托爾兄弟 (TOL) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Toll Brothers first-quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Douglas Yearley, Chief Executive Officer.

Please go ahead.

Thank you, Amy.

Welcome, and thank you for joining us.

I'm Doug Yearley, CEO.

With me today are Bob Toll, Executive Chairman; Rick Hartman, President and COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Mike Snyder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Company and Gregg Ziegler, Senior VP and Treasurer.

Before I begin, I ask you to read the statement on forward-looking information in today's release and on our website.

I caution you that many statements on this call are 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 [ourtoll@TollBrothersInc.com].

We completed FY16's first quarter on January 31.

First-quarter net income was $73 million or $0.40 per share diluted compared to FY15 first-quarter earnings of $81.3 million or $0.44 per share diluted.

FY16 first-quarter pretax income was $116.6 million versus $124 million one year ago.

Revenues of $928.6 million and home building deliveries of 1,063 units rose 9% in dollars and declined 3% in units compared to FY15's first-quarter totals.

The average price of homes delivered was $873,500 compared to $782,300 in 2015's first quarter.

This was the highest average delivered price for any quarter in our history.

Net signed contracts of $1.09 billion and 1,250 units rose 24% in dollars and 18% in units compared to FY15's first quarter.

The average price of net signed contracts was $869,600 compared to $821,500 in 2015's first quarter.

This was the highest average price for any first quarter in our history.

FY16's first quarter was our sixth consecutive quarter of year-over-year growth in contract units and dollars.

And for the last three quarters, we believe we are at, or near the top, of the industry in the growth of the dollar value of our contracts.

Our first-quarter end backlog of $3.66 billion and 4,251 units rose 34% in dollars and 16% in units compared to FY15's first quarter-end backlog.

The average price of homes in backlog was $861,600 compared to $750,300 at first-quarter-end FY15.

We ended the first quarter with 291 selling communities compared to 258 one year ago.

Deposits and contracts signed in the first three weeks of February, the start of our second quarter, were basically flat compared to the prior year.

This is understandable given the recent stock market decline and global economic uncertainty.

Positively, traffic was up 13% over the same three weeks and appears to be improving in quality.

This gives us reason for optimism for the balance of the spring selling season.

Now let me turn it over to Marty.

Thanks, Doug.

First-quarter home building gross margin, excluding interest and write-downs, was 26.9% of revenues compared to 27.3% in 2015's first quarter and 26.0% in 2015's fourth quarter.

The year-over-year margin change reflects a drop in super high margin mix associated with our 160 E. 22nd Street project in New York City that delivered a year ago.

Sequentially Q1 2016 over Q4 2015, margin improvements were due primarily to the absence of any charges for warranty and litigation.

First-quarter SG&A of approximately $122.3 million, or 13.1% of revenues, was higher than the $106.3 million or 12.5% of revenues in the first quarter of 2015, due primarily to a larger headcount associated with a 13% increase in community count and a 16% increase in our backlog.

SG&A for the first quarter of 2016 was also impacted by $1.5 million of nonrecurring professional services and technology expenses, as well as approximately $3 million of normal compensation expenses that we incur and expense only in our first quarters.

We remain confident in our full-year SG&A guidance.

To reiterate that as a percentage of revenues, we expect SG& A to trend down each quarter and average between 10.1% and 10.3% of full fiscal year revenues.

We continue to consistently generate significant income from JVs and other sources.

Our Q1 2016 other and joint venture income was $22.6 million compared to Q1 2015's total of $26.9 million.

Recall that Q1 2015's other and joint venture income included an $8.1 million gain on the sale of our security company's customer accounts.

Our share count on a diluted basis averaged 182.4 million shares for the quarter.

Our contracts in backlog, in dollars, have been up year-over-year in each of the past 6 quarters, and our gross margin has held up well.

We believe the sell-off of homebuilder stocks, including Toll Brothers, over the past few months is not reflective of the fundamentals of our business.

So, during the first quarter, we repurchased 4.8 million shares at an average price of $31.48 per share for a total expenditure of $150.1 million.

In the beginning of the second quarter, we spent an additional $25 million and bought back an additional 933,000 shares at an average price of $26.83.

While much of this repurchase activity occurred in the later stages of the first quarter, and therefore, has limited impact on Q1 share count, it does meaningfully reduce share count in each remaining quarter of the year.

Our expected share count for the second quarter is 180 million shares, and we will continue to be opportunistic with share buybacks and have authorization for another 12.8 million shares.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for full-year FY16.

Our Q1 growth in new contracts and backlog are very positive, but we are seeing a modest lengthening in production cycle times due to the increased complexity of our homes and a tighter labor market.

We now expect to deliver between 5,700 between 6,400 homes in FY16.

We narrow our average delivered price guidance for the full year to be $810,000 to $850,000, which is an increase of $10,000 to the bottom of the range.

This translates to projected revenues of between $4.6 billion and $5.4 billion in FY16 compared to $4.17 billion in FY15.

We expect backlog conversion in our second quarter of approximately 28% of backlog dollars, with the average delivered price to be between approximately $830,000 and $845,000.

In our first-quarter, our gross margin, pre-interest and write-downs, was 26.9% and benefited from approximately 15% of our revenues coming from our high margin City Living business.

In subsequent quarters this year, we expect City Living to be approximately 4% of revenues, and thus, it will have less of a positive impact on our gross margins.

Nonetheless, our gross margin guidance for the full year remains as stated in our previous call.

We expect full FY16 gross margin, excluding interest and write-downs, to be between 25.8% and 26.2% of revenues.

We expect interest in cost-of-sales to be 3.1% of revenue for FY16.

It was 3.4% of revenues in FY15.

For the year, our JV and other income guidance has narrowed to be between $105 million and $130 million with approximately 45 % of that occurring in the fourth quarter, primarily associated with New York City joint venture deliveries.

Now let me turn it back to Doug.

Thank you, Marty.

Looking around the country, our business remains solid as customers continue to demonstrate a healthy appetite for luxury homes.

In California, the drop in our first quarter contracts was not indicative of how we see the current market.

While contracts were flat in dollars and down 28% in units, both Northern and Southern California remain healthy.

First-quarter contracts per community of 5.2 were ahead of the company's average of 4.3 by 21%.

Given the fabulous locations of our communities in these coastal markets, with demand so brisk over the past two years, and with our backlog up 138% in dollars this quarter and versus last year, we made the decision to raise prices this year to manage our supply in order to maximize returns.

This is the classic give and take of pace versus price, and I am comfortable we are executing this business plan properly.

In Southern California, our Porter Ranch community, which in FY15 produced 33 agreements in the first quarter, was hobbled this year by a natural gas leak one mile from our site, which stalled sales for the past three months.

Adjusting for that one community, Southern Cal agreements were up 16% compared to last year.

Last Thursday, the state announced that the leak was certified as permanently sealed.

An official stated that air quality was back to normal levels.

Obviously, this is very good news, and we look forward to returning to normalcy soon.

We already saw an increase in traffic this past weekend and even took a few new deposits.

In Northern California, our largest community, Gale Ranch, did well.

We have some other communities that are nearing sell-out, so we have somewhat limited inventory available to offer to the market in the near-term.

Still out West, Seattle was particularly strong.

It has a diverse economy that is improving.

Homebuyers are gravitating to the new home market because the resale market inventory is particularly low.

In many of our submarkets there, resale inventory is down to one month.

Agreements per community were up 5% with four more communities opened this year versus last.

In Dallas, our per-community activity was up, but our community count was down due to some sell-outs.

We continue to view this market as healthy.

Houston, which is about 2% of our total agreements, and also our balance sheet, had a challenging first quarter.

Contracts were down 26% in units, 22 this year versus 30 last year.

The lower end is more active, and therefore, in our Houston master planned communities, where we sell parcels to other builders, we have concentrated on developing smaller lots.

Builders focusing on lower-priced homes have continued to line up to buy lots in future phases.

We are particularly pleased with performance of our northern and mid-Atlantic regions which have been slower to emerge from the recession.

The North, which runs from New Jersey up to Massachusetts and includes the Midwest, was up 56% in dollars and 38% in units compared to one year ago.

New Jersey produced nearly 38% of the region's total contracts and saw growth of 33% in dollars and 45% in units.

In the mid-Atlantic, we are seeing a reinvigoration of the Northern Virginia market where contracts increased 79% in units and 85% in dollars compared to last year.

New York City living, including Hoboken and northern New Jersey, which we consider the sixth borough, continues to sell well.

We had a very strong quarter at 1400 Hudson Street in Hoboken, and our projects in Manhattan sold at a pace and price that met our expectations.

Contracts in New York City, including joint ventures, were up 140% in dollars and 250% in units compared to Q1 2015.

While we are on New York City, we are often asked about the impact of foreign buyers on our business.

Overall, their presence has remained about the same at about 4% of our total contracts nationwide with the greatest concentration being about 15% to 20% in California, 15% in New York City and 10% in Seattle.

These percentages have not changed materially over the past few years.

Now let me turn it over to Bob.

Thanks, Doug.

The stock market seems to be pricing in a steep decline in the economy, and along with it, our sector.

We, on the other hand, are seeing signs that reflect strength and positive momentum in our business based on six consecutive quarters of year-over-year contract growth in both units and dollars.

Our average sales pace, per community, was also up this quarter versus one year ago, and we believe it still has room to grow.

Industry-wide housing starts remain far below normal, and new home supply remains constrained.

Interest rates are very attractive.

Unemployment is the lowest since 2008, and home values are rising.

As you saw in our press release this morning, my brother Bruce has chosen to retire from the Toll Brothers Board of Directors effective on the date of the company's annual meeting of stockholders March 8, 2016.

We all thank Bruce for his tremendous contributions to Toll Brothers over the past 49 years.

Now, back to you, Doug.

Thank you, Bob.

While global concerns have weighed on economic outlooks, we remain committed to growing our community count.

We continue to evaluate new land deals, although with a slightly sharper pencil at the moment given the global turmoil.

And we continue to believe that the industry remains on a trajectory of slow but steady growth with pent-up demand that will release over time.

Late last week, we learned that Toll Brothers had repeated as the world's most admired home builder in Fortune Magazine's survey of the world's most admired companies.

Even more exciting, we learned that we ranked number six in the world across all industries for the quality of our products and services behind only Apple, Walt Disney, Amazon, Alphabet and Nordstrom.

Bob and I agree that not just in my 26 year career, but more importantly in his 49 years, this is the single greatest honor in our history and is an incredible tribute to our Toll Brothers Associates and their dedication to our customers and our communities.

Apple, Walt Disney, Amazon, Alphabet and then Toll Brothers, ahead of Facebook and Netflix, among others in the top 10.

Truly incredible.

I have never been more proud.

Back to Bob.

Following up on Doug's comments, we thank Fortune Magazine for these tremendous honors.

Our goal has always been to provide our customers with the homes of their dreams.

To be grouped among the finest companies in the world with the quality of our products reflects tremendously on the customer-focused culture that drives our business each and every day.

It is a marvelous acknowledgment of the hard work and commitment of the entire Toll Brothers team.

Doug?

Thank you, Bob.

Amy, we are ready for questions.

(Operator Instructions)

Stephen East, Evercore ISI.

Thank you.

Good morning, guys; and Bob and Doug, congratulations on the award.

That's great.

Thanks, Stephen.

Doug, you mentioned in the call and also on the press release, when it comes to land and development, you are sharpening your pencil.

Could you talk about one, what that means in the real world to you all, and then also, the capital allocation, you got more aggressive on share repurchases.

You got a lot more that you could go out and buy.

Could you talk about, are those mutually exclusive?

How are you a evaluating the two alternatives, et cetera?

Stephen, we are still in the land buying business.

We are a evaluating new deals every week.

Thankfully, we are in a great position with the land we own, so we don't feel like we have to go out and overpay for land, because we've set up a land bank that we think is top quality in the right locations and positions us well for the coming years.

But we're still seeing deals.

We're still buying deals.

We continue to be opportunistic, but we've sharpened our pencil a bit, and that is really, again, because of the quality of the land we have and some of the uncertainty out there in the markets.

Trading stock buyback versus land buying, we don't look at it that way.

I think we're opportunistic on both fronts, and we have the balance sheet that allows us to continue to buy stock back when we think it's the right time, but also stay active in the land business.

Okay.

I appreciate that.

And does that mean, on the land buying side, are you still trying to build your land base, or is it more just a replacement type of thing.

And then the second question I had is can you talk a bit more about California?

Your bid price increases, it sounds like primarily that was price, but do you have a lot of mix going on?

It sounds like maybe Northern California is a bit weaker than Southern California when you take away the Porter Ranch impact.

Am I looking at that correctly?

So first on the land side, we are looking to build our landholdings, but again, carefully and opportunistically.

With respect to California, Northern California is very strong.

The numbers don't reflect the quality of the markets and our business.

We have been aggressive in raising price, as we mentioned.

Our backlog is up tremendously.

We've also had a few communities that are nearing sell-out, so they have less inventory, and therefore, we have less to offer the moment.

That will change over time, but I would not suggest in any way that Northern California is not doing as well as Southern Cal.

I think those numbers are, again, not reflective of what we are seeing in the market.

It's more the inventory that we have and the mix that we have at the moment.

Southern Cal as we mentioned would have been up this quarter, but for Porter Ranch, which was effectively shut down for the last three months.

And thankfully this gas leak which is about a mile from our property has been permanently sealed, signed off on by everybody, and we saw increased traffic and started taking deposits again this weekend.

We're very happy and optimistic about both the Northern and Southern California markets.

All right.

Thank you.

You're welcome.

Stephen Kim, Barclays.

Thanks, very much, guys.

Good quarter.

Looking forward to seeing you soon.

I guess my first question, I really do want to touch on that Fortune article, since you mentioned it, that survey.

Generally we think of homebuilder quality as being secondary to location.

I was curious as to whether or not it was the intent of the company to take this result and build anything around it in a more significant way on the marketing side, and what implications do you think it has?

Pretty much everybody else on that list is having very frequent touchpoints with their customers versus you guys which is very infrequent, but the dollar value, of course, being much higher?

Well, Steve, there's no question we will be marketing this award.

I hope everybody that ever thinks of Toll Brothers visits our website, visits our communities, walks into a Wall Street investor meeting, whatever they may do, they will be reminded that we are number six on a list of some pretty incredible companies worldwide.

It's a reflection on the quality of our communities, the quality of our homes, the passion we bring to the business, the way we treat our client, and I don't think it's because we are a custom homebuilder.

I think it's because of how we treat the customer and how our homes last through generations, and we're just so proud of what we've accomplished, but absolutely we will be marketing this starting last night and continuing for a very long time.

It's the dedication and enhancement of our brand.

It goes hand-in-hand with what we're talking about.

Great.

Okay.

Second question, you made a comment regarding Houston, which I thought was interesting.

I think you indicated that in light of the somewhat slower order pace there that you were looking to I guess take some of your existing parcels and subdivide them up into somewhat smaller lots.

I think that was what I heard and that some of those you were going to be divvying up to other builders building at somewhat lower price points.

I was just wondering if you could talk a little bit more about that.

My general sense has been that taking a parcel that is zoned and permitted for a particular type of larger or higher-end house, it's pretty difficult to go back and renegotiate that to have a higher number of families at a lower price point.

So can you talk a little bit about what you meant by that statement and how widespread is this?

Stephen, it's Marty.

Recall that in Houston, most of our landholdings are in three Master Plan communities where the bulk of our business is actually selling lots to other builders.

We take some of them for ourselves, but those other builders are generally at lower price points, so our commentary there was focused on the fact that we will be accelerating the phases that are at the lower price points and deferring some of those that are bigger homes.

By no means are we taking existing Toll Brothers communities and creating smaller lots and selling those lots to other lower price builders.

That comment was simply, as Marty said, related to the three Master Plan communities where we are in the lot development, lot sale business, and the builders anxiously want more and more of the lower priced lots, so we are aggressively developing those lots to satisfy their needs.

That's all we were talking about.

Got it.

Another thing that's worth mentioning, and we did in the prepared remarks is while contracts were down 26% in Houston, we're talking about going from 30 units down to 22.

It's a very small component of our entire business.

Less than 2% of our income statement and a little bit less than that on our balance sheet.

Perfect.

That's great clarification.

Thanks very much, guys.

You're welcome

Susan Maklari, UBS.

Good morning.

Good morning, Susan.

Your tone around the labor constraints seem to have change slightly relative to the prior quarters.

Can you just give a little more color around what you are seeing there?

Sure, I'm not sure our tone has changed.

There continues to be labor issues out in the field.

Those issues appear to be moderating as the cost increases of labor are also moderating.

We were up $1,500 this quarter over last quarter in building costs, and about 75% of that was labor.

The balance, 25%, was very small increases in some materials.

Our houses are taking a little bit longer to build, two weeks longer, three weeks longer.

It's a reflection of the tight labor market that the entire industry has been experiencing over the past year or two.

And it's a reflection, to some extent, of what you see happening with our average price point, which means our houses are getting bigger.

There's more options going into the houses, and they're a bit more complicated to build.

I don't think the labor comment has changed dramatically.

Maybe we're clarifying it a little bit right now.

We are also seeing, in certain markets, some municipality and utility company delays in terms of their ability to get out and inspect or provide meters, et cetera.

So, the lengthening of cycle times is impacted by a number of different factors.

Okay.

That's helpful.

And then, you noted that for the first few weeks of February that traffic is actually up about 13% even though the deposits are about flat, so it seems like people are definitely out there.

They're shopping, they're thinking about it.

Are you seeing it just taking them longer to actually make the buying decision, or are more of them just doing some shopping in anticipation of perhaps coming back later in the year?

What exactly is the tone or the feeling you are getting?

I don't think it has changed.

I think we're very encouraged by the increase in traffic in numbers, and even more importantly, in quality, which of course is the comments we get back from the sales teams every week when they grade the quality.

It doesn't appear that people are visiting more often.

They are being more deliberate.

It's early in the spring season.

We're about three weeks in, so we're encouraged by the traffic numbers and the quality of that traffic, but I don't think the buyer mentality, right now, is shifting.

Okay.

Thank you.

You are welcome.

Alan Ratner, Zelman & Associates.

Good morning, and congrats on the Fortune honors, as well.

On the February commentary, just curious if there was any big regional differences, if there are any particular markets that were weaker than others, or if that flattish trend was pretty consistent across your footprint.

Hold on one second.

Gregg is giving me the three weeks by region.

It's pretty consistent, Alan, across the Company.

I don't think there is any particular areas to note.

The action has been relatively flat with improving traffic pretty much everywhere and quality improving everywhere.

Great.

Okay, thanks.

And a follow-up to that, and then I actually have a second one, if you don't mind.

I think you typically have your sales event around this time of year.

I think you might have already had it, but what percentage, if you look at your typical second quarter, what percentage of your sales generally come from the first three weeks in February, or the month of February?

And then a second question.

On the JV guidance reduction, or the other income guidance reduction, I know Pierhouse is a big driver there.

Was curious if that's being driven by some timing related delays of closings that you had expected, or if that's more a function of price reductions that you made on sales during the quarter?

All right.

I will take the sales event, and Marty can take Pierhouse.

For the last three or four or more years, we've had a national sales event that runs from the last week of January through the third week of February, so it just ended for us last week.

The comp is a good comp year-to-year, because it's a same period of time.

It generally ends right around President's weekend, and we get good deposits out of that event, which of course then take one, two, three, five weeks to convert to agreement.

The action from that period of time is always pretty good, and is a fair component of the quarter, but it is not significantly disproportionate.

Remember we're heading into the end of February and all of March, which is really the meat of the spring selling season, so I don't think there's anything of significance in these three weeks, particularly since it's the same period as prior events.

With respect to the joint venture and other income guidance, it's important to note that we have not changed any of our expectations on Pierhouse from the beginning of the year to now.

That continues to perform at expected levels, and our timing for deliveries remains identical to what we thought three months ago.

The move in that number is really associated with a push-out, probably by a quarter, of some settlements in those Master Plan communities in Houston that I referenced before.

We think those will be sometime in FY17 rather than late in FY16.

We have income we generate from those land sales that will probably be 2017 rather than 2016.

Great.

That's very helpful.

Thanks for the clarification.

Good luck

Michael Rehaut, JPMorgan.

Good morning.

It's Jason Marcus in for Mike.

First question, just going back to the February trends for a second.

Just wanted to see if you are able to provide what the comp was last year in February for the month, and if it was much different from what the overall quarter was?

I think the quarter was up 16%?

So the first three weeks in February last year was up 13%, so it's a challenging comp, but not an overwhelming comp that we are compared to this year.

In March and April, were they similar?

Remember, last year we didn't have this global turmoil and the significant retraction in the stock market that we experienced in mid-January through, hopefully, last week.

Okay.

And then moving on, you called out Northern Virginia as being particularly strong in the quarter, so wanted to get a sense of what you think the drivers of the strong improvement there are, and if it was mostly driven by sales pace or community count?

It was driven by sales pace.

Demand.

And absolutely demand.

Is there anything that stood out to you as being a driver for that, or the market is just improving overall?

Market's just improving overall.

We are seeing better sales, better traffic, better interest across the board in Northern Virginia.

It was a slower market to recover, and now it appears to be really clicking.

Okay and lastly, on the City Living side, wanted to get a sense of if prices have stabilized, or if you are continuing to make any adjustments?

How you characterize the overall pricing environment there?

We're happy with our quarter in New York City Living, and prices are stabilized.

Okay, thanks.

You're welcome.

Mike Dahl, Credit Suisse.

Hi, this is Anthony Trainor on for Mike.

Thanks for taking my question.

Going back to the orders.

Can you talk about order progression through the quarter?

And then on February, there was a shift in the Super Bowl weekend, which took one selling weekend out of this year compared to last year.

Do you think that had an impact on February numbers, and how did February compare to January?

Thank you.

December was a standout month in the first quarter.

It was up mid-40% over the prior December.

November and January, what were they, flat?

[11].

So, they were up, but not quite as dramatically as December.

Whether the move in interest rate moved some people off the fence there is tough to determine.

It's interesting to note that right now, mortgage rates, for conforming are a 0.25 point below a year ago and for jumbo, are 0.5 point lower than they were a year ago, so it's still a great mortgage rate environment.

I think the biggest driver we've seen since that December timeframe is the performance of the equity markets.

Great.

Thanks.

And then just a follow-up on Porter Ranch.

How are you thinking about the impacts on sales and margin in that community, and with the new contracts you took this past weekend, was there any difference in price or incentives with those?

We are relieved and happy that the leak has been permanently sealed.

We have every reason to believe business will be back to normal.

We have made no downward adjustments in our pricing.

We have new models that have opened and will be opening.

It's a great community.

And now that this is all behind us, I think this past weekend is an indication of what's coming, and it should absolutely be business as usual with typical Southern California pricing power and great action.

Great.

Thanks.

You are welcome.

John Lovallo, Bank of America Merrill Lynch

Hi, guys.

Thanks for taking my call, as well.

The first question on the SG&A outlook, does your guide exclude the $1.5 million in non-recurring expenses and the $3 million in stock comp, or is that still included?

And I guess the follow-up to that would be how do you see the cadence of the improvement over the remainder of the year

Our total guidance for the year includes that $1.5 million and $3 million that were concentrated in the first quarter.

The cadence for the course of the year is as revenues go up the percentage will come down, and I think you will see the absolute dollars, both on the S side which is a little bit more variable to revenues, and on the G&A side continue to go up over each of the next three quarters.

Okay.

That's helpful.

And then the second question would be on the backlog conversion of 28%, the outlook for the second quarter, it's a little bit lower than it has been in the past.

Can you just talk maybe about what's driving that, please?

I think, generally, in periods where we see significant increases in our unit and dollar sales, the backlog has a tendency to slowdown.

We guided people in the past to the 2000 to 2006 periods.

We are not quite in those periods right now, but that's really the biggest driver.

You get busier.

You've got a lot of things to be working on.

Okay.

Thanks, guys.

Nishu Sood, Deutsche Bank.

Hi, guys.

Great quarter.

This is actually Tim Daley on for Nishu.

My first question is regarding around closings guidance, so you generally maintained the guidance for deliveries in 2016, but it sounds like absorptions weren't that great in the first three weeks of February, What do you guys expect you need in absorptions growth to get to this volume guidance?

I think our volume guidance we are pretty confident in, in that we don't expect a lot of homes from this point forward to sell and settle in this calendar year.

There are a few, but we have production times that are 9, 10 months on many of our homes.

So most of what we expect to deliver is either some quick delivery homes or in our backlog.

All right.

That's great.

Thank you for that.

Let me just point out, if I could, the backlog conversion for the rest of the year should be in line with our five-year average.

All right.

That's actually great to know.

Thank you for that.

I guess my second question.

This is a bit more technical, but I've been seeing that essentially the percent of owned lots that are finished -- or as you guys put it substantially improved, it's gone up quite a bit, from about 43% in 1Q 2015 to about 50% now.

It's the highest level in the history since you been giving this metric, so I was kind of curious what's the rise of this, and is it from not restocking development pipeline as rapidly more finished lots in the transactions you are doing?

Traditionally you guys tend to buy to develop.

What does this really tell us about strategy going forward?

I don't think there is a change in strategy at all.

We still generally buy to develop.

It has been harder to find option deals with the farmers.

Not option deals with the developers, but option the actual farmland, take it through the approvals, close on that ground when you get full entitlements, which is how we have always built the business.

Those deals have been harder to find in the last three to five years, so we've had more owned lots than optioned lots at this point in time been in many prior cycles.

And we're working hard on finding more optioned land to set up the business two, three, four, five years out.

But the percentage of improved lots, I would not read anything into that.

There is no different strategy, and I don't think it's really of any significance.

All right.

Thanks for clearing that up.

Buck Horne, Raymond James & Associates.

Hi.

Thanks.

Good morning.

I know it's been touched on, but I want to quickly go back to Porter Ranch real quickly.

And just saying that or you're thinking this, sales are a little bit slower to come back.

How quickly could you evaluate if the land position at Porter Ranch has been permanently impaired, and would you plan on pursuing SoCal gas for any damages to your sales or property value?

Well, we certainly have no comment on the second half of that question.

How long would it take?

Give us some time here to get through the spring season.

Of what I'm hearing, literally Thursday, the governor of California had a press conference saying Porter Ranch is permanently sealed, and Friday our traffic increased.

The weekend our traffic was up, and we started taking deposits again.

So, I'm very confident, particularly with the offerings we have at Porter Ranch which are many -- with many new models and many new sections that we've opened that we're going to be in great shape.

Awesome.

Thank you.

And one quickly on the balance sheet.

I noticed you paid down a fair amount of the credit line in the quarter along with the stock buybacks.

I'm just wondering how you view the mix of either debt repayment versus buybacks, just use of cash, how you want to manage the leverage at this point with the cash flow?

Sure.

I think about that nuance you mentioned about paying down the line is influenced a bit by the fact that we had a debt raise in the last week of the last fiscal year.

So our balance sheet was a bit grossed up at 10/31.

We took $300 million of that debt raise and paid down the line to essentially zero, other than the line of credit.

As we look at balance sheet management and leverage and liquidity, I think it's safe to say that with nearly $1 billion in capacity on our line, we are comfortable that we have flexibility to buy land and buy back stock, both meaningfully.

Great.

Thank you, very much.

Jack Micenko, SIG.

Hi.

Good morning.

Doug, I want to revisit the California commentary a bit.

I get it on pace and price, and Cali is a bigger part of your business than it was say three or four years ago.

I guess the question is should we think about the change in approach there as temporary or more permanent?

I guess maybe the better way to ask it would be will California community count be faster or slower than national community count and growth looking out 12, 18 months?

With the landholdings we have out there, I think you could expect California growth to be in the top third of our markets over the next couple of years based on the communities we see coming online.

Okay.

So, it sounds like it's maybe more of a temporary tapping of the brakes than something more strategic.

It's definitely strategic.

Tapping the brakes I'm not sure I would agree with that definition.

We've sold really well.

Our backlogs have grown, which means it takes longer to build the houses.

We're sitting on spectacular land, so we don't want to give it away.

We don't want to still houses 12, 13, 14 months out.

We raised the price.

We don't just do that in California.

We do that in many places in good markets.

California has been a great market lately, so you are seeing more of that there.

If the backlogs were to come down, then maybe we wouldn't be as aggressive with pricing, but right now we're in a situation in California that we believe we are making the right strategic decisions to manage the business by raising the price, which may reduce the sales but we think increases the returns.

Okay.

And then, Marty, tax rate higher this quarter than last year, how do we think about full-year tax rate?

And then they $1.3 million impairment.

Can you give some color on the?

Sure, tax rate.

I think we said guidance at the end of our last fiscal year to expect 38% for FY16.

I think that still a good expectation.

As it relates to the impairments, about half of it was associated with exploring new land opportunities and incurring some cost that you write off when you choose not to go forward with those deals.

And the balance of it was actually sales of some model homes that we expected to sell a little bit less than our embedded cost in them.

Okay.

Thank you.

Not much to talk about on impairments, right now.

Jade Rahmani, KBW.

Thank you.

On the New York City condo market, I was wondering if you could give additional color, just in terms of interest level at your projects and if you are seeing any slowdown at higher price points than most of what you are selling.

I think we've definitely seen a moderation in volumes, and there are some concerns in that market.

The pricing, the margins, the business of New York City Living, this quarter is as we expected when we set our full-year guidance.

We're happy.

As we mentioned, there's a building in Hoboken which is really part of New York that has done really well over the last three to six months, but our buildings in Manhattan are also doing very well.

I think we found the right price.

As I mentioned earlier, we're comfortable with our pricing.

We haven't had to cut pricing, and we're happy with the business.

And in terms of the stated play in Manhattan, would you say that demand is stable, or are you seeing a moderation?

Stable.

Okay.

And just in terms of the land market in New York City, how would you characterize your appetite?

We are hungry with the sharper pencil.

And finally, on the construction side, how would you characterize capacity and cost given the amount of development going on right now?

We still have capacity in most communities where we are delivering less houses than we have at other points in housing cycles.

Labor is tight, but it appears to be easing.

As I mentioned, we are controlling costs better, and that seems to be much better for us.

So, there is the capability in most of our communities to increase velocity.

Thanks, very much.

You are welcome.

Ken Zener, KeyBanc.

Good morning, gentlemen.

Good morning, Ken.

Doug, I have two broad questions for you.

One, if you could expand on your comments about foreign buyers given different trends in different Metro areas.

I think in Miami, not where you guys have a lot, obviously, but their sales were down 5%.

Cash buyers falling off.

That's LatAm currency, but if you think about your 10% to 20% comment of foreign buyers, I think you said in California, a bit higher than what you said two quarters ago.

How do you guys get comfortable with orders sticking given your backlog 9, 10 months where you have -- how do you guys get comfortable with that dynamic, a person on the other side of the purchase?

Okay.

As you know we are not in Miami.

4% of our total contracts nationwide are to foreign buyers.

The biggest concentration is California at 15% to 20%, New York City Living at 15% and Seattle at 10%.

Those numbers have not moved in any material way in the last two to three years.

We are managing it.

We don't have issues.

It's not going up, it's not going down.

We are great at obtaining mortgages for that clientele.

We take big deposits to protect ourselves, big down payments, and it's business as usual with no issues.

Certainly in California and Seattle, these foreign buyers are occupiers of the homes.

These are suburban homes where they move their family to get an education, so the motivation is different than a speculative investor who's trying to put money in the United States.

Okay.

Then, Doug, you talked about having more owned lots, and just broadly speaking, what is the implication of having more owned lots longer-term to, let's say, to your profile -- and I don't want to say risk profile.

But relative to past cycles, does that mean you're more motivated to increase turns to some extent?

It sounds like it, because your gross margins obviously aren't reaching the high points they did in the past.

Does that mean you, by definition, have to turn harder?

I know you guys were doing that with the Shapell assets, for example.

Ken, I don't think it is going to motivate us to increase turns.

We're always working hard to be a more efficient builder while giving our client that luxury experience with many upgrades, and that's of course always the balancing act.

But remember, when we had many optioned lots, we had over 90,000 total lots.

So, today we are in the mid-40,000 lots, and while a greater percentage of those are owned, when you compare it to the top of the roll back in 2005 of over 90,000 lots, the number of owned lots hasn't changed that dramatically -- the percentage has.

We're focused always on the corner of Main and Main.

We're not buying land in B&C locations.

So if we see the right opportunity at Main and Main, like Shapell or like New York City or like what we see in Seattle and other markets, and we must buy that land, because the only way the seller works with us is if we write a check, we will step up and write that check.

I am very comfortable with the quality of the land.

As I said, we are focused more and more on optioning land, but when the right opportunity comes at the right location and we must buy it, we will.

Thank you gentlemen.

Alex Barron, Housing Research Center.

Thanks and good morning, or afternoon, I guess.

I wanted to talk a little bit about the mid-Atlantic region, which was a pleasant surprise that it seems to be coming back to life.

But I wanted to square that increase against other builders who have commented that they've had to decrease prices and take impairment.

So I was wondering if you guys did something similar to boost the sales pace there.

And also wanted to jive your comment against the 0% in February, is that also applied to that region?

Or is there maybe some offset against some other markets?

Alex, on your first question, I can't comment on what others are doing, but I refer you to my last answer about owning land at the corner of Main and Main, and that appears to be paying off in our mid-Atlantic markets.

There is no new strategy except we love our land positions and our community locations and our brand, and the business is good.

Increased demand.

Absolute increased demand.

Which is not unusual in an election year.

The mid-Atlantic continues to do well in the beginning of the second quarter.

Okay.

Great.

Good luck.

Thanks.

Thank you.

You're Welcome.

Ryan Gilbert, Morgan Stanley.

Hi.

Thank you.

In California, I'm wondering how quickly you expect to replace the communities that are near sell-out, or are those going to be replaced within the next quarter or two?

Is that more of a back half or 2017 event?

Hold on one second.

Back half of 2016 event.

Okay.

Great.

And then in the South, nice turnaround on orders growth there.

How much of that is driven by community count increases versus improvements in absorption pace, and what regions of the South are driving that increase?

One second.

So, on agreements for Q1, the South was flat on a per-community basis.

But the highlights or the highlight of that area, would be Dallas and the Jacksonville market of Florida, and it looks like Charlotte is up and Raleigh is up, but they are small markets for us.

But for where the most action is, Dallas sold 4.9 homes per community which is up from last year and the Company average, of course, is 4.3.

Does that help?

Thanks a lot.

Yes it does, thank you.

You are welcome

(Operator Instructions)

Mark Weintraub, Buckingham Research.

Thank you.

I was hoping, if you had it available, to get the income before taxes by region, in particular for City Living.

We still are refining that, and that will be in our 10-Q, which will be filed in the next 10 days or so.

Okay.

Do you have a preliminary read on range for City Living?

Not with us at this time.

Okay.

Thank you.

You are welcome.

This concludes our question-and-answer session.

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

Thanks, very much, Amy.

Thanks everyone for joining us today, and we look forward to seeing you next quarter.

The conference is now concluded.

Thank you for attending today's presentation.

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