托爾兄弟 (TOL) 2016 Q2 法說會逐字稿

Good morning and welcome to the Toll Brothers second 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.

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; Kira Sterling, Chief Marketing 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 Rtoll@tollbrothersinc.com.

We completed FY16's second quarter on April 30.

Second quarter net income was $89.1 million or $0.51 per share diluted, up 31% from FY15's second quarter earnings.

FY16's second quarter pre-tax income was $140.4 million, up 62% from FY15's second quarter.

Revenues of $1.12 billion and homebuilding deliveries of 1,304 units rose 31% in dollars and 9% in units compared to FY15's second quarter totals.

The average price of homes delivered was $855,500 compared to $713,500 in 2015's second quarter.

Net signed contracts of $1.65 billion and 1,993 units rose 3% in dollars and units compared to FY15's second quarter.

The average price of net signed contracts was $825,500 compared to $826,300 in 2015's second quarter.

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

The slight decline in price and the modest growth in units and dollars was due primarily to a 93 unit decline in contracts from our California market which contain on average our most expensive suburban homes.

I will go into more detail on California later in my presentation.

Through the first three weeks of our third quarter, our contracts on a gross basis were basically flat compared to one year ago.

However, our non-binding reservation deposits were up about 25%, which is encouraging.

Our second quarter end backlog of $4.19 billion and 4,940 units rose 20% in dollars and 13% in units compared to FY15's second quarter end backlog.

The average price of homes in backlog was $848,600 compared to $793,800 at second quarter end FY15.

We ended the second quarter with 299 selling communities, compared to 269 one year ago.

Now let me turn it over to Marty.

Thanks, Doug.

We are pleased with our income statement results this quarter.

Virtually every metric improved compared to a year ago.

The second-quarter homebuilding gross margin before interest and writedowns improved 40 basis points to 25.7% of revenues, compared to 25.3% in 2015's second quarter.

Second-quarter interest expense included in cost of sales was 3.2% of revenues, compared to 3.5% from 2015's second quarter.

We recorded $6.4 million in impairments, $6 million of which was associated with one under-performing community in Connecticut.

A year ago, impairments were $12.2 million.

Second-quarter SG&A was approximately $128.3 million, compared to $107.7 million in the second quarter of 2015.

The increase was due primarily to our 30.8% growth in revenue and 20% growth in backlog.

As a percentage of homebuilding revenue, SG&A dropped to 11.5% for Q2 of FY16 compared to 12.6% in Q2 of 2015.

We continued to execute our strategy to generate meaningful recurring income outside of our core homebuilding operations.

Our Q2 joint venture income was $9.1 million, and our Q2 other income was $14.6 million.

This combined $23.8 million compares to $20.1 million from our second quarter a year ago, and $22.4 million from our first quarter.

This quarter, our effective tax rate was 36.6% but we continue to estimate our full-year tax rate at around 38%.

A year ago, our second quarter tax rate benefited from a $13.7 million state income tax accrual reversal.

As noted in the release, we made further progress this quarter in buying back shares, and our expected third- and fourth-quarter average diluted share count is approximately 176 million shares.

Also effective yesterday, our Board refreshed our buyback authorization to 20 million shares.

Included in our 176 million share count are 5.8 million unissued shares that are treated as outstanding associated with our convertible bonds.

Such bonds are convertible by the holders at a share price of $49.08, and our callable buyouts in September 2017.

They are putable to us in December of 2017.

We are also pleased to announce the extension and expansion of our bank credit line to $1.215 billion, due five years from now in May of 2021.

We pursued this extension and expansion, recognizing the upcoming late 2017 call and put dates of our convertible bonds and also the October 2017 maturity of our $400 million in 8.91% bonds.

Retirement of the converts and the replacement of the high rate debt are both items to factor into your projections.

This line extension and expansion gives us added flexibility to address these maturities while simultaneously pursuing new land purchases, acquisitions, and opportunistic stock repurchases.

With respect to FY16 guidance, we now expect to deliver between 5,800 and 6,300 homes at an average delivered price per home of between $820,000 and $850,000.

Our pre-interest, pre-impairment gross margin for the full year remains as stated on our previous call, 25.8% to 26.2% of revenues.

We expect interest expensed in cost of sales to be 3.2% of revenues for the full year.

Full year 2016 SG&A dollars are anticipated to be 10.4% of full-year revenues.

We expect backlog conversion in Q3 of roughly 30% on a unit basis, and an average delivered price between $815,000 and $835,000.

Our full year JV and other income guidance is unchanged at $105 million to $130 million, with 45% of that expected in Q4.

Now let me turn it back over to Doug.

Thank you, Marty.

We believe the California market is still strong.

Both Southern and Northern California were among our top 5 markets in contracts per community this quarter.

Our drop in California contracts reflects a temporary lack of inventory, strategic price increases we have implemented to meter out sales in communities with large backlogs, and the lingering impact on our Porter Ranch community of a leak from a nearby natural gas storage facility which appears to be heading towards a positive resolution.

Recall that in late October 2015, the SoCal Gas Company storage facility in neighboring Aliso Canyon experienced a gas leak.

The leak took months to fix.

But on February 18, 2016, California officials confirmed that the leaking well was permanently sealed.

Subsequent testing in Porter Ranch, including testing performed by the Los Angeles County Department of Public Health and SoCal Gas Company revealed that the current air conditions in Porter Ranch are normal and do not pose any health risks.

Obviously, this is very good news.

We're looking forward to returning to normalcy.

At Porter Ranch, we have sold 80 fewer homes in the first six months of FY16 versus the same period in 2015, and were down 38 this quarter.

We have also delayed new community openings within Porter Ranch until we can be confident that we will have success at our openings.

Also in Southern California, our Baker Ranch master plan sold out of its phase I lots and there was a gap until we opened phase II.

As a result, we reported 31 fewer contracts this quarter versus last year.

However, we have now taken 40 deposits in the past four weeks in the recently opened phase II at Baker Ranch.

Hidden Canyon in Southern California took 30 fewer contracts this quarter versus last year.

We intentionally limited inventory opened for sale as a result of having 92 homes in backlog.

With these large backlogs, we have raised prices $800,000 in the past year.

There is still a wait list for the next group of lots to be released, which indicates a continued high level of interest.

In Northern California where our contract count was down by 22 units, Jordan Ranch, down 11 this quarter and Schaefer Ranch down 14 this quarter, both had limited inventory as they are nearing completion.

At Gale Ranch our largest Northern Cal master plan, we have been closing out some sections while dealing with some minor delays in the opening of new sections.

We have not seen any significant change in the appetite of foreign buyers in California, or in our New York City high-rise projects.

The two markets where they are most prevalent.

Foreign buyers still represent about 15% to 20% of our California buyers, and 10% to 15% of our New York City buyers.

For the Company as a whole, foreign buyers represented about 3% of our contracts in the second quarter.

Looking around rest of the country, we saw strength across much of the rest of the West including Denver, Seattle, Reno, and Las Vegas.

Dallas is still a strong market.

Opening communities and keeping up with demand was the biggest challenge in our Dallas division this past quarter.

Back East, New Jersey, Northern California, Maryland, and Pennsylvania also enjoyed solid growth, and contracts in our wholly-owned New York City Living communities were up 26% in dollars and 18% in units this quarter compared to one year ago.

In total, City Living this quarter was down 14% in contracts, only because of Philadelphia where we have virtually no current inventory.

Toll Apartment Living continues to exceed expectations.

We have approximately 7,200 units completed or in development, nearly all of which are in the Metro Boston to Washington DC corridor.

Our stabilized properties currently average 96% occupancy.

We are now prospecting for sites in Atlanta, Dallas, Seattle, and Denver as well as in several California markets as we look to expand this business nationally in both urban and suburban locations.

Toll Apartment Living is one of a number of businesses that augments the homebuilding operations.

These also include our City Living and Gibraltar capital joint ventures, land sales to other builders in several master plan communities, Westminster Title, Westminster Security, Toll Golf Management and several other businesses.

Other income and income from unconsolidated entities now represents approximately 15% of our annual pre-tax bottom line.

With this contribution, our backlog up 20% at the end of the second quarter, more inventory coming online in California, and a generally positive climate for housing in most of our markets, we are optimistic about our future.

Now let me turn it over to Bob.

Thank you, Doug.

We continue to believe that the drivers are in place to sustain the current housing market's slow but steady growth.

Interest rates remain low, the job picture continues to improve, home equity values are rising, supply remains constrained, and the industry is still not building enough homes to meet the demand that current demographics imply are needed.

Last week, the Wall Street Journal cited a US census report that indicated suburban populations are on the rise, which is supportive of the new home market.

Another US census report last Tuesday noted that the single family housing permits had risen by 8% in April from one year ago.

As Millennials mature, studies indicate that their appetite for home ownership is consistent with past generations, which is of course encouraging for our industry.

Just this morning, the April census data on new home sales was particularly encouraging, with numbers up 24% from one year ago.

The release stated this represents a supply of 4.7 months at the current sales rate.

With a little bump in demand, we could be off to the races.

Doug, back to you.

Thank you, Bob.

Chad, let's open it up for questions.

Thank you very much.

(Operator Instructions)

The first question comes from Nishu Sood with Deutsche Bank.

Thank you.

Appreciate the color on California.

I just wanted to dig into that a little bit.

When should we broadly expect, with the strong demand there continuing, for the volume statistic that you're reporting to match up with that again?

Like on Porter Ranch, it sounded pretty encouraging last call with the leak having been sealed.

You described some of the phasing out of Baker Ranch, so just broadly when -- and obviously pricing has come up quite a bit.

When would we expect the volumes to match the level of demand on the ground again?

Nishu, Southern Cal, you will see the volumes increase as we progress through the balance of the year, as we do have new openings.

We mentioned Baker Ranch as one example, and there are others.

Northern Cal, there will be actually a continued small decline through the balance of the year.

Again, just because of phase gaps between what we've had open and what we're selling out of, and what will be opening in early 2017.

This is as expected.

It's as we've been talking about.

The net result in California is up but it is driven by more growth in Southern Cal than the decline that will continue for a short period of time in Northern Cal.

Got it.

And in terms of the margin outlook, since the -- obviously, you're much higher price points and very strong margins as well being delivered out of California.

Is that factored into the maintenance of gross margin guidance for the rest of the year?

Will that contribute to some quarterly volatility or would the long backlogs be pushed into 2017?

I think, Nishu, that was factored into the gross margin guidance we gave at the beginning of the year and that we reiterated today.

I think with respect to subsequent quarters of this year, the gross margin expectations should be pretty consistent with what we just delivered this quarter.

Got it, great.

And just one quick one on the City Living.

You mentioned obviously, the strong volumes in New York City living, which is very encouraging.

Has that lead to some pricing stability, pricing power, how has that been looking?

We continue to have significant pricing power in Hoboken, where we've had terrific results.

And in Manhattan, the pace and price have met our expectations.

So I'd say there, pricing is flat, is not going down and is as we had expected it to be when we talked about this over the past few quarters.

Great, thanks for the details.

You're very welcome.

The next question is from Stephen Kim with Barclays.

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

Great quarter.

I wanted to start off just broadly thinking about the high end.

We've been hearing concern that there is slowing at the high end.

We're just wondering from where you're sitting if you think that's more of a bid-ask spread, or do you think it's something that could potentially be more fundamental, i.e.

like a shortfall in the number of buyers?

And how long, if you think it is a bid-ask spread, do you think it will take for it to resolve itself?

We don't agree that there's weakness at the high end.

I think our results and our commentary confirms and supports that.

Every market runs differently, as we always talk about.

California, I think we've done a very good job of explaining why numbers are down but why the market is still very strong for us.

The community I mentioned, Hidden Canyon, which has $800,000 of price increases over the last year, continues to have a waiting list.

So I would not accept the thesis that the high end has a bid-ask issue.

We don't have buyers coming in that are looking to negotiate.

We are very comfortable with the business.

There are plenty of buyers and we love the luxury end.

I think the one potential exception to that, Doug, might be in the high end in New York City.

And in New York--

I took the question to be a national question about our general business, but go ahead, Marty.

I took the opportunity to mention that in the New York market, we have four buildings, five buildings where the average price of units still to be sold is less than $3 million.

I'm looking at averages that are $1 million, $1.4 million, $1.8 million, $1.9 million, and then one building with $3.5 million; and then we do have the building at 1110 Park where we have four units left that is the high-end market.

But the rest of our product in New York skews to the mass market, middle market rather than the ultra high end.

I love that the New York mass market is $3 million.

Got it.

Thanks for that, guys.

And secondly, you mentioned markets that you're exploring and studying in relation to your Toll Brothers Apartment Living business.

Could you talk about how far along you are in terms of really looking deep into those markets, and the potential appetite for you to go in and acquire buildings and retrofit them versus building them from the ground up?

We are pretty far along.

We have employees in a number of the markets I mentioned, and we have land acquisition teams, that come out of the homebuilding side of the business, that are helping us in those markets where we do not yet have Apartment Living employees.

But we are seeing opportunities in all five or six markets I mentioned, beyond the Washington to Boston corridor.

How many units do we have coming in at Freemont?

About 300 in Northern California.

So that -- we see that growing.

We're excited about the expansion of that business.

We're committed to it.

It's all luxury.

You walk into these buildings and you feel like you're in a high-end condo community, and like we've mentioned, it is outperforming all of our expectations and we will be in these other markets over the next year to two.

Got it.

Thanks, guys, very much and good luck going forward.

Thanks, Trey.

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

Thanks for taking my call as well.

In the first three weeks of May, you guys had talked about how order growth was flattish, and you certainly explained how California was a headwind.

But I guess what we're wondering, were there particular markets that helped offset that headwind in California?

Were there any markets that stood out on the positive side?

There was a number of them that I mentioned early on.

And they include, but will not be limited to: Seattle, led the Company in sales per community; Virginia, was number two in sales per community; Dallas, I mentioned as being strong; Reno; Las Vegas; Denver; Maryland; New Jersey.

So you think back to the old core Toll Brothers Markets of the North East Mid Atlantic, and while we've made a huge push out West and the West is doing really well, we've seen some great sales and some great strength, of late, back East.

Okay, that's helpful.

And then maybe just on a higher level, Bob, you mentioned that the new home sales print today of 619,000, which seemed somewhat inconsistent with what we're hearing from builders in terms of orders and their order outlooks.

Do you see this -- is there something quirky in this number, or is this -- you can see this as a real number?

I don't see anything quirky about it.

It's just a statement that I think the most important part is that you've got 4.7 months of inventory, but that's at the current pace.

You get a little bump up in pace, you're out of Schlitz, you're out of beer, what's going to happen is that it's going to get expensive.

And I'm not predicting that, that's coming on us but it could be a spur to new housing sales.

And pricing power.

Yes.

Okay, thanks very much, guys.

Thanks, John.

The next question is from Ken Zener with KeyBanc.

Good morning, gentlemen.

Morning, Ken.

Marty, you painted your balance sheet with a bit broader picture, obviously not quarter to quarter in terms of what you're doing with your revolver, you're highlighting debt repurchase.

Which I think obviously, given your guys' positive outlook, you're assuming -- you're setting up your balance sheet still to absorb some of your equity -- outstanding equity.

Why -- is it really just the what leads to that choice at this point of the cycle, where obviously there can still be a lot of growth for you guys to start thinking that far into the future?

Could you explain that?

It seems a little different than the past perhaps.

Well, I think what we've seen in this recovery is a slower, steadier pace of recovery.

Which results in a situation where you don't have to buy as much land as soon in the cycle, and you can in many respects, self fund through operations future land purchases.

Our balance sheet with 36,000 owned pieces of land, call that six, five years worth of owned supply, is also supportive of a longer-term view on the need to get more land.

We're certainly going to remain opportunistic in getting land.

And what we're talking about is a balanced approach to looking at our use of cash to include debt repayment, stock repurchases, and as always and as priority, land opportunities.

Okay.

We aren't trading stock buyback for land acquisition in any way.

We're very active in the land markets, we're very opportunistic.

We also felt that it was time to be very opportunistic in buying back the stock based on its price, and what we saw as a very bright future.

Understood.

And well, I think I might know the answer to this question; I'd like to hear from you guys.

So the industry obviously talks about pace and price to maximize margins.

Can you talk about with the Shapell assets you've sold out in different markets ex-Porter, you're highlighting demand but you don't have the community availability.

Could you walk us through you how you balanced pace versus price, versus markets where you decide to really, knowingly go ahead and sell the units even if you might not have communities opening?

Thank you very much.

Sure.

We talk about pace versus price all the time.

As backlogs grow, as we have strong sales, and it takes us several more months to deliver the next home sold because of the growing backlog.

In the right locations where we believe our land is unique, we will raise price.

And the example we've given, which is an extreme example of course, is Hidden Canyon, where we've built a backlog of almost 100 homes and we've raised the price $800,000.

In other markets where land is more plentiful, and I'll give as an example a market where there's many more developers that feed builders lots, such as a Dallas or a Phoenix.

If the sales are not quite as strong, if the backlogs don't grow as much and if maybe the land is not quite as unique because it can be replaced easily, we may take our foot off the throttle a little bit and not be as aggressive with pricing.

It's also dependent upon the labor force.

If we can build 60 homes a year because we have the labor to do it and not push backlogs out 10, 12, 14 months, we may not be as aggressive with price.

As opposed to those markets where there may be some labor constraints and the labor business can't handle more sales, which pushes backlogs out.

So it's -- we analyze it community by community based on the land we own, the location of that land, how successful we are with sales, what the labor market looks like and how easily we can replace that land.

Thank you.

The next question is from Michael Rehaut with JPMorgan.

Thanks.

Good morning, everyone.

Nice quarter.

Thanks, Mike.

Thank you.

The first question I had was on the Northern Virginia market.

You mentioned, Doug, I think it was your second highest sales per community.

And obviously in the last couple quarters, yourselves and others have pointed to that as an area as an improving market.

So I was wondering if you could just remind us, what does that market represent as a from a roughly speaking from a volume or revenue perspective?

And if you could give us any sense of the level of improvement, and if there's what you'd consider to be better pricing power in that market, that would be really helpful, thanks.

Sure.

So yes, we have more pricing power in Virginia.

It was a slower market to recover, and now it appears to be gaining momentum and it represents about 7% of our revenue.

Great.

And also on the share repurchase with the new authorization, should we expect a similar cadence of buyback that we've seen over the last couple of quarters?

Or if, let's say, for argument sake the share price moves more aggressively in the next three to six quarters, because you've implied that, that part of the buyback year is price driven, as opposed to perhaps some other builders that have tried to make it a little bit more of a systematic consistent type of a program.

Mike, I think we're going to continue to look at our repurchase activity as an opportunistic endeavor rather than a consistent, regardless of the price type endeavor.

That's for sure.

If Mr. Toll has anything to say about it.

Okay, great.

So hopefully, you will see the pace slowdown because that implies the stock price is moving in the right direction.

Great, thanks a lot, guys.

The next question is from Mike Dahl with Credit Suisse.

Hello, thanks for taking my question.

Good morning, Mike.

Morning.

I just wanted to go back to some of the California discussion, and again thanks for all of the helpful color there.

But maybe just to contextualize it a little bit more.

You give the Hidden Canyon example.

Can you just -- do you have a same-store pricing metric, as far as just to give everyone a sense of how meaningfully you've pushed up price, when you say we're metering sales in a lot of locations and/or some of the recent close outs that you've had just how much price you got on some of those projects?

Mike, it's really challenging for us to give a like-for-like, price-to-price, quarter-to-quarter or year-over-year because we generally don't sell the same house twice.

There's different things in house A than in house B. Greg is doing some research here to see if we can directionally try and give you an answer.

While he's doing that, do you think --

Mike, what I can do is put Hidden Canyon in context for you because we talked about $800,000 price increase.

Hidden Canyon has two communities.

It has a community that today is selling on an average price delivered with options, lot premiums at $2.8 million.

So that means one year ago, same house, same lot, was $2 million.

The second community within Hidden Canyon sells for $3.4 million, again delivered, one year ago call it $2.6 million.

Got it, that's helpful.

And do you think when you look at some of the recent pricing and the efforts to meter those sales, do you think you've reached a point where going forward the pricing power will be more modest?

Or as you look at the interest list, do you still think -- do you still feel like you'll have meaningful pricing power on those projects?

Hidden Canyon is in Irvine Ranch.

We opened four lots per month in each of these two Hidden Canyon communities I mentioned.

We have 200 people on a list who have completed preliminary mortgage qualification applications, so that we won't even talk to them unless we know they're qualified.

And in the past, I can't predict the future, we call five, we call six and we get our four sales.

So we have hundreds waiting in line for each month's release.

And each month, we raise the price.

Okay, that's helpful.

And then If I could -- .

It self fulfilling to a certain extent, especially if you think, and I do, that our competitors or peers are probably doing pretty close to what we're doing although different scale.

What you have with the price increase is an increase in demand created because the price is going up.

Which, by the way, may come to us in the summer months this year if the Fed goes up and mortgage rates go up an eighth or a quarter, that doesn't mean we shut down.

It probably means price increase coming soon which spurs demand and spurs action.

So it's too early yet to tell, but we could be on to something good.

Okay, and then if I can ask one more on Porter Ranch.

I think as of now, that some of the existing residents have been moved back into place, and could you give a little color on what you're seeing on the resale side of Porter Ranch?

And have you seen any meaningful uptick in listings as people have come back, but any uncertainty on just longer-term desire to live in that community?

No, the last I'm aware of was a feature article in LA Times or equivalent, several months ago in the middle of all of this, that showed that the resale values within Porter Ranch were holding up.

We have employees who live in Porter Ranch who never left.

They tell us that almost all of their neighbors are back, almost all of their neighbors have been back since the leak was permanently sealed in February.

We're very hopeful and anxious for the complete resolution of all this.

We have models ready to be opened, big beautiful new Toll Brothers models, which as we've talked about was part of the strategy of taking older Shapell models and building newer, bigger, prettier Toll models.

So we're finally at a point where we sure think we're seeing light at the end of the tunnel and we're going to be back to normal business quite soon.

Okay.

Remember Porter Ranch is a 30-year old community.

There are tens of thousands of residents.

ET was filmed in Porter Ranch when all of the kids were riding bikes through the neighborhood, and this is effectively a town.

Its got a great sense of community.

Its got schools and retail, and it's still from the people that work for us that live there, tell us that it's thriving and everybody is anxious to put all this behind them and it feels like we're very close to that.

Great.

Thanks for that color.

You're very welcome.

Our next question is from Susan McClary with UBS.

Thank you, good morning.

Good morning, Susan.

First of all, your closings were obviously much stronger in the quarter than what we had been expecting.

Did you see anything that happened -- what changed in the quarter that allowed you to get through more of the units perhaps than you'd otherwise expected to?

I think the production teams performed very well.

We had no mortgage related delays.

We digested [TREIT] this quarter very well.

A lot of hard work went into that.

I think we had anticipated in setting our guidance that we might run into some bumps there that we went right over.

Okay.

And was there any change in terms of the labor trends or anything there that you've seen that either helped or hurt?

Labor issues are out there, but they are improving.

We had very modest cost increases this quarter, about $4,300 per house and about 40% of that increase was associated with labor, the balance was materials.

So we're managing it well, and it appears to be easing.

Okay.

And then some of the markets where you noted that you've seen strength or areas in the West like say Denver and Reno and those sorts of markets, and that's an area where you've recently done a lot more with active adult.

So can you just give us an update on how that's going, and do you think you're continuing to outperform with that product?

I do, and we now have open for sale significant active adult communities in Denver, in Reno, and in Vegas.

They have certainly contributed in a big way to our success as we continue to chase the boomers, and the boomers want to move to markets like that, and I think we do it really well.

It's luxury active adult.

It's better homes, more features, it's better lifestyle, better clubhouses, better sense of community.

I'm very proud of the active adult everywhere, and most particularly our recent initiative to move it out to those western markets, and its made a big difference.

And stay tuned, we have more coming online.

Okay, perfect.

Thank you.

The next question is from Jade Rahmani with KBW.

Hello, this is actually Ryan Thomas on for Jade.

Thanks for taking my questions.

I was wondering if you could provide some color on the pace of land investment going forward, particularly as it relates to your approach to new land investments in your City Living communities, including in New York in particular?

This quarter, we spent $50 million on new land that is not reflective of less appetite.

It's not even reflective of less land action.

It's just when the checks were written so it's when the land closed.

In many cases, that could be land that was contracted for six months, a year in New Jersey, maybe three or four years ago.

Over the next few quarters, we anticipate more money spent on land closings because of the timing of when some larger deals will close.

We're seeing good deal flow nationwide.

City Living, our pencil is certainly a little bit sharper, but we like the market.

We, as we always talk about, we price to today's market.

We demand a minimum of 10 point gross margin higher return because of the risk associated with the business, but there's still decent deal flow in New York.

But we are certainly being a little bit more careful.

Great, thanks.

And then just given the typical buyer of your product, can you say if you saw any impact during the quarter from market volatility on either buyer interest, demand, or psychology that may have affected new contracts?

No, I don't think so.

Great.

And then just one last one if I could.

If you could provide a bit more color on the recent announcement regarding your asset management subsidiary, Gibraltar.

Do you envision any further opportunities to be able to grow that business through various JVs down the road?

So the venture we announced with Gibraltar was a commitment by Toll Brothers to invest $100 million in an institutional investor, to invest $300 million in land banking and land development opportunities that Gibraltar was identifying.

And this is an outgrowth of Gibraltar's, I'll say, previous business of buying distressed acquisition development and construction loans, foreclosing on that land, and essentially functioning as a land developer or land banker for smaller builders.

So we are encouraged by the deal flow they're seeing, and hope to have good news to report in terms of results over time as that commitment is invested and returned.

Great.

Thanks for taking my questions.

You're welcome.

The next question is from Will Randow with Citigroup.

Hi good morning, and congratulations on the results and buyback.

Thanks, Will.

Thank you.

I just had one question with a few pieces.

Could you talk through price increases relative to when you first guided for full-year gross margins, as well as what you're seeing on lumber inflation, labor inflation, other inflation as well as outside brokerage commissions, particularly in New York City?

So most of the units we will sell during this year deliver very late this year or in 2017.

So they are not significantly factored into the guidance that we gave at the beginning of the year.

Most of the guidance given at the beginning of the year is based on backlog at the beginning of the year, so we'll have more to say on margins for 2017 in six months.

With respect to cost increases, we mentioned $4,300 a home, 40% of that was labor, what was 25% was lumber and the rest was a combination of different things.

What was the other part of your question, Will?

If you could talk about outside brokerage commissions, has that picked up at all?

And I guess based on your commentary, where you're seeing a (inaudible) pricing trend relative to cost, I'll call it, a bit forward looking, are you seeing margin expansion overall when you're looking at the forward backlog?

On broker commissions, the percentage is not changing and the number of our buyers, who are represented by a broker, is not changing.

It varies by market.

New York City, most deals I would guess 80%, our clients are represented by a broker.

That's what happens in New York.

We fully budget for that, and we expect that.

When you have relo markets, Seattle is an example, you tend to have more outside brokers representing the client because they are new to the area and they want the comfort of a local expert working with them.

When you have local move-up markets like a Philadelphia, like a New Jersey, as examples; like for the most part in Northern Virginia, you tend to have less of the buyers represented by brokers, 50% or even less because they're local, they know the market and they know Toll Brothers and they come in on their own.

So that's the long of it, but the short of it is nothing has really changed.

Got it.

Congrats again, guys, thanks.

Welcome.

The next question comes from Alan Ratner with Zelman & Associates.

Hi, guys.

Nice job, and thanks for taking my question.

Doug, I was just hoping to dig in a little bit more on some of the order activity.

Because it's pretty interesting if you look at the contracts, pretty steady, flat to modest growth through the quarter into May.

But big spike in the non-binding reservations the last couple of weeks, and as far as I can remember that's as big of a gap as those two metrics we've seen in a while.

I know the non-binding reservations typically lead contracts by a couple of weeks.

But just curious if you can give any more color on what you're hearing from your salespeople?

And is this a sustainable inflection point of growth, or is there anything comp related or maybe some pent-up demand from new phase openings like the Baker Ranch you mentioned that might be temporarily propping that number up?

Alan, I don't think there's anything temporarily propping the number up.

We've had a good four weeks.

And about 57% of our deposits convert to contract historically, so deposits are obviously a pretty good indicator of a current market.

You've got traffic and then you've got deposits and then you've got agreements, and we're very happy with the action of the last month.

It is generally across the board, and we're having a good late April through the first three weeks of May.

And that gives us reason to be optimistic and to feel pretty good about the business right now.

Great, that's good to hear.

And the second question if I could.

On the New York City order increase, was that driven more by the buildings where you've got standing inventory that you mentioned earlier in the year, you might have adjusted some pricing?

Or is it driven more by the buildings that you opened for sale more recently I think a quarter or two ago?

Just curious if there's any differences across the buildings there that's driving that growth, thank you.

It's driven more by the more recent openings than the standing inventory.

And the number one building for us is in Hoboken, where we have sold -- bear with me -- it's a big number.

114 units we have sold in Hoboken in the last nine months.

So that is the number one driver, but our other buildings in Manhattan that are still under construction have, which are as you referenced, are the buildings that don't have standing inventory are also doing as we expected.

Great.

Thanks and good luck.

Thank you.

Our next question is from Jack Micenko with SIG.

Hi, good morning.

This is actually [Som] on for Jack.

So my first question was on California.

Just wondering how much of legacy Shapell do you guys still have available to deliver on?

I know you had about -- you took on about 5,000 lots there, so just trying to gauge what cost basis you have left to work with.

We don't even look at it that way.

But I think roughly speaking, we probably have around 3,500 lots at Shapell unsold, probably another couple hundred in backlog.

Got it.

And then on City Living, with New York stabilizing, what other regions do you see opportunity in today?

I know you've previously spoken about Miami, San Francisco as possible markets that you'd be interested in.

And then how would the margin profile differ to say your Hoboken properties?

We continue to look to expand City Living.

As I mentioned on my prepared remarks, right now Philadelphia is basically out of inventory.

We're looking for new opportunities in Philadelphia.

We had two for sale condo buildings in Bethesda, Maryland, looking for more in DC proper and Arlington, Alexandria and Bethesda.

We continue to look in Boston, we continue to look in San Francisco.

We're going to begin to look again in Seattle.

We're going to look for in fill locations in Southern Cal, not necessarily downtown LA but there's many sub markets of Newport Beach, and Pasadena, and Santa Monica, and Beverly Hills, as examples, that certainly are perfect for City Living.

So I'm still hopeful that we're able to expand it beyond where it now is in just New York, Philadelphia, and Washington.

Okay, great.

And if I could squeeze one more in.

We've heard some repricing on the option side in the Houston market, somewhere in the low double-digit range, and you've historically been seller of lots in the market.

Have you seen the same thing, have you experienced the same repricing there and are you adjusting your pricing when you sell lots?

You're talking about land sales to other builders?

You're right.

We have not seen it.

In fact, we're producing lots at the $400,000 price point of a home as quick as we can get rid of them.

If we could produce more, we could sell more.

North of $600,000, it's a little bit slower and so we're pivoting a little bit in some of our master plan communities to try and get more lots at the $400,000 and lower price and fewer at the $600,000 and up price.

Okay, great.

Thank you.

You're welcome.

The next question is from Alex Barron with Housing Research Center.

Thank you, and good job, guys.

Thank, Alex.

I was wondering if there was any further guidance you can give us with regards to City Living as far as volume this year?

I would imagine a lot of those units are already in backlog.

And any comments on your outlook for growth into next year?

I think for the balance of the year, we would expect on balance sheet City Living deliveries to be about 4% of total revenues in both Q3 and Q4.

And then as I gave guidance on JV income being back-end weighted to the fourth quarter, that represents a couple of our buildings owned in joint venture in City Living.

For 2017, we're going to avoid any guidance right now here, but we do produce some information in our corporate profile that you might find helpful and that should be available later today or tomorrow.

Okay, great.

Sounds good.

Thanks.

The next question is from Mark Weintraub with Buckingham Research.

Thank you.

Two quick ones.

First, I think you gave us the land acquisition spend about $50 million.

Do you have the development spend handy for the quarter?

Yes, what's the second question while Greg is turning the page?

And the second is, recognizing you're not giving any specifics for 2017, but on that other income line, presumably Pierhouse at Brooklyn Bridge Park has a nice tick up.

Are there any other big variables that one should be thinking about for the other income line as you look to 2017?

Well, we'll give guidance on that in 2017 in December.

You'll see that if you look back from -- I'm sorry, December 16 for 2017.

If you look back, from time to time, we have a gain on refinancing of an apartment building, we may have gain on sale of an apartment building or a sale of ancillary commercial real estate, or in the customer list of our security business.

So we've given perspective that it's recurring and it's meaningful, and we have some opportunities to deploy if we need to generate income to make it meaningful and recurring.

Okay, thank you.

And if you have that development spend?

The development spend is $124 million for the quarter.

Thanks a lot.

(Operator Instructions)

The next question is from Robert Wettenhall with RBC Capital Markets.

Good morning, this is actually Michael [Eisen] on for Bob this morning.

Just a quick question for you guys on community count.

As we think of the community count growth over the next couple of quarters, are you guys targeting any specific regions over others?

And as you look out to close any communities, are you not going to refill them in certain communities?

How should we think of the Toll footprint moving forward and how that plays into orders?

So for the balance of the year, the two leading markets for community count growth will be Southern California, as we've discussed, and Pennsylvania.

And again, that's not land we're buying now.

That is just when communities are ready to come on line and open, so that is not indicative of a current strategy.

We like both markets a lot, but that is a bit coincidental with when prior land buys are fully entitled and roads are in and models can open and off we go.

Beyond that, it's spread pretty well across the country and you will continue to see that.

These markets we continue to highlight nationwide that are doing well are obviously the markets that we continue to highlight for land acquisition, and therefore community count growth.

Awesome, that's very helpful.

Thank you very much.

You're very welcome.

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

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

Jack, thank you very much.

Thanks, everyone, we appreciate all the support and have a great summer.

Thank you, sir.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.