Hovnanian Enterprises Inc (HOV) 2004 Q4 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises's fiscal 2004 year-end earnings conference call. By now you should have all received a copy of the earnings press release. However, if anyone is missing a copy and would like one, please contact Dana Almack (ph) at 732-747-7800. We will send you a copy of the release and ensure that you are on the Company's distribution list.

There will be a replay of today's call. This replay will be available after the completion of the call and run for 1 year. The replay can be accessed by dialing 888-286-8010 with the pass code of 495-63467. (OPERATOR INSTRUCTIONS) This conference is being recorded for rebroadcast, and all participants are currently in a listen-only mode.

Management will make some opening remarks about the year-end results and then open up the line for questions. The Company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investors page of the Company's website www.khov.com. Those listeners who would like to follow along should log onto the website at this time.

Before we began I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call and to the information in the slide presentation. I would now like to turn over the conference call to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Please proceed.

Thank you. Good morning and thank you for participating in today's call to review the results of our fourth quarter and fiscal year ended October 31. Joining me today from the Company are Larry Sorsby, Executive Vice President and Chief Financial Officer; Paul Buchanan, Senior Vice President and Corporate Controller; Kevin Hake, Senior Vice President and Treasurer; and Jeff O'Keefe, Director of Investor Relations.

2004 marked another year of significant revenue and earnings growth for our Company, and we are excited to share our results for '04 as well as our outlook for fiscal '05. For those of you that are viewing the slides on the investor page of our website, www.khov.com, you may now turn to slide number 3.

For fiscal '04, we reported record earnings per fully diluted share of $5.35. This is slightly higher than our earlier guidance and represents a 36 percent increase from 2003's record earnings of $3.93 per share, which rose 83 percent over the previous year.

As shown on slide 4, net income rose 35 percent in '04 to $348.7 million, compared with $257.4 million in fiscal '03. Over the past 5 years, we have achieved a 34 percent compounded annual growth rate in revenue, and 63 percent growth rate in net earnings.

Our record results for fiscal '04 produced returns that are once again among the highest in the industry. For full-year '04, we posted a return on beginning equity of 42.5 percent and an after-tax return on beginning capital of 24.4 percent.

As shown on slide 5, our return on average equity for fiscal '04 was 35 percent. This represents once again one of the highest returns in an industry which is already generating great returns across the board.

Slide 6, total revenues for the full fiscal 2004 increased 30 percent to $4.2 billion, up from $3.2 billion in the prior year; again setting a record for our Company.

Slide 7, consolidated deliveries increased 26 percent in '04 to 14,586 homes. This record level of deliveries was achieved despite severe wet weather during the last 2 weeks of October in Southern California, which caused us to miss the delivery of more than 150 homes in that region, which would have obviously driven our earnings even higher.

The amount of rainfall during October in the counties of L.A., Orange County, San Diego, Riverside, and San Bernardino, California, exceeded 100-year peak levels for the month; and it prevented us from completing utility connections and landscaping necessary to obtain permits and certificates of occupancy that we obviously needed to deliver the homes in some communities.

Slide 8, net contracts were valued at 4.9 billion, representing 16,148 homes, an increase of 48 percent in dollar value from last year's results. Keep in mind that these record levels are coming off of a very strong '03, when the dollar value of net contracts was up 35 percent.

We were pleased with our ability to grow organically through new community openings and increased product diversification in many of our markets. Over 96 percent of our net earnings for the fiscal year came from organic operations, which exclude earnings from acquisitions closed since the beginning of fiscal '03.

We have a 2-pronged growth strategy. The first is based on organic growth through product diversification and community count expansion in our existing markets. We remain focused on achieving 20 percent growth in earnings organically each year prior to the effect of future acquisitions. The second part of the strategy is focused on making financially sound acquisitions of other builders to further grow our operations and to expand our geographic footprint.

Excluding the impact of the Company acquisitions, we achieved considerable increases in the dollar value of our net contract. During fiscal '04, the dollar value of net contract in the Northeast increased 34 percent, excluding the effect of the Summit Homes acquisition in Ohio.

The dollar value of net contracts for the year increased 14 percent in the Southeast, not including Windward Homes acquisition; and 20 percent in the Southwest, not including the impact of Brighton Homes and Great Western Homes. In the West, which was not affected by any acquisitions, the dollar value of our net contracts increased 54 percent.

While our overall sales activity remains quite healthy, we are continuing to battle to grow the number of communities that we are opening as we have been selling through some communities faster than anticipated in several markets, and are continuing to experience a growing level of regulatory delays in bringing new communities on line.

Thus our community count continues to lag just a bit behind our anticipated number of communities at the fiscal year-end and has actually declined from our peak during the year in April as you can see on slide number 9. We finished '04 with 275 communities.

Due to the lengthening of the regulatory land approval process in many of our markets it is becoming increasingly difficult to project the exact timing of new community openings. The lengthening of the approval process will also continued to create a fundamental imbalance between the demand for new residential homes and the supply in many of our more highly regulated markets.

Slide 10, for example, in New Jersey population growth declined considerably in the late '80s and early '90s. Although population growth has returned and even increased from previous levels, homebuilders in New Jersey are constructing nowhere near the number of new homes that we were in the mid to late 1980s.

As a result, there is an underlying demand for new housing which will continue to drive our business over the coming years. Pricing has also been rising from the excess of demand versus supply. These same conditions apply in numerous other highly regulated markets in which we are very active.

We have a very strong pipeline of new communities scheduled to open in the coming months in each of our markets. While we may experience temporary delays in opening new communities from time to time, our experience and size are an advantage in many of our markets in acquiring land and navigating successfully through the approval process.

As our community count continues to increase, we will continue to report increases in contracts, backlog, deliveries, and profits. Assuming that there is not a continued stretching out of the regulatory process, we project to have approximately 315 active communities open for sale at the fiscal year-end, an increased of 15 percent in community count over year-end '04.

Last week, we released the latest data available in our market sales activity, our monthly net contract results for the month of November '04. Including contracts from unconsolidated joint ventures, the dollar value of net contracts for the month decreased about 5 percent; and the number of net contracts were down about 16 percent over the same period in the prior year.

The decline in net contracts was significantly affected by the results of having only 4 selling weekends during the month, as compared to 5 in November of '03. Keep in mind November '03 net contracts were up 55 percent over the prior year; so it was a pretty difficult comparison month. Our year-over-year increase for net contracts for the fourth quarter of '04 was 16 percent in number and 42 percent in dollars. So we came off a pretty strong quarter.

Slide 11, notwithstanding the challenges in new community openings, our contract backlog as of October 31 reached 7,851 homes with a sales value of $2.7 billion, including 390 homes from our unconsolidated joint ventures.

The number of homes in backlog and the dollar value of backlog are certainly all-time records for any year end in our 45-year history. The value of our contract backlog represents a 73 percent increase over the end of '03. By the end of November, we already have more than 55 percent of this year's projected dollar amount of deliveries either in sales backlog or already delivered.

Throughout the year, we have seen significant increases in the price of various commodities including lumber, concrete, and steel. Our homebuilding gross margins would have been higher, clearly, without these commodity price increases. Though many investors are concerned about the future impact of building material prices, I would like to remind everybody that commodity prices have historically been cyclical.

As an example, slide 12 shows the pricing of lumber. As you can see, it clearly has been cyclical, as other commodities have been. But you can also see that it is currently trending down off the peak that we recently experienced. It is not yet at the bottom. So we anticipate that trend will give us some better costs than we have experienced over this last year.

Over the past 10 years significant price escalation in these commodities has traditionally been short-term in nature. We will continue to leverage our size and purchasing power in the non-commodity materials; and we have been successful in reducing costs in many of these materials.

Our strong contract backlog provides a solid base for fiscal '05 deliveries and gives us the confidence that we will exceed our preliminary earnings target for fiscal '05. Thus we are increasing our projection for the year.

Slide 13. At the end of the third quarter, we gave our initial projection for '05 EPS in excess of $6.30. Based on the current outlook, we now expect earnings to be more than $6.50 per fully diluted share in fiscal '05. This revised projection represents over a 21 percent increase from '04's record earnings of $5.35 per share.

This projection includes a first-quarter '05 EPS of greater than $1.40 per share, up more than 60 percent compared to the 87 cents per share in last year's first quarter. We expect quarterly earnings to be much more evenly distributed in fiscal '05 than we were able to achieve in '04.

Fiscal '05 revenue is expected to increase more than 19 percent to 5 billion on deliveries of more than 16,000 homes. Total EBITDA is expected to grow roughly 23 percent to more than $835 million. Details on our summary projections for the fiscal year ended October 31 ‘05 will be available in the financial information page of the investor relations sections on our Company's website at www.khov.com right after the call.

I will now turn it over to Larry Sorsby to discuss our financial performance in greater detail.

Thank you, Ara. I will give you a few additional highlights from our fourth-quarter and fiscal 2004 results and some specifics behind our 2005 expectations.

If you turn to slide 14, including unconsolidated joint ventures, the dollar value of net contracts for the fourth quarter ended October 31, 2004, increased by 42 percent, from the fourth quarter of fiscal 2003, and the number of homes deliveries rose by 25 percent.

For those of you who track our backlog, this means that our backlog in sales conversion ratio was lower in the fourth quarter in 2004 than in the prior year's fourth quarter, despite again delivering a significant number of homes in our fourth quarter.

We are thus starting the year with a higher backlog as a percent of projected deliveries for the year; and we are expecting our backlog conversion ratio in the first quarter of this year to be lower than last year's also. In other words, if you use last year's conversion ratios to project our quarter of deliveries, you're likely to over project our level of deliveries.

For the fourth quarter of fiscal 2004, total revenues grew 34 percent to 1.4 billion from fiscal 2003's fourth-quarter revenues of $1 billion.

Turning to slide 15. Net income for the last 3 months of fiscal 2004 was 133.8 million or $2.06 per diluted share, a 47 percent increase compared to 91.2 million or $1.40 per share in fiscal 2003.

Turning to slide 16. The average sales price per home delivered Companywide for the fourth quarter was 301,000, an 8.5 percent increase from the average sales price of approximately 278,000 in the prior year's fourth quarter. For fiscal 2004, the average sales price per home delivered Companywide was approximately 281,000, a 3.6 percent increase from the average sales price of 271,000 in the prior year.

The average sales price in our markets increased primarily as a result of geographic and product mix of deliveries. We expect that the average sales price per home excluding unconsolidated joint ventures will be in the range of 300 to 310,000 for fiscal 2005.

Although our average sales price in backlog at year-end was 327,000 excluding unconsolidated joint ventures, we anticipate that the average sales price of homes in backlog will decrease as we move through fiscal 2005, as a result of further changes in product and geographic mix, as we open new communities during the year.

For the full fiscal year in 2004, the Company's consolidated homebuilding gross margin, excluding land sales and before interest and cost of sales, was 25.5 percent, equal to the gross margin reported in the prior year.

In order to report our financials more consistently with other large public homebuilders, we decided to add an additional line item to the income statement to show previously capitalized interest now being amortized through cost of sales. After deducting interest expense, which was previously capitalized and is amortized to cost of sales in accordance with GAAP accounting, our homebuilding gross margin was 24.1 percent, equal to the gross margins achieved in the prior fiscal year on the same basis.

In fiscal 2004, we estimate gross margins were adversely impacted approximately 150 basis points due to the effect of price increases in lumber, concrete, steel, and certain other building materials. In addition gross margins were negatively impacted by our Tampa, Florida, acquisition which has lower margins than our historical consolidated average margins yet still achieves very strong returns on investment due to higher than average inventory turns.

Based on the homes we have in backlog for delivery in fiscal 2005, we are projecting our homebuilding gross margins for the full year, prior to the effect of interest expense, to be approximately 25.5 percent, equal to homebuilding gross margins achieved in fiscal 2004.

Many investors and analysts have been concerned with increasing land prices and the potential impact on our homebuilding gross margin. As illustrated on slide 17, our developed lot costs have remained relatively flat as a percentage of our home sales price since 2000, at just under 26 percent of homebuilding revenues.

At the same time, our ability to leverage our size and improve our process have resulted in direct and indirect construction costs declining as a percent of revenues from 45.6 percent in 2000 to 41.5 percent fiscal 2004. Thus our consolidated homebuilding gross margins, not including the effect of interest expense, increased from 20.7 percent to 25.5 percent over this period.

Since fiscal 2000 our average developed lot cost has increased from 64,600 to 70,600 per lot, a compounded annual growth rate of only 2.2 percent, while our average sales price grew at a compounded annual growth rate of 2.6 percent per year.

If you will turn to slide 18, total selling, general, and administrative expense including corporate expense as a percentage of total revenues, it was 8.4 percent in the fourth quarter of 2004, a 70 basis points decrease from 9.1 percent in last year's fourth quarter. For the full year in fiscal 2004, total SG&A expense as a percentage of total revenues was 9.5 percent, a 50 basis point reduction from 10 percent last year.

We anticipate that our total SG&A expense ratio will be approximately 9.5 percent of total revenues for the full year in fiscal 2005, as the positive effect of our increased scale efficiencies and process improvements are offset by the upfront cost of opening a substantial number of new communities throughout fiscal 2005.

Turning to slide 19, the Company's pretax margin in the fourth quarter increased 60 basis points to 14.6 percent from 14 percent in the prior year's fourth quarter, bringing the pretax margin to 13.2 percent for the full year, up 30 basis points from 12.9 percent in fiscal 2003.

Our tax rate for the fourth quarter declined to 34.7 percent in fiscal 2004 from 37.6 percent in the year-earlier period. Our lower tax rate was driven primarily by lower state taxes. Annually, we make an adjustment to the previous year's estimated federal and state income taxes based on actual taxes per the actual filed income tax returns.

Historically, this adjustment may cause us to book, say, a million more or a million less than the estimate we made at the end of the prior year. This year's net adjustment for 2003 state income taxes was made in the fourth quarter of 2004 and totaled 4.4 million, slightly higher than we have experienced in the past.

This adjustment was primarily caused by lower than estimated state income taxes in California and New Jersey. California, a unitary tax state, allows alternative methods of allocating income between states. For the accrual we used the standard allocation method; but in preparing the actual return we discovered that an alternative allocation methodology resulted in lower income taxes.

Fiscal 2003 was also the first year for a major change in New Jersey state tax laws. Being the first year to estimate taxes under the new law, we felt that it would be prudent to conservatively estimate our state income taxes for New Jersey. In the fourth quarter of fiscal 2004, we filed our actual New Jersey tax returns for '03, which yielded lower taxes than we accrued in '03.

For our 2004 California tax accrual which we made in the fourth quarter of fiscal 2004, the Company estimated the accrual using both methods mentioned above. Interesting to note, the standard method yielded the lower amount of taxes this time, which we recorded in our financial statements. Therefore, we believe that our tax rate in fiscal 2005 will be in the range of 37.5 percent to 38 percent, a little higher than what we actually achieved in fiscal 2004.

Now I will cover the performance our financial services operations. Turning to slide 20, although profitability and margins on our mortgage operations experienced competitive pressures throughout 2004 related to increased competition from third-party mortgage companies due to the significant fall-off in their mortgage refinance business and the increased popularity of less profitable ARMs, our financial services segment improved during the quarter and the year.

Pretax earnings from financial services were 8.9 million in the fourth quarter of '04, up 19 percent from 7.5 million in the prior year's fourth quarter. For the full year pretax earnings from financial services were 25.5 million, up 12 percent from 22.9 million in the prior year.

Turning to slide 21, we're currently originating mortgages in all of our markets except Florida, Arizona, and a portion of our Houston operations which we expect to begin origination in sometime during 2005.

Some investors have asked about the credit quality of our homebuyers and whether it is declining. Our recent data indicates that our customers' credit quality remains very healthy. Our average loan to value ratio decreased to 76 percent for fiscal 2004 compared to 78 percent in fiscal 2003.

For the year, our average FICO score was 713, a slight increase from the score of 710 recorded in the prior year. For the year, the average FICO scores for customers utilizing an adjustable-rate mortgage was equal to that of our traditional fixed-rate loans. This further demonstrates the strong credit profile of our customers who choose to finance their home purchases with adjustable-rate mortgages.

As we noted in our previous earnings call, we have seen an increase in use of adjustable-rate mortgages throughout the year. In fiscal 2004, ARMs represented 41 percent of all of our origination volumes versus 24 percent ARM originations in '03. The vast majority of our homebuyers that are choosing to use adjustable-rate mortgages are selecting 3-year or 5-year ARMs.

Our cash flow, balance sheet, and credit statistics continue to be very strong and improving further. While our shareholders are benefiting from our strong returns and earnings growth, our debt holders are also benefiting from our continued focus on maintaining low leverage and strong interest coverage at levels that many investment-grade companies would in fact envy. This helps our shareholders sleep well at night.

Turning to slide 22, for the full year EBITDA increased 35 percent to 678 million from 501 million in fiscal 2003. EBITDA represents earnings before interest expense, income taxes, depreciation, amortization, and nonrecurring write-offs. The reconciliation of our Company's EBITDA to net income can be found as an attachment to our quarterly earnings release.

EBITDA for the fourth quarter increased 39 percent to 242.1 million from 174.4 million in the fourth quarter of fiscal '03 and covered the amount of interest incurred in the quarter by 10.8 times.

Turning to slide 23. EBITDA cover the amount of interest incurred by 7.7 times for the year, an increased from 7.5 times during fiscal '03; and total recourse debt to EBITDA at year-end was a very modest 1.5 times. We ended the year with a strong balance sheet and the ability to more adequately service our debt requirements.

Turning to slide 24. While these EBITDA and interest coverage levels are very, very strong, many investors are confused about whether EBITDA is an appropriate measure of operating cash flow for homebuilders. Our audited cash flow statement, and those of most of the larger builders that are growing substantially, shows a negative operating cash flow after taking into account the effect of increases in land and housing inventories. These inventories are growing in line with the growth of our Company; and the amount of this increase is largely discretionary, subject to our control in seeking out and acquiring additional communities.

Homebuilders do not have significant amounts of required CapEx in fixed plant and equipment. In the event of a housing slowdown in a particular market or nationwide, we can slow down and defer any further acquisitions of land in order to maintain an actually increase our net cash flow. In fact, in past downturns we were able to pay down debt significantly and actually reduce our leverage ratio.

Slide 24 reflects the substantial amount of cash flow we generate if we were to decide not to add to our land position each year. It freezes our land position at the beginning of the year. It adds back our change in land investment each year to EBITDA.

On this basis during fiscal 2004, we would have generated $1,083,000,000 of cash. After paying interest and taxes of 276 million, we would have had over $800 million available to pay down debt. If we decided to stop investing in land, we could generate enough cash to pay off our $1 billion in debt in just over a 1-year time period.

Although we are well positioned for any slowdown in housing we do not foresee a significant slowdown in any of our markets unless the economy suddenly reverses course and we entered a prolonged recession. Thus we continue to maintain one of the best long-term land positions to ensure our future growth, largely controlled under option contracts with greater flexibility than outright ownership.

We further strengthened our balance sheet with a debt offering in the middle of November. We raised 300 million of additional capital, with 200 million in Senior Notes and 100 million in Senior Subordinated Notes. The coupons on these Notes further illustrate the strength of our balance sheet as we continue to price closer and closer to investment-grade debt offerings.

Turning to slide 25. Looking forward, we have a well-structured debt maturity with the majority of our bonds coming due after 2011. While we continue to invest in our future growth, we are focused on maintaining a conservative yet flexible balance sheet.

Turning to slide 26. We ended the year with our ratio of debt recourse debt to capitalization at 44.4 percent. For fiscal 2004, our average net recourse debt to capitalization was 48.1 percent. We anticipate that we will have an average ratio of net recourse debt to capitalization before 50 percent again in fiscal '05, in line with our current operating strategy.

Turning to slide 27. We finished the year with shareholders equity of $1.2 billion, a 45 percent increase from 820 million at the end of fiscal '03. We achieved a significant milestone in fiscal '04 as shareholders equity surpassed the $1 billion mark for the first time. Based on revised earnings projections for '05, we expect shareholders equity to grow to more than 1.6 billion by October 31, 2005.

Turning to slide 28. At October 31, we controlled approximately 100,000 lots in our various homebuilding markets for future development. Roughly 73 percent of our lots are controlled under option contract, which minimizes our risk exposure to any significant decrease in the value of the land.

Our current land position represents over a 6-year supply based on projected 2005 deliveries, which in fact is one of the longest controlled land positions in the industry. We will continue to employ a strategy of using land and lot option contracts whenever possible to minimize our land risk and give us flexibility if there is a slowdown in our sales within a particular community or market.

Turning to slide 29, shows our aggregate option position for all our lot options and the amount of aggregate deposit we have at risk, which represents only 6.7 percent of the total purchase price of the lots. We believe that this strategy maximizes our ability to reduce risk associated with land ownership. In addition our controlled land position gives us excellent forward visibility as we look to meet our growth objectives over the next several years.

Before I turn the call back to Ara, I would like to mention a few other points regarding our projections for fiscal '05. Our updated '05 projections are net of all amortization of definite life intangibles and include $49.7 million of projected definite life intangible amortization, representing a cost of about 47 cents per share in our '05 projection.

After this amortization our total remaining definite-life tangibles will be approximately 76 million at fiscal '05 year-end. We continue to believe that our financial treatment of acquisition premiums is among the most conservative in the industry and is the most appropriate way to represent our balance sheet.

At the end of October 31, 2004, we had only $32.7 million of goodwill on our balance sheet. At the end of fiscal 2005, total intangibles including goodwill are projected to represent about 7 percent of shareholders equity and about 3 percent of total assets. I will now turn it back to Ara for some closing comments.

Thanks, Larry. While the homebuilding industry continued to deliver solid operating results, our 43 percent return on beginning equity and 24 percent after-tax return on capital for our full fiscal year remain among the highest in our industry and illustrate our success in creating value for our shareholders.

Our record financial performance in 2004 is a direct result of our focused effort to meet customer demand by delivering a diverse array of homes and maintaining and attaining a market-leading position in each of our markets.

Slide 30. The homebuilding industry has consistently demonstrated an ability to achieve significant double-digit earnings growth. We are at the top of the chart with our peers.

Yet, the industry continues to trade at a significant discount to industries that are not producing even close to comparable returns or growth. The industry average P/E multiples at only 6.8 times projected '05 earnings are already less than half the equivalent P/E multiple of the S&P 500. Our closing share price on Monday of $41.59 represents a multiple of only 6.4 times our revised projection for fiscal '05 earnings.

For the industry to take such a low multiple, it obviously implies that the consensus of investors believe that the housing market is likely to turn down, and homebuilders' earnings and returns will fall substantially. We don't think this jibes with the substantial consolidation going on in the industry; the market share gains by the large public builders; the conditions in our markets, which are more weighted to the heavily regulated and undersupplied markets; nor with the current stage of our recovering economy.

Historically, a stronger economy with improving job growth, steady consumer confidence, and increasing GDP growth has coincided with good periods for the housing industry.

Almost all economists project that the Fed will continue to raise short-term interest rates in the foreseeable future as the economy strengthens. The financial press talks at great length about the impact of rising short-term interest rates and how it will crush, in some perspective, in some people's minds, the homebuilding industry's earnings power. We obviously do not believe this is the case.

What many do not focus on is that most economists project much more modest increases in long-term rates. Homebuyers don't typically borrow based on Fed funds rates or prime rates, but more on long-term rates. Currently about 60 percent of our buyers borrow based on the 30-year fixed-rate; and that is pegged more typically to a 10-year note. The majority of those that use our ARMs use 3 and 5-year ARMs.

If you turn to slide 31, this shows Wachovia Bank's current projections which are similar to many others. Their projections have short-term rates rising as many economists do; in their case about 275 basis points over the next 7 quarters; and that rise is quite yet gradual. However, they project long rates to move about half that amount.

Now again reminding you that 30-year rates are pegged to the 10-year rates, that would move the 30-year mortgage rates to about 7.25 percent in theory 7 quarters from now. That would still be a very affordable rate by historical standards and much lower than the 8 to 8.5 percent rates the market experienced in the recent period of 2000, still a very strong housing year.

Obviously the 5-year rates, the increases would be in between the short-term rates and the 10-year rates. Therefore, we see a very modest effect from the Fed funds rates movements in the residential for sale market, particularly as the gradual rise in long-term rates is likely to follow a much more robust economy, which is typically good for home sales.

For our Company, fiscal '04 was a record year of growth and financial performance that ranks us near the top of the industry, and I can assure you with great confidence that our talented group of associates remains focused on executing our business strategy and developing new initiatives that will continue our momentum in fiscal '05 and beyond.

That concludes our presentation and we would now be pleased to open up the call for questions.

Thank you, sir. The Company will now answer questions. (OPERATOR NSTRUCTIONS) Michael Rehaut with J.P. Morgan.

Good morning. Just had a question. I was wondering if you could review different regions and, trendwise, where you are seeing a pickup or a slowdown in year-over-year growth, particularly as it relates to, perhaps, what you were seeing 3 months ago and 6 months ago?

Sure. I would be glad to go market-by-market. First, the Northeast remains very solid and steady, and we are going to have pretty substantial year-over-year growth in the Northeast. The same really holds for the DC market, solid and steady, and we're projecting good solid year-over-year growth.

Moving down the coast, the North Carolina market is steady to slightly improving. We will have more modest growth there, but we do project an improving year again. That market in general has been weaker than some of our other markets, but 2 of our 3 markets there have really been improving, and on the whole, I would say it is steady to slightly improving.

The Tampa market, moving further south into Florida, is really solid. It is just a lack of supply there. Obviously, we and all homebuilders were quite devastated by the hurricanes, but things are slowly getting back into line and we are expecting good, solid year-over-year growth in that marketplace.

Moving along the southern coast in Texas, Houston and Dallas, interestingly, for many builders has been a difficult market. I'm pleased to say we have been quite pleased there; our returns are substantial there, and we are expecting good solid year-over-year growth in those markets.

Phoenix, moving along, is also showing some strength and gaining some momentum, and we expect solid year-over-year growth there.

Southern California is interesting. We are expecting very strong year-over-year growth in Southern California this year, where we already are a substantial market leader. At the same time that we are expecting solid growth and phenomenal margins, I would say that market definitely has pushed the outside edge of the envelope on pricing.

We and other builders have had to get more realistic in the pricing as we really pushed the outer edge. What that means, just to kind of put things into perspective, we were generating gross margins there in excess of 40 percent routinely. That is just a huge amount. That is kind of at the peak of the pricing.

In certain communities, we found we had gotten too aggressive and we had to adjust a little bit, where our gross margins are maybe in the 35 to 38 percent range, still way above what the feasibility is and what one might normally expect, which would be more in the low 20s. So we are very pleased in the market in spite of that, and expect huge growth there and a pretty good position.

Northern California, very solid. We are expecting, actually, a relatively flat performance there, but it's not because of the strength in the demand. It is really just related to our ability to get more communities on line. We expect that will turn around in '06.

Moving around, we have just entered the Minneapolis market, so it is really too early to report on it. We will have substantial growth because we are delivering 22 homes this year in the fourth quarter and that is up from zero, so the growth is phenomenal.

Finally, the Ohio market is the one market where I would say conditions are slower. We expect to have negative year-over-year growth in the Ohio market. It is at the moment for us one of our more challenging markets. I don't think I missed any, offhand.

That is great. Just one follow-up on that. In terms of -- and I appreciate all of the detail and certainly don't want to overemphasize 1 region over the others -- but given the level of interest in Southern California, overall in '05 versus '04, despite possibly pricing being flat or down, is it safe then to say that you are still expecting profit growth in that region for '05?

Definitely, yes. Absolutely. Keep in mind, I say Southern California; Southern California is really many different markets. The San Diego market is very solid, we find; it's been very solid. The Inland Empire market, Riverside, San Bernardino, remains very, very solid.

The trickier market to some extent is the Orange County and higher priced L.A. markets. But again everything is relative. We have had to do some minor price reductions from the very peak, but that still results in very high margins, much higher than our feasibility. All of that is going to mean substantial year-over-year growth in all of those geographies. (technical difficulty) growth in profitability as well as top line.

That is great. Thanks very much.

Stephen Kim with Smith Barney.

I had a few questions, one was if you could talk about the gross margin guidance you gave. I think back in September you said that you thought the gross margins were going to do better than 25.5, is what I have in my notes. You basically came at 25.48. Not to split hairs, but I assume that the lost California deliveries had some impact on that.

I was wondering if that sort of explains why you did not substantially come in better than 25.5? Or was it perhaps something else in addition to the California effect?

I'd say it is primarily the California effect, Steve. As Ara just went through, the margins there are higher than our average margins; and missing 150 of those do have an impact. And as you say you were kind of splitting hairs at 25.48 percent. So if would have been a little higher than 25.5 had those deals came in.

Okay. In terms the going forward, you have talked about your gross margin being around 25.5 percent in '05, which basically makes it sound like it's essentially flat year-on-year. Can you give us any sense for what you're thinking in terms of the year-over-year progression by quarter?

Are you anticipating that the beginning of the year, for example, in '05 will been higher than the beginning of '04; but maybe the back half will be lower? Or what are you thinking about there?

I'm going to beg off answering that and take the easy way out, and just say at this stage we are not going to give you guidance quarter by quarter.

Although we are obviously giving guidance on the absolute EPS by quarter. At least for the first quarter anyway. I think we're one of the few homebuilders that steps out on the edge and does that. We are doing it once again.

And we are going to be delivering a fabulous quarter, as I mentioned earlier. We believe about $1.40; that is up substantially from the 87 cents in the first quarter of last year.

Okay, thanks a lot.

Margaret Whelan of UBS.

Nice quarter and very fair overview already. So, 2 follow-up questions, really, to Mike and Steve. The first one is, you mentioned in your prepared comments -- and Larry I think you (technical difficulty) expected prices to be down going forward. Will you just elaborate on that?

Because the price in your backlog and the margin embedded in your backlog seems pretty high already. Is that mix or regions that you are going to move into, or the affordability crunch in some of your markets? How are you thinking about it?

Part of that is because the places were we tend to have a lot of backlog happens to be in our highly regulated markets, which are the higher priced markets, particularly the Northeast and the DC market.

Some of the other markets that will be selling more of their deliveries as we go forward, and closer to delivery dates -- like the Houstons and the Phoenixes and the North Carolinas -- have lower average prices. That is why we're projecting the average price to be lower for the full year than what is currently in our backlog.

It also has to do with the mix of communities that are going to be opening throughout the year. We just didn't want people to run in their models a number which is -- our backlog average sales price is significantly higher than what we are expecting to achieve for the full year. So we're trying to give you pretty good guidance.

I appreciate that. Just as a follow-up to that, really, in the press release you mentioned that going forward the breakdown of the earnings might be less seasonal. Can you just put that in perspective?

And also what the conversion ratio of the backlog into delivery is? I know it has come down a little bit over the last couple of years. Clearly you are still growing in units pretty dramatically. But can you just give us a sense for how we should model that for '05?

We are all looking around here to get (multiple speakers), Margaret. I think the answer there is that we were very heavily weighted in the fourth quarter. The California situation occurred. We have been putting a lot of pressure on our divisions to try to have a more even flow throughout the year.

We're starting the year with a very powerful first quarter, and it is just not going to be as weighted. I cannot really give you specifics at this stage precisely what the weighting is going to be quarter by quarter. But I can promise you that every quarter I will give you at least 1 more quarter outlook when we do it, as (multiple speakers).

What you can look at is for the year at this point we're projecting about a 21 percent increase year-over-year in EPS. Hopefully we will give further guidance and refinement of that number each quarter as we release our numbers and get more sales.

For the first quarter however, we're projecting that to be up 60 percent, and it will be obviously -- we are approximating $1.40 for the first quarter out of our projected $6.50. So that gives you a sense on that. You really just have to kind of weight out the other 3-quarters. But.

If it was perfectly even it would be $1.62 every quarter.

I can figure that out, Larry. Just relative to what you were saying I was trying to understand it a bit better. Just the last question that I have is, is there any market where you are actually seeing pricing on the like kind of apples-to-apples product decline? Or is it all just mix?

Repeat the question one time?

Her question is, is there any market where we are seeing actually apples-to-apples price declines. or is it all just mix. I would say if you add concessions, maybe a minor, minor decline in North Carolina. Excuse me; not North Carolina, Ohio. I think that is the only market at all.

In some of our markets we are actually still able to increase prices. We are quite pleased. Obviously all of our projection assumes zero price increases and that everything is flat.

Okay guys, thank you very much. Well done.

Timothy Jones (ph) with Wasserman & Associates.

First of all, you are one of the very few builders that have actually improved your financial service income this year. Is that because the financial services basically are only 15 percent of your homebuilding revenues and you're still growing it?

I think growth is the reason. We probably grew a little bit more than other homebuilders did this year. So that is probably the major reason.

We still have some upside, because we are not fully operational in several of our markets yet. As we roll those additional markets in, we will have continued growth. Even though margins are still under pressure we do expect some good top-line growth.

Is Florida now allowing builders to go into the mortgage market and the title insurance, or not?

Yes.

Both title insurance also?

Yes.

I know they fought it. Secondly, you said that your rise in raw material costs cost you about 150 basis points in margin. Yet you said that you did not really raise prices this year. You basically -- any improvement in the average sales price was mix.

No, no. We said the market also (multiple speakers). We also said the market was good to us. It's a combination of the market, which we clearly were able to raise prices in certain markets during the year, as well as the process and productivity improvements that we have in place.

I think what Larry was referring to was just some of the changes in average sales price. The increases did not reflect just price increases on an apples-to-apples basis, but it was the mix of products and geography in addition to that.

In other words, did you do more -- what was your percentage of multifamily this year versus last year?

You know, I don't have those statistics at the tip of my fingers, but it is not really just that. Because frankly in the Northeast we have some million-dollar-plus townhouses; and in San Diego, we're doing some million-dollar condos that are doing quite nicely.

It really has more to do with some of the product and geographies. For example, in Houston, we are selling hundred-thousand-dollar single-family detached homes. We are doing the same in Phoenix. And we have a lot of growth in that compared to prior years. Those are single-family detached. We sell those for much lower prices than some our condominiums in other markets.

So it is not really by product type. It really has to do -- purely by product type -- it has to do with the product type and geography. And not just single-family versus townhouse but what type of single-family and what type of townhouse.

What average price do you have in Houston and Dallas? It sounds like you're below the average and that is why you're doing well.

It is interesting. In Houston, we have 2 different companies that we acquired there a couple of years ago. Yes, our lower price points are definitely doing better. The 2 companies we have, one is called Parkside, they really focus almost exclusively on the lower price point, and they are doing quite well there. I think their average price is in the very low 100s, probably about $120,000.

Brighton Homes does more of a wide variety. They do some higher end move-up. But they also do some lower end. They are actually having more success at a lower end. They also do some urban infill; and that has been very successful and profitable for us in the Houston market.

In Dallas, we have a very wide array of products. I think that is part of the reason why we're doing so well. When we acquired Goodman Homes, it is, God, almost 6 years ago now, they were really focused on the high-end and the middle end. But as becoming part of our Company, we are very focused on ultimately offering a wide and diverse product array, they expanded their product lineup over the years.

They introduced a very low-end product that is doing extraordinarily well. They introduced their active adult age-restricted community. That is doing extraordinarily well. They are just about to open their first townhouse community in their history, and we're anticipating great demand.

So there I think part of the success has been broad product diversity in the Dallas market. Plus we have great management and some really good land positions and relationships.

Craig Kucera with FBR.

I had a question about your forecasted community count, about 15 percent growth. Where do you see most of that growth coming in?

Larry, I don't have those in front of me. Do you happen to have it by market?

I don't have it by market in front me. But clearly in the Southern California Inland market we're having growth in communities. In the Northeast region, primarily New Jersey and Pennsylvania, we're having growth in communities. A little lesser extend but still growth in the DC market. And then everywhere a little bit of growth, but those probably outweigh the growth on average.

Is it pretty fair to assume that those are kind of coming down a little bit on the mix scale?

I am not sure what you mean by that.

If I guess as far as like mix overall, are you kind of bringing -- given your ASP guidance, are you basically saying that we're opening up these communities and that overall mix is going to be a little bit lower than maybe it was this previous year?

Those would not necessarily be the lower mix. Those are the communities that are opening that won't be delivering until -- some of those will open in the latter half of this year and not actually have a delivery until '06.

When we're talking about the average sales price, we are talking about deliveries. I think Ara mentioned that in backlog already some of the heavily regulated have a disproportionate amount already in backlog; especially New Jersey, Pennsylvania, DC, for example.

Whereas we are continuing to sell homes in Houston and Dallas and North Carolina and Phoenix, which have significantly lower average prices than we have in backlog.

Okay. Following up, what does the Rocky Gorge acquisition give you? When do you anticipate the purchase accounting to kind of burn off from that?

The Rocky Gorge was really more of a bulk land purchase rather than a Company acquisition; although we bought all of their assets. We really did not -- unlike what we normally do -- since we have a management team and a lot of their existing senior management team really wanted to retire from the business, and they were quite thin on top anyway, we viewed it primarily as a bulk land purchase.

Virtually all of the premium was assigned to the land cost. That will be burning off rapidly; in fact every month as we deliver homes.

Okay, thanks.

Ivy Zelman CSFB.

Ara, I just had one quick follow-up on the comments you were making as far as short-term and long-term rates. I think we would generally agree with you, but when you look at a market like Southern California, the numbers coming out are that buyers using ARMs represent 75 to 80 percent of sales.

When you think about that ARMs are priced off of the short-term end of the curve, and you could see 150, 200 basis point increase, I'm sure you can appreciate the impact that would have on someone's monthly payment. I am wondering why that is not something that would concern you?

First of all, we are experiencing about 60 percent ARMs in California. It is the highest market for ARMs. I think part of the reason is that we have some higher prices. The people that are taking the ARMs are taking typically 3 and 5 years. So again they're not going to quite see the same bump-up as short-term rates.

But part of the reason that I am not overly concerned is that the majority of our deliveries in Southern California are in the much more affordable priced market of the Inland Empire.

Another big chunk of it is in the active adult age-restricted market; and frankly those buyers typically could qualify for 100 percent cash purchase and are only taking mortgages because rates are so low. For them, qualification is a nonissue. That is a growing segment of our business. So that is part of the reason also why we are not overly concerned about Southern California.

Frankly, our margins are so high that if we did have to do some price adjusting, we could do that and still deliver phenomenal performance.

Lastly, we are just very diversified in our product types. We have got urban infill; we have higher price; we have got high-density lower-priced detached housing; we are all the way out in the Palm Desert secondary home market, which again typically some of those are a lot less challenged from the income qualification standpoint. So all in all, we are feeling quite comfortable right now.

Just 2 quick follow-ups on that. First, I'd just like kind of a breakout of what percentage of the market is active adult, because I think that is a good point.

Secondly, if you think about pricing, I know you guys don't model in any price appreciation in the margins. They're significantly above elsewhere. But if you went the next year with flat pricing in Southern California, granted your margins would be above Company average, but would they be down?

First of all, I think we will have to get back to you just after the call with a breakdown of the active adults in Southern California. It is quite substantial; but I will get you the exact number. Jeff, if you make a note to get that number for him.

Regarding margins, I cannot tell you with absolute certainty, but my guess is probably yes; if you went out 1 more year, margin would likely be down from '05. Obviously, there are some pretty tough comparisons. But in general what is happening is the further out you go the more current your land price is. If you assume no appreciation in house price, that would generally yield more normalized margins.

Okay. That helps a lot. Thank you very much.

Andy Wagstaff with Touchstone Investments.

I wanted to focus on, if I could, San Diego specifically and the Acqua Vista project. It is my understanding that you guys have been having buyers sign contracts which prevent them from being able to rent or resell their homes within the first year of ownership.

Correct. Actually they're allowed to resell that; we just get any profit if we have investors there. That is similar to a clause we are employing in many of our markets; and shortly it will be in 100 percent. Because we don't encourage investor purchases.

What I wanted to find out is, have you guys experienced any lawsuits or arbitration from this provision with existing owners over dispute regarding their ability to do this?

We have not. Actually it is becoming a more common clause in the entire homebuilding industry. It is not just for us.

So you guys have not at this point seen any disputes over this provision?

Not at all.

You sound like maybe you have heard of some. Have you?

I don't know. I just am wondering if this is something that you guys have had to tackle yet; or whether or not you have run into any issues. But it doesn't sound like you have.

No. We are, as many people are, concerned about the investors distorting the marketplace. We want to make sure our backlog is solid. Investors typically would be the first ones to flee if market conditions change or they get a little bit concerned. So we discourage investors.

We have this deed restriction in place at many, many of our locations and soon to be all of our locations.

Got you. In that project in particular, just because you have obviously got -- I don't know, what it is? -- 382 units in the project, in the instances where you have got resale units available, have you guys been forced to discount prices to kind of meet the market?

No, we haven't. We've done phenomenally well there, frankly. We have already sold -- we just closed on the building. There was a unique transaction altogether. But we closed on the purchase of the newly constructed building in June.

There 382 homes. I think we have sold 340; and we have delivered over 300 already. So we are well through that. We are just on the very tail end of that. That has been one of the best selling communities every single week probably in our entire Company.

The Cortez Blu project is still in the planning phase, or is that -- ?

No. We have just begun construction there. That is a very small high-rise; only 67 homes in that. We have broken ground, and we hope to be opening for presales in or about January.

Got you. Last question for you. Interest-only; if you're looking at the ARMs and the number of people that are doing these ARM transactions, could you give me some sense of what percentage of the buyers are doing interest-only ARMs in California?

I would say it is insignificant, but I don't have the exact number in front of us.

Is insignificant less than -- I think you said 60 percent you're doing on adjustable. What would be insignificant? Less than 10 percent or 15 percent?

Larry, why don't you get that statistic as a follow-up bit of information for him after the call?

Okay.

We will get it for you.

Alex Barron (ph), JMP Securities.

Very good year.

Thank you. Wait till you see '05.

I'm looking forward to it. A couple of questions here. 1, just to go over your last press release about sales, just to make sure I understand. If you had had the same number of selling weekends, would the number have been roughly 20 percent higher? Is that kind of what we're supposed to read into it?

I think likely it would have been 20 to 25 percent higher. I think that is reasonable. Obviously almost all of the sales happen on the weekend, as you know, in our business versus a weekday. But I won't say it was a great month.

It just does not happen to be that every single month exactly the same number of homebuyers come into the sales office, they want to buy. And typically by the way November, December, and January are the slowest months seasonally for our Company.

But it wasn't a fabulous month. But we did come off of a fabulous quarter where we were up 42 percent immediately prior to that. We are feeling pretty good right now. The market seems to be holding reasonably strong and steady.

Okay. Focusing specifically on the Northeast region, it looks like this past quarter the average sales prices -- and even this month -- have been substantially higher than for the first 3 quarters of '04. Is that just a change in mix? Is that sustainable? How should we look into that specific region?

Yes, in most of the cases the big fluctuations in average sales price have more to do with community and product and geographic mix than they do with price increases. Having said that, it still is a very healthy market, and we still have many opportunities where we are increasing prices. But it is not a direct relationship to the average selling price at all.

Okay. Any plans for acquisitions or share buybacks?

You know, it's been an interesting time. The last 12 months we have not done a single acquisition, which is unlike us. But we have had a great track record of great and successful acquisitions that have been win-wins for both parties.

So we are pretty picky. We have looked at a lot of them. Were not successful during the last 12 months. But as always, we're working on many opportunities, and we hope that our success will be more like the prior years.

Nothing specific to announce at this point. But hopefully we certainly have not changed our acquisition appetite, and we have got a great track record of integrating companies and growing then substantially afterwards. So we e absolutely have no change in that strategy.

Stock buybacks an interesting question; and we talk about it often. It is very, very tempting to buy it back at these multiples over the last 3 or 4 years, and we have bought 2.5 million shares back. The challenge is that we are quite focused on maintaining a real solid debt to equity ratio.

We ultimately aspire to be an investment-grade Company; and we know we have to bring our leverage ratios down even lower than where they are. We have made great progress over the most recent years.

So the challenge with stock buybacks, as you know, as you acquire the shares it reduces your shareholders equity. So therefore if you are going to maintain and be true to your debt to equity targets, you would basically have to slow down your growth both in acquisitions and organic growth. At this point, we really don't want to do that. So we haven't been overly active.

Nonetheless we still have additional shares authorized from our Board, and if prices just get too crazy, we will do as we have from time to time in the past and get more active in the market and buy back. But we have no immediate plans right now.

Alpine Funds.

Congratulations. Thank you very much for a very detailed slide presentation; it is very helpful. Just a quick question off of that, though. You provided data on your average land costs and showed how that really has not changed that much even though sales price has increased as a proportion.

I look at the growth in your backlog over the past several years; and obviously it's been impressive in keeping up with your sales growth. I am curious though, when I look at your cost per lot and certainly your cost per deposit lot. You have got you $225 million worth of deposits and that is driving, what, $10 billion worth of land?

Can you comment on, frankly, whether there has significant appreciation? Because if I'm going to assume $280,000 for home sale price, as is the average of last year at least, that would imply a significantly higher proportion at cost and land at 25 percent. Or is there other development costs that are not figured into that number?

In other words, I'm assuming that the value is closer to 70,000 as opposed to 46,000 which you're showing it.

You're looking at slide 29 for the $225 million we have on deposit; and the aggregate purchase price is 3.37 billion. There is a mix of unimproved lots and the improved lots in that number. In certain instances we are optioning finished lots, which obviously the streets and infrastructure underground utilities etc. are already in. In other instances those our options on raw land where we are going to do the development.

So if we are going to bring it up to that 25 percent number, let's say, of cost -- of purchase price, rather sales price, your --

The 25 percent number which you are looking at from slide 17, that is a developed lot, to clarify it. Slide 29 is a mix of developed and raw.

Ara, Larry, what I'm getting at here, is it fair to assume that you are probably going to have 24,000 per lot in costs along the way to develop them? Or is it not that large a number?

What I would say is at the moment, we don't anticipate any significant change in our developed lot cost as a percentage of our sales price. So therefore, you are probably about accurate; that would imply that the developed lot cost would be in that 70-plus-thousand range.

Let me answer a different way, because I think you are trying to get after this. I don't have the number right in front of me for the October year-end, but our controlled option land position in the Northeast as we publicly reported was around 24 or 25,000 home sites, much of which we controlled -- some of which we controlled yesterday and some of which we controlled 5 or 6 years ago, and everything in between.

It is a very safe bet, though we don't even bother trying to run a calculation on it, that the land that we controlled 6 months ago to 6 years ago is worth a lot more than what we control it at. So if that is what your question is, clearly there is some appreciation in our option position that does not show up anywhere on our balance sheet.

That is partly it. It is really both. 1, what is the cost to bring these to market and is there -- are there significant capital outlays along the way? 2, of course, yes; is there significant appreciation already in your -- ?

We definitely think there is, and as that is part of the reason we have been generating some great earnings power; is because we control a lot of our land through options, we have locked up the price from years ago and we're developing that land or building on those homes today.

We are generating some fabulous margins and some fabulous returns. Part of the reason is because we are continuing to deliver homes today on land that we tied, put under contract, a couple of years ago. We anticipate that to continue to be the case.

I guess the corollary is that if we enter a flat market the question is, would it be a steady stream of -- proportionally a steady amount of old land, or undervalued on book terms land, that you deliver? And would that maintain the margins for a couple years? Or would it in fact start to -- would the margins start to fall off at some point?

I think over time, it is unrealistic to assume that we can continue to raise prices and see these high margins sustain themselves. Nonetheless, we completely believe we can continue to grow significantly our earnings per share, just because of the effect of consolidation and our growth and our volume, our economies of scale in terms of our buying power on our non-commodity prices.

And as you have seen this last year, the more we grow, the more economies we are getting in our SG&A. On top of that, I think we have really just begun to scratch the surface on cost-reduction opportunities. It has been a strong market, so a lot has happened in the price side.

I think there will be room for margin improvement on the cost side in years to come. Our whole industry and absolutely our Company is more focused on looking at its manufacturing processes and supply chain logistics and taking some cost out of our formula.

Said another way, Sam, we don't believe that it is sustainable for us to continue earning in excess of 40 percent returns on beginning equity forever. If we did that for another 10 or 15 years, pretty soon we would own the world. So we don't think that is sustainable forever.

What we do when we do feasibility studies on land is we target a 30 percent internal rate of return on an unlevered basis. As you apply our 50 percent debt-to-cap on a consolidated basis, that 30 percent IRR -- if all of our properties only achieved 30 percent, that would equate to roughly a 25 percent return on equity when the Company's leveraged 1-to-1.

That is a fabulous return in any industry. It's a fabulous return in the homebuilding industry. We think those are the kinds of numbers that we can continue to generate.

Even though we are very optimistic that we are going to continue to get higher than that for the foreseeable future, on a long-term basis, it is going to be very difficult to continue to generate 40 percent ROEs. I don't know any industry that does it.

But if we were able to achieve what we think we can, with complete -- with flat pricing from the time we contract a piece of property to the time we deliver the home, that generates a 25 percent return on equity that still outperforms many, many other industries, and obviously will generate substantial earnings per share growth for us.

Bob Klein with Bear Stearns.

Just a follow-up to the option deposit question from an accounting standpoint. In the normal course of business, you may not get entitlements on some of the land you have optioned, or some deals may not pencil out when it comes time to close. It's not likely in this environment -- less likely in this environment. But I just wanted to get a sense of what kind of reserves you take, if any, against your option deposits at the time you make them?

Unfortunately, GAAP does not allow us to do kind of a bad debt reserves equivalent for land options. I have argued that we should and it would be a more prudent thing to do, but it is not currently allowed by GAAP. Certainly, our auditors, E&Y, don't interpret GAAP that way.

So when we have a property that we have expended cost or deposits on that we are not able to get entitlements, we write it off at that time. Fortunately, given our size, it is not that big of a blip on the radar screen when occasionally that happens.

Thanks.

Joel Locker (ph) with Carlin Financial.

Good quarter. Just wanted to double-check with you on the FICA scores and the loan to value ARMs. I guess the ones on the chart were from the whole year. I was wondering what each one of those were for the quarter and if there was a cancellation rate, or what the cancellation rate was for the quarter?

I don't have that number at my fingertips. We will get back to you on it. I had it for the year, but I don't have it right at my fingertips for the quarter. But Jeff or Brian will get back with you with it.

All right. Thanks a lot.

William Nodler (ph) with Atlanta Sosnov (ph).

Congratulations on a good year and a very complete conference call. One question, you explained why you don't want to purchase shares at 6.5 times earnings. Could you explain your thinking about no dividend, particularly in view of the fact that some institutions probably cannot purchase your shares because of the lack of dividend?

Yes, that is also a question we spend some time on. It's particularly interesting, because my family continues to own close to half of the Company, and obviously we would be a huge beneficiary of the dividends. Nonetheless, the answer is somewhat the same as the stock buyback.

As we distribute -- if we did dividend, it would mean that our retained earnings or shareholders equity would be less and reduced. We are very committed to maintaining a conservative balance sheet, and that would mean reduced growth. Right now, we just think there are huge opportunities for growth, and we think the shareholders would be better served long-term by reinvesting the profits right back in the Company.

There are not many places where our shareholders can get a 42.5 percent after-tax return. We're projecting another solid, solid year, and at this point, as tempting as it is, we think we are better off reinvesting our profits right back in the Company. We recognize that that might rule out some investors, and we just think this is a more prudent thing to do long-term for shareholder value.

Okay. As a follow-up, you mentioned 47 cents a share of the amortization of intangibles. I just wanted a little color on that. This is from prior acquisitions, and this is the annual per share charge currently, which has reduced over time?

That is correct.

Yes. What happened, to go back a little bit, in the past, goodwill was one of the places where premiums were allocated on acquisitions. When the rules changed a few years ago, that basically prevented you from amortizing goodwill costs. We sought to find acquisitions that had other values where we could not utilize, would not have to utilize goodwill. We just don't think that fairly represents values in our industry.

So, in most cases, if there is any premium to book value in our acquisition, they are either assigned to stepped-up values of assets which are burned off quite quickly and are somewhat invisible to our earnings, or to definite life intangibles which are amortized over 3 to 5 years typically, on average.

So the $46 million is what we have budgeted to burn off for this year. At the end of '05, as Larry mentioned in our presentation, we expect to have about $76 million of definite life intangibles remaining after we've expended about 46 million -- after we have written off about 46 million during the year. So you can see that is projected to come down fairly aggressively.

The 46 million in '05, what would that compare with that was written off in '04?

Paul, do you have that number handy? I want to say in the 20 --.

It's right on the face of the income statement. I am looking at it right now.

I think it's in the 20 million range.

I think it is 28, if I remember right. 28.9 million in '04.

Yes. The big increase came about because of our decision to change the forecast name, and we did have some definite life intangibles associated with that. So in the third quarter, we started amortizing that premium as well, and that is what stepped up the pace.

Going back to the previous question on the credit quality of homebuyers for the fourth quarter, we've looked that data up, so I will just provide it to everyone.

The average loan to value for the fourth quarter was 75 percent as compared to 76 percent for the full year. The use of ARMs during the fourth quarter was 44 percent of our mortgage customers used ARMs, compared to 41 percent for the full year. Our FICO score for the fourth quarter was 712 versus 713 for the full year.

Preston Reisen (ph) with Reisen (ph) Capital Management.

Year-over-year, can you take us back? What is the average safe brokerage commission that you're paying, the brokers that represent your properties?

Also as far as incentives go, upgraded kitchens, telecommunications, TV, whatever, are you using great incentives and higher commissions paid out? I don't see that broken out. Thanks.

First of all, our activities with brokers vary dramatically from market to market. In the Northeast region, we have minimal participation with brokers; and in other markets like Houston or Dallas, we have very, very high participation. So it varies dramatically.

I really don't see much of a change at all in our strategy, nor are we changing the fee structure with any significance that I am aware of. Typically, we would pay about a 3 percent commission to outside brokers. Occasionally, they will run a special contest for a month or something and maybe raise it to 4 percent for a particular location or to move particular inventory, but that is really quite anecdotal.

On the whole it's 3 percent, and the usage of outside brokers varies dramatically from market to market, and it is not changing that substantially.

In terms of concession, that also varies not only market by market but community by community. Frankly, we just focus on the net price. In some cases, we have driven up prices very high; and rather than drop back prices, then they'll throw in some incentives to effectively accomplish some of the same.

In other cases, they offer incentives because the competitor across the street may do it, and customers may think we're not offering our value. In other cases we offer incentives to help with downpayment costs. So there are a variety of them.

I would say in some markets right at the moment like Southern California, you'll see a little more use of that; and in the Ohio market for different reasons you may see a little more use of that at the moment. On the whole, obviously, our projections in our earnings projections are net of all concessions; and we fully budget for that all the time.

Sir, we have no further questions at this time.

Thank you very much. It has been an exciting year, and we are thrilled with our results for '05. However, we are even more excited about the outlook -- excuse me for '04; and we are more excited about the outlook for '05. We are anxious to start off with a real strong first quarter. We look forward to reporting that to you soon.

As usual, our team is available for some further questions after the call, so please don't hesitate. We look forward to talking to you again soon. Thanks.

Ladies and gentlemen, this concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.