MDC Holdings Inc (MDC) 2011 Q2 法說會逐字稿

EventID. Good afternoon. We are ready to begin the M.D.C. Holdings, Inc. second quarter 2011 earnings call. I will turn it over to Bob Martin, Vice President Finance and Business Development. Sir, you may begin your call.

Thank you. Good morning, ladies and gentlemen. And welcome to M.D.C. Holdings' 2011 second quarter earnings conference call. On the call with me today I have Larry Mizel, Chairman and Chief Executive Officer.

At this time all participants are in a listen-only mode. After finishing our 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. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at M.D.C. 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 M.D.C.'s business, financial condition, results of operation, cash flows, strategies, and 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 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 second quarter 2011 Form 10-Q which was filed with the S.E.C. earlier this morning. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G will be posted on our website. And now I will turn the call over to Mr. Mizel for opening remarks.

Thank you, Bob. Good morning, everyone. During the second quarter of 2011 our operating losses increased, as we faced a very difficult comparison to the second quarter of 2010, which was heavily influenced by the Home Buyer Tax Credit. However, we achieved a 5% year-over-year increase in home orders. In addition, our quarter-end backlog improved by 28% year-over-year, positioning us well for the second half of the year. As we enter the third quarter, we're focusing closely on gross profit margin.

We have changed our view on the production of speculative homes which have yield margins significantly below those homes we start with a buyer under contract. Going forward in most of our markets, we will start very few specs. This is a significant departure from our previous approach, which allowed for a limited number to be constructed up to the drywall stage. Nevertheless, we believe it is the best opportunity we have to maximize profits from each of our subdivisions. By the end of the second quarter, our supply of speculative homes had already decreased 44% year-over-year. With our new policy in place, we should see this number continue to decline, and the percentage of our closings attributed to the more profitable homes sold with a buyer under contract, should increase.

We're also focused on reducing our expenses. Headcount reductions and other cost-savings measures taken during the last year have resulted in a 19% year-over-year decrease in G&A expenses. In the second quarter alone, we eliminated more than 100 positions, which should reduce our G&A expense in coming quarters. In addition, we completed a tender offer in July, on approximately $237 million of our senior notes to reduce our interest incurred. In total, we believe the second quarter headcount reductions, and the debt extinguishment, will save the Company nearly $20 million on an annualized basis. We will continue to focus on cost saving initiatives to position the Company for profitability.

We continue to believe and invest in our new enterprise resource planning system. We successfully installed the system in one additional division during the 2011 second quarter, marking the halfway point of our implementation. For those of you that are new to our story, this technology platform, when fully implemented, is expected to drive consistency in core process across the divisions, reduce operating costs and provide management with better accessibility to real-time operating data. While the implementation of this system has caused us to incur higher overhead costs, we believe that it will allow us to achieve improved operating leverage in the long term.

Thank you for your interest and attention. I will now turn the call back over to Bob Martin for more specific highlights of our 2011 second quarter.

Thank you, Larry. Turning to the income statement review, total revenue for the second quarter decreased 34% year-over-year to $216 million. The decrease was driven primarily by a drop in our home sales revenue due to a 38% decline in home closings, partially offset by 6% increase in our average selling price. We expected the year-over-year decline in home closings, as the second quarter of 2010 benefited significantly from the increased demand related to the Federal Home Buyer Tax Credit, and we started the quarter with a 20% fewer homes in backlog than a year ago.

Land sales revenue fell to $2.6 million for the 2011 second quarter from $5.7 million in the 2010 second quarter. Other revenue, which is mostly financial services revenue, declined to $7 million from $9.4 million in the 2010 second quarter, consistent with the decline we experienced in home sales revenue. Home gross margin declined by 500 basis points year-over-year, but sequentially, from Q1 to Q2, the drop was only 60 basis points. Our SG&A decreased year over year by 21% to $53.6 million. The selling cost component which is down 18% tends to move with revenue, explaining why you see a drop for this quarter. The G&A component, which is down 19% is mostly a fixed expense, so the change has more to do with the actions we've taken over the past year to reduce our overhead, such as reductions in our workforce.

Asset impairments during the quarter were $9.1 million, up from the 2010 second quarter when we had no impairments. The impairments this quarter were concentrated in our west segment, with most of the change attributable to just 6 projects. We also incurred $2.1 million expense related to projects under contract that we've decided not to move forward with during the quarter. This expense is included in the other operating line on this slide and is the reason for the $1.9 million increase you see there. Overall, we ended up with a $30 million loss from operations compared with a loss of roughly $2 million a year ago.

I will dive into some more specifics in a few slides. Looking at the rest of the P&L, other expense, which is generally net interest expense, showed a $2.3 million improvement. Through the careful management of our cash and investments, we have increased the overall interest rate we earned. In addition, given the increase in our inventories over the past year, we've been able to capitalize more interest instead of expensing it immediately to the other expense line. Overall, our pre tax loss for the second quarter was $30 million compared with a $4 million loss during the same period last year. Looking at the income tax line, we had a $2 million income tax benefit in the second quarter of 2011, primarily due to the settlement of various state income tax matters. So overall we ended one a net loss of $28 million or $0.60 per share, compared with a net loss of $4 million or $0.08 per share a year ago.

Turning now to home closings. We closed 709 homes during the quarter, which is down 38% from the 1,135 closings we had during the same quarter last year, which again benefited from increased demand due to the Federal Home Buyer Tax Credit. Most of our markets declined year-over-year, most notably Arizona and Nevada. Seattle, which we just entered through the acquisition of SDC Homes in late April, contributed 51 closings to our Q2 results. The average selling price of our closings increased 6% year-over-year to roughly $291,000. The increase was driven largely by a change in the mix of homes we closed. As I just mentioned, the biggest decreases in home closings occurred in Arizona and Nevada, which are our 2 lowest priced markets.

We also saw significant declines year-over-year in the average selling prices in our higher priced markets such as California, Maryland, and Virginia, as many of our new projects have focused on more affordable product. New subdivisions, defined as those acquired in 2009 or beyond, accounted for 66% of our closings in the 2011 second quarter. That's a significant increase from 22% a year ago, when we were just in the early stages of bringing our new subdivisions on-line.

Moving on to home gross margin, this slide shows the quarterly trend from the second quarter of 2010 to the second quarter of 2011. Our margins were 13.1% in the second quarter of 2011 compared to 18.1% in the second quarter of 2010, and 13.7% in the first quarter of 2011. The year-over-year decrease in the gross margin was largely the result of accepting lower margins to drive volume, especially on speculative inventory, consistent with our focus on reducing our speculative inventory count. In addition, land costs increased due to strong competition for finished lots and desirable locations. However, we believe that our land costs are consistent with our historical average.

Looking at the sequential trend, our margins were down from Q1 to Q2. The decrease was attributable in part, to a small increase in land costs as a percentage of homes closed, combined with a purchase accounting adjustment, that reduced our gross margin in Seattle, and impacted overall margins by 50 basis points.

Looking at our backlog, our estimated gross profit in backlog at the end of the second quarter did not change materially, compared to where gross margins in backlog were at the start of the quarter. I want to iterate what you've seen in the press release and heard from Larry. We are working to improve margin by significantly reducing our production of speculative homes. Furthermore, we are working very closely with our divisions to review pricing at a community level, and where we do still have speculative inventory, we are challenging our divisions to close the gap on the less profitable spec home margins. Clearly we will dedicate substantial time in the coming months to drive improvement here.

Turning now to selling expenses, commission expense was $7.5 million for the quarter down 35% from a year ago. This decrease is roughly in line with our 34% decrease in home sales revenue. Marketing expenses decreased by 14% from $11.5 million in the second quarter of 2010, to $9.9 million in the second quarter 2011. That decrease is mostly attributable to the decline in the number of homes we closed during the quarter, which decreased the amount of deferred marketing costs we amortized during the quarter. We continue to carefully use our marketing dollars to generate leads for our sales personnel across the country. We have focused increasingly on on-line advertising as our preferred medium, in an effort to drive traffic to our recently updated website. At the same time we have decreased our spending on direct mail and direct e-mail campaigns.

Moving to G&A expenses, the $36.2 million we incurred in the 2011 second quarter is down from $44.6 million we incurred a year ago. The primary reason behind the year-over-year improvement, as you heard from Larry, was a $5 million reduction in salary related expense. Most of that decrease is attributable to a significant reduction year-over-year in headcount, and just during the second quarter alone, we decreased our headcount by approximately 10%. As a result, we incurred $1.2 million in severance charges during Q2, and going forward we expect to save roughly $9 million on an annualized basis.

Turning to the next slide, inventory impairments. During the second quarter of 2011 we had $9.1 million of impairments while in the second quarter of 2010 we had none. Almost 90% of the impairment dollars relate to 6 subdivisions. 3 in California, 2 in Nevada, 1 in Utah. All 6 were put under control in 2010.

While we certainly are excited to see the recently purchased assets were impaired this quarter, the number is relatively small when considering the approximate 250 communities we've acquired since 2009, and we did evaluate all of those communities as a part of our impairment process. Nonetheless, we take the impairments very seriously. Our business model is set up to adjust to changing market conditions, as we target smaller communities and seek rolling option deals where possible. Note that in each market where we took impairments this quarter, we also reduced the number of lots that we have under control. Partly as a result of that action we wrote off $2.1 million of option deposits and feasibility costs during the quarter.

Moving on to orders. In the second quarter we received 1,064 net home orders which was a 5% increase from the same period last year. Looking into individual markets, we saw the most significant increases in Maryland, Virginia, and Jacksonville, largely due to an increase in active subdivisions, where as Arizona and Nevada showed the largest year-over-year decline. Our traffic increased by about 8% year over year for the 2011 second quarter, mostly due to an increase in the number of subdivisions opened for sale, and gross orders improved by 10%. Our cancellation rate increased to 29% for the quarter, higher than the 25% rate we experienced in the second quarter of 2010. Financing issues and inability to sell an existing home were the 2 most common reasons for the increase in cancellations.

The average price of net home orders in the second quarter was $283,000, up slightly from $277,000 a year ago. We ended the quarter with 1,424 homes in backlog, up 28% from the same time last year. Our average price in backlog of $304,000 at June 30, 2011, is down from a $350,000 -- $315,000 average price in backlog at the end of the second quarter last year.

Moving on to our final slide, gives you a little bit more detail on our subdivision count. For each period showing here, the light blue bar represents active subdivisions, which are defined as projects that have sold at least 5 homes and still have at least 5 remaining to sell. The brown bar gives you a sense for the subdivisions we have, that will likely become active soon. They have started construction or sales activity, but do not yet have the 5 sales necessary to reach an active status by our definition. And the gray bar shows the number of subdivisions that are currently active, but close to reaching inactive status.

You can see that our active subdivision count continued to increase this quarter, up 31% year over year and 8% sequentially. These increases reflect the impact of our organic growth in existing markets, as well as the addition of non-active communities, from our acquisition of assets from SDC Homes in Seattle. In addition, the number of subdivisions that are likely to become active exceeds the subdivisions reaching inactive status. The spread between the 2 is 18, which is an indicator for our subdivision count going forward.

That concludes my prepared remarks. Thanks to our M.D.C. team from across the country for all the work they do every day to move our Company forward during these tough times. I'd also like to thank everybody on the call for their continued support and interest, and at this time we will open the line for any questions you may have.

(Operator Instructions)

Your first question comes from the line of Steven East, from Ticonderoga Securities. Your line is open.

Thank you. Bob and Larry, you had some sales promo in the second quarter, I guess. Could you talk a little bit, what that was? Was that really to move your specs, or -- and what type of gross margin impact did it have?

We have run sales promotions on a routine basis now over the past couple years. The idea is certainly to present a very compelling value to our potential customers out there, and to really motivate our sales force around a central promotion. But given that we are negotiating a lot of deals, on a regular basis, we're really not, in our view, giving up substantial margin as a part of these promotions. But rather packaging it and communicating advertising to our consumers what the value of our homes are in a very concise and coordinated manner.

Okay. I was thinking that maybe it was to clear out some of your specs, but that helps. And then if you look at what type of trends you were seeing through the quarter and into July sequentially, and also your gross margin had some warranty reserve. When you talk about your backlog being comparable on gross margin, are you talking about that 13-1, or are you talking about the low 12's without a reserve reversal?

Well, there's a few questions in there. First of all, we're not going to comment on July at this point because we haven't done so in our public filings.

Okay.

But I will give you the monthly trend. $355 in April, $247 in May, $462 in June. As for the backlog, we were comparing what it was at the start of the quarter and the end of the quarter. We weren't comparing it to the actual closings that occurred during the quarter.

Okay.

Apparently, they should be related.

Your next question comes from the line of Michael Rehaut, with JP Morgan

Thanks and good morning everyone, or good afternoon on the East coast. First question, I was hoping you could help on the gross margins. What the impact was on the gross margins in terms of the spec homes and to the extent you're able to return to a predominant mix of pre sold, where would you expect that margin to improve over the next couple quarters?

Mike, let me phrase it just a little bit differently, because we don't want to get into the absolute specifics by quarter. We don't give that forward guidance. But the data points are as follows. If you look historically at what we've told you the spread is between dirt starts and spec starts, it's then in the 200 to 400 basis point range, and we've seen it more recently trend more towards that 400-basis-point differential.

In the second quarter we had 66% of the homes that we closed were sold at spec, and clearly the objective of what we're trying to do here is to reverse that trend so we're selling a substantial more -- closing a substantial more of the dirt starts than the spec starts. So using that information, I think you can calculate how it might turn out in the future. That said, we still do have 500, roughly, specs on our books that we're continuing to work through, and that will factor into the equation as well.

That's very helpful. The second question, just wanted to clarify, the $9 million of annualized savings that you highlighted from the additional actions taken during the quarter, was there any benefit that you received of that annualized number in the second quarter, or is this something that we should think about that on a full incremental basis we would start to see in 3Q?

It was really minimal, the benefit we received in the second quarter. Most of the reductions occurred towards the end of the period.

Great, thanks.

Your next question comes from the line of Dan Oppenheim, from Credit Suisse. Your line is open.

Thanks very much. Was wondering about the comment in the Q in terms of slowing down the community openings, given the sales environment here. Clearly volume is important to leverage the overhead. Is it something where some of the communities you would have been opening are in locations where they would be competing with existing communities, or closing out more slowly? Just wondering since those are developed lots, where you have got the sunk costs into that. So just curious in terms of the thoughts on all that.

I'm not quite understanding where you're getting the slowing community count openings. I think we're continuing to move forward on pretty much all the communities that we've already purchased. One thing we did mention in the press release, and hinted at in the Q at a minimum, is that in a very uncertain economic environment, which today's market certainly attests to, we're going to have to be pretty cautious going forward about what land we do acquire, because clearly there are some severe headwinds, not only for our industry, but for the economy overall, here and abroad.

Okay. And I guess the comments about margins, in terms of the margins on the homes that are started as spec versus started with contracts, is there really that much of a -- I guess you're describing it that way, but is it really an issue in terms of when things go to closing? Whether it was under contract at the start? Wondering, if you have something that's under contract to start, but you have a cancellation and it ends up as a spec, you would likely see the same margin as it was if you had started it as a spec. I was wondering in this current market, is there anything you're doing in terms of working to minimize cancellations so that unintended specs don't arise?

Well, what I think what we do, you'll always have some situations where you have the cans that produce the spec, but what we are doing is when we get a order and the buyer has not yet been loan approved, or that buyer has a home to sell, generally speaking we will not start that home for that consumer. So, if they do cancel, then we're still just left with the lot, and it still ends up being a dirt start. So, that is how we are minimizing that issue.

When you produce other specs beyond that, what you might call intentional specs, I think that's where you run into the problem, because then you potentially have specs from cancellations as well as specs that you already started. Then, you've got more inventory out there and more supply potentially, and in our experience has led to those decreased margins.

And then sorry, sneak one last one in. Of the cancellations that you're seeing right now, are those mostly early on? Are you seeing some of those later in the construction process?

Typically, they're 30 to 60 days.

Okay, thanks.

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

Thanks. First question, I wanted to ask about the increased focus on profitability. At what levels of volumes would you be break even? For example, last year you were about 3,200. Is it a -- is it at a steady run rate you would break even on profitability, or at some higher rate of closings?

Well, of course, Nishu, that all depends on what the margins are. If you're looking at margins as they are today, and you run the calculation, you're probably looking at something that looks more like 4,500 to 5,000, which is certainly part of the reason why we're focusing so much on our margin and expenses.

Got it. And if the spec strategy, or the reduced spec strategy, returns gross margins to where they were, would that be sufficient then at current volume levels?

It depends on a lot of factors, Nishu. I will let you do the modeling on that one. But clearly it would be a huge win for us if we can bump those margins back up, even on a couple hundred basis points.

Got it. And then a second question just on the spec units and the efforts to improve the -- or reduce the gross margin gap on the to-be built versus the spec units. This is the third quarter in a row, your gross margins have been affected by spec starts, and it's something you folks have been talking about for some time. I was just wondering why there has been a several quarter lag before you have become quite, you know, increased your aggressiveness on it, and really shifting back to to-be-built. Is that principally a function of having to work through some of the inventory in the new communities, or what's the reason for the lag there?

It's really just market conditions. We -- if you the go back to the tax credit, we ended up with probably more specs than we would have liked, but then again, we've come off on a very good sales period, so there wasn't the urgency to clear that inventory off of our balance sheet. As we got further and further away from the tax credit, that urgency, just by virtue of holding that kind of inventory, got greater and greater. And that's really what drove the urgency once we got into the first half of this year.

Okay, thanks.

Your next question comes from the line of Adam Rudiger, from Wells Fargo.

Bob, can you talk about what the potential impact you think on orders and backlog conversion would be based upon the lower -- the reduction in specs? Should we expect next year or the back half of this year, that your backlog turnover will be below your 2010 levels?

Yes, we do think they will be some impact. The point we thought about when we were going through the analysis is, is any reduction in units going to offset the additional margin that we get by being just dirt. And clearly the answer was we could sacrifice the additional units. I guess I would also point out that we're not going to be going to no specs, because of the reason that was just mentioned, that will you have specs that result from cancellations. So we think that will offset, to a large degree, some of the impact that you have from not having quite as many specs.

Okay, thanks. And my second question is, can you talk more about this land price, or land cost as a percent of your total cost rising year-over-year, and, I mean, from that comment, coupled with your earlier comment about your impairment coming from communities you signed up last year, suggests you really potentially got aggressive last year, too aggressive maybe, in how you bid for your new communities that you're opening up now. So can you talk about that and really what's -- how those communities are doing relative to how you underwrote them and perhaps if that's -- if what I said is a fair assessment?

We've impaired this quarter. Most of the impairments have come from 6 communities out of 250. Any time you are buying land there are going to be some hiccups. That said, when we're buying those communities, we kept intact the principles that we have as a Company, which is to buy a relatively small supply of land, finished lots in most cases, ready to go with certificates of occupancies and permits in our control, and where we could, doing it under option contracts. So what we did is make, in my view, a very safe bet.

And clearly we would have liked the market to show more up side from that point, when at this juncture, it seems like there's a little bit more downside than was in place at that time. So we sit here with those new communities, some of which are on our balance sheet, some of which are still under option, but as you can see from our results, the vast majority of them are profitable and accretive to our operating results, otherwise you would see them come up as impairments.

Okay, thank you.

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

Hi, good afternoon. Larry, you were fairly early and aggressive relative to your peers into the land market. I think you were positioning for a rebound, but now you're clearly throttling back a little bit on growth. You're not going to have any more land investment for the time being. So what specifically have you seen? You've been through a lot of cycles. What specifically have you seen recently, that's changed your mind about the trajectory, or the timing of a recovery in the housing market?

Well, you know, we all are sensitive to what's going on around us, and as some of you recall, in 2005, we started gearing down by 2006, we had really hit the brakes. And we were able to accumulate more cash than we have debt, which has distinguished us in the industry because of our liquidity. What we tried to do is in '09, at the end of '09, we thought it was reasonable to expose some capital to reposition some of the opportunities in buying land, and we did that also in '10.

And we've now pretty well decided that, I think, we're number 2 in the industry, or number 1 behind NVR in the least amount of land owned, and in my view, we have more than adequate amount of land owned, and you can see I think it averages out at this sales rate around 3 years plus or minus. As I always tell our land specialists, I said, as long as you have money, you can buy all the lots you need. I have seen the land market get softer, which gives us an added opportunity to take advantage of a softer land market with our liquidity, at the appropriate time. And I believe that the appropriate time is not now, that we're going into -- and we have seen, all of us, that the consumer confidence certainly has been impaired by many things that are happening in the financial and the political world, not only domestically, but foreign. MDC is uniquely balanced with almost 90% of our land assets on the books, are finished lots.

So, we have finished lots paid for. We have the ability to transact, if a unique opportunity comes in. We have more than enough inventory of land to carry it 2 or 3 years at this sales pace, and I believe it's a good time to position yourself for the new normal. And I consider sales, whether it's $320,000 new sales a year, or $250,000, or $350,000, might be the new normal for going forward for the next several years. And it is our goal, our underlying goal, to be profitable at today's market levels. I'm not expecting any improvement in the market, only expecting improvement in our ability to execute and operate our enterprise. And as we go forward with a little or no expectations of the market improving, other than it is what it is, our goals are pretty clear. We will drive to profitability, and we will deal with the market as it is today with very little expectation other than the statement - - it is what it is.

Okay. And Larry, second question, you know, some parts of the housing market are actually doing reasonably well, such as the rental market. You're an entrepreneurial kind of guy. What about getting into the rental market, whether that's building multifamily, or buying and renting properties? Is any of that on your radar?

You know, when I was younger, I think I was the largest apartment builder around, or one of them. I even built for Trammell Crow, so that goes back decades. The apartment market is a different business. Everything we have is geared to, principally, single-family detached, owner-occupied housing. To jump in and just be a builder, I have seen the apartment market go through all of those cycles. You know, if the consumer can't afford the other $200 or $400 a month that it's going to cost them to move into the brand-new apartments that everyone is in a big hurry to build.

We've got all sorts of interesting complications, when you consider that 30% of the CPI, I believe, is rent, and you're going to have a big rent bump, which is going to be a complication. Dealing to the focus of us getting into the apartment market, we're not going to do that. We are going to be one of the best builders in the country, single-family detached, principally, and we're going to focus on achieving profitability, doing what we're doing. And we're going leave the apartment market to others and those that have been around for several cycles. This is a great time, if you're in it, but from start to finish, it's 2 or 3-year head start is necessary, and things will change.

You have tens of thousands, if not hundreds of thousands of units that are going to come on the market over the next couple of years that were securitized, that will be repositioning themselves for opportunities for those that wish to pursue it. But the advantage to the homebuilder is it will make owning a home a compelling value. Because during this period of shortage in housing units, rental housing, the rents that they're able to push through now, reminds me of the price increases of '04 and '05 in housing, and that's the rent increases that are happening in many markets in the country, and I believe it will help send families or home buyers back to the home buying market over the next few years, so I consider that a positive opportunity.

Thanks, Larry.

Your next question comes from the line of Dennis Mcgill, from Zelman and Associates. Your line is open.

Hello, guys, and thanks. Maybe for Bob, can you just talk about the gap between a spec build and a pre build? Is that entirely discounting that you have to do after the fact or are there cost inefficiencies in the process as well that impact the margin?

I think it has more to do with discounting that we have to do after the fact, by virtue of having more inventory out there, and the other thing it does is, once you discount those homes, or if you are advertising those homes at a discount, it also impacts the psyche of the buyer who may want to buy dirt. They may see the price on a spec and want to get their dirt home for that price. So, I would say those are really more the impacts versus the cost side of things. There are some incremental costs, just holding on to that asset for longer, having to maintain the spec, all of those things, but not so much on the margin line.

So, I guess the question is this. If you're willing to sacrifice volume for profitability moving forward, why not just hold the line on price for those units if demand is not inelastic anyway? If you think about a consumer that's coming through that's interested in a home, what is it about the spec unit that they don't desire that requires to you move it?

What you really have is a highly educated realtor, buyer, sales person, market conditions, where because of the softness in the market, you have a buyer expectation for receiving more favorable pricing for standing inventory, and this is reverse of where it was previously, where standing inventory and a quick delivery, you could get a premium.

So you've seen from a premium to a discount of some level, and we believe that it will balance itself out and we're proving that out now. And over the next period of time it will be very transparent after the fact.

Okay. Fair enough. Separate question. What was the pre-impairment amount of the land that you impaired, the $9 million?

I believe it was roughly $20 million. We have in that the K, I believe -- closer to 30 million.

Okay. And the Delta there is wholly on price, I assume? Relative to original expectations?

I mean, that's ultimately where you get the profit margin, is you've got drop the price in order to drive volume.

Okay. Thanks again.

Your next question comes from the line of Alex Barron from [House] Research Center.

Could I ask, regarding the SG&A, you said you cut 100 positions. Can you elaborate where these people in the home office, or sales people, or just kind of people all over the place? And do you think it's enough, or do you think you might need to do some more?

It was people across the board really. You had people at the home office, including some at a very high level that were included. You had -- not as many sales people. It was more the actual overhead. Sales people are charged to a different line. Whether or not it's enough, is going to be a question for the market to tell us. If we don't get to profitability, then we'll know that potentially there's more to do.

My second question was, from Larry's comments, it sounds like, and I guess from your actions this quarter, it sounds like you guys are not afraid to walk away from some of these optioned lot deals, because you said consumer confidence was impaired. I guess it sounds to me a little bit like what we saw a few years back where you guys started pulling back from the market. If I'm reading this correctly, and you guys are thinking maybe the market will be $250,000 to $350,000 for awhile, what are your thoughts on the debt that you're carrying? You think you'll be buying back some more since maybe you won't need it right now?

I think the market, as I commented earlier, we're going adjust to whatever market conditions are, and as you can see from our financials, our debt and our cash are about equal. So I would say we're in a unique position to be opportunistic whatever direction we need to go. We're going to do what's necessary to properly operate the enterprise.

Got it. Thank you.

Your next question comes from the line of Jay McCanless from Guggenheim.

Good morning everyone. When you look at the national stats on new homes being sold right now, it looks like still about 3 out of every 4 homes are either in production specs or in completed specs. I was wondering if there's something you're seeing in your individual markets that says you all can beat that trend that we are seeing on a national basis, or if it's something exogenous, like the mortgage slowing down, or the apartment example that you mentioned.

I can't answer that question, because I don't have the reference point of the data that you're referring to. Do you want to rephrase it or ask a different question? That will be helpful.

Okay. I mean, the other question that I had, and it relates back to this, if you are going to reduce your specs going forward, is there a way to -- or should we see any expense savings on the SG&A line if you carry less specs in your neighborhood?

Well, will you have some. It will all tie into improved gross profit margins, because otherwise it would have been expensed out.

Jay, there are some costs that do go below the margin line, you have to maintain the specs, you have to clean them, potentially you'd have to heat them, depending on what stage of construction they're at. All those good things. There is some expense savings there as well, but that's not where most of the upside comes.

Okay. Great. Thanks, guys.

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

On your corporate expense it came down about $3 million, from $19 million to $16 million, and just was wondering if there was anymore room there from the cuts that you made in the second quarter, or is that a good run-rate going forward?

First of all the cuts that we took were incremental to what you see actually reported. But as we've alluded to a couple times, we really are going to do what we need to in order to get back to profitability. So I would say we'll certainly consider additional cuts from there if we need to.

And then, if you are looking at community count, from the end of 2011 to end of 2012, do you think that should slow up material from what it expanded from the end of 2010 to 2011?

Well, what we showed you as a part of the presentation, you see the differential between soon to be active and soon to be inactive at 18, and is --

Right.

-- and that is down from the differential last quarter. It was more like 35, I believe. So that would indicate a bit of a slowdown in the acceleration of our subdivision growth. But certainly, depending upon market conditions, that can change. Based upon additional purchases.

Right. Is there any chance that you would buy back shares or would you wait for profitability to return?

We do have a 4 million share authorization out there. So it's definitely possible. But we have not done a share repurchase in, I believe, 8 years.

Next question comes from the line of Michael Rihaut, JP Morgan.

Thanks. I just wanted to confirm or get the DTA, and just confirm that's -- as of quarter end and if that is fully reserved as it has been, I believe?

We've got a $250 million valuation allowance against our DTA at this time.

Perfect. Thank you.

And there are no further questions in queue.

Great. Thank you all for joining us on the call today. We look forward to speaking with you on our next conference call, following the announcement of our third quarter results.

And this concludes today's conference call. You may now disconnect.