霍頓房屋 (DHI) 2008 Q4 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Leslie, and I will be your conference operator today.

  • At this time, I would like to welcome everyone to the D.R.

  • Horton Americas Builder 2008 fiscal 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)

  • Thank you Mr.

  • Tomnitz.

  • You may begin your conference.

  • Don Tomnitz - President & CEO

  • 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?

  • Stacey Dwyer - 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's no assurance actual outcomes will 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 10-K and the most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission.

  • Don?

  • Don Tomnitz - President & CEO

  • Net sales orders for the fourth quarter were 3,977 homes, $852 million, compared to 6,374 homes, $1.3 billion year ago quarter.

  • Our average sales price on net sales order in the quarter was $214,300 and our cancellation rate remained elevated at 47%.

  • Our fourth quarter home sales revenues were $1.5 billion, 6,961 homes, compared to $3 billion, 11,733 homes in the year ago quarter.

  • Our average closing price for the quarter was down 12% to $221,900 compared to $253,000 in the year ago quarter, reflecting a dismal pricing environment compared to the prior year.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • Our gross profit margins on home sales revenue in the fourth quarter, before inventory impairments and land option write-offs, was 10.9%.

  • This was a 510 basis point decline from our home sales margin of 16% in the year ago period.

  • The majority of the margin decline was due to core margin deterioration resulting from an increased use of sales incentives, relative to last year, and price declines as reflected in our 12% decrease in average closing price.

  • Also, the amortization of capitalized interest as a percentage of home sales revenue increased from the prior year quarter.

  • Don?

  • Don Tomnitz - President & CEO

  • During the quarter, we consummated multiple land and lot sales transactions with various buyers.

  • These land and lot sales generated revenue of $209 million.

  • In addition to reducing our future carrying cost and land development obligations, and lowering our inventory of land and loss in certain markets, the more closely matched our expectations of future demand.

  • Approximately 32,000 lots were sold during the quarter, of which 55% were undeveloped, 20% were partially developed, and 25% were fully developed.

  • The largest concentration of sales were in California, Nevada, Arizona, and Florida.

  • Total cash expected from the sales, including their contribution to our income tax refund, is $795 million.

  • Bill?

  • Bill Wheat - EVP & CFO

  • During the fourth quarter we recorded total inventory impairments of $989 million as a charge to cost of sales to reduce the carrying value of impaired projects.

  • Of the total charges, approximately $624 million related to the land and lots we sold during the quarter.

  • The remaining impairments of $365 million relate to our owned inventory at September 30, 2008.

  • We reviewed all projects in the Company, and determined that projects with a combined carrying value of $2.2 [billion] had indicators of potential impairment.

  • We evaluated these projects and determined that projects with a pre-impairment carrying value of $968 million were impaired.

  • We recorded inventory impairments of $365 million as a charge to cost of sales to reduce the carrying value of these impaired projects.

  • Approximately three fourths of these charges related to projects in our East, Southeast and West regions.

  • Of the remaining $1.2 billion of evaluated projects which were not impaired, approximately 70% are located in our East , Southeast and West regions.

  • Also during the fourth quarter, we recorded $86 million in write-offs of earnest money deposits in pre-acquisition costs related to land option contracts that we do not intend to

  • Don Tomnitz - President & CEO

  • Homebuilding SG&A expense for the quarter was 10% of total homebuilding revenues, compared to 9% a year ago.

  • In the fourth quarter, we reduced total SG&A expenses by approximately $107 million, or 38% compared to the year ago quarter.

  • Homebuilding SG&A expense for the fiscal 2008 was 12.1% of total homebuilding revenues, compared to 10.3% in fiscal 2007.

  • In fiscal 2008 we reduced total SG&A expenses by approximately $350 million, or 31% compared to fiscal 2007.

  • We will continue to manage our SG&A levels relative to our expected number of home closing.

  • Although our long term goal is to keep SG&A at 10% of homebuilding revenues each fiscal year, that goal will be more difficult to achieve in fiscal .

  • Bill Wheat - EVP & CFO

  • FAS 142 requires that we test our goodwill balances in each operating segment for impairment at least annually.

  • During our fourth quarter we completed our annual analysis for goodwill and recorded an impairment charge of $79.4 million to our Southwest region.

  • Total goodwill balance remaining after impairments at September 30 is $15.9 million.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • We recorded approximately $16.1 million in interest expense during the quarter.

  • Since we've continued to reduce our residential inventory and our development activity, our active inventory did not exceed our homebuilding debt levels this quarter, so we expensed a portion of our home-building interest incurred.

  • Our Financial Services operations remained profitable, as we have proactively adjusted expense levels to lower volumes, and adjusted product offerings to the current restricted mortgage environment.

  • Financial Services pre-tax income for the quarter was $6.9 million compared to $16.1 million in the year ago quarter.

  • 93% of our mortgage companies business was captive during the quarter, reflecting our continued focus on supporting the Home Builders business.

  • In the fourth quarter, our companywide capture rate was approximately 63%, our average FICO Score was 710 and our average cumulative loan to value was 92%.

  • Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 71% of our volume.

  • Bill?

  • Bill Wheat - EVP & CFO

  • We have filed a federal income tax refund claim for $622 million, and expect to receive the refund in December 2008.

  • Due to an increase in fourth quarter land sales from what was anticipated at June 30, our fiscal 2008 tax loss and tax refund exceeded our previous expectations, which drove our $ 365.3 million income tax benefit in the fourth quarter.

  • Our net remaining deferred tax assets of $213.5 million at September 30 are expected to be realized in fiscal , primarily through net operating loss carry backs to tax year 2007, and will result in an expected tax refund in fiscal 2010.

  • Our reported net loss for the quarter was $799.9 million, or $ 2.53 per share.

  • For the fiscal year ended September 30, 2008, we reported a net loss totaling $2.6 billion, or $8.34 per

  • Don Tomnitz - President & CEO

  • Our overall inventory decreased by approximately $660 million, excluding non-cash impairment charges during the quarter.

  • We reduced our total number of homes in inventory to approximately 12,400 units, down 19% from June.

  • We also reduced the absolute number of speculative homes in inventory to approximately 6,900 homes.

  • We plan to continue to adjust both our total number of homes in inventory and our number of speculative homes in the coming quarter to match current demand.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • Our land and lot acquisition spending remains limited, and we continue to restructure our land development plans in light of current absorption.

  • Our land and lot acquisitions and land development expenditures for fiscal 2008 totaled approximately $600 million, and we expect to spend less in fiscal than we did in fiscal 2008.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Our supply of owned land at September 30, 2008, was approximately 99,000 lots, down 68,000 lots from September 30, 2007.

  • Our 99,000 owned lots represent a 3.8 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.

  • We control an additional 26,000 lots through option contracts, which includes 8,000 lots for which we do not expect to exercise our option that the contract has not yet been terminated.

  • Our net earnest money deposit balance at September 30 was approximately $27.5 million on a remaining purchase price of $484.4 million.

  • We have no unconsolidated joint ventures, and we rarely use land bank arrangements, so our deposits are typically of very low percentage of the purchase price.

  • Don?

  • Don Tomnitz - President & CEO

  • Our land sales combined with our reduction in dollars invested in homes and land and lots helped us generate $480 million in operating cash flow in the quarter, resulting in a $1.4 billion cash balance at September 30.

  • We have generated positive cash flow in each of the past nine consecutive quarters for a total of $4.1 billion in operating cash flow over the last 27 months.

  • We plan to generate positive operating cash flow in fiscal , in addition to the cash provided by our anticipated $622 million tax

  • Bill Wheat - EVP & CFO

  • As we announced in our press release today, we have declared a quarterly dividend of $0.0375 per share, a reduction of 50% from our prior quarter dividend and a 75% cumulative reduction from our peak dividend level.

  • While we remain confident in our ability to continue to generate cash flow from operations, and our long term ability to generate profits, we continue to prioritize balance sheet strength and preservation of capital in the current challenging environment.

  • Our dividend will continue to be subject to board approval each quarter.

  • Stacey?

  • Stacey Dwyer - EVP & Treasurer

  • At September 30, our homebuilding leverage ratio net of cash was 43.6% within our target operating range.

  • We had no cash borrowings outstanding on our homebuilding revolver at quarter end, however, as a result of the inventory reductions we achieved during the quarter, our borrowing base availability as of September 30 was $52.8 million.

  • Our availability will increase when we redeem the notes that mature in January and February of and as we reduce other homebuilding debt at a faster pace than further reductions in inventory levels.

  • With our $1.4 billion in cash, our expected $622 million tax refund in the first quarter of fiscal , and our planned additional positive cash flows from operations in fiscal , we currently do not anticipate a need to borrow from our revolver.

  • We were in compliance with all of our homebuilding revolver covenants at September 30.

  • We had a cushion of approximately $630 million on our tangible net worth cabinet, and our leverage calculation under the facility was 49.6% at September 30, 2008, compared to our maximum allowable leverage of 55%.

  • We expect our leverage to decrease in the first quarter of fiscal , as a result of receipt of our federal income tax refund and a higher average cash balance.

  • In the fourth quarter, we repurchased a total of $36.7 million of our outstanding notes for a totaled purchase price of $36.7 million plus accrued interest.

  • Subsequent to September 30, we have repurchased a total of $102.9 million of our outstanding notes for a total purchase price of $98.2 million plus accrued interest.

  • Our Board of Directors has authorized $500 million in debt repurchases for the period of December

  • Don Tomnitz - President & CEO

  • Thank you, Stacey.

  • I want to take this opportunity to thank all of our DHI team for their efforts in this dismal housing market.

  • We especially would like to thank our regional and divisional staffs in our Q4 land sales, and also our corporate staff on our Q4 bulk land sales.

  • It was a herculean effort.

  • It was also quite successful and was done completely, 100% by our DHI personnel.

  • Fiscal year will be a more challenging year, we believe, than fiscal year 2008, but we are confident in our abilities to deal with the blows the housing market and the economy will send our way.

  • This concludes our conversation this morning.

  • Any calls?

  • Stacey Dwyer - EVP & Treasurer

  • Leslie, we will now open for Q&A, please.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Our first question comes from Megan McGrath of Barclays Capital.

  • Your line is open.

  • Megan McGrath - Analyst

  • Hi, thanks.

  • Good morning.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Megan McGrath - Analyst

  • Just wanted to follow-up a little bit on your land sales.

  • If you include the land sale and you change your reporting segments a little bit, just curious if you've effectively exited any markets this quarter.

  • Don Tomnitz - President & CEO

  • No major market exits at all, Megan.

  • Megan McGrath - Analyst

  • Okay, thanks and could you maybe categorize the buyers of that land for us?

  • Was it mostly other builders, was it funds ?

  • Don Tomnitz - President & CEO

  • Well, there weren't a lot of builders buying land at this point.

  • But about half of our land sales were handled specifically by our regional Presidents and the respective Division Presidents, and the other half was handled by our corporate office.

  • A number of the land sales on the regional and division basis were local investors, local developers, who basically understood the properties better than someone who was purchasing from a bulk perspective.

  • They were, as I said, local and they understood the inherent value in those projects.

  • We also dealt with, I think, five other bulk sale investors, all different sizes of dollars in terms of the transaction, but those were handled by the corporate staff here.

  • So, basically about half and the regional division staff and about half from the corporate staff.

  • Megan McGrath - Analyst

  • Okay, great.

  • Thanks very much.

  • Operator

  • Our next question comes from Michael Rehaut of JPMorgan.

  • Your line is open.

  • Michael Rehaut - Analyst

  • Hi.

  • Thanks, good morning, everyone.

  • Don Tomnitz - President & CEO

  • You think they would get the number one analyst's name correct, would'nt you?

  • Michael Rehaut - Analyst

  • Takes a while.

  • Thanks, though.

  • Don Tomnitz - President & CEO

  • Almost as bad as Tomnitz.

  • Michael Rehaut - Analyst

  • First question, guys, just on the ridden down lots.

  • I'm sorry, yes, the ridden down lots where you had -- the base was $968 million.

  • Can you give us a sense of what was, you know, finished versus unfinished or maybe in the middle?

  • Don Tomnitz - President & CEO

  • Are you talking about the lots that we sold?

  • Michael Rehaut - Analyst

  • No, the lots that weren't sold but that were associated with the $365 million of impairments that you kept.

  • Don Tomnitz - President & CEO

  • Oh, sure.

  • Of the lots that we still own, about 30% of those are finished, and then the remainder are in either some form of development or are undeveloped at this point.

  • So about 30,000 lots, as far as absolute numbers, are finished lots at this point in time.

  • Michael Rehaut - Analyst

  • Okay, and then I guess my question was more to the lots that were impaired by that $365 million, can you give us a sense of the proportion of finished versus unfinished or in the middle?

  • Don Tomnitz - President & CEO

  • Right.

  • Of what we impaired during the quarter, about 20% related to finished lots and construction in progress and the remainder would have been related to land.

  • Stacey Dwyer - EVP & Treasurer

  • And we don't really have a break down on that 80% on whether the lots were completed or any phase of development.

  • We simply tracked it by land versus our residential inventory line.

  • Don Tomnitz - President & CEO

  • Right.

  • Michael Rehaut - Analyst

  • Okay, thank you.

  • Second question just on the can rate.

  • It has moved up for many builders, not just yourself, and I was just wondering if you could give us a sense of how much of that might have been due to DPA versus just other reasons, like cold feet or mortgage financing difficulty?

  • Don Tomnitz - President & CEO

  • We really thought that we would have higher sales from DPA in the fourth quarter than what we had.

  • I don't think our cancellation rate increased significantly because of the DPA in fourth quarter.

  • I really think the biggest issue, Mike, is just the fact that people have cold feet.

  • I think it's difficult for, in this economy with job layoffs, you may not be laid off but your neighbor was laid off, and people were becoming more conservative, and I also think that it's just as housing prices continue to decline in a number of markets, it's difficult to make a buying decision unless you absolutely have to.

  • If you're being transferred, or if you need another bedroom, I think those are easier decisions, but I think until housing prices bottom out, I think the cancellation rates are going to continue to increase or at least stay high.

  • And until the economy begins to improve, and people have confidence that the asset that they're purchasing is at least going to be worth what they're paying for it, it's going to continue to contribute to higher cancellation rates.

  • Michael Rehaut - Analyst

  • One last question if I could.

  • Just on the gross margins, we've heard different accounts from builders recently about -- or rather maybe in our view, kind of a shift that more recently last quarter to more builders have begun to talk about gross margins post- impairment for communities being in a low double digit range, markedly below normalized profitability.

  • In our view, it's a little bit of a shift from maybe a year or two ago where the talk was that that impairment was supposed to push you closer to either normalized or slightly below normal level of profitability on the gross margin side.

  • Can you give us a sense for, in terms of your impairments today, what camp do you fall in, or is it closer to the low double digit type margin that you're resetting your communities at?

  • Don Tomnitz - President & CEO

  • I'm not sure we're going to land in either camp necessarily, but the way we would look at it is for projects that have been impaired, typically a post-impairment margin on those projects would perhaps be generally in the midteens range.

  • However, in order for a project to become impaired, generally the gross margin must drop down into the single digit range.

  • So, at any point in time, especially in a declining price environment, you may be looking at your overall inventory, your overall projects that are open for sales, and you may have some impaired, recently impaired projects where the margins are in the midteens, you may have some projects that either have not been impaired but are declining that may be down in the low double digits or the high single digits that have not been impaired yet, and then you may have other projects, obviously, that are still performing very well from a margin perspective.

  • So, on an average -- weighted average balance in this environment, I think a margin in the low double digit range with a mix of impaired projects and unimpaired projects is probably a reasonable expectation.

  • Michael Rehaut - Analyst

  • Okay, yes, I appreciate that color.

  • I guess what you're saying is just those that have just been impaired would get you back into a midteens level, which I think is more consistent with what we've heard a year ago or so that companies were trying to peg it closer to either a normalized or slightly below normal level of profitability.

  • Don Tomnitz - President & CEO

  • I think that's clearly the first shot out of the box, when the project is impaired you're trying to -- it basically reflects out that it is a more normalized margin in those projects.

  • And then you mix everything in the basket and it becomes a weighted average.

  • Bill Wheat - EVP & CFO

  • And then, if post-impairment those projects performed at exactly the level that you assumed, then margins would remain in the midteens, but reality over the last year or two is that the pricing environment has continued to decline, so subsequent performance quarter by quarter has slipped back down from the actual impairment level.

  • Michael Rehaut - Analyst

  • Great.

  • Thanks.

  • Thanks very much.

  • Don Tomnitz - President & CEO

  • Thank you.

  • Operator

  • Thank you.

  • Our next question comes from the line of Dan Oppenheim of Credit Suisse.

  • Your line is open.

  • Dan Oppenheim - Analyst

  • Thanks very much.

  • I was wondering if you can talk about the goals -- you just talked about having fewer speck homes, but in the past in terms of orders you've talked about how you want to basically sign an order if you have a live body there.

  • Given that most of the specs these days are coming from cancellations or unintended specs, how will you think about orders in the coming year to avoid having more specs out there?

  • Don Tomnitz - President & CEO

  • Well I can tell you we can't really speak too clearly about orders currently, because I assure you that we're monitoring on a daily and weekly basis at the corporate office, as well as we are at the regional division, and currently, it's a week to week, month to month, quarter to quarter development in terms of what our orders will be.

  • I will say we're very comfortable, even though it may not seem like a big number, but we've closed over 26,000 units for the fiscal year we thought was a major accomplishment by our team.

  • The way we look at specs, I can tell you as I travel around the country, and Don Horton travels around the country, and by the way Don Horton is on the road today in Atlanta and Birmingham, and he will have visited all of our divisions by Christmas, the holidays, we are maintaining enough specs in each one of our communities, such that when someone does get qualified, such as someone moving out on an apartment or someone has actually sold their home, such that they can close on a home immediately because those people typically do not want to wait the construction cycle for that home to be built and closed.

  • So, we decreased our number of specs substantially.

  • I think at this time last year we had 5,000 completed specs and we're sitting on about 3,100 completed specs, and you should also know that our specs that have been completed greater than one year are basically less than 5% of our inventory, about 600 homes.

  • Dan Oppenheim - Analyst

  • Great.

  • Thanks very much, and just following up, wondering if you can give any color on what's happening in terms of orders in the Southwest region, if you had cancellations there that were certainly above what you had overall with what your sales strategy is looking forward?

  • Don Tomnitz - President & CEO

  • Absolutely, the order cancellations have increased substantially in the Southwest and that's a direct reflection of Arizona, which would include both Phoenix and Tucson, and as we all know California was the first one to enter into this housing down cycle, followed by Florida and now we had a good year in Arizona last year, we're going to have a not so good year this year.

  • It's going to be a worse year than we had last year, I guess is the best way to put it, largely because of the fact that cancellations are increasing substantially in both the Phoenix and Tucson market.

  • Dan Oppenheim - Analyst

  • And can you give us any color in terms of what the cancellation rate was for that region?

  • Don Tomnitz - President & CEO

  • We can get back to you on that.

  • I don't think we have that right at our finger tips.

  • Say again?

  • Mike Murray - Controller

  • For the year 56%, the highest among our region.

  • Don Tomnitz - President & CEO

  • 56%, Mike Murray says, our Controller, and that's highest amongst our regions.

  • Operator

  • Thank you.

  • Our next question comes from Nishu Sood of Deutsche Bank.

  • Your line is open.

  • Rob Hanson - Analyst

  • Hi, this is actually Rob Hanson on for Nishu.

  • Thus far you've been pretty successful in generating cash and managing your balance sheet, so I just wanted to see what the rationale was in not just completely cutting the dividend.

  • Don Tomnitz - President & CEO

  • Yes.

  • Well, frankly, I'll tell you that we've cut it, as I said, down to three quarters of what it originally was.

  • We've generated $4.1 billion in free cash flow over the course of the past 27 months.

  • We are comfortable, as we told you, that we'll generate free cash flow in fiscal year 2009 in addition to the $622 million check that we're about ready to get on our taxes, so as we continue to generate the levels of positive cash flow that we are, we believe that our dividend at this current level is appropriate.

  • It represents less than $50 million total of expenses relative to our cash position, which will be, at the end of December, somewhere around $2 billion, so we think that it's very prudent.

  • Rob Hanson - Analyst

  • Okay, and then in the preliminary release you mentioned about how your borrowing base in the Credit Facility is less than $100 million and what not, so given you have ample cash to fund your operations for the time being have you already started to rework the facility, and if so, can you give us any color on the discussions that you've had with the bank group ?

  • Bill Wheat - EVP & CFO

  • Right.

  • One thing to clarify is on the borrowing base, our capacity under our borrowing base at September 30 was $52.8 million.

  • Now, we do expect that that capacity to increase as we pay down further debt, as we pay off our maturities in January and February, and that will be offset somewhat by any further reductions in inventory, so that capacity will increase regardless of what we do with our banks.

  • We are having preliminary discussions with our lead banks regarding their facility, regarding the covenants under our facility, and so we will be evaluating further actions on the revolver in the coming months.

  • We certainly don't have an immediate need to address the facility, but we will be evaluating that.

  • Rob Hanson - Analyst

  • Okay, and just one last quick question, given the build up in cash, just wanted to see what types of securities that you invest your cash in?

  • Bill Wheat - EVP & CFO

  • A substantial majority of our cash is in treasuries or in funds that are directly invested in treasuries, and the remainder basically is spread around among our bank group.

  • Rob Hanson - Analyst

  • All right, thank you.

  • Operator

  • Thank you.

  • Our next question comes from Kenneth Zener of Macquarie.

  • Your line is open.

  • Kenneth Zener - Analyst

  • Thank you, good morning.

  • Bill Wheat - EVP & CFO

  • Good morning.

  • Kenneth Zener - Analyst

  • I'm interested, how far are you guys willing to let your units under construction ride up as a percent of backlog, because currently I think it's at a record level, the 12,400 units relative to backlog, and is it still useful to think about that number as basically being half your next quarter's deliveries?

  • Don Tomnitz - President & CEO

  • Next years deliveries, basically as we indicated to you we have 12,400 units in inventory, and clearly on a typical year, we would say two times that equals our projected next fiscal years closing.

  • I would tell you that we realize that we have a few too many units in inventory, and obviously one of the ways that we plan to generate free cash flow this year and the first half of this year is the same way we did it last year and that is we're going to continue to reduce our number of units in inventory.

  • So, we are aware of the number.

  • It is a little high for us at this point but it's not something that we're worried about.

  • We reduced our units in inventory last year substantially in the first half of the year.

  • Bill Wheat - EVP & CFO

  • For reference, a year ago we had 19,900 units in inventory after just closing a bit under 40,000 units in the prior year.

  • Today we have 12,400 units in inventory after just closing 26,000 units during the year, so we have continued to move our balance down, and based on the sales pace we are seeing and that perhaps it depends on what we will see in the coming quarters, we'll continue to adjust downward.

  • Stacey Dwyer - EVP & Treasurer

  • (Multiple Speakers) Go ahead, Ken.

  • Bill Wheat - EVP & CFO

  • Oh, I'm sorry.

  • Stacey Dwyer - EVP & Treasurer

  • The trade off for us right now though is a sell -- a build job has a high likelihood of cancellations.

  • When we have specs that are available, and we have a short time for when people come in and sign a contract to close, we have better certainty of closing and a lower cancellation rate, so those facts are actually helping us continue to move through our land and lots and continue to generate our cash flow, so we're going to focus really on specs more as just an overall percentage of our projected closings rather than looking at it as a percentage of our backlog.

  • Kenneth Zener - Analyst

  • That's really useful Stacey, because the following question I had was if you look at a place like Phoenix which is one of your largest markets where you're a dominant builder there, I just wonder how long builders can keep building despite over supply and job losses and how you think as positioning yourself there.

  • Is it simply because you have lower G&A costs that you can continue to build, or is it really your need to deplete land that keeps those spec levels high?

  • Don Tomnitz - President & CEO

  • Well, we need to deplete land, and obviously we have too many specs in the Phoenix market as the market has turned down over the past six months, and we're on a major program to reduce our number of specs in the Phoenix market currently.

  • The number of specs in Phoenix were largely driven by higher than anticipated cancellation rates in the last two quarters, so as a result -- and we always maintain in Phoenix a very low number of specs but frankly, the cancellation rates were so horrendous that it increased our specs above our comfort level, so those are coming down.

  • Kenneth Zener - Analyst

  • Thank you.

  • Don Tomnitz - President & CEO

  • You're welcome.

  • Operator

  • Thank you.

  • Our next question comes from Timothy Jones of Wasserman & Associates.

  • Your line is open.

  • Timothy Jones.

  • Timothy Jones - Analyst

  • Good morning to you all of you.

  • Stacey Dwyer - EVP & Treasurer

  • Good morning, Tim.

  • Bill Wheat - EVP & CFO

  • Good morning.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Timothy Jones - Analyst

  • A couple of things.

  • Let me get this straight.

  • Can you give us what -- on those 32,000 lots, what was the land on your books on that and what was the impairment, and I guess the tax benefit of that sale would be 35% or 38% of the $624 million, if I'm right or wrong.

  • So, what was the 32,000 lots on your books for, and how much has been impaired before that?

  • Bill Wheat - EVP & CFO

  • Yeah, prior to the sale, the total book value of these lots that were sold was about $975 million.

  • Timothy Jones - Analyst

  • Okay.

  • And how much of that had been previously impaired by?

  • Bill Wheat - EVP & CFO

  • Let's just go to the original cost?

  • Timothy Jones - Analyst

  • Yes.

  • Bill Wheat - EVP & CFO

  • The original cost on those lots was $1.8 billion.

  • Timothy Jones - Analyst

  • Okay.

  • So it had been impaired down quite a bit.

  • Okay.

  • Bill Wheat - EVP & CFO

  • Yeah.

  • Timothy Jones - Analyst

  • And the other question I had, on these -- your 12,400 units under construction, does that include the 6,900 specs?

  • Bill Wheat - EVP & CFO

  • Yes, it does.

  • Stacey Dwyer - EVP & Treasurer

  • Yes.

  • Timothy Jones - Analyst

  • And what's the number with the specs that was, that compares to the 6,900 last year, with the 19,900?

  • Stacey Dwyer - EVP & Treasurer

  • 10,600.

  • Timothy Jones - Analyst

  • Okay, and now -- but now don't you have to add in the finished specs, it wouldn't be under constructions?

  • Stacey Dwyer - EVP & Treasurer

  • That includes any vertical construction, so completed specs are already included in the 6,900.

  • Timothy Jones - Analyst

  • Oh, the 3,100 are included in that too?

  • Bill Wheat - EVP & CFO

  • Yes.

  • Stacey Dwyer - EVP & Treasurer

  • Yes.

  • Timothy Jones - Analyst

  • And you're one of the very few builders who has said that they will generate free cash flow next year before tax refunds.

  • I think you alluded to it.

  • Is it because you intend to bring these specs down significantly?

  • Don Tomnitz - President & CEO

  • That is correct.

  • We're going to bring the specs down and also bring our total inventory down.

  • Timothy Jones - Analyst

  • Okay.

  • Bill Wheat - EVP & CFO

  • In terms of lots.

  • Timothy Jones - Analyst

  • And lots too, okay.

  • Can I just get a clarification on something?

  • Don Tomnitz - President & CEO

  • Yes, sir.

  • Timothy Jones - Analyst

  • Michael, I think asked these questions.

  • You said that your impaired lots 20% were finished or under construction and the rest was raw land.

  • Is that correct?

  • Bill Wheat - EVP & CFO

  • 55% --

  • Timothy Jones - Analyst

  • I'm not talking about the stuff sold.

  • I'm talking about the stuff impaired.

  • Bill Wheat - EVP & CFO

  • Oh, the stuff that we own, the 99,000 lots that we own today, 30% are finished and --

  • Timothy Jones - Analyst

  • And how much are under construction then?

  • I mean, under development?

  • Stacey Dwyer - EVP & Treasurer

  • Yes, I think you're right, Tim.

  • It's 20% related to homes under construction for the current quarter impairment, 80% related to land in any stage of development.

  • Timothy Jones - Analyst

  • It doesn't just mean raw land?

  • Stacey Dwyer - EVP & Treasurer

  • That's correct.

  • Timothy Jones - Analyst

  • And for the entire Company, it's 30% and 70%, okay.

  • Not impaired, but you don't have a break down of what percentage of that land is raw, that's the stuff I'm worrying about, undeveloped land.

  • Stacey Dwyer - EVP & Treasurer

  • Yes, we didn't try to break down our impairment by raw versus partially developed or fully developed lots.

  • Timothy Jones - Analyst

  • How about your owned?

  • Stacey Dwyer - EVP & Treasurer

  • On our owned lots, we're approximately 30% developed, 30% finished and then the remainder is going to be a combination of partially developed and raw.

  • Timothy Jones - Analyst

  • Okay, but you don't have the break down there?

  • Of the 70%?

  • Stacey Dwyer - EVP & Treasurer

  • I don't have it in front of me.

  • Timothy Jones - Analyst

  • Okay, thank you so much anyway.

  • Stacey Dwyer - EVP & Treasurer

  • Thanks, Tim.

  • Operator

  • Thank you.

  • Our next question comes from Alex Barron of Agency Trading Group.

  • Your line is open.

  • Alex Barron - Analyst

  • Thanks.

  • It looks like Tim just stole one of my questions, but that's all right.

  • My other question I was going to ask you was, in the current quarter, I was wondering what the benefit from previous impairments was to your margins.

  • Bill Wheat - EVP & CFO

  • Alex, we're looking at that in terms of the closings that we saw during the quarter that had been previously impaired, so of our total closings during the quarter, about 2,750 of them had been previously impaired.

  • That's about 39% of our overall closings.

  • Alex Barron - Analyst

  • Okay.

  • Bill Wheat - EVP & CFO

  • We don't have the break out of the full impact on our margins from impairment releases.

  • Alex Barron - Analyst

  • Okay.

  • Now, as it pertains to the impairments, could you give us like a break down of say your California region, how much those lots are being valued at at the moment?

  • Bill Wheat - EVP & CFO

  • Well, I guess probably the first thing, the reason we're mumbling a little bit, Alex, is we actually don't have just a simple California region anymore.

  • We have a West region.

  • If I'm just looking at the total West region which does include the Pacific Northwest a little bit, so let me make sure I understand your question.

  • You are wanting to understand, versus our original cost, what we're currently impaired down to?

  • Alex Barron - Analyst

  • Correct, yeah.

  • I guess I'm just trying to, I guess the way I was looking at it and maybe you can correct me, I was adding -- I was trying to get what the average value was per lot, so I was dividing the 99,000 lots by the, it looks like you have about $2.4 billion on the balance sheet for lots under development and you have got another $530 million for land held for development, so I was just adding those two values divided by the 99,000 so I get about $30,000 per lot on average.

  • I was just kind of wondering how that broke down per region.

  • Bill Wheat - EVP & CFO

  • Okay.

  • Stacey Dwyer - EVP & Treasurer

  • There's actually probably not as much variability by region as there used to be, Alex.

  • Probably the South Central and the Southeast are going to have the lower lot costs, the West will probably still be a little bit higher as with the Northeast, but lot value could change and that's the reason we've impaired more in California than we have in other markets.

  • So, that's bringing the average cost per lot down.

  • The other thing to keep in mind, as you're looking at that, is there's a difference based on the stage of completion of the lot, so what you're taking is any stage of lots that are reflected in our land and lot positions and applying a straight average to it.

  • Alex Barron - Analyst

  • Right, yes, I understood.

  • I was just wondering if California was lower or higher than that average.

  • Stacey Dwyer - EVP & Treasurer

  • It's probably going to be a little bit higher, but not significantly higher.

  • Don Tomnitz - President & CEO

  • The value per lot.

  • Stacey Dwyer - EVP & Treasurer

  • Right, the value per lot.

  • Don Tomnitz - President & CEO

  • I will say one thing, in California, since our operating committee meeting and October -- late October, on deals that we're looking at in California today we're finding whereas the lot used to be during the peak, so where around 35% or 40% of the cost of the home, we're now finding that the deals that we're looking out there, we're seeing that the value of the lot is somewhere back to more normalized Company average, which is around 25% of the cost of the home.

  • So, the land prices in California have come way down and as a percentage of the cost of the home getting in line with traditional overall D.R.

  • Horton average lot as a percentage of the cost.

  • Alex Barron - Analyst

  • Okay.

  • Don Tomnitz - President & CEO

  • Which is a good sign from our perspective.

  • Alex Barron - Analyst

  • Right, right.

  • And another quick question I had was on the -- I wanted to see if I'm reading this correctly -- in your Midwest region, it looks like your prices, for both orders and deliveries, dropped fairly significantly versus any other previous quarter.

  • Was that just kind of a change in pricing to try to move stuff in that region, or is there something else that I'm not getting correctly here?

  • Don Tomnitz - President & CEO

  • Clearly, Chicago has gotten a lot softer, and Denver continues to be soft and Minneapolis continues to be soft, but I think the biggest driver of that was Chicago has experienced a lot of softness in the last two quarters.

  • Alex Barron - Analyst

  • Okay, alright.

  • Thanks, Don.

  • Operator

  • Thank you.

  • Our next question comes from Jay McCanless of FTN Midwest.

  • Your line is open.

  • Jay McCanless - Analyst

  • Good morning, everyone.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Jay McCanless - Analyst

  • I wanted to get an update on the mothballing process that I believe you had all spoken about over the last two quarterly calls, and also what implications if any that has for community counts in fiscal 2009?

  • Bill Wheat - EVP & CFO

  • We continue to evaluate all of our projects to determine whether we want to move forward or not.

  • We have determined a number of projects that makes no sense in the current environment to spend additional development dollars, and so we are mothballing certain projects.

  • That process really hasn't changed.

  • It's kind of a continual evaluation.

  • I would tell you, in the current environment, we're really not pulling any projects out of mothball, but we are certainly continuing to identify at least portions of projects, future phases of development that we do not want to move forward with and we'll move those into kind of mothball status.

  • Jay McCanless - Analyst

  • Okay.

  • Don Tomnitz - President & CEO

  • I think a lot of those mothball projects are projects which we believe to bring the market today doesn't make economic sense to us and it makes -- if there is a housing market three years from today, which we believe there will be that those projects have a higher economic value, so that's really the basis for most of those projects being mothball.

  • They are hard to replace deals in most instances, and we just don't see any real economic benefit to giving the buyer the benefit of current market.

  • Jay McCanless - Analyst

  • Sure.

  • Any idea what that's going to mean?

  • I know you don't disclose community accounts, but in terms of percentage change, down 10%, down 20%, anything you can give us there?

  • Bill Wheat - EVP & CFO

  • Yes, I wouldn't really expect the mothball process to change our active community count that much.

  • We are probably not mothballed but just a handful of active communities.

  • By and large, when you finished lots and you've already invested all of the dollars in the lots, it makes the most economic sense for us to continue to work through those finished lots of whatever pace and sales demand the market will bear.

  • So, typically an active community we're going to continue to work through it.

  • I would tell you, overall, our community count continues to work down as we're not bringing on new communities, by and large, and we're finishing out older communities, so our community count does continue to move down substantially.

  • Estimates on total community reductions are probably roughly in the 15% to 20% range, and I would expect it to continue to decline in the future year as we work through the remainder of some of these projects.

  • Jay McCanless - Analyst

  • Okay, and then one other quick question.

  • With the debt re purchases that you talked about in the prepared comments, are there any of the term debt vintages coming up whether 2009 , 2010, etcetera, where you're prevented in the indentures of the bond from buying back or repurchasing those

  • Bill Wheat - EVP & CFO

  • No.

  • There are no limitations on any of our outstanding debt to repurchase.

  • Jay McCanless - Analyst

  • Okay, great.

  • Thank you.

  • Don Tomnitz - President & CEO

  • Thank you.

  • Bill Wheat - EVP & CFO

  • Thanks, Jay.

  • Operator

  • Thank you.

  • Our next question comes from Carl Reichardt of Wachovia.

  • Your line is open.

  • Carl Reichardt - Analyst

  • Hi, folks, how are you?

  • Bill Wheat - EVP & CFO

  • Hi, Carl.

  • Don Tomnitz - President & CEO

  • Doing great.

  • Carl Reichardt - Analyst

  • I'm curious about costs to develop, if there's been any kind of meaningful change, and we know about materials costs what's happening there, but things like permitting fees or just site improvements, grading, curve and gutter, things like that, any significant alteration in what it's costing you to develop lots?

  • Don Tomnitz - President & CEO

  • Clearly, to give you a specific number, Carl, I don't have that.

  • Clearly, the price of everything has come down including development costs.

  • The reality of life is we're just not developing any lots to speak of.

  • At the current moment, as I think that we projected last year we spent about $600 million on land and land development, and I said this year we're going to be somewhere less than that, below $500 million, so we're just not bringing on a lot of lots, so it's not a substantial driver to our business right now in terms of cost saves.

  • Carl Reichardt - Analyst

  • But no permitting or fee reductions from the municipalities or counties as you can see?

  • Don Tomnitz - President & CEO

  • In general, there have been a few but it's been on both ends of the continuum.

  • In some places the revenue is down so they're increasing the price of the permits, and some other areas they are realizing it may be a way to generate additional business is to decrease it.

  • My general reaction is most of them have chosen to increase them as opposed to decrease them.

  • Carl Reichardt - Analyst

  • Okay.

  • Last question, Don.

  • I'm curious -- about foreclosures, and we've seen foreclosures as a percentage of existing home sales become much more significant and some year-over-year positive turnover and in some markets in the existing housing market.

  • What are you doing, specifically, to compete with foreclosures, if you can, and what's your sense as to who is purchasing them?

  • Do you have any data to support whatever your contention is?

  • Don Tomnitz - President & CEO

  • Well, I don't have data, but I do know that I've visited a number of people about and that's been there's a number of international buyers focusing on the foreclosures.

  • What we are doing, and each one of our subdivisions our salespeople have a list of the benefits of buying a new home with the warranty and the home being in good condition, as opposed to someone buying a foreclosure where there is no warranty, as-is-were-as house, and typically if you look at an average I think it's taking somewhere around $10,000 to $15,000 of cash out of their pocket to make the home livable.

  • So, I think there are a whole host of reasons why people should be buying a new home versus a foreclosure, unless they're an investor and deciding to put that home in a pool.

  • But if you're Mr.

  • And Mrs.

  • America out there looking for a place to raise your kids, I would definitely be looking for someplace that's a new home, as we like to even bring it down to the lowest common denominator, some dog hasn't defecated on the carpeting in the house, so therefore you can at least move into a new home with nice new carpeting.

  • Carl Reichardt - Analyst

  • Thank you for the visual, Don.

  • Don Tomnitz - President & CEO

  • You're quite welcome.

  • That's sort of the stink of the homebuilding market today.

  • Carl Reichardt - Analyst

  • I understand.

  • Thanks.

  • Operator

  • Thank you.

  • Our next question comes from Jim Wilson of JMP Securities.

  • Your line is open.

  • Jim Wilson - Analyst

  • Oh, great.

  • Good morning everyone.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Jim Wilson - Analyst

  • So, two questions.

  • First, margins in backlog, you guys talked a lot about current margins what you saw in the quarter, but is there any meaningful difference in what you currently have in terms of margins in backlog?

  • Bill Wheat - EVP & CFO

  • No appreciable difference necessarily.

  • It's really a matter of what the current sales are going to be and what the pricing environment is going to be is what's going to determine the forward margins.

  • At the current cancellation rates, that also has an impact on where the ultimate margins and backlog come in when we close the homes.

  • Jim Wilson - Analyst

  • Okay.

  • And then, the second one is any divisional or operations consolidations that either occurred recently in the quarter, or that are kind of imminent, obviously, that you've discussed internally?

  • Bill Wheat - EVP & CFO

  • Well, frankly, nothing is imminent but there are things that are constantly taking place specifically.

  • We've merged a lot of divisions.

  • We continue to look at each one of our divisions and see if they can sustain their level of SG&A with the number of closings that are projected and the number of sales that are projected, so we have had closings in fiscal year 2008 and we will continue to have mergers and some closings.

  • We haven't had a lot of closings in 2008, but mostly mergers, and we'll continue to be merging additional divisions in fiscal year 2009.

  • Jim Wilson - Analyst

  • Maybe I can just ask, give or take, how many divisions did you have a couple years ago and how many today?

  • Stacey Dwyer - EVP & Treasurer

  • We probably had somewhere in the mid 40s in terms of divisions, Jim, a couple of years ago, and we're down into the mid 30s right now.

  • Jim Wilson - Analyst

  • Okay, all right, great.

  • Thanks.

  • Don Tomnitz - President & CEO

  • Yes.

  • Operator

  • Thank you.

  • Our next question comes from Stephen East of Pali Capital.

  • Your line is open.

  • Stephen East - Analyst

  • Good morning, everybody.

  • You talked about cash flow being positive for 2009.

  • At what type of level would that probably move to a breakeven or less?

  • I'm trying to get an understanding of, without guidance here, just what you're sort of perceiving for the market for you all.

  • Bill Wheat - EVP & CFO

  • You know, Stephen, the way we're looking at our cash flow possibilities for the next year given our finished lot position going into the year, we really don't have to spend a lot on finished lots in order to generate any level of closing next year.

  • So, in terms of what cash flow we think we can generate at a certain volume level, we're really looking at the ability at any volume level to be able to continue to reduce our homes in inventory, to continue to reduce our lots in inventory and to have to spend very little on land and lots during fiscal 2009.

  • So, as long as then we can continue to control our overhead costs, it gives us a great deal of confidence that we can generate positive cash flow even at a substantially reduced volume level.

  • I'm not going to give you a specific level necessarily.

  • I'm sure you've got a model that could probably give you a pretty good number, but we do feel confident in generating positive cash flow even at a substantially reduced closing level.

  • Stephen East - Analyst

  • Okay, thanks.

  • And Don, if you look at the last two months, the September, October time frame, not the earlier part of the quarter, but if you look at your regional differences and performances, are there any two or three markets that stand out, either good or bad versus the rest?

  • Don Tomnitz - President & CEO

  • I think I would say to you the best housing market in the country right now is still in the state of Texas, and that market has continued to weaken over the course of the past 30 to 60 days, clearly with oil and gas prices having plummeted like they had, so I think Texas, I know Texas has been a strong market for us for quite some time, as is Louisiana but I think those markets are going to be weaker for us and they 're trending that way currently.

  • Generally speaking, Albuquerque is a good market but the number of markets that you can say that are good out there today, they aren't even worth mentioning.

  • I will tell you that as we look around the country, it's astounding and surprising to us that each market is very dismal.

  • There's just not much positive in any of the markets that are out there today.

  • Stephen East - Analyst

  • Okay.

  • And then one last question.

  • If you look at your completed specs, in today's environment, has your strategy changed any from say a year ago as far as trying to move those, discounting versus build to order, that type of thing?

  • Don Tomnitz - President & CEO

  • Well, we focus clearly around here on our aged inventory and our homes that are greater than one year completed that are a spec and especially the six months -- between six months and a year, and we do believe in incentivizing those incentive homes to sell so we do not want any high level of aged inventory in this Company.

  • Stephen East - Analyst

  • Has that changed any from a year ago?

  • Don Tomnitz - President & CEO

  • Not really.

  • It's pretty much in line.

  • Matter of fact we were going through that before.

  • When we came up with the total completed specs as a percentage of our total inventory is pretty much in line with exactly where it was about a year ago.

  • Bill Wheat - EVP & CFO

  • And our process is still subdivision by subdivision looking at the sales pace, looking at the level of inventory we have in any subdivision and we're adjusting our starts really on a regular basis based on what we're seeing in each subdivision.

  • So, looking at if sales decline, our number of starts decline.

  • Stephen East - Analyst

  • Okay, thanks a lot guys.

  • Operator

  • Thank you.

  • Our next question comes from Randy Raisman of Durham.

  • Your line is open.

  • Randy Raisman - Analyst

  • Hi, how are you?

  • Just a little more color with regards to the land sales in the quarter, I mean particularly given that the cost of the land, you just said earlier was $1.8 billion and it was sold for over $209 million.

  • I mean, can you give us any sense for kind of where some of this land was located, and was this more like C&D type locations and is that why the value fell off so dramatically?

  • We know you sold kind of a year ago, $154 million of land , what the original cost of that land was if you have that

  • Bill Wheat - EVP & CFO

  • You know, the two primary things about the mix of the land that we sold first is the geography, the major states where the land was located, were the states of California, Nevada, Arizona, and Florida.

  • Those were the areas that had the largest run ups and land prices at the peak, and they are also the ones that had the largest declines in home prices and as a result land prices and where we found more of our excess land.

  • The second thing is the status of the land that we sold.

  • 55% of the land that we sold was in a raw state, it was undeveloped.

  • So, clearly there's still additional spending in the future to be able to bring that land to market, so when you're valuing that land trying to sell it there is a greater hair cut on undeveloped land than on finished lots.

  • Those are really the two primary things that drove the overall valuation.

  • When you look back at a year ago we don't have the original cost on the land that we sold a year ago, but clearly there was a different dynamic in the market a year ago when we were selling land, a lot of it was primary commercial land and such that it didn't fit into our core operations, whereas this time it was more excess land in a declining sales environment that we didn't need in our operations in the short-term.

  • Randy Raisman - Analyst

  • How about the $1.8 billion.

  • I didn't mean to cut you off, the $1.8 billion when was that as of, that number?

  • Bill Wheat - EVP & CFO

  • That was when we purchased the land or when we added cost to it through entitlement or development costs.

  • Don Tomnitz - President & CEO

  • And to answer your question about the ABC or D, or as you indicated C&D locations, a lot of those projects were C&D locations.

  • When we purchased them they were probably B locations, largely because of the fact that we're going out to the next concentric circle.

  • We had all of the people in line closer in that were waiting to buy homes we went up to the next circle to try to find affordable land, so when we bought that it was probably B, maybe a B-minus piece of land, and today it's a D, it's an F.

  • Randy Raisman - Analyst

  • Right.

  • What type of buyer bought this land?

  • Don Tomnitz - President & CEO

  • Wealthy.

  • Typically they were funds or individuals who have high net worths who know the value of the land and who are patient money and are willing to do nothing with the land for a couple of years, and they believe the values will come back, just as we believe the values will come back out two, three years out but we can't, it doesn't make economic sense for us from a balance sheet perspective to hold the land.

  • They don't have a public balance sheet, so they have a longer term approach to it.

  • Randy Raisman - Analyst

  • Particularly when you can trigger a tax refund, right?

  • Don Tomnitz - President & CEO

  • Timing is certainly affected somewhat by the tax benefit, given that that was an expiring carryback.

  • Randy Raisman - Analyst

  • Okay, thank you very much.

  • Don Tomnitz - President & CEO

  • You're welcome.

  • Operator

  • Thank you.

  • Our next question is from Larry Taylor of Credit Suisse.

  • Your line is open.

  • Larry Taylor - Analyst

  • Good morning, and thank you.

  • I wonder if you could give us anymore detail on the potential for future land sales of any size going forward?

  • Don Tomnitz - President & CEO

  • Well, we look at land sales on a month by month basis, but I would say to you that the driving force for us was land that we didn't feel like that we were going to use in the foreseeable future out in the next year or two years, so most of the land we sold were pieces of land we thought maybe we wouldn't use for three or four years.

  • And secondly, clearly, was to capture the deferred tax benefit which we needed to do by September 30, so I would say to you before Bill supplements my answer, is that we don't have -- we probably won't have a lot of land sales driven by those same factors in fiscal year 2009.

  • Bill Wheat - EVP & CFO

  • Going forward, we'll be looking market by market and where we have excess positions that we think it makes the best sense for us to sell and we'll look at that, but we'll be very opportunistic about those sales.

  • As of September 30, and this will be disclosed in our 10-K, we have only $39.4 million of land on our balance sheet classified as held for sale.

  • And that compares back to, you know, over $300 million in previous quarters prior to our fourth quarter land sales.

  • Don Tomnitz - President & CEO

  • So, in a nutshell, not much.

  • Larry Taylor - Analyst

  • Okay, thanks.

  • Operator

  • Thank you.

  • Our next question comes from David Goldberg of UBS.

  • Your line is open.

  • Susan Haliday - Analyst

  • Good morning, it's actually Susan for David.

  • Just wanted to focus a bit on your liquidity.

  • You ended the quarter with the $1.4 billion and you'll get the tax refund and you commented that you've got the authorization, the repurchase up to $500 million of debt, yet you did cut the dividend.

  • Can you just kind of walk us through the thought process between paying down the debt versus preserving the cash on the balance sheet?

  • Bill Wheat - EVP & CFO

  • Yes.

  • Going forward, we clearly want to continue to maintain a solid cash balance on our balance sheet, and in the uncertain environment that we're in there's clearly a premium on having cash available.

  • With that being said, with the level that we're at with the refunds that we expect, clearly we have sufficient cash to still be active in repurchasing debt, as opportunities come to us, and that's basically the way we've handled our repurchases thus far.

  • As opportunities come to us at a good yield to repurchase debt we've taken advantage of those, and to the extent that continues we do have an authorization and we believe we'll have cash available to continue to do that.

  • Stacey Dwyer - EVP & Treasurer

  • And there is significant costs associated with continuing to carry the debt when we do have cash available to us to use to pay that down, so that's also a trade off we're looking at.

  • Susan Haliday - Analyst

  • And can you go back to the board for further authorization once you use up the $500 million?

  • Is that a possibility?

  • Bill Wheat - EVP & CFO

  • Certainly.

  • We've had conversations with the board.

  • We're all on the same page with regard to our game plan for repurchasing debt, and if we use it all up and it makes sense to go do some more we'll have those conversations with the board.

  • Susan Haliday - Analyst

  • And is there any kind of a target debt-to-cap level or some kind of a target debt level that you can share with us?

  • Stacey Dwyer - EVP & Treasurer

  • Yes, our target debt-to-cap level is to keep our leverage below 45%.

  • We are still clearly in that range and we would expect that to drop further after we receive our tax refund this quarter.

  • Susan Haliday - Analyst

  • Okay, thank you.

  • Stacey Dwyer - EVP & Treasurer

  • Thank you.

  • Operator

  • Thank you.

  • Our next question is from Rob Stevenson of Fox-Pitt Kelton.

  • Your line is open.

  • Rob Stevenson - Analyst

  • Good morning guys.

  • Most of my questions have been answered, but can you talk to the sort of attitude in Congress and the chances of getting any sort of help from action there?

  • Don Tomnitz - President & CEO

  • Well, actually the High Production Home Builders Council has been working very hard in terms of trying to visit -- or have been visiting with members of Congress on what we think our plight is and frankly, I'd suggest that you call back and give Jessica your number we would love to update you on what they're working on, because basically we're working on something very similar to the last time we had a major downturn in terms of home buyer credits.

  • Something that's more substantial than what they passed the first time, which is a $7,500 credit that you have to pay back.

  • So, frankly, it's a good initiative.

  • We believe strongly on it.

  • We're supporting it, but something has to be done much more than what's been done so far, because the only way people are going to buy homes is when they realize and substantial number of homes being sold that they have to have value, the value is not going to erode after they purchase the home, and that's just not a feeling that's in the marketplace today.

  • Rob Stevenson - Analyst

  • Are you feeling that there is some give on the part of Congress to accept something along those lines?

  • Don Tomnitz - President & CEO

  • I don't really have a good feel for that right now.

  • My initial reaction is I think we're such a small industry, though clearly we have something to do with this economic downturn as they found out.

  • I look back and listen to three and four months ago when officials were talking about how housing was insignificant to the overall economy, and I think they've found otherwise.

  • But I just don't get a good feel for it right now.

  • I think they're focused on the Citigroup of the world and AIG's of the world and the D.R.

  • Horton of the world are a rounding error to them right now.

  • Rob Stevenson - Analyst

  • Okay.

  • Don Tomnitz - President & CEO

  • Something needs to be done.

  • I know that.

  • Rob Stevenson - Analyst

  • Thank you.

  • Don Tomnitz - President & CEO

  • Yes, sir.

  • Operator

  • Thank you.

  • Our next question comes from the line of Michael Rehaut of JPMorgan.

  • Your line is open.

  • Michael Rehaut - Analyst

  • Thanks.

  • Just a couple of follow-ups, more detail oriented.

  • Could you try and give for us, on average, roughly, cost per lot to get it from undeveloped to fully developed?

  • Stacey Dwyer - EVP & Treasurer

  • I'll talk to that in a very broad average, Michael.

  • It's generally whatever the cost of your finish lot is, half of that runs to land and half is your development cost.

  • There's a huge variation in that depending on the topography, any requirements that the city is bidding on you in terms of road improvement or amenities, and there's just a myriad of things that can impact that and change the ratios either way significantly.

  • Michael Rehaut - Analyst

  • Okay.

  • So that half-half given the deflation in the marketplace, you wouldn't say that that mix has changed, or maybe in other words, finished lot costs as a percent of home have not increased given the recent deflation?

  • Stacey Dwyer - EVP & Treasurer

  • You know, we haven't been buying land in today's environment, so that's not an analysis we've been running right now.

  • Michael Rehaut - Analyst

  • Okay.

  • Also, you mentioned before that you hope to do below $500 million inland spend this upcoming fiscal year.

  • Can you give us a rough idea, let's say it is just for argument sake, $500 million.

  • How much of that would be kind of more mandatory costs, i.e.

  • taxes and basic overhead, interest?

  • Bill Wheat - EVP & CFO

  • Yeah, there's a good percentage of that.

  • It's not the majority, but there is a certain amount of work that helps us get off of bonds that are outstanding that make sense to do.

  • I don't have the numbers specifically in front of us, but there's some amount that is not necessarily required, but it makes sense in order to get the bonds.

  • Don Tomnitz - President & CEO

  • But to give you some comfort, we've gone through every project in the Company, every subdivision in the Company, and we've analyzed exactly which subdivision can have what portion of that $500 million to complete it, get off the bonds, we've done an economic analysis, does it make sense to spend X in order to get off Y bonds, so that's all-inclusive in our $500 million.

  • Michael Rehaut - Analyst

  • Okay, and so I assume you're referring to the Surety bond obligations?

  • Don Tomnitz - President & CEO

  • Yes.

  • Michael Rehaut - Analyst

  • And can you just give us an idea there, in that case, just where you stand right now in terms of Surety bonds outstanding and again, I guess you're deciding to complete some projects to complete your obligations with respect to those bonds, so maybe you could give us an idea perhaps where you are today and where you might be a year from now?

  • Bill Wheat - EVP & CFO

  • Our total outstanding surety bonds today is about $1.6 billion.

  • That is down about $0.5 billion from last year at this time.

  • Now, however the actual spending that would ultimately be required to get off of that is a fraction of that amount.

  • I don't have the exact amount in front of me, but it's typically a fraction of the outstanding bond amount, and very few of those bonds have any time frames on when they require you to do the spending, and so it's something that we can manage and work with the municipalities and if it doesn't make sense to spend the money right now, then we renew the bond and we keep it outstanding.

  • Michael Rehaut - Analyst

  • Right, right.

  • No, that's certainly what I've heard in terms of not having necessarily definitive time frame that would trigger anything, correct?

  • Bill Wheat - EVP & CFO

  • That's correct.

  • Michael Rehaut - Analyst

  • All right, thank you.

  • Bill Wheat - EVP & CFO

  • Thank you.

  • Operator

  • Thank you.

  • And we have reached our allotted time for today's conference call.

  • I would now like to turn the call over to the speakers for any additional or closing remarks.

  • Don Tomnitz - President & CEO

  • Yes, I'd just like to once again thank all of our employees for a great effort in fiscal year 2008, and I want everyone to focus on what we need to do in fiscal year 2009 as we all believe this is going to be a more challenging market in 2009 than 2008, but there's one thing about D.R.

  • Horton, we have survived and we've always survived at a high level, and we'll continue to proceed along and I appreciate all of the cooperation that everyone has given us as we've made employee cuts, and we continue to reassess our markets and we continue to combine operations.

  • When we get through all of this, as Don Horton and I were talking about on the phone this morning, we'll be a stronger Company and we'll continue to be a leader in the industry, so thank you very much and I hope everyone has a great Thanksgiving and a great holiday season.

  • Goodbye.

  • Operator

  • Thank you.

  • This concludes today's D.R.

  • Horton Americas Builder 2008 fiscal year-end conference call.

  • You may now disconnect.