Douglas Yearley - CEO Bob Toll - Executive Chairman Rick Hartman - President and COO Marty Connor - CFO Don Salmon - President of TBI Mortgage Company Gregg Ziegler - Senior VP and Treasurer.

Trey Morrish - Evercore ISI John Lovallo - Bank of America Merrill Lynch Paul Przybylski - Wells Fargo Jason Marcus - JP Morgan Ivy Zelman - Zelman & Associates Jack Micenko - SIG Ryan Tomasello - KBW Nishu Sood - Deutsche Bank Ken Zener - KeyBanc Marshall Mentz - RBC Capital Markets Mark Weintraub - Buckingham Research Jay McCanless - Wedbush Securities.

Good morning and welcome to the Toll Brothers Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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; Kira Sterling, Chief Marketing Officer; Mike Snyder, Chief Planning Officer; Don Salmon, President of TBI Mortgage Company; and Gregg Ziegler, Senior VP and Treasurer.

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

I caution you that many statements on this call are forward-looking 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 fiscal year 2016’s fourth quarter on October 31. Fourth quarter net income was $114.4 million or $0.67 per share diluted compared to $147.2 million or $0.80 per share diluted in fiscal year 2015’s fourth quarter.

Fiscal year 2016’s fourth quarter pretax income was $168.2 million, compared to $217.5 million in fiscal year 2015’s fourth quarter.

Impacting fiscal year 2016’s fourth quarter pretax income, reported in cost of sales were $2.5 million of inventory impairments and a $121.2 million warranty charge, primarily related to older stucco homes in the Mid-Atlantic region.

Fiscal year 2015’s fourth quarter pretax income included a $4.4 million of inventory impairments and a comparable $14.7 million warranty charge. Adjusting for these items, fiscal year 2016’s fourth quarter adjusted pretax income was $291.8 million compared to $236.7 million in fiscal year 2015’s fourth quarter, a 23% increase over last year.

Revenues of $1.86 billion and home building delivers of 2,224 units rose 29% in dollars and 22% in units compared to fiscal year 2015’s fourth quarter totals. The average price of homes delivered was $834,000 compared to $790,000 in 2015’s fourth quarter.

Net signed contracts of $1.47 billion and 1,728 units rose 17% in dollars and 20% in units compared to fiscal year 2015’s fourth quarter. The average price of net signed contracts was $848,000 compared to $872,000 in last year’s fourth quarter.

Fiscal year 2016’s fourth quarter was our ninth consecutive quarter of year-over-year growth in total net contract units and dollars. For the first five weeks of fiscal 2017, beginning November 1, 2016, non-binding reservation deposits were up 10% in units compared to the same period in fiscal year 2016.

Including the inherited Coleman Homes deposits, the increase was 14%. As the only national home building company focused on the luxury market, we continue to benefit from healthy demand, limited competition in many markets, superior land positions, a financially strong buyer base and a highly recognizable brand.

These strategic advantages and a solid financial foundation have propelled us to more than tripe our revenues and increase net income nine-fold in the past five years. Based on these initiatives, we believe we are well-positioned to continue to grow in a vibrant, luxury new home market.

While there has been some debate about softness in the luxury housing market, we continue to produce impressive results by serving what we believe is a demographic sweet spot in the luxury market. We are not focused on super-luxury.

With an average delivered home price of approximately $850,000 company-wide in fiscal year 2016 and $690,000 in markets other than New York City and California, our product lines are affordable to many households in the U.S.

The value of our brand, our demographically targeted product lines and our well-located communities all helped drive this year’s results. We achieved double-digit growth in EPS, revenues, contracts and backlog in fiscal year 2016.

As household formations increase, we continue to pursue growth initiatives to amplify the value of the Toll Brothers brand.

Through our dual-pronged strategy of expanding and diversifying our geographic footprint and broadening our platform of residential product lines, we reach affluent buyers across the demographic spectrum, from millennials to baby boomers and everyone in between.

Our for-sale products include luxury move-up, empty-nester, active-adult, second home and urban high-rise condominiums. We also build rental apartment communities. Toll Brothers Apartment Living took a major step forward this year.

In total, Toll Brothers apartment and City Living have projects completed, in construction or under development totaling over 10,000 units. We believe we are creating significant shareholder value for the Company through Toll Brothers Apartment Living.

With the millennial generation now entering their thirties and forming families, we are starting to benefit from the desire for home ownership from the affluent leading edge of this huge demographic wave. In fiscal year 2016, approximately 22% of our settlements included one primary buyer 35 years of age or under.

We currently are courting these customers with our core suburban homes, urban condos and rental apartment properties.

We are also introducing a new product line, T|Select by Toll Brothers, which incorporates the elegance and style of a higher-end Toll Brothers home but with slightly fewer structural options, a quicker delivery time and a slightly lower price. Now, let me turn it over to Marty..

Our larger, more capital intensive New York City high-rise condominium projects; all of our urban and suburban rental projects; and a number of our larger, longer-term master planned communities.

These financings, which encompass both project-specific construction and permanent loans and project-specific third-party equity investments, enable us to reduce our equity commitment, generate fees and performance based promotes, and increase our return on investment.

We are looking at more of these joint venture structures as a tool to improve return on equity. Our recently acquired Coleman Homes division in Boise, Idaho, involves lower cost land and higher inventory turns, albeit at a generally lower gross margin. This should translate into a stronger return on equity than our core business.

In fiscal year 2017, we expect Coleman to deliver approximately 300 homes at an average delivered price of $300,000 to $325,000. We expect the combination of purchase accounting and lower gross margins from our Coleman Homes acquisition to reduce our overall adjusted gross margin by 30 to 40 basis points in fiscal year 2017.

We also expect changes in our mix of product deliveries throughout the country to negatively impact adjusted gross margins in 2017 by 25 to 35 basis points. Therefore, our full year fiscal 2017 adjusted gross margin is expected to be between 24.8% and 25.3% of fiscal year 2017 revenues.

Our first quarter gross margin, adjusted gross margin in fiscal year 2017, will be the quarter most impacted by purchase accounting and mix. We expect adjusted gross margin to be approximately 23.4% in the first quarter with approximately 75 basis-point improvements expected each quarter thereafter through the end of the year.

We expect fiscal year 2017 first quarter deliveries of between 1,000 and 1,250 units which -- with an average price of between $750,000 and $780,000, and full fiscal year 2017 deliveries of between 6,500 units and 7,500 units with an average price of between $775,000 and $825,000.

SG&A as a percentage of full fiscal year 2017 revenues is projected to be approximately 10.6% of revenues and first quarter SG&A will be approximately 15.2% of first quarter revenues.

The Company’s full fiscal year 2017 other income and income from unconsolidated entities is now expected to be between $160 million and $200 million with approximately $50 million in our first quarter. Our fourth quarter tax rate benefited from a net $9 million state tax reserve release resulting from a settlement.

We estimate that our effective tax rate for 2017 will be approximately 36.2%.

With our existing backlog, strong sales trends and expected growth in revenues, we expect to deliver one of the highest adjusted gross margins in the industry in fiscal year 2017, while improving our return on equity to above 12% and growing earnings per share significantly. Now, let me turn it back over to Doug..

Thanks, Marty. Stucco related issues are an industry wide problem. Increasing this reserve is intended to set aside sufficient funds to stand behind our communities, get the repairs completed on these older homes and move forward.

Our customers buy homes from us because of our 50 years in business, and our reputation of standing behind the homes we build. Importantly, we discontinued the use of stucco in our Mid-Atlantic and North regions several years ago. We are seeing positive demand trends in many regions.

California, where we build primarily in the coastal suburbs of San Francisco, Los Angeles and San Diego remained our largest housing market. With a multiyear land position and desirable coastal locations, we see this is a dynamic region for us for years to come.

We also enjoyed strong demand in our other western markets of suburb in Seattle, Phoenix, Reno, Las Vegas and Denver as well as in Dallas, Jacksonville and Orlando, Northern Virginia, Philadelphia and New Jersey.

With the goal of augmenting our footprint in the western United States, we expanded into the Boise, Idaho market with the acquisition Coleman Homes.

Announced just after our fiscal year-end, Boise complements our significant presence in California and urban western markets, which accounted for over 45% in dollars and 30% in units of signed contracts in fiscal year 2016.

As we have said previously, demand at our New York City project is not as strong as it was several years ago when the market was on fire. In fiscal year 2016’s fourth quarter, we commenced deliveries at two joint ventures, Pierhouse at Brooklyn Bridge Park, and the Sutton on Manhattan’s East Side.

Also in early November, we launched sales at a project just north of Gramercy Park in Manhattan. We are not focused on the super-luxury in New York City, rather we are focused on price points in the $2,000 to $2,500 per square foot range and projects of a 150 units and less. City Living gross margins still lead the Company.

We did sign 40 contracts in our fourth quarter, even though we faced limited inventory at a number of our nearly sold out projects. And we have been encouraged by the 20 deposits we have taken in the past five weeks since our new fiscal year began.

We delivered 41% gross margins on $240 million of revenues from wholly-owned City Living projects in fiscal year 2016. We are projecting revenue growth of approximately 70% from wholly-owned City Living projects in fiscal year 2017 at on average 37% gross margins.

As we have explained before, due to the risk associated with this business, we underwrite City Living to a mid-30s percent gross margin compared to the mid-20s percent for suburban communities.

Even with the current softer New York City market, we still have internal [ph] margins embedded in what we believe is well-bought land acquired several years ago.

With our solid fourth quarter operating performance, double-digit increase in year-end backlog, and positive demand trends to jump start a new fiscal year, we are excited about fiscal year 2017.

Through the first five weeks of 2017, our non-binding reservation deposits in units, a precursor to signed contracts and eventually the home deliveries were up 10% compared to fiscal year 2016 same period.

With the strong start, our great brand, high-quality land positions, diversified product lines, and strong buyer profile, we believe fiscal year 2017 will be another year of solid growth in revenues and profits. Now, let me turn it over to Bob..

Thanks, Doug. Recent data highlights the recovery of home prices to pre-recession levels. It should translate into more equity for home owners looking to move up. We are encouraged by surveys that indicate most millennials still believe home ownership is a goal to aspire to.

In Monday’s Wall Street Journal, a ULI study highlighted that suburbs are outstripping cities in population growth. More than 90% of our business is transacted in the suburbs.

Yesterday, housing expert John Burns released a report stating that luxury home sales have increased, sales priced above $600,000 had risen in 37 of the 43 counties he had studied, and that home sales above $600,000 exceeded sales in the prior 12 months by 10%. These are positive data points.

With the employment picture and the stock market on positive trajectories, interest rates still extremely attractive, significant pent-up demand and a dearth of supply in many markets, we believe the new home market will remain on its current course of steady growth.

In fiscal year 2016, we marked our 30th year as a public company on the New York Stock Exchange. This is an impressive milestone in our three-decade evolution from a local suburban Philadelphia builder to a nationally diversified home building corporation with a uniquely recognized brand.

In June 2017, we will celebrate the 50th year since our formation back in 1967 when we sold our first home for $17,990. I am so proud of where our Company is today.

Now, with a much more diversified array of product offerings, a team of dedicated associates, a solid land position and a growing customer base, we look forward to a bright future for Toll Brothers, our shareholders and our associates. Now, let me turn it back to you, Doug..

Thank you, Bob. Gary, we’re ready for questions..

[Operator Instructions] Our first question today comes from Stephen Kim with Evercore ISI. Please go ahead..

Hey guys, it’s actually Trey for Steve. Thanks for taking my questions. First, I want to talk about is your additional home building business saw really strong, orders up in the south of 35% year-over-year. I’m wondering what drove that such a large growth.

And is that something that’s showing evidence of a mix shift, away from California that’s resulting in that margin and lower price that you guys are alluding to?.

So, Trey, the growth throughout the south was really across our major market. We saw a significant order growth in Florida; it went from 64 sales a year ago to a 116. We saw about 15% growth in North Carolina over that time; and Texas also had moderate growth. But it was really across our -- all of our major southern markets..

And then, secondly, on this new T|Select product that you mentioned, where are you guys going to try and introduce this product first, or do you already have it on the ground, and what’s been the response so far?.

So, T|Select will be launched officially in January in Texas, in Huston. We have three or four communities that will be following. We already do something like T|Select in places like Jacksonville.

And the Boise operation which we just acquired is more of a T|Select line, which means a great Toll Brothers experience, great homes, smaller, less upgrades, quicker turn, and we have that business already but we’re now launching it officially in markets we’re already in to distinguish T|Select from the larger Toll Brothers brand, again beginning in Houston but then from there you’ll see it growing.

So, while we don’t have specific T|Select experience, we have the same basic experience in a number of our existing markets where we do sell at a lower price point, faster turn, less upgrades, and it’s been very successful. So, we’re looking forward to the launch early next year and continue to look for new opportunities to expand it..

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

Thanks for taking my call, guys. First question here is on the California conversion rate was a lot stronger than we were looking at, I think about 58%.

I guess the question is, was there some pull forward in deliveries in the quarter that might be negatively impacting first quarter of 2017 and deliveries and also potentially the ASP?.

The answer to that is no. There is no pull forward. Going forward in California, we have a whole bunch of opening coming. You will see in southern Cal, continued revenue and order growth because we’re open in an action in many locations and doing really well.

And in southern Cal, --excuse me in northern Cal, you’re going to see early in the year some flattening or negative orders simply because of timing of new communities. We have seven communities opening in northern Cal in 2017. But many of those are in the latter part of the year.

In southern Cal, we will have 11 openings throughout 2017, and they are spread more equally throughout the year. So that’s why, you’ll see a little bit more growth at a southern than northern, but that is no reflection of the markets. They’re both doing really well for us..

Okay, great.

And then, I guess second question, the SG&A forecast of 15.2% in the first quarter, is that essentially assuming the midpoint of the 1Q 2017 revenue outlook of about, call it 862 million?.

Yes, it is..

The next question comes from Paul Przybylski from Wells Fargo. Please go ahead..

Thank you. Yes. This is Paul Przybylski on for Stephen East. Going back to the SG&A question, first off, why the lack of leverage next year? And it appears that’s mostly weighted in the first quarter.

Is this related to the Coleman conversion or is there frontend load to communities?.

I think with respect to the weighting in the first quarter, it’s a function of what is actually going to be lower revenue for us in the first quarter compared to a year ago. The fact that we have roughly 10% more associates around, so we lose some of that leverage there.

In our first quarter we also have a concentration of some compensation expense that will be spread more evenly through the balance of the year, but is concentrated in the first quarter. And we are spending a bit more on technology as we upgrade some systems. So, we’ve been fortunate not to pay any licensing fees for software for almost a decade now.

And we find it necessary to upgrade some of our software and processes to keep things moving smoothly here. .

Okay.

And then, second question, are you doing any type of further analysis on the stucco reserve? And you mentioned the Mid-Atlantic, any markets specifically where that occurred in the vintage [ph] of those homes and any other markets where you could have similar issues in the future?.

The stucco issue has been isolated for the most part to Philadelphia. We’ve now completed a significant number of repairs of homes in Philadelphia and have a much better understanding of the scope and the cost that we expect going forward.

And it really comes down to an industry-wide issue in Philadelphia with specific construction practices that occur here through the independent stucco contractors that all of the builders employ. We are not seen the issue outside of this market. We think we have a good understanding of the issue. And I think the reserve this quarter shows that.

And as I said in my prepared comments, we treasurer our reputation and our brand, and we are doing the right thing to repair the houses that are under warranty and are confident that we have our arms around it and are proceeding accordingly..

Great. Thank you. I appreciate it..

Paul, I wanted to go back to your first question too. We are also seeing some additional advertising and marketing expenses, not only in the first quarter but for the balance of the year. And we are investing in the model homes, in the design centers and in the sales centers.

And we think it’s a pretty solid investment, based on the results we’re getting on the top line..

That’s in response to his question about SG&A..

Yes..

The next question comes from Michael Rehaut with JP Morgan. Please go ahead. .

Hi. It’s Jason in for Mike. First question is on the community count guidance. I know you pointed to it growing -- you’re expecting to grow a similar amount versus 2016. And I wanted to confirm that that includes the 15 communities Coleman.

And I know you talked a little bit about the California openings, but just wanted to get a sense as to which reasons are expected to have the most growth and what the overall quarterly progression of community count should look like?.

Sure. Your first question, the answer is yes. That guidance on community count growth includes Boise. In fiscal 2017, right now, our -- we expect to open 99 new communities, that’s two a week. And we expect to sell out of about 79, which gives you the net 20 increase.

That obviously evolves over the course of the year, but right now going into the year that is -- that’s where our guidance is..

Okay. [Multiple speakers].

Well, Boise of course is new, so that has 17 new communities projected in 2017. As we mentioned, 15 have already joined us. We expect 14 new communities to open in Seattle, which is an extremely strong market for us, 11 in southern Cal, eight in Pennsylvania, seven in northern Cal.

Those would be the largest that the locations where we have the most openings..

Okay, great. And then, the next question, just want to get a sense of what you expect for interest amortization to be next year.

And then lastly, just an update on what you see in the mortgage market since we’ve seen in the recent uptick in rates, any trends there would be helpful?.

Sure. Interest amortization for this year was around 3.1% of revenues; we expect it to tick down 10 basis points next year..

And Don Salmon is here who runs TBI Mortgage. So, he will be happy to answer your question about the mortgage market..

As far as rates, I think everybody sees what’s going on; there has been a slight increase. But in terms of availability, we actually have seen an increase in availability; we’ve seen some non-banks get more interested in the market these days. So, we’re just steady as you go in the mortgage world today..

And in surveying our sales and project management teams across the country, we are not hearing that a small rise in rates has had a negative impact on our business. If anything when rates go up a little bit, it creates some urgency. And remember that 20% of our buyers are all cash, and those who get a mortgage on average for 30% down and mortgage 70%.

So, a small move in rates is not the number one driver as to whether they buy or not, they can afford our houses, they can lever up higher. And we have always done well in rising rate markets for long as obviously the rates move slowly and they move because of good economic news surrounding those moves which is what I think we have now..

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

Congratulations, guys, on a good quarter; and Bob, congratulations on your being inducted into the hall of fame in January, very exciting and well-deserved..

Thank you..

I guess I have two questions. So, I will go with the bigger picture question for you, Bob, if I may, and then come back, if you allow me a second one.

Bob, recognizing that there is a lot of uncertainty around the change in administration and the impact now having a Congress, so it’s a majority of Republican looking at what the implications are from your perspective of what it means for housing and getting your perspective on some of the people that are now in election process, the Secretary Treasury, Mnuchin, and Carson at FHA.

Even though you don’t do much FHA, I am serious about your opinion about it..

Ivy, I promise to people here, I wouldn’t get involved in the political analysis, even though it’s a great opportunity. Most of us [ph] are now studying neurosurgery believing that this is the safest way to run 4.5 million occupied homes.

The rest of it I think I’m going to have take a pace [ph] Ivy and go back to being a homebuilder as opposed to a political analyst. But thanks for the opportunity..

Bob, the old Bob would have given a little kind on view, what you’ve really been curtailed there, little handcuffed. So, I am proud of you, Bob. But everyone really would have enjoyed it; so, maybe over a cocktail, but okay, Doug, now one for you.

Doug, when we do our channel checking, and appreciating you mentioning John Burns research, would you actually dug into that research so you know that there is really the accounting that he focused on was the state of Washington, State of California, I think there was a few counties in Colorado. It’s pretty limited.

I think there was one in the Northeast. But when we broadly channel check the United States, we really commend you guys for bucking the trend because there is no question that not even just luxury, the higher end of the market is softer on existing home side.

So, I guess with you guys not being in luxury, if you go into Cleveland above 700, it’s considered luxury or even in the 450, 500 in markets like Dallas and markets in Colorado above 650, every market has a break point, and you guys have already demonstrated that you’re doing better and people just want a new home.

So, maybe you can tell us what you’re seeing because we’re seeing an existing home for sure but you’re obviously doing better than the existing home market overall. So, it’s not limited just to New York City from the channel check we’re doing and everything that we’re seeing.

So, I really would appreciate, Doug, giving us some of the cut off points where you do see the softness of what we’re seeing. And maybe just there is enough new homes, just small percent of the market that you’re able to capture that person, maybe the person can’t sell their existing home, and enough few of them are buying your house.

But there is no question of market is soft, as you move up price point and the break points different by market..

Okay. So, first with respect to John Burns, I’m not going to minimize his story because Settle, northern, southern Cal, Colorado, those are major markets for Toll Brothers today where we’re doing really well, and the northeastern counties that he referred to are locations I believe where we’re also doing well.

So, yes, he didn’t pick up every county of every major market that we and other builders are in. But his study supports our thesis and our results, which is our business is really good, we’re not in the super-luxury end of the market, we’re not part of any of those stories about Greenwich Connecticut and the Hamptons.

And I think Ivy, one thing you have to really focus on, yes, we do it really well and we’re really proud of the brand and the locations and the merchandising, and the way we treat our clients; that all makes us very special. But our end of the new home business is so fragmented where we do not have a lot of high-quality, well-run competition.

And so, even if your thesis is correct, which is the higher you go on price, the softer it gets. We are dominating our market. We just don’t have the competition. We do it better than anybody else. We’re selling 6,000, 7,000, 8,000, 9,000 homes a year as we grow. And there is a huge market out there at our price point that wants a new home.

And they want a home from Toll Brothers because we do it the best. And all I can say is....

No, no, and I applaud you for that. But, I want you to go beyond that to talk about like you used to when Bob and you would go around the horn, I mean in Dallas.

Where are you relative -- where is the market? Are you seeing the slowing in the 600 or the 450s? And maybe you guys can buck that trend but to acknowledge what you’re seeing would be helpful..

So, I gave in my statements the markets that are really strong. I don’t need to repeat those. There were many out west, but there are also many in the east.

The markets right now that are softer for us would be Minneapolis, we have two communities; Illinois, which we talked about for a year is it’s just not returning as we thought it would; Huston, which we talked about many times and it’s at the higher price point, yes that is definitely softer and it is the location where we will have our first launch of T|Select; Connecticut, where we haven’t bought land in years and we have shrunk in size and it has its own issues, not just 5 million in Greenwich [ph] but throughout the state; and then Maryland, which has also been softer a while and we have talked about it, and we’re doing really well in Northern Virginia but we have struggled in Maryland.

So that is the bucket of locations where we build that we have seen softness and we have redirected our Company into other areas, as you can see through the growth out west and in other places to account for it.

Is that like the old days?.

Yes. No, it’s a good job. Thank you and good luck. I really appreciate it. Happy holidays..

You too, Ivy. Thanks..

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

Hi, good morning. Marty, I want to go back to some of your prepared comments around the ROE. You guys have been doing the apartments in JV. It sounds like you’re moving more on the City Living side. But you mentioned master plan. Is that -- and I don’t want to interpret it wrong.

Are you looking to do more JV of current ownership of master plan as you sort of work to continue to improve the returns?.

I think it’s something we’re going to consider, but I’m speaking predominantly about our master plan in Houston. We have a joint venture with another builder in the Maryland market. We have a home building joint venture down in Jupiter, Florida. We have a Austin-based joint venture.

We have a southern California joint venture; we’re looking at one in Arizona. So, it’s more ones we’ve already done and ones that are on the drawing board, not moving any of our land that we currently hold into a master plan. That’s tricky from an accounting perspective to get rid of something you own and still to have a right to buy some of it back..

Okay, so more on the go forward versus anything else? And then, you’re targeting a 12 ROE, does that number go higher in 2018 as you execute some of these plans; where are you looking assuming reasonable market conditions like we have now on the demand side?.

I think we’re projecting an ROE in excess of 12% for next year. And we would look for 50 to 100 points increase on that as we get to 2018 as some of those initiatives that are outlined start to take hold for full year of 2018..

Okay, and just to sneak one more in, land and land development this quarter..

Land was 78 million.

What’s the land development Gregg?.

In Q4, land development spend was $207 million for Q4 of 2017 -- I am sorry. I broke out the wrong year. I’ll have to give you that after the call. So, I broke out 2017..

We’ll get that to you; our apologies..

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

Hi. This is actually Ryan Tomasello on for Jade. Thanks for taking my questions.

Regarding City Living, we appreciate the color you gave in your prepared remarks, but could you opine a bit more on the visibility you have for new supply coming on in the market in your price point in particular in the neighborhoods that you’re in say over the next 12 to 24 months? And also perhaps what types of trends you’re seeing in terms of pricing or any concessions in the remaining inventory at the projects that are currently in their last sell-out phases?.

Sure. In general, we believe supply will be coming down in New York City as compared to the last two years when every other block had a crane in the air. And obviously, we’re keeping a close eye on some properties that opportunistically may become available, because developers aren’t moving forward.

I remind you that we have not purchased a property in New York in over two years, we’re looking. We had deal flow internally, but we’re very strict on that 35% or better gross margin. And if it’s not transforming in today’s market, we’re not buying.

With respect to our own pipeline, we’re excited about a building that will be going up shortly in Jersey City. We have one tower there for apartments and the second tower in the same location will be condo. And we think we’re well-positioned and that building should prove to be very successful.

Everything we do today, knock on wood, in Hoboken has been spectacular. And we are selling our way through a building in Hudson Street [ph] that will start delivering later in 2017 that has had tremendous sales, a 130 plus or minus in the last year, at $900 to a $1,000 a foot. And that building will continue to sell and deliver later in the year.

We have a property in Tribeca called 91 Leonard that is under construction, and will open for sale towards the end of 2017. And then, we have King Street, which is in West SoHo, which will open in 2018. And that’s in addition of course to what’s already open that we talk about regularly.

So, from our perspective, we’re very happy with the new properties coming on, where they’re located. Our basis still works as I said in my prepared comments; it still exceeds the 35% underwriting gross margin.

For the overall supply of the market, we’re cautiously optimistic that appears there will be less supply coming on over the next few years based upon what is being entitled and going through the predevelopment phase. And for new acquisitions, we will continue to be very opportunistic and very careful, and we’ll see how that plays out..

Great. That was good color.

And then secondly, can you give some additional color on what is driving the mix shift impact on margins, particularly if it’s constituted in certain markets? And perhaps how much of that 25 to 35-bp compression headwind is being driven by the expected decline in City Living?.

So, it’s a very challenging question for me to ask. I have in front of me -- for me to answer. It’s easy to ask. I have in front of me a list of all 40 of our markets and what margins were in 2016 and what we expect them to be in 2017, and what volume was in 2016, and what we expect it to be in 2017.

And it is true that New York will grow nearly 70% in revenues, which makes it a bigger piece of a bigger pie, but we’re going to lose 3 to 4 points in revenue on that -- I’m sorry in margin on that. Excuse me. In Seattle though, on the other hand, we expect it to grow 15%, and add 3 points to margin, its margin.

California will be a little bit flat, north will be down and south will be up, but overall it’ll be a little bit flat. And the margin there on a net basis is going to move about a half of point down, which is a function of mix.

You go to Dallas where volume is going to be the same, which makes it a smaller piece of total, and we’ll see margins go down 2 percentage points. New Jersey, we’re going up half a point. So, it’s a bunch of different factors, Ryan that it’s come to draw theme.

Our margin moves around based on mix shift, based on cost pressures, and based on pricing power but a theme cannot be drawn around the country on all that..

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

Thanks. Marty, so, just following up on that, it’s difficult to as you mentioned to draw a general theme about it. But I think the broader question that investors are debating is whether there is enough pricing power to continue to cover the cost creep, both on the materials and the labor, and the land basis side.

So, to the extent that from your data it’s possible to talk about that dynamic, and I don’t know if it’s helpful to go regionally to some extent, I think that might be helpful..

Sure. I think overall, our incentives haven’t moved, they’re still 20,000 to 25,000 per house; moves a little bit geographically by quarter. Costs have gone up around $2,600 on average in this quarter, so call that $10,000 or $11,000 annualized. And we’ve seen price increases in the neighborhood of $3,000 to $4,000 on average for the quarter.

There is also the land input costs that go up. So, to get to the crux of the matter, it’s consistent with what we have said in the past. It is very challenging in this environment to overall improve margins. But we’re doing a pretty good job of staying relatively flat in most of our markets. What you’re seeing is a mix shift.

In our fourth quarter, our margins were negatively impacted by an approximately $5 million actuarially determined increase in warranty and other reserves. So that explains a bit of our margin drop off compared to expectations in the fourth quarter.

And we’re pretty proud of the margin expectations we set for next year, particularly on a comparative basis with our industry..

Got it. No, that is very helpful. On the return on equity, really appreciate all the details there. I wanted to ask you about the share buyback component of it and the inventory turns. The inventory turns, you mentioned T|Select as the potential to improve inventory turns, the Coleman acquisition as an example of improving inventory turns.

Those businesses are, call them departures from the traditional lower turn, more land intensive, longer timeframe Toll Brothers projects. And just in terms of incremental investment, you might see some improved turns.

But, what can you do on the bulk of your existing business to improve turns? And are those two examples, do they tell us anything about the sort of new deals that you’re brining on and whether those are faster term?.

So, in certain markets, the upfront cost of land as a percentage of the ultimate home sale revenue is lower than in other markets. The availability of attractive land in those markets may be also less constraint, so you can replace it easier.

Those markets are more conducive to a shorter build time and quicker inventory turns and an improved return on equity. Many of our other markets, where the land is tougher to find, it’s higher as a percentage of the total sale price; it’s not as conducive to that.

So, we’re balancing those higher turn -- quicker turn, higher return on equity markets with those markets where we think it’s more appropriate to drive gross margin increase..

Nishu, this is Doug.

Please understand that our special sauce is the Toll Brothers luxury home that 850 home nationwide, 680 out of Cali and New York City where you come in, you have the opportunity to build or to choose a lot of upgrades, to go our beautiful regional design studio and pick all of your finishes, and that’s the American dream that we sell to the move up buyer and that house takes longer to build.

We have historically had great pricing power in that business, which has led to terrific ROEs. And this cycle has been a slower recovery. We haven’t had quite the same pricing power. We’re not giving up on that business at all. That is what we do.

We’re supplementing that business with City Living, with Boise, with apartments, with some joint ventures in the big master plans where we’re being much more capital efficient, student housing.

So, you will see, you will continue to see at Toll Brothers a continued mix of everything you can think of that is luxury, including the 3 Series BMW to serve the millennial and 34 years old that has more money than my generation of boomers that bought it 25 years old.

And that will be less upgrades, no design studio, a faster turn, lower margin but higher ROE. But that’s just a mix into what we do; that’s one more component of what we do. We are not turning this shift in a dramatic direction.

We love our business; we’re just supplementing that with one more product line that we think will help ROE, but most importantly will bring in more buyers that we haven’t yet touched..

Got it, that is very, very helpful. And the share repurchase, just real quick on that. You mentioned that, Marty, I believe as a part of the return on equity improvement.

Does that mean we should view it as part of the program to improve returns and therefore that you will continue to prioritize at 2017 or should we continue to think about it in the traditional mold of just being opportunistic?.

I think you should think of it at this point as being opportunistic, and the expectation I set for next year presumes nothing in addition to what we’ve already done..

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

Good morning, gentlemen. Marty, the comments that you gave regarding the paper [ph] you have in front of you I think were very insightful, and if you guys want to help us out with the supplemental, that that would be much….

Break it up, Ken..

But it seems to me that while you do have all those different markets, Seattle is the only one where net pricing is leading really to margin expansion, given the higher either labor end or land cost running through to different businesses. So, I guess my question….

I would say, Ken, that’s the best example. We’re seeing pricing power in a number of other markets as well including California..

Right, but, yes, I think you said your margins are going to be down, on that piece of paper in California..

Because of mix..

Because of mix, right. So, I guess I apologize if I missed this at very beginning. Did you guys comment for the West Coast and or New York for the foreign buyer mix? And if you could add Seattle into that commentary, Doug, I would appreciate it..

Sure, we did not comment. Our foreign buyer percentages really have not changed. California, City Living and Seattle are by far one, two and three. Actually it goes California, Seattle and then City Living, in that order.

We are running 5.4% companywide foreign buyers and it’s about 20% in Cali; it’s about 25% this past quarter in Seattle; and down to 8% in New York City Living. And it’s moved a little bit quarter by quarter but that again can just be mix driven..

We think the Seattle tick up may be a reaction to the Vancouver tactics that have been charged for foreign buyers..

Because in the third quarter of 2016, Seattle was 16% foreign and it jumped up to 27% in the fourth quarter. We’ll have to see how that plays out over the next few quarters. So, there you have it, 5.4 nationwide but it’s really a story about three specific markets..

Right, no, I understand. Now, just looking out beyond what you’re going to give guidance to, but in terms of how you structured the Company in terms of these ancillary businesses. Other income which you guided to a lift this year 2017 expected.

I mean, does that rate, given the capital you deployed in those businesses, you’re 160, 200, I mean is that something that would continue for several years in your opinion?.

Well, it’s very lumpy because that 160 to 200 is being driven to a large extent by two JV buildings in New York City that are now delivering units, Pierhouse at Brooklyn Bridge Park and the Sutton, over in Sutton Place. And as you know, we talk about it all the time, the City Living business is lumpy. We sell, we build and then we deliver.

And it just so happened that this year we have two joint ventures that have significant deliveries at significant profit that are hitting in the big way this year. So, we have buckets for subsequent years. We’re going to be recapitalizing and probably selling some apartments.

We have a security company that over -- at certain times we sell accounts to one of the big boys. We own a parking garage Hoboken that’s very valuable. There is a lot of different things that can go to other income. We’re putting some of our master plan communities into JV, et cetera.

So, we’re not prepared to guide towards 2018, but to-date, it’s been driven a lot by when the big buildings in New York that are in JV deliver..

We have a pretty solid base line of $35 million to $50 million of kind of routine ancillary operation income that comes through the other income line. And we supplement that with some of the joint venture matters that -- or even sales of businesses matters that Doug mentioned..

The next question comes from Robert Wetenhall with RBC Capital Markets. Please go ahead..

Hey, guys. This is actually Marshall Mentz on for Bob. You all had a pretty sizable sequential increase in option lots during the quarter.

Would you talk about the drivers of that move, both on your part strategically and then were you’ve been able to take advantage of in the buying environment?.

In options lots?.

Yes..

I think we have a sizable opportunity in Seattle..

Boise. [Multiple Speakers].

All right, so we have 350 -- I’m sorry, it’s the entire Boise acquisition. So, Boise closed in November, we had it under contract for 1,700 lots in October, so it shows up is option lots at the end of the October. So that’s a little bit….

It sounds like [Multiple Speakers].

Yes..

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

Thank you. As you know, your gross margin looks to be pretty resilient compared to some of your peers. And some of your peers in the mean try to offset that has gone quite aggressive on -- putting pretty aggressive targets on SG&A, in some cases 9% and lower.

And you enumerated why this coming year your SG&A as a percentage of sales might go up a little bit.

But thinking beyond just 2017, is that an area where there is a scope for getting that to a lower number? And for instance does that potentially feed into the higher ROEs that you’re thinking you can achieve in 2018 or beyond 2018?.

Mark, we are absolutely focused on SG&A. One of the big issues of course that drives it is our pricing power, since it is a percentage of revenue. And if we see pricing power in 2018, you will see SG&A go down. We are also -- we are always looking at where we can be more efficient.

But remember as we build some of these big spectacular communities in places like California, and I talked about the number of openings we have out there for anyone on the call who has visited, our models are what is making us so successful, because you walk through these houses and you have to have it.

And we have worked very hard at the model of the architecture, the decorating, the merchandising, the marketing and I talk about special sell outs; that’s a big part of it.

But beyond just that, I know it’s a small component of SG&A, the long answer to your question is yes, we are very focused on it and we will continue to do what we can do to manage and get it down..

I don’t think we’ll ever leave the pack in terms of SG&A leverage because of the nature of the product and our customer and the experience, but it’s definitely something we’re focused on..

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

Good morning, everyone. Thanks for taking my questions. The first question on the single family detach business, you mentioned cycles times earlier.

Where is your average cycle time running now versus say a year ago?.

So, I think over the last 12 months, we haven’t seen much change. The bigger homes take 10 to 12 months, the smaller ones take six to nine months, but it hasn’t moved too much.

I think last January’s conference call, we said we had seen two or three weeks in creep but we’ve kind of kept it at that two or three weeks, we haven’t made any progress towards it but we haven’t let it slip any further..

Got it, okay.

Second question on T|Select, could you talk about maybe the margin differential for that product versus the average gross margin and maybe give us some idea of what percentage of the community calendar with the next couple of years you envision for T-select?.

It is less than 5% for everything that we’ve identified over the next year or two. On the margin front, I think we would accept a margin that’s two to three points lower with a ROE or we call ROI that’s more than two to three points higher and that’s how we look at some of these deals..

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

Gary, thank you very much. Thanks everybody for joining us and we wish you all a great holiday season. See you next year..

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