MDC Holdings Inc (MDC) 2002 Q4 法說會逐字稿

Good morning and welcome to the MDC Holdings fourth quarter 2002 earnings release. All participants will be able to listen-only until the question-and-answer session. This conference is being recorded at the request of MDC Holdings. If you have any objections, you may disconnect at this time. I would now like to turn it over to Mr. Joseph Fretz, who will read the statement concerning forward-looking statements.

Before introducing Larry Mizel and Paris Reece, it should be noted that certain statements made during this conference call including those related to MDC’s anticipated home closings, home gross margins, backlog value, revenues and profits and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. The company’s actual results, performance, and achievements may be impacted by various factors, including, among others, changes in general economic conditions, changes in interest rates or labor and material costs, the availability and cost of insurance, weather, government regulations, consumer confidence, actual or threatened terrorist acts, and other acts of war and the results thereof and competition. Additional factors that could impact the company’s actual performance are set forth in the company’s 2001 form 10-K and the third quarter 2002 form 10-Q. I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of MDC Holdings. Larry.

Good morning. We would like to welcome each of you and thank you for participating in MDC’s fourth quarter and full year 2002 conference call and web cast. As you have seen from our press release, we had a record-setting quarter and year, as we continue to build in our successes over the last decade. In 2002, we achieved record annual revenues for the ninth consecutive year. We reported record operating earnings for five years in a row, with expectations for a sixth in 2003. We realize new quarterly and annual highs for home closings, home orders and mortgage originations, as well as homebuilding and mortgage lending profits and we ended the year with the highest year-end backlog in our history. For MDC 2002 always will be remembered as the year these and many other milestones were reached, some of which extended beyond the reported results. In February, we celebrated MDC's anniversary for 30 years in business. In October, we reached 90,000 homes delivered since we began building single-family homes in 1977. Our annual earnings per share exceeded $6 for the first time, capped off with earnings per share in the fourth quarter that exceeded $2 for the first time. We increased our unsecured building line of credit to $600 million and extended the term to 2006, but ended the year with no outstanding borrowings on this line. We received an upgrade of our senior note ratings by Standard & [inaudible] to double B plus and we received positive outlooks with respect to our ratings of triple B minus by Fitch and BA 1 by Moody's. We issued 150 million of 7% 10-year senior notes to an investment community that is recognized our operating success and financial strength. We ended 2002 with more than $600 million in liquidity. And finally, on the strength of our performance, not only in 2002, but over the last decade, our stockholders' equity has surpassed 800 million and $30 per share -- $30 per outstanding share. We are extremely proud of our accomplishments in 2002. For this, we owe gratitude to our employees and those who have worked so hard with us to deliver quality and affordable homes to our home buyers. We look forward to 2003 with great anticipation. These are turbulent times; nevertheless, assuming no significant change in the world economy or the market for affordable homes, we believe we can deliver record home closings, revenues and earnings in 2003. This performance would keep us on track to achieve our goal stated at the beginning of 2002 of doubling the size of our company both top line and bottom line in less than five years. I will now turn the callover to Paris Reece, our Chief Financial Officer, who will describe more specific financial highlights of our 2002 fourth quarter and full year.

Thank you, Larry. I will run through these highlights and we will open the floor for questions here. Our operating income in the fourth quarter, I guess as Larry mentioned this is a quarter and year of new records in virtually every category for the company, starting with operating income. Up 21.3% in the quarter to $57.1 million dollars, which represents earnings per share of $2.08, up 20% from last year. This number is 7% above the consensus estimate for the quarter of $1.94. For the year, we earned $167.3 million dollars, compared with $155.7 in 2001. This is $6.03 per share, compared to $5.72 in 2001. Our revenues, total revenues for the quarter were $771 million, up 14% and $2.3 billion dollars, up 9% for the year. Our strong performance in the quarter and year are attributable to record performances by both homebuilding and mortgage lending segments in both fourth quarter and total year. On the homebuilding side, our operating profits were $101 million dollars, up 21% from 2001. We earned $295.6 million dollars for the year, up from $279 million in the total year for 2001. Our increase is really in profitability for the quarter, attributable to record levels of closings for both the quarter and the year. We closed 2994 homes in the fourth quarter of 2002, up from 2415 homes closed in the fourth quarter of 2001, up 24%. The increases were primarily in our growth markets of Las Vegas, which was up 142%, Phoenix was up 37% and Southern California up 34%, due to as you will hear later in this discussion, strong demand in these markets, as well as increases in active subdivisions in these markets. These increased closing levels were partially offset in the quarter by lower average selling price. We averaged just above $250,000 dollars compared to $275,000 dollars a year ago in the quarter. Our average selling price really was down in most of our markets, really all markets except Maryland, Virginia and Phoenix, due primarily to our focus on moreaffordable product mix in each of these markets. In Southern California, we saw the biggest decline from a year ago primarily due to fewer expensive homes being closed in that market. For the year, we closed an even 8900 homes, compared with 8174 homes closed last year, up 9%. Again, the increases were in Las Vegas, up 71%, an additional 500 homes in that market. We are also up in Colorado and we added closings in Utah, as well, an additional 100 closings. The average selling price for the year was pretty flat at $254,000 dollars. Same with our gross profit margins, although we were up slightly in the fourth quarter to 22.6%, compared to 22.2% a year ago. And our margins were flat for the year,right at 23%, comparable to last year.. On the mortgage lending side, we also had banner quarter and year. We earned over $8 million dollars in the quarter, up 26% from the fourth quarter of last year, and over $24 million dollars for the year, up 15%. We earned these profits on record mortgage originations. We originated and brokered over $515 million dollars in the fourth quarter, that’s up 12%, and over $1.5 billion dollars in mortgage loans originated and brokered for the total year. Gains on sales and mortgage loans contributed the largest increase. They were up 62%, relative to last year at $6.9 million in the quarter, right at $20 million dollars for the year, up 40% over last year. Our capture rate was right around 81%. We also throughout the year continued to build on a very strong balance sheet, as we have said before, and we were successful in ending the year with no off-balance sheet financing, no joint ventures, no goodwill and no specific performance contracts. As Larry mentioned, our equity has increased 22% since December of last year, to just over $800 million dollars, and $30.29 per share. This does take into account the repurchase during the last half of the year of 789,000 shares of MDC stock for $29.4 million dollars or an average price of $37.26. We did repurchase 346,000 of these shares in the fourth quarter. We have 147,000 shares remaining on our previous authorization and as previously announced, we did authorize in December an additional million shares to be repurchased at some point in the future. From an EBITDA standpoint, we also posted record levels. Our EBITDA for the quarter was over $111 million dollars, up 13% and over $326 million dollars for the year, compared to $318 million for the full year 2001. That contributed to an EBITDA interest incurred ratio in the fourth quarter of close to 18% and just over 15% for the year and both of these rates are very close to highs in our industry. Our debt to cap ratio came down considerably from where it was at peak periods earlier in the year. We ended the year with a debt-to-cap ratio of 29% and net of our cash was 27%. Our debt-to-EBITDA at just under one time and net-debt to EBITDA was .9. As Larry also mentioned, we ended the year with $619 million dollars in liquidity, that’s up 26% from where we were a year ago. Contributing to this was an expansion in our line of credit, which we just in the last week have increased to its full capacity of $600 million dollars, as Larry previously mentioned. We had nothing outstanding on this line at the end of the year. We also completed in the last two months of 2002 $150 million dollar issuance of 7% 10-year notes at very favorable prices and covenance. Talk a little bit about what’s been going on recently from an order standpoint. Orders in the quarter and the year also were at record levels. We received orders for 1931 homes in the fourth quarter of this year, up 40% from last year. This included December, which we announced in this release, which is up 15% from a year ago, which enabled us to end the year with 10 consecutive months of record home orders. For the year, we received net orders for 9899 homes, compared to 7701 a year ago, which was up 29%. The increases in the quarter came from substantially from Las Vegas, Phoenix and Virginia. Las Vegas was up almost 200% over last year. Phoenix was up 120%, Virginia was up 177%. All of these were up really due to significant increases in active subdivisions. Southern California was one of our stronger markets, from an order standpoint, they were up 41% on essentially flat subdivision count. And as we also disclosed in the release, Colorado was really the only market to reflect down orders in the quarter and the month down 25%, compared to last year, due to more challenging economic environment in that market. Traffic levels held up very well in the quarter and in December. Traffic levels were up 35% in the third quarter relative to the third quarter of 2001 and in December, traffic levels were up around 30%. The levels per market were pretty comparable to the increases in orders. Traffic levels in Colorado were actually better than the order levels indicate. Rates were slightly above 30%, which is relatively consistent from a seasonal standpoint. We did have a higher can rate last year at 36%. In the previous year, it was down around 30%, as well. In December, also, which is relatively seasonal, is our seasonal high in the mid-30s. These strong orders contributed to the highest backlog that we have ever seen at any year-end, just over 4000 units with a sales value of $1.12 billion dollars. This backlog is up 40% from the backlog last year at 2882 units. Our backlog increases have followed the order increases. We are up close to 100% in backlog in Phoenix, Virginia, Southern California and Las Vegas. Our active subdivisions, which drove a lot of order increases, were up 30% from this time last year, to 178 active subdivisions, versus 137 a year ago. We really saw growth in all of our markets and active subdivision count with the exception of Colorado, Northern California and Tucson. Phoenix saw the largest increase, we have 36 active subdivisions there, versus 16 a year ago. Vegas has 18, compared to 7. Virginia is up to 20, versus 11. Last quarter and previous releases, we had expected the subdivision count to be up around 190 by end of the year. This level was not reached for a couple of reasons. One, very strong orders caused us to close out of some subdivisions earlier than expected. And we do have 12 subdivisions in these growth markets, Las Vegas, Virginia and Phoenix, that have several orders, but we don't include them in active subdivisions until they receive five or more orders in total. So they are on the verge of coming on line and will be active. These 12 subdivisions will be active and probably are already active here in January. These active subdivisions have put us in a position for the 2003 numbers that Larry has indicated. We are also in a very good position from a lot supply standpoint.. We own 17,000 lots now compared to just over 13,000 a year ago. We’ve got options on 7000 lots. We’ve tied these up with just over $18 million dollars at risk. We have close to 4000 lots in some stage of construction. We also have another 13,000 lots that we are looking at, that we have soft dollars up on, but have no dollars at risk at this point. So, we are in a very good position from a backlog standpoint, to start the year from an active subdivision standpoint, and we’ve got the lots. So we are very well prepared for 2003 and in good position to close the 10,500 units and produce record revenues and closings and earnings in 2003. That concludes my prepared remarks, I would now like to open it up for questions.

Thank you. At this time, we are ready to begin the question-and-answer session. If you would like to ask a question, please press 1. You will be announced prior to asking your question. If you would like to withdraw your question, press 2. Once again, to ask a question, please press 1. Our first question comes from Armando Lopez of Morgan Stanley. You may ask your question.

Hi, good morning. Couple quick questions. I guess first on gross margins. Gross margins were up little bit it looks like year-over-year. I was wondering if you could just expand on what is driving that? Is that a function of mix or just the mix of closings by region?

Armando, as much as anything, it is mix, when you look at year over year. Due to our just improvements and our margins in a number of markets, Northern California, Maryland, Phoenix, Southern California in particular, all of these margins improved and offset slightly lower margins that we experienced in Colorado and Las Vegas. The margins on the subdivisions that we brought in and acquired from John Lang homes brought our margins down a little bit in Las Vegas . We also added closings from Utah, which produced margins below our company average.

Okay. And over the last couple of quarters you mentioned land cost and the pressure you had experienced some pressure on margin from land costs, are you still seeing that?

We are, yes. To a large degree we have been successful with price increases to offset substantially those increases in land costs over this last year.

Uh-huh okay.

We do expect land cost to continue to rise. Our ability to offset that will be depended on the price and powerwe are able to realize in the future.

Okay. And one last one in terms of community count for 2003, could you comment on what you expect community count to be at the end of '03, and maybe how you see that progressing throughout the year?

Well, we have not provided specific guidance on the count, Armando. If we double in size, we are going to need to continue to make progress and grow our subdivision count in some double-digit fashion in order to continue to grow our closing levels. So, you know, it is something that is not going to happen over night, although these 12 subdivisions that are on the verge may have happened overnight. But, beyond that we do have plans to continue to grow the company throughout the year in a controlled and primarily organic fashion.

Right. Were you with the twelve subdivisions, were you expecting those to come on line faster than they actually did?

In some cases, yes. In some cases we got a few of them going faster. But, we also sold out of some faster than we expected, which is a good thing and contributed to the record backlog.

Okay. Thank you.

Mr. Joseph Sroka of Merrill Lynch, you may ask your question.

Good morning, everyone. PARIS, you mentioned in some markets, you were trying to put affordable markets on the ground and average price is down below $200,000 in the $180,000 range. If you start to restructure markets and product types the way you want sort of where do you think your average price will end up drifting down to?

Well, I think that it is hard to say exactly where it ends up, Joseph.

You would expect to intentionally continue to take it down more?

I believe that will be the result because we are, the focus of the company is for lower priced products, even in higher priced markets in California, for example, both north and south, and in Colorado, where our average selling price is about the average for the company. But, just looking at where our growth is coming from, you heard me say where the active subdivisions were added and the largest increases have been in Phoenix and Las Vegas in addition to the subdivisions we had in Utah and Texas. Those are all markets that have average selling prices below $200,000. Just the sheer growth is going to drive it down.

Okay. And orders are sort of trailing deliveries in Colorado and you mentioned the subdivision count was about flat there. So, as you are delivering homes, are you intentionally rotating capital out of Colorado?

Not necessarily. We are not reducing our position here. However, that could be the result because when market conditions change in a market like Colorado, your capital requirements change, as well, if you are on top of your game. We are seeing the environment change from land acquisition standpoint from both purchases of unfinished lots to more sellers are more open to finish lot take-down. Our capital, even though we intend to maintain our position here and improve our position in Colorado, our capital requirements may in fact go down.

Okay. And then, maybe following up on Armando's question about the land. If land prices are going up, do you have the ability with the way some of your land has been entitled, that if you want to put lower-priced product on, that you can actually increase density from what you might have originally thought you would put on in a subdivision?

We really can't impact the density. When we buy the lots, the lots are platted. What we do have the flexibility to do is to move our products around in certain cases so that we can potentially offer a lower price point home in order to work through the lots. Keep in mind; we are not long on lots in any subdivision. We keep it very tight and we are able to get in and out of subdivision in a couple of years. So, if we are talking about changing product midstream, we are probably talking a relatively short duration we have to do that over. That does give us the flexibility to get through the lots.

No, that is more understandable based on the way you do the land. I will pass off to the next person. Thanks.

Ivy Zelman of Credit Suisse First Boston. You may ask your question.

Good morning guys, Dennis Migel on behalf of Ivy. Returning to gross margin, you had mentioned the fourth quarter was up due to mix. Given the number of communities you’ll have coming on line and your focus on a lower price point, should we expect going forward that margins might continue to creep up a little bit or should we expect looking at maybe a decline on a year-over-year basis?

I guess I wouldn't tell you what to expect there. One doesn't necessarily lead to the other. I think we are taking steps to -- we are very aggressive from a pricing standpoint in all of our markets, so we expect to be able to take full advantage of what the market gives us from that standpoint. We have a number of initiatives ongoing from a cost control and cost saving standpoint that should help us there. We continue to expand and improve our design center performance and we have a number of things going on that we continue to focus on the cost side and the revenue side that should help us make positive progress on the margin side. The one side that continues to offset that is the continuing rise in cost of land and the extent to which we can offset that. So, margins are going to be largely determined on what we are able to do with pricing going forward.

Okay. If you are looking at land, what might your expectation be for land purchases in '03 and what you actually spent in '02? And if you could, also, feel comfortable giving us some guidance for 2003, as far as earnings standpoint?

From an earnings -- let me go backwards to forwards. From an earnings standpoint, we really are not in a position to provide guidance on that. The only thing we can say is we provided some of the components that are needed to develop that. We do expect to exceed our performance in 2002 and we do expect to close at least 10,500 homes. And the other thing we have talked about is we do expect average selling prices to decline a bit, due to the mix of homes. But, just have to build it up in your model as to where that comes out and where those clients go based on market-by-market basis. In terms of purchases, I don't have that information handy right now. I kind of thought you guys might ask that because you focus on it. I don't have that information handy. Of course, in terms of what we are expecting for next year, if we continue to grow, we will spend more and we will -- but because we are in a position with a relatively short supply of land we can change on it, we can pretty much change on a dime in terms of the direction we go, in terms of buying land. We bought the land; you saw that we’ve increased our lot count 4000 lots, in support of these increased subdivisions. A lot of our increase is in the work in process arena. We are building through a much larger backlog. But, it is something that is fairly evident from the financials and I can get back to you on that.

Okay. Thank you very much, guys.

Stephen Kim of Smith Barney, you may ask your question.

Thanks very much. Obviously strong quarter gentlemen, congratulations.. The first question I had related to your talk about the average selling price. Seems to me I recall not that long ago, maybe a year ago, you were cautioning us that we might start to see some average price reductions at that time. And in fact, what we have seen this year in your ending backlog, looks like average prices have fairly consistently risen almost the entire year and in fact they rose again it looks like, unless my numbers are inaccurate -- rose again in the fourth quarter.

You are absolutely right. They did.

I don't mean to challenge you on that. It is a high-class problem, it’s not even a problem. I am wondering what sort of caused the result to differ so materially from what you had expected a year ago and perhaps should that color on the way we take your cautionary statements today?

Well, first let me say that basically when we talked about decline in average selling price, we talked about it appearing most materially next year. Average selling prices are much lower than they were at this time last year. And they are lower in the fourth quarter than the average for the year. So, the direction has been generally down. I will say this, the thing that you have to keep in mind in looking at backlog, especially at year-end, it is heavily influenced by homes in backlog that take longer to build and those are generally more expensive homes, more expensive homes in Colorado and northern California, southern California and Virginia and Maryland. That is heavily dominant in our backlog and that is why the average selling price is much higher. The closings that occurred, the heavy closings that occurred late in the year were primarily from the lower-priced markets, where we are able to move product much faster. So we cleaned out our backlog and when we look at the next quarter closings as a percentage of backlog, it is much, much lower in those markets than it is in high-priced subdivisions. We are able to do more near-term sales to near-term closings. So, especially in a year like this, when we had in December we closed more homes than we have in any month in our history. And that is largely due to heavy closing volumes in Phoenix and Las Vegas.

I don't mean to knit-pick here, but it does appear that is somewhat of an anomaly this year, that typically your highest average closing price occurs in the fourth quarter and many of the units that you deliver in the fourth quarter tend to be those larger units you just eluded to. I assume what we have coming here is somewhat a typical situation where over the next couple of quarters, probably, you will be delivering more of those larger homes. So, would it be fair to say that we might expect the average closing price to be not all that dissimilar from where it was this fourth quarter, over the next couple of quarters and then maybe tail off?

I think that is very possible. Certainly in the first quarter I think that we would expect the cause of what is in backlog, average selling price to be higher than they would be throughout the year. As we start to see these new subdivisions begin where the new sales will be occurring and delivering later in the year. I think that is a fair statement.

Would it also be safe to say that lower-end product or smaller product generally doesn't carry with it quite as high a gross margin in general because you usually make up for it with the increased turnover? Therefore, that may be something which actually somewhat depressed your gross margin this fourth quarter and may aid you in the next couple of quarters?

That is not necessarily true because we are seeing some strong margins with lower-priced homes. Phoenix has very good margins. Vegas is a little below our average, but they’ve made some improvement in the last couple of quarters. Quite frankly, the lowest margins in the company are on some of the higher-priced homes in California. So, again, it could be on homes like in nearby Ranch, which are close to rolling option and you get high returns on those accessed. So, I don't think you can really make that statement.

Okay. In terms of you talked about growth. Certainly you talked about doubling the size of the company in five years, which certainly with your track record, doesn't seem to be all that much of a stretch. I guess my question is if you for some reason intentionally decided to slow your growth, but say maybe by 5 to 10% off the top, do you feel you have enough knowledge or forecast ability to be able to say that if you intentionally did that, you would likely see higher margins or higher returns than you would if you grew at the rate you are currently projecting? In other words, if you intentionally slowed down by not doing the incremental project that maybe you feelwhen you do your feasibility are lower return. Do you think you would actually be successful in that and drive an incrementally higher return if you were to intentionally slow your growth?

Yes, I believe we would, Steve. The reason is that we would be slowing down the back end. Obviously we would be able to build through backlog with whatever margins were in it. Because we are so tight on land, if we decide to slow down very quickly we start converting assets to cash and that cash can be used to pay down debt. Asset levels drop off dramatically and the returns for the company actually go up pretty significant at circumstance.

It will be interesting to see whether the market would reward you more for that than doubling the size of the company in five years, although that is a noble goal, as well. Congratulations and thanks very much.

Thanks Steve.

Mr. Robert Manowitz of UBS Warburg, you may ask your question.

Hi, good morning. Was wondering if you could walk us through a little bit some of your markets and talk about the units that you have either in process or complete that have yet to be sold? Then, to the extent do you have some visibility or some views on what is happening with spec units just more broadly within the markets, that would be helpful.

Rob, in terms of the individual market, what, in particular, is your interest in terms of what we are building? Is it projects or is it --

I’m kind of curious if you are seeing in any specific markets a build up of speculative inventory that ultimately perhaps would drive some of the price declines that we are seeing in the deliveries? I understand most of it is driven by mix. I’m wondering if some is driven by concessions?

Actually it is, one of the things that you do tend to see more concessions this time of year as builders try to get through a lot of their inventory before year-end. But, you know, we are starting the selling season and we are going to get a real good feel for the strength of the markets here over the next three months as we proceed through the peak of the selling season. But, generally incentives in our markets other than trying to move a specific house here or there or pick up the pace in a subdivision here or there, have been pretty consistent with the possible exception of Denver and northern Colorado here in Colorado. And you know, we had not seen a build-up of spec inventory. Our specs, I think we discussed it before and certainly talked about it on this conference call, if we continue to maintain a very tight control on our spec inventory. We do have limits for specs by subdivision, which we watch every single week and if they get more than 30 days old, they have to submit a report every two weeks on strategy to move those. That has been very successful in keeping our specs down. Generally, in the marketplace, we have not seen a build up of specs that will drive incentivization that we saw in 1994 and 1995.

Great. Secondly, any comments on your appetite for geographic expansion in '03?

In '03 we will – we have expanded into a couple of markets, Texas and Utah, which will start to pay dividends in 2003. We plan to take a look at some other markets. We have discussed expanding beyond the boundaries of our existing markets in certain areas like Maryland, where we are looking into the Delaware Valley and southern most parts ofPhiladelphia. We are looking at possibly expanded from Dallas/Fort Worth, looking at Houston, Texas. We looked at markets like a couple of markets in Florida and perhaps Indianapolis or Chicago. These are just markets we are looking at right now. The growth in 2003 will be driven by the markets we are in. We are not counting on geographic expansion for that. To achieve our five-year goal we'll probably need to move into some of these new markets, either organically or from a start-up standpoint like we did in Dallas/Fort Worth or looking at opportunities to acquire subdivisions from builders in the marketplace.

Great. Lastly, I know you were in conversations with rating agencies several weeks back, as you alluded to on one of your conference calls. Are there any developments there that you can share at this point?

There really isn't, other than the actions. I'm sorry?

Continued battle?

Yes, we keep in constant communication. They know everything we are doing and certainly if something breaks, we will let everybody know.

Great. Thank you.

Thank you.

Barbara Allen of (inaudible). You may ask your question.

Thank you. I missed one of the markets you were reviewing cities or regions you had the biggest increase in the number of communities. You had Phoenix, Las Vegas and third one, you have 20 versus 11. What was the third market?

Virginia.

Secondly, I wonder if you participate in the Nehemiah program, as they’re called, in any of your markets?

Not the Nehemiah program per se. We had participated to a limited degree in a couple of markets, but it is really a very small part of what we do. Until this came to life, it wasn't something we focused on. It’s just a couple of percentage points in what we do in terms of total volume. I think basically what we had been doing is being scaled-back and eliminated.

Why are you doing that, why are you scaling it back?

It is not necessary in our markets. We want to continue to maintain high quality of financially capable buyers and we're able to attract buyers we need with programs we have.

Okay. And how did you account for the repayment or whatever it is of the down payment and fee?

It was all part of the cost of sales.

Okay. Lastly, I wondered, you had been in Colorado for all of your lives, I think. I wondered if you might could review for us what you saw this year, I guess it started with the weakness, and how that compares with previous downturns in Colorado? Did it start in a particular price point? Did it start in resale sector? Has there been any change in the financing available or anything like that that would help us understand what is going on there?

Barbara, what you see is really focusing higher price points. Think about 88% of our homes are below $300,000. And we developed and are introducing more affordable product in the marketplace. And a lot of the low down really is dealt with higher priced homes. That is something that is slower now than it was, but not as slow as it has been in prior slow down periods. Denver is I think will continue to adjust in this as one of the larger builders in the marketplace, we generally had some very advantageous moves when others who are more aggressive had to make changes, we have been able to be opportunistic and you can assume having had many decades of experience here that we might look at this sort of as an emerging opportunity versus anything else. So, we're optimistic that just like all parts of the country that go through certain adjustments, we are now I believe the largest builder in Colorado Springs, which is where I believe Homeland Defense is going to build. Norad is there, Falcon is there, Peterson Air Force Base is there. There is immense amount of government activity both on the direct government and on the private side taking place in Colorado Springs. It has for the last period of years, not just from 9-11, and that is continuing to expand and we went from a low market position there to number one market position. We have been working very diligently to move through with the opportunities might be here in Colorado.

Well, I guess the orders were down 25% in the quarter, you said. Colorado was down 48% in December. I guess I am not quite getting the connection if your focus is on low-priced points and weakness is higher priced points, why are your orders down so much?

Everything cycles through. Since we are on a small unit count at any one location as to our aggregate plan and December here was a little bit slower than we had anticipated, but, you will have more of the story over the next 90 days when Colorado sales really kick in the first four or five months of the year. I don't think you should read anything into three weeks of sales.

Okay.

Barbara, it is tough to get any direction on where the market is heading, based on what happens in December. One thing you should also understand, you heard where our growth is coming from. One thing we have been doing just through this growth outside of Colorado is we are becoming less dependent on this market. We don't intend to reduce our position, but our closings and revenues here in 2002 were in Colorado were close to a third of what we produced for the company as a whole. And that in a one year period may drop to 25% next year. Just because of the growth coming outside of Colorado.

Oh, I agree. You have done an excellent job on that. I was just curious if this downturn in Colorado based on your years and years of experience in the market, if it appears to be different from in any way from what we have seen in the past. It sounds like to a certain extent it is having started at higher price points.

The other thing that is significantly different. I was just coming on the scene in the last downturn. There was pretty much a glut of land on the market in the late '80s. You don't have that as a condition here now. This market, like many others, are constrained to a certain degree in buildable lots. We have the advantage of being the largest builder and seeing the best deals first. We are very selective and we pick the best locations. We are going to be in the best position to take advantage of what this marketplace has to offer going forward because of it. But, the constrained land supply will keep values from plummeting the way they did in the late '80s.

Okay. Thanks very much.

James Wilson of JMP Securities, you may ask your question.

Thanks. Most of mine have been answered. Just wanted to know your thoughts with the new Bush proposal on general capital allocation this year. Your thoughts on paying higher dividend versus stock buyback, versus as you discussed quite a bit, the opportunity to invest capital back in the business? Any general capital expenditure thoughts?

I think we will utilize our capital where we think strategically we will get the best risk adjusted returns. That will all depend on, as you know, what actually ends up being lost on the time later on this year and what the marketplace has to offer. But, we're staying abreast of the various proposals and we will respond according to the opportunities that we see and will have to see how it plays out.

Okay. Fair enough. Thanks.

Jim Keefer of [inaudible] and Partners, you may ask your question.

I wanted to follow up with a littlemore information on land cost. Could you tell us what the land cost as a percent of home sales came at for the quarter?

Just below 24%, I believe.

Just below 24%. Okay. And this is a guess, obviously that I am asking you to make. What would that underlying land cost at today's prices?

What would that land have cost at today's prices? That would be a guess because the -- there is so many factors that go into that. You've got a change in mix going on, depending on the marketplace you are in, you could have a different percentage. Land cost, we are in the mid-teens in Colorado and the mid-30s in Virginia and Maryland. So, it really is not a question, the answer is probably nonsensical. The thing to keep in mind about us is relative to many of the other builders with possibly one exception, we buy our land closest to the time of sale of anybody and keep a very short supply. We focus on manufacturing of homes and try for just in time delivery. We are as close to market value as anybody. There is not a lot of built-in value increases in the land we hold.

Okay. I will follow-up with that later. Advancing to the backlog, though, where do you expect land cost as percent of sales to come in, in relation to your backlog?

That, too, is a tough one. You have some tough ones today. Again, the mix change will cause that percentage to change.

You know what the mix change is in your backlog?

Uh-huh.

So, it seems that you would have a pretty good handle on what your land cost comes in as.

It is likely the percentage would creep up a bit. I can't tell you exactly what it would be. The bias would be on an upward trend. The increases are coming in Phoenix and Las Vegas where the average cost of the lot is higher than the average. The increases in Virginia, that is a higher lot cost, as well. With the lower percentage coming in Colorado, which is going to be a lower percentage of the total pie, going forward..

Where would you ballpark the number at, even use a range on it?

I don't think I would be comfortable even ball parking it.

The nine months up to September land cost came in around 28%, according to the data you provided. I think there is some accounting reasons behind that, but higher or lower than that number?

That number sounds high. Because the average for the year was actually lower than -- 24% or just below was fourth quarter. For the year was 23.5. So, I am not sure where the 28 came from.

That’s off some supplemental data on your website. Maybe that data is incorrect. Okay. Thinking about it this way,one other thought, then I will follow-up with you privately later. If the average is 250,000, average selling price for your homes

Uh-huh.

The land cost has increased over the last three years, and if you were at 250 two or three years ago, you’d be at 250 next year. You are putting a much less valuable house structure on that same piece of land and selling to the customer at that same price, is that correct?

Less --

Instead of building a $140,000 dollar house you are now putting $120,000 dollar house on the piece of land. In order to maintain your profit per unit at the same number and the house cost at same number, yet have increase in land cost, it would seem to me that you would be delivering to the customer significantly less house. Is my logic flawed?

I am not sure I follow. There are a lot of factors, some of which include how various markets handle certain types of fees. Some may be in house cost, some may be in land costs.

Is that still a general -- is the statement still generally fair that on any given -- if you are selling house for $250,000 dollars a couple of years ago and you are going to sell it for $250,000 dollars next year. They are going to get less house?

If you are in the same market selling the same house that is possibly true. It is also a mix issue. The average selling price is going down because the -- we're building houses in lower-priced markets. We are building more houses in those lower-priced markets.

Land costs are going up and absolute profit per house is somewhat similar. It seems that only would leave the house as becoming the item that takes the hit.

I am not sure how we get there. It is a mix issue. There is not -- our focus on quality continues. There is really not been any decline in the value being given to the buyer. It may be tied up and may have to do with level of options the buyers buy with respect to the houses. That would be add-ons. But, --

I will follow-up with a separate call.

Give me a call and we will discuss it.

Okay. Will do. Thank you

Timothy Jones of Watson and Associates, you may ask your question.

Good morning. Versus the 23 and-a-half percent, what was the averageland cost last year?

Average land cost last year was 22.7.

So, we have been listening for four years, I mean, you had said land costs were going to go up. I have to think back, about three years ago it was 22% and you were implying it would go up dramatically and it has not gone up. You expected lower margins for the last three years and finally had flat margins this year. Is this the effect of going into these new markets and having a better availability of reasonably price land?

you mean the fact the margins were higher?

Yeah. For three or four years, you cautioned land prices would go up and margins would probably come down and they are finally flat this year. It has been four years and you have beaten it every year. What has been the difference? The land did not go up as percentage. I know as much as you had expected. Is that a fact that you have gone into, expanded faster in these newer markets where there is more land availability?

Well, part of it, Tim is this year, of course, our margins have been impacted by incentives that we offered late in 2001. So, in the last half of 2001. That did impact the margins this year.

Your margins are better than you expected, they are not worse?

Right. Part of what you are saying is true. Some of the markets we moved into, Salt Lake City and Texas are two new markets. We haven't seen much out of Dallas/Fort Worth and the margins in Utah did not help our margins this year. What helped us this year is price increases that we didn't anticipate a year ago. We saw real strong price increases throughout the year in Maryland and Virginia and even in Colorado we experienced price increases primarily in the second and third quarter.

How much were prices up, ballpark, 5% for the year?

5 to 6% on average, ranging from low of 3 in Colorado to close to 10% in Atlanta.

Up 5 to 6% average price can offset 10 to 15% increase in land prices.

That is true.

Okay. Secondly, you mentioned two markets that I find repugnant and you are looking at. They are Houston and Indianapolis. I know many that wish they were not in it. Are you looking at that because you may have some very good buys to buy an existing building? You are not thinking of going in there from scratch, are you?

Tim, it may be a timing issue. We have had opportunities in both of those market to come in with local builders and have not done so because the timing is not right. So, --

So, if you went in, you would do it because you had a good price on an existing builder?

That would be a good reason to do it, but we also have some connections with people who sell lots down there in Houston and we talked to some people in Indianapolis. It is not something that is on the front burner for us. We are focused on really growing the markets that we are already in. I hear you.

I suggest you forget those two. Just forget them. Just take them off the table. The other ones are a lot better. Okay. Now, the lastly, last year your gain on sales were about 80% of your originations. This year it is 105%. So, they grew much bigger than the originations. Why was that? Was there a better margin on servicing? What happened here?

Primary reason is with direction of interest rates, we had a very favorable effect on our gains on sales of loans. That was where the largest profits came.

Did the percentage increase? Of the loan, the margin on the loan?

The percentage increased, as well as we did some changes throughout the year in terms of pricing on the loans. We started the year and in prior years subsidized to a greater degree off the screen. We brought our pricing much closer to markets. So, --

You are subsidizing the buyer a bit a year ago and this time you are not?

With respect to the interest rate, yes.

In fact, lastly, have you really been doing a lot of subsidizing of customers this year? I am sick and tired of hearing about the housing bubble bursting and every builder I talk to says they are not subsidizing or subsidizing any more than normal. What is the situation with you?

Our situation is consistent with what you are saying.

With the exception of Colorado?

Colorado is the exception.

Which I would expected. That is very interesting that you in fact are subsidizing less on the interest rate. Thank you very much.

Greg Nejmeh of Deutsche Banc, you may ask your question.

Good morning, Garry and Larry. Couple of questions. Larry, let me go back to the dividend policy once more. Your coverage ratios have improved tremendously. The agencies have recognized that. The marketplace has recognized that. Could you offer a little bit more color on your thoughts with regard to the dividend policy in a climate where your rapid earnings growth and balance sheet improvement have not been rewarded in the marketplace from a valuation standpoint, what change in your dividend policy to the extent that the administration proposal is enacted be another way of rewarding shareholders given that the marketplace hasn't rewarded shareholders from a valuation standpoint?

About 30% of the company is owned by management, Greg. Try to figure out whatever is the best for the shareholders in light of all the circumstances that might exist. We will continue to do that and would be a little speculative for me to say what we are going to do when we don't have any idea what the laws are going to be and what the world is going to be. One thing we've done is we've focused on our goal to raise the credit standards, the credit rating of the company. We have every expectation to investment grade on the other two rating agencies predicated on our balance sheet and our performance. We are hoping that will take place this year. And keeping that in mind, we will use our balance sheet to create the best values for the shareholders, which is what we've tried to do over all these years.

Uh-huh. And you certainly have. All I am saying, I think you have done what was within your discretion to do. You have done it admirably. It doesn't seem as though the market is giving you quite the credit that is warranted on the basis of performance. So, the dividend policy might be an alternate or another consideration. Let me ask you this, philosophically obviously some step-up in the dividend rate or dividend pay-out would take capital that could otherwise be devoted to growing the company, perhaps, at a more rapid rate, and return it to shareholders in the form of a dividend. Philosophically, is there reticence to do that? In other words, to sacrifice some level of growth perhaps a couple of percentage points in exchange for stepping up the dividend, depending on what the ultimate legislation is that passes?

I don't think there are any barriers to do anything. We are usually very opportunistic and we’ll have to see what develops.

Okay. Second question. I noticed this year there was an absence of inventory write-downs, compared with write-downs that did exist a year ago. Yet, the economy has continued to languish generally and you mentioned in some of yourcore markets home prices have moderated. Any particular reason why we haven't seen inventory adjustments or write-downs this year versus last year, when this year's climate seems to be a bit more challenging?

I guess the facts are that markets have been more challenging, but they haven't been challenging to that extent. Additionally, the write-downs that were last year I believe were two specific subdivisions that PARIS is telling me three that had specific problems at the time and we're generally very aggressive in looking for these weaknesses because we believe that is the correct way to handle it. And the markets really have corrected themselves where we had prior issues. And at this point, it looks at though everything is performing properly because we certainly aggressively stress test everything we have on an aggressive basis. We make sure there is any weakness that should be dealt with. We do deal with it.

Uh-huh. PARIS you mentioned earlier that you buy lots close to market, closer to delivery than many other builders. I can only think of one other builder in the universe that operates in a similar fashion as you. Given that consideration and given that home prices have moderated, you still have been able to maintain generally stable gross margins. Is there something -- I know you focused a lot on process and design and productivity in the last several years. Is there something going on that is meaningful on the cost side of the ledger or from a productivity standpoint that would explain the stability in a climate of rising lot costs and moderating home prices?

Greg, over the last year what has occurred and contributed to maintaining average markets where they are is really bringing the low performers up to a level consistent with the rest of the company through management focus and corporate initiatives and paying attention to our business. You may recall two or three years ago Maryland was a tough market. We had single-digit margins in that market. Our management team has done a tremendous job of taking advantage of a much-improved market to bring Maryland to one of the top margin divisions in the company. That has really been accomplished over the last year and-a-half. So, where as a couple of years ago or last year we had very strong performers and weak performers, we brought the weak performers up. They are performing more in line with the rest of the company. That being said, we still have some things we are doing on the cost side that are very aggressive and we expect to be productive in 2003 going forward. We have even as we speak, a major initiative in process with our purchasing groups throughout the country with objectives and with national purchasing as their leader to coordinate a nationwide effort to bring costs down to the maximum extent possible. It just takes focus on hard work and appropriate systems to be able to accomplish that. And because of that, systems and process and procedure will be a focus, as well, for this company. You may have seen our G&A creep up a little bit in the fourth quarter. That is partially attributable to additional commitments and dedication we have made to the IT arena, which will continue through next year to bring these systems to bare to provide us with the information that we need to break down our cost to disaggregate the hard cost from the labor and use that for bidding purposes to achieve the best possible costing of every item in the house. So, there is -- we are not sitting back and letting it happen. We are making it happen.

Okay. Terrific. Thanks.

Mr. David Einhorn of Greenlight Capital, you may ask your question.

Hi good morning. Happy new year. This is the longest I have ever waited on one of your conference calls. It means there is more interest than there was five years ago.. It is what it is. I want to go back into the land issue and try to at least bring it a little bit into context of what the whole argument is and give you guys an opportunity to swing at the whole pitch, if you want. You know, to the extent you want to make a comment or take a shot at it. The thinking I think some people are making here is if you had 5% price increase this year and land costs went from 22.7 to 23.5, it means that there was about almost 9% increase in land prices within the cost of your doing business. And the thinking is if that seems to be a steady state increase in the cost of land and you don't get any price increase in 2003 or later years, you will lose 200 basis points of gross margin. If land prices accelerate at a faster rate, more like 20%, you could have if you get no pricing increase, you could lose 500 basis points of gross margin. That would not enable you to achieve your goal of having increased earnings in 2003 and 2004. Putting the whole thing into context and I know you don't want to necessarily guess at to what pricing is going to do. Could you address that argument and situationrelating to the rate of growth of land cost to you know, give or not give comfort relating to the reasonability of the earnings growth expectation?

First of all, David, what we -- if you are in a rising land cost environment you generally don't see rising land cost without some degree of price appreciation, as well. There is a bit of a lag because we are buying the land ahead of the time that we actually sell the house. It is kind of a self-correcting situation over a period of time. You know, we would -- we know that is one of the reasons we are so aggressively approaching the cost side. We know there are dollars to be saved on the cost side and we also know in an environment where markets are stabilizing and prices are not increasing, that -- to the extent that maybe market closings and sales are declining, that is an environment where you are able to approach your subcontractors and make adjustments on the cost side. You have to look at both sides of the equation. So, we're attacking it from the pricing side and the cost side to try to offset the impact of the cost of land that we anticipate to move up as we anticipate the markets to continue to grow. If they don't grow and if they decline, at some point the land prices will stabilize, as well.

Also, David, as we acquire land, we assume flat pricing. So, our model of acquisitions, which is ongoing doesn't assume any pricing power. So, what we do, we call the marketplace the best land that makes are model. So, in order to ensure the performance of what we are doing in line with current values in the add-ons as both to deducts is what the market might provide. But, there is adjustments everyday and all these markets and PARIS's point is if you see a slow down in the market, you also see a change, not only in the price, but the terms of land where a land developer when there is a hot market would like to sell it and bulk all cash and as the market slows down, then you end up being able to buy it in part and maybe even more on rolling options and in smaller pieces and at different prices. So, this is really a supply and demand and what management does is deal with those changes that occur for 30 years. We've developed a skill set that seems to be able to adjust to these opportunities and whatever you see in the way of changes in the marketplace really are for opportunities for a company like us that has a high degree of liquidity and an ability to be very opportunistic. So, as the world changes we're sitting in a position to take advantage of it and so, we hope to both operate on an aggressive ongoing basis and be able to look out over the horizon if there are changes. This is what we've done on a consistent basis.

So, what you are saying is that knowing what you know about the pricing of land, if you assume a no pricing power, you still believe that you can achieve the margins that you need in order to achieve the earnings growth positive in that you have forecasted?

That is correct.

Thank you very much, guys.

Stephen Kim of Smith Barney, you may ask your question.

Hi, it’s Jed Barren for Steve. Couple of quick housekeeping items, if I could.. First of all, the contribution from Lang in both the quarter andDecember, I guess that would be in Vegas, specifically.

I don't have it for December, but I think you have the other two months. Lang contributed 50 orders in the fourth quarter total. 16 in Vegas, 34 in Utah.

Okay. Great. Finally, sub count, you had given the ending at 178. Would you happen to have average for fourth quarter?

Sure do. Hold on. Average was 176.

176. Great. Thanks very much.

Joseph Sorka of Merrill Lynch, you may ask your question.

Sorry, I absolutely have no more questions to ask at this point.

Thank you , at this time there are no further questions.

We would like to thank all of you for this long conference call. We appreciate you joining us. We look forward to speaking with you in April, following our first quarter results. Thank you very much.