Douglas Yearley - Chief Executive Officer Martin Connor - Chief Financial Officer Bob Toll - Executive Chairman Gregg Ziegler - Senior VP, Treasurer.

Eli Hackel - Goldman Sachs Nishu Sood - Deutsche Bank Alan Ratner - Zelman & Associates David Goldberg - UBS Unidentified Analyst - Barclays Kenneth Zener - KeyBanc Capital Markets Michael Rehaut – JP Morgan Jade Rahmani - KBW Adam Rudiger - Wells Fargo Securities Michael Dahl - Credit Suisse Joel Locker - FBN Securities Megan McGrath - MKM Partners Paul Puryear - Raymond James.

Good afternoon. My name is Britney and I'll be your conference operator today. At this time, I would like to welcome everyone to the Toll Brothers’ Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you. Mr. Doug Yearley, you may begin your conference..

Thank you, Britney. Welcome and thank you for joining us. I am 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; Mike Snyder, Chief Planning Officer; Kira Sterling, Chief Marketing Officer; Don Salmon, President of TBI Mortgage Company; and Gregg Ziegler, Senior VP and Treasurer.

Before I begin, I ask you to read the statement on forward-looking information in today’s release and on our website.

I caution you that many statements on this call are forward-looking statements based on assumptions about the economy, world events, housing and financial markets and many other factors beyond our control that could significantly affect future results. Those listening on the web can email questions to rtoll@tollbrothersinc.com.

We completed 2014's fourth quarter on October 31, 2014. Fourth quarter net income rose 39% to $131.5 million, or $0.71 per share diluted. Fiscal year 2014's fourth quarter pre-tax income rose 25% to $188.5 million, compared to $150.2 million in fiscal year 2013's fourth quarter. Q4 gross margin, excluding interest and inventory write-downs, was 25.5%.

Included in fiscal year 2014's fourth quarter pre-tax income, reported in cost of sales, were $10.8 million of inventory impairments and a $32 million increase in reserves for warranty and litigation. Without these charges our gross margin would have been 27.9%.

Revenues of $1.35 billion and home building deliveries of 1,807 units rose 29% in dollars and 22% in units, compared to fiscal year 2013's fourth quarter totals. The average price of homes delivered was $747,000 compared to $703,000 in 2013's fourth quarter.

Net signed contracts of $970.8 million and 1,282 units rose 16% in dollars and 10% in units, compared to fiscal year 2013's third quarter. The average price of net signed contracts was $757,000 compared to $721,000 in 2013's fourth quarter.

On a per-community basis, fiscal year 2014's fourth-quarter net signed contracts were 5.01 units compared to 5.17 units in 2013's fourth quarter. This was a first quarter in a year in which contracts rose in both dollars and units compared to the previous year's same quarter.

Backlog of $2.7 billion and 3,679 units rose 3% in dollars and was even in units, compared to fiscal year 2013's year-end backlog. At fiscal year-end, the average price of homes in backlog was $739,000 compared to $715,000 at 2013's fiscal year-end. We ended the quarter with 263 selling communities compared to 232 one year ago.

Stockholders' equity at fiscal year-end 2014 was $3.85 billion up 16% compared to $3.33 billion at fiscal year-end 2013. As the housing market progresses through the early stages of what we believe will be an extended and uneven recovery, we are pleased to report significant progress in growing our revenues and profits.

Since the recent low point in fiscal year 2011, our revenues and net income have increased at compound average annual growth rates of 38% and 104%, respectively. In fiscal year 2014, revenues rose 46% to $3.91 billion and net income doubled to $340 million compared to one year ago.

While fiscal year 2014 sales contracts were generally flat compared to fiscal year 2013, recent trends are encouraging. Fiscal year 2014 fourth quarter contracts grew 16% in dollars and 10% in units compared to fiscal year 2013.

The momentum has continued into fiscal year 2015, with contract growth of 16%, deposit growth of 15% and traffic growth of 37% through the first six weeks of fiscal year 2015, compared to fiscal year 2014's same period. We remain optimistic about the upcoming spring selling season, which begins in late January.

In 2014, we continued to strategically grow our land holdings in key markets, extend our product offerings across geographies, diversify our business lines, and strengthen our financial position.

In California, the $1.6 billion acquisition of Shapell Homes, which closed in February, gave us approximately 5,000 home sites in established coastal communities. Obviously this exciting acquisition has enabled us to expand our California operations significantly.

In Texas, we opened four large master planned communities, where we will sell and build homes and also sell lots to other builders, which will generate additional income. Two of these are in joint venture and two are wholly owned.

Our Toll Brothers City Living team, which is heavily concentrated in the urban metro New York City market, currently has 837 units in projects open or soon to be open for sale with another 1,203 units we control that are in the approval process. We also continue to expand our Toll Brothers Apartment Living pipeline of urban and suburban projects.

We currently have 1,441 units under management, 1,920 in construction, and about 3,000 in planning. We will continue to develop these in joint venture as we grow this business. Now let me turn it over to Marty..

Thanks Doug. We are pleased with our results for this quarter and this year. Operating margin grew to 12.4% of revenue for the most recent quarter and above 10% for the full year. Pre-tax income was 14% of revenue for the quarter and nearly 13% of revenue for the full year. These numbers are after some one-time charges as noted in our release.

Specifically for the quarter, we had inventory write-downs of $10.8 million consisting of $9.9 million on operating communities and $940,000 of predevelopment. Of the operating community write-downs, about 25% was associated with a plan to exit a small market and 50% was associated with continued weakness in one other market.

We also recorded an approximately $32 million increase in reserves for warranty and litigation which is reflected as a cost of sales. This increase was primarily driven by estimated cost associated with known and projected stuck or related repairs at older homes in certain closed communities in Pennsylvania and Delaware.

We are in the process of making repairs and look to complete the work in a timely and cost efficient manner. Fourth quarter home building gross margin before interest, inventory write-downs, and the aforementioned increase in reserve for warranty and litigation, was 27.9% of revenues compared to 25.4% in 2013's fourth quarter.

2014's third quarter margin was 26.8%. The 250 point year-over-year improvement in gross margin was driven by increased volume which spread certain fixed costs over our larger revenue base and price increases in excess of cost increases.

Q4 '14 gross margin in comparison to Q3 of '14 was also helped by the reduction in the impact of Shapell purchase accounting. We had no negative impact from purchase accounting in our fourth quarter.

Fourth quarter SG&A of approximately $120.3 million was higher than the $93.5 million in the fourth quarter of '13 and higher than the $110.3 million in the third quarter of '14. Our significant growth has led to this increase in cost on an absolute dollar basis.

However as a percentage of home building revenue, SG&A was 8.9% for this most recent quarter compared to 10.4% in Q3 and 8.8% excluding Shapell transaction cost in Q4 a year ago. The quarter-over-quarter improvement is primarily due to increased revenue on a year-over-year basis, Q4 to Q4.

It's important to note that the fourth quarter of 2013 benefited from a reversal of $4.8 million in accruals. It also absorbed $1.4 million in Shapell acquisition cost. During the quarter we bought back 2.94 million shares at an average price of $30.78 for a total purchase price of $90.4 million.

We also terminated our $500 million 364-day credit facility, which we never drew upon as we have nearly completed execution of the liquidity strategies put in place as part of the Shapell acquisition. We enter '15 with a diluted share count of 185.9 million shares.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for fiscal year 2015. As noted in the release, in fiscal year '15 we expect to deliver between 5,000 and 6,000 homes and estimate the average delivered price per home will be between $710,000 and $760,000.

Hopefully the growth in sales reported year-to-date at fiscal year '15 will continue through the year, and we can drive towards the higher end of that range. Our 2015 fiscal year-end community count is estimated at 270 to 310 communities.

And while we benefit from a tailwind in gross margins from the elimination of Shapell purchase accounting, we project that our 215 City Living deliveries will be down around 15% in dollars and 30% in units compared to fiscal year 2014. 2015 is a big year for City Living contracts and 2016 will be the big year for City Living deliveries.

Bearing this in mind, with limited pricing power across our portfolio and continuing cost creep, we believe full-year gross margins in 2015 will be roughly flat compared to 2014. We expect Q1 unit backlog conversion of roughly 29%. In fiscal year 2014 we enjoined an excellent year in our JV and other income generating $107.3 million pre-tax.

Our current best estimate for 2015 reflects JV and other income at approximately $75 million to $90 million for the full year. Our estimated tax rate for 2015 is 36% reflecting some expected favorable resolution tax exposures and some tax credits.

Importantly, looking beyond 2015, with agreement unit volume up 16% year-to-date, model openings planned in some key Texas and California communities, and continued community count growth, we are looking towards improving home building deliveries and operating margins in 2016.

We are also optimistic that the deliveries in City Living particularly from 400 Park Avenue South and 1110 Park will improve margins, and deliveries from Pierhouse at Brooklyn Bridge Park and The Sutton will significantly boost JV income in 2016. Now I will turn it over to Bob..

Thanks Marty. We believe the housing recovery has many years to run. Housing starts, through ups and downs from 1970 through 2007, have averaged about 1.6 million annually.

According to Harvard University's Joint Center for Housing Studies, "Despite the rebound in the last two years, home sales and starts are still nowhere near normal levels… this was the sixth consecutive year that starts failed to hit the 1 million mark, which was unprecedented before 2008 in records dating back to 1959." Meanwhile, the country has continued to grow.

In 2005, the peak of the last housing cycle, US population stood at 295 million. That number reached 316 million in 2013, an increase of 21 million people. Even with the well-publicized recession-driven lag in household formations, compared to population growth, there were still 4.6 million more households in 2013 than in 2005.

Against this backdrop of increasing population and underproduction, the luxury market remains quite fragmented. We are the only major publicly listed home building company that focuses on luxury market on a nationwide basis. Our primary competitors, the small and mid-sized local builders, remain constrained by limited access to capital.

With 47,200 lots owned and controlled, we believe we have an attractive portfolio of well-bought and attractively located current and future communities. We believe these communities should support our growth as housing continues to recover, pent-up demand is released and the industry returns to historical levels of production and demand.

Now, back to Doug..

Thank you Bob, thank you Marty. Britney, let's open it up to questions..

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

Thanks. Good morning. Just had a question on Texas starting off and that you guys have made a pretty good push there. You mentioned the master plan communities.

Can you one, remind us what your Texas exposure is now and then potentially just talk about the risks of having to sell down some of that master plan exposure given some of the increased concerns in those markets?.

Sure Eli. We’re in four Texas markets; we are very small in San Antonio. We have re-entered Austin in the last year and we are very small there, and we have a significant and very successful operation in Dallas, and a significant, successful and growing operation in Houston.

Three of the four master plans we referenced in the release are in Houston, the fourth is in Austin, Austin master plan is a joint venture. In Houston we have two master plans on either side of the Woodlands, on the northern side of Houston. Those are owned outright, and we have a third master plan on the south side of town which is in joint venture.

In all maser plans we are building homes, but we are also selling significant pods to other builders. In Houston, we are under contract with a number of builders in all three of these master plans. The builders went to Letter of Intent several months ago and recently have all pressed firmly and signed agreements of sale to take down their pods.

So we will continue to evaluate how much to build, how much to sell. They have a lot of site development going on in all of these master plans and there's a lot of models being built in '15 that will set up revenue deliveries in '16. I know the question relates to oil and what's going on in Houston, it obviously been a big subject.

We are comfortable with our position. It is a very small market for us right now. In fiscal '14 Houston accounted for about 14% -- excuse me, 15% -- sorry, I am on the wrong line, sorry, my mistake. 3.7% of our Q4 contracts for the whole company came out of Houston. So it's a small market.

We like our position with the two master plans when you decided to Woodlands, and we like our position in the one master plan in the south, and I think we are in good shape and we are confident that the other builders will be taking down sections with us, and we think we are well positioned to be successful there. This is big market and -- yes..

It's a big market; I've got you on that, for us,.

Yes..

Great. And then Marty, just on -- you might get some good color on gross margins for '15. What about on the operating margin side sort of how you are viewing SG&A and sort of as you go through the year and maybe flat and up a little bit on deliveries? Thanks..

Well I think SG&A will show an inflationary increase in the neighborhood of 4% as we currently projected, and I will let you do your own modeling of what the operating margin that falls out from that might be..

Thanks, appreciate that opportunity. Talk to you soon..

Anything I can do to help out..

And you next question comes from the line of Nishu Sood with Deutsche Bank..

Thanks. Good afternoon everyone. I wanted to ask about the gross margins as well. Now that we sit at the end of '14, City Living and the urban joint ventures are obviously doing terrifically well for you.

Just focusing on the more traditional single family side of the business, how did the gross margin trend if we were to axe-out the urban product look from '13 to '14? I know we sit at the end of '14, and in terms of your expectations you kind of laid out that senior living is going to fall as a percentage that the gross margins might be flat.

So does that imply that you expect improvement from '14 to '15 as well?.

We have a couple of different things that interplay there Nishu. We have purchase accounting that hurt us in 2014 and will not be prevalent at all in 2015, and then we have City Living being down approximately 15% in dollars as a percentage of the total revenue.

So we reported ex-charges margin improvement of 250 points for 2014 over 2013, I think about 60% to 75% of that was associated with kind of core home-building margin improvement.

And as we look at 2015, I said it on the list call the house we sell today is going to struggle to be marginally accretive when it delivers nine months from now because we just don't have the pricing power to improve the margin..

Got it, okay. Now that's helpful color. You expressed some optimism about '16 and you mentioned the many growth initiatives in your communities that you are going to be opening.

So volume-wise you said your expected growth in '16, is that if we look at '14 and the expectations that you have laid out for '15, absorptions have been flat to slightly down and in your expectations as well while community growth has continued to ramp up.

So in '16 are you foreseeing finally absorptions coming back a little bit or is the optimism predicated just on continued aggressive community count growth?.

It's the latter. We don't have that crystal ball to project what absorptions will be in '16. What makes us exited about '16 is the things Marty has outlined. We have community count growth accelerating through '15 and projections right now suggest it will accelerate through '16. We have City Living deliveries hitting in '16.

We have a number of new model openings particularly in California where as we have talked about we are talking a lot of the Shapell land up to another price point with bigger, prettier more expensive Toll Brothers homes replacing the older smaller Shapell homes.

We have model openings in Texas and other places around the country and so when we look at all of that without the crystal ball of where absorptions will be. We are very excited about '16. If you layer on a continued recovery, which we believe will happen, there's a bonus..

Got it, okay, great. Thanks for the color..

You are welcome.

And you next question comes from the line of Ivy Zelman with Zelman & Associates..

Hey guys, it's actually Allen on for Ivy. Thanks for taking the question. On the City Living if we look at the contribution in revenue, I think this year it was about 7% of your revenue coming from the segment. And it sounds like that's going to decline to, call it 5% to 6% next year based on your guidance.

So right now, I think if I calculate this correctly, it's about 8% of your dollar backlog and it sounds like you expected to be a pretty strong order year next year.

So now if we think that your backlog maybe is around 10% at the end of next year City Living, is that a fair way to think about what the revenue looks like longer-term in 2016 and beyond?.

I think that's fair, and I think the other aspect that's important is the two sizeable projects we will have in joint venture that will come through as a JV income and won't impact margins, and that is Pierhouse at Brooklyn Bridge Park and The Sutton. That is the bulk of the backlog in our JVs right now..

And can you just give an upfront date of what the ultimate sell-out value of these buildings are, I am not sure what percentage is sold versus unsold and kind of have that and that would flow through?.

So the Pierhouse at Brooklyn Bridge, the condos are expected to have revenue just shy of $500 million. Bear in mind we are half of that. And then The Sutton is expected to have $250 million to $275 million of revenue and we are going to be a quarter of that. But hopefully a promoted quarter of that..

Got you. And then just second on land spend.

What is your ultimately end of spending this year on acquisition and development and any guidance for next year?.

Greg's turning pages here..

We spend 124 million in the fourth quarter.

Yes, and for the full year it's 2.1 million..

2.1 million for the full year..

Billion..

Excuse me, billion, right, of course..

While 1.6 billion of that was one check..

Right, and then the improvement spend for the full year was just south of 500 million..

Got it. I think and it's for '16..

The question was '15..

'15..

We don't know what we will be buying in '15 that will close in '15. So Gregg, I don't know if you have a number for the sort of the land in backlog that's to be bought but that's really not relevant to what the year-end number will be..

Right. I think it's way too early to kind of give a -- we have a number, but I think it's too early to give guesses what the full year number is and switch to opportunistic. A year ago, I would have guessed we are spending 1.6 billion on to that. So not the same number here..

Right, good answer..

Got it, all right, thanks guys..

Alan the other things that's worth noting is there is a hotel there at Pierhouse that we own half of and at some point that will be sold as well, and that could be as much as $100 million of revenue for each of us and Starwood..

Would that be '16 you think as well or later than that?.

I probably should talk to my partner before answering that question..

Fair enough, thanks guys..

And your next question comes from the line of David Goldberg with UBS..

Thanks. Good afternoon everybody..

Hi David..

My first question was on land acquisition activity, a little bit more broadly and kind of how you are seeing the land pipeline. If feels like, Marty mentioned there's not a lot of pricing power.

Are you finding things free enough a little bit and also kind of look at the total land positioning year-over-year base this is down a little bit kind of in fourth quarter this year.

So should we read anything into that about kind of your intensions or your view on the pace of this cycle or is it just kind of opportunistically there are deals out there and they are improving given what's going on a raw. Maybe a temporary little blip in that number..

Yeah, I think that's exactly it. As you know we are very opportunistic. We are also very happy with our land holdings. So we have the luxury of being pretty positive. And obviously there's some market that we have a big appetite. There's markets where we have a very small appetite but I wouldn't read anything into the fourth quarter numbers.

The land market is still heated. Those builders with capital are still chasing deals and in many cases bidding deals up to numbers that we cannot compete with.

But we are grinding it out and we will continue to buy land as we always have but it will be very selective because of the 47,000 mots (ph) that we own and control and what we think are some great locations..

And then if you could just give us some color on the share repurchase activity obviously opportunistic just given what happened to stock price and were you guys able to buy the stock back.

But on a go-forward basis, do you see any change in kind of overall thoughts on capital allocation towards repurchases especially if the stock were to under-perform a little more moving forward?.

I think we will continue to be opportunistic with respect to stock repurchases. We saw such opportunity in the recent dip that the builders had in I guess that was September-October. We evaluated our cash position.

The $32 per share price that we issued shares last November for the Shapell acquisition and the opportunity to essentially buy those back at $1 or $2 cheaper than we issued them was what we acted upon particularly since we had made such progress in our liquidity initiatives to bring down the leverage after the Shapell acquisition..

Great, thank you..

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

Good afternoon guys, this is Tray on for Steve. Thanks for taking my question..

Sure..

You mentioned in your delivery and guidance for 2015 that you would feel more comfortable with the high end of the range if demand that has persisted August continued.

Would this demand environment require order growth to keep at this 10% pace or is there room do you think for that to give back some to a mid-single-digit to mid high-single-digit order growth pace?.

Well our order growth pace for the first six weeks of '15 has been 15% or was it 16% -- 16%. So I think as we said in the release if that keeps up we are more comfortable with the upper end of the range..

Okay. Thanks for that, that's helpful..

Remember with our product it is very hard for us to deliver anything that's sold in the last six months of our fiscal year..

Okay, that makes sense..

Yes, we will ultimately deliver it..

That's good you are not going to lose it.

And then in relation to your 2016 expectations, you mentioned again that you are looking to improve margins which categorize those expectations relative to a better mix from real price appreciation potentially or just the expected flow of increase of this City Living division?.

I think it's a better mix encompassing the City Living product some of which we already have sales in and then the new models in California and Texas in particular..

Right..

All right, thanks guys, appreciate it, good luck this quarter..

Thank you..

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

Hi gentlemen..

Hi Ken..

Hi..

Gross margin, could you break out the interest expense versus the non-interest expense component of that considering you are talking about a flat year-over-year?.

For next year?.

2015?.

For 2015, it's essentially going to be flat 3.5% with what we had in '14..

And then realizing you have a headwind coming from lower units in your City Living which traditionally and I believe still underwritted a much higher gross margin rate.

Could you say the headwind that or dollars or percentage basis if you will that you are incurring because of that City Living as opposed to your non City Living business so we could understand how that mix is impacting your flat forecast?.

Well we have a headwind and a tailwind that we've pointed to. We have the tailwind associated with no Shapell accounting or no Shapell purchase accounting, and the headwind associated with fewer City Living deliveries and they essentially offset each other..

Okay. And then Bob you obviously talked about being in the nascent period of this housing volume improvement. If one looks back historically the flattening if you will of gross margins tended to occur more at cyclical points rather than at the beginning.

Could you kind of talk to anybody, Doug included obviously, why pricing gains appeared to be moderating at this point of this cycle versus your cost inputs or if it's just a mix issue? Thank you..

Well we've been through with it number of times as the other builders have. The '13 was the clear beginning of a strong recovery.

We all raised prices a lot and then in June of '13 after the spring season was completed and all the builders had hit the price pretty hard mortgage rates went up over 1.3 weeks and we all think the combination of the price increases from the builders and that shock of the moving rate so quickly chilled the market.

And so from the summer of '13 until the late summer of '14, business was good but business was flat and we did not anticipate in a recovery particularly after how deep this housing recession was but that would be the case. We've seen some signs of pretty significant improvement since the end of the summer. We've talked about it.

That hasn’t led the pricing power yet. I think the buyers are still a little bit skittish, and we are working through this recovery. But as we've said it's going to be a bit bumpy, we think we are in the early stages of it, pricing power is out there in limited markets.

We certainly have pricing power in Northern Cal and Southern Cal and we've had it in New York City and that we've had it in Dallas. But overall it is perplexing, that's another word we've all used. Costs have gone up because backlogs grew.

There was limited labor coming back to the industry after so many left through the deep downturn and we will see how it plays out. We are confident, we are in the early stages, we are confident we will continue to have pricing power not only where I mentioned but in other markets.

But why it happened the way it did and why '14 was a pause, and flat to '13 and not improving, has been a bit puzzling because when you look at the stats and that number of 1.5 million homes needed a year and we are only producing 500,000 to 1 million over the last five years, so this huge pent-up demand is building, household formations are growing, population is growing, interest rates are 4%, it is certainly a bit frustrating and confusing, and all we are doing is making sure we are positioned in the best locations with the best teams and the best brand, and we will be there when it comes back, but right now it is -- it's a little bit confusing..

Thank you gentlemen..

You are welcome..

I am sorry. Your next question comes from the line of Michael Rehaut with JP Morgan..

Thanks, good afternoon everyone. The first question I had was on the discussion around the expected contributions from City Living not in '15 but more so in '16, and I guess some of the JVs as well. I was wondering if you could describe maybe City Living and then the overall JV investment.

What level we are at today from either just current capital allocated towards those efforts.

How much capital do you have allocated to those areas today, where do you think that could be overtime? And really what I am trying to get at is ultimately how big can these divisions be because there's kind of a falloff at least in City Living in '15, you expect that to rebound in '16 very nicely, any guidance in terms of kind of ongoing level of investment and where that might kind of normalize so to speak?.

So looking back through January of '13, our investment in City Living has been between $450 million and the $580 million it is right now.

I think that 580 will grow a bit next year until deliveries start to happen out of the bigger buildings we mentioned and I think that makes it essentially 10% of our inventory balance and I think that's not unreasonable to expect it to hover around there.

Depending on the cycle of the building and the delivery it might be a little bit below that or a little bit higher than that..

And any thoughts around the JV investments? Are your comments -- some of that City Living is JV and some is not and those comments are inclusive of that..

That includes the JVs, right?.

One sec, let me get to you..

One second please..

So Pierhouse we don't have in there and then Sutton we do have in for now until we structure the joint venture. So it's only good in the one project they have so far..

So the numbers Marty gave you in investments City Living, is everything except for Pierhouse..

Do you have an investment in Pierhouse?.

We do. So Mike, if you heard that properly one of the two City Living JVs is in that number Marty gave, Pierhouse which is the other big one is not in and Gregg will be getting you that number..

Okay, that's helpful. Maybe you can follow-up back towards if you can't get it. I guess the other question was just clarification….

Our investment's 24 million..

24 million is invested in Pierhouse..

Okay..

Remember that that is a building that's on a ground lease so there's not a large land purchase payment and it has as a JV external bank financings. So that 24 million is our equity..

Sorry, that's our equity in the residential and then we have 14 million for half of the hotel. So our total is 38 million, 39 million on the whole project..

Okay.

So Pierhouse 38-39?.

Yes..

Okay.

And then just on the gross margins this year, I don't know if you've -- I am sorry if I missed it, broken it out granularly, Marty if you could just give the total -- on a full year basis what the purchase accounting from Shapell, how that -- how much of an impact that was?.

Gregg you have that, right?.

Yes, the full impact on gross margin from Shapell for all of fiscal '14 was 80 basis points..

Okay. That's great. Thanks a lot guys..

You are very welcome..

Like to go back to the question before which is what's going on with the market. The way I see it is that those that healthy tried are tried and that's representing the sales that we've got on average basically since the recession, the great recession ended.

The general public, the large market is still not quite yet convinced that the new phenomenon of housing prices going down is no longer to be feared. In general that's a new equation, a new thought that didn't exist before. Housing got slower, went down in some markets by 50%.

As the market slowly recovers it's head, it's cents it's willingness to except that -- to believe that housing is not -- they are housing it, that they are purchasing. It's not going to go down on them.

You will see a geometric increase in the demand which will lead to more increase in price which will lead to more increase in demand until we go into the next recession. So we are not quite there yet, but we can feel the beginning of it as we speak right here. So that's my analysis of where we are and where we are going.

Any other questions?.

Britney?.

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

Hi. Thanks for taking the question.

Regarding City Living I wanted to see if you could give some color on how far ahead of you underwriting margins are given the rise in New York City land prices we have seen?.

We've always said that City Living margins are at least 10 points higher than the rest of the company's gross margin. There are certain buildings that have performed significantly better than that number. But in underwriting we are comfortable in continuing to provide that guidance at City Living at least 10 points higher..

Okay and I guess the color there is -- I mean one of the developers we meet -- we can speak to talk about difficulty in making land acquisitions pentel but they I think in a lot of cases are doing kind of conversions.

Is the economics of these instructions that much different that you were still able to find deals that work or I mean are you having to work elsewhere given what's happened to the pricing?.

Now we have excellent deal-flow coming out of Manhattan. We are looking to expand City Living into other markets. We have our first building opening for sale in Bethesda, Maryland and we are studying a couple of other big cities to expand the business. We have a smaller city living operation in Philadelphia but the land deal flow right now is good..

And so would you say that the new construction projects you have a different economic profile and say condo conversions or redevelopments?.

No. I think the condo conversion redevelopment opportunity is very limited. We for every 20 news builds we see -- land for new build, we may come across a condo conversion, they are difficult, the cost to convert can in many cases be more than the cost to build a new building..

Very risky..

Very risky. You've got in many cases ceiling height issues where it's an eight foot plate because it's an older building and that doesn't bode well for luxury condo. And so we've done a few condo conversions, they've been successful but that's a very limited of the deal flow we see -- limited amount of it..

Thanks.

And then just lastly on the last remaining terrain unit I haven't checked the website lately, but is that installed and if not what would be the risk of an impairment on that asset?.

It's sold and made a healthy profit..

Okay, congratulations. Thank a lot..

It's sold and delivered in the fourth quarter..

It's tough to generate an impairment out of that..

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

Hi, thanks. I was just curious what market you exited and talk a little bit about the decision and if there are any others on the list..

We exited Richmond, Virginia. It was being managed out of our Northern Virginia, Washington DC operation. We had two communities and we were able to slip out the back. It was not a market for us.

The price point was a little bit below where we generally build and we have struggled there for years, so it was a relatively easy and painless market for us to exit..

Okay, thanks.

And then the litigation and the warranty expense, were both of those expenses associated with the same stucco project or was the litigation something separate?.

So the litigation is associated with the stucco as well as some to much lesser extent turnover issues at certain communities..

Okay, thanks..

Your next question comes from the line of Michael Dahl with Credit Suisse..

Hi, thanks guys. Marty with respect to the gross margins, it's full year flat, implies that you are going to be down a couple hundred basis points potentially from 4Q level.

So just wondering how to think about that progressing through the year? Is it likely to be a big step-own early and then steady or higher or steady progression lower, steady sense of cadence there?.

I think in the first quarter of 2015 we will end the fourth quarter of 2015. We will have some city living deliveries that will be positive to the margin. But in the second and the third quarter is where we will see that dip down that you are referring to..

Got it, okay, that's helpful. And then if we on the order side, I think given if we look at 3Q and into early fourth quarter, you were seeing healthy non-binding deposits contract activity had lagged a bit, it seems like starting in September that changed and caught up and has carried into November and early December.

Just wondering how you would characterize the change in terms of that catch up in contracts versus deposits?.

I think you described it exactly right..

I guess anything notable from -- that you are hearing that from customers like why is the conversion rate better?.

No, we are not hearing anything in particular from customers or our sales teams except that as you saw from my numbers traffic is up significantly, buyers are serious and therefore deposits and our contracts are up and we are encouraged for what's coming late January with the spring selling season..

Okay, great, thank you..

You are welcome..

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

Hi guys. Just a little toned down little bit on SG&A.

Do you have a breakdown of the 120 million between just corporate overhead and then commissions and advertising?.

Sure. So over the fourth quarter is 120 million around 48 and a half of that was advertising and marketing and the rest was G&A..

Thanks.

And on the -- if you are looking at communities just being opened in 2015, we are just trying to take the -- how many are going to close out a component or absorption plays out of it? How many do you expect to open in '15 just and arrange and how many do you expect maybe you have a '16 number?.

Go ahead Gregg..

Sitting here today out estimate for '15 is that we will open 98 communities and the timing of that is it's still being worked out but I would assume a majority of them are in the second half of the year..

Majority in the second half. And what about -- do you have any initial target for '16 or do you -- it looks like, if you hit the mid-point it will be 11% increase year-over-year from the yearend.

Would you envision a similar low double-digit increase from the end of '15 to end of '16?.

Marty if you can answer that, please answer '17, '18 and '19..

I don't think we are prepared to answer that question for '16..

Got you. And then just a last one on tax valuation.

What was it at the end of the quarter?.

It was $40 million, DTI was 294 million and had a $44 million valuation to allowance..

So it was roughly 250 million on the balance sheet?.

That's right..

All right, thanks a lot guys..

And you last question comes from the line of Megan McGrath with MKM Partners..

Hi, good afternoon. And just to follow up on SG&A. Can you walk us through a little bit looking at that next year you've got the flattish closings but you are good on community count.

So are you expecting that to be basically an earnings headwind next year, do you think you will be able to keep as a percentage of revenues keep that flat?.

So I think it will be up marginally. Everybody at Toll Brothers like to make a little bit more money next year than they made this year..

So up marginally as a percent or on the dollar basis?.

I said on a dollar basis it will be up around 4%..

Okay..

And on a dollar basis it's up maybe $0.01 to tenth of a percent..

Okay, great..

Because while unit deliveries are flat, our average sales price is up a bit..

Okay, that makes sense.

And then quickly just wanted to talk a little bit about -- you talked about losing a little bit of pricing power, does that mean that you actually -- sorry if I missed it, but did you talk about incentives, did you actually increase incentives or it's just simply that prices aren't going up as they were before?.

I think the better way to characterize it is that prices aren't going up as fast. I wouldn't say we've kind of lost pricing power, it's been stagnant. We have it in a handful of markets that Doug referenced in and it's not there in many of the outlets..

Right, and incentives have been about 20,000 per house which is 2.5% over the last almost two years. That's been our average number..

Okay, great, thanks..

You are welcome..

You are welcome..

And you do have one last question from the line of Paul Puryear with Raymond James.

Thank you. Good morning. I got on a little bit late, so maybe I am just desperate. Bob, how can you be so confident that demand at your price point, there's been a demand -- demand is going to be so strong at some point in the future when new home sales at your price point are already up 300% from the troughs.

And looks like tracking about where they were in a normalized market pretty downturn? How do you get to the conclusion that that buyer for that $0.5 million house, the market is that deep?.

I have seen the movie before. In 1968 prices went up about 10,000 after that recession. In 1974 prices were at 50,000, that's was the next recession. In 1980 prices were about 125,000 and in '88 they were about 300,000, 350,000.

In '92 before we got rocking with the greatest market we've had, we were looking at 500,000, and that other problem with seeing the prices continue on the same line that they've been operating on since 1967. so when you walk into Casablanca and to repeat every word, it's a good chance you've seen the movie before..

Yes, I mean I can appreciate it's different market to market.

I guess what I am questioning is if you look at it more on a national level, do you have a sense for what a normal level of buying is at this $500,000 price point?.

Yes, about double..

Pardon me..

Double..

Okay, great. Thank you..

You are welcome. Thank you Britney..

There are no further questions at this time..

Thank you Britney, thanks everyone..

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect..