霍頓房屋 (DHI) 2009 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning.

  • My name is Stephanie.

  • And I will be your conference operator today.

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

  • Horton Inc.

  • America's Builder first quarter 2009 conference call.

  • All lines have been places on mute to prevent any background noise.

  • After the speakers' remarks there will be a question session.

  • (Operator Instructions).

  • Thank you.

  • I would now like to turn the call over to Mr.

  • Don Tomnitz, President and CEO, you may begin.

  • Don Tomnitz - President & CEO

  • Thank you and good morning.

  • Joining me this morning are Bill Wheat, Executive Vice President and Chief Financial Officer and Stacey Dwyer, Executive Vice President and Treasurer.

  • Before we get started, Stacey?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Some comments made on this call may constitute foward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

  • Although D.R.

  • Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.

  • All forward-looking statements are based upon information available to D.R.

  • Horton on the 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 and performance is contained in D.R.

  • Horton's annual report on form 10-K which was filed with the Securities and Exchange Commission.

  • Don?

  • Don Tomnitz - President & CEO

  • Net sales orders for the first quarter ended December 31, 2008 were 2,777 homes, $568 million, compared to 5,245 homes, $926 million in the year ago quarter.

  • Our average sales price on net sales orders in the quarter was $204,400 compared to $218,200 on the year ago quarter and our cancellation rate was 38%.

  • Our first quarter home sales revenues were $886 million, 4,068 homes compared to $1.6 billion, 6,549 homes in the year ago quarter.

  • Our average closing price for the quarter was $217,700 compared to $245,400 in the year ago quarter.

  • Stacey?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Our gross profit margin on home sales revenue in first quarter, before inventory impairments and land option write-offs was 15.5%.

  • This was a 120 basis point increase from our home sales margin in the year ago period.

  • 170 basis points of the margin increase was due to the average cost of our homes declining by more than our average sales prices.

  • Caused by a greater portion of our closings occurring in our South Central region and the effects of prior inventory impairments on homes closed during the quarter.

  • Also contributing 50 basis points to the margin increase was a reduction in our estimated cost to complete for certain development projects.

  • Partially offsetting the gross margin increase was the recognition of less previously deferred gross profit under FAS 66 during the current quarter than in the year ago quarter.

  • Bill?

  • Bill Wheat - EVP & CFO

  • During our first quarter impairment analysis we reviewed all projects in the company and determined that projects with a combined carrying value of $1.4 billion had indicators of potential impairment.

  • We evaluated these projects and determined the projects with a pre-impairment carrying value of $212 million, were impaired.

  • We recorded inventory impairments of $55 million as a charge to cost of sales to reduce the carrying value of these impaired projects.

  • The majority of these charges related to projects in our West Region.

  • Of the remaining $1.2 billion of evaluated projects, which were not impaired, approximately half are located in Florida, California and Texas.

  • We also recorded $1 million in write offs of earnest money deposits and preacquisition costs related to land option contracts that we do not intend to pursue.

  • Don?

  • Don Tomnitz - President & CEO

  • Home building SG&A expense for the quarter was $127 million compared to $213 million in the year ago quarter.

  • A reduction of $86 million or 40%.

  • We have and we will continue to actively manage our SG&A levels relative to our expected number of home closings.

  • We recorded $25.6 million in interest expense during the quarter.

  • As we continue to reduce our residential inventory, and our development activity, our active inventory decline relative to our home building debt levels this quarter, so we experienced more of our home building interest occurred.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Financial services pretax loss for the quarter was $2.9 million compared to pretax income of $6.9 million in the year ago quarter.

  • A primary factor that contributed to this loss was a $5.1 million decrease in revenues due to the current quarter effect of SEC staff accounting bulletin 109 which changed the way revenues on mortgage loan sales are recorded.

  • 89% of our mortgage companies business was captive during the quarter.

  • And in the quarter our company wide capture rate was approximately 65%, our average FICO store was 712, and our average combined loan to value was 92%.

  • Our product mix in the quarter, was essentially 100% agency eligible, with government loans accounting for 65% of our volume.

  • Stacey?

  • Stacey Dwyer - EVP, IR & Treasurer

  • We received a federal income tax refund of $621.7 million in December of 2008.

  • We expect to receive the remainder of our income tax receivable currently estimated to be $55 million in our fourth fiscal quarter.

  • Our net remaining deferred tax assets of $213.5 million, are expected to be realized through net operating loss carry backs to tax year 2007, based on projected tax loss to be incurred in fiscal 2009.

  • We expect this will result in an additional tax refund in the first quarter of fiscal 2010.

  • Our reported net loss for the quarter was $62.6 million or $0.20 per share compared to a net loss of $128.8 million or $0.41 per share in the prior year quarter.

  • Excluding current quarter charges our home building operations were close to break even this quarter.

  • Don?

  • Don Tomnitz - President & CEO

  • Our overall inventory decreased by approximately $200 million during the quarter.

  • We reduced our total number of homes in inventory to approximately 10,700 units, down 14% from September.

  • We also reduced the number of speculative homes in inventory to approximately 6,200 homes of which 3,300 were completed.

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

  • Our land and lot acquisition spending remains limited and we continue to re-evaluate our land development plans based on current sales trends.

  • We expect to spend less than $500 million in fiscal '09 on land and lot acquisition and land development expenditures.

  • Bill?

  • Bill Wheat - EVP & CFO

  • Our supply of owned land at December 31, 2008, was 97,000 lots down 32% from a year ago.

  • Our 97,000 owned lots represents a four year supply based on trailing 12 month closings.

  • We plan to continue to reduce our homeland and lot supply in line with our expectations for future home sales and closings.

  • We control an additional 22,000 lots through option contracts, which is includes 6,800 lots for which we do not expect to exercise our option, for the contract has not yet been terminated.

  • Our net earnest money deposit balance at December 31, was approximately $23.2 million, on a net remaining purchase price of $419.6 million.

  • 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?

  • Don Tomnitz - President & CEO

  • Our income tax refund, combined with our reduction in home building inventory and mortgage loans held for sale, helped us generate $818 million in operating cash-flow in the quarter.

  • We have generated positive cash-flow in each of the past ten consecutive quarters, for a total of $4.9 billion.

  • We plan to continue to generate positive operating cash flow for the remainder of fiscal 2009, in addition to any income tax refunds.

  • We utilized $278 million to repay debt during the quarter, resulting in a $1.9 billion cash balance at December 31.

  • Stacey?

  • Stacey Dwyer - EVP, IR & Treasurer

  • In the first quarter, we repurchased a total of $136.1 million of our outstanding notes prior to their maturities for a total purchase price of $129.7 million plus accrued interest.

  • As of December 31, we had $467 million remaining on our debt repurchase authorization.

  • Subsequent to December, we redeemed the remaining outstanding principal amount on our 5% and 8% senior notes of $460 million which became due on January 15 and February 1 of 2009, respectively.

  • At December 31, our home building leveraging ratio net of cash, was 35.5%.

  • Well within our target operating range of less than 45%.

  • We had no cash borrowings outstanding on our home building revolver at quarter end.

  • As a result of the inventory reductions we achieved during the past two quarters, our borrowing base availability, as of December 31, was $15.1 million.

  • We expect that our availability next quarter will increase as our outstanding debt will have be reduced by our notes that we were paid in January and February, totaling $460 million.

  • This increase will be offset by the effects of any inventory reductions next quarter.

  • With our substantial cash balance and our planned additional positive cash flows from operation, we currently do not anticipate a need to borrow from our revolver during fiscal 2009.

  • We were in compliance with all of our home building covenants at December 31.

  • We had a cushion of approximately $560 million on our tangible net worth covenant and our leverage calculation under the facility, was 44% at December 31, compared to our maximum allowable leverage of 55%.

  • Don?

  • Don Tomnitz - President & CEO

  • In conclusion, our industry continues to face many challenges, high levels of both new and existing inventory, increasing foreclosures, tight credit for our home buyers, low consumer confidence, increasing unemployment, and continued pricing pressure.

  • However, in spite of these head winds facing our industry, D.R.

  • Horton is in a solid position to weather this downturn and be in a preeminent position to capitalize on the eventual housing recovery.

  • Our balance sheet is the strongest it has ever been as reflected in our cash balance of $1.9 billion and our improved net home building leverage at 35.5%.

  • We will continue to reduce our own land and lot positions.

  • We will continue to adjust our homes in inventory to meet current and future demand levels.

  • We will continue to focus on returning to profitability by repositioning our product and targeting the entry level home buyer, aggressively reducing our SG&A costs and continuing to negotiate lower construction costs.

  • We would like to once again thank our DHI team for their efforts and for their perseverance through this difficult housing environment.

  • You continue to outperform the competition especially in the key areas, sales, closing, SG&A, free cash-flow, and leverage.

  • D.R.

  • and I continue to spend 90% of our time on the road, with you, in your divisions and in your subdivisions.

  • We extend our heartfelt appreciation for an exceptional quarterly performance and look forward to continued improvements in the quarter ahead.

  • We were close to break even in Q1, and leave no doubt, our goal is to achieve break even and return DHI to profitability.

  • This concludes our prepared remarks, now we'll host any questions.

  • Operator

  • (Operator Instructions).

  • And the first question is from Michael Rehaut from JP Morgan.

  • Your line is open.

  • Michael Rehaut - Analyst

  • Hi, thanks, good morning, everyone.

  • Don Tomnitz - President & CEO

  • Morning.

  • Michael Rehaut - Analyst

  • First question just on speck and orders during the past quarter, you continue to do great reducing your homes under construction and total specks but the completed specks are now up for a couple of quarters to I guess -- from 2,900 a couple of quarters ago now to 3,300.

  • So, just wanted to know what's going on there and obviously its a -- still a huge focus, what your goal for that number might be.

  • And if the orders, still being down in the mid-30s despite an easier comp in 1Q '08 that you faced, if a -- kind of a -- lower than expected orders had anything to do with that?

  • Don Tomnitz - President & CEO

  • Well first of all let me be frank our decrease in orders we're very proud of relative to the competition.

  • Its not a figure that I would ever say I thought I would be proud of in the past but relative to our competition, Mike, it certainly is an outstanding performance.

  • Secondly we continue to have the right number of specs available in our subdivisions to meet the buyers who are coming in who are moving out of an apartment and have the down payment and/or who have sold their home.

  • We do have a concentration in a limited number of subdivisions, and a limited number of divisions where we have completed homes that we've had more difficulty moving than we thought.

  • Our focus is -- is to make certain that those limited number of subdivisions move those specs before fiscal year end.

  • And to answer your question in terms of completed specs I think the number of completed specs needs to be somewhere around in the 25% or 30% range as opposed to 50% range where it currently is.

  • And that's our goal by fiscal year end.

  • Michael Rehaut - Analyst

  • Okay, great, thanks.

  • And second question if you could just comment on some of the variation quarter-to-quarter, you know, 4Q '08 year-over-year versus 1Q '09, there were a couple of segments that kind of flip flopped positive to negative.

  • The Midwest was almost, you know, slightly positive in 4Q and then you had a bigger drop in 1Q '09.

  • Conversely, the west last quarter was up about 20% year-over-year and now it is down against actually an easier comp.

  • I was wondering if you could kind of give us some more granularity on the regional trends?

  • Don Tomnitz - President & CEO

  • Well, I think the Midwest currently is clearly in a weaker position, our sales in two of our key markets up there both Chicago and Minneapolis have been weaker than we anticipated.

  • Some of it may be due to the extraordinarily -- and I don't want to give you a weather report but, it has been a little frosty up there in this year and I don't think a lot of people are out looking for homes at 20 below in Minneapolis or 10 below in Chicago.

  • California which is our west -- I think California is still struggling although I will tell you from my perspective after having spent ten days out there two weeks ago, I think California, for us, should produce better in the future.

  • One of the things I noticed that our sales prices are at foreclosure pricing or slightly above, and I think we're better priced in California today than we ever have been.

  • And I think that's been a recent phenomena which should be reflective in future quarters.

  • Operator

  • And the next question is from Nishu Sood from Deutsche Bank.

  • Your line is open.

  • Nishu Sood - Analyst

  • Hi.

  • This is Rob (inaudible) for Nishu, actually.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Nishu Sood - Analyst

  • Recently we heard about a promotional event in Las Vegas geared towards competing with REO and whatnot.

  • I just wanted to see if you could tell us a little bit about the event and how successful it was and if you would be looking to implement that type of promotion in other hard hit areas like Southern California or Phoenix?

  • Don Tomnitz - President & CEO

  • Well, all of our promotional events obviously are available to our other regional presidents and division presidents.

  • And frankly what we had in Las Vegas was a -- we clearly took $33 million worth of impairments in the quarter in Las Vegas.

  • Bill Wheat - EVP & CFO

  • Right -- correct.

  • Don Tomnitz - President & CEO

  • And so, we positioned ourselves in January to take advantage of those impairments and to reduce our inventory in Las Vegas.

  • Frankly, we had more specs in Las Vegas then our trailing 13 week sales indicated we should have.

  • We had a -- we had obviously used a hollywood character as our -- as our spokesperson or basically we used him as our billboard person and I think it was very effective.

  • I happened to be out there with our division president, Jim Fraiser, on Saturday and driving through subdivisions.

  • And we had a tremendous amount of energy and a tremendous amount of traffic generated by this.

  • So, to the extent that it was as successful as it was, we probably will use it in some other areas.

  • But that's up to the respective regional presidents.

  • Nishu Sood - Analyst

  • Alright.

  • Great.

  • And given how aggressive you've been in taking advantage of the potential tax refund, if the look back period was changed, would -- I mean, would this cause another big year in terms of cash flow generation?

  • Bill Wheat - EVP & CFO

  • You know, if the carry back period is expanded to beyond the two year current period it would open up more potential carry back available to us for tax losses.

  • And -- however, you know, we would have to generate additional tax losses in order to take advantage of that, you know, given our current cash position, given where we currently are on our balance sheet, I am not sure that you would see any major change in any of our activities.

  • But it would provide some additional flexibility in analyzing any individual prospects that we want to sell anyway.

  • So -- yes --we're not definitely going to be forecasting any major changes in land sales if the tax law changes, but it would provide some additional capital for any sales that we do accomplish this year.

  • Operator

  • And the next question is from Dan Oppenheim from Credit Suisse.

  • Your line is open.

  • Dan Oppenheim - Analyst

  • Great.

  • Thanks very much.

  • I was wondering if you can talk about your view on debt maturities if you look out to 2010 would you think about repurchasing some of those maturities during this year?

  • Don Tomnitz - President & CEO

  • Frankly what we are focused on now, Dan, are our maturities which are maturing.

  • Clearly our other side of the issue is that we believe now is a great time to preserve our cash and continue to build our cash reserves.

  • So, our focus is to meet our current debt maturities and to continue to increase our cash position.

  • Dan Oppenheim - Analyst

  • Great.

  • Thanks.

  • In terms of looking at land we've seen some other companies form ventures do that.

  • In the past you have certainly not gone with the joint venture structure.

  • As you think about, sort of the capital constraint environment and going forward, would you think about doing -- finding some sort of structure that could work for -- for your -- for Horton that you'd think about?

  • Don Tomnitz - President & CEO

  • We're clearly focused on our strategy going forward and we're going to be an "asset-like" builder, moving forward.

  • And we are at -- frankly keeping our plans to ourselves and not making a lot of smoke and mirror statements about what we're going to do in the future.

  • Operator

  • And the next question is from Megan McGrath from Barclay's Capital.

  • Your line is open.

  • Megan McGrath - Analyst

  • Thanks.

  • Hi.

  • Good morning.

  • Don Tomnitz - President & CEO

  • Morning.

  • Megan McGrath - Analyst

  • Just wanted to follow up a little on what you said about the order trends, you know you were proud of your numbers, all things considered.

  • And we've heard from some other builders that the trends throughout the quarter and even into January changed pretty significantly as the quarter went on.

  • So, I don't know if you -- if that was the same for you and if you could comment on that?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Megan, what we basically saw during the quarter is stable sales in each of the months and what we've seen in January is a seasonal pick up in terms of absolute number of sales.

  • But the percentage decline that we experienced in the December quarter is pretty consistent with what we we continue to see in January.

  • Megan McGrath - Analyst

  • Okay.

  • So, on a seasonal basis, pretty similar?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Yes.

  • That was an absolute increase in the number of homes sold.

  • Megan McGrath - Analyst

  • Right, okay.

  • Thanks.

  • And just a quick modeling question, I wanted to follow-up on what you said on the financial services segment, you said there was a decline in revenue due to an accounting mix.

  • I assume that's behind the operating margin change, and what should we kind of look for going forward just to help us out there?

  • Stacey Dwyer - EVP, IR & Treasurer

  • The change, Megan, is essentially in how we recognize the service release premium and FAB 10 changes that so that you recognize it at the point in time that its lost or originated rather than when we actually sell the loan to a third party.

  • So, what you've seen is a change in the absolute level of the service release premium and a decline in the number of homes that we've held for sale from September to December.

  • In terms of modeling it, its going to be based on the current service release premium and the level of homes that we have mortgages locked for or which we hold the mortgage for sale.

  • And it will probably change relative to the home builders closing -- is probably the easiest way to look at modeling it.

  • Bill Wheat - EVP & CFO

  • Volume and then changes on the interest rate environment will also effect it.

  • In a declining interest rate environment you would typically see a hit against revenue and a rising interest rate environment, you would probably see some level of pick up against revenues.

  • Don Tomnitz - President & CEO

  • And just back to your sales number, notwithstanding the fact that it is a seasonally -- seasonal increase, we're very proud of our sales in January so far because it could have been a lot worse given where the economy is and the unemployment is.

  • So, we're very proud of our sales in January.

  • Operator

  • And the next question is from Kenneth Zener from Macquarie.

  • Your line is open.

  • Kenneth Zener - Analyst

  • Good morning.

  • Don Tomnitz - President & CEO

  • Morning.

  • Kenneth Zener - Analyst

  • Just wanted to follow up on some of your comments about the reliance on spec sale last quarter.

  • And obviously while you're declining your overall units of specs its still rising as a percent of backlog, and you guys said you were comfortable with that simply because you could gain the incremental sales and the cancellation rates lower.

  • Is that position actually increased now that you're actually improving your gross margin?

  • Are you more interested in specs even though you are bringing down the overall spec count?

  • Stacey Dwyer - EVP, IR & Treasurer

  • I would say that specs will continue to be a core part of our operations.

  • As we look at specs as a percentage of our inventory they're probably still a little higher than we would like.

  • So, you know, our target would be to work that back down closer to the 40% range in total inventory.

  • But we have historically always built specs, we think that does give us a competitive advantage right now in terms of having inventory available to compete the resales.

  • And I think you will see us continue to start limited specs.

  • Kenneth Zener - Analyst

  • And the margin that we're seeing between the specs and you know, units you're selling out of backlog, is that still pretty similar or is there a 300 or 400 basis point spread there?

  • Don Tomnitz - President & CEO

  • I would say to you that our specs do have a better margin than our inventory -- should are have a better margin than our inventory, simply because of the fact that we are taking advantage of lower cost.

  • Now, I am getting some people shaking their heads.

  • So, let the accountant speak.

  • Bill Wheat - EVP & CFO

  • Well, I mean, in general, the specs, when we are pricing our homes to the extent that, you know, someone is buying a spec and closing it, you know, in a short period of time, we certainly have more predictability as to what the margin is going be.

  • But overall when we are building our homes and setting the pricing for our homes there's not a significant difference between the margin levels on our specs and the rest of our inventory.

  • To the extent that a spec becomes completed and we are then, you know, more motivated to move that spec, then you'll see generally more -- more incentives on that inventory.

  • Stacey Dwyer - EVP, IR & Treasurer

  • And really to what Don was saying as well.

  • Homes that we're building today have a significantly reduced cost basis than homes that were started 6 months or even 12 months ago.

  • So, a spec that we start today may turn out to be very competitive with a build job that was started 3 months ago.

  • Don Tomnitz - President & CEO

  • And I guess to my point is, is that the reason that we're trying to decrease our number of completed specs is because we're trying to get new specs on the ground which have a combination of two things.

  • One, our lower lot costs, either due to a function of our impairments or because we've auctioned the lots that are better priced from a new seller and our lower construction costs in terms of both labor and materials.

  • So, the real key is, is how do we get out new cost structure on the ground, as quickly as possible, and capitalize on what I think it should, be higher margins in those units than what our existing specs are.

  • Operator

  • And the next question is from David Goldberg from UBS.

  • Your line is open.

  • David Goldberg - Analyst

  • Nice quarter.

  • Don Tomnitz - President & CEO

  • Thank you.

  • David Goldberg - Analyst

  • The first question -- Don, its a question on the homes you were talking about in California and how you guys have gotten your pricing down to for -- you know close to foreclosure levels.

  • Just wondering if you could talk about what the margins on those homes look like and what kind of product you're offering, relative -- maybe kind of size and amenity wise, relative to what you see in the foreclosures.

  • And how competitive you think your product is at that price?

  • Don Tomnitz - President & CEO

  • Well, I think that our pricing is competitive relative to the quality of product that's out there.

  • As I -- one of the things, that as I am out there traveling and D.R.

  • is out there traveling, is our sales people do have foreclosures that they can take our perspective new home buyer to and show them the difference between price and the quality of the foreclosure versus our price, which might be slightly higher but on an apples-to-apples basis in terms of the quality of the unit, they get a lot more for their money.

  • Secondly, they have a warranty and someone who is going to stand behind that.

  • And thirdly, basically buying a foreclosure, even though the quality of the foreclosures has improved, there's still a significant -- to most people, cash out of pocket to make that foreclosure livable.

  • So, add all those things up, I believe without a doubt taking those into consideration our product is priced very competitively with the foreclosures in California today.

  • David Goldberg - Analyst

  • And in terms of your profitability relative to -- to maybe some of your other products where you're priced a little bit more above the foreclosure level.

  • Stacey Dwyer - EVP, IR & Treasurer

  • We're designing the product, David, so that we can offer those at competitive prices and hit a margin that's acceptable to us.

  • You know, an acceptable margin today is at a minimum double digit.

  • So, you're seeing that and then you know, we're doing it with a reduced land basis so that we are able to meet the profitability requirements to start a new project.

  • Operator

  • And the next question is from Josh Levin from Citi.

  • Your line is open.

  • Josh Levin - Analyst

  • Hello, good morning, everybody.

  • Don Tomnitz - President & CEO

  • Morning.

  • Josh Levin - Analyst

  • You said that you plan to be cash-flow positive in '09.

  • And I wonder if you could flush that statement out a bit more.

  • I mean, thinking about worst case scenarios just because that's the environment we're in.

  • I mean, how bad would things have to get before you think you'd be cash flow neutral?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Well, its an interesting question Josh, because if things continue to get worse we will continue to reduce our inventory, we'll actually bring our homes under construction down, probably even more than we're planning to do today.

  • And you would actually end up with more cash-flow at the end of the year, if conditions continue to worsen.

  • Its counterintuitive to an extent, but at the point the market recovers, thats when we would be looking to put capital back to work and thats when you would actually see cash-flow slow down.

  • Josh Levin - Analyst

  • Okay.

  • Another issue -- about interest rates, when you're out in the field and you're talking to potential home buyers, do you get a sense that some potential home buyers are holding off because they keep hearing in the news that the government might sponsor an even lower mortgage rate?

  • Or is that just not an issue for them right now?

  • Don Tomnitz - President & CEO

  • Absolutely notwithstanding the fact that the people can qualify at the current interest rates, they have people talking about mortgage rates going to 4%, 2%, all that does is create doubt in the buyers minds.

  • We'd like to see the government sift through all of the alternatives and decide upon one, so that our buyers can have some confidence that when they go buy and take a rate, that it is a good rate.

  • Operator

  • And the next question is from Timothy Jones from Wasserman & Associates.

  • Your line is open.

  • Timothy Jones - Analyst

  • Good morning.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Timothy Jones - Analyst

  • One of your competitors indicated that in their -- recent quarter that they had cut their build time by 31 days and their cost per unit by 33% over the last year.

  • I'm sure you have been doing the some of the same stuff, but do you have any comparable figures like that?

  • Don Tomnitz - President & CEO

  • You know Tim, to be quite kind this morning, I -- at this stage in my life, I am so tired of the smoke and mirrors comments from our competitors, what we're focusing on is the results and I think you see this results for us this quarter.

  • So, yes, we've decreased the construction costs, we've decreased our construction cycles, but to put a number to all of that, is a bunch of hokey pokey.

  • Timothy Jones - Analyst

  • Hokey pokey.

  • huh?

  • Don Tomnitz - President & CEO

  • Whats that -- how can you -- not to get (riled) up this morning, but how can you prove ever -- how can you prove what they say is true?

  • Timothy Jones - Analyst

  • Well, I -- there's been more than one builder who had been talking about streamlining the productions and reducing costs per square feet and then, and build times.

  • Don Tomnitz - President & CEO

  • And we had some of our competitors, with what was the focus there for a while?

  • It was -- anyway.

  • I don't want to -- You have another question?

  • I don't want to even get involved in that.

  • Timothy Jones - Analyst

  • Calm down, calm down.

  • Bill Wheat - EVP & CFO

  • Tim, we're continually focused on improving our operations across the board.

  • Timothy Jones - Analyst

  • Okay.

  • The other question -- the other question is, and I agree with the comment made, this is an excellent quarter.

  • That -- but you, or the cynics say yes but you only took $56 million of write downs when one of your competitors is going to take ten times as much and they will -- they come back with that number that you're maybe being light on the write-offs?

  • Bill Wheat - EVP & CFO

  • Right.

  • Well, you do we recall what we did take in our third quarter and fourth quarter, they were substantial amounts.

  • One comment I would make is when we were determining our impairments for fourth fiscal quarter into September, we were performing those analysis during the months of October and November, which were clearly very two (inaudible) months in the economic markets and in the financial markets and in the housing markets.

  • And so a lot of the pessimism that was generated during that period was contemplated in our fourth quarter impairments.

  • So, really as we looked at it this quarter -- we looked, okay, how is the performance in each of our projects as compared to how we evaluated them as of September.

  • And to the extent that the performance was in line with that there was no impairment to be taken.

  • So, we took the ones that needed to based on the performance this quarter and where we expect your price willing be.

  • You know, looking forward it's all going to be a matter of where the market goes in the Spring and the Summer and where pricing goes in the Spring and the Summer, as to what future impairments will be.

  • And, we're not in the business of predicting where impairments are going to be.

  • Don Tomnitz - President & CEO

  • The words we are looking for are even-flow production -- I don't know who was talking about the even-flow production over the last ten years, but there were a lot of people talking about even-flow production and we've got it now as we said.

  • Thank you.

  • Operator

  • The next question is from Steven East from Pali Capital, your line is open.

  • Steven East - Analyst

  • Thanks.

  • Good morning, Don.

  • Don Tomnitz - President & CEO

  • How are you doing this morning?

  • Steven East - Analyst

  • I like the even-flow conversation.

  • That was pretty good.

  • Don Tomnitz - President & CEO

  • What about vertical integration too?

  • Steven East - Analyst

  • Well, I know it, I know it.

  • If you look at incentives, what's going on on levels -- what you're seeing today and you were seeing in the quarter, and compared to the past and mortgage buy downs and costs, et cetera.

  • How are you all looking at the entire incentive picture?

  • Don Tomnitz - President & CEO

  • Well, I will start and then Stacey can give you the real data.

  • But what we are doing in each one of our divisions, in each one of our subdivisions, is we're focusing on how many units that we want to sell and close in each one of those subdivisions.

  • So, we're focusing on our incentives to move that inventory and reduce our land and lot positions that we own so that we can continue to generate the free cash flow that we are telling everybody that we are going to do.

  • So, as a result, those incentives will change on a daily basis and they will change on a product by product basis and a subdivision by subdivision basis.

  • So, to give a specific number to that, all I can say is if you look at our gross margins, I think that our incentives are --.

  • Stacey Dwyer - EVP, IR & Treasurer

  • Yes, our incentives are fully reflected in our gross margins.

  • I don't think we're seeing the same type of increase in incentives year-over-year that we saw last year, compared to the previous year.

  • Its -- its hard to segregate everything though and actually try to break out a percentage.

  • But, no significant changes in incentive levels.

  • Steven East - Analyst

  • Okay.

  • On the mortgage buy down issue, you mentioned that of course everybody is sort of (inaudible) about whether rates are going to drop further and it make them sort of just tread water for a little bit.

  • Is -- does mortgage buy down become a bigger piece of the incentive puzzle for you all or not?

  • Don Tomnitz - President & CEO

  • It has -- as I've been in the field, I can tell you that when I was in California we had some people buying down the rate to 3.75% and that basically took us 3 points I think, to buy down to that.

  • So, people are sensitive to if the rates -- if they keep hearing that rates are going down they are becoming more sensitive to, you know I get a lower rate than the face rate that's being quoted.

  • So, it is becoming a bigger portion of our incentives.

  • Operator

  • And the next question is from Alex Barron from Agency Trading Group.

  • Your line is open.

  • Alex Barron - Analyst

  • Thank you.

  • Hello, good morning, guy.

  • Don Tomnitz - President & CEO

  • Good morning, Alex.

  • Alex Barron - Analyst

  • I wanted to ask -- I guess regarding lots, what percentage of your lots, I guess -- or communities are currently -- have gone through at least one round of impairment?

  • Bill Wheat - EVP & CFO

  • You know, that hadn't moved a whole lot since last quarter, roughly over all of our total inventory balance, its roughly, you know, in the 25% to 30% range.

  • And of course you have to keep in mind our geographic mix and our geographic mix is very heavy in south through Texas and the south where you haven't seen nearly the price declines that you've seen in some of the other areas.

  • For our -- of our total communities, we've impaired you know a little over 40% of our total communities company wide.

  • Stacey Dwyer - EVP, IR & Treasurer

  • And one other thing to keep in mind is that is our current communities we did execute some land sales and those projects would have also been impaired but those are no longer included in the numbers that Bill is talking about.

  • Alex Barron - Analyst

  • Okay, that's helpful.

  • The other question I wanted to ask on the -- well related to the impairments.

  • Do you guys have like a number of -- what previous impairments -- how they benefited gross margins this quarter?

  • Bill Wheat - EVP & CFO

  • Yes.

  • This quarter we had -- on the homes gross margin lines, since you are looking at the homes gross margin line we had $72 million that came through as a -- as a -- previous impairments that were related homes closed this quarter.

  • Operator

  • And the next question is from Jay McCanless from FTN Midwest, your line is open.

  • Jay McCanless - Analyst

  • Good morning.

  • Don Tomnitz - President & CEO

  • Morning.

  • Jay McCanless - Analyst

  • Wanted to ask about land purchases.

  • And I know that you're in the mood to conserve cash right now, but are there any areas of the county where you would consider adding to your land position if the terms were right?

  • Don Tomnitz - President & CEO

  • No.

  • Jay McCanless - Analyst

  • Okay.

  • Second question along with that, are you seeing anymore offers from the banks are they getting more realistic in what they're expecting to get for some of their land at this point?

  • Don Tomnitz - President & CEO

  • Yes, they are.

  • Pockets across the country where banks are now coming to us, clearly because -- one reason, we've got the cash to put the vertical construction on the ground which not many builders do especially the privates which have lost virtually all of their financing.

  • So, as a result we've become, in a number of markets, the banks are coming to us and asking us to work through their lot position (inaudible).

  • I guess back on the land position, we are looking at land deals from time to time, but the return on our land deals where we would have to cash out a land track are extraordinarily high and we would have to have return of our money within a very short period of time.

  • So, its a much lower risk profile today on a deal that we do than what we have done in the past.

  • Stacey?

  • Stacey Dwyer - EVP, IR & Treasurer

  • If its an option contract though Jay, you know we're certainly interested because that's something we can tie up with very limited earnest money and still have a lot position in front of us without actually bringing the land on to our balance sheet and using our cash today.

  • Don Tomnitz - President & CEO

  • We believe we're the builder preeminent builder in terms of our cash position to be able to help banks work their way through their lot position as we did in the late 1980s in Texas and in the late 80s in the Virginia, Maryland market.

  • And so we are in a good position I think to take advantage of those opportunities.

  • Operator

  • And the next question is from Carl Reichardt from Wachovia Securities, your line is open.

  • Carl Reichardt - Analyst

  • Hi guys, how are you?

  • Don Tomnitz - President & CEO

  • We're doing great.

  • How about yourself?

  • Carl Reichardt - Analyst

  • Fine.

  • Thank you.

  • Stacey I was curious about the -- I think we've talked about this before, the cost to complete and the 50 basis points improvement I think in March and I think it was improvement due to that -- is that -- that's accruals on projects going forward where, oh, it looks like the indirect costs are going to be lower than you thought.

  • I was curious what does that due to?

  • Is that just due to over accrual or are you seeing you know, cost to complete just come down more than you thought?

  • Bill Wheat - EVP & CFO

  • Yes, Carl.

  • I will take that.

  • Really every quarter, as we evaluate our development projects, we're constantly adjusting our estimates, what we expect the future cost to be remaining are.

  • For those, the changes that came through this quarter, really were reflected on projects that were closer to completion.

  • And we had some estimates in there, what we thought it would ultimately cost and ultimately our revised estimates are lower.

  • And so we have a credit thats coming through the P&L..

  • There's always some level of adjustment of these estimates every single quarter, its just that simply, at our lower volume of revenues that we have now, it actually had a little bit bigger impact on gross profit this quarter than it would have had in the past.

  • But the types of adjustments and the level of adjustments was not necessarily unusual versus and other quarter in the past.

  • Carl Reichardt - Analyst

  • Okay, alright.

  • Thanks, Bill.

  • Although I -- I know -- talk about community count.

  • But as you guys look at '09, what's your rough expectation of how much shrinkage you will have in the number of communities that you have available to you and have you seen community count decline about in line with our order pace or has it been slower or faster?

  • Don Tomnitz - President & CEO

  • Actually, I know this may come as a shock to you, Carl, but we're anticipating our community count to go up in '09.

  • Operator

  • And the next question is from Jim Wilson JMP securities, your line is open.

  • Jim Wilson - Analyst

  • Thanks.

  • Good morning everyone.

  • Jim Wilson - Analyst

  • Good morning.

  • Was wondering can you comment a little bit on what the margins look like in backlog, I'm just still trying to get you -- I've noticed you're not going to quantify the exact components of how you've improved the cost structure.

  • But just maybe a little comment of what it looks like currently in backlog and whats continued to filter through?

  • Bill Wheat - EVP & CFO

  • You know we did still see some price decline in our sales price this quarter.

  • There will continue to be some margin pressure going forward.

  • So -- and then its just a matter of then of what happens, you know, in the marketplace whether cancellation rates stay down in the 30s or wether they go up.

  • So, as we see our margins, we certainly have continued to reduce our costs, we're pricing our homes based on what our costs are to achieve margins like we reported this quarter.

  • So, from that standpoint, I wouldn't say our margins and backlog are out of line with where we are this quarter, but the market going guard is going to determine what we actually report as our margin results though, going forward.

  • Don Tomnitz - President & CEO

  • And by the way we're very pleased with our cancellation rate, especially as its stayed stable in the second two months of the quarter and down from the first month of the quarter.

  • That's one -- that's a positive sign to me.

  • Jim Wilson - Analyst

  • Yes -- no, definitely.

  • And then the other question would just be I know you talked on a little bit of regional color of sales, (inaudible) Texas a huge market for you and looked like you had -- at least your comp in the southeast was relatively flat obviously at a low level.

  • But can you comment kind of on conditions and how you're moving product in those markets.

  • Don Tomnitz - President & CEO

  • Well, first of all Texas continues to be a strong market for us.

  • I know people continue to question that and have questioned it for years.

  • But clearly thats where -- Texas is where D.R.

  • got his start in 1978.

  • And we believe we're in the best position in the key markets in Texas which include, Dallas, Austin, (inaudible) area, as well as down in San Antonio and Houston.

  • So, our margins are not necessarily void of competition in Texas.

  • Its become more competitive in Texas especially since the oil and gas boom has subsided.

  • But never the less, we're in a great position in Texas and we'll continue to have Texas contribute very strongly to our overall earnings for the year.

  • Operator

  • And the next question is from Lee Brady from Wachovia.

  • Your line is open.

  • Lee Brady - Analyst

  • Hello, everyone.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Lee Brady - Analyst

  • Morning.

  • On the gross margin, I wasn't sure if I heard correctly, I think you said there's a 70 basis point improvement year-over-year or 170 basis point improvement year-over-year on the average cost coming down.

  • And just in more detail can you give is that across all categories, being driven by land, material, labor, can you break that out a little bit?

  • Just where are you seeing an improvement recently?

  • Stacey Dwyer - EVP, IR & Treasurer

  • It was 170 BPS Lee, and its really across the board.

  • I don't have a specific break down for you by the different categories but you know, one of the things we were talking about earlier was we've continued to renegotiate both labor costs, material costs that go into the land.

  • We are seeing some benefit of previous impairments coming back through in that number.

  • So, all of those are combining to add up to the 170 basis points.

  • Lee Brady - Analyst

  • Okay.

  • On a -- on the borrowing base, obviously its fairly low, but you don't need it because of the cash.

  • And you have, it appears you have plenty of cushion in regards to the covenants.

  • Last quarter I think you talked about being in some discussions with the bank just looking at the facility.

  • Are you continuing to do that and -- or is it even necessary because of your cash position?

  • Bill Wheat - EVP & CFO

  • We're still in discussions and just kind of evaluating our -- our -- what our alternatives are.

  • We haven't -- we certainly aren't needing to borrow on it so we haven't been in any hurry but we are still evaluating our alternatives there.

  • Don Tomnitz - President & CEO

  • And really what we're focusing on is trying to negotiate a deal that is a good long term deal for us, simply because of the fact that we've got the time now and we might as well get the deal right and we don't need the banks right now but we certainly anticipate needing the banks in the future.

  • Operator

  • And the next question is from Giles Van Praagh from Atlantic Investment.

  • Your line is open.

  • Giles Van Praagh - Analyst

  • Good morning just a follow up on some of the regional commentary and the commentary about the impairment charges that have been taken.

  • As you noted to the question of how much has already been impaired, you highlighted the concentration of inventory thats in the south, which has been holding up better in terms of a pricing standpoint.

  • Just wonder if you could flush that comment out a little further along the lines of a current look if possible if prices continue to hold up okay or if they're getting better or worse or anything else on that front?

  • Bill Wheat - EVP & CFO

  • Well, if you look at our sales this quarter our pricing in the south central region was flat year-over-year.

  • Our volumes are down, our volumes have been down for some time just reflective of the -- primarily the tighter mortgage environment.

  • The pricing has held relatively flat.

  • We're reducing our costs in the south central region similar to other areas and so thus far our margins have not seen dramatic compression.

  • We do comment -- we do comment that we do evaluate certain projects in the south central region for impairments and so we will continue to do that.

  • But based on what we've seen thus far we would not anticipate, you know, those impairments to necessarily be -- you know, at least based on what we're seeing today to be material charges.

  • Giles Van Praagh - Analyst

  • Okay.

  • Thanks.

  • And if I could one other just a naive question from someone who's not as familiar with the industry as most of the people on the call.

  • But, in the beginning of the prepared remarks, you talked about, once again, on the impairment front that you had evaluated $1.4 billion for potential impairments and $1.2 billion was not impaired.

  • That $1.2 now that, I am sorry -- I don't know if there's more color that you can put around that this was -- these were properties that were sort of on the bubble and just made it or, is it safe to say that they're now -- you feel pretty good about them for at least the immediate future.

  • Bill Wheat - EVP & CFO

  • Yes, you know, there will be a mix of both.

  • There will be a certain amount of those that would be relatively close to the line, but there would be others that we took a look at that we would feel comfortable with.

  • I'm not sure I can put a percentage on that.

  • But you know, I would comment the indicators that we looked at that would comprise that $1.4 billion would be projects in which we're seeing margin declines, typically margins that would be at or near single digit range.

  • Thats when we would really start looking hard at a project or project where we've seen a substantial amount of volume decline such that we expect to have to reduce pricing in the future.

  • And so, we then look at the performance of the project or expectations for the project and then from that determine what level of impairment needs to be taken.

  • We did comment that on the $1.2 billion that we did not impair, about half of that are in the states of Florida, California and Texas.

  • And so thats where the concentrations are.

  • Giles Van Praagh - Analyst

  • Okay.

  • Thank you.

  • Operator

  • The next question is from Derek Landry from Morning Star.

  • Your line is open.

  • Derek Landry - Analyst

  • Morning, thanks.

  • I missed some of the earlier comments.

  • The DTA valuation allowance I have it about $20 million increase.

  • Is that correct?

  • Bill Wheat - EVP & CFO

  • That's about right, yes.

  • Derek Landry - Analyst

  • Okay.

  • One more -- .

  • Bill Wheat - EVP & CFO

  • Increase is (inaudible) $184 million.

  • Derek Landry - Analyst

  • How much?

  • Stacey Dwyer - EVP, IR & Treasurer

  • To 984 from 961.

  • Derek Landry - Analyst

  • Okay.

  • Real quick, is it likely that if you're not planning on taking much advantage of the five year NOL carry back, is it likely that its about $1 billion and your DTA will not come back onto the balance sheet then, you will keep that reserved?

  • Or is there some way, that it can come back on the balance sheet, even though you don't plan on taking much advantage of the NOL carry back?

  • Bill Wheat - EVP & CFO

  • Well, first we're not going to absolutely state that we would not take advantage of any carry backs.

  • Derek Landry - Analyst

  • I understand.

  • Bill Wheat - EVP & CFO

  • We're going leave our options open there.

  • But moving forward, assuming that we don't do any additional carry back, then we would have to look to our forward profitability because that valuation allowance would be recoverable through future profits, so basically over a 20 year period from the time the loss was incurred.

  • And so the way the process would work there as far as that coming onto the balance sheet in future would be first we have to achieve profitability again.

  • And once we've achieved profitability again we need to establish some reasonable trend and forward visibility of profitability such that we can justify saying we will be profitable for the foreseeable future, and at that point then we could start considering bringing back the valuation allowance back on to the balance sheet.

  • And whether it would be a portion of it or the entire amount would be determined based on how confident we are in the level of profitability in the future.

  • Derek Landry - Analyst

  • Right.

  • So, its basically no changes if the NOL carry back is increased for you guys.

  • Stacey Dwyer - EVP, IR & Treasurer

  • We would have to evaluate it based on our business plans at each quarter.

  • So, its kind of like Bill said, we don't want to say that there's no impact from that possibly.

  • But if there was increased carry back that we thought we would take advantage of we could reestablish the DTA for that portion.

  • Bill Wheat - EVP & CFO

  • If we projected additional tax losses greater than we currently can carry back.

  • Derek Landry - Analyst

  • Right, great.

  • Thanks.

  • Operator

  • And the next question is from Garland Buchanan from Babson Capital, your line is open.

  • Garland Buchanan - Analyst

  • Good morning.

  • Don Tomnitz - President & CEO

  • Good morning.

  • Garland Buchanan - Analyst

  • Hi.

  • Would you please break out backlog and finished lots not in backlog that are in residential land and lots, developed and under development?

  • Stacey Dwyer - EVP, IR & Treasurer

  • In the residential lots category, you will -- our backlog is going to be in the homes in process.

  • So, anything that's in backlog is already going to be included in that homes in under construction lots

  • Garland Buchanan - Analyst

  • Okay.

  • Okay.

  • And then are there any finished lots then within residential land and lots developed and under development?

  • Bill Wheat - EVP & CFO

  • Yes.

  • It would be any lots that are finished that we have not yet started a home under construction.

  • Garland Buchanan - Analyst

  • Right.

  • And what is that count?

  • Bill Wheat - EVP & CFO

  • We have roughly 30,000 finished lots are currently finished and are in that line.

  • Garland Buchanan - Analyst

  • Okay.

  • And could you please explain whats driving the increase in land held for development?

  • Don Tomnitz - President & CEO

  • Those would be basically additional projects that we have determined in the past -- over the past quarter that we have determined we are not going to proceed with development the next 12 to 18 months we would then re-classify that inventory into land held for development, generally out of the residential land and lot line.

  • Garland Buchanan - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • And we do have a follow up question from Michael Rehaut from JP Morgan.

  • Your line is open.

  • Michael Rehaut - Analyst

  • Thanks.

  • First question, just I guess off one of your comments to Carl about community count going up.

  • I was wondering if you could -- there's some laughter around that, but you know, I don't know if, you know you're serious or not or if you could just give a little bit more clarity to that and if that's a change from the last couple of quarters in terms of year-over-year, you know comparison or trends?

  • Don Tomnitz - President & CEO

  • We believe as I explained to a previous caller, Mike, that as the banks begin to bring some of their subdivisions to market, that we are in a (inaudible) position because of our cash position to be able to help them work through their land and lot positions.

  • And that's really the basis upon which that comment was made.

  • Michael Rehaut - Analyst

  • Outside of that though, and I know you don't give absolute numbers, but can you give us a rough idea of what your community count was year-over-year on average for 1Q '09?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Mike, its probably around 20%.

  • Michael Rehaut - Analyst

  • Of a decline?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Yes.

  • Michael Rehaut - Analyst

  • Okay.

  • Second question --

  • Don Tomnitz - President & CEO

  • Lets be clear about -- lets be clear about one thing.

  • We're not going to go buy pieces of raw land and develop those because as we told you our land and lot and development spend is going be less than $500 million this year.

  • So, really what we're focused on is helping the banks work their way through their land and lot positions.

  • Michael Rehaut - Analyst

  • Okay.

  • Thanks, Don.

  • Just a couple of more quick questions just for clarification, just a couple of numbers.

  • You know you said, I think in answer to my first question, that you hoped to get completed spec down to I believe it was 25% to 30% of total spec is that right?

  • And Stacey, you kind of then said a little bit later maybe its 40 -- a 40% number.

  • I was wondering if you could just reconcile that or how should I think about that?

  • Stacey Dwyer - EVP, IR & Treasurer

  • Sure.

  • Yes, Don's 25% to 30% is completed as a percentage of specs.

  • My 40% was specs in all stages of completion as a percentage of our total inventory.

  • Michael Rehaut - Analyst

  • Okay.

  • Don Tomnitz - President & CEO

  • Because the question, the question was centered around our 6,600 and our 3,200 or 3300 -- 6,600 specs and 3,200 or 3300 completed specs.

  • And I agree that number is higher than we'd like and we're focused on reducing that number.

  • Michael Rehaut - Analyst

  • No, no, no, thanks.

  • I just heard the in two different numbers I wanted to make sure I understood what you were referring to.

  • Lastly just on the, you were good enough to give -- I think it was Bill, the $72 million contribution from prior impairments, I was wondering if you could just give us what that number was last quarter if you have it?

  • Bill Wheat - EVP & CFO

  • For the fourth quarter?

  • Michael Rehaut - Analyst

  • Yes.

  • Bill Wheat - EVP & CFO

  • Yes.

  • In the fourth quarter, it was $144 million.

  • Michael Rehaut - Analyst

  • Okay.

  • Great.

  • Bill Wheat - EVP & CFO

  • Homes gross margin.

  • Michael Rehaut - Analyst

  • Right.

  • Thanks very much.

  • Don Tomnitz - President & CEO

  • Thank you.

  • Operator

  • Our next question is from Megan McGrath from Barclay's capital.

  • Your line is open.

  • Megan McGrath - Analyst

  • Hi, thanks.

  • Just a couple of follow quick follow, ups I'm not sure if you gave this before, sorry if you did, but do you have the absolute number of homes in inventory?

  • Don Tomnitz - President & CEO

  • 10,400.

  • Megan McGrath - Analyst

  • 10,400.

  • Thanks.

  • And do you know the number of spec homes that went through your closings in the quarter?

  • Don Tomnitz - President & CEO

  • By the way, its 10,700.

  • I apologize.

  • Megan McGrath - Analyst

  • 700, thank you.

  • Stacey Dwyer - EVP, IR & Treasurer

  • And your question was how many spec homes went through this quarter?

  • Megan McGrath - Analyst

  • Yes.

  • Stacey Dwyer - EVP, IR & Treasurer

  • Its hard to give you that exact number, Megan, because some of those would have specs coming in to the quarter and some of them would have been homes that canceled, that then became specs.

  • A number that we can give you is the number that we sold and closed in the same quarter and that was about 43% of our total volume.

  • Megan McGrath - Analyst

  • 43% of volume.

  • Okay.

  • And then one quick follow up, on the gross margin, given the big improvement that you had this quarter, I know you said some of that was due to mix to the southeast.

  • So, as you look at your backlog, do you feel comfortable with that level of improvement that you saw this quarter, do you expect it to stabilize?

  • How do you feel about that?

  • Don Tomnitz - President & CEO

  • Well, now -- by the way, that came from the south central (inaudible) -- southeast.

  • Megan McGrath - Analyst

  • South central, okay..

  • Don Tomnitz - President & CEO

  • And to answer your question very clearly we had a wonderful quarter with our gross margins.

  • We are dealing with the market on a day-to-day basis subdivision by subdivision and we would love to be able to have those same margins in the third quarter but its uncertain and we're just dealing with it on a day-to-day basis.

  • Megan McGrath - Analyst

  • Okay.

  • Thanks.

  • Operator

  • And the next question is a follow up from David Goldberg from UBS.

  • Your line is open.

  • David Goldberg - Analyst

  • Thanks.

  • Actually my follow up question was answered.

  • Appreciate it.

  • Don Tomnitz - President & CEO

  • Have a great day.

  • David Goldberg - Analyst

  • You to.

  • Operator

  • Your next one is from Alex Barron from Agency Trading Group.

  • Your line is open.

  • Alex Barron - Analyst

  • Yes.

  • Thanks.

  • I had a couple of questions.

  • One was I was interested in your comment about helping the banks out.

  • Is that basically like you're going to buy land from these guys?

  • Or is it going to work more like an option where they hold the land and you just kind of take down one lot at a time and determine, you know, if you're going to do that based on whether the house is profitable or not?

  • Like, what are you thinking -- ?

  • Don Tomnitz - President & CEO

  • Actually its going be on a division by division, subdivision by subdivision basis and our division presidents are out there, in their respective markets adding to their, their lot and land inventory as they see fit.

  • And its going to differ from Salt Lake City to San Francisco to Orlando.

  • So, its really going to be dependant upon what the banks are trying to do and whether it fits with our business model.

  • Alex Barron - Analyst

  • And my other question was given the -- even though you guys did out perform the other builders in terms of the sales rate I mean on an absolute level it still seems pretty low and much lower I guess than any of us probably thought things would get to.

  • I'm just kind of wondering, if the sales rate doesn't get better, what are you guys thinking in terms of -- you know, so that the SG&A doesn't go up a lot?

  • Don Tomnitz - President & CEO

  • Well, I can only answer your question this way Alex, and we've known one another a long time.

  • People have had doubts about us when we entered into the downturn whether we had the ability to cut the SG&A, whether we were too lean and didn't have much SG&A to cut.

  • And I can only tell you one thing, we are focused as a company from the 38th floor where the executives are all the way out to the division presidents in each one of our divisions, we are going to adjust our SG&A to meet the level of demand from our home buyers.

  • And to the extent that's less, then our SG&A is going to become less.

  • So, feel comfortable.

  • Our game plan is if you look at our reductions and our total SG&A dollars, quarter after quarter, year after year, over the past three years of this downturn, we have consistently decreased our SG&A on a quarterly and annual basis and will continue to do that.

  • Alex Barron - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Don Tomnitz - President & CEO

  • Yes, sir.

  • This concludes our -- are there anymore calls?

  • Any more questions?

  • Operator

  • We do have one follow up from Michael Rehaut again.

  • Don Tomnitz - President & CEO

  • Okay.

  • Operator

  • From JPMorgan your line is open.

  • Michael Rehaut - Analyst

  • Thank you.

  • I guess I tried to push my luck and get one more in.

  • Appreciate it.

  • Don Tomnitz - President & CEO

  • We're going to have to start charging you a consulting fee.

  • A little humor today!

  • Michael Rehaut - Analyst

  • Just on -- I was kind of -- different question though.

  • So, you know, more on the, you know, reasons for cancellation on that front, you know, if you could give us any sense of, you know, if financing, generally speaking, is the number one, two and three issue?

  • And you know even looking at it more granularly, among the people where you know you do get a cancellation because of the financing or not being able to secure mortgage, you know, how much of that is, is more because of the lack of the down payment or just that they don have certain, you know, income requirements for you know, the government loans?

  • Stacey Dwyer - EVP, IR & Treasurer

  • In terms of the reasons for cancellations Mike, its consistently financing as the number one reason.

  • You know, over the years some of the reasons for that has continued to evolve, you know we saw certain types of products just go away when we already had people in our pipeline and qualified.

  • Today, I think, the down payment continues to be a challenge for a lot of home buyers.

  • There is just continual tightening of credit standards across many of our markets and increased down payment requirements.

  • The government loans themselves -- the down payment only increased about 0.5% from 3% to 3.5%.

  • So, I haven't really heard too much there.

  • The elimination of the down payment assistance programs did certainly impact some level of demand.

  • In terms of affordability and it having being -- income being the constraint.

  • I think prices in many markets have adjusted so that affordability is not the same level of issue it was a year -- or especially two and three years ago.

  • Don Tomnitz - President & CEO

  • The primarily result, as Stacey says around the financing, is we have a lot of buyers coming in to our models they're satisfied with where the pricing is today, they want to take advantage of the low rates and they want to take advantage of the low prices and as Stacey said affordability is at the highest its been in the last 8, 10 years.

  • So, basically it gets back down to one thing.

  • Jobs and consumer confidence and those two things are working against the home building industry right now.

  • Michael Rehaut - Analyst

  • Right.

  • And I guess just on the comment that you know, credit is -- you know, the requirements are getting tighter, you know, I mean most buyers today from in terms of your market and the customer that you serve is either taking out a government or a conventional agency type of mortgage, And so, are those comments being directed, I would think more on the agency side, the (GFC) type of a mortgage?

  • And if that's true in terms of it being a tighter credit or a higher rate as they move more towards risk adjusted pricing, you know, why can't just go slip back for an FHA/VA or is that -- or is there a home price problem or an income -- debt to -- you know, some of the income ratio requirements that they just don't qualify for that either?

  • Stacey Dwyer - EVP, IR & Treasurer

  • I think most of our houses are priced so that -- the price point that we're offering doesn't limit the mortgage products that are available to people.

  • The credit tighten that I am referring to is just continual tweaks to a minimum FICO score, or the amount of down payment thats required on it -- and -- on a certain type of product.

  • The incremental changes that we're seeing on that front are greatly reduced from where they were.

  • Don Tomnitz - President & CEO

  • The one thing thats helping us, is that our mortgage company has a home buyers club.

  • And to the extent that there are qualification issues or credit issues or whatever -- basically these people that were enrolling on our home buyers club we find 6 months later that they are a buyer.

  • So, as a result, that's one of the ways that we're dealing with the tightening standards.

  • Michael Rehaut - Analyst

  • Okay.

  • Thank you.

  • Stacey Dwyer - EVP, IR & Treasurer

  • Thanks.

  • Operator

  • There are no other questions in queue at this time.

  • Don Tomnitz - President & CEO

  • Alright.

  • We want to thank you for joining the D.R.

  • Horton first quarter conference call.

  • I will end by saying to our employees who are listening, it was a wonderful quarter, notwithstanding the fact that we need to do better.

  • The bottom line is that you know what your goal is.

  • Your goal is to out execute the competition and take no prisoners, thank you very much.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.