Good afternoon. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers’ Second Quarter 2014 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. (Operator Instructions) Thank you. I would now like to turn today’s conference over to Mr. Douglas Yearley. Please go ahead sir.

Thank you, Jody. Welcome and thank you for joining us. I am Doug Yearley, CEO. With me today are Bob Toll, Executive Chairman; Rick Hartman, President, COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; 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 future results. Those listening on the web can e-mail questions to rtoll@tollbrothersinc.com. We just completed 2014 second quarter on April 30, 2014. Second quarter net income was up 164% to $65.2 million or $0.35 per share diluted compared to net income of $24.7 million or $0.14 per share diluted in fiscal year ‘13’s second quarter. Pre-tax income of $93.5 million compared to pre-tax income of $41 million in fiscal year ‘13’s second quarter. Revenues of $860.4 million and the homebuilding deliveries of 1,218 units rose 67% in dollars and 36% in units compared to fiscal year 2013’s second quarter. The average price of homes delivered was $706,000 compared to $577,000 in fiscal year ‘13’s second quarter, an increase of 22%. Net signed contracts of $1.27 billion and 1,749 units rose 7% in dollars and were flat in units compared to fiscal year ‘13’s second quarter. The average price of net signed contracts was $729,000 compared to $678,000 in fiscal year 2013’s second quarter. On a per community basis, fiscal year ‘14’s second quarter net signed contracts were 7.14 units compared to 7.79 units…

Thanks Doug. Second quarter homebuilding gross margins before interest and write-downs improved 30 basis points to 23.6% of revenues compared to 23.3% in 2013 second quarter. Second quarter interest expense included in cost of sales was 3.4% of revenues compared to 4.5% from 2013’s second quarter. Year-over-year gross margin after interest and impairments improved approximately 140 basis points. And we estimate purchase accounting associated with the 119 units and $102 million in revenue delivered from Shapell communities in Q2 suppressed our Q2 2014 margin by approximately 150 basis points. So, overall, we continue to see price increases more than offset cost increases in our deliveries. Second quarter SG&A, excluding Shapell transaction cost of $5.1 million was approximately $99.2 million. This was higher than the $79.6 million in the second quarter of 2013 due primarily to our growth. As a percentage of homebuilding revenue, SG&A excluding Shapell transaction cost was 11.5% for Q2 of fiscal year 2014 compared to 15.4% in Q2 of ‘13. The improvement compared to year ago was due to revenue growth partially offset by expense increases. For the first quarter of 2014, SG&A was 15.1% of revenues. The improvement in Q2 over Q1 primarily reflects the revenue benefit from Shapell, which had lower related overhead growth. Our operating margin grew from 3.2% a year ago to 7.9% in Q2. If we exclude the $5.1 million in Shapell transaction costs, our operating margin was 8.5%. And we expect it to grow further in our third and fourth quarters. As emphasized in our last call, over the last five years, we have consistently generated an average of approximately $50 million in other income and income from JVs before impairments. For the first six months of 2014, we have reported $64.9 million of such income. In Q2 2014, we generated…

Thanks Marty. According to the April 2014 U.S. Census Bureau’s New Home Sales Report, new home inventory stands at just 5.3 months’ supply, based on current sales paces. If demand and pace increase, the 5.3 months’ supply could quickly be drawn down. Current demographics seem to suggest that new home sales should pick up. If the tight supply bumps into increasing demand, prices could rapidly rise. Our Builder of the Year award is a tribute to the tremendous hard work, dedication to quality, and devotion to our customers by the entire Toll Brothers team. The thoughtful expansion in growth markets and the broadening of our urban and rental footprints, our active-adult product lines and our large scale master plans, will continue to spread our brand across the upscale housing market. And now Doug questions.

Thank you, Bob. Thank you, Marty. (Jody) we are ready.

Thank you. (Operator Instructions) Your first question comes from the line of Eli Hackel from Goldman Sachs.

Hello, how are you Eli?

Good. Thank you. I just wanted to first ask on the City Living clearly prices are above your underwriting standard or your underwriting criterion in several of the New York deals, just wanted to understand maybe the margin impact that’s having this year as we go out and maybe into next year, I know you look for 1000 basis points better, but how much better is that and you are getting given some of the price increases you have seen in the projects?

Well, we don’t call them projects first.

With Luxury condominium building, as you know and as we say all the time the business is very lumpy. So certain buildings sell off and then they take couple of years to build and then they all deliver within two, three, four months. So right now we have Gregg deliveries coming out of Maxwell Place in Hoboken and 22nd Street what we call Gramercy Park. We are selling as we talked about rapidly with significant price increases at Pierhouse at Brooklyn Bridge. We are about to open at 400 Park Avenue South which is 28th and Park Av. And they will be delivering – Park Avenue will be delivering the end of ‘15, Brooklyn Bridge will be delivering.

Probably ‘16 fiscal year.

Right at the end of our fiscal year. And then Peirhouse will be delivering in the ’16.

Gramercy had significant price increases?

So in the guidance we have given for gross margin for the remainder of this year. The impact of the improved pricing we have seen in Maxwell C and Gramercy which are the two delivering is already factored in.

Got it.

With respect to Brooklyn Bridge that will deliver as a JV. So you won’t quite see the gross margin impact, but you will see the JV income impact there is just the higher number. And in terms of 400 Park Avenue, we are encouraged by what we think the market will bear but we haven’t opened that for sale yet. So it will be premature that to tell you what the margin impact beyond our underwriting criteria might be.

Right. But it is significantly higher than what we underwrite it at. And then the other smaller boutique buildings but a lot of dollars is 1110 Park Avenue, 89th and Park Avenue where the average unit will be $12 million to $13 million. Rick Hartman has giving me the thumbs up.

With the $15 million to $16 million?

I think we are able margin very quickly.

But that’s normally nine units, but that will open for sale shortly and hopefully deliver right at the tail end of fiscal ‘15.

Yes.

And that is also significantly higher we believe than what we underwrote it at.

And we would be better prepared to give more specific margin guidance, margin impact guidance on that, six months from now.

Right. Got it. And then one additional question, many builders are now rapidly growing community count, even builders invested later in the cycle than you did. I guess what I wanted to understand was maybe the performance of the incremental communities that you are opening around the country versus underwriting and there is maybe a demand is strong or maybe strong as to how they are performing relative to underwriting standards around the country? Thank you.

I think in general, we are pleased with the performance of what I will call the newer purchases.

It depends primarily where they are coming from.

Right.

But it’s not universal success.

Right. You are lucky enough to grant Stockton, California. You are looking at the good times rolling. Some of the oldest neighborhoods don’t generate the kinds of percentages that West Coast does.

And some of the older ones that have had significant impairments in markets that have now come back are showing good returns, but generally, the newer purchases are performing at a higher margin than the legacy land generally, but it’s very specific to the individual property and the individual market.

Right, right.

Okay, thank you.

You’re welcome.

Your next question comes from the line of Ivy Zelman from Zelman & Associates. Ivy Zelman - Zelman & Associates: Hi, good afternoon and congratulations on the quarter. And I must say although Doug Yearley is a phenomenal CEO and leader, it’s so much fun to have Bob Toll for the time of the year talk to us. And we love hearing from you, Bob, we miss you. So, they all does, like myself. And one of the comments that you made in the press release, Bob and maybe you guys can address is the strength of home prices and appreciating that, Doug you mentioned earlier that we haven’t captured the robust pace of ‘12 and ‘13 we have seen the moderation, but we have seen continued very strong pricing year-over-year? And prices have continued to exceed expectations at the most recently Case-Shiller data and CoreLogic. And I guess a lot of people are concerned that the new home prices are so much far above existing home prices that the spread has widened too much and therefore, new home prices won’t be able to be sustained in terms of their upward trajectory. So, maybe you can comment on well, do you believe that, that you are priced at a premium that’s above average relative to the historical relationship to resell? And maybe also talking about the constraints in resell, which are even Bob, frankly more pronounced than they are in the new home market? And what’s your outlook is on home prices, because I think that’s been really, Doug, in a much stronger part of the story that’s underappreciated?

I think that you have reached an inflection point on the margin, where you are no longer player catch-up ball with your used home that sunk by 30%, 35%. You are now back above the 30%, 35% and starting to see some real appreciation in the price that you can get now. So, I think you are out of point in the market, where your buyer feels a lot healthier, a lot better, because he is looking at real estate that seems to promise, seems to indicate that it’s once again a credible investment as opposed to just bigger, better mansion or town home or what have you. Ivy Zelman - Zelman & Associates: So, does that mean that the premium is within the normal range and we are back to normal and therefore we should see continued home price acceleration for new homes as well as existing homes?

I can’t think of the existing homes, but I think of the new home market, you are going to see continued and even increased sales price levels. Ivy Zelman - Zelman & Associates: And just thinking about the customers, Doug, that are buying your home, most of them have to sell a home, assumingly they are not having a temporary rental situation or it’s a second home, can you give us some talks around there is a lot of negatives sentiment in the market that job growth is tepid, it’s just not high quality. So, any flavor on the characteristics of the people that are in the market today and the pace that you thought the business is at tough comparison, you are still well below your historic normal absorption pace but would you say that the business on a grading system, is this a C market in pace or would you say you are already at relative to historical levels a little bit better than average, how would you characterize it?

I think it’s better than average. It’s certainly not an A. I think we have a lot of room to move. You are absolutely right I think our buyers obviously most of them have homes to sell and as Bob pointed out if they bought their home in ’02, ’03, ’04 most people stay in a home I think it’s seven years on average. They are back to even or in some markets they are back above water and they are looking to move their family on. So they are looking for the Toll Brothers house in the better school district with the bigger yard. And they are feeling better about the home not only as shelter but as the home as an investment. It’s all Bob just went through. But I think I mean job growth, unemployment rates, macroeconomic issues, consumer confidence all of that has the ways to go. And I think that is the primary reason why all of this pent up demand that continues to build because we are not delivering the number of homes we need to just be at equilibrium, so the pent up demand is actually growing. We have ways to go until there is enough confidence out there for more and more people to come out to buy. We don’t hear stories about I love your home, I am ready to go, but I don’t think I can sell mine, but I think underlying the reticence, the hesitation of some people is their lack of confidence in the economy. There are lack of confidence in their own job growth and that is healing but I think it’s still in process. And I think that’s the primary reason we have had a bit of a pause than last year of this recovery. Ivy Zelman - Zelman & Associates: Wonderful. Thank you, guys.

Thank you.

You’re welcome Ivy.

Your next question comes from the line of David Goldberg from UBS.

Thanks. Good afternoon everybody.

Hi David.

My first question has to do with price elasticity as we get outside of the City Living and maybe some on the California Coastal property. And I am just wondering if you are finding that buyers are reluctant on the price side when you are trying to raise pricing are you seeing any increased reluctance given maybe rates were up a little bit, come back down a little bit, our buyers are reluctant to price increases, are they still able to afford those in terms of the overall affordability in payments that they are making and obviously a little sensitive on your clients but just wondering what’s going on there?

They are able to afford it, 20% are cash for us and those will get a mortgage leveraged up 70% and 30% of their own money down. But we are being careful there are certainly cases where we bang the price pretty hard. And we have slowed sales as we thought we would because our backlogs grew our delivery dates got way out there. And we got the results we expected. So there is certainly the elasticity in demand. It is different market to market and we are very sensitive to it and we are pricing accordingly.

Anecdotally ISI reported at the end of April the (Hampton) home sales were up 52% and prices of air right to Manhattan are up 47%. This is a business without a lot of elasticity to it. You get backlog of 20, you are in an average business. You get backlog of 30 and you have got to stop sales. Couple of ways you can stop sales. We prefer raising prices and therefore somebody walks through that’s got to have it, you’ve got yourself an extra bunch of margins.

That’s very helpful. My follow-up question was actually on SG&A and I think it was an impressive quarter SG&A as a percentage came in a little bit later lower than we thought it was going to so that was great. And I know you reiterated guidance on the SG&A line for the full year, but I was wondering if you can talk about kind of what leverage is left in the SG&A line, maybe as a percentage of revenues where you guys see that headed over the next couple of years at least kind of where you are targeting and how much leverage is left in that number?

We think there is significant leverage left in the SG&A line and correspondingly in the operating margin results in terms of next two years, one year, three years, I think the market will tell us that. The revenue number will tell us that, not so much the cost number. But as we look at the back end of this year, we expect to show significant operating margin growth. And over the longer term, we would have optimism that we could get back above our long-term averages.

Just got to do with pricing, totally, right.

Alright, thanks guys.

You’re welcome.

Our next question comes from the line of Stephen Kim from Barclays.

Hi, Stephen. Jody?

Stephen, your line is open.

I am sorry, I was muted. Hi, guys.

Hi.

I wanted to follow-up on sort of the macro sort of commentary, I guess my question was are you finding that your buyers in general have been researching their home purchase sort of circling if you will before committing for a longer time period than historically was the norm?

I think so. They are definitely online, a lot longer and we study every second they are online and what pages they are hitting. And whether they are printing out directions to get to our communities, our conversion ratios of visitor to deposit and visitor to agreement, continue to run at all-time highs. So, the business has certainly changed in that. A lot of the work is done from the family room couch on the iPad and less is done in the sales office. How longer you are spending, which is your real question? It’s hard to gauge, but the common sense tells me with this pent up demand that the level was at, you have got a lot of people circling. And since they are not buying at the level we thought they would be, they are spending more and more time contemplating and studying the decision.

Yes, that’s interesting. Yes, it does seem like there is certainly like a fairly large group just waiting to sort of have their demand triggered. And you already said it previously, but you didn’t think it was because of an inability to sell their home. I was curious how you reached that conclusion?

Primarily from the commentary back from our sales teams who feed us, not every conversation they have with a visitor, but summaries of the major trends, major comments, major concerns and we can think back to ‘08 and ‘09 when virtually every visitor was in our sales center loving our decorating and our homes, but worried about their job security and the ability to sell their house and that conversation doesn’t occur anymore to any great extent. So, that’s the primary way we learn about it. The second way is by studying the used home markets in the areas we operate to look at the number of months of inventory, how many homes are selling quickly days on market. And we all come in every week with stories of our own neighborhoods that we live in. I have come in recently to talk about the number of homes in my neighborhood that are selling the weekend they go on the market over asking price. And I am in a Philadelphia suburb. So, but it’s primary from the sales team and secondary from some of the either local intelligence or data put out on the resale markets.

Great, that’s very interesting. I wanted to shift gears, we had heard that Shapell, earlier you had given a goal for selling a certain amount of land from Shapell, our sense was is that you are selling less Shapell still sort of selling the same amount of land, but less of it being Shapell. I was curious if you could comment a little bit on that? And what has driven the change in thinking there?

You are correct. We have closed one Shapell land sale transaction to another public homebuilder. We have a second Shapell property that is in due diligence with national public homebuilder. We have a third Shapell property that the RFP the bidding process is just beginning and right now that’s it. The balance is Toll Brothers land one large tract in California and a handful of tracts primarily in the East Coast that were non-strategic properties for us. Marty and gang have done a terrific job of also generating cash in other ways through the refinancing of apartments that brought cash back and some other things. Marty why don’t you comment on those?

Sure, so Stephen surprised to say that we are evaluating each piece of ground that we consider for sale extensively including to such an extent that certain Shapell parcels may have been scheduled to be sold, but we said hey wait a minute, the world is much better let’s build those out ourselves. But that doesn’t reduce our leverage. So we have embarked upon some other initiatives to generate cash. Some of those are as simple as refinancing the apartments that resulted in a big gain for us. Others are putting a line of credit rather than secured cash, restricted cash for some of our municipal obligations. To-date excluding the $106 million of cash we got from Shapell on acquisition, we have embarked upon sales and these other initiatives that have generated close to $150 million for us. And there is other aspects of this that we can’t quite count as well as we would like and that we have in one particular disposition of land avoided spending another $12 million to $15 million of improvements that we would have to put in on that land. So we have said we are trying to raise $400 million to $500 million to reduce our leverage. We have made great progress to that. But I think increasingly as we see success out of Shapell there may not be as much Shapell land sold as initially expected. And I cringe as I say that because…

We are – as we have said over and over we are even more in love with the Shapell land than we were last spring when this process started or in the fall when we won. The integration has been very smooth. The margins are up because of price increases we have already instituted. And so we are holding on to as much of it as we possibly can. But there is other ways that we can raise the cash and that’s more of our strategy today than we thought it would be when we closed on the deal a few months ago.

We bought the land in the summer of last year in California not knowing if we were going to win Shapell. If we won Shapell we now have the evaluation of the land we bought outside of Shapell, better or not as good as the land we have in Shapell. And then we sell some of that.

And importantly we have enough cash and enough access to our lines to continue to grow in all those places we want to grow City Living, Texas, etcetera.

Right.

We are trying – I have always been an easy buyer and a cold seller.

Well, it’s encouraging to hear that I mean it certainly sounds like it isn’t because of any kind of lack of demand on the part of buyers that’s for sure. So thanks for that. Very helpful answer.

You’re welcome.

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

Thank you. Good afternoon guys. Doug if I could just follow-on the Shapell a little bit, could you give us an update on your business plan where you are, how the communities are selling, your changeover in product etcetera, what type of community growth you think you get and where you think profitability would be I am thinking that on the gross margin line versus maybe the rest of your business that type of thing?

Sure. So, the first thing we did on February 4, was sit with sales and suggest immediate price increases even to the older existing Shapell communities that have the older Shapell Homes, the older sales centers etcetera. And every sales manager and this is the last thing you would expect of a sales manager said no problem. We have been expecting this, the Shapell board was reluctant to bring on new homes, push the price forward, because remember these ranches were bought in the 50s, 60s, and 70s. And their margins were huge. And they were very content with those margins and did not feel they had to push it. So, day one, prices went up at every Shapell community without any problems. The buyers still arrived. The buyers still bought. We sold out phases. And we have continued to raise prices from that day forward. We are transferring or switching over transitioning to Toll Brothers architecture, Toll Brothers models, Toll Brothers marketing as we sell out of the older Shapell sections. Now, if a Shapell section had 100 lots, well, that’s worth a new model. If a Shapell section had 30 lots, we will just build it out with the old Shapell architecture in homes and then we will move forward in the next phase with Toll Brothers. So, that is in process. Rick Hartman and I were both in California last week studying every community, the schedule of every new opening every new piece of architecture. And over the next 6 to 12 months, we will be transitioning to many new Toll Brothers’ communities within Shapell master plans that will have all new Toll architecture, all new marketing, bigger homes, that’s the most important part of this is bigger homes will drive bigger prices. And so it’s on track. And we are very excited. And the Shapell team is very excited, because they have new leadership that is energized and is driven to make their company better than it ever was and bring on a lot of new architecture in these new openings.

Okay, thank you. I appreciate that. And just a broader question for you and Bob, if you think about your business and how it’s evolved over the last five, seven years or so and you look out for the next five or so, how is your business look different, I mean you have gotten more aggressive on the City Living, you are pushing further into apartments, you are attacking master plan communities in Texas, the Shapell in California, etcetera. How do you all view it as you look out from now until call it 2018 to 2020?

Well, going backwards from now which I think is where you started. We were scared of that. We just came out of the great recession. So the whole mode of operation in here was from a foxhole. Finally, you get out of the foxhole, there is plenty of sunlight. People have thrown away the weapons and they are starting to look for golf and sail boarding and whatever you have again. And the optimism comes in and you start looking for property and spreading the brand.

You can tell that Bob has a home in Miami. Now, he is talking about golf and sail boarding.

Well, that was part of an active adult. I left that one out, so how that falls into it.

Stephen, I think obviously California is a huge move for us. Texas will be a huge move for us. Active adult is heading west. We are already open in Colorado, first active adult west of the Mississippi. We have a second very exciting opportunity in another Western sunbelt state. City Living, we are trying to get it beyond the East. So, the business will continue to grow, I think less geographically. That doesn’t mean there won’t be a new market or two here or there, but we are really happy with the footprint, but you will see more and more diversity of our products in more and more of the growth states. We will still dominate the East, because our competition is very small and very local and frankly can’t get that big, that fast. And we have the inside track on most land deals because of our balance sheet and our rep, but I think you are going to see more and more of what we do really well in the East spreading out to the growth markets of the south and the west.

Doug is this…

You mentioned the apartment business will get bigger and our land development business not just in Texas, I think had some implications of land development when we first entered it, but now we like the much out there. We are probably more reluctant to off some parcels to other builders.

Easiest way to understand how we have changed is just to look at the action put on in Texas, how many lots is it 500. And what we did in California paying all cash for Irvine’s offering which led us into another and then other. And they were so successful.

And all four of the master plans we referenced in Texas will – everyone will include lot sales to other builders. So that’s the diversification and a bit of a hedge for us.

And that’s sort of my follow-on to it is as you look out at all these things or is it more chasing what will bring the best margin or is it more a diversification process?

Combination and I think Marty has emphasized now several calls in a row that other income line is here to stay. And there is enough diversification to our business but that should not be discounted.

Okay. Thanks a lot.

You’re welcome.

Your next question comes from the line of Nishu Sood form Deutsche Bank.

Thanks. I wanted to follow-up on Steve’s question there, you are talking about Texas and a lot of questions today around City Living and Shapell Coastal California, I think the opportunity there as you guys described it price increases and leveraging that into significant margin expansion over time, I wanted to just get your updated thoughts on the Texas strategy what – how do you see – how do you frame the opportunity there over the longer term clearly the land constraints the ability to raise prices that would characterize those other markets you were talking about, not as much in play in Texas, so what – how do you frame the kind of value creation for Toll Brothers in the Texas markets within new master plans?

Well, we started in Dallas as a land developer a long time ago, 15 years or so and then we decided it was best to be a merchant builder and take all the risk off the table and simply build on finished lots and establish master plans. And our Texas strategy now is a blend. In Dallas most of what we do is still merchant homebuilding although we have a few development deals. In Austin, which was a market we had been in and we shutdown, we have reentered in a joint venture with Taylor Morrison where we will be selling lots and building homes. And then in Houston which is a little bit of newer market for us, but we are mature enough to really feel like we have a good management team there and our arms around the economic growth of that market, we were presented with three what we think there are terrific opportunities to buy master plans. One is a joint venture and the other are outright. And I will tell you based on the interest from the other big Texas builders public and private, we are in terrific locations. There is a huge economic engine now in Texas driven primarily by Exxon and all that they are doing. And it was just opportunistic growth should stake and land opportunities hit us at the right time and we jump in. So you will see a blend out of us in primarily Houston and Dallas but also to a lesser extent in Austin and San Antonio merchant homebuilding and development deals and so far so good. We are really excited and comfortable with the growth prospects for those markets.

Nishu we have got land development with great success up in the Northeast which is a more constrained environment and some of the skills are still transportable down to Texas which is not quite as constrained. And our brand play is very well known there particularly in attracting other builders to come into our communities.

And we are also hiring in some cases land development companies that develop most of these big master plans to do the work for us where we feel stretched or we feel they have a better track record. And it’s smarter from them to not only run land development, but they are running the lot sale program to other builders. So, I think we have all bases covered.

So, since the Texas strategy has shifted more towards the land development and master plans, is it correct to think about it then that the returns to Toll Brothers will be more on the back end of those projects as you build them out to completion or sell off the land to other builders?

No, I think it’s more appropriate to think of some of the profits coming from them showing up in our other income and income from JV lines rather than in our core homebuilding margins.

Right.

Because if we have 500 lots that are ready to go, we may buy a 100 of those ourselves spend the next 18 months building and selling homes on those and we may sell the other 400 in four separate transactions, each of which may recognize a gain in our other income or joint venture line item to other builders.

Got it. And the second question I wanted to ask was you guys successfully raised a good amount of the $400 million to $500 million you have been talking about for de-leveraging. Thinking about that need to reduce leverage as somewhat of a break on growth and obviously your lot count I think under control fell for the first time in a little while, how long should we think about that as a break or is even that the right way to think about it in terms of growth? What areas of your business is it more likely to affect? At this pace, it looks like it’s only going to be an issue of maybe into – into maybe the middle of 2015. So, I guess that’s more than one question, but…

I would have said the third quarter of ‘15.

I don’t think it’s quite a break. I mean, we have the liquidity and capacity to embrace future opportunities as we see them. This is a bit of de-leveraging, but if the right opportunity presented itself we would not be averse to taking advantage of it. And part of this strategy is a bit of de-concentration in California, despite the fact that it’s going so well. And we are still approving deals every week.

Yes.

Got it. Great, thanks.

And we don’t call Marty and say Marty we have got a spectacular $50 million deal in New York City, are we okay? We know we are okay.

I would like to get the call though.

The lot count reduction, was that strictly as a result of the Shapell land sales?

I think it was deliveries as well as Shapell and other lot sales.

Got it. Okay, thanks.

Your next question comes from the line of Robert Wetenhall from RBC Capital Markets.

Hi, guys. This is actually Desi filling in for Bob. When we look back over 2012 and 2013, we saw really strong demand from luxury buyers with Toll materially outperforming the overall new construction market. However, over the last three quarters or so, trends have been relatively stable in the new order side. So, as we think about the evolution of the housing recovery, do you expect demand from the luxury buyers to reaccelerate and you guys can outperform the industry overall again or is the current trend more indicative of what you are thinking in terms of your buyer demographic versus the overall market?

I think that some of the proof is in the pudding that’s already before as I had said earlier than anecdotally ISI noted that the Hamptons was up about 47%, 52% some outlandish number that air rights in New York were going for humongous numbers, I can’t remember, I think the 40%, 47% of it. I think if you look at what’s happening in the very extremely sought after markets, they are not only back, but they are back with a vengeance. And I think that just leads, because those people have the money and the ability to do what they want, when they want. I think that just needs the overall luxury market. And I think there is every reason to think that it’s going to kick in very soon. And the reason is it’s because as I said in the monolog, if you have got inventory at 5.3 months, that’s based on current sales, which are for new home sales something like $450,000 a year. If you get back to 700 which would not be any kind of real move because normally we did 1 million to 1.5 million. You get back to 700 inventory is growing because inventory was based upon 450. If you base that inventory today against supposed sales of 700 you don’t have any inventory. You don’t have any inventory but you got demand and you have price increases. You get price increases people are going to rush to try and beat the boat. So I think the best is yet to come. Caveat of course by everything else that can go haywire in the world.

Great. Thanks.

You’re welcome.

Your next question comes from the line of Jade Rahmani from KBW.

Thanks for taking the questions. Can you just talk about the low cancellation rate and what you think the reason is for it remaining in this range, do you it’s buyer mix, it’s obviously is strong but does it also suggest an opportunity to market more aggressively with respect to your sales?

Our cancellation rate has been low now for two – three years.

It’s been at our historical average is three years.

Right. So four out of hundred choose to walk away from $50,000 to $125,000 in deposits when you consider the base house deposits plus the deposits we take on upgrades that is a normal – that’s normal and a sign of a very good market. People are holding on to their jobs they feel confident that what they thought they could sell their home for they actually can and buying the Toll Brothers home is still part of their dream and still makes sense. Does that allow us to raise price, no. Well, I don’t think there is a connection. We don’t track our cancellation rate and when it gets very low considered that’s the time to raise price. Our pricing is based on this week’s action, last week’s action as we have talked about many times how big our backlog is growing and how long it takes to deliver a house. But what people maybe deciding 30 days before they are to move in and whether they cancel really doesn’t play a part in that. And the number is so low that every case is an isolated individual story. A divorce, the remote loss of job, a relocation.

That’s probably of course it would be weird under an ordinary circumstance for anybody to cancel because very much in general. Prices have been going up. So you bought a home that’s being delivered from us about an average of nine months later in nine months generally have been some significant price increase. Why would you walk away from the deposit of $100,000 as opposed to going through with the transaction and looking to turn it over. We don’t get a lot of that but I am surprised we get any cancellation to other than divorce, death, job relocation etcetera.

Jade I think any movement 3%, 4%, 5%, 6%, 7% quarter-over-quarter is just noise and a handful of things that happens in our buyer base and we have actually gone out of our way to try and deemphasize how much we talk about our cancellations because they are historical norms right now and are somewhat irrelevant.

Okay, great. Just switching gears on City Living I wanted to ask if you could give a sense for the pipeline that you are evaluating and how it breaks out by markets, and I think you have mentioned looking at other markets but are you evaluating New York City deals and just in New York City and particularly what do you think has driven the outsized growth, is there anything that concerns you whether it be influx of foreign buyers or something else?

Pipeline, we are opening in Bethesda, Maryland which we call DC with one condo building and we have three apartment buildings in DC proper. We have a team on the ground down there that is looking for future deals. We are studying Boston. We are studying Miami and we are studying San Francisco. We are in Philadelphia and we will be growing carefully the high rise business of Philadelphia is difficult, because high rise construction is riskier and much more extensive and that market is not a $2,000 a square foot market. And Gold Coast of New Jersey, we own Hoboken and we have 900 units in Jersey City, three towers, the first is rental, the next two we believe will be condo. There aren’t a lot additional opportunities in Hoboken and Jersey City. They have been worked through pretty well. So, I don’t see a lot of growth on that side. New York City, Brooklyn and Manhattan, tremendous growth opportunities we seemed to see a deal every week or two. We are excited by the opportunities and you will see a lot more coming out of New York from us. What’s driving it, Bob?

I wanted to ask you how much of pipeline that is not opened for sale yet.

We have 1,500 units still on our corporate profile on our website. We have a page that shows our City Living pipeline and our future City Living pipeline. And then on our desk around here, we have another set of potential opportunities we are evaluating.

Let’s not give what’s not big of the pipeline that’s (indiscernible).

We have about 1,500 units that we own or control for about $2 billion of revenue under today’s best guess that is future pipeline.

So the answer to the question of why is it so good, Rick Hartman?

Yes, still great job growth. We will see foreign buyers come into the market both Asian, South American, German, New York is the biggest city in the world and they want to live there, but it all comes down to supply and demand and population growth. If it’s job creation in New York is an all-time high and continues to grow, those people want to live there, they are not migrating, those people are not migrating into the suburbs. They are staying put. They are raising families. In fact, lot of the units that we are designing today were much larger for going it used to be mix of one, two and three, now it’s a mix of one, two, three, four and five bedroom units. So, people are staying in place. So, there is not only job creation it’s people not moving out of the city.

Just have to correct on the largest city, Mexican city…

There might be a few in China.

Shanghai, the biggest city you want to live in.

Sorry. And just a short follow-up, the IRR that you underwrite to, is that an un-levered IRR or in your JVs are you considering putting on any secured financing to make the numbers pencil? I assume you are competing with pools of capital that would use 50% to 70% leverage.

In our JVs, we may choose to put on leverage and that will increase the returns we expect to make. In some cases, we are bidding expecting it to be a JV and other cases we have bid independent of deciding whether it will be a JV or not.

There is a remarkable lack of inventory in New York. We hear stories some of you on the call tell us stories of, I am renting and paying $10,000 a month. I now have a couple of kids. We love New York. We want to stay. We are ready to buy and there is nothing out there. And I went to see it on a Saturday. And as I was at the next building looking at the next possible unit I get a call that there is four offers on the one I just looked at, three of which are over asking price. And this is limited inventory for such a big city.

I am laughing, because two weeks ago, Rick said go take a look at this, I am walking the streets, I just cruise it around. And so my honey and I jump in the ground, take the subway up to the site, coming out of the ground, I got a call from Rick, he said forget it.

Thanks for taking the questions.

You’re welcome.

Your next question comes from the line of Dan Oppenheim from Credit Suisse.

I was wondering in the comments about community count ranging between 250 and 290 at the end of the year is still fairly wide range, I am assuming there is not a huge change in terms of the demand environment between now and Halloween, I guess wondering on the – and so we can basically I think about what would be closing out there how much uncertainty do you have in terms of the openings and such and the timing of those?

I think as we look at the community count and we chose not to narrow the range of this particular quarter because of some of the uncertainty associated with sell out and open. I think it’s fair to say we are much more confident in the bottom of the range than we are in the top of the range. But we weren’t willing to give up on the top of the range quite yet.

Yes, Dan some of this is driven by approvals, it’s a very unpredictable process, we are waiting for that last permit from the state environmental agency and notwithstanding everything they tell you. The 30 days turns into 120 days. Part of it is strategic. We may decide let’s not open out of a trailer. Let’s wait until we have our beautiful model and open with the bang out of a decorated model and that may delay in opening four to six months. And those decisions are constantly reviewed and they may change. So it is a very hard number to nail down and I agree with Marty we are very comfortable with the lower end. We chose not to change the upper end and we will come in somewhere in between and again it will be based on approvals and some strategy decisions that we make.

Great. And I guess second question there is a lot of talk first in terms of deleveraging, could also call it some ways optimization as you look whether you are selling some of that land or other land, wondering how much you think about some of the markets where you are right now just say Reno would you look at selling some land there recognizing you need to sell the whole lot in Reno to move the needle relative to some other places, but just how do you look at some of the markets you are in terms of deleveraging and optimizing the land portfolio?

There is a lot more that goes into it than just that face value. Reno is actually doing really well for us. Really and I don’t think we would sell any land right there.

It would be a tough sale.

But in other situations we expect to pay cash taxes this year. So if we can monetize some of the impairments in certain pieces of ground that we have not yet monetized not only will we get cash from the sale of our land but we would save cash because would have a tax loss and wouldn’t have to pay as much in taxes. So there are market by market decisions made based on what we see in terms of the sales activity and pricing activity. And then there is also the valuation of our basis and our potential tax loss that could be triggered.

Okay. Thank you.

You’re welcome.

Your next question comes from the line of Mike Roxland from Bank of America.

Thanks for taking the question. Just following up on Dan’s questions, in terms of construction times and limitations on land development and can you just provide a little color on whether there has been any improvement there, certainly we have been hearing that one of the biggest limiting factors has been subcontractor availability and municipal staffing in terms of getting the homes on the ground and getting them up and running in an appropriate period of time?

It’s an issue, it’s market by market. I think Texas for us is the worst. Our prices are up about $2,000 in this quarter. We are working through and it’s better now than it was earlier in the recovery because more workers have come back to the industry. But in hot markets where backlogs are big and we have lots of action and Texas is a good example. It’s a struggle. We are working through it. We are managing it, the winter also set us back a little bit and Mid-Atlantic, Northeast, Midwest which lost us a little bit of time. So we are not beyond the issue but it is improving, but it’s very, very local issue. Massachusetts is right behind Texas for the market that has the biggest subcontractor issue. And we are having the hardest time managing costs, which you wouldn’t think because there is not a lot of action in Massachusetts in a good market or a bad market.

From the beginning Massachusetts has been insane when it comes to subcontractor prices.

Got it. And then just the second question I had would be that in the press release, you mentioned that the average price of new signed contracts in the second quarter declined versus 1Q and that was more due to geographic and product mix as opposed to rising incentives. Can you just elaborate on what that mix shift was in 2Q?

It was really all across the board. I think one, not quite intuitive factor was that we sold more homes out in California, which should be at a higher price, but what we sold were Shapell product, which is at a lower price than the homes we sold. There were 12 homes in California. So, it’s really Mike a geographic mix and a product type mix shift, not quite strategic, just happenstance that has driven that number down.

Got it. And largely related, it sounds like, Marty, to the California Shapell versus Toll?

That’s some of it certainly.

Got it. Good luck in the quarter.

Thank you.

Thank you.

Thank you.

Your next question comes from the line of Will Randow from Citigroup.

Hi, Will.

Real quickly, it’s a follow-up on some of the other questions. But last quarter you shared with us kind of traffic and demand trends as the weather impacted sales. Can you talk about how some of those markets have snapped back since then?

Virginia, very good, Maryland, slow, Delaware, slow, Philadelphia, fair, New Jersey, good, Connecticut, I am now going through weather states, Connecticut, Massachusetts, good. The Carolina has got hit a little bit by this weather. They like ice down there. They are fair. Midwest, Michigan fair, Chicago appears to have a heartbeat, Michigan is good. Numbers have been fair.

Thanks for that.

And then Minneapolis has been poor. That’s primarily where the weather hit us. There was a couple Seattle had got hammered a few weekends, nothing like that where we got back east. Texas got a little bit ice here and there, but Texas was doing great. So, I think I gave you a lot of fairs and goods.

Thanks for that again. And just trying to get a sense, you mentioned July is really when the comps get easier for you. What are you seeing on the traffic to order conversion front today versus probably what you are seeing in call it the non-weather affected states over the past quarter?

Well, I guess you could argue that if they found that they fought their way into our sales center, they must have really wanted to buy, but I don’t think there is a change.

Okay, thanks for that guys and good quarter.

Thank you.

Thanks.

Your next question comes from the line of Michael Rehaut from JPMorgan.

Thanks. Thanks for taking my question. First, I just wanted to touch on not just Shapell, but I think pricing in general. Appreciate the color of course on how Shapell is going and obviously sounds fantastic, but I was hoping if it’s possible to give a little bit of granularity or quantitative view on when you talk about pricing being better than you expected, what that means from a percentage standpoint. I think you had referred to ASPs as of the most recent quarter for Shapell averaging little less than $900,000 and certainly we are modeling in some improvement from there. But are we talking about 5% or 10% greater than original underwriting or is it more in the low to mid single-digits?

I think it’s 5% to 10% plus. We have told you we bought the Shapell deal at just ever so slightly below our company gross margin. It is now above our company gross margin on the Shapell communities, where we continued Shapell models. And we believe once we launch new communities with new Toll larger prettier architecture it will go even further north.

That’s on sales that happened today.

Correct.

Not sales that happened immediately after close.

Well, right that will take a little time, but as I mentioned before, we did hit the price pretty much day one. And I have tried hard and been successful in most places and continuing those price increases since then.

And some of those price increases we had baked into our bid.

Yes, we did. Well, we knew we would be bringing in some bigger products at bigger prices, because we knew their land supported bigger, more expensive homes than they were building.

Just to clarify on that then and appreciate the color there, Marty. The 5% to 10%, Doug that you just referred to again being above your original expectations, that’s above and beyond the underwriting that you did?

That’s correct, yes.

Okay. And just again more broadly on pricing, would really love your thoughts if you look at just your overall – and again, obviously you have a lot of different markets and regions, but some builders have been able to give us a sense of on your orders that you have taken during the quarter, what percent of communities, rough percent of communities you were able to take a price increase in and there is rough degree of magnitude and perhaps how that compares to the prior quarter?

I think go ahead, you haven’t said anything yet.

Yes, I know, I feel sighted, it’s almost (indiscernible), we are going to cut off there. Mike, I know you are looking for some very specifics, but in terms of number of communities, they are relatively consistent over the last, I’d call six quarters, where it’s generally 50% to 65% of the communities experience price increases during any one quarter. This quarter, the effect of that has been relatively muted. The sales incentives are flat. We have price increases of $2,000 and then we have I mean cost increases of $2,000. And we have price increases that exceed those cost increases, but not by a huge order of magnitude. So, it’s just generally speaking for the last 90 days that, that’s kind of where we are falling out.

Great. That’s extremely helpful. Just lastly from a modeling perspective I noticed your tax rate this quarter was a little bit less than we were expecting and obviously quarter to quarter fluctuation, but last year you did a 37% rate. I think we were looking for a little bit higher this year. Maybe if you could give us a sense, Marty if possible, your expectations, I am sorry, last year you did 36%, this year we are looking for 37%. If that’s still a number that, that makes sense, any help there?

Well, the best we can do is going to estimate that’s either audit findings or audit clearances, right. So with our increased concentration in the higher tax rate of California, I think 38% is probably not unrealistic for this year, but we do have some potential for some reserve releases upon the conclusion of some states and federal statute and audits that may happen over the next couple of quarters, but I would prefer not to model to them until they actually happen.

Right, right. And just one last modeling one and I will get off here, but the JV and the interest other, very helpful, Marty, because it’s a hard line to model what you are expecting for the back half and that kind of points to roughly $95 million for 2014. And you kind of said hey, we are having a lot further projects coming online, sorry, not projects, high-end luxury buildings coming online and that this shouldn’t necessarily drop off to where it was previously. So, is the $95 million or in that type of zip code kind of a reasonable number to even build off of as you continue to grow this business or these businesses?

Well, we gave you the average of $50 million for a reason. This year is an outsized year, but we have initiatives should we choose to execute on them that could help in subsequent years, but I think we are most comfortable with the 50.

Okay, appreciate it. Thanks guys.

You’re welcome.

Your next question comes from the line of Joel Locker from FBN Securities.

Hi, guys. Just was curious on your west orders, they were fairly strong, just I know with the Shapell acquisition you had an increase in community count, but just want to know if you could quantify that the year-over-year increase?

Yes, in the west, it’s going to be mostly driven by the Shapell acquisition. So, Shapell in terms of contracts took 186 contracts during the quarter, so that’s the driver of that big increase.

And this is not just 126 we bought that they had sold in the previous quarter essentially, which went into backlog.

Right. And on your $30 million in JV and other income, you mentioned for the back half of fiscal 2014, is that weighted in any one quarter or the third or fourth quarter?

It’s probably best displayed in here. And some of that math, there is going to be some transactions. And then whenever you have a transaction, we only control one half of the equation. So, we are dependent upon the other side meeting our timelines and sometimes they don’t.

Right. And last one on the amortized interest, it fell to 340 basis points or so, what do you expect it maybe not in the next quarter or two, but like if you look into 2015 as a percentage of revenues?

I think it will be a little higher. This quarter was I will say lower by about 30 basis points, because of Shapell, the Shapell 119 homes that closed had virtually no interest associated with them. So, if you read through that, our pre-interest margin was heard at 180 basis points by Shapell and post interest it was helped 30%, 30.5% interest. So that’s where we came with the 150 points in total.

Right. Alright. Thanks a lot, guys.

You’re welcome.

Your next question comes from the line of Jack Micenko from SIG.

Hey, thanks for taking the questions. Marty, in the context of the better granularity on the JV line, can you go through say the next maybe six quarters of City Living sales openings? And then is it a mix of what was wholly owned versus JV, so we can think about that on the order side?

Sure. I guess, the best thing I can do is go through the page in our corporate profile that outlines our current City Living pipeline and our huge City Living pipeline. So, upcoming deliveries or existing deliveries at Maxwell see 160 East 22nd 410 at Society Hill and 2400 South will all be a wholly owned and be part of our core homebuilding. Brooklyn Bridge Park will be a joint venture. 1110 Park Avenue will be wholly owned. 400 Park Avenue South and Hampton Row will be wholly owned. Sutton, we are exploring alternatives for Provo Square.

Still building just explaining JV partners.

Yes. And it is a little too early to project on. And I think Hudson and Maxwell as we look forward are probably wholly owned.

Okay, great. Thank you.

I will defer commentary on 17th Street and Kings Street, because again we are very early in the process.

Right, okay. And then, Don, I will let you off the hook. Are you – with the rise in pricing, are you seeing any increased activity in ARMs as sort of an offset, obviously your borrower is a different borrower than traditional homebuilding, but is there a preference shift to offset some of the price increases on the mortgage side?

My opinion is it’s not a preference shift because of price increases it’s because of the spread between ARM and fixed rate. For example, on a jumbo today, we are at 4.25% zero points on a 30-year fixed rate jumbo loan and we can do an ARM at that 3%, a five-year ARM with five years after that at no more than 5%. So, in average, 4% for 10 years, so for 10 years, you are better off with the ARM than you are with the fixed. So, I think it’s really in reaction to the curve and the spread between ARM and fixed than any price action. We have a 15%, 15%, that is a 3 5/8%. So for 15 years, there are 3 5/8. A lot of folks are looking at that. And by the way that’s a 30-year amortization. So, they are looking at the lower rate and the lower payment for a minimum of 15 years.

As compared to a straight 15 year, which would be 3 and 5/8.

On a jumbo?

Yes.

Straight 15 between a quarter today, yes.

So, the 80% is the mix.

The straight 15 years going to have amortization and the payments going to be 40% higher. So I hear they are doing it because of the reasons that I mentioned.

Right. So, look of the 80% that finance, I mean, is it half ARM, I mean, the jumbo bars are always going to be more ARM based?

It’s in ARM right now.

40% okay.

Yes.

Okay, alright, thank you.

You’re welcome.

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

Hi. All my questions have been answered, so thank you.

Thanks, Adam.

Thank you, Adam.

Your next question comes from the line of Jim Krapfel from Morningstar.

Hi, thanks for taking my questions. Just wanted to get a sense for the Apartment Living business and what your growth aspirations are there going forward beyond this year and next? And then how much you have invested in that business today?

We are really excited about the business. We see it growing in the Boston to Washington corridor and then hopefully jump into the West Coast, that’s a bicoastal business. As we have mentioned, it’s a great hedge. We all wish we had it through the downturn plus there is great synergies and leverage off the Toll Brothers teams that are out there. The amount invested right now is…

We have $66 million invested in the four projects that are currently under development, but in our total pipeline, our investment is $130 million.

So, we have roughly that same amount invested in projects we haven’t started yet.

That’s right.

Yes.

And we are looking to do – we have a number of JVs that’s 50:50 ownership and going forward we are looking to do more 25% coal, 75% other partners, but each deal sort of stands alone and have this own dynamics, but it’s so far so good. We think we have great locations. We think we have a great team. Construction is underway as we have mentioned on four properties and there is a bunch coming behind it.

And I think we have kind of mentally earmarked about a $0.25 billion that we will have invested at particular point in time, we just don’t – we haven’t gotten to that level yet.

We have proven the management capabilities as of now.

We have been in this business now for decades. And we certainly know how to buy the ground, get it entitled, design the architecture, build it and manage it. So, it’s as I said, there is great synergies with the rest of our business.

That’s very helpful. And how much were bricks and sticks up in the quarter?

$2,000 per home.

Including labor.

Right, that’s not just bricks and sticks, that’s all building costs.

And was about half of that labor?

25% was labor.

Okay, thank you so much.

You’re welcome.

Your next question comes from the line of Alex Barron from Housing Research Center.

Good afternoon, guys. Hopefully I will be the last. I just wanted to ask – I don’t know if I missed any commentary on the order trends month to month, were they all pretty flat or did you guys see some type of acceleration or was March better than April? Any comment there?

April was a little better, but overall flat.

Including May.

Including May.

Great, thanks.

Thank you. There are no further questions at this time.

Thank you, Jody.

Thanks everyone.

Thank you. That concludes today’s conference call. You may now disconnect.