Beazer Homes USA Inc (BZH) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Beazer Homes earnings conference call for third quarter of fiscal year 2011. Today's call is being recorded and will be hosted by Alan Merrill, the Company's Chief Executive Officer. Joining him on the call today will be Bob Salomon, the Company's Chief Financial Officer. Before he begins, Carey Phelps, Director 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. Phelps?

Thanks, Carly. Good morning, and welcome to the Beazer Homes third quarter conference call. This morning we will be discussing our results for the third fiscal quarter ended June 30, 2011. During this call we will webcast the synchronized presentation which can be found on the Investor page at beazer.com.

Before we begin, you should be aware that during this call we will be making forward-looking statements. 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 our SEC filings, including our annual report on Form 10-K. Any forward-looking statements speaks only as of the date on which that statement is made and except as required by law, we do not undertake any obligation to update or revise any forward-looking statements 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.

Joining me today are Allan Merrill, our President and Chief Executive Officer and Bob Salomon, our Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions in the time remaining. I will now turn the call over to Allan Merrill.

Thanks, Carey. Good morning, and thank you all for joining us today. On our call this morning we will discuss the environment for new home sales, our third quarter results and updated expectations for the remainder of fiscal 2011. Both the overall economy and the business of selling new homes remain very challenging.

On a macro level, it is now clear that the overall economy decelerated in the first 6 months of the calendar year which resulted in much lower than expected job growth. And there is no question that the fiscal uncertainties in the United States and around the world have contributed to a decided lack of consumer confidence. Job growth and consumer confidence have to be pillars of any housing recovery, so until they both show signs of strengthening, we expect the level of new home sales to remain suppressed. In addition, prospective home buyers are concerned about further home price deterioration, the scarcity of mortgage financing and unprecedented uncertainty regarding future housing and mortgage policies.

Despite the many challenges facing the industry, there are some encouraging signs. For one thing, the low home prices and low interest rates, home ownership is more affordable than it has been in generations. With rents rising consistently across the country, the economics of owning versus renting are decidedly in favor of owning in most markets and price points. That is certainly helpful. It is also true that we have worked through excess new home supply. In fact, almost all of our markets have less than an 8 month supply of homes under construction or in finished inventory, and that will become a genuine shortage with any improvement in demand.

The demand side of the housing equation is ultimately a function of demographics. We simply don't believe that household formation will stay at these depressed levels indefinitely. As new households form, particularly in the coastal and southern states, there's going to be a requirement for new residential construction since the supply of existing homes and apartments simply isn't large enough to contain a growing population. That's why we believe it's shortsighted to underestimate the prospects for the home building sector. The combination of inevitable demographic changes and compelling affordability are going to create powerful demand for homes in the years ahead.

With that overview, let me turn to our results from continuing operations for the quarter. We reported order growth of 24% for the third quarter compared to the same period last year. This was aided by a 1% increase in our community count which, although small, was our first year-over-year increase in at least 4 years. We had 791 new home closings compared with 1,558 for the same period last year. We were very successful tapping into the demand stimulated by the tax credit last year, but those sales had to close by June 30, so this year, the closing comparison was especially difficult. Our ASP was $213,000 for the quarter, up from $206,000 for the third quarter of last year. As Bob will discuss, the ASP is volatile because it is heavily influenced by the mix of homes closed.

Home building gross margin before interest and impairments was 17.8%, about the same as last year despite the lack of volume available to leverage their fixed costs. SG&A was down in dollar terms year-over-year, but was up in percentage terms as a result of a lower revenue base. Strategically, we decided to not continue building in the Northwest Florida market. We believe we have ample growth prospects in our major markets, and the efforts to sustain an operation in such a small market were ultimately a distraction from our objective of building profitable scale businesses in each remaining division. Following this decision we have no plans for further geographic contraction. From a P&L standpoint, the quarter contained approximately $16 million of nonrecurring charges, including $7 million in impairments.

Before I turn the call over to Bob, I'd like to discuss some of the priorities we are focused on as we work to accelerate our return to profitability. As a new CEO, I've been asked what strategic or operational changes we are going to make, and it is certainly the case that our leadership change is an opportunity for us to reassess our objectives and priorities. While there are some things we are going to change, I can confirm our primary corporate objective remains unchanged to sustainably -- to return to sustainable profitability as soon as possible. In pursuit of this objective and to ensure the long-term viability of the firm, our efforts in recent years have been primarily defensive in nature.

We have withdrawn from non-core markets, we've dramatically cut both overhead and direct construction costs, we have decreased land spending, we have reduced the number of floor plans we offer and we have limited the number of unsold homes we start. Together with the recapitalization transactions we completed which resulted in improved liquidity, a reduction in our total debt and an extension of our remaining debt maturities, we established a foundation from which we could withstand the housing downturn and ultimately return to profitability. With the market volatility evident the past few weeks, it is hard to remain focused on the future, but I'm convinced that there will be a housing recovery in the next several years. The challenge is that I don't believe we are well served by simply waiting for it to occur.

Instead, I think we need to be more focused on driving revenue growth to create the recovery in profitability that I know our shareholders are expecting. Now, before our bondholders over react, let me say this. We aren't going to throw a Hail Mary by going on an undisciplined investment binge and just hope it works out. We've worked too hard for too long to survive the downturn to just throw it away now, on an ill-advised and risky growth strategy. Instead, we're going to balance this new forward leaning revenue focus with an asset smart land strategy, lean operational costs and off-balance sheet expansion of the pre-owned homes division and protection of our core liquidity. I will comment on the first 4 of these, and Bob will address the capital structure as a part of his financial presentation.

We're going to pursue revenue growth in 2 very basic ways, the first of these is by improving our sales per community. With approximately 3,700 new home orders in the past 12 months, we've been selling at a rate at about 1.5 sales per month per community. As far as we've been able to calculate, that is about average in most of our markets, but it isn't remotely good enough for us. While I'm not naive enough to think we are going to see sales per community back or 3 or 4 per month that the industry enjoyed in the early 2000s. I believe we can get this metric into the 2s over the next 12 to 18 months. That should generate considerable top line growth and will better leverage the fixed portion of our community and corporate overhead.

I'm sure that everyone listening will want know how exactly how we plan to do it, and I would be lying if I told you we have it all figured out. But after touring nearly every one of our divisions during the past 6 weeks, I'm convinced that we can better apply the 4Ps; product, placement, promotion and price to drive profitable sales. In addition to improving our sales per community metrics, gradually growing our community count will also help drive top line growth. Over the past 18 months or so, our land acquisition efforts have been focused on stabilizing our community count in our core markets with land deals that meet our underwriting criteria. Looking forward to the next couple of years, we are targeting modest annual community count growth in order to provide a second revenue lever for the business, but do not intend to manage to a specific growth rate target. Rather, our growth rate will be based on the speed with which we find opportunities that meet our rigorous underwriting criteria.

Since reentering the land market about 2 years ago, we have been successful in sourcing 91 transactions, about two-thirds of which are now open for sales. Consistent with our underwriting standards, these deals supplement our current positions and fit our target submarket and buyer profiles, have value engineered product, including our eSMART features, and meet our minimum MIRR target of 20%. As we continue to grow our land position, I will try not to fall into the trap of letting a sound bite become our corporate strategy. We aren't going to be asset heavy or asset light, we are going to be asset smart. That means we will buy or option new assets based on multiple considerations, including our total investment levels and current returns in each market. While driving the top line is essential to accelerating our return to profitability, so is maintaining a lean and efficient operating and cost structure.

Last quarter we told you about some major overhead cost cutting initiatives that were being implemented which included a headcount reduction of approximately 130 positions. While this quarter's SG&A includes several million dollars related to severance, we believe we are on track to achieve the $20 million in annual cost savings that we estimated last quarter. During the fourth quarter, we will occur costs related to restructuring as some of office leases, including the corporate headquarters where we are consolidating into a much more compact and efficient space. On the construction cost side, I think the work we've done with both our material and labor supply chains has us in pretty good shape to withstand the inevitable price pressures that will start to arise as volumes recover. In the meantime, we will continue to fine-tune our purchasing activities, and in doing so, I expect we will be able to find additional savings.

In addition to ensuring that we have a cost structure that matches today's market realities, we have considered other opportunities that profitably leverage our homebuilding skill sets. While today's difficult new home sales environment creates challenges for our home building business, it creates sizable opportunities for the pre-owned homes division we launched this spring. The initial target was to acquire approximately 100 previously owned homes by the end of September, all within the Phoenix market, with the thought that a measured approach would allow was to test the water before deciding whether or not to significantly scale the business.

I'm pleased to report that the early results have been encouraging. We now own or have under contract just over 100 homes, including homes in Las Vegas. At this point, we are convinced that this can be a scale business, but we are mindful of the many opportunities and obligations with a claim on our resources. For this reason, we are planning to scale the business off-balance sheet. We intend to limit our investment to less than $20 million and further scale the business with third-party capital. This should enable us to accumulate a much larger portfolio from which to generate fee income for our efforts. At this point, I can't comment further, but I will look forward to sharing more details in the coming months. With those points covered, I will now turn it over to Bob to further discuss our financial results and capital structure.

Thanks, Allan. All of the results I will be discussing are from continuing operations. In the third quarter, we had 1,215 net new home orders which represented a 23.7% increase in orders over the same period last year, 719 closings,(Sic-see presentation slides) a 49% decrease from last year. 1,820 homes in backlog with a value of $431.2 million compared with 1,134 homes in backlog with a value of $279.3 million a year earlier and ASP on closings of $213,000, up 3.2% over the third quarter last year. Our cancellation rate improved to 24.3% compared to 29.3% last year when a number of first-time home buyers seeking to take advantage of the tax credit ultimately could not qualify for a loan. FICO scores of our customers who use Bank of America were up to 717 this quarter compared to 709 a year ago.

During the quarter, our backlog conversion rate was 56.7% compared with 91.1% last year, which again benefited from the push to close homes related to the tax credits expiration. It's important to walk through the activity that impacted our conversion rate this quarter that led to our reduced closing fund. 586, or 42% of those homes were scheduled to close in future quarters due primarily to construction status at the beginning of the quarter. 117 home sales were canceled during the quarter, 133 home sales were rescheduled to close in a future quarter due to a combination of mortgage financing and construction issues, and 231 spec homes were sold and closed during the quarter. Conversion rates will swing from quarter to quarter related to the mix of use and the respective construction status in backlog at the beginning of any given quarter.

Our ASP in backlog at June 30 was $236,900, or about 11% higher than our closing ASP, which was $213,000. ASP volatility relates primarily to the mix of closings within a particular quarter, and we have pointed out that the ASP in backlog often moves in a different direction. In fact, on this slide you can see there are many quarter to quarter variations in the backlog and reported ASP, so we suggest you look at the longer-term trailing four quarter ASP which is depicted by the solid line to see the trends more clearly. The trailing ASP of $221,800 reflects an increase of 1.4% on the same date a year ago. We provide our home building gross margins on 3 different bases. This slide illustrates each of these by showing the impact of both impairments and interest to our reported gross margins for the third quarter this year and for the prior year period. Excluding interest and impairments, our home building gross profit margin was 17.8% in the quarter representing a small decrease from 18% in the prior year. We believe the 17.8% figure is most comparable to the way investors and analysts compare gross margins across home builders.

As we have said previously, gross margin trends are difficult to evaluate over short periods of time due to the differences in mix and volume. Our gross margins were 19.3% for the first 9 months of 2010. Although when the $4.4 million warranty benefits in the second quarter last year was excluded, our gross margin becomes 18.6%. This compares favorably with our year to date gross margin of 18%, notwithstanding the lower closing volumes we have experienced this fiscal year. On this basis, we believe that our full-year gross margins for fiscal 2011 will be similar to last year. As we said in the past, the discussion of future gross margins comes with a significant health warning; our actual results could be better or worse than we are expecting, based on the specific quantity and mix of homes closed.

We continue to be very focused on increasing efficiency in our business and diligently managing overhead expenses. Total SG&A for the quarter decreased $6.4 million from 12.2% year-over-year, by $9.1 million in nonrecurring charges which included $5.4 million related to the severance of our former CEO, $1.9 million related to the significant cost realignment efforts we announced last quarter and $1.8 million for a write-off of an uncollectible receivable. We expect to recognize additional charges between $2 million and $3 million during the fourth quarter, primarily related to the lease abandonment. Operating G&A, which adjusts for both commissions and other items such as legal and settlement expenses, totaled $22.9 million this quarter, down from $26.7 million a year ago. The legal costs that we have incurred over the past several years have been unpredictable and may spike again as court proceedings against a former employee commence over the next few corridors. However, we expect for these proceedings to be resolved by the end of fiscal 2012, which should allow us to put these legacy issues completely behind us. The breakdown of these figures is provided in the appendix.

As Alan mentioned, total non-cash pre-tax inventory impairments and lot option abandonments were $6.9 million for the quarter, compared with $5 million during the same period of fiscal 2010. Changes in market conditions, including sales price movement, and changes in absorption estimates can significantly impact the fair value of our inventory. This quarter's impairments related to 370 lots in 6 communities spread across 5 different divisions. Our land position as of the end of the quarter totaled just under 30,000 lots, down 3.6% compared to the end of last quarter due in part to the abandonment of several lot option contracts as a result of the decision to exit the Northwest Florida market this quarter. 84% of our total loss at June 30 were owned and 16% were controlled under option. Approximately 28% of our owned lots were either finished lots or lots upon which home construction had commenced.

At present, much of our land and land development spending is discretionary. We can slow down our purchases in times of uncertainty or ramp it up to invest for the future as markets improve. We do not believe there is a shortage of land opportunities in any of our markets. When the housing market saw its most dramatic decline, we significantly reduced our land and land development spending. For fiscal 2011, we have taken a slightly more aggressive approach, replenishing the lots we have used and making strategic investments to position us for future growth. For the quarter ended June 30, 2011, we spent $54.2 million on land and land development which compares to $57.2 million in the same quarter last year. So far this fiscal year, we've spent approximately $178 million compared to approximately $131 million for the same period of fiscal 2010. Based on our expenditures to date, we now expect our full year land and land development spending to total just under $250 million. After anticipated receipts from land sales of approximately $45 million for the year, we expect total net land and land development spending just under $200 million for fiscal 2011.

As Alan mentioned, at the beginning of fiscal 2010, we have added 91 land positions to our portfolio. At the end of the third quarter, we were open for sale in 59 of the 91 locations. During the third quarter, these locations generated approximately 31% of our homeowners and approximately 24% of our closings. We are still on target for new locations to contribute approximately one-quarter of our closings for the full year. The ASP for our new communities is approximately 1% lower than our older communities. Year to date, our margins in the new communities are approximately 100 basis points higher than our existing locations. At June 30, 2011, we had 994 total unsold homes in inventory, down 10.9% from a year ago, but up 26% from the end of our second quarter. Finished unsold homes totaled 252 on June 30, down 21% from a year ago, and down 24% from last quarter.

Since the beginning of the home building downturn, we have taken a rigorous approach to preserve our liquidity, reduce our debt, and increase our net worth. Steps we have taken through nearly a dozen capital market transactions, including pushing all major debt maturities to at least mid-2015, has better positioned the Company to weather these difficult conditions, meet our obligations, and retain the capability to take advantage of improved demand for new homes. We ended the quarter with $559 million in total cash, including $247.4 million from our cash secured term line and $36.9 million in the other restricted cash related to letters of credit. Unrestricted cash was $274.6 million at the end of the quarter, which is down from last quarter, primarily due to our ramp up of construction to fill our increased orders for year end delivery. Looking ahead to the fourth quarter and based on our backlog at June 30, we expect to see a significant increase in closings and therefore, a sizable increase in our cash position at year end. In fact, I anticipate having an unrestricted cash balance of approximately $400 million at September 30.

During the third quarter, we made the second draw under our cash secured term line facility, $214.8 million, to preserve the refinancing basket provided for under our indentures. Cash in an amount equal to the draw amount is held by the lenders as collateral. It at some point in the future we were to pay off a portion, or all, of the nearly $250 million currently drawn under the cash secured term loans, we would have a window of 6 months during which to refinance up to that same amount. We are very comfortable with our current liquidity position, as well is the extensive flexibility we have within our capital structure. We have hundreds of millions of dollars of cash, no significant debt maturities until 2015, $450 million in secured debt capacity, and no limitations on incurring non recourse asset level debt.

If conditions in the future warrant, we could arrange a first lien revolver of about $250 million, refinance our cash secured term loan to a traditional 5 or 10 year bond either secured or unsecured, finance a portion of our land spend with non recourse financing, and perhaps most importantly, we can directly impact our liquidity by reducing land spend. We have a healthy supply of finished lots that provide significant discretion in our land spending. Finally, in light of the recent changes in market value of our debt securities, at some point, returns generated from the buyback of our debt may become attractive relative to the potential return from additional investments in the business; however, we will remain cautious with respect to our liquidity position while continuing to evaluate the various opportunities available to us as we drive to accelerate our resumption of profitability.

Let me now move on to the discussion of our deferred tax assets. As we have discussed previously, as a result of both the Section 382 ownership change that occurred in January 2010 and significant tax -- deferred tax liabilities, our deferred tax situation is more complex than most builders. The simplest description of our DTA situation is that despite the limitations imposed by the tax ownership change, we have a very large dollar value deferred tax asset that will make its way back onto our balance sheet upon resumption of sustained profitability. Worst case, we believe that dollar amount is $330.6 million, but our actual estimate at June 30 totals $452.6 million, and that figure will continue to grow until we resume profitability. Upon a sustained return to profitability, we expect to be able to begin utilizing this significantly valuable asset. I encourage investors and analysts to review the disclosure in our tax footnotes in the 10K and 10Q for more details. We will provide additional information as we are able to further refine our expectations. With that, I will turn the call back over to Allan.

Thanks, Bob. At the beginning of our fiscal year, many industry participants, including us, expected national single family housing starts for 2011 to grow by 15% to 20% to the 550,000 to 600,000 range. The tepid economic recovery and lackluster job growth this year have resulted in regular downward revisions to that forecast. The latest estimates are now for single-family housing starts for 2011 to fall by 5% to 10% from 2010 levels. We believe that we can outperform this dismal pace and gain market share. While there is some risk that we will fall slightly short of the approximately 4,000 units we sold in both 2009 and 2010, we do expect to generate more sales in the fourth quarter this year than we did in either of the last 2 years. As Bob said earlier, gross margins for fiscal 2011 should be similar to the gross margins we recorded for fiscal 2010, excluding the big impact we had last year from a warranty recovery. We anticipate our land and land development spending, net of land dispositions, to be just under $200 million.

Finally, despite the lower closing volumes this year, our EBIT loss, excluding the nonrecurring charges, should still show improvement over last year. I believe that over the past few years we've demonstrated extraordinary creativity and resiliency in dealing with our legal, regulatory and balance sheet challenges and still managed to make meaningful operational improvements. We have a solid balance sheet with a flexible capital structure and nearly 2 years worth of finished lots, given recent closing volumes. Taken together, this balance sheets allows us to direct our team to one objective; returning to sustainable profitability as soon as possible. We realize that driving the top line is a key component, and our strong order growth this quarter was a good start. I look forward to updating you again on our progress in November. I will, turn the call over to the operator to take us into the Q&A. Operator, we're available to answer questions.

Thank you. (Operator Instructions). One moment please. Our first question comes from David Goldberg of UBS.

Thanks, good morning, everybody. My first question, I want to get an idea, and I know you are maybe looking to be a little bit more aggressive as you look forward. But I'm just trying to get an idea, if you were to run the business at the current closing volume, the current order volume and without necessarily building land position, but just relying on keeping the land position more stable, what would the cash burn look like on a yearly basis?

I think it depends on a couple of things, David. What is the sales per community assumption you want to use? Are we at the same level, or are we at a lower-level?

Presumably, if you were somewhere between -- let's say you stay at a flat level at one and a half or so.

The operating loss right now is primarily comprised of our interest expense, and that is essentially what the operating loss is. And so the question is, if the land position is neutral, the cash burn will be in a range of with the interest expense is.

Okay, perfect. And then my second question had to do with the interest and the cost of goods sold. It looks like there's a percentage of revenue that's going up. I would think that as you build and sell more homes on newly acquired lots that would be going down, just the interest is being amortized in cost of goods sold. Because you'd held the land for less time, I would presume. So, what am I missing there, and why is that trend up, and is that going to reverse as we look forward?

I think, David, as our closing volumes increase, the percentage of revenue that the interest is going to bear will decrease. And I think as we continue to bring on lots from newer communities, that as a percentage, that will also have an impact. But I think the bigger impact is going to be increased volumes.

So, it's just a leverage issue?

Yes.

Okay, and then if I could sneak one more in, just to make sure I understand, by the end of the year, you think $400 million of unrestricted cash, and then there's an extra $247 million either secured or unsecured. So, if you want to think about total liquidity, another potentially $150 million revolver, is that right way to think about the sum of those as the total potential liquidity that you could have?

Yes, I think that's exactly the way to think about it, David.

About $800 million? Okay, perfect. Thank you, guys, very much.

Our next question, please?

One moment, please. Our next question comes from Ivy Zelman of Zelman and Associates.

Good morning, guys, this is actually Alan on for Ivy, and I appreciate all the disclosures you gave on the cash options you have, that's 's very helpful. I was hoping to dig in a little bit more on the backlog conversion this quarter which, I think you guys went through some good detail there, I believe you said that they were about 100, maybe 150 or so homes that were scheduled to close in the quarter but for whatever reason, were pushed out into future quarters. And I was curious if you can give some more color about what really drove that and if there is anything structurally that we should be focused on, whether it's from the mortgage financing side or from the construction side of things that seemed to have pushed more of those closings into the fourth quarter.

I think Alan, this is Bob, there's a combination of -- there's financing issues and there were some construction issues, as you stated. In today's financing environment with the requirement that every T is dotted, every I -- every T is crossed, every I is dotted, sometimes our closings get pushed from a month end into a week or two into the subsequent month end, and that's really mostly what has occurred during the financing issues that we have had. And then there are always construction issues of one or another needing homes completed to the satisfaction of our quality standards, as well as our buyers.

Alan, I would just add, I think on that construction side, we were excited by the sales volume that we had in the quarter. It created some production bottlenecks we were unaccustomed to, we haven't had in recent quarters. So, we definitely missed a few closings on our own, and I think our issue was, let's build it right, let's not create future warranty issues. And if it means we are a little soft on the closings in the June quarter, that's all right. Let's make sure we deliver it correctly. So, that was -- largely, that portion of it was clearly conscious on our part.

Okay, that makes sense. Interpreting Bob comments then, should it be safe to assume that the majority of those homes have since been closed now that you're about five weeks into the quarter? And I guess the follow-up on that is, and I know you are always hesitant to talk intra-quarter trends, but given all the recent developments there, any type of information or color you can share with us from your sales people about what the consumers are saying, visiting your models over the past week or two or whether you guys are concerned about what you're seeing on the ground. I think that given what we see on the news everyday, it might be helpful to hear what you guys see on the ground level.

Obviously, a lot has happened just in the last 96 hour, and it's hard to know what all of that means. I was sort of prepared to talk about April, May and June, but that seems like such old news. I will just say briefly, April was clearly down year over year, that was the final month in 2010 of the tax credit. May and June were up really significantly, over 75% year on year, we loved that. July was much flatter year over year, and just no way to get a read on August at this point. So, I would say we clearly have seen significant changes in the year over year monthly comparisons. It's a little bit of a roller coaster ride. In the last three weeks or so, with what was going on in Washington with the debt ceiling and then obviously what happened on Friday, there is clearly some trepidation out there. I spent Saturday and Sunday in our models here in Atlanta, actually talked to some buyers, and I think we can't hide from the fact that they are nervous about that. But if they have gotten themselves ready to make a decision and their financial circumstances are still in order, I think they will make that decision.

What I worry about is the pipeline. Given that the sales cycle is eight to 12 weeks, what I worry about is those people who in the last week or not starting that eight to 12 week process so that four weeks from now, six weeks from now, 10 weeks from now, we are seeing softer demand than we've seen in the last 96. Because I really don't think that it's just what happens today that is driving sales today, I think it's what happened two or three months ago. I think if we had to put out a warning out there, it would be -- and we kind of did, it would be let's be cautious thinking about August and September, particularly as we get to our fiscal year end, because I think what we may see is the results of all of this financial news affecting us at that point as opposed to today.

Okay, great. That's helpful. I appreciate it.

The next question comes from Susan Berliner from JPMC.

Good morning. A couple questions on your cash number. One, should we anticipate a decent size land spend in the fourth quarter? And if so, what should we be thinking about? I think you had outlined a $40 million or $50 million land sale number for the year. And then secondly, the Inspirada payment, is that -- can you tell us the amount, is that coming out in this fourth quarter?

Susie, this is Bob. I think when you think about our land spend, what we talked about was the total year to be just under $200 million, so -- net of our land sales. If you think about that in terms of what we spent with the land sales that have to close in this quarter, you're looking at a $30 million to $40 million number in the fourth quarter net. As it relates to South Edge Inspirada, we have accrued all the 13 million and 17 million there are to guarantee, but we don't anticipate that really getting through the bankruptcy court until some time in the first quarter.

Okay, great. And then with regards to the rental strategy, I know, Allan, you had touched on that. I assume we'll be seeing, or you will be talking about getting a joint venture partner, and that will just come off-balance sheet? Any idea? I guess you will only spent up to $20 million, but how big could that potentially be?

I think over time, I belief is that it's gone from being an opportunity in the hundreds of homes to an opportunity in the thousands of homes. The opportunity is there, the economics make sense. You're absolutely right, we're going to limit our investment to less than $20 million, but I think the market opportunity over the next year or so is going to be very significant.

Okay, and my last question is, the slides I think reflected that you bought back 8 million of your 15 bonds this past quarter? Is that correct?

(Multiple speakers)The total is about almost 12 in total (multiple speakers). There were some 15s and a small amount of 16s.

Okay, terrific. Thank you so much.

Our next question comes from Jay McCanless of Guggenheim.

Good morning, first question on the strategy you've outlined this morning to be a little more aggressive on growth, do the events of the last 96 hours make you rethink that and if so, what would be the first option? Would it be paying down debt or just trying to sell through what you have and reevaluate? Could you give us a little color on that?

Jay, I apologize, there was little disturbance on the line. Would you mind repeating that?

Sure. With all the comments that you'd made about the last 96 hour, framing those versus, I think a more aggressive strategy that you've outlined to start growing the topline again, do the events of the last 96 hour make you rethink that strategy? And if mortgage rates and the economy get worse from here, what are -- what is plan B, what is plan C, if you could talk about that?

Sure, well I think the two revenue levers we talked about were first and foremost, increase sales per community which generates cash, it doesn't use cash, and I think that's plan A, B and C. We are very focused operationally in executing at a higher level of absorption rates, and that creates liquidity. I think in terms of growing through the second lever, which is to gradually increase the store count, as Bob said, we've got a lot of discretion over that. We've got over two years of finished lots, and so if we see the next 96 hours play out over the next week or two or month and other bad things occurring, I can assure you our fiscal '12 land spend will be a lot lower that we are currently thinking it's going to be, and we will be in a much more defensive posture. But that doesn't change the fact that at an operational level, we want to sell more homes per community every single month. And I think that is -- that's an excellent strategy, because it's one that isn't dependent on the balance sheet.

Okay, my second question, and I'm guessing most of the homes that were in backlog that didn't close this quarter were related to financing issues, is there -- can you give any guidance as to if mortgage rates go up by 100 basis points, 200 basis points, how much slippage that's going to create in your back log? Or any type of frame or reference you could give us there would be helpful.

I think Jay, this is Bob, that there was a small portion of our homes that didn't close that got pushed into the next quarter. A substantial number of the beginning backlog really was never intended to close this quarter because they were either to be built homes or were very, very early stage spec sales from the prior quarter. They were always -- 42% of our beginning backlog was scheduled to close next quarter. The amount that we pushed, which is in the 130 range, was a very small percentage. And actually, to be honest, it's probably in the normal range.

Okay, great, thank you.

Our next question comes from Dan Oppenheim of Credit Suisse.

Thanks very much. I guess it's been discussed already, but this issue of the conversion, I think your last comment I think was interesting in terms of what was pushed off being in the normal range. Is it given what other companies are doing in terms of the efforts to have 99 day guarantees in terms of order to closing and such. It seems though that timing from contract to closing is accelerating, so I'm surprised to see so many [skits] of future quarters. Related to that, just wondering that when you think about those -- that high backlog going into 4Q in an uncertain environment which could mean more cancellations, a current tough quarter environment, doesn't that make it very difficult to get to the 25% order growth for 4Q orders?

I think we said today, Dan, that we expect our fourth-quarter to be above both '10 and '09. We said we may not get to the 40 -- 4,050 or so that we did last year. So, it does put a little bit of pressure on us in the fourth quarter, there's no question, but I think we're going to do better. Just take a step back. We had said in November and reiterated in February and May, whatever the then context was of expectations for single-family starts, we said we're going to do better than that. We thought we'd do better than at November, February, May, and now here we find ourselves in August. Looks like single starts are going to be down 5% to 10%, and we said we're going to do better than that. I still think we will be roughly flat with last year which, it doesn't feel great, but it feels better than being down 5% to 10%. And that is what we are saying about our orders in light of the current order environment.

And then related to -- it there going to be any emphasis in terms of reducing that construction cycle time in that if there is more risk in terms of uncertain environments you want to narrow that time, so you reduce risk of cancellations and such. Is there a focus on that now?

There is, there's no question that cycle time is extremely important for a lot of reasons. It reduces the cash tied up on the balance sheet, and it clearly is a better customer experience. So yes, that is very much a focus. Again, I'm a bit of trying to avoid sound bites because they can become destructive in a business. We build attached in detached product, we build one story and we build two-story. So really, in tightening up cycle time, we've got to be thoughtful and careful that we set targets for cycle time that are related to the conditions in the particular market. Are we building on a slab or are we building on a crawl space and that are related to the complexity of the home we are building. So, we are going through every single plan type and establishing tighter cycle time requirements that will have the effect of bringing down overall cycle time, but I can't tell you there's a one number sound bite to sell for.

Okay, thanks.

Our next question comes from Michael Rehaut from JPMC

Michael?

Sir, please check your mute button, we're unable to hear --

First question, last quarter I believe you said that expected second-half orders to equal the second half of '09. Given the tailing off in July and perhaps August, is that a statement that you are still comfortable with?

No, we actually modified that today. What I said, Michael, is that I expected we would sell more homes in our fourth-quarter than we did in '09 or '10. We just sold just under 1,000 in '09, we sold just under 800 in '10. That statement in May would've led us to about a 1200 number. I think we will be somewhere between where we were in '09, which was about 1,000 and where we were hoping to be, which was about 1,200. And I think we've still got a shot, in fact, we still have an internal plan over 1,200, but I'm trying to be a bit cautious because I can't fully anticipate the way what's happening right now is going to play out over the next two months. We are pushing for north of 1,000, but I'm not sure we will get all the way to 1,200.

Okay, I appreciate that. I was actually -- I guess the fog of yesterday is still on my brain a little bit. I thought you meant you weren't sure whether those statements were referring to closings that you weren't sure if that could be over Q4 '09. On the closing side of the equation, do you expect the backlog conversion to return to kind of the numbers that you have seen in the last three years in the fourth quarter? Or given the higher mortgage and finance issues, et cetera, that you're going to still be a little bit down year over year?

I think that we will be down in terms of closings. I think the conversion rate issue has a number of things going on with it. One of the things that's the case is we have a lot fewer finished specs at June 30 then we did a year ago at June 30. So, one of the ways you drive the very high conversion rates is you deal with the things that happen with your backlog by selling and closing specs within the quarter. We are gradually moving away from -- the emphasis on specs to total sales has decreased clearly during this year. So, I think that will have some effect in the comparative conversion rate in the fourth quarter, but I definitely think the fourth quarter conversion rate will be a lot higher than the third quarter, which is what gives us comfort that we can drive to that $400 million cash number.

Okay, also you talked about legal fees and expecting that maybe to tail off by the end of next year. And refer to the appendix, and it looks like -- in breaking out on the SG&A in the last three quarters, the legal fees -- legal and professional range between $3.5 million and $5.2 million. How are we to think about that in terms of a normalized run rate?

Let me just make one clarifying statement, which is it's probably going to get worse before it gets better. We also said in Bob's comments that there is going to be a trial of a former employee that takes place in the first quarter of our fiscal year and maybe another one in the second quarter. So, we expect that those things are going to bring up that number in the near term with a view to the issues related to the legacy challenges going away by the end of the year. I think a normalized run rate would be something under two hopefully closer to one, but the issues related to the restatement and the mortgage issues should be largely gone by the end of next year.

Okay, one last one if I could sneak it in, the geographic review with Northwest Florida, do you see any other regions like that that might be applicable to that analysis, and can you give us a sense of what that means in terms of percent of closings?

Sure. Northwest Florida was a bit of an anomaly for us. At this point, it was the one market we were in that was doing under 100 units and even if perfectly executed, couldn't do more than maybe 200 units. And to me, that made it vulnerable for this decision. There's no other market we are in that is constrained to an upside of only a couple of hundred units, which is why we said I have no plans, we have no plans for any further geographic contraction.

Great, thank you.

Our next question comes from Alex Barron from Housing Research Center.

Yes, thanks. I was wondering, with regards to the headcount reduction you talked about, what is the current headcount at this point?

I think about just under 800.

Just under 800.

Okay. To get a sense for the run rate there, given the breakdown you give, what's a good number for the operating part of the SG&A, about $20 million or so?

Yes, I think we said last quarter that the number we had was about 25, and we said that expected that the $20 million in annualized savings would be nearly fully realized by our fourth quarter and that most of that $20 million would run through the operating G&A. If you take $16 million, $17 million, $18 million of that $20 million, take that on a quarterly basis, that is $4 million plus a quarter that's going to come off of that operating G&A line.

Okay, got it. And then as far as your debt situation, how much of an emphasis do you think you guys would be placing on buying back some debt over the next year or so?

I think it's going to depend on the situation. It's going to depend on what the market is for new homes and our demands for cash and how that compares and the returns we could generate on that cash, how that compares to what our levels of our bonds are. While at the same time keeping in mind maintaining the core liquidity that we want to maintain.

Got it. Okay, thank you.

Our next question comes from Adam Rudiger from Wells Fargo Securities.

Good morning, thank you. Allan, you said that you -- I think mentioned you've visited all of your communities this quarter. And I was wondering as you did that, what you found, what you learned to be perhaps the lowest hanging fruit in terms of opportunities to improve those sales. And conversely, what do you think the biggest Company specific challenge is across-the-board?

Well, it's interesting. I think the two are somewhat intertwined. I think in taking the steps that were absolutely required, that were right to take to take costs out of this business in streamlining and centralizing and rationalizing to find cost savings, we lost some of our agility. And the lowest hanging fruit that I have found so far is letting our division presidents have a bit of autonomy back in how we compete for sales at every single community. I can tell you, if I heard once, I heard 20 or 30 times, well, what we would like to have done is swapped out this for that as a feature set in the hose, but we weren't allowed to.

Part of the standardization, centralization for cost reduction was absolutely essential. But as we are in the market now, we've got to find ways to be agile and give consumers not only what they want, but what they are willing to pay for. I think in competing for sales, the number one thing we have to do is provide a level of autonomy that allows our business to compete not at a division level, but at the community level. What is happening next door, what's happening in that absolutely microclimate around that community. That doesn't mean we can't end up with 15 divisions running 15 totally different business models. We have got to keep control of our number of floor plans, the buyer profile we are serving. But I definitely see opportunities for us to tweak up our product features, particularly around our eSMART Green. I think we made some good decisions, I think we've done some good works, some good science on creating energy efficiency in our homes. I think it's a real competitive advantage. But when you take things out of the house in order to preserve a cost of the home that are things that the buyer expects to get, you may get be getting feedback that says the buyers aren't loving the green features. Well, the fact is what they may not love is you took the granite counter out of the kitchen. I think -- it seems like small potatoes, but those are the kinds of things that I think directly influence sales per community.

Okay, that's interesting, thank you. And if you could get -- let's say you can get your closings up to the desired pace that you wanted to and everything else stayed the same, what kind of impact do you think that would have on gross margin?

There's no question that going from 1.5 to 2 plus sales per community per month will be positive in the gross margin because those indirects that are at the community level get leveraged. And I'd like to stop short of making a prediction about that, but I will certainly say that if sales prices remain constant and we grow velocities, we are clearly going to see gross margin improvements.

Thank you.

The next question comes from Michael Kim of CRT Capital Group.

-- for taking my question, good morning. Thinking about cash guidance for the year with unrestricted cash the $400 million, just one question. Does this include the $20 million allocated for off-balance sheet? And the follow -- the second question to that is how low of the cash balance would you be comfortable operating with during 2012?

To answer your first question, it does include the investment in the off-balance sheet venture with pre-owned homes. And when it comes to how much we would be comfortable for, again, it's going to depend on the market conditions. If we are beginning to grow again, I think we would be more comfortable with leaning into our cash a little bit more with the idea that we would certainly go towards putting a revolver in place to add additional liquidity.

To follow up on the comments on the capital structure, are you looking to adjust the capital structure into the first call date on the second lien bonds and inside of that put option on the cash secured loan, or are you planning on tapping into the existing lien's capacity under the second lien bond indenture for the revolver and the new five year bond to term out the cash loan -- cash secured loan, I'm sorry.

I, at least from my perspective, I would separate the revolver from the cash secured term loan. I think the revolver is an as of right ability that we have for a first lien security that primes the 2017s that are out there. What we do with the 2017s will obviously depend on market prices at that call date. Doing anything with it is somewhat expensive because there's a big OID associated with it. And giving up net worth, which we strived hard to create and to replenish is pretty challenges. So, I think that is one of the challenges with that 2017 bond, is its call date. As it relates to the cash secured term loan, there isn't a particular requirement that we do any type of financing. That's really, as I'm sure you understand, a holding pen that allows us, if we wanted to do a secured or unsecured bond in the future, we've got the basket by simply releasing the cash in that cash secured term loan and paying off that loan that creates that six month window that Bob talked about, during which we could affect the refinancing. But the likelihood is those would be essentially simultaneous with the new bond issue as opposed to doing it and then hoping market conditions were good for six months. Those would probably all get done about the same time.

Right, understood. Great, thank you.

Our last question comes from Joel Locker from FBR Securities.

Hi, guys. I wanted to talk to you a little bit about community count, that change year over year, what it is on a percentage basis.

It was up 1%, it was up two communities.

Up two communities, and how many communities have you unmothballed, year to date in the first three quarters of 2011?

It's a very, very small number. I think the main growth in communities, the replenishment and then the modest growth has come from the 91 new deals that we've done over the last 18 months.

Right. Your gross margins and backlog, also, are they looking a little better than they were in the third quarter in closing? Just because it looks like there's going to be a lot less specs closed as a percentage versus say what they were in the second quarter -- or I mean the third quarter?

As you know as a frequent participant in these calls, we don't get the backlog gross margin. What Bob has said is that we think our gross margin for the full year will be comparable to last year. We're a little bit behind in the nine months, so that's an indication that we feel, on a relative basis, pretty good about those fourth-quarter gross margins compared to last year.

Right, and just last question on customer deposits, what were they at the end of the third quarter?

It'll be in our Q, but I believe the number is about $8.5 million.

$8.5 million. All rightie, thanks a lot.

All right.

Thank you very much. We appreciate you guys joining us, we will talk to you again in November.

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