Good day, and welcome to the Toll Brothers Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Douglas Yearley, CEO. Sir, please go ahead.

Thank you, Steve. Welcome and thank you for joining us. I'm Doug Yearley, CEO. With me today are Bob Toll, Executive Chairman; Rick Hartman, President and COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations; Joe Sicree, Chief Accounting Officer; Kira Sterling, Chief Marketing Officer, Mike Snyder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Company and Gregg Ziegler, Senior VP 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 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 email questions to rtoll@tollbrothersinc.com. We completed fiscal year 2017's second quarter on April 30. Second quarter net income of $124.6 million rose 40% versus fiscal year 2016's second-quarter of $89.1 million and earnings per share of $0.73 per share diluted rose 43% compared to $0.51 per share in fiscal year 2016's second quarter. Fiscal year 2017 second quarter pretax income was $199.2 million up 42% over $140.4 million in fiscal year 2016's second quarter. Revenues of $1.36 billion and home building deliveries of 1,638 units rose 22% in dollars and 26% in units compared to fiscal year 2016's second quarter total. The average price of homes delivered was $832,400 compared to $855,500 in 2016's second quarter. The change in per unit price for revenues, contracts and backlog were all related to mix changes. Net signed contracts of $2.02 billion and 2,511 units rose 23% in dollars and 26% in units compared to fiscal year 2016's second quarter. The average price of net signed contracts was $804,200 compared to…

Thanks Doug. Before I address the specifics of this quarter, I want to note that a reconciliation of the non-GAAP measures referenced during today's discussion to their comparable GAAP measures can be found in the back of today's press release. We are pleased with our income statement results this quarter. Net income grew 40%, earnings per share grew 43% and we hit the high end of our projection in nearly all key metrics. Revenues, deliveries and average delivered price were at the top of our guidance and that drove SG&A down to 10.8% of revenues. Gross margin was 21% and adjusted gross margin, which excludes interest in impairments was 24.3% of revenues. Second-quarter interest expense included in cost of sales was 3% of revenues compared to 3.2% from 2016's second quarter. We recorded $4.3 million in inventory impairments. In the second quarter, we issued $300 million of 10-year bonds at a rate of 4.875% with $691 million in cash and $1.18 billion under our credit facility available at second quarter end, we are opportunistically positioned for various things including to retire our $400 million of debt maturing in October of 2017 as well as potentially our $288 million in convertible bonds in late calendar 2017. We paid our first quarterly dividend on April 28, 2017 of $0.08 per share and we ended 2017's second-quarter with a debt-to-capital ratio of 45.4% while our net debt to capital ratio dropped to 39.8%. Our weighted average diluted share count this quarter was 171.4 million shares and that includes 5.0 million unissued shares that are treated as outstanding associated with our convertible bonds. These bonds are convertible and an adjusted share price of $48.97 and are callable buyouts in September 2017 or portable to us in December 2017. For modeling purposes, with these carrying…

Thanks Marty. We believe our strong results are being supported by the release of pent-up. Single family housing starts rose to 835,000 in April. However, that is still just half the previous peak of 1.72 million in 2005. Many factors are bringing buyers off the fence right now. These include low interest rates, urgency created by the limited supply of resale and new homes and improving personal balance sheets and credit profiles. Our luxury buyers are further benefiting from a solid employment picture, strong consumer confidence, a robust stock market and increasing equity in their existing homes. Additionally, as the Wall Street Journal recently reported, the number of new owner households was double the number of new rented households in the first calendar quarter of this year. According to Trulia, this was the first time in a decade that new home buyers have exceeded new home renters. Clearly the new home market is alive and well. And back to Doug.

Thank you, Bob.

My pleasure.

We believe we are benefiting from the appeal and national recognition of the Toll Brothers brand and a lack of large scale competition in the affordable end of the luxury new home market. The breadth of products we offer, our beautiful home designs and our ability to appeal to a wide range of demographic groups including affluent move-up, empty nester and millennial buyers are also fueling our advantage. Increasingly, home buyers choose to buy new overused homes, particularly in the luxury market where consumers want and can afford to customize their homes. We think our customization program differentiates us within our segment of the luxury market. Buyers are spending on average over $120,000 to further customize their already well-appointed homes. The supply of new and existing homes continues to trail the growth in population and households. We are producing strong results even with industrywide home production levels, still well below historic norms. Our affluent discerning buyer base combined with our strong balance sheet and well-located communities is enabling us to outpace the industry in many metrics. As I mentioned earlier, this was the best spring selling season we had in over 10 years. We attribute our strong results to the expansion strategy we have undertaken over the past decade to diversify our luxury market product lines and geographic footprint. We have a great land supply to support further growth, a brand that we believe is top in the industry and a seasoned and dedicated team that positions us to continue to lead the luxury new home market in the years ahead. Steve, let's open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator instructions] And our first question comes from Robert Wetenhall with RBC Capital Markets. Please go ahead.

Hey guys. Good morning. Congrats on a nothing short of a complete blowout quarter.

Thank you.

Wanted to ask you had a massive surge in the West in your orders and it seems like across the portfolio, you're seeing strength. What drove that big uptick and when you're thinking about on a regional basis, strength and any softness, it sounds like everything is going in the right direction. Is that the right way to think about it and maybe if you just comment on why the West is so good.

Bob, the West is great in all regards. We had significant order growth in Arizona, Colorado, Idaho of course is new to us and doing very well. Las Vegas, Reno, the only place that was down in the West and it's strictly mix because we love the market was Seattle and we have more opening coming, so we'll make up for that, but the West was absolutely fabulous in all regard. We've course now report California independently, which is as west as we get and I have the same comments for all of California as I just made for our Western region. It's just fabulous.

That's obviously positive and I'm glad you leverage to the strong demand out there, you came in at the high end of your adjusted gross margin guidance. We're hearing a lot about lumber tariffs, higher cost for land and labor, direct costs rising too, but it seems like you're successfully navigating them in a very productive fashion even when you're getting a weaker mix on ASP. That's a tough balancing act and I was just curious what are you doing obviously something correctly to continue to get that highly profitable gross margin? Is it sustainable or do -- what you're thinking in the back half of the year? Thanks, and good luck.

Well I think Bob we've given guidance on the third quarter. We've given guidance for the full year so it's pretty evident that we expect margin in the fourth quarter to grow. That's a function of mix because we are seeing some headwinds associated with managing through the labor, lumber and land issues as well as some other costs, but with deliveries happening a 1400 Hudson in our New York City Living segment as well as an increase in our California deliveries, we expect fourth quarter margin to be up over third quarter and we're happy that we're able to continue to reiterate are beginning of the year margin guidance.

Got it and just if I can sneak one last standard, it seems like your orders are coming in ahead of expectations, how should we be thinking about backlog conversion in 2H relative to last year?

I think again we've given pretty specific guidance for our backlog conversion for the third quarter and for the full year. One other comment I wanted to make with respect to margin is our active adult segment in our Idaho business is producing more sales than we had expected at the beginning of the year and that is product that will be able to deliver this year and so that will generate a better ROE. But since that business is a bit lower margin then our average, it does offset some of the New York and California news that I mentioned a comment ago.

Got it. Overall great quarter and very encouraging commentary. Good luck gentlemen.

Thank you, Bob.

Our next question comes from Michael Rehaut with JPMorgan Securities. Please go ahead.

Hi thanks. Good morning, everyone and nice quarter.

Thank you.

First question obviously with the positive absorptions and a lot of the strength that you're pointing to in your different markets, I was curious about how you're thinking about price and maybe you could give us a sense of what the -- what type of a rate of like-for-like price increases you're seeing if you can kind of give perhaps a blended average across your communities or any type of sense. We heard out of our conference earlier or I'm sorry last week that couple of builders are still kind of seeing maybe only about low single digit type of depreciation. Is that given the strength that you're seeing in the sales base, is that something that are you seeing that type of rate of price inflation or is it perhaps better in some regions?

Mike, this Doug. It's certainly better in some reasons and it's worse in others. California and Seattle have had -- we've had the ability to raise prices the most. For the quarter, we on average nationwide we raised prices a little more than $5,000 per home. We had cost go up about $2,500 per home. So, we continue on a national level on average to outpace cost increases, but not by a whole lot, by $2500. But when I focus on those areas that have been strongest on you look to where we sold the most homes this quarter and that's Southern Cal, Northern Cal, Seattle, Northern Virginia, New Jersey, Las Vegas, Reno and Michigan. So many of those markets are out West, but some of the old steady performer from the old days of New Jersey and Northern Virginia and Michigan have continued to perform very well where we had pricing power, but when you blend it all together, it's number I started with a little more than $5,000 price increase and about $2,500 cost increase.

And those are house construction cost that are creeping. It does not factor in land or land improvement costs, which are also creeping.

Right. No that's helpful. Thank you. I guess you just secondly, if I have this right from a modeling perspective, it looks like you're -- in terms of squaring into your guidance that your fourth quarter SG&A might be up a little bit year-over-year, I wanted to know if we have the right and perhaps what's driving that. If it's extra costs in front of next year, if the community count continues to grow or there are some mix issues or anything like that?

I think it's a function of the growth of the company and while we're managing cost carefully, I think we anticipate with the growth in backlog, growth in sales, growth in communities we project, we need a few more bodies around here.

Okay. And just one quick one if I could on the modeling side, the increase in the tax rate, the new rate that you're pointing to for 2017, is that something that all else equal? I know there's a lot of puts and takes, but is good of a place marker is any to use for 2018 or are there a couple of items that maybe is temporary that won't continue into next year?

I think it's tough for us to project into next year. So, we're not going to do that. We're not sure what's going to happen with tax rates. Our blip up in the third-quarter projection is a function of trying to defer some income for tax purposes into later years in the hopes that we have some lower tax rates and in deferring income, you reduce the amount of Section 199 credits you're eligible for.

Okay. Thanks very much.

You're very welcome.

Our next question comes from Stephen East with Wells Fargo. Please go ahead.

Thank you and good morning, guys and congratulations on a great quarter. Maybe a quick follow-up question on the order front, could you just give us an update on when your Northern California communities are coming online in Porter Ranch? And then Doug, you had talked about the different categories driving your business, could you rank order your traditional business, your active adult T-select, attached townhome to give us a feel for where you all think you're getting the most bang if you would?

Sure. I think there are three questions there. So, I'll take my time to get through them. First on Northern Cal, we expect seven community openings in late 2017 and that's exciting for us. They're all terrific. In Southern Cal, we expect five community openings in late 2017. With respect to Porter Ranch, which is in Southern Cal, the recovery from the gas leak now what guys 15 months ago or more 17 months ago is on track. I was out there a few weeks ago. I was very happy with what I saw. We have lots of traffic. The schools are open. The retail is open. It is a thriving community of 20,000 residents. We are at about two thirds to three quarters that failed space of pre-leak, which is about where we thought we would be. I am very happy with the new openings we have, the new model presentations and we have to actually have one more Porter ranch community openings later that year. So, I think with every week that passes and we get further from the leak, the community get more and more back to normal and I feel good about where Porter Ranch is today and where I believe it will continue to improve in the next three, six, nine, 12 months. So, everything is on schedule there. With respect to product lines and how I would rank them, Stephen the business is clicking. I'm thrilled and very proud of the diversification that we've strategized towards for the last 10 years, both geographically and with product mix. As we talked about we've gotten active adult out West now. We had a big presence in the East and we're doing very well in Denver and now in Reno and Las Vegas. We have a new…

All right. I appreciate that. This is a shorter question I think for Marty, Marty you raised your target for your annual returns. I guess do you have a targeted improvement that you all are shooting for and as you look at this as I look at your returns, probably asset turnovers where you can get the most bang for your buck, but that's also the hardest to accomplish takes longer. So, as you're looking at moving your targets up, what's your biggest driver that you're seeing and do you have a targeted improvement?

I think we set a target for '17. At the end of this year we'll set a target for '18. We've exceeded our target for '17. So, we're pretty pleased with that. I think that's a function of good demand, future improvements in our ROE are going to be driven by our land basis and that turnover. Buying the land on terms on a deferred basis, while it may cost us a bit more, it should improve our return on equity.

Got you. Perfect. Thank you all.

Our next question comes from Alan Ratner with Zelman & Associates. Please go ahead.

Hey guys good morning. Nice quarter and congrats to Bob and Bruce for your induction into the Builder Hall of Fame a few weeks ago. Very impressive. So, my first question just on the comments in the release about buyers increasingly choosing new over existing, I think that it's clear where we're seeing that trend across a lot of major markets in the country. Given the fact that most of your buyers have a home to sell, just curious what you're hearing from yourself people as far as any changes in either the relative ease or difficulty in your buyer's ability to sell their home? Have you seen more price capitulation on their part to kind of move that inventory or have you seen any changes in contingency orders, not to mention, you're not doing a whole lot of those these days, but anything you can give us there anecdotally would be helpful?

Sure Alan. We do not view contingency orders, that's never been part of our business. What we're hearing from sales in that, the resale of our buyers home is not an issue. Remember our houses generally take 7 to 12 months to build. In some cases, we do have spec inventory that will turn faster, but as the resale markets are improving as more and more buyers have equity in their homes, they appear to be confident that during the timeframe to build their new home, they will have plenty of time to sell their existing home and they want to move up and here they come and we're seeing that pent-up demand come out and it's just not a conversation that sales is apparently having with our client.

Great. Thank you. Second question on the margin, Marty, you made that fourth quarter margins, which should be up nicely, it's really mix driven. I can understand the Hoboken deliveries obviously contributing to that, but you mentioned also the West in California, which seems like that should continue to be a pretty meaningful chunk of your business and with the order growth there I would imagine that the margin profile is pretty favorable relative to the company average. So why shouldn't we expect that to at least continue heading into 2018 the benefit from the West?

Well I think the margin profile with respect to California is definitely favorable to the company average with respect to the active adult product that has grown at 38% clip, it's not as favorable to the company average. So, the plus on the California side and plus on the active adult side have a tendency to offset each other.

So, should we think about just the overall margin profile today, just think more about the full year average something in that 25 range as being where you very early thinking the baseline, should be going forward?

We're not going to get into margin going for beyond the six months we've given you guidance for Alan.

Can't help to try. Thank you.

Our next question comes from Stephen Kim with Evercore ISI. Please go ahead.

Hey guys this is actually Trey on for Steve. Again, I want to add my congratulations on a great quarter. I want to stay in California for a minute, going back historically it grew as you required Shapell and since then it's definitely increased in your overall mix. It stayed somewhere around 30% of your sales and 15%ish of your closings. How do you guys think about your exposure to California, both in units and potentially dollars for the next year period because you see continued mix shift out there or do you think as a percentage of your business, it's fairly representative of how you think it's going to stay?

Trey, I think it's fairly representative of where it will be next year based on the land that we control and the openings we have coming. You are correct, California represented 29% of the second quarter contracts in dollars. Remember the price there is a quite a bit higher than our average. We're thrilled with our locations and our new opening have exceeded expectations. We don't see overheated market. We don't see investors. We certainly all know mortgage money is not easy. The percentage of foreign buyers has stayed stable and they have been quite easily been able to finance their homes or get cash into us to purchase their homes with truly no issues. I've checked with our mortgage company. I've checked with our California teams and it has been business as usual for some time now with that foreign buyer. So, it's a cliché but location, location, location, the Shapell deal combined with new acquisitions we have done in both Northern and Southern California, continue to position us in the best locations. And as I said on this call many times, we got to go see it to believe it to understand these Toll communities we're building, the architecture, the indoor-outdoor living. It's special and I'm feeling very good about our position in California and our future there.

Got it. Thanks for that and then broadly, just given you strong pace of sales as you've really seen over the past three four quarters, how is that changed if at all your thoughts on your ability to continue to grow you community count? Do you think you're potentially at risk given these new strong order trends of closing some communities out faster than you had initially expected and the potential for a community gap at some point call it year or two?

So, we're maintaining our community count guidance for the year, but we do recognize that as well as we've done, the community is well in some locations be selling out faster and we had first projected. So, we need to hustle and get future communities opened and we are focused on that. But for the time being we're going to stick with our guidance. We have plenty of land and as we sell through, we will work hard to open new communities so that we don't have the gaps the you described.

All right. Thanks guys. Appreciate it and good luck.

Thank you.

Our next question comes from Mike Dahl with Barclays. Please go ahead.

Hi. Good morning. This is Anthony Terrano filling in for Mike. My first question I wanted to talk about Idaho and Coleman Homes. Just wanted to clarify first, if you said that the gross margins in there are below company average, is that because of purchase accounting in this year or is that business underwritten to a lower gross margin through rest of company?

It's a function of purchase accounting to a certain extent, but it's also the underwriting with respect to that higher return on equity business.

Okay. Like in the past I think you talked about a 30 to 40 basis point headwind and full year gross margins because of purchase accounting that's still unchanged and right in that I guess you've now moved past most of that.

I think that's roughly still accurate. Boise looks like it may have more deliveries this year than we had previously expected but the market is strong.

Okay. No. Thanks for clarifying that and then for my second question, just wondering if you could talk a little more about the material side, you guys given your extended delivery timeframe it probably takes a little bit longer for material inflation to roll through your business. So, if you could just talk about how the rise in material specifically lumbers impacted your outlook on margins from when you gave the guide back in December?

As I mentioned, our costs were up about $2500 this quarter. That was driven by lumber, labor and then to some extent some other materials, but lumber and labor was the biggest part of it. We are generally successful in locking in costs when a home is sold. So, we are not blindsided with the cost of our backlog going up. Where this goes in the future we think most of the lumber increases have been baked in. There is a lot of headlines now about lumber pricing and tariffs on Canadian lumber, which effect Doug-Fir as opposed to Southern Pine, which of course comes out of Southern U.S. Parts of our houses are Doug-Fir. Parts of our houses are Southern Pine and the Doug-Fir component out of Canada has gone up months before the tariff conversation and I think in anticipation of it. So, I can't say it's all behind us, but we feel pretty comfortable that most of those increases have been fully baked into our numbers and the projection we've given to you.

Great. Thank you.

You're welcome.

Our next question comes from John Lovallo with Bank of America Merrill Lynch. Please go ahead.

Hey guys. Thanks for getting me in here. The first question I guess is maybe if you could give us some thoughts on 2018 when the deliveries from Brooklyn Bridge Park and the Sutton roll through. What are some of the levers you can pull to fill that gap in JV income if you will.

Well I think if you look back over '14, '15 and '16, we had nearly $100 million in JV and other income in each of those three years. It is picking up this year in large measure because of Pierhouse deliveries and Sutton and this apartment project we sold. We'll give guidance for 2018 in the future, but we have a pretty solid base line of around $50 million of other income before any JVs and then the JVs we'll give guidance on in December, but we have a number of apartment projects where we could sell out or sell down our interest as well as some other levers with respect to some of our commercial opportunities or security business etcetera that we can from time to time execute on to generate income.

In my prepared comments, I went into great detail on the two apartment communities where we sold our interest, recapitalized the assets and produced about 25 plus or minus million-dollar income and we did that to show that those are not one-offs that is part of our business plan for the apartments. Some we will hold long-term. Some we will recapitalize and take a smaller ownership position and some we will sell outright and so those are levers that we can pull, regularly particularly at that business grows from 11,000 units to what I mentioned we hope to be 20,000 or more in three to five years and you will continue to see opportunities for us to add to the other income line through sales and recapitalization.

Okay. That's really helping guys. And then the second question would be, we've heard from several sources of green shoots kind of in the labor market developing and recognizing that your labor basis is a little bit different than that of some of the other builders. Are you seeing any incremental labor coming into the market or are you seeing incremental easing that's noteworthy?

It's not getting worse. There certainly are some green shoots in local markets. The easiest markets appear to be the Midwest and Houston. I think we've proven the last two quarters with our revenue line and our ability to deliver that we are fighting the fight as well or better than many others and Rick Hartman is here with us. He runs operations and Rick it's certainly my belief and feeling that we have labor under control. It's getting moderately better and we're able to deliver the houses when we say we will.

And certainly, out West, the subs are gearing up. They are adding staff to keep us on pace, but we are seeing some growing pains is markets like Michigan where the trade base is not as broad, but for the most part, things have eased a little bit and in most of the markets things have gotten slightly better.

Okay. Thank you, guys.

Our next question comes from Jack Micenko with SIG. Please go ahead.

Hey. Good morning. Marty, I wanted to come back to your early discussion a little bit, I think in the past you talked about 12 and an ability to build maybe improve that another hundred and not guidance but potential. Now that you got the 50 above where you've taken the goal here this year from 12 to 1250, does that 100 potential still exist? You've got some opportunity in the debt side later this year. You've got some higher turning active adult in the Boise and T-Select coming on. Is that outlook still relatively the same?

Jack, I think of to refine the 100, I think our perspective has been 50 to 100, and we're about 50 points ahead of where we thought we would be. I am not going to get more specific than that as it relates to continued growth in ROE in terms of the target until we approach December, but it is something the company is actively focused upon and pleased with our results so far, this year.

Okay. A year ago, it seemed like everybody was worried about New York and it was probably the big part of the question is you got meetings with investors. A year later the concerns have subsided. I don't believe you've acquired any lots in New York since maybe 2014 King Street I think. And at the same time Doug, you talked about LA and some other markets. Is this a strategy to look elsewhere or is it just the bid ask on the return profile you need in this environment just still too wide, are you changing your strategy here or is it just -- there's nothing there that pencils?

Jack we're not changing our strategy. We've always wanted City Living to get to the West Coast to be in Seattle. We even looked in Vancouver. We've looked in Boston. I've said many times that I was frustrated City Living was only New York with a very small Philadelphia and Washington DC business. So, we've been hunting for years and we found now what we think are three terrific opportunities in the Los Angeles market. We're not Downtown LA, but we're in Beverly Hills and we're in Westwood and we're in some great urban portions of the LA market. Small building, quick turns as we've talked about many times. We continue to look hard in New York City. The bid ask has been the issue. Land prices have been too high it's a risky business as we've talked about, which means you need a significantly higher gross margin and we will not change the underwriting. So, we will certainly do more deals in New York. Right now, we have -- no new land buys to talk about, but there's no change in strategy. It's just -- it's a moment. The opportunities have come elsewhere, but I'm sure they'll be back to New York at some point here.

And our last land purchase in New York City was in 2014 and that was the land we just joint venture back in the first quarter at our basis. The King Street opportunity was in 2012.

Okay. Thanks for taking the questions.

Our next question comes from Nishu Sood with Deutsche Bank. Please go ahead.

Hey, this is actually Tim Daley on for Nishu. Thanks for taking my question. So, I wanted to talk on absorptions and I guess the monthly cadence of sales pace. So, absorption growth is strong in the quarter, but had a pretty easy comp last year and you guys discussed California headwinds last year as the source of that. Could you walk us through the cadence of the year-over-year sales growth for each month in the quarter?

Sure, February was down 4% and that is primarily because of the rainstorms that hit California hard and the snow that hit Reno and hit Boise. March was up 59% and April was up 28%.

But remember in March and April you had Easter/spring break weeks that were in different months year-over-year. We had the Easter in March of last year and April of this year and there is usually spring break corresponds with that week.

That's exactly right. So that explains -- that different between March and April, while big is in part driven by a calendar.

All right. No that's very helpful. And then as well the comment on the first three weeks being up that 12% in the nonbinding contracts. Last year that metric you gave was about up 25% but the corresponding contracts were flat year-over-year. Could you give us the contract number from May?

No, we gave the deposit information.

All right. No problem and my second question just quickly, could you give us the City Living gross margins during the quarter?

The City Living gross margins in the quarter were in the upper 20s, 28, 28 okay and we expect them to be far above that in the third and fourth quarter. A margin of some DC deliveries as well as moving some product in New York.

All right. And with the Hudson T building starting deliveries next month and we mentioned we have 200 in backlog, that is a non-balance sheet high margin building.

All right. And does that give you the confidence to stick with that 37% you guys gave in the first two calls?

I think we expected for the full year this year to be in the 35% range, which is what we underwrite these projects to.

All right. Great. Thank you.

Our next question comes from Jay McCanless with Wedbush Securities. Please go ahead.

All right. Thanks for taking my questions. The first one I had just on City Living, could you also talk about the revenue guidance which I gave at the beginning of the year and whether that's still valid?

Yes, it is still valid. No changes to that Jay.

Okay. And then my second question, could you maybe talk a little bit about 2018 in terms of community count growths and just maybe what you guys have modeled out so far?

Jay, we'll give you those numbers in December as we always do.

Thank you.

You're welcome.

Our next question comes from Jade Rahmani with KBW. Please go ahead.

Good morning. This is Ryan Tomasello on for Jade. Just going back to City Living in New York City, are you starting to be able to see beyond the supply concerns of the past few years given the pullback in construction lending and the impact of that it's had on new development. And as a follow-up to that, are there any potential opportunities to recapitalize stalled, counter products of other developers?

There are certainly some deals that have come back around at different pricing and we are analyzing those. With respect to construction financing being tighter and therefore supply easing, I think it's about flat.

Okay. And can you provide some color on the 107 million of land acquisitions in the quarter? What markets are you targeting for incremental land purchases and what's the mix been recently of finished lots versus raw land?

So, the land spend this quarter of $107 million was primarily in New Jersey and California. We are targeting land acquisition in almost all of our markets as we continue to be very opportunistic and we have land teams working hard everywhere we build to find as great opportunities. Our pencil of course is sharper in certain locations where maybe the market is doing quite well or we have an abundance of good land. We analyze that of course market to market. Typically, about 20% of our total land spend is on improved lots and the balance is on lots that we need to put roads in or the developer puts roads in for us.

Great. Thanks.

You're welcome.

Our next question comes from Ken Zener with KeyBanc. Please go ahead.

Good morning, gentlemen.

Good morning, Ken.

I believe communities in California are doing well Doug. So, given the strength you're seeing there and Marty your comments about asset efficiency in general, could you talk about perhaps your propensity to increase that building in California to increase some of the land turns that you have on this process given if or given that some of your buyers are interested in closing quicker than perhaps your traditional buyers?

Ken, yes we -- remember the price point California at $1.6 million is not a price that gives us great comfort to build a whole bunch of spec. I don't think that's the right business decision. We've had tremendous demand. The buyers have the opportunity and desire to customize their home. We send them to our beautiful design studios and allow them to go spend hundreds of thousands of dollars on upgrades and that model is working very well. So, we'll always have a few specs, but we think its smart business to continue to build the order. Even though that may take a little longer, we think that maximizes the margin and give us a very good if not unbelievably high ROE but when we blend it all together and we look at that price point and we look at the demand from the buyer to customize their own home, we think we have the mix right between spec and build order.

Understood and I guess Marty, I just want to pull you back on the fourth quarter you a sheet of paper that had 40 markets, '16 and '17 revenues in margin, since we're halfway through the year, I don't know if you still have that piece of paper in front of you, but could you talk about maybe two or three markets that are leading to higher closings or are doing better than you guys expected now we're halfway through the year, thank you?

Well, better is better if the margin is higher. Better is not as good with respect to margin if the margin is lower than average. So, on the better where it's a negative Boise and Dallas are performing better than we thought and thus are a larger percentage of our total, but are at slightly lower margin whereas California and Seattle are of higher margins and are doing better than we thought.

Our next question comes from Alex Barron with HRC. Please go ahead.

Thanks guys. I was hoping you can comment on the orders or the contracts you gave for the three weeks, is that like apples-to-apples comparison or does that exclude Coleman?

It is deposits and it includes all of our business everywhere including Boise.

Okay. That's helpful and then my other question with regards to City Living, a couple years ago, you guys said you had like couple thousand units opening soon or under approval. I guess we haven't really seen that segment. It's been good but it's been more flattish. Is there an expectation that that's going to, what's been holding it back in your opinion or is there an expectation at some point it's going to start to catch up in a sense?

I don't recall talking about thousands of City Living units coming. We've certainly talked about thousand of Toll Brothers apartment living units coming, many of which are in high-rise buildings. So maybe that was part of the confusion. We are on track for the building that we have talked about opening and when we talk about flat, it had been the market conditions of New York City.

Okay. And last question on the tax rate, what -- I'm sorry if I missed your comment, but what drove the higher tax rate guidance?

The Q3 decision to defer some taxable income into subsequent years through the completed contract method, which lowers the amount of taxable income projected for this year, which therefore lowers the amount of Section 199 manufacturing credits you can get this year.

Okay. Thank you very much.

Our last question for today comes from Mark Weintraub with Buckingham Research. Please go ahead.

Thank you. Just first one real quick follow-up, so deferring some of the taxable income, is that just on the tax books or is that on the reported P&L as well?

Tax books.

Okay. And then second, fundamentals have been going well, your execution has been great, your stock prices are also gone up a fair bit and so as you balance all that what are your thoughts on share repurchase in the context of capital allocation option at this point?

Mark, we have a significant amount of debt and convertible securities do or likely do in this calendar year and we want to position ourselves to handle those, reduce our leverage a bit as we've done a bit already on a net basis this quarter. And beyond that, land is always an opportunity and want to be opportunistic with and we will continue to evaluate stock repurchase as we do all the time, but I think those are the priorities for now.

Thank you.

When we think it's a good buy, we'll buy.

And as there are no further questions, I would like to turn the conference back over to Douglas Yearley for any closing remarks.

Steve, thank you very much. Thanks everyone for listening in and have a great week.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.