D R Horton Q4 Earnings Call Transcript

123jump.com Staff
24 Dec, 2008
New York City

The home builder reported wider net loss of $799.9 million or $2.53 per share in the quarter. Cancellation rate of orders was 47%. Total sold homes declined to 6,961 from 11,733 and average closing price declined 12% to $221,900. In the quarter the builder sold land and lots for $209 million.

D.R. Horton, Inc. ((DHI))
Q4 2008 Earnings Call Transcript
November 25, 2008, 10:00 a.m. ET

Executives

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer
Stacey H. Dwyer - EVP and Treasurer
Bill W. Wheat - EVP and Chief Financial Officer

Analysts

Megan McGrath – Barclays Capital
Michael Rehaut – JP Morgan
Daniel Oppenheim – Credit Suisse
Rob Hansen for Nishu Sood – Deutsche Bank
Kenneth Zener – Macquarie Research
Timothy Jones – Wasserman & Associates
Alex Barron – Agency Trading Group
Jay McCanless – FTN Midwest
Carl Reichardt – Wachovia Capital Markets
James Wilson – JMP Securities
Stephen East – Pali Capital
Randy Raisman – Durham Asset Management
Larry Taylor – Credit Suisse
Susan for David Goldberg – UBS
Rob Stevenson – Fox-Pitt Kelton

Presentation

Operator

Good morning. My name is Leslie and I will be your conference operator today. At this time, I would like to welcome everyone to the D.R. Horton, America''s Builder 2008 fiscal year end conference call. All lines have been placed on mute to prevent any background noise. After the speakers'' remarks, there will be a question-and-answer session. (Operator Instructions) If you’d like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you’d like to withdraw your question press the pound key.

Thank you Mr. Tomnitz, you may begin your conference.

Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer

Thank you and morning. Joining me this morning are Bill Wheat, Executive Vice President and CFO and Stacey Dwyer, Executive Vice President and Treasurer.

Before we get started, Stacey?

Stacey H. Dwyer - Executive Vice President and Treasurer

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statement. Additional information about issues that could lead to material changes in performance is contained in D.R. Horton''s annual report on Form 10-K and the most recent Form 10-Q, both of which were filed with the Securities and Exchange Commission. Don?

Donald J. Tomnitz

Net sales orders for the fourth quarter were 3977 homes, $852 million compared to 6374 homes, $1.3 billion in the year ago quarter. Our average sales price on net sales orders in the quarter was $214,300 and our cancellation rate remained elevated at 47%. Our fourth quarter home sales revenues were $1.5 billion, 6961 homes compared to $3.0 billion or 11,733 homes in the year ago quarter. Our average closing price for the quarter was down 12.0% to $221,900 compared to $253,000 in the year ago quarter, reflecting a dismal pricing environment compared to the prior year. Stacey?

Stacey H. Dwyer

Our gross profit margins, on home sales revenue in the fourth quarter before inventory impairment and land option write off, was 10.9%. This was a 510 basis points decline from our home sales margin of 16% in a year ago period. The majority of the margin decline was due to core margin deterioration resulting from an increased use of sales incentives relative to last year’s impractical and as reported in our 12% decrease in average closing price. Also the amortization of capitalized interest as a percentage of home sales revenue increased from the prior year quarter. Don?

Donald J. Tomnitz

During the quarter we consummated multiple land and lot sales transactions with various buyers. These land and lot sales generated revenue of $209 million. In addition to reducing our future carrying cost and land development obligations and lowering our inventory of land and lots in certain markets, they closely match our expectations of future demand. Approximately 32000 lots were sold during the quarter of which 55% were undeveloped, 20% were partially developed and 25% were fully developed. The largest concentration of sales, were in California, Nevada, Arizona and Florida. Total cash expected from these sales including their contribution to our income tax refund is $795 million. Bill?

Bill W. Wheat - EVP and Chief Financial Officer

During the fourth quarter we recorded 12 inventory impairments of $989 million as a charge to cost of sales to reduce the carrying value of impaired projects and the total charges approximately $624 million were related to the land and lots resold during the quarter. The remaining impairments of $365 million relate to our own inventory at September 30th 2008. We reviewed all projects in the company and determined that projects with a combined carrying value of $2.6 billion had indicators of potential impairment. We evaluated these projects and determined the projects with a pre-impairment carrying value of $968 million were impaired. We recorded inventory impairments of $365 million as a charge to cost of sales to reduce the carrying value of these impaired projects. Approximately three fourths of these charges related to projects in our East, South East and West regions and the remaining $1.2 billion of evaluated projects which were not impaired, approximately 70% were located in our East, South East and West regions.

Also during the fourth quarter we recorded $86 million in write offs of earnest money deposits and pre-acquisition costs related to land option contracts that we do not intend to pursue. Don?

Donald J. Tomnitz

Ongoing SG&A expense for the quarter was 10% of total home building revenues compared to 9% a year ago. In the fourth quarter we reduced total SG&A expenses by approximately $107 million or 38% compared to the year ago quarter. Home building SG&A expense for the fiscal 2008 was 12.1% of total home building revenues compared to 10.3% in fiscal 2007. In fiscal 2008 we reduced total SG&A expenses by approximately $350 million or 31% compared to fiscal 2007. We will continue to manage our SG&A levels relative to our expected number of home closures. Although our long-term goal is to keep SG&A at 10% of home building revenues each fiscal year, that goal will be more difficult to achieve in fiscal 2009. Bill?

Bill W. Wheat

FAS 142 require us to test our goodwill balances in each operating segment for impairments at lease annually. During our fourth quarter we concluded our annual analysis for goodwill and recorded an impairment charge of $79.4 million to our South West region. Total goodwill balance remaining after impairments at September 30 is $15.9 million. Stacy?

Stacey H. Dwyer

We reported approximately $16.1 million in interest expense during the quarter. Since we are continuing to reduce our residential inventory and our development activity, our active inventory did not exceed our home building debt levels this quarter so we expensed a portion of the homebuilding interest incurred. Our financial services operations remained profitable as we proactively adjusted expense levels to lower volumes and adjusted product offerings to the current restricted mortgage environment. Financial services pre tax income for the quarter was $6.9 million compared to $16.1 million in a year ago quarter. 93% of our mortgage capital business was captive during the quarter reflecting our continued focus on supporting home builders business. In the fourth quarter our company wide captive rate was approximately 63%, our average FICO score was 710 and our average cumulative loan-to-value was 92%. Our product mix in the quarter was essentially 100% agency eligible with government loans accounting for 71% of our volumes. Bill?

Bill W. Wheat

We have filed the federal income tax refund claim for $622 million and expect to receive the refund in December 2008. Due to an increase in fourth quarter land sales from what was anticipated at June 30th our fiscal 2008 tax loss and tax refund exceeded our previous expectations which drove our $365.3 million income tax benefit in the fourth quarter. Our net remaining before tax assets of $213.5 million at September 30th are expected to be realized in fiscal 2009 primarily through net operating loss carry backs to tax year 2007 and will result in an expected tax refund in fiscal 2010. Our reported net loss for the quarter was $799.9 million or $2.53 per share. For the fiscal year ended September 30th 2008, we reported a net loss totaling $2.6 billion for $8.34 per share. Don?

Donald J. Tomnitz

Our overall inventory decreased by approximately $660 million excluding non-cash impairment charges during the quarter. We reduced our total number of homes in inventory to approximately 12400 units down 19% from June. We also reduced the absolute number of speculative homes as an inventory to approximately 6900 homes. We plan to continue to adjust both our total number of homes in inventory and our numbers of speculative homes in the coming quarter to match current demand. Stacy?

Stacey H. Dwyer

Our land and lot acquisition spending remains limited and we continue to restructure our land development plans in line with current absorption. Our land and lot acquisition and land development expenditures for fiscal 2008 totaled approximately $600 million and we expect this will last into fiscal 2009, than we get in fiscal 2008. Bill?

Bill W. Wheat

Our supply of owned land at September 30th 2008 was approximately 99000 lots, down 68000 lots from September 30th 2007. Our 99000 own lots represent a 3.8 year supply based on trailing 12 months closings. We continue to actively work to reduce our own land and lot supply through building and closing homes as well as through opportunistic land and lot sales. We control an additional 26000 lots through option contracts, which includes 8000 lots, for which we do not expect to exercise our option because the contracts have not yet been terminated. Our net earnest money deposit balances at September 30th was approximately $27.5 million on a remaining purchase price of $484.4 million. We had no unconsolidated joint ventures and we rarely use land bank arrangements. So, the deposits are typically at very low percentage of purchase price. Don?

Donald J. Tomnitz

Our land sales combined with a reduction in dollars invested in homes and land and lots helped us generate $480 million in operating cash flow in the quarter resulting in a $1.4 billion cash balance at September 30th. We have generated positive cash flow in each of the past nine consecutive quarters for a total of $4.1 billion of operating cash flow over the last 27 months. We are trying to generate positive operating cash flow in fiscal 2009, in addition to the cash flow provided by our anticipated $622 million tax refund. Bill?

Bill W. Wheat

As we announced in our press release today, we’ve declared a quarterly dividend of 3.75 cents per share, a reduction of 50% from our prior quarter dividend and a 75% cumulative reduction from our peak dividend level. While we remain confident in our ability to continue to generate cash flow from operations and our long-term ability to generate profits, we continue to prioritize balance sheet strength and preservation of capital in the current challenging environment. Our dividend will continue to be subject to Board approval each quarter. Stacy?

Stacey H. Dwyer

At September 30th our homebuilding leverage ratio net of cash was 43.6% within our target operating range. We have no cash borrowing outstanding on our homebuilding revolver at quarter end. However as a result of the inventory reductions we achieved during the quarter, our borrowing based availability as at September 30th was $52.8 million. Our availability will increase when we redeem debts maturing in January and February of 2009 and as we reduce other homebuilding debt at a faster pace than further reductions in inventory levels. With our $1.4 billion in cash, and expected $622 million tax refund in the first quarter of fiscal 2009, and our planned additional deposit cash vouchers from operations in fiscal 2009, we currently do not anticipate a need to borrow from our revolver. We were in compliance with all of our homebuilding revolver covenants at September 30. We had a cushion of approximately $630 million on our tangible net worth covenant and our leverage calculation under the facility was 49.6% at September 30, 2008, compared to our maximum allowable leverage of 55%.

We expect our leverage to decrease in the first quarter of fiscal 2009 as a result of the receipt of our federal income tax refund and a higher average cash balance. In the fourth quarter, we repurchased a total of $36.7 million of our outstanding notes for a total purchase price of $36.7 million plus accrued interest. Subsequent to September 30, we have repurchased a total of $102.9 million of our outstanding notes for a total purchase price of $98.2 million plus accrued interest. Our Board of Directors have authorized $500 million in debt repurchases for the period of December 01, 2008 through November 30, 2009. Don?

Donald Tomnitz

Thank you, Stacey. I want to take this opportunity to thank all of our DHI team for their efforts in this dismal housing market. Especially, I would like to thank our regional and divisional staffs in our Q4 land sales and also our corporate staff on our Q4 bulk land sales. It was a Herculean effort. It was also quite successful and was done completely 100% by DHI personal. Fiscal year 2009 will be a more challenging we believe than fiscal year 2008, but we’re confident in our abilities to deal with the blows the housing market and the economy will send our way. This concludes our conversation this morning, any callers?

Stacey Dwyer

Leslie, we’ll now open for Q&A please.

Question-and-Answer Session

Operator

(Operator instructions) At this time I’d like to remind everyone that if you like to ask a question please press * then the number 1 on your telephone keypad. We would also like to request that you limit yourself to one initial question and one follow up question. Our first question comes from Megan McGrath of Barclays Capital. Your line is open.

Megan McGrath – Barclays Capital

Hi, thanks. Good morning. I just wanted to follow up a little bit on your land sales, if you include the land sale and you changed your reporting segments a little bit, just curious if you have effectively exited any markets this quarter?

Bill Wheat

No major market exists at all, Megan.

Megan McGrath – Barclays Capital

Okay, thanks and could you maybe categorize the buyers of that land for us? Was it mostly other builders, was it funds?

Donald Tomnitz

Well, there weren’t a lot of builders buying land at this point in this cycle, but half of our land sales were handled specifically by our regional presidents and their respective division''s presidents, and the other half was handled by our corporate office. A number of the land sales on a regional and division basis were local investors, local developers, who basically understood the properties better than someone who is purchasing from a bulk perspective. They were, as I said, local and they understood the inherent value in those projects. We also dealt with I think five other bulk sale investors, all different sizes of dollars in terms of the transactions, but those were handled by the corporate staff here, so basically about half from the regional and divisional staff, and about half from the corporate staff.

Megan McGrath – Barclays Capital

Okay, great. Thanks very much.

Operator

Our next question comes from Michael Rehaut of JP Morgan. Your line is open.

Michael Rehaut – JP Morgan

Hi thanks. Good morning everyone.

Donald Tomnitz

You think they’ll get the number one analyst’s name correct, wouldn’t you?

Michael Rehaut – JP Morgan

It takes a while, thanks.

Donald Tomnitz

Almost as bad as Thomas, Rehaut.

Michael Rehaut – JP Morgan

First question guys, just on the written down lots. I’m sorry, yes, the written down lots where you had the base was 968, can you give us a sense of what was finished versus unfinished or maybe in the middle?

Bill Wheat

You are talking about the lots that we sold?

Michael Rehaut – JP Morgan

No, the lots that, weren’t sold but were associated with the 365 million of impairments that you kept?

Bill Wheat

Sure. Of the lots that we still own, about 30% of those are finished, and then the remainder are in some form of development or are undeveloped at this point. So, about 30,000 lots as far as absolute numbers are finished lots at this point in time.

Michael Rehaut – JP Morgan

Okay and then I guess but my question was more to the lots that were impaired by that 365 million, can you give us a sense of the proportion of finished versus unfinished or in the middle?

Bill Wheat

Right, of what we impaired during the quarter, about 20% related to finished lots and construction progress, and the remainder would have been related to land.

Stacey Dwyer

And we don’t really have a breakdown on that 80% on whether the lots were completed or in any phase of development. We’ve simply tracked it by land versus our residential inventory lines.

Michael Rehaut – JP Morgan

Okay, thank you. Second question just on the can rate, it has moved up for many builders, not just yourself, and I was just wondering if you could give us a sense of how much of that might have been due to DPA versus just other reasons, i.e. cold feet or mortgage financing difficulty?

Donald Tomnitz

We really thought that we had higher sales from DPA in the fourth quarter than what we had. I don’t think our cancellation rate increased significantly because of the DPA in fourth quarter. We really think the biggest issue Mike is just the fact that people have cold feet. I think it is difficult for in this economy with job lay offs, you may not be laid off, but your neighbor was laid off, and people are becoming more conservative and I also think it is just as housing prices continue to decline in a number of markets, it is difficult to make a buying decision unless you absolutely have to. If you have been transferred, or you need another bedroom, I think those are easier decisions, but I think until housing prices bottom out, I think the cancellation rates are going to continue to increase or at least stay high. And until the economy begins to improve, and people have confidence that the assets they are purchasing is at least going to be worth what they’re paying for, it is going to continue to contribute to higher cancellation rates.

Michael Rehaut – JP Morgan

One last question, if I could, just on the gross margins, we’ve heard different accounts from builders recently about…or rather may be in our review kind of a shift that more recently last quarter too more builders have begun to talk about gross margins post impairment for communities being in kind of a low double digit range, markedly below kind of normalized profitability. In our view it is a little bit of a shift from maybe a year or two ago where the talk was that that impairment was supposed to push you closer to either normalized or slightly below normal level of profitability on the gross margins side. Can you give us a sense for in terms of your impairments today, what camp you fall in or is it closer to the low double digits type margin that you’re resetting your communities at?

Donald Tomnitz

I’m not sure we’re going to land in either camp necessarily, but the way we would look at it is for projects that had been impaired typically a post impairment margin on those projects would perhaps be in generally in the mid teens range. However, in order for a project to become impaired, generally the gross margin must drop down into the single digit range. So at any point in time, especially in a declining price environment, you may be looking at your overall inventory, your overall projects that are open for sales. You may have some recently impaired projects where the margins are in the mid teens. You may have some projects that either have not been impaired but are declining, that may be down in the low double digits or the high single digits, but have not been impaired yet. And then you may have other projects obviously that are still performing very well from a margin perspective. So on an average, weighted average balance in this environment; I think the margin in the low double-digit range with a mix of impaired projects and unimpaired projects is probably a reasonable expectation.

Michael Rehaut – JP Morgan

Okay, I appreciate that color. I guess what you are saying is just those that have just been impaired would get you back into a mid teens level which I think is more consistent with what we’ve heard kind of say a year ago or so that companies were trying to peg it closer to either a normalized or slightly below normal level of profitability?

Donald Tomnitz

I think that’s clearly the first shot out of the box when the project is impaired you’re trying to basically reflects of that is a more normalized, or it is close to a normalized margin in those projects.

Bill Wheat

Then you mix everything in the basket and it becomes a weighted average.

Donald Tomnitz

And then if post impairment, those projects performed at exactly the level that you assumed, then margins would remain in the mid teens. But the reality over the last year or two is that the pricing environment has continued to decline, so subsequent performance quarter by quarter has slipped back down from the actual impairment level.

Michael Rehaut – JP Morgan

Great thanks very much.

Operator

Thank you. Our next question comes from the line of Dan Oppenheim of Credit Suisse. Your line is open.

Daniel Oppenheim – Credit Suisse

Thanks very much. Was wondering if you could talk about having fewer spec homes, but in the past in terms of orders, you have talked about how you want to basically sign an order if you have a live body there, given that most of the lots you’ll be facing will be coming from cancellations and/or unintended specs, how are you going to think about orders in the coming year to avoid having some more specs out there?

Donald Tomnitz

We can’t really speak to currently about orders currently because I assure you that we are monitoring on the daily and weekly basis at the corporate office as well as we are at the regional and division. And currently it is a week-to-week, month-to-month, and quarter-to-quarter development in terms of what our orders will be. I’ll say we’re very comfortable even though it may not seem like a big number, but there are close to over 26,000 units for the fiscal year we thought was a major accomplishment by our team. The way we look at specs, I can tell you as I travel around the country and Don Horton travels around the country, and by the way Don Horton is on the road today in Atlanta and Birmingham and he will have visited all of our divisions by Christmas holidays, we’re maintaining enough specs in each one of our communities such that when someone does get qualified i.e. someone moving out of an apartment or someone has actually sold their home such that they can close on a home immediately, because those people typically do not want to wait the construction cycle for that home to be built and closed. So we have decreased the number of specs substantially. I think at this time last year we had 5,000 completed specs and we are sitting on about 3,100 completed specs and you should also note that our specs that have been completed greater than one year are basically less than 5% of our inventory, about 600 homes.

Daniel Oppenheim – Credit Suisse

Great, thanks very much. And then just to follow up, wondering about if you could give any color on what is happening in terms of orders in the southwest region, if you had cancellations there that were certainly above what you had overall as far as your sales I guess going forward?

Donald Tomnitz

Absolutely, the order cancellations have increased substantially in the southwest and that is a direct reflection of Arizona, which would include both Phoenix and Tucson and as we all know California was the first one to enter into this housing down cycle followed by Florida and now we had a good year in Arizona last year. We are going to have a not so good year this year. It is going to be a worse year than we had last year I guess is the best way to put it, largely because of the fact that cancellations are increasing substantially in both the Phoenix and the Tucson market.

Daniel Oppenheim – Credit Suisse

Can you just add color into in terms of what the cancellation rates was for that region?

Donald Tomnitz

We can get back to you on that. I don’t think we’ve got that right at our fingertips. One second.

Mike Murray

For the year?

Donald Tomnitz

Yes.

Mike Murray

For the year, 56%, it is the highest amongst our regions.

Donald Tomnitz

56%, Mike Murray says, our controller, and that was highest among our regions.

Operator

Thank you. Our next question comes from Nishu Sood of Deutsche Bank. Your line is open.

Rob Hansen – Deutsche Bank

Hi, this is actually Rob Hanson on for Nishu. Thus far you have been pretty successful in generating cash and managing your balance sheet and what not, so just wanted to kind of get, see what the rationale was in not just completely cutting the dividend?

Donald Tomnitz

Yes. Frankly I’ll tell you that we have cut it as I said down to three quarters of what it originally was. We have generated $4.1 billion in free cash flow over the course of the past 27 months. We’re comfortable. As we told you that we would generate free cash flow in fiscal year 09 in addition to the $622 million check that we’re about to get on our taxes. So as we continue to generate the levels of positive cash flow that we are, we believe that our dividend at its current level is appropriate and it represents less than $50 million total of expenses relative to our cash position, which will be at the end of December somewhere around $2 billion. So we think it is very prudent.

Rob Hansen – Deutsche Bank

Okay and then in the preliminary release, you mentioned about how your borrowing base in the credit facility is less than 100 million and what not. So given that you have ample cash to fund your operations for the time being, have you already started to rework the facility, and if so can you give us any color on the discussion that you have with the bank group?

Bill Wheat

Right, one thing to clarify is on the borrowing base, our capacity under our borrowing base at September 30 was $52.8 million. Now we do expect that that capacity to increase as we pay down further debt, as we pay off our maturities in January and February, and that will be offset somewhat by any further reductions in inventory. So that capacity will increase regardless of what we do with our banks. We’re having preliminary discussions with our lead banks regarding our facility, regarding the covenants under our facility, and so we will be evaluating further actions on the revolver in the coming months. We certainly don’t have an immediate need to address the facility, but we will be evaluating that.

Rob Hansen – Deutsche Bank

Okay and then just one last quick question, given the build up in cash, I just wanted to see what types of securities that you have invested your cash in?

Bill Wheat

A substantial majority of our cash is in treasuries or in funds that are directly invested in treasuries and the remainder basically is spread around among our bank group.

Rob Hansen – Deutsche Bank

All right thank you.

Operator

Thank you. Our next question comes from Kenneth Zener of Macquarie. Your line is open.

Kenneth Zener – Macquarie Research

Thank you. Good morning.

Donald Tomnitz

Good morning.

Kenneth Zener – Macquarie Research

I’m interested in how far are you guys are willing to place your unit under construction write up as a percentage of backlog, because currently I think it is at a record level, the 12,400 units relative to backlog? And it is still useful to think about that number as basically being half your next quarter’s deliveries?

Donald Tomnitz

Yes and obviously next year’s deliveries. Basically what we look at, as we indicated to you, we have 12,400 units in inventory, and clearly in a typical year we would say two times that equals our projected next fiscal year’s closings. I would tell you that we realize that we have a few too many units in inventory, and obviously one of the ways we are trying to generate free cash flow this year, in the past half of this year is the same way we did it last year, and that is we’re going to continue to reduce our number of units in inventory. So we are aware of the number. It is a little high for us at this point but it is not something that we are worried about. We’re reduced our units in inventory last year substantially in the first half of the year.

Bill Wheat

For reference a year ago, we had 19,900 units in inventory after just closing a bit over 40,000 units in the prior year. To date, we have 12,400 units in inventory after just closing 26,000 units during the year, and so we have continued to move our balance down and based on the sales pace that we’re seeing and it perhaps depends on what we will see in the coming quarters, we will continue to adjust downward.

Stacey Dwyer

The trade off for us right now there is, sale of build jobs. It has a high likelihood of cancellations. When we have specs that are available and we have a short time, so when people come in and sign a contract to close, we have better certainty of closing and a lower cancellation rate. So those specs are actually helping us continue to move through our land and lots and continue to generate our cash flow. So we’re going to focus really on specs more as just as overall percentage of our projected closings rather than looking at it as a percentage of our backlog.

Kenneth Zener – Macquarie Research

Okay, that is really useful, thanks. The follow question I had was if you look at a place like Phoenix, which is one of the largest markets where you are a dominant builder there, I just wonder how long builders can keep building despite oversupply and job losses, and how you guys think about positioning yourself there? Is it simply because you have lowered G&A costs that you can continue to build or is it really you need to deplete land that keeps those spec levels high?

Donald Tomnitz

We need to deplete land and obviously we have too many specs on the Phoenix markets as the market is turned down over the past six months and we’re on a major program to reduce the number of specs in the Phoenix market currently. The number of specs in Phoenix were largely driven by the higher than anticipated cancellation rates in the last two quarters and we always maintain in Phoenix a very low number of specs but frankly the cancellations rates were so horrendous that it increased our specs above our comfort level, so those are coming down.

Kenneth Zener – Macquarie Research

Thank you.

Donald Tomnitz

You’re welcome.

Operator

Thank you. Our next question comes from Timothy Jones of Wasserman & Associates. Your line is open.

Timothy Jones – Wasserman & Associates

Good morning to all of you.

Stacey Dwyer

Good morning.

Donald Tomnitz

Hi, Tim.

Timothy Jones – Wasserman & Associates

Couple of things, let me get this straight. Could you give us what the, on the 32,000 lots, what was the land on your books on that and what was the impairment? And I guess the tax benefit of that sale would be 35% or 38% of the 624, if I’m right or wrong? So what was the 32,000 lots on your books sold and how much of it has been impaired before that?

Donald Tomnitz

Yes. Prior to the sale, the total book value of these lots that were sold was about $975 million.

Timothy Jones – Wasserman & Associates

Okay and how much of it has been previously impaired?

Donald Tomnitz

Just go to the original cost, the original cost on those lots was $1.8 billion.

Timothy Jones – Wasserman & Associates

Okay. So it had been impaired down quite a bit, okay. And the other question I had on these, your 12,400 units under construction, does that include the 6,900 specs?

Donald Tomnitz

Yes, it does.

Timothy Jones – Wasserman & Associates

And what is the number of specs that compares to 6,900 last year, was it 99?

Stacey Dwyer

10.6.

Timothy Jones – Wasserman & Associates

Okay. But now won’t you have to add in the finished specs, there would be homes under construction?

Stacey Dwyer

That includes any vertical construction, so completed specs are already included in the 6,900.

Timothy Jones – Wasserman & Associates

The 3,100 are included in that too?

Stacey Dwyer

Yes.

Timothy Jones – Wasserman & Associates

And you are one of the very few builders who have said that they would generate free cash flow next year before tax refunds. I think you alluded to it. Is it because you intend to bring the specs down significantly?

Donald Tomnitz

That is correct. We are going to bring the specs down and also bring our total inventory down in terms of lots.

Timothy Jones – Wasserman & Associates

Okay, and lots too, okay. Can I just get a clarification also then?

Donald Tomnitz

Yes, sir.

Timothy Jones – Wasserman & Associates

It’s Mike who asked you this question, you said that your impaired lots, 20% were finished or under construction, and the rest was raw land, is that correct?

Donald Tomnitz

55% was.

Timothy Jones – Wasserman & Associates

I am not talking about the stuff sold. I am talking about the stuff impaired.

Donald Tomnitz

Yes, the stuff that we own, the 99,000 lots that we own today, 30% are finished and the remaining…

Stacey Dwyer

Yes, and…

Timothy Jones – Wasserman & Associates

And how much under construction then, I mean impaired under development?

Stacey Dwyer

Yes, I think you are right, Tim. It is 20% related to homes under construction for the current quarter impairment, 80% related to land in any state of development.

Timothy Jones – Wasserman & Associates

It doesn’t just mean raw land?

Stacey Dwyer

That’s correct.

Timothy Jones – Wasserman & Associates

And for the entire company, it’s 30 and 70, okay? Not impaired, but you don’t have a breakdown of what percentage of that land is raw, that’s the stuff I am worrying about, undeveloped land?

Stacey Dwyer

We didn’t try to breakdown our impairment by raw versus partially developed or fully developed lots.

Timothy Jones – Wasserman & Associates

How about your owned?

Stacey Dwyer

On our owned lots, we are a probably 30% developed, 30% finished, and then the remainder is going to be a combination of partially developed and raw.

Timothy Jones – Wasserman & Associates

Okay. But you don’t have the breakdown then of the 70%?

Stacey Dwyer

I don’t have it in front of me.

Timothy Jones – Wasserman & Associates

Okay, thank you so much anyways.

Stacey Dwyer

Okay, thanks Tim.

Operator

Thank you. Our next question comes from Alex Barron of Agency Trading Group. Your line is open.

Alex Barron – Agency Trading Group

Thanks. Looks like Tim just stole one of my questions. That’s alright. My other question I was going to ask you was in the current quarter I was wondering what the benefit from previous impairments was to your margins?

Donald Tomnitz

Alex, we are looking at that in terms of the closings that we saw during the quarter that had been previously impaired. So, of our total closings during the quarter, about 2,750 of them had been previously impaired, that’s about 39% of our overall closings. We don’t have the breakout of the full impact on our margins from impairment releases.

Alex Barron – Agency Trading Group

Okay. Now as it pertains to the impairments, could you give us like a breakdown of say your California region, how much those lots have been valued at, at the moment?

Donald Tomnitz

Well I guess probably the first thing really we are mumbling here a little bit Alex is we actually don’t have just a simple California region any more. We have a west region. If I’m just looking at the total west region which does include the Pacific Northwest a little bit, so let me make sure I understand your question. You are wanting to understand versus our original cost, what we are currently impaired down to?

Alex Barron – Agency Trading Group

Correct. I guess I’m just trying to, I guess the way I was looking at it and maybe you can correct me, I was adding the…I was trying to get what the average value was per lot, so I was dividing the 99,000 lots by the…looks like you have about 2.4 billion on the balance sheet for lots under development and you have got another $530 million for land held for development. So I was just adding those two values divided by the 99,000, so I get about $30,000 per lot on average. I was just kind of wondering how that broke down per region.

Donald Tomnitz

Okay, okay.

Stacey Dwyer

There is actually probably not as much variability by region as there used to be Alex. Probably the south central and the southeast are going to have the lower lot cost, the west will probably still be a little bit higher as with the northeast. Lot values have changed and that is the reason we have impaired more in California that we have in other markets instead of bringing the average cost per lot down. The other thing keep in mind as you’re looking at that there is going to be a difference based on the stage of completion of the lot and so what you are taking is any stage of lots that are reflecting our land and lot position and applying a straight average to it.

Alex Barron – Agency Trading Group

Right, yeah, I understood. I was just wondering if California was lower or higher than that average at the moment.

Stacey Dwyer

It is probably going to be a little bit higher, but not significantly higher.

Donald Tomnitz

The value per lot?

Stacey Dwyer

Right, the value per lot, right.

Donald Tomnitz

I will say one thing, in California, since post our operating committee meeting in October, late October, on deals that we are looking at in California today, we are finding whereas that lots used to be during the peak somewhere around 35 or 40 per cent of the cost of a home, we are now finding that the deals that we are looking out there, we’re seeing that the value of a lot is somewhere back to a more normalized company average which is around 25% of the cost of the home. So the land prices in California have come way down and as a percentage of the cost of a home getting in line with traditional overall D.R. Horton average lot as a percentage of the cost, which is a good sign from our perspective.

Alex Barron – Agency Trading Group

Right and another quick question I had was on the…wanted to see if I’m reading this correctly, in your Midwest region, it looks like your prices for both orders and deliveries dropped fairly significantly versus any other previous quarter. Was that just kind of a change in pricing to try to move stuff in that region or is there something else that I’m not getting correctly here?

Donald Tomnitz

Clearly Chicago has got gotten a lot softer, and Denver continues to be soft, and Minneapolis continues to be soft. But I think the biggest driver of that was Chicago has experienced a lot of softness in the last two quarters.

Alex Barron – Agency Trading Group

Okay, all right. Thanks Don.

Operator

Thank you. Our next question comes from Jay McCanless at FTN Midwest. Your line is open.

Jay McCanless – FTN Midwest

Thank you, good morning, everyone.

Donald Tomnitz

Good morning.

Jay McCanless – FTN Midwest

I wanted to get an update on the mass volume process that I believe you all have spoken about over the last two quarterly calls and also what implications if any that has for community counts in fiscal 09?

Donald Tomnitz

We continue to evaluate all of our projects to determine whether we want to move forward or not. We have determined the number of projects it really makes no sense in the current environment to spend additional development dollars, and so we are mothballing certain projects. That process really hasn’t changed; it is kind of a continual valuation. I would tell you in the current environment, we are really not pulling any project out of mothball, but we certainly are continuing to identify at least portions of projects, future phases of developments that we do not want to move forward with and we will move those into mothballed status. I think a lot of those mothball projects are projects which we believe to bring the market to date doesn’t make economic sense to us. And if there is a housing market for a year from today which we believe there will be, then those projects will have a higher economic value. So that’s really the basis for most of those projects being mothballed. They are hard to replace deals, and in most instances, we just don’t see any real economic benefit to the buyer, the benefit of the current market.

Jay McCanless – FTN Midwest

Sure, any idea though what that is going to mean for, I know that you don’t disclose community counts, but in terms of a percentage change, down 10%, down 20%, anything you can give us there?

Donald Tomnitz

Yes, I would say I wouldn’t really expect the mothballed process to change our active community counts that much. We have probably not mothballed but just a handful of active communities. By and large, when you have finished lots and you have already invested all the dollars in the lots, it makes the most economic sense for us to continue to work through those finished lots at whatever pace that the sales demands, that the market will bear. So typically an active community, we’re going to continue to work through it. I will tell you overall, our community count continues to work down, as we are not bringing on new communities by and large, and we’re finishing out older communities, so our community count does continue to move down substantially. Estimates on total community reductions are probably roughly in the 15 to 20% and I would expect it to continue to decline in the future years as we work through the reminder of some of these projects.

Jay McCanless – FTN Midwest

Okay and one other quick question, with the debt repurchases that you talked about in the prepared comments, are there any of the term debt advantages coming up, whether 09, ‘010 et cetera where you are prevented in the indentures of the bond from buying back, or repurchasing those bonds early?

Donald Tomnitz

No, there are no limitations on any of our outstanding debt prior to repurchase.

Jay McCanless – FTN Midwest

Okay, great. Thank you.

Donald Tomnitz

Thank you.

Operator

Thank you. Our next question comes from Carl Reichardt of Wachovia. Your line is open.

Carl Reichardt – Wachovia Capital Markets

Hi, folks. How’re you?

Donald Tomnitz

Great.

Carl Reichardt – Wachovia Capital Markets

Gentlemen, I am curious about cost to develop, if there’s been any kind of meaningful change over the last year. We know about the materials costs, what is happening there, labor, but things like permitting fees or just site improvements, grading, kerbing, kind of things like that, any significant alterations in what’s costing you to develop lots?

Donald Tomnitz

Clearly to give you a specific number, Carl, I don’t have that. Clearly the price of everything has come down, including development costs. The reality life is we’re just not developing any lots to speak of. At the current moment, I think we’ve projected that last year. We spent about $600 million on land and land development. And this year, we’re going to be somewhere less than that, below $500 million. So we’re just not bringing on a lot of lots, so it is not a substantial driver to our business right now in terms of cost.

Carl Reichardt – Wachovia Capital Markets

But no permitting or fee reductions from the municipalities or counties, can you see any kind of trend?

Donald Tomnitz

In general, there have been a few, but has been one both ends of the continuum. In some places, the revenue is down, so they’re increasing the price of the permits. And in some other areas, they’re realizing what might be a way to generate additional business is to decrease it. My general reaction is, most of them have chosen to increase them as opposed to decrease them.

Carl Reichardt – Wachovia Capital Markets

And then last question, Don, I’m curious, I have heard some other CEOs talk about foreclosures. We have seen foreclosures as percentage of existing homes sales become much more significant and some year-over-year, positive turnover in some markets in the existing housing market. What are you doing specifically to compete with foreclosures if you can? And what is your sense as to who’s purchasing them? Do you have any data to support whatever your contention is?

Donald Tomnitz

Well, I don’t have data but I do know that what I have visited with a number of people about and there’s been a number of international buyers who have been focusing on the foreclosures. What we are doing and each one of our subdivisions, our salespeople have a list of the benefits of buying a new home with a warranty and the home being in good condition as opposed to someone buying a foreclosure where there is no warranty, as is where is house, and typically if you look at an average I think it is taking somewhere around $10,000 to $15,000 of cash out of their pocket to make the home livable. So I think there are a whole host of reasons why people ought to be buying a new home versus a foreclosure unless they’re an investor and deciding to put their home on a pool. But if you’re Mr. Or Mrs. America, if you’re looking for place to raise your kids, I would definitely be looking for someplace that is a new home as we like to even bring it down to the lowest common denominator, some dog hasn’t defecated on the carpet in the house, so therefore you at least can move into a new home with nice new carpeting.

Carl Reichardt – Wachovia Capital Markets

Thank you for the visual.

Donald Tomnitz

You are quite welcome. It’s hard to stick with the homebuilding market today.

Carl Reichardt – Wachovia Capital Markets

I understand.

Operator

Thank you. Our next question comes from Jim Wilson of JMP Securities. Your line is open.

James Wilson – JMP Securities

Great, good morning everyone, so two questions, first margins and backlog, I know you guys talked about, and you talked a lot about current margins, what you saw in the quarter, but is there any meaningful difference in what you currently have in terms of margins and backlog?

Bill Wheat

No appreciable difference necessarily. It is really a matter of what the current sales are going to be and then what the pricing environment is going to be is what’s going to determine the forward margins. I guess at the current cancellation rate that also has an impact on where the ultimate margins and backlog come in when we close our homes.

James Wilson – JMP Securities

Okay and then the second one is, any divisional or operations consolidation either occurred recently in the quarter, or that are kind of imminent, obviously that you have discussed internally?

Donald Tomnitz

Well, frankly, nothing is imminent but there are things that are constantly taking place. Specifically we have merged a lot of divisions. We continue to look at each one of our divisions and see if they can sustain their level of SG&A with the number of closings that are projected and the number of sales projected. So we have those closings in fiscal year 08 and we will continue to have mergers and some closings. We haven’t had a lot of closings in 08, we had mostly mergers and we will continue to be merging additional divisions in fiscal year 09.

James Wilson – JMP Securities

Give or take, how many divisions did you have a couple of years ago and how many today?

Stacey Dwyer

We probably had somewhere in the mid forty’s in terms of divisions, Jim, a couple of years ago, and we’re down into the mid thirties right now.

James Wilson – JMP Securities

Okay, all right great. All right, thanks.

Operator

Thank you. Our next question comes from Stephen East of Pali Capital. Your line is open.

Stephen East – Pali Capital

Good morning everybody. You talked about cash flow being positive for 09. At what type of level would that probably move to a breakeven or less? I’m trying to get an understanding of without any guidance just what you are sort of perceiving for the market for you all?

Bill Wheat

Stephen, the way we’re looking at our cash flow possibilities for the next year given that our finished lot position going into the year, we really don’t have to spend a lot on finished lots in order to generate any level of closings next year. So in terms of lot cash flow, we think we can generate at a certain volume level, we are really looking at the ability at any volume level to be able to continue to reduce our homes in inventory, to continue to reduce our lots in inventory and to have to spend very little on land and lots during fiscal 2009. So as long as then we can continue to control of our overhead costs, it gives us a great deal of confidence that we can generate positive cash flow even at a substantially reduced volume level. I am not going to give you specific level necessarily, I’m sure you’ve got a model that could probably give you a pretty good number, but we do feel confident in generating positive cash flow even at a substantially reduced closing level.

Stephen East – Pali Capital

Okay thanks. And Don, If you look at the last two months, the September and October timeframe, not the earlier part of the quarter, if you look at your regional differences in performance, are there any two or three markets that stand out, either good or bad versus the rest?

Donald Tomnitz

I think I would say to you the best housing market in the country right now is still in the state of Texas, and that market has continued to weaken over the course of the past 30 to 60 days, clearly with the oil and gas prices plummeted like they have. So Texas has been …I know Texas has been a strong market for us for quite some time as is Louisiana but I think those markets are going to be weaker for us, and they are trending that way currently. So generally speaking Albuquerque is a good market, but the number of markets that you can say that are good out there today are so, they’re not worth mentioning. I’ll tell you that as we look around the country it is astounding and surprising to us that each market is very dismal. There’s just not much positive in any of the markets that are out there today.

Stephen East – Pali Capital

Okay and then one last question, if you look at your completed specs, in today’s environment has you strategy changed any from say a year ago as far trying to move those discounting versus build to order, that type of thing?

Donald Tomnitz

Well, we focused clearly around here on our aged inventory and our homes that are great than one year completed that are spec and especially the six months, between six months and a year and we do believe on incentivizing those homes to sell. So we do not want any high level of aged inventory in this company.

Stephen East – Pali Capital

Has that changed any from a year ago?

Donald Tomnitz

Not really. No, it’s pretty much in line. As a matter of fact, we’ve gone through that before. When we came up with the total, the completed specs as a percentage of our total inventory pretty much is in line with exactly where it was a year ago, it was about 25%.

Bill Wheat

Our processes is still subdivision by subdivision, looking at the sales pace, looking at the level of inventory that we have in each subdivision, and we’re adjusting our starts really on a regular basis based on what we’re seeing in each subdivision. So it contains sales decline, our number of starts declined.

Stephen East – Pali Capital

Okay. Thanks a lot guys.

Donald Tomnitz

Yes, thank you.

Operator

Thank you. Our next question comes from Randy Raisman of Durham. Your line is open.

Randy Raisman – Durham Asset Management

How’re you? Just a little more color with regards to the land sales in the quarter, I mean particularly given that the cost of the land you just said earlier was $1.8 billion and it was sold for $209 million. Can you give us any sense for kind of where some of this land was located and was this more like kind of C and D type of locations and is that why the value fell off so dramatically? And then we know you sold kind of year ago $154 million worth of land, sort of what the original cost of that land was? I mean if you have that number available?

Bill Wheat

The two primary things about the mix of the land that we sold versus the geography, the major states where the land was located were in the states of California, Nevada, Arizona and Florida. Those were the areas that had the largest run-ups in land prices at the peak, and they’re also the ones that have had the largest declines in home prices and as a result land prices and where we found more of our excess land. The second thing is the status of the land that we sold. 55% of the land that we sold was a raw state, it was undeveloped. And so clearly there is still additional spending in the future to be able to bring that land to market. So when you are valuing that land, trying to sell it, there is a greater haircut on undeveloped land than on finished lots. So those are really the two primary things that drove the overall valuation. When you look back at a year ago, we don’t have the original cost on the land that we sold a year ago, but clearly there was a different dynamic in the market a year ago when we were selling land. A lot of it was primarily commercial land and such that it didn’t fit into our core operations, whereas this time it was more excess land in a declining sales environment that we didn’t need in our operations in the short term.

Randy Raisman – Durham Asset Management

How about the 1.8 billion, I didn’t mean to cut you off, the 1.8 billion, when was that as of that number?

Bill Wheat

That was when we purchased the land or when we added cost to it through entitlement or development costs.

Donald Tomnitz

And to answer your question about the A, B, C or D as you indicated C and D locations. A lot of those projects were C and D locations. When we purchased them, they were probably B locations largely because of the fact that we are going up to the next concentric circle. We had all the people standing on line, closer in that were waiting to buy homes. So we went up the next concentric circle to try to find affordable land, and am so when we bought that, it was probably a B, maybe a B minus piece of land, and today it is a D, it is an F.

Randy Raisman – Durham Asset Management

Right, what type of buyer bought this land?

Donald Tomnitz

Wealthy, typically they were funds or individuals who have high net worths, who know the value of the land and who have patient money, and willing to do nothing with the land for a couple of years, and they believe the value will come back just as we believe the value will come back two, three years out. But we can’t, it doesn’t make economic sense for us from a balance sheet perspective to hold the land. They don’t have a public balance sheet, so they have a longer-term approach to it.

Randy Raisman – Durham Asset Management

And particularly when you can trigger a tax refund, right?

Bill Wheat

Timing is certainly affected somewhat by the tax benefit given that that was an expiring carry back.

Randy Raisman – Durham Asset Management

Okay, thank you very much.

Donald Tomnitz

You are welcome.

Operator

Thank you. Our next question is from Larry Taylor of Credit Suisse. Your line is open.

Larry Taylor – Credit Suisse

Good morning and thank you. I wonder if you could give us any more detail on the potential for future land sales of any size going forward.

Donald Tomnitz

We look at land sales month by month basis but I would say to you that the driving force for us was land that we didn’t feel like that we were going to use in the foreseeable future out in next year, or two years. So most of the land we sold were pieces of land we thought maybe we wouldn’t use for three or four years and secondly clearly was to capture the deferred tax benefit which we needed to do by September 30. So I would say to you before Bill supplements my answer, we probably won’t have a lot of land sales driven by those same factors in fiscal year 09.

Larry Taylor – Credit Suisse

Right.

Bill Wheat

Going forward we will be looking at project clearly market by market and where we have access positions that we think it makes the best sense for us to sell them, we will look at that. But we will be very opportunistic about those sales. As of 9/30 and this will be disclosed in our 10K we have only $39.4 million of land on our balance sheet classified as held for sale and that compares back to over $300 million in previous quarters prior to our fourth quarter land sales.

Donald Tomnitz

So in a nutshell, not much.

Larry Taylor – Credit Suisse

Okay, thanks.

Operator

Thank you. Our next question comes from David Goldberg of UBS. Your line is open.

Susan – UBS

Good morning. It is actually Susan for David, just wanted to focus a bit on liquidity. You ended the quarter with a 1.4 billion and you will have got the tax refund, and you commented that you’ve got the authorization to repurchase up to $500 million of debt. You did cut the dividend. Can you just kind of walk us through the thought process between paying down the debt versus preserving the cash on the balance sheet?

Bill Wheat

Going forward we clearly want to continue to maintain a solid cash balance on our balance sheet. In the uncertain environment that we’re in, there is clearly a premium on having cash available, but that being said, with the level that we are at, with the refunds that we expect, clearly we have sufficient cash to still be active in the repurchasing debt as opportunities come to us. That is basically the way we’ve handled our repurchases thus far, as opportunities come to us at a good yield to repurchase debt, we’ve taken advantage of those. And to the extent that that continues, we do have an authorization, and we believe we’ll have cash available to continue to do that.

Stacey Dwyer

And there is significant cost associated with continuing to carry the debt when we do have cash available to use it to pay that down. So that is an alternate way of looking at that.

Susan – UBS

Okay and can you go back to the board for further authorization once you have used the $500 million? Is that a possibility?

Bill Wheat

Certainly. We’ve had conversations with the board. We’re all on the same page with regard to our game plan for repurchasing debt and if we use it all up, and it makes sense to go to do some more, then we’ll have those conversations with the Board.

Susan – UBS

Okay and is there any kind of a target debt to cap level or some kind of a target debt level that you can share with us?

Stacey Dwyer

No. Our target debt to cap level is to keep our leverage below 45%. We’re still clearly in that range and we’d expect that to drop further after we receive our tax refund this quarter.

Susan – UBS

Okay. Thank you.

Stacey Dwyer

Thank you.

Operator

Thank you. Our next question is Rob Stevenson of Fox-Pitt Kelton. Your line is open.

Rob Stevenson – Fox-Pitt Kelton

Good morning guys. Most of my questions have been answered, but can you talk to the sort of attitude in Congress and the chances of getting any sort of help from action there?

Donald Tomnitz

Well, actually the High Production Home Builders Council has been working very hard in terms of trying to visit, have been visiting members of Congress, on what we think our plight is and frankly I’d suggest that you call back and give Jester your number. We’d love to update you on what they are working on, because basically they’re working on something that is very similar to the last time we had had a major downturn in terms of homebuyer credits, something that’s more substantial than what they passed the first time which is $7,500 credit that you have to pay back. So frankly it is a good initiative. We believe strongly in it, we’re supporting it, but something has to be done much more than what’s been done so far, because the only way people are going to buy homes is when they realize and a substantial number of homes being sold that they have to have value, their value is not going to erode after they’ve purchased the home, and that’s just not appealing in the marketplace today.

Rob Stevenson – Fox-Pitt Kelton

Are you feeling that there is some give on the part of Congress to accept something along those lines?

Donald Tomnitz

I don’t really have a good feel for that right now. My initial reaction is I don’t…I think we are such a small industry although clearly we have something to do with this economic downturn as they found out. I look back and listen to three and four months ago when officials were talking about how housing was insignificant to the overall economy. I think they’ve found otherwise. But I just don’t get a good feel for it right now. I think they are focused on the Citigroups of the world and AIGs of the world, the D.R. Hortons of the world are rounding them to the right now, something needs to be done, no doubt.

Rob Stevenson – Fox-Pitt Kelton

Okay, thank you.

Donald Tomnitz

Yes, sir.

Operator

Thank you. Our next question comes from the line of Michael Rehaut of JP Morgan. Your line is open.

Michael Rehaut – JP Morgan

Thanks, just a couple of follow-ups, more detail oriented. Could you try and give for us on average roughly costs per lot to get it from undeveloped to fully developed?

Stacey Dwyer

I’ll talk to that in a very broad average, Michael. It is generally whatever the cost of your finished is, half of that runs to the land and half of that is going to be your development costs. There are huge variations in that depending on the topography and any requirements that the city is setting on you in terms of road improvement or amenities and stations and there is just a myriad of things that can impact that, and change the ratio either way significantly.

Michael Rehaut – JP Morgan

Okay. So that’s half-half, given the deflation in the marketplace. You wouldn’t say that that mix has changed or maybe in other words, finished lot cost as a percent of home have not increased given the recent deflation?

Stacey Dwyer

We haven’t been buying land in today’s environment, so that is not an analysis we have been running right now.

Michael Rehaut – JP Morgan

Okay. Also you mentioned before that you hope to do below 500 million in land spend this upcoming fiscal year. Can you give us a rough idea, let’s say it is just for argument sake $500 million, how much of that would be kind of more mandatory cost i.e. taxes and basic overheads interest?

Bill Wheat

There’s a good percentage of that, it’s not the majority. But there’s a certain amount of work