MDC Holdings Inc (MDC) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the MDC Holdings 2004 second-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Joe Fretz, who will read the statements concerning the forward-looking statements. Mr. Fretz, you may begin.

Before introducing Larry Mizel and Gary 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. These and other factors that could impact the Company's actual performance are set forth in the Company's 2003 Form 10-K.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Should a non-GAAP financial measure be discussed, the information required by Regulation G will be posted on the investor relations section of our website, RichmondAmerican.com.

I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of MDC Holdings.

Thank you, Joe. Good morning and welcome, everyone. Thank you for joining us for MDC's 2004 second-quarter conference call and webcast.

Our second-quarter earnings were the highest for any quarter in our 32-year history, an impressive 93 percent increase over last year. All-time quarterly highs for revenues and home gross margins, combined with record second-quarter home closings, contributed to these outstanding results. Demand remained solid throughout the quarter in most of our markets as we received record levels of home orders for the 10th consecutive quarter.

These home orders enabled us to accumulate our highest-ever quarter-end backlog. The significant improvements in our earnings and revenues for the second quarter largely were driven by organic growth in our long-standing markets, as well as an extraordinary demand for housing in Nevada, and, to a lesser extent, in California and Arizona. This demand created the opportunity for us to realize substantial pricing increases in these markets, contributing significantly to the 430 basis points improvement in our home gross margins.

On the strength of these outstanding operating results, we improved our after-tax return on equity and assets to 27 percent and 14 percent, respectively. In addition, we generated a 320 basis point year-over-year improvement in our quarterly after-tax returns on revenues. Each of these figures ranks among the highest of our peers.

Our performance in the second quarter evidences our ability to achieve some of the strongest risk-adjusted returns in our industry. As we have maintained our discipline of not speculating in land, we believe that minimizing speculation reduces the risk profile of the Company, and therefore results in a higher quality of earnings.

We have continued to strengthen our financial position, as reflected in our decreased quarter-end ratio of debt to capital net of cash of 0.31, down from 0.35 a year ago. As we had previously reported during the quarter, we increased our home building line to 700 million and have the ability to further expand to 850 million with lender approval. Also, we extended the term of this line by three years to 2009.

Maximizing shareholder value continues to be our primary focus. During the 2004 second quarter, we allocated significant capital dollars to expand our highly profitable homebuilding operations. In addition, we declared and paid a cash dividend of 15 cents per share, which is double the dividend paid in the second quarter of 2003. Also during the quarter, we repurchased 119,000 shares of MDC common stock at an average price of $57 per share, leaving almost 1.7 million shares authorized for repurchase under our current approved program. Despite these capital outlays, we ended the quarter with 654 million in unrestricted cash and ability (ph) borrowing capacity, representing a 52-percent increase over the level of a year ago.

As we prepare for future growth, we plan to capitalize on expansion opportunities both in our existing markets and in new markets. We will work to increase our share of the markets we have served for many years. At the same time we will build a significant presence in the markets we have recently entered and explore other opportunities to expand our geographic footprint. Already we have proven our ability to penetrate high-growth areas of the country. Our operations in five of the seven markets we entered over the last two years contributed 12 percent of our total home orders in the 2004 second quarter. These operations should begin to make meaningful contributions to our bottom line in 2005.

Our conservative and disciplined land acquisition strategy has enabled us to grow while limiting our risk. We have expanded our controlled lot supply to over 32,000 at quarter-end, an increase of over 40 percent for the 2003 second quarter. This supply of quality lots will support our growth plan and is consistent with our objective to maintain a conservative 2-year supply of lots.

As we scan the economic horizon, we see improving consumer confidence and job growth in most of our markets as mitigating factors to the effects of the year-over-year increase in mortgage interest rates. We anticipate that MDC, along with the other large homebuilders, will continue to grow as the economy improves.

We have seen a dramatic improvement in economic data related to job growth. With over one million jobs added to the economy this year. In addition, consumer confidence has improved over 15 points year-over-year. These factors, along with a broad range of mortgage products available to keep housing affordable for our homebuyers, should enable us to expand in many of our markets, even in a rising interest rate environment.

With our quarter-end backlog of more than 8200 homes, valued at $2.5 million, the highest in our history, the record-setting results during the first six months and anticipated improvements in the economic conditions, we are positioned to close more than 13,500 homes and achieve our seventh consecutive year of record earnings in 2004.

I will now turn the call over to Gary Reece, our Chief Financial Officer, who will describe more specific financial highlights of our 2004 second quarter.

Thank you, Larry. As Larry has outlined, this was an outstanding quarter for the Company. This quarter we earned $82.6 million, which is 93 percent higher than the 42 million we earned a year ago, on revenues of $875 million, which are up 27 percent. I might note that these earnings numbers are higher than the dollars we earned in the entire first half of 2003, and this quarter represents the eighth consecutive record quarter of earnings, and it's our 20th record quarter out of the last 21. These earnings represent earnings per share of $2.43, up from $1.30 a year ago, which is an 87 percent increase.

These strong earnings were driven by an outstanding performance of our homebuilding operations, as you will see in a moment. And we achieved these results despite some moderation in our mortgage lending results. While the mortgage process is critical to the success of our homebuilding operations, it comprises a relatively small part of our overall earnings. The homebuilding business earned a record $152.5 million for the quarter. That's up 79 percent. That, too, exceeds the earnings for this segment for the entire first half of 2003. These results were driven really by an 18 percent increase in closings, a 430 basis point improvement in gross margins and a $23,000 increase in our average selling price.

On the closing side, we closed 3085 homes, which is up 18 percent from year-ago levels. These strong closing levels were driven by the record first-quarter backlog. You can see from this slide the stratification of our closings, and can see that the largest increases are coming in our newest markets, while we are seeing significant growth out of Virginia as well, as we talked about our expansion in that market. And growth in Las Vegas, Arizona and Colorado.

We can see Arizona actually for the quarter is flat with the previous quarter, actually flat with the year-ago levels because we were down in terms of our backlog to start the quarter. And you can see from our orders that we had very strong orders in Arizona during this quarter, but we closed more homes in the first quarter than we had anticipated, and so our backlog was lower to start the quarter, leading to lower closings this quarter. Colorado is also down slightly in the quarter, primarily because our backlog is down due to fewer active subdivisions than year-ago. We also had, contributing to these record closing levels, over 350 closings from our new markets.

Our average selling price for the quarter was up, and it's never been higher. It was over $279,000 compared with 256,000 a year ago, which is a $23,000 increase. We actually saw increases in our average selling prices in every state. Most significantly, though, and we've laid it out for you here -- where the increases were -- the largest increases coming in California and Nevada and Virginia, as we mentioned in the press release. From a percentage standpoint it's most outstanding in Las Vegas, which was up 25 percent. I think I've seen some recent statistics about the market there, and the market itself is up close to 20 percent.

But in any case, we have experienced the ability to raise prices in most of these markets, particularly in these three that showed the largest average price increases. We've got some increases that we've also experienced in Maryland and Arizona to a significant degree, although it's not reflected in the increase in average price, primarily because of mix issues.

But the big story for the quarter is really our gross profit margins, which were at an all-time high -- 27.6 percent, which is 28.4 percent before interest. This is up 430 basis points. A number of factors are contributing to these strong increases in gross profit margins, the largest impact being from Las Vegas.

As we talked about, we have expanded our presence in Las Vegas over the last couple of years and, as I mentioned in the press release, we could not have timed our expansion any better, as we have seen extraordinary demand for homes in that market and the ability to raise prices, which has enabled us to see significantly increased home gross margins there. But this same phenomenon is going on in other markets around the country; California and Arizona, in particular, we have seen come through the margin side because we have been able to continue to close homes there at a fast pace.

We have also seen some significant increases in Virginia and Maryland, although not quite as evident in margins this quarter because of the strong sales pace there and the fact that we've slowed down sales there recently in response to that strong demand, so that we can allow our construction activities to catch up with our backlog.

We also saw design center revenues increase in the quarter; year-over-year were up $2500 over where we were a year ago. And this has added an additional 50 basis points to our margins this year compared to last year. Rebate dollars are up, and we also saw around 90 basis points added to our margins this quarter as a result of the reversal of certain land development construction costs, which had previously been estimated and no longer needed in various markets around the country.

Lumber costs, as you know and as we have talked about in the past, have increased, although recently they started to move down. But the impact of the increases earlier in the year have impacted our margins this quarter and did cause a reduction of approximately 50 basis points related to lumber alone. We've seen increases in other raw materials as well. The impact of the lumber costs primarily will be felt in the third quarter, and the impact to some of these other raw materials in the third quarter that could have an impact of an additional 50 to 75 basis points.

Our marketing costs for the homebuilding segment are down. That's largely due to the reduction in our deferred selling cost amortization. We've seen a lot of subdivisions closing out this quarter, and we are going to be gearing up and bringing on a number of new subdivisions here over the next 90 days. We're expecting to add approximately 60 new subdivisions in the next 90 days. These will have new model operations that will be opening, and so that will probably return to normalization here in the third and fourth quarters.

Our homebuilding G&A has tracked pretty much, although we have opened some new operations that have not yet produced revenues. We have started to see some leverage created by increased revenues, and so overall we've seen that percentage of SG&A of homebuilding revenues has actually dropped.

On the corporate G&A side, we've seen increases related primarily to the increased profitability of the Company and the growth of the Company. But overall, as this slide shows that our SG&A as a percentage of revenues has actually dropped to 12.6 percent from 12.9 percent a year ago.

On the financial services side, our mortgage operations have continued to be challenged by the competitive pricing environment for mortgage loans. While we had substantial mortgage loan origination volume in the quarter, originating a record 527 million in loans, we saw a record level of origination fees of $5.4 million. The real story here is the reduction in gains on sale with the mortgage loans created by this pricing environment, and the increased G&A costs that we are incurring in this segment in order to handle the increased volume of mortgage loans. As a result, this segment recognized profits of $3.1 million compared to $8.6 million a year ago.

For those of you who are interested, I'll throw out a couple of statistics in relation to the type of loans, and perhaps your evaluation of the quality of the buyer and the borrower this year versus last year. We have seen a significant increase in the mix of ARM products. A year ago, 10 percent of our origination volume was ARMs. This quarter that has risen to about 33 percent. And that's fairly consistent with what we are seeing in our pipeline today.

We have seen a significant increase in the use of interest-only products, and today approximately 75 percent of all of our ARM products are in fact interest-only products. We believe this is driven primarily by the change in psychology of our borrower as opposed to a need to reach for affordability, and that is evidenced by the fact that our FICO scores of all of our borrowers have maintained at levels well above the 700 level and are comparable to where they were a year ago, even before this interest-only product was instituted.

As well, our loan-to-value ratio has stayed fairly consistent at about the -- overall, around 80 percent, maybe slightly above. But overall, the quality of the borrower appears to be fairly consistent and there is no weakening, no signs of weakening, of any indications that we are getting.

The strong results that we produced as a company enabled us to produce some of the strongest returns, certainly the strongest returns in our history, and some of the strongest in the entire industry. Our return on revenues this quarter was over 9.4 percent. That's up 320 basis points over the 6.2 percent that we recognized a year ago, driven really by the significant increase in our homebuilding margins, which are close to 18 percent compared to just over 12 percent a year ago.

The return on assets have -- this is a rolling 12-month number -- reached 14 percent; a year ago the rolling 12-month number was just over 11 percent. And our return on equity, which is a very key metric for us, reached in excess of 27 percent this quarter, and that's up close to 500 basis points from where it was a year ago.

We've also talked about the fact that not -- these are absolute numbers, absolute returns, and these are some of the highest in the entire industry. Larry mentioned the concept which I would like to touch on briefly here, and that is that not only are we achieving the highest absolute returns but the highest risk-adjusted returns in the industry. And the reason we say that, and what we mean by risk-adjusted returns is we take into account not only the returns themselves but the volatility inherent in a company's business model. From our standpoint, what we would view is that, obviously, the lower the volatility the lower the risk and the higher the quality of earnings produced by that type of investment. We believe that it's our risk profile that has led to the upgrade of our company to investment-grade, making us one of only five in the entire industry with investment-grade ratings from all three agencies.

Some of the factors -- the most important factor leading to this -- and Larry mentioned it as well -- is the fact that we don't speculate in land. We don't take entitlement risk. We limit our development risk. We are looking at land as a raw material for the manufacturing of our homes, so we are looking really for just-in-time delivery to the extent that we can get it.

This gets to our limited 2-year supply of lots, the fact that we only buy lots that have a duration of 2 years within a given project; we only buy assets if we have permits and seals under our control, and we have no joint ventures or off-balance-sheet financing or specific performance arrangements. And all of these things are confirmed through a very strict underwriting process that we undertake for every asset that we buy. So, again, without this speculation factor our risk is lower, and we believe the quality of earnings -- obviously the volatility in our earnings would be lower and the quality of earnings that we'd produce would be higher.

On the balance sheet side, we have never been stronger. Our equity is in excess of $1.1 billion, up 32 percent from where it was a year ago. Our book value per share has grown to over $35 a share, up 30 percent over the $27 a share last year. Another statistic that we are particularly proud of is our debt-to-cap ratio, which, while we continue to make significant investments in our homebuilding operations, continues at a level that's one of the lowest in the entire industry, which, I believe, again, exemplifies the strength of our capital structure.

And speaking of our capital structure, some of you may have noticed we did make a couple of filings with the SEC yesterday in addition to our 8-K. I just wanted to clarify this because I did get a couple of questions on it after the market closed. We filed two registration statements. One in particular was to register 500,000 shares for resale of stock, specifically related to -- or specifically contemplated the sale of some shares by our foundation, 122,000 shares that they had, and wanted to register them so they are available for sale. We added some additional shares just to have them available with (technical difficulty) in mind.

In addition, we refreshed our shelf registration statement, increase it back to $1 billion. It had been at 750 and was reduced last year with the issuance of -- we went through several issuances over a period of time of public debt and it had never been refreshed. So all we did -- we didn't want to be out of the market, in the hands of the SEC more than we needed to. So we took this opportunity to refresh it and increase the level of the shelf in relation to the increase in the size of our company.

Further about our balance sheet -- and I just mention this because many of you are interested in it -- specs continued to be controlled very tightly under specific procedures that we have deployed for many years. We have today a very limited supply of spec inventory. In fact, many of these markets it's impossible to even start a spec, because we have close to 3000 homes right now that we have sold that we haven't started. But we do have today only 85 finished homes in the entire company that are finished and not yet sold. So that continues to be a very, very low number.

As we look forward and some of the indications of where our future closings are coming from, we look to our order levels, which for the 10th consecutive quarter reached record levels. We received orders for 4232 homes during the quarter, which is up 15 percent, really almost 16 percent over the 3600 orders that we received a year ago. The most impressive increase, as I mentioned earlier when we were talking about closings being flat in Arizona -- you can see it's basically just because of a lull and a strong performance in the first quarter because we've come back strong in the second quarter with order strength, receiving over 1200 orders in the state of Arizona, which is up 26 percent on an absolute basis and 49 percent on a same-store basis. Las Vegas, also a source of significant growth for us this year, was up over 20 percent on both an absolute and a same-store basis. So we've seen --

One of the things that we've talked about that I've talked to many of you about and we've talked about in our press release is we do see some declines in certain markets, as represented by these numbers. You see it in Virginia, you see it in Maryland. These are declines that are clearly not related to demand. These are markets where the demand is some of the strongest in the entire country. We have had significant sales over the last year. And we have intentionally slowed down sales in those markets, as we announced last quarter, in order to catch up -- allow our construction process to catch up.

This phenomenon has spread into some other markets; we've also seen that occurring in California. So that the level of increase we are seeing, even though we're up 23 percent in the quarter, that's after late in the quarter instituting some processes to slow down sales, as well as in Las Vegas and to a limited degree in Arizona.

We see, again, Colorado, being one of our large markets, is down in the quarter, primarily due to fewer (technical difficulty) subdivisions and also some difficult comparisons. They had some very strong performing, high-volume subdivisions a year ago which have since closed out. And even today we have a number of subdivisions that are in the process of closing out. And so that caused their orders to be down this quarter. But market conditions here in Colorado appear to have stabilized. Traffic looks strong. We have a number of very, very well located subdivisions that we are planning on opening here in the next 90 days, which will -- I think you will begin to see the subdivision count in this market start to grow over the balance of this year.

Some other indications -- we did receive in the quarter over 500 orders from markets that we've opened since 2002. You can see that has been our greatest source of growth here in Texas and Utah, as well as Florida and a few sales in Illinois. Also for the quarter, our traffic levels continued to be strong. And traffic, even though we had some intentional slowdowns in sales, traffic was still up 10 percent for the Company as a whole throughout this quarter. And our can (ph) rate, as you can see, is down slightly from where it was in the second quarter of 2003.

These strong order trends led to a backlog level that is the highest ever for any quarter end. Close to 8300 homes, up 30 percent. But the big story is the change in the average selling price, which has pushed the future sales value of our backlog to $2.5 billion, which is a 53 percent increase over last year. And again, as I mentioned, we have close to 2800 homes in our backlog that have not been started yet. And this, obviously, has an impact on our closing levels in the short run. And many of you -- you know, look, we've talked about our closing levels being at above 13,500 for the year in terms of the conversion rate for our backlog as we ended the third quarter. Because we have so many homes not yet started, you'd tend to see the conversion rate be at the lower end of our historical range in that regard.

Other statistics that reflect the visibility for our future growth are the active subdivision count, and you can see that we're up 14 percent over last year at 217 active subdivisions. We are down slightly from the first quarter, primarily due to the strong sales activity. We closed out of about 10 more communities than we had anticipated, so that caused us to be down sequentially, yet we are up year over year. You can see that we have added most of our active communities in these new markets of Texas, Utah and Florida, while we have added three communities on a net basis as well in Maryland and some additions in Las Vegas.

The Arizona decline -- you can see the results of the strong orders. That's where we saw most of our active subdivisions coming off the board, as we are down eight communities from a year ago in Arizona. Primarily -- this is a temporary basis, as we gear up to bring on new communities over the balance of this year.

We have already added this year 95 communities on a gross basis that we've opened. And as I mentioned before, we are planning on adding and opening 60 new communities here over the third quarter. Obviously, we'll be -- and sales activity will determine how many communities come off the board. But you can see that we have a number of new communities that are starting; 155 of our 217 active communities will have been opened this year.

Also, additional visibility for the future is reflected in our lot supply, and we have provided for you in the press release where the lot supply is located and where it's growing. You'll see significant growth coming in Las Vegas, and you'll see the growth that we're anticipating in Arizona as our lot supply in Arizona has more than doubled from where it was a year ago.

As a company, though, the lots controlled -- as we've grown we've continued to bring in the lots. Many investors when we talk to them are concerned about our ability, with a short 2-year supply, the ability to replenish our lot supply. And we've shown and demonstrated over the years our continued ability to maintain that conservative profile and continually bring in quality lots to supply our growth.

You can see that we have to date over 32,000 lots under our control, which is a 43 percent increase over last year. Of this 32,000 lots, 13,000 of them are under option. That's a 41 percent mix, which is up from 29 percent a year ago. So we have more lots controlled under option. And I might mention these are true options; no specific performance requirements at all and nominal deposit in place. In fact, to control these 13,000 lots we have right around $33 million at risk, 20 million in cash and 13 in letters of credit, which is right around $2500 a lot. So it's a fairly nominal amount that is at risk to control a substantial number of lots.

And of course, as we have also discussed, these are lots that we have under control, under contract. And we always have a pipeline of lots coming behind these that will replenish this supply, and we have in excess of 20,000 lots in that pipeline today that are under soft dollars or under consideration.

So we are in a great position. We are growing in the right markets. We have a terrific lot supply, a tremendous balance sheet. And we are in a great position to perform and achieve record results for the balance of this year.

That concludes my prepared remarks. I'd like to open the call for questions.

(OPERATOR INSTRUCTIONS). Ivy Zelman from Credit Suisse First Boston.

Good morning, guys. Actually, Dennis McGill in for Ivy today. Just a couple of quick ones for you guys. Gary, could you maybe give us a sense of what you think may be driving the acceleration in demand and pricing power in Vegas, what might have changed over the last quarter or so that even let you push prices even higher than maybe you have the last couple of quarters?

Dennis, I think it's not something that has happened over the last quarter, it's really something that has been happening for -- we've seen it coming and building for a number of quarters now. It's really starting to really come through the bottom line now, but I think it's driven by the affordability. You can see that the affordability relative to, in particular, California, more than anything else. I think California values have also increased pretty dramatically, and that makes Las Vegas look even that much better, even at current pricing.

Well, to be fair, you did cite Vegas as the primary reason for the upside surprise on the quarter to margins. So at least some of that has to be above what your expectations were at this time on the last call; right?

I guess I would say yes. The pricing -- the ability -- the pricing increases that have come through the marketplace that we've been able to enjoy as well, over the last several months have been above our expectations for sure.

And there's no sense that you're getting from the buyer whether that's employment driven or it is migration from California, as far as new entrants in the marketplace?

My sense is is that it's driven by just the fact that, even at an average price of $225,000, it's very affordable relative to the areas that are within that geographic area.

Without giving us the absolute number, can you give us a sense of maybe what gross margins were up in Vegas, on a year-over-year basis?

Dennis, we just don't do that.

Getting to your land question, or the issue you had brought up -- we kind of struggle with it a little bit ourselves -- is where you do have a very conservative land strategy, and it seems like it's the most risk-advantageous. But there's a lot of talk in the marketplace about how constrained land is and how difficult it is to secure land, and especially markets like (indiscernible) where it's Vegas, D.C. or California, yet you are able to keep a pretty constant supply without locking up multiple years' worth. Can you talk about how maybe there's a divergence there in what we hear as far as land availability and your ability, obviously, to keep a strong pipeline without locking up multiple years?

Part of our success, Dennis, is being -- is first of all having trained professionals in each of these markets that are buying land every single day. We don't go out and focus on one large parcel, and then when we buy it we can take the next two months off. We are buying land every single day, we are getting term sheets in all the time from every market that we are in. And there are projects under consideration every day. And I think that when these sellers know we are in the market every day -- they know they can call us, they've seen us perform -- I think it's a credibility issue as well, that we have demonstrated that we can perform quickly, that we have the cash and the capital. And we have a process that can be counted on to evaluate the projects adequately and completely. And if the project doesn't work for us, we give them a quick no so they don't waste their time. And when we do proceed with a project, assuming that the aspects of the project are as demonstrated and advertised, that we move forward when it makes sense for us. So I think our credibility is a factor; I think our expertise; I think the fact that we have money and they know it, and we have demonstrated the ability to perform, all work in our favor.

You think, putting all that together, some of the commentary on the land constraints in certain markets is somewhat overstated?

I don't think it -- it works for us, but I think that we are still seeing that land is constrained. And that's part of why it is so profitable, because when you have the expertise and the ability to deliver in a difficult market, that's when you can make the most amount of money.

Just one quick follow-up. With the IOs (ph) you are seeing, we've heard quite a bit of the uses in, call it D.C. and California, which is to be expected, I think. Is that your experience as well? Are you seeing the uses also outside of those markets?

It's interesting you would ask that, I was just looking at that statistic. We are seeing over 80 percent of our IO product being in California, Virginia and Las Vegas. So Las Vegas is a market where it also is being used.

Craig Kucera from Friedman Billings Ramsey.

Congrats on another great quarter. Can you comment on some of your traffic that you saw maybe on a month-by-month basis? Did you see any variation, say, from April to June, or was it pretty much strong throughout the quarter?

Craig, my comment would be more subjective than objective, because -- and the reason I say that is that in the latter parts of the quarter, first of all you're getting seasonally into a slower time in summer, as the summer starts in June. But the other aspect of it is when you have intentional holdbacks of product for sale in your hottest markets, it has an impact on your traffic. So it's really not an objective factor that means anything in this current environment, in my view. Do you understand what I'm saying?

No; I follow what you are saying. I guess steering away from that, trying to understand your pricing -- you have had excellent pricing year over year. Can you kind of comment on the mix shift? Are you shifting down sort of in size of home, or is this pretty much a similar apples-to-apples comparison? Or is the price appreciation perhaps even higher than what we are seeing because you are offering less house, per se, on a year-over-year basis, than you were?

The mix has -- I wouldn't say the mix has changed greatly in Las Vegas, for example. We are doing some things in that marketplace to increase density, but in terms of a major mix shift I wouldn't say that that is a major factor there. The impact that we are seeing in some of the other markets -- as I mentioned, Arizona showing very little in the way of average price increase -- is not representative of what's happening in that market. So there is a bit of a mix shift there, a bit of a mix shift in Maryland as well, because the pricing increases in that market have been very, very strong. But other than that, it's kind of a -- it's fairly steady from a mix standpoint.

And finally, you made a comment, I think, last quarter that you were still seeing 20-plus percent gross margins in all your markets. And I certainly wouldn't expect you to comment on a given market. But are you still seeing that? (technical difficulty) pretty good across-the-board strength?

Yes, we are. And I think that comment was really related to the markets that we were in prior to 2002. The new markets are still getting up and going and are at lower levels, but everything else is performing well.

Right. And we'd expect those to ramp up over time as you kind of build your critical mass. Congratulations. Thanks again.

Jim Wilson from JMP Securities.

Gary, I might have missed it, but I was wondering if you could give a little color on the new subdivision openings geographically? And then, any thoughts on what the openings look like for the rest of the year or even what they might look like in '05 on the current planning process?

The communities that we have coming on are really -- they're pretty well spread across the country. We do have a number of new openings, and it would be hard to single anything out because we're growing in every single market, and we have openings in every single market. We're going to start to see some new communities open in Chicago. We should have several communities open in Chicago during the third quarter. And Texas will continue to add some communities. Las Vegas will be bringing on some new ones to replace some of the ones that have come off the board with their strong orders -- Phoenix, Tucson, California, in particular Southern California has a number of new openings. And as I mentioned, Colorado has 10 or more new communities that will be coming on board in the third quarter alone.

Any thoughts around the planning process for 2005, or as we move forward from a (indiscernible) and gross standpoint?

What I would say about that, Jim, is that we have a plan to grow approximately 15 percent. We're not counting on growth in orders per community. So we would probably target something in that range. I think we had said previously that we'd be up around 15 percent or so, maybe a little bit more, for this year. We got close to that with what we had added in the first quarter, and we are back down from that. But we should move more in that direction in the third quarter.

And presumably, as you look to '05, once again fairly evenly spread from a geographic standpoint?

I would say yes. We'll be -- as we look at openings, I'm looking at gross openings. And we plan to continue to grow to some degree in all of our markets. Obviously, the greater increases will come in some of our -- from a percentage standpoint, we'll be gearing up in Delaware Valley and Tampa. Houston will start to pick up the pace. And Jacksonville as well; we would expect to see some net increases there. But our plan would be to grow our volume and our presence in all the markets.

Outstanding quarter. Thanks.

(OPERATOR INSTRUCTIONS). Stephen Kim from Smith Barney.

Jed Barron for Steve Kim. Congratulations on another strong quarter. Just, I guess, really, one question, if I could. You talked about the strength in your backlog and in backlog pricing, in particular, over 300,000. I guess as you sort of look out in terms of the deliveries that you have embedded in your backlog, where might you expect your closing prices to trend? I would anticipate that they would certainly be on the move upwards here, given your backlog price, but just wondering if you could kind of provide a little bit more color on that?

Jed, the backlog, I would have to say, is probably the best indication of the direction that they are headed. The composition of the backlog -- you know, you can kind of see with what we have given you what the average prices are per market and what the amount of backlog is in each market. So you can see what the influence is of each of the markets in the backlog. As you know, the backlog is heavily influenced by homes that are there longer, take a longer construction period, being Virginia. Colorado, which the average selling price is now up (technical difficulty) and California. Those all have average selling prices significantly above our average right now, but it also takes a significantly longer period of time to build them than Arizona and Texas. And as we start to gear up, Texas and Utah and Jacksonville -- all which have prices down below $200,000 -- that will begin to have an increasing influence. But in terms of the near-term, Jed, I would say that backlog is the best indication of the direction. And you can see historically what the influence of these longer-term markets has had. I think, almost -- not without exception, but generally, the average price in backlog is higher by anywhere from 5 to 10 percent above what your closing price is. And I'm just quoting what the history shows, not necessarily what the future will hold.

I think that's it for us. Congratulations again.

Robert Manowitz, UBS.

Two questions. First, if you look at the FICO scores specifically in California and Nevada and Virginia, would they be flat year-over-year as well?

Yes, Rob, I believe so.

And then secondly, can you speak to what you're seeing in some of those markets, specifically California and Nevada, in terms of investor demand? We are hearing that homebuilders are trying to prevent investors from buying homes and flipping (ph) them with clauses, and that the amount of investor demand is on the upswing. Are you seeing that?

We are seeing it, and primarily in Vegas and California. But we are also seeing it in some other markets, even some of our Eastern markets, Virginia and Maryland. But we have as a policy that these need to be owner-occupied, and generally that's our general rule. So we have some circumstances where if we don't control the loan, we can't necessarily tell if they are an investor or not. But generally, our policy is not to sell to investors.

Would you venture a guess as to what percentage of the buyer traffic out there in some of those markets is investor demand? I know it's a tough question, but maybe you just have a range?

Rob, I really do not know what that percentage would be. It would just be a shared guess.

Thanks very much. Good quarter.

Gentlemen, at this time we have no additional questions. Do you have any closing comments?

We'd like to thank you again for joining our call today. We look forward to speaking with you again in October, following the announcement of our 2004 third-quarter results. Everybody have a nice day. Thank you.

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