托爾兄弟 (TOL) 2014 Q1 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Toll Brothers first-quarter 2014 earnings conference call.

(Operator Instructions)

Thank you.

I would now like to turn the conference over to Douglas Yearley.

Thank you, Arnika.

Welcome and thank you for joining us.

I'm Doug Yearley, CEO.

With me today are Bob Toll, Executive Chairman; Rick Hartman, President and COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance 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 2014's first quarter on January 31, 2014.

Our net income was $45.6 million, or $0.25 per share, compared to net income of $4.4 million, or $0.03 per share, in fiscal year 2013's first quarter.

Pretax income of $71.2 million compared to pretax income of $8.3 million in fiscal year 2013's first quarter.

2014's pretax income included $23.5 million from the sale of two shopping centers in which Toll Brothers was a 50% joint venture partner, as well as $6.3 million of gains from land sales.

Revenues of $643.7 million and home building deliveries of 928 units rose 52% in dollars and 24% in units compared to fiscal year 2013's first quarter.

The average price of homes delivered was $694,000, compared to $569,000 in 2013's first quarter.

Backlog of $2.69 billion and 3,667 units rose 45% in dollars and 31% in units, compared to fiscal year 2013's first quarter-end backlog.

The average price of homes in backlog was $733,000, compared to $665,000 at 2013's first-quarter end.

An additional $105.3 million and 126 units were added to backlog upon completion of the Company's acquisition of Shapell Homes on February 4, 2014, the start of our second quarter.

Net signed contracts of $701.7 million and 916 units rose 14% in dollars, despite declining 6% in units, compared to fiscal year 2013's first quarter.

The average price of net signed contracts was $776,000, compared to $631,000 in 2013's first quarter.

Gross margin excluding interest and write-downs improved 100 basis points to 24.4%.

SG&A as a percentage of revenue, excluding $800,000 of Shapell acquisition costs, improved to 15.1%, compared to 18.4% in fiscal year 2013's first quarter.

Operating margin improved to 4.9%, from 0.1% in fiscal year 2013's first quarter.

We ended the first quarter with 238 selling communities, compared to 232 at fiscal year-end 2013, and 225 at fiscal year 2013's first-quarter end.

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

At fiscal year 2014's first-quarter end, we had approximately 51,200 lots owned and optioned, compared to approximately 48,600 lots at fiscal year end 2013, and approximately 43,700 lots one year ago.

We delivered more homes at higher prices this first quarter than one year ago.

This higher delivery volume, coupled with price increases from late 2012 and early 2013, drove our first-quarter growth in revenues, earnings and margins.

As we have previously discussed, after very strong contract growth beginning in fourth quarter of fiscal year 2011, and running through the third quarter of fiscal year 2013, demand has leveled more recently against some very strong prior-year comparisons.

In the six months ended January 31, 2014, Toll Brothers signed 2,079 net contracts, with a total value of $1.54 billion, compared to 2,071 net contracts with a total value of $1.3 billion in the same period in the prior year.

Although net contracts were flat in units, they were up 19% in dollars.

The freezing, snowy weather of the past two months has impacted our business in the Northeast, Mid-Atlantic and Midwest markets where about 50% of our selling communities are located.

While it is still too early to draw conclusions about the spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand, and an industry still under-producing compared to both historic norms and current demographics.

Through the first three and-a-half weeks of our second quarter, our contracts in units were down about 8%.

While we cannot give you an exact figure because our buyers are still choosing options and finishes, the comparable dollar amount should be up.

During this time, traffic has actually been up about 8% per community, which is encouraging, especially given the weather in many of our markets.

One particularly exciting community we recently opened for sale is Pierhouse at Brooklyn Bridge Park where we now have an interest list of several thousand people.

This joint venture with Starwood Capital will develop a 192-room, one hotel, and 108 high-end condominiums on the East River overlooking Wall Street and the New York Harbor.

This past weekend we opened 12 units for sale and sold them all at prices well above original pro forma.

The total sales price for those 12 units is about $44 million.

We intend to open an additional 7 units this week and believe we will immediately sell them all.

Another very exciting new community is Baker Ranch in Lake Forest, Orange County, California, where we have welcomed more than 10,000 visitors since grand opening just three weeks ago.

This is a master planned community by Toll Brothers and Shea Homes where each of us is building our own homes.

It consists of approximately 1,700 lots in one of the most desirable locations in coastal Southern California.

The buyer interest we have enjoyed to date at Baker Ranch bodes well for the significant investment we have made in California.

Speaking of California, as you know, we completed a $1.6 billion acquisition of Shapell Homes in early February which corresponded to the start of our second quarter.

It has boosted our land position in California significantly.

We continue to be very encouraged by the strength of our coastal California markets.

And find the Shapell transaction to be even more compelling today than when we announced it last fall.

This growth in California as well as significant expansion in Texas should further diversify the Company and spur growth as we move forward in 2014 and beyond.

Now let me turn it over to Marty.

Thanks, Doug.

First quarter home building gross margin before interest and write-downs improved 100 basis points to 24.4% of revenues, compared to 23.4% in 2013's first quarter.

First-quarter interest expense included in cost of sales was 4% of revenues, compared to 4.7% a year ago in 2013's first quarter.

Therefore, year-over-year margin improved approximately 170 basis points excluding impairments.

Volume and price increases more than offset cost increases to lead to this improvement.

Compared to the fourth quarter of 2013, our margin declined 110 points due to a change in mix, including the absence in Q1 of high-margin terrain deliveries.

And we also had some increases in job site-specific overhead.

First quarter SG&A of approximately $97.9 million was higher than the $78 million in the first quarter of 2013 due primarily to our growth.

After adjusting for a $4.5 million insurance reversal in the fourth quarter of 2013, our SG&A in the first quarter of 2014 declined approximately $1 million from that fourth quarter.

It should be noted that Q1 includes $2.2 million in stock option expenses associated with immediate vesting of options granted to retirement age executives and directors.

These expenses will not occur in the remaining quarters of the year.

As a percentage of home building revenue, SG&A was 15.2% for Q1 of 2014 compared to 18.4% in Q1 of 2013.

The improvement compared to a year ago was due to revenue growth partially offset by expense increases.

As a result, our operating margin grew from breakeven a year ago to 4.9% in Q1, which is typically our seasonal low point.

Over the last five years, we have consistently generated an average of approximately $50 million in other income and income from JVs before impairments.

2014 will exceed that average.

Our Q1 2014 joint venture income of $22.9 million was primarily a gain on the disposition of two shopping centers we developed in 2005 in joint venture.

We also generated approximately $16.5 million in other income, the largest components of which were $3.3 million from our Gibraltar business and $6.3 million from land sales.

In this regard, our growing apartment development business continues to progress and we expect it to contribute to these earnings in future years.

Our share count on a diluted basis averaged 184.9 million for the quarter.

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

As noted in the release, the extreme weather has negatively impacted some starts.

We now expect to deliver between 5,100 and 5,850 homes for the entirety of the year.

And we estimate the average delivered price per home will be between $675,000 and $720,000 for fiscal year 2014.

As Doug mentioned, the range for our year-end community count remains at 250 to 290.

Our gross margin guidance for the full year also remains as stated on our previous call.

Full year 2014 should have 175 to 200 basis point improvement over full year 2013.

The most significant improvements will occur in our third and fourth quarters as purchase accounting associated with Shapell deliveries will negatively impact our second quarter.

Full year 2014 SG&A is still anticipated to be up 25% over full year 2013.

Finally, we expect backlog conversion in Q2 of roughly 30%.

As Doug noted, Shapell closed on February 4. We acquired $120 million in cash and backlog of 126 units worth $105.3 million.

At our last call, we had expected $15 million to $20 million in Shapell transaction expenses, and approximately $5 million in directly expensed interest, for 2014.

Those estimates were too conservative.

We now expect transaction costs to be $5 million to $10 million, and we expect any directly expensed interest to be nominal.

In fact, we paid down $170 million of our line draw last week and anticipate paying down the remaining $200 million tomorrow.

Now let me turn it over to Bob.

Thank you, Marty.

I'm so proud of what our team has accomplished with the acquisition of Shapell Homes, which represents one of the finest portfolios of Northern and Southern California home sites ever assembled.

Our Company has certainly come a long way since 1967 when we began with two homes.

This was the coldest January since 2001, one of the worst winters since we entered the business.

The storms that affect our industry were reflected in both the decline in the February NAHB Home Builder Confidence Survey and the 16% sequential drop in January housing starts.

Although the weather will result in some delays and some additional but not major costs, it should not result in lost sales or deliveries.

While some people may have hunkered down in the bad weather.

But they will venture out and should ultimately buy homes when the sun begins to shine.

Now let me turn it back to Doug.

Thank you, Bob.

Arnika, we're ready for Q&A.

(Operator Instructions)

Stephen Kim with Barclays.

Thanks very much, guys.

Congratulations, particularly on that Shapell acquisition.

That's going to be interesting to see how that plays out.

I wanted to just take up the comment you made about weather.

You said not major costs.

I just wanted to see if you could give some parameters around that because obviously there's going to be costs associated with snowplowing, at the very least, and, of course, other delays.

I remember in previous years it was one of those things that we tended to overlook.

And I just want to make sure we bracket what that range of impact might likely be and when we might likely see it.

This is Rick Hartman.

As Steve and I used to say, there is going to be some impact in the overhead due to snowplowing on the streets and keeping them open for our residents.

As far as construction goes, re-tenting houses, temporary heat, they all add to the cost, although as Bob said not major impacts.

But it adds to the cost due to the cost of the extra material and also the slowdown of production of the sub which extends the delivery a little bit.

But all those costs I don't believe they're going to have a major impact to our bottom line.

Okay.

Again, I'm getting the not major there.

I was hoping for something with a number around it.

Is there any way we could get some sort of sense for the overall --?

Stephen, I don't know if I could be that specific.

But as customary every quarter we do look to see how our costs are rising, not necessarily just as relates to weather but for some of the commodities and labor, as well.

And so far it continues to be nominal.

I'd say for the quarter we estimate it to be around $1,700 in terms of a cost increase.

Probably half of that is labor.

And maybe we're not capturing everything that Rick just mentioned in terms of tenting and heating, but, again, that's the magnitude of what we're talking about here.

Great.

Got it.

Thank you for that.

And then with respect to the commentary about more recent traffic and sales activity, I just want to make sure I heard you properly.

I think you said traffic was up 8%, sales are down, or deposits are down 8%.

Was just wondering if you could talk about that and make sure that I have the right numbers.

And then also give some sense as to why you think it's still too early to tell about the spring selling season.

Is it just simply because of weather?

Because I know usually, Bob, you advise us that actually the spring selling season starts before the Super Bowl kickoff.

That's right.

So, could you just talk a little bit about what you're seeing now on the ground and your read-through.

Sure.

What we mentioned was agreements for February, the first three and-a-half weeks of February, were down 8% in units.

And while we can't give you an exact number on a dollar basis because new buyers are still in our design centers, picking their options, picking their marble and granite and cabinets, we are confident that on a dollar basis the number will not be negative but it will be positive.

And, so, Stephen, it wasn't deposits, it was actually agreements, which really translates more to a January deposit, generally, into a February agreement.

Although there could be some agreements later in February as last week or so that came in early February.

And the reason, it's what we've all been saying now for some time which is the markets are flat in most areas.

They've been a bit choppy.

Frankly, we're a bit baffled by it because of all the great stats on our side with pent-up demand and affordability and still very affordable interest rates.

Weather has played a big part.

We highlight the Northeast, the Mid-Atlantic, the Midwest.

But let's not forget a couple of great storms that hit Texas that took our Texas sales out of commission for a few weekends.

A big storm hit Seattle which really hurt us there for one week.

Most of the weather impact is in the East where 50% of our action is, but it has extended beyond that.

I think confidence is still a bit fragile and I think we're all feeling that.

I think confidence is still a bit fragile.

And I think we're all feeling that.

Usually we can give you pretty good guidance on which markets are great, good, average or poor.

And this quarter we've all looked at it and talked about it and it's much more difficult to do that because week to week, market to market it's become very unpredictable.

And the one big thing is weather.

But beyond that, I think there is a confidence issue out there.

And so we're happy, we're optimistic.

But right now, we continue to be experiencing some choppiness and a relatively flat market.

A few words about traffic, in California especially.

Traffic in California is always bigger than most other markets.

I don't know if it's the weather or our beautiful model homes.

Bob always talks about in the old days visiting a model was a form of entertainment on a weekend.

That's not my experience but that's apparently the experience of the old days.

So maybe in California it's still a form of entertainment.

But we had 10,000 people visit Baker Ranch in the first three weeks.

That's obviously an extraordinary number.

But in many existing communities that are not having any sort of grand opening or special event, we will get 50 to 100 visitors per community out on the West Coast.

And just to clarify, when we quoted the 8% increase in traffic, we took those 10,000 people out of the math because of it being so unusual.

Right, we took Baker Ranch entirely out.

That's great.

Thanks very much, guys.

That's very interesting.

That was Baker Ranch.

Not Shapell Ranch.

Shapell Ranch is coming soon.

(laughter)

Ivy Zelman with Zelman & Associates.

Thank you.

Good afternoon, guys.

Listening to you, Doug, it sounds like the choppiness and some of the baffling that you talk about would help, if you further elaborate, maybe go around the footprint for Toll because California, as you mentioned, it sounds like it's pretty strong.

I don't know if it's baffling you there or is it more what you'd expect for this time of year.

And where the baffling is we'd love to hear more expounding upon that.

Because I know, after seeing some product in South Florida and some of the Texas markets, it seems as if those are even better than seasonal at this point, at mid February, late February.

I'll give it a shot, Ivy, but, again, with the caveat I said before where this is a very tough quarter to grade our markets because they're changing week by week.

But generally northern Virginia, which is a big market for us, had a slow fall and a slow beginning to January, but in recent weeks is performing well.

And we love our position there and I think we're in great shape and it appears that that market is strong.

Maryland, on the other hand, just on the other side of the capital --.

I can take that.

I have some real numbers in front of me.

For the full quarter, Maryland was up 20%, contracts per community.

For January, it was down 35%.

That's where I was headed, Marty.

Thank you.

I didn't know if you had it or not.

(laughter)

I had it in my head.

And then for the first three and-a-half weeks of February, it's down 50%.

Take a look at New Jersey.

With the lousy weather, 30 deposits this past weekend.

More in Maryland.

We got more there than--.

More snow in Maryland?

They did.

Philadelphia had 59 inches of snow.

Last year we had 4.

Back to you, Ivy.

Moving north -- I will continue to move north -- Philadelphia and New Jersey, as Bob was mentioning, is good.

And we've had a good couple of weeks and we feel good.

New York Metro, which is not City Living, and it's very little in Westchester county, but it's up in Fishkill, which is a stretch to even call it a suburb of New York but the train line does go there, has been very slow.

And we are concerned about that market.

It's a small market for us and it has not performed well for some time.

Connecticut, notwithstanding the bad weather, has done very well for the last couple of months.

And Massachusetts has been okay.

And we are growing up there and excited about our land offering.

Heading south, the Carolinas have had some pretty good storms this winter and have not done all that well.

But for us, that's Charlotte and Raleigh.

And they have been soft.

Florida, it's spotty based on market.

Jacksonville, where we're small, has done very well.

Orlando has not done as well but we are at a very high price point, and we are repositioning ourselves to a lower price point in some different locations.

And both the East Coast and West Coast have had a good start to their winter season.

Down there, of course, most people buy between Thanksgiving and Easter when the snow birds are down.

It's interesting, when we have a horrible winter up north, more and more people realize that the South is the place to be, and we tend to have better sales in the South because of what they're living through up here.

Heading out to the Midwest, Detroit is great.

Chicago had a comeback week but it's only one week, and before that was slow.

And Minnesota is very slow.

Colorado is doing great.

And we feel really good about where Colorado is.

Texas, fabulous.

We love it.

We're growing.

We've added about 10,000 lots to the state.

San Antonio is small, Austin is a start-up, Dallas and Houston are big and getting bigger for us, particularly Houston where we have three major master planned communities we've acquired in the last year.

And that will be a major growth area for us.

Phoenix, it came back a year and a half ago very strong and since then has been bumpy.

It's doing okay.

This last weekend, however --.

Roared.

Gangbusters.

Right.

Nevada, it's back, both Vegas and Reno.

We've repositioned ourselves at a lower price point.

So has the market.

The market has.

Inspirada, where we have 800 lots that have been written off, I think we opened -- Rick, is it six communities this year in Inspirada?

Summerland, we're back in action in Summerland, buying more ground.

So Vegas looks really good.

And Reno, which is a small market for us, we wish we could find more ground, doing really well.

Palm Springs, very slow.

We're very small.

But that market right now is asleep.

Northern and Southern Cal, unbelievable, continuing to raise price.

Baker Ranch is one example we gave.

But, really, everything we have in California, whether it be the new Shapell land or the old Toll land is fabulous, huge numbers, price increases.

We feel great about it.

And the last market is Seattle.

Seattle is off a little bit.

It came back the last couple of weeks but it's been pretty choppy.

Doug, that was more than I had hoped for and very, I think, value-added to everyone.

If you took it a step further and you looked at the broader market, we've seen weakness in the existing housing market, which some could attribute to many factors, one of which is obviously the weather but also a lack of available listing.

And, so, when you're thinking about the new supply that you're bringing to market, to gauge the success of that supply, the new communities, and how much you'd be able to absorb demand, do you feel good about that?

And is part of the decline in agreements more attributable to very tough comps and as the year progresses you can go back to double-digit order growth with your new communities garnering more of the transactions in the market with a lack of listings on the existing housing side?

Yes.

Thanks, Bob.

(laughter ).

You're welcome, Ivy.

Thank you.

David Goldberg with UBS.

I was wondering if we could talk a little bit about the competitive environment now for land.

It felt like there were some more sources of financing starting to come out last year when the market was real hot for some of the private builders, not just D&C but also some acquisition financing.

How do you think that's changing, given the back half of the year slowdown, and maybe demand being a bit more choppy?

Are you seeing those financing sources continue to move forward or have they pulled back at this point?

And what does it mean for the competitive landscape?

I don't think we're going to be able to provide you with much information.

Maybe you guys have a sense of it.

But it's not our market, not our thing.

I'm sorry, it's like reporting on somebody else's business.

It's just not our business.

But we don't appear to be competing against it.

We don't see more local and regional builders competing for land because now they're well-capitalized.

That has not changed.

Yes, that was really the question.

It wasn't so much you guys financing them, it was a question of competition for land.

I appreciate the color on that.

I was wondering if you could talk about -- and I thought it was very helpful to give Ivy the run down, give everybody the rundown on the markets -- but it's kind of strange to me the choppiness.

And it doesn't seem to be job growth-driven.

Jacksonville doing great.

Orlando has got great job growth but maybe the price point, you guys are a little bit higher or something.

But can you talk about what you think is in the buyer's mind that makes one week great and the next week not so great?

Is it just product?

Is it promotion?

Is there something you guys do that really changes the buyer's mentality towards it?

Or it's literally that fragile at this point that one week can be great and the next week can be off for really no you apparent region.

That would really be a great project for analysts.

(laughter) Would that we could, but we can't.

If we had, we would have told you, believe me.

Your clue is as good as mine.

This past weekend, as an example, was a very good week for us.

And it also happened to be much better weather.

Now, but that doesn't affect sales nationwide but it affects a lot of our markets.

California this past week, with the addition of the Shapell communities, had a great week.

We expected that because of what we've seen consistently in California for the last, boy, year, year and a half.

This was also the last weekend of our national sales event.

Right.

We also, we run four national sales events where our vendors contribute upgrades at their cost, that we can offer to our buyers for a limited period of time.

And we're able to create urgency because the buyer understands it's not Toll Brothers claiming the incentive runs out on Sunday but it's truly a vendor.

It's Kohler, it's our cabinet company, it's our appliance company, our flooring company that means it when they say it, that this Sunday is it.

And that certainly adds to urgency.

So, it's tough to gauge.

But in many markets we've been consistently good and in others we've been choppy.

In Phoenix, 54 in three weeks -- 54 deposits in three weeks.

The prior four weeks we took 26.

So, all of a sudden Phoenix comes to life.

And that was -- well, February's always better than January.

But you're right, that's disproportionate.

Okay.

Thank you for the color.

Dan Oppenheim with Credit Suisse.

[Dale Lexis] on for Dan.

I had a question, just going back to the deposits being down 8% year over year, but traffic being up.

Across the business how has absorption fared relative to your expectations?

And if, heading into the spring, demand doesn't necessarily materialize, as you might expect, at what point do you potentially increase incentives or try to drive additional traffic at your communities?

It's fairly simple.

We've been doing it for the last 40-some-odd years.

Every Monday we sit down, analyze traffic and deposits and agreements for each community.

And with about five minutes of instruction I think you could do it as well as we.

You sit there and say -- well, no deposits for the last three weeks, traffic is down, I guess we better put a little incentive on this job.

Call the sales manager so she now has an excuse to call 20 of the last suspects to tell them something's changed and they've got to come in and see Happy Acres before it disappears.

Right.

And as part of that we always look at the backlog and how many months to deliver the next home.

And when the backlogs get long because of good sales, we're more inclined to raise price.

And so that's part of the process.

But Bob's right on, it's community by community and we do it every week.

And under your hypothetical, if demand doesn't show up this spring, there would be more incentives to stimulate those sales.

Right now, we're not doing that.

Got it.

Thanks very much.

Stephen East with ISI Group.

Thank you.

Good afternoon, guys.

Doug, just following on that a little bit, as you look at your price trends and your strategy and all of that, you had been consistently raising prices.

As you look across the country now -- and I know it's different market by market -- but at least broadly how are you thinking about the pricing versus pace?

And during the quarter how much of your ASP jump was price versus that mix shift?

Marty, why don't you --.

I think when you look at the price increase on new contracts this quarter compared to a year ago's quarter, about one-third of that is price increases and two-thirds is mix shift, either geographic or product type.

At the current pricing mentality, I think Stephen was asking at the outset.

I would say right now we are more careful than we were a year ago in price increases because last year we roared out of the gate in the beginning of the selling season.

And this year it's been flat.

We are raising prices this week, which was a good week of sales.

We had a lot of conversation yesterday on those price increases.

And, Bob, I would guess 20%, 25% of the communities saw price increase.

Got banged, yes.

When you start to see the backlog take you into 10.5, 11 months, what the hey.

It'll take us five months to get the homes started, you might as well use some of them to see if more sales are going to come in at a higher price.

So you bang it.

Okay, fair enough.

And then switching gears, Shapell -- you talked about your strategy when you announced the acquisition and all of that.

As you've now looked at it and you've lived with it for a while, you said it's better than what you thought, how do you look at monetizing those assets moving forward?

How long does it take you to get through the old product, create new product?

Are you pricing?

Have you pushed up pricing in their old product?

Is the market allowing us to do that, that type of thing?

Just the whole ball of wax around Shapell's strategy.

March the 17th every Shapell sales center will be Toll Brothers.

Remember, when banks merge and from Saturday to Sunday every branch changes from red lollipops to green lollipops.

That's what we plan to do in mid March.

We have already moved price up of the existing Shapell product in their communities.

Those price increases were welcomed by the Shapell sales teams, as the Shapell management and board was not inclined to push price for the last few years.

We are bringing on new Toll product to replace what is a little bit of outdated Shapell product as quickly as we can, which is when you will see the real price increases because our product will be bigger, prettier, and, we think, much more valuable.

So we are implementing the strategy that we talked about in the fall, and so far we're excited.

It's been effective and prices are up even more than we had thought they would be.

You just have to look at the amount, the experience.

From two years ago, right.

Yes, which is the model that led us into the Shapell purchase.

Right.

That was the Shapell land we bought two years ago.

And we're able to push pricing significantly higher than what the Shapells thought they would sell homes for, simply by having better architecture, better marketing, bigger homes, backyard outside living space.

For those of you that have seen the cover of our new annual, that is the backyard of the Amalfi model, which is the Shapell land from two years ago.

And it's been extremely effective.

We're doing the same thing at Baker Ranch, which we just opened.

It's a business model that we're excited about and we think will be successful out West.

All right.

That's very helpful.

It sounds like by the end of this year you would probably basically turn over all the models, that type of thing.

Is that a fair time line?

Those that will turn over.

There are some sections of Shapell master plans that have so few lots remaining that we will just build it out with a Shapell model.

But we have to get new architecture designed and approved and then we have to build models.

So, I can't promise you by year end but we're pushing as fast as we can.

Okay.

All right.

Thanks a lot.

Adam Rudiger with Wells Fargo.

Hi.

Thanks for taking my questions.

You noted both in your remarks and in your press release that you didn't think the weather was going to impact orders or deliveries.

Yet you also took the top end of the closing guidance down a little bit.

So I was just wondering what the reason was for taking that down.

I think it was our intention to say that it will impact deliveries a little bit.

And we moved the top end of the range down a couple hundred units to reflect that.

So, the change is more, in your view, a supply-driven reduction not a demand-driven one?

Definitely.

It's a, I'm going to say, construction-driven reduction.

Okay.

A second question I wanted to ask, Doug when you were talking about doing your market overview, you mentioned a couple places -- I think maybe Orlando and then Nevada -- you'd repositioned your product.

I was wondering how long that process usually takes and how you weigh that versus making the incentive adjustments you were talking about.

By repositioned, we are not repositioning existing land.

So, we are not taking a community that was selling $800,000 homes and bringing in a new cheap model and undermining the community.

We're talking about buying new land that will be appropriate for different price points.

That process takes longer, obviously, than building a new model park in an existing community.

In Las Vegas we were fortunate to have 800 lots at Inspirada, and good deal flow coming out of Summerland because we're one of the favored builders there, so it's relatively fast.

In Orlando it's more difficult because we have to go out and contract with the farmer and get the land entitled, or buy approved land that we then have to put roads in.

So, that process is taking a bit longer.

Okay.

That's all I had.

Thanks very much.

Mike Roxland with Bank of America.

Thanks very much.

Doug, are there any other areas that you're considering diversifying the Company into?

Obviously the Northeast, Mid-Atlantic and Midwest are central to the Company right now.

But it seems like, given your commentary you're looking to grow the Company aggressively in other areas such as Texas, outside of Texas is there anything else you're looking to expand into?

Not geographically.

We went into Seattle two and a half years ago.

We've been hot to get into Seattle for the last decade.

And that really was the last piece of the puzzle for us.

We're very comfortable with the footprint.

We were in Atlanta.

We had one community and found it to be hyper competitive there and very tough to make a living.

We tried out Columbus, Ohio 15 years ago.

That didn't work.

We tried out Nashville 15 years ago.

That didn't work.

We tried it at Hartford, left, and then came back.

Right.

Lehigh Valley, we left and came back.

Which is really just part of Philly.

So, I think the footprint is solid.

We're not focused on other markets at the moment.

That could certainly change.

What you will see us do is try to spread what we do well elsewhere.

So, we're trying to move City Living up to Boston, expand it down in Washington, DC.

We're studying San Francisco.

We want City Living to get bigger and to be in other markets.

We want to get Active Adult out to the West Coast.

Our first Active Adult community West of the Mississippi is in Denver and is doing really well.

So, I think what you're going to see is a diversity of our product in more markets but not a new market.

Got you.

Thank you for all the color.

Bob just mentioned the apartments which I failed to mention.

We have about 1,500 apartments in development at four locations, and another 3,500 in the pipeline.

And we are looking to grow that apartment business.

Right now it's focused on Washington, DC to Boston.

That's our home turf, we know it best.

But we see expanding that out to the West Coast at some point.

And the other aspect is our land development business where, particularly in the Sienna joint venture in Houston, there's 7,000 lots that we own in partnership that we are developing.

A significant number of those will be sold to other builders, ideally at a profit to us.

Same thing with Austin with our joint venture with Taylor Morrison in Austin, we'll have pod sales to other builders.

Got you.

Thank you for the color.

Just following up, as you think about the various businesses, as you diversify away from single family detached home, can you help us frame how we should think about normalized gross margins, given the different mix, particularly as City Living grows and you expand your footprint there, as you expand Active Adult?

How should we think about gross margins on a normalized basis?

I think all that is in subsequent years.

So the guidance I gave for this year should hold true regardless of subtle mix changes.

But, generally when we do the high rises, we're looking for mid 30%s margins compared to the mid 20%s margins we expect from any of the other product types we have, whether that's Active Adult, large single family, attached single family, et cetera.

Got you.

Thanks very much.

Good luck in the quarter.

It's a dangerous business.

(laughter)

Michael Rehaut with JPMorgan.

Thanks.

Good afternoon, everyone.

Looking at the 2013 annual report cover that you referred to, Doug -- and it's a very painful look given the past month in New York.

(laughter)

The first question I had was just on absorption.

I appreciate all the commentary and color there.

Obviously the slowdown in year-over-year pace is not only felt by you but by others.

When I look at 2013 overall -- and this is just rough numbers but I'm adding it up quarter to quarter -- it looks like you're doing about 23, 24 sales per community per year.

And obviously it's a broad average.

You're in different geographies than in past cycles.

But you look into early part of the 2000s, you're anywhere from 28 to 30, 32.

So, you're still a bit far off.

And just wanted thoughts on what it takes to get back to that level.

Obviously we're still at the beginning of a recovery.

But we've seen other builders achieving a lot of markets three, four sales per month, let's say, and hit pretty good absorption paces earlier in 2013.

Is there anything that makes you think that you may or may not be able to get back to that type of a normal over time?

It seems to us that we will get back to what you're characterizing as normal, which I would characterize as a good market, in the time that it takes for people to regain confidence.

Hopefully the interest rates will not surprise people, the Congress won't do anything silly with the GSEs.

And we expect to be able to achieve that, depending upon the market.

I don't want to say in short order, but it feels as though it's coming rather than moving away.

And all other things being equal, Mike, we're building more attached product or high-rise product than we did back in those years that you referred to.

And generally those products and the Active Adult can turn quicker than our large single family.

So the more of the, I'll call them, smaller units we can do, the more our throughput could get to or exceed those longer-term averages.

But in general, we are the slow-go, slow-mo developer-builder model.

And when we get to 28 to 32, as you mentioned, that's really warp speed for us.

We start to really push price when we get to 25 or so per community because that's generally where we've got our production goal set.

And when we start to exceed them we make the market pay for them.

But in a really good market they pay for it anyway, which is what you reflected when you mentioned to us the paces you saw.

Right.

Thanks.

I appreciate that color.

And just a question of clarification, Marty, if you didn't hit on it before.

You reiterated the 175 to 200 bps of gross margin expansion for the year.

Just wanted to get a sense -- and sorry if you hit on this before -- but I believe that's inclusive of interest.

And just wanted to get your sense of how much of that is drawn by further leverage of the interest amortization versus the pre-interest gross margin.

It is after interest.

And so interest, we expect to show maybe a quarter of that improvement to, call it, 30 to 50 points of that improvement.

The rest would be in true cost of sales.

Great.

Thanks a lot.

And while I'm on the topic, Doug keeps sliding a piece of paper in front of me saying I may have said $25 million increase in SG&A.

It's a 25% increase in SG&A this year compared to last year.

In dollars.

In dollars.

In dollars, not in percentage.

The dollars go up 25%.

Exactly.

Great.

Thank you.

Nishu Sood with Deutsche Bank.

This is Rob Hansen on for Nishu.

I just wanted to talk about land for a minute here.

You've got the Shapell acquisition.

You've also got a lot of pending land sales.

So, we would have thought that your land buys would slow down a little bit.

However, over the past couple quarters you've kept your land spend fairly elevated.

So, can you just walk us through the thought processes around that and where we should see land buys directionally in the future.

I think the land buys are slowing down a little bit.

This quarter we spent $275 million on land.

$60 million of that was take-downs at Baker Ranch in a JV that we are involved in with Shea Homes.

And $70 million was a high-rise site on the east side of New York City that was contracted for pre-Shapell.

But the one reason we keep talking about bringing significant cash back from Shapell quickly is so we have plenty of dry powder to continue to take advantage of deals around the country.

And we are doing that.

We are a little more selective, particularly in certain markets like California.

But we're not out of business, and we need to grow this company everywhere.

And so I think we are in good shape.

And we have a strategy to sell Shapell land and sell other land in the Company, and come up with other ways of returning cash like refinancing some commercial assets, and like the sale of the shopping centers.

So I think you will see our land spend go down somewhat.

It will not dry up.

And we're analyzing every deal, as we always did, which is, does it work in that location.

And if so, we move forward.

We may have changed the underwriting a little bit to be a little bit more conservative because of what's out on Shapell for the next 12 to 18 months, which is a period of time when we get a lot of the Shapell money back.

Okay.

Thanks.

That's was really good color.

It's the off season for making trades.

It's got to do with what you're pulling in on Shapell versus what could you pull in on the next piece that comes to the desk.

And if the piece that comes to the desk can pull in the same or better than Shapell, well then it says buy and we ought to jump on its.

Likewise, if it's the reverse we might as well keep what we've got instead of selling it in order to be able to bring in something that yields less to us.

It's a good time for us for swapping ball players.

Understood.

I just wanted to switch gears and ask about the high-rise business.

What do you guys have in terms of the pipeline?

How many buildings will you have coming online in the next 12 to 18 months?

And what do you have open now?

We will have five openings in 2014.

Pierhouse at Brooklyn Bridge, which I mentioned in the monologue.

That just opened last weekend.

400 Park Avenue South, which is 28th and Park Avenue South, which will open later in the spring.

1110 Park Avenue which is --.

Do you have the unit count for Park Avenue?

99 units.

99 units.

1110 Park Avenue, which is 89th and Park Avenue, upper east side of Manhattan.

That will be somewhere between 9 and 11 units, average price, Rick, $14 million?

$14 million.

$14 million.

First Avenue in Manhattan, which is 52nd Street and First Avenue, that should open late in the year.

And then our first City Living building in the DC market in Bethesda will also open later in the year.

What we have open right now, we've got one unit left at The Touraine, which is the penthouse up top.

We have four properties in Philadelphia.

We have one in Hoboken.

And we have 160 East 22nd Street off of Gramercy Park in Manhattan.

Plus Brooklyn Bridge Park that just opened this past weekend.

You didn't say how many units at First, or at least I missed it.

First Avenue is 114.

All right.

Thank you very much.

Will Randall with Citigroup.

Thanks for taking my question.

Marty, I appreciated your comments on the non homebuilding earnings trajectory.

Could you talk a little bit more granularly in regards to what we should expect for the remainder of 2014 on a year-on-year basis, or whatever way you'd like to quantify it?

It's tough to do that because some of these transactions require a specific buyer of land or a repayer of debt at Gibraltar.

And until they actually show up, it's tough to set expectations because I can control what we do, I can't control what he does.

So, I think one thing that Doug did mention that we expect to do is some refinancings at one of our apartment projects.

And the proceeds from that, to the extent they exceed our basis, would be income, and that could be $7.5 million to $10 million.

And some of the non-Shapell land sales will count.

The Shapell land sales will go against the future lots.

But we are selling some land outside of the Shapell portfolio.

Got it.

Thanks for the color on that.

And if I could, I heard Don was there.

I was hoping to revisit where he sees the underwriting market for purchase originations today.

I appreciate his insight on that, especially following the implementation of QM and ATR.

There's really not a lot of change from last time.

We're still seeing most of the jumbo folks at 43% back ratio.

But we do have two major banks that will fund and have funded some non-QM loans.

I don't think, to my knowledge we haven't lost any sales because people didn't qualify under the QM banner.

So I think that's good news.

Interest rates continue to be strong.

We just came out with a brand-new 5-5 ARM product that today is 3% and zero points.

So people will average no more than 4% for 10 years, that's on a jumbo loan.

You can do a 7-1 ARM today at 2-7/8% for seven years with no points on a jumbo loan.

In terms of underwriting, you mentioned ATR, there's been ability to repay since the dark days of the downfall so we don't really see a big change.

There's some documentation issues we have to do today, but in my view I don't think we've lost any sales to QM or ability to repay.

Thanks for that.

And congrats on the quarter, guys.

Eli Hackel with Goldman Sachs.

Thank you.

Just on the Shapell land dispositions, it seems clearly -- and, Doug, from your commentary -- California continues to do extremely well.

Why not hold onto more of the land or all of the land that you bought in Shapell, and look for dispositions exclusively elsewhere in maybe some of your other lower-growing or lower-demand markets.

Tell the truth.

The CFO wants to generate cash to pay down some debt.

(laughter)

I assure you with Bob Toll on the land selling committee, he's biting the finger on every deal that's presented.

It's a great question.

We struggle with it.

We are following Marty's lead, although challenging him regularly.

We are analyzing non-Shapell versus Shapell and looking for other ways to generate cash, as I mentioned.

There are some opportunities.

We've discovered the buildouts on Shapell land fairly quickly where the money will come back.

Not as quick as a land sale but quick enough and so that's an alternative.

And Marty, anything else?

No, I think the strategy is to generate some cash to reduce our leverage.

And I think you've seen us do some of that with the repayment of the line draw.

You've seen us talk about doing some of that in methods that are not selling Shapell land, like the sale of the shopping center, like potentially the refinancing of the apartment buildings that we mentioned, and like, as Doug mentioned, selling through some parcels quickly to generate cash.

Yes.

I had mentioned earlier that our typical model is to shoot for 25, let's say, as a goal.

And if we sell more than that, raise the price, slow down the future pace so that you come back into the 25, take the additional profit.

In this case, we borrowed a bunch and instead of selling land we may change the model where we see the opportunity.

We won't be able to repay within three months.

It might take a repay within a year.

But that's certainly within terms of reasonableness for us.

And use that greater volume and greater pace as opposed to selling the land.

So, every time we get a 5,000-person weekend at Baker, Schaefer or Shapell, one more reason to bring on some more supers, hold the price and let it rip.

And we will go from week to week debating which we should do.

Got it.

And then just one question on the apartment business.

As you grow the business, it sounds like you want to grow it, is it your intention to hold on to the buildings and generate the rent income or sell off your joint venture interest and be more of a merchant builder?

I think it will be a combination of both as we look at it right now.

We like the holding of the units long term as a hedge against the cyclicality of the for sale business.

But we like evidencing to you guys that we are generating some value and creating some gains by selling a building every once in a while and reporting the gain.

Great.

Okay.

Thank you very much.

Jack Micenko with SIG.

Hi, guys, thanks for taking the question.

Just to beat the dead horse on the land sales, are we still at the $500 million over 18 months that was talked about around the Shapell deal?

Or has that number changed some given the debt paydown, given maybe a slowing land acquisition pace?

And maybe if you could talk about the nearer-term cadence.

Are we going to actually see those proceeds in the second quarter?

How to think about that over the visible future.

I think it remains to be seen.

I think we have made some progress already.

We have some attractive opportunities in front of us that likely will close in the second quarter.

And then we have other things we're planning to do for the balance of the year and the balance of the 18 months.

I think we may have initially categorized it as $500 million in land sales.

I think we want to refresh that a little bit to $500 million in cash proceeds generated.

Okay.

Great.

Thank you very much.

Jade Rahmani with KBW.

Regarding the SG&A increase, did that include any costs associated with the asset sales in the quarter?

No.

Okay.

And then just on the multi-family initiative and City Living, can you remind us how much capital you have invested in each of those?

In the multi-family business right now we have around $60 million to $70 million invested.

$62 million, Marty.

Okay.

We have, I'll say, plans for another $100 million to $150 million there.

And then Gregg is looking up our investment in the City Living.

Yes, City Living has been running for the last few quarters just under 10% of our total inventory.

And this quarter it's 9.8%, so right in line.

So, ballpark, $450 million.

Okay.

So the capital allocation is similar to the percentage of total inventory?

That's what we have invested in the inventory.

That's the capital we have in it.

These are not financed by outside debt in the high-rise.

The apartments do have outside debt.

Thank you.

I appreciate the color.

Joel Locker with FBN Securities.

Hi, guys.

Thanks for taking the question.

Just was looking at -- you mentioned contracts down 8%.

Did you give a number on actual deposits for the first three and-a-half weeks of February?

We did not.

And deposits quarter to date, three and-a-half weeks, are down about 6%.

That's in units.

You tend to thinks dollars but it's tough to get you guys to go that way.

Can you remind me how many days you ran the February sales event last year?

Every year it's about the same.

This year we had a short extension because of some weather.

It's usually a three-weekend event.

So, it runs 16 days.

Right.

And this week it was just like 23, 24?

Correct.

We added a weekend.

Added a weekend, right.

Just the last one, where were the land sales and how much revenues did those generate?

It was in Florida and it was $5 million.

It wasn't that much.

Part of the gain was recognition of a deferred gain on the shopping centers from when we sold the land into the joint venture 10 years ago.

and that would be in Virginia.

All right.

Thanks a lot, guys.

Jay McCanless with Sterne Agee.

Good afternoon, everyone.

I wanted to ask, first, you talked a little earlier about Active Adult.

How much of your business is tied to Active Adult now and what are you seeing from that buyer?

In terms of percentage of business, let's look at contracts for the quarter.

It was 14% of our contracts for the quarter.

And a year ago it was 12% versus Q1 2013.

And versus Q1 2012 it's 11%.

Those are units?

That's based on units.

So it's probably less than that on dollars.

Right, less than that on dollars, of course.

Okay.

And then on City Living, last year you gave some pretty detailed guidance on where gross margins would move as you go through the deliveries, and especially with the building that's delivering this year with the $14 million average price point.

What should we expect from the quarterly cadence on gross margin and on average selling price from those deliveries coming through?

That building's not delivering this year.

What building are you talking about?

1110 Park.

Jay, I think the -- and Gregg's going to correct me after I say this or maybe he'll get to the answer before I say it -- I think the cadence this year will be a little bit more even flow.

And the average price point of the units being delivered are going to be more in line with our average price point of the rest of the business than they were last year.

Okay.

Thank you.

Ken Zener with KeyBanc.

I'll be short, gentlemen.

Three housekeeping things.

First, clarify, when you say SG&A percent in dollars, do you mean each quarter or is it just for the annual?

Second, can you highlight the gross margin ramp that you're thinking first half versus second half?

And then your guidance given I think you said 30% conversion in the second quarter, what does that imply about the back half given product you still need to sell?

I think the product we still need to sell we're assuming is going to be at the same gross margins to the extent we can deliver it as the mix we currently have in our backlog.

We do not assume it's going to get better.

We do not assume it's going to get worse.

With respect to the margin guidance we gave you, it is 25% for the full year and it will ramp up through the course of the year, with the S component of that obviously being more sensitive to the total revenue.

And the revenue in the third and fourth quarter's going to be more significant than the revenue in the second quarter, as it has been for a long time.

I may have missed a question.

The timing of the gross margin improvement for the full year.

The second quarter is going to have a lot of backlog that we acquired from Shapell deliver, and a little bit of that may slide to the third quarter.

So, the second quarter's going to have the bulk of the high cost of sales product from Shapell as we purchase accounting allocate the basis to a higher percentage of the revenues expected.

So, the third and fourth quarter, as I mentioned at the outset, margin expansion is where you should expect to see it.

Okay.

And then, Doug and Bob, I actually did a little analysis, since you're calling us out here.

The seasonality over the last 15-plus years in terms of pace 2Q from 1Q is about 60%.

So, orders per community go up.

That would imply -- would you expect that to be any different?

And, Doug, when you talk about if you had to discount what drives that?

Is it something above or below normal seasonality?

Because you usually pick up 60% in pace which, depending on your community count, gets you a certain order rate.

If you hit normal seasonality are you comfortable with that given that it doesn't enable your annual absorptions really to pick up?

I don't fully understand the question.

If your sales pace goes up 60% in the second quarter versus the first quarter --.

You sell more homes.

We have November, December, January comparing to February, March and April.

But we don't run the business looking quarter-over-quarter increases.

I'm not surprised by that stat because you're talking about Thanksgiving, Christmas, New Year's.

Nobody's buying homes with February, March, April, everybody's buying homes.

So I think you're asking if we don't hit that 60% increase improvement do we start incentivizing?

Or just whatever your concept of normal seasonality is.

Do you have to really be driving a lot of volume?

Bob talked about backlog.

Normal seasonality is to sell a whole bunch of houses in February, March and April.

And, as Bob went through before in great detail, we study every community individually every Monday to decide whether it's deserving of a price increase or an incentive.

And, thankfully, for the last couple of years the decision to hit it with a price increase has far outweighed the need to hit it with an incentive.

Thank you.

One other thing that Gregg suggested I mention is a couple quarters ago we referred to the backlog conversion data from our busier times of 2002 to 2006 as a good benchmark for all of you to use to project our backlog conversions.

And certainly the 30% I gave you for the second quarter mimics that.

And I would encourage you to, as you look at the third and fourth quarter do a similar piece of math.

Use 2002 to 2006.

Thank you.

Alex Barron with Housing Research Center.

Thanks, guys, I'll try to be short.

You were talking about the decision of raising prices versus incentives.

Can you compare how the last quarter was, what percentage of your communities you raised prices versus what percentage you did incentives or stayed flat versus a year ago?

You mean the fourth quarter?

The first quarter?

No, first quarter over first quarter.

Year over year.

Yes.

In the first quarter of this year it looks like, in terms of number of communities where we raised prices, let's call it 55%.

And that's going to be consistent with Q1 a year ago.

Okay.

And then in terms of the Shapell communities, I think you mentioned that you're starting off with 11.

How much is that number likely to go up by the end of the year?

There will be an additional 20.

9 more.

We opened 11.

My apologies.

There will be 20 total for the year.

We started with 11 and we believe we will add 9 more.

Got it.

And, lastly, the 25% increase in the SG&A, does it matter much whether you hit the low end or the high end of your delivery guidance?

Only the S will be variable there.

So since two-thirds of the number is the G and the A, I would tell you it's not going to matter too much.

Got it.

Thanks a lot.

Buck Horne with Raymond James.

Thanks, my questions have been answered.

Jim Krapfel with Morningstar.

Hi.

Thanks for taking my questions.

How much were bricks and sticks up in the quarter?

And where do you see this going up next year or so?

$1,300, and half of that was labor.

$1,700.

Sorry, $1,700, and half was labor.

And where is it going?

That we can't predict.

I assure you we beat on our trades.

We do our best to manage it.

Thankfully, lumber has stabilized, which was the big mover the last few years.

I don't think it goes down but it appears to be leveling.

Okay.

And then how much were incentives in the quarter and how did that compare to last year?

Sales incentives, in the contracts we took during the quarter, sales incentives were 2.7% of the contract price.

And a year ago Q1 2013 they were at 3.7%.

So they went down 100 basis points.

Okay.

Thanks.

Michael Rehaut with JPMorgan.

Thanks.

Just had a few clarification follow-ups, if I could.

Marty, the tax rate for the year we're still expecting 39%, is that a fair number?

38%, 39%, yes.

Okay.

Also, when you mentioned Shapell and the price changes to the communities updating of product, et cetera, I think, Doug, you said that maybe it's going a little better than expected.

But given the relative size of Shapell versus your overall Company in 2014, if those communities continue to play out better than expected, would that just drive perhaps the likelihood that you'd hit the higher end of your gross margin range of improvement, Marty?

We'll get there but whether it happens by 10/31 or not, I don't know.

We have to sell and build these homes.

Okay.

And then just on the gross margins for the second quarter, given the big disproportionate impact from the purchase accounting, just so people aren't too surprised, would that result in more of a flattish year-over-year gross margin, when it's all said and done, or something in that neighborhood?

I think it will be an improvement similar to what we just had year over year.

All right.

Because with 170 in the first quarter, and you have a similar improvement in the second, and now you're talking about 175 to 200, I would have thought -- and I thought you said that at some point purchase accounting would have an impact.

It doesn't seem like it's having a major impact then.

I got half the year at 170, right?

Yes.

So obviously it will be at the higher end of the range towards the back of the year.

Right.

Okay.

And then just the raising of prices in 55% of the communities, what was that last quarter?

We said a year ago it was probably similar.

And in Q4, actually I took that off my print range.

Sorry about that.

I honestly don't have it for Q4 in front of me.

All right.

No problem.

Thanks, guys.

I know I let everybody down on that one.

(laughter)

They are no further questions at this time.

Presenters, do you have any closing remarks?

Thank you very much, Arnika.

Everybody have a good day.

Thanks, everyone.

Thank you.

This concludes today's conference call.

You may now disconnect.