Meritage Homes Corp (MTH) 2007 Q3 法說會逐字稿

Good day, Ladies and Gentlemen, and welcome to the third quarter 2007 Meritage Homes Corporation earnings conference call. My name is [Shiquanah] and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn your call over to your host for today, Mr. Brent Anderson, Vice President of Investor Relations. Please proceed, sir.

Thank you, Shiquanah, and good morning to everyone. I'd like to welcome you to the Meritage Homes third quarter 2007 earnings call and webcast. Our quarter ended on September 30th and we issued a press release yesterday with our results for the quarter. If you don't have it yet you can find it on our website at www.meritagehomes.com on the Investor Relations page, along with the slides that accompany this webcast.

Please refer to slide two of our presentation. Our statements during this call and the accompanying materials contain projections and forward-looking statements, which are the current opinions of management and subject to change. Management takes no obligation to update these projections or opinions. Additionally, our actual results may be materially different than our expectations due to various risk factors. For a discussion of risk factors please see our press release, most recent filings with the Securities and Exchange Commission, especially our most recent quarterly report on Form 10Q and our Annual Report on Form 10K.

With me today are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay, Executive Vice President and CFO of Meritage. I'll now turn it over to Mr. Hilton to review our results for the quarter. Steve?

Thank you Brent. We are pleased to report that Meritage generated positive cash flow from operations this quarter and maintained operating profitability before non-cash real estate charges and goodwill write-offs. Current market conditions are as weak as we have experienced. It's unclear when conditions will improve. Builders are reducing prices to compete aggressively for few buyers and buyers are looking for prices to stabilize before purchasing.

While conditions remain challenging, we are operating much more conservatively and protecting our balance sheet with a longer-term strategy to position the Company to capitalize on opportunities in traditional high-growth markets when homebuilding rebounds.

We can't control the market so we are focused on things that we can control and we've been proactive in protecting and strengthening our balance sheet during the downturn. We made significant progress on the objectives we laid out last quarter and we'll focus our discussion on those today. But first, we'll review our results for the quarter.

With that, let's begin on slide four.

We reported a net loss for the third quarter of $119 million, or a negative $4.52 per share, including the impact of $217 million of primarily non-cash charges. Included in this were $117 million of impairments related to real estate and $45 million of write-offs to goodwill. These charges combined to reduce our net earnings by $132 million. Excluding the charges, we operated profitably this quarter. Adjusted net earnings, excluding impairments for the third quarter of 2007, were a positive $14 million, compared to $65 million in the third quarter of 2006 when we incurred just $8 million of impairment charges.

Our third quarter home closing revenue was $575 million in 2007 compared to $876 million in 2006. This 34% revenue decline reflect a 9% reduction in average sales price on 28% fewer home closings. It's no surprise that our softest markets are California, Nevada and Arizona in terms of closing revenue or value in price.

Texas showed signs of weakening this quarter, but is still a very good market for us. And Colorado grew from its early 2006 startup base.

Cancellations increased again this quarter to 41%. When combined with lower-growth sales and declines in average selling prices, our total order value for the third quarter was down 33%. And backlog value declined 39% from the third quarter of 2006.

Obviously, the market continued to be weak and very competitive, which negatively impacted our results.

Let's now review the operational improvements we made this quarter on the objectives we communicated last quarter. Turn to slide five.

In order to strengthen our balance sheet and reduce debt, we liquidated over 11% of our spec inventory this quarter, renegotiated many lot purchases under option contracts, and opted out of about 6,000 of these lots, reducing our total lot supply by 20%. These actions contributed to our $88 million turnaround in cash flow from last quarter and resulted in us achieving positive cash flow from operations earlier than we had projected. Going forward, these improvements should continue to benefit our liquidity and future cash flow.

Additionally, we reduced our General and Administrative expenses by 38% to just 3.7% of revenue for the quarter. The real estate impairments we booked were primarily accounting charges and did not affect our cash flow for this quarter.

As shown on slide six, these charges include $100 million write-downs on impaired projects, $49 million for terminated options, and $23 million related to joint ventures and land sales, for a total of $172 million in the third quarter of 2007.

The largest write-downs came from projects in California, Arizona and Nevada, which accounted for 85% of the total. Florida and Colorado accounted for nearly all of the remaining 15%. Only one project in Texas was terminated at $1 million.

We also wrote off $45 million of goodwill in this quarter due to continued weakness in certain markets and expectations that a turnaround in the housing market will be deeper and longer than previously anticipated. We re-evaluated and wrote off all goodwill in California and Florida and portions of our goodwill in Nevada and Arizona.

As shown on slide eight, order cancellations increased again this quarter to 41%. These cancellations were driven by weak consumer confidence, mortgage industry issues, price concessions, and incentives in the home building industry. 41% 'can' rate this quarter compares to the cancellation we had 37% both last quarter and the third quarter of 2006. Our normal 'can' rate runs between 20 and 25%, so we're still well over the norm.

Our net orders were down 23% to 1,435 homes, with a total value of $390 million in the third quarter of 2007, compared to 1,870 orders valued at $581 million in 2006. I'll also note that we had more net sales this quarter than some of our larger competitors with much larger balance sheets.

Again, the largest declines were experienced in California, Nevada and Arizona. Sales also slowed noticeably in Texas where net order value declined 28% year-over-year, and Dallas and Fort Worth seemed the weaker of the markets there.

Slide seven explains a lot about our markets. There is intense competition among homebuilders for too few buyers willing and able to purchase the new home. Incentives and discounted prices have impacted ASPs dramatically. Our average prices in California, Nevada and Arizona have declined by almost one-third since the end of 2005.

In California, for instance, a home that was selling for $631,000 near the peak of the market, at the end of 2005 is now selling for $404,000. Part of the reason Texas sales have held up better than most is that Texas ASPs have been fairly stable in the range of $225,000 to $250,000 for several years, and neither saw the appreciation or the large declines in prices that other areas experienced.

The decline in prices in our aggressive program to reduce spec inventory has reduced our gross margin by 640 basis points. Our gross margin was 14.8% in the third quarter, excluding $148 million of real-estate related impairments that ran through our cost of goods sold. Our prior years' gross margin was 21.2%, excluding $8 million of impairments in the third quarter.

Prices are now at or below where we can earn a minimally acceptable homebuilding margin and we're seeing little price elasticity. Lower prices aren't necessarily generating additional sales, so we'll focus on trying to get buyers back into the market in other ways rather than further discounting prices.

If you'll refer to slide ten, these are the plans that we laid out last quarter with the objective of achieving positive cash flow by early 2008. The plans called for reducing our spec inventory, renegotiating or terminating option contracts, reducing lot purchases, selling land or JV interests, reducing our lot supply and reducing our overhead.

We achieved our objective ahead of schedule, generating $5 million of positive cash flow in the third quarter of 2007.

The next several slides will show you how we accomplished our objective.

On slide eleven, you can see we've reduced our spec inventory by 11% in total. We did even better in reducing our unsold completed homes by 15%, while our unsold homes under construction were reduced by 9%. Our spec sales were partially masked by cancellations. We actually sold 723 specs during the quarter, which would have reduced our spec count by about half, but we had 347 additional cancellations of homes under construction or near completion, which offset about half of the specs we sold.

If not for this abnormality of high level of cancellations we would have reduced our spec inventory even more than that amount we reported. Despite high cancellations, we showed good progress on this initiative.

During the third quarter, we terminated options to purchase about 6,000 lots, with a total purchase price of approximately $280 million, avoiding the cash flows that would have been associated with these purchases. Our own lots increased mostly due to the discontinuation of one JV interest we had with another builder controlling about 660 lots. The JV was 100% equity financed, so dissolving it resulted in the re-class of lots from JVs to owned inventory.

So, at the beginning of 2006 we have terminated options covering over 15,000 lots with a total purchase price of more than $1 billion. Had we owned these lots -- land positions, we believe we would have incurred much greater write-offs as real estate values deteriorated.

Our total lot supply at September 30th was down 43% from its peak in the third quarter of 2005, and we have reduced our option lots by 59% during that same period.

Turning to slide thirteen, you'll see that our total lot supply of 31,163 lots is roughly equal to 3.8-years supply of lots based on our trailing 12-month deliveries. We own about one-third of that and option the rest in various ways as shown in the pie chart.

As we've terminated options, our option percentage has come down from about 90% just a little over a year ago. We've reduced our lot supply in line with declines we've experienced in sales and closings. California lot supply is down 67%; Florida down 78%; Nevada down 56%; and, Arizona down 49%. Texas is relatively flat compared to the end of 2005. We're being very careful about adding additional new land positions anywhere.

Our lot supply is proportionate to our sales as shown on slide fourteen. 50% of our total lot supply is in Texas, which has represented 55% of our orders over the last 12 months.

We reduced our General and Administrative expenses by $13 million, or 38%, compared to the third quarter of 2006 as a result of reduced compensation expenses and other cost reductions. We are focused on controlling costs as demonstrated by G&A declining 21 basis points, as a percentage of revenue to 3.7%, lower than it's been for the last few years.

Commissions and other selling costs, the other part of that's G&A, declined 11% from the prior year. It rose as a percentage of home closing revenues due to a more competitive selling environment. It simply costs more to sell homes in a weak market.

Recapping our year-to-date results, we reported a net loss of $160 million, or $6.10 per share, for the first nine months of this year, compared to a net earnings of $216 million, or $7.94 per diluted share, for the first nine months of 2006.

Our 2007 results included pre-tax real-estate related and joint venture impairments of $269 million, and goodwill write-offs of $73 million. Together, they reduced our net earnings from homebuilding operations by $214 million, or $8.14 per share.

We've operated profitably for the first nine months of 2007, excluding the mostly non-cash charges we have taken related to lower real estate and goodwill evaluations. We've generated year-to-date closing revenue for 2007 of $1.7 billion from 5,548 homes closed at an ASP of approximately $310,000.

In the first three quarters of 2006, home closing revenues were $2.6 billion on 7,886 homes closed at an ASP of approximately $333,000. The largest revenue declines have been in Nevada, California, and Arizona, partially offset by an increase in Texas revenue.

Net orders for the first nine months of 2007 declined 20%, resulting in much lower absorption rates, as measured by net sales per community. Our active communities peaked at 222 at the end of the second quarter and began to decline this quarter. As we expect, it will continue throughout the yearend.

Moving on to slide sixteen, we reduced our total debt to $884 million during the quarter from $903 million at June 30, 2007. We were in compliance with all of our debt covenants at quarterend.

Total funds available under existing bank and credit facilities stood at $442 million at September 30, 2007, after considering the facilities borrowing availability and the most restrictive covenants.

Our net debt to capital was 50% as of September 30th, compared to 42% as of September 30th last year, resulting primarily from reduction of book value due to asset impairments.

Our interest coverage ratio was 3.7 times interest incurred, based on trailing four quarters EBITDA, adjusted to exclude non-cash charges. I'll point out that our third quarter adjusted EBITDA, using the calculation of interest coverage, was $10 million higher than the second quarter of 2007.

In September we amended our revolving credit agreement with Guaranty Bank and various other financial institutions. The amendment provides some relief under our minimum interest coverage ratio, which was specified at 2 times interest incurred. While we are in compliance with all our debt covenants as of the end of the quarter, we now need to negotiate with our banks to provide some extra cushion and additional flexibility during this extended downturn in housing demand.

We appreciate our bankers who have supported us in the true spirit of cooperation as we all continue to work through these difficult conditions and look forward to better times.

In summary, the weak state of the housing market is well documented by now. We can't control the market or buyer psychology, which we believe must improve to turn the market around and get back to normal. Some of the actions being taken by the government and the Fed may help, but it ultimately comes down to buyer confidence.

Considering the challenging market conditions in which we are operating, we are pleased to show progress relative to the objectives we laid out last quarter in terms of inventory reduction, managing our lot supply and purchases, and generating positive cash flow from operations.

We will continue to pursue these objectives and expect to show continued progress in the fourth quarter and in 2008. We are committed to sound balance sheet management, maintaining liquidity, and reducing debt to preserve maximum flexibility for the future.

I'd like to remind everyone that there is a larger selection of homes at lower prices today than we've seen in many years. We are encouraged by the fact that interest rates are still in historically low ranges, and money is available for buyers with good credit or income. For those considering a home purchase as a long-term investment, and to enjoy the many benefits of home ownership, we hope that they conclude that now is a great time to buy a home.

And with that we'll open it up for your questions.

(OPERATOR INSTRUCTIONS). Andrew Bronsa with Banc of America Securities.

Hey, guys. I was wondering, obviously, today's conditions in the market are the worst you've seen in a long time. I guess, are you speaking about October or are you speaking about September?

No, we're taking about the last quarter.

Okay. Is there any way you can comment on what you've seen since September?

Oh, about the same, maybe a little better in some places, but I don't know if I could -- I'd call it a trend yet.

Okay. I guess, obviously, you guys have halted some takedowns of options and that's helped your cash flow. It's good to see, I guess. Is there any way you could say, comment on where you plan to be on your revolver at yearend?

We're not going to project the number, but we certainly expect the revolver balance to continue to decrease as it did in the third quarter, but we aren't going to be projecting a number of where we expect it to be.

Okay. I guess the only other question I have is on the mortgage market, have you seen trends as far as the ability to get financing, especially in the jumbo part of the mortgage market, improving kind of sequentially, or is that sort of still fairly tough for most buyers?

As far as we're hearing, jumbo mortgages are available for buyers with good credit and employment. They're not available to the degree they were a year or two ago, but for those buyers with credit scores like our typical buyer has, over 700, they're available, albeit a little bit higher cost, but we don't get the impression or the evidence that our buyers can't get those mortgages.

Okay, thanks guys. I'll get back in line.

David Goldberg with UBS.

You mentioned the markets where price declines -- or cutting your prices weren't really helping to drive traffic and I was wondering if you could first maybe give us an idea of where that was or some specific areas, or maybe as a percentage of your overall geographic footprint, how many markets are kind of no-bid markets.

And I guess the follow-up to that is, you mentioned some strategies you were going to put in place in order to focus on selling homes in those markets. Maybe you could elaborate on what those strategies would be.

Well, David, I don't think there are any no-bid markets. I think there are some no-bid communities. Certainly, communities that have a lot of competition and where all the builders are cutting prices on a weekly or monthly basis erodes buyer's confidence and they continue to sit on the sidelines. So, I have seen evidence in some markets, for example, Las Vegas, where large national builders have stopped lowering prices and to some degree mothballing projects, and sitting on projects that aren't making sales that are still open for business.

So, I don't see that as a trend, I mean, or as a single market phenomenon. I'm starting to see that in a lot of markets and I think that's the beginning of creating consumer confidence again. Buyers have to believe that prices will not fall any farther before they'll jump back in the market and the larger public builders have to hold the line on prices. So, I hope that continues.

And the strategies that you were referring to (inaudible) anymore?

Well, we're going to be more aggressive about how we package our incentives, how we market our homes. The internet is a big marketing vehicle, focusing our sales -- sharpening our sales skills, training our sales people. Just executing, fine-tuning our product, making sure we have the right value equation, the right features in our homes. Just honing our skills and doing a better job of selling houses.

If I could sneak one more in. Last (inaudible) talked about takedown requirements and option lots, you mentioned that there were a bunch of options that you had to takedown requirements to stay in the option contract. Can you give us an update on where that is now and maybe kind of looking towards next quarters, what the takedown requirements might be and what kind of free cash flow would be associated with those takedowns?

Larry, do you want to take that?

Sure. We've reduced our takedown requirements in the neighborhood of 20 to 25%. Obviously, it's not having that total percentage impact to this last quarter because we were in the process of doing that. But certainly, out in '08, last year -- or last call we said we were doing takedowns kind of in the 7,900 to 7,000 total year range, with about $475 million of total takedown requirements for '08. And we're in the neighborhood of 20 to 25% reductions on those numbers so far. But we aren't done yet. We're still in the process of renegotiating other deals.

I think it's important to note that, again, because we use an option strategy there are a lot of subdivisions that we need to continue to buy lots to sell and build houses, so we're really focusing on those subdivisions that have slower sales than need to takedowns, or communities that, because of price -- sale price erosion, they no longer make sense, so we're terminating the contracts in those cases.

Okay, thanks so much.

Nishu Sood with Deutsche Bank

Thanks. I wanted to ask a question about the Texas market. Obviously, your move into -- or your focus on Texas was great in 2006. Now, as we've heard from other builders and from what we hear out in the field, Texas -- a lot of the Texas markets have slowed pretty dramatically. So, my question is on impairments.

Given the lower margins that you tend to earn in the Texas market and the greater sensitivity to your absorption rates, isn't it just a matter of time before we begin to see impairments in Texas as well?

I'm not saying that we won't have impairments in Texas, but I don't foresee them to be anywhere near the significance of the impairments we've had in other markets for a lot of reasons -- 1) We don't own a lot of land in Texas; 2) The option deposits are much smaller. 3) There's much more supply. I think we'll have a better opportunity to renegotiate options. We've had a lot of success renegotiating options there already. As I said before, we didn't have the big price run-up, so I don't think we're going to see the big price declines, albeit the market is softer today than it was a year ago. Prices really haven't fallen like you've seen in other markets. So, we're certainly not expecting large impairments in Texas.

Okay. And just on the takedown, following up on what Dave was asking. In prior quarters you've kind of taken an earnings-based approach in looking at whether you should stick to your agreements or you had a specific takedown schedule, perhaps taking down more than you needed to because you foresaw future profitability. Have you -- I mean, clearly you're focusing more on cash flow now, so are there situations in which, for example, if you projected out pricing from today's levels where you're walking away and saying, "We don't want to take that cash flow risk, even though our numbers tell us right now that it might still be profitable."

Well, that's only one thing that we're looking at. We're looking at cash return as well, return of our sub-costs. And we are making decisions based upon what we think the future is going to be, and if we think the future in that particular community doesn't look real bright, we may be -- we may be -- we'll maybe make a decision to walk away from an option that still is somewhat profitable today. And we have done that.

Yes, we aren't looking at price increases. We are saying, "Gee, if we have to put more lots on the books and even though on a cash basis we're making an okay or reasonable cash return --" if we think things might get worse we still might not go forward. It's not the other way around that we're hoping it will get better so we're putting lots on our books. It's exactly the opposite of that.

Larry, can you give us some sense maybe from last quarter to this quarter how many - or how much money you might have, in terms of lot -- I'm sorry, in terms of lot takedowns, in terms of dollars that you might have saved from last quarter to this quarter?

I don't have a specific number for you. I guess I would point out that our total inventory, even excluding the impairments, which will reduce the number, but if you add that back our total inventory went down slightly. So, I don't think we made a lot of progress in reducing the lot number a bunch, but we've certainly stopped the increase and have got it turned around going in the right direction, which is down.

If you look at the swing in cash flow from $88 million negative to $5 million positive, I think we've -- correct me if I'm wrong, Larry -- we closed a similar number of houses in Q3 as we did in Q2, so the difference really is getting rid of specs -- sold more specs this quarter -- and reducing our option takedowns.

If you look at the lot [balance] was going up anywhere from $25 to maybe $30 or $40 million in the prior quarters, certainly, by taking the actions we did, saved that cash flow. Now, I don't -- it varies from quarter to quarter, but you could go back and look historically what the buildup had been, and certainly, that's the savings we achieved this quarter by stopping that increase.

Okay, great! Thanks a lot, guys.

Susan Berliner with Bear, Stearns.

Good morning. I had two questions. One was relating to your takedowns, your reduction. Can we just assume that that reduction out of $475 million number is free cash flow in addition to whatever else for next year, so at least $100 million for next year?

I'm not certain I would call that free cash flow. The free cash flow is going to come from us reducing inventory going forward by burning off lots that are on our balance sheet. So, the first step was stopping the increase, which is what that $100 million does, continuing to push on getting further lot takedown reductions, and then continuing to sell and build houses, which will reduce that.

But certainly, I think -- I think it's reasonable to assume that we're going to be reducing our lot inventory over the next year, but I don't want to project a number. If you want to use $100 million, that's certainly is not unreasonable, but management is not projecting a particular number.

It will also depend on what sales do. If sales continue to decline we'll have to get the same kind of -- a parallel reduction from land bankers to maintain that cash flow.

Okay. And then my second question, I was wondering if you could give us any more color on the joint venture that you discussed earlier and if you can talk about any other potential issues you see with any of your joint ventures.

Yes, we did take a reserve against a couple of joint ventures this quarter and we will have a further discussion about this in our 'Q', but we are running into instances where either a joint venture partner isn't performing under their obligations, which is potentially causing problems for the joint venture; in lot takedowns where we're ready, willing and able to do lot takedowns on our side, but they aren't, which is causing a problem with the underlying financing. In some cases, even lenders are balking at financing if they're having their own problems.

So, there are going to be issues with joint ventures that we are working through to the extent that any existing problems are out there, we have fully -- which where we might have a loss on the joint venture, we have reserved that. And again, I'd point out that in nearly all of our cases we have very limited guarantees to our joint ventures, and in a few cases we have minor ones. We have disclosed those in the past. So, we think that joint venture issues are certainly controllable. There will be some problems with them, but certainly not huge problems in our mind.

Thank you.

Carl Reichardt with Wachovia Securities.

You talked about this 32% decline as you guys look at it -- California, Arizona and Nevada, Steve, I think from '04 or '05, I can't remember which. But, what's your sense of how much of that has affected mix versus price-plus incentives.

Oh, I think most of it was price-plus incentives. I don't think there's a lot of mix in there.

But, what are you doing from a mix alteration standpoint to move away, if anything, from what's been split in more your niche in the move-up side and back towards entry level of first-time move-up? Are you doing much in that regard?

Well, we're not buying new land, so it's kind of hard to change the strategy that is kind of set in place. We're a move-up builder. I think we're focusing on more of our smaller, more affordable plans within each community, within each lineup, and trying to make those values more compelling.

But, it's very hard to change the locations and the lot positions that we have in the mix and change the product that quickly. But, certainly, as we move forward and buy new positions, which we're not doing right now, or open stores that are in the development pipeline right now, we're going to be focused more on more value and affordably-priced product.

And just lastly. The 20,745 on the option side, Larry, how much of those would you say are placed in existing open communities as you sit right now?

Certainly, the great majority of them are. There may be a handful of projects that aren't yet online that really represent purchase contracts. Maybe 10% of the total might represent future projects that yet aren't open for sale, but they're in a handful of larger communities. And those are projects we continue to evaluate and figure out whether they make sense to go forward with. And again, each quarter we continue that evaluation.

But, certainly a great, great majority of our lots under option are in projects that are currently selling.

Okay, appreciate that guys. Thanks a lot.

Stephen Kim with Citigroup.

Hey, guys. Question for -- first question is sort of a housekeeping item. I wanted to ask you about your lot count. I think you said 31,163 for total control. What was the exact number for owned and optioned?

Let me see if I can dig that out here. Owned is 10,418 and optioned or under purchase contracts is 20,745.

20,745. And of that how much are the JV lots?

The JV lots represent about 10 or 15% of that option number.

Okay. Fine. And then, the second thing is, if you could give me a sense for the breakout of inventory between finished homes, construction in progress, and the land-to-land development line items.

Yes, we don't have that available yet to give you. It'll be in our 'Q' when it comes out. There are certain allocations of interest and common costs that have to be done, and so we haven't broken that out yet.

I see, okay. And if I were to look at the impairment you took this quarter, I assume -- the option impairment -- the option write-off, would that come out of the inventory as well, or does that show up under assets line?

The option write-offs would come out of the option category, and to the extent that we had pre-acquisition costs relating to those options, which are in inventory, that portion would come out of inventory.

And if we -- I guess I'm trying to figure out here, if I look at your disclosure, when you do file your 'Q', you basically have a line item which is 'homes under contract', 'under construction', and 'unsold homes completed and under construction'. But basically it's a WIP number. Generally speaking, the land impairment, like the $100 million this quarter, would we expect much of that to fall into the categories of basically WIP, which I know include the land underneath the homes too, or would we expect that most of that would fall in sort of the other land components?

Certainly, the great majority of the write-downs are going to hit either 'finished lot inventory' or 'lots under development' and not hit 'work in process, houses under construction'.

Thanks, that's great. And then, can you talk about your subdivision count in terms of -- I know it was 221 in this quarter. Where do you think we should expect that to be in the first half of next year relative to the year-ago period?

5%, 10% kind of thing. You'll start to see a significant decline in inventory count over '08. I'm not going to project a particular number and I'm not going to project a particular timeline. But certainly, going down by 20% by the end of the year 15 to 20%, wouldn't be unexpected. And it's just because we're -- we stopped buying land in certain markets. We're starting to get to the end of the subdivision.

And we terminated some subdivision options that we expected to open next year that we're not going to.

Okay, great! And then the last question I had, it relates to your negotiations with some of your partners, your land partners. When you negotiate for concessions in terms of takedown provisions and so forth, is it common for you to concede or to accept higher pricing in those negotiations as an offset for getting a slower takedown?

Steve, do you want to answer that?

I don't know if I would look at it that way. I don't think that's common. I think we would accept a lower margin in a community that we're already in versus a new community that we'd go into because we have -- already have some costs. We have more motivation to finish those neighborhoods for a variety of reasons.

So, we are very, very much focused on making sure that any renegotiations or agreements we enter into going forward the takedowns match up to our actual sales velocity. So, we're not going to accept a situation where we have to put lots on our balance sheet in excess of what we think we're going to sell.

Yes, in the past when we had normal margins we might have been more accepting of having a small slight increase to compensate the landowner for carrying the lots longer. Now that we're dealing with much tighter margins that's much less of an acceptable negotiating tactic, and oftentimes it's going to get away. It's not only a slowdown, but it's also a price decrease.

Okay, great! Thanks very much, guys.

[Mattin Dehya] with Lehman Brothers.

Good morning. I think you answered this, but I missed it. The overall count appears to have gone up by about 600 sequentially. Is that just because of your takedown requirements?

Actually, that's because we had one joint venture that was 100% financed that we dissolved --

100% owned, or equity.

Yes, 100% owned through equity -- excuse me -- and the other joint venture partners took their lots and we took our lots, so it was a re-class from joint venture investment to 'lots owned' or 'land owned'. So, it's not really an increase in dollars invested at all.

On impairments, I wonder if you can share with us what kind of assumptions you are using to get to the impairment number specifically, around future price declines. What I'm trying to get to is what kind of impairments could we see in the future.

Well, we -- we took a pretty conservative approach on pricing assumptions in the third quarter and lowered our pricing, not only just to be competitive, so I think the current pricing at the end of the quarter is pretty competitive. And we did not assume further price reductions beyond that in our impairment analysis.

So, you did not -- I'm sorry -- so, you did not (inaudible)further price declines versus what you are seeing now?

Correct.

I see. So, if prices were to decline further, and I'm not saying they would, but if they were to decline further then we could see further impairments just because of that.

Correct.

And lastly, on the cost front, could you quantify if you've been -- or to what extent you've been successful in lowering import costs?

You're talking about housing or construction costs?

Construction costs and material costs.

I think we've lowered construction costs anywhere from 7 to 15%, just depending on which markets, but overall I think in that range.

And how much of that would you say is (inaudible) versus labor, material costs.

I think most of it is labor and materials.

Okay. Thank you very much.

Alex Barron with Agency Trading Group.

Hey, Steve, hey, Larry. I have a question, I guess, about, can you go into your impairments a little bit? What were they like per region and how many communities have been impaired and re-impaired this quarter?

Alex, I think that was in our scripts.

It's also in the press release by state, although we don't go into the number and I wouldn't be able to give you the absolute number.

Yes, if you play the script back, that was in there.

Okay, alright, thanks. Can you also talk a little bit about, I guess, some of these -- some of these -- it looks like your owned lot count continues to go up, so I'm kind of wondering is that going up only in Texas or is that going up across every state as well?

Again, Alex, we answered that. The owned lot count didn't go up except for one joint venture that we dissolved and brought on balance sheet that was completely equity financed, so there was no dollar increase on our balance sheet. It just moved from joint ventures to owned lots.

Other than that the number didn't --

Owned lots did not go up this quarter.

Oh, okay, I understand. I guess I'm just wondering, one of the things that I saw was that you guys were running a couple -- a couple of sales, below builder's costs sale, and another one in Florida where you were, I guess, offering 4.25% discounts. So, I'm just kind of wondering, in a situation like that why not just walk away from the remaining options entirely?

Alex, I mean, we've gone over this ad nauseam. There is a whole variety of reasons. We own some of these lots. We have a positive cash return to the Company. There is a lot of reasons why we wouldn't walk certain options.

On the flip side, you can see we've walked more than $100 million of options, so if you're inferring that we're not walking options, you're completely inaccurate.

And in Florida, obviously, some parts of Florida have been very seriously impacted and there are a lot of people selling below cost, say in Fort Meyers. And we have a few houses we're attempting to liquidate in Fort Meyers, so I don't know if you're implying to those.

We need to move on to the next question. Thanks Alex.

Jim Wilson with JMP Securities.

Good morning, guys. I missed part of the -- early part of the call, I was on another call. But where do you think your line of credit balance might be at yearend, and any thoughts sort of on lowest for '08, where you might end up given your current planning strategy?

Our expectation is that the end of the year balance will be lower than the 9/30 balance, although we're not projecting a number, and we would anticipate that, based on our strategy, the balance would continue to go down over '08, but we're not projecting numbers at this time.

That's fine. Thanks. And then, just second, was wondering since the credit crunch -- that may be a generalization -- but, like you've seen in price reductions marketwise in your kind of major markets, (inaudible) major markets, if you could (inaudible) is it 5, 10%, or what does it feel like it's been reduced to by the credit crunch?

I mean, I can't speak to the credit crunch, per se, but I can say in several markets we lowered prices 10 to 20% in the last quarter, which is what (inaudible) these large impairments that we had.

Okay. Is that pretty evenly spread, or does it vary a lot by geography?

Probably more so in California and Nevada and Florida, and a little less in Arizona, and we're certainly no where near that degree in Texas.

Okay, that makes sense. Alright, thanks a lot.

Thank you for your participation and we look forward to talking to you next quarter.

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