MDC Holdings Inc (MDC) 2009 Q3 法說會逐字稿

We are ready to begin the MDC holdings Inc. third quarter 2009 conference call. I will now turn it over to Bob Martin, Vice President of Finance and Business Development. Sir you may begin your call.

Thank you, good morning ladies and gentlemen and welcome to MDC holdings 2009 Q3 earnings conference call. On the call with me 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 listen-only mode. After prepared remarks 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. This conference is being recorded and will be available for replay. For information on how to access the replay, please visit MDC holdings.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 business, financial condition, results of operation, cash flows, strategies and prospects and response 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 and 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 2009 third quarter form 10Q. It should be noted that SEC Regulation G requires that certain information accompanies the use of non-GAAP financial measures. Any information required by Regulation G will be posted on our web site.

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

Good morning and welcome. During the third quarter we saw some indications of improving business conditions for our industry but these positive signs were largely overshadowed by issues at the forefront of the national economic picture including continued deterioration in employment levels. However, each as volatile and uncertain conditions persisted, we were encouraged by a year-over-year increase in our own net home orders for a second consecutive quarter. We believe that the improvement in our home orders was made possible by our Company wide initiative to reevaluate, transform and streamline our core business practices. During the third quarter, we continued to expand our offering of the small more affordable homes that we introduced earlier this year in an effort to better serve the changing needs of our customers. In addition, to improve affordability for our home buyers, we initiated a sales program during the quarter which focused on providing low mortgage interest rates. We also positioned our inventory to allow buyers the opportunity to close on homes, prior to the impeding expiration of the federal home buyers tax credit.

During the quarter, we strategically increased the number of unsold homes available for personalization by more than 40%, while we decreased our finished homes by more than 75%. We believe that this approach will help to improve our profitability as the margins we realize on unsold homes available for personalization significantly exceed those of finished inventory. We generally stop construction on unsold units at the drywall stage. Once construction is restarted, these homes can close within 45 days, which allows us to directly compete with finished homes in the market. However, by holding the units of drywall, we offer our buyers the opportunity to personalize the home in one of our home galleries.

After several years of relatively limited land acquisition activity, during the third quarter we secured control of almost 1,300 additional lots to direct acquisitions or option contracts in the third quarter. As always we have underwritten these lots with great care using assumptions that we believe were appropriate given the current market conditions and submitting each to be reviewed and improved by our asset management committee. We anticipate starting the construction of homes at each of those projects as soon as possible. Doing so should allow us to add additional home closings volume starting in 2010 which is a key focus as we strive to return to a period of growth and profitability. Even after we funded our acquisition activities, we ended the third quarter with $1.6 billion in cash and investments. Therefore, we are well positioned to continue making opportunistic investments as we build our land pipeline for the future.

I will now turn the call over to Chris Anderson for more specific financial highlights.

Thanks Larry, good morning everyone. For your reference and as we have done in previous quarters, we filed our 10Q you earlier this morning. There is significant detail available as you look at our quarterly results. I'll hit some of the major points with the rest of our slide presentation and I'll start with orders. As Larry mentioned, in the third quarter, we received 1,016 net homeowners, which was a 52% improvement over the same period last year and a 4% increase over the second quarter. Each of our segments showed improvement in orders year-over-year but the most significant was in the mountain segment. Within our segments, only California and Delaware Valley had a decrease in net orders and in both cases, the decrease was caused by a decline in active subdivisions that exceeded the Company average. For the Company overall, active subdivisions were down 35% year-over-year including double digit declines in every market. Our average monthly net orders in active subdivisions improved to 1.8 for the third quarter compared with 0.8 in the quarter a year ago with improvements in every market.

Our gross orders were up 8% for the quarter, which is the first year-over-year increase we've had since the third quarter of 2005. Cancellation rate of 23% was half of the 46% in the Q3 of 2008, and the rate also decreased if you look at cancellation as a percentage of beginning backlog to 33%, as compared with 36% a year ago. The average price for the net homeowners decreased 2% year-over-year to roughly $268,000. Not a big change but the number is influenced by cancellations, if you look at the average price of homeowners year-over-year decline is 7%. As Larry mentioned earlier, the smaller, more affordable homes we started selling earlier are starting to have a definite impact on our results. It represented over 20% of our gross home orders during the quarter, with individual markets as high as 50%. Also we had great success this quarter in generating sales through a nationwide sales promotion, during which we offered incentives including attractive interest rates and positioned inventory to allow certain buyers the opportunity to take advantage of the federal tax credit.

Moving on, the strength of orders for the first time since the fourth 2005 units in backlog increased year-over-year by about 15%. For just the quarter backlog jumped 38% to current level of 1,298 homes. Average price in backlog is down 9% from 323,000 last year to 295,000 at the end of this quarter.

Moving on to inventory. This slide shows the trend over the last 12 months for land and work in process inventory. While inventory overall is town 37% over the year, it's up 2% in the past quarter due to increase increased the number of homes we have under construction as we prepare for fourth quarter closings. Looking at (inaudible), we decreased our lot account by 19% over the past 12 months and by about 7% for the quarter. The decline in the third quarter primarily was the result of transferring lots to our work in process inventory at the start of home construction, in the normal course of business. Partially offset by net acquisition of 650 lots during the quarter. See on the income statement we had $9.4 million in land sales during the quarter. But all of these sales actually relate to acquisitions we have done during the quarter. Situations where we only wanted part of a land parcel that was offered in bulk and therefore, we simultaneously sold some of the lots to a third party buyer as we closed.

Of the 6,264 lots remaining, about 600 classified as held or sale. Meaning that we 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 $6 million with California having the largest concentration of those lots. As we noted previously, our active subdivisions down 35% from 211 at September 30th, '08 to 137 today. In the third quarter, our active subdivisions fell slightly from 142 last quarter.

Next slide gives you picture of unsold home inventory, which tells a compelling story about our strategy. As we mentioned last quarter we believe the use of unsold inventory can be a very effective strategy if managed properly. Our experience tells us that a home that's been personalized for its ultimate buyer at one home galleries or design centers is much for profitable than a home that is sold after it is finished. So we concentrated on building a supply of unsold homes that fit with this strategy, while reducing our exposure to unsold finished homes. On the slide you can see the combined number of unsold homes in the foundation of frame categories which we call unsold homes available for personalization, increased by 42% in the third quarter while we reduced finished unsolds inventory by 77%. As Larry mentioned earlier, while the strategy is a good tool for operations, it's also a great thing for our buyers. We typically stop in unsold home at drywall and at that point, they can close in about 45 days once we restart, which competes nicely against finished homes on the market. However, by stopping construction at drywall, we do give our buyers the opportunity to personalize their homes in one of our home galleries or design centers, which is a fantastic selling point.

Turning to the next slide on land acquisition, this is a new slide for us this quarter, I think it gives you a great picture of how the land acquisition efforts progressed over the past five quarters. We put almost 1,300 additional lots under our control in the third quarter including about 500 through direct purchases and 800 through option contracts. That's clearly a big increase over any of the previous four quarters you see here. In addition we acquired about 150 lots through option contracts already in place at the beginning of the quarter. As always, we continue to underwrite all of our land acquisitions cautiously with every deal requiring the approval of asset management committee.

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 from the third quarter but we are able the narrow our losses on a pretax basis and on an after tax basis due to a significant decline in impairments and SG&A. Total revenue for the third quarter fell 44%, to $203 million mostly due to a 41% decrease in home closings. In addition, the average closing price was down 6% to $283,000 in the Q3, down almost $18,000 from where it was last year. All of our markets are down except for Virginia and Delaware Valley with the biggest drops in Nevada, Utah and Jacksonville. In Virginia and Delaware Valley, the increase was mostly a function of selling larger homes.

Looking at gross margin, overall for the Company we were at 18.9% in the third quarter, which was up 360 basis points from last year and up 90 basis points from the second quarter. I will give you more detail on that in a moment. We also have a slide later on for impairments as well but the story is fairly simple for the second quarter in a row, impairments were minimal with only about $1.2 million recorded. Looking at SG&A, we decreased our SG&A expense year-over-year by about $27 million, a 46% drop. On annualized basis, that would be about $108 million in savings.

Looking at financial services, our segment shifted to a $4.3 million loss this quarter down by almost $8 million from the same quarter a year ago. The decrease is primarily due to increase in G&A expense of $5 million. $6.5 million of which is associated with an increase in our loan loss resolves, as compared with what we booked a year ago. And we experienced a decrease in the gain on sale of mortgage loans, broker origination fees and insurance revenue of $2 million.

I want to give you more color on loan loss reserve. As has noted in industry reports, mortgage performance continued to deteriorate in the third quarter as evidence by significant year-over-year increases in delinquency rates. Additionally foreclosures and forclosures in process have increased substantially. Similarly, our mortgage company, Home America Mortgage, has experienced an increased in the number and magnitude of demands to repurchase previously sold mortgage loans. Accordingly Home American increased estimated loan loss reserve by $7.3 million during the 2009 third quarter compared with the reserve increase of only $800,000 booked in the Q3 last year. As noted above, the increase is included as a component of G&A on our income statement.

Now on the corporate side, our loss increased $27 million in the third quarter as compared with a $21 million loss a year ago. A couple of things drove this decline. First, we earned almost $6 million less in interest income during the quarter as higher cash balances did not offset much lower rates of return on our investments. Second, corporate G&A was a up slightly in large part due to $2.6 million write off of prepaid finance costs associated with the reduction of the commitment under our home building line of credit. Overall our pretax loss for the third quarter was $32 million, down from $117 million in the same period last year, and our net loss for the quarter was $32 million compared with $118 million in 2008 third quarter. We also recognized $12 million valuation allowance against our deferred tax assets in the third quarter compared with $61 million we booked during the same period last year. As of September 30th, total valuation allowance is $339 million, which is a full reserve of our net deferred tax asset.

Now looking a little bit closer to home gross margin, this slide shows trends since the third quarter 2008. On a after interest basis, margins improved in the third quarter both year-over-year and sequentially. Interest continued to have a significant impact at 380 basis points, which is 100 basis points higher than the third quarter last year, but 90 basis points lower than Q2 of 09. Looking at things before the interest impact, shown with the green bar on the slide, our gross margins are up by 360 basis points in the same quarter last year, with a two-fold explanation for the improvement. First, our warranty adjustment in Q3 increased the margin by 590 basis points as compared with an increase of only 100 basis points in the third quarter of '08. Second, as we mentioned in prior quarters, the improvement in margin largely a function of the significant amount of the impairments taken in the past. So, what you see here is as a result of inventories been appropriately valued to market conditions over the past 12 quarters.

Looking at the sequential trend compare with the second quarter, our preinterest gross margins were unchanged. We took similar warranty adjustments in both quarters resulting the in an elevated margin level for both periods. Now if you take out both interest and warranty adjustments in all periods, the gross margin is 16.9% in the third quarter of '09, which is about even with 17.2% in the third quarter '08 and 16.8% in the third quarter of '09. So even though we seen price declines over the past year, our gross margin is held steady when you remove some reconciling items.

Now turning to selling expenses. We reduced these expenses by nearly 47% year-over-year. The decrease in commissions is really just a function of decrease we've seen in home sales revenue, but the reduction in marketing expenses is a result of our efforts to reduce the expenses we incur related to model homes. Over the past year, the 50% decline on model home count has outpaced our 35% decline in actively subdivisions as we've reevaluated the number of models we need in each community or move to sell homes in multiple communities, using a single set of models. And we continue to closely control the merchandising spend we put in each homes. Amortization of these costs was down almost 35% in the third quarter compared the the same period a year ago.

Moving on to G&A expense. We are down 8% as compared with last year's third quarter. But keep in mind G&A for third quarter is running higher than the past couple of quarters for a couple of reasons. First, as I mentioned before, the $7.3 million reserve for mortgage loan losses is part of G&A as is the the $2.6 million charge we took as part of reducing our home building line of credit. If you take out those two items, we are running around the level we have been for the past two quarters which is a significant drop from a year ago. We have done this primarily through a significant adjustments to employee head count which is down by approximately 20% from last year. On our final slide here we have update on impairments for you, this shows the history of our impairments since the beginning starting in the third quarter of '06. As I mentioned previously, impairments in the third quarter of '09 were minimal. But we did book a small amount in Colorado, Florida and Nevada markets covering just 61 lots in these three subdivisions. We anticipate our impairment levels will remain low going forward given our low exposure to lands inventory.

To sum up, we are encouraged by what we have been able to accomplish during the third quarter, including the increase in homeowners and additions to land pipeline. We know we still have work to do in order to bring MDC back to a period of profitability and growth and many obstacles still exist on the road to recovery for our industry and the economy overall. We are intensely focused in the fourth quarter on these strategic initiatives, we believe will allow us to progress towards our ultimate goal of creating long-term value for shareholders. As always, I want to thank our MDC team from across the Country for the tremendous work they do everyday to put our Company at the top of home building industry. I would also like to thank everyone on the call for their continued support and interest. At this time, we will open the line for any questions you may have.

(Operator Instructions). Your first question comes from the line of Buck Horne from Raymond James.

Good afternoon. I was wondering if you could talk about the reserves further specifically on the warranty side. Several quarters in a row now where we seen benefits from the warranty reserves. Maybe explain what is going on and is this going to end any time soon or see continued benefits to the gross margin from warranty reserves coming back and then on the loan loss reserve from the financial services division, wondering what the risk is necessarily or why such a large reserve need to be taken given how much of your originations are government insured or conforming products wondering what the major risks are there?

Buck, this is Chris. I will give you a couple of points on the warranty piece. There were two things that impacted warranty reserves this time. One was actually a settlement of some prior construction defects in Nevada. That was about $7 million of the $10 million in warranty adjustments. So of the ongoing revenue adjustments that you've seen over the last few quarters were only about $0.6 million. The $7 million was a distinct item that happened as a result of resolving some construction defects from several years back. And will that continue? I think what we seen is our warranty payment experience is what informs us of what we think are expected expenditures will be going forward. We think we done a good job on improving the quality of our homes and improving customer experience over the last several years. And I think its I'm not going to project out what I think is going to happen to that but we seen a downward trend in our warranty payment experience. That's what's been driving that.

On the loan loss reserve we've watched this carefully and the loan loss reserve primarily relates to loans that were underwritten in prior years, not the most recent 12 to 18 months. So they're really related to older loans that ultimate I will have been made their way through all of the foreclosure process and now come back if the form of demands. As we disclose in our 10Q, we carefully evaluate that and take all of the inputs that we have to make the best estimate that we have and we think at this point that's our best estimate for our exposure on loans previously sold.

All right, thank you.

Your next question can comes from the line of Ivy Zelman from Zelman and Associates. Your line is open.

Good afternoon, guys, it's Alan Ratner on for Ivy. I was hoping to dig in deeper about your comments about the gross margin, kinds of stripping out the warranty, noise, gross margin actually declined on a quarterly basis couple of hundred bips versus the second second. And I know you guys have done a great job of taking your medicine on the impairments up front and obviously been posting pretty strong margins but that's kind of counter to what we seen from your other peers in that the third quarter results so far have demonstrated a nice pick up on the margin and some is catch up and some is stabilization we are seeing on price. The question is looking forward kind of directionally, would you expect there so be a lot more upside there assuming prices could be stabilized or are you actually experiencing a lit built of a negative mix shift now that maybe some of the newer deals you are underwriting aren't the level you are seeing from some of the impaired assets coming through.

Couple of responses one it's difficult to do comparisons to the other builders because of the large impact impairments have and the -- I know what our approach has been to impairments, we feel like we have taken those, took those largely early you can see what the trend looks like for us. When I look at our margins, as I did in my comments I look at sequentially and year-over-year when I adjust out interest and warranty adjustments I'm at 16.9% margins for Q3, 17.2% for Q2 and 16.9% last year. So I look at that and think about the price degradation from the top line and average stilling price and pretty happy and think the improvements we done on purchasing and product and costs have helped us offset the price erosion that we seen.

Related to future margins we are not going to comment on what projection will be on margins. But we feel made a lot of progress on our product and pricing and the value and the mix of our product and think that 16.9% margin holding that with the price declines and we are pretty happy about.

I appreciate that and thank you for the color there. If I could one second one, just on the land acquisitions you made in the quarter. Can you give color related to geographies where some of the lots were isolated. I would assume the vast majority are finished do. Do a lot of them tie in to the 2010 closings plan and if not, maybe give a little bit of color on kind of what the duration of those lots might look like?

Well, we are focused on acquiring finished lots. Those were finished lots. And they are to be closed or homes to be started and closed in 2010. They are definitely part of the 2010 plan.

Okay. Where they kind of focused on any specific geography or spread pretty evenly across your markets.

We are focused on every one of our markets where we are, and positioning ourselves to improve and increase our position.

Your next question comes from the line of Nishu Sood from Deutsche Bank your line is open.

Thanks. I wanted to follow up on the last question on lands purchases as we see the builders generally begin to pick up land purchases, the experiences to date, what we have been hearing is diverse, some people have been quite aggressive, some people have been arguing that the opportunities are more limited, now looking at MDC's tradition of being conservative and cautious, obviously that is reflected even in the way you described the conditions in the third quarter. I would expect MDC to traditionally be towards a conservative side. With 1300 lots that you taken control of, that's the higher ends of the spectrum we heard from some of competitors, wanted to get your sense of how you relate what you are sneak the market to the land purchase activities we seen from you in the third quarter.

I would say that we are focused on on expanding the land purchase opportunities across all the markets. Highly scrutinized underwritten and focused on where they fit and as our prior policies have been, we look for acquiring assets that we can utilize within 24 months of getting a building permit and that's what we are doing. We think that there is probably more availability that is attractively priced coming to the market and for those builders that are able to transact in a efficient manner, we believe that the patience that we had over the last three or four years will be properly rewarded.

One other comment on that, if you look at our presentation the breakdown of those 1300 or 750 are option. 500 are actually acquisitions. We are pretty conscious of our direction in what we want to do and our strategy.

Larry, Is there going to be a difference in how the different builders approach the market depending on degree of legacy assets. In other words, you have less legacy assets to deal with as you enter the land market here looking ahead to a future recovery, how does that show up in differences in terms of your negotiating stance perhaps or what sorts of opportunities you look at or how the sellers out there might react the the different bidders.

I would say that most of the other large builders in the country have capital. They're able to transact if they wish to and seems to be an indication several of them are acquiring some land I think a material difference would be since as you see our balance sheet, we have a nominal amount of prior assets and we should be able to see going far a better inventory turn because our inventory will be turning with current assets versus legacy assets.

Your next question comes from the line of Josh Pollard from Goldman Sachs, your line is open.

Good afternoon, Larry you tell your team not to hurt the core infrastructure in an effort to cut costs this relates to the directly to your G&A costs, with that said, what that said, when you put that together, what are you doing in your land acquisition strategy to really try and get some leverage off of the current cost structure that you already have.

Our land acquisition strategy is we are continuing to emphasize in I think almost every market our team or acquisition teams, and on a selective basis adding people to the land group as we perceive the opportunities for us and I really can't measure what the other person may or may not do, or going to be present. And as I have commented over the last year or so, we have spent and we are spending capital on improvement of information process procedures, broadly defined training, upgrading sales personnel. New product introduction. And the land component part I think I commented maybe a year ago and someone said well when are you going to start buying, I said, well, read the Q. So we have been a little bit more transparent which I think you could comfortably interpret meaning that we are becoming more comfortable with where we are as a Company and I think the public disclosures by the government seem to indicate some of the indicators are improving but for us specifically we've seen a improved on in the market place for our products specifically.

Along that same line can you talk abut your incentives to sell home as those numbers as a percentage of the price of the home gone down. Can you quantify that over call it the last two or three quarters.

I would say they they are trending down slowly. And them is all as you know specific market adjustment predicated on really subdivision by subdivision because each of the projects has different challenges but we believe that as the market firms up, you will see further reduction of incentives which of course will enhance the gross profits.

Your next question comes from the line of Josh Levin from Citi. Your line is open.

Thank you, good afternoon. Larry, you talked about how you positioned inventory to take advantage of the home buyer tax credit. How much of a net orders this quarter would you guess were driven by the tax credit? Would you say it's a lot or little or somewhere in between?

Somewhere in between.

I shouldn't have left it so open. Can you narrow it down a little bit?

I'm sorry, say that again.

Do you think a fair amount of demand was pulled forward. Where do you think it might have been without the tax credit?

We were pleased to see that the percentage was not as large as one could have expected. And of course having said that, and reading what is coming out of Congress, I think is like the car program there is a lull immediately afterwards and we will see over the next couple of months. What took place versus theoretically, but I think what it really did was create some enthusiasm in the market, created some urgency, and but that should not lead one to the conclusion that the overwhelming sales were only because of the credit because many of the people didn't qualify for it and they knew at the time of contracting that the homes that they were contracting for would not be available by the end of November, so consequently we felt good that the momentum created was helpful on the broad spectrum.

On the land market, when some of your competitors talk about the lands or lots they are buying, only buy lots with 18% or 20% minimum gross margin, would you think about buying land that gives your lower gross margins, 15%, but offers higher IRR. Because you can use options and not have to tie up much capital.

I would say we would be very flexible because as we all know everything is done on a risk adjusted basis and a lower gross with little or no risk and high IRR as you commented I think you are focused appropriately.

Your next question comes from the line of Carl Reichardt from Wells Fargo Securities. Your line is open.

Hi, guys, how are you? Two questions to start with just on the assumptions you are using in pro formas for current acquisitions can you give may general sense of what you are expecting in terms of pricing and what you expect to happen to direct construction cost?

No.

A little more detail than no?

You always ask the question that -- I would say the performance that we are seeing is in line with our goals of the new acquisitions that the gross profit margins -- we are not looking to transact on diminshed margins, we are hoping to transact on in line margins and I think the prior question dealing with IRR probably as we focus on our inventory turns, because of having the ability to do that it should result in substantially better performance on those assets.

Okay. The reason I ask is if land shrinks as percentage of overall input cost but wrong on your pricing assumption and directs and there are a higher portion of your cost base especially on quick turn stuff, I wonder whether or not the pro formas are right or wrong. That's why I asked the question. On the drywall plan that you guys have been using, what amount of time is there between the stop and restart for a customer choosing colors up and grades between a stop and drywall and start.

We think it will really add a more likely -- in today's market it might not add anything because there is a strong demands for the product and we are able to deliver it in 30 or 45 days. So it's not like we are in a big hurry and then we just stop. Everything is measured even the drywall hold ratio of presales to drywall hold is a controlled factor and as you can see from the information it's almost hard to believe that there is only 17 finished homes in the whole Company and so the strategy of the drywall hold as we've previously discussed in prior periods, the gross profit margin on those items that are in the design center are materially greater than the gross profit in the basic home. And this allows us to increase our overall gross, but I guess the best part is the home buyer is actually able as we call it is able to personalize what they've buying and we believe that this is more responsive to their desires and consequently the design centers that we have developed have continued to not only do well but our procedures are being better integrated and I think it will help us overall in our gross profit margins without a deterioration to the inventory turn.

Your next question comes from Daniel Oppenheim from credit Suisse.

Thanks very much. Talking about what happened after the tax credit you described it as a lull after cash for clunkers and similar things happening in housing, can you elaborate in materials of what that lull is that you are seeing here in October especially at the end of the month won't be difficult to sign contract and have a closing before November 30th.

First of all we you believe usually don't comment on current activities other than the fact that I think overall there has been a lull, one. Two, we are able to anyone we contract with since we have available inventory drywall hold, we can certainly get those homes done by the end of the year and so that's what we will be focused on.

Secondly, wondering about the land supply having just 721 lots in California right now in the past that's been a market of focus that's region of focus. Do you have goals in terms of land purchases over the next year within the geographic regions?

I would say that you should look to us to focus on all the regions of the country and California has I think 38 million people and they've had plenty of challenges in their budget their economy, but there are places in California that we believe we can execute and do it profitably and do it with the low risk and that's what we are working on and we you should assume that there will be further activity on our part in California.

Your next question comes from the line of Michael Rehaut from JPMorgan.com. Your line is open.

Thanks. Good morning everyone.

Good morning.

First question, just on trying to get a little more color if possible, on the demand as its play out during the quarter and post quarter. Certainly stock is down a little bit today I think on questions around the sustainability of sales pace as the sales tax expires. So wondering if you could give us a sense of how the order growth progressed on a year-over-year basis throughout the quarter, and what you are seeing post third quarter?

I can comment a little bit on the third quarter. Concurrent with the government's emphasis, we also had one of our most successful marketing programs initiated which was very successful as it was concurrent with the government program. The rollout of what is going to happen in the fourth quarter is premature, I think for everyone, at least this morning it sounded like we are going to have an extension of the tax credit planned which I think will be good but I'd like to refer back to a prior comment that those persons buying in the third quarter that the focus was not singularly on the tax credit because homes were contracted to be delivered between the contract time and later than the end of November. So I believe that there is a face demand and we can't measure it until we have a little more experience and some hindsight of what is taking place in the market after these last week or two.

In terms of the incentive in in vis-a-vis lower mortgage rates off the closing, on a overall basis, when you look at this kinds of feature in the sales program relative to just with that including the total amount of incentives you are offering on the homes you sold during the period, would that be in a net increase on a total level of incentives for the homes sold relative Q2 to Q1?

Mike, not really because when we look at that it ends up being a mix between the incentives that are offered, so may give more mix to the incentive on a rate and little bit less on a closing cost or we may change some other incentive, so it's hard to I wouldn't say that that caused us to balloon up. We are very conscious about margins on sales.

Your next question comes from the line of Jay McCanless of FTN Equity, your line is open.

I wanted to ask first fl was any impact from the 77% reduction in finished specs on the gross margin. If so could you quantify it?

We have not quantified that and disclosed that Jay, we are certainly conscious of that and as we have said, margins on finished are significantly lower than margins on your drywall hold product.

Okay. Second question, and talking hypothetically about the credit as the latest seems to be out this, the $6,500 I think maximum for move up buyers is that something that number one you all think might pass and number two if it does do you think you would get more aggressive on building some of these drywall specs since those move up customers would seem to fit in your wheel house?

I would say until anybody knows what the law's going to be, it would be just speculating of how we react to it. And we probably also want to see how the market itself reacts. Sometimes you find that the buyers aren't nearly as sophisticated the nuances of the programs, so everything that's taking place is not program oriented, so we will see what happens in Congress I guess next week. And then we will see how the public responds, but we're actively operating assuming that there is no extension to the tax credit that expired in November, and that's the way we run our business and if it happens to be reinstated in some form or another, that's just a bonus.

Your next question comes from the line of Jim Wilson from JMP Securities, your line is open.

Good morning, guys.

Hi, Jim.

I was wondering on the new lot acquisitions if you could give us a little color on timing of the community rollouts and if you can contrast what you expect in the way of margins versus your existing business?

I would say you should anticipate the community rollouts to be starting in 2010. And as I said previously our underwriting requires that as a general guideline, it's a 24 month absorption predicated on current predicated or current absorption rates and the margins one would expect to be generally in line with what we are seeing subject of course to market conditions.

I guess maybe goes without saying but you would consider everything you acquired be of a quality in terms of location?

We certainly expect so.

All right. Okay. All right, very good, thanks.

Thanks, Jim.

Your next question comes from the line of Alex Barron from Agency Trading Group, your line is open.

Thanks. I have a couple of questions, one was if this five year NOL thing gets passed I was wondering with you think is immediate impact that you might be able to Monetize from that.

We haven't calculated it for a couple of hours. We haven't made a comment on the -- at least in the form it was in yesterday, I think it's a substantial amount of money but I'm not sure today or Chris --

Alex, you can we -- we do a break down of our deferred tax asset, its footnote 15 in the 10Q. I think that will give you some feeling for what our numbers look like for NOL amounts. Right now our NOL is at $86 million as of the end of September.

Okay. The other question was I was wondering if going forward once you guys do become profitable, can you give us a sense of how the accounting is going to work from a GAAP stand point in terms of what would happen to your deferred tax asset. Does it get reversed all at once or over time, how does that work?

I think that's still to be determined. So that question is still open. We would like to get to the answer to that by profitability as soon as we can.

It's a excellent question that the accounting industry not just for home builders but other companies that have impaired their deferred tax asset and I don't think that the major accounting firms have written a position that is firm because the circumstances continue to change. But I would guess that there will be more transparency from the accounting groups the major accounting firms over the next 30 days. Because that is a opportunity that will be needing to be dealt with.

Your next question comes from the line of Joel Locker from FBN Securities. Your line is open.

Just a question on community. (inaudible) 10 fct sequentially, where you see it at ends of the Q4 and Q1 of 2010.

We have not made a projection and won't make a projection exactly on where we think that will be. I think the best indication is our chart that we have in our presentation that we're actively pursuing the addition of new lots and new subdivisions. But as Larry mentioned, some of those take a little by of time to get on line for closures to happen.

Right. Just the other question about obviously you've been conservative when it's come to cash balance of 1.6 billion or so, I was wondering if you were starting to lack at cash as more risky than buying land, just based on what the fed and central bankers are looking at money supply. I know you looked at it from top down from the industry I want to get your thoughts on that.

I think if you had no cash you would probably think that it was pretty risky to have no cash and having a reasonable amount, we are a home builder and we expect to focus on building our business and as the opportunities come forward we consider we are in a position to transact and so I consider it a major asset having liquidity in order to participate in what I believe will be a continuation at least at this level or maybe even greater in the sales rate of new homes because we are expecting that new home sales on a national basis does not necessarily increase on a substantial way but that we will grow in out market share in each of the markets we are in. And over the next few quarters it will become more transparent in our markets where we are currently located we have an opportunity to increase it substantially.

Your next question comes from the line of Eric Landry from Morning Star. Your line is open.

Thanks, I was wondering with regards to increase in new land put under contract was that a function of your so to speak your hit rate going up or more activity in the quarter.

We are aggressively focused on acquiring more land. And we have a large pipeline going through due diligence and which is a very, very rigorous process and as you see from our comments each asset that we acquire is appropriately evaluated and underwritten, and we look forward to opportunistically accelerating that part of our business in preparation for growth and profitability going forward.

Okay. So I take it from the -- I don't really -- I can't -- I guess has the competition increased, decreased or you can't even tell at this point over the past say nine months for land?

I would say for "A" land that is finished it has increased substantially. That most land that is fully finished in "A" locations in quality markets, there is more than one buyer and that is good. That means that there is doubt that the market in the industry is getting healthier and we've always during good times and great times we've done welcome meeting -- competing aggressively in a good market I'm glad to see there is signs of it coming back, we are very optimistic.

Thanks.

There are no further questions at this time.

Thank you very much. Chris and I, we appreciate everyone's participation, we look forward to speaking with you after the end of the quarter.

Thanks everybody.

This concludes today's conference call, you may now disconnect