托爾兄弟 (TOL) 2012 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Toll Brothers Third Quarter 2012 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions)

Thank you.

Mr. Doug Yearley, you may begin your conference.

Thank you, Jackie.

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; Don Salmon, President of TBI Mortgage Company and Gregg Ziegler, Senior VP Treasury.

Before I begin, I'd 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 been 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 I won't re-read it to you.

Today we announced results for earnings, revenues, contracts, and backlog for our third quarter ended July 31, 2012.

Our third quarter net income was $61.6 million, or $0.36 per share, compared to $42.1 million, or $0.25 per share, in fiscal year 2011's third quarter.

Our net income included pretax inventory write-downs of $3.1 million and a net tax benefit of $18.7 million compared to pretax inventory write-downs of $16.8 million' a $3.4 million pretax loss from early repurchase of debt, and a net tax benefit of $38.2 million in fiscal '11's third quarter.

Pretax income was $43 million compared to $3.9 million in fiscal 2011's third quarter.

Fiscal year 2012 third quarter total revenues of $554.3 million and homebuilding deliveries of 963 units rose 41% in dollars and 39% in units versus fiscal year '11.

Net signed contracts of $674.4 million and 1,119 units rose 66% in dollars and 57% in units.

Backlog of $1.62 billion and 2,559 units rose 59% in dollars and 44% in units.

We ended this quarter with $877.4 million of cash and marketable securities and $819.2 million available under our bank credit facility.

Our net debt to capital ratio was 27.5%.

While we have been opening, on average, 1.5 communities per week, we are selling out of existing communities and continue to see modest delays in some openings, due to the complexities of the local land entitlement game.

For these reasons, we are modifying our community count projections and now expect to end fiscal year '12 with between 225 and 235 selling communities, which is a slight decrease from our previous guidance of 230 to 245.

Community count projections for fiscal year '13 will be discussed on our fourth quarter call.

We are enjoying the most sustained demand we've experienced in over five years.

In the past three quarters, the values of our signed contracts were up 45%, 51%, and now 66% compared to fiscal year 2011.

Three weeks into our fourth quarter, our non-binding reservation deposits, a precursor to future contracts, are up 59% compared to the same period in fiscal year '11.

On a per community basis, our net signed contracts of 4.87 per community were the highest for a third quarter since 2006; up 39% versus 2011, 32% versus 2010, 37% versus 2009, 80% versus 2008, and 42% versus 2007.

In addition to markets that we would expect to be recovering, such as New York City, the entire Boston to Washington, DC corridor, Dallas and Houston, Texas, San Francisco, Silicon Valley and coastal Southern California, we have also seen improvement in areas written off by some for dead such as Phoenix, the Florida Gulf Coast, and even the Detroit suburbs.

The pace of our contract growth has far exceeded the national housing data as we are gaining market share.

We attribute this to the strength of our brand, our excellent land positions, our proven reputation for reliability and quality, our strong balance sheet, and our seasoned management team.

Additionally, as the only national homebuilding Company focused on the luxury market, we are facing limited competition from the capital-constrained, small and mid-sized private builders who are our primary competition.

This quarter, we announced two exciting joint ventures.

In late June, Mayor Bloomberg announced the team of Toll Brothers and Starwood Capital had been named to develop a luxury, eco-friendly hotel and condominium community in Brooklyn Bridge Park on New York City's East River.

The site will include a 200-room hotel, which will carry Starwood Capital's one hotel brand and 159 condominium residences marketed under the Toll Brothers' City Living banner.

The development will feature unobstructed views of lower Manhattan, the Brooklyn Bridge, the New York Harbor and the Statue of Liberty.

We expect to begin condo sales in the spring of 2014.

Also in late June, we announced a joint venture with Shea Homes to develop Baker Ranch in Lake Forest, Orange County, California.

The project, which is next to Irvine, will be a highly amenitized, master planned community with approximately 2,000 homes.

Because it is a JV, the lots are not in our reported lot count.

We expect to begin home sales in the spring of 2014.

Finally, our Seattle division that started with the acquisition of CamWest last November is performing well.

We are on pace with projections and have already added 350 new lots to the 1,500 we controlled at closing.

We should soon be recognized as the leading builder of luxury homes in the Seattle market.

We believe the housing recovery is being driven by pent-up demand, very low interest rates, and attractively priced homes.

Customers who have postponed buying for a number of years are moving into the market.

With an industry-wide shortage of inventory in many markets, we are enjoying some pricing power.

With operations in 20 states and 50 markets, we see the recovery occurring across most of our regions.

With over 39,000 lots owned or controlled, a wide range of product lines, and $1.7 billion of cash, marketable securities and available credit, we are positioned for growth.

Now, let me turn it over to Marty.

Thanks, Doug.

Third quarter homebuilding cost of sales as a percentage of homebuilding revenues before interest and write-downs improved to 75.6% compared to 76.8% in the second quarter and 76.6% in last year's third quarter.

The year over year and quarter over quarter improvement was principally a result of mix, with the largest driver being high-margin, high-rise urban deliveries at 205 Water in Brooklyn and 1450 Washington in Hoboken.

Third quarter interest expense including cost of sales was 4.7% of revenues; identical to last quarter and 65 points better than a year ago.

Third quarter write-downs were $3.1 million.

Third quarter SG&A improved to 13.5% of revenues compared to 18.3% in the second quarter and 16.4% a year ago.

This reduction was primarily a result of higher revenues in the quarter compared to the previous quarter in the previous year.

Our operating margin was 5.7% or $31.5 million.

It feels good to be making money from operations again.

In the third quarter, we recognized a tax benefit of $18.7 million, related primarily to the release of reserves associated with completed tax audits or statue expirations.

We do not expect a benefit of this nature in our fourth 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 that deliveries in the fourth quarter will be between 800 and 1,000 homes; bringing total deliveries in 2012 to between 3,000 and 3,200 homes.

We estimate the average delivered price per home for the fourth quarter will be between $570,000 and $590,000.

We believe our Q4 gross margins will decline modestly, due to a significant reduction in the number of deliveries from our fully owned urban New York, New Jersey high-rise products, which results from reduced supply.

Finally, as Doug mentioned, the guidance on the range of selling communities expected at year end has been revised to a range of 225 to 235 from 230 to 245.

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

Thanks, Marty.

Housing is on the mend and we are very encouraged by our results.

We do remain cautious in our optimism, as we believe consumer confidence remains fragile and subject to the impact of negative economic and political headlines.

With our strong land position and access to capital, we foresee increased opportunity for profit and growth.

As housing demand marches towards historic norms, we envision a significant industry-wide supply/demand imbalance due to a shortage of ready to build on home sites.

In most markets, complex land entitlement processes make it very difficult to quickly get land approved and new homes into production.

Therefore, after almost every recession, the supply/demand imbalance has led to a significant home price increase as accelerating customer appetite bumps up against very minimal supply.

These rising home prices have caused many homeowners to once again feel more comfortable with their net worth, which in turn, fuels the economy's expansion which then spurs greater demand for housing.

We believe this pattern will occur this cycle as well.

Thanks for listening.

Now, let me turn it back to Doug.

Thanks, Bob.

Before we open it up for questions, I want to acknowledge the tremendous effort put forth by our Toll Brothers associates.

Not just for the past few quarters, but over the past six years during the toughest time in the history of our industry.

We are seeing better times and they deserve all of the credit for their dedication, determination, and commitment to our customers, our capital providers, and our shareholders.

Thank you to all those who have worked so hard.

Jackie, let's open it up to questions.

(Operator Instructions)

David Goldberg, UBS.

I was wondering if I could get some more color on the delays you were talking about on the new community openings?

What is specifically slowing down these new communities and is it just a matter it's going to take a couple extra months relative to your expectations?

Or is it a combination with selling out of existing communities along with a little bit of administrative delay at this point?

It's exactly that.

It's both.

We are selling out of existing communities faster than we had anticipated because the market has improved.

As is the case for our business since the beginning of time, entitlements are very unpredictable.

We do our best, but snags occur, delays occur, and it's part of the business and we've had some modest slippage of new communities opening.

It's that plus the acceleration of the sell-out of the existing.

It's a game to see how long they can delay us.

We invent new legal stratagems to bring us to market and they invent new blocks, so the game goes on and gets more complicated.

Makes sense.

My follow-up question was actually I wanted to talk -- in the opening comments, you guys talked about supply and demand and the pent-up demand that's getting triggered combined with the lack of supply in the market.

I want to ask a theoretical question here.

If you had to weigh what was more important in the market today, if it's really supply, the limited amount of supply, people who were buying in the existing home market are now having to go to the new home market because there's no inventory out there or if it's demand?

How would you weight those two factors?

If it is kind of equal or even more demand weighted, what's doing that; given the fact that the macro backdrop is not that attractive, slow growth, not a lot of great job growth, not a real robust recovery that we've seen in the macro economy.

First half of your question, the answer is clearly demand is driving our successes than the limited supply.

Why is demand up in light of macro trends?

People on the sidelines for seven years, incredible interest rates, homes more affordable than ever, families tired of waiting, wanting to move on, empty nesters tired of waiting, wanting to downsize.

It's just the building demand through a down market, confidence is up, and people are coming back out.

Last few months, given some of the headwinds we've seen, again, in the broader economy.

No.

August 16, Census and Department of Housing and Urban Development released stats that single family authorizations in July were at a rate of 513.

Last year, the rate was 417.

You're looking at a tremendous increase; it goes to show you that the demand is there.

You, yourself, said slow growth.

Whether it's slow or fast, it's growth and with some growth, you get some additional demand for housing, which spurs price increases.

When you get price increases, you get more interest from people who have been sitting on the fence.

At first, the interest is just to fulfill the desire to get a new, better home.

Second comes a desire not to miss out.

As you see prices increase, you'll see more of that kind of demand and the demand forces greater price increases and a snowball or cycle begins.

I think we're at the beginning of the cycle that is no different than the five previous cycles that we've seen, except this time, playing off of the deepest, the darkest recession in housing that we've ever witnessed.

I think we're quite a few years away from having to worry about the bust, but sooner or later the bust will come.

We just think it will be at least five or six years from now.

Got it.

Thank you.

Ivy Zelman, Zelman & Associates.

Congratulations.

It's very exciting and I know how hard you guys have been working, so I just want to tell you it's a lot more fun to be bullish, you guys.

But in any case, I think, Doug, last quarter, you were a little bit tepid in your expectations for home price increases and yet, we're sitting here in a situation where you are running through the communities at a faster pace.

It's obviously a nice problem to have, but why not push pricing today, with a little more aggressive stance on it and what's your position generally on price, given your more tepid outlook on last quarter's conference call?

We're still scared, Ivy.

The $10,000 price increase in 2005 is probably a $3,000 price increase today.

We know our customers are coming back out, but they are a bit scared themselves.

We would love to build our backlog a little bit.

We love to have the new price sheet, effective Monday, with an increase to show the clients over the weekend.

It's working, but we're being very careful.

There are markets, like New York City, where we are more aggressive and we're doing what we did in '05, which was really push the price.

But there's other locations where we feel good but not great and the modest price increases are showing some strength.

But we're being careful we don't get out too far on that thin branch.

Okay.

I can respect that.

My second question would be -- I'm not sure if David asked this.

I apologize if it's a repeat question.

But there's a lot of concern in the market about the labor constraints and raw material inflation and generally being able to close your backlog, given that we're seeing the industry struggle to meet this increased demand.

Maybe you could just speak to that if you, again, didn't already.

I apologize.

In most markets, we're okay.

There are limited locations where we're hearing about some labor issues.

On the pricing front, lumber is up the most.

It's up about $1,100 and for the year, our costs are up about $2,900.

That, fortunately, has been a little bit more than offset by the overall price increases that we've achieved and the reductions in incentives that we've been able to achieve.

But in most markets, we have pretty solid subcontractor bases that have been with us a long time and we're not concerned about a labor shortage right now.

We are concerned about some price increases that we're trying to manage as best we can with long-term contracts.

Okay.

Thank you very much.

Congratulations, again.

Rob Hansen, Deutsche Bank.

Just wanted to see if you could talk a little about the pricing and gross margin dynamic in 4Q?

Specifically, more what's driving the prices a little bit higher from here, but margins to decline a little bit?

I think our expectations on margins really reflects the fact that we had significant volume deliver in the second and more so the third quarter of our two fully consolidated buildings in Hoboken and Brooklyn, 1450 Washington and 205 Water, respectively.

We expect much less in closings in the fourth quarter and since those were high margins and were significant dollars in the third quarter and they're not going to be there in the fourth quarter, they bring the average down.

Okay.

What percent of closings during the quarter were in those high-rise buildings?

How many do you have left?

It was about 10% of our closings in the third quarter and we think it's going to be in the neighborhood of 3% to 4% of our fourth quarter closings.

Stephen East, ISI Group.

You've talked about gross margin.

You've had a tremendous amount of growth, yet you've got a big backlog.

When you look at your SG&A, you've levered it this quarter.

As you grow your revenue numbers, do you need to staff up?

What should we expect from the SG&A line moving forward?

Opening 1.5 new communities per week will certainly lead to some increases in staffing.

We cannot possibly do that with the staff we have, but there is capacity in our existing overhead as we increase sales paces on communities that are open.

If we go from 14 sales to 21 sales, it doesn't necessarily mean we're adding a second construction manager or we're telling the project manager you no longer oversee three communities, you have to go back to overseeing just one.

You will not see the ramp-up in overhead that will be consistent with the number of new openings.

Remember, we also have many communities that are closing, so that frees up some people.

On the absolute dollar side, SG&A will go up.

But as a percentage of revenue, we expect it to continue to come down.

Right, Marty?

I think that's an accurate statement.

Revenue moves up and down a little bit, seasonally.

That won't be a steady decline.

First and second quarter revenues are generally behind third and fourth quarter revenues but the year-over-year trends, that's our objective.

Okay.

Thanks.

If we look at -- I am going to combine two questions here and I'll be done.

If you look at one, could you give us an update what you're seeing in the land market?

Then two, you had two regions that were really opposite ends of the spectrum.

In the West, you really blew it out.

The Northeast was some slow growth.

Can you talk about what's going on in both of those?

Sure.

First on the land side, we spent $79 million this quarter on land, plus $110 million, give or take, on the Baker Ranch deal, which is a joint venture, so that's in addition to the $79 million.

The land market is good.

We're seeing good deal flow.

We've got a lot of action.

There aren't too many bank deals right now, distressed deals.

Most of what we see is back to the old fashioned talk to the farmer, talk to the developer, talk to the heirs of an estate.

They're good deals.

We underwrite everything to work today, so we're not building inflation in and mothballing new purchases for better times.

I'd say it's not great, but it's good and it's been pretty consistent, the land market's been pretty consistent over the last year or so.

Marty, you want to take the second one?

Sure.

In terms of the West, that's an easier answer.

I think it's the addition of Seattle, which had contracts of I think 84 units in the quarter and none the quarter before -- or the year before.

Okay.

In terms of the Northeast -- or the Mid-Atlantic -- North, it's a little tougher to point to anything in particular.

I think it's really a function of a lot of that market came back relatively solidly or better than the other geographies in 2010 and held there in 2011.

So, it continues to be steady, whereas the other three regions are showing significant growth.

Okay.

Thanks a lot.

It's also a factor of the base that you're comparing --

Right.

-- yourself to.

I used to joke when Vegas was getting started, Vegas is up 100%, Vegas is up 100%.

Yes, it went from two homes to four, four to eight.

Meantime, New York was going from 2,000 to 2,100, percentage increases were much less, but the volume was much greater.

I think that's tilting some of these stats.

Joel Locker, FBN Securities.

On last call, you mentioned that you had 90 mothballed communities and you were going to open, I think, three in fiscal 2012.

Just was wanting to get an update on if you're planning to pull out some of the other 87, based on stronger orders.

We have opened two year-to-date.

We have one planned to be opened in fourth quarter.

That is our consistent with our prior guidance of three.

Next year, we expect to open significantly more than that.

I'm sure we'll discuss it on our next call.

Yes, we study it all the time and as the market improves, so long as we can hit that threshold profit margin, we are very anxious to open it.

All right.

Thanks a lot, guys.

Stephen Kim, Barclays Capital.

Before I get in my first question, though, I just wanted to point out, Marty, that you made the comment that it feels good to make money again.

Some of us have been around long enough to know that, I think, this is your first quarter where the Company's actually made money in homebuilding operating.

I think you misspoke there.

(Laughter)

But I wanted to -- talking about ancient history, I wanted to try to get a sense for how things in the marketplace were a little different than maybe they were in the past?

In particular, I'm wondering, if you have the data available, what percent of your buyers don't have a home to sell?

I'm wondering how this compares to what you've traditionally seen and if it's maybe begun to change in any way in the most recent couple of months?

Steve, we don't have that data for you.

Don Salmon, who's here, runs our mortgage Company, is indicating that the number is very small.

We have a few first-time homebuyer communities, Stratford Club, Marlboro Ridge, maybe.

But not a lot.

I think in some of our New York product, we pull people out of apartments.

We do.

Some of the condos, yes.

But it may also be some of our buyers have sold their home and then they come find us.

That's the essence of the question, yes.

(Multiple speakers)

Our second home markets are similar.

There's not a home to sell for a second home buyers either.

They don't have to sell to buy.

You don't have that data, though?

Okay.

That's fine.

The second question is just a basic question.

What is the dollar value of homes under construction that you had at the end of the quarter?

How does that compare with where you were in this quarter last year?

If you have the first quarter of this year, I'll take it as well.

It might be best to get that to you offline.

Do you have it all here, Gregg?

Construction in progress this quarter is just under $2 billion.

A year ago, it was $1.7 billion and just 90 days ago, it was $1.8 billion.

I think those are the three periods you asked for.

No, no.

The first quarter of '12 is what I was looking for.

First quarter of '12, $1.8 billion.

Okay.

Got it.

Great.

Thanks a lot, guys.

Appreciate it.

You're welcome.

I mentioned Don Salmon's name before, runs TBI Mortgage.

Don, why don't you give the group a quick update on the mortgage market?

Sure.

Rates are still extraordinarily low, conforming 3.5%, Doug, zero points in most markets.

Jumbo is getting more and more available by the day.

In the last month or so, we signed up two new jumbo investors; one with terrific rates.

Our spread between conforming and jumbo is now contracted to 0.75 of a point, which I don't think it's been there in a while.

Another one of the investors is more of a niche-y type investor to open up more product lines for us.

We're now on the street at a 5/1 ARM -- jumbo 5/1 ARM under 3%.

A 7/1 ARM, jumbo, true jumbo is 3% and no points.

There's nothing to complain about.

LTV is still 71%.

FICO score, 760.

LTV for the quarter was 72%, for the year, 71%.

761FICO score.

The basic buyer profile hasn't changed.

It's still very strong.

Adam Rudiger, Wells Fargo Securities.

I wanted to ask a bit about land.

I'm just curious if you see some of the land deals that cross your desk, maybe they're ones that you passed on but you then might see maybe competitors buy.

I was curious what the gross margin difference was versus land you might have bought during the downturn?

Really the genesis of the question is just trying to understand what potential benefit going forward your longer land supply will provide you relative to shorter supplied peers that are out more aggressively looking now.

That's a tough one, Adam.

We don't know what margin the other guys are willing to buy land at.

We don't know all the assumptions that go their pricing.

In some cases, it's fair to say they narrowly edge us out.

In other cases, we don't understand where their numbers are coming from.

It's tough to quantify what benefit we think we have from having land and not having to go get it when we're short like some of the others may be dealing with.

Is it fair to say, though, that you think in many markets that your longer land supply is going to afford you better margins than those that are scrambling to get it now?

I think that's true.

Much of the land we own and control has been with us a long time.

Some of it has been significantly impaired.

We're very comfortable with our pipeline.

There are still good deals out there that can be found if you hunt hard and there's other deals that you're right are getting priced up and in our opinion, make no sense.

Those are the ones we stay away from and we're able to stay away from those deals because we have enough land owned.

I'm going to ask another one that might be tough to answer, too.

If you think about maybe an 800,000 to 1 million single family start environment, what do you think the Toll income statement is going to look like from a perspective of community count, revenues, margin and earnings?

Broadly speaking and we're compared to the last time we were at that level.

This is Bob.

Go back and look at where we were when we were doing those numbers.

2005 we were clocking from, what, 330 communities, something like that?

Very close, 325.

The housing starts were 2 million.

He said when you have 800,000 to 1 million starts, that's half the '05 market.

Fewer players in the market.

Right.

We're more diverse.

We have a lot more offerings out there.

I don't think we're prepared to answer that.

What we're doing today is also the number like 600,000 starts.

If you put 25% to 50% on top of that, it's a guess.

Okay.

I appreciate the time.

Thank you.

I just read that number.

Where did it go?

Commerce and Housing said 517, 513 for single families and last year was 417.

Right.

Take the number and double it.

That would put us double where we are, but I think we get some greater efficiencies.

The overhead handles more so we would do better than to double what we're doing now.

I would think our throughput per community would increase to a much greater pace than it is now and our community count would increase, but not double.

Joshua Pollard, Goldman Sachs.

You talked about mothball communities a little bit.

Could you talk about the speed at which you can bring those on?

Do you think you'll face the same hurdles that you're facing that's slowing down a little bit of your community count this year?

Also, discuss what, if any, on the wholesale margin difference you guys would expect out of those?

Yes, we can bring them on quickly.

The way we define mothball means it could open.

So, we're not talking about the delay in those final few permits that frustrate us with other communities that are still running through the process.

Margin, the reason there's still 90 on the mothball list is because they don't work.

The markets will have to improve for us to bring them online.

That is happening in isolated locations.

That's why we've only brought three on to-date -- two on to-date this year; one more coming.

There are some locations where it could be years and there's others that are very close to being reopened.

When you say don't work, the question is the fulcrum between working and not, is that today's margins or is that something lower but still not the teens levels were where we were a few years back?

I think it's a combination of a number of those things.

It could be today's margins.

It could be competing product.

We're already offering very close to those mothball communities.

Let's sell out of the existing product before we open up one of the mothballs, so as not to cannibalize demand we have.

It's a combination of factors, Josh.

Okay.

On the inflation side, you said cost up $2,900.

I'm trying to understand.

Are your costs up more in markets where you're able to raise prices more?

In other words, are you guys able to raise prices in areas where you're seeing labor inflation on top of the more traditional commodity inflation?

Right now it's almost all commodity inflation.

The local labor market pricing is flat in almost all of our markets.

The $2,900, as I said, $1,100 of the $2,900 is lumber and then Gregg, number two was concrete, I believe.

Yes, after that looks like year-to-date is concrete, yes.

Which was around --

$750 a house.

$750, so we're already up to $1,850 out of $2,900 between concrete and lumber.

As you can tell, the labor component is a very, very small part of it.

The prices are not going up yet in the hotter markets because of our sales pace.

I wanted to emphasize, the price we're selling the homes for has very little, if any, relationship to the increased costs.

We raised the prices according to demand, not according to cost.

Cost has nothing to do with it.

Okay.

When we look at the M&A that we've seen across the builder space, particularly of private builders, you guys did one in Seattle.

I just would like to understand the appetite for that relative to buying land.

There's been a flurry of them here over the last year, but the conversations that I've been having with you all and with other builders suggest that you guys don't really want to do that, that you'd much rather buy the land.

I'm wondering if, over the last 12 months, what's gone on in the land market, even if incrementally, you guys have tilted a little more toward looking at private builder deals?

We've acquired seven builders in 17 years.

In every case, it was to enter a new market.

We're very happy with our geographic footprint right now.

The last market we wanted to get into was Seattle.

That was the final market of the top 15 most affluent that we were not in.

We would rather pick off individual parcels of land that work than buy a builder who has a portfolio of great land, good land, average land, and bad land.

It just doesn't make sense for us to do that in existing markets where we have the operations, we have the brand.

Right now, our strategy is to go after the individual pieces.

Okay.

I'm trying to understand your decision be fully consolidated versus joint ventures; both on the bigger master plan community deals you guys are doing, but also on some of the high-rise stuff.

You guys, obviously, have expertise on the building side, clearly have it on the land development side and have tons of capital.

I'm trying to understand what's really the decision point for fully consolidated versus joint ventures.

Thanks, guys.

It's the way we're permitted to get into the deal, generally.

You're right, we would prefer to be consolidated and own the whole thing, but if the land owner controller says, you can come into my house as long as you let me stay here and have a couple of bedrooms, well, for good food, we go.

That's how we get most of our consolidated deals.

I'm asked the question by Steve Sullivan through the Internet -- Bob, given the changing dynamics of the industry this year, would you be surprised to see consolidation occurring over the next 12 months or so?

Yes, I'd be surprised.

Thank you, Steve.

I had a question sent here from Mark Greenfield about some data for CamWest.

What were contracts we had in the first and second quarter to complement the 83 we mentioned in the third quarter?

We had 90 in the second quarter and 2 in the first quarter.

Recall that in the first quarter, we were a little stringent on our definition of a deposit.

About 20 deposits we took in the first quarter we did not classify as contracts until the second quarter.

Jade Rahmani, KBW.

Just wanted to ask, can you quantify how much equity capital you currently have invested in City Living and how many buildings or units will be actively delivering in 2013?

Okay.

Gregg's going to look that up for us.

In the meantime I had a question sent via e-mail about the increase in our joint ventures year-over-year.

The predominant increases associated with the 400 Park Avenue project we're doing with Equity Residential as well as the $110 million investment we made in the Baker Ranch project out in Orange County.

Gregg's still poring over that.

A second question I had is, structurally, has anything changed in the past few years compared to history that might restrict our ability to get back to what somebody else's definition of normalized earnings might be?

I think there's two offsetting factors.

First, since the beginning of the downturn, we've begun to expense stock options through our income statement, as has the rest of the industry.

Offsetting that drag, if you will, prospectively is the fact that we've learned a lot of lessons as we've gone through this and we've built some efficiencies into our operations.

It looks like the City Living brand, which, again, includes joint ventures and Philadelphia besides New Jersey and New York.

2013 should have 12 communities delivering out of it, but 2 or 3 of them actually only have a few units left.

They're not as material as the other ones.

Total capital invested to date, I don't have for you, I'm sorry.

Okay.

Just a follow-up, again, on City Living, when we think about the terrain given how high the price point is, is there any initial parameters you could tell us about how to think about the incremental impact on margins it could have?

I think we'll give you a little bit more detail on that as we wrap up the fourth quarter, but we expect the terrain to deliver in the first and second quarter of 2013.

There's one unit left for $20 million.

Don't miss it.

We had a $17.5 million offer on it and we kicked them out.

Michael Rehaut, JPMorgan.

First question, I was hoping to get a little more color on the gross margin and it was helpful to hear about the mix really influencing the quarter-to-quarter movement.

You said that 10% of the closings in the third quarter were from -- and I just wanted to clarify this, was it from those two specific buildings or your overall City Living?

Those two specific buildings.

Okay.

Thinking more broadly about City Living and multifamily as a percent of your overall business on a consolidated basis, can you give us a sense of where you are right now?

Is it just the City Living margins as part of the multifamily effort that are really the higher above corporate average margins?

Yes.

Where is City Living overall as a percent of the business today versus a year ago?

Where do you think it could be three or four years from now as the single family business would come back stronger?

City Living's 10% to 15% depending on whether you're counting closings or orders.

It is 10% to 15% because it's by far the best performer.

As the other groups come back, I think it will stay where it is or possibly shrink.

We do have 14 future buildings coming online where we own or control the land and we're hunting for more deals every day.

I think the City Living group will continue to grow, but probably not grow as fast as the rest of the business through the recovery.

It's more difficult to find the territory that will support the City Living brand.

It's hard.

In an average week, we must approve two to three new land deals to result in communities.

More than that?

Three or four.

I don't see us being that fortunate because we're restricted by the territories that will support the product.

With the ordinary land deals, you're talking about 50 markets.

With the City Living brand, you're talking about three markets, four markets at best so it's going to be hard to increase that above 10% or 15%.

Appreciate that.

Next question on the SG&A.

You had great leverage this quarter.

I think if you calculate sequentially 2Q to 3Q, your variable SG&A was less than 4%.

Great job there.

The question is, is that 4%-type number something that we should think about on a go-forward basis?

I'm not really trying to get into 2013 guidance or fiscal '13 guidance, but just conceptually, as you're perhaps growing your community count, I would think that the variable SG&A or that 4% would be maybe a little higher as you're adding on some level of additional personnel, et cetera.

Just thoughts on how to think about that?

Sounds like you have an opinion and I'm not going to disagree with it.

(Laughter)

Okay.

One last quick one if I could.

You mentioned, Doug, I think in your opening comments, you pointed to some pricing power and the recovery across most of the regions.

It would be helpful if you could give us a sense of -- not necessarily ask for the old report card, but if there are areas of strength or weakness, from a pricing standpoint, across your markets, that would be helpful.

We experienced price increases -- or imposed price increases in about 50% to 60% of our communities.

There are others where, during special sales events, we may be increasing an incentive for a limited time, so it can go the other way in isolated cases.

The most pricing power, we've said it thousands of times, is New York City.

The entire Boston to Washington corridor, where 60% of our action is located, has good pricing power in individual locations.

Remember how very local this business is.

One side of Philadelphia may be different than the other.

One community may be different than another.

As you head south, Raleigh and Charlotte, I'd say Charlotte has a little more pricing power than Raleigh.

They're both okay, improving markets.

Florida, it's been great, best in six years.

We are selling through the summer in the Gold Coast where everybody has returned to the East, the Northeast, and the Midwest.

In limited locations like where we have lots on the intercoastal, we have pricing power.

We weren't disposed to increase price.

We review every community every week and initially we weren't disposed to increase the price, but the regional President pointed out to us we only had six left.

They're not making lot more of these lots and he wanted to raise it.

He raised it and we kept right on selling as though we hadn't raised it.

It's a very community by community kind of thing.

Texas we have pretty good prices.

Texas, I was going to get to that next, Houston, Dallas and we're very small in San Antonio, but we're doing well.

All three of those markets, we have pricing power.

Vegas, still pretty flat.

Phoenix, sales are up, but I wouldn't say we have a lot of pricing power.

California, Silicon Valley, hot.

We just wish we had more.

San Francisco, strong.

Coastal Southern California, Orange County, and Northern San Diego County, very strong.

Colorado, some pricing power.

We've really grown there, done a great job with expansion and we're happy.

Then last and sadly least is the Midwest, where we're very small in Minneapolis.

We just had a new opening that we're excited about.

Chicago is still very slow and suburban Detroit is our best Midwestern market.

We're looking to grow.

We've actually had one community that we've raised price in and the relos is returning, the auto industry is stable and growing again and we're encouraged.

That roundup would tell you what I started with, which is 50% to 60% of our communities are seeing some price increases.

We're continuing to be careful because we know our clients are motivated but scared and we will plan accordingly.

Seattle, like we talked about earlier, Seattle prices are going up and we have a couple new openings that look like they should be very successful.

Dan Oppenheim, Credit Suisse.

Was wondering, just on that pricing issue, you've talked again about being scared on it.

What gets you to jump off the end of the diving board there?

Is it really looking at the remaining supply in a community, is it just looking at the absorption, is it sitting around Monday evenings and deciding okay, let's go ahead with it?

Wondering a little bit more in terms of what's driving that in terms of the obviously the community by community, but what the key there is?

Have you seen any appraisal issues at all where you have been raising prices?

Pretty much have escaped the appraisal issues and the difficult mortgage issues.

It's more of a pain to get a mortgage than it used to be, but we have the staff.

We have the experience to put up with the pain and therefore we don't have much trouble with the mortgages.

With respect to the pricing that Doug was describing, it comes from a weekly analysis of where you stand.

If you've done one deposit every two weeks and you're headed for 15 to 17 on a yearly basis, you don't feel the strength to raise the price there even though two people last week might have come in and bought.

On the other hand, if you get a deposit every week, and you see that you're headed for 25 in backlog then you definitely want to give that kind of community a kick.

If you've got 30 in backlog, then you start to ask what are our production capabilities, can you fill this all within the next 12 months?

You can't?

If you can't, then why the hell are we selling them at the price?

Let's boost the price.

It goes pretty much community by community.

Thanks.

I guess just the other question, wondering about some of the land.

You talked about a lot of it being back to the farmer, the developer, estate sales and such.

Wondering if you're getting much sourcing of land from Gibraltar, the relationships from that, are you seeing more opportunities there as opposed to the more typical developer deals?

Yes, Gibraltar has not yet sourced Toll Brothers with a single community.

We just talked about one yesterday that has the potential to become the first Toll Brothers community acquired from Gibraltar.

The deal flow into Gibraltar right now is pretty good.

As you saw this quarter compared to last, their profit will be lumpy as they work through the various loans that they have acquired and we're very happy with how that group is performing.

But it was never intended to be a source of land for Toll Brothers and that continues to be the case.

It's a different business.

Thanks.

Ken Zener, KeyBanc Capital Markets.

Just so I don't forget it, what is the existing DTA?

Within the historical context, could you help us think about the decline in interest expense and gross margins, was 5.1 in 1Q, 4.7 in 3Q, but that's well above the low 2 range we saw in '04 and '07.

I think that's going to be a big driver of your gross margins.

As you look out '13, '14, not explicit guidance but what would be the driver in terms of turnover that would bring that lower?

The deferred tax asset was $429 million.

About $350 million of that is federal and the balance is state.

In terms of the interest as a percentage of cost of sales, that's really a function of velocity on sales.

If you open a community like we did at 1450 Washington and at 205 Water and sell out of it real quick, you're going to have interest as a percentage of revenue that's much lower.

If you've had land for a while like we have in some of our other communities, it's going to be higher.

What we've seen is an increase in pace which accelerates the sell-out of the communities and reduces the interest as a percentage of revenue from the mid 5s where it was a year ago, two years ago, down to 4.7.

If that continues, we would expect it to go down further.

Okay.

As a recovery slowly unfolds, I think one of the bigger challenges is how builders like yourself that bought a lot of land at the bottom versus those that didn't buy as much.

But you said when you bought the land that it worked at the -- then, so it's better now, current absorption pace.

Are you inclined to open up all the new land once development is done, which is different than the mothballed?

Could you quantify how many of your lots are in communities were bought from the bottom?

Thank you.

If we have all permits and approvals, we are inclined to open for sale unless there is some strategic reason not to because we are selling right next door.

That's rare.

Sometimes we buy, particularly in a downturn, when you're working with a bank and they want to sell it as is, land that doesn't have all entitlements.

That's the exception.

That's not how we've built the Company, but that does happen on occasion and I think we quantify the risk and take the right discount on the land purchase.

Not everything we're buying through the downturn is ready to go today, but if it is we try to open it.

In terms of how much we bought through the downturn, Gregg, can you put your finger on that?

No, I wasn't going to say that as much as looking at the number of improved lots, they're sitting at 12,000.

A good portion of them are going to be from historical purchases and then outside of that, everything else is sitting at various stages of improvement.

Of the other 17,000 lots, that's hard to say how much of that is from old versus new.

I don't have a good answer for you specifically breaking it out.

Each quarter we identify how much capital we put out for new deals.

You could certainly go back and add that up quarter-by-quarter until the beginning of the downturn.

That wouldn't give you the lot count, but it would give you an idea on how much money we've spent.

You've got to take into account when we contracted the land.

There may be a several year lag from contract to actual acquisition of the land.

Right.

Some of the dollars spent is on old option contracts that still work.

That's right.

Or it could be new deals that we just found.

Right.

The final part of your question, comparing the returns on mothballed land to land we bought through the downturn.

If we did it right, the land we bought through the downturn worked.

That's why we bought it.

The mothballed, in many cases, still doesn't work.

I would hope the new purchases over the last five years are coming online as soon as they can because they make sense and they make money.

There are some instances where we have bought in the last five years with the intention of mothballing because it was in such good territories, such as Washington, DC, Northern Virginia market, where we have a bunch of lots.

The carry of those lots, when added to the profit that we can recognize if we wait until the next door community is sold out, the carry is insignificant compared to the pricing that we can get.

If we bring it on, we can do business at both communities, but we'd make 1.5 times and therefore we would rather wait and make 2 times on both of the communities because the carry isn't so great for the second one.

We're fortunate, we have a bunch of those cases.

Jack Micenko, SIG.

On the 14 wholly-owned City Living projects, how many sales offices do you expect to open of that 14 in 2013?

2013, we have one new one in Hoboken.

We have two new in Manhattan and we have one new in Philadelphia.

I believe it will be four.

Five.

How many units are behind those?

How many units are in those four buildings?

Yes.

I'm going to give you a very, very round number of 500.

Okay.

Then more of a broad-based question, you've been through a cycle or two.

When does the private guy begin to resurface?

(Laughter) Is it material price increases?

A couple banks have talked about reentering the homebuilder lending market in the past month or two.

You've been around a while, when do they finally reemerge?

You just put your finger on the key to the question.

It's when the banks start talking about entering.

It's got something to do with the memory span of the banking industry.

When they forget about how badly they got creamed by taking these deals and go back, in that you start to get private companies once more entering the market and prospering until they're busting.

Fair enough.

Thank you.

Buck Horne, Raymond James & Associates.

I want to make sure I was interpreting a comment correctly.

The percentage of orders that came from the high-rise projects in the quarter, was that 15%?

Was that the number you were thinking about for the orders in the quarter?

Total orders for City Living including JV, including Philadelphia was 7% based on units and 10% based on dollars.

That's the in orders in the quarter.

Perfect.

There's one question that's kind of been lingering out there in terms of comparability of margins between builders.

Is there any chance you guys might be able to disclose the level of external sales commissions that might be embedded in your cost of sales?

We've got it, but whether we have it here for this meeting -- we can get that.

We can get it.

That would be great, if I could follow up with you on that.

Just related to the City Living concept, you mentioned that in the recovery you think that as the growth in the more traditional single family product recovers that City Living might decrease as a percentage of your Company, either in orders or closings, and maybe I'm confused about that.

Maybe I'm thinking that there's actually this demographic opportunity that you guys are just beginning to tap into and just maybe -- do you think there's a limiting factor on that in terms of the land availability that might constrain your ability to keep pace with the overall recovery in the City Living concept?

There's plenty of land in lousy markets.

It's highly competitive and very little land in good markets.

I would say it's primarily a market constraint that keeps us down.

What do you think are the target markets where this is viable?

You've got New York, you've got Washington, DC, Boston, Philadelphia's a struggle, but it's our hometown and we can pick up a great deal there like every five years, one.

That's about it.

How many more markets are there?

San Francisco we don't really have the expertise yet.

That's about it.

We don't -- LA we don't have the expertise yet.

Chicago doesn't work anymore.

Chicago, it's a nightmare.

Seattle, we think one day.

Yes.

Seattle, downtown comes back.

Just not that -- I don't want to take the meeting up but there's just not that many markets to contend with.

Okay.

Thanks, gentlemen.

It's 2.1% external commissions that we have as a cost of a house, in cost of sales.

Alex Barron, Housing Research.

I didn't hear any commentary when you were going through the markets about part of the Washington, DC area.

I was recently there and I noticed that some of your projects in Northern Virginia were on fire.

The ones in Maryland seemed a little slower.

I'm trying to understand if what you guys think makes a difference between those two markets?

That's a great question.

Every Monday we sit here and say the same thing.

What's the difference between Northern Virginia and Maryland?

All we can say is there used to be a lot more action in Maryland than there is.

Virginia has not only held up very well, but is increasing now.

It seems to be coming back much stronger, much faster.

And I would love to get the answer to the question.

If you get it from somebody else, please give us a call.

All right.

My second question was, can you guys elaborate or give us a little bit more detail, update on Gibraltar like what happened during the quarter that led to the slightly lower income?

I think it's simply a fact that we didn't have gains on foreclosure like we had the quarter before and we didn't have gains on disposition like we had before.

As we mentioned, it's a pretty lumpy business.

We still have about $135 million invested in it.

It will continue to be lumpy, as frustrating as that may be for you guys.

It's more frustrating for us.

Thanks, guys.

Desi DiPierro, RBC Capital Markets.

Are there certain geographies or types of homes where you are gaining market share more than others?

Geographies where we're gaining more than others.

The whole northeast sector I think we're gaining more than others; in many markets, we are the market.

You sell to us or you just sit.

In Mid-Atlantic, there's still pretty good -- Pennsylvania's probably our market.

In Maryland and Virginia, there's a lot more competition.

Anything to add?

Dallas and Houston, we're growing rapidly.

Right.

It's a huge market with many players, but we are -- even though our market share is very, very small, that's a big growth market for us.

It's a little bit of the Vegas story, though.

You went from two to four, to four to eight.

Not any longer.

How many communities do we have in Dallas now?

We must have approved four this week.

Okay.

Thank you.

Timothy Jones, Moloney Securities.

Can I get one thing straightened out?

On one of your -- the biggest builders in the country, first of all, are you in Atlanta?

No.

(Multiple speakers)

Okay.

He mentioned also the two terrible markets as being Minneapolis and Chicago.

He's not in your price range, obviously.

Could you, before I ask my question, could you address those two markets?

I don't think the economies are that bad, but here is a guy that's in the start-up business and you're in the move-up business and you both mentioned those two markets.

What is the situation there?

Minneapolis, we didn't think that was a bad market.

It's constrained terribly by school systems.

If you're in the right school district, you've got good opportunity.

If you're in the wrong school district, you're dead.

I think.

Waziyahta or is that a camp in Maine?

Wayzata and there's another school system that's great in Minneapolis.

Chicago, Tim, we can't figure out.

It's dead as a doornail.

It has been very tough to market in.

We see just a little bit of life now, maybe it's just five years behind the rest of the market.

Is it over-building there or what?

I don't think the economy is that bad.

Chicago has lost north of 300,000 jobs in the last two years.

What percentage is that?

That I don't know.

Okay.

My sources tell me that many of those jobs are high wage earners and that is not good for a market.

Illinois is a very difficult state to do business in.

Illinois is a disaster.

Thanks, Tim.

I know what side of the aisle you're on.

Okay.

Here we go.

The first question is you were nice enough to break down the increases in cement and lumber.

The gypsum manufacturers, EXP and USG, prices for the last six months are up about 20% and 27%, double-digit for Owens-Corning.

Yet none of the big builders are seeing anything remotely like those type of price increases if you net out the labor costs that go with it.

Why is that?

Drywall for us is up $359 this year.

On a base of what?

Per house.

He wants to know up $359, what percentage increase is that.

The percentage increase.

I bet you that's a 10%.

Yes.

What?

Less than 10%.

That's exactly what the other people say.

How about fiberglass?

Insulation's up $182.

That's even less than 10%, way less than 10%.

There's a lot less insulation cost in a house than drywall.

I know that.

But it's still less than 10%.

You've answered my question on that.

Bobby, when you and I used to sit up in New York in the mid '80s, you used to sell three houses and you would automatically -- generally, raise the price $5,000.

That's right, Tim.

That was when we sold -- (multiple speakers)

I understand that.

Then you said in the good times, back in 2005, you raised it $10,000.

Obviously, that was 20 years later.

Now my question is now you're saying your raising them $3,000.

Are you raising them $3,000 like you used to raise them when you sell three to five of them and then go ahead and automatically raise it?

Are you following that same model you did 20 -- I don't know how many years ago now, 30 years ago?

Actually, we go all the way back to 40 some odd years ago.

I know.

Yes, Tim, we're following pretty much the same model and thanks very much.

Okay.

There are no further questions at this time.

Thank you very much, Jackie.

Thank you everybody.

See you next quarter.

Thank you.

This does conclude today's conference call.

You may now disconnect.