Q4 2007 D.R. Horton Earnings Conference Call on Nov. 20. 2007 / … · 2007-11-20 · to the D.R. Horton, Inc. America's Builder, the largest homebuilder in the United States 2007

F I N A L T R A N S C R I P T

DHI - Q4 2007 D.R. Horton Earnings Conference Call

Event Date/Time: Nov. 20. 2007 / 10:00AM ET

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C O R P O R A T E P A R T I C I P A N T S

Don TomnitzD.R. Horton, Inc. - President, CEO

Stacey DwyerD.R. Horton, Inc. - EVP, Treasurer

Sam FullerD.R. Horton, Inc. - Senior EVP, Finance

Bill WheatD.R. Horton, Inc. - EVP, CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Mike RehautJPMorgan - Analyst

Dan OppenheimBanc of America Securities - Analyst

Nishu SoodDeutsche Bank - Analyst

Joel LockerFBN Securities - Analyst

Ken ZenerMerrill Lynch - Analyst

Stephen KimCitigroup - Analyst

David GoldbergUBS - Analyst

Stephen EastPali Capital - Analyst

Timothy JonesWasserman & Associates - Analyst

Alex BarronAgency Trading Group - Analyst

Carl ReichardtWachovia Securities - Analyst

Jim MollstonGMP Securities - Analyst

Larry TaylorCredit Suisse - Analyst

Mike MarburgRamsey Asset Management - Analyst

Susan BerlinerBear, Stearns & Co. - Analyst

Bob ThompsonAdvantus Capital Management, Inc. - Analyst

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Nov. 20. 2007 / 10:00AM, DHI - Q4 2007 D.R. Horton Earnings Conference Call


Bob SellsO&K Capital Management - Analyst

Andrew Allman36 Capital - Analyst

Darren RichmondGSO - Analyst

P R E S E N T A T I O N

Operator

Good morning. My name is Cynthia and I will be your conference operator today. At this time I would like to welcome everyoneto the D.R. Horton, Inc. America's Builder, the largest homebuilder in the United States 2007 year end conference call. All lineshave been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answersession. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Don Tomnitz, President and CEO. Sir, you may begin your conference.

Don Tomnitz - D.R. Horton, Inc. - President, CEO

Thank you. And thank you, and good morning. Joining me this morning are: Sam Fuller, our Senior Executive Vice President ofFinance; Bill Wheat, Executive Vice President and Chief Financial Officer; and Stacey Dwyer, Executive Vice President and Treasurer.Before we get started, Stacey?

Stacey Dwyer - D.R. Horton, Inc. - EVP, Treasurer

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities LitigationReform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is noassurance that actual outcomes may not be materially different. All forward-looking statements are based upon informationavailable to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publiclyupdate or revise any forward-looking statements. Additional information about issues that could lead to material changes inperformance is contained in D.R. Horton's annual report on Form 10K and the most recent Form 10Q, both of which were filedwith the Securities and Exchange Commission. Don?


Net sales orders for the fourth quarter were 6,374 homes, $1.3 billion, compared to 10,430 homes, $2.5 billion in the year-agoquarter. This lower net sales rate was due in part to our consolation rate rising during the fourth quarter to 48% compared to38% in the third quarter and 40% in the same quarter of the prior year. Our average sales price on net sales orders in the quarterdecreased approximately 15% from a year ago to $205,400. However, our average sales price on gross sales only decreased 8%to $231,900, as more high-priced homes canceled during the quarter. Please note that we will no longer report our quarterlynet sales orders in advance of earnings. Beginning in the first quarter of fiscal 2008, we will report net sales orders in conjunctionwith our quarterly earnings release. Sam?

Sam Fuller - D.R. Horton, Inc. - Senior EVP, Finance

Our fourth quarter Homebuilding revenues were $3.1 billion compared to $4.8 billion in the year-ago quarter. Our averageclosing price for the quarter was down 7% to $253,000 compared to $272,400 in the year-ago quarter. Homebuilding revenues






for the year ended September 30, 2007, were $11.1 billion compared to $14.8 billion a year ago. Homes closed for the fiscal yeartotaled 41,370, and approximately 62% of our closings were for less than $250,000 each compared to 55% in fiscal 2006,demonstrating our continued focus on providing an affordable, quality, entry level or first-time move-up product. As a result,the financing for most of our customers can fit within conforming guidelines. Bill?

Bill Wheat - D.R. Horton, Inc. - EVP, CFO

Our gross profit margin on home sales revenues in the fourth quarter, before inventory impairments and land option write-offs,was 16%, down 490 basis points from our home sales margin of 20.9% in the year-ago period. This was a 70 basis point sequentialdecline from our third quarter gross margin of 16.7%. This decline was due primarily to core margin deterioration, resultingfrom increased use of sales incentives relative to last year and a lack of pricing power, as reflected in our 7% decrease in averageclosing price. During our fourth quarter impairment analysis, we reviewed all projects in the company and determined thatprojects with a combined carrying value of $2.6 billion had indicators of potential impairment. We evaluated these projects anddetermined that projects with the preimpairment carrying value of $940.5 million were impaired. We recorded inventoryimpairments of $278.3 million as a charge to cost of sales to reduce the carrying value of these impaired projects. Approximately55% of the impairment charges this quarter related to projects located in California. Of the remaining $1.7 billion of the projectswith impairment indicators, which were determined not to be impaired, the majority are located in California, Florida, andArizona. Stacey?


FAS 142 requires that we test goodwill in each operating segment, regions in our case, for impairment at least annually. Duringour fourth quarter, we completed our annual analysis for goodwill and determined that an impairment charge of $48.5 millionrelated to our midwest region was warranted. Total goodwill remaining after impairment as of September 30th is $95.3 million.Don?


We continue to adjust our land option contracts relative to current demand, which resulted in a $40.3 million write-off of earnestmoney deposits and preacquisition costs related to land option contracts during the fourth quarter across a broad section --cross section of our markets. Our net earnest money deposit balance at September 30th is approximately $75 million or 6% ofthe remaining purchase price. This low earnest money deposit percentage reflects our conservative approach to land and lotoptions. We have no unconsolidated joint ventures and we rarely use land bank arrangements, so our deposits are typically alow percentage of the purchase price. Our supply of land and lots at September 30th, 2007, is approximately 230,000 lots, ownedand controlled, down 42% from our peak of 396,000 lots at March 31st, 2006. 73% of these lots are owned and 27% are optioned.

We started our fiscal year with 323,000 lots, a 6.1-year supply based on trailing 12 months closings, and our 230,000 lots nowrepresents a 5.6-year supply based on trailing 12 months' closings. We continue to actively work to reduce our own land andlot supply through building and closing homes as well as through opportunistic land and lot sales. For example, in November,we closed on a land sale in Phoenix, which reduced our own lot position by approximately 20,000 lots or about a half a yearsupply. Total revenues will be approximately $70 million on this transaction and we will recognize a profit on the sale. There'sbeen no impairment associated with this project. Sam?


Homebuilding SG&A expenses for the quarter was 9.9% of total homebuilding revenues compared to 8.5% a year ago. For thefiscal year, our homebuilding SG&A was 10.3% of total homebuilding revenues compared to 9.9% last year. Our ongoing goalfor each fiscal year is to be at or below 10% of homebuilding revenues. Although we're above our 10% goal this year by 30 basis






points, we have continued to react quickly to the market to manage our SG&A levels relative to our level of home closings. Infiscal 2007, we reduced total SG&A expenses approximately $315 million or 22% on 22% pure closings. We will continue tofocus on being the low-cost operator in the industry, which remains one of our distinct competitive advantages. Bill?


Our financial services operations remain profitable, as we have proactively adjusted expense levels to lower volumes andadjusted product offerings to the current restrictive mortgage environment. Financial services pretax income for the quarterwas $16.1 million compared to $33.7 million in the year-ago quarter. For the fiscal year, financial service's pre-tax income was$68.8 million compared to $108.4 million last year. 96% of our mortgage company business was captive during the quarter,reflecting our continued focus on supporting our homebuilder's business. Our company-wide capture rate in Q4 wasapproximately 64% compared to 71% a year ago and for the year was 66% compared to 68% in the prior year. Our average FICOscore this quarter was 717, comparable to the year-ago quarter.

Our average cumulative loan to value for the quarter was 90%, compared to 91% in the year-ago quarter. As the mortgagemarkets continue to change, we saw a continued shift in the type of products that buyers utilized in the fourth quarter. Ourproduct mix during the fourth quarter was: 81% conforming, 10% agency-eligible alt A, 2% nonagency-eligible alt A, and 7%jumbo. For our full fiscal year 2007 our product mix was: 57% conforming, 19% nonagency-eligible alt A, 13% agency-eligiblealt A, 7% jumbo, and 4% prime -- subprime. Sam?


The effective tax rate related to our income tax benefit on our fiscal 2007 loss was 25.1%, because only approximately 23% ofthe goodwill impairment charge recorded in fiscal 2007 is deductible for tax purposes. Our reported net loss for the quarter is$50.1 million or $0.16 per share. However, our core operations before impairment charges and land option cost write-offsgenerated pretax profits of approximately $266.9 million. Our reported net loss for the fiscal year was $712.5 million or $2.27per share. Our core operations before impairment charges and land option cost write-offs generated pretax profits ofapproximately $852.4 million. All of our operating regions remain profitable for the fourth quarter and the fiscal year beforeimpairments and write-offs. We continue focus on managing the core business efficiently by controlling our costs and adjustingoverall conditions. Don?


Our overall inventory decreased by over $900 million excluding impairments at 9/30 compared to June 30th. We reduced ourtotal number of homes in inventory to approximately 19,900 homes, down 50% from 40,000 homes at our peak in June 2006and down 27% from 27,100 homes at June 2007. We also reduced the absolute number of speculative homes in inventory bymore than 18% this quarter to approximately 10,600 compared to approximately 13,000 at June 2007. This reduced the numberof homes and inventory combined with our earnings in the fourth quarter, allowed us to exceed our goal of $1 billion in operatingcash flow for this fiscal year by over $300 million. We plan to further reduce both our total number of homes in inventory andour number of speculative homes in the coming quarters in-line with current demand. Stacey?


Our Homebuilding leverage ratio, net of unrestricted cash, was 40.2%, an improvement of 50 basis points from a year ago andat the low end of our target range of 40% to 45%. As of September 30th, we have approximately $2.3 billion available on ourHomebuilding revolving credit facility and $228 million in unrestricted Homebuilding cash for a total of $2.5 billion ofHomebuilding liquidity. We have reduced our Homebuilding debt balances by approximately $900 million since the beginningof the fiscal year and we've reduced our consolidated debt balances by approximately $1.7 billion. As a reminder, D.R. Horton






does not have any unconsolidated joint ventures, so we have no exposure to parental guarantees or margin calls on joint venturedebts.

We currently have three primary financial covenants in effect under our $2.5 billion revolving credit facility, maturing in Decemberof 2011. They are a tangible net worth covenant, a maximum leverage covenant, and a trailing 12-month EBITDA to interestincurred covenant. All covenant calculations are based solely on our guarantor's subsidiaries, which includes substantially allof our Homebuilding operations, but exclude our financial service operations. Our current tangible net worth covenant is $4.3billion and as of September 30, we have a cushion of approximately $1 billion. Our current leverage is 42% compared to amaximum allowable leverage of 60%. And finally, our trailing 12 months interest coverage ratio a 3.6 times compared to ourtwo times covenants. Bill?


Our cash flow from operations this quarter was over $800 million, positive for the fifth consecutive quarter and bringing ourtotal for the fiscal year to over $1.3 billion, exceeding our goal of $1 billion. Over the last 15 months, we have generated in excessof $2.2 billion of operating cash flow. Our goal for fiscal 2008 is to generate an additional $1 billion of operating cash flow. Ourland acquisition spending remains limited and we continue to challenge our land development spending in light of our currentabsorptions. We expect our fiscal 2008 land acquisition and land development expenditures to total between $500 million and$1 billion for the entire fiscal year. For comparison, our fiscal 2007 land acquisition and land development expenditures were$2.5 billion and in fiscal 2006 they were $5.2 billion. We continue to develop smaller phases and pace our development of newphases based on current demand in individual communities. Don?


In closing, D.R. Horton will continue to manage very conservatively during this housing downturn. In fiscal 2007, by controllingour SG&A, renegotiating our construction costs and reducing our inventory, we generated approximately $852 million in pretaxoperating profits before impairments, with all of our reporting regions contributing positively towards this total. Our statedcash flow goal for fiscal 2007 was to generate $1 billion in cash flow from operations. We exceeded this goal, generating $1.36billion. We used this cash flow to reduce Homebuilding debt by $900 million and consolidated debt by $1.7 billion. Even thoughwe reduced our residential inventory by 7,000 homes in the fourth quarter, we plan to reduce our homes under constructionfurther, which will contribute to our goal of generating at least $1 billion in cash flow from operations in fiscal 2008. We willcontinue to focus on earning pretax operating profits before impairments, generating operating cash flow, reducing bothresidential and land inventories, and repaying debt.

In a downturn, we believe that the builder with the strongest balance sheet wins. We plan to be the winner, with a solid balancesheet and available liquidity to take advantage of opportunities as they present themselves in the marketplace. Finally, we thankthe entire D.R. Horton team. This includes, especially, our field staff, including construction, sales, and mortgage. As we knowwe are all in sales and sales are the key to our future successes. While it is difficult to outperform the markets, you continue tooutperform our competition. Our motto, BSCM: build, sale, close homes and make money is most applicable today, generatefree cash flow and leave no buyer behind. Thank you. We'll now entertain any questions that you may have.

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS) Your first question comes from Michael Rehaut with JPMorgan.






Mike Rehaut - JPMorgan - Analyst

Hi. Good morning.


Good morning.


Congrats on the cash flow generation. I just wanted to get -- my first question is, if you could just, for the full year, give me a, ifpossible, a breakdown of how that $1.3 billion fell across. Let's say, land sales, mortgage operation, and core Homebuilding,and how you think that composition will look for '08? And then I have a follow-up.


Well, Mike, as far as the breakdown in '07, I think it's presented fairly clearly in the cash flow statement in the press release.Primarily, from inventory reduction, approximately $800 million of that, and then we had about $500 million of mortgage loansheld for sale, there was a reduction during the year. Of course, that is supplemented by the preimpairment profits from ouroperations. The primary breakdown in '07. As we move forward to '08, we certainly -- our goal is to continue to generateprofitability before impairments and charges. We will see, I think, a -- hopefully a smaller reduction in our mortgage loans heldfor sale during the year, but the majority of the $1 billion that we expect to generate in '08 is going to come from inventoryreductions and our home building business.


Which is primarily going to come from us building homes on the lots that we owned and pulling development dollars out ofthe ground and closing on the whip that's associated with those houses.


And as we talked about in the conference call script, we'll going to be looking to sell land opportunistically. So we've alreadygenerated some -- some land sales revenue that will contribute to cash flow this quarter.


By the way, our land sales, our land inventory, our land and lot inventory now, boast that Phoenix transaction, is down to about5 years -- 5.1 years land and lot supplies. So we think that's a dramatic one-year reduction in a 12-month period -- about a13-month period.


The Phoenix sale is pretty impressive given what's going on in that market. The second question is just more of an accountingquestion. Last quarter I think you had about $7 million of a benefit in the gross margins from selling homes of previously impairedcommunities. I was wondering if you could give that number for this quarter?







Right, this quarter, on the home sales gross margin line, we had $49 million flowback through from previous impairments. Andthen on the land sales line, we had $10 million flow back through in the fourth quarter.


Great. Thank you.

Operator

Your next question comes from Dan Oppenheim with Banc of America Securities.

Dan Oppenheim - Banc of America Securities - Analyst

Thanks very much. Was wondering if you can talk about your pricing and sales strategy. You talked about how you want tooutperform others and not let any buyers get away. Given the declines been reporting in orders and what we've seen in aggressivepricing, what is it that you're trying to do differently as you go into fiscal '08 to capture more net orders?


Well, clearly, one of the things that we're doing in a number of communities is we're continuing to mark our product to market.We think it's unrealistic to hold pricing, which is not competitive with the market. And in some of our communities, frankly, weare having the rare opportunity to raise a few prices. We'd like to get to the point where we can have more stability in our pricing,which we have not experienced in '08. But the real issue is, the market is the market. And we are continuing to drive down ourcosts across the board on development costs, on costs from our suppliers and costs from our vendors and costs from oursubcontractors so that we can offer a more competitive product. Everything has to reset.

The first thing that's reset, as you know, has been the sale -- or the sales price of a single family home. Now we're in the processof resetting all those costs. But it's unrealistic for us to continue to expect or to offer a product that's higher than what themarket's willing to pay.


Thanks. And if you can just talk also about -- I guess if you think about spec homes here and bringing down the spec inventoryenvironment, where the buyers are looking for spec homes, knowing they can get the best prices, what percentage of constructionis spec right now, what's your goal for next year?


Well we have a very limited spec start policy. And basically it's X number of specs per community. Frankly, we need to have, webelieve, in order to maximize our sales opportunities in the marketplace, a limited number of specs in each community, simplybecause there are people out there who have existing homes, who are marking those to market and closing on those homes,and then they are coming into our sales offices and desiring to move into a new home within a very short period of time, threeto six weeks. So therefore we'll continue to maintain limited spec inventory in all of our communities such that we can appealto those buyers.







Thanks very much.


Thank you.

Operator

Your next question comes from Nishu Sood with Deutsche Bank.

Nishu Sood - Deutsche Bank - Analyst

Thanks. Good morning, everyone. Nice job, considering the environment.


Thank you.


First question I wanted to ask was, in some of the harder-hit markets, you're beginning to see what you might call a limited oreven a no demand environment. Places like Sacramento, you're hearing about mothballing and price inelasticity. I wanted toask your thoughts on that. Specifically, how many of your markets, do you think, have kind of reached that kind of state andwhen you consider pricing versus volumes trade-off, how are you counseling your guys' on the ground and in your marketsthat are like that?


That's a great point and you're exactly right. Remembering back when we were criticized two or three years ago, about offeringdiscounts on inventory back in December '05, and we wish we still had that kind of pricing power as we did back in Decemberof '05. But the way we are countering this and are in the process of a day to day basis, division by division, subcontractor bysubcontractor, is that we have to drive down the cost of everything that we're buying. And we have to drive down the cost ofour SG&A. Because the only way to continue to meet the market and satisfy the buyer's desires is to have a lower cost structurethan anyone else in the industry. That's why we are extraordinarily proud, even though it is 30 basis points over our goal of our10% -- 10.3% SG&A. So it's just a -- it's a cost game right now. And I think the buyer going to continue to demand competitivepricing and the one that has the best cost structure is going to win.


And I know it's tough to quantify, but roughly how many of your markets -- I think you're in like what, 75, 80 markets. How manyof those do you think have reached that type of state?







Well, I would look at it more from the perspective of where our big markets are. And to be frank with you, it was the -- it's thehot markets, I think, that have reached that stage of price and elasticity. If I think Las Vegas is clearly there, I think California isclearly there, and I think Phoenix and Florida are getting closer to being there, but they're not yet there.


And even within those markets, Nishu, there are differences based on locations and if you're further away from the job centers,you're probably experiencing more price pressure in those communities than ones that are a little closer in. And price pointsare going to make some differences based on mortgage products that were previously available and what's available in themarket today. So, as Don said, we're working on costs, we're also restructuring at of our product to make sure what we're bringto market meets the market demand.


Okay. Great. And one other quick question on the land sales. What was the age of 20,000 lots that you sold in Phoenix? Andgenerally of your I think $150 million in land sales, how old was that land as well?


I would say the Phoenix project is a project that I believe we've owned for approximately three years and the other sales --


We don't have that data in front of us on all of the other sales, but it's scattered.


Okay, great. Thanks a lot.

Operator

Your next question comes from Joel Locker with FBN Securities.

Joel Locker - FBN Securities - Analyst

Hi, guys. Just wanted to get a count or if you have a breakdown of your own lots, how many were finished, how many wereunder development, and how many were raw? What is it 72% or 168,000 or so?


Yes, I think it's 72% -- 70%, 72% are owned currently.







We've got about 167,000 owned lots. And right here in front of us, so we don't have a total count. Our breakdown of finishedversus raw at this point.


Do you have any kind of ballpark figure, percentage-wise? Just trying to look at cash flow going into next year, if -- just basedon if you have a lot more developmental costs or depending if you choose to mothball or not to mothball and just trying to getan idea of what's raw and what's finished and what's --


You can rest assured that virtually the vast -- the vast majority of what we're going to be closing homes in on '08 are alreadyfinished, and we have -- we mentioned on our conference call our development spend projection range for '08 is $0.5 billionto $1 billion and we would be sorely disappointed if it weren't closer to the low end of that range. So we're going to be spendingvery, very little money on developing lots. Most all of you are lots for '08 closings are finished and developed.


Actually that dollar spend includes both land development and land purchases.


Even if it's raw land, we are slowing our development spend based on and pacing our lots based on, and pacing our lots, bringingour lots to market, based on what we expect we're going to need for sales.


I've got you. And impairment reversals going forward is a big -- you went from $7 million to $49 million or $59 million includingthe land sales. What do you expect on the impairment reversals in fiscal '08?


That's a hard number to predict, Joel. It really depends on where we close our homes and whether we're closing our homes inimpaired projects going forward. Given the cumulative environment of our impairments through June and now throughSeptember, I wouldn't expect it to be down below $10 million in any quarter going forward, but whether it will be around the$49 or higher or lower is a little difficult to predict.


Right. And your selling costs as a part of the $283 million SG&A, what was selling and what was G&A? If you have that breakdown.If you don't have it handy, I can follow-up after you call.


We're going to get you a ballpark number here, Joel.







Give us five seconds.


Yes.


Roughly, about 25% of our SG&A was selling costs during the year.


During the year or during the quarter?


I'm sorry, that was during the year. And, let me look, during the quarter, roughly 25% during the quarter as well.


Roughly 25%. All right. Thanks a lot.

Operator

Your next question comes from Ken Zener with Merrill Lynch.

Ken Zener - Merrill Lynch - Analyst

Good morning.


Good morning.


Given the lower, I think, than expected impairments this quarter, can you talk about how impairments that you had this quarterwere influenced by your last quarter's discussion with the auditors based upon kind of down pricing and better absorptionrates? Essentially, was like the 39% in orders consistent with that type of elasticity of demand, you would have expected withdown pricing. And if not, did your impairment approach with the auditors change this quarter relative to last quarter given theapparent lack of elasticity?







No, there was really no change in our approach from June to September. We still have a very cautious outlook on the industry,on our pricing prospects, and on our volume. And certainly, as we move through the quarter, that outlook that we had in Juneand as we assessed our projects in June, that certainly, to a large extent, was accurate. And so as we've looked at the projectsagain in September, we looked at a lot of the projects we had previously impaired and in many cases, we had anticipated thepricing that did occur and so as a result, if that was in-line with our previous assumptions, it did not need to be impaired again.

Of course, naturally, with the volume of impairments we've had here in the fourth quarter, we've had a number of projects thathad performed worse than we had projected in June, and so that's why they are impaired in September. But really the approachis very consistent from June to September. We remain very cautious on our pricing assumptions and our models. And we'llcontinue to do so.


Okay.


I think you can go back in the records and I think one thing is certain, is we've been very consistent in our outlook for the industryin '07 and we've continued that through the fourth quarter.


Do you have a new choice word, Don, for '08?


No. I thought I would save it for someone's conference to really --


Okay. And I guess my second question --


The media needs to be there.


Well, my second question, I'm trying to understand your own land position, which was essentially flat Q-to-Q at about 167,000lots versus 169,000 in 3Q, despite your closing nearly 12,000 units. So can you talk about what percent of closings of lots are ona -- do you take down [intrayear]. And if you deliver 12,000 units, we'll see the land position decline by that amount excludingany land sales?







One thing we're focused on in '08, and Stacey can give more color on this as she wishes, but our goal in '08 is to close as manyof our units on owned lots as we possibly can. Because our primary goal in our land -- and our land position is to pull ourdevelopment dollars out of the ground where we've already gotten finished lots. Our goal is to take care of Horton first andworry about the third party developers later.


One thing we should clarify, Ken, is when we state our owned lot position, that does not include lots on which we are constructinga home it. Includes finished lots or lots under development that we own, but we have not started a home under construction.So actually to reduce our lots owned, we need to start a home and -- because then it will move into our construction in progress.Since we're not starting many homes right now, we're purchasing very few as well. But since we're not starting many homes,our position hasn't moved much in many quarters.


Yes. And that's a good point. Because what we're trying to do is reduce our spec inventory so that we can start additional homes.


Okay. And, obviously, selling land like you did in Phoenix is going to be helpful to that. I guess, that deal, if you can expand onthe logic behind that. Because I think a lot of people given the -- while it's good you're selling the land and certainly at a profitrelative to what you bought it at in '04, I think it's kind of surprised people the amount of lots, certainly me, the amount of lotsthat roughly 23,000, which represented 50% of the southwest lot position, as I did the calculation. So it just seemed to be sucha unique deal. Could you explain kind of the logic given what appears to be roughly $3,000 a lot cost basis? Thank you.


Well, we don't want to expound upon it too much, because obviously we have some agreements with our buyers, but essentiallywe ended up with too many lots in that market. And there was -- we had a very successful project that was essentially aboutthe same number of lots that have north of there that we started seven years ago and became very, very profitable for us. Aswe looked at that market today, it was one of the more outlying markets in our core area in Phoenix and we just decided wehad enough lots in that market to get us through the next two to three years, and clearly we will be buyers of lots most likelyfrom the gentleman and the party to whom we sold the land.


I think you're right on one thing, Ken, it was a unique transaction, and it certainly a larger number of lots, but it was on a veryattractive land basis. And our intention would have been to sell off some piece of that land in the normal course of business.Because typically we would not have an individual community that was that size.


And just along those same line, I would be remiss if I didn't mention Gordon Jones and Tom Davis who were very instrumentalin consummating that transaction with the buyers. So thank you very much, gentlemen. Next question?






Operator

Your next question comes from Stephen Kim with Citigroup.

Stephen Kim - Citigroup - Analyst

Hey, guys. Wanted to first ask you sort of a conceptual question. Actually, yes, I guess a conceptual question. You guys just gaveearlier in the call here a development spend projection for 2008 of I think $500 million to $1 billion. I wanted to make sure Iunderstand what that would be comparable to in 2007.


Well, according to what we said is not only that development spend i.e., the water, the sewer lines, and the paving that's goinginto improving the lots, but it's also the closing --


Yes, the closing on lands and lots as well.


Right. Yes, great. I would imagine any ongoing fees, you've got to pay to keep options alive and whatnot. What was that figurein 2007, full year?


$2.5 billion.


Got it, great. Perfect. Okay. And then the second question I had relates to your work in process, what you called finished homesand construction in progress. Obviously, it came down nicely with a nice driver to your cash flow for the year and I think youindicated that you'd sort of felt that that line item might be a driver again as you go forward into '08, which makes sense. Myquestion is this, though, if you look at that number, which I think was $3.3 billion, as a percentage of your backlog value, thefigure was noticeably higher, I believe than what we'd seen in your previous quarters. And I guess I was curious as to whetheror not -- and obviously that's because your backlog value dropped pretty meaningfully. And I guess my question was whetheror not we would expect that figure, as a percentage of backlog value, to come more down in-line with where it's been over thelast, let's say, year or so, and maybe what drove the big increase in 4Q '07?


I think when you look at 4Q '07, there are a couple of things that come into play. Obviously, fourth quarter is our strongestdelivery, so you see the biggest drop in our backlog in a sequential quarter in the fourth quarter. The other thing is that ourspeculative inventory, as a percentage of our inventory is higher in the fourth quarter than it has been. And that's why we'vesaid, we went to work down both our absolute number of homes in inventory as well as our speculative homes in inventory.As our spec works back down toward our target of 35%, you should see the percentage of residential inventory compared toour backlog coming back in-line with where it's been historically.







Great. Yes, because those specs opt to carry a heavy dollar weight.


Well, they just carry a dollar weight that's not offset by anything in the backlog number.


Right, right. More particularly. Okay. Switching gears to your SG&A, what was obviously very good, your control is very goodthis quarter, and it has been for quite a long time, obviously. As I look ahead into the first quarter of next year, the way weforecast your SG&A, it looks like it's going to be quite a challenge here for you to keep your SG&A rate as a percentage of -- I usehome sale revenues, but it's not going to be that much of a difference between when you calculated. I have it sort of jumpingup to a level that we have never seen in the history of your company because of some relatively weak revenues. According tomy records, you've never generated an SG&A rate higher than 12%. Is it your expectation that you should be able to sort ofmaintain that track record and stay 12% or below in the first half of 2008?


Steve, as long as I've known you and as long as you've known Don Horton and me, I'm surprised at your question. But I'll answerit for you, because obviously you must have forgotten something about the both of us, and that is we clearly reduced our SG&Ain line with our closings. As you noticed, it dropped 22% and 22%, and we will continue to do that. We are, frankly, at this stage,waiting to see what type of spring selling season we have, to see if there's any Super Bowl party. We're we're well positionedto take advantage of it. To the extent that we're not, we will keep our SG&A very closely in line with where it has historicallybeen. And that is the way this company has operated and will continue to operate.

Operator

Your next question comes from David Goldberg with UBS.

David Goldberg - UBS - Analyst

Hi, how you doing? I was hoping we could start with the decline in unsold homes that are under construction or completed.Can you give us just an idea of what kind of price discounts you guys used to bring that down and what the profitability ofthose homes might look like, having been resold?


Say that again please, David.


Yes. So for the homes that were in progress or completed and unsole, that came down, if my calculations are right, from about13,000 to about 10,600. I think that's about right. And I'm just wondering what kind of price discounts you used to move thosehomes.







So basically the pricing differential between a spec home and a to-be-built home.


That's right. And also the profitability difference.


It's all over the map. Quite frankly, what we're looking at is we're looking at the age of the inventory of the finished spec andwe're trying to mark that to market. As well as when we do a build job, our to-be-built home, we are pricing that home, I wouldjust say, rough numbers, at least 300 basis points above where we have got the spec home for sale, largely because of the factthat if we are going to take the risk of building a to-be-built home for someone, we want the additional profit in there to justifythat. And we really would prefer to move the existing inventory home. So we're trying to price that to be built home high enoughthat if the buyer wants that on that specific lot, that's a good margin home for us as opposed to moving on an existing inventoryhome.


And then I guess my follow-up question has to do with how comfortable you guys are with the backlog right now. That everyonein the backlog is going to -- like if you weeded it out to make sure everything can get a loan and everyone can qualify formortgages at the current rate. And give me an idea of whether that's just flushed out.


Gee, if I told you I was comfortable, I think I would be in a different business. Because given -- tell me what the mortgage market'sgoing to be like over the course of the next quarter. To answer your question, I believe with what's in our backlog today, especiallyreflecting what happened in the fourth quarter because one of the things that drove our cancellation rates so high in the fourthquarter is that we did review our backlog, region by region and division by division, with one specific goal in mind. Do we havea buyer in our backlog who is qualified in a mortgage that doesn't exist anymore, or looks highly unlikely that they'll be able toqualify as the mortgage mark changes? So we scrubbed our backlog the best I think we've ever scrubbed it relative to themortgage instruments that are available and may not be available going forward. So while there are still cancellations to behad in our backlog, I think the vast majority of those clearly were taken as we cleansed it in the first quarter.


Maybe I could just sneak one more in here. I'm just thinking about free cash flow priorities. You guys are going to generate $1billion in cash flow from operations next year. Maybe what you're seeing in the market now in terms of maybe M&A or evenland sellers outside this big transaction you guys did, if you're seeing that free up a little bit in terms of cash, pricing from landsellers, or M&A from other builders?


Well, I would say to you that in terms of M&A from our perspective, i.e., us buying someone or some other major assets, that'scertainly not at the top of our list, but rather at the bottom of our list. We're still dealing with an adjusting market. I don't wantknow where land values are going to be three months from today, six months from today. And so as a result for us to go out in






the marketplace today and to purchase some large asset or some builder, I think the most difficult thing would be, what's thevalue of the asset that we're buying. So that's certainly not on the forefront of our minds. Our goal is completely to reduce ourland and lot inventory and to reduce our finished home inventory and to reduce our spec inventory and to get our costs morein-line with what the consumer is willing to pay for our product.


So you just use the cash to delever?


Absolutely. We are absolutely convinced of one thing. There's a motto written across all of our foreheads as we walk in thisoffice. The homebuilder strongest balance sheet wins this fight and we have and we will have the strongest balance sheet whenthis is all over with.


Okay. Thanks.


Thank you.

Operator

Your next question comes from Stephen East with Pali Capital.

Stephen East - Pali Capital - Analyst

Good morning, everyone. One last question on inventories and then hopefully we'll leave you all alone on it. Your specs inabsolute came down pretty nicely as a percentage of total actually went up and I know you all are trying to focus heavily ongetting that percentage back into the 30%. Can you do that? With your plans that you have right now in fiscal '08, can you dothat?


I think it's -- to answer your question directly, yes, I do believe we can do that. I think it's going to be a tough goal to achieve. Ithink one thing you have to remember, Stephen, that we did not disclose, and that is that we have 299 homes that have beencompleted and unsold for a period greater than a year. So we really don't have a significant aged inventory problem. Althoughwe do have more specs than we would like. That number should come down as we continue to price our build jobs moreexpensively than our specs.







Okay, all right. And if we look at the California and west orders this quarter, down pretty sharply, pricing down pretty sharplyin California. The drivers for you all given the relative underperformance for you all this those particular areas and and whatyour response is looking out into this quarter and into the selling season?


I would say in the west, in particular, we believe that any dollar that we don't put in the ground out there is a profit this year.And as a result, we are absolutely trying to decrease our investment dramatically in all of those markets out there as we speak,in terms of land acquisitions, lot acquisition, development spend, you name it. The California market, we made a lot of profit, alot of PTI during the good times, and obviously, if you look at our impairments, we've given back $.5 million of impairments sofar and that's disappointing to us, but it's a very challenged market. I would say to you that the biggest issue in California todayis there are a lot of people who want to own a home and there are no mortgages out there or very few mortgage out therewhich would permit someone to a buy a home in California today. So there's got to be a great reset in both cost, prices, as wellas some additional mortgage instruments to make that market come back.


Okay. And that sort of leads right into my next question. The news this morning with Freddie, the mortgage environment ingeneral that you're seeing, does the Freddie news cause you all consternation? Does it affect your business and sort of tailingonto that, the performance you've seen in your market since the end of September?


Well, let me address everything, other than post September, and answer your first two questions, yes and yes. It does impactour business. It does concern us, I'm of the opinion that the best thing that can happen to the financial institutions, includingFannie and Freddie are just exactly what the homebuilders have done. We've gone through and we've reset our basis and ourproperties through impairments, earnest money write-offs. The best thing, not that I'm an adviser to them, but the best thingthey can do is to deal with it all, get it all out of the way as quickly as possible so we can move on. And let's applaud our industry,if you look at all the builders in the home building industry, we've attempted to clean it up as quickly as we possibly can andthat's what they need to do. Therefore we will have a whole new parameter to start with and a whole new market to start with.


Okay. Do you think it creates -- what's going on with Freddie today, do you think it creates another round of tightening oflending standards and thus taking another group out of the market?


It could very well. It really could.


Okay. Thanks a lot.






Operator

Your next question comes from Timothy Jones with Wasserman and Associates.

Timothy Jones - Wasserman & Associates - Analyst

Hello, guys. Good morning. Couple questions. First, did you say that land sale (inaudible - technical difficulties)


You are really breaking up there. Say that again.


Just a second. I'm sorry. Can you hear me better.


Yes, sir, better.


Okay. On the 20 -- this is housekeeping, the 20,000 lots, did you say they generated $76 million of revenues?


About $70 million. Seven. Zero.


Seven. Zero. Okay. And you didn't have impairments in the -- given the fact you had a 45% margin in the land operations, didyou?


There was no impairment on that property --


Anything there, because you generated 45% margins in there.


To clarify, Tim, this sale occurred after fiscal year end. This occurred in the month of November.







Oh, it did? That will help the first quarter.


Yes.


That's nice to hear. Okay. Now, can you give me the quarterly increases in sales -- monthly increases in sales this quarter andthe cancellations, and maybe any comment on October?


Well, we -- I will tell you that our cancellation rate in each of the months of the fourth quarter increased sequentially, which ledto our 48% can rate total for the fourth quarter.


And that (inaudible - technical difficulties) in the backlog or what?


I would say that the -- I don't have that number before me, but a lot of our -- the increase in our can rate, up to 48% over theyear-ago period and especially over the third quarter, a lot of that was a function of our cans in our backlog.


Right.


The other thing is you've talked about being really working on your fliers and I know Don well enough to know this is true. Howmuch have you reduced your material cost and labor cost per square foot in the last year or so, in the last -- from the peak,whenever you want to say it?


We don't have an exact number on that, and it's going to vary from market to market. Certainly in places like California and LasVegas, it's been more substantial than it has been in Texas, because Texas is still a good solid market for us. But I think as a goodrange, what we've told people over the course of the year is that number is somewhere between 5% to 10% and probably closerto 10%.







That's including labor and everything?


Yes, sir.


Okay. And lastly, just one other question. Some -- I just want to comment on this. One of your competitors has said they're goingto build 200 homes in southern California and hold onto them. That obviously surprised me and you've just said that anythingyou can get out of California is good. Would you like to make any comment on the different tactic?


No, sir. Frankly, we're in the -- we're focused on taking care of our own inventory of houses and lots, and our goal is to try toreduce our number of homes in inventory, as well as most importantly pull our development dollars out of the ground bybuilding, selling, and closing houses on those developed lots.


Sneak one more -- the -- you said there was price in elasticity in southern California. Yet one of your major, major competitorssaid, if you can offer homes that you can get a conforming $417,000 loan that you can sell them quite rapidly in southernCalifornia. I would suspect that most of your product would fall into that category.


I would agree that most of our product would fall into that category. And I think, still, the major issue in California is the factthat you have consumers who have seen single family home prices decline rapidly over the next -- over the last 12 to 18 months,and one of the things that we're fighting along with mortgage, ill liquidity into the California market is frankly one of boostingback consumer's confidence. And the only way we're going to have the confidence in the consumer is to have some pricingstability until we reach a level of inventory where it's relative to the demand out there, I think that's going to be very difficultto achieve. So clearly in California, we need some help on the mortgage side or a lot of help on the mortgage side, but rightnow I think it's a combination of mortgage and consumer confidence.

Operator

Your next question comes from Alex [Barron] with Agency Trading Group.

Alex Barron - Agency Trading Group - Analyst

Hi. Good morning.


Good morning. How you?







Good, how are you?


Doing great.


Excellent. I wanted to ask you if you could talk about the impairments. How many communities you guys impaired this quarter?And also what the breakdown was beyond California?


Sure. We impaired 98 communities this quarter and just rough number, we had 58% in California. The next two regions, kindof in the ranking there as far as volume of impairment, our west region was -- had the second largest amount and the southeastregion had the third largest amount. Combined, that'd get the vast majority of the impairments this quarter.


And of those 98, how many were reimpairments?


23.


23, okay. I guess my second question, going back to the SG&A issue, I'm just trying to get a sense of how much of the SG&A isrelatively fixed versus how much is variable. And I guess, do you have a target for where, as a percent of revenues, that's goingto come in next year?


Our goal has always been to keep it at 10% or less, obviously, we're at 10.3%, 30 bips higher than our goal. But we expect in '08for it to be real close to that 10%.


The only thing I would add to that, Alex, it is going to be challenging to keep that at 10% in a declining revenue environment.And we've been very proactive throughout the year and we managed to bring that in only 30 basis points above our target.We're going to be working to see that again. A lot of our costs are variable. Over 50%, probably closer to 60% of our SG&A costsrelate to people. It's the actual salaries, commissions, bonuses, and then all the related benefit costs that we pay. So as we'vecontinued to adjust our organization size to the demand that we're seeing in the market, we will continue to impact a largepercentage of that SG&A number.







Got it. And any comment on the dividend? Any chance that's going to get cut to save some cash?


Our dividend stands as it is and it's something our Board of Directors reviews on a quarterly basis. Clearly, with our $1.36 billionof free cash flow in the past quarter and over $2 billion of free cash flow over the last 18 months -- 15 months, and our projectionof $1 billion of free cash flow for fiscal year '08 to the extent that we can continue to generate the free cash flow that we expectto, we'll review it on a quarter-by-quarter basis relative to our ability to achieve those free cash flows in '08, but certainly we didthat in '07 and for the past 15 months.


Thank you very much. Take care.

Operator

Your next question comes from Carl Reichardt with Wachovia.

Carl Reichardt - Wachovia Securities - Analyst

Good morning, guys. How are you?


We're doing great. Good morning.


When you choose your new word, please do it at my conference in February.


All right.


I have a question about -- if we look at your budgets for absorptions over the course of fiscal '08, I don't know what you baseyour impairment analysis on, what's your guess as to with a your store count will decline if it will in '08 versus '07?


We expect it certainly to decline, I mean, probably in the 10% range, roughly. It's a little bit difficult to predict. It really dependson how quickly we sell through current communities, but we expect it certainly to come down and 10% wouldn't surprise us.







And that would be faster '07 to '06, correct?


That's about in line. We're roughly in the 10% range this year.


Okay. Great. And, Don, can you give us update on geographic markets where you've either substantially consolidated divisionaloperations or outright pulled out of?


I don't -- off the top of our heads -- specifically, we have not pulled out of any major markets that we were in. We have consolidatedoperations clearly in California. We are consolidating operations in Florida and those are really our primary areas where we haveconsolidated our operations significantly. And Stacey just mentioned Denver. In Denver we're one divisions versus three divisions.We've consolidated those three areas the most.


Okay. And then one last question. And I know you're not out there actually looking for dirt, but from a land price perspective,could you comment on what you might be seeing from especially the third party developers? And are you starting to see anyof the banks that have taken stuff back or developers start to ask you do fee deals with them, obviously, where they're hangingonto the dirt, but you're actually developing it out for a fee? Has any of that started to accelerate?


No fee. The approach we've been approached with, we've seen very little, if any, come from the banks yet. The only thing I cansay about the third party developers is they're too high in all their prices. Clearly, if the homebuilders are taking the impairmentsthat they're taking, their going to have to decrease their prices significantly, essentially to us in '08, because I can tell you theyneed to be impaired just as much as we've been impaired.


Okay. I appreciate that. Thanks so much, guys.

Operator

Your next question comes from Jim [Mollston] with GMP Securities.

Jim Mollston - GMP Securities - Analyst

Thanks. Good morning.







Good morning, Jim.


Was wondering, Don, could you kind of go through as you discussed what you've acquired in land in '07 and then your plansfor '08, where that is? I assume you've made material changes in where you're following through and acquiring land or lookingat new purchases.


Well, from -- the primarily place that our land acquisition is in option contracts where we're closing on lots to either build jobor specs in a specific community. As far as other land -- raw land purchases, I can tell you that we have in plans to acquire anypieces of raw land. And very little of any occurred in '07 to the extent that we did close a couple parcels in '07, I can tell you thatwe've already turned those around and sold them off to other people. So we just don't have any appetite to speak of of in anymarket today for new land parcels. What we're doing simply is closing lots and option contracts to build homes.


Okay. And I assume a lot of that, that dropped options were in certain locations and executed options were in others. Is that --there's a big difference in the geography, is that fair to say?


Yes. Very definitely.


Okay. Then second question, as you noted earlier, I think the number was like $2.6 billion of inventory for impairments andimpaired $900 million of it roughly 30%. What did you find in the large chunk there that you examined, but found no need forimpairment, what were the characteristics of not requiring it? Was it a geography again or just where you've been able lowercosts that allowed it to stay profitable or some combination?


The primary factor is the margin that we are seeing currently in the project and our prospects for margin going forward basedon what we expect to see in pricing in that project. At this point, based on what we can see, it is still really above the line whereit would not need to be impaired, similar to anything that we had impaired in previous quarters.


Okay. And did geography have a lot to do with that?







Geography certainly comes into play. One indicator that puts the project on the list is its geography relative to perhaps otherprojects that have been impaired. So that would be a factor. But the primary factor is how we expect that project itself to performbased on when we're seeing and what we expect in the short term.


The geography is pretty much limited to -- I would call it four states. It's really still California, still Arizona, primarily, Phoenix,still Florida, and also Las Vegas. So if you look at, as I've said before, the Homebuilding industry, everyone talked about the greatramp-up in the homebuilding industry and the appreciation in all of these markets. Really we had three or four hot states and-- where we've got most of our impairments and our future impairments are still going to be, I believe, in those four or five hotstates.


Got it. Alright. Thanks.

Operator

Your next question comes from Larry Taylor with Credit Suisse.

Larry Taylor - Credit Suisse - Analyst

Good morning. Thank you.


Good morning, Larry.


A number of my questions have been answered, but I wonder if you could provide a little more color on the use of cash flowgiven that you've already made substantial progress repaying the bank debt and have a limited number of maturities goingforward over the next 18 months?


First thing, Larry, we had a balance of $150 million remaining on our revolver at the end of the year, first use of cash will be togo ahead and reduce that. We also have $215 million of senior notes that mature in December that we'll be redeeming. Andthen past that, we will basically look at opportunistic ways to repurchase our debt. We may also choose to run with more cashon the balance sheet than we have historically, simply until we see market conditions stabilize a little bit, we want to make surethat we have sufficient liquidity.







Okay, great. That's helpful. And then I wonder if you'd comment, as you look into 2008 and think about the competitive landscape.And I realize this is sort of a general question, but how you anticipate pricing strategies to involve -- to evolve from some ofyour competitors? We've seen price cuts, we've seen a pause in price cuts in some markets, and I guess just trying to get somebenefit from your view of how things may unfold in 2008 from a pricing standpoint?


I believe '08 is going to be considerably more competitive than '07, both in terms of volume as well as pricing. And we areprepared to meet the market in each one of our markets and we think that it's going to be a little more painful for us in '08 thanit was in '07 in terms of trying to meet that limited market, because the market is -- there's less volume and the volume that isthere is demanding better pricing, which is coupled with our focus decreasing our cost as fast as we possibly can.


And another thing I'd throw in on top of that is just the continued changes and tightening that we're seeing in the mortgagemarket, tightening of the lending standards and changes in the products that are available tour buyers that allow them to getinto houses.


Great. That's very helpful. Thank you.

Operator

Your next question comes from Mike Marburg with Ramsey.

Mike Marburg - Ramsey Asset Management - Analyst

Hi, guys. Two questions. One around the gross margin. So as you look over the past four quarters at the gross margin change,it's tracked with some difference, but it's tracked somewhat with a decline in average selling prices. And I guess, starting nextquarter, we ought to really start to see the filter through or the flowthrough of the big declines in the last two quarters on ASPsper sold home, which we've not seen yet. The close -- the ASPs on closed homes have been pretty good, all things consideredin this environment. So do you expect the gross margins to really start to change, take a step function change early next year,or is -- are you able to really make up for that with these cost-cutting efforts, such that it would be different than with a waveseen in the last four quarters?


Realistically speaking, I believe our gross margins will come under continued pressure in '08. I'm not certain that we're goingto be able to offset those -- that decrease in gross margins 100% by our SG&A cuts, as you can tell. But clearly we anticipate '08to be more difficult than '07, and we've taken the proactive steps to be prepared for that.







One thing we should clarify, is in the sales -- the ASP in the current quarter's sales, product mix did impact -- especially productmix did impact our ASP quite a bit while our net sales order ASP did decline by 15%, our ASP on our gross sales orders onlydeclined 8%, because we did have more cancellations coming out of the higher products as the jumbo market was in flux, butcertainly an 8% decline, we do expect that to impact margins going forward.


But it's 8% versus 15% on one of the factors that we continue to work on is how do we hold those units in backlog and preventthem from canning, even if it takes us a little bit more negotiation to hold those in, because you can see the difference between8% and 15%. We've got quite a bit of leeway to work with the buyers in backlog to hold them in backlog to get them to close.


Yes, okay, thank you. And then as it relates to SG&A comments we were making earlier about 25% in selling. So for this year,that would put just on a quarterly basis your G&A costs at around $200 million, the low $200 millions per quarter. So if nextquarter we have a big drop in home building revenues, which I think is to be expected given the recent trends, the G&A -- andyou assume roughly 25% stays for selling. The G&A needs to go down to about $150 million from say $210 million per quarter.Are you prepared to make such a dramatic change in G&A in one quarter? It did happen last quarter, in the first quarter of lastyear. You went from maybe $300 million down to somewhere in the mid to $200 millions per quarter using the ratio you'vegiven us, but are you prepared to do that again?


Yes, we are. I'm not sure that we'll get it all done in the first quarter or all in the second quarter. What we are waiting for, eventhough we're lean today, we're waiting to see what happens in terms of the spring selling season, specifically, Super Bowl inFebruary of calendar year '08. We are as lean as we can possibly get right now in anticipation of what we think we're going todo. We've run the numbers based upon how many units we believe we will close in '08 and the numbers we're running basedupon what we believe we can close in '08, our SG&A is close to being in line where we want it to be. To the extent the numberof units that we think we can close are eroded, then we are prepared, yes, sir, to make the SG&A cuts, just as we've done overthe past 24 months.


Thank you very much.

Operator

Your next question comes from Susan Berliner with Bear, Stearns.

Susan Berliner - Bear, Stearns & Co. - Analyst

Good morning. Just two quick questions. One is, I was wondering if you could talk about which are your best markets rightnow?







Boy, that's a limited list today. To be quite frank with you, I still believe that California -- excuse me, what am I thinking? I thoughtyou asked a different question. Clearly, Texas continues to be a very good market for us. It's weakened some in '07 and weexpect it to weaken some in '08. But all the markets in Texas, from Dallas to Austin to Houston and to a lesser extent, San Antonio,are all good markets for us. Our acquisition in Baton Rouge, Louisiana, continues to perform very well for us. The Chicago market,we had a very good year in Chicago. We anticipate it to be a softer market in Chicago next year. But it will be still a good solidyear for us in Chicago. If you take a look at the coastal Carolinas and even the interior parts of Carolinas, where you're talkingabout Raleigh and Charlotte, we expect those to be good markets for us in '08. I believe the rest of the markets are going tocontinue to be as marginal as they were in '07 or even to decline some in '08.


And is that true for Atlanta as well?


I think Atlanta is just a -- it's pretty much a flat market. It's a great market for us. We get good sales and closings in Atlanta. Butit's just -- it's not as active as what it once was and it's a very competitive market that's influenced largely by a large number ofsmall and medium-sized builders, who we don't wish any ill will, but during this downturn we hope they go away because itwill get back into the larger builders who are working for a higher profit than the small or medium-sized builders in Atlanta.


Then my last question is, can you just talk about your philosophy and what kind of levels that you're giving nor incentives versusactual price declines?


Well, in terms of the incentives, where we are, it's out of one pocket in the other pocket. Frankly, we've tried to preserve as muchas our sales prices as we possibly can in our communities and offer incentives as opposed to marking to market permanentlyvis-a-vis the sales price. But, clearly, whatever it takes to get the market what's already produced and available sold and clearthe market with that, we're willing to do that with both price incentives -- price cut as well as incentives.


Great. Thank you very much.

Operator

Your next question comes from Bob Thompson with Advantus Capital.

Bob Thompson - Advantus Capital Management, Inc. - Analyst

Hi, guys. Going back to that, what were the average incentives and discounts in the fourth quarter? Do you give that amount?






Documents

Q4 2007 D.R. Horton Earnings Conference Call on Nov. 20. 2007 / … · 2007-11-20 · to the D.R. Horton, Inc. America's Builder, the largest homebuilder in the United States 2007