MDC Holdings Inc (MDC) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the M.D.C. Holdings 2005 fourth-quarter and full-year 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 to read the forward-looking statements. Mr. Fretz, you may begin, sir.

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 2004 Form 10-K and 2005 third-quarter 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.

Good morning and welcome to M.D.C.'s 2005 fourth-quarter conference call and Webcast. We are pleased to announce growth in our revenue and earnings per share for the tenth consecutive year, which we concluded with the strongest quarterly results in our 34 years in business. In both the fourth quarter and full year 2005, we achieved new Company highs for home closings, revenues, average selling prices, home building operating margins and net income, while producing returns on capital that rank among the best in the home-building industry.

Our record results in 2005 continue a long history of growth in earnings and financial strength. Over the past decade, we have achieved an average year-over-year profit increase of more than 40% while generating improved earnings in 36 of the last 40 quarterly periods. This growth has resulted in an 850% increase in stockholders' equity since 1995 and a 2200 basis point rise in our after-tax return on average equity to more than 30% in 2005. And over the same 10-year period, we raised our financial position to the prestigious investment grade level.

Our robust and quality growth has established us as a performance leader in our industry and among all public companies. In 2005, we achieved Fortune 500 status and ranked number 6 in the Barron's 500 and were recently named to the Forbes Platinum 400 as America's Best Big Companies for the eighth consecutive year.

Our accomplishments are a testament to our operating discipline, our conservative and strategic capital allocation policies and our continued focus on our primary goal of maximizing long-term shareholder value. On behalf of all of the senior management at M.D.C., I'd like to express my deep appreciation to our shareowners, employees, Board of Directors and business associates who have helped us achieve these outstanding results in 2005 and throughout the past decade.

Although we have a great opportunity to achieve continued growth in 2006, realizing growth this year will be more of a challenge, and as some of our markets are adjusting from a period of exuberance, causing sales to slow to a more normalized level. However, during the past 10 years, the housing industry has faced a host of challenges. Nevertheless, our Company has thrived, led by an experienced management team and employees who are dedicated to the Company's success.

We enter 2006 with record year-end backlog and [a] 21% more active subdivisions than a year ago, and we are positioned for meaningful contributions to our bottom line from our newer operations in Chicago, Tampa, Philadelphia, Delaware Valley. As a result, we believe we are well prepared to continue to grow and produce new Company highs for home closings, revenues and earnings in 2006.

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

Thank you, Larry. This truly was a remarkable quarter for the Company. We produced for the 14th consecutive quarter record earnings of $197.5 million, up 39% from $142.6 million we earned a year ago on revenues of 1,736,000,000, representing a 29% increase over last year. Our earnings per share for the quarter were $4.29, 35% above last year's total.

We produced for the year our eighth consecutive record earnings at $505.7 million, up 29% from last year on revenues of $4,884,000,000, representing a 22% increase. Our earnings per share of $10.99 is 25% above the $8.79 we earned a year ago.

As over the last few quarters, our results were driven by the highest level of quarterly and annual home-building profits we've realized in our history. Profits in the fourth quarter from home building were $337.8 million, 30% higher than last year. And our earnings for the year were $902.6 million, up 26%. Our revenues for the quarter were $1.7 billion, up 30%, and $4.8 billion for the year.

We saw our home-building profits increase in the usual suspects, as we talked about in previous quarters -- increases in Virginia and Maryland, Arizona, our new markets in Utah and Florida. And for the year, we can throw the market in Las Vegas into the mix as well.

The primary drivers for our profit increases in the quarter were a $40,000 increase in average price and a 15% increase in closings, (indiscernible) drivers for the year, as average prices were up over $30,000 and closings up 10%.

As we look at closings, closings were an all-time high for the quarter at just short of 5000 units. Our backlog was up 12% to begin the quarter, and we converted 55% of it, which is about an average for that period of time. We closed 4951 homes, 15% higher than last year.

We saw the primary increases occurring in Las Vegas, which was up 37%. Utah was up 33%. Arizona and California were both up 23 and Florida was up 25. We saw down closings in Colorado and Virginia, primarily due to lower beginning backlogs to start the fourth quarter.

Our closings for the year were just over 15,300, up 10% over the 13,876 we closed in 2004. All of our markets were up except for Virginia, Colorado and California.

So we look at our average selling prices, we saw the highest levels that we produced -- $345,000, which was $40,000 higher than the $304,000 of a year ago. And for the year, we were at $313,000, up $30,000 over last year. For the quarter and for the year we are up really in every market except Chicago. And in the fourth quarter, we were down slightly in California. We saw the largest increases occurring in Virginia year-over-year, followed by Florida, Maryland and Arizona leading the way.

From a gross margin standpoint, our margins continued to be at some of the highest levels in our industry. Although down slightly from the fourth quarter a year ago, our margins came in this quarter at just under 28%. And for the year, we exceeded 28% at 28.4, up 70 basis points from this time last year.

Although our margins were down slightly, we saw significant increases in margins during the year in Florida, Arizona, Virginia, Utah and Maryland. These were offset by declines in Nevada, as we anticipated, from levels that were unsustainable from year-ago period. We also saw a sequential decline from third quarter due largely not only to the Nevada impact, but also a significant change in the mix of homes that we closed in California in the fourth quarter, where our margins have been coming in at lower than the Company average and average prices are quite a bit higher than our Company average.

The offset to this, however, is the fact that our home building G&A and SG&A as a percentage of revenues came in much stronger than in the past, as we had previously discussed in other calls. We saw our home building SG&A drop to 8.4% relative to revenues here in the fourth quarter. That is down 30 basis points from a year ago and fairly comparable for the year.

However, we saw as a result of this our home building operating margins actually improved, despite the margin impact. They were up 10 basis points in the quarter and 50 basis points for the year. And relative to the third quarter, were actually up in terms of home building operating margin -- despite lower home gross margins -- were up in operating margins by 90 basis points, primarily due to the fact that our home building SG&A as a percentage of revenues is down 200 basis points from the third quarter.

Our Financial Services segment had a tremendous quarter as well. They closed and brokered a record number of home loans to produce the highest-ever quarterly earnings in their history -- $11.5 million, up 125% from where it was last year. And for our year, it was the second-best year ever, producing earnings of 24.7 million, up 34% from a year ago.

The primary drivers for both the quarter and the year were higher levels of origination fees due to the higher level of loan closings.

I'll provide you with some statistics here that most of you look for in understanding what's going on in our mortgage business. We did see the percentage of fixed rate loans versus total loans originated drop a little bit here in the fourth quarter. We are just below 50% in terms of fixed rate -- 48% fixed-rate, 52% ARMs.

Of the ARMs, 83% are interest-only, which is 43% of the total. But the vast majority of our fixed and ARM loans have fixed periods of five plus years. In fact, 93% of all the loans that we originated during this period were fixed for a period of five years or more.

FICO scores for the Company averaged around 730. Our loan-to-value is just below 80%, without seconds. As we add second mortgages in that we originated, it brings it into the mid 80s as it has been the last couple of quarters.

From a return standpoint, our strong performance continues a strong trend of industry-leading returns for our Company. We turned in the highest-ever return on revenues for a quarter and for a year for our fourth quarter. We saw a return on revenues at 11.4%, up 80 basis points over last year, and 10.4% for the year, up 60 basis points. Our return on assets and equity were at levels near industry highs -- 16% return on assets and just over 30% in terms of return on equity.

Our financial position has never been stronger. We ended the quarter with an equity of 1,952,000,000, up 38% from last year. And our book value per share of $43.7 per share is up 33% from last year. And we've grown at an average rate of about 30% over the last five years.

Our net debt to capital ratio, that being our home-building and corporate debt net of cash, came in at the end of the year at .28, which is well below -- the peer average is somewhere around 0.4. And our cash and borrowing capacity at the end of the year reached an all-time high for the Company at 1,231,000,000, up 17% for this time of year.

We have a schedule here in the Webcast that shows our cash flow. And you can see that our cash used during the year from operations was used to fuel our growth. We did see some significant use of cash in buying land, particularly in some of our newer markets. But the primary use was to build work in process, which you can see will convert to cash fairly quickly.

We paid dividends at almost twice the rate that we paid a year ago. And our payments as declared and paid in the fourth quarter are up over 117% over levels that we paid a year ago.

Turning to our orders and those factors that give an indication of where the business is headed for the future, we have, as previously reported, we received orders for 2405 homes during the quarter compared to 2662 a year ago. This is down 10%. While our estimated sales value, which was not previously disclosed, was actually up 10% to $830 million from 760 last year, primarily due to the fact that our average price of the orders that we took this quarter rose to $345,000 compared to 285 last year, which is a 20% increase.

Our average prices increased in most of our markets, as we saw Arizona, Nevada, Maryland and Florida show the largest increases.

The market tone feels -- as I've discussed with many of you, the tone feels like more of a normal seasonal pattern. We did see some strong traffic in the quarter. Our cancellation rate is not out of line, very close to where it was a year ago. And in terms of the orders we did receive, we saw California and Nevada take the lead again, as they did a couple years ago. Nevada was up 173% and California was up 20%. The other pack leader was Utah, which was up 18% despite the fact that its communities were down 25%.

We were lower in terms of orders in Arizona. As I've discussed with a number of you, last year in the fourth quarter, our Company averaged almost 11 net orders per community per month in the fourth quarter, which is typically a seasonal low period. This year, we returned to a net of around 4 per community per month, which is very comparable to the levels that we had realized prior to last year, in '03, '02 and '01. So that clearly is a return to normalcy.

We saw lower orders in Virginia, although the gross orders that we took in Virginia were very comparable to the levels that we received in the fourth quarter a year ago. We simply saw a greater level of cancellations this year versus where they were in the fourth quarter of 2004. And we were lower in terms of orders in Colorado, primarily due to a more competitive environment here.

Our backlog was the highest ever at year end. While we were up slightly in units to 6532 homes in backlog, our sales value of backlog was up significantly, up 27% to $2.4 billion, as our average price and backlog rose to 373.5 from 295 last year, up 27%.

Our active communities are very close to where we had told you in the last press release and conference call. We came in at 292 active communities compared to 242 a year ago, up 21%. The graph here shows you where our largest increases are coming and they are where you might expect -- our growth markets in Arizona, California and Nevada showing the largest increases and, of course, increases in our new markets in Illinois, Delaware Valley, Florida.

We saw some temporary declines in Utah and Virginia. We are going to be building up those levels fairly quickly here in the first half of 2006. As we also mentioned in the press release, you'll see that our active communities declined in Texas from 24 to 21, consistent with our decision to allocate capital away from the Texas markets to markets with the greatest potential for the highest risk-adjusted returns for our Company.

We do plan to build out or sell the lots that we currently hold. so this community count will continue to come down through the year. And we have no current plans to enter into contracts to purchase new land in the future.

So as we look at our community count without Texas, we actually see a community count of 271 active communities at the end of this year compared to 218 of a year ago, actually up 24%. And we ended the year with control of over 42,000 lots, of which 18,800 lots are under option and we control those lots with right around $3800 per lot at risk. So these are true options and we are very happy about our lot position going into 2006.

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

(OPERATOR INSTRUCTIONS) [Michael Rehad], JPMorgan.

The first question, I was wondering if you could go into a little more detail on the order traffic patterns during the quarter -- how would you characterize October versus November versus where you ended in terms of trends in December. And if you could possibly give any color in terms of what you are seeing so far in January.

The traffic patterns, as I mentioned, were fairly strong throughout the quarter. And as it typically occurs, although it hadn't in the last couple of years, we see traffic fall off as the year goes on. And that is pretty much how it went, October being the strongest and then getting progressively weaker through the end of the year. But still overall, up year-over-year in terms of traffic.

Maybe traffic isn't the right word, Gary, but more just overall order trends. I believe we had talked about perhaps December being a little bit better than November. And maybe you could talk about what you've seen over the last six weeks versus what perhaps was the low point in November.

We are coming off a fairly strong quarter in the third quarter. So October, I mean it -- I think that what had actually occurred is to see a little bit easier comparisons, we saw, I would say, last year October and November were heavily impacted by Nevada and what was going on in that market. And Nevada got progressively better throughout the year, so the comparisons got progressively tougher, I guess you would say, but were very easy in October.

Because that was a period -- I think everyone knows what was going on in Las Vegas at that time. So it got a little bit better in November and then a little bit better in December.

But it is hard to really talk about a trend occurring there because there was a much going on both ways, other than just a normal seasonal pattern. Here early in the year, we are, -- it's too early really to tell. We are just getting up and going. We've got a lot of new communities opening, models opening, it is the spring of the selling season.

So we need to -- there are a few things going on in our lives here in Colorado with the Broncos; it may complicate our selling season for a couple of weeks here, which is a good thing. But we will have to wait. Las Vegas says that sales don't burst out until after the Super Bowl, and that may apply to more markets than just Vegas this year.

Okay. And just lastly on the Financial Services, you saw more than a doubling of operating income. I was wondering if you could go into a little more detail. You talked about more origination fees and volume, but I assume you've had those things drive the last couple of quarters. Did you have better capture rate or was there a gain in there? Or what really drove that performance year-over-year?

The last couple of years have been more difficult with a competitive environment. We've seen -- our mortgage company has seen its capture rate improve; capture rate in the fourth quarter was higher than it was a year ago. We did see --

What was that, Gary?

(multiple speakers) a higher level of sales of gains on sales and mortgage loans and servicing in the fourth quarter than we'd seen. So that helped drive it. And this increased volume actually was done keeping our overhead to a minimum, and so that leverage created some upside as well.

What was the capture rate, Gary? Versus last year.

The capture rate was around 74% this year versus 72 a year ago.

Thanks very much.

Kim Stephen (sic) from Citigroup.

Actually, it's Stephen Kim from Citigroup. Thanks. I wanted to see if I could follow up on something you had said in your release about how you were maybe looking to pull out of Texas and how California generally operates with lower margins than the rest of the Company.

My sense is that both of those statements are not necessarily what we're hearing from a lot of your peers, where California actually for many companies is actually a pretty good market margin-wise, and Texas is by many accounts starting to rebound. So I was curious as to whether you could comment on why you think what you are seeing in those two markets may be different from some of your peers.

Okay, Steve. First of all, I did not say that California was at the bottom of the barrel in terms of margins. I simply said they were lower than our Company average.

Yes.

And we probably have more divisions below our Company average than above our Company average. But California has good margins. We are seeing margins in California well above what we were seeing in Texas.

As you know -- you've covered us for a lot of years -- know we do very well in land-constrained markets where it puts a lot of pressure on buying land, processing land, finding land and difficult to build in. And those are not characteristics that you would apply to the Texas markets. It is a market that we see as a need for high volume. It is low margins on the gross side and the net side. And it is volatile.

And from our standpoint, we believe that capital is not unlimited, and we have decided that we need to put our capital in other markets where we see today better opportunities for returns. So it's not to say that we couldn't make money there, just as anyone else is; it's just that we have alternatives available to us that we would rather put our capital in today.

It was interesting, because in your release when you talk about the gross margin trends, you said that it was impacted negatively, and pretty much the only thing you mentioned there was the greater mix of homes closing in California. So I inferred from that that California was meaningfully enough lower margins than the Company average for you to call it out like that.

Are you sort of suggesting with your comment here that in fact Texas was perhaps a bigger drag on your margin than California?

Overall, Texas is a much bigger drag on the margins. I can't comment on what that impact would be, but their margins are well below California.

Okay. So I guess where I'm kind of going with this is we know that the greater mix from California being a slightly lower or whatever -- lower margin than the Company average is going to continue into '06. And it would appear that Texas would be a drag that will start going away.

I guess my question is, between those two, you are telling me that the drag from Texas is a bigger one than the one from California and that will be going away, basically, over the next three or four quarters, correct?

Steve, when you look at the Company overall, the impact would not be quite as great because the average selling price in Texas is maybe a third of what it is in California. So it's not going to have an offsetting impact, but it will have a positive impact. We are doing this for a reason. We believe that this move out of Texas will help our margins, will help our returns, will help our average selling prices and will help our bottom line.

Sure. Last thing, I guess, ultimately because this is where I was really trying to go with this was, the gross margin obviously in '05 hit what many would view as a high water mark. I assume you wouldn't disagree with that statement. We're trying to figure out what is a reasonable expectation for where margins may retreat to over the next year or so.

And I guess what that in mind, would you be steering us more towards a year like 2004 or would you think that a year more like around 2002, 2001, 2003, all of which were roughly around the same level, would be more of a comfortable range that you would see things retreating back towards?

Steve, I wouldn't steer you anywhere right now. We are still being impacted by margins that are improving in Arizona. And we're going to have a lot of new markets coming on with greater levels of volume, which will probably start out at lower margins.

But there is a -- I don't know that I would -- I mean, the margins in '03, '02 and '01 show a significant drop from where we are now. And I would not -- I guess I wouldn't want to lead you in one direction or the other right now. Because there are a lot of variables going both ways. And we can talk about the implications, but it's inconsistent with our position of guidance.

Okay, thanks.

Joel Walker from Carlin Financial.

Pretty strong quarter on the margin front; it was pretty impressive. I just kind of wanted to talk about the SG&A a little bit. It seems like those were increasing the last few quarters and then finally you had a 30 basis point drop in the top line and in the corporate you had another 50 basis point drop. So I just kind of wanted to see if you could have a little more color on those two.

Joel, it is starting to happen as we have discussed previously. We saw a huge increase in terms of volume sequentially over the third quarter. And as we see our new division start to kick in with greater levels of volume, not only new divisions but also our newer operations from our new division in Phoenix, our new division in Northern Virginia, we should start to get some leverage relative to the corporate overhead. And this is kind of a first step here in the fourth quarter.

Right. And the share count I saw dropped about 190,000 shares from the third quarter. I was just wondering if that was a function of stock price or some buybacks?

It's actually a function of the stock price. We have not repurchased any shares this year.

Right. And I guess just the same kind of mentality on purchasing shares this quarter, or just going forward, just weight it with the other options of land investment and dividends and what not?

Right now, Joel, we still believe that the opportunities we see to invest in land and our operating divisions and the returns that we anticipate from that investment are the best use of our capital today.

Right. Have you guys given any more thought about maybe putting a little more leverage on the balance sheet? At 28%, I think you are about the second lowest of all the builders -- maybe just using some of the capital to buy back shares and getting more towards maybe Top 5 instead of Top 2.

We are really -- I mean adding leverage is not something that we would consider right now to buy back shares. Although it is a potential use of capital, it's a source of capital to increase our leverage and it is something that we think about on an ongoing basis. But it is not something that we are going to do right now.

Right. All right, thanks a lot.

Ivy Zelman from Credit Suisse.

Thanks. Congratulations, guys, on a great year. I guess just to understand something you said, Gary, on can rates. It looked like your can rates you said were in line with normal or something. But based on what I show is that in the third quarter -- I'm sorry fourth quarter '03, they were 26.5; and in fourth quarter '04, they were 32%, and now 33.8% this fourth quarter.

Clearly, last year we also had the negative impact from what was happening in Nevada and we also saw some weakness in Orange County and the southern part of California. So what should the can rate normally be? And were there are other markets that saw a big can rate increase, i.e. Phoenix? That is my first question.

The second question would be related to Colorado. Based on our private channel checks, we've heard that market has really gotten very tough, although it has been a tough market for a while. Can you comment on your views, X the Bronco factor?

Sure. Okay. The can rates, Ivy, Phoenix, the cancellation rates were not a major factor as I recall. It is something that -- let me get my schedule.

Also I guess Virginia -- northern Virginia, maybe excluding West Virginia.

Sure. Northern Virginia was actually -- Northern Virginia was one of the higher can rates that we saw, as we mentioned. Absolute cans for the quarter were very comparable to last year.

Right. But much higher than 4Q '03. So is it a trend that we should assume this is the right number or was fourth quarter '03 abnormally low?

Fourth quarter '03 was probably on the low side from a percentage standpoint. Because we typically see -- I mean, I don't know how you are calculating the can rate. I do the absolute cans divided by the gross sales. And our can rate last year was 32%. And it is 33.7 this year. That is why I said the can rate was comparable.

The fact is that in absolute cans, we are lower than last year. And our backlog was quite a bit higher, which is where the cans come from. So there is a mix in there that causes this to occur, the larger cancellations coming from -- on a relative basis -- coming from Virginia, which we virtually had no cancellations last year. So we had a higher can rate there.

Generally you see -- I mean I -- at least for us, you see very low can rate in the first quarter, which in some cases can be in the high teens. And then you see that creep around 20% in the second, the mid-20s in the third and around 30% in the fourth, is what is typical.

By the way, it was in the press release, so I didn't calculate it -- the can rate.

What about the Colorado color and maybe you -- because I'm assuming I'll get cut off eventually -- I'll throw in a bigger picture question. And you guys are operating at a negative free cash flow. Most companies that deserve a high multiple really are free cash flow generators. Do you see that as an impediment to getting a higher multiple? And do you think you could do anything to sort of normalize your -- meet your uses of cash in terms of working capital needs, etc., to change it and reverse that negative cycle?

Okay, first of all, Colorado.

The easy one first, right?

Yes. Colorado is actually -- it has been a more difficult market this year; you've seen it in our orders, you have seen it in our net orders. The fact is that we do have a view that is somewhat optimistic about the future, and we have reason to believe that the market has potential. We've not seen positive job growth in this market for over three years.

Last year, our job growth did increase for the first time in four years. And they are expecting a higher level of job growth in 2006. In fact, the University of Colorado is projecting numbers that are higher than the national average in terms of our job growth. We're expecting [net in-migration] this year, and our unemployment rate is supposed to decline. So with those elements occurring, we would anticipate some additional opportunities in this market.

We have recently taken some steps to put ourselves in a position to better capitalize on that. We had four operating divisions in this market and we have now consolidated one of them into the other three. So we now have three operating divisions in which we believe will be able to operate much more efficiently than we have in the past.

We are not reducing our subdivision counts or our investments in this market. In fact, after a brief pause, simply because of some timing issues in getting communities opened during the first half of the upcoming year, we should see our community count grow in Colorado in the back half of the year. So it is something that has not shown the promise that the job growth numbers seem to imply, but the outlook is positive.

As far as -- I forgot the other question.

Oh, come on. Larry, you can answer it. Do you want me to repeat the question? Are you serious?

Seriously, yes.

Okay. Seriously, you are currently negative --

Oh, free cash flow, I'm sorry. How could I forget. We have been investing, Ivy, as you know in opening some new divisions here the last couple of years. We've been ramping up gradually. And we have really put a lot of our free cash flow into these new markets here over the last couple of quarters in particular, although we were free cash flow positive in the fourth quarter.

It is something that is a function of our growth rate. We grew at 84% last year. And we grew at a significant rate this year. So the way we view it as we grow 15% or greater per year, we are going to be using more than the cash flow we generate to fund our business. And we've had opportunities to grow at rates greater than that here over the last few years. So if in fact opportunities diminish and our growth rate slows down, we will be a free cash flow generator.

Okay. Thanks, Gary.

Dan Oppenheim from Banc of America Securities.

Hi. This is Mike Wood. A question on your order price decline sequentially. Just curious what the difference is there in terms of mix or just price decline in any markets, and if you can comment on that.

Okay, there have really been -- what you see during the fourth quarter typically is a higher level of incentives being provided, particularly on spec homes that you want to move before the end of the year. And that is what we saw. Incentives were not up dramatically in any markets really. We didn't see prices decline. We saw very little movement in prices in an upward standpoint, although in virtually every market we saw some selective increases.

So it's been a situation where we've actually seen probably the greatest level of increases in markets that we've talked about that have been on the rise, such as Salt Lake City. Even Arizona had some positive price movement.

Okay. And then if I look at your lot counts where you've invested, I guess, year-over-year, it looks like the -- I see faster growth in markets like Arizona, where you already drive a large portion of your revenues.

Just wanted to get your view on how you view limiting capital to any particular area in case of a slowdown and kind of what you think about when you invest capital directed to any particular region.

Absolutely. That is a great question and it is something that we do focus on as we prepare our business plans and as we evaluate on an ongoing basis where our capital is invested and where it will go in the future.

We do impose limits on the amount of capital that we will invest in markets at any point in time. What you may be seeing there are, as you see in Arizona, a ramp-up in the number of lots that we control. We have a large number of lots under option in that market. We do have limits on what we will put in that market.

Now, we have continued to ramp up there because -- as we have opened a new division in the western part of Phoenix in markets that are emerging out there. It is a market that we believe will be very strong for the future. And so we have tied up a number of lots out there to fuel growth in the future in that market.

We have significantly increased the number of active communities in Phoenix and are going to increase it further in 2006. But we do impose -- we are not going to keep putting money into that market without limit. We have set some internal limits on markets -- really all of our markets throughout the country, but in particular markets like Las Vegas and Phoenix and Tucson, where we have opportunities to put virtually an unlimited amount of capital into that market. And we have self-imposed limits that we will strictly manage by going forward.

Okay, thank you.

Alex Barron from JMP Securities.

Thank you. Hi, Gary. I wanted to understand a little bit further regarding your share buyback. Just sort of your thought process -- maybe why you wouldn't pay at these kind of [$0.05] levels that being a good use for your capital.

Well, Alex, as we've talked about, at this time we have better uses of our capital. And so that is -- it's really as simple as that. We want to use our capital for growth at this time.

Okay. I guess that said, what kind of community count growth expectations do you have and which maybe two or three markets will be the ones where you're going to be growing most you think in '06?

I can't pinpoint an actual growth level. Obviously, we will see our communities drop in Texas by the end of the year -- may drop to zero. So when you pull that out, there is 21 communities to make up. So we are looking really at communities outside of Texas, which starts us at the 271 that I mentioned.

We are going to see increases here in the short run in our Mid-Atlantic region, where we've seen some temporary declines. So Virginia and Maryland should pick up some extra communities. Florida has been fairly flat for the last -- it's really flat year-over-year, but Jacksonville has a lot of new communities coming online and Tampa is adding new communities as well. So we should see those gear up early in the year.

We are seeing additional communities coming online from our Del Valle acquisition a year ago in Central Valley in Northern California. Those will start to produce orders in the first half of the year. And Utah, which is down 25%, has some opportunities to recover those communities and even have some upside there. So that is kind of where our growth is coming.

We're at Texas by the end of the year. Our objective is to continue to grow in all of our markets. And as we stated, our objective is to grow on an average rate of around 15% a year. That is consistent with what we have always said. And of course we are not seeing absorption rates pick up at this time. So you can take your assumptions from there.

Okay. And if I could ask one more. I have started to hear recently some of your competitors are dropping prices; in some cases, it seems aggressively -- $50,000 or more. Just kind of wondering how you guys would respond to that kind of competitive behavior.

In any particular markets?

Well, mostly some parts of Central Valley, Northern California and Florida.

Well, I would just have to say that is inconsistent with what we are seeing in our markets. Right now we are not seeing that. And we've seen builders do things in that magnitude with respect to certain homes or certain communities in some of our markets, but it is pretty much home specific or community specific and not marketwide. So we are not in a position where we have to meet the competition on that.

Are right. Great, thanks.

[Timothy Jones] from Wasserman & Associates.

Good morning both of you. I trust your lawyer still has you by the throat so you can't say anything about the year projections?

Well, Tim, I --

No, because (multiple speakers) -- we're talking here a little bit of flat backlog and down orders for the fourth quarter, though you have said you expect higher earnings next year. I mean, this implies either that you expect -- I mean you could have flattish deliveries next year unless you have a nice big pickup in the second and third quarters.

Are you expecting a turnaround in the sales so that you can, in fact, -- you have said you expect higher subdivisions -- you'll have average just by the way it falls right now. But do you expect a turnaround in the sales per subdivisions or will it be flattish sales per subdivision and just a growth in the subdivisions itself?

Well, actually, Tim, there are several things that will contribute to our belief that we will do better next year. We are starting the year with 24% more communities than we had a year ago, taking Texas out of the picture. Our average selling price is a big factor; that is up over $40,000 from where it was last year. Our backlog is already up 27%.

We have the -- where the community count is up are the markets that we believe will drive growth in the future. We are up 39% in Vegas, which is up over 150% from where we were at the end of '03. Arizona is up 70%, California is up 55%. We are going to start to see some G&A leverage, as I mentioned before, out of our new markets in Tampa, Chicago, Philadelphia and then our other new divisions that will be producing results. And again, we think leaving Texas will produce higher prices, higher margins, lower SG&A and better results as well.

Okay, the second question is, to follow off Steve Kim's question, virtually every builder I know has higher margins in California than the company average, though you do have a very nice company average -- I commend you on that. Is this because your land -- I mean, you've done a lot of expansion in Northern California and in the recent acquisition -- is it due basically that your land is relatively newer then maybe some other builders who have been holding land for four or five or six years?

Tim, I think that is a big part of it. We do buy land very close to the time we start to build a house on it. So we really don't have any market value buildup in that. And that is really a function of our operating strategy. But we do turn our inventories faster and our returns are fairly strong in that market. The offset is a little bit lower margins.

Your acquisition in Central California, you're up about 1000 units almost in lots in California. How much was that due to the acquisition?

We brought in about 1200 lots under control as a result of that acquisition.

Okay. I didn't realize it was that big. Thank you.

Carl Reichardt from Wachovia Securities.

Good morning, guys. How are you? Most of my questions have been gotten to here. But can you tell me, Gary, how much capital you have invested in Texas right now at end of fourth quarter -- dollars? Inventory?

Carl, I can't tell you exactly, but it is a relatively immaterial amount.

Relatively -- okay. And then another question, just on your total lots under control haven't increased over the course of the last couple, three quarters, I think. As you look at capital spending plans for 2006, can you give me a rough sense of how much you think your total lots under either optioned or owned will increase in 2006?

Well, Carl, I think to maintain -- assuming we have opportunities to grow, we would probably expect to see that number increase 10 to 15% as just kind of a ballpark estimate. We do have, as we've talked about, a substantial number of lots under control on a soft dollar basis that we are evaluating that we call our pipeline of lots to come in and replace the lots that we have under hard control.

So we have an ongoing pipeline behind the scenes to keep that pipeline growing. Assuming that the market permits us to continue to grow, we would expect that number to grow as well.

Okay. And last question. Just on the corporate expense line, which has been flat the last couple of quarters year-over-year but was a big pop in Q1 and Q2, I think, if I recall right. As you look out -- I'm just curious as to why it was flat, if there's anything particular you've done there? It's got to be more than just leverage. And then as you look out the next couple of quarters whether or not you expect that would continue to be flat or whether or not that might be ramping, especially if you were ramping, let's say, the broader business.

I guess what you are talking about is flat fourth quarter versus fourth quarter?

Right -- corporate expense, correct. Yes -- not the SG&A.

Yes. And what has happened is we have actually not incurred as much on the technology side as we had expected. And that is something that is a goal of ours; that is something that could drive these dollars up in the future. And as you know, we have some compensation items that are variable based upon volumes. So assuming -- excuse me -- based upon profitability.

So based on relative profitability growth year-over-year, we will see -- if everything else is equal, we will see that number move up as well.

Great. Thanks a lot.

Sam Kerner from Franklin Resources.

Hi there, nice quarter. Question for you. You recently increased your shelf to $1 billion, and your leverage is already very low. I just want to make sure I correctly heard you say you will not be increasing your leverage?

Well, Sam, thank you for bringing that up. I meant to cover that in my remarks because we have had some questions about our motives behind increasing the shelf.

I didn't say that we would not be increasing our leverage, just that at this time we would not be increasing it simply to buy back stock. We do have that shelf available to us for growth opportunities in the future. When we increased it, all we were really doing was raising it to the level it was a little over a year ago. $1 billion is the level of the shelf that we had established a year and a half ago.

And over the last year and a half we've issued $500 million of medium-term notes off that shelf. So all we did effectively is replenish that shelf, put it back to where it was a year and a half ago.

Okay, great. Thank you.

Jim Wilson from JMP Securities.

Hello, Gary. Just a quick question. I just had one more. I guess going back to the return on capital investment question. Even if you are seeing lower returns in some places, I guess obviously it doesn't necessarily mean that those returns aren't still better than buying back your own stock.

But would you characterize, besides Texas, what you are seeing in land deals that would -- if you could depict whether you feel returns in certain places are better or slightly less good as they have been or kind of the directional trend of the deals you are taking a look at?

Jim, the transactions that we're looking at are being underwritten under the same criteria that we've used when the market was even hotter. However, in many cases, we have even raised the underwriting standards from a standpoint of required returns and margins and absorptions and timing from the time we buy the land to the time that we actually close on our first home.

We have kind of tightened the reins a little bit on our divisions in order to improve their potential for success, and we continue to see opportunities in virtually every market -- really all of our markets, other than Texas, to meet these criteria.

So I guess you would say that the opportunities are substantial and they meet the criteria. We are perhaps not seeing in markets or not anticipating perhaps in markets like the Mid-Atlantic, where we have far exceeded that criteria upon ultimate execution, our expectations are a little bit different right now because things are a little bit slower.

But this is a -- the transactions that we are seeing continue to be plentiful in most of these markets. And even in markets that are expected to contract over the next period of time due to supply constraints or whatever, we are seeing opportunities to grow. So I guess that's a function of us continuing to take market share as us and the rest of the public builders have been doing for a number of years here.

Okay, fair enough, Gary. Thanks.

Michael Rehad from JPMorgan.

Thanks. Just thinking about some of the opening remarks that Larry made with 2006, I think you characterized it as being a little bit -- realizing growth will be a little bit more of a challenge. That being said, you also talked about your confidence in still getting new highs in closings, revenues and earnings.

So how are we to think about those two statements with your long-term goal of 15% earnings growth? Does this at all signal that you will not be able to make that number in '06? Or how are we to think about the different puts and takes in what could maybe be a subpar year in terms of growth relative to the past couple of years?

Michael, I guess it's a function of us in our position regarding guidance; it is difficult to say that. I think what Larry is implying is that 15% is an average, and this will be one of the more challenging periods that we have faced in the last two or three years.

We did go through a period of time -- but it took a terrorist attack on our country to bring that number below the 15% level. And that is not to say that a number of normalizing effects in many markets couldn't have the same effect on our business.

We do recognize that things are changing. And so unless we -- I think we're going to be in a much better position, Michael, here in 90 days to judge the health of the market and the health of our individual markets. And we will have a better level of confidence as to how this year will play out.

Great, thanks.

Ivy Zelman from Credit Suisse.

Real quick, guys, I appreciate the opportunity. Your margins, Gary, you've indicated in California are below the corporate average. I guess I always was thought they were actually above the corporate average. Were they above the corporate average at any time in terms of this year that you are posting results for?

No, ma'am, they have not been. They've not been for several years.

And would you say there are parts within California, since California is such a big place, where margins might be higher than the corporate average?

That is true, yes. There are markets that have ebbed and flowed and margins have been higher at times.

And realizing that you are in many places in California, can you tell us which are the ones that are above corporate average?

Are you talking about today? Or -- I mean, over -- at various time periods, it's very difficult in Southern California to meet the corporate average simply because of the influence of our presence in a number of master planned communities there like Ladera and the Irvine Ranch, where price participations keep margins at a relatively low level on a relatively high average selling price.

However, our returns in those communities are among the highest of any because of the fact that they are basically -- there is very little market risk, first of all. And then we are able to take a lot of those lots down on a rolling option basis. So margins can be misleading sometimes. But I'd say that factor in Southern California probably weighs more heavily on that market and where we've done better has been usually in the North.

Okay, that is fair. With respect to just overall sentiment, as things return to more normal levels and obviously contingent on how this selling season will be, it used to be in the old days if a home builder got a 10% margin they were ecstatic. I mean, if you were to say, generally speaking, how much margin risk there may be looking at 20% EBIT today, if things return to more normal levels sort of on a sustainable basis, what would be sort of a fair range for margins, not assuming you obviously are going to have to meet that, just kind of in your (indiscernible) big theoretical outlook?

Well, Ivy, that sounds like a loaded question. I honestly don't have a good answer for you.

Okay. Well, how about you think about it, next time you see me maybe you'll have an answer?

I look forward to having that discussion.

All right, guys. Thanks.

Maybe we can do it on the golf course.

I like that idea, thank you. And good luck to the Broncos.

Joel Walker from Carlin Financial.

Gary, just wanted to talk you about the land purchasing, since you guys have the lowest supply of land. I just wanted to see what you were seeing in the last month or two as things slowed up, if deals were starting to drop pricewise and if you were getting better -- you know, your margins might be coming down on your orders, but actually the land you're picking up now is actually lower too.

Joel, it's something that we monitor all the time. There are opportunities in various markets where we've seen -- we have to be aggressive as land buyers to take advantage of what the market gives us. But there have been opportunities on a selective basis to make some adjustments and see some better land prices. It's nothing that I would characterize as widespread in any market right now, so it's not having a significant influence on margins today.

Just with the thesis being that some of these -- a lot of the builders 10 years ago only had two or three years' supply of land and now they have four or five years. So a lot of them are net sellers, whereas they never used to be. I was wondering if it was kind of a buyers' market in land now versus, say, two years ago.

It is more of a buyers' market or perhaps less of a sellers' market maybe in a number of markets. It takes time for these things to change; we've talked about that. But that is part of our own operating strategy is because of our short land supply, we will be able to take advantage when these shifts occur to buy the land at current prices as they go down.

Right. So land prices, your best estimate over the last three or four months, are probably more like flattish rather than down or up?

Just general feel, it would be grasping -- it's a pretty big market out there. But that is probably a decent general statement.

Decent general. All right, thanks a lot.

Gentlemen, at this time, there are no further questions.

We'd like to thank all of you for joining our call today. We look forward to having the opportunity to speak with you again in April following the announcement of our 2006 first-quarter results. Have a great day.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may all disconnect.