Douglas C. Yearley, Jr. – CEO and Director Robert I. Toll – Executive Chairman of the Board Richard T. Hartman – President and COO Martin P. Connor – CFO Fred Cooper – SVP of Finance and Investor Relations Joe Sicree – CAO Mike Snyder – CPO Don Salmon – President of TBI Mortgage Company Gregg Ziegler- SVP, Treasurer.

Stephen Kim – Barclays Capital Ivy Lynne Zelman - Zelman & Associates, LLC David Goldberg - UBS Investment Bank, Research Division Stephen F. East - ISI Group Inc. Adam Rudiger - Wells Fargo Securities, LLC Michael Roxland - Bank of America Merrill Lynch Michael Rehaut –JP Morgan Rob Hanson - Deutsche Bank Securities Inc.

William Randow - Citigroup Inc..

Good afternoon. My name is Arnica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers First Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Douglas Yearley..

Thank you, Arnica. 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; 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 email questions to rtoll@tollbrothersinc.com. We just completed 2014 first quarter on January 31, 2014. Our net income was $45.6 million or $0.25 per share compared to net income $4.4 million or $0.03 per share in fiscal year 2013’s first quarter.

Pretax income of $71.2 million compared to pretax income of $8.3 million in fiscal year 2013’s first quarter. 2014’s pretax income included $23.5 million from the sale of two shopping centers in which Toll Brothers with a 50% joint venture partner as well as $6.3 million of gains from land sales.

Revenues of $643.7 million and homebuilding deliveries of 928 units rose 52% in dollars and 24% in units compared to fiscal year 2013's first quarter. The average price of homes delivered with $694,000, compared to $569,000 in 2013's first quarter.

Backlog of $2.69 billion and 3,667 units rose 45% in dollars and 31% in units compared to fiscal year 2013's first-quarter-end backlog. The average price of homes in backlog was $733,000 compared to $665,000 at 2013's first- quarter end.

An additional $105.3 million and 126 units were added to backlog upon completion of the Company's acquisition of Shapell Homes on February 4th, 2014 with start of our second quarter. Net signed contracts of $701.7 million and 916 units rose 14% in dollars despite declining 6% in units, compared to fiscal year 2013's first quarter.

The average price of net signed contracts was $776,000, compared to $631,000 in 2013's first quarter. Gross margin, excluding interest and write-downs improved 100 basis points to 24.4%. SG&A as a percentage of revenue, excluding $800,000 of Shapell acquisition costs, improved to 15.1%, compared to 18.4% in fiscal year 2013's first quarter.

Operating margin improved to 4.9% from 0.1% in fiscal year 2013's first quarter. We ended the first quarter with 238 selling communities, compared to 232 at fiscal yearend 2013, and 225 at fiscal year 2013's first-quarter end. We expect to end fiscal year 2014 with between 250 and 290 selling communities.

At fiscal year 2014's first-quarter end, we had approximately 51,200 lots owned and optioned, compared to approximately 48,600 at fiscal yearend 2013 and approximately 43,700 lots one year ago. We delivered more homes at higher prices this first quarter than one year ago.

This higher delivery volume, coupled with price increases from late 2012 and early 2013, drove our first quarter growth in revenues, earnings and margins.

As we have previously discussed, after very strong contract growth beginning in the fourth quarter of fiscal year 2011 and running through the third quarter of fiscal year 2013, demand has leveled more recently against some very strong prior year comparisons.

In the six months ended January 31, 2014, Toll Brothers signed 2,079 net contracts with a total value of $1.54 billion, compared to 2,071 net contracts with a total value of $1.3 billion in the same period in the prior year. Although net contracts were flat in units they were up 19% in dollars.

The freezing, snowy weather of the past two months has impacted our business in the Northeast, Mid-Atlantic and Midwest markets, where about 50% of our selling communities are located.

While it is still too early to draw conclusions about the spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand and an industry still under-producing compared to both historical norms and current demographics.

Through the first three and half weeks of our second quarter, our contracts in units were down about 8%. While we cannot give you an exact figure because our buyers are still choosing options and finishes, the variable dollar amount should be up.

During this time traffic has actually been up of 8% per community which is encouraging especially given the weather in many of our markets. One particularly exciting community we recently opened for sale is Pierhouse at Brooklyn Bridge Park where we now have an interest lift of several thousand people.

This joint venture with forward capital will develop a 192 room one hotel and 108 high end condominiums on the east river overlooking Wall Street and the New York Harbor. This past weekend we opened 12 units for sale and sold them all at prices well above original pro forma. The total sales price for those 12 units is about $44 million.

We intend to open an additional 7 units this week and believe we will immediately sell them all. Another very exciting new community is Baker Ranch in Lake Forest, Orange County, California where we’ve welcomed more than 10,000 visitors since grand opening just three weeks ago.

This is a master plan community by Toll Brothers and Shea Homes where each of us is building our own homes. It consists of approximately 1,700 lots and one of the most desirable locations in coastal California. The buyer interest we’ve enjoyed to-date at Baker Ranch bode well for the significant investment we’ve made in California.

Speaking of California as you know, we completed a $1.6 billion acquisition of Shapell Homes in early February which correspondence the start of our second quarter. It has boosted our land position in California significantly.

We continue to be very encouraged by the strength of our coastal California market and find the Shapell transaction to be even more compelling today when we announced it last fall. This growth in California as well as significant expansion in Texas should further diversify the company and spread growth as move forward in 2014 and beyond.

Now let me turn it over to Marty..

Thanks, Doug. First quarter homebuilding gross margin before interest and write-downs improved 100 basis points to 24.4% of revenues compared to 23.4% in 2013's first quarter. First quarter interest expense included in cost of sales was 4% of revenues compared to 4.7% a year ago in 2013's first quarter.

Therefore year-over-year margin improved approximately 170 basis points excluding impairments. Volume and price increases more than offset cost increases to lead to this improvement. Compared to the fourth quarter of 2013, our margin declined 110 points due to change in mix including the absence in Q1 of high margin trend deliveries.

And we also had some increases in job site specific overhead. First quarter SG&A of approximately $97.9 million was higher than the $78 million in the first quarter of 2013 due primarily to our growth.

After adjusting for $4.5 million insurance reversal in the fourth quarter of 2013, our SG&A in the first quarter of 2014 declined approximately $1 million from that fourth quarter. It should be noted that Q1 includes $2.2 million in stock option expenses associated with immediate vesting of options granted to retirement age, executives and directors.

These expenses will not occur in the remaining quarters of the year. As a percentage of homebuilding revenue, SG&A was 15.2% for Q1 of 2014 compared to 18.4% in Q1 of 2013. The improvement compared to a year ago was due to revenue growth partially offset by expense increases.

As a result our operating margin grew from great even year ago to 4.9% in Q1 which is typically our seasonal low point. Over the last five years, we have consistently generated an average of approximately $15 million in other income and income from JVs before impairments. 2014 will exceed that average.

Our Q1 2014 joint venture income of $22.9 million was primarily a gain on the disposition of two shopping centers we developed in 2005 in joint venture. We also generated approximately $16.5 million in other income. The largest components of which were $3.3 million from our Gibraltar business and $6.3 million from land sales.

In this regard, our growing apartment development business continues to progress and we expect it to contribute to these earnings in future years. Our share count on a diluted basis average $184.9 million for the quarter. Subject to our normal caveats regarding forward-looking statements we offer the following guidance for fiscal 2014.

As noted in the release, the extreme weather has negatively impacted some starts. We now expect to deliver between 5,100 and 5,850 homes for the year and we estimate the average delivered price per home will be between $675,000 and $720,000 for fiscal year 2014. As Dough mentioned, the range for our yearend community count remains at 250 to 290.

Our gross margin guidance for the full year also remains as stated on our previous call. Full year 2014 should have 175 to 200 basis point improvement over full year 2013. The most significant improvements will occur in our third and fourth quarters as purchase accounting associated with Shapell deliveries will negatively impact our second quarter.

Full year 2014 SG&A is still anticipated to be up 25% over full year 2013. And finally, we expect backlog conversion in Q2 of roughly 30%. As Dough noted, Shapell closed on February 4th. We acquired $120 million in cash and backlog of 126 units worth of $105.3 million.

At our last call we had expected $15 million to $20 million in Shapell transaction expenses and approximately $5 million in directly expensed interest for 2014. Those estimates were too conservative. We now expect transaction cost to be $5 million to $10 million and we expect any directly expensed interest to be normal.

In fact, we paid down $170 million of our line draw last week and anticipate paying down the remaining $200 million tomorrow. Now let me turn it over to Bob..

Thank you, Marty. I am so proud what our team has accomplished with the acquisition of Shapell homes which represents one of the finest portfolios Northern and Southern California home sites ever assembled. Our company has certainly come a long way since 1967 when we began with two homes.

This was the coldest January since 2001, one of the worst winters since we entered the business. The storms that affect our industry were reflected in both the decline in February NAHB Home Builder Confidence Survey and the 16% sequential drop in January housing starts.

Although the weather will result in some delays and some additional, but not major costs, it should not result in lost sales or deliveries. While some people may have hunkered down in the bad weather, they will venture out and should ultimately buy homes when the sun begins to shine. Now let me turn it back to Doug..

Thank you, Bob. Arnica, we are ready for Q&A..

[Operator Instructions] Your first question comes from Stephen Kim with Barclays..

Thanks very much guys, congratulations. Particular on that Shapell acquisition that’s going to be interesting to see how that plays out. I guess I did, I wanted to just take up the comment you made about weather, you said not major cost.

I just want to see if you could give some parameters around that because obviously there is going to be cost associated with snow [Indiscernible] of course the delays. I remember in previous years it was one of those things that we kind of tended to overlook.

I just want to make sure we put sort of we bracket like what that range of impact might likely be and when we might likely see it?.

This is [Indiscernible] Stephen, I just say that here is going to be some impact in the overhead due to still playing on the street and keeping it open for our residence. As far as construction goes, we are tending the houses temporary heat.

They all add to the cost below as Bob said, not a major impact but in order to cost to do the cost of the extra material and also the slowdown of production of the stock which extends the delivery a little bit. But all those cost I don’t believe they’re going to be a major impact to our bottom line..

Okay. So again, I am getting the not major there. I was hoping for kind of something with the number around it.

Is there any way we could get some sort of sense for the overall?.

Well, Stephen I don’t know if I could be that specific, as customer every quarter we do look to see how our cost arising not necessarily just as relate to weather but for some of the commodities and labor as well and so far it continues to be nominal, I say for the quarter we estimated to be around $1,700 in terms of the cost increase.

Probably half of that is labor and maybe we are not capturing everything that Rich has mentioned in terms of tenting and heating but again that’s the magnitude of what we are talking about here..

Great, got it. Thank you for that. And then, with respect to the commentary about more recent traffic and sales activity, I think, just want to make sure I heard you properly, if I think, the traffic with up 8%, sales are down or deposits are down 8%.

I was just wondering if you could sort of talk about that and make sure that I have the right numbers and then also give some sense as to why you think it's still too early to tell, the spring coming seasons, is it just simply because of weather, because I know usually Bob you sort of advise us at actually the spring selling season starts before the Super Bowl kick off and yes so if you could just talk a little bit what you are seeing now on the ground and your read through?.

Sure, what we mentioned was agreements for February, the first three and a half weeks of February were down 8% in unit and while we can't give you an exact number on a dollar basis because new buyers are still in our design centers picking their options, picking their marble and granite and cabinets.

We are confident that on a dollar basis, the number will not be negative but it will be positive. And so, Stephen it wasn’t deposits, it was actually agreements which really translates more to a January deposit, generally into a February agreement although there could be some agreement later in February last week or so, they came in early February.

And the reason, it's what we’ve all been saying now for some time which is the markets are flat in most areas. They’ve been a bit sloppy. Frankly we are a bit baffled by it because of all the great steps in our side with pent up demand and affordability and still very affordable interest rates. Weather has played a big part.

We highlight the northeast and mid Atlantic, the mid west but let’s not forget a couple of great storms that hit Texas that took our Texas sales out of commission for a few weekends. A big storm hits Seattle which really heard us there for one week.

So most of the weather impact is in the east where 50% of our action is, but it has extended beyond that. I think confidence is still a bit fragile. And I think we are all feeling that.

Usually, we can give you pretty good guidance on which markets are great, good, average or poor and this quarter we have all looked at it and talked about it and it's much more difficult to do that because week to week, market to market it's become very unpredictable and the one big thing is weather, but beyond that I think there is a confidence issue out there and so we are happy, we are optimistic, but right now we continue to be experiencing some sloppiness and relatively flat market..

Few words about traffic in California especially?.

Well, traffic in California is always bigger than most other markets. I don’t know if it's the weather or beautiful model home, Bob only talks about the old days of visiting the model with the form of entertainment on a weekend that’s not my experience but that’s probably the experience of the old days.

So maybe in California it's still in the form of entertainment but we had 10,000 people visit Baker Ranch in the first three weeks that’s obviously an extraordinary number. But in many existing communities that are not having any sort of grand opening or special event, we will get 50 to 100 visitors per community out in the west coast..

And just to clarify when we quoted the 8% increase in traffic, we took those 10,000 people out of the map because of it being so unusual..

Right, we took Baker Ranch entirely out..

That’s great. Okay. Well, thanks very much guys that’s very interesting. .

Your next question comes from Ivy Zelman with Zelman & Associates..

Thank you. Good afternoon guys.

You know listening to you Doug it sounds like the choppiness and some of the baffling that you talk about would help with you further elaborating to go around the footprint for Toll, California as you mentioned it sounds like it's pretty strong and I don’t know if it's baffling you there or is it more what you would expect for this time of a year and where the baffling is, we would love to hear more of expanding upon that because I know after seeing some product in south Florida, and some of the Texas markets it seems that those are even better than seasonal at this point, the mid February, late February?.

I will give it a shot Ivy, but again with the caveat I said before where this is a very tough quarter to grade your markets because they are changing week by week. But generally, Northern Virginia which is a big market for us had a flow fall and a flow beginning to January but in recent weeks is performing well.

And we love our position there and I think we are in great shape and it appears that market is strong. Maryland on the other hand just on the other side of the capital –.

To take that I have some real numbers in front of me. So, for the full quarter, Maryland was up 20%, contracts per community. For January it was down 35%. I didn't know if you had it or not. And then for the first three and a half weeks of February, it's down 50%..

Take a look at New Jersey with the lousy weather, 30 deposits this past weekend..

You got more there then..

More snow in Maryland. Well, Philadelphia has 59 inches of snow last year we had 4. Back to Ivy, so moving north so I will continue to move north. Philadelphia and New Jersey as Bob was mentioning is good. And we have had a good couple of weeks and we feel good.

New York metro, which is not city living and it's very little on west Chester county, but it's up in Fishkill, which is a stretch to even call at a suburb of New York and the train lines does go there has been very slow and we are concerned about that market. It's a small market for us. And it has not performed well for some time.

Connecticut notwithstanding the bad weather has done very well for the last couple of months. And Massachusetts has been okay. And we are growing up there and excited about our land offering.

Heading south, the Carolina have had some pretty good storms this winter and have not done all that well but it's rough at Charlotte and Riley and they have been soft. Florida, its body based on market. Jacksonville while where we’re small has done very well.

Orlando has not done as well, but we are at a very high price point and we are repositioning ourselves to a lower price point in some different locations. And both the east coast and west coast have had a good start to their winter season down there of course most people buy between Thanksgiving and Easter when the snow birds are down.

It’s interesting when we have a horrible winter up north, more and more people realize that the south is the place to be and we tend to have better sales in the south because of what they are living through up here. Heading out to the mid west, Detroit is great, Chicago had a comeback week.

But it's only one week and before that it was slow and Minnesota is very slow. Colorado is doing great and we feel really good about where Colorado is. Texas fabulous, we love it, we are growing. We have added about 10,000 lots to the state. San Antonio is small. Austin is a start up.

Dallas and Houston are big and getting bigger for us particular Houston where we have three major master plan communities we have acquired in the last year and that will be a major growth area for us. Phoenix came back a year and a half ago, very strong and since then has been bumpy. It's doing okay. Nevada it's back.

Both Vegas and Rino we repositioned ourselves at a lower price point and the market has, Inspirada where we had 800 lots that have been written off. I think we opened records of six communities this year Inspirada. Summerlin, we are back in action in Summerlin buying more ground.

So, Vegas looks really good and Rino which is a small market for us, we wish we could find more ground doing really well. Palm Spring, very slow, we’re very small, but that market right now is in sleep.

Northern and Southern Cal unbelievable, continuing to raise price, Baker Ranch is one example we gave, but really everything we have in California whether it would be the new Shapell land or the old Toll land, it's fabulous, huge numbers, price increases, we feel great about it. And the last market is Seattle. Seattle is off a little bit.

It came back the last couple of weeks, but it's been pretty choppy..

Well, Doug that was more than I had hoped for and very, I think value added to everyone.

If you took up the step further and you looked at the broader market, we have seen weakness in existing housing market which some could attribute to many factors one of which is obviously the weather, but also a lack of available listings and so when you are thinking about the new supply that you are bringing into market to gauge the success of that supply, the new communities and how much you will be able to absorb demand, do you feel good about that and as part of the decline in agreements more attributable to very tough comps and as the year progresses you can go back to double digit order growth with your new communities garnering more of the transactions in the market with the lack of listings in existing home housing site?.

Yes. .

Thanks Bob..

Welcome Ivy, thank you. .

Your next question comes from David Goldberg with UBS..

I was wondering if we could have, if you could talk a little bit about the competitive environment now for land.

And really, there were some more sources of financing starting to come out last year when the market was real hot for some of the private builders not just CNC, but also some acquisition financing and how do you think that’s changing kind of given the back half of the year slowdown and maybe demand being more choppy.

Are you seeing those financing sources continuing to kind of move forward or they hold back at this point and what does it mean for the competitive landscape?.

I don’t think we’re going to be able to provide you with much information. Maybe you guys have it. But, it's not our market, not our thing. I am sorry. It's like reporting on somebody else’s business. It's just not our business..

But we don’t appear to be competing against it. We don’t see more local and regional builders competing for land because now they are well capitalized. That has not changed..

Yes, I mean that was really the question, it wasn’t so much you guys finance them, it was a question of competition of land market and I appreciate color on that.

I was wondering if you can talk about and I thought it was very helpful to give Ivy the run down, you kind of run down on the markets, but it's kind of strange to me that choppiness and it doesn’t seem to be job growth driven, as Jacksonville is doing great or [Indiscernible] has great job, growth but maybe the price point you guys are little bit higher there or something.

But, can you talk about kind of what you think is in the buyers’ mind that kind of makes one week great and the next week not so great.

Is it just product, is it promotion, is it something that you guys do that really changes the buyers’ mentality towards or it just, it’s really that fragile at this point that one week can be great and the next week can be off for really no apparent reason?.

And would really be a great project for analyst. What we could, but we can’t if we had we would have told you believe me. Your clue is as good as mine..

This past weekend as an example was a very good week for us and it also happened to be much better weather. Now that doesn’t affect sales nationwide, but it affects a lot of our markets. California this past week with the edition of the Shapell communities had a great week.

We expected that because of what we have seen consistently in California for the last year and year and a half..

This was also the last weekend of our national sales unit..

Right. We run four national sales events where our vendors contribute upgrades at their cost that we can offer to our buyers for a limited period of time and we are able to create urgency because the buyer understands it's not Toll Brothers claiming the incentive runs out on Sunday but it's truly a vendor. It's [Co-Ver] it's our cabinet company.

It's our appliance company, our flooring company that means it when they say it that this Sunday is it and that certainly adds to urgency. So, it's up the gauge, but in many markets we have been consistently good and others we have been choppy..

And Phoenix 35, 54 in three weeks, 54 deposits in three weeks. The prior four weeks we took 26. So all of a sudden Phoenix comes to life..

And that was, well February is always better than January. But that you are right, that’s disproportionate..

Okay. Thank you for your color. .

You are welcome..

Your next question comes from Dan Oppenheim with Credit Suisse. .

[Neville] I am just on for Dan.

I had a question on, so just going back to the deposits being down 8% year-over-year and being up, kind of across the business how has absorption faired relative to your expectations? And if heading into the spring, demand doesn’t necessarily materialize as you might expect, at what point do you potentially increase incentives or try to drive additional traffic at your communities?.

Fairly simple, we have been doing it for the last 40 some odd years, every Monday we sit down, analyze that traffic and deposit and agreements for each community and with about five minutes of instruction I think you could do it as well as we, sit there and say well no deposits for the last three weeks, traffic is down, I guess we better put a little incentive on this job, call the sales manager and excuse the goal 20 of the last suspects to tell him something has changed and they have got to come in and see happy acres before it disappears..

Right and part of that we always look at the backlog and how many months to deliver the next home and when the backlogs get long, because of good sales, we are more inclined to raise price. And so that’s part of the process but Bob is right on, it's community by community and we do it every week.

And under your hypothetical if demand doesn't show up this spring, there would be more incentives to stimulate those sales. Right now we are not doing that..

Got it. Thanks very much..

You are welcome..

Your next question comes from Stephen East with ISI Group..

Thank you. Good afternoon guys.

Doug just following on that a little bit as you look at your price trends and your strategy and all of that you had been consistently raising prices as you look across the country now I know it's different market by market, but at least broadly how are you thinking about the pricing versus pace and during the quarter how much of your ASP jump was price versus that mix ship?.

I think, when you look at the price increase on new contracts this quarter compared to a year ago's quarter, about a third of that is price increases and two thirds is mix ship either geographic or product type. The current pricing mentality, I think Stephen was asking with the ops..

You know I would say right now we are more careful than we were a year ago in price increases because last year we were out of the gate in the beginning of the selling season and this year it's been flat. We are raising prices this week which was a good week of sales.

We had a lot of conversations yesterday on those price increases and Bob I would guess 20%, 25% of the communities saw price increase..

When you start to see the backlog take you into 10.5 to 11 months, I think is five months to get the home started might as well use some of them to see more sales are going to come in at higher price. So you bang it..

Okay fair enough. And then, switching gears Shapell you talked about your strategy when you announced the acquisition and all of that. As you now looked at it and you have lived with it for a while and you said it's better than what you thought.

How do you look at monetizing those assets moving forward? How long does it take you to get through the old product, creating new product or you pricing, have you pushed up pricing in their old product, what the market, is the market allowing you to do that, that type of thing? Just sort of the whole ball of wax around Shapell strategy?.

March the 17, every Shapell sale center will be Toll Brothers. Remember when banks merged and from Saturday to Sunday every branch changes from red lollypop to green lollypops and that’s what we plan to do in mid March. We have already moved the price up of the existing Shapell product in their communities.

Those price increases were welcomed by the Shapell sales team, as the Shapell management and board was not inclined to push price for the last few years.

We are bringing on new toll products to replace what are the little bit of outdated Shapell product as quickly as we can which is when you will see the real price increases because our products will be bigger, prettier, and we think much more valuable. So, we are implementing the strategy that we talked about in the fall and so far we are excited.

It's been effective and prices are up even more than we had thought they would be..

We have to look at the amounts we experienced, which is the model that led us into the Shapell purchase..

Right. That was the Shapell land we bought two years ago and we are able to push pricing significantly higher than what the Shapell thought they would sell homes for simply by having better architecture, better marketing, bigger homes, backyard, outside living space for those of you that have seen the cover of our new annual.

That is the backyard of the multimodal which is the Shapell land from two years ago. And it's been extremely effective, we’re doing the same thing at Baker Ranch which we just opened and it's a business model that we are excited about. We think it will be successful at west..

All right that’s very helpful.

It sounds like by the end of this year you would probably basically turn over all the models that type of thing, is that a fair timeline?.

Though that will turn over there are some sections of Shapell master plans that have so few lots remaining that we will just build it out with the Shapell model. But, we have to get new architecture designed and approved and then we have to build model. So, I can't promise you by year end but we are pushing as fast as we can..

Okay. All right thanks a lot..

You are welcome..

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

Thanks for taking my questions. You noted both in your remarks and your press release you didn’t think weather is going to impact orders or deliveries and you also took the top end of the closing guidance down a little bit.

So, I was just wondering what the reason was for taking that down?.

I think, it was our intention to say that it will impact deliveries a little bit. We moved the top end of the range down a couple of hundred units to reflect that. .

So the change is more in your view is supply driven reduction not a demand driven one?.

Definitely. I am going to say construction driven reduction..

Okay. Second question I wanted to ask Doug when you are talking about doing your market overview you mentioned a couple of places I think like maybe Orlando and then Nevada you repositioned your product.

I was wondering how long that process usually takes and how you weigh that versus making incentive adjustments you are talking about?.

Well, by repositioned, we are not repositioning an existing land, so we are not taking a community that would sell in $800,000 homes and bringing in a new cheap model and undermining the community. We are talking about buying new land that will be appropriate for different price point.

So that process takes longer obviously than building a new model park in an existing community. In Las Vegas we were fortunate to have 800 lots at Inspirada and good deal flow coming out of Summerlin because we were one of the favorite builders there. So it's relatively fast.

In Orlando it’s more difficult because we have to go out and contract with the farmer and get the land entitled there by improved or approved lands and we then have to put roads then. So that process is talking a bit longer..

Okay that’s all I have. Thanks very much..

You are welcome. .

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

Thanks very much. Doug, are there any other areas that you are considering diversifying the company into as far as you look to, you obviously at northeast, middle Atlanta, middle west or central to the company right now.

But things like giving your commentary, you are looking to grow the company across in other areas such as Texas, so outside Texas or anything else you are looking to expand into?.

Not geographically, we went into Seattle two and a half years ago, we have been hard to get in Seattle for the last decade and that really that was the last piece of the puzzle for us. We are very comfortable with the footprint. We were in Atlanta, we had one community and found it to be hyper competitive there and very tough to make a living.

We tried out Columbus, Ohio 15 years ago. That didn’t work. We tried out Nashville 15 years ago. That didn’t work. So, we had alley. We left and came back which is really just part of filly. So I think the footprint is solid. We are not focused on other markets at the moment. That could certainly change.

What you will see us do is try to spread what we do well elsewhere. So, we are trying to move city living up the Boston, expand it down in Washington DC. We are studying San Francisco. We want city living to get bigger and be another market. We want to get active adult out to the west coast.

Our first active adult community west of the Mississippi is in Denver and it's doing really well. So, I think what you are going to see is a diversity of our products in more market but not in new markets..

Got it. Thank you for all the color..

Bob just mentioned the apartments which I failed to mention, we have about 1,500 apartments in development at four locations and another 3,500 in the pipeline and we are looking to grow that apartment business.

Right now it's focused on Washington DC to Boston as our home turf we know it best, but we see expanding that out to the west coast to some point..

And the other aspect is our land development business where particularly in the joint venture in Houston, there is 7,000 lots that we own on partnership and we are developing significant number of those will be sold to other builders ideally at a profit cost..

Same thing with Austin, with our joint venture with [Indiscernible] in Austin we will have pod sales to other builders..

Got it. Thank you for the color.

Just on the following up as you are thinking about the various businesses, the diversified way of listing of test home, can you help us frame how we should think about normalized gross margins, given the different mix, living gross, you spend, your footprint there as you’re experimenting active adult how should we think about gross margins on a normalized basis?.

I think, all of that is in [indiscernible] with the guidance I gave for this year should held true regardless of subtle mix changes but generally when we do the high rises, we are looking for mid 30s margins compared to the mid 20s margins, we expect from any of the other product that we have whether that’s active-adult, large single family, attached single family, etcetera..

Got you. Thanks very much and good luck in the quarter..

Thank you. .

Your next question comes from Michael Rehaut with JP Morgan..

Thanks. Good afternoon everyone. I am looking at the 2013 annual report cover that you refer to Doug and its very painful look given the past months in New York. The first question I had was just on absorption I appreciate all the commentary and color there and obviously that the slowdown in year-over-year pace is not only felt by you but by others.

When I look at 2013 overall and this is just rough numbers, but I am kind of adding it up quarter-to-quarter.

It looks like you are doing about 23-24 sales per community per year and obviously it's broad average in different geographies in past cycles, but when you look to early part of the 2000, anywhere from 28 to 30, 32 so you are still a bit far off. And just wanted thoughts on what it takes to get back to that level.

I mean, obviously we are still at the beginning of recovery but we have seen other builders achieving a lot of markets, three four sales per month let’s say and kind of hit pretty good absorption paces earlier in 2013, is there anything that makes you think that you may or may not be able to get back to that type of a normal overtime?.

No, I think that we will get back to what you are characterizing as normal which I would characterize as a good margin. In the time that it takes for people to regain confidence hopefully the interest rates will not surprise people, the congress won’t do anything silly with the GSEs and we expect to be able to achieve that depending upon the margin.

I don’t want to say in short order, but it feels as it is coming rather than moving away..

And all other things being equal Mike, we are building more attached product or high rise product than we did back in those years that you refereed to and generally those products and the active adult can turn quicker than our large single families.

So, the more of the columns smaller units we can do, the more our throughput could get to or exceed those longer term averages..

But, in general, we are the slow go, the slow mo developer builder model and when we get to 28 to 32 as you mentioned that's really work speed for us. We start to really push price when we get to 25 or so per community because that’s generally we got our production goal set and when we start to exceed them we make the market pay for them.

But in a really good market they pay for it anyway which is what you reflected when you mentioned us the places you saw. .

Right. Thanks. I appreciate that color and just question of clarification Marty if you didn’t hit on it before you know you reiterated the 175 to 200 bits of gross margin expansion for the year.

I just wanted to get a sense and sorry if you hit on this before, but is that I believe that’s inclusive of interest and just kind of wanted to get your sense of how much of that is drawn by further leverage of the interest amortization versus the pre interest gross margin?.

It is after interest and so interest we expect to show maybe a quarter of that improvement to call it 30 to 50 points to that improvement. The rest would be in kind of true cost of sales..

Great thanks a lot. .

And while I am on the topic, Dough keep sliding a piece of paper in front of me saying I may have said $25 million increase in gross margin. I am sorry in SG&A it's a 25% increase in SG&A this year compared to last year in dollars..

The dollars go up 25%..

Yes..

Great, thank you. .

Your next question comes from Nishu Sood with Deutsche Bank..

This is Rob Hanson on for Nishu. Just wanted to talk about land for a minute here. You have got the Shapell acquisition. You also got a lot of pending land sales and so we would thought that your land buys would slow down a little bit however, over the past couple of quarters. You have captured your land spend fairly elevated.

So can you just walk us through the thought process around that and where we should see land buys direction in the future?.

Well, I think the land buys are slowing down a little bit.

This quarter we spent $275 million on land, $60 million of that was take downs at Baker Ranch and a JV that we are involved in with Shea Homes and $70 million was a high rise sighting on the east side of New York city that was contracted for pre Shapell, but the one reason we keep talking about bringing significant cash back from Shapell quickly is so we have plenty of dry powder to continue to take advantage of deals around the country and we are doing that.

We are a little more selective particularly in certain markets like California, but we are not out of business.

And we need to grow this company everywhere and so I think we are in good shape and we have a strategy to sell Shapell land and sell other land in the company and come up with other ways of returning cash like refinancing some commercial assets and like the sale of the shopping centers. So, I think you will see our land spend go down somewhat.

It will not dry up and we are analyzing every deal as we always did which is does it work in that location and if so we move forward.

We may have changed the underwriting a little bit to be a little bit more conservative because of what's out on Shapell for the next 12 to 18 months which is a period of time when we get a lot of the Shapell money back..

Okay. Thanks. That was really good color. I just wanted to –.

Season for making trades it's got to do with what you are pulling in on Shapell versus what you could you pull in on the next piece that comes to the desk and if the piece that comes to the desk can pull in the same or better than Shapell, well then it's rather fine, we would jump on it likewise if it's a reverse, we might as well keep what we have got instead of selling it in order to be able to bring in something to deals less to us.

It's a good time for us for swapping ball players. .

Understood. I just want to kind of switch gears and ask about the high rise business.

What do you guys have in terms of the pipeline or how many buildings will you have coming online in the next 12 to 18 months and then what you have opened now?.

We will have five openings in 2014. Pierhouse at Brooklyn Bridge which I mentioned in the monolog that just opened last weekend. 400 Park Avenues South which is 28th in Park Avenue South, which will open in later in the spring, a 11/10 Park Avenue which is – 99 units.

11/10 Park Avenue which is 89 in Park Avenue opposite side of Manhattan that will be somewhere between 9 and 11 units average price Ric, 14 mill. First Avenue in Manhattan which is 52nd Street and First Avenue that should open late in the year and then our first city living building in the DC market in Bethesda will also open later in the year.

What we have opened right now. Thanks Martin, we have got one unit left as a terrain which is the pent house up top. We have four properties in Philadelphia. We have one in Hoboken and we have 160 east 22nd Street off of Gramercy Park in Manhattan. Plus Open Bridge park which was opened this past weekend. First avenue is 114th..

All right. Thank you very much..

You are very welcome..

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

Thanks for taking my question. Marty, I appreciated your comments on non-home building earnings trajectory.

Could you talk about a little bit more granularly in regards to what we should expect for the remainder of 2014 on a year-on-year basis or whatever way you would like to quantify it?.

Well, it's tough to do that because some of these transactions require a specific buyer of land or a re-payer of debt at Gibraltar and until they actually show up, it's tough to set expectations because I can control what we do, I can't control what he does.

So, I think one thing that Doug did mention that we expect to do is refinancing one of our apartment projects and the proceeds from that to the extent to exceed our basis would be income and that could be $7.5 million to $10 million..

And some of the non-Shapell land sales will count. The Shapell land sales will go the future loss. But we are selling some land outside of the Shapell portfolio..

Got it. Thanks for the color on that and if I could, I heard Dan was there, revisit where he sees kind of the underwriting market for purchase originations today. I appreciate his insight on that especially following the implementation of [indiscernible] and ATR..

There is really not a lot of change from last time. We are still seeing most of the jumbo at 43% back ratio but we do have two major banks that will fund and have funded some non-QM loans. I don’t think to my knowledge we haven’t lost any sales because people didn’t qualify under the QM batter, so I think that's good news.

Interest rates continue to be strong. We just came out with a brand new [5-5 ARM] product that today is 3% and zero points. So people average no more than 4% for ten years that’s on a jumbo loan.

You can do a seven one ARM today at 2.78% in years with no points in a jumbo loan, and in terms of underwriting, you mentioned ATR, there has been ability the repay since the dark days of downfall. So we don’t really see a big change.

There is some documentation issues we have to do today, but in my view I don’t think we have lost any sales to QM or ability to repay..

Thanks for that and congrats on the quarter guys..

Thank you..

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

Thank you. So just on the Shapell land dispositions I mean it seems clearly and Doug from your comment California continues to do extremely well. Why not hold on to more land or all of the land that you bought in Shapell for disposition exclusively elsewhere and maybe some of your other lower growing or lower demand markets. .

Wants to generate cash to pay down some debts. .

I assure you what Bob told on the land selling committee or he is biting the finger on every deal that is presented. It is a great question. We struggle with it. We are following Marty’s lead although challenging him regularly. We are analyzing non-Shapell versus Shapell and looking for other ways to generate cash as I mentioned.

And there are some opportunities we have discovered to build out some Shapell land fairly quickly, where the money will come back not as quick as a land sale but quick enough, and so that’s an alternative and Marty anything else?.

No. I think the strategy is to generate some cash to reduce our leverage, and I think you have seen us do some of that with the repayment of the line draw.

You have seen us talk about doing some of that in methods that are not selling Shapell land like the sale of the shopping center, like potentially the refinancing of the apartment buildings that we mentioned and like as Doug mentioned selling through some parcels quickly to generate cash. .

Yes I had mentioned earlier that our typical model is to shoot for 25 let us say as a goal and if we sell more than that raise the price, slow down the future pace, so which come back into the 25, take additional profit.

In this case, we borrowed a bunch and instead of selling land, we may change the model where we see the opportunity, we won’t be able to repay within three months that might take a repay within a year, but that certainly within terms of [Indiscernible] and use that greater volume and greater pace as opposed to selling a land.

So every time we get a 5000 person weekend at Baker, Schaefer or Shapell one more reason to bring on some more supers, hold the price and let it rest. And we will go from week to week debating, which we should do. .

Got it, and then just one question on the apartment business.

As you grow with the business sounds like you want to grow, is it your intention to hold on to the buildings and generate the rent income or sell off your joint venture interest and be more of a merchant builder?.

I think it will be combination of both as we look at it right now. We like the holding of the units long term as a hedge against the cyclicality of the for sale business, but we like evidencing to you guys that we are generating some value and creating some gains by selling a building every once in a while and reporting the gain. .

Great. Okay. Thank you very much. .

You are welcome. .

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

Hi guys, thanks for taking the question.

Just to kind of beat the dead horse on land sales, are we still at the 500 million over 18 months, that was talked about around the Shapell deal or has that number changed some given the debt pay down, given maybe a slowing land acquisition pace and maybe if you could talk about maybe the near term cadence, I mean we can actually see those proceeds in the second quarter, how to think about that over the sort of visible future?.

I think it remains to be seen, I think we have made some progress already. We have some attractive opportunities in front of us that likely will close in the second quarter, and then we have other things we are planning to do for the balance of the year and the balance of the 18 months.

I think that, you know, we may have initially categorized it as $500 million in land sales. I think we want to refresh that a little bit to $500 million in cash proceeds generated. .

Okay, great. Thank you very much. .

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

Regarding the SG&A increase did that include any costs associated with the assets sales in the quarter?.

No. .

Okay, and then just on the multifamily initiative and City Living can you remind us how much capital you have invested in each of those?.

So in the multifamily business right now we have around $60 million to $70 million invested. .

$62 million Marty. .

Okay. We have I will say plans for another $100 million to $150 million there, and then Greg is looking up our investment in the City Living. .

Yeah. City Living has been running for the last few quarters just under 10% of our total inventory and this quarter it is 9.8%, but right in line. It will ballpark 450 million. .

Okay. So the capital allocation is similar to the percentage of total inventory. .

Well that’s what we have invested in the inventory. That’s the capital we have in it. These are not financed by outside debt. .

Great. .

In high rise, the apartments do have outside debt. .

Right. .

Thank you. I appreciate the color. .

You are welcome. .

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

Hi guys. Thanks for taking the question.

Just – you mentioned contracts on 8% did you give a number on the actual deposits for the first three and half weeks of February?.

We did not, and deposits quarter-to-date, three and half weeks are down about 6%. .

About 6%.

That’s in units. .

That is in units. .

Right, right, units. .

[Indiscernible]. .

Can you remind me how many days you ran the February sales of that last year?.

Every year it's about the same. This year we had a short extension because of some weather. So it's usually a three weekend event, so it runs 16 days. .

Right.

So in this week it was just like 23, 24?.

Correct. We added a weekend. .

Added a weekend, right.

And just I guess the last one on the – how much – where were the land sales and how much revenues did those generate?.

It was in Florida and it was $5 million. It wasn’t that much. Part of the gain was recognition of a deferred gain on the shopping centers from when we sold the land into the joint venture ten years ago. And that would be in Virginia. .

Right. Alright thanks a lot guys..

You are welcome..

Your next question comes from the line of James McCanless with Sterne Agee..

Good afternoon. Number one, I want to ask [Indiscernible] talked a little earlier about Active Adult.

How much of your business is tied to Active Adult now and what are you seeing from that buyer?.

Well, in terms of percentage of business let us look at contracts for the quarter, it was 14% of our contracts to the quarter, and at year ago it was 12% versus Q1 2013 and versus Q1 2012, it's 11%. So it has --.

And those are units?.

That is based on units. .

So it's probably less than that on dollars..

Right, less than dollars, of course. .

[Indiscernible] dollars, okay.

And then on city living, last year you all gave some pretty detailed guidance on where gross margins would move as you go through the deliveries and especially with the building that is delivering this year with the $14 million average price point what should we expect from the quarterly cadence on gross margin, and gross – or excuse me on average selling price from those deliveries coming through?.

That building is not delivering this year. He is talking about [Indiscernible].

So I think the – and Greg is going to correct me after I say this or maybe he will get to the answer before I say it, I think the cadence this year a little bit – will be a little bit more even flow, and the average price point of the units being delivered are going to be more in line with our average price point with the rest of the business than they were last year.

.

Okay. Thank you..

Okay. .

Your next question comes from the line of Ken Zener with KeyBanc..

I will be short gentlemen, just three housekeeping things.

First to clarify, when you say SG&A percent in dollars do you mean each quarter or is it just for the annual, second, can you highlight the gross margin ramp that you are thinking first half versus second half, and then your guidance given I think you said 30% conversion in the second quarter, what does that imply about the back half given product you still need to sell?.

Well I think with products we still need to sell we are assuming it's going to be at the same gross margins to the extent we can deliver as the mix we currently have in our backlog. We do not assume it's going to get better. We do not assume it's going to get worse.

With respect to the margin guidance we gave you, it is 25% for the full year, and it will ramp-up through the course of the year with the S component of that obviously being more sensitive to the total revenue and the revenue in the third and fourth quarters are going to be more significant than the revenue in the second quarter as it has been for a long time.

I may have missed a question..

The timing of the gross margin improvement for the whole year. .

Well, the second quarter is going to have a lot of backlog that we acquired from Shapell delever, and a little bit of that may slide to the third quarter. So the second quarter is going to have the bulk of the high cost of sales product from Shapell as we purchase accounting -- allocate the basis to a higher percentage of the revenues expected.

So the third and fourth quarter as I mentioned at the outset, margin expansion is where you should expect to see it..

Okay, and then Doug and Bob actually I did a little analysis, and so I am going to calling this out here.

The seasonality over the last 15 plus years in terms of pace 2Q from 1Q is about 60%, so orders per community go up that would imply kind of, you know, would you expect that to be any different and Doug when you talked about if you had to discount, what kind of drives that, I mean is it something above or below normal seasonality because you usually take up 60% in pace which, you know, depending on your community get you a certain order rate.

I mean if you had normal seasonality are you comfortable with that given that it doesn’t enable your annual absorptions really to pick up?.

I don’t fully understand the question. .

Well, if your sales pace goes up 60% in the second quarter versus the first quarter --.

[Indiscernible] we have November, December, January comparing to February, March and April. We don’t run the business looking quarter-over-quarter increases because I am not surprised by that stat because you are talking about Thanksgiving, Christmas, New Year, nobody is buying homes, February, March, April everybody is buying homes.

So I think you are asking if we don’t hit that 60% increase in improvement, do we start incentivizing?.

Yeah, or just whatever your concept of normal seasonality is, do you have to really be driving a lot of volume, I think Bob talked about you know backlogs?.

Normal seasonality is to sell whole bunch of houses in February, March and April and as Bob went through before in great detail we study every community individually every Monday to decide whether it is deserving of a price increase or an incentive, and thankfully for the last couple of years, the decision to hit it with a price increase has far outweighed the need to hit it with an incentive.

.

Thank you..

You are welcome..

Ken, one other thing that Greg suggested or mentioned is, you know, a couple of quarters ago we referred to the backlog conversion data from our busier times of 2002 to 2006 as a good benchmark for all of you to use to project our backlog conversions, and certainly the 30% I gave you for the second quarter mimics that and I would encourage to as you look at the third and fourth quarter do a similar piece of math, use 2002 to 2006.

.

Thank you. .

[Indiscernible].

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

Thanks guys. I will try to be short.

You were talking about the decision of raising prices versus incentives, do you compare how the last quarter was, what percentage of your communities you raised prices versus what percentage you did [incentive] versus a year ago?.

Your mean the fourth quarter?.

No, first quarter over first quarter. .

Year-over-year. .

In the first quarter of this year, it looks like in terms of number of communities where we raised prices, I will call it 55% and that’s going to be consistent with Q1 a year ago. .

Okay.

And then in terms of the Shapell communities, I think you mentioned that you guys were – you are starting off with 11, how much is that number likely go to up by the end of the year?.

There will be an additional 20 -- I am sorry -- my apology, there will be 20 total for the year. So we started with 11 and we believe we will add nine more. .

Got it, and lastly the 25% increase in the SG&A does it matter much whether you hit the low end or the high end of your delivery guidance?.

Only the S will be variable there. So since two thirds of the number is G&A I would tell you it is something that mattered too much. .

Got it. Thanks a lot..

You are welcome..

You are welcome..

Your next question comes from the line Buck Horne with Raymond James. .

Thanks. My questions have been answered. .

Your next question comes from the line of Jim Krapfe with Morningstar. .

Thanks for taking the questions.

How much were bricks and sticks up in the quarter and where do you see this going up next year or so?.

$1300, and half of that was labor, sorry $1700 and half was labor. And where is it going, that we can't predict. I assure you we beat on our trades, we do our best to manage it. Thankfully lumber has stabilized, which was the big mover the last few years. I don’t think it goes down but it appears to be leveling. .

Okay, and then how much were incentives in the quarter and how that compared to last year?.

You know, the incentives, in the contracts we took during the quarter sales incentives were 2.7% of the contract price, and a year ago, Q1 2013, they were 3.7%. They went down 100 basis points. .

Okay. Thanks. .

Your final question comes from the line of Michael Rehaut with JP Morgan. .

Thanks.

Just had a few kind of clarification follow ups if I could, Marty the tax rate for the year we are still expecting 39% is that a fair number?.

38%, 39% yes. .

Okay. Also, you know, when you mentioned Shapell and the price – the price changes to the communities updating of product et cetera. I think Doug you said that maybe it's going little better than expected.

But given the relative size of Shapell versus your overall company in 2014, you know, those communities kind of continue to play up better than expected, you know, would that just drive perhaps the likelihood that you would hit the higher end of your gross margin range of improvement Marty?.

Yes [Indiscernible]. We will get there, but whether it happens by [31] or not, I don’t know. .

Exactly. .

We have to sell and build these homes. .

Okay.

And then just on the gross margins for the second quarter given the big, I guess disproportionate impact from the purchase accounting, just so people aren’t too surprised I mean would that be – result in more of a flattish year-over-year gross margin when it's all set and done or something in that neighborhood?.

Right. I think it will be an improvement similar to what we just had year-over-year. .

All right. I mean because with 170 in the first quarter and you have a similar improvement in the second and now you are talking about 175 to 200 , I mean I would have thought and I thought you said that at some point that purchase accounting would have an impact.

It doesn’t seem like it's having a major impact then?.

I got half the year at 107, right. .

Yeah. So obviously it will be at the higher end of the range towards the back of the year. .

Right. .

Okay.

And then just the raising of prices in 55% of the communities what was that last quarter?.

Let's see [Indiscernible] similar, and in Q4 actually I took that off my print range. Sorry about that, which we don’t have it for Q4 in front of me. .

All right. No problem. Thanks guys. .

You are welcome. I know I let everybody --.

You have no further questions at this time. [Indiscernible] closing remarks. .

Thank you very much [Indiscernible]. Everybody have a good day. .

Thanks everyone. .

Bye. .

Thank you. This concludes today's conference call. You may now disconnect..