托爾兄弟 (TOL) 2014 Q4 法說會逐字稿

Good afternoon.

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

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

(Operator Instructions)

Thank you.

Mr. Doug Yearley, you may begin your conference.

Thank you, Britney.

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; Kira Sterling, Chief Marketing 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 forward-looking statements 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 completed 2014's fourth quarter on October 31, 2014.

Fourth-quarter net income rose 39% to $131.5 million, or $0.71 per share diluted.

FY14's fourth-quarter pre-tax income rose 25% to $188.5 million, compared to $150.2 million in FY13's fourth quarter.

Q4 gross margin, excluding interest and inventory write-downs, was 25.5%.

Included in FY14's fourth quarter pre-tax income, reported in cost of sales were $10.8 million of inventory impairments and a $32 million increase in reserves for warranty and litigation.

Without these charges, our gross margin would have been 27.9%.

Revenues of $1.35 billion and home building deliveries of 1,807 units rose 29% in dollars and 22% in units compared to FY13's fourth-quarter totals.

The average price of homes delivered was $747,000 compared to $703,000 in 2013's fourth quarter.

Net signed contracts of $970.8 million and 1,282 units rose 16% in dollars and 10% in units compared to FY13's third quarter.

The average price of net signed contracts was $757,000, compared to $721,000 in 2013's fourth quarter.

On a per community basis, FY14's fourth-quarter net signed contracts were 5.01 units compared to 5.17 units in 2013's fourth quarter.

This was the first quarter in a year in which contracts rose in both dollars and units compared to the previous year's same quarter.

Backlog of $2.7 billion and 3,679 units rose 3% in dollars and was even in units, compared to FY13's year-end backlog.

At fiscal year end, the average price of homes in backlog was $739,000 compared to $715,000 at 2013's fiscal year end.

We ended the quarter with 263 selling communities compared to 232 one year ago.

Stockholder's equity at FY14 end was $3.85 billion, up 16% compared to $3.33 billion at FY13 end.

As the housing market progresses through the early stages of what we believe will be an extended and uneven recovery, we are pleased to report significant progress in growing our revenues and profits.

Since the recent low point in FY11, our revenues and net income have increased at compound average annual growth rates of 38% and 104%, respectively.

In FY14, revenues rose 46% to $3.91 billion and net income doubled to $340 million compared to one year ago.

While FY14 sales contracts were generally flat compared to FY13, recent trends are encouraging.

FY14 fourth-quarter contracts grew 16% in dollars and 10% in units compared to FY13.

The momentum has continued into FY15, with contract growth of 16%, deposit growth of 15%, and traffic growth of 37% through the first six weeks of FY15 compared to FY14's same period.

We remain optimistic about the upcoming spring selling season, which begins in late January.

In 2014, we continued to strategically grow our land holdings in key markets, extend our product offerings across geographies, diversify our business lines, and strengthen our financial position.

In California, the $1.6 billion acquisition of Shapell Homes, which closed in February, gave us approximately 5,000 home sites in established coastal communities.

Obviously, this exciting acquisition has enabled us to expand our California operations significantly.

In Texas, we opened four large master planned communities, where we will sell and build homes, and also sell lots to other builders, which will generate additional income.

Two of these are in joint venture and two are wholly owned.

Our Toll Brothers City Living team, which is heavily concentrated in the urban metro New York City market, currently has 837 units in projects open or soon to be open for sale, with another 1,203 units we control that are in the approval process.

We also continue to expand our Toll Brothers Apartment Living pipeline of urban and suburban projects.

We currently have 1,441 units under management, 1,920 in construction, and about 3,000 in planning.

We will continue to develop these in joint venture as we grow this business.

Now let me turn it over to Marty.

Thanks, Doug.

We are pleased with our results for this quarter and this year.

Operating margin grew to 12.4% of revenue for the most recent quarter and above 10% for the full year.

Pre-tax income was 14% of revenue for the quarter and nearly 13% of revenue for the full year.

These numbers are after some one-time charges, as noted in our release.

Specifically, for the quarter, we had inventory write-downs of $10.8 million, consisting of $9.9 million on operating communities and $940,000 of pre-development.

Of the operating community write-downs, about 25% was associated with a plan to exit a small market and 50% was associated with continued weakness in one other market.

We also recorded an approximately $32 million increase in reserves for warranty and litigation, which is reflected as a cost of sales.

This increase was primarily driven by estimated cost associated with known and projected stucco-related repairs at older homes, in certain closed communities in Pennsylvania and Delaware.

We are in the process of making repairs and look to complete the work in a timely and cost-efficient manner.

Fourth-quarter homebuilding gross margin before interest, inventory write-downs, and the aforementioned increase in reserve for warranty and litigation, was 27.9% of revenues compared to 25.4% in 2013's fourth quarter.

2014's third-quarter margin was 26.8%.

The 250 point year-over-year improvement in gross margin was driven by increased volume, which spread certain fixed costs over our larger revenue base, and price increases in excess of cost increases.

Q4 2014 gross margin in comparison to Q3 of 2014 was also helped by the reduction in the impact of Shapell purchase accounting.

We had no negative impact from purchase accounting in our fourth quarter.

Fourth-quarter SG&A of approximately $120.3 million was higher than the $93.5 million in the fourth quarter of 2013 and higher than the $110.3 million in the third quarter of 2014.

Our significant growth has led to this increase in cost on an absolute dollar basis; however, as a percentage of homebuilding revenue, SG&A was 8.9% for this most recent quarter compared to 10.4% in Q3 and 8.8%, excluding Shapell transaction costs in Q4 a year ago.

The quarter-over-quarter improvement is primarily due to increased revenue.

On a year-over-year basis, Q4-to-Q4, it's important to note that the fourth quarter of 2013 benefited from a reversal of $4.8 million in accruals.

It also absorbed $1.4 million in Shapell acquisition cost.

During the quarter, we bought back 2.94 million shares at an average price of $30.78, for total purchase price of $90.4 million.

We also terminated our $500 million 364-day credit facility, which we never drew upon, as we have nearly completed execution of the liquidity strategies put in place as part of the Shapell acquisition.

We enter 2015 with a diluted share count of 185.9 million shares.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for FY15.

As noted in the release, in FY15, we expect to deliver between 5,000 and 6,000 homes, and estimate the average delivered price per home will be between $710,000 and $760,000.

Hopefully, the growth in sales reported year-to-date in FY15 will continue through the year, and we can drive towards the higher end of that range.

Our FY15 end community count is estimated at 270 to 310 communities.

While we benefit from a tailwind in gross margins from the elimination of Shapell purchase accounting, we project that our 2015 City Living deliveries will be down around 15% in dollars and 30% in units compared to FY14.

2015 is a big year for City Living contracts and 2016 will be the big year for City Living deliveries.

Bearing this in mind, with limited pricing power across our portfolio and continuing cost creep, we believe full-year gross margins in 2015 will be roughly flat compared to 2014.

We expect Q1 unit backlog conversion of roughly 29%.

In FY14, we enjoyed an excellent year in our JV and other income, generating $107.3 million pre-tax.

Our current best estimate for 2015 reflects JV and other income at approximately $75 million to $90 million for the full year.

Our estimated tax rate for 2015 is 36%, reflecting some expected favorable resolution of tax exposures and some tax credits.

Importantly, looking beyond 2015, with agreement unit volume up 16% year-to-date, model openings planned in some key Texas and California communities, and continued community count growth, we are looking towards improving homebuilding deliveries and operating margins in 2016.

We are also optimistic that the deliveries in City Living, particularly from 400 Park Avenue South and 1110 Park, will improve margins, and deliveries from Pierhouse at Brooklyn Bridge Park and The Sutton will significantly boost JV income in 2016.

Now I'll turn it over to Bob.

Thanks, Marty.

We believe the housing recovery has many years to run.

Housing starts through ups and downs from 1970 through 2007 has averaged about 1.6 million annually.

According to Harvard University's Joint Center for Housing Studies, quote, despite the rebound in the last two years, home sales and starts are still nowhere near normal levels dot-dot-dot this was the sixth consecutive year that starts failed to hit the 1 million mark, which was unprecedented before 2008, in records dating back to 1959.

Meanwhile, the country has continued to grow.

In 2005, the peak of the last housing cycle, US population stood at 295 million.

That number reached 316 million in 2013, an increase of 21 million people.

Even with the well-publicized recession-driven lag in household formations compared to population growth, there were still 4.6 million more households in 2013 than in 2005.

Against this backdrop of increasing population and underproduction, the luxury market remains quite fragmented.

We are the only major publicly listed homebuilding Company that focuses on the luxury market on a nationwide basis.

Our primary competitors, the small and mid-sized local builders, remain constrained by limited access to capital.

With 47,200 lots owned and controlled, we believe we have an attractive portfolio of well-bought and attractively located current and future communities.

We believe these communities should support our growth as housing continues to recover, pent-up demand is released and the industry returns to historic levels of production and demand.

Now, back to Doug.

Thank you, Bob.

Thank you, Marty.

Britney, let's open it up to questions.

(Operator Instructions)

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

Thanks.

Good afternoon.

Just had a question on Texas, starting off: You guys have made a pretty good push there.

You mentioned the master planned communities.

Can you, one, remind us what your Texas exposure is now?

And then, potentially, just talk about the risks of having to sell down some of that master planned exposure, given some of the increased concerns in those markets?

Sure, Eli.

We are in four Texas markets.

We are very small in San Antonio; we have reentered Austin in the last year, and we are very small there; and we have a significant and very successful operation in Dallas; and a significant, successful and growing operation in Houston.

Three of the four master plans we referenced in the release are in Houston; the fourth is in Austin.

The Austin master plan is a joint venture.

In Houston, we have two master plans on either side of The Woodlands, on the northern side of Houston; those are owned outright.

We have a third master planned on the south side of town, which is in joint venture.

In all master plans, we are building homes, but we are also selling significant pods to other builders.

In Houston, we are under contract with a number of builders in all three of these master plans.

The builders went to letter of intent several months ago, and recently have all pressed firmly and signed agreements of sale to take down their pods.

So, we will continue to evaluate how much to build, how much to sell.

There's a lot of site development going on in all of these master plans, and there's a lot of models being built in 2015 that will set up revenue deliveries in 2016.

I know the question relates to oil, and what's going on in Houston.

It's obviously been a big subject.

We are comfortable with our position.

It is a very small market for us.

Right now, in FY14, Houston accounted for about 14% -- excuse me, 15% -- sorry, Marty, I'm on the wrong line.

Sorry, my mistake.

That's the amount we went up.

Thank you.

3.7% of our Q4 contracts for the whole Company came out of Houston, so it's a small market.

We like our position with the two master plans on either side of The Woodlands, and we like our position in the one master plan in the south.

We're in good shape, and we're confident that the other builders will be taking down sections with us, and we think we're well positioned to be successful there.

(multiple speakers)

It is a big market and it will be --

It's a big market in the country, I meant for us.

Yes.

Thanks.

Great.

And then, Marty, you gave some good color on gross margins for 2015.

What about on the operating margin side, how you're viewing SG&A, and as you go through the year, and maybe flat to up a little bit on deliveries?

Thanks.

SG&A will show, I'll say, an inflationary increase in the neighborhood of 4%, as we currently project it.

And I'll let you do your own modeling of what the operating margin that falls out from that might be.

Thanks, appreciate that opportunity.

Talk to you soon.

(laughter) Anything I can do to help out.

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

Thanks, good afternoon, everyone.

I wanted to ask about the gross margins, as well.

Now that we sit at the end of 2014, City Living and the urban joint ventures have obviously been doing terrifically well for you.

Just focusing on the more traditional single-family side of the Business, how did the gross margin trend, if we were to ex out the urban product, look from 2013 to 2014; I know that we said at the end of 2014.

And in terms of your expectations, you laid out that, since City Living is going to fall as a percentage, that the gross margins might be flat.

Does that imply that you expect improvement from 2014 to 2015, as well?

We have a couple different things that interplay there, Nishu.

We have purchase accounting that hurt us in 2014, and will not be prevalent at all in 2015.

And then we have City Living being down approximately 15% in dollars, as a percentage of the total revenue.

So, we reported, ex-charges, margin improvement of 250 points for 2014 over 2013.

About 60% to 75% of that was associated with core homebuilding margin improvement.

As we look at 2015 -- I said it on the last call, that the house we sell today is going to struggle to be marginally accretive when it delivers nine months from now, because we just don't have the pricing power to improve the margin.

Got it.

Okay, that's helpful color.

You expressed some optimism about 2016, and you mentioned the many growth initiatives, the new communities that you're going to be opening, so, volume-wise you said you expected growth in 2016.

Is that -- if we look at 2014 and the expectations that you've laid out for 2015, absorptions have been flat to slightly down, and in your expectations as well, while community count growth has continued to ramp up.

So, in 2016, are you foreseeing, finally, absorptions coming back a little bit, or is the optimism predicated just on the continued aggressive community count growth?

It's the latter.

We don't have that crystal ball to project what absorptions will be in 2016.

What makes us excited about 2016 is the things Marty has outlined.

We have community count growth accelerating through 2015, and projections right now suggest it will accelerate through 2016.

We have City Living deliveries hitting in 2016.

We have a number of new model openings, particularly in California where, as we've talked about, we're taking a lot of the Shapell land up to another price point, with bigger, prettier, more expensive Toll Brothers homes, replacing the older, smaller Shapell homes.

We have model openings in Texas and other places around the country.

And so, when we look at all of that, without the crystal ball of where absorptions will be, we're very excited about 2016.

If you layer on a continued recovery, which we believe will happen, there's a bonus.

Got it.

Okay, great.

Thanks for the color.

You're welcome.

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

Hey, guys.

It's actually Alan on for Ivy.

Thanks for taking the question.

On the City Living, if we look at the contribution of revenue, this year it was about 7% of your revenue came from this segment.

It sounds like that's going to decline to, call it, 5% to 6% next year, based on your guidance.

So, right now, if I calculate this correctly, it's about 8% of your dollar backlog, and it sounds like you expect it to be a pretty strong order year, next year.

So, if we think that your backlog maybe is around 10% at the end of next year of City Living, is that a fair way to think about what the revenue looks like longer term, in 2016 and beyond?

I think that's fair.

And the other aspect that's important is the two sizeable projects we will have in joint venture that will come through as JV income, and won't impact margins; and that is Pierhouse at Brooklyn Bridge and The Sutton.

Pierhouse is the bulk of the backlog in our JVs right now.

Can you just give us an update of what the ultimate sell-out value of those two buildings are?

I'm not sure what percentage is sold versus unsold, and how that would flow through?

For the Pierhouse at Brooklyn Bridge, the condos are expected to have revenue just shy of $500 million.

Bear in mind, we're half of that.

Then, The Sutton is expected to have $250 million to $275 million of revenue, and we're going to be a quarter of that, but hopefully a promoted quarter of that.

Got you.

Then, just second on land spend: What did you ultimately end up spending this year on acquisition and development, and any guidance for next year?

Gregg is turning pages here.

We spent $124 million in the fourth quarter.

For the full year, it's $2.1 [million].

$2.1 billion for the full year -- excuse me, billion, right, of course.

Well, $1.6 billion of that was one check.

And then, the improvement spend for the full year was just south of $500 million.

Got it.

And any guidance for 2016?

For 2015?

(multiple speakers)

The question was 2015.

We don't know what we will be buying in 2015 that will close in 2015.

So, Gregg, I don't know if you have a number for the land in backlog that's to be bought, but that's really not relevant to what the year-end number will be.

Right.

I think it's way too early to give a -- we have a number, but it's too early to give a guess as to what the full-year number is, since we're so opportunistic.

Think back a year ago, who would have guessed we're spending $1.6 billion on Shapell?

So, for us to say a number here is just --

Right, good answer.

Got it.

All right.

Thanks, guys.

Alan, the other thing that's worth noting is: There is a hotel there at Pierhouse that we own half of; and at some point, that will be sold as well, and that could be as much as $100 million of revenue for each of us and Starwood.

Would that be 2016 you think as well, or later than that?

I probably should talk to my partner before answering that question to you.

(laughter)

Fair enough.

Thanks, guys.

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

Thanks, good afternoon, everybody.

Hi, David.

My first question was on land acquisition activity, a little bit more broadly, and how you're seeing the land pipeline.

It feels like -- Marty mentioned there's not a lot of pricing power.

Are you finding things freeing up a little bit?

And also, we look at the total land position on a year-over-year basis is down a little bit in fourth quarter this year.

So, should we read anything into that about your intentions or your view on the pace of this cycle, or is it just opportunistically, there are deals out there, and they are improving, given what's going on overall, just maybe a temporary little blip in that number?

That's exactly it.

As you know, we're very opportunistic.

We're also very happy with our land holdings.

So, we have the luxury of being pretty selective.

Obviously, there's some markets that we have a big appetite, and there's other markets where we have a very small appetite, but I wouldn't read anything into the fourth-quarter numbers.

The land market is still heated.

Those builders with capital are still chasing deals; and in many cases, bidding deals up to numbers that we cannot compete with.

But we're grinding it out, and we will continue to buy land as we always have.

But it will be very selective because of the 47,000 lots that we own and control in what we think are some great locations.

And then, if you could just give us some color on the share repurchase activity -- obviously, opportunistic, just given what happened to the stock price and where you guys were able to buy the stock back.

But on a go-forward basis, do you see any change in overall thoughts on capital allocation towards repurchases, especially if the stock were to underperform a little bit more moving forward?

We will continue to be opportunistic with respect to stock repurchases.

We saw such opportunity in the recent dip that the builders had in -- I guess that was September, October -- and we evaluated our cash position.

The $32-per-share price that we issued shares last November for the Shapell acquisition, and the opportunity to essentially buy those back at $1 or $2 cheaper than we issued them, was what we acted upon, particularly since we had made such progress in our liquidity initiatives to bring down the leverage after the Shapell acquisition.

Great, thank you.

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

Good afternoon, guys.

This is Trey on for Steve.

Thanks for taking my questions.

Sure.

You mentioned that, in your delivery guidance for 2015, that you would feel more comfortable with the high end of the range, if demand that has persisted since August continued.

Would this demand environment require order growth to keep at this 10% pace, or is there room do you think for that to give back some to a mid-single-digit to mid- to high-single-digit order growth pace?

Our order growth pace for the first six weeks of 2015 has been 15% -- or was it -- 16%.

So, as we said in the release, if that keeps up, we're more comfortable with the upper end of the range.

Okay, thanks for that.

That's helpful.

Remember: With our product, it is very hard for us to deliver anything that sold in the last six months of our fiscal year.

Okay, that makes sense.

(multiple speakers)

We will ultimately deliver it.

(laughter)

That's good that you are not going to lose it.

And then, in relation to your 2016 expectations, you mentioned again that you're looking to improve margins.

Would you characterize those expectations relative to a better mix, some real price appreciation potentially, or just the expected flow of an increase of this City Living division?

It's a better mix, encompassing the City Living product, some of which we already have sales in, and then the new models in California and Texas, in particular.

All right, thanks, guys, appreciate it.

Good luck this quarter.

Thank you.

Your next question comes from the line of Ken Zener with KeyBanc.

Hi, gentlemen.

Hi, Ken.

Gross margin: Could you break out the interest expense versus the non-interest expense component of that, considering you're talking about a flat year over year?

For next year?

2015.

For 2015, it's essentially going to be flat -- 3.5% -- with what we had in 2014.

And then, realizing you have a headwind coming from lower units in your City Living, which traditionally, and I believe still, underwrite at a much higher gross margin rate, could you say the headwind that -- or dollars or percentage basis, if you will -- that you're incurring because of that City Living, as opposed to your non-City Living business, so we could understand how that mix is impacting your flat forecast?

We have a headwind and a tailwind that we've pointed to.

We have the tailwind associated with no Shapell accounting -- or no Shapell purchase accounting -- and the headwind associated with fewer City Living deliveries.

And they essentially offset each other.

Okay.

Then, Bob, you obviously talked about being in the nascent period of this housing volume improvement.

If one looks back historically, the flattening, if you will, of gross margins tended to occur more at cyclical points rather than at the beginning.

Could you talk to -- anybody -- Doug included, obviously -- why pricing gains appear to be moderating at this point of this cycle versus your cost inputs, or if it's just a mix issue?

Thank you.

We've been through it a number of times, as the other builders have.

2013 was the clear beginning of a strong recovery.

We all raised prices a lot.

Then in June of 2013, after the spring season was completed and all the builders had hit the price pretty hard, mortgage rates went up over 1 point in three weeks.

We all think the combination of the price increases from the builders, and that shock of the move in rate so quickly, chilled the market.

And so, from the summer of 2013 until the late summer of 2014, business was good, but business was flat.

We did not anticipate, in a recovery, particularly after how deep this housing recession was, that that would be the case.

We've seen some signs of pretty significant improvement since the end of the summer.

We've talked about it.

That hasn't led to pricing power yet.

The buyers are still a little bit skittish, and we're working through this recovery.

But as we've said, it's going to be a bit bumpy.

We think we're in the early stages of it.

Pricing power is out there in limited markets.

We certainly have pricing power in northern Cal and southern Cal; and we've had it in New York City and we've had it in Dallas.

But overall, it is perplexing.

That's another word we've all used.

Costs have gone up because backlogs grew.

There was limited labor coming back to the industry after so many left through the deep downturn.

We'll see how it plays out.

We are confident we're in the early stages.

We are confident we will continue to have pricing power, not only where I mentioned, but in other markets.

But why it happened the way it did, and why 2014 was a pause, and flat to 2013 and not improving, has been a bit puzzling.

Because when you look at the stats and that number of 1.5 million homes needed a year, and we're only producing 500,000 to 1 million over the last five years, so this huge pent-up demand is building, household formations are growing, population is growing, interest rates are 4%.

It is certainly a bit frustrating and confusing, and all we're doing is making sure we're positioned in the best locations with the best teams and the best brand, and we'll be there when it comes back, but right now, it is a little bit confusing.

Thank you, gentlemen.

You're welcome.

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

Thanks.

Good afternoon, everyone.

The first question I had was on the discussion around the expected contributions from City Living, not in 2015, but more so in 2016, and some of the JVs, as well.

I was wondering if you could describe maybe City Living and then the overall JV investment.

What level we're at today, from either just current capital allocated towards those efforts?

How much capital do you have allocated to those areas today?

Where do you think that could be over time?

Really, what I'm trying to get at is: Ultimately, how big can these divisions be, because there's a fall off, at least in City Living, in 2015.

You expect that to rebound in 2016 very nicely.

Any guidance in terms of ongoing level of investment, and where that might normalize, so to speak?

Looking back through January of 2013, our investment in City Living has been between $450 million and the $580 million it is right now.

That $580 million will grow a bit next year, until deliveries start to happen out of the bigger buildings we mentioned.

And that makes it essentially 10% of our inventory balance, and that's not unreasonably expected to hover around there.

Depending on the cycle of the building and the delivery, it might be a little bit below that or a little bit higher than that.

And any thoughts around the JV investments?

Like what?

Or are your comments -- some of that City Living is JV and some is not, and those comments are inclusive of that?

That includes the JVs, right?

Sorry, let me just see.

For example, Pierhouse --

One second, please.

Pierhouse, we don't have in here; and then, Sutton, we do have in for now, until we structure the joint venture.

So, it's only excluding the one project, Pierhouse, so far.

But the numbers Marty gave you in our investment in City Living, that is everything except for Pierhouse at this point.

Do you have an investment in Pierhouse?

We do.

Mike, if you heard that properly, one of the two City Living JVs is in that number Marty gave.

Pierhouse, which is the other big one, is not in.

And Gregg will be getting you that number.

Okay, that's helpful.

Maybe you can follow up afterwards, if you can't get it.

The other question was just a clarification.

(multiple speakers)

Hold on.

Our investment is $24 million.

$24 million is invested in Pierhouse.

Okay.

Remember: That is a building that's on a ground lease.

So, there's not a large land purchase payment; and it has, as a JV, external bank financing.

So, that $24 million is our equity.

Sorry, that's our equity in the residential, and then we have $14 million for our half of the hotel.

So, our total is $38 million, $39 million, for the whole project.

Okay, so, Pierhouse, $38 million, $39 million?

Yes.

Okay.

Then just, on the gross margins this year, I don't know if you've -- I'm sorry if I missed it -- broken it out granularly.

Marty, if you could just give the total, on a full-year basis, what the purchase accounting from Shapell -- how much of an impact that was?

Gregg, you have that, right?

Yes, the full impact on gross margin from Shapell for all of FY14 was 80 basis points.

Okay, that's great.

Thanks a lot, guys.

You're very welcome.

I'd like to go back to the question before, which is: What's going on with the market?

The way I see it is that those that are hot to trot are trotting; and that's representing the sales that we've got, on average, basically since the recession -- the Great Recession ended.

The general public, the large market, is still not quite yet convinced that the new phenomena of housing prices going down is no longer to be feared.

In general, that's a new equation -- a new thought that didn't exist before.

Housing got slaughtered.

It went down in some markets by 50%.

As the market slowly recovers its head, its sense, its willingness to accept that, to believe that housing is not -- that their purchase is not going to go down on them, you will see a geometric increase in the demand, which will lead to more increase in price, which will lead to more increase in demand, until we go into the next recession.

So, we're not quite there yet, but we can feel the beginning of it, as we speak right here.

So, that's my analysis of where we are and where we're going.

Any other questions?

Britney?

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

Hi, thanks for taking the question.

Regarding City Living, I wanted to see if you could give some color on how far ahead of your underwriting margins are, given the rise in New York City land prices we've seen?

We've always said that City Living margins are at least 10 points higher than the rest of the Company's gross margin.

There are certain buildings that have performed significantly better than that number.

But in underwriting, we're comfortable in continuing to provide that guidance, that City Living is at least 10 points higher.

Okay.

And the corollary is: A lot of the developers we meet with and speak to talk about difficulty in making land acquisitions pencil, but they, in a lot of cases, are doing condo conversions.

Are the economics of new construction that much different, where you are still able to find deals that work, or are you having to look elsewhere, given what's happened with pricing?

No, we have excellent deal flow coming out of Manhattan.

We are looking to expand City Living into other markets.

We have our first building opening for sale in Bethesda, Maryland, and we are studying a couple of other big cities to expand the Business.

We have a smaller City Living operation in Philadelphia.

But the land deal flow right now is good.

And so, would you say that the new construction projects have a different economic profile than, say, condo conversions or redevelopments?

No, the condo conversion redevelopment opportunity is very limited.

We -- for every 20 newbuilds we see -- land for newbuilds -- we may come across a condo conversion.

They're difficult; the cost to convert can, in many cases, be more than the cost to build a new building.

Very risky.

Very risky.

You've got, in many cases, ceiling height issues where it's an 8-foot plate because it's an older building, and that doesn't bode well for luxury condo.

We've done a few condo conversions; they've been successful, but that's a very limited of the deal flow we see -- limited amount of it.

Thanks.

Then just lastly, on the last remaining Touraine unit, I haven't checked the website lately, but has that been sold?

And if not, what would be the risk of an impairment on that asset?

It sold and made a healthy profit.

Okay, congratulations.

It sold and delivered in the fourth quarter.

It's tough to generate an impairment out of that.

And your next question comes from the line of Adam Rudiger with Wells Fargo Securities.

Hi, thanks.

I was just curious what market you exited, and talk a little bit about the decision and if there are any others on the list?

We exited Richmond, Virginia.

It was being managed out of our northern Virginia, Washington, DC, operation.

We had two communities, and we were able to slip out the back.

It was not a market for us.

The price point was a little bit below where we generally build, and we have struggled there for years, so it was a relatively easy and painless market for us to exit.

Okay, thanks.

Then, the litigation and the warranty expense -- were both of those expenses associated with the same stucco project, or was the litigation something separate?

The litigation is associated with the stucco, as well as some, to a much lesser extent, turn-over issues at certain communities.

Okay, thanks.

Your next question comes from the line of Michael Dahl with Credit Suisse.

Hi, thanks, guys.

Marty, with respect to the gross margins, full-year flat implies that you're going to be down a couple hundred basis points potentially from 4Q levels.

So, just wondering how to think about that progressing through the year.

Is it likely to be a big step down early, and then steady or higher; or steady progression lower -- just any sense of cadence there?

In the first quarter of 2015, we will end the fourth quarter of 2015.

We will have some City Living deliveries that will be positive to the margin.

But in the second and the third quarter is where we will see that dip down that you're referring to.

Got it.

Okay, that's helpful.

Then, if we, on the order side, even if we look at 3Q and into early fourth quarter, you were seeing healthy non-binding deposits, contract activity had lagged a bit.

It seems like starting in September that changed and caught up and has carried into November and early December.

Just wondering how you'd characterize the change, in terms of that catch-up in contracts versus deposits?

You described it exactly right.

Anything notable that you're hearing back from customers, like why is the conversion rate better?

No, we are not hearing anything in particular from customers or our sales teams, except that, as you saw from our numbers, traffic is up significantly.

Buyers are serious, and, therefore, our deposits and our contracts are up.

We're encouraged for what's coming late January with the spring selling season.

Okay, great, thank you.

You're welcome.

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

Hi, guys.

Just drilling down a little bit on SG&A -- do you have a breakdown of the $120 million between just corporate overhead, and then commissions and advertising?

Sure.

For the fourth quarter, there's $120 million.

Around $48.5 million of that was advertising and marketing, and the rest was G&A.

Thanks.

If you're looking at communities just being opened in 2015 -- we are just trying to take the -- how many you are going to close out a component or absorption pace out of it.

How many do you expect to open in 2015 -- just a range and how many do you expect, maybe if you have a 2016 number?

Go ahead, Gregg.

You got it.

Sitting here today, our estimate for 2015 is that we will open 98 communities.

The timing of that is still being worked out, but I would assume a majority of them are in the second half of the year.

Majority in the second half.

And what about -- do you have any initial targets for 2016?

Or do you -- it looks like, if you hit the mid-point, it will be an 11% increase year over year to year end.

Would you envision a similar low double-digit increase from the end of 2015 to the end of 2016?

If you can answer that, please answer 2017, 2018 and 2019.

(laughter)

I don't think we're prepared to answer that question for 2016.

Got you.

All right, and then just the last one on a tax valuation: What was it at the end of the quarter?

It was $40 million.

DTA was $294 million, and had a $44-million valuation allowance.

So, it was roughly $250 million on the balance sheet.

Right.

All right.

Thanks a lot, guys.

You're welcome.

Your last question comes from the line of Megan McGrath with MKM Partners.

Hi, good afternoon.

Just a follow-up on SG&A: Can you walk us through a little bit, looking at that next year?

You've got the flattish closings, but you're growing community count, so are you expecting that to be basically an earnings headwind next year, or do you think you'll be able to keep, as a percentage of revenues, to keep that flat?

It will be up marginally.

Everybody at Toll Brothers likes to make a little bit more money next year than they made this year.

So, up marginally as a percent or on a dollar basis?

I said on a dollar (sic) basis, it will be up around 4%, and on a dollar basis it's up maybe 1/10%.

Okay, great.

Because our unit deliveries are flat, our average sales price is up a bit.

Okay, that makes sense.

Then quickly, just wanted to talk a little bit about -- you talked about losing a little bit of pricing power.

Does that mean that you actually -- sorry if I missed it, but did you talk about incentives?

Did you actually increase incentives, or it's just simply that prices aren't going up as fast as they were before?

The better way to characterize it is that prices aren't going up as fast.

I wouldn't say we've lost pricing power.

It's been stagnant.

We have it in the handful of markets that Doug referenced, and it's not there in many of the others.

Right, and incentives have been about $20,000 per house, which is 2.5%, for the last almost two years.

That's been our average number.

Okay, great.

Thanks.

You're welcome.

And you do have one last question from the line of Paul Puryear with Raymond James.

Thank you.

Hey, good morning.

I got on a little bit late, so maybe I missed this, but, Bob, how can you be so confident that demand at your price point -- there's pent-up demand -- demand is going to be so strong at some point in the future, when new home sales at your price point are already up 300% from the trough, and it looks like tracking about where they were in a normalized market pre-downturn.

How do you get to the conclusion that that buyer for that $0.5 million house -- the market is that deep?

I've seen the movie before.

In 1968, prices went up about [$10,000] -- after that recession.

In 1974, prices were at $50,000.

That was the next recession.

In 1980, prices were about $125,000; and in 1988, they were about $300,000 to $350,000.

In 1992, before we got rocking with the greatest market we've had, we were looking at $500,000.

I have no problem with seeing the prices continue on the same line that they've been operating on since 1967.

So, when you walk into Casablanca and can repeat every word, there's a good chance you've seen the movie before.

Yes, I can appreciate it's different market to market.

What I'm questioning is: If you look at it more on a national level, do you have a sense for what a normalized level of buying is at this $500,000 price point?

Yes, about double.

Pardon me?

Double.

Okay, great, thank you.

You're welcome.

Thank you, Britney.

There are no further questions at this time.

Thank you, Britney.

Thanks, everyone.

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

You may now disconnect.