Lennar Corporation Q4 2007 Earnings Call Transcript

Jan.24.08 | About: Lennar Corporation (LEN)

Lennar Corporation (NYSE:LEN)

Q4 2007 Earnings Call

January 24, 2008 11:00 am ET

Executives

Scott Shipley - Director of IR

Stuart Miller - President and CEO

Bruce Gross - CFO

Diane Bessette - Vice President and Controller

Analysts

Ivy Zelman - Zelman & Associates

Carl Reichardt - Wachovia Securities

Ken Zener - Merrill Lynch

Michael Rehaut - JPMorgan

David Goldberg - UBS

Nishu Sood - Deutsche Bank

Dan Oppenheim - Banc of America Securities

Stephen East - Pali Capital

Timothy Jones - Wasserman and Associates

Eric Landry - Morningstar

Operator

Good morning and welcome to Lennar's Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the presentation, we will open up the question-and-answer session. Today's conference call is being recorded. If you have any objections you may disconnect at this time. I will now turn the call over to Mr. Scott Shipley, Director of Investor Relations for the forward-looking reading statement.

Scott Shipley

Good morning and thank you. Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to do give any assurance as to the actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption risk factors contained in Lennar's annual report on Form 10-K for its most recently completed fiscal year which is on file with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

Operator

I would like to introduce your conference host Mr. Stuart Miller, President and CEO. Sir you may begin.

Stuart Miller

Yes, thank you, Catherine and nice job Scott. Perfect reading. Thank you everyone for joining us. I would like to say good morning and thank you. To start, let me say that it's apparent now the 2007 has been a very tough year for homebuilders and now our 2007 fourth quarter and year end results reflect a difficult and argyles reconciliation of our company's position with the difficult market conditions that started the year and deteriorated throughout the year.

You know only context of market conditions that continue to be difficult at that we'd like to share with you our thoughts on the homebuilding industry, market condition and the strategy and progress of Lennar in particular.

We are joined this morning by Bruce Gross our Chief Financial Officer, who will provide detail on our numbers and Diane Bessette, our Vice President and Controller, who will participate with an update on our asset reviews and impairments as she has done for the past quarters.

Just as a housekeeping note, I'd like to request that in our question and answer period that will follow our opening remarks that you please limit to just one question and one follow-up, so that we can be as fair as possible to all participants. And then, of course, you can rejoin the queue if you have additional questions.

Now, as noted in our press release that we issued this morning, the housing market is continued to deteriorate throughout 2007 and throughout our fourth quarter. Our fourth quarter results reflected very strong and definitive movement by our company to deal with the realities of the market conditions as they exist and processed and to try to get ahead of a curve while we expect market conditions to remain soft and perhaps continue to deteriorate as we go into 2008.

In fact and then retrospect market conditions have been consistent throughout 2007 and what we now know as required us and the entire industry to reconsider our positions, our sizing, our asset based and our strategy. The market has given us cause to pull back to retrench, to reconsider and to position for another day and that's exactly what we've done.

Our overall strategy throughout the fourth quarter was to address the component parts of our asset base, while we drove to turn hard assets into cash. And this is consistent with our long standing focus on our balance sheet first. This meant continuing to impair property values to properly state every asset on our books, so it can contribute to profitability in the future.

It meant reconsidering the value and the risk of each and every joint venture, and it meant generating cash from home deliveries asset sales and of course a book sale of assets to a Morgan Stanley Fund that we previously announced. While the fourth quarter report card is disappointing, we made a great deal of progress in preparing for 2008 and beyond.

Let me talk to some of those components. We have impaired our land positions on our books to reflect the continuing decline in the market. The evaluation process has been difficult to say the least, as with the each additional move downward in the market, a reexamination of prior impairment charges has revealed in some instances the need for further charges.

Certain assets that were underwritten to a positive margin in prior quarters have acquired an additional charge this quarter to keep up with the market slowdown. In the fourth quarter, we again reviewed our assets aggressively and impaired to the full extent of the current market slide. Additionally, we curtailed all land purchases where possible and we walked from ups and deposits on land contracts and rolled our pre-acquisition costs.

We've reconsidered the composition and contribution of every one of our joint ventures in the fourth quarter. Our ventures were established with the objective of either diversifying risks or gaining access to strategic assets through co-ownership. For the most part our ventures were leveraged conservatively and were positioned for stability.

In evaluating these assets, we've moved aggressively to dismantle any ventures where the strategic reason for being had been frustrated either by the deterioration of the underlying asset value or to the lack of performance of our partner in their obligation. In all instances, we've shared downside risk with our partners and in most of the partnerships they have worked exactly as originally intended.

We've also generated cash in a variety of ways: first, the company has remained focused on keeping inventories low, we've rigorously pursued this objective by using incentives and price reductions to sell homes and backfill cancellations. While we have slowed the start and felt paces through -- so that we can right size our operating division through the reduced demand levels in the market.

Our sales, year-over-year, are now down 50% while our stocks are down similar way and our inventory is maintained at very low levels. We've also generated cash by selling land assets that because of reduced volume would not be needed for many years to come. While most of these assets sold for prices below their stated booked value due to the drop in market prices and the lack of demand for land assets. We believe that the cash value of these sales has far outstripped the value of the land asset on our books.

Additionally, we generated cash by selling a bulk group of assets to a fund created by Morgan Stanley and ourselves. While this group of assets was also sold at a price for lower stated book and while we will be auctioning some of the home sites back from this fund, we believe in this instance as well that the availability of the cash generated from the deal is far more valuable than the hard asset on our books.

Finally, and incidental to the execution of the sale of assets, we collected substantial cash just after year end by recovering taxes paid in prior years to losses generated in 2007. As noted in our press release, we've actually collected the $852 million recovery relative to our losses for 2007.

What is not included in our press release is that the rapid recovery of this cash is due primarily to the tireless efforts of Mike Petrolino and an outstanding tax team that drove this recovery effort to completion.

While our financial results for the fourth quarter are disappointing. They are reflective of our strategy for dealing with these market conditions and preparing for the future. We've continued to deliver our backlog and maintained very low inventory levels, while we've reduced our start pace to reflect the sales pace in the marketplace.

While revenues for the quarter were down 49% to $2.2 billion, our balance sheet continues to remain strong with our homebuilding debt-to-total capital ratio standing at 37.5%. And while we've recorded a loss of approximately $1.3 billion for the quarter, it is reflective of our aggressive assessment of every land position, every joint venture, and every deal under option or contract within the company and reflective of the cash generation strategy designed to position us for the future.

As we look ahead to 2008, we're now prepared to readjust our primary focus back to the day-to-day homebuilding operations that will define position and profitability for the future. We know well, how to build homes profitably. It requires the right price for the underlying land, the correct product on that land, pre-price construction cost and SG&A properly sized for the operation.

We've refined our business model in each of our market and we've mapped out a strategy to regain margin of our now lower land cost basis. We've revamped product offerings in many of our markets. We've aggressively re-bid construction costs and we've lowered SG&A by reducing our workforce by over 50%.

We've reviewed our business plan within each division and it made meaningful progress in repositioning each individual division over profitability. Within each Lennar division, there remains a daily morning meeting where sale starts closing inventory and asset base are carefully reviewed. And this review dovetails with regular executive management meetings with the same elements to review on a company wide basis.

Our strategy overall has been recalibrated to match our pull back in each market. From our quarterly operations reviews, to our daily plant meetings in each division, we're focused daily on the fact that two factors will define our ability to be profitable in the near future.

First, our land position rewritten to current market values will enable profitability, and second our division management teams focus on product construction cost and overhead elements are more within their control to reposition and harvest value.

While we know that for the firs half of 2008 results will continue to be challenging based on the pricing and position that are already backed in our backlog, we are confident that the later of 2008 will begin to show evidence of the tremendous work that is been put forth this year.

In conclusion, let me say that while it would be easy to become disheartened by the black and white numbers on the paper that define our fourth quarter and year end results for 2007. I am instead encouraged by the truly outstanding efforts put forth and the progress made by the many outstanding associates of our company.

I am encouraging by the everyday leadership of Jon Jaffe in the west operating as the company plow horse relentlessly working through assets in some of the most impaired markets in the country. While in his spare time working to the due diligence process of putting together the Morgan Stanley Fund.

I am encouraged by Rick Beckwitt in the East, a relatively newcomer to this company, sharing the company flag as if he attached it together himself. Not a criticism, nor a distraction in working around the clock to fix an asset base that he didn't create.

I am encouraged by Bruce Gross and his treasury group working through the night to reposition the credit facility that has been suddenly turned upside down.

I am encouraged by Emile Haddad, our Chief Investment Officer with his asset management group assessing, positioning, and sometime selling one asset at a time to decision our company for a future.

I am encouraged just to have Jeff Krasnoff back working with us; he is just the smartest guy I know. I am encouraged by Diane Bessette and David Collins leading our accounting team to report accurately and with absolute integrity making sure through days and nights and weekends that there is backup for every reported number.

I am encouraged by the fortification of our Board of Directors with the addition, the recent addition of Sherrill Hudson a past esteemed Managing Director of Deloitte & Touche and now the CEO of TECO Energy in Florida, joining our Board of Directors.

I am encouraged again by Mike Petrolino one of tax group bringing home an $850 million check from the IRF in record time and why just because it is part of the plan. And I am encouraged by the many regional Presidents and division Presidents and their team who have responded for the countless request from corporate for information that never seems to end, as we try to get our hands around this turbulent market conditions while they continue their charge to innovate products for the markets, reduce constructions costs and of course at the same time reduce overhead and headcount.

For all of them and many others in the country it would in the company, it would have been easier for them to put their heads in the sand and avoid the harsh realities of these difficult market conditions and let someone else clean it up. But I am encouraged because they have chosen to engage a big challenge and confront the storm that has been hit upon us. They work nighttimes, weekends and holidays to get the job done. They cancelled holidays and family time and took personally the responsibility of fixing what has been broken and they did it with less compensation and without a sound.

These are truly the 24/7 soldiers of Lennar and because of them, their tireless efforts, their conviction, their love for this company, they will build upon the progress that has been made in 2007, and I am personally enthusiastic about the prospects not only for our recovery, but also our prosperity in the future.

With that let me turn over to Bruce.

Bruce Gross

Thank you, Stuart and good morning everybody. I am going to discuss our balance sheet, including some detail on our joint ventures and then our fourth quarter results. Let me start with the results of the balance sheet for strategy that Stuart articulated with the focus on converting inventory to cash.

We have continued to carefully manage our inventory levels, as they have decreased from $7.8 billion in the prior year's fourth quarter to $4.5 billion during the current quarter. The finished homes and construction-in-progress inventory category was reduced approximately 50% from $4.4 billion to $2.2 billion year-over-year.

Land under development was also reduced to approximately 50% from $3 billion in the prior year's quarter to $1.5 billion in the current fourth quarter. Consolidated inventory-not-owned increased from $372 million to $820 million. However, it would have also declined if not for the accounting treatment of the Morgan Stanley land transaction, which increased consolidated inventory-not-owned by approximately $525 million.

We have continued to manage starts to today's real estate volume levels and as a result we have reduced starts 68% in the fourth quarter compared to the prior year's quarter. Homes under construction also declined 68% from 17,000 in the fourth quarter of 2006 to only 5,500 in the fourth quarter of 2007. Unsold inventory under construction was reduced by approximately 66% year-over-year. And we were also able to reduce our completed unsold homes to 762 homes at 11/30/07, which is a reduction of approximately 900 completed unsold homes, since the first quarter of 2007.

As a result of our aggressive focus on asset management, we have reduced home sites owned and controlled by 197,000 homes sites from the peak in the first quarter of 2006. And that's a reduction from 346,000 to a 149,000 up 57% decline. Included in the 149,000 home sites that are remaining, are 63,000 home sites owned, 23,000 controlled by option with third party land sellers, and 63,000 option from joint ventures. This quarter's option deposit walk-away expense was $218 million and represented about 12500 home sites.

Our strategy of converting inventory to cash strengthened our balance sheet as follows. Inclusive of impairments our net debt to total capital was 30.2% at November 30th, 2007. Our debt levels have been reduced by approximately $318 million, since the prior year's fourth quarter.

Additionally we generated significant positive operating cash flow of over $0.5 billion in the fourth quarter of 2007 and this excludes approximately $450 million of cash, which we did receive by November 30th, but is not included in the operating cash flow section of our cash flow statement from the Morgan Stanley land transaction.

There was $642 million of cash on the balance sheet at November 30th, and subsequent to year-end, as Stuart mentioned we further strengthen our cash position with the receipt-in-hand of an additional $852 million of cash, relating to a tax refund from the carry back of net operating losses to recoup taxes paid in our peak earnings years of 2005 and 2006.

Additionally, we ended the quarter with no outstanding balance on a revolving credit facility, and we completed an amendment of the company's senior unsecured revolving credit facility, and given our liquidity position, we were comfortable reducing the company's borrowing capacity from $3.1 billion to $1.5 billion and we also amended certain debt covenant.

As a result of the two rating agency downgrades to below investment grade in the fourth quarter, we were required to be in compliance with the borrowing base covenant in our senior unsecured credit facility. As a result of the borrowing base covenant, as well as impairments that were taken, we modified the minimum tangible net worth covenant, the borrowing base covenant and the maximum leverage ratio covenant. These modifications, along with our cash position provide the company with the necessary flexibility and liquidity to operate in these challenging times.

We have continued to increase the transparency regarding our joint venture debt obligations; our 10-K, which is due to be filed next Tuesday, will provide a detail breakdown of categories of our joint venture debt.

We have made meaningful strides in reducing our joint venturing in indebtedness from $5.5 billion in the third quarter of 2007 to $5.1 billion by the end of the fourth quarter of 2007. Of these $5.1 billion of joint venture indebtedness, $3.4 billion is non-recourse indebtedness, of which $2.3 billion or 68% is specific to three large joint ventures, whereby our ownership percentage for these three joint ventures is approximately only 15%.

The company has been very focused on reducing its recourse JV indebtedness, which was reduced from $1.8 billion at the end of the fourth quarter of 2006 to $1 billion at the end of the fourth quarter of 2007. Our strategy is to continue to aggressively reduce, particularly the recourse joint venturing indebtedness. And we have agreed to further reduce the amount of this JV recourse indebtedness by $300 million in 2008 and $200 million in 2009, as part of our bank amendment.

We have reduced our ownership percentage in the aggregate equity of our joint ventures from 39% at the end of 2006 to 34% at the end of 2007.

Additionally the numbers of joint ventures have been reduced from a peak of approximately 270 joint ventures in 2006 to about 210 joint ventures at the end of 2007. And we're focused on considerably reducing the number of joint ventures again in 2008.

During the fourth quarter there was $3 million of re-margining payments made relating to joint venture recourse indebtedness and that brought the total for all of 2007 to $84 million.

Turning to the operating results for the quarter, Diane is going to work through the valuation adjustment detail in a few minutes. However, excluding these valuation adjustments, we had approximately a $0.42 last for the quarter.

Our results are fairly detailed in the press release, and as you will note the results tie into our strategy of pricing-to-market to move inventory, as we delivered over 7000 homes during the quarter and as our sales incentives increased to about $59,000 per home from $47,000 per home in the prior year's quarter.

As a result of our gross margin before impairments, that was 12.1% versus 14.4% in the prior year's quarter and gross margins were down in each of our segments as this was a broad based decline. Texas is probably the one market where gross margins were more stable and remain closer to its historical performance. The results in landed and joint ventures are primarily related to impairments, which Diane will cover.

Turning to SG&A, we've been very focused on rightsizing SG&A and we've consolidated many of our home building operations through our markets. And the numbers relating to the 50% associate head count reduction was from over 14,000 associates at the peak in 2006 to at this point we are under 7,000 associates today. This focus along with reduced variable selling expenses are the primary drivers leading to reduced SG&A expenses of $186 million or 38% compared to the same period last year.

Additionally, we have incurred unusual and non recurring expenses this quarter, primarily from severance and lease termination costs of about $12 million. As a percentage of revenue, SG&A increased to 15.1% during the quarter primarily as a result of the 51% decline in revenue.

New orders were down 50% during the quarter compared to the prior year and new orders weakened in all of our regions. As I mentioned it was a broad based decline, experienced in all of the regions. And the same goes with backlog as well, which declined 65% and was experienced in all of our operating regions.

The cancellation rate was 33% for the quarter. And turning to financial services, profits decreased from $42.9 million in the previous year's quarter to a loss of $18.7 million this quarter. The loss this quarter included approximately $5 million in severance and lease termination costs, which we expect to be non-recurring.

Mortgage decreased from $35.6 million to a loss of $7.8 million. This decline in profitability was primarily due to a 45% reduction in mortgage origination dollars. However, we did increase our capture rate from 70% to 78%.

Average FICO scores remained in the low 700s. This quarter fixed rate loans increased considerably to about 97% of the loans we originated compared to 70% in the prior year and jumbo loans were only about 4% of the total loans.

The percent of FHA or VA loans increase to about 36% in the current quarter from 11% in the prior year. And subprime loans were only about 2% of the loan volume, but these are agency eligible product. Alt-A also was reduced considerably from about 46% in the prior year to about 6% during the current quarter, and any Alt-A product that we originate requires significant down payment as well as higher credit scores than in the past, along with partial or full verification of income.

Title profits decreased from $5.7 million in the prior year to a loss of $11.8 million in the current quarter and that was the result of fewer transactions due to the slow market conditions.

As a result of our operating loss, we recorded a tax benefit for the quarter and we've adjusted the tax benefit to a tax rate of 37% for all of 2007. We did not have a FASB 109 tax valuation reserve this quarter, as we concluded it is more likely then not that we will be able to realize our deferred tax asset from future earnings.

However at this time we are not providing a 2008 earnings goal due to the current uncertain market conditions. We will however remain focused on generating strong cash flow, carefully managing our inventory, right sizing our overhead and positioning for profitability when the market stabilizes.

Now Diane's going to provide an update on our impairment numbers.

Diane Bessette

Thank you Bruce and good morning everyone. In conjunction with our balance sheet focus, we continue to evaluate and reevaluate our assets each quarter, throughout our fourth quarter the housing market continued to deteriorate, therefore it was important once again to maintain our comprehensive and rigorous process of division-by-division asset reviews, to ensure that our asset are properly stated.

In this morning’s release we outlined our fourth quarter valuation adjustments by segments, however let me quickly review the categories once again. In the first category is the Morgan Stanley land transaction, as Bruce and Stuart both mentioned, in conjunction with the strategic land investments that we found Morgan Stanley, we recorded an evaluation adjustment of $740 million on the property required by the venture.

The portfolio consists of approximately 11,000 home sites in 32 communities located throughout the country. The segment details of the valuation adjustments is as follows, in the East segment $170 million, in the Central segment $28 million, West segment $509 million and others $33 million.

The second category is additional land that we sold or intend to sell to third parties. Consistent with our strategy of converting inventory into cash we identified land that we sold during the fourth quarter or intend to sale subsequent to November 30th. We applied the standards of FAS 144 to that land and recorded a valuation adjustment of $230 million. The segment detail is as follow. East segment $65 million, Central segment $34 million, West segment $75 million; and other $55 million.

The final category related to land is option deposits and pre-acquisition costs, we continued to evaluate, re-evaluate and re-negotiate deposits on land under option as markets continued to decline. For those option contracts where we were not able to adjust or re-adjust the terms to a level that would lead to an acceptable return, based on current market conditions, we made the decision to walk away from the contract, as we've done in past quarters. As a result, we wrote-off $218 million of option deposits and pre-acquisition costs, which represented approximately 12,500 home sites. The segment detail is as follows. East segment $45 million; Central segment $8 million; West segment $146 million; and other $18 million.

Then turning to the homebuilding side of our business, we once again applied the standards of FAS 144 to land that we intend to build homes on and recorded valuation adjustment of $225 million. The segment detail is as follows. East segment $67 million; Central segment $31 million; West segment $116 million; and other $11 million.

In the fifth category is our joint ventures, we focused on the recoverability of our investment related, relative to the market conditions that exist today. We applied the standards of FAS 144 to the assets in our joint ventures, including the evaluation of discounted future cash book.

Additionally, we applied the standards of APB 18 to our investment balance related to those ventures. As a result, we recorded evaluation adjustment of $277 million. And the segment detail is as follows. In the East $64 million, Central $28 million, West $177 million and other $9 million.

And finally: goodwill. We recorded a write-off of goodwill, related to our home building operations in the amount of $174 million. This goodwill impairment was due to a significant decline in the estimated fair value of our reporting units, subsequent to our third quarter, which resulted from significant deterioration in market conditions and the decrease in our stock price. The segment detail is as follows, the East segment $46 million, Central $28 million, West $44 million and other $55 million.

So, with that quick overview, we would like to open it up for questions.

Stuart Miller

We are going to open that up to questions, Catharine are you available?

Question-and-Answer Session

Operator

We will now begin the formal question-and-answer session. (Operator Instructions)

Our first question is coming from Ivy Zelman of Zelman & Associates.

Ivy Zelman - Zelman & Associates

Good morning guys. Thank you very much for the opportunity. I am very impressed with what you have done on the balance sheet with reducing your debt-to-capital post 11/07, we actually showed it at 15%. And also, I am happy about your continuing to reduce the JV exposure and simplify it. I am wondering, realizing that you still have $1 billion of recourse debt in your plan as to continue to reduce that further: how do you give the market assurance that your balance sheet is strong? And it appears to be when so much concern related to taking the assets today that are JVs and not only the recourse debt, but all of the rest of it basically that that risk have been put back to you. And I realize it's difficult to given some market that that's not an issue, but if there is any way to assure us or give us any good thoughts on that would certainly be a help, because it appears that your balance sheet is a lot stronger than the market gives you credit for. And then just to elaborate, I guess, it's the sneak of the second question, but you mentioned that you're expecting the, all of your hard work to come to fruition in the second half of '08, wondering: if you can elaborate Stuart on that?

Stuart Miller

Yeah, listen, I don't want to overstate that Ivy, we're of course still going to be subject to market conditions, but as we look ahead it was really focused on getting each of our divisions and position to have a clear profitability model and that profitability model is focused on every home, it goes under production right now on home sight that should be properly priced.

They positioned themselves with the right product and construction costs; it should be able to be profitable as we turn into the second half of the year. But the market continues to deteriorate at an accelerated basis; we're simply not going to get there. I personally have some hopes that there's going to be some actions by the Fed by the Federal Government that will shore up some of the market condition even as they still have the tendency to fight. And as we get to the back half of year, I do not expect to see sales and home prices accelerate but I am just -- may be I am just hopeful, I am hopeful that the slide does not continue at the accelerated rates and I think that we are currently well positioned in each division to be able to start saddling back, as it relates to the first part of your question, as it relates to joint ventures.

One of the strong things that we have in our favor in times like this is that we worked hard on our balance sheet as prove to good times to be able to withstand and absorb some pretty steep shock. And even as we've gone through the recalibration that we have gone through now we still been able to maintain a balance sheet in pretty good shape, in very good shape and we've been able to generate cash both from operations and more importantly by doing some heads of things in the marketplace.

What's going to ensure that the balance sheet will remain strong as we roll forward? I think, the answer to that wise and the very exacting evaluation is: that we will fight not only to our balance sheet assets, but also to our joint venture assets today. Nothing is going to isolate us completely from a complete melt down in the marketplace beyond where we are, but to the extent that assets retain any value at all. We have taken the charges to-date that we think are appropriate. And for any kind of market conditions with some softening ahead but not with an exaggerated softening ahead, we think, we're very well positioned to move forward and to remain stable.

Bruce Gross

And let me just add some numbers behind what Stuart saying, as you look at the joint ventures Ivy, now looking at the total joint ventures we talked about there is a total of $5.1 billion of debt of which $3.4 million is recourse debt. But there is also $2.7 billion of equity and this is after we have gone through the review just like we do with our wholly owned assets of our joint venture investments, investment-by-investment for any potential impairments and there have been impairments as you know for the last few years that bring down the investment to the appropriate stated value, we have taken significant valuation adjustments.

So, there is significant equity and then there are hard assets that are additionally supporting the debt within those joint ventures. So, although, it doesn't mean we can't have a re-margining comeback to as such as we mentioned we had $84 million this year. There are hard assets, there is significant equity and the net recourse exposure has continued to decline to the company as well. In addition to the JV recourse indebtedness coming down to a billion, we've also reduced the net recourse exposure to the company from last year at $ 1 billion to the end of this quarter at $795 million.

Stuart Miller

But let me just clarify this: when you say there is $2.7 billion of equity that's not all our equity?

Bruce Gross

Correct.

Stuart Miller

Equity in large part that is partners' equity, the point that you are making now is that the ventures were established with fairly conservative debt put in place, a lot of equity in these joint ventures and there's a lot of equity to go through before the debt associated with any of those ventures becomes threatened, alright?

Bruce Gross

Correct.

Stuart Miller

Okay.

Ivy Zelman - Zelman & Associates

And just to follow-up on that, I think that makes -- obviously people should may can feel better, but realizing that you have taken impairments each quarter and it looks as if you've taken less homebuilding impairments this quarter and to your point Stuart, even if things get worse, but not materially worse, you think, you could have hopefully with your asset valuations gotten. If I'm hearing you correctly, your arms around maybe the impairments peaking and seeing a lot less impairments going forward, and with that said, the 10-K that you are reporting on Tuesday hopefully, what type of increase transparency will we get on the JVs? I guess, that's a two-folded question?

Bruce Gross

Well, that's, let me talk about the joint venture transparency. We do go through and identified all of the different categories of joint venture indebtedness, and we have again, significant detail disclosure on all of these, on the joint ventures, the various categories, the balance sheet, the debt side. And I think you'll find that there is significant increase in the transparency from where we've been in the past.

Ivy Zelman - Zelman & Associates

Great!

Bruce Gross

And that should be filed Tuesday, next week.

Ivy Zelman - Zelman & Associates

Great!

Bruce Gross

And Ivy, I think, that the point that you are highlighting is, we've really made an efforts here to get ahead of the curve. I simply don't want to die the death of a thousand cuts, I guess, that's a little cliché, but it's really the way that I feel. I think that it's almost axiomatic that you can not make money on land that is improperly evaluated, it doesn't matter how good your homebuilding operation is. We're really positioning to get ahead and relative to some of the land positions that we have and joint ventures that we have. And I think that we've made incredible steps going forward.

I have to qualify everything that I said by the uncertainties that lie ahead in the market place. And then, as it relates to the uncertainty relative to joint ventures on our book, we're certainly making additional attempts to improve the trends apparently in our 10-K and in all of our disclosures. So that people do get a good sense of comfort for the fact that we have a balance sheet that really is in good set.

Ivy Zelman - Zelman & Associates

Great, thanks very much.

Stuart Miller

Thank you.

Operator

Your next question comes from Carl, Reichardt, Wachovia Securities.

Carl, Reichardt - Wachovia Securities

Good morning guys. How are you?

Stuart Miller

Hi, Carl.

Carl Reichardt - Wachovia Securities

Thanks for taking my question. And back on the issue of joint ventures Stuart maybe one higher level; as you look forward at the business and the impression that we were covering '09 or whatever: do you expect Lennar to be more active in joint ventures to try to shrink the size of the land position on the balance sheet? Or: would less active because you're going to be taking advantage of fully on positions at the bottom to expand your business? I think why I am struggling with this: whether or not joint ventures are going to be a more important larger part of your business in future years? Or: a less significant part? Given this downturn and what has happened to this plan I am just trying to think about your strategy utilizing these going forward.

Stuart Miller

That's an interesting question Carl; I think that, I think you'd have to cut your question in a couple of different ways. Number one, I think it's absolutely the case and as we go forward we will use fewer joint ventures in terms of the numbers of partners that we will have. I think that having fewer of the smaller type joint ventures would make administrative -- it would make administratively much more manageable. And I think that would be less inclined to new use joint venture structures at the individual property level.

Let me also say that certainly for the next many years, the joint venture structure another structures are simple not going to be needed, there is going to be land available. And so, I think that for many years, we are going to be very inclined to take advantage of the market conditions that exist where there will be develop some sites available and I think that we'll build our business up about. So, in terms of the number of joint ventures will be less inclined to use smaller ventures in terms of the need to use ventures its simply won't be there. So, it will be a much smaller part of our business.

With that said, and using our transaction with Morgan family as a proxy, well, I classify that more of as a fund. I do think that the opportunities that exist in the open market today to be engaged in the real estate business and to the opportunistic in trouble time, is something that we have a real expertise sense. The joint venture experiences that we have had has given us a great platform for being able to be and a very effective fund manager and I think that there will be opportunities for us to put together pools of capital, but stick to engage the risk associated with lands, but buying land at the bottom of the market conditions and I think that we will use those kinds of vehicles to take our expertise and to lever that with land assets that are positioned for recovery. So, we will use the venture structures in one form or another, I think it will be more in line with a fund type concept than with an individual venture type contract.

Carl Reichardt - Wachovia Securities

Okay and then second - last question. Thinking about that recovery scenario: do you expect, as you see it now, Lennar will deepen its existing market footprint or even shrink and then re-deepen it? Or: do you expect to expand that geographic footprint as you look out?

Stuart Miller

Right now Carl we are focused on the footprints that we have in place. I think if you have to characterize the attitude within our company, it’s about looking at what we've got and getting it back to efficiency. I think we've spent a better part of 2007 focused on being asset managers. We've positioned ourselves now to get back into the primary focus of running operating division the way we know how as profit centers. And I think that we're looking at the existing footprint, we're not looking beyond it, we're not looking to materially shrink it either, but we are looking at the platform we have. We have scaled back from a headcount standpoint by almost 15%. We're really left with the eight players in all of our markets, and that’s what we're going to work with in terms of really refining the footprints that we've got.

Carl Reichardt - Wachovia Securities

I appreciate that. Thanks Stuart

Stuart Miller

Sure.

Operator

Our next question comes from Ken Zener, Merrill Lynch

Ken Zener - Merrill Lynch

Good morning.

Stuart Miller

Good morning.

Ken Zener - Merrill Lynch

With your corporate liquidity rising can you address your expected cash output for land development that you own, and some of the required lot take-downs that you have coming from options or from other joint venture structures that are acquired in ’07 -- ’08? Excuse me.

Bruce Gross

Let me comment on what’s required. With our option program, they are in fact options and there isn’t a requirement with respect to those take-downs. So, just as we’ve walked away from a very significant portion of our options over the last year across, those options that we have remaining continue to remain options. That option ability is to remain in their force. So there is virtually no specific performance. There might be no specific performance with respect to any take-down requirements.

The other part of your question: what is our required outflow with respect to home sites that we own? There isn’t a number per say to put on the tables. I am assuming you are talking about development dollars required with respect to home sites owned Ken?

Ken Zener - Merrill Lynch

Correct.

Bruce Gross

Okay, we don’t have an exact number there, but our focus has been to very tightly manage to the current demand in each local market, with respect to any development that we are taking on and we’ve aggressively reduced as we mentioned the number of home sites, the number of starts. So we are going to manage that very tightly with respect to the demand that exists in our markets today.

Ken Zener - Merrill Lynch

Okay, I guess another angle on that would be completion guarantees that you do have within your joint venture structure. Could you comment? I realize the bank’s Ken will contribute the majority of the capital to complete these projects, but: can you give us a sense of how these banks are responding on some of these completion guarantees? Given that they are the largest capital contributor. Are they just saying: “let's not move forward even though you have a completion guarantee”? And: could you give us some of the different dynamics around that?

Stuart Miller

Yeah, this is a fair question; unfortunately it hasn't quite ripened yet. And every situation really is unique and different in that regard. Each of those completion guarantees is being managed differently and separately. And I think we are going to sit back and wait and see. And you're right, a lot of it is funded by the underlined venture or debt itself, but each one is going to be looked at specifically.

In some instances you have some of the properties that you are talking about Ken. Our properties are really well positioned and should be developed for current absorption. And so the completion not only guarantees, but opportunity is one that is probably the right thing to do at this point, and we'll act accordingly. Additionally there other properties where it is very clear to both us and the banks and everybody involved that the strategy is: to not go forward and to not put more money in the ground at this time. One might be talking about an excellent property, but it simply doesn't make sense to put the money in the ground. And in those instances there are pull back. So, each of these deals is being dealt with very individually.

Ken Zener - Merrill Lynch

Okay, I appreciate that. And just: if you could comment how much of the Morgan Stanley land sale of $1.3 billion as a carried value had been impaired before? Thank you.

Bruce Gross

That number was about a $150 million in total --.

Ken Zener - Merrill Lynch

So: their original purchase price was 1.45?

Bruce Gross

Approximately.

Ken Zener - Merrill Lynch

Thank you.

Operator

Our next question comes from Michael Rehaut, JPMorgan.

Michael Rehaut - JPMorgan

Hello?

Operator

Mr. Rehaut your line is open you may ask your question.

Stuart Miller

Let's go on to the next.

Operator

One moment: Mr. Rehaut?

Michael Rehaut - JPMorgan

Yes I am here.

Operator

Thank you, your line is open.

Michael Rehaut - JPMorgan

Alright I was talking the whole time; I guess there is an issue there. First question was related to the tax refund or the tax cash refund and also the statement about the FAS 109 that you determined that you would be able to utilize that asset, and this is certainly at least from - I guess I have a couple of questions here. If you could just walk through the rationale on the 109 approach, because certainly the other builders are kind of looking at as the peak earnings of ’05 roll-of, that you'd have between ’06 being a lower year, ’07 being a very large loss year. The only way that you wouldn’t enter into it three year accumulative loss position in '08; the only way you'd be able to prevent that is having nice earnings year in '08, and that’s been the rational for the big tax FAS-109 write-offs. So I was wondering: if you could kind of walk through how you are getting to a different answer on that front and similarly the large cash tax refund? How you are able to recoup such a nice number post the year-end?

Bruce Gross

Well let me start me the easier one. As Stuart said earlier, we have an incredible tax team led by Mike Petrolino, who worked around the clock after year-end to facilitate the quick recoupment of the taxes that were previously paid, and that was just a lot of hard work effort, planning in order to shepherd that through appropriately in order to get a quick inflow of cash.

With respect to FAS 109 which has been a hot topic here lately. From the perspective of the literature as we've looked at it and our auditors have looked at it, you have determine that it’s more likely than not, that you will be in a position to realize that tax asset in the future. One very strong negative piece of information is, if you have cumulative losses over a certain period of time based on the sick locality of your industry, and based on the cumulative losses so far we're actually positive further three years, but based on cyclicality in the business, we're not looking at a three year period, we believe that we can go to a four year period.

And again that’s one piece of information, and we'll have to look at 2008 and see how that plays out, and at that point we'll able to conclude one way or the other if there is a potential valuation adjustment depending how 2008 plays it self out.

Michael Rehaut - JPMorgan

Okay, thank you. Second question: if you could just walk through what the changes were to the tangible net worth requirement and some of the other covenants?

Stuart Miller

I could get into the detail, it's probably easier Mike. We're filing an 8K with respect to that amendment that will have all the details relating to those items over the next day or so. And minimum tangible net worth is an easy one. It was basically a reset based on our equity value at the end of November, plus a provision, in case there is a valuation reserved in the future relating to FAS 109.

Michael Rehaut - JP. Morgan

Okay. Let me sneak in one more if I could then. The benefit in gross margins from prior impairments Bruce: would you happen to have that?

Bruce Gross

No. Mike, that's not something that we report on, because as we look at it there are land positions, they get renegotiated, some are new deals or old deals, and it's just not something that we track.

Michael Rehaut - JP. Morgan

Okay. Thanks.

Operator

Our next question is coming from David Goldberg, UBS.

David Goldberg - UBS

Thanks. Good afternoon.

Stuart Miller

Hi, David.

David Goldberg - UBS

How you doing? You mentioned in your opening remarks that most of your JV partnerships have worked out as they were planned to work out. I was wondering: if we could focus on some of the ones that didn't worked out the way that you thought they would? Maybe give us an idea just kind of: what goes wrong and how they play themselves out?

Stuart Miller

Well, so many thanks for bringing that up David. It might not have -- maybe I didn't say it quite right. They're clearly haven't worked out the way we had hoped they did. Our valuations for the assets certainly wasn't to see in a loss position, I was really talking about the mechanics of the joint venture. In most instances it has really worked out exactly. But we got what we've bargained for and that is a shared risk position with a joint venture partner.

What happens when they don’t work out, and we do have some that have not worked out, you have a partner that, because of the shift in market conditions, who finds himself in financial difficulty and can't uphold his end of day-to-day operations or funding interest or something like that. And we have to sit and talk and re-negotiate, this really puts us in a position relative to the partnership and relative to the bank relationship, to sit down and negotiate respective rights and obligations, and to reposition our position and the partnership in general.

David Goldberg - UBS

I guess it’s my second question, thank you for that Stuart. This is for Bruce. In terms of brining down the recourse that are in the JVs: if you could talk about mechanics behind how you actually achieve that in the next two years? Is that just the renegotiations, switching it from recourse to non-recourse? And, if so: is it more expensive for you do? Can you just talk about how you take it from $1.8 billion to a billion now?

Bruce Gross

Sure David. You know its from several different areas, the primary way is that, that is reduced is in dealing with the assets in the joint venture, which our partner might purchase, we might purchase, we might both purchase or a 3rd party can purchase. That’s the primary way that we will deal with the joint venture debt. So, once those assets are purchased, there's enough capital to pay down the recourse indebtedness at that point. Less so from transferring it to non-recourse indebtedness although we did refinance some of the recourse indebtedness in the past year. And some of that has been moved to non-recourse going forward. It's more dealing with the assets in the JV, focusing on reducing the number of JVs, and that’s how we are going to bring that number down. And we have been making a lot of progress already along those lines. And we are very comfortable we will achieve the goals that we set out and committed to with our banks.

Stuart Miller

Let me say that David, this is not a Smoking Mirrors program of moving debt from one bucket to another, each of these ventures is really being worked and focused on. Some of the ventures that we have in place have just lost their reason for being. It was that maybe we were sharing risk in equity with a partner, and today because of the shift in the market, the share risk is really just gone away. It could be that a venture has become, has moved from a responsibly levered partnership to a highly levered partnership just by the loss in equity.

In each of these situations we are sitting down with partners and figuring out the right construction for moving forward, I would tell you that in some instances we have bought land or the land asset from a partnership that what we think is an attractive price, having written-off equity and positioning the venture.

In other instances we have sold our equity to a partner who has taken on the debt and moved forward, so in all instances we are looking at fundamental alteration of the partnerships, some of our partnerships are excellently, excellently positioned and well there will be trails and tribulations going forward in working through a difficult market condition. They still have properly sized debt and properly positioned partners to be able to make the best of the assets.

David Goldberg - UBS

That’s great thank you

Stuart Miller

You bet.

Operator

Our next question comes from Nishu Sood, Deutsche Bank

Nishu Sood - Deutsche Bank

Thank you. I had a few questions on some of the land transactions, first I wanted to start with, I was wondering: if you could give us some more details on the 8,300 lots? I believe it was that you sold in Florida to a metro development I think it was, specifically the kind of basis of that land on a pre-impaired basis and: what you have realized for it?

Bruce Gross

Sure Nishu let me take that one. What we did there is we had 8300 home sites that were controlled for the future, they were longer term takedowns. And strategically what we did is we converted those 8300, which was one transaction, and for a similar dollar amount what we did is we actually purchased some shorter term home sites that were able to be put in production on a more current basis. The total dollar amount of each of those transactions, the sale and the purchase was in the $20 million range, so it was not significant at all, even though it was highlighted by the media just given that it was picked up shortly after the Morgan Stanley transaction, which had significant dollars involved and about 11,000 home sites.

Nishu Sood - Deutsche Bank

Oh! I see so it’s more of a swap really in terms of: when the land can be put into use?

Bruce Gross

Well there were two separate transactions, but it was a re-positioning, as we've looked at around the country with our asset base it wasn’t exactly a swap it was more of a re-positioning of assets, where we were more focused on shorter term assets that could be put into production sooner and generate cash flow quicker and to be going out as far, just given the fact that there is more land available as we look forward.

Nishu Sood - Deutsche Bank

Got it. And my second question, I wanted to ask also about the land that was involved in the Morgan Stanley venture, kind of looking at it qualitatively and if you work with the numbers that you folks provided, the $1.3 billion in the 11,000 lots, we get a pretty significant number, $120,000 or north per lot, which is a pretty significant number for lots which are in different stages of development. So: does that tell us that those are the lots that were dealt with here? Or: in a higher price markets? Maybe mostly in California or perhaps more ‘A’ grade lots? How do we kind of reconcile that in terms of understanding what types of lots were involved in that transaction?

Bruce Gross

Nishu, as you do look at the geographic breakdown of those home sites, the starting point is in our lower priced markets where we typically use rolling lot options like Texas and the Carolinas. There were no home sites that went into the program. So, you are correct. These were primarily in markets where land is more expensive, in more of the coastal markets. That’s where the geographic breakdown of these 11,000 home sites would split out more appropriately. There were quite a few end markets like California, as well as Florida and various other coastal markets in particular.

Nishu Sood - Deutsche Bank

Okay, thanks a lot.

Bruce Gross

Welcome.

Operator

Our next question comes from Dan Oppenheim, Banc of America Securities.

Dan Oppenheim - Banc of America Securities

Thanks very much. I was wondering: if you can talk about the inventory? They clearly are great things to generate cash and reduce debt. If we look at the backlog, which in couple of regions is below the stay orders where we presume a lot of the spec homes were sold during the past quarter: how would you look at -- how many homes are in construction right now? How many finished homes you have? Just give us absolute numbers also relative to: where we were at there six months a year ago? Just give some perspective on that.

Bruce Gross

Okay. Just a couple of those numbers which I have laid out Dan, at the start of my section, homes under construction declined 68% from a year ago, there were 17,000 homes under construction in the fourth quarter of '06 and 5500 at the end of Q4 of '07. The homes that were completed unsold have come down considerably as well. Actually, the first quarter of '07, we were about 900 completed homes higher than we ended the year and we ended the year with 762 completed unsold homes.

Dan Oppenheim - Banc of America Securities

Thanks. And if you can talk then in terms of your goals and towards strategy in terms of sales at this point? How do you describe it? And certainly it is switched to one where it is less aggressive and mothballing communities? What would the strategy be at this point?

Bruce Gross

The strategy with respect to sales, and you mentioned mothballing, so you are referring to with the land that we have remaining in our inventory. Our strategy as we have indicated has been just a match to current market demand levels.

Dan Oppenheim - Banc of America Securities

Thanks.

Operator

Our next question comes from Stephen East, Pali Capital.

Stephen East - Pali Capital

Thank you just a couple of questions. Bruce on the $500 million on free cash flow, which was pretty good, and that was before the Morgan Stanley: How would you split that out between homebuilding versus land sales?

Bruce Gross

I don't have that split here, we don't split that out on our cash flow statement Stephen.

Stephen East - Pali Capital

Okay. Just generally speaking: is the majority of it from homebuilding? Would that be a fair assumption?

Bruce Gross

Yeah, I can say that's probably fair assumption.

Stephen East - Pali Capital

Okay. And then, on the Morgan Stanley transaction, the inventory stays on your books can you help me out little bit, if the inventory stays on the books obliviously the cash come on the books as well. So: how do you relive the inventory? And: how is the cash flow through? How do we see it here in the same thing on the tax benefit? Do you get that immediately or does that have to flow through overtime later in the day?

Bruce Gross

Let me just make one comment and then I will have Diane walk through the mechanics. You indicated that the cash isn't actually on the books. So, the cash actually was received and we did receive that cash and it is on the books as of 11/30/07. But let me turn it over to Diane to walk through the mechanics of how this will work in the future.

Stephen East - Pali Capital

Okay.

Diane Bessette

Well, I just trying to keep it simple and the reason is I am just saying on our books is, if you look at the accounting rules under FAS 66 which speaks to sales of real estate, we have what's called continuing involvement, and what that really means is that its a moment we have option agreement and right the first offer is on all the land and certainly that is not in obligation, it truly as it stated it's an option or related first offer. So, what will happen is as we decide to exercise, we are not to exercise little the option, the land will then either come of our books, and we will have a sale or it will sale our books and will be building it out. So, it will really be determined on an option-by-option basis and whether we choose to exercise that way or not.

Stephen East - Pali Capital

Okay. And just one last question, Stuart, you have talked in the past that you wanted to get your balance sheet in a position to take advantage of opportunities that come along, I guess, as you look at the market and you look at your balance sheet: when do you think the markets start presenting those opportunities in a meaningful way? Is this a -- it's just in your opinion? Is this an '08 event or an '09 event?

Stuart Miller

That's a really interesting question, I am not sure yet, Steve, I think that there is still time, I think there is still reconciliation, I think that the homebuilding world has been a little bit ahead of the curve, the land world has been a little bit behind, liquidity in the marketplace in general has stabilized. We're odd officially stabilized land pricing, relative to where I think it's still going to go and I think that we still have some time before we start to see opportunity. I know that we're not going to compromise our balance sheet today by chasing opportunities as the market is still trying to find the bottom. So, I think that we're still driven by finding ways to take advantage of down market, as we're in right now, but we're are not inclined to further trigger to soon and I think that right now it's a little too soon.

Stephen East - Pali Capital

Okay, thanks. That's helpful.

Operator

Your next question comes from Timothy Jones, Wasserman and Associates.

Timothy Jones - Wasserman and Associates

Good morning to all of you.

Stuart Miller

Hi, Tim?

Timothy Jones - Wasserman and Associates

Hi. One thing, Carl Reichardt of course asked my two questions, I did that on the prior call on him, so it will works out. But to get one thing straight on 109 before ask the question. Are you -- isn't Deloitte allowing you to take 2005, 2006, and 2007 for your three year base year and that have to take 2008 right now?

Stuart Miller

In looking at that Tim again, the literature of 109 discusses the fact that you need to look at whether it's more likely then not that you'll be able to realize those benefits. And as you look at that and evaluate it, it's been the company's conclusion and Deloitte's conclusion that in a cyclical business like ours, as we've looked at three years is a guideline. But based on the cyclicality of your industry and what you've experienced potentially you can end up with a different number then just three year, so.

Timothy Jones - Wasserman and Associates

You're using that -- 2005 number, I mean: you know darn well that 2008 there's a 1% chance that 2008 look remotely to reassemble 2005 in earnings or lack of them.

Stuart Miller

As we look forward, we would look to include 2008 based on the cyclicality, as we evaluate 109 going forward. So, we're looking at it, as I indicated it before over a four-year time period. And looking at one of the components although it's strong indicator with respect to whether or not you have a valuation reserve or not and that's accumulative loss. So, we look at that at as a four year period based on cyclicality that we've experienced in the industry.

Timothy Jones - Wasserman and Associates

Okay, my two questions. My first one, I think your tax man should be sanctified, but my question there is: I don't understand: how you got $850 million of cash refunds? I understand how you got the 250 from the Morgan Stanley deal, because you realized an actual loss, but for the rest of the stuff most of these losses are non-cash charges and you really had not realized the loss. Therefore: how can you take the tax benefit from the IRS?

Stuart Miller

What we had a lot of focus on Tim this year is actually taken what was a non-cash charge and as we've actually concluded transactions, converting inventory to cash, and you could see that from a large reduction in our inventory, we've concluded transactions that which time you realize that differ tax outset and it becomes an Income Tax receivable.

Bruce Gross

Yeah Tim, I think, the thing that you might be missing is that in many instances, we made an active decision to take what might have been an impairment and then turn it into a realizable tax loss by actually concluding a sale transaction relative to the underlying asset. So, while the Morgan Stanley asset sale has received a lot of attention, there were a number of asset sales that may be more behind the scene that were part of creating the transaction, the sale transaction, that resulted in the tax recovery.

Timothy Jones - Wasserman and Associates

Why in the world didn't the rest of the homebuilders do this?

Bruce Gross

So, we were tarred in the fourth quarter and we …

Timothy Jones - Wasserman and Associates

Great job, but: why didn't the other ones do it? They just lost those benefits.

Bruce Gross

Yes Tim.

Stuart Miller

Yeah, you are going to let on some other calls Tim?

Timothy Jones - Wasserman and Associates

Okay one last thing is: Your joint ventures, you got at nine months, you had about a $1.5 billion of payables, that’s an awful high end amount. What does that consist of? And: what is your responsibility on that?

Bruce Gross

We don’t have that detail right now, may be that's something we could follow up after this call.

Timothy Jones - Wasserman and Associates

Okay I will talk to you off the line, thanks a lot.

Stuart Miller

Thank you Tim. Okay and we will take one more call.

Operator

Thank you our last question will be coming from Eric Landry of Morningstar

Eric Landry - Morningstar

Great! Thanks for taking my question.

Bruce Gross

Sure

Eric Landry - Morningstar

First let me mention that I am short at the speed at which you received that the tax rebate and I think it’s a testament to the management down there in Miami. So congratulations!

Stuart Miller

Thank you. But let’s just mention Mike Petrolino's name one more time, he really did an excellent job.

Eric Landry - Morningstar

Wonderful work! Stuart I am lucky enough to not have to have covered the industry back in the last downturn in the late 80s, early 90s, so I am hoping for a bit of historical perspective. It appears to me that the big builders today are, several of them are, extraordinarily well prepared for whatever the market has to throw at them over next several quarters or even years whatever you have. Was this the case back in the late 80s early 90s?

Stuart Miller

No. There are some significant differences right now. First of all in prior downturn, the capitalization of most of the big homebuilders was in the 60%, 70, 80% range going into the downturn. Most of the big builders in the current field started at the beginning of this downturn with debt-to-total cap ranges in the 30%, 40%, 50% range. So the starting point was a better capitalization.

Secondly, the capitalization in the prior downturns was always defined by short-term debt. In the current market, all of the big homebuilders are capitalized with longer term fixed rate debt as a base to their base business. So, those two factors are significant shock absorbers for the homebuilders in this downturn and really are creating a lot more stability.

Eric Landry - Morningstar

So basically, vastly more well prepared this time.

Stuart Miller

Yeah dramatically better prepared! I think the lessons of the past have been heeded in a lot of ways. It doesn’t mean that there haven’t been mistakes made, but the severity of this downturn has not yet proven fatal, and I think that most of the builders are likely to be able to sustain themselves through that.

Eric Landry - Morningstar

I agree and they are also well prepared to harvest opportunities on your side, which brings up why I was going to questioning. There hasn’t been much insider buying and the market hasn’t really been giving any credit for this preparedness as well. Anyway I have one more question and that is: Bruce if you could let me know some relative proportion of your 63,000 owned lots that are finished?

Bruce Gross

The percentage of the owned home sites that are finished and I don’t have that handy Eric. May be that's something I could follow-up on as well

Eric Landry - Morningstar

Okay, great. Thanks

Stuart Miller

Okay. Well listen, thank you everybody for your interest and attention. It's been a tough year and a tough quarter, and we look forward to stride forward in 2008 Thank you

Operator

This will conclude today’s conference.

Thank you.

Operator

This will conclude today’s conference. To listen to this call in its entirety, you may dial 1203-369-1032. You will be able to listen to the call in its entirety. Once again that number is 1203-369-1032. Thank you for participating in today’s conference. All parties may disconnect.

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