霍頓房屋 (DHI) 2004 Q3 法說會逐字稿

Good morning. My name is Miranda. I will be your conference facilitator. At this time, I would like to welcome everyone to the D.R. Horton, America's Builder, third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the conference over to Don Tomnitz. Please go ahead, sir.

Thank you. Thank you for joining the D.R. Horton third quarter conference call. With me this morning are Sam Fuller, Senior Executive Vice President of Finance, Stacey Dwyer, Executive Vice President of Investor Relations and Treasurer, and Bill Wheat, Executive Vice President and CFO. Before we get started, Stacey?

Some comments made on this call may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumption, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call and D.R. Horton does not undertake any obligation to update or revise any forward-looking statements.

Additional information about issues that could lead to material changes in performance is contained in D.R. Horton's annual report on form 10-K and the most recent form 10-Q, both of which were filed with the Securities and Exchange Commission. We will also be discussing non-GAAP financial measures during this call. The reconciliation to the nearest GAAP number is available at our website, www.DRHorton.com on the investor relations page through a link titled data tables.

Thank you, Stacey. It was another very strong quarter for D.R. Horton, America's Builder, and we're proud to announce the following highlights. Consolidated revenue increased 26% to $2.8 billion. Home building, pretax income increased 71% to $388.9 million. Net income increased 62% to a record $251.3 million.

Net sales orders increased 23% to $3.2 billion. That's 12,444 homes sold. Homes delivered increased 23% to 11,050 homes closed. Sales backlogs, our future revenue, increased 28% to a record $5.2 billion.

Home building debt to total capitalization net of cash improved 230 basis points to 43.6% from 45.9%. Home building SG&A improved 70 basis points to 8.9%, a record low for the third quarter. Gross profit margin on the home sales revenue improved 210 basis points to 22.6% from 20.5%. All these accomplishments contributed to diluted earnings per share of $1.06, a 61% increase. Our third quarter sales increased 23% to a third quarter record of $3.2 billion on 12,444 homes sold, up from $2.6 billion on 10,811 homes sold in the year ago quarter.

All of our regions reported double-digit sales dollar increases this quarter. Net sales orders for the first 9 months of fiscal 2004 increased 27% to $8.6 billion on 34,158 homes. Our stocks strong sales contributed to our all time record backlog, 19,531 homes, with a sales value totaling $5.2 billion, a 28% increase over last year. We are clearly focused on delivering this backlog while continuing in our strong sales performance to insure our 27th consecutive year of higher revenues and higher profits in fiscal 2004. Stacey?

Our asset concentration corresponds with our top 6 home building states. The percentage of our assets in these states are as follows: California with 27%; Texas with 16%; Colorado, 11%; Arizona, 9%; Nevada with 7%; and Florida with 6%. Our total sales dollars increase for the third quarter in those states are: California, 10%; Texas, 16%; Colorado, 26%; Arizona, 21%; Nevada, 50%; and Florida, 94%.

As we mentioned on previous calls, we are continuing to significantly increase our presence in Florida. We have 3 strong division presidents who've put together excellent teams and we want to give them additional assets to increase the strong returns that we're generating in Florida.

We're also-- we would also like to highlight some other areas where we saw significant sales dollar increases. Washington, DC area, up 72%. This also reflects our previous commitment to significantly grow our presence in this market. Carolinas, both North and South, up 26%; New Jersey, up 35%. We have had several questions about our profitability levels in Carolinas -- in the Carolinas -- as in Texas, particular. Each of our 51 division across the country continue to be profitable and were profitable begin in the third quarter.

Both Texas and the Carolinas are generating double-digit return on inventory. Further, we are exceptionally proud of all of our Texas divisions. They exceeded their closing targets and closed the second highest number of homes in Texas in the company's history. No other report here. Sam?

Thank you, Don. Our third quarter home building revenues increased 27% to $2.7 billion from $2.2 billion in the year ago quarter with home sales revenues increasing 28% on 11,050 homes closed. Our average closing price for the quarter was up 4% to $244,000 as a result of continued pricing power in many of our markets. Home building revenue for the 9 months ended June 30th, 2004 increased 25% to $7.2 billion from $5.7 billion in the year ago period with home sales revenues increasing 28% on 30,115 homes closed.

Our gross margin on home sales revenues in the third quarter increased 210 basis points to 22.6% from 20 1/2% a year ago. For the 9 months ended June 30th, 2004, our home sales gross margin improved 230 basis points to 22.5% from 20.2% in the year ago period. Our gross margin improvement has been driven by pricing power in many of our markets, as well as our continuing focus on controlling our construction costs.

Home building SG&A expense for the quarter was 8.9% of revenues, a 70-basis point improvement over the year ago quarter. This marks the first time in company history that our third quarter SG&A was less than 9% of revenues. Continuing our tradition of tightly controlling overhead costs. For the 9 months ended June 30th, 2004, our home building SG&A was 9.4% of revenues, a 60-basis point improvement versus the prior year.

Other income for the current quarter and for the 9 months ended June 30th is primarily related to the change in the fair market value of our interest rate swaps. Offset by minority interest in income from our consolidated joint ventures. All of our joint ventures are consolidated, which provides excellent financial statement transparency. Bill?

Thank you, Sam. Financial services revenue for the quarter increased 7% to $48.7 million, from $45.6 million in the prior year. For the 9 months ended June 30, financial services revenue increased 7% to $131.7 million. Our company-wide capture rate in the third quarter improved to approximately 72% from 69% a year ago.

Financial services pretax income for the June quarter was $19.7 million, compared to $24 million in the year ago quarter and for the 9-month period was $56.6 million compared to $65.1 million last year. 91% of our mortgage company revenue is captive, reflecting our continued commitment to focus on supporting our home builders business. Our FICO scores this quarter improved to 718. This compares to 713 for the same period in fiscal year 2003 and 704 for the same period in fiscal year 2002.

In addition, our loan to value continues to improve, dropping to 84% from 85% a year ago and 87% 2 years ago. The mortgage company's financial results in the third quarter reflect the impact of our startup costs in California, product mix and excess capacity in the mortgage industry. For the quarter, our consolidated net income increased 62% to $251.3 million from $155.6 million last year.

For the 9 months ended June 30th, 2004, net income increased 58% to $625.5 million from $395.2 million last year. Diluted earnings per share for the quarter increased 61% to $1.06 from 66 cents in the year ago quarter. For the 9 months ended June 30th, 2004, diluted earnings per share increased 52% to $2.64 per share from $1.74 a year ago. Sam?

Thank you, Bill. Our home building leverage ratio net of unrestricted cash, improved 230 basis points to 43.6% from 45.9% a year ago. Our goal for fiscal year 2004 is to continue to maintain our year-end home building debt to cap ratio in the low 40s. Our lot and land position is approximately 218,000 lots owned and controlled, which represents a lot supply of about 3.4 years. 45% of these lots are owned and 55% are optioned.

2 years ago, we owned 58% of our total lot supply. Last year we owned 50%, and this year we're down to 45% owned. This reflects our low-risk approach to controlling our land supply and our commitment to keeping a strong balance sheet by controlling, rather than owning an increasing percentage of our lot supply. In the third quarter, the company increased its unsecured revolving credit facility to $1.21 billion.

At June 30th, we had approximately 882 million in dry powder, with approximately 202 million in cash and $680 million available on our home building revolver. In July, we issued $200 million of 6 1/8 10-year senior notes and used to the proceeds to repay indebtedness outstanding under our revolving credit facility. Stacey?

As referenced in our press release, D.R. Horton, America's Builder, expects earnings for fiscal year 2004 to be in the range of $3.75 - $3.85 per diluted share on approximately 237.1 million shares. This will be a 37-41% increase over our fiscal year 2003 earnings per share of $2.73. The earnings estimate is based on approximately 43-44,000 homes closed and consolidated revenues of approximately $10.5 - $10.7 billion. Don?

Thank you, Stacey. Now to give you guidance on what to expect at D.R. Horton, America's Builder. In fiscal 2004, we will complete our 27th consecutive record year continuing to increase our revenues and profits and growing the bottom line faster than the top line. We will continue our growth in fiscal year '05 and '06.

In fiscal year '05, our goal is to close 52,000 homes and generate $12 billion in consolidated revenue, all organic growth. In fiscal year '06, our goal is to close 63,000 homes and generate $14 billion in consolidated revenue, all organic growth. This growth will be characterized by continuing to control our SG&A and being the low cost operator in the industry and continuing to expand our gross margins. We plan to continue on focusing on internal growth in fiscal year '05, but we will also continue to evaluate acquisition opportunities on a going-forward basis. We also maintain our debt to cap net of cash in the low 40s.

So why is D.R. Horton, America's Builder, excited about its business? Why do we believe that we can achieve our performance goals? On a trailing 12-month basis, our pretax margin has improved 430 basis points to 13.6% at June 30th, 2004 from 9.3% at June 30th, 2002. In the same period, our return on net invested capital has improved 540 basis points to 16.5% from 11.1%. Return on equity has improved 480 basis points to 26.5% from 21.7%. Our EBITDA margin has improved 460 basis points to 16.6% from 12%. And our EBITDA coverage ratio has improved to 7 times from 4 times. D.R. Horton, America's Builder, has a record backlog, a solid land position and proven operators in each of our divisions.

Our dividend yield is currently 1.23%. On an apples to apples basis, D.R. Horton, America's Builder, has the highest operating margins of the top 5 home builders. We continually close a higher percentage of our beginning backlog than our peers. We have the highest 5-year CAGR revenues and net income amongst our peers and our closings and revenue goal for the next 3 years are the highest in the industry and position us to continue to outperform the industry. We are excited about our business because we are confident of achieving our future goals just as we have achieved our historical goals.

In conclusion, we ask 1 final question. D.R. Horton, America's Builder, with a 33% 10-year CAGR and EPS should trade to what PE? Clearly, higher than we are today. That concludes our presentation. We'll entertain any questions you may have.

At this time, I would like to remind everyone if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question is from Margaret Whelan with UBS.

Hello?

Hi, guys. Can you hear me?

We can hear you, Margaret. Good morning.

Hi. Good morning. I'm out of the office, so let me know if I'm low. But I have 3 questions. The first one is your margins are absolutely exceptional and well done, but I'm just wondering, can you talk a little bit about the call side versus the prices and where the improvement is coming from.

Do you want to talk about that? Clearly it's coming from both sides of the business. We still have pricing power in a number of our markets clearly because of the limited lot supply and the entitlement that's present in most markets, although clearly as we said, we have more than an adequate supply to meet our next 3-year business plan.

On the cost side, we continue to achieve scale. We continue to achieve economies of scale. And as Don Horton reminded me 21 years ago, the home building business is a business of pennies and we continue on everything from air conditioners to plumbing fixtures to you name it to drive down the costs of our goods purchased simply because we're purchasing more of it from our suppliers and that's good for them. Drives down their costs.

Where do you think you are in the process of kind of consolidating the vendors or leveraging the nation-wide opportunity?

I'm absolutely convinced that we're in inning 3 and it's a 9-inning ball game. Clearly we have a lot more of low-hanging root to pick up. We just a year and a half ago started our regional purchasing. We're aggregating products and supplies or purchasing on a regional basis that we don't do in other regions.

Clearly we're also trying to drive more of our business to single manufacturers. Where basically we have 2 manufacturers as we do in windows. As I mentioned in California, we've got 8 divisions in California now purchasing windows, 70% of our windows are going through 1 manufacturer and we think that's achieving economies of scale for us.

Okay, and your comment about the pricing leads to my second question, which is around speculative demand as opposed to speculative supply. I know that your're building inventory in some of the markets, but in terms of the buyers, do have you a sense for how many of them are flipping or may flip to homes in the next couple of years which may - or, you know, could put pressure on pricing?

Really, we don't have a feel for that. We do in the number of our cities and our subdivisions preclude buyers from flipping their house within the first year or 2 based upon what is being Denver or California, because really we're interested in selling to homeowners as opposed to flippers. So we tried to prevent that, but I really don't have a feel for your question.

Okay. And just finally, you made a very valid point about the valuation being so low, but will you explain to us why you flip-flopped throughout the year in terms of the share repurchase program, originally was 5% now you're saying closer to 2. You know, what the use of cash may be going forward, how you're going to prioritize them.

Clearly I would say to you that as you have so eloquently stated in the past, flip-flopped, we would prefer to look upon it as seeking alternative investments.

Okay.

And the way that I look at it clearly is that we evaluate our investment alternatives every day here in the company and on a quarter to quarter basis as we move assets from 1 market to the other. Clearly with a 50% ROI in places like New Mexico, 40% return in California and Florida, we've had some exceptional investment opportunities. I would tell you one thing. We understand the no risk return of purchasing, repurchasing our stock. I would say to you that it's becoming very appealing at our current stock price.

Okay, and the acquisitions that the pipeline is obviously very solid, but are these companies, or is it just land deals you're referring to?

Typically most of them are supplemental land acquisitions that we're looking-- they are smaller and medium sized companies in various markets where we're supplementing our existing division presence. As I say, we have a beautiful situation. We have 51 proven profit center managers across the U.S. All we have to do to grow is to continue to send more assets their way. I would say on the acquisition side, as we've done in the past, we're going look at everything from number 2 on down.

Great. Okay. Thank you very much.

Your next question is from Michael Rehaut with J.P. Morgan.

Hi. It's John Barlow on behalf of Mike. Just had a quick question on the SG&A. I was wondering if you could address, you know, what's been driving -- what drove the improvement this quarter and what do you expect going forward into the second, I guess next quarter and into '05?

I would say to you what's driven most of our improvements is obviously a little over 2 years ago we did the Shuler acquisition and clearly Tom Noon, our regional president in California, has done a good job of getting all the Shuler and Western Pacific division presidents on the Horton program, of doing more with less.

They have clearly bought into the deal and we have seen a lot of cost saves from those division presidents, agreeing with us that they could operate under the Horton mentality better than they could under the Shuler/Western Pacific mentality. So that's really where most of our improvement has come from. I think on a going-forward basis, I would say to you I'm amazed at how efficient we've become on SG&A.

I never make any promises on SG&A. I would say at the current level, we are the lowest SG&A operator in the industry and sort of waiting for everyone else to catch up with us.

Okay. Great. 1 final question. Could you give us your cancellation rate for the quarter and what it was a year ago and last quarter?

It's running a tight range of 17-19% for as long as we've been keeping records, which was over 12 years ago. With the exception of the 2 or 3 months post 9/11 when it ran into the low to mid-20s, but it's been in the 17-19% range and it's on the lower end of that range.

Okay. Thank you very much.

Your next question is from William Nobler with Atalanta Soft [inaudible].

Hi. Congratulations on another great quarter.

Thank you.

Thank you.

The shelf registration that was announced today, $2 billion, could you add some color on the purpose?

Basically as you know, we issued 200 million in senior notes in July and that virtually exhausted our prior shelf registration. It pulled it down to $85 million and we felt it was time to reload. Got to have something to fund our growth with.

Okay, and the second question, free cash, what is your guesstimate for the current fiscal year?

As we look at this fiscal year, we, with the inventory growth that we have invested our cash in, we expect cash flow to be slightly negative this year on an ongoing basis, we typically expect our cash flow to either be slightly positive, neutral or slightly negative, no significant swings either way.

At the end of this fiscal year, to give you more clarity, for the past 2 fiscal years, we'll be slightly positive.

Clearly we have discretion in how we invest our cash and this year with the incredible investment opportunities we see in our existing markets, we have chosen to reinvest a significant portion of the cash that has been generated by the business and in our existing markets.

Okay, and going back to Margaret's question on share buy-backs, I assume you did not purchase any stock in the last quarter.

That is correct.

Okay, and on your forecast for '05, it looks to me like you're looking for, continuing to look for something like, oh, a 19% increase in homes sold and about a 13% increase in revenues, all organic. What kind of price change are you assuming next year?

We're assuming pricing to be flat. Our goal has been stated for about the past year and a half that we have committed for the next 3 years to grow the top line 10-15% and the EPS Line 15-20% and so your calculations are very close to those projections.

Okay. Thank you very much. Keep up the good work.

Yes, sir. Thank you.

Your next question is from Stephen Kim with Smith Barney.

Good morning, Jed Barron for Steve Kim. Congratulations on the quarter.

Thank you, Jed.

Couple questions. First of all, the guidance that you took up for the year, just wanted to get a better sense for where the increased optimism is coming from. I mean obviously you have posted an upside surprise here in the quarter and understanding that that represents some of the increase in the guidance for the year, I guess in relation to the fourth quarter, what expectations have changed?

The biggest number that's probably changed in the numbers that I've put together, Jed, is the gross margin assumption. Now that we're through the third quarter we have a lot more clarity on where margins are going to be for the year and so, you know, basically if you assume that our margins even taking the year number, run into the fourth quarter, you would be at an earnings number above what we had originally talked about.

And the revenue goal that we have put out there is slightly up from our prior guidance simply because our average sales price is up 4% over where it was this time last year.

You were saying basically if you took the third quarter margin and sort of applied that in the fourth?

Either the third quarter margin or even the year to date margin at this point it's higher than where we were at this time in March.

Right, right. Okay. The-- secondly, understanding also that there is some variability in the other expense, other income line, I think Sam, you had commented that you have your interest rate swaps in there and you also have some of the JV income flowing through the line. On a go-forward basis, what might be a safe assumption to sort of model in just sort of looking at the variability of the past few quarters what may be a safe guess?

Jed, I don't know how you modeled a change in the value of interest rate swaps, the current quarter amounted to $9.3 million positive for us. The joint venture income you mentioned is an offset to that. It's actually a charge. It represents not joint venture income, but actually the minority interest portion of the earnings that are consolidated joint ventures have earned in the quarter. So it's a debit.

Okay.

I would say to you on a going-forward basis we're not doing any more interest rate swaps. I know never to say no, but we're not. Secondly, the only joint ventures that we have are ones that we've inherited through acquisitions and mergers. So basically both those numbers will be working their way off the balance sheet.

Okay. Great. One last one, if I could. Looking at your, the price increases and I guess if we just look at the price increase in backlog continues to be up at a pretty decent clip over the year ago period, could you just talk to us a little bit, is that-- I guess I would assume it it would be a function of both the price increases that you have been able to put through as well as perhaps some mixed shift. Is that-- could you maybe break it down in terms of, you know, which of those components or other components may be more significant.

I think the most significant component is the fact that we are realizing pricing power in a number of our markets simply because we've done a great job in titling land in every one of our markets from Florida to New Jersey to San Diego to Seattle. Bottom line is that we're able, we're only releasing so many units for sale each month. We understand what drives pricing power.

We understand if you can go out and buy 300 Ford Tauruses that are red with tan leather in the Dallas/Fort Worth market, as an example, there is no pricing power. We don't have a high number of specs available in any of our subdivisions. We have waiting lists of prequalified buyers in most of our subdivisions across the U.S.. So we're really continuing to have opportunistic pricing simply because we're controlling our releases and we have a large prequalified waiting list of buyers.

Great. That's very helpful. Congratulations, again, on the quarter.

Thank you.

Your next question is from Timothy Jones with Wasserman & Associates.

Good morning.

Good morning, Mr. Jones.

First of all, I can speak firsthand to that Don Horton knows the value of a penny. After watching him argue for 20 minutes about a $13 gas bill with Hertz. Anyways, couple questions. The low debt to cap that you're projecting, low 40s, is that net of cash, or not?

Net of cash, yes.

Net of cash, yes.

Okay. Okay. First of all, on your-- what do you-- How many homes do you have, roughly, in inventory?

26,000.

That would be net of specs?

That includes specs.

Includes specs.

Includes specs? What do you got--and -- I mean models, net of models.

That includes models as well.

That includes models.

Okay, and what do you have in specs total and completed over the year?

Okay. We have a total of 48 homes that, specs that have been completed for a greater period of time than a year that are unsold, which is the lowest the company's history.

Okay, and what would you say your specs are in all stages of development?

They are running the lowest-- we don't release specific spec count, but they are running the lowest as a percentage of our total inventory in the history of the company.

Okay, and the-now, when you did that -- not the -- the prior debt deal at roughly 5% or so, you said that 80% of the investors that bought that were investment grade, is that correct?

That's pretty much accurate. That's what the investment --

Yeah, and about the last deal that you did? Was that roughly 80% [inaudible] grade-- investors bought that too?

Yes, sir.

Now with the 7 times EBITDA coverage and the debt equity of low 40s and controlling 3 1/2 years of land, what in the world will it take for these these clowns at the rating agencies to put you as investment grade, especially with 27 years of up earnings and a 40% projected gain this year?

Well, first of all, let me make sure that they understand that you used the word clowns.

I did. I've used the word clowns before too. It's not the first time I've used it and it won't be the last.

Well, I know that. In any event, I would say to you that we are waiting for Moodys and S&P to get on board with Bob Curren (ph) at Fitch, who has already got us at investment grade and it's disappointing to us with the kind of improvements and the kind of balance sheet that we have in our earnings that we're not investment grade. I don't know what they don't know at Moodys and S&P. Maybe they ought to call Bob because Bob's got a clear understanding of our business.

Just lastly, how do these investment grade funds, if 80% of them buy it, how can they buy your bonds if they're not investment grades if they are supposed to be investing in investment grades paper. Or are they just ignoring the rating agencies?

Tim, anecdotally,what we've been told is they do internal ratings within their firms and internally they consider us investment grade parameters.

So do I.

Thank you, Tim.

Thank you.

Your next question is from Lorraine Maikis with Merrill Lynch.

Thank you. Good morning.

Good morning.

Just wanted to touch on the pricing issue again. You had mentioned in your last quarter conference call a $230,000 average price for this year. I assume we're changing that after this quarter's performance.

Oh, yeah. We're going take that up just a little bit, Lorraine.

Okay. If you look at your price in backlog, it's quite high, which really would forecast, you know, fourth quarter and first quarter prices being up as well. Would that imply, if we have next year's pricing being flat, would that imply a slight deceleration through '05?

One thing we never assume in any of our guidance is increasing sales prices, so, you know, we're not ever going to put guidance out that assumes any kind of continued pricing increases. And one thing I do want to point out about the pricing and backlog compared to the pricing and deliveries, there is always a difference.

Our backlog is generally always higher in terms of the average sales price simply because the higher price homes stay in backlog longer. They take longer to build. The net skews, the pricing backlogs up compared to the closing price.

Right.

But we don't anticipate any deceleration in '05. That's-- are you there?

Yes, I am.

Okay. When you talk about deceleration, are you talking about deliveries, pricing or--

Yes.

In deliveries?

Yes.

No, we do not anticipate any deceleration in deliveries '05.

Okay. Thanks for that clarification. On the gross margin line, if we have-- if we're assuming flat pricing next year, I know you are still generating some cost savings. Do you anticipate that offsetting most of your inflation and costs like lumber and cement?

Yes. As I tell investors, we have prices going up on a daily basis and we have prices going down on a daily basis. Our goal is to keep our prices that are going up as those increases as low as possible and to maximize our decreasing in cost.

Clearly our job as a company is to continue to increase that gross margin line, whether through pricing power or cost saves on national purchasing, regional purchasing and our local purchasing. So our goal is to continue to deliver increased gross margins by virtue of controlling our costs primarily.

Thank you.

Yes.

Your next question is from Carl Reichardt with Wachovia Securities.

Good morning, guys. How are you?

Good morning.

Good morning, Carl.

I want to ask about the California sales dollars number. I think you said it was up 10%, is that right, for the quarter?

Yes.

That seems lower than I guess I would have expected would I -- were I to model such things. Is that more related to the attempt to raise prices to slow orders down, lack of community count, what do you attribute that number which one would think would be higher to?

Combination of increasing our sales prices, but also just a function of delivery of subdivisions. It depends upon which quarter it is - in this quarter we didn't have as many subdivisions to sell out of as we've had in the year ago quarter.

Is it your guess on it that number would start to accelerate percentage growth-wise as we look forward in the next couple, three quarters?

Yes.

Just because of new openings?

Yes.

Okay. Cool. I wanted to ask about the, the, just costs related to the branding campaign. We've talked about kind of the unification of brands under the D.R. Horton name. What kind of costs you anticipate and what kind of benefits you would anticipate to get out of that.

Well, the cost basically is insignificant. We are repainting signs and putting new signs on buildings and those sorts of things, but it's not nearly like Taco Bell trying to do 20,000 stores across the U.S. at one time. It's really insignificant cost.

We are already achieving, I think, some great benefits from rebranding ourselves. Clearly we're having a lot of people move from Atlanta to San Diego, San Diego to Chicago and so forth and to the extent that they see D.R. Horton, America's Builder, based upon our warranty policy in this company to make sure every buyer is a satisfied customer, we're getting a lot of repeat business because of that.

And we hear a lot of anecdotes too, Carl, and in Birmingham, Alabama, I know he said that he was having, you know, better interaction with land sellers and suppliers simply because he wasn't operating as Regency any longer, he was operating as D.R. Horton and they hadn't realized he was part of our family before.

Stafford Homes in Seattle is now operating as D.R. Horton and the realtor community is bringing a lot more people by because they associate D.R. Horton with a national large builder. So there are all kinds of different advantages to marketing under one name.

Okay, fair enough. But the cost, as you view it, is insignificant.

Insignificant.

Just finally, if you have this, do you know what your attached to detached mix was in this last quarter and compared to last year?

We've been running about 10% attached, 90% detached. That's about equivalent with where we were this time last year.

And your guess, no real change in that as you look forward the next year or so?

I think they will increase slightly, clearly as we drive our product toward more affordability. One of the ways we've done that, Carl, is to continue to move more and more into attached products, especially in high-cost land areas, so I would say that would increase slowly as we move forward.

Okay. Great. Thanks a lot. I appreciate it, guys.

Your next question is from Ivy Zelman with Credit Suisse First Boston.

Good morning, guys. Actually Dennis McGill on behalf of Ivy.

Good morning.

Stacey, at the beginning of the year, you guys had kind of laid out that in the west you thought your average price would come down quite a bit, just on where you were building. And in the most recent quarter we saw that go up pretty substantially on the orders basis. Can you give us an idea of where you expect that to trend. And was it just an aberration this quarter with that jump up in price?

What we talked about in the west in particular was Southern California. In Southern California, their prices are slightly down this year compared to last year simply because of their product mix change. In the west, in general, we have Las Vegas, Portland, Seattle, Hawaii and Denver. So there are a lot of other markets that feed into the west other than just Southern California.

Would it be fair to assume that some strong pricing in Vegas has offset some of that product mix that you talked about in Southern Cal to begin the year?

We have strong pricing in Las Vegas. We have strong pricing Hawaii. Denver is performing very well.

Okay. Going back to the mortgage business, you said that the profitability was effected by a shift in products. I assume you're referring to ARMs there.

Yes.

And how many of those ARMs would be interest-only products? I guess as a percentage of the overall, if you could.

Right. You know what, Dennis, that's not something that I have in front of me right now, but we can get back with you on that one.

Okay. I would certainly appreciate it. And then looking at the options, you mentioned roughly 55% of your lots are now optioned. What would be the total take-down of those.

It would be around $3 billion.

Okay, and how much of that would be contractually obligated take-down within the next year?

Actually very little. We have very few contracts that have specific performance requirements, less than $100 million or so as a general guess. I don't have the specific number in front of me.

None of those contracts expire within the next year?

No. They are expiring, typically expiring over the next 2 to 3 years.

Okay, but those expiring within the next year, excluding specific performance, would be less than 100 million?

Pretty much so, yes.

Okay. And then of those optioned lots, do you typically break out how many are finished and unfinished and also how many are entitled and not?

No, we really don't. We leave that at the regional level. The regional level, each division has a spreadsheet that we see on a quarterly basis that shows how many lots they have for '04, '05, '06 and '07 subdivision by subdivision. We're confident that each one of our divisions has an adequate lot supply where the lots are being delivered and will be entitled in order to meet their going-forward business plan certainly for '05 at this stage.

From a company-wide perspective, a ballpark figure on how many are titled versus untitled isn't something--

No, sir, we don't. No, sir.

All right. Well, I appreciate the time, guys.

Thanks.

Your next question is from Alex Ferron (ph) with JMP Securities.

Hi, good morning. Congratulations.

Thank you, Alex.

Long time no speak with you.

Yes.

But I'm glad to be back. Anyway, I wanted to ask you a couple questions. First one was what is your strategy going forward now that I guess everyone is assuming interest rates are going to start rising in terms of your mix. Are you going to be trying to, I guess, build less entry-level homes and more move-up or can you elaborate on that?

Actually we don't plan any significant change in our mix going forward. Clearly we believe with all the mortgage instruments that are available in the marketplace today, 100 basis point increase in interest rates is not going significantly impact our business one way or the other.

As a matter of fact, I have said for many years as the interest rates move up, our business gets better because basically there is better job growth, better median income growth and better consumer confidence because the economy is doing better. We don't think interest rates are going to go up in a vacuum. We have each one of our division presidents. As you know, at D.R. Horton we are very decentralized.

And they are driving their business plans in each one of their markets and driving their products in their markets to hit their '04, '05 and '06 business plans and they are on historical basis adapted their business models as need be. Because I can tell what you is happening in San Antonio is not happening in San Diego, is not happening in New Jersey. Each market's different.

Okay. Great. And also congratulations on improving your returns. I would assume that a lot it has to do with your move towards more optioned lots. I did miss, though, if you gave the number of exact lots that you optioned versus owned at the end of the quarter.

We didn't, but it's 218,000 total lots, of which 45% are owned and 55% are optioned. So I can't do the math, but I know you can. You're better at it than I am.

Okay. Lastly, have you given out guidance for '05 in terms of EPS?

No, sir. What we have said is here going to do $12 billion in revenue and close somewhere approximately 52,000 units or greater.

Okay. Thank you very much.

Okay. Thank you.

Your next question is from Greg Gieber with A.G. Edwards.

Good morning, gentlemen. I think earlier you gave a breakout of where your assets were at least in some of your larger states. I wonder if you could actually break out your, your, the number of lots you have in each of your large states like California, Texas, Arizona, Nevada. Do you have that number handy, perhaps?

No, but we can give you a call back and give you some, some number. The number of lots that we have in each one of those states, but we don't have it with us, Greg.

Okay. I would appreciate that very much. And the other question I would like to ask is just what are you seeing in terms of pricing on land, on options, given how much land has gone up or at least how much pricing power you have, are you seeing people asking, you know, developers asking for shared appreciations. Has there been any change in the land buying situation?

I think in some markets we've seen a little bit of softness in the land pricing, but in general with the housing doing as well as it is, I think in some markets in particular like in California, it's becoming more painful to buy land.

The buyers are asking for more and asking for, you know, less time to do your due-diligence and so forth, but as I've said, one of the things that has really brought this company to the point of success that it is today is that we have some of the best land acquisition people across the country. And typically we entitle more land than we need and we are a net seller of land and a number of our markets. But the bottom line is that we don't sell much of it, but if we get too much entitled, which we do from time to time, we'll sell it off, but I'm confident that we've got adequate lots in '05 and '06 and we're working on '07 to produce our growth targets of 52,000 and 63,000 closing respectively.

When you enter into a new option, what is the average length of that option and what sort of, you know, payment are you making initially on it? Is that--

It's about a 2 to 3 year time period on the option and we're putting up somewhere about 3-5%.

Okay. Thank you very much.

Yes, sir.

Your next question is from Steve Fockens with Lehman Brothers.

Hi, good morning, guys. First quick question, Don, in the '05-06 outlook, what kind of assumption from a macroeconomic perspective -- total new home sales, employment growth, just generally speaking, does that kind of envision?

We do not envision single-family permits deviating from the historical 10-year range where basically they have run between somewhere around 900,000-1.2 million single-family starts. We think they will continue to stay within that tight range.

Our assumption is the business doesn't get any better on a nation-wide basis. It could get worse, but the bottom line is that we'll continue to profitably aggregate market share as we're doing currently both from the small and medium-size builders as well as from some of the larger builders.

Okay. The reason I ask is that [inaudible] I think some mortgage bankers association is looking for something like a 20% decline in new home sales next year versus this year. It sounds awfully conservative to me, but let's throw that number out there for a moment. If there to be was what would appear to be a pretty significant fall off in the macro market, would that dramatically change your own outlook?

I would say only from the profitability level. Because I believe one thing, that that kind of drop-off happens in single-family starts. I believe there will be some great economies of scale on the cost side because there will be a lot of subcontractors and a lot of manufacturers and suppliers looking to sell more product to us because we're going to continue to pick up market share from those people and our cost structure will only improve in that kind of scenario.

So it might be a trade off between units and maybe somewhat softer units but higher profitability per unit?

I really do believe that, yes. As you look back on the history of D.R. Horton, we have made some of our best margins in soft markets simply because of our, the cost improving so dramatically as subcontractors have less work and suppliers and manufacturers are shipping fewer units.

Great. Thanks. Actually, one sort of follow on to that, you certainly said all your divisions were profitable. Have any of your divisions in the last couple quarters seen any kind of meaningful margin decline over the last couple years?

No, sir.

Okay. Great. Thank you so much.

Thank you.

Your next question is from Mike Kender with Citigroup.

Yes. Most of my questions have been answered, but one was what was the percentage of adjustable rate mortgages in the quarter versus fixed of your buyers.

Our adjustable rate loans this quarter ran at about 39%.

Okay. Great. Thank you.

Thank you.

Your next question is from Jane Haugh with Dwight Asset Management.

Hello. My question has to do with your strategy for your cash. I know that you've got debt to cap targets, you said in the low 40s and you want to the maintain that. Would your use of cash for acquisitions or anything like that, you know, I'm just looking at this as possibly a blocking point for the rating agencies to raise you to investment grade, you know, depending upon how you would want to use your excess cash, you know, how acquisition-minded you were and would you make a sizable acquisition.

Well, let's back up. We don't have Microsoft's cash obviously, but we do have a couple hundred million dollars of cash. We probably will end the year with about that same amount of money, couple hundred million dollars in cash, so I don't think that's a large number. Then we'll probably end with our revolver pretty much, so we'll probably be around cash, 200 million and our revolvers 1.2, so we'll probably have somewhere around $1.2-1.4 billion in what we call dry powder.

As we move forward into the next fiscal year though, that revolver will be used to support our growth in our inventories both from a work in process as well as additional land and lot positions across the country, so I don't believe that we've got a situation where we have excess cash. I think really what we've got a revolver set up to do is to handle our growth of our existing business without any acquisitions.

Okay. So your intent still is to maintain your motive organic growth?

We-- yes, it is. We've done that for the last several years and all of our projections that we've been giving analysts and investors is 100% organic growth, not to say, and I know the rating agencies are listening to this, not to say that we won't do an acquisition, but clearly we don't have to do an acquisition in order to achieve our 20% growth.

Okay. Thank you.

Yes.

At this time there, are no further questions. Mr. Tomnitz are there any closing remarks?

Yes. Stacey has a clarification.

Yeah, I need to clarify our adjustable rate mortgage percentage. We ran at 30% this quarter and 27% on the fiscal year to date rather than the 39 I said earlier.

Okay. That concludes our third quarter presentation from D.R. Horton, America's Builder, and we thank you for listening. Good bye.