MDC Holdings Inc (MDC) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the 2004 fourth-quarter earnings conference call. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) Please note that this conference is being recorded. I will now turn the call over to Mr. Joe Fretz, who will read the statement concerning the forward-looking statement. 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 September 30, 2004 form 10-Q.

It should also be noted that SEC regulation G requires that certain information accompanies 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, www.richmondamerican.com. I will now introduce Larry Mizel, Chairman of the Board and Chief Executive Officer of MDC Holdings.

Good morning. Welcome to everyone to MDC's fourth-quarter and full year 2004 conference call and webcast. 2004 was another great year for MDC, by far the most successful of our 33 years in business. Once again, we demonstrated our ability to capitalize on the factors underlying the strengths of the housing market. Last year the economic climate was excellent for the home-building industry, and MDC took full advantage of it. We ended 2004 with the most profitable quarter in our history, earning $3.17 per share, 109 percent higher than the fourth-quarter of 2003.

Full year earnings per share increased by 79 percent $8.79 cents, and established MDC as one of the fastest-growing companies in the entire industry. Our 2004 net income of $391 million represents the seventh consecutive year for record earnings, and our total revenues of $4 billion marks our 11th consecutive annual record. In addition, we achieved all-time quarterly and annual highs for home closings and home gross margins.

These financial results demonstrate that our operating strategy is not only sound, but also enables us to excel within this industry. Our disciplined and conservative approaches to expansion and capital allocation distinguish MDC for producing risk-adjusted returns among the highest of all the homebuilders. In addition, our 33 percent return on equity and 17 percent return on assets are among the best in the industry and support our investment-grade status.

Strong demand for homes in most of our markets in 2004, particularly during the first half of the year, led to our highest ever annual orders for 14,248 homes. These strong orders enabled us to end the year with a record backlog of over 6500 homes valued at nearly $2 billion, representing a year-over-year value increase of 20 percent. Our financial strength and flexibility put us in a position to grow and prosper in both an improving and declining economy.

Total stockholders equity year end exceeded $1.4 billion and our debt to capital ratio, net of cash of .19 is one of the lowest in the entire industry. Early in 2004 the term of our home-building line of credit was extended to 5 years, and we increased our borrowing capabilities to $700 million with the ability to further expand to 850 million with lender approval. We expanded our shelf registration to $1 billion and earmarked $500 million for medium-term note program. $250 million of ten-year senior notes were issued under this program in December at our lowest coupon ever of 5 3/8 percent.

These actions enabled us to end the year with more than $1 billion in cash and borrowing capacity. In 2004 we made great progress towards our primary goal of enhancing shareholder value. We declared a 10 percent stock dividend in February, and earlier this week we completed a 1.3 for 1 stock split. Considering these actions and our intention to continue paying quarterly cash dividends at 15 cents per share, we have effectively tripled the dividend payment over the last twenty-four months. In addition, we repurchased 155,000 shares of stock in 2004 at a price more than 30 percent below current market and we have 1.65 million additional shares authorized for repurchase. Clearly our achievements in 2004 further solidified MDC as a leader in the home-building industry. On behalf of senior management at MDC, I would like to express my deep appreciation to our shareowners, employees, Board of Directors and business partners who helped us achieve these outstanding results during the past year.

With our record backlog to begin the year, geographically diversified operations and continued expansion endeavors, we are looking forward to 2005 with great optimism. We have confidence that our disciplined operating model combined with potential job growth, anticipated economic recovery, increased consumer confidence and the imbalance of supply and demand for new housing and growth markets around the country, will position us to improve our record-setting performance in 2004 with higher home closings, increased revenues and our eighth consecutive year of record earnings in 2005.

I'd now like to turn this call over to Gary Reese, our Chief Financial Officer who will describe more specific financial highlights of our 2004 4th-quarter and full year performance.

Thank you Larry. What an introduction there; this has been a terrific year. From the standpoint of this quarter this was as Larry said this was the best quarter we have ever had. It was our 10th consecutive record quarter and 22nd in the last 23 quarters, so it has been quite a run. We earned $142.6 million, which is up 113 percent over last year, $3.17 a share, which is up 109 percent. As far as the year is concerned, this was our 7th consecutive record year. We earned $391 million, up 84 percent, $8.79 cents a share which is up 79 percent, and this is the first year in our history we actually exceeded $4 billion in revenues. It was quite a year for us.

Now our home-building operations were the primary driver of these record results. We earned for the quarter over $260 million, 107 percent over the fourth quarter of last year on revenues of $1,316,000,000 in home sale revenues. The primary contributors to these increases were 28 percent increase in closings to a record level, a $54,000 increase in average selling price and a 320 basis point improvement in our home gross margins.

For the year we saw earnings in the home-building segment increase 83 percent close to $720 million on just short of $4 billion in revenues. The same drivers for the year a 24 percent increase in closings, $29,000 increase in average price and a 360 basis point improvement in our home gross margins. The closing levels, as I mentioned, were really the largest contributor to our increased profits for the year and for the quarter. We closed 4,323 homes in the quarter, up 28 percent. The leading indicator of that was a 28 percent increase in backlog that we saw to begin the quarter.

Every division was higher in terms of closings. We saw in terms of percentage increases the largest increases coming from our new markets in Texas, Florida and Utah but also very large contributions from our existing markets in the mid Atlantic, California and Las Vegas, for both the quarter and for the year. From an average selling price standpoint every market saw an increase in average price except for Texas. Our average price in the quarter was just short of $305,000 per home and was 283,400 for the year. As we mentioned in the press release, the largest increases came in California which saw its average price rise to over $500,000. Las Vegas was the second-largest increase and Virginia also saw a very large increase.

From a profit margin standpoint we saw the highest level of quarterly and annual home gross margins in our history. A 28.2 percent which was equivalent to margins in the third quarter, but up 320 basis points from the fourth quarter of last year. And our 27.7 percent margins for the year exceeded last year's record by 360 basis points. Really the increases were due largely to improvements in a number of our markets, just market improvements. Las Vegas being the largest contributor for the quarter but for the year as a whole we saw pretty significant increases, not only in Las Vegas but in Florida, Arizona and California, as well.

Also as we mentioned in the release, we are beginning to see with our volume increases some level of leverage with respect to our G&A. As we talked in prior conference calls we have spent a lot of time, effort and dollars in establishing a reasonable reporting structure and setting up new divisions in Phoenix, Las Vegas, Virginia, California as well as the overhead related to our new operations in our startups. As we see closings increase and coming out of the new operations, we are seeing that leverage materialize. And here in the fourth quarter you take that combined with our corporate overhead as a percentage of revenues, our SG&A home-building and corporate dropped to 11.3 percent. That is a full 160 basis point drop in the fourth quarter of a year ago. And for the year we saw the percentage drop from 12.8 percent down to 12.3 percent.

From a financial services side for the fourth quarter our profits rose to $5.1 million from 4.9 a year ago. For the year we are down kind of a trend we saw during the first three quarters of the year, $18.5 million, down from 28.3 million primarily due to the more competitive environment for mortgage loans, the fact that the number of ARM loans that we provide now has increased significantly to approximately 50 percent of our originations were ARM loans this quarter as compared to about 20 percent a year ago. And those loans are not quite as profitable as the fixed-rate loans. And we brokered more loans this quarter, which we do not receive fees for servicing on the brokered loans.

But some of the real highlights for the quarter really center around the returns that result from the strong results we've produced throughout the year. They are in every case among the highest in the industry. Our return on revenues for the quarter is an all-time high for us. This is net after-tax return on revenues, at 10.6 percent for the quarter, which is a 280 basis point increase. Our Home-building operating margins increased very close to 20 percent this quarter almost up 500 basis points.

Return on assets was 17 percent, up 490 basis points and our return on equity, one of the key indicators of this strength of the our ability to allocate capital and utilize leverage is 33 percent, 900 basis points over the average for last year. From a financial position standpoint we have never been stronger than we are today. We have included in this package a slide that shows the operating cash flow for the Company for the year. And as you can see from this slide, we have continued to grow and have invested basically the cash flow that we have generated from our business back into the business and acquiring land and building subdivisions for growth in the future.

We did see a very large increase in cash for the year at $234 million, primarily resulting from the issuance of the senior debt in December. But our book value per share continues to grow. The compound annual rate for the last five years has been 22 percent growth. We reached $32.80 a share there at the end of the fourth quarter, which is up 36 percent over last year. Our equity is up to $1.4 billion as Larry mentioned, which is 40 percent above where we were a year ago and our debt to cap ratio at 19 percent net of cash is one of the lowest in the industry.

As we look to the future one of the key indicators is the level of our backlog. And our backlog continues to show strength. We had the highest year in backlog ever at 6505 units, up 16 percent from last year with future sales value of just over $1.9 billion, which is up 20 percent from where we were a year ago. The orders are one of the contributors to those backlog levels, and we saw very strong orders throughout most of the year. As we previously reported our orders were essentially flat in the fourth quarter as compared to a very strong quarter a year ago where we saw orders up a full 39 percent over the fourth quarter 2002. So all in all a pretty strong performance.

As we look we have here a slide that shows the orders by market and the relative increases. You will see that there is a decline in several markets, but the very next slide actually shows the fourth quarter average orders per active community. And as you can see, the very strong market that we experienced a year ago produced an average of 4.5 per community per month. This year we were back to a 3.8 per community per month, which is comparable to the fourth quarter of 2002 and much better than years prior to that. So we do have some difficult comparisons here but all in all a pretty strong performance.

In terms of the specific markets, Las Vegas and California as we receive calls after the last release that got the primary attention and I think we explained in the release and to most everyone the factors contributing to this. But we tried to reflect this in an additional slide that we added here for this quarter. Nevada was down. It is down to a more normal level. We show here in the slide that on a gross order basis before cancellations that the orders per community in Las Vegas were over 6 per community per month which is a healthy level and comparable to years prior to an extraordinary period that we experienced in the third -- beginning of third-quarter of 2003. We did have a few more cancellations in Las Vegas than normal, resulting from a number of things going on in the market that I think everyone is aware of. But we think that is a short-term situation and is working its way through.

California is down as well. But as this slide also shows that California had a very strong year a year ago, very strong market conditions and was selling before cancellations almost 10 homes per community per month, which is not a sustainable level. We are down to 6 homes per community per month this quarter before cancellations which is very comparable to our years prior to last year.

In Virginia we saw lower orders as well but primarily due to community count and the fact that we continue to run into difficulties in that market of getting homes started. We don't want to sell too far ahead so we've intentionally kind of slowed the pace of orders in that market. The bright spot on the order front in the fourth quarter was Phoenix, which was up over 130 percent over the fourth quarter of a year ago. That market in particular has shown great strength despite the fact that community count is down in that market. It is still up fairly substantially.

Another indicator even before we get to the orders, is the direction of community count, which we spend a little bit of time in the press release in talking about to give you an idea of where -- that we are continuing to grow and that where that growth is coming. The slide that you see here shows that our community count is up 22 percent over where it was in December a year ago, 242 active communities versus 198, and where those increases really come -- Las Vegas has been not only a significant contributor from a margin standpoint and increases in selling prices, but we've also added a significant number of communities. This year we added 14 communities in Las Vegas.

We've also added communities in each of our new markets in Texas, Utah and Florida. Contributions -- we've opened up two communities in Delaware Valley, and we have one active community in Chicago now. You can see the declines in active communities in Virginia, California and Arizona that we talked about before. But as we look forward to 2005 we expect to see growth in active community count in most of our markets; really all of our markets are planning for growth and we expect the community count to move toward 300 before the end of next year.

In terms of where that growth will come, the largest increases as we have discussed in prior conference calls should come in Arizona and California on a relative basis. If both of these being down this year should see a comeback, largely in the first half of the year. As we mentioned, both Arizona and California should be up 50 percent by the end of the year from where they are now. We had mentioned in previous releases that California was going to see 10 active communities coming online before the end of the first quarter. Some of those may be delayed slightly because of some of the rains that California is experienced in the last couple of weeks, but still nevertheless we have these communities in the pipeline, and they will be coming on during the first half of the year.

Las Vegas, even though we are up significantly from last year, we expect them to grow further an additional 15 percent by the end of the year, which should put them pretty close to double where they are. By the end of the first quarter I think we had mentioned they will be close to double where they were at that point a year ago.

We also expect to 10 to 15 percent increases in Jacksonville and Colorado and additional communities in most of our new markets. And even the precursor to the active subdivision growth is do you have the lots, and do you control the lots? And as you can see from our final slide here that our lot supply has grown significantly over the last few years. We have -- we've increased the number of lots that we control to close to 42,000 lots. This is up almost 50 percent from where it was a year ago. We are controlling more than 50 percent of these lots under option, 21,200 of these lots are under option and we are controlling them at somewhere in the neighborhood of $3000 per lot. So these are true options, no specific performance, and a minimum amounts of capital at risk to control these lots. And it keeps us in a position to control somewhere our objective of somewhere between 2 to 2.5 year supply of lots.

So that completes my prepared remarks. I would like to open the floor for some questions.

(OPERATOR INSTRUCTIONS) Michael Rehart (ph) from J.P. Morgan.

Congratulations on the quarter. Just a couple questions. First question can you comment any on the -- I am sorry if I missed this earlier and I was late getting on the call, but any effect in terms of timing delays with the recent weather issues in Southern California?

I think that we are going to see -- it is a little bit early to tell. We unlike (indiscernible) we are early in our quarter so we may have some time to recover, but the early indications are we may see some delays in development, which will delay the opening of some of our communities this quarter and next. And we may see some closings move as a result of that move out of the quarter. But at this point we don't know the degree of that. But we don't have a lot of communities open down there right now. So it is not going to be a significant part of what we do. But there likely will be some closings pushed out into the second quarter.

And how many communities would be affected by that area?

Give me one second. Right now we have about a dozen communities open in that area between San Diego and Los Angeles.

Great. Thank you and the second question I had -- you know you referred to in the press release and prepared remarks the potential negative mix shift on ASPs as you open up some communities in other regions like Chicago. Would that have an affect also on margins?

Michael, I would say that it is not a direct affect just because the prices are going down. The prices themselves within the markets are not declining. It is just a mix of more Texas, more Florida, more Salt Lake City. Lower-priced markets. And you say the negative impact -- I prefer not to use that word but more of a decrease in the average selling price, which we would view as a positive versus a negative.

Yes, I mean a mixed shift.

Right. We focus more on a more affordable product.

But are your better -- I would think that you are able to achieve higher margins currently in Vegas and California given the -- at least in '04 -- given the leading degrees of price appreciation.

First of all, I think we have said before that Las Vegas does have our best margins. They have experienced the highest degree of pricing power over the last 12 months or so. And California is seeing some nice price appreciation, as well, but keeping in mind that we are a purchaser of lots at retail out there doesn't necessarily mean that our margin are as strong there as they are in some other markets. We again, I think there has been times for example that I can remember a time when Tucson, Arizona had our best margins and they were our lowest average selling price. So that's not the case now, but there is not necessarily a direct correlation. What there is a correlation to is as we open new subdivisions and new markets we will be entering those markets at entry-level pricing, and will probably take us some period of time to get up to a normalized level.

Thank you and one last question if I may. If you were to just comment on the average FICO scores and loans to value ratios for your average customer for the quarter and against what it was if you have it -- last quarter or last year.

Actually the loan to value has not changed a great deal. It has been hovering in the low 80s, and that is very comparable to where it was last quarter. Before seconds it is about 81 percent, and the seconds usually comprise another 2 percent, roughly. The FICO scores are in the 720 to 725 range and have been for the last year plus.

John Lynch from Lynch Research.

I have a couple of questions. First one is if you were looking at the growth and community count and obviously it is a mix of some disappointments, hopefully short term, and success. What do you sense in the way of a trend in terms of getting new communities on?

First of all, John, some of these disappointments are not really disappointments because Phoenix, for example being down is not a disappointment because it is down as much as anything because of the strong sales we've had earlier in the year. And selling out of communities faster than we were able to bring them on. I think that we are able to, for the most part, get communities on timely with the exception perhaps of the two coasts. It seems like California takes a bit longer, and Virginia certainly there is bureaucratic red tape every step of the way, and that has been a disappointment because the market has been so strong. There again, though, the offset to that is that the longer it has taken, the more valuable the homes are when we eventually do build them. But we would still like to get these communities online faster in those two particular areas.

These don't represent evolving trends? They represent the status quo pretty much?

I'm sorry?

The difficulties in given markets are not new events. They represent a continuation of problems that existed pretty much through the year?

That's correct.

Okay. Denver. Denver has been all over the place. It has been comparatively weak in recent years. Do you sense that there might be some factor out there, maybe investment in oil sands or something that could produce economic pluses for the market and in '05 would you think the Denver market will be stronger?

John, there is certainly signs that the market has stabilized and is moving in a positive direction. You can see our orders in the fourth quarter were positive, and that is a good sign. We are seeing pickup and interest in traffic, and we are experiencing over the last few months job growth in this city for the first time in three or four years. So that is a very positive sign. And so there is nothing that I would point to dramatic that is happening that will turn this thing around on a dime, but we certainly are optimistic about the prospects for 2005. We are investing in growth here after several years of bringing our investment level down and lowering our community count; we have started to head the other direction. And we expect to be building positions and have some very good, well located subdivisions at good price points across this city and up North and down in Colorado Springs. So we are hopeful that we have, that we will see better things in 2005 and everything seems to point in that direction, but it is not really materialized at this point.

Well it certainly was an excellent year. Thank you.

Alex Barron (ph) from JMP Securities.

Congratulations on a great quarter and year. I was hoping you could focus a little bit on sales pace for community in a couple of your markets, you touched a little bit on what's going on Las Vegas but I was hoping you could also help us understand what is going on in California. It seems like there are a number of communities earlier this year, early in '04 was roughly the same as at the end of the year but the sales pace dropped off there for the last couple of quarters so I was hoping you could help us understand that there.

And then also wondering if you could comment on the sales pace in Arizona that you are seeing, do you think that would come down a little bit per community next year?

Alex, as far as California where it is really a little bit like what we are seeing in Vegas, we were in a very hot market a year ago. Cancellations were almost nonexistent a year ago and in California because prices were moving up, and people were locking in values. And this year, as we pointed out in the slide, the gross sales before cancellations is very comparable to what it was in a more normalized environment prior to the end of 2003. And over 6 sales per community per month riding that many contracts in the fourth quarter of a year, which is the lowest generally the lowest sales quarter of the year is pretty strong.

So I don't think we are disappointed at all in the growth and the level of gross sales and the cancellations are a little bit higher than they were a year ago. But they are well below I think for the quarter even the Company average. So they moved to a more normal level. So I think that the other thing going on for us in California is that we've got some communities on hold. We've got a couple, three communities that are at very high price points that the sales pace is generally lower. These are communities in the Irvine Ranch where the sales pace may be 1 or 2 a month. That tends to bring the average down. And so we don't see any need to be alarmed about what's going on there. This first quarter will tell the tale, and we will keep our eyes peeled. But there is very strong indicators. There's positive job growth, low unemployment and traffic has been good. But we also need things to dry out a little bit. What was the other markets you are interested in?

Arizona.

Arizona, Phoenix, the pace has been very strong through a typically a slow period. It is not unlike the phenomenon that we saw in California and Vegas a year ago. So whether that is able to be sustained we hope it is, but we are not counting on it sustaining. We are adding additional communities, and just like we're doing in Las Vegas, we are hoping to hold the volume and even increase through community count increases as opposed to trying to drive more absorption out of the same communities.

Any comments you can offer on your expectations for the Watson acquisition in Florida; what you can expect in deliveries (inaudible) this year?

The Watson acquisition, the effect of that has really been to give us an opportunity to double the size of what we're doing in Jacksonville. So our expectation is that we would be somewhere at or above 1000 units. And we have indicated that we expect to be one of the top 3 builders of single-family homes in the Jacksonville market in 2005.

Larry Horan from Parker Hunter.

Yes, in your markets here in Las Vegas and California there has been a great deal of talk about investment buyers over the years, people who didn't plan on living in the unit. And I was wondering if you are seeing any increase in the existing homes for sale inventory in those markets that might be symptomatic of an overhang of what are essentially new homes that have not been lived in but will be counted as existing.

Larry, I guess the two that we've been focusing on have been Southern California and Las Vegas. And in Southern California the level to my knowledge and actually we just made some increases in the last couple days has not increased significantly. But the effect has been a little more dramatic in Las Vegas. The number of resales on the market increased in September to somewhere in the neighborhood of 16,000. My understanding is that it has dropped sequentially over the last several months down into the 12,000 plus range. So it is moving in the right direction. And so that is working its way through the market. Whenever you read the industry reports from the city they always talk about that, but lately the latest reports which I saw just came out a couple days ago is it is speaking positively about this kind of working its way out by the end of the first quarter of next year.

Great. Thanks. By the way compliments on the improvement in your margins. I looked at where you were in '98 on your operating margins and home-building, you are up (ph) 7 percent. That is one heck of an improvement in a fairly short period of time. Great job on getting costs out of the business.

Thank you.

David Einhorn from Greenlight Capitol.

First off thank you. I got about maybe three questions; let's see what I can do. First off can you talk about after really a lot of revenue growth for a long period of time the expense margin really finally showed some leverage this quarter. Was there something or anything kind of unusual that contributed to that or was just the revenue growth so overwhelming that the expenses didn't keep up? Do you expect there to bee catch-up or do you think we are sort of at a lower expense level prospectively?

Well, first of all, David, on that question the two real drivers in that I think we did see revenues really jump as a result of in our 28 percent increase in closings is pretty dramatic, as well as the $54,000 increase in average selling price. You combine those two really puts the revenues, which were up over 55 percent in the quarter, creates a nice amount of leverage. Some of those expenses are variable, but for the most part we were able to -- there is a fairly large fixed component in there, as well. So it is something that might move a little bit in the other direction when the average selling price comes down, which we have also indicated as we hit a very strong -- you could almost see it coming in the backlog, but you could also see that the backlog is showing a lower average price at the end of the year. So that is indicative of this mix issue that we talked about. So that might have an impact.

And of course you've got a different quarter by quarter you get a different result because you end up having most of the biggest part of your closings in the fourth quarter and the smallest amount of closings in the first quarter. So there would be some impact there. But still net net it is definitely a positive over where we were a year ago.

Not to be too argumentative, historically there really hasn't been sort of the seasonal leverage that the fourth quarter operating expenses go against the higher revenues, it seems like the Company does a good job of just planning and allocating expenses or what not. Do you expect that some of the improvements here are sustainable or do you think we, have kind of come all the way back?

I don't think we have come all the way back David, because over the last year we have invested a great deal in operations that have produced no profits and no revenues, no closings to this point. And as the startups start to grow throughout the year as well as we set up another layer of management to facilitate the volume that we've had with several regional offices and a regional structure. All of those are paying dividends with growth in our existing operations, as well. So I don't think we give it all back by any means.

Terrific. I've got a couple more. On cancellations can you explain what the economic impact of the Company is when a customer cancels or the cancellation rate goes up? And second, do you think that there is another quarter or two or more of higher cancellations to kind of work through what is evolving in the markets?

The economic impact really varies by time and by market because there has been a time up until the summer of this year, cancellations in Las Vegas for example and California were a good thing, because we were able to turn around and sell the same house at a higher price. That has been the case in Virginia. That has been the case even in Jacksonville. So that -- a more typical situation is if you, depending on where the stage of the home, you like to see a lot of your cans come before the house starts but if you end up with some late cancellations, you end up with a spec and you usually have to sell it with some small amount of incentives applicable to it. So it really goes both ways, David.

On balance for what you are seeing now, how would you characterize the current batch of cancellations?

I would say that in Vegas today and in Southern California it is probably more to the negative. We probably do need to offer some level of incentives when we turn around and sell these. And they are probably at a slightly lower price. And then on the other hand we've got Phoenix and Virginia. But I would say on balance probably since the majority of the cans are in those other markets that it is probably a slight negative, not really material though, David.

Okay. Did you answer the question on the outlook for cancellations as we work through the markets?

I didn't, I thought you might forget. No, I'm kidding. The outlook is probably going to take another quarter for Vegas to work its way through. And that really is the, its Las Vegas that was the primary driver of the cancellations above the level it was a year ago.

All right, terrific, I got one last one. You kind of expressed that you are expecting sort of unit quarter growth to improve as we go through the year. And you have mentioned that you think the earnings for the year for 2005 should be a record over 2004. Does that extend such that you think that as we exit the year we will be earning on a quarterly basis at a higher rate than 2004? Or is it too soon really to have a view about that?

It is -- I mean certainly the -- we don't really talk about that, David. It is a little early to tell on a quarter by quarter basis. Some quarters are easier than others. Obviously the first quarter is the easiest comparison. But it is a little early to talk about that.

Okay. Again thanks a lot, guys, for the great work.

Eric (indiscernible) from Vanguard.

I was wondering if you guys have seen labor costs increasing.

On a limited basis we have, Eric. The high-volume markets in particular of Arizona, Nevada primarily. But generally across the board we have not. But it is in Phoenix and Tucson and Las Vegas its a supply and demand issue.

And have you been able to recoup those costs at all?

Not directly. We are closing houses that we sold earlier in the year, and at fairly high prices. So there is not a direct correlation. All on balance I would say with the higher costs late in the year its probably had the effect of reducing some of the margins a little bit.

Okay. Thank you very much.

Joe Locker (ph) from Carlin Financial.

Gary, I just want to say a great quarter first of all and I guess I spoke to you about a month or so ago about the possible share buybacks and I was just wondering with the debt to capital so low and the $400 million in cash, why maybe one of (indiscernible) mid 50s or so to these levels (indiscernible)at 6.5 times why you wouldn't buy back a little more shares at that level? Just because the flip side of the 6.5, 15 times return or 15 percent return on equity compared to what you're borrowing at a 5.4 percent. Just wondering why you wouldn't get a little more aggressive in that area.

One of the reasons, obviously we have a balance we're trying to achieve a balance in terms of how we allocate capital to dividends or to buying back stock or to growing our Company. Right now we are achieving a very high return on our equity and even higher in terms of capital deployed. And we have a lot of growth in store for the Company. We have lined up a lot of lots, you see 21,000 lots under option and we are going to be expending some of these dollars throughout the first quarter in getting these subdivisions online. So I guess our first approach is toward growing the business. And we look to be opportunistic in terms of buying back shares and certainly we have the authorized level. It is something we talk about at every board meeting. We meet every month. The board does. And so it is something we will definitely keep on our radar screen.

I know the ROE on the home-building side is great right now but just wondering why you wouldn't issue say another 100 million in debt or so and just use that to buy back, so it would not interrupt your home-building growth operations. And just because the ROE is so much better and with the debt to capital, even if you borrowed another 100 million it might go up to -- maybe the quarter end was like 25 percent instead of 19, but still very reasonable.

Sure. Well, there is -- I have an advantage -- I know what our capital needs are over the next 90 days. And so that is really what we're looking at.

All right. Thanks a lot.

Tom Marsico from Marsico Capital Management.

I had a question for Larry, and it has to do with the significant ownership he has in the Company and if he has any planned diversification thoughts as far as his position in the Company. We've seen similar plans from other major shareholders in companies such as Microsoft and Cisco where there is a planned sale on a consistent basis; if he is looking at any of those plans. If you can comment on that, I would appreciate it.

Good morning, Tom. At this point there is no systematic plan.

So I assume then you are comfortable with the position you have in the Company and --.

From time to time there has been sales by my family, as a matter of diversification and estate planning. I would expect from time to time that will continue, has not been material.

I'm trying to foresee out into the future when the time may arise when you choose to look at diversification and the market impact on a potential sale that you might have. And this is frenetic (ph) sales approach which more and more managements are going to seems to be the way of the future. Basically you're saying you don't have any changes in your thoughts and you will determine when you want to sell your stock?

I think at this point that is correct.

Thanks a lot. And great year.

Stephen Kim, Smith Barney.

Hi, (indiscernible) for Steve Kim. Congratulations on another solid quarter and year. Just two questions if I could. First of all, you talked about mix shift impacting the average selling price in '05, and that is perfectly understandable. I am wondering if you might be able to put any sort of range on what type of a decrease that might calculate out to be.

Jed, I really could not.

Okay. I guess secondarily then, if we are looking at your SG&A -- I know you talked about getting some additional leverage out of new markets and things of that nature, once again looking at '05 and not to ask specifically about the numbers you are expecting, but if you can maybe perhaps talk qualitatively about some of the factors that could be material in driving the SG&A in '05.

Sure. As far as where the leverage is coming from, Jed, we are going to be opening up -- you can see where the community count is coming. That as our existing operations grow in Arizona and Las Vegas we will be able to leverage the existing administrative base that we have in those operations. And we are going to start to see closings coming out of Chicago, Philadelphia, Delaware Valley, Tampa, increased closings coming out of Houston, Texas. And we've set up staffs there that have been working behind the scenes for over a year in some cases. And so we've been incurring costs that have not had any revenues to go with it. So as those operations ramp up, we will get even increased leverage from that standpoint.

On the other hand, we are -- we do continue to expend at the corporate level significant dollars for development of technology. And that is something that we will be investing in in 2005 forward as we try to get up to speed from a system standpoint.

Great. That's helpful. Thanks again.

(OPERATOR INSTRUCTIONS) Gentlemen, at this time I am showing we have no additional questions.

Thank you. We would like to thank all of you again for joining our call today. We look forward to having the opportunity to speak with you again in April following the announcement of our 2005 first-quarter results. Everybody have a good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.