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The Ryland Group, Inc. (NYSE:RYL)

Q2 2008 Earnings Call Transcript

July 24, 2008 12:00 pm ET

Executives

Drew Mackintosh – VP, IR

Chad Dreier – Chairman, President, and CEO

Dave Fristoe – SVP, Controller and Chief Accounting Officer

Larry Nicholson – COO

Analysts

Dan Oppenheim – Credit Suisse

Nishu Sood – Deutsche Bank

Joel Locker – FBN Securities

Megan McGrath – Lehman Brothers

David Goldberg – UBS

Michael Rehaut – JP Morgan

Ivy Zelman – Zelman & Associates

Alex Barron – Agency Trading Group

Jay McCanless – FTN Midwest

John Emrich – Ironworks Capital

Carl Reichardt – Wachovia Securities

Chris Hussey – Goldman Sachs

Richard Fitzimmon [ph] – Fitz Creek [ph]

Tim Millway [ph] – Black Rock Capital

Randy Raisman – Durham

Susan Berliner – JP Morgan

Operator

Good day, ladies and gentlemen, and welcome to the Ryland Group second quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions following at that time. (Operator instructions)

And now ladies and gentleman, your host for today’s conference, Drew Mackintosh, Vice-President of Investor Relations. Sir, please begin.

Drew Mackintosh

Thanks. Good morning and welcome to Ryland’s second quarter 2008 earnings conference call. Today's call is being transmitted live over the Internet and can be accessed through Ryland's Investor Relations section of the website at www.ryland.com.

In a moment, I'll be turning over the conference call to Chad Dreier, Ryland's Chairman, President, and Chief Executive Officer. Also joining us today are Larry Nicholson, Executive Vice President and Chief Operating Officer; Gordon Milne, Executive Vice President and Chief Financial Officer; and Dave Fristoe, Senior Vice President and Controller.

Before we begin, please be aware that certain statements in this conference call are forward-looking statements based on assumptions and uncertainties that include the completion and profitability of sales, changes in economic conditions, mortgage lending markets, cost and pricing, and interest rates, consumer confidence, and general housing market conditions and general economic business and competitive factors as well as the factors set forth in the company’s press release. These factors and others may cause actual results to differ from the statements made in this conference call.

With that out of the way, I will now turn the call over to Chad Dreier.

Chad Dreier

Thanks Drew. Hello to everybody and thanks for joining the call. As I am sure you could tell, the second quarter of 2008 proved to be another very difficult quarter for the homebuilding industry in general and Ryland in specific. Due to pre-tax charges associated with our inventory and valuation allowances related to our differed tax assets we recorded a per share loss of $5.72 in the period. Taking these hits was an unfortunate but necessary step in working our way through the current contraction in our industry. Eventually, these charges will aid our return to profitability when things do improve, but for now accounting rules compel us and other homebuilders to recognize their impact on the income statement and the balance sheet.

It was not all doom and gloom in the quarter. We generated $37 million in cash on operations. We trimmed our SG&A expense as a percent of revenue and improved our gross margins compared to the first quarter of 2008. We successfully amended our credit facility providing us with a greater cushion with respect to our covenants and we are taking market share in a majority of our markets as evidenced by the 29% increase in our backlog since the start of the year. These achievements are testament to our business model that focuses as our return on capital, geographic diversification, and balance sheet conservatism.

At the conclusion of the call, I will talk about how Ryland will benefit from this evolving housing market, but first here are some of the details from the quarter.

New orders for the second quarter came in at 2045 homes, a 19% decline compared to last year. Factoring in 20% drop in community count from the second quarter of last year, new orders were essentially flat on a per community basis. Our divisions in Texas fared the best with a narrow 2% drop in unit sales. Divisions that experienced positive year over year sales trends were Houston, San Antonio, Las Vegas and Charleston, South Carolina.

Our cancellation rate of 29% in the second quarter was up slightly compared to the first quarter, but still on improvement over last year’s 34% cancellation rate. We closed 1828 homes in the second quarter at an average closing price of $254 000. Divisions that posted positive year over year closing were Indianapolis, Phoenix, Charleston and Jacksonville, Florida.

I hesitate to call any of the markets where we show positive sales or closings as strong homebuilding markets. Some like Charleston, Indianapolis and Houston are performing better than other markets in the country. Others like Las Vegas and Phoenix have been stimulated by price discounts that spurred buyers to act. Every market faces its own unique challenges and it’s up to us to find the right balance between price and volume.

While a number of our competitors have seen our backlogs decline year over year to date, ours has grown. For the second consecutive quarter, we were able to increase our backlog on a sequential basis. Our backlog at the end of June stood at 3702 units, up 6% from the end of March. We’ve done this by managing to stick to our to-be-built strategy. Our spec count at the end of the quarter was 680, with a breakdown of 256 finished and 424 unfinished homes.

Gross profit margins excluding impairments were 12.5% during the second quarter compared to 11.9% in the first quarter. SG&A as a percent of homebuilding revenue also came down in the period to 14% versus 16% earlier this year.

The current environment favors builders who know how to turn assets quickly and adjust their cost structure to minimize losses and ultimately return to profitability. We intend to prove that Ryland is one of those builders.

Turning to the balance sheet, we took several steps in the quarter to ensure that we maintain our strong financial position. We ended the quarter with roughly $200 million of cash and no borrowings outstanding on a revolving credit facility.

In June, we paid off the remaining $50 million of a senior note that had matured for payment. Our next bond maturity does not occur until 2012.

Debt to total capital at the end of the period was 48% and net debt to capital was 41%. At the end of the second quarter, we controlled 32,352 lots with a breakdown of 24,322 owned and 8030 optioned. This represents a 40% decline in controlled lots compared to the second quarter of 2007.

Total inventory at the end of June stood at $1.5 billion. We took $180 million pretax charge associated with land valuation adjustments, joint venture impairments and the abandonment of options; two large projects, one in Chicago and one in Orlando, accounted for nearly half of these charges. Imbedded in $180 million pretax charge is a $36 million joint venture impairment. Now that we have written off the equity in our two large joint ventures, one in Nevada and one in Chicago, we think the likelihood of future joint venture impairments is small.

The other significant charge in the quarter was $124 million reduction to the company’s deferred tax asset, which was reflected as a charged income tax expense. These charges along with the land valuation adjustments are noncash charges. As a result, the company was successful in reporting operating positive cash flow for the period of $37 million. The tax charge and the inventory impairments did however have a material impact on our equity which resulted in another amendment to our credit facility. We worked with the bank group to successful negotiate reasonable financial covenants reflecting our current and expected future performance while maintaining $550 million line of credit.

Ryland’s financial services statement which provided mortgage title escrow and insurance services contributed $5.5 million of pretax earnings in the second quarter. Our mortgage company secured loans for 85% of our home buyers in the quarter and the average FICO score for these loans was 710, and the average combined loan-to-value was 90%. Despite all the negativities surrounding the mortgage industry, we have not experienced a significant change in our ability to market the loans we originate which are exclusively conventional and government insured loans.

Fannie Mae and Freddie Mac continue to buy loans that conform to their standards although stricter underwriting guidelines from the mortgage insurers may make these loans harder for the home buyer to obtain. As a result, our mortgage group and us believe that we will continue to see a shift to government insured product, which made up 45% of our loan volume in the quarter.

The acquisition of Countrywide by Banc of America closed earlier this month. And so far, the transition has not affected the way we do business with them. In addition, we continue to expand our relationship with Guaranty Bank. The $40 million warehouse facility we have in place with Guaranty gives us the ability to sell our loans to a number of buyers. Our financial services statement has done a great job of navigating through these uncertain times and remains a best in class operation for us.

As the housing market continued its downward trend in the second quarter, Ryland reacted accordingly and adjusted to the changes. Headcount, inventory and community count are down from the second quarter of last year.

The focus for the remainder of 2008 is on generating cash with an eye towards profitability. This means staying competitive in the marketplace without overacting to decline and sales pricing. We averaged two sales per month on a community basis in the first quarter and we were able to sustain that pace in the second quarter while the keeping the average closing price relatively flat. If we can continue this trend, keep cancellations to a minimum and deliver on our existing backlog, we will enter 2009 in good shape.

In addition to the cash we are generating, we expect to receive a substantial tax refund in the first quarter of 2009 further enhancing our liquidity position. When land reaches a competitive pricing level, we expect to see land deals in attractive locations that meet our hurdle rates, and we will be in a position to take advantage of these opportunities.

Until then, we continue to work down our existing land position and take down options when it makes financial sense to do so. We have plenty of land in the best markets in the country that will likely lead to recovery in housing. This geographic diversification along with our strong balance sheet and return on capital focus will enable us to take advantage of the opportunities that will inevitably arise from this housing downturn.

That concludes my prepared remarks, and I am guessing there will be a few questions and we will be happy to answer them.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Dan Oppenheim of Credit Suisse.

Dan Oppenheim – Credit Suisse

Thanks very much. Just hearing comments about the focus on turning inventory and your slot sales per community during the quarter, sounds like a slight shift in strategy for you. As we look forward, should we continue to expect community counts come down by 20% rate looking forward, will the focus will be on keeping the sales per community at that level and so just pushing the absorption in the cash flow there?

Chad Dreier

Well, I am not the world’s biggest fan of community account. I would say on the second part of the question, I mean, two sales per community sort of not a very good performance in terms of getting the hurdle rates on IRs and some stuff like that. I mean, in a better market, we would expect or want to do a lot better on that. I would say we are intentionally dropping community account, but what’s really happening there is we’re not buying new land parcels and opening new communities to community accounts going down.

Dan Oppenheim – Credit Suisse

(inaudible) differently this quarter in looking at impairments to – or this market focus on sales which resulted in, and was there anything different in terms of your assumptions that went in to that as you look at the impairments?

Chad Dreier

I mean, the accounting rules are the accounting rules and I wouldn’t say we did anything different on that.

Operator

Thank you. Our next question is from Nishu Sood of Deutsche Bank. Your line is open.

Nishu Sood – Deutsche Bank

Thanks. First question on the JV write-offs, thanks for the details you already provided on that. I just wanted to go for the accounting, but the write-off was $36 million, your equity balance from your last Q was $24 million, $25 million or so. So, I just want to understand the difference there, was that related to deck guarantees or completion guarantees?

Chad Dreier

Well, actually, I am an old accountant, so I actually did T accounts on this and we did write off the equity and have basically reserved, for lack of another word, on anything else that might come out of the joint venture.

Nishu Sood – Deutsche Bank

Got it. So nothing yet, just a future reserve?

Chad Dreier

Right.

Nishu Sood – Deutsche Bank

Okay, and second question I wanted to ask was on your debt paydowns, obviously your June of ’08 maturity is behind us now, the next one is not until 2012, is your focus now in terms of your cash flow just going to be kind of shoring up that cash balance, are you going to continue to bring in your debt a bit, what are you thinking about doing you’re your dividend in terms of preserving cash flow, so how are you thinking about all these things?

Chad Dreier

Well on the first one, yes, we wouldn’t have any intent to buy down any of those debt. Like I think we said, it is not due till 2012, so that $750 million. So we wouldn’t do anything on that. The dividend, we’re paying $0.12 a quarter and we wouldn’t have any intention of changing that, but we did, we haven’t changed it and unless things change drastically, we wouldn’t consider that either. I think that is like 5 or 6 point a quarter, about $0.12 on 42 million shares or so.

Nishu Sood – Deutsche Bank

Okay, thanks.

Operator

Thank you. Our next question is from Joel Locker of FBN Securities. Your line is open.

Joel Locker – FBN Securities

Yes, I just wanted to talk to you about Texas a little bit. Just noticed the orders were only down 2% year over year and much better than the company. Was that a factor of community account or was that just overall Texas still a lot stronger year over year than the other markets?

Chad Dreier

Well, I think it’s once again not the community account. Don't let reality and community account mix you up, but the fact of the matter is Texas never has had – never had the kind of price appreciation that the other parts of the country had. It is still a much lower average price, I assume that’s in our site [ph].

Joel Locker – FBN Securities

Right.

Chad Dreier

And with the result of oil in Houston and a few other things, my guess is their economy is a little better there. So, I mean I think let me put all three of those things together. It’s a little easier to sell houses in Texas than in California.

Joel Locker – FBN Securities

Right. And just to follow up, the 6.5% increase in order price in Texas for orders, is that mostly organic or was that just something on the mix issue?

Chad Dreier

I would say primarily mix.

Joel Locker – FBN Securities

Primarily mix. All right, thanks a lot.

Chad Dreier

Okay.

Operator

Thank you. Our next question is from Megan McGrath of Lehman Brothers. Your line is open.

Megan McGrath – Lehman Brothers

Hi, thanks. I guess I wanted to follow up on the write-offs a little bit. I realize there’s a danger in looking at ASPs because it means that there does seem to be a disconnect with your ASPs which are done 1% than the level of write-downs that you took. So, could you give us just a little more color on what areas got worse between this quarter and last, and maybe a little on the two large projects that you mentioned?

Chad Dreier

In the past, most of our – I am using general numbers here, so most of our write-downs had been in the West, which we could – California, Las Vegas, Phoenix. This time, we – I think in my opinion and I can be overruled on this, is most of that has spread farther back to the Midwest and to the South and for us to be the Mid-Atlantic. The big write-off, the $36 million we mentioned was a joint venture in Chicago and that market has really dropped. We were – I think the number permits has declined just staggeringly in Chicago. And we haven’t moved houses there, we didn't move any in the first, say, five months of the year, so we made a decision that we really needed to write down. The second big piece that we mentioned, and Larry might have told me, is in Orlando. So, the Florida market I think is fair to say, Fort Myers, Tampa, Orlando has suffered significantly. So, those were the two biggest. The rest were odds and ends. Another one in Las Vegas, we wrote down a deal in Northern California that we’re trying to sell. We wrote down a little bit, Charleston in spite of how (inaudible) we took an impairment. And in addition to that, there were some part of 180 was we walked away from some options and stuff like that.

Megan McGrath – Lehman Brothers

Okay. Just a point of clarification on Chicago, was your only write-down the $36 million JV or was there another incremental write-down that wasn’t JV related?

Gordon Milne

About $10 million additional in Chicago over and above the $36 million JV, but also there was $16 million related to the same lots taken out of JV, so total in Chicago other than the JV was $26 million.

Megan McGrath – Lehman Brothers

Okay. And can you just give us the level of incentives that you have this quarter?

Gordon Milne

About 15%.

Chad Dreier

Yes. I don’t think that’s significantly different than the first quarter.

Gordon Milne

Down about a point.

Chad Dreier

Down, did you hear that, down about a point, so 15% and we used 16% in the first quarter.

Operator

Thank you. Our next question is from David Goldberg of UBS. Your line is open.

David Goldberg – UBS

Thanks, good morning. First question, Chad, I guess somewhat theoretical here, talking about land and land prices coming down and increased distress possibly amongst small private and local banks. I guess my questions is what do you think is going to be catalyst for that to start happening and what do you guys monitoring to try to get an idea that would be kind of an early indication when that’s going to start, went out on [ph] the market?

Chad Dreier

Well, actually, Larry just showed me a – I don’t think a press release or just something yesterday that one of the bigger builders in Indianapolis just filed bankruptcy. So, I mean I think you’re starting to see more of those low to middle size builders, we don't want to characterized that, I mean if you combine that, there was an article on yesterday's Wall Street Journal that a lot of mid range or regional banks, whatever you – however you find that, are just stopping commitments to banks, so I think you are going to see those smaller guys have more and more challenges like that. I mean, I think that land will eventually go back to the banks and without being too critical of the banks, they usually took a long time to put that into an apartment to get that out, so I think it would be a while before you see those deals come back on the market personally.

David Goldberg – UBS

And then, just a quick follow-up, just wondering about, if you're seeing increased pressure from foreclosure sales against – in terms of pricing in your communities, and if you're seeing increased level of foreclosures maybe in adjacent communities that might be causing some problems for you from a pricing standpoint.

Chad Dreier

I'm going let Larry answer that one.

Larry Nicholson

Well, it's definitely headwind I think that it continues to show up everyday. It is affecting appraisal so it is a challenge, but I would tell you we're pretty comfortable with our communities. We don't have a lot of foreclosures in our existing communities and we're just going to have kept fighting it everyday.

David Goldberg – UBS

Okay, thanks.

Operator

Thank you. Our next question is from Michael Rehaut of JP Morgan. Your line is open.

Michael Rehaut – JP Morgan

Hi, thanks. Good morning everyone.

Chad Dreier

Hey.

Michael Rehaut – JP Morgan

The first question, just on down payment assistance, you’d mentioned that FHA insured loans is about 45% of your closings in the quarter. I was wondering if you could just remind us what it was, what the FHA was in 1Q. And also, how many of your closings have the down payment assistance from the nonprofit groups that play in that area for this quarter alone?

Chad Dreier

I don't know off the top of my head what the first quarter FHA was, so we'll have to somehow track that down and either later this call or we'll get you that answer. The second part of your question, I would guess we tried – we (inaudible) answers. We think 18% to 20% of our, say, first half of the year, our backlog is in the down payment assistance.

Michael Rehaut – JP Morgan

Okay. And are you concerned at all with the recent housing bill eliminating these programs? It seems at least anecdotally and also just from the default rates that are associated with these loans that these – good fortune of these buyers might have difficulty finding alternative finance options. Do you have a view in terms of that and in terms of how some of these buyers might be able to find alternative financing or how this might play out for you?

Chad Dreier

Well, I mean, I think it's like so many, but first of all I think all this just happened yesterday, so we do know. But, you know it's not – it’s another thing that's probably not good. It's 20% of your buyers now we have to figure out something else. Sooner or later, something else will happen. I will say I haven't analyzed the bill, but I think part of it was also that there is a $7,500 tax credit. So that will help and the bill applies to everybody, so it's not like it applies to Ryland and not (inaudible) or something like that. So hey, I think it's just one more challenge that we have to deal with and I'm sure the market will figure it out.

Operator

Thank you. Our first question is from Ivy Zelman of Zelman & Associates. Your line is open.

Ivy Zelman – Zelman & Associates

Hey guys, thanks.

Chad Dreier

Hey.

Ivy Zelman – Zelman & Associates

Chad, realizing everyone's struggling in a very challenging market and fortunately you guys are very diversified and not really married to a particular area, and realizing it seems as if the economy is slowing and we're obviously seeing more of the housing woes spreading to other parts of our economy, what do you do in a scenario where if you see another leg down, if you can't sell to a neighborhood and your seeing one in neighborhood, what kind of action can you take strategically to – or do you just kind of continue to shrink the communities and like you were saying before, can you just give me your thought process there?

Chad Dreier

Well, actually, I think the last part of what you said would be the answer. And hypothetically if the market went down another leg, however we define that, it means we probably wouldn't buy anymore land and I think we had 4,200 sales in the first half. If you define that as 3,000 and all of a sudden you're a 6,000-unit builder instead of an 8,000. I think you have to make another overhead correction and probably be even tougher on things that we haven't done yet. Having said that, if – and that's all hypothetical, if you did that, I mean, I think if you were a 6,000-unit builder and you could get half decent margins and you'd be generating a lot of cash flow, you still have a pretty decent business, not like 2005, but I think you could be profitable.

Ivy Zelman – Zelman & Associates

And just moving to a separate sort of idea of how today in some markets you obviously are with the impairments, you're making money with impairments now as those homes – or previous impairments as those homes closed, do you feel like there is some markets, it doesn't even pay to build a house because the land is zero and you can't even cover construction and labor? Do you see any markets like that? I have heard like Central Valley is a market like that. And do you in those scenarios, for cash, you can't even recover your cash flow, are you finding that –?

Chad Dreier

I would say, whoever told you the Central Valley is probably correct.

Ivy Zelman – Zelman & Associates

Are there any other markets like the Central Valley or is this pretty –?

Chad Dreier

I actually, – we have 21 divisions. I would say absent the Central Valley or Northern California, however you want to define that, I would say most all of them were still positive margins and that's – if you go back to your business classes in school, all positive gross margins are making a contribution, so that's the only one I really feel that bad about, that market I mean.

Operator

Thank you. Our next question is from Mario Balo [ph] of Ryland [ph]. Your line is open.

Chad Dreier

Well, maybe we'll go to the next question.

Operator

Our next question is from Alex Barron of the Agency Trading Group. Your line is open.

Alex Barron – Agency Trading Group

Hey Chad. Hey guys.

Chad Dreier

Hi.

Alex Barron – Agency Trading Group

I wanted to ask you, the communities that you currently own or control, like what percent have you guys had an impairment at least once?

Chad Dreier

I'm going to let David respond to that one.

Dave Fristoe

This quarter? 27%.

Alex Barron – Agency Trading Group

I just meant, so 27% of any – okay, got it.

Dave Fristoe

27% of our impairments this quarter are repeats.

Alex Barron – Agency Trading Group

No, no, that wasn't the question. The question is, of all the communities you control, like let's say if you have 500 communities?

Dave Fristoe

Oh, 55%.

Alex Barron – Agency Trading Group

Okay. 55% have had an impairment. Okay, great. And my other question is, when you do these impairments, generally like at what point does the impairment get triggered and then what gross margin kind of results after the impairment? In other words, what gross margin are you getting on those homes after you've impaired these communities? It could be just a range or something.

Dave Fristoe

The range is probably 10% to 18% and it depends on the level of risk that we perceived on the different projects, how large they are, how long go out and any other factor that affects the discount rate.

Operator

Thank you. Our next question is from Jay McCanless of FTN Midwest. Your line is open.

Jay McCanless – FTN Midwest

Hey, good morning.

Chad Dreier

Hi.

Jay McCanless – FTN Midwest

Just wanted a little bit more perspective on the Midwest market, hearing what you all said this morning, impairing the Chicago market and then also doing – listening to other builders' calls and troubles they are having in the Midwest. Just want a little more perspective ground level what's going on there?

Chad Dreier

Well, we would define the Midwest, for Ryland, Chicago, we kind of talked about. Indianapolis, we actually have a pretty good business there and they are actually doing reasonably well. We think we're the number one builder volume-wise now in Indianapolis. Cincinnati, I think we talked about before is – we are exiting that market and it has not gone much. Minneapolis is the other market we're in and the Twin City in the Midwest and that's been a challenging, difficult market. Minneapolis or the Twin Cities was – is or was a higher priced market even than Chicago, and I think you've seen a lot of builders take a hit there in Minneapolis. I think the permits are pretty far down there in Minneapolis and so that's actually all we're in, in the Midwest.

Jay McCanless – FTN Midwest

Okay, thank you. And then my other question, you may have given this out, but headcount, where are you now in headcount and percentage decline relative to the peak?

Chad Dreier

Well, I think our peak was 3,200 and we're now at about 1,725, so that's 45%, 46%, something like that.

Jay McCanless – FTN Midwest

Okay, thank you.

Chad Dreier

Okay.

Operator

Thank you. Our next question is from John Emrich of Ironworks Capital. Your line is open.

John Emrich – Ironworks Capital

Thanks. Could you expand on your comment about owning lots of land in the best markets? I'm wondering what you consider those markets to be, and not just in terms speaking to the geography, what city or SMA there are in, but how – talk about them in light of this, what appears to be a secular move by consumers away from what is now being called commuter's sprawl in favor of smaller units, urban building, public transportation, and things like that? Thank you.

Chad Dreier

Well I think before you buy in to your last statement, you get some facts. But basically in Florida, we’re in Tampa, Orlando, and Jacksonville. So, Florida is and will always be one of the biggest homebuilding markets in the country. So, we feel pretty good about that. We’re in Atlanta, Charleston, and Charlotte. So, those six markets in the southeast are pretty good markets. We feel pretty good about those markets. In the Midwest, as I just talked about. We’re in Indianapolis, Chicago, and Minneapolis. So, those are pretty nice markets. In the Mid-Atlantic, we’re in Baltimore which is the home of the company founded in 1967 there and Northern Virginia, and the government continues to grow no matter who’s in and that’s a pretty nice place to live. So, those are pretty good markets. In Texas, we’re in the four big markets, Austin, Dallas, Houston, and San Antonio. So, those are pretty nice markets. And then in the west, basically, we’re in Denver, Las Vegas, and then Phoenix and Southern California. We don’t have much left in Northern California and we think those are pretty good places to be. So, that’s our 20 or 21 markets.

Operator

Thank you. Our next question is from Carl Reichardt of Wachovia Securities. The line is open.

Carl Reichardt – Wachovia Securities

Hey Chad.

Chad Dreier

Hey.

Carl Reichardt – Wachovia Securities

You’re (inaudible) of the lots that you own, the 24,000 plus, do you have an idea of what percentage of those are finished or have houses on them?

Chad Dreier

There are about 80% to 85% finished.

Carl Reichardt – Wachovia Securities

Good. And then, Chad, can you give me a sense as to what you’ve been seeing in terms of materials costs? And a couple of other builders have been talking a little bit more about commodity price inflation obviously filtering through. I’m just curious what you’re seeing in terms in your directs?

Chad Dreier

I’m going to let Larry respond.

Carl Reichardt – Wachovia Securities

Okay. Good. Thanks.

Larry Nicholson

Hey Carl.

Carl Reichardt – Wachovia Securities

Hey.

Larry Nicholson

I think our guys have done a great job. We’ve seen, in the earlier calls, we talked about all the price reductions we had. And I think we’ve seen that slide [ph]. I think our guys have done a great job of just fighting off price increases. They’re obviously coming on the petroleum side, but I think our goal right now is just to prolong and drywall, it is going to go up. We think we’re in pretty good shape with that for the rest of the year. So, I think right now, we’re just in the defensive mode just to fight off any price increases. There’s going to some, we understand that, we’re just going to try and minimize them. We don’t see a big impact this year.

Carl Reichardt – Wachovia Securities

Okay. I appreciate that. Thanks guys.

Larry Nicholson

Okay, thanks.

Operator

Thank you. Our next question is from Chris Hussey of Goldman Sachs. Your line is open.

Chris Hussey – Goldman Sachs

Thank you guys. Can you just clarify on the inflation side? Are you seeing on a per square foot basis your construction costs are going down or they sort of stabilized now?

Chad Dreier

I would tell you right now they’re about stabilized.

Chris Hussey – Goldman Sachs

Okay. And if oil were to stay up here in this $130 level or whatever it is today, in '09, do you think you have still other things to tweak here that will keep you stable, or at some point you’ve got concern that’s going up [ph]?

Chad Dreier

I think we’ve got a lot of – our larger long-term contracts are locked in with price protection. So, we know what our downside is on a lot of the bigger components. I think obviously, we think we’d see some increases. To tell you what it would be today, I couldn’t give you a good guess.

Chris Hussey – Goldman Sachs

That's fair. And then finally, just on the cash, what cash did you put into joint ventures – you wrote off, but can you quantify how much cash if any you put into joint ventures?

Larry Nicholson

Minimal, less than $0.5 million.

Chad Dreier

We’re not doing many joint ventures right now.

Operator

Thank you. Our next question is from Richard Fitzimmon [ph], Fitz Creek [ph]. Your line is open.

Richard Fitzimmon – Fitz Creek

Hi, just had a question about the new bank agreement or the amendments in the bank agreement. How much room did you give yourself on that $600 million of tangible net worth, and I was wondering whether that number stays the same over the course of the agreement?

Larry Nicholson

Those stay the same over the course of agreement. As of the end of the second quarter, I think we’ve got little over $200 million of room.

Richard Fitzimmon – Fitz Creek

Okay. Alright. Thank you.

Operator

Thank you. Our next question is from Alex Barron of Agency Trading Group. Your line is open.

Alex Barron – Agency Trading Group

Yes, thanks. I wanted to know if you had – what benefit you guys got from previous impairments this quarter either in dollars or in basis points or however you want to put it.

Larry Nicholson

$35 million.

Alex Barron – Agency Trading Group

35?

Larry Nicholson

Yes.

Alex Barron – Agency Trading Group

Okay, great. Thank you very much.

Larry Nicholson

Sure, okay.

Operator

Thank you. Our next question is from Tim Millway [ph] of Black Rock Capital. Your line is open.

Tim Millway – Black Rock Capital

Hi, gentleman. Could you estimate the average cost to bring a lot from raw land to plot [ph] status, particularly in Florida?

Larry Nicholson

I think we have to get back to you on that one.

Chad Dreier

Yes, that’s pretty hard to generalize.

Larry Nicholson

Yes. We’ll get you some information but we don’t have that right here, right now.

Tim Millway – Black Rock Capital

Okay. Thanks.

Operator

Thank you. Our next question is from Randy Raisman of Durham. Your line is open.

Randy Raisman – Durham

Hey, just two questions. With regards to the 15% to 16% incentives that you had referred to earlier on the call, are those actual cash costs that you incur or is that somehow baked into the purchase price? Is it cash cost on top of the materials and labor?

Chad Dreier

No.

Randy Raisman – Durham

And then a second question, maybe you could just address materials and labor as percentage of ASP, how should we think about that?

Chad Dreier

Well, first of all, we don’t bake anything into the sales price, just for the record. Probably some of them are cash and some of them are discounts and options, we’re taking a break. So, it’s probably half cash and half non-cash. What was the second half of the question?

Randy Raisman – Durham

Materials and labor, how much of that as a percent of sales?

Chad Dreier

I can give you a normal world, which I can't tell you that it has anything to do with [ph] today. But if everything was equal, I would say 50%.

Randy Raisman – Durham

And that is pre-incentives, right?

Chad Dreier

Yes. But let's just say if a house was $300,000. The lot was probably $75,000 to $85,000 and the construction is $150,000. So that's $230,000 or something like that. I mean that should give you some ballpark.

Randy Raisman – Durham

Plus incentives in this environment?

Chad Dreier

Yes, correct.

Randy Raisman – Durham

Okay. Thank you.

Operator

Thank you. Our next question is from Susan Berliner of JP Morgan. Your line is open.

Susan Berliner – JP Morgan

Hi. I was wondering if you guys had updated all your cash spend for the year. I think you had given 300 to 325 before.

Chad Dreier

Yes, we are thinking about 280 now, so it is a little lower.

Susan Berliner – JP Morgan

Okay, great. And just other question, can you just update us your thoughts on share repurchases?

Chad Dreier

Well, right now, we are really conserving cash to make sure that we get through this cycle, however people define it. So right now, we would not be purchasing any shares and I think it will be highly unlikely we would do any for the rest of the year.

Susan Berliner – JP Morgan

Great, thanks very much.

Chad Dreier

Okay.

Operator

Thank you. And I show no further questions at this time.

Chad Dreier

Okay. Hey, obviously, it is a challenging the environment. We will talk to you next quarter. Thanks, bye-bye.

Operator

Ladies and gentleman, thank you for your participation in today's conference. This does conclude the program. You may now disconnect and everyone have a great day.

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