Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Standard Pacific Corp. (NYSE:SPF)

Q3 2007 Earnings Call

October 26, 2007 11:00 AM ET

Executives

Lloyd McKibbin – VP, Treasurer

Steve Scarborough – Chairman, President, CEO

Andy Parnes – EVP, CFO

Analysts

Steve Kim - Citigroup

Ivy Zelman - Zelman and Associates

Michael Rehaut - J.P. Morgan

Timothy Jones - Washerman and Company

Mike Wood - Banc of America

Susan - UBS

Susan Berliner - Bear Stearns

Robert Manowitz – RBS

Andrew Bronsa - Banc of America Securities

Alex Barron - Agency Trading Group.

Dwayne Kennemore - McDonalds Investment

Ken Ben - Jefferies and Company

James Eustice - Churchill Pacific

John Kohler - Oppenheimer & Close

John Jester - Stone Tower Capital

James Wilson - JMP Securities

Keith Wiley - Goldman Sachs

James Lucania - Levine Leichtman

Eva Young - IndependenceUnited

Joseph Arinright - Elm Capital

Andy Shaffer - GK Capital

Ryan Randall - Randall Capital

Philip Ray - GSC Group

Peter Mydek - GI Partners

Steven McCauley - Camulus Capital

Michael Rehaut - JP Morgan

Buck Horne - Raymond James

Mike Zelcer - Honeywell

Darren Richman - GSO Capital

Operator

Good day, everyone and welcome to the Standard Pacific Homes2007 Third Quarter Conference Call. Today's call is being recorded. At thistime for opening remarks and introductions, I would like to turn the call overto Mr. Lloyd McKibbin, please go ahead, sir.

At this time for opening remarks and introduction I wouldlike to turn the call over to Mr. Lloyd McKibbin, please go ahead, sir.

Lloyd McKibbin

Thank you. Good morning, ladies and gentlemen and welcome toStandard Pacifics 2007 Third Quarter Earnings Conference Call and webcast. Theformal presentation will be followed by a question-and-answer period where youwill be invited to ask any questions you may have.

I'm now going to read a notice regarding forward-lookingstatements. This conference call and accompanying slide presentation containsforward-looking statements, including statements about the Company's outlook,markets, orders, backlog, land position, operating strategy, potential forfuture profits, available borrowing dates and potential joint-ventureobligations, as well as statements regarding it's expected community openings,inventory levels, leverage, liquidity and borrowings.

In general, any statements contained in these materials thatare not statements of historical facts should be considered forward-lookingstatements. We caution you that forward-looking statements involve risks anduncertainties and there are a number of factors, which could cause our actualresults to differ materially from those that are contained in or implied bythese statements.

For a list of certain of these factors please see our pressrelease of October 25, 2007, and our most recent Annual Report on Form 10-K andsubsequent quarterly reports on Form 10-Q. Copies of these documents arereadily available, including on our website at www.standardpacifichomes.com orfrom the Company upon request. Both the presentation and question and answersessions are being recorded and can be replayed via the Internet by going toStandardpacifichomes.com and visiting our Investor Relations section.

The recorded presentation will be available for replay by3:00 p.m. Pacific Time this afternoon and will be available until November 25,2007. The audio portion may also be replayed by dialing 888-203-1112 andentering pass code number 1498773.

Our presenter this morning are Steve Scarborough, Chairmanand CEO, Standard Pacific and Andy Parnes, Executive VicePresident and CFO, Standard Pacific.

Now I would like to hand the call over toSteve Scarborough.

SteveScarborough

Thank you Lloyd and good morning andthank you for participating in Standard Pacific's 2007 third quarter earningsconference call. Conditions across most of the countries major housing marketscontinue to weaken during the Company's most recent fiscal quarter. High levelsof unsold new and existing homes, decreasing home prices, tenacious home buyersconfidence and further erosion of mortgage credit liquidity during the quartercombines or undermine any stability with in the markets.

These forces continue to weigh heavily onthe minds of our prospective home buyers during the third quarter, puttingadded pressure on home prices, which resulted in soft sales absorption rates,higher levels of buyer cancellations and additional inventory impairmentcharges for the company.

During the quarter we recorded a net lossof $119.7 million or a $1.85 per share, compared to net income of $30 millionor $0.47 per share in the year earlier period. Home building revenues for thequarter were $676 million versus $834 million last year.

The Company's results for the 2007 thirdquarter include non-cash pre tax impairment charges of $223 million or $2.12per share after tax of which $175 million related to consolidated real estateinventories, $42 million to the company's share of joint venture inventoryimpairment charges and $6 million to land deposit write-offs. Excluding thethird quarter charges the company's earnings would have been $0.27 per share.

During the third quarter we took steps to improve ourliquidity, including providing the Company with added flexibility, under thecovenants of our revolving credit facility. We amended our bank revolver, termloan A and term loan B facilities, to among other things reduce the level ofrequired consolidated tangible network and provide greater flexibility underour interest coverage ratio of covenant.

In exchange for these adjustments, the company agreed to areduction and tightening of the leverage covenant overtime and a reduction inthe revolving credit facility commitment from $1.1 billion to $900 million, alevel commensurate with our projected capital requirements looking forward.

In addition to create additional liquidity under thefacilities borrowing base provision the company issued $100 million of seniorsubordinated convertible notes. The company is cushioned under its borrowingbase, which stood at over $300 million at September 30, 2007, increased nearly$47 million from the end of the second quarter.

As we manage our business through these challenging times,we continue to be focused on reducing our level of consolidated inventories,generating cash-flow and paying down debt. Over the last 12 months, we havereduced our level of consolidated home building unsecured debt by over $265million and expect to continue to be cash-flow positive, as we look to thebalance of this year and for calendar 2008, taken as a whole.

It is our goal to pay off a substantial portion of ourrevolving credit facility and reduce our absolute home building debt levels bythe end of 2007. In addition, we expect to generate net cash, next year evenafter retiring our $150 million of senior notes maturing in October, 2008.

To support our financial objectives, we continue to makeimportant progress, on a number of operating initiatives companywide. Duringthe year, we have significantly curtailed our expenditures on land and landdevelopment improvements and we are budgeting further reductions next year.

In addition, we sold over 4400 lots year-to-date, generatingover $190 million in cash and $50 million of future tax cash flow benefits. Andwe are forecasting, an additional $50 million in lots sales, in the fourthquarter this year.

As a results of these efforts and with the conversion of ourbacklog we have been able to reduce our lot position by 25% over the last 12months and we expect to continue to meaningfully reduce our lot inventories,through next year with a goal of bringing our lot supply closer, to ourlong-term target of a three to four years supply.

During the year, we have also made appropriate adjustmentsto our work force and overhead structure in response to today's lower volumelevels. Our employee account is down 29%, from the peak in June, 2006. Inaddition, we have recently consolidate three operating divisions, which webelieve will save nearly $7 million in overhead expenditures, on an annualizedbasis going forward.

With the regard to production, we are aggressively managingour spec inventory. The level of spec homes under construction is down over 50%year-over-year. Additionally, we are carefully monitoring, our starts giventoday's lowered volume levels.

I also want to comment on the, significant progress, that wehave made with our national purchasing initiatives which we call one standard.One standard is focused on improving our cost structure, increasing ourproduction efficiencies and enhancing our operational capacities.

Over the last 12 months we have generated over $65 millionor $5,000 per home on average, in cost savings through our rebidding efforts.And seven of our divisions have completed an extensive value engineeringefforts that is identify potential direct cost savings of $10,000 per home or$4 per square foot.

Before I turn the presentation over to Andy Parnes, I wantto acknowledge and thank the team of professionals of Standard Pacific, foryour dedication and hard work and for your ever present focus on our customer,under very challenging market conditions. This year Standard Pacific moved upto number three in customer satisfaction, among the national publicly tradedhome builders, according to J.D. Powers. Congratulations team.

At this time I will turn the presentation over to Andy toreview our third quarter results in more detail.

Andy Parnes

Thank you Steve. For the 2007 third quarter the companygenerated a net loss of $119.7 million or $1.85 per share, versus net income of$30.8 million or $0.47 per share the previous year. Year-over-year change wasdriven primarily by a 19% decrease in home building revenues, a negative homebuilding gross margin percentage resulting from a $175 million of inventory andimpairment charges. A $44 million decrease in home building joint ventureincome, which reflects $42 million of J.V. impairment charges, a 130 basispoint increase in our SG&A rate, offset by $2.4 million decrease in otherexpense.

The Company recorded a total of $223 million of pre-taximpairments and write-offs during the quarter, the detail of which we willreview in a moment, compared to $59 million in the 2006 third quarter.Excluding the various non-cash charges we would have earned $17.3 million or$0.27 per share.

This slide provides more detail on the impairment chargesrecorded in the third quarter. We continue to review every project each quarterfor impairments including projects not yet open. For the vast majority ofprojects that were impaired this quarter, we experienced one or more of thefollowing conditions during the quarter, which contributed to the impairmentcharges.

Further home price declines due to the increasing supply ofnew and existing homes, coupled with eroding home buyer confidence. Continuedturmoil in the mortgage markets which led to further tightening in moreexpensive pricing of certain mortgage products, in losses, on the sale ofexcess land or lot positions. Until market conditions stabilize the company maycontinue to incur additional inventory impairment charges.

As you can see from the numbers on the slide 66% of theinventory impairment charges for the quarter including joint ventures were fromCalifornia, but 57% recorded in SouthernCalifornia, principally in the Inland Empire in San Diegoand 43% in Northern California principally in the Bay Area into a lesser degreethe Central Valley in Sacramento.

10% of the impairment total is from the South West withprojects impaired in Phoenix, Tucsonand San Antonio.24% of the impairment total for the quarter was from the South East region andincluded write downs in Jacksonville, Tampa, Miami and Sarasota. $120 million ofthe inventory impairment charge related to ongoing projects, while $55 millionrelated to lot sold or held for sale. Of the combined $223 million ofimpairment charges for the company and joint venture projects, approximately$104 million or 48% represents potential future profits.

This slide is intended to give you a sense of the aggregatelevel of inventory impairments recorded to date, including joint ventures andthe percentage of inventory and lots, owned or written down thus far, based onour December 31, 2006 inventory balance in lot position.

For purposes of calculating the percent of inventoryimpaired, we divided the total inventory balance for impaired projects, by ouraggregate consolidated inventory total as if 12/31/06. As you can see, we haveimpaired 51% of our project inventory balances between housing and land sold orheld for sale and 59% of our owned lot position. In addition, we have impaired35% of our joint venture inventory balance and 20% of our joint venture lots.

The 19% decrease in third quarter home building revenues to$676 million was primary attributable to 25% decrease in new home deliveriesand a 1% decrease in our consolidated average home price. These decreases werepartially offset by a $51.5 million year-over-year increase in land salerevenues. Land sale revenues totaled $57.3 million for the quarter andrepresented the sales of approximately 1500 lots. Our backlog conversion ratefor the quarter stood at 62%.

In California,consolidated new home deliveries decreased 8% from the prior year period.Deliveries were off 26% in Southern California,reflecting a slowdown in order activities in middle of 2006.

While still at depressed levels deliveries increased 58% in Northern California and were driven by an increase inorder trends in the first three quarters of 2007, as compared to the yearearlier period.

In the South West, new home deliveries decreased 22% in thethird quarter. Deliveries in Arizonadecreased 32% reflecting the decrease in order activity in the later half of2006 and into 2007, coupled with a sharp increase in our cancellation rate inthe state through out most of 2006.

New home deliveries were down 23% in Texas,driven primarily by a significant drop in demand in San Antonio and Dallas, which waspartially offset by an increase in deliveries on the company's Austin operation.

In Coloradodeliveries were off 13% and while it continues to be a challenging housingmarket. New home deliveries in the companies South East region decreased 37%,due primarily to a 48 % year-over-year decline in Florida as a result of weaker housingdemand, which began last year combined with the decrease in the companyinflation rate in the state. In the Carolinas deliveries were off 14% from theyear earlier period, driven by a decrease in deliveries in both the Company's Raleigh and Charlotteoperations.

During the 2007 third quarter the company's consolidatedaverage home price dropped 1% to 364,000. The modest decline was primarily dueto an increase in the level of incentives and discounts required to sell homesin California, Floridaand Arizona,which was substantially offset by changes in the company's product andgeographic delivery mix.

The company's 2007 third quarter gross margin percentagefrom home sales was down year-over-year to 0.9% from 19.2% last year. The lowergross margin reflects $120 million housing related inventory impairment charge.Excluding this charge the company's third quarter gross margin from home sales wouldhave been 20.2% compared to an impairment adjusted year-over-year gross marginof 24.9%. Lower gross margin is adjusted for impairments was driven byincreased incentives and discounts in generally falling home prices across mostof our major markets.

As you can see on the left hand side of the slide wegenerated $524 million of cash flow from operating activities, over the last 12months, which was partially offset by a $183 million of cash used for investingactivities. The net result of this was a reduction in our consolidatedunsecured homebuilding debt of $268 million over this period, principallythrough the pay down of our revolving credit facility.

EBITDA for the third quarter was down 54% to $64 milliondriven by the lower level of pre-tax profits before the non-cash impairmentcharges. Please refer to the next slide for definition of EBITDA and areconciliation of EBITDA to operating cash flows.

At quarter end our net homebuilding debt-to-capital ratiosstood at 57.9%, up from the previous quarter, due to the impact on our equityfrom the impairment charges. Our total debt-to-capital ratio, which includesindebtedness of our financial services subsidiary and FIN 46 liability was59.7%.

Our LTM interest covered ratio was 2.7, down from the previousquarter ratio of 3.2. It is expected that our interest covered ratio willcontinue to gradually decline during the balance of this year and into 2008.

At September 30, 2007 we utilized $294 million of capacityunder our revolving credit facility, including $41 million of letters ofcredit. The additional borrowing base capacity at September 30 was $304million, an increase of nearly $47 million from the previous quarter. Pleasekeep in mind that the borrowing base capacity is calculated as of September 30,2007 and that we could borrow in excess of this amount if the borrowings wereused acquire borrowing base eligible assets.

We have also included for your reference the calculated andrequired ratios and amounts for the bank revolvers debt-to-equity andconsolidated tangible net worth covenants, which the revisions made under thefacility during the third quarter.

The purpose of this slide is to give you a better sense ofour JV portfolio, including additional detail on our twelve largest homebuildingand land development joint ventures. All of this information will be includedin our forth coming third quarter 10-Q so when it becomes available you canstudy this information in more detail.

We thought it would be helpful to give you a sense of the sizebalance sheet composition, including leverage and credit enhancementsassociated with these twelve ventures. As you can see the twelve venturesrepresent approximately 75% of total combined JV too assets and debt. The totalleverage of these twelve ventures is 51%, although leverage for all of our JVsis 52%.

The few items worth noting about our JVs we thought worthmentioning. It represent a well diversified portfolio of assets located invarious markets, primarily throughout the state of California. The age of land holdings verysignificantly from land that has been help for more than 10 years to severalthat are four to five years old and with the few that were more recentlyacquired. And we have a diversified group of partners in our ventures, whichincludes some of the large well capitalize public builders, some large privatebuilders and sophisticated strategic partner such as [Starword] and IHP.

We also wanted to provide you with an update on developmentswith respect to certain of our joint ventures during the third quarter. At theend of the second quarter we mentioned that we are consolidated two SouthernCalifornia ventures due to disputes with our partners over additional capitalneeded for certain construction issues. These two ventures one during thirdquarter or by the company purchase the assets of the ventures, combinedconsideration of approximately $85 million.

It should be noted that the two buildings acquired by usassociated with these ventures are nearing completion and we expect to monetizeour investment in these assets over the next few quarters. We consolidated aventure in Northern California during thethird quarter due to a dispute over additional capital contributions. We willlikely unwind this venture in the fourth quarter and purchase the assets forapproximately $60 million.

Well over the course of this downturn, we may find itnecessary to unwind additional joint ventures. We are not currently indiscussions with any of our other venture partners to acquire or assume theirventure assets.

We made a re-margin payment during the third quarter of $7million and are projecting future re-margin payments of $45 to $60 millionbased on estimated current asset values. But if asset values decrease in thefuture, re margin obligations may increase.

The above mentioned venture buyout in Northern California and projected re-margin payments have been reflected inour 2007 and 2008 cash flow projections. We have included certain dataregarding loans originated by our mortgage subsidiary for the current and yearearlier periods. As you can see under product mix, 59% of our recent loanoriginations were of conforming size that is less than $417,000, while 28% werejumbos and 8% were government loans under the VA and FHA programs.

Under credit quality, 1% of our loans were subprime, while14% were all day. Under other data, our combined loan-to-value decreased to84%. We continue to have a high average FICO score of 739, while the level offull or reduced stock loans continue to increase, which means the use of statedproduct continue to decline. Our capture rate continued to improve and was 76%for the quarter.

The impact of the current mortgage market turmoil has leadto the significant reduction of subprime and all day product. In addition,while available whose lending institution is willing to hold product, jumboloans have become more expensive.

As you would expect, this environment has had an impact onour recent sales activity including a moderate uptick in our CAN rate and a decreasein our sales absorption rate.

At this time, I would like to turn the presentation backover to Steve after which we will answer any questions you may have. Thank you.

Steve Scarborough

Thank you, Andy. Revenue orders, company-wide excludingjoint ventures increased 23% to 1,474 new homes. The Company's consolidatedcancellation rate for the third quarter was 34% compared to 50% in the 2006third quarter, and 28% in the 2007 second quarter. While the Company'scancellation rate is as a percentage of beginning backlog, for the 2007 thirdquarter it was 28%, compared to 22% on the year earlier period.

While orders were up year-over-year, last year's thirdquarter levels were down 58% compared to the 2005 third quarter. The overallincrease in orders resulted primarily from an increase in orders in California and Arizonaand to a lesser extent nominal increases in Coloradoand Nevada.These increases were partially offset by order decreases in Florida,Texas and the Carolinas.

Despite the positive comparisons in some of our markets, ourabsolute sales absorption rates continued to reflect difficult housing marketconditions in most of our markets resulting from reduced housing affordability,higher mortgage interest rates and the growing levels of completed new andexisting homes available for sale.

These conditions were exasperated further during the 2007third quarter by the increased tightening of available mortgage credit for homebuyers, including increasing pricing for jumbo loans and the substantialreduction of all-day mortgage products. All of these conditions havecontributed to an erosion of home buyer confidence.

Net new orders in California,excluding joint ventures for the third quarter increased 106% than the 2006third quarter on an 18% higher community count. Orders were up 87%year-over-year in Southern California, and a11% higher average community count. The increase is primarily due to additionalincentives and more aggressive marketing strategies.

The regions 2007 third quarter cancellation rate, while downfrom 57% a year ago, increased to 34% from 28% in the 2007 second quarter,driven by increases in our Orange County and Inland Empirecancellation rates. I might mention that we did have a successful campaign inthe Southern California region that ran fromSeptember 6 through September 23. We called it Mission Impossible, and weexceeded our expectations generating 227 sales during this two week period.This is on, throughout 49 communities in the region, and the campaign was conceivedto reduce inventory and meet year-end goals as selected neighborhoodsthroughout the region. And we are obviously very pleased with the results.

We have to have some fall out, from the campaign. But it wasrelatively minor, so far, 10% of our sales that were generated during thatperiod of time have cancelled. But again, this is lower than our rate that wehave experienced in the other regions and during the quarter. So we are very,very pleased with the campaign.

Let me move to Northern California.Our orders were up 165% year-over-year. During the quarter, in NorthernCalifornia on a 30% higher community count, while our conditions remainchallenging in the company's Northern California divisions, improved sales year-over-year focus onincreasing traffic and orders through a more competitive pricing strategy. Thecompany's cancellation rate of 35% for the third quarter was down from 53% onthe year earlier period but up on 25% in the second quarter.

Net orders in the Southwest for the quarter were up 13%year-over-year. In Arizona the orders were up 53% on a 17% lower averagecommunity count, despite the increased orders in Arizona, which was largely theresult of a decrease in the level of cancellations during, the quarter, ascompared to the year earlier period.

The Phoenix anti Tucson markets continuesto experience weak demand for new and existing homes. In addition the company'scancellation of rate in Phoenixwas 34% which was down sharply from the 2006 third quarter rate of 68% butstill remains high reltatiev to historical levels.

In Texasnet new orders were down 15% on a 16% higher average community count. Thisdecline was primarily due to the continued deterioration in the San Antonio market. Thismarket with its high concentration of first time buyers is been adverselyimpacted by the tightening of mortgage credit underwriting standards,particularly with respect to sub-prime borrowers.

To a lesser extent the company has experienced weakness inthe Dallas market over the past year and morerecently has experienced some softening in the Austin market. In Coloradonet orders were up 32% on a 27% lower community count and in Nevadawe generated 30 new home orders from four communities in the company's Las Vegas division. Inthe Southeast net new orders decreased 14% during the 2007 third quarter, dueprimarily to a 14% decline in orders in Florida.

The year-over-year drop in Florida order activity reflects continuederosion in buyer demand, the tightening of mortgage credit underwriting standardsand the increasing level of available homes in the market. Our cancellationrate in Floridaare down from 54% a year ago, increased to 49% for the 2007 third quarter from37% on the 2007 second quarter. Then finally net new orders in Carolinas were down13% on a 55% higher community count as a result of recent slowing in housingdemand in the Charlotte and Raleigh markets.

Our 2007 third quarter backlog of 2,584 pre-sold homes wasvalued at $1 billion, a decrease of 39% from the year earlier period,reflecting in the meaningful slowdown in order activity during 2006 and intofirst three quarters of 2007.

As housing market conditions began to erode in 2006, ourcancellation rate increased meaningfully resulting in a higher level of spechomes across the company. The level of spec homes peaked at 12.9 homes percommunity at the end of June 2006 and has been steadily at around nine homesper community over the past three quarters.

Over the past year, we have intensified our review of specstarts in a effort to balance our corporate inventory objectives with ourdivisions requirements to maintain an appropriate level of homes that can besold and closed in a relatively short of time, which many buyers prefer today.We will continue to carefully monitor our levels of spec starts and our attemptto control and automatically reduce the number of completed spec homes, companywide.

In the lower left hand side of the slide you can see theprogress we have made reducing our lot positions. I talked a little bit aboutthis earlier as a result of our significant curtailment and adding new positionthrough our land pipeline, combined with selling excess lot positions andterminating a large number of land purchase contracts over the past year. Ourlot count is declined 25% year-over-year. This reductions will help move ascloser to our long-term target of a three to four years land supply withapproximately 50% owned and the balance option or in joint venture structures.

Well this times are certainly trying we are managing ourbusiness for the goal of improving our liquidity and the financial position.Our efforts to generate positive cash flow have resulted in the reduction ofover $250 million of embeddedness over the past twelve months. It is our goalto pay off a substantial portion of our revolving credit facility by the end of2007. In addition, we expect to generate positive cash, next year even afterretiring our $150 million of senior notes, maturing in October 2008.

To support our financial objectives we have implemented anumber of operating initiatives companywide. We are focused on maintaining acompetitive pricing strategy, while finding the right balance between margin,volume and cash flow generation. We are also carefully managing our starts andother cash outflows including land and land development expenditures and wehave sold access plans and been successful in reducing our lot inventoriesacross the company.

In addition we continue to focus on product design andproduction efficiencies, with a goal of reducing the overall cost structure ofour homes. And finally we are appropriate adjustments to our workforce andoverhead, and consolidated certain of our divisions to right size the companyin light of today's lower volume levels.

Well thank you for your time, this morning, and now thisconcludes our prepared comments. And we will now open the conference call toyour questions.

Question-and-AnswerSession

Operator

Thank you (Operator Instructions). Our first question isgoing to go to Steve Kim at Citi, please go ahead.

Steve Kim - Citigroup

Hey guys, good job in a tough environment.

Steve Scarborough

Thank you, Steve.

Steve Kim - Citigroup

I wanted to ask you the question regarding your JointVentures. If you look back at the few joint ventures that you went in todisputes and you subsequently had to absorb. Are there any similarities aboutsort of the reasons why those got into a disputed situation, then when you lookat them and then you look ahead at your other joint ventures, gives youoptimism that perhaps you are not going to have a significantly greater numberof such disputes in the future?

Andy Parnes

Yeah I think that's a good question. Of the four we'veeither unwound or in the process of unwinding, two of them are Los Angeles division with financial partnersand we had some constructions issues on projects that we had managed. So therewere some unique aspects to those from a construction prospective and we justfelt it was equitable to kind of go our separate ways on those particularsituations.

The other two that were in Northern California were actually with the same financial partner, one hasbeen unwound, one is in the process of unwinding, and they just indicated alack of desire to continue to participate economically in the project.

And we kind of put them into different categories, and thenI would say the bulk of our partners that I would refer to a strategicpartners, either other builders whether they are large publics or largeprivates or what I would say partners that are kind of committed to theindustry long term and we have had situations where we've run into the need tore-margin, the need to put in additional capital and most of our partners arestepping up to the plate and putting additional capital in.

So as we sit here today as we mentioned in our comments, weare not aware of any other situations where things may unwind. But I woulddefinitely put those partners that we dealt with on those matters in kind of adifferent category from the rest of our partners that really are representativeof the vast majority of our remaining joint ventures.

Steve Kim - Citigroup

Okay great. Yeah that's very helpful. And then secondarily,as we look forward into the fourth quarter and maybe even the early part of '08,and we look at the sources for cash generation, I would guess that probably asignificant amount may reside in inventory reductions.

First of all can you talk about whether you expect more ofthe inventory reduction to occur in WHIP or for homes completed underconstruction or on a land side, or if there is any other balance sheet itemthat you think maybe salient in terms of generating cash that I might not bethinking of over the course of the next few quarters?

Steve Scarborough

Steve I think certainly from our perspective, we seesignificant reductions from WHIP. Having said that, we are certainly not addingsignificantly to our land positions, and the further more we have a fairlysignificant amount of our land holdings in at fairly advanced stage as far asland development cost. So incrementally, we are not feeling like we have a lotof incremental dollars, that need to be invested to bring that land on thosehouses through.

Operator

We'll go next to Ivy Zelman at Zelman and Associates.

Ivy Zelman - Zelmanand Associates

Hey good morning guys. Congratulations, I know it's been areally tough ride in the last several weeks. I wanted to just focus in on therelationship with your banks. There has been a lot of speculation that thegroup of banks on your working capital line are not being supportive and maynot be amenable and be patient going forward.

Now one of the reasons that's been speculated is, given thetrading in your bank term D notes and as well as what's happening on thetrading, if there is some [biz] on your bank term A notes? Can you pleaseexplain to us, how those relationship works and the interaction that the banksmay have with those in trading activity, If anything at all? That will be thefirst question.

Andy Parnes

Sure. And I will answer a couple of different parts. Firstof all, we've gone back to our bank group twice this year, and we feel that thegroup has been very supportive of our efforts. Clearly it's a differentenvironment today, and they are very diligent in analyzing from a creditprospective and we spent a lot of time working with them.

But we do, appreciate their support in their long-termcommitment to the company. I would say though, that the term B note is adifferent debt instrument. That is generally participated in by institutionalinvestors. Although it ties in to the bank covenants, its really not a notethat is really representative of participation by banks.

These are institutional investors that trade these notespretty frequently, whereas the revolve in the term loan B, are essentiallybanks that we have worked with over a number of years, and we haven't hadtrading activity in our revolver or our term loan A upto this point. But termloan B, just in the normal course does trade, those are institutional investorsthat would sometimes participate or in many cases participate in our otherpublic notes. So, it could be some of the same traders that again do activelymove in and out of those notes. Is that helpful?

Ivy Zelman - Zelmanand Associates

Yeah, that helps. Andy, with respect to the increase in theborrowing base by $50 million, can you give us some idea what the relationshipwith the banks are or what the conversations may be like realizing that,obviously you would like to have been cash flow positive this quarter, and whattheir expectations are going into '08. And even if you default this, let's sayon a covenant whether it will be into the minimum casual network covenant,their appetite for accelerating that and forcing you in a situation that youotherwise wouldn’t be good for everyone. What's the conversation like withthem, do you think?

Andy Parnes

Well, I think, I am just looking back at level ofcooperation and support that we've received upto this point. They have shown awillingness to work with us upto this point. We believe that if we are in theprocess of generating cash and paying down debt that it's in their bestinterest and our best interest to work with us and allow us to do that. Wewould not expect that even if we had covenant issues, but we were in theprocess of paying down the debt that we would be put in a position or perhapsthe debt would be accelerated.

Operator

And our next question goes to Michael Rehaut at J.P. Morgan.

Michael Rehaut - J.P.Morgan

Hi, thanks. Good morning.

Steve Scarborough

Good morning Mike.

Michael Rehaut - J.P.Morgan

First question, going back to the cash flow generation, asyou've noted, you've been paying very high level of scrutiny on every dollarthat goes out. But, I was wondering as we look into the fourth quarter, yousaid that you now expect to pay back a majority of the revolvers balance. Ifyou could give us some additional idea of perhaps getting our arms around therange of what that might be, and obviously, to some extent, you have lesscontrol over cancellations. But, in terms of cash going out the door forincremental development, I was wondering if you can give us an idea of what therequirements are there, and how that contrast perhaps 2Q and 3Q ‘06 where,perhaps you still had to put a lot of cash into development to get to theclosing point in the fourth quarter?

Steve Scarborough

I think without getting into specifics on what the numbersare, it's clearly come down pretty dramatically from a year ago in terms ofwhat we are spending on land. We are going to be down quite a bit from whatwe've spent on land last year. We expect that trend to continue next year, thesame with land spends. We are going to spend quite a bit less this year landdevelopment spends this year, and we expect that number to be lower next year.

We used kind of the reference to substantially paying itoff. There are a number of moving parts here, I would say, it's more on the revenue side than it is on withrespect to what's going out the door. I think we have a pretty good handle onwhat we are going to be spending. But as you mentioned, the cancellation ratehas been kind of moving around and because of that, there is some degree ofuncertainty around our delivery level, although we think we’ll deliver enoughhomes to where we can generate a meaningful amount of cash, and we said incommentary that we expect to pay down a substantially portion of the revolver.So, we think we'll make a meaningful dent in it.

We have run a number of different business plan scenariosfor the quarter, any of which could be viable, hence our reluctance to giveanything specific, we think that the levels of deliveries will meaningfulenough to generate cash. And yeah, we are entering the quarter with a backlogof over 2,000 homes. We generally have a pretty good idea of what you thinkyour deliveries will be in the upcoming quarter, and I think our recent historyhas shown that we've been pretty accurate in projecting. But again, in theseuncertain times, we kind of want to hedge our bets a little bit.

Michael Rehaut - J.P.Morgan

Okay. Thank you for that Andy. The second question, justgoing back to the JVs for a moment, you've identified that you expect to takeone more on in the fourth quarter, and that has had about $60 million ofrelated debt that you have to take on. In terms of your other large JVs thatare out there, is the password is give any more detail in terms of the --yousaid that most of them are with either public builders or bigger financialinstitutions committed. I guess the question is, how many JVs perhaps you don'tfall into those two categories, and perhaps on the large public and financialinstitutions that you are talking about -- maybe just give a little more colorin terms of the day-to-day communication and to the extent that might give alittle more color on your comfort level with those partners?

Andy Parnes

Well as you would expect, these joint ventures are prettysizable in operations and there's pretty frequent contact, particularly intoday's market, where it's a pretty dynamic rapidly evolving environment. So weare constantly talking about our budget updates and the timing of land takedowns and if there is home building involved what the pricing strategies areand in many cases there is on going discussions with banks about makingadjustments to the financing extensions and things like that so there I wouldsay there's pretty frequent interaction and in a number of cases we have thesame partners across a number of joint ventures but just to give you a sense Ithink the first part of your question was just maybe how many financialpartners we have in the entire pool of JVs.

We have I believe somewhere around 45 to 50 total jointventures. We have shown 12 largest on that one slide but there's 35 others thatwe have and that's kind of footnoted below 23 kind of have ongoing activities12 are inactive.

And I would say out of the total 45 or so JVs we have thereis just a handful of a single digit number where we have what I would callfinancial partners and so that means the substantial majority of our venturesare with what I would call strategic partners, builders or in some casesfinancial partners but financial partners that have pretty substantialinvestments across a wide spectrum of real estate activities like a Starwood oran IHP.

Operator

Our next question go to Timothy Jones at Washerman andCompany.

Timothy Jones -Washerman and Company

Yes good morning, you stated that you reduced yourheadcount. Could you give me the number of employees you have now and what youhad a year ago?

Steve Scarborough

Yes, Tim at our peak we were in the neighborhood of 2850 andI believe we are closer to we are down about 850. So we are just about 2000.

Timothy Jones -Washerman and Company

Okay. I know that it was impressive your increase in salesgranted you -- you were going to progress at a very depressing number of lastyears. One worry I guess is the bearer who say are you giving the homes away.We do expect to at least make money from those sales three any write downs ofland?

Steve Scarborough

I think that was reflected in our numbers that we showedex-impairments that we were generating a slight margin on the houses. It isextremely challenging and I think we mentioned that our strategy is workingvery hard to find a balance between margin, volume and cash flow generation andwe are managing that very closely and diligently with our Division Presidentsand with our Sales Managers as well.

We were pretty gratified by the results in Southern California. We saw a meaningful results as you might expect in alower price points relatively speaking in the region. In the Inland Empire andin some of our LA markets that are -- well we have some very well locatedappropriately priced product and we did there are some homes prettysuccessfully in the San Diegoarea as well. Little bit more challenged up in the Northern California area butin a very competitive market we were holding our own in Sacramento.

And I would say the same is true and when you move into Florida we've all heard how tough Tampa is, and while orders were down prettysignificantly. We were still ahead, of where we were last year for the quarterin Tampa. Andon Phoenix samestory, we again very competitive market, but we beat our numbers, that weregenerated last year. So, we are hanging tough and I think we have just makingday-to-day decisions, on appropriate price levels and just gauging that againstwhat our sales rate targets are.

Operator

We will go next to Dan Oppenheim at Banc of America.

Mike Wood - Banc of America

Hi this is Mike Wood. Can you speak a bit about, the thoughtprocess with the announcement in vote to increase the share authorization?

Andy Parnes

Well sure, when we did the convertible note offering, lastmonth between the offering and share lend facility had assumed essentially. Theremaining balance are just substantially all of the remaining balance, that wehad authorized.

So we decide, it was prudent corporate move to establishinga new authorization level. Our initial authorization in our existing by lawsand articles was 100 million shares and that's what we are doing again. Soagain, we have just consider this kind of guessed it, of moving the ordinarycourse, just to maintain some level of authorized shares.

Mike Wood - Banc of America

Okay and you mention in the release, -- you had bought outtwo partners interest in the JV's and you are expecting another in the fourthquarter. Can you just talk about, what was attractive with these investment orwhat led you to take these actions to buy off the partners interest given theneed for cash flow.

Steve Scarborough

Well, with respect to the two, that were bought out duringthe quarter. Those assets, as I mentioned in my prepared comments, willessentially being converting the cash here over the next couple quarters. Theywere rather complex podium structures that needed some repair work. And we'rethe managing member of those projects. We have the expertise to repair theproject get them to be sold.

And as I've mentioned, our partner were financial partnersand we really are the ones that have the capacity to finish the projects anddeliver them and so we decided it make sense for us to buy those. Despite the85 million that went out the door, we think we get that back in a relativelyshort period of time. The other two projects that we've been involved are bothup in Northern California. We have been inthat market 30 plus years, we believe in that market, things may be bumping inthe near term, but we think these are well located projects at over time willdeliver good value.

Operator

We go to David Goldberg at UBS

Susan - UBS

Hi, its actually Susan for David

Steve Scarborough

Hey, Susan?

Susan - UBS

Yes. Can you talk a little bit about the assumption that youuse in order to come at the $45 million to $60 million estimate in there-margining merging agreement?

Lloyd McKibbin

Sure. It's a process that our treasury department goesthrough every quarter and we look at, what we believe, the current values ofthe assets are, we look at the terms of the loan agreement for that particularproject and make an assessment based on the terms of loan agreement and ourdetermination of the value what the remerging obligation will be. In some cases,there is an appraisal that's underway, that the banks have requested, in somecases the assets have not been appraised and we have kind of done that processinternally. So there is various kind of stages involved, some being appraised,some not appraised and again we've got folks in our treasury departments thathave worked at banks and understand the valuation process pretty thoroughly.

Susan - UBS

Okay. And then have you looked at kind of the probabilitiesaround that coming in lower or higher than that estimate that you given us?

Andy Parnes

We’ve seen situations were when the appraisal has come inthat its been higher than our estimate and we’ve seen where they have come in,where they have been lower. I wouldn’t say, there has been a consistent patternand they have been – that they have kind of occurred in both counts. But wethink – we are trying to take a reasonably conservative approach, so when wemake commentary about our cash flow, we can make these comments with some levelof assurance that we’ve got our bases covered.

Operator

Will come now to Susan Berliner at Bear Stearns

Susan Berliner - BearStearns

Good morning. Couple of questions, one I guess just Andy, ifcan kind of go through the debt I guess, assuming you payoff your bank line atthe end of the year or first quarter, what’s the priorities. I know you havethe bond coming due in October, but could you buy bond back in the open marketprior to paying off many of term?

Andy Parnes

We have to ability to do that. There is nothing in any ofour credit agreements that prohibit us from buying bonds in the open market.But you are right, I think right now, our first priority is to pay down therevolver, making sure we have the capacity to pay down the notes maturing nextyear. I think after that, right now, we are not really committed any particularstrategy. I think we’ll see how much cash we wind up generating next year andthen make a decision at that time.

Susan Berliner - BearStearns

Great. My second question was if you guys can talk abouthave you been impacted about the – with the fire is going on in California, if you canjust review any insurance you may have for fires?

Steve Scarborough

We mentioned there that we have surveyed all our divisionsand we so far have been extremely fortunate we haven’t seen any significantdamages or incurred any significant losses. And to my knowledge our employeeshomes have been able to stay away from the prior damage, so we are very, verypleased as far as that is concerned. And I think there has been a lot of great,great progress in the last couple of days with the fires so I think we areagain very, very fortunate to have escaped that. We have a very largecommitment as to a lot of other builders here in the region. So as so far we arevery, very please with the result. Andy, do you want to speak to the insurancerelative to that should we have any problems?

Andy Parnes

I don't believe so, I think we have got pretty sufficient ininsurance levels, fire is generally covered under our property course ofconstruction, our policies fire unfortunately isn’t new to us in California. So reviewour insurance with that in mind.

Operator

We go next to Robert Manowitz at RBS. Please go ahead.

Robert Manowitz – RBS

Yeah. Hi. Good morning. Just two last question. First, canyou go though the net impact to the borrowing base from the $85 million spentin the third quarter and what you think the impact will be on the fourthquarter's resolution for $60 million?

Andy Parnes

That's a good question. The $85 million that was spent tounwind those joint ventures when to put assets on our balance sheet thatactually went into the 90% borrowing base category. So those two transactions Ibelieve may have been modestly accretive to our borrowing base, because thatthey were buildings under construction, so they go into our highest borrowingbase level. And the capital that we have invested in those previously did notreceive any borrowing base credit, so those particular transactions did notharm our borrowing base. The asset that we will be buying in the fourth quarterhas some home building activity on it, but it mostly land. And that I don'tthink will be added if to our borrowing base, it may be modest subtraction fromour borrowing base.

Robert Manowitz – RBS

Okay, fair enough. And then on the question earlierregarding the increase in the authorization. Is there a scenario where youcould meet your re-margin requirements at the joint ventures through theissuance of stock may be not dollar-for-dollar for cash. But is that somethingthat could be contemplated?

Andy Parnes

Your mean issuing stock to the banks to satisfy yourre-margining arrangement, for issuing equity to raise cash to them.

Robert Manowitz – RBS

Well issuing equity raised cash is easy, but I am wonderingif there is a scenario were you could actually issue stock in lieu of cash tothe joint venture effectively supporting the JV and the to the benefit of thebanks at some account to….

Andy Parnes

The re-margin payments needed, it needs to come in the formof cash, because that needs to go to the bank to pay the loan down. Sosomewhere along the way that stock would have to be converted to cash.

Operator

We'll go next to Andrew Bronsa at Banc of AmericaSecurities.

Andrew Bronsa - Bancof AmericaSecurities

Hi guys.

Andy Parnes

Hello.

Andrew Bronsa - Bancof AmericaSecurities

Hi. As I go through your noted [dentures] I’m trying tofigure out kind of maximum amount of secure debt that can be incurred under themost stringent of the covenant. But as I calculated under the [inaudible] ofthe tightest basket, which is $75 million general basket plus I think leans onmodel homes which puts you somewhere in the mid-200 for secured debt. What isthe ability or lack of ability for the current facility to be secured and areall my numbers correct?

Andy Parnes

Well, you ‘re right. Those of the general lean limitations.It's important to understand that if for some reason the revolver became asecured facility, that we would then have to provide that same collateral toour public notes, to our public note holder. So I think those are provisions inour public notes, let's say. If the revolver ever becomes a secured facilitythat the public notes would remain [Perry pursue]. So as long as we kepteverybody Perry pursue, we could move in a direction of a secured facility.

Andrew Bronsa - Bancof AmericaSecurities

Right I guess

Andy Parnes

Does that answer your question

Andrew Bronsa - Bancof AmericaSecurities

Yeah. I guess following on that would be, obviously thatwould some serious doubt on the banks actually getting secured. So how do youthink just speaking out loud, the banks change their view on the lendingsituation, given the fact that we’ve seen in past amendments with otherbuilders, banks shooting for security and getting it in most cases, whereas inthis particular structure, it seems like they might not be able to be securedand have a claim at the assets outside of the general unsecured pool. Do youthink that changes their thinking at all, or do you think that -- what haveyour conversations been on that front ?

Andy Parnes

Well it's hard to get into that, because we are dealing with24 different banks when we are going through this process. So that's probably difficultfor me to get into that, specifically, in terms of what the conversations havebeen. But its possible there could be a scenario that the banks wouldcontemplate going forward. Obviously it wasn’t one that they contemplated thisgo around.

But that's something they want to do, but the understandingthat if they did, they would be Perry pursue public lenders. But that’s notsomething we hope we are going to be dealing with in the near term.

Operator

And we’ll go next to Peter Plaut at Sanno Point Capital.Please go ahead.

The lines is open Plaut,we are not hearing you. Let me go ahead release that line. We’ll go next toAlex Barron at Agency Trading Group.

Alex Barron - AgencyTrading Group.

Hey guys.

Lloyd Mckibbin

Good morning, Alex.

Alex Barron - AgencyTrading Capital Group.

Good morning. I was just wondering when you guys do like amortgage write down as an incentive, where does that expense show up?

Andy Parnes

The mortgage write down that usually shows up as a reductionof our revenue

[PND] incentives.Incentives generally would show up as a reduction of our sales price.

Alex Barron - AgencyTrading Capital Group

So it's not in the cost to good sold?

Andy Parnes

No.

Alex Barron - AgencyTrading Capital Group

Okay. The other question I had was pertaining to any homesthat were delivered from communities previously impaired. Like how many homeswere that and what impact did that have on gross margin this quarter?

Andy Parnes

That was on Slide 4 and it was $69 million, and I don’t knowhow many homes that related to, but $69 million of our operating results,represented recapture from impairments recorded in prior periods. $21 millionof that came through joint venture. So it would have been $48 million relatedto consolidated deliveries and then $21 million from joint venture deliveries.

Operator

We’ll go next to [Dwayne Kennemore] at McDonald Investment.

Dwayne Kennemore -McDonalds Investment

Hello. I have a quick two questions. Have the cash flowsassociated with re-margining in JV wind of payment already occurred or is itstill in on an accrual basis?

Andy Parnes

I am sorry, say that again.

Dwayne Kennemore -McDonalds Investment

Have the cash flows associated with the re-margining and JVwind of payment, already occurred or is it still an accrual.

Steve Scarborough

Well there were two joint ventures during the third quarterand one joint venture in the second quarter where we have unwind those and thatcash was gone out the door, it was $85 million in the third quarter and Ibelieve $80 million in the second quarter for the unwinds. And then the $60million for the fourth quarter that has not been spend yet.

Dwayne Kennemore -McDonalds Investment.

Okay.

Steve Scarborough

And then with respect to the re-margin payments the $45million to $60 million that we have kind of estimated that has not been spentyet. We have spent I believe about $35 million this year on re-margins that wasactually gone out the door I think it was $7 million in the third quarter and$25 million in the second quarter.

Dwayne Kennemore -McDonalds Investment

Okay. My second question is what's the level of overlapbetween assets written down this quarter as impairment and assets sold distinctquarter?

Steve Scarborough

Well, I am trying to think most of what we have even heardfor ongoing projects would represent future deliveries. So of that I think itwas $120 million of housing related impairments that really represents futuredeliveries.

And then we took $55 million of impairments related to landthat were either again a sale or that we have sold and I think it was onesecond I have that right here, of that $55 million, $32 million related to landthat is held for sale that we haven't sold and $23 million related to land thatwas actually sold during the quarter.

Operator

We will go now to Ken Ben at Jefferies and Company.

Ken Ben - Jefferiesand Company

Good morning.

Steve Scarborough

Good morning, Ken.

Ken Ben - Jefferiesand Company

I was wondering on your revolver to the end of this year youare going to pay most of that, but early on next year to the first two or maybe three quarters do you expect it to be a borrower under that revolver tillthe fourth quarter?

Andy Parnes

Till the fourth quarter of next year?

Ken Ben - Jefferiesand Company

Yes.

Andy Parnes

It depends on what scenario we are looking at but we doexpect that at some point in time next year it does get paid off in somescenarios it gets paid off earlier than others but ---

Ken Ben - Jefferiesand Company

But you will need that to fund construction activity and therepayment of the '08 notes?

Andy Parnes

We don’t believe we are needed to pay the '08 notes that wewill retire at maturity next year there is a possibility that we take advantageof the trading of the '08 notes the trading price of the '08 notes today andbuy some of those prior to their maturity so if we bottoms '08 notes today wewould draw down on the revolver to buy those but ultimately by the end of nextyear we believe the revolver will be paid off. So there is a number ofdifferent scenarios that kind of could unfold one having to do with ourbusiness plan and one having to do with the timing of the '08 retirement againdepending upon how many of the '08’s we could buy prior to maturity.

Ken Ben - Jefferiesand Company

And could talk also a little bit about your incentives andhow much the level of incentives have increased over the last three quartersand what are the level of incentives that you are offering during this lastquarter to generate orders. How much of an impact that's going to have on grossmargins as those homes get delivered over the next couple of quarters?

Steve Scarborough

Incentives just you can imagine if we look at year-over-yearhas increased fairly significantly on average for us for this last quarter thatwe've been in across the company our incentives were in the range on an averageof 38,000 per unit, compared to that same period in '06 incentives were 13,000per unit.

And then if you look at a nine month period year-over-year.It was pretty much in that same category 33,000 per house in '07, 9,000 perhouse in '06. Areas where incentives were higher, in this last quarter with theup in the Northern California area. Where theygot up to maybe, 29% as a percent of revenue and Phoenix in the neighborhood of 20%. South Florida and in the neighborhood of 20% to 25%. Andso our market increase, as you have been fearing and from other builders aswell, in those areas that had a significant run up in price.

Operator

We go next to James Eustice at Churchill Pacific. Mr.Eustice, your line is open. We are not hearing you, please check you mutebutton.

James Eustice -Churchill Pacific

Yes, this is James Eustice. Sir, just on explaining the cashflow from operations just about three month period ending 2007. What's it, isit just because of the payment that were paid out or how would you explainthat?

Andy Parnes

You are talking about the negative $18 million.

James Eustice -Churchill Pacific

Yes, exactly.

Andy Parnes

Well included in that number, would have been the $85million or so that we spent to unwind those two joint ventures. Those would beconsidered additions to our inventory. So, that's were that number would havebeen reflected. So that excluding the $85 million would have been a positivenumber.

James Eustice -Churchill Pacific

Alright, thank you.

Operator

And we will go next to John Kohler at Oppenheimer &Close.

John Kohler -Oppenheimer & Close

Hi. Yes, I didn't see, and maybe you didn't publish theaverage selling price on new orders. I was just wondering if you had thatavailable?

Andy Parnes

I normally get a roll forward of that report. I don't haveit in front of me, but that's something I could get you, John, if you want it,call me after the call. My phone number is at the bottom of the press release.

John Kohler -Oppenheimer & Close

For new orders in third quarter, the average price?

Steve Scarborough

Yeah, average price, we were at 377 on average across thecompany, and that was in contrast to that same period last year of 372.

John Kohler -Oppenheimer & Close

That was for deliveries or that was --

Steve Scarborough

That is for deliveries, right.

John Kohler - Oppenheimer & Close

Okay.

Andy Parnes

Yeah, I do have that, so if you want to call me later, I canget that for you.

John Kohler -Oppenheimer & Close

Okay, that's fine. And I was wondering, in the communitiesof which you ran the sales promotion, how large were the impairments that youhad taken prior to those sales?

Andy Parnes

I don't if we have that information on to answer thatquestion. They were in Southern Californiaprojects where we have taken a number of impairments. It is probably importantto understand, when we did that program, most of incentives in arrangementsthat we were advertising, we had in place, there were some incrementalincentives that we added. But I don't think that in and of itself triggeredadditional impairments, but we did have a numbers of projects that we sold outof where we have previously taken impairments.

John Kohler -Oppenheimer & Close

Correct.

Steve Scarborough

What helped us on that program we did, as Andy indicated, wewere pretty much operating within pricing and incentives ranges that had beenin the market, maybe there were some incremental additions, but we complimentedthat with some attractive financing programs to help entice people and givethem qualified to close the product. So, I think that was significant to thesuccess for the program.

John Kohler -Oppenheimer & Close

Okay great. Did you happen to -- were you keeping squarefootage roughly the same or did that come down a little bit in the salespromotion.

Steve Scarborough

Square footage of the houses were -- these were pretty muchhouses that were pretty advanced in constructions that could close fairlyquickly. So, the product was really not in different price ranges or footageranges than what we have been operating in over the last couple of quarters.But as I mentioned earlier, a bulk of the sales were more in the moremoderately price projects, while we were dealing with the conforming loans.

Operator

We will go next to [Peter Mullen] at Stone Tower Capital.Mr. Mullen, your line is open.

John Jester - Stone TowerCapital

It's actually John Jester, can you hear me?

Operator

Yes sir.

John Jester - Stone TowerCapital

Just trying to get a percent for what differentiated you inthe markets where you had very strong orders, particularly, Northern and Southern California. Is there any branding going on here,what was sort of the strategy that drove those results?

Steve Scarborough

Well again I think. We've been operating in the California markets for40 years, and so our brand is very well established and I do believe that it'sa very significant competitive advantage that we have. So we very stronglybelieve that we do not necessarily solely need to compete on price. We believethat we have a product that is well recognized for its design and quality, andthe locations because of the relationships that we have with developers. Oftentimes we find ourselves in extremely strong locations with very limitedcompetitive alternatives for the buyer. So again, I think it's a great point,and I think that's one that we are really stressing with our buyers and takingadvantage of that.

John Jester - Stone TowerCapital

Just say for a competing product, your price concessions areless in the competition?

Steve Scarborough

No, I wouldn't say we are necessarily less in thecompetition, but I'd say that in the Southern California market, it's a moresupply-constrained environment, so there are not as many competitors that onemight find in more open markets in the outer areas of Inland Empire or in other markets across the countries. So we feel thatan advantage for us. We still have to compete toe-to-toe, but we think todeclining advantage for us, all things being equal as our products, ourreputation in the market for quality design and service.

Operator

We'll go next to James Wilson at JMP Securities.

James Wilson - JMPSecurities

Hi, filling in for Jim, could you guys provide a little bitof color on what kind of price cuts, it's up to spur sales in the differentgeographic regions?

Steve Scarborough

We've talked generally in the more competitive markets thatare price cuts in centers if you would put that all together, we've been in therange of 20% to 25%, and it's actually, its a reflection of the competitivemarket that we find ourselves in. I mentioned also earlier that we've had somepretty good traction recently in the lower price points, say in the California marketswhether we can bring conforming product to the market to support our buyer'spurchase decision.

We've had a little bit more difficulty in moving the higherend product because of the tightening in the jumbo end of the market. And againgenerally the higher price points are often times little bit more of adiscretionary purchase decisions. So we could be often depending upon pricepoints. We could be off $200,000 on certain projects other projects that mightbe more $50,000 or $100,000 off but by percentages basically in the range of20% to 25%.

James Wilson - JMPSecurities

Thank you.

Operator

I will go next to Goldman Sachs and this is Keith Wiley ofGoldman. Please go ahead.

Keith Wiley - GoldmanSachs

Yeah. Just a question on the joint ventures and I couldn'tsee twice as they went by so fast but how much of the joint ventures that island versus homebuilding? And then for the joint ventures that are land how do-- can you just describe briefly the business model how they generate the cashto complete the land development and pay the debt service?

Steve Scarborough

Well, a typically land development joint venture ends withland either being sold to the venture partners or third parties. So that's howthe cash flow is generated. I would say most of our land development joinventures are ones where the partners are buying the land, some of the largerjoin venture like Black Mountain Ranch and Talega, that are two of the landdevelopment joint ventures that are on slide 14, knows there is actually quitea bit third party land sale. We will be posting the slides on our website, ifyou want access those later you can.

We also have this information in our 10-Q, but of this, ofthe joint ventures that were posted there were $765 million of debt, $533million related to land development joint venture, $232 million related tohomebuilding joint ventures that’s $765 million of debt for the 12 largest.Then there was another $262 million of debt related to the joint ventures noton that slide, and I don’t have a breakout, my guess is probably more thanwould be related to the land development joint ventures, because we do more ofthose just in the normal course.

Operator

And we’ll next go to James Lucania. I believe it is LevineLeichtman. Please go ahead.

James Lucania -Levine Leichtman

Yes. Thank you for taking my call. Just a question about,you got of 3500 homes under construction, what you estimate it would cost tojust get all those homes up to ready to be sold?

Andy Parnes

I think that’s going to vary quite a bit by market in someof our less expensive markets, the stick and brick cost could be $100,000 inCalifornia. It could be $0.5 million plus. So and of course, I just don’t thathave that information available.

James Lucania -Levine Leichtman

Okay. And then on your revolver could you tell us what thecurrent balance on that is and if the borrowing base, the $300 millionborrowing base limit is that the limiting factor on way you can draw on underthe revolver or is there a covenant cushion that pushes that number actuallylittle bit lower?

Andy Parnes

That’s what really governance what we can borrow on aday-to-day basis. So I would say that’s the primary governing factor we’relooking at. And when we say that we have to be $300 million of borrowing basecushion, it’s a little bit more complicated in saying we can only go out andborrow $300 million more. If we go and we spend $300 million more into the revolver,but buy or we invest in inventory, that creates additional borrowing baseeligible assets, which could then increase our ability to borrow. So its aniterative process and the number could actually be quiet a bit higher, again ifwe’re investing in inventories.

I believe our revolver balance hasn’t changed much it may beup a little bit, if anything from where it was at the end of the quarter. AndOctober is a pretty like closing month for us, so there is really not, we’reprobably not going to be much in a way of cash flow positive this month, thebulk of our closings will come in December for this quarter.

Operator

And we’ll go next to [Eva Young] at Independence United.

Eva Young - Independence United

Hello.

Operator

Please go ahead

Andy Parnes

Hi, Eva.

Eva Young - Independence United

Hi. Have you bought any of your notes, public notes in thefourth quarter so far ’08 and any of the other outstanding debt?

Andy Parnes

We haven’t yet, and once our window opens at something thatwe will likely do.

Eva Young - Independence United

What you mean by when the window opens?

Andy Parnes

Well, we can buy those securities only when we got an openwindow very much like.

Eva Young - Independence United

Yeah.

Andy Parnes

We buy stock. If we are repurchasing shares, we can all dothat during an open window. So we’re, since we are insiders we have to besensitive to the timing of when we do that.

Eva Young - Independence United

And then, from the second quarter third quarter could youtell us about your gross margins on your new orders? Has it declined, was is itflat?

Andy Parnes

I don’t have that information available. What I do have andmay be this kind of helps to answer the question indirectly is that our grossmargin on our deliveries during the third quarter, excluding the impairmentswas 20.2%, so that was our gross margin on deliveries in the third quarter. Ourgross margin on deliveries in the second quarter excluding impairments was20.7%. And just to give you a little bit more color the gross margin ondeliveries in the first quarter excluding impairments was 20.7%. So it's beenpretty consistent around 20% the last three quarters.

Now your question was what was that on orders? Because wewere being very diligent in taking these impairments. If it's an impairedproject and we are taking an order on it, the gross margins should be in thatvicinity of around 20%.

Operator

And we will go next to [Joseph Arinright with Elm capital].

Joseph Arinright -Elm Capital.

Yes good morning. As you know the bonds that are due nextyear yesterday were trading to yield 20%. So obviously some body thinks thatthere is a change they are not going to get paid.

So my question is if in an emergency if push comes to shoveyou need it to raise cash quickly to pay them. Is there anything in yourcovenants that will prevent you from having a fire sale of your houses and[WHIM] and raising the $150 million quickly and just paying off the bondsbecause it's a very small part of your total debt.

So unless there's some covenants that will preclude you, itwould seems like a pretty safe bet they will get paid off.

Andy Parnes

Well we think in the normal course we're going to generateenough cash to be able to do that. So we are not contemplating right now, wewould have to do a fire sale or kind of a distress sale of our assets to getthere.

I don't think there is any thing specifically in it, thatwould preclude that type of strategy other than we just have to be sensitive towhat that would do to covenants like our minimum net worth and leveragingthings like that if that created losses of such a magnitude that that can inturn undermine covenants. We just don't think that the strategy we need toemploy at this time.

Joseph Arinright -Elm Capital.

Do the senior debt notes have net worth covenants?

Andy Parnes

No.

Joseph Arinright -Elm Capital.

As about in banks? It's only the bank which would have thatcovenant?

Andy Parnes

The net worth covenant?

Joseph Arinright -Elm Capital.

Yes.

Andy Parnes

That's correct.

Steve Scarborough

The bank in the term A and term B

Andy Parnes

That's correct yes.

Operator

Our next goes to [Andy Shaffer] at GK Capital.

Andy Shaffer - GKCapital

Yes, hi. On the joint venture debt if I heard you correctly,you have a little bit over $1 billion outstanding. Now, given that at least bymy count over $700 million of the debt associated with joint ventures werestarted or formed after 2002, can you give a breakdown on what you are solelyresponsible for under your credit enhancements and what you could be jointlyresponsible for? And then also who those other parties are?

Andy Parnes

Well those would be our home builder partners and ourstrategic partners. And I believe the amount of debt that is subject to loan tovalue agreements where we have some level of recourses, a little under $500million and I got that in the footnote here somewhere.

Andy Shaffer - GKCapital

So that decline roughly $80 million to $90 million from theend of second quarter?

Andy Parnes

Yes. Yes $498 million, that's how much is subject to[inaudible] so that's $196 million of debt we are solely responsible for, or$301 million we are jointly and severely responsible for with our partners.

Andy Shaffer - GKCapital

I am trying to understand at what point do you becomeresponsible for it? Is it a re-margin situation where so long as you or yourpartner continues to put money in, that keeps debt responsibility down at thejoint venture level?

Andy Parnes

Well, the numbers that I have given you, those are theobligations of the partners not at the joint venture level. And when we talkabout $45 million to $60 million, of re-margin obligations that we're kind ofestimating based on today's value, that would be against these numbers that Ihave given you.

It's probably important, to may be give you some perspectiveon, if you are looking at these numbers the 498 and 196 and the 301. For us tobe responsible for that entire amount, you have to see two things happen. One,our partners not stepping up and putting in their fair share of the $301million, and the values of the assets decreasing may be not to zero pretty downclose to zero.

So, it would have to be complete melt down in the assetvalue for that number to be a contingent liability for us.

Operator

We will go next to Ryan Randall at Randall Capital.

Ryan Randall -Randall Capital

Hi and thanks. My questions are already answered.

Operator

Thank you. And Our next question goes to Philip Ray at GSCGroup

Philip Ray - GSC Group

Hey, guys. Two part question. The land sales that you bookedon approximately 1500 lots, could you give a rough break out of raw versusdeveloped in geography? And the second part is, in your strategy of generatingcash in '08, how much of land sales is that going to be a significant numberrelative to building out homes and finishing that and selling that off?

Steve Scarborough

Just trying to give you a little sense on the land sales intwo categories. I would say, generally in the Arizona market we've had a fairamount of activity in the lot square more in a raw state, future developmentstate. That's a general statement, but I think accurate.

In the California area, where we've had some good successselling assets, they've been more in the developed condition and in some cases,we've actually had houses, a model construction underway and we've sold theproject in that condition to the purchaser.

Philip Ray - GSCGroup

And what's about break out between Californiaand Arizona,just ballpark?

Andy Parnes

On the dollar perspective?

Philip Ray - GSCGroup

Yeah, percent of the 57 million or percent of 1500 lots.

Andy Parnes

I think most of what was sold during the year was outsidethe California, Arizona,a little of Florida and that was [a project]in California.In the quarter?

Philip Ray - GSCGroup

In the quarter?

Andy Parnes

Yes, during the quarter, I am sorry, was that your questionfor the quarter?

Philip Ray - GSCGroup

Yeah.

Operator

And we go next to [Peter Mydek] at GI Partners.

Peter Mydek - GIPartners

Hi guys, just really quickly, I am wondering under whatcircumstances you guys have a number of surety and performance foundoutstanding and under what circumstances, if at all, and what the process isfor those having (inaudible)?

Andy Parnes

We have, I believe, it is around $639 million of suretybonds outstanding. I think the cost to complete associated with those will bearound $525 million to $530 million, so about 100 million of the work has beendone.

Peter Mydek - GI Partners

And then secondly, you mentioned, that your estimates on,what cash make a lot of door for under performance or performance, enhancementsas based on current pricing assumption. I just wonder if you can flush out alittle bit what happens if prices go down 10 or 20% mark?

Steve Scarborough

Oh, if that happen, that would likely increase the amount,we have to kind of run through each of the projects. That's how we come up withthe 45 million to 60 million it's really a project by project analysis and thatprojects drop 10%, that doesn't necessarily mean different project with resultand re-margin. Again, it will have to be done deal by deal, that’s really howwe do it. So, I just can’t answer that question.

Operator

And we’ll go next to [Steven McCauley at Camulus Capital].

Steven McCauley -Camulus Capital

My question has been answered. Thank you.

Andy Parnes

Thank you.

Operator

And we will go next to Michael Rehaut at JP Morgan.

Michael Rehaut - JPMorgan

Thanks. Just a follow-up question on the cash requirementsgoing forward, you’re right now about I think nine or so specs per community.Many other builders operate on a much lower level and I was wondering,obviously, given the environment, if that’s something you are looking at in termsof changing at least on a near-term in terms of reducing the homes under aconstruction and working capital requirements?

Steve Scarborough

Yeah. I think Michael, we talked a little bit about that inour comments earlier that we are significantly curtailing our starts across thecountry. I think in our last budget, we have significantly pulled starts outand our assumptions going forward were very cognizant of not wanting to put aninordinate amount of specs in the marketplace. There are some markets whereit's more appropriate for us and in some markets the buyer is looking for amore completed house, so we see that as being advantages. But we worked ourspec level down from 12 to 9 per community and I would expect it will continueto work number down.

Michael Rehaut - JPMorgan

Do you have a goal in mind, is it 6, is it 5, I mean isthere actual target or is there actual target or is it just kind of continuousimprovement type of actions that you are taking.

Steve Scarborough

Different from a continuous improvement.

Operator

And we'll go next to Buck Horne of Raymond James.

Buck Horne - RaymondJames

Hey guys, am I missing something here I have your spec here,I mean your active community at 227.

Andy Parnes

232.

Buck Horne - RaymondJames

232. Maybe I am missing I look at the spec count here andlooks a lot bigger than the numbers you guys were doing out. I am justwondering well first of all what markets may be or is the predominance of theremaining specs located in and I guess why exactly the spec count continue togo up while you are talking so many new orders?

Andy Parnes

We are showing our spec counting is actually coming downquite a bit.

Buck Horne - RaymondJames

What’s the absolute number of specs from June to September.

Andy Parnes

In June of '06.

Buck Horne - RaymondJames

No June of '07 to September '07.

Andy Parnes

We went from spec under construction from 2000 down to 1800in that period of time. And…

Buck Horne - RaymondJames

I see 2000 on the press release I am sorry.

Andy Parnes

Yeah.

Buck Horne - RaymondJames

Okay, but aside from that is there a reason why they are notselling any fasters at price or location or what is the take to sale thosespecs?

Steve Scarborough

Well I think one thing that it is important to keep in mindin today's environment, you cannot operate without spec homes. What we arereally keeping a closer eye on is our completed spec homes, people today in avast majority of situations are looking to sale their existing home and then moveinto a new home pretty quickly the market dynamic is changed from what it usedto be where people would kind of double less grow their sale of their existinghome and buying a new home and they would take their time, they would gothrough and order their home before it was started, select their options.

Today people are looking to buy something that's eithercompleted or nearly completed. So we are trying to very carefully balancetoday's market dynamic with trying to avoid accumulating a lot of completedspecs and we think we've done a petty good job. We've got less then threecompleted homes per community, and that number is continuing to come down. Butthat’s really is the more important measure, you can start a spec, as long yousell it before it's done and we see very little risk in doing that. That’sactually I think it necessary in today's market.

Steve Scarborough

And to add to that point, a fair number of those specs cancome about from cancellations of houses that had been previously sold. So evenbuilders that talk about, hey, we don’t build any, we don’t start any housesuntil we have sale, while you can certainly, in this environment contemplategetting some of those houses back, and having specs, and to Andy's point, Ithink we've done a very, very good job of managing that effort, and keeping ourcompleting unsold numbers down to below historic levels.

Operator

And we'll go next to [Mike Zelcer] at Honeywell. Please goahead.

Mike Zelcer -Honeywell

Hi guys, a quick question on your land development spend fornext year. And maybe what regions -- you mentioned a lot of your land that youowned is fully develop, they're pretty close to it. Can you tell us what youplan in spend in '08, and maybe how that compares what you already or plan to spendin '07?

We haven’t given out specifics on what we plan on spending.We can assure you its going to be down quite a bit from this year and this yearthe number is down quite a bit from next year. Just to give a sense of thestate of our land position, we own 29,000 lots, almost 27,000 of those lots areeither completed or under development so less than 10% of our lots are rawlots. There isn't a lot left that needs any type of development and we are justbeing very thoughtful about when we spend the dollars, if we don’t see thatthere is going to be an immediate return of that cash we are not putting itinto the ground.

Steve Scarborough

And typically the way we approach our developments is thatwe will phase our land development improvements coincidental with the phasingof the houses. So we are not going out and completing unnecessary improvementsthat are out of concert with the sales rates that we are achieving in ourmarkets.

Mike Zelcer -Honeywell

Okay and I know 2007 has been a pretty heavy year for JVspending and you have obviously taken out couple of your partners. Do you thinkfor the most part or for all for basically in the entirety you are pretty muchdone with much of your JV investment, whether it's new investment or existingpartnership?

Andy Parnes

Well, there is always investing capital just in the ordinarycourse. So when we talk about buying partners out and re-margin payments that'sreally over and above capital that's either going in or coming out in theordinary course. Some of our ventures are kind of near the tail end and theyare generating cash flow. Some do need some additional working capital,although again, we are going through the same thought process to make sure thatthe timing of those spends makes a lot of sense. But as we mentioned, as we sithere today, we don’t have any other ventures that we contemplate having to2011. Now who knows how long the down turns is going to last. There could beother issues down the road, but we think we flushed out a good chunk though sofar.

Operator

And our final question of the day comes from [DarrenRichman] at GSO Capital.

Darren Richman - GSOCapital

Hey guys, can you hear me?

Andy Parnes

Yes, Darren we can, thanks for your patience.

Darren Richman - GSOCapital

Yeah I know thank you guys for this call. The question Ihave is to what extent are you guys expecting cash flows from tax recovery inthe next quarter and then in 2008?

Andy Parnes

We have got a little bit contemplated in the fourth quarter,which really just represents our (inaudible) from '06 that we just rolled overto '07 that we won't need this year. I think that’s about $12 million we getback in the fourth quarter. And then next year, we have got, I would say abroad estimate, but it's going to be a decent amount. I don’t think right nowour forecast show that number being over a 100 million, but it could besomewhere in the $50 million to $100 million in terms of what we get back inthe first half of next year related to this years and it will carry back. Itreally would be a function of which land sales we close before the end of theyear. If we sell land before the end of the year, at a loss we will be able totake advantage of that.

Darren Richman - GSOCapital

Can you just give me and rest of the callers just theunderstanding of how that -- for bulk purpose you are creating a differed taxasset, for tax purposes you don’t get a benefit, but you actually sell part oflands?

Steve Scarborough

Close yeah.

Andy Parnes

Yeah, that’s correct. So land sales, we get to takeadvantage of any impairments in that year tax returns. So, any of losses thatwe have realize for taxes in '07 we get to carry back to '05 and then next anytaxable losses that we have generate in '08 we get to carry back to '06. Wherewe take impairments on ongoing projects, you are right; we are not going to beable to take a tax deduction for the impairment until the underlying home issold.

Operator

And gentlemen, that does conclude our question-and-answersession. I would like to turn the call back to Mr. Scarborough for any closingcomments.

Steve Scarborough

Yes, I would like to thank all the participants on the callthis morning. You've been very patience, and we feel like we are making goodprogress and feel strong about our abilities to generate cash as we explain inthe call going forward. And we look forward to updating you on that progress atthe next quarter's call. So thanks again for your participation.

Operator

Thank you. That does conclude the call; we do appreciateyour participation. At this time you may disconnect. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts