托爾兄弟 (TOL) 2012 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Toll Brothers fourth quarter and year-end earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you.

I would now like to turn the call over to the CEO, Mr. Douglas Yearley, to begin the conference.

Sir?

Thank you, Patrick.

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 I won't re-read it to you.

Fiscal year 2012 ended October 31.

Fourth quarter revenues rose 48% in dollars and 44% in units, contracts rose 75% in dollars and 70% in units, and backlog rose 70% in dollars and 54% in units, compared to fiscal year 2011's fourth quarter.

Our fourth quarter pre-tax income was $60.7 million, and net income was $411.4 million.

Pent-up demand, rising home prices, low interest rates and improving customer confidence motivated buyers to return to the housing market in fiscal year 2012.

As household formations accelerated and unsold home inventories dropped to record lows, the industry took further steps towards a sustained housing recovery.

We enjoyed resurgent activity across all of our product lines and in most of our geographic regions, the momentum that began in our first quarter of fiscal year 2012 built throughout the year.

Sequentially, over the four quarters of 2012, the value of net signed contracts rose 45%, 51%, 66% and 75%, compared to fiscal year 2011's same four quarters.

Our net contracts per community, same-store sales, which increased 33% and 60%, respectively, versus fiscal year 2011's full year and fourth quarter, were the highest for a fiscal year since fiscal year 2006, and the highest for the fourth quarter since 2005.

Now, five weeks into fiscal year 2013, our contracts are up 34% versus fiscal year 2012 same period.

Our large increase in contracts was achieved primarily through an increase in per community sales.

Fiscal year 2012 contracts per community of 18.2 while up 33% from fiscal year 2011 were still 36% below our average annual pace from 1987 through 2006 of 28.6.

Therefore, as the economy strengthens, we believe there is great potential to increase sales paces per community.

We have been positively surprised at the growth in contracts because traffic has been relatively consistent with recent years, meaning weak.

We are experiencing our highest conversion ratio from visitor to agreement in the history of the Company, as the quality of the traffic is superb and visitors are very serious about buying.

When traffic returns to normalized levels, we believe there is a strong possibility of significant increases in absorptions, and therefore, pricing power.

We believe the publicly traded home building companies are growing market share.

As the only national home building Company focused on the luxury market, we are particularly well-positioned.

We ended fiscal year 2012 with approximately $1.2 billion of cash and marketable securities, $814.9 million available under our 12-bank credit facility, and a net-debt-to-capital ratio of 23.6%.

Our financial strength gives us a competitive advantage over the small and mid-sized private builders in our luxury niche whose access to capital and land remains constrained.

Our financial strength also gives us an advantage in buying land.

As sellers know, we have the appetite and capital to close transactions quickly.

Since the start of our fourth quarter, we have been seeing great deal flow in some excellent locations.

Our philosophy has always been to acquire exceptionally located sites, on the corner of main and main.

In contrast to the just-in-time model of some land-light builders, we often take this land through the approvals while we have it under option and then improve it.

This helps increase our profit margin and enables us to position the Company for the future as we put land under control today that may translate into revenue, starting several years later.

With the strong presence in the Northeast and Mid-Atlantic states, we felt some effects in the immediate aftermath of Hurricane Sandy, but don't expect any long-term impact on our performance.

Our associates were incredibly generous of their time and resources as they and the Company donated food, clothing, equipment and money to aid the recovery in the towns and cities where we operate and live.

We are proud of our team's response as our thoughts go out to those who have suffered from this tragic event.

As the economy slowly heals and more customers re-enter the housing market, we look forward to the future.

Based on our strong balance sheet, solid land holdings, recognized brand and excellent team of associates, we believe we are well positioned for the housing market's continuing recovery.

Now let me turn it over to Marty.

Thanks, Doug and good afternoon everyone.

Fourth-quarter home building gross margin, before interest and write-downs was 24.6% of revenues, compared to 24.2% in 2011's fourth quarter.

2012's third quarter margin was 24.4%.

The improvements are driven by volume and a slightly improved pricing environment.

Fourth-quarter interest expense included in cost of sales was 4.3% of revenues, compared to 5% from 2011's fourth quarter and 4.7% from 2012's third quarter.

The improvement here is a function of increased settlement pace and mix shift with more deliveries from newer communities.

Fourth-quarter SG&A of approximately $74.5 million was higher than the $68.4 million in the year-ago fourth quarter, but down from the $74.9 million in the third quarter of 2012.

The decrease compared to the third quarter was primarily attributable to an $8 million accrual reversal for our self-insurance reserves, driven by our annual actuarial study.

As a percentage of home building revenue, SG&A was 11.8% for Q4 of fiscal year '12, compared to 13.5% in fiscal year '12 Q3, and 16% in Q4 of fiscal year 2011.

The improvement is primarily due to increased revenue and the aforementioned reserve reversal.

Fourth-quarter other income and income from joint ventures was $8.1 million.

We expect our joint venture income in 2013 to decrease compared to 2012, as we continue to have fewer units delivering from joint ventures.

With the successful completion of our September convertible deal, our share count grew by 5.86 million shares on a fully diluted basis, and so we enter 2013 with a diluted share count of 177.6 million shares.

As noted in our release, we reversed $400 million of the deferred tax asset valuation allowance.

The reversal was deemed appropriate after careful weighing of all the evidence.

All of our federal valuation allowance has been reversed.

While we still maintain valuation allowances for certain state deferred tax assets, we do not believe it likely that they will reverse in the near term.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for fiscal year '13.

For fiscal year '13, we expect to deliver between 3,600 and 4,400 homes, and we estimate the average delivered price per home will be between $595,000 and $630,000.

The range for our year-end community count is 225 to 255.

With the reversal of our valuation allowance on our deferred tax asset, we project the tax expense of approximately 39% for 2013 and beyond, but note that we still do not expect to be a cash taxpayer for some time.

Now let me turn it over to Bob.

Thanks, Marty.

Our optimism for our own and the housing industry's prospects is buoyed by basic demographics.

During the last five years, population has continued to increase in the United States by 12.6 million people since 2007.

However, household formations, a key driver of housing demand, has not kept pace.

A recent study by Harvard University estimated that based on historic trends, 1.8 million to 2.8 million more US households should have been formed since 2007, than actually were created.

Recent trends suggest these formations are starting to occur.

Meanwhile, new home production has been anemic.

Many experts believe that going forward, the industry has to produce between 1.4 million and 1.7 million new homes per year to keep pace with basic demographic-driven demand.

From 2008 through 2011, annual new home production dropped to 660,000 on average, and is projected by the National Association of Home Builders to be about 757,000 for 2012.

Clearly, more new home production will be needed to meet future demand.

While general economic trends are encouraging, we hope there is a recognition among our leaders that policies supportive of a housing recovery will have an exponentially positive impact on job growth; and that an increase in home value will translate into stronger family balance sheets, improved consumer confidence, and a greater propensity to spend, which will accelerate the economic recovery.

In the speech on November 15, 2012, Federal Reserve Chairman Ben Bernanke stated the case for housing.

Strengthening and broadening the housing recovery remain a critical challenge for policymakers, lenders and community leaders.

The degree to which that challenge is met will help determine the strength and sustainability of the economic recovery and the extent to which its benefits are broadly felt.

Close quote.

As we end 2012, and look forward to 2013, Doug and I especially want to thank our co-workers.

Toll Brothers was named 2012 Builder of the Year by Professional Builder Magazine a few weeks ago.

Our colleagues' enthusiasm, diligence and perseverance and commitment to quality is the reason Toll Brothers received this honor.

Thanks for listening.

Now, I turn it back to Doug.

Thanks, Bob.

Patrick, we're all set for questions.

Yes, sir.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster.

(Operator Instructions)

Joshua Pollard from Goldman Sachs.

I'd like to finish where you -- or start where you finished off, Bob, on the policy side.

You talked a lot about Washington, but there's a couple of things out there.

You've got QM, you've got mortgage interest deduction, you've got a few other things.

Can you just give as much detail as you currently have on where those things stand, and how you ultimately think they'll shake out?

I think you'd rather do Meet the Press and Face the Nation, and get somebody in front of you like Geithner than Bob Toll to give you my evaluation of the nation's stance of not mucking up the attempt not to go over the fiscal cliff.

I think everybody agrees that that is not something we look forward to, and not something we should play brinksmanship with, and nevertheless, there it is.

So many appear to have swallowed the Kool-Aid that we might be in risk of actually going over the cliff.

Personally, may not be the worst thing that happens to the US and to the economy, but nobody's looking forward to it.

So, we hope our Congressmen and policymakers do the right thing, as Ben Bernanke suggested in what I just read, and that is not muck up the tremendous engine that has mostly pulled our economy out of the mire and brought it to the position it's at today.

You don't want to screw around with housing, while it appears to be the main engine of recovery.

Give it a year, and then if you want to come back, go ahead and bang it.

But I don't suggest that that should be done today.

I think most of the legislators understand that.

I think the primary focus, if not the only focus, is really on the revenue enhancement through the tax increase and the elimination of some deductions and perhaps even means testing of some of the payers.

My second question is a little bit of a two-part one.

It's around community growth, and some of the talks around the industry of slowing the sales pace to drive higher margin.

My first question on the community side is -- is 255, or 240, which is the midpoint of your 2013 guidance, as high as you guys could go, or are you holding off on certain communities?

(laughter) (multiple speakers) It's great, thanks.

I don't know -- I didn't catch the joke in there.

(laughter) Marty?

Well, I'll answer the question, not explain the joke.

(laughter) I think, Josh, the range we gave you is our best estimate of where we think the moving pieces will settle out at the end of the year.

You've got ins-and-outs associated with how quickly do you sell out of communities, and how quickly can you open them up.

We have a little bit of control over both of them, but not ultimate control over both of them.

Do you have a sense of how -- can you give the gross number of communities you plan to open, and just a sense of whether you guys are pushing at your highest pace or not?

Josh, we plan, at least sitting here today, to open 77 communities in our fiscal '13.

If your next question is where, it's pretty evenly split amongst our four geographies, which is the North, Mid-Atlantic, South and West.

So, it's a pretty even split.

And in terms of push and pace, obviously, we've experienced a nice bump so far, but we're just continually monitoring the demand side to understand where price and pace are ideal for us.

Well, I wish you guys the best of luck.

Nishu Sood from Deutsche Bank.

The comments you made, Doug, that net contracts up 34% in the first five weeks of the year -- so, I just wanted to get a better sense of how to read that.

I mean, on the face of it, that's a slowdown from the 60% in 4Q.

However, I believe you get more orders in the back half of the quarter.

There may have been some Sandy impact in the first five weeks of this quarter, so just qualitatively give us your sense.

Is that a -- do you see that as a continuation of momentum or is there some decline in there?

Or how should we read that number?

It's a continuation of momentum.

Remember, the comp to -- from '12 to '11 is certainly an easier comp than '13 will be to '12, since '12 was a better year.

It's also seasonal.

The second half of this quarter, or at least the last month of this quarter is the beginning of the Spring season.

We also had Seattle.

You need to take that into account.

And remember that 50% our business is Mid-Atlantic, Northeast, and we lost a couple of weeks due to Sandy, which, Sandy hit in --

29th to 30th of October.

-- October.

The agreements that we're talking about are November 1 on, so I think all of those things combined explain the number.

But we're pretty proud of the number, and we're looking forward to what's coming.

So, in no way would I read that as a deceleration.

I think we're very happy with where we are.

Great, great.

And second, I wanted to ask, maybe just following up on Josh's questions on policy.

Just digging in on the mortgage interest deduction, I mean, two things being considered obviously -- scaling back to a standardized credit or reducing the amount of mortgage expense.

I know a good percentage of your buyers are cash, but how do you guys think about that affecting your business?

I doubt there's any way to plan for it.

But how are you guys thinking about what effect that might have if you modeled it out across your communities?

And just your thoughts on that.

I think that the most important aspect of that deals with the mortgage interest deduction.

Don Salmon, President of TBI Mortgage, is here.

Don, give us a little chatter about what kind of mortgages we're placing.

Our average LTV, Bob, stays right around 70%.

We still have roughly 20% of our people paying cash, so -- actually 17% of our people paying cash.

So, it affects a relatively small universe.

Average interest rates right now are 3.25% on the conforming.

Jumbo is sub-4% today.

If everything holds, everything we can see in the next couple of weeks, we see jumbo rates improving rather dramatically.

If we were to introduce some things that we're working on today, we'd be in the 3.5% to 3.625% range on true jumbo loans up to a $1 million or so.

Regarding the mortgage interest deduction, I think it's important to note that the proposal that has the most legs, in my view, is to limit the deduction to $500,000.

That will affect roughly 20% of our buyers, but if you think about it, it only affects the amount of loan over $500,000.

If somebody were to buy a $1 million house and put 30% down, the real effect at a 5% interest rate and a 40% tax bracket, it really affects them by $350 a month.

I don't think that's material to a $1 million house, and I don't think that's going to stop somebody from buying.

So, I think everything looks strong on the mortgage front.

Don, I did similar math, so the incremental $100,000 from $500,000 to $600,000 at a 4% tax rate (multiple speakers) -- or 4% interest rate, is $4,000.

Correct.

Assuming you get a 25% tax break on that.

You're giving up $1,000 if the tax rules change, a year, which is $80 a month.

Correct.

I'll leave it to everybody around the table and the audience to determine whether $80 a month is enough to move somebody's behavior.

I'm still not willing to concede that it's good policy at this time in the economic recovery to slow down MID, mortgage interest deduction.

Until housing is fully recovered and the economy is fully recovered, it makes no sense.

Of the $100 billion MID, I think total of $6 billion are above $500,000.

If you think about the amount of money that will come to the Treasury, you've got to be crazy to futz around with that economic picture in order to try and justify to the public that we're doing the best we can to hit the heavy hitter.

I think where we're headed is to hit the heavy hitter with an income tax increase, and I think that makes the most sense, as opposed to trying to grab one part of the economy or another part of the economy.

All right, great.

Thanks, guys.

That's great color.

Dan Oppenheim from Credit Suisse.

Great quarter.

I just wanted to ask, first, another Sandy-related question.

On the back end of the storm, as we get through the rebuilding process, we're likely to see actually some increased demand as some people choose to move on rather than rebuild.

Is there anything you're thinking about as far as incentivizing people like that to choose a Toll community?

No.

Dan, most that were affected were on the coast.

Most were second homes.

We have not seen an impact to our business.

In fact, New Jersey, the last few weeks have been very strong.

We are not reaching out to those people any differently than we market generally to everybody that's in the market looking to move into our homes.

Okay.

Thanks.

Secondly, Gibraltar, I just wanted to know where we stand today.

Are you guys happy with the level of the portfolio?

What should we think about as far as 2013 and beyond?

We are happy.

Gibraltar has about $120 million invested in it today.

It made $7.2 million in 2012.

The deal flow is slowing somewhat as the market recovers.

It was set up as a distressed market play, but just yesterday, we looked at three deals.

So, there's still action.

(multiple speakers) Total dollars of unpaid balance?

$150 million, $200 million.

Right.

So, their doors are open.

We're happy to be in it.

I don't think it will grow or double in the next year, as we had said a year ago that we would be happy if it doubled.

We're not unhappy that it has not, but I think as the market has recovered, the deals have become a little thinner and fewer, and there you have it.

But like I say, yesterday we had three deals, and so the guys are still in action.

Okay, great, thanks, guys.

Due to the amount of questions in queue, please try to limit yourself to one question.

Ken Zener from KeyBanc.

All right.

Just want to make sure you can hear me.

Marty, your interest expense, which was 4.6% in '12, fell 70 bps from 5.3% in '11.

Can we look forward to another 70 bps based on the turnover rates you're looking for in your communities?

Well, Ken, I don't think we're going to get into the specifics of that nature, but it should get a little better next year.

Okay.

The range of communities -- is the high/low basically, is it based on the openings or the potential to close out communities quicker that's leading to the range?

Combination.

And specifically as it relates to Hoboken, I think you guys have had some properties there have had obviously -- the city was very much impacted by Sandy.

Can you talk about the ability of your homes to actually get certificates of occupancy, given the distress that's happened in the community?

Thank you.

No problem at all.

We only have one building under construction at the moment in Hoboken, and we had to pump out a basement and we were back in action two days later.

We took two this week in agreements, and two this week in deposits.

Right.

So, pretty good business.

Joel Locker from FBN Securities.

Just was curious on your backlog conversion rate, I guess back in '03, '02, before things got heated, you were around 31%, 32% in the first three quarters, and bumped up to 36%, 37%.

Obviously, the revenues were stronger than most expected.

Do you think that backlog conversion will trend back to, say, those '02, '03 levels in 2013 or 2014?

I think, as we look to next year, compared to more recent years, we really don't have, other than the terrain, a high-rise building delivering, which has a tendency to convert backlog on a more rapid basis than the farm fields.

So, I think we will move down on our backlog conversion from the more recent history, but I don't know that we get down to the low-30%s.

Right.

Just a follow-up question on communities.

How many did you open and close in the fourth quarter?

In the fourth quarter -- .

The answer man will give us the answer, also known as Gregg Ziegler.

So, in Q4 2012, we opened 16 and we closed 18.

Thanks a lot, guys.

David Goldberg from UBS.

My first question, Doug, in the opening remarks, you talked about traffic and the fact that traffic wasn't looking good but the quality of traffic was very, very strong.

I guess if you could give me just an idea of, as you think about the macroeconomic backdrop, think about some of the concerns about higher taxes, maybe mortgage interest tax deduction, which I think we've beaten to death at this point, is the level of traffic in line with what you would expect at this point of the housing recovery, given where inventories are at the existing home level and given where rates are?

No.

I think we're disappointed in the level of traffic, but we're very happy with the quality.

Because we are at the highest conversion ratio, as I said, in our history from visitor to agreement.

So, those that come are not looking for a bathroom, are not looking for the name of the decorator.

They're looking to buy a home.

Part of that may be a fundamental change in buying patterns in housing because the Internet now provides an opportunity to pre-screen your builder.

But I think part of it is that the market is still in the early stages of recovery, and we are very encouraged that as traffic picks up, there's a great opportunity to increase absorptions and have some real pricing power.

So, is it fair --

But the answer is, at this stage and for the level of our sales, we are disappointed in traffic, but that's also a good thing because of where we can head from here.

Is it fair to summarize that you think it's a confidence issue among your buyers at this point?

I think that has a lot to do with it.

My follow-up question relates to private builders.

We've been reaching out a lot and we've been hearing more about private builders getting financing.

It's still personal guarantees, it's still 55% LTVs now, but we're hearing more about financing on the land side, kind of [across ADC] financing lately.

Are you guys finding that that there's been some resurgence of private builders with the pick-up in the broader housing market, that you're seeing some local banks maybe getting out there, lending to privates again?

No.

And the best way for us to judge that is on land deals.

We are not competing with the small builder that went away for a few years and is now back.

It has not happened.

I think where that shows most pointedly is not on the $100 million, 400-lot offering, but we're still picking up 25- and 30-lot opportunities in New England and Mid-Atlantic states.

Where the private builder to be stacked again with money and opportunity, I mean, ability to go get that kind of thing, we would notice it, and we're not noticing it.

As a matter of fact, we're noticing the opposite, where the builders are coming to us after having weathered all this storm and saying -- you know what, cash me out.

I see you have the cash, and I know you're closing on this land and use it.

Right.

Are they asking reasonable prices when they're asking you to cash them out?

Sometimes.

Yes.

Okay, thanks, guys.

Jade Rahmani from KBW.

We wanted to just follow up with you guys about the current mortgage environment.

Specifically, first, can you guys further comment on your outlook for jumbo production?

Have you guys been approached by any banks or even mortgage REITs looking to buy your loans?

Yes, several.

Don Salmon, President of TBI Mortgage.

We have several jumbo conduits in the hopper right now, negotiating agreements.

We justify finalized agreement with a major public REIT early -- yesterday.

We expect -- all indications are that jumbo liquidity is improving dramatically.

I don't think there's a lot of action in the secondary market yet, but certainly portfolio action, and those who want to create a secondary market in jumbo is stronger than I've seen in at least five years.

Okay.

That's helpful.

And just --

Remember, jumbo is about 10% of our mortgage business.

Jumbo for Toll Brothers across the board was 16%.

It's about 10% of TBI Mortgage's jumbo.

Our capture rate on jumbo is a little lower than our capture rate on conforming.

Number one, because of liquidity, and number two, because many of the jumbo buyers have strong private banking relationship with their bankers and they just use them as their source.

But overall, I do believe that jumbo liquidity is improving dramatically.

Okay.

That's helpful.

Do you guys view this as an opportunity to boost earnings at TBI Mortgage?

TBI Mortgage is primarily a service operation to Toll.

Although we don't like to lose money, we don't focus solely on earnings at TBI.

Our job is to help Toll Brothers sell houses, number one.

And we do that by helping people understand their financing options, and making sure that there's liquidity for those folks, and making sure they can get to the closing table on time.

Okay, and then --

(multiple speakers) Plus fabulous service.

Okay.

That's our goal.

And secondly, can you guys just quantify the difference in rate between agency-conforming jumbo and the true jumbo rate.

We heard it's getting pretty narrow now, so -- .

Yes, without a doubt.

Conforming today, these are all zero point and no origination fee quotes, by the way.

Conforming today in most markets is around 3.25%.

Agency jumbo is around 3.5%.

Jumbo today is 3.875%, but as I said earlier, we fully expect that to come into maybe equal or just slightly north of the agency jumbo around 3.5% or 3.625% in the not too distant future.

Okay.

And then just lastly, just a quick clarification.

Does all of TBI Mortgage flow through Other income, and can you guys quantify your current margins?

Marty --

Well, it does flow through Other income.

Okay.

The contribution on a net income basis direct from TBI Mortgage is nominal, but it certainly contributes to making sure our buyers show up at the settlement table with money to close on our homes.

Okay, thanks a lot, that's helpful.

Michael Rehaut from JPMorgan.

First question on the gross margins.

You've had, obviously, great improvement this year, and you pointed primarily to volume as being the main driver and a little bit of price.

I know you really haven't given guidance going into 2013, but maybe at least directionally, can you give us a sense of, if you expect the same order of magnitude of improvement in '13, given your strong backlog and the fact that the improvement this year was largely volume-driven?

Or are there other factors, in terms of either mix changing that might alter that type of magnitude of improvement?

Again, you had about 150 bps if you exclude last year with the small benefit.

Just any thoughts directionally around the margins?

Yes, I think directionally, I would look to the margins to be relatively consistent with the full-year margins for 2012.

But our second quarter will be better than any of the other quarters because we currently anticipate deliveries of the high-margin terrain building to be concentrated in that quarter, and certainly not start any earlier than that quarter.

Great.

That's very helpful.

Appreciate that, Marty.

And then, on the community count, obviously a pretty wide range relative to where you are this quarter, understanding there's a lot of variables there.

But looking at first half versus second half, obviously a lot of people try and open up new stuff in the Spring.

Would you expect there to be a greater weighting in one half or the other?

Or is this really that maybe you could have a higher community count in the first half and hold on to that, plus or minus, depending on close-outs?

Is that the right way to think about it, or would it be more back-half weighted?

Gregg?

So, we've spent most of our time thinking about what the next 90 days will look like.

So, what I can tell you is that we expect to open 11 communities through our first quarter of '13, and then -- because I told you earlier, we were going to do 77.

So, 66 would get open through the rest of the year, but we have not provided the detail internally here to show how that's going to break-out over the last three quarters of the year.

Those are openings.

That does not take into account sell-outs.

Right, right.

Just lastly, if I could sneak one in.

On a regional basis, in terms of order trends, obviously great contribution in the last couple quarters from the West, even excluding the Seattle acquisition.

I was wondering if you could go a little bit more granular in the West in terms of which areas have been driving that?

And if that's been largely community-count-driven or all sales pace, which regions has that flowed into that West region, and also the South?

It's primarily California North, and believe it or not, Las Vegas, and Arizona's coming back.

Great, thanks very much.

And as a reminder, due to the number of questions in queue, please try to limit yourself to one question.

Your next question --

Patrick?

I'm sorry?

We don't mind if there's a follow-up question.

It's okay.

Okay, one question and a follow-up.

Adam Rudiger from Wells Fargo.

I wanted to ask the backlog conversion question again.

The reason I'm asking is because I'm having a hard time getting to your closing guidance for next year without really slowing orders or really dropping the backlog conversions.

I was wondering if you could maybe answer it from the perspective -- what's in the closing guidance for next year?

What are your expectations and what's driving that?

Well, I think there are two ways to come up with closings for next year, and we use both of them.

One way is to look at historical backlog conversions, as you have.

The second way is to get the numbers ground-up from our teams in the field.

We balance those two computations, and that's where we come up with our range of guidance.

It's a combination of, what should it be based on history, and what should it be based on what the guys in the field think.

I think that's how we got to 4,000 as the midpoint of the range of 3,600 to 4,400.

Okay.

And then just wanted to follow up, Marty, on your recent comment on somewhat flattish gross margins for next year.

I recognize there's probably a bit of conservatism built into your comments here, but can you talk about what's impacting that, and maybe touch on any recent trends in labor and commodity costs?

Sure.

I think -- on a more global basis, I think we expect fewer deliveries, a little less revenue out of the New York high-rise product in 2013 with the exception of the terrain, compared to 2012 where we had two, three, four buildings that were contributing there.

And then, as we look at price increases on -- or cost increases in our construction for 2012, it was up roughly $4,500 a house.

While we try and control those costs for 2013, I think directionally, based on what we are feeling in the market, it's going to be tough to control those costs.

You mentioned earlier that that's mostly timber, construction, wood and concrete.

Right.

Yes.

So, there's not a lot we can do with that.

Labor actually went down over the year, but we don't think in '13 that that can happen again.

Definitely.

Great, thank you.

Alan Ratner from Zelman & Associates.

Nice quarter.

First question, just on terrain, I just wanted to confirm a couple numbers here.

So, I think that, that building is 22 units, and back in first quarter of this year you indicated it was an average price of about $4 million per unit.

I just wanted to make sure those numbers are still correct.

Yes.

Okay.

And as far as the timing goes, then so 2Q is when they might start delivering, but sounds like that might bleed into the back half of the year as well.

So, just to get a point of comparison, what percentage of your revenue, or what dollar amount of revenue this quarter in 4Q was driven from New York City high-rise?

We just looked at that, correct?

Yes.

So, City Living deliveries for Q4 '12 were 8.5% in units, 9.5% in dollars.

Okay.

So, even with terrain being roughly $100 million of revenue next year, you still expect the contribution from New York City to be down on a full-year basis?

Yes.

Okay.

All right.

We had nearly $200 million of revenue in New York in '12?

We had $275 million.

$275 million.

Got it.

Okay.

(multiple speakers) It was New York, or New York and New Jersey?

All of City Living.

(multiple speakers)

So, it included some Philadelphia product.

So, there will still be some Hoboken and Philly this year.

Hoboken as well, yes.

Okay.

Second question, just on the SG&A, so if I add back the $8 million reversal, looks like this quarter's core number would have been close to $82 million, $83 million, which is a bit higher than where you had been running.

So, just thinking about 2013, is that a good starting point to think about for 2013, obviously adjusting for any changes in the underlying contributors there?

I think it is a pretty good number.

I think that will build a little bit over time because we traditionally have more volume and thus more S in Q3 and Q4.

But that's a good average.

Okay, thank you.

Will Randow from Citi.

Just a question on land development, as well as land spend.

Can you give us a sense of what you're thinking, either directionally or quantify it, for land development costs in 2013, as well as land spend?

Well, we spent $92 million on land in fourth quarter, and $600 million in fiscal '12.

We don't project what we will spend in '13, except to say -- to repeat what we said, which is the deal flow lately has been terrific.

Have you guys been ramping up significantly on development spends as opposed to just acquisition?

Yes.

We have 77 openings in 2013, and as you know, we tend to do a lot of our own land development.

So yes, there is a tremendous amount of land development taking place during this coming year.

Just as a follow-up, in terms of mothballed lots, where do you stand today, and where do you think that goes over the next year?

Thank you, and great quarter, by the way.

We have 83 mothballed communities.

We project to bring 11 back in '13.

The lot count -- Mike, do you have the lot count on that?

About 9,000 lots.

9,000 lots.

Okay, thanks, guys.

Stephen Kim from Barclays.

Sorry, it's actually John filling in for Stephen today.

Just have a few questions.

So, around City Living, just wanted to get an update on your ability to extend that to cities outside of the Manhattan, and of Manhattan, Brooklyn and then Hoboken.

And then as far as a mix between the second and third quarters for the terrain, basically what percentage should we expect to go in 2Q versus 3Q because it's obviously going to be pretty distortive to the numbers.

I'll take the first half, Marty, and then you can jump in.

It's a goal of ours to expand City Living beyond Metro New York and Philadelphia.

We have a few opportunities in Washington, DC that we're excited about.

We put a land acquisition manager in place in DC to focus exclusively on City Living-type opportunities.

We're also looking in Boston, and we're also looking at some other markets across the country, including San Francisco, some infill areas around LA, maybe Seattle, maybe Vancouver.

We'll have to see, but we are looking to expand it.

I think the first would be to DC.

That's the natural next step for us.

Marty?

In terms of the terrain, when we look at our schedules right now, we expect all the currently sold deliveries to -- units to deliver in the second quarter.

But there are variables associated with that, including certificates of occupancy for the building, and when the buyers actually want to move in, which we control to a certain extent but not ultimately.

So, we have one left to sell, and that's the penthouse, and we'll take any offers that any of you have out there.

It's a wonderful unit.

So long as it's $20 million.

Right.

(laughter)

Or $19.9 million.

$19.6 million, maybe.

Then finally, just a modeling question.

Can you give me the dollar value of all construction in progress, including the land under the homes?

Yes.

Really?

Construction in progress at 10-31-12 is $2 billion even.

And the land under it?

I stumped --

They just wanted to stump him.

(laughter) When you said, really, I went -- this is going to be good.

Maybe we can just follow up after the call.

Thanks, guys.

Great quarter.

Steve East from ISI.

Paul Przybylski on for Stephen.

I was wondering if you could give maybe some order end and price trends on the active adult versus your traditional business, and then what percent of your business is active adult presently?

Sure.

So, if we look at Q4 '12 contracts, active adult was 13% of the business, and a year ago, it was 12.3%.

In terms of pricing, my recollection is we've seen some increase in pricing to a greater extent in the active adult than we have in the general.

But you don't show that?

No.

So, our average price has been right around $470,000 over the last 12 months.

Okay.

That's 55 and over.

We do a whole bunch of empty nester age targeted that is not within that number.

Right.

Okay.

Has that been any different than the active adult?

Is it better?

It tends to be higher priced.

Okay.

Is it better?

I think it's the same.

It's the same demographic.

The age targeted, however, allows for greater volume and, therefore, greater demand because you're not restricting somebody who shows up and says -- I'm 50 and I want to live here.

I'm awfully sorry, you have to be 55.

If you have age targeted, you take as many as show up at the door and are willing to pay.

Okay.

Even if they have (inaudible) (multiple speakers) --

On Gibraltar, I noticed that you lost money this quarter.

How should we look at that moving into 2013?

Lost money at Gibraltar?

Think it was like --

We lost about $350,000 to $400,000.

Gibraltar is a lumpy business.

We have certain income recognition that comes from accretable yield and earnings from owned real estate, but the bulk of the income we expect from Gibraltar would come from gains on dispositions of the notes for the REO, and that is not easily projectable.

Okay, all right, thank you.

Susan Berliner from JPMorgan.

Wanted to, I guess, just talk about -- I know you provided outlook for next year.

I was wondering just what the backdrop of that was from your perspective with regards to employment?

What you expect the unemployment rate to go next year?

If you're really just basing the demand on household formation and pent-up demand?

And then also, does any potential change in mortgage interest tax deduction or anything else that the government could do factor into this guidance?

Susan, I think the most important [element] aspect of the question is answered by attention to demand.

There is hardly anyone who owns a home, lives in a home, or is thinking of buying a home that doesn't understand that home prices have gone up a decent amount in this past year, and that demand has come into the market in a decent amount in this past year.

That begets additional attention and additional demand.

Case-Shiller, I think, estimated this past 12 that -- 12 months that the prices are up about 5%.

Does anybody have the real number that Case-Shiller put out, that's close to that?

I'm sorry?

3.6%.

You take a $500,000 house, you're up $20,000, so $18,000.

It's not chicken feed.

I think that reverberating back through the populace that's interested in new homes, motivates and spurs additional demand.

And with additional demand, you will get additional prices, as though they are electronically directly hooked to one another.

Because we're not in a business where you can fire up the oven and make extra loaves of bread if you think you've got increased demand coming in tomorrow morning to the bakery.

It doesn't work like that.

You've got to start in the Northeast and Mid-Atlantic states, seven years in advance in order to bring the product to market.

So, what's going to happen is what has happened always in the past following a recession.

And that is -- initial demand begets more demand, begets price increase, and gets more demand and so on and so forth until after five, six, or seven years of that, we go back into the toilet and visit the next recession, which is far enough away that we don't have to worry about it right now, it seems to me.

So, I think that's what you want to concentrate on, is the increase in price getting more demand, and more demand getting more price increase, et cetera.

Okay.

Great.

My second question was -- can you just tell me what the percent of your buyers are second home buyers?

It's about 4%.

That's right.

And about 2.5% take out a mortgage.

Thank you.

Desi DiPierro from RBC Capital Markets.

Bob, you all did an excellent job at leveraging SG&A expenses this year, so if we use the midpoint of your deliveries and ASP guidance for 2013, we get around $2.5 billion in revenues.

I was looking to see if you could provide some commentary regarding how we should think about SG&A expenses at that level of revenue?

Marty?

Well, I think we gave a little bit of guidance on that to somebody's question earlier, where they asked if $82 million was a good quarterly number to use.

We said it was a good quarterly number to use.

Okay, that was it, thank you.

Jeremy Pinchot from Gilford Securities.

-- but you answered all the questions already.

Thanks again.

Great.

Thanks, Jeremy.

Good luck, guys.

Alex Barron from Housing Research Center.

I wanted to ask you how you guys are thinking about pricing power versus sales pace?

In other words, are you more concerned with making sure the sales pace stays, and continues to improve, or are you more concerned with raising prices?

I guess related to that, I was curious about -- I mean, you didn't seem too bullish on the margin increases, and so, do you basically think that your price increases will just keep up with cost increases?

We think that the proper way to manage the business is to watch your volumes and be careful not to push price to the point where it inhibits the growth of volume to what the most efficient work and delivery is for a particular community.

Some communities are structured to handle 50% a year, some are structured to handle 25% a year.

So, you watch what your structured, most efficient return is for volume, take it to that volume, and then when you get demand that's additional for that volume, that's when the price increases start to kick in.

Do you understand?

Yes.

Okay.

That's fair.

My second question was on the DTA.

You mentioned you still have some state level ones.

How much is still remaining from those?

How long would you estimate it would take you to monetize the DTA you reversed today?

Well, the DTA we reversed today basically shelters about $1 billion of income, and so however many periods it takes us to generate $1 billion of income is how long it will take us to monetize that.

By monetizing it, it really turns into a -- not a check to the IRS.

It just is cash savings.

In terms of the state component that still has a valuation allowance against it, we think those numbers don't have tremendous ultimate value.

If we thought there was near-term value associated with those deferred tax assets, we would have released them.

Okay, all right, thanks.

Michael Rehaut from JPMorgan.

I just wanted to go back to your comments around that you had benefit from only slightly better pricing during this year, and I think that, in general, is a tone that perhaps is a little bit more cool, I guess, than some other builders which have seen a lot greater degree of pricing in their markets.

So, I'm just trying to dig down into what's the driver of that, because obviously, at the same time, you've had better sales pace improvement than most other builders.

Granted, that's from probably a lower base.

But are there things in your markets that have held either your -- the markets or the areas that you're competing, or the product positioning within those markets or the product positioning across demographics that might have resulted in the pricing trends that you've seen being perhaps less robust than a bunch of your peers?

I think we're being asked to answer a question about the other magician's act when he put the rabbit in the hat and then pulled it out.

I wasn't there to see the rabbit go in, so I don't know how they pulled the rabbit out.

Well, Bob, maybe not on the other magicians.

Bob, maybe not on the other magicians, but at least against the market broadly.

I mean, even on the market broadly, I think pricing has perhaps improved a little bit better than the commentary that you've put out there, which is only slightly better.

I'm not sure we agree with that.

I think -- look at the markets we're in.

Look at the limited land in those markets.

Look at the competitors of ours that have blown up, that's primarily Northeast, Mid-Atlantic.

I think we've had good pricing power.

We commented that in about 60% of our communities, we have been imposing price increases.

If you read into what we say as being cautionary, I think we're okay with that.

Sure.

But we're pretty confident, and we do a lot of market research to make sure we're not giving anything away.

That's certainly never been the reputation of this Company.

I think we've always driven price, as well or better than many others, and I think we are doing that now.

We are just, as Bob said, very focused on backlogs.

Every week, we look at a community, and if they've had good sales and they have 25 in backlog and the next home sold will take 11 months to deliver, then they're going to get a nice little price increase.

If they have eight sales and the next home sold can be delivered in six or seven months, then we may approach it somewhat differently.

And that's how we go about running our business, and I think we're very comfortable with the price increases we put in place.

Marty, in your monologue, you said delivered price per home will be between $595,000 and $630,000.

Yes.

Is that for the same home, or are you taking mix into consideration?

Mix impacts that number.

Well, of course, mix does, but --

Right.

I'm asking -- is this for the same kind of unit, or is this believing the mix is going to go up?

It's believing the mix will go up for things like the terrain, or believing it may go down because we won't have as many in City Living.

So, it's a combination.

This sounds like Harry Truman's economist, on the one hand or the other.

I'm looking for a one-handed economist.

That is all our mix and all our best guess as to what we expect to deliver next year.

A lot of it is backlog.

So, it's [baked].

So, it's $595,000 to $630,000 if it's -- it sounds like it could go -- you have more with the terrain, but less with City Living because we don't have other than that coming in right away, so it sounds like it's pretty static.

If it's a static unit mix, you're up $35,000 on $600,000 basically, which to us is a slight increase, and maybe in the semantics that we're delivering our impression -- we're delivering to you our impression of what our increases will be for '13 deliveries, and we think they will be $35,000 on a $600,000 product.

That, to us, is slight.

But maybe to the guy who's used to doing $250,000 and is now going to do $260,000, a tremendous amount.

So --

Right.

One man's slight might be another man's great party.

No, that's fair.

Maybe I'm reading into it too much.

But, Doug, on the 60% of communities that you got price, what would you say is the average price increase of percentage terms?

Gregg?

So, we hate to be pinned down to specific numbers here, but they've been modest price increases, and every week we're looking at the communities, as Bob and Doug were trying to tell you, and deciding what kind of pace we're experiencing there.

And so, sometimes it might be $3,000.

Sometimes it might be $5,000, but that's generally the ballpark that we're talking about.

When you get a hot job in arts, that's the beauty, we think, of the business we're in.

We can hit home runs.

The other guys can hit singles and doubles perhaps, but they can't hit it out of the park.

We have a community in Florida that is on the water.

We raise the price by $20,000 every home we sell.

Right.

There's no --

How about Jersey this weekend?

We're up $20,000 from Friday to Sunday.

Right.

At a new opening in Jersey, and Northern Cal.

So, we get the chance to hit it out of the park.

We're not at that yet, but as we build up volumes per community -- if we run into a 12-month delivery or an 11-month delivery because we have that many in backlog, then we're going to use a good old capitalist system to decide who gets the next home, and that is who will pay the price.

Great, thanks, gentlemen.

Joel Locker from FBN Securities.

-- specs you have at the end of the quarter, both finished and unstarted?

Joel, I think if you could repeat the question, you cut in and out a little bit.

So, how many specs did you have at the end of the quarter, both finished and in process?

We don't -- so, we don't break it out between finished and in process, but our spec count for our traditional single family and townhouse product was 344 specs.

Total specs, including the high-density City Living brand, is 523.

344 and 523.

Thanks a lot, guys.

Joel, when we call it a spec, that's where lumber has been dropped.

Right.

So, that's not a roof or it's not a deck.

It's not drywall.

It's when lumber hits the ground, as far as we're concerned, it's a spec.

Joel, let me make sure we clarify.

It was 523 in total, and 344 of those were single family, multi.

Right, got it, all right, thanks a lot, guys.

There are no further questions in queue at this time, sir.

Thank you, Patrick.

Thank you, everyone.

This does conclude today's conference call.

All lines may disconnect at this time.

Thank you.