Summary of AVATAR HOLDINGS INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
In the preparation of our financial statements, we apply United States generally accepted accounting principles. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. For a description of our accounting policies, refer to Avatar Holdings Inc.'s 2008 Annual Report on Form 10-K.
Certain statements discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: the continuing decline in value and the instability of the financial markets; disruption of the credit markets and reduced availability and more stringent financing requirements for commercial and residential mortgages of all types; the number of investor and speculator resale homes for sale and homes in foreclosure in our communities and in the geographic areas in which we develop and sell homes; the increasing level of unemployment; the decline in net worth and/or of income of potential buyers; the decline in consumer confidence; the successful implementation of Avatar's business strategy; shifts in demographic trends affecting demand for active adult and primary housing; the level of immigration and migration into the areas in which we conduct real estate activities; Avatar's access to financing; geopolitical risks; changes in, or the failure or inability to comply with, government regulations; and other factors as are described in Avatar's filings with the Securities and Exchange Commission, including under the caption "Risk Factors" included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Active adult homes are intended for occupancy by at least one person 55 years or older.
EXECUTIVE SUMMARY
We are engaged in the business of real estate operations in Florida and Arizona. Our residential community development activities have been adversely affected in both markets, bringing development of our active adult and primary residential communities to their lowest level in several years. We also engage in other real estate activities, such as the operation of amenities, the sale for third-party development of commercial and industrial land and the operation of a title insurance agency, which activities have also been adversely affected by the current economic downturn.
Our primary business strategy continues to be the development of lifestyle communities, including active adult and primary residential communities, as well as the development and construction of housing on scattered lots. However, due to the significant decline in the economy, we have increased our focus on maintaining the integrity of our balance sheet through preservation of capital, sustaining liquidity and reduction of overhead. Our development activities will be minimal as we work through the negative impacts on the homebuilding industry. We continue to evaluate the economic feasibility of other real estate activities or unrelated businesses.
While we have curtailed our homebuilding operations, our business is still capital intensive and requires expenditures for land and infrastructure development, housing construction, and working capital, as well as potential development opportunities.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued EXECUTIVE SUMMARY - continued
During the first quarter of 2009, our homebuilding results reflect the difficult conditions in our Florida and Arizona housing markets characterized by record levels of new and existing homes available for sale, reduced affordability and diminished buyer confidence. The number of foreclosure sales as well as investor-owned units for sale, the tightening of mortgage underwriting standards, the number of foreclosures and pending foreclosures, the availability of significant incentives, the difficulty of potential purchasers in selling their existing homes at prices they are willing to accept and the significant amount of standing inventory continue to adversely affect both the number of homes we are able to sell and the prices at which we are able to sell them. As a result, our communities continue to experience low traffic, significant cancellations, high incentives, low margins, and continued high delinquencies on homeowner association and club membership dues. Our profits on the sale of homes continue to decline as we offer lower prices and higher discounts to meet competitive pricing and declining demand. During the first quarter of 2009, most of our sales contracts have been signed at selling prices that have resulted or will result in losses upon closing when factoring in operating costs such as sales and marketing and divisional overhead. During the first quarter of 2009, we recorded impairment charges of $430 for housing communities relating to homes completed or under construction. We believe that housing market conditions will continue to be difficult and may deteriorate further during 2009. Demand for, and values of, commercial, industrial and other land has decreased significantly.
While the level and duration of the downturn cannot currently be predicted, we anticipate that these conditions will continue to have an adverse effect on our operations during 2009. We anticipate such operating losses for 2009 will be greater than such losses incurred during 2008. We believe that we have sufficient available cash to fund these losses for 2009.
We have taken steps to decrease operating expenses including the consolidation of field operations and a reduction of staff. Since December 31, 2005, we reduced our headcount by 60% to 232 full-time and part-time employees
(almost half of whom are support staff for amenity operations and maintenance)
from 585 full-time and part-time employees.
We continue to manage Avatar and its assets for the long-term benefit of our shareholders. We remain focused on maintaining sufficient liquidity. We continue to carefully manage our inventory levels through curtailing land development, reducing home starts and reducing prices of completed homes. Our strategy also includes the monetization of commercial and industrial land from our holdings, and the possible sale of certain residential land to bring forward future cash flows from what would otherwise constitute long-term residential developments.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued
RESULTS OF OPERATIONS
   The following table provides a comparison of certain financial data related
to our operations for the three months ended March 31, 2009 and 2008:

                                                              Three Months
                                                            2009         2008

        Operating income (loss):
        Primary residential
        Revenues                                         $  5,536     $  9,805
        Expenses                                            7,434       12,071

        Segment operating loss                             (1,898 )     (2,266 )

        Active adult communities
        Revenues                                            6,198       11,625
        Expenses                                            7,630       11,648

        Segment operating loss                             (1,432 )        (23 )

        Commercial and industrial and other land sales
        Revenues                                            1,825        7,428
        Expenses                                               47          358

        Segment operating income                            1,778        7,070

        Other operations
        Revenues                                              228          562
        Expenses                                              217          477

        Segment operating income                               11           85


        Operating income (loss)                            (1,541 )      4,866

        Unallocated income (expenses):
        Interest income                                       199        1,014
        Gain on repurchase of 4.50% Notes                   1,365            -
        Equity loss from unconsolidated entities              (62 )        (49 )
        General and administrative expenses                (4,667 )     (5,137 )
        Interest expense                                   (1,837 )       (527 )
        Other real estate expenses                         (2,563 )     (1,562 )
        Impairment of the Poinciana Parkway                  (318 )          -

        Loss before income taxes                           (9,424 )     (1,395 )
        Income tax benefit                                    830          523

        Net loss                                         $ (8,594 )   $   (872 )

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued
RESULTS OF OPERATIONS - continued
   Data from closings for the single-family primary residential and active adult
homebuilding segments for the three months ended March 31, 2009 and 2008 is
summarized as follows:

                                             Number of                  Average Price
     For the three months ended March 31,      Units       Revenues        Per Unit

     2009
     Primary residential                           22     $  4,684       $      213
     Active adult communities                      12        3,071       $      256

     Total                                         34     $  7,755       $      228


     2008
     Primary residential                           36     $  9,309       $      259
     Active adult communities                      29        8,168       $      282

     Total                                         65     $ 17,477       $      269

Data from contracts signed for the single-family primary residential and active adult homebuilding segments for the three months ended March 31, 2009 and 2008 is summarized as follows:

                                        Gross Number                           Contracts                          Average
                                        of Contracts                         Signed, Net of                      Price Per
For the three months ended March 31,       Signed         Cancellations      Cancellations      Dollar Value       Unit

2009
Primary residential                            48                  9                    39      $     6,951       $   178
Active adult communities                       23                  5                    18            3,387       $   188

Total                                          71                 14                    57      $    10,338       $   181


2008
Primary residential                            57                 21                    36      $     9,136       $   254
Active adult communities                       36                 19                    17            3,137       $   185

Total                                          93                 40                    53      $    12,273       $   232

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued
RESULTS OF OPERATIONS - continued
   Backlog for the single-family primary residential and active adult
homebuilding segments as of March 31, 2009 and 2008 is summarized as follows:

                                       Number of      Dollar      Average Price
           As of March 31,               Units        Volume         Per Unit

           2009
           Primary residential               33        6,868       $      208
           Active adult communities          46       11,793       $      256

           Total                             79     $ 18,661       $      236


           2008
           Primary residential               72     $ 20,888       $      290
           Active adult communities          63       19,038       $      302

           Total                            135     $ 39,926       $      296

The number of net housing contracts signed during the three months ended March 31, 2009 compared to the same period in 2008 increased 7.5%, however the dollar value of housing contracts signed declined by 15.8%. The decline in the dollar value of housing contracts signed for the three months ended March 31, 2009 continues to reflect the weak market for new residences in the geographic areas where our communities are located. Our communities are located in areas of Florida and Arizona where there is an excess of units for sale, including foreclosures and assets being sold by lenders, and an increasing use of various sales incentives by residential builders in our markets, including Avatar. During the three months ended March 31, 2009, cancellations of previously signed contracts totaled 14 compared to 40 during the three months ended March 31, 2008. As a percentage of the gross number of contracts signed, this represents 20% and 43%, respectively.
As of March 31, 2009, our inventory of unsold (speculative) homes, both completed and under construction, was 181 units compared to 233 units as of December 31, 2008. As of March 31, 2009, approximately 85% of unsold homes were completed compared to approximately 88% as of December 31, 2008.
During the three months ended March 31, 2009 compared to the three months ended March 31, 2008, the number of homes closed decreased by 47.7%, and the related revenues decreased by 55.6%. We anticipate that we will close in excess of 80% of the homes in backlog as of March 31, 2009 during the subsequent 12-month period, subject to cancellations by purchasers prior to scheduled delivery dates. We do not anticipate a meaningful improvement in our markets in the near term.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued RESULTS OF OPERATIONS - continued
Net loss for the three months ended March 31, 2009 and 2008 was ($8,594) or ($0.99) per basic and diluted share and ($872) or ($0.10) per basic and diluted share, respectively. The increase in net loss for the three months ended March 31, 2009 compared to the same period in 2008 was primarily due to decreased pre-tax profits from commercial and industrial and other land sales as well as increased losses from our active adult operations.
Revenues from primary residential operations decreased $4,269 or 43.5% for the three months ended March 31, 2009 compared to the same period in 2008. Expenses from primary residential operations decreased $4,637 or 38.4% for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in revenues is primarily attributable to decreased closings and average sales prices in our primary residential homebuilding communities. The decrease in expenses is attributable to lower volume of closings. Also contributing to the loss from primary residential operations for the three months ended March 31, 2009 are impairment losses of approximately $373 from homes completed or under construction. The average sales price on closings from primary residential homebuilding operations for the three months ended March 31, 2009 was $213 compared to $259 for the same period in 2008. The average contribution margin (excluding impairment charges) on closings from primary residential homebuilding operations for the three months ended March 31, 2009 was approximately 8% compared to approximately 13% for the same period in 2008. Included in the results from primary residential operations are divisional overhead not specifically allocated to specific communities and our amenity operations. We have been experiencing increased defaults in payments of club dues for our amenities. We have also incurred higher expenditures to fund homeowner association operating deficits.
Revenues from active adult operations decreased $5,427 or 46.7% for the three months ended March 31, 2009 compared to the same period in 2008. Expenses from active adult operations decreased $4,018 or 34.5% for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in revenues is primarily attributable to decreased closings and average sales prices. The decrease in expenses is attributable to lower volume of closings. Also contributing to the loss from our active adult operations for the three months ended March 31, 2009 are impairment losses of approximately $73 from homes completed or under construction. The average sales price on closings from active adult homebuilding operations for the three months ended March 31, 2009 was $256 compared to $282 for the same period in 2008. The average contribution margin (excluding impairment charges) on closings from active adult homebuilding operations for the three months ended March 31, 2009 was approximately 19% compared to approximately 35% for the same period in 2008. Included in the results from active adult operations are divisional overhead not specifically allocated to specific communities and our amenity operations. We have been experiencing increased defaults in payments of club dues for our amenities. We have also incurred higher expenditures to fund homeowner association operating deficits.
The amount and types of commercial and industrial and other land sold vary from year to year depending upon demand, ensuing negotiations and the timing of the closings of these sales. Revenues from commercial and industrial and other land sales decreased $5,603 for the three months ended March 31, 2009 compared to the same period in 2008. During the three months ended March 31, 2009, pre-tax profits from sales of commercial, industrial and other land were $1,778 on revenues of $1,825. Expenses from commercial and industrial and other land sales decreased $311 for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in expenses is attributable to lower volume of closings of commercial and industrial and other land sales.
For the three months ended March 31, 2009, pre-tax profits from commercial and industrial land were $1,758 on aggregate revenues of $1,785. For the three months ended March 31, 2009, pre-tax profits from other land sales were $20 on aggregate revenues of $40.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued RESULTS OF OPERATIONS - continued
During the three months ended March 31, 2008, pre-tax profits from sales of commercial, industrial and other land were $7,070 on revenues of $7,428. For the three months ended March 31, 2008, pre-tax profits from commercial and industrial land were $1,182 on aggregate revenues of $1,428. On March 31, 2008, we closed on the sale of the stock of one of our wholly-owned subsidiaries, the sole asset of which was land leased to a third-party that generated revenues to Avatar of approximately $600 per annum. Therefore, this sale is classified for financial statement purposes as a sale of other land. Pre-tax profits on the sale were $5,888 on aggregate revenues of $6,000.
Revenues from other operations decreased $334 or 59.4% for the three months ended March 31, 2009 compared to the same period in 2008. Expenses from other operations decreased $260 or 54.5% for the three months ended March 31, 2009 compared to the same period in 2008. The decreases in revenues and expenses are primarily attributable to decreased operating results from our title insurance agency operations.
Interest income decreased $815 or 80.4% for the three months ended March 31, 2009 compared to the same period in 2008. The decrease was primarily attributable to decreased interest rates earned on our cash and cash equivalents during 2009 as compared to 2008.
During the three months ended March 31, 2009, we repurchased $7,500 principal amount of the 4.50% Notes for approximately $6,038 including accrued interest. This repurchase resulted in a pre-tax gain during the first quarter of 2009 of approximately $1,365 which is included in Other Revenues in the consolidated statements of operations for the three months ended March 31, 2009 including the write-off of approximately $63 of deferred finance costs.
General and administrative expenses decreased $470 or 9.1% for the three months ended March 31, 2009 compared to the same period in 2008. The decrease was primarily due to decreases in compensation expense and share-based compensation expense.
Interest expense increased $1,310 for the three months ended March 31, 2009 compared to the same period in 2008. The increase in interest expense is primarily attributable to the decrease in the amount of interest expense capitalized due to decreases in development and construction activities in our various projects.
Other real estate expenses, net, represented by real estate taxes, property maintenance and miscellaneous expenses not allocable to specific operations, increased by $1,001 or 64.1% for the three months ended March 31, 2009 compared to the same period in 2008. The increase is primarily attributable to the increase in charges related to the required utilities improvements of more than 8,000 residential homesites in Poinciana and Rio Rico substantially sold prior to the termination of the retail homesite sales programs in 1996. During the three months ended March 31, 2009 and 2008, we recognized charges of $545 and $0, respectively. These charges were based on third-party engineering evaluations. Future increases or decreases of costs for construction, material and labor as well as other land development and utilities infrastructure costs may have a significant effect on the estimated development liability. Also contributing to the increase in other real estate expenses for the three months ended March 31, 2009 are non-capitalizable expenditures of $341 related to the Poinciana Parkway.
We reviewed the recoverability of the carrying value of the Poinciana Parkway as of March 31, 2009 in accordance with SFAS No. 144. Based on our review, we determined the estimated future undiscounted cash flows of the Poinciana Parkway were less than its carrying value. Therefore, we have reduced the carrying value of the Poinciana Parkway as of March 31, 2009 to the estimated fair value of $15,732 and recognized an impairment loss of $318 for the three months ended March 31, 2009 which is due to cumulative additional capitalized interest allocated to the Poinciana Parkway upon adoption of FSP No. 14-1. During the fiscal year 2008 we recorded impairment charges of $30,228.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands except share and per share data) - continued RESULTS OF OPERATIONS - continued
Income tax benefit was provided for at an effective tax rate of 8.8% for the three months ended March 31, 2009 compared to 37.5% for the three months ended March 31, 2008. The income tax benefit of $830 for the three months ended was due to an adjustment to reduce the valuation allowance to reflect the tax effect of certain restricted stock compensation expense for which the tax deduction was taken in 2008 and is also reflected as a decrease in additional paid-in capital. SFAS No. 109 requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, we review the need to establish valuation allowances for deferred tax assets based on the SFAS No. 109 more-likely-than-not realization threshold. As a result of our net loss during the three months ended March 31, 2009, we recorded a valuation allowance for the deferred tax assets generated during the three months ended March 31, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Our primary business activities are capital intensive in nature. Significant capital resources are required to finance planned primary residential and active adult communities, homebuilding construction in process, community infrastructure, selling expenses, new projects and working capital needs, including funding of debt service requirements, operating deficits and the carrying costs of land.
With the continuing deterioration in the residential land and housing values in Florida and Arizona, we are focused on maintaining sufficient liquidity. As of March 31, 2009, the amount of cash and cash equivalents available totaled $172,430. During the three months ended March 31, 2009, we spent $2,834 to fund operating deficits. As of March 31, 2009, we had borrowings of $55,975 outstanding under the Amended Unsecured Credit Facility.
Our operating cash flows fluctuate relative to the status of development within existing communities, expenditures for land, new developments or other real estate activities, and sales of various homebuilding product lines within those communities and other developments.
For the three months ended March 31, 2009, net cash used in operating activities amounted to $2,834, primarily to fund our operating losses. Net cash used in investing activities amounted to $107 as a result of expenditures of $77 for investments in property and equipment, expenditures of $7 on the Poinciana Parkway and investment in unconsolidated entities of $23. Net cash used by financing activities of $25 was payment of principal under the Amended Unsecured Credit Facility.
For the three months ended March 31, 2008, net cash used in operating activities amounted to $5,783, primarily as a result of the increase in land and other inventories of $3,930 and the decrease in accounts payable and accrued liabilities of $1,622. Net cash used in investing activities amounted to $12,041 as a result of expenditures of $817 for investments in property and equipment primarily for amenities, and expenditures of $11,210 on the Poinciana Parkway. Net cash used by financing activities of $15,547 resulted from the payment of $15,765 in real estate debt and $52 for withholding taxes related to earnings . . .