托爾兄弟 (TOL) 2011 Q1 法說會逐字稿

Welcome to Toll Brothers First Quarter 2011 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.

(Operator Instructions)

Thank you.

I will now turn the call over to Mr.

Douglas Yearly, CEO.

Please go ahead, sir.

Thank you, Charday.

Welcome, and thank you for joining us.

I'm Doug Yearly, CEO, and 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 Greg 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 e-mail questions to rtoll@tollbrothersinc.com .

At the suggestion of several of you we are going to reduce our prepared remarks to provide more time for Q&A.

Since our detailed release has been out since early this morning and is posted on our website, I'm sure you have all read it, so I won't reread it for you.

For the third consecutive quarter we achieved a modest pre-tax profitability on a pre-writedown basis.

Compared to last year's first quarter, revenues were up 2% in dollars and down 4% in units.

Net contracts were up 5% in dollars and 4% in units, and our backlog was down 2% in dollars but up 1% in units versus fiscal year 2010's first quarter.

On a per community basis, contracts were the highest for a first quarter since fiscal year 2007, but still less than 60% of the average for the last 10 years.

Cancellation rates are back down to historic norms of about 6% to 7%.

We continue to focus on building our land position and growing our community count as we position the Company for the recovery.

We spent about $132 million on land this quarter.

This comes on top of $420 million of land purchases in fiscal year 2010.

Our lot position is up about 13% from one year ago.

We ended this first quarter with 200 selling communities and expect to end fiscal year 2011 with between 215 and 225 selling communities.

In addition to investing in land for Toll Brothers, we, through our wholly owned subsidiary Gibraltar Capital and Asset Management, continue to selectively review a steady flow of new opportunities.

These have included FDIC and bank portfolios and other distressed real estate investments.

We have the balance sheet and liquidity to continue to take advantage of future opportunities.

We ended the quarter with $1.1 billion of unrestricted cash and marketable securities and nearly $800 million available under our $885 million credit facility.

Our net debt-to-capital ratio remains low at 17.6%.

Although consumer confidence continues to improve, the market is still tough.

The home buyer is still wary.

We are encouraged that the Metro Washington D.C.

to metro Boston corridor, especially our metro New York City urban projects as well as Texas, are improving.

Combined these markets represent almost 70% of our backlog.

Although it is too early to judge the spring selling season, we are encouraged by the first week of our national sales event.

Deposits this week were up 15% gross and 9% per same-store versus last years national sales event.

Let me give you some examples of recent successes.

Last weekend we held a grand opening at Stratland Estates in Phoenix where 114 people toured our model, resulting in four deposits and two agreements.

Phoenix has been a very tough market, but where we have recently bought land at the right price and with new products, the market has reacted favorably.

At Reserve at Estero on the West Coast of Florida, we took 15 deposits this past week.

Under our City Living brand, urban New York continues to show strength, as we took 10 deposits and three agreements at Maxwell Place in Hoboken and six deposits and five agreements at Northside Piers in Brooklyn this past week.

These two buildings combined have taken 41 deposits and 26 agreements in the last eight weeks at an average price of about $1 million.

And high end move up homes continue to sell well in certain locations.

We took four deposits and five agreements at Woodlands at Ridley Creek outside of Philadelphia this past week.

The community has taken 25 agreements since it opened five months ago at an average price of $750,000.

Now let me turn it over to Marty Connor, our

Thanks, Doug.

First quarter homebuilding cost of sales before interest and writedowns as a percentage of homebuilding revenues was 77.5% compared to a revised 81.7% in 2010's first quarter.

2010's fourth quarter was a revised 78.6%.

As noted in the press release, in Q1 2011, we revised our accounting for excess subsidies to our mortgage Company and reclassed those excess subsidies out of other income to cost of sales, a reduction of cost of sales.

Our margin improvement of more than 400 basis points from Q1 '10 to Q1 '11 was due predominantly to reduced incentives, closeout of certain lower margin communities, and cost savings driven by our regionalization of subcontractor trade purchasing.

First quarter interest expense included in cost of sales was 5.4% of revenues, about 10 basis points higher than a year ago and 30 basis points higher than our previous quarter.

The increase was caused by inventory being held longer and mix.

The first quarter pre-tax writedowns of approximately $25.1 million included $5.5 million attributable to operating communities, a recovery of approximately $400,000 attributable to options, and $20 million attributable to joint ventures.

First quarter SG&A at approximately $62.4 million was lower than the $73.4 million in the fourth quarter of 2010 and down 20.8% from the $74.5 million in the first quarter of 2010.

Q1 2011 SG&A benefited from $6 million in insurance proceeds and other accrual reversals.

Direct interest expense included in SG&A, or formerly included in SG&A, now on a separate line item, in Q1 2011 declined to $1.1 million from $4.2 million in Q4 2010 and down from $7.3 million in Q1 2010.

Qualifying inventory continues to grow as a percentage of outstanding debt resulting in less direct interest expense.

First quarter other income and income from JVs excluding impairments was $13 million, reflecting the strong performance of our urban New York City and Hoboken, New Jersey joint ventures.

I want to remind you that because we are in a fully reserved position on our deferred tax assets, we do not see much tax impact from operations in our income statement.

We will continue to establish and reserve against deferred tax assets for book income or book losses, but we will also accrue for interest and penalties and on certain tax positions and release reserves established under FIN48 upon statute expiration or resolution with tax authorities.

In the first quarter, we recognized the tax benefit of $21.7 million related to the resolution of some tax uncertainties.

It was offset by $1.2 million of accrued interest and penalties resulting in our net tax benefit of $20.5 million.

The average number of shares used to calculate EPS was approximately 168.1 million for the first quarter.

Subject to our normal caveats regarding forward-looking statements in today's release and in our SEC filings, we offer the following limited guidance.

We ended first quarter 2011 with a backlog of 1472 homes, aggregating $826.2 million, which was 1% higher in units and 2% lower in dollars than the first quarter of 2010.

As a result, we expect that deliveries in 2011 will be between 2200 and 2800 homes.

We still estimate the average delivered price per home to be between $540,000 and $565,000.

We estimate absolute dollars expended for SG&A in the remainder of fiscal '11 to be relatively consistent with the total expended in the final nine months of fiscal year 2010.

We expect that qualifying inventory will approximate debt and therefore will have little to no interest directly expensed going forward.

And although we are not providing quarterly guidance, we do note that we normally deliver fewer homes in the second quarter than in the third and fourth, and we expect that this will continue in '11.

At this point I'll turn it over to Bob.

Thanks, Marty.

The industry needs to string a few good quarters together to give buyers more confidence.

Improved confidence will pull customers off the fence and into the market, creating volume and pricing power.

We are cautiously optimistic as we head into the spring selling season with the emphasis on cautious.

While some data suggests an improving economy, many customers remain hesitant.

We were encouraged by yesterday's Conference Board release of its consumer confidence index for February, which hit a three year high due to growing optimism about the near-term future.

The confidence index showed improvement in consumer outlook in both the present situation index and the expectations index.

During the past few years, the industry has naturally put very little ground through the approval process.

We believe demand is increasing somewhat in certain markets and that eventually this demand will bump up against constrained supply.

When this happens, we foresee happier days ahead for those homebuilding companies with reputations intact and the capital and home sites to meet that demand.

In the current debate about the future of governmental support for housing, we urge all involved to remember that new housing is one of the largest job creators and especially one of the largest manufacturing job creators in our nation.

The ancillary purchases it generates, furniture, appliances, drapes, landscaping, et cetera, have a dramatic multiplier effect on employment and economic growth.

Let's not pull the new rug out from under the new house before it's built.

Now let me turn it over to Doug.

Doug?

Thank you, Bob.

Charday, we're all set for questions.

(Operator Instructions)Dan Oppenheim with Credit Suisse.

Hi, it's actually Mike Dahl on for Dan.

First question.

Interesting the comments about the or, I guess, just the accounting on switching the methodology there and was curious how much would that have impacted the 1Q 2011 numbers, so if you had not made that change?

Do you know what the dollar number is?

We'll be right with you.

And also, I guess, while you're looking that up, what was driving the change for that?

Is this -- ?

It would be about $2.3 million and within the past several years we increased the fee.

Mortgage was charging homebuilding.

For the first time in '10 this fee, because of the spread increases that mortgage was able to get and the capture rate increases that mortgage was getting was greater than the related cost it was supposed to cover.

So as we looked at that in 2011 and it continue, we thought it appropriate to revise our classification and move that fee out of other income up as a reduction of cost in sales.

Got it.

Okay, and then second -- .

It wasn't really a cost to Toll Brothers, Inc.

The second question just, I guess, bigger picture.

We've all had a couple weeks now to review kind of the initial Treasury proposals on GSE reform.

Just wondering what your thoughts are there and maybe you can remind us all kind of at what percentage of your closings would actually come from what the new jumbo loans might be if the limits come back down.

Don Salmon?

You should jump in.

Don is head of TBI Mortgage Co.

If the limits drop to 625, which I think is the most popular proposal, that will impact about 3.8% of our home sales.

In units.

In units, right.

Don, as long as you've got the floor, why don't you recap mortgage business for the last quarter.

Sure.

Just to put it in perspective, about 72% of Toll Brothers buyers got conforming loans and that's up to the 729 limit.

And remember, the 729 is only in selected markets.

About 10% of our buyers got true jumbo financing and about 18% paid cash.

Of the type of loans that we did, we closed about 414 loans in the quarter, that's TBI Mortgage, 99.3% of those were prime.

We only did three high quality Alt A loans.

Most of the self-employed people, we did zero sub-prime loans.

Credit scores remain very strong.

Overall credit score in the portfolio for loans closed in the quarter was 759.

Thanks, Don.

Charday?

David Goldberg with UBS.

The first question I had, Doug, in some of the comments you made in the beginning about some of these communities coming online where you have right product, right location, I'm wondering if you guys are raising prices?

Sounds like you're achieving a pretty good sales rate and I'm just wondering about the price sensitivity of buyers at those communities, if you're finding opportunities to raise prices and how you're kind of balancing raising prices with the sales pace given that it seems like demand for some of those products is pretty robust?

Well, in isolated locations we do have some pricing power, but today it's quite limited.

It's still a buyers market.

Right now, we're in the middle of a major national sales event.

We did the same thing last year and the event is supported by our vendors.

Our major suppliers are throwing in upgrades for a 10 day period of time and we're having great success, as I mentioned earlier, but the pricing power is limited.

We're seeing some of it in urban New York.

We're seeing some of it in the corridor of D.C.

through Boston that we've mentioned, a little bit in Texas, but for the most part, we're not having any problems where we have to raise incentives.

I think we're clearly off the bottom and I don't think an increase in incentives is necessary today, but the ability to push price is pretty limited right now.

It's also limited, David, by our own fear.

About a year ago from January up to May, we were feeling our oats and thought things were pretty well cured and we pushed prices and then found out that at the end of May and beginning of June that we had gotten way over our, way out front of our skis and we had to pull back.

So this time around we're being more cautious because we don't want to kill the goose.

Got it and thank you for the detail.

The second question I had and realizing you guys don't really break into the JV charges and how it kind of separated, but I'm just trying to make sure I understand.

The $20 million charge was that primarily related to Inspirada and with that, did you effectively just consolidate the land that you might have to take and then taking impairment tests on it relative as though you had fully consolidated the land.

Is that effectively what happened in the transaction?

David, we generally don't comment on matters in litigation or specific joint ventures.

South Edge is an increasingly complex situation and we remain confident we've adequately provided for it in our financials.

Part of that provision evaluates what we would have to pay, what land we would get, and the residual value of that land.

You can't fault me for trying, Marty.

You come pretty close.

I tried.

I tried to put one past you and see what happens.

Teaches me.

Thanks, David.

Thanks guys.

Ivy Zelman with Zelman & Associates.

I'm sure the quarter you're excited to see some order growth for a change and I think we were surprised given the order growth and the success of your margin expansion that you sounded so cautious in your commentary and so normally with your deposits and some of the commentary, Doug, that you provided on the successes that you've had, I would think that you would be a little bit more upbeat and would you characterize the spring selling season so far in line with expectations?

Are you just being conservative to your point where you were getting a little too excited, Bob, where you said January through May and then you got burned and I think people really would like to get a better understanding of what you guys are seeing right now and if those successes in terms of sales are giving you a sense that you're off to a better than expected spring selling season start, so a little color expanding on your commentary, please.

Well, the spring season, which begins right around the Super Bowl and gains momentum right now and usually continues until April, is off to about the exact same start as last year's season.

And we had a national sales event at the same time as we're having this event.

I mentioned earlier that there's some vendor incentives tied into this event and its been a major marketing blitz for the Company.

As I said, we're up 9% same-store for the past week, first week of the event, over last year but it feels about the same.

The traffic numbers are about the same.

The quality is about the same and so, yes, last year maybe we were doing cartwheels on this call, but now we've had the history of last spring, as Bob mentioned, and I think we're a little more cautious as to how we approach guidance for what's coming ahead of us.

It does feel better because we don't have demand maybe being pushed forward from a tax credit that was expiring.

Maybe this is organic demand and so maybe that makes us feel a little better but we're still cautious.

You put your finger on it, Ivy.

There's no doubt that our release and this conference call has a Yin and a Yang to it.

The territories that are good are good, but there's plenty of territories out there that are bad and the uptick is very slight.

So, we've got to remain cautious until we put a few more quarters behind us and I think we've got to remain cautious until some of those territories start to kick in.

Well, I'm sure the investors appreciate your being conservative, especially in an environment like we're in.

If you can help us understand one of the concerns that specifically to Toll is that people have to sell their existing home to buy a Toll home in many cases and the difficulty with the market being as depressed as its been to get out the equity that they either thought they had or for that matter are willing to buy into a new home on the exchange.

I'm wondering what your traffic or what your salespeople are telling you about, I guess, the stuck factor and is that really limiting or is your share of the new home market so small as it is as a percent of the overall market that it's almost irrelevant because there's plenty of people that don't have a mortgage.

Who is your buyer?

Is it someone that's completely not encumbered by a mortgage and they 100% own their house free and clear, because I would assume that most of these people are having to sell a house to come and buy one of your homes.

So if you can help us understand that, especially markets mentioning Phoenix, Doug, the Phoenix that you had such a success with the recent sales blitz there.

Phoenix is a pretty significant underwater market, so I think people assume that Phoenix that no one could sell a house there.

Yes, Phoenix is a terribly underwater market.

It is tough and that's why we pointed out the success.

I think moving back to your true question, the key is your use of the term "willing" in your question and we are finding that in those markets that have behaved themselves recently, there is movement to buy irrespective of the problem of getting out of the old home what you put in or what you perceive to be a decent price.

We're reaching a point in the market, it seems to us, in the decent markets where a decision is being made on the basis of I want it.

I want the new look, I want the bigger home, I want more amenities, I want the new location rather than on the basis that let me take out my pencil and eraser and see if I can get out of my old and get into the new for what I perceive to be a fair, reasonable number.

So we're starting to see some movement without regard to the 10, 20, 50 or 100,000 that may be left behind on the old home.

And Ivy, remember 18% of our buyers are cash and of those that get a mortgage, the average they put down is 30%.

Right.

But it sound like it (multiple speakers).

Bob's right on.

The number they heard in '06 from their realtor friend, that stuck with them, for the value of their home, that stuck with them for a couple of years, but now we're beyond that and they know this is a great time to buy, that the new home is more affordable and it's not a qualification issue for a buyer.

It's really a confidence issue and they're getting to the point where they are ready to move on.

Well, I appreciate that.

We certainly agree with you and I would only add that the Scansion it sounds like it's not dead, as some people have said.

Would that be a pretty overblown statement?

We know the Toll Mansion is definitely not dead.

Ivy, there was an article in the Wall Street Journal, Feb 22, yesterday, sales strengthened for luxury digs.

I don't know whether you caught it by Josh Barbate, sales in Manhattan, co-op and condo market show signs of bouncing back after dropping (inaudible).

January was hurt on the taxes and the bounce is back according to this article.

They go into Wall Street bonuses and stock market success, which changes as we know day-to-day.

That might at least give you an idea of the New York market and some of our other markets are reacting similarly.

Great.

Thanks, guys.

Thanks, Ivy.

Ken Zener with KeyBanc.

Just a question about mothballed communities and the interest expense that's been accruing on the inventory side.

Given that mothballed communities are inactive but accruing interest, how should we think about the interest that's accruing as a percent of sales to the extent that you're not opening up these communities, because I know you've talked about in the past, not wanting to open up mothballed communities.

Go ahead.

Ken, if a community is mothballed, it does not qualify for interest capitalization.

Okay, so the declining -- so the interest rate more broadly than that you are expensing through COGS, how will that trend now that you have more inventory coming online?

Well that kind of lower that interest rate, that interest expense that we've seen as we move into or through 2011 and into 2012, down from the kind of 5% range that we're at now?

I think it will slowly decline, but at this point, all of our inventory that comes through is fully burdened with interest expense and it sits in inventory for a little longer than maybe our historicals averages would be.

So if in the past I had $0.75 of debt for every dollar of inventory, now I have $1.00 of debt for every dollar of inventory, so I have a higher percentage of the inventory that's being burdened and that will continue until we see inventory grow in excess of debt.

Okay, I guess if I could ask you another angle on that.

If you think about the expense interest now running 200, 300 basis points above its historical rate, do you expect your gross margins, your net gross margins with interest expense, will rise perspectively over the next, whether it's two or three years, in equal parts from declining interest expense as well as improvements related to direct costs and pricing?

Well, I think as it relates to direct costs, it's tough to project that they will improve.

And in terms of pricing, as we've learned over the last four years, it's very tough to project that those will improve.

I think we're comfortable that our margins will be relatively level until we see pricing power and volumes increase.

Okay.

And then I guess just about the absorption pace.

Did you guys see, given that you're highlighting the Mid Atlantic North, were the absorption paces that you were seeing in those regions significantly ahead of the other regions consistent with last year or was there a real pick up that you did notice in some of the regions versus last year?

Thank you.

I think it's relatively consistent with last year.

We've been fairly happy with the performance of Washington D.C.

up through Boston, most particularly urban New York.

A year ago I recall being pretty happy with what was going on in Texas.

So California a year ago was doing pretty well.

It's doing okay now, but for the most part, I think, the geographic mix of success is pretty similar.

Thank you.

You're welcome.

Charday.

Jonathan Ellis with Banc of America Merrill Lynch.

The first question is I want to talk about land.

I know you gave a number for land spend.

Do you happen to have available the number for development spend in the first quarter and then can you update us on land and development spending for the full year '11, as well as any estimated mix of deliveries from newer communities?

Greg?

Sure.

If I can start with the end.

The newer communities that we've brought online the last six months represent about 10%, 11% of our community count in terms of contracts over the last six months.

It also represent about 10% or 11% of our contracts, so its run pretty consistent.

In terms of land, you asked about the full year.

The spend on land versus development for the full year, as we said last quarter should be a pretty even mix, somewhere near 50/50, but of course we're opportunistic land purchasers so we're only at end at Q1.

This could easily change.

And in terms of development dollars for Q1, I don't have that actually, I'm sorry for that one.

Okay, I can follow-up.

The second question is just do you happen to have handy the actual incentive rate as a percentage of gross revenue for the quarter and then the related question is really, and you talked about markets where you're actually seeing some pricing power.

I guess maybe if I could flip that on its head, are you seeing markets where, although obviously still somewhat depressed, that you're starting to see signs of more normal elasticity returning, i.e., that if you actually started to raise incentives or discount pricing that it actually may be driving more buyers into your communities?

The answer is no.

We think pricing right now is very inelastic.

We think the buyers recognize this is a great time to buy.

They recognize that the builders are offering great value.

Of course there's a negotiation, it's still a buyers market, but we're off of those days when we were all advertising $100,000 off this weekend and driving a lot of sales.

We are convinced that we're priced right, the buyers recognize it and it doesn't pay to add a bigger incentive.

This event I talked about right now is a different type of event where, as I said, our vendors have stepped up and have given upgrades.

You get nicer cabinets, you get nicer Kohler fixtures, et cetera, and it's very different than just throwing more money building a bigger incentive into your program.

So, we're pretty convinced that almost all markets the pricing is inelastic and it's not worth it to raise the incentive.

Okay.

And then, I'm sorry, did you just have the incentive as a percentage of gross revenue for the quarter?

Greg?

Oh, of revenue?

Yes, we did do that.

The offering today is about $40,000 per house.

It's about 6% to 7% of our ASP.

6% to 7% of the ASP.

Okay, great.

Thank you.

You're welcome.

Michael Rehaut with JPMorgan.

Hi, this is actually Jason Marcus in for Mike.

I was wondering if you could talk a little bit about Gibraltar and the level of deal flow that you're seeing now versus six months ago and also how much capital do you think you intend to commit to Gibraltar over time and what type of returns are you looking for?

Gibraltar has done one deal.

We announced it last summer.

The investment in that deal was about $30 million.

That was the large FDIC AmTrust portfolio.

In the last six months, the deal flow has increased significantly.

Right now they're working on a half a dozen exciting opportunities.

It's a combination of public offerings through the FDIC, private bank bulk sale deals, and individual distressed assets.

The amount we would invest in Gibraltar depends entirely on the quality of the opportunities that are coming in.

If the deals we're working on right now materialize, then we're going to throw another $30 million, $50 million or more at Gibraltar, but it's opportunistic.

Our return threshold is very high.

It's a unique business where we're buying non-core assets, working them out and profiting, but we're excited by the results so far on the AmTrust deal and we're very excited by the deal flow we're seeing right now.

Okay, thanks, and then just regarding the newer communities, do you have kind of what the latest gross margin for the new communities is versus the existing ones in terms of spread?

Marty?

That's not something we actively track, Jason.

Okay.

All right, thanks.

You're welcome.

Charday.

Nishu Sood with Deutsche Bank.

Hi, this is Rob Hansen on for Nishu.

Looking at your margins in 1Q, incentives were less, as you mentioned, so are buyers upgrading on a dollar basis to what you were previously offering in incentives and that's where you get the upside in the margins?

So are the upgrades what drove the upside this quarter?

No, I think the upgrades have consistently run about 20% of the price of the home, about $100,000, and that has been consistent through good times and bad, through times with very little incentive and times with large incentives.

So I don't think the buyer ties their upgrade purchases to the deal they cut on the base house.

Okay.

And as you mentioned, the buyers recognize it's a good time to buy, but they lack that sense of urgency or the confidence, I guess, so what do you think will create this sense of urgency on a broad basis or do you think you're going to have to commit more to kind of create that urgency through more promotions or longer promotions, etc?

I think it's going to come from a string of quarters that go together with that interruption showing progress and I think ultimately what will happen is the buyers will bump into a lack of supply against an ordinary growth in demand.

As I said in the introductory remarks, naturally, there's been next to no land put through the approval grinder to pop out lots in the past four years.

So if it takes you four years on average to get approvals for very well located pieces that merit spending $600,000 or $650,000 on average for a home, you're going to have a deficit of supply that will be expressed by an increased price.

And I think the first shock will come when somebody comes out to the model home and says look, we've been talking about it for the last three months and we've decided to take lot number six in Happy Acres and we'll take the Adams elevation and the sales person say, oh, damn, we just sold that yesterday.

And through that disappointment will come another selection and we're back on the cocktail circuit that, I thought I had a lock on something at a very decent price and things are starting to move away.

This is normally the way it has occurred in the past four or five recessions that I've gone through, including the Great Recession we've just had, and I think that will be the way that it happens again, so it's going to be a fairly ordinary process.

When it does start out I think it will come faster than we expect, including ourselves.

All right, thanks.

You're welcome.

Joel Locker with FBN Securities.

Just on your community count in the West, what was that up or down year-over-year?

Any different than the Company?

Let's see.

So our community count in the West at the end of Q1 is 43 and just give me a second here.

Sure.

And Q1 of '10 it was 45 in the West.

45 in the West.

And then also what was the tax valuation at the end of the first quarter?

I might have missed that.

The deferred tax asset, which is fully reserved, was $414 million.

$414 million.

And just one last one.

The interest expense, that obviously dropped sequentially.

Is it by the second quarter, are we pretty much done with expense and the interest?

That's our expectation.

It will continue to go whether it goes all the way to zero or not, it will at least be close.

It will continue to trend down from the $1 million.

All right, thanks a lot, guys, that's all I have.

You're welcome.

Bob Wetenhall with RBC.

Just speaking to the comments about you needed to see a string of quarters of improved demand, do you think you're at the front end of that string in the New York metro area and Boston/D.C.

corridor?

No, that's been going on for a while, so I would say we're getting further into it than at the beginning of the string.

The New York market has been, especially the urban market, Manhattan, Brooklyn, Hoboken, which is the 6th Burrough of New York, have shown pretty good strength for at least a year, more than that.

Would you say in Texas then we're at the start of the string?

Just trying to gauge how optimistic you are based on your new order growth.

I think Texas has been improving for the last year to 18 months now.

There have been a couple of fallbacks during that time, but I think we're still relatively early in the string because it hasn't been steady.

Its been a little bit bumpy, but it is getting better.

Got it.

And SG&A, I guess you're expecting $200 million of spending in the upcoming three quarters and is there any chance that's going to grow up, like increase through the year?

I don't think it's going to change dramatically upward.

I think it is right around $200 million.

I think that's a good estimate.

Okay, great.

Thanks very much.

You're welcome.

Buck Horne with Raymond James.

Sorry to go back to interest expense one more time.

I'm just a little confused by a couple things.

I just wanted to clarify, do you expect the absolute dollar amount of interest expense, I guess, flowing through the cost line?

Not the direct interest expense, but just what you allocate to the houses, is that going to stay the same or gradually increase later this year and, I guess, as a corollary do you expect or would you expect capitalized interest or your balance of capitalized interest to increase later this year?

Well, I think the formerly capitalized interest that will be expensed through cost of sales will vary with the revenue.

So, from an absolute dollars perspective, it will increase in the third and fourth quarter because those are the quarters where we generally settle the most homes.

It will remain at the 5.4%, 5.5% of revenues through the balance of this year.

Okay, that's very helpful.

I guess the other topic is there's been some chatter from the administration about or it seems maybe it's not administration but some increased chatter about bringing back discussions about phasing out the mortgage interest tax deductibility for higher income households, I guess, over $250,000.

I just wondering maybe what your thoughts are on that and also how many of your buyers that you know of roughly would fall in that category of having incomes higher than $250,000?

In reverse, Don Salmon, Marty, Greg, do you guys know if any of our buyers make more than $250,000?

Sure, so there's a couple ways to look at it.

At the highest level you look at the average of median income of our buyers, bear with me one second, so the median income is $165,000 so they don't fall into the highest tax bracket.

The average income is $196,000, so they again are not in the highest tax bracket.

So you asked more specifically who does fall in the highest tax brackets, which is for the first quarter, it was about 20%, 21% of our buyers, however, 20% of them paid cash.

So that's going to net you down to about 16% of the buyers that would actually impact it, meaning those buyers that are above 28% tax bracket and who take out a mortgage.

With respect to the first part of the question, it's beyond belief that when we want to concentrate on creating jobs, on job growth to pull ourselves out of the great recession and to put some confidence back in the market, peren - note that one of the reasons the confidence index went up was that people felt better about the jobs they had and about the jobs that could be gotten - close peren.

During a time when we're trying to create jobs, why in good God's name would you start to talk about changing policy and tax implication for new home purchase?

I can understand it once you've created the jobs, we're back on an even keel, feeling good about ourselves, then go into a policy discussion.

But why you would do it just as the rose is starting to open the petal is beyond my thoughts for the moment.

So there you have it.

Very helpful.

Thank you very much.

(Operator Instructions)Jack Micenko with SIG.

Hi, most of my questions have been asked and answered.

Just, I guess, since I'm on the call, can you give me specifics around the community count and growth.

I think you're talking about 15 to 25 net communities for the year.

Can you talk about geographically where those are going to be located?

Greg?

Sure.

So we are expecting for the remainder of this year, again this is just our best estimate, that we'll open 50 communities in Q2, Q3, and Q4 and as I look through the list here, the North and the Mid Atlantic have let's call it the majority share followed by the South and then by the West.

Okay, thank you.

You're welcome.

Alex Barron with Housing Research Center.

I have two separate questions.

The first, I guess, is more theoretical in nature.

I wanted to find out as it pertains to accounting in your joint venture write-off that you took this quarter, what triggered, I guess, the impairment this late into the cycle given that we all know what's happened to Vegas for several years now and also, is your recognition of an impairment independent of what other associated builders in the joint venture do or do all have to take the impairment at the same time?

I don't think we want to go any further than we've already gone.

Once we start to play 20 questions, is it bigger than a bread box or smaller than an elephant, by the end when we get up to question number 18 you are going to have the names and numbers of the council and CFOs and other information that I really don't think we should address, so I appreciate the question.

We're going to take a pass on the answer.

Okay.

My second question hopefully will get an answer.

I noticed your ASP in the western region went down pretty significantly, whether you look at it sequentially or year-over-year, so I'm just trying to understand is that a function of new product, new communities, and how should we think of the margins in that region given that lower ASP?

It's a function of mix and I think that's all we need to say right now.

We have less expensive communities replacing more expensive communities.

Going forward, we're looking at all opportunities out West, some of which are less expensive and some of which are very expensive.

Got it.

Okay, thanks.

You're welcome.

At this time, there are no further questions.

I will now turn the floor back to Mr.

Yearly for any closing remarks.

Thank you, Charday.

Thanks, everybody.

Have a great day.

This concludes today's conference call.

You may now disconnect.