Toll Brothers, Inc. (TOL) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Dishanta and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers First Quarter 2015 Earnings Conference Call. [Operator Instructions]. Thank you. I will now turn the conference over to Douglas Yearley, CEO. Please go ahead.

Thank you, Dishanta. Welcome and thank you for joining us. I'm Doug Yearley, CEO. With me today are Bob Toll, Executive Chairman; Rick Hartman, President, COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations, Mike Snyder, Chief Planning Officer; Kira Stirling, Chief Marketing Officer; Don Salmon, President of TBI Mortgage company and Gregg Ziegler, Senior VP and Treasurer. Before I begin, I ask you to read the statement on forward-looking information in today's release and on our website. I caution you that many statements on this call are forward-looking statements based on assumptions about the economy, world events, housing and financial markets and many other factors beyond our control that could significantly affect future results. Those listening on the web can e-mail questions to rtoll@tollbrothersinc.com. We completed 2015's first quarter on January 31st. We're pleased to have achieved another strong quarter and believe we're well positioned for future growth as the housing market continues its recovery. First quarter net income rose 78% to $81.3 million, or $0.44 per share diluted. Pretax income rose 74% to $124 million. Q1 gross margin, excluding interest and inventory write-downs, was 27.3%. Revenues of $853 million and home building deliveries of 1,091 units rose 33% in dollars and 18% in units compared to FY ‘14s first quarter totals. The average price of homes delivered was $782,000 compared to $694,000 in 2014's first quarter. Net signed contracts of $873 million and 1,063 units rose 24% in dollars and 16% in units compared to FY '14's first quarter. The average price of net signed contracts was $821,000, compared to $766,000 in 2014's first quarter. On a per-community basis, FY '14's first quarter net signed contracts were 4.09 units, compared to 3.95 units in 2014's first quarter. Backlog of $2.74 billion and 3,651 units rose 2% in dollars and was basically even in units compared to FY '14's first quarter end backlog. At first quarter end, the average price of homes in backlog was $750,000, compared to $733,000 at 2014's first quarter end. We ended the quarter with 258 selling communities, compared to 238 one year ago. Stockholders' equity at fiscal year-end 2014 was $3.96 billion, up 9% compared to $3.62 billion at first quarter end 2014. Momentum continues to build as we begin the spring selling season. In our first quarter, we achieved 24% growth in the dollar value of signed contracts. Since the start of the second quarter which began on February 1, contracts in units are up 13%. We continue to benefit from our ongoing geographic diversification strategy. While we remain the dominant luxury builder in the suburban Washington, DC, to Boston corridor, our growth in the west and south and urban centers have expanded our brand into more locations and product lines. Our California presence has increased significantly with the acquisition of Shapell Homes and several other well-timed coastal California land purchases. This quarter, California produced 29% of the value of our signed contracts at an average price of approximately $1.1 million. We ended the quarter with 25 selling communities in California compared to 7 one year ago and our sales per community were up nearly 30%. Here are some California examples. At Hidden Canyon, a new community in Irvine, California, we opened three weeks ago. We have taken 20 deposits averaging about $2.5 million. At Porter Ranch, a legacy Shapell community northwest of Los Angeles, we have taken 22 deposits in the past month. At Baker Ranch, in Lake Forest in Orange County, we have taken 39 deposits in the past month. At Gale Ranch, another legacy Shapell community in San Ramone in the East Bay suburb of San Francisco, we’ve taken 47 deposits in the last month. We have seen excitement in other markets as well. In Orlando, we have taken 20 deposits at Grand Cypress which opened two weeks ago. In Cordova at Spanish Wells in Fort Myers, we have taken 18 deposits in three weeks. In Hoboken, at Maxwell Place, we have taken 21 deposits at about $1 million per unit on average over the last three weeks. And at our latest New York City condo project, The Sutton, in midtown Manhattan, we have taken 10 deposits since opening in late January at an average price of $2 million. In addition to California, Texas contributed 11% of the value of contracts this quarter, with Dallas the main contributor. City Living contributed 5% at an average price of $2.3 million. Since much attention has focused on Houston, let me share a couple of facts. Houston has remained solid with backlog cancellation rates well below the company average and contracts per community up compared to last year. Of roughly 150 Houston homes in backlog at fiscal year-end, we have had just one cancellation. Our sales per community this quarter in Houston were actually stronger than in the same period last year. And in several Houston master plans where we're under contract to sell about 400 lots to third party builders, not one builder has stepped away from their commitment. Looking ahead to FY '16, we're optimistic about earnings growth based on the high quality of our land positions, continued strong sales, particularly in California and the projected delivery growth from City Living buildings in FY '16. Now let me turn it over to Marty.

Thanks, Doug. First quarter home building gross margin before interest and write-downs improved 290 basis points to 27.3% of revenues, compared to 24.4% in 2014's first quarter. A larger number and dollar value of high margin City Living deliveries drove the increase. I'll speak more about margins in a moment. First quarter interest expense included in cost of sales was 3.3% of revenues, compared to 4% from 2014's first quarter. First quarter SG&A of approximately $106.3 million was higher than the $97.9 million in the first quarter of 2014, due primarily to our growth. Positively, as a percentage of home building revenue, SG&A was 12.5% for Q1 of FY '15, compared to 15.2% in Q1 of 2014. The improvement compared to a year ago was due to revenue growth, partially offset by the aforementioned expense increases. We continue to consistently generate significant income from JVs and other sources. Our Q1 2015 other and joint venture income of $26.9 million included an $8.1 million gain on the sale of our security company's customer accounts. We remain in this business. We'll regrow a customer base and hope to generate another gain of this type in a few more years. We began leasing at two of our apartment development communities in our first quarter. This business continues to progress and we expect it to contribute to these earnings in future years. Our operating margin more than doubled from 4.9% a year ago to 11.4% in Q1. Our income before taxes was 14.5% of revenue for this quarter. Our share count on a diluted basis averaged 184.1 million shares for the quarter. In Q1, we opportunistically spent $6.2 million to repurchase 201,000 shares at approximately $31 per share. Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for the remainder of FY '15. Our Q1 growth in new contracts and increase in average sales price has improved our outlook for the rest of FY '15. We now expect to deliver between 5,200 and 6,000 homes and we estimate the average delivered price per home will be between $725,000 and $760,000 for FY '15. The range for our year-end community count remains 270 to 310. Our gross margin guidance for the full year remains a as stated in our previous call. We expect full-year 2015 gross margin before interest and impairments to be approximately equal to full-year 2014, excluding the warranty charge from Q4, that's 26%. Our low point in margins will be in Q2, with steady upward progression in Q3 and Q4. City Living which is a somewhat lumpy business, contributed roughly 300 points to our Q1 margins, will have very few deliveries next quarter. We expect backlog conversion in Q2 of roughly 32% and average Q2 delivered price of $720,000 to $740,000. With recent strong California sales and several highly profitable New York City, City Living buildings delivering late next fall, we expect earnings growth in FY '16. Now let me turn it over to Bob.

Thanks, Marty. We're encouraged by the latest data from the Labor Department indicating strong job and wage growth momentum and also the Census Bureau's recently monthly reports showing solid growth in household formations, all of which are good for housing demand. According to The Wall Street Journal, employers added more jobs in 2014 than in any year since 1999. More jobs and better jobs should boost household formations and provide a basis for stronger housing demand. In the latest release from the National Association of Realtors and this morning from Case-Shiller, citing home price appreciation, our buyers, who often are selling a home to move up, will have more money to invest in their new home and more potential customers to buy their existing home. We believe these positive macroeconomic trends, coupled with recent federal initiatives to increase mortgage availability, should support housing's recovery. Last week, Toll Brothers was recognized as the most admired home builder in Fortune Magazine's annual survey of the world's most admired companies. We were also recently named America's most trusted home builder from among 133 U.S. home builders, based on a study of 43,200 new home shoppers in the nation's top 27 housing markets conducted by Life Story Research. Since starting Toll Brothers in 1967, we have sought to build a brand whose foundations are quality and trust. I am proud of how well we have done. Now Doug, back to you.

Thanks, Bob. This recognition speaks not only to the quality of our homes and communities, but also to the core of our business culture, our financial strength, our personnel and our corporate management strategy. We salute all of our Toll Brothers colleagues for their tremendous commitment to our customers and the hard work that has led to these honors. Now let me open it up for questions.

[Operator Instructions]. Your first question comes from Will Randow with Citi.

In terms of City Living, in terms of funding that business, are there opportunities to further fund that off-balance sheet to enhance ROEs? And how big can that business be in '16 and '17 as a percentage of closings, if you have some direction there?

Well, we continue to explore opportunities on occasion to find a joint venture partner and move some of these buildings off balance sheet. In fact, The Sutton which Doug referenced in his comments, his opening comments, is a venture that we sold a 75% interest in to a fund in the first quarter. We deferred a gain of $9 million on that, that we will recognize on that as we sell homes. There remains opportunities, Will to partner with others if we choose to and that is a decision we make based on a number of factors, one of which is the risk of concentration. In terms of our expectations for City Living in '16 and '17, Gregg?

Yes. City Living has been single digits in '14 and '15, right around - well, '15 is a projection, but we assume it will be somewhere around 7% when the year is out and then '16 will actually get into double digits. Let's call it 10% for now, but the thing about City Living in '16 to remember is that we'll have a lot of income from joint ventures flowing through, not through normal home building operations, but through the joint venture line item. So I'm excluding those from the 10% I'm throwing out for '16.

On the luxury market in particular, you guys commented on your last call regarding reduced pricing power, if you will. Have you seen that turn around at all with tightening and existing inventories, particularly in some strengthening in the Mid-Atlantic?

The first part of your question, the answer is yes. I highlighted a number of communities out west and in Florida and in the New York area that you can certainly surmise, based on the sales pace that I mentioned over the last three to four weeks, we have significant pricing power. Mid-Atlantic is about the same as it's been. We have some pricing power in certain locations and in others we do not. But as I mentioned, certainly out west and in certain communities in Florida, we have significant pricing power.

Your next question comes from Stephen East with Evercore.

Doug, when you all bought Shapell and I mean, California drove your business this quarter on the order front. When you all pro formaed what was going on, what's it look like? What's your demand today, both from an absorption pace and a pricing perspective versus what you all had pro formaed. It sounds like it's accelerated but I just want to make sure that's clear.

Absolutely, it has accelerated. We're about a year into the transaction now. We had said early on that there were phases of Shapell master plan communities where it did not make sense to bring new Toll product online because there weren't enough lots left to support a new model. Now as we've moved into new phases of new sections, new land, we're building new models, offering new Toll architecture, bigger, better, prettier, more ability to customize and we're thrilled and doing better than we ever projected.

And then if I can squeeze a few more in on the order side of it. You talked a little bit about Mid-Atlantic, but your other margin - your other regions went down on units but pricing was much stronger than we expected. Is that a conscious strategy? Is that a mix shift that's going on? And then if we look at just January and February, growth in orders versus November, December, are you going against tougher comps in January, February? If so the magnitudes that you got versus what we saw in November, December?

So the first question, Stephen, as to strategy on price, it's mix driven. In terms of the comps from the end of 2014 to early 2015, Gregg?

It broke out that November we ended up - we're setting up our comp for 2016 to be higher than it was in 2014. So what does that mean? It means from November 2014 to November 2015, our orders are up double digits, like 20%. December was flattish and January is also strong. So January we're setting up our comp for 2016 with almost up 20% as well.

And then squeeze one in real very quickly. Is the SG&A leverage that you got this quarter, is that a sustainable type of performance?

I think it is pretty sustainable, certainly through the balance of this year. It will be relatively consistent quarter and then we hope to actually improve it thereafter.

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

Gregg, quickly first question just for bookkeeping here, the 7% of, I think you said closings from City Living this year, is that units or revenue? Because I think units would be pretty tough.

That's in dollars. We tend to discuss City Living only in dollars because that's what's really meaningful there.

I figured that was the case. On City Living, was hoping you could give us an update on where things stand with your two largest buildings, the Pierhouse and 400 Park Avenue and specifically just update us on timing. Within that, any commentary on trends you're seeing from foreign national buyers? There has been a lot of press about that here in New York lately and given the strengthening dollar was curious if you're seeing any change in demand from that subset of buyers.

Both Pierhouse and 400 Park Ave are still on schedule to deliver in the late fall. We pushed price significantly at both buildings through last spring and summer and as we mentioned on the last call, New York is still good. It is second or third to Northern and Southern Cal in terms of the quality of our markets. It is not as frothy as it was a year or two ago, but both buildings are doing well and - both on the construction side and on the sales side. So with all the price increase we had, we certainly have the ability where necessary to incentivize a little bit to get some more sales and still have very high margins and so even though New York is not quite as frothy as it was, it's still very strong and we're delighted. In terms of foreign buyers, we haven't seen any change. Our foreign buyers in New York run about 15% and we're not seeing a change in that.

And if I could just sneak in one more, just on the balance sheet, second quarter in a row you bought back some stock this quarter, obviously much less than the fourth quarter. But looks like you're gearing up for potentially starting to generate some cash flow, especially as you start to monetize some of your City Living projects. How are you thinking about the balance sheet over the next couple years in terms of the debt balance and other potential uses of cash?

It's something we talk about quite frequently. We're exploring a number of alternatives. We have some debt due this May that we'll have to address either with a refinancing or a payoff. I guess we have to pay it off no matter what, but whether we replace it with you knew debt or use existing cash, we'll evaluate the circumstances at that time.

Your next question comes from Michael Rehaut with JPMorgan.

It's Jason Marcus in for Mike. Appreciate the color on the California and Houston sales pace that you gave earlier, but was hoping that you could maybe comment on what you saw throughout the quarter in some of the other regions in terms of sales pace and community count growth and how they may have compared to the company average.

Well, I guess community count growth is not really something that there's company averages to compare to. It just kind of happens relatively organically as we get communities open. But with respect to sales pace per community, I think we've been pretty clear that California is a bright spot and the aggregate stats for some of the other regions imply that it did much better.

Reno was hot. Vegas was hot.

Our top markets when looking at growth off of 2014 would be Northern and Southern California, Dallas and Houston, City Living, Phoenix, Reno and Vegas, Seattle and Florida East Coast.

And then just the next question, a clarification on the gross margin guidance, in terms of the interest amortization, would you also expect that to be about 3.5% for 2015?

Yes.

Your next question comes from Nishu Sood with Deutsche.

I wanted to ask about the 13% figure you're talking about since the quarter end, so for February. It sounds like the strength in demand has continued into February. Was just wondering if you could comment on any potential weather effect you've been seeing. With the significant percentage, you've diversified out, but a significant percentage still being in the weather-affected areas. Have you seen that? Would that number have been even stronger without any potential weather effect? What are you seeing out there?

Nishu, how quickly everybody forgets how rough last winter was in many regions of the country. It was very cold and very snowy. Again it's cold this year. It's a little less snowy, unless you're up in New England. We've looked at weather a bit, but I don't think there is a story to tell there.

Story to tell is that usually, if you've got good land, you got good offering and you're hot, bad weather brings them out for some strange reason.

As long as they can get there.

It's amazing.

Boston.

Well yes, excluding Boston. It's amazing the power they find in order to get there. Even in deep snow, shovel the walk up to your front door, you can sell houses.

Massachusetts this past week, we have about 8 communities, took 13 deposits.

Right.

Very strong week.

Also wanted to ask, on Texas, Houston in particular, appreciated the color commentary you gave there. There has been some comments from the supply chain that construction pace has slowed down in Houston, particularly at the high end. So reconciling that with the strong demand trends that you're noting, does that just indicate to us that the builders are taking maybe a little bit easy on specs? I know that you folks obviously don't do a lot of spec building. Maybe what you're seeing from your peers, are the builders just taking a more cautious stance or does that kind of foreshadow some declines in demand as well?

It's tough to follow ourselves among the other builders as closely as you're asking. The simple answer is, we don't know.

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

So my first question relates to contingency sales and just how your customers are dealing with the home that they have to sell, whether you're seeing any discernable trends that are worth calling out amongst your buyers regarding contingency sales.

Stephen, we don't sell homes on contingency to sell your existing home. We have very few contingent sales in our company. Occasionally at a lower price community there may be a contingency on a mortgage, but that's very rare. We're not hearing of issues our buyers have with selling their existing home. In fact, as this recovery strengthens, we're hearing better news that they're more confident they can sell their home and that's why our traffic is up and they're out in the market anticipating the ability to sell their home later in the spring. So you buy the new home now, you sell your home late in the spring and you move the kids into the next school year. That's the normal cycle and it's all good from what we're hearing in the field.

Second question relates to something that we've observed for some of the other builders who are building at somewhat lower price points than you. In general, what we've begun to detect is that builders are more interested this year in pushing volume relative to price, in particular getting absorption rates higher. The general sense that we've had is that, the sense we've gotten from the builder is that they feel that maybe they pushed prices too much in 2013, 2012 and 2013. I believe you guys also made a comment something along those lines last year, so I was wondering if you could just sort of help me clarify my thinking as to how Toll Brothers is going to position itself relative to this dynamic of getting absorption rates higher versus raising price.

It's not our game. We're very unlikely to be pushing for volume. That does occur when you've got an ordinary community and you're not doing the budget what you had projected and what your subcontractors therefore have projected. At a certain point your overheads start to eat you up, so you increase your volume, but that's not our game. We have listened to reports of other builders and that was the case. I'm not sure that it exists. The other builders may have grown out of incentivizing in order to increase volume.

Steve, this is Fred Cooper also. We're, in general, at a very different price point so we're not really banging heads with the other builders in most of the markets where we operate. I think probably that's the competition that they face with each other puts a little additional pressure on them.

A lot of that top-line growth is through speccing, most of it has been. That's been the commentary and that is not our business.

Could I just follow-up on that? Doug, you talked about speccing. That's interesting because we've seen at least one builder, a fairly prominent builder, get a little more active in the higher end and with a willingness to pursue a spec model there. As you've observed what's going on in the market is there any increased willingness on the part of buyers at your price points to go for a specced product?

No. But there are buyers who have circumstances that lead them to want to spec because they're relocating to a new market and they want to move in quickly, or they sold their home faster than they thought they would and they need to move quickly. We recognize that and we study our markets and those markets that are re-lo markets, we will have a few more specs than those markets that are not re-lo markets. But there is no change in the buying style or philosophy of our buyers. Their preference is always to custom design the home and make it one of a kind, with every addition, every finish, every upgrade that suits their lifestyle and it's personal to them, that is always the desire. But like I say in certain markets on certain occasions, specs are needed and we think we have the right number in those locations.

The spec gives the other builder the opportunity - it dovetails with your first question, gives the builder the opportunity to move the product compared to waiting for the customer's wishes and selection of options, because when your customer is choosing whether he wants the elite room or the special mother-in-law suite, the permitting process today much more prominent than it was 10 years ago. Down shifts in the counties and the boroughs are making you submit a whole roll plans with respect to that single home. By the other builders speccing, they increased tremendously their volume compared to what it would have been if they were going to customize the home.

Your next question comes from David Goldberg with UBS.

My first question, I wanted to spend a little bit of time just talking about the land position now. The land position has kind of been shrinking for the last couple quarters which no doubt probably represents generating some free cash flow, especially after Shapell. But I'm wondering about how you're thinking about the land position as you look forward kind of growing the business in 2016 and beyond and if you think the total position now is sufficient for the growth that you envisioned for the company or do you think you need to go out and buy a bunch of land? Maybe it will be for 2018 and 2019 deliveries. How are you thinking about land as we kind of look forward?

We're thinking about land as we've always thought about it which is to be very opportunistic, take advantage of our balance sheet and buy what we think is the best land at the corner of Main and Main to set up the company for many years to come and that's how we're going about it. There are deals like Shapell that I think come along maybe once in a career. Hopefully there's another two or three of those. And then there are quarters where things are a bit quieter, but it's less strategic than it is the opportunities that are presented to us. There are certain markets that we have plenty of land and we can be more selective and there are other markets that we feel very strong about our growth potential and we're out there with a few more land acquisition managers, kicking the dirt a little bit harder. That's how we've always run it and how we always will.

One of the things we're trying to do is increase the percentage of optioned land as compared to owned land in our holdings. Right now, most of the land that we have, we own which means we've paid for and we put the capital out. Whereas if we option it, it's a little bit more efficient from a capital perspective and that is part of the marching orders the land acquisition team has been given. It's just been tough to do that as we emerged from the downturn because the sellers of land wanted to sell and not give options. And then the Shapell opportunity we executed on kind of exacerbated the situation by buying the land rather than optioning it.

No, you caught on the horns of that typical dilemma. Your seller will sell to you much quicker and at a much lower price if you'll deliver all cash all at once and the sooner the better. So the yin and yang, yes, we will for a great one, maybe for a good one. No, sir for a fair one, you've got to come to see it our way.

My follow-up question, it felt like in December, the last quarter conference call, there was a sense that it was getting more difficult to get pricing power in the business and that while you might be able to get volumes and the customers were still there, it was just difficult to raise prices. The tone today feels a little more optimistic. I'm wondering if you could talk a little bit of kind of - maybe not quite market by market, but just broadly are you finding it easier to get pricing power? Is that because of where rates are or is that because of consumer confidence?

The business is better.

Okay. We should read that as easier to get pricing power? That's the way to read through?

Yes. Now, part of that is seasonal. We spoke to you in December and now we're speaking to you in late February. So we're now three to four weeks into a spring selling season and there are more buyers in the market. We talked about California and our strategy and how we're bringing on the Toll homes and how well that's working. But where we sit today, we certainly feel better and have more pricing power than we had in November and December.

And I think as Bob mentioned in his part of our prepared remarks, there is a lot of positive statistics coming out from census Case-Shiller, National Association of Realtors as it relates to home price appreciation, limited existing home inventory, more jobs, better jobs, wage improvement. So we have a lot of positive macroeconomic trends and as we looked for some that were going the opposite direction, we struggled to find many.

Your next question comes from Jade Rahmani with KBW.

Small ones, what do you expect the tax rate to be for the full year, since it was lower than the normalized rate in this quarter? And also, where are selling expenses running at a percentage of revenue?

Sure. Jade, we expect the tax rate to be around 35% for the balance of the year. There is a manufacturing credit that many of us home builders enjoy that helps by about 2 or 3 percentage points to move the rate down from 38% right now. As it relates to selling expenses, I would encourage you to model somewhere in the upper 4%s for the succeeding couple quarters and then down to the high 3%s for the final quarter.

Just on City Living, could you care of comment on the pipeline of future investments you're considering and the competitiveness on new deals? Do you think that there are any potential incremental opportunities in the New York area that you haven't yet pursued, such as in, say Queens, for example?

We've been in Queens. As a matter of fact, we spoke about it yesterday because we issued a release, I can't remember for what purpose, but we mentioned Brooklyn, Manhattan and said hey, don't leave out Queens. So we're definitely there. Hello?

And care to comment on the pipeline?

We have a good pipeline. We're always looking. Deals in New York City, Hoboken are tricky. There is not a lot of vacant land laying around with signs on it. We've got a great team that's been very creative. So I'm very happy and confident with not only the team, but the deals that will be coming. We're also looking to expand City Living beyond New York. We have our first building that just opened for sale in Bethesda, Maryland and we're looking for more opportunities in DC. We continue to look in other markets such as Boston, Miami, Toronto, San Francisco and we have an existing operation in Philadelphia and which has done very well for us, primarily mid-rise stick built and we have three or four opportunities we're pursuing in Philly. City Living is primarily New York but not exclusively New York and we're looking to get bigger in New York and in these other markets.

Jade, I would encourage you to look at our corporate profile in our slides there. We have the current City Living pipeline outlined and we also have a future pipeline that talks about a couple buildings to be started later this year, three buildings to begin construction in 2016, one in 2017 and one in 2018. So we have a pretty robust pipeline right now.

Your next question comes from Michael Dahl with Credit Suisse.

Wanted to follow-up on some of the comments around pricing power and also ask just from an options standpoint, have you seen any meaningful changes in overall level of option packages or within the packages, any notable shifts?

No. Options upgrades on a percent of sales price are, Gregg, are still running--

Right around that 18% to 20%.

18% to 20%.

I think it seems like some of the follow-up to some of the wording around 2016 expectations seems very carefully worded. But if we think about your comments on the incremental pricing power being encouraged by that increased level of City Living as a percentage of revenues next year, is the implication that in addition to earnings growth you'll also see gross margin growth on a percentage basis?

It won't be an implication if you answer that. He's got an implication he wants to get a little firmer.

It's interesting you said our wording was very carefully chosen, because it was. I think it's a little early for us to talk about gross margins for next year and a bit of the commentary associated with earnings growth for next year reflects the high profile, high margin City Living deliveries that are going to be off balance sheet.

Your next question comes from Megan McGrath with MKM Partners.

Just a couple follow-ups, most of mine have been answered. Marty, are you still looking for $75 million to $90 million in other and JV income this year?

I think we're sticking with that guidance. We're considering internally had some of the land sales we had projected to happen the rest of this year will still happen, but that's where we're right now. There will probably be a better update three months from now, the strength of the California market makes us reconsider some things that we had on the drawing board to sell.

And then I just wanted to make sure I understood some of the commentary following the question on absorption pace, your absorption pace up about 7% in the quarter. You outlined those, a lot of regions where you said absorption pace was improved. Was absorption pace in those regions actually up year over year or just less down than before?

You can see the change in agreement per community on the right there. It's up in our regions.

So all the regions you outlined had growing absorption pace in the quarter?

Yes, except for City Living. City Living just had less contracts per community this quarter, but we noted as a strong market for us, obviously because of our continued performance there.

I don't think we're up 7% either. I thought we were up just over 4%.

For contracts per community was up 4%, correct in February of '15.

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

I was wondering in the west, the strength you talk about there, how much of that relates to new communities or repositioning Shapell ones as opposed to inflection points and maybe core home buyer demand. I'm just trying to interpret your enthusiasm for the strength there, if that's company specific, product, location, new communities versus change on the ground overall.

Adam, California has stayed strong.

It's both.

It's exactly both. I mentioned Baker Ranch as one of the communities that's had tremendous sales in the last month. We had taken 39 deposits. Baker Ranch has been open now for a year and a half?

12 months.

Okay. So that's an existing community. The others I mentioned, Porter Ranch, Gale Ranch which are Shapell communities, they're existing communities but in some of the product lines within those communities it's new offerings, it's new homes, new lots. So it's a real mix. It's both.

Okay. And then the other question I had and this kind of mirrors a previous question asked, but when you mentioned earlier the list of top markets, you left out what you typically say are the 50% of your communities or so from the Baltimore to the Boston corridor. So when I think about your enthusiasm, is that relating to these Florida and California communities or when you take the whole portfolio is it a little more tempered? Would that be fair to say?

Yes. If we give you the best when you ask for a list, what's left is not the best.

I'm just trying to get a somewhat selective choices of all these strong-selling communities. I didn't hear any strong-selling communities in the Mid-Atlantic. I'm trying to make sure we get a full picture as opposed to the all-stars.

New Jersey is good. Philadelphia suburbs are good. Northern Virginia, where we have great offerings, is good. We would like it to be great, but it's good. It didn't make my list of top 8 or 10. Connecticut has been a little bit slower and Massachusetts is good but has been hammered for the last five or six weeks with some weather issues.

Chicago is not great. Not even--

Coming back a little bit.

But we noticed strong bounce back there within the last couple of weeks.

Raleigh and Charlotte have been fair.

Yes, but they haven't - I don't put them up there.

Fair was down there.

Michigan has been pretty good for us.

Right.

Your next question comes from Mike Roxland with Bank of America.

Just a question on gross margin guidance, obviously, you've raised the lower end of your ASP for the year. Can you talk about why you did not change or why there's been no adjustment to your margin guidance when you've kept that flat year over year if you're expecting pricing to be better? Is that really due to maybe some rising inputs that you're seeing that's causing you to have a little bit of caution with respect to your gross margin guidance?

I think we do continue to see some rising inputs but I think what we've really seen is our mix shift to California and a higher priced product out there which has driven the ASP or ADP for the year to be up. Profitability doesn't necessarily go up just because you're in a higher priced geography.

Marty, if you're selling more California homes which tend to be higher gross margin product, why wouldn't you see - and you're dealing with a higher quality mix. Why wouldn't you see the margin move up as well?

Remember, we paid fair value for Shapell 12 months ago. So while it's doing better than we thought, at purchase price it does not necessarily get to the company's averages yet.

So is it still some purchase accounting that you're dealing with over there?

No.

And then just last question. Just wondering if you could provide a color a little around your Southern segment and what's happening from an orders vantage point. I realize that the Raleigh, Charlotte may not be the strongest markets for you, but is there something else that drove the weakness from an orders vantage point in the South during the quarter?

Florida was part of the reason for the decline in units.

Gregg, what actually happened there, if you don't mind?

Well, we took fewer contracts this quarter than we did last quarter, a year ago in Florida.

It was Florida and North Carolina, that's what drove it.

That's right.

Texas is very well.

Your next question comes from Ken Zener with KeyBanc.

Marty, if you could maybe give some context to - I'm going to stick with California here, you guys got about 5000 gross lots from Shapell. You talked about 3000 net after selling off. Your commentary suggests you're still reviewing how much liquidity you want to drive from units you want to sell. The comments you made around the sales pace in California, I think an earlier question alluded to this, but obviously as you guys repositioned communities you have to load up backlog which gets you higher or very high growth rates. Are you guys still thinking about keeping that, those assets for seven-plus years or are you taking orders in now that are actually shortening your duration?

I don't believe we've taking orders in that are shortening our duration. There was one community in Northern California last year where we had thought about selling it initially and we decided to build through it, but that is, for the most part, delivered at this point. Fiorella at Gale.

And then Marty, your comments around urban contributed roughly 300 basis points of margin, is that the all else being equal sequential decline when you refer to 2Q being lower, being the lowest quarter in the year as well as the 13% order growth that you talked about, Doug? If your pace is up 4%, does that imply your community count in 2Q is up 9%? Thank you.

I guess to the first half of your question, I would answer yes. As it relates to community count growth, three or four weeks in, I don't know that we study it in that kind of detail. We're just going gross over gross for the 13%.

Your next question comes from Buck Horne with Raymond James.

Sorry, guys. Sorry about beating the City Living horse to death one more time. But I just want to go back to the orders that you got this quarter. You had 19 units that were under contract this quarter. I presume that, that's partially related just to timing of building openings and when units are available for sale. Can you may be put that in context for how many units you had available for contract in the first quarter and maybe give us some clarification on how many total units, City Living units, you’ve available for sale in the second quarter?

We'll give it a shot for you here. We have three, four buildings in Manhattan and Brooklyn that are presently open for sale and in those buildings, if you include The Sutton which just opened for sale and has 111 units left since, as we mentioned, we just opened in the last few weeks and have been pleased with two weeks of action, but we have a long way to go. There is about 220 units that are in those buildings. We don't open the entire building, ever. We will open select units. We'll keep a special penthouse off the market. We always have a mix. So any buyer that comes in we hope we have a home for them and of course if they insist on seeing something that's not on open, we'll find a way to maybe get them into that unit. But generally, we don't open a whole building. We would over overwhelm ourselves and our clients, that's the total inventory in those buildings. Right now, we probably have 40 or so units available out of that 225 in New York. When you move over to Hoboken, we have about 50 units available, primarily at Maxwell place which as I mentioned, has had a terrific run here and then down in Philadelphia, we have about 30 units that are available. And then Bethesda, Maryland, has about 50 units available in that new building I mentioned which is just opening.

And then switching gears, as you see demand and it look like a lot of indicators are showing that buyers are coming out this year, do you think there are any constraints on either construction costs or labor, materials that may delay cycle times? Are there any constraints in the field related to sticks and bricks or just labor that may either constrain your gross margin potential or just your delivery schedules?

Labor is still short but it's getting better as we get further into this cycle. Most markets we have very few if any issues. California's an example where we're selling a whole bunch of homes, building backlogs and we're still able to deliver homes in six, seven months. So it's easing and certainly feels a lot better. Colorado, Denver, is probably the tightest labor market. There is a whole bunch of apartments built. Most of the workers jumped off the residential for-sale properties and jumped onto the big apartment complexes which they could make more money and go to the same job site every day. So that's probably been our toughest market and we do have backlogs in Denver that approach a year or more and that is mainly labor related. But generally, the labor market is building and the issue is behind us in most places and I don't think it will affect gross margin or delivery. Our backlog is what we're focused on and when we sell so many homes that we push the next sale to a 10, 12, 14 month delivery that's when we raise the price more often, that's how we've always run the business.

Your next question comes from Jim Krapfel with Morningstar.

I would like to get your thoughts on people, especially Millennials, increasingly preferring living in city centers and what that means for your longer term expectations for City Living. So in other words, do you still see City Living contributing 10% to 15% of revenue long term or could that go higher?

It could go higher. It could go lower. It could stay the same, depends on what deals come across our desk on Monday morning, how many of them we take and how many of them we shoo away.

We love the City Living business, as we said many times. We're looking to expand it. We hope to grab more and more of those Millennials that want to stay in the cities and then as they get older and form families and have kids, many of them want to jump to the burbs and we're their builder.

Have we got a burb for you.

Okay. And what kind of inflation are you seeing in your land costs and what kind of activity, probably, are you seeing from your primary competitors, the small and mid-sized builders that have been more constrained by access to capital?

They're still constrained. The small guys have not come back into the business. They're unable so far, at least in our markets, to find the capital to compete on the land deals that we go after. We've always loved our position because we tend not to compete against the large public builders who tend to look at land and locations that supports lower-priced housing. The land market is about the same as it's been over the last of couple years. We're very selective. We're very diligent and we continue to buy land.

[Operator Instructions]. Your next question comes from Joel Locker with FBN Securities.

Just a question on the communities out west. How many did you have at the end of the first quarter and what do you expect to end the year with?

The west finished the quarter with 74 communities. And right now our projection is to finish the year, October 31st, with 96 communities in the West.

96. I mean if you look at a preliminary 2016, are you expecting moderate growth or more outsized growth or double-digit growth in community count if you're just looking at the land you have under control right now?

It's a little early for us to comment on 2016, Joel.

There are no further questions. I'll turn the call back over to the presenters for closing remarks.

Thank you, Dishanta. Thanks everyone. Have a great week.