Beazer Homes USA Inc (BZH) 2008 Q3 法說會逐字稿

Good morning and welcome to the Beazer Homes third-quarter fiscal 2008 earnings conference call. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Joining him on the call will be Allan Merrill, the Company's Chief Financial Officer, and Bob Salomon, the Company's Chief Accounting Officer. Before he begins Leslie Kratcoski, Vice President of Investor Relations, will give instructions on accessing the Company's slide presentation over the Internet and will make comments regarding forward-looking information. Ms. Kratcoski, you may begin.

Good morning, everyone, and welcome to the Beazer Homes conference call on our results for the quarter ended June 30, 2008. During this call we will webcast a synchronized slide presentation. To access the slide presentation go to the investor home page at Beazer.com and click on the webcast link in the center of the screen.

Before we begin you should be aware that we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks, uncertainties and other factors are described in the Company's SEC filings including its annual report on Form 10-K for the year ended September 30, 2007.

Any forward-looking statement speaks only as of the date on which such statement is made and, except as required by law, we do not undertake any obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise. New factors emerge from time to time and it is not possible for management to predict all such factors.

Ian McCarthy, our President and Chief Executive Officer, and Allan Merrill, our Executive Vice President and Chief Financial Officer, will give a brief presentation after which they will address questions you may have for the duration of this one-hour conference call. Today we're also joined by Bob Salomon, our Chief Accounting Officer. In the interest of time and allowing everyone a chance to ask questions, we kindly request that you limit yourselves to one question and then one follow-up. I'd now like to turn the call over to Ian McCarthy.

Thank you, Leslie, and thank you all for joining us on the call today. Before we begin our discussion of the results we released this morning and the current business environment, I would like to make a few brief comments on the company-specific issues that we have been and continue to work through.

As previously disclosed, Beazer Homes and our subsidiary, Beazer Mortgage Corporation, are under investigation by the US Attorney's office in the Western District of North Carolina, the SEC and other federal and state agencies concerning matters that were the subject of our audit committee's previous independent investigation. From the outset we have been fully cooperating and will continue to fully cooperate with the ongoing external investigations and intend to attempt to negotiate a settlement with government authorities with respect to these matters.

We also continue to defend the Company's interest in the related civil litigation. To date two cases have been concluded following dismissal by the courts. We also continue to actively work on remediation efforts to address the material weaknesses identified in our ICFR or internal control over financial reporting. This is an ongoing process that will take several quarters, but you can track our progress in item 4 of our 10-Q to be filed shortly.

I would like to confirm that with respect to ongoing investigations, litigation and possible future settlements our public filings to date speak for themselves and until definitive resolutions have been reached we cannot provide any further comments beyond the details included in those filings.

Turning to the current business environment, market conditions remain very difficult for the home building industry during our third quarter. Despite lower home prices, relatively low interest rates and a wide choice of available homes, potential home buyers remain reluctant amid concerns over slowing job growth, higher energy costs and the overall economy.

In addition to these demand dynamics, supply levels of both new and existing homes inventory remained elevated, exacerbated by increased numbers of foreclosures. As such we maintain a disciplined and cautious operating approach as we believe industry conditions will remain challenging for the remainder of this fiscal year and as we enter fiscal 2009.

Despite the challenging conditions reflected in our quarterly financial results overall, there are certainly some bright spots to report, including -- positive operating cash flow for the quarter and year to date enabling us to end the quarter with $314 million in cash, more than double the year-ago level; sequential improvement in gross margins from the second quarter of this fiscal year before inventory impairment and lot option contract abandonment; continued reductions in both overhead and direct costs; and further reduction in unsold inventory.

Subsequent to the end of the quarter we also finalized two large asset sales in Virginia totaling approximately $85 million and successfully completed the amendment to our revolving credit facility, modifying or eliminating many restrictive covenants.

At this point we are comfortable with our current liquidity position. We have achieved this by following our principle operating goals of generating cash from operations, reducing both overhead and direct costs, limiting investment in land and inventory, and exiting non-strategic markets and communities. We still expect to end fiscal 2008 with a cash balance in excess of year-end fiscal 2007 levels despite paying down approximately $100 million in debt and absorbing a significant loss from operations.

While maintaining a solid liquidity position to whether this part of the cycle remains a key priority, we are also implementing near and long-term strategies aimed at returning to profitability and positioning ourselves for the eventual market recovery. These strategies include increasing sales absorptions per community, continuing to pursue direct cost reductions and efficiencies in our business, and reallocating capital and resources within our geographic footprint.

We're also strongly focused on further differentiating Beazer Homes in the eyes of the consumer so our holistic approach to home building, which we call a smart design, it which we bring together a team of experts who understand homes, our own architects, designers and builders as well as outside sources like professional chefs, home organizers and realtors, to design and build homes for our customers that are more livable, more organized, well-built and eco-friendly.

We believe this strategy enables us to differentiate our homes not only with other new homes but also with existing homes and specifically against foreclosures, which are often perceived to be the most affordable way to purchase a home. In fact, in addition to the immediate cash cost required to close, foreclosures may require extensive cash outlays for improvements and deferred maintenance after closing. In contrast, we can offer a home ready for immediate occupancy upon closing which is more livable for today's contemporary homeowner and which is eco-friendly and results in substantially lower cost of ownership. We believe these strategies will enable us to enhance shareholder value over the long run.

Let's now review the financial results. For the third quarter we experienced a total revenue decline of 40% from the same period in the prior year. This decline was driven by both decreases in closings and average selling prices year-over-year. These factors negatively impacted gross margins compared to the prior year. However, gross margin, excluding inventory impairments and abandonment charges, improved sequentially to 10.6% in the third quarter from 6.4% in the second quarter of this year.

Inventory-related and goodwill impairment charges of $95.5 million and $4.4 million respectively contributed to a net loss per share from continuing operations of $2.85 compared to a loss of $3.09 in the prior year. For the third quarter homebuilding revenue declined about 40% due to both a 37% decline in home closings and a 9% decline in average selling prices from the same period in the prior fiscal year. Home closings declined in all regions with the most significant declines in the Southeast, the West and Florida. Average selling prices were most under pressure in the West and Florida.

Net new home orders totaled 1,774, a decline of 42% from the prior fiscal year, with declines most pronounced in our Mid-Atlantic and other homebuilding segments. At 37% the cancellation rate for the quarter was comparable to the 36% rate experienced for the same period in the prior fiscal year. The decline in net orders and the unusually high cancellation rate in the Mid-Atlantic were due in part to cancellations arising from our decision to sell a condominium project in Virginia to an apartment owner. This resulted in the cancellation of over 100 sales contracts.

Excluding these contracts the cancellation rate for the quarter would have been 33%, in line with that of the March quarter. Resulting backlog as of June 30, 2008 was 2,716 units with a dollar value of $668 million representing a 54% and 61% decline from the unit and dollar value backlog levels as of June 30, 2007. I'd now like to turn it over to Allan Merrill, our Chief Financial Officer, to further discuss our financial results and other items. Allan?

I'll start with the inventory, option abandonment, joint venture and goodwill impairment charges incurred during the quarter. As with our May filings, you will find expanded disclosure in our 10-Q as it relates to impairment charges split between properties held for development and land held for sale as well as by segment.

Inventory impairments totaled $68 million in the June quarter; of that amount $47 million related to properties held for development and $21 million related to land held for sale. Impairments recorded on our held for development inventory resulted from the continued decline in the housing market characterized by falling home prices and slowing sales paces which in turn led to higher levels of home buyer incentives. Many impairments were again incurred in the West region where a significant portion of our inventory is located.

The June quarter impairments represented 2,430 lots in 44 communities. Year to date we have impaired approximately 8,850 lots in 191 communities. The $21 million in impairments related to properties held for sale were spread across many different markets with approximately 75% in our continuing markets and approximately 25% in markets we are exiting. During the June quarter we also incurred lot option abandonment charges totaling $28 million. Over 40% of this amount related to projects in markets we decided to exit during the quarter. We also further reduced the carrying value of our interest in joint ventures by $18 million.

Lastly, as a result of our decision in the third quarter to exit operations in Colorado, we impaired the $4.4 million in goodwill related to that market. As a result of our comprehensive market reviews we have exited or are in the process of exiting eight markets -- Fresno, California; Denver and Colorado Springs, Colorado; Cincinnati and Columbus, Ohio; Lexington, Kentucky; Charlotte, North Carolina and Columbia, South Carolina.

Our land position as of June 30th totaled 46,224 lots, 72% of which were owned and 28% of which were controlled under option. This represents a reduction of approximately 15% and 36% from levels as of March 31, 2008 and June 30, 2007 respectively. We've achieved these reductions through the abandonment of lot options, selected asset sales and of course our own home closings. This has led to a significant shift in the weighting of our landholdings toward land owned.

Of the 33,297 owned lots as of June 30th approximately one-third were finished lots, less than 4% were in the form of raw land. We continue to exercise caution and discipline with regard to land and land development spending. So far this year we've spent about $275 million on land and land development compared to $694 million in the first nine months of last year. Our expenditures in the fourth quarter should be around $100 million allowing us to end the year with land and land development spending below half of the $800 million we spent in fiscal 2007.

As of June 30th we had 300 unsold finished homes and 1,157 unsold homes under construction representing declines of 32% and 41% respectively from year-ago levels. We have continued to significantly limit new home starts. But as you may have heard from other builders, a modest level of speculative units remain an inevitable part of the business today. Buyers with homes to sell often have short decision-making windows, so having homes nearly complete can be important. Also, even moderate cancellation rates will result in some unsold homes under construction.

At June 30th our total debt stood at $1.8 billion, a net decrease of about $95 million from our fiscal year end in September. However, net debt to total capitalization stood at 63%, up from September, due to the impact on our balance sheet of the approximately $565 million in impairments and abandonments we have recognized so far this year.

At June 30th we had a cash balance of $314 million. Cash provided by operations totaled $52.1 million for the quarter bringing year to date cash from operations to a positive $24.5 million. This cash generation has occurred despite year to date cash costs of approximately $28 million related to the investigation and a further $21 million in bond holder consent fees paid.

As previously reported, we received a cash tax refund of approximately $56 million relating to a fiscal 2007 net operating loss carried back to fiscal 2005. During fiscal 2009 we expect to collect additional cash tax refunds of approximately $150 million.

As Ian mentioned, we remain comfortable that we will exit the year with cash balances above the level at the end of last year with the $85 million in proceeds already collected from asset sales in the fourth quarter, a significant number of home closings scheduled before year end, proceeds from several small asset sales currently pending, and moderate land and land development spending our liquidity should be quite strong at year end.

We will continue to consider ways to strengthen the balance sheet going forward, but, with our strong liquidity and still to be resolved issues with regulatory authorities, we don't expect to make any changes to the capital structure in the near term.

We're pleased to report that yesterday we entered into an amendment to our revolving credit facility which changed the size, covenants and pricing of the facility. During a very tough time in the credit markets we achieved our principal objective in the amendment negotiation namely gaining additional financial flexibility during the current housing downturn by modifying or eliminating certain restrictive covenants by agreeing to reduce the size of the facility, increase collateralization requirements and increase pricing paid to the bank group.

In addition, to minimize uncertainty regarding the real or perceived consequences of potential further deterioration in our financial metrics over the next three years, we and the bank group also agreed to a framework that would further reduce the size of the facility and increase collateralization and pricing if particular financial metrics are not maintained. We believe this framework should eliminate many of the circumstances that might otherwise lead to the requirement for future facility amendments.

The amendment eliminated financial covenants related to interest coverage, leverage and landholdings and reduced the network maintenance covenant from $900 million to $100 million which provides significant additional flexibility for the Company to absorb both potential additional inventory impairments and the potential consequences of a reserve against the Company's deferred tax asset under FAS 109.

In exchange the Company agreed to a reduction in the size of the facility from $500 million to $400 million, an increase in collateralization requirements which are the value of assets secured under the facility in relation to amounts outstanding or drawn as letters of credit from approximately 2.25 times to 3 times, and to an increase in pricing from LIBOR plus 350 to LIBOR plus 450 basis points.

Other than the $100 million tangible net worth covenant the only other financial maintenance covenant which remains unchanged by the amendment is a requirement for the Company to maintain minimum liquidity of $120 million in the form of cash or availability under the facility or a combination of the two.

The facility is subject to further reductions in the future to $250 million and $100 million if the Company's consolidated tangible net worth falls below $350 million and $250 million respectively. As of June 30, 2008 the Company's consolidated tangible net worth as calculated for the facility was $784 million.

The facility size is also subject to a reduction to $250 million if the Company's leverage ratio exceeds five times or 3.5 times excluding the effect of any deferred tax valuation allowance. The Company's leverage ratio at June 30, 2008 was 2.19 times.

To the extent the facility is reduced to $250 million or $100 million, both the multiple of assets securing the facility and the pricing will increase. The facility size is also subject to a reduction to $200 million if the Company's interest coverage ratio for the quarter ended June 30, 2010 is less than one times. Availability under the facility continues to be subject to satisfaction of a secured borrowing base. And I want to point out that the Company has not had cash borrowings under this facility since its inception in June of last year.

I'd like to conclude my remarks by saying that we are very pleased with the flexibility this amended facility provides and we appreciate the support and confidence of our bank group led by both Wachovia and Citigroup. I'll now turn it back over to Ian.

Thanks, Allan. I'd like to add my appreciation to our bank group as well as to our many other partners and stakeholders who continue to work with us to weather the current downturn. And in particular I would also like to thank the many Beazer ambassadors for their tireless efforts on our behalf.

Before moving on to the Q&A I wanted to take a few minutes to discuss the recently passed housing stimulus legislation. Although it's too early to tell what the impact will be, we are encouraged by certain provisions of the stimulus package including the $7,500 tax credit available for first-time homebuyers, the permanent increases in FHA and GSE loan limits, the extension of the maximum FHA loan maturity to 40 years, and other measures including GSE support and foreclosure relief.

We're hopeful that these measures will provide an incremental boost to the industry over the next several quarters. We are immediately seeking to leverage the availability of the tax credit by hosting a free national first-time home buyer webinar next week and offering free on-site seminars in all of our markets through mid-September, focusing on the new tax credit and basic steps of the mortgage approval process.

We're disappointed with certain aspects of the bill that will provide some near-term challenges and inhibit home ownership possibilities for certain homebuyers, specifically the increase in the minimum down payment for FHA loans to 3.5% and the elimination of down payment assistance. We currently estimate that approximately 20% of our customers make use of down payment assistance, although our visibility is somewhat limited as we no longer conduct our own mortgage operations.

With its elimination in October we would not be surprised if we see an uptick in its usage during our fourth quarter. At the same time we and our mortgage partners at Countrywide, believe a portion of the buyers who have made use of it may not have actually needed the assistance to close on their home. Irrespective of the potential positives and negatives of this legislation, in the end we view anything that can stimulate potential home buyer awareness, interest and education is good for our business.

Alan and I will now be glad to answer your questions and I would ask the operator to give the instructions for registering your questions.

(OPERATOR INSTRUCTIONS). David Goldberg, UBS.

Good afternoon, everybody. First question is actually on SG&A and the efforts you guys are making to lower SG&A. Remember this quarter as a percentage of revenue came in a little bit higher than we were expecting and I'm just wondering how you're thinking about overhead and reducing overhead as you look forward and where you think that could get to over time?

This quarter had a couple of anomalies -- at least one big anomaly in it; the investigation-related expenses were quite significant in the quarter. Remember, that was the quarter that we completed our restatement in and so the professional fees associated with that were very significant. The other factor that flows through that line, David, is a pretty good-sized bump in realtor cooperation in our home sales and those two provided the majority of the increase in the SG&A.

We don't have a target number going forward, but I will say that between division level overheads and corporate level overheads we have taken out with jobs, with reorganizations of the financial structure of the business, centralizing things like planning and design, we've taken out, at you know, over 1m500 jobs -- 1,700 jobs really from the peak and nearly $200 million in overheads over the last 18 months.

Great. And then I guess as a follow-up, I'm wondering if you can talk about the margins on the homes you sell, the spec homes that get sold versus the kind of built for order homes. It was interesting, and you noted in your remarks that some buyers are looking and this has certainly been spoken of by a number of builders that some buyers are looking to get homes more immediately and so you need to have a certain amount of spec on the ground. I'm just wondering what the margins look like, what the margin profiles look like between those homes and how you kind of think about that moving forward in terms of the mix of spec versus build to order?

I'll give you a couple of thoughts and then Ian will probably have some as well. I think one thing that we've tried to institute is the concept of a line of margins between spec sales and to be built sales within every community. You should expect that there's a slope that we would expect and do receive quite a bit higher margin on a to be built home where we still have the work to do to lay out the cash to build the home, somewhat lower margin on a spec.

Now the slope of that line that would kind of connect those points is dependent on a number of factors. If it's a particular community where we had had more specs the slope might be somewhat steeper. If it's a community where we have a significant cost basis in the land and therefore the cash generation out of a spec sale is very, very significant we may take a lower margin as well.

So I would just tell you that in general we are seeing a -- and it's hard to give a number that would be representative. We've just gone through our first pass of looking into 2009 and reviewing year to date results across every single division in the last couple of weeks. And I would tell you universally that slope exists, we are getting better margins on pre sales than on the spec sales, but that gap can range from a couple of hundred basis points to nearly 1,000 basis points.

David, I would add in terms of the number of specs that we have we've been very disciplined during this current downturn that we continue to have less than one finished spec home per community and approximately two and a half under construction. So that's a level that we've maintained over the last 12 months and we've brought it down in absolute numbers by over 900 homes. So a very disciplined approach there. We realize that we're going to have specs through the cancellation rates that we have, but with the cancellation rate somewhat normalized now in the low 30s we're not too many specs.

Great. Thanks so much.

Larry Taylor, Credit Suisse.

I know it's impossible to quantify exactly, but I wonder as you look at the business and think about the relative order of magnitude, the difference between the impact of the down payment, assistance loss and then the impact of these tax changes, how would you sort of weigh those two?

Well Larry, as you say, it is too early to tell. We don't feel that we have too high a percentage, as I said, about 20% of our buyers use down payment assistance, it's higher in certain markets -- California is substantially higher, Florida is higher. But as I said, with the ease of being able to accept down payment assistance we believe that many buyers who didn't actually need it were using it and why wouldn't they if it's there and available.

So I think that we want to get out, we want to educate our buyers now, that's why we're proactively getting out to our buyers. We're holding this webinar next week across the whole country, in every market we'll be holding seminars to try and understand from the buyers and explain to the buyers how they can use that tax credit. A lot of these first-time home buyers are not going to be that sophisticated, so we really want to be proactive in getting out there.

At this point we can't really tell if the tax credit and the linked ability for family members to now loan the down payment in addition to gifting, if that's a benefit as well, we can't tell it's that. Those measures are going to equal out all of the down payment assistance. And as I said in the remarks, we were certainly disappointed the down payment assistance was taken away and, as you well know, there are some measures to try to bring it back as well.

So I think this is a moving target. I know we're hopeful that the positive news about housing, after many years now of negative news about housing -- falling prices, foreclosures, etc., now we've got something positive to talk to the buyers about. We just hope that that positive stimulus at least gets some people into homes. And plus the time restrictions on the tax credit again I think will take some people off the fence and put them into a home.

Thanks. And then a second question. Can you give us some sense -- you had this relatively large project sale subsequent to quarter end -- so what the book value was of that piece of property?

It was actually two different assets and I believe that the impairment in the quarter associated with those two asset sales was about $5 million, but I don't know, Larry, if there had been impairments of those assets in prior quarters. I don't have that at my fingertips. But these were two -- to be sold out condo projects sold to apartment developers that were never occupied by our homebuyers. And so these were sold awfully close to their cost basis and hadn't been kind of white elephants sitting around waiting. We sold them literally at their completion dates.

That's helpful. So that just means there wasn't a big write-off associated with that asset sale in the fourth quarter?

Yes, we had, as I said, I think $5 million associated with these assets in the third quarter, which they would have been carried as property held for sale and we had to mark them to our expected realized value less cost of sale and then several days later we sold them. So you'd think that our mark for those assets at June 30th was pretty close to their sale proceeds.

That's great. Thank you.

Ivy Zelman, Zelman & Associates.

Good morning, guys. It's actually Alan Ratner on for Ivy. I was hoping to dig in a little bit more to your cash flow. We were a bit surprised through the first three quarters of the year to see you negative on a free cash basis if you exclude the tax refund. And understanding that the fourth quarter is typically your seasonally strong period for cash flow generation, just wanted to see kind of given the fact that you're down 60% year to date on land spend, really how much room there is to cut further to generate cash and I guess tie that into your current supply of finished lots which I think is roughly around a year's supply on a trailing 12-month basis?

A few comments. First of all, you're clearly right to acknowledge and we did intentionally the $56 million cash tax refund as a component of the year to date cash flow of $24.5 million. But I think at the same time we wanted to point out the $50 million spent on investigation and bond holder consent fees. And so if we're really going to look at the cash generation of the business we probably need to look at both sides of that.

Further, you did point out, and it was clearly the cash case last year, that we had very significant cash generation in the fourth quarter. We expect that to be the case again. It's why we've said consistently from December forward that we expected to get to a cash balance at the end of this year in excess of the cash balance at the end of last year despite incurring the extraordinary investigation expenses and despite paying down $100 million in debt.

So we have been making decisions by project by project, market by market, managing to a strong liquidity position. We have had some market exit decisions that we've made, that's also added to our cash strategy. And we're seeing the benefits are that already through the third quarter and we'll see more of that in the fourth quarter. I think we feel pretty good. You're well aware of what our maturity situation is with respect to our long-term indebtedness with no maturities until 2011, so we think we've been very prudent in building the cash position and the growing cash position that we have.

On the finished lot side, I think we said we had about 33,000 to 34,000 owned lots, a third of which or 11,000 to 12,000 were finished. Unfortunately that represents well over a year's supply and I think the other thing is that the two thirds that are not finished such a tiny fraction are raw there are many of the lots that are in between that don't require significant capital to get to a finished lot position. So I think net net there is further room in land and land development spending as we look into '09, not a lot, but we are not at this point giving any '09 forecast as to cash flow or balance sheet metrics.

Thanks a lot. That was great color.

Michael Rehaut, JPMorgan Chase.

Good morning, everyone. First question, just I was hoping to get a little bit more clarity with the DPA. You said that you estimated it was 20% of your buyers, but that at the same time you don't have a full visibility given your agreement that Countrywide has taken over the origination. When was the last time -- where is that 20% from? Is it what's in your backlog or is it the last quarter that you yourselves originated loans? And can you give us a sense of a time snapshot of where that 20% relates to?

I would say that it's our best estimate of the calendar year to date. Because as you know, FHA rules limits change January 1 in '08 and that really enhanced the use of the FHA program in calendar '08. So we've seen approximately 50% of our closings now going through the FHA program and that's where we've got the use of that down payment assistance.

So I would say that it's something that we haven't got a clear number on because as we've transitioned to Countrywide through this year they haven't got the full capture rate of all our buyers. So a number of our buyers, as we integrate Countrywide into our various operations we've got a number of smaller mortgage companies closing loans for us up until this point year to date.

So (inaudible) that number as best we can. I think what we're saying going forward is that we actually might see that go up a little bit in the September quarter as people get in to use that program. And then of course we'll have to decide how well the text effect is being used going forward until July next year.

Let me just add I think one other data point that we used in arriving at that estimate, Michael, is some checking that we did with the charities that provide that benefit to our buyers. And so we've done back checking through them directly, looked at our own closings, worked with Countrywide. So it's not a shot in the dark; it's just when you're not closing them yourselves we wanted to point out that there was the possibility of a slight discrepancy but we feel very good about that estimate capturing what's happened so far this year.

Thanks, Allan, for that added description. I guess just a follow-up to this and I have one more if I could. But just on the tax refund, you mentioned it's unclear how perhaps the homebuyers will take to that. A lot of people talk about the tax credit and they kind of stop in the description of that tax credit in a very brief way just saying it's a credit.

Are you concerned at all about the 15-year payback and I mean is that going to -- and I see a lot of builders describe the tax credit; they really don't describe the other half of it. How does that work in terms of making potential homebuyers somewhere and do you think that payback will factor into their decision?

I think it will. I think that we would much prefer this to have be a straight gift, as a straight tax credit rather than a loan that has to be paid back over 15 years. I've discussed this on many occasions with our Chief Operating Officer who told me back in the 70s before I was here that there was a straight tax credit that was an absolutely really positive stimulus to the market at that time. And again, we were very involved in the lobbying here in terms of assisting NAHB in trying to get this through and we would much have preferred that to be the case because it was so effective.

I think buyers are going to look at this now and say it's a real benefit here. There's a real benefit and we need to explain it to the buyers. They need to understand how it works. In many cases we may need to explain it to their families if their families are going to help them get into this deposit going forward.

So I think there's an explanation there. We recognize that it's not a straight gift. We recognize that it's got to be repaid over a period of time. But I do think that just that positive impact of getting people on the front foot instead of the back foot and being able to say to people if you buy a new home within the next year there's a real positive benefit to you. I think that's a positive stimulus.

One more question if I could. Just on the credit facility, it said in the press release, I think you mentioned in your prepared remarks, that you expect to add more assets to the borrowing base in order to create availability under the facility. I was wondering if you could give us a sense of that and, given at this point with zero to the borrowing base or the availability of zero what do you hope that number to increase to over the next 12 months?

We have plenty of assets. We can make that number whatever we want it to be. It's clearly an operational and financial burden to add assets to it. With this amendment there are a couple of things that went on, and this may be more detail than you want. But with the asset sales that Ian and I talked about, the $85 million, one of those assets, the larger of the two was actually in the borrowing base and so that came out. The collateralization requirement went up from 2.25 to 3 times. And so the combination of those things really affected availability at a moment in time. We'll deal with that. We are in the process of putting additional assets in.

Now your question as to what's the target level -- we clearly want to cover our LCs. We clearly want to cover something in excess of the LCs. I don't today and I don't think Ian has a specific number that we want to have available, but I would tell you it would be very surprising if we went to the effort in the near term to create availability that approximated the entire amount of the facility, because we simply don't need it and don't need to incur the expense or the distraction of gaining it.

And I know you didn't specifically ask this, what we were really trying to do is future proof the facility so that as business conditions evolve, whether better or worse, we weren't in a quarter-to-quarter kind of mode of do we or don't we have a facility. And I think that was really the important part of the amendment.

Thank you.

Carl Reichardt, Wachovia.

Good morning, guys. Just as clarification on the cash flow for next quarter, I assume that assumes the $85 million from the condo sale, so will you be free cash flow positive without that?

Yes, we will be.

I thought so. And then Allan, I had a question about -- Hovnanian, as you may have seen, their rights offering that they talked about earlier related to section 382 of the IRS code. And I'm curious if you've taken a look at that and whether or not you expect that a change in ownership in your share base might impact the ability of you to continue to utilize or realize your NOL carryforwards?

I think that was an important and a very interesting development this week. As you know, we had our annual shareholder meeting that happened to coincide with Board and committee meetings that happened to coincide with preparation of our 10-Q and our earnings call. So that's probably a direct way of saying that we haven't spent as much time looking at it yet, but it's clearly important, it is interesting and we will study it closely.

I appreciate that. Thanks, guys.

Alex Barron, Agency Trading Group.

Good morning, guys. Wanted to ask you if you guys have a way to quantify the benefit to your gross margin this quarter from some previous impairments?

I guess I'll take that. I think the way I look at it is I don't have it -- let me answer it quickly. I don't have a specific number to give you. I would tell you it's a range of -- it's clearly about $25 million in the quarter. Because of the different types of things that happen in the impairment it hits the previously capitalized interest, it hits the basis, some of it relates to property held for sale which is accounted for differently than homes sold.

It's hard to just give you a number that would be particularly meaningful. But having taken nearly $1 billion in total impairments, those are in the process of working their way through the income statement. But I give you as a swag number kind of $25 million.

Thank you. My other question is more I guess theoretical. I guess I'm trying to understand generally at what point in the gross margin is an impairment triggered and after you take the impairment what does the typical gross margin get reset back up to?

I'm glad you asked that question. I've had a chance to look through some other scripts and calls and I think there's been a lot of confusion on this point. And I guess I get the benefit of going near the end here on these earnings calls to deal with this.

The first thing is that the level of the gross margin at a moment in time is not really much more than a data point for the determination of whether an impairment exists. An impairment exist if the aggregate cash flows of the project undiscounted are below the book value. And there are circumstances where that can occur with higher or lower gross margins based on the projections of what's going to happen in the future.

So I need to create kind of a break here where we don't say that a margin itself is going to create an impairment. It's a good indicator, but it isn't the only indicator. What happens in the future is really important.

And the second side of it is what should margins be or what are they when you get done impairing it? For the same reason that the margin isn't the sole trigger, it isn't the sole benefit or the sole way in which to look at what the result of the impairment was. We will have a wide range of gross margins or contribution margins after impairments depending on the length of the community, longer lived communities tending to have higher gross margins after impairments and quick turning nearly built out communities having much lower gross margins.

And the reason for that is that the valuations that are arrived at in the impairment calculation are discounted cash flows. And obviously the power of compounding effects longer lived communities more than shorter lived communities. We use a range of 18% to 22% in our discount rates and that then drives what the margins are. And I know that that isn't very satisfactory because the way the question was framed was just tell me what the gross margin is before impairment and after impairment, but I'm intentionally not answering it because it isn't really the way that we are able to look at it under the accounting standard.

I guess that's fair. I've just gotten different answers so I was trying to see what yours would be. If I could ask another quick one, I guess a number of builders have taken a deferred tax asset allowance, I guess primarily because they're audited by E&Y. I'm trying to understand what your situation is and perhaps why we haven't seen any from you guys.

You haven't seen anything from us yet. We certainly haven't said that there won't be something. We talked at length in our last Q, we will in the Q that we'll file here shortly talk about it more, and that is we've listed all of the factors that you're required to look at to reach a determination as to whether or not a reserve in full or in part needs to be taken.

As of June 30th we had still concluded that it was more likely than not that we would be able to use it. We have to look at that based on this whole mix of factors every quarter. I said last call, I'll say again, I will be surprised if at some point we don't have an impairment or a reserve against that asset in whole or in part, but we're making that determination on a quarter-by-quarter basis.

Thank you.

Lee Brading, Wachovia.

I wanted to -- I did see where you had an impairment on the JV side of about $18 million and I know that the JVs are relatively small for you guys versus others. I was wondering if you could give a little more detail, like what your balance sheet debt there is at the JV level.

Our total investment in JVs is down to under $40 million. Our total exposure to repayment guarantees is under $40 million. Our exposure to loan to value maintenance is about $6 million. Total debt in the JVs is a little over 6.25, I think it's $640 million, but almost $400 million of that is in one joint venture in Las Vegas that we have a 2.6% interest in. So our share of that is about $10 million. So that's kind of the numbers on the JVs.

Perfect, that's helpful. And then on the investigation you said it was $28 million and I was wondering how much of that fell into this last quarter?

I think $11 million hit this quarter.

Okay, great. Thanks very much. That's it.

Joel [Locker], FTN Securities.

Just was wondering if you had a number on your total customer deposits versus your backlog?

The total customer deposits at June are $25 million.

And just a second question. The other expense being down negative $13.5 million or so, were there any one-time charges in that?

It was principally the fact that we, due to not being able to capitalize interest over all of our inventory assets, we have expensed approximately $36 million of interest year to date that is in that other income and expense account.

How much was it this quarter, the $13.5 million?

This quarter it was $15 million.

All right, thanks a lot.

Andrew Ebersole, Sentinel Asset Management.

Good morning. One question, most of my questions have been answered, but I was wondering regarding your legal liabilities and a hope for settlement. Are you guys close to being in a position to begin negotiations? And if not, can you discuss a little bit what the barriers are to getting to that point where you can start negotiations?

Andrew, as I said in the prepared remarks, everything that we can say currently will be in our filings. So it will be in the Q's we've issued already and the Q that we're going to issue very shortly. So really we can't add any more to that at this time. Bit we'll give as much disclosure as we can in our public filings.

All right. Thank you. I'll look for that filing.

Jim Wilson, JMP Securities.

Was wondering if you could go or give a little color on pre-impairment profitability in different parts of the country, kind of where things are working better or worse for you by region.

Pre-impairment -- I'm not sure I understand, Jim, exactly what you mean. Post-impairment is a little bit easier to analyze where we are today.

That would be fine too. Yes, that would be fine.

Jim, why don't I address it more in an operation stance first, and if Allan wants to add any margin sense to that he can do. But what I would say is across the markets that we're in at this time there's not a lot of good news. It's pretty tough out there, it's been very tough in this last quarter and we're still seeing a very tough environment. That's why the stimulus that we're going to get out there and talk to homebuyers about the potential tax credit, the hopeful issue with maybe mopping up some of the foreclosures we hope will improve.

But I could tell you that in terms of new orders there's only a couple of markets that were positive in June -- Charleston, South Carolina and somewhat surprisingly Las Vegas. We had quite an improvement in new home orders in Las Vegas and I think that really is just because the prices have gone down so much there buyers are now taking up opportunities to buy.

I think one of the other things to look at might be destabilization in average prices across the market. We've seen some stabilization in the Mid-Atlantic, particularly for as in New Jersey and Maryland where we've seen some stability in prices. We've seen a little bit of that, again somewhat surprisingly, but positive improvements in Florida in Jacksonville particularly.

So a couple of markets are seeing some stability. In Texas in our Dallas market we've seen stabilized new orders and stabilized pricing as well. So I would say those are kind of very small incremental benefits amid quite a lot of other negatives. But the only one other point that I would look at and say we're seeing some stability is in our cancellation rate. As we reported, if you exclude that 100 units of sales that we had to cancel in Virginia because of the sale, our average cancellation rate across the markets now is 33%.

But if you look at all of our Southeast markets and including Florida, they're all somewhat below that. The only one in all of those markets would be Orlando which is above. So we've got around a 20% cancellation rate in all of our markets in the Southeast. We're also seeing again, going with that, stronger orders in Las Vegas, cancellation rates in Las Vegas also coming down.

And the higher cancellation rates rose are really in our exit markets. It's not surprising the markets that we're leaving we're seeing some shedding of sales in those markets. So I look at this as a somewhat more stable environment in terms of the cancellation rates. Obviously we want to write every deal that we can, but we are seeing some benefits there in certain markets which I take as a slight positive.

And that's a far better answer than I had.

That's great. That's very helpful. Thanks and that's all I had.

Timothy Jones, Wasserman & Associates.

On this 20% on the down payment assistance, that's a six-month figure, correct, not a three-month figure?

It's a run rate at this point, yes, that's right. As I said, that's this calendar year.

Your larger competitor (technical difficulty) and Horton and Lennar have reported those numbers between 25% and 33%. Is that mainly because they have a bigger proportion of the business in Texas?

I think it may well be with the reporting controls that they have within their own mortgage businesses. As we said, we've transitioned during this period from our own mortgage company to Countrywide and Countrywide haven't got up to full capture rate in all the markets. So we've had to collect this information from various sources.

So I think that number is reasonable. I think that in certain markets we don't use a lot of down payment assistance. Over the last few years as we've broadened our product line I think we've got quite a wide range of product now. So not all of these buyers are going to be using this. I think you've just got to take that number as it comes.

Is your experience roughly the same as Countrywide's? Is theirs higher or lower?

I couldn't tell you on that. They obviously cover an enormous range of home building, so I really couldn't tell you that.

Lastly, you of course lowered your tangible net worth covenant from $900 million to $100 million. I trust that includes any potential write down under FASB 109. What were your deferred taxes at the end of the quarter and also your intangibles?

Deferred tax was a little over $400 million and the intangibles were about $16 million.

So it's been written down since fiscal year end of the year?

Yes, by a lot.

Okay, I'm glad to see that. Generally people when they take these write offs -- I know it's very difficult to estimate. But usually the deferred tax right downs come -- account for about two-thirds of what's on the books. Is that a good guess if you have to take the -- once you get into that free period (technical difficulty) loss envelope?

One thing I've learned so far, Tim, is not to guess. So I would say at this point we don't have a reserve against it. I'm aware of what others have done. In the future we may very well have a reserve, but I just can't speculate as to what it may be in the future.

I trust your $100 million tangible net worth includes any write offs from deferred taxes.

Yes, that is done with the intention to deal with potential future impairments, potential FAS 109. We, as I said, tried to move this bank agreement kind of into a future state where we're not living quarter to quarter worrying about tangible net worth.

I think it was the right thing to do. Thank you.

David Martin, BlueMountain Capital.

I just wanted to drill down on the cash flow a little bit. I want to see if I understand this correctly. You closed the quarter with $314 million of cash, and I think last year you closed the year at about $450 million of cash implying if you're going to exceed that target for the end of the year you generate about $140 million. And the condo sale is $85 million. So are you leading us to think that cash flow would be in that ballpark or should I be focused more on the in excess portion of the comment?

We said a few things and I think we just said above we haven't given a specific dollar amount. But there are, and I did make this point, some very small pending asset sales that will also contribute to our cash position at the end of the year. But we have said and maintain that we will expect to get above where we were last year. And I'm not going to get into this by what amount or just at the number.

But we've said we've got a great head start in the fourth quarter with those asset sales. We had a good starting point with where we ended the third quarter. We've got a lot of closings coming. We feel very good about where the cash position will get to.

Okay. And I wanted to certain circle back on the line of credit and availability under the line of credit just a little bit. I mean Michael was asking about this before and I think it's a little bit difficult to understand exactly why you guys aren't a little more proactive in terms of at least maintaining some availability just for the financial flexibility that there is. So I was a little curious as to why you didn't seem to have a lot of urgency to replenish or to set a target for a minimum availability that you'd like to maintain?

Okay, a couple of answer there. There's the short-term issue, there was the double whammy of having a big hunk of assets pulled out of the borrowing base with their successful sale and an increase in the collateralization multiple that happened effective yesterday. So at a moment in time, irrespective of whatever our intent had been, the dynamics changed. We anticipated that. We are well along in getting additional assets into the borrowing base. We have a high degree of urgency to do that to more than cover our LCs.

What I was trying to intimate though is that we don't have a number in mind that is toward the top end of the total facility size and at this point we don't have a specific number that we're shooting at. We clearly want to have availability under the line in addition to the LCs. Part of it is sort of project by project as we put those projects in and they go through the appraisal process and the liens get perfected.

It's a little bit hard and we could set up specific dollar amount targeted at a specific date and then events outside our control that relate to reporting mortgages or appraisal processes don't happen as quickly as we would like and all of the sudden it looks like we've missed some target that has implications for our liquidity. The fact is it's in the near term really more optical than it is substantive. We do want availability, we will create availability, but that's really the position that we've taken.

All right, great. Thanks for the color.

At this time I'll turn the call back to Ian McCarthy for closing comments.

Thank you, Operator. I'd just like to take this opportunity to thank all of you for joining us today and remind you that a recording of this conference call with the slide presentation will be available this afternoon in the investor relations section of our website at Beazer.com. With that we'll close the call and talk to you after the next quarter. Thank you.