MDC Holdings Inc (MDC) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the M.D.C. Holdings 2005 First Quarter Earnings conference call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question and answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Mr. Joe Fretz, who will read the statements concerning the forward-looking statements. Mr. Fretz, you may begin.

Before introducing Larry Mizel and Gary Reece, it should be noted that certain statements made during this conference call, including those related to MDC’s anticipated home closings, home gross margins, backlog value, revenues and profits, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause the Company’s actual results, performance, or achievements to be materially different from the results, performance, or achievements expressed or implied by the forward-looking statements.

These and other factors that could impact the Company’s actual performance are set forth in the Company’s 2004 Form 10-K. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Should a non-GAAP financial measure be discussed the information required by Regulation G will be posted on the investor relations section of our web site, richmondamerican.com.

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

Good morning, everyone. Welcome to MDC’s First Quarter 2005 conference call and webcast.

As many of you know, our friends at DR Horton will discuss their latest earnings release shortly after the completion of our call. To allow you to shift your focus we will end our call today no later than 10:45 Eastern Daylight Time.

As for MDC, we’re off to the best start in any year of our history. This comes on the heels of our record performance in 2004, a year in which we established our Company as an industry leader in earnings growth and operating returns.

MDC and the other well capitalized public homebuilders have benefited from historically low interest rates, improved job growth, and continued strong demand for new homes to gain market share in important land constrained markets around the country. In the process these companies have produced results that have rivaled the best of any industry.

This is not a new phenomena. Over the last five years our industry has delivered outstanding results, even in the face of unemployment, rising interest rates, the dot com technological bust, economic recession, terrorist attacks, and the war with Iraq. As a result, it should be no surprise that the homebuilding industry now has 11 companies ranked among the Fortune 500, six of which are investment grade, including MDC.

More importantly, Fortune magazine has stated that the homebuilders have produced the highest returns to shareholders over the last five and 10-year periods of any industry in America. We are especially proud that our Company ranked among the top five of all Fortune 500 companies in these return categories.

We continued to build on our 2004 achievements during the 2005 first quarter, establishing a new first quarter high in revenues and earnings. We continued to focus on homebuilding markets that exhibit the important characteristics of strong demand for homes, significant job growth in a constrained supply of available lands. This disciplined strategy has enabled us to improve our home gross margins and produce after tax returns on revenues, assets, and equity that rank among the best in our industry.

We expressed increased benefits, we experienced increased benefits from the geographic diversification of our operations, as the new Divisions we established over the last three years contributed to our results at an increased pace. The new markets we entered in 2002 and 2003 contributed more than 20 percent of both home closings and home orders in the 2005 first quarter.

As we continue to expand in both our new and existing markets, we remain focused on our goal of maximizing value for our shareholders, while maintaining one of the strongest balance sheets in the industry. Total shareholders equity now exceeds $1.5 billion, and our net debt to equity capital ratio of .26 is one of the lowest in the entire industry.

Furthermore, we have enhanced our financial flexibility by increasing our cash and available borrowing capacity by 77 percent, aided in the January increase in the amount available of our homebuilding line of credit to almost $1.1 billion, with no balance outstanding on March 31st. In addition, we continue to reward our shareholders, as evidenced by the fact that we have nearly tripled our quarterly cash dividend over the past 24 months.

Our record performance during the 2005 first quarter, bolstered by strong demand for our homes throughout the country, combined with significant growth in our active community, and our record March 31st backlog provide a solid basis for achieving our goals to produce new records for revenues and earnings in 2005.

I would now like to turn our call over to Gary Reece, our Chief Financial Officer, who will describe more specific financial highlights of our 2005 first quarter.

Thank you, Larry.

We’re very pleased today to announce our earnings for the first quarter which represent our eleventh consecutive record quarter and twenty-third out of the last twenty-four. We earned here in the first quarter $84.6m, which is up 39 percent over last year, $1.86 a share, up 35 percent. This $1.86 was slightly better than we had anticipated when we preannounced a little over a month ago, primarily due to a little bit higher margins than we were anticipating, as well as incorporating the impact of the new Section 199 production activities deduction, which had a favorable impact on our effective tax rate, effectively reducing it from 38.5 percent down to 37.7 percent, with an impact of roughly $.03 per share impact on our earnings per share.

As has been the case over the last several quarters, our results have been driven by record profits from our homebuilding segment. We earned $162.5 million, up 43 percent, on revenues of $916.8 million, which is up 23 percent. The primary drivers of this growth has been a $33,800 increase in our average selling price, a 9 percent increase in our home closings, and a 220 basis point increase in our gross profit margins. Also, we received this year increased contributions from each of our new operations in Jacksonville, Florida, Salt Lake City, and Texas, as well.

As we look at our closing levels, we closed 3,158 homes, up 9 percent over last year’s closings of 2,910. We had a strong beginning backlog which was up 16 percent, so that certainly helped. And as I mentioned, we received significant increases from our new markets. Florida was up over 300 percent, Texas up close to 150 percent, and Salt Lake City was up over 60 percent. Our closings were approximately 200 units lower than anticipated with a lower conversion rate on our backlog than we’ve experienced in the past, primarily due to difficult weather conditions in Southern California, Arizona, and Las Vegas.

As for our average selling price, we had an increase to $290,000, up 13 percent. All of our markets were up except for the Texas market. We did see a decline in our average selling price from the $305,000 we experienced in the fourth quarter, primarily due to the significant level of closings from markets like Florida, Texas, and Utah which have average prices below $180,000. The largest increases in prices came in Las Vegas, northern California, and Virginia YOY, each of which were experiencing increases of more than $75,000.

Our gross profit margins, also as we mentioned, were a contributor, reaching an all time quarterly high at 28.4 percent, up 220 basis points from last year. We saw significant improvements in Las Vegas, and also improvements in margins in northern California, Virginia, and Arizona. But the largest contributor to this margin increase was Las Vegas, as it has been over the last several quarters, these margins in Vegas were significantly above the Company average primarily due to the price increases we experienced in the first half of 2004 as a result of the extraordinary demand for homes in that market during that time.

Our financial services segment produced profits of $2.8m, down from $4.7m a year ago, primarily due a decline in profits from our mortgage lending segment resulting from a more competitive environment for mortgage pricing. We did originate a higher number of less valuable ARM loans and brokered loans, as well. Almost 40 percent of the total loans we processed were broker during this quarter, and close to 45 percent of all of the loans we originated during the quarter were adjustable rate mortgages.

We did produce, as we have over the last several quarters, some of the highest returns in our industry. Our return on revenues exceeded 9 percent, which is up 110 basis points, contributing to that were record levels of homebuilding operating margins approaching 18 percent, up 250 basis points. Our return on assets is close to 17 percent, and our all important return on average equity exceeded 32 percent, up 730 basis points over the returns from a year ago.

Our financial position continues to improve. We ended the quarter, as Larry mentioned, with about $1.2b in liquidity, including $227m in cash, nothing outstanding on our line of credit. Our equity has grown over 40 percent to $1.5b, which is approaching $35 a share. Larry mentioned our debt-to-cap ratio at close to an industry low of 26 percent. And we continue to maintain a very tight control on our spec inventory where we've had at the end of the quarter about a three-day supply of finished specs on hand.

As we turn our focus to orders, and where we’ve positioned ourselves, and the visibility for the future, we did produce in the first quarter the highest quarterly orders of any quarter in our history despite difficult weather conditions in the West, and tough comparisons which our first quarter YOY last year was up 32 percent over orders in 2003. So, a very strong performance by most of our markets.

In fact, if we look, we have a slide here that shows the relative orders per active community here during the first quarter, which you can see is a very strong six net orders per community per month. While it’s down from the seven orders per community last year, you can see it’s comparable to the strength that we’ve experienced in years prior to 2004.

Sales during the quarter were up significantly in our new markets. Florida, Jacksonville was up close to 200 percent, Salt Lake City up over 40 percent, and Texas up close to 20 percent. For the first time in over a year we saw increases in our Maryland and Virginia markets, up 17 percent, as that market begins to, you know, we begin to open up more of our communities in higher releases for sales.

We were also up significantly in Arizona, which is up close to 30 percent, even though our active communities in that market were virtually flat for the quarter. We were down in Las Vegas and California as we were in the fourth quarter, primarily due to the weather conditions and return to more normalized order pace.

We have here a slide that shows a comparison. You can see that the extraordinary levels of orders experienced in both Las Vegas and California last year. Las Vegas during the first quarter we were selling very close to 20 homes per community per month, in California, 11 homes per community per month. This quarter a very strong eight homes per community per month in Las Vegas, and in California seven homes per community per month, both of which are comparable to levels achieved prior to 2004.

These strong orders contributed to a record level of backlog at the end of the quarter, right around 7,900 units, over $2.4b in future sales value. And as additional visibility for the future, we see our active communities are moving up a little bit faster than we had anticipated. We ended the quarter with 265 active communities, which were up close to 20 percent from where we were a year ago, and up about 10 percent from the 242 active employees we had at the end of the year. The largest increases came in Las Vegas which we added 14 communities, added communities in virtually every market except for Virginia.

As we look forward, we expect this community growth to continue. And as we mentioned in our release, we expect our community count to approach 300 communities by the end of the third quarter as opposed to our previous disclosure that it would take us to the end of the year. And we do expect additional growth in the fourth quarter to exceed 300 by the end of 2005, which will put us up for the year in excess of 25 percent.

Most of the growth in active communities we expect to continue in Las Vegas. We’ll see added communities in southern California, Phoenix, and Colorado. We’re also adding new communities in each of our new markets in Utah, Chicago, both Florida markets, both Tampa and Jacksonville, as well as Delaware Valley.

And supporting this active community growth you could see significant increases in the lots that we control. Up 28 percent from last year to close to 41,000 units, 41 percent of which or 17,000 of which are controlled under option. And we do, these are true options, we had no specific performance, and we have a nominal amount at risk. In fact, we have approximately $3,500 per lot at risk to control this lot supply.

And as we look forward in taking advantage of this visibility and we look into the second quarter, some of the things we mentioned in the release and in our previous release, the home closings that we lost in the first quarter we do not expect to pick-up in the second quarter, but rather late third quarter, fourth quarter due to the impact of the weather being not only delays in closings but delays in development activity and community openings, which has a little bit of a longer range affect. Although, we do expect to recover all of these closings before the end of the year. And with a significant portion of our backlog sold but not started as yet our conversion rate will probably be a little bit lower than usual in the second quarter.

Our average selling prices, while they increased in our backlog, as you can see, to close to $310,000, even up from the fourth quarter, we don’t expect this to translate into higher prices in the second and third quarters in particular, primarily due to the fact that a lot of the sales that we received during the first quarter and contributing to the entire average selling price and backlog are homes in Virginia and California and markets where delivery times will be a little bit longer. So, we do expect that the average selling prices will probably be down from the first quarter and only slightly higher than the $280,000 that we recorded during the second quarter of 2004. Nevertheless, we do expect second quarter to be higher than the second quarter a year ago which was $1.87 per share.

And for the year this will be, as we said earlier, this will be more of a backend loaded year because of the shift in closings, but we do expect it to be a record year for us. And with the subdivision growth that you’ve seen, the easier comparisons coming on orders, for the balance of this year we’re certainly well-positioned to continue our growth throughout the year.

Now, that concludes my prepared remarks. I’d like to open up the call to questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from [Margaret Whelan] with UBS. Please state your question.

Good morning, guys.

Hi, Margaret.

Well done. Very good quarter. I wonder, some big picture questions on Phoenix and Vegas. Can you comment a little bit about the pricing power you’re seeing and the inventory levels both for MDC and the competitive environment?

Well, Margaret, in terms of pricing power this is the season to raise prices, for sure. And we are doing it on a selective basis. We’re certainly not seeing the type of – and certainly in Las Vegas, the type of pricing power that we had a year ago, although we have been able to raise prices throughout the quarter in many of our subdivisions. The pricing power in Phoenix has obviously been stronger, and again not to the levels that we saw in Las Vegas or southern California a year ago but we were able to raise prices pretty much across-the-board on a regular basis. And that being a little bit more of a competitive environment, the price increases are a little, quite a bit lower than they were in Vegas a year ago.

Rate of increase is at around 20 percent?

Probably not that high.

Okay.

Probably not. But probably a little bit more than a percent a month.

Okay. And then in terms of incentives, are you discounting more?

They’re – this is also a time when incentives tend to stabilize, as well. We have not had to add incentives. And usually, it’s a seasonal affect, really. Our incentives are fairly normal pretty much across-the-board. And so nothing significant to report in that regard.

You know, as far as lot supply, I think you’ve seen some of the numbers as well, and certainly in Phoenix where the resales on the market have dropped substantially, you know, below 7,000 units, and as far as our inventory levels there it’s very tight. We had very few spec homes, and we are pressing like crazy to get homes started that we’ve already sold.

I guess delay or even in labor?

There is, we are experiencing some tightness in the labor market in certain areas just because of the sheer volume that we’re experiencing. But because we are – it’s not significant because we are a larger builder there, one of the top three. And being such we are able to command some of the better sub bases there. So, we’re doing just fine.

The situation in Vegas, we’re selling and closing a lot of houses there. The situation is actually, it actually feels much better there this year because we have almost twice as many active communities in that market as we had a year ago. Whereas, we were trying, we were almost tripping over ourselves we had so much going on in 17 subdivisions a year ago, and now we’ve got 34. And the pace is more normal, and we’re doing very well in getting houses started and moved through the pipeline.

Could we switch over to the Mid-Atlantic? In Virginia your results are pretty impressive. Do you feel like you’re gaining share there?

I think that we are, we’re pretty much holding our own, Margaret. We have been one of the top three builders in that market for a long period of time, as long as we can remember. You know, we’ve been in that market since the mid ‘80’s. And I think that we are certainly positioning ourselves, you’ll be able to see this in our 10-Q. We do disclose the number of lots that we control in each market.

And we’ve done a very good job in tying up lots in that market for the future, which should put us in a position to continue to grow in the future. You know, that’s a very highly land constrained market, it’s very difficult to get the land through the process. We have three Divisions in Virginia now, and one in Maryland, and one in the Delaware Valley. And we have a lot of experience in each one of those Divisions in processing lots which gives us a competitive advantage. So, we expect to leverage that as we continue to grow here in the future.

Okay. And just the last question I had was, and maybe you gave it to us already, but your cancellation rate for the quarter versus last year?

The cancellation rate was up only slightly. It was right around 20 percent.

Okay. Thank you very much.

Our next question comes from [Steven Kim] with Smith Barney. Please state your question.

Thanks very much. Gary, I was wondering if you could give first of all just a housekeeping thing. What do you think the tax rate for the year should be?

Steve, the best I can tell you it’s kind of where we came out in the first quarter which would be somewhere in the 37.7, 37.8 range.

Okay. That’s fine. And regarding the issue of average price, the figure was obviously down a little bit, you’ve got some mix shift going on. Where do you think the low point for average closing price might be in the next couple of quarters?

You know, I would probably, you know, it’s hard to say. But I mean as we look at the backlog I think that probably second quarter is going to be pretty close to the low.

And remind me what sort of figure you’re suggesting we might see in that quarter?

Well, I’m giving my reference to the amount, the $280,000 that we put up last year. And we expect it to be a little bit higher than that, not much.

Okay. That’s fine. And related to your gross margin, obviously, you had a powerful gross margin. You indicated that Vegas was a major driver behind that. I suspect that most of your other markets were up as well. First of all, is that in fact the case? And then, secondly, in Vegas do – from what you can tell, from what’s in your backlog at this point, would the trajectory of margins in that particular market be basically flat to up or do you think they would be flat to down?

Yes, Steve. Steve, that’s one that’s hard for us to comment on. You know, I think that we know what happened in Vegas last year. We were as good as anyone in taking what the market gave us on pricing power. We also know, and you do from your visits there, that the price of land continues to increase.

So, we are paying more for land today than we were a year ago. And there’s still leverage, as you know. You know, we haven’t, as we said before, we haven’t had to give back any of the price increases we took. But it, you know, our ability to maintain these margins will be dependent on the leverage we’re able to achieve on roughly a three-to-one increase of lot cost versus land.

And so we have been able to raise prices in Vegas and at quite a bit a slower pace than a year ago, so it’s something that I wouldn’t want to say that it would be a downward trend, because if we’re able to continue to raise prices we can hold our own. But if not, then the increasing land costs are going to push those margins in a downward direction.

Well, let me put it this way then, bringing it to the Company as a whole. Would it be unrealistic to think that even if the margins in Vegas were to deteriorate because of stable pricing on homes combined with rising prices for land, that even if it were to deteriorate that the performance in your other markets and the mix shift going on would still enable you to have a flat to positive gross margin for the year in ’05 relative to what it was in ’04? Would that be unrealistic?

Would – that’s not unrealistic, Steve.

Okay. Great. That’s what I would have thought. All right. Thanks very much.

Our next question comes from [David Einhorn] with [Green Lake Capital]. Please state your question.

Hello. Good morning, guys.

Hello, David.

Quick question for you. Last quarter there was a lot of improvement on a YOY basis on sort of the SG&A line. And you thought that in 2005 that there could be further improvement there relative to revenues. And then this quarter it sort of went in the other direction from that. Could you comment on what happened in that here in this first quarter, and whether you still feel that there’s opportunities there in 2005?

Sure. David, as far as our homebuilding SG&A, we actually saw a movement in a positive direction. I think our SG&A as a percentage of revenues was 11 percent versus 11.3 a year ago. So, there’s some positive movement there. It’s a little tough to measure in the first quarter because it is our lowest revenue quarter. And we did see our corporate G&A drop relative to the fourth quarter but perhaps not as much as one might anticipate, primarily because we are investing in our future in a number of areas.

Number one being our training program which is quite extensive, and we’ve extended it beyond just pure sales training, to purchasing, and many of the other disciplines for our Company. And that program is ramping up in a hurry. Secondly, we are evaluating and about to embark upon the implementation of a new computer system. And so we’re investing in technology now. And that’s something that will continue for the balance of this year. So, those are a couple of big ticket items that we embarked upon here at the beginning of the year.

I think as the revenue base grows for the balance of the year you’ll see the leverage begin to materialize. At the same time, you know, on the homebuilding side what we’re hoping for is a greater level of production from our new markets in Chicago, and Tampa, and Philadelphia, each one of which have not contributed much of any closings to this point. We’ll be ramping up on an increased pace throughout the balance of this year.

Okay. A follow-up question is that given all that you’ve described before in terms of sort of a backend weighting in terms of the closings and the higher sale values, and so on, and so forth as you move towards the back part of the year, the question becomes as you look at the results as a whole do you expect to be able to achieve higher earnings in the quarters throughout the balance of the year? Particularly that fourth quarter, which was a very strong quarter last year?

David, I would expect that we would show increased earnings in each of the remaining quarters.

Terrific. Thank you so much.

Our next question comes from Tony Campbell with [MAP Partners]. Please state your question.

Good morning.

Hi, Tony.

A couple of questions, if I might? I’m wondering if you – I hear some of the builders are requiring a higher deposit down to kind of discourage speculations, so that would be my first question? And my second question is kind of a general question. I wouldn’t normally ask this but since the decline in the stock market has been on the front pages of every newspaper, I wondered if you had seen an affect on selling activity over the last weekend?

Okay, Tony. The first, as to the first question on deposits, we have made some moves. I would say, in particular, in Las Vegas and Phoenix where the speculation seems to have heightened the most over the last year or so. And our deposits per home in those markets are up. We are requiring much higher deposits on – for certain buyers where they may be – we do sell in some cases to second home buyers, owner occupied but second homes. Those, for the most part in Las Vegas we’ve doubled the deposits required for those. And increased deposits on design center items, as well. So our deposits in those markets are up. For the rest of the markets it hasn’t been a significant change.

And as to your question on sales activity?

Correct. I wouldn’t normally ask that, but I just wondered if you had seen any impact last weekend?

And you’re talking about impact on orders?

Orders, visits?

You know, I would say no, no. You know, we had a little blizzard here in Denver a week ago. That had a little affect on orders, on the 10th of April. But other than that, it’s pretty much as expected.

Terrific. Thanks a lot.

You bet, Tony.

Our next question comes from [Joel Locker] with [Carlin Financial]. Please state your question.

Hi, guys. Great quarter, let me say that first. And just wondering with yield rates come back down to, you know, like the 10 year is back down to 4.23 percent today, and if you guys were thinking about issuing any more debt at something like a 5.5 percent rate like you guys did in December?

I would have to say that we have not made a decision in that regard, although we are always, always have our eyes open for opportunities to take advantage of situations like this in the market. However, we do have $750m outstanding right now. We’ve got over $200m of cash. So, you know, we have to be, our financial position, our debt-to-cap ratios are of utmost important to us, and we have to evaluate the need first.

Right. It’s just, I guess it seems like with such a healthy balance sheet compared to the rest of the builders that you could afford to borrow a few more, and then maybe this year step-up the buyback? I just noticed, that was the only thing I was kind of a little bit concerned was that share count was up 3 percent over last year, and was wondering just using maybe the $220m of cash on the books for a buyback and then maybe issuing a little more debt just to kind of bring back the share level. Has that crossed you guys’ mind at all?

It certainly has. We’ve considered it. We are always considering it. We have board meetings every month, and we talk about opportunities to apply our capital, including a number of things, as well as stock repurchases. So, we do have an active program that’s still available to us, over 2m shares still available to be repurchased under that program. So, it’s something that we look at. But we also are in the process of growing our business. And so we have to weigh all those factors.

Right. I just guess seeing you guys’ stock turn at seven times earnings today, it just seemed like you ought to be able to buyback some shares. But it just didn’t – I guess the other question was just I missed the, what was the percentage of adjustable rate mortgages for the quarter?

Adjustable rate mortgages are 44 percent.

44 percent?

Yes.

And that was on orders for the first quarter?

That was actually on closings.

On closings. And do you guys track a number for orders, or?

We do, and that number, and I don’t have handy. I don’t believe based on my discussions with our mortgage company that that number has changed significantly.

Okay. Thanks a lot.

Our next question comes from [Alex Barone] with JMP Securities. Please state your question.

Yes, thank you. Good morning.

Good morning, Alex.

I had a question here regarding your expectations for average sales prices and orders. I mean realizing that you’re still having quite a bit of impact from all your new markets, where would you expect your average sales prices to sort of trend over the next three quarters relative to what you did this quarter?

Well, Alex, what we expect, first of all, is that we will probably be down a bit in the second quarter from the first. And it’s possible that we may see a little bit of a rise from that point but nothing dramatic for the next couple of quarters, anyway.

Okay. Secondly, you’ve mentioned that you expected a lot of your community account growth to come in Las Vegas. And I guess I was wondering if you could give us some idea of how much you were talking about there?

Okay. Well, it – I would imagine that – I mean our community account today stands at 34 active communities.

Right.

I would expect over the next 60 days or so we’ll probably be adding another 10 communities there on a net basis. Of course, that’s dependent on how strong sales are in that market and how quickly we sell out of our current active communities. But that’s kind of the way it looks right now.

All of the markets that I mentioned, Colorado, California, Las Vegas, all of those we should see growth as somewhere between five and 10 active communities over the next couple of quarters.

And so you would expect to count, once you reach that plus net 10, to kind of as stated through the rest of the year?

It’s, in Las Vegas, only?

Yes.

I mean it’s possible we could add a couple more before the end of the year. That’s a market that we still believe is extremely vibrant and where opportunities exist. And it’s also a market where we can, we have some very aggressive land people there who are able to find opportunities, in field opportunities, that can be turned around fairly quickly. So, there’s still time right even now to find opportunities that meet our business plan and add them to the portfolio by yearend.

Now, these communities, are they roughly speaking equivalent to what you would have had last year in terms of size and price points? Or are you kind of making any dramatic changes there, either way, going up or down?

Very similar. The size of these projects continue to be in the two year or less supply category. A lot of them are five, 10, 15-acre sites, and the price points are consistent with where we are today which two-thirds of our, of the homes we’re closing in Vegas today are below $300,000. So, there are no significant changes in our positioning in the Vegas market.

What about in Washington, D.C.? What do you expect the community accounts to do in your Virginia and Maryland markets?

In that market we’ve got some coming and some going over the balance of this year. Don’t expect to see a significant level of increase from this point. We might add a few in each one, but a few coming off, as well. So, you know, we do have a number of communities that will be coming online late in the year and early next year as we prepare for growth in 2006, but most of our growth in that part of the country in terms of community count will probably come in the Delaware Valley.

Now, is your increase in pricing in those particular markets coming from change in mix? Or is it mostly appreciation?

You’re talking about the 75,000?

Yeah, well, I was talking still in the D.C. market?

Yeah. That – it’s a little bit above, but I’ll tell you that the pricing, the ability to raise prices in that market is probably the best of anyplace in the country.

I would assume margins goes along with them?

Yes.

Okay. All right, great. Well, great job. Thank you.

You bet.

[OPERATOR INSTRUCTIONS]

Our next question comes from Gary Freeman with Gem Realty Capital. Please state your question.

Good morning, Gary. I joined the call a little late, so hopefully this is not repetitive. But can you give us a sense of the order of magnitude of locked cost increases that you expect to flow-through your P&L over the next several quarters?

Oh, wow. Gary, that’s a tough one, because it’s…

I’m just looking at it from an overall company perspective, just sort of order of magnitude. You know, less than 4 percent, more than 5 percent, something, just some guideline?

Over the last – over the next year?

Yeah, you know, as you progress through the next few quarters just what your rough expectations are for that?

I would – first of all, in most of the markets that we’re in lot costs are increasing, so particularly in these hot markets where we’re closing most of the houses. So, I would expect the increases to be more than 5 percent over the next few quarters. But by the same token, we’re hopeful that we will be able to continue to raise prices, as well.

Now, just to be clear, when you say ‘greater than 5 percent,’ are you talking from a replenishment basis or what’s expected t hit the P&L?

I would expect that to hit the P&L. A lot of these prices increases the most dramatic have occurred in the last year, which will be coming through the P&L here in the next few quarters.

And if you look at actually replenishment of lots in the market today on a lot-by-lot, on a just a general lot basis, what are you seeing in terms of order of magnitude increases? I’m trying to get a sense if that’s sort of tending to accelerate, stay pretty stable, just trying to get a sense of the direction there?

Boy, Gary, it’s a local market question. You know, we continue to see increases in the hot markets, the land constrained markets, there’s no question about it. You know, Virginia, Maryland, Delaware Valley. As dramatic as last year maybe in southern California. It’s – we’ve seen some pretty significant increases in northern California and in Vegas. It’s not accelerating as quickly, but it’s probably moving up faster in Phoenix because of the type of growth in that market.

What would you estimate today is you’re the length of your land pipeline in terms of sort of current absorption rates?

I’m sorry, Gary, I’m not sure I understand the question?

If current absorption rates were to hold company wide what would you estimate is your, the length of your land pipeline in sort of years, years’ worth of land?

Okay. It’s about just short of 2.5 years’ supply right now. And we do have probably another 1.5 year supply that we have soft dollars on that we are evaluating as part of our pipeline.

So, if you look at – there’s a slide, Gary, in the webcast, where you’ll see where our lot supply stands March 31st. And you’ll see that we have about a little over 40,000 lots under control at March 31st, and about 60 percent of that is owned. But at the current pace that’s about a 1.5 year’s supply and about a year’s supply or so under option.

Got you, got you. Okay. Thanks, Gary.

You bet.

Our next question comes from Timothy Jones with Wassermann. Please state your question.

Good morning, guys.

Good morning, Tim. Sorry I missed you yesterday.

That’s okay. I’ll talk to you later.

Okay.

Now, I want to get something straight. I mean I’m getting quite worried about the speculation going, that I’m seeing in I would say six of your 10 markets, I would call the hot markets and highly speculative, both. First of all, are you still continuing not to require buyers to sign something on their contracts which ties them up from selling the home for a year?

We are not doing that at this time, Tim.

You do know that you are the only builder in the United States that’s not doing that?

I would…

I mean the big ones, you know, obviously.

A number of others that were.

There are no other large builders that I know of, of the 15 I cover, that is not doing that especially in the hot markets like Phoenix and Las Vegas, for example. And I want to know why either you’re not doing it, you know, obviously somebody is trying to spec a unit, if you had that clause in even if you have to go to court you can certainly tie these people up. And a lot of them are on a shoestring, and they certainly would go to another builder rather than risk that.

Well, it’s something that we have, you know, Tim, we’ve looked at various ways of attacking this. And we believe that we’ve been pretty effective so far in our approach. Which is basically we have a policy, we have a means of evaluating the buyers through our mortgage company, and this is something that we’re able to kick-out the speculators, as well as the fact that we are requiring a much higher deposit where the potential speculators have significant dollars at risk.

You mentioned, obviously, too, that everybody is worrying about which is Las Vegas and Phoenix. What is your average down payment in those two markets? You said it doubled in Las Vegas, where is it now? As a percentage of the price of the house? I guess it doubled from 2 to 4 percent, that’s not meaningful; if it doubled from 5 to 10 percent, it is meaningful.

Yeah, Tim, our average deposit right now, our average deposit on homes that we’ve closed so far, is about 5 percent.

That’s on the entire company, correct?

That is on, that is in Las Vegas.

Oh, it’s Las Vegas. It’s still 5 percent?

That’s correct

I mean that’s still dangerous.

You talked about Las Vegas home prices not going up, looking at your homes closed they went from $207,000 to $289,000, that’s almost a 40 percent increase. I’d call that significant.

Well, Tim, a lot of those increases are the result of price increases that we took during a good part of 2004. In terms of 2005 I didn’t say that we haven’t been able to raise prices, but really nothing even close to what we did a year ago.

So this is price increases that you did six to nine months ago?

That’s correct.

And you are talking now, you and I both know that you’ve got, that the danger, real dangerous area in Las Vegas is the $400,000 plus market. How much, you said you had a third over $300,000. How much do you have over $400,000?

We – it’s very limited.

Right.

We do have some communities that are over that level, but it’s a limited number. And they are in very strong areas in the market. But I tell you, we are, and you can see our average price, and that’s really, there’s a fairly narrow band there. I will not say that we don’t have any active communities over that price point, but right now the ones that we have for the most part are ones that we’re working through at the tail end. We haven’t brought very many recently at that price point, and the ones that we have are in areas where the strength of the Las Vegas market is. But our primary focus is below $300,000.

Good, good, good, good.

Lastly, you talked about a $3,500 average price on your lots, on your opt in lots. What percent of those lots are completed lots? Are they most -- I mean what stage are they in? Are they just basically raw land that’s been approved? Are they some completed? So, I get an idea.

Okay. Excuse me. I would say, Tim, that probably 80 percent of the lots that we have under option will require some level of development. Most of the lots that we have, actually most of the lots that we buy are under option at one point in time because we tie them up.

Right.

And they’re subject to certain conditions proceeding. And in most of the markets that we’re building in, other than Texas and Colorado Springs, you know, there’s a limited number of markets where we’re able to buy finished lots on a roll. I would say most of the lots that we have under option require some degree of development work.

Okay. I mean – and on your ARM, just a quick question. What percentage of those ARMs are interest only, and how – and I see there was an article by the Los Angeles Times that suggested that 48 percent of the loans last year were ARMs and interest only ARMs, or at least going to convert into that, which scares the living daylights out of me. What percentage of yours are interest only? And I suspect you cover it by at least a couple of years of fixed rates?

Tim, of our ARM product probably 75 percent is interest only.

Really? But they are covered by a couple of years of fixed rates, aren’t they, or not?

Covered by a couple of years?

In other words, I mean do they start the first day being not only interest only but I mean subject to a rise in interest rates the next month or something? Usually they do two years or five-year fixed, then they turn, they become adjustable.

These are – yes, that’s correct. There is a – they pay interest only during an initial period, and the balance, and they pay a variable rate over…

But they have a fixed rate also during those first couple of years, correct?

I believe that’s the case.

Okay. I’ll talk to you later, but thanks for the information.

You bet.

Our next question comes from Alex Barone with JMP Securities. Please state your question.

Yes, thanks. Going back to the corporate G&A, you mentioned you have been doing some investments in technology and in training. I was wondering, I mean it seems like your costs have been sort of ramping up there, both in dollars and in percent of revenues. I was wondering to what extent is that sort of temporary? And do you expect that to come down at some point? And, also, like can you quantify your technology expense? I mean is that both in dollars? And, also, like is that something that’s going to be phased over time, or just a one-time sort of charge?

Alex, on our training, I would say that it is not a temporary expense. It’s something that we will probably, it’s possible it may even grow a little bit from where it is now. You know, some other things that we’re doing that tend to translate into higher costs at the corporate level are the fact that we are, we have brought to the corporate level a higher degree of merchandising, and have consolidated that at the corporate level.

We have an ad agency in-house, we brought into our national marketing group, where we have, we’ve set-up our own agency which tends to increase costs at the corporate level but will minimize those types of expenses at the homebuilding division level. And some of these costs are charged via a supervisory fee to the Divisions, but still net, net it’s a higher cost at the corporate level.

As far as the technology is concerned, this will be a cost that we will probably be, it will probably take several years for us to complete this process. So, it’s something that probably will ramp-up a bit from this point as we begin the implementation. And it will be a process that will continue for at least three years.

Okay. And would you be able to quantify sort of what kind of investment you get there, and the dollars involved?

It’s something we would not discuss at this point, Alex.

Okay. All right. Great, thank you.

Our next question comes from Gary Freeman with Gem Realty Capital. Please state your question.

Hi, again, Gary. Sorry, I’ve just got a follow-up. You’re not going to love me after this call, but let me just try anyway. You mentioned on your locked cost increases flowing through the P&L that you expect those to probably be greater than 5 percent company wide. What is the top end of that range, potentially?

Gary, I am sorry. Would you please repeat?

Absolutely. You stated earlier that the locked cost increases that is company wide you expect to flow through the P&L over the next several quarters should be about 5 percent. What is the top end of that range, potentially?

Well, first of all, Gary, I want to make sure we don’t misunderstand what the 5 percent means, because that doesn’t mean 500 basis points against margins or anything like that. We’re talking about a 5 percent increase in lot costs which can be covered by a 1.5 percent increase in average selling price increases. You know, in terms of leverage, and maintaining margins.

Right, understood. So, when you say over the next several quarters, you expect it to be slightly up, maybe flattish, that’s where you get your sort of flat margins from? Because lot costs are increasing roughly 5 percent, is that right?

Well, the relatively flattish average selling price is more a function of mix, it’s not really indicative of where average prices are going in terms of increasing our home prices.

Understood.

We have continually been able to increase prices to some degree in all of our markets. And so it would be a mix shift where we see more of a, more closings coming from these lower priced markets, and a greater percentage from Phoenix as that market, you know, these strong sales convert to closings. So, excuse me, that is what is keeping our for all average price lower. You know, it’s, you might, it could in some of these hotter markets be 50 percent higher than that in terms of land price increases.

Right, right. Understood. Okay. Thanks. That’s helpful, Gary.

Okay.

There are no other audio questions at this time.

We would like to thank you, again, for joining our call today. We look forward to the opportunity to speak with you again in July following the announcement of our 2005 second quarter results.

This concludes today’s teleconference. You may all disconnect.