Operator: Good afternoon. My name is Don and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers Second Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
Thank you. Mr. Douglas Yearley, you may begin your conference, sir.
Douglas C. Yearley, Jr. - CEO: Thank you, Don. Welcome and thank you for joining us. I am Doug Yearley, CEO. With me today are Bob Toll, Executive Chairman; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance, International Development 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 Greg 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 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 e-mail questions to firstname.lastname@example.org.
As has become our regular practice, we are going to limit our prepared remarks to provide more time for Q&A. Since our detailed release has been out since early this morning and is posted on our website, I'm sure most have read it, so I won't re-read it to you.
Our fiscal year 2013 second quarter ended April 30. Fiscal year 2013's second quarter net income was $24.7 million or $0.14 per share diluted compared to net income of $16.9 million or $0.10 per share diluted in fiscal year 2012's second quarter.
Fiscal year 2013 second quarter revenues rose 38% in dollars and 33% in units. Net signed contracts rose 57% in dollars and 36% in units and our backlog rose 69% in dollars and 52% in units compared to fiscal year 2012's second quarter.
On a per community basis, fiscal year 2013's net signed contracts were the highest for any second quarter since fiscal year 2006. Demand accelerated significantly this quarter. Our strong brand, land position and capital base are giving us a competitive advantage in many of our markets. Buyers who have been on the sidelines for six years are jumping in. Low interest rates, improved customer confidence, a strong stock market, rising home prices, and a reawakening economy are stoking demand in our luxury market.
One year ago, we were somewhat reluctant to raise home prices for fear of crimping demand. Now we are finding that in many markets as prices increase, a sense of urgency takes hold and demand continues to rise. We have raised prices this quarter approximately $26,000 per home on average. We continue to take advantage of land opportunities. In the second quarter, we spent approximately $165 million on land. This quarter, we also put under option another $381 million on land totaling 2,833 lots.
One site we bought is for our first active adult community in the Western U.S. in Metro, Denver. We entered the active-adult market in 1999 and are excited to continue to expand our active-lifestyle brand across the country as we follow the baby boomers entering the next phase of their lives. With our backlog up 69% in dollars and 52% in units and with our community count increasing throughout fiscal year 2014, we expect continued growth over the next few years.
Now, let me turn it over to Marty.
Martin P. Connor - CFO and Treasurer: Thanks Doug. Second quarter homebuilding gross margin before interest and write-downs as a percentage of homebuilding revenues was 23.3% compared to 23.2% in 2012 second quarter. 2013's first quarter was 23.4%. The small decline in margin compared to last quarter is a result of mix. Our margin exceeded our guidance because the mix of deliveries from lower margin communities was not as large as expected.
Second quarter interest expense including cost of sales dropped to 4.5% of revenues from 4.7% in fiscal year '13 first quarter and 4.7% in fiscal year '12 second quarter. The improvement over the prior periods was caused by delivered inventory being held for a shorter time.
Second quarter SG&A of approximately $79.6 million was higher than the $68.3 million in the second quarter of 2012 and higher than the $78 million in the first quarter of 2013. As a percentage of revenues, though Q2 fiscal year '13 SG&A was 15.4% compared to 18.4% the previous quarter and 18.3% a year earlier. The improvement as a percentage of revenues was due primarily to higher revenues.
Second quarter other income and income from joint ventures, excluding impairments was $24.5 million, reflecting amongst other items a $13.2 million gain on settlement of a lawsuit, a $2.1 million gain on land sale and a contribution of $2.1 million from our Gibraltar operations. The average number of shares used to calculate earnings per share was approximately $178.1 million for the second quarter.
Subject to our normal caveats regarding forward-looking statements in today's release and in our SEC filings, we offer the following limited guidance. We ended second quarter 2013 with the backlog of 3,655 homes, aggregating $2.5 billion which was 69% higher in dollars and 52% higher in units than second quarter of 2012. We expect that deliveries in 2013 will be between 3,850 and 4,200 homes.
We again encourage you to use our average third quarter backlog conversion rate for our last rapid growth period, 2002 to 2006, as the best indication of our delivery expectations for the third quarter. Furthermore, we expect to deliver about 25% more homes in the fourth quarter than in the third quarter.
Our average delivered price per home in the second quarter of 2013 increased to $577,000 due to an expected shift in geographic and product mix. We estimate the average delivered price per home for the full year to be between $610,000 and $630,000. Our third quarter average delivered price should be about $25,000 higher than the fourth quarter.
I'd also like to set some margin expectations. The following commentary includes interest, but excludes impairments. In the third quarter, with the high-margin high-rise project delivering and price increases from other community starting to come through in revenues, margins are expected to improve approximately 275 points over Q2. In the fourth quarter, margins are projected to come in around 200 basis points over Q2.
In our year-end 2012 call we guided to flattish gross margins for the full 2013 fiscal year. With the benefit of first and second quarter sales and deliveries behind us, we now expect margin improvement for the full year '13 compared to '12 to be approximately 80 basis points higher.
Again, all of the above figures include interest but exclude impairments.
Finally, the range for our year-end community count remains 225 to 255. But as we've said before, the growth will happen late in the second half of our fiscal year.
At this point, I'll turn it over to Bob.
Robert I. Toll - Executive Chairman: Thank you. Most recent ISI survey of large and midsized builders is near record highs. For those builders who have the capital to buy land and build homes it is a very good time. We believe the industry is still in the early stages of a recovery. Even so, this quarter our pace of contracts per community was consistent with second quarter paces we produced in the decade from '93 to 2003, as the industry normalized after the previous downturn.
While up significantly from the bottom, April 2013 industry-wide total annualized housing starts were approximately 853,000, just 55% of the 1.5 million houses started annually, on average, between 1987 and 2006. With new home production still well below the volumes required to meet projected demand based on history, population growth and the pace of current household formations, we believe we and the industry have lots of room to grow.
Thanks for listening. Back to you, Doug. Q&A time.
Douglas C. Yearley, Jr. - CEO: Thank you Bob. Okay Don, line them up.
Operator: Stephen East, ISI Group.
Stephen East - ISI Group: Bob, I'm glad you find our survey helpful. I think it's – I would agree I think it's one of the best surveys you will find out there and it gives a good reflection of what the big builders are doing. Can you just help us understand a little bit, Doug, maybe when you look at pace versus price today and compare it to how you were thinking about it a quarter or two ago, and where do you think the pricing metric goes over the next several quarters?
Robert I. Toll - Executive Chairman: Well, we of course focus very much on backlog when we decide on price increases. That's what we spend most of our Mondays doing and of course when the backlogs are bigger and the next home sold takes longer to deliver, we're more aggressive with pricing. So we don't raise price by market, we raise price by community, based on the action in that community. The best sale season of course is January through April. So when you talk about looking back a quarter or two, we have just come through some terrific times where we've had great sales and we've had significant price increases. If you ask where it goes for the next few quarters, we will continue to raise price. We don't see anything getting in the way of that. Backlogs are growing, but we are heading into the summer. So, the sales through the summer are generally not as strong as the winter, but based on what we are seeing right now in late May, I think you can expect us to continue to raise price and business will be – is and will be good.
Stephen East - ISI Group: And then if you look at…
Robert I. Toll - Executive Chairman: I want to add to the remarks started by your question. The other builders, big, small, large also have backlog slots that they look to fill, and I would guesstimate that they have filled their backlog slots as we have filled ours, which means that the next house that a guy sells is not the 10th house he's got to produced, but the 20 or the 25th house that he's got to produce, because he is in a situation where you can't deliver those in less than a year, he, she or us or we say to ourselves, why not raise the price on this 26th house or this 27th. So, I think we're in a situation where as Doug said, although the summer is slow traditionally, you probably will see price increases greater than you did a summer ago or two summers ago or even back when times were good, not when times were silly but when times were good.
Stephen East - ISI Group: If you look at – Doug, you mentioned what's in your backlog and how long it takes you to run through it. What type of gross margin do you all have embedded now in the backlog and just sort of relate that to, I know, last quarter, you talked about the cost inflation you were seeing wasn't giving – versus your pricing – wasn't giving you much of a bump and sort of how that dynamic is changing, some type of magnitude there?
Martin P. Connor - CFO and Treasurer: Steven, it's Marty. I think the margin in our backlog, we'll say, is better than the margin we are delivering today, but I don't want to get into the specifics. I think we've given some commentary on what we have raised prices in the quarter from the beginning to the end of the quarter. We want to caution that that doesn't mean we've raised prices $26,000 on every house in the backlog. First, we raised prices on average $2,000, then $5,000 and then $10,000. So through the course of the quarter, we have homes that we have homes that we have contracted for that are less than that $26,000 increase, just to give you an order of magnitude. In terms of cost increases we are seeing, which is the second piece of that question, this quarter, things moderated a bit. They were only up around $700 a home. We saw lumber go up dramatically and start to come down. It's still about half of that $700 that is lumber-related price increases. I'm sorry, is that right? No, I was looking at labor, excuse me. Lumber is even, labor is about half of that. Those are my 49-year old eyes.
Stephen East - ISI Group: I feel your pain on that one. Thank you, guys. Great quarter.
Operator: Ivy Zelman, Zelman & Associates.
Ivy Zelman - Zelman & Associates: Doug, you mentioned that the margins, or maybe Marty, it was you, that sequentially your guidance – you actually did better than you guided for the 100 basis points sequential decline and maybe it was that you had lower margin deliver in the mix. What I guess I would wonder what happened there, obviously those homes are in backlog. It wasn't as if you raised prices on them and should we expect that that negative mix is going to be impacting third and fourth quarter and then we're broadly when you think about the legacy communities where you have lower margins, or you expect that those are going to be lower margins? What percent of the, I guess, next 12 months of order activity would you say is that an overhang or a better way to think of it that your active inventory?
Douglas C. Yearley, Jr. - CEO: Smart. Let me address the first two-thirds of that Ivy if I can. We've sold and delivered more townhomes and condos in the quarter than we had expected. Some of those condos and townhomes are in our urban product and have higher margin. So that was the good news. The other good news which turns into bad news is that some of our lower margin deliveries slid from the second quarter into the third quarter. So they will hurt the third quarter, but that is factored into the margin guidance I've given and their hurt on the third quarter, which is a higher revenue quarter than the second quarter, is less than it would have been in the second quarter. In terms of lower margin older communities, I don't think we study that, but they are naturally going to be a lesser percentage of the total as we sell out of some of those and the margins we see from our more recent openings are starting to gap more positively than they had in the past from the margins in the older communities.
Ivy Zelman - Zelman & Associates: And then just broadly, your community count is kind of flat and Doug, you mentioned you expect to see community count growth in '14. Is there delays that you're experiencing that's causing community count to remain flat? And then just a second part question to that, your pace when pace you talk about going back to '03 to '06 pace and recognizing that April and the spring has been very good for the industry, Doug, can you talk to what you think a normal pace per community per year you could expect to achieve because you've got higher than you normally have been and there's been a slower pace historically versus your peers which we would expect, but you actually got closer to your peers' pace in this recent quarter than you've been to before. So I kind of just want to understand what your expectations are and should that gap continue to narrow or what is the annualized pace that you're most comfortable guiding to?
Douglas C. Yearley, Jr. - CEO: Sure. On the community count question, we are selling out of communities faster than we had anticipated because of the hot market. So we're opening communities but the net number has stayed flat. But as Marty mentioned in his comments, the fourth quarter we see as the quarter where we begin to grow net community count and that accelerates through 2014. On pace, we have some room to go to increase pace; again it's very community specific. We are ramping up construction teams, we can handle it. Are we bridging the gap with the others? Well, our homes are a lot more expensive, a lot more complicated. We put $100,000 of upgrades into an average house. So, I don't think we will, and I don't think we want to – I know we don't want to ever get to the absorptions of the others. Remember, our mix has changed. We have more multifamily now. We've more townhomes. We have more urban and when you get into the higher density multifamily, you tend to have higher paces. So, be careful not to compare today's pace with historic numbers when we were a very different company.
Ivy Zelman - Zelman & Associates: So what do you think the right pace is that we used to talk about the number of homes that you could do on an annualized basis that's normal? And so I think that that number might not be applicable today that you've spoken with me about in the past. What do you think the right bogie is on an annualized basis per community with the mix changing to more attached product?
Douglas C. Yearley, Jr. - CEO: I think it's mid-20s. Maybe with more attached it could get into the high 20s. But remember, we have communities in Florida that sell $2.5 million homes that can probably handle 12 a year. And we have jewel box active adult communities where we can handle 60 or 80 a year. So, it's an average of many different parts of our business that are not similar but I think mid to high 20s is a good bogie.
Ivy Zelman - Zelman & Associates: Let me sneak in one more, but that was a great answer. And maybe this question is for Bob, but a lot of people that I mean where they are always talking about the fact that we are having an ageing population that soon who want to downsize and leave their large homes or go to something in a condo or even go into assisted living and we are looking at the peaking of baby boomers and concern about that impact. We certainly don't see it in the near-term, but how are you preparing for that as a company. Is that the mix strategy that you are employing right now and continue to expect that you will move more to the mix of attached and condo living because of that phenomena?
Robert I. Toll - Executive Chairman: I don't think it's because of the phenomena, I think it's because of the opportunities that are presented to us. But there is no doubt after discovering the urban business that we are doing (indiscernible) offering that is geared to not just the young professional hedge fund manager, master of the universe, but is also geared to the people that have made it and decided they want to go back to the city. And therefore, the answer to your question is we are not following what we see to be the change in the demographic. But we don't turn down any opportunities on that basis to do large single-family luxury homes or even the executive size of the single-family home.
Operator: Dan Oppenheim, Credit Suisse.
Daniel Oppenheim - Credit Suisse: I guess, listening to some of the comments there in terms of the backlog is filled, the backlog for others is filled, the communities are coming online and so prices are going up. But as we think about the quarter starting there in February, did you, sort of, as the quarter started and you didn't see your shadow on pricing. Was there a lot more significant as the spring season went on, so that if we look at those trends for April as far more significant than that 26 average for the quarter?
Douglas C. Yearley, Jr. - CEO: No, I don't think so. I think it occurred throughout the quarter. We had price increases in about 60% of our communities that accounted for about 70% of our sales, and I don't think it accelerated through April. I think it was consistent and it continues to stay consistent through May.
Daniel Oppenheim - Credit Suisse: Then, I guess in terms of the backlog conversion and there's certainly a lot of talk of backlog conversion of the homes, if we think about backlog conversion in terms of the land based on the supply, you talked about that, sort of the community count growth accelerate into '14. How much sort of emphasis is there, so that we'll see much more of that coming – what is the aim in terms of that for '14?
Robert I. Toll - Executive Chairman: I think, for community count guidance for '14, we'll give at the end of the year.
Martin P. Connor - CFO and Treasurer: Dan, I think as we said at the beginning of the year, we're kind of sticking pretty close to it. We're opening right now about a community-and-a-half a week and we're selling out of a community a week. We think that ratio will actually improve next year in that we will be increasing the total number of our communities in '14 compared to the end of '13. We're not really prepared right now to set a specific number on that, but the growth in '14 should be bigger than the growth in '13.
Douglas C. Yearley, Jr. - CEO: That's correct. It will accelerate.
Operator: David Goldberg, UBS.
David Goldberg - UBS: My first question is about the kind of geographic mix shift in terms of new land purchases and if we should expect the new lots that are being put on option are being purchased or maybe geographically situate a little bit differently as a more California exposure given what's going on in that market or should we expect it to stay pretty similar?
Douglas C. Yearley, Jr. - CEO: We're happy to say this quarter there's more in California, more in the West than in prior quarters and we certainly have a focus out there, that market is so strong. But I think you'll see it everywhere we were growing pretty rapidly in Houston and Dallas. 48% of the land deals we've done in fiscal 13 have been from the west.
Martin P. Connor - CFO and Treasurer: Optioned. This is optioned.
Douglas C. Yearley, Jr. - CEO: Optioned. Thank you. So we're focused out there, but we're also very opportunistic and we're looking at deals everywhere.
David Goldberg - UBS: And then just as quick kind of housekeeping question, you guys on the last couple of releases have talked about reservations for the first couple of weeks post the quarter. I know it wasn't on the release this time. I assume there's nothing to that just given how strong demand is, but would you say that the pace is decelerating a little but just because you are focused a little more on raising prices, and so as we kind of move through, you might have seen that in the reservation numbers?
Martin P. Connor - CFO and Treasurer: David, for the first three weeks of the third quarter, we were up about a half a home per community in agreements and in deposits compared to a year ago. And remember, a year ago is a pretty tough comp, because we were up significantly a year ago. Our third quarter total was up 60% in agreements over 2011.
David Goldberg - UBS: So pretty robust in terms of additional growth on top, that's great.
Martin P. Connor - CFO and Treasurer: Yeah, its 25% to 30% up in terms of agreements and deposits in the first three weeks compared to a year ago.
Operator: Adam Rudiger, Wells Fargo.
Adam Rudiger - Wells Fargo: First question is just a modeling one, I think Marty, in last call, you mentioned that about $82 million in quarterly in SG&A was a decent average for the year, is that still intact?
Martin P. Connor - CFO and Treasurer: It is still intact.
Adam Rudiger - Wells Fargo: Second question is, we're seeing some smaller private companies emerge to public companies now and we've seen from other private companies raise some additional capital. I was just wondering if you'd seen that additional liquidity from other players kind of where it's headed in the land market yet from a competitive perspective?
Martin P. Connor - CFO and Treasurer: No, not in our end of the market.
Robert I. Toll - Executive Chairman: Not yet.
Operator: Buck Horne, Raymond James.
Buck Horne - Raymond James: I guess maybe said another way, back to the land question. Would you characterize the current environment for land positions? I mean, how competitive is the current environment for betting on land and is the underwriting remaining disciplined? Are you still seeing normalized margins and IRRs, are we seeing others baking in significant price appreciation to make these numbers pencil?
Douglas C. Yearley, Jr. - CEO: The land market is hot in many places, Northern Cal, we have a community in Sunnyvale and Silicon Valley. We have taken 18 contracts in the second quarter, raised the price $280,000 over the quarter. We are up $500,000 since October and when we opened, we sold 41 homes. Obviously, that translates into a very hot land market and we are continuing to be careful and conservative in our underwriting. We have found some, what we think, are terrific deals in Northern Cal. It's very competitive. Are others baking in some inflation? Probably. Based on some of the numbers we see, we think that must be going on. But when I talk about these types of price increases since October, it seems it sure is working.
Buck Horne - Raymond James: Also what are your thoughts about potential M&A activity with – are there interesting plays among maybe some of the private builders that maybe a little bit more capital constrained into the market. Given your ability to raise capital in some of the pricing terms that the street is affording, all of the homebuilders right now, does it makes sense to go out and be a little bit more aggressive on the M&A side?
Douglas C. Yearley, Jr. - CEO: Right now, not for us. We haven't seen those opportunities. We have acquired seven builders in our history. Everyone was to enter a new market. We are very happy with the footprint right now. So, we are not looking at a new market to enter which we would consider – where we would consider a builder acquisition. Remember, when you buy a builder, you have good land, you have average land, you have some bad land, and then you pay premium for the organization. So, right now, we're focused on buying only good land in the best locations where we already operate, and so we're not all that enamored with the smaller builder deals that are coming along.
Buck Horne - Raymond James: If I can sneak one quick one in, did you ever break out for the new orders that were your City Living or part of the City Living projects, and what the average value of those City Living orders were?
Douglas C. Yearley, Jr. - CEO: While Greg is looking that up, let me just tell you what happened this quarter with City Living. We have two buildings that opened; 1100 Maxwell Place which is our newest Hoboken building; we sold 75 home units into February, raising the price on average $140,000, and we opened 160 East 22nd Street which is 22nd on Third Ave also in February, taking 27 agreements, raising the price $275,000 since February. So, Greg, those are the two unique City Living buildings and what do they account for?
Robert I. Toll - Executive Chairman: So Q2 of '13, City Living sold 157 units. The average price was just over $850,000, and of our consolidated results including JVs, that's 11.1% of the sales in dollars for the quarter.
Operator: Stephen Kim, Barclays.
Stephen Kim - Barclays: Wanted to just ask you first a housekeeping question. Your construction in progress that you reported on the balance sheet or in your old version, can you give us a sense what that number was this quarter?
Martin P. Connor - CFO and Treasurer: Yeah, it was $2.419 billion.
Stephen Kim - Barclays: Second question I had relates to your gross margin. I know you talked about the fact that in the third quarter there's going to be some of these homes that I guess you would initially expected would be delivered into the second quarter. So, that's going to be a little bit of a headwind for you in the second quarter. And at the same time, I also know that you are expected to have deliveries from the terrain in that quarter. I just want to, I guess, make sure I understand, when you're talking about a decline or a lower margin contribution from some – it's going to be landing in the third quarter – is that primarily a geographic issue or is that a function of communities that are selling a somewhat lower-end product in your spectrum, really is it geography or is it a price point issue?
Martin P. Connor - CFO and Treasurer: It is community specific. It is not geographic. It is not price point. Some of our communities regardless of product type or location have lower margins than others and those are the ones where we saw some expected settlements slide from the second quarter to the third quarter. But that's not to be significant. Remember, we expect roughly 40% more revenue in the third quarter than in the second. So these few homes that slide are not that significant.
Stephen Kim - Barclays: I guess where I'm really going with this is that you've seen some tremendous price appreciation. I mean, you've seen price appreciation that's pretty much on par it would seem in most of the hot markets with your peers or even greater and yet the margin guidance you're giving seems to be a much more conservative than some of your peers. And I guess I'm curious as to whether or not this reflects a bit of a coiled spring that we might see lead to significant improvement in gross margin in 2014 or there's something else that's more structural in your margin, and I guess the only structural thing I can really think of is that when I look at your Company's margins in the past, you peaked out somewhere in north of 30%, you're well below that now. I guess the only thing that really comes to my mind is that you have a much longer land position than many of your peers, and so perhaps that 30% plus gross margin you achieved at the peak was a result of many, many years of price appreciation which some of your peers weren’t able to capture that you were. And I guess, do you believe that that was a major driving force behind your margins reaching such high peaks back in the mid-2000 or do you think that it really was primarily a function of just raising prices on a let's say, trailing two to three year basis because if it's the latter, I would expect your margins would be approaching those prior peaks within the next couple of years?
Robert I. Toll - Executive Chairman: We're certainly ready for that phenomenon to takes place, but I wouldn’t say that our prices went up because of pricing power in last two years. I think the description you gave at the initial try, of what forced our margins up was more accurate. We had long land positions that finally came through the (sneak), and when they spit out, they spit out with tremendous increased profits and therefore margins. And I would expect that we're building a backlog in land to replicate what happened before. So I think it's primarily the long line of growth, but we do increase prices as much as we can and especially when we run up against high backlogs in the communities that we are studying every Monday.
Martin P. Connor - CFO and Treasurer: I guess I would add that many of the other builders have a shorter build cycle. So, in an improving market, they can turn an order into revenue quicker than we do. So, the price increases they get, they start reflecting three to six months later in their income statement. It takes us nine to 12 because of the larger homes and the longer lead time. I would also say that one of the benefits of our longer land, whether this happened before or happens now, is that appreciation will benefit most of the lots in that stockpile as compared to going out necessarily and having to buy at current prices land on an appreciated basis. Now that's a generalization, location is important in all of that, but that's part of our strategic view.
Robert I. Toll - Executive Chairman: We are seeing recently size making a difference, because of the size of the company and the ability to raise money so easily in the bond market, we were able to take on deals that only a few of our competitors can take on as well, so that's adding this time around.
Operator: Nishu Sood, Deutsche Bank.
Nishu Sood - Deutsche Bank: Wanted to ask about your land acquisitions so far this year. Since the beginning of your fiscal year, you've optioned more lots in terms of your additions than you have purchased outright, and that certainly runs counter to the trend to the general description of the land market out there that the infrastructure for optioning lots, financial infrastructure just isn't there like it used to be during the boom. So I just wanted to dig into that a little bit. One thought that came to mind was obviously since you guys do more land development, those sort of options may play a heavier role. Just wanted to get your thoughts on what's enabled you to option more successfully than we are generally hearing.
Douglas C. Yearley, Jr. - CEO: I think we have a greater appetite for option lands than some of the others. Remember, we have a very long land position. We had 90,000 lots and we shed almost all of our option land, so that we were left with 30,000 and now 45,000 lots, most of which was owned. So we are in a good position in most of our markets with owned land, and so we tend to look further out and look to tie land up that will come online after it's fully entitled when we actually close on it, which could be one, two, three, five years out. That's not to say we don't go after land that is fully approved or even improved, but I think because we're in a good position with the owned land and we've always had the appetite to do our own land approvals and land development, we are looking further out than the others.
Nishu Sood - Deutsche Bank: Second question, I wanted to dig in on…
Frederick N. Cooper - Finance, International Development and IR: Nishu, this is Fred. You mentioned the financial structure in place for options we are not typically land-banking types of options. These are basically more conventional options with the seller.
Nishu Sood - Deutsche Bank: The pricing on your new contracts, and I know that that's inexact figure given cancellations and whatnot, it accelerated to by our calculation to 17% order price basically year-over-year. I think I may have gotten the answer to my question earlier when you mentioned that you had some super sales out of the Hoboken and Gramercy project. I just wanted to confirm that.
Douglas C. Yearley, Jr. - CEO: I think it's a combination of prices increases and mix. Is it correct?
Martin P. Connor - CFO and Treasurer: Yeah. And I think you're asking what's the purchase price by your math coming out on a per lot basis that we've done so far in '13 and we're still following historical norms, whether we're buying it raw, which is the majority of lots we buy or improved which is the minority of lots. But that price per lot except for a couple of outliers that you're mentioning still follow historical norms of 10% of the sales price raw pushing 20% of the sales price improved.
Nishu Sood - Deutsche Bank: No, I was thinking of the pricing under new contracts just working from your backlog and your…
Douglas C. Yearley, Jr. - CEO: Yeah, I think he's off the lot issues when he was asking about the significant increase in price, is that because of Hoboken and New York and that's why I answered that it's a combination of mix and the price increases that we've achieved.
Martin P. Connor - CFO and Treasurer: So, California where we've had significant sales in excess of 1 million homes, I think we did in Southern California more than 1 a day for more than $1 million. Washington, Seattle, we had strong sales at higher prices points. Arizona, we had stronger sales at higher price points, particularly compared to a year ago. So, if you look in our supplemental data, I think we are north of $800,000 on an ASP or contracts compared to mid-5s a year ago (at West) and that is really a function of higher priced homes.
Nishu Sood - Deutsche Bank: So, does that mean that you're kind of marrying the trend that we're seeing in the broader market? You've seen the move-up market stronger than the first time buyer market. Obviously, that doesn't affect you folks, but also people being able to stretch their monthly mortgage payment a lot more. Are we seeing a similar trend here in what you're describing for you folks?
Douglas C. Yearley, Jr. - CEO: I think so. Don Salmon is here. He runs TBI Mortgage. Don, why don't you give a quick overview of the mortgage market?
Donald L. Salmon - President, TBI Mortgage Company: Well, I answered the question about stretching their payments. Stretching their payment is a function of interest rate; it's not a function of underwriting. Underwriting is still relatively tight. Most jumbo buyers, is what we're talking about, are maxing at about 40% DTI, but when you get to the lower interest rate, it obviously gives them the ability to stretch their payments. We're still in the 4% range on a true jumbo 30-year fixed-rate loan with no points. You can get a (10/1 arm) today with zero points at 3.25%. So that's an awful lot of buying power. When you look at that on an after-tax basis, you're approaching at 2% cost of capital to buy that asset. It's extremely attractive to people to do that, and that, I think that phenomenon is real and it's here. We will see if it continues, but here it is. In terms of availability, we're seeing a lot more, a lot more players in the jumbo market. We're dealing with two REITs today that we did not deal with six months ago and they are public REITs which is terrific. We're in a serious conversation with a major insurance company who is going to shift their asset purchases from MBSs into directly buying loans from originators. They love the Toll Brothers product and that's going to be, we think, a terrific both conforming in jumbo product, but the real advantage for us, I think, is going to be in the jumbo end. We're looking at ability to leverage the Toll brand with them in terms of helping them with maybe some insurance product through our Westminster insurance subsidiary which I think will help both companies. So it's that kind of stuff that's going on in the marketplace I think that will be very helpful to us.
Robert I. Toll - Executive Chairman: Nishu, I want to make certain that we a less misunderstanding with respect to definition of options land. We are not talking land that a builder buys 30 lots and then he has to take down 6 a quarter for the next year and then if he does that he gets to take down 30 more, etcetera. We are not talking about those kinds of options, which is developer to production build. What we are talking about is we put land under contract. We give a down payment and a promise to close when we secure the approvals and in some cases even installed infrastructure. And if during the term of that contract we decide that land is not as it was supposed to be in terms of generating potential profit for us, then we walk away and leave the deposit on the table for the land seller. So, that’s one man's option that another man would call it just an ordinary contract to buy land. So, I wanted to straighten out the confusion and definition of the word option.
Nishu Sood - Deutsche Bank: Then your 'option' you obviously describing a big bucket has grown faster than your peers, that makes sense. Thanks.
Operator: Megan McGrath, MKM Partners.
Megan McGrath - MKM Partners: I wanted to ask you a little bit about inventory. We got the macro U.S. housing data today at about five months of supply, but curious as to your thoughts either on a regional basis or for the luxury market, where you think the existing competition is now and any color you are getting from sales folks out there about any trend they are seeing if it's starting to increase at all?
Douglas C. Yearley, Jr. - CEO: No, we're not hearing that. There is still very limited resale inventory in, I think, all of our markets or almost all of our markets. We haven't heard that it's increasing. Remember, the used home market does tend to begin a little later in the spring than the new home market, because you can put your used home on the market in May or June and have it closed in August which is when people want to move in. So I think that occurs naturally later in the spring, but it is still at a very low number, which is helping new home sales, and we are not hearing about that increasing.
Robert I. Toll - Executive Chairman: We can get inventory into our (land).
Douglas C. Yearley, Jr. - CEO: Correct, we are trying to build more and more spec or what we call quick delivery homes, and they sell at foundation. So we can't even get sticks in the air that are unsold, because the demand is so strong.
Megan McGrath - MKM Partners: Then just a quick modeling question, a follow-up on the Touraine. Just want to verify that you are still expecting to deliver all of those units in the third quarter, and if you could just remind us on the numbers there?
Robert I. Toll - Executive Chairman: Sure. Megan, the Touraine is roughly $110 million of total revenue. We have not yet sold the penthouse, which is about 20% of that revenue, so that is not projected to deliver in the third quarter. The rest of the units, we are optimistic about delivering in the third quarter, but some of the more sophisticated detailed units, there is a potential for them to slide early into the fourth quarter.
Megan McGrath - MKM Partners: I'm sorry, what's the actual number of units.
Robert I. Toll - Executive Chairman: So there are 21 units sold, one unit still available.
Megan McGrath - MKM Partners: And then (average price was) about $4 million, yes?
Douglas C. Yearley, Jr. - CEO: We have about $90 million in backlog with those 21 units.
Operator: Joel Locker, FBN Securities.
Joel Locker - FBN Securities: I was just looking at your amortized interest that's I know was down 450 basis points or so. But back in '05 I think that (was down) as well as 220 basis points. But what are you seeing in say 2014, coming down a lot from these levels or maybe not close to '05, but just kind of where do you see that trajectory?
Martin P. Connor - CFO and Treasurer: I think the trajectory will continue to come down, because the inventory would have been held less and the more favorable pricing on interest on our debt will contribute to that as well, plus we will continue to have significant amounts of more inventory than debt. So, that should help us as well as we go into 2014 unless we choose to tap markets for additional debt. So I can't give you specific number, Joel, but it will continue to trend down.
Joel Locker - FBN Securities: And I was just curious on your mothball communities. I know you had about 90 two years ago when you had mothball, (a couple here and I think three). How many of those are left in mothball status and how many do you plan to take out, say, in 2014?
Douglas C. Yearley, Jr. - CEO: We're down to 71. We've opened five so far this year and we're projecting to open about nine for the balance of the year and we're not giving guidance yet on '14 community count, but right now we certainly expect to open more mothballs than the five plus nine for then the 14 for this year.
Operator: Jade Rahmani, KBW.
Jade Rahmani - Keefe, Bruyette & Woods: I wanted to ask with respect to the City Living business, if the pickup in CRE lending on the part of specialty finance companies and some of the banks creates more development opportunities. And on a related note, how comfortable you might be using project-specific leverage on your wholly-owned future City Living projects?
Martin P. Connor - CFO and Treasurer: So far right now, we are very comfortable building on our own balance sheet. We have put some project-specific debt on buildings where we have a joint venture partner in the past, and at Brooklyn Bridge, we may look to do that again as it starts to incur additional cost here as it's constructed. In terms of paraphrasing your term, easy money creating more competition out there, it may be the case. We haven't seen it overwhelm us yet.
Jade Rahmani - Keefe, Bruyette & Woods: Can you quantify the amount of City Living G&A that's running through your SG&A line?
Martin P. Connor - CFO and Treasurer: I don't think we're prepared to do that. We don't have that detail with us, and I don't think we look at it that way. We don't look at any particular geography or product type (differently).
Jade Rahmani - Keefe, Bruyette & Woods: And then just finally on the quality of the land deals you're seeing, how would you compare it this year and over the last six months with the types of deals you've looked at and executed on over the last couple of years? Beyond price, what other factors would you use to describe the deals, whether it'd be characterizing the types of sellers or whether it'd be the duration on when you would expect to bring those deals online?
Douglas C. Yearley, Jr. - CEO: As Bob mentioned earlier, I think we are doing bigger deals today then we have done maybe a few years ago when we were working with banks and the banks sometimes they are big problems but a lot of times they had small sub-divisions here and there that they needed to get rid of. We are taking advantage of our capital structure. Our ability to write the big check where there is lot less competition, but we are also doing the 15, 20, 25 lot, luxury, suburban, sub-divisions, communities. So, it's really all over the place, the seller haven't changed except the banks are but it's been that way for some time now. The banks are no longer sellers for the most part. We are going back to more traditional sellers. There is more land out there because the seller can now get a higher dollar. So, those sellers that made it through and we waiting for better pricing are now seeing that better pricing and bringing their land to market.
Jade Rahmani - Keefe, Bruyette & Woods: And how are the locations compare now versus the last couple of years?
Douglas C. Yearley, Jr. - CEO: I mentioned earlier that a half of the land we optioned this quarter came from our western region which we were excited about because that scenario we are looking to grow, that Seattle Northern Cal, Southern Cal, Arizona. The…
Jade Rahmani - Keefe, Bruyette & Woods: In terms of quality.
Douglas C. Yearley, Jr. - CEO: I'm sorry.
Jade Rahmani - Keefe, Bruyette & Woods: In terms of quality like A, B location versus are you seeing the location description move out?
Douglas C. Yearley, Jr. - CEO: No. If you are suggesting that the A's have been picked over and all is left is a couple of B's and lot of C's and D's absolutely not. I think the quality today is as good or maybe even better than it's been.
Robert I. Toll - Executive Chairman: Commitment and resolve to stay at Main Street, and Main Street is very strong.
Operator: Jack Micenko, SIG.
Jack Micenko - SIG: Net debt-to-cap ratio has moved up in the last couple of quarter, money is cheap, the business is improving. Is there a number we should think about? As to maybe where that tops out at or any other way to think about that?
Martin P. Connor - CFO and Treasurer: Jack, I think, we've operated in the past in the mid-to-upper 40s debt ratio and that number doesn't scare us moving forward, the way is to get there with the $900 million plus of cash we have on our books right now, and as we grow and make money, increasing the cap, we're not averse to taking on more debt as long as we see the appropriate uses for it.
Jack Micenko - SIG: Then, any updates you can share with us on the apartment announcements from last quarter and if anything has changed or there's anything incremental worth passing along there?
Martin P. Connor - CFO and Treasurer: I think we're pleased with what we see there. We're making progress on the deals that we have previously announced. They are still a number of years away from producing revenue for the organization. We have around $130 million invested in that enterprise, that $130 million does not count and offset for $50 million to $55 million of unrealized depreciation we have on some of our existing buildings. If you were to offset that, we'd be down in the $70 million, $75 million range. We like what we're seeing. We like the progress we're making. We like the partnerships we're forming, and we have optimism about that business for the long-term.
Operator: Jay McCanless, Sterne Agee.
Jay McCanless - Sterne Agee: Two questions, first one, did I understand or hear you guys correctly earlier that you increased prices at about 60% of the communities this quarter and if that number is correct, is that number consistent across City Living and then everything else Toll built, or what is that mix in terms of one versus the other?
Douglas C. Yearley, Jr. - CEO: The number is correct. It's 60% of the communities which represented 70% of the sales. And no, it's not consistent across geographies or product lines. City Living, we raised price, I think everywhere.
Martin P. Connor - CFO and Treasurer: Everywhere would be five communities.
Douglas C. Yearley, Jr. - CEO: Correct, correct. And in certain geographies like Northern California and almost all of Southern California, we're raising price, I believe everywhere when you get into Dallas, which is hot and Houston which is hot, we're probably raising price in 80%. So almost everywhere and then you get into some other markets that aren't quite as hot and they will be less than 60%. So it's not only – its product line driven and it's geography driven, and we do it on a community by community basis.
Jay McCanless - Sterne Agee: And then on the City Living delivery schedule that you all provided back in March, are there any changes to it besides the guidance that Marty gave about some of the Touraine deliveries potentially slipping into the fourth quarter?
Martin P. Connor - CFO and Treasurer: I don't think there's any changes Jay.
Operator: Alex Barron, Housing Research Center.
Alex Barron - Housing Research Center: I wanted to see if we could talk a little bit about the actual leverage we've seen in the business on the SG&A side and what we might expect as we move into next year. I was kind of looking at, I guess my expectations for your revenues and when the last time was that you guys got to those levels and I think it'd be helpful if you could help me understand with the staff you guys have on board, at the corporate level and how much would you need to hire extra people, I guess to handle what you expect to do next year in terms of deliveries? Maybe another way to put it is how fixed is the SG&A versus how much is the variable portion?
Martin P. Connor - CFO and Treasurer: I think we're doing our best to control that Alex, but we do need some more people. We've probably increased our staff size since our fiscal year-end by about 5% to 7% and we probably have another 5% to 7% of job openings. How many we will need a year from now is probably a little bit beyond where we are thinking at this point, but you'll see as you have our SG&A increase but we think it's modest and we think the leverage coming from the revenues will more than offset that to show SG&A as a percentage of revenues continuing to trend down.
Alex Barron - Housing Research Center: Well, this quarter, your revenues were up 38% and your SG&A was up 17%, which is great and SG&A as a percentage of revenue was still high this quarter, but I'm expecting that in a very short-term, we should be approaching I guess more normalized levels around 10%. In fact, I was looking at your historical levels and looks like before the bubble, you guys had some years where you were between 8% to 9%. So I was kind of wondering if that's somewhere where you think the business will trend over the next couple of years.
Donald L. Salmon - President, TBI Mortgage Company: Alex, I've given guidance on an average SG&A of around $82 million for each quarter for the year, it was a little below that for the front end, it'll be a little higher than that for the back-end. And either in my speech or in the press release, I mentioned that revenues in the back six months of the year are going to be 50% higher than the front six months of the year. So I'll let you guys draw your own conclusions from that.
Operator: There are no further questions at this time. I would now like to turn it back over to our presenters for any closing remarks.
Douglas C. Yearley, Jr. - CEO: Thank you very much Don. Thanks everyone for listening in. We appreciate it very much. Have a great week.
Operator: This concludes today's conference call. You may now disconnect.