Hovnanian Enterprises Inc (HOVNP) 2008 Q3 法說會逐字稿

Good morning, thank you for joining us. This is fiscal 2008 third quarter earnings conference call. By now, you should all have received a copy of the earnings press release. However, if anyone is missing a copy of the press release and would like one, contact Donna Roberts at 732-383-2200. We will send you a copy of the release and ensure that you are on the company's distribution list. There will be a replay of today's call. This telephone replay will be available after the completion of the call and run for one week. The replay can be accessed by dial ling 888-286-8010, pass code 56507648. Again, the replay number is 882-86-8010, pass code 56507648. An archive of the web cast slides will be available for 12 months.

This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will be making some opening remarks about the third quarter results, and then open up the line for questions. The company will also be web casting a slide presentation along with the opening comments from management. The slides are available on the investment page of the company's web site at www.khov.com. Those listeners who would like to follow along should log onto the web site at this time.

Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call, and to the information in the slide presentation.

I would now like to turn over the conference call to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Thank you. And thanks all for participating in today's call to review the results of our third quarter and nine months ended July of '08. Joining me from the company are Larry Sorsby, Executive Vice President and CFO, Paul Buchanan, Senior Vice President and Chief Accounting Officer, Brad O'Connor, Vice President and Corporate Controller, and Jeff O'Keefe, Director of Investor Relations

If you turn to slide number one, you can see that year-over-year comparisons for our third quarter in most key metrics were off from last year's third quarter. We gave all of this data, and a little more detail in our press release which we issued yesterday. So, as usual, I will not go over every data point but instead I'm going to focus on some of the key parameters driving our performance and talk about the current market conditions as well as our current initiatives.

The challenging market conditions continue and there is not yet any evidence of the overall housing market bottoming out. However, there are a few early signs of a market rebound in some individual markets that might end up proving to be the start of an improving trend, but it's a little early to say a recovery is underway. I will discuss some of those potential early signs in a moment.

The seasonally adjusted annual rate of national housing starts has been running at or above a million housing starts per year for the last eight months. This is similar to the trough levels seen in the past three downturns. We have a handful of communities outside of Texas that are doing well, but I really can't point to any one product type or price point that is out performing any of the others.

Today, in many of our communities we are still faced with the difficult trade off between pace and price. We lowered our sales price in many cases but our absorption levels for the quarter are still very low.

If you look at slide number two, our quarterly net contract pace per community was only 4.5 homes. That's about 21% lower than last year's third quarter. While net contracts were down 38% year-over-year, some of this decline was due to us having fewer communities open for sale. Our community count is down 21% year-over-year.

Keep in mind that our fourth quarter comparison is going the be very difficult because we sold about 1500 net contracts during our deal of the century sellathon last September. We are not planning on holding a similar national promotion during our fourth quarter this year.

Our third quarter sales pace is typically slower than the second quarter sales pace, even in robust years. If you go back to '97, we typically see an average of a 15% decline in sales pace from the second quarter to the third quarter. We had a 21% sequential drop this year in contracts per community, about 6% more than is typical. So the market is clearly continuing to be difficult and challenging and slowing down.

Low absorption levels, like those that we've experienced during this downturn, make it very challenging to staff our communities efficiently. If we are going to keep the doors to a community open, we need to maintain a certain minimal staffing level of at least a salesperson and a construction associate, even though that team may be capable of handling greater volumes. If it's logistically possible, some of the associates can be spread across more than one community. In our regional and divisional offices, we have likewise reduced our staffing levels. On slide three, you can see that the staffing levels were down through the end of the July quarter. At July of '08, we had a total of 3,075 associates. That's a 55% reduction from the peak in June of '06, and an 8% decline from April of '08. We will continue to right size our staffing levels to match the current business activity in each of our markets.

Even though our staffing reductions have been significant and our absolute dollar expenditures for SG&A for the quarter dropped 28% year-over-year, slide four shows that our total SG&A as a percentage of sales remains higher than normal. These higher SG&A percentages are a result of reductions in staffing, not being able to keep pace with the declining absorption levels, home price declines and the inefficiencies of lower sales per community mentioned earlier.

The slow sales pace and lower pricing have dramatically decreased our revenues and are adversely impacting our gross margins. Our gross margin has been in the single digits for the past couple of quarters, as you can see on slide number five. But for the third quarter our gross margin was up slightly compared to our first and second quarters of the year. Going forward, we do expect to see a slightly better mix of product delivering over the next couple of quarters, some lower priced land coming through, and increased reversals of impairments, all of which should help keep gross margins from trending in the wrong direction.

During the third quarter of '08 our home building cost of sales was reduced by $44.8 million from the reversal of impairments taken in prior periods. Operating profitability before impairments has been elusive due to the combination of lower than normal gross margins and higher than normal SG&A as a percentage of sales and our focus on cash flow over margins.

We've navigated downturns many times throughout our almost 50 years of operation. Typically we see increases in sales pace precede improvements in pricing. During the last 11 years, we have not seen third quarter contracts per community, as shown on slide number six, anywhere near the low levels that we are at today. A return to more normalized absorption levels would clearly be a sign that a housing recovery is underway.

We continue to see very high levels of existing home inventory. Slide seven shows that for the month of July, the month's supply of existing home sales stood at about 10.6. This is down slightly from the previous month's reported inventory of an 11 month supply. Even though we have seen higher levels of months supply of homes in the early 80s, the absolute level of inventory is at record levels. We need to work through this inventory in order to see some improvement on the new home sales front.

One of the factors that caused some markets to be better than others is the relative level of local market supply of existing homes for sale. Most markets are still dealing with substantially higher than normal resale listings. In order of worst to best, our California and California market remain the most challenged today. However, recently several of our northern California markets have begun to see an interesting trend develop. On slide eight, we show monthly resale listings, closed sales, and months supply in Stockton, California going back to 2006. This is a market that's getting a lot of attention as ground zero nationally for foreclosures. As a result, Stockton has been a very difficult operating environment for sometime now.

However, total listings appeared to have peaked in March of '08 and have been coming down since then. At the same time, the pace of new sales has risen. The effect of these two movements is that months supply is at 2.4 months. That's not only the lowest level we've seen in the past two years, that's a very healthy level even for the best of times.

Slide 9 shows sales volume and prices going back several years. Here we see that prices were sticky in the early part of the downturn, only reducing from $249 a foot to $217 per foot. What we see -- excuse me, as they were sticky, we see that volumes dropped. What we see more recently is that as prices of existing homes have finally reduced more dramatically, as you see on the chart there, from $217 a square foot in June of '07, to $123 a square foot in June of '08, the market then reacted very favorably to these reduced prices and we saw existing home sales volumes increase from a little over 1,000 homes in June '07 to 3,250 homes in June of '08, more than triple the previous year's sales volume.

We see similar trends in Stanislaus County. This county is south of Stockton. It's where Modesto is located. Modesto is another foreclosure hot bed. As you see on slide ten, total listings in this market appear to have peaked last summer, and have been gradually trending down since then. Earlier this year we also saw sales start to pick up. Once again, month's supply is moving in the right direction and we are at the lowest level of months supply since the beginning of '06 and, again, at what would be considered a normal healthy level of about a 5.3 months number of month's supply.

On slide 11, we see a similar pattern of pricing and sales volume in this county. The existing homeowners, or in many cases the banks, have dropped prices of the homes, and we are seeing sales volumes rising and inventory levels falling as a result. Clearly some of the movement in both of these markets are tied to prices on foreclosed homes being substantially reduced so that they are selling quickly. But if these trends continue and start to develop in other markets, and month's supply can return to more normalized levels and remain there, we could see some stability in these and other challenging markets.

Another market where foreclosures have not been as big of a problem as the two I just highlighted in California, is the Virginia market. This market currently has only a 5.6 months supply of existing homes, a dramatic drop from the last nine months in what would normally be considered a healthy level of existing home supply. As you can see on slide 12, this market has recently seen a decrease in listings, and an increase in sales pace. We've dropped prices in some of our communities here in order to pick up absorption rates, and it looks like existing homeowners have also finally dropped prices. And in this case, not as much due to the pressure of foreclosed homes.

While we are pleased with the trends in Virginia, I will note that the Maryland side of the DC market still has persistently high inventory with 9.4 months supply. So it's not all good news out there just yet. We are keeping an eye on indicators like the MLS listings in these markets, and it could provide a signal that the markets are finally starting to get back to more normal stabilized conditions in terms of the balance of supply and demand.

Moving on to Arizona and the Midwest, which have also been through some difficult times, these markets are operating at slightly better levels than California and Florida. Our operations in Carolinas are doing a little better than these. As of late, we have lowered prices in the Washington DC market, and took impairments there. The Northeast is still holding up better than most markets but they, too, have felt their share of pain in this downturn. On top of the list of relative performance today, our Texas operations are doing the best but even here we seen some weakness, particularly in Dallas.

Given the continuation of these difficult market conditions, our focus remains intense, and our cash generation is our number one priority. While we will sell a parcel of land occasionally, the best way for us to accomplish further inventory reductions and maximizing the cash generation, is to continue selling and delivering homes on the lots that we own. On slide 13, you can see the progress we have made to bring down our owned lot position, which is down 35% from peak levels, and our option lock position which is down 73% from peak levels. The reduced number of lots controlled is simply a function of purchasing a lot fewer lots than we delivered homes on. For example, at the end of the second quarter, we owned a little over 25,000 lots. During the third quarter we delivered about 2,200 homes, sold only about 40 lots. And offsetting these reductions we took down about 400 lots on existing options. This resulted in a net decline of 1,700 lots for the quarter.

The slight difference in our lot count is due to the lots where we delivered own-your-lot homes, in which case we never owned the lot, or construction to perm financing lots where the homebuyer bought the lot prior to closing on the home.

Our land option positions by segment have come down dramatically from 87,000 lots in April of '06 to a little over 23,000 lots at the end of July of '08. As you can see on slide 14, this shows our owned and optioned position by our six geographic segments.

On slide 15, you can see how our land position stacks up to those of our peers. It's sorted according to owned land supply based on trailing 12 months deliveries. Even at a 1.9 year supply, we still own more than land than we would like to right now, but compared to our peers we are in relatively good condition. The good news is that each quarter we work through more of our own land and we eventually replenish our land supply with lower cost land which we hope to do at the bottom of the housing cycle, and that will clearly help our gross margin increase to a more normalized level.

We also continue to bring down our level of investments in started unsold homes. You can see that on slide 16. As of July '08, we had a little over 1,300 started unsold homes. That's down 51% from the end of last year's third quarter. Based on our recent sales pace, this represents only a 2.6 month supply, and I'm happy to report, as I had mentioned earlier, our peers are also containing their unsold home inventory.

Our disciplined focus has lead to a sequential trend of lower inventory, as you can seel on slide 17. Here we show our investment dollars in inventory broken out to two distinct categories. Sold and unsold homes, which include homes that are in backlog, started unsold homes, and model homes, as well as the land under these homes. And, two, land, both finished lots and lots under development, which are associated with all other owned lots that do not have a sales contract and/or any vertical construction. We reduced our total dollar investment in these inventory categories by 40%, since our peak level in July of '06. And we plan to make further progress in reducing our inventories through the balance of '08 and again in '09.

Most importantly, these reductions in inventory have led to cash flow generation. As you see on slide 18, we generated $192 million of positive cash flow during the third quarter. Some of this was from an approximate $95 million federal tax refund that we received in July. We expect to once again generate cash flow in the final quarter of fiscal 2008, such that our home building cash balance at the end of October of '08 is projected to be about $800 million, an increase of approximately $125 million from the end of the third quarter, as you can see on slide 19.

In years past, land takedown had to get corporate approval at the time of our most recent budget update process. During '08 and '09, land takedowns still need to be approval during the budget process, but then have to be approved by me lot by lot prior to the actual takedown.

On slide 20, you can see that we do not have any debt maturities until 2010, and that is only a $100 million issue. After that, nothing comes due until 2012. We believe the capital markets moves that we made in May of '08 have put us on a solid footing to weather this downturn without having to go back to the capital markets to raise additional cash.

I will now turn it over to Larry Sorsby to discuss some of the charges we took in the third quarter, and some other topics in greater detail.

Thank you. I will start by talking about the land related charges we took in the third quarter. We walked way from 3,733 lots in the third quarter, and took a write off of $30.8 million related to these these optioned lots. Slide 21 shows the geographic break out of these charges which represent the amount invested in these options primarily through option deposits, but also in any predevelopment dollars we invested in getting this land through the approval process.

In our most challenging markets, we have significantly reduced our exposure to land options. 78% of our remaining lot, options are in our better performing markets of Texas, Washington DC, Northeast, and the Carolinas. For most of these options, the price or terms or both have been renegotiated. Many, in fact, have been renegotiated multiple times. Nonetheless, we are constantly reevaluating every lot option before exercise to ensure that the option take down makes economic sense based on today's home prices and absorption levels.

Our remaining investment in option deposits has also dropped dramatically from a peak of $466 million at the end of the second quarter of fiscal '06 to $96.4 million at July 08. The $96.4 million consists of $64.1 million of cash deposits and the other $32.2 million of deposits being letters of credit. Additionally we have another $113.6 million invested in predevelopment expenses on the lot options.

The next category of pretax charges relates to impairments. We incurred impairment charges of $80.1 million related to land and communities that we owned in the third quarter. This is significantly lower than the $226 million of impairment charges we took in the second quarter of '08. While the trend is positive, if home prices continue to deteriorate, we will see additional impairments in future quarters.

So far, we have mothballed land in 33 communities. The book value at July 31st '08, associated with these mothballed communities was $422 million, net of and impairment balance of $147 million. We mothball communities when we are currently unable to obtain a reasonable recovery of our land costs relative to our perceived long-term value. We will save that land until such time as the market improves and we can generate better returns.

Additionally during the third quarter of 08, we recorded $725,000 for our portion of impairments on land that is owned in joint ventures in Chicago and in Florida. Looking at all our communities in the aggregate, including mothballed communities, we have a book value of $2.6 billion net of $590.6 million of impairments recorded on 140 of our communities.

Turning to slide 22, it shows our remaining investment in land and land development by segment. Our total investment declined 20% year to date and totals $1.29 billion on a consolidated basis, July 31, 2008. There has been much discussion about how home prices need to drop more. Indexes, like the Case-Shiller Index, only track existing home prices. Last week even this index showed signs that month over month decreases in pricing were declining in several of the key markets that are tracked.

We agree that existing home prices need to come down more in order to clear out excess inventory. But how much more prices need to come down is very specific to local markets. However, new home prices have less need to fall compared to existing home prices as new home builders, including us, have been much more aggressive on dropping sales prices than existing home sellers were during the last couple of years of market correction.

On slide 23, we show an example of a community in Arizona and another one in California that were impaired in the third quarter because of recent price reductions. We test all of our communities at the end of each quarter for impairments, whether or not the community is open for sale. If we see further declines in home prices, we would expect to see further impairments in future quarters.

That leaves us with the last major area of charges for the quarter which is related to taxes and the FAS 109 current and deferred tax asset valuation allowance. We concluded that we should book an additional $98 million after tax non cash tax asset valuation allowance during the third quarter. While our tax asset valuation allowance charge was noncash in nature, it did adversely affect our net worth by $98.4 million during the quarter and $455.9 million to date. Hovnanian Enterprises, Inc.

The FAS 109 charge was for GAAP purposes only and is a noncash valuation allowance against our current and deferred tax assets. If you add back the impact of FAS 109 to our equity, our net debt to cap would have been 59.7% as of the end of the July quarter. This is a more accurate picture of our leverage compared to our peers because some builders have not had to take FAS 109 allowances simply because of the auditor that they use.

Let me reiterate what I said on our conference call last December. The FAS 109 tax asset valuation allowance is for GAAP purposes only. For tax purposes, our tax assets may be carried forward for 20 years and we expect to utilize those tax loss carry forwards as we generate profits in the future.

While I'm on the subject of our expectations to utilize these net operating loss carry forwards, or NOLs, and built in losses, let me take a couple minutes to discuss IRS Code 382 and our board's recent decision to adopt a stockholders rights plan in order to project the value of these NOLs.

While we were well aware of the fact that we could not go out and buy a company with NOLs and obtain the full benefit of those NOLs to offset our income, we were not aware until recently that there was a complicated calculation to that same 382 tax code that could significantly limit our use of NOLs and built in losses if we have a change in ownership, as defined by the tax code. Let me briefly explain the change of ownership component of IRS Code 382.

As a publicly traded company, the turnover of shares of our largest holders could severely limit our ability to use our NOLs and built in losses. If over a three year measurement period there is more than a 50% turnover of our outstanding shares traded by stockholders who own more than 5%, an ownership change is triggered under 382. Once triggered, we would be required to calculate our limitation on the use of NOLs and built in losses. The calculation takes the current market cap of our equity, and multiplies it by the federal long-term tax exempt interest rate which right now is about 5%.

Turning to slide 24, it illustrates an example of this calculation. In this example, our market cap is $500 million. If you multiply that by 5% you get $25 million. In this example, our NOLs and built in losses are $400 million. Under scenario one, if we make $200 million pretax during our first year of profitability, and our use of NOLs and built in losses is not limited, we would be able to use $200 million of our NOLs and built in losses and not pay any federal income tax. Therefore, our after tax income would be $200 million.

As illustrated under scenario two, using those same assumptions, if a change was triggered and our ability to use our NOLs and built in losses was limited, we would only be able to use $25 million to offset our pre-tax income, and we'd still have to pay Uncle Sam on the $175 million of pretax income, or pay him taxes of approximately $61 million. So that the second scenario does not occur, our board of directors felt it was in all shareholders best interest to protect this valuable asset and (inaudible) a shareholders rights plan.

If the stockholders rights plan was triggered by someone buying more than 4.9 percent of our stock, or by one of our current 5% owners buying additional shares, then each shareholder, other than the one who triggered the plan, would receive an additional share of stock for each share of stock they currently own. This would severely dilute the shareholder that triggered the plan.

The intention of the rights plan is to discourage anyone from making a trade that would potentially would cause us to have a triggering event under Section 382 of the tax code. Once again, the reason we adopted this plan is to protect the use of our NOLs and built in losses. The board's intention is to eliminate this plan once we use all of our NOLs and built in losses.

Now let me update you on the mortgage markets and our mortgage finance operations. If you will turn to slide 25, our recent data indicates that the average credit quality of our mortgage customers remain higher than national average with our FICO scores at 726, our average loan-to-value at 86% for the third quarter. Only 4% of our customers took out adjustable rate mortgages during the third quarter.

Turning to slide 26, we show a breakout of all the various loan types originated by our mortgage operations during the third quarter of fiscal 2008 compared to all of fiscal 2007. We continue to see our volume of FHA and VA loans increasing. FHA and VA now represent about 46% of our originations. As is the case with much of the industry, including our publicly traded peers, we had a fairly substantial percentage of buyers who utilize the FHA down payment assistance program. The down payment assistance programs were 16% of our loans for the first nine months of fiscal '08. This compares to 2% for all of fiscal 2007.

It's very much counted to the name of the housing stimulus bill. On October 1st, 2008, these down payment program, assistance programs, will be eliminated. What we don't know is how many of these buyers could have come up with the down payment themselves. My suspicion is that a substantial portion could have come up with the needed 3% down payment to qualify for a normal FHA loan. We are hopeful that the recently enacted $7,500 tax credit for first time home buyers will help fill some of the void from the elimination of the down payment assistance program. The down payment assistance was limited to 3% of the sales price. So as you can see on slide 27, for a $150,000 home, the down payment assistance would have been, only provided a $4,500 benefit. Now that same home buyer can get a $7,500 tax credit. That's a $3,000 difference for this home buyer.

The other benefit of tax credit is that it can ultimately be in the form of a tax refund where the home buyer actually gets the cash. With the down payment assistance program, the home buyer never actually gets the money. We admit that the timing difference between the cash tax refund and the down payment is a steep hurdle for some to overcome. However, we certainly believe there will be some significant portion of home buyers that will be able to greatly benefit from the tax credit.

Regardless of the exact impact, the pool of qualified buyers will be affected by the elimination of the down payment assistance program. Most of the homes in our backlog that are using the down payment assistance program have been approved at this point. Even though the availability of mortgage products has been sharply curtailed during the current housing downturn, we still have more mortgage products available today than we did six or seven years ago, but not as many as we did two years ago. The industry is going back to sound, reasonable lending practices. Buyers who have a decent credit history, can verify their jobs, and have the ability to make a modest down payment will continue to have no issues obtaining approval for loans.

On slide 28, you can see that our cancellation rate peaked during the four quarter of 2007 at 40%. It came down slightly in the first quarter to 38% and declined further to 29% in the second quarter of '08. It ticked back up during the third quarter of '08 to 32%. But that number was still below where it was during last year's third quarter.

Now I will shift to talking about joint ventures. At July 31st, 2008, we had invested $164 million in eight land development and ten home building joint ventures. Turning to slide 29, we have continued to maintain modest leverage in our joint ventures and have financed them on a nonrecourse basis. At the quarter end, our debt to cap of all our joint ventures in the aggregate was 46% better than our consolidated leverage.

We did not have debt arrangements at any of our joint ventures that would require us to provide equity capital beyond our initial commitment to our joint ventures in the future, and we don't anticipate for us to voluntarily invest additional cash to support our joint ventures beyond the amount that was budgeted to be vested by our partners. The majority of our joint ventures are in the advanced stages of development and thus the amount of budgeted equity investment has largely already been invested. In fact we expect to generate cash from our joint ventures as a number of them are in the wind down stage of delivering homes without significant additional development dollars needed. We report significant details on the balance sheet in profits of our unconsolidated joint ventures and our 10Qs and 10K, so you can look there for more details.

I will now turn it back to Ara Hovnanian for some closing comments.

Thanks, Larry. We haven't seen land prices on new deals that make economic since just yet. At some point soon, the banks will take on more real estate owned REO from the smaller billers. Obviously banks don't want REO and will mark down the land to levels that will allow them to move it off their books. This is definitely likely to be a greater factor in the next 12 months based on all of our current recognizance. This scenario will ultimately benefit the public builders because we could then buy land and build a home and generate a more typical appropriate margin, assisting us in getting back to operating profit more quickly.

We bought a lot of land from the RTC in the last housing downturn of the early 1990s. Looking back, I wish we had bought more. Today, we have more leverage than we are comfortable with and would not consider taking on more leverage to buy land. But one way that we will be able to take advantage of land prices that will inevitably present themselves, is to partner with a financial institution. Let me take a few minutes to update you on the progress we are making on forming such a joint venture with a financial partner.

We have spoken to many private equity shops and hedge funds about the prospect of forming a joint venture to buy distressed assets. We narrowed the field down to just a couple of firms and are very close to finalizing an agreement with one of these partners. The proposed structure would be similar to current and past joint ventures we have formed with financial partners, the summary of the balance sheets of which Larry just discussed. In this case, we would put up 10% of the equity and the financial partner would invest the remaining 90%. If the properties performed to pro forma, we would earn about 40% of the profit. If the market improves, thereby enhancing margins, our top tier of profit participation is 50%. Again, that's with contribution of 10% of the equity.

In the past, we have leveraged most of our joint ventures but never more than 50% debt to cap. Today the debt for real estate has all but dried up, so we intend to initiate the joint venture with no debt. At some point in the future, we may apply debt when terms make more sense than they do today, but I can assure you it will be applied conservatively.

The structure of our joint venture will be different than some of the deals announced by our peers over the last nine months. We intend to seed the joint venture with a handful of communities. We are not ready to buy new land today, but by starting off with a few communities, the reporting structure and relationship will already be in place, so when we do see opportunities to buy land we can move quickly.

We will not be optioning lots from the joint venture but will be marketing, selling, building and delivering homes in the joint venture. This is similar to the joint venture structure we have utilized with other financial partners. We report our contracts, deliveries and backlog from existing joint ventures on a quarter basis. We will continue to keep you updated on the progress and hope to be reporting a finalized deal soon although there hasn't been a great deal of urgency because we think the timing for buying land is still ahead of us.

Let me wrap up my prepared remarks by talking briefly about some of the larger forces and the impact on the home building industry and more specifically our company. If you turn to slide 30, the first bullet on the top left hand corner shows household formation data from the latest Harvard Joint Center for Housing Studies report. Based on demographics and actuarial studies, the think tank's estimates for the next decade is for growth slightly more than 1.4 million net new households per year. This is a slight increase over the past five years, since 2000, and it's a significant increase over the net new households created over the decade of the '90s which were about 1.15 to 1.2 million households per year.

Notwithstanding the very poor current housing conditions which causes a delay over the short-term in household formations, this coming decade is projected to have greater housing demand than we have seen in a long, long time.

Moving onto the next bullet, home building was, is and unfortunately will probably continue to be a cyclical industry. As a group, the home builders are repeat offenders of overbuilding and then as the market slows under building so that the market can absorb the overhang of supply. We don't know exactly where we are, but we are certainly near trough production levels of the past three downturns, and we also don't know how long we are going to stay near this trough but for certain, at some point, the industry is going to recover, and build homes to satisfy the needs of a growing number of households in this country. The housing population is growing in the United States.

Now on the center of the slide, once the cyclical trend reverses and we start to build more homes than we did in the previous year, it is likely there will be far fewer home builders around to take advantage of the upswing. Smaller builders around the country are closing their doors each day as the housing storm is crushing their weaker financial foundation, and there is no liquidity to be found in the market for home builders.

That's a good segue for our next bullet, liquidity. There is no doubt that this downturn has stressed our leverage. However,with the cash that we are generating, coupled with the steps we took back in May to raise capital through a bond offering and equity offering, we have the liquidity we need to weather this downturn and be positioned to take advantage of the eventual cyclical upturn.

And finally, franchise value. We have the infrastructure and franchise in place across the country to take advantage of the tremendous opportunities that will inevitably present themselves as the industry rebounds. On top of that, we will have the benefit of a huge net operating loss carry forward. Since we won't be paying any taxes for sometime, our pretax profits will quickly refill our coffers. When the market was strong, we made more profit in six months than the entire market cap of our company today. The market will get strong again, and as a builder of 50 years, we will get strong with it, and we will prove to be an exceptional value at today's stock prices.

That concludes our prepared comments for today. I will be glad to open up for questions and answers.

Thank you, sir. Ladies and gentlemen, the company will now answer questions. So that everyone has a opportunity to ask questions, participants will be limited to one question and a follow up. After which they will have to get back in to the cue to ask another question. At this time, we will open the call to questions. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Carl Reichardt with Wachovia.

Good morning, guys, how are you? I'm curious, Larry, if you can tell me, you talked about -- or actually, Ara, you talked about the minimal overhead to keep the store open. Do you have some numerics? Like, on average, what would be the normal fixed costs that you'd need to cover to keep your doors open? I know it's going to vary market to market but I'm just curious to get some numbers.

Well it's really not a matter of the velocity alone as to what justifies keeping a particular community open. It really has to do with the price versus our costs. The analysis we do is the lot's recovery. We look at how much of our investment we are able to recoup by moving forward and building a house, and if we don't recoup enough, then we consider mothballing the community, as we did with many, as we discussed during the call.

What I was referring to really had to do more with just the challenge when you have, for example, a typical construction individual and a salesperson that in normal environments, as they sit in a construction trailer and a sales office with a model complex, could, between the two of them for example, could easily produce, let's say, 30 homes per year, and instead at the moment they are only producing 15 homes a year. The challenge is you can't reduce more than one salesperson and one construction person. You still have to have the sales office and models and a construction trailer. So it makes SG&A a real challenge in that environment.

Nonetheless, as we do the lot recovery analysis, even though in that example SG&A would be virtually doubled from those two individuals, it still is typically well worth our while, because we are recouping some of our land investment and we are anxious, as you know, to burn through our land investment today which are at older prices and make room to refill our inventory position with new lower priced land.

Okay. Secondly on the concept of larger JV going forward. Would you consider, 10%, do you expect that to be cash or is that land in lieu of cash? And what kind of communities would you expect to contribute to a joint venture assistance?

First, the contribution of a few communities, and it's a small number, is really the minority portion of the venture we are establishing. The notion is just to seed it, get the relationship and reporting started, so that we can build a relationship to move quickly when we get moving going forward. There is a good chance that it will include some active adult communities, it's a small number. I'm talking about three or four communities we are going to seed it with. It's not that significant. There will be probably active adult communities which typically have more investment. It makes more sense because they have the clubhouse and recreational facilities as amenities, and those take some bigger dollars.

Just to put it into reference, what we are currently contemplating is less than $100 million of purchase price of our assets would go i to it. If you apply 10% to that, it's less than $10 million that we would put in in terms of our investment to close the deal. As Ara mentioned, our real intent here is to take advantage of opportunities at the bottom of the cycle. We are getting started with our own assets but the real purpose of the venture is to invest in new deals at the bottom.

I guess I should have mentioned the other part to your question, Carl. In the initial deal, as we sell these assets, to seed the deal, and let's use the round number of $100 million for ease, our equity contribution would be $10 million. But effectively, if you use that number, we would receive cash of $100 million as the venture would buy the assets from our company. That cash of $100 million would be able to fund our 10% investment on a billion dollars of acquisition. So the equity leverage power is huge.

And what's attractive to us, is that, as I mentioned, if we just hit our pro forma return, which when you're buying at the bottom of the marketplace should be achievable. And, by the way our plan is not to buy with the hopes that the market recovers. We plan to do the same thing we have done with every one of the other housing downturns over our 50 year history . We will buy when you can make an economic return right then and there with the current lousy prices and the current lousy pace. So if we make the pro forma returns on acquisition, we should get a number approaching 40% of the profits with only 10%. Obviously if the market improves and our margin does better we will get a greater percentage.

That is obviously something that's attractive to us and we think is an excellent financial model for our company. We are more highly leveraged and will likely be much more highly leveraged. We will probably end the housing downturn with a balance sheet that looks more like a private company did at the peak of the market. But we will have lots of cash available, and by using the joint ventures, the cash flow we will get will allow us to pay down our debt without using up our

I appreciate the color very much, guys, thank you.

Your next question comes from the line of Ivy Zelman. Please proceed.

Good morning, everybody. Ira, you point out some positives referring to markets in northern Cal, and Modesto and Stockton where the market's seen an improvement in existing home sales. Ironically, the increase in existing home sales is coming from foreclosures, and dominating markets as much as 50% to as high as 75% of those existing home sale increases. We know that through title companies and work we've done that half of those, and maybe even more, many are being purchased by investors. And the good news is that it's moving inventory. The bad news is that for every house that's taken off there is more in the pipeline to come. And the other bad news is taking share from your new home market, and your prices, although in many cases you may not be making money now, are likely to go lower because appraisals are coming in lower because the comparables are foreclosures.

So I'm really having a hard time seeing the light at the end of the tunnel that you seem to see. If you take out the foreclosure sale activity, which arguably, we could be creating another investors gone wild down the road, you're looking at primary sellers who are going to be looking at comparables significantly lower, and in many cases could be under water. As you refer to gross margin improving and going higher, I'm curious how are you going to do that as prices are likely to have to go lower because of the competition with foreclosures?

First of all, I tried to be careful to make clear that we thought it might be a glimpse of a early indicator. I'm far from popping the champagne cork at this stage. But what is important is to clear the inventory. And frankly, whether it's cleared through foreclosures, which are selling often through MLs or cleared through a normal nonforeclosure sale, the point is it's clearing the market. And that is an important fundamental step to take place. There are new foreclosures being listed. But, obviously, for outstanding listings to be coming down, that means more sales are happening each month for the last few months than new listings coming onto the marketplace. That's a healthy situation. What it is is a healthy trend. It's still a very challenging marketplace there, believe me. And we are not excited about it. But what it does do is start clearing the decks and getting to a more balanced market condition. It's an important first step.

In regard to the other point you mentioned, it is critical, it is true clearly that our pricing has been affected by the existing homes. What was interesting is that typically new homes sell at a premium to comparable existing homes. For a while, the public home builders lowered their prices more than the existing home builders were willing to lower their prices. It created this odd situation where new home prices were at a discount to existing homes. What we've seen recently, and a lot of that is thanks to competitive pressures from existing homes, they have finally moved prices down below, as well, and it's getting to a normal scenario. Nonetheless, that's obviously affected our pricing and has obviously affected our margins.

We are taking that into account as we are looking at our margins, and we're still comfortable with what we said in regard to the future margins. Frankly, part of that is also being helped by the fact that we have more impairments, which means in future quarters we will have a lower cost basis, and as those impairments reverse that will help the gross margins positively.

Just a quick follow up on that. Let's assume, unfortunately, the absorptions are at the lowest levels in your 50 year history on a per neighborhood basis. I think there are other builders. Obviously, you are not alone in your performance. From what we understand it's been a very tough summer. So we are hearing that some of the publics, which are looking at year end closings, are going to have to try to create a catalyst to sell more units. We are hearing many are going down again in price. And looking at your strategic position, realizing you also want to hit year end closings and you got goals and cash flow expectations, will you strategically do more promotion activity, maybe not the deal of the century like you did last fourth quarter, but will you look to stimulate your sales activity with more price cuts as others are already beginning to do?

We have only a month and a half left of our year end. A lot of that is in backlog. We are not planning, nor feel like we need to plan, for a lot of additional, anything out of the ordinary for what we have been doing in terms of promotions right now. And we have tried to factor in our absolute most recent current pricing into the impairments that we recently took. We are reasonably comfortable at this stage. Having said that, it's not an environment where we are raising prices very much. And it's clearly a challenging environment. But at this stage we are comfortable with the numbers we just gave.

Your next question comes from the line of David Goldberg with UBS. Please proceed.

Thanks, good afternoon. Actually kind of following up on Ivy's question. I was wondering if you could give us an idea, Ara, on the communities you pointed out where the average price has fallen and you've seen some pick up in terms of sales space. Maybe what you think generally that pricing looks like relatively to where new homes are pricing on a square foot basis. And then maybe also juxtapose that against your cost structure relative to maybe your raw material costs and what would be left to think about buying land and what you could pay for lots.

Okay. Obviously that's a difficult question to answer given that everything is so locally specific. But I would say, in those markets, I'm actually in California right now and I was just in northern California touring and analyzing several communities. And in those particular locations that I just viewed, the existing home prices per square foot in that particular county is basically, has finally come down to levels that are competitive with new home prices per square foot. They were very similar in that particular example to what we are offering. So that, I think, is what finally has prompted existing home sales in that location to start selling.

That's an important part of the marketplace because for somebody, for a home builder to sell a move up house for example, because not all of our homes are first time home buyers, our customers have to sell their existing home. So if there is finally activity in the sales of existing homes, that begins that food chain and then buyers can sell and hopefully move up to one of our homes. So pricing, existing homes were selling at a premium -- let me rephrase that. They were asking a premium price and there was very little velocity, they dropped their prices to the more appropriate and more normal relationship with new homes, and it is starting activity back up.

And then relative to the hard costs in the house, the actual construction costs?

In terms of the land or house?

The house itself.

Could you elaborate on the question? I'm not sure--

What I'm trying to get an idea of is, if you know that you're selling a house for $170 a square foot, what does it cost you to actually build the house on a square footage basis? What is left for your margin, to buy the finished lot itself or the raw land?

It varies dramatically from market to market. In some cases, for example the developed lot is 15% of the sales price in normal environments. And in another higher end market in California or northern New Jersey it could be 40% or even 45%. The construction cost would obviously be the corollary in that kind of relationship. I can say at the moment, typically speaking, new land, if you want to make a profit, a fair profit, at today's house prices, there are very few land opportunities yet that make sense. But this is typical in the cycles. We have been through so many of these.

I remember as recently as the '90s downturn, our last one, it took a while for land prices to come down to a level that made economic sense at today's level, factoring in the land price and also construction costs. But what it takes is for this last leg of the housing correction to happen, and that last leg is for more financial institutions to take over the land and then sell it to other home builders or investors, whatever the case may be. That last leg doesn't really affect house prices very much, but what it does do is make land available finally at prices that can make economic sense. And I don't think that's too far off.

Suffice it to say, David, what we would do if we saw an opportunity is we know what our current hard and soft costs are to build that house. We know what our current absorption pace is in that particular location. We also know what kind of return we would want to generate based on today's prices and paces. We would back in to what we could afford to pay for the land which is a significantly lower number than it would have been four years ago.

Thank you for the detail. If I could get one more quick question. [NO AUDIO]

Your next question comes from the line of Mike Rehaut with JPMorgan. Please proceed.

Sorry about that cut off, by the way. I think that was the operator, not us. Go ahead, Mike.

It wasn't me but I will take the question. Just I'd appreciate the detail on the DPA for the first nine months of the year. I was wondering if you could provide that for quarter by quarter in 1Q, 2Q, and 3Q.

I don't have it at right at my finger tips but we can get back to you on that. It did climb higher sequentially throughout the year. I just don't have the numbers off the top of my head.

If we could, I would love to circle back with you on that. The other question I have is when you talked about the tax credit, and you compared it to the down payment assistance. One part that was not mentioned was the fact that it's really a 15 year loan, and would be in some ways added to a person's debt profile and debt burden. I was wondering, number one, as yourselves and others in the industry make consumers aware of the tax credit, is that understood? And how does that or how, is that going to come in to the decision making process, and if you've seen any type of reaction by consumers, given that fact?

Certainly we make them aware that it is an interest free loan. And we explain to them in great detail how the program works. But the fact is that people want to buy a house and this helps them have the needed funds to pull it off. I think it's being favorably received. Would it be better if it wasn't a loan? Sure. But I don't think the fact that it's an interest free loan is going to make the program not workable.

By the way, I do not believe, although I don't think it's been completely crystallized, but I don't believe, because it's an interest free loan with long maturity, I do not believe that that goes in to the, at least in the interest payment calcs, on qualifying a customer. What is interesting also, is that while it is effectively an interest free loan, it's a lit bit better than that because if upon -- there is $500 a year repayment required starting in the third year. So you do get a couple of years of grace. But, the balance is due upon resale, unless the proceeds and the profit from the resale are not enough to pay it. Then it's forgiven. So it's not as good as an absolute credit.

On the other hand, it's not as bad as debt because it's interest free, nominal amortization, and in a bad scenario where you don't sell it for sufficient profit you actually don't have to pay it back. So there are some good features. And as we pointed out in the presentation, the down payment assistance can actually get you 100% financing on lower priced homes, as like the $150,000 price home we gave in our example, you could actually get 102% financing, so to speak, which we think would be enticing for customers. And that extra financing, again, is interest free, and potentially repayment free in a bad downside scenario.

You next question comes from the line of Dan Oppenheim with Credit Suisse. Please proceed.

Hi, this is actually Mike on for Dan. That question, on the same line, with down payment assistance going away, we've heard that in this environment it takes at least 30 days to get a loan approved with an appraisal. So, given that that needs to be done by October 1st, I've heard of two different things happening in August where one part seeing a tick up initially in buyers with rushing to get into these programs before they are eliminated. But then, as the month progressed, activity really dying off and starting to see the real impact of what is it going to be like once this program goes away since these loans that would be on contracts for the end of August and beginning of September would be, there would be a good chance they couldn't use the program anyway. Could you comment on if you saw similar things in August?

I don't think we've seen similar things things in August. In fact we have been pretty pleased with our recent, just the past week and prior couple of weeks to that have been good weeks from our perspective from a sales point of view. We didn't see any tailing off. It's still theoretically possible that it's still people trying to jump on the bandwagon before it ends. I don't have evidence that that's the case.

So no view of what the impact could be yet? It's still too early?

My suspension is that many of the people that were getting the down payment assistance program, to get the 100% financing, can actually come up with a 3% modest down payment that FHA's normal programs require. There will be some percentage of them that can't. But I think the vast majority can. I don't think the impact of the elimination of the down payment assistance program will be anything close to eliminating, in our case, I think we had 16% over the last nine months, the vast majority of that 16% would still be able to qualify for a loan.

Thanks, and just the follow up. On the joint venture, you mentioned that you had narrowed the list down to several finalists and were close to announcing one partnership. Is this something where you could potentially, this would be one of several that may be announced over the next few months, or is it just going to be one initially, and if just one initially, are you considering, if this is successful, doing more?

First of all, we literally, the interest out there of financial institutions, money managers, hedge funds, equity shops, et cetera, of investing with us was just enormous. Literally I think if we were interested we could have gotten a couple of billion dollars of commitment. What we have chosen to do is start with one fund and one relationship, and do basically one at a time and see how that relationship goes. We thought it's best not to do multiple funds simultaneously or multiple ventures because then you get into a question as to okay you get a land opportunity, which fund gets to buy it and did one fund get the good deals and another one get the bad deals. We think the appropriate thing to do is to do one at a time. The good news is the institution that we are about to finalize the deal with has a pretty big appetite. We feel pretty good about the opportunity. But the other good news is there are many others that are interested as well with significant investment dollars.

Your next question comes from the line of Nishu Sood from Deutsche Bank. Please proceed.

Thanks, hello everyone. I wanted to ask about mothballing. I imagine earlier in the downturn a lot of the communities you were mothballing were probably, hadn't opened the sales center yet or were maybe at a major break point. More recently we have been hearing in places like Bakersfield you folks are mothballing or curtailing construction even mid phase. I imagine that in that type of situation you're not even generating enough cash on each sale to cover your cash costs or your sticks and bricks. I wanted to ask how widespread this type of dynamic might be and what happens to the land in that type of situation. You would think that the land would need to be written down to if not a zero basis, nearly a zero basis.

First of all, you are correct that we have mothballed a community in Bakersfield, I think two of them actually. But it's not because the cash flow generation was at zero. It's just that the cash flow generation was just not sufficient, and basically what it meant is you were just not really recouping enough for the land investment. We felt we would be -- again, having gone through these cycles and not being forced to liquidate land on the basis that doesn't make economic sense, we said, hey, we'd rather hold on to this land, let the market recover, and ultimately the cash generation will be far better. So that's really a criteria. In none of the conditions have we gotten to a point of zero cash flow. We would mothball a community long before that.

And keep in mind, in the development, what is typically what we are seeing is you have some sections of lots, some are developed, some are partially developed, some are fully developed in one community which is already open. So you may complete a section and say okay, after this section I'm not going to continue on anymore sales, I'd rather hold onto the land. In terms of impairment, some of that is clearly occurring in land that has been impaired. So that is part of our impairment challenge and part of the impairment that we have taken.

Thanks. The other question I wanted to ask was about your backlog and cash flow. You have been converting your backlog at a higher pace this year than you have last year. Your backlog is down a lot, 58%. You mentioned you're not planning aggressive promotions, anything like a deal of the century. You've taken on the $600 million of debt at a higher interest rate. So factoring all that in, should we expect there to be a lot of pressure on cash flows, maybe cash flows wouldn't be anywhere near next year where they were this year?

I think one thing you need to keep in mind as you look at conversion of backlog is that we have a significant number, I think close to 1,500 deliveries from Fort Myers that was cash flow neutral this year, and, in fact, really didn't contribute, you really need to ignore that when you're calculating the backlog conversions. I don't think our backlog conversions are going be all that different going forward than it has been historically.

That was it, thanks a lot.

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

Good morning. To follow up on the prior question. On that $422 million, how much of it was land or the write down of 147, either way you want to do it? And how much was development, either land development or other amenities?

We don't differentiate or allocate the impairment to this type of inventory to the community as a whole. Impairment is on the community, made up of land, land development, home construction, whatever.

Yes, but it's mostly land, right?

It's allocated to whatever you want to first. It's really a judgment call. Argument that could be land. Developed land.

The second one would be, you had about $120 million rise in land and options held for future development or sale. Why did that go up? Did that include the $422 million or is that in inventories or somewhere else? What was that increase due to, then?

It's exactly what you just said. When the communities move into being mothballed, going to planning and move from active, so that's what is causing the increase.

Your next question from the line of Megan Mcgrath with Lehman brothers. Please proceed.

Hi, thanks very much. Wanted to follow up on some of your comments around gross margin. You talked about a few factors that would influence it going forward. Understanding that you don't want to give guidance, I'm just wondering if you could give us any more color on how much of an improvement you could see, what's the second and third quarter improvements, the scale of that improvement. Is that fair to assume going forward on a quarterly basis? Or could you see a higher jump as you sell off some of this impaired land?

You're trying to trick us into giving guidance. We can't go there.

The next question is going to be on your spec. We've heard from a couple of your peers that they're starting to feel a little bit more comfortable with the amount of specs that they're holding and may not be as aggressive going forward in trying to sell it. How are you on the scale of how you feel out your spec? Are you still being pretty agressive in trying to sell that down?

Obviously there's less of them out there now. We've made significant reductions over the past year, year-and-a-half, so reductions going forward will be much less. We really look at it on a per community basis. There's some markets where you have to have a couple (inaudible) homes per community in order to insure that you have products necessary to meet the demand of someone who recently sold their home that has to move out of their existing home and into the new home. I think it's safe to say that the reduction will be less than it's been over the last year or so.

We are at a point today where our inventory is not accidental specs, so to speak, that we have all of these unsold homes, oh my lord, we have to sell through these. We are consciously putting these specs up, as Larry said. What we are not doing is just randomly building specs. If we have three specs and sell two of them, then we will start two more. Because as Larry pointed out -- that's in a particular community -- as Larry pointed out, there are customers that are not signing a contract early in advance and going to backlog. They are waiting until they sell their existing home and then they have to move quickly to buy a new home. And that, by definition, has to be a spec because you typically can't build a new house fast enough. So we are keeping a certain minimal level of specs in the ground at all times. If you just look on a ballpark basis, we have 350 communities, and you want to keep three homes on hand that you at least started, then by definition you would have whatever that is, about 1,200 specs, plus you have models on top of that at all times.

And on a margin perspective, given that you've worked through most of your accidental specs, are they comparable on a gross margin basis to a to be built model?

I really can't comment on that. It varies dramatically. In some markets like Houston or even in some markets in southern California, most of our sales come about because we started it as spec. But I guess in general, I would say they are more comparable today.

Your next question from Alex Barron with Agency Trading Group. Please proceed.

Thanks, guys. I wanted to talk about your gross margins and your impairment methodology. I believe in the press release it said they were 3.5%, after interest expense. And I was wondering why, what is it in the impairment methodology that doesn't cause the margins to be higher at this rate, or, in other words, why maybe haven't the impairments been a little higher so that the margin would be higher?

One thing is for sure is that every community (inaudible) so If they have low margins they may not have triggered an impairment yet. We don't take that impairment. The other thing that can happen is even when you book an impairment, the margins could improve but we could have price declines since we recorded those impairments, but those declines have not happened enough to cause us a follow-on impairment. So it all depends on the community and the specifics with that community. Prices in some places, if you had taken impairments over the last two years, certainly some communities where we've taken impairments and prices have declined further since then but not enough to take another impairment. Some communities we taken a second impairment. It really is the mix of how those impairments are taken and where they are in relation to triggering another impairment.

But beyond that, the way the GAAP methodology works, typically when you do an impairment it doesn't bring the land or the asset value all the way down to a point where you're back to normalized 25% gross margins. It definitely improves and is definitely positive gross margins but they are much lower gross margins than what you would have in a normal marketplace.

Okay. My second question is on a slightly different topic. Given that your backlog is down significantly year-over-year and sales and everything, I was kind of curious why we haven't seen a comparable decrease in your accounts payable.

Anybody have a thought?

Before our financial people answer that, I will remind you one more time, as Larry pointed out earlier, a large chunk of our inventory reduction just during this current period, when you compare the first nine months or period now compared to a year ago, a lot of that was in Fort Myers where we had construction perms and they were delivered. And that definitely, while that was technically backlogged, that was very different from our normal backlog and had a very different impact on accounts payable. Brad or Paul, did you want to add anything to the accounts payable numbers? I know we have had reductions.

That may be something we can get back to him on. Nothing immediately comes to mind.

In that accounts payable number that's on the balance sheet, there are other liabilities impacting that, as well. Accounts payable by itself is down slightly from the last quarter and from year end, but there are other liabilities that were in there at year end as well.

Your next question is from the line of Joel locker with FBN Securities. Please proceed.

Just on the 23,100 option loss, what's your total dollar exposure including LOCs and preacquisition cost?

I went through that in my portion of the script. Let me see if I can get there again, Joel.

While you're looking for that, on the corporate expenses, it's been around $21 million for the last four quarters. Is there any way you can get that down? What is involved in most of that? Revenue has been coming down but that hasn't been coming down along with it.

Corporate is the harder number to reduce because we are still having to file appropriate SEC filings and that type of thing. So even though our business shrunk the work hasn't shrunk a whole lot at corporate. We are taking a hard look at it. We continue to try to right size corporate. At the same time we're right sizing our other business units. But it's a harder number to bring down.

As of July 31st, the deposits on letter of credit was $96.4 million, including $64 million of cash and $32 million of letters of credit.

Thanks a lot. Do you have the impairment reversal number for the third quarter?

$44 million.

Thanks a lot.

Your next question comes from the line of Vicki Bryan with Gimme Credit. Please proceed.

Good morning. I have a couple of questions, one housekeeping about your revolver. What was your available credit at the end of the quarter?

The $300 million facility, of which we had used -- what was the number for, anybody that? 217, 220, something like that, in letters of credit.

About the same as last quarter?

A little less.

To reiterate what we mentioned before, we are not really using our revolving, or line of credit for anything other than LCs. Our LC usage has been steadily trending down overall.

I see that. And then, my second question. I was noticing on your cancellation rates, you seem to be improving not just relative to 2007, but 2006, the last couple of quarters. I was wondering, with six weeks into this fourth quarter, have you see if you've got enough visibility to see that continuing, if it maybe has to do with that you're not doing big promotions in neighborhoods and so the quality of your orders is more stable? And what that maybe says about your backlog.

I don't think we are prepared to comment on our cancellation rates so far in the fourth quarter.. We will do that next quarter when it's over, Vicki.

Thank you.

Your next question comes from the line of Andy [Shaffer] with [Onyx]. Please proceed.

With respect to your joint ventures, is that going to be an open ended type of arrangement or will it be a set period where, say, there is a three year time frame for you to go out and purchase lots to develop. And then, depending on how you answer that, how do you decide whether something is better for the joint venture or for your base business? As the market improves and whatever you still have in your own inventory in terms of lots and options the value of that would tend to improve it. So it seems there would be a conflict of interest as you move forward with that joint venture.

First of all, we earmarked initially about a quarter of a billion dollars of equity for the venture, as opposed to a time frame. And our plan and agreement is that basically, so that there isn't a conflict of interest, we will offer all new acquisition opportunities above a certain minimal amount of several million dollars, anything of substance, we will offer to the venture first. Only after the venture would we -- if the venture declines, only then would we look at purchasing it on our own.

In other words it's a set total dollar amount and once the joint venture runs through that, you would have a decision to make with your partners as to whether or not you would continue it and re-up the funding.

Yes. Either we would re-up it. And, by the way, our partner initially wanted to do a much larger number but I think we both finally agreed let's get the relationship going and if things go well we will both be pleased to do it. But either we increase the initial funding if we go through that, or go and find an additional or new partner, or do some of it on our own balance sheet.

And so given, that you 10%, the $2.5 billion is what you're thinking about initially.

No, no. The 250 is not what we have earmarked. That's what we earmarked together with our partner. Ours would be $25 million.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Mike Rehaut with JPMorgan. Please proceed.

Hi, thanks. I just had a follow up. I was wondering if you could just hit on the cash flow generation. You're expecting to do about 125 in the fourth quarter which is, I believe, down from a year ago in contrast to the rest of the year having a better performance relative to '07. And so I was wondering, number one, why that is, and number two, if it just has more to do with the prior couple of quarters having such strong cash flow, or stronger cash flow. And looking in to 09, with backlogs, declines continuing to worsen, and now at around 60% if you look at backlog dollars, what we might expect for '09 cash flow being higher or lower than '08.

First, Mike, as you know, we are not projecting '09 cash flow levels, as is the situation with most of our peers. But in regard to fourth quarter cash flow, it will be our highest quarter cash flow. Sequentially our cash flow position has been better every quarter. It's not as big as the fourth quarter last year for two reasons. Number one, overall our deliveries and sales are down in '08 compared to '07. So I think it's natural to get a little less cash flow. Secondly we did a better job, as you know, generating cash flow earlier in the year and have a little more balanced and even year in terms of cash flow that we did in '07. In 07 it was really a fourth quarter act, and as we mentioned, this year we almost had almost $200 million just in the third quarter. So we have been able to balance the cash flow more evenly this year.

On the earlier part of that answer, Mike, Ara was talking about excluding the tax refund cash flow.

Thank you. That's correct. If you take out the cash flow impact from the refund, plus or minus $100 million, therefore the $125 million in the fourth quarter is going to be a greater number of cash flow, excluding that tax refund.

Suffice it to say, we remain laser like focused on maximizing cash flow every quarter going forward.

Just to follow up on that, in terms of cash out the door, land spend and development, I was wondering if you could remind us what those numbers were in fiscal '06 and 007, and what you believe they're on track to be for this year?

I don't think we ever provided a historical number for what we have spent for land and land development. So I can't give you that for '06 or '07. We don't have it for the remainder of this year available at our fingertips though it is something we are looking at potentially providing in the future but we're not in a position to do so now.

Suffice it to say, we are burning through a lot more land than we're buying, I think we gave you the example, we delivered about 2,200 homes, only bought about 400 lots. In locations where we bought lots, a lot of them were in Texas or North Carolina, which are very low land cost markets. In those markets we do a lot on the developed lot basis. So that is a big part of what is generating cash flow. We are simply selling a lot more land with a house under it than investing in new lots right now.

As there are no further questions in the queue at this time, I would like to turn the call back over to Mr. Ira Hovnanian for closing remarks. Please proceed.

Thank you very much. Obviously as you know, it's been a challenging marketplace, continues to be a challenging marketplace for our company and for the entire industry. However, there are a few early signs, not cause for celebration yet, but early signs that the market may slowly be getting into a better balance in terms of supply and demand. And that's an important first step to get to a more normalized market overall. We will continue to work hard for all shareholders and look forward to giving you an update on our next quarter. Thank you so much.

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating and have a nice day. All parties may now disconnect.