托爾兄弟 (TOL) 2019 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Toll Brothers Third Quarter Earnings Conference Call.

(Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Douglas Yearley, Chairman and CEO.

Sir, please go ahead.

Thank you, Jamie.

Welcome, and thank you for joining us.

With me today are Rick Hartman, President, COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Kira Sterling, Chief Marketing Officer; and Gregg Ziegler, Senior VP and Treasurer.

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

I caution you that many statements on this call are forward-looking based on assumptions about the economy, world events, housing and financial markets and the many other factors beyond our control that could significantly affect future results.

Those listening on the web can e-mail questions to investorrelations@tollbrothers.com.

We produced strong fiscal year 2019 third quarter results, including home sales revenue of $1.8 billion, a 23.1% adjusted gross margin, $146.3 million of net income and earnings per share diluted of $1.

Our third quarter contracts were down 8% in dollars and 3% in units.

In our third quarter, we were able to decrease incentives slightly on new contracts versus our second quarter.

In addition, with demand off to a good start in our fourth quarter, we have increased prices modestly at over half of our communities.

We will continue to strategically balance sales pace and price.

According to the NAHB, builder sentiment in August rebounded to the highest level of the year.

The Census Bureau reported single-family housing starts in July were at the highest level over the past 6 months and single-family building permits rose for the third month in a row.

And just 1 hour ago, July existing home sales numbers came out and exceeded consensus expectations.

We view these as positive signs of the overall health of the housing market.

We continue to broaden our product lines and price points beyond our traditional move-up and active-adult buyers.

We serve the widest variety of home buyers in the industry with homes ranging from $275,000 to over $3 million.

In fact, about 1/3 of our communities today offer homes with a base price under $500,000.

We have also expanded geographically.

This year, we have entered the Atlanta, Salt Lake City and Portland, Oregon markets.

We are also expanding northward on Florida's West Coast in the Tampa.

We have seen healthy demand across these new markets.

We're also serving urban and suburban renters.

Through Toll Brothers Apartment Living, we currently have a pipeline of 19,000 units in various stages of approval and development across the country.

In addition, our new single-family build-to-rent joint venture is growing, and we are excited to be a leader in this evolving market segment.

With demographics improving, low interest rates, record low unemployment, continued wage growth and limited new and resale inventory in many markets, we are optimistic about the opportunities ahead.

Now let me turn it over to Marty.

Thanks, Doug.

Before I address the specifics of this quarter, I want to note that a reconciliation of the non-GAAP measures referenced during today's discussion to their comparable GAAP measures can be found in the back of our earnings release.

I also want to note that our guidance is subject to our normal caveats on forward-looking statements.

This quarter, we have increased the midpoint of our guidance for fiscal 2019 full year deliveries, average price and revenue, and we are reiterating our adjusted home sales gross margin guidance.

With the longer construction time line from our build-to-order model, particularly at our higher price points, the exact delivery date of homes in our backlog can shift between quarters.

During the third quarter, adjusted gross margin came in better-than-expected, driven primarily by favorable mix and timing of certain deliveries.

Some of the timing benefits that we experienced in our third quarter, we expect to reverse in our fourth quarter.

Irrespective of these timing differences, we are reiterating our fiscal 2019 full year adjusted home sales gross margin guidance of 23% that we provided on our second quarter earnings call.

Turning to SG&A.

Our third quarter SG&A as a percentage of home sale revenue was 10.6%.

This is better than expected due to home sales revenue coming in at the high-end of our previous guidance.

We continue to expect SG&A margin to be approximately 10.4% for the full year.

Our SG&A margin is expected to be higher this year than in fiscal year 2018 due to lower revenue than last year, compensation increases, continued investment in our infrastructure and information systems and an increase in the number of communities we are operating from.

We now expect fiscal year 2019 other income, income from unconsolidated entities and land sales gross profit to be $105 million, up $5 million from our previous guidance of $100 million.

Our fiscal year 2019 tax rate is expected to be approximately 25.6%.

We remain focused on maintaining our conservative balance sheet with ample liquidity, low leverage and long-dated debt maturities.

At the end of our third quarter, we had more than $1.9 billion of liquidity comprised of cash and available bank credit facilities, and we have only $250 million of debt maturing over the next 30 months.

Our leverage and liquidity give us the flexibility to execute on our balanced capital allocation strategy.

This strategy includes capital-efficient land acquisitions, returning capital to our shareholders through share repurchases and dividends and maintaining conservative leverage.

During our third quarter, we repurchased $142 million of our stock and since the beginning of our fourth quarter, we have repurchased an additional $8 million.

This reduced our share count by 4.2 million shares or nearly 3% since the start of our third quarter.

Our book value per share at fiscal year 2019's third quarter end was $34.72, up 3% from $33.84 last quarter and up 14% from $30.55 one year ago.

Our backlog at the third quarter end was $5.84 billion.

We are pleased that our community count has grown from 301 a year ago to 322 at the third quarter end.

We expect modest growth in community count in our fourth quarter as well.

Now let me turn it back to Doug.

Thank you, Marty.

Jamie, let's open it up for questions.

(Operator Instructions) And our first question today comes from Truman Patterson from Wells Fargo.

Just wanted to start off in California, the market slowdown hoping we can dig a little bit further into it.

Have you guys seen the international buyer return at all?

Or even potentially retrace given the intensifying trade war and I realized it might be difficult to parse out, but looking at kind of organic domestic demand in California, are you seeing that buyer return at all?

Truman, we have not seen a change in the foreign buyer in California.

For the entire company, we have about 10% foreign buyers.

Obviously, that is concentrated primarily out West.

And in California, it's been trending pretty much the same over the last many quarters.

Okay, okay.

When I'm looking at your gross margin guidance for the full year, it implies that fourth quarter falls a bit sequentially.

Could you just walk us through the drivers of that?

And how we should think about this going forward some of the moving parts, I think you guys should have lower lumber costs flowing through, but I think you mentioned the insignificant levels have started to come in very modestly on the orders front product mix shift.

Just I was hoping if you can walk us through some moving parts there?

Sure.

The timing differences we mentioned on our prepared remarks were concentrated in markets like New Jersey, Vegas, Colorado, Massachusetts to certain extent Atlanta, our new acquisition there came in better than we had expected.

And we expect those markets do not have quite as good a quarter just based on the timing of deliveries in the fourth quarter.

Our next question comes from Stephen Kim from Evercore ISI.

I would wanted to ask you a little bit about land spend and land development spend that we can anticipate going forward.

First is kind of a general commentary.

Is it your view that you will be skewing your land purchases more towards partials that would be appropriate at lower price points and what we have historically seen?

Has that -- and if so, has that process begun already?

How do you think that will play out in terms of your overall land spend in dollars and units over the next year or so?

Sure, Stephen.

So we spent $287 million on land in the third quarter.

We expect to spend quite a bit more in the fourth quarter, that is just the timing of when deals are closing.

We continue to be very opportunistic and look for land in all of our markets.

Therefore, there will be land purchase for higher price communities and there will be land purchase for mid-price.

And then, yes, probably a bit more than historically for Toll at the lower price point.

The third quarter contracts -- 40% of those contracts had a base price of the home under $500,000.

So we continue to be America's luxury builder, but we are committed to have more diversity of products, more spread of price points.

Right now, we are building more and more of our lower price communities in places like Phoenix and Houston and Dallas and Philadelphia suburbs, all throughout Florida, Boise, Idaho, more coming soon in Denver and Northern Virginia.

And with the acquisition of Sharp in Atlanta, some of that is at a lower price.

So if you compare our land spend today to 5 or 10 years ago, yes, I would say, there is more of it on lower price communities, but we're still fully across the spectrum.

We have great opportunities even at the higher price points, but on a percentage basis if you look back that far in time then the answer would be, yes, it'll be more of it at a lower price.

That's helpful.

And just a couple of clarifying questions on that.

The land spend -- the $287 million, how much of that was purchase versus land development?

And then when you talk about the 40% of contracts having a base price under $500,000, can you give us a sense of what they have been, let's say, as recently as a year ago?

And then second -- general question is about the, you talked about base prices.

I was particularly curious as to whether or not your customer, with the falling rates, saw the opportunity to add more options and upgrades into their homes, particularly the stuff that really hadn't even really begun getting outside of the framing stage, whether they could add and thus bolster your gross margin beyond what you may have thought when you were originally selling those homes?

So just getting a sense of the ability to sort of upsell as the rates have come down.

Sure.

So the $287 million, the first part of your question, that $287 million in Q3, that was all land.

On top of that, of course, in some locations, we must put roads in.

However, 30% of the $287 million was for improved lots.

And as we talked about more and more, we are very focused on being capital efficient in our land acquisition to move the ROE.

And so when we can buy land over time or land that is improved and ready to go, we will do that as much as we possibly can.

With respect to the numbers today versus 1 year ago, we'll have to get back to you on that.

We don't have that with us right now.

That goes to the amount of communities that are selling under $500,000 versus 1 year ago.

And then the final part of your question...

Was -- can buyers add more options when rates went down?

Our buyers, as you know, Stephen, don't generally max out their mortgage.

So it's not an affordability issue for them where when rates go down, they have more capacity.

When they maximize the mortgage, they put into the upgrades.

So we really haven't seen much of an uptick in the options and design studio finishes that are purchased in good market versus bad market and low interest rate versus high interest rate market because of sort of the financial health of our buyer and the fact that they tend to put a lot more cash down and do not max out the mortgage.

Our design studios, I will say, we will add here, are doing really well.

The margins are improving.

We're now over 30 design studios that have all revamped or have built fresh and new.

We're thrilled with the new management team that runs all of that.

And as many of you on the call, we hope have taken us up on a visit to those design studios.

They're really a differentiator and one of the major total advantages of being able to truly build your custom home by all the finishes and selections that we offer.

The only thing I'd add, Stephen, because I know you model this way is that the amount we spend on socks and improvements in the third quarter was approximately $215 million.

So we spend around $500 million combined with the acquisitions during the third quarter.

Of the land.

Yes.

Our next question comes from John Lovallo from Bank of America Merrill Lynch.

The first one, Doug, last quarter you'd mentioned that May traffic and deposits have been pretty encouraging.

So I'm just wondering how things kind of trended in May, June and July from an order standpoint?

And then if you could possibly quantify the solid start that you're speaking about for August?

Sure.

So May contracts were up 7%, June contracts were down 18% and July contracts were up 1%.

I would not read too much into June.

There were quite a few openings in June of '18 that made June of '19 a difficult comp and there were some sales events run around the country in May of '19 that might have pulled a little bit of the June demand forward.

With respect to August, I think we're going to stick with our comment that demand is off to a good start.

I did mention in my prepared comments that we have had some modest price increases in over 50% of our communities during the start of August.

And so we feel good about the beginning of the fourth quarter.

Okay.

That's helpful.

And then maybe just dovetailing off the Truman's question on California, I mean, clearly, there remains a challenging market, but I think what a lot of folks are trying to get a grip on is, are you seeing any signs of stabilization in that market or potentially even early signs of inflection?

Yes.

California is better.

We fully recognize the comp gets easier from the fourth quarter forward because of the slow fall and winter we had in California last year.

Even in the third quarter where contracts in California were down 36%, actually in Southern Cal, contracts were only down modestly.

They were down much more significantly in Northern Cal and that was primarily due to a difficult comp back to third quarter of '18 when we had either new openings or communities in early stages that we're still working through significant pent-up demand.

Next question comes from Michael Rehaut from JPMorgan Securities.

First question I had was just on community count and how do you think about that?

Obviously, appreciating the fact that you're not giving fiscal '20 guidance yet, but just looking at your lot count over the last few quarters, it's been, I would say, somewhat flattish sequentially going back to like the second half of 2018, maybe up a touch.

Will that -- And I guess, you said that for the fourth quarter, you expect community count to be up a little bit sequentially.

Will that more flattish recent trajectory of your overall lot count result in more of a modest community count growth as we look into 2020?

Or would you in contrast be looking to potentially trying to just increase the velocity of what you have and we might still be able to expect a mid-high single digit type of year-over-year growth?

Michael, so yes, we do expect modest community count growth in Q4.

We will give guidance on the next call about the community count for 2020.

All I'll tell you is we anticipate community count growth in 2020.

Okay.

Appreciate that.

I guess, secondly, you talked about incentives coming down slightly in the third quarter on orders and fourth quarter increasing prices modestly in over half of your communities.

Love to get a little more color around perhaps just geographically which markets might have stood out where those trends were like -- were a little more pronounced?

Sure.

So the strongest communities from a pricing perspective, which again would be, I'd call that, a combination of reducing incentives and increasing prices for Boise, Idaho, the State of New Jersey, the State of Florida, Seattle, Northern Virginia, Phoenix, Denver, Pennsylvania and Orlando, Florida, those will be the top markets.

By contrast, what would be the softer markets?

We continue to struggle a bit in the Midwest with pricing power in Chicago and Detroit, and we continue to struggle a bit in Florida East, which for us is just north of Miami up to Jupiter.

Our next question comes from Ivy Zelman from Zelman & Associates.

Good results, guys.

You've done a good job at improving your ROE at now 14.6 and one of the things that the markets laser-focused in on, are those returns continue to see an upward trajectory, but you guys have roughly 6 to 7 years supply of land and continue to, as you pointed out, accelerate land spend and whether you're allocating land spend or your capital to land spend?

Do you think that you should be pulling back on the total land on the books both owned and optioned just in more concerned that were a record level of growth for this recovery -- economic recovery?

So just your thoughts there and I have a second follow-up.

Sure.

So, Ivy, yes, we're very focused on being capital efficient in our land spend.

I think, as Marty mentioned in the prepared comments, we've -- our capital allocation strategy has now included a significant buyback program, regular dividend and keeping leverage low and conservative.

We are opportunistic in land, as we always talk about.

We are being selective and we are much more focused on optioned land than owned land because the optioned land is obviously the much more capital efficient land to buy.

So we are focused on moving that ratio of owned to optioned, more in favor of optioned and you'll see more and more of that.

I think that's a full answer I can give right now.

We're certainly not reducing the land buy, but we are again much more focused on the capital efficient buys, which also includes, as I mentioned, buying finished lots that are ready to go.

And that's why 1/3 of what we spent this past quarter was on finished lots that are ready to be built on because that does drive ROE and it avoids, as you called, that long 6- or 7-year land owned control numbers.

So we're on it.

Got it.

You also have done a great job at strategically positioning yourselves in the rental market, which every part of the housing equation rental or for sale where we have shortages of shelter today and going into BB Living.

Can you help us understand a little bit more about BB Living in terms of obviously strong pipeline, but talk to us a little bit about what the homes will look like in terms of comparing it to the Toll product and the economics of that business?

And what should we expect in terms of returns on that business or any economics you're willing to share in metrics, please?

Sure.

So BB Living is a joint venture between Wall Street private equity, which has the largest part of the investment, Toll Brothers and BB Living, which is an existing company that is in the space.

It started in Phoenix and they will now expand, primarily, in the markets that we are in because we have the land teams, the entitlement teams, the land development teams, the brand, not putting our name on it, but the brand brings contractors and brings attention.

And so we're really excited by the business.

It is primarily focused on taking sections of master plan communities where master developers now recognize that they're going to have houses at $1 million, houses at $600,000, houses at $400,000, maybe houses at $200,000 and then nice homes or town homes that can be rented that look the same as the homes that are being built in the community by the for-sale builders.

More and more renters are families that want to live and raise their families in a home with a swing set in the backyard and the bus picking their kids up at the corner and being able to take advantage of the master plan amenities, the pool, the clubhouse, the tennis courts, et cetera.

And so we really like doing it this way where we're part of master plan communities and we're getting great reception from the master plan developers, some of those are in communities where Toll builds.

And as for the economics, Marty?

Sure.

So our planned investment in this venture is approximately $60 million.

That investment will be deployed over roughly 36 months.

It'll be harvested back hopefully at a 3x equity multiple over the subsequent 36 months and all of our overhead associated with our role in this business will be absorbed by the joint venture.

Got it.

Pushback that people have out there that, I'd love your comments on, Doug, you just said homeowners don't want renters in their community and there is going to be a backlash.

How do you read about that?

You need to see it to understand it.

It's professionally managed.

The renters are families who are going to probably one day become homeowners, maybe even the same community because they like it.

And I think there is enough precedent and history out there to show that, that's not happening.

And based on the master developers, who are big and sophisticated and have certainly done their research, they are embracing the opportunity to sell sections of their community to BB Living.

And I don't think they would be so short-sighted as to take a few bucks on one section to compromise everything else they're developing.

These residents have a pride of ownership.

They're putting pumpkins on the front of their houses in the fall or when Christmas lights up in December.

They do take pride in where they are living.

Our next question comes from Ken Zener from KeyBanc.

And Mr. Zener has disconnected.

Our next question comes from Mike Dahl with RBC Capital Markets.

I wanted to follow up on some of the commentary you provided around some of the geographic dynamics on pricing and ask it on contracts about specifically the West was extremely strong off of what was still a difficult comp.

And so wanted to just dig in a little bit and get a sense for which specific markets we're really driving that strength?

Or was it really broad-based across that segment?

Yes.

Mike, the 2 primary drivers of the 23% up in units in the West were Boise and Denver.

Got it.

Okay.

And the second question I had was just, could you give us an update on where you stand with Metro Crossing?

What's in backlog?

And I think last quarter, you talked about some of the push outs on some of those units, just an update on next couple of quarter deliveries from Metro Crossing?

And how that may influence margins as well, if you could?

Metro Crossing is now moving forward according to plan, as we mentioned on the last call, with the historic range in Northern California over the last 6 or 8 months.

There were some construction delays.

We are now scheduled to begin closing units at Metro Crossing in the fourth quarter and they will -- because of the size of the backlog that will continue into 2020.

Okay.

And do you -- could you provide the updated backlog for that project?

We'll have to get back to you with that, Mike.

Our next question comes from Matthew Bouley from Barclays.

Just back on California, I think just year-to-date gross margins, I think it's still been running kind of several hundred basis points ahead of the rest of Traditional Home Building.

How does that differential look in your backlog today just given the demand trends we've seen there these past few months?

And kind of any sense you can provide beyond the fourth quarter on that margin differential would be helpful as well.

Sure.

So the California margins continue to be in excess of company averages and not dissimilar from what we've reported in the past.

Okay.

Perfect.

And then, Doug, when you said that you've increased prices modestly in light of the strong start to the fourth quarter, just wanted to understand the timing there.

Is that a comment specifically around the first 3 weeks of August?

Or have we -- can we see any of those price increases already in the order ASPs from Q3?

And really just on a net basis, would you say that you have increased your prices net of some of what you talked about with some of the softer markets?

It is the 3 weeks of August.

So now you would not see it in the Q3 orders, and it is pretty much nationwide.

Our next question comes from Jack Micenko from SIG.

Certainly about the incentive and pricing power question a little more, is there any product type or price point range you talked about regions, but what about product segmentation, any -- maybe performing better or worse around the incentive and pricing discussion?

No.

It's pretty much across the board.

Okay.

And then sales pace has come in 2 quarters in a row double digits.

And I know, I think for you guys, it's more of an output than an input, but just thinking big picture wise, as you mix 2 lower price points, does that change your thinking?

Or does that change the way we should think about sales pace and think about modeling the company forward?

I apologize, I do not understand the question.

I think just the question is...

Go ahead.

Generally speaking, you're going to sell more $500,000 homes and $3 million homes, and is that mix that you're sort of transitioning towards change the sales pace outlook from where you said?

No.

I think it is fair to say that in the mid-4s, we're generally going to sell more homes than we're going to sell in the mid $2 millions.

We have the one example we've given of a very successful community in Phoenix that is now up to 71.

Is it Gregg?

Yes.

There you go, 71 sales since we opened about 10 months ago with the average price in the high 300s.

So I think it's, as I said, it's fair to say, as you go down in price, the buyer pool is bigger.

There's more people that can afford a $400,000 house and can afford a $2.5 million house.

So the more traffic means the more deposits, which means the more agreements and we, of course, underwrite those communities to have a higher pace as they should.

So I think as price does come down a bit, the sales per community should naturally go up a bit.

Our next question comes from Jade Rahmani from KBW.

Can you tell us what percentage of deliveries this quarter were from spec sales or quick delivery homes?

And how that compared with last quarter and perhaps a year ago?

One moment please, as Mr. Ziegler gives us that answer.

So this quarter, our spec settlement as a percent of total was on high-teens, call it, around 18%.

And I think you asked a year ago, it was mid-teens, call it, 13%, 14%.

Okay.

I was also wondering if you could provide any color on the New York City condo market just an overall update.

And also if you could inclusive of that on Toll's recent acquisition of the Marrakech Hotel site, look like maybe in off market or stressed acquisition?

Wondering if you're seeing any interesting opportunities there.

Sure.

So we can't comment on the specific land deal you mentioned, I'm sorry.

I'd love to talk about deals, but that one I cannot.

New York has felt better this summer.

We don't have as much open, of course, we talked about.

We haven't been buying ground in New York for the last 4 or 5 years.

It's only 3% of our business at the moment, but it feels better this summer.

Our next question comes from Megan McGrath from Buckingham Research.

Just a couple of quick follow-ups.

Sorry, if I missed this.

But could you give the actual incentives per home this quarter?

I think it was $34,000 last quarter.

Megan, I think our preference because all the moving parts associated with that kind of dollar figure is to give you a percentage.

It was 4% a quarter ago.

It's down to 3.8% now.

Okay.

Great.

And just follow-up on that in terms of the gross margin, thinking about both next quarter and I know you're not giving guidance for next year, but how much of next quarter's implied sequential decline?

You talked about the mix issue, but how much of that is the higher incentive starting to roll through 4Q compared to 3Q?

And should we think about the build cycle?

I think these numbers were on orders.

So like a 9-month build cycle as we think about how these headwinds might roll through on their own over the next couple of quarters?

I think we've talked about some of the timing differences involved in the gross margin guidance as said today versus said 90 days prior.

We're very comfortable with the margin guidance we've given.

Certainly, the incentive growth that has happened during the challenge sales period is starting to see its way into the margin, and we're going to leave it at that.

Okay.

And then quickly there was an article this morning in the journal on Horizon.

I think they were calling an unconventional loans non-QM.

Maybe you could take this opportunity to comment on any financial statistics or the health of your particular buyers?

We really haven't seen much change in the buyer profile.

Still around 20% to 21% cash, still around 67% LTV and not much change between the conventional and jumbo mix.

Our FICO scores are right on where they were 3 months ago, at 762.

Our next question comes from Jay McCanless from Wedbush Securities.

Marty, could you give us what the incentive percentage was in 3Q '18?

It was approximately 3%.

And then wanted to ask Jack's question maybe a different way.

If you guys are talking about going to a lower price point trying to buy more land under or lots under $500,000 and then also talking about 1/3 of your lots being finished lots, which theoretically should generate higher sales pace, why wouldn't your monthly orders per community, your monthly sales absorption, why wouldn't that move up over time?

Or did I misunderstand your answer, Doug?

No.

I think it will.

I mean over...

Yes, I think, as I said, we underwrite and expect and have seen higher sales paces at lower price points.

We've got more buyers.

And as we continue to diversify and expand our offerings across multiple buyer segments and price points and demographics, you should see a higher velocity because of that.

Do you think Toll is at the -- or you guys are at the point now where it can start to inflect over the next year?

Or is it still shifting the mix going to take a couple of more years before we see that type of inflection in the sales pace?

I think it will take, I'm not sure, a couple of years, but it will take time.

We are carefully and slowly expanding the price point.

So we've been talking about, what do you call, a T Select or Toll Lite or the 3 Series BMW as these millennials hit their mid-30s and become homebuyers because they are 10 years older than their parents, who bought in their mid-20s.

They -- many of them are wealthier and will be able to afford a little bit more expensive starter home that, that's the group we're focused on.

We're not focused on going down and grabbing the $180,000 homebuyer.

We're focused on going after the modestly more affluent first-time homebuyer, that's a little bit older, which is what these demographics are supporting.

It's still luxury.

It's still different.

We're committed to our brand and focused on it.

We are carefully going down in price making sure all fits within the way we operate with our brand, the homes we deliver, the service we provide.

And so the answer to that long story is, it will take a little more than a couple of months or even a couple of quarters for you to see that difference.

Our next question comes from Alex Barrón from Housing Research Center.

I wanted to see if you could expand a little bit more on BB Living?

In terms of what are some of the -- I mean have you guys put on a few more deals since you launched this?

Have you expanded to other states beyond the Arizona at this point?

And is this $60 million just an initial commitment?

Or is this pretty much the extent of the commitment that you see?

Or is that going to depend on how this opportunity evolves?

Well, I think any subsequent commitment will certainly depend on how this opportunity evolves.

The venture at this point has acquired a parcel.

It has a pipeline that I would consider encouraging.

The markets that we are evaluating are Arizona, Boise, Denver and some Texas markets as well as Florida.

And we're encouraged by the opportunities we're seeing, the way the venture is working together and the receptivity from the master plan community developers too, including the rental product.

Okay.

Great.

And then in terms of the numbers you'll be reporting and the way this deal is working out, is that all going to be like off balance sheet like in the joint venture?

Are you guys owning this land on your balance sheet?

Are you reporting any -- are you going to be reporting any like units?

Can you just give us a sense of how we can track the progress of BB Living?

This will be in our investment in unconsolidated ventures line items.

We will not include any deliveries or lots in our Toll Brothers' deliveries or lots data.

This is roughly a $400 million piece of equity that the 3 parties have agreed to contribute.

We are $60 million of that.

It will have some element of leverage that is still being developed where you will only see this as an off balance sheet joint venture as currently structured.

And our next question comes from Ken Zener from KeyBanc.

So, Doug, obviously, there's a lot of talk around price points.

Let me ask you this just to make it a bit more quantifiable.

The backlog price, which is down about 6% average sales price, is down about 6% year-over-year.

Obviously, backlog price versus close exits tend to be higher because of the higher price units stuck there.

But what's wrong with the logic to assume that is the forward price trend you will see as we move into FY '20 somewhere in that magnitude?

Ken, that is mix primarily driven by less California.

So wouldn't that still apply to what your ASPs will be trending towards?

Yes.

And then -- now by the way, Doug, the BMW 3 Series peaked in 2015 in the U.S., but the California stuff, meaning the order -- sorry, I just wanted to give you that update.

The order rates that we've seen, I mean, clearly, California, the CAR has given data today.

Orange County, where you guys drive a lot of profits, I mean, the existing sale side is kind of flattening out, the declines are over the inventory, increases are over places like Riverside are doing better and the Bay Area is okay.

But what you're seeing in terms of the lower orders, how can -- is there a way that you could express to investors that, that's not going to result in margin compression next year as today's orders flow through?

I mean what would be the logic that would keep one from coming to that conclusion?

We will discuss 2020 in 3 months.

As I mentioned earlier, very little of the California order decline in Q3 came out of South Cal.

It was much more out of Northern Cal where we had a very tough comp.

We're doing well in our locations in Orange County.

We're doing well in LA County.

We have a very large new community that will be coming online next year in LA County.

So no, I would not jump to the conclusion you are jumping to about next year.

And the Western region, of course, we break out California because of its size but the West is seeing significant growth and very strong gross margins.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session.

I'd like to turn the conference call back over to management for any closing remarks.

Jamie, thank you very much.

Thanks, everyone, for your interest and support and enjoy although that we have of the summer.

Thank you.

Ladies and gentlemen, the conference has now concluded.

We do thank you for attending today's presentation.

You may now disconnect your lines.