托爾兄弟 (TOL) 2013 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Toll Brothers fourth quarter and fiscal year-end 2013 earnings conference call.

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

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

(Operator Instructions)

Thank you.

Mr. Douglas Yearley, CEO of Toll Brothers, you may begin your conference, sir.

Thanks, Brandy.

Welcome and thank you for joining us.

I'm Doug Yearley, CEO.

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

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

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

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

We just completed fiscal year 2013 on October 31.

With revenues and contracts up over 40%, backlog up over 50%, and operating income up over 200%, fiscal year 2013 was an excellent year for Toll Brothers.

In the fourth quarter, our net income of $94.9 million, or $0.54 per share diluted, compared to $411.4 million, or $2.35 per share in fiscal year 2012's fourth quarter.

Included in fiscal year 2012's fourth quarter net income was a $394.7 million deferred tax asset valuation allowance reversal, so the more relevant comparison of results is on a pre-tax basis.

In that regard, our fourth quarter pre-tax income was $150.2 million, compared to $60.7 million in fiscal year 2012's fourth quarter, an increase of 147%.

Revenues of $1.04 billion and home building deliveries of 1,485 units rose 65% in dollars and 36% in units, compared to fiscal year 2012's fourth quarter.

Net signed contracts of $839 million, or 1,163 units, rose 23% in dollars and 6% in units, compared to 2012's fourth quarter.

On a per community basis, fiscal year 2013's fourth quarter net signed contracts of 5.17 units per community, up 6% versus fiscal year 2012's same period, were the highest for any fourth quarter since 2005.

Backlog of $2.63 billion and 3,679 units rose 57% in dollars and 43% in units, compared to fiscal year 2012's fourth quarter end backlog.

We ended fiscal year 2013 with 232 selling communities, compared to 224 at fiscal year end 2012.

At fiscal year end 2013, we had approximately 48,600 lots owned and optioned, compared to approximately 40,400 lots one year ago.

We expect to end fiscal year 2014 with between 250 and 290 selling communities.

We started fiscal year 2013 very strong, building on the sales momentum of 2012.

Buoyed by historic low interest rates and significant pent-up demand, we raised prices and accelerated per community home sales paces as the housing market continued its recovery.

Our first nine months contracts rose 35% in units and 49% in dollars.

In our fourth quarter, the impact of those price increases, combined with the political discord in Washington and a sudden rise in interest rates, contributed to a leveling of demand.

In our fourth quarter, contract growth was 6% in units, but was still up 23% in dollars, against strong growth comparisons.

Fiscal year 2012's fourth quarter contracts were up 70% and 75%, respectively, versus fiscal year 2011's fourth quarter.

Since August 1, 2013, the beginning of our fourth quarter, through this past weekend, which is halfway through our first quarter, our business has been basically flat compared to the same period of time one year ago.

During that 19-week time frame last year, two weeks were highly unusual.

Hurricane Sandy hit on Thursday, October 25, 2012, and wiped out sales in about half our markets that weekend.

The contracts which would have been signed that last weekend of October 2012 were pushed into the first week of November 2012.

Because November is a new fiscal quarter for us, our reported results and comparisons to last year are affected.

Excluding this first week of November 2012, our last five weeks of business have been flat to one year ago; and as mentioned, the full 19-week period since August 1 has also been flat.

We believe this leveling of demand will prove temporary, based on still significant pent-up demand, the gradual strengthening of the economy, and the improving prospects of our affluent customers.

We were pleased by improvements in our gross and operating margins, as the price increases instituted in previous quarters were reflected in this quarter's results.

Our home building operation has ramped up to deliver our growing backlog, and our joint ventures and ancillary businesses also contributed solid results.

We increased our land position by 20% from one year ago, to approximately 48,600 lots, a total that will increase again in coming months when we complete the acquisition of Shapell Homes.

We bought land in nearly all of our 19 states and strategically expanded our product lines into a number of key markets in 2013.

We entered the urban Metro Washington, DC market with both condo and rental apartment projects.

In the Metro urban New York City market, we made some timely Manhattan condo site acquisitions and we launched construction of a large rental tower in Jersey City, five minutes by PATH train to Wall Street.

We introduced our already established Active Adult brand in the Western United States, with a new community in the Denver suburbs.

In Texas, we acquired several large master planned communities in fast-growing Houston and reentered the Austin market with a large acquisition, as well.

Most significantly, in early November of 2013, we announced the acquisition of Shapell Homes of California, for $1.6 billion, which we expect to close in early calendar 2014.

Shapell has a long and illustrious history as one of California's largest and most successful land development and home building companies in the affluent coastal markets of Northern and Southern California.

This acquisition provides us with California's premier land portfolio, consisting of approximately 5,200 entitled lots in affluent, high barrier to entry markets, the San Francisco Bay area, Metro LA, Orange County and the Carlsbad market.

Since this announcement at the start of fiscal year 2014, we have raised $600 million of 5- and 10-year debt in the public capital markets, issued $230 million of stock and, at the end of fiscal 2013, secured an additional $500 million 364-day bank facility to fund the Shapell acquisition and provide ample liquidity for future growth.

We intend to sell approximately $500 million of land in California and elsewhere to delever the transaction.

Going forward, even after closing Shapell, we will have over $1 billion of available liquidity to grow the Company.

As we look forward to 2014, we see our revenues and community count growing, margins improving, and our profitability increasing.

Now let me turn it over to Marty.

Thanks, Doug.

Fourth quarter home building gross margin before interest and write-downs was 25.4% of revenues, compared to 24.6% in 2012's fourth quarter.

2013's third quarter margin was 25.1%.

The improvements were driven by increased volume, which spread certain fixed cost over a larger revenue base, and price increases in excess of cost increases.

The average price of homes delivered was $703,000 this quarter, compared to $651,000 three months ago and $582,000 a year ago.

Fourth quarter interest expense included in cost of sales was down to 3.9% of revenues, compared to 4.3% from 2012's fourth quarter and 4.2% from 2013's third quarter.

The improvement was a function of increased settlement pace and mix shift, with more deliveries coming from newer communities.

Fourth quarter SG&A of approximately $93.5 million was higher than the $74.5 million in the fourth quarter a year ago, and higher than the $88.9 million in the third quarter of 2013.

Our significant growth has led to the increase in cost on an absolute dollar basis.

However, as a percentage of home building revenue, SG&A was down to 8.9% for Q4 of fiscal year '13, compared to 12.9% in Q3 and 11.8% in Q4 of fiscal year 2012.

The improvement is primarily due to increased revenue.

Note that in the fourth quarter of 2013, we reversed $4.8 million in insurance reserves, as contrasted to an $8.3 million reversal in the prior year's fourth quarter.

Both reversals were driven by our annual actuarial review.

As a result of all these factors, our operating margin grew from 8.3% in last year's fourth quarter to 12.3% in the current quarter.

We enter 2014 with a diluted share count of 185.8 million, which includes the 7.2 million shares issued in our recent equity raise.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for fiscal year 2014.

As noted in the release, we expect to deliver between 5,100 and 6,100 homes, and we estimate the average delivered price per home will be between $670,000 and $720,000.

The range for our 2014 fiscal year-end community count is 250 to 290.

We expect to close the Shapell acquisition in the first calendar quarter of 2014, and have included 300 Shapell units and 10 Shapell communities in the delivery and community count figures just mentioned.

We expect Shapell-related transaction costs to be expensed and to negatively impact the first half of fiscal year '14 by between $15 million and $20 million pre-tax dollars.

These costs primarily relate to legal, due diligence and transfer taxes.

Additionally, we expect approximately $5 million of directly expensed interest over the second and third quarter of next year.

We anticipate 2014 full year gross margin improvement of 175 to 200 basis points over 2013, even after the impact of purchase accounting driving lower margin on Shapell deliveries.

We expect Q1 2014 backlog conversion of roughly 24% to 25%.

This conversion rate is slightly below our long-term growth period average, as we have approximately 150 units in backlog associated with high-rise buildings that will not deliver next quarter, and our over performance in deliveries in the fourth quarter of 2013 will impact our deliveries in the first quarter of 2014.

With the value of our backlog heading into 2014 almost equivalent to our full-year 2013 revenue, we foresee continued growth in 2014.

As a result, we expect SG&A dollars expensed in 2014 to grow approximately 25% over 2013, with the roughly 33% increase in unit deliveries and the addition of Shapell.

Now I'll turn it over to Bob.

Thanks, Marty.

We believe that Toll Brothers, as well as the other public home builders, still have significant room for growth.

The economy, while still improving slowly, is far from fully recovered.

National housing starts, although projected to be up in 2013 compared to 2012, will still be well below the average of the last 40 years, despite a significantly increased population.

Due to a shortage of approved home sites, labor constraints in some markets, and a lack of available capital for small and mid-sized privately owned builders, the supply of luxury homes is still not meeting current demand, let alone the pent-up demand of the last seven years.

This supply constraint could lead to a further escalation in luxury home prices above and beyond normal trends until industry production returns to historic equilibrium.

Supported by our solid land portfolio, community count growth, strong financial position, broad product diversification, industry-leading brand and dedicated team, we believe that fiscal year 2014 will be another year of growth for Toll Brothers.

Now let me turn it over to Doug for questions.

Doug?

Thank you, Bob.

Thank you, Marty.

Brandy, we're ready to go.

Certainly

(Operator Instructions)

Your first question comes from Ken Zener with KeyBanc Capital Markets.

Hello, Ken.

He's withdrawn his question.

Your next question is from Dan Oppenheim with Credit Suisse.

Thanks very much.

Was wondering if you could talk a little in terms of the comments about the recent few weeks.

You talked about it overall, but wondering -- I'm not asking for you to go through the Bob-style review of markets with grades -- but just any regional color or price point color, given what you've been seeing as of late.

Sure.

New York City Living continues to be very strong.

Northern and Southern California in our locations, which is coastal, is very strong.

Dallas and Houston are fantastic.

Markets that have been off a little bit lately include Maryland and Virginia.

We think those markets are more directly impacted by what's going on in Washington, DC.

We also had significant price increases and a significant ramp-up in backlogs in those markets, and right now they are a bit slower.

When you get north of Maryland into Philly, north, it's been very strong.

Great.

Thank you.

You're welcome.

Your next question is from Ivy Zelman with Zelman Associates.

Thank you.

Congratulations, guys, on a great year and a good quarter.

Doug, you mentioned -- and Marty -- in the guidance providing quite a range for the community count for next year.

Maybe just the first question would be what are some of the factors that would allow for you to drive to the higher end of that range?

And then secondly, when you're looking at your gross margin expectations for '14, how much of that is already reflected in the backlog, and what would be the risk that you wouldn't be able to achieve those gross margins with respect to what appears to be pretty robust guidance?

Okay.

Ivy, I'll take the first one and Marty can take the second.

We always start the year with a broad range.

As you know, we build in very difficult markets, where the land entitlement process is very unpredictable.

We also don't know how quickly we will sell out of our existing communities.

Last year, we came in just above the bottom of our range, because we sold out faster in many communities and we struggled to get entitlements in other communities.

So we always enter the year being very conservative.

What would drive the upper end of the range would be our ability to turn permits quicker and get communities opened that still have a couple of steps left in the process.

And also, I guess, on the down side of that may be that some communities wouldn't sell out as quickly, and therefore, we would have more of those older communities still open for sale.

But right now, we're pretty confident in the middle of the range, heading into the year.

We have it all lined up to be at about that number or better.

But we'll have to see how it plays out.

The other aspect on community count variability is associated with what projects we find buyers for or choose to sell out of the Shapell portfolio.

Right.

With respect to margin improvement expected for next year, if you take the mid-point of our guidance of deliveries, it's 5,600.

We have roughly 3,700 homes in our backlog.

So when we look at setting margin expectations for next year, the vast majority of that improvement is coming from homes that are in our backlog.

Great.

That's very helpful.

And if I can ask, Doug, a more specific question about some of your comments.

On your last conference call, when we were talking about the first few weeks of this fourth quarter, you indicated that you felt as if the consumer was pausing and that people were apprehensive, especially with the government shutdown, and that they would have to adjust to the new pricing that had surged earlier in the year.

And recognizing you're not going to lower prices, it seems as if the industry's been more rational with respect to incentives.

Do you feel like that that pause is now behind us and you're starting to see some improvement in conversion of traffic?

I know your sales may not reflect it, with the tough comp.

But if you can speak to that and your general views.

It sounds like you're optimistic about '14, and maybe you're seeing something in the field that would support that.

Ivy, it's a really tough time of year to gauge where we are.

November, December are not typically months where we see a lot of sales.

Time to be happy.

Right.

So I think our commentary is that our business is flat.

That's the best word we can come up with.

It's been flat, as I mentioned, since August.

We will, I'm quite confident, stay flat through the new year, because there's just not a lot of action.

We still feel like pent-up demand is building, demographics are on our side, affordability is in place, and we're cautiously optimistic about the Spring season, which begins the end of January.

Great stock market action for the luxury class.

Right.

Great.

Thanks, guys.

You're welcome.

Your next question comes from Michael Rehaut with JPMorgan.

Hello.

Thanks.

Good afternoon, everyone.

Hello, Michael.

Hello, Mike.

First question, just wanted to get a little clarity in terms of -- sorry, in terms of the first quarter to date orders.

You had highlighted the first week falling off, but then the subsequent five weeks being flattish, and also over the last 19 being roughly flattish.

So am I to kind of extract that if you just looked at the first six weeks of the first quarter of fiscal '14 that it would be perhaps down roughly 5% to 10%, or closer to 10%?

Is that, given that you're talking about half a quarter compared to the positive 6% on the full quarter of fourth quarter, is that -- am I in the neighborhood?

Mike, I think you are in the neighborhood.

I think it's north of 10%.

But remember, it's a small sample size and it's only one week that it's down, and it was associated with that anomaly from a year ago where the number was higher than normal.

Right.

I appreciate that.

And again, just trying to get to the impact on the overall numbers.

And certainly the past five weeks, giving that color is very helpful.

So if we continue to be flat, that north of 10% would actually come down.

It's more diluted.

Right.

Exactly.

I guess -- thanks for that clarification.

Second question, just on bigger picture as you think about incentives.

If you could just remind us where you are right now in terms of incentives as a percent of revenue versus the most recent quarter versus a year ago and what's normal.

And as you look into the Spring selling season, given how quickly you had prices come up in 2013, would there need to be any potential adjustments to incentives as the recovery unfolds, but you just had such a big move forward in 2013 and things often don't go up in a straight line.

Okay.

So the incentive right now is about $17,500 per house, which is 2.6% of the sales price of the home.

One year ago, that number was just over $24,000 per house, which was about 4% of the sales price of the home.

We are not adding incentives.

We will obviously evaluate what, if anything, has to happen, as this market continues and as the Spring season is upon us.

As we've said many times, our decisions on incentives and pricing in general is tied to backlog and the length of time it takes to build the next home.

So as we build backlogs and it's a 9-, 10-, 11-, 12-month delivery for the next home, we are less interested in incentivizing, and that's how we run the business.

There are more contractors coming back to the industry.

We are beginning to burn through some of our backlogs, as sales have been flat over the last few months.

But we will evaluate that decision community by community, as it comes up.

But you are correct, right now we are not adding incentives, and we do not anticipate that we will need to do that.

Great.

Thanks very much, everyone.

You're welcome.

Your next question comes from David Goldberg with UBS.

Very nice quarter.

Hello, David.

I wanted to start just by asking about non binding reservation deposits and traffic.

Historically, you guys have talked about non binding reservation deposits and traffic along with the order growth trends.

And I was just wondering if those followed in line, and so there was nothing to read in to that, not talking about it as much this quarter, or if there was some sort of deviation between the two that we should be looking at?

Gregg?

In Q1 of '14 so far, traffic is actually up 2% per community, so call it flat.

And then in terms of deposits, deposits fall a little bit more closely with everybody's commentary on the contracts.

So for the first six, seven weeks here, we're down 11% per community for deposits.

What did we get info on from the web recently?

Was that the month of November?

Our web traffic is up significantly.

It was up like 50% month over -- I mean, year-over-year.

Yes.

And virtually every buyer is spending some time on our website.

That's one of the reasons why our conversion ratio from visitor, physical visitor to the sales center to agreement, is at a Company high, because of the pre qualification, prescreening the client does online.

Right.

I think you guys talked about it in Q3.

And that seems to make a lot of sense.

Right.

That continues.

Yes.

My other question was actually on the land market.

I think even outside of Chicago, you guys have done a really good job building the land position.

And I'm just wondering about the competitiveness.

You guys seem to have increased the percentage of lots optioned.

What's going on in the land market?

Are you finding that the opportunities have actually gotten a little bit better, since we're in this kind of pause that we're in in the market?

And maybe you can talk about the competitive nature of the land market right now.

It's still competitive in those locations where you have a lot of money chasing limited deals.

California, Northern Virginia are two examples.

I don't think the land buyers out there are backing off significantly because action may be flat.

Remember, flat in 2013 is not all that bad, considering where we were in '09, '10 and '11.

So we continue to be very selective.

After Shapell, we're being more selective.

We're very happy with the land we own and, therefore, we can be very selective.

In certain markets, like New Jersey and Connecticut and Massachusetts, where there's very little competition, we seem to dominate the land market.

But in other locations, like California and like Northern Virginia, it's very difficult and we're being very careful.

We've had some great buys in Dallas and Houston, and are really growing both of those markets as they continue to perform and there seems to be plenty of land to go around.

That's great color.

Thank you.

You're welcome.

Your next question comes from Will Randow with Citigroup.

Doug, kind of curious on the multi-family product, how are you thinking about that going forward?

Do you want to get more aggressive?

Pull back?

And are you thinking about other parallels, like multi-family for rent?

We're not thinking about -- when you say multi-family for rent, buy homes to then rent them, I assume you mean?

I think he's talking about building condos.

Expanding city living.

Building town homes, building duplexes is one classification.

And the other classification is apartments for rent.

Yes.

Was that it?

You got it.

Okay.

So we're doing both.

With respect to the condos, towns, duplexes, that is pretty much guided by us, or is guided to us by the municipality.

And if it's zoned for town homes, we analyze it for town homes.

If we like it, opportunistically, we take it.

So we aren't picking towns over singles or singles over towns.

We're picking one location over another location.

But the product goes with the location.

Right.

And on the multi-family rental side, we have about 1,500 units under development, $77 million invested.

We have partners for another $77 million, and we have about $300 million of debt.

And those apartment properties are located in Jersey City, Plymouth Meeting, Pennsylvania, East Brunswick, New Jersey, and down in Washington, DC by the ballpark.

And we are looking to grow that business.

We have a pipeline behind these 1,500 of about another 5,000 units that will be coming over time.

They will all be done in partnership off balance sheet.

Thanks for that.

And Don, I heard you were on the line.

I was hoping you could discuss any movement you might have seen in regards to underwriting standards.

We talked about that a month or two back.

Are you seeing any loosening on LTVs, FICO?

s there any change in competitiveness in regards to pricing?

We are.

We're seeing two things.

We're seeing LTVs loosen up.

We just announced, for the first time in a very long time, 90% jumbo, true jumbo product.

We'll do 90's now to $850,000, and we do 85's to $1 million.

That market has been dormant for four, five years.

We are seeing some people tighten LTBs a little bit -- excuse me, tighten debt to income ratios a little bit in anticipation of QM coming on-board January 10.

But we do have two major banks who have committed to funding non-QM loans for us, and we're very excited about that.

So we don't think that's going to have a material impact.

And we are seeing people loosening some of their credit score boxes, as well.

So credit scores are coming down a little bit relative to LTVs.

So overall, we're seeing a loosening, I think, in the market, especially in the jumbo market.

Okay.

Thanks for that, guys, and great quarter.

Thank you.

Thanks, Will.

Your next question comes from Jack Micenko with SIG.

Hello.

Thanks for taking the question.

Hello, Jack.

How you doing?

In your 2014 outlook, I'm wondering if you could give us a little help on City Living.

Obviously, sales are chunky, deliveries are chunky there.

Can you help us with what kind of projects are coming on line, both in the sales and deliveries, maybe on a net basis as you look out into 2014?

Sure.

We have two buildings delivering, two new buildings delivering in '14, Maxwell Place Building C in Hoboken and 160 East 22nd Street, near Gramercy Park in New York City.

We have six new openings out of City Living in '14, 2400 South Street in Philly; Pier House under the Brooklyn Bridge in Brooklyn; 400 Park Avenue, 28th and Park Avenue South, in Manhattan; 1110 Park Avenue, that's 89th and Park Avenue in Upper East Side; and First Avenue over in the low 50s on the east side of Manhattan; and then the last one is down in Bethesda, Maryland.

In terms of numbers, Marty, do you want to go through those?

I think Gregg has them.

City Living, at least in dollars as a percent of revenue, was in the low 6's for 2013, 6.4%.

And then at least as a projection, it's a projection for 2014, we're looking around 7% for City Living as a percent of revenue.

Okay.

Great.

That's helpful.

And then looking at the fourth quarter, this quarter, ASP, and talking about how you sort of narrow the guidance range in as the year goes on, if I take the midpoint of your ASP guidance for next year, looks to be fairly flat.

So I'm wondering if you're being purposely conservative there, if there's mix.

Obviously you had some big, high price point units in the 2013 mix.

But can you just talk about the ASP numbers on the mid-point from where you're at this quarter?

I think a large reason why you are not seeing an increase is because, if you're looking at the fourth quarter, we had $37 million or $38 million of revenue from five units that delivered at the Touraine.

So those are $5 million, $6 million, $7 million units.

We only got one left of those, at $20 million.

It's the penthouse.

And the math just results in a lowering of the ASP when you take those units out of the mix.

Sure.

Okay.

Perfect.

That's helpful.

Thanks, guys.

But when the stuff that's in the pipe, that's under construction now comes through, you'll have the same good problem again.

Yes.

Right.

More so with the openings that are expected in 2014 that won't deliver until 2015.

Right.

You get '13 price increases and '14 deliveries.

Correct.

Yes.

All right.

Thanks.

You're welcome.

Your next question comes from Stephen Kim with Barclays.

Thanks very much.

Guys, I just had a couple of quick housekeeping ones first.

I didn't hear you give the actual land spend and development in the quarter, and I also wanted to know if you had the construction in progress number yet.

Go ahead, Gregg.

Land spend for Q4 '13 was $350 million, and development spend was $105 million.

And then, one second for construction in progress at 10/31/13, it was $2.553 billion.

Great.

That's very helpful.

And then I just had a question about the Spring selling season.

I think this upcoming Spring selling season is really gearing up to be quite a closely watched event, maybe actually may feed the Super Bowl, in that regard.

And I guess I'm just trying to understand --

We'll sell you some ads.

(Laughter)

I wanted to understand how I should be thinking about your expectations for the spring selling season.

Specifically, what I'm thinking about is the fact that it's very difficult to -- it's going to be much more easy to see positive news than it will be negative news, because negative news will take time to be proven out to be negative.

In other words, demand -- in communities where demand is very strong initially in the spring selling season, you'll know that right away.

In communities where demand is maybe taking a little longer, and maybe it eventually doesn't show up, it will take a few weeks, several weeks for you to ascertain that.

So my question is related to what your internal expectations are for how spring selling season sales and deposits and those kinds of indicators of volume are likely to trend as you move from January into February, into March.

Can you give us some sense for is it a linear kind of expectation or is it truly that the week after Super Bowl, it just takes a phased shift up?

I'm just trying to get some handle on what your expectations are as we enter this very important season.

Okay.

So it begins the week before the Super Bowl.

There's no football.

New Year's and the holidays are behind us.

It builds until the week before -- the week of and the week after President's weekend are generally the strongest.

Now, remember that's for deposits.

So it will usually take two to three weeks after that window for those agreements to hit.

And then normally by mid-April we begin to slow down a bit, heading into May when you have graduations and weddings and thinking about opening the summer house, through the summer and obviously into the fall.

So I guess late January starts it, late February is the peak, but those agreements may not occur until early to mid-March and then mid-April it tends to taper off.

That's really helpful.

I appreciate it.

And I know you all have a very disciplined way of dealing with strong demand.

I mean, you have instant price increases that can go through.

How long do you usually wait where demand doesn't show up for a period of weeks before you'll take some action in terms of incentive?

Is it three weeks, usually, of disappointing numbers, or longer?

No, Steve.

What drives our decision there is what we've got in backlog.

Got it.

If it's supposed to be a -- you got it?

Then I'm done.

(Laughter)

Yes.

I appreciate it.

That's very helpful.

Thanks very much, guys.

Thank you, Steve.

Thanks, Steve.

Your next question comes from Stephen East with ISI Group.

Thank you.

Guys, I love your business, but I'll be watching the Super Bowl.

So, sorry about that.

(Laughter)

Very low ad cost.

Doug, just following on some of the stuff, I hate to focus on the very short run, given how your business is a longer term, but I'm going to do it temporarily here.

When you look at the comps that you saw in the first six weeks of this quarter versus the comps that you have for the rest of the quarter, any meaningful difference there?

And also just looking at your price trends, what you've seen quarter-to-date and is there anything -- I know you said you haven't been incenting more.

Is there anything that you're closely watching that would start to move your thought process on incentives?

There's no trend, Stephen, that I can point to from the last six weeks, except what we keep saying, which is our business is flat.

The time of the year, as we've talked about, is such that we're not going to read a lot into it.

I mentioned before that Northern Virginia and Maryland have slowed down.

So you ask where we have a keen eye.

That would be on the top of my list.

We have long backlogs there.

We have great ground.

We have had significant price increases, with now very high margins.

So for the moment, as we build through the backlogs and the labor force ramps up, we're not doing anything, particularly this time of year.

Should those markets prove to stay slow in late February, yes, maybe we would have to throw some incentives at it.

But that's a long way out.

And that's not something we're thinking about now.

That's certainly a market that we have our eye on.

Okay.

That's really helpful.

And then switching back to a little bit longer term, when you look at Shapell and what that gives you, Marty talked about 10 communities, 300 units or so this year.

But how's that unfold this year?

Do you quickly burn through their product to put your product in?

Do you keep a steady pace and go through it?

And if we walk through their communities today versus, say, this time next year, how would we -- how would it look and feel differently?

Well, yes, the reason that there's only 10 openings for Shapell, or new communities, is because we will be selling some land that is ready to go, because that's the land we can sell quickly and get the highest amount for.

So in the short term, there may not be the community count growth that we could have achieved if we kept it all.

But I think for very good, smart reasons, we will be disposing of some of the Shapell land.

When you look out a year or two, there should be more openings coming out of Shapell, as we've completed the sale of land to others and we continue to process more of the Shapell land, put the roads in, and ramp up.

With respect to the existing Shapell communities, where there are enough lots left for us to build a new model with new architecture under the Toll banner, the way we do it with more upgrading, we will do that.

They have a nice business that has been very successful and very profitable, so nothing is broken there, but there are some opportunities, we think, to add value and sell homes for more money.

And where there's enough lots left, we will do that.

So it's really a community by community analysis.

Okay.

And Stephen, while we're on the topic of Shapell, we are encouraged, and in some cases very encouraged, by the price talk we are hearing as we discuss disposition opportunities of that land with potential buyers.

I want to note that from an accounting perspective, if we sell some of that ground soon after closing, at prices that are greater than we had, I'll say, purchased the ground, we do not get to reflect a gain, because purchase accounting says you reallocate the basis into the other land you are holding onto.

So we'd get reduced basis instead of gain, which is fine, too.

Okay.

And Stephen, just to finish the story, we mentioned on our Shapell call a month ago that we purchased land from the Shapell family a couple of years ago in Yorba Linda, Orange County, two product lines in a community called Amalfi Hills.

We came in with fresh, new architecture and are selling homes there at significantly higher prices than the Shapell organization had ever thought was possible.

And part of it was a great market, but part of it was some tremendous architecture, great outdoor living space, some real fresh ideas and the ability to upgrade the client through a lot more customizing than they had done.

So I think that's an example of how we can take some of the Shapell land and add significant value because of the way we do it.

Doug, we had walked through that community and we thought you all were blowing the doors off of it.

That was before you all acquired Shapell.

So that definitely made us feel more comfortable with it.

On the apartment side, is this -- as you go from 1,500 to 5,000 -- is this a business that you hold onto and run, or is this something that you try to monetize, spin, sell, whatever the case may be, turn into a REIT?

Our plan right now is to hold it, run it.

Long-term, there may be options, depending upon how big it gets.

So that's certainly in our mind, but that is not our short- or even middle-term strategy.

Okay.

Thanks a lot, guys.

You're welcome.

Thanks.

Your next question comes from Nishu Sood with Deutsche Bank.

Thanks.

First question, on your gross margin figure, 175 to 200 basis points, I believe you said, year-over-year '14 over '13, including the effect of Shapell, I think you mentioned that purchase accounting effect of that.

Just wondering what that drag is from Shapell.

I don't know that I quantified it.

But I think there are roughly 100 to 150 work in process units that we would probably have a margin of 10% on, from a purchase accounting perspective, that would negatively impact us, and then another 150 units that would probably be in the upper teens percentage coming from Shapell.

So that should be enough detail for you guys to tell me what the specific impact is.

So that brings us to the roughly 300 closings from Shapell for '14.

Does that mean in your guidance, basically the guidance only includes what's already in backlog?

I said half of those units were in backlog.

The other half we will sell.

Got it.

Okay, the 150, okay.

Got it.

Next thing I wanted to ask about the mortgage, your mortgage operation, just your broader -- your units that you're closing.

There's a lot of stuff going on in the different parts of the mortgage market.

Don gave us a pretty good rundown of some of the easing in the private jumbo availability, the FHA's reducing its limits, the GSEs are raising fees.

So I was wondering if you could give us the latest breakdown of cash versus GSE versus the private versus FHA, if there is any.

And then broader, I wanted to get the sense, all of that -- clearly on the private jumbo side, things are easing.

And then these other pieces, maybe -- net-net for Toll Brothers customers, if you consider the fee increases, ignoring the volatility of, obviously, underlying interest rate market, is it going to be easier or more difficult and how much?

Because all this stuff is happening right into the spring selling season, or within the spring selling season, so just wanted Don's wisdom on net-net if it's going to be a headwind or a tailwind.

Let me answer your first question first, and that was the business mix.

In the quarter, roughly 19% of total deliveries were true cash.

About 55% took either conforming or FHA VA loans, and almost 26% took jumbo loans.

If that answers your question.

And then regarding the broader question of availability and qualification and whatnot, I really believe it's going to be neutral.

When you break down the different factors of it, with FHA dropping from a max of 729 to 625, we did an analysis of our pipeline, we have about 15 or so loans, FHA loans, in the entire pipeline that are over 625.

So we think the impact of that is minimal.

Some of those folks have the ability to put more down and, for example, are choosing high LTV because of leverage, especially the VA folks.

In terms of qualification, QM will have an impact, but we think the impact on the conforming and the FHA side is going to be minimal, because as you probably know, they're exempt, for somewhere around seven years, from the 43% back ratio guideline, which is the key part.

The other part of QM that could be a little troublesome is the 3% fee cap.

We don't think it's material to us at all.

We did another analysis a few months ago, and the impact on that was 1% or 2% of our pipeline.

And all that would happen is they would either choose a different lender or choose a different mortgage company.

So we don't think that's material at all.

As I said earlier, LTVs are loosening up.

Especially in the jumbo space, it's hard to get above 95.

So all in all, I think it's neutral.

Got it.

No, that's very helpful.

Can you break that 55 down for us?

Just trying to get a sense of the FHA.

I know it's been very small for you, historically.

I can break it down for TBI mortgages.

I can't break it down for Toll Brothers across the board.

I can tell you that almost 7% of the TBI mortgage business was FHA/VA.

Got it.

Great.

Thank you.

You're welcome.

Your next question comes from Eli Hackel with Goldman Sachs.

Thank you very much.

Just one quick question.

In terms of the land to sell, the $500 million, how much of that have you identified already?

Around $300 million.

Okay.

And then just one more in terms of Shapell.

You mentioned 10 communities in '14.

In terms of the ramp-up, it should be a hockey stick, so 10 in '14, and then maybe 20 in '15, or maybe just think about the longer term growth of Shapell into the portfolio.

We have not at this point, Eli, projected '15.

And it will be impacted by what we sell and what we don't sell.

We have decisions to make on that last 200 in dispositions as to whether we sell finished lots, raw lots, or whether we choose to put some roads or improvements there.

Or whether it's even Shapell land.

Right.

Okay.

That's it.

Thank you very much.

You're welcome.

Your next question comes from Adam Rudiger with Wells Fargo Securities.

Hello.

Thank you for taking my questions.

Was wondering if you could give us a quick update on what you're seeing on labor and materials, and if there's been any softening given all the flatness that you've been seeing.

It's getting better.

The building costs are up $2,500 for the quarter, and about $7,000 year-over-year.

This last quarter's increase of $2,500 is primarily labor.

But every market has a different story.

Every market has a different problem.

But as we move further into this recovery, more workers are coming back to the industry and generally, the problems are easing.

Okay.

Thank you.

And the second question I had was, Bob, I was hoping maybe you could shed some light on something I'm struggling with, as I think about.

You wrote in your prepared commentary, and you talked about limited inventory and the supply constraint, how that could translate into higher prices.

It seems that the industry, in combination of prices and rates, priced their customers out this summer.

And so I'm just curious if you'd seen that -- this kind of tug of war in previous cycles before and what your experience was in this kind of environment, and is there a scenario where this just keeps -- just go through these little mini cycles within the cycle as supply dries up, we raise prices and then demand falls off again?

No, I don't think in the past our experience has been to see mini cycles within the broader cycle.

It's just been a broader one.

This recent flatness brought on by whatever, but primarily, I believe, from Washington, DC, is a new phenomenon and not something that we're used to.

The limited supply is a very real thing.

You've got a market that fell apart, basically in '07, and stayed apart until '11.

And during that time period, of course, there's no land being put in for approvals, relatively little.

And this is the same story that you've seen from '68, '74, '80, '81, '82, '88, '89, '90.

The same movie has been playing, and it will play again.

And that is because of the lack of supply, because nothing was put into the pipe when things were bad, when just a little demand comes, the price gets bumped up pretty rapidly, because there's no supply, no inventory to take care of the demand.

When that price pops up, then you create more demand, because people like the Duke brothers say, hey, we've been trying to corner the orange market, let's get into it.

And so you have the beginnings of the next bubble take place.

We're far from that right now.

So that's one thing we don't have to worry about.

But I think you're going to see the prices increase the same as they have in those last recessions that I just mentioned.

Okay.

Thank you for your time.

You're welcome.

Your next question comes from Bob Wetenhall with RBC Capital Markets.

Hello, thanks for taking my question.

Deliveries were up 37%, and average selling prices were up 21%.

So I was actually expecting a little stronger gross margin performance.

And I was hoping you could give some color whether it was labor and material cost creep that stopped the expansion or what's going on with mix, price and cost to affect gross margin?

I certainly think that you can't take a straight numerical average of the price increases without factoring in some of the mix issues in terms of both the product type and the location of that product type by geography.

So I think it's tough to answer the question, other than to say there's a lot to it.

Price increases is one component.

Cost increases is another.

Geographic shift of mix is a third.

And then land basis would be a fourth.

Fair answer.

So thinking about your guidance for next year with ASP growth of 5% to 13%, how do you break that up between the benefit you're expecting from mix to better geographies and more expensive product versus raw price increases?

Well, I think as I said earlier, about 60% of the deliveries we expect for next year are already baked into our backlog, and that backlog has a component of all of those factors I just previously mentioned.

As we look forward on the other 40%, it's a lot more suspect as to what actually is going to happen, but we generally use the same data set that we have in the 60% to project the 40%.

Understood.

Good luck next year.

Thanks very much.

Thank you.

Your next question comes from Jade Rahmani with KBW.

Hello.

Yes, this is actually Ryan Tomasello on for Jade Rahmani.

I believe you guys touched on this a bit earlier, but regarding Shapell, could you provide any insight on how we should think about modeling incremental interest expense associated with the recent debt issuance, and how much of that would be capitalized versus expensed?

We think about $5 million will be expensed next year, call it 66% to 75% of that in the second fiscal quarter, and the balance in the third fiscal quarter.

The rest would all be capitalized into inventory and released with home sales.

Great.

Thank you.

Your next question comes from Joel Locker with FBN Securities.

Hello, guys.

Just had a few questions on the moth balled community status, and how many you had left and how many you plan to open in 2014.

We have about 60 left.

We opened 12 in '13, and we expect to open 18 in '14.

18 in '14.

And then on your gross margins, the 175 to 200 bip increase, was that off the 20.2% reported gross margin or was that pre-interest?

That is pre-interest.

That's pre-interest.

And then the last one, on just your JV income, just on -- in 2014 it was around $14.4 million, and do you expect an uptick in that with the higher backlog, or any kind of range you want to give?

What do we have?

Jupiter's got a bit of backlog down there.

It will go up -- I think it will go up a little bit, call it an increase of somewhere in the neighborhood of $7 million to $10 million.

$7 million to $10 million.

All right.

Thanks a lot.

Welcome.

Your next question is from Ken Zener with KeyBanc Capital.

Thank you.

Marty, your comment on gross margins, because that's pre-interest, can you clarify what the change in interest expense is?

And combined with your comments on SG&A being up 25%, it seems like you're guiding EBIT to be up effectively 300 basis points in '14.

Could you confirm that?

Let me think about that one.

Yes, I think it's up a little bit north of that.

And I think in terms of the interest and cost of sales, we just had about 4.2% of revenue for the full fiscal year '13.

We think it'll be below 4% for the full fiscal year '14.

Thank you.

And then Bob, since you're thinking about cornering the market, I wonder as you guys think about the future, specifically your multi-family product that you're bringing out, are you guys reserving the right to convert those units, for example, your one in Jersey City, back into condos as the cycle matures and pricing goes up?

That's a good idea.

( Laughter ) Yes, wherever we can, of course, subject to the whim and desire of the municipality.

If the municipality is New York City, it's pretty much open.

Jersey City, Hoboken get a little tougher.

I don't know what the regs are in the DC market.

So it hasn't been such an issue with your partners prospectively?

Correct.

It's more about the municipality.

Thank you.

Right.

I think with respect to our partners, some of them, based on the nature of their fund, may be more amenable to it than others.

But if you're going to make more money doing it one way versus the other, I think their mentality might change.

And your final question comes from Jay McCanless with Sterne Agee.

Good afternoon, everyone.

First question I had, over the next 18 months it looks like you're going to be bringing approximately $750 million of cash back onto the balance sheet, $500 million from the land sales and about $250 million from Shapell.

Do you have that money earmarked already, or could you discuss how you're going to allocate that capital as it rolls back in?

It's going to go to pay down the line of credit that we're going to draw to pay for Shapell.

Okay.

And no notion of either accelerating the buyback or anything of that nature?

Not at the current time.

Okay.

And then I want to ask Don, because Don was talking about the FHFA, since it looks like there's a potential regime change happening there and also some new guidance on G fees, Don, I'd be interested on your take on what's going on there and what you see for lending standards over the coming year.

I can't predict anything that's going to happen with the regime change at FHFA.

We'll just have to wait and see how that plays out.

G fees are going up.

That's going to narrow the spread between private capital and Fannie, Freddie.

I don't think it will -- obviously, it won't affect FHA.

So we'll just see what happens.

Right now, in ARMs and the jumbo, jumbos are actually ahead of conforming ARMs.

Fixed rate is still ahead of jumbo.

But if they keep raising G fees, that could flip.

Okay.

And then last thing, just a request, I didn't know, now that you're breaking out the City Living closings and orders versus the rest of Toll's business, are we going to see the historical data on that in the K, or could you all release that at some point?

We'll have three years in the K.

Okay.

Thank you.

-- along those lines.

And then each quarter will have the quarterly related data.

Okay.

Thank you.

For two years.

Brandy, is that it?

Yes, sir, there are no further questions at this time.

Thank you, Brandy.

Thanks, everyone.

Have a great week.

Thank you.

Ladies and gentlemen, this does conclude today's conference call.

You may now disconnect your lines.