MDC Holdings Inc (MDC) 2009 Q1 法說會逐字稿

Good morning. We are ready to begin the MDC Holdings Incorporated first quarter 2009 earnings conference call.

I will now turn it over to Robert Martin, Vice President of Finance and Investor Relations. You may begin.

Thank you. Good morning, ladies and gentlemen. Welcome to MDC Holdings 2009 first quarter conference call. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer and Chris Anderson, Senior Vice President and Chief Financial Officer.

At this time all participants are in a listen-only mode. After finishing our prepared remarks we will conduct a question-and-answer 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 Web site at MDCHoldings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call including those related to MDC's business, financial condition, results of operation, result flows, strategies, prospects 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 result, 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 2008 Form 10-K and 2009 first quarter Form 10-Q. It should also be noted that SEC regulation G requires that certain information accompany the use of non-GAAP finance measures and the information required by regulation G will reposted on our Web site.

I will turn the call over to Mr. Mizel for opening remarks. Larry?

Morning. And welcome. The quarter was characterized by many familiar issues for our economy including high foreclosure rates, rising unemployment, and low consumer confidence. While affordability has improved across our markets, we have yet to see a meaningful recovery in sales activity. As the downturn continued to severely impact our operating results for the quarter of 2009, we diligently took advantage of opportunities to strengthen our balance sheet on many levels.

After reducing the total number of lots we owned in 2008 by 40%, we further reduced our lot count for the first quarter of 2009, with particular attention given to reducing our investment in finished specs and models. This effort combined with the receipt of $161 million tax refund allowed us to generate operating cash flow of nearly $240 million during the quarter. As a result our cash and investment balance increased to more than $1.6 billion exceeding our total debt by 60%.

Our inventory balance is now at the lowest level in more than a decade. And we have largely mitigated our exposure to performance bonds and letters of credit related to various land development activities with an estimated cost complete these reactivities of only $20 million. In addition the total capital we have at risk for lots activities controlled under option contracts at the end of the quarter was only $10 million.

With no borrowings outstanding on our home buildings line of credit and no senior debt maturities until 2012, we are well positioned with the option to take advantage of market opportunities as they arise. Our interest in pursuing these opportunities in this environment will be balanced by the conservative disciplines that we have governed -- that have governed our past and our primary focus will continue to be on our core business, single family detached home building.

While we are eager to make investment that will help return our Company to a pattern of growth and profitability, we remain cautious and patient as our country continued to face economic and regulatory uncertainty. Although we did not see significant opportunities to invest in assets outside our Company during the first quarter, we did continue to make significant investments in our internal operations through our Company-wide initiative to re-evaluate, transform, and stream-line our core business practices.

A key focus for this initiative currently is the evolution of our product offerings. An effort to accelerate our sales pace, we introduced smaller more affordable homes in many of our markets during the first quarter. These homes are designed both to meet the current needs of our customers and to allow for a more efficient construction process. As we await a recovery in the home building activity, we will continue to pursue and implement improvements to our business that we believe will enhance profitability for our Company in the future.

I will now turn the call over to Chris Anderson for more specific financial highlights of our 2009 first quarter.

Thanks, Larry. And good morning to everyone. First off I will mention that our 10-Q has been filed so you will have that resource available as you look at our quarterly results. But before we get to that I will give you highlights that we think are are particularly important. Turning to the slide on our earnings call recently, then this slide will look familiar. For the 11th consecutive quarter, we generated positive operating cash flow. Almost $1.8 billion in total since the third quarter of 2006.

As Larry mentioned, of the approximately $240 million we generated in the first quarter about $161 million related to the receipt of the tax refund we mentioned to you on our last call. But even without that refund our operating cash flow was $78 million which is an improvement from $51 million we produced in fourth quarter of 2008. Cash generated this quarter was largely on the strength of a 32% decline in our finished spec and model inventory.

Moving on to lots owned, this slide shows the trend the past year for both our land and work in process lots with sequential decline every quarter for each category. Overall including lots both with and without construction currently in progress we are down about 35% over the past 12 months and 7% if the first quarter alone. Looking at the just the land side of things we decreased our lot count by 29% over the past year and by about 6% for the first quarter. The decline in the first quarter primarily was the result of transferring lots to our work in process inventory at the start of home construction and the normal course of business.

Of the approximately 7100 lots we have remaining about 860 are classified held for sale which meaning that we've determined that the best use for them is to sell them to an outside party. At the end of the quarter, these lots had a book value of approximately $11 million, more than half of these are in California with most of the remaining balance split between Arizona, Virginia, Illinois, and Florida.

As we've noted on previous calls the vast majority of the lots that we own are finished so there's not a lot of development money to be spent on these assets. And we have continued to keeping our exposure on the asurety side down. At the end of the first quarter we had only about $150 million in bonds outstanding which is down 14% since the end of the fourth quarter. We estimate that we only have $20 million of development work that's required to fulfill our obligations under those bonds.

For work in process our lots are down to 1400 at the end of the quarter. That's a decrease of 14% during the quarter and 55% from the same time last year. As I mentioned on the previous slide we made significant progress in finishing our spec count with a 35% decrease since the beginning of the year to about 290 homes at March 31. That's less than two finished specs per active community, which is a very manageable supply. In addition, we reduced our model could by almost 30% during the quarter, in the interest of saving on selling costs, and through the overall reduction in our subdivision. Over the past year, our past model count is now down 57%.

The lots that we have under option only decreased slightly during the quarter, but year-over-year, they're down 27% to approximately 2300 at quarter end. For those lots, we only have $10 million at risk, $9 million in deposits and $1 million in due diligence costs. In first for the quarter our active subdivisions fell from 191 to 175 with the largest declines in Arizona and Colorado. Over the past year our active subdivisions are down 33% from 260 at March 31st 2008 to about two-thirds -- with two-thirds of that decrease coming from California, Arizona, and Nevada.

This next slide should be another familiar one for those of you who have followed our story for awhile. For the fifth consecutive quarter our cash and investment balance exceeds our total debt. Now, by 60%. And on top of that we have just shy of $500 million of available borrowing capacity on our home building line of credit.

Turning to some other key operating metrics, you can see that demand is still limited when you look at the decline in our sales. In the first quarter we received 676 net home orders which is a significant improvement of 93% over the fourth quarter. But was down 38% versus the same period last year. Every market had a year-over-year decrease in sales. Of course the decline attributable to our 33% year-over-year decline in our active subdivision count as our net orders per average active subdivision held relatively steady down to only 0.9 for the 2009 first quarter compared with 1.1 in the year ago quarter. The average price of the net homeowners decreased 4% year-over-year to roughly $283,000.

On a positive note our cancellation rate of 23% was down significantly from 43% in the first quarter of 2008. You could take a different look at that cancellation rate if you look at it as a percentage of beginning backlog instead of as a percentage of gross sales then the rate is only down slightly from a year ago. But regardless we certainly see the trend in a positive light that the decline in cancellations out paced the decline in gross orders which is an important step in stabilizing and eventually increasing our net sales price. The most common reason for cancellations we experienced in the quarter, during the quarter was for financing issues.

The slow pace of homeowners over the past year led to a 67% year-over-year decline in our backlog, which is now down to 629 homes. Our average price in that backlog is also down to, from $326,300 at March 31, 2008 to $311,600 at March 31, 2009. The good news is that our backlog is increased by almost 20% from the beginning of the year. That's the first time in two years we have shown a sequential increase in backlog.

The next slide takes a look at our bottom line. The story is much the same as the past few quarters both our home closings and average selling price declined year-over-year for the first quarter. But we were able to narrow our losses on a pretax basis and an after tax basis due to significant decline in impairments and SG&A.

Total revenue for the first quarter fell 56% to $176 million. Mostly due to a 49% decline in home closings. In addition, the average closing price was down 8% to about $288,000 in the first quarter. That's down $25,000 from where it was last year. All of our markets were flat or down except for Virginia with the biggest drops coming in Arizona, Nevada, and Illinois. In Virginia, the increase was a function of selling larger homes, not necessarily a price appreciation.

Looking at gross margins, overall for the Company we were at 15.4% in the first quarter which is up almost 400 basis points from last year. And up 270 basis points from the fourth quarter. I will give you a little more detail on that in a moment. We have a slide later on for impairments as well by just to give you the basics in the first quarter of 2009 we booked a charge of about $15 million which is down 75% from where it was a year ago.

As I mentioned we decreased our SG&A expense year-over-year by about $30 million which is a 36% drop. Financial services profits were down 60% for the quarter primarily due to an overall volume decrease. The mortgage company experienced a $2.9 million lower gain of sale on mortgage loans and insurance revenue decreased by $1.6 million. These were offset by a $2.5 million reduction in G&A expenses.

On the corporate side we shifted from a $4 million loss as the corporate segment to a $24 million loss in the first quarter. A few things drove this decline. First, similar to the past two quarters, we recognized significant interest expense at the corporate level this quarter outside of what runs through our cost of sales. Because we couldn't capitalize the full amount of interest incurred related to our senior notes. The amount for the current period was $10 million while no interest was expensed in the corporate segment during the first quarter of last year.

Second, we earned $6 million less interest income during the quarter as higher cash balances did not offset much lower rates of return on our investments. Finally, corporate G&A increased by almost $5 million year-over-year for the first quarter due to a $3 million decrease in the supervisory fees that our corporate segment charges to our other segments. And the $2 million increase in stock-based compensation resulting from a favorable adjustment booked in the first quarter of last year.

Before I move on, I want to stop for a minute and talk about interest and its impact on our P&L. We have interesting charges coming through in a couple of different places on our income statements. So we put a bullet here on the bottom of this slide to tie it all together. When you add together the home building piece which runs through cost of sales to the corporate piece, which you can see on our income statement, there is about $18 million of interest expense in our P&L. Then when you subtract out the interest income we generated, which you can also see on the face of the income statement, you get to a net interest expense figure of about $14 million.

Which gives you a sense for the expense associated with maintaining our capital structure in an environment where we have declining sales and where we haven't yet found the opportunity to deploy the asset that now constitutes more than two-thirds of our balance sheet; which is cash. We think it is important to remain a flexible and opportunistic capital structure and wanted to size what the cost of maintaining that structure is in our income statement.

Moving on, overall our pretax loss for the quarter was $41 million down from $77 million during the same period last year. Our after tax net loss for quarter was also $41 million as compared with $73 million in the 2008 first quarter. Consistent with recent quarters we didn't see a significant benefit from income taxes during the quarter despite our pre tax loss. Because we recognized a $15 million valuation allowance against our deferred tax assets. This valuation allowance basically eliminated the benefit from income taxes that might have expected to see. As of March 31st our total valuation allowance is nearly $310 million which is a full reserve of our deferred tax asset.

Looking a little bit closer at our home gross margin, this slide shows our trend since the first quarter of 2008. Both the pre and after interest basis, margins improved in the first quarter both year-over-year and sequentially. Interest continued to have a big impact, about 480 basis points in this quarter. However the interest impact was similar for both the first and the fourth quarters of last year so it doesn't have a big impact on the comparative margins.

Looking at things before the interest impact shown as the green bar in the slide, our gross margins are up by more than 400 basis points from the same quarter last year. There's a two-fold explanation for the improvement. First, the west segment of our home building operation benefited from a $3.4 million reduction of their warranty reserve due to a significant reduction in warranty payments in 2008 and thus far in 2009. Second, as we have mentioned in prior quarters the improvement in margins is largely a function the significant amount of impairments we have taken in the past. So what you see here is the culmination of all the work we have done the past 11-quarters to keep inventories appropriately mark to market conditions. This has the impact of giving you a very transparent view of our business adjusted almost realtime for changing market conditions.

Looking at the sequential trend, compared with the fourth quarter our preinterest gross margin increased by about 320 basis points. Again, the improvement was driven by lower basis in land because of prior impairments and the warranty adjustment. It is important to note that the impact of spec sales is particularly pronounced in the first quarter. About 75% of the closings were from specs which typically generate a lower margin than dirt sales.

In addition as I have mentioned a couple of times already we really did a great job of taking finished specs and old models off of our balance sheet this quarter and those homes are the ones that we typically discounted the most heavily meaning they have even more of a negative impact on margin than the spec that hasn't reached completion.

Turning now to selling expenses we have reduced these expenses by nearly 55% year-over-year. The decrease in commissions is really just a function of the decrease we've seen in home sales revenue. But the reduction in marking expenses is the result of a conscious effort to curb our spending separate in this market in a couple of ways. First of all as we pointed out for the past couple of quarters we have changed our approach to product advertising and substantially reduced our dependence on print media in favor of Internet advertising. This is not just a lower cost alternative, we believe it is really more in tune with the way our average buyer shops for a home.

Secondly, we've actively worked to educe the expense we incur related to model homes. Over the past year the 57% decline in our model home count has out paced our 33% decline in active sub divisions. As we we re-evaluated the number of models we need in each community or moved to sell homes in multiple communities using a single set of models. And we continue take a close look at the merchandising spend that we've put into each our homes.

Moving on to G&A expenses, we are down 25% for the first quarter as compared with last year's first quarter. We have done this primarily through significant adjustments to our employee head count which is down by approximately 40% from last year. We have also consolidated or eliminated a couple of operating divisions over the past year to better align our structure with the market. We're certainly conscious that our G&A expenses have increased in relation to our revenues. This has occurred partly because of the speed of the decline in revenues, but also because we've made a committment to re-evaluate, transform, and stream-line our core business practices.

In addition we want to be sure keep a core team in place to help us return to growth as conditions improve. That doesn't mean we are not done with our focus on G&A. We will continue to make hard choices, especially if we see another leg down for the industry but we remain committed to the long-term needs of the Company.

And on our final slide here we have an update on impairments for you. This shows a history of our impairments since the beginning, starting in third quarter of 2006. The first quarter of 2009 is actually the lowest level of impairments we've taken during this time period. Our Nevada market accounted for nearly the entire charge driven by a significant decline in the value of homes in that market during the first quarter. Overall we have impaired 719 lots in 46 subdivisions. All inventory impairments are related to held for development inventory, with $10 million of that related to our land account and $4 million to our work in process account.

Consistent with our practice over the past 11 quarters, I will point out that given our relatively low level of land holdings all of our land has been considered in our impairment analysis. There's 's no other category of land that is held for long term development. To emphasize the message you hear from Larry, earlier we are excited to see the opportunities this market has in store for us. But we are going be patient and make sure we that we are making the right decisions. Keeping in mind that our ultimate goal is to create long term value for our shareholders.

In the meantime, we have plenty of work internally to prepare us for an eventual turn around. As always, I what to thank our MDC team from across the country for what they do every day to put our Company in such a strong position in the home building industry. And finally I would like to thank everyone on the call for their continued support and interest.

Now, at this time we will open the line for any questions you may have.

(Operator Instructions). Your first question comes from Michael Rehaut. Your line is open.

Thanks. Good afternoon everyone, or good morning out in Denver. First question just on the comments earlier on about still being -- restraining yourselves in terms of investments in land, and any types of opportunities. I remember last quarter I think you did one or two very kind of small one-off deals if I remember right. And was there any sort of similar kind of more smaller one offs this quarter? And more broadly speaking, perhaps you can talk about market by market, where you might see perhaps more potential for return of some level of investment, which markets may be closer to what you would require in terms of price or other factors?

Michael, you should be aware that I think in virtually every market we are in we are very active with our land group. In I think probably every market continuing the presence of evaluation of perspective transactions. And the deal slow is increasing, you know, I think that Government finally getting the rules out at least for capital and the PPIP programs started. And the deal slow is increasing. I think that Government finally getting the rules out at least for capital and the PPIP programs started. We expect that there will be a multitude of opportunities. Hopefully at the right levels that are appropriately profitable. I think in most of the markets there's, there's actually, there's probably no place that we are active in that we don't have exposure to opportunities. And we will work those really hard and as the spread comes together, we are going to be in business. And we are really very excited about it.

Great. Thank, Larry. And just a separate question on gross margins, if I missed this I apologize. If you could break out the benefit to the gross margin, the actual dollar amount from prior impairments? I believe as you have done in the past. And you also mentioned that particularly high portion of specs in the closings this quarter as a percentage of 75% I believe. If you could kind of give us what that was, perhaps last quarter and a year ago, if that is on hand?

The impairment number is in your earnings release as well it is on page nine just for reference for everybody else. But $43 million went through our P&L in impairments and cost of goods sold for this particular quarter, $49.9 million in the prior year. And roughly the spec count was about two-thirds prior quarter and prior year.

Great.

Your next question comes from Dan Oppenheim. Your line is open.

Thanks very much. I was wondering if you can talk a little bit more about your spec strategy, were you're saying that 75% of the closings during the quarter were specs I think reflecting some of the demand, end market demand there for the spec homes. At the same time you talk about reducing it. How do you think about the two at this point you are not exactly short on cash , do you think about having more specs to encourage

It is a combination we can call it old models and old specs. And new models coming into the market that we are currently building and new specs that will be product of the new models. And over the next period of time, it will become more transparent on what our strategy is. One of the advantages MDC has is we have a very integrated design center marketing approach. And we are leveraging that by integrating it into the sales strategy. Where we believe that in the past you had a significantly higher gross profit margin on dirt starts and your lowest profit margin was on old specks that you're trying to clean out or old models or cancellations. And that is really been, you have seen that over the past couple of years.

And as we move into new product and new models, new specs and new specs with a, a very focused strategy that we will implement what you will call a drywall hold strategy where we will bring product to the market, but we will allow the home buyer to really out of our design centers which is we previously commented has probably doubled the gross profit margin of our basic homes, we will let the home buyer come to the design center to really more customize what they want versus what has been delivered to them in the past. We believe that this will be something that we will be able to speak about in further detail over the next few quarters as we roll this out to more completely.

Thanks. And then secondly just wanted to ask about your efforts to differentiate your strategy in terms of trying to build the homes at lower price points and smaller homes there, clearly a trend with the industry. What are you doing to compete with others in terms of capturing some of the share there? And what portion of your, of the activity do you think will come from that?

I think that we will probably stay in the ratio of first time first time move up at probably 80% or maybe even higher on a perspective basis. As you know, that dollar value on first time, first time move up is different from Tucson to Southern California, or the Mid Atlantics. So price wise of course it will be different. But our focal point will be where is sweet spot of the market is and that's where our new product is being developed and delivered at this time.

Your next question comes from Nishu Sood, your line is open.

Thanks. First question I wanted to ask was on the cash balance. As you mentioned it is significant majority of your balance sheet. I think it is also, almost in par with your market capitalization now. You did a great job describing the carry cost of your current capital structure. So naturally there's going to be some limit there where you decide that the carrying cost is too high. You might begin to bring in your debt. Also you want to maintain your balance sheet flexibility to pursue opportunities but at some stage you have past a point of cash balance that you can deploy in a reasonable period of time. So there's a limit there as well. I was wondering if you can maybe discuss how you are viewing those limits and at what stage you will begin to work off some of that cash balance maybe by bringing in some debt.

Well I think we are very comfortable with where we are. And we don't have any present intent to change what we have done because we believe it's the right opportunity for our shareholders. And that is to be positioned to be opportunistic with the market currently developing a slightly better tone. I think that our timing will be exactly as we expected.

Okay. All right. So maybe a little different topic for my second question. The, as Dan was mentioning the popular strategy now a days of reducing floor plans maybe even taking out amenities and features to reduce the price point of your house, is that mainly something you are thinking about applying just to the first time buyer? Because I imagine it is something that would be much more difficult to adapt to a move up product, where the larger floor plan and the features are a significant reason why people even trade up. So is that the correct interpretation or am I missing something? Is there some way to apply that to move up product as well?

We expect to apply it across everything we are, we will be building in the future. There will be a transition period that may take us a period of time. But you should assume that we will roll out at probably most price points. New product that is more efficient to build, we can build it quicker, we can build it cheaper and we can give the consumer a real value.

The challenge is to give the home buyer something unique by using our design center. They're able to customize their home. And by having a -- the 2009 or the 2010 design level the floor plans are more efficiently, the livable space is better. We are increasing the amount of finished -- basements that are available to be fully finished. And value to the consumer, both real and perceives, is the real focal point. Our theme point is personalization. And as you will see the efforts that we are making directed towards consumer confidence and the correct product for today's market we believe will be right on the money.

Your next question comes from Joshua Pollard. Your line is open.

Hi. Thanks for taking my question. My question is on the balance sheet, and what you guys could likely look like after some land purchased or after being opportunistic. By my quick math you could spend $700 million or $800 million and still be one of the top three capitalized home builders in the country. Is there a level of cash that you ultimately want to have on the balance sheet even after things are off to the races and you are in a much better housing environment?

I think the guide lines we have always operated under is that we respect the fact that we are an investment grade Company. And we are going to operate in a manner that would be consistent with those expectations. And we also are an aggressive Company as we were on being the fact conservative early. We will also be active at the appropriate time if the right levels to maximize the value for our share holders.

Excellent. Two quick follow ups. The first is you talked about potentially being active in all of the communities or in all of the states that you are currently in. Is there anywhere that you would look to expand as you guys look to grow the business? And my second follow up is on your cash flow, it has been strong but you guys now have a pretty low level of spec inventory. Where do you think cash flow goes, excluding any large use of your cash balance? For the rest of the year.

I think the active markets we are in or the markets over the next few years we expect to stay in. One of the thing that is have been unusual and it seems to be transparent that the markets we are in some of them have had the most significant price declines in values of the homes. The same markets have had the highest traffic levels, and they've had the most amount of sales.

As you look through the transition of clearing the market of excess inventory, you see that the growth in some of these markets they certainly, the growth of housing is, will reaccelerate as it has over the prior decades. Arizona, California, Colorado, Florida, Nevada, the mid Atlantic these are great markets. They're cyclical, where growth was, where the traffic is, and where the future growth will be. Because it is where people want to live and where there will be and has been in the past job creation.

And as the country goes through this hopefully close to the end of the job deterioration that maybe by the end of this year or next year that will be behind us. These are great growth markets. The cash flow projections I think we just take it as it comes. We look forward to being active in these markets and we really look forward to the hundreds of billions of dollars of impaired assets that will be on the market over the next period of time. And we expect to be active in that arena.

Your next question comes from Carl Reichardt. Your line is open.

It is [Adam Rutiger] on for Carl. I wanted to follow-up on the very first question that was asked in terms of land. We heard from at least two of your competitors who have talked about finding some smaller land deals, 18% to 20% gross margins, 30% IRRs and some of those were in what seem to be similar markets that you operate in. So I was wondering what the disconnect was and if you had seen those and why you wouldn't pull the trigger, do you have different hurdle rates, do you have outlook on the market? Maybe you are not seeing them. I just wonder why we have maybe heard them talk about it and you are not ready to do that yet?

Well, I don't know what they have spoken about. I can only comment on what we have done. And we will evaluate it on our metrics and I will let our results speak for themselves.

Okay. And a follow up, when you are looking at deals, what who is the most common counterparty you are talking to, it is banks, is it Government agencies liquidating bank assets, land funds or just traditional developers?

I would say virtually you have spoken about everybody that comes in the door. Each one has their own unique opportunities. The, the ones that probably are the least flow of opportunity are other builders because they have their own approach to it. And until the impair it adequately and it is deemed surplus then it is probably not something to speak about.

But everyone will see with the Government providing guidance direction and the PPIP and the capital adequate being starting to be clarified. I think it will be very good for the real estate market and especially for the history of residential housing. Because history shows us that housing has led the economy into the current recession. But history is equally clear that housing has also led the economy into a recovery period. And as we look forward to that taking place, those land transactions will be readily available in order to take advantage of what is happening.

Your next question comes from Josh Levin, your line is open.

Hi. Good afternoon, guys. Larry you have mentioned the PPl, PPIP program twice today. Did MDC look into participating in PPI, PPIP as an investor? Too many P's.

We will just try to get it, I think we are going to participate in everything that we works if it works to our benefit.

Well, do you think the PPIP program will work to your benefit?

Well, since they haven't done the first transaction, they haven't selected whether there's going be five people or 100 people, and the banks haven't been advised on what level they have to mark the assets to, and if it is going be an open bid. I think a simple way of looking at it, it is the Government will package the assets by categories, it will be very helpful. If they don't, those persons that are going to acquire those assets ultimately will need to dispose of the residential piece because it is the most unique ones. And we expect to communicate actively directly and indirectly with whatever programs are actually implemented. And maybe when we speak next quarter on this call, all of us will know more than we know now because this information is all, as you know is very fresh in the last week.

Your next question comes from Alex Barron. Your line is open.

Good morning, guys.

Hi, Alex.

I guess I was looking at the ratio of your revenues to your SG&A, and I'm coming up with if I include all of the marking and corporate G&A et cetera, it is almost 32% of revenues. I am just wondering I mean in that environment what can you guys do to cut costs substantially? Because I don't expect gross margins are ever going get back to 30 or 40% in order for you to be profitable on that scenario.

Well, I think you are looking at a window of time where your revenues are very low. And the initiatives that we are doing are very high plus the interest costs without the benefit of the investment revenue, is at extremes. We have all seen the ability to increase your rates of return on your liquidity. As you have watched the tenure roll out, 25, 30 basis points over the last couple of weeks, I think that we are moving into extremes maybe more normal interest rates and the liquidity will deal with the, its own adjustments. And the G&A deals with the foundations and the activities besides of course the regular operating G&A for the future.

And we are focused on what we are going do in the future because we believe we have dealt with our balance sheet. We have dealt with our inventories and we're balanced where we want to be. That doesn't mean there's not more G&A to take out. But we are getting close.

Yes because as you say I tend to agree with you. I think it is going be challenging for a while and I mean your balance sheet is great. It looks like you guys are ready for new land opportunities, but in the meantime if interest rates go up it would seem and especially if the California tax credit goes away here in the next couple of months it would seem revenues are going to continue to be low. So I am just kind of wondering if you guys are, how many years you are planning at kind of hanging in there at these rates before cutting further on the SG&A front?

Well if it turns out the be years that we need to hang in there, you could assume that we will deal with the G&A before years pass. Okay.

We are on it everyday, and we are using our judgment of exactly what and where we should expend our capital. We consider it to be of great value and we don't plan to waste it. And whatever we are doing in standing by, I can assure you it is well thought out and well planned.

Your next question comes from Ivy Zelman, your line is open.

Good morning/afternoon everyone. Larry your comments are always very insightful. Just a follow on Alex's question. And coming at it from a different angle you have significant opportunity of leverage on the upside when you get the volume. And I guess what we would love to have an understanding of is does that mean if you can break even, do you need 50% more volume to come through the system at the current level of dollars spend on SG&A? Because I think of you as a manufacturing plant that needs to get your utilization rate up. So maybe some thoughts on relative to where you would have to be in volume to get to a break even?

I would say it is probably just a little bit premature for me to comment on it. I will let our actions speak for itself over the next couple of quarters because anything I would give you would be complete speculation. And I can't do that. I can, but I won't.

Okay. Well, let me ask you a broader question with respect to your comments earlier. You guys are in the enviable position to be sitting on cash that many would love to have and looking at PPIP and other Government programs. I would argue you might be a little optimistic with respect to being able to buy assets at attractive prices through the programs the Government is outlining at least because the banks are not willing to sell at the prices that make sense for you to reload out at and get attractive enough margins and returns.

So unless banks are willing to wipe out their capital and actually take the hit and capitulate which we so far have yet to see, even if the bid is somewhat higher because they can get some leverage now off of whatever program is Government is offering through PPIP or TALF or you name the acronym. The gap is too wide still. So it seems like the iterations that need to unfold, we first need to see the banks capitulate on their commercial real estate and a lot of the dirt is worthless. So where is all the optimism coming from, Larry?

The optimism is coming from the fact that there is 335,000 new homes being built in I think and that will continue to decrease for a period of time. And I believe there will be a pent up demand created through the shortage of brand new homes never occupied. And I am not talking about foreclosures. Excuse me or anything like that. I am saying brand new home, single family, detached never occupied. And that demand is ultimately going to increase. And as the demand increases the ability to pay a little bit more for the land becomes available because you're able to create your gross profit margin through a little different pricing model.

Additionally we are not waiting for the banks to capitulate to create assets that we can acquire. There's a lot of movement out there. And it is just like anything, there's a bid and there's an ask and the bid is not going to move up until there's a proper profit. And if you have got assets that you want to sale eventually, you're going to adjust your expectations when you're ready to move it. And we believe that those two influences will cross at some point and that will be the time that we will look forward to take advantage of it.

Your next question comes from Jay McCanless. Your line is open.

Hi, good morning. Wanted to dig deeper on the gross margin specifically on the west. I believe even if I made the adjustment for the warranty it looks like the gross margin was up about 300 to 400 basis points year-over-year. And I was going see if that was from I know most from was from impairments but were you seeing better results in California, we're you seeing better results in Arizona, was there something operational there as well?

Jay, it is hard to say that, I mean because of the weight that the impairment carries and that gross margin. I mean that is the predominant reason.

Okay. And then just to harp on California a little more, are you call anticipating flexing up your specs there? Are you seeing any positive reaction from state tax credit there in addition to Federal first time credit?

I think it is working. And we will see what California does by policy and the expectations from California. I think ultimately, we all believe California is going to exist as a vibrant economy. And they have got their problems, but history shows they cycle through them. And I think the affordability factor that housing is now able to deliver will ultimately come back into play.

Your next question comes from Eric Landry your line is open.

Hi. Good morning, thanks. A couple of building who have already reported first quarter results and had pretty strong gross margins are talking about per foot cost in the $35 to $40 range. Larry you mentioned in your opinion is that where people are going to have to be to be competitive here?

Talking about selling or buy something. Talking about construction costs; right.

Yes, exactly.

I was going to say if you were selling at that level we would be a buyer. I think that from the first of all every market is different. What we build in Phoenix and Nevada versus southern California or the mid Atlantic or even Denver are all different. But I would expect that $35 to $45 range depending on the quality and what's included because sound bites don't give you a complete break down of who includes what in that number. Could end up being a good guideline which will mean that the consumer will truly get a real value.

Part of competing with the resale market and competing with impaired assets is to deliver new product that is reasonably competitive and to do that you need more efficient plans and lower construction costs. And both of those are in the process of taking place at this time.

I have one more question but real quick do you believe that a descent percentage of the industry is there yet at that range?

No, I don't. But that's okay.

Okay. One more question.

I am not interested in a decent percentage just a few.

All right.

Your next question will come from Joel Locker, your line is open. Your line is open. Mr. Locker, your line is open. We will move to next question and that will come from Jim Wilson, your line is open.

Thanks. Good morning, guys.

Morning, Jim.

Was wondering -- I mean I think most of my questions have been answered but could you give a little color I know you talked about your mix of first time and first time moving or maybe now are moving to 80% or so of your business. Could you give a little regional color or thoughts? Because obviously it is some places more or less difficult to change product or change focus but mainly in your biggest markets, California, Arizona, Nevada, and Colorado?

I think you should assume that we will do our best to have that guideline apply in all those markets.

Okay. And how much let's see, given how much or how much could this change with new product introduction? I guess maybe you are going to take it toward 100% once you roll it all out?

Well I don't know that anything is ever going to be 100%. We will roll it out as quick as we can efficiently do it. And see where the market is at the time that everything is implemented. So, I don't want to be so optimistic to give you an impression of something that we may not be able to get to immediately. But the markets will really tell us if there's an opportunity and a little higher price point. Meanwhile we will focus on the sweet spots which is the 80% category.

Your next question comes from Michael Rehaut. Your line open.

Hi, thanks. Larry just kind of hitting on some comments earlier, and I don't want to necessarily overly focus on this but just to clarify more so. With the comments related to PPIP, given that with your typical investor presentation, one of the first slides is no JV's, no off balance sheet, simple no even attached units. Why would you -- I mean I would think that kind of participating in some way in a direct investment in a PPIP related scenario in terms of getting an interest in these mortgage securities would be pretty complex and off center in terms of your core mission as you have stated.

So I just want to be clear in terms of if that's really what you are look at? Or more is it that you are in close discussions with the banks in terms of trying to acquire or eventually looking at acquiring at the right place of course actual land which you can kind of put through your own machine in the way that you always have?

I think that our first design will be to do regular delivery which we have always done. What I don't want to do is foreclose the fact that there will be unique assets out there held by others that will have a need to have a builder to be part of it, to maximize their investments, and our investments. And one of the reasons why we stayed away from ventures in the past is we didn't want to rely on someone else coming up with their money, we'd rather come up with the money and know that our destiny was in our own court.

And of course we don't know what the rules are of the PPIP. And I don't know having the Government participate in theory with part of the equity and part of the upside is going to be a formula or is it going to be complicated? Is there going to be procedures? We don't know. And until the regs are out, what I don't want to do is as we come into this next period of time, there is going to be different types of structure that there is going to be different types of structure that are going to in the past have not considered. And I want to have an open mind and an open door to listen to and look at what might be available.

And it is I think it is good business and we are going to continue the philosophy of having our destiny in our own hands. That's not going to change. But we are open to look at different structures.

Okay. Thank you.

Thank you.

Your next question comes from Alex Barron. Your line is open.

Hi Larry, I was wonder if you coil elaborate on the deals you have seen that maybe you've past on. What is it about those deals? Is it you think you can't get the sales pace that you need or are the prices are still too high and therefore you couldn't get the margins to work?

You know Alex I think you would be A, B, C and D. Each one has its own nuances. What we don't want to do is be early. What we don't want to do is end up with assets that have complications with them. When you're in this period of time, there will be enough available that we don't have to be the lead bid. And we are going to continue to do what we have always done which is as you know we underwrite every single asset one piece at that time and we are going to continue to do that. I don't think there's one thing specific that I could highlight other than the fact that on a risk adjusted basis, they don't clear committee. And every asset we acquire goes through a full underwriting and goes to committee and it will continue that way.

Okay. That's fair. I wanted to ask a slightly different question as far as your current lot inventory, what percent of those lots are finished? And for the ones that aren't finished how much extra money would it take to get them to a finished date?

It is a very high percentage. It is already finished. And the dollar amount I don't have a dollar amount for you, Alex on what it would cost to finish those, but it is 80 to 90% finished.

We're there, there's stuff that needs to be done on some. But you're dealing with substantially most of them.

your next question comes from Eric Landry.

Thank you very much. Larry, with regards to your inactivity would you say that it is more a factor that you are just not seeing enough A property or that you are seeing plenty of A type properties it is just that the offer is too high? Can you generalize even?

Yes, I'd say that we are only interested in As. And we are just not quite there yet. I don't know if that's a function of 90 days or six months. I really think the Government will be helpful to the entire financial system as they roll out rules and regs for the banks. And directly or indirectly, the land bankers have loans at bank, builders have loan add banks. The banks now know kind of what the guidelines are. And it is kind of a cycle and everyone has been waiting as you can see by the markets reaction the last 24 hours. We need for the log jam to clear in order to start to working through these assets that are on the in the market that need to be liquefied. And so we will just have to wait. My sense is that it will be within a reasonable timeline.

So if I hear you correctly you are say that there are plenty of A's out there it is just that the price is not right at this time?

Well, there's never plenty of As, but there are an adequate amount.

Okay. Thank you.

At this time, there are no further questions.

Well, we would like to thank you for being on our call today and we look forward to having you for our second quarter call. Thanks.

This concludes today's conference call. You may now disconnect.