KB Home (KBH) 2002 Q3 法說會逐字稿

Please stand by. Good day, everyone. And welcome to the KB Home 2002 third quarter earnings conference call a reminder today's call us being recorded. Discussion us today will include certain projections and forward-looking statements in order to help investors better understand. These are based on their assessments of current business and operating conditions. Please be aware of that actual results may differ from those that may be expressed or implied by the projections and forward-looking statements and the differences may be material. These discussions in the company's annual report on form 10-K, quarterly reports on form 10-Q and current reports on form 8 K filed with the SEC actual results to differ from those that KB Home will be projecting in the forward-looking statements that will be made today and we urge you to read those.

I would like to remind everyone that this conference call is being webcast at KB Home's webcast at,, for opening remarks and introductions, I would now like to turn the call over to have KB Home's chairman and Chief Executive Officer Mr. Bruce Karatz.

Thank you very much and good morning to everyone. We're happy that you're joining us here today to discuss our third quarter earnings. With me this morning are Jeff Metzger our executive vice-president and chief operating officer, Dom Cecere, Bill Hollinger, senior vice-president and Clem Tang of investor relations. Our agenda with this morning will cover the following topics. I will provide the highlights of our third quarter performance and comments on the current state of our business then I will turn it over to Dom to review our third quarter profitability and other key financial information for the quarter and finally, I'll be back to wrap up our business and market outlook for the remainder of the year and our guidance for 2003. At the conclusion of my remarks, of course we'll be happy to address my questions.

I'm very pleased with our third quarter results. We had a very active quarter executing on or strategic to position us for 2003 and for sustainable profitable growth. First and foremost in midAugust Dom and I certified our historical financial disclosures with the, SEC a full two months ahead of October 15th. Operating under our standard KB next business model and having centralized our financial accounting and controls several years ago, gave us the ability to expeditiously and confidently certify our results.

We are pleased with the recent trend in net orders with the third quarter of of 6,320 units up 10 percent from the third quarter last year. This growth occurred despite overall community counts being down almost 9 percent in the US and down three percent when including France.

As you will recall, our second quarter orders were down 3 percent. Also, impacted by community count comparisons. In the fourth quarter we expect our unfavorable community count comparisons to turn positive. And drive even more favorable order growth for the fourth quarter and into next year.

With additional new communities opening over the next few weeks, we are on course to have approximately 400 active communities open in the fourth quarter which represents an increase over the year earlier period.

This puts us on solid ground to expand our revenue growth and market share in the fourth quarter and into next year.

As anticipated, third quarter unit deliveries of 6500 units were about even with the prior year quarter. Mainly the result of selling from fewer active communities earlier in the year.

Total revenues for the quarter reached 1.2 billion up nearly 5 percent from the year earlier quarter due primarily to hire average selling prices.

Company's net income increased 39 percent. To 83.9 million on top line revenue growth of 5 percent. Our continued emphasis on driving product duct improvements across all operating divisions and business processes continued to deliver real long-term benefits to our bottom line profitability. Our diluted EPS rose 23 percent to $1.95 to the third quarter from $1 point 58 a year early. A dollar 67 by nearly 17 percent writing our records to 29 executive quarters of meeting owner beating consensus estimates.

The third quarter earnings per share improvements was tempered by an in accurately of nearly 13 percent in the average number of diluted shares outstanding.

During the quarter, we repurchased 2 million shares of our common stock. Completing our board approved repurchase of 4 million common shares. The repurchases made during 2002 have brought our average diluted share count down to 43.1 million shares for the quarter from 45.2 million in the second quarter of this year.

The total cost of our buy back program to date is 190.8 million dollars or approximately $47.70 on a per share bases. Recently or board provided a new authorization to repurchase an additional 2 million shares of common stock.

Now I would like to make some observations about the current state of our business and the whole building market in general. With respect to our business, KB Home is expected to deliver over twenty-five new homes this year in 15 US markets and in France.

We continue to believe that our KB next operating model along with our focus on first time and first time move up home buyers gives us a competitive advantage to be a dominant builder in select growth markets. In addition to increasing the number of communities in our exists markets we continue to seek opportunities to leverage our KB next model into new geographic markets. To further expand our platform for growth we entered into an agreement to acquire American heritage homes that delivered over 800 homes last year and currently comes in excess of 4,000 lots. This acquisition strength incidents our foot hold in Florida, supplementing our business. These are excite new markets for us that fit nicely with our gross strategic. We anticipate the transaction will close by the ends of this month with little or no goodwill book.

Now I would like to change topics and talk for a moment about the home building market. Real estate has been an incredibly solid investment for home buyers the not once since the 1960s has the nation's immediate done home price declined. Overall home price is have revenue an annually 6 percent annually since the sixties. This has been one the contributing factors for the increase in home ownership rights in the United States. The supply of new homes continues to be constrained. Housing experts measure supply in months with 6 months of inventory being considered normal. The national backlog of unsold homes reached 9.two months in the 1990 recession. But today stands at just 4.8 months with new homes having declined to just 3.9 months of supply.

We believe that the risk of a material rise in mortgage rates in the remainder of this year and next year is minimal. In addition, there is general consensus in our industry that the perceived negative impact on demand for housing from somewhat higher mortgage rates should it happen is diminishing given the greater variety of much options now available to home buyers. Owning a home is still a better option than renting. It is also our view that the housing industry is not nearly as volatile at some investors believe. Supply is constrained and market growth is still heavily based on demographics, industry consolidation, and market share gains. Furthermore we believe our focus on first time and first time move-up buyers in select growth markets of the US makes KB Home even less susceptible to volatility than many other public builders. Alan Greenspan told the Senate banking commit of committee that are basically three factors driving the housing market. Specifically he cited much low mortgage interest rates, the increased shortage of land available for building, and the expansion and population resulting from immigration.

We expect these factors to continue to work in our favor and support healthy demand for KB Homes going forward. All macro indicators continue to point to the home building market remaining healthy. There is no bubble. And our market segment of first time and first moveup home buyers is even health they are than the market overall. More importantly our base for growth in 2003 is in place. With approximately 20 percent more active selling communities in 2003, and our expansion into the southeast market, we are poised for profitable growth.

Now I would like to ask Dom to take you through some of the financial highlights of the quarter.

If you would please turn to our exhibit labeled consolidated statements of income. Company's housing revenues for the quarter reached 1.25 billion up approximately 8 percent from the same quarter of 2001. We delivered 6500 units in the third quarter about even with 2001 deliveries. Our housing revenue growth for the quarter watts driven by an 8 percent increase in the average selling price. Reference from commercial and land sales were nominal in the third quarter, totaling approximately 13.6 million, in 2002, compared top 53.5 million in 2001.

Our construction pretax profits for the quarter rose nearly 32 percent to 1.86 million as the percentage of reference construction pretax profits up 8.6 percent rows 180 basis points in the third quarter of 2001. During the third quarter we increased our housing gross margins by 140 basis points to 21.4 percent from 20 percent for the year earlier quarter. Our SG and A ratio rows slightly by 20 basis points to 12.1 percent in 2002 from 11.9 percent in 2001. The increase in SG and A cost came as a result of higher insurance costs and higher incentive compensation tied directly to the significant improvement in our operator [inaudible]. Our mortgage banking pretax income was up significantly. Increasing by 76 percent to 16.6 million in the third quarter up 2002 from 9.5 million in the same quarter of 2001. The tremendous growth in our mortgage banking results was driven by an increase in our retention rates to 90 percent up 7 percentage points from 2001 as well as a continued favorable interest rate spread.

Our company wide pretax income of 125.2 million for the third quarter was up nearly 37 percent from the same quarter every 2001 and our pretax income margin jumped 230 basis points to 9.7 percent. The company's effective income tax rate for the quarter decrease the from one year, to 33 percent. We still expect our tax rate to remain at 33 percent, for the remainder of 2002.

Net income increase the 39 percent to a record 83.9 million, in Q3 from 60.4 million for the same quarter every 2001.

Our third quarter EPS of $1.95 increased 23 percent from a year earnings per share,, absorbing a 13 percent increase in the average number of diluted shares outstanding. For the 9 months ended August 3 first, 2002, total construction reference of 3.28 billion increased nearly 7 percent there the same period of 2001 reflecting a 4 percent increasing in deliveries to 17,633 units and an approximate 5 percent increase in the average selling price.

Net income for the first 9 months of 2002 of 190.6 million was up [inaudible]. EPS 429 was up 93 cents or 28 percent over the prior year. In summary or profitability for the third quarter end 9 months was excellent with strong operational performance driving substantial earnings growth. This was achieved despite the negative impact lower community counts had on our lower overall growth in revenue.

Turning to or balance sheet. The company entered 2002 with approximately 281 million in cash. During the first 9 months of 2002, we reinvested some of this cash with cash from operations back into our business where we expect to achieve the highest returns for our shareholders. During the last two quarters 190.8 million was used to repurchase 4 million shares of KBH stock. We believe buying back our stock at average price of 47.70 would be a high return relatively risk free investment. In the last three years, we have repurchased 18.5 million shares of our common stock at an aggregate price of approximately 520 million dollars and an average per share price of $28.10.

We have also invested 230 million in inventories since last year to expand the number of active communities which selling homes by approximately 20 percent in 2003. We currently over 96,000 lots in inventories compared to 82,000 lots this time last year, approximately 42 percent of or lots are under option contracts. Our land approval process myth gates our financial risk and permits our divisions to invest only in communities where the return is significantly above our cost of capital. Trailing 12 months return on invested of capital at the end of the third quarter was about 15.9 percent, up nearly 200 basis points from the prior year and well above our cost of capital.

Our balance sheet remains solid at the end of the third quarter and flexible ratio improved 240 basis points to or 48.9 percent when including our cash position as reduction of our debt. This compares to 53.4 percent at August 31st 2001. Our construction debt totaled just under 1.2 billion at August 31, 2002 and had an annual interest cost of approximately 100 million. And our interest costs are compared to our annual profits, it gives is a solid interest coverage ratio of 5 and a half times our cost of debt.

And we ended the quarter with 121 million in cash and no apartments borrowed under our 644 million resolving credit familiarity.

At the end July or French business completed the first European bond offering in our industry placing 150 million Euros senior notes at 83 quarter percent this additional financing gives our French business that funds their business without reliance on project financing and also provides for their operations future growth. Now if you would please turn to our exhibit summit mental information. Company wide our average selling price tort quarter was 193,100, a year ago. Reflecting increases in all of our geographic regions. During the third quarter the overall selling price in the US operations rows 8 percent on a year-over-year basis. Market conditions in California were particularly strong with the average selling price up 12 percent.

In France, the average selling price in US dollars rows 10 percent on a year-over-year basis. Foreign currency effects accounted for 9 percent of this increase.

Finally, we end the third quarter with a healthy backlog of 13,561 units with a dollar value of approximately 2.64 billion up 13 percent over 2001. Our west coast operations continues do have strong unit demand in pricing. In California our dollar value backlog at August 31st, 2002 was up more than 5 one percent from the same time last year. This puts us in good position to achieve our financial objectives and sets us up nicely for 2003. Now I will turn it back to Bruce for the wrap up our third quarter conference.

BRUCE KARATZ: Thanks. First observations in the outlook. Demands for housing by first time and first time move up home buyers continues to remain healthy. To more and more people there seems month better place to put their savings or their disposable income than into a home. We believe with relatively low mortgage interest rates and low down payments requirements, the children of the baby boomers, called echo boomers, and I am grants, could drive home ownership rates to 70 percent over the next decade. This will great increase the long-term demand for new homes since each one percent increase in the home ownership rate represents about that 1 million household which is roughly equivalents to a full year of new home sales.

2, two house bills have been introduced in congress to facilitate. HR 1995, the houses affordability act of 2002, has provisions that relax some restrictions on borrower qualifications for FHA adjustable rate mortgages and makes permanent certain temporary provision that is relax FHA loan qualifications. There's also a provision to allow local governments to apply federal community block development grants to certain. Limited home ownership assistance programs for education and public safety employees.

Right down our alley. HR 5052, renewing the American dream tax credit act is the bush administration pro forma to increase low income and minority home ownership. If enacted it will provide an income tax credit for selected projects to provide low to moderate income household the much ability to purchase homes. As large builder focused on the first time, with the lowest. Average much home price of all public builders we are in a position to benefit from the upsurge of buyers from the immigrant and minority communities and the potential favorable outcomes of federal legislation. And finally the single family new home building market is roughly a 220 billion dollar market. In 2001, the top 10 builders share was only 35 billion or 17 percent of the total market. Leaving considerable home for growth everyone a market slow down. Now let me turn to the outlook for KB Home for the remainder of the year and next. We are year maintaining a expanding into new markets that fit our overall strategy for growth. In 2002 we delivered homes in 15 US markets and expect to be in 18 US markets by the end the year. In 2003 we can plan to enter additional geographic markets either by acquisition or to expand our market base for continued profitable growth. Based on our strong 9 month results and our positive outlook entering the fourth quarter we remain on track to meet our delivery estimate for 2002. Of over 25,000 units. We anticipate the fourth quarter will be particularly strong. Much pricing and enter operate efficiencies will drive our results. We expect to close yet another year with record financial results with net income just under 300 million dollars. That would represent a 40 percent increase from the 214 million earned in 2001. Request based on our updated photographs, we are raising our EPS guidance for this year to $6.75, up 23 percent compared with the 5.50 record last year and that above our second quarter EPS guidance of 6.50. Revenue growth and improved margins good wife based on the current economic outlook we are targeting our businesses to deliver double-digit revenue and earnings growth next year. Reference are expected to be around 5.5 billion dollar and our EPS he is forecasted to grow to approximately 7.75. Up approximately 15 percent from the 6.75 projected this year and we will above the consensus estimate for next year. This concludes our formal remarks. And we will now open up the lines to take your questions.

Our question and answer session will be conducted electronically. Press the star coach followed by the digit 1 on our touch-tone telephone. We will proceed in the order that you signal and we will take as many questions as time permits. Once again to ask a question today, please press star 1, and we'll pause for a moment to assemble the roster.

Our first question comes from Joseph [inaudible] with Merrill Lynch.

Good afternoon, everyone.

Can you walk me through the community count again. US versus France. The quarter. And the year ago. And then what you expect it to be a year end. US versus France.

Let me give you the US to start ask I'll have Bill look at France for me. Of the US in the third quarter, we had approximately 250 communities. That will go to approximately 290 communities in the fourth quarter of this year. And all of 2002 in the US we averaged 250 communities. And we expect in 2003 in the US to be around 300 communities. Did you get that?

Yes, I did, sir.

And Bill can you give us the France look?

We ended with France operating from active communities of about much 82 and that compared to a year ago of for the same quarter at 68. And we look at that boosting up in the fourth quarter to 94. In the fourth quarter.

Okay. And then Bruce, the 7.75, that's a number we hadn't heard yet out of your mouth and you gave us the 5.5 billion in revenue. Could you think about that, can you give order of magnitude between deliveries, pricing, margins and sort of how you get there?

BRUCE KARATZ: We don't want to do that right now, Joe. But what I can tell you is, based on the community count increase, based on the present state of our margins without anticipating any significant improvement in those margins, we feel comfortable with the estimate and that's why we gave it today for the first time.

Okay. I won't push you. Lastly, on the acquisition in Florida, is that all cash or are you going to have a stock component in that.

All cash.

Thank you.

Now I'll move onto Steven Kim with Salomon Smith Barney.

Very strong results, gentlemen. My question represents to the gross margins. I was wondering whether or not I given what you see currently in our communities whether there will be any reason to believe at this point that any of the quarters in '03 would have a down year-over-year comparison in gross margin or if in fact you think that they would probably be up year-over-year.

As we it, Steve, we think that margins going into '03 as we go quarter to quarter will be better than year-over-year comparisons.

That's great. That of course includes the accounting adjustments as well in the first quarter and the second quarter from this acquisition you just announced.

Yes.

That's great. You're ramping up a lot of subdivisions, a lot of times that brings with it some SG and A and overhead costs. Can you give some comfort on where you think SG and A comparisons may be year-over-year.

One of the interesting things, this community count increase is coming in places where we already have businesses. As opposed to acquisition.

So we think that outside of the items that we mentioned for this quarter that we think our fixed ought to stay right in line with where it's been and we ought not to suffer with a ramp up.

Great. And one more question I'll just jump off after that. One of the things that's plagued these builders for many years now with respect to the multiple and we all feel is more reasonable has been the ability to predict out earnings. Seems like six months isn't enough for people even though that's much better than most businesses.

Right.

Given the fact you're opening a number of communities here, it would seem to me that the normal trajectory of profitability in a community would be one where it is rising for the several quarters and doesn't peak out for maybe a year or so after you open it up. That would imply that you would probably be expecting to get your biggest margins about a year from now, at the ends of '03, even heading into '04. Is that cause for optimism with the respect to your earnings power at the he could of next year heading into the `04 and anything else that gives you optimism about the outlook for earnings past the next six months.

It's an interesting theory that you've just he is posed. I'm not sure it's exactly goes like that in practice. Because you're closing out communities. You're opening up new ones. The fact that we're increasing community count by 20 percent. On those 20 percent extra, maybe that the thesis is correct but overall, I don't think I would subscribe to it. It is true that as communities develop out, that margins improve as opposed to the opening moment. The consumer has learned generally speaking the best buys are when we open. And we frankly, have gotten much better at opening up at higher margins. We have many processes in place to guide us at hitting the right price targets when we open rather than some old notion and then rapidly raising prices later after you've already sold 30 or 40 homes at too low of a margin.

That's your thesis. With respect to our views going out beyond '03, there are things that give us some excitement about '04 which is our expansion activity. We are not counting on significant profitability from the acquisition that we just announced in '03. But we are in '04. And with some of the other things that are getting T-ed up here, we think there's a lot of exciting margin and growth opportunities for our company in '04.

Bruce, are you alluding to community teas which I anticipate opening up maybe 6 months from now?

Yes.

And the embedded land opportunity that you see there or the land margin opportunity.

I'm alluding to that and alluding also to other opportunities that we are seeing on the acquisition front.

Great. Thanks very much.

Yeah.

Our next question today comes from Carl [inaudible] with Banc of America Securities.

ANALYST:. This is Rich [inaudible] for Carl. I want to check on options. You guys mentioned last year that options represented about him 8 percent of the base price of your homes. And your long-term goal was about 10 percent. Trends in that. Where it is now and what you've been seeing lately with mortgage race being as low as they are.

Rich, right now we're running about 9 percent.

What are the recent trends lately?

We're getting better. We're not happy with that and we think there's much more there to be gotten. And we are developing - there are certain divisions that operate better in this arena than others and we're trying to uniformly hit much higher targets throughout the company. But we're very happy with what we've got but there's - it's an opportunity.

You're not seeing a pull-back from home buyers in terms of them declining the number - decreasing the number of options they select, are you?

No. No.

And then second, what are the geographic trends in Texas right now? That's been a relatively flat market here of late. And I want to get your thoughts on the markets there.

Well, we're in four distinct markets. each of them have their own characteristics. We are a leader, a clear leader in two of those markets. Climbing fast in a third, and working hard to move up in a fourth.

But, each of the markets has been very good to us. Because of the segment of the market that we operate in. Unlike some other folks, we have really stuck to our and stayed in the first time moveup in which there is almost limitless possibilities and in which we think we compete very favorably against our competitors.

So, you've heard our story from Austin, Austin is a market in which the higher price product dried up. Our business continued to thrive and continues to thrive today.

And we attribute that to market segment, discipline, and sticking to our operating model which operates well even in a soften anything market.

And quickly, just your quick thoughts on Phoenix and Vegas.

Well, interestingly, while at different times over the last year we thought those markets were soften anything, in fact as we sit here and look back, we think both markets are looking better today than they were a year ago. And forget about 9/11. They're holding extremely well. And Las Vegas, in particular, of course, where I think there is something like 12 or 15,000 hotel rooms that will be constructed over the next 18 months. It keeps purposing along very well.

Thanks a lot.

Yeah.

Our next question today will come from Jason put man with [inaudible].

Hi, good afternoon and congratulations on the quarter. I want to clear up the fourth quarter guidance. You beat consensus by 28 but the guidance for the year went up by 25 cents. There anything that was maybe brought forward in the third quarter that distorted that a little bit or being conservative?

Well, we like meeting and beating estimates. Some of it was brought forward. But it's - I think we've raised estimates now for three straight quarters. So we're comfortable with the 6.75.

Fair enough but on the average price, should we expect that to decline a little bit in the fourth quarter.

No.

Next question, just really on trends. You kind of touched on this a little bit already. Can you walk through, not looking at it by market but more on a throughout the quarter, how orders came through. Was there any dinners really a month to month? Did it get better through the quarter, slow down at all, any real change in trends there?

You know, we're just sort of talking. It was in the quarter, we were up each month. But as we reflect on it, at least sitting here, we don't think there's really any trend that comes to mind from us. Some of it is new community openings. When they fell and so forth. But I don't think there's anything there that would help us or you to determine what will come in the future.

Okay. Then lastly, on the acquisition. Can you provide any additional details. I know you said that it was - sounds like it was roughly around book value. Cab you quantify in terms of revenue or anything else at this time or do you want to wait?

Yeah. We don't want to give - I mean, what we gave is what we want to give. It's going to close in hopefully in the next couple of weeks. And shortly we will then certainly lay out much more of what we anticipate for '03.

Okay. Thanks a lot.

It's a good business. It's not a turnaround business.

Larry [inaudible] with Parker Hunter has our next question.

Thank you all. My questions have been answered except I'm trying to back into the profit on the commercial piece E. it would appear on the gross margins you made about 2 million on in the commercial.

Yeah it was 2782.

If you find your question has been answered you may remove yourself from the queue by pressing the pound he key and next we'll hear from Barbara Allen from [inaudible].

Good morning in California. I Bruce I was interested in something that may be an anomaly. It was your average price I get, 319,000.

I think that's right.

The immediate Dan price in California now is up to about 324, you're really bumping up against that and your strategy is staying below the immediate Dan price has worked effective. Is this an aberration mix or what is going on here.

It's definitely a mix. Everything you said still remains part of our business strategy but whether you get into certain northern California communities, first time buyers are buying $500,000 homes in San Jose. And also, San Jose. We have benefited from very healthy demand over the last six or 9 months which take advantage through pushing prices. So I think the price increases that you've seen out of west coast recently are probably not sustainable. And so my guess is, we'll still hang in there at prices below average immediate Dan throughout the state. Although, we don't make decisions on acquiring land based on that because it's - you got to look at each specific market. But I think we're still on track. But that big spike-up, really was market opportunity driven.

So you haven't changed strategy? That's the important thing.

Yeah. And you know, the one question that just comes to mind is, is the number you gave for the state the new or existing?

Existing.

Yeah. That's the other thing. I mean, I think the new is considerably higher than that. So even at 319, we would still compare ourselves very favorably to the immediate Dan new.

I agree with that. It's just that I had thought that previously you had talked about staying below the immediate Dan price in the resale market had worked effectively.

Yeah. That's true.

One other question. On these two bills that are before congress.

Yeah.

The recent delinquency in foreclosure surveys shows the much highest level of forclosure since they've been doing the data on those FHA loans. Do your people in Washington indicate that this might prevent these bills being passed or is there any impact from that that you've heard about.

You know, I'm not aware of any impact. And I think that the for closer rate, although I don't have complete data, is very much attributed to B and C, subprime type mortgages. And which of course we don't originate any of. But I think that there's still and the present administration has expressed that much like the past, an overriding desire to bring home ownership to population groups that up to now have been prevented or not participated as much as others. And that group or groups are specifically the families that KB Home would like to cater to. So any legislation that would assist these families in acquiring homes I think will also go to our benefit.

Seems likely. Thank you.

Okay. Thanks.

Our next question comes from David Jarrett with Credit [inaudible].

Bruce, again, it's a great quarter.

Thanks, David.

I don't have any joint ventures going anymore. Can you discuss that? And also, can you discuss the transformation of your home centers to the newer type center? And the how many new home centers you want to open up this year?

Yeah. David, on the JV question, we just have now a few in France. That is correct. We are now out of that.

And secondly, with respect to the home centers, the question was, how are they developing or new ones.

How is the conversion going to the new larger type home center? Are you complete with that conversion? And how many new ones do you plan to open up and where?

Yeah. We are about half way done with the conversion. There are just - Jeff tells me we've got 5 or 6 left to open. The new format. And it's a piece of our business that we continue to develop, find additional products to sell. And where the percentage of sales versus base price continues to rise. As well as the margins. So, we put a lot of focus in that area.

Now, the margins still around 40 percent.

Yes.

In any trend upward in those margins.

Some divisions have found ways to increase those margins and we're trying to use best practices to get that spread throughout all of the divisions although there are some pricing peculiarity teas by region. But we think there is opportunity to increase those margins.

Very good. Thanks a lot.

Uh-huh.

Next up is Jim Collins with Partners Capital.

Guys.

Hi.

Quick question about options on your lots with a couple follow-up questions. Can you quantify for me dollars, how many - what's your exposure to the options on lots, on our balance sheet?

I don't have the number in mind. 2 to 300 million.

It's minimal.

2 to 300 million.

Okay. And can you - do you know what their average maturity is and who is the underwriters for those lots, for the options, excuse me?

I'm not sure what - who do you want to know now.

Well, they're options so they must have some sort of stated maturity as to when they expire.

What are we talking about, option toss acquire.

Correct.

Land.

Correct.

This isn't like a bond. So the maturity is negotiated on a transaction by transaction basis. Can be extended depending on obtaining approvals or other conditions that need to be satisfied. So, it could - some options could go out as much as five years. Most are within a year or 2.

A year or 2. Okay. And it is the strike price generally in line with what the current value of land is or do you do them in the money or out the money?

Well, again, this is unlike the securities market where there's a bid and ask everyday. It's usually one off negotiations. We acquire land at what we believe is the value and adequate return today based on pricing today without inflation.

Okay. Okay. So my last question, how do I better understand how gains and losses from these options flow through the income statement?

Well, there aren't losses because if you don't acquire it, you just move on. With the exception of from time to time, a nonrefundable deposit, that would be written off in the quarters in which you terminated the option. You just follow that quarter by quarter.

With respect to land that you actually acquire, we don't break out simply because we don't know what percentage of profit comes from appreciation of land between the time you option it and the time you deliver a home. And how much comes from building and selling your home.

Generally speaking, in most of our markets, with the exception of certain markets in California during the past year, we believe almost all of our profitability comes from designing, selling and building homes, not from appreciation of the land.

Okay. Great. I guess, one of my risks or concerns is, I mean, right now, real estate is very strong. And hopefully it will continue to be so. But in the scenario for whatever reason we went into a two year period where real estate values were flat to declining, would that mean that you would have to take an earnings charge of the book value of those options.

No. No. No. No.

2 or 300 billion dollars.

No. Because, let me put one more piece back together that I said. Is that we sign options and acquire land based on the enacts exist today. If in fact housing prices do not continue to appreciate the way they have in the past, but flatten out, we are buying land based on that assumption. The other item of course is what is the affordability of buyers that comes into the equation because as incomes increased and affordability were to increase then even if for other reasons markets don't expand, prices don't expand, the markets ought to remain very healthy. I would just tell you, obviously you're trying to work through the bubble concept.

Right.

I would just tell you, housing had been and will continue to be the single most important financial investment that American families make. This is not something that a trend. It has gone on forever. Tense of millions of American families know that owning their home as opposed to renting is a smart thing to do. And that's why they do its.

And almost everyone listening to this call, owns their home. And so, what goes on in the future I believe as has gone on in the past, there will always be plus or minus a million families a year buying homes. And there will be very variances in certain markets because of employment, gains or losses will show variances but if we look forward with a population increases that we anticipate primarily driven through immigration in the United States, I think housing should remain a very viable consumer product.

Okay. Great. Thanks very much for the great quarter.

Yeah.

Our next question Timothy Jones with Wasserman and Associates.

Good morning. A couple of things. On these 2 million additional shares. Have you bought any back recently.

No.

What do you expect the average diluted shares to be in the fourth quarter?, around 43 million.

42.5.

42.5. The tax rate of 33 percent, do you expect a - for how many years to you expect that to continuing to forward.

We anticipate it to go forward at least through next year.

And lastly, you talked about entering increasing your markets from 15 to 18, what are the three new markets.

Well, one we've got Orlando and Tampa or '03. And then we would anticipate at least one other. And not to be disclosed today.

And do you expect to continue to grow rapidly in Florida and the Carolinas?

I can't speak for the Carolinas this morning. But, yeah. We expect to continue to grow in Florida, and how fast that will be will be I think as dependent on our management as anything else. It's a very large growing markets. In order day think has become the biggest single family market in the country. Nip and tuck with Texas. And we've done a nice job in Texas ask we think we ought to be able to do similarly in Florida and how long it takes, we've got the challenge before us and as you know, Tim, we like to go faster rather than slower.

Is there any part of the state, are you going to come down to south Florida. You some people don't like it because you have to buy so much more land down there.

It probably is not on the top of our hit parade this morning to be in south Florida.

You would rather have more land availability.

I think so, yes.

Thank you.

Next we'll here from Jim Wilson of J and P Securities.

I'll keep it quick since I got so many questions. But could you give us some thoughts, Bruce, on what has been a little bit softer markets for you and where you see things going or your position in the market in both Texas, outside of San Antonio and also in Denver.

We expect Texas to - well, they're going to present record results in all categories for us. There are differences in submarket but overall we continue to grow our presence and our profitability. With respect to Denver, we're doing a terrific job in Denver and weakened housing environment. And it is affecting us as it is others. But we have reacted to it by first quarters on higher density, lower price product which is proving to be a successful antidote for conditions but there's no question that the market is softer.

Just maybe in general, the 20 percent expected growth in community count or additional new communities next year. Geographically, anywhere that it's that there's imbalance, that there's a lot more that you don't expect to open a lot of communities.

Let me see what we've got, Jim.

You know, it is pretty well on a percentage basis, it's a little bit stronger in Texas. But no. It's across the board.

Okay. Great. All right. Thanks.

Yep.

Our next question today comes from Brandon Lee with Cliffwood Partners.

Do you guys keep statistics on the amount of cash buyers in your marketplace today?

We don't. Jeff.

Very small portion. It's not much.

Similarly, do you guys keep statistics on the amount of like say 5 percent down or interest only buyers?

Well, 5 percent down basically consumes most of our buyers.

Consumes most.

That's the - that is - we have a large - again you have to go gee ago graph. We are big FHA, VA originators. We have a smaller retirement component in markets that you can imagine like Las Vegas and Phoenix and too son in which they have higher cash deposits but again, that is not the heart of our business. But low down payment is the bulk of our home buyers.

When you say most, would you say maybe 50, 60 percent or 30 percent.

You know, if we're looking about 40 percent of our buyers are government. And you break up, I can't tell, and to the extent it's government, it's minimum down payment.

Great. And also, has this trend been increasing or addressing, would you say?

My - every.

I think it's relatively constant as we expand our business outside of California, I would questions that our government activities has actually gone up a little bit but overall, the last few years, my impression though would be about flat.

A great. Thanks thank you very much.

We have time for one more question today and that will be a follow-up good Steven Kim.

Thanks very much. Actually I was going to ask you about your average loan to value but I think you've pretty addressed the question in various ways.

The second question I was going to ask was related to more efficient production. I was wondering whether or not, I don't know if you gave this, I didn't catch it, but the degree too which you believe your actual direct construction costs to the degree you can exclude land changes, have decline over whatever period of time you want to use, maybe a year, two years, three years.

I can tell that you it's been significant and we continue to focus on it. We have each division has a specific objective now which we operate under. PathFinder is the name we've given to it. Initiatives. To increase efficiencies but it is definitely one of the things driving our higher margins, Steve.

Okay.

And the beautiful thing is it's sustainable. It's not market specific or related. These are things that we ought to be able to have in good and less good markets.

Okay. And then just a quick household keeping question. The land profit this quarter, was its basically de minimus.

Yeah. 117,000, Steve. Thanks very much, guys.

That will conclude our question and answer session. Mr. Karatz, we'll turn the conference back over to you or any additional or closing remarks.

Thank you. I want to reiterate the solid state of our current business conditions. And obviously, optimism we have for the remainder of the year. And for 2003. We hope to see many of you at our luncheon meetings in New York on September 30 and in Boston on October first. If you want to receive any information about these luncheons, please contact Clem, Tang in our office here, we would be very happy to see you there and thank you. And we'll report to you as our year finishes off.

That will conclude today's conference call. Thank you everyone for your participation.