Lennar Corp (LEN) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to the Lennar Corporation conference call to discuss first quarter earnings.

As a reminder, today's conference is being recorded.

The information that Lennar Corporation is going to discuss will include forward-looking statements.

As is always the case with regard to forward-looking statements, Lennar's actual results may differ materially from those that are projected in the forward-looking statements.

There are discussions in Lennar's report on Form 10-K and the quarterly report on Form 10-Q, which have been filed with the Securities Exchange Commissions, of factors that could cause actual results to differ materially from those projected in the forward-looking statements.

The Company urges you to look at them.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Stuart Miller, President and Chief Executive Officer of Lennar Corporation.

Please go ahead, Mr. Miller.

Good morning everyone, and thank you for joining us as we report on the progress of Lennar to the first quarter of 2003.

We're pleased to report that Lennar has had another record quarter of revenues, earnings and backlogs and is today situated with an extremely strong balance sheet, which positions us well for the future.

As you can see from our press release, an increase of 30 percent in revenues to $1.6 billion is translated into an increase of 48 percent net earnings to approximately $106 million.

At the same time, we've continued to maintain a very strong balance sheet and have, in fact, fortified it with our recent upgrades to investment grade credit by Moody's and S&P, and with our recent issuance of $350 million of 5.95 percent 10 year note.

At the same time, we've maintained an extremely strong return on net capital of 21.1 percent.

These results reflect the Lennar process, which is focused on driving strong earnings, while at the same time, remaining focused on strengthening our balance sheet for the future and maintaining a very strong return on capital.

This balanced approach to running our business makes us feel particularly comfortable as we face the current economic and political environment, which to say the least, is defined by uncertainty.

While we, like the rest of the world, wait to see what happens with the looming war in the Middle East, we recognize that the ramifications of geopolitical events and the future of the economy are impossible to anticipate.

Accordingly, we've remained focused on running our business for current market conditions, which remain very healthy, while we prepare our balance sheet to withstand long-term turmoil.

Current market conditions remain very strong for homebuilders.

In spite of recent indications that the housing market is softening -- like yesterday's statistic that housing starts fell some 11 percent -- housing sales remain brisk relative to uncertain times in which we are operating, and the economic downturn that exists today.

Interest rates have remained very low and have kept new home purchases affordable.

Unemployment has remained relatively low, and consumers -- even with confidence waning -- have continued to view the home purchase as the bastion of stability in troubled times.

Right now it feels like this trend is continuing and is going to continue.

As we compare strong sales numbers with record breaking numbers last year, it may at times seem that quieter trend can be discerned.

But in fact, we expect and have expected that the sales pace that we are currently experiencing would and will drive our company to our previously described guidance of earnings to $8.50 per share based on a 76 million share count, that is assuming dilution from our convertible debt instrument.

Bruce will cover this in more detail in a couple of minutes.

But before I turn over to Bruce, let me speak briefly about our strategy for moving forward over these next quarters.

First, let me note that we will continue to adhere to Lennar's process of running our business for the currently existing market while staying focused on returns on capital.

And while continuing to fortify our balance sheet for the future.

Next, in the wake of our extensive acquisition activity last year, we've become increasingly internally focused.

While we will continue to consider acquisitions that enhance our strategic product, market share or geographic position, we are currently focused on using our extensive coast to coast position in all of the largest markets in the country to continue to grow organically through land purchases and options that position our company to increase market share.

We've also intensified our focus on improving internal systems in order to continue to translate our top line growth into even stronger bottom line growth.

We are becoming increasingly confident that economies of scale will continue to benefit our bottom line as we use growing market share in strategic markets to reduce both labor and material costs while we improve the quality of our homes.

Additionally, we feel that we will be able to continue to grow ancillary businesses around our increased size, as is evidenced by our growth in financial services income, which is up some 47 percent.

Finally, we'll continue to benefit from the capital advantage that is afforded by size and a strong balance sheet as we continue to reduce our cost of capital going forward through the strategic focus on our balance sheet.

Overall, Lennar Corporation has never been better positioned to perform and to continue to grow even through times of uncertainty as exist today.

We are confirming our previously stated guidance of $8.50 per share for fiscal year '03.

And we feel we are on track to accomplish our goal -- our stated goal -- of $10.00 per share for fiscal '04, assuming the economic environment does not change dramatically.

But perhaps most importantly, Lennar is positioned strategically with a strong balance sheet and tremendous liquidity to protect against adverse conditions which may come our way.

And to also seize opportunity as we have many times in the past, which may result from these uncertain times.

With that introduction, let me turn over to Bruce who will add color to some of our numbers.

Thank you, Stuart.

Good morning.

In the first quarter we continued to build on our long track record of consistent earnings growth.

The success in net earnings was noted in both home building and financial services.

All aspects of our business are performing well.

Homebuilding operating earnings increased 42 percent and financial services operating earnings increased 47 percent.

Homebuilding operating earnings benefited from sales of homes, joint ventures, land sales and other revenues.

The driver behind wholly owned deliveries being up 18 percent was primarily higher deliveries in California, which entered the year with a backlog of homes up 169 percent over the prior year.

Additionally, our two acquisitions in Chicago in the latter part of 2002 have also contributed to delivery growth in the first quarter.

Concord Homes and Summit Homes are excellent franchises and have been integrated quickly and have begun immediately focusing on dual marketing communities, which is enhancing return on capital.

Our Eastern region in the quarter had severe weather, which delayed approximately 50 to 75 deliveries during the quarter.

And also delayed approximately 200 starts, which will likely back load some of the Eastern region deliveries into the fourth quarter of this year.

The 10 percent increase in average sales price to $255,000 in the quarter was a result of changes in product mix, primarily due to recent acquisitions as well as the ability to raise home prices in many of our markets.

For a breakout of that average sales price by region, it breaks out like this: the Eastern region average sales price is $243,000, which is up 12 percent year over year.

Central region is $203,000, that's a 10 percent increase year over year.

And the West is $309,000, which is an eight percent increase year over year.

And some of that is due to the focus on growth in the inland and central valley area of California, which has a lower average sales price than the coastal areas.

The gross margin increased 70 basis points over the prior year's first quarter.

All regions showed strong margins with the Western region, which again is California, Arizona and Nevada and Colorado, showing the largest gains.

The one exception with increased margins was really Texas, which has experienced job losses and isn't as supply constrained as most of our other markets.

Selling, general and administrative expenses were flat during the quarter at 12.1 percent of revenues from home sales.

But higher revenues due to growing market share did give us some SG&A leverage in California, Maryland and Virginia primarily, while offset by Colorado and Texas, which are seeing some increased advertising and other marketing costs due to some softness in those markets.

Insurance costs remain at the same high levels as we discussed in previous quarters.

There hasn't been much change there.

And in conclusion with our homebuilding program, it continues to be very diversified whether we're looking at geography, product or price point.

This diversification is positioning us well where strong markets are offsetting some of the weakness in some of the other markets.

Turning to joint ventures.

Equity and earnings from unconsolidated JV's increased to 8.6 million from 6.2 million in the prior year.

This increase was primarily driven by an increase in joint venture home deliveries from 119 homes to 188 homes in the quarter.

Our joint ventures are structured to mitigate risk, enhance returns on capital and provide current fee income, which we include in the results of land and other revenues net.

Looking at that category, the sales of land and other revenues net actually increased from 4.7 million to 11.4 million.

The majority of this, however, is not land sales.

The majority are management fees.

Approximately 6.6 million of the 11.4 million are revenues driven from management fee income and that continues to be a recurring revenue stream.

We have previously released our first quarter new orders, reflecting positive new order growth of eight percent year over year.

New orders, as you know, are impacted by timing of community as well as model openings, homes available to sell in existing communities and general market conditions.

And although we're coming off record home sales in 2002, we're managing our business assuming a strong sales pace, even if it's not a record pace in 2003.

Although new orders were positive overall, they were down in the West during the quarter as we previously have announced.

We're finding the California, Arizona and Nevada markets, however, are still remaining strong while Colorado continues to be on the softer side.

We intentionally had fewer homes released in California, which will be the case until construction catches up with the sales pace.

And Arizona and Nevada had some timing issues with new community openings.

When we entered 2003, we had a $3.2 billion backlog value, which was up 61 percent.

This backlog was primarily a result of backlog acquired from acquisitions made in 2002.

In certain cases, primarily in California, the backlog acquired was in place, however, the sales pace was ahead of the construction pace.

We manage our company to match the sales and construction paces.

We want to release sales prices and homes for sale at the point construction is ready to commence.

As a result, we entered the year with 12,108 homes in backlog, which was approximately 38 percent of 2003 expected deliveries where typically backlog represents only about one third of the next year's deliveries.

The backlog level at the end of 2003 is expected to return to the more typical percentage of approximately one third of 2004's expected deliveries at this time of approximately 37,000.

The average community count in the quarter was approximately 689, which was up 22 percent from first quarter of 2002.

The second quarter is typically the highest selling quarter of the year and we are entering the second quarter well positioned from a community standpoint.

We expect to be in good shape with additional community openings through the remainder of the year, which coupled with our very strong backlog dollar value positions us well to achieve our goal of 31,500 to 32,000 homes.

Turning to financial services.

Operating earnings increased 47 percent in the first quarter compared to the prior year, which was 34.3 million compared to 23.4 million in the prior year.

There was significant improvement in both mortgage and titles during the quarter.

Our mortgage operations generated 26.7 million pretax versus 18.9 million in the prior year.

We originated 1.5 billion in loans for the quarter, versus 1.2 billion in the prior year's quarter.

The overall company capture rate was lower in the quarter due to the number of new acquisitions.

It generally takes about a year for the capture rate of Lennar deliveries to reach our desired 70 to 80 percent range when we make an acquisition.

The capture rate overall was 69 percent in the quarter, but excluding last year's acquisitions, it was pretty much in line with prior quarter's capture rates.

Title operations earned 7.4 million in the quarter compared to 3.8 million in the prior year.

Our strategy of adding Sentinel Title in Baltimore to our program to augment our homebuilding entry into Maryland in 2002 is working well as Sentinel is immediately contributing to Title's results.

Additionally, Title has benefited from higher homebuilding and refinance activity in 2003 versus the prior year.

To conclude with the income statement results, diluted share count in Q1 was an average of 76.1 million shares.

And we received approximately a six cent benefit by not being diluted for our contingent convertible instrument due 2,021 during the quarter.

The convertible interest added back in the first quarter was $1.69 million.

Turning to the balance sheet.

As part of the Lennar process, there's tremendous focus on maintaining a strong prudent balance sheet at all times.

And during the quarter, we were upgraded to investment grade rating by both Moody's and Standard and Poor's.

We now have investment grade ratings from all three nationally recognized rating agencies that rate homebuilders.

Upon receiving these upgrades, we pursued further strengthening of our balance sheet by extending debt maturities and reducing borrowing costs.

We issued $350 million of ten-year senior notes with a 5.95 percent coupon in February.

The net proceeds are 344 million were used to repay approximately $100 million of debt and the remainder was added to general working capital.

We also successfully remarketed our institutional term loan B, reducing the interest rate from LIBOR plus 250 to LIBOR plus 175, and extending the maturity term from May of 2007 to December 2008.

We now have no significant maturities of long-term debt until December of 2008; however we are managing our capital structure to be prepared to either convert, retire or maintain the zero coupon convertible as the first call date comes up in July 2003.

If this convert, if this converts from debt to equity, you will see approximately 272 million being added to our shareholders equity with no impact to diluted EPS since we've been diluting our share count since the issuance in July of 1998 for some 6.1 million shares.

As part of our Lennar process, we start and end with the way we grow with a strong balance sheet, and after 10 acquisitions, since the beginning of 2002, our first quarter ratios have grown stronger.

Debt to total capital has declined from 46 percent in the first quarter of last year to 44 percent in the first quarter of this year.

Net debt to total capital declined from 37 percent to 36 percent.

Debt to EBITDA declined from 1.7 times to 1.4 times.

Interest coverage improved from 6.9 times to 8.5 times and our cash position improved as we ended the quarter with half-a-billing of cash and zero outstanding on our 926 million-credit facility.

The strength of our balance sheet is that we're financed for the long-term, while we're invested in short-term inventory.

Our total debt outstanding has an average duration of 10 years with no current maturities until 12, '08, and an average cost of approximately seven percent.

Our home sites owned and controlled are approximately 174,000 with about 45 percent owned and 55 percent controlled.

While strengthening our capitalization structure, we also a have focused on carefully managing our asset levels, our inventory was 3.7 billion at the end of the quarter, which is comprised primarily of construction in progress, as well as finished home sites, and supported by a strong backlog of 3.5 billion.

We carefully managed construction in the Salispades and we manage our asset levels in individual markets based on current existing state of the market, with a turn over ratio of 1.7 times, and a strong mix of home sites, owned and controlled, we are well positioned to adjust to any downturn in the marketplace while giving us the ability to take advantage of upside potential.

Our 2003 goal, we provided guidance in January of $8.50 per share.

This guidance assumed a diluted share count of 76 million shares and we want to remain consistent with this assumption, which assumes as stock price of more than $70 per share in order of this dilution to occur, and that would be an additional four million shares of dilution from our contingent convertible security.

Given the uncertainty in the world, it's not a time to revise our goals for the year, and at this point in time, we remain focused on our original goal for 2003, which is $8.50, and it breaks out consistently with what we laid out in our January conference call.

The range for the second quarter, we expect to be $1.80 to $1.85 per share.

The range for the third quarter at 2.25 to 2.30 per share.

The range for the fourth quarter $2.90 to $2.95, all assuming 76 million average shares outstanding in the diluted share count.

We remain well positioned to achieve this goal, all aspects of our business are performing well.

We have the people who are focused on managing the Lennar process, with the financial disciplined focused on growing earnings, reducing high returns, and a strengthening balance sheet, to help protect our company against the downside while providing opportunities on the upside.

And with that, we'll like to open it up for questions and answers.

Hello?

Yes, our question-and-answer will be conducted electronically.

For those of you that do have a question today, please press the star key, followed the digit one on your touch-tone telephone at this time.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again if you do have a question today, please press star-one at this time.

And we'll pause for just a moment.

We will take our first question from Margaret Whelan with UBS Warburg.

Morning folks.

Morning.

Morning.

Congratulations on a great quarter.

Couple of questions, the first one, would you give a sense please for deliveries and order growth organic versus the acquisitions you'd made last year?

You know, Margaret, we don't break out the organic versus acquisitions, because some of the acquisitions that we make are actually the acquisition of communities, which going into existing operations.

So they really, they lose their identity, and it's just not something that we track.

Can you give us any sense of it by region?

I'm sorry?

Can you, I understand what you're saying, but can you give us any sense by region, because I know some people are worried that your orders might be declining organically.

Well with respect to orders, we did give the breakout by region of what was happening, and we showed strength in the east and the west year-over-year, and the west region was down about 14 percent; however, that wasn't really representative of the strength of the various markets, and if you look at acquisitions versus organic, by the markets, it's just not something that we could really breakout in detail, because we don't track it, and it just, it gets all mingled together with acquisitions that would have been new communities in our existing operations.

OK, I understand.

And the second thing would be, have the supply constraints contributed at all to the higher selling points?

I know you said part of it was mix.

Well supply constraint has continued to keep homebuilding strong, and we have been able to raise prices.

So that was a contributing factor, as well as the fact that the product mix changed and the acquisitions have tended to increase the price as well.

Now I will say that as we entered this year, we did acquire a South Carolina builder that does have a lower average sales price, which approximately $100,000 per home, and although they only do about 400 homes a year, that might moderate the price just slightly.

And our next question is Armando Lopez with Morgan Stanley.

Yes, good morning.

Just a couple quick questions on the subdivisions.

So it sounds like you guys have mentioned your managing the orders for the pace of construction.

Can you just talk about that a little bit in terms of you know, what happened that slowed construction more than you would have expected?

I don't think we slowed construction more or, sales more than we expected, and there's, and the program of matching our sales pace and our construction pace has been one that has been the way we've run our business for many, many years.

The difference or the thing that has piqued interest this time around is the fact that basically at the end of 2002, or towards the end, we made a number of acquisitions, which added substantially to our backlog.

So our backlog as we went into 2003, represented closer to 40 percent of our expected production for '03.

And what that basically meant is that the sales pace that we were, that we had acquired, but did not flow through sales, had gotten a little bit ahead of what we typically would have done in terms of managing inventory levels and backlogs of sales levels.

So what we've basically done is allowed construction to catch up with the sales that we had in backlog by not opening new sections or new products as quickly as we might otherwise have.

But in terms of what we anticipated, our numbers, our year-end earnings numbers, and our expectations are very much in line with where we are right now.

And as a reminder to ask a question, please press star-one at this time.

Additionally, please limit yourself to one question at this time also.

Our next question will come from Ivy Zelman with Credit Suisse First Boston.

Wow, that's only impossible for me to only ask one question, but I guess, can I ask two quick housekeeping questions, and then a good question?

Sure, go ahead.

OK.

OK, thanks.

OK, number of percent of refi in your overall volume origination roughly Bruce?

The percentage of refi is very low, because most of our originations are through Universal American Mortgage, which provides mortgages to our home buyers, and it's really only in our Eagle Mortgage operation that's based in Seattle that we have the refinance business.

So you're looking on the mortgage side at a relatively minor percentage.

Now on the title side, that's where refinance is more significant, because you need a title policy to refinance, and you know, title is very healthy right now, and as refinancing continues at a strong pace, I would suspect that will likely continue into the next quarter.

OK, and the second housekeeping is percent of specs roughly, what percent of your inventory?

In terms of completed unsold homes, we're still managing somewhere between one and two per community.

So our spec level is still being managed very tightly as we always do.

And you know, we don't really see that changing much either.

Right, but not just completed, what do you have in the ground that's not been pre-sold, roughly?

OK, if we were to look at what's under construction unsold and what's completed unsold, you're in the four to 5,000 range.

OK, and this question I think combining it is a big question in theory.

I don't understand why Lenar is not willing to disclose the prices that they pay for their acquisitions, when you used to do it, and realizing that in a market where there's a lot of concerns and uncertainties, and you have such a great track record of having made prudent purchases, why you would give investors reasons for concern that you may be overpaying when, you know, historically you used to disclose it and now you're not.

And I could that with why aren't you buying back your cheap shares and I want to understand your capital allocation.

So that's the big question, and then I won't ask any more.

Well let me say Ivy, that I think if you look historically, we have tried to remain consistent in our approach to what we disclose and what we don't.

We don't have shyness about disclosure, but we do try to remain consistent.

If you look back over the private deals that we've done, of course the public deals, there has been disclosure of purchase price as required, but in private deals that we've done over many years, we have not disclosed purchase price, and I think are reluctant to more in the line of just remaining consistent and not changing from one purchase to the next.

What was the other part of the question?

Share buyback.

Oh, share buyback, right ...

Your favorite question Stuart.

My favorite question, well, you know, I think particularly in the context or where we are today, you can't, today of all days is marked by uncertainty in the world.

And the question of share buyback for our company is always a question of competing alternatives and the alternatives are other investment alternatives, the opportunity to grow the business and the benefits that come from that, and as well, the important alterative of maintaining liquidity and positioning the company for eventualities in the midst of uncertain times.

Today, I think we have to, we'd have to say that who knows what's going to happen relative to the war, who knows what's going to, how it's going to impact the economy.

I think even Fed Chairman Greenspan has declined to look around the corner and suggest that there's any certainty around the corner and we think it's a good time to be liquid and to be fortified.

But additionally, as we look ahead generally, getting out of this moment in time, we have felt that the opportunities to grow our business and ultimately the economies of scale that we're feeling are being harnessed through the growth of the business, are competing very favorably as investment opportunities, relative to the buyback of shares.

And so we feel that investment in growth has been able to not only produce the normal results, the norm, the bottom line results that go along with good purchases, but additionally, the increased market share are beginning to reflect positively on the overall growth of our bottom line through synergies and cost reductions while we improve quality throughout the entire business.

Stuart, would you issue a shares at this price, at the current stock hold, at the current share price?

Would I issue new shares, would I ...

Make a purchase, to make an acquisition, would you use your currency at these prices?

For the appropriate acquisition, sure.

You would.

You know, I think if I were, if I were looking at an acquisition of a company that was, who I was basically trading equity for equity at the same level, you know, I'd have to consider that, because I think that, you know, it's certainly in the public markets, equities are trading in parody.

OK, thank you.

Thank you.

And, excuse me, Carl Reichardt with Banc of America has our next question.

Hi guys.

Looking at the gross margin, which expanded nicely this quarter, and as you look at your current backlog, can we expect a similar type of gross margin expansion and within that context, how is everything included performing relative to the design center homes, is that having an impact on gross margin.

And were there any purchase accounting adjustments.

Is that one question?

I think that's one.

It's one question about, it's three questions about one topic.

OK, we'll count that as one.

Thank you.

As we gave guidance at the beginning of the year, our goal was to have a gross margin for the year that was somewhere close to 24 percent.

And you know, we're remaining consistent with that guidance that was set out.

Now from quarter to quarter it might shift a little bit, and we did have a 70-basis point increase in the fourth quarter, and you know, I think what you're seeing is you're seeing our operations performing very well, however, it is offset partially by, you know, some sales incentives that have increased in markets like Texas and Colorado.

So although our program as we're gaining market share, is performing really well, and that's both, with everything's included and design studio, which are both doing really well.

We're really excited about that program.

Both of them are doing outstanding, and it's really the execution in the local marketplace by the division and region president as to whether everything's included or design studio is performing a little better.

And our Chief Operating Officer has done a fabulous job of bringing these dual marketing communities on immediately after these 10 acquisitions that we had just closed on in the last 12 months.

So that was the gross margin question.

And everything's included and the third part of that?

Purchase accounting?

Purchase accounting, there are really nothing significant in the purchase accounting area.

We did close on [Inaudible] homes on January 30th, and it's really a nominal impact in this quarter from purchase accounting.

Let me just add Bruce and say that, you know, everything's included, which was, I think your question Carl, really continues to perform excellently as a program.

And you really have to had it to Bob Strudler to maintain two competing programs, both of them performing exceptionally well, each one has its virtues in each and every market across the county.

And really from an operations standpoint, keeping them separate and functioning with their individual integrity is a real job and a task, but I think it's been done exceptionally well in this case, and everything's included continues to just do, just be a real strong performer in each market in which it's introduced.

And, thanks a lot guys.

You're welcome.

Thank you.

And as a reminder, if you do have a question at this time, please press star-one on your touch-tone telephone.

Additionally if you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Our next question is from Steve Fockens with Lehman Brothers.

Hi, good morning guys.

Just one quick question.

When you look at regionally, California looks like it, or the west continues to be strong from a demand standpoint, especially vis-à-vis Texas and Colorado.

What are the, what if any factors concern you about the California market over the next 12 to 18 months that you know would slow them down to more of a maybe not exactly a Texas or Colorado level, but would weaken that area of the country?

Well I would say, Bruce, I don't know, you might want to add to it, but you know, in today's world I think everything concerns me, and you know, relative to California, it's been a strong market.

It is clearly one of the more land constrained markets in the country, but demand patterns remain strong.

It is a healthy part of our world.

But you have to be concerned in the current economic and geopolitical environment that a lot of things can change and change very quickly.

And that certainly would impact, those things would impact California, very much like other parts of the country.

So I think it would be general economic concerns that would define our concerns in California.

And I don't think anything specific to that part of the country.

The only thing I might add to that Steve is that we are tremendously diversified in that land constrained market that we call California, and we have expanded into areas, such as the Central Valley, and Inland Empire, but if you look at our price points, the geography through the state, the product where we have in-fill, first-time, first-time move up, active adult, it's a very diversified program and in each of the markets in California are very diversified from a job base.

So that coupled with the land constraints, we feel relatively confident at this point, barring any of the macro issues Stuart talked about.

OK, thanks very much.

You're welcome.

And our next question is from Stephen Kim with Salomon Smith Barney.

Hi it's Jed Barron for Steve Kim.

Question on your delivery guidance for '03 and '04, if I could.

The contribution from JVs for both the guidance this year and next year, and then specifically in regards to the '04 delivery guidance, whether or not that assumes any contribution from acquisitions.

I would assume for your comments early on about focusing on internal growth, it may not, but just wanted to confirm that.

Yes, Jed , this is Bruce, as we stated at the beginning of this year, our goal for this particular year of 31,500 to 32,000, we were comfortable, because we came in with such a high backlog into 2003, and again, barring any of the macro events that could happen, we're very well positioned and that was not assuming any additional acquisitions, other than where you make acquisitions where there are acquisitions of communities, which would replace acquisitions of communities that you might have done on a one-by-one basis.

And the same thing really holds true for 2004 as well.

Often, such as the Pacific Century transaction last year, which was an asset transaction, that was both setting up a new division for us as well as acquiring communities, which replace other communities that we would have been buying on an organic basis.

OK, great, and then just the contribution you're expecting from JVs in those deliveries figures?

Yes, we were expecting this year somewhere around 1,000 deliveries in the current year, and that number would be slightly higher in 2004.

Great.

Thanks very much.

You're welcome.

And Paul Puryear, with Raymond James, has our next question.

Thanks, good morning.

Could you tell us how much land you acquired in 2003, how much you expect to acquire in '03?

And then also sort of comment on the rationale between buying additional land versus making acquisitions.

The numbers, Paul, for 2002, we acquired approximately 1.3 billion of land, and that's without land development costs, which typically are another three or four hundred million.

In 2003, in order to keep the growth that we're projecting, we figured that that 1.3 billion would be somewhere closer to probably 1.7 or 1.8 billion, again, without the land development costs.

And, you know, as we look at acquisitions, again, sometimes acquisitions is an easier way to obtain communities in a marketplace that we're already in with backlog in place that could facilitate a dual marketing strategy in a particular market, or for entering a new market, we're obviously focused on looking for an excellent franchise, as we did with the 10 acquisitions we made this past year, where there's a great management team in place with local market expertise, with well-positioned land.

So it really depends on the marketplace.

And Stuart, you might want to add to that.

Yes, let me say that the acquisition program has been one of strategy.

We are looking to position ourselves geographically.

When we can enter a new market, geographically, with an already-existing team that is connected with land, positions and connections with people who are sellers of land, we think that we've taken multiple steps forward as opposed to starting fresh and cold.

So, our entry into Chicago, for example, over the last year was done with management teams that are well positioned in that marketplace and give us a strategic advantage.

We've also looked to fortify existing market positions by adding either an everything's included or design studio approach to a market where we have existing one of those approaches.

We think that entering new markets that way gives us the ability to not just go from a cold start.

Now, additionally, we've been able to replace land positions that we're running out of, or buy new land positions in marketplaces through acquisition as opposed to through buying land.

And that gives us the opportunity to buy a position that is already cash flowing.

So the startup time that is generally associated with buying a piece of land, designing models, getting the land developed and ready to actually begin production, is cut short when we can do it through acquisition where there's already product in place, a construction and sales team in place in the field, and that acquisition can augment a situation that we already have in the marketplace.

So there are a lot of strategic reasons for going the acquisition route, as opposed to just going the land route.

And we of course try to balance between the two approaches.

OK, thanks.

If I could just ask a short follow-up then, what about the returns that you seek in either instance?

Well, as you know, we target a return on capital within the company of 15 percent or better.

Of course, we've been performing at a higher return on net capital than our target numbers.

But when we make an acquisition both of land and of company, we're looking to achieve the same kind of return on capital.

Sometimes with a company acquisition, we will expect to achieve that level sometime after a startup period, because of purchase accounting or other considerations.

But it is always with a view of being well within that range, exceeding 15 percent return on capital, that defines our investment criteria.

Terrific, thanks.

And Michael Rehaut with JP Morgan has our next question.

Hi, good morning, nice quarter.

Thank you.

Just had a couple of questions, I guess an IV 1 question.

On the -- just a couple of housekeeping thing.

If you're able to give a little bit on the detail of the ASP gain, what percent from mix versus pure price increase?

Well, you know, we don't break that out, Mike, because our product is always changing and it's just not something that's very easy to track, because models change, geography changes.

Everything's changing.

It's not an apples to apples comparison, so we don't really try to give an exact number, but the average sales price was a combination of those.

You saw that in a lot of our markets there was strain offset by some decreases.

And when we do give sales incentives in marketplaces like Colorado, that is a reduction of average sales price.

Sales incentives reduce the revenue side of the equation.

But it's not something that we could give you an exact percentage breakout on.

OK.

I was also wondering also it's sort of a housekeeping question, if it's possible to sort of review the assets of the JVs that you derived the equity earnings from.

What the asset size of those aggregated JVs are at this point, and what's the average percent ownership and percentage controlled of those JVs, if that's possible?

Well, as you know, starting with our investment in these partnerships, our investment in these partnerships actually went down slightly in the quarter, year over year, as you can see from our balance sheet in the press release, but if you looked at the assets in the balance sheet for all of these joint ventures aggregated, it's probably about 1.3 billion, approximately.

And all of our joint ventures are strategically focused for business purposes where there's a true sharing of the invested capital and the risks and rewards from both our side as well as our partner or partners' side.

And from the standpoint of leverage, if you looked at leverage for all of these joint ventures, if they were consolidated into our balance sheet, we'd still be in our normal leverage range of the 35 to 45 percent net debt to total capital.

And the joint ventures also use our conservative accounting policies as well.

So these are, for business reasons, the same prudent balance sheet management applies to the joint ventures and the same conservative accounting, as if they were consolidated on our books.

OK, thanks, Bruce.

Just one last question on the regional strengths.

I was wondering if you could comment if you'd seen any change in terms of pricing strength or strength overall in the last month or two in Florida.

I've heard a little bit that there has been incrementally a little bit of a softer trend there.

And then I just had a quick question on Texas and Colorado.

That sounds like more than one question and then a follow-up, but..

OK.

Well, you know, Florida, like California, is really -- you really can't look at Florida as a single market.

It's got a lot of different markets that kind of get lumped as one.

And there is a distinct difference between central Florida these days, northern Florida, and southern Florida.

Southern Florida, we're seeing a lot of strength in that marketplace.

The greatest limitation confronting that market, the market of Dade, Palm Beach counties, is really the availability of land.

But there's a lot of strength in the market relative to demand and pricing power.

In the more central markets, and particularly Orlando, where you're seeing more dependence on the travel business, you have a little bit of softness in some of those markets, and then again on the west coast of Florida, Naples, Sarasota, you're seeing more strength again where you have land constraint and some of the land pattern people moving into those marketplaces.

So, really, as you dissect -- as you ask a question about Florida, you kind of have to dissect it and look at it on a market by market basis.

OK, and roughly, of your Florida exposure, can you give a rough idea how it lays out between those three regions?

Well, as in California, we have a very diversified approach throughout Florida.

We're well positioned in all strategic markets, with good products and a land supply.

But we really don't define on a regional basis how we're positioned in each of those markets.

Thank you, Stuart.

One last part of my one question.

On the -- a big debate in the industry is obviously if there is a trough coming up, and a pullback in performance, where that trough would be this time around versus, let's say, five years ago or 10 years ago.

And I was wondering if you could give us any insight into, let's say, the Texas market, where you have seen some softness, you have seen some sales incentives, and perhaps some margin pressure there.

And just to give us some visibility in terms of just seeing in a tougher area what sort of the downside scenario might be.

Well, I'm not really sure that our crystal ball is better than anybody else's.

I think that people have been consistently anticipating the trough in the homebuilding industry for the past seven years, and I don't meant to be cavalier about it.

I think that economic conditions are always uncertain, and the things that define where we're headed are so wrapped up not only in economic statistics, but on the psychology of consumers and the psychology of the marketplace, and there are so many variables, I just don't know that there is visibility now or at any other time as to when cyclical changes might or might not occur.

Relative to slowness that we see in various markets, we have seen various markets across the country for various reasons go into slower times and then pick back up again.

A couple of years ago, we were looking at the San Francisco market and wondering what would happen there, as we sat in the middle of the tech bust.

And that impacted in ripples through that market with job loss and commercial property fundamentals deteriorating.

The fact of the matter is, because of short land supply, that market came back fairly quickly.

Today, we see ourselves in the midst of some slower times for the Dallas and the Denver markets.

We find ourselves slower for various reasons, and different reasons in each.

But our expectation is that across the country, we will see various submarkets go into slower times, but the -- fundamentally sound environment for homebuilding, and no material changes in the overall economy, we think that that slowness will come back in fairly short order.

And we expect that particularly for us and other larger builders, we'll be able to continue to grow as the industry continues to consolidate and we pick up market share across the country.

OK, thank you very much.

John Stotton with BankOne has our next question.

Thank you.

Congratulations on the quarter.

Just in the same vein as a number of these questions, I wonder if you could tie together the 22 percent growth community count to some of the markets, Texas, Colorado, California.

Is your expansion in line with current conditions, or are you getting ahead?

Could you just give us a perspective to the pattern so far and what you might look forward to?

Well, one thing I caution again with community count is sometimes community count can be higher because we haven't closed out of certain communities as fast as expected.

And that's part of the reason the central region had the biggest growth in community count.

And I think you might see, as Texas's sale space has slowed down a little bit, part of that is you just -- you have more communities because you haven't closed out of some of them.

So the real key thing with communities is your opening.

When the models are ready, when you actually have your opening, and that's when you typically get the largest sales space going.

And it's a little deceiving just to look at pure community count, because these really aren't same store sales, and it leads to extreme volatility.

So I'd apply some caution with respect to that.

But in general, we are very well positioned in terms of communities that are going to be opening up for the year.

We do see communities opening up even though there have been some weather delays, we do feel like the communities will be there and available for us to meet the deliveries that we have as goals for this year and next year.

Thanks very much.

You're welcome.

Ken Zener with Deutsche Bank has our next question.

Hi, this is Ken Zener for Greg Nejmeh.

Just want to go back to the pricing.

The 10 percent increase was by data we have the highest since fourth quarter '99, which is really amazing in this climate.

I realize many issues at play, supply, product mix, et cetera, but I'd like you to focus if you could on one, which would be the option trends in the design studios and the customers are purchasing more.

What you could disclose about that.

Thank you.

Sure, Ken.

You know, on the average shelf space increase once again of 10 percent, again, part of that was due to some of the acquisitions we made.

For instance, the central region, adding Illinois, that significantly brought up the average sales price in that region.

And as we added a couple builders in the mid-Atlantic, that also brought up some of the averages there as well.

The customer trends with respect to design studio options I wouldn't say really changed dramatically in this particular quarter, and obviously everything included has a few options.

Our design studio program has more selections, and I'd say it's been remaining within a normal range.

I wouldn't say that it's anything unusual in this particular quarter.

And there is a follow up question from Margaret Whelan.

Hi, just going back to the order question, Stuart, would you try and characterize the slowdown, maybe for example in terms of what you think is demand versus supply related?

Could you repeat that again, Margaret, please?

Sure, sorry, I'm no my cell phone.

I'm just trying to figure out, if you look at slowdown in the orders, how would you characterize the weakness in demand versus supply as you...

Well, I'm not sure that we have characterized anything as real weakness.

In fact, we're looking at numbers nationally and for the company that are comparing against record-breaking numbers a year ago.

I think that we're still feeling that there's a lot of overall strength in the marketplace.

I think that what some of kind of interpreted as slowness is the fact that our orders, though up year over year, are reflecting the fact that our backlog was very high in the beginning of the year, and some of our acquisitions have gotten a little ahead of themselves in sales, and that we don't have quite as many new community openings as some might have anticipated.

But the fact is that we still feel relative strength in the housing market, and that should really be indicated by the fact that we are projecting comfort relative to our year-end numbers of $8.50 a share, and our next-year number of $10.00 a share.

These goals are goals that we're still feeling.

We're on track for, and we're very much in line with, the position that we expected to be in.

OK, and then just a second question on the community cap.

If you've got about 670 communities open currently, and I think you're targeting that 740 [Inaudible] .

Is that correct?

That's correct for the end of the year, depending how some communities close, that would be the biggest determination of whether we end at 740 or a different number.

But we feel pretty comfortable with the openings that are lined up.

And the average size of those communities, if I just use the current closings level, would be about 45 homes?

You're selling about one a week, is that it?

Well, if you're translating deliveries to a per community, you know, the community count is a leading indicator for future deliveries that will also go into the following year.

So as some of these communities open, it will go into backlog, and that's a leading indicator for the future.

But the open communities is not really -- I wouldn't take an average, because some of these communities might be just finishing up, and some of them are just opening up for 2004 activity.

I guess what I'm trying to do is just to look at how much supply you're putting into the market versus some of the regions where you're seeing slowdowns and just wonder how prudent it is given the lifecycle of the communities can be more than a couple of years.

And we're really managing that from a return on capital standpoint as we look at some of those things.

And in some of the softer markets, like Texas, for example, we do use a lot of rolling options, so our investment, our capital investment in that marketplace, is managed very closely.

And I don't think you're seeing anything out of the ordinary, and if that was the case, it would be reflected in a declining return on capital, as opposed to a growing return on capital.

OK, thank you.

You're welcome.

And from Eminence Capital, Matt Sherwood has our next question.

Hi guys, good quarter.

Just had a quick housekeeping question.

First of all, on financial services, could you just go over what your numbers were for the breakdown between mortgage and title?

Sure, mortgage in the quarter generated 26.7 pre-tax versus 18.9 million in the prior year.

OK.

And title was 7.4 million pre-tax versus 3.8 million in the prior year.

OK, and then in regards to your guidance, are your assumptions for the different divisions and the average sales price and stuff unchanged from what they were in the beginning of the year?

Yes, with the uncertainty in the world right now, we didn't think this was the time to update any guidance.

I think you could use the ranges that we set out in the beginning of the year.

We gave annual goals for each of the line items, and then we broke EPS out by quarter, and we would suggest sticking with those at this time.

Even with the strength in sales price in financial services?

Yes.

I mean, we still expect that at some point, refinance activity will slow down on the financial service side, and we're trying to be conservative.

We think it's at a very high level right now.

And there's a couple of soft markets as well as some strong markets out there, and again, we're just trying to manage as we're seeing things today.

Yes, just being conservative.

And the diluted share count is 76 for each individual quarter?

That's correct.

OK, great.

Good job.

Thank you.

And we will take a follow-up question from Ivy Zelman.

Good afternoon, guys.

Dennis McGill on behalf of Ivy.

You mentioned earlier that you felt that the poor weather probably pushed about 50 or 75 units out of Q1.

If you look at how many deliveries you closed as a percent of backlog in the East particularly, it comes at about 35 percent.

Typically, you guys track somewhere near 50 percent.

There's something else going on that would cause that discrepancy?

And I'm looking in only the first quarter.

Yes, you're looking at first quarter in the Eastern region, and we did have a combination of some acquisitions as well in that region, so I think what you're finding is in some of the acquisitions, they sell ahead of construction starts, and we're always tightly managing the sales and the construction phase.

So I think that's part of it as well Dennis .

So I think as we look at it, the 50 to 75 are going to push out, but there's about 200 starts that will backload the eastern region a little bit closer to the fourth quarter of this year.

OK, do you guys feel comfortable breaking out the proportion of your inventory that's related to land and the portion that's related to work in process?

And if so, the portion of specifically homebuilding, how much of that would already be sold versus the spec you mentioned earlier?

In terms of looking at the balance sheet, your first question, there is about a $3.7 billion inventory balance on the balance sheet.

And homes under construction, which includes homes, whether they're completed, models under construction is about 1.7 billion.

The remainder is finished home sites, which is about 600 million, and then the additional remainder is about 1.0 to 1.3 billion, which is land under development, options and other deposits.

And are you able to break out the 1.7 that you mentioned between the homes that you have already sold versus the spec?

No.

I mean, obviously the $3.5 billion backlog is supporting the construction activity there in terms of generating some quick cash flow, but we don't break that out further.

OK, just my last question, can you give us an update of how much goodwill you guys currently have since that isn't broken out in the press release.

Sure.

Goodwill is -- it's about 198 million at this point, which includes goodwill in homebuilding as well as financial services.

And the homebuilding portion?

Homebuilding portion, we'd have to back out about -- there's about 35 million or so that's financial services.

So you're looking at just over 160 million on the homebuilding side.

OK, thank you very much, guys.

And we do have a follow-up question from Michael Rehaut.

Yes, hi.

Just a point of reference.

Most of the other builders that have reported in the last month or so have seen steady cancellation rates since the last year ago.

Just any comments on that metric?

Yes, the cancellation rates, which we've always said range from approximately 20 to 30 percent continue to be at the lower end of the range, and you're seeing some real consistency recently with cancellation rates, so there's really no change there, Mike.

OK, great.

Thank you.

And it appears there are no further questions at this time.

Very good.

Well, thank you all for joining us, and we look forward to keeping apprised of our progress with next quarter's conference call.

Thank you.

And that does conclude today's conference.

We thank you all for your participation.