Lennar Corp (LEN) 2005 Q3 法說會逐字稿

Welcome to Lennar's third quarter earnings release conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session, instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

Today's conference call may include forward-looking statements that are subject to risks and uncertainties, relating to Lennar's future financial and business performance.

These forward-looking statements may include statements regarding our business, financial conditions, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent the Company's estimate only on the date of this conference call.

And are not intended to give any assurance as to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in the forward-looking statements.

These factors include those described under the caption, risk factors related to our business, contained in our Annual Report on Form 10(K), for our most recent completed fiscal year, which is on file with the SEC.

Please note Lennar is under no obligation to update any forward-looking statements for past or present filings and conference calls.

I would like to turn the conference over to our host, Mr. Stuart Miller.

Please go ahead.

Good morning everyone, and thank you for joining us for our third quarter conference call.

I'm joined here by Bruce Gross, who will give a financial overview, but first I'd like to give a couple of overview comments about the Company, the quarter, and prospects for the year-- the quarter, and the year ahead.

Let me begin by saying that we are very pleased to report strong third quarter results for 2005, and very strong prospects for our fourth quarter, and for 2006.

The story remains very consistent for both Lennar, and as well for the home building industry.

Across the country demand for new homes remained strong, and this is driven by strong fundamentals that continue to form a favorable environment for the new home customer.

Relatively low interest rates, along with positive demographics, still very strong job growth, and as well income growth, and the generally strong economy at both the national, and as well the local level, continue to propel the overall home building market to consistently positive performance.

Limited supply of available land, especially in constrained markets, continues to limit inventory from speculative building, while generating pricing power going forward.

While the consistent strength and success in the housing market has given rise to a lot of discussion about a national housing bubble, credit quality, types of mortgages that are available, interest rate hikes, and a variety of other questions, the industry continues to show tremendous resilience, and the drivers of stability and growth rest in the fundamentals, and that is the growing population across the country that needs a place to live, the aging stock of existing dwellings, and the fundamental economic strength that's at the national, and as well the local level.

Today we are very pleased to announce yet again record earnings for our Company for the third quarter of 2005.

As you can see in our press release revenues were up a healthy 27% and that, together with a 340 basis point improvement in gross margin, fueled a 48% increase in homebuilding operating earnings.

As we look forward to the final quarter of 2005, we derive a great deal of confidence from our strong pace of new orders that were up 24%, our strong gross margin of 26.3%, and our $8.1 billion backlog, which is up 33% year-over-year.

And this gives us excellent visibility to guide the full year 2005 earnings to $8.10 per share, up from our prior guidance of $7.80 per share.

As we look ahead to 2006, we are establishing initial guidance of $9.25 per share, which reflects some conservatism due to uncertainties about the year ahead.

In looking ahead, we've considered carefully the reality that the Fed is fully focused on slowing the rapid rate of increases that we've seen in pricing in some of the most desirable and constrained markets.

Accordingly we have tempered our view of price increases, particularly in what has been historically the hottest markets, and have projected only a modest overall increase for the year.

Additionally the impacts of the two recent storms in the Gulf region, will have a, today unpredictable impact on housing markets in general.

While we did not suffer direct impact from either storm, except perhaps a loss of two to three weeks of production in Texas, the impact of these storms on labor and building materials costs, and the potential displacement of labor in a number of markets, as some will move to the most affected areas to join the rebuilding effort, will have some impact, although temporary, on business in general.

The timing and the extent of these impacts will remain uncertain for some time.

Our extensive experience in the aftermath of hurricane Andrew, teaches us that these impacts are not entirely predictable, and they do not tend to be as dramatic at any moment in time as expected, and they are temporary.

These cautionary flags are injected in our look ahead for next year.

Strategically, however, we are very well-positioned in all of our major markets.

Our excellent land position, particularly in land-constrained markets, where there is an increasing shortage of entitled home sites, will continue to drive the future growth and earnings of our Company.

Our community count continues to grow, and will continue to grow throughout the year and into 2006, as many of our excellent land positions continue to translate into active communities.

Additionally our always strong balance sheet and cash positions afford us the unfettered opportunity, to continue to build on an already strong market share position, while we continue to look for new opportunities to consolidate and grow into new markets.

All of these factors continue to drive strong and sound returns on capital and returns on equity that benefit the Company, and our investors in the long-term.

Our well-recognized land franchise continues to provide excellent growth and position for the future growth of our Company, while simultaneously adding to our overall profitability, as we continue to sell land, excess land to others as part of our well-known payer down strategy.

As we've grown our business and continue to enhance land position, we've continued also to be very focused on building balance sheet strength.

We continue to operate at a very conservative leverage level and have maintained excellent liquidity for future growth and/or uncertainty, as we have added to our long and medium-term debt maturities to match our earnings growth.

We remain a balance sheet first focused company, even while we position for future growth.

In conclusion let me say we are very optimistic about the future for the homebuilding industry in general, and in particular for our Company.

It's our sense that we will continue to report record earnings for the foreseeable future.

With that let me turn it over to Bruce for a more in-depth financial look at the Company.

Thank you, Stuart, and good morning.

The financial results that I'll be discussing are from continuing operations, before the impact of the redemption of the Company's 9.95% Senior Notes.

Our strategic focus remains, first, strong growth as our EPS increased 51%, while we are generating strong returns on net capital which were up 21.2% for the trailing four quarters, and maintaining a strong liquid balance sheet as our debt to total capital was 37.1%.

Our record results for the third quarter were driven by strong homebuilding fundamentals, as we exceeded our delivery goals again, and improved our gross margin percentage 340 basis points year-over-year.

Our belong conversion ratio improved from 48% to 53% year-over-year, and wholly owned deliveries increased 14% year-over-year.

And the increase was noted in all three operating regions.

The average sales price increased 14% year-over-year from 269,000 to 306,000.

In our East region it was up 19% from 253,000 to 301,000, in the Central region it was down 2%, to 192,000, due to a higher percentage of deliveries from our Texas market, where our average sales price is in the 160,000 range.

In the West region, our average sales price was up 18% from 346,000 to 407,000.

The Company has experienced continued favorable pricing conditions, as we achieve gross margin improvement in almost all of our states.

The most significant impact is improved gross margin from Florida, Texas, California, Arizona, Nevada, Maryland, and Virginia.

Our SG&A percentage as a percent of revenue, was up 20 basis points year-over-year to 11%.

However, we expect that this percentage will be flat for all of 2005 compared to 2004.

Gross profit on land sales during the quarter were 46.4 million, versus 53.9 million, please note that land sales from consolidated joint ventures are included here with the partners minority interest, reflected as a reduction in management fee and other, which totaled 13.2 million and 7.2 million, for 2005 and 2004 respectively.

Joint venture profits increased from 9.7 to 16.8 million during the quarter, driven by homebuilding activity in the joint ventures this quarter.

Lennar's profit related to the homebuilding activity and the JVs increased 52% from 6.4 million to 9.7 million.

Lennar Financial Services pretax increased from 22.9 million in the prior year to 34.9 million.

Our mortgage profit improved from 13.6 to 18.6 million, and our mortgage capture rate was 64% versus 71% in the prior year, as the mortgage market remains competitive.

Of the mortgages that we capture, the fixed component actually increased this quarter to 56% versus 44% variable.

However, over 80% of the variable loans are fixed for between three and ten years.

Our FICO scores didn't change significantly, and was relatively unchanged from the prior year.

And our title pretax earnings increased from 10.3 to 16.8 million, as our volume and profit per transaction increased.

Turning to the balance sheet, in the third quarter we generated EBIT of approximately 586 million versus 396 million in the prior year.

In addition to our low balance sheet leverage, we had over $1 billion available under under our revolving credit facility.

EBIT to interest coverage improved to 12.5 times versus 11.4 times in the prior year.

Our debt to EBIT leverage was 1.1 times, unchanged from the prior year, and these calculations of course, are on a rolling four quarter basis.

During the third quarter some of the holders of our zero coupon convertible bonds due 2021, converted approximately 119 million into class A shares.

As a result of these conversions we issued 3.8 million of class A shares, which were previously accounted for in our diluted share count.

And, of course, this transferred 119 million from debt to equity.

These bonds are callable in the April, 2006, and we would expect the remaining bonds to be converted by the call date.

In September of 2005, this month, we further improved our liquidity and enhanced our capital structure with the issuance of 300 million of 5.125% Senior Notes due 2010.

During the quarter there were no open market repurchases of our shares.

We currently have over 13 million shares remaining under the existing share repurchase authorization.

We are growing the business as we build a stronger balance sheet, and the average number of activity communities for the quarter and, again this is an average for the quarter, was 842, which is a 12% increase over the prior years quarter.

The total number of home sites owned and controlled increased 18% to approximately 303,000 versus the prior year.

About 32% of these home sites are owned, and about 68% controlled.

Updating our goal for 2005 that Stuart mentioned to $8.10, just want to point out our homebuilding process has been operating very efficiently each quarter this year, and as a result we've been able to increase our EPS goal with each quarterly earnings conference call.

This quarter as we are increasing the goal to $8.10.

This would be a 42% increase over 2004 EPS.

Our new orders were up 24% in the third quarter, with strength in all three regions.

And this positions us well as we enter the fourth quarter with a backlog dollar value up 33%.

Starting with deliveries our homebuilding delivery process is working well, as we exceeded our targeted deliveries in each of the quarters this year so far.

However, as Stuart mentioned as a result of the recent storms, we do feel that the appropriate delivery range should be 42,200, to 42,500 for all of 2005, and this number would include approximately 1300 joint venture deliveries.

The average sales price for the fourth quarter of 2005, we would estimate to be approximately 330,000.

And this is supported by an average sales price in backlog of about 370,000 on wholly owned homes in backlog, and over 400,000 on joint venture homes in backlog.

As you know, backlog average sales price consistently runs higher than actuals.

Gross margin as we saw a significant improvement in our third quarter gross margin percentage, we are increasing our gross margin percentage goals for the remainder of the year.

Our gross margin in the fourth quarter should be about 100 basis points higher than the prior years fourth quarter, to be somewhere in the middle of the 26% range.

We expect SG&A as a percentage of revenue to be below 10% in our fourth quarter, and that would again give us a flat comparison for the full year compared to 2004.

And corporate G&A percentage for the fourth quarter should be somewhere around 1.4%.

We are sticking with our previous goal for joint venture profits in the range of 115 to 120 million for the year.

Our management fee and other profits we expect to be 5 to 10 million.

Our land profits we expect to be 180 to 185 million for the year.

And Lennar Financial Services we expect to be 115 to 120 million.

Our tax rate for the year will remain at 37.75% in 2005.

And our weighted-average share count for the fourth quarter of this year will be slightly over 165 million shares.

Our goal does not project any additional share repurchases in 2005, and the add back for the remaining convertible securities in the fourth quarter, should be about 1.3 million.

As Stuart indicated we are establishing a 2006 goal with some conservatism injected.

Deliveries, we are projecting a goal of 48,000, and this includes approximately 2400 joint venture deliveries.

Our average sales price we expect to be about 320,000 for the full year of 2006, and we are expecting that our gross margin percentage will be about the same level as 2005, and SG&A percentage will also be at about the same level as 2005 as a result of this conservatism, and that would bring the housing net margin to be about the same as this year, which is about 15%.

We are estimating about $175 million in joint venture profits, with most of the upside manages from homebuilding in the JVs, and land is expected to be below our 2005 actuals in a range of 150 to 160 million.

We expect management fees and other to be about 5 to 10 million in 2006, and Lennar Financial Services to be in a range of 120 to 125 million.

Corporate G&A as a percent of revenues we expect to be about 1.4%, and we are expecting our tax rate to be 2006 to decline to approximately 37%, largely due to the benefit from the American Jobs Creation Act, and the final regulations have not been issued by the IRS, so therefore this impact could change.

Beginning in 2006 we will be expensing stock options for the first time and the impact will be approximately $0.09.

Our average weighted-average share count will be about 166.5 million shares outstanding in 2006, and the convertible add back will be approximately 2 million, but this should end in the second quarter of 2006, when we expect the remaining zero coupon convertible bonds to convert.

In summary, we are proud to report the strong third quarter results, and we remain very well-positioned to achieve our increased goals, both for the fourth quarter of this year as well as for 2006.

With that I would like to open it's up for your questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question, [OPERATOR INSTRUCTIONS].

Our first question will come from the line of Stephen Kim from Citigroup.

Please go ahead.

Thanks.

Good quarter.

Very strong showing.

I guess my question relates to your guidance on average price.

Now you've given, I think I heard you say 330 in the fourth quarter, and 320 for next year.

Is that right?

That's correct.

Now, those figures include JVs?

That figure,

Is a blended, right.

Is a blend, that's correct, Steve.

I know you gave us the math to be able to figure out what it would be in the fourth quarter, just the consolidated results, but l didn't hear you give us that for '06.

Could you give us what you think the consolidated figures might be Q4, and particularly '06?

Consolidated deliveries for 2006?

It would be 48,000 less 2,400 deliveries, which would be 45,600.

No, no, I meant the price, I'm sorry.

Average sales price for wholly owned deliveries for 2006, I do not have that broken out, but what I would say is because the joint venture deliveries are only 5% of the total deliveries, you could just subtract a little bit for the 5% that are joint venture where the joint ventures are about 400,000, 10 to 20% higher.

That's fine.

As you look back historically one of the issues that resulted in your Company not putting forth perhaps the results you might to have liked to have seen, was your order pace, and had you attributed that to your average subdivision count, sort of falling to being basically flat year-over-year, and that happened a few quarters ago.

It's been getting steadily better.

My question is, can you talk about what you have done over the last year or six months or so to make sure that that kind of a situation doesn't happen again?

Well, let's see.

That's interesting.

I think that we've been working in an evolving market, Steve, where it has become more and more difficult to get communities approved.

We've probably intensified our focus on the approval process, relative to new communities.

But I think that additionally part of what you're referring to relates back to some time ago, when we probably did not accelerate our acquisition of new parcels of land, perhaps as aggressively as some others had.

I think that we are now well-positioned with some of our communities having caught up.

We are well-positioned with an even flow of community count, that is not only flowing evenly, but also growing evenly as we look ahead to the future.

That's in part due to the maturing of some of the communities that were a little bit sluggish, perhaps a year and a half, two years ago.

And additionally just an intensified focus on what we look at as the Asset Management side of our business, which is land acquisition and the processing of new land into new communities.

My understanding, Stuart, was that some time ago, maybe a couple of quarters ago you instituted or implemented a change in your management structure at the division level, a liason if you will, between the land development side, and the home construction side.

Such that the even flow of land from your pipeline into active communities would be matched more closely.

Is that something that you have continued to do?

Is that something that you've backed away from?

Well, what you are really referring to, Steve, is a difference in operation that we've maintained for some time, that we have intensified as part of that asset management process.

We have for many, many years separated the land and the homebuilding functions within the Company.

I think that we've added strength to the separation of those two functions, and have also added a lot of focus to the delivery system of land from the land side to the homebuilding side.

But it's been, it's just been a lot more focus on a process that has been in place, and we think holds us in good stead for the future.

We think it is also a key process that has enabled us to be a franchise player, in terms of dealing making, land acquisition, finding unique opportunities.

And probably sitting at the cutting edge, in terms of the structuring of deals for our future.

Okay.

Thanks.

Thank you.

Our next question will come from the line of Ivy Zelman from CSFB.

Please go ahead.

Good afternoon, this is Justin on for Ivy.

I had a few questions, one regarding your September business trends.

I don't know if you had any color there, if you could comment on it?

Justin we generally don't comment inter-quarter, and I think that one month in a row or one week in a row or two weeks in a row, doesn't really give us enough information.

I think especially last week with the storms that have come through and pretty much the shut down of Houston, we are going to get somewhat erratic readings, if we were to try to give color.

I would just say that business continues to remain strong.

And then in regard to cancellation rates, have you seen those increase or decrease in any of your markets?

Well, Justin, overall the cancellation rate continues to remain below what is our normal range of 20 to 30%.

And from week to week you might see it change from one market to another, but overall in all three regions we are seeing a very low cancellation rate of the backlog.

Does that vary by product, is there a difference between attached or detached product?

No.

We haven't broken that out by product, but I think will you see that again the cancellation rate overall has remained at the low end, or even below the low end of the range.

We've seen the resell listings in several markets, such as Phoenix, Sacramento, Las Vegas have increased.

How has that impacted your markets?

Resale listings are kind of a, they are a strange statistic.

I think as markets get stronger, sometimes retail listings with people fishing at very, very high prices without really expecting to sell their homes, we haven't seen an impact from an increased number of listings on our business, and I would suspect that some of that is just more people putting their homes on the market, at what might be considered an unrealistic price.

In the West your order trends were very solid.

Could you provide some incite where the underlying strength was?

The strength was really in northern California, central part of California, and Southern California.

It was throughout the state.

As you know, we are extremely diversified through the state, from Sacramento all the way down to San Diego.

It's a diversified program, and we really are seeing strength in all three regions of California.

Just a follow-up, just a quick housekeeping question on inventory.

Didn't know if you had that on hand and also your I/O percentage of origination?

Yes, as far as inventory goes we are going to see an increase in inventory, which is a seasonal buildup, and as we're well-positioned for our deliveries for the fourth quarter most of this increase is in WHIP, and we would expect would be somewhere about 7.7 billion inventory, and that increase again, the vast majority is construction in progress, as well as models.

As far as interest-only loans, I think the way to look at the mortgage side, the interest-only really for starters, covers different maturity periods.

So the interest-only has steadily increased over the last couple of years.

And for us it's, it's probably about 30% of our total loans.

But keep in mind you have interest-only on five-year fixed, and it's a preferred mortgage that a lot of our customers are selecting.

It doesn't mean that they wouldn't qualify if it wasn't interest-only.

It's just preferred because the paydown of principal is so small for that period of time anyway.

So the most common interest-only loan that we offer is a five-year fixed.

And I just want to point that out.

So do you qualify them based on I/O Characteristics or conventional characteristics?

It depends on the investor buying the loans.

We have to move on.

Our next question is from Lorraine Maikis from Merrill Lynch.

Thank you, good morning.

In your 2006 expectations it looks like you had a 5% increase in your average selling price at flat margins.

Is that price increase being offset by higher costs from the hurricane related-activity. or is there something else that you are baking into that guidance?

I think that overall, as I said in my opening remarks, we are injecting some conservatism due to some uncertainty as to next year.

It can come from any number of areas, increased cycle time.

It can come from increased labor, materials cost, and I think it's just that, there is that kind of uncertainty as we look ahead.

There can be upside in those numbers.

We are just going to have to wait and see.

Then could you just talk about your cycle time in Florida, and how that's been trending?

Cycle time in Florida has been improving.

As we know, last year there were four hurricanes in Florida.

And we are now seeing a lower cycle time than we saw last year.

So we are right on pace with where we should be at this point.

And then how many days to build is that now in Florida, and where was it before the hurricanes last year?

Really varies by market and by the product that you are building, Lorraine.

So it's based on the product mix differences from year-to-year, it's not an apples-to-apples comparison, you are typically looking at five to six months to build a home in Florida.

Okay.

Thank you.

Our next question will come from the line of Margaret Whelan from UBS.

Please go ahead.

Actually it's Dave Goldberg on for Margaret Whalen.

My question was about the split between the Design Studio business and the Everything's Included business, and how you see that looking forward, and maybe in terms of the options that buyers are purchasing in the Design Studio, and how you've modeled that going forward?

We still continue, to have a marketing strategy where we have Everything's Included in our Design Studio business, and it's been running roughly half and half throughout the Company.

And we are looking for that trend to continue going forward.

As far as options go, we continue to make sure that we are doing the research to make sure that we know what the buyers really want in a home, and refining our program.

But options in our case on the Everything's Included side are very minimal, and on the Design Studio, they probably tend to be less than most of the other builders.

As we do our research, we try to refine that as best we can.

Have you seen any sensitivity to interest rate changes in the amount of options that buyers are selecting in the Design Studio?

Not really, David.

Interest rates remain at low levels, and there really hasn't been a depictable trend at this point.

Thank you very much.

You're welcome.

Our next question will come from the line of Rick Murray from Raymond James.

Good morning, guys, just a couple of quick questions.

I guess and maybe I made a mistake here, but it looks to me like the average price of your orders in the quarter, kind of dropped off relative to the second quarter.

Is that right?

No.

Our average sales price in backlog is actually up.

For wholly owned it's up to 370,000.

I guess I was referring to the average price of the new orders you took during the quarter.

Okay.

Well, the average sales price in the backlog is up, so I would suspect the average sales price of the orders were up as well.

Okay.

And I guess again with regard to the backlog, was there, I guess we were trying to calculate the units in backlog, and they were a little bit different than the reported number.

Was there anything that could have caused that?

Yes, from time to time as we are buying assets, Rick, sometimes we acquire some backlog in acquiring assets and we did acquire approximately 600 homes in backlog during this quarter, that were added to backlog and that might be something you have to factor into the calculation for your average sales price.

Did those flow through the order line?

No, it does not flow through the order line.

Okay.

All right.

Great.

I guess the last question is, Bruce, could you talk about the use of incentives, if any, perhaps on a market by market basis, and how that trend has been lately?

Realistically, Rick, the trend really hasn't changed much, and as we talked about in the markets that have seen strong margin improvement, we are seeing a pretty healthy trend out there.

We didn't see any markets where there was a significant decline.

So it's pretty much the same or healthier at this point.

Great.

Thanks.

Our next question will come from the line of Alex Baron from JMP Securities.

Great job.

Can you talk a little bit about what you just mentioned, 600 homes acquired.

Where was this, and what kind of price are we talking about?

Yes.

This is normal for us, Alex, as we acquire assets.

Half of them were in the East region.

Half in the West region.

But if you go back over many quarters, you see this on a regular basis.

Average sales price is right in line with the Company's average.

So this was insight joint ventures, is that what you're saying?

No, they weren't joint ventures.

We are always in the markets to grow organically, as well as through acquisitions, and as we are buying communities one at a time, sometimes we by a couple of communities, and there could be some backlog in place, and this happens on a regular basis for us, if you go back over past quarters.

So this is really nothing out of the ordinary.

It wasn't an acquisition of a company then?

No, these were acquisitions of assets.

Okay.

The other question is where are you guys seeing the best opportunities to redeploy new capital?

I think our strategy for deploying capital remains consistent.

We are focused in all of our major markets.

We continue to find opportunities in those markets, and at the same time we've looked at and continue to look at new markets in which to expand.

We haven't made a strategic step over the past couple of quarters but it doesn't mean there isn't one out there, that we think that most of the markets remain healthy as indicated by economic conditions and job growth, and that's where we invest capital into that.

But you are not seeing any one market that looks more attractive at this point?

No, nothing that I would distinguish.

I think if you look at, I think if you look backwards at where we've invested capital, I think that you are likely to see that our investment will remain distributed pretty much along the same lines.

Thanks.

I'll get back into queue.

Thank you.

Our next question will come from the line of Greg Gieber from A.G. Edwards.

I want to go back to your guidance for next year.

If I did my math correct, you are suggesting that wholly owned deliveries will be around 41,000 and change.

Is that correct? 42,000 to 42,500?

Wholly owned deliveries will be 45,600.

Okay. 45,600.

Okay.

Approximately.

I don't know where I got that, because that's about what I have.

Now, I wanted to you ask you a couple of questions, a lot of questions on options and things like this.

Is there a different trend if if look at lot premiums, in what you are saying?

Lot premiums are really particular to a community, Greg, based on the views, or if you are on a lake.

It's, we are not really noticing anything different, and it's tough to get an apples-to-apples comparison because each community is different.

I understand.

Okay.

Now, in the some 600 homes that you acquired in backlog during the latest quarter, I assume you have to mark all the land and stuff up to market.

What kind of margins do those 600 homes have, relative to what you already had where you had sold a house?

The way to view these, Greg, are consistent with us acquiring any communities.

It factors into our normal hurdles of due diligence, and I would not anticipate that those acquisitions would change our number different from any other community acquisition.

I understand that.

What I'm really talking about is where you buy a community that had houses already sold.

It depends on the stage.

If a home is ready to be delivered within the next quarter, they tend to have a lower margin, but a lot of the backlog that we acquire, is also on homes that have not started yet.

Okay.

Final question for you, Bruce, it's really more an accounting question than anything else.

I know you've stepped up your activity in condo building, new condos, as well as doing some condo conversions.

I don't know how large that is your business, probably small, minute I would assume.

But how do you account for that on an accounting basis?

Do you use percentage of completion accounting there?

On attached, yes, we use percentage of completion accounting now, and we apply it conservatively like we do our other accounting, of course.

This quarter I believe there was less than a penny of earnings coming from our attached product under percentage of completion accounting.

What would be your going forward?

I assume you are going to be building more attached product as we go forward into '06 and '07.

Do you have any idea how much more?

It's included in the joint venture numbers I gave earlier and, again, it's applied very conservatively, Greg, so you should see it grow consistently as our activity and attached product and joint ventures grows, but you are not looking at a huge number for 2006.

Okay.

Thank you very much.

You're welcome.

Our next question will come from Michael Rehaut from JP Morgan.

Good morning.

Just a quick question on, if you could discuss Texas.

You mentioned it is one of the markets that had improving gross margins, and I was wondering if you could walk us through the major cities metro areas there, and comment on demand trends, and where you are getting the most improvement in gross margins?

As you know we build primarily, most of our closings in the third quarter came from Dallas, Houston and Austin marketplaces.

We opened up in San Antonio last year, and we are growing there.

We are seeing margin improvement in the markets there, Mike, and we are diversified in each of these markets, with respect to product type, price point, active adult, conventional.

And specifically if you are wondering where the most improvement is, its really overall in Texas, that we've been seeing improvement.

Okay.

And just a question or a request on the data that you give on a regional basis.

It's very helpful to give us the ASP numbers on the conference call for the deliveries, but is it possible also in the press releases to give the ASPs or the total revenues by region, for closings and orders going forward?

It's something that most of the other builders do and it's helpful in understanding the trends by region.

We will certainly note that.

We get a lot of requests to show that differently, so we will certainly keep that in mind, Mike.

Thanks.

We also get some requests to not say on the conference call what's already in the press release.

We have to have something to talk about.

Our next question is from Sam Lieber from Alpine Funds.

Good morning, gentlemen, excellent quarter of course.

I'm curious about if you have any feedback from Houston regarding the impact of Rita on any of your development sites?

Well, we definitely have feedback.

I will tell you, Sam, that I personally was there.

The impact was virtually nothing.

I think that Houston was really spared any significant impact from the storm.

The one impact was, of course, the evacuation of the city, the production cycle was shut down pretty early in the week in preparation for these storms, is really making sure that job sites are very, very clean, and production stops to make sure that that's the case.

And that production cycle probably is just starting back up maybe now, maybe in the next few days, and it will be a little bit sporadic for different communities, as people are still returning to the city.

So you lose a week or so of production?

I'm guessing more like two weeks.

That's what I'm thinking right now.

From your experience with hurricanes in general, does that have an impact on demand over time for new homes?

Our experience certainly dating back to hurricane Andrew, and then some of the storms that we saw last year in, throughout Florida, would indicate that in perhaps the most affected areas, there is a propensity of some people to maybe even leave those areas, and to find new places to get on with life.

And there is an uptick in demand.

We will just have to wait and see what the impact is on the affected areas in the Gulf, and also surrounding markets.

Just one clarification if I may, since your average price in backlog, 370,000, and you are projecting for next year a blend of, what, 320.

Right.

Where, where are you going to be coming up with a lot of the lower cost sales that would you expect to be feeding through, to bring that average price down over the next year?

Where are those orders going to be coming from?

A lot of those come from markets that have a shorter cycle of time like Texas, Sam.

And the same question came up last quarter, as we had a high average sales price in backlog, and we gave an estimate for this quarter that our average sales price would be 307,000, and it came in at 306,000.

So what you are really seeing is that within a quarter, we are selling and delivering homes in some of the markets where we have a lower cycle time.

And so the backlog then doesn't necessarily reflect any of the attached or multistory product, that may take longer to develop, I assume.

Well, the backlog does include that, and the backlog is also weighted in some of the constrained markets where either you have a larger home, or it takes a little bit longer to build.

So it tends to sit in backlog a little longer, and it's the reverse impact of what's sold and delivered in the same quarter.

You have some others that take longer than sometimes two quarters to deliver, that tend to always weight the backlog average sales price a little bit higher.

Well, thank you, gentlemen.

You're welcome.

Our next question will come from the line of Timothy Jones from Wasserman and Associates.

Good morning.

First thing, what's the $3 million loss and management fees and other?

What that is, we are required to consolidate some joint ventures, and as there were lands sales in those joint ventures, we are required to show the minority interest expense in the management fee and other line item.

So there was over 13 million of minority interest expense that reduced our normal management fee and other activity this quarter, and that's what brought it to a negative.

Is that a one-time deal or what?

Well, each quarter as we look at different joint ventures that possibly might be consolidated, we had the same issue last quarter, and that's a little tougher to project what line it's going to go in, and that's why I kind of suggest that you look at those two line items, land sales and management fee and other together.

Okay.

That's one thing.

Secondly you talked about two of your three areas that we had deliveries up about 18% in average price, your backlog is up 18%.

K&B, I think mentioned that they expected home price this year to be up around 16%.

How much of that 18% rise is prices, as opposed to mix or something else?

I would think it's a good amount of it but--?

Well, it's based on the product mix of what we are seeing prices out of those communities either today, or what the trend is in those areas.

So a lot of that is really what we are seeing already existing in the marketplace today, Tim.

But is it mostly right now, these were deliveries, is it mostly prices, price increases?

Yes, most of it was price increases in these markets.

We are not changing our actual product to be a larger or a luxury product.

When the chickens cluck, feed them.

Thank you.

Next question is [Myron Caplan] from Caplan Mason.

Hi, guys, great quarter.

Even though your progress is met by the market's general disbelief, I guess I would call it suspicion in individual, I don't think anybody can believe the growth is so good for an enterprise of your size.

In any event I just notice despite the big increase in volume, that the SG&A rose I think over 11% if I'm not mistaken, and I'm just wondering if you could comment why that occurred?

Sure.

SG&A was actually up 20 basis points year-over-year, and sometimes you have timing issues from quarter to quarter, Myron, but for the year we expect to be right on track with the 10.9% selling and G&A as a percentage of revenue.

We are on track as far as any accruals go, we are certainly booking accruals as with go.

So sometimes the timing can be a little different from quarter to quarter, based on where you are in the year.

But we are right on track with last year overall.

So you are where you are, but just looks like it may have been a little high for temporary reasons?

Yes.

Okay.

Thank you.

Our next question is from Steve Fockens from Lehman Brothers.

Good morning, guys, just two quick questions.

I was wondering if you might be able to provide a little more color on the Texas margin improvement, first you talked about it being across all of the markets, but as you think of the things that actually drove it, was it better pricing realized than expected, or better focus on cost controls, or a mix, any color there would be appreciated?

I think, this is Stuart, it is broad-based, I think it's a combination of those markets have shored up a little bit pretty much across the board.

There's been more softness in Texas markets than some of the others, so we've seen some strengthening in pricing power.

But at the same time, because of our volume in those markets we have a tremendous focus there on cost control, and I think that's additionally adding to margin improvement.

Thanks.

Just last question, have you, did you guys buy back any stock in September?

We don't comment on stock buybacks inter-quarter.

Okay.

Given that you guys are trading at just about 6 times earnings here, which by my very rough math is like mid, upper teens, kind of risk free after tax return on buybacks, is that the way you think about that, if you are comparing a buy back versus a land purchase?

Yes, we definitely look at alternative returns, and we definitely measure returns from land acquisition as compared to buy back.

But just to kind of remind us, or remind you that our primary objective, our primary focus has always been to grow the Company where the opportunities to grow exist.

We think that's kind of a proxy that's given to us, and to the extent that we find opportunities to grow the Company we think that those over time will be more valuable than a basically similar investment in buying back stock.

So that is the measurement that we take into account, but we always are, we are in favor of growing the Company.

Thanks very much.

Thank you.

Our next question is from the line of Todd Vencil from BB&T Capital Markets.

This is Paul on for Todd.

I was looking at your orders for JV and I was noticed the percentage of total for the quarter was down, and also down percentage of total for backlog, and I thought maybe your strategy was changing, but then when you gave guidance you provided higher equity and higher deliveries for the JV.

Has the strategy changed, or is this kind of a one quarter anomaly?

Joint ventures are a very small percentage of the total deliveries and therefore it might look like there's a large percentage change in any particular quarter, but our strategy remains in constrained markets.

We think this is an important focus, to be focused on density in those constrained markets.

So our strategy has not changed.

You just see some differences sometimes from quarter to quarter.

Thank you.

Our next question is from Dan Oppenheim from Banc of America Securities.

Thanks.

Just wondering if you can talk about the West region with the strong orders there.

Is that primarily a function of just community growth, or do you also see a faster pace of absorption in those communities?

The markets in California have remained strong, and we continue to see strength in those markets.

Order of growth is derived from both additional community count, and strength in the market.

Thanks.

And then secondly, just wanted to ask if you could address the monthly trends that you saw during the quarter, given the concern of the market with the consensus bureaus new home sales for August today?

Could you repeat that?

Can you address in terms of what have you saw in the pattern of orders during the three months of the quarters, given the concern in the market about the August new home sales numbers that came out today?

The orders for the quarter were strong.

I don't think that we saw, we certainly didn't see a weakening pattern as we went through the quarter.

I think that it was fairly evenly distributed, and I don't think that we've seen confidence numbers or sales numbers reflected in our numbers in particular.

Thank you.

I think we will take one more question.

That question will come from Dana Richardson from Argus Research.

Please go ahead.

Good afternoon.

I noticed that last quarter you gave guidance for lands sales around 25 to 35 million.

And they came in at 130 million.

And I was wondering if that was as a result of the fact that you had to consolidate some of your JV land sales, and if that's the case, what kind of a quantifiable effect did that have?

Sure.

The guidance that we gave last quarter was for the net profit on land sales to be in that range.

When you take into account the minority interest expense from a joint venture that we had to consolidate, if you netted that together, I think the land sales was right in that range at about 33 million.

Thank you.

You're welcome.

Well, thank you all very much for joining us on our review of our quarterly earnings.

As I noted earlier and in conclusion, we look forward to record earnings ahead.

We think there's what will lot of stability in the housing market in general, and I think our company is well-positioned for the future.

Thank you.

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