MDC Holdings Inc (MDC) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the M.D.C. Holdings 2007 third quarter earnings teleconference. (Operator instructions).

I would not like to turn the conference over to our host, Mr. Joe Fretz. Please go ahead sir.

Before introducing Larry, Michael and Gary Reece, it should be noted that certain statements made during this conference call, including those related to M.D.C.'s anticipated home closings, home gross margins, backlog value, revenues and profits, and responses to questions, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the company's actual performance are set forth in the company's 2006 Form 10-K and 2007 second quarter Form 10-Q.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G will be posted on our website, mdcholdings.com.

I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of M.D.C. Holdings.

Thank you, Joe. Good morning and welcome to M.D.C.'s 2007 third quarter conference call and webcast.

As most of you are aware, difficult conditions for homebuilding have intensified over the last three months. The well-documented fallout in the mortgage industry and the subsequent turmoil in the overall credit markets have weighed heavily on consumer confidence and the demand for new homes. We have continued to take responsive actions to sell homes at a pace permitted by this highly competitive environment. However, consistent with the first half of this year our primary focus has been to enhance our investment grade balance sheet, strengthen our financial position and improve the efficiency of our business.

During the third quarter we achieved a number of successes in each of these areas. Our centralized asset management committee comprised of senior officials of the company has continued to keep our land acquisitions to a small fraction of prior year amounts. Recently, we expanded the scope of this committee to scrutinize all cash outflows for land development and home starts. Their actions have helped us reduce the number of lots we control by more than 40% year over year and generate $740 million in operating cash flow over the last 12 months, including more than $130 million in the third quarter alone. As a result, our total cash on hand this quarter end rose to almost $730 million with no balance outstanding on our $1.25 billion line of credit. Our cash in available borrowing capacity has grown by 45% from this time last year.

Our approach to improving the operating efficiency of our business is twofold. First, we have realigned our organizational structure combining a number of operating divisions and lowering our employee head count by almost 40% from the peak levels. These rightsizing efforts enabled us to realize a 23% year over year reduction in SG&A in the third quarter. Second, throughout this downturn we have focused on making key improvements in our business that will believe will not only enhance our prospects for future profitability but also improve relationships with our customers and strengthen our subcontractor base. We have designed new products that better meet current buyer preference at a lower cost per square foot.

Our nationwide customer experience initiative remains a high priority with the objective of continued improvements in every aspect of the home buying process. We have attacked aggressively the cost side of our business, working diligently with our subcontractors and suppliers to unbundle our hard cost while tightening our processes for managing each phase of construction. At the same time we have continued to preserve the integrity of our brand as we position our company both financially and operationally for an eventual recovery.

Going forward we will continue to maintain the discipline and patience that our senior management has learned in leading our company through the past 35 years. With almost $2 billion in cash and available borrowing capacity, and debt and inventory levels among the lowest in the industry, we are confident in our ability not only to weather this downturn but also to emerge as an even stronger and better company when the demand for new homes rebounds.

I would now like to turn this call over to Gary Reece, our Chief Financial Officer who will describe more specific financial highlights of our 2007 third quarter.

Thank you, Larry. Just running through some of the numbers here, our net income for the quarter, our actual net loss was $155.4 million or $3.40 a share on revenues of $686.7 million. This compares to net income for the quarter a year ago of $48.7 million or $1.06 a share on $1.81 billion in revenues.

Our pre-tax loss for the quarter of $251.3 million is essentially comprised of the impairments and project abandonment costs that we recognized during the period of $254 million. The same is true for the nine months as a whole where we recognized a pre-tax operating loss of $566 million, comprised of $566 million of impairments.

In terms of the year over year comparisons, we are down year over year in terms of profitability primarily due to the impairments, as I said, but also lower closings, lower home gross margins, lower prices. And these declines were offset by lower SG&A costs. Also contributing to our low profits is lower earnings from financial services, primarily mortgage lending profits.

In terms of -- I'd like to come back to impairments and we'll discuss those in detail here in a minute. In terms of closing levels, we closed 1,963 homes in the quarter; this is down 34% from 2,955 homes we closed a year ago, really attributable to the fact that we began this quarter with a backlog that was down 36%. We did convert 48% of that backlog, which is up from 46% a year ago. All of our markets in terms of closings were down, but most notably in Nevada which was down 56%. California, as well as Colorado, was down 34%.

From a home gross margin standpoint, our margins for the quarter were 14.1%, compared to 22.5% a year ago. Margins were down pretty much across the board with the exception of Colorado and Delaware due to higher incentive levels and lower prices as well, which caused our land costs as a percentage of revenues also to increase by a couple hundred basis points.

Our average selling prices were down 7%; $331,700 on average for the quarter, compared to $355,000 for the quarter a year ago. Most of our markets reflected lower average selling prices, really Maryland and Arizona being the highest declines. We did see several markets show increases in average prices with Utah being up $42,000 per unit reflecting sales that occurred nine months to a year ago when market conditions there were stronger, as well as in Colorado which was up $56,000 per unit.

The SG&A declines were approximately 23%, as Larry mentioned. We had total SG&A in the quarter of $129 million. This is down almost $40 million from where we were a year ago with the bulk of the decline coming in relationship to commissions which are variable due to the decline in revenues, as well as declines on the G&A side.

If we look at our G&A for the quarter, total G&A for the company was $76.5 million. This was down $23 million, 23% from the $100 million that we recognized in the quarter a year ago. Most of this decline is really attributable to lower salaries, bonuses, and benefits that result from our rightsizing efforts; as well as our high efforts -- as mentioned in the press releases over the last year, we have reduced the number of active divisions across our company from 27 to 17. And so the reductions and costs related to that are also reflected here.

We look at financial services. As we mentioned, our financial services profits were down fairly significantly, approximately 60% from where they were a year ago, really attributable to lower mortgage lending profits which stem primarily from a lower gains in sales and mortgage loans. These lower gains were a result of the lower number of loans to sell, due to the reduced number of closings, the lower average selling price, and a slightly lower capture rate. In addition, we started selling our loans at a faster pace so we really significantly reduced the amount of time we hold the loans on our books, which produced a lower level of gains on the sales, but also significantly reduced our risk.

And that's a shift that continues to occur in our financial services area in the mortgage lending business. As we shift the risk profile of our portfolio from one that had a much higher level of all-paid product to this quarter, where 86% of the loans that we originated are prime loan products with the remaining 14% being government products; no Alt-A or subprime products initiated or originated during this period, and this compares to a year ago when only 60% of our product was prime and 35% was Alt-A.

We have seen our fixed rate product increase significantly. In this quarter 87% of the loans that we originated were fixed rate loans, and that's up from 83% in second quarter and up from 53% from a year ago. Also, the loans with seconds that we've originated this quarter; only 20% of the loans that we originated had seconds, compared to almost 60% a year ago. So as a result, our loan-to-value ratio has declined from very close to 90% in the third quarter a year ago to just over 82% in the current quarter.

Our FICO scores continue at very high levels, actually slightly above where we were a year ago in the low 730 range, and obviously, with the issues in the mortgage market, it's become much more difficult to originate mortgage loans on the jumbo side. From our standpoint, we've been able to find homes for the jumbos and as a mix of the loans that we've originated, jumbo product has continued in the 14% to 15% range, which is consistent with where we were a year ago. Now, today we do broker a larger percentage of those than we did a year ago, but we're still able to meet a substantial part of that demand.

We move back to impairments. We actually recognized in the quarter $249 million of impairments. 76% of that was in our Western segments in California, Nevada, and Arizona; with California being the largest piece of that, 33%; Nevada being 25%; and Arizona 18%. California really being in the areas we discussed last quarter, the Antelope Valley, the High Desert, southern Riverside County; up north in Central Valley, Fairfield, and Brentwood.

The other markets comprised 24% of our impairment, primarily Florida, Maryland, Chicago, and Colorado. All totaled, we impaired this quarter some 7,100 lots and 132 subdivisions. 73 of these subdivisions had been impaired in previous quarters. The pre-impairment value that was impaired was $1.1 billion approximately, and post-impairment, the value is $873 million. So the assets impaired, 22% of the value was impaired.

Up to this point we've impaired approximately 50% of our -- actually, in this quarter we impaired approximately 50% of the assets that we own. That included 60% of our land and about 35% of our work-in-process. Year to date we have recognized impairments of $551 million, and over the last five quarters we've impaired assets to the tune of $663 million. At this point, 55% of the 18,500 lots that we own today, that including lots owned as well as homes under construction, work-in-process, have been impaired over the last five quarters.

From an order standpoint, our orders were down as well this quarter some 42%. 1,228 net orders were taken, compared to 2,120 a year ago. The average value of -- estimated sales value of those orders is down 46% to $365 million, roughly, reflecting an average selling price of $297,000. That's on a net basis. Now the gross sales that were received that quarter were quite a bit higher than that and there is a mix issue that kind of gives rise to this answer, but that is the net effect of the cancellations, orders, and closings.

Our orders were actually down in all of our markets this quarter, except for Chicago and Virginia. Virginia was actually up 7% over last year on a net basis. The largest decline coming in Utah, down some 84% off of all-time highs we recognized in this quarter a year ago. We're also down in excess of 40% in Arizona, California, Nevada, and Maryland; and Maryland and California in particular have been impacted by difficulties on our buyers in attaining jumbo mortgage loans. Colorado is also down some 22%.

The can rate for the quarter -- the estimated cancellation rate was just about 57%, compared to 48% a year ago. However, as a percentage to our beginning backlog, the rate was approximately 40%, which is somewhat in the range of what we've been saying over the last several quarters.

Due to the lower orders, our backlog is down some 40% to 3,399 units with a future sales value of $1.2 billion. Every market but Chicago's down. The average selling parts of our backlog is $356,000.

The real progress made by the company, as Larry mentioned, is on the side of the lot supply, the balance sheet, the cash flow. On the lot supply standpoint, we continue to have one of the industry's lowest. At 17,420 lots we're down 45% from where we were at this point last year; owning 13,427 lots which is down 35%; and we have just under 4,000 lots under auction, which is 64% below where we were last year. Out of these 4,000 lots, we only have $16 million at risk and we have another $4 million in capitalized expenses as well that could potentially be at risk; so a relatively nominal risk with respect to our outstanding optional lots.

Our spec inventory continues to run at very low levels. We're right at 1,550 units, which is slightly above where we were in the second quarter, as well as slightly above where we were in the third quarter of last year. And we only had 493 finished specs in the whole company across all of our markets.

The next slide is a summary of our pre-cash flow. As you can see, this has been relatively significant in this quarter, as well as year to date. We had reduced cash from operating activities in the quarter of $136 million; that's compared to $70 million a year ago, primarily due to reductions in our land inventories and our mortgage loan inventory. We had generated free cash flow in the quarter of $118 million.

For the year to date, we generated cash flow from operations of $335 million; and over the last 12 months, as Larry mentioned, we generated cash flows of $740 million from operations. This cash flow has enabled us to strengthen our balance sheet. And our cash position -- our cash is up over 400% where it was at this time last year at $731 million, which has enabled us to increase our cash and available borrowing capacity by 45% to $1.96 billion from where we were last year.

We don't have anything outstanding on our homebuilding line of credit in terms of outstanding balances. The only debt outstanding is our public debt. And while our equity level has declined slightly, our debt to cap ratio continues to be one of the lowest in the industry. Including all debt and all capital, we stand now at 37%, which is only up slightly from where we were last year. And if we eliminate the mortgage debt and exclude the -- and net the cash against it this quarter, the ratio would be 0.13, as compared to 0.28 at this time last year.

That concludes our summary remarks. We'd like to open the call to questions, and again I'd like to just ask your indulgence as we have other calls for other builders today that people need to get to, to keep your questions to one question and a brief follow-up on that. And then if you could get back in the queue if you have others. And I'll be available to answer any questions for you if you want to call me later in the day.

Thank you. (Operator instructions). Your first question comes from Michael Rehaut of JPMorgan.

Hi. Thanks. Good morning.

Hi, Mike.

First question relates to the regions that you've been operating on, and if you could comment in particular in terms of the more challenged conditions over the last three months. Which markets have really slowed down incrementally the most in regards to that? I mean, I see that Utah has really fallen off and that obviously areas like California and Arizona and Nevada remain pretty challenged, but that's my first question. And in regards to that more difficult market, what you've seen in terms of incremental price deterioration.

Well, Mike, since you answered your own question, you can ask another and you won't be charged, and you won't be charged a question.

Okay.

Just kidding. I mean, the markets you mentioned are the markets that were most challenged. I mean, the level of impairments we talked about pretty much reflect what has happened in those markets in the last 90 days, and those that have the largest level of impairments have the largest movement in pricing. And so we have seen California and Nevada, and Arizona to a certain degree -- really California first, Nevada second, and Arizona third. Utah has started to experience some of the same symptoms that the other markets have, although we haven't seen any impairments there and we're still -- from a margin standpoint it has not been affected quite as much, primarily because they did not see the same level of price appreciation as the rest of the country, or these other Western markets, at least. But it has come off from its highs.

And Florida, it's been difficult for a lot of people and it's tough for us as well, but our exposure there is relatively limited.

Second question -- thank you, Gary. The second question just relates to the continued strong balance sheet and congrats on that. The question is with regards to what you're seeing out there in the market. You've mentioned that you one of the, perhaps some of the few builders that are knocking on doors in terms of land deals and seeing what's out there. And certainly, while maybe the price isn't right yet, could you talk about which markets perhaps you're seeing land prices come down the most, and with another kind of mid-sized private builder bankruptcy in Neumann Homes are there some deals coming out at the market right now that are what you would consider appropriately priced? Or how are you looking at that?

Mike, as you can see from our balance sheet, we haven't spent much in the way of land acquisition so far, even though we are on the hunt, actively on the hunt. I don't know that there's any market right now that -- certainly in the West that we've seen a significant enough movement to actually take any action. The few lots that we have purchased have come in Colorado, for example. Colorado's been difficult for a long time, but it hasn't deteriorated as much and there's still pockets of lots in great locations where it does make sense to buy. Same thing holds true in the mid-Atlantic region and in the Delaware Valley. Those markets have not deteriorated as much of late and so those are areas that we've seen limited amounts of opportunities. But at this point, it's been very limited.

One last question, if I could.

Thank you.

Follow up, Mike?

Our next question comes from Dennis McGill of Zelman and Associates.

Hi, guys. How are you?

Hi, Dennis.

My first question. I think, Gary, last quarter you guys had talked about the impairment benefit on the gross margin line being somewhere around 270 basis points, is that right?

I believe that's correct.

Do you have a comparable number this quarter and can you briefly explain what that represents and how you calculate it?

Well the -- I guess it's probably not -- and to back up a minute. The last quarter, we speak of it in terms of impairments related to assets that closed during this period that we had claimed previously. It's not really a benefit, necessarily. What we do disclose in the press release is the amount of the impairment related to homes that closed during the quarter, and that number is $36.4 million this quarter.

So that's kind of the root of my question. It's not necessarily a reversal; it's basically the amount that if you had not impaired any of the homes you had closed this quarter, your gross margin would be that much lower.

That's correct. That's correct.

Okay.

And it's related to homes that, had we not taken an impairment in for our quarters, we would have had essentially negative margins.

Right. Okay.

And that's the purpose -- that's the effect of the impairment.

Right. But it's not a reversal of a prior impairment; it's just the value that's flowing through.

That's right.

Okay. The other question I had, just thinking about your land position and assuming that in a lot of these markets you're not getting the adjustment on land prices that you would like, and eventually that's very likely to happen, but how long could you sit there in some of your markets, realizing you had a lead time of community plan and so forth, before you have to begin acquiring land again? Are you essentially protected through '08 and you could sit on your hands if you wanted to through next year?

Dennis, I'm glad you asked that question. It gets asked a lot when I talk to people and first you should understand that we don't have to buy lots, anytime, ever. We are going to buy lots when it makes sense in the market, when the price makes sense and the market conditions are right. Even though we're ready, willing, and able right now, the fact is that we have a substantial amount of lots that can carry us through in most of our markets next year.

We have over 13,000 lots and over 18,000 unclosed lots right now that we have to close houses on. And so in most -- some markets have more on a relative basis than others, but in those markets where we are running lower than others, we will only buy lots there when it makes sense and not because we need to maintain some level of presence. We'll continue to shrink it down. Everything is variable. And we'll right-size until that point in time when it makes sense to gear up again. I mean, at this point, if we had no lots there it still takes a substantial amount of time for us to work through what we have, and so our presence in most of these market is pretty substantial. We're not going anywhere in these markets for a while.

Thank you. Our next question comes from Dan Oppenheim of Banc of America.

Thanks very much. I was wondering if you can talk about the SG&A a little bit more. You talked about the decline you've done to help bring that down, but as you think about SG&A as a percentage of revenue, do you have any goals in terms of where you'd like that to be if we look out to '08 or the fourth quarter of this year?

Dan, we'd like it to be lower for sure. It's high and one of the reasons it's high is that when you unwind a number of divisions as we have, there are costs associated with terminations of leases, with severance related to terminated employees, and also transition costs related to combinations of information on our systems and making sure that we follow through and transition to the next level of activity in the right way and don't leave any stone unturned.

So during the transition period we are running at a much higher level than we believe is acceptable, and whether it's -- to peg a percentage for the next quarter or the next year is probably premature. All that we know is that we're too high and we know we're going to be lower going forward; we believe we will be because we have some costs that are hang-overs from actions we've already taken that will run their course for the balance of this year, and then we'll have a much cleaner looking company to begin next year.

Thanks. And just one follow up, then. In terms of the operation, what's your uptake for doing more on the pricing side just to adjust more to increase your revenue base here? I know, obviously, you work through land more rapidly there, but do you anticipate doing more to find the market and generate more orders there?

Dan, our goal is to continue to sell houses at a pace that is appropriate in the market. We're not in a position like some of our peers where there's a large backlog of inventory that needs to be worked through. We really don't have that inventory overhang and our goal is to maximize the profit that we make on a house, while at the same time taking whatever actions are necessary to sell houses at the same pace as our competition, whatever the market bears. We're not pushing to sell four a month in a market where all of our peers are selling two a month. We will price it to sell two a month.

Thank you. Our next question comes from Stephen Kim of Citigroup.

Thanks, guys. Good job, given the environment.

Thanks, Steve.

I guess I had two questions related to the land market, if I could. First of all, we see from some of the other builders that they are starting to look to sell some parcels of land, and at least we see something showing up in terms of the income statement so obviously they're selling some parcels here and there, although not many.

And so I guess my question relates to what you're seeing in terms of the counter parties, the ones who are looking to sell land; there's obviously builders to consider and then there are other entities. Given your position of kicking a lot of dirt and checking out the market, could you give us a sense for where you're seeing the -- what is the nature of the resistance to reduce the prices? And what, in your opinion, would it take or will it take for the land sellers, and you could talk about it by group if you like, to actually reduce the selling prices to a level that you think is appropriate in the market?

That's an interesting question, Steve.

What is causing the resistance is probably as much a function of not wanting to go too low too fast, maybe not enough pressure to take action at this point, and until they get pressure from their partners or their -- those that are financing them, maybe their motivation is in desperation as yet. And in this market, the prices have to go quite a bit lower to be attractive, particularly in the Western markets, in Nevada, Arizona, and in California in particular. So in terms of -- I think just pressure from the banks, pressure from their partners to liquidate, to monetize, to do something other than sit on the ground because nobody's a buyer.

You know, Steve, we've sold some land, too, here in the quarter. Sold a few lots in California and some lots in Arizona, but they were at pretty distressed prices and they were lots that had special attributes to them that would make it not feasible for us to proceed with any development or certainly try to build on those lots. And so we were -- somebody got a very good deal with us on those lots.

And so until these land sellers recognize they're going to have to make it worthwhile for the builders who already are flushed with inventory, most of them, to come off the fence and spend dollars, I don't know that it's going to happen.

Okay.

Steve, the -- I think you're going to see starting next year -- we forget that a substantial majority of all housing is built by non-public builders. And I'd say the non-public builders, as their interest reserves expire and as the private banks, the non-capital market financial sources recognize the conditions of the builder, then at that time we will see land opportunities. And the land opportunities, I would guess, will be more substantial as we go through next year and we focus on the fact that the regulators and the auditors need to mark to market for the non-public builders. And we always talk about the public builders, but there's -- probably most of the land is held in the non-public builders and the lenders to that market are just now dealing with those issues and those opportunities will take place, I would assume, some time next year. But that's just conjecture. It's all a matter of market forces and we're standing by.

Okay. I appreciate that. My next question on land relates to what you think might happen once some of those opportunities eventually do arise. Obviously if we went all the way back to 1990 or coming out of the last downturn, there were a number of years where you all were trying to tear down your inventory of land. Those days are well behind you now. As I look at it, ever since you got your land basis down so that really wasn't a problem, you kind of stuck to maybe a three and a half or less, really more like three or less years worth of supply controlled, if you use the trailing 12 month closing to the metric as a guide.

And my question is, when these opportunities do arise, can you give us a handle on maybe what your thinking is in terms of sort of an upper limit of years owned or controlled of land might be? Are you willing to lever up and to buy land if the opportunities are ample and plentiful to a level well beyond a three years owned -- controlled of land?

No.

Okay. I appreciate it.

It'll be less, not more.

Thank you. Our next question comes from David Goldberg of UBS.

Thanks. Good morning.

Hi, David.

I was hoping that as follow up on Steve's question -- and I realize it varies by region in the country, but how far away are land sellers from where you think would be attractive pricing? Maybe you could kind of give a range on how much more land prices need to come down from where they are today.

Substantially.

It's hard to give you a -- to peg it. In a lot of markets it's not even close and --

It's not just price. It's price and terms. And we believe there's a big difference between price and terms. Price is just one component and we'll see. As we've always operated with a little bit different paradigm, you should assume that we will also change how we deal with the market opportunities next year and going forward.

I guess my follow up question would be about any markets you're seeing where reducing pricing isn't stimulating demand, kind of no-bid markets, if you're seeing that. And if so, kind of how pervasive is that?

I'd say everything is responsive to pricing.

There is -- there'd be an odd community here or there that maybe you would experience that on a temporary basis, but pretty much we are -- the price adjustments that we make, we see the desired response.

Thank you. Our next question comes from Susan Berliner of Bear Stearns.

Hi, good morning. I know you guys are obviously in a great liquidity position. I was just wondering if you could help me. I know you haven't gone back to your banks and I was just wondering if you could kind of walk us through what your tangible net work cushion is now.

Susan, I know you're trying to be our straight man here today, but actually we did file an 8-K last night and included in that 8-K was our earnings release, as well as an amendment that we executed yesterday with our banks in regard to the tangible net worth test. Having -- it's something that was not -- obviously not required now. We had a substantial cushion; it's a number that we've not disclosed publicly. But what you can see relative to our shareholders' equity, which stands just above $1.8 billion, that we reset the floor for our tangible net worth test at $1.405 billion.

Okay.

And that's really the starting point. Obviously, tangible net worth is a little different from what our shareholders' equity is, but on a relative basis you can see a substantial gap there. And you should understand that the test -- this tangible net worth test to which the $1.405 billion applies, failure of that test does not result in a default under our agreement. It merely sets into works a term that occurs over an 18 month period.

Great. That helps a lot. Thank you. I'm sorry I missed that.

No problem.

Thank you. Our next question comes from Randy Raisman of Durham Asset Management.

Hi. Can you guys talk a little bit about sort of what you think kind of normalized gross margins would be in this environment? And then within that question I'd also like to kind of understand between the revenue line and the gross margin line, break out the components between how much of that cost is materials and labor, how much is land, and then whatever else may be buried in there.

Wow. That's something that maybe we'd want to talk about offline a little bit, if you want to give me a call later or I can give you a call --

Okay.

-- to get into much specifics. But in terms of a normalized margin, we have been hard pressed to really determine what a normalized margin is because there's such a large swing in terms of margins, and certainly we've experienced it over the last couple of years. Right now we're near the low end of where we've seen margins for our company. And so what's normalized? We've certainly taken steps to try to raise the bar on what that average might be when that averages out, but it is something that really is hard to -- it would be hard to quantify.

In terms of the margins, the values in between, our land costs is running right around 27% of revenues. The difference -- you've got some financing costs that run in the 1% to 2% range in terms of closing costs, and the rest of it is sticks and bricks.

And are those percentages of carrying ASP or percentages of peak ASP?

Current.

Okay. And then just one last question. Of the -- when you guys talk about your backlog of 3,399, how many homes do you have in WHIP right now?

We have 5,100 homes in WHIP right now, of which just over 1,500 are unsold.

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

Hi, Gary. Hi, Larry.

Hi, Tim.

Tim, how are you?

I'm fine. How are you?

Good.

Okay. A couple questions. One thing I've been asking to all the builders, can you give me what your total head count, and especially the head count from just the building operations as of now and what it was last year on both sections?

You're splitting it between the mortgage company --

Mortgage company and anything else, and the state building. I'm trying to get sales per employee and seeing who's doing what. Probably better on sales per employee on new orders, but --

Yeah. I don't have a breakdown in front of me, but we -- you know, in total we have about 2,500 employees right now.

Probably, what, about 350 in the title and so forth?

We've got our corporate employees, we've got the title company, we've got --

That's all included --

Not a lot there.

I include the corporate really with the builders, I think. Okay. And do you know what it was last year?

I'm sorry?

Do you know what it was -- was it down from last year?

Yes, it is. It was around 3,500, I believe, a year ago.

Okay. The other question is -- I'm sorry if I missed this; I was called off for about five minutes. But this reduction, which is pretty Draconian, of your divisions from 27 to 17, what happened to the other managers and how much did that cost you?

The other managers are -- I would say most of them are no longer with the company. We have -- and it's been a combination. As we grew, we not only had 27 divisions, we had 6 regions. So in addition to division presence, we had regional presence that as we've shrunk we've moved more to a structure that is more of a direct reporting relationship. We still do have several regional presidents that pretty much function not only as regional presidents but division presidents as well for certain divisions. And the division presidents for the divisions that are no longer there, those managers are, I'd say for the most part, are no longer with us.

Thank you. Our next question comes from Jim Wilson of JMP Securities.

Thanks. Good morning, guys.

Hi, Jim.

I think -- I mean, most of my questions have been answered, but I was -- take me through regional profitability. I know, obviously, if you x out the impairments, because they have a lot to do with it, where are margins still at reasonable levels? Or could you discuss them a little bit? Any parts of the country -- I'm thinking maybe coastal California or parts of Virginia, and what do those look like at the moment and maybe contrast with some of the poorer regions?

We really -- Jim, we don't -- we haven't disclosed margins by region. We talk about profitability and I think we do have --

Well maybe if you want to tell us where it is more profitability without tell us what the numbers are. That would be helpful.

Thank you.

Let me respond to Jim's question. Jim, I guess you could say that right now the greater level of profitability, excluding impairments, certainly is probably on a relative basis in our Mountain region, here in Colorado and in Utah. Utah still reasonably profitable, and Colorado has been holding its own. It hasn't deteriorated nearly to the degree over the last couple of years that we've seen in the West and the East. And the other markets are -- I would say California -- the Western region is difficult pretty much across the board, with California being the toughest. Nevada is still very difficult as well. And Arizona, there are certain parts of Arizona, Tucson in particular, that Tucson's not doing too badly; but Phoenix, certain parts of Phoenix, some of the outlying areas more difficult, and certainly Maricopa and Casa Grande, some of those outlying areas are very difficult as compared to some of the inland markets, or inner markets in that city. Maryland is also a market that has continued to do reasonably well relative to some of the other markets around the country. Does that help you?

Yes. That's great. All right, thanks.

Thank you. Our next question comes from Alex Barron of Agency Holding Group.

Hi, Gary. Hi, Larry. Some other builders have been talking about some communities being, I guess, priced inelastic, and I guess Larry, you said everything is responsive to pricing. So I'm just trying to understand what is your strategy when you start running into very few or no sales? You just keep cutting the prices, or what is sort of the minimum sales level you're trying to achieve?

Try to balance our assets with a reasonable degree of velocity predicated on the markets, and we found that price adjustment, incentive adjustment, product adjustment, and even sales personnel adjustment almost always has a positive result. And all these things are very, very intensely managed at the home office. We are very hands-on and we're analyzing on a continuous basis each and every subdivision.

And, Alex, the -- this is -- when Larry says it's being managed very tightly, we are looking at this all the time and the impairment process has brought a higher degree of sensitivity at this level in terms of what pricing is doing and what makes sense. When you look at what it takes to build a house in some of these communities and you run through a residual cash flow analysis, you see that in a given community here or there may produce a result because of competitive pressures that may be temporary in a particular submarket where continued reductions in pricing just don't make sense from a financial standpoint. You end up selling houses with a residual land value that's lower than what it costs to develop the lot, and it may lead you to a different conclusion on some of -- what you do with those lots, which was kind of the case with these parcels that we sold during the third quarter.

Now not a large part of our business, certainly, but certainly an example of what -- as these impairments have gotten larger the sensitivity that we have to these changes has led us to react differently than just, okay, let's keep lowering prices and selling houses at a loss. Sometimes it makes sense to do something with the lots themselves.

But if other builders are just lowering -- becoming more desperate because they've got liquidity issues, or whatever, I realize sort of what you're saying but, I mean, is there any other alternative to just trying to match what they're doing? Or is what you're saying basically just sell the land for whatever you can get for it?

Well I think one of the key elements in my earlier comments is we believe there's a value to protecting our brand. We're not the low-cost producer. We're not the mass-marketer. We believe that we have a reputation and an image of a quality builder and we intend to maintain that through this market period, and we've been very selective on how we handle everything. Since we don't have a lot of specs we're not forced to making decisions that are not in the interest of the company. As you can see, we've created a very substantial amount of cash flow from our management skills and we will continue to do that for the benefit of not only the short run of a large cash flow, but also with preparing ourselves for the future.

We commented on the programs that we have going on the customer initiative. We are very focused to make sure that our customers are leaving with a good impression, that we provide a better product, and that our operations are in a manner consistent with where we expect to be going forward, versus these current difficult conditions. But having been through this for about 35 years, this is just a little bit more rapid market adjustment than in the past, but it's well within our skill set and we expect to deal with it in a proper way.

Thank you. (Operator instructions). We have a question from Michael Rehaut of JPMorgan.

Hi. Thanks. Just a couple quick follow ups. First, on the tangible net worth, we appreciate Gary pointing out some of the details from the 8-K. You said that you reset the floor to $1.405 billion. What was the original floor? And you said that even if you fall below it, that doesn't represent a technical default.

Mike, the original floor was set in September of '05 at $1.36 billion, and of course it's been adjusted up from there based on earnings subsequent to that date, and proceeds from issuing stock, and things of that nature in accordance with the terms of the agreement.

So the new floor is -- from here on out it works off of the $1.4 billion, roughly?

Yes.

Okay.

$1.405 billion is the new starting point. And to the extent that we recognize profits in the future, 50% of that will increase it and the other terms will pretty much stay the same, including the $300 million available with respect to for repurchases of stock subsequent to September 30.

And if you have losses on a net income basis, do 50% of those losses get applied to the floor to lower the floor?

No, they do not.

Okay. And like you said before, you said that if you do fall below it does not constitute a default?

That's correct. If you fall below, it starts to term out of the facility over an 18 month period.

Okay. Second question, just on the SG&A, you mentioned in the beginning of the call that you had some good year over year declines in head count and that you've reduced the number of divisions. But I was wondering if you could kind of give us what you've done in this quarter from the end of Q2, what incremental have you done in the last 90 days and -- because what I'm trying to get at is that if there's any incremental benefit from the $105 million which you hit in the third quarter, which is obviously a nice reduction.

The changes that we've made, Mike, are not going to be -- even for some of the things we did in the second quarter are not going to be visible in their entirety until after the first of the year because we made the decision earlier in the year, even before this third quarter, to combine four divisions in Southern California into one. Over this last period of time we've spent the time vacating offices; that's something that we accomplished during the quarter which created certain lease termination costs. And there have been some people that have left. We've undergone a large conversion of our information base in that market into one new company, combined company. But a lot of these things throughout these markets are not going to manifest themselves until the impact of the severances have occurred, which were primarily targeted to the end of this year.

Can you give us an idea of perhaps what incremental savings you might be looking forward to in '08 versus '07 regarding the actions you've taken?

No, Mike. It's -- I can't put a specific dollar figure on it. I just know that all these things are -- they're somewhat diluted by the fact that our -- the cost of our project write-offs have been higher this year than last, and those things run through G&A as well. And so I can't really put a dollar figure on it; I just know that as we have shrunk the company, this line item is going in the same direction. Perhaps not at the same pace, but hope to pick up the pace and create additional leverage beginning first quarter of next year.

Thank you. (Operator instructions). Our next question comes from Rashid Dahod of Argus Research.

Hi. Thanks. Regarding pricing and the adjustments that you may make, what impact does that have on backlog and how do you handle that?

That's a very good question. In certain markets, depending on how deep the cut is and whether the adjustment is deemed to be appropriate to base prices versus special incentives for spec homes, if we cannot distinguish them from what's in backlog there have been times that we have had to go to our homeowners and be proactive and make some adjustments. But it's really -- it varies community by community and it -- I would say in a lot of cases these adjustments relate to our attempts to move spec houses. And we generally can distinguish those homes in terms of location or what's included in those homes to avoid a mass impact to the backlog, but there are circumstances where we've had to go back to the other home buyers in backlog and make some adjustments.

Okay, thanks. And then so your cash flow assumptions, are they based on your current state or do you also build in what may happen if you have to take further adjustments?

In terms of for impairment purposes?

Yes, for impairment purposes or just your -- what you're expecting to generate for the year or for the quarter.

We haven't disclosed what we expect to generate, and that's a different question. When we do our impairments we pretty much assume what's going on in the marketplace today, and that may involve reductions below where we're priced today, but only because we haven't found the market based on what we're pricing houses at today. So if we're not selling houses at the pace we anticipate, we have to estimate where the market is and where we're going to have to lower prices in the future in order to hit where the market is today.

Thank you. Our next question comes from of Goldman Sachs.

Thank you. Sangam Sogani. I have two questions. First question, when you look at your write-offs, what sort of pricing environment are you expecting for 2008? Are you seeing flat pricing, 5% down, 10% down, 5% up? If you could help me with that.

Sure. We are assuming no change in pricing. Generally our projects have a couple year duration, and over that couple of years we are assuming no change in pricing. When we start getting into the few projects that we have that are longer term -- we will starting in 2010. If we go beyond that point we assume there's a nominal increase in the net pricing starting in that year, but there are very few subdivisions that are impacted by that.

Okay. So if we were to assume a 5% price difference next year, what would that do to your inventory, the book value of your inventory?

It would depend on where the price -- if you assumed it across the board --

Across the board.

Yes. There would obviously be some additional impairments. The impairment is a very bright line.

Right.

If you have $1 of positive cash flow, there's no impairment. If you have $1 of negative, you drop over the cliff. And our inventory is a mix of assets that are now on the positive side of that line after these impairments, but there are some that are closer than others, and I can't tell you -- it's not something that we get into because pricing is not the only assumption that impacts it. There are -- actually, absorptions are important, as well as the discount rate that's applied, and so we have -- we stayed away from even getting into that. But obviously you can see that with the level of impairments we've taken we've impaired a substantial amount of the assets that we have, and so relative to others in our industry, I think we're probably on the high side there, which puts us further down the road as this thing hopefully comes to an end at some point in the future.

Okay. Great. And second question, when you look at your land bank you had mentioned earlier that the pricing environment is still pretty high for land sales. How does that compare with the book value of your land versus where the market is right now?

The -- I'm sorry, run that by me one more time.

You had mentioned earlier that land prices, land sales, are still very optimistic in the market. I'm wondering how does your land price, book value of your land, compare to the transactions out there in the marketplace, or the prices that are being quoted for land bank out there?

It's a mixed bag. Obviously the book value of our land is at a level that we believe, based on today's market.

Right.

It's at a level that will enable us to be profitable. And for those assets that we've impaired, which constitute more than half of our lots, we believe that our land values are at a level that will enable us to produce a reasonable rate of return, somewhere between -- as our discount rates range from 10% to 18%, averaging approximately 15%. So it's going to be somewhere in a 15% return standpoint, which depending on the stage of the asset would yield a wide range of margins, but nevertheless would produce some level of profits going forward.

Okay. Thank you.

Thank you. I'm showing no further questions at this time, sir. Please continue.

We'd like to thank you again for joining our call today. We look forward to having the opportunity to speak with you in January following the announcement of our 2007 fourth quarter and full year results. Everybody have a great day. Thank you.

(Operator instructions). That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.