Hovnanian Enterprises Inc (HOVNP) 2005 Q3 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2005 third quarter 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 Teshi] at 732-747-7800. We'll 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 will run for 12 months. The replay can be accessed by dialing 888-286-8010, pass code 85683264. Again, the replay number is 888-286-8010, pass code 85683264.

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 second quarter results and then open up 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 Investor's page of the Company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time.

Before we begin, 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 the conference call and to the information in the slide presentation. I would now like to turn the conference call 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 third quarter ended July 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're pleased to report a very strong third quarter. We set all-time third quarter records in net contracts, contract backlog, home deliveries, revenues and net income, once again. I'll review the financial highlights, comment on our operations and recent acquisitions, provide an updated outlook for the remainder of fiscal '05 and introduce our initial expectations for earnings 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 turn to slide number 3. For the third quarter of '05 we reported record earnings of $1.76 per fully diluted share. This represents a 32% increase from '04's record earnings of $1.33 per fully diluted share. The third quarter earnings were slightly above our latest guidance and projection of greater than $1.70 per share. As shown on slide 4, this continues a steady positive trend in the third quarter earnings over the past several years. As you can see from slide number 5, net income rose 34% in the third quarter to $116 million, compared to $87 million in the third quarter of fiscal '04.

Slide 6, for the trailing 12 months, we posted an after-tax return on beginning common equity of 41.5% and an after-tax return on beginning capital of 22.5%. Now, keeping these return ratios at high levels is not an easy task as we grow larger and add acquired companies, which typically have lower returns in the earlier years due to our conservative acquisition accounting. Our entire industry continues to post great results and we're pleased that our return on capital and return on equity continue to be among the very highest in a great industry.

Slide 7, total revenues for the third quarter increased 24% to $1.3 billion, up from $1.1 billion in the prior year's third quarter, setting another record in revenues for the quarter.

Slide 8, consolidated deliveries increased 6% in the third quarter to 3,967 homes, another record. If you include unconsolidated joint ventures, our deliveries were up 21%. The joint venture activity has become a bigger part of our Company over the last couple of years, particularly since the acquisition of Town and Country Homes, which was acquired earlier this year in a joint venture with the Blackstone Group. Thus, in order to get a true picture of our growth, it is necessary to look at our deliveries, contracts and backlog, including the activity of our joint ventures.

Although we've been very active in making acquisitions in our history and certainly this year, 93% of our growth in the third quarter EPS came from organic operations which we have owned for over a year. For each of the past three years, our organic growth has accounted for more than 90% of our earnings each year. Organic growth will remain a major component of our growth strategy and we expect to grow earnings per share more than 15% annually for the foreseeable future, prior to the effect of any future acquisitions.

Slide number 9, the second part of our growth strategy is seeking to make financially sound acquisitions of other home builders to further grow our operations and expand our geographic footprint. This slide, showing a map of the United States, displays our current geographic markets with our estimated market position in each market and the number of homes that we delivered in that market for the full fiscal year last year. Our most recent acquisitions are highlighted in the red and blue dots.

Let me start by updating you on the acquisitions we made at the beginning of March this year. We're extremely pleased with our progress to date on the ongoing integration of Town and Country Homes. Our communities in the Chicago-Minneapolis markets are doing very well. Our communities in Florida are doing exceptionally well. The midwest markets are solid, while not being quite as robust as some of our strongest markets, they're still very good and very solid and meeting our projections. The South Florida market is extraordinarily strong and continuing to rank as one of our stronger markets. Overall, we're pleased with the initial results of this acquisition and we expect continued growth and market share gains from the Town and Country team over time. We expect Town and Country will deliver more than 2,000 homes in the combined Town and Country operations during the most current calendar year.

Because of the structure of the acquisition as a joint venture with Blackstone, our equity portion of the net income from Town and Country flows through a single line in our income statement and the equity investment is accounted for under the equity method on our balance sheet. However, we continue to provide detailed disclosure of all of our unconsolidated joint ventures in the footnotes to our financial statements. By structuring the ownership of the current Town and Country communities in a joint venture, we were able to mitigate a substantial portion of the risk and limit our leverage at the corporate level, while we continue to participate in a higher percentage of any upside in performance. As a result, the venture enhances our returns on capital.

In addition, under the venture structure on our Town and Country acquisition, all new communities are purchased on a wholly-owned basis by our Company. As with every other land acquisition that we make, these communities are recorded at book value with no premium. We have already begun to purchase new land parcels in which we will be developing housing outside of the joint venture as 100% wholly-owned communities.

The integration of Cambridge Homes, another acquisition in Orlando, is also going quite well. We have 13 communities that are open for sale and selling well as the Orlando market continues to show overall signs of strength. Cambridge Homes definitely contributed to our third quarter results and is on target with our expectations. We expect to deliver about 450 homes in Orlando in the current fiscal year with only 8 months of operations there.

Now, I'll elaborate on our most recent acquisition od Oster Homes and First Home Builders in Florida, which we completed about a week after the third quarter ended. Oster Homes in Ohio was attractive to us for several reasons. We've already been operating in the Ohio market through a build-on-your-own-lot operation that we acquired in April of '03. This operation focused primarily on the outlying suburban and and rural areas within and throughout the state.

The addition of Oster Homes presents us with a high quality traditional production homebuilding operation in Ohio, focused on the suburbs of Cleveland. While the state has been a difficult market recently, from an economic perspective, Oster has received solid returns and the company has delivered more than -- about 250 homes in '04. That was a good increase over the prior year's production. It's got a great reputation and a very strong management team.

It also provides us with a great opportunity to leverage our existing distribution facility in Canton, Ohio, not far from their locations. As well as the trade contractors that we have vertically integrated into our on-your-lot Ohio operation. This will allow us to further our efforts in exploring new ways to remove costs from the traditional homebuilding process and advance another step in our efforts to become a more efficient home builder.

The other acquisition, First Home Builders in Fort Myers, Florida is actually our third addition to the state of Florida this year. We're very excited about the addition of Fred Herman and [Bruce Rob], the existing senior managers there and the quality team of associates that they bring with them. First Home Builders has the number one marketshare in the Fort Myers - Cape Coral market, which is the 18th largest housing market in the United States. The Company delivered about 1800 homes in calendar '04 and they are projecting good solid growth this year. First Home Builders also uses a distribution facility and operates with several vertically integrated trades, including concrete, steel framing, septic, flooring and painting services.

As of July 31, First Home Builders had a contract backlog of approximately 4,000 homes with a sales value of $888 million. As a result of First Homes unique operating model, this backlog represents about 18 months of deliveries, which is longer than our traditional home building operations, but obviously gives us great visibility, going forward.

In our First Home operation, home buyers come to our one sales center or Super Center as we refer to it, which includes nine models in one location. They choose a home, then select a homesite from a wide choice of locations. First Home Builders owns and controls scattered lots predominantly located in the Cape Coral and Lee High Acres, two large tracts of land that were substantially developed with infrastructure but never fully built out in the 1950's and 1960's. Today, there are still about 190,000 vacant buildable lots, mostly owned by individuals or their heirs that purchased them many years ago. First Home Builders are able to control these lots through contracts and utilize a just-in-time approach to lot acquisition. However, the lead time from signing a sales contract through the permitting through the completion of construction definitely is longer than our company-wide average and hence, our contract backlog conversion rates are a little slower. We're extremely excited about adding this unique and profitable operation to our Company and excited about the potential of also expanding them into traditional subdivision housing, as well.

A very large percentage of the value of the assets that we have written up during the acquisition for accounting will be written off during the first 24 months. The result is that there will be minimal accretion from this acquisition during the initial timeframe, despite the large number of deliveries and revenues. However, we expect our returns and our profits to improve dramatically once we get beyond this initial period.

We continue to look at additional acquisition opportunities across the country as a way to enter new markets, as well as a means to expanding our geographic penetration of existing markets and as a way to add complementary product offerings or types of housing and housing approaches in the overall array of our homebuilding sector. However, we remain extremely disciplined in our approach to acquisitions. And once we are comfortable with a company's track record the management team, operating culture, market position and financial returns, then we work hard to negotiate a reasonable price and move forward with an acquisition.

As we've mentioned in the past, integration of acquired operations is a core strength of our Company. We have acquired about 14 companies since 1998, a track record -- and our track record of integrating and growing these operations subsequent to the acquisitions, speaks for itself.

Let me get back to our performance with slide number 10. Our contract backlog at July 31, reached 11,331 homes with a sales volume of $4.2 billion. This includes 2,300 homes from unconsolidated joint ventures or about 20%. The number of homes in backlog and the dollar volume of backlog are both all-time records for any quarter in our history. The dollar value of contract backlog represents a 56% increase over the end of July '04.

As a result of our healthy backlog and continued improvements in our margins, we are increasingly confident in our EPS projection for the current fiscal '05 year ending in October, of greater than $7 per fully diluted share. Slide 11, this projection would represent a 31% increase from '04's record earnings of $5.35 per share. This projection implies earnings in the fourth quarter of more than $2.37 per fully diluted common share, up more than 15%, compared to $2.06 in last year's fourth quarter.

Fiscal '05 revenues are expected to increase more than 31% to $5.5 billion on deliveries of more than 16,200 homes. This excludes deliveries from our unconsolidated joint ventures in which we expect to deliver more than 1,600 homes this year, bringing our total to just under 18, 000 homes. Details of our summary projections for fiscal '05 will be available later today on the financial information page of the Investor Relations section of our website at www.khov.com.

Because of the strength of our backlog, our new communities, our continued sales pace, we are comfortable that we will be able to achieve our goal of growing earnings in fiscal '06 between 15 and 20% to between $8.05 and $8.40 per fully diluted common share. This assumes no further home price appreciation in any of our communities, as is our standard methodology for budgets and projections. It also assumes that economic conditions remain generally stable and our planned community openings remain on schedule.

While we are not monitoring the impact of that Katrina may have -- excuse me, while we are monitoring the impact Katrina may have on our operations, it's not really clear at this time point on just what the effect will be on material supplies, construction delays in any of our markets in the short-term, nor what the long-term impact may be of Katrina in the overall marketplace.

Slide 12 shows our five-year growth in earnings per share, including the midpoint of our initial projection for '06. The five-year compounded growth rate is likely to keep us in the top 10 among the fortune 500, as we were last year. Our new community openings and contract backlog are starting to get us quite excited about '06, but we still have a lot of work to do this year with more than 3,700 homes to deliver in the last two months. But, we have an excellent operating team in each of our markets focused on delivering these homes in accordance with our quality standards, as they typically do in our high volume fourth quarter.

Obviously, the weather is the major unknown and uncontrollable factor, as we saw just recently with Hurricane Katrina. Additionally, the Tampa Electric Company notified us yesterday that they're diverting a portion of their staff to Katrina repair work and that we should expect delays in obtaining electrical service for our homes in Tampa. If other utility companies follow suit and divert some of their manpower to assist in the restoration efforts, delays in home deliveries are likely to occur. We've attempted to factor the reasonable delays and the likely scenarios into all of our projections.

I'll now turn it over to Larry Sorsby to discuss our financial performance in a little greater detail. Larry?

Thank you very much, Ara.. I'll go into more detail pertaining to the third quarter and the nine month period, as well as some specifics behind our expectations for the remainder of 2005. A summary of our nine month results is displayed on slide 13. Total revenues increased 30% from $2.8 billion to $3.6 billion, and net income increased 41% from $214.9 million to $303.7 million. Earnings per share for the first nine months of fiscal 2005 were $4.63, up 40% from $3.30 per share during the same period last year.

Turning to slide 14, at the end of the third quarter, we had 323 active selling communities, excluding communities owned in unconsolidated joint ventures. We have a very strong pipeline of new communities scheduled to open during the next six months. Excluding communities owned in unconsolidated joint ventures, we expect to have approximately 350 active selling communities, including 17 communities from our recent Oster Homes acquisition open for sale at October 31, 2005; an increase of 27% in community count over October 2004.

Turning to slide 15, the dollar value of net contracts for the third quarter ended July 31, 2005, including unconsolidated joint ventures, increased by 35% from the third quarter of fiscal 2004. The number of net contracts for the quarter was 4,865, an increase of 17%, compared with 4,173 contracts in last year's third quarter. As we opened additional communities during the final months of the year, we expect our year-over-year quarterly sales comparisons to gain some further positive momentum.

This morning we announced our net contracts for the month of August, which in dollar amount, were up 29.9% and a number of homes up 23.6%, when compared to August 2004. Our results are even better than the numbers reflect, as August 2004 had five Sundays and August 2005 only had four Sundays. And as I'm sure all of you realize, most new homes are sold during weekends.

Turning to slide 16, the average sales price for home delivered company-wide, excluding unconsolidated joint ventures for the third quarter, was approximately $325,000, a 16% increase from the average sales price of approximately $279, 000 in the prior year's third quarter. The average sales price in our markets increased primarily as a result of geographic and product mix of our deliveries. Additionally, although we have seen the pace of home price increases moderate, we still have the ability to raise prices in some of our more heavily regulated markets. We expect that the average sales price per home, excluding unconsolidated joint ventures,will be close to $325,000 for the remainder of 2005.

Turning to slide 17, for the third quarter of 2005, the Company's consolidated home building gross margins, excluding land sales and prior to deducting interest cost of sales was 27.1%, a 160 basis point increase from 25.5% in last years' third quarter. After interest and cost of sales, gross margin was 25.6%, 140 basis point increase in -- than the 24.2% margin reported in the prior years' quarter. Based on the homes we have in backlog for delivery in fiscal 2005, we're projecting our homebuilding gross margins for the full year, prior to the effect of interest expense, to be in the range of 26 to 26.5%, 50 to 100 basis points higher than the 25.5% homebuilding gross margin we achieved in fiscal 2004.

Now if you'll turn to slide 18, total selling, general and administrative expense, including corporate expense as a percent of total revenues, was 10.3% in the third quarter of '05, compared with 9% in last year's third quarter. SG&A was up, primarily due to Sarbanes-Oxley compliance costs, opening several new divisional offices in preparation for future growth, and the salary and advertising expenses associated with launching new community grand openings. We anticipate that our total SG&A expense, as a percent of total revenues, will be in the range of 10 to 10.2% of revenues for the full year in fiscal '05. Expenses from other operations were higher in the third quarter of '05, primarily due to higher earn-out payments related to several of the Company's acquisitions.

For the 2005 third quarter, our income from unconsolidated joint ventures was $13.9 million, compared with$ 2.3 million in last year's third quarter. While our equity investment and advances to unconsolidated joint ventures increased to $161 million from $42 million on October 31, '04. Our joint venture activity has been increasing over the past couple of years as we implement our JV strategy, which mitigates risk and enhances our returns on capital. We remain committed to providing significant transparency into our joint venture activities through disclosures in our financial statements and in our footnotes. This quarter we further enhanced J V disclosure by adding separate line items to our financial statements, which highlight the net income from JV's and the amount of capital we have invested in JV's. At stated in our footnotes, we generally limit the leverage of our JV's to 50% of it's assets and we do not provide maintenance guarantees or other financial guarantees for the debt of our JV's. Although we will provide completion and limited environmental guarantees, all JV debt is non-recourse to Hovnanian.

Turning to slide 19, the Company's pre-tax margin in the third quarter increased 160 basis points to 14.8% from 13.2% in the prior year's third quarter. Our effective tax rate for the third quarter was 40.4%. For the full year, we're expecting our effective tax rate to be in the range of 39 to 39.5%.

Excluding model homes, we had only 1,762 started and unsold homes at the end of July. Based on our current sales pace, this represents only about a four week supply of started, unsold homes and compares extremely favorably to the national average of over four month's supply of completed, unsold homes. Our financial services operations have continued to perform well and add meaningful earnings to our overall performance.

If you'll turn to slide 20. However, as I've commented on past calls, our Financial Services business continues to experience increased competition from third party mortgage lenders, as the level of mortgage refinancing has fallen significantly. Despite the negative impact of increased competition and the lower profitability of adjustable rate mortgages, pre-tax earnings from our Financial Services were up 24% to $6.2 million in the third quarter, compared to the pre-tax earned in the prior year's third quarter of $5 million.

We're currently originating mortgages in all of our markets, except Tampa and the markets where our Town and Country acquisitions operate including Chicago, Minneapolis, West Palm Beach and Ft. 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 Home Builders of Florida.

Turning to slide 21, our recent data indicates that our customer's credit quality remains quite healthy. Our average loan to value ratio was 76% for the third quarter, flat compared to our fiscal 2004. For the third quarter of 2005, our average FICO score was 712, compared to fiscal 2004's FICO score of 713, virtually unchanged. For the quarter, our average FICO store for customers who utilized an adjustable rate mortgage was still a very high 702. We believe that our customer's FICO scores are above mortgage industry averages.

The trend of increasing percentage of -- of usage of adjustable rate mortgages appears to have slowed and perhaps even reversed in the past month or so. Which in fact is logical as the yield curve has flattened considerably. In the third quarter, adjustable rate mortgages represented 40% of all of our origination volumes, slightly less than the 41% of originations for all of fiscal '04. The majority of our ARMs are two-year, three-year or five-year instruments.

Turning to slide 22, for the quarter, EBITDA increased 30% to$ 233 million from $179 million in the third quarter of fiscal '04. 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 23, EBITDA covered the amount of interest by 8.3 times in the quarter, flat when compared to last year's third quarter. We expect to cover our interest by more than 8 times for the full '05 fiscal year, up from 7.7 times coverage during fiscal 2004. The ratio of total debt to EBITDA is expected to be approximately 1.8 times, which is very healthy, but is higher than our prior projections for year-end because we have all the data associated with our recent acquisitions, but will have only two months worth of EBITDA from those operations. Our credit statistics continue to be at very attractive levels.

Turning to slide 24, we ended the quarter with the ratio of net recourse debt to capitalization of 42.5%, substantially lower than where we stood at the end of the prior years' third quarter; in part, due to our perpetual preferred stock offering, the raising of additional equity capital through our joint venture structures, including our Town and Country venture with Blackstone and our prudent management of our balance sheet leverage, even as we've continued to experience very significant growth. During the third quarter, we increased the committed amount of our unsecured revolving credit facility to $1.2 billion and we raised more than $130 million through a preferred stock offering. At quarter end, we only had $43 million outstanding under our facility.

Since the end of the third quarter, we raised $300 million in additional capital through a senior note offering. As Ara's already discussed, we also completed two company acquisitions in August. Even with this balance sheet activity, we anticipate that our average ratio of net recourse debt to capitalization will be below 50% for the full fiscal year of '05 and inline with our targeted leverage goals.

Turned to slide 25, at July 31, 2005, stock holder's equity was $1.6 billion, a 55% increase from $1.1 billion at the end of the third quarter of '04. Based on our projection for the fourth quarter of fiscal '05, we expect stock holder's equity to grow to more than $1.8 billion by October 31, 2005.

At July 31, if you'll turn to slide 26, we controlled on a consolidated basis more than 107, 000 lots in our various homebuilding markets for future development. This excludes approximately 10, 000 lots that we control in 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 6.5 year supply based on '05 projected deliveries.

Turning to slide 27, it shows our aggregated option position for all of our lot options in the amount of aggregate deposits, which have that risk, which are only 7.3% on average of the total purchase price of the lots. We believe that this strategy minimizes our risk associated with land options and land ownership. In addition, our controlled lot position gives us excellent forward visibility and confidence that we'll be able to continue to generate strong earnings growth going forward.

During the fiscal '05 third quarter we repurchased 100,000 shares of HOV common stock at an average price, or approximately $62 per share. This recent activity leaves our current stock buy back authorization at 1.7 million shares. We've purchased 400, 000 shares this fiscal year and expect that we will continue to buy back shares from time to time. In fact, today might be a good opportunity.

Our updated 2005 fiscal projections include the effect of our recent acquisitions and our net of all amortization of definite life intangibles and expenses related to stepped up inventory. Our projected 2005 earnings are net of approximately $72 million of pre-tax expenses related to definite life intangibles and inventory step-up expenses, representing an after tax cost of about $0.66 per common share. After this amortization, our total remaining definite life intangibles, including intangibles from the two acquisitions we made in August '05, will be approximately $210 million at fiscal '05 year-end.

Our earnings projections for 2006 include more than $100 million of pre-tax charges related to acquisition premiums, which are just about evenly split between stepped-up inventory and definite life intangibles. Let me clarify this further. During fiscal '06, we expect to expense $50 million of definite life intangibles and roughly $50 million of inventory step-up related to our prior acquisitions. The combined $100 million charge is a noncash expense to Hovnanian. Despite the negative impact of our margins in the short run, we continue to believe that our conservative approach to purchase accounting, which amortized expenses of 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 two recent acquisitions. And at July 31, '05, we only had $32.7 million of goodwill on our balance sheet, which in fact is left over from acquisitions we compensated prior to the change in goodwill accounting rules. Now I'll turn it back to Ara for some closing comments.

Thank you, Larry. I'd like to conclude by commenting on the market's reaction to our earnings release. I certainly feel a sense of frustration. As we have said repeatedly on the last few quarterly conference calls, we have been working hard to give more and more accurate guidance, particularly one quarter out. At the last quarterly conference call, we gave guidance of $1.70 per share for the third quarter EPS and in fact, we just reported $1.76 per share. It represents a 32% increase in earnings. It also represents a trailing 12 months after-tax return on equity of 42%. We reported that our backlog is up 56%. I believe that those statistics rank us as one of the best performers on the Fortune 500.

Further, the stock is already trading at an anemic PE for us and the industry somewhere around 6 or 7 or 8 times earnings for the entire group, probably one of the lowest industries in Wall Street. So when we report earnings and performance that would be a welcome cry for most companies and an already low stock price in multiple goes down further, it certainly is frustrating.

Now, I understand that analysts have been expecting home builders to exceed their guidance. I also recognize that we have been exceeding our guidance historically year-after-year, quarter-after-quarter. And I do realize that we began this year giving guidance of about $6.30 for fiscal '05, and here we are at $7.00. Clearly, we've been exceeding our own guidance quite significantly from the annual perspective. However, annual guidance is obviously much more difficult than guidance one quarter out. And as we have said for the last few quarters, we're continuing to work very hard to give our best estimates one quarter out with fewer surprises up or down.

Regarding '06, it's obviously hard to be as accurate that far into the future. Clearly, it's harder than it is one quarter out. However, we currently stand with a backlog of over $4 billion, much of which is scheduled to deliver in fiscal '06.

There are clearly challenges, though. We have many entitlements on many of the projects we have around the country that we still have to receive. There is still uncertainty regarding the effects of Katrina on material costs and deliveries. And clearly, that is something we are factoring in and have to factor in, because that's realistic. And while I'm optimistic about the outlook for long-term interest rates, and I'm frankly quite confident that the housing industry will perform well with moderately higher rates, no one of course, knows what the Fed actions will be over the next year.

Now, on the positive side, while I have some of those concerns, mortgage rates are very favorable and the likelihood for dramatic increases in the mortgage rate, I think are quite low. Demographics and household growth remain very positive. And our projections, as you know and has always been the case, assume no price increasing in any case, which is essentially assuming the market slows considerably from what we have been experiencing.

Currently, in spite of all the concern in media about housing bubbles, our markets remain very strong and very steady. Clearly, the frothiness that existed a year or two ago is not present, but that's a good thing. I've already had some questions about my comment in our press release that the rate of pricing increasing is decreasing and will likely remain that way. But that is a good thing. It is not a sustainable environment to continue the price increases in housing that we've seen over the last 24 to 36 months. Housing would remain completely -- and would become completely unaffordable.

We need a little steadiness in the marketplace for the markets to really balance, and that's exactly what's going on. A steady, solid marketplace is a very good thing. And incidentally, that still means we are raising prices in many of our locations in many parts of the country, particularly in the highly restricted markets. It just means that we are raising them at a little less than what we had been over the last 24 months. Again that is a good thing, and again we project zero price increases into our budgets.

Hence, considering our backlog, the outlook and timing of entitlements, factoring in reasonable effects from Katrina that and other factors, we feel that a 15 to 20% increase in earnings per share for fiscal '06 is our most realistic estimate at this time. As always, we'll fine tune our guidance with every quarter. 15 to 20% earnings per share growth would typically be considered very good performance among the Fortune 500 and would definitely warrant a higher P E than our Company is experiencing and certainly than our industry is experiencing. And hence, we certainly are frustrated with the market's reaction today from what would otherwise be considered, for almost any other company in almost other industry, a very good quarter.

With all of that, we remain very confident about the future, both in the near-term, the next 18 months, and over the long-term, based on all the factors that I've described. We look forward to continuing to report some solid results for you in the near quarters to come, and certainly as we conclude fiscal '05 and begin our next fiscal year. With that, I conclude our comments for today. And we'll be pleased to open up the floor for questions.

The Company will now answer questions. [OPERATOR INSTRUCTIONS] We'll take a question from the line of Michael Rehaut. Please go ahead.

Hi. Good morning. Can you hear me?

Yes.

Just a couple quick questions. First, your comments on moderating pace of sales increases. Just wanted to be clear with the language in the press release, when you said it was during the quarter that this was more just a general comment with regard to this year versus last year.

Yes. There was nothing that really changed this quarter, compared to the prior quarters. I'd say the last few quarters, we have seen a moderating pace in the rate of price increases. We're still increasing prices in many of our markets, just not the kind of increases -- the level of increases as we had been achieving. And again, this past quarter was pretty similar to what we had seen the prior couple of quarters .

And before I get to my second question -- I don't want to be cut of since this is kind of a follow-up. But in the August month, you had ASP's rise, but in the Northeast is was down a little bit. Was that due to a mixed shift? What are you seeing in some of the Northeast markets in terms of the pace of sales increases, perhaps in New Jersey and D.C.?

Sure. Average sales price is greatly affected byproduct mix, particularly when you break it down to a given market or two. The New Jersey and Washington markets are both very strong. Frankly, I wish we had 30 more locations open right now. The challenge is getting through the entitlement process and getting new products open. But the market is very strong and very healthy.

Both of those markets, in spite of the fact that they're very, very strong and actually related to what I'm about to say, both of those markets are producing fewer homes and have been producing fewer homes than they were in the strong production years of the 80's. And that's because it's just a very restricted marketplace. That is absolutely remaining right now. You just can't get product to the market. And that's part of what's driving this big price appreciation. Demand is remaining strong. You can't get product there. So pricing is going up to bring the market into equilibrium.

Michael, specifically with the Northeast, I don't have all the data in front of me, my supposition is also that Oster Homes in Ohio, they certainly have lower average sales prices than the rest of our historical Northwest operation. That probably drug it down a little bit for the month.

Thanks, Larry and Ara. And just the second question here, with regards to the upside or the actual reported number -- certainly when you issued the guidance, there was a person that was high in the street that skewed the numbers up a little bit. But I was wondering if you could comment on -- the SG&A did come up a little bit above what we were looking for. You mentioned Sarbanes-Oxley and a couple other things. But I was just wondering if you just could mention the SG&A, what drove that a little bit higher?

Also, when you look at the upside that you had in the last couple of quarters, what was different in the last couple of quarters than the current quarter? Was it the SG&A? Were there other things that prevented the results to exceed your guidance?

Well again, the results did exceed our guidance. Our guidance was $1.70. Our results were $1.76. We did exceed our guidance. But we didn't exceed what some analysts projected, but again, that's beyond our control. We have been, including the last couple of quarters, been much closer to our guidance each quarter with less surprise up and down. But let me turn it to Larry to discuss the SG&A question in more detail.

The SG&A answer is pretty much what I've said on the formal prepared remarks. Sarbanes-Oxley had a significant impact. We also opened a number of new divisional offices as we continued to grow in our existing markets. I mean, we've opened about three, plus enlarged one in our existing operation during the quarter, all of which have some costs. And the other thing, as we open a slug of new community openings or are preparing to have new grand openings we have expenses related with those and no revenues to offset it. So the combination of those things really drove the SG&A cost up for the quarter.

And for fiscal '06, you're expecting SG&A to be roughly what, versus fiscal '05?

We've not made a public projection of that now. But I think if you look at the 10 to 10.2% that we're projecting for '05, that's in the ball park.

Great. Thanks a lot, gentlemen.

Okay. Thank you.

We will take our next question from Stephen Kim.

Great. Thanks very much. I guess I wanted to focus on the question of First Homes. You indicated that that's going to be acreetive in '06, I think you said by roughly $0.05 or so. Is that right?

Yes.

I was wondering whether or not you could give us a sense for what that would look like over the first, let's say two to three quarters. Is it -- I would assume that it was probably dilutive or likely to be dilutive in the fourth quarter of this year and maybe a little bit in the first quarter of next year? Is that a proper way to look at it?

You are in the right ball field.

So can you give us a flavor for how much it was dilutive or it's going to be dilutive, let's say for Q? And maybe how that trend is going forward by quarter?

I think something along $5 million or $0.05 a share, something along those lines probably for the fourth quarter. And then just take the $0.05 that we're projecting and weight it heavily to the second half of '06, to where the loss is probably in the first and second quarter and gains that offset that in the third and fourth.

Got it.

What was unusual Steve, about First Home Builders is obviously as you know, we do not typically have acquisitions that book goodwill. And this was not an exception. And obviously, as per GAAP, the first thing we look to do is step-up assets. And we try to be very conservative there, assigning as much as allowable by GAAP, which is conservative, because that gets written off the fastest. With most companies, the step-up of assets -- they may have three to four years of land on their books, so those assets will get written off over three to four years. In the case of First Home Builders, they have typically maintained a much shorter land supply because they haven't needed to do it. They manage it more of a just-in-time basis because it's just an unique market there with the scattered lots. Hence, there, we are writing off the stepped-up basis much more rapidly than a typical acquisition. And that's why the acretive effect are very insignificant. Actually, the earning effect for the first two years are very insignificant one way or the other.

And actually, dilutive in the fourth quarter, which I guess simply -- where I was going with this is, since you didn't raise your '05 guidance but you didn't lower it, this acquisition actually was a bit of impairment, which means your organic operations, or your legacy operations, actually improved.

That's accurate. Actually, there's one more factor and that's that we have issued preferred stock, which also means we must -- which is a little more expensive than our bank debt, which also means we are doing slightly better than the projection as well. Because that hadn't been factored into our contemplated either.

Right. I guess my second line of questioning relates to your order growth that you reported this quarter. I'm sorry, just this morning. I'm working under the assumptions that First Homes is going to generate roughly, somewhere in the neighborhood of 700 to 750 orders per quarter and Cambridge probably does something close to like 150. So altogether, maybe 300 units, 275 to 300 units a month. If you use that kind of thinking, it appears that acquisition -- the First and Cambridge together would generate roughly 20% order growth this quarter in the fourth quarter of the year.

You reported August orders, which is first month of your fourth quarter, up about 20% in units on a consolidated basis. Which sort of seems to imply that your orders outside of those acquisitions were flat to possibly even down. It looks like to me like your subdivisions, excluding acquisitions are up about 15%, currently. So it seems -- I just want to try to understand. It seems like your sub count is up 15% on a real organic basis and your orders were kind of flat to slightly down on a real organic basis -- can you sort of talk about what you're doing there? Maybe intentionally slowing orders or something like that?

Let me take it first, as perhaps you missed my comment on the August release is, we only had 4 Sundays this year versus 5 last. So that really does have an impact on the month-over-month. But if you look back over the year, your comments are not far off point. And we've had certain communities where we are consciously slowing sales pace. I mean, Arizona comes to mind. I don't know whether you want to take over and comment on various markets, Ara, or whether you want me to.

I'll comment and you can add, Larry. There are several markets, and Arizona is one, where sales are not an issue -- construction can be a challenge. The Arizona market, we're doing quite well there. The market is doing quite well. And construction in the whole marketplace is having a bit of a struggle to keep up. So we have consciously, in that marketplace, as one example, decided we have to hold off just a bit, if we're -- number one, because we don't want to disappoint customers with giving them inaccurate dates. And number two, at this point, there is some good price appreciation happening in that marketplace. And there ore we don't want to sell the houses too early to be able to take advantage of it at the moment. We have some pretty good growth going there, and we just don't want to get too far ahead of ourselves.

In other cases, we've had challenges in certain of the California markets, for example, in the entitlements, including in future sections. So we've had our challenges there. And again, we're just trying to be a little more prudent in getting our sales too far out. So I wouldn't read too much into our month-to-month orders, from one market to the other or overall as a whole. I would say in general, and of course the markets are quite different, but in general, the markets are steady and healthy right now.

Okay. Great. Thanks very much.

Okay.

We will take our next question from Margaret Whelan.

Good morning, guys.

Good morning.

I have a couple of questions. I guess one just to follow-up on what Steve and Mike were asking about. In terms of the tone of the business now and also the SG&A, did you see any meaningful change in your cancellation rates or the level of incentives amounting this quarter that might have contributed to the higher SG&A?

No. And the concessions we would do, if we did, would not find their way into SG&A, anyway. But, no, there has been really no change in incentives or cancellation rates.

In any markets?

No. Certainly nothing that comes to mind.

Okay. Good. I think that might have been some of the concern today. And then the other question I have is, you were saying the historically organic growth rate has been about 90% of the total. And it's slowing down this year. I just want to make sure I understand your --

I'm sorry. The organic growth is 90%, did you say?

Of your growth? Is that what you had said in your prepared comments ?

Yes, it has been, historically.

-- Historically, and it will be a smaller part this year. But I just want to understand, you is said your backlog is up 56%, which includes your joint ventures in dollars and it's up 27% excluding JV's. Are you going to convert all of that 56% growth into earnings or some of that is part of the JV's, so you only get a fraction of it?

Yes, obviously some of the 56% is in JV's. We don't get 100% of the earnings on, our JV partner gets a part of it.

Can you give us an idea of what percent you'd get so we have a better understanding of how to model?

I out of the backlog, I think we broke out the numbers. I believe about 2,300 out of the 11,000 in backlog are in unconsolidated joint JV's.

So you're going to get 80% -- ?

Is that accurate, Kevin or Paul? I'm talking from the top of my head.

It is 2,300.

Okay. So you're going to get about 80% of the 56% growth, combined with the 5% you have just put up, close to a 30% order growth and you have 13% more communities open? I'm just trying to reconcile.

That that's about right. But, do keep in mind we did inherit some healthy backlog from First Home Builders, as well, who runs a pretty big backlog. And as we have just discussed, we're being quite conservative in how we amortize those premiums. So that growth will obviously not be the same as our normal organic growth without the issue of the conservative purchase accounting.

Okay. I mean, I understand that and I understand the need to be conservative. But it just seems like your guidance is not realistic relative to your backlog, what you've just said in terms of your August orders. You're not seeing any change in incentives or pricing. And it's just, the two don't come together very well. I might be missing something.

Do keep in mind -- of course, with every year we replenish with newer land which has a higher cost basis. We've already said we're not doing the price increase -- while we are increasing pricing, we're not increasing it at the same rate we have. We do have -- while back log grew quite a bit part of that is JV's, part of that -- a good chunk of that is related to First Home Builders, which has a minimal impact. So at this point we are very comfortable and we think our projection of 15 to 20% is the most realistic and best estimate at this time.

Margaret, I appreciate -- you've been very optimistic about us and I saw your projection, but we stand by ours. And we'll continue to give guidance with each quarter. And obviously, as we conclude this fiscal year, shortly, we will give more guidance for '06 with our next quarterly conference call and then update it every point, going forward. But at this point, we're comfortable with the guidance we have given and we think it's the most accurate.

In terms of what you why saying about not recognizing or not expecting any more home price appreciation, the reality is that you are getting it. You can see it in the backlog you reported this morning, you're going to get the benefit from the 15% higher ASP. Just wondering, as you're buying land, as you're buying dirt now, have you increased your hurdle rates for your division presidents?

We have not. First of all, the 15% A S P, I know you know this but just to make clear for everybody on the call, does not mean we raised prices 15%, a lot of that is mixed. But we have been fortunate. And we have achieved sales price increases in many of the markets. And when I say that, it's typically in the restrictive markets, that would be all of California, the Northeastern markets, certainly in the Washington, D.C. markets, in most of the Florida markets and the Phoenix market. We have continued to be able to see price increases over the most recent quarter, again, not the level of price increases we had before, but they are price increases. Of the other markets, the North Carolinas, the Minneapolis', the Houstons, the Dallas' have not -- and Ohios', have not seen price increases at all and that market has been steady and good -- all except I would say Ohio, which is the one weaker market we've been talking about for awhile. But the other ones have been good, just clearly not the same robustness as the highly regulated marketplaces.

Can I just squeeze in one last question?

Sure.

Your orders were impressive for August, recognizing especially, that you had four weekends as opposed to five. Were there any markets that were impacted directly by the hurricane by extra rain or just by the fact that there was so much media attention on that? Did you feel like you lost any traction or traffic?

I do not believe that.

It only would have been one week. It would have been the last week. And that was kind of Labor Day weekend.

Labor day weekend is not a very --

Kind of hard to judge anything. So I would say, I don't think so.

Nothing? Okay. Thanks very much, guys.

Okay.

And we'll take our next question from Dan Oppenheim.

Thanks very much. Wondering if you could talk a little bit more about the SG&A in 2006? Wondering about the three division offices that you opened most recently and if you're expecting to open more of those? I guess what I'm curious about is to why we wouldn't be seeing SG&A leverage in '06, given the revenue growth in some of these costs that came this year that shouldn't be growing next year.

Well, most of the SG&A costs in the home builders are not at the corporate level, which in theory, should be getting more leverage. Most of SG&A is all the way down at the community level and grows arithmetically with the communities and is also down at the division level. And we are preparing for growth and it just so happens that in several locations we are splitting divisions, adding divisions, opening some new offices to deal with the growth that we've incurred and to add some additional -- provide for some additional growth that we are anticipating. So while there can be and have been some economies of scale, they are not quite at the level that you might expect.

Okay. And then wondering also, in terms of just the issue of slowing sales based on the issues with labor -- mostly labor in terms of if we're looking at Arizona or other places, Tampa -- I guess more of the electricians, there. But do you think that part of that is a function of having a lower marketshare there than some of your other markets, where you're tried to focus on having a much higher position in each market?

No. I think Phoenix, in particular, is just a very strong market. In some of our markets the overall level of activity has been relatively stable in terms of the housing units being produced, compared to the prior year. In Arizona, over the last three years, it's continued to see some pretty significant increases each year. And there are only so many -- so many in the labor force there to provide for it. Of course, that grows, as there is demand more people come into that area to enter those trades, it just is a little sticky, in terms of the speed.

Okay. Thanks very much.

We will take our next question from [Alex Baron].

Yes. Good morning. Thank you. I wanted to focus on joint ventures a little bit. I was hoping if you could give us some idea of what you expect to book next year in joint venture income?

Yes. We just haven't made a detailed projection of our fiscal '06 year. When we do, we will give you guidance on that. But at this stage, it's just premature, Alex.

Okay. Another question I had regarding joint ventures has to do with the average price you guys have been booking here in terms of deliveries, compared to what you've been having both in backlog and orders. Can you help us understand why it's much lower? Is it just smaller units getting delivered first?

Are you talking about joint ventures now?

Yes. In join ventures, yes.

It's just the mix of communities that actually delivered. You know, we've done some individual community joint ventures, as well as the Town and Country joint venture. And it's just impacted by the mix that happens to come up. Nothing substantive.

Are you referring to 2005 to 2006 or 2005 to 2004?

No. I was just referring to this quarter's average sales price in joint ventures, compared to what you've had in the last couple of quarters in backlog and orders .

Well, by adding Illinois and Minnesota into the mix, prior to that, a large amount of our sales have been in the community right along the ocean here in New Jersey, where the sales price there has been significantly higher than you'll find in Illinois and Minneapolis. So right there, that mix would cause the average sales price to go down. Okay. And can you tell us of the orders you guys had this order and also this month this morning, how many of those came from your acquisition?

No. We don't disclose that.

Okay. And then lastly, the community openings you guys are expecting for fourth quarter, relative to what you just had in third quarter are almost 30 new communities. Are those pretty much evenly spread across your markets? Or is there any one market where we would expect more of those openings to happen?

Kevin, do you happen to have that data handy?

I don't think we do. I think last look at it, though, they were fairly even. I think you're talking about a net change, rather than community openings.

Right.

And remember that will include the number of communities we're acquired, as well.

I see. That's probably the bulk of it, then.

There are some community openings that we do have. We've opened some, even in the last month and will continue to open. We also close down communities on a regular basis, as well. And I think the net change number, on an organic basis, is spread fairly evenly, including the Northeast and Virginia and Maryland and California, where we are excited about these new openings and markets where we're getting the better returns and better performance.

I'll let others go, I'll get back in. Thanks.

Thank you.

We will take our next question from Ivy Zelman.

Good afternoon, guys. Actually, it's Dennis McGill in for Ivy. You had mentioned your First Home Builder backlog is stretched out. I think you said 18 months. Do you have some protection on the sales price, should cost go against you,whether it be Katrina-driven or not?

No. We really have not, nor do we in any of the marketplaces. We have a healthy enough margin, we're comfortable taking on that risk.

Okay. Are you continuing to sell at a similar pace as they were selling, prior to your acquisition?

Yes.

Okay. And how do you account for the communities there?

I don't believe we list them as any communities.

There are no communities.

Okay.

Also the case in Ohio.

Which is also the case, not for new Ohio -- not for Oster, but for our previous acquisition of Summit Homes a couple of years ago, there's no communities there.

And just to clarify, on the cancellation rates you had said you're not seeing any material change in any of your markets?

That's correct.

And just lastly, if I could could, thinking about the price increases, you always comment that your guidance going out doesn't assume any further increases. And if we look so far this year, I think prices, Company-wide are probably up 18, 19% and the margins are up, maybe 90 basis points .

Let me just tell you, if you think our prices are up because we've increased sales prices 18 to 19%, you're just wrong. It's primarily mix of product and mix of geography. We've not gotten home price increases anything close to that, Dennis.

Okay. So you're saying that your average sales price could go up. You're just not assuming apples to apples?

Say it again?

Yes. That's right. Number one, average sales price really has nothing to do -- it has something to do, but there is not a direct relationship as to average sales price of the Company and what price increases we're actually able to do on a specific model type in a specific geography.

I understand that mix plays a role. I'm only trying to understand --

-- a very significant role --

-- what type of mix is factored into your guidance, I guess is the point?

The existing mix that's in our backlog plus our anticipated sales in each of our individual communities that we're projecting to sell in in '06, community by community, market by market, is taken into our comment. We're saying that if we froze prices today in each of our existing communities and any new communities where we had a grand opening they sold at the price we anticipated in our budget, that is the sales price assumptions that we have in our forward-looking projection. That's what we mean.

To give you an example on how significant that can be and people always underestimate this. In our coastal California operation, our average price there, where we're delivering over 1,000 homes, is close to $500,000. In one of our two Houston operations, our average sales price is about $130,000. They're also about a 1,000 homes. So a lot depends on any given month, quarter, who's growing faster this moment than another moment. We could have zero change in price but have significant swings in our average sales price depending on which operation happens to be selling in. And even within an operation, in the coastal California that I mentioned, they have some communities where the average sales price is $250,000 and they have other sales -- communities where the average sales price is $2.5 million. So you can see that the effect on mix is very, very significant.

Okay. How many of your ARMs are interest only? And do you qualify the buyer for fully amortizing loan?

I don't know how many of them are interest only. It's not a very big percentage of our portfolio of business. And we use whatever the qualifying requirements of the end buyer of that loan. I don't know the answer to that question. I'll be glad to check it for you, Dennis. I just don't know the answer. But whatever the underwriting requirements of Fannie Mae, Freddie Mac or whoever we're selling the end loan to is what we use for each of our properties.

I think, Larry, do you have the statistics on the percentage of ARMs in general?

Yes. It's 40%. I gave that in the script.

If you could double check, it would be helpful, Larry.

To whether we use fully amortizing -- ?

Just on the interest-only breakout.

No. We're not going to just give you that data, Dennis. So call me later and I'll try to answer your questions.

Okay.

Obviously Larry's point is, we can't give information to one analyst, that is not publicly available for everyone. But we can give some general guidance and still be in the rules .

Great. Thanks.

I will take our next question from [Alex Baron].

I wanted to focus again on the amortization of intangibles. So I guess I was still a little confused about the $100 million -- ? So does that imply that not all of it is in the typical line where you report that and some of it's going to be within the inventory that goes inside cost of goods sold?

Exactly. About 50% of it is the amortization of intangibles. I don't know, Kevin, if you have the exact number handy? But it's about 50%. And about 50% of it is the expensing of stepped-up assets.

That's true for '06.

Okay. And how long do you typically, if there is such a thing -- or how long do you expect this to run before it goes away?

Well, stepped-up assets typically go away very rapidly, within one or two or three years or acquiring the assets. That's usually quite rapid. And then the definite life intangibles are typically over a period of five to 10 years. Each one is analyzed separately by an outside appraiser and there are different amortization periods for different companies for different assets within those companies. Probably, on the whole, our average is probably five to seven years.

Okay. All right. Great. Thank you.

Okay. Any other questions?

And we have a question from Craig Kucera. Please go ahead, sir.

Good morning. I had a couple follow-up questions. On your loan stats, you did mention it's 40% ARMs and the IO definitely would be interesting to the street. But the sense you give -- are those just for your loans that are captured? 69% that we capture, we don't have those stats on the others. Okay.

And I wanted to ask kind of a big picture, looking at '06. I know you're not giving any specific guidance. But how do you see yourself growing the business organically in '06? Typically, in the past, you shot for around 15% community count growth -- or at least 15% topline growth? Do you have any general thoughts about where you're going to grow the business next year?

Where, in terms of geography or in terms of revenue?

Just scale and size. Organic versus acquisition I think, is the primary question, there.

Okay. I would say our growth will remain primarily through organic growth again. I'm not sure if we broke it out this way, but my quick guess would be we will still see organic growth driving 90% of our earnings.

Growth.

Earnings growth, yes.

Okay. And there was a bit of a discrepancy between your projected closings between what you had on the website and this presentation. Are you now looking for 16,200 for this year? Or is it still -- ?

The website will be updated shortly after this call, if it isn't already.

Okay. And then I was going to ask about the, just briefly, on the First Home Builder, what kind of deposit levels are required for that operation?

Actually it's really unique. It's probably the best contract we have. Because what we have is a lot more than a deposit. The buyers, in that case, actually purchase the lot from us first. And then effectively, we have a contract to build a house from them. That lot purchase typically happens within a few months of the contract. I'm sorry, Larry. Were you elaborating on that?

I'm just thinking. I think that 80% of the backlog has already closed on the lot with them. So it's not 100% of the backlog at first, but roughly 80% of that backlog has already closed on the lot, so it's very solid.

And then, many of our buyers, the overwhelming majority of our buyers, use construction perms. Which basically means that as a contractor for somebody that already -- who has already purchased a lot from us, we receive periodic payments as the house progresses in construction. So the backlog at First Home Builders is probably one of the strongest and most solid backlogs from many perspectives, not only in our Company, but in the industry, because of those peculiarities.

Now, that is a very interesting way of structuring it. Does that mean you guys will be out optioning land and then you ultimately sell the land to the buyer?

Exactly.

Or do they locate the land themselves?

No. We are the ones that actually control the land and then we sell it to the buyer.

Okay. That's good. And just one final question.

That is different, by the way, from our Ohio scattered lot operation, where the customers by the land and then come to us.

That's what I thought. And then finally, you may have hit this already, so I'll be brief. You did kind of change the way you were reporting your interest expense this quarter. I just wanted to understand -- you had interest expenses associated with the house and in a different category. What's that different category associated with?

We changed the breakdown of our interest expense by putting the home component into cost of sales at the start of this fiscal year.

It was not the first quarter. We've been doing this throughout the whole year.

I guess I'm asking, then, what were the other -- if you had, I believe, roughly $19, $20 million of interest on the house and then it was like $4 million other, what was the other associated with?

Well, the others associated has to do with interest associated with communities in planning where we have deposit points or predevelopment monies, the interest on that. Interest on our intangibles,that also gets expensed. Those are the two largest expense components -- components of the expense that's not included in the cost of sales.

Okay. Thanks a lot, guys.

Yes.

And our next question comes from [Timothy Jim].

Good morning.

Good morning.

Two questions. First of all, I'm intrigued with this First Home Builders. Is this really -- it sure in the [expletive] smells like it -- using the old land as General Development?

I think that's what it is, yes.

That's where the 190,000 lots -- .

I believe General Development certainly did a lot of these lots.

I went through those guys about 15 years ago. I know them well. That really what accounts -- now, when the person has put down the down payment on the land, it's on the raw land, right?

No. The land actually is improved, that we purchase.

Improved --

The streets are there. We typically put septic tanks in, so that's not there.

Okay. They put down the land. And then they're getting the loan -- the construction loan themselves?

We help arrange that for the .

The construction loan is non-recourse to you?

That's correct.

Lastly on your SG&A, I haven't heard anybody talk about incremental Sarbanes-Oxley costs because they've been around a year. Are you expecting --?

Not for us. This is the first year that we've had to implement Sarbanes-Oxley, Tim.

Why is that?

Our fiscal year end is October .

So could you tell me how much Sarbanes-Oxley cost you?

I don't really have an absolute. Just the corporate cost of it is probably a couple million dollars. And then there's much more than that, probably imbedded in the divisions, as some have had to hire full-time people that do nothing but Sarbanes-Oxley out in divisions. But just corporate's professional costs approaches a $2 million incremental increase.

Are you talking over the nine months or over the quarter?

Yes. It's over the year, but a substantial amount of that has come in this quarter because that's when our outside auditors and others are doing their testing.

The answer is your October fiscal year.

Yes. But a lot of it hit the third quarter.

I've got it. Thank you.

And we'll take a question from Fred Taylor. I'm sorry. I think most of my questions have been answered. I'll just ask one more on the hurricane. Especially given your history of doing urban infill locations, is there an opportunity in New Orleans? I know most of the public home builders are not represented there in any major way. And I I also realize what you're going to be working on the next six to nine months is currently in backlog. But is there an opportunity there for you and or some of the other major home builders, given the fact there's probably going to be a lot of, to use the word 'pork', around from the federal government?

In theory, yes, and it's certainly something that the industry has been talking about. However, just kind of low level observations from prior hurricanes, it takes years to resolve what is going to happen in the aftermath, in terms of what gets rebuilt, what the insurance claims are, where do the buyers end up living or not living? Do they transfer out of the areas and so forth. And hence, it's not a situation where 30 days later, all of a sudden, hundreds of thousands of houses need to be rebuilt. It just doesn't seem to happen that way.

And secondly, there just have been enough experiences for us to feel that we don't like going into new geographies that we're not already in, unless we have a good company to acquire in that geography. So I would say, while it does sound intriguing, at the moment, it's not a primary focus of ours .

Okay. Might there be some inward migration into Texas that would help the Texas group?

It certainly is conceivable.

A lot of them in Houston.

Yes.

Thank you very much.

And we'll take a question from [Joel Walker].

Hi, guys. Just looking at the west orders for August, down 24%. Was just kind of -- was that just community openings? Or is there something a little different behind that?

No. It really has to do, primarily, with the communities. The marketplace is very strong there. It has been a challenge getting the new communities open and getting the entitlements -- all the entitlements that we need underway. We're very pleased with the market there. The returns are just solid as can be. We just need to get through the entitlements to get our new communities open there.

Right. I just was wondering, do you expect gross margins in California as a whole to be higher, lower or kind of the same in 2006 versus 2005? Just looking at your backlog and openings -- community openings and things like that?

To be honest, it's not a number I would have at the top of my head. So I just couldn't answer that, accurately.

And I guess the other question was, like the San Diego County, I saw some M L S data, actually, and saw pending sales were down 14% since the end of June and the actual listings were up 22%. I was wondering if you could comment about the San Diego market?

San Diego market, we have found to be solid. It's not a huge market. So a little change in the number of new homes listed or the number of new homes built can make an impact. But on the whole, we're very pleased in San Diego. And I wish we had more communities there. Our sales remain just very good.

Right. So in the condo market, is that -- ? I know you guys had some attached downtown. I was just wondering how that was going. I was hearing inventory builds were getting pretty intense there.

We have three condo communities downtown, one very large one, 382 homes, of which I think we have three remaining. That's done very well. And we have two underway, both over 50% presold. So --

Right.

We are very comfortable there right now.

Thanks a lot.

We will take our final question from Wayne Cooperman. Wayne? You're on the line, sir.

Sounds like he changed his mind.

Mr. Cooperman, your line is open, sir . I think we'll end the call, Operator.

This concludes our conference call for today. Thank you for your participation. I'll turn the call back over to the speakers for closing remarks.

Okay. Well, thank you very much. Again, we're very pleased with our performance and look forward to giving you continued positive news as the subsequent quarters unfold. Thank you again.

Ladies and gentlemen, thank you for joining us on the call today. [OPERATOR INSTRUCTIONS]