托爾兄弟 (TOL) 2012 Q1 法說會逐字稿

Good afternoon.

My name is Dawn and I will be your conference operator today.

At this time I would like to welcome everyone to the first-quarter 2012 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.

Mr.

Douglas Yearley, you may begin your conference, sir.

Thank you, Dawn.

Welcome and thank you for joining us.

I'm Doug Yearley, CEO.

With me today are Bob Toll, Executive Chairman; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance, International Development and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira Sterling, Chief Marketing Officer; Mike Snyder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Company; and Gregg Ziegler, Senior VP, Treasury.

Before I begin, I ask you to read the statement on forward-looking information in today's release and on our website.

I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect future results.

Those listening on the web can e-mail questions to RToll@TollBrothersInc.com.

As has become our regular practice, we are going to limit 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 most have read it, so we won't reread it for you.

This first quarter we reported a net loss of $2.8 million, or $0.02 per share diluted.

Our first quarter included a net tax benefit of $3.6 million and inventory write-downs totaling $8.1 million.

Excluding write-downs, fiscal year 2012's first quarter pretax income was $1.7 million.

Our first-quarter revenues and home building deliveries of $322 million and 564 units decreased 4% in dollars and 1% in units compared to 2011's first quarter.

Since some of our backlog is in towers, with longer delivery times than our average single-family community, some of our backlog did not convert into revenues as would have been expected based on historical conversion ratios.

Our first-quarter net signed contracts of $444.7 million and 652 units rose 45% in dollars, and 19% in units compared to 2011's first quarter.

We ended our first quarter with a backlog of $1.12 billion and 1,784 units, an increase of 35% in dollars and 21% in units compared to one year ago.

We ended the first quarter with 228 selling communities, up 14% from one year ago.

And we had approximately 39,700 lots owned and optioned, up 11% from a year ago.

At fiscal-year 2012's first-quarter end, we had $720 million in cash, and $815 million available under our $885 million 12-bank credit facility, which matures in October 2014.

At the start our second quarter, we raised approximately $300 million of 10-year debt priced at 5.875% in the public markets.

The past few months have been exciting for Toll Brothers.

Our total and per-community contracts were the highest for first quarter in five years.

The value of our backlog is up 35%.

We entered the Seattle market through the acquisition of CamWest.

We teamed with Equity Residential to acquire a great site at 28th Street and Park Avenue South in Manhattan, where total owned and sell condominiums on the top 18 floors of what we believe will be an iconic 40 story building.

And our Gibraltar subsidiary acquired its fifth portfolio of distressed assets, with a combined outstanding loan balance of $51.4 million.

This was Gibraltar's first portfolio of primarily commercial assets.

Historically, our first quarter is the most challenging time to gauge sentiment among our home buyers since it encompasses Thanksgiving, Christmas, New Year's, and the doldrums of early January.

However, in general, the market feels healthier than it did one year ago.

The urban Metro New York City market remains very strong.

We are also encouraged by the continued health of the Washington DC to Boston corridor, along with Houston, Dallas, Raleigh, and more recently, Southern California.

We're even seeing some recovery on the East Coast of Florida, and in the suburbs of Detroit and Phoenix.

Our first quarter deposits, which are nonbinding, were up 22% gross and 4% per community compared to last year's first quarter.

More recently, in the first three weeks of February, on a gross- and per-community basis, deposits were up 43% and 25%, respectively, compared to the prior year's same period.

With the economic and employment picture improving, and the financial markets trending up, buyers are taking advantage of tremendous affordability and record-low mortgage rates.

Now, to the famous family with the dog and the two kids, they're even more tired of waiting.

They've added a second dog.

They are more confident they can sell their existing home, and they love today's interest rates.

Their kids are now in middle school, and they want to get them settled into the better school districts.

So they are chomping at the bit to get their new home with a bigger yard.

If they wait much longer, the kids will have graduated from their old-school, and mom and dad will be eligible for our 55 plus active adult communities.

We believe our community count is on track to reach between 235 and 255 by fiscal year end 2012.

We continue to explore land and debt portfolio acquisition opportunities, across most of our current markets.

Our balance sheet, reputation, and expertise in the approvals and development process combined with our ability to close on transactions quickly and reliably make us an attractive buyer for many land sellers.

Now let me turn it over to Marty.

Thanks, Doug.

Our first-quarter home building cost of sales before interest and write-downs as a percentage of home building revenues was 76.8%, compared to 77.5% in 2011's first quarter.

2011's fourth quarter was 75.8%.

Our margin improvement of approximately 70 basis points from Q1 '11 to Q1 '12 was due primarily to the sellout during fiscal year '11 of certain lower-margin communities, and cost savings driven by our regionalization of subcontractor trade purchasing, offset by purchase accounting write-ups of Q1 deliveries acquired for CamWest.

Purchase accounting also contributed to the 100 basis point decline in our margin compared to our fourth quarter.

Additionally, our fourth-quarter margins benefited from a $2.1 million accrual reversal on a favorable legal ruling.

There were no such reversals in Q1 of fiscal year '12.

First-quarter interest expense included in cost of sales was 5.1% of revenues, about 30 basis points lower than 2011's first quarter, and 10 basis points higher than our previous quarter.

These changes are principally related to mix.

The first quarter of pretax write-downs of approximately $8.1 million included $6.4 million attributable to operating communities, approximately $900,000 attributable to land owned for future communities, and $800,000 related to options.

We have grown the Company, as evidenced by our community count increase and backlog growth.

With such growth, comes some increase in SG&A, in advance of growth in revenues.

First-quarter SG&A at approximately $69.6 million was above the $68.4 million in the fourth quarter of '11, and up significantly from the $61.3 million in the first quarter of '11.

However, recall the Q1 '11 SG&A benefited from $6 million in insurance proceeds and other accrual reversals.

Looking forward, we expect SG&A as a percentage of revenues to decrease, particularly in the last half of fiscal year '12.

We had no direct interest expense in Q1 '12, and believe that will be true for the remainder of the year, as qualifying inventory will continue to exceed outstanding debt, including the $300 million in 5.875% 10-year notes just raised.

First-quarter other income and income from joint ventures was $12.8 million, reflecting the strong performance of our urban New York City and Hoboken, New Jersey, joint ventures and a $2.6 million gain on sale of land out of a California joint venture.

As certain of these ventures are nearing sellout, and our latest New York urban products are wholly owned, we believe the income from joint ventures will diminish over the remaining quarters of the year, and be replaced with core home building revenues and margins.

The average basic number of shares used to calculate earnings per share was approximately 166.3 million shares 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 expect deliveries in 2012 to be between 2,600 and 3,200 homes.

We still estimate the average delivered price per home to be between $550,000 and $575,000.

Although we are not providing quarterly guidance, we normally deliver fewer homes in the first and second quarter than in the third or fourth.

And we expect that this will continue in 2012, with approximately 60% of our deliveries in the second half of the fiscal year.

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

Thanks, Marty.

Since the new-home industry is coming off several years of historic low levels of production, we are encouraged by the recent improvement in housing starts.

As announced last week, January 2012 housing starts seasonally adjusted were up 10% compared to January 2011.

Some big public builders such as Toll Brothers appear to be gaining market share as their order numbers have grown more rapidly than housing starts in general.

These large builders benefit from access to capital and more marketing firepower.

We believe this is most pronounced in the luxury market, where our brand is firmly entrenched.

Consistent with previous cycles, we believe we are benefiting from a flight to quality.

Buyers gravitating to our brand, the quality and value of our homes, our strong balance sheet, and our track record, with our solid land position and well-located communities, we believe we are well positioned as the market recovers.

Now let's open it up for questions.

(Operator Instructions)

Michael Rehaut, JPMorgan.

First question, I was wondering if you could expand on the February deposit trends, and give us a sense, number one, were there certain regions that really stood out as a driver including possibly certainly the strength in the urban New York area?

And were there any programs or marketing programs associated with the beginning of the spring selling season that may have also helped the strong start to the second quarter?

Sure.

In terms of geographies, New York City continues to lead by a lot.

Washington DC to Boston in general has been -- has continued to show strength.

There are pockets within that corridor that are better than others, but generally that corridor has been strong.

We've mentioned Dallas and Houston.

And more recently, we've mentioned Southern California is showing some life, Phoenix is showing some life.

The East Coast of Florida is having a better winter season, and what did I miss?

Massachusetts, Connecticut --

And Detroit.

Sorry, I missed Detroit.

And the Sixth Borough, Hoboken and Jersey City.

Right.

When I talk about New York I always -- we hear and believe it is the Sixth Borough.

Yes, it's part of our New York urban City Living program.

Special programs --

Special program, every -- for the last three or four years, we have run a national sales event, right around President's weekend.

We did it last year, the year before and I believe even the year before that.

We are in the middle of that program right now.

It ends this coming Sunday.

And last year, it also ended this coming Sunday.

And so I think year-over-year numbers are relatively consistent because of that program.

It is very effective in driving sales.

Our vendor partners offer free upgrades of kitchen cabinets and upgraded flooring and upgraded faucets and appliances.

And so it's a great partnership, because the incentive doesn't come out of our pocket.

But comes out of our partners' pocket because they appreciate the additional sales as we do.

And it definitely helps and it's helping us right now.

I appreciate that.

The second question on the SG&A, I believe Marty, you had discussed in guidance that you expect some leverage to play out relative to where we are today as a ratio in the first quarter, as you get into the back half of the year.

But, as you think about the full year -- and I'm sorry if I missed this -- do you expect the SG&A ratio to be higher or lower than 2011?

Fiscal '11?

Michael, we haven't given specific guidance on that.

We do expect revenues to be slightly above last year, and we're keeping an eye on SG&A.

Okay.

Thanks.

Stephen Kim, Barclays Capital.

I wanted to ask you a question about how you know when to, or how you decide to raise prices in a Community?

You talked about a level of absorptions in the quarter, that was the best it's been in a while.

I would generally think given your higher-end mix that you wouldn't necessarily need to see as high absorptions per Community before you started raising prices, versus let's say an entry-level builder?

Because your communities may operate very, very profitably at a lower level of absorption.

But I was curious if you could comment on what it is -- what metric perhaps, or metrics you look at and what thresholds, perhaps, to tell you it's time to raise prices?

Thanks, Doug, I'll take that.

It's a fairly simple metric of Monday, Doug and I and Rick Kirkman and all of the regionals gather round one at a time, and we go over every community, and when you see the community has two agreements signed, three new deposits, hasn't lost any deposits or agreements, that you have outstanding agreements that nearly meet a full year's worth of production which could be as low as 20, it could be as high as 35, somewhere in that mode, except in the high rises.

And you are encouraged to raise prices, and we've been particularly encouraged over the past -- I guess, about eight weeks, by the existence of some pricing power on a limited basis.

It's gratifying at least to be able to discuss whether to raise the price by $5,000 or $10,000, rather than sit and worry about how much additional incentive is required to take deposits and get the Community moving.

So, I hope that helps.

Just as a point of clarification, do you -- you talked about a level of production that lasts about a year, but one would think that you could probably scale up that production if you needed to on a per-Community basis.

I just wanted to confirm that that was true.

And then my second question related to the number of Communities that you were planning on opening, you talk about a range of communities you expected to have open by the end of the year.

But I was curious if you could just give us a range of the number of Communities that you're actually looking to open this year?

Thanks.

Sure.

Yes, we can scale up production, answering your first question, to a point.

We have long permitting processes in many towns, we have difficult inspections in many towns.

These houses have a lot of options in them, and so there is absolutely an opportunity to do that.

But our land we think is pretty special, and if we have good demand, it may be a better Business model to keep raising the price, and we evaluate that for every location.

With respect to --

Let me add to that.

We all know that prices over the past five years in general have gone down anywhere from 50% to 30%.

Depending upon which pundit you listen to.

And as you know, we're talking about small increases, $5,000, $10,000, and the reason is that there is a chance that we will revert back to, as we always have, the previous highs and even exceed them.

That means a lot of room at the top, so we're not anxious to blow through a great location because the demand is there to permit us to do so.

Rather, we'd like to sit and milk a great situation and if we can get enough of those aggregated, sooner or later, you're talking some serious money.

Steve, with respect to the second question, we anticipate opening 49 communities, the balance of the year, the leading states of Pennsylvania and Texas, and only 2 of those 49 are coming out of mothball.

Okay.

Great.

Thank you very much, guys.

Dan Oppenheim, Credit Suisse.

I was wondering if you can clarify the comments on February a bit more.

Looks as though last year the national sales event was February 19 to 22, so two weekends.

This year it started a week earlier, February 11 going to 26, so three weekends now.

You talked about the 25% increase in sales per Community or deposits per Community.

Do you think that's a trend we should be looking at here?

Or do you think that's influenced by starting a week earlier with a national sales event here?

Are you depositing by this Sunday?

It sounds like you're at the top of our program.

(laughter) These incentives do go way, we didn't make them up.

There from Kohler and Anderson, and Shaw.

Yes, we were able to negotiate a deal with our suppliers where this winter event and the best-selling season would be a three-weekend event.

Last year it was a two-weekend event.

So yes, you're absolutely right that we had one weekend earlier this year of increased sales.

We look at Presidents weekend, this last weekend, as the middle weekend of a three weekend event, so maybe that fell off a little.

And we are anticipating a good weekend coming up because the event does end on Sunday.

So I think the numbers we're giving you in terms of year-over-year improvement are fair.

They're a fair judge of what's going on.

But we'll have to see.

We're relatively early into the spring selling season.

Got it.

And then second question, wondering about the West where if we exclude CamWest, West would be the only region that would be down in terms of Community counts on a year-over-year basis.

Aside from the acquisition there, are you still finding it a bit difficult to acquire land, or is it something where you're not looking for as much land, given some of the trends you're seeing in demand?

We are absolutely looking for land and it is very difficult to find ground in both Northern and Southern California.

We're very frustrated.

Thank you.

Jade Rahmani, KBW.

I want to ask what backlog conversion ratio you expect the next few quarters, what range it should be within?

Marty, do you want to quote some of the prior history?

I think -- we generally don't project that for you, Jade.

I would tell you that our building at 1450 Washington will deliver some units in the second quarter.

Our building at -- on Water Street will deliver some units in the third quarter.

And so --

Hopefully.

Hopefully.

We do -- when you look backwards, you see that our backlog conversion ratio for the second quarter is somewhere between 35% and 40% generally.

For the third quarter, it gets up into the low 40%s, where it stays for the fourth quarter.

Okay.

Thanks.

And can you give the impact that CamWest had on this quarter's orders and closings?

Sure.

I think CamWest was relatively nominal from an orders perspective, because the deposit requirements out there are less than what we count as the deposit.

So, we have a number of -- we'll call them agreements that we don't report to you as agreements, because they haven't hit our internal threshold yet.

In terms of closings, we had 23 closings at roughly $10 million of revenue.

The Seattle market is a little bit later into the spring, because it has a lot reloads that tend to buy resale homes or builder spec homes.

CamWest has more quick delivery homes than many of our other markets, and so we anticipate sales out of CamWest to be a little bit more backend loaded into the spring than the other markets where we tend to have what we call dirt build or custom-built homes.

We hope.

Great.

Thanks a lot.

David Goldberg, UBS.

I wanted to dig a little bit -- I don't mean to beat a dead horse here, but I'm just trying to understand the February absorption rate a little bit better.

If we were to separate out the absorptions on a multifamily versus single-family basis, would we see a different pattern?

In other words, are the multifamily properties absorbing much, much faster?

And are they effectively responsible for a lot of the growth we've seen year-over-year?

Gregg?

Let me see.

So, if we break out our gross contracts for Q1, the multifamily not high density high-rise, multifamily is 17% of the total gross contracts.

If I go a year ago, it was 19%, and in between there, the three quarters in between, last year and this year at 17%, 18%.

So, there is no real meaningful change in the level of what we found.

Maybe I should've been more clear --

And that goes through 1, 31, right?

That was 1, 31, '11 through 1, 31, '12.

Maybe I should have been more clear.

(multiple speakers) Let me be more clear.

I was focusing on the high-rise thinking that you might have taken a lot of deposits or a lot of orders in the high rises specifically that were driving some of the order growth trends we've seen this year.

Is that not the case?

Well, especially for Q1 of '12, it was.

But if I look at the four quarters of '11, it was 10% to 12% each quarter.

Okay.

Perfect.

Thank you.

And then just a quick follow-up, I was wondering about --

David, it's Marty.

I think one of other things to recognize is that the towers we had, many of our sales in last year, were off-balance sheet.

And the towers we're selling mostly in this first quarter and first month of the second quarter are on balance sheet.

I got that.

Yes.

And then just a quick follow-up here, on cash flows in Gibraltar -- and I appreciate the color you guys gave and some of the breakout in terms of cash flows -- how do you think about cash flows into Gibraltar moving forward?

And what cash flows in, cash flows out picture looks like for the subsidiary at this point?

And if you would ever consider segmenting that off, or separating that, given especially that you just completed your first commercial deal, and maybe it's moving away from some of the core things, and what you guys do from residential perspectives?

Just trying to get a feeling for where -- how the cash flows look from the vehicle on a go-forward basis.

I think with respect to cash flows into the portfolio, it's very difficult for us to project what the next deal might be and whether we'll win that next deal, so we really can't project with any confidence that we'll spend $25 million, $50 million, $75 million in the next so many months or quarters to buy portfolios.

With respect to cash flows out, again, that's also episodic as to whether or not we find a buyer for a piece of real estate, or find a buyer for a loan, or find a discounted payoff.

So, it's a challenge to answer that question, as well as you'd like us to.

But as we look at the Gibraltar investments in their entirety, we generally get into the portfolio with a three to six year investment horizon.

Some of the loans will be shorter than that, some of them will go to the end.

And when we look at the total investment into Gibraltar, I think we've said, softly, if we get up in the $200 million range, there may be a different structure we need to do future deals with, or something we need to do with the existing Gibraltar structure.

Right now, we have about $136 million invested in Gibraltar.

Pretty close to the hundreds of millions of dollars range.

Not really.

All right.

Fair enough.

Stephen East, ISI Group.

If I could ask just a little bit on the towers, coming back to it, when you look -- when you talk about later in the year having heavier deliveries, I'm assuming the towers might accentuate that this year.

Could you just talk about how many towers you think are -- what you're towers could look like this year versus last year?

And the leverage impact you might have on your SG&A?

And then the other part of it is if I just look at it, a couple of your investments in New York are at about -- equivalent to about 10% of equity.

At what level are you comfortable taking the investment in the high rises to?

We have two buildings that will start delivering over the next few quarters.

1450 Washington Street in Hoboken, which has about 85 sales to date.

That actually started delivering a week or two ago, and will continue to deliver through the end of the year and into '13.

That started deliveries about a month and a half before we expected.

Correct.

So, some of the buyers will not be ready to settle as quickly as we currently are, because they were planning on a late March settlement.

But, let's consider that a late March start to deliveries, even though we may have a few that dribble in before then.

Right.

Okay.

Thank you, Marty.

And the second building at 205 Water in DUMBO, Brooklyn, that building is selling, has about 35 sold out of about 70 total.

And that will start delivering in the third quarter of '12.

Those are both on-balance-sheet buildings.

We also have what we consider under the City Living umbrella our Naval Square property in Philadelphia, which continues to hum along as it has been doing so for a few years.

In terms of how big the does City Living get, we love the Business.

It's been terrific.

We mentioned the deal we did with Equity Residential, down at Park Avenue South.

We've mentioned a few quarters ago the property we bought at foreclosure sale, at Gramercy Park.

We have some other exciting land opportunities that are cooking.

We understand it's a riskier Business.

We underwrite it to a higher return, because of that risk.

I think right now it looks bigger than it really is, because it is the best performer in the Company.

And when everything else starts clicking, it will naturally become a smaller component.

But we don't put a threshold on it.

We're opportunistic on the land buys, and we're very happy with how it's performing.

Okay.

That's helpful.

And the last building is the Touraine.

And I think we put some details on we have it on backlog for Touraine in the release.

That will not deliver until next year.

Okay.

All right.

And then on the cash, Marty, you all have about $720 million.

What do you expect from -- as you look at 2012, considering that your Business is starting to take off and ramp up, and which it is going to require some more cash?

Are you cash positive this year?

Does that most likely -- is it negative this year, and where are you comfortable on your cash levels?

Some of that -- some of our thinking on that is evidenced in the $300 million of new debt we raised a couple weeks ago.

We raised debt at sub 6%.

We found it to be a very opportunistic transaction, and an attractive interest rate, 5.875%.

And we kind of parlayed that into an exchange offer for some of our nearer-dated maturities, some of which are due in November of '12, and September of '13.

So we're mindful of the cash being spent in the Company for land opportunities, and the development of buildings, including with Equity Residential, and at the Gramercy, and so we looked ahead and said, 6%, 5.875% debt, let's get some.

And replenish the coffers a little bit, because we do have some usages that we've seen recently, and construction costs that are anticipated.

Okay.

So if I hear you, it sounds like it will probably be an investment year for you?

I think it's definitely going to be an investment year.

We've already invested more than $400 million.

All right.

Thank you, guys.

Nishu Sood, Deutsche Bank.

This is Rob Hansen on for Nishu.

I just want to see if you can just talk a little bit about the land that you acquired in the Inspirada settlement, and how much land you gained access to, and is this still held in a JV?

Or how quickly you'll be able to deliver homes and how much money you'll have to spend to develop any portions of it?

We, as part of the settlement, we are the proud owners of about 800 to 1,000 lots within Inspirada.

Inspirada is going through a replanning of sorts to try to make it a bit more marketable.

We are holding that ground.

We are in Inspirada, we are building at lower price points, quite successfully, or relatively successfully for the market, but we are -- with this 800 to 1,000 lots that we now own through the settlement, we have no plans for that.

We're just sitting on it.

And, Rob, while we just paid $50 million some for that land, we had accrued that payment in the past, and recognized the appropriate impairments associated with that land in the past, as well.

So, our current basis is significantly less than the $57 million.

Okay.

Thank you.

And you also mentioned that the first three quarters of the year you see a little bit of margin deterioration, just from the purchase accounting and whatnot.

So, I just wanted to see, is 1Q '12, is that a likely trough for the margin deterioration?

Gregg?

I think Marty has tried to give you his best margin guidance as he possibly can.

If you're looking on a percentage basis, it's because of the lower delivery volume that happened in Q1, and that's driving the percentages as opposed to the absolute dollars.

Okay.

Thank you.

Megan McGrath, MKM Partners.

Thanks.

A couple of questions.

First, just wanted to follow-up on your decision to put more of these New York towers onto your balance sheet, rather than going through the JV structure.

Is it more of a function of them being smaller and your large coffer of cash, or is there something more fundamentally different about your view on JVs now as you had a year or two ago?

Hi, Megan.

The JVs were primarily as a result that somebody had the land.

We wanted, we tried to buy it and the landowner said, I'm not selling, but I'll be your partner.

You do all the work and give me half the profit.

That's not the ideal situation from our point of view, but since we were enamored with the situation, we thought it spelled fairly easy success, given the market conditions.

And the fact that during the doldrums in very, very much of the rest of the United States at the time, we took the opportunity in JV.

Now that we've become more well known for it, we're seeing more offerings and opportunities to buy the ground and build it on balance sheet, which, I assure you, we prefer.

It hasn't much to do with the size, because some of the JVs have been smaller, and some of the on balance sheet stuff has been quite large.

Thank you.

Okay.

Thanks.

And just a quick one, this is sort of a rich man's question here, but at some point, if things look like there bottoming and start to accelerate, how far are we in terms of growth where we actually might run into a bottleneck in terms of your ability to open new communities and permit fast enough and get enough folks on the ground?

Is that one of the swing factors in terms of how many net new communities you're going to be able to open this year?

No.

No.

We have a deep bench here, we have a deep bench of alumni that sadly, we had to let go.

We're not worried about the permitting.

This is market driven, and if the market improves, and we also have a fabulous marketing group of about 60 people that can crank out the brochures, and architecture group and everything else we need, so if the market improves, we will be there.

Great.

I think what we'd really like to do is ramp up our throughput per Community, when we see that kind of acceleration.

As well as open new Communities, but it's really the throughput that will come back quickly.

And I'm betting you that she's onto something, that when the market turns, and we see it turning, we hope permanently -- we can't tell, but we see it turning now, that today's problems will not be tomorrow's problems.

Tomorrow's problems will be to get it through the townships that -- the counties, metro areas that today are being easier in approvals, that will be tougher as the worm turns.

So, it will be interesting to see how long it takes to turn.

Adam Rudiger, Wells Fargo Securities.

Doug, you alluded to this briefly in your family scenario with the two dogs and the comfort with selling your existing home.

I was wondering if you saw some of the trends we saw this morning in the existing home sales where inventory has been, seems like has been sopped up a bit, and existing home sales seem to be consistently and steadily trending up.

I was just wondering if you were seeing that, and how that was impacting your buyers' ability to buy your homes and if that was alleviating any of the price pressure out there in the market?

I think our buyers feel much better about selling their home.

I think they've gotten over the value that their friend the realtor gave them in 2005, and they want to take advantage of the interest rates.

It takes -- it can take nine months, sometimes we'll give people a 12-month contract to move into our homes.

So there's some peace of mind there that they have enough time to sell their existing homes.

We are hearing from our friends in the Realtor business that there are more and more resales hitting the market this winter, and anticipated for this spring as people feel better about the market, and believe that it's time to sell their homes.

So, I think that's all good news.

We're not hearing from our clients, nearly as much as we did a few years ago, of their concern about the inability or the frustration with selling their own house, just like we're not hearing nearly as much about their insecurity over their job.

So, I think that's all very encouraging.

Great.

The other question I had was any update on your International plans?

We put China on the back burner.

I think our timing was very, very lucky and good for that.

We are now studying Toronto for high-rise, and we are studying Brazil.

Very early stages in both markets.

If we go, we'll be very careful.

Nothing to report beyond that.

Great.

Thanks very much.

Dennis McGill, Zelman and Associates.

First question.

Just on the nonbinding deposits, what would be the normal flow through of that orders, if you think about a close rates?

About 50%.

50%?

And if you -- have you seen any change in that recently, relative to what you've experienced over the last couple of years?

No.

Okay.

Second question would be around the SG&A.

You made some comments about are there any inhibitors to growth, and it sounded like you have everything internal you need, so just want to challenge you on the comments in the press release about SG&A being up because you're growing the Business.

Is that just a function of the quarter and some of the unique investments you made, or is that something that we should think about when we're looking at the recovery?

Well, I think point one is that we did add the Seattle Division, and there is overhead and personnel that comes along with that, and as we open a Community, there are personal associated with that community who we report as G&A, not as project specific cost of sales.

So, existing communities have a lot of leverage to go and new communities will bring some overhead with them?

Yes.

When we can we leverage off the existing personnel, but a new community may not always be in a location where we can efficiently do that.

A new Community always has a sales team.

That's a given.

So, we are leveraging as best we can, but there will be some added SG&A as we open these additional 49 Communities this year.

Doug, anything else beyond that salesperson that would be material that would come along with the Community growth?

Again, based on location, the Community may require a fresh new project manager, who is, under our system, the boss.

Again, it depends on location.

As we sell homes and have productions, there will certainly be a construction manager on site, who is running the day-to-day construction of the homes.

Okay.

That's helpful.

By Community, Dennis, it's not material.

But we are up 14% in terms of Communities year-over-year.

Joel Locker, FBN Securities.

Just wanted to get your take on the materials side, the pressure side with crude oil being at a nine-month high today and then wallboard prices going up, if you are able to mitigate that with your suppliers, or that's going to come through the balance sheet eventually.

I mean, income statement?

Yes.

Right now, we're seeing small increases with drywall and lumber, and those increases combined are being offset by labor savings.

So, our costs right now are basically flat, when you put it all together.

Got you.

And you mentioned the first three months of deposits already, but what about the binding deposits?

Did you give a number on that in the first three weeks of February?

I don't think we -- we did not.

We did not give that.

All right.

All right.

Thanks a lot.

Bob Wetenhall, RBC Capital Markets.

This is Steven Bachman in for Bob.

How much did favorable weather conditions, particularly in the Northeast, impact your performance during the quarter?

That's a great question.

Last year, we got slammed.

Delaware North, the year before, Maryland and Virginia got slammed.

Last year we had a storm on the 26 of December and didn't see the grass until mid-April, but we are diverse enough in enough markets that we're encouraged by traffic trends, deposit trends, in California and Florida and the Carolinas and in enough place -- Texas, that I don't think it's affecting our Business.

If somebody wants to buy a house, they can't get out this week because of a foot of snow, but they don't forget about buying the house.

They may come out two or three weeks later, so I don't think -- it may be lumpy for a week here or there, but overall I don't think it affects our Business.

Got it.

Thank you.

And just as a follow-up.

Whereas for most builders the multifamily shift has been kind of incrementally negative for margins, should we expect a more favorable mix shift in fiscal '12 for you guys, as you continue to sell more multifamily apartments particularly in the North -- in the New York area?

We have not given any specific guidance on that, but as Doug mentioned, we underwrite the high rises to a higher expected return.

Fair enough.

Thank you very much.

Jack Micenko, SIG Group.

Just had a couple questions for you, could you elaborate on your comments about California land purchases, that you can't find land, is it because asking prices are too high, just not very any attractive parcels?

I didn't hear the second part.

The first part I heard.

Yes, asking prices were too high.

And unreasonably so, from our point of view.

What was the second part?

Attractiveness?

In terms of land --

There is definitely less attractive coming to our attention on a deal flow basis.

But they're still are plenty of attractive parcels that we'd like to buy for our price.

Okay.

And then second question, in the Seattle market, with the large Amazon purchase in Seattle, now looking to your EQR partnership, do you see an opportunity there to build resi on top of all their planned tower space?

Not a bad idea.

Haven't looked at that.

Have we?

There's one deal that we studied.

We're going to digest CamWest in the suburbs --

Okay.

-- before we jump in, but it's something that's certainly on our mind.

And then one final question, with Inspirada, when you bought the land on balance sheet and did your evaluation, did you guys assume any kind of price appreciation when you brought the land back on, or assumed flat pricing?

Flat.

I think the opposite.

(laughter).

Is it a 0?

Very, very close to that.

(multiple speakers) We haven't got a lot of room at the bottom here, so --

And technically, just to clarify, that land is still in the JV.

But it's almost book kept the same way in terms of carrying value as if it were on balance sheet.

All right.

Great.

Thank you very much.

Alex Barron, Housing Research Center.

I wanted to ask you, when I look at your interest and your capitalized interest this quarter, I see you incurred $29 million and you've expensed $16 million.

Obviously, I try to adjust for that as your volume grows and stuff, but when can we expect those two numbers to get a little bit closer in line with each other?

I think in order for that to happen, we'd have to have either less debt, and we just added $300 million, or more inventory in production, which we hope to have.

But as we've seen, that goes a little slower than we want it to.

That's how those numbers come together, Alex.

Okay.

And when it comes to your SG&A, I understand you're investing and growing, and that's good.

And I'm just trying to get a sense for how much of the incremental dollars were coming from a fixed portion, if you will, versus variable and how I should think about that going forward?

Well, the S component of our SG&A is the most variable with our revenues.

And it's about 30% of that SG&A number?

Correct.

Right.

Okay.

So, I think that's the best way to look at it.

As we sell more homes, we have more selling expense.

Got it.

Okay.

That's helpful, thanks.

Michael Rehaut, JPMorgan.

Just had a follow-up question regarding how to think about the order trends in the first quarter and so far in February, you had referred to the shift in the tower sales from unconsolidated JVs to on balance sheet, and I was wondering when you refer to the 43% gross deposits and 25% per community, does that refer to the total orders that include the JVs irrespective?

And so the shift really wouldn't impact those numbers?

Or --

Michael, that's on balance sheet to on balance sheet.

So then could you then kind of give us a sense of what the contribution from the towers now being on balance sheet contributed to the February and first quarter trends?

I think it's hard to do.

We had 228 Communities, and three of them are the towers, that are incremental this year compared to last year.

So I don't think it's as dramatic --

So on a per-Community basis you would adjust for that then, ostensibly?

What?

No.

It's divided per Community, there's high-rise towers, they're one of the 228 Communities --

Right.

Jade Rahmani, KBW.

I wanted to ask if you could give an update on the deferred tax valuation allowance, and also if the corporate tax rate was lowered to 28% from 35%, would you lower the valuation allowance by that 7% difference?

The deferred tax asset valuation allowance is $428.6 million this quarter, and I am not going to speculate on how the tax code's going to treat a change in rate as it relates to previously incurred losses.

And there are no further questions, sir.

I will now turn the floor back over to you for any closing remarks.

Thank you, Dawn.

Thanks, everyone.

Appreciate it.

Goodbye.

And this concludes today's Toll Brothers first quarter's 2012 earnings conference call.

You may now disconnect.