KB Home (KBH) Q3 2007 Earnings Report, Transcript and Summary

Good day, everyone and welcome to KB Home’s third quarter earnings conference call. As a reminder today's conference call is being recorded and webcast on KB Home’s website at KBHome.com. The recording will also be available via telephone replay until October 4th, 2007 at midnight. You can access this recording by dialing area code 719-457- 0820, or 888-203-1112, and entering the replay passcode of 4094051. KB Home’s discussion today may include certain predictions and other forward-looking statements regarding market or economic conditions, and about KB Home’s business and prospects, future financial and operational performance and future actions and their expected results. These are based on management's current expectations and projections about future events, but should not be considered guarantees of future performance. Please be aware that KB Home’s actual results may differ from those that are expressed, forecasted or implied by the predictions and forward-looking statements that may be made today due to a number of risks, assumptions, uncertainties and events outside of the company’s control, and that the differences may be material. Many of these risk factors are identified in the company's periodic reports and other filings with the SEC and the company urges you to read them. For opening remarks and introductions, I'd now like to turn the call over to KB Home’s President and Chief Executive Officer, Mr. Jeffrey Mezger. Please go ahead, sir. Jeffrey Mezger: Thank you, Kevin. Good morning, everyone. Thank you for joining us today for an update on our business and the financial results for our third quarter of 2007. With me this morning are Dom Cecere, our Executive Vice President and CFO, Bill Hollinger, our Senior Vice President and Chief Accounting Officer; and Kelly Masuda, Senior Vice President of Investor Relations and Treasurer. Market conditions continue to be challenged with an excess supply of unsold homes, lack of affordability and declining consumer confidence impacting pricing and demand. The recent tightening of lending standards and rising delinquency and default rates have compounded the situation. Inventory of existing unsold homes increased in August to a ten-month supply and new home inventory now stands at an eight-month supply. As a result of this continued overhang of unsold homes, we have seen major price reductions by competitors trying to move new unsold inventory and are beginning to see more aggressive downward movement on resale pricing as well. We anticipate the pricing and margin pressure will continue until the inventory levels of unsold homes is back in balance with demand which will not occur without consumer confidence being restored. At this time, we are not seeing indication that sales absorptions are improving to a level that will start to clear the excess inventory of unsold homes. We continue to execute on the strategic initiatives we outlined in the spring of 2006 to reposition our business. Some highlights of these efforts are: $1.8 billion in cash has been generated in the last 12 months by converting inventory into cash and selling non-core assets. The balance sheet was strengthened with net debt to total capital improving to 36% at August 31, 2007 from 53% at August 31, 2006. Third quarter 2007 general administrative expenses were 45% lower as compared to the year earlier quarter. Cycle times from contract to close have been reduced by 35 days, and lot counts owned and controlled have been reduced by 55% from 186,000 at the peak in the first quarter of 2006 to 83,000 at the end of the third quarter. We have and will continue to move aggressively to reposition our company as the downturn has extended. We are staying disciplined in adhering to our KB business principles as a build-to-order home builder with even flow production based on a six-month backlog of 11,880 sold homes at quarter end and limited spec inventory with only 14% of current production unsold. We continue to differentiate ourselves in the marketplace, providing home buyers with exceptional value and choice and the opportunity to customize their homes by choosing from more than 5,000 options at our world-class design studios, and also from branding initiatives such as our partnerships with Martha Stewart and now Disney. Our partnership with Martha Stewart continues to generate tremendous excitement across the country. We have four new Martha Stewart KB Home communities that have recently opened or are about to open, including our first communities in Colorado and Florida. We grand opened on September 8th in Denver at our Stapleton Community and had over 2,500 potential buyers through the models on Saturday and Sunday. This weekend, we will grand open in Ormond Beach near Daytona Beach, Florida. Ormond Beach was recently named one of the 100 best places to retire by Where to Retire Magazine. In both communities we are seeing a high level of activity, which further illustrates that consumers respond favorably in any market conditions to the combination of a strong brand, quality product, great value and something different. Our strategic partnership with Countrywide, America's number one mortgage lender has proven to be invaluable. Over 150 mortgage lenders have now quit the industry or declared bankruptcy as delinquencies have risen and tighter capital markets have deprived them of operating cash. With Countrywide loan counselors dedicate to each KB Home community and full access to the Countrywide loan programs and operational platform, execution risk in processing and closing loans is minimized and the financial risk of early payment defaults is mitigated. In the third quarter, our retention rates surpass 70%, the highest level since the partnership was established in 2005. As I've mentioned, during the third quarter of 2007, there was a significant deterioration in housing market conditions. This deterioration accelerated dramatically in the month of August with traffic count, traffic quality and sales conversion rates on average reaching their lowest levels of the current housing downturn, and the continued tightening of lending standards and rising foreclosures only exacerbates the problem. In the third quarter we took a pre-tax non-cash charge of $690 million related to inventory impairments and abandonment triggered by the rapid downward movement in pricing. In this challenging environment, we are being proactive in best addressing the needs of home buyers. We continue to reposition our product offerings and spec levels to more affordable price points targeting the median income of the buyers in the submarkets where we have communities open for sale. This will also allow us to remain competitive with resales. We view resale inventory as our main competitor and we are using the benefits of new construction, choice, quality and our partnerships with Countrywide, Martha Stewart and now Disney as true competitive advantages. From a mortgage qualifying perspective, over 90% of our 372 active selling communities have a price range that enables our buyers to purchase homes without the need for a jumbo mortgage. A new KB Home can be financed through FHA, VA, or conforming loans that can in turn be purchased by the government-sponsored entities, Fannie Mae and Freddie Mac. These loan products, with lower down payment requirements, have remained readily available while the credit markets have been restricting or eliminating non-conforming loans. We continue to focus on our core business, targeting first time, first time move up and active adult buyers in markets that have solid underpinnings based on strong population and job growth projections over the next decade. We have renewed our emphasis on the first time and first time move up home buyer and expect this to be our largest segment as we move ahead. At the end of the third quarter, the attributes of our business model and our focus on our core business began to unfold. Orders were down 3% year over year in the second quarter and 6% year over year in the third quarter of 2007, and we entered the fourth quarter with just under 12,000 sold homes in backlog, one of the largest backlog levels in the home building industry. And, we have made tremendous progress in strengthen our balance sheet in the last 12 months, having generated over $1.8 billion in net cash flow by shrinking community counts, aggressively converting operating assets back into cash, and consummating the sale of our 49% stake in our French operations, KBSA. These are turbulent times, and I want to thank all of the KB Home employees for their extraordinary effort. I am proud of their performance as we have moved quickly to reposition our company in order to take advantage of opportunities when markets stabilize. In our 50-year history, KB Home has been through these cycles before, each time emerging with a stronger business. We have an experienced management team and our execution and KB disciplines will pay off in the long run. Now, I'd like to turn it over to Dom for the financial highlights.

Thanks, Jeff. Net orders of 3,907 new homes were down 6% on a year-over-year basis. Community counts this quarter were down 15% from the prior year quarter with 372 active selling communities compared to 439 active selling communities in the third quarter of 2006. We entered the third quarter with 13,672 sold homes in backlog, and converted 5,699 or 42% of our backlog through revenue in the quarter, compared to a conversion ratio of 43% last quarter and 38% in the third quarter of 2006. We experienced a 50% cancellation rate against gross orders in the third quarter with approximately 3,900 orders for new homes being cancelled compared to 3,656 cancellations in the second quarter of 2007. Cancellations were 29% of the beginning backlog in the third quarter of 2007, and as a percentage of beginning backlog have ranged between 29% to 33% for the last five quarters. We are entering the fourth quarter with 11,880 sold homes in backlog, still one of the largest backlogs of sold homes in the home building industry. The average sales price of homes delivered in the third quarter of 2007 decreased by 7% to $267,700 from $288,000 in the third quarter of 2006. At $267,700, the average sales price for a KB Home was just slightly below the $269,000 average sales price for a resale home in the month of August. Sales prices in the Southeast and on the West Coast were down 10% year over year. Sales prices in the Southwest are down 17%, and the Central region is up 9% due solely to mix. Housing gross margin excluding impairments and abandonments was 13.9% in the third quarter compared to 14.9% in the second quarter of 2007 and 23.3% in the third quarter of 2006. SG&A was 12.8% of construction revenue in the third quarter, up slightly from 12.6% one year ago. SG&A expenses have been reduced by 31% on a year-over-year basis, roughly in line with a 32% decrease in construction revenues. The construction pre-tax loss from continuing operations for the third quarter included $627 million of inventory and joint venture impairment charges, $63 million of option abandonment charges related to 6,500 lots under option contract, and $108 million of goodwill writedowns. Excluding these charges, continuing operations remained profitable. The net loss for the quarter was $35.6 million, taking into consideration the after-tax impact of the impairment and abandonment charges and the $443 million of income from our French discontinued operations, including the after-tax gain of $438 million on the sale of these operations. At the end of the third quarter, we owned or controlled approximately 83,000 lots, down 55% from a peak of 186,000 lots owned and controlled in the first quarter of 2006. On a forward-looking basis, we own just fewer than 53,000 lots, approximately a two-year supply of land, and have approximately 30,000 lots controlled via land option contracts. With our continued focus as a risk-averse, build-to-order home builder, we had approximately 11,500 homes in production of which 1,600 were unsold, only 14% of production inventory, up slightly from 11% of production inventory in the second quarter of 2007; again, one of the lowest levels of spec production in the industry. There were approximately 600 finished, unsold homes in inventory at quarter end, less than 1.5 per active selling communities. As of August 31, 2007, debt net of cash was approximately $1.5 billion, representing a 55% reduction from over $3.3 billion of debt just one year ago. We reduced debt net of cash by approximately $1.8 billion, improving our net debt to total capital ratio to approximately 36% at the end of the 2007 third quarter from 53% at the end of the third quarter of 2006. The company’s tangible net worth has declined by approximately 7% in the last 12 months; $2.8 billion at the end of third quarter 2006, to $2.6 billion at the end of the third quarter of 2007. Profits from operations before land charges for the last 12 months and the gain on the sale of our 49% stake in KBSA has kept the erosion of our tangible net worth to a minimum, despite having taken $1.4 billion in impairment and abandonment charges. The tangible book value at the end of third quarter was $34 per share with a current stock trading at a 25% discount to the tangible book value. From a liquidity perspective, we ended the third quarter with no borrowings outstanding on a $1.5 billion bank revolver and $646 million in cash. In the third quarter, KB Home generated approximately $1 billion in cash, over $800 million from the sale of our 49% stake in KBSA and approximately $200 million in cash from a reduction in inventory. Part of the cash proceeds were used to pay off our $400 million term loan and to redeem $250 million of 9.5% senior subordinated notes. In the third quarter, KB Home also filed a Form 8-K to describe in its entirety the terms of its revolver amendment to address the homebuilding downturn and keep this liquidity in place. In summary, we have realigned our pricing to the median income of home buyers in our served markets. We have a six-month order backlog of sold homes, minimal spec inventory in production, substantial cash, a very strong balance sheet, lean operations, and are patiently waiting for the market to show some signs of stability, which we are very well positioned to capitalize on. Now I'll turn it back to Jeff for closing remarks. Jeffrey Mezger: Thanks, Dom. In 2005, KB Home formed a unique collaboration with Martha Stewart to design and build residential communities, influenced by Martha Stewart's aesthetic and classic approach to design. We're now gaining momentum in opening communities across the country and we have demonstrated tangible success. High profile partnerships such as this one with Martha have helped make KB Home the most recognized brand in homebuilding. When asked to name a home builder, nearly four times as many respondents cited KB Home than our next five competitors combined. On Wednesday, we announced a new collaboration to offer Disney home products to KB Home buyers. Beginning in 2008, our home buyers will be able to create custom Disney rooms in their new homes by selecting among the many Disney options to be offered at our KB Home design studios. Incorporating Disney home products into the design of a room blends cherished memories into the every day spaces of a home. This exclusive opportunity, featuring Disney home products available through KB Home, will expand to include most of the beloved Disney characters and franchises. Our build-to-order business model is all about choice, and together with Disney we're offering even more options to the whole family. The KB Home brand and co-brand initiatives with Martha Stewart and now Disney, along with our design studios, give us the opportunity to differentiate our homes and drive traffic to our communities based on extraordinary value and choice. In this challenging environment, we're staying disciplined to our business model as a build-to-order home builder with limited spec production focusing on the first time, first move up and active adult home buyer. Nearly all of our communities are priced to provide product that can be purchased with an FHA, VA, or conforming conventional loan. In the last four quarters we've strengthened our liquidity, generated approximately $1.8 billion in cash. Debt net of cash was reduced by 55% in the last 12 months, and we ended the third quarter with a 36% net debt to total capital ratio, with no borrowings against our $1.5 billion revolver and $646 million in cash. A strong balance sheet and ample liquidity positions us to take advantage of future opportunities. Our overhead and inventory of lots owned and controlled are in balance with the harsh reality of today's housing market, and we will continue to manage these areas appropriately. The downturn in homebuilding will not stabilize until consumer confidence is restored and supply and demand are back in balance. Until then, we are confident that we are well positioned to deal with the challenges ahead of us. In the long run, the housing market will eventually recover with continued demand for new homes being created by favorable demographic trends, job growth, growth in personal income and lifestyle changes. We will now open up the lines to take your questions.

Your first question comes from Stephen Kim - Citigroup. Stephen Kim - Citigroup: Good job with the cash flow. I wanted to ask you about your inventory if I could, a little bit more detail than what was provided in the press release. What I'd like to get is a sense of where your WIP versus your land inventory stood at the end of the quarter? Jeffrey Mezger: Stephen, the $4.4 billion of inventory dollars, $1.6 billion related to the 11,880 homes in backlog, and $1.7 billion was in the slots and open communities, so $3.3 billion of the $4.4 billion was in open communities, finished lots, homes under construction. Another $500 million in land and $600 million in options to buy land. Stephen Kim - Citigroup: The FIN 46 inventory was basically zilch, right? Jeffrey Mezger: Right. Stephen Kim - Citigroup: My second question relates to your intentions with respect to subdivision count. You guys have done a pretty good job think as well paring down your subdivisions, but in light of Jeff's commentary about the excitement over your brand recognition and Martha Stewart and so fourth, I was curious as to what you anticipated a subdivision ramp as we entered next year? Jeffrey Mezger: Stephen, we really don't see a ramp up right now. It doesn't make sense to us to fuel cash into opening communities if we're not going to hit our margin in returns, so we'll continue to be very strategic and community specific. Clearly we're driving to open as many Martha communities as we can because we do have great success stories now. I would not expect a community count ramp up in '08.

Your next question comes from Carl Reichardt - Wachovia. Carl Reichardt - Wachovia Securities: Jeff, could you talk a little bit about the rational for cans on the 50% can rate? Do you have a sense of what percentage of those folks canning were due to finance challenges versus leaving you to go buy a house from peers? Jeffrey Mezger: Carl, as I shared on my comments, we saw the can rate spike a bit in August from where it was trending in June and July, and a lot of it was tied to the credit crunch and the media noise around the credit crunch that occurred in August, so there's always a mixed bag in cans, but we saw significant increase in people who had a loan and with the changes in the credit environment and the tightening loan terms, either didn't like the payment or couldn't qualify at the new payments, so that was a phenomenon. I think in part our cans spiked because consumer confidence got rattled. We had buyers who said that I'm not comfortable making this purchase today. Carl Reichardt - Wachovia Securities: Jeff, could you give us a little bit of an update on the markets that you occupy currently where you're either exiting totally or significantly compressing your presence? Jeffrey Mezger: I can give you both ends of the spectrum, Carl. We like the markets we're in because we have focused on long-term growth projections for both population and jobs in the sun belt primarily where it's mostly a builder-friendly environment, so we like the positions we're in. While I say that in the long run, we would only stay in those markets because with we can get our returns. As I know you're aware, we walked out of Indy. We walked out of Treasure Coast in Fort Myers and in all three cases we were new to the markets, didn't have our franchise set up where we were getting our returns and we decided to pull back out and wait for another day. So we're committed to the markets we're in and we'll be mindful of ensuring over time that we remain comfortable we can get our returns.

Your next question comes from Michael Rehaut – JP Morgan.

Just trying to get a sense of potential future impairments, if you can give us a breakdown of what you guys use for your assumptions in terms of lower absorption paces versus assuming some negative pricing going forward? Jeffrey Mezger: We haven't made any changes in assumptions to our models at all, and the impairments we've taken today are impairments that were required based on the results of the third quarter. I have no idea what's going to happen in the future, if there's continued price erosion, there could be continued impairments. I would say this: we're the with the fact we have about 86,000 lots an we're down to 83,000 lots and we only have 53,000 lots that we own and even though we've taken $1.4 billion in impairments in the last year, our book value was only dropped by $200 million because of the profits we've made and the one-time gain we got on the sale of our non-core asset in France. So we think we're pretty well positioned going in the future to some day get this behind us, but I don't think anybody can predict what's going so happen over the next several quarters.

In terms of pricing you guys are just assuming today's pricing? Jeffrey Mezger: It is what it is today, is the way we view it.

Just a follow-up question on the inventory dollars. Adjusting for the impairment, it looks like the inventory dollars are down roughly $100 million from the second quarter. Just wondering if you could give us a breakdown of the different components that are driving that decline? Jeffrey Mezger: You mean exclude the impairments?

Right. Jeffrey Mezger: I don't think I would have it. The best way to look at our inventory is that $1.6 billion of our $4.4 billion in inventory is sold in backlog and $1.7 billion is in active communities that have finished lots so 75% of inventory are in open communities today. We continue, we generate a couple hundred million dollars in cash out of operations in the third quarter from operations, from reductions of inventory, and another $800 million out of France.

Your next question comes from Mike Wood - Banc of America Securities. Mike Wood - Banc of America Securities: Earlier in the call you cited heavy discounts from the builders moving spec inventory. Can you just talk about how this impacted the build to order sales throughout the quarter and maybe if you want to also give the order trends year over year throughout the quarter? Jeffrey Mezger: You asked a few questions I think, Mike. Have you to look community-specific on the incentives and the aggressive pricing on the competitive landscape. I wouldn't focus on what brand X did across the street because it's a market move, not one builders move, and we stay focused on resale. A bigger concern for us is the heavy inventory overhang of resale and where we're starting now to see prices move down on the resale as well. So if you look at our business model, we don't start the home until loans are approved and they have selected everything at our design studio so they're building a custom home. If it is a one-off discount of a home in the neighborhood, they aren't going to cancel to go buy that home. If there's a broad-based price move where values drop below what they're paying, it's a different decision for them. So, you have to go down to a community level but I wouldn't say that any given builders inventory liquidation on its own triggered a bunch of cans in our backlog. Mike Wood - Banc of America Securities: Have you been selling more or fewer percentage of the sales coming from cans and spec homes that you have versus the dirt sales? Jeffrey Mezger: Clearly, if we have a can in our inventory while the lowest as a percent of production is higher than we would like it to be, our target is to have 10% or less under construction unsold and we're at 14%. So we have a little bit more inventory so you do have more sales targeted to clear the inventory, but on a weekly basis we continue to sell far more lot sales where we haven't started a home yet than we do inventory.

We still operate with a six-month backlog of sold homes in our business model. Mike Wood - Banc of America Securities: With the can rate creeping up, is there any thought to increased deposit requirements to try to lower that can rate ? Jeffrey Mezger: No. We're comfortable with our current deposits and our policy. We haven't changed that over the last couple of years, and the important thing to keep in mind if they have an approved loan and it's a custom home being built for them, they're committed to the purchase. It's when these disruptions come through the system that it creates some of the cans.

Your next question comes from Kenneth Zener - Merrill Lynch. Kenneth Zener - Merrill Lynch: Regarding the large joint venture that you guys have outside Vegas, which is actively selling and you guys started, you have a 49% ownership in it bought in February '05, $510 million was the total purchase price. Have you guys had any impairments related to this venture yet? Jeffrey Mezger: There's been no impairment to the joint venture itself, no. Kenneth Zener - Merrill Lynch: I guess with volumes so far down in Vegas, we're showing existing sales trending 30% to 40% down since the peak about three years ago, how does that kind of work out that there's no impairments there if the absorption is down and there's clearly been so much pricing. Is it that you got the land at such a good deal? But I think it was about $300,000 an acre. Jeffrey Mezger: Well there's always moving parts in a JV tied to impairments, Ken, and keep in mind that when we went into this we bought it well below market, and that it's in the most desirable area of Las Vegas, without a lot of land around it to be developed, so it's a very valuable asset that continues to be appraised by the banks and viewed by the JV partners and right now the values are supportable at the JV level. If we take some lots out of the venture as the builder, then we go through the normal impairment process like we do every asset on our books. Kenneth Zener - Merrill Lynch: Just surprising given that absorptions have declined so dramatically there, but it's good to buy cheap. I guess the second question is if you can talk about margin change by regions versus the Q2 and especially in the Southwest where which is largely Vegas and Phoenix and it has been so strong at roughly 8% and 9% in the last two quarters.

That will come out in the Q. You can pick that up when we publish our Q in a few weeks. Kenneth Zener - Merrill Lynch: Jeff, in prior quarters you talked about how much you've taken out on a sticks and bricks basis on a square foot. Could you talk about where you are now and just give us a baseline of the year ago, please? Jeffrey Mezger: it continues to be a major initiative for us. Our directs are down year-over-year. We continue to push it. It gets gray because in addition to what we pay the framer or the plumber, we're also moving to smaller homes and lowering the spec level so our costs are down but it's more than just how we renegotiate it with a plumber. If I had to peg a range, probably 5% to 7%. The costs have been sticky for us. We're continuing to view this as a major opportunity going forward.

Your next question comes from Jim Wilson - JMP Securities. Jim Wilson - JMP Securities: Could you give the color on the impairments, the regional level of impairments?

Again, we haven't given any color on it but you'll get that in the Q, but it hasn't changed from what you've seen in the last several quarters and that is it's over 50% in California and the vast majority are on the two coastal areas, Florida and California. And you can get the specifics when we put out our Q. Jim Wilson - JMP Securities: I know the same would be true on of course on regional margins but could you give us a little color even within where, rather than saying where incentives are community by community but maybe the same answer but where are you seeing better success where margins are reasonable and that you have some positive things you might even say or try to say? Jeffrey Mezger: Jim, I don't know if you heard my comments relative to Martha Stewart, but our Martha Stewart communities continue to generate above average margins for us so it's clearly a bright spot. Many of the markets we were in where prices ran up so much over the last few years are running down a little harder, so we're seeing more pressures in places like California than we are in Texas or the Carolinas where prices didn't run up that much.

Your next question comes from Rob Stevenson - Morgan Stanley. Rob Stevenson - Morgan Stanley: Good morning, guys. In terms of the deposits you were talking about before, you said that you were holding last year’s or consistent with previous deposit policies, you haven't been changing that and lowering it? Jeffrey Mezger: Correct. Rob Stevenson - Morgan Stanley: Have you been seeing other competitors -- because we've been hearing anecdotal evidence of other people dramatically lowering deposit requirements and also Lennar on their call the other day said they had to do that to match people in the other markets. Jeffrey Mezger: I can't speak, Rob, to what the other builders are doing. Our current deposit levels aren't a barrier to buying a home. So in our business model we're comfortable with our deposit levels. Rob Stevenson - Morgan Stanley: No, I'm looking at it from the reverse angle that the lower deposit the easier it is for somebody to walk away so people who are lowering their deposit level significantly are going to likely incur significant cancellations in the future from basically providing free call options on homes. Jeffrey Mezger: They could. I can't answer that because we haven't done that. Rob Stevenson - Morgan Stanley: In the darker days in August when Countrywide looked like it might shut its doors, what was the fall back plan from a mortgage perspective had that happened? Jeffrey Mezger: What? I don't want to speak to Countrywide’s situation. You'd need to talk to the management and the officers over at Countrywide but the media certainly painted a much direr picture than what was reality for that company. We have a lot of banking relationships and we're always talking out on the street but we were not out looking for a follow-up lender because we were comfortable with the job and the situation they were in.

Having Countrywide as a joint venture partner is a big advantage for us. Rob Stevenson - Morgan Stanley: If something were to happen in that relationship, do you feel that you could go to somebody else relatively quickly or to find enough mortgage liquidity in order to meet your demand? Jeffrey Mezger: Yes, absolutely. When your product is priced at FHA VA and conventional levels, there's ample liquidity to finance our buyers. We would take a step back in service and performance if we pulled away from Countrywide because we do see them as a great partner.

Your next question comes from Dennis Gill – Zelman and Associates. Dennis Gill – Zelman and Associates : Dom, you had talked about having one of the shorter owned land supplies and it's clearly an advantage for you guys now, yet we've also seen you at the high end of the spectrum as far as impairments. Do you think this is a function of you just being ahead of the curve or more your geographic footprint going into the downturn?

It's difficult to say because I can't speak for other builders are in the impairment cycle. I think we're where we are supposed to be and I think we have as we said earlier, we reduced lot counts from 186,000 to 83,000 and we know we only have 53,000 lots owned left so we think that's a plus. We have started with $7.2 billion worth of inventory and it's down to $4.4 billion and you look at many of the public builders they haven't reduced inventory by that much so maybe we're ahead of the group as far as getting through the inventory and we think that will be an advantage in a year from now. So, I think it is what it is. Dennis Gill: On the raw land, you had mentioned I think you said you have about $500 million now. Had that been impaired at all?

I'm sure it has. I can't say it's a big number. It's only $500 million but I think the vast majority of the impairments were probably more related to finished lots than they were to raw land itself, but sure there's been some impairment there. Dennis Gill: Do you have a number for the cash from operations for the quarter?

We don't have it. It will be in the Q when it comes out. Net-net, we do that we generated about $1 billion of cash in the quarter and we just look at our cash and what happens to cash and debt from the end of the second quarter to the end of the third quarter, but when you get the cash flow statement you can see.

Your next question comes from Joel Locker - FBN Securities. Joel Locker - FBN Securities: Your impairments of the $627 million or so, how much of that was the actual land under development at the end of the second quarter?

Actually, we don't have that. Joel Locker - FBN Securities: Will it show up in the Q?

No, it won't. The land in development was only $500 million so it's not a big number. Joel Locker - FBN Securities: Right, but it was $1.27 billion including options.

No, that's including the options. Joel Locker - FBN Securities: Right. So do you have any factor of how much that actually came down? I mean just including or just that land under development in the options?

$60 million for 6,500 lots. Joel Locker - FBN Securities: But the other figure you don't have?

Don't have it. Joel Locker - FBN Securities: On the impairment reversals for the third quarter from previous quarters, how much actually came back through the income line?

It was de minimus.

Your next question comes from Andrew Bronsa - Banc of America Securities. Andrew Bronsa - Banc of America Securities: Do you guys have any idea either some sort of number or range of where you expect your cash balance to be at the end of the year? Jeffrey Mezger: Don't have it yet. I think as soon as we settle in on how much of the 11,880 homes we have in backlog delivered and there's a couple land transactions that are under contract, if they close, we'll know we'll be at the end of the year. It's going to be up from where we are in the third quarter but the number could swing significantly and we'll let you know as we get closer to closing the fourth quarter. Andrew Bronsa - Banc of America Securities: As you look through to the end of the year and you end up with obviously substantial amount of cash and liquidity. Did you earmark any of that for any sort of payment of debt in addition to what you've already done or are you satisfied with where you are today? Jeffrey Mezger: We're going to hold on to the cash and we're pretty comfortable with where our debt position is today, especially since debt to total capital was 44%, so that's very good and net debt is 36% so we're going to hold on to the cash. Andrew Bronsa - Banc of America Securities: What's the current availability on your revolver under the borrowing restriction? Jeffrey Mezger: It's all of it, I believe.

We think all of it is available under the borrowing restriction. Andrew Bronsa - Banc of America Securities: Net of credit and everything? Jeffrey Mezger: Net of letters of credit it's $1.2 billion. Andrew Bronsa - Banc of America Securities: Same as last quarter? Jeffrey Mezger: Roughly.

Your next question comes from Susan Berliner – Bear Stearns. Susan Berliner - Bear Stearns: Just wanted to get color on some of the joint ventures. Can you talk about some of your larger joint ventures, what's going on with those and if you made any contributions during the quarter to them?

Very little contributions in the quarter to the joint ventures. I think the best way I would talk about joint ventures is to say that really the vast majority of our money is in the large one in Las Vegas, a piece of property in Maryland called Crown Family Farm that we're getting entitled and we've got four or five mid-rise density products in California. You take those, that is probably 60% to 70% of our joint ventures; so all A locations. Susan Berliner - Bear Stearns: Are there any financial partners or is it mostly other home builders?

The mid rise are financial partners and the Esperanza and Crown are public builder partners.

Your next question comes from Alex Barron - Agency Trading Group. Alex Barron - Agency Trading Group: Can you talk about how many communities you impaired this quarter and how many were reimpairments? Jeffrey Mezger: We impaired 75 communities this quarter and I think over the time we've had about 24 impairments the second time around. Alex Barron - Agency Trading Group: The other question I was going to ask was on the community count, I know it's been coming down but I'm just trying to understand, is this because you're actually selling out of communities or you're just shutting them down midway? Jeffrey Mezger: No, we're selling out the community and not opening new ones. Alex Barron - Agency Trading Group: What was the count last quarter? I thought it was lower than this quarter? Jeffrey Mezger: Well, it's a seasonal business on community counts, but the count this quarter was 372 and last quarter was 342 but it always peaks and comes back down. You open the communities at the beginning of the year and close them out towards the end of the year. Alex Barron - Agency Trading Group: All right, but your overall theory is not to just shut down some that are active? Jeffrey Mezger: We have abandoned some options that in effect we shut down the community. There's others that we've built out, and we're not aggressively opening new communities, so the balance of that over time will drop our community count. Alex Barron - Agency Trading Group: Did I hear you correctly that $600 million is remaining option deposits or what was the $600 million that you referred to?

That was the options to buy land, yes.

Your next question comes from Larry Taylor - Credit Suisse. Larry Taylor - Credit Suisse: I wonder if you could provide clarification in terms of in the press release and on the commentary you've talked about increasing levels of discounts and incentives. Do you see this as a change among your public builder competitors and is the environment substantially different than it was for you guys a quarter or two ago with respect to how your competitors are reacting to the slowdown? Jeffrey Mezger: Well we react to the overall market, and what we experienced in August in particular was more downward pressure on pricing and an increase in incentives, so I would say, yes, it stepped up from where it was earlier in the year. Larry Taylor - Credit Suisse: As a follow-up to that, I wonder if you can comment on how things looked in September? Jeffrey Mezger: We don't go into the current quarter, Larry. We'll talk about that at the end of the fourth quarter.

Your next question comes from Robert Manowitz - UBS. Robert Manowitz - UBS: Just to follow up to the questioning on cash flow for the fourth quarter. If my memory serves me correct your last guidance was for cash flow in the second half of the year of about a billion, which was essentially half of or half from the sale of the French operations and half from homebuilding operations. If I go through the math and think about what you said earlier, it implies roughly $300 million of cash flow in the fourth quarter. Is that kind of a good ballpark still? Jeffrey Mezger: I think that's roughly correct. Robert Manowitz - UBS: You've talked about in your press release and on the call that you feel like you've paid down debt to a level that's appropriate and it gives you flexibility and that the cash going forward is earmarked for opportunities. I know it's very early in the process, and who knows what will happen over the next six months, but as you sit here today, would you guess that those opportunities are more likely in your stock or more likely in land? Jeffrey Mezger: Robert, we've always had a three-pronged a approach to cash management and that's what we'll continue to go going forward. Keep an eye on our balance sheet and our debt levels, look at stock and then also be opportunistic with growing the business.

But until we see an actual trough in the business, we're maintaining that our number one focus is liquidity. Robert Manowitz - UBS: So one step further, the concept of any sort of privatizing wouldn't be appetizing given all of the uncertainty out there? Jeffrey Mezger: Right now, we're running the business.

With that, gentlemen we thank everyone for your participation in the Q&A session. I'll turn things back over to our speakers for additional or closing remarks. Jeffrey Mezger: Thank you, everyone for joining us today for our third quarter earnings conference call. I look forward to speaking with all of you in the future. Have a great day.