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Standard Pacific Corp. (NYSE:SPF)

Q1 2008 Earnings Call

May 12, 2008 11:00 am ET

Executives

Lloyd McKibbin – VP and Treasurer

Jeffrey V. Peterson – Chairman, President, and CEO

Andy Parnes – Executive Vice President and CFO

Scott D. Stowell – COO

Analysts

Ivy Zelman - Zelman & Associates

Michael Rehaut - JP Morgan

David Goldberg – UBS

Carl Reichardt – Wachovia

Joel Locker - FBN Securities

Timothy Jones - Washerman and Associates

Alex Barron - Agency Trading Group

Susan Berliner - Bear Stearns

Tom Carroll of Imperial Capital

James Wilson - JMP Securities

Cheryl Van Winkle - Independence United

Scott Cavanaugh– Merrill Lynch

James Eustice - Churchill Pacific

Chris Sipple - Blue Lion Capital

Mike Glickman - UBS

Unknown analyst - Credit Suisse

Larry Taylor - Credit Suisse

Phillip Pennell - Turnberry Capital

Operator

Welcome to the Standard Pacific Homes’ first quarter 2008 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Lloyd McKibbin.

Lloyd McKibbin

Our formal presentation today will be followed by a question-and-answer period. In the interest of time, we ask that each caller’s question be limited to one and a follow-up. We will also limit the entire call time to about one hour.

Now, I am going to read a notice regarding forward-looking statements. This conference call and the accompanying slide presentation contain forward-looking statements.

Such forward-looking statements may include, but are not limited to, statements about our outlook, markets, orders, backlog, interest coverage ratio, waiver extension with our bank group, joint venture funding needs, capital and liquidity resources, joint venture debt, joint venture unwinds, exploration of financial and strategic alternatives, level of spec homes, generations of sales and delivery, management of starts, reduction of land acquisitions and land development spending, and reduction of our overhead rate.

In general, any statements contained in these materials that are not statements of historical facts should be considered forward-looking statements. We assume no obligation to update these or any other forward-looking statement. We caution you that forward-looking statements involve risks and uncertainties, and there are a number of factors that could cause our actual results to differ materially from those that are contained in or implied by these statements.

These factors include, but are not limited to, local and general economic and market conditions including consumer confidence, employment rates, and interest rates. These and other risks are discussed in our press release of May 12, 2008. We refer you to this press release and our most recent annual report on Form 10-K and quarterly report on Form 10-Q for further information. Copies of these documents are provided on our website at www.standardpacifichomes.com or from the company upon request.

We suggest you to click on these links after you’ve reviewed the slides and listened to the audio portion of our conference call. Clicking on the links during the slide show or conference call may cause you to miss a portion of the slide show or call. The recorded presentation will be available for replay this afternoon and will continue to be available until June 16, 2008. The audio portion may also be replayed by dialing 888-203-1112 and entering pass code 3504714.

Our presenters this morning are Jeff Peterson, Chairman, President, and CEO, and Andy Parnes, Executive Vice President and CFO, as well as Scott D. Stowell, COO.

I will now turn the call over to Jeff.

Jeffrey V. Peterson

We appreciate everyone’s presentation and participation on today’s call. As many of you may be aware, I was elected by Standard Pacific’s Board of Directors to be Chairman, President, and CEO in late March. I welcome this opportunity to speak with you regarding the company’s first quarter results; hHHowever, first I would like to acknowledge the continued contributions of the employees for their commitment to the company, their accomplishments in executing our business of building and delivering high-quality homes with a dedicated focus on our customers, the home buyers. The company’s results continue to reflect the challenging housing market conditions which exist nationwide; however, review of our balance sheet and certain operating measures shows that we are working effectively to manage cash and reduce inventories.

During the quarter, we generated $229 million in cash flow from operations, and we ended the quarter with $329 million in home building cash on our balance sheet. In the process, we were able to reduce our consolidated debt by $22.5 million through additional open market purchases of our 6.5% senior notes due this October. We generated an operating loss for the quarter of $216 million or $3.34 cents of share, driven primarily by additional inventory and joint venture impairment charges which totaled $192 million for the first quarter and an additional $84 million deferred tax asset valuation charge.

While net new orders for the first quarter were on plan, they were down 30% year over year, reflecting tough market conditions. Our cancellation rate came in at a respectable 24% due to our focus on prescreening buyers. We continue to make significant progress in reducing overall level of joint venture debt, and we are pleased to get an agreement in principle from our bank group to extend the waiver of our back facilities for an additional 90 days. We will review this in more detail later in the presentation. At this time, I would like to turn the presentation over to Andy and Scott for a review of our first quarter operating results.

Andy Parnes

Please join me on slide #4. For the 2008 first quarter, the company generated a net loss of $216 million or $3.34 cents per share, versus a net loss of $40 million or $0.63 per share last year. The year-over-year decline was driven by the following factors from continuing operations: a 47% decrease in home building revenues, a negative home building gross margin of 33.6% resulting from $170 million of inventory impairment charges, a $2.7 million decrease in other income which includes a $2.3 million deposit write-off charge, and an $83.7 million deferred tax asset reserve, all of which were partially offset by $14.6 million decrease in our SG&A expenses and an $18.6 million decrease in our homebuilding joint venture loss, which reflects $20 million of JV inventory impairment charges for the first quarter. Excluding the impairment and tax reserve charges, we would have lost $14.8 million or 23 cents per share during the first quarter. Please refer to the exhibit at the end of the presentation for a reconciliation between the net loss before and after the impairment and other charges.

Slide #5 provides more detail on the impairment charges recorded during the first quarter. We continue to review every project each quarter for impairments including projects not yet opened. The vast majority of impairments recorded in the quarter were triggered by continued housing price erosion. The impairment charges related to ongoing projects cover 32 projects and joint venture impairments related to six projects. They were most significant in Southern and in Northern California, while the land held for sale charges related to primarily one project in Southern California.

Slide #6 is intended to give you an aggregate level of inventory impairments recorded since January 1, 2006, including JVs and the percentage of lots written down thus far based on our December 31, 2006, lot position. Now, I would like to turn the presentation over to Scott.

Scott D. Stowell

Turning to slide 7, the 47% decrease in first quarter homebuilding revenues to $348 million was primarily attributable to a 38% decrease in new home deliveries combined with a 12% decrease in our consolidated average home price. In addition, land sale revenues declined from $16 million last year to $2 million this year. Our backlog conversion rate for the quarter was 81% and reflected shorter escrow periods and our focus on selling standing and nearly completed homes.

Our next slide, slide 8, shows deliveries by state. New home deliveries exclusive of joint venture and discontinued operations decreased 38% during the 2008 first quarter as compared to the prior year period. Deliveries were off and substantially all of the markets in which we operate, reflecting the continued slowdown in order activity, a decrease in our backlog levels, and weaker housing demand overall.

Slide 9 demonstrates that our consolidated average home price drop 12% year over year in the first quarter to $334,000 due primarily to the level of incentives, discounts, and price cuts required to sell homes in most of our markets. This decline in average selling price was partially offset by changes in the company’s geographic mix whereby a greater percentage of homes were delivered from the higher priced California markets. Andy?

Andy Parnes

Moving to slide 10, the company’s negative gross margin percentage from its homebuilding segment was driven by the $170 million of inventory impairment charges related to ongoing projects in land held for sale as well as continued margin pressure from increased levels of incentives, discounts, and price cuts used to sell homes. Excluding the impact of land sales and their related impairments, the company’s gross margin from home sales would have been a negative 25.4%, and further excluding ongoing project inventory impairments, the home sales gross margin would have been 15.2% versus 23.5% last year.

Please refer to the exhibit at the end of the presentation which reconciles the gross margin percentage for the homebuilding segment to that excluding land sales and impairment charges. The company’s higher SG&A rate for the quarter was driven by the lower revenue base, combined with increased levels of advertising and co-broker commissions. With that being said, our absolute level of first quarter G&A expenses excluding the non-cash components was lower by 12% year-over-year. Our leaner overhead structure is a result of division consolidations, market exits, and intense focus on spending, and our efforts to right size the organization.

On Slide 11, I would like to direct your attention to the left hand side of the slide. You will see that we generated $229 million of cash flow from operating activities during the first quarter, the bulk of which came from our tax refund, plus an additional $9 million from investing activities. The net result of this was a reduction in our consolidated unsecured homebuilding debt of $22 million from December 31, 2007, combined with an increase in cash on our balance sheet of $110 million. For the first quarter, EBITDA was a negative $6.5 million driven by the pre-impairment operating loss. We generated $201 million of EBITDA on an LTM basis compared with $601 million a year ago. Please refer to the next slide for a definition of EBITDA and a reconciliation of EBITDA to operating cash flows.

As you can see on slide 13, our quarter end adjusted net homebuilding debt-to-capital ratio stood at 64.9%. Our total debt-to-capital ratio which includes indebtedness of our financial services subsidiary and FIN 46 liabilities was 70.2%. Please refer to the exhibit at the end of the presentation for a reconciliation of total debt-to-adjusted net homebuilding debt.

Our LTM interest covered ratio was 1.5, and it is expected that our interest-covered ratio will continue to decline during the balance of the year. At March 31, 2008, we had utilized $142 million of capacity under our revolving credit facility including $52 million for letters of credit. We have also included for your reference the calculated and required ratios, amounts for the bank revolvers debt equity, and consolidated tangible net worth covenants. We did not meet the required minimum consolidated tangible net worth and leverage covenants as of 03/31/08. We continue to operate under a waiver from our banks till May 14, 2008.

On May 9, 2008, last Friday, the company obtained a preliminary consent of its bank group based on a fully negotiated term sheet subject to the group’s receipt, review, and execution of final documentation to further extend the waiver until August 14, 2008, and to expand the waiver scope. The proposed waiver extension will expand the scope of the existing waiver to include among other things a broader waiver of defaults arising from noncompliance with financial covenants and a suspension of the application of the borrowing base.

Certain representations required to be made in connection with request for additional borrowings and a cross default provision regarding defaults from other agreements between the company and members of the bank group. In exchange for the extension and expanded scope, the company will agree to collateralize new advances made under the revolving credit facility, reduce the revolving credit facility commitment from $700 million to $500 million, and not borrow under the facility when our cash on hand exceeds $300 million. While the company expects that this waiver extension will be completed on or prior to May 14, 2008, there can be no assurance in this regard.

As shown on the slide, our debt equity ratio calculated under the most restrictive senior public note indenture was 2.42 at March 31, 2008, versus a maximum allowable ratio of 2.25. Since we no longer meet the leverage or interest coverage ratio requirements under certain of our public note indentures, we are prohibited from incurring additional debt subject to certain carve-outs and making restricted payments.

The carve-outs for incurring additional debt include borrowings under bank facilities and borrowings to refinance existing indebtedness. Assuming that the company’s bank group approves the proposed waiver extension, the company believes that these exceptions and its cash balance of $328 million at March 31, 2008, provide it with substantial resources and alternatives to fund its short-term cash needs.

A prohibition on making restricted payments affects our ability to invest in or otherwise make contributions to our joint ventures; however, the company has funds available in its unrestricted subsidiaries which are available for making restricted payments. Based on current estimated funding requirements and assuming that the company is successful and unwinding the joint ventures that it has targeted for termination and in extending certain joint venture loan maturities, the company believes that the funds in its unrestricted subsidiaries are sufficient to fund its joint venture investment obligations for the foreseeable future.

The purpose of slide 15 is to give you a better sense of our JV portfolio including additional detail on our 10 largest homebuilding and land development joint ventures. All of this information is included in our 10-Q which was filed earlier today for further reference. These 10 ventures represent over 80% of the total combined JV assets and debt. The total leverage of these 10 ventures is less than 48%, while the leverage for all of our JVs is less than 49%. Most importantly, however, is that the total level of JV debt continues to decrease meaningfully. At the end of 2006, it was over $1.12 billion. At the end of 2007, it was $770 million, and at the end of the first quarter, the total amount of JV debt had dropped to $644 million.

Additional JV developments and activity since the beginning of the year include the following: Additional JV re-margin payments of $15.7 million made during the first quarter. There were no JVs consolidated during the first quarter. We unwound our Three Oaks Walnut JV in April through the buyout of our partner’s interest for a cash payment of $39 million and the assumption of $45 million in project debt. We feel that this is a well-located project and that the buyout will reduce future joint venture capital contribution obligations. Further JVs have been targeted for unwind, buyout, or sale of our interest for the purpose of reducing future joint venture capital contribution obligations.

To help position the company to weather the current market downtrend and to be prepared to take advantage of market opportunities when the market strengthens, we are exploring alternative financial and strategic opportunities available to us to provide the company with possible additional liquidity and operating flexibility. These alternatives may include the sale of equity or debt securities, debt exchanges, sale of additional non-core assets, or a merger business combination or sale of the company. This process may or may not result in any prospective future action.

On slide 17, we have included certain data regarding loans originated by our mortgage subsidiary for the current and year earlier periods.

Scott D. Stowell

On slide 18, we see that the net new orders company-wide excluding joint ventures and discontinued operations for the 2008 first quarter decreased 30% to 1245 new homes. The company’s consolidated cancellation rate for the 2008 first quarter was 24% compared to 24% in the 2007 first quarter and 37% in the 2007 fourth quarter. The company’s cancellation rate as a percentage of beginning backlog for the first quarter was 31% compared to 23% in the year earlier period.

This increase was primarily the result of a significant decline in our backlog levels. Our absolute sales absorption rates continue to reflect difficult housing conditions in most of our markets resulting from reduced housing affordability and the higher level of homes available for sale in the market place including increasing levels of foreclosure properties. These conditions have been magnified by the tightening of available mortgage credit for homebuyers, including increased pricing for jumbo loans and a substantial reduction in availability of "Alt-A" mortgage products. All of these conditions have resulted in a declining home price environment which has contributed to an erosion of homebuyer confidence and a decrease in the pool of qualified buyers.

Moving to slide 19, our level of spec homes peaked at 12.9 homes per community at the end of June 2006 and has been steadily decreasing since then to a 3-year low of 7.3 per community. During the past several quarters, we intensified our review of spec starts in an effort to balance our corporate inventory objectives with our divisions’ requirement to maintain an appropriate level of homes that can be sold and closed in a relatively short period of time which most buyers prefer today. We will continue to carefully monitor our level of spec starts in an attempt to control the number of completed spec homes companywide.

On slide 20, we show the continued progress that we’ve made over the past two plus years to reduce our lot position. We ended the quarter with under 33,000 lots owned and controlled companywide, down from 57,000 a year ago. Our total lots owned has decreased 45% over the past two years to 21,557. I’ll now turn the presentation back to Jeff for closing remarks and questions.

Jeffrey V. Peterson

In closing, we continue to take productive steps to strengthen our cash position during the first quarter, and we believe that we will be cash flow positive for the year. We will continue to maintain our focus on cash generation and cash management during the remainder of 2008 by a number of steps including generating sales and deliveries by balancing our price, volume, and margin objectives; managing starts; minimizing land acquisitions; reducing land development spending; and aggressively cutting spending with a focus of reducing our overhead rate. Finally, not withstanding all the current challenges presented to us, we continue to maintain a positive focus on selling and delivering high-quality homes and a continued commitment to a high level of customer satisfaction.

That closes our formal presentation. Thank you for your time today. We will now be open for questions.

Question-and-answer Session

Operator

(Operator Instructions) Your first question comes from Ivy Zelman - Zelman and Associates.

Ivy Zelman - Zelman & Associates

With respect to the joint venture debt, can you give us a level of debt right now and also can you help us understand what is available in the unrestricted subsidiary to pay joint venture debt as it comes necessary given the restrictive natures of the pubic debt covenants. You didn’t get your waiver today, so some people will be concerned in two days that it won’t go through. Can you just elaborate why that couldn’t have happened today?

Andy Parnes

On Friday, we did receive the requisite approval percentage of the banks through written consents that they had signed off and accepted the fully negotiated term sheet. We feel that it was just logistically a challenge to get it fully executed and closed prior to today, but a term sheet was circulated to the entire bank group last week. We asked that written consents be provided based on the review of the term sheet subject to the review of the full documentation which is going to be occurring today with a goal of closing it tomorrow, and we did get a very strong positive response through the written consent process on Friday, so we fully anticipate that that will close tomorrow.

With respect to the JV debt, as I indicated, it was $644 million at the end of the quarter. We have unwound a few joint ventures subsequent to the end of the quarter which total somewhere around $75 million of JV debt. There is a few more that are targeted for unwind which also include substantial amounts of debt, so if everything that we’re targeting for unwind occurs, the total debt number would be somewhere around $500 million, and just to give a little bit more color on that $500 million number, $222 million of the $500 million represents non-recourse debt, and the largest component of that is the $180 plus million related to our North Las Vegas JV, again which is purely non-recourse, and I think it’s important to keep in mind that we are not on the hook for all of the debt.

Our partners would be responsible for sharing in those obligations as well, and we have had some extensions with respect to the joint venture loans that we’ve been working on, and all indications are that the banks are still willing to continue to work with us in the normal course, and then your third question was on the size of the restricted payment basket. I can’t remember if it was the size of the restricted payment basket or the amount that we have funded in the unrestricted subsidiaries, but we have a decent amount of money funded in the unrestricted subsidiary. We haven’t specifically disclosed that amount, but as we said, based on what we have unwound, what we anticipate to unwind, and our expectation that the banks will continue to work with us, we think that will last us for the foreseeable future.

Operator

Your next question comes from Michael Rehaut - JP Morgan.

Michael Rehaut - JP Morgan

On the waiver, you expect to get an extension through August 14, 2008, but I was wondering if you could give us any insight into the process as to why you weren’t working towards or maybe you just weren’t able to get more definitive amendments by May 14, 2008, versus ultimately what you are going to be doing is pushing it out another 3 months and what do you hope to achieve or what can change or potentially benefit you by extending this as a waiver for another 3 months instead of getting more definitive amendments today?

Andy Parnes

Well, I think a couple of things. First of all, it’s a very complex process, and as you saw, the terms of the extension include a shift to now borrowing on a secured basis, and I think that was something we talked about on prior calls that we were likely to transition to in connection with moving towards a permanent amendment. While this is a waiver extension, there are also some what I would call permanent amendment aspects associated with it, like transitioning to borrowing on a secured basis, so while we didn’t get a fully negotiated permanent amendment, I think we made some progress in that direction.

We did talk about in both our prepared comments and in our 10-Q that the company is working on pursuing a number of strategic and financial alternatives, all of which would improve our capital structure and our balance sheet, and we want to make sure we get the full benefit of whatever transactions or paths that we go down when we do negotiate the permanent amendment with the bank, so rather than negotiating from a position where we don’t have those fully baked into our capital structure, we wanted to take the time to wet those options, achieve what we can, and then go back to the bank group and renegotiate the amendment.

Michael Rehaut - JP Morgan

Going to the JVs where you had mentioned that there could be several others that could be targeted for an unwind as you did in April with that one JV. If you could give us any sense in terms of how many you are looking at and what the debt assumption is with that and potential cash payments to take out your partner’s interest.

Andy Parnes

So the question was how many are we unwinding or how many are we targeting?

Michael Rehaut - JP Morgan

Yes. If you could just give us maybe you are looking at a certain number, maybe ultimately you won’t actually unwind all of them, but how many are you looking at right now in terms of potentially unwinding and what is the debt assumption and cash payments to partners to get those done?

Andy Parnes

We have unwound two thus far, one which was our Walnut joint venture that we essentially paid our partner their capital and we assumed the debt. That is now on our balance sheet. That’s the project located in LA County called our Walnut JV which we feel is a very good asset. There was another smaller JV up in Ventura County that we unwound. We are also buying that asset.

There are three others that we are currently working on right now - two of which we expect will close this week and the other one, our expectation is that it will happen within the next week or two as well. Again, there are still some negotiations left, but right now, that is the pool of JVs that we are talking about, and there could be others, but those five are what we are focused on right now.

It did take some cash to unwind those JVs that we had not previously reflected in our cash projections, but with that being said, we did make some comments on the call that we still expect to be cash flow positive for the year, and we do expect to be modestly cash flow positive for the balance of the year, and that’s even after taking out the balance of the ‘08 so while it did consume some cash, it still won’t detract our ability to generate cash during the balance of the year.

Operator

Your next question comes from David Goldberg - UBS.

David Goldberg – UBS

My first question is about the unsold, in-progress, and completed specs, and I think on the slide it said like 47% was in progress and unsold and if you add on the completed info, I think it’s around 75% to 76%, and I guess the first question is for the stuff that is in progress and unsold, can you give us an idea how much cash you might have to invest in that to get those to completed levels and maybe where on average you are on that?

Andy Parnes

I don’t think we track it to that level. You are talking about the 969 or so. I don’t have that information. My guess is you could probably just assume on average they’re halfway done, but I really don’t have that.

David Goldberg – UBS

It seems like a high level of unsold, completed, and finished at 75%. Is that just despite the fact that cancellation rate is seeming to level off or even come down a little bit? Is there any reason for that or is it just trying to work [inaudible]?

Andy Parnes

To us, what’s more important to measure is not how many unsold specs we have under construction but how many unsold and completed homes we have, because the market dynamic today is such that buyers are looking for shorter escrows, and that actually works to our advantage as well—just keeping that window as short as possible, I think, has helped us manage our CAN rate down, so our completed and unsold homes have been steadily declining.

We’re at a little over 500. We were at 700 at the end of the year, so to me, that’s the better measure. We do need to keep some level of spec homes under construction. That is just the dynamic of the market we are in right now. I would say in more normal market conditions people are buying at the beginning of the construction process, and the percentage of specs that we have under construction will be lower, but today, we are carefully balancing that.

David Goldberg – UBS

Andy, I think you said before in terms of buying out the JVs potentially, you were talking about I think slowing some of the cash flow once you bought them out. Is that right? Is that just slowing down the investment? I believe that was the comment you made earlier in the prepared comments. Is that true?

Andy Parnes

Yes, exactly, in terms of just the dollars we’re spending to develop land, we are managing that very carefully. We have accelerated some of the lot takedowns from our JVs as a way of managing the amount of cash that would be going into the JV. Buying lots out of a JV is not a restricted investment or restricted payment since we are getting an asset in return for that, so by accelerating lot takedowns, that does minimize or at least reduce the amount of cash we may have to otherwise invest in the joint venture.

Operator

Your next question comes from Carl Reichardt - Wachovia.

Carl Reichardt – Wachovia

Andy, I know the Q’s came out, but what you have in dollars and models on balance sheet right now and whether or not you’ve taken any write-downs against those?

Andy Parnes

We’ve got $160 million of models at the end of March, and I don’t know if we specifically impaired models. If they are in a project that has been impaired, there could have been some impairments related to models. When we take an impairment, it really is project based. We are not looking at it lot by lot, so the answer is yes, we’ve probably taken some impairments on models, but again, we just don’t look at those as an asset class on their own.

Carl Reichardt – Wachovia

And then, when I’m thinking about that just a second question in the context of what’s the maximum you can collateralize now, because I know that there are models plus I think it was $75 million plus there is some debate or whatever the word is about language in the bonded indentures. Can you give me a sense of what you believe right now is the maximum that you can collateralize under the proposed amendment?

Andy Parnes

Well, with the banks, as the amendment currently stands or proposed, we will collateralize our models and then we will be providing collateral on completed homes and finished plots, but only to the extent of $75 million worth of borrowing, so again the way the current facility stands, we will have $75 million dollars of borrowing that will be secured by finished lots and finished homes and then another pool which will be represented by our models.

Operator

Your next question comes from Joel Locker - FBN Securities.

Joel Locker - FBN Securities

Just was looking at your SG&A being around $79 million. What would you contribute, I don’t know if you mentioned about this, but what percentage of that is head count and what percentage is actually selling expenses?

Andy Parnes

Of the $79 million, $45 million is G&A and $35 million would be sales and marketing.

Joel Locker - FBN Securities

Impairment reversals in first quarter, do you have a number for that, at least from previous quarters?

Andy Parnes

It looks like $39 million. I have got here our homebuilding growth margin would have been around 4% if we get backed out the impairments, and that compares to the 15.2% number that we disclosed.

Operator

Your next question comes from Timothy Jones - Washerman and Associates.

Timothy Jones - Washerman and Associates.

The first question is, you said that you had $229 million of cash flow and that you intended to be cash flow positive for the rest of the year including I think you said paying off the $100 million of debt. Basically then, weren’t you in the last call saying that you expected to be about $100 million cash flow positive. Aren’t you basically raising this to about by another $150 million?

Andy Parnes

I don’t recall us giving a specific number for the year. I think we said at year-end when we had our call that we were going to be cash flow positive for the full year even after paying off the notes, and I think we are essentially saying the same thing. I don’t think we gave any specific numbers.

Timothy Jones - Washerman and Associates

But you say you are not really raising it from what you did before?

Andy Parnes

No. With the unwinds of the JVs, that is going to consume some cash that you know we had not reflected in our original cash flows.

Timothy Jones - Washerman and Associates

The other thing is somebody mentioned that your spec inventories and completed inventories, completed inventories actually were up about 20 units and you said there were around 969 and 620 some in uncompleted. 7.3 per community is still incredibly high. Usually, the worst you want to have is like one finished unit and 2 under construction. Why haven’t you brought that number down further?

Andy Parnes

The completed number of 537, that’s about 2-1/2 per community. From our perspective, that’s not a bad number. That’s, I’d say, pretty normal for us. In a lot of our markets, our buyers are looking for completed homes. We have always had a higher number of completed and unsold homes in markets like Texas, in the Carolinas, Colorado, and Arizona because they have a lot of relocation buyers, people who are looking to move in pretty quickly, so having an average of 2 to 2-1/2 of completed homes per project, from our perspective, that’s not an excessive number, and then the 7.3 – yes, if you back out the completed, that is about 5 specs under construction, but if you are looking at a 5- to 6-month construction cycle time, that gives us plenty of time to get those homes sold before they are completed.

Operator

Your next question comes from Alex Barron - Agency Trading Group.

Alex Barron – Agency Trading Group

Hi I wanted to ask you how many communities have been impaired since the beginning of this whole process at least one time - what percentage of your total community?

Andy Parnes

We have got the slide that shows percentage of our lots, and the vast majority of our communities have been impaired. I’m trying to think of the total number of communities we have opened, and unsold is probably around 300 plus. Again, I would say a good majority of those communities have been impaired. I just don’t have the exact numbers.

Alex Barron – Agency Trading Group

The other question I wanted to ask you is that at this point, based on what you are seeing in your various markets, are you feeling that there is more pricing pressure in the market due to what other home builders are doing or based on what foreclosures and those kinds of things? What is impacting you the most you think?

Scott D. Stowell

Our view is that there will continue to be pricing pressure in all of our markets for the remainder of the year.

Operator

Your next question comes from Susan Berliner - Bear Stearns.

Susan Berliner - Bear Stearns

Andy, I was wondering if you could talk about your mortgage operations. With the bank lines expiring, exactly how you are going to go about financing that and if that could potentially turn into a joint venture? The second question would be in terms of cash flow, what are you thinking about in terms of land sales or getting out of additional markets?

Andy Parnes

On the first question, regarding our mortgage operations, the market has gotten very difficult to continue to secure traditional warehouse facilities, and our facilities that we had in place expired at the end of April, and we are looking for alternative sources. We do have some opportunities to explore finding more permanent warehouse financing opportunities, but in the meantime, what we’re doing is we’re transitioning our business model to brokering all of our loans in the meantime.

We have been brokering all of our jumbo and other nonconforming loans because those have not been eligible collateral under warehouse facilities, so on an interim basis, we are brokering all of our business, but at the same time, we are looking for replacement facilities. With all of that being said, this has not had an impact on our ability to sell homes, so it’s been relatively seamless from an operating perspective.

With respect to land sales and exiting additional markets, that’s an ongoing process. We didn’t have a lot in land sales in the first quarter; we do have some assets that are targeted for sale this year. I think we indicated on our year-end call that the amount of land sales that we were planning on for this year was going to be substantially lower than what it was last year, and that’s still our plan, and with respect to exiting markets, that’s something we continually evaluate. We didn’t do anything this particular quarter, but as we look to right size the organization, we will evaluate that, but I would say for the most part, we like the footprint that we have today.

Operator

Your next question comes from Tom Carroll - Imperial Capital.

Tom Carroll - Imperial Capital

Taking a look at your 10-Q, it looks like you have about $46 million held at your unrestricted subsidiaries. As I look at that number, is that what we are looking at that you will have to handle some of the JV obligations now that your restricted payment bucket is extinguished?

Andy Parnes

Yes, those are our unrestricted subsidiaries.

Tom Carroll - Imperial Capital

As far as your loan to value payments, I know that we had a target for this year. Can you update that for us? I know we did $15 million this last quarter. Where do we see those shaking out the rest of the year, with some of the unwinding and some of the situation there?

Andy Parnes

We haven’t given a specific number, but with the unwinds that we’ve accomplished and that we’re targeting, that number should be lower than what we have talked about previously.

Operator

Your next question comes from James Wilson - JMP Securities.

James Wilson - JMP Securities

Could you give us some color on margins and backlog? Obviously, I got your margins excluding impairments for the quarter, but what do they look like at this point? Just trying to identify what else you might have seen in pricing impact?

Andy Parnes

The margin for the first quarter excluding impairments was around 15%, so give or take a few percentage points. That’s probably where we are going to be.

James Wilson - JMP Securities

Your SG&A, obviously the revenues have dropped, and that ratio now is looking pretty high as percentage of revenues, anything else on the cost reduction side of things at the corporate or regional level? Obviously I know you are targeting exiting a market or two here or there, but what target you can give? Where do you think that can go across the rest of the year?

Andy Parnes

Historically, our first quarter is always the highest just because we have our lowest revenue total during the quarter, so that 22% number is not indicative of what we are going to generate for the full year. I think it’ll be somewhere in the mid to high teens as opposed to low 20s, and as we get towards the fourth quarter, where we have our higher delivery total, that percentage will be down quite a bit. With that being said, we are very focused on our entire overhead structure. We think we’ve made very good progress in rightsizing our headcount, but we are looking at every line item in our budget to make sure that everything we spend is absolutely necessary, so we are not done and there is more.

Operator

Your next question comes from Eva Young - Independence United.

Cheryl Van Winkle - Independence United

Could you clarify what your community count average was for the quarter and what it was at the end of the quarter?

Andy Parnes

I think we ended the quarter with around 205, and our average was right around that.

Cheryl Van Winkle - Independence United

Right now, it’s sort of an open question where are you headed for the rest of the year. In another words, if it will be stable or if it will be down?

Andy Parnes

It will be down. We’re going to be opening a lot fewer communities this year than we did last year, so you will see that trend in the downward slope.

Operator

Your next question comes from Scott Cavanaugh - Merrill Lynch.

Scott Cavanaugh– Merrill Lynch

Just a question on your senior debt - is it at this point secured or we have to wait till tomorrow when you plan to get it signed?

Andy Parnes

The way the amendment will be structured, only new borrowings and new LCs under the revolver will be secured, so the existing borrowings will remain unsecured. We have $90 million under the revolver, $100 million under the term loan A. Those borrowings will remain unsecured, so anything that we draw upon going forward will be secured based upon the 90-day waiver and amendment.

Scott Cavanaugh– Merrill Lynch

I mean the senior debt?

Andy Parnes

I am sorry, the public debt??

Scott Cavanaugh– Merrill Lynch

Yes, the public debt.

Andy Parnes

Yes, that will continue to remain unsecured.

Operator

Your next question comes from James Eustice - Churchill Pacific.

James Eustice - Churchill Pacific

Did you say for the rest of the year what you are going to spend of JVs to purchase them out or such?

Andy Parnes

We didn’t give any specific numbers on re-margins or unwinds.

James Eustice - Churchill Pacific

And just on the security that you are issuing for this new revolver, are there any other covenants that within the senior notes that that is going to be a problem going forward or this will be the carve-outs of that amendment you’ve been talking about?

Andy Parnes

The security that we will be providing to the banks works within the carve-outs of the senior notes.

James Eustice - Churchill Pacific

You got my question.

Andy Parnes

We are working within the confines of the public note lien carve-outs.

Operator

Your next question comes from Chris Sipple - Blue Lion Capital.

Chris Sipple - Blue Lion Capitals

Can you talk about the collateral you’re going to have to put up? Is that on future borrowings or existing borrowings?

Andy Parnes

Future borrowings, the existing borrowings under the revolver and the term loan A will remain unsecured at least during this 90-day waiver extension period, and we will only be providing collateral for new borrowings and new LCs during this 90-day waiver period.

Chris Sipple - Blue Lion Capitals

What kind of advance rate would you get on this collateral if you’re putting up $160 million of models and $75 million of other? How much can you borrow against that?

Andy Parnes

It varies by category. It is much higher for the models and finished homes and then it is lower for the finished lots.

Operator

Your next question comes from Scott Cavanaugh - Merrill Lynch.

Scott Cavanaugh - Merrill Lynch

It says the senior indebtedness will be secured on equal ratable basis. Could you explain that? There seems to be some confusion on whether the senior public debt has to be secured versus just the credit facility.

Andy Parnes

There is some existing collateral that in the form of our subsidiary shares - subsidiary stock - that is pledged as collateral to the public senior notes, the term loan A, the term loan B, and the revolver, so I think that may be what you are referring to, and that is the only collateral that is being shared ratably amongst all the various debt classes, and then what we are talking about here is real estate collateral being used as security for the revolver borrowings and that does not need to be shared ratably with the public senior notes. There are carve-outs within the public notes that allow us to provide some collateral to the banks and not having it shared ratably.

Operator

Your next question comes from Joel Locker - FBN Securities.

Joel Locker - FBN Securities

Just wanted to see how many of your own lots and JV loss were finished completely?

Andy Parnes

Of our owned lots, about 70% are finished, so the rest would be raw, and the 30% that are raw, we are really not doing much with those lots right now. Most of those lots would represent lots that we’ve kind put on the back burner.

Joel Locker - FBN Securities.

Do you have any in between? So there is 70% completely finished and 30% raw. There are none that are partially?

Andy Parnes

It’s really a couple of percent.

Joel Locker - FBN Securities.

Just a couple of percent?

Andy Parnes

Very little is under development. We have the bulk of what we need, and the lots that we take out of our JVs, when those are purchased, those are finished, and so if you look at our JVs, the percentage of those lots that are finished is lower. I don’t have the exact numbers here, but is probably less than 50% or finished in the JVs so that is where you have a little bit more development activity going on.

Operator

Your next question comes from Timothy Jones - Washerman and Associates.

Timothy Jones - Washerman and Associates

Did you say what your available borrowing base is right now?

Andy Parnes

We didn’t. We took that out Tim because during this 90-day waiver extension period, the borrowing base is suspended, so we normally would have provided that information, but we didn’t.

Timothy Jones - Washerman and Associates.

Now you said that if you continue to unwind some of these JVs that you’d have $500 million of debt in the second quarter - did you say of which $222 would be nonrecourse?

Andy Parnes

That’s correct.

Timothy Jones - Washerman and Associates.

So, [inaudible] under $300 million right?

Andy Parnes

That’s right.

Timothy Jones - Washerman and Associates.

North Las Vegas, is that recourse or non-recourse?

Andy Parnes

Yes. That is the vast majority of the $222 million of non-recourse. That is purely non-recourse, so that is $180 and change of the $222 of non-recourse.

Operator

Your next question comes from Chris Sipple - Blue Lion Capital.

Chris Sipple - Blue Lion Capital

In terms of the advance rates getting on the collateral both the model and other, can you help quantify the amount- are we talking 80 cents on the dollar, 60 cents on the dollar?

Andy Parnes

The models and the finished homes will be 90%, the finished lots 65%.

Operator

Your next question comes from Mike Glickman - UBS.

Mike Glickman - UBS

Under your current bond agreements, you have some stuff that restricts your ability to pledge collaterals with banks. Are you saying that working within the confines of those restrictions, you are allowed to pledge up to $75 million of collateral plus and new amounts from the new model homes?

Andy Parnes

Yes. There is a separate basket for model homes, and there are actually a few different baskets depending upon which indenture you are looking at that ranges anywhere from $75 to $100 million of indebtedness that can be secured, so we are really working within those two separate baskets.

Operator

Your next question comes from Alex Barron - Agency Trading Group.

Alex Barron - Agency Trading Group

I just wanted to clarify what is the maximum you could borrow on this secured basis going forward, and how do you allocate what real estate goes to that versus what does not?

Andy Parnes

The model basket is the models of $160 million that we have, and then we can use finished lots and finished homes to secure another $75 million of borrowings, and we haven’t decided which assets we are going to use for the $75 million.

We clearly have significant multiple of assets relative to that $75 million, so we got more than enough collateral for that, but the other thing to keep in mind too is that the way this amendment and extension works, we can only borrow to the extent we have cash in our balance sheet of less than $300 million, so looking at it as of March 31, 2008, we had over $300 million of cash on our balance sheet, so we would not be able to borrow under this waiver extension. To the extent our cash drops below $300 million, the difference between the cash balance and $300 million would be available to us for borrowing on a secured basis.

Alex Barron - Agency Trading Group

Did you mention how much you got in the tax refund already?

Andy Parnes

That was $235 million, and we did receive that back in February.

Operator

We will go to [inaudible] of Credit Suisse.

Unknown analyst - Credit Suisse

I’ve been hearing in the market place that lot of the large banks are asking for updated appraisal information on the underlying collateral for their loans and to the extent there is any meaningful degradation in that collateral, you have to post additional collateral to be able to borrow. Can you just comment on that? You have been seeing that from your bank group and what is it exactly happening out there in the market place given the weakness in home prices and certainly land prices and how are the banks responding to that to their customers?

Andy Parnes

The only appraisal experience we have is with our JVs. Up to this point, all of the borrowings that we have made on our own balance sheet have been on an unsecured basis, and we haven’t had to get our assets appraised, but we have seen appraisals at the JV level and that is really what triggers the margin payments, and we have been making those, so there have been some declines in value based on those appraisals. Going forward with the new structure of our facility, being that certain amounts that we are going to borrow, if we borrow on a secured basis, we will have to get appraisals on the assets that are pledged as collateral.

Operator

Your next question comes from Larry Taylor - Credit Suisse.

Larry Taylor - Credit Suisse

I wonder if you could comment on working capital usage relative to normal seasonality. This is obviously anything but a normal year. How do you think that is likely to play out this year compared to what we have been normally seeing? Just in terms of seasonality and working capital usage as you go through the year, how is it likely to compare to a normal year?

Andy Parnes

There is still a seasonal aspect to our order patterns for the year which is going to result in, I would say, somewhat a normal seasonal pattern with respect to our deliveries. Based on our plan right now, our first quarter is going to be our lowest delivery level, and our fourth quarter will be our highest delivery level, which means now we’re spending more than we’re bringing in, and as we move through the balance of the year, we will bring in more than we spend, so our anticipation is that there is still going to be that typical cash flow dynamic.

Operator

Your next question comes from Phillip Pennell - Turnberry Capital.

Phillip Pennell - Turnberry Capital

Andy, in terms of the new revolver and the security, you mentioned that you could not draw if you had cash of $300 million. Is that inclusive of any additional draws, so if you went to $299 million of cash, could you fully draw down everything that is available on the secured part of the new revolver or would you draw $1 million, you will be back to $300, you have to wait until we go under $300 again?

Andy Parnes

Yes, the latter.

Phillip Pennell - Turnberry Capital

So, it inclusive of new borrowing?

Andy Parnes

That’s correct.

Operator

At this time, there are no other questions in the queue.

Jeffrey V. Peterson

I would like to thank you all for your time today. Again, I’d encourage you to feel free to revisit our website or any information with respect to the web call, and with that, thank you very much.

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