MDC Holdings Inc (MDC) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the M.D.C. Holdings 2004 third-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 M.D.C.'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 June 30th, 2004 Form 10-Q. 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 M.D.C. Holdings.

Thank you, Joe. Good morning everyone. Thank you for joining us for our third-quarter 2004 conference call and webcast. M.D.C.'s 2004 third quarter performance continued to set new highs for our company. We achieved quarterly records for net income and earnings per share that exceeded last year's third-quarter levels by approximately 60%. Our earnings for the first nine months of 2004 already exceed the record earnings for the entire year in 2003 by more than 15%. We closed 3,558 homes, an all-time quarterly high. And as a result of these closings and our increased average selling price of $283,100, we produced record revenues that reached $1 billion for the first quarterly period in our history. And our home gross margins have never been higher.

These strong operating results enabled us to improve our after-tax returns on average equity and assets to nearly 30% and 15%, respectively. Our returns have ranked consistently among the best of our peers. These returns have been achieved with a disciplined land acquisition strategy, and we believe is one of the most conservative in the industry.

Our 2,925 home orders were the most received in any third quarter. In the process, we accumulated a backlog as of September 30th of 8,166 homes valued at nearly $2.5 billion -- the highest ever at this point of the year and 50% above the value a year ago. Demands for new homes was healthy in most of our markets, even with what appears to be a return to more normal order patterns in Las Vegas and California from the exceptionally strong levels earlier in the year, which Gary Reece will address in more detail.

Our balance sheet continues to be one of the top priorities and greatest strengths. Stockholders equity at September 30th approached $1.3 billion, or $38.47 per share, up 34% year-over-year. Our inventory levels increased 36% over last year, due to the substantial growth of our homebuilding operations. Yet, we have continued to operate our business with one of the lowest debt-to-cap ratio amongst our peers. Even with our significant growth, we ended the third quarter with $575 million in cash and borrowing capacities, 12% above a year ago. This conservative capital structure, combined with our disciplined approach to expansion, are key distinguishing characteristics that have established M.D.C. as one of only six investment-grade companies in the homebuilding industry.

We further enhanced our financial flexibility by expanding our shelf registration to $1 billion with 500 million earmarked from our recently announced medium-term note program. This program should enhance our ability to react to opportunities in the capital markets with a wide variety of pricing and terms that better match our short-term and long-term objectives.

We are extremely proud of our accomplishments this quarter and during the first nine months of 2004. We would like to express our sincere appreciation for contributions made by our employees and business partners towards the achievement of our goals in 2004. With their continued support and the strength of our record performance to date and the highest September 30th backlog in our history, we expect to close more then 4,400 homes in the 2004 fourth quarter, on our way to earnings that should exceed significantly our record results in the third quarter. Absent adverse changes and economic conditions, we believe we will continue to grow our business and produce our eighth consecutive year of record earnings in 2005.

Now, I would like to turn the call over to Gary Reece, our Chief Financial Officer, who will review our markets and third-quarter results in greater detail.

Thank you, Larry. Before we get into the numbers, I just want to say a few words about the markets that we operate in, and I wanted to start with Las Vegas. Over the last week many questions have been raised in response to several articles and new stories regarding the pricing activities of certain homebuilders in the Vegas market, and I wanted to take a few minutes to clarify what we are seeing in Vegas.

First, it's very important to remember that the national housing picture is always a compendium of local markets with activity levels that could vary significantly, for better and worse, from overall national patterns. In our communications throughout the first half of this year, we referred to Vegas as an extraordinary market, meaning that we were seeing levels of demand-related activity, including absorption rates and price increases that, in our experience, were unprecedented for this or any other market.

M.D.C. has been well-positioned to benefit from these conditions. Operating out of an average of approximately 20 active communities since the middle of last year, we saw our sales for active community rise to almost 12 per month. And third quarter of last year, it peaked at 18 per month in the first quarter of this year and reached 13 per month in the second quarter. These are powerful absorption levels compared to a more normal range of 5 to 8 orders per month. Our sales for the 12 month period ended June 30th increased 60% from the previous 12 month, while our backlog at the end of the period rose almost 80% year-over-year.

Prices in the market increased 50% from June 30th '03 to '04 as the median price of new detached homes rose from $202,000 to just over $300,000 according to the Myers Group. We closed almost 1,900 homes in Vegas during the first nine months of this year, which is up 39%, at an average price of $233,000, which is 26 percent higher than the 184,000 average price a year ago. All these factors contributed significantly to our record performance this year.

As we stated in our press release on September 22nd, in the 2004 third quarter, we've seen the Las Vegas market return to what we believe is a more normal level of demand. We've seen a slower absorption pace, fewer camp-outs and lotteries, a slower rate of price increases, the need for some level of sales incentives, and a modest increase in the number of unsold homes available for sale. These are not characteristics of a market that has hit the wall, but would exist in any healthy homebuilding market in the country. The Las Vegas economy appears to be strong, and we believe the demand for new homes at the right price points and the right location should be healthy.

Here are some of the facts about our company that have contributed to and should support our success in this market. First, we believe we build in the right price points. Our average selling price during the first nine months was 233,000. For the third quarter it was 258,000, which is generally comparable to the median price in the entire market, including detached homes, but well below the single-family detached average price. Also, almost 90% of the homes we closed in the third quarter had base sales prices less than $300,000, which is well below the 400,000 plus price points that have experienced the most slowing and the highest degree of publicized price discounting by their builders.

As for price discounting, as we stated in our release of October 5th, we've generally been able to maintain the price increases realized in this market earlier in the year. Just as in any market, we've applied discounts to specific homes in a community to move standing inventory or as a promotional measure. And in only two communities in the last 90 days did we reduce base prices across the board, and one was only between 1,000 and $3,000. And in each time, to move the last lots in the community, which had less desirable locations as compared to the rest of the lots.

In our other active communities, we've either maintained our pricing or raised prices, but generally at a much slower rate than earlier in the year. As I mentioned previously, we've increased our sales incentives in Vegas in recent months, but the incentives currently offered in our active communities average less than 3% of the home sales price, which is consistent with normal market conditions and is comparable to incentives we offer in some of our stronger markets around the country.

Additionally, concerns have been raised about the levels of home order cancellations and unsold homes in this market. And in this regard, we've seen modest increases in recent months, but we continue to be in great shape. At September 30th we had approximately 30 unsold homes beyond the foundation stage with less than half of these finished, both of which are insignificant relative to our level of activity in the market. And our order cancellations in the third quarter were comparable to the level in 2003, despite having a significantly higher level of backlog this year. Our orders in Vegas were lower in the third quarter when compared to the same period a year ago, largely due to the decline in the rate of monthly orders for active communities -- from 12 last year to six in the most recent quarter. In actuality, six orders per month in any market at any time of the year is pretty healthy. This six-per-month in Vegas was achieved in the heat of the summer, which is typically a time of relatively slower sales.

Also, in a market that places a high reliance on being able to view model homes to make the buying decision, many of these orders were taken out of sales trailers. Almost two-thirds of our 26 active communities at September 30th did not have model homes, compared to only six active communities without model homes a year ago. We hope this situation is turned around before the selling season begins in January. We have more than 10 model complexes scheduled to open in the next 100 days.

While we have positioned our company to take advantage of the extraordinary attributes of the Vegas market, we have not compromised in any case the basic underlying disciplines of our operating strategy to accomplish this. Every project that we purchased in this market has been subjected to the same strict underwriting standards that we apply throughout the country. No property is acquired without entitlements or without our ability to control the process of getting the necessary building permits and certificates of occupancy. The projects are expected to achieve the same minimum IRR level as required in our other markets, and must be of a size that would enable us to sell all the homes within a two-year period, based upon conservative absorption assumptions. And our overall position of lots controlled in a market should approximate 2 to 2.5 years. Now, these disciplines should help us minimize our exposure to the major shifts in economic conditions in Las Vegas.

So that's the Las Vegas market. As I turn to some of the others -- California is another market where we saw our order pace slow, particularly in Southern California. Actually Northern California, throughout this period, has continued strong with the ability to increase prices. We have five active communities in both the Bay Area and Sacramento, so Northern California continues strong. Southern California -- there has been some leveling. We have seen our average sales per month per community decline from seven last year to about four this year. And the situation has been exacerbated by a situation similar to what's going on in Irvine, where we have four active committee, but two of them have been stopped due to strong sales earlier in the year, and the other two are in price points in excess of $1.5 million. So that is where there has been a little bit of slowing here of late. But it's still a strong market with pricing power still available.

Arizona is one of the strongest markets in the country for us. It exhibited the strongest characteristics in the third quarter. Our orders were 26%. We have 30 active communities in that market, and we were able to continue to raise prices during the heat of the summer. Our backlog there is up 25%. You could see our lot supply is up dramatically; over 6,000 lots added over last year. And our average selling price continues to move upward, approaching $200,000.

Virginia and Maryland may be the strongest market in the country when you consider the land constraints and the difficult regulatory environment in which we operate. We have not seen increases in our orders in that market, primarily because of the time it takes to get communities on and the fact that strong orders early in the year have caused us to slow sales in that market, so that our construction activities can catch up. But again, we were able to continue to increase prices there in the 36 active communities we have in that market.

Colorado is no longer our largest market, but we are the largest builder in the Colorado marketplace. It continues to show signs of improvement. We have 56 active communities here, which is down slightly from where we were a year ago. Yet, sales in the quarter were flat and our average selling prices are up. There has been some job growth, and the unemployment rate appears to be dropping. So, it is, again, a market that we would not characterize as on the major upswing, but it does appear that there are some positive signs for the future.

As we look to some of our new market, Salt Lake City and Texas, for example, where we have been in since 2002. Salt Lake City is a market that we have grown fairly dramatically, and we now have 22 active communities in that market. Our closings are up 160% over last year. Sales are up almost 100%. And based on our permits in that market, we were the number one builder in the Salt Lake City market in the third quarter.

Texas is another market where, with the addition of Houston, we have continued to increase our presence. We have 16 active communities in Dallas and another eight in Houston. Our sales are up, our closings are up, and that is a market that we look forward to seeing strong performances out of in 2005.

Our startups in Chicago and Tampa are proceeding. Chicago -- we have seen the addition of our first active community. We are currently selling out of three communities, and we are scheduled to open several additional communities in the first quarter.

Tampa -- we control 800 lots. We currently do not have any active communities, but we are scheduled to open our first community in the first quarter of the year with continued openings throughout the year.

Jacksonville, which we entered last September with the acquisition of the assets of Crawford Homes -- we've gone from nothing in August last year to 22 active communities there this year, moving toward being one of the largest builders in that market next year. We added 15 communities in September of this year with the acquisition of the assets of Watson Homebuilders, which gave us control of over 2,000 lots, including 600 lots that we purchased outright and another 1,400 lots that we optioned, which we'll be taking down over the next five years, generally in a finished state. We added approximately 50 of their employees, added 500 in units to our backlog. And the additional volume that this acquisition should provide should put us among the top three builders in that market next year. And should establish, or at least put us in a position to be the number one builder of single-family detached homes in that market in 2005.

And finally, in the Delaware Valley, we are currently selling out of two communities, which should become active in the fourth quarter. We did acquire the assets of Patriot Homes, which gave us control. We did not buy any lots outright, but we acquired control of some 600 lots in 12 communities in southern New Jersey. It's a very land-constrained market, and that should add close to 200 closings to our portfolio by 2006 and really jumpstart our growth in that marketplace.

That's a summary of the markets. Now for the numbers, which I will breeze through quickly, and then we can get to some questions. As Larry mentioned, this was a tremendous quarter of milestones for our company. It was our ninth consecutive record quarter. It's our 21st out of the last 22. It was the first quarter in which we exceeded $1 billion in revenues, $100 million in profits, and $3.00 in earnings per share. We did see our earnings for the quarter at $105 million, up 60% over last year. The earnings per share exceeded -- where it was $3.07 a share, up 57%. And this growth was driven by record profits from our homebuilding operations. We recognized $193 million from our homebuilding business, which is up 64% over last year -- on revenues of $1,007,000,000. Again, a record for any quarter, up 29%. These strong results were driven by our record home closings, a 340 basis point improvement in gross profits, and a $33,000 increase in our average selling price.

In the quarter, we closed 3,558 homes, which is up 14% over last year. The slide you see there will show you where these closings came from. You can see that Arizona is now our largest market, followed by Las Vegas, California, with Colorado actually being our fourth largest market. And we did see increases in closing levels in most of our markets except for Colorado and Arizona. Arizona being very close, but Colorado being lower due to lower active subdivisions and a lower beginning backlog. And we did receive strong orders from our new market, over 500 closings -- excuse me, not orders but closings -- over 500 closings from our new markets in Florida, Texas and Utah, which comprise approximately 15% of our total closing levels.

Our average selling price, which you will see here, has continued to rise -- a $283,100 average selling price in the quarter, which is up 32,700 from last year. You can see the markets where we are seeing the largest increases -- the largest absolute increase coming in Virginia, which is up $95,000 per home, up 27%. On a percentage basis, Las Vegas saw the largest increase -- 258,000 versus 185, which is up 39%. And then a strong increase of $66,000 per home in our California markets.

On the gross profit side, we reached, as Larry mentioned, an all-time high of 28.2%. This was driven, in large part, by the extraordinary demand for homes in Las Vegas. But we also saw significant improvements in Arizona and Northern California. We also had additional contributions from our national purchasing programs and a higher contribution from our design center -- in the neighborhood of approximately 60 basis points over last year.

On the SG&A side, we saw the beginning of the achievement of some degree of leverage from -- as we saw a number of our new operations contribute either increased closings or the first degree of closings. And as a result, we saw our homebuilding SG&A, as a percentage of revenues, drop 70 basis points to 9.3%, which enabled us, or the Company as a whole, to lower our corporate and homebuilding SG&A from 12.3% to 12.1% this quarter.

On the mortgage lending side, we continue to be challenged by the competitive mortgage environment, which has really resulted in, overall, a higher degree of brokered loans and a lower capture rate. We did achieve, because of the high level of home closings, a record level of originations and broker loans -- at 614 million, up 16%, which enabled us to produce record level origination fees, $6.8 million, up 17%. But this was more than offset by lower gains on sales of mortgage loans and higher general and administrative expenses.

Our strong performance has continued to result in some of the most important measurements of our success, and that's our returns. Our return on revenues -- which all these returns are on an after-tax basis -- our return on revenues in the quarter increased 200 basis points to an all-time high of 10.2%. Our homebuilding operating margins were the primary driver of that, being up 400 basis points to 19.1%, which contributed to our highest level of last-12-months return on average assets, just about 15% of 300 basis points. And perhaps our most significant measurement to our shareowners is the after-tax return on equity, which is 29%, up 450 basis points over where we were a year ago.

The balance sheet continues to be one of our major strengths, as Larry mentioned. Our equity is approaching 1.3 billion, close to $39 per share. Our debt-to-capital ratio, net of cash, is 0.31. And our spec levels continue to -- we continue to maintain control, just over 100 units finished at this point.

As far as visibility for the future, I think we can see it in several areas. Our sales, as we mentioned, were the highest for any third quarter. We talked a little bit about the sales and I mentioned it in my market overview as to where these are coming from and why some of the markets are down. Our traffic was up for the quarter. Our cancellation rate was approximately equal to what it was a year ago. And these strong orders led to the highest ever third-quarter backlog in our history -- 8,166 units, which is up 30%. We saw the value of the backlog rise, however, 50%, to just short of $2.5 billion. And of this backlog, we still have approximately 2,300 units that have been sold and not yet started, which puts us in a position to where we, based on 4,400 units closed in the fourth quarter, should put us in a 54% conversion rate, which is approximately where we have been the last few years.

Another measurement of visibility is our active subdivision count, and where the active subdivisions are rising in terms of growth. We have here a slide that shows that our active subdivision count has risen so far this year to 238 active communities, up 20% from last year. You can see that there are increases in most of our markets, primarily in Texas, Florida, primarily due to the acquisition. Salt Lake City. Las Vegas has got eight active committees. Maryland, Illinois. We'll see the Delaware Valley contribute active communities in the fourth quarter. Colorado has been fairly stable. And we have seen declines in the markets that have been the strongest in terms of orders, that being California, Virginia and Arizona, which we hope to turn that around in a big way. Especially Arizona, which is down 12 active communities. We expect to see strong additions to active communities in the first quarter of next year in Arizona.

And then also our option lots. We are very proud of our accomplishments so far this year in tying up additional lots to fuel our growth. We now have close to 40,000 lots under control, and more than 50% of those are under option. We are getting closer to where we'd like to be in that regard. The lot control is up 74% over where it was last year. And what's important to note is, with the 20,000 lots that we control under option, we control that with $50 million at risk, which is 34 million in cash and 16 million in letters of credit, which is about $2,500 per lot. It's a relatively nominal amount per lot, representing the fact that these are true options, no specific performance, and there's been a true shifting of risk in each case.

As far as the lot supply and the visibility it provides, you can see this in the growth and where these lots are located. As I mentioned, Arizona has shown the strongest level of growth, up almost 200%, up 6,000 lots. We've added 2,800 lots in Florida, close to 2,000 lots in Las Vegas. We added 1,200 lots in California and 1,500 lots in Texas. But I think, as you see the comparisons in the press release, you'll see that we've added lots in virtually every market in which we operate, which puts us in a position to continue our growth story in 2005.

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

Thank you. (OPERATOR INSTRUCTIONS). Ivy Zelman, Credit Suisse First Boston.

Thank you. If you can address one small question first. You mentioned Southern California that you're still seeing pricing power. Can you tell us where exactly in Southern California and what price point, please?

Primarily the -- I guess most notably Inland Empire since we are -- we really don't have much to sell right now in Orange County. And most of our activity in Southern California is in the Inland Empire and in Los Angeles. We are seeing in the Los Angeles market the ability to raise prices as well. Most of these are in the price points well below a million dollars.

Like what price point?

Our price point -- we are fairly consistent, running from the high 2s to the 5, $600,000 range. So, our average prices in the mid 4s, so it is in that area.

And in Los Angeles, the same thing? Or is it --

Yes.

And how much annualized price increases are you getting now, would you say, in those two markets?

On annualized basis? You know, it has been averaging at this point -- this quarter, a little more than a percent a month.

Was that the same rate it was running in the first six months of the year?

In the first six months of this year it was faster.

Roughly, do you know by how much?

I don't know offhand, Ivy.

You mentioned also that your can (ph) rates were flat when you were giving the Vegas market color. Were you just referring to Vegas or the aggregate company lock-in (ph) rates?

I was referring to the aggregate company-wide cancellation rate. In Vegas, what I said was the cancellations in total in terms of number of cancellations was relatively flat.

What was it on a year-over-year -- what was the rate of cancellations?

The rate was -- I don't have the rate right offhand, but you know, the rate is going to be higher if you just look at a rate. But, you know, the rate is a function of gross sales in the quarter, which were obviously down per community. So the rate is going to be higher. But you also have a much higher level of backlog. It's really -- I would submit that your cancellations -- it is more relevant to look at cancellations as a percentage of backlog than as a percentage of gross sales, because there's such a disparity from quarter to quarter. If you look at the rate of cancellations as a percentage of backlog, it is lower actually this year than it was last year.

Moving along, in Dallas there's been some discussion or rumors in the market that you guys were actually going to exit that market. Is that being discussed right now?

No, it is not, Ivy. We have made some adjustments there to our product and our locations, but that is all we are doing.

Okay, and then really focusing on my biggest question, as related to your margins -- clearly there's been significant pricing power in many markets that have driven your operating margins to new record levels. You talk about '05 being a growth year and one of the things that is hard to digest and understand is how you are going to sustain those margins, given the year-over-year comparisons you'll be up against without having possibly the same pricing power, assuming that the pricing we're starting to see, as you play in the more normalized environment in certain key hot markets. So with that said, the land, the lots that you've purchased in Vegas -- you mentioned 2,000 lots in Las Vegas were added. I'm assuming those lots are not going to generate the same type of margin that the lots that were just closed were able to generate. So, can you give us a sense of how margins of 19.8% for the quarter are sustainable and why you think you can still grow earnings if margins, in fact, could be challenged just on a tougher comparison basis?

Ivy, first of all, the growth would start with the top line, which we have -- you can see from the lot supply and the community growth that we are growing the company in a position where we can grow closing levels. On the margin side, I would not necessarily assume that the Las Vegas, the new projects, as to where their margin will be relative to the past. Now, if the rate of increase in prices is not as high, it may impact it, depending on how that relates to the land cost percentage increase over what the land was before. We've not given back the pricing levels that we achieved earlier in the year. So, there are a lot of factors that go in here. And again --

Right. But admittedly, your absorptions are cut in half and you selling incentives are up modestly compared to where they were. So you're already eating into margins just by absorptions and incentives. So clearly, today's margin on the sales you sold in the third quarter cannot be as good as it was in the second quarter.

But, we're also seeing improving margins in some of our newer markets as we become more mature in markets like Jacksonville --

Right, but what kind of operating margin are you doing in those markets? Are they the 15 to 20%-type operating margins you're doing in Vegas? Or are you doing single-digit today in those new markets?

They are well below Las Vegas right now. But as you see, the improvement generally across the board, it can offset declines in a single market. We are in --

You still believe in '05 you can actually sustain your current level of 2004 operating margin? Is that what you want us to walk away with thinking?

I would not say that for sure. I would also not say no, I would not say yes. I'm not saying either way. I am just saying that there are a number of factors that could go either way on this. And you know, our growth next year is going to be focused -- I think we will maintain strong margins, but unit count is going to drive -- be a major driver in our growth next year.

I will let other people ask questions. Thank you.

Stephen Kim, Smith Barney.

Thanks. Gary, I guess my first question relates to Vegas -- if you could just comment on what your men on the ground there are saying with respect to the potential psychological impact of all the news flow related to, probably following Pulte's actions and troubles there. Are you seeing tentativeness on the part of your buyers to sort of go ahead and sign on that dotted line for fear that they are getting ripped off? Are you seeing any indication that that kind of behavior is manifesting itself?

Steve, I don't know if they're thinking they are getting ripped off. I think that when you see the kind of press that has been there in the newspapers and on TV, that it definitely has an impact. What our guys on the ground are saying is that there are some buyers who are going to wait and see. We have not seen a mass exodus of buyers in our backlog, which is a good sign. People are hanging in there. And so I think that that's an indication that our pricing, to this point, has been reasonable, and reflective of the market. But I think they think that there could be some hesitancy and some tentativeness here in the short run, but it should run its course over the next month or so.

I guess my question is, have traffic patterns held up better than your order patterns? Not that your order patterns are bad. Have they had the traffic held up better?

You know, Steve, I honestly don't have a report on that this week.

Is that a report that you're likely to get? Do you get that kind of data weekly?

We do get that kind of information weekly and keep an eye on it. I think that there's -- this week was a little bit different than others. But, I think we are going to have to see how this plays out over the next few weeks. I don't think that we believe that this is anything that is going to be long-term; it's just kind of got to run its course.

Right. I do think that the comment you made about the fact that, while certain markets have been, perhaps, unsustainably strong are cooling a little bit, you have markets where you are newly-entered, where you are seeing some maturing or seasoning of those markets. So you have sort of an offsetting effect. Your company has generally refused to offer specific guidance. Your comment about record earnings again in '05 is sort of, therefore, intriguing, because one can't actually pin you guys down on where you think you're going to actually show improvement. You are not telling us the margin; you are suggesting it's going to be the units. What can you tell us with respect to line items in the income statement or even the buildup in terms of units or average price, that you would be comfortable giving us some sort of specificity on?

Steve, at this point we're not prepared to provide any comfort on line items. I think that you can see from the buildup of the community count and the lot supply where the growth is coming. The buildup of the backlog -- clearly, Arizona is going to be a major player over the next few quarters, because of the orders we have seen in the communities that we operate in and that we plan on adding in the first quarter. We plan on growing in every market, though. And we expect to see next year some initial contributions from Chicago, and a much larger contribution from Jacksonville and Texas, and also some level of activity out of our Delaware Valley market. So, really, the plan is to grow in every market that we are in next year. But as to specific line items, we would not be in a position to provide something there.

How about the SG&A? That's something which, theoretically, you guys should have some pretty good control over. Would we expect that if Vegas sort of continues to soften a little bit more than your current expectations, maybe southern California softens a little bit more -- nothing cataclysmic, but certainly a little bit of a softening -- and as you do greater volume, that being offset by doing greater volume in some of these other newer markets, what impact do you think that sort of dynamic will have on your overall SG&A rate?

Our hope would be that we would start to see some leverage out of this. We have expended dollars in all these new markets. We have established new regional offices around the country, and all of these have been established to facilitate the growth we hope to begin to see in 2005. I would expect to see some level of leverage on that side.

In other words, what kind of SG&A rate are you running or have you been running in, lets say, Vegas and California versus the rest of the country? Have Vegas and California been higher on an SG&A rate or lower?

California is probably a little bit higher. And Vegas is probably running about the company average.

Okay. Appreciate it, and a very strong quarter.

Timothy Jones from Wasserman & Associates.

I must say the information that you in your quarterly report probably is the best in the industry. Don't fall over dead that I gave you a compliment.

Thank you. Thank you.

A couple of things, okay? First of all, for years -- like three years -- you guys kept saying you thought that margins were going to go down because land price are going up. And of course, each year they went up 100 to 300 basis points. Given your backlog, could you achieve a 20% growth on the topline next year? Are you there?

I'm here. You know, --

Okay, I'll make it easy here. Fifteen to 20?

Could we?

Well, you should with that backlog up so much, the community count up so much.

Tim, we're preparing ourselves for -- what we generally plan for, as we said several years ago, that our goal would be to grow at a 15% pace. And what we have done is -- we set ourselves up with a 20% growth in community count and a 74% increase in the number of our lots, which bodes well for new community openings in the near future. (multiple speakers)

This suggests a 20% plus topline revenue growth. What am I missing?

One of the things we have to look at, Tim, is that you see where a lot of this growth is coming in community count, which is in Salt Lake City, in Texas and Jacksonville. Those are where most of the communities are added, as well as -- and I know we've got communities coming in Arizona and we added in Las Vegas. All of these are at average selling prices that are lower than our company average.

I was talking units, Gary. The units are clearly over 20%. The average selling price, because of mix and so forth, not particularly because of you lowering prices, could stay flat or come down. Is that correct?

We believe that we'll be having the stores. A lot of it will depend on absorption paces and -- you know better than anybody --

You've answered. The answer is yes, I think. But I will not put words in your mouth. How are your margins and backlog compared to the year ago? Are they up? Flattish? Down?

In backlog, the margins are probably a little bit higher than they were a year ago. That's because of the makeup of the backlog is largely Vegas and Arizona and Virginia, all of which have a larger piece of the pie. So generally, coming into the year, our margins were quite a bit lower than they are now, which is where our backlog was a year ago. (multiple speakers) 300 basis points lower.

What was 300 basis points lower?

I think it was about 300 basis points lower last year?

The margins in backlog?

(multiple speakers) coming in.

Really? Well that obviously gives you very good comparisons for the first half of next year. It does not take a rocket scientist to figure that out. The 100 specs -- is that completed specs or total specs our what?

That is completed specs.

And that's on what? 250 or some -- so that's like less than one-half a unit per subdivision.

That is correct.

That is extremely good. In Las Vegas, you gave two numbers of average price -- I think it was 233 and 258. I think maybe the 258 was your average price. And 233, is that the average price of resales or something or what?

Hold on one second. 258, I know, was our average price -- (multiple speakers)

That's your average and 233 --

During this third quarter. 233 was the average for the nine months.

Oh, the nine months. Now, the problem seems to be in the homes over $400,000 -- am I correct to think that homes in your price range in Las Vegas in the 250s, which is also the average price of the resale market, are still extremely strong?

They have been healthy. They are not as strong as they were earlier in the year in terms of the absorption pace, but it has been a healthy pace.

Could you tell me roughly what percent of your sales or your units are over, let's say, 400,000 of the sales -- 10% or something? Just a guess?

For us, it's a very small percentage. Actually -- hold on, I've got the numbers here. In terms of base pricing, 87% of our sales in the third quarter, or closings rather, were below 300.

So, that's fabulous.

13% was about 300, and most of those are below 400. So there are some above 400, but it is a small percentage.

That's where the problems even starts, so you are in good shape. Thank you. Good report.

The Craig Kucera from FBR.

I don't know if you touched on this or not, but I had a few questions. Lately you've been putting out some stats on your financial services unit, and -- I didn't know -- did you put out an update on where arms were at, FICO scores, etc.? And can you comment on that if you didn't?

We did not, but I can give you some of that information. The ARM percentage continues to move up a little bit. We had, in the third quarter, just over 40% of our total loans originated were ARM products. This is a little more than twice what it was a year ago.

Are those still predominantly three- and five-year?

Yes, but the predominant makeup of that is interest-only's. And probably 75% of those ARM loans originated are interest-only ARMs. FICO scores -- actually on average on a combined basis, have actually moved up a little bit. They're in the 720 to 730 range on average. Our loan-to-values are still in the low 80s.

What was your capture rate for the quarter? On originations, not for broker-included?

Not including broker?

I can get back to you on that, that's not a problem.

We'll be talking here in a little while. I think it is in the release. In the third quarter, it was 53% of loans that we closed. And then we had another 22% that we brokered. So a 75% total capture.

Kind of staying away from that -- and I know you're not giving any sort of specific guidance, so I won't ask about it -- but I guess I'd like to get your thoughts on the new communities that you are going to be opening up next year. You say you're going to be trying to grow in most of your markets, particularly Arizona. I guess I'd like to kind of talk about mix. I know you kind of made a conscious decision, at least I thought that you tried to make a conscious decision to work a little bit down the product mix curve. Is that still -- it's kind of to keep affordability in line with different markets. Is that still kind of your general strategy? Are you anticipating more of the same?

Yes, that is our general strategy, Craig. And, you know, our primary focus has been first-time move-up in the markets that we're in, and that will be where we'll continue to focus. But there has been some pricing increases in the Phoenix market, and in particularly in the Tucson market here recently. So that price point has moved up a little bit. But our focus is still to push the price point down as much as possible.

Are you increasing density to do that Or is it just -- how are you getting there?

In some cases, we are. We always looking for new types of products. And in some cases there is increased density. That is particularly the case in Las Vegas, for example. But in some cases in Arizona as well.

I will wrap up after this. I guess, finally with some of your markets that you are in, Las Vegas, obviously, and some of your Southern California markets where things have slowed a little bit on the volume side, have you seen any change in the asking rates for some of the land that you're looking at? Has price appreciation on land slowed down? Has that happened or is that still remaining quite robust? And if so, what kind of price appreciation are people asking for on land relative to, say, a year ago or so?

Craig, that is a broad question, because it's different in every single market. I would say, generally speaking, the prices are moving up. As generally speaking, most of our markets are very strong and healthy. And this is characteristic of the strong markets. The one area that may be the land prices are not increasing in a way that is fairly consistent with home selling prices is probably Dallas (ph).

One more and then I'll definitely get off. I'd like to get your thoughts on your community count growth in D.C. You've had a tough time getting communities open, maybe to where you would like them to be, and you've been selling out a little bit further than your construction capabilities. I guess I'd like to ask -- obviously, the D.C. market is very robust and pricing remains very strong -- if you had to, could you open up more communities more quickly than you are currently able to? Or is it really just a regulatory issue here and it's just not going to go away?

We really can't open them faster than we are doing it, Craig. We are not holding back anything. Everything that we own, we are developing as quickly as we can. And everything that we don't own, which we don't own anything that is not entitled, but we still have control of some of those lots -- we are pushing it through the process just as quickly as we can. So it is a time-consuming process from the planning stage to the engineering stage, to the building permit stage, inspections, etc. It is a protracted process. But that's what makes it so profitable.

Barbara Allen, Natexis Bleichroeder, Inc.

I was assessment of what you are seeing as the amount of speculative buying in the Arizona, particularly Maricopa County, markets?

Barbara, I can't tell you what the level is. Our people are telling us that the level has increased here of late, as prices have stabilized somewhat in Las Vegas, or certainly the rate of increase has slowed. But we are having -- we are seeing some degree of increases in the Arizona marketplace. You know, we do have a policy, though, that you should understand that we have applied -- wherever these speculators go, be it from California to Vegas to Arizona, is that we don't sell to speculators. We have a provision in our contracts where they represent that they are acquiring this as their primary residence. We do get buyers who are not totally truthful with us, but we do everything we can to avoid having speculators in our backlog.

Well I agree, but you know, 75% of the houses constructed are by non-public builders, and they may not be as careful about it as you are. Do your people agree with the estimate that was put out last week that the 25% of sales are to speculators this year, double last year's percentage?

I don't know, Barbara. We have not discussed that.

Okay. Thanks very much for the very thorough review of all of your markets. As usual, you guys do an excellent job and I appreciate it.

Jim Wilson, JMP Securities.

Gary, as you can imagine, I think pretty much all of my questions have been asked by now. I was just wondering, only in California, what difference in your expectations for community count between Northern and Southern? Obviously you've differentiated what you're doing in Southern specifically, but what are your plans right now for Northern?

For Northern, we feel very good about the Northern California market, Jim. We have seen some strong sales up there. It is an area that we would like to see continue to grow. I think that whether we increase active communities there will largely be dependent on how fast the sales are in our existing communities. But our plan is to add active communities there next year. And it's not going to be a dramatic increase, but there will be an increase.

Good quarter.

Fred Taylor from Lord Abbot.

I think most of my questions have been answered. I'll just ask maybe one on capital structure. You gave the leverage ratios, etcetera, but I was intrigued with the slide that showed your options going up as a percent, which actually is a good thing from a credit perspective. But what it's allowed you to do is de-capitalize the balance sheet a little bit; therefore, growth going forward if you maintain 50-50 will require wither more retained earnings, more debt, or some common mixture of both. Could you sort of talk about that a little bit, and what you see in terms of debt issuance, as well as the hit that most homebuilder stocks took in October -- do you get a little anxious to buy in some of your stock at these levels? Two questions.

Okay. I guess what we would say is first of all I'm not entirely sure I follow what you're saying about the increases in debt. But there likely could be increases in debt required to grow our business as these assets that we have under option are actually acquired. We operate under a philosophy that we are -- it took us a long time to get to an investment grade level, and we intend to operate at a level of activity, disciplined growth strategy that will enable us to maintain a debt to cap ratio that is reflective of an investment-grade company. What does that mean? I think most of our peers average 45 percent or around 45 percent, and we would hope -- our plans would be not to operate at any point in time where that ratio exceeds that level, even at peak levels like we are here today. But in terms of buying back stock, we do have just over 1.6 million shares available under our authorized program, and we have bought back a few shares in the second quarter. Have not bought back any this quarter. But it is something that is part of our strategy. We think it is appropriate to maintain a balance of growth of our business, share repurchases at opportune times and at the right price points, and the payment of dividends. And so we hope in the future to continue to maintain that balance. But right now our primary use of capital is to grow our homebuilding business.

Okay. That is very good answer. Thank you.

Margaret Whelan, UBS.

Nice quarter. I have a big picture question. Maybe a lot of this stuff (indiscernible) has answered already. But just in terms of overall demand is clearly slowing across the U.S., and we know the big builders have an opportunity to gain a lot of share. But on the land that you control right now, the lot, can you give us a sense for how you can right-size your business? I know you've got a lot of visibility over the next six, nine months with the backlog. But after that, how you can right-size the business to hold or to increase your margins in the event that home price inflation really does slow across the board? So maybe talk about the sales line and (indiscernible) and then also on the call side where you see the opportunity to take (indiscernible)

The things that we are doing, Margaret, obviously, that we are not counting on price increase to carry us in the future. And as a result, as you mentioned, there are opportunities on the cost side which we are attacking with vigor through our national purchasing organization which we have established. And we're already seeing some dividends from that even in this quarter.

Could you give us an example?

I'm sorry?

Could you give us an example?

Just in this particular quarter we were able to just through focusing on coordinating our efforts, our buying efforts across the company, were able to increase pretty close to double some of the returns we get from our suppliers, due to volume discounts. And that is something that we have done historically without the same level of focus that we've had here over the last year or so. And that's just one step. We also are looking for other opportunities to trim costs and to improve efficiencies, to reduce construction times, to improve our scheduling and the flow of information between our company and our suppliers through technology. There is an investment right now in several projects by our company in relation to construction scheduling and communication efforts. We call it a communication portal between our company and our suppliers, and a focus on training at all levels throughout the Company that will enable us to do a better job from the sales process to the construction process, even in our purchasing organizations and our land acquisition organizations. It starts right at the very beginning of the process. These are investments that we are making today in technology and training and people that we believe will pay dividends in the future as the opportunity, perhaps, to raise prices in certain markets may slow.

In terms of you're saying the construction scheduling, how easy or difficult is it to go to these subs that you don't actually control who might find more flexible business practices among private or less disciplined public peers? How difficult is it to go and force change on them?

It's something that, actually, Margaret, we have been fairly successful in doing in a number of arenas, from insurance to some other practices that -- it's a matter of communication and when it is communicated properly, to where actually we believe the scheduling process and the proper coordination of activities can actually save them money. And when you show them that it is mutually beneficial, it's a fairly easy sell.

And then the second part of the question was on the sales line itself, kind of price by units. Where do you see the opportunity in the event that a market does turn more quickly than anticipated to change your mix or your density? How quickly can you do that?

I'm sorry, Margaret. I had a little trouble hearing you at the end.

In terms of the sales on revenues priced by units, and in the event that units are priced slower or change more quickly than anticipated, how do you react to that in terms of product mix, the price point you're targeting or the actual density per acre? How quickly can you change?

That's one of the things that really puts us ahead of the game, relative to other builders, Margaret. It goes to the core of our operating strategy. We do not -- we generally buy our assets in very small pieces, so we know that with our strategy we are going to be in a project as it stands, no more than two years. And to replace it, we are replacing it with a current focus at current price points. So we are not going to be stuck at current densities, current products, current price points for very long. And the next project we buy will be more focused on whatever the requirements of the market are.

On the other side of the equation, in markets like Colorado where we have 14 or 15 different product series in different sizes that will fit on different size lots, we have the ability in this market to move products within certain projects, given whenever the demand is at that point in time. We have done that successfully a number of times. So in markets like Colorado, and Arizona, where we have a large product line, and now in Las Vegas, we are -- we have a lot of flexibility to make changes in the market changes.

And just a final question. In terms of your order growth, or maybe lack of over the next six months, you are facing difficult comps and you are having some delays opening communities. When do you think order growth would kick up again? Doesn't it seem like it's possible for the fourth or the first quarter?

We never give up, Margaret. But I think that with the community count growth that we are seeing, and especially in the first quarter, I would say that our ability to deliver against last year will get easier in the second quarter of next year.

Alex Barone, JMP Securities.

Thank you very much. Great quarter. Can you give us the dollar value of the backlog you acquired for Watson?

The dollar value of the Watson backlog. It's just over $100 million.

Okay. And what is going to be the average sales price for what they are going to be doing?

Their average selling price is actually right around the $200,000 range.

Can you elaborate a little bit on your SG&A? That was, I think, one of the most interesting things this quarter -- how it dropped as a percent of revenue. So I'm hoping you can elaborate. What are you guys doing there and what do you see going forward?

The biggest driver of that decline was the significant growth in revenues and the fact that we are starting to see some fruits of our efforts. For the longest time through the first part of this year and late last year, we were incurring costs for startup divisions that had no revenues. And we are starting to see significantly higher closings come out of Salt Lake and Jacksonville and Texas. And now we have -- the growth that we have been anticipating coming out of Las Vegas, where we split the divisions into two, Arizona, where we split the divisions into two; and some of the regional offices we established. It's really tied to the volume increases that our new organization has facilitated.

Okay. That sounds good. In terms of your tax rate, I noticed that dropped about 50 basis points. Is that something due to your different markets that you're in?

It's a function of the addition of markets, and really a change on a favorable basis in our effective state tax rate.

And lastly, can you sort of explain to us how you envision using these medium-term notes that you guys were talking about?

We have not determined exactly how we are going to use them at this point. We do like very much the flexibility it gives us in terms of size of offering, timing can be very quick, and flexibility in terms of terms. So we know that we are going to be growing, that capital that will be needed in the future. And we want to be opportunistic as we have been in the past, and we believe this is the best vehicle to give us that flexibility to be opportunistic in the future. But right now we don't have any immediate plans.

Cory Gilchrist from Marsico Capital Management.

Are you hearing me? This is Tom Marsico from Marsico. You have contracted your markets quite dramatically after the attacks of 9-11. With the dramatic price increases we've seen in oil, generally in the past they have been followed by recessions. At what point in time do you start planning to downsize your company and the prospect that you have for your company going forward, if we were to see oil stay at these levels and recessionary conditions start to emerge?

Tom, this is Larry. I think we have demonstrated not only at 9/11 but prior times in history, if there's a material change in the marketplace, that we are in a position to react quickly. And since we have a hands-on management strategy, if something dramatic was to happen, we certainly are in a position to evaluate and to make whatever adjustments as unnecessary. And with having know speculative land, since all of our land is active and we don't speculate like some others might, we're really in a position to react in a constructive, positive way to negative circumstances that might take place.

Just a follow-up on the question so to speak. We have seen now over a period of three or four months oil go from the 35 level to the 54, $53 level. So the action's have taken place. And so in anticipation of what we have seen already in the commodity markets, few react by trying to change your mix of options versus land under contract? So unlike 9/11, which was an unforeseen event, we are in the midst of something that has the ability to predict the outcome. What will happen as a result is $50 oil prices. And as we saw in Denver in the '80s, the impact was quite dramatic. So unlike 9/11, we do have evidence of changes in commodity prices and the eventual impacts that these prices usually have on markets. So it's a little different situation than 9/11. So I understand the answer to the first question. But kind of phrased in a different way, we have a new set of circumstances here.

Well, we take every day the information and the data not only that we generate within the Company, but the financial information that is available in all sources of -- that come to us, public and private. We evaluate weekly, in some cases Daily, our traffic. We evaluate our backlog. We have a weekly formal AMC meeting that deal with every transaction that the Company makes. We don't have what is known as delegated authority; we have a centralized authority on the acquisition of new assets. But also we have, you might call it a double trigger, not only does the asset management committee approve an acquisition, but it also has to re-approve the exercise of any and all options.

So, if we were to determine and see in a specific market, or within that market, a product within that market, a material adjustment. We're able to then reevaluate our capital allocation to that market or to that submarket on a very rapid basis. Also, since we monitor not only traffic but sales on a very high-level basis, we could make appropriate adjustments on a current basis that would allow us to focus on -- if we so chose -- to increase our liquidity through the adjustment of capital expenditures. Since we don't speculate in land and our pieces are bite-sized pieces, we really have a lot of flexibility, Tom, in adjusting to changing circumstances, and not in a Draconian basis, but in a basis that would respond to whatever the market is telling us. And we have done that for many years and we expect to be able to continue to do it in a highly-disciplined, pretty sophisticated manner.

Just one last follow up. It seems as though after 9/11 the Company made a back road decision as to what the outlook of the economy would look like, and took very rapid actions to change the structure and the focus of the Company. Would you proactively take that same sort of action if we were to see the price of oil remain at these levels, and if we saw economic activity measured by the unemployment rate or lack of job growth -- those sort of factors -- allow you to make a macro decision as to where you are positioning the company?

I'd say we would evaluate everything. The most important factor to us is traffic on the ground and sales on the ground. Everything that you have mentioned would be taken into consideration, and since we are focused very intensely on financial information and other information that is out there, I would say that we would react as circumstances dictate. We are not going to flinch just because of one number or another number, but all these numbers are put together. If there was a material variance on the ground in our business, we would adjust accordingly. I think to distinguish 9/11 from the two points you're talking about, that was something unique unto itself that required an instant reaction, which we did within a matter of hours, where we made certain policies which you're speaking of as something that we're reviewing on an ongoing basis, and housing is something that is very important to our economy. And I think that there's as much chance that if the government was to decide to increase the expansion and growth of money and a reduction of the tenure -- which is tough to dictate what it might do, since a week ago was going one way and a few days ago was going another, and I don't know what it's doing the last hour. These are factors that could stimulate housing, and housing is a national driver. It is a natural driver and an important political driver for this country. And I remain cautious as we do through everything with all information, and believe that we'll be responsive as appropriate.

I greatly admire the record over the 25 years I've been following this company. Congratulations on your great quarter.

Ivy Zelman, Credit Suisse First Boston.

Just a follow-up on some of the market color, which I'm also very appreciative of you giving the detail you do, Gary. With respect to Texas, you mentioned that you're opening more communities there as well as in Florida. Just wondering -- the environment we hear is pretty challenging, and Dallas particularly. Can you talk a little bit about what kind of contribution that would be making from a profit standpoint? Is it considerably lower than the Company average? And what type of selling incentives are you seeing there being implemented by yourself as well as competitors?

Ivy, the communities that we have added in Dallas -- first of all, we are not planning significant increases over where we are, but -- and we are being very careful about the selection of our locations there. I think we have found that location does make a big difference in that market. We are also achieving what we're achieving with the contribution of very little capital to that market, because all of our acquisitions, or most of them are on a rolling-option basis with finished lots. Therefore, we have not yet achieved a mature stream of earnings out of that operation yet. And of course, the Houston market is just about a year old, so it's just getting up and going. But it does appear that Houston has an opportunity to contribute even more than Dallas at this point.

The margins are lower then our company average, I can tell you that. The incentives are a little bit higher than our company average, maybe 100, 200 basis points higher. But right now we are planning our niche there. We have plans for next year. I think we are going to be in some very good communities. We are very optimistic about where we will be next year. But it is a very competitive environment.

We will plan next year we are going to be doing better than this year. Houston has actually been very good for us, and we have a strong manager there who understands the market and has been in it for a long time. We have eight active communities there now, and I think we hope to see Houston grow even more next year. You know, Florida, right now Jacksonville is a major contributor in Florida. Tampa is not yet (technical difficulty). Tampa is a strong market and it looks like the margins -- clearly, both of them are going to be a little bit below our company average in any case. We are just getting started there. And I think our hope is that there has been some pricing power in the Jacksonville market of late, and hopefully we'll see that reflected in the communities that we are opening up there. The acquisition we made of the assets of Watson Homebuilders are in strong locations. Certainly the homes that we are closing right after the acquisition will not have much in the way of margins at all, quite frankly, just because of the way we allocate it from a -- allocate the purchase price from a purchase accounting standpoint. So that tends to have a little bit of a depressing impact on margins out of Florida in the short run, but for the long run, we feel very good about our positions there and about that market. And we are confident that Tampa is going to be a strong addition as well. But just out of the gate, their margins are lower than our company average.

Going back to Margaret Whelan's question with regard to your ability to sustain margins, assuming that AFPs across the board start to flatten out. One of your comments was your ability with your diverse product mix, and you pointed to Denver as an example. If I recall though, post the 2000 tech wreck, did you not admit that despite that dominant position in Denver, that you're operating margins or your gross margins were down considerably like as much as five to six points in Denver? So despite your strong position in the market, you might have done better than other builders, but you did see considerable margin contraction when absorptions fell.

We did see that, yes, from a very high-level, though. We were seeing margins well above our company average prior to that decline.

Kind of like Vegas right now?

Not quite as high as Vegas.

But I'm saying, because the idea here is that despite what happened three, four years ago in Denver, should we now take away from Margaret's question that you think you can mitigate margin contraction through your diverse, density, product offering, purchase accounting, etcetera -- I mean, purchasing synergies, etcetera?

The -- I guess our thought is that our ability to do that in the future is even more possible by way of our geographic diversification. You know, these markets -- when Colorado went down, Colorado was a substantial piece of our business. And right now, we are in a situation where we are much more diverse than we were. And by 2006, we are going to be even more greatly diversified than we are today.

But not from a profit standpoint, correct?

From a profit standpoint as well, yes. Even more so from a profit standpoint.

Much more diverse than you are today, you mean?

Yes. Oh yes.

Thanks Gary.

Timothy Jones from Wasserman and Associates.

Hello, again. I can't believe I have a couple of questions, given how thorough this has been. But they are really fast ones, okay? First of all, what is your, on speculators -- do you put in that clause that over one year you have the right to buy back the units? While it may not be legal, it scares the hell out of them to tie up their money because they don't have a whole bunch.

No, sir. We do not.

Could you consider doing that?

You know, we've talked about it, and it's something that we have explored. We have just not felt that it was something we wanted to do at this point.

In the real hot markets, it seems to back them off.

I have seen where there have been several builders that have done that, at least been successful in getting approval by the DRE. At this point, we have not sought that approval.

Second question is -- volume discounts and rebates. What were they last year and where do you think they will be this year? The savings roughly, the combined? Do you have a dollar value?

Tim, we're not really in a position to talk about that. I will tell you that the benefit of that was about 20 basis points to our margins this year.

Okay. I can figure it out back. Anywhere between 1,400 and 2,000 of savings for a lot of the homebuilders for home. Lastly, in the fourth quarter, did you say that you do 4,400 units? Were there 4,400?

4,400 in the fourth quarter this year.

Well, since you earned 305, 307 in the third quarter, and 4,400, it delivers substantially higher than the third-quarter deliveries. Am I to assume that perhaps your $3-plus guidance might be a little conservative?

Yes.

Thank you. And that was our last question today. Gentlemen, do we have any closing remarks?

Yes. We'd like to thank you again for joining M.D.C.'s conference call today. We look forward to speaking with you again in January following the announcement of our 2004 fourth-quarter and full-year results. Have a great day everyone.

Thank you. And ladies and gentlemen, this concludes our M.D.C. Holdings 2004 third-quarter earnings release conference call. You may all disconnect, and thank you for participating.