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Toll Brothers Inc (NYSE:TOL)
Q4 2019 Earnings Call
Dec 10, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Toll Brothers Fourth Quarter and Fiscal Year and Conference Call. [Operator Instructions]

I would now like to turn the conference over to Doug Yearley, Chairman and CEO. Please go ahead, sir.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thank you, Rocco. Welcome and thank you for joining us. With me today are Bob Toll, Chairman of Emeritus; Marty Connor, Chief Financial Officer; Rob Parahus, and Jim Boyd, our new Co-Chief Operating Officers overseeing Toll East and Toll West, respectively; Fred Cooper, Senior VP of Finance and Investor Relations; Wendy Marlett, Chief Marketing Officer; and Gregg Ziegler, Senior VP and Treasurer.

Before I begin, I ask you to read the statement on forward-looking information in our earnings 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 email questions to investorrelations@tollbrothers.com.

Fiscal 2019 ended on a strong note, building on a steady improvement in buyer demand throughout the year, our fourth quarter contracts were up 18% in units and 12% in dollars, and our contracts per community were up 10% compared to one year ago. Through the first six weeks of fiscal year 2020's first quarter, we have seen even stronger demand than the order growth in fiscal year 2019's fourth quarter. This improving demand should positively impact gross margins over the course of fiscal 2020.

We reported fourth quarter home sales revenues of $2.3 billion with a 21.9% adjusted gross margin and net income of $202.3 million or $1.41 per share diluted. Our fiscal year-end backlog was $5.26 billion and 6,266 units, which was down 5% in dollars, but up 3% in units from last year. We are positioning ourselves for growth as we expand our luxury brand to new price points, product lines, and geographies. Our land position supports this strategy and we believe provide the platform for continued growth in coming years.

We now operate in 23 states and the District of Columbia. This year we expanded our footprint into four new states and seven new markets. We acquired Sharp Residential to enter metro Atlanta, and Sabal Homes to enter Charleston, Greenville, and Myrtle Beach, South Carolina. Both companies offer a wide range of price points to their customers. We also opened our first communities in Salt Lake City, Utah, and Portland, Oregon, and we have land under contract in Tampa, Florida.

We remain committed to our luxury niche. We will always be America's luxury home builder. We will continue to buy land and build communities at the corner of Main Street and Main Street, and allow our customers to -- empower our buyers to customize their homes through our unique design studio experience. This market is strong and demographics suggest it will grow over the next decade, as millennials mature.

We are also strategically focusing on more affordable luxury communities. One-third of our current communities offer a home with a base price of $500,000 or less. We believe we receive a premium for these homes because of our brand. This will position us for faster growth as we expand our product lines, price points, and geographies.

While the affordable luxury crosses all buyer segments, including move up and active adults, this initiative is driven in large part by a growing number of millennials who are older, more affluent and more discerning when they buy their first home. Think of it as a BMW 3 Series, a great example of affordable luxury. In fact, in fiscal year 2019, over 20% of our closings had one purchaser of 35 years old or under. This strategy builds on our strong brand reputation and complements our focus on capital efficiency as lower-priced faster pace communities tend to turn capital quicker.

Our multifamily group which develops upscale rental apartments and student housing in both suburban and urban locations across the country continues to show impressive growth. Toll Brothers' Apartment Living was named the number 14 largest and number one fastest-growing apartment developer in the country in 2019 by the National Multifamily Housing Council. We have a nationwide pipeline of over 20,000 units in various stages of development or operation, nearly all of which we undertake in joint ventures. Some of these projects will be held long-term and others will be sold upon completion.

Most recently, we entered the purpose-built single-family rental market in partnership with an experienced operator and a major financial institution, which we believe has great potential. As we enter our fiscal year 2020, the economy remains very supportive of housing. October housing starts were at their highest level since July of 2007, while the month's supply of homes on the market remains constrained. Consumer confidence is healthy, household formations are strong and interest rates and unemployment remain low.

With this positive environment as a backdrop, we are encouraged by the start of fiscal 2020. We are projecting 10% community count growth over the course of the year. With this growth, our well-established brand, our great land positions, our broadening geographic footprint, and our increasingly diverse product lines and price points, we believe we are well-positioned as we enter this new decade.

Now, let me turn it over to Marty.

Martin P. Connor -- Chief Financial Officer

Thanks, Doug. Before I address the specifics of this quarter, I 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 our earnings release. I also want to note that our guidance is subject to our normal caveats on forward-looking statements.

Q4 home sales gross margin was 18.8% of home sales revenue. Adjusted home sales gross margin which excludes interest and inventory writedowns was 21.9% of home sales revenue. These numbers are consistent with our guidance at third quarter-end and are reflective of the challenged sales environment a year or so ago, when we sold most of these just delivered homes.

SG&A as a percentage of home sales revenues was 9%. Income from operations was 9.5% of total revenues. Other income, income from unconsolidated entities and land sales gross profit was $48.4 million. Our balance sheet remains strong. We ended fiscal year '19 with $1.3 billion in cash and cash equivalents and had $1.7 billion available under our bank revolving credit facility.

Benefiting from our strong reputation in the capital markets and favorable market conditions, in fiscal year 2019's fourth quarter, we increased our bank revolving credit facility from $1.3 billion to $1.9 billion, and extended the facility's maturity to five years, along with that of our $800 million bank term loan facility. During our fourth quarter, we also raised $400 million of 10-year 3.8% debt in the public capital markets, a portion of which we later used to retire $250 million of more expensive maturing public debt.

As we begin fiscal 2020, we have over $3 billion of liquidity through cash and undrawn bank credit facilities with no public or bank debt maturities in the next 24 months. Our weighted average debt maturity is 5.8 years.

We have increased our focus on capital efficiency in our land acquisition process. By broadening our geographic footprint, price points and product types, we intend to also improve efficiency through quicker inventory turns and lower upfront land cost. We continue to execute on other capital efficiency initiatives as well. In fiscal year '19, we repurchased approximately 6.6 million shares of common stock at an average price of $35.28 for a total purchase price of approximately $233.5 million. In our fourth quarter, we purchased 1.85 million shares at $35.66 per share for approximately $66 million total.

Fiscal year-end 2019 stockholders' equity was $5.07 billion compared to $4.76 billion at fiscal year-end 2018. And our fiscal year 2019 book value per share was $35.99 compared to $32.57 at fiscal year-end 2018. We ended fiscal year 2019 with a net debt to capital ratio of 32.9%.

Looking forward, we are projecting first quarter deliveries of between 1,650 units and 1,850 units, with an average price of between $800,000 and $820,000. The drop in average price from $863,000 a year ago is strategic and reflects changes in the mix as we execute on our geographic and product diversification strategy. It also reflects our increased focus on the affordable luxury segment and a reduction in the number and mix of homes being delivered in California to more lower-priced and attached homes.

We project first quarter adjusted home sales gross margin of approximately 21.25% of home sales revenues. This first quarter gross margin should be the lowest of the fiscal year as most Q1 2020 deliveries were from contracts signed in the first half of fiscal 2019, which was our slowest period. Sales were down 21% in the first half of 2019 compared to 2018, and that challenged selling environment impacts gross margins in Q4 of '19 and Q1 of '20.

As the latter half of 2019 and the beginning of this year have seen a progressive improvement in market conditions, we have been able to increase sales pace and in many cases increased price. And over the same period, building cost increases have slowed. For these reasons, we anticipate that our gross margin will increase modestly quarter-by-quarter as fiscal 2020 progresses.

With the stronger demand particularly over the last quarter and a half, we want to carefully evaluate and understand how it impacts full fiscal 2020 results before providing full-year unit deliveries, revenue and adjusted gross margin guidance. We project first quarter SG&A as a percentage of home sales revenues of approximately 13.5%. This includes approximately $10 million of G&A expense related to stock compensation that is not expected to occur in the subsequent quarters in fiscal 2020.

With our projected 10% growth in community count which involves investment in personnel and in other costs in advance of revenue generation, we would expect SG&A as a percentage of revenues to be modestly higher this fiscal year. Essentially, as we open new communities, we will incur some costs in advance of the revenue, but we believe this investment is appropriate and the resulting home sales revenue will provide SG&A leverage in future years.

First quarter other income, income from unconsolidated entities and land sales gross profit is expected to be approximately $15 million. We reiterate our expectation that we will generate $100 million to $150 million of such income annually, and expect the same in fiscal 2020. We expect that the majority of this income will be realized in the last two quarters of the year. We project the first quarter and full-year tax rate of approximately 26.5%, and Q1 fiscal year 2020 weighted average shares outstanding of 142.5 million shares.

Now, let me turn it back to Doug.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thank you, Marty. For the fifth consecutive year, we were named World's Most Admired Homebuilder by Fortune magazine. This honor is a tribute to all of our Toll Brothers colleagues. We thank them for their tremendous hard work.

Now, let's open it up for questions. Rocco, we're ready.

Questions and Answers:

Operator

Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Ivy Zelman of Zelman and Associates. Please go ahead.

Ivy Zelman -- Zelman and Associates -- Analyst

Thank you, Rocco. Good morning, and congrats on a solid quarter, guys in an environment that is definitely looking a lot more positive than where we were a year ago. So it's nice to hear good news. Maybe we could just dig in a little bit of on where we've seen weakness and have started to see the reacceleration of demand, a little bit more color around California. Your orders were still down double-digits and is that community count or absorption, a lot of concern, Doug, around Salt, and obviously, you commented that you do have pricing power in communities. So just maybe first question, just drilling in on California growth, please.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Sure. So just to give a bit of an update, Southern Cal was pretty flat to last year, Ivy, and it's running at about the Company average for sales. And for the first six weeks, so call it half of this quarter, this -- the quarter that we're now sitting in, we're encouraged that deposit are -- call it low-double-digit in SoCal.

Northern Cal was down year-over-year and that was primarily driven by a number of cancellations that we had that came through in Q4 from a large community outside of San Francisco called Metro Crossing. And those cancellations occurred because of weather that led to construction delays, this is a significant multi-condo townhome community that had construction cycle time of 14 to 20 months down with weather extended even as long as two years. And we had about 250 or more homes in backlog, and because of the weather delays, we lost some of those contracts. Thankfully, many of those were lost earlier and the prices are actually up. But that issue is what led to a bit of a distorted drop in the California numbers because those cans came through pretty much in one quarter as the buildings are now delivering, and they through the numbers, off a bit.

Overall, we're encouraged by what we see in California. It feels a lot better. Our mix is a bit different as we mentioned where the prices down a bit. But I think for sure California fields better than a year ago even six months ago. So I hope that helps with a bit of an understanding of where we are in California.

Ivy Zelman -- Zelman and Associates -- Analyst

Yes.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Other top markets just to help...

Ivy Zelman -- Zelman and Associates -- Analyst

Okay, go ahead.

Douglas C. Yearley -- Chairman and Chief Executive Officer

...more recently, I'd say, Boise is doing really well in Northern Virginia, Denver, Orlando, New Jersey, Massachusetts, New York City Living feels better, Las Vegas, Reno, those sort of round out, -- I'm not sure I gave you 10 but I gave you about 10, so they will be on top of the rest.

Ivy Zelman -- Zelman and Associates -- Analyst

Well, thank you for the detail. And just have my follow-up and let others drill in on California [Indecipherable] more detail of that was really helpful. I got what I needed.

You've guided for 10% community count growth over the next year, which is stronger than even we were anticipating. That's just great to see the growth coming. Can you talk about the mix of how that business evolves in terms of that is communities opening in terms of like smaller square footage? I think you've guys done an excellent job of keeping luxury but providing smaller square footage. So just trying to understand like, what should we be thinking about absorption versus actual community count, and how that breaks down by price point a little bit?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Sure. So we expect to open 156, that's a very specific number, new communities this year. That obviously moves up and down with approvals and with new land we acquire. But obviously, that's a huge number. There is many that are selling out, so obviously, that's not the net number. But that's a lot of activity and that also helps explain Marty's commentary on SG&A and how that can get out ahead of revenue coming in.

In terms of locations, the top locations for those 156 new openings are Arizona, which for us is Phoenix, Philadelphia, Denver, Jacksonville, Seattle. Now, there's many others that could hit the list, but I'm just giving you the top five. Price point, it will continue to get wider and wider. We are fully committed that Main Street and Main Street selling luxury first, second move up with the opportunity to truly customize your home. And that is a major part of the Toll Brothers business. However, there is more and more 3 Series BMW affordable luxury focused on the little bit older, more affluent millennial plus some move-ups and frankly some move downs. That aren't going to reach quite as high as the typical Toll House, but it's still chasing affordable luxury.

So I think what you'll see is a modestly higher percentage of lower-priced communities that will have higher sales velocity, because of their lower price and faster turns. With less customization and smaller homes, we can build them more efficiently and faster. And so that will get mixed in, but it is incremental. We've been at this now for a couple of years. It is accelerating, but it is really just supplementing the core business of the traditional luxury move up.

Martin P. Connor -- Chief Financial Officer

Another point to make on our...

Ivy Zelman -- Zelman and Associates -- Analyst

Sounds great, guys.

Martin P. Connor -- Chief Financial Officer

...another point, Ivy, [Speech Overlap]

Ivy Zelman -- Zelman and Associates -- Analyst

I was just going to say, Martin for you.

Martin P. Connor -- Chief Financial Officer

...community count is -- that it's going to happen over the course of the year. I think in other of these calls, we've cited it as back-ended, this is a bit steadier over the course of the year.

Ivy Zelman -- Zelman and Associates -- Analyst

Great. And just making sure I understand -- that sounds awesome. Just with respect to absorption growth, when you're looking at the existing business, are you comfortable saying that you can grow same-store on top of that community count at this time based on what you guys see today?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Based on what we see today, with our commentary on how the first six weeks of Q1 are even better than the sales growth we saw in Q4, yes. But we don't have that crystal ball as to how the balance of the year plays out. But right now, the macroeconomic environment is encouraging, our land positioning is very encouraging, our geographic growth is exciting, our price points and product line diversity is strategic and exciting, so right now we feel very good about the business.

Ivy Zelman -- Zelman and Associates -- Analyst

Awesome. And a special shout to my buddy, Bob, happy holidays. Great to have you on the call.

Robert I. Toll -- Chairman Emeritus of the Board

Thank you, Ivy. Happy holidays to everybody.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thanks, Ivy.

Operator

And our next question today comes from John Lovallo of Bank of America Merrill Lynch. Please go ahead.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys, thank you for taking my questions. The first one is on gross margin, you know, understanding that you did say that it's going to improve throughout the year and you don't want to give a full-year look. But is it unreasonable to assume that as we trend through the year that we could exit the fourth quarter at somewhere closer to that 23.5% or 24%?

Martin P. Connor -- Chief Financial Officer

John, I don't think we're going to get into any particular numbers. But that one feels a bit aggressive.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay, understood. And then just looking at the West and the South, which we know obviously, performances were very good from an order standpoint. Could you just help us understand some of the drivers there, maybe some of the key markets that help support that growth?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Sure. So on the South, were -- sales were up 49%, that was primarily driven by Orlando, Jacksonville, Raleigh, and of course, the acquisitions of Sharp in Atlanta and Sabal in three markets in South Carolina. And in the West, which was up 46% in units, that was driven by Boise and Denver, and then number three would be Phoenix. And remember, we entered Salt Lake City and Portland, which also contributed.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay, that's helpful. If I could squeeze one quick one here. On the land sales, $87 million seems like it came in at a fairly low margin. Could you just give any color around -- on that?

Martin P. Connor -- Chief Financial Officer

Yes. I think you'll see that in our income statement in the future. It really relates to finding joint venture partners for our apartments. So we will often by the apartment land, a few months before we find a partner, and the accounting rules are that we reflect that as land sales revenue and land sales cost when we sell it. Sometimes we sell it for a gain, but oftentimes we'll sell it at our cost into the joint venture. And that's what happened in that quarter.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you, guys.

Douglas C. Yearley -- Chairman and Chief Executive Officer

You're welcome.

Operator

And our next question today comes from Mike Dahl of RBC Capital Markets. Please go ahead.

Mike Dahl -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my questions and for the helpful information so far. Marty, just a quick clarification on the community count growth comment, you said it will be a bit steadier. Is that in terms of the year-on-year growth rate steady each quarter around the 10% or a steady sequential build in the number of communities throughout the course of the year?

Martin P. Connor -- Chief Financial Officer

The 10% will have evenly over the course of the year.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay, thanks for that. And the second question just on Metro Crossing. I guess, now that the project is starting to deliver on some of these buildings, I guess, a little surprised to see cancellations come through understanding that there's been significant delays, but it's still supply constrained market and that's a pretty prime location. So pricings, I would imagine up over the course of the life of the community so far, as you've been selling. What have you heard as far as the rationale for the cancellations at this stage in the game? And then are you finding success maybe in these first six weeks of the first quarter at reselling some of the canceled units? And any additional color you could provide there would be great.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Sure. So Metro Crossing is in Fremont. It's right next to the Tesla plant. It's at a new BART station. It is a spectacular location. And we are building 800 plus or minus condos and townhomes in what feels like a village with multiple product lines within that high-density community. And when we opened for sale, we were incredibly hot and we quoted 18-month delivery, and because of significant weather delays that occurred in Northern Cal that I think we're all familiar with, from last year, those buildings took 24 months to deliver. We lost six months.

There were a number of buyers where their lifestyle change, where they needed to move, where they wanted to move within the time frame that we quoted and they asked to get out. It is a small percentage of the 250 plus in backlog that we had, [Phonetic] right around 10%. And we have backfilled many of those with new sales, in some cases at higher prices because of the community has seen significant price increases over those 24 months. So that's the extent of it. And thankfully, that market is still very strong, we are now delivering and prices are up.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay, that's helpful. And just seems like then the distortion is really just because it's low volume selling period and 25 or so cancellations, actually makes a difference. Thanks.

Martin P. Connor -- Chief Financial Officer

You're welcome.

Operator

And our next question today comes from Matthew Bouley of Barclays. Please go ahead.

Christina Chiu -- Barclays -- Analyst

Hi. This is actually, Christina Chiu on for Matt, today. My first question is regarding the first quarter gross margin guidance and commentary that 1Q margins would be the bottom for the year. Is this just attributed to a timing of deliveries from the first half, or what's giving you confidence in margin improvement?

Martin P. Connor -- Chief Financial Officer

Sure. It generally takes us nine to 12 months to build a home. So the deliveries in the quarter we just had and the quarter that we're in are associated with sales that happened approximately a year ago, and that was the most challenged sales environment that we have seen in quite a while, and that results in a little lower price, maybe a little bit more incentive and thus lower margins.

Christina Chiu -- Barclays -- Analyst

Got it. And then...

Martin P. Connor -- Chief Financial Officer

As the world has gotten better over the balance of 2019 and here into the first six weeks of 2020, we don't face those same market challenges and it gives us optimism on gross margin.

Christina Chiu -- Barclays -- Analyst

Got it. And then on the California margin differential versus the remainder of your home building business, how does the differential this quarter given the mix down in California that you mentioned earlier compared to what you've previously seen?

Martin P. Connor -- Chief Financial Officer

I think the California marketplace a year ago was hit a bit harder than many of the others and so the margin there is down a couple of 100 points compared to where it has been in the past. But it is still higher than Company average, and as we outlined on the first question, we are encouraged by California.

Christina Chiu -- Barclays -- Analyst

Got it. Thank you.

Operator

And our next question today comes from Susan Maklari of Goldman Sachs. Please go ahead.

Susan Maklari -- Goldman Sachs -- Analyst

Thank you. Good morning, everyone.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Good morning.

Martin P. Connor -- Chief Financial Officer

Good morning, Susan.

Susan Maklari -- Goldman Sachs -- Analyst

My first question is just around the land strategy. Can you talk to any changes that we should expect in there, especially as you do pursue this kind of shift to a wider ASP and a wider product range? Is there anything in terms of maybe optioning more lots or pursuing other means of kind of land acquisition that we should be aware of?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Sure, Susan. So we -- as we talked about in our opening comments, we're very focused on capital efficiency. And with that comes, how you structure a land buy, trying to get optioned land over owned land with a land seller where you can have a purchase money mortgage and pay for land over time. On occasion, we've gone to third parties to land bank land to increase the capital efficiency, and you will continue to see more and more of that from us.

When we buy the expensive land at the corner of Main and Main, it is more difficult at times to do that. When we buy land for lower-priced luxury communities, affordable luxury that may be in master plan communities, for example, where there are developers that will feed you finished lots on an as-needed basis, there is more opportunity to do that. Those lower priced affordable luxury homes will also turn faster, we should have more sales because of the price point and of course that returns capital quicker, and that also leads to more capital efficiency.

So over time, you will see us with more diversity of land at more different price points which generally means more lower price points. And those deal structured with more options and less owned. In the fourth quarter 32% of the lots that we put under option at a base price -- proposed base price of homes under $500,000. So I think that is fairly consistent with our strategy. That number has been like that for several quarters now. And I just think it shows as a supplement to our traditional Main and Main strategy, more and more affordable luxury that will be more capital efficient.

Martin P. Connor -- Chief Financial Officer

And that's a base price...

Douglas C. Yearley -- Chairman and Chief Executive Officer

Yes.

Martin P. Connor -- Chief Financial Officer

...of $500,000, doesn't include options or lot premium, etc.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Correct.

Susan Maklari -- Goldman Sachs -- Analyst

Okay, great. That's very helpful. And then just as a follow-up. Can you talk a little bit to what you've seen on the cost side of things in terms of labor and materials? It seems like lumber prices have come up a bit lately. How are you thinking about that heading into next year?

Douglas C. Yearley -- Chairman and Chief Executive Officer

We're encouraged in that cost in the fourth quarter for both labor and materials were flat and tariffs have not had an adverse impact.

Susan Maklari -- Goldman Sachs -- Analyst

Okay. Thank you.

Douglas C. Yearley -- Chairman and Chief Executive Officer

You're welcome.

Operator

And our next question today comes from Truman Patterson, Wells Fargo. Please go ahead.

Paul Przybylski -- Wells Fargo -- Analyst

Yes. Actually, it's Paul Przybylski. First, I was wondering if you could give us any color on the active adult demand in the quarter and if the future proceedings were weighing on that buyer's sentiment?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Active adult in Q4 was steady. It's a very important part of our business and it's doing very well and it's expanding. As we've talked about, we're moving it into many new markets. We have a number of very exciting active adult communities coming one of which is in LA County, and another very large one is in Phoenix. And no, I have not heard that the impeachment proceedings are weighing on that buyer. That's nothing that has gotten to me from anyone in the field. And the sales results would not reflect any added concern from that demographic.

Martin P. Connor -- Chief Financial Officer

For any buyer segment...

Douglas C. Yearley -- Chairman and Chief Executive Officer

Correct.

Martin P. Connor -- Chief Financial Officer

...we haven't heard the impeachment proceedings. And I feel Paul just raised it.

Douglas C. Yearley -- Chairman and Chief Executive Officer

And if you look at the results, we've been talking about for the last four and a half months as those proceedings have been ongoing, they don't appear to have any adverse impact whatsoever.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. As you look to improving your inventory returns to -- your inventory turns to improve your returns, is there anything you can do on the vertical capital side and increase the efficiency there to also aide that effort?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Paul, we're looking at that all the time. As you know, we have five-panel trust plants that very efficiently help us build houses in the Northeast, Mid-Atlantic, and Midwest. There is no new technology or extraordinary innovation that we have yet found in the industry. We're very involved in tracking all of that and even investing in some of that innovation that's coming to homebuilding. But for us, it's to continue to refine our architecture and make it as efficient as possible to have a very robust purchasing group that works very hard at driving prices down by having Oregon on the job sites, where one contract to show up, the house is ready, they can get anything get out and make their money, and of course, taking advantage of the balance sheet to make sure we pay religiously every other Friday. And we will continue to build on those disciplines and hopefully drive cost down.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Thank you. And one real quick one. Is there any purchase accounting in the 1Q gross margin guide?

Martin P. Connor -- Chief Financial Officer

Very modest, Paul.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Thank you.

Douglas C. Yearley -- Chairman and Chief Executive Officer

You're welcome. Thank you.

Operator

And our next question today comes from Jade Rahmani of KBW. Please go ahead.

Jade Rahmani -- KBW -- Analyst

Thanks very much. I think in your opening remarks, you commented that City Living or perhaps it was in response to a question that City Living was seeing an uptick. I was wondering if you could comment on how you see things in the New York City condo market? Some of the brokers have indicated sales seem to have picked up in November.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Yes. So we're active in Hoboken, Jersey City, and Manhattan. We're under beginning construction in Philadelphia for an exciting high rise. We have a small, mid-rise building in LA, and we're about to begin a new high-rise in downtown, Seattle. So right now, the revenue is coming out of New York and the Gold Coast of New Jersey. And as I remind you were not in the super-luxury towers. We are focusing on plus or minus $2,000 per square foot in Manhattan, and $1,000 per square foot on the Jersey side. That is relatively affordable in the New York City market. And we like that niche and we've done pretty well. As an example, we have a building at 77 Charlton, which is in, we call it West Soho. And that building at about $2,000 a foot took 20 sales in the fourth quarter. And in the Hoboken, Jersey City side, we continue to sell well at $1,000 a foot. We had 14 sales and a building in Jersey City. We had 10 sales in a building in Hoboken during that fourth quarter. So -- New York is not back to where it was four or five years ago, but it's better. And I very much like where we've positioned ourselves at these price points and locations I've described.

Jade Rahmani -- KBW -- Analyst

Thanks very much. Secondly, can you give the percentage of deliveries that came from quick delivery homes and how that may be compared with the year-ago period?

Gregg Ziegler -- Senior Vice President and Treasurer

Sure.

Martin P. Connor -- Chief Financial Officer

Gregg is looking that up for us. Let's say QDs in Q4 of '19 it was approximately 15%, and you asked about a year ago, let's say so Q4 of '18, it was about 13.5%, so not much of a difference. If you look at it that's pretty much in line with our long-term averages as you look at this over time.

Gregg Ziegler -- Senior Vice President and Treasurer

It was if you can get this stuff together.

Jade Rahmani -- KBW -- Analyst

Thanks very much.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next question today comes from Stephen Kim of Evercore ISI. Please go ahead.

Trey Morrish -- Evercore ISI -- Analyst

Hey, guys, this is actually, Trey Morrish on for Steve.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Hi, Trey.

Trey Morrish -- Evercore ISI -- Analyst

So the -- talk about the affordable luxury, clearly, is something that we greatly appreciate moving down the price point being more open and appealing to the more millennial buyer. But how big do you ultimately think this accented part of your business can get? And how do you view the general margin profile on these types of homes relative to the traditional Toll home?

Douglas C. Yearley -- Chairman and Chief Executive Officer

So affordable luxury, absolutely focus is primarily on the millennial and of course, we talked about the 75 million millennials which is the same size as the boomers. But we've also recognized now that we have a bunch of it out there that we have move-up buyers that are just looking for a bit more affordable luxury home. And we have active adult and empty nesters, they want to move down to a bit more affordable home. So when you put that all together, again, driven primarily by the millennial, it -- as I've mentioned, 37% -- I think I said one-third in my prepared comments, but 37% of our communities have an opening price -- that's base price that's under $500,000, that's not all starter home and that's -- some of that again is affordable move up and affordable move down. But I think that gives you some indication where we're approaching 40% of our communities have a lease and opening price under $500,000. Now, you had a lot premium and you add some finishes and some structural changes to the home, and certainly, that house can get the $600,000. But we have other communities that are opening at $375,000 as an opening price or $399,000 in places like Phoenix and Houston and Las Vegas and other and Jacksonville and Boise. So I think it's probably fair to consider that number 35%, 40% as accurate.

But understand, we're not defining affordable luxury as a segment. Our segments are move up, move down. First time in our case, it will be more luxury first time. So we're not going to be delivering sort of an affordable luxury segment to you. But it's important that you all -- and I can tell you all get it that we are more and more focused on having a greater diversity of locations, price points, and product lines.

Trey Morrish -- Evercore ISI -- Analyst

Okay. And -- go ahead.

James W. Boyd -- Regional President

This comes to us from rather dependent upon what vantage point, you look at the result of the price. Three, four or five years ago, we did a lot of luxury stuff. It took our average price way up.

Douglas C. Yearley -- Chairman and Chief Executive Officer

California.

James W. Boyd -- Regional President

Yes.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Average price in Cal -- average price in Southern Cal, Jim, $2 million, right? Average price in Northern Cal $1.6 million. [Phonetic]

James W. Boyd -- Regional President

We have one job where the average price was $2.4 million per house.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Right.

James W. Boyd -- Regional President

That was -- that we've gotten to about the same as $800,000 to $900,000 a house.

Douglas C. Yearley -- Chairman and Chief Executive Officer

In [Indecipherable]

James W. Boyd -- Regional President

No, a little less.

Unidentified Speaker

Yes.

James W. Boyd -- Regional President

So you have to step back and look at this from a vantage point, it's [Indecipherable] you've got here just difference in a mix that's occurred. We're rediscovering what Toll -- what made Toll Brothers. This is the Toll Brothers market and what was. Then we got the $2 million and $3 million, the average slightly up. [Phonetic]

Douglas C. Yearley -- Chairman and Chief Executive Officer

Correct.

James W. Boyd -- Regional President

And now we just find it more Toll Brothers product.

Douglas C. Yearley -- Chairman and Chief Executive Officer

And we have this demographic coming, that is very large and are settling down later, buying their first home later and therefore are more affluent and discerning. And just as their first car, I'll give Audi a plug can be the A4, their first home can be Toll.

Trey Morrish -- Evercore ISI -- Analyst

Got it. The margin on these homes, I would imagine that probably a little bit lower given that their smaller bit smaller footprint, but returns will be faster. So the return focus that you guys have been talking about for a few quarters, is probably in line to a little bit better than the traditional product. Is that a fair way to think about it?

Douglas C. Yearley -- Chairman and Chief Executive Officer

I think that's very fair. We think the gross margin will be a little bit less, and the ROE will be higher.

Trey Morrish -- Evercore ISI -- Analyst

Okay. And then lastly, you talked about how you expect JV and other income this year to be in that $100 million to $150 million range. What are the things happening in any given year that can end you up on the low-end versus the high-end of that?

Martin P. Connor -- Chief Financial Officer

Well, as you know in that line item is $50 million to $60 million of kind of routine other income from our security business, from our title business, from our mortgage business, from our interest income on our cash balance and various other components. The balance is apartment sales, some commercial pieces at ground sales, the retail sales under some of our buildings in Manhattan. The golf business we sold, the -- a sale of an accumulated pile of customers in the security business, various pockets that we can pull some income from.

I think as we move forward, part of the strategy in our apartment business is to generate more and more of that JV income from disposition of apartment buildings. And we're enthusiastically looking at 2020 as a sizable year for our apartment starts and JV formations. And then you all have gains on land sales that can occur either through those JV formations or through some of our master plan communities where we sell lots to other builders.

Trey Morrish -- Evercore ISI -- Analyst

Okay. Thank you very much, guys, appreciate it.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thank you. You're very welcome.

Operator

And our next question comes from Jack Micenko of SIG. Please go ahead.

Jack Micenko -- Susquehanna International Group -- Analyst

Hi. Good morning. Marty, I wanted to touch on the 2020. You guys have the cycle time nine to 12 months, you talked about it in the opening comments, what you sold last year, you delivered this fourth quarter. So it seems like you've got a lot of 2020 visibility. The reticence around lack of a full year I guess would be -- I mean are we thinking more quick delivery homes as you shift the product set or is cycle time at Toll going to compress as the product changes as there more maybe attached product, help us sort of understand the gap between your visibility historically and why 2020 is a little different from -- as we think about deliveries and margin and mixing the business.

Martin P. Connor -- Chief Financial Officer

I think you touched on a couple of other points there, how much quick delivery, how compressed might cycle times get as we move to some of these affordable luxury price points. It also factors in the pretty wide range we have in our pricing. We're selling homes between $300,000 and $3 million. And a few less at the $3 million range can really impact not only margin but expected revenue. So we're going to carefully study this particularly in light of the pretty rapid expansion in sales, we saw in the fourth quarter and we hit at in the -- six weeks into the first quarter, and how those -- that increase in business is going to be able to be delivered, and whether that's going to happen in the traditional nine to 12 months period or in a six to nine-month period instead or even if this rapid growth comes up continues what it might do to the labor availability.

Jack Micenko -- Susquehanna International Group -- Analyst

Got it. That's helpful.

Douglas C. Yearley -- Chairman and Chief Executive Officer

There are still a number of communities that can deliver homes that sell in the traditional spring selling season, right, of late January to mid-April is when this industry sells most homes. And we have communities that can sell at least in the early part of that spring selling season and still deliver by October. So with -- as Marty said, the pretty significant improvement in orders over the last four and a half months, and as we're about to approach that spring season, I think it's prudent for us just to take a little more time to understand the full year.

Jack Micenko -- Susquehanna International Group -- Analyst

All right. Thanks for that. Yes.

Martin P. Connor -- Chief Financial Officer

Jack, in the second quarter for example of '19, our average delivered price was $895,000. Nine months later here, we're projecting it at $810,000. That gives you some of view on how rapidly things can change for us.

Douglas C. Yearley -- Chairman and Chief Executive Officer

But that's a mix.

Martin P. Connor -- Chief Financial Officer

Yes.

Douglas C. Yearley -- Chairman and Chief Executive Officer

That is not...

Martin P. Connor -- Chief Financial Officer

That's all mix.

Douglas C. Yearley -- Chairman and Chief Executive Officer

...that's not the price of the same-store. That's just mix.

Martin P. Connor -- Chief Financial Officer

Right.

Jack Micenko -- Susquehanna International Group -- Analyst

Sure. Okay. And then you had an active quarter, yes, on the debt side. I think on the reported margin, I think you were what 2.6% of interest. Is that a tailwind some of the things you've done this quarter on the debt side? Is that a tailwind to reported gross margin in 2020 versus 2019?

Martin P. Connor -- Chief Financial Officer

I don't think it happens as rapidly as a year. We capitalized interest into our inventory and it could take 18 to 36 months before the benefit flows through the income statement.

Jack Micenko -- Susquehanna International Group -- Analyst

But net benefit not punitive?

Martin P. Connor -- Chief Financial Officer

Not punitive, correct.

Jack Micenko -- Susquehanna International Group -- Analyst

All right. Great. Thanks, guys.

Douglas C. Yearley -- Chairman and Chief Executive Officer

You're welcome. Thank you.

Operator

And our next question today comes from Michael Rehaut of J.P. Morgan Securities. Please go ahead.

Elad Hillman -- J.P. Morgan -- Analyst

Hi. This is Elad on for Mike. First, I just -- I was wondering if you could share your order contracts growth by month for 4Q. And any more color on what you've seen so far in the first six weeks of 1Q. In particular, any regions where you're seeing particular strength or weakness so far in 1Q or any changes in 4Q besides just overall being stronger, anything more in particular? Thanks.

Douglas C. Yearley -- Chairman and Chief Executive Officer

So every month of the fourth quarter was better than the prior year's and month, and that trend continued even more so in November and the first half of December.

Elad Hillman -- J.P. Morgan -- Analyst

Yes.

Douglas C. Yearley -- Chairman and Chief Executive Officer

And then in terms of the first quarter, the areas where we've been hottest without getting into specifics, since we haven't giving you specifics on these six weeks, except the general commentary would be Austin, Jacksonville, Northern Virginia, Southwestern Florida, Phoenix, Orlando, Salt Lake City, Denver. Boise.

Martin P. Connor -- Chief Financial Officer

Very consistent with the fourth quarter.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Those are all my list and they're fairly -- that's right. I think New Jersey was on the fourth quarter and maybe something else -- we have Massachusetts maybe, but yes, it's fairly consistent.

Elad Hillman -- J.P. Morgan -- Analyst

Great. Thank you. My second question just on incentive levels. So overall, this has been improving throughout the year and I was wondering where incentive levels are in the market now and in particular if you could share your incentive percentage this quarter compared to last year in 4Q '18, and also anything to call out incentive trends in the market or anything special by region? Thanks.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Incentives are flat. They have been flat for some time. There is no specific market trend worth noting. We are encouraged with recent sales activity that is giving us some pricing power.

Elad Hillman -- J.P. Morgan -- Analyst

And just to clarify, I mean, flat sequentially, OK?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Flat, that's correct.

Elad Hillman -- J.P. Morgan -- Analyst

Thank you.

Douglas C. Yearley -- Chairman and Chief Executive Officer

You're welcome.

Operator

And our next question today comes from Ken Zener of KeyBanc. Please go ahead.

Kenneth Zener -- KeyBanc -- Analyst

Good morning, everybody.

Martin P. Connor -- Chief Financial Officer

Good morning, Ken.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Hi, Ken.

Kenneth Zener -- KeyBanc -- Analyst

So I hear you about the asset turns and stuff. I just want to start with California where you -- Doug seem to be saying 25 units came out of the Metro Crossing, and that would put California down about 7% year-over-year adjusted for that. Is that correct? I assume Southern California flat, Northern California was still weaker.

Martin P. Connor -- Chief Financial Officer

Maybe -- the improvement maybe is not as dramatic, but yes, somewhere in that ballpark, yes.

Kenneth Zener -- KeyBanc -- Analyst

Okay. So -- and the reason I ask is the margin, and I don't have the fourth quarter by EBIT, but Northern California still represents -- just on California, not Northern, about just under half of your guys segment EBIT. If you guys are moving down in price points broadly, but also in California I assume, how should we think about FY while the first quarter's price as a benchmark for all of next year, I mean, FY '20? And then does the mix of California's EBIT for the year, so just under 50%, I mean is that something that we should think about next year? Is that going to really kind of change? Because canned units and Metro Crossing obviously, you guys have built that place, so you're still going to close on which it seems like that'll be margin accretive. There's a couple of different questions there but I'm going to California is concentrated in FY '20 in your opinion as it was 19% of EBIT, and your ASP -- I mean, is first quarter's ASP really -- what is going to be for FY '20?

Martin P. Connor -- Chief Financial Officer

So, Ken, I think when we look at EBIT from California in 2019, we think it's in the upper 30s and for 2020, I think we would expect it to come down to the lower 30s as a percentage of total. We expect margin around the Company including California to improve through the course of the year, compared to the first quarter.

Kenneth Zener -- KeyBanc -- Analyst

Okay. And then the SG&A, you said for FY '20 it's going to be modestly above FY '19, was that correct, Marty?

Martin P. Connor -- Chief Financial Officer

Yes, it is.

Kenneth Zener -- KeyBanc -- Analyst

Is that's excluding the $10 million you called out in the first quarter?

Martin P. Connor -- Chief Financial Officer

It includes the $10 million I called out.

Kenneth Zener -- KeyBanc -- Analyst

And then what percent I guess, on an annual basis of your SG&A do you describe is fixed versus variable? Thank you.

Martin P. Connor -- Chief Financial Officer

So I think the S [Phonetic] is mostly variable and we would expect that to be around 40% of the total SG&A.

Kenneth Zener -- KeyBanc -- Analyst

Thank you very much, gentlemen.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thank you.

Operator

And then our next question today comes from Jay McCanless of Wedbush Securities. Please go ahead.

Jay McCanless -- Wedbush Securities -- Analyst

Hi. Good morning. Thanks for taking my questions. And the first one I had, could you break out the order growth in 4Q that came from the acquisitions versus your organic growth?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Gregg?

Martin P. Connor -- Chief Financial Officer

Gregg?

Gregg Ziegler -- Senior Vice President and Treasurer

Yes. All right. Paging through a lot of pages, OK. So we have...

Douglas C. Yearley -- Chairman and Chief Executive Officer

A pretty small.

Gregg Ziegler -- Senior Vice President and Treasurer

...that's right. [Indecipherable]

[Indecipherable] we're getting there.

Martin P. Connor -- Chief Financial Officer

Sharp was 44 contracts in the quarter and Sabal was 35 contracts in the quarter.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Sabal was about a half a quarter owned by Toll.

Jay McCanless -- Wedbush Securities -- Analyst

Thank you for that. And then the -- and I'm sorry, I know you all discussed it before, but I didn't hear the answer. In terms of incentives, how did those compare year-over-year for the fourth quarter and then maybe 4Q versus 3Q '19?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Incentives were flat 4Q to 3Q. And year-over-year -- let's see, I -- hold on. Gregg is going to pull that out. It looks like incentive peaked in the second quarter just by a little. They just ticked up ever so little and then they were flat in the third and the fourth quarter of '19.

Gregg Ziegler -- Senior Vice President and Treasurer

Files loading, maybe we should get back to [Indecipherable]

Jay McCanless -- Wedbush Securities -- Analyst

Yes. I'll follow up offline.

Gregg Ziegler -- Senior Vice President and Treasurer

Call us back, Jay. [Phonetic]

Douglas C. Yearley -- Chairman and Chief Executive Officer

Do you have another question while our file loads?

Jay McCanless -- Wedbush Securities -- Analyst

Yes, absolutely. So just maybe asking Jack's question a different way. If you guys are moving to a smaller price point or smaller square footage, at what point does that start to impact the cycle time and when should we expect that to contract a little bit? Or is that not going to happen. It's just the product that's going to be a nine to 12 months cycle time?

Douglas C. Yearley -- Chairman and Chief Executive Officer

No, the smaller more affordable luxury homes will be -- they should cycle faster for the reasons we gave, which is they're smaller and they have less options. It will be incremental over time.

Gregg Ziegler -- Senior Vice President and Treasurer

They don't happen over time, Jay. It's real tough to tell you that six months from now we'll have a better...

Douglas C. Yearley -- Chairman and Chief Executive Officer

Right.

Gregg Ziegler -- Senior Vice President and Treasurer

...and a final mix of product type. It's going to vary. It should just go down.

Jay McCanless -- Wedbush Securities -- Analyst

[Indecipherable]

Douglas C. Yearley -- Chairman and Chief Executive Officer

And the incentives compared to a year ago were basically flat.

Gregg Ziegler -- Senior Vice President and Treasurer

Yes.

Jay McCanless -- Wedbush Securities -- Analyst

Great.

Douglas C. Yearley -- Chairman and Chief Executive Officer

So it's the same answer, Q4 to Q3 and Q4 to prior Q4, it's...

Gregg Ziegler -- Senior Vice President and Treasurer

$1,000. [Phonetic]

Douglas C. Yearley -- Chairman and Chief Executive Officer

...all plus or minus $1,000, right within the same range.

Jay McCanless -- Wedbush Securities -- Analyst

Great. Thanks again.

Douglas C. Yearley -- Chairman and Chief Executive Officer

You're welcome.

Gregg Ziegler -- Senior Vice President and Treasurer

Thank you.

Operator

And ladies and gentlemen, today's final question comes from Mark Weintraub of Seaport Global. Please go ahead.

Mark Weintraub -- Seaport Global -- Analyst

Thank you. I was hoping if you could just give us your feel for, recognizing how complex this question is. If we look at the adjusted gross margin guidance for the coming first quarter and we think of three variables at play; one, timing related to the health of the market, which sounds like that's the biggest factor in as you pointed out, health and market is getting better; but two, you also would have geographical mix shift; and three, we have the shift to the more affordable product, and again recognizing this is complex. But if you were to estimate the impact of those three variables on the delta in expected margin for this year versus last year's first quarter, what percentage might fall in those buckets?

Martin P. Connor -- Chief Financial Officer

I don't think I can give you percentages, but I think the geographic mix is going to skew with less California and then the marketplace is obviously, a positive to margins, and then the mix will have the least -- I'm sorry, the price point mix will have the least impact on things.

Mark Weintraub -- Seaport Global -- Analyst

Right. Well, -- and markets are negative for the first quarter, but then will become a positive going forward, just to clarify?

Douglas C. Yearley -- Chairman and Chief Executive Officer

Correct.

Martin P. Connor -- Chief Financial Officer

Yes, correct.

Douglas C. Yearley -- Chairman and Chief Executive Officer

That's correct.

Jay McCanless -- Wedbush Securities -- Analyst

All right. And then one other quick follow-on, if I could. You also referenced labor availability, one of the variables that makes it trickier to forecast 2020. And I guess, there are two different ways that could play out was -- wanting to understand which one you were focusing on. One is, is it the ability to get all the homes you would want to get built versus the cost of building those homes?

Douglas C. Yearley -- Chairman and Chief Executive Officer

We have the labor to build the homes. And we are encouraged that labor and material costs in the fourth quarter were flat to the third quarter. And we have not been able to say that in some time.

Mark Weintraub -- Seaport Global -- Analyst

Okay. I'll leave it there. Thank you.

Douglas C. Yearley -- Chairman and Chief Executive Officer

Thank you.

Martin P. Connor -- Chief Financial Officer

Thanks, Mark.

Operator

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

Douglas C. Yearley -- Chairman and Chief Executive Officer

Rocco, thank you very much. You did a great job. Thank you, everybody, for your interest and support. And have a wonderful holiday season.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Douglas C. Yearley -- Chairman and Chief Executive Officer

Martin P. Connor -- Chief Financial Officer

Robert I. Toll -- Chairman Emeritus of the Board

Gregg Ziegler -- Senior Vice President and Treasurer

James W. Boyd -- Regional President

Unidentified Speaker

Ivy Zelman -- Zelman and Associates -- Analyst

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Christina Chiu -- Barclays -- Analyst

Susan Maklari -- Goldman Sachs -- Analyst

Paul Przybylski -- Wells Fargo -- Analyst

Jade Rahmani -- KBW -- Analyst

Trey Morrish -- Evercore ISI -- Analyst

Jack Micenko -- Susquehanna International Group -- Analyst

Elad Hillman -- J.P. Morgan -- Analyst

Kenneth Zener -- KeyBanc -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Mark Weintraub -- Seaport Global -- Analyst

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