托爾兄弟 (TOL) 2015 Q4 法說會逐字稿

Good morning, and welcome to the Toll Brothers fourth-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 of Toll Brothers.

Please go ahead, sir.

Thank you, Chad.

Welcome, and thank you for joining us.

I'm Doug Yearley, CEO.

With me today are Bob Toll, Executive Chairman; Rick Hartman, President, COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Mike Snyder, Chief Planning Officer; Marc Mercurio, Senior VP 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 at tollbrothersinc.com.

We completed fiscal year 2015's fourth quarter on October 31.

Fourth-quarter net income was $147.2 million or $0.80 per share diluted compared to fiscal year 2014's fourth-quarter earnings of $131.5 million or $0.71 per share diluted.

Fiscal year 2015's fourth quarter pre-tax income was $217.5 million versus $188.5 million one year ago.

Revenues of $1.44 billion and home building deliveries of 1,820 units rose 6% in dollars and 1% in units compared to fiscal year 2014's fourth quarter totals.

The average price of homes delivered was $790,000 compared to $747,000 in 2014's fourth quarter.

Net signed contracts of $1.25 billion and 1,437 units rose 29% in dollars and 12% in units compared to fiscal year 2014's fourth quarter.

The average price of net signed contracts was $872,000 compared to $557,000 in 2014's fourth quarter.

This was the highest average price for any quarter in our history, driven by an increase in the number and average price of California and City Living contracts.

Fiscal year 2015's fourth quarter was our fifth consecutive quarter of year-over-year growth in contract units and dollars.

The momentum has continued into fiscal year 2016's first quarter.

Through the first five weeks of fiscal 2016, our contracts and units are up 21% compared to fiscal year 2015's same period.

On a per community basis, fiscal year 2015's fourth quarter net signed contracts rose 4% to 5.21 units compared to 5.01 units in 2014's fourth quarter.

Our fiscal year-end backlog of $3.5 billion and 4,064 units rose 29% in dollars and 10% in units compared to fiscal year 2014's year-end backlog.

The average price of homes in backlog was $862,000 compared to $739,000 at fiscal year-end 2014.

This was the highest average price in backlog in our history.

We ended fiscal year 2015 with 288 selling communities compared to 267 one year ago.

We expect similar community growth in fiscal year 2016.

Some community highlights.

At Gale Ranch in Northern California, we have taken 55 deposits in the past two months averaging approximately $1.2 million.

At Regency at Damonte Ranch in Reno, Nevada, we've taken 32 deposits in the last two months.

We also continue to see strength in City Living.

We had a strong opening in Chelsea at 55 West 17th Street where we have taken 12 agreements since opening in October at an average price of $3.3 million.

And at 1400 Hudson Street over at Hoboken, we have taken 57 agreements averaging approximately $1 million since opening in September while raising prices by $8 million.

The housing market continues on a pace of steady growth and we are well positioned to take advantage of it.

On a compound average annual basis, our revenues, fiscal year-end backlog in dollars, and contracts in dollars have grown 30%, 33%, and 25% respectively since their recent respective lows in fiscal 2011, 2010, and 2009.

We enter fiscal year 2016 with a backlog up 29% in dollars and are experiencing a healthier housing market in many regions.

Therefore, we believe fiscal year 2016 will be a year of strong growth in revenues and profit.

The various initiatives we have pursued over the past several years to diversify the Company, both geographically and by product mix, are starting to yield results.

Our expansion in California, New York City, and Texas, and our entry into Seattle, the geographic broadening of our active adult product, the growth of our apartment living division, and our national brand, should all contribute to our continued success.

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 13.6% for the fourth quarter and 10.7% for the full year.

Pre-tax income was 15.1% of revenue for the quarter and nearly 13% of revenue for the full year.

These numbers are after some charges as noted in our release.

Specifically, for the quarter we had inventory write-downs of $4.4 million and net increases in reserves for warranty and litigation of $8.2 million.

Fourth-quarter homebuilding gross margin after interest, write-downs, and the net increase in reserves, was 22.3% of revenues compared to 21.3% in 2014's fourth quarter and 19.8% in 2015's third quarter.

Full-year 2014 gross margin was 21.2% and rose to 21.6% for full-year 2015.

Fourth-quarter SG&A of approximately $124.9 million was higher than the $120.3 million in the fourth quarter of 2014 and also higher than the $116.2 million in the third quarter of 2015.

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

However, as a percentage of homebuilding revenue, SG&A dropped to 8.7% for Q4 of 2015 compared to 11.3% in Q3 and 8.9% in Q4 of 2014.

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

JV and other income amounted to $21.6 million for the quarter and $88.7 million for the year.

Income taxes were $70.4 million or 32.4% of pre-tax income for the quarter as we benefited from a state valuation allowance reversal.

For the year, our tax rate was 32.2%.

During the quarter, we opportunistically bought back 1.45 million shares at an average price of $34.56 for a total spend of $50.1 million.

We also issued $350 million of 4.875% bonds due in 10 years on 11/1/2025.

We enter fiscal year 2016 with a diluted share count of 184.7 million shares.

Looking forward to 2016, we expect improvement in revenue, gross margin, operating margins, SG&A leverage, and JV and other income.

Specifically for 2016, we expect to deliver between 5,600 and 6,600 homes and estimate the average delivered price per home will be between $800,000 and $850,000.

All in, gross margins for 2016 should improve 110 to 150 basis points compared to the 21.6% reported in 2015.

This assumes no impairments in 2016.

For purposes of clarity, this computes to a gross margin after interest and assuming no impairments for 2016 of between 22.7% and 23.1%.

2016 SG&A should drop to 10.1% to 10.3% of revenues.

Our current best estimate for 2016 JV and other income is approximately $100 million to $150 million for the year, with the biggest driver of that range being the number and timing of closings at our Pierhouse joint venture condo project in Brooklyn.

We continue to expect sizable contributions to earnings from these line items in 2016 and beyond.

Our estimated tax rate for 2016 is 38%.

Looking to next quarter, we expect Q1 unit backlog conversion of roughly 26% and our Q1 average delivered price will be above the top end of our guidance for the full year.

Now, I'll turn it over to Bob.

Thanks, Marty.

With nationwide housing starts signaling about 1.1 million in 2015, the industry still has a lot of runway ahead to reach even its average annual production volumes of 1.6 million units per year since 1970.

According to the Federal Reserve, homeowner equity has doubled since 2011, the start of the housing recovery, and is now approaching pre-downturn levels.

With the economy still improving and home equity growing, we believe our future should be bright.

In 2015, we were named by Fortune Magazine as the Most Admired Company in the homebuilding sector in a survey of over 4,100 executives, directors, and security analysts.

We were also named America's Most Trusted Homebuilder by Lifestory Research based on a survey of 43,200 home shoppers in 27 markets from among 133 homebuilders.

These honors are a tribute to the tremendous effort of our entire team at Toll Brothers.

As the year ends, we thank our colleagues for their dedication and hard work.

Now, I'd turn it back to Doug.

Thank you, Bob.

Thank you, Marty.

Chad, let's line them up.

Sounds good.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

The first question comes today from Mike Dahl with Credit Suisse.

Please go ahead.

Hi.

This is actually Matt on for Mike.

Thanks for taking the questions.

Just on the community count, the quarter end of 288 I think was above the earlier guidance range of 270 to 285.

I was just wondering if you could elaborate a little on that, if there are any openings that came in faster than expected or any delayed closeouts, and how we should be thinking about that dynamic during the first quarter.

Matt, it was driven by delayed closeouts.

Okay.

Thank you.

You're welcome.

Then just sticking on that, you mentioned the similar growth you're expecting in community count during 2016 for the full year.

Just wondering if you could talk about where regionally you might be targeting community openings and how you're thinking about the mix between kind of traditional move-up versus active adult communities.

Sure.

This coming year we're going to open in the range of about 100 new communities.

Obviously as we just mentioned, communities close out at different times and so that's nothing like a net number.

But that gives you some idea of our growth, about two communities per week.

California leads with the most new openings for 2016, followed by Florida, Pennsylvania, Nevada, and Texas, in that order.

The blend between urban, suburban in-fill, suburban move-up, and active adult is an ever-changing mix but it's certainly fair to say that we are more focused on active adult, particularly in the west.

We've mentioned in my comments the great success we're having in Reno with the new active adult community.

We now have active adult in Denver.

We're opening active adult in Vegas and looking for other opportunities out west, in addition to some openings back in the east.

So I don't think there will be a dramatic change in the mix but certainly a portion of those 100 new openings will be in what I call the empty nester, active adult age targeted segment.

Okay.

That is very helpful.

Thank you.

You're welcome.

The next question is from Michael Rehaut with JPMorgan.

Thanks.

Good morning, everyone, and nice quarter and obviously solid guidance.

On the gross margin guidance, just wanted to be clear and Marty, appreciate some of the details around that.

And just to make sure I fully understood it correctly, what was the gross margins pre-impairments, pre-interest, up 110 to 150, and -- .

Mike, that's not what we said.

All right.

That's why I'm asking.

We said all-in gross margins including interest, including impairments, including reserve changes for 2015, compare it to 2016 and we expect 2016's to be up 110 to 150 points.

So then the 22.7% -- .

So on our -- the face of our income statement, we reported GAAP gross margins of 21.6% in 2015.

It will be up 110 to 150 points on top of that for 2016 --

Okay.

-- assuming no impairments.

Okay.

Perfect.

I appreciate that clarity, Marty.

Thank you.

Second question, just in terms of the mix shift that obviously you're benefiting from in 2016 and largely driven by the west in obviously City Living.

How sustainable is that (technical difficulty) as a part of your business?

Do you kind of you view this as a 2016 event or are you continuing to see this positive mix sustainable and be present in your numbers in 2017 as well?

The latter.

We believe it is sustainable in 2017 and beyond.

California is fabulous and we have the best land and continue to look at more and more opportunities out there to find great new communities.

New York, we have new openings coming up this year.

We've had great success in the sales I mentioned in Hoboken and Chelsea, which are buildings that deliver in 2017.

A portion of Brooklyn Bridge delivers into 2017.

A portion of 400 Park Ave.

may deliver into 2017.

And we have other buildings beyond that.

So when I look at what's going on in California in our land holdings and I look at what's going on in New York City in our land holdings and I look at the margins coming out of both of those markets that are significantly above Company average, and then I blend in everywhere else where I'm very happy with our positioning and our holdings, this is not a 2016 story.

This is a long-term story.

Great.

That's great, Doug.

I appreciate the detailed answer.

And then just one last one if I could.

How do you see the land market today?

You talked about community count growth in 2016 similar to 2015.

Relative to your underwriting standards, is this type of a 10%-ish type growth -- I apologize, I'm out of the office, if I had that number right -- 10%-ish type growth?

Is that a number that you can see sustaining over the next two or three years as well?

Or some builders have talked about maybe having that growth moderate a little bit, even in 2016, which you're not going to have.

But how would you think -- given what you're seeing right now in the land market pricing relative to your underwriting criteria, how should we think about that?

Well, Mike, as you know, we're sitting on 45,000 plus or minus lots, so we have the land owned or controlled to continue to grow.

We're also in action in most markets looking for new opportunities, and we see good deal flow.

It's still competitive.

We're still very careful.

We're able to be careful, not only because it's our nature but because we have 45,000 lots.

So continued community count growth is sustainable, not only with what we control and own but with what we're seeing on the land side.

So I'm very confident that that kind of numbers can certainly continue with what we have.

Great.

Thanks so much.

Our next question comes from Stephen East with Evercore ISI.

Please go ahead.

Thank you and congratulations, guys.

Thank you.

You talked about your orders being up 21% quarter to date.

If you looked at not only that but -- well, one, could you talk about I assume that's coming from the same markets that you got in the third quarter or in the fourth quarter, but I want to make sure.

But then as you look at your order growth, we've been hearing that the Asian buyer has been slowing down in California.

I want to understand if your all's business has been affected any by that.

And then you had had some nice performance in the Mid-Atlantic and Texas has gotten tougher.

If you wouldn't mind talking about Houston and that and what you all are seeing, all from a demand perspective, if you will.

Sure.

So California, our foreign national buyers actually went up in the fourth quarter.

So we apparently are bucking the trend you're hearing of others.

Northern Cal, the foreign national buyer represented 15% to 20% in the fourth quarter compared to about 10% in the first, second, and third quarter.

And in Southern Cal, the foreign national buyer represented 20% compared to 15% to 20% in the first, second, and third quarters.

So Southern Cal was about the same, up slightly, and Northern Cal was up more than slightly.

In terms of Texas, Houston is slower, no question about it.

It's 2% to 3% of our business, very, very small part of our action.

We do have several master plan communities where we not only build homes but sell lots to others.

So far, all of the other builders continue to step up and want the next phase of lots from us.

In fact, they're anxious for us to get land development completed so they can have those lots.

Dallas is still very strong.

We haven't seen any slowdown in Dallas, and we're very encouraged.

That's obviously a much more diversified economy.

So since most of our action is in Dallas, which I'm right now happy for, overall we see the state of Texas as a positive.

Mid-Atlantic, it's been pretty good.

Virginia has improved.

That's a big market for us.

It's been fairly flat.

In the last couple of quarters, we've certainly seen some improvement there, which is encouraging.

Okay.

I appreciate that.

And then do you all have the land spend for 2015?

And I know you don't typically project to next year.

You take it as it comes.

But I would expect you would probably -- your goal is to spend more than you spend in 2015.

And if I could tie one other question in, on your like-for-like product across the US, what type of house price appreciation do you think you all are seeing?

Gregg, do you have the land spend handy?

I do, Stephen.

For fiscal 2015, the total land spend was $704 million.

That excludes the soft costs or the improvements.

And in terms of where that happened, California was the largest percentage of that land spend and that's followed by City Living in a close second.

Okay.

And on price appreciation, we are up about $5,000 in the fourth quarter, which is just shy of 1%.

That's an average of course of the whole country and that was driven -- the most pricing power we had in order would be Northern Cal, Southern Cal, Nevada, Phoenix, and Seattle.

All right.

Thank you, Doug.

I appreciate it.

You're very welcome.

Next question is from Alan Ratner of Zelman & Associates.

Hey, guys, good morning.

Nice quarter.

Doug, just quickly to double check, that 1% price appreciation, was that year over year or versus 3Q?

Year over year.

Okay.

Great.

So just a couple of questions.

One, on the City Living business, I think we saw some headlines that you guys had some pretty high priced penthouse sales here in November so far.

As you've completed a few buildings over the last couple months or are set to complete one or two more, how should we think about your strategy on sales for the remaining units that are unsold?

Where do you see the price elasticity among the buyers?

How long are you going to hold out to maximize value versus what's your ideal timing to be completely out of the building once it's completed?

It's a great question.

We have two buildings -- we have three buildings I'll talk about.

Pierhouse, Brooklyn Bridge, that building doesn't deliver until the end of the fiscal year.

We have 30 units, plus or minus, left to sell.

We have 75 in backlog to deliver.

So let's call it eight months, nine months until the building delivers.

But then we have 75 to burn through which means the next sale probably can't be delivered, be closed until call it 11 or 12 months because if you settle 20 plus or minus a month, one a day, you've got 75 to burn through so call that three months.

So we have to look at 30 sales over the next 11, 12 months, which means we need to sell call it two-and-a-half a month.

And we're on top of it.

We price accordingly.

A sales pace of 30 a year in New York is very achievable.

There's certain units in certain locations within a building that are hot and then there's other units that maybe are in a dark, cold corner that you have to incentivize a bit more and that's the business we run every week.

So that's one example.

The other example would be 400 Park Avenue.

That building's completed, CO'd.

We're in the middle of delivering units now.

We have about 20 plus or minus in backlog to deliver.

We've delivered about 30.

And we have about 30 left to sell.

So those units can close within a month or so since we only have 20 in backlog to close and the building is completed, which means we have to be a bit more aggressive in pricing.

Thankfully, we have huge margins there.

There's the opportunity to throw some incentives at certain units and speed it up.

How long will we sit with those 30?

Well, not as long as Pierhouse because we've got a completed building, and we've got the revenue sitting out there that we want to collect.

So we would be more aggressive there and we will be.

It's our belief that over the next year, we will price accordingly to sell that building out.

We will not fire sale it to move those units in the next couple of months.

We don't think that's smart business and it's not necessary, but we will price to the market.

So that's really the strategy we employ.

It has to do with when a building is completed, how many are left to sell, what date you can close them, how hot the market is, how specific units are doing versus others, and we bake that in and chat about it almost every day and price accordingly.

Did you want to talk about 1110 Park as well?

1110 Park is like 400 Park Avenue in that that building is completed.

It was only nine units.

We have delivered three.

We have one in backlog and five to sell.

So that's a similar story to 400 Park Ave.

where we have a completed building that's fully CO'd and ready to deliver, huge margins.

So we will be a bit more aggressive in pricing to move that out.

But again, it doesn't have to go in the next month or two months or three months.

We will price accordingly so we're not sitting on it all too long, but we'll let the market naturally play its course.

Those are very expensive units and therefore, there's less buyers out there.

Great.

That's a really helpful overview.

Second, Marty, maybe this one's for you.

This is the second year it looks like at least where you've generated positive operating cash flow.

You bought back some more stock this quarter.

As you enter this stage of the cycle, you're in a pretty strong position as far as your land position.

It looks like you should be able to continue growing while generating some cash flow.

So how are you thinking about the balance sheet here?

You did the debt deal.

What's the flexibility look like to do more buybacks or are you still looking to keep some dry powder there just for any opportunities that arise?

I think our corporate history is to always keep a sizable amount of dry powder around to take advantage of opportunities as they present themselves.

As you've seen over the last three or four years, we've balanced that with opportunistically buying back stock.

I don't need to tell the folks on this phone call that the stock's been relatively volatile from day to day and over certain periods, and we want to be positioned to take advantage of opportunities as they present themselves to us, although we're not necessarily interested in having those opportunities presented to us on a buyback basis.

Got it.

Thank you.

You're welcome.

The next question comes from Susan Maklari with UBS.

Please go ahead.

Good morning.

Good morning, Susan.

When we think about your 2016 guidance, it seems like your absorption pace will be about flat to maybe up ever so slightly versus what we saw this year.

Can you talk about that relative to the price appreciation that you're seeing and how you think about that going forward?

I think absorption is one aspect of things, Susan, but the bigger aspect is production.

We enter this year with roughly 4,000 units in backlog.

That means we need to sell and settle another 2,100 to hit the midpoint of our range.

While we do have some units on a spec basis, particularly in the high-rise as Doug mentioned, it's not a sizable number of units.

So if we don't sell within the first three to six months of this fiscal year, it's very challenging for us to deliver that unit.

So I don't think we're looking at a sizable uptick in sales absorption.

We'll take it if it comes.

But I think production is what is driving the backlog numbers, the amount of time it takes us to build our product from when we sell it.

Okay.

And then along those lines, you guys have obviously been less impacted perhaps by some of the labor issues that we're hearing about out there.

Have you seen any changes in that over the quarter?

Not really.

It's improving as we move further through the recovery.

Every market has a different story.

One market has a problem with framers and another market has a shortage of plumbers.

Costs were up about $3,800 in the fourth quarter and that was half labor and half material, driven by drywall, concrete, siding, steel, and lumber.

But that's a very modest number, obviously.

Call it $1,900 for labor and $1,900 for those various materials I mentioned.

Okay.

Thank you.

You're welcome.

The next question is from Stephen Kim with Barclays.

Thanks very much, guys.

Was wondering if I could ask a question about your backlog turnover rate I think that you guided for in the first quarter.

It was a little lower than we expected.

Just wondering whether or not embedded in that number is anything unusual in a particular region or if there's any other commentary you can provide about that number.

There's nothing really that we can point to.

We do kind of a ground-up assessment of what we expect to deliver based on construction status and based on historical norms and we're comfortable with the 26% conversion ratio.

Okay.

In land development, I think you gave the land acquisition number but you didn't give the land development number in 4Q.

Do you have that number handy?

Yes, we do.

Give me one second.

Stephen, do you just want it for 4Q or the full year?

4Q is fine.

Land development spend Q4 fiscal 2015 is $179 million.

Got it.

So definitely, overall land spend as a percentage of revenue is like around 30%, 31%, which is I think as you had indicated last quarter was going to go up in the fourth quarter and it did a little bit.

But it's still very much within the bounds of what I would consider to be pretty normal for your Company.

You talked a little bit about what you're seeing in the land market and you're indicating I think that you're still very much in the hunt.

I guess overall, though, as we look into 2016, are you finding that the competition for deals maybe particularly at the lower end of the price point has ebbed a bit?

Because what we've heard from some of the other builders is that they are cutting back a little bit in terms of their appetite for land.

And I would just be surprised if you hadn't seen any impact of that on the land market.

Modest impact, Stephen.

You said lower and we're not down lower very often.

Well, I meant the lower end of your range.

Yes, I understand.

I think it's been about the same.

Okay.

The markets that we all want to grow in, everybody is very competitive.

And so maybe there's some markets where we're all in the sidelines.

And so maybe there land sellers, if they can't ride it out, will become a little more realistic in their pricing.

But that hasn't happened much yet.

I think the market's about the same.

Okay.

Well, that's helpful, that commentary.

Lastly, you didn't mention anything about apartments.

Just wondering if maybe you could give an update on that.

Thanks, guys.

Sure.

The apartment business is doing great.

It's growing significantly.

We focused, as you know, on the Washington, DC to Boston corridor as a start but we are now looking at deals in other markets and looking to expand the business nationwide.

We have about 6,000 units in various stages of either stabilization, lease-up, construction, or predevelopment with terrific deal flow, and so far we are outperforming on all metrics with everything we have built and started to run up.

So it's a business we really like.

There have been great synergies with the teams out there that can help had us find land, get entitlements, build, market.

There's definitely brand recognition which we think has helped significantly and I'm really proud of it.

We're building condo quality apartments with condo quality amenities and finishes and so far, so good.

Sounds great.

Thanks a lot.

Thank you.

The next question is from Jack Micenko with SIG.

Please go ahead.

Hi, good morning.

Questions around the active adult -- I guess maybe active adult/empty nester.

Trying to frame out what that means to the business going forward.

You've talked about it growing, taking it out west more.

Will it be a bigger part of the business 2016 and 2017 versus what it was in 2015, 2014 just on a number mix perspective?

And then all else equal, how should we think about that margin relative to obviously not City Living but the traditional stick built?

I know those buyers tend to be more option oriented.

But any color you can give there on the forward view.

So I think on a margin perspective, Jack, we underwrite it to a very similar margin.

It's been a very consistent margin over the past few years, but as markets improve it is harder to drive that margin up compared to the large single family house that has all the options you can add to it.

Your perspective there is accurate.

Doug, you want to talk about expansion?

In terms of mix, it has been pretty consistent for the last three years or two years plus what we project for 2016.

Active adult has run right at about 23.5% for those three-year period of time.

Remember, active adult is 55 and over by law but then of course you have empty nester age targeted which is a larger group.

It's the same baby boomer, same aging boomer, but the community isn't legally age restricted.

So when you add that to the mix, it's more.

But as all of our segments grow, we will continue to grow active adult.

But I don't think it will be disproportionate.

Doug's 23.5% was a margin approximation.

But in 2014, active adult as legally restricted was around 9% of dollars, growing to 10.5% this year and up to 11% next year -- revenue.

My apologies for the confusion.

Perfect.

That's what I was looking for.

And then I guess a question for Don.

I guess in the quarter, we saw that spread of jumbo to conforming kind of widen out.

There's I guess a few hiccups in the ABS market overall.

Is there anything going on there?

Have you seen any issues with execution or is that just maybe a reversion back to the historical gap between the two loan products?

This is Marc Mercurio sitting in for Don Salmon.

Banks and REITs and our credit unions continue to be strong buyers of mortgages today.

Liquidity remains -- continues to be strong in all markets and loan programs.

There still continues to be a small gap between 30 year jumbo money.

Today we're about 3.75% and a 30 year conforming fixed rate is around 4%.

Okay, so you're still seeing spreads inside conforming on jumbo.

Yes.

Yes.

Okay.

Perfect.

Thank you.

The next question is from John Lovallo with Bank of America Merrill Lynch.

Hey, guys.

Thanks for taking my call as well.

First question is, it looks like 2015 order pricing was close to $840,000 on average.

The delivery pricing outlook you guys are talking about is between $800,000 and $850,000 which seems a little bit low to us.

What would drive kind of the low end of that range?

I think in certain circumstances the higher priced units are in the New York City high-rises, and as we mentioned we have a couple buildings that are not going to deliver until 2017.

And so we kind of constantly play a bit of catch-up in the average delivered price compared to the average selling price.

Okay.

That's helpful.

And then I guess on the community count growth close to 10%, can you maybe help us with the cadence of that, how you're thinking about that?

Yes, this is Gregg.

It's a little bit early for that but at least as we look out through Q1, which we're in the midst of Q1 2016, it looks like probably a quarter of that will happen in Q1.

And then the rest of the year, if you want to make presumption, it will happen out evenly over the rest of the year.

But we'll get more clarity on that as the next couple calls come up.

Most of the community count growth this year happened in the back two quarters of the year.

2016 shouldn't be any different.

I would look at community count growth as a driver of 2017 and 2018, not much of a contributor to 2016.

Okay.

Thanks, guys.

Next question is from Nishu Sood with Deutsche Bank.

Thank you.

Doug, you mentioned of the 100 -- of your communities next year, you're going to have 100 I think new community openings and some skewed towards California and some of the other growth markets.

How much growth could we end up seeing in California, just rough orders of magnitude in terms of your community count?

Well, on the books right now, 416.

Do you have that, Gregg?

I have it.

We have 14 new communities scheduled to open.

That can change.

But that going into the year, that's what we have planned in California.

That's right.

Got it.

And that is a gross figure or is that a (multiple speakers)?

(Multiple speakers) we have a number of closings associated with it as well.

Yes, of course there will be some sell-outs within California.

That's new community openings that are right now on the books.

As of now we expect our openings to exceed our closings for next year in California.

Got it.

That's helpful.

And then a question, Marty, on the gross margin.

110 to 150 basis points of the gross margin improvement, if we were to look at City Living versus the remainder of the business, how would the relative trends be between the two?

I think California is the biggest driver of the margin improvement.

City Living is not as sizable as it's been in prior years.

The actual volume from City Living we expect in 2016 in terms of on-balance sheet deliveries will be slightly below as a percentage of total 2015.

That's right.

Got it.

That's deliveries, though.

I was thinking from a margin perspective.

So I think the margin story will follow that theme, as in New York City, as Doug mentioned, we have some speculative inventory, if you will, and we will be motivated to move it.

Got it.

Okay.

Thanks for the color.

Next question is from Megan McGrath with MKM Partners.

Good morning.

I wanted to follow up on that gross margin question just a little bit, maybe think about puts and takes next year.

Apples-to-apples to make sure I'm doing this right, but if we had the same level of impairments in 2016 that we had in 2015, your margin guidance would be essentially for flat to up in the year.

Obviously, you talked about California being a positive, City Living maybe a negative mix shift next year.

Anything else we should be thinking about that's going to contribute to that movement?

A positive on an overall basis is that interest as a percentage of cost of sales will be around 3.1% to 3.2% in 2016 as we currently estimate it, compared to 3.4% to 3.5% this year.

I think as we go from region to region or even city to city, we see some positives and negatives in margin.

It's tough to point to anything in particular.

We expect, for example, Arizona to go down but it's a relatively healthy market for us.

It's really a function of new community openings and old community close-outs as well as the health of a particular market.

Okay.

Thank you.

And then just thinking about, given City Living, is there anything we should be thinking about as we model in terms of the potential lumpiness of those margins, similar to the first quarter of last year when you had that big contribution.

Anything we should be thinking about there?

I think as Doug mentioned, in the first quarter of 2016, we have backlog at 400 Park Avenue that will deliver and that will impact positively, a little bit, our gross margin.

But definitely our average selling price, which is why my guidance talked about that first quarter average delivered price being above the top end of our range.

Through the course of the rest of the year, we should have deliveries in the JV and other income line from the Pierhouse and the Sutton that are back in the fourth quarter but shouldn't have much -- they would have no impact on margin.

Got you.

And on the order front, we will -- we're open in Chelsea.

We're open at Pierhouse.

We're open at 1110 Park.

We're open at 400 Park Ave.

South.

We're open over in Hoboken.

And we will be opening St.

Luke's in Greenwich Village in the second quarter and 121 East 22nd Street by Gramercy Park in the fourth quarter.

And any change -- I haven't seen your slides yet, so any change to the closing or opening time lines there?

So the slides will be available on our website shortly after the conclusion of the call.

There are some modifications to delivery time lines as well as updates to our range of revenue from each building.

Great.

Thanks.

I'll have a look.

Thank you.

You're welcome.

The next question is from Ken Zener with KeyBanc.

Good morning, gentlemen.

Good morning, Ken.

I'm interested in the California, which is a new or partition now from the west.

Could you give us a little bit of background as to why that happened now as well as give us context for the roughly call it 16 in change EBIT that we saw year to date in the west and how that would look in the K once you file it so we can understand the spread between the west and California?

Sure.

So the addition of a new segment which would just be California and segregating it from the west is a result of kind of the SEC rules and the way we need to disclose things as it's gotten so sizable and, from a practical perspective, behaves a little bit differently than many of the other states out in the west.

So we thought this was helpful information to begin disclosing.

It will be presented in the 10-K on a restated historical basis for the three years of income, two years of balance sheets that we're required to do that, and we think it's just more meaningful information as well as required.

I think it should give you better clarity on the contribution from each of those new segments, the west without California and California.

Hopefully that will shed some light on your second question, Ken.

I'm sure it will.

I do think it is useful.

Doug, I wonder, just sticking with the California theme -- given the higher prices that we see there and certainly Northern California associated with technology -- could you talk about kind of the supply/demand dynamics that you're operating in in that Northern California tech market?

And how you think that might play out if things were to slow in the technology sector perhaps a little different than the 2000 period, if that's something you could put color to?

Thank you very much.

Northern Cal, we're primarily in the East Bay.

Some of it is Shapell land and some of it is land we owned.

We have also some new opportunities post-Shapell that we're excited about.

I'm very comfortable with supply/demand dynamics.

There's limited supply and tremendous demand.

I like where we're positioned.

I like our -- the towns we build in, the communities we build in.

And so if tech was to slow, I think we have the land in the right locations and we will be fine.

I don't see that happening.

We have continued through this week to see tremendous demand and have significant pricing power and I'm very comfortable with how we positioned Northern Cal.

Thank you.

We see in California great opportunity as compared to the other markets that we've traditionally been involved with.

It's I think a significant benefit to a couple of builders that when you talk about the availability of ground deals, they're there but they're fairly huge in number, not only in units but in the price there.

California is both exciting and expensive.

But if you can play in the game, it's a pretty good dance.

Thank you.

The next question is from Ryan Tomasello with KBW.

Hi.

Yes.

Thanks for taking my questions.

I just wanted to go back quickly to City Living and the condo exposure particularly in New York.

What are your thoughts on the increased supply that we've been hearing about, particularly in the high end market?

How much capital do you have invested in those assets or in City Living overall, and could you potentially look to JV out any of those remaining projects?

There is certainly more supply in New York, particularly at the upper end.

We don't have all that much at the upper end, which I define in New York as north of $7.5 million or maybe even $10 million.

Most of what we have is $2,000 to $3,000 a foot, call it $2.5 million to $7.5 million.

I told a few stories about continued great success on opening in Chelsea, $900 a square foot average price now in Hoboken with huge sales in the last two months.

We have a pretty special location at St.

Luke's and another special location by Gramercy Park soon to open.

So I don't think the Company is overly exposed to the segments of New York that may have more supply.

Although, as I mentioned and we have mentioned for a couple of quarters, it is certainly not as frothy as it was a few years ago, but we're still doing really well and are very well positioned.

And thankfully because of the land buys and the way New York took off, we have plenty of margin.

If we have to incentivize a little bit, we will still be significantly above even the 10 percentage point higher gross margin we talk about within City Living.

So I think we're in good shape, and we continue to look for new opportunities in New York.

We have about 10% of our balance sheet invested in New York.

We continually evaluate projects we have ownership of as to whether they should be joint venture.

We also evaluate going into a project with a joint venture partner.

So there's a couple on-balance sheet projects where we have secured the land, bought the land, that we are likely to go to a JV for.

Right.

Our building at Sutton Place is a joint venture.

Our building at Pierhouse in Brooklyn is in joint venture.

And as Marty mentioned, we have a couple of our future buildings that we are probably going to go forward in joint venture on.

Great.

Thanks for that good color.

And then just finally on the land market overall, what are your thoughts on what markets currently are more attractive?

You mentioned California along with City Living taking the brunt of the spending in 2015.

Would you expect a similar allocation in 2016?

In particular, how much of that are you looking to continue to spend in the New York City market?

I think you'll see even more of a percentage in California in 2016.

New York, I don't think it will be more on a percentage basis but I would certainly believe there will be a deal or two in New York in 2016.

Like I say, we have the appetite and we have pretty good deal flow there.

And then the rest is spread out.

I mentioned the top markets for us are the west, so you'll see land spend in Seattle and you'll see it in Nevada and I'm hopeful in Denver and Dallas and Northern Virginia and rounded up.

The rest will be I think distributed around the country in the markets that we continue to be excited by.

Great.

Thank you.

You're welcome.

Our next question is from Scott Schrier with Citi.

This is actually Will Randow.

Good morning, guys.

Congrats on the progress and the forward handle on the latest bond deal.

Thank you.

In terms of City Living in particular, I don't know if you mentioned it, but there's news out there that you're looking at a Tribeca condo building and a few others.

Can you talk about your pipeline there which I'm sure will be updated in the slide deck?

We have a Tribeca condo building that we own.

We haven't started yet.

There's no second Tribeca building at the moment.

I'm not sure if that's the one you're referring to.

We've owned that one for a while.

We've owned that one for a while, right.

I was referring to the 19 story condo.

Okay.

Got it.

In terms of the financing markets, the City Living business, have you guys looked at EB-5 financing?

I know you recently have gotten a bit more creative.

You were talking about JV financing just about five minutes ago or so.

But can you give us a feel for how you plan to fund some of that business going forward?

Is it going to be more exotic, if you will?

Hi, Will.

This is Fred Cooper.

We've looked at EB-5 but really haven't delved into it.

There are some issues related to long-term job creation.

We're primarily building condominiums.

We've been able to access capital very easily given our scope, our size, and financial relationships.

So EB-5 comes with some challenges, some timing issues, and other things so we've actually kind of stayed away from it.

We have a lot of good joint venture partners that we deal with, very institutional quality.

So if we were going to joint venture a deal, that's a more likely way we would go.

Thanks, again, and congrats on the past year progress.

Thank you.

Thanks, Will.

Thank you.

The next question is a follow-up from Michael Rehaut with JPMorgan.

Hi, thanks.

Appreciate the follow-up.

Just wanted to clarify a couple minor things on the model.

Tax rate for fiscal 2016, could you give us a sense of what you're thinking about there, Marty?

38%.

38%.

And what's driving that versus the big increase for 2015?

So 38% is a pretty normalized rate.

The federal government wants 35% from us and the states want something in the neighborhood of 4.5% from us.

So tax planning saves us a little bit.

In 2015, our 32.4% number benefited from a settlement and reserve release with a particular state in the second quarter that was in the neighborhood of $14 million, and we also had a $5 million or $6 million state valuation allowance reversal in the fourth quarter.

We do not expect either of those two items to recur next year.

Okay.

And in terms of just going back again around the 22.7% to 23.1%, you said that's -- just want to make sure I understand that it's after interest and after impairments.

Or is that -- or is there any type of assumption for inventory impairments in that number?

The assumption is that there are no impairments.

Okay.

You've restated it correctly.

Okay.

Great.

Thank you.

The next question is our final question and it's also a follow-up and it's from Stephen East with Evercore ISI.

Please go ahead.

Thanks.

Marty, could you tell us what was going on, what was driving the warranty and litigation reserve and where the impairment was?

Sure.

So the impairment was a community in suburban Philadelphia that accounted for almost all of that impairment, north of $4 million of the $4.4 million.

And the reserves for warranty and litigation are revisions of our estimated costs associated with the stucco disclosures we mentioned last year.

Okay.

That's what -- the multifamily in California?

Or is that a different issue?

I think that is a similar situation but the amount is not that much.

Okay.

If you were to ask me what the reserve was for, I would tell you it was additional water infiltration stucco repair costs.

Okay.

Got you.

Thanks.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session.

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

Thank you, Chad.

Thanks, everyone.

Have a wonderful holiday season, and we'll see you soon.

The conference has now concluded.

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