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Executives

Robert I. Toll - Chairman of the Board, Chief Executive Officer

Don Salmon - President of TBI

Joel H. Rassman - Chief Financial Officer, Executive Vice President, Treasurer, Director

Analysts

Stephen Kim - Citigroup

Buck Horne - Raymond James

Mike Rehaut - J.P. Morgan

Ken Zener - Merrill Lynch

Ivy Zelman - Zelman & Associates

Mike Wood - Banc of America Securities

David Goldberg - UBS

Myron Kaplan - Private Investor

Carl Reichardt - Wachovia

Joel Locker - FBN Securities

Alex Barron - Agency Trading

Jill Aranoff - Citigroup

James Wilson - JMP Securities

Jeff Matthews - Ram Partners

Ray Horner - J.P. Morgan

Toll Brothers, Inc. (TOL) F4Q07 Earnings Call December 6, 2007 2:00 PM ET

Operator

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

Robert I. Toll

Thank you, Julianne. Welcome and thank you 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, our mortgage company; and Greg [Zeigler], AVP 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.com. We’ll try to answer as many as possible.

Today we announce final results for our fourth quarter and fiscal year ending October 31, 2007. Since the release was distributed at 5:00 a.m. this morning and is on our website, tollbrothers.com, I expect most of you have read it by now. Therefore, I will not read most of the financial results from the release, sparing you and me a very boring monologue. Instead, we will make a few comments and then go to Q&A.

By many measures, fiscal 2007 was the most challenging of the 40 years that Toll Brothers has been in business. 1974 was perhaps rougher, but the difficult times only lasted one year.

Confronted with this extremely difficult environment, our team still produced revenues of $4.6 billion and net income of $35.7 million, which was our 22nd consecutive year of profitability.

Stockholders’ equity grew to $3.53 -- to $3.53 billion at this fiscal year-end 2007. We ended the year with a net debt-to-capital ratio of 26.8%, our lowest level ever compared to 31.8% one year ago.

However, since going public in 1986, we’ve just reported our first quarterly loss this fourth quarter after 85 consecutive profitable quarters. The loss was driven by $315 million of non-cash pretax inventory related impairments and related write-downs. These resulted in a fourth quarter net loss of $0.52 per share.

Before write-downs, fourth quarter net income was a positive $118 million, or $0.72 per share. However, the fact that we took such substantial write-downs this quarter on top of the nearly $488 million of pretax write-downs in the previous four quarters, reflects the market’s continued weakness.

We believe that motivated sellers, excess supply, and low interest rates make now an attractive time to buy a home. But weak consumer confidence continues to buck these positives.

Broader concerns about the nation’s economy have magnified worries about potential price declines in the housing market. It’s not a matter of if but a matter of when the oversupply is absorbed. Then we shall return to better times.

I believe those who wanted to buy but didn’t will kick themselves for their reticence. But the biggest hurdle for our clients right now is their concern about their ability to sell their old homes. An inability to obtain mortgages does not appear to be a problem for our buyers but probably is a concern for our buyers’ buyers.

On that note, let me introduce Don Salmon who runs our mortgage company to discuss the current state of the mortgage market for our buyers. Don.

Don Salmon

Our company remains well-positioned to provide loans for our homebuyers. TBI Mortgage provided financing for approximately 52% of our fourth quarter buyers, 88% of whom qualified for prime loans. Less than 12% of that universe was Alt-A; less than 1% sub-prime.

The Fannie Mae, Freddie Mac conforming segment, loans at or below $417,000 representing 57% of 2007’s in-house mortgage business, remains generally unaffected by the market disruption.

While the overall jumbo market is still somewhat thin, we are able to offer attractive programs and pricing to our buyers. Our conforming jumbo spreads have narrowed to within one-half of 1%.

We believe that our history of presenting a high quality buyer has reinforced our strong relationships in the lending community, which has helped us narrow those spreads. We have added two portfolio vendors who have an appetite for customers with our buyer profile. We expect to add at least two more in the next two to three weeks.

Some well-publicized, high profile portfolio lenders have stopped doing correspondent and broker business. We have easily replaced them as they represented less than 4% of our volume.

Banks are discovering that our buyers are among the most desirable in the country. They are beginning to view the mortgage transaction as a customer acquisition strategy rather than a pure asset play.

Should that attitude spread in the marketplace, we would expect more direct lenders to offer attractive options to our buyers.

Robert I. Toll

Thanks, Don. Now, Joel Rassman to do the numbers. Joel.

Joel H. Rassman

Thanks, Bob. Homebuilding revenues for the fourth quarter and full year were approximately $1.2 billion and $4.6 billion, with an average delivery price of $690,000 and $672,000 respectively.

Fourth quarter homebuilding cost of sales as a percentage of homebuilding revenues before interest and write-downs was 73.7%. This was higher than last year’s equivalent fourth quarter cost of sales, which was 69.5%, but slightly better lower, that is, since 2007 third quarter, which was 74.3%. The improvement in the fourth quarter compared to the third quarter was principally a result of a richer mix of homes delivered principally in New York City.

The fourth quarter pretax write-downs were $314.9 million, which included $59.2 million of write-downs attributable to joint ventures and $12.8 million attributable to options as we continued to reevaluate, renegotiate, and in some cases, walk away from options.

Two-hundred-and-six million dollars of the fourth quarter write-downs were in the western region, predominantly in California and Nevada.

Fourth quarter SG&A at $120.5 million, about 10.3% of revenues, compared to the $144.1 million, which is approximately 8% of revenues expended in the fourth quarter of 2006.

Gross profits from land sales were $404,000 in the fourth quarter and $3.8 million for the year.

Fourth quarter other income was $29.5 million, including approximately $11 million of retained deposits and $7 million of interest income.

For the fourth quarter, the effective tax benefit rate was only 32.4%, which had the effects of raising the effective tax rate for the year to 49.6%. As income shrinks or becomes negative, as it did in the fourth quarter, small changes in state tax allocations or small charges resulting from settlements of tax audits can have a disproportionate effect on the effective tax rates.

The average number of shares used to calculate earnings per share was 156.8 million for the fourth quarter and 164.2 million for the year.

The creation of projections is difficult at any time. In the current climate, it’s particularly difficult to provide guidance for fiscal 2008, given the numerous uncertainties related to items such as sales paces, sales prices, mortgage markets, cancellations, market direction, and the potential for and size of future impairments.

As a result, we will not provide earning guidance at this time. However, subject to our normal caveats as Bob described, as well as the caveats discussed previously, we offer the following guidance: we currently estimate we will deliver between 3,900 and 5,100 homes in fiscal 2008; we estimate the average delivered price for the year will be between $630,000 and $650,000 per home.

For those of you who model quarterly, we expect that the average delivered price will decrease sequentially each quarter over the year, so that the average delivered price for the first quarter may be higher than the range for the full year and the average delivered price in the fourth quarter may be lower than the range for the year.

We believe that primarily due to continuing incentives and slower sales paces per community, our cost of sales as a percentage of revenues before taking into account write-downs, will be higher in fiscal ’08 than in 2007.

Additionally, we believe, based on 2008’s lower projected revenues, our SG&A, which we expect will be lower in absolute dollars in ’08 versus ’07, will likely be higher as a percentage of revenues.

At this point, I’ll turn it back to Bob.

Robert I. Toll

Thank you, Joel. Having navigated through previous downturns, we focus on ensuring ourselves adequate financial liquidity. At fiscal year-end ’07, we had about $1.2 billion available and unused under our bank credit facility which expires March 2011. This combined with our $900 million in cash, gives us approximately $2.1 billion of available liquidity.

In addition, we have no maturities on our $1.5 billion of outstanding public debt until 2011 and its average maturity is over 5.6 years. We have also strategically trimmed our land position by 35% in the past 18 months. We have streamlined our stamping operation to better match our reduced production. Unfortunately, we’ve had experience at this, having worked through the major downturns of ’74, ’80, and ’88. We have maintained active deal teams in most of our regions that are out looking for opportunities that may arise from the difficulties in the market.

This downturn may be our toughest yet but I believe our great team is up to the challenge. We still believe the demographics exist to usually support the housing market. Pent-up demand has to be building. Immigration is at record levels and large amounts of wealth are being created. With interest rates still quite low and very few new lots moving through the approval process, as soon as we remove the fear of dropping home prices, we may witness a faster and stronger recovery than anticipated.

Thanks and now let me open it for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Stephen Kim with Citigroup.

Robert I. Toll

Hello? Julianne, it doesn’t appear to be working.

Operator

Mr. Kim, your line is open.

Robert I. Toll

Julianne, why don’t we try another one.

Operator

Hold one moment, sir.

Robert I. Toll

Sure.

Operator

Your next question is from the line of Buck Horne with Raymond James.

Buck Horne - Raymond James

Good afternoon, guys. I’m just wondering if you could -- just a little housekeeping. On the portion of the write-down that was related to inventory and land, that was like 240 -- $243 million, what portion of that went to construction in progress, vertical construction versus just land under development?

Robert I. Toll

Joel.

Joel H. Rassman

We don’t break it out that way. What we try to do is a community that has impairment has both impairment in its land and impairment in its construction progress and you try to spread them based on the fair value of each of the assets and I don’t have a breakdown that way, as you just asked it. Sorry.

Robert I. Toll

Sorry. Julianne, I have a question from [Braham Satov]: “Bob, do you think the U.S. economy is heading into recession, given your experience with housing and its ability to act as a leading indicator for the broader economy?”

Well, Braham, normally, other than for this time around, housing has not been a leading indicator but generally a follower. You go into a recession and then housing takes it in the ear and sometimes the housing comes out first and sometimes the economy comes out first, so I don’t think housing is necessarily a leading indicator, but to answer the question directly, if I had to make a bet on recession or no recession right now, I’d probably think that we’re going to have a recession. I have no idea how deep or how long it would be and it’s nothing more than an uneducated person’s opinion, since I’m certainly not qualified to even make the guess.

Julianne.

Operator

Your next question is from the line of Mike Rehaut with J.P. Morgan.

Mike Rehaut - J.P. Morgan

Just a couple of questions here; first, I was wondering if perhaps you or maybe Joel have handy the benefit that the gross margins had in the quarter from prior impairments of the communities that or the homes that were sold?

Joel H. Rassman

Eight-million dollars.

Mike Rehaut - J.P. Morgan

Eight-million -- do you have --

Joel H. Rassman

You’re not going to see a lot of benefits from us. Most of our write-offs get attributable to the land portion. It takes a long time to recover that. Our communities run five to 15 years.

Mike Rehaut - J.P. Morgan

Okay, so that implies that the impairments that you have taken so far really haven’t been focused on the open communities and those communities have been filled, by and large, profitable?

Joel H. Rassman

No, we’ve had communities that are open. A lot of communities have opened and have taken impairments. It just hasn’t turned around to the same extent that it would if you have very little land.

Mike Rehaut - J.P. Morgan

Okay.

Joel H. Rassman

To build into a very large construction progress on the spec units compared to ours, it would turn around much faster.

Robert I. Toll

If you have a community of 80 homes and you thought you were going to do 25 or 30 a year, but it turns out you are doing eight, that eight gets cranked into a new profitability, project projected profitability and you see that you are under water, so now you have to take a write-down on that community. And now, if you continue with a pace of eight, you’ve only got eight opportunities to have absorbed some of the impairment and to report now higher earnings you’re suggesting and you can see why that would take a while.

Mike Rehaut - J.P. Morgan

Right. Any idea of what that benefit to the gross margin line might be in ’08?

Robert I. Toll

No. Sorry.

Mike Rehaut - J.P. Morgan

Okay. One last question, if I could; your orders obviously have taken a substantial hit and part of that is because of relative to some of your peers, your greater reluctance to discount as aggressively. As you just had a negative 35% order comp on top of a negative 55%, at what point do you start to modify that approach and get worried that the longer that you hold off perhaps pricing more aggressively, just the further out of the money those homes become and at some point, you are going to have to -- unless you are just willing to take it on your balance sheet for five, six, seven years, that you are going to have to do something to generate some amount of sales.

Robert I. Toll

Well, for the time being, it would appear that we are doing all right, as our liquidity is building and our cash and available cash position is growing larger.

We don’t need to sell to generate cash and we are discounting a much larger rate than the to-be-built homes, the speculative inventory that we’ve inherited due to cancellations primarily. So we have discounts there but we are not at a point where we are willing to discount what we consider to be prime ground.

When you discount past your profit so that you are into a loss, the loss is I think properly to be reflected in the analysis of the ground. And so if the lot that you are building on is $150,000 improved, just for the land acquisition and then for the improvements, even skipping the cost of capital for that ground and improvements, if you drop the price of the home past the profit now instead of 150, it’s 125, 100 -- how much lower do you want to take that ground? Well, if at a certain point you look at your equation and say now I’m down to 50,000 a lot, well hell, I personally would buy them for 50 a lot and put them away. At that point, you don’t go any further.

So that’s probably -- that is the way that we look at it. So far, we haven’t gotten too far into it and I can’t say for how long it would be until we would take further cuts to produce cash flow. I think it would be obvious to all, so far, thank goodness, we’re not there and far away from it.

Mike Rehaut - J.P. Morgan

Thank you.

Operator

Your next question is from the line of Ken Zener with Merrill Lynch.

Ken Zener - Merrill Lynch

Good afternoon. I’m just interested -- the joint venture, could you expand on that? Was that at all related to the largest joint venture in Surprise?

Joel H. Rassman

We had a couple of joint ventures that had some write-downs and one of them was Surprise.

Ken Zener - Merrill Lynch

Okay, and then when I look at your inventory levels, which I add back charges to look at the real capitalized cost, the inventory hasn’t really moved at all down from what is the peak. Would you guys expect that to occur, given you are obviously generating some cash and your liquidity is fine with your cash position, but do you expect that to start decline through time?

Joel H. Rassman

I would expect that if we don’t replace lots, our inventory will go down and we’ve been much more reticent in replacing lots currently than we were in the past and we’re not building up our lot count in general, so I would expect inventories would go down. However, construction in progress, if I’ve pre-sold the house, will continue to go up if we have sales.

Ken Zener - Merrill Lynch

Right. And I guess, Bob, with the perspective that you’re applying, i.e. ’74, ’88, et cetera, when I look back at your guys’ position, you guys are obviously a smaller company. You did have less capitalization in the business and this cycle is said to be much more prolonged in the sense that in ’91, you guys troughed but you had a 50% volume increase in 1992 and then another increase in 1993. With your land position, how do you think about that?

I mean, you just described the absolute value of the land in the prior question but how do you think about the net present value of the land as you hold it and instead of delivering it in 2011, it’s 2014? How do you think about that relative to your cost of capital and just net present value? Thank you.

Robert I. Toll

I don’t know how to think about it. Maybe Joel does. Joel.

Joel H. Rassman

We build into our calculation a theoretical charge for interest as a cost of 10% and on top of that, we have to make a reasonable profit, so if you believe our cost of capital is 20% then obviously the interest charge is not enough. But we do consider interest as a cost and build it into all of our valuations.

Ken Zener - Merrill Lynch

Thank you.

Operator

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

Ivy Zelman - Zelman & Associates

Good afternoon, guys. Thanks for the opportunity to chat. Bob, you obviously are in a very well-capitalized position and have cash and your debt is in good shape. But you also have the opportunity to take advantage of some tax losses as you move into -- I guess going forward, you could look at those tax benefits going forward or you could go back and get a check. And knowing you have a lot of land, is there an opportunity where you can actually consider selling land and maybe using the tax benefit as a rationale and elimination of a burden, so you can load up to buy land even cheaper, like you did in the last downturn?

Robert I. Toll

Well, sure. I looked at the Stewart Miller Lenard transaction, Bruce Groves transaction with serious concern -- not concern but, you know, interest, looking for an education. And we’re looking to see if we have any land where we can take advantage of the tax loss and accomplish further liquidity without selling below what we consider the land to be worth.

Obviously the good part about the transaction is that after you’ve taken the discount, you add back the benefits of recouping the tax loss. You look at it on a present value basis as opposed to taking five or ten years to get the tax loss, you get it all back right away. So in Stewart’s case, for instance, if you discount at 60 and you bought for -- you sold for 40, then the 60 times the tax rate of 40 gives you 24, 24 to 40 and you are now up to 64 and he got a 20% participation, he’s still managing it, getting 5% a year perhaps for managing it, so he’s got the [hoop] certificate as well as the management fee. All that might add up to taking really a 35% discount or a 40% discount.

The trick is to make sure that the land needs to take a 35% or 40% discount but if it does, you are probably in a better position walking around with cash than you are walking around with land, to have further powder to jump on the next transaction.

So yeah, it’s something that we and everybody have been looking at and will be looking at further.

Ivy Zelman - Zelman & Associates

Thanks for that, Bob. Shifting to a different topic, jumbo mortgages, today you guys are in a fortunate position. You have agreements with I believe it’s Banc of America and Royal Bank of Scotland that buy your mortgages. What we are hearing from banks is that they are finding it much more difficult --

Robert I. Toll

Excuse me, Ivy -- we don’t have a Banc of America deal. I don’t want any false advertising out there, but we do have a Royal Bank.

Ivy Zelman - Zelman & Associates

Okay, sorry.

Robert I. Toll

That’s all right. Go ahead.

Ivy Zelman - Zelman & Associates

Just heard wrong, sorry. I guess what I’m worried about is that the commercial banks, some of them that are in the jumbo market today are finding it more difficult to sell them. It’s almost the spreads have blown out again and they are finding that they are holding them on balance sheet and there is only so much they can hold.

What are you looking at going forward that could mitigate that as a problem for you, assuming that it gets more difficult to sell them?

And then just your big picture view, Bob, related to Paulson and Bush and what you think about the mortgage freeze plan and whether you think it can actually work. I know I’m asking you to talk politically but we always enjoy your comments.

Robert I. Toll

I’ll be glad to give you those but first, Don Salmon addressed the jumbo concern. The Royal Bank of Scotland, the first commitment was $500 million. What have you got now?

Don Salmon

We still have most of that $500 million available to us. In fact, we’ve only used less than $5 million of that $500 million commitment, so we have a lot of liquidity there. We are chatting with the major banks on a regular basis and you are right that the spreads have widened a little bit in the secondary. The banks are really looking at this now when they are using their portfolio, as I said earlier, as customer acquisition as opposed to asset acquisition, and our customer base is so strong and so desirable that we think the banks are going to step up.

Robert I. Toll

Where else are you getting your jumbos from right now, Don?

Don Salmon

We’re talking to -- Guarantee Bank has just stepped up and is buying some loans from us now, mostly on the Alt-A side, which is a new investor for us. They help to take care of a lot of self-employed borrowers. We’re talking to some insurance companies again right now. We are just about to add ING. I think in a week or so they will be --

Robert I. Toll

Are you still giving some jumbos to Countrywide, for instance?

Don Salmon

Yeah, Countrywide, Wells, we’re still giving loans to. Thornburg is still back in the market although today they are not competitive. They were competitive not too long ago. We hope that they’ll be competitive again. And we’re talking to a number of people every day.

Robert I. Toll

Thanks, Don. The spread, by the way, Ivy, right now for us -- not the spread in the secondary market but the spread for us is down to a half a point. We can put you in a jumbo for six-and-an-eighth, 30-year, zero points and today we could put you in a conforming for four -- five-and-five-eighths. No fours -- five-and-five-eighths.

With respect to what do I think about the most recent announcements, to be a wise guy, not much. There is no such thing as a sub-prime loan. There’s a sub-prime borrower; that is a borrower who hasn’t got the credit, the respect for his credit in the marketplace that’s equal to what you would consider to be necessary, which we call now prime. A little misnomer in the use of the words.

What I understand has been offered to the congress to consider and pass is a break for sub-prime. So if you’ve got -- sub-prime borrowers, so that if you are not credit worthy, we’ll give you five years at your present rate but the next door neighbor, who decided he liked the teaser mortgage and went for four for the first six months and six for the next six months and then according to an index with a differential, he would be pushed to eight and then to 10, he’s stuck because he had prime rating.

I think what would have made more sense, if I were running the zoo, is I would have said we are going to stop teasers, not just sub-prime but for everyone at a rate and pick a number. If we think a -- we’ve done it in the past. The rates used to be regulated in this country up to the elimination of Regulation Q. I think that was in the ‘70s when disintermediation took place.

I think it wouldn’t be a great feat for us to say that for the next two years, we are going to cap the rates for teaser mortgages at 8%, or 8.5%, which has been approximately the 40-year average rate that we’ve lived with.

Thank you, Ivy.

Ivy Zelman - Zelman & Associates

Bob, one more question, can I?

Robert I. Toll

Sure.

Ivy Zelman - Zelman & Associates

Okay, good. Asking you on a more difficult topic, banks today are obviously finding it difficult to continue to see performing assets, or even they are performing but maybe they are 125% LTV and therefore requiring more equity and they can’t take blood from a stone so they are winding back up with assets and maybe doing workouts. And they certainly have a big portfolio of REO homes that have been foreclosed on. And what we are hearing from them is they want to be reasonable and they don’t want to fire sale assets if they are holding them. In fact, the last thing they want is to hold those land acquisition development loans and they don’t want the assets. But on the REOs, it cost them so much to hold those on a monthly basis, call it 1.5% per month per house, that many are talking about auctioning off those REOs on a national basis at distressed prices to get rid of that cost burden.

What is the prices? And then in talking, I guess answering your question to Michael Rehaut about land prices, I mean clearly land prices could be at risk of falling further, so is that something that you guys are thinking about and what are you going to do to mitigate the impact?

Robert I. Toll

No, it’s not something we’re thinking about. With the auctions that took place in ’88, they took place in ’80, they took place in ’74 and they’ll take place again. It won’t be just this cycle but it will be in the next cycle. An auction is one logical conclusion to how to get rid of your real estate. But it’s not going to impact, I believe, our thinking and our planning.

Just as in golf, there’s no shot that doesn’t please someone. With this business, there is no tragedy at that doesn’t please someone and there will be opportunity out there.

Thank you, Ivy. Julianne, I’ve got a question from Robert [Roulin]: “Bob, can you break out your inventory for this quarter and give us a comparison to year-end 2006 and last quarter?” Joel.

Joel H. Rassman

I can give you this quarter versus 2006. I don’t have last quarter in front of me -- um, hold on a second.

Robert I. Toll

Well, we were good right up until the “um".

Joel H. Rassman

Land and land development costs this quarter, the end of this year is $1.6 billion. Last year it was $2.2 billion. Construction in progress, completed contract method, last year was about $3.3 billion -- I mean, this year is about $3.3 billion, last year it was $3.2 billion. Construction in progress, percentage of completion is $27 million and last year it was $124 million. Sample homes and sales offices this year is $357 million and last year it was $244 million. And land deposits and cost of future developments this year is $275 million, last year it was $315 million, and the rest is other. Other is about $19 million this year and $15 million last year. The total is $5.6 billion roughly this year versus $6.1 billion last year.

Robert I. Toll

Thank you, Joel. Julianne.

Operator

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

Mike Wood - Banc of America Securities

This is Mike Wood. Can you talk a bit about how it is that management actually carries out their pricing strategy that you were talking earlier with kind of sending it out to the different regions and communities, is there like a minimum level of sales per community or you dictate from a management level to cut pricing or -- trying to understand how you think about maximizing returns and actually carry that out.

Robert I. Toll

Well, we don’t do it on a basis of a minimum number of sales. We do it on a purely opportunistic basis, looking at what is in that marketplace and selling the homes for as much, not as little, but as much as we can in that marketplace and we do the same math that you or anybody else would do.

Are we better off doing eight a year versus doing 16 a year, but doing the 16 at $50,000 less a house? You look at your cost of capital to carry and you look at what you value your lots at. As I said earlier, at a certain point you say I’d rather not sell anything and just sit on the lot.

So you analyze the pace, the interest, what you think is the intrinsic value of the ground and make a decision on your pricing based upon those models.

Mike Wood - Banc of America Securities

Does that imply though by thinking about the intrinsic value of the land being above where you could actually sell the house today, I guess that is sort of implying that you are expecting prices to go up at some point. Do you ever -- is there a quantification that you could provide or a framework to think about how you think about potential -- when pricing rebounds or by how much?

Robert I. Toll

We don’t look at it as when pricing rebounds; we look at it in relation generally to other kinds of products. For instance, if you are in a multi-family product, you are doing five to the acre, carriage homes, attached, 31 foot wide, three to the bar. And I’m sorry, three of them are stuck together and your management has suggested that you take the price down to a point where you are now at a land price of $30,000 a lot, improved. And you look at the management and you say at $30,000 a lot improved, I’d rather go back into the town and zone it for apartments because certainly this location, you could make a hefty profit with apartments built at $30,000 a lot.

We’re not suggesting we’re going to do that. We’re not going to build apartments but it’s a matter of backstopping how far you would go down in your evaluation of pricing before you’d say I’m sorry, guys. We’ll cut the grass, sell off the models and keep the entrance looking good but we are not going to leave here by selling for a price that sells the ground for less than we think it’s worse. And I’ve just given you one of the main ways that we evaluate the value of the ground.

Mike Wood - Banc of America Securities

Thanks.

Operator

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

David Goldberg - UBS

Good afternoon. Bob, what gives you the confidence that there’s pent-up demand in the market versus excess building in the last couple of years that just pulled forward demand?

Robert I. Toll

Well, there’s no doubt that you had excess building in the market and there’s no doubt that it pulled forward some of the demand. Most of the excess building I believe was to speculators and investors, not to pulled forward demand.

What gives us not necessarily the confidence but the information to evaluate that there’s pent-up demand is the customers that we -- the potential customers, I wish they were customers, that we see in our models. Now, the traffic is not as strong. As a matter of fact, it’s weak but those who we are seeing definitely want to buy. Their primary holdback is their inability to sell their old home, not the reticence that they are going to buy and then prices are going to fall.

Our web visits are up 8% in October over September. We haven’t got the November results calculated yet, so with websites up 8%, that’s one indication. The other is -- but the main indication is primarily the feel that we get from talking to our potential clients.

David Goldberg - UBS

And you don’t think we need -- or I guess do you think we need a change in mortgage liquidity to pull those people back into the market?

Robert I. Toll

You need to be able to give a prime borrower or a borrower that’s close to prime a mortgage. The problem is that in our food chain, that fella still needs to get a mortgage for his buyer, and he needs to get a mortgage for his buyer. So I think the lack of liquidity, as you put it, I would put it that the lack of willingness any longer to provide sub-prime borrowers with mortgages is having an impact on the daisy chain. But once we are through absorbing the excess inventory, the supply that’s in the marketplace, we will go back to doing good business as we did in ’02 and ’03 perhaps. Not as we did in ’04 and ’05 because that was with excess demand. Although that will visit us again once the market starts.

I don’t think you have a liquidity crisis except for those who are already in the market who bought a home who shouldn’t have and who were approved. And it’s still going on. Until we get regulation, it’s going to continue and we know that from our own experience. For instance, this is a large story, we had sold a home and gotten a mortgage commitment for a buyer and of course, the mortgage commitment says that the buyer has to have his old home sold. We come close to settlement and the buyer still has his old home and we say that we can’t go to settlement with you, the mortgage just won’t fund because you haven’t met the condition. And the buyer says well, I don’t want to lose my $70,000 deposit, and our contingency is for a commitment, not for the conditions of the commitment to be fulfilled, so we’re going to take the 70. And the buyer says get me a mortgage on both my homes, a combo mortgage. We can’t do that. That would be 80% of your income and there’s just no way that we can get that mortgage.

We were lucky in this case. The buyer went out -- and this is within the past month -- the buyer went out to another mortgage co, he failed there. He went to another mortgage co and succeeded, came to the settlement table, thank goodness for us. We got rid of what would have been a spec plus $70,000. I’d much rather not have the 70 and have the total home sold and have the profit from the home. But he’s now making mortgage payments that are 80% of his income, or close to it, and he’s doomed to failure. But it’s a sad thing that he was able to go some place and get that mortgage. Happy for us but sad for him.

David Goldberg - UBS

Thanks for the detail. If I could just sneak one more question in; Joel, maybe give us an idea of the range of delivery, closings for next year. What are the kind of assumptions that go into the range between 3,900 and 5,100? Maybe on the kind of cancellations you are thinking about that might cause the variations and the sales pace maybe in the first half of the year or something?

Joel H. Rassman

I don’t think we’re going to go break it out. We did our best to come up with a range, running it five or six different ways and that’s the range. I don’t want to pick and choose which way is the best way to get you there. So the range is very broad because it has multiple -- different answers to different kinds of questions you would ask.

Robert I. Toll

That was get you there again, not get you --

Joel H. Rassman

Right. Get you there.

Robert I. Toll

Sorry.

David Goldberg - UBS

All right. Thanks, guys.

Operator

Your next question is from the line of Myron Kaplan, a private investor.

Myron Kaplan - Private Investor

At the risk of going over the [inaudible] ground, would you be willing to do your run-down of the various markets? Or are they all F?

Robert I. Toll

It’s the -- neither, Myron and I’m not beating my wife, either. It’s the season to be jolly, not to buy homes in general, so for the last four weeks, you wouldn’t expect to see any great change in the markets and we haven’t. There haven’t been enough changes to warrant going down that 44 item list to say how things have changed one way or the other. Thank you, Myron.

Julianne, we have a question from William Maloney, and he asks: “Are you seeing any improvements anywhere in the country and how are the Hoboken/Jersey City projects selling?”

I refer you to my answer to Myron, together with my analysis of Hoboken/Jersey City projects of the last conference call. Thank you, Bill.

We have a question, Julianne, from Dimiter Kristoff: “What is the total debt of the JVs Toll has an interest in? And what is the total recourse debt, including debt with guarantees, either completion or performance?” You guys gave me this question?

Joel H. Rassman

I’ll answer that.

Robert I. Toll

Of course you will. “What is the geographic breakdown of the write-downs for full fiscal year ’07? What is the percentage of total community counts that have been impaired two and three times?” Go ahead, Joel.

Joel H. Rassman

All of our joint ventures together have $1.4 billion of debt. The maximum guarantee we believe of Toll at the worst case would probably be about $140 million for all of our joint ventures, for our share.

The geographic breakdown, as I said, the largest portion of our geographic breakdown of write-offs took place in the West. That was about $215 million, or $206 million. It’s about $30 million in the North, about $38 million in the mid-Atlantic, and about $41 million in the South.

And the last piece was, or question was what is the percentage of total community counts that have been re-impaired two or three times? In this current quarter, there have been -- I don’t think there are any that got impaired a second time. If there was, it was only one.

Robert I. Toll

But we have had some that have been impaired two times --

Joel H. Rassman

Two times, yes. We talked about it last time. I think there was a handful that had had over, in the eight quarters that we’ve had, the impairments have had a second impairment.

Robert I. Toll

Have we had any with a third impairment?

Joel H. Rassman

I don’t think so. I don’t believe so.

Robert I. Toll

I don’t think so. I hope not. Well, congratulations, Joel. Thanks for answering that question. Julianne.

Operator

Your next question is from the line of Carl Reichardt with Wachovia.

Carl Reichardt - Wachovia

I just have one question; the comment in the press release about identifying opportunities and maintaining deal teams in most of your regions. Could you talk about the regions where you are not doing that and other places where you feel that you are currently light lots, if there could be such a thing right now, where you might not be replacing anytime soon?

Robert I. Toll

We’re not that active in Georgia. We just got started and we intend to experiment with the three communities within the one master plan community that we’re kicking the dirt on right now.

We’re not that active in Phoenix in looking for new ground, although we do have the team still there. We’re not that active looking for new ground in Chicago. We are definitely not that active looking for new ground in Michigan and we have no team there.

Just about everywhere else, we are investigating.

Carl Reichardt - Wachovia

Terrific. Appreciate it, thanks a lot.

Operator

Your next question is from the line of Joel Locker with FBN Securities.

Joel Locker - FBN Securities

Just one or two -- if you had changed your philosophy towards deposits, I saw they come out to 9.1% of your actual backlog, sales percentage, versus I think it was about 8.0% a year ago. I was just wondering with the higher cancellations if you are even demanding a higher percent of the deposits.

Robert I. Toll

Yes, we are.

Joel Locker - FBN Securities

So that was one of the -- so maybe --

Robert I. Toll

We’ve dichotomized in many of the communities where we’ve got spec inventory, again given to us by cancellations. Deposit is really not that important. I mean, I’ve already got the home built so I’ll take [wampum] beads against it if you are going to close in three weeks, or as soon as we can get you a mortgage. What difference does it make, I’m already stuck.

When it comes to with respect to a to-be-built home, which is the backbone of our business, which is our business, we are requiring higher deposits to keep us from getting higher rates of cancellation. So we have raised our deposits.

Joel Locker - FBN Securities

And then the other thing, you know, the sequential rise in gross margins. I know you said it was New York City influenced, but if we are trying to model this going forward on a gross margin basis, I mean, can you give us some kind of idea of what your margins are in backlog?

Joel H. Rassman

No, I can only tell you that we expect it to be lower next year.

Joel Locker - FBN Securities

Right, but not to a significant degree or?

Joel H. Rassman

I can’t tell you that.

Joel Locker - FBN Securities

All right, and just the last question on just with the excess or significant liquidity you have, and it doesn’t look like you guys bought any shares back. I mean, would you actually take that or possibly buy shares back at a certain discount to book value?

Robert I. Toll

Well, of course we’d buy back at a certain discount to book value but the question is properly answered with a no. We’re saving our powder for when blood runs in the streets. We hope it doesn’t but if it does, we’ll put on the eye-patch and get out the sword and run up to Jolly Roger and we’ll be out there as we were in ’88 and back in ’80 and --

Joel Locker - FBN Securities

You sound like you’re pretty sure it’s going to run in the streets.

Robert I. Toll

No, I’m not pretty sure but I think there’s a good possibility that it might.

Joel Locker - FBN Securities

Right. All right, thanks a lot, guys.

Robert I. Toll

You’re welcome.

Operator

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

Alex Barron - Agency Trading

I wanted to ask you regarding the communities, how many got impaired this quarter and how many have been impaired to date --

Robert I. Toll

Anybody know how --

Joel H. Rassman

I don’t know. We have it some place but I don’t know. We’ll see if we can look it up while you’re talking.

Alex Barron - Agency Trading

Okay. My next question was how many lots did you guys walk away from in the options that were written up?

Robert I. Toll

How many lots did we walk away from when the options were dropped --

Joel H. Rassman

This quarter?

Robert I. Toll

This quarter or in total?

Alex Barron - Agency Trading

Yeah, this quarter.

Robert I. Toll

This quarter. Anybody know? Very few.

Joel H. Rassman

We did $12 million of write-offs, of walk-aways, so it has to be -- I don’t know. Sorry, that’s -- I owe you.

Alex Barron - Agency Trading

You mentioned that there was a couple of JVs that had the big write-downs. What was the other one that --

Joel H. Rassman

I think I’ve done enough. I think that’s all. I was asked specifically about Surprise. I don’t think we’re going to go into any others.

Robert I. Toll

-- on Surprise?

Joel H. Rassman

Yes, I said there was some.

Robert I. Toll

Some. Okay.

Alex Barron - Agency Trading

So it’s not the big one in Vegas?

Joel H. Rassman

I think I’ve answered the question as far as I’m going to answer it. I apologize. I just --

Robert I. Toll

We don’t break that out?

Joel H. Rassman

I don’t want to break it out.

Robert I. Toll

Okay.

Alex Barron - Agency Trading

Can you at least talk about the impairment you took in the JVs, like what percentage of the previous asset value does that represent?

Joel H. Rassman

Very small. Of the JVs asset values, very small. Very small. It just really primarily relates to our risk of our investment.

[Multiple Speakers]

Joel H. Rassman

We had 45 communities that had some kind of impairment for the quarter.

Alex Barron - Agency Trading

Okay, and did you also have the total count to date?

Joel H. Rassman

Ninety-one for the full year. I don’t have a -- forever. He wants for the -- I don’t have it. We’ll try to find it for you.

Alex Barron - Agency Trading

Okay. All right. Thanks, Joel. Thanks, Bob.

Operator

Your next question is from the line of Stephen Kim with Citigroup.

Robert I. Toll

Isn’t this where we started?

Jill Aranoff - Citigroup

This is [Jill Aranoff] for Stephen Kim. Just following up on the question on gross margin, can you quantify the benefit in the quarter from the delivery of the New York City homes? And how many homes can we expect to be delivered next quarter from New York?

Robert I. Toll

How many did we deliver this quarter in New York City -- that’s Brooklyn, Queens, and Manhattan, guys. I think what she really means is Manhattan.

Joel H. Rassman

I think she means Manhattan.

Robert I. Toll

And then we can get into Brooklyn.

[Multiple Speakers]

Joel H. Rassman

Fifty-two homes. Yeah, there’s a very --

Robert I. Toll

Fifty-two homes -- is that for the three boroughs?

Joel H. Rassman

No, just for New York City.

Robert I. Toll

That’s just for Manhattan? Fifty-two.

Jill Aranoff - Citigroup

Right, and how much do you think that benefited your gross margins in the quarter?

Joel H. Rassman

I don’t know but it’s -- not a whole percent. It’s 20, 30 basis points, probably.

Jill Aranoff - Citigroup

And what can we anticipate going forward over the next couple of quarters? Along the same lines you think --

Joel H. Rassman

No, I -- we’re -- New York City is almost finish delivered, so --

Robert I. Toll

Well, again, it’s not New York City. We only had --

[Multiple Speakers]

Robert I. Toll

-- 76, so if we’ve delivered 50, so we -- 24 in backlog.

Jill Aranoff - Citigroup

Okay, and can you give me the spec inventory breakout for the quarter, the units?

Robert I. Toll

The spec inventory breakout. Greg to Joel.

Joel H. Rassman

Single family specs is 527, multi-families is 414, a total of 941. The high density is 672 and in total, we’ve gone down 20 units in total.

Jill Aranoff - Citigroup

From the 1179 last quarter?

Joel H. Rassman

From the -- in total, including condo converts, we’re down 20 units in the quarter.

Jill Aranoff - Citigroup

Okay. Thank you.

Operator

Your next question is from the line of Jim Wilson with JMP Securities.

James Wilson - JMP Securities

I wanted to ask, I guess maybe it’s a little different margin question of where maybe you might want to -- where, not how much, but where are -- I mean, part of the answer is New York, but where else are margins still holding up pretty well in the country?

And then the second question is traffic, not sales, but where is traffic holding up or doing best for you?

Robert I. Toll

I can look that up but it’s going to take a while. Since I review every community one at a time, I haven’t got that information lumped into my head. Joel, do you have any idea while I’m looking for the paper?

Joel H. Rassman

Well, obviously New York City and Hoboken have very strong margins, relatively.

Robert I. Toll

Yup, that’s -- that’s for sure.

Joel H. Rassman

And most of the other markets have had slowing sales and therefore I would expect that those margins are lower than they have traditionally been.

Robert I. Toll

Margins in Pennsylvania --

Joel H. Rassman

No, those are not margins you are looking at. Those are contributions to G&A. That’s not GAAP.

Robert I. Toll

Yeah, but it will give us a rough idea. No, it won’t give me a rough idea --

Joel H. Rassman

I don’t think you want to go through that.

Robert I. Toll

No, I’d have to -- you know, Jim? I don’t want to start another precedent. I’ve got this pack of paper here with every community and I’d have to start to go through every state for you, but --

James Wilson - JMP Securities

Yeah, no, I don’t want you to --

Robert I. Toll

Let’s just let it go with the way Joel answered it, okay?

James Wilson - JMP Securities

Okay, so nothing else much to add -- and what about traffic? Because I’ve heard you get traffic even if they can’t get sales going, and it’s unclear -- financing or obviously a lack of confidence obviously all having impacts, but anything that stands out where traffic is still good but you still can’t get sales across the goal line?

Robert I. Toll

I’ve got the Mike Snyder Monday morning report here somewhere, guys, which gives you the traffic. No, it’s not here. It is long but I can’t find it.

James Wilson - JMP Securities

We can follow-up on this if it’s hard to find. That’s okay.

Robert I. Toll

It’s not hard to find. It’s just dislocated for a moment. Here it is. No, unfortunately this is last week’s. Using last week’s traffic report, I think traffic is in general pretty bad. Traffic is at a low level compared to the last 10 years. Traffic compares going all the way back to those glorious years of ’96 backwards through 1990, so we are back into that kind of traffic per community I’m giving you, ’90 through ’96. Okay?

James Wilson - JMP Securities

Okay, that’s fine. Thanks. We’ll follow up.

Operator

Your next question is from the line of Jeff Matthews with Ram Partners.

Jeff Matthews - Ram Partners

I was wondering what you were doing, if anything, potentially down the road in China?

Robert I. Toll

Well, I went there for business and pleasure, met some people who were in business there, toured some buildings, primarily Shanghai and Beijing. We sent a team of -- how many total to China? Five guys. They didn’t all go at the same time. They tag-teamed it, so we spent a couple of weeks, three weeks. We were there investigating. We’ve met some people here and as of this conversation, we have nothing cooking and we’re not interested in anything and anything is not interested in us right now. So the bottom line to the question is we looked. We’re not done looking. We’re not done analyzing. There may be an opportunity for us but right now, we don’t see it.

Jeff Matthews - Ram Partners

And if I may ask, what are the biggest issues with doing it?

Robert I. Toll

Well, one of the issues is getting your money out after you’ve got your money in and the other issues are the normal ones, of being satisfied that the market is there to support your product and that you can build the product you want to build where you want to build it.

Primarily development in China is done high rise. High rise is much riskier than our ordinary model. You have to be fairly well assured that you are going to get rid of your stock because once you start, you can’t stop.

The market there we believe is fairly frenzied. You might compare it to the U.S.A. ’05 and ’06. Everybody is a real estate investor who can [inaudible], and there are -- I don’t know how many people, 1.5 billion people or whatever. You know, there’s a lot of room in the market but I’d rather not be coming in at such a hot time. So that gives you our thoughts.

Jeff Matthews - Ram Partners

Thank you.

Robert I. Toll

You’re welcome. We have a question, Julianne, from Greg [Golinsky]. Greg says: “Should the market not improve appreciably over the next few quarters, do you feel that there is a risk of violating any debt covenants?” The answer to that is no. “Which covenants present the most potential for problems” -- get away, Greg -- “and have you been speaking to the banks proactively to deal with this?” Deal with what? I said no. Thank you, Greg.

You guys hand me these questions? How about when did you stop beating your wife? Julianne. Yes, I did answer that. Thank you.

Operator

Your next question is from the line of Mike Rehaut with J.P. Morgan.

Ray Horner - J.P. Morgan

This is actually Ray [Horner] for Mike. Just one last question; just wondering what your incentives were this quarter as a percent of sales? Also what it was last quarter and last year?

Joel H. Rassman

If you looked at the weighted average of incentives today, it’s about $50,000 a home, or about 7.5%. And a year ago, that number was about $30,000, about 4%.

Ray Horner - J.P. Morgan

And last quarter?

Joel H. Rassman

Last quarter, I was $33,000. And the difference for that is the spec units.

Ray Horner - J.P. Morgan

Thanks a lot.

Operator

There are no further questions at this time. Mr. Toll, are there any closing remarks?

Robert I. Toll

Thank you very much, everybody. Have a great holiday season and a healthy and a happy new year. Julianne, thank you very much. Goodbye, all.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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