Standard Pacific Corporation (SPF) Q2 2008 Earnings Call July 31, 2008 11:00 AM ET
Good day everyone and welcome to the Standard Pacific Homes second quarter conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Lloyd McKibbin, Senior Vice President and Treasurer.
Thank you and good morning. Our formal presentation will be followed by a question and answer period. Out of respect for your time, we will ask that each caller be limited to one question and a follow-up. We’ll also limit the entire call time to one hour.
Now I am going to read a notice regarding forward-looking statements. This conference call and the accompanying slide presentation contain forward-looking statements. Such forward-looking statements may include but are not limited to statements about our:
Interest coverage ratio;
Capital and liquidity resources;
Joint venture exposure and debt;
Ability to weather the downturn and take advantage of potential strategic opportunities and values;
Level of spec homes;
Generation of sales and deliveries;
Management of starts;
Reduction of land acquisitions and land development spending;
And reduction of our overhead rates.
In general, any statements contained in these materials that are not statements of historical facts should be considered forward-looking statements. We assume no obligation to update these or any other forward-looking statements.
We caution you that forward looking-statements involve risks and uncertainties and there are a number of factors that could cause our actual results to differ materially from those that are contained in or implied by these statements.
These factors include but are not limited to, local and general economic and market conditions, including consumer confidence, employment rates and interest rates. These and other risks are discussed in our press release of July 30, 2008. We refer you to this press release and our most recent annual report on Form 10-K and quarterly report on Form 10-Q for further information.
Copies of these documents are provided on our website, www.standardpacifichomes.com or from the company upon request. We suggest you click on these links after you have reviewed the slides and listened to the audio portion of our conference call. Clicking on the links during the slide show or conference call may cause you to a miss portion of the slide show or call.
The recorded presentation will be available for replay an hour after this call ends and will continue to be available until August 30, 2008. The audio portion may also be replayed by dialing 888-203-1112 and entering pass code number 1473292.
Our presenters this morning are Jeff Peterson, Chairman, President and CEO, and Andy Parnes, Executive Vice President and CFO. I will now turn the call over to Jeff.
Thank you Lloyd, and good morning. We appreciate your participation on today’s call. It’s been quite a while since we started our earnings call off on a positive note but today we are noting that we’ve closed the first phase of the MatlinPatterson equity infusion.
We would get into the specifics of the transaction in a moment but the impact of this event on the company has been profound. With the closing of the first phase, we ended the quarter with over $570 million of cash on our balance sheet, while the MatlinPatterson debt for warrant exchange contributed to the $156 million reduction in consolidated unsecured homebuilding debt for the quarter.
With the unwind of a number of joint ventures during the quarter, the details of which we will discuss later, we used nearly $63 million of operating cash. The company’s operating results continue to reflect very challenging market conditions which continue to erode.
While our net loss increased year-over-year to $248 million, our homebuilding segment pre-tax loss was lower at $185 million versus $244 million last year, due to a reduced level of impairments. The consolidated net loss was higher as a result of nearly $131 million deferred tax asset valuation charge recorded this quarter.
New home orders continue to slide and we’re down 21% year-over-year while our cancelation rate was in the mid 20% range, consistent with the first quarter of the year. We continue to make significant progress in reducing our joint venture exposure as evidenced by the $136 million reduction in JV debt during the quarter.
As I mentioned, we closed the first phase of the MatlinPatterson transaction on June 27 through the sale of 381 million of senior preferred stock at a common stock equivalent of $3.05 per share, which subject to shareholder approval will be convertible into 125 million common shares.
In addition, also on June 27, MatlinPatterson exchanged $128.5 million of company notes for a warrant to purchase 89.4 million common shares with an exercise price of $4.10 per share.
On July 21 and July 30, we announced the terms and schedule of the transferable rights offering to our existing shareholders to purchase 50 million shares of common stock at $3.05 per share. The rights offering is fully backstopped by MatlinPatterson.
Pursuant to the notice of special meeting of stockholders mailed on July 17, we have scheduled a shareholder meeting for August 18 to approve, among other things, the conversion of the senior preferred stock issued to MatlinPatterson into junior preferred stock; the issuance of junior preferred stock upon the warrant exercise, and the issuance of the common stock upon the conversion of the junior stock.
The entire transaction results in increase in our cash position of over $500 million; reduces our debt levels by $128 million and increases our equity balance by $662 million, all of which meaningfully reduces our balance sheet leverage.
Please keep in mind though that the June 30 balance sheet does not reflect the additional $152 million of cash and equity from the rights offering, which is targeted to close next month.
Moving to slide 5, the MatlinPatterson transaction allows us to refocus our efforts on our core business, while reinvigorating our focus on our relationships with customers, employees, vendors, and subcontractors.
The cash from the transaction not only provides valuable liquidity to weather the housing downturn but positions us to take advantage of the strategic opportunities that may be available at attractive prices coming out of the current housing slowdown.
This formation of a long-term strategic alliance with MatlinPatterson was earmarked a meaningful portion of their latest $5 billion fund for homebuilding opportunities. We’ll incorporate taking advantage of attractive opportunities likely to emerge over the next few years.
At this time, I will turn the presentation over to Andy for a review of our second quarter operating results.
Thanks Jeff. Please join me on slide number 6. For the 2008 second quarter, the company generated a net loss of $248 million or $3.82 per share versus a net loss of $165 million or $2.56 per share last year.
The year-over-year decline was driven by the following factors from continuing operations:
A 38% decrease in homebuilding revenues;
A negative homebuilding gross margin of 18.3% resulting from $129 million of inventory impairment charges;
And $131 million deferred tax asset reserve.
All of which were partially offset by an $8.2 million decrease in other expense, which includes a $5.9 million deposit write-off charge; a $12 million decrease in our SG&A expenses, and a $23.6 million decrease in homebuilding joint venture loss which reflects $14.3 million of JV impairment charges.
Excluding the impairment and tax reserve charges, we would have lost $14.7 million or $0.23 per share during the second quarter. Please refer to the exhibit at the end of the presentation for a reconciliation between the net loss before and after the impairment and other charges.
Slide number 7 provides more detail on the impairment charges recorded during the second quarter. We continue to review every project each quarter for impairments including projects not yet open.
Vast majority of impairments recorded in the quarter were triggered by continued housing price erosion. The impairment charges related to ongoing projects covered 39 projects and the joint venture impairments related to 8 projects. The impairments were most significant in California, Arizona and Florida, and to a lesser degree in Colorado.
Turning to slide 8, the 38% decrease in second quarter homebuilding revenues to $411 million was primarily attributable to a 19% decrease in new home deliveries combined with a 10% decrease in our consolidated average home price.
In addition, land sale revenues declined from $107 million last year to $6 million this year. Our backlog conversion rate for the quarter was 83% and reflected shorter escrow periods and our focus on selling standing and nearly completed homes.
Our next slide, slide 9, shows deliveries by state. New home deliveries for the quarter, exclusive of joint ventures and discontinued operations, decreased 19% year-over-year. Deliveries were off in all of our markets other than California and Nevada reflecting the continued slowdown in order activity, a decrease in our backlog levels and weaker housing demand overall.
Moving to slide 10, the company’s negative gross margin percentage from its homebuilding segment was driven by the $129 million of inventory impairment charges, as well as continued margin pressure from increased levels of incentives, discounts and price reductions used to sell homes.
Excluding the impact of land sales and inventory impairment charges, the home sales gross margin would have been 13.1% versus 20.8% last year. Please refer to the exhibit at the end of the presentation, which reconciles the gross margin percentage for the homebuilding segment to that excluding land sales and impairment charges.
The company’s higher SG&A rate for the quarter was driven by the lower revenue base combined with increased levels of advertising and co-broker commissions. With that being said, our absolute level of full year G&A for 2008 will be down meaningfully from last year. Our leaner overhead structure is a result of division consolidation, market exits and intense focus on spending and our efforts to right-size the organization.
On slide 11, I’d like to direct your attention to the left hand side of the slide. You will see that we used nearly $63 million of cash in our operating activities during the second quarter. We used in excess of $80 million of cash during the quarter to unwind three joint ventures, which we will discuss later.
Excluding the JV unwinds, we would have been modestly cash flow positive for the quarter. For the second quarter, EBITDA was a negative $10.9 million driven by the pre-impairment operating loss.
We generated $124 million of EBITDA on an LTM basis compared with $462 million a year ago. Please refer to the next slide for a definition of EBITDA and a reconciliation of EBITDA to GAAP operating cash flows.
As you can see on slide 13, our quarter-end adjusted net homebuilding debt-to-capital ratio stood at 50.4%, down from 64.9% at the end of the first quarter. Our total debt-to-capital ratio which includes indebtedness of our financial services subsidiary and FIN 46 liabilities was 61.9%, down from 70.2% last quarter.
Remember upon closing of the rights offering in August, we will be receiving an additional $152 million of cash, which will further reduce our leverage ratio and improve our cash liquidity position. Please refer to the exhibit at the end of the presentation for a reconciliation of total debt-to-adjusted net homebuilding debt.
As previously announced, we amended our revolving credit facility and bank term loans in conjunction with closing the first phase of the MatlinPatterson transaction. As part of the amendment, Standard Pacific:
Reduced its total commitment under the revolving credit facility from $500 million to $395 million;
Paid down its revolver balance from $90 million to $55 million, and its term loan A balance from $100 million to $65 million;
Agreed to make quarterly principal amortization payments of $2.5 million under each of the revolver and term loan A and agreed to secure future borrowings.
The financial covenants contained in the revolver and term loan A credit facilities were modified to eliminate consolidated tangible net worth, leveraged unsold land and minimum interest coverage covenants. The borrowing base and limitations on joint venture investments were also eliminated.
The amended credit facilities contain a new liquidity test requiring the company to maintain either a minimum ratio of cash flow from operations to consolidated homebuilding interest incurred, or a minimum liquidity reserve and also prohibits, subject to various exceptions, the repurchase of capital stock, payment of dividends and the incurrence and early repayment of debt.
The financial covenants including the elimination of the borrowing base and certain other provisions of the company’s $225 million term loan B were automatically amended to match those of the revolver and term loan A.
At June 30, 2008, we had utilized $96.6 million of capacity under our amended $395 million revolving credit facility, including $41.6 million for letters of credit. We have included for your reference the calculated and required cash flow coverage ratios under the bank facilities and the maximum and actual debt-to-equity ratios under the company’s public notes.
The purpose of slide 15 is to provide you with an updated view of our JV portfolio, including additional detail on our 10 largest homebuilding and land development joint ventures. All of this information will be included in our upcoming second quarter 10-Q.
These 10 ventures represent over 85% of the total combined JV assets and debt. The total leverage of these ten ventures is less than 50% while the leverage for all of our joint ventures is 51%.
The total level of joint venture debt has decreased meaningfully. At the end of 2006, it was over $1.2 billion; at the end of 2007, it was $770 million; and at the end of the second quarter, the total amount of JV debt had been reduced to $507 million.
Moving to the next slide, additional JV developments and activity during the second quarter include the following:
Joint venture re-margin payments of $775,000 (there were no joint ventures consolidated during the second quarter);
We unwound two California JVs through the buyout of our partner’s interest for cash payments totaling $53 million and the assumption of $47.7 million of project debt.
In addition, we and our partner unwound another California venture whereby each partner purchased approximately 50% of the lots. Our share of the venture lot purchase resulted in a cash payout of $30 million.
Subsequent to June 30, we exited two joint ventures in Northern California for an aggregate payment of approximately $3.3 million.
On slide 17, we have included certain data regarding loans originated by our mortgage subsidiary for the current and year-earlier periods and you will also note that 12% of our deliveries for the first 6 months of the year were made to buyers who used funds from down payment assistance programs.
On slide 18, we see that net new orders companywide excluding JVs and discontinued operations for the quarter decreased 25% to 1,241 new homes. The company’s consolidated cancellation rate for the 2008 second quarter was 25% compared to 28% in the 2007 second quarter and 24% in the 2008 first quarter.
The company’s cancellation rate as a percentage of beginning backlog for the second quarter was 28% compared to 23% in the year-earlier period. During the second quarter, June was the weakest month with our sales absorption rate declining from the two previous months and thus far in July we have seen those same slower trends continue.
Moving to slide 19, our level of spec homes peaked at 12.9 homes per community at the end of June 2006 and has been steadily decreasing since. During the past several quarters, we intensified our review of specs starts in an effort to balance our corporate inventory objectives with our division’s requirements to maintain an appropriate level of homes that can be sold and closed in a relatively short period of time which most buyers prefer today.
We’ll continue to carefully monitor our level of spec starts in an attempt to control the number of completed spec homes companywide and feel that the current level of 400+ completed and unsold homes is approaching our comfort level. Jeff?
Thank you, Andy. In closing, we are extremely pleased with our significant improved balance sheet and cash position achieved through the MatlinPatterson transaction.
We can begin the planned transition from being a conservator to an acquisitor or at the right time going from defense to offense. Also in the process we’ve renegotiated our bank facility, enhancing our ability to manage through the current downturn.
With all that said, we remain intensely focused on generating cash through a balanced and disciplined pricing strategy and aggressive approach to managing starts and careful analysis of land acquisition and development spending.
Through all of today’s challenges, we’ve recommitted ourselves to the high standards we have set over the years with the quality of our homes and our customer experience.
That closes our formal presentation. Thank you for your time today. We will now open the call to questions.
Our first question is from Ivy Zelman - Zelman & Associates.
Ivy Zelman - Zelman & Associates
I wanted to just talk to you a little bit about strategy now that you’ve got this solid balance sheet moving forward and how you can employ some of that capital and strategically, how you’re working with MatlinPatterson assuming you’re working with them to look at specific markets.
Do you see any opportunities that you can start employing some of that capital or you think you’d keep your powder dry because land prices haven’t really hit rock bottom yet and you think you should be more patient and prudent?
The second question is just looking at market conditions. June was clearly a tough month for the market and if our number is calculated correctly, a press release that showed a 12% decline through May. So, can you give us what happened in June because that must have been much uglier relative to the first two months of the quarter? Thanks.
Thank you Ivy. First, addressing your question with respect to strategy in MatlinPatterson, you’re absolutely correct. With this additional capital, we’re positioned to weather this market environment and to capitalize on opportunities as we see them, both proactively and reactively.
MatlinPatterson as I think you also know has two seats on our Board of Directors and has a third seat that they can nominate an additional director to. Their view is they’re not going to be involved in the day-to-day management of the business but rather would be working from the Board perspective on governance, on strategy and direction of the company and really reinforcing its supporting management’s efforts here.
Specific opportunities, as I say, we have an open eye for things. At the present time quite frankly, we just are hard pressed to see the right economics at the current market levels. These are things we’re continuing to look at. We will over the course of the next 18-24 months be much more proactive in the land arena in particular.
To answer part two to your question regarding the drop-off in June activity, yes, we did observe a noticeable drop-off in our absorption rates in June which have continued into July. I would say the more noticeable drop-offs were in California, Florida and Texas, in June.
It looked like Arizona and the Carolinas, the absorption rates were pretty consistent throughout the quarter. It just seemed like there was just a lot of negative headline news in June regarding Freddie and Fannie, higher oil prices and that just seem to be weighing on the mind of consumers.
We’ll go next to Michael Rehaut - JPMorgan.
Michael Rehaut - JPMorgan
First, I saw that you mentioned the DPA [Down Payment Assistance] was 12% for the first 6 months. I was wondering if you had a sense or could break out first quarter versus second quarter or second versus first?
I don’t have that detail right in front of me but I could tell you that the percentage has been increasing. If you go back a year ago, we were still operating with the lower GSE and HUD limits. The down payment assistance program activity we were seeing a year- two years ago was really limited to markets like the Carolinas and Texas and Arizona.
With the expanded loan limits, we saw the down payment assistance programs that really expanded all of our markets to where they were being utilized pretty significantly even in the Inland Empire.
The 12%, if you compared the first 6 months of this year to the first 6 months of last year, while I don’t have the numbers in front of me, my guess is the number is up quite a bit. Again, I don’t know how it transpired between the first and the second quarter. My guess is the trend has been steadily increasing just because more buyers are eligible for those types of programs.
Michael Rehaut - JPMorgan
Okay. And before I move on to the second question, just to make sure these are DPAs that you yourselves are funding and it goes through the non-profits into the buyers’ hands?
Michael Rehaut - JPMorgan
Okay. The second question, just in terms of your footprint, which obviously continues to morph as the market shifts and it appears that in general you’re keeping to most of your pre-existing markets.
But I was wondering if you could identify for us of the larger markets that you’re in, if there are certain MSAs or cities or areas that just given your outlook for perhaps continued challenging times, you’re going to de-emphasize or even exit as you try and redeploy your assets and your newly found cash position and balance sheet strength over the next 12 months?
I think as we look at our footprint, we’re taking a long-term view of the markets. It’s not just what we’re experiencing today. And we’ve got a team here at the company that is doing research, very thorough research on all of our markets and the decisions we make with respect to which markets we want to remain committed to will be based on the longer-term fundamentals.
There is just a lot of very weak markets today and we want to make sure that our decisions are not based on what we’re experiencing today but the longer-term fundamentals and we think for the most part that we are in the best markets. Not saying that we are going to remain in every market we’re in but we do believe that overall we have a very strong footprint.
Our next question is from Susan Berliner - JPMorgan.
Susan Berliner - JPMorgan
Andy, I was wondering if you could update your estimate for operating cash flow. I think last quarter you had said that you would earn in excess of repayment of the October maturity?
Yes. Right now, our projections reflect that we will be cash flow positive for the balance of the year even after taking out the remaining public notes as well as the amortization that we will be commencing here on the bank debt.
Those projections do reflect cash from the rights offering and then they do reflect some cash flow from land sales. We will continue to evaluate the desirability of consummating those land sales and it’s possible if a good chunk of those land sales are not closed that our cash flow cushion could be substantially reduced.
Susan Berliner - JPMorgan
And my other question would be, can you give us any color on, subsequent to quarter-end of the remaining large joint ventures, how comfortable are you with those and any expectations for remargining or potentially taking any others on your balance sheet?
The two JV’s that we unwound subsequent to the end of the year, we actually exited; we made a payment to our JV partner. We exited those ventures. I believe the JV debt associated with those two ventures was a little under $30 million.
As we sit here today, we are not in the process of unwinding any other joint ventures but we do have some situations that we’re carefully monitoring. We’re carefully monitoring our partners and we may have a handful of JVs where our partners could be challenged and they could lead to unwinding.
I think it’s just quarter-to-quarter we’re staying on top of that and carefully monitoring those and we’ll just see how they play out. I think that the positive is, as you mentioned in your question, that the pool of JVs has shrunk dramatically.
We’ll go next to Andrew Brossa - Citadel.
Andrew Brossa - Citadel
I want to just focus for a second on the second phase of the MatlinPatterson deal. When you get your roughly $150 million of cash, what would your pro forma net debt-to-cap be? I’m getting around 40%?
I think that’s about right. It would go down about 10 percentage points from where we were at the end of the second quarter and then you’d have to make adjustments to that to reflect the operating results of the third quarter. But it will be pretty impactful.
Our next question will go to David Goldberg - UBS.
David Goldberg - UBS
Wondering if we could start with a little bit of discussion of the $60 million in FAS 109 allowances that are not going to be recoverable. If you can just walk us through how you get to that level and how you’re thinking about that and whether there’s any chance of that reverses as we move forward?
That comes about because we had a change of control or I should say a change of ownership, that’s a technical term under Section 382 of the Internal Revenue Code. So a change of ownership for tax purposes is completely different than a change of control for legal purposes. It’s a very complicated calculation, and it’s a completely different concept.
But we did have a change of ownership under Section 382 and it’s clear that NOLs are restricted from a carry-forward perspective upon a change of control. There’s a little bit more of an ambiguity with respect to the ability to carry back losses after a change of ownership under Section 382.
Up until the change of control on June 27, we had unfettered access to taking our losses that we incurred in the first half of the year back to 2006. What we’ve assumed in our financial statements as of June 30 is that any NOLs related to built-in losses generated after June 30 that we cannot carry those back.
And again, I apologize for getting too technical. The restriction on carry back is for built-in losses, not the total amount of NOL. So we will have a small amount of NOL subsequent to June 30 we can carry back.
But the bulk of what we were anticipating incurring in the second half related to built-in losses which come about from the impairments that we’ve recognized for book, but not for tax.
We have been working on this and there’s a possibility that we get a private letter ruling on this matter that if favorable will allow us to have full carry-back capacity for NOLs and built-in losses in the second half of the year.
Again, we’ve assumed we don’t have that; that’s where the $60 million reserve comes about and hopefully before the end of the year, we’ll have clarity on this. If we do get a favorable ruling on this issue then we will reverse either all or a portion of that $60 million reserve.
David Goldberg - UBS
If you don’t get the favorable letter ruling, is there a chance that there’s going to be a greater reserve other than the $60 million or that’s going to cap where it is now?
The $60 million reflects the worst-case scenario. If we get an adverse ruling, we’ve reflected that through the $60 million reserve. If we get a favorable ruling, then all or a portion of that would get reversed.
We’ll now go to Lee Brading - Wachovia.
Lee Brading - Wachovia
Wanted to follow-up on the JV, very good churn obviously from the JV debt. I think in the past, you’ve given some disclosure in regards to how much of that is exposed to remargin payments and then also just how much of that is non-recourse?
Of the $507 million, $180 million or thereabouts relates to the North Las Vegas JV which is non-recourse and there’s another maybe $20 or $30 million of non-recourse debt in there.
Probably two-thirds of it is recourse and about a third is non-recourse. If you look on that the slide and in the 10-Q, we indicate which JVs have the remargin agreements and which ones don’t.
Lee Brading - Wachovia
Okay. And then from the community count, excluding the JV, we’ve seen two quarters here about flat. Should we see community count trend in this area going forward?
I think over time that our community count will be trending down. We have not entered into any new land acquisitions or land purchase contracts in quite a while. So we’re just going to be slowly burning off existing projects and we will have a very modest level of new communities that we’ll be opening over the foreseeable future.
We’ll go next to James Wilson - JMP Securities.
James Wilson - JMP Securities
Thanks, good morning. Two questions; first, could you identify as you move forward now with the recapitalization and with the new capital base, what your return requirements or hurdles or margin targets might be on any new land spend? I know it may not be attractive yet but what you really are targeting for return requirements?
I think if you’re underwriting today, you’re going to set some pretty lofty return targets. I would say in a normal environment where you feel you’re kind of in a steady state pricing environment, we would probably normally look for returns on average in the low 20s.
Again, we risk-adjust our return targets depending upon how we risk rate a project. Today, I think if you were going to be underwriting, you would probably want to use very conservative assumptions in your pricing and your absorption rates and probably set much loftier return target.
I think it would have to be very deal specific but you’re not going to buy a deal today and just shoot for a 20% return target.
James Wilson - JMP Securities
Okay. Then the other thing is on operating expense or SG&A expenses. Obviously with the volume as low as it’s gotten to for this quarter, you’re at 19%, could you give a little color on strategy? What you’re doing to actually manage the number and maybe where you hope to get it back down to over the course of the next 6 to 12 months?
It’s an area that we are spending a great deal of time on. I think we’ve made a lot of progress in cutting dollars from an absolute perspective. The revenue rate has just been dropping very significantly.
Since our peak staffing level middle of 2006, we’ve cut our head count about 50% which is just a little behind our unit delivery reduction. I think if you look at unit delivery declines from peak, we’re down about 55%. So our head count reductions have been pretty much in line with the unit reductions.
This year, we’ve incurred some, what I would characterize as, extraordinary expenses in conjunction with number of special things we’ve been working on; the bank facilities and our financial and strategy analysis.
As we move into next year, a lot of those expenses are gone. I think even assuming revenues were flat next year, I think our SG&A rate has the potential to come down next year.
Our next question goes to Buck Horne - Raymond James.
Buck Horne - Raymond James
How are you thinking about changing the product you’re building and selling in terms of features or price point relative to what competitors are doing in this tough environment?
We have been spending a lot of time in reengineering and redesigning our product in today’s environment. During the very strong market conditions when prices were escalating, you have a tendency to add a lot of nice features to a home. We have been redesigning product to offer more value or a better value to our homeowners or homebuyers.
We’ve also been working very closely with our subcontractors and our divisions to reengineer product just to take cost out of the equation and that’s been a very successful endeavor for us. I’d say those are the two biggest areas that we’ve been focused on, redesigning and reengineering, that have paid very significant dividends thus far.
Buck Horne - Raymond James
Okay. Do you have a number for the cash you spent on the land acquisition or development in the quarter and what you might expect to spent for the full year?
During the second quarter we spent, excluding the JV unwinds, I mentioned that was about $80 million, other than that we spent about $19 million on land. That essentially was just represented option takedowns.
We spent about $46 million on land development. It’s worth noting that the land development dollars include fees and building permits. That’s where we code those types of costs. So, it’s not $46 million of money going into dirt. When we start a home the costs associated with that get reflected in those land development costs.
In terms of what we’re going to spend the balance of the year, it’s going to be under $50 million for additional land spends and probably about $80 million or so for land development.
Our next question comes from Alex Barron - Agency Trading Group.
Alex Barron - Agency Trading Group
Good morning. I wanted to focus on couple of things. My first questions are on impairments. I wanted to ask you what percent of the communities you currently have been impaired at least once and what was the benefit to the margins in this quarter from previous impairments?
I don’t have the number in front of me regarding projects that have been reimpaired. I know there are some; I know it’s well under 50% but we have had some projects that have been impaired more than once.
Alex Barron - Agency Trading Group
How many have been impaired at least once?
How many of our projects have been impaired at least once?
Alex Barron - Agency Trading Group
I’d say probably three quarters of our projects. It’s a pretty high percentage.
Alex Barron - Agency Trading Group
And then I believe the amount of impairments that ran through cost of sale or the dollar amount of previous impairments that ran through cost of sales was about $71 million or so this quarter. So, pretty significant amount.
Alex Barron - Agency Trading Group
Okay, thanks. My other question was regarding land spend, both development and purchases. Wondering what you have done year-to-date and what the budget is for the remainder of the year and what percent of that is discretionary versus HOA fees or taxes or stuff like that.
I think I just answered that on the previous call. We’re going to spend less than $50 million on land acquisitions, less the rest of the year and about $80 million on land development. I don’t have the exact breakout of the $80; how much of that is fees and permits and how much of that is hard costs. But it’s a pretty de minimis number compared to where we have been in the past.
We’ll go next to Tom Carroll - Imperial Capital.
Tom Carroll - Imperial Capital
Just jumping back to IRS Section 382, I know you spoke about it briefly. We had targeted $135 million for potential cash tax refunds this year. Will that affect that $135 million; reduce it or is it just going to affect maybe potential second half of the year implication?
The $60 million reserve we’ve taken really is a reserve against that $135 million. The $135 that’s the full carry back opportunity that we have and if we get an unfavorable ruling on this matter we’ll lose about $60 million of that carry back ability. That means we have about a $65 million refund potential.
Tom Carroll - Imperial Capital
Okay, got it. And then as far as the new credit facility covenants, the 1.75 to 1 cash flow from operations to interest incurred. If some of the land sales don’t develop as you spoke about earlier, could you just talk about the remedies there? I think you have to move cash into reserve; could you take us through the mechanics there?
Sure, in any quarter where we don’t meet to 1.75 requirement we can setup what is referred to as an interest reserve account which is equal to our LTM, amount of interest incurred, and we just set that aside in an account with Bank of America and then we’re in compliance with that covenant.
I think the number as of the end of the second quarter would have been $129 million and over time that number should shrink as our debt levels reduce that; the interest incurred number should go down. But as of today it would be $129 million.
We’ll go next to Harlan Cherniak - Venner Capital.
Harlan Cherniak - Venner Capital
My question has been answered, but I just want to congratulate you on the transaction and the new capital structure. Great job.
We will go next to James Eustice - Churchill Pacific.
James Eustice - Churchill Pacific
Just on your cash flow from operations, so was the primary reason you were a user of cash was just because of the JV pay outs?
It was the JV unwinds. We spent about $80 plus million during the second quarter to acquire assets from JVs. So that wasn’t money that went into JVs, it was money that we used to buy land out of JVs. If you exclude the $80 plus million, we would have been modestly cash flow positive for the quarter.
With no other questions in the queue, I’d like to turn the call back to Mr. Peterson for any closing comments.
We thank you for all of your support and we have the rights offering which we’re kicking off on the road show. We’ll be filing the registration statement next week and thank you again for your time today.
Thank you. That does conclude the call. We do appreciate your participation. At this time, you may disconnect. Thank you.
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