Toll Brothers, Inc. (TOL) Q3 2013 Earnings Report, Transcript and Summary

Douglas C. Yearley - Chief Executive Officer and Director Martin P. Connor - Chief Financial Officer and Senior Vice President Robert I. Toll - Co-Founder and Executive Chairman Gregg L. Ziegler - Senior Vice President and Treasurer Donald Salmon Kira Sterling

John Coyle - Barclays Capital, Research Division Ivy Lynne Zelman - Zelman & Associates, LLC Daniel Oppenheim - Crédit Suisse AG, Research Division Stephen F. East - ISI Group Inc., Research Division Adam Rudiger - Wells Fargo Securities, LLC, Research Division Megan McGrath - MKM Partners LLC, Research Division Michael Jason Rehaut - JP Morgan Chase & Co, Research Division Eli Hackel - Goldman Sachs Group Inc., Research Division Buck Horne - Raymond James & Associates, Inc., Research Division Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division Susan Maklari - UBS Investment Bank, Research Division Michael A. Roxland - BofA Merrill Lynch, Research Division Joel Locker - FBN Securities, Inc., Research Division James McCanless - Sterne Agee & Leach Inc., Research Division Alex Barrón - Housing Research Center, LLC Paul Goncalves - KeyBanc Capital Markets Inc., Research Division James Krapfel - Morningstar Inc., Research Division John R. Benda - Susquehanna Financial Group, LLLP, Research Division Stephen S. Kim - Barclays Capital, Research Division

Good afternoon. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers Third Quarter 2013 Earnings Call. [Operator Instructions] I would like to now turn the call over to your host, Mr. Yearley. You may begin your conference.

Thanks, Andrea. Welcome, and thank you for joining us. I'm 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 Gregg Ziegler, Senior VP, 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 the future results. Those listening on the web can e-mail questions to rtoll@tollbrothersinc.com. Our fiscal year 2013 third quarter ended July 31. Third quarter net income was $46.6 million or $0.26 per share compared to $61.6 million or $0.36 per share in fiscal year 2012's third quarter. Net income included a tax expense of $21.7 million compared to a tax benefit of $18.7 million in fiscal year 2012's third quarter. Pretax income was $68.3 million compared to $43 million in fiscal year 2012's third quarter. Total revenues and homebuilding deliveries rose 24% and 10%, respectively. Net signed contracts rose 47% in dollars and 26% in units, and backlog rose 75% in dollars and 56% in units compared to 2012's third quarter. Sales volumes and pricing power both increased this quarter from 1 year ago, a pattern consistent with recent quarters. We believe the recovery is real, and we are in the early stages of the rebound. Our average contracts per community at 6.24 this quarter, are about where they where in the 1997-1998 timeframe, several years into the previous cyclical recovery. From there, over the next 7 years, through August 2005, a period when mortgage rates averaged between 5.8% and 8.1%, sales per community continued to increase, eventually peaking at twice that pace. We remain focused on growing our company. This quarter, our land position grew to 47,200 lots, up 20% from 1 year ago. We expect our community count, 225 at third quarter end, to remain stable through the end of fiscal year '13 and to grow by 10% to 15% by the end of fiscal year 2014. It doesn't appear as though rising interest rates have hurt our business. Our third quarter cancellation rates, which historically average approximately 7%, remained under 5% this quarter. Mortgage rates, while up, are still extremely attractive. Housing is still very affordable in most markets. About 18% of our buyers pay all cash. Our buyers who do borrow close with, on average, 70% mortgages. With their strong credit scores, they are generally overqualified to buy the homes they've chosen. In the first 3 weeks of August, our nonbinding reservation deposits were up 15%, and our signed contracts were flat compared to the same 3 weeks of fiscal year 2012, which was an extremely strong period with increases of 59% in deposits and 79% in contracts compared to the first 3 weeks of August 2011. Therefore, it's a tough comp. We don't read much into August. It's never been a bellwether month. Families take vacation and kids get ready for school or double sessions on the football or soccer fields. Considering how strong August 2012 was over August 2011, we will take 15% deposit growth and prepare for a hopefully even better time during the fall. Interestingly, foot traffic to communities in the third quarter was up 9%, but Internet leads were up nearly 100%. It appears that buyers now spend much more time educating themselves online before ever walking into our models. Because they are so knowledgeable when they first arrive, our conversion rate from actual visitor to agreement is at an all-time high. Now let me turn it over to Marty.

Thanks, Doug. Third quarter gross margins, before interest and write-downs as a percentage of homebuilding revenues, improved to 25.1% compared to 23.3% in the second quarter and 24.4% in last year's third quarter. The quarter-over-quarter improvement was principally a result of deliveries at The Touraine. Last year, deliveries at 205 Water in Brooklyn and 1450 Washington in Hoboken had a margin boost equivalent to The Touraine's this year. Therefore, the year-over-year improvement is primarily a function of improved pricing in our non-high-rise business. Third quarter interest expense, included in cost of sales, was 4.2% of revenues, 30 basis points better than last quarter and 50 basis points better than a year ago. Third quarter SG&A improved to 12.9% of revenues compared to 15.4% in the second quarter and 13.5% a year ago. This reduction was primarily a result of higher revenues in the quarter compared to the previous quarter and the previous year. On an absolute dollar basis, SG&A increased from $74.9 million a year ago to $88.9 million this quarter, as the volume of production and sales has demanded additional personnel. While selling communities are relatively flat, volume in those communities has increased, and the number of sold-out communities with backlog and future communities in the land development or entitlement process has grown significantly over the prior year. In addition, we had some sales of quick delivery units with particularly high deferred marketing cost. Our operating margin improved to 8.0% or $55.2 million, compared to 5.7% or $31.5 million a year ago. Third quarter other income and income from joint ventures was $13.1 million this quarter and included gains on land sales of $2.7 million and Gibraltar income of $4.3 million. In the third quarter, we recognized a tax expense of $21.7 million and an effective rate of 31.7% of income. In the quarter, we released $3.9 million of reserves associated with completed tax audits or statute expirations. The average number of shares used to calculate earnings per share was approximately 178 million shares even. During the quarter, we repurchased 490,000 shares at an average price of $30.87. 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 expect that deliveries in the fourth quarter will be between 1,225 and 1,425 homes, bringing total deliveries in 2013 to be -- to be between 3,925 and 4,125 homes. We estimate the average delivered price per home for the fourth quarter will be between $675,000 and $695,000. At this point, I'll turn it over to Bob.

Thanks, Marty. The University of Michigan consumer sentiment survey, though down slightly from last month's 6-year high, is up significantly from 1 year ago, as is the Conference Board similar survey. Inventory levels are still tight in almost all of our markets and housing remains very affordable. Unemployment trends are slowly improving and demand, based on household formations, is compelling, especially given the still very low volume of industry home production. We closed on a new $1,035,000,000 5-year bank credit facility on August 1, 2013 with 15 U.S. and international banks. That, combined with our $1.02 billion of cash and marketable securities at third quarter end, will help position us to continue to grow the company in the coming years. Now back to you Doug, for questions.

Thanks, Bob. Andrea, let's line them up.

Yes, sir. And your first question comes from the line of Stephen Kim with Barclays Capital.

It's John actually filling in for Steve. Just wanted to get an idea around geographies. Would you describe the environment that we're in right now as normalized with regard to the differences across geographies? Because the order rate across different regions vary pretty meaningfully. So I just wanted to get any input you had there?

Sure. The -- the differences by region are more due to our inventory. The communities we have opened and within those communities, how many lots may be available or how big our backlogs may be, and therefore, how aggressive we've been with pricing, than they are a reflection of the economics of that region. So be careful when you study those stats and dig a little deeper there. In terms of how our various markets are doing, New York City urban is still on top of the list, both Northern and Southern California are right behind. However, at the moment, we're in between some communities. So there's one example of where we have less inventory at the moment. Texas still does very well for us. Florida has rebounded nicely, even in the summer. And then, of course, the Washington-to-Boston corridor, which is half our business and which is the corridor that we dominate, continues to do very well in almost every market through that area.

That's helpful. And then as far as order growth, taking a higher-level look. Can you maybe give us some color on how order trends progress over the course of the quarter? It seems like, just from your commentary, maybe August had a bit of softness, but just trying to get an idea of how things trended through July.

Gregg? Give that breakdown.

Sure. So in terms of contracts we're talking about, it was relatively consistent throughout the quarter. I would say that July was still very solid, maybe a little bit lower than the first 2 months of the quarter. August continues, as Doug said, on a comparable basis to do fine. But again, we don't use August as a bellwether, and we only have the 3 weeks worth of data.

Thanks, Gregg.

You're next question comes from the line of Ivy Zelman with Zelman & Associates. Ivy Lynne Zelman - Zelman & Associates, LLC: Guys, can you talk about incrementally buying more land and appreciating opportunistic deals that you may be capitalizing on. Can you talk a little bit about just the total land portfolio with respect to what might still be mothballed, and whether or not looking forward, when Marty talks about margins, you talked about non-high-rise margins were up. I think you had talked about that there was some legacy parts of the portfolio that might still be a bit of headwind. So I'm wondering if that headwind might be now a tailwind with home prices appreciating as fast as they are and just appreciating what percent on the portfolio of land held is it still mothballed?

We have 66 mothballed communities. Year-to-date, we've opened 6 communities out of mothball. So we started the year at 72. We believe we will be opening 7 more mothballed communities in the fourth quarter. And we believe we will be opening plus or minus 30 mothballed communities in fiscal '14. Remember, a lot of that land has been significantly impaired and we have been waiting for it to make a fair return. We're not interested in opening those communities for the fun of it. We'd like to make money at those communities. So that's why we've been slow in bringing them back and careful in bringing them back. But it's becoming a smaller and smaller part of our portfolio, particularly as we buy more and more land, but we're slowly working our way through it. Ivy Lynne Zelman - Zelman & Associates, LLC: And just in terms of the margin. Would you say that there is still some headwind as it relates to that legacy portfolio? And then I do have another follow-up question, but it seems -- can you talk to that margin contribution?

Sure. Ivy, it's tough to draw a universal conclusion on each of the mothballed communities that are opened. Some of them do better, some of them do average and some do a little worse than our margin. I think it is a fair presumption that the fact that they are in mothball implies that their margins is a little bit less than our average margins. If they were better than our average margins, we'd be -- we'd have taken them out of mothballed already. Ivy Lynne Zelman - Zelman & Associates, LLC: Right. That's very helpful. And then just switching gears, Doug, with respect prospectively with so much concern over the spike we've seen in rates. With the pricing strength that you had in the market, maybe you can talk about what you're seeing with new releases and whether the rate of inflation, you think, is going to slow as people are pausing? Or just some discussion, maybe, around what you're seeing from the consumers that are converting and what you're hearing from your salespeople might be really helpful for everyone, please.

We chat with our sales teams every week at all levels of the company. I get involved. Bob gets involved. Rick Hartman, our President, gets involved. Don Salmon's here, who runs the mortgage company. And we are just not hearing that the move-in rate has affected our business. We raised prices more this spring than we did last spring. So I think it's fair to understand why August of '12 was way up over August of '11 because -- and we said it last year, that we were still a little bit scared, and we were be careful with our price increases. And this spring, we gained a lot more confidence. We had more pricing power. We took advantage of it. Our backlogs had grown significantly.

That's okay [ph] .

So we were much more interested and aggressive in raising price when our next home sold maybe a 10- to 12-month delivery. And so I think what's happening this August, and as Gregg pointed out, maybe a little bit in the end of July is, a lot less about mortgage rates and more about us managing our business and our backlog and being more aggressive with pricing. Ivy Lynne Zelman - Zelman & Associates, LLC: But you would sustain -- and then I'll go in the queue -- but you would sustain the rate of inflation with maximizing house [ph] profit per unit? Or do you expect that the -- maybe, if there's lower level of absorption, you would back down and maybe not be as aggressive?

For sure. We study it every week. And if sales are slower, we're obviously very careful about price increases. That's community by community. So we don't even do it division by division or submarket by submarket. We look at every community. It stands on its own. And it's also the time of the year. We always raise prices more in the spring, in the middle of the selling season, than we do in July and August. So that's part of what's going on now. We're a few weeks away from all the kids being back in school. Labor Day being behind us. And mid-September, I think we're going to have a much better idea of where we stand. We feel good. Our sales teams feel good. And we're positioned to continue to grow with a more communities opening through the fall and into next year. We'll have to see how it plays out. But right now, I think we're very comfortable in our position, and we're comfortable where the market is.

And your next question comes from the line of Dan Oppenheim with Crédit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: Was wondering if you could talk about the thoughts in terms of the pace of releases there and the absorption. Plenty of other builders really have been slowing releases down, clearly, you've been pushing pricing. In the past, you've highlighted the community in Sunnyvale which I think you're almost closed out now. But just wondering your thoughts on that, would you slow down more with that? Just push price more? I think you've done enough in terms of pricing there, but how are you thinking about that as you're talking about sort of being between The Touraine in that California market now?

Well, I'd love to have Sunnyvale back. It's been unbelievable what happened there. But we did just fine. We're up, I don't know, $400,000 probably. And we will continue to push price. I don't think we've been less aggressive than the other builders in terms of pricing. I think -- right and historically, I think we're more aggressive, and we're in markets with buyers that are so qualified and where markets get so hot that I think we've had more pricing power. And Dan, in your example of Sunnyvale, I think we've proven that. Again, we manage this business week to week by studying activity and backlogs. And we will continue to balance price increases with sales absorptions on a community by community basis. Daniel Oppenheim - Crédit Suisse AG, Research Division: Great. I guess then second question relates to that in terms of the backlog. Can you give any sense in terms of how the margins are in backlog as you think about the fourth quarter? And maybe helpful to do it sort of inclusive of Touraine or x Touraine in there just to -- given the impact.

Well, I think it is natural to conclude that the margins in backlog are higher than the margins we've just delivered. But the margins we will deliver in the fourth quarter are on homes we sold, on average, 9 months ago. So the price increases we've gotten more recently are not quite going to hit those margins yet. So the guidance we gave on margins for the full year, 3 months ago, we're going to stick with.

Your next question comes from the line of Stephen East with ISI Group.

If I could follow on a little bit on the prior questions. Doug, if you look at your business mix today versus what it was historically, what would you expect from your gross margins relative to history? I'm not talking about of the peak in '05, '06, but more sustained gross margin. And how much does your pricing strategy today come into play on that the potential, where you think you can take it relative to the past?

Well, every cycle has its own dynamics. We don't think we'll see what we saw in '04, '05, '06 at this time. In my -- in our release today, I commented -- and in my comments today, I commented on the prior cycle and how we were -- the equivalent of the early stages of a cycle where prices doubled, and they doubled over a 7-year period of time. Whether that happens again, we don't have that crystal ball. If you look at how few homes were produced in this country for so many years now and compare that to just the average year of 1.5 million or 1.8 million, you could easily concluded that there is such an undersupply of new homes and pent-up demand that hasn't been out there now for 5 years that in many of our markets, we are very early in this recovery. And there is a long way to go, which could get us to the place of prices doubling. California, in certain markets, we're up 25%, 30% in a year. New York City, we've seen similar types of numbers. But those are unique individual markets. So Steve, I can't try to compare this to a prior cycle, except to suggest that the numbers line up in such a way that we think there's a lot more coming at us, and it's all real good.

It seems as though it's impossible to have the future cycle or the cycle that we're in measure up to the past. Every single time we've come out of recession, we have almost doubled, and in some cases, tripled in the price of homes. Can that happen again? Well, it seems as though it's unlikely. My bet is that it will. There's nothing in the demographic information to indicate that we're going to enjoy anything other than what we enjoyed before. Unfortunately, that also includes the other side of the mountain. So sooner or later, we'll be looking at the -- looking down instead of looking up. But it looks like...

Fair enough, fair enough. And I was also thinking about it from the standpoint of, do you have fundamental differences now? Your City Living, obviously, carries a higher-margin, but you're also focused, even ignoring that less on the traditional McMansion, if you will, and I just didn't know if fundamentally, you had any difference in gross margin that was running through that. And then -- so that's the first part. And then, the other thing, you've talked about traffic not being a good indicator anymore. What are you all looking at and what should we look at moving forward as the yardstick on how we should expect conversions to occur and how your business should grow?

Stephen, I'll address the margin as it relates to 2 things. First, on City Living, we do shoot for margins that are in the mid-30s compared to the mid-20s for the farm fields out of our City Living business. So with that being 10% to 15% of our business now, and generally not having been there at all before, that should be a margin boost. But I would also caution that the RTC provided us with some great land buying opportunities that really helped our margins in the decade of the '90s and a little bit into the 2000s. And while we saw some good opportunities here emerging from this cycle for land purchases, we didn't see deals as robust and rich or as sizeable as they were out of the RTC days.

Okay. And then on the...

On the Internet.

Yes, on what should be your leading indicator? Traffic is still important to us. We're -- our buyers, while they play online, they still come out to see us. This is not like buying an automobile online. It's the biggest purchase of their life, and they will come out. The conversion ratio of traffic to agreement has been at our high now for a number of quarters as the world is changing and the Internet becomes more important. That's why we put so much effort into our website, and we advertise so much more through our website. The next and a very important leading indicator is the deposit. The fully refundable, nonbinding deposit, which is, please give us $1,000. This home site is now off the market officially for the next few weeks while we work out exactly what home, what options you want. And that's where our sales teams really go to work. And that number is very important to us. We track that very closely. We make pricing decisions based on deposit activity more than we do agreement activity. And that won't change. The Internet has not changed that. And I think you should keep a keen eye on deposit numbers for us and the other builders.

Your next question comes from the line of Adam Rudiger with Wells Fargo Securities.

Doug, earlier in a response to some of the questions, you commented that you are in markets, I think you said, "With the buyers that are so qualified." I was wondering, when you look at the broader U.S. housing market and maybe across all the geographies, including those that you aren't in and other price points, how different do you think you are positioned given your product mix and buyer mix relative to the rest of the markets -- rest of the other builders, let's say?

I think we're very different. Our buyer -- we've given the stats, 18% are cash, and those that get a mortgage, average 70% mortgage, 30% down. They have plenty of room to go higher. They choose not to. That's been the case even with a 3.5% mortgage, they've stayed at 70%. We would have thought they would have levered up then and taken advantage of free money. 4 5/8% is still pretty close to free. So it's a conservative bunch. It's a well-heeled client that has -- they're on their second, third, fourth home. Through this downturn, while the other builders were all talking about the problems they were having with mortgages, the frustration they were having with the tighter underwriting standards, the concerns they were having with FHA, we didn't have any of those issues. And we felt very fortunate. And I think that shows how different we have been. And we will continue to be with an average price point in the mid-6s.

I think our buyers at 18% all cash is significantly higher than the rest of the public builders. And I think our buyers, who take mortgages at -- what is it, 8% now, Don, of our total?

I'm sorry?

8% of our buyers are FHA/VA?

Yes.

Is much lower than the rest of the public builders.

I guess what I was trying to ask was more -- I was trying to get you to say what you thought about the overall housing market and just get -- what you thought the strength of it was? I guess, I gave you a lay-up question instead of asking what I was trying to figure out.

I think the answer is, as I gave before. We think we're in the early part of the cycle. There's no reason to believe that this time it's different. That it's going to be a 2-year cycle or a 3-year cycle instead of an average cycle, which runs 5 to 7 years. And so we look forward to continued upside for at least a couple of years. That's the way we see it.

Okay. And then on the stock buyback, is that just a -- I think in the past you've mentioned you tried to buy back stock to limit share creep. Was that the case here? Or is there some different change in capital allocation?

I think it was to offset the share count creep. And we were -- we thought the price was opportunistic. Disappointed in the price, but we were happy that we were able to buy it that cheap.

Watch what you wish for, you may get it.

You're next question comes from the line of Megan McGrath with MKM Partners.

Just talking about your community count openings in 2014, how are you thinking about them? Should we expect -- if all goes as expected for you, that we would see more of those happening in the first half of the year, in the first quarter as you prep for the spring selling season? Or how should we think about the trajectory of those?

We open as quickly as we can. We don't hold back waiting for a magic weekend. And this year, we came in at the lower end of our range for 2 reasons: One, we sold out of more communities because of the strong market; and two, we had some delayed new openings because the entitlement process in this business is very tricky and very unpredictable, particularly in the more affluent towns that we build in. So for next year, we will open as many communities as we possibly can based on getting all of those permits that we need. If the market continues to move forward, we could sell out of more communities than we had expected. But we push as hard as we can. This year, we will open 70-plus new communities. But as you can see, our net increase was flat, which means we've sold out of, and therefore, closed out of, about the same number. Next year, we anticipate continuing to close out of a whole bunch of communities, but we have even more in the pipeline that should open.

And we'll be more prepared 3 months from now to give you more detail on the timing of those openings. We do a more robust analysis of that in preparation of the December call.

You mentioned entitlement as an issue. What about labor and supply shortages? Was that an issue for you in terms of community openings?

No. Not in terms of community openings.

It's just a matter of money.

Right.

Okay. And then just a follow-up question, we obviously, talked about The Touraine in the last couple of quarters. Could you walk us through your upcoming pipeline of other City Living projects? And what we should be expecting over the next couple of quarters?

Sure. Hold on 1 second, while Gregg gives me the list so I get it right.

We have nothing opening new in Q4.

Correct.

We are selling out of...

160.

160.

East 22nd Street.

East 22nd Street.

And Building C in Maxwell.

Building C in Maxwell.

That's right.

That's our current sales activity.

Right. So we have 1 building in Hoboken open for sale and 1 building near Gramercy Park open for sale. The next 2 buildings to come online will be in early '14, and that will be the Brooklyn Bridge Park property in Brooklyn, which is a joint venture with Starwood. It's a hotel and condo building. And the other one will be 400 Park Avenue, 28th Street and Park Avenue South, which is a joint venture with EQR.

Now that second joint venture will deliver on balance sheet, so that will be all our sales, whereas the Brooklyn Bridge Park joint venture will be sales coming through our income from joint venture line.

And we've had some exciting deal flow in New York urban, so stay tuned.

Settlements on those buildings will be at least a year from opening away.

Correct.

And your next question comes from the line of Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question on orders and backlog ASP. We saw a nice improvement there this quarter, I guess, which is in keeping of a good trend for you guys. And just wanted to get a sense of how much of that sequential improvement in your view for both -- or particularly for the orders is driven by price increases versus mix.

Marty?

I think it's tough to split that baby, but maybe Gregg has some specifics here that he's looking at.

Yes. Excuse me, the mix versus a year ago is pretty consistent, meaning our single-family home was 63% a year ago, a little under 65% this year. Our active-adult is -- was 10% a year ago. It's 15% now. City Living is pretty consistent, around 5%. And then the townhouse product in the high-teens. So the mix, I'd say, is pretty similar. But the unit order growth we saw, we've had great growth, obviously, up 40% in the North. There, you had 2 City Living projects that we just mentioned, which did very well. The next area that did great was the South. That's up 39%. That's mostly driven by Texas and, to a bit lesser extent, by Florida. And then the Mid-Atlantic was up 23%, mostly Virginia, Pennsylvania, which are 2 big states for that area. And Doug mentioned, the West being flat for the quarter, and it's simply a lack of inventory at this point -- in California, sorry. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Right, right. Okay. My second question was on the first weeks of August and the perspective, which was very helpful in terms of the comps for a year ago. And so you mentioned the comp for contracts or orders were -- was up 79%. The quarter itself though, overall, I believe, is up 71% as an overall comp. So I guess it gets a little bit easier in September and October. I was just trying to get a sense for -- if you could give us maybe month-by-month year-ago comps, that would be helpful in terms of orders. But also, more broadly, given that the overall comp is still 71%, should we be thinking about more of a flat to maybe plus 10% for the quarter, if the current sales paces hold? Or, perhaps, new communities might be opening up that might help you out in the last 2 months of the quarter?

Mike, I don't think we can answer that. We don't have the crystal ball as to what September and October will bring. We feel good. We do have a number of communities opening in the fourth quarter, as we do every quarter, and we don't have that breakdown for you month-by-month.

And in terms of last year's order trends, I don't think we brought that information in for the fourth quarter of last year. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Okay. But certainly, if you're up 79% in the first 3 weeks, it would imply maybe a little bit of a lower growth rate for the last amount -- last 2 months of the quarter?

We'd have to know what the fourth quarter in 2011 was in order to assume that, because if the fourth quarter of 2011 got progressively better, then the fourth quarter of 2012 could have also gotten progressively better but just not as much.

Right.

Your next question comes from the line of Eli Hackel with Goldman Sachs.

Just a question here. It seems like in some parts of the country, inventory is starting to pick up on the existing home sale side. I'm just curious what your thoughts are if you think new -- existing home sale inventory could start to take away some people that were looking to buy. I know it's been one of the driving factors. There's not a lot existing. But if some existing does pick up, how much concern is that for you?

I've always felt like we're in a good place as existing inventory picks up because our buyers are moving up, and they're feeling better about the ability to sell their own home and deciding it's the right time to put it on the market. I think the inventory was low for a while because people didn't have to sell and they were waiting for a better time to sell. So I think in our position, on the luxury end, I'm not worried about it. I'm looking forward to it. And I was encouraged by the stat we saw today, that July was a good month for improving existing inventory. So...

It got back to 2009 levels, which was not the greatest year in the world.

And then just one more question, just on City Living. I know you're looking at expanding to some other cities, maybe like at San Francisco. Can you just give an update and sort of your capital plans there, if you're still looking at maybe expanding that more broadly across the country?

Sure. City Living right now is in New York, Philly and Bethesda. Washington, D.C., not opened yet but coming soon. We continue to study Boston, Miami and San Francisco, with nothing to report, no deals. But we're intrigued by those 3 markets, and there will be others that we look at from time to time.

And your next question comes from the line of Buck Horne with Raymond James. Buck Horne - Raymond James & Associates, Inc., Research Division: Sticking with the City Living theme, help me understand -- I don't know if you can give a number on this. I'm just thinking, would you expect the contribution in terms of percentage revenue from City Living to be closer to that 10% to 15% range you're targeting versus, I think, the number was given 5% or so in 2013? Is that a fair ramp-up that we should expect?

In what year are you... Buck Horne - Raymond James & Associates, Inc., Research Division: In 2014 versus 2013, your fiscal year.

I think 2014 will be moderately up, maybe a couple percentage points from the 5% to the 7%. And then we hope to get above 10% in '15, maybe as much as 13%. Buck Horne - Raymond James & Associates, Inc., Research Division: Okay. That's helpful. And I guess, other topic. I'm thinking around looking at seeing more public builders trying to move up in price point, some even starting to start up new luxury home divisions. And I'm wondering if you're seeing any new competition for land positions that you guys would typically target from other public builders out there.

No. We have not seen a change based on what you described as a desire to have a luxury division. There are markets where we, on occasion, compete with the publics, but we haven't seen any change in that recently. Buck Horne - Raymond James & Associates, Inc., Research Division: Okay. And just one last one. What would you expect -- what's the normalized tax rate you're expecting for the fourth quarter?

For the fourth quarter, it would be 38%.

And your next question comes from the line of Jade Rahmani with KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: If we compare ASPs in your backlog, can you speak to some of the differences by segment, excluding The Touraine? For example, in the Mid-Atlantic, South and West, ASPs were about 10% on average below -- or ASPs and backlog were about 10% higher than your reported ASPs. I just wanted to see if, essentially, 2 to 3 quarters from now, we would see your current ASP and backlog show up in closings?

Yes. I think that a lot of the large single-family stuff that we've been selling over the last 6 to 9 months. Obviously, our sales volumes have grown tremendously, and that's causing our backlog to be up 56% in units. And it's much easier to deliver the active-adult home or the townhome than it is to deliver -- just a bit smaller unit than it is to deliver some of the large single-family. So you're probably -- you are seeing a bit of that single-family be held back into our backlog, which will naturally start to catch up and flow through in the future quarters. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And so is it possible that your reported ASP can continue to increase but then once you -- once that mix that you spoke to normalizes, given the cycle time differences, that you could see sort of the headline ASP decline following that?

I'm not sure what your question is. Could you rephrase it? Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Well, if you're saying that the single-family homes have longer cycle time, so the reported ASP should continue to increase because those are higher-priced homes, and you put those in backlog a bit earlier than the townhomes and the quicker-to-deliver product. Following the delivery of those homes, could the actual mix shift move in the opposite direction?

No, because I think we're filling the pipeline consistently. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then just on the City Living side, the -- I mean, has the move-in rates changed any attractiveness of new deals, your underwriting assumptions or even competition, say, other sponsors not having access to construction loans, for example, on the multi-family product? Is there anything notable you've seen just on the availability of deals?

I think we've seen an increase in the availability of deals in the last couple of years. And yes, your hypothesis of us having greater access to financing making a difference in our ability to score, the deal is accurate, I think.

Yes. In New York City, your approvals, believe it or not, are very predictable. So you can buy a building or if you can find it, a vacant lot, with air rights that gives you protected rights to build to a certain height. And therefore, the closings on land in New York occur quickly. It's not like the farm fields where you have a 2-, 3-, 5-, 7-year process before you close on the land. There's a whole bunch of money in New York, but there's not a lot of 30-day money. And we are 30-day money. And we have distinguished ourselves by being able to close quickly on deals in New York. And we are seeing increasing deal flow in New York right now. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: And that would be for the -- over the past quarter?

Over the past year. And several deals of great interest this quarter.

And I think our increasing prominence and reputation continues to help us find deals.

Right.

You have 10 deals pipeline that haven't got a shovel in the ground.

In New York.

In New York and Hoboken.

Right.

Make that 12 deals.

12 deals in New York City in the pipeline that have not opened. Bob just pointed out.

That have not had a shovel in the ground. There's a year lead time between the time that you put the first shovel in on the ground and the time you open for sales.

Right.

And your next question comes from the line of Susan Maklari with UBS.

You guys noted that part of the delay in the opening of some of your communities goes around the sort of entitlement process that you need to go through. As we've seen more development work just sort of across the industry, are you noticing any change in the attitude of the municipalities towards this? And has that had any sort of impact on your community counts and when they sort of come online?

Sure. In the Great Recession, the -- after the first year, the counties and townships and boroughs, governmental entities that caught on to the fact that they were going to go broke if they didn't fill back up the requirements of the building departments and the inspection department, et cetera, so we had much, much greater ease in changing zoning and gaining plan approvals. That has now switched. We've been in good times now for 2 years. Counties, townships and boroughs are feeling a little stronger. And you're back to "not in my backyard" philosophy, so I would say that we're back to where we were before the Great Recession began.

As a follow up, I mentioned before that we're going to finish the year at the low end of our community count guidance. And I said that, that was partially due to communities selling out faster and partially due to delayed in openings of new communities. It's weighted a little bit more towards the new communities taking longer to get through permitting than to the communities that have sold out faster. There was a follow-up question about that, that I felt I needed to answer.

Okay. And then can you just also give us any update in terms of what you're seeing on material prices and any labor shortages? Has that changed at all as things have continued to get better?

In the most recent quarter, costs have been only modestly up, a couple hundred dollars. I think we've gotten benefit of reduction in lumber prices that's been offset by a little increase in concrete insulation, stucco and labor.

And your next question comes from the line of Mike Roxland with Bank of America Merrill Lynch.

Just want to touch, Marty, I think you made a comment about some quick delivery units that you had in this past quarter and then the associated high deferred marketing costs. Can you just provide a little more color around that and the impact on SG&A? And just quickly, were there any costs incurred with the delivery of the 5 Touraine units that you're going to -- that have since shifted into 4Q, but like you incur the costs this past quarter that you're not going to incur next -- in the current quarter?

In reverse order, no. There were no costs of that nature. And as it relates to the deferred marketing on a couple furnished units that we dressed up, it was about $1 million in the third quarter associated with a particular building in Florida, on Singer Island. Furnished the units, sold the units, done with the building, let's move forward. We had that deferred marketing costs for dressing up the units.

And that was just to get the [indiscernible] building completely done and out of the portfolio? That would be...

Yes.

Okay. Got it. And then just quickly, with respect to tax that you just mentioned, 38%, that's where you're guiding to in terms of your fiscal 4Q. I believe that 2 quarters ago, you had guided to a 39% tax rate for the year. I realize that there are a lot of moving pieces driving the tax provision, but can you elaborate some of the items that caused a tax provision this quarter to be lower than the 39% you'd outlined?

We had about $3.9 million of reserve releases associated with tax positions we took that we could not reflect in our financial statements until the statute of limitations associated with the year we took them expired. Expect a little bit of that in the fourth quarter as well.

That was the biggest driver for...

Yes. And then some of the rest of it really functions based on where the income is coming from state-by-state.

And your next question comes from the line of Joel Locker with FBN Securities.

Just was curious on your gross -- or order prices, actually. They went up 4.2%, sequentially, but how much would that -- would you say of that, just the sequential increase, say -- or maybe if you just go from the end of the second quarter to the end of the third quarter, was organic or same plan?

Our -- we raised prices $18,000 in the third quarter on average and $52,000 year-to-date.

$52,000 year-to-date.

That was kind of more of where the projected next sale is coming from.

Correct. That's -- we raised prices for the next sale, so that's not backlog price increase, that is offering price and that is same plan to same plan.

Same plan to same plan. And also on the SG&A, do you -- I mean, do you have a breakdown of the $89 million? And do you expect a similar sequential jump, like, I think, last year, it was about $7.5 million from the third to the fourth quarter?

I think the fourth quarter, we're looking at SG&A to be 10% to 10.5% of revenue. And the breakdown for this most recent quarter was about $33.5 million was selling-type costs and $55.5 million was general and administrative costs.

Just one last question on the penthouse in The Touraine. Did you end up putting that under contract?

Not yet.

Not yet?

So anyone who wants...

But you better move quickly.

And your next question comes from the line of Jay McCanless with Sterne Agee. James McCanless - Sterne Agee & Leach Inc., Research Division: Wanted to jump back to cycle times for a minute. Could you give us what your cycle time and months is now for your single-family homes?

It is completely dependent upon the local municipality and how many months it takes for them to give us a permit; and the backlog, how big that backlog is and how long it takes to build the next home and the labor force, subcontractor base.

Number of options, [indiscernible] .

How big the house is and how much it is being upgraded. So, Gregg, on average, single-family is 9 months?

Or longer. I was going to say, it's probably going to range somewhere from 8 months to maybe as far as 15 months.

Those are rare. If we get beyond 12, we hit the price pretty good. But...

Where are we in Florida?

Florida runs 10 to 12 months.

That's the worst example in the company.

Yes. Very big homes, very complicated, tough towns, big backlogs. So as you can tell from our conversation here, the answer to your question is very local. James McCanless - Sterne Agee & Leach Inc., Research Division: Right. And then my other question I had on the mortgage side. I understand that your customers may not be as interest rate-sensitive as some others. Have you seen, in general, a loosening of credit standards? Or are underwriters trying to generate a little bit more loan volume right now? If you could just talk about what you're seeing from the people who buy the mortgages.

We're going to turn this over to Don Salmon, who runs our mortgage company.

We've seen investors -- since refis have slowed down, we've seen investors get more aggressive in trying to do business with us in terms of some loosening, not a lot, but some loosening in parameters, in underwriting guidelines. We're seeing more people coming out with a little bit better LTVs that we haven't seen in a while. In terms of ratios, we're not seeing any increase in ratios, but we are seeing more aggressive loan programs coming to the floor as well.

Have you seen any rate locks?

Yes. We have always had the ability to do a 12-month rate lock on conforming. We are hoping to be announced today at 9-month rate lock on jumbo, which is the first time in a long time. That's probably going to be next week. But today, we can do a 6-month, 170-day lock on the jumbo. We fully expect that to go to 9 months in very, very short order.

But you can go 1 year on conforming.

We can go 1 year on conforming, yes.

We have seen an increase as a percentage of total in our jumbo loans from around 10% a year ago, up to 17% or 18% now, because the average price of our home has gone up.

But it's driven by 2 things. It's driven by the price going up. It's also driven by some markets, the high balance conforming balance has dropped, which those ones may have fit into a Fannie, Freddie security before, now have to go jumbo.

But we have a lot of jumbo availability.

We have a ton of jumbo visibility and we're not constrained, really at all, in jumbo availability. People are being aggressive.

What's the spread, jumbo versus...

Right now, the spread on a conforming loan is 4 5/8%. On a jumbo today is 4 3/4%. The spread is miniscule, and that really reflects, I think, that the banks are keeping a lot of the jumbo in portfolio and they're meeting their hurdle return rates as opposed to rates they have to get in securities market.

Your next question comes from the line of Alex Barrón with Housing Research Center. Alex Barrón - Housing Research Center, LLC: I wanted to go back a little bit to the jump in the order prices this quarter. Can you kind of tell us that the $18,000 happened more earlier in the quarter? Or was it kind of evenly spread out? And what percentage of the homes did you actually -- or the communities had a price increase this quarter? And have you been able to raise prices again and so far in August?

Alex, the $18,000 is from the beginning of the quarter to the offerings at the end of the quarter. So in theory, we haven't been sold a home yet as of July 31 with that $18,000 increase. It's the next one that will have that $18,000 increase. We've sold $15,000 in '12 through the course of the year. So it naturally builds over the...

We've sold it. We haven't reported it yet.

Right. Right. Alex Barrón - Housing Research Center, LLC: Okay. All right. And then the impairment that you guys reported this quarter, I know it's pretty small, but, I guess, what are you guys doing this late into the cycle?

So we have -- essentially, that impairment is 2 components. It's about $140,000 of predevelopment costs as we explore new communities. Sometimes we decide not to go forward with them and write off the research costs associated with that using outside consultants. And then it's about $100,000 associated with 1 model home that we're going to take a loss on as we close out a community.

We're always going to have that.

Yes, we're always going to have both of those.

And your next question comes from the line of Paul Goncalves with KeyBanc Capital Markets.

In regards to the increase in lots this quarter, both owned and optioned, in which regions are the majority of those incremental lots located? And then just generally speaking, are you guys seeing any difference regionally in terms of lot availability, be it from the lack of land available or less motivated sellers?

You got it there, Gregg?

Yes. The increase in total lots owned and controlled 4/30/13 versus 7/31/13 is 2,004 units, pretty evenly spread but the South had the biggest. The South was just under 900, the North was a little over 400, the West was 460 and the Mid-Atlantic was 300 units. So it's a pretty even spread in increasing units.

The South was Texas.

South Texas.

But there's a big differential in money. You're talking units now, which is not how we keep score. More relevant is the difference -- the delta in dollars.

The dollars spent in Q3, which was $99 million spent on land, so this will be for land owned, the North is $19 million, the Mid-Atlantic is $5 million, the South is $37 million and the West is $38 million.

So you spend more in the West and got fewer lots.

Right, right. Prices are astronomical, but fortunately, the people pay 1.25 astronomical.

In terms of land availability, I think that was the second half of the question.

It's tough out there. Both coasts continue to be the most difficult markets to find land. California is land-constrained, with a lot of players. Texas, there still seems to be plenty of land, and we are positioning ourselves well, where we're seeing greater deal flow. Northern Virginia continues to tighten; limited land with lots of competition. But lately, we've been seeing bigger land deals, which is exciting for us because we're able to take advantage of our balance sheet and distinguish ourselves from other bidders and, we think, make some great buys.

And your next question comes from the line of Jim Krapfel with Morningstar.

To what extent have tighter labor conditions constrained sales pace?

Tighter land positions?

Labor.

Labor?

Yes. Really good to the backlog, of course.

Absolutely. If homes are taking longer to build because the plumber's spending every other day in our home because he's somewhere else on the odd days, then we push price for the reason we gave before, which is the next home sold is 10, 12 months out. And why sell it today when it takes that long to deliver? Fortunately, in most of our markets, while labor has been tight, we are managing it. We have had to pay a little bit more, but we have long-term relationships with many trades. And the issues are getting better as we get further along in this recovery. So that's less of a reason for the price increase than the demand that's coming out and the additional sales we're seeing.

Got you. And then how soon do you think it will take for supply of labor to catch up with expected demand?

Yes. It's hard to project. In some markets, we're already there. In others, we've got a ways to go. Labor is definitely coming back to the industry, but again, it's a local issue. I can't answer it for everywhere. Some will be shorter and some will be longer.

And have you seen labor inflation accelerate over the past quarter or 2? Or is it still the same year-over-year increase?

The same.

And your next question comes from the line of John Benda with International Group.

This is John Benda on for Jack today. Just a quick question on the JV income. It seems like since the end of 2011 to today, call it 7 quarters, the investment there has doubled, but the earnings on the income statement haven't really caught up. I know that Marty provided some guidance about 2 projects in City Living there that will start hitting that in '14. But how about the rest of the investment dollars there?

I think there are a number of factors at play. We have, in the second quarter, invested some dollars in land development joint venture. That will take a little while to develop that land. We have the 2 projects in the New York area at 400 Park Avenue South and Brooklyn Bridge Park that we discussed earlier. And we also have some multi-family product, apartment product that we have announced as of the -- it was either first -- I think it was the first quarter or second quarter we announced it, that will take 2 or 3 years to build before it generates any income.

All right, great. And then just a follow-up quickly in terms of growth and a tight land supply. There's a big regional builder, Weyerhaeuser, looking to unload its unit. And as you guys look to growth opportunities and adding lots, is that type of builder a size that you would consider? Or are you looking at smaller deals like CamWest in the Northwest?

Confidentiality signed on this so we can't answer as much as we would like to.

Yes.

Okay. Well, can I rephrase? Just on a size of a deal, I mean, is there a particular size you look at or just if it's the right fit, then it's worth pursuing?

If it's the right fit, it's worth pursuing.

And your next question comes from the line of Stephen Kim with Barclays.

I just have 1 follow-up question housekeeping. What is the amount of inventory that is designated construction in progress?

Let me turn to Page 305 in my book, and it is -- at 7/31/13, CIP is $2.543 billion.

And your next follow-up question comes from the line of Michael Rehaut with JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Just on the tax rate, I appreciate the 4Q guidance. The 39% though that you originally were thinking of, is that a number that we can still use in terms of kind of a longer-term normalized tax rate for you guys?

I think it's fair to take the 35% we got to pay the Feds and a rough average of 4% based on our product mix around the various states and come to 39%, yes. But state-by-state income could vary year by year, and we could have some blips in there associated with exposures that we need to reserve for or that we no longer need to reserve for.

And ladies and gentlemen, we've reached the allotted time for questions. This concludes today's conference. You may now disconnect.

Thank you, Andrea. Thanks, everyone.

Thanks, Andrea.

Thank you, sir. And you all have a great day.

You, too. Bye.