Douglas Yearley - Chief Executive Officer Bob Toll - Executive Chairman Rick Hartman - President and Chief Operating Officer Marty Connor - Chief Financial Officer Fred Cooper - Senior Vice President, Finance and Investor Relations Joe Sicree - Chief Accounting Officer Kira Sterling - Chief Marketing Officer Mike Snyder - Chief Planning Officer Gregg Ziegler - Senior Vice President and Treasurer Don Salmon - President, TBI Mortgage Company.

Stephen East - Wells Fargo Alan Ratner - Zelman & Associates Robert Wetenhall - RBC Capital Markets Jason Aaron Marcus - JPMorgan Trey Morrish - Evercore ISI John Lovallo - Bank of America Carl Reichardt - BTIG Tim Daley - Deutsche Bank Susan McClary - Credit Suisse Ryan Tomasello - KBW Will Randow - Citi Mark Weintraub - Buckingham Research Jack Micenko - SIG Ken Zener - KeyBanc Alex Barron - Housing Research Center.

Good day and welcome to the Toll Brothers Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [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, Austin. Welcome and thank you for joining us. I am Douglas 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; Gregg Ziegler, Senior VP and Treasurer; and Don Salmon, President of TBI Mortgage Company.

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

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

We completed fiscal year 2017 third quarter on July 31. Thanks to our broad geographic presence, diverse product offerings, unique brand, robust demand among affluent buyers, and of course, our great team, we continue to produce strong results. Third quarter net income of $148.6 million rose 41% compared to fiscal year 2016 third quarter.

Earnings per share of $0.87 per share diluted rose 43% compared to fiscal year 2016 third quarter. And pre-tax income of $203.6 million rose 24% compared to fiscal year 2016 third quarter. Revenues of $1.5 billion and homebuilding deliveries of 1,899 units rose 18% in dollars and 26% in units compared to fiscal year 2016’s third quarter total.

The average price of homes delivered was $791,400 compared to $842,700 in 2016’s third quarter. The drop in average price was due to a change in mix which was expected. Net signed contracts of $1.81 billion and 2,163 unit rose 25% in dollars and 24% in units compared to fiscal year 2016’s third quarter.

The average price of net signed contracts was $837,300 compared to $830,800 in last year’s third quarter. This third quarter was our 12th consecutive quarter of year-over-year growth in total contract dollars and units highlighted by 20% or higher year-over-year unit growth in each of the past four quarters.

You may have noticed in our release that we did not include the results of our nonbinding reservation deposits for the first three weeks of the fourth quarter compared to the same period a year ago. We have decided to discontinue the practice of disclosing this information as we do not think it is a very reliable indicator.

In four of the last five quarters and in each of the last three quarters, the nonbinding reservation deposits for the first few weeks of the current quarter were not indicative of the full quarter totals for final signed contracts. With that said, Q4 is off to a strong start.

Our third quarter end backlog of $5.31 billion and 6,282 units rose 21% in dollars and units compared to fiscal year 2016’s third quarter end backlog. At third quarter end, the average price of homes in backlog was $845,100 basically flat to $844,300 at fiscal year 2017’s third quarter end.

Fiscal year 2017’s third quarter contracts in both units and dollars with the highest third quarter totals in 12 years. California, with contracts up 63% in units and 75% in dollars and the West region up 39% in units and 21% in dollars, led the way. But many of our community [Technical Difficulty].

Pardon me, this is the conference operator. We have temporarily lost the connection with the speakers, please hold for a moment while we reconnect them. Pardon me, this is the conference operator. We have reconnected with the speakers. Mr. Yearley, you may continue with your presentation..

Austin, thank you. I am not sure, we don’t know at this end exactly where we lost connection. I am reluctant to start from the beginning and bore everybody. So, Kira believes that I should pick up with…..

I would start with this third quarter was our 12th consecutive quarter of year-over-year growth..

Thank you, Marty. So, here we go. I hope I am not repeating too much and I also hope I am not cutting anything out, but take two. This third quarter was our 12th consecutive quarter of year-over-year growth in total contract dollars and units highlighted by 20% or higher year-over-year unit growth in each of the past four quarters.

You may have noticed in our release that we did not include the results of our nonbinding reservation deposits for the first three weeks of the fourth quarter compared to the same period a year ago. We have decided to discontinue the practice of disclosing this information as we do not think it is a very reliable indicator.

In four of the last five quarters and in each of the last three quarters, the nonbinding reservation deposits for the first few weeks of the current quarter were not indicative of the full quarter totals for final signed contracts. With that said, Q4 is off to a strong start.

Our third quarter end backlog of $5.31 billion and 6,282 units rose 21% in dollars and units compared to fiscal year 2016’s third quarter end backlog. At third quarter end, the average price of homes in backlog was $845,100 basically flat to $844,300 at fiscal year 2017’s third quarter end.

Fiscal year 2017’s third quarter contracts in both units and dollars with the highest third quarter totals in 12 years. California with contracts up 63% in units and 75% in dollars and the West region up 39% in units and 21% in dollars led the way.

But many of our communities across the country and across a variety of price points have contributed to this ongoing increase in contracts. Here are some examples. Park Side in Lake Forest, which is in Orange County, Southern Cal has seen a lot of action.

There have been over 3,000 visitors over the last two months and we have taken 56 deposits at an average price of $1.2 million during those two months. Boise Idaho continues to exceed our expectations. In the third quarter, we signed 149 agreements and delivered 74 homes.

The Reserve at Franklin Lakes, a master plan community located in Bergen County, New Jersey has taken 27 deposits since opening a month ago at prices averaging $1.2 million and $1.7 million for its two product lines.

Coastal Oaks at Nocatee, a master plan community in Ponte Vedra in Jacksonville, Florida has taken 41 deposits over 2 months for homes that start in the low 300,000s and go up to over $800,000. Our diverse offerings enable us to expand our presence within our many markets.

In addition to our core move-up communities, our active living communities targeted the 55 plus age buyers, have produced 21% of our contracts in units for the first three quarters of 2017.

We have seen continued strength in our more traditional active adult markets such as New Jersey or Regency at Flanders has taken 23 deposits and Sea Breeze at Lacey at the Jersey Shore has taken 33 deposits over the last 2 months. Our new active living markets in the West are also doing very well.

For example, Regency at Damonte Ranch in Reno, Nevada has taken 35 deposits over the past 2 months. Millennial households in which one buyer is 35 years of age or under represented 23% of our contracts in units in the first three quarters of fiscal year ‘17.

After delaying forming households, the first millennials are starting families and buying homes. Our city living urban condominium division, which includes both wholly owned and joint venture projects is mostly concentrated in the metro urban New York City market. We are seeing strength in the lower more affordable price points.

We have to work harder to sell larger units at higher price points although we are not competing in the super-tall or super-expensive condominium product.

This quarter, our wholly-owned city living contracts increased in units compared to the same quarter last year as we opened 10 Provost Street at Provost Square, our first Jersey City for-sale community in a decade. Located a block from the Grove Street PATH Station, this 28-story high-rise will contain 242 residences.

Since opening 6 weeks ago, we have taken 49 agreements. In Manhattan, we sold 17 units in the third quarter at 121 East 22nd Street, our joint venture located a block north of Gramercy Park.

Revenues from City Living also increased in the third quarter of fiscal ‘17 compared to last year as another North Jersey Gold Coast community in Hoboken, 1400 Hudson started deliveries. Deliveries are expected to peak in the fourth quarter of fiscal year 2017 and continue into 2018. Our apartment living platform continues to grow.

We are at 95% occupancy and roughly 3,000 units in six communities that have reached stabilization. These completed communities are a component of our nationwide pipeline of 12,600 units that also includes projects in construction, under development or on approvals. Our ownership in these joint venture projects varies between 25% and 50%.

Not only is apartment living growing, it is generating profits for the company. For fiscal year 2017, we are projecting that apartment living will produce $22.8 million of profit compared to $4.6 million in fiscal year ‘16. We expect apartment living earnings to continue to grow in 2018.

We recently broke ground on two new apartment living communities, 232 units at Park at Princeton Junction in New Jersey and 421 units at Carraway on the Platinum Mile in Harrison, a Westchester County suburb of New York City. In conclusion, the macroeconomic environment remains positive. The unemployment rate is at a 15-year low.

The economy is growing. The stock market is strong. And home prices continue to rise putting equity in the pockets of those who may want to sell their existing home and move to a new one. New home prices are significantly outpacing existing home prices many buyers want new and they want it their way.

That’s exactly what we provide and this bodes well for Toll Brothers over the coming years. Now, let me turn it over to Marty..

Thanks, Doug. Before I address the specifics of this quarter, I do want to note that a reconciliation of the non-GAAP measures referenced during today’s discussion to their comparable GAAP measures can be found in the back of today’s press release. We are very pleased with our income statement results this quarter.

Net income grew 41%, earnings per share grew 43%, and we were near the high-end of our projection in nearly all key metrics. Fiscal year 2017’s third quarter tax expense was positively impacted by a net $27.9 million benefit associated primarily with the reversal of a state deferred tax asset valuation allowance. Gross margin was 21.7% of revenues.

Adjusted gross margin, which excludes interest and impairments, was 25% of revenues, up 25 basis points sequentially and exceeding our previous guidance.

This was primarily due to state reimbursements of previously spent Brownfield environmental cleanup cost and a reversal of a no longer necessary accrual for off-site improvements at a completed community. SG&A was down to 10.3% of revenues compared to 10.6% last year.

Third quarter interest expense including cost of sales was 3.1% of revenues the same as 2016’s third quarter. We recorded $2.4 million in inventory impairments, nothing unusual there.

Turning to the capital markets, in the third quarter, we issued an additional $150 million of our 4.78% 10-year senior notes due in 2027, but they were priced at a yield of 4.4%. Last week, we elected to redeem our $287.5 million in convertible securities on September 15, 2017.

With $946 million in cash and $1.15 billion available under our credit facility at third quarter end, we are positioned to retire the $400 million of 8.91% senior notes maturing in October 2017 as well as the $288 million of convertible securities in September 2017 both with cash.

Retirement of this debt will lower our leverage, remove approximately 5.9 million shares from our share count, and reduce our interest costs as we enter fiscal year 2018. We paid our second quarterly dividend of [Technical Difficulty] and we also repurchased 1.9 million shares in the third quarter at an aggregate purchase price of $75.3 million.

So far in the fourth quarter, we have purchased an additional 580,000 shares at an aggregate purchase price of $22.3 million. So cumulatively since the start of fiscal year 2017 we have repurchased approximately 3.1 million shares for a total purchase price of approximately $113 million.

These actions are part of our continued focus on improving our return on equity. In addition, to our growth in earnings our stock repurchases and our dividend we have reduced the number of years of land we own in relation to our current deliveries by over 1 year from last year’s third quarter.

Our weighted average diluted share count this quarter was 171.4 million shares and included the aforementioned 5.9 million shares un-issued associated with our convertible bonds which are treated as outstanding.

As noted above, we have called these bonds effective September 15, 2017 and thus the shares will be removed from our share count at that date so for modeling purposes we estimate our fourth quarter weighted average share count to be 170.5 million shares.

We ended fiscal year ‘17 third quarter with a debt to capital ratio of 45.8% and a net debt to capital ratio of 38.4%. With the aforementioned debt payoffs, we expect the year end ratio to be in the low-30s. Subject to our normal caveats regarding forward-looking statements we offer the following guidance.

We now estimate we will deliver between 7,000 and 7,300 homes in fiscal year 2017 compared to previous guidance of 6,950 to 7,450 units. We believe the average delivered price for fiscal year ‘17 school year will be between $800,000 and $825,000 per home.

This translates to projected revenues of between $5.6 billion and $6 billion in fiscal year ‘17 compared to $5.17 billion in fiscal year ‘16. We and other builders have been impacted by the floor joist recall by a major lumber manufacturer.

We were prepared to raise the midpoint of our full year fiscal ‘17 delivery guidance by 100 units from the midpoint of 7,200 deliveries to 7,300 deliveries. But our fourth quarter and full fiscal year ‘17 projections were reduced by approximately 150 impacted homes, which we now delivered in fiscal year ‘18.

Therefore we are guiding the full fiscal year ‘17 delivery projections midpoint down 50 units. We had approximately 20 home closings in the third quarter representing $18 million in revenue that have been delayed until subsequent periods due to the floor joist issue.

We have approximately 10 settled homes and 340 homes in backlog impacted by the floor joist issue. We are working hard with the manufacturer, our suppliers and our home buyers to minimize delays and cancellations. Appropriately the manufacturer is absorbing the cost associated with resolving these issues.

We have updated our previous guidance for full fiscal year ‘17 adjusted gross margin to be between 24.8% and 25% of revenues and SG&A down to 10.4% of revenues.

Other income and income from unconsolidated entities is projected to be between $160 million and $180 million as we will have fewer deliveries out of our New York City joint venture projects than previously anticipated. These closings are now expected to occur in fiscal year ‘18.

Our effective tax rate is expected to be approximately 35% for fiscal year ‘17. To summarize our full year guidance, we have reduced our unit delivery guidance midpoint by just 50 units associated to floor joist recall, while increasing the midpoint of our average delivered price by $12,500.

This increased the midpoint of our revenue guidance by $50 million. Our gross margin midpoint was lowered by 15 basis points, but this was more than offset by a 20 basis point improvement in SG&A leverage. While we lowered the midpoint of JV and other income due to delays in closings, this is offset by incremental revenue in a lower tax rate.

So, while there are number of components of our full year guidance that have changed there is almost no change in our net income midpoint. And in fact absent the floor joist delays, net income guidance would have been increased.

For fourth quarter, we expect deliveries of between 2,275 and 2,575 units, with an average price of between $840,000 and $860,000. We expect fourth quarter fiscal year ‘17 adjusted gross margin to improve 35 to 50 basis points from fiscal year ‘17’s third quarter results. Fiscal year ‘17’s fourth quarter SG&A is approximately 8% of revenues.

Our fourth quarter 2017 other income and income from unconsolidated entities is projected to be between $10 million and $30 million. The fiscal year 2017 fourth quarter effective tax rate is projected to be approximately 38%.

Regarding fiscal year end ‘17 community count due to strong pace of sales at many of our current communities, we are selling through some communities more quickly than anticipated and now expect to end ‘17 with between 300 and 310 selling communities.

While we are not giving any specific guidance until December we do intend to increase community count in fiscal year ‘18 based on our existing supplier lots and prospective purchases of land. We ended fiscal year ‘17’s third quarter with approximately 47,800 lots owned and optioned compared to 46,600 one quarter earlier and 48,701 year earlier.

At fiscal year ‘17’s third quarter end, approximately 32,400 of these lots were owned, of which approximately half, 17,600 including those in backlog were substantially improved. These owned lots represent a 4.5-year supply based on the midpoint of our fiscal year ‘17 projected deliveries.

This is down from 5.8 years of owned land based on fiscal year ‘16 deliveries at the end of Q3 in fiscal year ‘16. Now, let me turn it over to Bob..

Thank you, Marty. In early June, we celebrated the 50th anniversary of the founding of Toll Brothers. I am so proud of how we have evolved from a local suburban Philadelphia homebuilder into [Technical Difficulty].

Pardon me, this is the conference operator. We have temporarily lost the location of the speakers. Please hold while we reconnect them. Pardon me, this is the conference operator. I have reconnected the location of the speakers. Management, you may proceed with your remarks..

Thank you, Marty. In early June, we celebrated the 50th anniversary of the family of Toll Brothers. I am so proud of how we have evolved from a local suburban Philadelphia homebuilder into America’s luxury homebuilder. We are now a national Fortune 500 company operating across 50 suburban and urban markets in 20 states.

Our growth has been driven by relentless focus on quality, value and service, the establishment of a great brand and reputation in a luxury market, our broad geographic presence and our diversified platform for-sale and rental communities serving everyone from baby-boomers to millennials. We believe the industry has room to run.

Single-family housing starts at $811,000 are still well below the 50-year industry average of 1.02 million units. The homeownership rate is on the rise, but also still below historic norms. Interest rates remain low. Unemployment is low. And more binders are entering the upscale market.

Based on these trends, we believe Toll Brothers is well-positioned for future growth. Now, back to Doug..

Thank you, Bob. Thank you, Marty. Austin, we are ready for questions..

[Operator Instructions] And our first question comes from Stephen East with Wells Fargo. Please go ahead..

Thank you and good morning guys and congratulations on a good quarter. Marty, maybe I will start with you on the gross margin guidance, if you look at guidance this quarter versus what was implied from last quarter, it’s coming down, it’s a little bit down year-over-year.

Could you talk about what the drivers were and how you expect those to play out? I assume we have got some elevated costs in there, but I want to know if there was anything else that we were missing that wasn’t there last quarter?.

Sure, Steve. And I think it’s important to mention that the net change in our midpoint of our guidance was only 15 basis points and that was offset by improvement in SG&A. So operationally, we have an improvement to talk about. That being said, from a margin perspective, most of the change is a function of mix.

There are certainly some cost increases for both land, labor and materials that we are dealing with, but we are generally offsetting those costs with improved pricing, but the loss of some of the Weyerhaeuser units which are a little bit higher margin than what we are trying to replace them with which are generally smaller quicker build in some cases QDH sales impacted the numbers.

It’s tough to get into much more specifics than that. It’s a slight small change and we have some good news to offset it..

Got it. Fair enough..

I just want to clarify, Stephen, that we haven’t lost the Weyerhaeuser houses. They have been pushed forward 60 to 90 days..

Okay, got it. And Doug, you all have done a great job driving growth this cycle growth profitability you have gone into a lot of stuff, apartments, T Select, etcetera.

As you look at your game plan moving forward say for the rest of the cycle, I mean, how do you see it playing out? I am asking from a product mix geography cash allocation, I know you all are spending a lot more time and focus on return.

So, I am just trying to get an idea of the way you view your business moving forward versus how much you all have already changed as you have gone through this cycle?.

It’s a great question. I am, as Bob said, so proud of where this company is today. I think we have a lot of runway in front of us. We have led the industry for the last year in order growth.

We have been 20% north every quarter, four quarters in a row in order growth selling houses at $800,000 and we have great variety that’s growing as we do more and more active adults, as we focus more and more on millennials as we move into more and more geographies, we have focused in the West, dramatically significantly over the last 5 years and that’s obviously paid off.

So, you are going to continue to see more of the same out of us, where we will continue to be, I think very astute, very careful, but very opportunistic on the land volume side. We are focused on growth markets.

They are not all out West many of them are, but we have had great success lately in Northern Virginia and in New Jersey and even in Philadelphia. So, it’s truly a national platform and you will just continue to see more variety in the markets we are in, with the possibility of adding on a new market here or there. We have been pretty good at that.

So, I feel great about where we are positioned, the brand, the landholdings we have, the land opportunities we are looking at. And you are correct return on equity has become more of a focus which means we are trying to structure land buys a little differently. We are focused on the dividend. We are focused on the stock buybacks.

We are focused on joint venture buildings or properties. We will sell land off. So Steven it’s going to be of what you have seen over the last 5 years that has allowed us to I think position ourselves the best as anybody in the industry and more of the same to come..

Alright, great, I appreciate it..

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

Hi guys, nice quarter, congratulations.

So on the theme of ROE and the focus there, you guys have done a great job as you mentioned Doug on the order front and I think it’s interesting how much improvement you have seen on the absorption side because the Toll Brothers of old probably at this point in the cycle might have been pushing price to get that margin even higher back to where you were in the prior cycle and as I look at the community count, the closeouts there perhaps some people are maybe a little bit concerned about the sustainability of that growth, but can you maybe just talk through a little bit your current views on the price versus volume dynamic and whether even with a flattish community count is that cycle turnover on the asset front? Thank you..

There is definitely more room to run on the absorption side. There are certain markets that we talked about like Southern California and Seattle and Northern Cal and even Nevada as another example where we have some of the highest absorptions that we have seen in a decade. But we have the teams in place, the land in place to sell more homes.

For the most part we are not maxing out our delivery timeframes. We are 12 months, 14 months out. The trades have been tougher to find, but that’s easing as the business improves and more workers come back to housing. But there is many markets Alan where you know we are below company historic averages for absorption.

We have the teams in place and there is plenty of room to run. I do want to comment that we are not compromising margin for sale, so you are not seen our gross margin go down in any significant way because we are trying to drive top line.

This has been a different recovery than other cycles as we talked about many times where we have not had the nationwide pricing power that we have seen through prior cycles. We have had local pricing power in primarily Western states, but more recently as an example in Northern Virginia and more recently have an example in New Jersey.

But generally while we have been able to offset costs creep with pricing it hasn’t not been dramatic where the industry and Toll have not seen a significant expansion of margin, but I am happy that we have been able to maintain margin and produce these 20% plus order growth over the last year..

Absolutely that’s very helpful. Thank you for that.

And just on the pricing power comment affected and maybe you are starting to see that pick up a little bit in some markets that were slower to develop, I was curious to kind of think about your footprint right now and it’s great that it seems like you are able offset the cost creep, are there any markets where you feel like that pricing power is sitting a bit of a wall and you are seeing some pushback from consumers?.

No..

Simple enough. Thanks a lot..

And I will comment on North – I was in Northern Virginia two weeks ago for division visit.

And the Division President says to me after I visited these communities with tons of action, he says, Doug what sales keeps telling me, this is not a normal summer, August feels like February and when I hear that coming out of Northern Virginia that makes me feel pretty good..

It sounds great. Thanks a lot..

Our next question is from Robert Wetenhall with RBC Capital Markets. Please go ahead..

Hey, congrats on a very strong quarter. And just keying off Doug’s comments, you are pretty down the fairway kind of guy and there is a lot of enthusiasm that both in New York and your comments about Virginia, California seems tremendous.

Do you think that there is something different in the structure of the market today, which is allowing pricing to accelerate at the pace and maybe to just tie that together a little bit and give us a sneak preview of next year in terms of how you are going to manage the robust demand you are seeing?.

I don’t think there is anything all that different. I think the example you raised of let’s talk about Southern California it used to be that LA County garnered a premium in price to Orange County. Orange County was on the outskirts. And today, Orange County is benefiting from a significant premium in pricing to LA County.

That of course means land prices have been driven up, but what’s happened there is, there is great schools, it’s a great lifestyle.

We are very well-positioned within Orange County and have significant pricing power right now and there is really no signs of a bubbler of issues, because you remember mortgage money is very tight, we don’t have people buying houses for investment who are not occupying those homes. We don’t see over spec building. The economy is growing.

The jobs are growing. And so I am hopeful and confident that 2018 in Southern Cal should be a continuation of the success we are seeing right now and we are positioned to take advantage of it with the landholdings we have. We have talked about Shapell for many years. That deal is now 4 years old.

And everything we are now building in Orange County is our own land that was either acquired before or after Shapell, but is no longer part of that transaction. So, we are continuing to be opportunistic in the land market. There is master plan communities that – we are like we are the Whole Foods of homebuilding right. They want us in the community.

They want to bring Toll in. We drive price. We have great architecture. We provide great customer experience. And we are being invited into what we think are some of the best locations in master-planned communities and able to take advantage of it.

So I feel very good about California and the entire West for ‘18 and we have the land and the teams to take advantage of it..

That’s – the housing market out there is certainly encouraging.

Maybe you could comment for a second, your ASP growth in the upcoming quarters really strong and just to Stephen East earlier comments, it seems like there is little bit of margin pressure not really thinking about next quarter, but more into ‘18, with this pricing tailwind you have, what’s your ability to manage in cost inflation and how do we think about gross margins going into next year?.

Bob, we will give some guidance on gross margin in December fort 2018 like we always do. And I think it’s too preliminary for us to make a comment on it..

Got it. If I could just sneak in, Marty what was your comment about community count growth given the fast pace of absorption? Thanks and good luck..

I think our comment was that 2017 year end community count should be between 300 and 310 communities and that’s our intention to grow from that number in 2018..

Got it. Thanks and good luck..

Thank you..

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

Good morning. It’s Jason in for Mike..

Good morning, Jason..

First question, looking at the SG&A, it looks like for this year is on track to be pretty flattish relative to last year.

Just wanted to see what you are seeing on that front, how you are thinking about SG&A we go into next year and if you would expect it to improve off the current levels? And then if there are any bigger opportunities that you have identified that could drive SG&A down over a longer period of time?.

I think I am going to default to the same general answer I gave earlier. We will give 2018 guidance in December. We are pleased with what we have been able to accomplish and project they will accomplish in 2017 compared to our expectations at the beginning of the year. We continue to progress on some of the technology initiatives and investments.

We mentioned at the beginning of this year and are optimistic about the long-term benefit those will give us..

Okay.

And then on the other and JV income which was lowered slightly I think due to fewer NYC JV projects, I just wanted to see if those projects that are being delayed until 2018 I just want to make sure I understand the moving parts there?.

So those are really associated with half a dozen to a dozen units that we had previously expected to sell and settle in 2017 that we now expect for 2018..

Okay, great. Thanks..

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

Hi, this is Trey on for Steve. I want to add my congratulations on another strong quarter from you guys as well..

Thanks Trey..

So kind of going back to this price or space kind of talking a bit more about California specifically, you definitely had a really good quarter with your orders up 60% plus in the quarter and you are no longer going up against the easy comps that you were given with the Porter Ranch issue and wondering if you could talk about what’s going in that market to see such robust growth happening out in California?.

It’s as I mentioned before it is primarily driven by Orange County. Porter Ranch is performing at about two-thirds the performance of the sales we saw before the gas leak. It’s on track for us, it’s on schedule we knew would be, it would take some time to come back fully.

The community is – our models are – our sale centers are open, the retail is open, the schools are open, everything is good. It’s just taken some time and we are up of the belief that ‘18 will improve upon ‘17 as ‘17 had improved upon ‘16 because it will be 2 years this October when that gas leak occurred.

But the number you are seeing the success that we are seeing in Southern Cal is being driven by a very successful community in Northern San Diego County called Robertson Ranch. And then again the balance of it for the most part is coming out of a number of very successful communities in Orange County..

Got it. Thanks for that.

And then turning to apartment living for a minute you guys were at 3,000 units in six projects and about 4x that seems like in your pipeline which hopefully show up in the short and intermediate term as those get rolling and start to fill up, but how are you thinking about that business longer term, do you think it could really become a core part of the total story like city living has become?.

I do, we have grown the business significantly over the last 3 years. We started out Washington DC to Boston and we now have opportunities in Atlanta, in Dallas, in Southern California, in Northern Cal, in Phoenix looking hard in Houston, looking hard in Seattle, looking hard in Denver.

And so if it is obviously if we get into more markets there is more opportunity and you will see that business grow significantly and we will continue to hold some assets for the long-term and either recapitalize or sell down or sell out of other properties at stabilization as we have done over the last few quarters and as we anticipate to do through next year and thereafter..

Got it. Thanks guys. I appreciate it..

Thank you..

Our next question is from John Lovallo with Bank of America. Please go ahead..

Hi guys. Thanks for taking my questions.

First question is consumer confidence has been really strong despite what’s going on in North Korea, despite what’s going on with some of the uncertainty in Washington, so I guess the question is does this surprise, I mean I realized the economy is doing reasonably well and things are moving in the right direction, but is this kind of a continuation of the backdrop I laid out a surprise to you?.

No, remember where we were and how deep it got and how we have slowly come back so this country produced 1.5 million or more houses for 30 years taking it over 2 million in ‘04 and ‘05. We fell to a third of that or less from ‘07 to ‘11 and we are still not back to the 1.5 million. We are really nowhere near it.

So we have had pent-up demand building that continues to build even in this good market because of how deep and dark the housing recession was. And we just have years and years of buyers who sat on the sidelines who are now coming back out.

You lay on top of that the millennials which is a bigger generation than the boomers, who are now the leading edge of the millennials are becoming of age to buy homes and they are buying in their mid-30s which means they are more affluent. And so I am not surprised.

I am actually surprised that how slow the recovery has been and that’s why think we have a lot of runway out in front of us..

Yes. We would agree with, that’s helpful.

And then Marty in terms of the slight 15 basis point reduction in the midpoint of the gross margin rate for 2017, I know you had mentioned the floor joist component, but in terms of the city living deliveries that got pushed into 2018 were those consolidated deliveries or were those JV delivers?.

The ones I referred to earlier were JV deliveries, it would not impact the margin guidance..

Okay. Thanks guys..

Our next question is from Carl Reichardt with BTIG. Please go ahead..

Hi.

One cleanup question for you Marty what was the basis point impact of the cleanup cost reimbursement and the accrual reversal on the gross margin this quarter?.

The total amount of dollars was around $10.5 million, so that was around 50 basis points to 60 basis points on margin..

Okay. Thank you.

And then Doug can you talk a little bit about the T-Select, how it’s been selling, what the rollout plans are and is their target market similar to the sort of mid-30s, higher end millennial or younger than that, I would just like to know what you think the future of that product is?.

Sure, so we have been building T-Select type product without labeling it T-Select in places like Boise, Idaho and Jacksonville, Florida and townhomes in Arbor, Michigan and other some townhomes in Northern Virginia.

So we know the business, we decided to brand T-Select in certain communities to draw some attention to it for primarily what you described Carl as 35-year-old leading edge, slightly more affluent millennial. Right now, we have two communities in Houston and we just opened in the last two weeks two communities in Philadelphia.

It is we don’t send you off to the fancy design studio, we don’t show you hundreds of ways that you can redesign and add-on structurally to your home, it’s more spec building, it’s much faster turn and it’s a streamlined approach, but you are still going to get we think a Toll Brothers experience and the great attention we give our client.

So it’s moving slowly as we expected to and frankly as we wanted to and you will continue to see a handful of T-Select communities being launched in different markets around the country over the next year. I don’t think it will have any significant impact on our business.

And frankly we are learning more about T-Select through our other operations in places like Jacksonville and places like Boise that already doing without that brand. And so I think what you will see if some communities called T-Select, but in other places where we already do that we will just build it under the Toll Brothers banner.

The key I think in the messaging of this is that we are committed to sell homes to the leading more affluent edge of the millennials, because we are not going to wait for them to buy their second or third move-up house, which in a decade, they will obviously be doing, but we want to catch them earlier in the cycle.

And we have had great feedback where buyers were unaware that they could afford and find the Toll Brothers community that would be suitable for them for the first home. So, that’s the strategy and that’s a brief summary of the launch of it..

Thanks very much, Doug..

Thank you..

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

Hi. This is actually Tim on for Nishu. Thanks for the time. So, my first question, I just wanted to dig a bit into demand trends and specifically on Doug, you mentioned the breakdown in the relationship between the nonbinding deposits and the orders.

I was just wondering has anything changed in the selling process or I guess the type of buyer that you are tracking that could be the cause for this breakdown.

Obviously, you are moving more into the millennials and the baby-boomers, is that what could be driving I guess the breakdown in the correlation there?.

No, it’s a good question and it’s certainly fair for us to explain it further. So, all of you will recall, we used to give 3-week information on agreements and we used to give 3-week information on deposits. First of all, we recognized that we were one of the few or maybe the only builder that did that.

And on the agreement side, we recognized the year or so ago that because the agreements for the beginning of a quarter in many cases reflect deposits that had been taken in the last month of the prior quarter, because remember, our homes are big and they are complicated and it can take people 2, 3, 4, 5 weeks to go from a deposit to an agreement.

So, we recognized that 3 weeks of agreement information really wasn’t giving you good guidance on where the quarter may end up. So, we moved to deposits.

And frankly, we just reflected upon the last couple of years and in looking at the 3-week deposit information we were sharing, it was not well correlated to the agreement numbers that that we were producing for the full quarter.

Part of that is there are always deposits taken as I mentioned the last month of the prior quarter that are on the books or on the balance sheet as the quarter begins that are not reflected in the new deposits of the first 3 weeks. And part of it is its only 3 weeks and it’s a 12-week quarter.

So, if you take the time to track what’s happened over the last we have mentioned five quarters, where four of them were not correlated in the last three quarters, where none of those three were correlated, we just decided that this was a time to discontinue that specific information.

I did comment on my prepared script that we are off to a strong start in the fourth quarter. So, I would only either read anything into our discontinuation of this information. I will repeat that we are off to a strong start for the beginning of the fourth quarter..

No, no, I really appreciate that color.

I guess – and then kind of tailing on to that, is there any other metrics you look at firstly and anything you could provide us on our side to help us I guess try to get a feel for how the traffic is going, whether it’s food traffic or online traffic, something along those lines?.

Traffic is up modestly. I think our web traffic is up more dramatically I think in the range of 30%. We all recognized that people buy their buying habits are different and that they do a lot of research on the couch with the ballgame on, on the iPad.

And they spend less time actually physically visiting the model homes, but we are comfortable with traffic. I mentioned 3,000 visitors in the last few months in the Southern California community. It does appear in Southern California that as Bob used to talk about visiting a model home was a form of weekend recreation.

And in California, it still seems to be true, because the traffic numbers are crazy high, but for the most part, we run 20 visitors plus or minus per community per week.

That number is up a little bit and we are comfortable with where the numbers are and we are most comfortable when we view our social media accounts and when we view our website and we have our online concierges who communicate with the buyers months before we open communities through e-mail and through the Internet.

And so overall I am very pleased with where both online and foot traffic stands..

That’s great color as well.

And then I guess just quickly moving on to the JV project, obviously the discussion around the improving the ROE targets and getting to that, I think of 12.5% mentioned, just wanted to double check is that still the plan for this year and then as well as we go forward, discuss how some of the riskier projects will be JV the bit more than they had been in the past, so just curious I guess what kind of share from the city living pipeline could end up being JV versus wholly owned, currently I think there is only one project that is six that is earmarked for JV? Thank you..

Sure. So I think with respect to the expectation for this year of 12.5% ROE, I think we are trending a little bit higher than that, but at this point we are not prepared to increase the guidance. So I think we have made significant progress this year and hope to make progress next year as well.

We will get into more details with respect to that in December. As it relates to joint ventures for some of our condominium projects, we have a number that are operational right now. We expect another one to close here in the fourth quarter.

And we are going to meet later this afternoon to discuss another piece of ground and whether we want to move that into joint venture or not. The decision is a combination of evaluation of what kind of gain we could get for selling the land we already own into the joint venture.

On an immediate basis what we think of the market, what we think of the risks and what else we have on the table, on the balance sheet for New York City..

Great. So of the last three buildings to start or that will start soon in New York City, two of those three and possibly all three of those three will be built in joint venture..

Great. Thank you..

You’re welcome..

Our next question is from Susan McClary with Credit Suisse. Please go ahead..

Thank you. Good morning..

Good morning Susan..

First I wanted to dive in a little bit more into the active living part of the business, that’s an area where some of your peers have perhaps not seeing things improve to the rate that had been expected, you have seen a decent amount of success there, can you talk a little bit to that and maybe where you are in terms of thinking about the growth in the future trajectory of that part of the company?.

Sure, we love the business, right now 21% of our sales are in what we call Toll Brothers active living that is 55 and over by law, no kids in the house.

In addition to that 21%, we have many communities that are empty nester or age targeted, so they are not 55 and over by law, but they are targeted towards the move down buyer whether that be in Scottsdale or Palm Springs or Southern Florida or wherever.

But they are just not 55 and over, so that 21% number is really just a subset of the baby boomer generation that is moving down. But your question is specific to active adult, so I will focus on the 55 and over. We have been doing it for decades in the East and the Mid-Atlantic and the Midwest, we love the business.

We have a great brand of Regency by Toll Brothers on active living community, highly amenitized our homes while smaller are truly jewel boxes. You open up the little box and it’s loaded with jewels. So we attract different client that I think has more disposable income is a bit more discriminating. Later in life, they want it their way.

We allow them to customize it their way. And it’s been highly successful. We have taken it West. We are now in a number of locations in Denver. We are in Las Vegas. We are in Reno. And we have a large community going through entitlements in the Greater Phoenix market. I would love to get into California. I would love to get into the Seattle, Texas.

And it will grow. There is no question it will grow. We are chasing the boomers.

They bought houses from us when they are moving up 10, 15 years ago and they are still our client and we intend to find an active adult home through them, whether it be in the East where their grandkids and the kids live or whether it be out west or down south where the sun shines, you are going to see more and more of it out of us.

And I am really proud about how we do it between the amenities and the quality of the home. We don’t just provide the amenity and kind of forget the home. The home is really important. And again, while a jewel box – it’s Toll Brothers all the way and our buyer has the discretionary money. They are willing to spend it.

So, I think that’s why if I had to explain it, we are doing so well with it. We are maybe at a lower price point. They haven’t had quite the same success..

Okay, that’s very helpful. Thank you.

And then building on the comment that you made that we could see Toll enter another new market or two, can you talk a little bit to how you think about M&A, especially in this point in the cycle? And then given the success that you have seen in places like Boise, could that expansion perhaps come in some of these smaller markets that are a bit maybe more off some people’s radar screens and yet it could be a good fit for you?.

We have acquired 9 builders in, what’s it been now, 23 years, I am trying to think of the first deal I did with Geoff Edmunds in Phoenix, 22 years. So, we are very selective. In 8 of the 9 cases, we acquired a builder to enter new markets.

The only one we didn’t was Shapell, where we are already in California, but that was just really a very, very large land deal that did come with a nice homebuilding operation, but it was driven by the land deal. And so we are opportunistic we are looking. We have a dedicated team that focuses on M&A. They are running all over the country.

There are three markets right now that we are intrigued by. We could enter those de novo. We could enter those through builder acquisition or we could take a pass. Two of those three are in Western states. I think you will continue to see some M&A out of us. It could be a small market like Boise, which is a bit of a sleeper market.

That’s a bit off the radar screen of others or it could be a larger market that we just think we need to be in. So, stay tuned, but while nothing to report, we are making progress in a couple of markets in terms of our investigation and both some either land opportunities or possible builder opportunities..

Alright, thank you very much..

You are welcome. Thank you..

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

Good morning. This is actually Ryan Tomasello on for Jade.

Regarding city living, what’s your current view of the supply demand landscape overall in the New York City counter market? Are you – for example, are you starting to be able to see past the supply concerns that we have seen over the past two years given the pullback in lending and that your city living products, what are you seeing in terms of absorption pace, trends and incentives?.

We haven’t bought a deal in New York as we talked about in 3 years now. So, I think it’s fair to say that many other developers have also been on the sidelines. So, supply is coming back down a bit as less new buildings are starting.

We have had a good August in New York, which has surprised us a bit, because August is a time that hit the Hamptons before the action begins again after Labor Day. And I’d have to say sitting here today I am a bit more encouraged by what we see in New York than I have been on the last few calls.

We are fortunate to not have very expensive trophy buildings. We do have a handful of expensive units and those have been harder to move than the less expensive, but remember less expensive in New York, I mentioned great sales at Gramercy Park, 17 sales in the last quarter and 30 plus sales since we opened in November. And that’s $1.82 million range.

So, you have to put it in perspective as to what is affordable in New York.

Jersey City and Hoboken, absolutely on fire at $800,000 to $1 million, 49 sales in 6 weeks and deposits, agreements in 6 weeks in a new building in Jersey City at $850,000, but even spread throughout the other units we have in our buildings in New York, we have had some encouraging sales over the last 3 weeks or so.

Too early to tell, we will see how it plays out when we get into September and October, but I am feeling right now like things are turning up..

That’s really good color. And just on the same topic, is any of the stress on the 57th Street corridor of interest to you, for example, there is one project in particular that it’s been in the headlines lately that seems to be facing an equity shortfall.

So, are there any potential opportunities to recapitalize projects like this or from other developers?.

As I mentioned, we have avoided the trophy buildings and we read that same articles you read and we have some intelligence on the ground, because we are there, but at the moment, I would say no, we are not chasing any of those opportunities even though newspapers may label them to stress. I don’t think it’s for us..

Great. Thanks for taking the questions..

You’re welcome. Thank you..

Our next question is from Will Randow with Citi. Please go ahead..

Hey, afternoon and thanks for taking my questions. On a related basis, can you guys talk about your top quartile in terms of high-end markets across the country, I know you placed over this point, but I would just like to get a sense that you are seeing incremental acceleration on a year-on-year basis and on the sequential basis versus last year.

So, our top five or six markets for contracts per community, but you mentioned – I think I heard you mentioned something about price point, this is not price point, but this is the sales pace per community for the quarter would be Southern Cal, Reno, Virginia, Michigan, Northern Cal, Boise and New Jersey and they all sold in the range of 12.5 down to 9 sales per community for the quarter.

So, with our price point, the way we do it, that’s cooking..

And then just on the joist recall issue you guys discussed, what’s roughly, I don’t know if you can talk about it, the cost per home and potential upside or downside to this year’s margin guidance if your accruals aren’t spot on so to speak?.

So, from an accounting perspective, technically, you only have to accrue cost to repair the homes that have been delivered not the ones that are in backlog, but both the cost for those repairs as well as the cost for the ones in backlog we expect and have confirmed will be absorbed by the manufacturer who supplied those joists.

So, we do not expect these homes to deliver at a margin any different now than they would have delivered before..

And just to be clear, the manufacturer also covers the cost overruns and in terms of timing is there any sort of dues they have to pay if your closings get delayed?.

We are in active discussions with the manufacturer as to the repair protocols and the various costs involved that include things like hotel rooms, out of pocket meal allowances, rate lock changes in fees and so forth as well as our internal team and the actual physical costs of the repairs..

Got it. Thanks guys again and congrats on the progress..

Thank you..

Our next question is from Mark Weintraub with Buckingham Research. Please go ahead..

Thank you.

I was hoping to get a little bit more color on input costs and in particular to best understand how particularly like lumber or OSB where prices have moved quite a bit as the year proceeded or proceeded sorry, how much of that’s already showing up in the cost of the homes being sold or how much of that might be yet to come since I am really trying to understand that the lag that if we are looking at the framing lumber index and when does that start to kind of run through your P&L and then additionally whether perhaps you got caps and collars or other sorts of types of contract agreements that might smooth or reduce the volatility that one might expect if one was just looking at the indexes?.

Mark, that’s a really difficult question to get very precise on. We contract generally on a per home basis or both the labor and as much as materials as we can, certain materials are contracted a year in advance or six months in advance. Lumber is one of those that we can go out in many regions of the country three months to six months in advance.

I think the simplest way to answer your question is to say that some of those costs are flowing through – have flowed through the income statement already as we have delivered homes, some more are expected, but we have generally been able to offset those costs with increases in prices..

Okay.

And is it fair to say that you generally when you are your selling that home you basically are able to have an embedded price for materials known at that time, so that you have a pretty good idea what your margins are going to be on that that home at that point of sale?.

Yes. And I think it’s important to note that we don’t sell these homes on a cost plus basis, we sell the homes based on what price the market will bear and build them based on what we contract the cost to be..

Understood. Thanks very much..

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

Hi good afternoon.

So you have taken the owned inventory down from 5.8 years to 6.5 years over the last year, how comfortable or how low are you going comfortable on that number, do you break 40 going into region couple of competitors have gone this region, but you know that’s a bit different than the way you run your business in the past, I am curious what your tolerance is the low end?.

Though pre-downturn we owned a third of our land and optioned two-thirds..

And maybe a little more owned but yes over certain periods of time where….

40-60..

Yes, that’s probably close..

We have recognize that will be very tough to achieve now. But we had gone the other way because we shut all the option land to the downturn, because you could cancel your contract with the farmer and walk away from some soft cause and move on your life when the deal didn’t work anymore tougher to do that when you own the land.

So we went from probably 40% owned, 60% option to 80% owned, 20% option. If you look back in 2009-ish in that range and we are bringing it back. I don’t – 50-50 would be a great goal. It’s going to be tough to get there. I think this will be incremental. We – as you pointed out we build at Maine and Maine.

We build in markets where you don’t have land developers feeding us finish lots that happens in some places, but Princeton, New Jersey has no land developers feeding you finished lots. So we are a bit more opportunistic and there are more cases where we have to buy the land.

We always try to structure it so that we can even if we are buying it maybe we could buy it over time. We can have a purchase money mortgage with a landowner and not pay all upfront which helps the ROE.

But so I think what you will see going forward is relatively modest incremental improvement in that year zone, but it will never get back down to our old historic numbers..

Right. I think it’s really hard to set a targeted number of years owns Jack, because it’s going to be influenced by a number of years option that you have at the same time. For example if you have 6 years or 7 years worth of option land that you know you can get your hands on relatively quickly you are more comfortable operating it 2 years or 3 years.

If you are in a situation like we are right now where we have a little more than 2 years of option land, I don’t think you will see us get much below 4 years of own land..

Alright, that’s very helpful.

And then Marty just a clarification on the units that were pushed out 150 with margin guidance for the fourth quarter have changed had those units not been pushed out, I guess the question is outside accruals and everything else, was that a dilutive impact, were those new units I guess higher than the expected average for the quarter?.

I think they were a little bit higher. I think we probably would have had to move some of the margin guidance in the direction we moved it, but maybe not as far..

Okay, thank you..

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

Good afternoon gentlemen..

Good afternoon Ken..

Marty – But Doug, the dog you used talk about that, I think he passed away a few years ago in terms that head up demand, why don’t you guys name that dog as I recall? So is that over, name the dog, right?.

Never to happen is the name..

So the first question I have really an observation because you guys are switching off this binding contract which I think is obviously warranted and less information is often more, but we look at these seasonally, so your guys orders actually did quite a bit better than your historical trends, so sequentially or patiently fell about 13% sequentially, normally meeting last many, many, many years it’s usually 20, so I think actually did better than seasonal trends would suggest, may I bring that up because one obvious vetting that’s a good sign, but also I wonder if these higher closing cases or the orders are going to perhaps raise risks relative to opening communities next year, if you could kind of and I know you are not to give guidance but talk about how you are gaining comfort around your forecast given the repeated misses we have seen with other builders in terms of their ability to measure those community openings?.

Well, as we have talked about many times, our community count and it’s true with the entire industry, it is very, very difficult to nail down because you don’t know how fast you are going to sell-through what you have which is what we are experiencing right now.

And you don’t know exactly when you will get that last permit that allows you to start construction. As much as you believe that you have that permit in October when they find the Indian artifacts on the property and slow you down six months, you have a delay.

And while that’s a rare exception I am just pointing out that we do our best, we hit many of our opening dates, but in other cases something comes up and it slows us down.

It’s also a bit dependent upon land acquisition although it’s fairly rare that we buy finished lots that are ready to go within a couple of months and in certain markets that can occur.

So we give a range and it’s really quarter-by-quarter we try to give some update to that range and we have the land slotted to be open next year to show community count growth. In December we will give you more information about that.

Part of it may turn on do we want to open out of the sales trailer when the roads are going in and the sites of construction mess or do we want to wait and have a fully decorated model and some of those strategic decisions will determine when exactly communities will open..

And they can change in the middle right?.

Absolutely..

We can say let’s open before the model is done or we can say depending on the health of that market, maybe we want to wait until the model is done?.

It’s new product or if the sites really torn up and it’s hard to get in. So stay tuned for the guidance, but you will see growth in ‘18..

And now I realized you are not giving gross margin guidance, Marty. However, you do have a good idea of your debt schedule and your interest.

Could you talk to the interest expense component given the moving around of your debt going into the fourth quarter obviously there is some shifting parts there? All else equal, are we looking for the interest expense in gross margins to be up or down by how much in FY ‘18? Thank you..

I think it take a while for interest incurred to run through our income statement. So, it’s hard without having studied it in detail and I haven’t yet to give you an answer to that question. We are retiring some 9% debt, but we are also retiring some 0.5% debt. So, our weighted average debt rate isn’t going to change too much.

I think what will change is our net leverage, which means the interest we incur will be spread over a bigger inventory base, but the timing of those deliveries will be extended over a number of years. And so I think it will go down a little bit, Ken, but it will take a while before it goes down meaningfully..

Thank you..

Our last question today comes from Alex Barron with Housing Research Center. Please go ahead..

Yes, thanks guys. I will try to keep it short and great job on the quarter. I wanted to ask about the ASP of the orders in the city living quite a bit of movement in especially this quarter.

I was just wondering if going forward are we to expect lower price points or is this just a one-time quarter anomaly?.

Alex, it’s driven by the opening of our Jersey City condo building we referenced where we have taken 49 contracts in 6 weeks at an average price of around 850. So, that is what has brought that number down. That’s a big building.

It will continue to sell through 2018, but we also have inventory in New York City that’s much more expensive that we anticipate selling next year. So, I can’t comment on where next year’s number goes, but that explains what happened this quarter..

Got it.

And then as far as the tax rate obviously you had state DTA reversal, is there much more of that that could come down the road either that you haven’t fully reversed?.

No, there is no valuation allowance against our deferred tax asset any longer. And with respect to accruals for tax exposures, I think we have made some good progress over the past few years being able to reverse those into income. That pile is not as large as it once was..

Okay, great job and I look forward to next year..

Thank you..

Thank you very much..

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

Austin, thank you very much. Our apologies for dropping off the line a few times. Enjoy the last few weeks of summer and thanks for all your interest and support..

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