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Executives

Jerry Starkey - President and CEO

James P. Dietz - Executive VP and CFO

James Cullen - VP and Deputy General Counsel

Analysts

Michael Bailey - Par-Four Investments

Andrew Brausa - Banc of America Securities

Sue Berliner - Bear Stearns

Ralph Elliott - J.P. Morgan

Buck Horne - Raymond James

Chris Hussey - Goldman Sachs

Marcelo Lima - Horn Eichenwald

Dennis McGill - Zelman & Associates

Daniel Oppenheim - Banc of America Securities

Peter Plaut - Sanno Point Capital

Randy Riesman - Durham

Larry Taylor - Credit Suisse

Mike Wood - Banc of America Securities

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

Operator

Good morning ladies and gentleman, thank you for standing by, and welcome to the WCI Q3 conference call. (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 to the WCI Communities Q3 conference call. Speaking today will be Jerry Starkey, President and CEO of WCI and Jim Dietz, Executive Vice President and CFO. Jerry will start with an overview, followed by Jim with the financials. We’ll wrap up the call with questions and answers.

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

These forward looking statements involve risks and uncertainties that could significantly affect results and may cause them to differ materially from expectations that we express here today. Those risks are outlined in today’s news release and other SEC filings. W encourage you to review these matters and caution you about placing undue reliance on these forward looking statements. I’d also like to point out that the slides that go along with this call can be accessed at www.wcicommunities.com in the investor relations section of our website.

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

Jerry Starkey

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

Q3 was another challenging quarter for WCI. Florida continues to see low order activity and we did see an increase in defaults during the quarter both in traditional and tower home building.

On top of the confused and negative sentiment throughout the marketplace, the Q3, which is the summer months, is typically the slowest season in Florida, as retirees and second home owners seek, and prefer, milder climates during that time, so a tough quarter impacted by consumer sentiment which continues to trend down, as well as being at the slowest part of our season.

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

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

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

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

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

Our strategy continues to be focuses on reducing cost and maximizing cash flow, not withstanding these construction delays.

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

During the course of this quarter, 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, or end-users who couldn’t sell their existing home, or end-users who’d become flattened or negative, due to the overall negativity in the market. And the expectation that continues to prevail in the market, that prices that will continue to erode, even though price adjustments have been pretty significant, not only for WCI, but across the board. More so among builder new stock than the resale markets.

Inventories, of course, continue to be up in most markets, resale and overall inventory, so we still have a significant disconnect between the supply and the demand. Most of our unsold 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’ and these buildings we have reduced our pricing significantly, to focus on moving that. And we hope that as the natural selling season begins towards the end of this quarter and principally in Q1 and Q2, that those second home and retirees looking for a Tower home in southwest Florida and the panhandle will find these prices compelling, and move that inventory and reduce our carrying costs as well as enhance the cash flow, even (inaudible) are projecting.

Speaking of consumers, notwithstanding the overall negative conditions of the market, the demographics of our WCI buyer continue to be quite strong; the 78 million baby boomers reaching 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 to pay cash, so right now, our buyers are certainly able, they’re just not ready and willing. And so we believe that there is a very significant pinup demand among the affluent, retiree, and second home buyers that make about two-thirds of 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 this slowdown is going to continue through 2008 and into 2009. Our goal is to preserve our irreplaceable land assets that mainly consist of undeveloped portions of highly amenitized master plan communities, with a lot of infrastructure in place, for a time when demand does pick up. This land is generally well located, it took years to entitle, and even with pricing trends down, our basis continues to be relatively low, and of good value.

We continue to focus on selling some of our more mature, recreational amenity assets, some of our golf courses, marinas, and some of our commercial land, but we’re not focused on moving these at fire sale prices. Our board, new board, which was elected on August 30, has met twice since the annual meeting; the board is working very well together. The board, as you know, is made up of representatives and direct shareholders, who are the largest shareholders of the company. The board is focused on preserving value; the board recognizes the value of the underlying assets, and while we are sharply focused on reducing our cost of operation and reducing our cost of carry and maximizing cash flow, we’re not focused on moving, or sacrificing, some of our unique and irreplaceable assets. So while the construction delays and the increasing defaults has hampered and delayed our cash flow, we still expect significant cash flow, we still expect to significantly de-lever the company over the next several quarters, and we are again focused on preserving the irreplaceable assets of the company, and making sure that we continue to size the organization to match the slower demand.

Let me touch on a brief summary and then turn it over to Jim. For Q3, our revenues of $166 million declined 61% over the same period last year. Almost $89 million of that was due to revenue reversal from recording Tower defaults. The Traditional Homebuilding revenue 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 than last 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 last year.

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

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

The Q3 Traditional Home orders were down in value 45%, and 27% in units. We had a 44.4% cancellation rate on the Traditional Homebuilding business; that was down slightly, it was 47.8% in Q2, and that was basically 84 cancels versus 75 cancels in the same period last year. The average price of a cancelled Traditional Home unit was 767,000 for the period, so that’s consistent with the average price sold a year ago in this period of 775 versus the average price sold Traditional Home during the Q3 of 686.

Average discounts during the period on spec orders was about, discounts and incentives, total impact about 25%, and on to-be-built about 13%. 131 gross sales during Q3. Our Tower backlog was down 63%, at 517 million, compared 1.4 billion a year ago, and that was made 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 Tower Homebuilding backlog, compared to 384.3 million a year ago, 2006, Q3 ending.

I’ll speak a little bit to the traffic, if you’re following along on the webcast, slide 5 illustrates traffic 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 takeaway from this slide really is that the traffic trends in Florida have become less negative each quarter, and for all of Florida in Q3, our traffic was actually up 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 the deficits earlier in the year. We were off by 1%, and Tampa is up about 13%, notwithstanding the fact that orders in both areas continue to be challenged.

The top level summary on Traditional 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 before write-downs of 11.1%, compared to 23.7% a year ago, so you can see the significant impact of the discounts and incentives compared to the homes closing a year ago.

Gross margin as a percent of revenue for Q3 was 8%, compared to 22.6%, and there was 4.9 million of asset impairments, which lowered the gross margin about 310 basis points, and we also retained almost $3 million of deposits, which added 170 basis points to the Traditional Homebuilding margin for the period.

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

We announced yesterday a restructuring 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 and Homebuilding operations under the management principally of David Fry, with the exception of the Northeast and Mid-Atlantic Tower Homebuilding, reporting directly to me. Under this new organization, we expect to trim our workforce down to about 2,100 employees, down from a peak of almost 3,900. We’ve reduced our head count by about 46% over the last five quarters or so, and this basically, this current reorganization will reduce our head count about net 575 position. Necessary due to the slower market environment, and also a more efficient environment given the size of the company and the slower demand.

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

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

So this is a structure that will work well, not only if we continue to receive lower demand but also in a structure that has been able to retain the talent to respond geographically if we happen to see rolling increases of demand in the near term or in the future.

With that I’ll turn it over to Jim.

Jim Dietz

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

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

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

Impairment charges were spread between Traditional Homebuilding, about $4.9 million in Traditional Homebuilding and about $31.1 million in Tower Homebuilding and directly reduced the margin reported and shown on these slides excluding $23.7 million which was related to both actual defaults recorded and also reserves for defaults on Tower contract closings. Also $31.1 million of impairments related to Tower Homebuilding and $12.9 million of other charges again on the Tower side I should be saying. The overall Tower margin would have been $11.1 million 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 by a number of factors which makes it all a bit difficult to sort through and that’s why I wanted to bring out these points and clarify the effect of these items.

Dropping down below gross margin the SG&A expense for the period, for the quarter was $46.5 million. That expense was about $4 million higher due to consulting charges we paid relating to the closing, the settlement of the proxy contest.

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

So if we take those changes, those variances, and set them aside the overall selling, general and administrative expense category would have declined by 13.6%. Our expectation is that in future periods i.e. 2008, those declines will be evident as these onetime charges will be behind us.

Interest expense is also up this period at $22.4 million versus $8.7 million for the quarter a year ago. That’s primarily due to less capitalization again driven by less development activities when less in asset value is under construction there’s simply less interest to capitalize.

And finally we have a $3.6 million charge related to debt costs that related entirely to the amendment that occurred in August of 2007. We reduced the commitment amount, the revolving facility and the term facility. While we did so, we wrote off the associated charges in accordance with accounting pronouncements that require that. So that’s how we get to the overall loss of $69.7 million.

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

Other assets increased compared to year end and also compared to June 30. That’s primarily the recording of deferred tax assets associated with tax benefits that are expected to be realized related to the losses recorded during the period.

Focused on 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 as used by operations $53 million of the cash outflows was the net [yield] from operations. And that’s really due to the delay in One Bal Harbor closings and also due to increased defaults in Florencia and also fewer closings in the Traditional Homebuilding division. So much of the cash flow was pushed forward into Q4, and as Jerry said, seller cash flow will be pushed forward into 2008.

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

So net compared to the second quarter, we essentially are roughly flat in terms of Traditional Homebuilding Spec Units and that’s simply reflecting the fact that even though we sold over 130 Traditional Homebuilding inventory units we also had significant defaults. We also had unsold units that were still under construction and that were completed during the period and therefore added to the finished count. And on the Tower side, I explained the increase driven by completion and also defaults.

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

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

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

Let me talk about the status of our bank loans for a moment, page number 14 gives a brief overview. Basically this quarter we were not able to comply with the August modification with respect to fixed charges coverage covenants out of the credit facility and term loan. All the other covenants were in compliance however, based upon primarily the defaults recording of the defaults charges, we fell below the 0.5 requirement and turned it a 0.38 requirement. We immediately turned to our lead banks and the banks worked with us to go out to the participants in those facilities and I’m pleased to say that yesterday obtained a limited waiver performance which is a 30 day waiver. The reason for the 30 day waiver is to allow us to finalize the details of a amendment term sheet which we do have and are working through. There are details we are not ready to disclose that still need to be negotiated and as that’s finalized, and we do expect to finalize it will be sent out to the participating banks for a vote. The required vote is two thirds and we do expect to have that complete by the end of November or the very beginning of December.

With that I guess the only think I’ll do before I turn it over to the operator moderating questions and answers is speak about some of the things in the appendix. Page 16 we’ve updated though there hasn’t been much change, our detail of our land position. Page 17, we’ve repeated the asset opportunity pool. If you recall from the last conference call we said that there’s a broad range of 200-300 cash flow that can come from selling all of these assets not that all of these assets will be sold immediately but we’re pursuing several of them and so these assets, many of which are not in the sort of outlook or short range plan could provide upside from a cash flow perspective and from a profit perspective 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 we have 30 units remaining to close of the seven Towers closed in 2007 and of those we’ve reserved 16. That’s an update from what you see on the slide which was as of September 30 and then finally there’s an impairment summary at the back just summarizing the three quarters.

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

Question-and-Answer Session

Operator

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

Andrew Brausa – Banc of America Securities

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

Jim Dietz

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

Andrew Brausa – Banc of America Securities

Alright. Given the importance of One Bal Harbour to the cash flow and potential (inaudible) payment focus, your assumptions there, can you put a number around what your assumptions there are for defaults?

Jim Dietz

I don’t think we want to give out the faults per building. I think that’s one of the hesitations that I have here, just as the real estate downturn was partially a self fulfilling prophecy, I don’t want to create yet another self fulfilling prophecy, out expectation is that the fault rate will be low at One Bal Harbour, lower than the average that I just stated and I want to point out that there have been some commentators that have said while they might do okay on the condo because those are really great units in the hotel they’re all investors. We expect high default rate. I think that’s illogical and inconsistent with our experience at Singer Island resort. At Singer Island we had a great deal more condo hotel units. It’s a less desirable location from a hotel perspective. Miami Beach is probably the most desirable location from a Hotel perspective in virtually the whole world, and our view of the condo hotel is the purchaser is a long term oriented investor. They understand that they’ll make a purchase of real estate, which is, of course, what we’re selling. We’re simply selling real estate. They’re making sort of their own analysis and concluding that makes sense from a cash flow or investment perspective. Our view is that they’re looking forward to the revenue that will come from the hotel occupancy, so we don’t think there’s a higher default rate there.

Andrew Brausa – Banc of America Securities

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

Jim Dietz

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

Andrew Brausa – Banc of America Securities

Okay and I guess finally…

Jerry Starkey

That language is legal disclaimers. So when we complete we’ll report.

Andrew Brausa – Banc of America Securities

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

Jim Dietz

I think our primary focus is getting this bank negotiation wrapped up because we don’t, we’re not very far apart with the banks and we’ve just completed this 30 day waiver. We think we can wrap this up, wrap up the negotiations quickly and then complete the approval. If that doesn’t turn out to be the case there are other alternatives obviously, some form of take out financing which might be available from a non traditional source. Certainly our new board of directors represents, include groups 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 to reach consensus on what we believe to be a reasonable amendment, but we think the banks will, we think that we will reach that consensus.

Andrew Brausa – Banc of America Securities

Okay thanks guy.

Operator

Our next question is coming from Dennis McGill with Zelman and Associates.

Dennis McGill – Zelman and Associates

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

Jim Dietz

Well, as we pointed out, we’ve reduced our cost of selling specs. Our prices and incentives are down 25% so if you look at where our closings were a year ago in Florida it was over almost 23% so clearly with 25% discounts and incentives over where we were a year ago you 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 think in this environment obviously your cost is coming down but the homes that you’re selling that are specs were built in a higher cost environment before we were able to focus on, or before we accomplished focusing on reducing our direct cost of construction. Many of the homes that are closing now also have a higher imbedded interest and imbedded carry cost in them because they’re been in inventory for a while. I think that the margins at this point in the cycle aren’t indicative in a normal go forward business environment.

Dennis McGill – Zelman and Associates

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

Jim Dietz

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

Dennis McGill – Zelman and Associates

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

Jim Dietz

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

Dennis McGill – Zelman and Associates

Okay, thanks. Fair enough. Thanks Jim Dietz.

Operator

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

Dan Oppenheim – Banc of America Securities

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

Jim Dietz

That’s right. I think that what we highlighted is 200 million of cash flow from OneBal Harbour and Watermark up in Jersey will flow into the Q1, so the delays have pushed some of that cash flow into next year. That’s a couple of hundred million so that would be part of the shortfall this year and balance of the shortfall results in higher defaults that we actually have experienced year to date and that we’re providing for through the sell out of all of those remaining buildings.

Dan Oppenheim – Banc of America Securities

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

Jim Dietz

Actually the, as I mentioned earlier most of our finished inventory is in Southwest Florida, in Marco Island, in Bonita Springs, and then up in the panhandle of Florida. In those instances, we have taken impairments and we have adjusted downwards our prices as much as 25%, and so to the extent that this is a highly seasonable market and that most of our natural buyers aren’t even in the state at this point, we’ve begun a shoulder season [directel - ph] and direct marketing campaign. We really 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 actually below the original offering price. In buildings like Bal Harbour where we’re sold out and where units are being traded and all to trade on the resale market at higher prices than the original sale price we don’t anticipate significant reductions of pricing if there are cancellations.

Dan Oppenheim – Banc of America Securities

Thanks very much.

Operator

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

Susan Berliner – Bear Stearns

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

Jerry Starkey

Actually there hasn’t been a change. I think we have in the appendix a list of assets that we consider an opportunity pool which is comprised of some of our mature recreational facilities, marina, and golf courses. We sold a couple of recreational facilities this year, or have under contract and then principally some commercial land of which we sold some this year, and for the quarter I think our margin on small land piece is over 80% so we really haven’t changed our strategy on that opportunity pool. It’s relatively high margin land. In a few instances we’ve had bids that are wider than our ask, and we simply turned them down, so as long as we see visibility on the cash flow coming from the tower business, which we continue to expect, we’re not going to be focused on moving those lands at anything but what we believe is market value. So it’s a patient situation.

Susan Berliner – Bear Stearns

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

Jim Dietz

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

Susan Berliner – Bear Stearns

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

Jim Dietz

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

Susan Berliner – Bear Stearns

Okay, thank you.

Operator

Okay, thank you. Our next question is coming from the line of [Robert Menowich] with RBS. Please go ahead.

Robert Menowich - RBS

Yeah, hi, good morning Jim and Jerry. I was wondering if you had some assumptions or let’s say, assuming a successful negotiation with the lenders, would you have some expectations on the amount of room you would have under that amended facility to potentially refinance the senior sub-converts next year. And I guess I’m wondering, is there the potential of having access to senior secured debt to take those senior sub notes out, or do you think that it would have to be a new financing that would be [power to sue] with the existing senior subs?

Jim Dietz

Well, that’s a very detailed question, Rob, as you are a very detailed person. But, I guess what I would say is that we have, in our forward planning, anticipated the possibility that the converse 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 not bend the pressure point for us. We do have the capacity today even without the amendments for that.

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

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

Robert Menowich -RBS

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

Jim Dietz

Well, again, that’s asking questions 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, I don’t think the builders will either. However, I can add a few comments that will hopefully be helpful.

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

Community and district expenses, which is really ongoing upkeep of communities, again, really would not wretch that fact. That’s about $20 million also. So that’s about $40 million.

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

There’s a significant amount of facility costs, certainly you have to maintain a fairly stable accounting team 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 next year, I’m giving you some specific ideas. I think that from a dollar perspective, you could see this in the $100 million range, or a bit more perhaps. But I think $100 million would be a goal. We may even be able to get below that goal, depending upon the details of, for example, are we able to sublease a given office and consolidate that office space further, saving further dollars, etc. So there’s a lot of details that go into this.

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

Robert Menowich - RBS

Great, very helpful answer. Thanks.

Operator

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

Alex Brown – HTC Trading Group

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

Jim Dietz

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

So, in the last week and a half, we closed nine units for buyers that were just really anxious to get started to finishing out their condo units. But the first closing date we expect, perhaps as many as half the condos, 90 units or so, would be November 16th, followed by a later closing at the end of November as well.

Alex Brown – HTC Trading Group

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

Jim Dietz

They are actually allowed to move in there, but the condo units are unfinished. They are delivered decorator-ready, because you recall those are pretty expensive units, in the $2 million area. The hotel units are fully finished and furnished and ready for occupancy at the time the closing occurs. And the hotel closings, won’t occur until the end of this month and December.

Alex Brown – HTC Trading Group

Now in terms of impairments, I know it relatively small in the single family site this quarter. Can you talk about how many sites were involved? Or was it just a re-impairment of a previous 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 on the traditional home building for the period related to areas where we were selling spec homes below cost. So in that case, we analyzed the go for pricing and concluded that in some communities we needed to impair the standard inventory in order to reflect the prices and absorptions that we expect, most of which we would expect to clear by the end of 2008.

Alex Brown – HTC Trading Group

So when that happens, you’re not required to impair the land for all the future closings?

Jim Dietz

Again, the land, Alex, there are two different accounting rules. When you look at the finished units, they are finished goods ready for sale. And so you look at that from the standpoint of, what is the fair market value today? Which takes into account the selling period, takes into account what is the price that we clear the market today. And that also requires a discounting, an appropriate discount rate. So that tends to drive greater impairments on the finished goods side, as opposed to assets in production.

Land and land development fall into the assets in production category, and the process there for an impairment analysis is very different. It basically looks at the gross cash flows undiscounted that you’re expecting through the sellout.

So if you had a situation where markets were compressed, let’s say a community had expected 30% margins and 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, the cash flow, the gross undiscounted cash flow still exceeds the basis, and therefore you don’t have an impairment charge. You can’t simply choose to have an impairment charge; it’s a mandatory accounting rule. So it’s a different requirement from an accounting perspective and I think that that is one of the reasons why you see fewer land charges.

Jerry Starkey

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

And in our case we have additionally engaged in significant value engineering and redesign of some of the structures of our homes because we weren’t as efficient as we could have been 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 pricing because of the trough. But you’re also going to match that with lower costs that reflect the current cost. So inherently you’re going to have higher margins 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 equilibrium valuing the future sellout of a large-scale community.

Jim Dietz

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

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

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

The analysis on a finished lot is more difficult because it becomes very evident that the fair value of that 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 lots are needed, avoids that impairment.

Alex Brown – HTC Trading Group

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

Jim Dietz

You know, as I said, we don’t know what the right answer is. So that’s the thing that you have to keep in mind. We think it will be about two years from now that we’ll see meaningful recovery. We hope it starts before two years out. Again, I hate for these statements to become self fulfilling prophecies, but we think ’08 hopefully is the bottom of the trough, and that ’09, perhaps as we get into ’09, we start to see stabilization of demand, which eventually eats away at the existing inventory, which will finally get to a demand for new housing, and start to see prices stabilizing. That’s the process. I hope it begins in ’09, and perhaps by the start of ’10, we’re back to an era, say, similar to 2002.

Jerry Starkey

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

Alex Brown – HTC Trading Group

Got it, thank you.

Operator

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

Peter Plaut - Sanno Point Capital

Hey guys, thanks for taking my call, and sorry to bereave the point. Just going back to the credit facility here. Back in August, you revised down your EBIDTA fixed charges ratio quite dramatically. So, I would assume that you and the banks were pretty surprised to find that you were below that level at the .38 times this level.

So you also mentioned at the press release that you’re in compliance with all your other covenants. So for the negotiations with the lenders, is the primary hold up here is basically getting 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 most importantly, 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 time after August 2008.

Jim Dietz

Well again you are asking for details that have not been worked out yet with the bank. So I can’t really comment. However you know in terms of what happened in the Q3, we expected Q3 to be the tightest against the Point Five requirement. What we didn’t anticipate was the continued high default rate in the Traditional Homebuilding business. It fell a bit short in terms of spec sales. And then, most importantly we did not anticipate the $23.7 million impact of defaults. Really the variance there was Florencia where you know, we had expected to see 25% to 30% defaults and it was closer to 55%. So, those charges pushed the fixed charge ratio below the Point Five. And I might also point out that when we first started closing the books, we had just started closing the Florencia units. And the Tower team was cautiously optimistic that many of the Florencia units that maybe hadn’t closed yet had a good reason to need an extra week or two and would close.

But, then as we got late into the month it turned out that no, they are not going to close. And we made a decision to default them. So really it was late in the month when we learned that those additional 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 the details 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 be difficult, wouldn’t it be best just to try to see if you can get the banks and if you had a payout for it to drop that indenture if you are going to be in compliance with the others?

Jim Dietz

Well if you are asking about the 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’t comfortable with it. I think going forward it might be a different situation. But, again you know, those negotiations are sort of the next step.

Peter Plaut - Sanno Point Capital

Thank you.

Operator

All right, thank you. Our next 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 just the first one I have which just is something I am, just not making sense of here. You show Tower backlog of 74.9 million as of the end of Q3, but from looking at the other slide in the slide deck, there are 43 sold units in the buildings that have already been completed and then another 600 sold units in the Towers under construction, so why is the backlog only 75 million when there are 643 sold units?

Jerry Starkey

It relates to percentage completion accounting, so in the Tower business where you’re recognizing revenue and margin, and incurring your cost on a GAAP basis as you progress construction, the remainder that isn’t reflected in percent of completion because the unit is not built. The portion that’s unsold is the portion that’s in backlog. That is why you can have very low or EBITDA or very low Tower margins and yet have positive Tower cash flow. Because you 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 some details that will help you out. This is from the 10-Q which we expect to file today perhaps or tomorrow morning.

Basically as of September 30, 2007, there were 652 Tower units in backlog. The cumulative 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 or sales 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 are 4% or 5%, closing costs are about a point?

Randy Riesman

The next question I have is just in the…

Jim Dietz

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

Randy Riesman

I guess the next question I have is maybe just building on the questions around the impairments. With regard to doing an impairments you need to have a valuation for land. I just want to understand what methodology, or how are you guys getting comfortable with your land values? Have you seen any land trade?And if so, maybe you can give us a little bit of color as to sort of at what price or at what value these pieces of land are trading and I guess the third question and I guess the third question is on some of the other assets, how should we as investors thing about putting 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 impairment perspective, first of all, the land that we are developing into lots for homebuilding purposes is evaluated based on the cash flow that we expect from the overall build out. It’s not based on sell residential parcels, that would be 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 cash flows. If we change the community, if we decided that you know what, we’re going to have to lower the prices or change the product types or we’re going to make some other step that’s going to change cash flow in the future then we would reevaluate that community, which would be an improvement or could lead to an impairment depending upon what the situation is. Land in terms of non residential land, we’ve sold at very attractive margins; certainly this quarter was a very high margin quarter from a sale perspective. We continue to garner interest in our parcels, we have a limited number of parcels on that list, and we 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 higher than our cost, I’m sorry 30-50% margin or better margin of revenue.

Randy Riesman - Durham

And are these lots that people are interested in and the preponderance…

Jim Dietz

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

Randy Riesman - Durham

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

Jim Dietz

Again we’re going to file our 10-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 real estate inventories is as follows; land and land improvements $961.4 million, investment and amenities, which are equity clubs $101.5 million. The work in progress is as follows, the Tower component is $261.5 million.

Randy Riesman - Durham

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

Jim Dietz

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

Randy Riesman - Durham

Of that, can you give us a sense for kind of, how many days old, how far into width that is? Or how close to 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 get the total of real estate inventories. The completed inventories for the tower for the quarter totaled 186.6 million, and the completed inventory of traditional homes is 196 million, so the sub total should come to $1,995,000 which is the number shown on the financial statements.

Operator

Alright. Thank you, our next call is coming from the line of Marcelo Lima with Horn Eichenwald. Please go ahead

Marcelo Lima – Horn Eichenwald

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

Jerry Starkey

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

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

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

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

In the future, we had begun a strategy of pursuing a third party owner from the beginning of those facilities with WCI managing those facilities. And that would enable us to assure the quality is matched with the pricing of the homes. We have a large golf management operation. We operate and own about 387 holes of golf, it’s about 21.5 18-hole courses. So we do have a significant economy of scale in that business, and believe that if we offloaded that management, it would come at a higher cost than managing it ourselves.

Marcelo Lima – Horn Eichenwald

Yeah, that makes absolute sense. Thanks for the answer. And by the way, are those amenities included in asset pool of opportunity that you mentioned earlier?

Jerry Starkey

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

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

Marcelo Lima – Horn Eichenwald

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

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

Jim Dietz

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

Jerry Starkey

Another point to add on is that this year we had a significant backlog in towers and in traditional homebuilding that we had to invest to build during the course of the year. The defaults and cancellations have delivered to us, undesirably delivered to us, finished units in traditional and homebuilding that have been finished and paid for.

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

Marcelo Lima – Horn Eichenwald

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

Jim Dietz

We are not prepared to give that guidance at this point.

Marcelo Lima – Horn Eichenwald

Okay, but it should be…

Jim Dietz

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

Marcelo Lima – Horn Eichenwald

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

Jim Dietz

No, we may be able to eliminate 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 the principle significantly, and as we report Q4, we will give appropriate guidance for next year. But, at this point the cash flow guidance that we have given for this year, and the fact that we expect some of those buildings to go onto next year with the guidance we are able to give at this point.

Jim Dietz

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

Marcelo Lima – Horn Eichenwald

Debt service, not the total amount of debt…

Jim Dietz

I was thinking about the debt coverage, at this point we are running at about $10 million a month in terms of interest. We should see that come down. That is sort of where we will be once we close these, Watermark and One Harbor units, that should come sown somewhat over the year. All the principle payments due will be the repayment of the Tower loan. The Tower loan should be repaid by the proceeds from the three buildings that are left to close: One Bell Harbor, Watermark and Oceanside B.

Marcelo Lima – Horn Eichenwald

Ok , excellent. Thank you very much.

Operator

All right, thank you. Our next question is coming from Michael Bailey with Par-Four Investments. Please go ahead.

Michael Bailey - Par-Four Investments

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

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

Jim Dietz

I think I addressed earlier that the Board continues to monitor the cash flow and the capital requirements of the Company. And at this point we expect to build and generate internal cash flow from operations, de-lever the company 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 the need, and as far as the asset opportunities go, we continue to negotiate, and we’ll report the status of any of those asset sales once they have closed.

Jerry Starkey

One of the reasons for not giving a lot of forward information on those asset sales is that those types of sales are typically, you know, you go to contract after an inspection period.However, there is no great certainty, there is less certainty than with a home, that there will indeed be a closing, until you basically close the asset. So we have identified the asset pool and will report on the closings once they actually occur. So that we are not giving guidance based on information that we have a low confidence level in.

Jim Dietz

Let me correct something that I said earlier. I said 10 million a quarter on interest, I meant 10 million a month, which would be 120 million for a full year, although as I said, we hope to see that decline as we go through the year.

Michael Bailey - Par-Four Investments

Okay thanks.

Operator

Thank you. Our final question will be a follow-up from Dan Oppenheim. Please go ahead.

Mike Wood - Banc of America Securities

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

And secondly, you know, without quantifying this, but the potentially higher interest costs have you renegotiate some of these stabilities with the banks, are you internally incorporating that into your impairment analysis going forward?

Jim Dietz

Well, let me take your last question first. Interest is only incorporated into the impairment analysis to the extent that interest would be capitalized, and you know, 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 reasonable to say, there will be higher capitalized interest costs, and that will be incorporated, once we determine what that rate is.

The question about the pricing of the units, the recovery of the market, is sort of a 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, and absorption in those time frames, and basically made appropriate adjustments. I think that absorption is more likely to go back to 2002, 2003 levels, pricing will probably be off of the 2005 peak, but it will probably won’t get back to 2002 levels. It might get back to 2004 levels. The reason is, the cost of materials, and even subcontractor labor, has continued to rise, or at least has been 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 just significantly higher. So you know, the price of a home will be higher in 2010 than in 2002, it perhaps will be off the peak of 2005 though.

Mike Wood - Banc of America Securities

If a 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 in today’s market is lower than those assumptions? So I’m just trying to understand why you… model that…

Jim Dietz

You asked me about the modeling once the recovery occurs, we’re not in a recovery period at present.

Jerry Starkey

We basically have projected today’s low prices into the future and expect to see absorptions increase beginning sometime probably in 2010. But you know the question you ask about the person that defaults, one guy defaults because he couldn’t sell his house, or maybe he was an investor, and the guy next door closes on his unit, so I think that is what is creating the quandary over what exactly values are today. So, you know, clearly, we’re all giving discounts and incentives on our [selective] inventory that’s resulted from all the cancellation and defaults, and as we go forward we know that as we come out of this trough the pricing will be at today’s low levels, and that as inventory is depleted, we’ll have to build to-be-built homes at a price that generates a profit and a return on the capital.

Mike Wood - Banc of America Securities

Okay, thank you.

Operator

Thank you management. Please continue with any closing comments.

Jerry Starkey

We appreciate you joining in. Stay focused on us as we work through this tough time, and generate cash flow, de-leverage the company, and work through the balance of this inventory. Thank you.

Operator

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

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Source: WCI Communities Q3 2007 Earnings Call Transcript
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