托爾兄弟 (TOL) 2015 Q2 法說會逐字稿

Good morning and welcome to the Toll Brothers second-quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead.

Thank you, Gary.

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 email questions to rtoll@tollbrothersinc.com.

We completed FY15 second-quarter on April 30.

Second-quarter net income rose 4% to $67.9 million, or $0.37 per share diluted, compared to FY14's second-quarter earnings of $65.2 million, or $0.35 per share.

FY15 pretax income was $86.5 million versus $93.5 million one year ago.

Excluding write-downs, pretax income was $98.7 million compared to $95.4 million in FY14's second-quarter.

Q2 gross margin, excluding interest and inventory write-downs, improved 170 basis points over last year to 25.3%.

Revenues of $853 million in home building deliveries of 1,195 units were basically even in dollars and units compared to FY14's second-quarter totals.

The average price of homes delivered was $713,000 compared to $706,000 in 2014's second-quarter.

Net signed contracts of $1.6 billion and 1,931 units rose 25% in dollars and 10% in units compared to FY14's second-quarter.

The average price of net signed contracts was $826,000 compared to $729,000 in 2014's second-quarter.

This significant increase reflects our greater concentration in California and some high-priced City Living products.

On a per-community basis FY15's second-quarter net signed contracts rose 4% to 7.43 units, compared to 7.14 units in 2014's second quarter.

Backlog of $3.48 billion and 4,387 units rose 9% in dollars and 1% in units compared to FY14's second-quarter end backlog.

At second-quarter end, the average price of homes in backlog was $794,000 compared to $742,000 in 2014's second-quarter end.

We ended the quarter with 269 selling communities compared to 252 one year ago.

Contracts for the first four weeks of our third quarter were flat due to a lackluster first week.

However, we have seen robust improvement in the past three weeks with contracts in units up 29% and non-binding reservation deposits up 33%.

We're pleased with the way FY15 is unfolding.

California demand remains very strong.

Our communities there accounted for roughly 30% of the value of signed contracts this past quarter, as we enjoyed pricing power across both Northern and Southern California.

Here are some California examples.

At Hidden Canyon, a new community in Irvine, California we opened just three months ago, we have taken 65 agreements averaging about $2.7 million.

At Baker Ranch and Lake Forest, also in Orange County, we have taken 26 deposits in the past month averaging above $1 million.

At Porter Ranch in LA County, we have taken 26 agreements in the past two months averaging in the mid $800,000.

At Gale Ranch in San Ramon in the East Bay suburb of San Francisco, we have taken 51 agreements in the last two months at an average price of $1.2 million.

We also saw strength in New York City, Texas and a number of other markets.

At our latest New York City condo project, The Sutton, in Midtown Manhattan, which we're building in joint venture, we have taken 28 contracts since opening in late January at an average price of $2.3 million.

Texas, which we're told is primarily Dallas and Houston, continues to perform well.

Over the past few weeks more than 1,500 visitors have showed up at grand opening events at our Sienna Plantation master-planned community on the south side of Houston, where we and other builders will be selling homes.

Lot sales to third-party builders continue to stay on pace at our three master-planned communities in Houston.

We now have contracts in place for over 550 lots with outside builders, of which over 50% have already been delivered.

All builders have been taking down their sites in accordance with their lot purchase agreements.

We have seen a number of strong community openings in the past few months elsewhere in the country.

Pent up demand is releasing in many markets.

We continue to expand our active adult brand in the West with the opening of Regency at Damonte Ranch in Reno, Nevada, where we have taken 42 deposits since opening five weeks ago.

In Westridge Estates of Canton in Michigan, we have taken 20 agreements since opening in March.

In New Jersey, at the Estates at Bamm Hollow we have taken 15 agreements at an average price of $1.2 million since opening in January.

And at Royal Cypress Preserve in Orlando we have taken 19 agreements in two months.

Our rental apartment business continues to grow.

We are currently leasing up two new communities totaling 685 units, one in downtown Washington, DC and the other in suburban Philadelphia, at faster paces and higher rents than we had originally projected.

Construction costs have also come in under budget.

We are currently in construction on five other rental communities totaling 1,833 units, stretching from Massachusetts to Maryland, and have more than 2,200 additional units in our pipeline.

As we look to FY16, we currently expect gross margin and net income growth based on an increase in the average price of our homes, our growing and profitable presence in California, increased revenues projected from our City Living division and overall solid current demand in most of our markets.

Now let me turn it over to Marty.

Thanks, Doug.

Second-quarter home-building gross margin, before interest and write-downs, improved 170 basis points to 25.3% of revenues compared to 23.6% in 2014's second-quarter.

Improved profitability in California drove most of this increase.

Second-quarter interest expense included in cost of sales was 3.5% of revenues compared to 3.4% from 2014's second-quarter.

In Q2 we recorded $12.2 million in impairments, including $11.1 million associated with one underperforming community.

Second-quarter SG&A was approximately $107.7 million.

This was higher than the $104.3 million in the second quarter of 2014, which included Shapell transaction costs of $5.1 million, due primarily to our growth.

As a percentage of home building revenue, SG&A was 12.6% for Q2 of 2015 compared to 12.1% in Q2 of 2014.

The increase compared to a year ago was due to an increase in community count, contracts and joint ventures as we incur overhead before revenues.

Our Q2 joint venture income was $6.2 million and our Q2 other income was $13.9 million.

Combined, this $20.1 million and the $26.9 million from our first quarter, have us more than halfway to our full-year guidance of $75 million to $90 million from these line items.

This represents 22% year to date of our pretax income.

As we look to future years, we expect to continue to report sizable income on these lines and highlight our Pierhouse project at the foot of the Brooklyn Bridge, our New York City high-rise JV, The Sutton, our master-planned land development JVs and our growing apartment business as future contributors.

Turning to taxes, this quarter we resolved a state tax matter and were able to release some reserves, resulting in a roughly $13.7 million benefit to net income.

We now estimate our full-year tax rate to be around 31%.

Our share count, on a diluted basis, averaged 184.8 million shares for the quarter.

And we now expect to deliver between 5,300 and 5,900 homes.

We update the estimate of our average delivered price per home to be between $730,000 and $760,000 for FY15.

The range for our year-end community count remains 270 to 310.

Our pre-interest, pre-impairment and expected gross margin for the full year remains as stated on our previous call, approximately 26%.

Full-year 2015 SG&A dollars are anticipated to be up 6% to 7% over full-year 2014.

And lastly, we expect backlog conversion in Q3 of roughly 32%.

Now let's turn it over to Bob.

Thanks, Marty.

The strength of our California communities, of which you've heard plenty so far, has exceeded our expectations in both price and pace since we acquired Shapell Homes about 15 months ago.

Many of our other markets have also shown improvement.

The economy and housing continue on parallel paths of recovery.

It appears that the housing market is on firm footing and heading in the right direction.

As pent-up demand is released, we envision a solid recovery for housing.

Now let me turn it back to Doug.

Thank you, Bob.

Thank you, Marty.

Gary, we're ready for questions.

(Operator Instructions)

Susan McClary, UBS.

Good morning.

Good morning, Susan.

Hi, Susan.

First question is, can you guys give us a little bit more detail on what you are seeing in Houston?

We've been hearing that there's perhaps some more inventory building, especially at the higher end.

So if you could give us some color what's going on down there.

Well, so far, so good.

Our quarter numbers were down a bit, as you probably noticed from last year.

But that is because of inventory constraints on our behalf, with some communities that closed out and others that are just beginning to open.

More than it is due to a change in demand, a change in the market.

So we keep a close eye on it as we've talked about.

We're constantly asking sales and our management team down there with they are seeing.

The market is holding on.

We're keeping our fingers crossed.

Right now it's okay and we love our positioning.

We're very happy with our locations.

These three major master-planned communities that we are involved in, are very well positioned in the market.

And as I mentioned in my opening comments, we had 1,500 people come out in the last few weeks to grand openings at our master-planned community.

We also only have one cancellation in backlog out of 141 homes, which -- our Company is running 3%, which is incredibly low.

Houston's even lower than that.

Okay, thank you, that's very good color.

And then just a follow-up, a broader question, on how do you think that the impact of potentially higher mortgage rates could show itself in the demand trends as we go through, especially later this year?

I don't think the increase in mortgage rates is truly meaningful at this point.

It had been as low as 3.5%, 3.75%, now you're at 3.875%.

I don't think that is going to determine the market going one way or the other.

We've always said that if the rates pick up slowly because of great economic news, which is why they should pick up, we'll take it all day long.

And right now buyers don't talk about rates.

It's not an issue.

They have been sitting at this number for so long, so we don't see it as an issue right now for our business.

Okay, thank you.

Stephen Kim, Barclays.

Hi, guys, this is actually Trey on for Steve.

Thanks for taking my questions.

No problem.

You guys mentioned that contracts in the first four weeks of the third quarter were flat due to a disappointing first week, but then rebounded, growing 29% over the last three.

What were the drivers for the first week being poor?

Was there some prolonged activity that occurred in 2014 that is comping here?

Were those last weeks just catch up?

And also, how big is May normally in relation to full 3Q orders?

Lackluster first week really goes more toward the tough comp, because last year Easter was the third Sunday of April.

April 20.

Right.

Which means the end of April last year was slow, since we don't sell many homes Easter weekend.

Or we don't deposit many homes Easter weekend, which take a week or two to turn into agreements.

And the first week of May last year, therefore, was busier.

So the first week is really more towards a comp issue with the timing of Easter Sunday than anything else.

As for the next three weeks, it's more than catch up.

The numbers are too big to just be catch up.

We've had a terrific three weeks.

Momentum is building.

We had a good Memorial Day weekend, which is not normally a big weekend to be selling homes.

It's very rare.

In terms of the final part of your question, how important or how big is May?

It's the tail end of a spring selling season.

It's not as good as April.

It's not as good as March.

It's certainly not as good as February.

May is the month to graduate, open the shore house, attend the wedding, and generally not be all that focused on purchasing homes.

So we are pretty thrilled with the action we have seen in the last three weeks of May.

Got you, that's very helpful.

Secondly, we've heard that there's been somewhat of a softening in the New York City market related to the international buyer, due to the stronger US dollar.

As a result, how has your process evolved over the past six months or so surrounding the New York City market and City Living in general?

And also, could you possibly give us the pretax income dollars for traditional home building in City Living?

The pretax income dollars.

The pretax income dollars per segment, I think we will get to that when we file the 10-Q.

I don't think we brought that in with us.

Okay.

On the international buyers, right now about 13% of our New York City Living buyers are foreign.

That number is driven down a bit because Pierhouse at Brooklyn Bridge Park in Brooklyn only has about 5% foreign buyers.

So if you take Pierhouse out, we are at about 23% of our buyers are foreign for the City Living business.

So that buyer has held up, notwithstanding a strong dollar.

I think foreigners are still very interested in investing in New York City.

And we're doing just fine.

As to the market, we love it.

It strong.

It's not as frothy as it was 1.5 years, 2 years ago.

We've said that now for a number of quarters, but it's still one of our top three markets.

All right, thanks guys, very helpful.

And good luck next quarter.

Thank you.

Ivy Zelman, Zelman & Associates.

Thank you, good morning, guys

Good morning, Ivy.

You have a pretty big range in terms of the number of communities you expect to have at the end of the year.

One of the big picture questions, I think, related to appreciating what sounds like a very solid strong market for you overall, and you guys sound very enthusiastic.

Do you believe that the function of growth in the market being stronger is really about bringing supply and impediments to bringing supply to the market?

And is it fair to say if you build it, they will come?

Maybe the industry, it's more about the either lack of interest of bringing on a lot of supply, or inability because impediments, local municipalities, weather delays?

Help us understand, bigger picture, why growth might not be stronger or why you have such a wide range in where you guys are on the communities?

Ivy, existing home prices have continued to rise, exponentially almost.

We're approaching the prior peak, which was nearly 10 years ago.

This may release significant amounts of pent-up demand, and create a -- I hate to say it, broadly burgeoning market could be -- shaky.

Ivy, with respect to if we build it they will come, I got into some great detail in my opening comments on some of these new openings we have had that if had terrific sales.

It's Florida and it's Michigan and it's Reno.

Forgetting California and Texas and City Living, we are experiencing huge pent-up demands for the new openings that we have in great locations.

And that's a very encouraging sign.

I don't think all the numbers are coming through yet, but I think that's an early indicator of where we are headed.

You are right, we've given a big range as to community opening this year.

A lot of that is dependent upon that last permit we need from that last agency, and that's a very tough and unpredictable part of this business.

But we're very encouraged by the demand that's coming out to our new offerings.

Just to think about your customer, assumingly that person who's selling an existing home, and in some cases, that market we all know has been very tight.

We've not seen increase in listings, but we have seen a stronger overall resale market.

So do you feel that is holding back?

Or the customer that's coming in is finally able to make the move because they can sell their house faster?

Days on market, I think, was under 50 days, so it's moving faster.

But is there enough people willing to list, to Bob's point, that they actually have enough equity now that they can trade up to buy that dream Toll house?

And do you have people coming in actually saying I finally could sell my house and take enough equity to by the Toll house?

We don't hear as much about the concern of selling the existing home as we heard a few years ago.

To Bob's stats, the stronger that resale market becomes, the higher price those houses become, the more comfortable people are in moving up.

And that is evolving.

It creates mobility.

Ivy, I think it's logical to look back 10 to 12 years from now and see significant volumes of transactions in the housing market.

And not as significant since then, because many people who bought then can't see the motivation to sell quite yet.

Because despite that their family has gotten bigger or larger, the equity has not recovered or exceeded the original price in their house, to motivate them to move up.

That is starting to shake loose.

Great.

Good luck, guys, thank you.

Thank you.

Mike Dahl, Credit Suisse.

Hi, thanks for taking my questions.

I wanted to push a little bit on those last points.

Because if we take a step back, you are still running a sales pace that is more or less flat year on year for the past couple of quarters, up a little bit.

It's still a pace that is well below where you were selling at the peak, or leading up to the peak.

It seems like you've made the decision to push price fairly aggressively over pace.

But if the demand is really so strong, the question is why isn't there both?

And how are you thinking about the scope for upside and pace from here?

The reason you don't see the pace is we're geared up to do 30 a year, I suggest, on most of the communities.

When you hit that 31st sale, you are now selling the next guy for delivery 12-plus months out.

And you say to yourself -- self, do I know what is going to happen 13 months from now?

Maybe we better choke this sales pace back a little bit.

That gets you an increase in price, which slackens demand just because it may be overreaching.

So the expectation is that at some point you are still targeting 30 per year?

Yes.

Got it.

Second question.

Given the strength that you're talking about and clearly have seen in the results in California, how has that changed the thought process around some of the land sales that were previously planned?

Well, we bite the finger every day and wish we had it all back.

But it's gone.

We wish those that bought it well.

The question is, what about the future for land sales?

We are land buying, not land selling.

Exactly, that's where I was headed.

The only land selling we're doing is in the master plans in, for the most part, Texas

Right, which was always part of the --

That's the deal.

-- the deal.

But our California land selling is complete.

In fact, we're back in action buying more land out in Cali.

And balance sheet is in great shape, so that's all behind us.

Got it.

Any geographies, specifically Northern, Southern, or all along the coast, is the focus right now?

Both Northern and Southern coastal.

We're not going inland.

South Bay, East Bay at San Fran, LA County, Ventura County, Orange County, Northern San Diego County.

If you can get to Laguna Beach within 20 minutes, that's Toll Town.

Okay, great, thanks.

Michael Rehaut, JPMorgan Securities.

Thanks, good morning, everyone, and nice quarter.

Thank you.

First question I had on, was the -- you gave some of the examples about new communities.

I know obviously everyone has specific underwriting and different pulls and pushes with pace versus price.

But I think you had highlighted one community in California, Doug, in your opening remarks, where you said 51 agreements in two months, which I believe is a little more than six a week at -- I believe you said around a $2 million ASP, correct me if I'm wrong.

And it just seemed a little bit of a stronger pace that you would think.

Certainly your first couple weeks you jumpstart with sales, and maybe that was part of it.

But seems like six a week for two months is typically a little stronger than you would think about in terms of a higher ASP, where you want to run the pace a little slower and get more price.

I was just curious around that specific example.

Sure.

I think you are referring to Hidden Canyon, which is in Irvine.

We actually took 65 agreements in three months, at an average price of $2.7 million.

That is actually two product lines that sit next to each other.

One product line is $2.3 million and the other is $3 million, so they average out to about $2.7 million.

We would call that two communities.

Within our count, that is two communities.

It is one location, it is one sales pavilion with two model home offerings.

But we have hit that price significantly.

We still have great demand.

Right now we're managing this backlog and have very few homes for sale as we take care of the backlog and get them all buttoned up, and have them pick all their upgrades and features.

And we have hundreds of future buyers who have filled out the financial qualification statements, and are fully approved for the price of our homes.

We will just work through that list in due course.

The reason we've let this backlog build up and this pace build up, is that we see faster action from our crews in California.

We produce a house much more rapidly in California than we do in Virginia or Connecticut or New Jersey.

Right.

They seem to have plenty of trades.

Right.

So we've got good production, why not take advantage of it as well as taking it to price?

You draw a correct distinction.

That's helpful.

And the two product lines and maybe I was thinking of a different example, but two product lines over three (technical difficulty) gets you much closer to that lower pace per community per week that, I think, most people think about at that higher price point.

So thanks for that.

A couple of quick modeling questions, Marty.

The 31% tax rate for the year, that's inclusive of the benefit for the quarter?

Yes.

Okay.

And then the interest amortization, if you could remind us, I believe you said that you expected it to be similar this year for a full year basis than last year.

Where could that go on a normalized basis in the last cycle, aside from the peak years when it was around 2%?

It looks like it was in the mid 2%s.

Is that a good way to think about it over the next two, three years or so?

You are correct.

We said roughly 3.5% for this year, which is the same number as last year.

Where it could go, it could go lower, it could go higher, depending on the pace of sales and the rate of interest that we incur.

Right now our interest rate is pretty manageable, but if rates go up our costs per house would go up.

I think it is trending down, Mike, but that's only going to hold as long as interest rates hold.

Okay, thanks so much.

Will Randow, Citigroup.

Good afternoon, or I guess good morning, and thanks for taking my questions.

You are welcome, Will.

In terms of interest rate sensitivity, have you guys looked at the volatility in interest rate locks for Toll Mortgage relative to changes in interest rates over time?

We offer a lot --

I'm sorry.

Don Salmon is here, so -- runs TBI Mortgage.

He'll answer this for you.

We offer a lot of options to our consumers to lock long term.

They can lock up to 360 days on both the conforming and the jumbo loan.

We can do an 80% up to $4 million, with a 360 day lock.

So the buyers can really manage their own volatility as they choose.

We make it a practice not to predict or try to manage interest rates here.

We offer the buyers as many options as we can and let them choose the option that is best for them.

And have you seen as either buyers anticipate rates rising or, for lack of better term, rates going up, locks being used more often?

We have seen a slight uptick in long-term locks.

I wouldn't call it significant, but we have seen a slight uptick in long-term locks.

Our folks are talking to buyers about it more and more.

I think there's more interest.

If you think about interest rates today, we can lock a 15-year jumbo ARM.

That's a 30-year amortization.

It's fixed for 15 years at 3.25%, plus a little price for the long-term lock.

I don't why you wouldn't do that, it doesn't make any sense not to do that.

Put that against a 10/1 ARM at 3.5%, you get five more years at a quarter lower interest rate, and you can lock it for 360 days.

There is a slight price to locking it, but again, it's a cheap insurance policy.

The options are there for the buyers.

Thanks for that.

And if I could squeeze one more in on input cost inflation or deflation.

What categories are you seeing the most movement in for the home-building business?

On the cost side, you're asking?

Correct.

Our costs are up this quarter -- Gregg, is it $3,000?

Yes, it was about $3,000 for the quarter.

It's less, about half of that is in labor and the other half is split among things like stucco, drywall, concrete.

Lumber is still coming down.

Right.

And lumber continues to come down.

All right, thanks, guys, and good luck in the next quarter.

Thank you.

Gary, I have an Internet online question, web question, if I could read and then answer.

Yes.

Great.

This is from Sharif over at Alpenglow Capital.

The tragic floods in Houston appear to be quite severe and their effect on the local community seems significant.

How will they impact your Houston operations?

Project destruction, delays, et cetera?

Well, most importantly, our hearts go out to all the people of Houston as they recover from this flooding.

So far we have no damage or significant delays at any of our communities.

Thank you.

Nishu Sood, Deutsche Bank.

Hi, this is Tamika on for Nishu.

The first question I had was that you mentioned that you believe gross margins will be higher next year.

You talked about how this will be primarily due to California and City Living being the driving factors.

Outside of those mix impacts, do you expect to see higher margins coming from your other markets?

And what kind of pricing power to you expect to see there?

I think the visibility we have on City Living and the strength and visibility we have in California are greater than the visibility we have in the rest of the markets.

So our focus in identifying California and City Living as the drivers was in large measure because we are more certain of those factors.

We are encouraged by the demand we are seeing released around different pockets of the country.

Hopefully that continues and will also contribute to margin expansion around the rest of the country in 2016.

But we'll probably have more to say on that later this year.

And California and City Living now account were about 40% of our business, combined.

Yes.

Got it, thanks.

When you mentioned improved profitability in California, was this part of the Shapell portfolio or your legacy operations?

Do you expect this to continue trending?

We have about 4,000 lots remaining in the Shapell portfolio.

I'm sorry, to answer an earlier question, which includes about 270 units in backlog.

So the net left to sell is about 3,700.

3,700 future to sell, plus about 300 in backlog.

But what I was referring to is new land opportunities outside of the Shapell transaction that we are evaluating.

We're seeing margin improvement in California on the Shapell purchase, on legacy Toll land and on new purchases like at Hidden Canyon, which is a two- to three-year-ago purchase.

Okay, thanks.

You are welcome.

Jack Micenko, SIG.

Good morning, guys.

Good morning, Jack.

Thinking about Toll's, historically, one of the longer land pipelines in the business, that number has come down in the last year or so.

Obviously Shapell will move that number around and get some land sales and some JV mix.

Is there a cultural shift around land in that eight, nine year timeframe?

Any thoughts you can offer there around the recent trend?

There's no cultural shift.

We're very opportunistic.

We're very careful.

We, of course, evaluate land holdings we have in different markets and how well those markets are performing, which affects our appetite.

I wouldn't read too much into the land levels coming down.

It's just lately we've bought a little bit less land and we're in such great position with the land holdings we have that we can afford to be very selective, and we are.

With the recovery being a bit more gradual than other recoveries have been, the need to get land has not been as significant.

Okay, fair point.

And then on the rental side of the business, curious, with some supply coming online there in the rental market, has your thinking changed relative to nine months or year ago?

Or is the strategy in rental like it is in sale, which is main and main, it doesn't matter, supply and demand doesn't really affect that strategy.

Curious if any thoughts there have changed on the rental business?

Definitely not the fungible rental business.

These communities are specifically located and brought into the fold because of the extra power, the pricing power, they have in the market.

I recently visited our new community in Washington DC, right by the Nationals ballpark.

The quality rivaled our condo buildings in New York City.

I was so proud.

The rooftop decks, the rooftop pool, the gym, the quality of the units.

We're getting a premium and we're leasing up significantly above budget, because not only is it main and main, but the quality of the offering is at a condo level.

That's how we're building the business.

But we're still sensitive to supply and demand, no question.

But we're very bullish on this apartment business, and particularly the way we are positioning it with a luxury brand.

Okay, great, thanks for taking the questions.

You are welcome.

Jade Rahmani, KBW.

Thanks for taking my questions.

On the apartment rental communities, do you anticipate the impact to the income statement to be in terms of periodic sales of specific leased up buildings to reach other entities?

Or do you expect to hold and retain an interest and generate recurring earnings off of that?

I think the most significant impact will be from periodic sales to purchasers.

And we're not going to be all that selective about who the purchaser is other than the dollars they are talking about.

I think the routine run rate of income from these apartments will not be tremendously significant, because of the depreciation expense that comes along with it.

Okay.

In terms of periodic sales, when do you anticipate a reasonable time frame for some of those taking place?

They will be leased-up stabilized before we consider it.

Right now we have two legacy properties from the old days, one in Princeton and one in Northern Virginia, that have been stabilized for a decade.

Right now we have no intention of selling.

And then we have two we mentioned in the opening monologue, that are leasing up.

They have another year or so of lease-up.

So I can't imagine, Marty, we see this until FY17.

I don't think there will be a sale next year.

12 to 24 months, we might be able to get something done, depending on where the leasing goes.

I neglected to mention that we could choose to refinance these rather than sell them.

And as we did at both Princeton Junction and Dulles Greene, we can have a gain on the refinancing.

We are comparing other income this year -- joint venture income this year, excuse me, to last year.

Last year had an approximate $12 million gain from the refinancing of the Princeton Junction apartments.

A REIT would typically add back depreciation expense for FFO purposes.

So if the income adjusted for depreciation or on a cash basis, were significant, would you consider introducing that kind of a metric?

Yes.

Part of our strategy is to hold some and sell some.

But until you have a sizable amount that you are holding, the income statement impact, particularly since these are off balance sheet and our ownership rate runs from 20% to 50%, takes an awful lot of units to start to aggregate.

Whether that's pre-depreciation/FFO-wise or post-depreciation.

Okay.

On the land budget, is there a number in mind that you anticipate for this year or next year?

Is it opportunistic or do you look at it as a percentage of revenues?

Do you expect to grow the actual land holdings?

It's opportunistic.

We do not budget for land acquisition.

We do not allocate capital to divisions.

This quarter we spent $117 million on land.

That is light, historically.

But again, it just ran to the opportunity that we saw and when the closings of land occurred, so there's no formula.

We will continue to be opportunistic.

And a small follow-up on the impairment you took.

Can you say which community that was?

And if there's been any change in absorption since you took the impairment?

Well, we don't name the community, but it was located in the New York City exurbs.

So it's 60 to 90 minutes north of New York City in a location that has been soft for us.

It's a very small division for us, and we took an impairment in one community that was about $11 million of the $12 million.

And there has not been enough time passed since we took the impairment to answer the second piece of your question.

Great, thanks for taking my questions.

You are welcome.

Ryan Gilbert, Morgan Stanley.

It's Haendel St.

Juste here.

My first question to you is on margins.

I'd love to hear your thoughts on the opportunity to produce operating leverage in the second half of this year on a year-over-year basis.

Is that a reasonable expectation?

Or is the second half of this year revenue increase opportunity perhaps too small?

No, I think we do expect significant increases in income from operations as a percentage of revenue, both in our third quarter and incrementally from the third quarter to the fourth quarter.

Such that for the full year we would expect income from operations to be up 60 to 90 points over last year.

Great, I appreciate that.

And a nice turnaround in orders in the North and Mid Atlantic.

Can you talk a bit about the extent improving demand drove that increase versus the decline in ASP?

Demand has improved.

In the Mid Atlantic, Virginia was one, Pennsylvania was two.

In the Northeast --

New Jersey, Michigan and --

I'm sorry, if you didn't hear Gregg, for the Northeast it's driven by Michigan, number one; and New Jersey, number two.

So it's a mix issue, Haendel, it is not any kind of increase in incentives or reduction in price.

Right.

Fair enough, okay, thank you for that.

And lastly, if I could sneak one in, I don't know if I heard it or not before, if you might have mentioned it, but can you talk about the geographic dispersion of your land spend this last quarter?

Sure, we had -- I'm sorry, the $117 million.

The biggest spends were $25 million in New York City and $21 million in Dallas.

So that makes up almost half of it.

And the rest was scattered throughout the rest of your markets?

Or any particular region?

Number three was Nevada and number four was Arizona.

Number five was Virginia, number six was another Texas deal.

Okay.

It's opportunistic.

I see, okay, thank you.

Not necessarily strategic in terms of trying to get bigger in one particular spot.

Right.

There's no great plan to this.

Remember, the land spend is the closing.

We might have tied this land up 6 months, 18 months, 36 months ago.

So it doesn't reflect the current action.

Okay, fair enough.

Any change in the tenor in the conversations with some of the potential sellers?

Just trying to get any sense for how the land spend dynamic, the land cost dynamic might be changing, if at all.

I don't think it's changing.

I don't think it's changing at all.

I think the land market has been pretty stable and fluid now for the last couple of years.

Some ground gets bid up with multiple bidders to a point where we take a pass.

We play up our brand, we play up our balance sheet, our ability to quick close with cash.

All the time, it distinguishes us.

But I think the market is pretty much the same.

Okay, I appreciate that, thank you.

You're welcome.

Paul [Przybylski], Evercore ISI.

Inks this is Paul Przybylski on for Stephen East.

I was wondering if you could give us any kind of update on the Shapell product transition and the percent of communities that you still have left to transition to Toll product.

Following on that, what kind of margin differential you are seeing in those communities once you make the switch?

Paul, the switch is in progress.

We are, as we explained when we had 10, 20, 30 lots remaining that were being served by Shapell model, we built out that phase with the Shapell model.

And when we had an opportunity to move into the next phase of one of the Shapell master plans and start fresh with a new Toll model, we did it.

And that has been occurring now over the last six months.

In some cases we opened a new phase with the Toll model off of blueprints, because it had not been built yet.

Right now we have a number of Toll models that are under construction.

In other cases we delayed the opening until the Toll model was actually up, decorated, spectacular, and off we went.

So it is in progress.

Prices are up significantly, partially because our houses are bigger.

We are maximizing the lots in a way Shapell did not.

But more so because our houses are just prettier and better designed and have spectacular indoor-outdoor living, and the market is responding.

So it's in progress.

We have 3,700 lots in front of us to continue to build Toll models on.

Okay.

Can you give any color on what kind of absolute pricing power you are seeing in California?

You said that your ASPs are now over $1 million.

If you continue to transition that Shapell is, would you get to $1.1 million or some ballpark range you could give?

Remember, every community is different.

But I will tell you prices are up significantly and we continue to experience pricing power even Memorial Day.

So it's hot, the market is hot.

North and South, old Toll communities and new Shapell communities, everything we have out there is hot.

Okay, thank you, I appreciate it

You're welcome.

Jay McCanless, Sterne, Agee.

Good morning, everyone.

First question I had, going back to the May commentary.

Historically, what percentage of 3Q orders has May been?

I'll try a rough number of around 40%.

40%, okay.

Of 100% for Q3.

Got it, okay.

And then secondly, you guys discussed cycle times earlier.

Could you discuss where your cycle times are now versus where they were last year for your traditional product?

I think it's very similar.

Part of that is the way we run the business.

When we get out 12 months, we raise the price to try to keep it at 12 months or less.

I don't think there's been a change in the last year.

Okay.

And then the last one I had, with City Living ramping up next year, has there been any meaningful change to the delivery schedule that you guys published in the corporate profile last quarter?

Modest changes that go both ways.

We will deliver a few more units earlier at 400 Park Ave.

We will deliver a few units a slight little bit later at 1110 Park Ave.

Our Bethesda property in Maryland has had some modest construction delays, which has pushed that building back a little bit.

So I think when you wash it all out, I don't think the numbers will change much.

But there is a story for each building, either moving it forward or moving it back a little bit.

It's part of the business.

Okay, thank you.

You are welcome.

Jim Krapfel, Morningstar.

Good morning, thanks for taking my questions.

What kind of buyer demand trends are you seeing in your true luxury product versus your lower-price move-up?

And what's your strategy going forward for buying and developing land for your different buyer groups?

Well, as I talked about in the beginning with some of the examples I gave, and if you focus on the price points of those examples, the move-up luxury market is alive and well.

It's one of our strongest segments.

And that's not just California.

I gave an example in New Jersey and I gave an example in Michigan and Florida.

But then I gave examples of a tremendous start to a 55 and over active adult community in Reno.

Everything is clicking on all cylinders.

In terms of our strategy to buy land, again, it goes back to the opportunity.

It's easier to get active adult land entitled because there are no school kids.

And many towns that feel the crunch on their schools are more supportive of a 55 and over, no school kid community.

But there's other locations, particularly in the state of Texas, where the entitlements are pretty predictable, where the schools are big and they welcome more kids.

We're chasing all segments.

Our active adult is high end.

We will continue to be luxury even when we down-size the product.

But there's not one segment right now that we're looking at, we're really focused on all of them.

Thanks for that color.

And if you were to exclude California and City Living, how would your adjusted gross margins compare this quarter versus the year ago quarter?

I don't think we look at it that way, Jim, or have looked at it that way.

If we're going to take the good stuff out, we'd like the opportunity to take some of the not-so-good stuff out.

Okay, thank you.

You are welcome.

Buck Horne, Raymond James & Associates.

Thanks, guys.

You guys have answered most of my questions already here.

I want to go back, one of my questions did relate to the timing of the City Living delivery.

You partially answered this, but I wanted to drill down just a little bit on the story behind 1110 Park Ave, since the average prices of those units are so sizable and can move the numbers around a little bit.

I think you mentioned that you thought the deliveries were going to be backed up this year.

Was that correct?

Help me understand 1110 Park Ave.

We were hopeful that maybe we'd get a closing or two in the fourth quarter.

That now looks like it will be early 2016.

But we're going to get more units out of 400 Park Ave in the fourth quarter and it's a wash.

The few out of 1110 and many more out of 400, when you put the revenue dollars together, it's a wash.

And the margin dollars.

Right.

Okay, perfect.

My other question was simply talking about your thoughts about the active adult and age-targeted market.

I think you started to answer this question already, but how do you think Toll and the brand that Toll brings, could fit in with a more aggressive push into that market?

Really, where would be the best target market for that?

How do you think about Florida versus Arizona versus Texas for an age-restricted type push?

Buck, we're all over it.

We're chasing the demographic, we're chasing the boomers.

We have dominated the luxury active adult market in the Northeast, Mid-Atlantic, Midwest.

We just opened, as I mentioned, in Reno.

We've been very successful in Colorado, in Denver.

We are going to open in the fall in Vegas.

I saw the Vegas ground last week in Summerlin, it is spectacular.

There is pressure on the guys in Dallas to get some active adult cooking there.

There's a national move for us to be bigger in the luxury active adult.

Perfect, thanks, guys, I really appreciate it.

Thank you.

Mark Weintraub, Buckingham Research Group.

Thank you.

First, I wanted to clarify when you were talking about the margin improvement from City Living in California, certainly part of that can come from mix, as you have more City Living next year and it's a higher-margin project to begin with.

I think you all made it pretty clear that in California you were also saying that apples to apples in California, there are reasons why you would expect the margins to be improving.

Did that also hold for City Living, where you actually expect the margins at City Living to get stronger?

Or was that a comment that there would be more of it and hence the overall margin would be stronger?

Margin improvement next year will come from more higher-margin City Living product than we've had this year.

This year we'll have less and it will be lower-margin Philadelphia product than the New York product next year.

Okay, great.

One quick follow-up.

Could drought in California, what are your thoughts in terms of implications for you and your various product there?

We're okay.

We've studied in great detail.

New home communities in California are very water efficient.

Many of our communities use reclaimed water for irrigation.

We've talked to all of our water authorities and they are in good shape, and they do not anticipate any change in our business.

We're obviously very sensitive to it.

We do a lot of drought-resistant landscaping.

There are some areas where gray-water is available into the community through the infrastructure from the utility company, that allows us to use recycled water for irrigation.

There's also some examples where that gray-water can be used for washing machines and toilets in a home.

And so we're confident that our communities, our landholdings, are protected and in good shape.

Thank you very much.

You are welcome.

(Operator Instructions)

Alex Barron, Housing Research Center.

Good morning, guys.

Good morning.

I think the market is pretty good, so I haven't heard you talk much about incentives.

But I imagine there are still some somewhere, so can you quantify what incentives are this quarter versus last quarter versus a year ago, as a percentage of revenues?

Sure, Alex.

Incentives still sit at $20,000 per home.

That number has not changed now, Gregg, in a couple years, right?

That's right.

We wrote a note in the last 27 months, so a couple years.

Okay, good guess.

So as a percentage of home prices, it's gone down.

There you go.

Got it.

And in terms of those communities, where think it was mostly Southern California, where you were talking about selling 50, 60 in the first month or two, and I think Bob said earlier that you're only targeting to build about 30 a year.

So how do you guys -- when do you reopen the community for sales?

Do you shut it down?

Or what is it that you -- how do you handle that?

And also, how do you gauge -- I imagine as you were selling the 50, 60 you were raising prices, is that correct?

That's correct.

I didn't mean to imply that we targeted California for 30 when we're selling 60 in the first two months, obviously.

What I said was, we have got greater production capability in California.

We take advantage of that so that it permits us to raise prices but to stay open and still meet the production schedule.

And that 65 that we referenced at Hidden Canyon in three months, is two product lines with two construction teams.

We count it as two communities at one location.

Right, although it's still very strong, I think, no matter how you look at it.

It's very strong and we have the subs out there to build the homes and so we're still open for business.

Got it, okay, thanks.

There was a second part to your question.

I forget it.

I was asking about gauging raising prices as you go along, because I thought maybe you would shut down the community for little bit.

You wanted to know how we handle it when we finally do shut down a community.

And what we do is go over to reservation deposits.

You come in, you see the models, you pick your home, you pick your lot.

We can't give you the lot, so we can put you in a list.

You sign as many documents as we can think of and give us a deposit, which is fully refundable, and then we will call you when we open up again.

What the price is at that moment, it will be your price.

That's how we handle an over-booked community.

If I could sneak one in on the tax rate issue, in order to get to the 31%, is there going to be one quarter were the tax rate is lower than the other?

Or should we assume they are both roughly the same?

I think they will both be pretty close to roughly the same.

Okay, thank you.

You are welcome.

Collin Verron, RBC Capital Markets.

Hi, thank you for taking my question.

Quick question on the gross margin front.

Earlier in the year you said that second-quarter margins were supposed to be the low point of the year with sequential improvement.

Given the strength that you saw in the second quarter because of California, does that continue to be true?

Or are you expecting gross margins to flatten out in the back half of the year?

I think gross margins will be consistent in the third quarter with what we just delivered in the second quarter, but improve in the fourth quarter.

Okay and what's driving that, the flatness, sequentially?

Product mix.

We delivered this quarter some higher-margin product than we had originally projected, so they are not there to deliver next quarter.

Great, thank you very much.

You are very welcome.

Morris Mark, Mark Asset Management.

Hi.

It's fairly obvious that you are doing great in 40% of your communities along the coast, on the East Coast and on the West Coast.

What about the rest of the country?

I am generalizing the question.

Where the trends are more lackluster, what will it take to show meaningful improvement there in terms of unit volume and better pricing?

A second question is related to the first.

I believe you may have covered this, but can you give us some sense of where the new communities will be that you will be opening up and what impact this is likely to have on future product mix and margins?

Thanks, Morris.

So the rest of the country includes some pretty great places.

Maybe they are not quite as great as California and New York City, but Texas is doing very well for us.

Nevada -- Vegas is back, Reno is back.

They are doing very well for us.

Florida, on the East Coast in particular, is doing very well for us.

Virginia is improving.

We mentioned that Pennsylvania, Philadelphia, and New Jersey doing well.

So I wouldn't characterize 40% as great and what the heck is going on with the rest.

There are certainly some areas that have a ways to go in the recovery.

North Carolina for us, Charlotte and Raleigh, are recovering but they are recovering very slowly.

Detroit is doing very well, but Chicago and Minneapolis have a ways to go in the recovery.

Colorado was doing -- Denver -- was doing very well for us and has slowed a bit.

Some of that is due to our own issues with inventory and long lead times on delivery, and therefore slowing down sales intentionally.

So it's really a mix throughout the country.

What is it going to take to get those B or even C-plus markets rolling?

Better local economies, for one.

Chicago is a great example.

Great city, big city, diverse economy, the economic engine has gone away a bit.

The job loss in the downturn was significant.

They haven't gotten back the jobs they lost.

House prices haven't come back to the peak.

Right.

So the issues for those that are struggling are local.

We keep a keen eye, it obviously affects our land spend in certain markets.

That's my wrap-up for you.

With respect to the community count growth for the balance of the year on where it comes from, Gregg, why don't you jump on that?

Sure.

For the last six months of the year we expect to have good community count growth on the Northern and Southern California, in Colorado, in New Jersey, in Pennsylvania, in Dallas and in Houston, Virginia and Seattle.

Those are the big numbers.

We obviously have a number of openings everywhere else.

But you're going to have to have enough impact settlement mix next year.

I don't think you are going to see a huge shift.

As we look at it today, we think maybe in 2016 we'll have potentially a little bit less single-family deliveries as a total using dollars, and maybe a little bit less multi-family.

And then where the plus is, that means that will shift into some active adult, which is a big driver for us.

And then City Living next year, we said would be a bigger component of our deliveries.

But there's no monumental shift from 2016 based on openings in the back half of 2015.

Thank you.

Thank you.

You are welcome.

This concludes our question-and-answer session.

I'd like to turn the conference back over to Douglas Yearley for any closing remarks.

Thank you, Gary.

Thanks, everyone.

Have a great week.

The conference is now concluded.

Thank you for attending today's presentation.

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