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Toll Brothers, Inc. (NYSE:TOL)

F4Q07 Earnings Call

December 6, 2007 2:00 pm ET

Executives

Robert I. Toll - Chairman of the Board, Chief ExecutiveOfficer

Don Salmon - President of TBI

Joel H. Rassman - Chief Financial Officer, Executive VicePresident, 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 ofAmerica 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

Operator

Good afternoon. My name is Julianne and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Toll Brothers 2007 fourth quarter earnings conference call. (Operator Instructions)I would now like to turn the conference over to Mr. Robert Toll. Please goahead, 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 VicePresident of Finance and Investor Relations; Joe Sicree, Chief AccountingOfficer; 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 onforward-looking information in today’s release and on our website. I cautionyou that many statements on this call are based on assumptions about theeconomy, world events, housing, and financial markets and many other factorsbeyond our control that could significantly affect future results.

Those listening on the web can e-mail questions tortoll@tollbrothersinc.com. We’ll try to answer as many as possible.

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

By many measures, fiscal 2007 was the most challenging ofthe 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, ourteam 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 atthis fiscal year-end 2007. We ended the year with a net debt-to-capital ratioof 26.8%, our lowest level ever compared to 31.8% one year ago.

However, since going public in 1986, we’ve just reported ourfirst quarterly loss this fourth quarter after 85 consecutive profitablequarters. The loss was driven by $315 million of non-cash pretax inventoryrelated impairments and related write-downs. These resulted in a fourth quarternet 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 suchsubstantial write-downs this quarter on top of the nearly $488 million ofpretax write-downs in the previous four quarters, reflects the market’scontinued weakness.

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

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

I believe those who wanted to buy but didn’t will kickthemselves for their reticence. But the biggest hurdle for our clients rightnow is their concern about their ability to sell their old homes. An inabilityto obtain mortgages does not appear to be a problem for our buyers but probablyis a concern for our buyers’ buyers.

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

Don Salmon

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

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

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

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

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

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

Should that attitude spread in the marketplace, we wouldexpect 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 quarterand full year were approximately $1.2 billion and $4.6 billion, with an averagedelivery price of $690,000 and $672,000 respectively.

Fourth quarter homebuilding cost of sales as a percentage ofhomebuilding revenues before interest and write-downs was 73.7%. This washigher than last year’s equivalent fourth quarter cost of sales, which was69.5%, but slightly better lower, that is, since 2007 third quarter, which was74.3%. The improvement in the fourth quarter compared to the third quarter wasprincipally a result of a richer mix of homes delivered principally in New YorkCity.

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 quarterwrite-downs were in the western region, predominantly in California and Nevada.

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

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

Fourth quarter other income was $29.5 million, includingapproximately $11 million of retained deposits and $7 million of interestincome.

For the fourth quarter, the effective tax benefit rate wasonly 32.4%, which had the effects of raising the effective tax rate for the yearto 49.6%. As income shrinks or becomes negative, as it did in the fourthquarter, small changes in state tax allocations or small charges resulting fromsettlements of tax audits can have a disproportionate effect on the effectivetax rates.

The average number of shares used to calculate earnings pershare 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 thecurrent climate, it’s particularly difficult to provide guidance for fiscal2008, given the numerous uncertainties related to items such as sales paces,sales prices, mortgage markets, cancellations, market direction, and thepotential for and size of future impairments.

As a result, we will not provide earning guidance at thistime. However, subject to our normal caveats as Bob described, as well as thecaveats discussed previously, we offer the following guidance: we currentlyestimate we will deliver between 3,900 and 5,100 homes in fiscal 2008; weestimate 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 theaverage delivered price will decrease sequentially each quarter over the year,so that the average delivered price for the first quarter may be higher thanthe range for the full year and the average delivered price in the fourthquarter may be lower than the range for the year.

We believe that primarily due to continuing incentives andslower sales paces per community, our cost of sales as a percentage of revenuesbefore taking into account write-downs, will be higher in fiscal ’08 than in2007.

Additionally, we believe, based on 2008’s lower projectedrevenues, 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 previousdownturns, we focus on ensuring ourselves adequate financial liquidity. Atfiscal year-end ’07, we had about $1.2 billion available and unused under ourbank credit facility which expires March 2011. This combined with our $900million in cash, gives us approximately $2.1 billion of available liquidity.

In addition, we have no maturities on our $1.5 billion ofoutstanding 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 18months. We have streamlined our stamping operation to better match our reducedproduction. Unfortunately, we’ve had experience at this, having worked throughthe major downturns of ’74, ’80, and ’88. We have maintained active deal teamsin most of our regions that are out looking for opportunities that may arise fromthe difficulties in the market.

This downturn may be our toughest yet but I believe ourgreat team is up to the challenge. We still believe the demographics exist tousually 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 theapproval process, as soon as we remove the fear of dropping home prices, we maywitness a faster and stronger recovery than anticipated.

Thanks and now let me open it for questions.

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question is from the lineof 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 withRaymond James.

Buck Horne - RaymondJames

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

Robert I. Toll

Joel.

Joel H. Rassman

We don’t break it out that way. What we try to do is acommunity that has impairment has both impairment in its land and impairment inits construction progress and you try to spread them based on the fair value ofeach 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 yourexperience with housing and its ability to act as a leading indicator for thebroader economy?”

Well, Braham, normally, other than for this time around,housing has not been a leading indicator but generally a follower. You go intoa recession and then housing takes it in the ear and sometimes the housingcomes out first and sometimes the economy comes out first, so I don’t thinkhousing 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 probablythink that we’re going to have a recession. I have no idea how deep or how longit would be and it’s nothing more than an uneducated person’s opinion, sinceI’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 ifperhaps you or maybe Joel have handy the benefit that the gross margins had inthe quarter from prior impairments of the communities that or the homes thatwere 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 ofour write-offs get attributable to the land portion. It takes a long time torecover that. Our communities run five to 15 years.

Mike Rehaut - J.P.Morgan

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

Joel H. Rassman

No, we’ve had communities that are open. A lot ofcommunities have opened and have taken impairments. It just hasn’t turnedaround 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 specunits compared to ours, it would turn around much faster.

Robert I. Toll

If you have a community of 80 homes and you thought you weregoing to do 25 or 30 a year, but it turns out you are doing eight, that eightgets cranked into a new profitability, project projected profitability and yousee that you are under water, so now you have to take a write-down on thatcommunity. And now, if you continue with a pace of eight, you’ve only got eightopportunities to have absorbed some of the impairment and to report now higherearnings 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 marginline might be in ’08?

Robert I. Toll

No. Sorry.

Mike Rehaut - J.P.Morgan

Okay. One last question, if I could; your orders obviouslyhave taken a substantial hit and part of that is because of relative to some ofyour peers, your greater reluctance to discount as aggressively. As you justhad a negative 35% order comp on top of a negative 55%, at what point do youstart to modify that approach and get worried that the longer that you hold offperhaps pricing more aggressively, just the further out of the money thosehomes become and at some point, you are going to have to -- unless you are justwilling to take it on your balance sheet for five, six, seven years, that youare 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 doingall right, as our liquidity is building and our cash and available cashposition is growing larger.

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

When you discount past your profit so that you are into aloss, the loss is I think properly to be reflected in the analysis of theground. And so if the lot that you are building on is $150,000 improved, justfor the land acquisition and then for the improvements, even skipping the costof capital for that ground and improvements, if you drop the price of the homepast the profit now instead of 150, it’s 125, 100 -- how much lower do you wantto take that ground? Well, if at a certain point you look at your equation andsay now I’m down to 50,000 a lot, well hell, I personally would buy them for 50a 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. Sofar, we haven’t gotten too far into it and I can’t say for how long it would beuntil we would take further cuts to produce cash flow. I think it would beobvious 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 withMerrill Lynch.

Ken Zener - MerrillLynch

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

Joel H. Rassman

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

Ken Zener - MerrillLynch

Okay, and then when I look at your inventory levels, which Iadd back charges to look at the real capitalized cost, the inventory hasn’treally moved at all down from what is the peak. Would you guys expect that tooccur, given you are obviously generating some cash and your liquidity is finewith 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 inventorywill go down and we’ve been much more reticent in replacing lots currently thanwe were in the past and we’re not building up our lot count in general, so Iwould expect inventories would go down. However, construction in progress, ifI’ve pre-sold the house, will continue to go up if we have sales.

Ken Zener - MerrillLynch

Right. And I guess, Bob, with the perspective that you’reapplying, 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 inthe business and this cycle is said to be much more prolonged in the sense thatin ’91, you guys troughed but you had a 50% volume increase in 1992 and thenanother increase in 1993. With your land position, how do you think about that?

I mean, you just described the absolute value of the land inthe prior question but how do you think about the net present value of the landas you hold it and instead of delivering it in 2011, it’s 2014? How do youthink 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 forinterest as a cost of 10% and on top of that, we have to make a reasonableprofit, so if you believe our cost of capital is 20% then obviously theinterest charge is not enough. But we do consider interest as a cost and buildit into all of our valuations.

Ken Zener - MerrillLynch

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 andyour debt is in good shape. But you also have the opportunity to take advantageof some tax losses as you move into -- I guess going forward, you could look atthose tax benefits going forward or you could go back and get a check. Andknowing you have a lot of land, is there an opportunity where you can actuallyconsider selling land and maybe using the tax benefit as a rationale andelimination of a burden, so you can load up to buy land even cheaper, like youdid in the last downturn?

Robert I. Toll

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

Obviously the good part about the transaction is that afteryou’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 yearsto get the tax loss, you get it all back right away. So in Stewart’s case, forinstance, if you discount at 60 and you bought for -- you sold for 40, then the60 times the tax rate of 40 gives you 24, 24 to 40 and you are now up to 64 andhe got a 20% participation, he’s still managing it, getting 5% a year perhapsfor managing it, so he’s got the [hoop] certificate as well as the managementfee. 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 walkingaround with cash than you are walking around with land, to have further powderto jump on the next transaction.

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

Ivy Zelman - Zelman& Associates

Thanks for that, Bob. Shifting to a different topic, jumbomortgages, today you guys are in a fortunate position. You have agreements withI believe it’s Banc of America and Royal Bank of Scotland that buy yourmortgages. What we are hearing from banks is that they are finding it much moredifficult --

Robert I. Toll

Excuse me, Ivy -- we don’t have a Banc of America deal. Idon’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 isthat the commercial banks, some of them that are in the jumbo market today arefinding it more difficult to sell them. It’s almost the spreads have blown outagain and they are finding that they are holding them on balance sheet andthere is only so much they can hold.

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

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

Robert I. Toll

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

Don Salmon

We still have most of that $500 million available to us. Infact, we’ve only used less than $5 million of that $500 million commitment, sowe have a lot of liquidity there. We are chatting with the major banks on aregular basis and you are right that the spreads have widened a little bit inthe secondary. The banks are really looking at this now when they are usingtheir portfolio, as I said earlier, as customer acquisition as opposed to assetacquisition, and our customer base is so strong and so desirable that we thinkthe 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 andis buying some loans from us now, mostly on the Alt-A side, which is a newinvestor 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 toadd ING. I think in a week or so they will be --

Robert I. Toll

Are you still giving some jumbos to Countrywide, forinstance?

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 competitiveagain. 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 ahalf a point. We can put you in a jumbo for six-and-an-eighth, 30-year, zeropoints 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 recentannouncements, to be a wise guy, not much. There is no such thing as asub-prime loan. There’s a sub-prime borrower; that is a borrower who hasn’t gotthe credit, the respect for his credit in the marketplace that’s equal to whatyou would consider to be necessary, which we call now prime. A little misnomerin the use of the words.

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

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

I think it wouldn’t be a great feat for us to say that forthe 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 livedwith.

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, bankstoday are obviously finding it difficult to continue to see performing assets,or even they are performing but maybe they are 125% LTV and therefore requiringmore equity and they can’t take blood from a stone so they are winding back upwith assets and maybe doing workouts. And they certainly have a big portfolioof REO homes that have been foreclosed on. And what we are hearing from them isthey want to be reasonable and they don’t want to fire sale assets if they areholding them. In fact, the last thing they want is to hold those landacquisition 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 monthper house, that many are talking about auctioning off those REOs on a nationalbasis at distressed prices to get rid of that cost burden.

What is the prices? And then in talking, I guess answeringyour question to Michael Rehaut about land prices, I mean clearly land pricescould be at risk of falling further, so is that something that you guys arethinking 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 theauctions that took place in ’88, they took place in ’80, they took place in ’74and they’ll take place again. It won’t be just this cycle but it will be in thenext cycle. An auction is one logical conclusion to how to get rid of your realestate. 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 pleasesomeone. With this business, there is no tragedy at that doesn’t please someoneand 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 acomparison to year-end 2006 and last quarter?” Joel.

Joel H. Rassman

I can give you this quarter versus 2006. I don’t have lastquarter 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 ofthis year is $1.6 billion. Last year it was $2.2 billion. Construction inprogress, completed contract method, last year was about $3.3 billion -- Imean, 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 yearit was $124 million. Sample homes and sales offices this year is $357 millionand last year it was $244 million. And land deposits and cost of futuredevelopments this year is $275 million, last year it was $315 million, and therest 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 withBanc of America Securities.

Mike Wood - Banc ofAmerica Securities

This is Mike Wood. Can you talk a bit about how it is thatmanagement actually carries out their pricing strategy that you were talkingearlier 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 amanagement level to cut pricing or -- trying to understand how you think aboutmaximizing returns and actually carry that out.

Robert I. Toll

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

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 tocarry and you look at what you value your lots at. As I said earlier, at acertain 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 theintrinsic value of the ground and make a decision on your pricing based uponthose models.

Mike Wood - Banc ofAmerica Securities

Does that imply though by thinking about the intrinsic valueof the land being above where you could actually sell the house today, I guessthat 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 frameworkto think about how you think about potential -- when pricing rebounds or by howmuch?

Robert I. Toll

We don’t look at it as when pricing rebounds; we look at itin relation generally to other kinds of products. For instance, if you are in amulti-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 togetherand your management has suggested that you take the price down to a point whereyou are now at a land price of $30,000 a lot, improved. And you look at themanagement and you say at $30,000 a lot improved, I’d rather go back into thetown and zone it for apartments because certainly this location, you could makea hefty profit with apartments built at $30,000 a lot.

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

Mike Wood - Banc ofAmerica Securities

Thanks.

Operator

Your next question is from the line of David Goldberg withUBS.

David Goldberg - UBS

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

Robert I. Toll

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

What gives us not necessarily the confidence but theinformation 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 whowe are seeing definitely want to buy. Their primary holdback is their inabilityto sell their old home, not the reticence that they are going to buy and then pricesare going to fall.

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

David Goldberg - UBS

And you don’t think we need -- or I guess do you think weneed 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 borrowerthat’s close to prime a mortgage. The problem is that in our food chain, thatfella still needs to get a mortgage for his buyer, and he needs to get amortgage for his buyer. So I think the lack of liquidity, as you put it, Iwould put it that the lack of willingness any longer to provide sub-primeborrowers with mortgages is having an impact on the daisy chain. But once weare through absorbing the excess inventory, the supply that’s in themarketplace, we will go back to doing good business as we did in ’02 and ’03perhaps. 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 thosewho are already in the market who bought a home who shouldn’t have and who wereapproved. And it’s still going on. Until we get regulation, it’s going tocontinue and we know that from our own experience. For instance, this is alarge story, we had sold a home and gotten a mortgage commitment for a buyerand of course, the mortgage commitment says that the buyer has to have his oldhome sold. We come close to settlement and the buyer still has his old home andwe say that we can’t go to settlement with you, the mortgage just won’t fundbecause you haven’t met the condition. And the buyer says well, I don’t want tolose my $70,000 deposit, and our contingency is for a commitment, not for theconditions 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. Wecan’t do that. That would be 80% of your income and there’s just no way that wecan get that mortgage.

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

David Goldberg - UBS

Thanks for the detail. If I could just sneak one morequestion in; Joel, maybe give us an idea of the range of delivery, closings fornext year. What are the kind of assumptions that go into the range between3,900 and 5,100? Maybe on the kind of cancellations you are thinking about thatmight cause the variations and the sales pace maybe in the first half of theyear or something?

Joel H. Rassman

I don’t think we’re going to go break it out. We did ourbest to come up with a range, running it five or six different ways and that’sthe range. I don’t want to pick and choose which way is the best way to get youthere. So the range is very broad because it has multiple -- different answersto 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, aprivate investor.

Myron Kaplan -Private Investor

At the risk of going over the [inaudible] ground, would yoube 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 thelast four weeks, you wouldn’t expect to see any great change in the markets andwe haven’t. There haven’t been enough changes to warrant going down that 44item list to say how things have changed one way or the other. Thank you,Myron.

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

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

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

Joel H. Rassman

I’ll answer that.

Robert I. Toll

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

Joel H. Rassman

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

The geographic breakdown, as I said, the largest portion ofour 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 $38million in the mid-Atlantic, and about $41 million in the South.

And the last piece was, or question was what is thepercentage of total community counts that have been re-impaired two or threetimes? In this current quarter, there have been -- I don’t think there are anythat 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 therewas a handful that had had over, in the eight quarters that we’ve had, theimpairments 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 withWachovia.

Carl Reichardt -Wachovia

I just have one question; the comment in the press releaseabout identifying opportunities and maintaining deal teams in most of yourregions. Could you talk about the regions where you are not doing that andother places where you feel that you are currently light lots, if there couldbe 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 weintend to experiment with the three communities within the one master plancommunity 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 newground in Chicago. We are definitely not that active looking for new ground inMichigan 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 FBNSecurities.

Joel Locker - FBNSecurities

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

Robert I. Toll

Yes, we are.

Joel Locker - FBNSecurities

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

Robert I. Toll

We’ve dichotomized in many of the communities where we’vegot spec inventory, again given to us by cancellations. Deposit is really notthat 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 canget you a mortgage. What difference does it make, I’m already stuck.

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

Joel Locker - FBNSecurities

And then the other thing, you know, the sequential rise ingross margins. I know you said it was New York City influenced, but if we aretrying to model this going forward on a gross margin basis, I mean, can you giveus 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 nextyear.

Joel Locker - FBNSecurities

Right, but not to a significant degree or?

Joel H. Rassman

I can’t tell you that.

Joel Locker - FBNSecurities

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

Robert I. Toll

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

Joel Locker - FBNSecurities

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

Robert I. Toll

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

Joel Locker - FBNSecurities

Right. All right, thanks a lot, guys.

Robert I. Toll

You’re welcome.

Operator

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

Alex Barron - AgencyTrading

I wanted to ask you regarding the communities, how many gotimpaired 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’llsee if we can look it up while you’re talking.

Alex Barron - AgencyTrading

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

Robert I. Toll

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

Joel H. Rassman

This quarter?

Robert I. Toll

This quarter or in total?

Alex Barron - AgencyTrading

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 hasto be -- I don’t know. Sorry, that’s -- I owe you.

Alex Barron - AgencyTrading

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

Joel H. Rassman

I think I’ve done enough. I think that’s all. I was askedspecifically 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 - AgencyTrading

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 toanswer 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 - AgencyTrading

Can you at least talk about the impairment you took in theJVs, 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 forthe quarter.

Alex Barron - AgencyTrading

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. Hewants for the -- I don’t have it. We’ll try to find it for you.

Alex Barron - AgencyTrading

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

Operator

Your next question is from the line of Stephen Kim withCitigroup.

Robert I. Toll

Isn’t this where we started?

Jill Aranoff -Citigroup

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

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 grossmargins in the quarter?

Joel H. Rassman

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

Jill Aranoff -Citigroup

And what can we anticipate going forward over the nextcouple 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 forthe 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 totalof 941. The high density is 672 and in total, we’ve gone down 20 units intotal.

Jill Aranoff -Citigroup

From the 1179 last quarter?

Joel H. Rassman

From the -- in total, including condo converts, we’re down20 units in the quarter.

Jill Aranoff -Citigroup

Okay. Thank you.

Operator

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

James Wilson - JMPSecurities

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

And then the second question is traffic, not sales, butwhere 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 Ireview every community one at a time, I haven’t got that information lumpedinto 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 strongmargins, relatively.

Robert I. Toll

Yup, that’s -- that’s for sure.

Joel H. Rassman

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

Robert I. Toll

Margins in Pennsylvania --

Joel H. Rassman

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

Robert I. Toll

Yeah, but it will give us a rough idea. No, it won’t give mea 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 startanother precedent. I’ve got this pack of paper here with every community andI’d have to start to go through every state for you, but --

James Wilson - JMPSecurities

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 - JMPSecurities

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’sunclear -- financing or obviously a lack of confidence obviously all havingimpacts, but anything that stands out where traffic is still good but you stillcan’t get sales across the goal line?

Robert I. Toll

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

James Wilson - JMPSecurities

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 trafficreport, I think traffic is in general pretty bad. Traffic is at a low levelcompared to the last 10 years. Traffic compares going all the way back to thoseglorious years of ’96 backwards through 1990, so we are back into that kind oftraffic per community I’m giving you, ’90 through ’96. Okay?

James Wilson - JMPSecurities

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

Operator

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

Jeff Matthews - RamPartners

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 somepeople who were in business there, toured some buildings, primarily Shanghaiand Beijing. We sent a team of -- how many total to China? Five guys. Theydidn’t all go at the same time. They tag-teamed it, so we spent a couple ofweeks, three weeks. We were there investigating. We’ve met some people here andas of this conversation, we have nothing cooking and we’re not interested inanything and anything is not interested in us right now. So the bottom line tothe 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 - RamPartners

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 afteryou’ve got your money in and the other issues are the normal ones, of beingsatisfied that the market is there to support your product and that you canbuild the product you want to build where you want to build it.

Primarily development in China is done high rise. High riseis much riskier than our ordinary model. You have to be fairly well assuredthat you are going to get rid of your stock because once you start, you can’tstop.

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

Jeff Matthews - RamPartners

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 nextfew quarters, do you feel that there is a risk of violating any debtcovenants?” The answer to that is no. “Which covenants present the mostpotential for problems” -- get away, Greg -- “and have you been speaking to thebanks proactively to deal with this?” Deal with what? I said no. Thank you,Greg.

You guys hand me these questions? How about when did youstop 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 lastquestion; just wondering what your incentives were this quarter as a percent ofsales? 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 isthe spec units.

Ray Horner - J.P.Morgan

Thanks a lot.

Operator

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

Robert I. Toll

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

Operator

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

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