Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Donald J. Tomnitz - Vice-Chairman, President and CEO

Stacey H. Dwyer - EVP and Treasurer

Bill W. Wheat - EVP and CFO

Analysts

Mike Rehaut - JPMorgan

Megan McGrath - Lehman Brothers

Nishu Sood - Deutsche Bank

David Goldberg - UBSWarburg LLC

Dan Oppenheim - Credit Suisse

Kenneth Zener - Macquarie Research Equities

Alex Barron - Agency Trading Group

Chris Hussey - Goldman Sachs & Company Inc.

Carl Reichardt - Wachovia Securities

Stephen East - Pali Research

James Wilson - JMP Securities LLL

Jay McCanless - FTN Midwest Securities Corp

D.R. Horton, Inc. (DHI) Q3 FY08 Earnings Call August 5, 2008 10:00 AM ET

Operator

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the D.R. Horton Incorporated, America's Builder, the largest homebuilder in the United States 2008 Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Don Tomnitz, President and CEO. Sir, you may begin your conference.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Thank you and good morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO and Stacey Dwyer, Executive Vice President and Treasurer.

Before we get started, Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statement. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and the most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Net sales orders for the third quarter were 5501 homes, $1.2 billion compared to 8559 homes, $2.0 billion in the year ago quarter. Our average sales price on net [ph] sales orders in the quarter decreased approximately 5% from a year ago to $224,800.

Our third quarter homebuilding revenues were $1.4 billion compared to $2.5 billion in the year ago quarter. Our average closing price for the quarter was down 10.5% to $229,400 compared to $256,200 in the year ago quarter, reflecting a softer pricing environment compared to the prior year. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Our gross profit margin on home sales revenue in the third quarter before inventory impairments and land option write offs was 10.1%. This was a 660 basis point decline from our home sales margin of 16.7% in the year ago period. The majority of the margin decline was due to core margin deterioration, resulting from price declines and an increased use of sales incentives relative to last year as reflected in our 10.5% decrease in average closing price. The remaining margin decline from the year ago quarter was primarily due to the prior year quarter benefiting from a reversal of deferred revenue under FAS 66. Our deferred revenue balance did not change this quarter, so there was no similar benefit this year. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

During our third quarter impairment analysis, we reviewed all projects in the company and determined that projects with a combined carrying value of $2.6 billion had indicators of potential impairment. We evaluated these projects and determined that projects with a pre-impairment carrying value of $915 million were impaired.

We recorded inventory impairments of $323 million as a charge to cost of sales to reduce the carrying value of these impaired projects. 70% of these charges related to projects in our California, West and Midwest regions. Of the remaining $1.7 billion of evaluated projects which were not impaired, approximately half are located in Florida, Arizona and California.

During the third quarter, we also recorded $7 million in write-offs of earnest money deposits and pre-acquisition costs related to land option contracts that we do not intend to pursue. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Homebuilding SG&A expense for the quarter was 13.6% of total homebuilding revenues compared to 10.5% a year ago. In the third quarter, we reduced total SG&A expenses by approximately $73 million or 27% compared to the year ago quarter. We will continue to manage our SG&A levels relative to our expected number of home closings and we are making adjustments today to position the company to return to our long-term goal of keeping SG&A at 10% of homebuilding revenues each fiscal year. We will continue to focus on being the low-cost operator in the industry, which remains one of our distinct competitive advantages. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

We recorded approximately $11.7 million in interest expense during the quarter. Since we have continued to reduce both our residential inventory and our development activity, our active inventory did not exceed our homebuilding debt levels this quarter, so we expensed a portion of our homebuilding interest incurred. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Our Financial Services operations remained profitable as we have proactively adjusted expense levels to lower volumes and adjusted product offerings to the current restrictive mortgage environment. Financial Services pre-tax income for the quarter was $9.4 million compared to $18.2 million in the year ago quarter.

90% of our mortgage company's business was captive during the quarter, reflecting our continued focus on supporting the homebuilder's business. In the third quarter, our company wide capture rate was approximately 59%. Our average FICO score was 707 and our average cumulative loan-to-value, LTV, was 92%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 65% of our volume. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

During the quarter, we recorded a valuation allowance of $169 million, primarily for deferred tax assets created during the third quarter. The net remaining deferred tax assets of $519 million at June 30th are expected to be realized in fiscal 2008 and 2009 through net operating loss carry backs to tax year's 2006 and 2007 including subsequent reversals of existing taxable temporary differences.

Our reported net loss for the quarter was $399 million, or $1.26 per share. For the nine months ended June 30, 2008, we reported a net loss totaling $1.8 billion or $5.81 per share. Tom?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Our overall inventory decreased by approximately $340 million excluding impairments during the quarter. Our 15,400 homes in inventory is consistent with the prior quarter as is our spec home inventory of 7400 homes. Our completed unsold homes decreased to 2900 at the end of June from 3200 at the end of March. We plan to continue to adjust both our total number of homes in inventory and our number of speculative homes in the coming quarters to match current demand. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Our land and lot acquisition spending remains limited and we continue to restructure our land development spending in light of our current absorption. We now expect our land and lot acquisition and land development expenditures to total less than $750 million in fiscal 2008. We also expect to spend less than $750 million in fiscal year 2009. Bill?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Our supply of land and lots at June 30, 2008 was approximately 169,000 lots owned and controlled, down 61,000 lots from the beginning of the fiscal year. 79% of these lots are owned and 21% are optioned. Our 169,000 lots now represent a 5.4 year supply based on trailing 12 months closings. We continue to actively work to reduce our owned land and lots supply through building and closing homes as well as through opportunistic land and lot sales.

Our net earnest money deposit balance at June 30th was approximately $53 million on a remaining purchase price of $765 million. Our low earnest money deposit balance reflects our conservative approach to land and lot options. We have no unconsolidated joint ventures and we rarely used land bank arrangements. So our deposits are typically a low percentage of the purchase price. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Areduction in dollars invested in homes and land and lots helped us generate $390 million in operating cash flow in the quarter, resulting in a $851 million cash balance at June 30th.

We have generated positive cash flow in each of the past eight consecutive quarters for a total of $3.6 billion in operating cash flow over the last 24 months. Our goal for the remainder of 2008 is to continue to generate additional positive operating cash flow. Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Our homebuilding leverage ratio net of unrestricted cash was 43%, within our target operating range of less than 45%. We had no cash borrowings outstanding on our homebuilding revolver at quarter end. Our available capacity under our borrowing base limitation was $880 million.

During the quarter, we amended our revolving credit facility. The primary changes included reducing the facility from $2.25 billion to $1.65 billion, increasing the interest rate spread on borrowing, reducing the minimum tangible net worth covenant to $2 billion, increasing the maximum land and lot to tangible net worth ratio and adjusting the calculation of leverage to allow us to net all cash in excess of $50 million against our debt.

We would like to thank all members of our bank group for their support of our limiting [ph] process. Subsequent to June 30th, through an unsolicited transaction, we repurchased $23.1 million of our 8% senior notes due 2009 at par plus accrued interest. Don?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

In summary, the bright side: We generated an additional $390 million of operating cash flow; our cash flow was positive for the last eight quarters, totaling over $3.6 billion; our cash balance of approximately $850 million at quarter end; our inventory reduction, $345 million decrease from Q2 pre-impairment; our completed specs are down another 9% since March and down 45% from the peak; our land and lot supply is down 27% in the first nine months of the fiscal year and down 57% from the peak; our SG&A continues to decrease, down $73 million and 27% year-over-year; our leverage remains in our target range of less than 45%.

The dark side: there is minimum pricing power in the markets in which we operate. There is continued pressure and there will be continued pressure from foreclosures both on the land, lot and housing side. We perceive continuing weakening in the U.S. economy. There is continued weakness in the financials and the mortgage industry. There is continued weakness in the U.S. consumer and consumer confidence. We are disappointed with the housing bill that just passed and believe it falls far short of creating the intended boost for housing. While the temporary tax credit is certainly a positive for buyers who purchase a home before July 2009, the tax credit does not offset the elimination of the DPA or Down Payment Assistant program which our industry so vitally needs.

Our side: our mission will continue to be that same. We will align our SG&A and inventory levels in line with demand as it may change from moment to moment. We will continue to generate additional cash flow from our operations. We will continue to strengthen our already strong balance sheet and our primary goal is to return D.R. Horton to operational profitability.

This concludes our Q3 conference call. We'll now entertain any questions you may have.

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question is from the line of Michael Rehaut with JPMorgan.

Mike Rehaut - JPMorgan

Hi, good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Mike Rehaut - JPMorgan

Appreciate your comments surrounding the housing bill. And you mentioned that you had about 65% FHA/VA loans in the quarter. I think that was up from 50% last quarter. I was wondering if you could give -- if you have a number of what... how much of the overall loans that you've closed, there's been... has down payment assistance and what that number was last quarter. And then I have a follow up.

Stacey H. Dwyer - Executive Vice President and Treasurer

Yes, we're running about 21% on the down payment assistance year-to-date Mike. And that compares to about 7% for the prior fiscal year.

Mike Rehaut - JPMorgan

Okay. So that's a year-to-date number. Is it safe to say that in the second quarter, or the third quarter was higher than the second quarter?

Stacey H. Dwyer - Executive Vice President and Treasurer

Yes, the third quarter was closer to 29%.

Mike Rehaut - JPMorgan

Okay. Second question just on SG&A. You continue to make progress on an absolute dollar basis year-over-year. We were looking for a little bit better improvement on a percent of sales basis. Actually, looks like you had a... you were up about 130 basis points year-over-year in the second quarter and that spread widened in the third. So I was wondering if you could just describe... are you kind of hitting perhaps core SG&A spend or what you see if all things else equal, and let's say the sales... the revenue stays where it is, roughly speaking, which obviously the backlog is continuing to decline. But what do you see in terms of incremental areas to cut that may be that... the 13% run rate that you are at right now you could see visibility towards a lower number?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, frankly, we were disappointed in the 13.5% number. We're continuing to cut at all levels, everything is on the table. Clearly, with our decreasing in revenue base as a percentage of our home building revenues, our SG&A increase despite the significant dollar decreases that we've had. Although I will say to you relative to everyone else in the industry, we have the leading SG&A in the industry. Our goal is, as we've told you before, is to cut at every level and there is nothing that's sacrosanct that we're protecting. Everything is going to be cut and we're going to get our SG&A back down in to closer to that 10% range.

Mike Rehaut - JPMorgan

Can you... thanks Don. Can you share with us what you might have saved with the changing of the auditors and if that was something that came up earlier in the quarter?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I would say to you that over the course of time that it's a six-figure number.

Mike Rehaut - JPMorgan

All right. Thank you.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question is from the line of Joel Locker [ph] with FBN Securities.

Unidentified Analyst

Hi guys. Just I was wondering on your community count, I know you guys don't really give a number. But just how much roughly is it down year-over-year?

Stacey H. Dwyer - Executive Vice President and Treasurer

We are down double-digit, we are down over 10% on our community count year-over-year.

Unidentified Analyst

Over 10%. And just on I guess the... sorry, the customers deposits, do you have a number if that was at the end of the quarter?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

While they are looking for that number, I will tell you what we are doing on a community-by-community basis. Don Horton has taken the Western half of the United States and I am doing the Eastern half of the United States and then we are going to switch. But we are evaluating every sub-division in the company in order to determine whether or not that sub-division needs to be... continue to be producing or whether it needs to be mothballed. And basically, our goal is to evaluate each one on a probability basis and get back to making a profit in each one of our active subdivisions.

Unidentified Analyst

I guess on that note, you are accelerating the mothball process for just the overall community count, just through attrition on margins or just increase to cash flow?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We are increasing our mothballing based upon whether the sub-division can produce a profit or not, even pre or post-impairment, yes.

Unidentified Analyst

Right.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Bill, do you have that number?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

And Joel, the earnest money that we... that customers currently have up on homes totals $23 million as of June 30th.

Unidentified Analyst

23 million. So that's roughly like 1.2% or so of backlog?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

The number --

Bill W. Wheat - Executive Vice President and Chief Financial Officer

About $2800 a home.

Unidentified Analyst

$2800 a home. Alright, thanks a lot.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

You'rewelcome.

Operator

Your next question is from the line of Megan McGrath with Lehman Brothers.

Megan McGrath - Lehman Brothers

Good morning, thanks. Just wanted to follow up a little bit on spec count. Can you tell us the number of specs that were in your closings this quarter?

Stacey H. Dwyer - Executive Vice President and Treasurer

For homes that we sold during the current quarter that also closed during the current quarter, we were running about 40%.

Megan McGrath - Lehman Brothers

40%. So that's about the same that you had in 2Q. Is that the biggest reasons why... you did see an uptick sequentially in gross margin, but maybe not as much as we had been looking for.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, I will say to you that our operating plan is continue to maintain a number of... the right numbers of specs in each one of our communities such that we can sell a home to someone who is moving out of an apartment who has all of a sudden made the decision to buy a home as well as we are seeing more and more people come into our sub-divisions had their homes listed for a while. They finally have sold their home and they don't want to move into an apartment or a rental on an interim basis. So we continue to maintain what we believe are the right number of specs to capitalize on every buyer at the time they are ready to buy.

Megan McGrath - Lehman Brothers

So on that note, do you feel comfortable with the spec level that you have right now?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

To answer for your question, directly, yes, relative to where we are today, we will continually adjust the spec level on our inventory level relative to our trailing 13-week sales. And based upon our trailing 13-week sales, we're relatively comfortable now. The number needs to come down some, but we're relatively comfortable.

Megan McGrath - Lehman Brothers

Okay great. Thanks very much.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question is from the line of Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. Good morning everyone.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Nishu Sood - Deutsche Bank

First question I wanted to ask was on the GAAP, or the pricing you are seeing on specs versus your build to order. And obviously, during the downturn, a lot of pricing pressure has come in the form of substantial discounts required on that... on the spec unit. So I was wondering, as we're kind of settling out here at a bottom in terms of absorptions, order pace, are you seeing that gap shrink? So in other words, are your competitors still being just as aggressive on pricing on those specs, or are you beginning to see that gap narrow a bit?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I think one of the benefits we are seeing, to answer your question, is that in most of our communities, we, I believe, are in an opportunistic sales position because we are maintaining a few specs in a number of our communities whereas our other... our competitors have a lack of specs on their communities. I think that's putting us in a positive pricing situation. The difference between a build job and a spec and the pricing really is going to vary from sub-division to sub-division. Just last week, I was in a community and we're selling our build jobs for a higher margin than we are specs, which I found sort of ironic in a way. But nevertheless, the people in this particular subdivision, the buyer profile, people are coming in and typically it's their second home, they essentially sold their home and they want their next home exactly the way they want it. So they are willing to pay more to have the build job and get their home exactly the way they want it than they are specs. In other sub-divisions, we have people who come in and they don't want to wait that 60 to 90 or 120 days to purchase a home and they will pay more for a spec today than to take the market risk of waiting for the home to be built for 90 to 120 days.

Nishu Sood - Deutsche Bank

So that sound pretty different than most of the other builders who are seeing a more substantial hit on their spec pricing than they are on the build orders. Would you say that the latter, your situation where you are seeing better margins on the spec units is a more common situation or is the other situation more common?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I think it's more common, and I think that for us, we are seeing a higher margin on our specs because I will tell you these build jobs that we keep seeing that people are selling, basically, those are having to be resold a couple of times during the process of the construction. So I think when we have a buyer come into our models and they are ready to make the purchase decision, they are going to close within a very short period of time so that buyer is not back having to re... we're not having to retrade the price with the buyer on numerous instances.

The other side of the coin is that the key is to keep the right number of specs in that sub-division and also to be the beneficiary of our lower cost by virtue of having built that spec more recently than having our older inventory specs. We've essentially gotten rid of older, higher cost inventory, so those specs are out of the system, gone, sold, and closed. So really our best margin should be in our sub-divisions where we have got our lower cost and we've got a spec home where someone is ready to buy today and we don't get re-traded by the buyer two or three times during the construction process.

Nishu Sood - Deutsche Bank

Got it. And one just quick housekeeping question, what percentage of your communities have been impaired to date?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

In total, around 40% of our total communities have been impaired. Of course, as you look across the country, there is a wide disparity as far as that percentage. For instance, in California, about 90% of our communities have been impaired. Nevada, it's north of 80%. So there is a wide disparity, but the total number is around 40.

Nishu Sood - Deutsche Bank

Thanks a lot.

Operator

Your next question is from the line of David Goldberg with UBS.

David Goldberg - UBSWarburg LLC

Thanks. Good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Good morning.

David Goldberg - UBSWarburg LLC

Trying to get an idea with the land spend and the land spending projections for '08 and for '06 being below $750 million, where does that leave you? And may be it's kind of a theoretical answer in terms of size of the company, should the market kind of pick up as we get into 2010, the ability to grow and the ability to expand the operations if demands starts to come back at that time?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Clearly, we are in a wonderful cash position and we can turn our loss very quickly. It will be wonderful problem to have David that basically we have semi-shortage of lots. And right now if you look at our developed lot inventory, we do not have a shortage in any one of our markets. And to the extent that we do spend any money on land and... or on development expenses in '08 and '09 is going to be on very small, high margin pro formaed land development deals.

David Goldberg - UBSWarburg LLC

I'm sorry, so did you already give out the percent of your owned lots or finished lots?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

No, but about a third of our total owned lots are finished, which more than covers next 12 months expected closings.

David Goldberg - UBSWarburg LLC

Got you. And then just for a follow-up question, I was wondering if you guys have looked at where your homes price relative to foreclosures and what kind of premium your homes are getting relative to maybe some foreclosures in the market. And understandably, it differs based on how long [ph] the foreclosure, what kind of condition it's in, how long it's been... just generally taking a look at it.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I think generally speaking, across the country, as you analyze it market by market by market, where we see the banks pricing the foreclosures right now. They are under where we are on our new home price. But yet at the same time, our sales people clearly understand. There is no warranty on those foreclosures. There is typically cash out of pocket required to get those foreclosures on a livable position and there is absolutely no warranty on those units. So as a result, we feel like that despite the fact that the lending institutions are offering their foreclosed homes at a slightly less price than what our new homes are that the discriminating buyer will clearly understand that they have a lot less risky buy with a new home than with a foreclosure.

David Goldberg - UBSWarburg LLC

Do you give an idea what that spread is kind of on average?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I don't. It would just... it's going to be an aware [ph]. To give you an example, we are probably in Las Vegas. The product that's coming out of Las Vegas that's in foreclosure now, as I understand it, is probably anywhere from $2 to $3 a square foot less than what our new homes are. But that's going to vary widely from market to market.

David Goldberg - UBSWarburg LLC

Okay, thanks so much.

Operator

Your next question is from the line of Dan Oppenheim with Credit Suisse.

Dan Oppenheim - Credit Suisse

Thanks very much. I was wondering if you can talk about just on the FHA down payment assistance in terms of the 29% of the closings that had that this past quarter. Did you look at what percentage of those buyers could have come up with a down payment given the FHA loans are fully documented?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, that's a good question, Dan. As a matter of fact, as I was being suicidal in one of our sub-divisions the other day on the DPA going away, one of my more proactive saleswoman said you know, Don, the question is the same question you just asked. And we don't know the answer to that until we actually put it to the test. And that is how many of our buyers who, of the 100%... if there are 100 buyers in the DPA pool, then how many of them really could come up with the money if they had to? And I don't know the answer to that question. Unfortunately, I think we are going to find out the answer to that question over the course over next two to three months. But it's certainly not 100%. As someone said, if someone is willing to give you money to buy a home and you say, well, gee, I don't want the money, I am going to put my own money down, you would have to probably send them to a psychologist or a psychiatrist.

So in general speaking, we don't know the number, but I don't, clearly, I don't believe 100% of our DPA buyers are going to go away.

Dan Oppenheim - Credit Suisse

Okay. And then second question, I was wondering about you can rate and what you are doing in terms of goals to bring that down as it could certainly help the margins if you could keep more of those in backlog. Anything you are doing with in terms of deposits, other things?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We are not doing anything to make our can rate go down. As a matter of fact, what I've always said and I will continue to say, until our sales begin to be positive on a quarter-by-quarter and month-by-month basis, our can rate needs to be high. I know our sales people are working harder than some of the sales people in other companies, because we are going to rewrite these contracts. But I still am a believer that the right answer is if the buyer is warm and has a pulse, we need to be writing them and trying to qualify them to put them in a home. So, as a result, our can rates continue to stay high. And I applaud our sales people because then I sleep well at night realizing that they have left no buyer unturned.

Dan Oppenheim - Credit Suisse

Okay. Thanks.

Operator

Your next question is from the line of Ken Zener with Macquarie Capital.

Kenneth Zener - Macquarie Research Equities

Good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Hi Ken.

Kenneth Zener - Macquarie Research Equities

Don, I appreciate your adjectives there. I hope they are not in earnest obviously. Your can rate, I just want to explore that a little more. How much variance is there around markets like Sacramento or Phoenix, Vegas, et cetera where you are having 50%, 60% of existing sales coming from the banks? Are you seeing materially higher cancellations rates in those places relative to let's say Texas or some other markets?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

To answer your question on a general way, I don't believe that the foreclosures are contributing to our can rates. I think what clearly contributes to the majority of our cans are contracts where we have written a buyer who wants to buy and that we just can't get them qualified with the changing mortgage environment. So I would say very, very few of our cans are coming from someone saying, gee, I can buy a foreclosed home for less than a new home.

Kenneth Zener - Macquarie Research Equities

Okay.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I'm still a strong believer that there are new home buyers and there are existing home buyers, and the two very rarely cross over.

Kenneth Zener - Macquarie Research Equities

Okay. And I guess related to that and the potential erasing of the down payment program, one of the themes that I've been thinking about is the fact that there is low equity in the system, which is in part contributing to all the units coming back to the market today. Can you talk about structurally, what you think the risks are to this marginal buyers coming in with very low equity, being we don't know how much equity they could actually put down in the context of really a flat interest rate environment and an amortizing loan structure where they can't really build a lot of equity without price appreciation. Can you just talk about some of the concerns you might have about that relative to the last 15, 20 years as we knew it in this country with price appreciation?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I think we have a higher risk today clearly than what we have had over the last 20 years. I go through subdivisions, I have just done a couple of subdivision last week where some developer was wanting to offer us a rolling option contract to go into what I perceived as almost 100% DPA subdivision. And, well, I said not on your life. So I look upon it and say there is a higher risk in the existing mortgage portfolio just because people don't have the down payment.

And I don't... I hate to say this because my group here is going to probably chastise me later, but I also on the other hand say to myself, our federal housing program is a disaster. We have spent billions of dollars over the years funding all these HUD programs on the inter city which has been a dismal failure. So from my personal perspective, I think the fact that the DPA loans have a higher default ratio than the non-DPA loans, they are not a 100% default and we're putting people on homes that typically would be living in an inter city HUD projects into a single family home and a good environment where they can send their kids to school, and associate with people of all economic background. So, that's sort of my social statement. But I do believe that there is a higher risk in the mortgage portfolio today, that I think it's a good risk relative to the HUD projects that we've had a terrible failure in over last 30 years.

Kenneth Zener - Macquarie Research Equities

I appreciate your comments.

Operator

Your next question is from the line of Timothy Jones with Wasserman & Associates.

Unidentified Analyst

Good morning all.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Unidentified Analyst

Remember who I had called up in the West and East St Louis, 40,000 units torn down to the ground. I am talking about 100 [ph] now. Never mind. The... you have said [ph]... have talked about your DPA being about 25% to 30%. Other builders have said 10%. Why the disparity and what is the average down payment assistant on your loan relative to the mortgage or to the price of the home?

Stacey H. Dwyer - Executive Vice President and Treasurer

The down payment assistance relative to the price of the home has generally been 3%, which have been the FHA down payment requirement. The recent housing bill actually changed that now to 3.5%. And I think one of the reasons speaking specifically for D.R. Horton, not for Symtec [ph] that our DPA is probably higher than some other builders is we have one of the lowest price points in the industry. So a greater percentage of our homes actually fit within the FHA financing limit.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

And I think our DPAs are... I agree with Stacey along that line, I think our sales people are also pushing harder on the sales side. So we are obviously looking for... we're seeing buyers who basically need the down payments assistance more so than the other builders.

Unidentified Analyst

Okay. And Don, you and Don Horton, I believe you said you have been going back over to every development, division recently. Since you are going back to divisions, you probably saw about two or three months ago, what difference are you seeing now as opposed to then?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well I'd say the biggest difference we see now is that fact that in some markets our buyer... first of all, most of our markets there are fewer buyers in our sub-divisions than what they were two three months ago and I think that's a function of the fact that people are uncomfortable with the economy, uncomfortable with their present situation and I think the DPAs are also having a negative effect on the market place. Quote the DPAs, I think if you look at DPAs across the country, there are higher percentage than most people are reporting today because what was looking as a trailing 2 and 3 and 4 month percentage of our sales has been DPAs, and I think as our in the last three or four months the DPA is to become a bigger percentage. So I think there is more weakness facing the industry just simply because it's a bigger DPA number out there than most people realize.

Unidentified Analyst

Why didn't the Congress include DPAs in this legislation?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

If I knew the answer to that question, I'd be probably a Vice Presidential candidate. I don't know, Tim. It's --

Unidentified Analyst

I mean I really don't understand it.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I am absolutely shocked by it and I am upset by it and I don't want to go any further than that because my team is going to get me --

Unidentified Analyst

You've been through that, I guess.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Becauseof all of the things... I mean, if you listen to the administration and you listen to Congress and you agree with them, like I do that housing is a major problem in the economy today to take 10%, 20%, 30% of the buyers out of the homebuilding buying decision at a point in the economy that they did is absolutely ludicrous.

Unidentified Analyst

I agree 1000%.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Okay, thank you. We better be quiet or they'll be sending the people in the coats for us.

Unidentified Analyst

Okay.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

All right, bye.

Operator

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

Alex Barron - Agency Trading Group

Hey, good morning Don, good morning guys.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Alex Barron - Agency Trading Group

Just wanted to ask you, this is more kind of generically or whatever, as far as your communities that get impaired, my understanding is once they reach some kind of minimum gross margin, I guess the... that's when they go through the impairment. I'm kind of wondering in general what gross margin do these homes or communities get reset back up to after an impairment.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, typically, they are somewhere north of double digit is where they are.

Alex Barron - Agency Trading Group

Okay.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

It really depends on how much longer is left in the project, Alex, to the extent that they are mostly finished home, will be at the lower end of the range, the low teens. If it's a longer term project, the margins probably are going to be higher. It will be in the higher teens. But typically, somewhere in the teens.

Alex Barron - Agency Trading Group

Okay. Got it. Thanks. My second question is in terms of I understand you guys have some debt coming due I guess in six months. Is the idea that you will just continue to generate positive cash flow and just pay it off from that or are you guys contemplating any sort of capital raise at all?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Yes, clearly, right now we are building cash on our balance sheet, so we expect we will certainly have the cash available to take it out totally with cash. We are not going to rule out any alternatives. We'll just... we'll evaluate that as we get closer to the maturities. And as we look out, we look at our maturities over the next three years and we have a total of $1.4 billion of maturities over the next three years. And to the extent that we continue to generate solid cash flow, as we have for the last eight quarters, we expect that we will be able to generate sufficient liquidity to more than meet those maturities and provide cash to reinvest in our business.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

And I would say from my perspective that that is a strong, strong statement. I don't know how many companies could say and look at their next three years worth of debt maturities and say with a high degree of confidence based upon our historic free cash flow and our projected future free cash flows that we can pay off 100% of that debt that's going to mature in next three years, if we choose to do so.

Alex Barron - Agency Trading Group

Great, thank you very much.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir.

Operator

Your next question is from the line of Chris Hussey with Goldman Sachs.

Chris Hussey - Goldman Sachs & Company Inc.

Thank you, gentlemen. Question on the size, related to that debt payment and cash flow. As you go forward over the next three years, could it be that your cash flow will start to subside as you guys get smaller and your home prices keep coming down?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

It could, but I will say one thing to you that's not included in our free cash flow currently are any profits. And we're clearly positioning this company to get back to a level of profitability as soon as possible. And I would hope that's in the couple of three quarters to make a projection, or a prediction or a hope, I guess is what I should say. But clearly, that profitability will supplement to an extent our free cash flow that's being generated by our decrease in inventories. But at the same time, as our sales continue to slide, we clearly have additional opportunities of relieving our inventory both on the land and lot size to continue to generate that free cash flow.

Chris Hussey - Goldman Sachs & Company Inc.

Two follow ups on that. You talk about profitability. There is accounting profitability, but from a debt repayment, we really only care about cash. You are cash profitable now, sizably cash profitable. And so as you go forward, what are the levers that you can push that would increase that cash profitability? Maybe you could talk a little bit about materials and labor inflation or lack thereof deflation perhaps. And then in terms of land sales, what you might be thinking about in terms of selling land wholesale to generate cash flow?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We are continuing to put pressure on our subcontractors and on our vendors. Let's not get confused, and I don't think you are or people shouldn't be confused. They are struggling also. So to the extent that we continue to push them, I think that there are still accomplishments to be made in decreasing our costs. But currently, I think we have squeezed at least 50% or more out of what we think we can save out of those subcontractors.

On the land and lot side we have been active in terms of contracting and selling land to investors. We are focused clearly differently than our competition, we are focused on selling our land and lot positions to the local developers and investors because I believe they appreciate and can do the diligence and understand the value in those projects been at the higher level then someone who is sitting New York or San Francisco or Boston, just says, let me pay $0.15 and they got be were something more than that in future.

If you look at the percentage we gotten our land sales, they have been significantly higher than our competition. So that's one of the ways as we continue to generate free cash flow continue to move land sales at a higher profit level than our competition.

Chris Hussey - Goldman Sachs & Company Inc.

Your current on locked position you know what percentage of those lots you think you could sell in a wholesale?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

WellI think you can sell all of them, but the question is would we want to sell them for the price someone is willing to pay us. Currently, and it will be disclosed in our Q, we have about $300 million worth of land that is classified as held for sale that we are actively working and we expect to close within the next 12 months. So we clearly identified a portion that is being worked immediately. We haven't talked about taxes. We have a $519 million deferred tax asset, and that represents what we expect to get back in the form of refunds over the next two years on taxes. And then additionally as we return to profitability, when we return to profitability, we will not actually be paying taxes on that for sometime because we do have carry forwards of net operating losses as well. So there will be more cash flow out of our profitability in future years than we've seen in the past simply because we won't be paying taxes.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

AndDon Horton always wanted to get in a position where he didn't have to pay taxes. Unfortunately, that's [indiscernible] way to get there.

Chris Hussey - Goldman Sachs & Company Inc.

The wrong way. But the... and lastly, you didn't address the materials inflation. I mean there's been some inflation on the commodity side. Is that a headwind you guys can offset?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, I think the headwind is going to decrease as these commodity prices come down. And I'm an economist [ph], but I don't want to be known as one. But clearly, a lot of this stuff, a lot of the commodity and oil prices I think have run up dramatically in last six months as you know better than I. And I think we are seeing some decrease in those. And I think we will be facing less strong headwinds over the course of the next 12 months on commodity prices than we have in the past 12 months. So that should benefit us.

Chris Hussey - Goldman Sachs & Company Inc.

Thank you very much guys. Appreciate it.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question is from the line of Carl Reichardt with Wachovia Securities.

Carl Reichardt - Wachovia Securities

Good morning guys, how are you?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We are doing great Carl.

Carl Reichardt - Wachovia Securities

Gladto hear it, Don. Hey Bill, do you have offhand an idea of the number of lots that you own that are in communities that are actively selling right now?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Lots we own in active communities.

Carl Reichardt - Wachovia Securities

Correct.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

I don't have that in front of me Carl.

Carl Reichardt - Wachovia Securities

Do you have a rough idea?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

No, not really, not in front of me.

Carl Reichardt - Wachovia Securities

Okay. And then Don, I think I have asked you this before as you and D.R. tour the world, are you rethinking the idea of staying in all of the markets which occupy obviously consolidated divisions. But have you thought more seriously or might there a plan... in a way to get the SG&A down, might you plan to begin more significant exits of markets that you have expanded into, especially more recently as the cycle got older?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

We are looking at every market on a individual basis. We have exited a couple of markets we may exit one or two other markets. But our approach has been, I think as the right approach and we are continuing with that approach and that is we are consistently consolidating multiple division markets into a single division as we have done in San Francisco, San Diego, LA, Denver you name it and most recently Phoenix, where we had three divisions and now as of yesterday we have one division in Phoenix. So as result, we are decreasing our SG&A significantly by doing those consolidations, but most importantly on a look forward basis, as I was riding up the elevator this morning, somebody saw my D.R. Horton shirt and I said well, yeah this I my fourth downturn and the one good thing about it is, we're going to get through this one like we got through the last four. So we're in a position I believe as we move forward to capitalize on an improving market, although we still believe that's a couple of years away.

Carl Reichardt - Wachovia Securities

Okay, appreciate it. Thanks a lot guys.

Stacey H. Dwyer - Executive Vice President and Treasurer

Thanks.

Operator

Your next question is from the line of Stephen East with Pali Research.

Stephen East - Pali Research

Good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning Stephen.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Good morning.

Stephen East - Pali Research

If we look at specs first, a couple of different questions here. Your 40% in closings, does that remain for the foreseeable future and is that a level that you prefer to have?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, frankly, I do believe that in the foreseeable future, we're going to sell a big percentage of our specs and close them in the same month and certainly in the same quarter just by virtue of where the industry is today. Person own a apartment, once a home, all of a sudden there is a mortgage instrument out there that qualifies and puts him in a house, there is going to be a buyer. Someone who sells their home and doesn't want to move into an apartment they have had on the market and they may have had their existing home on the market for six months or whatever. They have adjusted the price and they want to move into a new home, they are going to move in. So we believe that our spec percentage and our various sub-divisions are the right number. And one thing we didn't tell you is that the number of specs that we've had completed and unsold for a period greater than a year is less than 300.

Stephen East - Pali Research

That's perfectly hitting to my next question, Don. If you look at what you have invested per spec today versus say a year ago, how much would that have come down?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, well, I can tell you that our... well, first of all, I don't know the answer to your question. I would say there are factors that would clearly apply to that. One is our land and lot price on an option basis is down. Our land and lot price on an impairment basis obviously is down. And we believe that we have driven down our cost of goods purchased by a little over 5%. So it's come down there too. So you can apply that number, and I really don't know where that gets you. It's going to be on a sub-division by sub-division basis.

Stephen East - Pali Research

Okay.

Stacey H. Dwyer - Executive Vice President and Treasurer

It will probably be a pretty good analysis even if you take our homes under construction and looked at our total residential dollars last year and did the same comparison this year, since the dollars invested in specs would not be significantly different than a dollar invested in a build job.

Stephen East - Pali Research

Okay, all right. Thanks. And then the other thing is if you look at... you've had a cash flow focus. It sounds like you are trying to move to profitability focus if I hear you correctly. While they are mutually exclusive, what's more critical for you as you look over the next four quarters?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, and I will let Stacy and Bill chime in, but I will clearly tell you, Don Horton and I desire is... our focus is to return to profitability on an operational basis.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

But you are right, Stephen, they are not mutually exclusive. And we can see still solid cash flow from operations in the coming quarters, so we believe that for a period of time until we see significant growth and significant reinvestment in the business, growth in inventory, we will continue to see some positive cash flow as well. So I think there is going to be a balanced approach for a while.

Stacey H. Dwyer - Executive Vice President and Treasurer

That's reflected in our land spend projection for the balance of this year and next year and we'll also have cash flow incoming from tax refunds in both of the next two years as well.

Stephen East - Pali Research

Okay. And that's my last question. If you look at the $519 million, how much do you think you wind up getting just roughly this year versus next year on that DTA?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Our assumptions right now would show that we would get about 300 this year and about 200 next year. And that's subject to obviously what happens in our fourth quarter in terms of the homes we close, previous impairments that have been reversed and the amount of land sales. We could be less than 300, we could be more than 300, because we do have more than 300 of carry back available to us.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

By the way, I want to make one correction because I always like to give the right number right. I understand our number of specs that have been completed for a period of greater than a year unsold, which, by the way, also includes our model homes in that number is around 400. And that happens to be... just doing the quick math... about 2.5% of our total inventory, so not a problem.

Stephen East - Pali Research

Okay. Thanks a lot.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir.

Operator

Your next question is from the line of Jim Wilson with JMP Securities.

James Wilson - JMP Securities LLL

Thanks, good morning guys and Stacey.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Good morning.

James Wilson - JMP Securities LLL

Just I mean most of my questions are answered. But just wondering, Don, if... I mean obviously, plenty of inventory, still pricing pressure in general. Anywhere you are seeing any pricing pressure easing, inventory coming down, things that make you look a little more... make you feel a little more encouraged that a bottom is getting closer?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Well, I spent last week in the Carolinas with David Auld, our regional President and Brian Gardner out there. And there are communities in the Carolinas where, surprisingly enough, we have raised our prices ever so little. But that was very encouraging. It was also encouraging to me out there that in the entire Carolinas, we had one completed spec in the entire two states. And so as a result, that gave us some opportunities to start some additional inventory out there. I fixed that.

So I look at that market, and I think that's positive. I think Texas is still positive. But I... and I think California is positive from the perspective as these people told you earlier that we have impaired 90% of the projects in California. I still don't see very much pricing power in California and I still see continued weakness in the state of Florida, although we're focusing on sales in Florida and trying to improve our sales in Florida. But in general, it's just pretty... you've got to get up in the morning when you go out because you can get down if you took it the wrong way. But there are a lot of opportunities out there. We are doing exactly what we need to do in the business to get our company back to that 10% SG&A and to get back to profitability from an operational perspective.

James Wilson - JMP Securities LLL

Okay, thanks. That's all I had.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir.

Operator

Your next question is from the line of Bob Thompson [ph] with Atlantis.

Unidentified Analyst

Hey Don. Just a couple of questions regarding the getting back to profitability, what exactly... which numbers exactly are you looking at in terms of that and how far away are you from the way you look at it?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

We're looking at operational profitability before charges, before impairment charges and deferred tax charges. In the current quarter, we were at about $49 million of pre-tax operating loss before charges.

Unidentified Analyst

Okay.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

$51 million last quarter. So we are relatively flat on a sequential quarter basis.

Unidentified Analyst

Okay. And what percentage of your... do you know what percent like communities are in second and third tier suburbs?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

No, we don't; we know which ones are in the last year. As you drive around, you can tell. As Horton used to say, there's a bridge too far in a couple of these areas where we went out seeking profitability. But we really haven't tracked that number, it's really... those are, and to be quite frank with you the ones that are in the second and third and the bridge too far...

Unidentified Analyst

Yes.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Those are deals that we are saying gee, we going to mothball those because they is just no demand out there today.

Unidentified Analyst

Sure. And that's kind of my next question is, are you seeing a shift where given the high gas prices amongst everything else where it could actually be a long time for those areas to recover relative to areas that are closer in.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Gosh, you just want to get me involved in politics today, don't you? I think we're seeing... to answer your question, when you have a buyer come in, we have a sub-division in Houston that I was in and the buyers have low FICO scores and they have a difficult time with the payment. And the real key is that to the extent that they are paying an extra $100 a month for gas, that impacts their ability to qualify for the loan from that perspective. So yes we are in some of those outlying areas been adversely affected by gas prices. On the other hand, I don't think that's going to be long-term problem, I think over the course of the next twelve to eighteen months, that's going to be a less of a drain on the typical consumer. Stacey?

Unidentified Analyst

Okay.

Stacey H. Dwyer - Executive Vice President and Treasurer

I was just going to say, that's the same is what you've usually seen happen is prices closer in adjust and rise as there is more demand closer in, which then drives the demand further out for the affordability even with the higher price of gas. So there continues to be a trade off as people adjust to what's happening with other prices in their lives.

Unidentified Analyst

Okay. And last question is in terms of the, are you seeing any difference this time around in the foreclosures prices in terms of the speed to foreclosure and are you bidding on any of the foreclosures?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Currently, I think that foreclosures have been a slow process, slower than in the past when Horton and I have been through these... this is our fourth downturn together and in the past it seems like the foreclosures have come to market more quickly and so as a result I think it's a slower process and that's why we believe the industry will be clouded for the rest of this year and perhaps most of next year with the foreclosures that are coming in the market.

Unidentified Analyst

Okay, thank you very much.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Yes, sir.

Operator

Your next question is from the line of Jay McCanless with FTN Midwest.

Jay McCanless - FTN Midwest Securities Corp

Hi, good morning.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Good morning.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Good morning.

Jay McCanless - FTN Midwest Securities Corp

Two questions for you. The first on the credit facility. Can you tell me again, what the leverage ratio covenant is and what flexibility you have on that?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

The maximum leverage we can have is 55% and that's based on a net of cash basis on the debt, we can count all the cash but... all homebuilding cash above $50 million is a net against our indebtedness.

Stacey H. Dwyer - Executive Vice President and Treasurer

And that is based on D.R. Horton's Guarantor

Subsidiaries that doesn't include the Financial Services and you can find a pretty clear layout of the guarantors subs in our 10-Q.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

We lay out the calculation of the leverage pretty well in our MD&A, and our 10-Q as well.

Jay McCanless - FTN Midwest Securities Corp

Okay, great. And then my second question is on the mothballing. Hypothetically if you decide to extend and expand the moth balling what... where would we see the impact, would it been in further impairments or higher SG&A. Can you just talk about that a little bit?

Stacey H. Dwyer - Executive Vice President and Treasurer

I think the impairments would not necessarily be affected, because even its community is moth balled we still need to go through an evaluation process on every community we own. So we would be looking that in terms of when we plan to bring it to market what the current land basis is compared to current sales price. And in terms of that, I don't think there is lot of change. In terms of SG&A we would be adjusting our SG&A locally to only support the communities that are open and selling. There is some cost of maintaining the land though, and that's part of what's factored into the decision on whether we want to moth ball the community or go ahead and build through it.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Thereal intent on the mothballing is simply it's a good piece of land, it can't support... it can't be supported by the demand in that particular location. So as opposed to continuing to sell or putting that piece of land in production today, we see it ourselves as the housing market recovers, then we'll have better demand in that project going forward and our absorptions will be better. Most of our mothballing projects quite frankly are where just don't have enough demand to justify the SG&A that has to be thrown at the sub-division to maintain an operation.

Jay McCanless - FTN Midwest Securities Corp

Okay, great. Thank you.

Operator

Your next question is from the line of Michael Rehaut with JPMorgan.

Mike Rehaut - JPMorgan

All right, thanks. Just a couple of quick follow ups if I could. First, there has been a talk about the specs and the can rates. Anything in particular, Don, or Stacey or Bill that drove the sequential rise this quarter as a percentage gross orders, I see that on an average there is part of seasonality here, because there was up 3Q '07 versus 2Q '07. That's the first question.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Specifically, no, I think that clearly, we are continuing to push our sales people to continue to sell a bigger percentage of the people coming on the door. I believe it's also complicated by the fact that the mortgage industry keeps changing, what the FICO score is, what the payments are and that sort of things and rate. As you know, rates have gone up some in the last 30 days, especially on a 30 year fixed. So I think it's just a combination of all those factors. But primarily Horton's can rate will typically be higher than the others during this downturn as it has been as we continue to try to find every buyer and put them in a house that comes to our door.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

One thing we do need to make sure we clarify here Mike is that the composition of our specs did improve during the quarter. We have 300 fewer completed specs now and we had a beyond of March. If you look at the Dollars invested in those specs per home its less now because we have more the broad mix of homes under construction in our spec category versus heavily waiting towards completed homes a quarter ago. So as continue to closely monitor our specs in each community and our start sees community based with on our sales were more efficient now in the dollars we have invested in those specs than we have been in the past.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

And I think our spec inventory, to say it in another way is strong as it's ever been because we've got our lowest cost inventory out there. We have moved our old specs and we are very few old specs today, and so as a result we believe we're in a very property-active position to sell homes at a higher margin, and with out lower cost in then what we were in six months ago.

Bill W. Wheat - Executive Vice President and Chief Financial Officer

And that's a primary driver between our... behind our cash flow from operations by having just an optimal level of specs, that's allowing us to get the cash back out of the light in a much more efficient manner than trying to serve a lot wholesale.

Mike Rehaut - JPMorgan

Right. I appreciate that guys. I guess second question, just on the gross margins. At 10.1, first off, a couple of quarters ago, you were able to give us what the benefit from prior impairments were. Do you have that number for us?

Bill W. Wheat - Executive Vice President and Chief Financial Officer

Mike, what I do have is the number of homes that closed this quarter that had been... that are in communities that had previously being impaired. And of our total homes closed this quarter, we have 1935 homes that were in previously impaired communities.

Mike Rehaut - JPMorgan

Okay. I guess as we look at the gross margin and you guys are I think to some degree in contrast to your peers, more sticking with the spec strategy. Is there a point where perhaps if you are seeing diminishing incremental cuts on the SG&A in terms of opportunities there, given the cash flow generation, given the balance sheet being in pretty good shape, would you consider kind of easing up on the spec to try and repair the gross margin or is there is a break point that you see in that regard or do you have to see what you could do further on the SG&A side first?

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

It's a tough balancing act and we continue to adjust it on a daily basis. I am the only individual in the company approving specs right now. And so we have the balance and we have a formula for each sub-division. I'd say I guess the disappointing thing to me, and I hear this doubt in your voice is that if you look at what Horton has done, we continue to outsell everybody else in the industry. We continue to out close everybody else in the industry. We continue to have the lowest SG&A in the industry and we have the highest free cash flow in the industry. We are getting more for our land and lots by virtue of selling them to local investors instead of selling them to funds and so forth like that in New York and Boston at cents on the dollar compared to what we are getting today.

So I guess that... and I... we have spent a lot of time together, Mike. I guess I just get... I am getting a little disappointed I guess in terms of recognition in a market that is really a weak market, and Horton outperformed in the good market and we are outperforming in a terrible market. And people keep questioning, why are we doing what we're doing and I keep asking myself, why would any body question what we are doing simply from the perspective of we're outperforming everybody else in the industry.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions and the answers. I will now turn the call back over to Mr. Tomnitz for any closing comments.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

I am not sure I could say any better closing than what I just said. Thank you for joining our conference call. We look forward to reporting in Q4 fiscal year in '08. Thank you very much. Good bye.

Operator

Thank you for participating in today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: D.R. Horton, Inc. F3Q08 (Qtr. End 06/30/08) Earnings Call Transcript
This Transcript
All Transcripts