WCI Communities Q3 2007 Earnings Call Transcript

Nov. 8.07 | About: WCI Communities, (WCIM)

WCI Communities Inc. (WCI) Q3 2007 Earnings ConferenceCall Transcript November 8, 2007 10:00 AM ET

Executives

Jerry Starkey - President andCEO

James P. Dietz - Executive VPand CFO

James Cullen - VP and DeputyGeneral Counsel

Analysts

Michael Bailey - Par-FourInvestments

Andrew Brausa - Banc of AmericaSecurities

Sue Berliner - Bear Stearns

Ralph Elliott - J.P. Morgan

Buck Horne - Raymond James

Chris Hussey - Goldman Sachs

Marcelo Lima - HornEichenwald

Dennis McGill - Zelman &Associates

Daniel Oppenheim - Banc of AmericaSecurities

Peter Plaut - Sanno PointCapital

Randy Riesman - Durham

Larry Taylor - Credit Suisse

Mike Wood - Banc of AmericaSecurities

Operator

Good morning ladies andgentleman, thank you for standing by, and welcome to the WCI Q3 conferencecall. (Operator Instructions) Now I’d like to turn the conference over to Mr.Jim Cullen, Deputy General Counsel and VP. Please go ahead sir.

Jim Cullen

Good morning and welcome tothe WCI Communities Q3 conference call. Speaking today will be Jerry Starkey,President and CEO of WCI and Jim Dietz, Executive Vice President and CFO. Jerrywill start with an overview, followed by Jim with the financials. We’ll wrap upthe call with questions and answers.

Before we begin I want toremind everyone that certain information we will be sharing with you today willrepresent forward looking information. This may include statements about thecompany’s anticipated operating results, financial resources, revenue,profitability and cash flow, as well as the ability to acquire land, sell anddeliver homes, and it’s ability to secure materials and subcontractors.

These forward lookingstatements involve risks and uncertainties that could significantly affectresults and may cause them to differ materially from expectations that weexpress here today. Those risks are outlined in today’s news release and otherSEC filings. W encourage you to review these matters and caution you aboutplacing undue reliance on these forward looking statements. I’d also like topoint out that the slides that go along with this call can be accessed at www.wcicommunities.com in the investor relationssection of our website.

With that, I’d like to turnthe call over to Jerry Starkey, President and CEO of WCI.

Jerry Starkey

Good morning, I appreciateyou joining us. I understand that there are some technical difficulty on theweb cast. I think you are able to access the slides on our website, but thewebcast versus the phone I think is experiencing some difficulty with ourprovider. Hopefully that’ll be corrected during the course of the call but wedidn’t want to delay any longer.

Q3 was another challengingquarter for WCI. Floridacontinues to see low order activity and we did see an increase in defaultsduring the quarter both in traditional and tower home building.

On top of the confused andnegative sentiment throughout the marketplace, the Q3, which is the summermonths, is typically the slowest season in Florida, as retirees and second homeowners seek, and prefer, milder climates during that time, so a tough quarterimpacted by consumer sentiment which continues to trend down, as well as beingat the slowest part of our season.

The activity slowed duringthe quarter in the Northeast US, which hadbeen a bit more favorable earlier in the year, and the year to date favorabletrends in the Mid-Atlantic also turned slightly negative during the period,although year to date orders are still favorable over last year even thoughthis is a small part of our business.

Our financial performance wasseverely impacted during this quarter by the continued poor conditionsimpacting the tower business in Florida.The increased defaults at closing both in traditional and tower business, wecontinued to see very, very low, almost no orders, eight gross orders in thetower business and slower orders in the traditional home business as well.

Revenue and margin reversibleas well as inventory impacts, excuse me, inventory impairments of almost $36million also had a negative impact on the quarter.

The tower defaults andconstruction delays had both reduced and delayed our cash flow. We did beginthe year projecting about a billion dollars of cash flow that’s trended downduring the year, and at this point because of construction delays and theincrease defaults we’re expecting a pretty wide range of cash flows from theyear, from about $210 to $460 million for the full year.

We expect about $200 millionof the billion dollar cash flow that we started in the year to actually moveinto the Q1 as Watermark Tower up in Jersey and Bal Harbour will both have someclosings continue into the Q1 of next year, whereas early in the year we’dexpected most of those closings to occur in the Q3 or Q4.

Our strategy continues to befocuses on reducing cost and maximizing cash flow, not withstanding theseconstruction delays.

Yesterday we announced arestructuring that’s designed to reduce our salary and benefit costs about $46million a year, and this principally comes through combining the Tower andHomebuilding responsibilities, and consolidating some geographic regions.

During the course of thisquarter, and throughout the year, we’ve increased our discounts and incentives,particularly on five finished specs and Traditional Homebuilding business,which has largely come from defaulting buyers who basically were investors, orend-users who couldn’t sell their existing home, or end-users who’d becomeflattened or negative, due to the overall negativity in the market. And theexpectation that continues to prevail in the market, that prices that willcontinue to erode, even though price adjustments have been pretty significant,not only for WCI, but across the board. More so among builder new stock thanthe resale markets.

Inventories, of course,continue to be up in most markets, resale and overall inventory, so we stillhave a significant disconnect between the supply and the demand. Most of ourunsold Tower inventory is located in southwest Florida,and to some degree in the panhandle of Florida.This is where we’ve taken large impairments on the finished inventory’ andthese buildings we have reduced our pricing significantly, to focus on movingthat. And we hope that as the natural selling season begins towards the end ofthis quarter and principally in Q1 and Q2, that those second home and retireeslooking for a Tower home in southwest Florida and the panhandle will find theseprices compelling, and move that inventory and reduce our carrying costs aswell as enhance the cash flow, even (inaudible) are projecting.

Speaking of consumers,notwithstanding the overall negative conditions of the market, the demographicsof our WCI buyer continue to be quite strong; the 78 million baby boomersreaching peak earning years, the inter-generational transfer of wealth.Notwithstanding all the mixed signals, we still have a pretty strong economy,relatively low interest rate, and a high percentage of our buyers continue topay cash, so right now, our buyers are certainly able, they’re just not readyand willing. And so we believe that there is a very significant pinup demandamong the affluent, retiree, and second home buyers that make about two-thirdsof our ordinary demand in the state of Florida,and also among our affluent move-up buyers in other regions.

When this will turn,obviously we have no idea, and we’re going to run the business as if thisslowdown is going to continue through 2008 and into 2009. Our goal is topreserve our irreplaceable land assets that mainly consist of undevelopedportions of highly amenitized master plan communities, with a lot ofinfrastructure in place, for a time when demand does pick up. This land isgenerally well located, it took years to entitle, and even with pricing trendsdown, our basis continues to be relatively low, and of good value.

We continue to focus onselling some of our more mature, recreational amenity assets, some of our golfcourses, marinas, and some of our commercial land, but we’re not focused onmoving these at fire sale prices. Our board, new board, which was elected onAugust 30, has met twice since the annual meeting; the board is working verywell together. The board, as you know, is made up of representatives and directshareholders, who are the largest shareholders of the company. The board isfocused on preserving value; the board recognizes the value of the underlyingassets, and while we are sharply focused on reducing our cost of operation andreducing our cost of carry and maximizing cash flow, we’re not focused onmoving, or sacrificing, some of our unique and irreplaceable assets. So whilethe construction delays and the increasing defaults has hampered and delayedour cash flow, we still expect significant cash flow, we still expect tosignificantly de-lever the company over the next several quarters, and we areagain focused on preserving the irreplaceable assets of the company, and makingsure that we continue to size the organization to match the slower demand.

Let me touch on a briefsummary and then turn it over to Jim. For Q3, our revenues of $166 milliondeclined 61% over the same period last year. Almost $89 million of that was dueto revenue reversal from recording Tower defaults. The Traditional Homebuildingrevenue fell 25.9%, as we closed 212 homes in Q3, compared to 279 in Q3 of ‘06.Defaults were higher than expected, and we have, again, lower closings thanlast year. For the quarter, the company generated a net loss of $69.7 million,with was $1.66 loss EPS, compared to $0.25 earnings in the same period lastyear.

Speaking just a bit toorders, the value of the Q3 orders for the overall company was down 22.5%, andthe units down 13.6%. Again, Tower sales continue to be, orders continue to bevery low in this environment. Again, summer, not in the season, but just theoverall negative summer, we had eight orders offset by 89 defaults on the Towerbusiness, for a net negative 81 orders.

What we find is that, in buildingsunder construction, buyers are essentially sort of waiting on the sidelines andsome buildings that continue to be under construction, for instance like One Bal Harbour, that building isfor all intents and purposes sold out, and we really don’t have inventory forbuyers. Over in The Resort at Singer Island, where we have ahandful of inventory remaining, we believe that is, again, a unique location,and we look forward to seeing our season, our natural influx of seasonalretirement and second home buyers, and hope to move through that inventory. Andas I mentioned in southwest Florida, and up in the panhandle, we’vesignificantly reprised our standing inventory on the Tower business, and lookforward to moving, and perhaps increasing, absorption with those lower prices,when season comes around in Florida.

The Q3 Traditional Homeorders were down in value 45%, and 27% in units. We had a 44.4% cancellationrate on the Traditional Homebuilding business; that was down slightly, it was47.8% in Q2, and that was basically 84 cancels versus 75 cancels in the sameperiod last year. The average price of a cancelled Traditional Home unit was767,000 for the period, so that’s consistent with the average price sold a yearago in this period of 775 versus the average price sold Traditional Home duringthe Q3 of 686.

Average discounts during theperiod on spec orders was about, discounts and incentives, total impact about25%, and on to-be-built about 13%. 131 gross sales during Q3. Our Tower backlogwas down 63%, at 517 million, compared 1.4 billion a year ago, and that wasmade up of 442 million in backlog from the Traditional Homebuilding business,versus just over 1 billion a year ago, and 74.9 million on the TowerHomebuilding backlog, compared to 384.3 million a year ago, 2006, Q3 ending.

I’ll speak a little bit tothe traffic, if you’re following along on the webcast, slide 5 illustratestraffic for each of the quarters. The delta compared to same period last year,and the same period 2005, which arguably was the peak, and I guess the takeawayfrom this slide really is that the traffic trends in Florida have become lessnegative each quarter, and for all of Florida in Q3, our traffic was actuallyup 4% compared to last year. So Q1 was down 30%, Q2 10%, and Q3 trended up 4%compared to last year, and I guess, southwest Florida has improved compared to thedeficits earlier in the year. We were off by 1%, and Tampa is up about 13%, notwithstanding thefact that orders in both areas continue to be challenged.

The top level summary onTraditional Homebuilding, basically Q3 revenues of 157 million, down 25.9%compared to last year. 212 closing in Florida,excuse me, 212 closings in total, 145 in Florida,53 in the Northeast, and 14 in the Mid-Atlantic. Gross margins beforewrite-downs of 11.1%, compared to 23.7% a year ago, so you can see thesignificant impact of the discounts and incentives compared to the homesclosing a year ago.

Gross margin as a percent ofrevenue for Q3 was 8%, compared to 22.6%, and there was 4.9 million of assetimpairments, which lowered the gross margin about 310 basis points, and we alsoretained almost $3 million of deposits, which added 170 basis points to theTraditional Homebuilding margin for the period.

Tower business snapshot:again, continuing to be very negative, with increasing defaults. The revenuefor the Tower business was actually negative revenues, due to the reversal ofrevenue from defaults and margin was negative, impacted by 23.7 million ofgross margin that was reversed due to the reserve impacts and expecteddefaults. We also had other adjustments that reduced margin by about 12.9million. And then finally, the $31.1 million of impairment charges to unsoldTower units had a very negative impact on margin for the period.

We announced yesterday arestructuring that began a week or so again. As far as actual implementation,it’s mostly implemented. Some of the reductions will trail into the early Q4,but basically, we’ve reorganized the company to combine Traditional andHomebuilding operations under the management principally of David Fry, with theexception of the Northeast and Mid-Atlantic Tower Homebuilding, reportingdirectly to me. Under this new organization, we expect to trim our workforcedown to about 2,100 employees, down from a peak of almost 3,900. We’ve reducedour head count by about 46% over the last five quarters or so, and thisbasically, this current reorganization will reduce our head count about net 575position. Necessary due to the slower market environment, and also a moreefficient environment given the size of the company and the slower demand.

If you look at the slide onpage 9, where I summarize this restructuring, while we’ve reduced our workforce from peak about 46% over the last five quarters or so, I think that is abit misleading, because if you focus, I have the employment divided by,basically, our lines of business, or where the employees reside. And you’llnotice that 70% of our work force now is associated with our real estateservices and our recreational amenities, principally our recreational amenities,which is about 387 holes of golf from almost 22 golf courses, and the clubs andthe restaurants and the marinas that are associated with that, property management at ourcommunities, and then real estate services, which basically is our PrudentialRealty employees, and some of our title company, or all of our title companyemployees. So a good 70% of our work force resides in those businesses, most ofwhich haven’t seen the downturn that… recreational amenities, obviously, wehave a fixed number of member and in some cases, members shift is actuallygrowing slightly, so we haven’t been able to reduce our work force in thatregard, because we haven’t seen a slowdown in those lines of business.

On the other hand, if youlook at our Traditional and Tower Homebuilding business, we’ve reduced our workforce over the last five quarters about 71%, so about 260 of our employees areworking directly in the Traditional and Tower Homebuilding, excluding sales andmarketing, another 215 employees in sales and marketing, so TraditionalHomebuilding and sales and marketing make up about 22% of our work force andthose have each been reduced, as I said , 71% and 51%. And then SG&A makesup about 8% of our work force and that’s been reduced 55% over the last five quarters.

Sothis is a structure that will work well, not only if we continue to receivelower demand but also in a structure that has been able to retain the talent torespond geographically if we happen to see rolling increases of demand in thenear term or in the future.

Withthat I’ll turn it over to Jim.

JimDietz

ThanksJerry and good morning. I guess I’d like to start by making a few comments onthe financial statements which are pages 10, 11 of the slide deck or areattached to the press release.

Lookingat the summarized condensed financial statements first of all from a revenueperspective, certainly the most unusual item and probably the most difficult tounderstand is the Tower revenue which is negative. As Jerry’s mentioned alreadythat we had $89 million of revenue reversals related to 88 defaults. That hadan impact on an overall revenue of about 35% reduced overall revenue by 35%.

Inaddition, Traditional Homebuilding was hurt by fewer closings due to the 44%cancellation rate and also some lower margins due to discounting, particularlyon recent spec sales that we’ve made during the second quarter and even thethird quarter.

Impairmentcharges were spread between Traditional Homebuilding, about $4.9 million inTraditional Homebuilding and about $31.1 million in Tower Homebuilding anddirectly reduced the margin reported and shown on these slides excluding $23.7million which was related to both actual defaults recorded and also reservesfor defaults on Tower contract closings. Also $31.1 million of impairmentsrelated to Tower Homebuilding and $12.9 million of other charges again on theTower side I should be saying. The overall Tower margin would have been $11.1million as shown prior to slide that Jerry showed, that would have been about 25%of revenues so you can see that the Tower business really is being affected bya number of factors which makes it all a bit difficult to sort through andthat’s why I wanted to bring out these points and clarify the effect of theseitems.

Droppingdown below gross margin the SG&A expense for the period, for the quarterwas $46.5 million. That expense was about $4 million higher due to consultingcharges we paid relating to the closing, the settlement of the proxy contest.

Alsothere was about $1 million in severance costs [recorded] and $2.8 million ofhigher real estate taxes simply because there is less to be capitalized becauseless development is ongoing.

Soif we take those changes, those variances, and set them aside the overallselling, general and administrative expense category would have declined by13.6%. Our expectation is that in future periods i.e. 2008, those declines willbe evident as these onetime charges will be behind us.

Interestexpense is also up this period at $22.4 million versus $8.7 million for thequarter a year ago. That’s primarily due to less capitalization again driven byless development activities when less in asset value is under constructionthere’s simply less interest to capitalize.

Andfinally we have a $3.6 million charge related to debt costs that relatedentirely to the amendment that occurred in August of 2007. We reduced thecommitment amount, the revolving facility and the term facility. While we didso, we wrote off the associated charges in accordance with accountingpronouncements that require that. So that’s how we get to the overall loss of$69.7 million.

Turningthe page to the balance sheet cash flow data, just a couple things to pointout. Total assets for the period were down about 2.5% mainly reflecting adecline in contracts receivable from $1.26 billion to $787 million from thestart of the year and compared to June 30, the decline was about $138 millionand again that reflects collection of receivables, that also reflects defaultsthat have been recorded during the period.

Otherassets increased compared to year end and also compared to June 30. That’sprimarily the recording of deferred tax assets associated with tax benefitsthat are expected to be realized related to the losses recorded during theperiod.

Focusedon cash flow, cash flow from operating activities is positive year-to-date$33.3 million. However, for the period, for the third quarter, the cash flow asused by operations $53 million of the cash outflows was the net [yield] fromoperations. And that’s really due to the delay in One Bal Harbor closings and also due toincreased defaults in Florencia and also fewer closings in the TraditionalHomebuilding division. So much of the cash flow was pushed forward into Q4, andas Jerry said, seller cash flow will be pushed forward into 2008.

Thenext slide in the slide deck just talks about Spec Units. Spec Units in totalthat are finished are 746 as of September 30. The breakdown is 356 TraditionalHomebuilding Specs in Floridabeing the majority of the total 384 for the Traditional business. Total TowerHomebuilding Spec Units finished Tower Units, 362 Units. That’s an increase ofabout 115 related to the completion of the LeJardin and Florencia buildings,where there were significant unsold units and also as the defaults are recordedwe add those units back into the inventory for resale.

Sonet compared to the second quarter, we essentially are roughly flat in terms ofTraditional Homebuilding Spec Units and that’s simply reflecting the fact thateven though we sold over 130 Traditional Homebuilding inventory units we alsohad significant defaults. We also had unsold units that were still underconstruction and that were completed during the period and therefore added tothe finished count. And on the Tower side, I explained the increase driven bycompletion and also defaults.

Cashflow projections: this is slide number 13 if you’re following along in theslide deck. The expectations Jerry mentioned $210 million - $460 million forthe full year. That’s from operating and in investing activities. Mostly fromoperating activities, $10 million from investing activities which waseffectively the net cash flow that came from the sale of a non-golf recreationalfacility in the second quarter.

(inaudible)range well, clearly visibility is not perfect even at this stage into thetiming of closings. At the One Bal Harborthey have started and we did receive a TCO as we’ve noted in some of ourdisclosures and closings are under way and are expected to continue in Novemberand in December. The Watermark and Hudsonshould finish up very shortly. However, we expect some of those closings alsoto happen in early 2008. The change clearly was the timing of the Tower cashflow. Also we had higher defaults in the third quarter so we had to incorporatethe lower cash flow from the third quarter into our overall year forecast. Andfinally the slower sales pace and increased defaults in Traditional businessdoes also have a negative impact on cash flow.

Inthe fourth quarter we’re looking forward to 275-300 Traditional Homebuildingclosings. If you add that to the 212 we closed during the current quarter we’relooking at the low end of the range we had previously guided towards which was500-600 for the second half so we should be close to the 500 range for the fullsecond half of the year.

Letme talk about the status of our bank loans for a moment, page number 14 gives abrief overview. Basically this quarter we were not able to comply with theAugust modification with respect to fixed charges coverage covenants out of thecredit facility and term loan. All the other covenants were in compliancehowever, based upon primarily the defaults recording of the defaults charges, wefell below the 0.5 requirement and turned it a 0.38 requirement. We immediatelyturned to our lead banks and the banks worked with us to go out to theparticipants in those facilities and I’m pleased to say that yesterday obtaineda limited waiver performance which is a 30 day waiver. The reason for the 30day waiver is to allow us to finalize the details of a amendment term sheetwhich we do have and are working through. There are details we are not ready todisclose that still need to be negotiated and as that’s finalized, and we doexpect to finalize it will be sent out to the participating banks for a vote. The required vote is two thirdsand we do expect to have that complete by the end of November or the verybeginning of December.

Withthat I guess the only think I’ll do before I turn it over to the operatormoderating questions and answers is speak about some of the things in theappendix. Page 16 we’ve updated though there hasn’t been much change, ourdetail of our land position. Page 17, we’ve repeated the asset opportunitypool. If you recall from the last conference call we said that there’s a broadrange of 200-300 cash flow that can come from selling all of these assets notthat all of these assets will be sold immediately but we’re pursuing several ofthem and so these assets, many of which are not in the sort of outlook or shortrange plan could provide upside from a cash flow perspective and from a profitperspective because we’re focused on generating margin from the sales as well.Page 18 gives you the status of the Towers. As of the current time period wehave 30 units remaining to close of the seven Towers closed in 2007 and ofthose we’ve reserved 16. That’s an update from what you see on the slide whichwas as of September 30 and then finally there’s an impairment summary at theback just summarizing the three quarters.

Withthat I’d like to turn it over to the operator. Thank you.

Question-and-Answer Session

Operator

Certainly, thank you sir.(Operator instructions). Our firstquestions will be coming from Andrew Brausa with Banc of America Securities.Please go ahead.

Andrew Brausa – Banc of AmericaSecurities

Hey guys. How’s it going? Iwanted to ask you, on the forward guidance of cash flow, and I apologize if Imissed it, what default rates are you assuming on your tower product goingforward?

Jim Dietz

We have made some adjustmentsto our default expectations based on the recent experience that we’ve had insome of the towers we don’t expect much of a change and some of the towers weexpect a bit more of a change. For example, the Watermark up in New Jersey we expect very little change, while in Bal Harbouralso relatively little change. We thing that’s a very unique asset and thecontract holders there have a significant amount of built in gain. Oceanside Bis a little less certain but it’s also a little further out, so the data isless certain. I think we’ve raised the average to something in the mid to highteens overall expectation.

Andrew Brausa – Banc of America Securities

Alright. Given the importanceof One Bal Harbourto the cash flow and potential (inaudible) payment focus, your assumptionsthere, can you put a number around what your assumptions there are fordefaults?

Jim Dietz

I don’t think we want to giveout the faults per building. I think that’s one of the hesitations that I havehere, just as the real estate downturn was partially a self fulfillingprophecy, I don’t want to create yet another self fulfilling prophecy, outexpectation is that the fault rate will be low at One Bal Harbour, lower thanthe average that I just stated and I want to point out that there have beensome commentators that have said while they might do okay on the condo becausethose are really great units in the hotel they’re all investors. We expect highdefault rate. I think that’s illogical and inconsistent with our experience at Singer Islandresort. At Singer Island we had a greatdeal more condo hotel units. It’s a less desirable location from a hotelperspective. Miami Beachis probably the most desirable location from a Hotel perspective in virtuallythe whole world, and our view of the condo hotel is the purchaser is a longterm oriented investor. They understand that they’ll make a purchase of realestate, which is, of course, what we’re selling. We’re simply selling realestate. They’re making sort of their own analysis and concluding that makessense from a cash flow or investment perspective. Our view is that they’relooking forward to the revenue that will come from the hotel occupancy, so wedon’t think there’s a higher default rate there.

Andrew Brausa – Banc of AmericaSecurities

Okay, I guess to move to thecovenant issues and potential amendment. You mentioned in the press releasethat it was going to be expensive. Is there any way to quantify exactly whatyou meant by that?

Jim Dietz

Not at this point. That’scertainly one of the open points that we have to agree upon with banks in termsof is there an upfront fee, what is the upfront fee, is there an increment to theinterest rate, what is that increment? We’re not there yet. So it would bepremature to give any sort of guidance on that.

Andrew Brausa – Banc of AmericaSecurities

Okay and I guess finally…

Jerry Starkey

That language is legaldisclaimers. So when we complete we’ll report.

Andrew Brausa – Banc of AmericaSecurities

Right, okay. Thinking out,let’s say December 7th rolls around and there’s some sort of issueat the banks, just for arguments sake, then have you guys thought at alllooking forward on potential options outside of the existing arrangement or asfar as other sources of financing? Or are you guys still just focused ongetting on board with your banks?

Jim Dietz

I think our primary focus isgetting this bank negotiation wrapped up because we don’t, we’re not very farapart with the banks and we’ve just completed this 30 day waiver. We think wecan wrap this up, wrap up the negotiations quickly and then complete theapproval. If that doesn’t turn out to be the case there are other alternativesobviously, some form of take out financing which might be available from a nontraditional source. Certainly our new board of directors represents, includegroups that have substantial free cash flow that might become available to us.And so there’s a number of an alternatives if the banks, if we’re not able toreach consensus on what we believe to be a reasonable amendment, but we thinkthe banks will, we think that we will reach that consensus.

Andrew Brausa – Banc of AmericaSecurities

Okay thanks guy.

Operator

Our next question is comingfrom Dennis McGill with Zelman and Associates.

Dennis McGill – Zelman andAssociates

Hey guys. I just actuallyhave two questions. The first, just thinking about on the traditional side, andmaybe I’m looking at this wrong, but I just want to put it in perspective. Thegross margins that you’re reporting pre-impairments and so forth in the lowdouble digits are well below what a lot of your peers are reporting, yet youhave some of the older land, and certainly probably the oldest land in some ofthose communities than any of your peers. So I’m trying to understand therelative gross margins versus age of land when we’d expect that you’d beprobably above average on the gross margin line given the duration of yourassets?

Jim Dietz

Well, as we pointed out, we’vereduced our cost of selling specs. Our prices and incentives are down 25% so ifyou look at where our closings were a year ago in Florida it was over almost23% so clearly with 25% discounts and incentives over where we were a year agoyou can see that our costs had come down and our pricing was up and with a 25%impact we’re still in the single to low double digit margin. You know, I thinkin this environment obviously your cost is coming down but the homes thatyou’re selling that are specs were built in a higher cost environment before wewere able to focus on, or before we accomplished focusing on reducing ourdirect cost of construction. Many of the homes that are closing now also have ahigher imbedded interest and imbedded carry cost in them because they’re beenin inventory for a while. I think that the margins at this point in the cyclearen’t indicative in a normal go forward business environment.

Dennis McGill – Zelman andAssociates

Well with that being said,incentives are pretty common for most builders, and given the average age beingmuch longer for yourself is it just a function of carry costs beingoverwhelming the age? Or the development costs put on that older ground is muchhigher than initially would have expected? I’ trying to understand theunderlying the capability of those partials given that home prices probablyaren’t going up anytime soon?

Jim Dietz

I think you’re right. Thecarry costs have been tremendous and we do still see a significant spreadbetween the prices of to-be-builts and spec homes. And while we’re discountedour specs tremendously we do think that the undeveloped portions of many of ourcommunities which still have a five to ten year life is better to preserve thatirreplaceable land for a better day. Obviously as the market has trended downthe cost to improve land in Florida,the cost of fill ahs all trended down. Obviously we’re setting with a lot offinished lots as well, which was improved in a higher cost environment. I thinkto some extent we’re, I don’t want to engage on an intellectual debate abouthistory versus present, but the 25% citizen discounts a significant impactcompared to our margins in the low 20% a year ago.

Dennis McGill – Zelman andAssociates

Okay that’s helpful. My onlyother question has to do with One Bal Harbour and maybe even Watermark, can yougiver us a sense of cash flow per closing taking into account maybe anyincurred liabilities that you’d have to fund from the net revenue as well?

Jim Dietz

Yeah, I’m not sure gettingthat granular is terribly helpful or something we want to do, frankly it wouldtake some calculation effort and I’m not sure how useful it would be.

Dennis McGill – Zelman andAssociates

Okay, thanks. Fair enough.Thanks Jim Dietz.

Operator

Thank you. Our next questionis coming from Dan Oppenheim with Banc of America Securities.

Dan Oppenheim – Banc of AmericaSecurities

Thank you very much.. I waswondering if you could go back to the tower business for a second in terms ofyour reserves and default expectations. It seems that with the lower cash flowguidance that you said that your expectations for One Bal Harbour and Watermark haven’t reallychanged. So the lower cash flow is primarily due just to delays in the closingsin those units?

Jim Dietz

That’s right. I think thatwhat we highlighted is 200 million of cash flow from OneBal Harbourand Watermark up in Jersey will flow into theQ1, so the delays have pushed some of that cash flow into next year. That’s acouple of hundred million so that would be part of the shortfall this year andbalance of the shortfall results in higher defaults that we actually have experiencedyear to date and that we’re providing for through the sell out of all of thoseremaining buildings.

Dan Oppenheim – Banc of AmericaSecurities

And now if we think about thedefaults that are occurring now just for those two buildings, but given thatjust the age gross orders that you had during the quarter clearly moredifficult and probably lower price than you expected in reselling those(inaudible). Have you change your expectations in terms of your resale priceson defaulted units?

Jim Dietz

Actually the, as I mentionedearlier most of our finished inventory is in Southwest Florida, in MarcoIsland, in Bonita Springs, and then up in the panhandle of Florida. In thoseinstances, we have taken impairments and we have adjusted downwards our prices asmuch as 25%, and so to the extent that this is a highly seasonable market andthat most of our natural buyers aren’t even in the state at this point, we’vebegun a shoulder season [directel - ph] and direct marketing campaign. Wereally expect to see (inaudible) in those three areas in this coming season,and in some of those buildings the pricing that we’re offering now is actuallybelow the original offering price. In buildings like Bal Harbour where we’resold out and where units are being traded and all to trade on the resale marketat higher prices than the original sale price we don’t anticipate significantreductions of pricing if there are cancellations.

Dan Oppenheim – Banc of AmericaSecurities

Thanks very much.

Operator

Alright, thank you. Our nextquestion comes from Susan Berliner with Bear Stearns, please go ahead.

Susan Berliner – BearStearns

Hi, good morning. I justwanted to follow up. I know you had said that you didn’t want to sell assets atfire sale, which seems like a change from last quarter so I don’t know if it’sjust market driven, what has happened the past quarter. But I was wondering ifyou could just update us with what’s going on in the market on land as well asyour amenities.

Jerry Starkey

Actually there hasn’t been achange. I think we have in the appendix a list of assets that we consider anopportunity pool which is comprised of some of our mature recreationalfacilities, marina, and golf courses. We sold a couple of recreationalfacilities this year, or have under contract and then principally somecommercial land of which we sold some this year, and for the quarter I thinkour margin on small land piece is over 80% so we really haven’t changed ourstrategy on that opportunity pool. It’s relatively high margin land. In a fewinstances we’ve had bids that are wider than our ask, and we simply turned themdown, so as long as we see visibility on the cash flow coming from the towerbusiness, which we continue to expect, we’re not going to be focused on moving thoselands at anything but what we believe is market value. So it’s a patientsituation.

Susan Berliner – BearStearns

And I guess just following upon that if you could just kind of go through, I guess the covenants in yourindentures for the senior sub-bonds, it’s our understanding that capital couldbe put both obviously below that as well as above that and I was wondering ifyou could just give us any details on that?

Jim Dietz

Yeah, technically, and againI’ll let the lawyers sort that out, and of course if we decided to take thatapproach they would be involved in the team. You can look at the indenturesyourselves, but it is certainly possible for us to obtain debt that would besenior to the senior subordinated, subject to certain conditions and in thepast we have obtained junior subordinated debt and we could continue to dothat. So there is availability to add additional debt, obviously we would bejudicious in doing so. That would be more of a replacement of the facilities iffor whatever reason weren’t able to reach an agreement versus simply addingdebt. We don’t believe that we’ll be adding debt in the future; we believewe’ll be de-leveraging.

Susan Berliner – BearStearns

And I guess lastly, in earlySeptember when you put out one of your press releases exploring alternativesyou mentioned a potential right to offering, can you just update us on that?

Jim Dietz

I think the Board continuesto look at all the opportunities to be rated as capital. If incremental capitalis required at this point, we believe that with sufficient cash flow fromoperations to de-lever, and any additional capital that we might raise, wouldbe in conjunction with opportunistic acquisitions. And at this point in thecycle there really doesn’t seem to be a tremendous amount of opportunisticacquisitions. So we’re continuing to focus on de-leveraging from operating cashflows, and the Board maintains flexibility and will reach a conclusion if andwhen that becomes a desired capitalization strategy.

Susan Berliner – BearStearns

Okay, thank you.

Operator

Okay, thank you. Our nextquestion is coming from the line of [Robert Menowich] with RBS. Please goahead.

Robert Menowich - RBS

Yeah, hi, good morning Jimand Jerry. I was wondering if you had some assumptions or let’s say, assuming asuccessful negotiation with the lenders, would you have some expectations onthe amount of room you would have under that amended facility to potentiallyrefinance the senior sub-converts next year. And I guess I’m wondering, isthere the potential of having access to senior secured debt to take thosesenior sub notes out, or do you think that it would have to be a new financingthat would be [power to sue] with the existing senior subs?

Jim Dietz

Well, that’s a very detailedquestion, Rob, as you are a very detailed person. But, I guess what I would sayis that we have, in our forward planning, anticipated the possibility that theconverse will be put. So, we have anticipated the need for that capacity. In fact,that has not been a pressure point for us. We do have the capacity today to notbend the pressure point for us. We do have the capacity today even without theamendments for that.

We are asking for additionalcapacity in certain aspects. Again, I don’t want to get into the specifics ofthe ask or the negotiations of the longer term amendment. But we do expect tobe able to take care of that.

As far as refinancing, itdepends on the market at the time. Right now I don’t want to be in thefinancing market. It would be very expensive to be in the financing market. Soour anticipated source of funds to take out that $125 million is simply to rollit into the overall outstandings under the senior secured facility.

Robert Menowich -RBS

Okay, fair enough. And thenmy second question, and it may be equally as detailed, is, I’m wondering if youhad an updated guesstimate for the fixed component within your SG&A. Youkind of pro-form it for the $46 million or so of our headcount reductions.

Jim Dietz

Well, again, that’s askingquestions about guidance going into next year. I guess it’s a good time to say,we’re not going to give guidance going into next year. From a general sense, Idon’t think the builders will either. However, I can add a few comments thatwill hopefully be helpful.

There are two components thatare really unavoidable for the company. The two components are real estatetaxes, and we can only capitalize a portion to aspects of the business that areunder developments, or under construction, like homes or lots. That’s about $20million.

Community and districtexpenses, which is really ongoing upkeep of communities, again, really wouldnot wretch that fact. That’s about $20 million also. So that’s about $40million.

In terms of the othercomponents, of costs that fall into SG&A, obviously it’s sales, offices,our marketing efforts including advertising, our national databank and soforth. And then general and administrative, which are finance counting,treasury, HR, legal and obviously facility costs, and various other costs.

There’s a significant amountof facility costs, certainly you have to maintain a fairly stable accountingteam and treasury team, legal team, HR team. And again, as Jerry said, 55%reduction has got us down quite a bit.

So as we go forward to nextyear, I’m giving you some specific ideas. I think that from a dollarperspective, you could see this in the $100 million range, or a bit moreperhaps. But I think $100 million would be a goal. We may even be able to getbelow that goal, depending upon the details of, for example, are we able tosublease a given office and consolidate that office space further, savingfurther dollars, etc. So there’s a lot of details that go into this.

I think that’s the range tothink about in addition to the $40 million of real estate taxes and communityand district costs.

Robert Menowich - RBS

Great, very helpful answer.Thanks.

Operator

Alright, thank you, and ournext questions come from [Alex Brown] with [HTC Trading Group]. Please come in.

Alex Brown – HTC TradingGroup

Yeah, thanks, hi guys. Iwanted to talk about the One Bal Harbor.You mentioned you started to get some closings. Can you talk about how manyyou’ve gotten to deeds, and also whether you’ve had any resistance, or pushedback any people that are kind of trying to cancel?

Jim Dietz

Sure, we just received thePCO about two weeks ago, and the primary closing date. The main closing eventbegins on November 16th. Because of the size of the building, weexpect to close this building out of four periods: a couple of dates inNovember and a couple of dates in December, then with some trailing into thefirst quarter.

So, in the last week and ahalf, we closed nine units for buyers that were just really anxious to getstarted to finishing out their condo units. But the first closing date weexpect, perhaps as many as half the condos, 90 units or so, would be November16th, followed by a later closing at the end of November as well.

Alex Brown – HTC TradingGroup

Now, are people actuallyallowed to move in and live there, or do you have to have a final CO for thatto happen?

Jim Dietz

They are actually allowed tomove in there, but the condo units are unfinished. They are delivereddecorator-ready, because you recall those are pretty expensive units, in the $2million area. The hotel units are fully finished and furnished and ready foroccupancy at the time the closing occurs. And the hotel closings, won’t occuruntil the end of this month and December.

Alex Brown – HTC TradingGroup

Now in terms of impairments,I know it relatively small in the single family site this quarter. Can you talkabout how many sites were involved? Or was it just a re-impairment of aprevious project? And I guess, intuitively, we would have seen a little more,so can you talk about why we haven’t seen a little more?

Jim Dietz

Basically the impairments onthe traditional home building for the period related to areas where we wereselling spec homes below cost. So in that case, we analyzed the go for pricingand concluded that in some communities we needed to impair the standard inventoryin order to reflect the prices and absorptions that we expect, most of which wewould expect to clear by the end of 2008.

Alex Brown – HTC TradingGroup

So when that happens, you’renot required to impair the land for all the future closings?

Jim Dietz

Again, the land, Alex, thereare two different accounting rules. When you look at the finished units, theyare finished goods ready for sale. And so you look at that from the standpointof, what is the fair market value today? Which takes into account the sellingperiod, takes into account what is the price that we clear the market today.And that also requires a discounting, an appropriate discount rate. So thattends to drive greater impairments on the finished goods side, as opposed toassets in production.

Land and land developmentfall into the assets in production category, and the process there for animpairment analysis is very different. It basically looks at the gross cashflows undiscounted that you’re expecting through the sellout.

So if you had a situationwhere markets were compressed, let’s say a community had expected 30% marginsand now it’s down to 15%, and an expected three years of senior (inaudible).Well, certainly the internal rate of return went down, but mathematically, thecash flow, the gross undiscounted cash flow still exceeds the basis, andtherefore you don’t have an impairment charge. You can’t simply choose to havean impairment charge; it’s a mandatory accounting rule. So it’s a differentrequirement from an accounting perspective and I think that that is one of thereasons why you see fewer land charges.

Jerry Starkey

I think the other point isthat your expects are being sold at trough prices, embedded with peak costs. Sowhen you analyze the community going forward, your cost structure on improvingthe land and your cost structure on building the underlying home, reflectssignificantly higher costs today. Because as the market is slowed, constructioncost for traditional home building has come down pretty significantly.

And in our case we haveadditionally engaged in significant value engineering and redesign of some ofthe structures of our homes because we weren’t as efficient as we could havebeen in the prior cycle. And so as you look at the lifeline of the community,as Jim mentioned, five years or ten years, you’re going to have lower pricingbecause of the trough. But you’re also going to match that with lower coststhat reflect the current cost. So inherently you’re going to have highermargins to begin with because you’re not selling trough prices peak price,you’re selling trough prices trough cost. So that gets back into an equilibriumvaluing the future sellout of a large-scale community.

Jim Dietz

And if I could just add on tothat. We all know that the duration of this downturn is uncertain, but we alsoknow or believe that there will come a time when recovery will take hold andaccelerate. Will we get back to ‘04/’05? We don’t believe so. The industrydoesn’t believe so. However, when you do this analysis, typically, what we aresaying is we’re going to operate with a minimum of cost and overhead; we’re notgoing to continue development.

So there’s a period wherethere is limited cash flow. But then we get to a period of recovery, and inthat period of recovery, prices should return to a more normalized level.Certainly not the rate of depreciation from ’04 and ’05, but a more normalizedlevel and more normalized margins.

I think that’s the way mosthomeowners are analyzing their land. However, there’s a difference between usand other homebuilders. There are many homebuilders that have taken a shorterland position and/or have decided to option their lots. And so all of theirlots are finished lots. Whereas we have the luxury of being able to hold landthat we perhaps acquired five or ten years ago, and not developed the futurephase.

The analysis on a finishedlot is more difficult because it becomes very evident that the fair value ofthat finished lot has declined. So that could result in a community impairment,whereas our approach to business, where we develop the lots only when the lotsare needed, avoids that impairment.

Alex Brown – HTC TradingGroup

Got it. Just quick, last one,what is that recovery time frame that you guys are modeling in right now. A fewyears out, like 2010, or when does that start to happen?

Jim Dietz

You know, as I said, we don’tknow what the right answer is. So that’s the thing that you have to keep inmind. We think it will be about two years from now that we’ll see meaningfulrecovery. We hope it starts before two years out. Again, I hate for thesestatements to become self fulfilling prophecies, but we think ’08 hopefully isthe bottom of the trough, and that ’09, perhaps as we get into ’09, we start tosee stabilization of demand, which eventually eats away at the existinginventory, which will finally get to a demand for new housing, and start to seeprices stabilizing. That’s the process. I hope it begins in ’09, and perhaps bythe start of ’10, we’re back to an era, say, similar to 2002.

Jerry Starkey

Obviously you continue tolook at this, and if demand continues to trend down, then you’ll have moreimpairments and bigger impairments. So we’re all focused on the same datapoints.

Alex Brown – HTC TradingGroup

Got it, thank you.

Operator

Alright, thank you, our nextquestion is coming from the line of Peter Plaut, with Sanno Point Capital.Please go ahead.

Peter Plaut - Sanno PointCapital

Hey guys, thanks for takingmy call, and sorry to bereave the point. Just going back to the credit facilityhere. Back in August, you revised down your EBIDTA fixed charges ratio quitedramatically. So, I would assume that you and the banks were pretty surprisedto find that you were below that level at the .38 times this level.

So you also mentioned at thepress release that you’re in compliance with all your other covenants. So forthe negotiations with the lenders, is the primary hold up here is basicallygetting rid of the fixed charge coverage ratio, and if you’re confident that,even at a higher cost, that they will give you that waiver? And mostimportantly, is it a complete drop? Or just another waiver for a certain time?And if it is just a waiver, is there an end date to it? For instance some timeafter August 2008.

Jim Dietz

Well again you are asking fordetails that have not been worked out yet with the bank. So I can’t really comment. However you know in terms of whathappened in the Q3, we expected Q3 to be the tightest against the Point Fiverequirement. What we didn’tanticipate was the continued high default rate in the Traditional Homebuildingbusiness. It fell a bit short interms of spec sales. And then, mostimportantly we did not anticipate the $23.7 million impact of defaults. Reallythe variance there was Florencia where you know, we had expected to see 25% to30% defaults and it was closer to 55%. So,those charges pushed the fixed charge ratio below the Point Five. And I mightalso point out that when we first started closing the books, we had juststarted closing the Florencia units. Andthe Tower team was cautiously optimistic that many of the Florencia units thatmaybe hadn’t closed yet had a goodreason to need an extra week or two and would close.

But, then as we got late intothe month it turned out that no, they are not going to close. And we made a decision to defaultthem. So really it was late in themonth when we learned that thoseadditional charges were required and so,recalculating the ratio led to the covenant situation. That is really why we are going with the two step process. It was late in the month, so we said,Well let’s just wait for thirty days, giving us some time to work through thedetails of the longer term amendment.

Peter Plaut - Sanno Point Capital

But based on just the outlook for the remainder of the year,and you’ve said that it was going to bedifficult, wouldn’t it be best just to try to see if you can get the banks and if you had a payout forit to drop that indenture if you are going to be in compliance with the others?

Jim Dietz

Well if you are asking aboutthe August amendment would it have been better? Absolutely. That is what we asked for, we debated it at length,and at that time the banks weren’tcomfortable with it. I think going forward it might be a differentsituation. But, again you know,those negotiations are sort of the next step.

Peter Plaut - Sanno PointCapital

Thank you.

Operator

All right, thank you. Ournext question is coming from Randy Riesman with Durham.. Please go ahead.

Randy Riesman

Hey, how are you doing? Just a few questions, just I mean justthe first one I have which just is something I am, just not making sense ofhere. You show Tower backlog of 74.9million as of the end of Q3, butfrom looking at the other slide in the slide deck, there are 43 sold units inthe buildings that have already beencompleted and then another 600 soldunits in the Towers under construction, so why is the backlog only 75 million when there are 643 sold units?

Jerry Starkey

It relates to percentagecompletion accounting, so in the Tower business where you’re recognizingrevenue and margin, and incurring your cost on a GAAP basis as you progress construction, the remainder that isn’treflected in percent of completion becausethe unit is not built. The portion that’s unsold is theportion that’s in backlog. That iswhy you can have very low or EBITDA orvery low Tower margins and yet havepositive Tower cash flow. Becauseyou basically recognize the revenue in advance of the closing, and then at the closing you collect the cash and relieve the receivables.

Jim Dietz

Well let me fill in somedetails that will help you out. Thisis from the 10-Q which we expect tofile today perhaps or tomorrow morning.

Basically as of September 30, 2007, there were 652Tower units in backlog. Thecumulative contract values, which again are related to the cash flow, basically would be the cash flow,expect for any defaults, and except for any deposits which are specifically 20%.

Randy Riesman

Are there closing costs orsales commissions that also get netted against the ultimate purchase price?

Jim Dietz

Sure, sure.

Randy Riesman

Well then how do we, is it 2%of the price, 5% of the price, 10% of the price?

Jim Dietz

Commission specifically are4% or 5%, closing costs are about a point?

Randy Riesman

The next question I have isjust in the…

Jim Dietz

I was going to give you thenumber, because I think that is what is going to help you. The amount is 883,894. The 883,894 is the contract value ofthe units still on backlog that we haven’t closed yet, minus the revenuesrecognized and the percent complete method which Jerry referred to; 808,955,000. so you net those twonumbers you get to the 749 and again that’s shown in the pressed 10-Q, you willsee it compared to the prior year.

Randy Riesman

I guess the next question Ihave is maybe just building on the questions around the impairments. With regard to doing an impairmentsyou need to have a valuation for land. I just want to understand what methodology, orhow are you guys getting comfortable with your land values? Have you seen any land trade?And if so, maybe you can give us alittle bit of color as to sort of at what price or at what value these piecesof land are trading and I guess the third question and I guess the thirdquestion is on some of the other assets, how should we as investors thing aboutputting a value on the golf course holdings, putting a value on the marinas,and the other kind of non-core recreational facilities?

Jim Dietz

From an impairmentperspective, first of all, the land that we are developing into lots forhomebuilding purposes is evaluated based on the cash flow that we expect fromthe overall build out. It’s not based on sell residential parcels, that wouldbe very difficult to do in the first place and secondly it’s not required,that’s not the approach that GAAP mandates. So we look at the future cashflows. If we change the community, if we decided that you know what, we’regoing to have to lower the prices or change the product types or we’re going tomake some other step that’s going to change cash flow in the future then wewould reevaluate that community, which would be an improvement or could lead toan impairment depending upon what the situation is. Land in terms of nonresidential land, we’ve sold at very attractive margins; certainly this quarterwas a very high margin quarter from a sale perspective. We continue to garnerinterest in our parcels, we have a limited number of parcels on that list, andwe continue to garner interest on a number of them, most of them I would say,at prices close to our list price which are typically 30 to 50% or more higherthan our cost, I’m sorry 30-50% margin or better margin of revenue.

Randy Riesman - Durham

And are these lots thatpeople are interested in and the preponderance…

Jim Dietz

They’re parcels thatbasically are either commercial sites or they might be retail oriented or theymight be hotel or different uses that we choose not to build apartment,assisted living, truthfully non-core assets but assets and land types that wedevelop as a part of developing planned communities and allocating diverse usesto the perimeters and the parts of our communities that might be on majorthoroughfares for shopping centers or hotels or other uses, apartments.

Randy Riesman - Durham

Okay, and just one lastquestion that I had here. What’s work in process right now, and how does thatbreak out between traditional home building and towers, as I’m just trying toforecast out from here what are the cash outflows to…

Jim Dietz

Again we’re going to file our10-Q in the next hopefully 12, well not 12 hours, hopefully five or six hours.I’ll simply read off the numbers if you don’t mind, the breakdown of realestate inventories is as follows; land and land improvements $961.4 million,investment and amenities, which are equity clubs $101.5 million. The work inprogress is as follows, the Tower component is $261.5 million.

Randy Riesman - Durham

And how far along would yousay you are on those projects?

Jim Dietz

Well, again, that’s justrelated to the three remaining towers, I’d day on average 96 97% complete. OneBal Harbour was 99% complete at the end of the quarter, Watermark was probably97%, and then Oceanside B was a little bit further behind, maybe 90%, we’reexpecting delivered early Q1. So $261.5 on that category, the homes,traditional home building work in progress, which would be the back log of soldhomes mostly, a few spec units are being completed, usually simply the unitsthat might be located within multi, duplex or quad buildings, multi familybuildings where we end up with a forked spec. but mostly this is sold backlogand the related inventory value is $288.9 million. Finally…

Randy Riesman - Durham

Of that, can you give us asense for kind of, how many days old, how far into width that is? Or how closeto completion?

Jim Dietz

I’d say it’s probably 75%ish, that’s a gut feel.

Randy Riesman - Durham

Okay.

Jim Dietz

Just to finish out so we getthe total of real estate inventories. The completed inventories for the towerfor the quarter totaled 186.6 million, and the completed inventory oftraditional homes is 196 million, so the sub total should come to $1,995,000which is the number shown on the financial statements.

Operator

Alright. Thank you, our nextcall is coming from the line of Marcelo Lima with Horn Eichenwald. Please goahead

Marcelo Lima – HornEichenwald

Hello, good morninggentleman. I have a question about your number of employees. It seems like youhave 2100 employees, not 1460 of which are in the amenities and real estateservices. What keeps you, these are, correct me if I’m wrong but these are sortof low margin businesses at this point, not really contributing a lot toliquidity, what keeps you from sort of cutting back even further, or just maybeshutting down those businesses now just to conserve some cash?

Jerry Starkey

I’d say, in just kind of afirmer overview is that most of those courses I’d day fall into a couple ofcategories. One would be some of the golf courses are actually generating goodcash flow and have thousands of members, so it might be appropriate to sellthose assets but it wouldn’t be appropriate to shut those assets down becauseone they’re profitable and two you’ve got several thousand customers who arepaying dues and have paid membership prices. Another category would fall intoequity clubs or private bundled clubs within communities that we’re activelyselling homes or have actively sold homes in the past. Again, we may have a 300membership golf community with 100,000 to 150,000 membership fees and maybe wehave 100 members, and 200 members remaining If we shut that down, one, we wouldbe assured to never sell a home in that community again, two, that’s an assetthat’s not really ripe for selling because it’s probably still in a deficitmode, so the goal is to operate that as efficiently as possible, but it’s a keycomponent to preserving and driving the value on the homes and condos in thosecommunities. Again, our average sales price in our traditional community isaround $700,000; and then our towers, over $1 million. And the buyers that havebought in those communities or towers historically, and live and enjoy the lifestylesin the communities, are members of paid for, and expect to receive thoseamenities as part of the value package that they paid for.

Over the years, maybe 15years ago or so, we had sold some golf courses in communities that were stillunder development, and what we found is that the operators weren’t aligned withthe community development. And if those operators choose to deliver lowerquality services than the customer expects, that has a negative impact on thepricing and value of your real estate.

So in communities that areactively under development, we’ll continue to operate those golf courses,minimize our cost of carry, but deliver the customers the quality of clubs thatthey choose. And preserve and enhance the real estate that we’re selling inthose communities.

So, we’re not in thosebusinesses just for the love of the businesses there, tied to the overalldevelopment of the life styled communities and the high priced homes that wesell there. So, while the development is underway, we’ll own those amenities.

In the future, we had begun astrategy of pursuing a third party owner from the beginning of those facilitieswith WCI managing those facilities. And that would enable us to assure thequality is matched with the pricing of the homes. We have a large golfmanagement operation. We operate and own about 387 holes of golf, it’s about21.5 18-hole courses. So we do have a significant economy of scale in thatbusiness, and believe that if we offloaded that management, it would come at a highercost than managing it ourselves.

Marcelo Lima – HornEichenwald

Yeah, that makes absolutesense. Thanks for the answer. And by the way, are those amenities included inasset pool of opportunity that you mentioned earlier?

Jerry Starkey

A handful are. For instance,we have some retirement golf courses in our Sun City Centercommunity that are generating reasonable cash flows. And we think that thereare third party acquires for those golf courses, and also in some cases theresident associations have expressed interest in purchasing those.

And one of the residentassociations bought our non-golf recreational facility earlier this year for$47.5 million, so these larger retirement communities do have the ability toraise the capital and they have large organizational structures that actuallyenable them to own and manage these kinds of facilities. So in some cases, theresidents are the natural buyers as well.

Marcelo Lima – HornEichenwald

Okay, thank you. Now just onemore question. Looking at your balance sheet, quarter-over-quarter, you’re upabout $55.7 million in total debt obligations. Of course, everybody seems tohave, including on this side of the line, has underestimated the debts of thisdownturn. At the beginning of the year, we’re talking cash flow guidance ofabout $1 billion.

Last quarter that came downto 530 to 730 million. And now even the upper range of the current guidance isbelow the lower range of this previous guidance. And I realize that there’s alot of closings left on One Bal Harbourand other assets coming up, but how do you expect to generate enough cash flowin the coming year? What’s your plan there, and what do you see generating theneeded cash flow considering the debt.

Jim Dietz

Well, we expected cause ofcash flow next year, based upon our prior guidance when we expected virtually,all of the Watermark and One Bal Harbourunits to close in the third and fourth quarters. Now that we expect, Jerrymentioned, about 200 million potentially to slip into next year. This year’sloss will be next year’s gain. So we expect significant positive cash flow nextyear. We’re not going to give out a specific number for that at this point, butwe expect more de-leveraging next year, we expect positive cash flow, and we’regoing to manage our expenses to ensure that we realize that cash flow.

Jerry Starkey

Another point to add on isthat this year we had a significant backlog in towers and in traditionalhomebuilding that we had to invest to build during the course of the year. Thedefaults and cancellations have delivered to us, undesirably delivered to us,finished units in traditional and homebuilding that have been finished and paidfor.

So a high percentage of nextyear’s revenue will come from selling finished tower units and finishedhomebuilding units that have already been paid for. So it’ll be significantlyless investment in inventory and whip next year, and to a large extent will beharvesting cash that was spent in prior periods.

Marcelo Lima – HornEichenwald

Got it. Now just, Jim, couldyou just remind us, what do you expect to be the full year debt service fornext year?

Jim Dietz

We are not prepared to givethat guidance at this point.

Marcelo Lima – HornEichenwald

Okay, but it should be…

Jim Dietz

Again, the amendment processwill perhaps make that irrelevant from a bank perspective. Certainly, that is one of our major goals, so I think…

Marcelo Lima – HornEichenwald

Irrelevant in the sense thatyou might be able to suspend payments for a while?

Jim Dietz

No, we may be able toeliminate that covenant for a time.

Jerry Starkey

We expect to get significant de-leveraging next year. We will make our interest payments and de-lever and pay down theprinciple significantly, and as we report Q4, we will give appropriate guidancefor next year. But, at this pointthe cash flow guidance that we have given for this year, and the fact that weexpect some of those buildings to go onto next year with the guidancewe are able to give at this point.

Jim Dietz

Yeah, I may have misheardyour question, was your questionwhat is the amount of debt service or what is the amount of…

Marcelo Lima – HornEichenwald

Debt service, not the totalamount of debt…

Jim Dietz

I was thinking about the debtcoverage, at this point we are running at about $10 million a month in terms ofinterest. We should see that comedown. That is sort of where we willbe once we close these, Watermarkand One Harbor units, that should come sownsomewhat over the year. All theprinciple payments due will be the repayment of the Tower loan. The Tower loan should be repaid by theproceeds from the three buildings that are left to close: One Bell Harbor, Watermark and Oceanside B.

Marcelo Lima – HornEichenwald

Ok , excellent. Thank you very much.

Operator

All right, thank you. Ournext question is coming from MichaelBailey with Par-Four Investments. Please go ahead.

Michael Bailey - Par-FourInvestments

Hey guys , I just have acouple questions. I mean, you did release a press release saying that you areconsidering doing a rights offering. Isthat off the table now or is that kind of been pushed back, is it somethingthat you might do in connection with thisrecent bank amendment?

And I guess my other questionis just whether, in the last call you had talked about, you know, some of theopportunity asset sales and where they were, and if you could just give us any update on the timing on any ofthose sales. Because some of those I know were definitely in the negotiationstage.

Jim Dietz

I think I addressed earlierthat the Board continues to monitor the cash flow and the capital requirementsof the Company. And at this point weexpect to build and generate internal cash flow from operations, de-lever thecompany and move forward. We have other options and strategies. If we decide that that’s the way to go and if we see the opportunities or theneed, and as far as the assetopportunities go, we continue to negotiate, and we’ll report the status of anyof those asset sales once they have closed.

Jerry Starkey

One of the reasons for notgiving a lot of forward information on those asset sales is that those types of sales are typically, you know, yougo to contract after an inspection period.However, there is no great certainty, there is less certainty than with ahome, that there will indeed be a closing, until you basically close the asset. So we have identified the asset pooland will report on the closings once they actually occur. So that we are notgiving guidance based on information that we have a low confidence level in.

JimDietz

Letme correct something that I said earlier. I said 10 million a quarter oninterest, I meant 10 million a month, which would be 120 million for a fullyear, although as I said, we hope to see that decline as we go through theyear.

MichaelBailey - Par-Four Investments

Okaythanks.

Operator

Thankyou. Our final question will be a follow-up from Dan Oppenheim. Please goahead.

MikeWood - Banc of AmericaSecurities

Hithis is Mike Wood. I had a question, just to follow-up on a comment that youmade earlier about the expectation of recovery being priced in your impairmentanalysis on the land and land under development. Some of the other builders hadactually commented on, quantified that, in terms of, you know, in x number ofyears, expecting price appreciation of this amount. Can you sort of frame thatfor us. I’m sure it’s not a project by project analysis, probably just anoverarching view on your whole land portfolio.

Andsecondly, you know, without quantifying this, but the potentially higherinterest costs have you renegotiate some of these stabilities with the banks,are you internally incorporating that into your impairment analysis goingforward?

JimDietz

Well,let me take your last question first. Interest is only incorporated into theimpairment analysis to the extent that interest would be capitalized, and youknow, during the period when the project is not under significant development,in other words, next year we’re mainly focused on selling finished product,there won’t be much interest to capitalize. Beyond that, yes, it’s reasonableto say, there will be higher capitalized interest costs, and that will beincorporated, once we determine what that rate is.

Thequestion about the pricing of the units, the recovery of the market, is sort ofa difficult one to generalize. We don’t have specific data for you per say,other than to say that we looked back at pricing from 2002 and 2003, andabsorption in those time frames, and basically made appropriate adjustments. Ithink that absorption is more likely to go back to 2002, 2003 levels, pricingwill probably be off of the 2005 peak, but it will probably won’t get back to2002 levels. It might get back to 2004 levels. The reason is, the cost ofmaterials, and even subcontractor labor, has continued to rise, or at least hasbeen relatively stable, and so the cost of building a product five years later,and now, if we’re talking about 2009 or 2010, eight years later, is justsignificantly higher. So you know, the price of a home will be higher in 2010than in 2002, it perhaps will be off the peak of 2005 though.

MikeWood - Banc of AmericaSecurities

Ifa buyer’s walking away from a contract now that they signed in ‘04, based on‘04 pricing, and they had a deposit down, wouldn’t that imply that pricing intoday’s market is lower than those assumptions? So I’m just trying tounderstand why you… model that…

JimDietz

Youasked me about the modeling once the recovery occurs, we’re not in a recoveryperiod at present.

JerryStarkey

Webasically have projected today’s low prices into the future and expect to seeabsorptions increase beginning sometime probably in 2010. But you know thequestion you ask about the person that defaults, one guy defaults because hecouldn’t sell his house, or maybe he was an investor, and the guy next doorcloses on his unit, so I think that is what is creating the quandary over whatexactly values are today. So, you know, clearly, we’re all giving discounts andincentives on our [selective] inventory that’s resulted from all thecancellation and defaults, and as we go forward we know that as we come out ofthis trough the pricing will be at today’s low levels, and that as inventory isdepleted, we’ll have to build to-be-built homes at a price that generates aprofit and a return on the capital.

MikeWood - Banc of AmericaSecurities

Okay,thank you.

Operator

Thankyou management. Please continue with any closing comments.

JerryStarkey

Weappreciate you joining in. Stay focused on us as we work through this toughtime, and generate cash flow, de-leverage the company, and work through thebalance of this inventory. Thank you.

Operator

Thankyou ladies and gentlemen. This does conclude the WCI Q3 Earnings ConferenceCall. You may now disconnect. We thank you very much for using conferencing;have a very pleasant rest of your day.

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