Meritage Homes Corp (MTH) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Laura, and I will be your conference operator today. At this time I would like to welcome everyone to the Meritage third-quarter conference call. (Operator Instructions). Thank you. Mr. Anderson, you may begin your conference now.

Thank you, Laura. Good morning, everyone. I would like to welcome you to the Meritage Homes third-quarter 2008 earnings call and webcast. Our quarter ended on September 30, and we issued a press release yesterday with our results for the quarter and first nine months of the year. If you need a copy of the release, you can find it on our website at www.meritagehomes.com on the Investor Relations page, along with the slides that accompany our webcast today.

Please refer to slide two of your 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. We undertake 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 information regarding those risk factors, please see our press release and the most recent filings with the Securities and Exchange Commission, specifically our 2007 annual report on Form 10-K and our latest report on Form 10-Q.

Today's presentation also includes certain non-GAAP financial measures as defined by the SEC. To comply with their rules, we have provided a reconciliation of the non-GAAP measures in our earnings press release.

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

Steve?

Thank you, Brent. I would like to welcome everyone to our call today. I will start on slide four.

Our year-over-year results for third quarter and year-to-date reflect the significant declines we have seen in home-building over the last year, as well as the crisis in the financial markets that began in early September.

Our sales were down 29% in the quarter, but we have seen a substantial decrease in traffic and sales across the Company in the last six to eight weeks similar to what other homebuilders have reported recently. These factors resulted in additional impairments this quarter and evaluation allowance against our deferred tax asset.

Continuing with our defensive strategy, we increased our cash balance again this quarter, have no bank debt and no debt maturities until 2014 and maintain one of the lowest supplies of owned lots in the industry. We are also adjusting our plans based on conservative assumptions for 2009.

Our third-quarter 2008 home closing revenue declined 35% from the prior year as a result of 25% lower closings and a 14% decline in average sales prices. The increase in foreclosures is impacting both sales volume and prices as banks are heavily discounting their prices on foreclosed homes they bring onto the market.

While Hurricane Ike hurt our Houston operations in early September, the financial crisis and slowing economy have damaged buyers' confidence and resulted in further declines in home sales and asset values, which prompted us to record further real estate impairments in our third quarter. Based upon greater uncertainty as the timing of eventual recovery in home-building, we also concluded this quarter that evaluation allowance against our deferred tax asset was warranted.

Slide six, we reported a third-quarter net loss of $144 million in 2008 compared to a 2007 net loss of $119 million. Our pre-tax loss for the third quarter of 2008 was $62 million, which included $55 million of pre-tax charges against our real estate and joint venture assets. By comparison, our 2007 pre-tax loss on the third quarter was $192 million, which included $172 million of real estate related and joint venture charges and a $45 million charge to impair goodwill.

Excluding those primarily non-cash charges in each year, our third-quarter pre-tax loss was approximately $7 million in 2008 compared to a pre-tax income of $24 million in 2007. The additional operating loss in 2008 reflects fewer closings, increased incentives and lower revenue margins on homes closed.

Slide seven, asset values fell further during September, causing our real estate impairments to increase after several quarters of declining charges related to real estate. Our asset valuations for determination of impairments took into account the recent impacts of the financial crisis, incorporating assumptions for slower absorptions and lower prices.

Impairments on existing communities accounted for $35 million of our total third-quarter real estate related charges with additional impairments of $13 million related to land held for sale, plus $6 million in option terminations and $1 million of joint venture impairments.

More than half our third-quarter 2008 real estate impairments were primarily related to four underperforming projects in Phoenix. These four are the only attached home communities that we have in that market. We impaired the inventory and owned lots for main on two of these projects, terminated option for the remaining lots on another and wrote down the value of the fourth project as being held for sale.

In California, the second most significant level of impairments, made up approximately 20% of the total this quarter as housing markets there were further impacted by falling prices and an oversupply of new and existing inventory, including many foreclosed homes. California has some of the highest foreclosure rates in the nation after experiencing some of the greatest declines in housing values.

Slide eight, the slowing economic environment also contributed to our conclusion to record a valuation allowance against our deferred tax asset this quarter, reflecting our greater uncertainty as to the timing of eventual recovery in home-building.

We impaired our deferred tax asset by $106 million in the third quarter, representing our estimate of the amount we believe will not be realized by the end of 2008 and, therefore, are not allowed to carryback to 2006, our last profitable year.

We anticipate that we will realize approximately $31 million of our September 30 deferred tax asset during the fourth quarter of 2008. When combined with the deferred tax assets we have already realized through the third quarter, we expect to collect a tax refund of roughly $80 million in the first half of 2009.

While $106 million is no longer carried on our GAAP balance sheet, the asset can be carried forward for tax purposes and used to offset further taxable income.

Slide nine, in the wake of September's unprecedented financial systems failures and consistent with what other builders are reporting, we experienced a substantial decrease in traffic and sales during September, which has continued into October. Our September net sales were about 30% lower than our July/August pace, and our cancellation rate jumped to 45% that month alone.

Our third-quarter net orders declined 29% from 2007 to 2008 after a 40% cancellation rate for the quarter. This is considerably higher than the 27% and 29% rates in the first two quarters of 2008 and in line with a 41% rate reported in the third quarter of 2007.

Fear has discouraged some buyers as they worry that more bad news may be coming. It is our job to show buyers who are able to buy now that this is an historically opportune time to buy a house with the latest designs and amenities at some of the lowest prices we have seen in many years.

Analyzing third-quarter orders a bit further, our Arizona sales increased over the third-quarter 2007 by 17%. We were able to increase absorptions there through programs targeting spec sales, aggressive pricing of our attached home communities and retooling our product offering, replacing the higher end models with more affordable homes that appeal to more buyers. The largest percentage declines were experienced in Florida, down 74% and California down 53%.

In California our lower sales numbers reflect our reduced number of communities in addition to continued weakness in the housing market. We have not been opening new communities nor reinvesting in lots in some areas, so we're simply selling out from fewer stores.

In Texas we are fortunate that Hurricane Ike caused less than $0.5 million of direct physical damage to our homes in Houston. However, it delayed construction, closing and sales in our largest market. When combined with the overall impact of the financial crisis, those events caused our third-quarter year-over-year sales to decline 28% in Texas, resulting in a 16% decline year-to-date in 2008.

Our comparatively large operation in Texas has still benefited us relative to many other builders as we report lesser sales declines in the last several quarters than they have. Recent results from several homebuilders reported a 40% to 65% decrease in sales from the same periods last year versus a 29% overall decline for Meritage.

Slide 10, excluding the real estate related charges from cost of sales in both years, our adjusted third quarter gross margin was 12.7% in 2008 compared to 14.8% in 2007, though the smaller margins reflect lower net sales prices on fewer deliveries partially offset by construction cost reductions and a lower asset base on homes closed due to prior impairments.

As discussed last quarter, we have been working to reduce our cost of construction, and several divisions have already hit their targets of 25% to 30% reductions in average home construction cost per square foot from their peak. The reduced construction costs allow us to offer more affordable homes and compete more effectively for homebuyers today.

We have also reduced our overhead expenses as revenues and sales have declined. Commissions and sales costs have decreased 30% year-to-date to about 9% of total revenue, which is relatively in-line with that 35% decline in revenue. Year-to-date general and administrative expenses are down 31% lower in 2008 than in 2007, which includes the benefit of a $10 million legal settlement we collected during the second quarter this year. Excluding that item, our year-to-date G&A expenses were approximately $14 million lower than 2007 and were 5.6% of total revenue in this year-to-date compared to 4.4% last year.

We entered the third quarter with about 1100 total employees, approximately 30% lower than the level of about 1550 a year ago and about half of what it was at our peak in mid-2006. Unfortunately we are faced with making further reductions in force to bring our operations more in line with declining sales. These decisions are very difficult, but we believe they are necessary for the continued health of the Company as a whole.

I will now turn it over to Larry Seay, our Chief Financial Officer, and I will end our prepared remarks with a few closing thoughts before Q&A.

Larry?

Thanks, Steve. If you'll turn to slide 44. Our third-quarter cash flow has traditionally not been as strong as the fourth quarter due to seasonality as more closings occur in the fourth quarter.

In addition, due to Hurricane Ike, some closings in Texas that were scheduled for September were pushed into October, and we lost orders due to higher cancellations. As a result of more closings and higher inventories, our cash flow was modestly positive in the third quarter. Yet we have generated more than $106 million of positive cash flow from operations for the first three quarters of 2008 and ended the quarter with $119 million in cash and no bank debt.

Slide 12. Despite being a build to order homebuilder, increased cancellations this quarter resulted in an inventory of unsold homes increasing to 809 at September 30, 2008, up from 725 the previous quarter.

324 of the 809 unsold homes were completed, and 485 were under construction. Although the total was 34% lower than a year ago and averages at a little less than four specs per community, it is higher than we like. We're working to bring the spec count back down in the next couple of quarters, reduce the capital tied up in inventory and generate additional cash.

Slide 13. We also continue to reduce our total lot supply control, taking it down another 5% in the third quarter, a decrease of almost 1200 lots. We have reduced our total supply by 62% from the peak in September of 2005 and cut our total owned lots to about 9100, a 1 point year supply, one of the lowest in the industry.

Slide 14. Approximately 57% of all the lots we control were in Texas, which also accounts for about 72% of our remaining option lots. We are even more cautious now about entering into any new lot positions considering the weak environment. Our community count decreased to 207 at quarter-end, and we have continued to bring it down since the middle of last year. Approximately 40% of our communities have fewer than 25 lots remaining for sale. As these older communities -- lower margin lots are sold, our active community count should come down even more over the next several quarters.

Slide 15. Our net debt to capital ratio was 46% at September 30, 2008 compared to 41% at the end of the previous quarter and 50% at September 30, 2007. The sequential increase this quarter resulted from a reduction in shareholder's equity, driven primarily by the deferred tax valuation allowance and real estate impairments.

Our interest coverage ratio is one times interest incurred based on trailing four quarters' adjusted EBITDA. We anticipated the potential for a deferred tax asset valuation allowance when we amended our credit facility in July, so its impact was factored into our modified covenants.

At September 30, 2008, we had no borrowings outstanding under our amended credit facility, and our borrowing capacity was $338 million after considering the most restrictive covenants in place at quarter-end. Our tangible net worth cushion was $195 million at quarter-end.

I will now turn it back over to Steve.

Thank you, Larry. Slide 16. We believe that the true demand for homes is being depressed by volatility in the financial markets and the constant barrage of negative news. It appears that this may have caused many buyers to defer home purchases until prices and economic conditions stabilize. A few markets such as Sacramento have shown sales increases recently as buyers have taken advantage of large selection and low prices on homes and brought down inventories despite the tide of foreclosures. However, those isolated bright spots may not be indicative of the market in general, so we're emphasizing a more defensive strategy going forward.

Let me review some market statistics with you. Net monthly new home sales for the benchmark group of NAHB builders have fallen 72% from January 2006 to September 2008. Home sales prices have dropped up to 50% in some markets with land prices down even more in just one year's time. And existing inventory is nearing an all-time high of resale homes.

We're hopeful the actions being taken by our federal government and other leaders will restore faith in the credit markets, ease liquidity and stem the tide of foreclosures. We urgently need a housing stimulus package that will revive demand for home sales and stabilize prices. Reviving the housing market is among the quickest methods of generating job growth as home construction produces 3.1 new jobs for each new home built.

In 1975 Congress enacted a temporary tax credit and reduced 30-year fixed mortgage rates. That measure yielded an immediate upturn in the autonomy, not only in the short-term but well beyond the expiration of the legislation, leading the way to economic recovery of the mid-1970s. We're encouraging Congress to implement such a plan again in order to stimulate home sales.

At Meritage we're focusing our efforts on reducing our inventory of unsold homes, reducing construction costs and overhead expenses, generating cash and protecting our balance sheet. We will be cautious in acquiring any new lot positions.

Despite lower sales and current market conditions, we expect to generate positive cash flow for the next several quarters from our continued reduction of inventory and projected collection of roughly $80 million in tax refunds in the first half of 2009. We will continue to focus on protecting the balance sheet, and we believe that we're in a market to offer some of the best long-term opportunities for homebuilders.

We will now open it up to questions. Operator, will you -- the operator will remind you of the instructions for Q&A. Thank you.

(Operator Instructions). David Goldberg.

I am wondering if we can maybe start with a conversation about the spec home levels and maybe try to put a little bit of quantification around where you think the spec home levels could go into the future? I appreciate the detail on the breakout opportunity what was finished and unfinished, but maybe give us an idea of where you would like to see that going? I mean what kind of cash flow that could generate?

Well, we don't expect it to go higher. And it has always been our stated goal to have no more than a couple two to three spec houses per community. So, as our community count falls, our spec houses level should fall with that. But with about 200 communities, we would like to get that number down close to 600. And I believe we are a little over 800 this quarter.

So if we could knock 200 specs off over the next couple of quarters, that should generate $40 million to $60 million of cash flow for us.

Maybe to ask it another way, too, is to say, the last slide you guys had generated positive cash flow, including the change in spec inventory and the carryback losses and the NOL carrybacks. But if you did not have those, if you were just looking at your normalized business model now without the benefit of the tax refunds and without the spec inventory reduction, is it still a free cash flow positive model at this point as you look forward?

(multiple speakers). This is Larry. If you -- essentially our net income, excluding inventory changes and tax assets, is pretty much cash flow. There is a little bit of depreciation and amortization but not a whole lot. So our goal, excluding inventory changes and tax asset refunds, is to operate as close to breakeven as possible during this difficult time and get back to profitability. But if you are operating at a breakeven profit, you are operating at pretty close to a breakeven cash flow with a little bit of add-back for depreciation and amortization.

Great. And then I guess my other question has to do with Texas. And maybe I know operating profits ex impairments this quarter were negative on the whole. But maybe you can give us a little more color how it might have looked in Texas versus some of the other markets and just some more granularity on maybe if you're still operating profitably in Texas?

We're still operating profitably there, although the traffic and the sales have slowed down quite a bit particularly over the last couple of months. But we're not seeing the radical price declines, the large incentives, the large discounts that we have seen in the other markets that we're in on the Coast and in Arizona. So we feel pretty confident that prices are going to hold for the most part in Texas, but sales levels are certainly off.

Has that been a trend that has accelerated the decline in sales in the last, let's say, three or four weeks?

I would say, since the early part of September, it has really accelerated. I think it started with the hurricane, and it just did not pop back after the hurricane passed.

Dan Oppenheim, Credit Suisse.

I was wondering if you can talk a little bit about the pricing strategy in terms of the sales per community in some of the regions? If we look at the orders per community, should we think about were there a lot of cancellations in September that sort of drove that? Were the cancellations consistent across the markets? Just a little color in terms of what you're seeing there in terms of that trend in September.

Well, I don't think the cancellations are what is driving the low absorption. It is just less traffic, less buyers in the market. I mean people are getting barraged every day with negative news about the economy and the stock market, and they are seeing the gyrations up-and-down the stock market, and they are just afraid. And the people that are in the market buying homes today are really focused more on the foreclosure market then they are on the new home market, even though our prices are relatively competitive with foreclosed homes. We've lowered our prices in some markets 40% to 50%, and we're in line with a lot of foreclosures. But for some reason, a lot of potential buyers believe that foreclosures are a better deal today. And we're losing a lot of that business, even though you have seen in markets like Phoenix and California levels of resale activity are up 50%, 60% from a year ago. That activity is going to the foreclosures, not to the new homes.

Right. I guess what I was wondering about in terms -- it helps in terms of thinking about the activity just with lower traffic. I guess with the goals for cash flow in the fourth quarter, is there anything you can quantify with that? And then how is it that you're going to achieve sort of the reductions in specs and the cash flow coming through with the slow traffic -- (multiple speakers)

I do not think we are in a situation where we have just got a ton of specs we have got to get rid of. Like I said to David earlier, we're only a couple hundred specs above where we normally want to be. So our spec -- our level of specs is not as out of balance as you might think that it is. So we're not going to have a firesale to try to bring our spec level down. We want to be cash flow positive, but we do not want to do it at the expense of the balance sheet and create a tremendous amount of additional unnecessary impairments.

Yes, we will plan to -- most of the cash will come from winding down subdivisions and selling out the last work-in-process homes, the last model homes, the last spec homes and the last few lots we have. So, as we wind down subdivisions, each of those subdivisions will generate positive cash flow as our subdivision count falls.

So over the next several quarters, a lot of it is going to come from that. Some of it will come from specs, but as Steve said, we're not -- we don't have a terribly out of balance spec level today, but it is certainly higher than we would like.

We certainly had more specs in prior quarters. I think at one point we were well over 1000. So although we are not down to the level we want to be, we're not panicking about it either.

Stephen Kim, Alpine.

My question relates to your inventory breakout. I wanted to know whether or not you could provide the breakout in dollars between your finished home sites and home sites under development? Just a percentage, rough percentage, how much of that -- I think it is $499 million is for finished home sites if you have that.

Yes, most of that is finished home sites, and a small portion of it is under development. But the number is probably something like 20% to 25% under development and 75% to 80% finished lots.

Okay. Great.

It may not even be that big, Larry. I bet it is even less than that.

Okay. Great. But that gets me close. The second question relates to your, I guess what you would consider to be incremental land spend. You know I try to triangulate in on that, and I came up with a figure that at least on a rough cut looks like it increased in the third quarter from what you had been running at on a second quarter and first quarter in the second and first quarter. And this is basically the amount of investment you are making into parcels, which you needed to get to the finished stage so that you could build on it and that kind of thing. And it seemed that the dollar outflow this quarter was greater than that in the first and second quarter. But I'm dealing with rough numbers and triangulating. Would you say that that is a fair statement, or did you actually spend about the same or less than you spent in the first and second quarters?

I do not think it was a lot more. We really have not been buying any new land. Of course, we're continuing to buy, particularly in Texas, lots under option where we are selling houses and starting houses on them. So we have that normal land spend.

But the only thing we did for the quarter, we actually did buy a couple of very small subdivisions in Phoenix at really, really good prices. About 150 lots for about $8 million or $9 million, so maybe you picked that up.

Yes, that would explain part of it. The last question if I could, gross margin, I just have here that it looked like it increased sequentially while your SG&A was sort of flat sequentially. I was just curious whether or not -- well, first of all, did your gross margin actually improve, and secondly, as we go forward, should we look at that third-quarter gross margin number as sort of a reasonable base from which to go forward, or was there something aberrationally in that number, and do you think SG&A could be cut significantly as we go forward as a ratio?

Yes, as we have said before on other calls, the gross margin number we think that we were at 12.7% after backing out impairments, and we think we will be around that number. We do not see it going a lot lower, but on the other hand, we don't see it going up significantly until we see some improvement in the market.

As far as G&A goes, we're working hard to cut G&A as we speak. With a credit crisis, we have made a decision that we need to cut overhead more than what we have in the past. And you should over the next few quarters see the G&A number come down.

As a ratio, right?

Yes, now whether we can cut it exactly the same percentage as we cut -- as revenues fall, it remains to be seen. But our goal is to bring G&A down significantly over the next few quarters.

Nishu Sood.

[Robin Hanson] in for Nishu. During the quarter, despite your spec count coming down, your cash flows increased. So I just wanted to try to get some of the dynamics behind generating the cash flow this quarter. Did your specs get younger, so to speak, or did you defer development and things like that?

I think it is a combination of things. I mean less development, less lots, getting rid of or selling more completed homes and having cancellations of homes that were earlier in the construction phase, which increased the total spec number but did not necessarily increase the cash expenditures. It is just a variety of things. I don't think we can pin on any one item.

Okay. And just looking at some of the regional stuff and the volumes in Arizona were up on a year-over-year basis, but you took a lot of impairments there. Is this a larger kind of promotional activity, or was this detached and single-family with the sales completely different in the two different markets?

I think we were very aggressive with our marketing this last quarter. We changed up our marketing strategy a little bit. We did a lot of DPA, the down payment assistance. We were aggressive about moving some of our attached homes, so we took some pretty big impairments to get those off the books and get cash flow. It certainly was not anything from the market here. It was more what we did internally.

And were sales weaker in Arizona in September as well?

Yes.

Joel Locker, FBN Securities.

I was just wondering on the lot deposits, you have $69 million obviously on the balance sheet. What additional letters of credit and preacquisition costs do you have against the 11,600 option lots?

On the letters of credit, I don't have the precise number, but it is somewhere in that $10 million to $15 million range now. We only have about $30 million plus on letters of credit, and some of those relate to other kinds of matters.

As far as the preacquisition costs, I don't have a number. We have several projects where we have incurred preacquisition zoning, legal -- some development work. I just don't have a number for you today.

Is it larger than the option number or the LOC of $10 million or $15 million additional?

It is certainly more than a few million dollars. I would say it is up in the several tens of millions of dollars, so it is $20 million, $30 million, $40 million. I don't really have the precise number.

Got you. And the other thing on the $111 million settlement from Hancock, I believe, is there any timetable or actually what percent you think you may actually recoup from that?

It was not a settlement. It was a judgment that we received, (multiple speakers) and we're not claiming that we're going to collect $111 million. And I cannot -- we cannot even project what we're going to collect.

(multiple speakers) when would the final ruling be on that? I mean (multiple speakers) would it be a few months down the road?

Well, he filed personal bankruptcy last week. So it's going to go through the bankruptcy court, and we're just going to have to go through all his assets and see what is available for us to collect. I'm sure he has other liabilities as well.

But we're not -- we don't want to give away the impression that we're going to collect $111 million because that is not going to be the case. But, on the other hand, I cannot tell you what we're going to collect.

Got you. The last question on the Florida orders I guess, that was -- those were down 74% year-over-year with flat communities. Was that more of factor of the cancellations or just gross orders or both?

It is kind of all of the above. We're winding out of communities in Orlando. We have a very light lot position there. I think we own about 400 lots now. We canceled all the options. So we have a scattered number of lots left, and sales were -- traffic was often substantially this last quarter. So I think it's a combination of what we have for sale and the fact there is not a lot of buyers.

Carl Reichardt, Wachovia.

Steve, I'm curious many builders have been talking about foreclosures and competition with new. But do you have any evidence, data or support for who is actually purchasing these foreclosures? Because I think there's a difference between your customers buying them versus an investor pool out there buying them and not solving our vacancy issues.

So what is your -- can you give me some more color on that or sense? I don't understand why a comparable product of yours would not be more attractive to a core customer if it is similarly located at a similar price with a two-year warranty or whatever.

You know, I wish I could answer that for you, but I just have this -- the feedback I'm getting from the field is people think when they are talking to prospects that prospects for some reason in their mind think because it says foreclosure on it it is a better deal. I still think we're competitively priced to a lot of the foreclosures.

There are some investors buying them. To what degree, I don't know. But I'm hearing about private investors going out and buying multiple foreclosed homes and renting them. But that is a good question. I'm sorry I just don't have an answer.

Fair enough. And then the second, since I was asked this, I'm curious Proposition 201 is on the ballot in Arizona. That is a big state for you. If passed, our read of it is there are some really significant negatives for the home-building industry if it passes. Maybe you can outline what one or two of those might be, and what your sense is as to whether or not it is got a shot or not. It is the last thing the industry needs obviously.

Well, number one, I don't think it is going to pass. But again, you never know. But the work we have done tells us that people are not in support of it, and it should not pass. But there's a lot of things in there regarding a buyer's right to rescind. They have up to 100 days. You have to give them their money back. A lot of issues with regard to litigation. You cannot mediate. You have to litigate. You cannot collect attorneys' fees if a builder litigates with a customer. And a builder wins, a builder cannot collect attorneys' fees. There's just a lot of things in there that are real negative for our industry. This was created as a blackmail tactic from unions because we would not help them unionize some of our subcontractors. So hopefully it will not pass, and we will put it behind us.

Jim Wilson.

I was wondering if you mentioned maybe a market in a little better condition than Sacramento, are you actually -- I know we're seeing that in the resale market. Are you seeing that at all in your sales pace relative to obviously the weak performance in other parts of California?

We just have very few communities left in Sacramento. We have a very, very small presence, so I don't think we could be a bellwether for the market.

But with that said, the few communities we have we're not seeing a lot of positive traction. We are kind of winding up a few stores there. But from what we're hearing, the resale market has become much more back into balance with a three or four month supply of resale homes on the market.

And then I know you are -- to make sense, you're not being very aggressive with land buys and holding on to cash and trying to generate cash. But I know you have been looking for deals out there. Can you kind of describe the environment? Is the pricing look attractive enough, or is that a little hard to tell yet? Can you get your hands on any land deals from the banks?

We bought a few small deals of lots, less than what similar deals -- the lots were less than $30,000 a piece. We're looking for smaller communities of 50 to 100 lots that we can get in and out of quickly and make money even at today's low housing prices.

We are seeing an acceleration of opportunities. We're seeing some pretty interesting deals come to the market here just particularly recently the last couple of months. And I expect, as we get closer to the end of the year, those opportunities are going to accelerate and on into 2009.

So we've a very light land position, and we're going to generate cash from the liquidation of the lots on our balance sheet and from specs, but we're going to be cautious about reinvesting those. But, as we see opportunities going into next year, we will pursue some of those selectively that will help us get back to profitability.

(Operator Instructions). Nicole Torraco, Babson Capital.

With respect to Texas, in the past you have focused on that market because it has held up pretty well. Now that there has been some weakness there, any change in your regional strategy of developing more in California or things like that?

You know, our strategy always has been to be in about a dozen markets in six Sunbelt states, and we expect to continue with that strategy. Texas became a bigger part of our business only because those other markets were more affected, and sales declined much more rapidly there than they did in Texas. I think over time things will balance out with approximately a quarter or a third of our business in California, a third of it in Arizona and the Nevada area, and then a third of it or so in Texas. So I think that is just going to rebalance over time. But at this point, we're not changing our strategy.

Alright. And then one quick question on slide 15, the bank line availability of 338, the note says it includes cash. So does that mean your actual availability on the revolver is the 338 less the 119 in cash or 219 actually?

Yes, well, the 119 is, the cash is part of the borrowing base. So if you spent the cash on a non-borrowing base item, yes, your cash -- your borrowing base would go down by the amount of cash you spent. If you bought borrowing base assets, the borrowing base would go up by the percentage of advanced rate on the asset you bought.

So we footnote that because it is not correct to say that it is completely excluded or completely included, but yes, the number does include cash. But if you spent the cash and bought borrowing base assets, the borrowing base would go up, and your availability would not go down dollar for dollar. It might go down by $0.30 on the dollar or $0.20 on the dollar if you see what I'm saying.

Got it.

Would you like to take one more question?

We have one more, operator?

Certainly.

We will take one last one, and then we will wrap it up.

Chris Hussey, Goldman Sachs.

This is Joshua Pollard for Chris Hussey. The question is around your tax refund. You're saying you expect $80 million in the first half of '09. You had previously said you were expecting $40 million to $60 million. What has changed over that time?

Well, we have been more successful in triggering tax losses on previously impaired property. So, at the end of the quarter, we have $60 million in tax asset receivable and another $30 million we hope or so that will be triggered. We've said $80 million to be a bit conservative because we may not completely be able to trigger that last 30. So we are in kind of that 80 to 90 range, and we have kind of said the lower end of the range.

Okay. So the $30 million could be triggered in the fourth quarter, potentially leading you from 60 to somewhere in the 80 or 90 range for the first half of '09. Is that correct?

Exactly, and we have just been real aggressive in trying to sell projects that have large impairments or are in some cases terminating partnership investments or selling a piece of property here or there. So it's been a full-court press to trigger as much as possible.

My second question is on your absorption levels. You guys changed your estimates there. What are they now, and what were they -- and are they higher in Texas than they are for the rest of your operations?

Are you saying sales per community? Is that what you're getting at?

Yes, your sales for community estimates that you guys changed for your write-down.

Well, we are -- unfortunately we're selling in the third quarter less than two sales per community per month, and at that kind of sales level, we can still make a profit, but it gets to be fairly thin because of overhead at the division level. So it is that kind of absorption swelling from where we were in July and August to what we have seen in September and October that triggers further impairments.

Although in Texas we're still making relatively good money in most of our subdivisions and still have not to date had any real impairments in Texas. All the impairments have been in the other states.

So when you think about it, is Texas -- do you have higher absorption rates in Texas, or are you just able to make more money at similar absorption rates to the rest of the Company?

No, we do not have higher absorption rates in Texas, but we have -- it is a lower overhead model because the communities in Texas generally only have one model home per community. The business is a little bit more fragmented there, so it's less overhead intensive. But the absorptions are not higher in that market.

But pricing also has held up better in Texas, and that is the other thing that continues to make us profitable in Texas.

Yes, that is really the key difference, is the pricing.

The last question, close to $120 million in cash. What do you guys have that invested in now? Where is it?

It is sitting in a treasury or a treasury agency backed security. So it's got the full faith and credit of the government behind it in mutual funds, or it is sitting in some cases in some very large banks that are in our credit facility. But most of it is in treasury money market type funds.

Thank you very much. That is going to wrap up our call for this quarter, and we will look forward to talking to you again after the first of the year. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.