D.R. Horton, Inc. (DHI) Q1 2008 Earnings Call Transcript
Published at 2008-02-07 21:37:08
Donald J. Tomnitz - Vice-Chairman, President and CEO Stacey H. Dwyer - EVP and Treasurer Samuel R. Fuller - Senior EVP Bill W. Wheat - EVP and CFO
Mike Rehaut - J.P. Morgan Kenneth Zener - Merrill Lynch Nishu Sood - Deutsche Bank Stephen Kim - Private Investor David Goldberg - UBS Timothy Jones - Wasserman & Associates Alex Barron - Agency Trading Group Stephen East - Pali Research James Wilson - JMP Securities Jay McCanless - FTN Midwest Carl Reichardt - Wachovia Wayne Cooperman - Cobalt Capital Ethan Auerbach - Marathon Asset Management Joel Locker - FBN Securities Susan Berliner - Bear Stearns Eric Landry - Morningstar Bob Thompson - Advantus
Good morning. My name is Cynthia and I'll be your conference operator today. At this time, I would like to welcome everyone to the D.R. Horton, Incorporated, America's Builder, the largest homebuilder in the United States 2008 First Quarter 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]. I will now turn the call over to Don Tomnitz, President and CEO. Sir you may begin your conference. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Thank you, Cynthia. Thank you and good morning. Joining me this morning are Sam Fuller, Senior Executive Vice President of Finance; Bill Wheat, Executive Vice President and CFO; and Stacey Dwyer, Executive Vice President and Treasurer. Before we get started, we always just start it with 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 on 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 statements. 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 which is filed with the Securities and Exchange Commission. Don? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Net sales orders for the first quarter were 4,245 homes, $900 million, compared to 8,771 homes, $2.3 billion in the year ago quarter. This lower net sales rate was due in part to our 44% cancellation rate during the first quarter, compared to 33% in the same quarter of the prior year. Our average sales price and net sales orders in the quarter decreased approximately 17% from the year ago, to $218,200. Stacey? Stacey H. Dwyer - Executive Vice President and Treasurer: Homebuilding revenue totaled $1.7 billion in the first quarter, which included $21.2 million related to the reversal of the portion of our FAS-66 deferred revenue balance. In prior quarters, we were required to defer revenue equal to the gross profit dollars associated with homes closed for which the buyers financed the home purchases through our mortgage company with certain loans with a low down payment and the loans were still held for delivery. This quarter, the balance of those loans held for sale decreased and we are recognizing $21.2 million of revenue related to homes that closed in prior quarters. Excluding the FAS-66 reversal, our average closing price on 6,549 homes closed this quarter was approximately $242,100, compared down 10%, compared to $269,000 in the year ago quarter reflecting the softer pricing environment over the past year. Sam? Samuel R. Fuller - Senior Executive Vice President: Our gross profit margin on home sales revenues in the first quarter before inventory impairments and land option write-offs was 14.3%. This was 170 basis point sequential decline from our fourth quarter gross profit margin of 16% and 430 basis point decline from our home sales margin of 18.6% in the year ago period. Approximately 170 basis points of the margin decline from the year ago quarter was due to an increase in the amortization of capitalized interest, as a percentage of home sales revenues, which was partially offset by an improvement in margin of 70 basis points, related to the FAS-66 reversal previously mentioned. The remaining margin declines were due primarily to core margin deterioration resulting from an increased use of sales incentives relative to last year and the lack of pricing power, as reflected in our 10% decrease in average closing price. Bill? Bill W. Wheat - Executive Vice President and Chief Financial Officer: During our first quarter impairment analysis, we reviewed all projects in the company and determined the projects with the combined carrying value of $2.9 billion and indicators of potential impairment. We evaluated these projects and determined the projects with the pre-impairment carrying value of $749 million were impaired. We recorded inventory impairments of $243.5 million as a charge to cost of sales to reduce the carrying value of these impaired projects. Approximately 60% of these impairments charges will record into residential land and lots and land held for development. And approximately 40% were recorded to residential construction in progress and finished homes in inventory. Approximately 54% of the $243.5 million in impairment charges related to projects in our California region. Of the remaining, $2.1 billion of evaluated projects which were not impaired, the majority are located in California, Florida and Arizona. During the first quarter, we also recorded $2 million in write-offs of earnest money deposits and pre-acquisition costs related to land option contracts that we do intend to pursue. Don? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Homebuilding SG&A expense for the quarter was 12.5% of total homebuilding revenues, compared to 10.5% a year ago. We've continued to react quickly to the market to manage our SG&A levels relative to our number of home closings. In the first quarter, we reduced total SG&A expenses by approximately $82 million, compared to the same period in the prior year on 36% fewer closings. Our ongoing goal for each fiscal year is to be at or below 10% of homebuilding revenues, although this goal will be more difficult to achieve in fiscal 2008. We will continue to focus on being the low cost operator in the industry, which remains one of our distinct competitive advantages. Stacy? Stacey H. Dwyer - Executive Vice President and Treasurer: Our financial services operations remain profitable as we have 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 $27.1 million in the year ago quarter. 94% of our mortgage company business was captive during the quarter, reflecting our continued focus on supporting our homebuilders business. In the first quarter, our companywide capture rate was approximately 59%. Our average FICO score was $7.10 and our cumulative loan to value was 90%. Our products mix during the first quarter was 94% conforming, 4% agency eligible Alt-A and 2% jumbo. Sam. Samuel R. Fuller - Senior Executive Vice President: Our reported net loss for the quarter was $128.8 million or $0.41 per share. Our core operations before impairment charges, land option cost write-offs and the effect of the change in profit deferred under FAS 66 generated pre-tax profits of approximately $21.4 million. We continue to focus on managing the core business by controlling our costs and adjusting quickly to changing market conditions. Don. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Our overall inventory decreased by over $500 million excluding impairments during the quarter. They reduced our total number of homes and inventory to approximately 17,300 homes, down 57% from 40,000 homes of our peak in June 2006, and down 13% from 19,900 homes at September 2007. We also reduced the absolute number of speculative homes and inventory by 8% this quarter to approximately 9,800, compared to approximately 10,600 at September 2007. We plan to further reduce both our total number of homes and inventory and our number of speculative homes in the coming quarters inline with current demand. Bill. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Our land and lot acquisition spending remains limited and we continue to challenge our land development spending in light of our current absorptions. We expect our fiscal 2008 land and lot acquisition and land development expenditures to total between $500 million and $1 billion for the entire fiscal year. For comparison, our land acquisition and land development expenditures were $2.5 billion in fiscal 2007 and $5.2 billion in fiscal 2006. We continued to develop smaller phases and pace our development of new phases based on current demand in individual communities. Sam. Samuel R. Fuller - Senior Executive Vice President: Our supply of land and lots at December 31, 2007 was approximately 197,000 lots owned and controlled, down 50% from our peak of 396,000 lots at March 31, 2006. 73% of these lots are owned and 27% are optioned. Our 197,000 lots now represent a 5.2 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. Our net earnest money deposit balance at December 31st was approximately $62 million or 6% of the remaining purchase price, this low earnest money deposit percentage reflects our conservative approach to land and lot options. We have no unconsolidated joint ventures and we rarely use land bank arrangements, so our deposits are typically a low percentage of the purchase price. Bill. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Our reduction in number of homes and lots and inventory combined with a decrease in mortgage loans held for sale, helped us generate $558 million in operating cash flow in the quarter. The two main sources of cash from operating activities were a reduction in inventories of $476 million and a decrease in mortgage loans held for sale of $278 million. The main use of cash in operating activities was to reduce accounts payable accrued expenses and other liabilities by $296 million. In financing activities cash was used to reduce the balance on our homebuilding revolving credit facility from $150 million to zero, to repay our $215 million senior notes which matured in December 2007 and to reduce financial services debt by $282 million, for a total of $647 million of debt reductions during the quarter. We have generated positive cash flow in each of our past six consecutive quarters for a total of $2.8 billion and operating cash flow over the last 18 months. Our continued goal for fiscal 2008 is to generate more than $1 billion of operating cash flow. Stacey. Stacey H. Dwyer - Executive Vice President and Treasurer: Our homebuilding leverage ratio net of unrestricted cash was 39.5%, an improvement of 170 basis points from a year ago. As previously announced, the company completed an amendment to its senior unsecured revolving credit facility maturing in December 2011, although we currently had ample room under the existing covenants, which were actively modified certain financial covenants to gain additional operating flexibility. We also reduced the facility size from $2.5 billion to $2.25 billion with an uncommitted accordion feature which can increase the facility size to $2.6 billion. No cash borrowings were outstanding on our revolver at quarter end. And to our borrowing based calculation, additional borrowing capacity from any source would have been limited to $1.9 billion at December 31st. We were in compliance with our five revolver covenants in effect at December 31st 2007. Our revised tangible net worth covenant is $3.5 billion and as of December 31st, we had a cushion of approximately $1.6 billion. Our leverage was 41% at December 31st, 2007, compared to our revised maximum allowable leverage of 55%. Our trailing 12 months interest coverage ratio was 3.2 times and our recent amendment eliminated our previous two times coverage covenant. Our ratio of unsold homes to homes closed on a trailing 12 months basis was 26%, compared to our covenant maximum of 40% and our ratio of residential land and lots to tangible net worth was a 108%, compared to our covenant maximum of 150%. Don? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: We're focused on increasing our sales pace and we'll contend you to adjust the product that we are offering, negotiate better pricing on our input costs and reduce sales prices or increased incentives as necessary to meet our sales goals. Our sales people have been empowered to clear any excess inventory in each of our communities to bring our inventory in line with current demand. This approach combined with home affordability and it's the best that that has been in many years given mortgage rates and current home pricing, gives us confidence that our inventory will continue to decline in the months ahead and that we can continue to meet our inventory reduction goals. As I've said before to our people, we cannot outperform our markets, but we can, must and have consistently adjusted our business model to adjust to our markets. We have reduced our inventory, reduced our staffing and reduced our costs in order to offer the most competitively priced products in our markets. We will continue to do all of these on a going-forward basis. The bright points to me in Q1 include, we continue to remain operationally profitable. We continue to have the lowest SG&A in the industry. We continue to reduce our debt outstanding and strengthen our balance sheet. We continue to reduce our inventory. We continue to generate substantial free cash flow, a total of $2.8 billion in the past six quarters and a total of $550 million in Q1, relative to our fiscal year '08 goal of $1 billion. As importantly, we restructured our revolving credit facility and it is now the largest and best structured in the industry. We thank our banks for their cooperation. In conclusion, I wish to thank all of our DHI teammates for their accomplishments in Q1. We look forward to completing fiscal year '08. Putting that behind us and participating in the future recovery of the U.S. homebuilding industry. DHI America's Builder has been the leading builder in the industry for the past six years and DHI will be the leading builder in the future. Thank you and we'll entertain any questions you may have. Question And Answer
[Operator Instructions]. Your first question comes from Mike Rehaut with J.P. Morgan. Mike Rehaut - J.P. Morgan: Hi good morning. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning. Mike Rehaut - J.P. Morgan: First question just on orders and pricing, you had a bit of a fall off, down 52% from 39... down 39% in the fourth quarter and your order ASPs went up about 6% sequentially, so I was wondering if this is a shifting strategy, you'd been more aggressive in pricing the previous two quarters and how do you see that playing out as we go into 2008? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Well we continue, Mike, to try to find market in each one of our sub-divisions and each one of our cities and each one of our markets. We did not achieve the sales that we had as an internal goal in Q1, as we move forward, as I said in our... my conclusion, our sales people have been empowered, specifically vis-à-vis pricing and incentives. They clear any excess inventory that we deem as excess in various markets and our goal is to increase our sales on a going forward basis. Mike Rehaut - J.P. Morgan: And what do you have as a goal for reducing spec, you've reduced it, continue to reduce it in one Q, but you have a goal over the next couple of quarters to get it to a level? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Yes we are, as I have said before, our specs are too high, we have done a good job in the field of reducing our specs, related to last several quarters. The spec count is still too high, as our inventory is too high. We have a specific control here at the corporate office and with each one of our regional Presidents and specifically start specs and only an Executive Officer in the corporate office and usually that's me, can approve a spec start in a sub-division. So as we continue to control our new specs and continue to incentivise the sale of our existing specs, you'll see that our spec inventory has come down and our inventory has come down and that will continue to be the case in the quarters ahead. Mike Rehaut - J.P. Morgan: Alright thanks. And one more question on the cash flow which... congrats you did a great job there. My question is, if you could give us some inside into how you see it progressing throughout the year, I mean it would seem that with the success you had in the first quarter, you are well on your way to exceeding $1 billion. As we go through the years, there is some seasonality expected that you might have a negative quarter or two or what's your... how do you see the year playing out? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Well as my good buddy, Todd Horton, he is one of our division Presidents in Dallas Fort Worth West says, no good deeds, you go unpunished. We did generate a substantial portion of our goal for free cash flow in the fiscal year in the first quarter. We do not anticipate any negatives in the quarter and clearly, as it was the case last year, our fourth quarter should be our largest free cash flow quarter, although relative to Q1, that's going to be tough to achieve, but our goal is to continue to achieve that $1 billion of free cash flow and we are comfortable that we can get there to the extent that we exceeded. You and all of us are going to be extraordinarily happy. Mike Rehaut - J.P. Morgan: Thank you.
Your next question comes from Dan Oppenheim with Banc of America Securities. Dan your line is open. Your next question comes from Ken Zener with Merrill Lynch Kenneth Zener - Merrill Lynch: Good morning. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning Ken. Kenneth Zener - Merrill Lynch: Congratulations on the cash as well as paying down the debt, but I have a bit broader question about the leverage of the company. If you were to maintain a 40% leverage through the year or year end. I'm interested to think how does this not put you at a disadvantage to other builders that have a lower net leverage and who could re-lever by buying new land. So I understand you guys are throwing off cash, maintaining leverage. In my view not going bankrupt obviously. But how does it not put you at a disadvantage to other builders that can put new money to work in new land? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Well clearly if I understand accounting right, I hope I do, to the extent that we continue to generate the cash and we don't pay down the debt then the cash is going to be on our balance sheet. So whether we are in a position to take advantage of new opportunities vis-à-vis the cash on our balance sheet or by releveraging the company, I'd say it is the same. We are in a wonderful position; I can't even say the word that you said in the question, because certainly that doesn't even enter into our mind up here. But nevertheless we are well positioned with a strong cash position, nothing borrowed under our revolving credit facility and our position to take advantage of any opportunities in the marketplace, when they come forward. Kenneth Zener - Merrill Lynch: Okay, yes. And I was not at all implying bankruptcy. I disagree with that. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: I know you weren't, but I just want to make sure you weren't. Kenneth Zener - Merrill Lynch: As do I. So the other question is, with orders down 52%, could you give us a little more flavor on how much of that we could attribute to a lower community count, given that your can rate coming out of beginning backlog actually was lower than it was in the fourth quarter. I just want to see how much of that is based upon lower community count? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: As you know we don't provide community counts, but I would say to you, not much of that is due to lower community count, frankly. It's just the fact that we held our prices in the quarter perhaps a little better and we anticipated and we didn't make the sales that we thought we were going to make with that kind of solid pricing. Kenneth Zener - Merrill Lynch: Right, I appreciate that. And then I guess just last question is on the balance sheet. You have increased in the developed land held for development is now nearly $900 million versus roughly $200 million last year. Can you discuss if there is any accounting change there and why? Thank you. Bill W. Wheat - Executive Vice President and Chief Financial Officer: No Ken, there is no accounting change. What that really reflects is just our decisions on a community-by-community basis to slowdown our plans for development of property. It doesn't represent any additional new properties, it is simply reclassification of properties that previously were classified as land under development, which would include things that would start in this relatively short period of time. So as we slow things down and the lands sits unimproved for a little bit longer, then it moves into that category. Kenneth Zener - Merrill Lynch: Are those in California? Bill W. Wheat - Executive Vice President and Chief Financial Officer: They're all over the country. Kenneth Zener - Merrill Lynch: Thank you.
Your next question comes from Nishu Sood with Deutsche Bank. Nishu Sood - Deutsche Bank: Thanks, good morning everyone. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Good morning. Nishu Sood - Deutsche Bank: I wanted to ask about your owned land position, wanted to get a sense of the kind of state of development of it. So I guess two ways of looking at that would be how many of your owned lots are fully developed. And a second way of looking at it would be the dollar amount that it would take to bring their owned lot portfolio to a fully developed state. Stacey H. Dwyer - Executive Vice President and Treasurer: Yes Nishu, I don't have either of those numbers in front of me at the moment. But what I can tell you clearly is we have sufficient developed lots in front of us in 2008 to deliver the homes that we're planning to deliver in 2008. And such that we don't have to spend more than $500 million to a $1 billion in both land acquisition and land development to meet our delivery goals. Nishu Sood - Deutsche Bank: Right, of that $500 to a $1 billion that you mentioned, that's very helpful disclosure. How much of that is going to be incremental lot takedowns, and how much of that is going to be kind of finishing out the development? Bill W. Wheat - Executive Vice President and Chief Financial Officer: The greatest percentage will be finishing out the development. There will be a small portion that would be lot takedowns, but clearly the biggest portion would be development. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: In fact what we are focusing on at the company is building houses on lots that we already own as opposed to taking down lots under option contracts that we don't own. Nishu Sood - Deutsche Bank: Okay. And second question I had was on deferred taxes. I wanted to ask if there is going to be any positive cash flow benefit as we've seen from some of the other builders from recovery of different tax assets this year. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Clearly as we sell assets that had previously been impaired, we will realize the tax benefits from any loss that is incurred, and that cash would come in to play whenever we file our tax returns or make potential estimated payments throughout the year. But given our current situation, I wouldn't expect that cash from taxes to come in, in the next few quarters though. Stacey H. Dwyer - Executive Vice President and Treasurer: We continue to pay tax throughout fiscal year 2007, because we still generated pre-impairment profits. So in terms of year end filing that's going to generate taxes from our fiscal year 07. That's not something that we will be realizing. Nishu Sood - Deutsche Bank: Got it. And the decision not to, or I guess the decision not to take an evaluation allowance against your deferred tax assets. I guess the way people are going to interpret that is that you are forecasting still a three-year window of profitability, perhaps more optimistic outlook than we've seen from lot of the other builders. Is that an appropriate way to look at that? Bill W. Wheat - Executive Vice President and Chief Financial Officer: That is one factor that goes in to our evaluation but frankly Nishu the most significant factor in our valuation of this quarter in which we didn't take an allowance is the significant amount of profit... taxable profit that we had in 2006 and 2007 that provides us with significant carry back periods for losses... tax losses that we incurred both in fiscal 2008 and in fiscal 2009, and because of that significant available carry back that allows us certainly some time to move assets, generate losses and realize those tax benefits. Nishu Sood - Deutsche Bank: Okay, Thanks a lot.
Your next question comes from Stephen Kim, Private Investor. Stephen Kim - Private Investor: Hey guys. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Good morning, Steve. Stephen Kim - Private Investor: Good quarter here in terms of disclosure, I just wanted to zero in a little bit if I could on the work in process portion of your inventory. I heard you say Don, basically that's you, you know your intent was that point to lower that and presumably that's going to be... but allows you to be cash flow positive in each and every one of the quarters of this year. By my calculation and I always look at the finished homes and construction and progress as a percentage of your backlog value, it looks to me like your figure was about double in dollars, what it would have been or should have been, if you would be running at what you might consider in more normal with the backlog value ratio. That implies about you know gosh almost a $1.4 billion, I just wanted to see if you can give us some sense as roughly how much more than you would have liked or you had hope, with came in this quarter, is it $1 billion too high or is it something considerably less than that? Bill W. Wheat - Executive Vice President and Chief Financial Officer: Well Steve I'll take that. We look at it... we look at our homes and inventory and our total inventory relative to where we expected are sales and closings to be in the coming quarters and typically we as the benchmark are trying to keep our homes and inventory about half the amount of closing that we expect in the next 12 months that would relate somewhat to backlog. But clearly when you look at where our homes are where our sales have been what they would annualize to be, we have more homes and inventory than we need and so clearly we would expect to continue to be able to reduce the homes and inventory to match our most recent sales space and our expectations and that will generate some additional consistent cash flow in the coming quarters. Trying to nail it down to a specific dollar amount that will be a moving target based on how sales go in the next quarter or two so we will adjust based on how we see our sales each quarter. Stephen Kim - Private Investor: But your comment about how you felt that the balance was to high today is a function of what you are anticipating you might sell going forward, the degree to which you are prepared for that. So I am just trying to figure... is a billion dollars even in the ballpark or is that considerably too high? Bill W. Wheat - Executive Vice President and Chief Financial Officer: $1 billion dollars of additional... Stephen Kim - Private Investor: Add back to us? Bill W. Wheat - Executive Vice President and Chief Financial Officer: I am not going to get nailed down to an individual number there Steve because its still going to ultimately come down to where our sales space is and if our sales space is better than our expectations then we will adjust that direction as well Stephen Kim - Private Investor: Okay. And then if I could I had a couple of housekeeping items I think I needed the cap capitalized interest that you had in the quarter the incurred and the capitalized amount? Stacey H. Dwyer - Executive Vice President and Treasurer: Are you looking for what, what amortized for your cost of sales fee or are you looking for the balance and inventory? Stephen Kim - Private Investor: Why don't you give me both I am really looking for the amount incurred and the amount that was amortized? Stacey H. Dwyer - Executive Vice President and Treasurer: Alright interest incurred is $62.8 million, interest amortized to cost of sales was $58 million. Stephen Kim - Private Investor: Okay. Stacey H. Dwyer - Executive Vice President and Treasurer: Debt consolidated. Stephen Kim - Private Investor: Say that again. Stacey H. Dwyer - Executive Vice President and Treasurer: Those are consolidated numbers for both financial parts of this. Samuel R. Fuller - Senior Executive Vice President: The balance in inventory Steve is about $328 million at the end of it. Stephen Kim - Private Investor: Okay great thanks. And then Sam you had given some lot data and I wasn't quick enough to write it down, can you just reiterate what you said in terms of lot count at the end of the period as well as your comment about the option deposits and the percent of purchase price and all that, that was the data that I couldn't get to write. Samuel R. Fuller - Senior Executive Vice President: Sure Steve. We had a 197,000 lots owned and controlled. 73% were owned, 27% are optioned. Our deposits... our risk money deposits were approximately $62 million, about 6% of the remaining purchase price of the land and lots that are under option. Stephen Kim - Private Investor: That $62 million... is that inclusive of whether it's a credit? Samuel R. Fuller - Senior Executive Vice President: Yes. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Letters of credit. Stephen Kim - Private Investor: Great. That's great. That's what I needed. Thanks very much guys. Samuel R. Fuller - Senior Executive Vice President: Thank you.
Your next question comes from David Goldberg with UBS. David Goldberg - UBS: Thanks. Good morning. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning. David Goldberg - UBS: I am trying to get an idea, a little more color on the cancellations, may be if they were concentrated in certain buyer segments or geographically? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Pretty much across the board. Clearly I think, three of the states where we have slightly bigger percentage continues to be California, continues to be Las Vegas, continues to be Arizona as well Florida. David Goldberg - UBS: Is there a most common sighted reason or may be some concentration in the buyer segment or something like that? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: It's largely function of us curling our backlog if the mortgage instruments are not available or if we don't believe they are going to available on a going forward basis. We trust those people or cancel them, though also that we do not want anything on our backlog that we don't think as a high probability in closing, so we're, we question our regional presence and division presence and flush that backlog. As just soon as it becomes doubtful what the unit is going to cost. David Goldberg - UBS: Are you pretty comfortable on what's in backlog now, at least based on the latest evaluation, its pretty solid in terms of cancellations, it should be... Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Based upon the facts of exist in the mortgage market today. Yes, that could change tomorrow. David Goldberg - UBS: And I guess the follow up question will really be about the loan to values and the fact that those haven't declined kind of through the down turn despite tighter lending standards. I would think any more declines using FHA loans. Have you seen a pick up or... ? Stacey H. Dwyer - Executive Vice President and Treasurer: FHA loans has certainly increased. If we look at government loans overall the total of our portfolio was 35% in this first quarter versus 11% last quarter. So the lower down payments on those types of loans have been offset though by tighter lending standards across the board on another product. Lot of the Alt-A products required lesser down payment or is it 30-year mortgage right now is going to require a certain level of down payment. SO there is some offsets to the increase that we've seen in the government loans. David Goldberg - UBS: Got it. And then if I could just sneak one more in on the SG&A. Can you give us an idea of what's variable versus fixed in that and how you see trending on a per house basis per delivery basis over the year? Stacey H. Dwyer - Executive Vice President and Treasurer: Really the best way to answer the fixed versus variable is to talk about our people costs and that's generally running somewhere between the 55% and 60% of our total SG&A. Those are the costs that are most easiest for us to adjust in relation to our volume. And their other costs that will be considered variable that's running in our office lease for such communication cost and for consolidating divisions. All back offices and some of our region that really the 55% to 60% is probably going to be the best guess we can give you on our variable cost. David Goldberg - UBS: Okay, great thanks.
Your next question comes from Timothy Jones with Wasserman & Associates. Timothy Jones - Wasserman & Associates: Good morning. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning. Timothy Jones - Wasserman & Associates: Three quick questions. You cancellation rate went up to 44% and 33% and which is completely different than most builders, their cancellation rates have been coming down and of course you had a over 50% decline in orders. As you eluded to the fact that you were trying to hold prices. Remember you did this about a year ago in California and paid a heavy price for that. Are you trying to do the same thing now? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Let me correct you. I don't think we paid a heavy price in California if we are trying to hold our prices because... Timothy Jones - Wasserman & Associates: You had taken down quite dramatically the following two quarters. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Yes. We did. We definitely did. So I don't think there is ever an air over a quarters basis Tim, where we're trying to hold our prices because certainly from a personal perspective, as to the industry if there is one thing that's going to turn this industry around is when we all get some stabilized pricing and we can begin to raise our prices so much. So I encourage all of our other brothers and sisters out there to try to stabilize prices also. Timothy Jones - Wasserman & Associates: I don't think they are listening to you. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: You know what, and if they are not we're going to take ours right on down to hit the sales pace we need to. Timothy Jones - Wasserman & Associates: I know I can congratulate you to try to hold the Q3... to be one of the 300 but that's okay. The orders that you had [indiscernible] flow the percentages not year-to-year from the... on a monthly basis? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: 78. Deteriorates to the same. What happened? Stacey H. Dwyer - Executive Vice President and Treasurer: It was relatively consistent throughout the quarter and just one other clarification, Tim. Sequentially we did see an improvement on cancellation rates. We included about 400 basis points in that so the year-over-year did show an increase that we improved that from our September quarter. Timothy Jones - Wasserman & Associates: Good. I'm glad about that. And that land you offered that 900 million of land held for development. Is that basically properties that you are moth ball in? Samuel R. Fuller - Senior Executive Vice President: Mothball properties are included in that number, yes. Timothy Jones - Wasserman & Associates: What percentage would be Mothball as opposed. What else would be in there? Its not on the properties held for sale so what else would be there other than Mothball properties? Samuel R. Fuller - Senior Executive Vice President: I mean Mothball might include that you are never going to touch it again. In some of these as of right now our plan is not to move forward. Potentially some of those could be sold, potentially we may see you know done improvement in the market and we may choose to pull it back out sooner, but right now based on our intentions of 12.31, we are not going to develop from anytime soon. Timothy Jones - Wasserman & Associates: Okay has it been a big... that you don't, you just hold them until the things get better as of today. Samuel R. Fuller - Senior Executive Vice President: Yes. Timothy Jones - Wasserman & Associates: Right. Thanks. Samuel R. Fuller - Senior Executive Vice President: Yes, sir.
Your next question comes from Alex Barron with Agency Trading Group. Alex Barron - Agency Trading Group: Hi. Good morning guys. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning. Alex Barron - Agency Trading Group: I guess I wanted to ask you just kind of more conceptually and I guess you partially answered it. Other builders kind of were generating more sales than you guys this quarter and I'm just trying to understand how you guys are thinking about improving the sales pace versus maintaining your profitability, kind of what drives you there? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: It's a difficult balance from sub-division to sub-division really house by house basis with clearly I said of the conclusion Alex, that we have desires of increasing our sales in Q2 over Q1 and that we have compared our sales people to move the excess inventory in our sub-divisions to the excess inventory. So I would be positive in terms of Q2 sales being better than Q1 sales. Alex Barron - Agency Trading Group: My second question is lot of other guys have been selling brand at significant losses, I'm talking about the tax refund that they are getting, wondering how you guys are thinking about yourselves and does that make any sense to or is that something that you guys are planning on doing also? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: We are looking at land sales and we have made land sales, as you can see in this quarter I think we had somewhere around $100 million in land sales. Two of the sales primarily were out of Arizona and one of them was out of Florida and we are focusing on moving the pieces of property and areas where we don't think we are going to be using that land in 2 or 3 years out. At the same time our focus is to land a lot inventory down to a more reasonable level I think right now the same set is 5.2 years we would rather see that some where between 3 and 4 years. We also clearly have identified in our last operating committee meeting with our regional presidents those projects with the highest deferred tax credit that we can return to the company and we are focusing on moving those pieces of property. Alex Barron - Agency Trading Group: And were those $100 million land sales, were those previously impaired? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: No sir they were not and both of them were profitable as a matter of fact. Alex Barron - Agency Trading Group: Okay thanks a lot. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Yes.
Your next question comes from Stephen East with Pali Capital. Stephen East - Pali Research: Good morning everyone. Just one quick question here if we look at California, if we look at prior year's December quarters you are down more than 75% on orders what's your strategy there in and why is your performance where it is versus the broader market etcetera. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Well first of all I think in California there we are performing as well if not better Steven than any one else in the marketplace. Clearly California is in a very difficult position in terms of just affordability and most importantly mortgage instruments. I think the affordability index has improved dramatically as we have lowered our prices and taken impairments of there as an industry and specifically as a company. As I was talking about Chris Chambers our Regional President for California he said the one good thing about where we are in California today is most of our sales prices on our product out there is conforming. So as a result we believe that by lowering prices and taking impairments out there we have made the product more affordable. I don't think anybody should forget though and we have done an in house calculation about where we are in California vis-à-vis the last seven years in terms of the pre-tax income that we generated in California less the impairments that we have taken and just to give you some inside information right now we setting $2 billion to the positive if you calculate all of our profits, any of our losses and all of our impairments and all our earnest money and due diligence write-offs that we've incurred since inception out there. We are still $2 billion to the good. Stephen East - Pali Research: Okay and when you look at your current footprint in California and you look out, say over the next 2 to 4 years or so, do you see a continued shrinkage or do you see a growing... how do you review that? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Let me be very clear when I say this. We have closed emerged number of divisions in California, currently we have three divisions in Southern California, one in San Diego and one in the Desert and one in the Inland Empire. And then we also have our Ventura county area and then we have the San Francisco Bay area and then we have the Sacramento area. Those divisions have consolidated a lot of back offices and we believe that we are very close to being properly structured out there although we continue to down size California as to the demand for our homes. Where we are structuring specifically, we believe what we have got out there today, for those three divisions even though they are very sparsely staffed and the three in Northern California, we believe we have got the core operators to take us into the recovery in California. Unfortunately in California I don't see a recovery in California in the next 12 months. Stephen East - Pali Research: Okay thanks.
Your next question comes from Jim Wilson with JMP Securities.. James Wilson - JMP Securities: Thanks. Good morning, guys. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Good morning, Jim James Wilson - JMP Securities: Lets see two questions on just to follow up on California and obviously you have the... at least the... your worse comparison year-over-year and the new orders there. What is your pricing strategy, I mean you want to step up, what are you looking at as your pricing strategy near term you try to get the volumes improve in California? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: We've got two sales that are coming up in the third and fourth or second and third, I guess it's the third and fourth weekends and I think it is a second and third weekends in February that are already been set up and structured and we've identified units in specific communities where we believe we got excess inventory and we're going to turn that inventory at the market price. Stacey H. Dwyer - Executive Vice President and Treasurer: The great thing about turning that inventory Jim is that maybe inventory that is build on a cost structure that's higher than we can currently build it so turning that inventory lets us to do a couple of things that lets us challenge the product that we're building and also lets us drop our cost basis in the product that we can adjust our sales process and still remain profitable out there. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: You're in California and you're seeing several of these downturns as we've seen several of downturns in California and we get back to Steven's question of when do we see this coming around. I have every one of the past downturns in California basically are 3 to 5 years in linked and I think we're in December of 2005 was really when California began to get softer. I think we're just clearly a couple of years under this and I think we've got at least 12 to 18 more months... 12 to 18 more months before we see any firming in pricing in California. James Wilson - JMP Securities: And then I guess the other one is can you a little color of cancellation rates by regions or markets how they might have differed just through your experience? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: I think the way I answered the question earlier was probably the most color we're going to provide is our can rates are primarily in areas our higher can rates are primarily in California, Las Vegas, the Phoenix, Tucson area and Florida. That's where most of our cans we see coming. James Wilson - JMP Securities: Okay alright thanks.
Your next question comes from Jay McCanless with FTN Midwest. Jay McCanless - FTN Midwest: Hi good morning. Two questions if I could the first one if you look at the neighborhoods that you have opened right now and the neighborhoods that you plan to open during 2008 what percentage of those would you estimate what put under either conforming are FHA rules for their specific area? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: I can tell you we are not interested in opening anything that's not within conforming and to the extent that it can't be conforming its going to be Mothball. Jay McCanless - FTN Midwest: Okay. And then my second question on the last call you all discussed that there were certain specific MSAs I believe where you are able to raise prices or at least hold prices firm. Has that continued through to this quarter and has that number of areas where you can hold the line on pricing has that expanded? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: It has not and I think as a matter of fact we have seen more pricing weakness in the quarter than we anticipated and I think that truly was reflected in our sales which were slightly lower than what we internal had budgeted. So therefore on a going forward basis that's why I mentioned that our sales people are empowered to move the inventory if its excess in our communities at the market price. Jay McCanless - FTN Midwest: Okay thank you.
Your next question comes Carl Reichardt with Wachovia. Carl Reichardt - Wachovia: Actually thanks. I am actually good now after all these other questions. I appreciate it.
Your next question comes from Wayne Cooperman with Cobalt Capital. Wayne Cooperman - Cobalt Capital: The same mine were answered thanks. Stacey H. Dwyer - Executive Vice President and Treasurer: Thanks.
Your next question comes from Ethan Auerbach with Marathon Asset Management. Ethan Auerbach - Marathon Asset Management: Hi. Of your $1 billion cash flow estimate from operating cash flow how much of that is expected to be from mortgages being sold? How much is expected to be from tax refunds and how much is from direct land sales? Bill W. Wheat - Executive Vice President and Chief Financial Officer: I will start at the bottom; we are really not including much in the way of land sales since those are so unpredictable. Secondly, as we mentioned little bit earlier, we don't expect a tremendous amount in tax refunds this year. We expect really more of our cash from our tax refunds to come after the end of fiscal 2008. And then, definitely a greater percentage we expect to come from inventory reductions and a lesser percentage from mortgage loans held for sale. The mortgage loans held for sale will really be driven by our level of sales and then therefore the mortgages that we originate throughout the year. To nail it down to specific numbers little difficult, but we do expect more from inventory than from mortgages. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: And clearly our focus has been where we have development dollars in the ground. We are focusing on building houses on those lots as opposed to taking down lots from third party developers simply because we want to extract those development dollars off the ground. Ethan Auerbach - Marathon Asset Management: Sure, and just conceptually If I look at your numbers, and what I don't know if you assume revenues are down like 30% or 40% this year, and your construction costs are around 55% of revenues then you plug in somewhere around $500 to $1 billion land spending, basically get to, I guess about $700 to $800 million of cash flow that you generate. Well after taking into account, somewhere like $1 billion in SG&A, basically without kind of dramatically changing your inventory position, basically just by operating without replacing a lot of the land that you are using. Is that kind of how envision the year going or you kind of looking to much more aggressively reduce things? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: We are clearly focused on aggressively reducing our inventory both in our width as well as our land and lots that are developed, and our focus is to clearly reduce our inventory of homes under construction which we perceive as probably 4,000 or 5,000 too high for us relative to where we see our sales currently and rolling those forward for 12-month basis. And then secondly, we've got 399 homes out there that have been completed and unsold for a period every year and we're planning on putting the home owner in those in this quarter. Ethan Auerbach - Marathon Asset Management: Are you finding that you are able to sell things like that close to where they are marked on your books right now? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: So let me talk about the houses? Ethan Auerbach - Marathon Asset Management: Yes things that you have... complete that has been this in aged for a couple of months. Are you selling imposed your cost basis, are you selling above or below that? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: That's got a very sub-division by sub-division and frankly we're selling them at whatever the market is and some of those projects have been impaired. Some of them haven't been impaired and when we get finished with this of course, some of them will be impaired. Bill W. Wheat - Executive Vice President and Chief Financial Officer: To answer you specifically yes, most of times it is at or better than our cost on our books. Ethan Auerbach - Marathon Asset Management: Okay. And then final question, Don. What... without having a breakout of the finished sites versus what's unfinished, its hard to get this number but can you just estimate what the cost basis is for the finished lot in your inventory right now? Stacey H. Dwyer - Executive Vice President and Treasurer: There is a finished lot cost on our homes that close, it is generally somewhere between $65,000 and $70,000. Ethan Auerbach - Marathon Asset Management: Okay. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: As a percentage of our sales pace is, remain pretty conservative because its been somewhere between 20% and 25%. The revenue associated with the house. Ethan Auerbach - Marathon Asset Management: Right. And so that's consistent with what's actually in your inventory as well as what you are actually selling right now? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Yes. Ethan Auerbach - Marathon Asset Management: Yes. Okay. Great. And final question would just be what... approximately what percentage of the sites in your inventory are finished right now? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: The vast majority of the land that we have on our books is finished. We don't hold a lot. We never have held a lot of land for future development. Now, as I am going to mention we have added to that simply because we mothballed some projects that we... not we are going to put into development more quickly than what we have. So therefore that segment of our balance sheet has increased slightly. Ethan Auerbach - Marathon Asset Management: I'm so little bit confused about that then because it looks like you have a much lower cost basis, or new book, so you got... I guess the residential land and lots plus land held for development is about $5.6 billion and you just said that you've got about to what was it 143,000 or 144,000 sites in your inventory which? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: 1,96,000 is how many lots we own. Stacey H. Dwyer - Executive Vice President and Treasurer: Ethan, how about if Jessica and I give you callback after the call, so we can actually sit down and go through the numbers with you? Ethan Auerbach - Marathon Asset Management: Okay, that's fine. Stacey H. Dwyer - Executive Vice President and Treasurer: Okay, Thank you.
Your next question comes from Joel Locker with FBN Securities. Joel Locker - FBN Securities: Hi guys. I apologize if you guys have already stated this, but what was your impairment reversals in the first quarter from you know previous quarters that benefited gross margins? Bill W. Wheat - Executive Vice President and Chief Financial Officer: We had about $44 million that came back through from previous impairments during the quarter. Joel Locker - FBN Securities: $44 million so what's that about 270 basis points or something like that? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Roughly yes. Joel Locker - FBN Securities: Alright. And just I was curious on the... your percentage, your percentage deposit as a percentage of the home price what that's running currently on orders and backlog? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: This is going to range from certain levels to and if it's a bill job today which there are not many that goes been written today, it could be as much as 5% typically on a lot of these houses that we're closing today that deposits are $1000, $2000. Joel Locker - FBN Securities: Right. So do you have a number I mean the backlogs $2.01 billion. Do you have a percent or dollar amount of deposits against that backlog? Stacey H. Dwyer - Executive Vice President and Treasurer: That is definitely something we track. I don't have the numbers in front of me at this moment. Joel Locker - FBN Securities: Alright. I will just catch up after the call. Thanks. Stacey H. Dwyer - Executive Vice President and Treasurer: Okay.
Your next question comes from Susan Berliner with Bear Stearns. Susan Berliner - Bear Stearns: I hope I didn't miss this, so I apologize in advance. Finished specs, did you give out that number? Bill W. Wheat - Executive Vice President and Chief Financial Officer: We did not. So our finished specs at the end of December were about 5,300 and as Don mentioned earlier, we have 399 that are greater than one year old. Susan Berliner - Bear Stearns: Okay and then can you just comment on I guess the comfort with keeping your dividend where it is? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Yes I can. First of all our directors review that dividend on a quarterly basis and approve it on a quarterly basis and if you look at our cash flow, we're currently running about 10 times where our dividend is and I feel that when we are running 10 times our dividend in terms of free cash flow, we're comfortable with that level. Susan Berliner - Bear Stearns: Perfect, thanks very much.
Your next question comes from Eric Landry with Morningstar. Eric Landry - Morningstar: Good morning. Thanks for taking my call. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: You are welcome. Eric Landry - Morningstar: I just want to make sure your tax year is the same as your fiscal year, correct? Bill W. Wheat - Executive Vice President and Chief Financial Officer: Yes it is. Eric Landry - Morningstar: Okay great and thanks for the color on the finished lots. Let me make sure I have this straight. Are you saying that your finished lot cost right now is roughly $65,000 to $70,000? Sitting in inventory? Stacey H. Dwyer - Executive Vice President and Treasurer: No the finished lot cost has the homes that are closing, is about $65,000 to $70,000. Eric Landry - Morningstar: But then you also made a comment that that's roughly the same as what's sitting in inventory right now? Stacey H. Dwyer - Executive Vice President and Treasurer: For loss there would be finished. That's probably very similar to what's in inventory now. Eric Landry - Morningstar: Okay. Would you have been always that... is that vintage 2004 or 2003 or do you know that off the top of your head? Stacey H. Dwyer - Executive Vice President and Treasurer: I don't know the blend off the top of my head, its going to be across the board though and the lot costs that I am giving you would be, our net lot costs, so there have been impairments, those impairments would be added against that 65 to 70, so theoretically the vintages are going to help you a lot there. Eric Landry - Morningstar: Okay, finally interest... are you going to be able to capitalize all of your interest incurred this year? Looks... if you are going to be north of $250 million interest incurred if my numbers are right here and with $500 million in development spending or less than that if you count the acquisitions in there or somewhere around that number, is it possible that we are going to see an interest expense line show up here some time throughout the year or how does that work? Bill W. Wheat - Executive Vice President and Chief Financial Officer: Yes that is possible in the coming quarters as of the end of December, we were still in position. Our inventory relative our to debt where we capitalized 100% of our interest, but as our inventory continues to come down that it is possible that we will expense some of our interest directly in a coming quarter. Eric Landry - Morningstar: Okay would you gather to guess some sort of proportion of it or is that not computable right now? Bill W. Wheat - Executive Vice President and Chief Financial Officer: Difficult to put a guess on that, it would really depend on the level of inventory that is reduced in a particular quarter. Eric Landry - Morningstar: Okay thank you. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: In interest of, one of our competitors having their conference call at 9 O'clock here and giving you all of you time to sign on with them, we will take one more question please.
Your final question comes from Bob Thompson with Advantus. Bob Thompson - Advantus: Hi guys, I just want to go over a couple on the numbers, if the market continues like Q1 in the end of with that delivered homes in the 20,000 to 24,000. So would that... would there goal be to bring down 17,300 inventory down like the may be the 12,000 range? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: That's correct. Bob Thompson - Advantus: Okay and then overall specs, were overall specs were 9800? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Yes. Bob Thompson - Advantus: And so would the level to bring that down be in 6,000 to 7,000 range? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: That's probably realistic, not where we would like to be but that's probably realistic, that where it will be. Bob Thompson - Advantus: And where would the goal be on that? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: We have always tried to keep our specs somewhere between 30% and 40% of our finished inventory and sequentially we have not been running that, so that would be the goal. Bob Thompson - Advantus: Okay and what are the new, covenants on the bank line? Bill W. Wheat - Executive Vice President and Chief Financial Officer: There are no new covenants necessarily what has changed is our leverage maximum has been reduced from 60 to 55. Our tangible net worth was lowered down to $3.5 billion. Our interest coverage covenant is no longer a covenant that could create on event of the default. At a two times coverage, our pricing changes if we drop below two times, there we do not have to maintain a certain level of liquidity. If it drops down below 1.5, and then within a couple of items have covenants have stepped in and now that we are not investment grade, with two agencies, so we have a limitation on our specs, must be at 40% of trailing 12 months closings and then our land and lots on our balance sheet are limited to a 150% of our tangible net worth. Bob Thompson - Advantus: Okay. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: And I would just like to say that... we want to thank our banks again for working with us on restructuring, and what is the largest and the best structure in revolving credit facility in the industry and we had a 90% yes vote on it and I think this is a lot for where we are and where the banks are. Bob Thompson - Advantus: Okay. And last question... what... in terms of the just the cancellations are the reasons for the cancellations changing at all versus what they were a couple quarters or is it kind of the same old story with the cancellations? Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: I think it's the same old story. I think one of the things is still mortgages are changing, down payments are changing, qualifications are changing, the pricing on the marketplace continues to change. You make contract to buy a house today at 250 and the same house being sold or somewhere else sold while the competitor could be 230 tomorrow. So I still think the marketplace is in disarray from the home buyers perspective in terms of what is a good deal out there. So largely there is a lot of people getting cold feet. Stacey H. Dwyer - Executive Vice President and Treasurer: Really the third large factor in that is that people have an existing home that they need to sell. They are still competing with lot of existing home inventory out there right now. Bob Thompson - Advantus:: Sure. Well thank you and good cash flow. Stacey H. Dwyer - Executive Vice President and Treasurer: Thank you. Bill W. Wheat - Executive Vice President and Chief Financial Officer: Thank you.
I would not like to turn the call back over to Mr. Tomnitz for closing remarks. Donald J. Tomnitz - Vice-Chairman, President and Chief Executive Officer: Thank you and thank you for joining our Q1 fiscal year '08 conference call. In conclusion, I would like to thank all the DHI teammates out there. You performed admirably in the first quarter. It was a tough quarter. We achieved a lot of our goals and our humble opinion, you outperformed your competitors once again. We look forward to the end of fiscal year '08 because we hope at the end of the fiscal year '08 that things are improving and that we are once again building this company back up to the size and the profitability that it once was. Thank you very much.
Ladies and gentlemen, this concludes today's D.R. Horton Incorporated, America's Builder, the largest homebuilding in United States 2008 first quarter conference call. You may now disconnect.