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Toll Brothers (NYSE:TOL)

F1Q08 Earnings Call

February 27, 2008 2:00 pm ET

Executives

Robert Toll –CEO

Joel Rassman –CFO

Fred Cooper - Senior VP of Finance and Investor Relations

Joe Sicree - CAO

Kira McCarron - CMO

Donald Salmon – President of TBI Mortgage

Greg Ziegler - VP of Finance.

Analysts

Ken Zener – Merrill Lynch

David Goldberg - UBS

Michael Rehuat – J.P. Morgan

Doug Kass – Seabreeze Partners

Megan McGrath – Lehman Brothers

Buck Horne – Raymond James

Nishu Sood – Deutsche Bank Securities, Inc.

Alan Ratner – Zelman & Associates

Susan Berliner – Bear Stearns & Company, Inc.

Joe Alocker – SB & Securities

Alex Barron – Agency Trading Group, Inc.

Scott Kavana – Merrill Lynch

Operator

Good afternoon. My name is Pasha and I’ll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Conference Call. (Operator Instructions) Mr. Toll, you may begin your conference.

Robert Toll

Thank you Pasha. Welcome, everybody, 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 Ziegler, our Vice President 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 email questions to our rtoll@tollbrothersinc.com. We’ll try to answer as many as possible. Today we announced final results for earnings, revenues, contracts and backlog for our first quarter ending Jan. 31, ’08. I assume that you’ve seen the release which we put out this morning and is on our website at tollbrothers.com; therefore, I’ll try to hit the highlights or the lowlights, make a few comments and then go to Q&A.

In fiscal year ‘08’s first quarter, Toll Brothers generated a net loss of $96 million or $0.61 per share diluted. This included pretax write-downs of $245.5 million, $27.8 million of which were attributable to joint ventures. Excluding write-downs, fiscal year ‘08’s first quarter earnings were $57.3 million or $0.35 per share diluted. For comparison, fiscal year ‘07’s first quarter net income was $54.3 million or $0.33 per share diluted after pretax write-downs of $105.9 million. Excluding write-downs, fiscal year 07’s first quarter earnings were $118.9 million or $0.72 per share diluted.

Fiscal year 08’s first quarter total revenues were $842.9 million, 23% lower than fiscal year 07’s first quarter total revenues of $1.09 billion.

Fiscal year ‘08’s first quarter end backlog was $2.4 billion, 42% lower than fiscal year ’07’s first quarter end backlog of $4.15 billion.

Gross signed contracts for fiscal year ‘08’s first quarter of $573.1 million and 904 homes declined 46% and 38% respectively versus year 07’s same period totals of $1.07 billion and 1,463 homes.

In fiscal year ‘08’s first quarter, the Company had 257 cancellations totally approximately $198 million compared to 436 cancellations totally $18.9 million in fiscal year ‘07’s first quarter and 417 cancellations totaling $328.5 million in fiscal year 07’s fourth quarter. Fiscal year ‘08’s first quarter net after cancellations signed contracts totaled 647 homes or $375.1 million, a decline of 37% in units and 50% in dollars compared to fiscal year ‘07’s first quarter results of 1,027 net signed contracts or $748.7 million. We ended fiscal year ‘08’s first quarter with approximately 55,000 lots owned and optioned compared to approximately 91,200 at our peak at the quarter end of fiscal year ’06. We ended the first quarter with 315 selling communities, down from the peak of 325 at second quarter end and expect to be selling from approximately 300 communities by fiscal year end 2008.

The selling season, which we believe starts in mid January, has been weak for the third year in a row. We have seen a few glimmers of hope, for example, in the Naples, Florida, area and the suburban Washington, D.C. market. The improvement in Naples, which was a tremendous market before the downturn, is noteworthy because for March ’06 through late ’07, it seemed as though we couldn’t give a home away in the market. In metro D.C., which was amongst the first markets to weaken, we have seen the glimmer before and it faded, perhaps this time it won’t.

We continue to conservatively trim our land positions and focus on maintaining our strong balance sheet and liquidity. Our net debt to cap ratio at Jan. 31, ’08, stood at 26.8%, our lowest level ever compared to 31% one-year ago.

With over $950 million in cash and over $1.2 billion available in our bank credit facility, which matures in March 2011, we believe we are positioned to profit from opportunities that may arise in the current market.

Now let me turn it over to Joel to further do numbers.

Joel Rassman

Thank you, Bob. First quarter homebuilding cost of sales as a percentage of traditional homebuilding revenues before interest and write-downs was 74.6%. This was higher than the first quarter of ‘07’s cost of sales, which was 71.1%, and also higher than 2007’s fourth quarter, which was 73.7%. The increase in cost of sales or decrease in margins from the fourth quarter was principally a result of product mix and higher incentives in this quarter’s closings.

First quarter interest expense was 2.5% of revenues, which was 30 basis points higher than the fourth quarter of ‘07’s, principally a result of inventory turning less quickly and lower inventory to spread the cost to. Interest expense as a percentage of revenues will probably trend up slightly for the rest of the year.

The first quarter pretax write-downs were $245.5 million, which included $27.8 million of write-downs attributable to joint ventures and $72.5 million attributable to options as we continue to revaluate, renegotiate, in some cases walk away from options. Approximately two-thirds of the first quarter write-downs were in Florida and Nevada and Arizona.

First quarter SG&A was $121.3 million, approximately 14.4% of revenues compared to $134.2 million, approximately 12.3% of revenues in the first quarter of 2007.

First quarter other income was $20.1 million, including approximately $7 million of retained deposits and $8 million of interest income. Given the current environment of lower investment rate opportunities, I would expect interest income to be lower in the next few quarters.

For the first quarter, the effective tax rate was only 37%. As income shrinks or becomes negative, as in this first quarter, small changes in the allocation of income between states as a disproportionate impact on the effective tax rate.

The average number of shares used to calculate earnings per share was 157.8 million. The creation of projections is difficult at any time. In this climate, it is particularly difficult to provide guidance given the numerous uncertainties related to the items such as sales paces, sales prices, mortgage markets, cancellations, market directions and the potential for and size of future impairments.

As a result, we will continue not providing detailed guidance or earnings at this time. However, (inaudible) to our normal caveats regarding forward-looking statements in our SEC filings and as Bob mentioned earlier, as well as the caveats discussed above, we still estimate the deliveries for the year will be between 3,900 and 5,100; 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 would expect that the average delivery price will decrease sequentially each quarter of the year so that the average in the second quarter may be lower than the first quarter but higher than the middle of the range and the average in the fourth quarter will probably be lower than the middle of the range.

We believe that due primarily to continued incentives and slower sales per community, our cost of sales as a percentage of revenues before taking write-downs into account will be higher in fiscal 2008 than in 2007, and may increase during the year.

Additionally, we believe that based on 2008’s lower projected revenues, our SG&A, which we expect will be lower in absolute dollars in ’08 versus ’07, will be higher as a percentage of revenues. Because revenues may be more evenly distributed throughout the year may not show the normal declines through the quarters as a percentage of revenues.

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

Robert Toll

Thanks, Joel. Ceaseless talk of a recession and of declining house prices continues to dampen the mood of consumers in general. The homebuyers we believe is drumbeat coupled with concerns over mortgages and foreclosures has kept pent up demand on the sidelines. Household formations continue to grow as they are projected to do into the next decade. Personal wealth continues to be created as well. Mortgage rates are low, unemployment is still low by historical standards and housing affordability has continued to improve. Conforming in jumbo mortgages are quite available to buyers such as ours with strong credit scores and reasonably leveraged home purchases.

We believe that revived buyer confidence is paramount to getting the market moving again. Only when customers believe we are done with housing deflation will the excess apply clear and the market return to equilibrium. We are certainly in a buyer’s market. When our customers recognize that they can only take advantage of a buyer’s market by buying, we will be back on track.

Now let me open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ken Zener with Merrill Lynch.

Ken Zener – Merrill Lynch

Afternoon.

Robert Toll

Hi.

Ken Zener – Merrill Lynch

Larger question about your gross margins given the resilience to date, as recently as ’99, which was seven years after, 7/8 years after the last recession (inaudible), your margins kind of trended down to be 22% verse the 25% where at today. Is there any reason (inaudible) margins wouldn’t float down to that level this cycle and how large a role did rising home prices play in your ability to kind of set the floor last time?

Robert Toll

It seems as though you’ve answered the question but, Joel, why don’t you try?

Joel Rassman

Every piece of ground that we put under control in every geographic region ends up having slightly different results. When 2009 and I can’t, I said 1999 was floating around that I can’t remember exactly what the mix was, my guess is we were probably entering a bunch of new markets where we didn’t do a lot of land approvals for the ground that we opened and we also had some acquisitions that taken place both in 1999 and 1997 with purchase accounting negatively effected the margins, so I don’t think there’s a comparable period of time to use 1999 to today because it was effectively by at least two acquisitions that were done in 1997 and 1999.

Ken Zener – Merrill Lynch

Okay.

Robert Toll

Pretty good memory.

Ken Zener – Merrill Lynch

If you could kind of just talk about two things, how much you’ve taken down your hard cost (inaudible) vertical cost as well as talk about the operating margins by segment relative to the 4Q? Thank you.

Robert Toll

You’re welcome. Joel.

Joel Rassman

I don’t know if I can answer. During the quarter, costs went down another half, about another half a percent on bricks and sticks, but it changes, and I don’t have it broken out by product line or geographic region in that way so I’ll pass to the rest of the question.

Robert Toll

Thank you.

Operator

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

David Goldberg - UBS

I’m wondering if you can give us some thoughts on the recovery that you’re seeing in the Naples and the D.C. market and how you’re measuring that. Is that traffic? Is it absorption? Is it sales price kind of stabilizing?

Robert Toll

Well, the way we measure it is by comparing the sales week-to-week on a year-over-year basis. I’m sorry I said it wrong. It’s just a year-over-year basis. On a week-to-week basis, of course everything looks good because you come out of the Christmas and New Year Holidays and people are just laying around recovering from New Year’s Eve and then finally they get out and start to look at homes and that market builds until you get to President’s Day weekend, which is generally about the best of the year. So on a week-over-week basis, everything looks pretty good. But the only way you can really see how you’re doing is by going on a year-over-year basis and even tracking it back to the same week going all the way back to 1990.

What we saw in Naples was a very high rate of sales compared to where we’ve been for the last year and a half, shockingly so, and even selling as opposed to getting rid of spec inventory, selling some to-be-built product again in the Naples market. That rang a bell for us and indicated that we could be, it’s only a four-week time period that I’m discussing with you, but we could be on track for better times.

Washington, D.C.., I think I was quoted as saying we were dancing off the floor, that was about a year ago by recollection, and it faded. This time I characterize it as a glimmer of hope. We did get much stronger in the D.C. market and we get extremely strong in the Maryland D.C. market as opposed to the Northern Virginia D.C. market. But I’m not willing to say as of this call that we’re back. It’s a glimmer and let’s hope the good times sticks for those markets.

David Goldberg - UBS

Great. If I could just get a follow-up, I was wondering, maybe, Joel, you have unsold homes per community that are in progress or finished.

Joel Rassman

I think we did. I don’t think I have it per community, but I think we had unsold homes down for single-family and multifamily homes in the last conference call and they were down from, they were down sequentially about 70 unites, which is about 7%. On a per community basis, I don’t know, probably around the same.

David Goldberg - UBS

Great. Thank you.

Robert Toll

You’re welcome, David. I don’t want to give an impression by my exuberant description of Naples and Washington D.C. and Northern Virginia Maryland that we’re on a comeback trail because there’s a lot of other markets out there that haven’t spoken on it. We also had some good times in the Connecticut market in the last four weeks. Hoboken Jersey City continued to do real well for us in the urban high-rise. But there are another 35 markets out there that we’re still waiting to see hope in. Pasha.

Operator

Your next question comes from the line of Michael Rehaut with J.P. Morgan.

Michael Rehuat – J.P. Morgan

Hi. Thanks. Good afternoon.

Robert Toll

Hi Michael.

Michael Rehuat – J.P. Morgan

First question I guess is a little bigger picture and then I have kind of second question on specific numbers, but bigger picture: You like to talk about how over the last 20 years you’ve taken advantage of downturns to enter markets, gain footholds, I think even starting out you were based in Phily and New Jersey and you were able to break into the D.C. market in the ‘90/’91 recession, if I remember right .Today obviously great cash position, obviously though also a much bigger geographic footprint. As you see opportunities, the question is: Are you looking to just opportunistically buy assets in any given market or are there specific markets maybe that you’re not in today or have a relatively small position that you’d more want to focus on before others?

Robert Toll

No, is the short answer. We are not strategically tuned to looking for opportunities in specific geographical areas that we’re not yet, rather it’s your first supposition which is: We’re open… We have our store open and we’re ready to take advantage of whatever opportunities come and we’re not especially interested in places where we’re not at the current time. We’re just interested in trying to find good deals.

Michael Rehuat – J.P. Morgan

There are no markets where you would kind of, that you’ve stopped buying land that you’d take this opportunity to actually exit at this point?

Robert Toll

No, we haven’t got any markets that we want to exit. (Inaudible), there’s about 30 markets I’d like to exit and get back into when they come back, but we don’t plan to exit any markets permanently.

Michael Rehuat – J.P. Morgan

Right. Second question: Just benefit… If you could, Joel, maybe if you have the number, what was the benefit in the gross margins from prior impairments roughly?

Joel Rassman

I think it was $60 million, $11 million.

Michael Rehuat – J.P. Morgan

Oh only… Just $11?

Joel Rassman

Just $11.

Robert Toll

Just $11.

Michael Rehuat – J.P. Morgan

Just $11. Lastly, option walk, you know, the option walk away costs took a nice step-up this quarter, just if you have what’s the balance on your books in terms of option deposits and pre aq costs.

Male Speaker

I don’t remember. Maybe Joel remembers, that we’ll look it up. But I don’t remember…

Robert Toll

We don’t write the walk away from options as opposed to impairments?

Joel Rassman

Not necessarily walk away of options cost. In some cases, the option may not have a value but we may not have walked away from the cost or from the option.

Michael Rehuat – J.P. Morgan

All right, I’ll follow-up with you. Thanks.

Robert Toll

Thank you. I have a question from, email from Angie Salom or Salome. It says, “Hi, I was wondering if you could provide any detail as to what your cash balance is invested in. Do you have any exposure to the auction rate security market? Oh, thank you, Angie. We did have tremendous exposure to the auction rate security market. I don’t know what made me think of it, but about five weeks ago we bailed out of everything but about $80 mill.

Joel Rassman

No $20 mill.

Robert Toll

No, as of weeks ago, and we’re now, we have still left in the auction market…

Joel Rassman

$20 million.

Robert Toll

…about $20 million right now which we still feel pretty good about. Thank you, Angie. Pasha.

Operator

Your next question comes from the line of Doug Kass with Seabreeze Partners

Doug Kass – Seabreeze Partners

Hi Bob.

Robert Toll

Doug Kass, how you doing?

Doug Kass – Seabreeze Partners

How are you, sir?

Robert Toll

Good, thanks.

Doug Kass – Seabreeze Partners

Two-part question: First question is: My understanding is that Toll based on 12-month trailing closings now has about five years of land inventory. So question number one: Over the last two housing cycles, can you give us the lowest level of land inventory you had, again, as measured in years, the highest level of inventory you’ve had and the mean level of inventory.

Robert Toll

You could’ve stopped with the first typo. No, I don’t think so. Have you got… Anybody hear have that info?

Joel Rassman

No.

Robert Toll

No, sorry.

Doug Kass – Seabreeze Partners

But let me ask Joel a second question then.

Robert Toll

Doug, we can get it, and we’ll get it to you.

Doug Kass – Seabreeze Partners

Thank you. Second question is: In such a difficult, Bob, and uncertain residential housing market, explain to use how you’re going to manage inventory going forward and what your principal forecasting tools?

Robert Toll

How am I going to manage inventory? If it’s a spec home, do my best to get rid of it.

Doug Kass – Seabreeze Partners

I’m really not talking about the immediate, the next 12 or 18 months. I’m saying looking beyond that.

Robert Toll

Looking beyond the next 12 or 18 months, I’m not good enough.

Doug Kass – Seabreeze Partners

You don’t want to join my club?

Joel Rassman

Very conservative underwriting standards.

Robert Toll

In terms of how we’re selling homes, we’ve increased the deposits on the to-be-built homes to make sure that we drop the level of cancellations which have been very high compared to our traditional average for 30 years or 40 years. We ran about 7% for cancellations and we’re now running, what guys, like 25, 25% to 30% of cancellations, which is ridiculous. Unfortunately raising deposits won’t stop it entirely because we have some huge deposits that have been walked away from. But on those communities where we have not been collecting good size deposits, we’ve increased it to make sure that we have a better change of seeing that completed home go to market and be titled out to the buyer. We conservatively underwrite the deals that we’re looking, very conservatively. It means we’re, we believe we’re only taking care of our deals but only time will tell.

Doug Kass – Seabreeze Partners

Thanks, Bob.

Robert Toll

You’re welcome, Doug.

Joel Rassman

The other part of it is that we’ve increased underwriting standards on deals a number of years ago; we continue to when we look to take down land or put it under control.

Doug Kass – Seabreeze Partners

Thank you.

Robert Toll

You’re welcome.

Operator

Your next question comes from the line of Megan McGrath with Lehman.

Megan McGrath – Lehman Brothers

Hi.

Robert Toll

How you doing?

Megan McGrath – Lehman Brothers

Good, thanks. Bob, you’ve previously been a little bit skeptical when asked about government proposals, just curious as to your thoughts on oh say a listing of caps today. Does that any incremental good news for you?

Robert Toll

Yeah, there’s been some stuff. The Fannie, Freddie increased amounts of what will be conforming mortgages for jumbos is I think a great help, when they get it together. Don.

Donald Salmon

They also raised the capital limit today.

Robert Toll

Right.

Donald Salmon

Not just the loan amounts, but today they essentially removed the capital limits now that they can put in their portfolio, and that just happened this morning.

Robert Toll

Yeah, that’s what Megan just asked. That’ll help us. Some of the things I think put us at risk. There’s conversation about changing the bankruptcy law to permit cram downs of some mortgages and I would urge the Congress not to futz with a mortgage system that gives our country the greatest home ownership rate in the world. I think that’s dangerous. We all want to help those who are being foreclosed on that were led into a bad situation by predatory beast. But we don’t want to throw the system out that we’ve got that’s worked so well in order to aid future people who may be subject to predatory lending practices. I think the… I would urge the Congress the best thing that they could do is to try and offer instead of rebates, of course I’m very partial to the housing industry, but a tax credit for the purchase of a home, anything to get the housing asset rising again will be a tremendous help of course to our businesses in the homebuilding industry, but also tremendous help to the bond market because when the basis of the bond with the asset and the bond, which is for mortgage-backed securities obviously home price, when that asset is deflating nothing can save those bonds, and that can bring on a tremendous credit crunch, and I believe is. But if those assets stop deflating and start inflating once again, start appreciating once again, then all the bonds will be good. It doesn’t matter whether the mortgagor is paying or not paying. If the mortgagor is not paying, but the asset is appreciating as it has almost every year since the Second World War, then the bonds will be in good shape. So I would urge the Congress to look at laws to try, new reg tax break to try and spur home ownership again and I think that will get the bond market moving again and then we’ll all get healthy. We hate bail out predatory lenders and foolish speculators, but I think we hate even more to be left on the sandbar as the tide goes out. Sorry for that long answer.

Megan McGrath – Lehman Brothers

No, thanks a lot for the cover, color. One follow-up question: In terms of cash, you’ve got a lot on the balance sheet; you’re talking about some glimmers of hope, at what point do you think may or would you ever this year consider doing a stock buyback?

Robert Toll

I think I’d rather have my cash. I think can make more with my cash by buying great opportunities than by buying my own stock. That isn’t to say, I hate to give a negative add, it isn’t to stay that my stock isn’t a great buy, by the way I have no idea, but I think we’d be better off holding our cash and looking for opportunity.

Megan McGrath – Lehman Brothers

Great. Thanks very much.

Robert Toll

You’re very welcome. I’ve got a question from Edward Grian. Can you talk about the availability of mortgage financing to your customers?

Yeah, it’s very plentiful. Don Salmon, head of our mortgage co can address it. Don.

Donald Salmon

Yeah, we have…. We believe that our buyers have great access to capital. We have over 20 investors that we can sell loans to right now. People are actively seeking business from our buyers and banks continue to look at it more as a customer acquisition rather than just as asset acquisition and they find our customers to be very viable and attractive to their entire bank portfolio. Our interest rates continue to be lower than the market in general, so we think that the mortgage situation for our customers today is pretty good actually.

Robert Toll

Now the problem is not the mortgages, not mortgage availability for our clients. The problem is our buyers’ buyers’ mortgage and their buyers’ buyers’ buyers’ mortgages. As you go down the chain and people are pushing, our LTV is still like 73%.

Donald Salmon

70 to 71.

Robert Toll

70% to 71% in the latest quarter. But our buyers’ buyers’ buyers may not be at 70, but maybe at 90. They may not be as creditworthy and they’re definitely having a harder time finding mortgages.

Donald Salmon

Especially higher LTVs.

Robert Toll

Right, and we do what we can to help the chain move along so that we can make our sale, but it’s more difficult. Thank you.

Operator

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

Buck Horne – Raymond James

A couple questions: One: Of your remaining lots that you have left, how many are undeveloped lots? Number two: Have you guys… Can you provide additional color on your cap ex budget for land development and acquisitions for 2008 and relative to what that was in 2007?

Robert Toll

Joel.

Joel Rassman

We don’t have… If you have the board book, what we can tell on unapproved versus approved, but we don’t really do it that way. Every community is done as a separate decision making process and so the numbers I would give you for cap ex would be meaningless. When I started this and I foolishly asked this question two years ago when I said $1.5 billion to $2 billion for my cap ex and I came in at $700 million for the year, I realize it’s not a question I should by answering because every community changes all the time. It gets pushed out; it doesn’t get bought, etcetera. So it’s not an answer I can give. In improvements, substantially improved lots, we’ll try to look it up for you. You had an open question before.

Male Speaker

Excuse me. Joel, approximately 16,000 substantial improvement.

Robert Toll

16,000 lots substantially improved.

Buck Horne – Raymond James

Great. Thanks, guys.

Joel Rassman

We had a question before that we owed an answer for: The predevelopment costs and deposits for future deals is about $212 million at the end of the quarter.

Robert Toll

Thanks, Joel. Pasha.

Operator

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

Nishu Sood – Deutsche Bank Securities, Inc.

First question I wanted to ask was a follow-up on the mortgage availability situation. Now the higher conforming loan limits, that was something that was obviously passed, approved by Congress. It’s not going to be implemented for a few more weeks here I think, so my question was: Are you folks…

Robert Toll

We hope in a few more weeks.

Nishu Sood – Deutsche Bank Securities, Inc.

My question was: Are you folks underwriting any mortgages or originating mortgages that will meet those standards in anticipation of that or are you waiting until everything is finalized and all the Is are dotted and the Ts are crossed before you begin to take advantage of that?

Robert Toll

Don.

Donald Salmon

We’re not promising anything to our customers yet because we don’t what we can promise them. What we will do is once all the guidelines are clearly established and once we know the pricing, we will underwrite it that. But right now, we’re underwriting to our standard conforming and jumbo guidelines.

Nishu Sood – Deutsche Bank Securities, Inc.

I see. So your customers haven’t seen any rate benefit yet from it?

Donald Salmon

Not yet.

Robert Toll

The delta between the conforming and jumbo on the immediate delivery market is a half point, 5 7/8 on a conform and 6 3/8 on a jumbo, so there’s not a terrible spread right now in the immediate delivery market, so it’s not that great a concern.

Donald Salmon

That’s actually our spread, which I think is a little bit less than the market. We happen to enjoy pretty good spreads with that because of the quality of our customer. So as far as our customers are concerned, that spread is really not that wide.

Nishu Sood – Deutsche Bank Securities, Inc.

That’s very helpful.

Robert Toll

Is that the Scottish Bank’s rate or…

Donald Salmon

Royal Bank of Scotland.

Robert Toll

Is it… Yeah, the Royal Bank of Scotland. But is most of that jumbo coming out of Royal Bank, that commitment?

Donald Salmon

That particular rate is coming out of Royal Bank of Scotland.

Robert Toll

That’s what I thought. That was a commitment that we got a couple of months ago, at least, September/October. Yeah, we signed up a $0.5 billion from The Royal Bank of Scotland.

Nishu Sood – Deutsche Bank Securities, Inc.

Got it. Second question I had was on your community accounts. Now those were still rising into early ’07, obviously they’ve leveled out here and are going to fall this year.

Robert Toll

We hope so.

Nishu Sood – Deutsche Bank Securities, Inc.

Yeah, a lag based on when the downturn begins, so my question was: When demand does ultimately recover, should we expect a similar lag like that in terms of you being able to ramp up your community count, or is it going to be easier on the way up to kind of open up maybe (inaudible)…

Robert Toll

Well, it’ll be easier than it was when we were ramping up during the good times because we have communities that we can pretty rapidly access. In our business, if you decided to open a community, unless you’ve got all your permits in line, which we have on quite a few that are not open now, it can take years to open up a community, not just months. So we should be able to ramp-up much faster when the market changes, which it will. Thank you.

Nishu Sood – Deutsche Bank Securities, Inc.

Thanks.

Robert Toll

I have a question from Harper Philips. What is the average cost basis per lot of all the lots owned, controlled on an unimproved basis of the 55,000 lots. Okay guys…

Joel Rassman

Roughly $75,000. I’m not sure that helps you, but, of course it includes tower projects in New York City and single-family product some places and multifamily in others, but $75,000.

Robert Toll

Is the average, yeah, sure it helps. It’s too high. Pasha.

Operator

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

Alan Ratner – Zelman & Associates

Hello, gentlemen.

Robert Toll

Hi.

Alan Ratner – Zelman & Associates

Had a quick question on the tower side of the business, was hoping you could provide some color on your backlog there both from a new product standpoint coming online in the next year or so and also from a closing standpoint over the next few quarters.

Robert Toll

Let’s see, we’re sold out in Manhattan. We have just begun another project in Manhattan.

Joel Rassman

It’ll be a joint venture though.

Robert Toll

Yeah, joint venture and that’s at 2nd and 32nd Street.

Kira McCarron

33rd.

Robert Toll

33rd, sorry. Maybe it’s between 33rd and 36th.

Kira McCarron

East 33rd Street.

Robert Toll

It’s East 33rd Street. All right, thank you, Kira. That’s, how many units, about 125 as I recall. Brooklyn, we have one tower almost completed and about 70% sold, little less than that, 65%. Brooklyn has slowed down. The other projects in Brooklyn are pretty well finished off. The projects in Hoboken in Jersey City, as I referenced before, are selling very well and are progressing nicely. Was there another part to the question?

Joel Rassman

I need to clear up probably a misunderstanding. From an accounting standpoint what we marked as percentage of completion of business, which was named “towers” by most people who were following us basically round down. We have very few units left in those buildings. All of our other buildings are accounted for on a completed contract method whether their towers, mid-rise or single-family homes because of the economic conditions and the inability to predict and the inability to take enough deposits to predict or down payments to predict. So when you talk about towers, we talk about towers being products that may not be accounted for as a percentage of completion unit.

Robert Toll

Does that help?

Alan Ratner – Zelman & Associates

That does. If I can sneak in one follow-up: Just was hoping for a little bit more discussion on the SG&A. It looks this year was down about 10% year-over-year and your revenues were obviously down more than that, about 23%. What’s that?

Joel Rassman

Finish your question, sorry.

Alan Ratner – Zelman & Associates

I was just asking kind of what steps you’re taking there to kind of bring that more in line and obviously you said it’s going up on a year-over-year basis as a percentage of sales, but kind of what your timing would be to kind of bring that more in line with the drop in revenues.

Joel Rassman

The first quarters are an anomaly because of some accounting for options and also because of some reversals in the first quarter of last year, etcetera. So I don’t think you can judge its down in expenditure standpoint and we have cut overhead significantly more than that 10%.

Robert Toll

As demand is down, production is down. We hope to be able to stay in line with our overhead until we keep reducing our overhead to meet the need for same. Okay?

Alan Ratner – Zelman & Associates

Perfect. Thank you.

Robert Toll

Thank you. I have a question from Briggs Philips. Why are gross signed contracts, 633.9 per unit so much higher than net signed contracts, 579.8? I thought we answered that in our release, but go ahead do it again.

Joel Rassman

We did. The answer is that the cancellations had a higher average sales price of about $771,000 and that brings down the average when we net the cancellations against the signed for the quarter.

Robert Toll

Thank you, Joel. Pasha.

Operator

Your next question comes from the line of Susan Berliner with Bear Stearns.

Susan Berliner – Bear Stearns & Company, Inc.

I was wondering if I could ask kind of a big picture kind of stepping back question because it seems that a lot of people are getting, and I’m not saying necessarily you Bob, a little bit more comfortable with housing. But I guess in terms of kind of looking out there in terms of M&A, I was wondering if you could kind of update us your thoughts as to when you think you could possibly begin.

Robert Toll

It could begin tomorrow and I can’t give you more guide than that. We don’t have anything to announce.

Susan Berliner – Bear Stearns & Company, Inc.

What about, I guess you guys have talked pretty openly about looking at opportunities. You obviously have a lot of cash. I mean would it be focus on kind of busted joint ventures? Is it really going to be a focus on land? Can you just kind of elaborate on that?

Robert Toll

No, there’s other options as well, but you’ve named two of them – busted JVs and land certainly should be opportunities that we’ll get to look at. So far we haven’t seen that many. They’re just starting to come in from the banks. I saw my first portfolio two days ago. There’s another one that…

Joel Rassman

Two more.

Robert Toll

Two more that have come in that haven’t reached me yet. So we’re just starting to see the product come through the pipeline.

Susan Berliner – Bear Stearns & Company, Inc.

Great. Thank you.

Robert Toll

Does that help?

Susan Berliner – Bear Stearns & Company, Inc.

Yep, thank you.

Robert Toll

You’re welcome. Pasha.

Operator

Your next question comes from the line of Joe Alocker with SB & Securities.

Joe Alocker – SB & Securities

Hi, guys. Just wanted to follow-up on the SG&A just to see if you had a breakdown of the $121 million through of headcount and selling expenses and stock compensation?

Joel Rassman

No, but the stock compensation, the option compensation because our people tend to be a little older gets hit in the first quarter, substantially in the first quarter, and that was about $12.5 million of the charge for stock just in the first quarter.

Joe Alocker – SB & Securities

$12.5 million, and what was it a year ago, the same stock?

Joel Rassman

I don’t know, but less than that.

Joe Alocker – SB & Securities

A lot less than that, and no ballpark figure for overhead of the $121 million?

Joel Rassman

No.

Joe Alocker – SB & Securities

No. All right, thanks a lot.

Robert Toll

You’re welcome. Pasha.

Operator

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

Alex Barron – Agency Trading Group, Inc.

Hi guys.

Robert Toll

Hi Alex.

Alex Barron – Agency Trading Group, Inc.

I was hoping you could talk a little bit about your I guess joint ventures with the focus property group in Vegas, just kind of, roughly what is your exposure either in terms of lots or dollars, have those been impaired? Also, how is the debt structured in those projects?

Robert Toll

I’m going to turn that one over to Joel.

Joel Rassman

I think we’re going to pass on that question. Our debt is non-recourse in general in joint ventures and I think that’s the way we’ll just leave it that way.

Alex Barron – Agency Trading Group, Inc.

Okay. My other question was: Some builders I guess haves sold some land, other guys sound like they’re getting ready to sell land. Any plans on your part to sell land or do you consider yourself more buyers of land?

Robert Toll

We consider ourselves both. We’re definitely buyers and to the extent we can figure out how to get back tax refunds by selling some land, we will do so. We’re studying it now. We’re in a little different situation than the other guys because we made money in ’06 and ’07 and have to beat our… In order to take a loss, you can’t do it just on a community or ground basis. You got to do it overall, so we’ve got to fight our way through profits in order to get to a loss and we have to think about how much of a discount we want to give in order to be able to grab the tax loss while not hurting assets or getting rid of assets that are worth more than they would be to the market to permit us to take a tax loss, so can’t give you an answer yet. Joel, do you have anything to add to that?

Joel Rassman

No.

Robert Toll

Okay, thank you.

Alex Barron – Agency Trading Group, Inc.

All right, thanks.

Robert Toll

You’re welcome.

Operator

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

Timothy Jones – Rossman & Associates

Hi Bobby.

Robert Toll

Hey Tim, how you doing?

Timothy Jones – Rossman & Associates

I’m doing fine. Hello to the other five of you.

Robert Toll

Thank you.

Timothy Jones – Rossman & Associates

A couple of questions: There’s a lot of information in this call, but the one question one of your major competitors, not in your price range, said that raising the limits on loans would be the most promising thing you could imagine. My question is, and I know, is this: You’ve talked about the one-half point of difference on your new home buyers, I want to know the effect of this change on your existing buyers who may have bought a little too high but can now have the ability that they still to take a jumbo mortgage, to get a conforming loan and to really help the housing situation that way, which I think is probably a much greater effect on the industry.

Robert Toll

Well, I agree with you, Tim. In talking to some senators and pushing for the raise of the cap, I took that exact position that while our buyers are able to secure financing, their buyers are not; and if their buyers are trying to sell a $500 or $600,000 product that requires financing of over $417, which is where the limit was, that inhibits the entire daisy chain from moving which inhibits the housing market and if the housing market is inhibited, if it’s not going up, must be going in the other direction which is down. So I think this will have a significant impact on the housing market on the daisy chain as you’ve just said.

Timothy Jones – Rossman & Associates

I mean I was astounded, Bobby, to hear you say a tax credit for the purchase of the home. Looking at the two, of those two situations, wouldn’t you think… Now I’m talking for the entire industry, not your Company, that the raise in the limit and allowing other people to refinance their homes too, which we haven’t gotten into, is much more important?

Robert Toll

We’re transitioning in your question from mathematics and business examination to almost political theoretical conversation. What is going to move the market is what excites the market; and if a small credit against taxes produces excitement to the market, it would have a greater impact than the mortgage increase. If it doesn’t excite the market, then obviously you’re right and the increase in the mortgage amount will have a greater effect. I don’t have the answer, Tim, and I’m not running for Congress and not proposing any laws. It just occurred to me that what this housing market needs is some kind of jump start; although, we may just do it the old fashioned way. If left alone, there’s plenty of us that will survive and we’ll just slog through the mud until we come out the other side. We’ve don it four times before, so either way we’ll get back.

Timothy Jones – Rossman & Associates

Could I ask you a quick other one?

Robert Toll

Sure, go ahead.

Timothy Jones – Rossman & Associates

Really quick to Joel, how in the world did you stop percentage of completion accounting with your auditors? I applaud you tremendously, but how did you do it?

Robert Toll

I insisted on it, but go ahead, Joel.

Timothy Jones – Rossman & Associates

But how did you get the accountants to do it?

Joel Rassman

The FAS basically reinterpreted previous announcements and pronouncements such that the rules made it more restrictive to use percentage of completion and because of that most jobs today don’t qualify.

Timothy Jones – Rossman & Associates

Over my 40 years, I’ve hated percentage of completion all 40 years. Lastly, you just said since…

Robert Toll

That was last week.

Timothy Jones – Rossman & Associates

I’m sorry, okay. I just wanted to ask you about Naples.

Robert Toll

You heard what I said.

Timothy Jones – Rossman & Associates

Yeah, but you said that the last time… No, I live two subdivisions from one of your subdivisions in Naples…

Robert Toll

You’re almost there, Tim.

Timothy Jones – Rossman & Associates

No, I’m delighted to hear what you said is you said last time something that you got 24 units that maybe that you sold under the market. Has something different happened this time?

Robert Toll

Yes, something different has happened. The markets gotten real decent again which is astounding because that was among the worst markets in the whole United States. You couldn’t, as I said in the monologue, you couldn’t give a home away in Naples and people are buying them again, but I don’t have anything to add to that.

Timothy Jones – Rossman & Associates

Well thank you so much for that.

Robert Toll

Don’t thank me. The luck of the draw. Don Salmon pointed out that bank liquidity is being helped or will be helped by the rise in the cap under Fannie and Freddie because now banks will be able to get rid of some inventory that they’re stuck with resulting in more liquidity and lower rates.

Timothy Jones – Rossman & Associates

That’s what I was getting at.

Robert Toll

Yep, you’re right. Thank you. Pasha.

Operator

(Operator Instructions) Your next question comes from the line of Scott Kavana with Merrill Lynch.

Scott Kavana – Merrill Lynch

My question has been previously answered. Thank you.

Robert Toll

Good, thank you. Best question of all. Pasha

Operator

At this time, there are no further questions.

Robert Toll

You have a question on a Blackberry? I draw the line at the email. Thank you very much, Pasha; and thank you, everybody, for listening in. Good day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Toll Brothers F1Q08 (Qtr End 1/31/08) Earnings Conference Call Transcript
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