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

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 - Independence United

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

Standard Pacific Corp. (SPF) Q3 2007 Earnings Call October 26, 2007 11:00 AM ET

Operator

Good day, everyone and welcome to the Standard Pacific Homes 2007 Third Quarter Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Lloyd McKibbin, please go ahead, sir.

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

Lloyd McKibbin

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

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

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

For a list of certain of these factors please see our press release of October 25, 2007, and our most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. Copies of these documents are readily available, including on our website at www.standardpacifichomes.com or from the Company upon request. Both the presentation and question and answer sessions are being recorded and can be replayed via the Internet by going to Standardpacifichomes.com and visiting our Investor Relations section.

The recorded presentation will be available for replay by 3:00 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 and entering pass code number 1498773.

Our presenter this morning are Steve Scarborough, Chairman and CEO, Standard Pacific and Andy Parnes, Executive Vice President and CFO, Standard Pacific.

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

Steve Scarborough

Thank you Lloyd and good morning and thank you for participating in Standard Pacific's 2007 third quarter earnings conference call. Conditions across most of the countries major housing markets continue to weaken during the Company's most recent fiscal quarter. High levels of unsold new and existing homes, decreasing home prices, tenacious home buyers confidence and further erosion of mortgage credit liquidity during the quarter combines or undermine any stability with in the markets.

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

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

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

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

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

In addition to create additional liquidity under the facilities borrowing base provision the company issued $100 million of senior subordinated convertible notes. The company is cushioned under its borrowing base, 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 have reduced our level of consolidated home building unsecured debt by over $265 million and expect to continue to be cash-flow positive, as we look to the balance of this year and for calendar 2008, taken as a whole.

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

To support our financial objectives, we continue to make important progress, on a number of operating initiatives companywide. During the year, we have significantly curtailed our expenditures on land and land development improvements and we are budgeting further reductions next year.

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

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

During the year, we have also made appropriate adjustments to our work force and overhead structure in response to today's lower volume levels. Our employee account is down 29%, from the peak in June, 2006. In addition, we have recently consolidate three operating divisions, which we believe will save nearly $7 million in overhead expenditures, on an annualized basis going forward.

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

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

Over the last 12 months we have generated over $65 million or $5,000 per home on average, in cost savings through our rebidding efforts. And seven of our divisions have completed an extensive value engineering efforts 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 want to acknowledge and thank the team of professionals of Standard Pacific, for your dedication and hard work and for your ever present focus on our customer, under very challenging market conditions. This year Standard Pacific moved up to number three in customer satisfaction, among the national publicly traded home builders, according to J.D. Powers. Congratulations team.

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

Andy Parnes

Thank you Steve. For the 2007 third quarter the company generated 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 was driven primarily by a 19% decrease in home building revenues, a negative home building gross margin percentage resulting from a $175 million of inventory and impairment charges. A $44 million decrease in home building joint venture income, which reflects $42 million of J.V. impairment charges, a 130 basis point increase in our SG&A rate, offset by $2.4 million decrease in other expense.

The Company recorded a total of $223 million of pre-tax impairments and write-offs during the quarter, the detail of which we will review 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 charges recorded in the third quarter. We continue to review every project each quarter for impairments including projects not yet open. For the vast majority of projects that were impaired this quarter, we experienced one or more of the following conditions during the quarter, which contributed to the impairment charges.

Further home price declines due to the increasing supply of new and existing homes, coupled with eroding home buyer confidence. Continued turmoil in the mortgage markets which led to further tightening in more expensive pricing of certain mortgage products, in losses, on the sale of excess land or lot positions. Until market conditions stabilize the company may continue to incur additional inventory impairment charges.

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

10% of the impairment total is from the South West with projects impaired in Phoenix, Tucson and San Antonio. 24% of the impairment total for the quarter was from the South East region and included write downs in Jacksonville, Tampa, Miami and Sarasota. $120 million of the inventory impairment charge related to ongoing projects, while $55 million related to lot sold or held for sale. Of the combined $223 million of impairment 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 aggregate level of inventory impairments recorded to date, including joint ventures and the percentage of inventory and lots, owned or written down thus far, based on our December 31, 2006 inventory balance in lot position.

For purposes of calculating the percent of inventory impaired, we divided the total inventory balance for impaired projects, by our aggregate consolidated inventory total as if 12/31/06. As you can see, we have impaired 51% of our project inventory balances between housing and land sold or held for sale and 59% of our owned lot position. In addition, we have impaired 35% 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 deliveries and a 1% decrease in our consolidated average home price. These decreases were partially offset by a $51.5 million year-over-year increase in land sale revenues. Land sale revenues totaled $57.3 million for the quarter and represented the sales of approximately 1500 lots. Our backlog conversion rate for 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 in order trends in the first three quarters of 2007, as compared to the year earlier period.

In the South West, new home deliveries decreased 22% in the third quarter. Deliveries in Arizona decreased 32% reflecting the decrease in order activity in the later half of 2006 and into 2007, coupled with a sharp increase in our cancellation rate in the 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 was partially offset by an increase in deliveries on the company's Austin operation.

In Colorado deliveries were off 13% and while it continues to be a challenging housing market. 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 housing demand, which began last year combined with the decrease in the company inflation rate in the state. In the Carolinas deliveries were off 14% from the year earlier period, driven by a decrease in deliveries in both the Company's Raleigh and Charlotte operations.

During the 2007 third quarter the company's consolidated average home price dropped 1% to 364,000. The modest decline was primarily due to an increase in the level of incentives and discounts required to sell homes in California, Florida and Arizona, which was substantially offset by changes in the company's product and geographic delivery mix.

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

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

EBITDA for the third quarter was down 54% to $64 million driven by the lower level of pre-tax profits before the non-cash impairment charges. Please refer to the next slide for definition of EBITDA and a reconciliation of EBITDA to operating cash flows.

At quarter end our net homebuilding debt-to-capital ratios stood at 57.9%, up from the previous quarter, due to the impact on our equity from the impairment charges. Our total debt-to-capital ratio, which includes indebtedness of our financial services subsidiary and FIN 46 liability was 59.7%.

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

At September 30, 2007 we utilized $294 million of capacity under our revolving credit facility, including $41 million of letters of credit. The additional borrowing base capacity at September 30 was $304 million, an increase of nearly $47 million from the previous quarter. Please keep 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 were used acquire borrowing base eligible assets.

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

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

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

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

We also wanted to provide you with an update on developments with respect to certain of our joint ventures during the third quarter. At the end of the second quarter we mentioned that we are consolidated two Southern California ventures due to disputes with our partners over additional capital needed for certain construction issues. These two ventures one during third quarter or by the company purchase the assets of the ventures, combined consideration of approximately $85 million.

It should be noted that the two buildings acquired by us associated with these ventures are nearing completion and we expect to monetize our investment in these assets over the next few quarters. We consolidated a venture in Northern California during the third quarter due to a dispute over additional capital contributions. We will likely unwind this venture in the fourth quarter and purchase the assets for approximately $60 million.

Well over the course of this downturn, we may find it necessary to unwind additional joint ventures. We are not currently in discussions with any of our other venture partners to acquire or assume their venture assets.

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

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

Under credit quality, 1% of our loans were subprime, while 14% were all day. Under other data, our combined loan-to-value decreased to 84%. We continue to have a high average FICO score of 739, while the level of full or reduced stock loans continue to increase, which means the use of stated product continue to decline. Our capture rate continued to improve and was 76% for the quarter.

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

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

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

Steve Scarborough

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

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

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

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

Net new orders in California, excluding joint ventures for the third quarter increased 106% than the 2006 third quarter on an 18% higher community count. Orders were up 87% year-over-year in Southern California, and a 11% higher average community count. The increase is primarily due to additional incentives and more aggressive marketing strategies.

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

We have to have some fall out, from the campaign. But it was relatively minor, so far, 10% of our sales that were generated during that period of time have cancelled. But again, this is lower than our rate that we have 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 Northern California on a 30% higher community count, while our conditions remain challenging in the company's Northern California divisions, improved sales year-over-year focus on increasing traffic and orders through a more competitive pricing strategy. The company's cancellation rate of 35% for the third quarter was down from 53% on the 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 average community count, despite the increased orders in Arizona, which was largely the result of a decrease in the level of cancellations during, the quarter, as compared to the year earlier period.

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

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

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

The year-over-year drop in Florida order activity reflects continued erosion in buyer demand, the tightening of mortgage credit underwriting standards and the increasing level of available homes in the market. Our cancellation rate in Florida are down from 54% a year ago, increased to 49% for the 2007 third quarter from 37% on the 2007 second quarter. Then finally net new orders in Carolinas were down 13% on a 55% higher community count as a result of recent slowing in housing demand in the Charlotte and Raleigh markets.

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

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

Over the past year, we have intensified our review of spec starts in a effort to balance our corporate inventory objectives with our divisions requirements to maintain an appropriate level of homes that can be sold 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 attempt to control and automatically reduce the number of completed spec homes, company wide.

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

Well this times are certainly trying we are managing our business for the goal of improving our liquidity and the financial position. Our efforts to generate positive cash flow have resulted in the reduction of over $250 million of embeddedness over the past twelve months. It is our goal to pay off a substantial portion of our revolving credit facility by the end of 2007. In addition, we expect to generate positive cash, next year even after retiring our $150 million of senior notes, maturing in October 2008.

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

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

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

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Our first question is going 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 Joint Ventures. If you look back at the few joint ventures that you went in to disputes and you subsequently had to absorb. Are there any similarities about sort of the reasons why those got into a disputed situation, then when you look at them and then you look ahead at your other joint ventures, gives you optimism that perhaps you are not going to have a significantly greater number of such disputes in the future?

Andy Parnes

Yeah I think that's a good question. Of the four we've either unwound or in the process of unwinding, two of them are Los Angeles division with financial partners and we had some constructions issues on projects that we had managed. So there were some unique aspects to those from a construction prospective and we just felt it was equitable to kind of go our separate ways on those particular situations.

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

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

So as we sit here today as we mentioned in our comments, we are not aware of any other situations where things may unwind. But I would definitely put those partners that we dealt with on those matters in kind of a different category from the rest of our partners that really are representative of 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 a significant amount may reside in inventory reductions.

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

Steve Scarborough

Steve I think certainly from our perspective, we see significant reductions from WHIP. Having said that, we are certainly not adding significantly to our land positions, and the further more we have a fairly significant amount of our land holdings in at fairly advanced stage as far as land development cost. So incrementally, we are not feeling like we have a lot of incremental dollars, that need to be invested to bring that land on those houses through.

Operator

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

Ivy Zelman - Zelman and Associates

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

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

Andy Parnes

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

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

These are institutional investors that trade these notes pretty frequently, whereas the revolve in the term loan B, are essentially banks that we have worked with over a number of years, and we haven't had trading activity in our revolver or our term loan A upto this point. But term loan B, just in the normal course does trade, those are institutional investors that would sometimes participate or in many cases participate in our other public notes. So, it could be some of the same traders that again do actively move in and out of those notes. Is that helpful?

Ivy Zelman - Zelman and Associates

Yeah, that helps. Andy, with respect to the increase in the borrowing base by $50 million, can you give us some idea what the relationship with 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 what their expectations are going into '08. And even if you default this, let's say on a covenant whether it will be into the minimum casual network covenant, their appetite for accelerating that and forcing you in a situation that you otherwise wouldn’t be good for everyone. What's the conversation like with them, do you think?

Andy Parnes

Well, I think, I am just looking back at level of cooperation and support that we've received upto this point. They have shown a willingness to work with us upto this point. We believe that if we are in the process of generating cash and paying down debt that it's in their best interest and our best interest to work with us and allow us to do that. We would not expect that even if we had covenant issues, but we were in the process of paying down the debt that we would be put in a position or perhaps the 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, as you've noted, you've been paying very high level of scrutiny on every dollar that goes out. But, I was wondering as we look into the fourth quarter, you said that you now expect to pay back a majority of the revolvers balance. If you could give us some additional idea of perhaps getting our arms around the range of what that might be, and obviously, to some extent, you have less control over cancellations. But, in terms of cash going out the door for incremental development, I was wondering if you can give us an idea of what the requirements 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 the closing point in the fourth quarter?

Steve Scarborough

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

We used kind of the reference to substantially paying it off. There are a number of moving parts here, I would say, it's more on the revenue side than it is on with respect to what's going out the door. I think we have a pretty good handle on what we are going to be spending. But as you mentioned, the cancellation rate has been kind of moving around and because of that, there is some degree of uncertainty around our delivery level, although we think we’ll deliver enough homes to where we can generate a meaningful amount of cash, and we said in commentary 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 scenarios for the quarter, any of which could be viable, hence our reluctance to give anything specific, we think that the levels of deliveries will meaningful enough to generate cash. And yeah, we are entering the quarter with a backlog of over 2,000 homes. We generally have a pretty good idea of what you think your deliveries will be in the upcoming quarter, and I think our recent history has shown that we've been pretty accurate in projecting. But again, in these uncertain 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, just going back to the JVs for a moment, you've identified that you expect to take one more on in the fourth quarter, and that has had about $60 million of related debt that you have to take on. In terms of your other large JVs that are out there, is the password is give any more detail in terms of the --you said that most of them are with either public builders or bigger financial institutions committed. I guess the question is, how many JVs perhaps you don't fall into those two categories, and perhaps on the large public and financial institutions that you are talking about -- maybe just give a little more color in terms of the day-to-day communication and to the extent that might give a little more color on your comfort level with those partners?

Andy Parnes

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

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

And I would say out of the total 45 or so JVs we have there is just a handful of a single digit number where we have what I would call financial partners and so that means the substantial majority of our ventures are with what I would call strategic partners, builders or in some cases financial partners but financial partners that have pretty substantial investments across a wide spectrum of real estate activities like a Starwood or an IHP.

Operator

Our next question go to Timothy Jones at Washerman and Company.

Timothy Jones - Washerman and Company

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

Steve Scarborough

Yes, Tim at our peak we were in the neighborhood of 2850 and I 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 sales granted you -- you were going to progress at a very depressing number of last years. 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 of land?

Steve Scarborough

I think that was reflected in our numbers that we showed ex-impairments that we were generating a slight margin on the houses. It is extremely challenging and I think we mentioned that our strategy is working very hard to find a balance between margin, volume and cash flow generation and we are managing that very closely and diligently with our Division Presidents and 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 a lower price points relatively speaking in the region. In the Inland Empire and in some of our LA markets that are -- well we have some very well located appropriately priced product and we did there are some homes pretty successfully in the San Diego area as well. Little bit more challenged up in the Northern California area but in 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 pretty significantly. We were still ahead, of where we were last year for the quarter in Tampa. And on Phoenix same story, we again very competitive market, but we beat our numbers, that were generated last year. So, we are hanging tough and I think we have just making day-to-day decisions, on appropriate price levels and just gauging that against what 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 thought process with the announcement in vote to increase the share authorization?

Andy Parnes

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

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

Mike Wood - Banc of America

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

Steve Scarborough

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

And as I've mentioned, our partner were financial partners and we really are the ones that have the capacity to finish the projects and deliver them and so we decided it make sense for us to buy those. Despite the 85 million that went out the door, we think we get that back in a relatively short period of time. The other two projects that we've been involved are both up in Northern California. We have been in that market 30 plus years, we believe in that market, things may be bumping in the near term, but we think these are well located projects at over time will deliver 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 you use in order to come at the $45 million to $60 million estimate in the re-margining merging agreement?

Lloyd McKibbin

Sure. It's a process that our treasury department goes through every quarter and we look at, what we believe, the current values of the assets are, we look at the terms of the loan agreement for that particular project and make an assessment based on the terms of loan agreement and our determination 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 some cases the assets have not been appraised and we have kind of done that process internally. So there is various kind of stages involved, some being appraised, some not appraised and again we've got folks in our treasury departments that have worked at banks and understand the valuation process pretty thoroughly.

Susan - UBS

Okay. And then have you looked at kind of the probabilities around 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 in that 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 pattern and they have been – that they have kind of occurred in both counts. But we think – we are trying to take a reasonably conservative approach, so when we make commentary about our cash flow, we can make these comments with some level of assurance that we’ve got our bases covered.

Operator

Will come now to Susan Berliner at Bear Stearns

Susan Berliner - Bear Stearns

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

Andy Parnes

We have to ability to do that. There is nothing in any of our 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 the revolver, making sure we have the capacity to pay down the notes maturing next year. I think after that, right now, we are not really committed any particular strategy. I think we’ll see how much cash we wind up generating next year and then make a decision at that time.

Susan Berliner - Bear Stearns

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

Steve Scarborough

We mentioned there that we have surveyed all our divisions and we so far have been extremely fortunate we haven’t seen any significant damages or incurred any significant losses. And to my knowledge our employees homes have been able to stay away from the prior damage, so we are very, very pleased 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 are again very, very fortunate to have escaped that. We have a very large commitment as to a lot of other builders here in the region. So as so far we are very, very please with the result. Andy, do you want to speak to the insurance relative to that should we have any problems?

Andy Parnes

I don't believe so, I think we have got pretty sufficient in insurance levels, fire is generally covered under our property course of construction, our policies fire unfortunately isn’t new to us in California. So review our 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, can you go though the net impact to the borrowing base from the $85 million spent in the third quarter and what you think the impact will be on the fourth quarter's resolution for $60 million?

Andy Parnes

That's a good question. The $85 million that was spent to unwind those joint ventures when to put assets on our balance sheet that actually went into the 90% borrowing base category. So those two transactions I believe may have been modestly accretive to our borrowing base, because that they were buildings under construction, so they go into our highest borrowing base level. And the capital that we have invested in those previously did not receive any borrowing base credit, so those particular transactions did not harm our borrowing base. The asset that we will be buying in the fourth quarter has some home building activity on it, but it mostly land. And that I don't think will be added if to our borrowing base, it may be modest subtraction from our borrowing base.

Robert Manowitz – RBS

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

Andy Parnes

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

Robert Manowitz – RBS

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

Andy Parnes

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

Operator

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

Andrew Bronsa - Banc of America Securities

Hi guys.

Andy Parnes

Hello.

Andrew Bronsa - Banc of America Securities

Hi. As I go through your noted [dentures] I’m trying to figure out kind of maximum amount of secure debt that can be incurred under the most stringent of the covenant. But as I calculated under the [inaudible] of the tightest basket, which is $75 million general basket plus I think leans on model homes which puts you somewhere in the mid-200 for secured debt. What is the ability or lack of ability for the current facility to be secured and are all 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 a secured facility, that we would then have to provide that same collateral to our public notes, to our public note holder. So I think those are provisions in our public notes, let's say. If the revolver ever becomes a secured facility that the public notes would remain [Perry pursue]. So as long as we kept everybody Perry pursue, we could move in a direction of a secured facility.

Andrew Bronsa - Banc of America Securities

Right I guess

Andy Parnes

Does that answer your question

Andrew Bronsa - Banc of America Securities

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

Andy Parnes

Well it's hard to get into that, because we are dealing with 24 different banks when we are going through this process. So that's probably difficult for me to get into that, specifically, in terms of what the conversations have been. But its possible there could be a scenario that the banks would contemplate going forward. Obviously it wasn’t one that they contemplated this go around.

But that's something they want to do, but the understanding that if they did, they would be Perry pursue public lenders. But that’s not something 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 to Alex Barron at Agency Trading Group.

Alex Barron - Agency Trading Group.

Hey guys.

Lloyd Mckibbin

Good morning, Alex.

Alex Barron - Agency Trading Capital Group.

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

Andy Parnes

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

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

Alex Barron - Agency Trading Capital Group

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

Andy Parnes

No.

Alex Barron - Agency Trading Capital Group

Okay. The other question I had was pertaining to any homes that were delivered from communities previously impaired. Like how many homes were 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 know how many homes that related to, but $69 million of our operating results, represented recapture from impairments recorded in prior periods. $21 million of that came through joint venture. So it would have been $48 million related to 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 flows associated with re-margining in JV wind of payment already occurred or is it still 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 JV wind of payment, already occurred or is it still an accrual.

Steve Scarborough

Well there were two joint ventures during the third quarter and one joint venture in the second quarter where we have unwind those and that cash was gone out the door, it was $85 million in the third quarter and I believe $80 million in the second quarter for the unwinds. And then the $60 million 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 $45 million to $60 million that we have kind of estimated that has not been spent yet. We have spent I believe about $35 million this year on re-margins that was actually 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 overlap between assets written down this quarter as impairment and assets sold distinct quarter?

Steve Scarborough

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

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

Operator

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

Ken Ben - Jefferies and Company

Good morning.

Steve Scarborough

Good morning, Ken.

Ken Ben - Jefferies and Company

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

Andy Parnes

Till the fourth quarter of next year?

Ken Ben - Jefferies and Company

Yes.

Andy Parnes

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

Ken Ben - Jefferies and Company

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

Andy Parnes

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

Ken Ben - Jefferies and Company

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

Steve Scarborough

Incentives just you can imagine if we look at year-over-year has increased fairly significantly on average for us for this last quarter that we've been in across the company our incentives were in the range on an average of 38,000 per unit, compared to that same period in '06 incentives were 13,000 per 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 per house in '06. Areas where incentives were higher, in this last quarter with the up in the Northern California area. Where they got 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%. And so our market increase, as you have been fearing and from other builders as well, 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 mute button.

James Eustice - Churchill Pacific

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

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 $85 million or so that we spent to unwind those two joint ventures. Those would be considered additions to our inventory. So, that's were that number would have been reflected. So that excluding the $85 million would have been a positive number.

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 the average selling price on new orders. I was just wondering if you had that available?

Andy Parnes

I normally get a roll forward of that report. I don't have it 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 the company, 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 can get that for you.

John Kohler - Oppenheimer & Close

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

Andy Parnes

I don't if we have that information on to answer that question. They were in Southern California projects where we have taken a number of impairments. It is probably important to understand, when we did that program, most of incentives in arrangements that we were advertising, we had in place, there were some incremental incentives that we added. But I don't think that in and of itself triggered additional impairments, but we did have a numbers of projects that we sold out of where we have previously taken impairments.

John Kohler - Oppenheimer & Close

Correct.

Steve Scarborough

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

John Kohler - Oppenheimer & Close

Okay great. Did you happen to -- were you keeping square footage roughly the same or did that come down a little bit in the sales promotion.

Steve Scarborough

Square footage of the houses were -- these were pretty much houses that were pretty advanced in constructions that could close fairly quickly. So, the product was really not in different price ranges or footage ranges 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 more moderately 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 Tower Capital

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

Operator

Yes sir.

John Jester - Stone Tower Capital

Just trying to get a percent for what differentiated you in the 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 for 40 years, and so our brand is very well established and I do believe that it's a very significant competitive advantage that we have. So we very strongly believe that we do not necessarily solely need to compete on price. We believe that we have a product that is well recognized for its design and quality, and the locations because of the relationships that we have with developers. Often times we find ourselves in extremely strong locations with very limited competitive 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 taking advantage of that.

John Jester - Stone Tower Capital

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

Steve Scarborough

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

Operator

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

James Wilson - JMP Securities

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

Steve Scarborough

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

We've had a little bit more difficulty in moving the higher end product because of the tightening in the jumbo end of the market. And again generally the higher price points are often times little bit more of a discretionary purchase decisions. So we could be often depending upon price points. We could be off $200,000 on certain projects other projects that might be more $50,000 or $100,000 off but by percentages basically in the range of 20% to 25%.

James Wilson - JMP Securities

Thank you.

Operator

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

Keith Wiley - Goldman Sachs

Yeah. Just a question on the joint ventures and I couldn't see twice as they went by so fast but how much of the joint ventures that is land 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 cash to complete the land development and pay the debt service?

Steve Scarborough

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

We also have this information in our 10-Q, but of this, of the joint ventures that were posted there were $765 million of debt, $533 million related to land development joint venture, $232 million related to homebuilding 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 not on that slide, and I don’t have a breakout, my guess is probably more than would be related to the land development joint ventures, because we do more of those just in the normal course.

Operator

And we’ll next go to James Lucania. I believe it is Levine Leichtman. 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 to just 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 some of our less expensive markets, the stick and brick cost could be $100,000 in California. It could be $0.5 million plus. So and of course, I just don’t that have that information available.

James Lucania - Levine Leichtman

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

Andy Parnes

That’s what really governance what we can borrow on a day-to-day basis. So I would say that’s the primary governing factor we’re looking at. And when we say that we have to be $300 million of borrowing base cushion, it’s a little bit more complicated in saying we can only go out and borrow $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 base eligible assets, which could then increase our ability to borrow. So its an iterative process and the number could actually be quiet a bit higher, again if we’re investing in inventories.

I believe our revolver balance hasn’t changed much it may be up a little bit, if anything from where it was at the end of the quarter. And October is a pretty like closing month for us, so there is really not, we’re probably not going to be much in a way of cash flow positive this month, the bulk 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 the fourth quarter so far ’08 and any of the other outstanding debt?

Andy Parnes

We haven’t yet, and once our window opens at something that we 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 open window very much like.

Eva Young - Independence United

Yeah.

Andy Parnes

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

Eva Young - Independence United

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

Andy Parnes

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

Now your question was what was that on orders? Because we were being very diligent in taking these impairments. If it's an impaired project and we are taking an order on it, the gross margins should be in that vicinity 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 next year yesterday were trading to yield 20%. So obviously some body thinks that there is a change they are not going to get paid.

So my question is if in an emergency if push comes to shove you need it to raise cash quickly to pay them. Is there anything in your covenants 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 bonds because it's a very small part of your total debt.

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

Andy Parnes

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

I don't think there is any thing specifically in it, that would preclude that type of strategy other than we just have to be sensitive to what that would do to covenants like our minimum net worth and leveraging things like that if that created losses of such a magnitude that that can in turn undermine covenants. We just don't think that the strategy we need to employ 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 that covenant?

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 - GK Capital

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 by my count over $700 million of the debt associated with joint ventures were started or formed after 2002, can you give a breakdown on what you are solely responsible for under your credit enhancements and what you could be jointly responsible for? And then also who those other parties are?

Andy Parnes

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

Andy Shaffer - GK Capital

So that decline roughly $80 million to $90 million from the end 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 - GK Capital

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

Andy Parnes

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

It's probably important, to may be give you some perspective on, if you are looking at these numbers the 498 and 196 and the 301. For us to be 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 $301 million, and the values of the assets decreasing may be not to zero pretty down close to zero.

So, it would have to be complete melt down in the asset value 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 GSC Group

Philip Ray - GSC Group

Hey, guys. Two part question. The land sales that you booked on approximately 1500 lots, could you give a rough break out of raw versus developed in geography? And the second part is, in your strategy of generating cash in '08, how much of land sales is that going to be a significant number relative 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 in two categories. I would say, generally in the Arizona market we've had a fair amount of activity in the lot square more in a raw state, future development state. That's a general statement, but I think accurate.

In the California area, where we've had some good success selling 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 the project in that condition to the purchaser.

Philip Ray - GSC Group

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

Andy Parnes

On the dollar perspective?

Philip Ray - GSC Group

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

Andy Parnes

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

Philip Ray - GSC Group

In the quarter?

Andy Parnes

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

Philip Ray - GSC Group

Yeah.

Operator

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

Peter Mydek - GI Partners

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

Andy Parnes

We have, I believe, it is around $639 million of surety bonds outstanding. I think the cost to complete associated with those will be around $525 million to $530 million, so about 100 million of the work has been done.

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, enhancements as based on current pricing assumption. I just wonder if you can flush out a little 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 with the 45 million to 60 million it's really a project by project analysis and that projects drop 10%, that doesn't necessarily mean different project with result and re-margin. Again, it will have to be done deal by deal, that’s really how we 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 - JP Morgan

Thanks. Just a follow-up question on the cash requirements going 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 terms of changing at least on a near-term in terms of reducing the homes under a construction and working capital requirements?

Steve Scarborough

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

Michael Rehaut - JP Morgan

Do you have a goal in mind, is it 6, is it 5, I mean is there actual target or is there actual target or is it just kind of continuous improvement 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 - Raymond James

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

Andy Parnes

232.

Buck Horne - Raymond James

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

Andy Parnes

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

Buck Horne - Raymond James

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

Andy Parnes

In June of '06.

Buck Horne - Raymond James

No June of '07 to September '07.

Andy Parnes

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

Buck Horne - Raymond James

I see 2000 on the press release I am sorry.

Andy Parnes

Yeah.

Buck Horne - Raymond James

Okay, but aside from that is there a reason why they are not selling any fasters at price or location or what is the take to sale those specs?

Steve Scarborough

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

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

Steve Scarborough

And to add to that point, a fair number of those specs can come about from cancellations of houses that had been previously sold. So even builders that talk about, hey, we don’t build any, we don’t start any houses until we have sale, while you can certainly, in this environment contemplate getting some of those houses back, and having specs, and to Andy's point, I think we've done a very, very good job of managing that effort, and keeping our completing unsold numbers down to below historic levels.

Operator

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

Mike Zelcer - Honeywell

Hi guys, a quick question on your land development spend for next year. And maybe what regions -- you mentioned a lot of your land that you owned is fully develop, they're pretty close to it. Can you tell us what you plan in spend in '08, and maybe how that compares what you already or plan to spend in '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 year the number is down quite a bit from next year. Just to give a sense of the state of our land position, we own 29,000 lots, almost 27,000 of those lots are either completed or under development so less than 10% of our lots are raw lots. There isn't a lot left that needs any type of development and we are just being very thoughtful about when we spend the dollars, if we don’t see that there is going to be an immediate return of that cash we are not putting it into the ground.

Steve Scarborough

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

Mike Zelcer - Honeywell

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

Andy Parnes

Well, there is always investing capital just in the ordinary course. So when we talk about buying partners out and re-margin payments that's really over and above capital that's either going in or coming out in the ordinary course. Some of our ventures are kind of near the tail end and they are generating cash flow. Some do need some additional working capital, although again, we are going through the same thought process to make sure that the timing of those spends makes a lot of sense. But as we mentioned, as we sit here today, we don’t have any other ventures that we contemplate having to 2011. Now who knows how long the down turns is going to last. There could be other issues down the road, but we think we flushed out a good chunk though so far.

Operator

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

Darren Richman - GSO Capital

Hey guys, can you hear me?

Andy Parnes

Yes, Darren we can, thanks for your patience.

Darren Richman - GSO Capital

Yeah I know thank you guys for this call. The question I have is to what extent are you guys expecting cash flows from tax recovery in the 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 over to '07 that we won't need this year. I think that’s about $12 million we get back in the fourth quarter. And then next year, we have got, I would say a broad estimate, but it's going to be a decent amount. I don’t think right now our forecast show that number being over a 100 million, but it could be somewhere in the $50 million to $100 million in terms of what we get back in the first half of next year related to this years and it will carry back. It really would be a function of which land sales we close before the end of the year. If we sell land before the end of the year, at a loss we will be able to take advantage of that.

Darren Richman - GSO Capital

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

Steve Scarborough

Close yeah.

Andy Parnes

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

Operator

And gentlemen, that does conclude our question-and-answer session. I would like to turn the call back to Mr. Scarborough for any closing comments.

Steve Scarborough

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

Operator

Thank you. That does conclude the call; we do appreciate your 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!

Source: Standard Pacific Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts