霍頓房屋 (DHI) 2008 Q3 法說會逐字稿

Good morning. My name is [Julianne] and I will be your conference operator today. I would like to welcome everyone to the D.R. Horton Incorporated, America's builder, the largest home builder in the United States, 2008 third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

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

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

Some comments made on this call may substitute 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's 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 in contained in D.R. Horton's annual report on form 10-K, and most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission.

Don?

Net sales orders for the third quart were 5,501 homes $1.2billion, compared to 8,559 homes, $2.0 billion in the year ago quarter. Our average sales price on net sales orders in the quarter decreased approximately 5% from a year ago to $224,800.

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

Our gross profit margin on home sales revenue in the third quarter before inventory impairments and land option write offs was 10.1%. This was a 660 basis point decline from our home sales margin of 16.7% in the year ago period.

The majority of the margin decline was due to core margin deterioration resulting from price declines and an increase use of sales incentives relative to last year as reflected in our 10.5% decrease in average closing price. The remaining margin decline from a year ago quarter was primarily due to the prior year quarter benefiting from a reversal of deferred revenue under FAS 66.

Our deferred revenue balance did not change this revenue this quarter so there was no similar benefit this year. Bill?

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

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

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

Home building SG&A expense for the quarter was 13.6% of total home building revenue, compared to 10.5% a year ago. In the third quarter, we reduced total SG&A expenses by approximately $73 million, or 27% compared to the year ago quarter.

We will continue to manage our SG&A levels relative to our expected number of home closings and we are making adjustments today to position the company to return to our long-term goal of keeping SG&A at 10% of home building revenues each fiscal year. We will continue to focus on being the low-cost operator in the industry, which remains one of our distinct competitive advantages.

Stacey?

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

Our financial services operations remaining 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 $9.4 million, compared to $18.2 million in the year ago quarter.

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

Bill?

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

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

Our overall inventory decreased by approximately $340 million excluding impairments, during the quarter. Our 15,400 homes in inventory is consistent with the prior quarter, as is our spec home inventory of 7,400 homes.

Our completed unsold homes decreased to 2,900 at the end of June from 3,200 at the end of March. We plan to continue to adjust both our total number of homes and inventory and our number of speculative homes in the coming quarters to match current demand.

Stacey?

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

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

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

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

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

Stacey?

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

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

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

In summary, the bright side. We generated an additional $390 million of operating cash flow. Our cash flow was positive for the last eight quarters totaling over $3.6 billion, our cash balance of approximately $850 million at quarter end. Our inventory reduction, $345 million decrease from Q2, preimpairment, our completed specs are down another 9% since March and down 45% from the peak.

Our land and lot supply is down 27% in the first nine months of the fiscal year, and down 57% from the peak. Our SG&A continues to decrease, down $73 million, and 27% year-over-year. Our leverage remains in our target range of less than 45%. The dark side, there's minimum pricing power in the markets in which we operate. There's continued pressure and there will be continued pressure from foreclosures both on the land, lot and housing side.

We perceive continued weakening in the US economy. There's continued weakness in the financials and the mortgage industry. There's continued weakness in the US consumer and consumer confidence. We are disappointed with the housing bill that just passed and believe it falls far short of creating the intended boost for housing. While the temporary tax credit is certainly a positive for buyers, to purchase a home before July 2009, the tax credit does not offset the elimination of the DPA or down payment assistance program, which our industry so vitally needs.

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

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

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from the line of Michael Rehaut with JPMorgan.

Hi, good morning.

Good morning.

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

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

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

Yes, the third quarter was closer to 29%.

Okay. Second question, just on SG&A. You continue to make progress on an absolute dollar basis year-over-year. We were looking for a little bit better improvement on a percent of sales basis. Actually, it looks like you had a -- you were up about 130 basis points year-over-year in the second quarter and that spread widened in the third.

So, I was wondering if you could just describe -- are you kind of hitting, perhaps, core SG&A spend or what do you see -- if all things else equal and let's say the sales, the revenue stays where it is roughly speaking, which obviously the backlog continues to decline. But, what do you see in terms of incremental areas to cut that maybe that -- the 13% run rate that you are at right now you could see visibility towards a lower number?

Frankly, we were disappointed in the 13.5% number. We are continuing to cut at all levels. Everything is on the table.

Clearly with our decrease in revenue base as a percentage of our home building revenues, our SG&A increased despite the significant dollar decreases that we have had. Although I will say to you, relative to everyone else in the industry, we have the leading SG&A in the industry.

Our goal is, as we told you before, is to cut at every level and there's nothing that's sacrosanct that we are protecting. Everything will be cut and we will get our SG&A back down to closer to that 10% range.

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

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

Thank you.

Yes.

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

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

We're down double digits. We're down over 10% on our community count year-over-year.

Over 10%. And just on, I guess the -- I mean -- sorry, the customer deposits. Do you have a number that was at the end of the quarter?

While they are looking for that number. I will tell you what we are doing on the community-by-community basis. Don Horton has taken the western half of the United States and I'm do the eastern half of the United States and then we're going to switch.

But we are evaluating every subdivision in the company in order to determine whether or not that subdivision needs to be -- continues to be producing or whether it needs to be moth balled. And basically our goal is to evaluate each one on a probability basis and get back to making a profit in each one of our active subdivisions.

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

We are increasing our moth balling based upon whether the subdivision can produce a profit or not, even pre or post impairment. Yes. Bill do you have that number?

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

$23 million so that's roughly like 1.2% of backlog?

The number -- the number -- About $2,800 a home.

$2,800 a home. Alright. Thanks a lot.

You're welcome.

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

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

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

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

Well, I would say to you that our operating plan is to continue to maintain a number of -- the right number of specs in each one of our communities such that we can sell a home to someone who is moving out of an apartment who has all of a sudden made a decision to buy a home.

As well as we are seeing more and more people come into their subdivision who had their homes listed for a while and they have finally sold their home and they don't want to move into an apartment or rental on an interim basis. So we continue to maintain what we believe we have the right number of specs to capitalize on every buyer at the time they are ready to buy.

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

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

Okay. Great. Thanks very much.

Yes.

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

Thanks. Good morning, everyone.

Good morning.

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

I think one of the benefits we are seeing, to answer your question is that in most of our communities, we, I believe, are in an opportunistic sales position because we are maintaining a few specs in a number of our communities. Whereas our competitors have a lack of specs in the communities and I think that's putting us in a positive pricing situation. The difference between a build job and a spec on the pricing is really going to vary from subdivision, to subdivision.

Just last week I was in a community and we are selling our build jobs for a higher margin than we are specs, which I found ironic in a way but nevertheless the people in this particular subdivision, the buyer profile, people are coming in and typically it is their second home. They have essentially sold their home and they want their next home exactly the way they want it.

So they are willing to pay more to have the build job and get their home exactly the way they want than they are specs. And other subdivisions we have people who come in and they don't want to wait that 60 to 90 or 120 days to purchase a home and they will pay more for a spec today then take the market risk of waiting the home to be built for 90 to 120 days.

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

I think it is more common and I think that for use, we are seeing higher prices on the specs because the build job that we keep seeing that people are selling, basically those are having to be resold a couple of times during the process of their building.

So I think when we have a buyer come into our models, they are ready to make the purchase decision, they are going to close within a very short period of time so that buyer is not having to re -- we are not having to retrade the price with the buyer on numerous instances.

The other side of the coin is that the key is to keep the right number of specs in that subdivision, and also to be the beneficiary of our lower cost by virtue of having built that spec more recently than having our older inventory specs. We have essentially gotten rid of our older, higher cost inventory.

So those specs are out of the systems, gone, sold, and closed. So really our best margins should be in our subdivisions where we have our lower cost and we have a spec home where someone is ready to buy today and we don't get retraded by the buyer two or three times during the construction process.

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

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

Thanks a lot.

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

Thanks. Good morning.

Good morning.

I'm trying to get an idea with the land spend and the land spending projections for '08 and for '09 being below $750 million. Where does that leave you -- and maybe it's kind of a theoretical answer in terms of size of the company, should the market kind of pick up as we get into 2010, the ability to grow and the ability to expand the operations, if the demand starts to come back at that time?

Clearly we are in a wonderful cash position and we can turn our lots very quickly. It would be a wonderful problem to have, David, that basically we have semi shortage of lots and right now, if you look at our developed lot inventory, we do not have a shortage in any one of our markets.

And to the extent that we do spend any money on land -- or on development expenses in '08 and '09, it's going to be on very small, high margin performa land development deals.

I'm sorry. So did you already give out the percent of your owned lots that were finished lots?

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

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

I think generally speaking across the country, as you analyze it, market-by-market-by-market, where we see the banks pricing the foreclosures right now, they are under where we are on the new home price, but yet at the same time, our sales people clearly understand there's no warranty on those foreclosures.

There's typically cash out of pocket required to get those foreclosures in a livable position and there's absolutely no warranty on those -- on those units. So as a result, we feel like that despite the fact that the lending institutions are offering the foreclosed homes slightly less priced than what our new homes are, that the discriminating buyer will clearly understand that they have a lot less risky buy with a new home than with a foreclosure.

Do you have any idea what that spread is on average?

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

Okay. Thanks very much.

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

Thanks very much. I wondering if you talk about some of the FHA down payment assistance, in terms of the 29% of closings that had that this past quarter. Do you look at what percentage of those buyers could have come up with the down payment given the FHA loans or else fully documented?

Well, that's a good question, Dan. As a matter of fact, as I was being suicidal in one of our subdivisions the other on the DPA going away. One of my proactive sales women said Don, the question is, the same question you just asked and we don't know the answer to that until we actually put it to the test. And that is how many of our buyers who -- of the 100% -- if there are 100 buyers in the DPA pool, then how many of them really could come up with the money if they had to? And I don't know the answer to that.

Unfortunately I think we'll fine out the answer to that question over the course of the next two to three months. But it's certainly not 100%.

As someone said, if someone is willing to give you money to buy a home and you say, well, gee, I don't want the money, I will put my own money down, you would have to probably send them to a psychologist or psychiatrist. So in general speaking we don't know the number but clearly I don't believe that 100% of our DPA buyers are going to go away.

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

We are not doing anything to make our can rate go down. As a matter of fact, what I've always said and I will continue to say until our sales begin to be positive, on a quarter by quarter and month by month basis, our can rate needs to be high.

I know our salespeople are working harder than some of the salespeople in other companies because we are having to rewrite these contracts. But I'm still a believer that the right answer is if the buyer is warm and has a pulse, we have to be writing then and trying to qualify them to put them in a home.

So as a result, our can rates continue to stay high and I applaud our salespeople because then I sleep well at night, realizing that they have left no buyer unturned.

Okay. Thanks.

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

Good morning.

Hi, Ken.

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

The answer to your question in a general way, I don't believe that the foreclosures are contributing to our can rates. I think what clearly contributed to the majority of our cans are contracts where we have written a buyer who wants to buy and then we just can't get them qualified with the changing mortgage environment.

So I think very, very few of our cans are coming from someone saying, gee, I can buy a foreclosed home for less than a new home. I'm still a strong believer that there are new home buyers and there are existing home buyers and the two very rarely cross over.

Okay. I guess related to that and the potential erasing of the down payment programs. One of the things that I've been thinking about is the fact that there's low equity in the system which in part is contributing to all the units coming back to the market today.

Can you talk about structurally what you think the risks are to the marginal buyers coming in with very low equity, being we don't know how much equity they could put down in the context of really a flat interest rate and amortizing loan structure where they can't build a lot of equity without price appreciation.

Can you talk about that relative to the last 15, 20 years as we knew it in this country with price depreciation?

I think we have a higher risk to date clearly than what we've had over the last 20 years. I go through subdivisions, I was just in a couple of subdivisions last week where some developer was wanting to offer us a rolling option contract to go into what I perceived was almost a 100% DPA subdivision. I said not in your life.

I look upon it and say, there's a a higher risk in the existing mortgage portfolio just because people don't have the down payment. I hate to this because my group will probably chastise me later but I also on the other hand say to myself, our federal housing program is a disaster. We spent billions of dollars over the years funding all of these HUD programs in the inner city which has been a dismal failure.

So from my personal perspective, I think the fact that the DPA loans have a higher default ratio than the non-DPA loans they are not 100% default and we are putting people in homes that typically would be living in inner city HUD projects into a single family home and a good environment where they can send their kids to school and associate with people of all economic backgrounds.

That's my social statement. But I do believe that there's a higher risk in the mortgage portfolio today, but I think it is a good risk relative to the HUD projects that we had a terrible failure in over the last 30 years.

Appreciate your comments.

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

Good morning, all.

Good morning.

Remember [Pruitt Icall] up in West -- East St. Louis, took 40,000 units and tore them down to the ground. I'm talking about HUD now. Never mind.

You and Centex have talked about your DPA being about 25 to 30%, other builders have said 10%. Why the disparity and what is the average down payment assistance on your loan relative to either the mortgage or the price of the home -- to the price of the home?

The down payment assistance relative to price of the home is generally been 3%, which has been FHA down payment requirement. The recent housing bill actually changed that now to 3.5%.

And I think one of the reasons, speaking specifically for D.R. Horton, not Centex, that our DPA is probably higher than some other builders is we have one of the lowest price points in the industry. So a greater percentage of our homes actually fit within the FHA financing limit.

And I think our DPA's -- I agree with Stacey along those lines, I think our salespeople are pushing harder on the sales side. We are seeing the buyers who need the down payment assistance more so than the other builders.

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

Well, I would say the biggest difference that we see now is the fact that in some markets, our buyer -- first of all, most of our markets there are fewer buyers in our subdivisions than what there were two or three months ago.

I think that's a function of fact that people are uncomfortable with the economy, uncomfortable with their present situation, and I think the DPAs are also having a negative effect on the market place.

You quote the DPAs, I think if you look at DPAs across the country, they are higher percentage than most people are reporting today, because what we are looking at is a trailing, two or three or four month percentage of our sales as being DPAs. I think in the last three or four months, the DPAs have become a bigger percentage. SO I think there is more weakness facing the industry, just simply because it is a bigger DPA number out there, than more people realize.

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

If I knew the answer to that question, I would probably be vice presidential candidate. I don't know, Tim. You know --

I really don't understand it!

I'm absolutely shocked by it. And I'm upset by it.

I don't want to go any further than that because my team is going to -- it's all of the things -- I mean, if you listen to the administration and you listen to Congress, and you agree with them, like I do, that housing is a major problem in the economy today, to take 10%, 20%, 30% of the buyers out of the home building buying decision, at a point in the economy that they did, it's absolutely ludicrous.

I agree 1,000%.

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

Okay.

All right. Bye

Your next question is from the line of [Alex Theoren] with Agency Trading Group.

Hey, good morning, Don. Good morning, guys.

Good morning.

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

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

Okay.

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

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

Clearly right now we are building cash in our balance sheet and we expect that we will certainly have the cash available to take it out totally with cash. We are not going to rule out any alternatives.

We'll evaluate as we get closer to the maturities. And as we look out, we look at our maturities over the next three years and we have a total of $1.4 billion of maturities over the next three years.

And to the extent that we continue to generate solid cash flow as we have for the last eight quarters we expect that we will be able to generate sufficient liquidity to more than meet those maturities and provide cash to reinvest in our business.

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

Great. Thank you very much.

Yes, sir.

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

Thank you, gentleman. Question on the size of you -- related that that pay event and cash flow. As you go forward over the next three years, could it be that your cash flow will start to subside as you just get smaller and the home prices keep coming down?

It could, but I will say one thing to you that's not included in our free cash flow currently are any profits. And we are clearly positioning this company to get back to a level of profitability as soon as possible and I would hope that's in the next couple, three quarters to make a projection or prediction or hope I guess is what I should say.

But clearly that profitability will supplement to an extent our free cash flow that's being generated by our decrease in inventories. But at the same time, as our sales continue to slide, we clearly have additional opportunities of relieving our inventory, both in the land and lot size to continue to generate that free cash flow.

Two follow-ups on that. You talk about profitability. There's accountability profitability but from a debt repayment we really only care about cash. You are cash profitability now, and decidedly cash profitable.

So as you go forward, what are the levers that you can push that would increase the cash profitability, maybe you could talk a little bit about materials and labor inflation of lack thereof, deflation perhaps? And then in terms of land sales what you might be thinking about in terms of selling land wholesale to generate cash flow?

We are continuing to put pressure on our subcontractors and our vendors. Let's not get confused and I don't think you are, people shouldn't be confused, they are struggling also.

So to the extend that we continue to push them, I think that there's still accomplishments to be made in decreasing our costs, but currently I think we have squeezed at least 50% or more out of what we think we can save out of the subcontractors. On the land and lot side we have been active in terms of contracting and selling land to investors. We have focused clearly differently than our competition.

We have focused on selling our land and lot positions to the local developers and investors, because I believe they appreciate and can do the due diligence and understand the value in those projects being at a higher level than someone who'ssitting in New York or San Francisco or Boston would says let me pay you $0.15 on the dollar and they've got to be worth something more than that in the future.

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

When you look at your current owned lot position, what percentage of those lots do you think could you sell?

I think we could sell all of them but with we want to tell them for the price that someone is willing to pay currently and it will be disclosed in our Q. We have $300 million worth of land that's classified as held for sale we are actively working and we expect to close within the next 12 months. So that -- so we clearly identified a portion that is being worked immediately.

We haven't talked about taxes. We have a $519 million deferred tax asset and that represents what we expect to get back in the form of refunds over the next two years on taxes. And then additionally as we return to profitability, when we return to profitability, we will not actually be paying taxes on that for sometime, because we do have carry forwards of net operating losses as well.

So there will be more cash flow out of our profitability in future years than we have seen in the past, simply because we won't be paying taxes.

Don Horton wanted to get in the position of not to pay taxes, unfortunately it's a heck of a way to get there.

The wrong way. But last one. You didn't address the materials inflation. I mean there's been some inflation on the commodities side. Is that a head wind you guys can offset?

Well, I think it's -- the head wind is going to decrease as these commodity prices come down and I'm not an economist but I don't want to be known as one. But clearly a lot of this stuff and a lot of the commodity and oil prices have run up dramatically in the last six months as you know better than I. And I think we are starting to see some decrease in those.

I think we will be facing less strong head winds over the course of the next 12 months on commodity prices than we have in the past 12 months. That should benefit us.

Thank you very much, guys. Appreciate it.

Yes.

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

Good morning, how are you?

We're doing great, Carl!

Glad to hear it, Don Bill, do you have offhand the number of lots that you own that are in communities that are actively selling right now?

The lots we own in active communities?

Correct.

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

Do you have a rough idea?

No, not really. Not in front of me, no.

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

We are looking at every market on an individual basis. We have exited a couple of markets. We may exit one or two other markets, but our approach has been -- I think it's the right approach and we are continuing with that approach, and that is we are consistently consolidating multiple division markets into a single division as we have done in San Francisco, San Diego, L.A., Denver, you name it.

And most recently Phoenix, where we had three divisions and now as of yesterday we have one division in Phoenix. So as a result, we are decreasing our SG&A significantly by doing those consolidations, but most importantly on a look forward basis.

As I was riding up the elevator, someone saw my D.R. Horton shirt, I said this is my fourth downturn and the one good thing about it is we'll get through this one like we have the last four. So we are in a position I believe as we move forward to capitalize on an improving market, although we still believe that's a couple of years away.

Okay. Appreciate it. Thanks a lot, guys.

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

Good morning.

Good morning Stephen.

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

Well, frankly, I do believe that in the foreseeable future, we will sell a percentage of our specs and close them in the same month and certainly in the same quarter, just by virtue of where the industry is today. Person in an apartment wants a home all of a sudden there's a mortgage instrument that qualifies is puts them in a house is going to be a buyer. Someone who sells their home and doesn't want to move into an apartment, they've had on the market.

They may have had their existing home on the market for six months or whatever. They've adjusted the price home and they want to move into a new home, they're going to move. So we believe that out spec percentage in our various subdivisions is the right number. One thing we didn't tell you is that the number of specs that we have had completed and unsold for a period greater than a year is less than 300.

That's a perfect lead into my next question, Don. If you look at what you have invested per spec today, versus, say, a year ago. How much would that have come down?

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

So you can apply that number and I really don't know where that gets you. It's going to be on a subdivision,-by-subdivision basis.

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

Okay. Alright. Thanks. And then if you look at -- you've had a cash flow focus. It sounds like you are trying to move to a profitability focus, if I hear you correctly. While they aren't mutually exclusive, what's more critical for you as you look over the next four quarters?

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

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

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

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

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

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

Okay. Thanks a lot.

Yes, sir.

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

Thanks. Good morning guys and Stacey.

Good morning.

Most of my questions are answered but I'm just wondering Don -- I mean, obviously plenty of inventory, still pricing pressure in general. Anywhere where you are seeing any pricing pressure easing, inventory coming down, things that make you feel a little more encouraged that a bottom is getting closer?

Well, I would like to tell you I spent last week in the Carolinas with our [David Alt] our regional president and [Brian Garnder] out there and there are communities in the Carolinas where surprisingly enough, we have raised our prices ever so little, but that was -- that was very encouraging.

It was also encouraging to me out there that in the entire Carolinas we have one completed spec in the entire two states and so as a result that gave us some opportunities to start some additional inventory out there.

You fixed that.

Yes, I fixed that. So I look at that market, and I think that's positive. I think Texas is still positive. But I -- and I think California is positive from the perspective as these people told you earlier that we have impaired 90% of the projects in California.

I still don't see very much pricing pair in California and I still see continued weakness in the state of Florida although we are focusing on sales in Florida and trying to improve our sales in Florida. But in general, it's just pretty -- it's -- you've got to -- you've got to get up in the morning when you go out, because you could ge down if you took it the wrong way but there are a lot of opportunities out there.

We are doing exactly what we need to do in the business to get our company back to that 10% SG&A and get back to a profitability from an operational perspective.

Okay. Thanks. That's all I had.

Yes, sir.

Your next question is from the line of Bob Thompson with Advantus.

Hi Don. Just a couple of questions. Regarding the getting back to profitability. What exactly -- which numbers exactly are you looking at in terms of -- in terms of that and how far away are you from the way you look at it?

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

Okay.

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

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

No, we don't. We know which ones are in the last tier. We drive around you can tell.

As Horton used to say, there's a bridge too far in a couple of these areas where we went out seeking profitability but we really vice president tracked that number. Those are -- and to be quite frank with you, the ones in the second and the third and the bridge too far, those are deals that we are saying, gee, we will mothball because there's no demand out there today.

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

Gosh, you want to get me involved in politics today, don't you? I think we are seeing -- to answer your question when you have a buyer come in. We have a subdivision in Houston that I was in and the buyers have low FICO scores and they have a difficult time with the payment. And the real key is that to the extent that they are paying an extra $100 a month for gas, that impacts their ability to qualify for the loan from that perspective.

So, yes, we are in some of those outlying areas being adversely affected by gas prices. On the other hand, I don't think that's going to be a long-term problem. I think over the course of the next 12 to 18 months, that's going to be less of a drain on the typical consumer. Stacey?

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

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

Well, currently, I think the foreclosures have been a slow process, slower than in the past when Horton and I have been through this. This is our fourth downturn together and in the past it seems like the foreclosures have come to market more quickly.

And so as a result I think it is a slower process, and that's why we believe that the industry will be clouded for the rest of this year and perhaps most of next year, with the foreclosures that are coming on the market.

Okay. Thank you very much.

Yes, sir.

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

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

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

And that's based on D.R. Horton and its [garand four] subsidiaries, so that doesn't include the financial services and you can find a pretty clear layout of the [Garand Four] side in our 10;Q

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

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

I think the impairments, would not necessarily be affected because even if the community is mothballed, we still need to go through the evaluation process on every community that we own. So we would look at in terms of when we plan to bring it to market, what the current land basis is, compared to the current sales price. So in terms of that, the I don't there's a lot of change.

In terms of SG&A, we would be adjusting our SG&A locally to only support the communities that are open and selling. There's some cost of maintaining the land, though and that's part of making the decision, on whether we want to mothball the community or go ahead and build through it.

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

Okay. Great. Thank you.

Your next question is from the line of Michael Rehaut of JP Morgan.

Hi. Thanks. Just a quick follow-ups, if I could. First, there's been talk about the specs and the can rate.

Anything in particular, Don or Stacy or Bill that drove the sequential rise this quarter as a percent of gross orders? I see that -- I don't know if it's -- there's a part of seasonality here because it was up 3Q '07, versus 2Q '07. That's first question.

Specifically, no. I think that clearly we are continuing to push our sales people to continue to sell a bigger percentage of the people coming in the door. I believe it's also complicated by the fact that the mortgage industry keeps changing, what the FICO score is, what the payments are and that sort of thing.

And as you know rates have gone up in the last 30 days, especially on a 30-year fixed. I think it is a combination of all of those factors. But primarily Horton's can rate will typically be higher than the others during this down turn, as it has been, as we continue to try to find every buyer and put them in a house that comes through the door.

One thing we need to make sure that we clarify here, Mike, is the composition of our specs did improve during the quarter. We have 300 fewer completed specs now than we had at the end of March. If you look at the dollars invested in those specs per home, it's less now because we have more of a broad mix of homes under construction in our spec category, versus a heavier weighting towards completed homes quarter ago. So we continue to closely monitor our specs based in each community and our starts in each community based on our sales we are more efficient now and the dollars that we have invested in those specs than we have been in the past.

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

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

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

Mike, what I do have is the number of homes that closed this quarter that are in communities that had previously been impaired. And of our total homes closed this quarter, we have ,935 homes that were in previously impaired communities.

Okay. I guess as we look at the gross margin, and you guys are -- I think to some degree in contrast to your peers more sticking with the spec strategy.

Is there a point where perhaps if you are seeing diminishing incremental cuts on the SG&A in terms of opportunity there, given the cash flow generation, given the balance sheet being in pretty good shape. Would you consider kind of easing up on the spec to try and repair the gross margin or is there a break point that you see in that regard or do you have to see what you could do further on the SG&A side first?

That's a tough balancing act and we continue to adjust it on a daily basis. I'm the only individual in the company approving specs right now and so we have the balance and we have a formula for each subdivision. I'd say I guess the disappointing to thing to me and I hear this doubt in your voice is that if you look at what Horton has done, we continue to out sell everybody else in the industry.

We continue to out close everybody else in the industry. We continue to have the lowest SG&A in the industry. And we have the highest free cash flow in the industry. We're getting more for our land and lots by virtue of selling them to local investors instead of selling them to funds and so forth like that in New York and Boston at cents on the dollar compared to what we are getting today.

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

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

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

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