霍頓房屋 (DHI) 2005 Q3 法說會逐字稿

Good morning.

My name is Cynthia and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the D.R.

Horton Inc., America's Builder, third-quarter earnings release 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. (OPERATOR INSTRUCTIONS).

Thank you.

I would now like to turn the conference over to Don Tomnitz.

Please go ahead, sir.

Thank you.

Joining me this morning is Sam Fuller, our Senior Executive Vice President of Finance, Bill Wheat, our Executive Vice President and Chief Financial Officer, and Stacey Dwyer, our Executive Vice President and Treasurer.

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 assumptions, 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 publicly update or revise any forward-looking statement.

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.

Don?

Thank you, Stacey.

D.R.

Horton, America's Builder, the largest builder in America, is proud to acknowledge its recent inclusion in the S&P 500 index.

Further, D.R.

Horton continues to distance itself from the competition by again selling and closing more homes in America than any other builder over the last 12 months.

The third quarter of fiscal year 2005 was another record quarter for D.R.

Horton, America's Builder, as we continued to grow the bottom line significantly faster than the top line.

We are proud to announce the following highlights.

Stacey?

Consolidated pretax income increased 48% to $604.4 million.

Net income increased 48% to an all-time Company record, $371.7 million, yielding a record 11% net income margin.

Sales backlog, our future revenue, increased 36% to a record $7 billion.

Don?

Net sales orders increased 29% to $4.1 billion, 14,980 homes, setting an industry record of selling more homes in a quarter than any other home builder.

Consolidated revenue increased 21% to $3.4 billion.

Homes delivered increased 11% to 12,269 homes closed.

Stacey?

Home-building debt to total capitalization, net of cash, improved 120 basis points to 42.4% from 43.6%.

Our gross profit margin on home sales revenue improved 370 basis points to 26.3% from 22.6%.

For the trailing 12 months, the Company reported a return on average shareholders' equity of a record 30%.

All of these accomplishments contributed to an all-time Company record diluted earnings per share of $1.17, a 46% increase.

Don?

Our third-quarter sales increased 29% to $4.1 billion on 14,980 homes sold, up from $3.2 billion on 12,444 homes sold in the year-ago quarter.

All of our regions reported double-digit increases in sales dollars and units this quarter.

Additionally, both sales units and dollars increased through the quarter at an increasing rate.

Our May percentage increase was stronger than our April increase and our June percentage increase was stronger than our May increase.

Net sales orders for the first nine months of fiscal 2005 increased 27% to $10.9 billion on 39,282 homes, up from $8.6 billion on 34,158 homes sold in the year-ago period.

Our strong sales contributed to our all-time record backlog, 23,916 homes, with a sales value totaling $7 billion, a 36% increase over last year.

We are focused on delivering this backlog while continuing our strong sales performance to ensure our 28th consecutive year of higher revenues and higher profits in fiscal year 2005, in addition to positioning ourselves for the first half of fiscal 2006.

Stacey?

Our asset concentration corresponds with our top six home-building states.

The percentages of our assets in these states are as follows -- California with 27%, Texas with 13%, Nevada and Arizona with 9% and Colorado and Florida with 8%.

Our total sales dollars increases for the third quarter in those states are California increased 21%, Texas increased 15%, Nevada was down 11%, Arizona increased 61%, Colorado increased 8%, and Florida increased 50%.

We'd also like to highlight some other areas where we saw significant sales dollar increases.

New Mexico, the coastal Carolinas, Chicago, Portland, Charlotte, Atlanta, New Jersey, and Hawaii all reported sales dollar increases greater than 25%.

Sam?

Thank you, Stacey.

Our third-quarter home-building revenues increased 21% to $3.3 billion from $2.7 billion in the year-ago quarter with home sales revenues increasing 22% on 12,269 homes closed.

Our average closing price for the quarter was up 10% to $267,100 as a result of the continued pricing power in many of our markets and as a result of our continued asset investments in markets with higher than average sales prices, such as Washington D.C., Hawaii, Seattle and Portland.

Home-building revenue for the nine months ended June 30th, 2005, increased 20% to $8.6 billion from $7.2 billion in the year-ago period, with home sales revenues increasing 19% on 32,550 homes closed.

Bill?

Thanks, Sam.

Our gross profit margin on homes sales revenue in the third quarter increased 370 basis points to 26.3% from 22.6% a year ago.

For the nine months ended June 30th, 2005, our homes sales gross margin improved 300 basis points to 25.5% from 22.5% 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.

In addition, interest and our cost of sales decreased by approximately 60 basis points in both the third quarter and in the year-to-date period compared to the prior year, reflecting our continued leverage improvement and refinancing efforts of the past two years.

Sam?

Home-building SG&A expense for the quarter was 9.1% of total home-building revenues compared to 8.9% a year ago.

For the nine months ended June 30th, 2005, our home-building SG&A was 9.6% of revenues compared to 9.4% last year.

We expect to finish the fiscal year with our SG&A in the low 9% range.

Other income for the current quarter is primarily related to interest income.

For the nine months ended June 30th, other income is primarily related to the change in the fair market value of our interest rate swaps.

In June, we announced the call of our 9+3/8% notes due 2009.

These notes were redeemed on July 15th and we expect approximately $5 million of interest expense in the fourth quarter related to the call.

Bill?

Financial services revenue for the quarter increased 25% to $60.7 million from 48.7 million in the prior year.

And for the nine months ended June 30th, financial services revenue increased 19% to $156.5 million.

Financial services pretax income for the June quarter increased 37% to $27.1 million from 19.7 million last year with a margin improvement of over 400 basis points to 44.7%.

For the nine-month period, financial services pretax income increased 14% to $64.3 million from 56.6 million last year. 94% of our mortgage company revenue is captive, reflecting our continued commitment to focus on profitably supporting our home builders business.

Our Company-wide capture rate in the third quarter improved to approximately 65% from 64% a year ago, and our average FICO score this quarter was 718, flat with the year-ago quarter.

Sam?

For the quarter, our consolidated net income increased 48% to $371.7 million from 251.3 million last year.

For the nine months ended June 30th, net income increased 45% to $906.7 million from 625.5 million last year.

Diluted earnings per share for the quarter increased 46% to $1.17 from $0.80 in the year-ago quarter.

For the nine months ended June 30th, diluted earnings per share increased 44% to $2.85 per share from $1.98 a year ago.

Bill?

Our home-building leverage ratio, net of unrestricted cash, improved 120 basis points to 42.4% from 43.6% a year ago.

Our goal for fiscal year end 2005 is to continue to maintain our year-end home-building debt-to-cap ratio in the low 40s or lower.

Our lot and land position is approximately 320,000 lots owned and controlled, which represents approximately a four-year supply of land. 46% of these lots are owned and 54% are optioned.

At June 30th, 2005, we had approximately $1.15 billion in dry powder, including $110 million in cash and $1.04 billion available on our home-building revolver.

Stacey?

The Company is raising diluted earnings per share guidance for the year ended September 30th, 2005, to be in the range of $4.35 to $4.40 on approximately 318 million diluted shares.

This increased guidance reflects the strength of our operations and our record backlog and is based on approximately 50,000 homes closed and more than $13 billion in consolidated revenue.

The fiscal year earnings guidance represents a 41 to 42% increase over the $3.09 reported in fiscal year 2004.

For the past two years, we have stated that our goals are to grow revenues 10 to 15%, grow our earnings per share 15 to 20% and to improve our gross profit margin 10 basis points per year.

Therefore, for fiscal year 2006, our preliminary guidance is to increase revenues 15% to approximately $15 billion, and increase diluted earnings per share 15% to approximately $5.00 to $5.05.

We are starting our guidance for the year based on approximately 58,000 homes closed.

Other assumptions include a 10 basis point improvement in gross margin year-over-year, offset by a 10 basis point increase in SG&A as we begin to expense stock options.

We have also assumed a flat pricing involvement.

While those assumptions may seem conservative today, we are 15 months away from the end of fiscal year 2006.

We have historically increased our guidance throughout the year as we have more clarity on our volume and operating margin.

Looking forward to Q1 of fiscal year 2006, our diluted earnings per share guidance is $0.90 to $0.95 per share on approximately 319.5 million shares, which will be an 18 to 25% increase over the $0.76 reported in Q1 of 2005.

We expect to earn approximately 40% of our estimated fiscal year 2006 earnings per share in the first half of the year with the second quarter slightly higher than the first quarter.

Don?

In summary, it has been another incredible quarter for D.R.

Horton, America's Builder.

We continue to experience strong demand across the nation and across all of our price points, as evidenced by the double-digit sales increases in each of our regions.

We are well positioned to achieve our goal of closing 50,000 homes this year, given our all-time record backlog of $7 billion.

This will result in our 28th consecutive year of increased revenues and profitability.

Looking forward to fiscal year '06, we see continued opportunities to increase market share in our existing markets.

First, by simply allocating additional inventory dollars to our already proven profit center managers; second by expanding our satellite operations as we focus on profitably aggregating the 74% of the U.S. home-building industry held by the small and medium builders, through our far superior cost structure.

This quarter, our satellite operations added two new states and four new markets.

Kenosha, Wisconsin, Oklahoma City, Oklahoma, Brunswick, North Carolina, New York, Lancaster, Pennsylvania.

Our goal for 2010 is to be the first builder to close 100,000 homes, all the while continuing to improve all of our financial metrics as we have done since our IPO.

This goal can be achieved with a 15% annual organic growth rate, which is lower than our historical growth rate.

The drivers for our business remain strong.

Demographically, demand continues to be driven by the baby boomers, their children, the echo boomers and immigration.

The economy continues to slowly improve with our major markets experiencing job growth, the major driver behind home-building.

The supply continues to be constrained by no growth, slow growth initiatives, in an increasing number of our markets.

D.R.

Horton, America's Builder, will continue to improve upon its own performance and outperform our industry peers by having the best people, operating in the best markets with the best home-building business model in the industry.

We thank you for joining our Q3 conference call and we'll now open the phone lines for questions.

(OPERATOR INSTRUCTIONS).

Margaret Whelan, UBS.

Ms. Whelan, your line is open.

Ms Whelan?

Ms. Whelan has withdrawn her question.

Your next question comes from the line of Lorraine Maikis with Merrill Lynch.

Thank you.

Good morning.

Looking at your full-year delivery guidance implies a 73% backlog conversion ratio or about 17,000 deliveries for the fourth quarter.

Can you just talk a little bit about how you prepared your infrastructure and your subcontractors for that record level of deliveries?

Well, in terms of our subcontractors, one of the advantages we continue to talk about is with our volume in our local markets, subcontractors are generally going to show up on our job sites before they show up on job sites for smaller builders.

So, the labor side of things, we think we're in a very good position to be able to deliver our backlog.

There is a little bit of a mix shift for the Company.

Two years ago, we did no midrise projects.

And now with the nature of that product, as we sell those units, they stay in backlog until an individual building is 100% complete, and then the deliveries in that building tend to occur over a relatively short timeframe.

So that's another thing that we're looking at as we go into Q4 with a slightly higher conversion rate.

The status of the construction in our backlog as we talk with our different divisions and look at their budgets for Q4 gives us a high feeling of confidence with our 50,000 unit home delivery.

Yes, our subcontractors and our suppliers are prepared to deliver the 50,000 units.

Of course, as we mentioned on conference calls before, Horton has always chosen to grow the bottom line at a faster pace than the top line.

And our target is 50,000 units, but if we have the opportunity to maximize our pricing power and drive more earnings to the pre-tax line, that's what we'll do.

Greg Gieber, A.G. Edwards.

Good morning guys and Stacey.

I want to drill down a little bit further on this rather impressive growth you had in the orders numbers for the quarter;

I'm looking at units.

I know you don't give community count for some unknown reason, but I was wondering if you could just give us some sort of qualitative approximate breakdown of how much of that order growth came from an increase in sort of same-store sales, opening more communities in any established market versus the new markets and satellites?

Yes, Greg, our overall community count has increased about 10% year-over-year.

So, certainly, our order growth is greater than that.

So we are seeing improved sales on a community by community basis.

Our satellite markets are still, I believe, in their infancy stage.

They are contributing a small percentage of our increase;

I'd say less than 5% at this stage.

But we look forward to those contributing a larger and larger percentage as we move forward, Greg.

Could you give me some idea of when you put together your numbers for the coming fiscal year, how much would be from communities versus new markets and satellites?

Any roughly, idea there?

In general when we're looking at our growth rate for the coming year, our divisions are providing us with their plans based on their planned community growth openings.

And in general, our community increases are generally in line with our overall growth targets.

So you're assuming essentially flat same-store sort of numbers, essentially?

Yes.

And you may know and you may recall, each one of our operating regions, we allocate the same percentage increase in inventory to each one of those regions because we want to keep a balanced portfolio across the U.S.

I remember, yes.

Now, I think The New York Times had an article this weekend on weakness in the Denver housing market.

You have, I believe, three divisions -- two or three divisions in Denver.

Can you tell me how the Denver division is doing relative to this sort of pessimism that appeared in the Times article?

Well, our Denver divisions are profitable and have been profitable each year since inception.

As I've mentioned before, as people ask me about pricing power, four, five, and six years ago, our Denver divisions were one of the most profitable divisions in the Company.

Over the last two to three years, they've been one of the least profitable divisions, although they have been profitable.

So as a result, even though we're having increasing profits in Denver, it's a slow go up there, and I would tell you that Horton certainly doesn't have any pricing power and I would suggest to you that no one else has any pricing power in that market.

And that's really a function of the fact that the whole state of Colorado last year, generated 4,000 new jobs.

If there are not new jobs being created, we don't have much opportunity for pricing power.

And you contrast that to the Washington D.C. market, which last year generated 85,000 new jobs, we have a lot of pricing power in Washington D.C.

So Denver, we've reduced our inventory somewhat over the past two to three years, but we feel very strong about the Denver market.

It's a wonderful city.

It's got a wonderful opportunity for relocations of corporations.

It's a wonderful place to live and that market will come back.

The beautiful thing about Horton is we're in 23 states and 73 markets.

And we're going to have some that go slow at times and we're going to have some that go faster.

Denver will come back.

Just as a follow-up to that, Greg, our sales were up 8% in terms of dollars this quarter versus being flat last quarter.

So we're actually seeing some solid sales performance from our divisions there.

That's good.

Speaking of places probably less desirable to live in right now, I understand Phoenix, Las Vegas are going through, for them, extremely hot weather, which is unbearable probably for anybody else.

Will that have any effect on your closings going forward?

I mean if you have 120 degree weather outside, it's kind of hard to get framers and roofers working.

Can you just -- has that been factored into your numbers for the fourth quarter and the first quarter?

Yes, and we've been in Phoenix since 1988 and we've been in Las Vegas since 1994.

And when you're in that market during the summertime, you'll notice that the subs show up on the job about 3 o'clock or 4 o'clock in the morning and they break about 1 o'clock or 2 o'clock, about when it hits 117.

So we've got that factored in and they're moving forward.

They know what they have to close for us this year.

Okay.

Thank you very much.

Stephen East, Susquehanna International Group.

Good morning, everybody.

Don, maybe I'll ask you first.

If you talk about 58,000 closings for next year off a 50 base, that implies to me maybe your conversion rate is slowing down there.

Could you just talk about whether you really expect a slowing conversion rate, and how should we look at it beyond the fourth quarter into '06?

Well, frankly, Stacey and Bill have looked at our conversion rates on a historical basis, and the one thing about our conversion rates is they're pretty much running true to form for first and second quarter and third and fourth quarter.

So we're not really anticipating any decrease in our historical conversion rates.

Although as Stacey said at the beginning of her guidance, is, is that, we are internally projecting 60,000 units, but we are giving the Street the estimate of 58,000 units because we want to make sure that we develop clarity on our earnings for third and fourth quarter as we develop our backlog in the first two quarters.

Okay.

That was exactly my next question on the 60 versus 58, so I appreciate it.

The other question, if you just look at your gross margin, and I know you're trying to be conservative with a 10 basis point increase, but you're actually -- this quarter, you accelerated it.

Could you just give me a feel for how you expect it?

It looks like you're not expecting any pricing moving forward.

Is that really a rational assumption or is that again just some conservatism there?

Well the way we underwrite all of our land deals and the way that we give our guidance is we simply assume flat pricing.

And I think that's the only logical approach to the business from a financial perspective.

I've said for three consecutive years, I don't expect to have as much pricing power in the next year as we've had in the past year.

For three consecutive years, fortunately, I've been wrong.

I don't know what our pricing power is going to be next year.

I think it's going to be good.

I don't know whether it's going to be as good as this year.

But we certainly don't want to build that into any kind of financial projections that we give you.

Right, okay.

I appreciate it.

And then the last question, specifically on mid-Atlantic, I know you've been trying to ramp that up and all that and the conversion rate has been slowing.

Is that pretty much something we can expect to continue for the next several quarters?

I think as we continue to ramp, you'll continue to see a conversion rate.

It's probably in about the same range it is now.

There's the Carolinas, the D.C. area, New Jersey, and then up into Philadelphia, in those divisions.

And where we're deploying more capital right now is the D.C. and up into the Northeast more than the Carolinas.

They build a higher-end product and it actually takes a little bit longer to build.

So I think that's already showing up in our conversion rates;

I wouldn't expect to see a big change going forward.

Larry Horan, Parker Hunter.

Good morning, fellows.

Great job!

Most of my questions have been answered, but I just have kind of a nit-picky one here.

In your financial services income statement, you have a big increase in other income.

What is that?

That's primarily interest income, Larry.

Oh, okay.

Why would you -- oh okay.

So it's primarily interest and income?

Is it half -- is that because you're carrying more loans through the quarter before they are securitized, or what?

Just because of the volume of the home builder, the amount of loans that the mortgage holds at any point in time is going to be a little bit higher because as they are increasing their tax rate and keeping up with our growth, their loans they are holding are going to be a little bit higher.

Okay, so there's basically a sustainable increase, then?

For modeling purposes?

Yes.

Okay, thanks.

The offset to that, Larry, is the interest expense.

Really our goal is for those to net as close to zero as possible.

We're not trying to hold the loans to make money.

I understand.

Thanks.

Ivy Zelman, Credit Suisse First Boston.

Good morning, guys.

Congratulations on a good quarter.

If you look at the order trends and understanding that you've been getting more into midrise and some attached products, realizing that you may sell a lot more in a short period of time out of one building, can you give us the mix for the quarter on orders in terms of attached versus a year ago?

Ivy, we don't have that for the most recent quarter.

The most recent number we have is that we're running about 17% attached.

Right, but I'm just thinking, Stacey, if you were to qualitatively -- if you don't have it in front of you, just think about it.

In orders, it's really not apples to apples if you've accelerated doing midrise and attached.

So just in thinking about it, would I be right to assume that orders might be actually on an apples to apples basis for single-family somewhat lower if you excluded the attached product growth that you've enjoyed?

I'd say probably yes, Ivy, because the attached has been an increasing percentage of our sales.

Okay.

Second question related to just looking at the Denver market, I appreciated your comments, Don.

One of the mind-blowing ones that we see is Fresno, which actually has lower job growth than Denver, but the price appreciation in Fresno is up 27% compared to price appreciation of 4% in Denver.

What are your thoughts there, Don, as to why that might be the case?

Because you said it's all about job growth.

Well, I would suggest to you that it's anticipating job growth is what I really think is happening in the Fresno market, because as the markets become pricier and pricier further West, basically, as the builders move further and further out, we're having to pay more for land.

And as a result, I think the single-family and the attached product -- it's mostly single-family -- are tracking with the land prices.

So I think it's really a function of the land sellers getting out ahead of us and saying, hey, it's coming and you're going to pay a higher price to be here.

Okay.

Thank you.

Lastly, just thinking about two stats, if you can provide cancellation rates, have they changed much this quarter versus last year?

And then just a final question on absorptions in terms of your absorptions you actually generated this quarter and what you're using on a go-forward basis.

I know you said you don't incorporate price, Don, into your assumptions, which I definitely appreciate and think it's the right move.

But do you actually -- when you're underwriting land in '06, for '06 deliveries, have you changed the absorptions to more normalized levels given the high velocity that you're currently enjoying?

(multiple speakers) cancellation rates, we are still in our historic range of 17 to 19%.

That really has not changed.

And as to your question on the absorptions, we really have not changed the absorption assumption on our communities.

And one of the reasons that is is because although we are underwriting, as we mentioned to you when we were in San Francisco, our newer land deals in markets like California and Florida and Las Vegas, the higher returns, the bottom line is we keep driving down the price curve so that we can have more affordable products.

As a result, even though you may think that we may have to reduce our absorptions, what we're trying to do is maintain and improve our absorptions because what we're paying our division presidents to do is achieve 15 to 20% growth year-over-year.

So they are sliding down that price curve, so I don't think our absorptions need to be adjusted.

And one of the other factors on absorptions is our division presidents are constantly looking at their forward land pipeline, and they are managing their absorptions based on their -- and adjusting their sales pace -- based on where they see their land pipeline and the construction pace on a continuing basis, and we really don't see that activity changing either.

Great.

You guys, I really appreciate it.

I guess one final question and I'll sneak a new one in, is that you mentioned on your mortgage company the FICO score, which we really appreciate.

Can you give us any color as the other builders have on ARMs and I/Os, the percent, for the quarter versus a year ago?

Yes adjustable rate mortgages for us this year are around about 33%.

And as a percent of our ARMs, the interest only loans ran about 30% -- 35%, I'm sorry.

Great.

Thank you very much, Stacey.

William Knobler (ph), Atlanta Softnoff (ph).

Hi.

Congratulations on a very good quarter and very good guidance.

First of all, on the satellites, you alluded to -- I didn't quite get what states, what markets, and perhaps some idea of what could happen next year in further geographic expansion.

As we mentioned, we entered in the quarter, included Kenosha, Wisconsin, which was basically an expansion of our Chicago operation across the border on the 94 freeway.

And then we -- our Dallas-Fort Worth east division established a satellite in Oklahoma City, Oklahoma.

And Brunswick, North Carolina, that came out of our coastal Carolina's division.

And then New York/Lancaster came out of our Delaware Valley division.

It's just -- in terms of satellites, it's really a function of one or more divisions continuing to penetrate their markets and maximizing the return in their core markets.

And then to the extent that there are ancillary markets or satellite markets adjacent to them, where they feel like that they can make a good return on our investment, then we're going to expand into those.

And I tell the story.

I was sitting at the Pacific Coast Builders Conference and had lunch and I was listening to -- guess who we were listening to -- yes.

Okay, we were listening to Henry Cisneros and Jack Kent talk about the housing industry.

Right.

And the bottom line is I was sitting next to a builder who is building in Iowa.

And I always made the joke, I had a friend from Ottumwa, Iowa and I said well, we'll never build in Ottumwa.

So this builder was describing to me how they were closing over 500 units in western Iowa, largely driven by Eastern European immigrations to Iowa.

So I think there are a whole host of markets out there where we can continue to expand into other markets, largely because of our low cost structure.

Now, on the financial service business, the mortgage service business, as you very well know, one of your competitors did a joint venture and I believe the reason they did it was not so much to make more money, although I'm sure they are happy about that opportunity, but also to, at a time when there are so many more sophisticated products available, mortgage products, the opportunity to be more competitive and close mortgages quicker and sell more homes.

Have you given any thoughts of doing something similar?

Absolutely not.

Our mortgage company is a stand-alone operation.

We've always operated it as a profit center.

We've always made our mortgage company compete with third-party mortgage companies.

And most importantly, the people to whom we sell our loans, we request from them the same type of mortgage instruments that they provide to their buyers.

So as a result, we're getting just as competitive a product out of our purchases of our mortgages as they are providing to their customers.

So we are very, very happy with our mortgage company.

One of the things that Stacey likes to say is, is that it really is just simply a process where our home buyers are handled day one and they're processed through the system, and we know with a high degree of certainty that our backlog is going to convert into a closing because our mortgage Company is part of D.R. Horton.

So no interest whatsoever in selling it.

Okay, last question or rather comment.

This is not a complaint about the performance of your stock; it's been sensational, and the results have been sensational.

But each quarter when you talk about the increase in your dry powder and your decline in the debt versus equity, and of course the lower cost of refinancing the debt, with your yield at 0.9 and with your multiple remaining at let's say 8 or thereabouts, have you given some thought or will you give some thought to going back to share buybacks or increasing the dividend or other ways of returning cash to shareholders?

We give constant thought to increasing our dividend and buying back shares.

Our business plan calls for us as long as we, Bill, can continue to invest our incremental inventory dollars in markets where we can get a 30 and 35% return on our inventory, such as Florida, the Washington D.C. market, and now the Pacific Northwest and California and Arizona and places like that, then we're going to continue to do that, as long as we can continue to grow the bottom line faster than the top line.

As I tell investors time and time again, when you see us not able to grow our bottom line faster than our top line, certainly, we're going to adjust our inventory growth, and when we do, we'll generate a lot of free cash flow.

And then we'll have the choice of what we wish to do with that free cash flow.

But currently, and I think that the record and our earnings speak for ourselves, we've been correct in the assessment that we needed to continue to invest in our business at an increasing rate just simply because of the returns we have out there.

Well thanks again, and congratulations and keep up the good work and congratulations on being part of the S&P.

One other point I might mention to you, as you know, almost 20% of our stock is held by insiders.

And as I tell investors, 70% of Don Horton net worth is in D.R.

Horton and 70% of my net worth is in D.R. Horton.

And I don't think you should ever get confused about where Don Horton is going with shareholder value.

Dan Oppenheim, Banc of America Securities.

Thanks very much.

Just wanted to ask about the percentage of assets that you'd like to have in markets like Florida and Maryland and Virginia, given that those are growing markets.

Do you have any goals for what they will be let's say a couple of years from now?

Well, I can tell you both the Maryland and Florida, Dan, we're going to increase our inventory in both those markets based upon our current returns.

And I think Florida currently has about 8% of our assets, and that's up from 3 or 4% of our assets a couple of years ago.

I don't know what our total investment is in the Maryland, Virginia market, but it's close to 1 or 2%.

And that's way underinvested in that market relative to the job growth.

As I like to say, every president that I've known, been around, has always gone to Washington on the platform they're going to reduce the size of the government and we have yet to do that, and there's tremendous job growth in that D.C. market.

So we're underinvested in that market.

So we're going to continue to increase our investments in those markets at a prudent rate, where our divisions can grow at a prudent rate and not over-invest in them, which would then create a difficult time for them delivering their product.

But both those markets in particular, we have great expectations from over the course of the next two to three years.

Thanks.

And then one other question talked about adding new markets; you've gone up to 71 from 67 last quarter.

Wondering if there are other markets where you're concerned about land prices or affordability.

On your last conference call, you talked about San Diego, where you're moving further to the east.

Are there any other markets where you have those similar concerns?

Not really.

Really, we mentioned on the Las Vegas and California in particular.

One of the things that we did at the beginning of this fiscal year, which really changed the whole way our Company operates in terms of return on business is that as opposed to having a specific hurdle rate on return on inventory for all of our 73 profit centers across the U.S., what we did is we adapted a specific return on inventory for each one of our markets.

So as an example, in Florida, where we've been receiving -- achieving a 30 and 35% return on our inventory, they no longer have the hurdle rate of getting a 20% return on inventory as they did in all the previous years of Horton's existence.

So bottom line is today, they're having to achieve a 30 and 35% return.

And basically what that does then is cushion our margins in those markets.

In the event there is not pricing power even if prices adjust slightly, we can still maintain our margins.

Stacey likes to say when we are underwriting our land with those kind of guidelines, to the extent that we lose pricing power in those markets, what happens?

We go from a 35% return back to a --

Back to normalized 20 to 25 to 30% return and we're still in great shape as a company.

Great.

Thanks very much.

Carl Reichardt, Wachovia Securities.

Don, I'm curious about just the Midwestern markets, where we've seen a reasonably good sized pickup in order growth just recently.

Is that a sales per community story there?

Or is it just a community count story there?

Actually, it's the great success of Doug Brown, our division president in Chicago achieving entitlements on a piece of land which took forever -- three to five years, that's when it first started working on the project.

And during the course of the time, we were able to experience some good appreciation of land prices during the entitlement process.

And we are at the process of right now just not being able to satisfy the demand in the marketplace in that big master plan community that he had entitled.

What percentage is Chicago of your Midwest business overall?

It's probably right at half.

Right now, (multiple speakers) two Midwestern markets, it's Minneapolis and Chicago.

Yes, okay.

So we've got no presence in the upper Midwest or the west (ph) belt (ph).

We believe we're in the only two good Midwestern markets; that's Chicago and Minneapolis.

I'm just curious because we've seen inventories come down and sales up generally in the region and I'm curious about the rest of the potential expansions; since everyone hates it, maybe it's time to look at it.

But do you have a -- sorry, Don.

We've been there.

We're in Chicago and Minneapolis right now.

Do you have a finished spec count per community at the end of Q2, Stacey?

And how did that compare to last if you have it?

No, but I will tell you -- we do have that, but I can tell you about our spec count and Bill can tell you more specifically because our spec count is --

Really the way we look at our specs and we manage our specs is we look at, for each division and each community, we look at our overall spec count, all specs under construction and then our completed specs, which are very few.

But we look at that very closely based on our sales pace.

And at the current -- at the end of the current quarter, we have less than a half a month's supply of homes nearing completion.

And so that's at one of the lowest points in our history and certainly given this time of the year and in the summertime, it is at a very good position as far as we're concerned.

As I like to argue with the accounting side of the business, we are under-specked right now, but they'll never buy that.

Is there such a thing?

The last question I have, Don, is -- and you have said frequently in the past that Horton generally is not interested in working through JV structures, either to acquire other companies or do larger land deals.

Given that, clearly in a number of markets, we've started to see bigger parcels come to market and builders ban together to actually take those parcels down.

Would you reconsider that stance anytime soon?

And is the move to satellite markets a way of kind of offsetting that, being able to have full control for Horton in these markets as opposed to moving into the JV structure with other builders?

Yes to the latter on the satellite.

No to the issue on joint ventures.

We're just not interested in doing joint ventures, but don't get confused.

We do do projects with other builders, but what our desire is, is if there are three builders in the piece of land, I want each of us to take title to our property independently and then enter into a joint development agreement so each one of us -- most importantly, Horton is in control of our own destiny and we don't want to be held up in terms of development.

That's our approach to the joint venture side, and then it keeps our balance sheet transparent and clean.

I appreciate it.

Thanks a lot, guys.

Steve Fockens, Lehman Brothers.

Just two quick questions.

As a percent of assets in California over the last few quarters appears to be creeping up a little bit, 25% first quarter, 26 last and 27 this.

Is that just a function of construction in progress moving further along or is it actual land expansion?

A combination of both.

California, obviously, is increasing its deliveries at an increasing rate.

Then also it's just a timing issue on certain pieces of land that we close.

So it's not -- I mean, as you've talked about in the past, you've been trying to keep your California land at -- if I remember correctly, around the three years.

So that hasn't changed?

No, not at all.

And it just happens to be that right now, last quarter, I think California was -- I know it was 25% of our assets and this quarter is 26% of our assets.

That's just really timing issues on land closings.

Okay.

And then to follow up on the hurdle rates, are there any other markets outside of California, Vegas or Florida where more recently, you've been raising hurdle rates?

Or is that something you look at annually?

Actually -- go ahead, Stacey.

I was just going to say we generally reset those hurdle rates annually, that we look at them monthly.

So there's definitely some divisions that are exceeding their hurdle rates and the targets that they have established and that we set for them on their bonuses.

So next year, as we go through the process of establishing the hurdle rates, there will probably be some that move up.

Okay, great.

Thanks very much.

Margaret Whelan, UBS.

But I did hear all of your prepared comments and most of the Q&A, so I just have a couple of wrap-up questions.

The first one is on the gross margin.

You said that it's coming from (indiscernible) is coming from strong pricing but also the fact that you're being more efficient in your buying.

Can you give us some specific examples of that?

Well, we continue to enter into new national accounts.

We continue to renegotiate our existing national accounts based upon our own increased volumes.

We are also involved in regional purchasing as you know in a number of markets.

Right.

And probably one of the best examples we can give you right now is the structure we've done down in Florida.

We were having not really difficulties, but to get the volume that we wanted in a timely basis, we needed to work with additional distributors other than just the roof shingle suppliers in Florida.

So we leveraged an existing relationship out of Atlanta to make sure that we had the volume and the pricing we needed in Florida.

So there's that type of thing going on on a local basis all across the country.

Do you actually see opportunities for you to own any of these subs at any point?

That's not something that we're focusing on right now, Margaret, simply because of the fact that we clearly see our way to 2010, growing the company as we told you we were going to grow it without doing any acquisitions of any builders or any suppliers or any vendors.

And I look up (ph) on each one of our division presidents and regional presidents are responsible for developing their own subcontractor base and their own supplier base with assistance form corporate.

So no, we're just not interested in doing that.

We are trying to solidify our relationships though.

And we actually do get a lot of attention, as we talk about 50,000 homes this year, 58,000 homes next year, growing to 100,000 homes.

And we're partnering more closely with our subcontractors and their business is growing in lock step with our business.

So you can partner but you don't have to own them (multiple speakers) your strategy?

Yes.

Okay, that makes sense.

And I know M&A is not included in your plans, but are there any specific regions or markets that you'd like to be in that you're not in already, that you might buy into?

As I like to say, the blue states are blue and the red states are red and we don't really need to make any of the blue states red, although our reverse (multiple speakers).

But the bottom line is, is that all we have to do at Horton for the next five years is just allocate additional inventory dollars to our 73 proven profit center managers.

And there are going to be instances like Kenosha, Wisconsin, Oklahoma City, Oklahoma, where Rick Horton went with his division, where we can find additional opportunities.

But that's just only if the returns are there.

On the -- (multiple speaker)

We're really not -- we've looked, as you know -- Stacey heads M&A.

We've looked a lot of small, medium-sized builders.

The numbers just don't work.

We think we're in a beautiful position.

We don't need to do acquisitions.

They're not paying right now.

If they start to pay, and there's a good return, then obviously with our dry powder and our low debt-to-cap, we're in a position to do whatever we need to do.

Are there any markets you're in that you're trying to get out of?

No.

Our only two wheat -- two or three weak markets include Salt Lake City, where our earnings are increasing there.

It's just a slow go in Salt Lake City.

Our people are doing a great job out there.

It's a tough market.

And then Greenville and Columbia, South Carolina, right now are weak.

But again, we have 73 profit centers across the U.S. and for the third consecutive year, all of our profit centers really are profit centers.

Yes.

And one -- just the final question I had is that I think in terms of how you compensate your division presidents and focusing on the profits, that they are very aware of the product mix that they need, and I think one of the reasons that your growth and your margins have been improving so much is because you're getting the consumers what they want.

Maybe there's less competition because you're doing attached product or lower pricing.

Do you get a sense for whether or not your mix is going to shift much over the next couple of years?

And what are the margins and the returns on attached versus that detached product or high-rise?

Well, clearly, our product has shift over the last 10 years.

Ten years ago, Stacey saw that we had zero attached, and now we'll be about 17% attached so far this year.

And the attached has even evolved, because we used to just one-story, two-story, maximum three-story attached and now we're doing six- and seven-story attached, and specifically in California, we formed an entire new division called our Podium division, which is basically building anything which requires an underground parking garage.

And the bottom line is that product is evolving.

So I would say to you as Horton still continues to focus on the first-time and the second-time home buyer and we continually try to drive down our average sales price so we can stay in the sweet spot of the affordability index in all of our markets, based upon current land prices, you'll find us continuing to do an increasing amount of attached business.

There's just no sense of strategy?

It's just an offensive from the perspective that we have a growth target that will reach into the next five years, and the way to achieve that growth target is to hit the sweet spot on the affordability index and as many markets as we can.

And the margins are about the same?

Actually, in the attached product, overall, the margins are about the same.

The returns have to be higher simply because the product is under construction for a longer period of time.

All right.

Thank you very much.

Well done.

Timothy Jones, Wasserman & Associates.

Were you trying to hide from my questions?

All right, now last year, if you recall, to this day, when you gave out that ridiculous estimate of 10% up in earnings on a 15% sales, you didn't change your 50,000 number the whole year and you raised your number from 10% to 42%.

I appreciate you being conservative, but there's conservative and then there's really being ultraconservative or.

Let's go through your -- there are a couple of things.

You're changing your way of doing things and I'm sort of interested.

First of all, since you bought Schuler, your average community has been up for the last three years about 10%.

Basically you're just making larger communities.

I think I'm right on that, am I not?

Correct.

But then you talked about this year or next year, having a 10% increase in communities.

Can you tell me what -- rather than going to the larger communities, why the difference all of a sudden?

Not that I care one way or the other.

Actually, Bill Wheat was talking about our community count for this year.

This year is 10%.

Yes.

I mean that's different than the prior three years maybe being 10% fumadez (ph).

Tim, the move into satellite markets will necessarily probably drive the average size of our communities down a little bit.

I understand.

How big are those satellite markets anyways?

Well let's take Laredo.

Basically Laredo has about 4, 5,000 permits and we think we can get 25% of the market down there.

You go to Oklahoma City, where Rick Horton just expanded to, we think that we can ultimately get as much as 800 to 1,000 closings out of Oklahoma City.

So I think the real litmus test for us is one, can we go in there and auction land versus owning the land, because that's a low-risk expansion for us.

Secondly, can we get at least 2 to 300 closings out of the market and is it going to be accretive to that expansion?

So you're looking at at least 200?

Most builders won't even go for 300.

But I know the way.

These are more the D.R. type of custom sales homes, aren't they?

Yes, a lot of times, they are, because basically we're doing the customization of production homes there.

Not to be critical, but to be objective, the reason the other builders aren't focusing on those kinds of markets is because of the fact that we've got a higher operating margin than any of the other builders.

Our cost structure is lower so we can go in there and compete with the small builders.

If you look at our operating margins as we calculate them versus the number two builder, our operating margins are 200 basis points higher and almost 400 basis points higher than the number five builder.

So that gives us a distinct advantage over the other top five or ten home builders when we go into these satellite markets.

Ten years, I look to have a small little piece with D.R. with 37 lots.

No other public builder could do that.

I don't think you'd bother -- not Florida, but I understand your flexibility there and it's been very profitable.

But it's kind of interesting.

First of all, you've got your deliveries up 16%; given your backlog, that's reasonable.

You've got your sales of 15%.

You're not going to have -- what are you assuming the percentage of multifamily will be next year, as opposed to the 17% this year?

Is it a huge jump to 25% or something?

It won't be a huge jump, Tim, but it will continue to trend upward a little bit.

Based on what I've same, it will probably still be a little south of 20.

Okay, look.

You've got a 90-day construction cycle.

Your sales in the fourth quarter were up 11%.

Say you're going to be up 11% or so in that first or second quarters.

How do you -- I know you're being conservative, but I can't -- if you do a 16% increase in sales, I can't even fathom one, you not having less than a 20% increase in deliveries, it's a 20% increase in sales; and also higher than that in margins, even though given the fact that -- might you just say, how are your margins in backlog -- I can get a pretty good idea, compared to the first nine months?

I would suspect they're still pretty strong.

Yes, our margins in backlog are in line with the margins we've been seeing, but as you look at our backlog today and you look at what we're going to close, to close 50,000 homes, we still have visibility in our backlog of about two quarters.

And so therefore any future margins are going to be relying on future sales.

But those sales (technical difficulty) really are up for the first -- the first-quarter sales are not to be delivered until December, the quarter you just recorded.

And those are up 11%.

You with me?

Yes, right.

Okay, I know you're being conservative, but I mean you know --

Let me say, one thing that this Company does not want to do, Tim, and we're not going to get pushed on our guidance because we've analyzed it very clearly, is we do not want to miss a number.

We want to hit all the numbers that we're telling you.

And let's speak specifically about Q1 of '06.

I think we have given very solid guidance on Q1 of '06.

We know we're going to be delivering a lot of units in this fourth quarter, ending 9/30.

And it's just like in the army.

The troops are going to be worn out come October, November and December.

So we don't anticipate our deliveries to be higher than what we're telling you they're going to be in our guidance.

You got it there.

I understand.

I had one other question.

The -- how much -- on this 9+3/8 debt, I didn't know you had any debt that high last -- how much was that, and what is this going to cost to prepay?

Are you prepaying it, or did you not have to prepay it?

Tim, that's a senior issue, one of the senior issues we inherited with the Schuler acquisition.

It's $235 million and (multiple speakers).

Were they callable, or are you going to have to do a prepayment penalty?

It was callable, first callable on July 15th.

And that was at a premium of 4.68%, and that's actually already been paid off on July the 15th.

The net impact for the payment of the premium, net of any write-off of amortized costs, will result in about $5 million in interest expense that will be directly expensed in our fourth quarter.

Not carried as -- well they don't do it anymore as the (indiscernible).

That's fine.

And you're replacing that with 5.5% debt, aren't you?

Basically.

Our last debt was 5+3/8.

All right.

That's pretty good.

Let's just see if I have one quick.

Oh, I missed one thing, Nevada and Arizona, you gave the percentage of assets, but I just missed the number.

What was that?

In the (multiple speakers) did you say?

Yes, the percentage of assets.

Texas was 13 and then you had Nevada and Arizona had some of it, and then you had the Florida and Colorado at 8%.

What was Nevada and Arizona?

Nevada and Arizona were at 9%.

Oh, 9.

I just didn't hear that.

Thank you very much.

Lorraine Maikis, Merrill Lynch.

Thank you.

I just wanted to --

Thank you for calling back.

We apologize, Lorraine.

I don't know how you got cut off.

No problem.

I just wanted to follow up a little bit on the midrise.

Are there specific geographies?

I know you'd mentioned California, but where else is that business focused?

And I guess how high will you go?

Well, how high we are going to go is right now, we're topped out around seven or eight stories.

I think that the maximum that we have on the drawing boards now are ten stories.

We really don't want to get any taller than that.

That segment of the business just has a long construction period and they're just longer the higher you go, obviously.

So we're pretty comfortable with ten stories right now.

Clearly, we're looking at it in the Las Vegas market.

We're looking at it in the south Florida market.

And we're already doing some projects in Chicago.

And most of what we've done in California so far has been in southern California.

We're looking at expanding that more into different areas of California.

Beautiful thing about the business is that if you're on the forefront of it in a particular urban redevelopment area, the land prices are good and you can get some nice incentives from the city in the central business districts of a lot of these suburbs, of even around L.A. and places like that, to make the project really work nicely.

Okay.

And you alluded a little bit to the riskier nature of this.

Can you just talk about what your sell rate has been prior to construction and what type of deposit levels you are requiring from these buyers and if that's different from your single-family business?

Well, our deposits are going to vary from market to market, but the product deposits are pretty much in line with single-family as well as attached.

I perceive it to be riskier because if you're going to go build 250 single-family detached units, you can build 20 at a time and you don't have to go build 250 at a time before you close all 250.

So I look at the midrise portion of the business as riskier just simply from the perspective that you've got to complete all 250 units before you can close the first unit.

And that's one of the reasons why we demand a higher return on that business.

Okay.

And just switching gears a little bit to your land phase (ph), can you just talk about the price of land that you have in inventory right now and what you expect from a cost increase perspective rolling through your cost of goods sold for the next couple of years?

Well, one thing about land prices, and I'm going to let Bill Wheat think about that question for a second.

But I can tell you, land prices over the last ten years have done one thing, they've continued to go up.

And we do have -- the nice thing about taking longer to get land entitled is we're the beneficiary, obviously, of appreciating land prices in most of those markets.

I think land prices will continue to go up as I look upon the supply and demand side of our business.

Simply the demand side, I believe, will far outstrip the supply side for the whole building industry as well as Horton.

So in terms of what's in our gross margin?

And no doubt, our land that's in the backlog today, our land that's in cost of sales is certainly higher than it's been in the past, but at the same time, you're seeing our margins go up.

So land prices have moved up as either demand has moved up or the constraints have been tighter in many of these markets.

And the real key thing to how we're managing that and it's driving our expectations on our margins is the fact that in these markets where there's been higher demand, where the land prices have gone up, we have raised our underwriting hurdles in these markets.

And so each of our division presidents, when they're looking at a new deal, and if they are facing higher land costs, they are still needing to make sure that the deal pencils at a higher margin and at a higher return hurdle.

So that's really key.

So as far as our margins going forward, our goal is to continue to maintain our margins where there are.

The other thing we're doing, Lorraine, is kind of what we've talked about with the tax is cost per acre has gone up on land.

What we're doing is working with local cities, local municipalities, to make sure that we're getting the density in each project that will let us absorb the higher per acre land cost without maybe a per unit land increase.

And the great thing about our business is as we go out and look at different projects, we can actually design an individual house, in other words, an individual line of houses to fit on a piece of land to try to absorb those land costs because we're not limited in the number of plans that we can offer.

That's part of the process that our divisions go through and determining how to make a deal work is they're looking at the product mix and what the absorptions would be and the density in order to hit those return hurdles.

And certainly not trying to get too contentious, which I have a tendency to do from time to time, I think that's the one beautiful thing about Horton is, is we're not trying to downsize nor limit the number of plans we're building across the U.S.

As a matter fact, what we're trying to do is we're trying to develop plans to incorporate the land structure and land cost and what the cities expect from us.

So just conclusion, all of those initiatives should be able to provide you with still holding your margins flat or raising them a little bit next year, even if you don't get any price increases?

Yes, but we're not going to tell you that because what we're assuming is flat pricing and we're assuming that our gross margins are going to go up by 10 basis points a year due to cost saves on purchasing.

And unfortunately, that 10 basis points, we think is going to be eroded this year by the increase in SG&A due to the requirement to expense our options.

You can call Stacey conservative, but that's where we are.

Thank you.

Michael Rehaut, J.P. Morgan.

Actually all our questions have been answered.

Thank you.

David Knott, Knott Partners.

Congratulations.

Your projection for next year would indicate an average price of $258,600 a home versus 260,000 this year.

Is that just being conservative or is it mix?

Or are you anticipating pricing problems, or what?

David, I'll take that question.

We've had approximately 15 million -- I'm sorry, 15 billion.

So basically we're not trying to pin down our average sales price to an exact amount at this point.

And we do basically assume that our average sales price next year will be approximately equivalent to what we're running this year.

Do you do -- since you're being conservative in doing that, or are there reasons that you're concerned or are you changing your mix?

It kind of goes back to what do we consistently do as a Company?

And when we started last year, we said 50,000 (ph) homes and we assumed a flat average sales price.

Obviously, this year, we've been very fortunate in the pricing environment that we've seen.

And going into next year, we don't see anything that would lead us to think that the pricing environment is going to change, but we just don't feel comfortable 15 months out assuming that our average sales price is going to increase another 10%.

So the guidance that we're starting with is going to be relatively conservative and assume a flat average sales price.

To answer your question directly, David, we don't see anything in '06 that would lead us to be concerned about where our business is going or we wouldn't have given the guidance that we did for '06.

Thank you.

Stephen Kim, Smith Barney.

Yes, sorry I had some technical problems I guess getting on.

So I missed a couple of your questioners, but I wanted to pick up where David just left off.

It seems to me that your 260 assumptions for this year seems awful conservative, given what you've been doing and given what your backlog is.

Any reason why that 260 number will be that low, that I'm maybe not thinking about?

I'm just going to circle back to what our assumptions were going into the year, which is basically we took approximately our year-to-date average sales price, multiplied it by 58,000 (ph) homes and we rounded.

It may be 15.1, it may be 15.2, but we've got approximately $15 billion in revenue.

Again, it's 15 months out and we're going to narrow that down as we get throughout the year.

This year, we started out at $12.5 billion in revenue.

We've now raised that to be over $13 billion in revenue.

But we'll keep you updated throughout the year, but we just don't want to start with incredibly aggressive numbers as we are 15 months out.

I understand.

I'm talking about the '05 though.

Year-to-date for fiscal '05, yes, our average price is 259,000.

So around 260, we're expecting our pricing through the fourth quarter to be about where we have been year-to-date.

And again, the $13 billion, an approximate number.

We understand that there are going to be different assumptions that analysts use in their models.

Okay.

That's fine.

And then following up on a line of questioning that was I think -- I heard earlier regarding midrise, it seemed to be the implication that, as much as your deliveries from midrise can be somewhat lumpy, because of you have let's say all 250 units delivering at the same time, there seemed to be an implication that perhaps that was also skewing your order trend.

But I just wanted to ask you, is there a reason to believe that your orders for midrises occur in as big chunks as you see when you deliver them?

Or are they fairly steady throughout the life of the project?

I'm glad you brought that up because we didn't completely answer Lorraine's question earlier.

It's pretty much even flow and we're not preselling at too early a stage in the cycle just like we're not the single-family homes largely because of the fact that we don't want to lose the pricing power associated with preselling a condo unit too soon.

And another way to say that is we're not going to wait until the unit is 100% complete to begin the selling process.

So we're going to release some units about the time we start construction, and then as we move through the construction process, we're going to have a set number of releases throughout the life of the project.

So those sales are actually absorbed over probably a nine to 12-month period as we build the project.

And our real game plan focus is, is when we get that building completed, we would like to have it essentially sold out.

And then also, not to make too much of this issue, what percent of your closings do you anticipate midrise or in this kind of vertical type stuff might represent in a year or two, maybe 5%, 6%?

Right now, it's running less than 2%.

And three to four years out, it's going to be less than 5%.

Right.

This is a pretty de minimus issue anyway, it seems.

Yes.

Good.

Alex Barone (ph), JMP Securities.

Great, thank you.

Hoping we could focus on the mid-Atlantic region.

I guess your deliveries there have been trailing quite a bit lower than the orders you've put up for the last four quarters.

So hoping you could help me understand that as well as what to expect in fourth quarter.

Yes, Alex, just kind of circling back to some of the color we gave earlier, the markets in the mid-Atlantic for us are the Carolinas and then the Washington D.C. area and the New Jersey and Northeastern part of the United States.

And as we have continued to invest more dollars in Maryland, D.C., and up into New Jersey and Pennsylvania, we're going into higher price points and more complex products because a lot of those communities are going to be built with basements.

They have a longer build cycle, and so the construction time just takes a little bit longer in those markets.

And we've actually decreased our investment some in the Carolinas in some of the markets that we've mentioned is weak (ph) before.

So you're just seeing a shift in geographic even within the region in terms of the product that we're building.

Right.

So I guess I still don't understand why the units are significantly lower than what the orders have been, the deliveries.

Because it's taking us longer to build the homes that we're selling.

And so the build process in the Carolinas is probably somewhere around four months; in D.C., it's probably at least six months.

And so those homes are going to stay in backlog a little bit longer.

And our increasing investment in those markets in the Washington D.C. area, obviously, our sales are going to occur prior to our closings, and so the growth in sales will occur prior to the growth in closings as well.

So part of it is timing as well.

Which is a good thing because if the sales weren't increasing at an increasing rate with our increased inventory investment up there, I'd be on the phone with somebody.

Right, but I guess it would almost seem to meet your 50,000 number, it would almost seem that the fourth quarter is going to be pretty unit heavy almost across every single region.

I was just wondering if you could confirm that that's really the case.

You're asking if the mid-Atlantic has to step up their closings on the fourth quarter for us, they definitely do, and the are well aware that.

Okay.

And then I guess in terms of pricing in your West region, your order -- the pricing of your orders came down relative to last quarter, and I'm wondering if that's just a function of sort of where you're trying to take the mix, or just the parts of the state where you're building.

Alex, I don't have an answer for you right now.

We can look at that and get back with you.

We look at it generally on a year-over-year basis, and I know the average sales price was up year-over-year, so we haven't actually converted that back to the prior quarter.

Okay, thank you.

Drew Torbin (ph), Litchfield Capital.

I just appreciate the guidance, just I wanted to -- a couple of clean-up things here.

Are you assuming any land sales in your '06 numbers that you've given?

We will always have some land sales.

I don't expect to see land sales at the same volume that we saw this year.

For the three years starting in 2002, we had about 100,000 in land sales -- I'm sorry, 100 million in land sales every year; and that's probably a pretty good run rate to assume, maybe slightly increasing as the size of the Company increases.

Okay.

And then we've seen some of your competitors' tax rate decrease with this Section 199.

Is that something that is in your guidance as well, or no?

We're still evaluating the impact of the Jobs Act on our tax rate.

And as we finish that evaluation, we'll work that into our guidance, but at this point, we're still evaluating it.

That actually applies to fiscal years that began after December 31 of 2004.

So it doesn't apply to our fiscal year 2005 ending in September, so it's not incorporated in that guidance.

And the guidance for '06 does not incorporate that yet.

Susan Berliner, Bear Stearns.

Just had two quick questions.

One is, if you can just go through the markets in Texas, I don't think you've touched on that yet.

And also, just talk about the pricing in the Midwest.

And the second question would be if you can just opine on what you think the rating agencies are going to do regarding your credit rating.

Well first of all, let me say that Texas is still a great market for Horton.

As you may know, we have a 20% hurdle rate for return on inventory in our Company.

It's market specific, but that's our average for the Company, in terms of a hurdle rate, and our Texas markets are exceeding that hurdle rate.

The Dallas-Fort Worth market continues to be very strong for us.

We're the largest builder in Dallas-Fort Worth and we continue to profitably aggregate the Dallas-Fort Worth market.

In the Austin market, where we're the largest builder, our margins have been increasing.

As you may know, post the .com and the technology bust of three or four years ago and the unemployment rate in Austin going from 2% to 10%, that market got a little tougher for us, but yet our profits are increasing in the Austin market.

And Austin will be one of our top 10 divisions in the Company this year.

If you go down to -- top 20 divisions; thank you, Stacey.

And if you look at San Antonio, where we've gone from 8% in 1998 of the San Antonio market to about 22%, 23%, on the San Antonio market, our margins have increased significantly in that market since 1998.

And San Antonio is an extraordinarily good market for us.

Houston, good market for us; it's weaker than the other three markets in Texas, but nevertheless, very profitable for us.

The margins are not as good.

The returns are not as good in Houston as they are in Dallas-Fort Worth and San Antonio.

Your question about the Midwest?

Yes, pricing in Midwest is basically driven by the new large community that we've opened in Chicago.

We entitle the land at a very favorable price and we are able to offer product there at average sales price that's less than what we've been running historically.

So that's really just the mix shift in the (technical difficulty) for lower average sales price.

And regarding (technical difficulty) we've had a lot of discussions with both Moody's and S&P over the last year or two.

The way we've been running our Company for the last three years, we have been running it based on investment-grade metrics, and we believe we truly are an investment-grade Company.

We are pleased with the progress that we're making, but obviously, it's never as quickly as we would like it.

But we're pleased with the announcement that Moody's made a couple of weeks ago announcing that they are formally putting our ratings under review for possible upgrade.

So we're optimistic there.

It has been 16 months since they put a positive outlook on us, so we think it's time.

And then we're certainly pleased with the discussions we've had with S&P.

S&P does have us on a positive outlook, and we have had a lot of discussions with them and feel like we are making good progress with them as well.

And so we're optimistic that we'll get an upgrade from S&P as well and reflection of where we are as a Company and where our metrics are.

And of course, we're sure that Bob Curhan (ph) at Fitch has been right all along with his BBB-.

Absolutely.

And actually, Stacey lost a bet;

I won't tell you the timing on the Moody's upgrade, but I gave her a chance to get her bet back, so I think she has an achievable date now.

Any interest in sharing that date with us, Stacey?

I will say the date.

I lost based on March 31st, which would have been about a year from the positive outlook.

And my new extended time line is September.

Great, thank you.

Timothy Jones, Wasserman & Associates.

Couple of questions.

You gave guidance on the earnings per share for the first quarter.

Could you give us some guidance on the deliveries and revenues?

Basically, Tim, what we did is assumed relatively flat pricing in -- I'm sorry, we basically looked at our sales assumptions for Q4 and looked at our ending backlog for September and applied our historic backlog conversion rate.

So since we don't project sales, I really hesitate to give you unit guidance.

We'll let you end up with your own ending backlog and apply the conversion rate.

But the earnings guidance, if you just back into it with pretty close to our current metrics, it's going to end up pretty close to what we saw in revenues and units.

I find it very difficult for that to happen with sales in this current quarter up 11% and backlogs of 12%.

It will be very interesting to see how you accomplish that.

I'd like to reiterate.

I think that we have given very good guidance.

No, but I just think you're being too conservative.

I mean I don't see -- these units are sold.

They're going to be delivered in the quarter, and they're up 11%.

I don't see how they're going to be flat.

Well I'm going to go back to my original explanation, Tim.

And the fourth quarter for D.R.

Horton, as it is with any other builder, is a huge order.

We have to deliver a lot of units this quarter and I can tell you at the end of the fourth quarter from October 1st, we're going to have some tired troops.

And we're not going to bet on a bigger conversion of our backlog than what we've already implied.

I'm sorry, I'm not talking about the fiscal fourth quarter.

I'm talking about the calendar -- your fiscal first quarter, that's the one I was asking you about.

And that's what I'm talking about.

If you (multiple speakers)

I'm talking about your December quarter.

Right.

Right.

I'm talking about Q1, which is going to be October through December of this calendar year, that's going to be our first fiscal quarter, as you know, and our troops are going to be tired at the end of the fourth quarter ended 9/30.

I don't have any problem with the units maybe being that good.

I just think your average price will be up.

Anyway, you say you do -- all your multifamily on -- you don't do any percentage of completion accounting?

No, we do none. (multiple speakers)

How does this work?

When you start in one of these high rises, I know (indiscernible) -- how much do you have to have sold before you -- what percentage -- before you start the construction?

Is it 80%, 70% or what?

Or 50 --?

No.

When we close a piece of land for the attached, we have the product already designed and are ready to move there and start digging the parking garage as soon as we close on the piece of property.

But you'll start it with very low sales.

But you don't take any of the sales in until the whole unit is completed?

Is that correct?

No, once we start construction on the project, then we'll start a specific number of units per month --

I know the sales.

I'm talking taking revenues into your (multiple speakers)

No revenues until the first unit closes.

Yes, until the unit closes.

Okay, very conservative. that's great.

All right, well, good luck.

Nice conference call.

At this time, there are no further questions.

Mr. Tomnitz, are there any closing remarks?

I'd just like to thank everyone for joining our Q3 conference call.

And most importantly, for all the D.R.

Horton employees who are listening, we appreciate all the efforts out there.

You once again produced a stellar third quarter and I'm comfortable and confident that you'll also produce a stellar fourth quarter.

We appreciate all the efforts in the field, and as Horton has said many times, we know the money is made in the field not at the corporate office and we appreciate you.

Thank you very much.

Thank you for participating in today's conference call.

You may now disconnect.