MDC Holdings Inc (MDC) 2007 Q4 法說會逐字稿

Good morning, we are ready to begin. I would like to introduce to you Mr. Bob Martin, Director of Investor Relations for M.D.C. Holdings, Inc. Sir, we're ready to begin.

Thank you. Good morning ladies and gentlemen, and welcome to M.D.C. Holdings' 2007 fourth quarter and full year earnings conference call. Joining me today on the call are Larry Mizel, Chairman and Chief Executive Officer; Gary Reece, Executive Vice President and Chief Financial Officer; Michael Touff, Senior Vice President and General Counsel; and Joe Fretz, Secretary and Corporate Counsel.

At this time all participants are in a listen only mode. Later we will conduct a question and answer session, at which time we request that participants limit themselves to one question and one follow up question. Please note that this conference is being recorded, and will be available for replay. For information on how to access the replay, please visit our website at www.mdcholdings.com. I will now turn the call over to Joe Fretz, for a disclaimer on forward-looking statements. Joe?

Before introducing Larry Mizel 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 2007 Form 10K. 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 fourth quarter conference call and web cast. The difficult home building environment we experienced during the first nine months of 2007 continued through the fourth quarter as we saw no indication of an emerging rebound of our industry. The impact of the sluggish housing market has been increasingly evident in overall economic conditions and consumer confidence declining, GDP growth slowing and employment levels falling for the first time in several years. The Federal Reserve has taken notice, having lowered the Fed Fund rate by 125 basis points in just the last few weeks.

Despite the aggressive actions taken by the Fed, the outlook for homebuilding remains uncertain. For this reason our primary focus continues to be generating cash flow and enhancing our investment grade balance sheet, while increasing the efficiencies of our business processes in preparation for an eventual homebuilding recovery. We were successful in each of these areas in 2007.

First and foremost, we generated over $590 million in cash flow from operations, including almost $260 million in the fourth quarter alone. As a result, our cash on hand at the end of the year rose to $1 billion, which is almost double the beginning of year balances, and roughly equivalent to our current outstanding debt. We achieved this substantial cash increase primarily by reducing our lot inventories, which were down more than 40% over the past year, including a 20% reduction in the fourth quarter.

In addition we further increased our cash balances earlier this week when we received a $90 million tax refund from the IRS on a carry back of our 2007 net operating loss. Furthermore, we conserved out cash by tightening controls on land development expenditures, working with our suppliers and subcontractors to lower direct cost of home construction, and shrinking our overhead in recognition of reduced levels of demand for homes. With no borrowings outstanding on our $1.25 billion line of credit we increased our cash in available capacity year over year by 30% to $2.25 billion.

Throughout 2007 we took advantage of the decline in the homebuilding activity to work on improving the operating efficiencies of our business. we made significant adjustments to our organizational structure allowing us to eliminate our regional offices and reduce by half the number of our operating divisions from peak levels. These right sizing efforts enabled us to realize a 36% year-over-year reduction in G&A expenses in the fourth quarter and they should have a significant effect on 2008 expenses as we realize the full year impact of the changes we have made.

We focused on making key improvements to our core business practices. Many of our efforts centered on our customers as we design new product that better meet current buyer preferences at a lower cost. In addition we ramped up our nationwide customer experience initiative with the objective of continued improvement in every aspect of the homebuilding process, and we aggressively attacked the cost side of our business, working diligently with our subcontractors and suppliers to un-bundle our hard costs while tightening our process for managing each phase of construction.

While we're unsure of the challenges 2008 will provide for the homebuilding industry, we believe that the strength of our balance sheet, coupled with our efforts to streamline our operations and increase efficiencies will position us to capitalize on opportunities created in this environment. Our preparation for these times is far from coincidental. A carefully planned operational strategy, almost a century of collective senior management experience and disciplined approach to business are the keys behind the financial strength and flexibility we enjoy today. We are confident that these attributes will provide us with a competitive advantage when the demand for new homes rebounds.

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

Thank you Larry. I would like to start out by saying that as of this morning M.D.C.'s 2007 Form 10K has been filed and received by the SEC and is available for review. This provides, as all of you know, a tremendous amount of visibility and transparency on the results of our company for this quarter and this year, to supplement the information we're providing to you in our press release and in this conference call this morning. We'll try to keep our comments fairly high level and then we'll have sufficient time for you to ask questions about the information you've been provided.

To start off with, the first slide that you see here relates to operating cash flow. As Larry mentioned, we generated in this quarter in excess of $250 million in cash flow from operations, bringing our total for the year to $593 million compared to $363 million a year ago. This quarter was the sixth consecutive quarter in which we have generated positive cash flow. You can see each one of these quarters on this graph. And over this period of time we've generated just short of $1.1 billion in operating cash flow, resulting primarily from reductions in our inventory.

If you turn to the next slide you'll see where our inventory stood at June 30 of 2006, before this six quarter period began. You'll see that we stood with inventories of $3,272 million, of which $1.8 billion was land and $1.5 billion was work in process. We ended this last quarter with a significant reduction in inventory, $1.8 billion down to $1,456 million of which only $554 million is land. Obviously we've taken some impairments over this period of time, but what we tried to show here in this middle bar is where these reductions actually came from, and you can see that when you take net impairments into account we've taken since this period started some $836 million in impairments, $219 million of which have been realized through sales of lots or assets, or homes, leaving $617 million remaining in our ending inventory. So when you take that out of the difference, we've actually generated cash flow of $1.2 billion from reductions in inventories. So this is a very powerful story.

The next slide shows really where this stems from. Our number of lots controlled have dropped substantially over this period of time, as Larry alluded to. we ended the quarter with 15,130 lots under control, which is down 45% from where we were just a year ago. Looking at the lots that we own, we ended the quarter with 11,500 lots, down 40% from where we were a year ago, and our lots under option, which began the year at over 8,000 lots, we ended the year with only 3,600 lots under option. And we have under $13 million at risk in terms of non-refundable option deposits and less than $1.5 million of dollars capitalized with respect to those option deposits.

We've also seen our work in process drop. We ended the year with under 3,500 units, which is down 25% from where we were this time last year, as we continue to successfully control our home starts in terms of backlog, managing backlog, which is seeing some significant cancellations as well as keeping tight controls on our supply of spec inventory, which is down slightly from where it was at this time last year.

On the next slide you will see our cash position, which Larry also alluded to. We ended the year with just over $1 billion in cash, which is up 98% from the $508 million we had last year. This essentially puts us in a debt neutral position relative to our corporate homebuilding debt. From the standpoint of cash and available bond capacity we had $2,247 million of available cash and bond capacity, which is up almost 30% from where we were this time last year.

From an operations standpoint it's been a difficult quarter as a continuation of what we've seen throughout the year as a whole. From an order standpoint, you can see on this slide that our orders for the quarter on a net basis were down 52% from this time last year. We received net orders for 748 homes during the quarter. The sales value of these orders is down approximately 60%. Year to date, we received, for the entire year, just over 6,500 orders, which is down 36% for the year.

Gross sales actually for the quarter were down only 40% but we did continue to see some fairly high levels of cancellations as we saw an increasing number of our buyers had difficulty obtaining financing for their home purchase or an indirect impact from the buyers of their homes not being able to obtain financing. Our cancellation rate for the quarter rose to 65% which is up from 56% this time last year. As we look at this rate relative to our beginning backlog, this rate is just above 40%, which is only slightly above where it was sequentially from the third quarter and up to 36% where it was last year.

Orders were down for the quarter in virtually every market, although we did see an up tick in our Florida markets. Our Vegas market was only down some 10% as we did see some pick up in orders there at the end of the quarter, but we also had a major focus there, added some additional incentives and moved some inventory late in the quarter. These lower orders contributed to a backlog, which is down 46% from this time last year. We ended the year with 1,947 homes in backlog, with an average price of $333,000, which is down $23,000 from backlog of a year ago.

The operating results for the quarter and for the year are reflected on the next slide. You will see our net loss for the quarter at $281 million, or $6.14 a share of $785 million in revenues. For the year, we saw a loss of $637 million, $13.94 a share on revenue of just over $2.9 billion in revenue. These losses were attributable, really, to lower homebuilding profits, lower mortgage lending profits. A big contributor to the net loss this quarter was a valuation allowance, which we took against our deferred tax asset, that valuation allowance being $160 million.

On a pre-tax basis, you'll see that, for the quarter, we had $190.4 million and $756 million for the year. This is largely attributable to impairments. We also had some write-offs of project costs and abandonment costs for the quarter and for the year, as well as some losses on land sales. I think what this slide shows is when you renewed those items, non-recurring and, in most cases, non-cash items from our pre-tax losses, we are, in fact, in an operating profit position for both the quarter and for the year.

As we look at our homebuilding profits being down for the quarter and the year, they are attributable to the impairments. And I'll come back to the impairments and discuss that in greater detail here in a moment. We saw, in the quarter, losses on land sales of $13.8 million. During the quarter, we did sell approximately 1,800 lots for approximately $37 million in cash proceeds, recognizing a loss of $13.8 million. The loss for the year was a net $9.4 million.

Our closings were down 38%. Our average selling price dropped $35,000 and our margins dropped for the quarter and the year as well. These declines were offset by lower SG&A costs. Our homebuilding G&A was actually down 35% as we saw our company continue to take steps to right size our business. We eliminated, essentially, our regional operating structure and cut our operating divisions pretty much in half. Our marketing costs were also down, right around 20% and our corporate G&A was down 18%.

If you look at the next slide, in terms of G&A, this represents a summary of our right sizing efforts as our G&A costs are down. If you look at our mortgage company, our corporate overhead as well as our homebuilding company, we incurred G&A of just over $60 million, which is down over 35% from the costs we incurred in this category a year ago.

On the mortgage side, the mortgage business, while profits are down, continues to operate profitably, which can't be said by all companies, I think, in this environment. It's a tribute to their efforts to continue to right size their business so they can be profitable in producing the loans on a per-loan basis, while continuing to provide competitive products for our buyers. While our capture rate's down, it's still relatively high, in historical terms.

At the same time, we continue to bring the risk profile of our portfolio down. We continue to originate higher quality loans, primarily prime, government related. Our loan-to-values are declining; our average loan amounts are down significantly, a much higher percentage of fixed rate loans. During the quarter, we were in excess of -- 95% of our loans were fixed rate. In fact, those scores continue to be high.

And, we have also deployed, as we've stated in our releases, a strategy of selling these loans faster, so that we're getting them off our books and we're turning them into cash much faster as well. So, in addition to operating profitably, this continues to operate with a lower risk profile.

And then finally, just to touch on impairments; we have a couple of slides here to give you a little more color into what occurred from an impairment standpoint. We did recognize impairments of our assets, during the quarter, of $175 million. We impaired, during the quarter, right around 4,900 lots in some 153 active communities, or 153 subdivisions, some of which were active, some of which were not. Of this 153, 91 have been impaired previously. And most, as has been the case throughout the year, most of these impairments occurred in our West segment of California, Nevada and Arizona, with close to 80% of the impairments occurring in that market.

For the year, we realized impairments of $727 million. And again, 80% of it being in the West segment, which brings our cumulative total for '06 and '07, during this latest six quarter period, to $838 million in terms of impairments, of which 80% again, has been in our West segment.

The next slide gives you an indication; you can see in the previous slide, the bar graphs, that we did see sequential increases in our impairments through the third quarter of '07, followed by a sequential drop here in the fourth quarter. And what the next slide is intended to show is just to indicate what has happened to the levels of assets that have been impaired. Obviously, we're very proud of the fact that our land balances have dropped dramatically, down to $554 million, after beginning the year at $1.575 billion. So our land balances, which are where most of our impairments have been incurred this year, are down 65% from where we began the year.

You can see from this slide that of our $726 million in impairments we claimed during the year, $556 million were taken with respect to land, 80% of which was taken with respect to our West segments. And so, if you look at the land balances that have been impaired in previous quarters, or throughout 2007, we started the year with almost $1 billion in land. And we ended the year with just over $220 million in land. So, this is down 80% in the area which has been impaired the most.

California really has seen the greatest level of impairment. And their assets, from a land standpoint, are down to next to nothing. In fact, they're down to $35 million, most of which is being held for sale to third parties in its current condition.

So, we don't know what the future holds in this area but, as you can see, the assets to which an impairment might apply, have dropped dramatically just over the last four quarters.

That concludes my prepared remarks. So, we'd now like to open the floor for questions.

(OPERATOR INSTRUCTIONS)

Our first question will come from Dan Oppenheim, from Banc of America Securities. Please go ahead.

This is Mike Dahl, on for Dan. Just wondering if you could comment on what you're hearing from land sellers. You know what's the gap between their expectations and what you'd be willing to pay? And have you seen any transactions that are -- that would be at attractive values for you at this point?

I think what I would say is it varies significantly, market by market. So you can't make a blanket statement, other than the fact that generally, there is still a gap because you haven't seen us start to buy yet. So obviously, the bid and the ask are still some ways apart.

It has come closer and there are a number of deals that not only us, but many others are talking about. And we're going to continue to watch it and keep our eyes and ears open and stay in front of the land sellers. And when they become realistic, then we'll be there to start buying.

Great. And would there be any markets in particular that you're looking to either exit from or enter into if the price was right?

The only one that, right now, we are looking to exit is the Tampa market. We do have some lots there. All of the lots that we hold there are being held for sale in their current conditions. We have about just under 250 lots in that condition, in that market. That's really the only market that we've identified as one that we would exit.

Good.

As far as new markets, that's not the mode we're in right now. We are right sizing to the markets that we're in and we're just looking for opportunities. We have infrastructure and the ability to grow in those markets that we're in.

Great; thanks.

Your next question will come from Michael Rehaut with JP Morgan. Please go ahead.

Hi, good morning. First question is just on the, you know, you'd mentioned, you know, the can rate and the order of decline. And, you know, I think, in some ways, it sounds like it certainly continues to kind of fall short from, perhaps, your expectations. At the same time, your average order price is falling dramatically and it doesn't seem to have the desired effect of getting some volume through.

So I was wondering how you're approaching that, going forward, in terms of ultimately trying to get some volume back and, you know, if you could give us some color in terms of where that's -- you know, the difficulties are more pronounced. And, if there's any changes that you might be thinking of in terms of how you go about pricing or going to market over the next quarter or two?

Mike, first of all, I want to make sure you don't misunderstand the pricing of our net orders. It'd be very misleading and I'm sure you're referring to the fact if you do the math, you end up with an average price of net orders of around $250,000, vs. last year of $327,000. That's really not indicative of what we're selling houses at. That's a combination of the effect of gross orders and cancellations. And we're seeing some cancellations of some high dollar homes that are bringing that net way down.

I think more indicative of where the average price is going is, what is the average price in our backlog, which is just above where we are from a closing standpoint, which is usually the way it works, at $333,000. It is down and the direction in most of our markets, but not as dramatically as reflected in the net orders.

And I would say that, in terms of where things are more pronounced, it's pretty pronounced in most markets. I think that we've seen some movement in the Jacksonville market recently. Relative to last year it is very positive. The Las Vegas market's showing some signs of life as well, as reflected in our orders also.

But the can rates are still pretty high. And we believe that we're very active in staying on top of our backlog and making sure that we take buyers who can't qualify and get them out; make sure that our cancellations are properly reflected. All those things that improve the quality of the backlog that we have tend to have a negative impact on the net order trends.

But, we are out there competing in every subdivision for every house, for every sale, and we're in some markets that are more competitive than others, Nevada and California, and Arizona. Phoenix and Tucson are very competitive. So these are markets that we had high exposure to and we think will be great markets for the long run, but they're very tough to operate in right now.

So do you take a more aggressive approach on pricing or what do you do in terms of ultimately getting some volume through the door?

You know Mike, we are in an enviable position I guess you could say, of not having to give houses away and not having to drive our inventory down, because we're in a very low inventory position. What we do need to do is stay abreast of where the market is, what the traffic is, what the market absorptions are, and compete at those levels. We don't have to try to drive four or five per month per subdivision in a market that's only selling two. So what we want to do is sell at the market rate, price accordingly, and keep a decent pace going.

There's nothing so dramatic that we have to do from this point out, just keep our eyes and ears open and stay conscious of what our competition is doing and compete in every subdivision.

Last question Gary, and perhaps Larry you can give us your thoughts as well. You've been obviously increasing your cash position consistently over time and you really haven't, obviously, gone into the market yet and that's been the right move as prices continue to fall. What's your sense of when the right time might be? We just heard from D.L. Horton that they believe that it won't be another -- it will be another 12 to 18 months, in their opinion, before California firms in terms of pricing. Do you feel that the land sellers out there, possibly including other public builders, are just holding on to an ask that is just unrealistic? Or is it just that you're actually getting closer to an appropriate bid/ask spread? What would drive your -- drive better activity in terms of taking advantage of those opportunities on your part?

I think the answer is really on the ground, every seller is unique and different, and special. And we stand prepared to transact and as the market comes at the levels that seem appropriate we will. I don't think I can give you any better color other than every day somebody sends us a piece of paper with a new idea and it's just like the stock market, when should you start expanding your position in any security? I think our skill set is we adjusted how we ran our business starting in '05 and we're adjusting how we're running our business every day, and we expect to be very active, very aggressive on terms and conditions that are risk adjusted and makes sense for us in the future. And you'll probably have the clearest signal of what we're doing by when you read our quarterly reports and you see the land positions going up instead of down.

Fair enough, thank you.

And our next question will come from Joe Locker with FBN Securities, your line is open.

Hi guys. I just wanted to get a number for prior impairments that were reversed in the fourth quarter.

Hold on. Joe we had, in terms of the homes we closed during the three months, we had $65 million reversed.

$65 million, and did you have additional in the land sales also?

We did. We had substantial amounts in land sales; I believe it was around $90 million, approximately.

Around $90 million total on the land sales?

$90 million in reversals.

In reversals, so the cost base originally was much higher.

Much higher, yes.

Got you, $90 million. You accumulated about I guess $845 million which you've reversed now around $200 million. So you still have about $645 million of prior impairments. Do you have any kind of ballpark figure of what you expect to be reversed in 2008?

I do Joe, but I'm not sure how relevant it is. It's something -- it's nothing that we have disclosed. It's a component of our determination of what our deferred tax asset evaluation allowance is, and so it's -- because we have such a short land supply you would expect that most of this would reverse over the next couple of years.

Right.

In terms of when it actually falls I don't have that number for you.

All right, thanks a lot. I'll jump back in the queue.

Our next question will come from Stephen Kim, a private investor, please go ahead.

Hi guys.

You sound just like, that sounds like my old friend Steve Kim.

I think we may have a lot in common. I had a question for you that was a little bit more conceptual, maybe you can help me with this. One of the things that has been bandied about among investors over the last several years has been what the value added of a public homebuilder really is. And obviously there's an element of public homebuilder advantage in the way of their strong balance sheets, we certainly know that.

I'm curious though, the magnitude of the decline or the diminishment in yours and other public builders businesses has been very dramatic. I mean the number of orders that you're running with closings you're operating at has shrunk by so much that I've been giving thought to what the opportunity is, or your ability to sort of reconstitute those orders back up into sort of a normalized basis might be. And what it's going to require, I would think, would be that you would go back to a lot of the trades that you are now walking away from. That you would be looking to rehire folks in markets that you have since recently let go, and basically you're going to be, in many ways, sort of growing your homebuilding business much like somebody who might be looking to be a new entrant in the market might be trying to grow their business

So what I'm trying to figure out is, to what extent it's going to be easier for M.D.C. to grow significantly over the next three years, or four years or something, versus another non-public builder which may have some reasonably strong financial backing. Is it just the finance? Is it just the balance sheet that you bring to the table that allows you to grow versus your peers? Or is there something more than that? Is there something that we can look to, to sort of say "herein lays some significant value for a public builder like M.D.C. beyond just the balance sheet"?

Well Steve I think it's everything we are as an enterprise. You heard my comments that we're focusing on the future, we're working on the customer initiative, we're developing new product. I consider this period of time a great opportunity because most people that are in this business are busy working with only negatives, and we are concurrently focusing and working on positives on a perspective basis. And I expect that we'll spend some money that others wouldn't spend in getting ready to reposition ourselves for the future. We don't know when the market's going to turn, but we do know one thing, we have people, we have product, we have a positive attitude. We know what to do, how to do it, and where to do it.

And I'll just make a comment on the non-public builders; their availability of capital will be geometrically reduced. Their ability to take losses so they can liquefy is almost nonexistent because they're not in a position to take losses. The banking world, you don't read much about it yet, but their appetite for real estate residential, whether especially [Rand] but construction, their appetite is diminished to as low as possible. The regulators will help adjust it. The auditors will adjust it, the board will adjust it. We are in a traditional cycle and those persons that work through this period of time are usually, and will be, the big winners.

The public companies, those that right size their balance sheet; will do very, very well. And one of the things that one should look at, is that I believe that the capacity to produce new homes will be dramatically reduced during this period of time, maybe to the extent of 500,000 to 600,000 new homes a year or lower. And the ability to replace that infrastructure will take a period of years, and during that period of years those enterprises that are in business aggressively will do extremely well. That's my answer Steve.

And our next question will come from the line of Alex Barron with Agency Trading Group, please go ahead.

Hi, good morning guys.

Hi Alex.

I wanted to, I guess you guys have touched on this a little bit, but you know other builders are, I guess, cutting prices pretty aggressively. And from our surveys it seems like every single month. And they seem to be getting some traction with sales. I'm just kind of wondering how you think '08 is going to play out, and are you guys going to try to get in front of that curve to try to boost your sales base?

Well Alex I think that we are, as I said before, we're going to try to stay with the market. There may be certain circumstances where you're at the end of a subdivision; you may do some things that would behoove you, from an overhead standpoint, to move out of it quickly. But beyond that we aren't compelled to lower inventory as some of our peers are. And so we want to sell at a market pace. We still believe the subdivisions we have, which are declining, we're down to 278 active communities at the end of the quarter, down from I think it was 308 at this time last year. So the number of communities is declining.

But as our lot supplies decline, we are in great locations and we have a great product, high quality. We have a wonderful home gallery that our buyers can take advantage of to construct a home that is very special for them, and we are going to try to make the most we can for every house. Having said that, we're going to sell at a pace that is reflective of the demand in that particular submarket.

My other question has to do with California in particular. Just kind of looking at how low your inventory values have come down in that market, and I thought I heard you mention that a lot of those lots are for sale. I'm just kind of wondering if you're also thinking of exiting or severely reducing your position in California.

Well Alex it's already significantly reduced. We've gone from six operating divisions in that market down to one because of the change in our size. We're still covering a lot of geographic area; we're still in the northern part of the state and the southern part of the state. And in the long haul it's still a market that we want to participate in, but we've been right sizing and reducing our inventory because the values have come down significantly. So we have a substantial number of lots that we're holding for sale right now in that market, and we're going to -- we still continue to have a number of subdivisions open there, and we keep our eyes and ears open for opportunities to add to that business. But it's not a market that we are looking to exit, no.

Okay, thanks.

Our next question comes from the line of Carl Reichardt from Wachovia Securities. Please go ahead.

Good morning guys. How are you? Larry, I had -- you've been doing something interesting and I've been surprised as well that I had -- given what some of the transactions we've heard about that M.D.C. hasn't appeared to participate in. In effect, is your expectation that there's going to be a very, very large increase in bank owned portfolios, REO coming back into the market this year and that might be a place that looks more attractive to you, as a place to reinvest?

We usually, of the price point of the bank, has already eliminated the whatever equity that, in theory, existed is certainly more attractive than any other basis. So the direction of your question I'm agreeing with.

Okay; appreciate that. And then, Gary, not to press too hard on the order issue but, especially given that the cancellation rate -- would you say that the underlying rationale for your customers' canceling has changed in a meaningful way, relative to earlier this year? It seems to me -- again, ex the order price issue that, perhaps, given that you are relatively light on lots, you don't need to press to move units. I'm just trying to say if that's the case, then should I start to see margin enhancement on a year-over-year basis more aggressive than with some of the other builders? Because you are holding price more aggressively.

Just, it's not showing up in the numbers. I just want to know, should I anticipate that the next couple of quarters?

Well, there are so many factors, Carl that are coming in to play; the impact of the impairments, what's going on in each of the individual markets. What's happened, the only area that we've seen a dramatic change in the reasoning behind the cans is in the financing side. And the offset has been we've had fewer buyers that have failed to comply with the terms of the agreement. It's really that financing contingency and failure that has been where we've seen a pretty dramatic rise in that as a reason for it.

Okay. Thanks so much.

Our next question comes from the line of Dennis McGill from Zelman and Associates. Please go ahead.

Hey guys; how're you?

Hi, Dennis.

My first question just has to do with, you know, getting a better focus on when you may reenter the market on the land side. Do you think, given there's a lot of capital flowing around and willingness to do bulk deals, that some of your competitors are extremely long in some markets? Would you envision potentially pursuing something that could be a very large transaction to lighten the burden of another competitor to maybe take advantage of their illiquidity in the near-term? Or, will you be more likely to do smaller deals, piecemeal deals, in all your markets, that end up adding up to a larger portfolio?

I think our best position is to always be open for business and that could be broadly defined. And, as you know, we're willing to do small transactions. And in today's market, I don't want to address it to necessarily gaining one, other than the fact that there are some financial institutions that probably will have some assets that might be attractively priced. And on certain terms and conditions, we might facilitate a transaction.

I guess you're referring to banks potentially selling back into the market. Whether the bid and the asked are in the right spot or not, have you been approached with any sizable land deals that you would take a look at?

There's always a lot of conversation in the market place and so, I don't think I can answer it any other way.

Okay. And then just one other question; Gary, realizing January is in the books, can you talk about, just trend wise versus December and November, whether you saw a typical seasonal up tick? Whether you want to talk traffic, orders, etc., on whether they -- how they kind of compared to expectations heading into the year?

Dennis, I really can't. We have not -- having filed the K, that is not in there. Nor is it in our press release and we just don't like to talk about orders on a monthly basis because things can change so dramatically.

I guess, even if you want to stay away from orders and just top level picture, are you seeing the same type of seasonal pick up in traffic that you would normally see?

Well, you know, you really can't judge it until after the Super Bowl. And, we just had that pass and it needs to -- we're going to keep our eyes open here over the next few weeks, Dennis and then we'll see where it leads us. But nothing to report at this time.

Yes. Well thanks again for the time, guys.

You bet, Dennis.

We'll go to the line of Eric Landry from Morningstar. Please go ahead.

Hey, thank you for taking my call. Gary, first of all, I'd like to say good work on getting that refund back in such short order. I don't suppose you've had much -- you or your teams have had much sleep in the last few months.

Thank you for recognizing that. Between the tax refund and getting the 10K filed and a few other challenges along the way, it's been an interesting few weeks. (Inaudible).

It's been kind of busy out there.

It was quite a coup. We had some help from some of our friends and to get it filed and in the bank, I think even before, statutorily it had to be given to us, is a real bonus for us to get that behind us.

Right; good work. My question is kind of longer-term in nature here. You folks joined, I think it's three other builders with over $1 billion, or about $1 billion in cash sitting in the balance sheet, which indicates to me that the emergence from this downturn, whenever that does happen, is going to look significantly different than it did in the late '80s, early '90s. My question is, first of all, am I correct on that?

And then Larry, second of all, could you maybe give a little color as to how you think that this may lay out with such a bifurcation of prepared builders and then you've got the, both the unprepared public builders and the smaller builders, which, to me, look even less prepared? How might that look, going forward?

Well, you know, this cycle came upon us a lot quicker than prior ones. And is this a V, is it a U, or is it an L? So everybody gets to guess on what the shape of it is. And if the general economy of our country stays reasonably okay and that has nothing to do with designating it as a slowdown, a real slowdown or a recession, those are kind of descriptions that some people apply. But if you segregate housing; and the basic need in our country for housing historically, there's a baseline demand. And the baseline demand has been there through many cycles. And I believe that baseline demand still exists and you have the new construction build probably will have dropped more than 50% from the high.

The existing leftover, unoccupied re-sales, occupied re-sales coming forward, foreclosures, etc., etc., it'll take a period of time to eat through that product. But the reality of it is, the basic business is a good business. And I believe you will see a stronger concentration of market share in those growth markets by the larger builders that have their business in proper order. And I think that'll be great opportunities, at some point.

In your years in the business, have you ever seen it such that you've got a handful of such well prepared builders, relative to the rest?

No.

Okay.

In my years of being in the business, I didn't know any homebuilders that had $1 billion in cash.

And now we've got four of them. Last question, Gary, you mentioned that I believe it was Denver, California, Arizona were very, very competitive. What markets are not competitive right now?

Well, Bermuda's pretty non-competitive.

Or less competitive?

I think that, as I mentioned, we've seen some signs of life in Jacksonville; some signs of life in Vegas; some signs of life in Tucson. They're just signs of life. It's still very competitive in those markets.

Okay. Great, thanks a lot.

Our next question comes from the line of Jay [McCandless] from FTN Midwest. Please go ahead.

Hi, good morning. Two questions for you; the first one, to keep pushing on the land issue, potential land acquisitions. Right now, as I understand it, according to the slides that you put out this morning, your distribution of land is still heavily weighted to the Mountain and West regions. I think It's approximately 78%. Over the next couple of quarter, the next couple of years, what're your thoughts in terms of expanding back East, to maybe moving into lower price point areas?

We think that our growth will be where the demand is. And the demand will lead us to where we should be. And it'll be self evident at the time. And, at this point, there's a greater probability that where the growth was probably is where it will be. But it will be pretty apparent, over a period of time, of what's going on. It won't be hard to figure out.

And we're not going to go and create demand. We're going to have the demand pull us. And, I think that's a better way to approach it.

Okay. And then my second question, if you look at the neighborhoods that you have open right now and that you're planning on opening during 2008, what percentage of those neighborhoods, or what percentage of the homes offered in those neighborhoods would qualify for conforming or FHA financing, depending on their MSA?

Well, I'm assuming that the proposed new regs and dollar limits are going to be implemented. That would probably be the sweet spot of the market, is to make most of what you do a conforming product.

Right, so at this point, but if you assume that it doesn't pass; actually, the Senate shot it down this morning. What would we be looking at, assuming that we don't get the new regs?

Well, as you can see, our average sales prices are in the low threes. So, we're still covered under $417,000.

Okay. Thank you.

You're welcome; thank you.

Our next question comes from the line of [Gabe Kim] from Wellington Management. Please go ahead.

Hi guys. I just wanted to ask you about the $90 million on the land, the reversal. Is that the first quarter where that's been a meaningfully positive number?

Well, it certainly is the first quarter that we've had a significant amount. It's not the only quarter. We've had small amounts in previous quarters, but this was by far the most significant, Gabe.

And should I assume that, you know, that $90 million is flowing through -- I mean, where are those reversals happening, relative to the geographies; West, Mountain, East, other?

Okay. Well, it's heavily weighted to California, although I don't think that we have broken it out.

Okay. So, sort of in line with the impairment mix for '07?

Yes. It's primarily in the West of where we had most of our sales.

Okay; okay, that's all. Thanks, guys.

Our next question comes from the line of Jim Wilson of JMP Securities. Please go ahead.

Hello?

Hi Jim.

Sorry Gary, I'm juggling calls. I just had one more question on -- it was great the detail on the expense level, but you had a pretty material drop just in Q4. Your presentation made it sound like you thought there was a lot further to go, or that the full impact wouldn't be felt until we started to get into '08. And I was just wondering if you put any dollar perspective obviously just on a sequential base you went from $53 million to $39 million in G&A and I assume there's meaningful improvement that might be seen on the marketing and other expense side too.

You know we have a concentrated effort to make even more progress on the marketing side. You can see that that really didn't fall in relation to level of revenues necessarily. So there's some things that we're doing there. I think one of the things that you'll see that is reflected in -- and you'll see it when you review the 10K, and I know you'll look at it in detail, where we showed the quarterly numbers there is an impact to G&A that involves the reversal of some accruals we had earlier in the year. And so that tends to bring down that impact a little bit, as you're looking at relative impact.

But we still have, we have continued to downsize, we've continued to cut back on offices and our locations throughout the country. We had several million dollars of pure restructuring costs that we incurred this quarter that relate to offices that we will not be in, in the future. So those are the types of things that we're talking about when we say we have some things that are not fully matured that will be reflected next year. We haven't really put a dollar number around it.

Okay. All right, well that's good. All right, thanks.

Our next question comes from the line of David Einhorn from Greenlight Capital, please go ahead.

Hey, good morning guys. Can you talk about sort of what's going on with the taxes in a little more detail? Just to the extent that if there's profits at some later time, what would the tax rate look like? And second, if there's further losses, what would the tax rate look like?

I think David, in general terms, because of the existence of this valuation allowance the tax rate is going to look a little bit screwy for a while until this reverses. In the event that we incurred additional losses we'd have to look at all the evidence, what's going on in terms of whether those losses would occur in years where we would have capacity to carry them, carry them back, and if the loss is a result of temporary differences and things of that nature.

Things that occur during 2008 will be able, for the most part, to be carried back to 2006, because we do have carry back capacity. So those losses are not necessarily likely in and of themselves, to the extent they're realized this year, to impact the tax rate. But to the extent that we -- let's say that we were to incur some significant impairments in the current year, and holding everything else equal, if those impairments were to reverse in some future period that could result in a additional valuation allowance relative to that benefit if there weren't other items that would offset it.

You know if we make profits in the future those profits beyond 2008 would create, potentially, capacity to use some of these deferred tax assets that we've taken a valuation allowance against. So that might be in some future period a positive impact on our tax rate. So there's a lot of things, David, that influence it. I think because we do have a 10K out there I think that would be very helpful to you. We've been pretty explicit in our MD&A and in the footnote disclosure as to how this is calculated and how the amounts are determined, and I think that will be very helpful to you on both of these categories. And to the extent you have further questions; you know how to find me.

Fantastic, thanks.

We have a follow up from the line of Michael Rehaut from JP Morgan, please go ahead.

Thanks. Just a couple of quick ones; what do you expect for land spend in '08 versus '07 and what was it actually in '07 and '06, if you have that.

The land spend, Mike, in -- Mike we haven't disclosed that number. All I can tell you is, relative to, you can obviously see from the stark reduction in our land balances that we've spent very little on land this year in terms of acquisition or development. And that the number in '06 was substantially higher than that. In '08 most of the lots that we own are fully developed and therefore we don't have to put a lot of dollars into them to bring them to the point where we could start to build a house on them. So that's another positive we have relative to the assets we do own.

In terms of what we spend for acquisition going forward, I can tell you that with only 3,000 lots under option, or 3,600 under option all of which are being highly scrutinized before we take any steps, absent changes in market conditions it's possible we would not buy very many lots. But there are always opportunities here and there; we even bought a few lots in one market at the end of the year, because it was opportunistic. And so those things will be out there for us, but it would be impossible to predict what we would spend.

And what are the option deposits and pre-ac costs associated with those 3,600?

The option deposits are just short of $13 million and $1.3 million in capitalized costs.

Great. And one last question, you kind of started off the call pointing to SG&A as one of the prime areas of reacting and right sizing the cost base. You certainly had good dollar decline year-over-year, this most recent quarter still on a leverage basis it went up. But I was wondering if you could give us an idea what you think -- obviously there's a variable component, but looking at the size of the business today, is there a certain dollar number you could share with us in terms of what you think additionally you can right size the cost structure to, by a certain amount.

Mike I couldn't give you an exact number. I think what I would tell you is that every cost in our company is a variable cost to a certain degree. Nothing is fixed, and we will continue to look at every category. I guess the only fixed item is my salary, but other than that...... No, I'm just kidding. Everything is variable.

Okay. I mean part of the question is you just mentioned that you consolidated six California divisions into one, I guess not saying that obviously you still have opportunities, but it seems that perhaps the opportunities are less if you've already done some of those types of major moves. Unless you completely close up shop in California it doesn't seem like there's a lot of incremental change you can do there. In terms of consolidations would it be fair to say you're closer to the end of that?

Really at this point there's still some things that, when I think back to where we were in the early 90s, there's a couple of steps we haven't taken that are still available to us. But one of the things, it kind of gets back to what Jim was asking as well about what we've realized. While we've taken six divisions down to one in California, that's something that occurred fairly late in the year. A lot of the cuts that we took were not reflected in the numbers that you see here. So the benefits of a lot of these moves have yet to flow through the income statement, termination costs and lease termination costs and things of that nature. So I think that once we get past 2008 a lot of the low hanging fruit will be gone and we'll just have to look and see, it may come to a point where a market is -- we downsize to more of a satellite operation as opposed to a full fledged operation.

But we still, Mike we have a few tricks up our sleeve.

And I guess you wouldn't be willing to share that with us right now.

Well no.

Okay. One last thing, the restructuring costs in the quarter, can you share with us what that was this quarter versus last?

I'm sorry, the what costs?

You had mentioned that there was some restructuring charge embedded in the numbers this quarter. I was wondering if you could give us an idea what that was versus last quarter.

Relatively speaking Mike it's not a material number. It's not something that we disclose separately.

So I should think of it in like the zero to $5 million range or something like that?

That's a reasonable estimate.

Okay. Very good, thanks a lot.

Sure Mike.

And we have no further questions at this time.

We'd like to thank you again for joining on our call today, and we look forward to having the opportunity to speak with you again in a few months following the announcement of our 2008 first quarter results.

And that concludes our conference call for today, thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.