Douglas Yearley - CEO Bob Toll - Executive Chairman Rick Hartman - President and COO Marty Connor - CFO Fred Cooper - SVP of Finance and IR Don Salmon – President, TBI Mortgage Company Gregg Ziegler - SVP and Treasurer.

Susan Maklari - UBS Trey Morrish - Barclays Ivy Zelman - Zelman & Associates Michael Dahl - Credit Suisse Michael Rehaut - JPMorgan Securities Will Randow - Citigroup Jack Micenko - SIG Jade Rahmani - KBW Paul Przybylski - Evercore ISI Jay McCanless - Stern Agee Jim Krapfel - Morningstar Buck Horne - Raymond James & Associates Mark Weintraub - Buckingham Research Group Alex Barron - Housing Research Center Collin Verron - RBC Capital Markets Morris Mark - Mark Asset Management.

Good morning and welcome to the Toll Brothers Second Quarter 2015 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Douglas Yearley, CEO. Please go ahead..

Thank you, Gary. Welcome and thank you for joining us. I'm Doug Yearley, CEO.

With me today are Bob Toll, Executive Chairman; Rick Hartman, President, and COO; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance and Investor Relations, Joe Sicree, Chief Accounting Officer; Mike Snyder, Chief Planning Officer; Kira Stirling, Chief Marketing Officer, Don Salmon, President of TBI Mortgage Company and Gregg Ziegler, Senior VP and Treasurer.

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

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

We completed fiscal year 2015 second quarter on April 30. Second quarter net income rose 4% to $67.9 million, or $0.37 per share diluted, compared to fiscal year 2014 second quarter earnings of $65.2 million or $0.35 per share. Fiscal year 2015 pretax income was $86.5 million versus $93.5 million one year ago.

Excluding write-downs pretax income was $98.7 million, compared to $95.4 million in fiscal year 2014 second quarter. Q2 gross margin excluding interest and inventory write-downs improved 170 basis points over the last year to 25.3%.

Revenues of $853 million and home building deliveries of 1,195 units were basically even in dollars and units compared to fiscal year 2014 second quarter totals. The average price of homes delivered was $713,000 compared to $706,000 in 2014 second quarter.

Net signed contracts of $1.6 billion and 1,931 units rose 25% in dollars and 10% in units compared to fiscal year 2014 second quarter. The average price of net signed contracts was $826,000, compared to $729,000 in 2014 second quarter. This significant increase reflects our greater concentration in California and some high priced City Living products.

On a per-community basis, fiscal year 2015 second quarter net signed contracts rose 4% to 7.43 units, compared to 7.14 units in 2014's second quarter. Backlog of $3.48 billion and 4,387 units rose 9% in dollars and 1% in units compared to fiscal year 2014 second quarter end backlog.

At second quarter end, the average price of homes in backlog was $794,000, compared to $742,000 at 2014 second quarter end. We ended the quarter with 269 selling communities, compared to 252 one year ago. Contracts for the first four weeks our third quarter were flat to a lackluster first week.

However, we have seen robust improvement in the past three weeks with contracts in units up 29% and non-binding reservation deposits up 33%. We’re pleased with the way fiscal year 2015 is unfolding. California demand remains very strong.

Our communities there accounted for roughly 30% of the value of signed contracts this past quarter as we enjoyed pricing power across both Northern and Southern California. Here are some California examples.

At Hidden Canyon, a new community in Irvine, California, we opened just three months ago, we have taken 65 agreements averaging about $2.7 million. At Baker Ranch in Lake Forest also in Orange County, we have taken 26 deposits in the past month averaging above $1 million.

At Porter Ranch in LA County we have taken 26 agreements in the past two months averaging in the mid-$800,000. At Gale Ranch and San Ramone and the East Bay suburb of San Francisco, we've taken 51 agreements in the last two months at an average price of $1.2 million. We also saw strength in New York City, Texas in a number of other markets.

At our latest New York City condo project, The Sutton, in midtown Manhattan, which we’re building in joint venture, we’ve taken 28 contracts since opening in late January at an average price of $2.3 million. Texas which for Toll is primarily Dallas and Houston, continues to perform well.

Over the past few weeks more than 1500 visitors have showed up a grand opening events at our Sienna Plantation master plan community on the South side of Houston, where we and other builders will be selling homes. Lots sales to third-party builders continue to stay on pace at our three master plan communities in Houston.

We now have contracts in place for over 550 lots with outside builders of which over 50% have already been delivered. All builders have been taking down their sites in accordance with their lots purchase agreements. We have seen a number of strong community openings in the past few months elsewhere in the country.

Pent-up demand is releasing in many markets. We continue to expand our active-adult brand in the west with the opening of Regency at Damonte Ranch in Reno Nevada, where we’ve taken 42 deposits since opening five weeks ago. In Westridge Estates of Canton in Michigan, we have taken 20 agreements since opening in March.

In New Jersey at the Estates of Bamm Hollow, we have taken 15 agreements at an average price of $1.2 million since opening in January. And at Royal Cypress Preserve in Orlando, we have taken 19 agreements in two months. Our rental apartment business continues to grow.

We're currently leasing up two new communities totaling 685 units one in downtown Washington DC, and the other in suburban Philadelphia at faster paces and higher rents then we had originally projected. Construction costs have also come in under budget.

We’re currently in construction on five other rental communities totaling 1,833 units stretching from Massachusetts to Maryland and have more than 2200 additional units in our pipeline.

As we look to fiscal year 2016, we currently expect gross margin and net income growth based on an increase in the average price of our homes, our growing and profitable presence in California, increased revenues projected from our City Living Division, and overall solid current demand in most of our markets. Now let me turn it over to Marty..

Thanks Doug. Second quarter home building gross margin before interest and write-downs improved 170 basis points to 25.3% of revenues, compared to 23.6% in 2014's second quarter. Improved profitability in California drove most of this increase.

Second quarter interest expense included in cost of sales was 3.5% of revenues, compared to 3.4% from 2014's second quarter. In Q2, we recorded $12.2 million in impairments including $11.1 million associated with one underperforming community.

Second quarter SG&A was approximately $107.7 million, this was higher than the $104.3 million in the second quarter of 2014, which included Shapell transaction cost of $5.1 million due primarily to our growth. As a percentage of home building revenue, SG&A was 12.6% for Q2 of '15 compared to 12.1% in Q2 of '14.

The increase compared to a year ago was due to an increase in community count, contracts and joint ventures as we incur overhead before revenues. Our Q2 joint venture income was $6.2 million and our Q2 other income was $13.9 million.

Combined this $20.1 million and the $26.9 million from our first quarter, have us more than half way to our full year guidance of $75 million to $90 million from these line items. This represents 22% year-to-date of our pre-tax income.

As we look to future years, we expect to continue to report sizable income on these lines and highlight our Pierhouse at the foot of the Brooklyn Bridge, our New York City high-rise JV, the Sutton, our master plan land development JVs, and our growing apartment business as future contributors.

Turning to taxes, this quarter we resolved the state tax matter and we are able to release some reserves, resulting in a roughly $13.7 million benefit to net income. We now estimate our full year tax rate to be around 31%.

Our share count on a diluted basis average 184.8 million shares for the quarter and we now expect to deliver between 5300 and 5900 homes. We update the estimate of our average deliver price per home to be between $730,000 and $760,000 for fiscal year 2015. The range of our year end community count remains 270 to 310.

Our pre-interest, pre-impairment and expected gross margin for the full year remains as stated on our previous call approximately 26%. Full year 2015 SG&A dollars are anticipated to be up 6% to 7% over full year 2014 and lastly we expect backlog conversion in Q3 of roughly 32%. Now let's turn it over to Bob..

Thanks Marty. The strength of our California communities which we had planning so far has exceeded our expectations in both price and pace since we acquired Shapell Homes about 15 months ago. Many of our other markets have also shown improvement. The economy and housing continue on parallel pace of recovery.

It appears that the housing market is on firm footing and heading in the right direction. As pent-up demand is released, we envision a solid recovery for housing. Now let me turn it back to Doug..

Thank you, Bob. Thank you, Marty. Gary, we're ready for questions..

[Operator Instructions] Our first question comes from Susan Maklari with UBS. Please go ahead..

Good morning. First question is, can you guys give us a little bit more detail on what you are seeing in Houston? We've been hearing that there's perhaps some more inventory building, especially at the higher end.

So if you could give us some color what's going on down there?.

Well so far so good. Our quarter numbers were down a bit as you probably noticed from last year but that is because of inventory constraints on our behalf with some communities that closed out and others that are just beginning to open more than it is due to a change in demand, a change in the market.

So we keep a close eye on it as we’ve talked about, we're constantly asking sales and our management team down there what they're seeing and the market is holding on, we’re keeping our fingers crossed. Right now it’s okay, and we love our positioning. We are very happy with our locations.

These three major master plan communities that we’re involved in are very well positioned in market. And as I mentioned in my opening comments, we had 1500 people come out in the last few weeks to a grand opening at our master plan community.

We also only have one cancellation in backlog out of 141 homes which our company is running 3% which is incredibly low, and Houston is even lower than that..

Okay, thank you, that's very good color.

And then just a follow-up, a broader question, on how do you think that the impact of potentially higher mortgage rates could show itself in the demand trends as we go through, especially later this year?.

I don’t think the increase in mortgage rates is truly meaningful at this point. It is low as 3.5, 3.75 now you're at 3.70. I don't think that is going to determine the market going one way or the other..

We've always said that if the rates pick up slowly because of great economic news, which is why they should pick up, we’ll take it all day long, and right now buyers don't talk about rates, it's not an issue, they have been sitting at this number for so long, so we don't see it as an issue right now for our business..

Okay. Thank you..

The next question comes from Stephen Kim with Barclays. Please go ahead..

Hi, guys, this is actually Trey on for Steve. Thanks for taking my question. You guys mentioned that contracts in the first four weeks of the third quarter were flat due to a disappointing first week, but then rebounded, growing 29% over the last three.

What were the drivers for the first week being poor? Was there some prolonged activity that occurred in 2014 that is comping here? Were those last weeks just catch up? And also, how big is May normally in relation to full 3Q orders?.

So lackluster first week really goes more towards the tough comp, because last year Easter was the third Sunday of April..

April 20..

Which means the end of April last year was slow since we don't sell many homes Easter weekend or we don’t deposit many homes Easter weekend which take a week or two to turn into agreements, and the first week of May last year therefore was busier.

So the first week is really more towards a comp issue with the timing of Easter Sunday than anything else as for the next three weeks, it’s more than catch-up, the numbers are too big to just be catch-up. We've had a terrific three weeks, momentum is building, we had a good Memorial Day weekend which is not normally a big weekend to be selling homes.

In terms of your - the final part of your question, how important or how big is May, it’s the tail end of a spring selling season, it’s not as good as April, it’s not as good as March, it’s certainly not as good as February, May is the month to graduate open the shore house, attend the wedding, and generally not be all that focused on purchasing home, so we’re pretty thrilled with the action we’ve seen in the last three weeks of May..

Got you, that's very helpful. Secondly, we've heard that there's been somewhat of a softening in the New York City market related to the international buyer, due to the stronger U.S. dollar.

As a result, how has your process evolved over the past six months or so surrounding the New York City market and City Living in general? And also, could you possibly give us the pretax income dollars for traditional home building in City Living?.

The pretax income dollars per segment I think we’ll get to that when we file the 10-Q, I don't think we brought that in with this..

Okay..

On the international buyers right now about 13% of our New York City Living buyers are foreign. That number is driven down a bit because Pierhouse at Brooklyn Bridge Park in Brooklyn only has about 5% foreign buyers. So if you take Pierhouse out we're at about 23% of our buyers are foreign for the City Living business.

So that buyer’s held up, notwithstanding a strong dollar I think foreigners are still very interested in investing in New York City and we're doing just fine. As to the market, we love it. It's strong. It's not as frothy as it was a year and a half, two years ago, we’ve said that now for a number of quarters.

But it is still one of our top three markets..

All right, thanks guys, very helpful. And good luck next quarter..

Thank you..

The next question comes from Ivy Zelman with Zelman & Associates. Please go ahead..

Thank you, good morning guys. You have a pretty big range in terms of the number of communities you expect to have at the end of the year and one of the big picture questions I think related to just appreciating what sounds like a very solid strong market for you overall and you guys sound very enthusiastic.

Do you believe that the function of growth in the market being stronger is really about bringing supply and impediments to bring in supply to the market and is it fair to say if you build it they will come and maybe the industry it’s more about either lack of interest of bringing on a lot of supply or inability because of impediments, local municipalities, weather delays.

Help us understand bigger picture maybe why growth might not be stronger or why you have such a wide range and where you guys are on the communities..

Ivy, existing home prices have continued to rise exponentially almost. We are approaching the prior peak, which was nearly 10 years ago. And this may release significant amounts of pent-up demand and create, I hate to say it, broadly burgeoning market, could be shaky..

And Ivy with respect to, if we built it they will come, I got into some great detail in my opening comments on some of these new openings we've had, that have had terrific sales and its Florida and its Michigan and its Reno and forgetting Californian and Texas and City Living, we are experiencing huge pent-up demands for the new opening that we have in great locations and that’s very encouraging sign.

I don’t think all the numbers are coming through yet, but I think that is a early indicator from were we are headed and you're right, we have given a big range as to community opening this year.

A lot of that is depended upon that last permit we need from that last agency and that's a very tough and unpredictable part of this business, but we are very encouraged by the demand that’s coming out to our new offerings..

And just to think about your costumer assumingly that person is selling an existing home and some cases that market we all know has been very tight and we have not seen increase in listings, but we have seen a stronger overall resale market.

So do you feel that's holding back or the customer that's coming in is finally able to make the move because they can sell their house to house days on market I think was under 50 days.

So it’s moving faster, but is there enough people willing to list to Bob’s point that they actually have enough equity now that they can trade up to buy their dream Toll house and maybe do you have people coming in actually saying, I finally could sell my house and take enough equity or buy the Toll house..

We don't hear as much about the concern of selling the existing home as we heard few years ago. To Bob stats, the stronger the resale market becomes the higher price of the houses become, the more comfortable people are in moving up and that is evolving..

Ivy, I think it’s logical to look back 10 to 12 years from now and see significant volumes of transactions in the housing market and not as significant since then because many people who bought then can't see the motivation to sell quite yet because despite that their family has gotten bigger or larger, the equity has not recovered or exceeded the original price in their house to motivate them to move up.

That's starting to shake loose..

Great. Good luck guys. Thank you..

The next question comes from Mike Dahl with Credit Suisse. Please go ahead..

Hi, thanks for taking my questions.

I wanted to push a little bit on those last points because if we step back you're still running a sales pace that is more or less flat year-on-year for the past couple of quarters, up a little bit and it’s still a pace that’s well below where you were selling at the peak or leading up to the peak and its seems like you have made the decision to push price fairly aggressively over pace.

But if the demand is really so strong, I guess the question is why isn’t there both and how are you thinking about the scope for upside and pace from here..

The reason you don't see it in pace is, we are geared up to do 30 a year I suggest on most of the communities when you hit the 31 sale, you are now selling the next guy for delivering 12 plus months out. And you said yourself too high what’s going to happen 30 months from now.

Maybe we better choke this sales pace back a little bit and that gets you an increase in price, which slackens demand just because it may be over reaching..

So the expectation is that at some point you’re still targeting 30 per year..

Yes..

Got it.

Second question, just given the strength that you're talking about and clearly we have seen in the results in California, how has that changed the thought process around some of the land sales that were previously planned?.

We bite the finger everyday and wish we had it all back. But it's gone. We wish those have bought it well..

The question is, what about the future for land sales. We are land buying not land sales..

Exactly, that's where I was at..

The only land selling we are doing is in the master plans and for the most part Texas..

Right, which was always part of the deal. But our California land selling is complete, in fact we are back in action buying more land out in Cali and balance sheet is in great shape so that's all behind us..

Got it.

Any geographies specifically in northern, southern or just all along the coast is the focus right now?.

Both northern and southern coastal, we are not going England. South Bay, East Bay of San Fran, LA County, Ventura County, Orange County, Northern San Diego County, if you can get it is going to be within 20 minutes at the Toll town..

Okay, great, thanks..

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

Thanks good morning everyone and nice quarter.

First question I just had on was the - you gave some of the examples about new communities and I know obviously everyone has specific underwriting in different plus polls and pushes with pace versus price, but I think you had highlighted one community in California Doug in your opening remarks where you said 51 agreements in two months, which I believe is a little more than six a week.

I believe you said around 2 million ASP correct me if I am wrong, and it just seemed a little bit of stronger pace that you would think certainly in first couple of weeks, kind of jump start with sales, maybe that was part of it, but seems like six a week for two months is typically a little stronger than you would think about in terms of a higher ASP where you where you want to run the pace a little slow or get more price.

I was just curious around that specific example..

Sure, I think you’re referring to Hidden Canyon, which is in Irvine. We actually took 65 agreements in three months at an average price of $2.7 million that is actually two product lines that sit next to each other. One product line is $2.3 million and the other is $3 million. So the average add to about to $2.7 million..

So where we would call that two communities?.

Within our account that is two communities it is one location, it is one sales per billion with two model home offerings, but we have hit that price significantly. We still have great demand.

Right now we are managing this backlog and have very few homes for sale as we take care of the backlog and get them all buttoned up and have them pick all their upgrades and features, and we have a hundreds of future buyers who have filled out the financial qualification statements and are fully approved for the price of our homes that we will just work through that list in due course..

The reason we've let this backlog build up and this pace build up is that we see faced our action from our clues in California. We produced a house much more rapidly in California than we do in Virginia or Connecticut, New Jersey..

It seems have plenty of trades..

Right, so we’ve got good production why not take advantage of it, as well taking it to price, but you draw correct distinction..

That's helpful and the two product lines and I guess maybe I was thinking of a different example but two product lines over three gets you much closer to that lower pace per community, per week that I think most people think about at that higher price points so thanks for that.

Just a couple of quick modeling questions, Marty the 31% tax rate for the year that's inclusive of the benefit for the quarter?.

Yes..

Okay. And then the interest amortization if you can just remind us, I believe you said that you expect it to be similar this year for a full year basis than last year.

And where could that go on a normalize basis in the last cycle kind of site from the peak years when there was around 2% kind of looks like it was in the mid-2s, is that a good way to think about it over the next two three years or so?.

Well you're correct, we said roughly 3.5% for this year, which is the same number as last year, and where it could go, it could go lower, it could go higher depending on the pace of sales and the rate of interest that we incur. Right now our interest rate is pretty manageable, but if rates go up, our cost per house would go up.

So I think it’s trending down Mike..

Right..

But that's only going to hold as long as interest rates hold..

Okay. Thanks so much..

The next question comes from Will Randow with Citigroup. Please go ahead..

Good afternoon or I guess good morning and thanks for taking my questions.

In terms of interest rate sensitivity, have you guys looked at the volatility in interest rate locks for Toll mortgage relative to changes in interest rates over time?.

Don Salmon is here, who runs TBI Mortgage who will answer this for you..

We opt for a lot of options to our consumers to lock long-term, they can lock up to 360 days on both the conforming and the jumbo loan. We can do an 80% up to $4 million so up with the 30 day lock. So the buyers can really manage their own volatility as they choose.

We make it a practice not to predict or try to manage interest rates here that’s we offer the buyers as many options as we can and let them choose the options that’s best for them..

And have you seen as either buyers anticipate rates rising or for like a better term rates going up locks being used more often?.

We've seen a slight uptick in long-term locks. I wouldn’t call it significant, but we have seen a slight uptick in long-term locks our folks are talking to buyers about it more and more, I think there’s more interest.

If you think about interest rates day we can lock a 15 year jumbo arm and that’s a 30 year amortization, it’s fixed for 15 years that's 3.75, plus a little price for the long-term lock I don’t know why you wouldn’t do that, it doesn’t make any sense not to do that.

And you put that up against the 10 loan arm and 3.5, you get five more years at a quarter lower interest rate and you can lock up for 360 days, there is a slight price to locking it but again it’s a cheap insurance policy, so the options are there for the buyers..

Thanks for that. And if I could just squeeze one more on input cost inflation or deflation.

What categories are you seeing the most movement in for the home building business?.

Or the cost side you are asking..

Correct..

Our costs were up this quarter - to $3,000..

It was about $3,000 for the quarter, it's less about half of that is in labor and the other half is split among things like stucco, drywall, concrete..

But lumber is still coming down..

And lumber continues to come down..

All right, thanks guys. And good luck in the next quarter..

Gary, I have an Internet online question web question if I could read and then answer. This is from Sharif from Alpenglow Capital. The tragic floods in Houston appear to be quite severe and their affects on the local community seem significant.

How will they impact your Houston operations project destruction delays et cetera? But most importantly our hearts go out to all the people of Houston as they recover from this flooding. So far we have no damage or significant delays with any of our communities..

Thank you..

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

Hi this is Smitha on for Nishu. The first question I had was that, you mentioned that you believe gross margins will be higher next year and you talked about how this will be primarily due to California and similar thing being the driver factor. Outside of those mix impact, would you like to see higher margins coming from your other markets.

And what kind of pricing power do you expect to see there?.

Well I think the visibility we have on City Living and the strength and visibility we have in California are greater than the visibility we have in the rest of the markets. So our focus in identifying California and City Living as the drivers was in large measure, because we’re more certain of those factors.

We are encouraged by the demand we’re seeing released around different pockets of the country. And hopefully that continues and we will also contribute to margin expansion around the rest of the country in 2016, but we’ll probably have more on that more to say on that later this year..

And California and City Living now account for about 40% of our business combined..

Yes..

Got it, thanks. And then when you mentioned improved profitability in California, was this part of Shapell portfolio or your legacy operations.

And do you expect this to continue trending?.

We have about 4,000 lots remaining in the Shapell portfolio..

I have to answer another question which includes about 270 units in backlog. So the net left to sell is 3700..

3700 future to sell, plus about 300 in backlog, but what I was referring to is new land opportunities outside of the Shapell transaction that we’re evaluating..

So we’re seeing margin improvement in California on the Shapell purchase, on legacy Toll land and on new purchases like Hidden Canyon, which is a two to three year ago purchase..

Okay, thanks..

You’re welcome..

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

Good morning guys. Thinking about Toll historically one of the longer land pipelines in the business, that number has come down in the last year or so.

Obviously Shapell moving that number around in some land sales and some JV mix but is there a cultural shift around land in that sort of eight, nine year timeframe any thoughts you can offer there on the recent trends?.

There's not cultural shift we’re very opportunistic. We’re very careful. We of course evaluate the land holdings we have in different markets and how well those markets are performing, which affects our appetite. And I wouldn’t read too much into the land levels coming down it’s just lately.

We've bought a little bit less land and we’re in such great position with the land holdings we have, that we can afford to be very selective and we are..

With the recovery being a bit more gradual than other recoveries have been, the need to get land is not been a significant..

Okay. Fair point. And then on the rental side of the business, just curious with some supply coming online there in the rental market as you’re thinking changed relatively maybe nine months or year ago or is the strategy in rental like it is on sale which has looked main and main, it doesn’t matter supply demand doesn’t really affect that strategy.

Just curious if any thoughts that have changed in the rental business?.

Definitely not the fundable rental business, these communities are specifically located and brought into the fold because of the extra power – the pricing power they have in the market..

I recently visited our new community in Washington DC led by the Nationals Ballpark, the quality rivaled our condo buildings in New York City.

I was so proud the rooftop deck, the rooftop pool, the gym, the quality of the units and we’re getting the premium and we’re leasing up significantly above budget because not only as a main and main but the quality they offering is that condo level and that’s how we are building the business but we’re still sensitive to supply and demand, no question but we’re very bullish on this apartment business and particularly the way we’re positioning with luxury brand..

Okay, great. Thanks for taking the questions..

Welcome..

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

Thanks for taking my questions.

On the apartment rental communities, do you anticipate the impact of the income statement to be in terms of periodic sales of specific leased up buildings to reach other entities or do you expect to hold then with paying interest and generate recurring earnings off of that?.

I think the most significant impact will be from periodic sales to purchasers and we’re not going to be all that selective about who the purchaser is other than the dollars, they’re talking about. I think the routine run rate of income from these apartments will not be tremendously significant because of the depreciation expense becomes along with..

Okay.

In terms of periodic sales, when do you anticipate reasonable timeframe for some of those taking place?.

Well, that will be leased up stabilized before we consider it and right now we have two legacy properties from the old days one in Princeton and one in Northern Virginia that have been stabilized for a decade and right now we have no intention of selling and then we have do we mentioned in the opening monolog, that are leasing up and they have another year or so of lease up.

So you won’t, I can imagine Marty we see this until fiscal ’17. I don’t think to be sale of next year..

12 to 24 months, we might be able to get some done depending on where the leasing goes and I neglected to mention that we could choose to refinance these rather than sell them and as we did at both Princeton Junction and Dulles Greene, we can have a gain on the refinancing.

We’re comparing other income this year, joint venture income this year to last year, last year had an approximate $12 million gain from the refinancing of the Princeton Junction apartments..

Is typically add back depreciation expense for FFO purposes, so if the income adjusted for depreciation on a cash basis were significant, when do you consider introducing that kind of a metric?.

Yes, part of our strategy is to hold some and sell some but until you have a sizable amount that you’re holding, the income statement impact particularly since these are off balance sheet and our ownership rate runs from 20% to 50% takes an awful lot of units to start to aggregate whether that’s pre-depreciation/FFO wise or post-depreciation..

Okay.

Just on the land budget, is there a number in mind that you anticipate for this year and next year is it opportunistic and or do you look at as a percentage of revenues, do you expect to grow the actual land holdings?.

It’s opportunistic, we do not budget for land acquisition, we do not allocate capital to divisions. This quarter, we spent a $117 million on land that is late historically but again it just ran to the opportunity that we saw on when the closings of land occurred, so there is no formula we continued to – we will continue to be opportunistic..

And the small follow up on the impairment, you took can you say which community that was and if there has been any change in absorptions since you took the impairment?.

Well, we don’t name the community but it was located in the New York City exurbs, so it's 60 to 90 minutes North of New York City in a location that has been soft for us, it’s a very small division for us and we took an impairment in one community that was about a $11 million of the $12 million..

And there has not been enough time past since we took the impairment to answer the second piece of your question..

Great, thanks for taking my questions..

The next question comes from Ryan Gilbert with Morgan Stanley. Please go ahead..

Hi, [indiscernible] here. So I guess my first question for you is on margins. I love to hear your thoughts on the opportunity to produce operating leverage in the second half of this year on a year-over-year basis, is that a reasonable expectation or is the second half of this year revenue increase opportunity perhaps too small..

I think we do expect significant increases in income from operations as a percentage of revenue both in our third quarter and incrementally from the third quarter to the fourth quarter such that for the full year, we would expect income from operations to be up 60 to 90 points over last year. .

Okay. I appreciate that.

And then nice turnaround in orders in the North and Mid-Atlantic, can you talk a bit about the extent improving demand drove that increase versus the decline in ASP?.

Demand has improved. In the Mid-Atlantic Virginia was one, Pennsylvania was two, in the Northeast..

Derby, Michigan, and Birmingham..

I’m sorry we didn’t hear Gregg. For the Northeast, it’s driven by Michigan number one and New Jersey number two..

So it’s a mix issue handle it is not any kind of increase in incentives or reduction in price..

Great, got it fair enough. Okay. Thank you for that.

And then lastly if I could sneak one in, I don’t know if I heard it or not before you might have mentioned but can you talk a bit about the geographic dispersion of your land spend this past quarter?.

Sure. We had I’m sorry the $117 million, the biggest spends were $25 million in New York City and $21 million in Dallas. So that makes up almost half of it..

Okay.

And the rest was just scattered throughout the rest of your markets or any particular region?.

Number three was Nevada, number four was Arizona, number five was Virginia, number six was another Texas deal..

Okay. .

It’s opportunistic – strategic in terms of trying to get figure in one particular spot..

Right, there is no great plan with this..

And remember the land spend is the closing, we might have tied this land up six months, 18 months, 36 months ago. So it doesn’t reflect the current action..

Okay.

Fair enough and then any change in the tendering the conversations with some of the potential sellers or just trying to get any sense for how the land spend dynamic, the lands cost dynamic might be changing if at all?.

I don’t think it’s changing..

I don’t think it’s changing at all. I think the land market has been pretty stable and fluid now for the last couple of years and some ground gets bid up with multiple bidders to a point where we take a pause.

We play up our brand, we play up our balance sheet, our ability to quick close with cash all the time it distinguishes us but I think the market is pretty much the same..

Okay. Appreciate that. Thank you..

The next question comes from Paul Przybylski of Evercore ISI. Please go ahead..

Thanks. This is Paul Przybylski on for Stephen East. I was wondering if you could give us any kind of update the Shapell product transition in the percent of communities that you still have left to transition to Toll product.

And then following on that, what kind of margin differential you’re seeing in those communities once you make the switch?.

Paul the switch is in progress, we're - as we explained when we had 10, 20, 30 lots remaining that were being served by a Shapell model, we built out that phase with the Shapell model.

And when we had an opportunity to move into the next phase one of the Shapell master plans and start fresh with the new Toll model, we did it and that has been occurring now over the last six months.

In some cases we opened a new phase with the Toll model off of blueprints, because it had not been built yet and so right now we have a number of Toll models that are under construction. In other cases we delayed the opening until the Toll models actually up decorated spectacular and off we went.

So it is in progress prices are up significantly partially, because our houses are bigger. We’re maximizing the lots in a way Shapell did not, but more so, because our houses are just prettier and better designed and have spectacular indoor outdoor living. And the market is responding.

So it’s in progress, we have 3700 lots in front us to continue to build Toll models on..

Okay. Can you give any kind of color on what kind of absolute pricing power you’re saying in California and you said that, your ASPs are now over a $1 million.

If you continue to transition at Shapell as which you get to like $1.1 million or some kind of ballpark range you could give?.

Paul remember, every seniority is different, but I will tell you prices are up significantly and we continue to experience pricing power even Memorial Day. So its hot, the market is hot North and South, all Toll communities and new Shapell communities everything we have out there is hot..

Okay. Thank you. I appreciate it..

The next question comes from Jay McCanless with Stern Agee. Please go ahead..

Good morning everyone.

First question I had, going back to the May commentary historically what percentage of 3Q orders has May been?.

For a rough number around 40%..

40% okay..

Of 100% for Q3..

Got it, okay. And then secondly, you guys discussed cycle times earlier.

Could you discuss where your cycle times are now versus where they were last year for your traditional product?.

I think it's very similar. And part of that is the way we run the business when we get out 12 months, we raise the price to try to keep it at 12 months or less. So I don’t think there’s been a change in the last year..

Okay.

And then the last one I had with City Living ramping up next year has there been any meaningful change to the delivery schedule that you guys published in the corporate profile last quarter?.

Modest changes that go both ways. We will deliver a few more units earlier at 400 Park Av, we will deliver a few units of slight little bit later at 11, 10 Park Av. Our Bethesda property in Maryland has had some modest construction delays, which has pushed that building back a little bit.

So I think when you wash it all out, I don’t think the numbers will change much, but there is a story for each building either moving it forward or moving it back a little bit it’s part of the business..

Okay. Thank you..

The next question comes from Jim Krapfel with Morningstar. Please go ahead..

Good morning. Thanks for taking my questions.

What kind of buyer demand trends are you seeing in your true luxury product versus your lower price move up and what's your strategy going forward for buying in developing land for your different buyer groups?.

Well as I talked about in the beginning with some of the examples I gave and if you focus on the price points of those examples, the move up luxury market is alive and well it’s one of our strongest segments. And that's not just California, I gave an example in New Jersey and I gave an example in Michigan and Florida.

But then I gave examples of tremendous start to 55 and over active-adult community in Reno.

So, everything is quick and on all cylinders in terms of our strategy to buy land again it goes back to the opportunity, it’s easier to get active-adult land entitled because there are no school kids and many towns that fill the crunch on their schools, are more supportive of a 55 and over new school kid community.

But there’s other locations particularly in the state of Texas with entitlements are pretty predictable where the schools are big and they welcome more kids.

And so we’re chasing all segments, our active-adult is high-end, we will continue to be luxury even when we downsize the product, but it’s – there’s not one segment right now that we’re looking at, we’re really focused on all of them..

Thanks for that color.

And if you were to exclude California and City Living, how would your adjusted gross margins compare this quarter versus the year ago quarter?.

I don’t think we look at it that way Jim, or have looked at it that way. If we’re going to take the good stuff out, we'd like the some of the not so good stuff out..

Okay. Thank you..

The next question comes from Buck Horne with Raymond James & Associates. Please go ahead..

Thanks guys.

You guys have answered most of my questions already here, I just want to go back one of my question did relate to the timing of the City Living delivery you partially answered this, but I kind of wanted to drill down just a little bit on the story behind 11, 10 Park Av and the average prices of those units are so sizable and can move the numbers around a little bit.

I think you mentioned that you thought the delays were going to back up a little bit or deliveries would be back up this year was that correct or help me understand 11, 10 Park Av?.

Yes, I think we were hopeful and maybe we get a closing or two in the fourth quarter, that now looks like it will be early 2016, but we’re going to get more units out of 400 Park Av in the fourth quarter and it’s a wash, just a few out of 11, 10 and many more out of 400 when you put the revenue dollars together it’s a wash..

And the margin dollars..

Right. Okay, perfect.

And then my other question was simply talking about your thoughts about the active-adult in each targeted market and I think you started to answer this question already, but just how does how do you think Toll and the brand the Toll brings could fit in with a more aggressive push into that market and really where would be the best target markets for that.

How do you think about Florida versus Arizona versus Texas or an age restricted type push?.

Buck we're all over it, we’re chasing the demographic, we’re chasing the boomers, we’ve dominated the luxury active-adult market in the Northeast mid-Atlantic Midwest. We just opened as I mentioned in Reno, we’ve been very successful in Colorado, in Denver we’re going to open in the fall and Vegas.

I saw the Vegas ground last week in summer one it is spectacular where this pressure on the guys in Dallas to get some active-adult cooking there. So there's a national move for us to be bigger in the luxury active-adult..

Perfect. Thanks guys, really appreciate it..

The next question comes from Mark Weintraub with Buckingham Research Group. Please go ahead..

Thank you. First I wanted to clarify, when you were talking about the margin improvement from City Living in California, certainly part of that can just come from mix as you have more City Living next year and it’s a higher margin product to begin with.

I think you made it pretty clear that in California, you were also saying that apples-to-apples in California are there reasons why you would expect the margins to be improving.

Did that also hold for City Living where you actually expect the margins of City Living to get stronger or is that a comment that there will be more of it enhanced the overall margin would be stronger?.

Margin improvement next year will come from more higher margin City Living product than we’ve had this year. This year we’ll have little bit - we’ll have less and it will be lower margin Philadelphia product than the New York product next year..

Okay, great.

And then one quick follow-up could - Southern California, what are your thoughts in terms of implications for you and you various products there?.

We're okay. We've studied in great detail. New home communities in California are very water efficient. Many of our communities use reclaimed water for irrigation.

We’ve talked to all of our water authorities and they are in good shape and they do not anticipate any change in our business we're obviously very sensitive to it, where we do a lot of ground resistant landscaping.

There are some areas where greywater is available into the community through the infrastructure from the utility company that allow us to use, recycled water for irrigation. There is also some examples were that greywater can be used for washing machines and toilets in the home.

And so, we're confident that our communities, our land holding are protected and in good shape..

Thank you. Thank you very much..

[Operator Instructions] The next question comes from Alex Barron with Housing Research Center. Please go ahead..

Hi, good morning guys.

I guess the market is pretty good so I haven’t heard you talked much about incentives but I imagine there is still some margins, so can you quantify what incentives are this quarter versus last quarter versus the year ago maybe as a percentage of revenue?.

Sure Alex.

Incentives still sit at $20,000 per home and that number has not change now Gregg in a couple year, right?.

That's right. We wrote a note in last 27 months couple of years..

So as a percentage of home prices it's going down..

In terms of those communities were I think it was mostly Southern California where you were talking about selling 50, 60 in the first month or two, and I think Bob said earlier that you're only targeting to build about 30 a year.

So how do you guys - when do you reopen the community for sales, you shut it down or what is that you - how do you handle that and also how do you gauge, I imagine as you were selling the 50, 60 you’re raising prices is that correct?.

That is correct. I didn’t mean to imply that we targeted California for 30, when we’re selling 60 in the first two months obviously. What I said was, we've got greater production capability in California. We take advantage of that so that it permit us to raise prices but stay open and still meet the production schedule..

And that 65 that we referenced at Hidden Canyon in three months is two product lines with two construction teams. We counted as two communities at one location..

Right, although its still very strong, I think no matter how you look at it but -.

It's very strong and we have the subs out there to build the homes and so we’re still opened for business..

Got it. Okay, thanks. .

There was a second part to your question, I forgot it..

Yes, I was asking about gauging, raising prices as you go along because I thought maybe you would shutdown the community for a little bit..

Yes, you wanted to know how we handle it, when we finally do shutdown our community.

And what we do is what we do reservation deposits, coming to see the models, you pick your home, you pick your lot but we can't give you a lot, so we can put you in a list to sign as many documents as we can think of and give us the deposit which is fully refundable and then we’ll call you when we open up again and what the price is at that moment it won't be your price and that’s how we handle our overbooked community..

If I could sneak one on the tax rate issue, in order to get to the 31% is there going to be one quarter were the tax rate is lower than the other or should we just kind of assume there both roughly the same..

I think, they will both be pretty close to roughly the same..

Okay. Thank you..

The next question comes from Collin Verron with RBC Capital Markets. Please go ahead..

Hi, thank you for taking my question.

Quick question on the gross margin, earlier in the year you had said as second quarter margin were suppose to be the low point at the year with sequential improvement given the strength that you saw on the second quarter with California, does that continue to be true or you expecting gross margins to flat now in the back half of the year..

I think gross margins will be consistent in the third quarter with what we just delivered in the second quarter but improve in the fourth quarter..

Okay. And what's driving that kind of the flat as sequentially..

Product mix. We delivered this quarter some higher margin product than we had originally projected so they’re not there to deliver next quarter..

That's great. Thank you very much..

The next question comes from Morris Mark with Mark Asset Management. Please go ahead..

Hi. It's fairly obvious that you doing great in 40% of your communities along the coast, on the East Coast and on the West Coast. What about the rest of the country - I’m generalizing the question, where the trends are more lackluster what will it take to show meaningful improvement there in terms of unit to volume and better pricing.

And second question is related to the first, I believe you may have covered this, but can you give us some sense of where the new communities are will be that you’ll be opening and what impact this is likely to have on future product mix in margins?.

Thanks Morris. So the rest of the country include some pretty great places, maybe they’re not quite as great as California and New York City but Texas is doing very well for us. Nevada, Vegas is back, Reno is back, they’re doing very well for us. Florida on the East Coast in particular is doing very well for us.

Virginia is improving, we mentioned that Pennsylvania, Philadelphia and New Jersey are doing well. So I wouldn’t characterize 40% as great and what the heck is going on with the rest.

So there are certainly some areas that have a ways to go in the recovery, as North Carolina for us Charlotte and Raleigh are recovering but they are recovering very slowly, Detroit is doing very well but Chicago and Minneapolis have a ways to go on the recovery.

Colorado was doing, Denver was doing very well for us and has slowed a bit some of that is due to our own issues with inventory and long lead times on delivery and therefore slowing down sales intentionally.

So it’s really a mix throughout the country, what it is going to take to get those B or even C plus markets growing, better local economies for one, Chicago is a great example, great city, big city diverse economy The economic engine has gone away a bit. The job loss in the downturn was significant. They haven't gotten back to jobs they lost.

So most -.

Loss prices have been come back to the peak..

Right. So the issues for those that are struggling are local and we keep a keen eye and obviously effects our land spend in certain markets but that's sort of the - my wrap up for you with respect to the community count growth for the balance of the year and where it comes from, Gregg why don't you jump on that..

Sure. So for the last six months of the year we expect to have a good community count growth in Northern and Southern California, in Colorado, in New Jersey, in Pennsylvania, in Dallas and in Huston, Virginia and then Seattle.

Those are the big names, we obviously have a number of openings everywhere else but you then had about impact settlement mix next year.

I don't think you’re going to see a huge shift, I mean as we look at it today we think maybe in 2016 will have potentially a little bit less single-family deliveries in a total using dollars and maybe a little bit - little bit less multifamily.

And then where are the pluses that I mean that will shift into some active adult which is a big driver for us and then City Living next year where that would be a bigger component of our deliveries. But there's no monumental shift from 2016 based on the openings in back half of '15..

Thank you..

This concludes our questions and answer session. I would like to turn the conference back over to Douglas Yearley for any closing remarks..

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..