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Real Estate HOW WE DID IN 2007 We report single-family unit statistics for our Real Estate business segment in Our Business/What We Do/Real Estate. Here is a comparison of net sales and revenues and contribution to earnings for the last three years: Net Sales and Revenues and Contribution to Earnings for Real Estate  Key trends from our single-family operations – including net sales and revenues, homes closed and average sales price – affected our Real Estate net sales and revenues and contribution to earnings. Here is a comparison of certain key items for the last three years: Key Data From Single-Family Operations  The housing market continued to deteriorate during 2007, particularly in three of our key geographies – Southern California, Nevada and Arizona. For the Real Estate segment as a whole: • Our total buyer traffic decreased 22 percent, which resulted in a 9 percent decrease in sales (orders). • Substantial use of incentives and discounts by our competitors has adversely affected our pricing strategy and margins. • Our contract cancellation rate was 26 percent for the year, but increased to 40 percent in the fourth quarter. COMPARING 2007 WITH 2006 In 2007: • Net sales and revenues decreased $976 million, or 29 percent. • Contribution to earnings decreased $519 million, or 72 percent. Net Sales and Revenues Net sales and revenues decreased primarily due to the following: • Single-family revenues decreased by 30 percent or $872 million. This includes:
Contribution to Earnings Contribution to earnings, excluding impairments discussed below decreased in 2007 primarily due to the following: • Earnings from single-family activities decreased by $376 million, or 45 percent. The decrease was due to lower sales prices and higher land, construction and development costs. Single-family activity includes net sales less cost of goods sold. • Other income items decreased approximately $76 million due to lower partnership and investment income, fewer investments, and charges taken against residential related investments. Offsetting the decrease was: • General and administrative costs decreased $25 million from 2006, primarily due to lower incentive compensation. Impairments and Pre-Acquisition Cost Write-Offs We continually monitor our assets for potential impairment, particularly in light of the current market conditions. Additionally, we control some land through deposits with land sellers that defer the payment of the full acquisition price until certain entitlements are obtained. We also control some land through structured options offered by land sellers. In 2007, we recorded $128 million in impairments of real estate projects and intangible assets. This was a significant increase in impairments from the previous year due to the challenging market conditions for selling new homes and the inability for many home buyers to secure financing due to the changing mortgage market and tightening credit standards. In 2006, we recorded $36 million in impairments of real estate projects. COMPARING 2006 WITH 2005 In 2006: • Net sales and revenues improved $420 million, or 14 percent. • Contribution to earnings decreased $11 million, or 1 percent. • The market changed in key geographies with the following results:
Net Sales and Revenues Net sales and revenues increased primarily due to the following: • a 10 percent increase in single-family revenues, bringing total single-family revenues to nearly $3.0 billion, or 88 percent of total revenues for this segment; • increases in average selling prices in all of our markets except Las Vegas – contributing $175 million to the increase in revenue; • increases in single-family home closings of 3 percent, resulting in a total of 5,836 single-family home closings in 2006; • increased revenue from land and lot sales – up $127 million from 2005 levels; and • the sale of an apartment building late in 2006 for $33 million. Contribution to Earnings Contribution to earnings decreased primarily due to the following: • Single-family margins decreased by $101 million, or six percentage points, due to higher land, construction and development costs. Each of our markets experienced declines in single-family margins except the Puget Sound region of Washington and Houston, Texas. • Selling, general and administrative costs increased, primarily due to market-related increases in selling costs and benefit-related costs equal to 10.3 percent of single-family revenues in 2006 compared with 9.6 percent in 2005. Offsetting these decreases were: • increased margins from land and lot activity – up $92 million from 2005 levels; and • a gain on the sale of an apartment building – $28 million in 2006. Impairments and Pre-Acquisition Cost Write-Offs Charges for 2006 and 2005 were as follows: • In 2006, we recorded impairments of assets in a number of projects for which management’s most likely course of action included a combination of incentive increases, selling price reductions, and sales incentives to improve sales velocities. These actions caused the carrying value of the projects to exceed the sum of the undiscounted cash flows for the projects. Accordingly, we discounted the expected future cash flows of these projects and recorded impairments totaling $36 million in 2006. In 2005, we recognized a $33 million impairment on a parcel of land intended for development when it was unlikely development would occur in the near future. • In 2006, we wrote off $14 million in costs associated with option deposits and other pre-acquisition costs related to parcels that we decided not to acquire. In 2005, we wrote off $1 million of option deposits and pre-acquisition costs. OUR OUTLOOK As of December 30, 2007, we have a backlog of 1,224 single-family homes sold but not closed compared with 1,499 units in backlog as of December 31, 2006. Our backlog represents approximately three months of single-family sales. We expect a loss from the Real Estate segment in the first quarter of 2008 because of difficult market conditions for selling new homes, a seasonal reduction in single-family closings and lower single-family margins due to excess home inventories and the impact of competitor price discounts and sales incentives. We do not anticipate any significant land or lot sales in the first quarter of 2008. |