Hovnanian Enterprises Inc (HOV) 2005 Q4 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2005 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 [Donna Tesche] at (732)747-7800. We will send you a copy of the release and assure 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 12 months. The replay can be accessed by dial (888)286-8010, passcode 85639682. Again, the replay number is (888)286-8010 passcode 85639682.

This conference is being recorded for rebroadcast and all participants are in a listen-only mode. Management will make some opening remarks about the year end results and then open the line for questions. The Company will also be webcasting the slide presentation along with opening comments from management. The slides are available on the Investors page of the Company's website at www.khov.com. Those listeners who would like to follow along should log onto the website at this time. Before we begin I would like to remind everyone that cautionary language about forward-looking statements contained in the press release also applies to any comments made during the conference call and to the information in this slide presentation. I would now like to turn the conference over to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Thank you. Good morning and thanks 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 CFO; Paul Buchanan, Senior Vice President and Corporate Controller; Kevin Hake, Senior Vice President and Treasurer; Brad O'Connor, Vice President and Associate Corporate Controller; and Jeff O'Keefe, Director of Investor Relations. We are pleased to report another very strong year in fiscal '05. Once again we set all kind of records in net contracts, contract backlog, home deliveries, revenues, and net income. I will review the financial highlights, comment on our operations and provide an outlook for fiscal '06. Larry Sorsby will then spend some more time reviewing our financial performance in greater depth.

For those of you that are reviewing the slides on the investor page of our website, www.khov.com you can now turn to slide number three. We reported record earnings of $7.16 per fully diluted common share for '05. This represents a 34% increase from '04s record earnings of $5.35 per fully diluted share. While each of the four acquisitions we executed in '05 contributed to our full year earnings 91% of the growth in EPS for fiscal '05 came from our organic operations. For each of the past three years our organic growth has accounted for more than 90% of our earnings growth. Our earnings would have been even higher in the fourth quarter had Hurricane Wilma not made landfall in Florida right at the end of our fiscal year. While Rita and Katrina received more media attention and national awareness due to the overall devastation, property damage, and loss of life, the damage in southeast Florida and Wilma was very significant and much more so than people realized from the news and Wilma had much more of an impact on our operations than either of the other two storms.

For our company the construction and delivery of new homes on both the East and West Coasts of Florida were impacted as was the mortgage company for the entire company which happened to be based in West Palm Beach. Since our mortgage company lost power during the critical period surrounding our year end we moved many of our associates up north to Orlando to operate out of our home building division there for more than a week so that they were able to handle the closings that were lined up throughout the country in the critical last few days of the quarter. However, the number of homes that we were able to close and deliver in our Florida operations were definitely impacted by the inability to pull final permits, obtain inspections, get utility hookups and generally complete the final construction tasks on many homes that were scheduled to close during the final two weeks of October. Instead our crews were busy boarding up houses, securing materials from potential damage from the impending storm. Despite these effects we are able to exceed our most recent EPS projections for the year, we are pleased that we were able to make up for the impact of Hurricane Wilma by exceeding our expectations in other parts of our operations.

Overall we are delighted with our performance in '05 as shown on slide four we've established a steady positive trend for the full year earnings which have grown at a compounded annual growth rate of 57% since 2000. Maintaining this high level of growth is no small challenge considering the total U.S. housing starts have only grown at a 5% annual rate during this same period. Our growth and the growth of other large public homebuilders has come from taking market share from smaller homebuilders.

Our net income also reached record levels in '05. As you can see from slide number five net income available to common shareholders rose 35% in '05 to $469 million compared to $349 million in fiscal '04. Slide six for the full year we posted an after tax return on beginning common equity of 39.3% and an after tax return on beginning capital of 23.7%. Slide seven, total revenues for '05 increased 29% to 5.3 billion, up from 4.2 billion in the prior year, setting another record in revenues for the year. Slide number eight, consolidated deliveries increased 12% in '05 to 16,274 homes, another record, and if you include unconsolidated joint ventures our deliveries were 17,783 homes, an increase of 21%. Joint ventures have become a bigger part of our company over the last year, primarily as a result of the acquisition of Town & Country homes in a joint venture with the Blackstone Group but there are also other joint venture deliveries outside of Town & Country homes that have grown substantially and have also contributed to these results.

Let me step back and address some of the perceptions investors have about housing and the large homebuilders. Many are saying that the recent anecdotal evidence about softness in certain markets or at certain price points means that the housing market in the U.S. is going to fall off dramatically. Some are even predicting a collapse. We obviously don't agree with this outlook. The housing market is still a very localized business. One of the reasons that large homebuilders have diversified regionally is so that the effects of the weaker and stronger markets can help offset one another. It is true that the housing markets are not as robust today as they were 12 or 24 months ago. The frothiness that we saw over that period of time has dissipated and the markets have returned to more normalized levels. Now, Wall Street seems to be speculating that the large builders will stop growing altogether and stop generating healthy returns. We don't believe this an accurate projection. Our company and other large homebuilders may not be able to grow as quickly as we have over the past few years but we expect to continue to grow by taking market share. Similarly we may not generate 40% plus returns on equity going forward but we do believe we can generate ROEs in the upper 20% range and returns on capital well above our cost of raising that capital, levels that compare very favorably with the S&P 500.

We believe that future revenue growth, while likely to be less than the past several years, will more than offset any margin declines. Our projections for '06 are a good example of this scenario. We are projecting a decline in our gross margins of between 140 and 190 basis points as we begin to sell out some of our older land positions, but due to the simultaneous revenue growth we are projecting we are still able to grow our EPS at double-digit rates. Over time the amortization of intangibles, expensing of stepped up basis of assets and earn outs related to our earlier acquisition will be reduced, further helping our consolidated margins.

We also believe that because of the strength of our land position and our proven skills in making company acquisitions we will continue to gain market share and thus will grow our top line and grow our bottom line even if the overall housing market does slow down. Another thing to keep in mind is that not all housing markets are slowing down at this time. Some markets like North Carolina and Dallas are actually getting stronger as the economy has gained a bit of strength. In addition our '06 projection is largely already baked in given our contract backlog. Although we still have to deliver these homes and there's a cost risk and some sales risk for deliveries that we are projecting in the second half of the year, our current backlog gives us great confidence in our ability to deliver strong results in '06 and we try to project the current market conditions in our sales later in the year.

On slide nine you can see substantial growth in our contract backlog at October 31, which reached 14,931 homes with a sales volume of $5.1 billion. We are well-positioned as we enter '06 as the number of homes in backlog and dollar volume of backlog are both all time records for any quarter in our history. We have actually begun to build a significant backlog for '07, particularly with our first homes operation in Fort Myers which already has a backlog of more than 1,600 homes for deliveries in '07. In addition we have presold some mid rise homes in other parts of the country with significant down payments for '07 deliveries. On the basis of our sales backlog and current market conditions we are reaffirming our EPS projection for fiscal '06 of between $8.05, and $8.40, per fully diluted share.

Slide number ten. This projection would represent a 12 to 17% increase from fiscal '05s record earnings of $7.16 per share. This projection of income in fiscal '06 is after approximately 95% of non-cash pretax expenses related to company acquisition premiums, an increase of $23 million over '04. Also it's after $11.5 million in non-cash employee stock option expenses, a new GAAP expense calculation that didn't exist in '05, and after a full year of preferred dividends of $10.7 million after only one quarters was included in our '05 costs.

Fiscal '06 revenues are expected to increase more than 25% to between 6.6 and $6.9 billion on deliveries of between 20 and 21,000 homes. This excludes deliveries from our unconsolidated joint ventures in which we expect to deliver more than 2000 homes this year, bringing our total to greater than 22,000 homes. Details of our summary projections for fiscal '06 will be available later today on the financial information page of the Investor Relations section of our website at khov.com.

I can also give you a bit more color on how we see the year unfolding from a quarterly perspective. Due primarily to the adverse impact of Hurricane Wilma and the timing of new community openings as well as regulatory delays in California and construction delays caused by labor and material shortages in Arizona and Florida, we will lose a bit of ground in '06 on our efforts to smooth out our quarters. And thus '06 will again be more back end loaded than last year with the first quarter being our weakest quarter as has nearly always been the case for our company. While our backlog is substantial our abilities to deliver these homes over the next few months has been dampened for the reasons I just mentioned. Our '06 projection includes earnings in the first quarter of approximately $1.10 to $1.25 per fully diluted common share representing 13 to 16% of our full '06 earnings projection. In '05 our first quarters earnings were approximately 17% of our full year earnings.

There's still a large amount of uncertainty in projecting the timing of our Florida deliveries in the beginning of '06 because of the hurricane effects. The direct effects such as destroyed homes under construction, damaged materials, the loss of power for weeks were challenging. But less problematic overall. The indirect effect, delayed availability of labor, severe shortages of certain materials, stalled utility hook-ups, and permits are much long prolonged and have impacted a more widespread segment of the state beyond the areas experiencing the physical damage. It is difficult to estimate when some of these delays will be resolved. As an example today, almost a month and a half after the hurricane we still have hundreds and hundreds of homes that have completely stopped construction at the roofing stage because of shortages of roofing tiles and roofers.

Some of you may not realize this but Florida is now expected to be about 20% of our '06 projected deliveries, making it our largest state. Hence our aggregate delivery projections for the first half of the year are subject to a greater amount of uncertainty than would normally be the case. Assuming no further home price increases as we continue to sell out communities where we have higher margins from past price increases we expect that our gross margin will decline over the next few years back to a level that represents a more normalized level but still very healthy. Even with these lower margins we believe we can generate a level of returns and net profit performance that most industries would relish on a long-term basis. For the full fiscal '06 year we are projecting our home building gross margins to be in a range of 24.5 to 25%, 140 to 190 basis points lower than the 26.4% home building gross margin we achieved in fiscal '05. Remember, this assumes no further price increases as is always the case with our projections and budgets.

During '06 our margins are also expected to fluctuate quarter by quarter due to the geographic and product mix we have. During the first quarter we expect our aggregate home building gross margin will fall to a range between 24 and 24.5% below where it was in our fourth quarter of '05, primarily due to the community and market mix issues as well as a certain sell out of certain higher margin communities in some markets. Again as we said earlier our '06 projection shows that revenue growth will more than offset the decline in margins -- in gross margin and will allow us double-digit growth in EPS in '06. I will now turn it over to Larry Sorsby to discuss our financial performance in a little greater detail.

Thank you, Ara. I will go into more detail pertaining to the fourth quarter and the full year as well as some specifics behind our expectations for 2006. If you will turn to slide 11, at the end of the year we had 367 active selling communities excluding communities owned and unconsolidated joint ventures. This is an increase of 33% over the 275 communities that we had open at the end of fiscal '04. Much of our future growth will be the result of delivering homes in these communities already opened for sale as well as through our strong pipeline of new communities scheduled to open during 2006. Keep in mind with the acquisition of First Homebuilders in Florida, a scattered lot homebuilder we will be increasing our home deliveries without adding any additional communities. Excluding communities owned and unconsolidated joint ventures we expect to have approximately 420 active selling communities at the end of fiscal 2006.

Turning to slide 12, the dollar value of net contracts for the fourth quarter ended October 31, '05, including unconsolidated joint ventures increased by 46% from the fourth quarter of fiscal 2004. The number of net contracts for the quarter was 5,305, an increase of 38% compared with 3,839 contracts in last year's fourth quarter. Since we increased our community count during the final months of 2005 we expect our year-over-year quarterly sales comparisons to be positive throughout 2006. In light of several recent Beris housing reports we are going to provide you with a data point on our November contract pace.

During the month of November our number of new contracts increased 34% and our dollar amount of new contracts increased 37.4% including unconsolidated joint ventures; demonstrating once again our ability to grow faster than the overall housing market as we take market share away from smaller homebuilders. Despite our strong backlog and recent contract activity however our deliveries will be clumped into the back half of fiscal 2006 again. In addition to the reasons Ara cited earlier with regard to construction delays I would like to point out another reason why our backlog conversion will be slower going forward and why a significant portion of our current backlog will be converted into deliveries later in '06 and even into fiscal 2007.

It has to do with the acquisition of First Homebuilders of Florida which closed in early August of 2005. First Homebuilders is a leading builder in western Florida and ranked first in the greater Fort Myers Cape Coral market based on 2004 permit activity. First Homebuilders has an operating model that is quite different from most of other operations. They are a scattered site homebuilder and our first home operations, home buyers come to our sales centers which include nine model homes. They choose a home and select a homesite from a wide choice of locations. First Homebuilders owns and controls scattered lots predominantly located in two large tracks of land that are already substantially developed with infrastructure built decades ago. The buyer then typically closes on the purchase of the homesite and obtains a construction loan for the construction of the house under a standard construction contract with First Homes as the homebuilder.

Although we receive the cash for the lot and a reimbursement of construction expenses as we build the home the sale of the house is not recorded for accounting purposes until it is completed and delivered to the home buyer. And the lead time from the signing of sales contracts through the completion of construction and delivery of the home tends to be longer than our company-wide average. Thus contract backlog conversion rates are slower than our historical averages. As of July 31, 2005, at the time of the acquisition First Homebuilders had a strong contract backlog of approximately 4,000 homes with a sales value of about $888 million. As a result First Homes -- as a result of First Homes unique operating model this backlog represented at least 18 months of future deliveries which is longer than our traditional home building operation. In fact, First Homes has more than 1600 homes currently in backlog that are projected to be delivered in fiscal 2007 and thus will not be converted at all in fiscal 2006.

If you will turn to slide 13, the average sales price for homes delivered company-wide excluding unconsolidated joint ventures for the fourth quarter, was approximately $318,000, a 6% increase from the average sales price of approximately 300,000 in the prior year's fourth quarter. For the full year the average sales price increased 14% to approximately 318,000 in fiscal '05. The increase in average sales price in our markets is primarily the result of geographic and product mix of our deliveries as well as some home price increases. During the fourth quarter we were able to raise prices in some of our communities but at a much more normalized level as we have seen the pace of home price increases continue to moderate. Remember our projections never include price increases so any increase we do get further enhances our returns on those communities. We expect that the average sales price per home excluding unconsolidated joint ventures will be somewhere around 320,000 to 330,000 in fiscal '06, reflecting a modest shift in geographic and product mix.

Turning to slide 14, for the full year the Company's consolidated home building gross margins excluding land sales and prior to deducting interest cost of sales was 26.4%, a 90 basis point increase from 25.5% last year. This was toward the higher end of our guidance of 26 to 26.5% due to our continued ability to raise prices in some of our communities and the final delivery mix. Based on the homes we have in backlog for delivery in the first half of fiscal '06 and the mix of homes that we anticipate delivering in the second half of the year without any further price increases from today's levels and the communities in any of our markets we are projecting our consolidated gross margin for the full year fiscal 2006 to decline from 2005.

I would like to comment briefly on the land sale that was recognized in the fourth quarter. Net pretax profits from land sales were 26.3 million in the fourth quarter and 34.3 million for fiscal '05. Although the amount of land sale profits vary from year to year some amount of landfill profits are typically recognized by the Company each year in the normal course of operations. As noted on the projection page of our website such sales are typically anticipated and the net proceeds are included in the Company's public projections of revenues and net profits. The amount of lands sales profits realized in the fourth quarter and for the full year of fiscal 2005, although substantially higher than in the prior year, were in line with the amounts included in the Company's prior guidance for fiscal '05 earnings. This was certainly not some land sale that we drummed up in the final weeks of our fourth quarter. Land sale profits represented about 4% of our 2005 pretax profits. For 2006 we are also anticipating an amount of land sale profits similar to those achieved in fiscal '05, such amount is included in our 2006 projections.

Now if you will turn to slide 15, total selling, general, and administrative expense including corporate expense as a percent of total revenues was 9.2% in the fourth quarter of '05 compared with 8.3% in last year's fourth quarter. For the 2005 fiscal year SG&A increased 50 basis points to 10%. SG&A was slightly higher for the quarter and the year as we discussed on our last conference call, this increase is primarily due to increases in professional fees including Sarbanes-Oxley compliance costs, expenses associated with opening several new divisional office and the salary and advertise expense associated with launching new community grand openings that had no deliveries in our fiscal '05 year. Going forward we anticipate that our total SG&A expense including corporate as a percent of total revenues will be approximately 10% of revenues for the full year in fiscal 2006.

For the 2005 fourth quarter our income from unconsolidated joint ventures was 12.6 million, compared with 738,000 in last year's fourth quarter. Income from unconsolidated joint ventures was 35 million for the full year in fiscal '05, compared with only 5 million in fiscal '04. Our investments and advances to unconsolidated joint ventures increased to 187 million from 41 million on October 31, 2004. This is due to increased activity in our overall joint venture activity but was especially influenced by our acquisition in Town & Country homes in a joint venture earlier in the year. We remain committed to providing significant transparency into our joint venture activities through disclosures in our financial statements and in our footnotes. While a good deal of activity in our unconsolidated joint ventures come from our Town & Country joint venture with Blackstone there are also single community joint ventures some of which include a number of our high rise or mid rise products that have lumpy deliveries and could thus cause significant variations in profits from one quarter to another.

Turning to slide 16, the Company's pretax margin in the fourth quarter increased 120 basis points to 15.8% from 14.6% in the prior years fourth quarter. For the 2005 full year, our pretax margin was 14.6% compared with the pretax margin of 13.2% for all of fiscal '04. Our effective tax rate for the fourth quarter was 39.8% bringing our full year effective rate to 39.6%. For 2006 we are expecting our effective tax rate to increase slightly to about 40%. Excluding model homes we had 2,062 started and unsold homes at the end of October. Based on our recent sales pace this represents only about a five-week supply of started and unsold homes.

Our financial services operations have continued to add meaningful earnings to our overall performance. If you will turn to slide 17. For the year our pretax earnings from financial services were down slightly at 24 million in '05 compared to pretax earnings in the prior year of 25.5 million, which is primarily a result of increased competition from third party mortgage lenders as the level of refinancing has fallen significantly and lower profits generated by adjustable rate mortgages. We are currently originating mortgages in all of our markets except Tampa and the markets where our Town & Country acquisitions operate including Chicago, Minneapolis, West Palm Beach, and Fort Lauderdale, Florida. In Orlando and Fort Myers, Florida, we originate mortgages through JV mortgage companies that were in place prior to the acquisition of Cambridge Homes and First Homebuilders of Florida.

Turning to slide 18, our recent data incase that our customers credit quality remains quite healthy. While there has been a lot of discussion about consumers over levering their home purchases our average low to value ratio was 75% for fiscal '05 compared with 76% in fiscal 2004. For 2005 our average FICO score was 712, compared to fiscal 2004s FICO score of 713, virtually unchanged. For the year our average FICO score for customers that utilize an adjustable rate mortgage was still a very high 704. We believe that our customers FICO scores are above mortgage industry average.

Recently we've seen the percentage of home buyers using ARMs decrease which in fact is logical as the yield curve has flattened considerably. In the fourth quarter adjustable rate mortgages represented 32% of all of our origination volumes, significantly less than the 46% of originations for the fourth quarter of fiscal '04. For the full years adjustable rate mortgages were 40% of our total originations in '05 and 42% in 2004. Less than 7% of our mortgage originations in 2005 included adjustable rate mortgages where the rates adjust in the first year.

Turning to slide 19. For the quarter EBITDA increased 35% to 326 million from 242 million in the fourth quarter of fiscal '04. For the full year EBITDA was 928 million, compared to 678 million last year, a 37% increase. EBITDA represents earnings before interest expense, income taxes, depreciation, and amortization, a reconciliation of our company's consolidated EBITDA to net income can be found as an attachment to the quarterly earnings release.

Turning to slide 20. For the year EBITDA covered interest by 9 times compared to last year's coverage of 7.7 times. We expect to cover our interest by more than 7.5 times for the full '06 fiscal full. The ratio of total debt to EBITDA is expected to be less than 2 times as of the end of fiscal '06.

Turning to slide 21. We ended the year with the ratio of net recourse debt to capitalization of 41.7%. Substantially lower than where we stood at the end of the prior year. The effects of our $600 million worth of debt offerings in '05 was more than offset by a zero balance on our revolving credit line at year end on a $140 million perpetual stock offering during the year, cash at year end of 219 million a very strong year for net income. We anticipate that our average ratio of net recourse debt to capitalization will be below 50% for the full fiscal year of '06 in line with our targeted leverage goals. In short all of our credit statistics continue to be at vary attractive levels.

Turning to slide 22. At October 31, '05, common shareholders equity was $1.7 billion, a 39% increase from 1.2 billion at the end of '04. Based on our projection for fiscal '06 we expect common stockholders equity to grow to approximately 2.2 billion by October 31, '06.

At October 31, if will you turn to slide 23, we controlled on a consolidated basis more than 116,000 lots in our various home building markets for future development. This excludes approximately 10,000 lots that we controlled at unconsolidated joint ventures. Roughly 74% of our lots controlled are under option contracts which minimize our risk exposure to any significant decrease in the value of land. Our current land position represents more than a five-year supply based on '06 projected deliveries.

Turning to slide 24, it shows our aggregated option position for all of our lot options and the amount of aggregate deposits which are only 7.1% on average of a total purchase price of the lots. We believe that this strategy provides us a flexibility in working with land sellers to modify take down schedules if absorption rates were to change. In addition our controlled lot position gives us excellent forward visibility and confidence that we will be able to continue to generate strong earnings growth going forward. As several of our peers have recently announced increases in their share purchase programs stock buybacks have become one of the hottest topics of the day for big public homebuilders. We have approximately 1.5 million common shares left to buy back under a current authorization which has been in place since 2001. During the fourth quarter of fiscal '05 we repurchased an additional 200,000 shares of Hovnanian common stock. We purchased a total of 600,000 shares during fiscal 2005.

We believe that buying back shares can at times be an appropriate use of our cash depending not only on the stock price but also on our capital needs for growth and current opportunities available to us to deploy capital in our ongoing business and our targeted levels of return on investment. Some investors and analysts have been arguing for more stock repurchases at various times over the past five years. If we had followed their advice by purchasing a significant amount of stock we had missed out on the significant returns that we have generated on capital by investing it in housing developments instead. Our investment returns stack up very well not just against our industry but also against a broader universe of companies in other industries. We've generated returns that ranked us second on the Fortune 500 list last year for five-year total returns to shareholders. We expect that we will continue to buy back shares but we do not anticipate that you will see a material increase in our activity under our current authorization. We target our current land acquisitions to yield after tax returns on equity in the high 20% range. This is higher than the short term effect of buying back stock even at there current lower valuations of our shares.

Our 2005 results include more than 73 million of amortization of definite life intangibles and expenses related to stepped up inventory from company acquisitions. The magnitude of the purchase accounting differences between '04 and '05 is most obvious in the fourth quarter which included the impact from First Homebuilders of Florida acquisition. When you combine the expenses of stepped up inventory and amortization of definite life intangibles the impact on the fourth quarter of '05 was 30 million, more than double the 14 million expensed in the fourth quarter of 2004. At the end of the year our total remaining definite life intangibles were $250 million. We expect to be below 200 million by the end of fiscal '06 assuming no further additional company acquisitions during 2006. Our earnings projection for '06 includes more than 95 million of non-cash pretax charges related to acquisition premiums which are split between stepped up inventory and amortization of definite life intangibles.

Let me clarify this further. During '06 we expect to expense approximately 55 million of definite life intangibles and roughly 40 million of inventory step up related to our prior acquisitions. The combined $95 million charge is a non-cash expense to Hovnanian. Despite the negative impact on our margins in the short run we continue to believe that our conservative approach to purchase accounting which amortizes 100% of any purchase premium is among the most conservative in the industry and is the most appropriate way to represent our financial results on our balance sheet. We did not book any goodwill in conjunction with our recent acquisition. And at October 31, '05, we only had 32.7 million of goodwill on our balance sheet which in fact is related to acquisitions we completed prior to the change in goodwill accounting rules. I will turn it back to Ara for some closing comments.

Thanks, Larry. I would like to conclude by making a few additional comments on our view of the housing market today since concerns over the housing market are clearly hanging over the stock markets view of our stock, our company, and our industry. While the frothiness that existed in some of the local markets we operate in over the past two years has dissipated we are faced with markets that have returned to what I will call more normalized levels. We believe this is a good thing. What does this mean at the community level? Well, we have to work harder to sell homes today not just take orders but I know that our sales associates are up to the task and this is a more normal environment that they are well trained for. We do offer incentives in a variety of communities but it's evaluated on an individual community basis rather than any type of program offered across the board. On the flip side we are still able to raise prices in some of our communities as recently at the last month or two. Again this is being done on a community by community basis. Where we have been able to raise prices it is not at the level that we were able to raise prices 12 or 24 months ago. But keep in mind that the projections that we just shared with you assume zero price increases.

This trend and the slower pace of home price appreciation has been a gradual trend over the last 12 months not a drastic change over the last few weeks. While some material prices have risen over the past year, lumber prices, one of the largest cost components of a home has been trending down. Certain markets, primarily those that are heavily regulated saw the pace of price increases over the past few years at a level that was unsustainable over a longer period given the level of wage increases in the same areas. I am primarily talking about our markets in California, the greater Washington D.C. market, New Jersey, Pennsylvania, and Florida.

Even though demand for housing has slowed down to a more normalized level we do not believe that it is going to dry up completely or that the housing market is going to collapse. Many have been concerned that investors and speculators together with exotic mortgage products have been driving the housing market. The speculators have largely left the housing market over the last four to six months. And almost 70% of our recent buyers as Larry mentioned that utilize mortgages have obtained fixed rate mortgages recently, with only about 7% utilizing ARMs with a one-year or less reset rate. Nonetheless, as we stated earlier our November sales were solid. Again, less torrid than perhaps in the last 24 months but very solid.

We don't see a significant fall off in demand going forward as the U.S. needs to build between 1.8 and 2 million housing units on average each year to meet the projected needs based on household formation, the need to replace older housing stock, and the demand for second homes from affluent baby boomers. The supply of buildable lots is getting more and more difficult to obtain in a more highly regulated environment. We believe there is ample room for growing in markets that are cooling off from their white hot levels seen over the past few years. We as well as the other large homebuilders will accomplish this by gaining market share, opportunities may actually grow in a slower, more normalized market.

While we have been very successful at making acquisitions and growing in that fashion, we have also achieved strong organic growth in our existing operations. A good example of this was our performance in Washington, D.C. during our recently ended fourth quarter. There's been a lot of media and investment community attention being given to the perceived slow down occurring into this market. Our presence in Washington, D.C. is a great example of the strategies that we are applying across all of our markets. In D.C. we offer a wide variety of product from high-end attached and detached products in the areas closest to D.C. to very affordable single-family detached product further out in the suburban and ex urban geographies.

Our market position includes a handful of very well located successful active adult communities and we currently have construction in a number of communities that would be considered niche products in the mid rise and urban in fill category. All of this category led to a 57% increase in the number of net contracts and a 75% increase in the dollar value of net contracts in the fourth quarter in the D.C. market. We achieved this despite market conditions where sales absorption and the pace of price increases have been slowing. While you can't draw a long-term conclusions from one quarter's performance there has been a lot of concern over the D.C. market and I believe our performance in this market provides an excellent example of how we can grow our presence through increased community count and market penetration even in a market that has cooled off to more normalized levels.

While we did well in this market during the fourth quarter we didn't have the ability to raise prices to the same extent that we were able to do over the last couple of years yet our returns remained excellent, far above our company-wide averages. Examples of the strong organic growth I just talked about are not just a one quarter phenomenon. As you can see on slide 25, we have shown strong organic growth in numerous markets including those that we just highlighted in New Jersey and the metro D.C. market over the last several years. Revenues in New Jersey had a 22% compounded annual growth rate per year over that period of time and an even more impressive compounded annual growth rate of 46% in the metro D.C. market since 2000. While we don't report P&L by market for competitive reasons, they have grown very nicely as well. Both New Jersey and metro D.C. are prime examples of markets where we have successfully deployed our broad product array and have been equally successful in growing our community count.

If you turn to slide 26, over the past several years we've successfully grown the operations in companies that we have acquired. This slide shows some examples in southern California in the inland area, in the Dallas area, and in Tampa where we've made some acquisitions and they've had a compounded annual growth rate of 29, 51, and 11% since becoming part of our company. The combination of a strong local knowledge and experience base combined with the broader experience of a larger, national builder with more capital and a balance sheet and reputation that attracts land sellers has been a winning formula. All of the operations I've described in these two slides will be growing again in '06.

While the housing markets are returning to more normalized levels, the demographics support the fundamentals that allow me to be confident about the future. We maintain our financial discipline and expect to achieve strong returns. We look forward to continuing to report solid results for you in '04 and the years to come. With that I conclude our comments for today and we will be pleased to open up the floor for questions.

[OPERATOR INSTRUCTIONS] Margaret Whelan, UBS.

Good morning, guys. Nice quarter.

Thank you.

A lot of prepared comments so you covered some of my questions. But one that I don't remember is why you are changing your unit delivery guidance for '06? I think it had been 25 and now you are saying 22 and over and the same for the JV unit closings.

Right. Well, obviously we had prepared our earlier guidance based on earlier budgets. We update our budgets throughout the year and we think it's a prudent time to be a bit more conservative in light of the challenges of construction more than sales right now. I mentioned we are definitely seeing material shortage in several markets, some labor shortage. A lot of that based on the hurricane but in places like Arizona it's just because of strong market conditions making it difficult to keep up. Those two things are expanding our product build cycle time, our construction cycle times.

So we thought it would be more prudent to be a tad more conservative and perhaps I should say more realistic in light of those changing conditions. Fortunately margins continued to get more solid and in spite of the reduced volume and in spite of some of the additional new costs I mentioned we are still confident that we are going to achieve the earning guidance we gave you earlier.

Sure. I am just trying to figure out, is it all supply driven or is this demand?

We think it's really more supply driven, both supply of land and improvals which just continue to be a problem as well as the ability to construct. It's a challenge out there today and it's one of the few times when I've stood here in the office and said there is a challenge to actually build the homes. That is a relatively new phenomenon. Certainly the string of hurricanes has not helped and Arizona which is getting a little more significant for us has been a challenge as well. So construction cycle times are definitely stretching out right now.

And the second question I have is about your margins, I guess you are forecasting that they will be down to be conservative and because of the higher cost and construction delays or is it mix or something else going on there?

It's a little bit of everything. Mix place a part of it. The fact that we are delivering out some of the older lots and we are now replenishing it with slightly higher costs although I am pleased that because of our option position some of the new land we have -- we are bringing in are at costs that we locked up two and three years ago. So it's still very good margins, just not quite as high as we had projected. Plus First Homebuilders is a significant company. It's a new acquisition and after you take into account the stepped up basis and we are expensing out the premiums their margins are definitely lower than the Company, or at least they will be for the next few years as we go through our purchase acquisition expenses. And that brings down the margins as well. So for all of those reasons we are doing it. And, of course, as always we are projecting zero price appreciation.

Thank you, guys.

We'll take our next question from Carl Reichardt with Wachovia Securities.

On First Homes, I'm trying to figure out with the scattered lot operation how you get construction efficiencies different from the traditional track business, so how margins end upcoming out from the gross margin perspective. Can you kind of help me understand what those look like relative to the traditional business?

Well, the comment -- clearly for us right now our margins there are lower. Partly because of purchase accounting. But they actually get some of their efficiencies in unique ways. As I think we might have mentioned in the past they are unique not just because they are doing scattered lots but they also have their own distribution facility which helps with efficiencies plus there are several trades that they build themselves, that they do their own construction on. That includes concrete work. That includes some framing and some of the other areas as well. That helps gain some efficiencies even though there are inefficiencies inherent in scattered lots.

But what really drives a phenomenal return on investment there is a very unique selling approach there. And that is a scenario where they sell the lot first very early in the process. And then effectively have a contract to build a house for the customer and receive contract payments along the way. So our investment levels are very low relative to the income. And that combination, even though the margins are a little lower when you compare them to the investment we make, the returns on investment are excellent in that marketplace.

So it's got build on your lot and ROIs to a certain degree and SG&A will be lower, too. Okay, I got it. The follow-up, which has nothing to do with that, is just on those markets, Ara, where you have over the last quarter been increasing your incentives where they are, can you give me a sense as to what the consumers response -- to the extent that you've lowered bases or actually offered greater incentives what has the consumer response been? Is there some elasticity in demand that you are seeing in the marketplace now or has that had less of an impact?

Well, first, to my knowledge I don't think we've gone and actually lowered any base prices. If we have it's in some very rare, unusual circumstances. What we have done is we looked at our premiums in some of those locations and more likely if there had to be any kind of adjustments we might have done some deals on options and upgrades which obviously cost us a lot less. But what we have seen is when there have been adjustments that the absorption typically gets right back to pace.

Terrific. Thanks so much for the help.

We will take our next question from Michael Rehaut of JP Morgan.

First on the SG&A just want to make sure I understood correctly, you're guiding for roughly 30 basis points down, and within that you hit about a corporate expense level this year about 90 million. I was wondering if you could give us what you think that will be for '06?

I think we gave guidance of 10% for total SG&A for '06 identical to what we experienced in '05.

That's correct.

Okay. So the corporate plus the -- okay. I think you're right. I was dividing by homebuilding revenue. The second question, just if you could give us an update across the country in terms of where you are seeing the strength in terms of order trends. You gave the October sales and units and on that actually I think you gave those numbers including unconsolidated JVs. I was wondering if you could give us, excluding the JVs and maybe give some regional color in terms of where that strength is coming from.

Mike, the October data that we gave out we actually put a press release out about a month ago that has market by market data.

I'm sorry, I'm referring to November.

We are not going to give any additional color on November in terms of specific detail. As we announced at the end of October we are no longer giving monthly order data. We just wanted to give you a data point on overall the market certainly hadn't collapsed. Our activity -- if you compare the month of October to the month of November I think on a unit count basis, on a total, grand total basis including unconsolidated joint ventures it's within a percent of what we did in October. So just go back and look at October.

Okay. Thank you.

Sir, we'll take our next question from Jim Wilson, JMP Securities.

I think most of my questions have been answered, but, Larry, community count, going back through this, is that with JVs or without it and how are, if, either way, how do you plan on growing community count wise or what would you expect out of both the new acquisition markets, Chicago and Florida?

We -- the numbers that we give are excluding joint venture communities. And the second question is how are we going to grow in Florida and Chicago in terms of community count? I mean we're going to -- first, in Florida because of the First Homebuilder operation there's zero communities today and there will be zero for the foreseeable future although at some point they may get into traditional home building operations but there's no communities counted in their operations because of the scattered lots that I elaborated on in my portion of the script and the rest of our Florida operations we will do it there as well as in Chicago the same way that we do it everywhere through the country. We are constantly looking for sites that are suitable for building one of our broad product array types on and as long as we can pencil it out at a 30% unlevered IRR we will move forward with it.

Then maybe another way to look at it, in the what amounts to about 14% total growth you expect from this year and next year end is there certain markets where that growth rate is a lot higher and certain markets where it's lower and can you give any color on that? Or expect it to be?

I don't know whether Red Bank has any data in front of them. I don't know in New York.

I don't have had it handy but I would say it will be less in places like North Carolina and this year coming up I think it will be greater in the Washington, D.C. marketplace and the New Jersey marketplace as some examples that come to mind.

Very good. All right. Thanks a lot.

We'll take our next question from, Ivy Zelman, Credit Suisse First Boston.

Good morning, gentlemen, it's Justin Spear in for Ivy. I had a couple of questions for you. One, in regard to your assumption that some of weakness is more supply driven but you also mentioned investor activity has pretty much been stamped out. Was that just primarily in the new or was that in both the new and existing market that investors have exited the market as far as you can tell?

In all -- well, first of all investors really were more prevalent in the highly regulated markets where we had high price appreciation. So I would say over the last four to six months they have been slowly but surely exiting the marketplace in all markets today.

Our new versus existing markets.

Oh, new homes versus existing, I don't know specifically, I don't track that for existing but I would venture to say that if they are exiting the new home market I think they will be exiting the existing home market as well.

Okay. What are the implications on margins if your sales pace actually deteriorates from those levels that you attained over the last couple of years?

It baked into our projection we've already told you that in '06 we are projecting lower margins.

I know that but that was assuming that sales stayed flat according to the press release.

Well, it assumes current sales prices.

Okay.

Basically whatever, we really look to what our sales paces have been over the last few months and project that going forward. Obviously, if they fall further than that it would have an effect on our margins. However, keep in mind we have a huge backlog going forward. So the effect would probably be somewhat minimal for '06 and perhaps could have more of an effect in '06.

And then the five weeks of spec homes under construction how does that compare to the past? Is that a change or is that pretty much in line with your historical averages.

Pretty much in line with our historical averages. It's grown as the Company has grown but in terms of weeks supply it's about the same.

Then your SG&A guidance does that include the option expense? Expected option expense?

Stock option expense?

Yes, it does.

Okay. And then lastly I don't know if you can do this but maybe some of the demand trends in the markets, maybe you can highlight the per community trends in metro DC and maybe some of the other markets that are notable in your opinion.

We really don't have that data handy at the moment. And we are trying not to get away -- we are trying to do what all the homebuilders are doing get away from month by month information, but just in general I would say the community trends are pretty solid in terms of pace what we've really done is made sure our pricing was right to hold the absorption levels and in some cases as we talked about we've been much more conservative on price increases and in some cases, maybe not increasing prices at all in a new section, in other cases if we felt it was over priced we may really look at the premiums remaining on lots or we may do some special deals to move inventory or we may offer isolated incentives on a community by community basis. Generally speaking we try to hold the absorption level and adjust pricing to keep it there.

I appreciate it, guys, thank you very much.

Okay.

We'll take our next question from Michael Molnar of Goldman Sachs.

Quick question to follow-up on an earlier question, I believe Margarets, regarding your margins for 2006 I know there's a lot of things that impact it, what's -- how's the best way to think about it as far as the higher construction costs versus perhaps higher cost land coming on line? As far as the order of magnitude?

Well, when we make our projections we assume current construction costs so I wouldn't factor a whole lot of construction cost increases into our gross margin. It was kind of at the time we made the projection the majority of the margin is an implication of the markets where we are getting deliveries, we are now getting deliveries from First Homes in Florida as an example, their margins in '06 are significantly below our historical average of margins, significantly below our '05 margins, so that has an impact. And as we have different product mixes in different geographies that has an impact as well and then there's also an impact obviously by more expensive land coming in. So it's a combination of a lot of different things. I mean this past year we obviously saw -- the whole industry saw a pretty significant cost increase. If I was a betting man, part of that by the way is based on what's happening in oil prices. If I was a betting man I would say prices are much more, costs are much more likely to the stabilize as well as prices. So I think we will see industry, much less significant movement in both of those categories during '06.

Okay. Great. One other quick question would be, do you give any guidance or any additional color on the other income line? As far -- I know it can be lumpy at times? How is the best way to think about that coming through in the next few quarters? As far as Town & Country, et cetera?

Well, Town & Country is on a joint venture line. So that's not in the other income line.

I'm sorry, the joint-venture, I apologize.

You are asking about joint venture.

Unconsolidated income from JVs, yes.

We don't give that level detailed guidance on a quarterly basis so I prefer not to get into that kind of detail.

Okay. Thanks a lot, guys.

We will take our next question from Steve Fockens from Lehman, please proceed.

First in the markets where you are seeing material and/or labor issues from what you can tell is that something that's hitting all of the large builders relatively equally in those markets and it's the really small guys who are getting impacted disproportionately or is it even impacting from what you can tell you versus bigger builder in different ways?

To be honest I can't tell you authoritatively. My gut sense is it would be affecting all builders. And the larger builders because of their greater clout are probably affected a little less than the smaller builders but it's probably affecting many of them to about the same level.

Fair enough. One follow-up question, it's actually a detail in slide 26, I'm just wondering if you break down some of those nice growth numbers, how much of that would be pricing and how much would be units?

I don't think we calculated that.

I would also say that it's not really pricing in terms of raising prices. Much of the price delta from year to year or over a few years is just in product mix in those geographies as well.

So you have moved up the price point continuum in those markets as well?

Well, what we have is one of the broadest product arrays in the industry and when we by a company they typically focus on one or two niches and over time we will gradually expose them to our broad product array, whether that's up or down in price point what from what they have historically done.

In general I would say Dallas has seen much, much less price appreciation that is not a supply constrained market and southern California and Tampa, they probably have a relationship and revenues and delivery growth which is somewhat related without having the data in front of us, somewhat related to New Jersey and the metro D.C. data and that one just because it was a consistent period of time we put both points of data in there.

Okay. Thanks very much.

We'll take our next question from Dan Oppenheim of Banc of America Securities.

Thanks very much. Was wondering if you can talk about the land sales, it looks as though what we've seen in 2005 and what you are talking about for 2006 is substantially above what has occurred in the past, wondering what is has caused you to change your thinking to.

Well, part of what's happening and this certainly includes our sale for '06 as well is we are looking at larger tracks and what's happened in the marketplace is the land prices have gotten more significant and the effects of carrying it are more significant and in some cases to make good land buys we are doing some very, looking at some very significant purchases. In '06, for example, it's a large land purchase in California. We are already going to be building -- that's our plan, of course things shift around and we will see what happens -- but we are already going to be building numerous product types ourselves. And there's just more land than we need so we will be selling off some of them so I'd say in general my guess is you will see more land sales as a component with us and perhaps other builders because of it.

Having said that it's a grand total of about 4% of our overall marketplace, of our overall profit so it's still an insignificant part of the business. Another minor component part of it is we did establish a very small group that we call Hovnanian Land Investment Group and part of their strategy is to go out and buy property, do some infrastructure improvements and sell it both through our own divisions and to other geographies. That may come into play a little bit more as well as this group gets started. But having said that -- again, while land sale, I guess while it's significant in dollars when we are talking about pretax profits in '06 in the $900 million range, it's not an overall large component of our strategy.

Okay. Thanks very much.

We'll take our next question from Margaret Whelan.

I have two follow-ups. Did you mention the cancellation rate already? Did I mention it or could you give it to us?

No, and I'm glad you brought it up because I wanted to include it in the script but our average cancellation rate on a consolidated basis since '02 is within a reasonably tight range, averaging 22.8% I think during that three-year time period and that's pretty much right where we are today. There have been individual markets that we see fluctuations but no different than what we've seen over that same three-year time period.

And the second -- thanks for that, Larry. The second one I had is just regarding your comment about the opportunity to buy instock versus growing the business and you are saying that people have put you to buying stock for years and years and you feel like you've generated great returns which you have, but given that as a group and on average your margins have doubled in the last five years, your market share positions have doubled in the last five years I'm just wondering if the returns going forward are going to be as, show as much upside as they have in the last five years, is that your assumption and if not wouldn't buying in some stock here make more sense?

Well, the returns I think would, it's very reasonable to assume we are not going to be able to continue getting 40% returns. However, we do feel very good that there are plenty of opportunities that meet our threshold of a 30% all in cost IRR on new acquisition -- I'm sorry , a 30% IRR with all costs taken into account unleveraged. That can yield returns on equity in the high 20% range. That by our calculations will yield better results over the near term than buying back stock. Obviously you can calculate it many, many different ways but we think the returns are better -- we can get a one-year boost without a doubt by buying back stock, our '06 results would definitely be a little more turbocharged but we would pay for it in '07. At this point we are fairly comfortable that we can generate the returns that warrant further investing in land. If we did not, I assure you we would definitely look at buying back the stock without hesitation rather than expanding. We don't want to grow for growth sake but as long as there are opportunities that meet our significant hurdle rates we will move forward with them.

The other factor is there are other home builders that are more significantly underleveraged and underinvested. We are more fully invested, more fully levered. And secondly -- which doesn't give us as much room. Obviously if you buy back $100 million of stock, debt goes up 100 million, equity goes down 100 million, and it definitely has an impact on leverage. But secondly we probably have a smaller footprint than many of the other homebuilders geographically. We've tended to concentrate and be major players in the handful of markets where we operate but there are many, many market opportunities out there for expansion.

Thirdly if the market does slow down we don't want to have tied up all of our capital by buying back stock, eliminating our equity. We want to have plenty of dry powder available for that. So for all of those reasons while it's awfully tempting we've decided at this point that we are going to continue moving forward. We are going to buy back stock. We may increase the pace just a little bit but not a significant and profound amounts, at least that's our current thinking today.

How do you think about it as a one-year super charge or turbocharge if you reduce the share count as a permanent reduction and yours was one of the only homebuilding stocks that's actually down this year so your cost of equity is going to be higher.

Well, the calc is as follows more or less. If we buy back shares today and we are somewhere, I don't know where we are trading at this moment, it's been gyrating quite a bit but if you used $50 as a base where we were yesterday before everybody got concerned about the news of whatever it was at the moment, at $50 if you take our projection of $8.05 to $8.40, that translates to whatever that is, a 16 or 17% return after tax on that. If you look at what we are achieving on our acquisitions, land acquisitions, that translates to a return on equity of in the high 20%. And those also continue on later years. So now the difference is in year one the EPS impact is much more profound by buying back stock than investing in land because when you invest in land you have to build the houses and then start delivering. That occurs the following year. But the following year we would have returns we feel that are much higher and still warrant that versus buying back our stock.

Thank you.

We'll take our next question from Timothy Jones of Wasserman & Associates.

Good afternoon.

Good afternoon.

I hate to ruin my reputation but this may be one of the five best presentations I've heard in 37 years.

Well, you are very kind. Thank you.

But, okay, first question is on your, both questions actually are on your First Builders. One, is you are stretching your prices, you have fixed prices I assume on the contracts that you are going out to 2007. Aren't you sort of taking an unwarranted risk by going out so far in your backlog?

We are a bit. However, I mean number one, those homes happen to have a longer cycle time than our typical homes. I think we frankly will improve on that as being part of our company. But today they have a much longer cycle time. So just by its nature you are forced to have a longer time. The permitting takes longer on a house by house basis. That can easily be 90 to 120 days. So there's no getting around that and the construction cycle time is more like six to seven months. So that in and of itself guarantees kind of a minimum of nine months. So--.

I figure you have got 1400 going out to 2007.

Tim, the short version is when we acquired First, they had that backlog in place and over time I think you will see us begin to bring down the amount of backlog that's beyond 12 months. It just takes some time to adjust it.

Now let me give you the good question. Okay?

Okay.

You have been definitely silent about one factor on this acquisition. First of all it's a two-part question if that's okay. The margins on this company X. the write off you are taking for acquisitions, do they approach the company average?

Yes.

Okay. Now the way you are getting the buyers to take the construction loan your return on assets have to be astronomical.

It is phenomenal, yes.

Would you like to give me a number? I don't think there's any assets.

No, there are some--.

There aren't many assets, if the guy is taking the construction loan and he is basically financing it for you.

That is generally true. Now keep in mind obviously we have some investment because we bought the Company and unfortunately they weren't willing to sell it for no cost. So we had to pay a premium that we are amortizing that rapidly. But it is a very intriguing formula and it's part of what attracted us to the acquisition. They earn phenomenal returns.

You should have a mask and a gun.

They do own some land and lots, not a lot but some as opposed to our Ohio operations in which case the lots are owned by the customers when they come in.

Returns are phenomenal.

There's no question about that. They do have a plant because of some of the vertical integration that we are doing and a huge sales center but your general analysis is right on point.

Good job.

Thank you.

We'll take our next question from Joel Walker, Highland Financial.

Hi, guys, I'm just wondering on the corporate general and administrative expense since it went up about 20 million from 21 million to 41 and just wanted to see the reason behind that?

Paul, you want to take that?

Sure. As our company is expanding with acquisitions, the corporate office has been expanding. It includes also our -- so we have associates and associates compensation and bonuses going up. We also have in there our wonderful costs this quarter from a large amount of Sarbanes-Oxley work by our consultants and needless to say Sarbanes-Oxley has required us to hire other accounting professionals in the area of tax. We also are implementing now our new enterprise wide software package and we have a significant number of consultants working on that implementation out in California. So that's also resulting in some significant one time professional fees in that implementation.

So just going forward what percentage would you say that was going to increase year-over-year by quarter or is -- this one was up 93%, would you say?

On a consolidated basis we are projecting SG&A to be 10%.

So virtually unchanged, I mean, the quarter looked very big just because of the timing of a variety of expenses but on an annual basis -- do you have those numbers handy, Brad? For the full year the increase in corporate G&A for '05, I will give you those numbers in just one moment but they are not as significant. The quarter was just more of an aberration for some reason, so it was a 43%, not nearly the doubling that you see in that one quarter but we do, between computer information systems, some better bonuses because we are making more money, one other factor that wasn't mentioned, I don't believe we mentioned was we are about to move into new offices, because we've been expanding and we've been doubling up in offices for quite some time, but we are about to move into new facilities soy that's all part of the expense as well.

Right. Thanks. Just, I caught the last part of the order number for the November. I was wondering was it 37% on a dollar basis including JVs?

Yes.

All right. Thanks a lot.

Okay. Any other questions?

[OPERATOR INSTRUCTIONS] We have a question from Mr. Brian Watson of Stanfield.

Just talking about -- the question about margin. I guess you said about the slightly higher cost of land going forward and as you cycle off some of the lower cost land but doesn't it turn out to be a high class problem at the end of the day? Or are you guys experiencing pressures whereby the demand is softening in your market such that you can't cover the increased cost of the land purchases?

Our assumption when we make our projections both internally as well as for public consumption just assumes zero home price increases, historically speaking for the last 30 plus years the median price in the U.S. has gone up right about 7% a year so we are assuming zero. The historical average is seven across the whole nation, obviously it varies widely from one market to the next. So when you assume zero home price increases and every day you are selling a house on land and replacing the land and starting a new house on land that costs a little bit more there's an impact on margins, I mean it's not rocket science it would be negative if in fact there's zero home price appreciation unlike what's occurred in the median home price in America, going up 7% on average the last 30 years. I think there may have been only one year in the last 34 years that the median new home price has declined and I think that decline was like a 2% decline.

So what is your assumption -- and I'm positive you already said this but what is your assumption then for '06, it's 0% home price appreciation and then what do you assume for lands costs?

The land costs are whatever the contracted amount is in that particular community so if there's a price increase that has been included in our land cost analysis for the margins for next year.

We actually do a bottoms up budgeting process community by community, model type by model type so we know what our land cost is going to be underneath the homes that we are projected to sell.

Can you give me an overall number or not?

No, I can't give you an overall number. I'm just telling you the process.

It's so different for different markets, different product types. Even if we gave you an overall we don't track it because it's really irrelevant. It's a market by market phenomenon. But rest assured we took it lot by lot costs into our budget, into account when producing our budget. So that part is quite accurate.

Okay. Is there -- are there regional differences that you can speak to at least.

Sure, just to give you an idea. In North Carolina, a developed lot may only be about 15 to 17% of the home sales price. In Southern California in the coastal area it can easily be 40% and the high-end products can be higher than 40% of the home sales price. That gives you an idea on the wide spread of lands costs across the country.

Not to mention the sales price itself would be dramatically higher so those percentages are somewhat misleading. I mean land costs is a ten multiple in some instances in California versus North Carolina for basically the same product.

I guess I was just thinking directionally land costs in each region so California land costs are up, North Carolina are they up--.

I would say in all places the only good thing about all the negative media about housing is the land sellers read newspapers and magazines too, and I think they are getting a little less aggressive, for the first time we are starting to see terms ease a little bit and land sellers are getting more interested in getting, in working with the most financially solid builders which are typically the large public builders so that's a positive thing. I would say at the moment land prices have stabilized for the first time in awhile in terms, I can't say they have gone down. They have not in most cases. But terms have gotten a little better and there's more -- just a little more interest in dealing with the large very well capitalized homebuilders that land sellers can see, believe can whether a potential slow down better than the smaller highly leveraged builders.

So you should be able to get some operating leverage then to the extent that land prices stabilize.

And going down the road I mean in '06 if we by a piece of land today it's unlikely we would get any '06 delivery.

To clarify that, if we contract for a piece of property today deliveries won't happen in '06. In fact in some cases we may buy the land in '07 and deliver the homes in '08. And that's only if all the entitlements are very close to being in place.

Okay. Thank you.

Other questions?

We have no questions at this time. I will turn the call back over to the presenters for closing remarks.

Well, we appreciate your interest. As I said we are proud of our results and we look forward to giving you continued good results and updates throughout the year in fiscal '06. Thank you very much.

This concludes our conference call for today. Thank you for your participation and have a nice day. All parties may now disconnect.