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Operator
Good morning.
My name is Cynthia and I will be your conference operator today.
At this time I would like to welcome everyone to the D.R.
Horton, Inc.
America's Builder, the largest homebuilder in the United States 2007 year end conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session.
(OPERATOR INSTRUCTIONS)
I would now like to turn the call over to Don Tomnitz, President and CEO.
Sir, you may begin your conference.
- President, CEO
Thank you.
And thank you, and good morning.
Joining me this morning are: Sam Fuller, our Senior Executive Vice President of Finance; Bill Wheat, Executive Vice President and Chief Financial Officer; and Stacey Dwyer, Executive Vice President and Treasurer.
Before we get started, Stacey?
- EVP, Treasurer
Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
Although D.R.
Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes may not be materially different.
All forward-looking statements are based upon information available to D.R.
Horton on the date of this conference call, and D.R.
Horton does not undertake any obligation to publicly update or revise any forward-looking statements.
Additional information about issues that could lead to material changes in performance is contained in D.R.
Horton's annual report on Form 10K and the most recent Form 10Q, both of which were filed with the Securities and Exchange Commission.
Don?
- President, CEO
Net sales orders for the fourth quarter were 6,374 homes, $1.3 billion, compared to 10,430 homes, $2.5 billion in the year-ago quarter.
This lower net sales rate was due in part to our consolation rate rising during the fourth quarter to 48% compared to 38% in the third quarter and 40% in the same quarter of the prior year.
Our average sales price on net sales orders in the quarter decreased approximately 15% from a year ago to $205,400.
However, our average sales price on gross sales only decreased 8% to $231,900, as more high-priced homes canceled during the quarter.
Please note that we will no longer report our quarterly net sales orders in advance of earnings.
Beginning in the first quarter of fiscal 2008, we will report net sales orders in conjunction with our quarterly earnings release.
Sam?
- Senior EVP, Finance
Our fourth quarter Homebuilding revenues were $3.1 billion compared to $4.8 billion in the year-ago quarter.
Our average closing price for the quarter was down 7% to $253,000 compared to $272,400 in the year-ago quarter.
Homebuilding revenues for the year ended September 30, 2007, were $11.1 billion compared to $14.8 billion a year ago.
Homes closed for the fiscal year totaled 41,370, and approximately 62% of our closings were for less than $250,000 each compared to 55% in fiscal 2006, demonstrating our continued focus on providing an affordable, quality, entry level or first-time move-up product.
As a result, the financing for most of our customers can fit within conforming guidelines.
Bill?
- EVP, CFO
Our gross profit margin on home sales revenues in the fourth quarter, before inventory impairments and land option write-offs, was 16%, down 490 basis points from our home sales margin of 20.9% in the year-ago period.
This was a 70 basis point sequential decline from our third quarter gross margin of 16.7%.
This decline was due primarily to core margin deterioration, resulting from increased use of sales incentives relative to last year and a lack of pricing power, as reflected in our 7% decrease in average closing price.
During our fourth quarter impairment analysis, we reviewed all projects in the company and determined that projects with a combined carrying value of $2.6 billion had indicators of potential impairment.
We evaluated these projects and determined that projects with the preimpairment carrying value of $940.5 million were impaired.
We recorded inventory impairments of $278.3 million as a charge to cost of sales to reduce the carrying value of these impaired projects.
Approximately 55% of the impairment charges this quarter related to projects located in California.
Of the remaining $1.7 billion of the projects with impairment indicators, which were determined not to be impaired, the majority are located in California, Florida, and Arizona.
Stacey?
- EVP, Treasurer
FAS 142 requires that we test goodwill in each operating segment, regions in our case, for impairment at least annually.
During our fourth quarter, we completed our annual analysis for goodwill and determined that an impairment charge of $48.5 million related to our midwest region was warranted.
Total goodwill remaining after impairment as of September 30th is $95.3 million.
Don?
- President, CEO
We continue to adjust our land option contracts relative to current demand, which resulted in a $40.3 million write-off of earnest money deposits and preacquisition costs related to land option contracts during the fourth quarter across a broad section -- cross section of our markets.
Our net earnest money deposit balance at September 30th is approximately $75 million or 6% of the remaining purchase price.
This low earnest money deposit percentage reflects our conservative approach to land and lot options.
We have no unconsolidated joint ventures and we rarely use land bank arrangements, so our deposits are typically a low percentage of the purchase price.
Our supply of land and lots at September 30th, 2007, is approximately 230,000 lots, owned and controlled, down 42% from our peak of 396,000 lots at March 31st, 2006.
73% of these lots are owned and 27% are optioned.
We started our fiscal year with 323,000 lots, a 6.1-year supply based on trailing 12 months closings, and our 230,000 lots now represents a 5.6-year supply based on trailing 12 months' closings.
We continue to actively work to reduce our own land and lot supply through building and closing homes as well as through opportunistic land and lot sales.
For example, in November, we closed on a land sale in Phoenix, which reduced our own lot position by approximately 20,000 lots or about a half a year supply.
Total revenues will be approximately $70 million on this transaction and we will recognize a profit on the sale.
There's been no impairment associated with this project.
Sam?
- Senior EVP, Finance
Homebuilding SG&A expenses for the quarter was 9.9% of total homebuilding revenues compared to 8.5% a year ago.
For the fiscal year, our homebuilding SG&A was 10.3% of total homebuilding revenues compared to 9.9% last year.
Our ongoing goal for each fiscal year is to be at or below 10% of homebuilding revenues.
Although we're above our 10% goal this year by 30 basis points, we have continued to react quickly to the market to manage our SG&A levels relative to our level of home closings.
In fiscal 2007, we reduced total SG&A expenses approximately $315 million or 22% on 22% pure closings.
We will continue to focus on being the low-cost operator in the industry, which remains one of our distinct competitive advantages.
Bill?
- EVP, CFO
Our financial services operations remain profitable, as we have proactively adjusted expense levels to lower volumes and adjusted product offerings to the current restrictive mortgage environment.
Financial services pretax income for the quarter was $16.1 million compared to $33.7 million in the year-ago quarter.
For the fiscal year, financial service's pre-tax income was $68.8 million compared to $108.4 million last year.
96% of our mortgage company business was captive during the quarter, reflecting our continued focus on supporting our homebuilder's business.
Our company-wide capture rate in Q4 was approximately 64% compared to 71% a year ago and for the year was 66% compared to 68% in the prior year.
Our average FICO score this quarter was 717, comparable to the year-ago quarter.
Our average cumulative loan to value for the quarter was 90%, compared to 91% in the year-ago quarter.
As the mortgage markets continue to change, we saw a continued shift in the type of products that buyers utilized in the fourth quarter.
Our product mix during the fourth quarter was: 81% conforming, 10% agency-eligible alt A, 2% nonagency-eligible alt A, and 7% jumbo.
For our full fiscal year 2007 our product mix was: 57% conforming, 19% nonagency-eligible alt A, 13% agency-eligible alt A, 7% jumbo, and 4% prime -- subprime.
Sam?
- Senior EVP, Finance
The effective tax rate related to our income tax benefit on our fiscal 2007 loss was 25.1%, because only approximately 23% of the goodwill impairment charge recorded in fiscal 2007 is deductible for tax purposes.
Our reported net loss for the quarter is $50.1 million or $0.16 per share.
However, our core operations before impairment charges and land option cost write-offs generated pretax profits of approximately $266.9 million.
Our reported net loss for the fiscal year was $712.5 million or $2.27 per share.
Our core operations before impairment charges and land option cost write-offs generated pretax profits of approximately $852.4 million.
All of our operating regions remain profitable for the fourth quarter and the fiscal year before impairments and write-offs.
We continue focus on managing the core business efficiently by controlling our costs and adjusting overall conditions.
Don?
- President, CEO
Our overall inventory decreased by over $900 million excluding impairments at 9/30 compared to June 30th.
We reduced our total number of homes in inventory to approximately 19,900 homes, down 50% from 40,000 homes at our peak in June 2006 and down 27% from 27,100 homes at June 2007.
We also reduced the absolute number of speculative homes in inventory by more than 18% this quarter to approximately 10,600 compared to approximately 13,000 at June 2007.
This reduced the number of homes and inventory combined with our earnings in the fourth quarter, allowed us to exceed our goal of $1 billion in operating cash flow for this fiscal year by over $300 million.
We plan to further reduce both our total number of homes in inventory and our number of speculative homes in the coming quarters in-line with current demand.
Stacey?
- EVP, Treasurer
Our Homebuilding leverage ratio, net of unrestricted cash, was 40.2%, an improvement of 50 basis points from a year ago and at the low end of our target range of 40% to 45%.
As of September 30th, we have approximately $2.3 billion available on our Homebuilding revolving credit facility and $228 million in unrestricted Homebuilding cash for a total of $2.5 billion of Homebuilding liquidity.
We have reduced our Homebuilding debt balances by approximately $900 million since the beginning of the fiscal year and we've reduced our consolidated debt balances by approximately $1.7 billion.
As a reminder, D.R.
Horton does not have any unconsolidated joint ventures, so we have no exposure to parental guarantees or margin calls on joint venture debts.
We currently have three primary financial covenants in effect under our $2.5 billion revolving credit facility, maturing in December of 2011.
They are a tangible net worth covenant, a maximum leverage covenant, and a trailing 12-month EBITDA to interest incurred covenant.
All covenant calculations are based solely on our guarantor's subsidiaries, which includes substantially all of our Homebuilding operations, but exclude our financial service operations.
Our current tangible net worth covenant is $4.3 billion and as of September 30, we have a cushion of approximately $1 billion.
Our current leverage is 42% compared to a maximum allowable leverage of 60%.
And finally, our trailing 12 months interest coverage ratio a 3.6 times compared to our two times covenants.
Bill?
- EVP, CFO
Our cash flow from operations this quarter was over $800 million, positive for the fifth consecutive quarter and bringing our total for the fiscal year to over $1.3 billion, exceeding our goal of $1 billion.
Over the last 15 months, we have generated in excess of $2.2 billion of operating cash flow.
Our goal for fiscal 2008 is to generate an additional $1 billion of operating cash flow.
Our land acquisition spending remains limited and we continue to challenge our land development spending in light of our current absorptions.
We expect our fiscal 2008 land acquisition and land development expenditures to total between $500 million and $1 billion for the entire fiscal year.
For comparison, our fiscal 2007 land acquisition and land development expenditures were $2.5 billion and in fiscal 2006 they were $5.2 billion.
We continue to develop smaller phases and pace our development of new phases based on current demand in individual communities.
Don?
- President, CEO
In closing, D.R.
Horton will continue to manage very conservatively during this housing downturn.
In fiscal 2007, by controlling our SG&A, renegotiating our construction costs and reducing our inventory, we generated approximately $852 million in pretax operating profits before impairments, with all of our reporting regions contributing positively towards this total.
Our stated cash flow goal for fiscal 2007 was to generate $1 billion in cash flow from operations.
We exceeded this goal, generating $1.36 billion.
We used this cash flow to reduce Homebuilding debt by $900 million and consolidated debt by $1.7 billion.
Even though we reduced our residential inventory by 7,000 homes in the fourth quarter, we plan to reduce our homes under construction further, which will contribute to our goal of generating at least $1 billion in cash flow from operations in fiscal 2008.
We will continue to focus on earning pretax operating profits before impairments, generating operating cash flow, reducing both residential and land inventories, and repaying debt.
In a downturn, we believe that the builder with the strongest balance sheet wins.
We plan to be the winner, with a solid balance sheet and available liquidity to take advantage of opportunities as they present themselves in the marketplace.
Finally, we thank the entire D.R.
Horton team.
This includes, especially, our field staff, including construction, sales, and mortgage.
As we know we are all in sales and sales are the key to our future successes.
While it is difficult to outperform the markets, you continue to outperform our competition.
Our motto, BSCM: build, sale, close homes and make money is most applicable today, generate free cash flow and leave no buyer behind.
Thank you.
We'll now entertain any questions that you may have.
Operator
(OPERATOR INSTRUCTIONS) Your first question comes from Michael Rehaut with JPMorgan.
- Analyst
Hi.
Good morning.
- President, CEO
Good morning.
- Analyst
Congrats on the cash flow generation.
I just wanted to get -- my first question is, if you could just, for the full year, give me a, if possible, a breakdown of how that $1.3 billion fell across.
Let's say, land sales, mortgage operation, and core Homebuilding, and how you think that composition will look for '08?
And then I have a follow-up.
- EVP, CFO
Well, Mike, as far as the breakdown in '07, I think it's presented fairly clearly in the cash flow statement in the press release.
Primarily, from inventory reduction, approximately $800 million of that, and then we had about $500 million of mortgage loans held for sale, there was a reduction during the year.
Of course, that is supplemented by the preimpairment profits from our operations.
The primary breakdown in '07.
As we move forward to '08, we certainly -- our goal is to continue to generate profitability before impairments and charges.
We will see, I think, a -- hopefully a smaller reduction in our mortgage loans held for sale during the year, but the majority of the $1 billion that we expect to generate in '08 is going to come from inventory reductions and our home building business.
- President, CEO
Which is primarily going to come from us building homes on the lots that we owned and pulling development dollars out of the ground and closing on the whip that's associated with those houses.
- EVP, Treasurer
And as we talked about in the conference call script, we'll going to be looking to sell land opportunistically.
So we've already generated some -- some land sales revenue that will contribute to cash flow this quarter.
- President, CEO
By the way, our land sales, our land inventory, our land and lot inventory now, boast that Phoenix transaction, is down to about 5 years -- 5.1 years land and lot supplies.
So we think that's a dramatic one-year reduction in a 12-month period -- about a 13-month period.
- Analyst
The Phoenix sale is pretty impressive given what's going on in that market.
The second question is just more of an accounting question.
Last quarter I think you had about $7 million of a benefit in the gross margins from selling homes of previously impaired communities.
I was wondering if you could give that number for this quarter?
- Senior EVP, Finance
Right, this quarter, on the home sales gross margin line, we had $49 million flowback through from previous impairments.
And then on the land sales line, we had $10 million flow back through in the fourth quarter.
- Analyst
Great.
Thank you.
Operator
Your next question comes from Dan Oppenheim with Banc of America Securities.
- Analyst
Thanks very much.
Was wondering if you can talk about your pricing and sales strategy.
You talked about how you want to outperform others and not let any buyers get away.
Given the declines been reporting in orders and what we've seen in aggressive pricing, what is it that you're trying to do differently as you go into fiscal '08 to capture more net orders?
- EVP, CFO
Well, clearly, one of the things that we're doing in a number of communities is we're continuing to mark our product to market.
We think it's unrealistic to hold pricing, which is not competitive with the market.
And in some of our communities, frankly, we are having the rare opportunity to raise a few prices.
We'd like to get to the point where we can have more stability in our pricing, which we have not experienced in '08.
But the real issue is, the market is the market.
And we are continuing to drive down our costs across the board on development costs, on costs from our suppliers and costs from our vendors and costs from our subcontractors so that we can offer a more competitive product.
Everything has to reset.
The first thing that's reset, as you know, has been the sale -- or the sales price of a single family home.
Now we're in the process of resetting all those costs.
But it's unrealistic for us to continue to expect or to offer a product that's higher than what the market's willing to pay.
- Analyst
Thanks.
And if you can just talk also about -- I guess if you think about spec homes here and bringing down the spec inventory environment, where the buyers are looking for spec homes, knowing they can get the best prices, what percentage of construction is spec right now, what's your goal for next year?
- President, CEO
Well we have a very limited spec start policy.
And basically it's X number of specs per community.
Frankly, we need to have, we believe, in order to maximize our sales opportunities in the marketplace, a limited number of specs in each community, simply because there are people out there who have existing homes, who are marking those to market and closing on those homes, and then they are coming into our sales offices and desiring to move into a new home within a very short period of time, three to six weeks.
So therefore we'll continue to maintain limited spec inventory in all of our communities such that we can appeal to those buyers.
- Analyst
Thanks very much.
- President, CEO
Thank you.
Operator
Your next question comes from Nishu Sood with Deutsche Bank.
- Analyst
Thanks.
Good morning, everyone.
Nice job, considering the environment.
- President, CEO
Thank you.
- Analyst
First question I wanted to ask was, in some of the harder-hit markets, you're beginning to see what you might call a limited or even a no demand environment.
Places like Sacramento, you're hearing about mothballing and price inelasticity.
I wanted to ask your thoughts on that.
Specifically, how many of your markets, do you think, have kind of reached that kind of state and when you consider pricing versus volumes trade-off, how are you counseling your guys' on the ground and in your markets that are like that?
- President, CEO
That's a great point and you're exactly right.
Remembering back when we were criticized two or three years ago, about offering discounts on inventory back in December '05, and we wish we still had that kind of pricing power as we did back in December of '05.
But the way we are countering this and are in the process of a day to day basis, division by division, subcontractor by subcontractor, is that we have to drive down the cost of everything that we're buying.
And we have to drive down the cost of our SG&A.
Because the only way to continue to meet the market and satisfy the buyer's desires is to have a lower cost structure than anyone else in the industry.
That's why we are extraordinarily proud, even though it is 30 basis points over our goal of our 10% -- 10.3% SG&A.
So it's just a -- it's a cost game right now.
And I think the buyer going to continue to demand competitive pricing and the one that has the best cost structure is going to win.
- Analyst
And I know it's tough to quantify, but roughly how many of your markets -- I think you're in like what, 75, 80 markets.
How many of those do you think have reached that type of state?
- President, CEO
Well, I would look at it more from the perspective of where our big markets are.
And to be frank with you, it was the -- it's the hot markets, I think, that have reached that stage of price and elasticity.
If I think Las Vegas is clearly there, I think California is clearly there, and I think Phoenix and Florida are getting closer to being there, but they're not yet there.
- EVP, Treasurer
And even within those markets, Nishu, there are differences based on locations and if you're further away from the job centers, you're probably experiencing more price pressure in those communities than ones that are a little closer in.
And price points are going to make some differences based on mortgage products that were previously available and what's available in the market today.
So, as Don said, we're working on costs, we're also restructuring at of our product to make sure what we're bring to market meets the market demand.
- Analyst
Okay.
Great.
And one other quick question on the land sales.
What was the age of 20,000 lots that you sold in Phoenix?
And generally of your I think $150 million in land sales, how old was that land as well?
- President, CEO
I would say the Phoenix project is a project that I believe we've owned for approximately three years and the other sales --
- EVP, CFO
We don't have that data in front of us on all of the other sales, but it's scattered.
- Analyst
Okay, great.
Thanks a lot.
Operator
Your next question comes from Joel Locker with FBN Securities.
- Analyst
Hi, guys.
Just wanted to get a count or if you have a breakdown of your own lots, how many were finished, how many were under development, and how many were raw?
What is it 72% or 168,000 or so?
- President, CEO
Yes, I think it's 72% -- 70%, 72% are owned currently.
- EVP, CFO
We've got about 167,000 owned lots.
And right here in front of us, so we don't have a total count.
Our breakdown of finished versus raw at this point.
- Analyst
Do you have any kind of ballpark figure, percentage-wise?
Just trying to look at cash flow going into next year, if -- just based on if you have a lot more developmental costs or depending if you choose to mothball or not to mothball and just trying to get an idea of what's raw and what's finished and what's --
- President, CEO
You can rest assured that virtually the vast -- the vast majority of what we're going to be closing homes in on '08 are already finished, and we have -- we mentioned on our conference call our development spend projection range for '08 is $0.5 billion to $1 billion and we would be sorely disappointed if it weren't closer to the low end of that range.
So we're going to be spending very, very little money on developing lots.
Most all of you are lots for '08 closings are finished and developed.
- EVP, Treasurer
Actually that dollar spend includes both land development and land purchases.
- EVP, CFO
Even if it's raw land, we are slowing our development spend based on and pacing our lots based on, and pacing our lots, bringing our lots to market, based on what we expect we're going to need for sales.
- Analyst
I've got you.
And impairment reversals going forward is a big -- you went from $7 million to $49 million or $59 million including the land sales.
What do you expect on the impairment reversals in fiscal '08?
- EVP, CFO
That's a hard number to predict, Joel.
It really depends on where we close our homes and whether we're closing our homes in impaired projects going forward.
Given the cumulative environment of our impairments through June and now through September, I wouldn't expect it to be down below $10 million in any quarter going forward, but whether it will be around the $49 or higher or lower is a little difficult to predict.
- Analyst
Right.
And your selling costs as a part of the $283 million SG&A, what was selling and what was G&A?
If you have that breakdown.
If you don't have it handy, I can follow-up after you call.
- EVP, Treasurer
We're going to get you a ballpark number here, Joel.
- President, CEO
Give us five seconds.
- Analyst
Yes.
- EVP, CFO
Roughly, about 25% of our SG&A was selling costs during the year.
- Analyst
During the year or during the quarter?
- EVP, CFO
I'm sorry, that was during the year.
And, let me look, during the quarter, roughly 25% during the quarter as well.
- Analyst
Roughly 25%.
All right.
Thanks a lot.
Operator
Your next question comes from Ken Zener with Merrill Lynch.
- Analyst
Good morning.
- President, CEO
Good morning.
- Analyst
Given the lower, I think, than expected impairments this quarter, can you talk about how impairments that you had this quarter were influenced by your last quarter's discussion with the auditors based upon kind of down pricing and better absorption rates?
Essentially, was like the 39% in orders consistent with that type of elasticity of demand, you would have expected with down pricing.
And if not, did your impairment approach with the auditors change this quarter relative to last quarter given the apparent lack of elasticity?
- EVP, CFO
No, there was really no change in our approach from June to September.
We still have a very cautious outlook on the industry, on our pricing prospects, and on our volume.
And certainly, as we move through the quarter, that outlook that we had in June and as we assessed our projects in June, that certainly, to a large extent, was accurate.
And so as we've looked at the projects again in September, we looked at a lot of the projects we had previously impaired and in many cases, we had anticipated the pricing that did occur and so as a result, if that was in-line with our previous assumptions, it did not need to be impaired again.
Of course, naturally, with the volume of impairments we've had here in the fourth quarter, we've had a number of projects that had performed worse than we had projected in June, and so that's why they are impaired in September.
But really the approach is very consistent from June to September.
We remain very cautious on our pricing assumptions and our models.
And we'll continue to do so.
- Analyst
Okay.
- President, CEO
I think you can go back in the records and I think one thing is certain, is we've been very consistent in our outlook for the industry in '07 and we've continued that through the fourth quarter.
- Analyst
Do you have a new choice word, Don, for '08?
- President, CEO
No.
I thought I would save it for someone's conference to really --
- Analyst
Okay.
And I guess my second question --
- President, CEO
The media needs to be there.
- Analyst
Well, my second question, I'm trying to understand your own land position, which was essentially flat Q-to-Q at about 167,000 lots versus 169,000 in 3Q, despite your closing nearly 12,000 units.
So can you talk about what percent of closings of lots are on a -- do you take down [intrayear].
And if you deliver 12,000 units, we'll see the land position decline by that amount excluding any land sales?
- President, CEO
One thing we're focused on in '08, and Stacey can give more color on this as she wishes, but our goal in '08 is to close as many of our units on owned lots as we possibly can.
Because our primary goal in our land -- and our land position is to pull our development dollars out of the ground where we've already gotten finished lots.
Our goal is to take care of Horton first and worry about the third party developers later.
- EVP, CFO
One thing we should clarify, Ken, is when we state our owned lot position, that does not include lots on which we are constructing a home it.
Includes finished lots or lots under development that we own, but we have not started a home under construction.
So actually to reduce our lots owned, we need to start a home and -- because then it will move into our construction in progress.
Since we're not starting many homes right now, we're purchasing very few as well.
But since we're not starting many homes, our position hasn't moved much in many quarters.
- President, CEO
Yes.
And that's a good point.
Because what we're trying to do is reduce our spec inventory so that we can start additional homes.
- Analyst
Okay.
And, obviously, selling land like you did in Phoenix is going to be helpful to that.
I guess, that deal, if you can expand on the logic behind that.
Because I think a lot of people given the -- while it's good you're selling the land and certainly at a profit relative to what you bought it at in '04, I think it's kind of surprised people the amount of lots, certainly me, the amount of lots that roughly 23,000, which represented 50% of the southwest lot position, as I did the calculation.
So it just seemed to be such a unique deal.
Could you explain kind of the logic given what appears to be roughly $3,000 a lot cost basis?
Thank you.
- President, CEO
Well, we don't want to expound upon it too much, because obviously we have some agreements with our buyers, but essentially we ended up with too many lots in that market.
And there was -- we had a very successful project that was essentially about the same number of lots that have north of there that we started seven years ago and became very, very profitable for us.
As we looked at that market today, it was one of the more outlying markets in our core area in Phoenix and we just decided we had enough lots in that market to get us through the next two to three years, and clearly we will be buyers of lots most likely from the gentleman and the party to whom we sold the land.
- EVP, Treasurer
I think you're right on one thing, Ken, it was a unique transaction, and it certainly a larger number of lots, but it was on a very attractive land basis.
And our intention would have been to sell off some piece of that land in the normal course of business.
Because typically we would not have an individual community that was that size.
- President, CEO
And just along those same line, I would be remiss if I didn't mention Gordon Jones and Tom Davis who were very instrumental in consummating that transaction with the buyers.
So thank you very much, gentlemen.
Next question?
Operator
Your next question comes from Stephen Kim with Citigroup.
- Analyst
Hey, guys.
Wanted to first ask you sort of a conceptual question.
Actually, yes, I guess a conceptual question.
You guys just gave earlier in the call here a development spend projection for 2008 of I think $500 million to $1 billion.
I wanted to make sure I understand what that would be comparable to in 2007.
- President, CEO
Well, according to what we said is not only that development spend i.e., the water, the sewer lines, and the paving that's going into improving the lots, but it's also the closing --
- EVP, CFO
Yes, the closing on lands and lots as well.
- Analyst
Right.
Yes, great.
I would imagine any ongoing fees, you've got to pay to keep options alive and whatnot.
What was that figure in 2007, full year?
- President, CEO
$2.5 billion.
- Analyst
Got it, great.
Perfect.
Okay.
And then the second question I had relates to your work in process, what you called finished homes and construction in progress.
Obviously, it came down nicely with a nice driver to your cash flow for the year and I think you indicated that you'd sort of felt that that line item might be a driver again as you go forward into '08, which makes sense.
My question is this, though, if you look at that number, which I think was $3.3 billion, as a percentage of your backlog value, the figure was noticeably higher, I believe than what we'd seen in your previous quarters.
And I guess I was curious as to whether or not -- and obviously that's because your backlog value dropped pretty meaningfully.
And I guess my question was whether or not we would expect that figure, as a percentage of backlog value, to come more down in-line with where it's been over the last, let's say, year or so, and maybe what drove the big increase in 4Q '07?
- EVP, Treasurer
I think when you look at 4Q '07, there are a couple of things that come into play.
Obviously, fourth quarter is our strongest delivery, so you see the biggest drop in our backlog in a sequential quarter in the fourth quarter.
The other thing is that our speculative inventory, as a percentage of our inventory is higher in the fourth quarter than it has been.
And that's why we've said, we went to work down both our absolute number of homes in inventory as well as our speculative homes in inventory.
As our spec works back down toward our target of 35%, you should see the percentage of residential inventory compared to our backlog coming back in-line with where it's been historically.
- Analyst
Great.
Yes, because those specs opt to carry a heavy dollar weight.
- EVP, Treasurer
Well, they just carry a dollar weight that's not offset by anything in the backlog number.
- Analyst
Right, right.
More particularly.
Okay.
Switching gears to your SG&A, what was obviously very good, your control is very good this quarter, and it has been for quite a long time, obviously.
As I look ahead into the first quarter of next year, the way we forecast your SG&A, it looks like it's going to be quite a challenge here for you to keep your SG&A rate as a percentage of -- I use home sale revenues, but it's not going to be that much of a difference between when you calculated.
I have it sort of jumping up to a level that we have never seen in the history of your company because of some relatively weak revenues.
According to my records, you've never generated an SG&A rate higher than 12%.
Is it your expectation that you should be able to sort of maintain that track record and stay 12% or below in the first half of 2008?
- President, CEO
Steve, as long as I've known you and as long as you've known Don Horton and me, I'm surprised at your question.
But I'll answer it for you, because obviously you must have forgotten something about the both of us, and that is we clearly reduced our SG&A in line with our closings.
As you noticed, it dropped 22% and 22%, and we will continue to do that.
We are, frankly, at this stage, waiting to see what type of spring selling season we have, to see if there's any Super Bowl party.
We're we're well positioned to take advantage of it.
To the extent that we're not, we will keep our SG&A very closely in line with where it has historically been.
And that is the way this company has operated and will continue to operate.
Operator
Your next question comes from David Goldberg with UBS.
- Analyst
Hi, how you doing?
I was hoping we could start with the decline in unsold homes that are under construction or completed.
Can you give us just an idea of what kind of price discounts you guys used to bring that down and what the profitability of those homes might look like, having been resold?
- EVP, Treasurer
Say that again please, David.
- Analyst
Yes.
So for the homes that were in progress or completed and unsole, that came down, if my calculations are right, from about 13,000 to about 10,600.
I think that's about right.
And I'm just wondering what kind of price discounts you used to move those homes.
- EVP, Treasurer
So basically the pricing differential between a spec home and a to-be-built home.
- Analyst
That's right.
And also the profitability difference.
- President, CEO
It's all over the map.
Quite frankly, what we're looking at is we're looking at the age of the inventory of the finished spec and we're trying to mark that to market.
As well as when we do a build job, our to-be-built home, we are pricing that home, I would just say, rough numbers, at least 300 basis points above where we have got the spec home for sale, largely because of the fact that if we are going to take the risk of building a to-be-built home for someone, we want the additional profit in there to justify that.
And we really would prefer to move the existing inventory home.
So we're trying to price that to be built home high enough that if the buyer wants that on that specific lot, that's a good margin home for us as opposed to moving on an existing inventory home.
- Analyst
And then I guess my follow-up question has to do with how comfortable you guys are with the backlog right now.
That everyone in the backlog is going to -- like if you weeded it out to make sure everything can get a loan and everyone can qualify for mortgages at the current rate.
And give me an idea of whether that's just flushed out.
- President, CEO
Gee, if I told you I was comfortable, I think I would be in a different business.
Because given -- tell me what the mortgage market's going to be like over the course of the next quarter.
To answer your question, I believe with what's in our backlog today, especially reflecting what happened in the fourth quarter because one of the things that drove our cancellation rates so high in the fourth quarter is that we did review our backlog, region by region and division by division, with one specific goal in mind.
Do we have a buyer in our backlog who is qualified in a mortgage that doesn't exist anymore, or looks highly unlikely that they'll be able to qualify as the mortgage mark changes?
So we scrubbed our backlog the best I think we've ever scrubbed it relative to the mortgage instruments that are available and may not be available going forward.
So while there are still cancellations to be had in our backlog, I think the vast majority of those clearly were taken as we cleansed it in the first quarter.
- Analyst
Maybe I could just sneak one more in here.
I'm just thinking about free cash flow priorities.
You guys are going to generate $1 billion in cash flow from operations next year.
Maybe what you're seeing in the market now in terms of maybe M&A or even land sellers outside this big transaction you guys did, if you're seeing that free up a little bit in terms of cash, pricing from land sellers, or M&A from other builders?
- President, CEO
Well, I would say to you that in terms of M&A from our perspective, i.e., us buying someone or some other major assets, that's certainly not at the top of our list, but rather at the bottom of our list.
We're still dealing with an adjusting market.
I don't want know where land values are going to be three months from today, six months from today.
And so as a result for us to go out in the marketplace today and to purchase some large asset or some builder, I think the most difficult thing would be, what's the value of the asset that we're buying.
So that's certainly not on the forefront of our minds.
Our goal is completely to reduce our land and lot inventory and to reduce our finished home inventory and to reduce our spec inventory and to get our costs more in-line with what the consumer is willing to pay for our product.
- Analyst
So you just use the cash to delever?
- President, CEO
Absolutely.
We are absolutely convinced of one thing.
There's a motto written across all of our foreheads as we walk in this office.
The homebuilder strongest balance sheet wins this fight and we have and we will have the strongest balance sheet when this is all over with.
- Analyst
Okay.
Thanks.
- EVP, Treasurer
Thank you.
Operator
Your next question comes from Stephen East with Pali Capital.
- Analyst
Good morning, everyone.
One last question on inventories and then hopefully we'll leave you all alone on it.
Your specs in absolute came down pretty nicely as a percentage of total actually went up and I know you all are trying to focus heavily on getting that percentage back into the 30%.
Can you do that?
With your plans that you have right now in fiscal '08, can you do that?
- President, CEO
I think it's -- to answer your question directly, yes, I do believe we can do that.
I think it's going to be a tough goal to achieve.
I think one thing you have to remember, Stephen, that we did not disclose, and that is that we have 299 homes that have been completed and unsold for a period greater than a year.
So we really don't have a significant aged inventory problem.
Although we do have more specs than we would like.
That number should come down as we continue to price our build jobs more expensively than our specs.
- Analyst
Okay, all right.
And if we look at the California and west orders this quarter, down pretty sharply, pricing down pretty sharply in California.
The drivers for you all given the relative underperformance for you all this those particular areas and and what your response is looking out into this quarter and into the selling season?
- President, CEO
I would say in the west, in particular, we believe that any dollar that we don't put in the ground out there is a profit this year.
And as a result, we are absolutely trying to decrease our investment dramatically in all of those markets out there as we speak, in terms of land acquisitions, lot acquisition, development spend, you name it.
The California market, we made a lot of profit, a lot of PTI during the good times, and obviously, if you look at our impairments, we've given back $.5 million of impairments so far and that's disappointing to us, but it's a very challenged market.
I would say to you that the biggest issue in California today is there are a lot of people who want to own a home and there are no mortgages out there or very few mortgage out there which would permit someone to a buy a home in California today.
So there's got to be a great reset in both cost, prices, as well as some additional mortgage instruments to make that market come back.
- Analyst
Okay.
And that sort of leads right into my next question.
The news this morning with Freddie, the mortgage environment in general that you're seeing, does the Freddie news cause you all consternation?
Does it affect your business and sort of tailing onto that, the performance you've seen in your market since the end of September?
- President, CEO
Well, let me address everything, other than post September, and answer your first two questions, yes and yes.
It does impact our business.
It does concern us, I'm of the opinion that the best thing that can happen to the financial institutions, including Fannie and Freddie are just exactly what the homebuilders have done.
We've gone through and we've reset our basis and our properties through impairments, earnest money write-offs.
The best thing, not that I'm an adviser to them, but the best thing they can do is to deal with it all, get it all out of the way as quickly as possible so we can move on.
And let's applaud our industry, if you look at all the builders in the home building industry, we've attempted to clean it up as quickly as we possibly can and that's what they need to do.
Therefore we will have a whole new parameter to start with and a whole new market to start with.
- Analyst
Okay.
Do you think it creates -- what's going on with Freddie today, do you think it creates another round of tightening of lending standards and thus taking another group out of the market?
- President, CEO
It could very well.
It really could.
- Analyst
Okay.
Thanks a lot.
Operator
Your next question comes from Timothy Jones with Wasserman and Associates.
- Analyst
Hello, guys.
Good morning.
Couple questions.
First, did you say that land sale (inaudible - technical difficulties)
- President, CEO
You are really breaking up there.
Say that again.
- Analyst
Just a second.
I'm sorry.
Can you hear me better.
- President, CEO
Yes, sir, better.
- Analyst
Okay.
On the 20 -- this is housekeeping, the 20,000 lots, did you say they generated $76 million of revenues?
- EVP, Treasurer
About $70 million.
Seven.
Zero.
- Analyst
Seven.
Zero.
Okay.
And you didn't have impairments in the -- given the fact you had a 45% margin in the land operations, did you?
- EVP, CFO
There was no impairment on that property --
- Analyst
Anything there, because you generated 45% margins in there.
- EVP, CFO
To clarify, Tim, this sale occurred after fiscal year end.
This occurred in the month of November.
- Analyst
Oh, it did?
That will help the first quarter.
- EVP, CFO
Yes.
- Analyst
That's nice to hear.
Okay.
Now, can you give me the quarterly increases in sales -- monthly increases in sales this quarter and the cancellations, and maybe any comment on October?
- President, CEO
Well, we -- I will tell you that our cancellation rate in each of the months of the fourth quarter increased sequentially, which led to our 48% can rate total for the fourth quarter.
- Analyst
And that (inaudible - technical difficulties) in the backlog or what?
- President, CEO
I would say that the -- I don't have that number before me, but a lot of our -- the increase in our can rate, up to 48% over the year-ago period and especially over the third quarter, a lot of that was a function of our cans in our backlog.
- EVP, Treasurer
Right.
- Analyst
The other thing is you've talked about being really working on your fliers and I know Don well enough to know this is true.
How much have you reduced your material cost and labor cost per square foot in the last year or so, in the last -- from the peak, whenever you want to say it?
- President, CEO
We don't have an exact number on that, and it's going to vary from market to market.
Certainly in places like California and Las Vegas, it's been more substantial than it has been in Texas, because Texas is still a good solid market for us.
But I think as a good range, what we've told people over the course of the year is that number is somewhere between 5% to 10% and probably closer to 10%.
- Analyst
That's including labor and everything?
- President, CEO
Yes, sir.
- Analyst
Okay.
And lastly, just one other question.
Some -- I just want to comment on this.
One of your competitors has said they're going to build 200 homes in southern California and hold onto them.
That obviously surprised me and you've just said that anything you can get out of California is good.
Would you like to make any comment on the different tactic?
- President, CEO
No, sir.
Frankly, we're in the -- we're focused on taking care of our own inventory of houses and lots, and our goal is to try to reduce our number of homes in inventory, as well as most importantly pull our development dollars out of the ground by building, selling, and closing houses on those developed lots.
- Analyst
Sneak one more -- the -- you said there was price in elasticity in southern California.
Yet one of your major, major competitors said, if you can offer homes that you can get a conforming $417,000 loan that you can sell them quite rapidly in southern California.
I would suspect that most of your product would fall into that category.
- EVP, CFO
I would agree that most of our product would fall into that category.
And I think, still, the major issue in California is the fact that you have consumers who have seen single family home prices decline rapidly over the next -- over the last 12 to 18 months, and one of the things that we're fighting along with mortgage, ill liquidity into the California market is frankly one of boosting back consumer's confidence.
And the only way we're going to have the confidence in the consumer is to have some pricing stability until we reach a level of inventory where it's relative to the demand out there, I think that's going to be very difficult to achieve.
So clearly in California, we need some help on the mortgage side or a lot of help on the mortgage side, but right now I think it's a combination of mortgage and consumer confidence.
Operator
Your next question comes from Alex [Barron] with Agency Trading Group.
- Analyst
Hi.
Good morning.
- President, CEO
Good morning.
How you?
- Analyst
Good, how are you?
- President, CEO
Doing great.
- Analyst
Excellent.
I wanted to ask you if you could talk about the impairments.
How many communities you guys impaired this quarter?
And also what the breakdown was beyond California?
- EVP, CFO
Sure.
We impaired 98 communities this quarter and just rough number, we had 58% in California.
The next two regions, kind of in the ranking there as far as volume of impairment, our west region was -- had the second largest amount and the southeast region had the third largest amount.
Combined, that'd get the vast majority of the impairments this quarter.
- Analyst
And of those 98, how many were reimpairments?
- EVP, CFO
23.
- Analyst
23, okay.
I guess my second question, going back to the SG&A issue, I'm just trying to get a sense of how much of the SG&A is relatively fixed versus how much is variable.
And I guess, do you have a target for where, as a percent of revenues, that's going to come in next year?
- President, CEO
Our goal has always been to keep it at 10% or less, obviously, we're at 10.3%, 30 bips higher than our goal.
But we expect in '08 for it to be real close to that 10%.
- EVP, Treasurer
The only thing I would add to that, Alex, it is going to be challenging to keep that at 10% in a declining revenue environment.
And we've been very proactive throughout the year and we managed to bring that in only 30 basis points above our target.
We're going to be working to see that again.
A lot of our costs are variable.
Over 50%, probably closer to 60% of our SG&A costs relate to people.
It's the actual salaries, commissions, bonuses, and then all the related benefit costs that we pay.
So as we've continued to adjust our organization size to the demand that we're seeing in the market, we will continue to impact a large percentage of that SG&A number.
- Analyst
Got it.
And any comment on the dividend?
Any chance that's going to get cut to save some cash?
- President, CEO
Our dividend stands as it is and it's something our Board of Directors reviews on a quarterly basis.
Clearly, with our $1.36 billion of free cash flow in the past quarter and over $2 billion of free cash flow over the last 18 months -- 15 months, and our projection of $1 billion of free cash flow for fiscal year '08 to the extent that we can continue to generate the free cash flow that we expect to, we'll review it on a quarter-by-quarter basis relative to our ability to achieve those free cash flows in '08, but certainly we did that in '07 and for the past 15 months.
- Analyst
Thank you very much.
Take care.
Operator
Your next question comes from Carl Reichardt with Wachovia.
- Analyst
Good morning, guys.
How are you?
- President, CEO
We're doing great.
Good morning.
- Analyst
When you choose your new word, please do it at my conference in February.
- President, CEO
All right.
- Analyst
I have a question about -- if we look at your budgets for absorptions over the course of fiscal '08, I don't know what you base your impairment analysis on, what's your guess as to with a your store count will decline if it will in '08 versus '07?
- EVP, CFO
We expect it certainly to decline, I mean, probably in the 10% range, roughly.
It's a little bit difficult to predict.
It really depends on how quickly we sell through current communities, but we expect it certainly to come down and 10% wouldn't surprise us.
- Analyst
And that would be faster '07 to '06, correct?
- EVP, CFO
That's about in line.
We're roughly in the 10% range this year.
- Analyst
Okay.
Great.
And, Don, can you give us update on geographic markets where you've either substantially consolidated divisional operations or outright pulled out of?
- President, CEO
I don't -- off the top of our heads -- specifically, we have not pulled out of any major markets that we were in.
We have consolidated operations clearly in California.
We are consolidating operations in Florida and those are really our primary areas where we have consolidated our operations significantly.
And Stacey just mentioned Denver.
In Denver we're one divisions versus three divisions.
We've consolidated those three areas the most.
- Analyst
Okay.
And then one last question.
And I know you're not out there actually looking for dirt, but from a land price perspective, could you comment on what you might be seeing from especially the third party developers?
And are you starting to see any of the banks that have taken stuff back or developers start to ask you do fee deals with them, obviously, where they're hanging onto the dirt, but you're actually developing it out for a fee?
Has any of that started to accelerate?
- President, CEO
No fee.
The approach we've been approached with, we've seen very little, if any, come from the banks yet.
The only thing I can say about the third party developers is they're too high in all their prices.
Clearly, if the homebuilders are taking the impairments that they're taking, their going to have to decrease their prices significantly, essentially to us in '08, because I can tell you they need to be impaired just as much as we've been impaired.
- Analyst
Okay.
I appreciate that.
Thanks so much, guys.
Operator
Your next question comes from Jim [Mollston] with GMP Securities.
- Analyst
Thanks.
Good morning.
- President, CEO
Good morning, Jim.
- Analyst
Was wondering, Don, could you kind of go through as you discussed what you've acquired in land in '07 and then your plans for '08, where that is?
I assume you've made material changes in where you're following through and acquiring land or looking at new purchases.
- President, CEO
Well, from -- the primarily place that our land acquisition is in option contracts where we're closing on lots to either build job or specs in a specific community.
As far as other land -- raw land purchases, I can tell you that we have in plans to acquire any pieces of raw land.
And very little of any occurred in '07 to the extent that we did close a couple parcels in '07, I can tell you that we've already turned those around and sold them off to other people.
So we just don't have any appetite to speak of of in any market today for new land parcels.
What we're doing simply is closing lots and option contracts to build homes.
- Analyst
Okay.
And I assume a lot of that, that dropped options were in certain locations and executed options were in others.
Is that -- there's a big difference in the geography, is that fair to say?
- President, CEO
Yes.
Very definitely.
- Analyst
Okay.
Then second question, as you noted earlier, I think the number was like $2.6 billion of inventory for impairments and impaired $900 million of it roughly 30%.
What did you find in the large chunk there that you examined, but found no need for impairment, what were the characteristics of not requiring it?
Was it a geography again or just where you've been able lower costs that allowed it to stay profitable or some combination?
- EVP, CFO
The primary factor is the margin that we are seeing currently in the project and our prospects for margin going forward based on what we expect to see in pricing in that project.
At this point, based on what we can see, it is still really above the line where it would not need to be impaired, similar to anything that we had impaired in previous quarters.
- Analyst
Okay.
And did geography have a lot to do with that?
- EVP, CFO
Geography certainly comes into play.
One indicator that puts the project on the list is its geography relative to perhaps other projects that have been impaired.
So that would be a factor.
But the primary factor is how we expect that project itself to perform based on when we're seeing and what we expect in the short term.
- President, CEO
The geography is pretty much limited to -- I would call it four states.
It's really still California, still Arizona, primarily, Phoenix, still Florida, and also Las Vegas.
So if you look at, as I've said before, the Homebuilding industry, everyone talked about the great ramp-up in the homebuilding industry and the appreciation in all of these markets.
Really we had three or four hot states and -- where we've got most of our impairments and our future impairments are still going to be, I believe, in those four or five hot states.
- Analyst
Got it.
Alright.
Thanks.
Operator
Your next question comes from Larry Taylor with Credit Suisse.
- Analyst
Good morning.
Thank you.
- President, CEO
Good morning, Larry.
- Analyst
A number of my questions have been answered, but I wonder if you could provide a little more color on the use of cash flow given that you've already made substantial progress repaying the bank debt and have a limited number of maturities going forward over the next 18 months?
- EVP, Treasurer
First thing, Larry, we had a balance of $150 million remaining on our revolver at the end of the year, first use of cash will be to go ahead and reduce that.
We also have $215 million of senior notes that mature in December that we'll be redeeming.
And then past that, we will basically look at opportunistic ways to repurchase our debt.
We may also choose to run with more cash on the balance sheet than we have historically, simply until we see market conditions stabilize a little bit, we want to make sure that we have sufficient liquidity.
- Analyst
Okay, great.
That's helpful.
And then I wonder if you'd comment, as you look into 2008 and think about the competitive landscape.
And I realize this is sort of a general question, but how you anticipate pricing strategies to involve -- to evolve from some of your competitors?
We've seen price cuts, we've seen a pause in price cuts in some markets, and I guess just trying to get some benefit from your view of how things may unfold in 2008 from a pricing standpoint?
- President, CEO
I believe '08 is going to be considerably more competitive than '07, both in terms of volume as well as pricing.
And we are prepared to meet the market in each one of our markets and we think that it's going to be a little more painful for us in '08 than it was in '07 in terms of trying to meet that limited market, because the market is -- there's less volume and the volume that is there is demanding better pricing, which is coupled with our focus decreasing our cost as fast as we possibly can.
- EVP, Treasurer
And another thing I'd throw in on top of that is just the continued changes and tightening that we're seeing in the mortgage market, tightening of the lending standards and changes in the products that are available tour buyers that allow them to get into houses.
- Analyst
Great.
That's very helpful.
Thank you.
Operator
Your next question comes from Mike Marburg with Ramsey.
- Analyst
Hi, guys.
Two questions.
One around the gross margin.
So as you look over the past four quarters at the gross margin change, it's tracked with some difference, but it's tracked somewhat with a decline in average selling prices.
And I guess, starting next quarter, we ought to really start to see the filter through or the flowthrough of the big declines in the last two quarters on ASPs per sold home, which we've not seen yet.
The close -- the ASPs on closed homes have been pretty good, all things considered in this environment.
So do you expect the gross margins to really start to change, take a step function change early next year, or is -- are you able to really make up for that with these cost-cutting efforts, such that it would be different than with a wave seen in the last four quarters?
- President, CEO
Realistically speaking, I believe our gross margins will come under continued pressure in '08.
I'm not certain that we're going to be able to offset those -- that decrease in gross margins 100% by our SG&A cuts, as you can tell.
But clearly we anticipate '08 to be more difficult than '07, and we've taken the proactive steps to be prepared for that.
- EVP, CFO
One thing we should clarify, is in the sales -- the ASP in the current quarter's sales, product mix did impact -- especially product mix did impact our ASP quite a bit while our net sales order ASP did decline by 15%, our ASP on our gross sales orders only declined 8%, because we did have more cancellations coming out of the higher products as the jumbo market was in flux, but certainly an 8% decline, we do expect that to impact margins going forward.
- President, CEO
But it's 8% versus 15% on one of the factors that we continue to work on is how do we hold those units in backlog and prevent them from canning, even if it takes us a little bit more negotiation to hold those in, because you can see the difference between 8% and 15%.
We've got quite a bit of leeway to work with the buyers in backlog to hold them in backlog to get them to close.
- Analyst
Yes, okay, thank you.
And then as it relates to SG&A comments we were making earlier about 25% in selling.
So for this year, that would put just on a quarterly basis your G&A costs at around $200 million, the low $200 millions per quarter.
So if next quarter we have a big drop in home building revenues, which I think is to be expected given the recent trends, the G&A -- and you assume roughly 25% stays for selling.
The G&A needs to go down to about $150 million from say $210 million per quarter.
Are you prepared to make such a dramatic change in G&A in one quarter?
It did happen last quarter, in the first quarter of last year.
You went from maybe $300 million down to somewhere in the mid to $200 millions per quarter using the ratio you've given us, but are you prepared to do that again?
- President, CEO
Yes, we are.
I'm not sure that we'll get it all done in the first quarter or all in the second quarter.
What we are waiting for, even though we're lean today, we're waiting to see what happens in terms of the spring selling season, specifically, Super Bowl in February of calendar year '08.
We are as lean as we can possibly get right now in anticipation of what we think we're going to do.
We've run the numbers based upon how many units we believe we will close in '08 and the numbers we're running based upon what we believe we can close in '08, our SG&A is close to being in line where we want it to be.
To the extent the number of units that we think we can close are eroded, then we are prepared, yes, sir, to make the SG&A cuts, just as we've done over the past 24 months.
- Analyst
Thank you very much.
Operator
Your next question comes from Susan Berliner with Bear, Stearns.
- Analyst
Good morning.
Just two quick questions.
One is, I was wondering if you could talk about which are your best markets right now?
- President, CEO
Boy, that's a limited list today.
To be quite frank with you, I still believe that California -- excuse me, what am I thinking?
I thought you asked a different question.
Clearly, Texas continues to be a very good market for us.
It's weakened some in '07 and we expect it to weaken some in '08.
But all the markets in Texas, from Dallas to Austin to Houston and to a lesser extent, San Antonio, are all good markets for us.
Our acquisition in Baton Rouge, Louisiana, continues to perform very well for us.
The Chicago market, we had a very good year in Chicago.
We anticipate it to be a softer market in Chicago next year.
But it will be still a good solid year for us in Chicago.
If you take a look at the coastal Carolinas and even the interior parts of Carolinas, where you're talking about Raleigh and Charlotte, we expect those to be good markets for us in '08.
I believe the rest of the markets are going to continue to be as marginal as they were in '07 or even to decline some in '08.
- Analyst
And is that true for Atlanta as well?
- President, CEO
I think Atlanta is just a -- it's pretty much a flat market.
It's a great market for us.
We get good sales and closings in Atlanta.
But it's just -- it's not as active as what it once was and it's a very competitive market that's influenced largely by a large number of small and medium-sized builders, who we don't wish any ill will, but during this downturn we hope they go away because it will get back into the larger builders who are working for a higher profit than the small or medium-sized builders in Atlanta.
- Analyst
Then my last question is, can you just talk about your philosophy and what kind of levels that you're giving nor incentives versus actual price declines?
- President, CEO
Well, in terms of the incentives, where we are, it's out of one pocket in the other pocket.
Frankly, we've tried to preserve as much as our sales prices as we possibly can in our communities and offer incentives as opposed to marking to market permanently vis-a-vis the sales price.
But, clearly, whatever it takes to get the market what's already produced and available sold and clear the market with that, we're willing to do that with both price incentives -- price cut as well as incentives.
- Analyst
Great.
Thank you very much.
Operator
Your next question comes from Bob Thompson with Advantus Capital.
- Analyst
Hi, guys.
Going back to that, what were the average incentives and discounts in the fourth quarter?
Do you give that amount?
- President, CEO
We didn't give that amount, but I think we've pretty much dealt with it, I believe, when we talked about our core margins and -- right.
- EVP, CFO
It's fully reflected, our entire deterioration in our margin is wholly the result of the incentives and price adjustments that we have made during the quarter.
I tend to say we talk about it, because it does hit both lines.
Incentives hit costs where as price reductions come off the revenue line.
- Analyst
Okay.
Also going back to the 20,000 lots, did you say did you sell them for $70 million?
- EVP, CFO
We said the revenue on the -- it was a raw piece of land that was entitled for as many as 20,000 units, both single family, as well as multi family, and the revenue associated with that was approximately $70 million.
- Analyst
Okay.
And then do you anticipate any further -- are you actively seeking lot sales going forward?
- President, CEO
Wherever we have -- to answer your question directly, yes.
Wherever we have excess lots, and it's going to vary market to market.
- Analyst
Okay.
And then last question is, as the year unflows, as the covenants get closer, do you anticipate needing to amend your covenants in '08?
- EVP, CFO
At this point, we certainly have sufficient cushion at 9/30.
As we go into '08, we'll evaluate where we think we're going to be and will be in active conversations with our banks if necessary.
- President, CEO
Frankly, we're very proud of where we are today relative to those covenants.
We have more room, I think, than most everyone else in the industry, so we're very proud of our financial performance relative to those covenants.
But to the extent that our financial performance should adjust going forward, and as we said earlier, we think '08's going to be more difficult than '07.
We'll be, if we need to, be actively discussing with our banks discussing those covenants.
- Analyst
Great.
Thank you very much.
- President, CEO
Yes, sir.
Operator
Your next question comes from Bob [Sells] with [O&K] Capital Management.
- Analyst
Three questions.
First question is, in looking at the spring '08, as you call it, Super Bowl selling season, why not make the overhead cuts now, assuming the direction -- given the direction of the credit markets rather than waiting to see the results of spring '08?
- President, CEO
I believe -- first of all, let me say that from an SG&A perspective, we are the leanest builder in the industry.
We believe we're properly positioned for what we envision is going to happen in '08.
And to the extent that doesn't materialize, according to our spreadsheets that we've done, for each month of the fiscal year, we're going to make those adjust, as it does not meet our expectations.
- Analyst
When you look at those assumptions, where do you assume the low watermark is for orders?
- President, CEO
I really -- typically, if you look at our first quarter, our first quarter of sales is our weakest and second quarter is usually our -- starts to pick up.
And third quarter is a little bit better and the fourth quarter is a little bit less.
So if we use these as the first and fourth quarter, our lowest points in the second and third quarter are our highest points.
I would say today with where the mortgage market is and our constant evolution with the mortgage markets, I wouldn't say which is going to be our best quarter at this point.
- Analyst
But it sounds like you'll wait until the second quarter, kind of the beginning of the second quarter at '08 before making the hard -- further decisions on SG&A cuts?
- President, CEO
Well, we're going to -- let me clearly say, and maybe I misstated this earlier.
We're not holding excess SG&A in anticipation of an unrealistic fiscal year '08 sales and closings number.
We're frankly looking at it, we're positioned exactly where we want to be relative to our projections, which are internal for '08 and will adjust those as we move forward accordingly.
The one thing that I will remind everyone of is we have had the lowest SG&A in the industry and will continue to have the lowest SG&A in the industry and we're going to adjust our business just as we've done over the last 24 months to meet the market.
- Analyst
The -- with the lack of further -- second question.
With the lack of further impairments, the implication is that your pricing assumption for orders doesn't drop radically going forward, although you -- I understand you're doing a good job on costs.
Help me -- help reconcile that implication with the statement that you made, and I believe is your philosophy, that you will price as it takes to move inventory.
I guess my assumption had been that pricing will continue to move down more quickly than you're able to cut costs as we look into the fourth quarter and the first quarter.
- EVP, CFO
Our assumptions are that our prices will continue to drop and most cases, there is no implication with regard to the amount of impairments that are taken in any one quarter.
The assumptions that go into the impairment evaluation are consistent and do assume plat to lower pricing in virtually all projects that we're evaluating.
This is the second largest quarter on record for us in terms of dollar amount of impairments, so it certainly is a substantial amount of impairments from our standpoint and really there no implication regarding assuming the pricing is going to be better.
We assume that pricing will continue to be challenged.
Operator
Your next question comes from Andrew Allman with [3-6] Capital.
- Analyst
Hi, guys.
Thanks for taking my question.
You guys have done a great job kind of assessing the situation for what it is.
So, I just kind of want your color on a higher-level question.
There's been a lot of talk lately that about given the state of buyer confidence in some of the more troubled states that the cost of home ownership is going to have to come down to the point where it's competitive with rents, which means anywhere from another 10% to 20% drop in prices.
Is that kind of a theory you subscribe to, or is that kind of analysis missing something?
- President, CEO
Absolutely not.
Each market is adjusting on its own and some markets are adjusting more and some markets are adjusting less and I would not attach a percentage decline to any of it, because frankly, I would say to you and I would say to the home buyers in America that if we're not at bottom in terms of our pricing, we're really close to it, and to the extent that you're waiting to buy a home because you think prices are going to come down, you're going to do the same thing you do on interest rates most of the time, and that is, you're going to say, gee, we missed the bottom of the market.
So, I think we're very close to the bottom of the mark in most of our markets.
Some still have some additional deterioration, but it's difficult to determine where those are at this stage.
- Analyst
Okay, great.
Thanks, guys.
Operator
Your next question comes from Darren Richmond with GSO.
- Analyst
How you doing, everybody?
Thanks for taking the time today.
On the topic of impairments, I was wondering, once you make the determination to impair a property, can you walk me through exactly the methodology used, what type of margins you're trying to target, what discount rates you may use in the process, just to add some more light to that process?
Thanks.
- EVP, CFO
Certainly, the assumptions are set project by project.
In order to determine that a project is impaired, we must determine that the project will not essentially make money from an accounting standpoint after covering direct overhead costs.
Once we've made that determination, then we will perform a fair value analysis, which in most cases will be a discounted cash flow analysis of all of the future cash used or cash flows from that project in the future.
That will be discounted back.
The discount rate assumed in each project will vary and it will vary basically as -- based on the relative risk of the project.
The closer that we are to delivering homes in a project, the lower the discount rate will be.
If it's raw land and we still have developments and will not deliver homes for some period in the future, the discount rate will be higher.
But essentially, we discount those cash flows back, determine the fair value based on that compared to the current carrying value of the inventory and record the impairment accordingly.
By choosing different discount rates based on the relative risk, generally the assumed gross profit that would result from an impairment charge would be lower on a project that's closer to delivering homes.
Again, lower risk project and it would be higher on a project that would be delivering homes further into the future.
The range can vary quite a bit.
I'm not going to state necessarily specific ranges of gross profit or discount rates, but it's project by project.
- Analyst
I'm just wondering, though, I mean, does it -- some of the -- some of your competitors are put out some discount rates.
I was wondering if you could at least bracket it.
Are they in the double digits, or are they closer to 20%?
Just really to get a better sense for it.
- EVP, CFO
The numbers that you've seen kind of bracketed for the other builders out there have been very consistent with what we've used as well.
There is basically one audit firm that audits a majority of the industry, and overall I believe that the builders and the audit firms have worked together to make sure that we're keeping the assumptions on the impairments as consistent as we possibly can given that it is a project by project analysis.
- Analyst
Sure.
And what do you do on a raw land basis?
Is that something that you'll discount as well?
I think the methodology there differs builder to builder?
- EVP, CFO
We will discount that.
Of course, it depends on what our intent is for that land.
If our intent is to build it out, then that's one set of assumptions.
If our intent is to sell the land, that is another assumption and that will be based more on the market price of the land, but that will vary based on the intent of our use of the land.
Operator
Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer segment.
I would now like to turn the call back over to Mr.
Tomnitz for any closing remarks.
- President, CEO
Thank you very much.
As I sit here around the conference table and I look at our 2006 21st Annual Builder 100 Single Family D.R.
Horton Number One trophy, I would say to all our employees and our investors, that we entered this downturn in the market as the largest and most profitable builder.
Clearly as we go through this market downturn, we are shrinking the size of our organization to meet the demand.
But as I tell our employees and I tell our investors, on the other side of this, we will come out as the largest and the most profitable builder.
We have the most transparent financials in the industry.
We have the least -- we have no unconsolidated joint ventures and the bottom line is, is that D.R.
Horton entered this with the strongest balance sheet and will come out of this downturn with the strongest balance sheet.
We have been, we will be, and will continue to be the survivor and the leader in our industry, and we look forward to great opportunities in the year ahead.
As I tell our salespeople, it's all about sales, we're all in sales, regardless of whether you're a construction superintendent, or whether you're a field person, a warranty person, or whomever, we're all in sales and it's all about sales.
So as we've told all our regional Presidents and divisional Presidents and I hope a lot of salespeople are listening to us today, the future of the company and how well we do is based upon how many homes you sell.
Go out there, leave no buyer behind.
Sell and close homes.
Thank you very much.
Operator
Ladies and gentlemen, this concludes today's D.R.
Horton Incorporated America's builder, the largest homebuilder in the United States, 2007 year end conference call.
You may now disconnect.