Lennar Corp (LEN) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Lennar Corporation fourth quarter and year-end earnings release conference call. [OPERATOR INSTRUCTIONS].

Ladies, and gentlemen, 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 condition, results of operations, cash flows, strategies, and prospects.

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

Forward-looking statements represent the Company's estimates 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 forward-looking statements.

These factors include those described under the caption "Risk Factors Relating To Our Business" contained in our annual report on Form 10-K for our most recently completed fiscal year, which is on file with the SEC.

Please note that Lennar assumes no obligations to update any forward-looking statements from past or present filings and conference calls.

With that being said, I'd like to turn the conference now to the chief executive officer, Mr. Stuart Miller.

Please go ahead, sir.

Yes, good morning everyone, and we'd like to welcome you to Lennar's fourth quarter and year-end conference call.

Very pleased to have your attention.

I'm joined here by Bruce Gross, who will give a financial overview in just a couple of minutes but before that I wanted to give a couple of overview comments about the Company and our year-end.

Let me begin by saying that we're very pleased to report a very strong fourth quarter and year-end results for '05, and we're looking forward to another record year in 2006 as well.

Our story remains consistent and it's a consistent story, not just for Lennar Corporation, but also for the home building industry.

If you look across the country and all of the major markets, demand for new homes remains relatively strong and it's driven by strong fundamentals that continue to form a relatively favorable environment for the new home customer.

Now, of course, there are some cautionary signs as well.

But overall, the home building market appears very healthy.

It's formed by relatively low interest rates, even as interest rates have been going up a little bit, along with positive demographic trends, there's still very strong job growth and also strong income growth.

And the economy remains relatively strong at both the national and as well the local level.

And this continues to propel the overall home-building market to consistently positive performance.

Additionally, limited supply of available lands, especially in the constrained markets along the coastal areas, continues to limit inventories and restrict speculative building.

Although pricing power has moderated, nevertheless, there seems to be strength in terms of pricing and support, where pricing is certainly not going down.

While the consistent strength and success in the housing market has given way to a lot of rise in discussion about a national housing bubble, credit quality question, the types of mortgages that are available, the industry continues to show a tremendous resilience as we've seen in our numbers, and in our sales results as well.

The drivers of stability and growth continue to be found in the fundamentals that drive the industry, and that is the growing population, the economy, the aging stock of existing dwellings, and the general strength of the consumer.

Today, we're very pleased to announce another quarter and year of record earnings for the Company.

Even after the very real impact of Hurricane Wilma, and the very tumultuous hurricane season that we experienced, which directly impacted our year-end production and caused the delay of some 4 to 500 deliveries.

As you can see in our press release, revenues were up a healthy 42% for the quarter and 32% year-over-year, and that, together with a 140 basis-point improvement in gross margins for the year fueled a 55% increase in homebuilding operating earnings for the quarter, and 47% for the year.

As we look forward to 2006, we derive a great deal of confidence from our strong pace of new orders which were up some 25%, our strong gross margin of 27%, and our backlog, which is up 36% year-over-year.

This gives us excellent visibility to confirm our guidance for 2006 of $9.25 per share.

Now, this guidance reflects some conservatism due to the uncertainties in the year ahead, and in looking ahead, we've considered carefully the reality that the Fed is fully focussed on slowing the rapid pace of increases that we've seen in pricing and in some of the most desirable and constrained markets.

And, therefore, we've tempered our view of price increases, particularly in these historically -- historically hottest markets, and we've projected only a modest overall increase for the year.

Strategically, Lennar continues to be very well-positioned in all of our markets.

Our land position, particularly in the land constrained markets, where there's an increasing shortage of entitled home sites, is going to continue to drive future growth and earnings for our company.

Our community count continues to grow, and will continue to grow throughout 2006 as many of these excellent land positions that we've purchased over the years continue to translate into exciting new active communities.

And additionally, our always-strong balance sheet and cash position, affords us the ability to look ahead to seek new opportunities and to build on an already existing market share position while we continue to look for new opportunities to consolidate and grow into new markets.

We think that these opportunities will continue to present themselves through 2006.

All of these factors continue to drive strong and sound returns on capital and returns on equity that benefit our company and our investors over the long run.

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

As we grow our business and continue to enhance our land position, we've continued to be focused on building our balance sheet strength as we have always been a balance sheet-first company.

We continue to operate at very conservative leverage levels, and have maintained excellent liquidity for future growth.

In conclusion, let me say that we're very optimistic about 2006 for Lennar Corporation and for the industry in general.

It's our sense that we will continue to be able to report record earnings quarter by quarter and year-over-year.

And with that, let me turn it over to Bruce.

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% notes.

Our scorecard for 2005, once again, highlights the three components of our strategy.

First, strong growth as noted with our 55% increase in EPS, second, while generating strong returns on net capital, which were 23.5% for the trailing four quarters; and third, as we maintain a strong liquid balance sheet as our debt-to-total capital ratio was 33.1% at year-end.

We exceeded our earnings per share goal for the fourth quarter by $0.20.

Let me tell you how that breaks out.

It was driven by a gross margin improvement which was approximately $0.07 of the 20, improvement over our land goal of $0.07, and improvement in our joint venture activities of approximately $0.06, and this was offset by a more competitive Lennar Financial Services environment where we were $0.05 below our goal.

The remainder was improvement in other income and G&A.

Our record results for the fourth quarter were driven by the strong homebuilding fundamentals that Stuart talked about, as our delivery goals were achieved and our improvement in gross margin was 140 basis points year-over-year.

The achieving of our delivery goals was driven by a backlog conversion ratio which improved to 66%, in a period that was challenged by Hurricane Wilma in particular.

Our wholly-owned deliveries increased 18% year-over-year, and that increase was noted in all three operating regions.

Our average sales price increased to 18% year-over-year from 287,000 to 338,000.

In the east region, the average sales price was up 30% from 263 to 342,000, with the largest increase in Florida.

The central region was more stable, up 2% to 201,000, and the west region was up 19%, from 376,000 to 445,000.

The states with the largest gross margin percentage improvement during the quarter were Florida and Arizona, and this was primarily due to favorable pricing conditions in those markets.

As we have said in prior quarters, the more supply-constrained markets continue to deliver the highest gross margin percentages in our company.

Our SG&A percentage as a percentage of revenue from home sales was consistent with the prior year at 9.6%.

Our gross profit on land sales during the quarter were 58.2 million versus 13.3 million in the prior year's fourth quarter, but please note that land sales from consolidated joint ventures are included in this number.

So one adjustment to consider is the partners' minority interest, which on our financial statements, are reflected as a Reduction In Management Fee and Other, was 11.2 million in the quarter, and that compares to 3 million in the prior year's fourth quarter.

That number for the year, by the way, is 45 million of minority interest expense which was included in land sales and is shown as an expense in Management Fees and Other.

Joint venture profits during the quarter increased from 61.8 million in the prior year's fourth quarter to 79.1 million.

And Lennar's profit related to the homebuilding activity in joint ventures was 10.8 million, and that compares to 16.8 million in the prior year's fourth quarter.

Lennar Financial Services pretax increased to 34.6 million from 33.1 million for the fourth quarter, and our mortgage profit was 21.5 million compared with 23.3 million in the prior year.

This is a very competitive mortgage environment and our mortgage capture rate was 64% during the quarter, which compares to 72% in the prior year.

Of the mortgages that we do capture, the fixed component was 56% versus 44% variable loans; however, consistent with prior quarters, 80% of the variable loans are fixed for between three and 10 years.

One highlight here to note is that the pay option loans that some of you have asked about have declined this quarter from 9% in our third quarter to 2% of the total variable product in the fourth quarter.

The FIFO scores didn't change significantly from the prior year, they remain in the low 700 range.

And our title pre-tax increase to 13.9 million from 10.5 million in the prior year.

Turning to the balance sheet, we continue to focus on building a stronger balance sheet as we grow the business, and in addition to our low 33% debt-to-total capital ratio, we had over 900 million of cash on the balance sheet and zero outstanding on our $1.7 billion revolving credit facility.

In the fourth quarter, we generated EBIT of approximately 999 million, a 53% increase over the prior year, and our EBIT-to-interest coverage improved to 13.7 times, versus 12 times in the prior year.

Debt-to-EBIT leverage was one times for both year, and of course these are on a rolling fourth quarter basis.

During the quarter, we repurchased approximately 790,000 shares in open market repurchases.

For the year, we have now repurchased 5.1 million shares at an average price of just over $53 per share, and we currently have 12.4 million shares remaining under existing share repurchase authorization.

The average number of active communities for the quarter was 865, which is a 13% increase over the prior year's average community count.

The total number of home sites owned and controlled increased 27% to approximately 325,000 versus the prior year, and approximately 32% of these home sites are owned and 68% controlled.

Our investment in joint ventures continues to be a strategic initiative to maintain a supply of well-positioned home sites while enhancing return on capital and mitigating risk.

And in the quarter, we controlled 222,000 home sites in the joint ventures, the entities controlled that many, of which Lennar controlled 95,000.

Our investment in unconsolidated entities at year-end was approximately 1.3 billion, and at year-end, the debt-to-total capital net of cash in the joint ventures was 55%.

New homeowners including joint ventures, net of cancellation, were up 25% in the fourth quarter compared to the prior year, and the dollar contract value was up 33% with the same comparison to the prior year.

There was strength in all three of our regions, and our cancellation was up a little bit, but still at the lower end of our typical 20 to 30% range, and it was 23% during the quarter.

Turning to 2006 goals, in September, we initiated a $9.25 earnings per share goal for 2006.

Today we are reaffirming that goal and we are providing details by quarter.

We're providing a range for each quarter; however, under the current environment, we emphasize the middle portion of the range is the appropriate goal that we would like you to really look at, and that would tie back to the $9.25 earnings per share goal that we are issuing for 2006.

Obviously, if the market improves or declines the goals would shift accordingly.

The ranges by quarter are as follows: In the first quarter, it's $1.45 to $1.55; in the second quarter, it's $1.90 to $2; in the third quarter, it's $2.40 to $2.50; and in the fourth quarter, it's $3.30 to $3.40.

Our delivery target for 2006 is 48,250, and we increased our previous goal by 250 homes as we do expect to deliver the 4 to 500 homes delayed by Hurricane Wilma, however, this shifts our production machine and does move approximately 250 homes that were scheduled for 2006 into 2007.

Approximately 2500 of these deliveries are expected to be from unconsolidated joint ventures, and the approximate breakdown by quarter is as follows, first quarter, 9,000 deliveries, second quarter, 11,500 deliveries, third quarter, 12,000 deliveries, and the fourth quarter, over 14,800 deliveries.

The average sales price for 2006, we would expect to be approximately 325,000, which is supported by an average sales price and backlog of 365,000 on wholly-owned homes in backlog, and as you know, backlog average sales price consistently runs higher than actuals.

Our gross margin goal for 2006 is projected to be 26%, which is consistent with the gross margin achieved in 2005, and as we look at the quarters, we would expect the first quarter to be approximately 25% and then increases in each quarter ending with the fourth quarter of approximately 26.5%.

We do see less variability in the gross margins in 2006 than we have seen in prior years.

Turning to overhead, we expect SG&A as a percentage of revenue to run about 11% for the year, slightly ahead of 2005 actuals, and corporate G&A should be about 1.4% for the year, which is consistent with 2005.

One thing to mention, though, is included in these numbers, we are expensing stock options for the first time as required, representing approximately a $0.09 charge after tax.

Our joint venture goal for 2006 is 145 to 155 million, the upside in joint venture profits in 2006 is coming from the delivery of homes in joint ventures, which is increasing from 43 to 65 million as we project today.

We expect joint venture profits to be higher than the prior year in the first and third quarters, while closer to the prior-year numbers in the second and fourth quarters.

Our goal for land is 150 to 160 million for 2006, which is below the $200 million actual in 2005.

And at this point, we would guess that first quarter would be over 30 million, and the remaining quarters would be spread more evenly throughout the year.

However, as you know, land sales can vary considerably by quarter.

Management Fees and Other we believe will be 5 to 10 million, and Lennar Financial Services we expect to be in the range of 105 to 110 million, as we still believe it will be a competitive financial services environment.

Financial services, we believe, will break out where the first quarter will be closer to 8 million, second quarter approximately 20 million, third quarter approximately 35, and the fourth quarter approximately 45 million.

We are expecting the weighted average share count for 2006 to be approximately 165.5 million shares, that goal does not project any additional share repurchases at this time.

The add-back to the convertible security in the first quarter should be about 1.3 million, and in the second quarter, approximately 900,000, and we expect the convert to be fully converted by the second quarter.

The tax rate we're expecting for 2006 should decline to about 37%.

As we mentioned in the last quarter, due to the benefit of the American Jobs Creation Act.

The final regulations have not been issued by the IRS, and therefore, that impact could change through the year, depending on that outcome.

In summary, we proud to report these strong results.

We remain well-positioned to achieve our EPS goal for 2006 while generating strong return on capital and having a strong balance sheet once again.

And with that, we'd like to open it up for questions.

Certainly. [OPERATOR INSTRUCTIONS].

First Steve Kim with Citigroup, please go ahead.

Thanks guys, congratulations, good quarter.

Thank you.

I wanted to talk to you a little bit about your guidance that you've given here.

I had a couple of -- I had a few sort of small ones, but I guess you gave closings guidance.

Let's start with that.

I think the closings guidance you gave was inclusive of JVs, or was that exclusive?

That's inclusive of JVs, Steve.

How do you think the 2500 JVs sort of spread out over the quarters?

The way that spreads out, we would expect that it's only a few hundred in the first quarter, and then the rest of the year it's 7 to 800 in each quarter.

And as we look at your average price, your average price at -- did you say 325, 000?

Correct.

Now, 325,000, it looks to me like you're backlog price is 366, I know you're saying that 325 reflects the fact that your backlog price is generally higher than your subsequent closing price but it's not usually that much higher than your closing price, unless I'm doing something wrong here, and it looks like you're doing some sort of imputed sales price, it seems to suggest that that number is pretty conservative.

I'm just trying to square that with how much of that is conservatism and how much of that is maybe something else.

Stuart made some remark about how you were changing your view on prices to be only up modestly.

I just wanted to see if that anything to do with what you're talking about here.

How much of this is just conservatism on your part, and how much of this is because you see a certain mix shift coming?

Well, let me comment that at the end of the third quarter, the average sales price in backlog was 370,000.

And our average sales price in the fourth quarter, I believe I said was in the high 330's.

So as our --

Two-quarter lag maybe for instructive, though, right?

You've generally been running only about 4% or 3% -- somewhere between 3 and 5% below what your two-quarter preceding backlog was.

Yeah, the one thing that is not an average sales price in backlog is we have a much quicker turnover in our lower-priced states, like Texas and the Carolinas.

And that's one of the biggest adjustments that have to be made.

So from our standpoint, we're kind of looking at the environment as we see it today.

If there are sales prices that continue going forward, that number could increase.

But based on the way that we saw today, Steve, that's how we were coming up with this guidance.

You know, Steve, I think to address the import of your question, I think that if we had to explain, maybe some of my commentary and some of the information you're highlighting, I think we're playing it right down the middle in terms of what we think the numbers are going to be, and in terms of conservatism, we recognize that the field ahead has some questions.

There's no question that from just reading newspaper reports and looking at the media and recognizing where the Fed stands, you have to at least be humbled by the possibility that the future can change.

So we're playing it right down the middle and not injecting a lot of optimism, but not overly conserving either.

Okay, great.

Thanks a lot.

Sure.

Next to Ivy Zelman with CSFB.

Please go ahead.

Hi guys, congratulations on a good quarter.

One very quick question, you mentioned FICA scores, Bruce, with respect to the low end or the range being in the low 700's.

Can you tell me what percent of your loans are government loans and what the FICA score is on those loans?

I don't have that number at my fingertips, but let us look that up.

Just one second.

Okay.

Should I go on with the follow-up?

Sure.

Okay.

With respect to your guidance, you had talked about deliveries by quarter.

And one of the questions I was wondering, maybe you can help us with, is your order growth expectations, and how much of that order growth and/or deliveries, I guess in conjunction, would come from you acquiring lots that show up in backlog without us being aware of it as we were in the last two quarters, and can you explain that strategy a little bit?

Sure.

In this quarter, first of all, when we acquire a backlog, we do not include any of those numbers in our new order information.

So the new orders that were up 25% and over 30% on a dollar value basis do not include any of the acquired backlog.

During the quarter, we had 914 homes that were acquired in backlog through many different transactions that were focussed on the land side, and in structuring the next community purchase, often we end up as part of that deal to maybe take on the backlog in a community where the builder has not gone in very far.

That's a good portion of these.

There was one larger deal of the 914 over 300 of the acquired backlog was in Jacksonville where as part of growing our position in Jacksonville, we added a number of communities and we did hire the majority of the people from Admiral Homes.

But as we were already in that market, we had the option of adding communities one at a time or buying them in bulk as we did in that transaction.

If I can, let me go back to your first question, Ivy.

The government loans were about roughly 12% of the total, and the FICO tracking, we do not have a breakdown of FICO scores based on the government loans versus other loans.

Okay.

With respect to the backlog acquiring units in backlog, you had acquired we saw a thousand units in the third quarter.

Was that in the lines of the same, was there any major transactions like the Admiral Homes that we should be made aware of?

No, as I look at the breakdown, it's in several different parts of the country, in Arizona, in Nevada, in Florida.

There was nothing significant that I would point out there.

So when we look at your order growth going forward to incorporate the 9.25 that you've given for your goal or '06, realizing it's conservative, what should we be incorporating in our order expectations?

I'm sure we can back into it with conversion rates to get to those deliveries, but what do you think's a good order pace?

We haven't -- we really haven't given any goals on order pace in the past, Ivy.

You know, because it fluctuates from quarter-to-quarter depending how fast the pace is.

So we really haven't laid that out.

But from our standpoint, we are trying to match very closely sales starts and closings as best we can.

Just to add to this, I just think we should clarify, the acquisition of backlog is incidental to broader acquisitions, and they tend to be kind of tag-along in nature to what the primary acquisition is about.

In Admiral Homes we're buying a terrific operating program that happened to have some backlog because it's been a terrific operating program.

And some of these other instances where we're buying smaller companies, we're really buying maybe a few pieces of land at one time, but it's part of an operating company, so we're getting backlog incidentally.

But the primary objective in the acquisition is not to bolster backlog, but instead to apply the forward-looking asset.

Stuart, in that vein, you clearly have not done this historically from at least -- it's easy to track backlog, you add new orders, you subtract closings, that give us you ending backlog.

It's only been in the last two quarters that we've really seen the change in backlog reflective of these acquired units, I guess what we'd like to understand, is this going to be a new ongoing part of the strategy, if so, maybe it's something you should be publishing or letting us know when you acquire Admiral Homes, 300 units, if it's a sizable transaction.

Is there a reason that you didn't disclose that publicly?

You know, Admiral Homes, I think -- we didn't feel that we were acquiring backlog, we thought we were acquiring a company.

We've bought a number of companies, and where there's the acquisition of a company has been significant and material to the overall operation, we've had a press release and a disclosure.

But kind of generally we haven't disclosed some of the smaller acquisitions.

In terms of the alteration or the change that you're highlighting in terms of acquiring backlog, I think it's more reflective of a change in the environment.

It's more and more difficult in some of more constrained markets to find new land acquisition.

This is another part of our growth strategy that's been well-defined for many years.

If you go back through many of our presentations, we've highlighted the fact that our growth strategy includes buying land but also buying smaller companies which are really a program of buying multiple pieces of land at a time, and in more constrained markets, coming along with those land acquisitions which we think are excellent for the growth of the Company, coming along with those land acquisitions is sometimes backlog.

It has been more incidental in the past, but I think it's part of an overall strategy of how we grow our business.

And I think it's one of the great strengths of our company, is the ability to be growth-oriented in a number of directions, not just buying pieces of land, but acquiring companies, whether small companies or larger companies, growing geographically, and within our own market, market share.

So it's part of our diversified approach to growth.

Thanks, Stuart.

Our next question with Dan Oppenheim with Banc of America Securities, please go ahead.

Thanks, I was wondering if you can talk about the trend that you saw over the course of the quarter in the way that you're talking, you started the call in terms of some cautionary times.

Is that any deceleration in trends during the quarter or is that just overall what could happen, and nothing you've seen at this point?

The conservatism that was laid out at the start of the call, Dan, was really just more of what you're seeing in the market as some of the hotter markets that we've seen, and has been noted in the press and by other builders as well, like a Sacramento or San Diego, or Northern Virginia, have been slowing a little bit, similar to the way Las Vegas slowed last year.

They were very hot markets and they're becoming a more normalized type of market.

And that's more of where the comment is coming from.

Okay.

Thanks.

And then just following on, you talked about the cancellation rate staying low but increasing slightly to 23%.

Were there any markets or regions where you saw this increase more than the overall increase?

Yes, I think the market that I just mentioned, for example, in Sacramento, it might have increased a little bit more.

And again, that's very similar to what happened last year as Las Vegas experienced a little bit of a slowdown.

The first thing that happened in both Las Vegas and Southern California in the third quarter last year, is that the cancellation increased in those markets and then the markets stabilized from there.

That's more of what we're seeing in some of the markets that I mentioned.

Okay, great.

Thanks very much.

Our next question's from Margaret Whelan with UBS, please go ahead.

Hey, good morning, guys.

Good morning.

Nice quarter.

A couple of things, just to follow up on Steve's question about sales and deliveries, are you seeing a change in your mix maybe other than what you talked about in Texas and the Carolinas, but is there deliberate price reductions in any of your markets?

Looking forward to next year, no.

Well, let me just say that as far as mix goes, as we look at going from 42,359 to 48,250, the biggest percentage increase is going to be Florida.

So there is a little bit change in the mix.

We think Florida deliveries could be up approximately 40%.

And then Nevada and Arizona are also up more than the company average.

But otherwise, I guess those would be the biggest changes in the mix.

And they're premarkets what we're hearing that the margins and backlog are higher than the margins in what you're delivering right now for the most part, right?

That would be positive mix?

Those markets are seeing some pretty good margins in backlog.

I tell you, Arizona and Nevada are closer to the company average, and Florida is above.

Okay.

At least within Lennar.

The second question I have is just about could you give us your community count target for '06 and which markets you're going to be really targeting to open new communities in?

I'd say that the community growth, Margaret, is similar matching up with the deliveries that we're showing.

So we will have more communities opening up in Florida, for example.

As far as -- I'm sorry, what was the second part of the question?

Do you actually have a number that you want to give us yet for your community count or how many communities you opened --

Yes, I'd focus on the average again, and the average community count was up -- we've been saying it should go up 10 to 12% or so, this year it was up 13%, I think 10 to 12% is a good range.

And lastly, in terms of use of cash for the year, I don't think buybacks are going to be a priority, but are you seeing land prices soften at all in any of the markets?

Not really at this point, Margaret.

Each land opportunity is distinct in the way we look at it and structure it and analyze it and underwrite the risk.

We really haven't seen any major shift in the land pricing at this point.

Okay, thank you.

You're welcome.

Your next question is from Michael Rehaut at JP Morgan.

Please go ahead.

Hi, good morning.

Good morning.

Just a couple of questions.

First on the guidance, Stuart, in your opening remarks you mentioned that you're being more conservative this year in terms of pricing only forecasting a small increase.

I just wondered how that kind of compares to prior years in terms of what you assume for price in forward-year guidance?

Interesting question.

I don't know that I can go back right now in my mind and reconstruct, but I know that we're -- as we look ahead to this year, we're just taking a very realistic view of the market relative to what everybody's reading, what everybody's writing.

We're taking a very humble approach and not kind of cavalierly expecting everything to stay exactly as it's been with expansion and growth in pricing power and everything.

Okay.

Just say that generally we're moderating our view of the future being --

I guess part of what I'm getting it is generally when we hear about forward planning in terms of buying land, the industry generally talks about assuming flat pricing going forward, and generally I think also in issuing forward guidance, many builders assume no price except what's in their backlog going forward.

So I just am trying to get at in terms of how you plan the business and buy land, I'm just trying to understand how price comes into the picture in general when you're talking about forward earnings growth, and, you know, when you buy land what assumptions you make on price in general?

Well, I think that as we and everyone have bought land as we've looked back, we've had to take a realistic view that we've been in a price-growing world in terms of the more difficult markets, we've had to have expectations that prices would rise at least as fast as costs were going up, or else we wouldn't have been able to buy anything.

But as we've looked ahead, we've kept a very modest view of where we think the prices might go over the next year.

We're probably projecting -- not probably, we are projecting in some flattening of prices, particularly in some of the more constrained markets, and, if we look back historically, we've employed perhaps a more aggressive posture recognizing that land constraint and very, very strong demand would drive prices up a little bit faster.

But I think that as we look ahead, as we underwrite land positions, we're certainly taking a more conservative view.

And as we give guidance going ahead, we're just taking into account that we're going to see some moderating in price increases, and as well perhaps in sales and deliveries.

Okay, thanks for that.

Also on the SG&A, I was wondering if you could comment, over the past few years, as a result of home building revenue, it's been remarkably consistent, slightly under 11%, and the same is roughly for '05.

But this year, many of your peers have had some SG&A leverage of anywhere from 50 to 100 basis points.

I was just wondering what -- why yours is more flattish in the face of the strong ASP growth and closings growth that you've had this year?

The one thing I'd say with that, Mike, is with our continued growth, as you know, our accounting policies might be slightly different than others as we tend to frontload and expense more cost.

As we're opening new communities, whether it's architecture or in the models, or opening communities.

So that might be a portion of it.

So as long as we're growing, and maintaining a more consistent SG&A percentage, we do feel like we're getting some leverage because SG&A's not going up as we're growing, because those expenses are front-loaded.

Okay.

So you're not getting the overall leverage, though, because of the front-loading as you continue to have a double-digit community growth?

Is that what you're trying to say?

Right.

As long as we've been in this significant growth mode and we're opening new communities, and growing volume as we have, we're front-loading the SG&A costs, the model costs, the architecture costs, the grand-opening costs.

And that is all hitting at the front end.

So if we have aggressive growth on the volume side, and SG&A is remaining somewhat flattish, by the nature of front-loading those costs, we are getting some leverage.

Okay.

And lastly, you know, in terms of raw material and labor costs, I was wondering if you could comment what you're seeing today in terms of year-over-year.

I mean, lumber right now is down over 10% year-over-year.

What do you expect -- what are you seeing right now, and what do you expect for '06?

There's been some increases in certain items as I'm sure you see on the commodity reports that you read.

Concrete has been going up, as an example.

And it goes up differently in different markets.

So that's one item as a result of the hurricanes that has been increasing.

But, otherwise from a material standpoint, we really haven't projected additional increases beyond what we know today.

And to the extent that material increases occur going forward, they're likely to be offset by some small price increases, is what we would expect in the goals that we put forth.

All right.

So do you have an idea net-net today what material costs are year-over-year in terms of percentage change, and the same for labor?

No, we don't have them broken out as a general item, Mike.

Okay.

All right, thanks.

You're welcome.

Our next question's from Lorraine Maikis from Merrill Lynch, please go ahead.

Hi good morning.

I wanted to talk about your current land portfolio, are there areas where you're letting supply go below the corporate average or areas where your focussed on for investment in 2006?

I think in all of our markets, we're focussed on moving forward.

We're not depleting any of our inventories.

We are producing and replacing.

We think that each of our markets has strength.

Some there's been some pullback, but we think the pullback will be modest and relatively short-lived.

So I'd say no, we're continuing to grow in our markets.

Okay.

Can you give us an update on some of your larger projects, like the Valencia, Newhall and El Toro. and what you are anticipating in terms of deliveries there?

Sure.

In 2006, we do expect over a thousand home sites to be transferred from the joint venture to our homebuilding operations.

We -- as we have said, we expect a very small number of deliveries to happen in our homebuilding operations at the very end of the year, and we're talking a nominal amount, under 100 homes.

So that is well underway and on track as far as Newhall goes.

As you know, Mare Island has already been delivering homes.

Those are the two that are furthest along as far as transactions that have been very visible.

Okay.

Do you have an anticipated sales base for 2007 and '8 at Newhall?

What we've said, as you get out into '07, we expect to deliver in our homebuilding operations, an average of about a thousand deliveries a year, give or take, some years a little more, some a little less, that will go on for many years beginning in '07.

And do you still expect to sell approximately the same number of lots through the joint venture?

The home sites that transfer will have to transfer pretty similar so that we could achieve the deliveries of close to a thousand a year pace.

So yes.

Okay, thank you.

Our next's question from Greg Gieber with A.G. Edwards.

Please go ahead.

Happy holiday, guys, you really delivered a nice present to us this morning.

Thank you.

Thank you, Greg.

I want to ask if you, Bruce, do you have the detailed balance sheet information for the quarter?

I was interested in what happened to your inventories and particularly the land under development.

Yeah.

I'm told the search from recorded liabilities, the last step of the audit, we don't have the final number, but I can tell you that inventory is approximately -- is just under $8 billion at this point.

That's totaled?

That's total inventory, that includes consolidated inventory not owned through FIN46, finished homes, CIP, and land under development.

And of that number, to answer your question, the land under development has gone up from about maybe a billion three, roughly, to close to a billion nine.

Okay.

I was kind of interested in what your sort of rough guess or idea is as to how that number would look a year from now?

I mean, basically, with your cash, are you accelerating, decelerating, or holding steady your pace of actual land that you're bringing in for development and eventually home-building?

At this point, Greg, what I would assume as far as modeling goes, is we're still focussed on making sure that we generate high returns on capital and have a strong balance sheet.

So we're balancing all of that with strong growth.

So I would expect consistent type of growth numbers as far as the inventory goes at this point.

Okay.

You mentioned, I think in answer to Ivy's question, that you expected -- you would try to keep closings in line or at the same pace as sales.

Can I take that in kind of -- this is my inference -- that you're talking about I believe it's low teens increase in closings next year?

I don't have the percentage in front of me, that you'll get about the same growth in sales during the coming year, and particularly in the fourth quarter, your closings are only up low single digits or mid to low single digits from this past quarter.

May I assume that you are rather cautiously assuming a slowdown in the pace of sales over the course of the coming year as the Fed tightens or whatever?

I think, Greg, that what you're seeing is a more even distribution through the year.

And I think that in answer to your first question, yes, you can expect that the percentage increase in sales for the year should be about the same pace.

Okay.

Increase in deliveries.

Okay.

Final question, could you talk to me about what you're doing, your exposure to the mid and high-rise condo market and what cities you're in, and what you're seeing in that market in your own neighborhood, southern Florida, where I understand you have some activity going on?

You know, as we talk about the high-rise, we indicated that the high-rises are basically in unconsolidated joint ventures.

The deliveries in 2006, we would expect to be between 4 and 500.

So it's not a large number at this point, they're located in some of the coastal markets such as up in New York, and a small number down here in South Florida.

Where we've focussed down here has been more in the primary market, which is a little bit more affordable and we're seeing good success down in South Florida with the communities that we've opened for sales.

Okay.

Thank you much and have happy holidays.

You, too.

Our next question is from the line of Alex Barron with JMP Securities, please go ahead.

Great, thank you.

Again, congratulations.

Thank you.

I wanted to ask you guys to walk us through your thought process or your strategy.

When you guys see a market that's slowing down, how do you approach the issue of incentives and if you could just kind of walk us through the different steps as the market slows down progressively?

I think the answer to that question is that it's going to be different in every market, really depending on how quickly it has slows down, how abruptly it slows down, and kind of our view where it's going in the future.

We've seen some markets change fairly abruptly and recover fairly quickly.

In most of the markets today that we're looking at, while we might see somewhat of a slowdown, we're looking at fundamentals underlying the market that are still reasonably strong.

Most markets have strong employment numbers, strong job growth, and there might just be a step-back because perhaps pricing has gotten ahead of itself or something along those lines.

Our approach has been to try to keep our sales pace fairly steady, so as the market slows down, we will probably introduce some sales incentives.

We do it in modest pace, modest form.

And with the expectation that the market in some short order will probably recover.

I think that to anticipate how we will approach that question in the future would probably be too difficult because you'd have to know a lot more about the factual surroundings concerning the particular market slowdown that you might be talking about.

But as we've seen so far, the markets have slowed generally in response to prices trailing a little bit higher.

And while sales and the market catch up to those price increases, where there has tobe to a moderation, we view pricing incentives to keep sales pace in line with our production machine.

But conceptually, would those incentives come more in the form of commissions or sales price drops or just kind of option upgrades or --

It can be a mixture of any or all of those elements.

Okay.

But it sounds like at the end of the day, you guys want to keep the volume steady and even if it's somewhat at the expense of a little bit of margin; correct?

You know, I think that one of the problems in answering some of these questions is that the decisions about pricing incentives and adjusting sales pace is made very much at a local level, so there isn't a national formula on these things.

And the answer is -- the answer to your question is we would like to keep sales fairly well matched with our production machine, about in some cases that means toning down the rate of production, in other cases, that might mean stepping up the rate of sales and using incentives to do that, or a combination of the two.

And it really is a market-by-market question, depending on kind of local inputs as opposed to there being a national formula.

Okay.

If I could ask another one, I think earlier in the year, you guys had discussed slowing down the sales pace to, like you said, better align the delivery pace from backlog.

Are there any markets -- well, first of all, do you feel you're already caught up in most markets or are there any markets where you're still doing that?

Yes, I believe at this point, Alex, we're pretty close to being caught up, is the assumption I've used.

Okay.

But are there any markets, say, Phoenix or anywhere where you're still trying to hold back the sales pace?

No, I wouldn't say any one market stands out.

Okay, great.

Thanks.

Thank you.

Our next question is from the line of Darin Fierstein with Wachovia Securities.

Hi guys, how you doing.

Good.

A quick question about Florida, if you could maybe give us a little more color on which markets you see a lot of that growth coming from, and maybe a little more color on how much of that growth would be organic and how much would be acquisition-related in terms of some of the backlog you've recently acquired?

Florida continues to be a very strong market overall.

Of course there are a number of sub-markets in Florida.

I think that as we look ahead, we continue to see very strong organic growth.

And most of our growth is probably derived from organic expansion on a market-by-market basis.

As of right now, except for probably Palm Beach, most of the markets are moving ahead in a pretty strong fashion.

We feel pretty comfortable here.

Palm Beach, of course, was probably the most hit by Hurricane Wilma, and it still has yet to kind of get back up on its feet, we'll have to wait and see there.

But, you know, what percentage of our business or our growth will come from acquisitions, well, again, remember that acquisitions, and especially smaller acquisitions are really part and parcel of land purchases.

But of course the Admiral acquisition will be a portion of the growth in Florida, but overall we expect strong organic growth in Florida to be our primary driver.

Okay.

And so from a community-opening perspective, there aren't any markets in Florida in particular that you're seeing a greater rate of community openings than you are in some of the other ones, maybe like a Jacksonville or Tampa, as opposed to Orlando?

Jacksonville would be the largest, and that's given that we entered Jacksonville last year doing only about 100 homes.

So as we've added communities, you're going to see the biggest percentage growth up in Jacksonville.

Okay, great.

But really across the state we're growing organically in all the markets, Darin.

Okay, perfect.

Thanks guys.

I think this will be, we've got time for one more question.

And that will be from [Myron Kaplan with Kaplan Mason Company].

Please go ahead.

Hi guys, terrific quarter.

Thank you, Myron.

My question is about Newhall, as far as the damage by the 2004 hurricanes, and Wilma this year, it seems like there must be some kind of production glitch on the east coast of Florida and how you're resolving this.

It's interesting, Myron, I'm not sure we call it a production glitch anymore, it's almost a normal state of affairs here.

I think that as you listen to the meteorologists, it's something that we're going to have to factor into our production schedules more and more.

The hurricanes that actually hit caused one form of production slowdown, but the ones that don't hit, that just threaten, pretty much shut down production for a week at a time.

So we just have to factor this into our expectations going forward.

We've become fairly expert at hurricane preparedness and shutting down communities and reopening them before and after.

So I think it's the normal course of business here in Florida, and we're just going to have to make that adjustment.

It's going to be more of a regular adjustment than it has been in the past.

Do you see this now, because Florida's apparently regained its strength from your remarks, do you see that individually the families are -- or people who want second homes and so forth who are coming down from up north or what have you, that they're having second thoughts about choosing Florida, that they're thinking about going into the desert in the west or something instead because the hurricanes seem too threatening to buy in Florida?

Or is there just determined to take advantage of the natural appeal of the state?

I'll tell you what, Myron, hurricanes aside, I think I'm going to put on my tee shirt and swim trunks and you put on yours, and we'll both go outside right now.

Okay.

I think that's the real perspective.

You guys are batting on -- you're leading the league as far as that goes.

Thank you, Myron.

Thanks.

Bye-bye.

Well, thank you everybody for joining us on our year-end conference call.

We look forward to reporting more results, more record results as we go into 2006.

Thank you very much.

Ladies and gentlemen, this conference is available for replay.

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That number again, (320)365-3844, the access code 805917.

That does conclude your conference for today.

Thank you for your participation and you may now disconnect.