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Executives

John M. Stephens – Chief Financial Officer & Senior Vice President

Scott D. Stowell – Chief Operating Officer

John P. Babel – Senior Vice President, General Counsel & Secretary

Kenneth Lind Campbell – President, Chief Executive Officer & Director

Analysts

Ivy Zelman – Zelman & Associates

David Goldberg – UBS

Michael Rehaut – JP Morgan

Susan Berliner – JP Morgan

James Wilson – JMP Securities

Adam Rudiger – Wells Fargo

[Alex Baron – Housing Research Center]

Joel Locker – FBN Securities

Buck Horne – Raymond James

[Ed Holstack] – Alliance Bernstein

Standard Pacific Corp. (SPF) Q4 2009 Earnings Call February 4, 2010 1:00 PM ET

Operator

Welcome to the Standard Pacific Homes fourth quarter conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. John Stephens, Chief Financial Officer.

John M. Stephens

Our formal presentation will be followed by a question and answer period. Now, I’m going to read a notice regarding forward-looking statements. This conference call and the accompanying slide presentation contains forward-looking statements. Such forward-looking statements include but are not limited to statements about our outlook, markets, new home orders, absorption rates, deliveries, pricing, backlogs, spec homes, our ability to obtain financing, consummate land purchases and rebuild our land portfolio, acquisition opportunities, cost reduction initiatives, profitability impairments, trends in our gross margins and other measures, cash flows, the sufficiency of our liquidities to support growth and withstand further market declines, the value of our deferred tax assets and an anticipated tax refund.

In general any statements contained in these materials that are not statements of historical fact should be considered forward-looking statements. We assume no obligation to update these or any other forward-looking statements. We caution you that forward-looking statements involve risks and uncertainties and there are a number of factors that could cause our actual results to differ materially from those that are contained or are implied by these statements.

These factors include but are not limited to local and general economic and market conditions including consumer confidence, employment rates, interest rates, the availability of mortgage financing and the supply of homes for sale in the market. These and other risks are discussed in our press release of February 3, 2010. We refer you to this press release and our most recent quarterly report on Form 10Q and our annual report on Form 10K.

The recorded presentation will be available for reply today two to three hours after this call ends and will continue to be available until March 7th. The audio portion may also be replayed by dialing 888-203-1122 and entering pass code number 8400892. Also joining us on the call this morning are Scott Stowell, our COO and John Babel, our General Counsel. I will now turn the call over to Ken Campbell our CEO.

Kenneth Lind Campbell

This marks the one year anniversary for Ken here so we’ll see if I can do any better than I did last time. I think three days after my last call the stock went to something like $0.65 a share so maybe we’ll do better this time. I hope everybody liked the harpsichord music there while you were on hold, we had to pay extra for that so I hope that everybody enjoyed it. As we’ve promised in the past we’d give you a weather update at the beginning of the call and I must admit that it is sunny and 70 degrees outside. Although, full disclosure, we’re a full disclosure kind of place, it did rain last week so it’s not perfect here. I even hear it’s going to rain later.

Today, what we’re going to try and do is once again engage in what we might call risky behavior which is trying to basically increase the amount of transparency in our numbers. One of the things I learned over the course of the year is I think there is more transparency available both to us internally in terms of understand our business and externally in terms of helping our shareholders on the outside understand our business and maybe more specifically helping the analyst community out there to help our shareholders understand the business.

I guess I have to admit that the questions and the analysis done by the analysts has helped me as well because to the extent that you guys ask questions and I don’t know the answers I have to go back and figure it out so I guess that’s why analysts make so much money, because they’re good at that kind of thing. Anyway, we’re going to try and make your job easier with the obvious risk that the more transparency there is the harder it is to hide. Oh well, here we go.

The last little point I have to make is a little bit of humor that we sprinkle around, we’re going to continue to do despite the fact that some of our former shareholders aren’t so happy about it. I had one friend in Ohio say I sounded a little bit too serious on my last call and he’s the president of the local Steelworks Union so I’m going to try and make it a little more fun because one thing you don’t want to do is make the steelworks angry. So apologies to those who were hoping for a much more serious scripted discussion here.

I guess the headline or the highlight has to be the net income. Although the total net income of around $83 million was driven largely by this sort of tax benefit that the government decided to give us. But separate from that if you sort of clear away all the noise the tax benefits, and the impairments, and the restructuring costs we’ll talk about a little bit later, we still managed to get our nose above water so making a little bit of money, although it’s a little bit, is better than losing money so we’re happy about the fact that we got our nose above water.

Hopefully you’ve come to expect these king of core operating margins. I guess our core operating margin is sort of in the 4% neighborhood or in the 11% neighborhood if you exclude the interest. Core operating margin being our gross margin less our SG&A. I think you have to go to the core operating margin to understand our performance because different builders put different numbers in different rows. So anyway, we’re happy about that.

I think you should be, as we were, a bit disappointed by the SG&A rate which those of you who stayed up late and got up early to write reports noticed. I think to try and help you with the SG&A rate what I would suggest doing which we alluded to in the press release we had a lot of our incentive compensation for the year accrued in the fourth quarter largely because it is linked to our EBITDA which was high in the fourth quarter. But, I wouldn’t eliminate it for the number I would just spread it out. If you took the incentive comp that we showed in the fourth quarter and spread it out that brings the SG&A rate something a little under 15 which is closer to what I think our running rate is.

I think the trick on going forward and understanding our SG&A rate is to key on the SG&A actual spending dollars and kind of looking at our sales number and sort of tying that to revenues at around 5% and the rest of it is not a fixed cost but doesn’t move with sales and you can sort of decide whether we’re going to add costs or not against however you want to do the projecting of revenues.

I guess I should talk a little bit about the impairment. I know you guys are getting tired of impairments. I think it was around $11 million. I don’t think it’s an indication of sort of a view that the market is deteriorating or the prices are going down or sales are slowing down which I guess is what you have to have normally to get impairments in a lot of our friends in the industry seem to be having that happen in the fourth quarter. Our outlook really hasn’t changed that much.

But, $7 million or thereabouts of that impairment is really one project which is for six houses I think. I don’t know if we refer to in the past but we have this small community where we use to build these $8 million houses and we’ve been unable to sell them. We sell a lot of $1 million houses and I guess at some point we decided we’d move up and we just did it big. Instead of going from $1 to $1.5 million we went from $1 to $8 and it didn’t work so well. They’re beautiful homes and I think they’ll sell but we just decided we had to drop the price on them by $1 million apiece in order to get them out. That’s where most of the impairment is.

The rest of it is related almost entirely to this podium that we sold so like the prior quarter we sold another podium. I think we sold it for around $35 million and had to take a $3 million hit on that sale. It’s bad at impairments and we’re trying to get rid of them but it’s not an indication that there’s sort of more deterioration I don’t think. One sort of big picture comment I would make is that we’re pretty far away now from any significant impairment numbers so the margins that you’re seeing I think should be getting to the point where they’re fairly dependable. In other words the margins that we’re earning in the current quarter are not a function of some big impairment we took on the prior quarter. I think you can kind of tell what the margins are that are built in to our backlog, our inventory since it’s been so long since we’ve taken an impairment.

Then of course the cash basically continued at about the rate that it has been in the past. We ended up with $6 million of cash, pretty close to where we started the year at. Of course, we expect to get something in the neighborhood of $100 million, a little north of that in February from this NOL thing the government did. Just to be fair, I’m going to have to talk about orders and I think that there’s probably a lot of concern or whatever about the orders.

They are basically flat from last year’s fourth quarter. Our absorption rates are up to around 1.5 from what was one last year so we’re selling a lot more homes per community than we use to but we have mothballed a lot of our communities. I think there are around 52 that are mothballed right now. The reason that we’ve done that is basically because we think we’ll make more money by holding on to them and bringing them out to the market later than prices would if we sold through them now. We’re not in a position where we are desperate to generate cash so if we think we can make a good return on them by holding them longer, returns sort of consistent with what our stockholders expect in that sort of 20% neighborhood, if we think that we’ll get more money later than we hold on and don’t do it.

The cost of that is we have lower sales and the benefit is we have higher margins and those margins are likely to continue. So that’s the trade off we’ve made. I’m sure you’re going to ask lots of questions about it later but that’s sort of in a nutshell the explanation. It’s not an excuse just an explanation.

Alright, I get to do two slides this time because it’s the end of the year instead of one so don’t worry next time I’ll be back to one and the call will be a lot shorter. But, I thought I would go back and at the risk of being disappointed look at what we were faced with a year ago and what we mentioned on the call that we were going to work on. The first one this is borderline an advertisement so I have to be careful what I say here or our general counsel here is going to kick me or make funny faces or whatever.

Anyway, we said we needed to reduce costs and I think the reduction is pretty significant. We want from over $280 million to $170 million, that’s a real number it means we did something real in order to get the SG&A percent to move the way we did on a declining sales required that kind of move. We said we needed to reduce debt and we were particularly concerned about the debt that was due before 2013 and that debt has gone down from well really if you add the joint venture debt it’s gone down from $1.7 billion to $1.2 billion which is what we call progress here.

Maybe even more importantly we reduced the pre 2013 debt from close to $850 million to around $250 million. So whatever the concerns were about our needs over the next few years to cover our debt that sort of hurtle or mountain was largely eliminated. It turned in to a mole hill. You combine that with the cash flow that we’re generating which is somewhere in the ballpark of $100 million a quarter before you start buying and selling land. We’ll talk a little bit more about that later so we can help you guys to sort of figure out who much we’re generating from operations.

We had a goal of trying to get our nose above water and improve our margins. Although we still have to do a lot of explaining to get us to convincing you that we have a positive margin. We do have a positive operating margin. I think that once you spread out the incentive comp you sort of have a pretty good feel for what we’re spending and that number has actually gone down a little bit recently. I think that kind of spend rate is a fairly predictable number at this point so we ought to continue at about the same rate.

The last thing I said that we were going to do on the call last year was load up on land. At the time there was quite a bit of discussion in the market about people going to land light and I explicitly said on the call that we were not going to do that. We were going to try and load up on land and we have sort of largely not succeeded on that. We have started to spend money. As you can see we went from $2 million to something north of $100 but we go through $300 or $400 million of land selling 4,000 houses so we obviously reduced the amount of land that we had relative to our sales.

The reason we didn’t load up on land is because we have set return thresholds such that when we do do deals they add value. We’re not trying to generate volume to cover overhead and we’re not going to change those criteria. We’ll talk more about that later but we’re still focused on trying to load up on land and I think the pipeline is looking pretty good and so I think we’ll do better on that this year but I’d give us a bad grade on that score.

Now, I’m going to let John kind of go through the numbers and then get to your questions which as always are the most interesting part of this call.

John M. Stephens

Our revenues from home sales for the 2009 fourth quarter were down 20% from the prior year as a result of an 18% decrease in new home deliveries and a 3% decline in our average home price to $318,000. The decline in our fourth quarter average home price from the prior year quarter was primarily due to general price declines in most of our markets and was offset in part by a mix shift in more California deliveries in the 2009 fourth quarter.

Our average home price as compared to the 2009 third quarter however was up 5% due to a greater distribution of homes deliver within California at higher prices. The higher average price in California was driven by a mix shift including fewer podium deliveries and to a modest degree price increases in certain markets.

On a same plan community basis our average home price for the 2009 fourth quarter was up 1% from the 2009 third quarter and down 5% from the 2008 fourth quarter. Our fourth quarter home building revenues also included $40 million in land sales, $35 million of which related to the bulk sale of a Southern California podium project that Ken referred to earlier.

Our gross margin from home sales excluding impairments was up for the fourth consecutive quarter reaching 20.3%. The steady improvement in our gross margins over the last four quarters was driven by our efforts to lower our direct construction costs and to a modest degree price increase primarily in certain California markets. The 2008 fourth quarter gross margin included $10.7 million downward adjustment in our warranty accrual which resulted in a 2.8% increase in our 2008 fourth quarter gross margin.

Kenneth Lind Campbell

I just want to make sure everybody understands that that decline although consistent with my arrival was not solely because of my arrival. I just wanted to make that clear.

John M. Stephens

Then also as Ken covered a little bit earlier, the company did record $10.9 million of inventory impairment charges during the quarter. $4.3 million of which was included in cost of land sales. $1.4 million of that related to a parcel of land in Florida and again, as Ken alluded to earlier $2.9 million related to the sale of a podium project in southern California which generated $35 million in cash. The other $6.6 million related to that unique luxury product that Ken was referring to in Southern California where we believe some price adjustments will be necessary to move that product.

Kenneth Lind Campbell

A couple promises, one is we promise not to start any new $8 million per house projects this year and unfortunately on a related matter we have run out of podiums so we’re not going to be selling any more of those either.

John M. Stephens

Then we provided a reconciliation at the end of the presentation that reconciles our home building gross margin with and without impairments and land sales. The company made significant progress as Ken alluded to earlier with reducing our cost structure. Excluding our restructuring charges the company reduced its full year 2009 home building SG&A expenses by $114 million or 40%.

The company’s SG&A rate for the quarter was 16.1%, 110 basis point increase as compared to the 2008 fourth quarter primarily due to the $16.5 million swing in our incentive compensation expense between the two periods. The 2009 fourth quarter included $7 million of incentive compensation expense that was linked to the company’s EBITDA while the 2008 fourth quarter SG&A expenses included the reversal of $9.5 million of incentive compensation accrual.

Adjusting the SG&A rate to further exclude compensation expense just to get an apples-to-apples, the SG&A rate would have been 13.8% for the fourth quarter versus 17.5% for the year earlier period. Excluding restructuring charges and incentive compensation, our fourth quarter SG&A dollars were down $24 million from the 2008 fourth quarter.

Kenneth Lind Campbell

Just one other thing, a lot of people comment on the Chinese drywall on the side. We have our own Chinese drywall activity going on. We’re fixing all the homes but we’ve already recorded all the costs so we haven’t highlighted as we’ve discovered the problem during the course of the last year or so but those costs are 100% already in our numbers. While I’m on the drywall topic, we have we believe identified all the homes that have that problem.

We’ve notified all of them. we have begun a full scale effort to fix them and they are largely in two or three communities in South Florida and the projects are underway and my guess is that it will still take six or nine months to get this completed but I don’t think there are anymore sort of surprises. We’ve looked at every single home we built, and every single model, and every single vacant home, and I think that we have the problem covered. I think there is very low probability that we’re going to see any Chinese drywall expense in the future.

John M. Stephens

Really as a result the progress the company has made with respect to its gross margins and reducing its SG&A spends, we’re seeing the benefits of these efforts in our adjusted operating margin percentage which we define as our gross margin percentage less our SG&A rate. You can see it from the graph, we’ve generated three consecutive quarters of positive operating margins.

The next slide provides an overview of the significant improvement the company has made with respect to its adjusted home building EBITDA during the last year. Our 2009 fourth quarter adjusted EBITDA totaled $49.5 million or a 14.6% EBITDA margin and $116 million for the full year 2009 versus $44 million for the full year 2008. Again, the improvement in our adjusted EBITDA is a result of the improvements we’ve made in our operating performance and in particular our operating margins. Again, we’ve provided an exhibit at the end of the presentation that shows the definition of adjusted home building EBITDA and a reconciliation to the GAAP operating cash flows.

During the 2009 fourth quarter the company generated $101 million of cash flows from operations, $36 million increase over the 2009 fourth quarter despite a 10% drop in total home building revenues. The 2009 fourth quarter included $39 million in cash flows for land sales including $35 million related to a podium project and $35 million in cash outflows related to the purchase of approximately 750 lots during the quarter.

For the full year 2009 the company generated $411 million in cash flows from operations, $148 million or 56% increase from last year. The full year 2009 included $65 million in land purchases and $104 million in proceeds from land sales. Looking ahead, we also expect to receive $103 million federal tax refund in the 2010 first quarter related to the NOL carry back legislation.

On the graph here we’ve also provide the green bars are our cash flow from operations from a GAAP perspective and the blue bars depict what our cash flows from operations were before land purchases and land sales. So, we’ve also provided an exhibit at the end of the presentation that describes how these amounts were calculated.

Over the last year we’ve reduced our completed spec homes an spec homes under construction excluding the podium product by 37% from over 1,200 homes to 763. As of December 31, 2009 the company had 233 completed unsold homes or 1.9 per community. That’s a moderate increase from our 1.3 per community at the end of the 2009 third quarter. As we discussed on our last quarterly call we believe having some level of spec homes will be beneficial as we move towards the spring selling season.

On the right side of the slide you can see that by reducing our spec unit levels we also reduced the dollar value of work in process inventory during 2009 by approximately $210 million of which $100 million of the decrease related to the podium inventory. Again, while we will continue on focusing on managing our construction in process and spec inventory levels going forward, we do not anticipate shrinking our work in process inventory like we did in 2009.

On the debt front, we’ve made significant progress during 2009 and the company reduced the principle amount of its total home building debt by $322 million even after the assumption of $77 million of debt in connection with unwinding three joint ventures during the year. Including our joint venture recourse debt, the company reduced the principle amount of its homebuilding debt since December 2008 by $457 million and its pre 2013 home building debt by $734 million from $1 billion to $278 million.

Since December 2007 we’ve reduced total debt including the joint venture recourse debt by $955 million or 44%. The company ended the year with an adjusted net home building debt to cap ratio of 56% versus 67.8% as of the end of 2008. The improvement in this ratio is due primarily to the reduction in our home building debt and the $94 million tax benefit related to the NOL carry backs.

Our consolidated net new orders for the quarter were up 1% from last year on a 28% drop in our average community count. Net orders were down 39% from the 2009 third quarter which was more than our average seasonal decline of about 17%. Our monthly sales absorption rate was up 50% over the prior year fourth quarter to 1.5 homes per community compared to 1.0 per community in the 2008 fourth quarter but was down 32% from 2.2 per community in the 2009 third quarter.

Our cancellation rate while still in our historical average range crept up a bit during the fourth quarter to 21% up from 15% from the 2009 third quarter but down from 33% in the 2008 fourth quarter. Our fourth quarter cancellation rate as a percentage of beginning backlog was 15% versus 21% for the year earlier period and 17% for the 2009 third quarter.

As far as our backlog goes, our backlog conversion rate for the 2009 fourth quarter was 95% versus 92% for the same period last year and 91% for the 2009 third quarter. The number of pre-sold homes in our backlog declined 40% from the third quarter as a result of the high backlog conversion rate we experienced as well as the decline in our fourth quarter orders.

On a year-over-year basis the number of homes in backlog was down 7% as compared to the 2008 fourth quarter. However, the dollar value of our backlog was up 7% during the same period. The increase was due to a higher average sales price in backlog due primarily to a mix shift to more California homes as well as a 5% increase in our California average home price. Our California backlog made up 41% of all of our homes in backlog compared to 24% in the prior year.

This next slide here gives you a recap of the 19,000 lots that we control of which 16,000 are owned. As of the end of the year we had about 6,200 finished lots which was down from 7,100 at the end of the third quarter and we have another 2,100 lots that were partially improved. I’ll now turn the presentation about to Ken.

Kenneth Lind Campbell

I think increasingly these calls are going to be talking about land activity in the home building world and we get back to normal and we’re starting to rebuild although it may be a slow rebuild. During the quarter we did around 18 deals, improved around 1,400 lots, spent $90 million. You can see that’s most of what we did last year. For the whole year we purchased 1,900 lots, spent $120 million. Most of these purchases, I thought this was kind of interesting, were from developers and not from banks.

Although a lot of our activity in terms of talking to people about land parcels is with banks, a lot of the deals that we get down are sort of more traditional with the same old developers and the developers that are in a position to sort of deal with reality and price things at the market or are at least in a position where they’re still in control, are the kind of people that we seem to be best of dealing with.

There are some advantages to that for us. One, is we’re sort of taking advantage of a long term relationship that we have with these people in many case so these are not public bid everybody racing to see how much they can pay and it just sort of reinforces the value of being in a community for an extended period of time which particularly in the state of California is true for us so that’s kind of where it ends up happening.

I guess 75% of our purchases were in California. The flip side of that is less than 10% were in Florida and I think the current state of the land business is sort of points at that kind of an outcome because the value of land as a portion of the cost of the house in Florida is a lot less than it is in California and when you have a weak market like we have in Florida it’s really hard to make land purchases work out. At least it is for us.

Our need to sort of generate returns at the level we are, north of 20% gross margins and mid 20s IRR, it’s really hard for us to do given the current market in Florida. It’s easier for us to do it in California where land is more valuable as a piece of the pie and where the current outlook I think is better. The pipeline is pretty big. There’s some concern that we’re still not buying as much land as we’re going through and I think that’s true although some people a year ago anyway, would have liked us to move in that direction, our years of land supply going down.

There’s quite a bit of stuff in the pipeline and the stuff in the pipeline meets our criteria although we aren’t going to close on a lot of that $300 million I think north of $100 million is pretty likely to very likely. As it says at the bottom here we’re still holding on to our requirement that the sum of the gross margin and the IRR has to sort of be in the 45% to 50% range. Somehow between those two and that’s certainly been the case in the land that we have bought and in the land that we expect to buy.

The last slide, I think our goal for next year is to eliminate the need for all those slides behind this one that John spends three days working up that explains all our non-GAAP words that we use. So the goal for next year is to eliminate the need to explain adjustments or at least that’s John’s goal.

In terms of what as a company other than that, what we’re focusing on is continuing to push on this land acquisition. The same speech one year later, although the land buying opportunity I don’t think it’s going to be as good as I once thought. It think it will be reasonably good and as is normally the case, that sort of the bottom of the land market sort of trailed a little bit, the bottom of the home sale market so I still think the next 12 to 18 months is going to be a good time to buy land and we are still on that track. The strategy has not changed.

We sort of feel that it’s important to sort of maintain these margins. As you’ve all noticed, we pay a price for that because our order numbers don’t follow everybody else. The trade off here is our margins are creeping up but our sales aren’t growing as fast. I think the sort of silver lining is that our margins are not likely to deteriorate but it does hurt our overall sales volume and makes it harder for us to have an SG&A rate that is sort of consistent with making money.

We’re not trying to generate as much cash as we can and we’re preserving those assets because we think we can make more later. But, if the market gets worse we’re going to have to respond. The flip side of that is if the market gets better, I think we’re extraordinarily well positioned relative to our peers to participate in that growth. The one thing that we’ve invested in over the last now nine months or six months pretty heavily is we’re building a new website. We’re spending millions of dollars on it.

Our sort of general view in marketing is that more and more home builders are using the internet as at least a first point of entry in to the home buying market and we’re investing as I said millions of dollars in trying to make that entry point our front window and to do a good job of trying to attract them to our communities and that will come out in the next few months, begin to come out in the next few months.

In terms of the sort of general outlook I’m not very good at forecasting despite the fact [inaudible] I started my career. We kind of plan the company based on a flat world because we believe that if the market improves we’re perfectly well positioned to participate and the margins will be better. That’s sort of what we’re planning on. Recent experience like for instance in our backlog, the ASP continues to go up mostly because our market shifts to California but our prices are also up slightly.

Our gross margins are holding in our backlog so there’s no sign of deterioration and our SG&A rate, the costs have already been reduced to get that number sort of towards where I was indicating earlier in the call so I don’t see that changing. Though the only other thing I might say about the market is in January and I guess we always comment a little bit about January, January is better.

I think our orders are more than 10% above where they have been last year. Giving we’re projecting a flat sales year in terms of how we structure the company if that continues, that would certainly improve our prospects. Traffic is up and anecdotal stories, at least here in California and in particularly southern California are starting to get sort of interesting. Recently the [Irvine Company opened a few new communities and we’re back to the putting people in busses to get them to the site and selling out entire phases, multiple entire phases in the opening weekend and stuff like that. I don’t think that is going on everywhere but as an anecdote it certainly is interesting.

Hopefully, the length of the monologue that we do here will be shorter next year and inversely proportional to our financial performance so I sort of apologize for the length but as everybody who knows me I can’t help myself, I talk too much. Given that, quit nodding. We’ll turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ivy Zelman – Zelman & Associates.

Ivy Zelman – Zelman & Associates

Do you have really from looking at the perspective of the 10 communities that you’re in today outside of California are you interested in staying in those markets and do you need to step up your land buying where you might run the risk of running out of communities? Or is it possible you may not stay in those markets because your buying is concentrated in California?

Kenneth Lind Campbell

Our current plan is to stay in the communities that we are in. We’re actively looking for land in all of those communities and we bought land in a lot of those communities, in the Carolinas, in Florida. There are a couple of communities were we are sort of starting to get to the point where we need land. I think Denver is a pretty good example of that. Otherwise as everybody knows we had too much land. But, we’re trying to buy land in Colorado and it’s just hard for us to find it at a price that clears our hurtle rates.

But, as it stands right now we have no plans to leave anywhere and we certainly wouldn’t leave an area because for six months we had difficulty. We kept kind of a long term view on these things and we place a high value on being in a community and staying there because we think there are benefits in terms of dealing with the trades, and understanding the land situation and building relationships with the banks and things like that so no change.

Operator

Your next question comes from David Goldberg – UBS.

David Goldberg – UBS

A question on the land market, you kind of thought that maybe 2010 you’d see some more opportunities coming through and maybe the pipelines are filling up a little bit more than what you thought in 2009 and I’m trying to get maybe a better idea why you think that is? Is it a big ask kind of spread situation where you think the ask is going to come down a bit to more reasonable levels or do you think the bidding environment is going to change relative to peers and the competitiveness in the bidding environment?

Kenneth Lind Campbell

Actually, I think both is going to happen. I think you can only hold your breath for so long. There’s this big spread that there was, particularly a year ago, between the bid and the ask is collapsing but I think it’s collapsing from both directions one of which is good news and the other one is bad news sort of. I think people are realizing the market isn’t going to take off and this is the value of the land and they’re getting convinced that that is the value of the land and they’re willing to transact to do it.

It’s a crack, we’re still not buying as much land as we’re going through so we’re not back to the 2005 land buy binge thing. I think there’s a lot of focus on land buying in the United States for the last six months has been on I don’t know what we’d call it, in fill opportunities and good locations and entitled properties, and blah, blah, blah, finished lots. People are kind of recognizing that there aren’t that many of those and they’ve bid them up a bit and those are going to run out.

I think that even in our pipeline we’re starting to look at some stuff that goes beyond and is buying semi entitled land, maybe not raw land but moving in that direction and worrying about 2012, ’13, ’14 land positions particularly here in California I guess. It’s a different market and there is less people chasing it and the sort of need to fill up their pipeline in markets where the people are buying, other public home builders, and I think that need to sort of quickly build up their active communities to help cover their costs, I think that will die down.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

First question just on the SG&A, if I heard you right you had mentioned that it was up a little bit more than it would have been normally due to the incentive compensation accrual. I was wondering if you could give us a sense of that $49 million what the run rate is? How would you think about that for the upcoming year? And, what ’09 4Q would have been without that?

Kenneth Lind Campbell

I guess the way I would do it, I haven’t totally done that analysis or whatever, but the simple way to get I think a pretty good take on it is you take the incentive comp number and spread it out. Then, you can reduce it by a little because we’ve cut back our costs and that’s probably our spend rate. For the year, our incentive comp number was around $10 million so stick that in at this level of EBITDA that’s about what we pay. There’s been a slight decrease because we have 30 less people or something like that and a few million less per year of lease costs.

I think that will get you awfully close to what our run rate is. Looking forward the only plans we have to do anything about it that are significant really are all related to changes in sales. When we open a new community, which we are planning on doing, we’re done reducing communities, we’re now adding communities. Each time you add communities there are four or five people that come with it.

Operator

Your next question comes from Susan Berliner – JP Morgan.

Susan Berliner – JP Morgan

Two questions, one I know you gave your land acquisition spend for 2009. I was wondering if you could give what you spent on finishing land in 2009 and if you can help at all us think about how much that total number could be in 2010?

John M. Stephens

In terms of 2009 we spent about $93 million in improving land this year.

Kenneth Lind Campbell

That goes up a little bit next year depending on which communities we bring on and stuff like that. It doesn’t double but it goes up a little in terms of trying to get your cash flow number figured out. I don’t think we’re going to start getting in the business of telling people exactly what we expect but I think it goes up by 20% or something, 25%, something in that ballpark. I don’t have that number with me but it creeps up a little bit but not a lot.

Susan Berliner – JP Morgan

I guess in terms of land purchases?

Kenneth Lind Campbell

Do you mean what are we going to buy in 2010?

Susan Berliner – JP Morgan

Yes, if you had to give a ballpark.

Kenneth Lind Campbell

Well, I’m going to buy as much land as I can find when the gross margins are in the low 20s and the IRRs are in the high 20s. You tell me, who’s going to sell me land at those prices and I’ll tell you how much I’m going to buy. Our theory on this is that if I can buy land with those kinds of returns with really low price appreciation assumptions like -0 and one and absorption rates slowing getting up to three, or 3.5 over the course of several years then I think if I run out of money I can find more.

So far we’re not doing a very good job of that. I think if I was going to guess that I’d guess maybe we’d buy as much land this year as we go through. But, that would be a wild guess that I would rely on if I were you but it’s sort of probably in the $300 to $400 million range of something. But, as I said, if land prices go down we’ll buy more. If they go up we’ll buy less.

Operator

Your next question comes from James Wilson – JMP Securities.

James Wilson – JMP Securities

Ken, obviously you described the $90 million you purchased or I guess it was $124 last year in land, who it came from. Can you talk about the pipeline of $340 and is there any difference in mix of who’s in that? Are you getting anymore deals out of banks for instance or what it was looking like and what you’re working on?

Kenneth Lind Campbell

In the pipeline it’s still heavily California centric. In terms of who are the sellers in the pipeline I don’t know if it’s any different. Scott, do you think it is much different? I mean, there are some bank deals in there.

Scott D. Stowell

I think the mix, the proportion of developer to banks will shift towards the banks this year.

Kenneth Lind Campbell

I was surprised at how little it was even after I had done it. I’d say, “What’s the number?” Because, I’m on the committee that approves all these things so you would think I would know that. I think that the pipeline has probably got more of that stuff in it. It’s harder to get the banks to move. We just bought a big piece of land the other day from a bank and it’s an expensive piece of land, it was a $29 million purchase or something. I think the pipeline is more bank stuff and we’ll see how that goes. Some of the really big things are bank stuff as well but those are real wild cards.

Operator

Your next question comes from Adam Rudiger – Wells Fargo.

Adam Rudiger – Wells Fargo

I understand the margin volume decision you’re making and how it’s impacting orders, but I was wondering if you thought having less exposure to the entry level market versus your peers might have also impacted your orders this quarter?

Kenneth Lind Campbell

Yes, I think maybe. Our entry level is higher priced than other people’s entry level. I think in the long run, as I’ve said before, there are going to be buyers of homes at all different price points. We make more money, more profit at a higher price point and we took a decision a long time ago not to try and chase price down and compete with foreclosures and things like that so some of our competitors who are doing that, or the other home builders, are selling more homes. But, I don’t think they’re making more money.

I think that might be part of what’s going on. I think that’s fair. It’s hard for us to measure because our mix of sales hasn’t moved. For us we think of it more should we open more communities? When can we open them? Can we maintain our 20% margins? Blah, blah, blah. That’s starting to happen. We opened 10 of them I think in the past quarter. But, I think that’s a fair comment and I just don’t know how to quantify it.

Operator

Your next question comes from [Alex Baron – Housing Research Center].

[Alex Baron – Housing Research Center]

I had a couple of questions, one was have you guys made any sort of attempt to measure the shadow inventory surrounding your communities? And, my second question was do you have, sorry if I missed it, the benefit of previous impairments to your gross margins this quarter?

John M. Stephens

I’ll go ahead and give you that number first Alex, it was about $84 million for home sales.

Kenneth Lind Campbell

We look at shadow inventory in every single market fairly carefully. We look at the vacant homes which I think is more interesting in every community. We look at a couple of different people’s projections of employment growth in the community. We look at this stuff in fairly gory detail, maybe even too gory but it’s sort of my background because I’m whatever, an econometrician by trade.

I can tell you that over the last 12 months, whatever people said was going to happen because of those things didn’t. So, our prices have been creeping up since January of last year, I don’t think they’ve gone down in any market. We do look at it, we don’t share that information, some of it we’re not allowed to share because we pay somebody for it and we’re not allowed to give it to other people. So, we look at it but we so far don’t change our behavior. We price our houses sort of to sell at the rates that we’re selling at and the rates that we’re selling at are pretty much consistent with the rest of the industry.

I think our sales absorption rate in January was 1.7 or something and in January that’s not so bad. So, we’re not going to lower our prices to increase it abnormally. I think that one of the reasons that prices don’t go up is probably because of that shadow inventory but we price it to sort of keep our sales going and maintain our margins and that’s just the way it works out.

Operator

Your next question comes from Joel Locker – FBN Securities.

Joel Locker – FBN Securities

Just on the orders from a year ago in the first quarter, do you have those broken down by month? January, February and March of ’09?

Kenneth Lind Campbell

January, February and March of ’09 orders, new orders, they were 180, 250, 350.

Joel Locker – FBN Securities

Just a theoretical question on California obviously you’re dependent there, maybe 55% of your revenues or so are from there and I was just wondering are you a little bit cautious based on if you look at a 30 year trend of home price versus income levels it’s still probably 70% or 80% above the median when it use to be maybe 20% based on a better place to live, sunshine factor, whatever it maybe? I was wondering if you’re I guess apprehensive about that at all to fall back in line or regress more to a national average?

Kenneth Lind Campbell

That’s an interesting question. Or, will Florida increase to the national average, right? When we do our little price protections here that’s actually something we look at fairly carefully, the affordability metric and as you point out in California people spend a bigger share of their income on homes than they do in Florida and of course where I moved from, Manhattan, people do the same thing as they do in Southern California.

I guess the answer is no. I mean yes, I’m concerned about it but we’re not sort of changing our way of looking at things assuming that’s going to happen. I’d say the risk with us is we’re sort of assuming that’s going to be the tendency to go back to. So whether it’s there or not – like right now the homes in Orange County for instance are particularly cheap and homes in Florida are still expensive relative to history and we sort of think that home prices in Orange County are going to sort of drift up and homes prices in Florida are going to maybe drift a little further down before they are done. So you’re right that’s a risk.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

I just wanted to get back to gross margins for a second. What are you expecting in terms of the next couple of quarters year-over-year sequentially based on your backlog?

Kenneth Lind Campbell

I think that the number that we reported in the fourth quarter of 20% is sort of a reasonable expectation. There are sort of offsetting factors, our new communities are higher but it’s a pretty small percentage of our total. The value engineering, rebidding efforts that we have underway which we call one standard are having an impact which reduces our direct costs and on the flip side as we bring on mothballed communities, sort of the built in margins on some of those are maybe in the high teens based on current prices versus the low 20s which is what our new stuff is at. There’s sort of a tug-of-war going on and I think it’s probably a reasonable expectation that gross margins probably aren’t going to move a lot.

Michael Rehaut – JP Morgan

As a percent of new orders what would the new communities represent?

Kenneth Lind Campbell

In terms of deliveries in 2010 it’s I guess less than 10% would be the number that I would use, or about 10%. It’ slightly less than 10% in our plan, in a plan that’s flat. What happens if our sales do something other than flat, that number goes up pretty quickly because that’s where it comes from so in a flat world it’s about 8% or 9%. If the world starts to grow that percentage grows so that is an upward pressure on prices without prices going up. Do you see what I mean? It has an upward pressure on gross margin without prices moving.

Operator

Your next question comes from Susan Berliner – JP Morgan.

Susan Berliner – JP Morgan

I think this will probably be the last time I ask this question but John, I was wondering if you can give an update on the joint ventures? What you did this quarter and how much total debt is left at the joint ventures?

John M. Stephens

We have about $39 million of recourse debt left in the joint ventures Sue and it really relates to three projects, two really big ones in California, one in San Diego and one up in northern California and we have one really small joint venture in Florida. Then also the north Las Vegas, that bankruptcy has been approved. It’s in the appeal period which we think will likely be resolved shortly. That’s really it, that’s all we have on the joint venture side.

Susan Berliner – JP Morgan

And the total debt?

John M. Stephens

The total debt of what?

Susan Berliner – JP Morgan

Of the joint ventures, sorry not just recourse?

John M. Stephens

Well the north Las Vegas debt I think is right around $180 million as it comes out of the bankruptcy.

Susan Berliner – JP Morgan

Because last quarter I think you had like $270, is that right?

John M. Stephens

I think it was around $230 but again, after the bankruptcy I think it gets down to around $180 million.

Operator

Your next question comes from [Alex Baron – Housing Research Center].

[Alex Baron – Housing Research Center]

I think I heard you say you guys had mothballed about 52 communities or so. I was wondering can you talk a little bit more about that in terms of how many lots are there? Are the lots finished or are they undeveloped? And, just because they’re mothballed does that mean that you don’t have to record impairments going forward until you reopen them?

Kenneth Lind Campbell

I’ll work backwards, if we have to impair them we have to impair them whether they are mothballed or not and we look at them. Of the 52 that are out there 10 of them we think are basically mothballed and held for sale so we don’t really expect them to come back but that can change. That’s not a number you can rely on much because if prices go up or sales accelerate then they get more interesting so there are 40 mothballed communities. I think that most of them are in California, is that far? 65%?

John M. Stephens

A big chunk are in California and of the 50 we have mothballed as Ken said, about 10 are held for sale and another 10 or so we’re projecting to bring back on line in 2010 so that number should be shrinking as we move through the year. But, a large chunk of them are in California. I would say another piece is in Nevada. Some of the property that we purchased we’re just not going to get going on right away, there’s no sense of urgency there. Then I would say the balance is primarily in Florida.

[Alex Baron – Housing Research Center]

In terms of the development stage of those?

John M. Stephens

I think it’s different stages. I think some of it is partially improved, some of it is raw and some of it is finished lots. It’s kind of across the board.

Kenneth Lind Campbell

Like for instance is [Laguna Valley Co] mothballed?

John M. Stephens

Yes it is and that’s raw.

Kenneth Lind Campbell

So we have one big community which is a really cool piece of land outside of Sacramento that ultimately has a cost of development in sort of the $140 million range that we don’t expect to start working on, even putting a shovel in to ground until next year. So some of it’s like that and some of it we built two of the five communities and the other three we’re going to wait. It’s all over the map. I don’t think that the development stage of them as a group is much different than what we’ve been selling through lately.

John M. Stephens

Then Alex, just to kind of get back, we haven’t ignored these from an impairment point. We’ve actually impaired almost most of these projects. Of the 50 only eight have not been impaired so we’re not shoving them in the closet and not addressing them. We are analyzing them just like we do any other project.

Operator

Your next question comes from Buck Horne – Raymond James.

Buck Horne – Raymond James

Just following up on this a little bit on the mothballed communities, if for example you don’t see any meaningful price appreciation in these markets for maybe another year or two, how does that change your strategy of holding on to these mothballed communities?

Kenneth Lind Campbell

Well first of all we don’t see any significant price appreciation this year anyway and we’re bringing 10 more of them back on. That’s already in the sort of number. If there’s also no price appreciation next year then you have to sort of question the impairment number not just for the mothballed communities but for every other community. We sort of globally expect prices to be kind of flat this year I would say more or less but we expect a small amount of price appreciation next year, like a couple percent.

But, if prices go down this year and the outlook is bad next year that will force us to revisit all of our properties so I don’t think the mothballed properties have any special spot there except they are farther out. I think the effect on mothballed will be the same as some other ones. On some of the properties I’m not sure it would affect it at all. In other words like that one I was just talking about, we don’t expect to sell homes on that piece of property until 2012 or something like that. So if it takes another year for the market to recover it wouldn’t even affect that one. So some it would affect, some it wouldn’t.

Buck Horne – Raymond James

One other one, now going in to the spring selling season would you guys expect to increase your number of specs or how do you think about your spec strategy going in to the deadline? Do you want to do any drywall hold type of strategy or anything else along those lines?

Kenneth Lind Campbell

We’re building up our spec count. We started building up our spec count from like four months ago or something. First, because we over shot, we reduced our specs by more than we were planning on so we’ve been slowly but surely building the specs up and we expect to continue to do that a little bit. But, we’re not doing it like some of our competitors are. We’re doing it a little bit is what I would say. For us, it’s like going up one house in a community or something like that, or maybe two houses a community in some places.

This sort of notion that somebody should get all the houses built to the point where they’re putting countertops on them and stuff like that would be pretty tricky to do I think. What we do is we sort of keep them going in some kind of a cycle and if home sales accelerate than we have more homes in sort of the early stage of construction. Since we’re only building, maybe we have five or six homes, specs, at some stage of building at each community in any given point in time sort of the sales rate for us really just accelerates the amount of which homes are being sold.

If the sales were particularly good like they were last spring, we’re going to end up with the same number of specs but they’re going to be at early stages of construction instead of later stages of construction because it takes us four months to build a home, three or four months. So it’s a gradually moving process, we are building up specs but not like more than one or two a community.

Operator

Your next question comes from Michael Rehaut – JP Morgan.

Michael Rehaut – JP Morgan

The last question I just had was you had mentioned or put on a slide 42 active letters of intent totaling $340 million. I was wondering if you could break down given you had commented that you are possibly looking a little bit further down the line in terms of perhaps some partially developed or not finished lot type deals, of the $340 can you give us a sense of the percent of those deals that are either unfinished or partially finished that you would have to put additional dollars in to?

Kenneth Lind Campbell

It’s pretty small. It’s 10% or 15%, in that category. I mean they are pretty interesting but they’re still small.

Michael Rehaut – JP Morgan

So then the vast majority or the rest of that would be finished lots?

Kenneth Lind Campbell

Yes or almost finished. The same thing everybody else is running around after. I mean we’re starting to try and think about 2012 and beyond and we have one or two things in the pipeline along those lines and we think that might be an interesting place to look but the vast majority of our activity is looking at the same stuff everybody else is.

John M. Stephens

And half of it is outside California, the 42 and those markets tend to have more option lots that are finished.

Kenneth Lind Campbell

Two thirds of our lots that we bought, I think that’s the right number.

John M. Stephens

For the year.

Kenneth Lind Campbell

For the year in 2009 were option deals.

John M. Stephens

Yes.

Kenneth Lind Campbell

I don’t think that’s maintainable maybe but that’s how that works out.

Operator

Your next question comes from [Ed Holstack] – Alliance Bernstein.

[Ed Holstack] – Alliance Bernstein

Two questions for you, first in the longer term do you still see your core markets evolving back to a kind of one sale per week type of number?

Kenneth Lind Campbell

Well, if I last that long, in our long term projections that we don’t share with anybody I don’t think we even get there. I think we get to like 3.5 or something.

[Ed Holstack] – Alliance Bernstein

Is that because of California per say or that even includes some of the other markets?

Kenneth Lind Campbell

That’s just because I’m kind of a conservative fellow. I mean, if I let Scott do it, he’d go back to a higher number. Part of it is I just don’t want people to start holding me accountable for something that is too hard for me to do. I don’t think there is a view here that the world’s going to be very different than it was in the past. So when the market does its strong recovery thing which I think ultimately it has to, we’re going to get back to 900,000 homes a year at some point. It might be 2014 but eventually we’re going to move off this 350,000 unit number and the sales rate is going to spike.

In fact, in the beginning it might really spike because as you’ve noticed the number of communities out there has gone down and the private builders are continuing to have difficulty accessing capital so the market share of the public people, or the people who have access to capital is going to continue to go up. But, long term we don’t think it’s going to be any different. We don’t think it’s ever going to get back to the 2004, 2005, 2006 stuff where we’re selling 30 homes on Saturday morning. But, it doesn’t really affect what we do much either. In other words, if it goes to 4.5 great. There’s not something we ought to be doing today in order to make sure we can take advantage of that, I don’t think.

[Ed Holstack] – Alliance Bernstein

But the IRRs you’re talking about don’t require that either?

Kenneth Lind Campbell

No, no, no.

[Ed Holstack] – Alliance Bernstein

Then lastly just on the incentive comp, I think it was mentioned about $7 million was for the quarter, does that ramp up much different as EBITDA starts to expand? How can we model that in? Can you give us some help with that?

Kenneth Lind Campbell

It’s lock step. The board can change their mind but I think expecting it to be the same in 2010 as a percent of EBITDA is a pretty good guide. It’s an adjusted number because ultimately the impairments go get incorporated to the number. In other words, there’s no free lunch from when I got here going forward so that makes it a little harder to model but basically it’s just a percent of EBITDA. If we had the same EBITDA in 2010 as we did 2009 we’d pay the same amount of bonus plus or minus, I mean adjusted for this impairment thing.

[Ed Holstack] – Alliance Bernstein

That’s a cash payout?

Kenneth Lind Campbell

It’s not. We have shifted the mix from what historically the company did. The company use to pay about – well whatever, we’ve shifted it. About 35% of it is in stock and 65% of it is in cash and the stock is limited on transfer over three years. So basically you get it but you can’t sell it for three years, or a third, a third and a third.

Operator

There are no other questions coming in the queue at this time so I’ll turn it back over for closing remarks.

Kenneth Lind Campbell

Thanks for listening to a really long call. Hopefully next quarter we won’t have to do so much explaining, we’ll just gloat.

Operator

This concludes today’s conference call. Thank you for your participation.

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