel Greenberger – Gem Realty

Presentation

Operator

Good afternoon. My name is Vonda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers'' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press “*” then the number “1” on your telephone keypad. If you have already done so, please press the “#” sign now, then press “*1” again to ensure your question is registered. If you would like to withdraw your question, press the “#” key. Thank you. I would now like to turn the call over to Mr. Robert Toll, Chairman and CEO of Toll Brothers; please go ahead sir.

Robert Toll

Thank you Vonda. Welcome everybody and thank you for joining us. With me today are Joel Rassman, Chief Financial Officer; Fred Cooper, Senior Vice President of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira McCarron, Chief Marketing Officer; Don Salmon, President of TBI Mortgage Co.; and Greg Zeigler, Vice President of Finance.

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 e-mail questions to rtoll@tollbrothersinc.com. We’ll try and answer as many as we can.

Today, we reported final results for our fourth quarter and fiscal year ended October 31, ’08. Since the release has been posted on our website I will just touch on the key results.

In fiscal year ’08’s fourth quarter we had a net loss of $78.8 million or $0.49 per share diluted which included pre-tax write-downs totaling $175.9 million. This compared to fiscal year ’07’s fourth quarter net loss of $81.8 million or $0.52 per share diluted which included pre-tax write-downs totaling $314.9 million.

Excluding write-downs, fiscal year ’08’s fourth quarter earnings were $38.5 million or $0.23 per share diluted compared to fiscal year ’07’s fourth quarter earnings of $118.2 million or $0.72 per share diluted.

For the full fiscal year 2008 we reported a net loss of $297.8 million or $1.88 per share diluted which included pre-tax write-downs totaling $848.9 million. This compared to fiscal year ’07’s full year net income of $35.7 million or $0.22 per share diluted which included pre-tax write-downs of $687.7 million.

Excluding write-downs, fiscal year ’08’s 12-month earnings were $232 million or $1.41 per share diluted compared to fiscal year ’07’s 12-month earnings of $464.6 million or $2.83 per share diluted.

Fiscal year ’08’s fourth quarter total revenues were $698.9 million compared to fiscal year ’07’s fourth quarter total revenues of $1.17 billion. Fiscal year ’08’s 12-month total revenues were $3.16 billion compared to fiscal year ’07’s 12-month total revenues of $4.65 billion.

Fiscal year ’08’s fourth quarter net signed contracts were $266.7 million compared to fiscal year ’07’s fourth quarter total of $365.3 million. Fiscal year ’08’s 12-month net signed contracts were $1.61 billion compared to fiscal year ’07’s 12-month total of $3.01 billion.

Fiscal year ’08’s year-end backlog was $1.33 billion compared to fiscal year ’07’s year-end backlog of $2.85 billion. Although we were one of just two public homebuilding companies in our industry to be profitable before write-downs and although we ended fiscal year ’08 with the highest market cap among the public homebuilders, these milestones were little consolation; they were little stones.

Obviously there are enormous challenges in our industry but the current turmoil will create opportunities. We are beginning to see some deals that are appealing in terms of quality but not price. We believe our strong capital position will give us an advantage in competing for them at the appropriate time when the price is right.

We ended fiscal year ’08 with over $1.63 billion in cash and more than $1.32 billion available under our 32-bank credit facility which matures in March 2011. We have no public debt maturing until our second quarter of 2011. Our net debt-to-cap ratio on October 31, ’08 stood at 12.6%; our lowest level ever and this compared to 26.8% at October 31, ’07.

Our stockholder equity at fiscal year ’08 end was $3.24 billion compared to $3.53 billion at fiscal year end ’07.

The most frustrating aspect of fiscal year ’08 was that the longer it went, the worse it got. This no doubt was due largely to the financial crisis which deepened over the course of the year, especially since mid-September.

Until the last month of fiscal year ’08 fourth quarter net contracts were shaping up to be about the same in units and dollars as fiscal year ’07’s. However, the preliminary signs of stability we had seen and discussed with the public in early September were upended by the worsening financial crisis.

The turmoil that ensued accelerated concerns of all kinds among potential buyers and precipitated a large decline in consumer spending, a significant capital crunch, increased credit market disruption, and plummeting stock market values. It also drove down homebuyer confidence and demand. With slower sales paces we have been cutting back on our number of communities. We ended fiscal year ''08 with 273 selling communities, down from 315 at fiscal year-end ''07. We expect to end fiscal year ''09 with approximately 255 or fewer communities, which is down 22% from 325 communities at our peak at fiscal year ''07''s second quarter end. We’ve also reduced our land position by 33% to 39,800 lots owned and controlled compared to 59,250 at fiscal year-end ''07.

We are focused on managing our investments in land and improvements and our overheads as well as we can to match our reduced demand and projected pace of production. Opening fewer new communities enables us to slow our land development expenditures and conserve cash for future opportunities. Although not spread proportionately across all our regions approximately 14,000 of our lots are substantially improved. This means we don’t need to continue to spend as much money as we otherwise would to bring these lots to market.

On the national level new single-family housing starts have sunk to the lowest level since October, 1981. Although builders have essentially eliminated spec production, the supply of unsold inventory still stands near record levels as new and existing home sales remain mired near historic lows while foreclosures add to available inventory.

Many experts have suggested that falling home prices are at the root of the current financial crisis and that stabilization of home prices will help stem foreclosures, shore up the value of mortgage backed securities, and ultimately therefore stabilize the balance sheets of the world’s financial institutions.

Two days before Thanksgiving ’08, the US government announced a plan to aid the housing market by stating its willingness to pump hundreds of billions of dollars into the mortgage market, an action that significantly lowered mortgage rates immediately. Perhaps this initiative which is a positive first step combined with already dramatically improved affordability will be a catalyst to stimulate customer demand, stop the decline in house prices, and restore confidence in the new home market. Obviously the Treasury and the Fed are not in the marketing business. Announcing a program as dramatic as this two days before Thanksgiving is not exactly great timing. I would have waited a few days and included a tax credit of up to $20,000 for new home contracts entered into before April 15, 2009. I believe this would build momentum and get buyers off the fence and into the market so we can start to stabilize home prices, reduce inventory, and put a floor under the mortgage bond market. This would strengthen the balance sheets of global financial institutions.

There are other glimmers of hope. Dan Oppenheim of Credit Suisse just published a report noting that “affordability is significantly improved and better than at any time in the past several decades. The mortgage payment on the median priced home now equates to 16.7% of median household income; an improvement of a 430 basis points since this past summer. That’s down from 25.1% when affordability was at its worst in July ’06 and well below the long-term average of 23% from 1982 to 2007.” That’s a compelling reason for buyers to get into the housing market due in part to the Fed’s new program and its impact on mortgage rates. Today there were articles in both The Journal and The New York Times, probably a lot of other papers, about a further initiative to provide mortgage loans with rates of 4.5% to people buying homes, but not for refi. A program like that would go a long way to soaking up excess inventories assuming buyers had the equity to meet program parameters. Low interest rates clearly help price affordability.

Now let me turn it over to Joel to do the numbers. Joel.

Joel Rassman

Thank you Bob. Fourth quarter homebuilding cost of sales as a percentage of traditional homebuilding revenues before interest and write-downs was 76.6%, slightly higher than 2008’s third quarter of 76.5%.

Fourth quarter interest expense was 3.1% of revenues, 20 basis points higher than 2008’s third quarter principally a result of inventory turning less quickly and less average inventory under construction over which to spread these interest costs; a trend which is likely to continue.

Fourth quarter pre-tax write-downs were $175.9 million which included $106.2 million attributable to communities or land owned, $54.4 million attributable to joint ventures, $12.1 million attributable to option as we continued to re-evaluate, renegotiate, and in other ways reduce option costs; and $3.2 million attributable to writing off the remaining goodwill associated with the two prior acquisitions.

More then 80% of the fourth quarter write-downs were in the north and the west. Fourth quarter SG&A was $96.8 million, approximately 13.9% of revenues, compared to $103.1 million approximately 12.9% of revenues in the third quarter and $120.5 million approximately $10.3 million of revenues in the fourth quarter of 2007.

Fourth quarter other income was $19.9 million including approximately $7 million of retained deposits and $7.5 million of interest income. The effective tax benefit rate was 25.7% for the fourth quarter and 36.2% for the year.

When income is negative in a quarter, small changes in state allocations or small changes in estimated audit settlements can have a disproportionate effect on the effective tax rates. The average number of shares used to calculate earnings per share was approximately 159.7 million shares for the three months and 158.7 million shares for the year.

The creation of projections is difficult at any time. In the current climate it is particularly difficult to provide guidance given the numerous uncertainties related to the entire economy, employment, and to the items such as sales prices, sales paces, mortgage markets, cancellations, consumer confidence, and the potential for future impairments. As a result, we will continue to not provide full earnings guidance. However, subject to the caveats above and those contained in our statement of forward-looking information included in today’s press release and other public filings, we offer the following guidance.

We do not expect to have any percentage of completion revenues for 2009. We currently estimate that we will deliver between 2,000 and 3,000 homes in fiscal 2009. We estimate that the average delivered price for the year will be between $600,000 and $625,000 per home.

For those of you who model quarterly, we expect that the average delivered price will decrease sequentially each quarter over the year so that the average delivered price in the first quarter may be higher than the range and the average delivered price in the fourth quarter may be lower than the range.

We believe primarily due to continuing incentives and slower sales per community our cost of sales as a percentage of revenues before taking into consideration write-downs will be higher in fiscal 2009 than in 2008.

Additionally, we believe based on fiscal 2009’s lower projected revenues our SG&A, although expected to be lower in absolute dollars in fiscal 2009 versus 2008 will be higher as a percentage of revenues.

At this point I’ll turn it back to Bob.

Robert Toll

Thanks Joel. As we look to the future we see reduced competition from the small and mid-size private builders who are our primary competitors in the luxury market. Their access to capital already appears to be severely constrained.

We envision that in the future there will be fewer and more selective lenders serving our industry. Those lenders will likely gravitate to the homebuilding companies that offer them the greatest security, the strongest balance sheets, and the broadest array of potential business opportunities.

We believe a less crowded playing field combined with attractive long-term demographics will reward those well-capitalized builders who can persevere through the current challenging environment. We thank our shareholders, suppliers, and contractors who have been alongside us during this difficult year. Most of all we thank our coworkers, the tremendously hardworking and dedicated Toll Brothers team across the United States for their great efforts.

Vonda, at this point we turn it over for questions.

Question-and-Answer Session

Operator

Thank you. At this time I would like to remind everyone, if you would like to ask a question press “*” then the number “1” on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Goldberg with UBS.

David Goldberg – UBS Securities LLC

Thanks. Good afternoon everybody. First question Bob, in the press release and in your comments you talked about seeing some high quality land come back on the market and not yet at attractive prices, so I guess the question is who are the sellers of the land that you’re seeing and what would have to happen either to home prices or to the offering prices on that land to make it more attractive to you.

Robert Toll

The offerers are banks. In both cases I have two deals in mind that came recently and I think we’re not that far apart on price. We need some terms which will make it less risky for us and of course with the terms it will be less expensive as well.

David Goldberg – UBS Securities LLC

Great. And then I guess my follow up question would really be about at the pace that you guys are selling now and with the expectation of 2,000 to 3,000 deliveries in fiscal ''09, do you think you can continue to be free cash flow positive and if so, how much sensitivity is there within that should the sales pace fall, should you not be able to hit the 2,000-delivery mark.

Robert Toll

Joel.

Joel Rassman

It’s a hard question to answer as we’ve talked about in the past. When we do our modeling we always end up starting the year saying we’re not going to be cash flow positive and end up the year over the last few years, being cash flow positive. We continually change our business plan during the year as we match production and sales. So we would think that absence write-downs we have a good chance of being cash flow positive because we have in the last few years, but at this point I can’t tell you for sure.

David Goldberg – UBS Securities LLC

Great. Thanks so much.

Operator

Your next question comes from the line of Rob Stevenson with Fox-Pitt Kelton

Robert Stevenson – Fox-Pitt Kelton

Good afternoon guys. Can you talk a bit about the jumbo mortgage market and what you’re being able to offer your buyers these days and what you’re expecting given that the 10-year Treasury is down around 2.6 and the 30-year for conventional is down under 5.5.

Robert Toll

Well, way down under 5.5 but I want to give an opportunity to Don Salmon, Head of TBI Mortgage to answer these questions. Don.

Donald Salmon

The good news is we see real glimmers of hope on the jumbo market. We just struck a deal with a major bank to supply jumbo financing for some of our condo products. We’re having terrific conversations with banks. We’re about to we think consummate a deal with a major life insurance company and we see liquidity is coming back into the market, slowly but surely, but it sure is coming back.

Robert Toll

You want to give the rates on the jumbos, Don? And on the conform --

Donald Salmon

Today on a conforming we’re at 5% and zero points. On the jumbo we are at 5 78 and zero points and we think those are terrific rates for consumers today. Those are on fixed rate product by the way.

Robert Stevenson – Fox-Pitt Kelton

And that’s the rate that you’re able to give to buyers without having Toll Brothers absorb any cost as a concession?

Donald Salmon

There are no concessions going on the HUD-1 for those rates. Those are the rates that we are offering to buyers as a regular course of business.

Robert Stevenson – Fox-Pitt Kelton

Okay, great. And then --

Robert Toll

However, rest assured that I’ve told the sales staff that through this weekend we don’t want to go quoting 0.5%, we’ll quote 4.95%. We’ll buy it down 5 bps. It would be idiotic not to for marketing purposes.

Donald Salmon

Right, we’re putting the final touches on that right now. That should cost us virtually nothing.

Robert Stevenson – Fox-Pitt Kelton

Okay and then follow up question. Bob, last time we saw unemployment hitting into the high single-digit into the low double-digits was the early 80s, if we’re going towards that level what’s from an operating standpoint do you wind up changing in the business model versus where you’re sitting today.

Robert Toll

Well, implicit I think in the question is an assumption that home sales go south, so stop me if I’m wrong, but I think what you just said is if business continues to get worse, how do you change your operations and I think the answer is you continue to cut overhead, you continue to renegotiate options, you continue to shrink the number of communities, you continue to shrink the amount of improvements that you would put into your land, you hunker down and wait for the storm to blow over.

Robert Stevenson – Fox-Pitt Kelton

But there’s no fundamental difference in how you would operate if I told you unemployment was going to peak at 8% versus unemployment was going to peak at 10% during this recession.

Robert Toll

No, I think you just go with the flow, at 8% I would assume we do less business than we’re doing at 6.5% or 7%, wherever the number is today and you would shrink your overheads and conserve your cash accordingly. The deals that you would take would be tougher for you to take. I said that wrong. The deals that you would take would be of a higher threshold too.

Operator

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

Ivy Zelman - Zelman & Associates

Good afternoon guys.

Robert Toll

Hi Ivy.

Ivy Zelman - Zelman & Associates

Maybe we could just chat a little bit more on the mortgage front, down payment, FICO scores on the 5% and the 5 78, can you give us those two please for any differential between FICO and down payment for the standard jumbo that’s getting 5 78, can I get it if I‘m a 580 credit score or obviously it’s going to be 700 plus.

Donald Salmon

No. We can do, on the conforming side the 5%, hopefully soon to be 4.95, we can do 95% financing for most buyers. There are some areas where that’s a little constrained in declining markets and that credit score generally would be in the 640, maybe 650 range. So we think that fits most buyers, certainly most of our buyers. On the jumbo side it’s typically 10% down. Again, in declining markets it might be a little bit constrained from there and again credit scores in the 660 to 680 range.

Ivy Zelman - Zelman & Associates

What about the condo market which is jumbo condo?

Donald Salmon

Jumbo condo, as we just opened up 90%, jumbo condo is for New York City and for Hoboken and we think we’re about to open up 90% jumbo condos across the board.

Robert Toll

The average delivered credit score right now is 753, Ivy. Our average LTV is 68.72%.

Ivy Zelman - Zelman & Associates

Okay. So people are not putting down 10, they’re putting down 30 you’re saying.

Donald Salmon

That’s been our history too, our average LTV for years has been in the 70% range.

Ivy Zelman - Zelman & Associates

Okay. So, one other question on the mortgage front. You have this new required use rule that is going into effect in January that HUD just passed on November 14th which would limit the use of the mortgage company’s ability to incentivize and also control the mortgage process and there’s obviously some concern on that, your comments and thoughts please.

Donald Salmon

We don’t think it’s going to affect us to any great degree. We don’t tie incentives as a general rule now. We have about two communities in the country where we’re doing it today so we don’t think it’s going to have a major impact on the way we do business.
Ivy Zelman - Zelman & Associates

Okay and then just switching gears. Bob, you guys are in again always the enviable position with such a great capitalized balance sheet yet you sit on so much land and I realize that you’re in –

Robert Toll

Want me to give it back, Ivy?

Ivy Zelman - Zelman & Associates

You were going to give it back to the guys in Vegas, remember?

Robert Toll

That''s true.

Ivy Zelman - Zelman & Associates

Let’s just assume that there’s a lot of, lot of land and that land we know you haven’t written it to zero and at some point there will be value there again some day. I guess I’m just trying to understand how do you monetize that land in an efficient, friendly, shareholder way when you’re now looking to accumulate new land and the question is if you’re trying to buy land you’re trying to reload at pennies on the dollar and get great returns, but you’re going to be just plagued with this large amount of land that’s going to hurt your returns because it used to be Toll Brothers in ’90, ’91, you wrote all these big checks and you said, you went in the RTC and it was a lot of fun, and you and Doug and all the boys had a great time because you were the only game in town and you were able to buy and reload, but now you’ve got maybe the ability to reload but you’re sitting on this burden of huge amount of land so that your returns are going to be negatively impacted for a long period of time so if I’m a shareholder and I’m looking at your stock and say okay, the book is $20, do I put an ROE of what on that because maybe Toll won’t see an ROE better then 10% because they have all this land their plagued with.

Robert Toll

Well, all the land that we have and I''ll remove the epithet of plagued with, all the land that we have we certainly examine every quarter very closely. If it’s operating land we have to write it down so as to permit us to make 10% on a GAAP basis.

Joel Rassman

That’s not true. It ends up with having a GAAP margin of much more than 10%. It’s economic thinking.

Robert Toll

My contribution to G&A, right. So we have to write it down in order to permit ourselves to make, I don’t know what the number is.

Joel Rassman

It does not work that way. It’s a discounted cash flow and I don’t give out what the -- it runs all over the place, the numbers.

Robert Toll

Okay. Land we are not operating on, we also examine every quarter and in effect do our best to mark it to market, bring it down. Unfortunately, we never get to bring it up but we bring it down according to GAAP accounting principals.

Ivy Zelman - Zelman & Associates

I realize you’re writing land down but you’re certainly not writing it down to levels that in many cases, as you’ve told me, we talked about it, there’s undeveloped land out there that’s theoretically negative residual value and you laughed and you said there’s no such thing as negative residual value, land has got value and I’ll buy it myself for 10Gs.

Robert Toll

That’s right.

Ivy Zelman - Zelman & Associates

The point is, is that at some point you’re going to have to put improvements in the ground and bring those lots to finished lots and so that’s going to negatively impact the returns when you have to do that even if you’ve written it down to $0.50 on the dollar or you’ve written it to $0.30 on the dollar, I’m just trying to understand --

Robert Toll

You may be right, Ivy, I can’t follow it if I’ve written it. In fact, I found three deals we did write down to zero. The ground is certainly worth more than zero and when we improve it, if we haven’t already and I don’t recall how many were improved of the three and how many weren’t improved, but when we improve it we hope that we’re improving it to get ourselves our normalized return. Otherwise we’ll continue to let it sit especially since it’s paid for.

Ivy Zelman - Zelman & Associates

Okay, great. Thanks guys.

Robert Toll

You are welcome. Thank you.

Operator

Your next question comes from the line of Dan Oppenheim with Credit Suisse.

Daniel Oppenheim - Credit Suisse

Thanks very much. I was wondering if you can talk a little bit about the northeast market or 42% of the backlog seems to be in the north, how much of that is the New York, New Jersey metro area and can you give us a little bit of color on that.

Robert Toll

I think most of it is, Massachusetts, not much; Connecticut is for this market doing okay. The rest of the market I would say is pretty much for slow.

Joel Rassman

The backlog is broken out in detail in the releases and in the 10-K. I think you’d be better off looking at that. It tells you by region what we have.

Daniel Oppenheim - Credit Suisse

We know it’s 42% in the north, I was just wondering how much of that specifically is the New York metro of that 42%.

Robert Toll

Oh, you wanted to know how much is New York metro?

Daniel Oppenheim - Credit Suisse

Yes.

Joel Rassman

I don’t know that we have details more than we do in our public filings.

Robert Toll

Thanks Joel. I will go with that.

Daniel Oppenheim - Credit Suisse

Okay. Thanks.

Robert Toll

You are welcome Dan.

Operator

Your next question comes from the line of Ken Zener with Macquarie.

Kenneth Zener - Macquarie Research Equities

Afternoon.

Robert Toll

Hi.

Kenneth Zener - Macquarie Research Equities

I’m interested, I guess it’s related also to the regional exposure of backlog given the broad operating margin differences where the north and the Mid-Atlantic is roughly in the mid-15% currently and the south and west is about 3%. How much of your profit yield in this or in 2009 is really defined by the mix that you guys have because obviously when you set down your business in the south and west you’d be a lot more profitable even though you have stale assets in the other segments.

Joel Rassman

I don’t think I can answer the question because I haven’t broken it out that way and we don’t give out detailed projections but in general the Mid-Atlantic area and the northeast area have been more profitable than the south and the Midwest.

But with write-downs, take into account write-downs and in fact that may no longer be true.

Robert Toll

The west is rough right now, it stinks now but when it’s hot it gets real hot. At least it has in the past.

Kenneth Zener - Macquarie Research Equities

All right. Another angle is if the Federal program, the latest Federal action actually reduces mortgage rates down to it seems to be a 4.5% range, how would that as a real estate buyer, how would that change your evaluation of land deals because obviously to the extent it is a better market, it’s more valuable asset. Could you perhaps quantify how that --

Robert Toll

You don’t value land on a ticker tape kind of experience because 10-year Treasuries have gone from 4 down to 2.6, land doesn’t go up concomitantly. It would be very foolish to do that. The way you value land stays the same which is you take a valuation off what you think you can sell homes for. Now to the extent that we stayed at a 4.5% mortgage rate for a long period of time which would (a) create demand and (b) create therefore rise in prices, the builder/developer would have to make a judgment as to whether he thought this was it permanently and value land as worth more because obviously everything is cheaper if it’s being purchased at a 4.5% rate versus a 7% rate. Or the developer/builder would sit on the sideline and say I’m not going to buy land based upon what I’m able to sell houses at with a 4.5% rate because I expect the rate will go back to the norm of the last 20, 25 years which has been I think about 8, 8.5%.

Kenneth Zener - Macquarie Research Equities

Yeah, and the reason I ask that is that although equity investors don’t treat, making a direct call on the land they obviously seem to be somewhat positively responding to these actions out of the government, so it seems to be that perhaps there’s a disconnect in your view based on --

Robert Toll

I don’t know, if the equity purchaser you’re talking about is a homebuyer, I think it makes a lot of sense, if the equity purchaser is a land fund, call them, I can’t help you.

Kenneth Zener - Macquarie Research Equities

Or a homebuilder. Thank you.

Robert Toll

Homebuilders I can help you with. Welcome.

Operator

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

Rob Hansen- Deutsche Bank

Hi, this is actually Rob Hansen on for Nishu. Since the announcement that the original plans for TARP are off the table a couple of weeks ago, have you found that this has brought any of the banks back to the bargaining table?

Robert Toll

No, we don’t see any connection. I don’t think the REO departments operate in connection with announcements of the Treasury or the Fed to help troubled banks as opposed to troubled assets. I don’t think you’re going to see a direct connection there.

Rob Hansen- Deutsche Bank

All right. And then I just want to circle back to those two lands you just mentioned, how close are you to actually completing those two deals?

Robert Toll

As close as the sellers want us to be, not close until they say yes.

Rob Hansen- Deutsche Bank

And then one last, more of a housekeeping question was, what was the benefit to COGS from prior (inaudible) this quarter?

Robert Toll

I am sorry. Could you say that again?

Rob Hansen- Deutsche Bank

Prior (inaudible).

Joel Rassman

It’s $29 million.

Rob Hansen- Deutsche Bank

All right. Thank you.

Robert Toll

I didn’t hear the question. What was the question? Oh, I got it. I am sorry, Vonda.

Operator

Yes sir. Your next question --

Robert Toll

Excuse me Vonda. I have a question from Michael Kessler at Barclays Bank, Barclays Capital I am sorry, not Barclays Bank. Can you tell me how many specs you currently have and if possible the breakdown between finished and unfinished specs?

We count a spec at the point where we drop lumber and we don’t keep track of them differentiating between those that just have lumber, those that have a roof, those that are closed in, and those that are finished so I can’t give you that.

And on our specs, on the ordinary communities, on single-family jobs we have 527 specs which means homes with lumber. I would say probably all but 10 or 11 of those became specs when people walked away from their contracts and since we have about 275 communities operating now, you’re about two per community on average for those singles. Thank you. Vonda.

Operator

Yes sir. Your next question comes from the line of Josh Levin with Citi.

Josh Levin – Citigroup

Hi, good afternoon.

Robert Toll

Hi.

Josh Levin – Citigroup

I was curious, over the past few months have you run specials where you’ve sponsored a material buy down of mortgage rates and if so, how much of those buy down specials had in bringing on additional buyers?

Robert Toll

I didn’t understand the second part, I am sorry. The first part is no, we haven’t had special buy down mortgage promotions, when we buy down a mortgage we pretty much permanently put it in that, well not permanently, but we put it into play for a period of time that is generally a couple of months.

We don’t buy down a mortgage for a week then. We haven’t done any recently now because the rates have been fairly low recently so there’s been no reason to buy down. I am sorry. I didn’t hear the second part of your question.

Josh Levin – Citigroup

No, you answered that. Let me ask my next question. Who’s the marginal buyer of a Toll home these days, is it somebody who has to move because of personal circumstances, or is it somebody who voluntarily wants to trade up into a Toll home?

Robert Toll

For the most part it’s the latter. I remember speaking to one of our sales managers, I said, Yvonne, you don’t seem to have the traffic necessary to develop the deposits, what can I project out of the community and Yvonne said, well that’s the case, she said but I’m working on two people and it’s not a matter of whether they’re going to buy, they are definitely going to buy. It’s just a matter of how long it takes me to push them over the line. So that pretty much sums up the average Toll Brothers, the most numerous Toll Brothers kind of client, and the short answer was the latter.

Josh Levin – Citigroup

Okay and my final question. If the Treasury comes out and actually officially adopts this plan and rates were lowered to 4.5%, I know this is hard to answer but what would be your guess best before how long it would take for the lower rates to translate to increased traffic and sales.
Robert Toll

You know what; I think that it depends on the marketing of those rates by the government. The builders of course will jump up and down and logically will argue the greatest rates since the Second World War which they would be, but I think you still have to overcome the lack of confidence.

If I come to you and that’s what has the entire economy seized right now, not just for homebuyers but for stock analysts, hedge fund operators, mutual fund operators, etc. we are all under the log right now, we’re scared.

So, I think it very much depends on how it’s marketed which is why I emphasized if government came forward with an increased tax credit program in conjunction with this lowered mortgage rate and said we are clearly calling the bottom. If you have the inclination to buy a new home, have the credit rating to enable yourself to do it, and have the capital for a down payment to permit you to do it, if you don’t do it now you are crazy. If they call the bottom there is a good chance that we get this economy rolling again because I believe the economy is stopped, clogged, due to the non-ability of the price, all the mortgage-backed securities and CMBSs that are out there.

But unfortunately I can’t give you a direct answer to the question; I can only give you what I’ve just done.

Josh Levin – Citigroup

That’s great. Thank you very much.

Robert Toll

Welcome.

Operator

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

Michael Rehaut – JPMorgan

Hi, thanks. Good afternoon everyone.

Robert Toll

Good afternoon.

Michael Rehaut – JPMorgan

First question, this might be tough to answer but I do know that you monitor traffic and orders pretty frequent, I believe weekly.

Robert Toll

That''s correct.

Michael Rehaut – JPMorgan

If you have in fact seen any type of pick up in traffic and orders in the past week, Thanksgiving weekend I guess, long weekend, given that the rates started to come down a couple of days before Thanksgiving.

Robert Toll

No.

Michael Rehaut – JPMorgan

So no noticeable difference there?

Robert Toll

Correct.

Michael Rehaut – JPMorgan

Is Thanksgiving a weekend that you would get some level of traffic?

Robert Toll

No, Thanksgiving is traditionally one of the deadest weekends of the year. It’s up there with Christmas and New Year. So it’s three dead weeks, Thanksgiving, Christmas and New Year’s.

Michael Rehaut – JPMorgan

Okay.

Robert Toll

And this was true to form.

Michael Rehaut – JPMorgan

And the second question I had and maybe for Don Salmon, I forgot his first name, I apologize, the Head of TBI. He had mentioned that you started to see a little bit of liquidity coming back into the market and that you were getting close to signing a deal or two and one was with a life insurance company.

Robert Toll

No, I didn''t say. You did. You said. Oh, you''re talking about mortgages. I thought he was talking about land buys. Yes, yes, you''re right. Go ahead.

Michael Rehaut – JPMorgan

So my question was more that that doesn’t necessarily seem a traditional route in terms of securing financing. I would assume that more traditionally it might come from the banks and money centers and just wondering if that is the case and you’re saying some liquidity is coming back, but what are your level of discussions I guess with the more traditional banks, are they just not as much a part of the picture right now in terms of participating in some of these facilities.

Donald Salmon

With the banks we’re seeing more targeted and localized activity. Banks are getting smarter about their business policies and actually going after customers as opposed to going after assets and that’s one of the real advantages that we have that our customer is highly attractive to these banks because for the most part, they’re affluent people.

In terms of more traditional, life companies have traditionally been buyers of mortgage-backed securities and mortgage bonds. This particular company I think is getting smarter because they are buying directly from the high quality producers so they know exactly what’s in the assets that they’re buying as opposed to the nebulous MBSs that were out there in the past.

Michael Rehaut – JPMorgan

Okay. Thanks for that and then just one last one. When you had answered a question earlier about FICO scores and LTVs that you were able to offer a conforming at only 5% down and a 640, 650 FICO, that doesn’t jive as much as what we’ve generally been hearing in terms of the availability of credit particularly at those types of rates and I was wondering if and certainly your average customer doesn’t necessarily fit that type of profile, I was wondering how often that actually occurs that you do have that situation where a 650 or 640 FICO needs only to put 5% down to get that type of rate for your type of home.

Donald Salmon

Generally, it’s the first time homebuyers who are looking for the higher leverage and often they’re also the ones with the lower credit scores. So if you look at some of the entry level condo communities for example, those would be the ones that are looking for that type of financing, and the fact is that FHA is very attractive to those folks because its only 3.5% down and their credit parameters are much more relaxed than those of the MIs.

Michael Rehaut – JPMorgan

Okay. And how much of FHA do you do actually?

Donald Salmon

We’re just beginning to do a fair amount of FHA, I think in the end of the year we have eight or 10 FHA loans closing and if you look at over the last five years we might have closed three in those entire five years. This year for the entire fiscal year we might close 20 of them but we expect that piece of the business to grow next year.

Michael Rehaut – JPMorgan

Okay. So growing but still you’re talking about 1% or something in that order.

Donald Salmon

It helps us move some marginal units to people who couldn’t get in under the current conventional parameters and we’re thrilled to have it but it’s not something that we think is going to be a major part of our business going forward.

Michael Rehaut – JPMorgan

Okay, great. Thank you.

Donald Salmon

You are welcome.

Robert Toll

Thanks Don. Vonda, I have a question from Jim Meyer. Is this the Jim Meyer, an old buddy? It is, good. Hi Jim. Bob, over the next several years as your business hopefully returns to normal how will the structure of your balance sheet differ from what it was in the early 90s? Who remembers what the balance sheet was in the early 90s? Do you Joel?

Joel Rassman

We probably had leverage around 45%, maybe 50%.

Robert Toll

That’s all? Oh yes, because we were coming out of bad times. Will you still buy and develop land in the same manner you did in the past?

The answer is yes, but we have to selectively pick that period of the past, we hope it isn’t the recent past.

Will you change the way you handle land?

Again, we hope to handle land the way we did when we were enjoying profits as opposed to getting kicked as we are recently.

Will your future leverage ratios be different than what they were five years ago?

I hope that they go up. Nothing the matter with 40%, that would mean I’m back in business. Yes, I would think that would be about where we want to be, about where we were five years ago. What was that?

Joel Rassman

The high point was 53 when we were booming and growing at 100% a year. So we’d be I guess 40.

Robert Toll

In the 40s, right and that would make the most sense.

Maybe the question should be, have you learned any long-term lessons through this housing crisis?

Yes, of course we’ve learned some lessons. Although I swore we learned these lessons in ’88, ’89, ’90 but apparently they didn’t sink in. We hope that this time they do. Thank you Jim.

Vonda, I have questions from James Grouse. Please answer one or more of the following if you could. That''s good. Like a multiple choice exam. Why would you imply that Toll is looking to acquire assets but they are priced too high and yet Toll hasn’t devalued its own assets?

We have devalued our own assets. And what Joel?

Joel Rassman

$1.676 billion --

Robert Toll

We’ve devalued.

Joel Rassman

-- since the start of the write-offs, $1.676 billion.

Robert Toll

Now that includes however predevelopment costs.

Joel Rassman

That includes everything.

Robert Toll

Everything. So we haven’t devalued our assets $1.676 billion but I’ll bet it’s about $1.5 billion and the rest are options walked away from or predevelopments.

And why buy more when your own future is so unclear?

We hoped our future wasn’t so unclear and we hope you’re wrong about that, but if you’re right then we’re wrong and I can’t say more than that.

And then question two, clearly the government does want to make cheap mortgage money available to folks buying homes over $500,000. That''s not clear to me. How would this program benefit Toll?

Joel Rassman

Incentive our buyers, our jumbo conforming into a conforming so --

Robert Toll

Obviously, if they make the mortgage cheaper and they make the mortgage money higher that’s going to benefit America’s luxury homebuilder. Our buyers have to sell their own home so that helps them buy our homes, right.

With rising unemployment and slowing economy, tighter lending restrictions and the government playing every card and then some to prop up the economy, where are the new Toll buyers going to come from?

We’ve been in this down market for three and a third years; the difference this time is that this has been a much more severe downturn, so much so that we are at risk of entering a depression and I think the government and the congress and most out there recognize that, and if we’re going to make a mistake we’re certainly going to make it on the side of over priming the pump rather then under priming it because when a pump is under primed you get no water out of the pump. If it’s over primed, you just get the water that much faster with more volume. Our buyers are going to come from where they’ve always come from, the demographics haven’t stopped. People haven’t stopped moving to the United States. Quite a bit of wealth has been accumulated over the last five to 10 years and still is, although we’ve all gotten slaughtered in the last 10 weeks, so we’re going to need some return of that equity to the market, and some return of confidence to our clients. Thank you James. Vonda, have you got a question?

Operator

Your next question comes from the line of Stephen East with Pali Capital.

Stephen East - Pali Capital, Inc.

Good afternoon.

Robert Toll

Hi Stephen.

Stephen East - Pali Capital, Inc.

Don, one quick question going back to mortgages again, what percentage of your total deliveries are Fannie/Freddie conforming in all ways not just jumbo conforming but below the cut off?

Donald Salmon

A little over 80% of total deliveries qualify for sale in Fannie Mae.

Robert Toll

He wants it without agency jumbos.

Donald Salmon

Your question was combined, right?

Stephen East - Pali Capital, Inc.

No, without the jumbos.

Donald Salmon

I don’t have the number in front of me but I’m going to speculate it at over 75%.

Stephen East - Pali Capital, Inc.

Okay and then along those lines, I know we haven’t seen all the details of the Treasury plan but is it your interpretation that jumbo conforming would probably fit the program and get the low 4.5% rate?

Donald Salmon

I don’t know the answer to that. There hasn’t been anything that I have read that’s addressed that.

Stephen East - Pali Capital, Inc.

Okay.

Robert Toll

There is nothing printed, but I would think it would. Logic tells you that they’ll probably do what they’ve done in the past which is buy what the GSEs put out so to the extent that GSEs put out 625s as agency jumbos, they’ll back the mortgage up to 625.

Stephen East - Pali Capital, Inc.

I hope the logic holds because so far it seems to confound them on that. If we look at land spend for ''09 I know Joel in the last conference call you said we have a lot of -- we don’t know what the number is going to be because there may be some opportunistic purchases and Bob, you just talked about a couple of them, if we ignore that and what you need to take down and what you need to develop to get between 2,000 and 3,000 units delivered and 255 communities, what do you think your land and development spend in ''09 would be?

Joel Rassman

The land for those deliveries we already own and there’ll be some improvement costs that may have to go in for the deliveries at the last half of the year but, on some communities, I don’t know what the number is but for the 2,000 to 3,000 range we already own that land and it’s primarily approved.

Stephen East - Pali Capital, Inc.

Okay, all right. And then the last thing, Bob, earlier the conversation about you have a significant amount of land and if you go and take advantage of these opportunities that you see your returns could really be depressed for a long time, I guess I want to come back and revisit that because I think the fear out on the street is, is that you have a significant amount of land that’s enough to last you for years even in a good growth scenario. The more you bring on, something has to give, either you delay bringing the current land that you own to market or the land that you just bought is very far out in the future before you monetize it.

Robert Toll

There’s a third possibility. The third possibility is that we’ve evaluated, that we can sell in the current market, depressed as it is, at enough of a price, at enough of a pace to make a very good or acceptable return on that new land acquired.

Stephen East - Pali Capital, Inc.

Okay. And when you look at potential big purchases that are coming along, do you look at it from the perspective of hey, we already have this land, if we bring this on we will have issues with running this off and it will really compress our returns or do you not look at it that way.

Robert Toll

We look at it every way that we can, of course.

Stephen East - Pali Capital, Inc.

Okay. Thanks a lot.

Robert Toll

You are very welcome.

Operator

Your next question comes from the line of Carl Reichardt with Wachovia.

Robert Toll

Hi Carl.

Adam Rudiger – Wachovia Securities

It’s actually Adam Rudiger on for Carl. I have two questions but one is just for housekeeping. If you could break out the owned versus optioned lots?

Joel Rassman

About 80% is owned and 20% is option, so about 32,000 or so.

Adam Rudiger – Wachovia Securities

Okay. And then my second question is I wanted to ask you your thoughts about the entry-level market and how that recovery will relate to the recovery and kind of the move up luxury markets. Do you think that those segments can all recover at the same time or do you think that we’ll need to see a recovery in the entry level market before we can really see the move up in the luxury market recover?

Robert Toll

We hope the latter is not the case but there’s a good logical argument for it. Certainly, there will be a concentration on the entry-level markets by the congress, the Treasury and the Fed to a certain extent. There always is. In the past, if it’s any indication of the future, the luxury market has recovered right along with the entry level market and we would think that would be the case this time as well.

Adam Rudiger – Wachovia Securities

Okay. Thank you.

Robert Toll

You are very welcome. Vonda.

Operator

Yes sir. Your next question comes from the line of Josh Hamby with Artemis.

Josh Hamby – Artemis Investment Partners

Good afternoon guys.

Robert Toll

Hi Josh.

Josh Hamby – Artemis Investment Partners

I was hoping we could revisit the undeveloped land that you’re currently not operating on, can you discuss a little bit your methodology for how you’re marking those assets. I’m assuming you’re not marking them as if you were just going to blow them out as tracks to other developers.

Robert Toll

Well that’s correct. Joel.

Joel Rassman

We do the same process that we do for operating communities, which is that we look to see when those communities will be open for sale. We estimate the selling price of those units and the pace based on today’s information with whatever changes we think need to be made to that and then we, if it doesn’t recover its costs we then present value, its cash flows down to a write-off.

Obviously, the longer out it is for a job to start and finish the bigger the potential write-down is on that piece of ground and when you then start selling it, a potentially bigger margin you would have when you start to sell.

Josh Hamby – Artemis Investment Partners

That’s really my question because obviously there’s a lot of sensitivity to when you develop and sell and I wanted to know do you guys, are these conservative assumptions in your view as to when, basically the plugs that you’re using to calculate the values of this undeveloped land, are you feeling you’re conservative or what’s realistic or --

Joel Rassman

We believe we are reasonably conservative but within reason so you don’t want to take write-downs to zero when it is worth more.

Josh Hamby – Artemis Investment Partners

Now say Q1 since the end of Q4, can you discuss a little bit your pace of sales and signed contracts and expected profit margins on those deals based on what you’re seeing.

Robert Toll

I don’t think so. Joel.

Joel Rassman

No, I don’t think so.

Josh Hamby – Artemis Investment Partners

Final question is, I am not sure if you guys commented on share price or not, but can you, if you do I’d love to hear if you feel the market is fairly valuing your shares and if not, if you are planning on any selling?

Robert Toll

I don’t think we do care to answer that question. We don’t opine on whether we think the price of the stock is fair.

Josh Hamby – Artemis Investment Partners

Or if you’re selling.

Robert Toll

Thank you.

Josh Hamby – Artemis Investment Partners

Thanks guys.

Robert Toll

Thank you.

Operator

Your next question comes from the line of James McCanless with FTN Midwest.

James McCanless – FTN Midwest Securities Corp.

Hey, good afternoon. I wanted to ask if the mortgage liquidity that we’re seeing right now is not a flash in the pan and that rates stay down, etc. Is there any thought to potentially expanding the product mix, making it a little bit richer mix i.e. more higher end single family units rather than attached or anything of that nature?

Robert Toll

No, not really. We look at every opportunity opportunistically and try and set track up or land up for the highest and best use, for the highest return and that wouldn’t vary on a planned basis, strategic basis. It varies on the basis of what we think is the best opportunity for the land.

James McCanless – FTN Midwest Securities Corp.

Okay and then I also wanted to find out I think you made reference to in the commentary or on the release about more competitors falling out, are you still seeing the competitive field, the small and mid-size builders continue to see people falling out in that market? Is it getting to be more clear?

Robert Toll

Yes, unfortunately and fortunately that is the case.

James McCanless – FTN Midwest Securities Corp.

Okay, great. Thank you.

Robert Toll

You are very welcome. Vonda.

Operator

Your next question comes from the line of Alex Barron with Agency Trading Group.

Alex Barron - Agency Trading Group

Hi Bob and Joel.

Robert Toll

Hi Alex.

Alex Barron - Agency Trading Group

I wanted to ask you about your impairments, I think about a quarter or so ago you guys said you had about 15,000 or so finished lots, and I was just wondering how many of those lots have been impaired and how many of the undeveloped lots have been impaired?

Robert Toll

I haven’t got that info for you, I’m sorry.

Joel Rassman

We don’t do it that way. Each community is looked at separately and some communities you have both finished, improved and unimproved lots and they would both be impaired and we don’t break it out that way. Sorry.

Alex Barron - Agency Trading Group

How about if you just tell me then how many, what percent of your communities have been impaired at least once?

Joel Rassman

One hundred and eight-five communities have been impaired at least once.

Alex Barron - Agency Trading Group

My second question has to do with joint ventures, so I guess this quarter you guys took a $54 million or so write-down but your investment and the balance sheet seem to have gone up sequentially, so can you elaborate on what’s happening there and where you took those JV impairments this quarter.

Joel Rassman

We won’t elaborate other than the region where we took write-offs but we did have a new joint venture that we entered into where we owned some land and a land bank owned some land and we combined the two together into a joint venture. So that land came from land owned and went into a joint venture as compared to just stated land owned. There was no new cash that went out and it was just an asset we moved to a different classification.

Alex Barron - Agency Trading Group

Okay. So it was owned and then it went to a JV?

Joel Rassman

That’s correct.

Robert Toll

Right.

Alex Barron - Agency Trading Group

Okay and you said you could or couldn’t elaborate on the geography where you took the write-down.

Joel Rassman

We gave you that it was the north and the west. I don’t think we ought to go into individual states. We made a determination to keep our disclosure to what’s public in that area.

Alex Barron - Agency Trading Group

Okay and if I could ask one last one, what was the benefit from impairments to gross margins this quarter.

Joel Rassman

We just said about $29 million was the estimate that we recovered into the gross margin line that were previous impairments.

Alex Barron - Agency Trading Group

Right. Okay. All right. Thanks.

Robert Toll

You are very welcome. Vonda.

Operator

Your next question comes from the line of Doug Kass with Seabreeze Partners.

Douglas Kass - Seabreeze Partners Management, Inc.

Hey Bob, how are you?

Robert Toll

Great. How about you?

Douglas Kass - Seabreeze Partners Management, Inc.

Good. Thanks. I have two quick questions. I was struck by a number in the release, the average selling price of your cancelled units in the fourth quarter rose from 606,000 in the third quarter to 785,000, my question was, was there any concentration with regard to community exposure or regional exposure in those high priced cancelled units.

And the second one, as you used the word feshlook (ph).

Robert Toll

That was fishlook.

Douglas Kass - Seabreeze Partners Management, Inc.

Fishlook. My grandma Colfax would say that you probably either meant verkac or fresh pumpkin.

Robert Toll

It could have been fermished and verchoten (ph) is where we are right now. So I think we are back to fishlook.

Douglas Kass - Seabreeze Partners Management, Inc.

That is clear. Thanks for clarifying it.

Robert Toll

You''re very welcome.

Douglas Kass - Seabreeze Partners Management, Inc.

The question?

Robert Toll

What was that question? Oh, yes, he wanted to know, the question is, is there any specific region.

Douglas Kass - Seabreeze Partners Management, Inc.

Community or region of the country that community is at the higher average price.

Robert Toll

Community given towards the higher cancellation, higher price cancellation.

Joel Rassman

If you looked in the disclosure, I think you see it’s in the north, the higher priced communities in the north and the west that caused us --

Robert Toll

That is what I thought. I remember it as being the west.

Douglas Kass - Seabreeze Partners Management, Inc.

Thanks Bob.

Robert Toll

We had some northerns, that''s right. I remember where they came from.

Joel Rassman

Had this question apparently three or four times and all those gentlemen said we don''t have to waste our time on the conference call since we''ve had it four times now. We probably should.

Robert Toll

Oh, I am sorry. We have to address this, you didn’t want to waste time on the call, but looking at fourth quarter ''08 preliminary release of 11/11 you guys said you had 46,000 lots owned and optioned at fiscal year 2008, today’s release puts the same at 39,800, what is the difference between these numbers. Very good, guys. You are on the ball. And difference in these numbers is --

Joel Rassman

We had thought we had renegotiated a number of options to levels that we would be willing to stay in the options. It is now our estimate that it is less probable that we will ever close on those deals that are still under option.

Robert Toll

We may but I thought it was at a point where we would tell ourselves and those who are negotiating with us that these are not our lots. We paid our price and we default our deposits and these lots are no longer ours and we made that evaluation obviously between the last release and this release and should negotiations dictate a change then we’d have to go about putting them on in a different way but for now these lots are as far as we’re concerned gone. Vonda.

Operator

Your next question comes from the line of Lynn Savage with KBW Management.

Lynn Savage – KBW Management

Hey, thanks guys. I was just hoping you can reconcile the guidance for ''09 as an average delivery price of 600 to 625. In the fourth quarter the net sign was 495 so can you just talk me through how we get back to the higher average price.

Joel Rassman

You have to look at gross signed, not net.

Lynn Savage – KBW Management

Can you give me an apples-to-apples comparison?

Joel Rassman

Do you remember the gross signed? It is like 600,000? Gross signed was 582, so you’ve got a backlog of about 647 and you have gross signed at 582, when you blend them all together we think we’ll be in the 600 to 625 range and the reason we gave you the guidance which says it’s going to start higher is because that’s going to come more from the backlog and the stuff at the end of the year will come more from the closings that we signed in the fourth quarter.

Lynn Savage – KBW Management

Right. And your average cancelled price this quarter was a lot higher at 785, so is there an assumption in that 600 to 625 number that we stop seeing that dynamic where the average price has a higher cancellation?

Joel Rassman

It’s assuming that cancellations will be historically spread among the company in normal proportions and --

Robert Toll

I would tend to answer; the answer is yes to a certain extent, yes.

Lynn Savage – KBW Management

Can you just talk through that? Why are we seeing that higher price?

Joel Rassman

You have fluctuation from quarter to quarter. Some quarters it’s been very close to the same number and some quarters it’s been higher. As the average product point that we offer goes down and the backlog is higher you would expect that some cancellations coming from the backlog, that average cancellation has a higher price than the average --

Lynn Savage – KBW Management

So you’re saying this quarter is just sort of random fluctuation or is there something else going on, any other dynamic that we’re --

Joel Rassman

Not random but there are communities that are higher priced that had lost agreements.

Lynn Savage – KBW Management

Right. I’m just trying to understand, the higher price can’t get the mortgage you think, or is it just sort of, I’m just trying to figure out why --

Robert Toll

No, for the most part it’s not the mortgage. It’s that they’ve decided that the market has gone south and that they don’t want to go with it.

Lynn Savage – KBW Management

But more so than the lower price, do you know what I’m asking? Like more sort of -- ?

Joel Rassman

It’s not, it’s older deals that had, chance is the market changed in the deal that other people who have had that problem.

Lynn Savage – KBW Management

Got you. Okay. Thanks guys.

Robert Toll

Thank you.

Operator

Your next question comes from the line of Daniel Greenberger with Gem Realty.

Daniel Greenberger – Gem Realty

Hey guys. Thanks. This is just sort of echoing the last call. Can