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Executives

Robert Toll - Chairman and Chief Executive Officer

Joel Rassman – Executive Vice President, Treasurer, Chief Financial Officer, and Director

Fred Cooper - Senior Vice President of Finance and Investor Relations

Joe Sicree – Senior Vice President and Chief Accounting Officer

Kira McCarron - Chief Marketing Officer

Don Salmon - President of TBI Mortgage

Greg Zigler - Executive Vice President of Finance.

Analysts

Nishu Sood - Deutsche Bank Securities

Ray Huang – JP Morgan

David Goldberg – UBS Securities

Alan Ratner - Zelman & Associates

Saul Gerathon - Merrill Lynch

Stephen Kim - Citigroup

Daniel Oppenheim - Banc of America

Timothy Jones - Wasserman & Associates

Rick Dowdle - ARX

Alex Barron - Agency Trading Group

Clifford Allison - UBS

Janice Nyeman - Charles Schwab

Toll Brothers, Inc. (TOL) F4Q07 Update Call November 8, 1969 8:00 PM ET

Operator

Good afternoon. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2007 outlook conference call. (Operator Instructions). I will now turn the conference over to Robert Toll, chairman and CEO. Please go ahead, sir.

Robert Toll

Thanks, Crystal, hello, everybody. Thanks for joining us. With me today are Joel Rassman, Chief Financial Officer, Fred Cooper, Senior Vice President of Finance and Investor Relations, Joe Sicree, Chief Accounting Officer, Kira McCarron, Chief Marketing Officer, Don Salmon, President of TBI Mortgage, and Greg Zigler, EVP of Finance.

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 e-mail questions to rtoll@tollbrothersinc, that's all one word, .com. We'll try to answer as many as possible.

We've just announced preliminary results for our fourth quarter and fiscal year ending October 31, 2007. We will announce final results when we release earnings on December 6th, 2007.

For the fourth quarter, home building revenues were approximately $1.17 billion dollars, declined 36% compared to fourth quarter '06. Backlog of approximately $2.85 billion dollars, declined 36% compared to '06.

Gross signed contracts for '07's fourth quarter of approximately $693.7 million dollars, and 1,073 homes declined 38% and 33% respectively versus fourth quarter '06. We had 417 cancellations in '07's fourth quarter, totaling approximately $328.5 million dollars compared to 585 cancellations, totaling $412.3 million dollars in fourth quarter '06.

The fourth quarter cancellation rate was 38.9% as a percent of current quarter contracts compared to 36.7% in '06's fourth quarter. As a percent of beginning quarter backlog, the cancellation rate was 8.3% compared to 7.3% in fourth quarter '06.

Fiscal year '07 fourth quarter net signed contracts totaled 656 homes, or approximately $365.2 million dollars, a decline of 35% in units and 48% in dollars compared to fiscal year '06's fourth quarter.

The average price per unit of gross contracts signed in the fourth quarter was $646,000, compared to $667,000 in '07's third quarter. This was consistent with our previously discussed expectations, as our product mix in the near term shifted to a higher percentage of multifamily versus single-family communities than in the past.

Multis tend to be lower priced. However, the average price of the 417 cancellations in fourth quarter '07 was a much higher $788,000 per unit. The cancellations were heavily concentrated in high-priced markets and product lines.

The effect of these cancellations, coupled with the company's product mix shift, reduced the average price of net signed contracts in fiscal year '07's fourth quarter to a much lower $557,000 per unit.

For the fiscal year ended October 31, '07, the homebuilding revenues were approximately $4.63 billion dollars, and net signed contracts were approximately $3.01 billion dollars, a decline of 24% in home building revenues, and 33% in contracts compared to fiscal year '06's year end results.

We ended the fourth quarter with nearly $900 million in cash and more than $1.2 billion dollars available under our bank credit facility, which matures in March of 2011. As we continue to manage and reevaluate our land position, we ended this fourth quarter with approximately 59,300 lots owned and optioned, compared to 91,200 lots at our peak in second quarter '06.

We ended the fourth quarter with 315 selling communities, down from a peak of 325 at second quarter end. We expect to be selling from approximately 300 communities by fiscal year end '08.

We continue to believe that excess supply created by cancellations, speculative buyers and overly ambitious builders, as well as customer concerns about selling their existing homes, and a general lack of consumer confidence are the primary impediments to our market's recovery.

An inability to obtain mortgages does not appear to be a major factor for our buyers, although it may affect our buyers' buyers.

We saw some further weakness this quarter compared to the third and second quarters, and some further slowing in October versus September. The base of customer cancellations increased this fourth quarter.

Net contracts were down 35% in units from one year ago. This decline was higher than the mid 20% declines in our second and third quarters, compared to the prior year quarters.

The growth in the rate of cancellations, the decline in new contracts, and the weaknesses we observed in October suggest that we still have tough times ahead, which we believe are reflected in our estimates for fourth quarter impairments.

While we have not yet finalized our impairment analysis, we estimate that pretax write-downs in fiscal year '07's fourth quarter will be between $250 million and $450 million dollars.

We have been in the current down period since September '05, we can't predict how long this down period will last, but the foundation of the housing market, primarily solid demographics, has remained strong. Many of our perspective clients are on the sidelines watching and waiting.

Actually fewer sites are proceeding through the land approval process, which could result in a shortage of buildable lots in our industry when confidence returns and markets reach equilibrium.

Government data indicates that production of new homes has plummeted, which we believe should help expedite the clearing of excess inventory. We also believe that the government data is even short in its reality, in projecting the reality of what production is of new homes today.

Perhaps as the presidential campaign heats up and moves to the front page, negative articles about housing will move off the front page, then hopefully, the positive underpinnings of low interest rates, low unemployment, and a decent economy will raise new home buyer confidence.

Now, Crystal, we'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks, good afternoon, guys.

Robert Toll

Hi.

Nishu Sood - Deutsche Bank

First question, looking at your order pace, 656 orders across 315 communities, obviously that would indicate that a number of your communities, perhaps even your submarkets overall, are going weeks, perhaps even months without seeing a sale.

So my question was, Bob, looking back to the downturn in the early '90’s, how bad was it back then, if you look at it on a kind of similar basis, and what was the, what were the tactics you employed back then to kind of respond to that, that type of demand softness?

Robert Toll

Well, in comparison, we're pretty and I would say we're pretty much worse now, not by a whole lot, but we're worse now than we were in '88, '89, '90, and the tactics that we employed then are the same tactics that we're employing now, which is primarily to offer special incentives on any spec inventory that we have, and with respect to, to-be-built product, to offer some incentive, but not so much as to cut into the value that we evaluate the ground as having.

So that, if by cutting a price on a home by $50,000, if you count everything as being constant other than land, you're dropping the land by $50,000, and you take a look at what that brings you to on a land evaluation, and if you think that that land is not worth that, then you're okay, and if you think the land is worth more than that, then you made a mistake and you raise your prices.

So it’s pretty much the same, same tactics and we do think that this is worse than it was in '88 through '90, first month of '91.

Nishu Sood - Deutsche Bank

So, I know at some stage if the pessimists are right and the economy does weaken a lot more substantially, I mean, you could reasonably see the vast majority of your communities not having any sales for long stretches of time. So what's your threshold for when you began to become much more aggressive in terms of pricing, pricing to kind of prop up your absorptions again?

Robert Toll

As long as you don't need to develop cash flow in that method, in order to protect yourself from covenants in your bank lines, or the ability to feed your overhead, if you haven't cut your overhead sufficiently, then on a theoretical basis, you would have to be more aggressive. But fortunately, for the time being, that's not us.

Joel Rassman

We look at our communities, each community separately.

Robert Toll

This is Joel.

Joel Rassman

That decision is made on a community by community basis, and there are times that we've determined that a community could effectively be closed because it doesn't have incremental value to keep it open versus the overheads, but most times we still think it's positive to market from that community and we continue to do so.

Nishu Sood - Deutsche Bank

Great, one final quick question, if you could, the cancellations you mentioned in the high priced point products were higher.

Joel Rassman

Yes, geographically primarily geographic issue.

Nishu Sood - Deutsche Bank

Which geographies?

Joel Rassman

California primarily. California, Arizona.

Nishu Sood - Deutsche Bank

Okay, thanks.

Robert Toll

You're very welcome. Crystal?

Operator

Your next question is from the line of Michael Rehaut with JPMorgan.

Ray Huang - JPMorgan

Hi, guys. This is actually Ray Huang for Mike. I was wondering if you could give some color on the tower business, it looks like orders are down well below the company average, I'm just wondering about the function of demand or if you guys just sold out of the tower communities?

Robert Toll

Function and demand is pretty strong. Actually there was an anomaly. It took us longer to complete than we should have and it gave some the opportunity because we had exceeded the time period in the agreement of sale to walk.

We're not unhappy with the walking, because we're selling the units in most cases for more money. But when you get some walking and then you get some coming back in, the net effect is evenness, or no progress it might look, I think actually things are a lot better than they look in the tower business because of that factor.

Joel Rassman

Its communities capped on a percentage basis that we break out, not towers, and there were very few of them, there are very few offerings of homes left to sell in those re-buildings, I think.

Ray Huang - JPMorgan

Okay, then if you could just provide your local market commentary. Obviously there's going to be a lot of F-minus' but you could humor us?

Robert Toll

Do you want to finish? Let me find that paper I gathered in here. Okay. Massachusetts, Rhode Island is an F. Connecticut is a B, which is strange, except that most of Connecticut that we build in funnels down into the New York and suburb and New York market.

That's probably the reason. New York suburbs, these are really excerpts. Putnam and Dutches are C-plus. Our city living division in New York City is a B. Our city living in New Jersey, that's Hoboken, New Jersey city, is a B-plus. New Jersey itself is a D, with the exception of the Princeton area, which is a B.

Michigan is an F-minus, while Illinois, Chicago, is just an F. Minnesota is all the way up from an F-minus to an F. Mid-Atlantic states, the Philadelphia suburbs have slipped down to a D. The Pocono’s are an F-minus. Delaware is a B. Maryland Shore its offerings are an F-minus.

Washington, DC, Maryland is a D. Virginia is a D-plus. West Virginia is a D-minus. That's actually better than most of our margins, unfortunately. Raleigh is a D-plus now. And that's a serious slip for Raleigh. And Charlotte has gone all the way down, in our experience, to an F, and that's probably due to the two banks laying off. Hilton Head has gone way down for us to an F-minus.

Atlanta, Georgia right now is an F-minus, but we're really not a good judge. We are cutting roads and we have a trailer. It's tough to get to the trailer. We have nothing to show, so that might account for the F-minus. But it's definitely the market as well.

Florida Central, let's see, Orlando primarily is D-minus. Florida East Coast, F. Florida North, Jacksonville, et cetera, F. Florida Tampa, F-minus, and Florida West, a C. Now that's a significant change recently. We've had 24 deposits in the last four weeks.

I'm not sure that it's not due to more aggressive discounts that we gave on some of the spec homes as the spec homes neared completion. Austin, Texas is a C. Dallas, Texas is a C. And San Antonio, Texas, I'm sorry to say, has gone down to a flunk, F.

West territory, Northern California is a D. Southern California is an F. And that's surprising. Even Orange County, where we have some pretty neat offerings has slipped seriously down. California, Palm Springs, F-minus. That could be seasonal.

We can't tell, except the season should be starting now. Arizona is an F. Vegas has its own special category along with Tampa. It's got an F-minus-minus. Reno is an F. And Colorado was a C-minus. The fact that I differentiate between, I don't think there were any F-pluses.

But the fact that I differentiate between F, F-minus and F-minus-minus, shows you that the drop in the market and to the extent that we've gone to in order for me to give you gradations, I go from miserable to outright purgatory. Thank you.

Ray Huang - JPMorgan

Thank you.

Robert Toll

You're welcome.

Operator

Okay. Your next question is from the line of David Goldberg with UBS.

David Goldberg - UBS

Thanks, good afternoon.

Robert Toll

Hi.

David Goldberg - UBS

I guess my first question is about what you're seeing from your smaller private builder peers, if you're seeing more distress among them, greater capital constraints? And if not, maybe when you would expect to see something like that?

Robert Toll

About now, we're receiving phone calls from the private builders, and we're looking at some of the land, but unfortunately, the private builders have, for the most part, just in time kind of provisioning of land so that the land they have got is land that they bought at '04, '05 prices and that's too high for this market. So I'm afraid we're going to have to wait in order to acquire some of that until we see the blood in the streets, as they say.

David Goldberg - UBS

I guess the follow-up question would be, I mean, you guys obviously have a lot of cash on the balance sheet. Do you just leave it there until you start to see some greater distress, more blood on the streets?

Robert Toll

Have you got another idea? I don't mean that sarcastically or facetiously. I mean seriously. What else?

David Goldberg - UBS

Maybe there are opportunities I don't know. Good question. What are the other opportunities? I guess…

Robert Toll

Well, there are some opportunities that we're looking at.

David Goldberg - UBS

Maybe international expansion, maybe, who knows?

Robert Toll

Yes, we're looking at international expansion, but we're also looking at debt acquisition, playing with those that play in the distress market. But, in term the vast bulk of the cash will be left for the opportunities that unfortunately, we believe we will see before this is over. I don't want to wish for it to continue to be poor that would be silly.

But I think having seen this movie before in '74, in '80, '81 and '82, in '88, '89, '90, '91, we're best advised to sit on our cash and wait for opportunity.

David Goldberg - UBS

And then, if I could sneak one more in, the range in the impairment charges from 250 to 450, can you just give us an idea what's driving the size of that range? I mean what kind of…

Robert Toll

I can, but I would rather let Joel do it.

David Goldberg - UBS

There you go.

Robert Toll

Joel?

Joel Rassman

The process requires a lot of information is coming out of the quarter. The quarter just ended. And we therefore have to run those, that information through. So, we do a top side review first to try to see if we can develop a range for you based on a certain set of assumptions and that's the range that comes out of it. I recognize it's a very large range, but…

Robert Toll

But there it is.

Joel Rassman

Right.

David Goldberg - UBS

Thanks, guys.

Robert Toll

Thank you.

Operator

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

Alan Ratner - Zelman & Associates

Good afternoon, guys.

Robert Toll

Hi Alan.

Alan Ratner - Zelman & Associates

One quick housekeeping question here, do you happen to have the breakout of your completed contract revenues that came from towers in the quarter?

Robert Toll

Anybody have that?

Joel Rassman

Completed contract revenue that came from towers…

Robert Toll

Because they completed, you can skip. He just means contract revenue what we have…

Joel Rassman

We had $70 million of closing. I think the question probably was where it comes from, but remember; we pick up revenues as the building is being built. We actually have $70 million worth of closings with respect to 110 Third Avenue, but only a portion of that gets recognized in this period. The rest got recognized in previous periods as we built the building.

Robert Toll

Because of that percentage of completion method which we're doing…

Alan Ratner - Zelman & Associates

Which you are shifting to completed contract, and I think you had said…

Robert Toll

Yes, we are.

Alan Ratner - Zelman & Associates

We wonder that you were going to start recognizing completed contract revenues on the tower side, so that's what I was asking there.

Robert Toll

Right.

Joel Rassman

And the rest came from Hoboken and then, basically inland Florida.

Alan Ratner - Zelman & Associates

Well, the second question I had was on your comments on the mix shift. I was wondering if you could give any quantification of that just maybe percentage of orders that you're taking on the attached or the multifamily side and maybe just give some examples in the marketplace.

Joel Rassman

In the fourth quarter of last year, which was higher than we expected, we had 59% of our orders on gross basis coming from single families, communities. In the fourth quarter of this year, we had 49% of our orders coming from single-family communities.

Robert Toll

Joel, I'm impressed. That's good.

Alan Ratner - Zelman & Associates

Were there any markets in particular that there was a greater than average shift there?

Joel Rassman

No, generally, I think we went through it in other conference calls, but I don't remember the mix, but it’s all…

Robert Toll

I think there's a greater than average shift in California, but that's got to do with the product available, not with the market necessarily.

Joel Rassman

Yes, none of this is market-driven. It's all opportunistic. Many of these are deals we tied up three or four or five, six years ago and they came through the approval process…

Robert Toll

That's right.

Alan Ratner - Zelman & Associates

Got it, okay. So that's something that you would continue to see over the next two quarters, that 50-50 split or so?

Joel Rassman

We had expected that, we would see the effect on revenues in late 2007, which we are and in 2008, significantly, and I'll update that for the next conference call, if you would like, as to where we think the percentage of closings will be. I can't obviously, don't know what orders will be, but I know that the general trend will be to more somewhat multis than singles.

Alan Ratner - Zelman & Associates

Okay, great. Thanks a lot.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Kenneth Zenger with Merrill Lynch.

Saul Gerathon - Merrill Lynch

Hi, this is Saul Gerathon for Ken.

Robert Toll

Hi.

Saul Gerathon - Merrill Lynch

How are you doing?

Robert Toll

Good.

Saul Gerathon - Merrill Lynch

As your guys product mix…

Robert Toll

Change that to fair.

Saul Gerathon - Merrill Lynch

Excuse me?

Robert Toll

Excuse me, you asked me how I was doing. I said good and I said let me change that to fair.

Saul Gerathon - Merrill Lynch

So, my question is, as your guy’s product mix resembles other builders with more cash and lower priced products. How should we expect this to impact your margins? And if you could just kind of go into what the profit dispersion is between your lower and your higher priced homes?

Robert Toll

First of all, we'll address the comment that we are shifting to appear as other builders. I hope not. It's not our intention to do that. When you have a mix shift, there's still expensive multis, but multis are less than singles generally, except for the towers. I didn't mean to imply by my prior comments that we were shifting the nature of our business, we are certainly not. And with respect to the second part of the question, Joel?

Joel Rassman

When we underwrite individual communities, we basically underwrite them for the same levels of returns and where the difference comes out in a strong economy, which we're currently, housing economies we're currently not in, you get the opportunity to raise prices more in very expensive single-family homes than you would in the more affordable product, and so you have a cap on your profits, but since this is not a strong economy I would answer your question, we get roughly the same margins on all the property.

Robert Toll

Right.

Saul Gerathon - Merrill Lynch

Okay, and then just wondering in your commentary, you highlighted that your buyers are not having difficulties finding mortgages.

Robert Toll

That's correct.

Saul Gerathon - Merrill Lynch

I also noticed that the cancellation rate, it had obviously increased materially, but the bulk of the cancellations happened in high cost regions and product lines and I'm just wondering if you could reconcile this with your earlier commentary.

Robert Toll

I would guess I don't have the stats. Actually I do have the stats, that much of the cancellations comes from the buyers, our buyers' inability to sell their old property, their used home, may even be that they're buyer's buyer, in other words, that they had an agreement for the sale, but their buyer's buyer had to walk because he couldn't sell his home or other related matters.

We see cancellations, large number of cancellations coming out of family job status change or reduced financial position, but we don't see it for mortgages.

Joel Rassman

11% of the cancellation were for mortgage-related, but on our survey from mortgage-related issues.

Robert Toll

We have 17% coming from unfortunately, what appeared to be investors or those who just wanted to walk from the product, they didn't like the value any longer. Translation, they have read one too many Times articles and decided now is not the time to buy a home.

29% are in that changed financial position, job loss, relocation, divorce, medical issues, buyer deceased; Military has impacted us just slightly. 18% come out of existing homes not sold, so there are a number of reasons why we're seeing such high cancellations.

The reason you see them in the higher price product is the higher price guy is likely to have a higher priced older home that he's got to sell and the daisy chain is having trouble.

Saul Gerathon - Merrill Lynch

Okay, and then just one last question on the, specifically on the west segment, the orders I noticed were down a little over 80%. I was just wondering if you could give us what the gross orders were to get an indication of how much that decline was earned by cancellations.

Robert Toll

Go ahead, Joel.

Joel Rassman

173 gross orders and 156 cancellations.

Saul Gerathon - Merrill Lynch

Okay, great. All right, thanks, guys.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Stephen Kim of Citigroup. Stephen Kim?

Stephen Kim - Citigroup

Hey, Bob, can you hear me?

Robert Toll

Yes, I can hear you well, Stephen.

Stephen Kim - Citigroup

Okay, great. Couple questions for you. One, related to Dave's question earlier, regarding how you might use your funds that are accumulating in the balance sheet. Historically, your company has sought to go into new frontiers by sort of paying your dumb tax, doing it the hard way, putting in the sweat equity to learn the businesses and you've done it that way, even when you've entered a new geography or if you've developed your expertise in multifamily and high-rise stuff.

Are there sub-sectors or adjacent markets or opportunities that you have been eyeing over the last few years, where you feel like your funds, at the appropriate time, whether it be a year from now or longer, you might actually look to acquire expertise in an adjacency or should we pretty much assume that whatever you use your cash for eventually will be pretty much along the same lines as we've seen it over the last several years?

Robert Toll

I would say honestly that it's the latter. The only exception is that we looked at some foreign opportunities and we obviously want at the minimum, joint venture with locals as opposed to doing it the way that you described and paying the dumb tax.

We don't want to pay the dumb tax for Slovenia, Romania, China, or India. That dumb tax, I'm afraid, is too high.

Stephen Kim - Citigroup

Right.

Robert Toll

So that's the only exception.

Stephen Kim - Citigroup

Okay, and then moving on from there, obviously right now you have indicated an intention to sort of scale down aggressively in places where it really doesn't make a whole lot of sense to sell right now, whether you ask to see a price really isn't factoring well into your equation and you have the financial flexibility to do that.

I guess I was curious as to whether what you're doing to ensure that you have the operational flexibility to be able to rebound because obviously one would assume them.

Robert Toll

We discuss that every week as we review all the communities, our system is that all 315 or whatever it is are spoken about and discussed with the regional presidents every week.

We review, and with regard to making sure that we have operational capability for a rebound, A, remember this is not the kind of business where the price this isn't the oil barrels. We won't find ourselves going from 97 to 86 and back up to 95. We'll have the time.

And secondly, we're making sure that as an area shrinks in overhead, that is management, take Arizona as an example, you might have 20 operations, ordinarily you would have 20 project managers, you've reduced yourself to five or six project managers, who are overseeing all the operations.

But you make sure that you want to keep five or six so that when the business does return, you've got the infrastructure, the core of management necessary to go and build the product.

But you don't keep the, you don't keep 20 superintendents. You might not even keep 5 superintendents. You don't keep 20 clerks of the work in the trailers. You keep two or three and so on and so forth.

Stephen Kim - Citigroup

I guess.

Robert Toll

What we do keep, is we do keep our best sales people and almost every one of the communities, I think with maybe one or two exceptions out of 300 some odd, we're open seven days a week and we have a sales staff on hand.

Stephen Kim - Citigroup

I guess I wasn't so much thinking about the personnel, although thanks for that. I think that is an important part of it, but I was referring to things other than personnel, things related to, do you have, do you have the ability to move on planned communities or phases that are being mothballed, or …

Robert Toll

That's no trouble at all.

Stephen Kim - Citigroup

Okay. And then lastly I was wondering …

Robert Toll

Remember, as we're mothballing, so is the excavator/road contractor who has got all that iron. He's mothballing his iron. It doesn't take a lot to call that out of the yard and to start to push dirt and lay asphalt and get started again.

You might have some difficulty in starting up operations with carpentry, except that we're paneled and trussed, so we've got a mechanical manufacturing capability, which is easily geared up, plumbers.

If the market loses too many plumbers, then it's going to be slow to come back until you train people for that operation, but I don't see that yet. We haven't been down long enough for that kind of shift to take place.

Stephen Kim - Citigroup

Got it, okay. And then lastly, I was wondering if you could comment or give us a feeling for when you start coming back into the market and I know that it's obviously not necessarily going to be the next few months or maybe, who knows, even the next year.

But at some point you're obviously going to be looking to the act on opportunities as you see them. Do you have an idea right now for any differences, material differences in the way you approach your negotiations with some of the land sellers, in terms of aside from price, in terms of looking to change the way you may structure takedowns? For instance…

Robert Toll

Yes. You always do that. I'm sorry for cutting you off, but I think I've got it. You always do that in these times, whether it's '82 or '88 or 2007. What you do is you've now got the capability to go to a seller and say, look, you're sitting it's not going anywhere.

We're sitting. We'll put up a model and we'll take down lots as we sell homes, as opposed to paying the $10 million bucks up front for black acre. So in that regard you get a change in terms that you would offer in down markets.

Stephen Kim - Citigroup

And is there any opportunity to maybe lock in a minimum profit, because we're hearing that in some markets, some builders are able to sort of negotiate in these difficult times already, some vehicles whereby where they can at least guarantee a minimum profit.

Is that something you're seeing?

Robert Toll

I don't understand. How do you guarantee a minimum profit?

Stephen Kim - Citigroup

It's basically not a hard lot cost, if the lot cost is bought sort of contemporaneous with selling the home, that kind of …

Robert Toll

Oh, I get it. No, we haven't got any of that.

Stephen Kim - Citigroup

Is that something that you would be interested in exploring or is that sort of something, which is more for just in time type builders as opposed to folks who sit on land longer, like yourself?

Robert Toll

No, we would be, we would be quite happy to see that. We haven't, we haven't seen any of it.

Joel Rassman

Downside.

Robert Toll

No, as I understand what you're saying is that, I pay for the land as a percentage of the sale price of the house to be determined when we arrive at the sale price of the house. So that if I put the land in for I'm being silly here, but if I put the land in for $10 in the quotient, then I can buy a lot for $10?

I don't see how the seller does that, but maybe you got some desperate sellers out there. We haven't run into that.

Stephen Kim - Citigroup

Got it, great, appreciate it, thanks, Bob.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Dan Oppenheim with Banc of America Securities.

Dan Oppenheim - Banc of America

Thanks very much. Was wondering if in the California, where you had a lot of cancellations and generally talked about being resistant to cutting prices below what you view as the intrinsic value.

Are you going to do more on the spec homes that you have there following cancellations to get rid of that inventory?

Robert Toll

Yes.

Dan Oppenheim - Banc of America

Okay, and then also in terms of the land impairments, you talked about how assuming some further weakness there and in the past I believe Joel has talked about how impairments there is not an assumption of further weakness in the market when calculating the impairments.

Joel Rassman

I think we've always evaluated the markets and in our own internal evaluations we often include additional incentives to move product or slower paces than we're currently having if the market warrants it.

So I think it's an individual community-by-community evaluation.

Robert Toll

Let me give you an example. If you haven't sold anything in a month or two months and Joel's reviewing all in his banner merry manner, reviewing every community when it's the end of the quarter.

And he gets to the regional president, myself, and the project manager, the vice president, and we have a little meeting and Joel says, well, it's been two months, you haven't sold anything, what do you think it will take to sell a home here?

And then we get into that fight, well, why do you want to know, Joel? He says well, if you think it's going to be 300 instead of 500, then I would suggest that you've got land here that you are down 200 a lot.

And then we have to not only go down, but we have to make a little money because impairments are taken below breakeven, they're taken down to a discounted value so that you're left with a potential to make money.

That's how it's arrived at. So, yes, to some extent, Joel's, and his gang's evaluation that give us the impairments take into consideration potential future deterioration or erosion. Generally that's not the case, but it can be.

Dan Oppenheim - Banc of America

Okay, thanks. Just final question, I was just wondering, there have been a lot of comments about looking for land. Given the land supply that you have right now, how much appetite, how much land would you want to have, given that you're not really trying to move through what you have via lower prices?

Robert Toll

It depends on the price of the land that's being offered. If and when the banks start to take back the property and the regulators then force the banks to kick that property out, and if you were the only buyer for that stuff, then you can imagine some pretty great prices. At that point, we'll have a pretty significant appetite.

Dan Oppenheim - Banc of America

Right, in that scenario, though, that sounds pretty dismal, I'd imagine your land would be significantly impaired though, if you were then having all the land going back to the banks from other projects, just given what happened to home pricing and such.

Robert Toll

No. Our land would be significantly impaired in an environment like that, perhaps.

Dan Oppenheim - Banc of America

Thanks very much.

Robert Toll

But, that's a race or kind of operation as opposed to straight business profit and loss kind of evaluation.

Dan Oppenheim - Banc of America

Okay, thank you.

Operator

Your next question comes from the line of Timothy Jones with Wasserman & Associates.

Timothy Jones - Wasserman & Associates

Hello, Robert.

Robert Toll

How are you doing, Tim?

Timothy Jones - Wasserman & Associates

I'm doing fine.

Robert Toll

Good.

Timothy Jones - Wasserman & Associates

First question, could you give me for this year and last year your units under construction, your finished, and unfinished spec units this year and last year?

Joel Rassman

I would rather wait for the year-end call to…

Robert Toll

Okay.

Joel Rassman

To deal with what that is, but our backlog is generally under construction and our spec units are probably roughly the same as where we were in the third quarter.

Timothy Jones - Wasserman & Associates

Okay. That's good enough. Mr. Bernanke today, obviously had nothing else to do because no one cares what's going on with the industry it said that he expected housing to drop in the second quarter of next year.

I talk regularly with about 15 builders. I know of no builder who would suggest that at this time. Can you look into his head, other than politics and try to give me a comment, it happened just today?

Robert Toll

Yes, that's fortuitous. I was talking to a couple of fed governors, actually, very recently and I was asked, when I thought it would turn around? And I said that I had no idea, but that I thought the earliest that we could expect would be when the presidential campaign got into high enough gear that the candidates were clear.

So, that it wasn't an issue of who's going to run on what ticket and that the candidates started to talk, as they usually do, as to the greatness of America and looking forward and being positive and removing the focus from the reality and the trouble that we have today and I thought that might give us the first opportunity to turn around and I suggested that that time period probably would be April or May of '08. So, that could be what's in the head of Mr. Bernanke. But I really have no idea. It's just a guess.

Timothy Jones - Wasserman & Associates

Before I go to my second question, it's kind of interesting. At least half of all the time spent and this is several hours today, that Bernanke was how to do with housing. It was amazing. I've never seen his account for 10%, let alone over 50%. But that was the conference.

Robert Toll

Well, it makes sense, Tim, because the housing industry probably accounts for what…

Joel Rassman

Employment is directly or indirectly related to housing was the last…

Timothy Jones - Wasserman & Associates

Okay. We know there was the problem. Okay. Second question, last question, I'm sorry; I gave you two questions, so I'll come back into queue.

Robert Toll

Thank you, Tim. Crystal, I have a question from Kevin Kinahan of BankUnited. Where is the community that you got 24 deposits to get the C rating?

Joel Rassman

West Coast of Florida he was talking about. Oh, it wasn't one community. I'm sorry. I gave you the wrong impression. In the West Coast of Florida, West Gold Coast, we have, from memory, about seven or eight, at least, communities. I can give you an exact number, Mr. Kenehan, in a moment.

Central Florida, East Florida, North Florida, west, three, six, we have nine different communities and this week, for instance, we took seven deposits in those nine communities. The week before we took seven, the week before that, we took seven.

So, that's a tremendous turnaround. And while some of it is accounted for by more aggressive discounting on speculative inventory as this inventory moves through the construction process and becomes more complete, a whole bunch of it, of the demand for that is either anomalous or perhaps predictive. We would hope for the latter, but I wouldn't spend any money on that. Crystal?

Operator

Okay. Your next question comes from the line of Rick Dowdle with ARX.

Rick Dowdle - ARX

Just a quick question on your asset management or balance sheet management, with the closing in on $1 billion here of cash, is there any thoughts or could you give your thoughts on the balance between debt repayment and hoarding liquidity for the near future? You do have some callable debt.

Robert Toll

I think it would be foolish for us to pay debt. We have no effective use of our line. We've got $1.2 billion available under the line. Yes, we have $300 million, but that's because you guarantee the banks you would keep that borrowed in order to keep them happy with the line.

So, we can't pay that back. Well, if you could, I would, but you can always re-borrow it. You can't re-borrow it. Oh, in that case, we would keep it out there; our price for the money is very cheap. And I would think liquidity is more important than reducing that line.

Rick Dowdle - ARX

Great, thank you.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Alex Barron with Agency Trading Group.

Alex Barron - Agency Trading Group

Hi, Bob. Hi Joel.

Robert Toll

How are you doing?

Alex Barron - Agency Trading Group

Great, thanks. Hey, I wanted to ask you maybe, this is for Joel, some builders say that when they go through the impairment analysis that it's possible to only impair standing inventory and that the remainder of the land, if it's raw, you can just leave it alone and doesn't need an impairment is that true? Is that your understanding?

Robert Toll

That's a builder with a different, with a different accountant than we have.

Joel Rassman

No, the answer is not the way we look at it.

Robert Toll

The question was broader than that. He's asking you to comment on industry, not industry, but accounting, since you guys don't call yourself an industry, accounting standards.

Joel Rassman

There maybe reasons why the only impairment you have is your standing speculative inventory, but it's not the normal.

Alex Barron - Agency Trading Group

Okay. Yes, the reasons given were that, based on the recovery model of their thinking of where the market was going to go in the future, that basically, if your cash flow's going forward on all that raw land were positive, that wouldn't need to impair it.

Robert Toll

That is absolutely correct, but you've got to find an accountant who would buy that, and I'm not sure I would even to sell it, why would I want to sell that, unless I had some kind of covenant that didn't permit me to go further.

Joel Rassman

I think you should talk to the guy who gave you the comment.

Robert Toll

That's right, thank you, Joel.

Alex Barron - Agency Trading Group

Okay. My other question is just kind of general also. So, if we start to see some private builders, maybe even some public builders go bankrupt and maybe they are forced to sell their land at distressed prices, do you think that that's going to force more impairment because now there's going to be kind of comparables for land parcels out there?

Robert Toll

It's possible, sure. Makes sense, doesn't it?

Joel Rassman

If you're using comparable prices as your floor…

Robert Toll

Not as your floor, as your estimate.

Joel Rassman

No, you don't write down to the comparable land prices, you write it down to whether you can make money.

Robert Toll

I know, but at a certain point, it's certainly, it's certainly logical that your accountant would look at you and say, how can you put your ground down for $50,000 a lot when the guy next door just sold land for $10,000 a lot? I don't think it's a question. It's just a statement of theory that you've given us, and I can say that, yes, makes sense, but who knows?

Alex Barron - Agency Trading Group

My last question is, if I look at your lot position, I guess more interesting, more interested in the owned lot position, how many of that is, I guess associated with communities that are currently open for sale versus how many lots are for communities that haven't even opened yet?

Robert Toll

I'm sorry.

Joel Rassman

He doesn't want the breakout between owned and controlled. He wants to know if we're land banking a lot of land, I think, that is, wait for the future, and generally we don't do that. There are some situations in which we have, have land that would have, we would have expected to open, but because of the slow market, we're holding off on opening. But I don't think…

Robert Toll

It's not much, no. I'm sorry?

Joel Rassman

It's too early to give any other good data.

Robert Toll

But you've got, 59,000 owned and controlled.

Joel Rassman

We think 60% plus owned, but I don't think that's the question he's asking.

Robert Toll

Yes, we've got 60 of…

Joel Rassman

Inactive communities.

Alex Barron - Agency Trading Group

Right. That's…

Joel Rassman

Most of it is in active most of what's owned is in active communities.

Alex Barron - Agency Trading Group

Okay, all right great. Thanks.

Robert Toll

I wouldn't think so. You got 36,000 lots owned I don't have 36,000 lots in active communities.

Joel Rassman

We haven't done it yet.

Robert Toll

We do it for the 10-K? All right then…

Joel Rassman

December.

Robert Toll

Sorry.

Alex Barron - Agency Trading Group

Okay. Thanks Bob.

Robert Toll

You're welcome.

Operator

Your next question comes from the line of Clifford Allison with UBS.

Robert Toll

Hi Clifford.

Clifford Allison - UBS

Hi, guys. Thanks for taking my question. First, I just wanted to confirm something I thought I heard. Did you say that your bank debt balance is now down to $300 million?

Robert Toll

Yes, I said that we had $300 million approximately borrowed from the banks, because that is one of the conditions, one of the conditions of our credit facility. It's a term loan.

Clifford Allison - UBS

Okay, great, great.

Robert Toll

And I think that the time of that term is coincident with the 2011, so it's consistent with the rest of the line.

Clifford Allison - UBS

All right, and then another question I had was what sort of, how much gains are you seeing now as you go back to renegotiate the construction costs of your homes? How much are you able to reduce the cost of sales side through that? And are you looking at other, lot of home builders have talked about reducing the number of floor plans in order to take down manufacturing costs. Are you working on things like that to try and…

Robert Toll

No. As America’s luxury homebuilder, reducing floor plans as a method of gaining efficiency, and you certainly would is not our thing with respect to reduction in subcontractor and material pricing, that is our thing, and I haven't got a number for you, because we look at it on a month-to-month basis. I can't recall over the last three months what we've reduced prices for material and labor.

Joel Rassman

$2000, in this quarter on an average house.

Clifford Allison - UBS

Okay, great. Thank you.

Operator

Your final question comes from the line of Janice Nyeman with Charles Schwab.

Janice Nyeman - Charles Schwab

Hey, guys. I was wondering how many of those lots are owned versus optioned?

Robert Toll

36,000 are…

Joel Rassman

We think are roughly 36,000…

Robert Toll

On roughly.

Joel Rassman

It's roughly. We don't have the actual count yet.

Janice Nyeman - Charles Schwab

Okay.

Robert Toll

But that's pretty good.

Janice Nyeman - Charles Schwab

Okay, and then what are you guys doing with your cash?

Robert Toll

We've been asked that now. I'm sorry, maybe you haven't been aboard, are you asking…

Janice Nyeman - Charles Schwab

What are you investing it in?

Robert Toll

What are we doing with our cash?

Joel Rassman

Are you asking what are we?

Janice Nyeman - Charles Schwab

What are you investing it in on a short-term basis?

Joel Rassman

On a short-term basis, we use high quality tax-free primarily instruments.

Janice Nyeman - Charles Schwab

Okay, and what sort of yield are you obtaining on that?

Joel Rassman

We have been obtaining on a before-tax equivalent basis, because there is some invested in high quality taxable stuff, on an average probably 5.6% for the last quarter.

Janice Nyeman - Charles Schwab

Okay. So why is it beneficial to Toll to take this negative R between paying out 8.25% on the senior sub notes versus calling them potentially?

Joel Rassman

It's only availability of money. I can't raise easily, money in the capital markets, and I think in the long-term, we will be able to utilize that money in a more efficient fashion than just paying down debt. If we're wrong, we can always pay down debt.

Robert Toll

However, no representation is made with respect to whether we are going to call that or not.

Joel Rassman

Right.

Robert Toll

At any time including immediately.

Janice Nyeman - Charles Schwab

Okay, and if you were to call it, it's a 30-day notice to the trustee, would you give us that same 30-day notice, or would you just let us know later than that 30 days?

Robert Toll

Joel, this is certainly a question for you.

Joel Rassman

I have not, we have not at this point made a decision to do something that we're willing to make public, even if we do take the decision, so I would have to judge it. But I do know that you hold our bonds, and if you have an interest, we'd be glad to talk to you separately when we're ready.

Janice Nyeman - Charles Schwab

Fair enough, thanks.

Robert Toll

You're very welcome. Crystal, I have a question from Ange Salam. She says -- or he says -- hi, I was wondering if you could comment further on the statement you made about possible debt acquisitions?

Joel Rassman

That we know of.

Robert Toll

Yes, does that mean you would consider buying a distressed builder in a debt-financed acquisition? I think the questions are over my head. I mean what I meant to imply was that we are, we are looking at, we are dealing with people who make a living buying distressed debt, not distressed builder necessarily, but distressed debt.

And going in with them, buying the debt with them and then two things take place. Either the debt gets paid in full and we make a bundle of money that way, or the debt doesn't get paid, in which case we acquire the assets of the company, and then we manage them and build it out. Joel, do you have something to add to that?

Joel Rassman

I think that's well. I think we're in the initial stages of conversations with a number of people.

Robert Toll

Okay. Crystal, do you have any other questions?

Operator

No sir, not at this time.

Robert Toll

Okay. Thank you everybody. I appreciate your time and patience. Crystal, thank you.

Operator

Yes, sir, you have a wonderful day.

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Source: Toll Brothers F4Q07 (Qtr End 10/31/07) Earnings Call Transcript
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