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Executives

Douglas Yearley - CEO

Bob Toll - Executive Chairman

Marty Connor - CFO

Fred Cooper - SVP of Finance, International Development and IR

Joe Sicree - Chief Accounting Officer

Kira Sterling - Chief Marketing Officer

Mike Sneider - Chief Planning Officer

Don Salmon - President of TBI Mortgage Company

Gregg Ziegler - SVP, Treasury

Analysts

Joshua Pollard - Goldman Sachs

Nishu Sood - Deutsche Bank

Dan Oppenheim - Credit Suisse

Ken Zener - Keybanc

Joel Locker - FBN Securities

David Goldberg - UBS

Jade Rahmani - KBW

Michael Rehaut - JPMorgan

Adam Rudiger - Wells Fargo

Alan Ratner - Zelman & Associates

Will Randow - Citi

Susan Berliner - JPMorgan

Desi DiPierro - RBC Capital Markets

Alex Barrón - Housing Research Center

Joel Locker - FBN Securities

Toll Brothers Inc. (TOL) F4Q12 Earnings Call December 4, 2012 2:00 AM ET

Operator

Good afternoon. My name is Patrick, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Toll Brothers Fourth Quarter and Year-end Earnings Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

Thank you. I would now like to turn the conference over to the CEO, Mr. Douglas Yearley to begin the conference. Sir.

Douglas Yearley

Thank you, Patrick. Welcome and thank you for joining us. I’m Doug Yearley, CEO. With me today are Bob Toll, Executive Chairman; Marty Connor, Chief Financial Officer; Fred Cooper, Senior VP of Finance, International Development 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, Treasury.

Before I begin, I ask you to read the statement on forward-looking information in today’s release and on our website. I caution you that many statements on this call are based on assumptions about the economy, world events, housing and financial markets, and many other factors beyond our control that could significantly affect future results. Those listening on the web can email questions to rtoll@tollbrothersinc.com.

As has become our regular practice, we are going to limit our prepared remarks to provide more time for Q&A. Since our detailed release has been out since early this morning and is posted on our website, I’m sure most have read it, so I won’t re-read it to you.

Fiscal year 2012 ended October 31. Fourth quarter revenues rose 48% in dollars and 44% in units; contracts rose 75% in dollars and 70% in units; and backlog rose 70% in dollars and 54% in units compared to fiscal year 2011 fourth quarter. Our fourth quarter pretax income was $60.7 million and net income was $411.4 million.

Pent up demand, rising home prices, low interest rates and improving customer confidence motivated buyers to return to the housing market in fiscal year 2012. As household formations accelerated and unsold home inventories dropped to record lows, the industry took further steps towards a sustained housing recovery.

We enjoyed resurgent activity across all of our product lines and in most of our geographic regions. The momentum that began in our first quarter of fiscal year 2012, built throughout the year. Sequentially over the four quarters of 2012 the value of net signed contracts rose 45%, 51%, 66% and 75% compared to fiscal year 2011 same four quarters.

Our net contracts per community same store sales, which increased 33% and 60% respectively versus fiscal year 2011 full-year and fourth quarter were the highest for fiscal year since fiscal year 2006 and the highest for fourth quarter since 2005.

Now five weeks in the fiscal year 2013, our contracts are up 34% versus fiscal year 2012 same period. Our large increase in contracts was achieved primarily through an increase in per community sales. Fiscal year 2012 contracts per community of 18.2, while up 33% from fiscal year 2011 were 36% below our annual pace from 1987 to 2006 of 28.6. Therefore as the economy strengthens, we believe there is great potential to increase sales paces per community.

We have been positively surprised that the growth in contracts, because traffic has been relatively consistent with recent years, meaning weak. We're experiencing our highest converging ratio from visitor to agreement in the history of the company, as the quality of the traffic is superb and visitors are very serious about buying. When traffic returns to normalize levels, we believe there is strong possibility of significant increases in absorptions and therefore pricing power.

We believe that publicly traded home building companies are growing market share. As the only national home building company focused on the luxury market, we are particularly well positioned. We ended fiscal year 2012 with approximately $1.2 billion of cash and marketable securities, $814.9 million available under 12 bank credit facility, and a net debt-to-capital ratio of 23.6%.

Our financial strength gives us a competitive advantage over the small and mid-size private builders in our luxury niche whose access to capital and land remains constraint. Our financial strength also gives us an advantage in buying land, as sellers know we have the appetite in capital to close transactions quickly.

Since the start of our fourth quarter, we have been seeing great deal flow in some excellent locations. Our philosophy has always been to acquire exceptionally located sites on the corner of Main and Maine. In contrast of just in time model with some land wide builders, we often take this land through the approvals, while we have an under option and then improve it. This helps increase our profit margin and enable us to position the company for the future, as we put land under control today that may translate in the revenue starting several years later.

With a strong presence in the North East and mid United States, we felt some affects in the immediate aftermath of hurricane sandy, but don't expect any long term impact on our performance.

Our associates were incredibly generous of their time and resources, as they and the company donated food, clothing, equipment and money to aide the recovery in the towns and cities where we operate and live. We are proud of our team’s response, as our thoughts go after those who have suffered from this tragic event.

As the economy slowly heals and more customers reenter the housing market, we look forward to the futures. Based on our strong balance sheet, solid land holding, recognized brand and excellent team of associates; we believe we are well positioned for the housing markets continuing recovery.

Now, let me turn it over to Marty.

Marty Connor

Thanks Doug and good afternoon everyone. Fourth quarter home building gross margin before interest and write-downs was 24.6% of revenues, compared to 24.2% in 2011’s fourth quarter. 2012’s third quarter margin was 24.4%. The improvements are driven by volume and a slightly improved pricing environment.

Fourth quarter interest expense including the cost of sales was 4.3% of revenues, compared to 5.0% from 2011’s fourth quarter and 4.7% from 2012’s third quarter. The improvement here is a function of increased settlement pace and mixed shift with more deliveries from newer communities.

Fourth quarter SG&A of approximately $74.5 million was higher than the $68.4 million in the year ago fourth quarter but down from the $74.9 million in the third quarter of 2012. The decrease compared to the third quarter was primarily attributable to an $8 million accrual reversal for our self insurance reserves driven by our annual actuarial study.

As a percentage of home building revenue, SG&A was 11.8% for Q4 of fiscal year ’12, compared to 13.5% in fiscal year ’12 Q3 and 16% in Q4 of fiscal year 2011. The improvement is primarily due to increased revenue in the aforementioned reserve reversal.

Fourth quarter other income and income from joint ventures was $8.1 million. We expect our joint venture income in 2013 to decrease compared to 2012 as we continue to have fewer units delivering from joint ventures.

With the successful completion of our September convertible deal, our share count grew by 5.86 million shares on a fully diluted basis and so we entered 2013 with a diluted share count of 177.6 million shares.

As noted in our release, we reversed $400 million of the deferred tax asset valuation allowance. The reversal was deemed appropriate after careful weighing of all the evidence. All of our federal valuation allowance has been reversed while we still maintain valuation allowances for certain state deferred tax assets; we do not believe it likely that they will reverse in the near-term.

Subject to our normal caveats regarding forward-looking statements, we offer the following guidance for fiscal year ’13. For fiscal year ’13 we expect to deliver between 3,600 and 4,400 homes and we estimate the average delivered price per home will be between $595,000 and $630,000. The range for our year-end community count is 225 to 255.

With a reversal of our evaluation allowance on our deferred tax asset, we projected tax expense of approximately 39% for 2013 and beyond but note that we still do not expect to be a cash tax payer for sometime.

Now, let me turn it over to Bob.

Bob Toll

Thanks, Marty. Our optimism for our own and the housing industry prospect are buoyed by basic demographics. During the last five years, population has continued to increase in the United States by 12.6 million people since 2007.

However, household formations, a key driver of housing demand has not kept pace. A recent study by Harvard University estimated that based on the [start] trends, 1.8 million to 2.8 million more US households should have been formed since 2007 than actually were created.

Recent trends suggest these formations are starting to occur. Meanwhile, new home production has been anemic. Many experts believe that going forward; the industry has to produce between 1.4 million and 1.7 million new homes per year to keep pace with basic demographic driven demand.

From 2008 through 2011, annual new home production dropped to 660,000 on average and is projected by the National Association of Home Builders to be about 757,000 for 2012. Clearly, more new home production will be needed to meet future demand.

While general economic trends are encouraging, we hope there is a recognition among our leaders that policy supportive of the housing recovery will have an exponentially positive impact on job growth and that an increase in home value will translate into stronger family balance sheets, improve consumer confidence and a greater propensity to spend which will accelerate the economic recovery. In a speech on November 15, 2012 Federal Reserve Chairman Ben Bernanke stated the case for housing.

Strengthening and broadening the housing recovery remain a critical challenge for policy makers, lenders and community leaders. A degree to which that challenge is met will help determine the strength and sustainability of the economic recovery and the extend to which it benefits our broadly close look.

As we end 2012 and look forward to 2013, Doug and I especially want to thank our coworkers. Toll Brothers was named 2012, Builder of the Year by Professional Builder Magazine a few weeks ago. Our colleagues’ enthusiasm, diligence and perseverance and commitment to quality is the reason Toll Brothers received this honor. Thanks for listening.

Now, I turn back to Doug.

Doug Yearley

Thanks Bob. Patrick, we are all set for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joshua Pollard from Goldman Sachs.

Joshua Pollard - Goldman Sachs

I would like to finish, or start where you finished off Bob, on the policy side, you talked a lot about Washington but there is a couple of things out there, you got QM, you have got mortgage interest deduction, you’ve got a few other things. Can you just give as much detail as you currently have on where those things stand and how you ultimately think they will shake out.

Marty Connor

I think you would rather do meet the present [preservation] and get somebody in front of you like Geithner and Bob Toll to give you my evaluation of the nation’s expense of not mucking up the attempt, not think over the fiscal cliff. I think everybody agrees that that is not something we look forward to and not something we should play brinkmanship with and nevertheless there it is. So many appear to have swallowed the cool aid that we might be in risk of actually going over the cliffs.

Personally it may not be the worse thing that happens to the US and to the economy, but nobody is looking forward to it. So we hope our Congressmen and policy makers do the right thing as Ben Bernanke suggested and what I just read and that is not muck up the tremendous engine that has mostly pulled our economy out of the mire and brought it to the position its at today.

You don't want to screw around with housing, but it appears to be the main engine of recovery. Give it a year and then if you want to come back, go ahead and bang it, but I don't suggest that that should be done today and I think most of the legislators understand that and I think the primary focus is not the only focus. It’s really on the revenue enhancement due to tax increase and the elimination of some deductions and perhaps even means testing of some of the tires.

Joshua Pollard - Goldman Sachs

My second question is a little bit of a two-part one. It’s around community growth and some of the talks around the industry of slowing the sales pace to drive higher margin. My first question on the community side is, is 255 or 240 which is the mid-point of your 2013 guidance as high as you guys could go or you are holding off around certain communities. I don’t know, I didn't catch the joke in there.

Bob Toll

Marty?

Marty Connor

I'll answer the question, not explain the joke. I think Josh the range we gave is our best estimate of where we think the moving pieces will settle out at the end of the year. You've got ins and outs associated without quickly to sell other communities and how quickly can you open them up. We have a little bit of control over both of them, but not ultimate control over both of them.

Joshua Pollard - Goldman Sachs

Do you have a sense of can you give the gross number of communities you plan to open in just a sense of whether you guys are pushing at your highest pace or not?

Marty Connor

No, Josh we planned sitting here today to open 77 communities in our fiscal ’13 and if your next question is where its pretty evenly split amongst our four geographies which is the North, [Mid-Atl], south and west so it’s a pretty even split. And in terms of pushing pace obviously we've experienced a nice bump so far. But we are just continuously monitoring the demand side to understand where the price and pace are ideal for us.

Operator

Our next question comes from the line of Nishu Sood from Deutsche Bank.

Nishu Sood - Deutsche Bank

The comment you made Doug, that net contracts up 34% in the first five weeks of the year. So, I just wanted to get a better sense of how to read them; on the face of it, that’s a slowdown from the 60% in 4Q. However, I believe, you get more orders in the back half of the quarter. There may have been some Sandy impact in the first five weeks of this quarter. So, just qualitatively, give us your sense; do you see that as a continuation of momentum or is there some decline in there? How should we read that number?

Douglas Yearley

It's a continuation of momentum. Remember the comp from ‘12 to ‘11 is certainly an easier comp than ‘13 will be to ‘12, since ‘12 was a better year. It's also seasonal, the second half of this quarter or at least the last month of this quarter is the beginning of the spring season. We also had Seattle. You need to take that in to your account and remember that half of our business is mid-Atlantic, northeast and we lost couple of weeks due to Sandy, even though Sandy hit in October, you know, the agreements that we're talking about are November 1 on. So, I think all those things combined explained the number. So we're pretty proud of the number and we're looking forward to what's coming in. So, in no way would I read that as a deceleration. I think we're very happy with where we are

Nishu Sood - Deutsche Bank

Second I wanted to ask, maybe just following up on Josh’s question on policy. Just digging on the mortgage interest deduction, two things being considered obviously, scaling back to a standardized credit or reducing the amount of mortgage expense. I know a good percentage of your buyers are cash, but how do you guys think about that affecting your business. I doubt there is any way to plan for it, but how are you guys about sort of affect that might have you modeled it out across your communities and just your thoughts on that?

Bob Toll

I think the most important aspect of that deals with the mortgage interest deduction, Don Salmon, President of TBI Mortgage is here, Don gives a little chatter about what kind of mortgage is replacing.

Don Salmon

Well, our average LTB about stays right around 70%, we still have roughly 20% of our people paying cash. So actually 17% where people are paying cash, it affects a relatively small universe. Average interest rates right now are 3.25% on conforming. Jumbo was subbed 4% today, if everything holds, everything we can see for the next couple of weeks, we see Jumbo rates improving rather dramatically if we were to introduce something that we are working on today, we be even 3.5 to 3 and 5 (inaudible) range on to Jumbo loans up to $1 million or so.

Regarding the mortgage deduction, I think it’s important to know that, the proposal that has the most legs in my view is to limit the deduction at $500,000. That will affect roughly 20% of our buyers, but if you think about it, it only affects the amount of loan over $500,000. So somebody would buy $1 million house and put 30% down, the real affect at a 5% interest rate and the 40% tax back it really affects him by $350 a month, I don't think that's imperial to $1 million house, and I don't think that going to stop somebody from buying. So I think everything look strong on the mortgage front.

Douglas Yearley

Don I did similar math, so the incremental $100,000, yeah from $500,000 to $600,000 had a 4% interest rate would be $4,000. Assume we get a 25% tax break on that, you are giving up a $1,000 if the tax rules change a year which is $80 a month. And I will leave it to everybody around the table and in the audience to determine whether $80 a month is enough to move somebody’s pay.

Bob Toll

I'm still not willing to conceive that it’s good policy. At this time in the economic recovery to slow down MID, Mortgage Interest Deduction until housing is fully recovered and the economy is fully recovered, it makes no sense. Of the $100 billion MID I think a total of $6 billion are above $500,000.

If you think about the amount of money that will come to the Treasury, you've got to be crazy to fuss around with that economic picture in order to try and justify to the public that we are doing the best we can to hit the heavy hitters. I think where we are headed is to hit the heavy hitter with an income tax increase. And I think that makes the most sense as opposed to trying to grab one part of the economy or another part of the economy.

Operator

Your next question comes from the line of Dan Oppenheim from Credit Suisse.

Dan Oppenheim - Credit Suisse

I just wanted to ask first another Sandy related question. You know on the back end of the storm, you know, as we get through the rebuilding process we are likely to see actually some increased demand as some people choose to move on rather than rebuild. Is there anything you are thinking about as far as incentivizing people like that to choose a Toll community?

Doug Yearley

No, Dan most that we were effective were on the coast most for second homes. We have not seen an impact to our business. In fact, New Jersey the last few weeks has been very strong and we are not reaching out to those people any differently than we market generally to everybody that's in the market looking to move into our homes.

Dan Oppenheim - Credit Suisse

And secondly, Gibraltar, I just wanted to know where we stand today? Are you guys happy with the level of the portfolio? What should we think about as far as 2013 and beyond?

Doug Yearley

We are happy. Gibraltar has about $120 million invested in it today. It makes $7.2 million in 2012. The deal flow is flowing somewhat as the market recovers. We set up as a distressed market play but just yesterday we looked at three deals. So there's still action.

Bob Toll

Total dollars on the unpaid balance.

Doug Yearley

Oh $150 million to $200 million?

Bob Toll

Right.

Doug Yearley

So the doors are open. We are happy to be in it. I don't think it will grow or double in the next year as we had said a year ago that we would be happy if it doubled. We are not unhappy that it has not but I think as the market has recovered, the deals have become little thinner and fewer and there you have it, but like I said yesterday we had three deals and so the guys are still in action.

Operator

(Operator Instructions) Your next question comes from Ken Zener from Keybanc.

Ken Zener - Keybanc

Marty, your interest expense which is 4.6% in ‘12 fell 70 bps from 5.3 in ‘11. Can we look forward to another 70 bps based on the kind of turnover rates you're looking for in your communities?

Marty Connor

Well, Ken, I don't think we're going to get into the specifics of that nature but it should get a little better next year.

Ken Zener - Keybanc

Okay. The range of communities is the high low basically, is it based on the openings or the potential to close out communities quicker that’s [leading] to the range?

Doug Yearley

Combination.

Ken Zener - Keybanc

And specifically as relates to Hoboken, can I think you know, you guys had some properties there. Had that obviously, city was very much impacted by Sandy. Can you talk about the ability of your homes to actually get certificate of occupancy given the distress that happened in the community? Thank you.

Doug Yearley

No problem at all. We only have one building under construction at the moment in Hoboken and we had to pump out our basement and we're back in action two days later.

Bob Toll

We took to this weekend agreements [until] this weekend deposits. Pretty good business.

Operator

Our next question comes from Joel Locker from FBN Securities.

Joel Locker - FBN Securities

Just I was curious on your backlog conversion rate. I guess back in ‘03, ‘02 kind of before things that hided your around 31%, 32% in the first three quarters and then bump out to 36%, 37% and you know, obviously the revenues were stronger than most expected and do you think that backlog conversion will trend back to say those ‘02, ‘03 levels, in 2013 or in 2014?

Marty Connor

I think as we look to next year compared to more recent years. We really don't have other than the terrain, it highlights building delivering which has (inaudible) and see the convert backlog on a more rapid basis in the [farm fields]. So I think we will move down on our backlog conversion from the more recent history, but I don't know that we get down to the low 30%.

Joel Locker - FBN Securities

And just a follow-up question on communities, how many did you open and close in the fourth quarter?

Bob Toll

In the fourth quarter, the answer may (inaudible).

Marty Connor

In Q4 2012, we opened 16 and we closed 18.

Operator

Your next question comes from David Goldberg from UBS.

David Goldberg - UBS

My first question, Doug you know in the opening remarks, you talked about traffic and the fact that traffic wasn't looking good but the quality of traffic was very, very strong. And I guess if you could give me just an idea kind of as you think about the macroeconomic backdrop, think about some other concerns about higher taxes maybe Mortgage Interest Deduction which I think we’ve kind of (inaudible) at this point, is the level of traffic inline with what you would expect at this point of housing recovery given where inventories are at the existing home level and given more rates are?

Doug Yearley

No, I think we are disappointed in the level of traffic, but we are very happy with the quality because we are the highest conversion ratio as I said in our history from visitor to agreement. So those that come we are not looking for [bathroom], we are not looking for the name of the decorator, they are looking to buy a home. Part of that maybe a fundamental change in buying patterns in housing because the internet now provides an opportunity to prescreen your builder, but I think part of it is that the market is still in the early stages of recovery and we are very encouraged that as traffic picks up there's a great opportunity to increase absorption to have some real pricing power. But the answer is at this stage and for the level of our sales, we are disappointed in traffic but that's also a good thing because of where we can head from here.

David Goldberg - UBS

Is it fair to summarize that you think its confidence issue among your buyers at this point.

Marty Connor

I think that has a lot to do with it.

David Goldberg - UBS

My follow-up question relates to why the builders and you know we've been reaching out a lot, we've been hearing more about private builders getting financing, its still personal guarantees, its still 55% LTVs now but we are hearing more about financing on the land side kind of across ADC financing lately. Are you guys finding that there's been some resurgence of private builders with the kind of pick up in the broader housing market that you have seen some local banks to be giving out their lending to private again.

Douglas Yearley

No. And the best way for us to judge that is on land deals. We are not competing with the small builder that went away for a few years and is now back. It has not happened.

Marty Connor

I think what that shows most poignantly is not on the $100 million, 400 lot offering but we are still picking up 25 and 30 lot opportunities in New England and the Mid-Atlantic states and we are the private builder to be stacked again with money and opportunity, I mean ability to go get that kind of thing. We would notice it we are not noticing it. As a matter of fact we are noticing the opposite, where the builders are coming to us, it’s having weathered all the storm and saying you know what cash me out, I see you have the cash and I know you close in the land and use it.

David Goldberg - UBS

Are they asking reasonable prices when they are asking the cash amount?

Douglas Yearley

Sometimes, yeah.

Operator

Your next question comes from Jade Rahmani from KBW.

Jade Rahmani - KBW

We want to just follow-up with you guys about the current mortgage environment, specifically first can you guys further comment on your outlook for jumbo production and have you guys been approached by any banks or even mortgage REITs looking to buy your loans.

Douglas Yearley

Yes, several. Don Salmon, President of TBI Mortgage.

Don Salmon

We have several jumbo conduits in the [hop] right now negotiating agreements. We just finalized agreement with a major public REIT early yesterday. All indications are that jumbo liquidity is improving dramatically and I don't think there's a lot of action in the secondary market yet, but certainly portfolio action and those who want to create a secondary market in jumbo is stronger than I have seen it in at least five years.

And remember Jumbo is about 10% of our mortgage business.

Douglas Yearley

Jumbo [drove] Toll Brothers across the board was 16%, its about 10% of TBI Mortgages, Jumbo TB, our capture rate on Jumbo is a little lower than our capture rate conforming number one because of liquidity and number two because many of the Jumbo buyers have strong private banking relationship with their bankers and they just use them as their source. But overall I do believe that Jumbo liquidity is improving dramatically.

Jade Rahmani - KBW

That's helpful. Do you guys view this as an opportunity to boost earnings at TBI mortgage?

Don Salmon

TBI Mortgage is primarily a service operation to Toll. Although we don’t like to lose money, we don’t focus solely on earnings TBI. Our jobs is to help Toll Brothers sell houses, number one, and we do that by helping people understand their financing options and making sure that there is liquidity for those folks and making sure they can get to their closing table on time and fabulous service. That’s our goal.

Jade Rahmani - KBW

Secondly, can you guys just quantify the difference in rates between agency conforming Jumbo, through Jumbo rates. We heard it is getting pretty narrow now.

Douglas Yearley

Yeah, without a doubt, conforming today, these are all zero point and no origination fee quotes by the way. Conforming today in most markets around three and a quarter. Agency Jumbo is around 3.5. Jumbo today is 3.78. But as I said earlier, we fully expect that to come in to may be deep or just slightly north of the agency Jumbo around, 3.5 to 3.58 in the not too distant future.

Jade Rahmani - KBW

Okay, and then lastly, just a quick clarification. Does all of TBI Mortgage flow through other income and can you guys quantity your current margins?

Marty Connor

It does flow through other income. The contribution on a net income basis, direct (inaudible) TBI Mortgage is nominal but it certainly contributes to making sure our buyers show up at the settlement table with money to close on our (inaudible).

Operator

The next question comes from Michael Rehaut from JPMorgan.

Michael Rehaut - JPMorgan

First question on the gross margins; you’ve had, obviously great improvement this year and you pointed primarily to volume as being the main driver and a little bit of price. I know you really haven't given guidance going into 2013, but you maybe at least directionally. Can you give us a sense of if you expect the same order of magnitude of improvement in ‘13, given your strong backlog and the fact that the improvement this year was largely volume driven or are there other factors in terms of either mix changing that might alter that type of magnitude of improvement again at you got about a 150 bps if you exclude last year with the small benefit, so just any kind of thoughts directionally around the margins?

Marty Connor

Yeah, I think directionally I would look to the margins to be relatively consistent with the full year margins for 2012, but our second quarter will be better than any of the other quarters because we currently anticipate deliveries of the high margin terrain building to be concentrated in that quarter, and certainly not start any earlier in that quarter.

Michael Rehaut - JPMorgan

Great, that's very helpful, I appreciate that Marty. And then on the community count, obviously a pretty wide range relative to where you are this quarter. Understanding there is lot of variability well there, but looking at first half versus second half obviously lot of people try and open up new stuff in the spring. Would you expect there to be a greater waiting in one half for the other or is this really, maybe you could have a higher community count in the first half and hold down to that plus or minus, if depending on close outs. Is that the right way to think about it or would it be more back half weighted?

Marty Connor

Okay, so we've spent most of our time thinking about what the next 90 days will look like. So if, what I can tell you is that we expect to open 11 communities through our first quarter of ’13 and then because I told you earlier we are going to be 77, so 66 would get open through rest of the year. But we have not provided the detail internally here to show how that's going to breakout over the last three quarters of the year.

Doug Yearley

And those are opening. That does not take into account sell outs.

Michael Rehaut - JPMorgan

Right. Just lastly if I could sneak one in, on regional basis in terms of order trends, obviously great contribution in the last couple of quarters from the west even excluding the Seattle acquisition, I was wondering if you could kind of go a little more granular in the west in terms of which areas have been driving that and if that's been largely community count driven or all sales pace you know which regions has that flowed into that west region and also the south?

Doug Yearley

It’s primarily California North and believe it or not Las Vegas and Arizona is coming back.

Operator

(Operator Instructions) And your next question is from Adam Rudiger from Wells Fargo.

Adam Rudiger - Wells Fargo

I wanted to ask the backlog conversion question again and the reason I'm asking is because I'm having a hard time getting to your closing guidance for next year without really slowing orders or really dropping the backlog conversion. So I was wondering if you could maybe answer it from the perspective of what's in the closing guidance for next year, or what are your expectations and what's driving that?

Marty Connor

Well, I think there are two ways to come out with closings for next year and we use both of them. One way is to look at historical backlog conversions as you have. The second way is to get the numbers ground up from our teams in the field and we balance those two computations and that's where we come up with our range of guidance. It’s a combination of what should it be based on history and what should it be based on what the guys in the field think and I think that's how we got to 4,000 is the midpoint over the range of 3,600 to 4,400.

Adam Rudiger - Wells Fargo

And then just wanted to follow-up Marty on your recent comment on somewhat flattish gross margin for next year. It recognizes probably a bit of conservatism built into your comments here but can you talk about what's impacting that and maybe touch on any recent trends in labor and commodity costs?

Marty Connor

No I think on a more global basis I think we expect fewer deliveries, no less revenue out of the New York high rise product in 2013 with the exception of the terrain compared to 2012 where we had two, three, four buildings that were contributing there and then as we look at price increases or cost increases in our construction for 2012, it was up roughly $4,500 a house. And while we try to control those costs for 2013, I think directionally based on what we are feeling in the market, it's going to be tough to control those costs.

Bob Toll

You mentioned earlier that’s obviously timber construction, wood and concrete.

Marty Connor

Yes.

Bob Toll

So that’s not a lot we can do with that.

Marty Connor

And labor actually went down over the year but we don’t think in ’13 that can happen again.

Bob Toll

Definitely.

Operator

Your next question comes from the line of Alan Ratner from Zelman & Associates.

Alan Ratner - Zelman & Associates

First question is on (inaudible) and I just wanted to confirm a couple of numbers here. So, I think that you net building is 22 units and back in the first quarter of this year, you indicated there was an average price of about $4 million per unit. I just want to make sure those numbers are still correct?

Doug Yearley

Yeah.

Alan Ratner - Zelman & Associates

Okay, and as far as the timing goes then, so 2Q is when they might start delivering but sounds like that might bleed into the back half of the year as well. So to just kind of get a point of comparison, what percentage of your revenue or what dollar amount of revenue this quarter in 4Q was driven from New York City high rise?

Marty Connor

So city living deliveries for Q4 ’12 were 8.5% in units, 9.5% in dollars.

Alan Ratner - Zelman & Associates

Okay, so even with terrain being roughly $100 million of revenue next year, you still expect the contribution for New York City to be down on a full-year basis?

Bob Toll

Yes.

Alan Ratner - Zelman & Associates

Okay, alright.

Bob Toll

We had nearly $200 million of revenue in New York in ‘12.

Marty Connor

We had $275 million.

Bob Toll

$275 million.

Alan Ratner - Zelman & Associates

Got it.

Bob Toll

New York and New Jersey.

Marty Connor

All the citywide.

Bob Toll

Right. So it included some Philadelphia product.

Alan Ratner - Zelman & Associates

And so there is also some (inaudible) during this year?

Bob Toll

It includes some Hoboken as well.

Alan Ratner - Zelman & Associates

Okay, and the second question just on the SG&A, so if I add back the [$8 million] reversal, it looks like this quarter’s core number would have been closed to $82, $83 which is the higher than where you had been running, so just thinking about 2013 is that kind of a good starting point to think about for 2013, obviously adjusting for any changes in the underlying contributors there?

Marty Connor

I think it is a pretty good number. I think that will build a little bit over time because we traditionally have more volume and those more (inaudible) in Q3 and Q4, but that's a good average.

Operator

Your next question is from line of Will Randow from Citi.

Will Randow - Citi

Just a question on land development as well as land spend, can you give us kind of expense of which you are thinking, we go directionally or quantified for land development cost in 2013 as well as land spend?

Doug Yearley

Well, we spent the $92 million of land in fourth quarter and $600 million in fiscal ’12. We don't project what we will spend in ’13 except to say its repeat when we said which is the deal flow lately has been terrific.

Will Randow - Citi

Have you guys in ramping up significantly on development stands as opposed to acquisition?

Doug Yearley

We have 77 openings in 2013 and as you know we tend to do a lot of our land developments, so yes, there is a tremendous amount of land development taking place during this coming year.

Will Randow - Citi

And just into follow-up in terms of (inaudible) where do you stand today and what do you think about goes over the next year? Thank you and great quarter by the way.

Doug Yearley

We have 83 mothballed communities. We project to bring 11 back in ’13. A lot count, Mike do you have a lot count on that?

Marty Connor

Yeah, 9000 lots.

Douglas Yearley

9000 lots.

Operator

Your next question is from Stephen Kim from Barclays.

Unidentified Analyst

It’s actually John filling in for Stephen today. I just have a few questions. So around City Living just wanted to get an update on your ability to extend that to cities outside of the Manhattan and of Manhattan Brooklyn and then Hoboken. And then as far as the mix between the second and third quarters for the terrain, basically what percentage should we expect to go in 2Q versus 3Q because it’s obviously going to be pretty distortive to the numbers.

Douglas Yearley

I will take the first half Marty and then you can jump in. It’s a goal of ours to expand City Living beyond metro New York and Philadelphia. We have a few opportunities in Washington DC that we are excited about. We put a land acquisition manager in place in DC to focus exclusively on City Living type opportunities. We are also looking in Boston and we are also looking at some other markets across the country including San Francisco, some ancillaries around LA, maybe Seattle, maybe Vancouver. We will have to see, but we are looking to expand it. I think the first would be the DC. That's the natural next step for us. Marty?

Marty Connor

In terms of the terrain, when we look at our schedules right now, we expect all the currently sold delivery units to deliver in the second quarter. But there are variables associated with that including certificate of occupancy for the building, and when the buyers actually want to move in which we control to a certain extent but not ultimately. So we have one left to sell and that's the penthouse and, we will take any offers that any of you have out there to two wonderful units.

Douglas Yearley

So long as its 20 million.

Marty Connor

Right.

Unidentified Analyst

Then finally just a modeling question, can you give me the dollar value of all construction and progress including the land under the homes.

Marty Connor

Yeah. Really. Construction in progress at 10/31/12 is 2 billion even.

Bob Toll

And the land under it?

Marty Connor

I stumped that.

Douglas Yearley

They just wanted to stump. This is going to be good.

Operator

Your next question is from Steve East from ISI.

Unidentified Analyst

(inaudible) on for Steven. I was wondering if you could give maybe some ordering and price trends on the active adult versus your traditional business and then what percent of your business is active adult presently.

Douglas Yearley

Sure. So if we look at Q4 ’12 contract active adult was 13% of the business and a year ago it was 12.3%.

Marty Connor

In terms of pricing my recollection is we've seen some increase in pricing through to a greater extent in the (inaudible) we have in the general, we don’t show that.

Douglas Yearley

No, our average price has been right around 470,000 over the last 12 months. That's 55 and over. We build whole bunch of empty age targeted (inaudible) that number.

Unidentified Analyst

Okay, has that been any different than the active adult or is it better?

Douglas Yearley

It tends to be higher priced. It's the same demographic.

Marty Connor

The targeted, however, allows for greater volume and therefore great demand because you are not restricting somebody who just shows up and says I am 50 and I want to live here. I am so sorry but you have to be 55. So you have age targeted and we take is as many show up at the door and they are willing to pay.

Unidentified Analyst

On Gibraltar, I know that you lost money this quarter. How should we look at that moving in to 2013?

Marty Connor

We lost about $350,000 to $400,000 and Gibraltar is a lumpy business. We have certain income recognition that comes from accretive yield and earnings from owned real estate. But the bulk of the income we expect from Gibraltar would come gains of dispositions of the notes for the [REO] and that is not easily projectable.

Operator

The next quarter is Susan Berliner from JPMorgan.

Susan Berliner - JPMorgan

Wanted to talk about, I know you provided outlook for next year and I was wondering just what the backdrop of that was from your perspective with regards to kind of employment. What do you expect the unemployment rate to go next year? If you really insist basing the demand on household formation and pent up demand and then also does any potential change in mortgage interest tax deduction or anything else that the government can do factor in to these guidance?

Marty Connor

Susan I think the most important of element aspect of the question is answered by attention to demand, there is hardly anyone who owns a home, lives in a home or is thinking of buying a home. It doesn't understand that home prices have gone up a decent amount in this past year and that demand is coming to the market in a decent amount in this past year. That begets additional of attention and addition of demand.

(Inaudible) I think estimated in this past 12 months the prices were up about 5%, anybody got the real number to (inaudible) put out and closed to that. I am sorry. 3.6, You take a $5000 house, you are up $20,000 or $18,000 not chicken fee. And I think that we are vibrating back to the populist of interested new homes motivates and spurs additional demand, with additional demand you will get additional prices as though they are electronically directionally helping one another, because we are not in the business where you can fire up the oven and make extra loafs of bread, if you think you have got increased demand coming in tomorrow morning to the bakery.

It doesn't work like that, you have got to start in the north east and middle Atlantic states seven years in advance, in order to bring the product to market. So what's going to happen is, what is happened always in the past following recession and that is initial demand begets more demand, begets price increases and gets more demand and so on and so forth and (inaudible) five, six or seven years of that we go back into it until the next recession which is far enough away that we don't have to worry about it right now. It seems to me. So I think that's what you want to concentrate on is the increase in price getting more demand and more demand getting more price increase etcetera.

Susan Berliner - JPMorgan

And my second question was can you just tell me what the percent of your buyers are second home buyers?

Doug Yearley

That's about 4%.

Marty Connor

That's right.

Doug Yearley

And about 2.5% takeout on mortgage.

Operator

Your next question comes from Desi DiPierro from RBC Capital Markets.

Desi DiPierro - RBC Capital Markets

Bob, you all did an excellent job at leveraging SG&A expenses this year. So if we use the midpoint of your deliveries and ASP guidance for 2013, we get around $2.5 billion in revenues. I was looking to see if you could provide some commentary regarding how we should think about SG&A expenses at that level of revenue?

Marty Connor

I think we gave a little bit of guidance on that to somebody’s question earlier where they asked if $82 million was a good quarterly number to use. And we didn't, we said it was a good quarterly number to use.

Operator

And your next question is from Alex Barron from Housing Research Center.

Alex Barrón - Housing Research Center

I wanted to ask you how you guys are thinking about pricing power versus sales pace, in other words are you more concerned with making sure the sales pace stays and continues to improve or are you more concerned with raising prices and I guess related to that you know I was kind of curious about I mean you didn't seem too bullish on the margin increases and so do you basically think that your price increases will just keep up with cost increases?

Bob Toll

We think that the proper way to manage the business is to watch your volumes and be careful not to push price to the point where it inhibits the growth of volume to what the most efficient work in delivery is for a particular community. Some communities are structured to handle 50 year, some are structured to handle 25 year. So you want what you are structured most efficient return is for volume, take it to that volume and then when you get demand that's additional to that volume that's when the price increases start to kick in. Do you understand?

Alex Barrón - Housing Research Center

Okay that's fair. My second question was on the DTA, you mentioned you still have some state level ones, how much is still remaining from those and how long would you estimate it would take you to monetize the DTA you reversed today?

Marty Connor

Well, the DTA we reversed today basically shoulders about a $1 billion of income and so however many periods it takes us to generate a $1 billion of income is how long it will take us to monetize that and by monetizing it, it really turns into a not a check to it IRS. It adjust is cash savings. In terms of the state component that still has a valuation allowance against it, we think those numbers don’t have tremendous ultimate value. If we thought there was near-term value associated with those deferred tax assets, we would have released them.

Operator

Your next question is a follow up from the line of Michael Rehaut from JPMorgan.

Michael Rehaut - JPMorgan

Thanks a lot. I just wanted to go back to your comments around that you had benefits from only slightly better pricing during this year and I think that in general, is it tone that perhaps there is a little bit more, you know, cool, I guess then some other builders which have seen a lot greater degree of pricing in their markets. So I am just trying to dig down in to in to what's the driver of that because obviously at the same time you had better sales pace improvement than most other builders granted that’s from probably a lower base but you know, are there things in your markets that have held either the markets or the areas that you are competing or the product positioning within those markets or the product positioning across demographics that might have resulted in the pricing trends that you have seen being perhaps less robust than a bunch of your peers?

Bob Toll

Being asked to answer the question about the other magicians act when he put the rabbit in the hat, I wasn't there to see rabbit go in, so I don't know how I pulled the rabbit out.

Michael Rehaut - JPMorgan

Bob maybe not on the other magicians but at least against the market broadly. I mean, even on the market broadly I think pricing has perhaps improved a little bit better than the commentary that you have put out there which is only slightly better?

Bob Toll

I am not sure we agree with that. I think look at the markets we are in, look at the limited land in those markets, look at the competitors of ours that have blown up as primarily North East, mid Atlantic. I think we’ve had good pricing power, we commented that about 60% of our communities. We have been imposing price increases. If you read into what we say as being cautionary, I think we are okay with that.

Michael Rehaut - JPMorgan

Sure.

Doug Yearley

But we are pretty confident and we do a lot of market research to make sure we are not giving anything away and certainly never been the reputation of this company. I think we have always driven price as well or better than many others. And I think we are doing that now, we are just as Bob said very focused on backlogs. Every week we look at community and if they had good sales and they have 25 in backlog and the next time sold, will take 11 months to deliver, and they are going to get a nice little price increase, if they have eight sells in the next home sold can be delivered in six or seven months then we may approach it somewhat differently. And that's how we go about running our business and I think we are very comfortable with the price increases we put in place.

Bob Toll

Marty in your monologue you said delivered price per home will be between 595 and 630.

Marty Connor

Yeah.

Bob Toll

Is that the same home or are you taking mix into consideration.

Marty Connor

The mix impact that I don't.

Bob Toll

Well of course mix does, but I'm asking is this for the same kind of unit or is this believing the mix is going to go up.

Marty Connor

It’s believing the mix will go up for things like the terrain, but believing it may go down because we won't have as many in City Living.

Bob Toll

This sounds like Harry Truman’s economist. On the one hand, on the other hand I'm looking for a one handed economist.

Marty Connor

That is all our mix and all our best guess as to what we expect to deliver next year.

Douglas Yearley

And a lot of it is backlog.

Marty Connor

Yeah. So it sinks. So its 595 to 630 if its, it sounds like (inaudible) you have more of the terrain but less of the City Living because we don't have other than that coming in right away. So it sounds like its pretty static and if its static unit mix you are up 35,000 and 600 basically, which to us is a slight increase and maybe in the semantics that we are delivering our impression. We are delivering to you our impression of what our increases will be for ’13 deliveries and we think they will be $35,000 on a $600,000 product. That to us is slight, that maybe to the guy who is used to doing 250 and is not going to do 260 a tremendous amount. So one man’s slight might be another man’s great party.

Alex Barrón - Housing Research Center

No that's fair and maybe I'm reading into it too much. But Doug on the 60% communities that you got price what would you say is the average price increase in percentage terms.

Douglas Yearley

Gregg.

Gregg Ziegler

So we take specific numbers here but they have been, you know modest price increases and every week we are looking at communities and that Bob and Doug were trying to tell you in deciding what kind of pace we are experiencing there and so you know sometimes it might be 3,000, sometimes it might be 5,000 but that's generally the ballpark that we talked about.

Doug Yearley

But when you get a hot job in (inaudible) that's the beauty we think of the business we are in. We can hit homeruns. The other guys can hit singles and doubles perhaps but they can't hit it out of the park. We have a community in Florida that is on the [water]. We've raised the price by $20,000 every home we sell.

Marty Connor

So how about Jersey this weekend. We are up $20,000 from Friday to Sunday at a new opening in Jersey.

Doug Yearley

Right.

Marty Connor

And Northern Cal.

Doug Yearley

So we get the chance to hit it out of the park. We are not at that yet but as we build up volumes per community if we run into a 12-month delivery or an 11-month delivery because we have that many in backlog then we are going to use the good old capitalistic system to decide who gets the next home and that is who will pay the price.

Operator

And your last question in queue is a follow-up from Joel Locker from FBN Securities.

Joel Locker - FBN Securities

(Question Inaudible)

Marty Connor

Joel I think if you could repeat the question. We cut in and out a little bit.

Joel Locker - FBN Securities

Oh, so how many specs did you have at the end of the quarter both finished and in process?

Marty Connor

We don't break it out between finished and in process but our spec count for a traditional single family and town house product was 344 spec. Total specs including the high density, city living brand is 523.

Joel Locker - FBN Securities

344.

Bob Toll

Joel, we call it a spec, that’s where you number has been dropped.

Joel Locker - FBN Securities

Right.

Bob Toll

So that’s not a roof or it's not a deck, it's not drywall, it’s when number hits the ground as far as we're concerned is a spec.

Marty Connor

And Joel, let me make sure we clarify. Those 523 in total and 344 of those were single family multi.

Operator

There are no further questions in the queue at this time, sir.

Doug Yearley

Thank you Patrick, thank you everyone.

Operator

And this does conclude today’s conference call. All lines may disconnect at this time. Thank you.

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