托爾兄弟 (TOL) 2014 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Toll Brothers Second-Quarter 2014 Earnings conference call.

(Operator Instructions)

Thank you.

I would now like to turn today's conference over to Mr. Douglas Yearley.

Please go ahead, sir.

Thank you, Jody.

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 and 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 second quarter on April 30, 2014.

Second-quarter net income was up 164% to $65.2 million, or $0.35 per share diluted, compared to net income of $24.7 million, or $0.14 per share diluted, in FY13 second quarter.

Pretax income of $93.5 million compared to pretax income of $41 million in FY13 second quarter.

Revenues of $860.4 million and home building deliveries of 1,218 units rose 67% in dollars and 36% in units, compared to FY13's second quarter.

The average price of homes delivered was $706,000 compared to $577,000 in FY13's second quarter, an increase of 22%.

Net signed contracts of $1.27 billion and 1,749 units rose 7% in dollars and were flat in units, compared to FY13's second quarter.

The average price of net signed contracts was $729,000 compared to $678,000 in FY13's second quarter.

On a per-community basis, FY14's second-quarter net signed contracts were 7.14 units, compared to 7.79 units in FY13's second quarter.

In conjunction with the closing of the $1.6 billion Shapell Homes acquisition on February 4, 2014, we purchased 126 units under existing contracts.

These units were not included in the net signed contract total for FY14's second quarter.

Backlog of $3.21 billion and 4,324 units rose 27% in dollars and 18% in units, compared to FY13's second-quarter end backlog.

The average price of homes in backlog was $742,000, compared to $693,000 at FY13's second-quarter end.

We ended the second quarter with 252 selling communities, compared to 238 at FY14's first-quarter end and 225 at FY13's second-quarter end.

Two weeks ago, Toll Brothers was honored by BUILDER magazine with the National Builder of the Year award.

We are proud to receive this award not only for our quality homes and luxury brand, but also for the strategic initiatives we implemented during the past few years.

This honor is the second significant industry-wide award we have won in the past two years.

In honoring Toll Brothers, BUILDER said, "Toll Brothers one day will be a globally recognizable luxury housing and hospitality trademark along the lines of Four Seasons or Ritz Carlton." This may be over exuberance, but it sure was nice to hear.

We work so hard every day to enhance our great brand.

It is deeply engrained in our culture.

As the nation's leading builder of luxury homes, we are pursuing a program of prudent expansion supported by our strong liquidity.

In the affluent Boston-to-Washington, DC corridor, we are expanding our suburban footprint and continuing the successful growth of our City Living brand, which develops for-sale urban condominium projects in New York City, the Northern New Jersey Gold Coast, Washington, DC and Philadelphia.

One of our City Living projects, Pierhouse at Brooklyn Bridge Park, our 50/50 joint venture with Starwood Capital, was a major reason our joint venture contracts rose to $160 million this quarter from $16 million a year ago.

Since opening in February, we have signed contracts on 43 units for $160 million, or $3.7 million per unit on average.

We could have perhaps sold the entire building already.

But since we won't be delivering condos until 2016, we prefer to meter out the units and raise prices along the way.

After all, we can't build it in a few months, so why sell it in a few months?

Our significant expansion over the past year in key California and Texas markets will be a major source of future growth.

These are among the strongest housing markets in the US.

The Shapell Homes acquisition, which gives us a portfolio of spectacularly located, well-established communities in affluent Coastal California, is already proving better than we originally expected based on our early operating results.

We have been systematically raising prices across the board in both our Shapell and other Coastal California communities.

In Texas, we are active in Houston, Austin, Dallas and San Antonio.

In Houston, we now have three major master planned communities, two of which we own, and one that is a 50/50 JV, totaling approximately 8,500 lots.

We will build some of the homes and sell lots to others.

We are about to open our first new master planned community of nearly 3,000 lots in Austin in a 50/50 joint venture.

And we continue to grow our presence in Dallas, our biggest Texas market.

Our Apartment Living brand is also growing.

In the Northeast and Mid-Atlantic regions, we currently have four projects, two in suburban Philadelphia and central New Jersey markets, and two in urban locations, one in Jersey City and the other in Washington, DC, totaling approximately 1,500 rental units under construction with joint venture partners.

We own or control sites for another 3,800 rental units in the same corridor and have additional expansion plans on the horizon.

Demand over the past year has been solid, although relatively flat, compared to the strong growth we experienced beginning in 2011 coming off the bottom of this housing cycle.

So far in May, the story has been more of the same.

Traffic and deposits are up a little, and agreements are down a little.

Business continues to be good but relatively flat.

Comparisons do get easier in July, which last year was when we saw the impact of rising interest rates.

We note that the last cycle's recovery in the early 1990s began with a period of rapid acceleration followed by leveling before further upward momentum.

We believe that we are in a similar leveling period in the early stages of the housing recovery, with significant pent-up demand building.

Now let me turn it over to Marty.

Thanks, Doug.

Second-quarter home building gross margin before interest and write-downs improved 30 basis points, to 23.6% of revenues, compared to 23.3% in 2013's second quarter.

Second-quarter interest expense included in cost of sales was 3.4% of revenues, compared to 4.5% from 2013's second quarter.

Year-over-year gross margin after interest and impairments improved approximately 140 basis points.

And we estimate purchase accounting associated with the 119 units and $102 million in revenue delivered from Shapell communities in Q2 suppressed our Q2 2014 margin by approximately 150 basis points.

So overall, we continue to see price increases more than offset cost increases in our deliveries.

Second-quarter SG&A, excluding Shapell transaction costs of $5.1 million, was approximately $99.2 million.

This was higher than the $79.6 million in the second quarter of 2013, due primarily to our growth.

As a percentage of home building revenue, SG&A, excluding Shapell transaction costs, was 11.5% for Q2 of FY14, compared to 15.4% in Q2 of FY13.

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

For the first quarter of 2014, SG&A was 15.1% of revenues.

The improvement in Q2 over Q1 primarily reflects the revenue benefit from Shapell, which had lower related overhead growth.

Our operating margin grew from 3.2% a year ago to 7.9% in Q2.

If we exclude the $5.1 million in Shapell transaction cost, our operating margin was 8.5%.

And we expect it to grow further in our third and fourth quarters.

As emphasized in our last call, over the last five years we have consistently generated an average of approximately $50 million in Other income and income from JVs before impairments.

For the first six months of 2014, we have reported $64.9 million of such income.

In Q2 2014, we generated $25.4 million of such income.

Our Q2 joint venture income of $14.3 million was primarily driven by a $12 million gain on refinancing of existing apartments.

Our Q2 Other income of $11.1 million included $4.4 million from land sale gains and $1.4 million from our wholly owned Gibraltar business.

We note that the Other income and JV income expected in the second half of 2014 is expected to be around $30 million.

As we look to future years, we expect to continue to report significant income on these lines and highlight the $130 million already in signed contracts associated with our Pierhouse project as of April 30, which is at the foot of the Brooklyn Bridge, and has a total expected revenue of approximately $400 million.

We also highlight our master plan land development JVs and our growing apartment business as significant contributors to this line.

In addition, we will continue to have our more routine income expected from ancillary operations including Gibraltar, Gulf, security, title, and other areas.

Our share count on a diluted basis averaged 186.4 million shares for the quarter.

Subject to our normal caveats regarding forward-looking statements, we offer the following additional guidance for the remainder and the total of FY14.

We continue to expect to deliver between 5,100 and 5,850 homes, and update the estimate of our average delivered price per home to be between $690,000 and $720,000 for FY14.

The range for our year-end selling community count remains 250 to 290.

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

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

Significant improvements will occur in our third and fourth quarters, as purchase accounting associated with Shapell deliveries, which negatively impacted our second-quarter margin by approximately 150 points, will incrementally dissipate.

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

And lastly, we expect backlog conversion in Q3 of roughly 31%.

Now let me turn it over to Bob.

Thanks, Marty.

According to the April 2014 US Census Bureau's new home sales report, new home inventory stands at just 5.3 months' supply, based on current sales paces.

If the mean and pace increase, the 5.3 months' supply could quickly be drawn down.

Current demographics seem to suggest that new home sales should pick up.

If the tight supply bumps into increasing demand, prices could rapidly rise.

Our Builder of the Year award is a tribute to the tremendous hard work, dedication to quality, and devotion to our customers by the entire Toll Brothers team.

The thoughtful expansion in growth markets and the broadening of our urban and rental footprints, our active-adult product lines and our large-scale master plans will continue to spread our brand across the upscale housing market.

Now, Doug, questions.

Thank you, Bob.

Thank you, Marty.

Jody, we're ready.

Thank you.

(Operator Instructions)

Your first question comes from the line of Eli Hackel from Goldman Sachs.

How are you, Eli?

Good, thank you.

Just wanted to first ask on the City Living.

Clearly prices are above your underwriting standard, or your underwriting criterion in several of the New York deals.

Just want to understand the margin impact that's having this year as we go out, maybe into next year.

I think you look for 1,000 basis points better, but how much better is that than you're getting given some of the price increases you've seen in the projects?

Well, we don't call them projects.

(laughter)

Luxury condominium buildings.

As you know, and as we say all the time, the business is very lumpy, so certain buildings sell and then they take a couple years to build, and then they all deliver within two, three, four months.

So right now we have, Gregg, deliveries coming out of Maxwell Place in Hoboken.

And 168 22nd Street.

22nd Street, what we call Gramercy Park.

We are selling as we talked about rapidly with significant price increases at Pierhouse at Brooklyn Bridge.

We are about to open at 400 Park Avenue South which is 28th and Park Ave.

Park Avenue will be delivering the end of 2015; Brooklyn Bridge will be delivering --

Calendar 2015.

2016 fiscal year.

Right at the end of our fiscal year.

Pierhouse will be delivering into 2016.

Gramercy had significant price increases.

So in the guidance we have given for gross margin for the remainder of this year, the impact of the improved pricing we've seen in Maxwell and Gramercy --

Which are the two delivering.

Is already factored in.

Got it.

With respect to Brooklyn Bridge, that will deliver as a JV, so you won't quite see the gross margin impact, but you will see the JV income impact.

It's just a higher number.

In terms of 400 Park Avenue, we're encouraged by what we think the market will bear, but we haven't opened that for sale yet, so it would be premature for us to tell you what the margin impact beyond our underwriting criteria might be.

It is significantly higher than what we underwrote it at.

The other smaller boutique building, but a lot of dollars, is 1110 Park Avenue, 89th and Park Avenue, where the average unit will be $12 million, $13 million.

Rick Hartman's giving me the thumbs up.

$15 million, $16 million.

$15 million, $16 million.

But that's only nine units.

But that will open for sale shortly and hopefully deliver right at the tail end of FY15.

Yes.

And that is also significantly higher, we believe, than what we underwrote it at.

We'd be better prepared to give more specific margin guidance, margin impact guidance on that six months from now.

Got it.

And then one additional question.

Many builders are now rapidly growing community count, even builders that invested later in the cycle than you did.

I guess what I wanted to understand is maybe the performance of the incremental communities that you're opening around the country versus underwriting standards maybe as demand isn't as strong -- or maybe it's strong, how they're performing relative to underwriting standards around the country.

Thank you.

I think in general, we're pleased with the performance of what I will call the newer purchases.

Depends primarily where they're coming from.

Right.

But it's not universal success.

Right.

Right.

If you're lucky enough to grab stuff in California, you're looking at the good times rolling.

Some of the older neighborhoods don't generate the kinds of percentages that the West Coast does.

And some of the older ones that have had significant impairments in markets that have now come back are showing good returns.

But generally, the newer purchases are performing at a higher margin than the legacy land, generally.

Generally.

But it's very specific to the individual property and the individual market.

Correct.

Okay.

Thank you.

You're welcome.

Your next question comes from the line of Ivy Zelman from Zelman & Associates.

Hi, good afternoon.

Congratulations on the quarter.

And I must say although Doug Yearley is a phenomenal CEO and leader, it's so much fun to have Bob Toll four times a year talk to us.

We love hearing from you, Bob.

We miss you.

The old dogs like myself.

Miss you too, Ivy.

One of the comments that you made in the press release, Bob, and maybe you guys can address is the strength of home prices.

And appreciating that, Doug, you mentioned earlier that we haven't after the robust pace of 2012 and 2013 we've seen a moderation.

We have seen continued very strong pricing year-over-year.

Prices have continued to exceed expectation was the most recent Case-Shiller data and CoreLogic.

A lot of people are concerned that the new home prices are so much far above existing home prices that the spread has widened too much, and therefore new home prices won't be able to be sustained in terms of their upward trajectory.

Maybe you can comment on do you believe that, that you're priced at a premium that's above average relative to the historical relationship to resale.

And maybe also talking about the constraints in resale which are even, Bob, frankly more pronounced than they are in the new home market and what your outlook is on home prices.

Because I think that's been really, Doug, a much stronger part of the story that under-appreciated.

Au contraire, my love.

I think that you reached an inflection point in the market where you're no longer playing catch-up ball with your used home that sunk by 35%.

You're now back above that 30%, 35%, and starting to see some real appreciation in the price that you can get you now.

I think you're at a point in the market where your buyer feels a lot healthier, a lot better because he's looking at real estate that seems to promise, seems to indicate that it's once again a credible investment, as opposed to just a bigger, better mansion or town home or carriage home or what have you.

So does that mean that the premium is within a normal range and we're back to normal and, therefore, we should see continued home price acceleration for new homes as well as existing homes?

I can't speak to the existing homes, but I think of the new home market, you're going to see continued and increased sales price levels.

And thinking about the customers, Doug, that are buying your home, most of them have to sell a home.

Assumingly they're not having a temporary rental situation or it's a second home.

Can you give us some thoughts around -- there's a lot of negative sentiment in the market that job growth is tepid, it's just not high quality.

So any flavor on the characteristics of the people that are in the market today and the pace that you said the business is at, tough comparisons, you're still well below your historic normal absorption pace.

But would you say that the business on a grading system, is this a C market in pace, or would you say you're already at relative to historical levels a little bit better than average?

How would you characterize it?

I think it's better than average.

It's certainly not an A. I think we have a lot of room to move.

You're absolutely right, I think our buyers -- obviously most of them have homes to sell.

And as Bob pointed out, if they bought the home in 2002, 2003, 2004, most people stay in a home I think it's seven years on average, they're back to even or in some markets they're back above water and they're looking to move their family on.

So they're looking for the Toll Brothers house in the better school district with the bigger yard, and they're feeling better about the home not only as shelter but the home as an investment.

It's all that Bob just went through.

But I think job growth, unemployment rates, macroeconomic issues, consumer confidence, all of that has a ways to go.

And I think that is the primary reason why all of this pent-up demand that continues to build, because we are not delivering the number of homes we need to just be at equilibrium.

So the pent-up demand is actually growing, we have a ways to go until there's enough confidence out there for more and more people to come out to buy.

We don't hear stories about -- I love your home, I'm ready to go, but I don't think I can sell mine.

But I think underlying the reticence, the hesitation of some people is their lack of confidence in the economy, their lack of confidence in their own job growth, and that is healing.

But I think it's still in process, and I think that's the primary reason we've had a bit of a pause for the last year of this recovery.

Wonderful.

Thank you guys.

Thank you.

You're welcome, Ivy.

Your next question comes from the line of David Goldberg from UBS.

Thanks, good afternoon everybody.

Hi.

Hi, David.

My first question has to do with price elasticity as we get outside of the City Living, maybe some of the California coastal property, and I'm just wondering if you're finding that buyers are reluctant on a price side when you're trying to raise pricing.

Have you seen any increased reluctance given maybe rates are up a little bit, come back down a little bit?

Are buyers reluctant to price increases, or are they still able to afford those in terms of the overall affordability and payments that they're making, and obviously a little less sensitive on your clients, but just wondering what's going on there.

They're able to afford it.

Our 20% are cash for us, and those that get a mortgage leverage up 70% to 30% of their own money down.

But we're being careful.

There's certainly cases where we've banged the price pretty hard, and we have slowed sales as we thought we would, because our backlogs grew.

Our delivery dates got way out there, and we got the result we expected.

So there is certainly elasticity in demand.

It is different market to market, and we are very sensitive to it and we're pricing accordingly.

Anecdotally, ISI reported at the end of April the Hampton home sales were up 52% and prices of air rights to Manhattan are up 47%.

This is a business without a lot of elasticity to it.

You get backlog of 20, you're an average business.

You get backlog of 30 and you've got to stop sales.

Couple of ways you can stop sales.

We prefer by raising prices and, therefore, somebody walks through that's got to have it, you've got yourself an extra bunch of margin.

That's very helpful.

My follow-up question was actually on SG&A.

I think it was I'm impressive quarter, SG&A as a percentage came in a little bit lower than we thought it was going to, which I thought was great.

And I know you reiterated guidance on the SG&A line for the full year, but I was wondering if you could talk about what leverage is left on the SG&A line, maybe as a percentage of revenues where you guys see that headed over the next couple years, at least where you're targeting and how much leverage is left in that number.

We think there's significant leverage left in the SG&A line and correspondingly in the operating margin results.

In terms of whether it's over the next two years, one year, three years, I think the market will tell us that.

The revenue number will tell us that, not so much the cost number.

But as we look at the back end of this year, we expect to show significant operating margin growth, and over the longer term, we'd have optimism that we could get back above our long-term averages.

Got to do with pricing, totally.

Right.

Sure.

All right, thanks, guys.

You're welcome.

Your next question comes from the line of Stephen Kim from Barclays.

Hi, Stephen.

Jody?

Stephen, your line is open.

I'm sorry.

I was muted.

Hi, guys.

Hi.

I wanted to follow up on the macro commentary.

I guess my question was are you finding that your buyers in general have been researching their home purchase, circling if you will before committing for a longer time period than historically was the norm?

I think so.

They're definitely online a lot longer, and we study every second they're online and what pages they're hitting and whether they're printing out directions to get to our communities.

Our conversion ratios of visitor to deposit and visitor to agreement continue to run at all-time highs.

So the business has certainly changed in that a lot of the work is done from the family room couch on the iPad and less is done in the sales office.

If you track it back granularly --

Which is your real question, it's hard to gauge, but common sense tells me with this pent-up demand at the level it's at, you've got a lot of people circling.

And since they're not buying at the level we thought they would be, they're spending more and more time contemplating and studying the decision.

Yes, that's interesting.

It does seem like there's certainly like a fairly large group just waiting to have their demand triggered.

And you are already said previously that you didn't think it was because of an inability to sell their home.

I was curious how you reached that conclusion.

Primarily from commentary back from our sales teams who feed us not every conversation they have with a visitor, but summaries of the major trends, major comments, major concerns.

And we can think back to 2008 and 2009 when virtually every visitor was in our sales center, loving our decorating and our homes, but worried about their job security and the ability to sell their house, and that conversation doesn't occur anymore to any great extent.

So that's the primary way we learn about it.

The secondary way is by studying the used home markets in the areas we operate to look at the number of months of inventory, how many homes are selling quickly, days on market, and we all come in every week with stories of our own neighborhoods that we live in.

I've come in recently to talk about the number of homes in my neighborhood that are selling the weekend they go on the market over asking price.

And I'm in a Philadelphia suburb.

But it's primary from the sales team and secondary from some of the either local intelligence or data put out on the resale markets.

Great.

That's very interesting.

I wanted to shift gears.

We had heard that Shapell, earlier you had given a goal for selling a certain amount of land from Shapell.

Our sense is that you're selling less Shapell, still selling the same amount of land but less of it being Shapell.

I was curious if you could comment a little bit on that and what has driven the change in thinking there.

You are correct.

We have closed one Shapell land sale transaction to another public home builder.

We have a second Shapell property that is in due diligence with a national public home builder.

We have a third Shapell property that the RFP, the bidding process is just beginning, and right now that's it.

The balance is Toll Brothers land, one large tract in California, and a handful of tracts primarily in the East Coast that were non strategic properties for us.

Marty and gang have done a terrific job of also generating cash in other ways, through the refinancing of apartments that brought cash back and some other things.

Marty, why don't you comment on those?

Sure.

Stephen, suffice it to say that we are evaluating each piece of ground that we consider for sale extensively.

Including to such an extent that certain Shapell parcels may have been scheduled to be sold, but we said -- hey, wait a minute, the world's much better, let's build those out ourselves.

That doesn't reduce our leverage.

So we have embarked upon some other initiatives to generate cash.

Some of those are as simple as refinancing the apartments that resulted in a big gain for us.

Others are putting a line of credit rather than secured cash, restricted cash for some of our municipal obligations.

To date, excluding the $106 million of cash we got from Shapell at acquisition, we've embarked upon sales and these other initiatives that have generated close to $150 million for us.

And there is other aspects of this that we can't quite count as well as we'd like in that we have in one particular disposition of land avoided spending another $12 million to $15 million of improvements that we would have had to put in on that land.

We have said we're trying to raise $400 million $500 million to reduce our leverage.

We've made great progress to that.

I think increasingly as we see success out of Shapell, there may not be as much Shapell land sold as initially expected.

And I cringe as I say that because Bob's holding me to it.

As we said over and over, we're even more in love with the Shapell land than we were last spring when this process started or in the fall when we won.

The integration has been very smooth.

The margins are up because of price increases we've already instituted.

So we're holding on to as much of it as we possibly can.

There's other ways that we can raise the cash, and that's more of our strategy today than we thought it would be when we closed on the deal a few months ago.

We bought the land in the summer of last year in California, not knowing if we were going to win Shapell.

When we won Shapell, we now have the evaluation of the land we bought outside of Shapell better or not as good as the land we have in Shapell.

And maybe we will sell some of that.

Importantly, we have enough cash and enough access through our lines to continue to grow in all those places we want to grow, City Living, Texas, et cetera.

Right.

I've always been an easy buyer and a cold seller, a tough seller.

Well, that's encouraging to hear that.

It certainly sounds like it isn't because of any lack of demand on the part of buyers, that's for sure.

So thanks for that very helpful answer.

You're welcome.

Your next question comes from the line of Stephen East from ISI Group.

Thank you.

Good afternoon, guys.

Hi, Stephen.

Doug, if I could just follow on the Shapell a little bit, could you give us an update on your business plan, where you are, how the communities are selling, your changeover in product, et cetera, what type of community growth you think you get and where you think profitability will be.

I'm thinking about on the gross margin line versus maybe the rest of your business, that type of thing.

Sure.

So the first thing we did on February 4 was sit with sales and suggest immediate price increases, even to the older existing Shapell communities that had the older Shapell homes, the older sales centers, et cetera.

And every sales manager, and this is the last thing you'd expect of a sales manager, said no problem.

We've been expecting this.

The Shapell Board was reluctant to bring on new homes, push the price forward, because remember, these ranches were bought in the 1950s, 1960s and 1970s and their margins were huge, and they were very content with those margins and did not feel they had to push it.

Day one, prices went up at every Shapell community without any problems.

The buyers still arrived.

The buyers still bought.

We sold out phases.

And we have continued to raise prices from that day forward.

We are transferring or switching over, transitioning to Toll Brothers architecture, Toll Brothers models, Toll Brothers marketing as we sell out of the older Shapell sections.

Now, if a Shapell section had 100 lots, well, that's worth a new model.

If a Shapell section had 30 lots, we will just build it out with the old Shapell architecture and homes, and then we will move forward in the next phase with Toll Brothers.

That is in process.

Rick Hartman and I were both in California last week, studying every community, the schedule of every new opening, every new piece of architecture.

And over the next 6 to 12 months we will be transitioning to many new Toll Brothers communities within Shapell master plans that will have all new Toll architecture, all new marketing, bigger homes.

That's the most important part of this is bigger homes will drive bigger prices.

And so it's on track and we're very excited, and the Shapell team is very excited because they have new leadership that is energized and is driven to make their Company better than it ever was and bring on a lot of new architecture in these new openings.

Okay.

Thank you.

I appreciate that.

And just a broader question for you and Bob.

If you think about your business and how it's evolved over the last five, seven years or so, and you look out for the next five or so, how's your business look different?

You've gotten more aggressive on the City Living.

You're pushing further into apartments.

You're attacking master plan communities in Texas, the Shapell in California, et cetera.

How do you all view it as you look out from now until call it 2018 to 2020?

Well, going backwards from now, which I think is where you started, we were scared to death.

We just came out of the Great Recession.

So the whole mode of operation in here was from a fox hole.

Finally get out of the fox hole.

There's plenty of sun light.

People have thrown away the weapons and starting to look for golf and sail boarding and whatever you have again.

And optimism comes in and you start looking for property and spreading the brand.

You can tell that Bob has a home in Miami now; he's talking about golf and sail boarding.

(laughter)

That was part of it, active adult, I left that one out, how that falls into it.

Stephen, I think obviously California's a huge move for us, Texas will be a huge move for us.

Active adult is heading west.

We're already open in Colorado, first active adult west of the Mississippi.

We have a second very exciting opportunity in another Western sunbelt state.

City Living we're trying to get it beyond the east.

So the business will continue to grow.

I think less geographically.

That doesn't mean there won't be a new market or two here or there, but we're really happy with the footprint.

But you will see more and more diversity of our product in more and more of the growth states.

We will still dominate the east because our competition is very small and very local and frankly can't get that big that fast.

And we have the inside track on most land deals because of our balance sheet and our rep, but I think you're going to see more and more of what we do really well in the east spreading out to the growth markets of the south and the west.

Doug, is --

You mentioned the apartment business will get bigger, and our land development business, not just in Texas, had some implications of land development when we first entered it.

So much out there, we're probably more reluctant to off some parcels to other builders.

The easiest way to understand how we've changed is to look at the action put on in Texas.

How many lots is it, 8500?

Yes.

And what we did in California, paying all cash for Irvine's offering.

Right.

Which led us into another and another because they were so successful.

All four of the master plans we referenced in Texas will -- every one will include lot sales to other builders.

So that's a diversification and a bit of a hedge for us that we --

That's my follow-on too.

As you look out at all these things, is it more chasing what will bring the best margin, or is it more a diversification process?

Combination.

Combination.

And I think Marty has emphasized now several calls in a row that that other income line --

Shouldn't be ignored.

Is here to stay.

And there's enough diversification to our business that that should not be discounted.

Okay.

Thanks a lot.

You're welcome.

Your next question comes from the line of Nishu Sood from Deutsche Bank.

Thanks.

Wanted to follow up on Steve's question there.

You were talking about Texas, and a lot of the questions today around City Living and Shapell, coastal California.

I think the opportunity there as you guys described it, price increases and leveraging that to significant margin expansion over time, wanted to just get your updated thoughts on the Texas strategy.

How do you see -- how do you frame the opportunity there over the longer term?

Clearly the land constraints and the ability to raise prices that we characterize those other markets you were talking about, not as much in Texas.

How do you frame the value creation for Toll Brothers in the Texas markets within your master plans?

We started in Dallas as a land developer a long time ago, 15 years or so, and then we decided it was best to be a merchant builder and take all the risk off the table and simply build on finished lots in established master plans.

And our Texas strategy now is a blend.

In Dallas, most of what we do is still merchant home building, although we have a few development deals.

In Austin, which was a market we had been in and we shut down, we have reentered in a joint venture with Taylor Morrison where we will be selling lots and building homes.

And then in Houston, which is a little bit of a newer market for us but we are mature enough to really feel like we have a good management team there and our ARMs around the economic growth of that market, we were presented with three what we think are terrific opportunities to buy master plans.

One is a joint venture, and the other are outright.

I will tell you, based on the interest from the other big Texas builders, public and private, we are in terrific locations.

There's a huge economic engine now in Texas, driven primarily by Exxon and all that they are doing, and it was just opportunistic.

Growth should stake, and land opportunities hit us at the right time, and we jumped in.

So you will see a blend out of us in primarily Houston and Dallas, but also to a lesser extent in Austin and San Antonio, of merchant home building and development deals, and so far so good.

We're really excited and comfortable with the growth prospects for those markets.

We've done land development with great success up in the Northeast which is a more constrained environment.

Some of the skills are still transportable down to Texas which is not quite as constrained, and our brand plays very well down there, particularly in attracting other builders to come into our communities.

We're also hiring in some cases land development companies that develop most of these big master plans to do the work for us, where we feel stretched or we feel they have a better track record and it's smarter for them to not only run land development but they're running the lot sale program to other builders.

So I think we have all bases covered.

So since the Texas strategy has shifted more towards land development and master plans, is it correct to think about it then that the returns to Toll Brothers will be more on the back end of those projects as you build them out to completion or sell off the land to other builders?

No, I think it's more appropriate to think of some of the profits coming from them showing up in our other income and income from JV lines rather than in our core home building margins.

Because if we have 500 lots that are ready to go, we may buy 100 of those ourselves, spend the next 18 months building and selling homes on those.

And we may sell the other 400 in four separate transactions, each of which may recognize a gain in our other income or joint venture line item to other builders.

Got it.

And second question I wanted to ask was you guys successfully raised a good amount of the $400 million to $500 million you've been talking about for deleveraging.

Thinking about that need to reduce leverage as somewhat of a break on growth, and obviously your lot count I think under control fell for the first time in a little while, how long should we think about that as a break or is even that the right way to think about it in terms of growth?

What areas of your business is it more likely to affect?

At this pace, it looks like it's only going to be an issue into maybe the middle of 2015.

I guess that's more than one question.

I would have said third quarter of 2015.

I don't think it's quite a break.

I mean, we have the liquidity and capacity to embrace future opportunities as we see them.

This is a bit of deleveraging, but if the right opportunity presented itself, we would not be averse to taking advantage of it.

And part of this strategy is a bit of deconcentration in California, despite the fact that it's going so well.

And we're still approving deals every week.

Yes.

Got it.

Great.

Thanks.

We don't call Marty and say -- Marty, we've got a spectacular $50 million deal in New York City.

Are we okay?

We know we're okay.

Right.

So --

I would like to get the call, though.

(laughter)

The lot count reduction, was that strictly as a result of the Shapell land sales?

I think it was deliveries and as well as Shapell and other lot sales.

Got it.

Okay.

Thanks.

Your next question comes from the line of Robert Wetenhall from RBC Capital Markets.

This is actually Desi filling in for Bob.

When we look back over 2012 and 2013, we saw really strong demand from luxury buyers with Toll materially outperforming the overall new construction market.

However, over the last three quarters or so, trends have been relatively stable in the new order side.

As we think about the evolution of the housing recovery, do you expect demand from the luxury buyers to reaccelerate and you guys can outperform the industry overall again, or is the current trend more indicative of what you're thinking in terms of your buyer demographic versus the overall market?

I think that some of the proof is in the pudding that's already before us.

I had said earlier that anecdotally ISI noted that the Hamptons was up 47%, 52%, some outlandish number, that air rights in New York were going for humongous numbers, I can't remember, I think it was 40%, 47% up.

I think if you look at what's happening in the very extreme -- extremely sought after markets, they are not only back, but they're back with a vengeance.

And I think that just leads because those people have the money and the ability to do what they want, when they want, I think that just leads the overall luxury market.

And I think there's every reason to think that it's going to kick in very soon, and the reason is because as I said in the monologue, if you've got inventory of 5.3 months, that's based on current sales which are for new home sales something like 450,000 a year.

If you get back to 700, which would not be any kind real move because normally we did 1 million to 1.5 million.

You get back to 700, inventory's gone.

Inventory was based upon 450.

If you base that inventory today against supposed sales of 700, you wouldn't have any inventory.

You don't have any inventory, but you've got demand, you're going to have price increases.

You get price increases, people are going to rush to try and beat the boat.

So I think the best is yet to come.

Caveat of course by everything else that can go haywire in the world.

Great.

Thanks.

You're welcome.

Your next question comes from the line of Jade Rahmani from KBW.

Thank you for taking the questions.

Can you just talk about the low cancellation rate and what you think the reason is for it remaining in this range?

Do you think it's buyer mix which obviously is strong, but does it also suggest an opportunity to market more aggressively with respect to your sales?

Our cancellation rate has been low now for --

Three years.

Two, three years.

It's been -- our historical average is three years.

Right.

So if four out of 100 choose to walk away from $50,000 to $125,000 in deposits, when you consider the base house deposit plus the deposits we take on upgrades, that is --

That's normal.

That's normal and a sign of a very good market.

People are holding onto their jobs.

They feel confident that what they thought they could sell their home for, they actually can and buying the Toll Brothers home is still part of their dream and still makes sense.

Does that allow us to raise price?

No.

No.

I don't think there's a connection.

We don't track our cancellation rate and when it gets very low consider that's the time to raise price.

Our pricing is based on this week's action, last week's action, as we've talked about many times, how big our backlog is growing and how long it takes to deliver a house.

But what people may be deciding 30 days before they're to move in and whether they cancel really doesn't play a part in that, and the number's so low that every case is an isolated individual story.

A divorce, the remote loss of job, a relocation.

That's probably it.

It would be weird under an ordinary circumstance for anybody to cancel because very much in general prices have been going up.

So you bought a home that's being delivered from us about an average of nine months later, in nine months generally been some significant price increase.

Why would you walk away from a deposit of $100,000 as opposed to going through with the transaction and looking to turn it over.

We don't get a lot of that, but I'm surprised we get any cancellations, other than divorce, death, job relocation, et cetera.

Jade, I think any movement 3%, 4%, 5%, 6%, 7% quarter-over-quarter is just noise and a handful of things that happen in our buyer base, and we've actually gone out of our way to try and de-emphasize you how much we talk about our cancellations because they're at historical norms right now and are somewhat irrelevant.

Okay.

Great.

Switching gears on City Living, I wanted to ask if you could give a sense for the pipeline that you're evaluating and how it breaks out by market.

I think you've mentioned looking at other markets, but are you evaluating New York City deals, and just in New York City in particular, what do you think has driven the outsized growth?

Is there anything that concerns you, whether it be influx of foreign buyers or something else?

Pipeline, we're opening in Bethesda, Maryland which we call DC, with one condo building, and we have three apartment buildings in DC proper.

We have a team on the ground down there that is looking for future deals.

We are studying Boston.

We are studying Miami.

And we are studying San Francisco.

We are in Philadelphia and we will be growing carefully, the high rise business of Philadelphia is difficult because high-rise construction is riskier and much more expensive, and that market is not a $2000 a square foot market.

Gold Coast of New Jersey, we own Hoboken and we have 900 units in Jersey City.

Three towers, the first is rental, the next two we believe will be condo.

There aren't a lot of additional opportunities in Hoboken and Jersey City.

They've been worked through pretty well.

So I don't see a lot of growth on that side.

New York City, Brooklyn and Manhattan, tremendous growth opportunities.

We seem to see a deal every week or two.

We're excited by the opportunities, and you will see a lot more coming out of New York from us.

What's driving it?

Bob?

I wanted to ask you, how much in pipeline that is not open for sale yet?

We have 1500 units.

On our corporate profile on our website we have a page that shows our current City Living pipeline and our future City Living pipeline and then on our desk around here we have another set of potential opportunities we're evaluating.

Let's not give what's not baked.

Right.

Pipeline that started and about to start.

We have about 1500 units that we own or control for about $2 billion of revenue under today's best guess that is future pipeline.

Now, for the answer to the question of why is it so good, Rick Hartman.

It's still great job growth.

We're seeing foreign buyers come into the market, both Asian, South American, German.

New York is the biggest city in the world, and they want to live there.

But it all comes down to supply and demand and population growth.

Job creation in New York is an all-time high and continues to grow.

Those people want to live there.

They're not migrating.

They're staying put.

They're raising families.

A lot of the units we're designing today are much larger.

Used to be one -- a mix of one, two and three.

Now it's a mix of one, two, three, four and five bedroom units.

So people are staying in place.

So it's not only job creation, it's people not moving out of the city.

Just have to correct on the largest city.

Mexico City, Sao Paulo.

Might be a few in China.

Shanghai, the biggest city you want to live in.

(laughter)

Just a short follow-up.

The IRR that you underwrite to, is that an unlevered IRR or in your JVs are you considering putting on any secured financing to make the numbers pencil?

I assume you're competing with pools of capital that would use 50% to 70% leverage.

In our JVs, we may choose to put on leverage.

That will increase the returns we expect to make.

In some cases, we are bidding -- expecting it to be a JV, in other cases we have bid independent of deciding whether it will be a JV or not.

There's a remarkable lack of inventory in New York.

We hear stories, some of you on the call tell us stories of renting and paying $10,000 a month and now have a couple of kids.

We love New York, we want to stay.

We're ready to buy.

And there's nothing out there.

And I went to see it on a Saturday, and as I was at the next building looking at the next possible unit, I get a call that there's four offers on the one I just looked at, three of which are over asking price and this is -- there's just limited inventory for such a big city.

I'm laughing because it was two weeks ago Rick said go take a look at this, I'm walking the streets, just cruising around, and so my honey and I jump in the ground, take the subway up to the site, come out of the ground.

I've got a call from Rick, he said forget it, sold.

(laughter)

Thanks for taking the questions.

You're welcome.

Your next question comes from the line of Dan Oppenheim from Credit Suisse.

Was wondering in the comments about community count ranging between 250 and 290 at the end of the year, still a fairly wide range.

I'm assuming there's not a huge change in the demand environment between now and Halloween.

Wondering on the -- basically think about what would be closing out there.

How much uncertainty do you have in terms of the openings and such and the timing of those?

I think as we look at the community count and we chose not to narrow the range this particular quarter because of some of the uncertainty associated with sellout and opening.

I think it's fair to say we're much more confident in the bottom of the range than we are in the top of the range, but we weren't willing to give up on the top of the range quite yet.

Dan, some of this is driven by approvals.

It's a very unpredictable process.

You're waiting for that last permit from the state environmental agency, and notwithstanding everything they tell you, the 30 days turn into 120.

Part of it is strategic.

We may decide let's not open out of a trailer.

Let's wait until we have our beautiful model and open with a bang out of a decorated model, and that may delay an opening four to six months, and those decisions are constantly reviewed and they may change.

So it is a very hard number to nail down, and I agree with Marty.

We're very comfortable with the lower end.

We chose not to change the upper end, and we will come in somewhere in between and, again, it will be based on approvals and some strategy decisions that we make.

Great.

I guess second question, there's a lot of talk in terms of the deleveraging.

Could also call it some ways optimization as you look at whether you're selling some of that land or other land.

Wondering how much you think about some of the markets where you are right now, Reno, would you look at selling some land there, recognizing you need to sell a whole lot in Reno to move the needle relative to some other places.

But just how do you look at some of the markets you're in in terms of deleveraging and optimizing the land portfolio?

There's a lot more that goes into it than just that face value.

Reno's actually doing really well for us.

And I don't think we would sell any land right there.

It would be a tough sale.

In other situations, we expect to pay cash taxes this year, so if we can monetize some of the impairments in certain pieces of ground that we have not yet monetized, not only will we get cash from the sale of the land, but we'd save cash because we'd have a tax loss and wouldn't have to pay as much in taxes.

So there are market by market decisions made based on what we see in terms of sales activity and pricing activity, and then there is also evaluation of our basis and our potential tax loss that could be triggered.

Thank you.

You're welcome.

Your next question comes from the line of Mike Roxland from Bank of America.

Thanks for taking the questions.

Just following up on one of Dan's questions.

In terms of construction times and limitations on land development, can you just provide a little color on whether there's been any improvement there?

Certainly we've been hearing that one of the biggest limiting factors has been subcontractor availability and municipal staffing in terms of getting the homes on the ground and getting them up and running in an appropriate period of time.

It's an issue.

It's market by market.

I think Texas for us is the worst.

Our prices are up about $2000 this quarter.

We're working through it.

It's better now than it was earlier in the recovery because more workers have come back to the industry.

But in hot markets where backlogs are big and you have lots of action and Texas is a good example, it's a struggle.

We're working through it.

We're managing it.

The winter also set us back a little bit and Mid-Atlantic, Northeast, Midwest, which lost us a little bit of time.

So we're not beyond the issue, but it is improving, but it's -- there's very, very local issues.

Massachusetts is right behind Texas for the market that has the biggest subcontractor issue and where we're having the hardest time managing costs which you wouldn't think because there's not a lot of action in Massachusetts in a good market or a bad market.

It's always been that way, from the beginning Massachusetts has been insane when it comes to subcontractor prices.

Got it.

Then just the second question I had would be in the press release, you mentioned that the average price of new signed contracts in the second quarter declined versus 1Q, and that was more due to geographic and product mix as opposed to rising incentives.

Could you just elaborate what that mix shift was in Q2?

It was really all across the board.

I think one not quite intuitive factor was that we sold more homes out in California which should be at a higher price, but what we sold were Shapell product which is at a lower price than the homes we sold that were Toll homes in California.

So it's really, Mike, a geographic mix and a product type mix shift, not quite strategic, just happenstance that has driven that number down.

Got you.

Largely related sounds like, Marty, to the California Shapell versus Toll.

That's some of it, certainly.

Got it.

Good luck in the quarter.

Thank you.

Thank you.

Thank you.

Your next question comes from the line of Will Randow from Citigroup.

Hi, Will.

Real quickly, it's a follow-up on some of the other questions.

But last quarter you shared with us traffic and demand trends as the weather impacted sales.

Can you talk about how some of those markets have snapped back since then?

Virginia, very good.

Maryland, slow.

Delaware, slow.

Philadelphia, fair.

New Jersey, good.

Connecticut, -- I'm now going through weather states.

Connecticut, Massachusetts, good.

The Carolinas got hit a little wit by this weather.

They like ice down there.

They're fair.

Midwest, Michigan, fair.

Chicago appears to have a heartbeat.

Michigan's good.

Numbers have been fair.

Thanks for that.

And then Minneapolis has been poor.

That's primarily where the weather hit us.

There was a couple -- Seattle got hammered a few weekends, nothing like what we got back east.

Texas got a little bit of ice here and there, but Texas is doing great.

So I think I gave you a lot of fairs and goods.

Thanks for that again.

And just trying to get a sense, you mentioned July's really when the comps get easier for you.

What are you seeing on the traffic to order conversion front today versus probably what you're seeing in call it the non-weather affected states over the past quarter?

I guess you could argue that if they fought their way into our sales center, they must have really wanted to buy.

But I don't think there's a change.

Okay.

Thanks for that, guys, and good quarter.

Thank you.

Thanks.

Your next question comes from the line of Michael Rehaut from JPMorgan.

Thanks.

Thanks for taking my question.

First I just wanted to touch on not just Shapell, but I think pricing in general.

Appreciate the color of course on how Shapell's going and obviously sounds fantastic, but I was hoping if it's possible to give a little bit of granularity or quantitative view on when you talk about pricing being better than you expected, what that means from a percentage standpoint.

I think you had referred to ASPs as of the most recent quarter for Shapell averaging a little less than $900,000, and certainly we're modeling in some improvement from there.

But are we talking about 5% or 10% greater than original underwriting, or is it more in the low to mid single digits?

I think it's 5% to 10%, plus.

We've told you we bought the Shapell deal at just ever so slightly below our Company gross margin.

It is now above our Company gross margin on the Shapell communities where we've continued Shapell models, and we believe once we launch new communities with new Toll larger prettier architecture, it will go even further north.

That's on sales that happen today.

Correct.

Not sales that happened immediately after closing.

Right.

Took a little time.

But as I mentioned before, we did hit the price pretty much day one and have tried hard and been successful in most places in continuing those price increases since then.

And some of those price increases we had baked into our bid.

Yes, we did.

We knew we'd be bringing in some bigger product at bigger prices because we knew their land supported bigger, more expensive homes than they were building.

Just do clarify on that, then, and appreciate the color Marty.

The 5% to 10%, Doug, that you just referred to, again, being above your original expectations, that's above and beyond the underwriting that you did?

That's correct.

Yes.

Okay.

And just again, more broadly on pricing, would really love your thoughts if you look at just your overall -- and again, obviously you have a lot of different markets and regions, but some builders have been able to give us a sense of on your orders that you've taken during the quarter, what percent of communities, rough percent of communities you were able to take a price increase in and rough degree of magnitude and perhaps how that compares to the prior quarter.

I think -- go ahead.

You haven't said anything.

I know, I feel slighted.

It's almost 3:30.

We're going to cut off here.

This is New York talking now.

Mike, I know you're looking for some very specifics, but in terms of number of communities, been relatively consistent over the last I will call it six quarters where it's generally 50% to 65% of the communities experience price increases during any one quarter.

This quarter, the effect of that has been relatively muted.

The sales incentives are flat.

We have price increases of $2000.

And then we have -- cost increases of $2000 and we have price increases that exceed those cost increases but not by a huge order of magnitude.

So it's just generally speaking for the last 90 days, that's where we've fallen out.

Great.

That's extremely helpful.

Just lastly, from a modeling perspective, I notice your tax rate this quarter was a little bit less than we were expecting and obviously quarter to quarter fluctuation, but last year you did a 37% rate.

I think we were looking for a little bit higher this year.

Maybe if you could give us a sense, Marty, if possible, your expectations.

I'm sorry, last year you did 36%.

This year we're looking for 37%.

If that's still a number that makes sense and any help there.

Well, the best we can do is estimate absent either audit findings or audit clearances, right.

So with our increased concentration in the higher tax rate of California, I think 38% is probably not unrealistic for this year.

But we do have some potential for some reserve releases upon the conclusion of some state and federal statute and audits that may happen over the next couple quarters.

But I prefer not to model to them until they actually happen.

Right.

Right.

And just one last modeling one and I will get off here.

But the JV and the interest other, very helpful Marty, because it's a hard line to model what you're expecting for the back half.

And that points to roughly [$95] million for 2014, and you said hey, we're having a lot further projects coming online.

Sorry, not projects, high end luxury buildings coming online and that this shouldn't necessarily drop off to where it was previously.

So is the [95] or in that type of zip code a reasonable number to even build off of as you continue to grow this business or these businesses?

Well, we gave you the average of 50 million for a reason.

This year is an outsized year, but we have initiatives should we choose to execute on them that could help in subsequent years, but I think we're most comfortable with the 50 million.

Okay.

Appreciate it.

Thanks, guys.

You're welcome.

Your next question comes from the line of Joel Locker from FBN Securities.

Hi guys.

Just was curious on your west orders.

They were fairly strong, just I know with the Shapell acquisition you had an increase in community count.

But just wanted to know if you could quantify that, the year-over-year increase?

In the west, it's going to be mostly driven by the Shapell acquisition.

So Shapell in terms of contracts took 186 contracts during the quarter.

So that's the driver of that big increase.

And that does not count the 126 we bought that they had sold in the previous quarter essentially which went into backlog.

Which went into backlog.

Right.

And on your $30 million in JV and other income, you mentioned for the back half of FY14, is that weighted in any one quarter, the third or fourth quarter?

It's probably best to split it in half.

In some of that math, there's going to be some transactions, and whenever you have a transaction, we only control one half of the equation.

So we're dependent upon the other side meeting our timelines and sometimes they don't.

Right.

And last one on amortized interest, it fell to 340 basis points or so.

What do you expect it, maybe not in the next quarter or two, but if you look into 2015 as a percentage of revenue?

I think it will be a little higher.

This quarter was I will say lower by about 30 basis points because of Shapell.

The Shapell 119 homes that closed had virtually no interest associated with them.

So if you read through that, our pre-interest margin was hurt 180 basis points by Shapell, and post interest it was helped 30 points by interest.

So that's where we came up with the 150 points in total.

All right.

Thanks a lot, guys.

You're welcome.

Your next question comes from the line of Jack Micenko from SIG.

Hello, thanks for taking the questions.

Marty, in the context of the better granularity on the JV line, can you go through say the next six quarters of City Living sales openings, and then is it a mix of what is wholly owned versus JV so we can think about that on the order side?

Sure.

I guess the best thing I can do is go through the page in our corporate profile that outlines our current City Living pipeline and our future City Living pipeline.

So upcoming deliveries or existing deliveries at Maxwell, 160 East 22nd, fourth [pannet] Society Hill and 2400 South will all be wholly owned and be part of our core home buildings.

Brooklyn Bridge Park will be a joint venture.

1110 Park Avenue will be wholly owned.

400 Park Avenue South and Hampton Row will be wholly owned.

Sutton, we are exploring alternatives for.

[Provo] Square --

Still building, just exploring JV partners.

Yes.

And it is a little too early to project on -- I think Hudson and Maxwell as we look forward are probably wholly owned.

Okay great.

Thank you.

I will defer commentary on 17th Street and Kings Street, because again, we are very early in the process.

Right, okay.

And then, Don, I will let you off the hook, are you -- with the rise in pricing, are you seeing any increased activity in ARMs as an offset?

Obviously it's a different borrower than traditional homebuilding, but is there a preference shift to offset some of the price increases on the mortgage side?

My opinion is it's not a preference shift because of price increases.

It's because of the spread between ARM and fixed rate.

For example, on a jumbo today, we're at 4.25% zero points on a 30-year fixed-rate jumbo loan, and we can do an ARM at the 3%.

A five-year ARM with five years after that at no more than 5%.

So you're going to average 4% for 10 years.

So for 10 years, you're better off with the ARM than you are with the fixed.

So I think it's really in reaction to the curve and the spread between ARM and fixed than any price action.

We have a [15/15] that is at 3 5/8%, so for 15 years, they're at 3 5/8%.

A lot of folks are looking at that -- and by the way, that's a 30 year amortization.

So they're looking at the lower rate and a lower payment for a minimum of 15 years.

As compared to a straight 15 year, which would be 3 1/8%?

On a jumbo, straight 15 would be 3.25% today.

Yes.

So 80% is a mix.

The straight 15 years is going to have amortization, and the payment's going to be 40% higher.

They're doing it because of the reasons that I mentioned.

So of the 80% that finance, is it half ARM?

The jumbo bars are always going to be more ARM based.

[3%] ARM right now.

[3%], okay.

All right, thank you.

You're welcome.

Your next question comes from the line of Adam Rudiger from Wells Fargo Securities.

Hi, all my questions have been answered, so thank you.

Thanks, Adam.

Your next question comes from the line of Jim Krapfel from Morningstar.

Hi, thanks for taking my questions.

Just want to get a sense for the Apartment Living business and what your growth aspirations are there going forward beyond this year and next.

And then how much you have invested in that business today.

We're really excited about that business.

We see it growing in the Boston to Washington corridor and the hopefully jumping to the West Coast.

It's a bicoastal business.

As we mentioned, it's a great hedge.

We all wish we had it through the downturn plus there's great synergies and leverage off the Toll brothers teams that are out there.

The amount invested right now --

We have $66 million invested in the four projects that are currently under development, within our total pipeline, our investment's $130 million.

So we have roughly that same amount invested in projects we haven't started yet.

That's right.

And we're looking to do -- we have a number of JVs at 50/50 ownership, and going forward, we're looking to do more 25% Toll, 75% other partners.

But each deal stands alone and has its own dynamics.

But so far, so good.

We think we have great locations.

We think we have a great team.

Construction is underway as we've mentioned on four properties, and there's a bunch coming behind it.

I think we've mentally earmarked about $0.25 billion that we will have invested at any particular point in time.

We just don't -- we haven't gotten to that level yet.

We've proven the management capabilities.

We've been in this business now for decades, and we certainly know how to buy the ground, get it entitled, design the architecture, build it, and manage it.

So as I said, there's great synergies with the rest of our business.

That's very helpful.

How much were bricks and sticks up in the quarter?

$200,000 per home.

Including labor.

Right, that's not just bricks and sticks.

That's all building costs.

And was about half of that labor?

25% was labor.

Okay.

Thank you so much.

You're welcome.

Your next question comes from the line of Alex Barron from Housing Research Center.

Good afternoon, guys.

Hopefully I will be the last.

I just want to ask -- I don't know if I missed any commentary on the order trends month to month.

Were they all pretty flat, or did you guys see some type of acceleration, or was March better than April?

Any comment there?

April was a little better, but overall flat.

Including May.

Great, thanks.

Thank you.

There are no further questions at this time.

Thank you, Jody.

Thanks everyone.

Thank you.

That concludes today's conference call.

You may now disconnect.