Meritage Homes Corp (MTH) 2002 Q3 法說會逐字稿

Please stand by. the conference is about to begin. Good day, everyone, and welcome to the Meritage third quarter 2002 Earnings Conference Call. Today's call is being recorded. At this time or opening remarks and introductions, I'd like to turn the call over to Mr. Alan Osheiki (ph) Please go ahead, sir.

Thank you, Operator. Good afternoon and welcome to the Meritage to discuss financial results for the third quarter ended September 30th, 2002. Participating on the call today from the company's management are Steve Hilton and John Landon, co-chairman and co-Chief Executive Officer and Larry Say, Chief Financial Officer.

First a housekeeping matter. I'd like to remind everyone that during the course of this conference call certain projections and other forward looking statements may be made regarding future events or the future financial performance of the company. We refer you to the disclosures that the company files with the Securities and Exchange Commission, specifically those contained in the company's most recently filed forms 10(k) and 10(q). These documents describe important factors that may cause actual results to differ materially from those contained in any projections or forward looking statements made during this conference call. I'd now like to turn the call over to Steve Hilton. Steve?

First I want to apologize for the delay on the call this morning. We had some difficulties with our conference call operator. Thank you for joining Meritage third quarter results. Our format will follow the pattern we've used in the past. First I'll recap our excellent quarter and year-end results -- sorry, year to date results, then John will address the market and our outlook and thoughts for the fourth quarter 2002. Larry will then provide details about our balance sheet cash flow and other financial information.

Based on our excellent results so far this year and our record third quarter end backlog, we believe 2002 will be our 15th consecutive year of record revenues and net earnings. Net income reached a record 22.4 million for the third quarter or a dollar 58 per diluted share, up 50 percent from the 14.9 million for the same period last year. For the nine months -- for the first nine months of 2002 net income totaled 45.9 million or $3.58 per diluted share, up 32 cents -- sorry, 32 percent from the 34.8 million dollars for the last three quarters. for last year's first three quarters. The company also set third quarter records for new orders closing the backlog of homes sold by unclosed homes. Our home building revenue in the third quarter of 2002 grew to a 328.5 million from 207.2 million in the comparable 2001 quarter, an increase of 59 percent and an all time record. The dollar value of new orders in the third quarter of 2002 reached an all time high of 304.6 million, posting 89 percent increase over 2001's third quarter. the dollar value you'll of order backlog was up 38 percent to 598.9 million, yet another quarterly all time record. This is our first quarter to include hames mopped (ph) home operations but even excluding hames mopped (ph) [inaudible] up an impressive 34 percent and 60 percent respectively.

Looking at our quarter results on a regional basis home building revenue in Northern California was up 67 percent for the quarter which is primarily the result of continued strong demand for housing in the area and our successful efforts to maintain moderate pricing. In Arizona home building revenue was up 22 percent while in Texas home building revenues was up 112 percent over last year's quarter. A little less than half the total increase in Texas is comprise of an additional 50 million home sales revenue from our acquisition of ham on homes closed July 1st, 2002. New homeowners in California were up 172 percent for the prior year's quarter from prior year's quarter further reflective of our growth and strength in the market in that region not. Arizona orders were down 15 percent reflecting the early (inaudible) of some communities in our Hancock division ahead of replacement communities in the soft luxury market in Scottsdale. Orders from our Tucson division of Monterey homes remain strong orders in Texas were up 116 percent reflecting 209 orders from ham (inaudible) comprising about two thirds of the total increase.

Of pretax net margin for the third quarter was 11.2 percent of revenue, a slight decrease from the 11.6 percent pretax margin generated in the prior year's quarter: Current year's quarter was impacted by the purchase accounting impact of writing up the ham (inaudible) inventory and backlog of which approximately $2 million was expensed through cost of sales this quarter. The current year margin would have been approximately 6/10 of 1 percent higher had this amount not been expensed in the quarter. In addition although the current quarters gross margin was off in comparison to the current year substantially all of the decrease was offset by holding down SG&A costs as a percentage of revenue.

We are very pleased with our record setting performance in the third quarter in the first nine months of 2002. We believe our success reflects our strategy of being very selective in choosing our markets and offering the right product at the right price. with our revenue up to $750 million so far this year, 59 percent compared to the same period last year we are well on our way to exceeding a billion dollars in revenue this year. John Landon will now cover expectations for the remainder of 2002 and beyond. John?

Thank you, Steve, and good morning and afternoon to those of you on the East Coast. As Steve pointed out, the first nine months of 2002 have been strong and the good news is that we expect this trend to continue for the remainder of the year and 2003. The housing market in this country continues to be strong and has returned operating results superior to those experienced in many other sectors of the economy. In fact, according to market guides, Meritage has received a return on assets and equity over the last year of 15 percent and 28 percent respectively. Considerably exceeding return on assets and equity of the S&P 500 of 6 percent and 21 percent respectively. And fortunately in spite of this superior performance, Meritage and the home building industry has a whole continues to trade at earnings multiples less than half of the S and P 500. Which continue to see strength in the housing sector as indicated by inventories being in balance, mortgage rates continuing to add or near historic lows and demographic trends projected to remain favorable to the industry for the next several years. And currently we don't foresee any housing bubble in any of the markets and prices that we operate in as being reported in the news.

Looking forward, all these factors bode well for our business. As Steve pointed out, we are well on our way toward exceeding a billion dollars in revenue for 2002. That estimate does include the impact that our hammonds and perm a build acquisitions will have on revenues for the fourth quarter of 2002. We also currently anticipate that full year diluted earnings per share should fall between $5 and 5 cents and $5 and 15 cents. After giving effect to these acquisitions. Due mainly to our acquisition of hammond homes which had 39 actively selling communities our community count company wide increased dramatically from 77 to 117 communities during the third quarter the perm a build acquisition that closed on October 7th will add approximately five communities to our operations during the fourth quarter fourth quarter. With the completion of two acquisitions over the last two quarters, we plan to concentrate our efforts on fully integrated those companies operations over the next several quarters.

Inclusive of those acquisitions, Meritage now has divisions in nine dynamic markets within the four fast growing sun belt states of Texas, Arizona, California and now Nevada. These provide us with the solid base of operations from which to grow organically. Beyond that we still remain interested in selective acquisitions in other sunbelt markets such as Southern California, Denver, Atlanta, and some of the Florida markets.

In summary, our optimism for the remainder of 2002 is strong and we look forward to reporting our full year results to you early next year. Now Larry Say will comment briefly on the financial update. Larry?

Thanks, John. At quarter end the company had approximately 2,004 million notes payable consisting of 155 million in senior notes with a $49 million balance comprised mainly of our revolving construction lines. Even after our Hammonds acquisition our liquidity at quarter end was very strong with 6.8 million of carbon our balance sheet and approximately 126 million in the immediately available but undrawn reserves under our credit facilities. After consideration of our most restrictive covenant this entire amount would be available to borrow. Our ratio of debt to capital at the end of the third quarter was 40 percent. a significant improvement over last year's third quarter ratio of 54 percent. Subsequent to the quarter end on October 7th we closed our acquisition of perm a build homes which was located in Las Vegas seventh largest homebuilding market in the U.S.. This purchase utilized approximately 47 million of the above referenced liquidity and would have increased our debt to capital ratio September 30th, 2002 to approximately 45 percent.

During the quarter we repurchased 33,000 shares at a price of 1 million 57 thousand dollars under our stock repurchase program. EBITDA for the quarter was 49.8 million compared to 30.2 million for the prior year's quarter an increase of 65 percent.

Thank you, Larry. That ends our formal comments and now we'll open the floor to questions. the conference call Operator will provide you with instructions on how to register your comments -- your questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you'd like to signal to ask a question, please press star 1 on your touch phone telephone. If you're using a speakerphone make sure your mute button is disengaged so your signal will reach our equipment. Once again it is star 1 or questions and we'll pause just a moment so everyone has a chance to queue up.[Pause.]Our first question comes from Robert Mannawitz (ph)with UBS Warburg. Please go ahead, sir.

Robert Mannawitz (ph): Hi, good morning. Just a couple questions. First when you talked about your Arizona orders, I thought I heard you talk more about the sell out of Hancock in the year over year drop in communities rather than maybe some weakness in Monterey. And I was wondering if you could talk a little bit about Scottsdale.

Well, I think we kind of said both. Scottsdale continues to be soft. It's been soft now for about 18 months, and although the last few weeks we've seen some traffic picking up, but overall for the last quarter it was soft.

Robert Mannawitz (ph): Can you just give us sort of directionally or some sort of magnitude where you are year over year?

I don't have those numbers in front of me, but I want to say we're probably down 10 or 15 percent.

Robert Mannawitz (ph): Okay.

Let me say though, Rob, in Scottsdale we're soft we're still making good money in Scottsdale but not at the volumes we were in the years past.

Robert Mannawitz (ph): Right.

Still very profitable business.

Robert Mannawitz (ph): Understood. On the front of integration, can you just talk a little bit about the status of Hammonds and maybe a little bit about the compatibility of the most recent acquisition in terms of IT systems?

Why don't you take it.

On Hammonds we've gonna led and actually integrated the accounting system, actually we turned it on Monday. So that's been completed. It's all been tested and it's working very nicely. So that's all been done and then Steve, if you want to talk about the accounting.

In Las Vegas they're actually on the same software system that we're using in Arizona. Don't expect any challenges to integrate that business relatively simple straightforward accounting system that they have, and we're very, very optimistic that it will be relatively easy to integrate.

Robert Mannawitz (ph): Okay. And just two numbers question for Larry, I apologize, I missed the revolver availability based on the borrowing basis.

126 million is I think the number. Let me just check, yeah, 126.

Robert Mannawitz (ph): Great. and can you just hem help me get to the EBITDA number? It just seems that since you haven't provided interest amortized or DNA, they must be larger than I was including in my model to get to a 49 number.

Well, I think it's the increase over prior year seems a little higher. Some of that's made up by the differential in interest costs from last year where we were still rolling through interest that had been capitalized without our -- without the increased bond interest which is a higher rate than our bank facility, and I'd be happy to walk you through that number off line.

Robert Mannawitz (ph): Sure, okay. That's probably the difference. Okay. I'll give you a ring later. Thanks.

Thank you.

We'll take our next question from John Stanley with UBS Warburg.

Good morning, guys. a couple questions on the gross margin first. Maybe Larry can answer this one. How much in purchase accounting adjustments do you expect for Hammonds in coming quarters and then kind of the addendum is what would you expect for perm abilities as well?

I can answer the Hammonds question: It will be 800,000 to a million dollars. We ran about two-thirds of the purchase adjustment during the third quarter and we'll run the other third through during the fourth quarter For perm ability, I don't have that number calculated but I think it will be a bit lower than the Hammonds number, maybe in the 2, slightly greater than 2 range but I don't have the precise number. We haven't finished that calculation.

And then with respect to gross margins adding back the purchase adjustments, you're still down a little from last year. Would you attribute that to just the incentives offered last year, mixed issues all of the above, none of the above?

John or Steve?

I'd say it's all of the above. It's some of the mix and it's some softness in the market, but I think as we said in our comment we really made that up by not increasing our G & A as we put on more revenues and bringing our G & A down. So we feel pretty comfortable we can hold the line on the net margin.

And looking forward and clearly pricing has been pretty good in California this year. I presume it's okay in Arizona. We've heard from some others and things are getting a little tougher in Texas but as you kind of mix that all up, would you say it the pricing picture today versus three or six months ago is the better or the same?

I would say that, you know, looking back not three to six months, because this still is a little bit of a seasonal business. If we compare it more towards last year this time, I'd say it's pretty much even in most of the markets that we're operating. Definitely Texas and Arizona. And I would say that you know, I think the markets overall in Texas, Austin started getting soft about 18 months ago. We're still seeing the price points we're operating in Texas which average prices right at about 200,000 is a price point to be at in Dallas Fort Worth and Houston. We're still seeing good activity levels for this time of the year so we still feel pretty good about our business.

I would agree. I would add in California Sacramento east bay markets we're starting to see the depreciation level off. We're still not in appreciation but not at the pace we had a year ago.

So you would say (inaudible) not a lot different than they were post September 11th, is that paraphrasing it?

Incentives in California?

No, overall.

Overall? I'd say that's accurate.

And so excluding mix issues, and excluding purchase adjustments, you hope gross margins will pretty much hang out where they are?

Yes, I think that's good, yeah.

And will there be any mix effects from the perm a build acquisition pro or con?

No, I think it's pretty much right in line.

Good. Second question is on the backlog pro forma for perm a build. Do you have a rough idea as to how much that added in terms units or dollars to your backlog?

Larry, do you have that handy?

You know, I don't have that handy, Ralph, but John will have to -

I'll call you back on that and lastly, you know, to the extent you're going to effect us a little more on integrating your current acquisitions and balance sheet is in pretty good shape and your stock is still cheap as heck, would you expect to be more active on the share repurchase prospectively than you were in the third quarter?

I think we'll be a little more active. It's going to depend what the share price is, but in the range it's in right now I think we're going to be a little more active.

Great. Thanks, guys.

Thank you.

Next we'll take a question from Jim Wilson with J and P Securities.

Good morning, guys. Just was wondering if you could contrast a bit parsing out [inaudible] your margins in your various markets and any thoughts on the outlook up or down for any of those markets specifically?

I would say that going market by market we could start in Texas and last year 2001 we achieved higher margins than we had in years past. If you go back and look historically at 2000, 99 and beyond. I think you're going to see the margins be in line with what they historically have been, which is a little bit lower than last year, but right about where they are right now. I think in Arizona in our volume business, our margins are pretty much steady compared to where they were in 2001. As Steve said, we've sold units faster than we anticipated and we're bringing on the other communities. We're planning on opening, I think, 12 communities in the next 14 months in our volume business in Phoenix just to show you what we've got coming up. So we still have a very good land supply where we expect good margins in our Phoenix business looking forward. You want to talk about California a little bit, Steve?

No, I would just echo what you just said. I think appreciation is topped off in California. We're still going to have some appreciation, but not in the double digit pace that we've had during the last couple years.

And comparing the relative levels of the three Northern California a lot higher and how does Arizona compare with Texas or are they about the same?

They're pretty close. Texas and Arizona are within the 150 basis points of each other, and then California is higher.

Okay. and then one question. You talked about your community count as you get through the end of this year. What's your outlook for community count growth excluding acquisitions for '03?

Yeah, I can't give you precise number, but I don't think we're going to have a lot of growth next year. As we said we're rotating through a lot of communities right now, particularly in Arizona, and we've taken on a lot of new communities with the acquisitions. So we will have some growth, but I don't think it's going to be at the pace it's been in the past. You want to comment on that, John?

No, I think that's exactly right the thing though is we have community count, we're pleased and comfortable with our community count and we'll start seeing that higher community count translate into higher revenue obviously than what we've had in the years past. So it's been the strategy that we're comfortable with.

We'll be focusing on particularly with Hammonds. Take off 39 communities there, we can easily increase the absorption by a small amount per community and get a lot more home sales out of that business.

Okay. Very good. Thanks.

Next we'll take a question from Tony Campbell with Knot Partners.

Good morning, gentlemen, and congratulations. I actually have a couple of questions. Perm a Build or Perm build is accretive acquisition. Can you give us some sense of how accretive it will be to earnings?

Larry?

Yeah. Well, we disclosed the EBITDA number as of the year 2001 and if you back out interest and taxes from that number, you know, just kind of estimating, you come up with a number that's somewhere in the 30 cents, 35 sent kind of range. Could be a little lower, could be a little higher, depending what 2003 actually does.

That was based on last year's number, though.

Right.

This year's number is going to be higher than that. I don't know that we want to give you a precise number, but we expect it to be higher than that.

Do you think -- well, I guess none of the analysts have those numbers, then, in their estimates.

Well, I don't know if they've updated those or not, but some of them -- I don't believe at this time people have updated their estimates for the perm a build acquisition.

Okay, thank you. Let's turn to Texas, because a lot has been made -- it's been a weak market. What have you seen in terms of discounts, if any, and since 9/11 maybe you could give us some idea how those discounts might have changed quarter over quarter and then finally, have you seen much -- much change in your cancellation rate, and what's your traffic been overall like in the last little while?

Okay. the Texas markets, I think in the price range kind to have reiterate what I said, the price range which we're operating from the mid 1 hundreds to the mid 2 hundreds is the healthiest part of the market and we're still seeing very good sales year over year our sales are up on a store to store basis and even if you look over the past, oh, let's say several weeks, 6 to 8 weeks, the business has still been very strong. I think there's a lot of -- the softness is primarily above the pricing point that we're operating in. I talked to some of the people in the markets and they're saying the further you go up it's gotten softer. Also, some of the builders that we're operating in the sea locations that's where they've seen softness. One of our strategies has only been to build in the A locations because our experience has been the A locations are the ones that hold up in all market conditions. So it is this even speaks to, if I other people are hearing some softness and we're not really feeling it, it's just due to our strategy of being in the right place at the right price. So I think to follow-up with that, because of that, our cancellations company wide, I think are within the same range as they've been historically. Larry, would you speak or Steve, do you think that our cancellations are any different than they've been...

No, I think they're right in line with what they've historically been. I think you have to be a little bit modest in September we had an awesome month, particularly in Fort Worth and in Houston in ore core legacy business there for year-over-year results. Last September we had September 11th, so kind of hard to compare to that. But we were pretty pleased with what we did in September.

Are cancellation rates running right where it has been historically, 22, 23 percent? And of course that's before we get that second deposit and start [inaudible] at that point the cancellation rate drops to a very low number, 1, 2, 3 percent. One thing I did get the bag backlog number for perm a build. It's a little over 210 homes as of 9/30 so that's a good number for that result. Just a hair over 200,000.

We closed a deal 10/1 so those aren't in these numbers.

Correct.

John, can I just circle back on Texas? One of your competitors couldn't answer this question, but what do you think the hustle formations are on an annualized basis for Texas?

You're talking on an annualized basis for all Texas? Boy, I wouldn't know. I think you have to break it down in even further and go market by market and talk about, you know, what the Dallas Fort Worth. Not [inaudible] those are two they operate as two different markets. A lot of people group it as one, but they have a lot of distinctions to them. I don't know what that would be, Tony.

I guess what I'm trying to get at is there a pin up demand for housing like there is for California where I think the numbers are sort of are on the 250,000 hustle formations a year, and yet they build out 50,000 houses?

I don't think we have that phenomena happen. I would almost say in the middle of the country. I think as you go toward where it's more restricted and it's tougher to get land and affordable housing in locations where people want to live, I think that's where that exists more than where it does in the Texas markets.

Okay. I was just curious because it seems that Texas might be a market where you'd have a lot of in migration from Mexico.

I think we have a good balance. I think that the lower end is still doing very well. We really don't do much in the lower end of Texas, but I know that those guys are saying that market is still is good. Lower end, I would say in Texas is homes that are between let's say 80,000 to like 120,000.

Thank you very much and good luck.

Thanks, Tony.

Next we'll take a question from Greg Negmesh (ph) with Deutsche Banc.

Greg Negmesh (ph): Good morning, good afternoon. Couple of questions some of what which have already been asked. But with respect to the regulatory climate, John or Steve you know, as the economy has continued to remain sluggish, are you noting any change in municipalities' appetite, vis-a-vis the regulatory climate? In other words as they clamor for additional revenue given the weakness in the economy, is there any evidence to suggest that the restrictive climate that you've operated under for some time now is beginning to ease? That's the first yes.

No, Arizona and California I'll speak to that. Still to the contrary it's getting tougher, not easier.

I totally agree, and that holds true for I think all the markets we're in unfortunately.

Greg Negmesh (ph): Are you surprised at that given economic conditions?

No, there's just no connection whatsoever between what happens at City Hall and what's going on in the economy. These people just aren't connected.

Greg Negmesh (ph): Okay. Second question, you raised guidance for '02 to what degree does the existing backlog and the momentum you demonstrated in the quarter from an order perspective begin to give you confidence with regard to '03 visibility? Obviously you have the acquisition which is yet to contribute, so when you consider existing backlog, momentum in orders, the fact that order comps I guess in the fourth quarter comparatively are easy and you'll be layering in the Vegas acquisition, what can you tell us with regard to conviction levels for next year?

We haven't started to comment on the next year's numbers until we've gotten into that year. We traditionally start commenting on that in the first quarter earnings call. So at this point, Tom, I don't think we have any comment on '03 numbers.

I would only say that, you know, because of the trends in sales, we definitely have a positive outlook on '03. We don't want to put any numbers to that's correct but we definitely feel good given what orders have been going into '03.

Greg Negmesh (ph): Was the pattern of orders you experienced post 9/11 particularly in the fourth quarter such that this is a, would you character this upcoming quarterly comparisons in orders as comparatively easy, or how would you characterize it?

I would characterize it as somewhat easier. It wasn't hugely easier, but we really did have a very good quarter in spite of a somewhat easier comparison to the third quarter of last year.

Are you speaking to fourth quarter, Greg?

Yes, 02 to 01.

Greg Negmesh (ph): Is the current quarter order compare ton relative to the fourth quarter of '01, would you characterize it as a relatively easy comp?

You know, I would say that we were pleasantly surprised at how quick the market rebounded in the fourth quarter of '01. Having said that, I think that because of that it's not going to make it an easy comparison. I think it's comparison is going to be a relatively good comparison to use. And I think the third quarter comparison '01 to '02 when we look back may be an easier comparison to the fourth quarter. What do you think, Steve?

Yes, certainly third quarter was easier. But then the fourth quarter is going to be harder. But that being said, we still feel pretty optimistic about what we're going to do in the fourth quarter. But it's not a cake walk. It's going to be more of a challenge, but it's a bit easier.

Greg Negmesh (ph): You've tended to operate with a very risk averse strategy vis-a-vis land procurement. Are you seeing any increases in lot costs given the fact that you're basically purchasing lots on, you know, as close to adjust time approaches as possible?

I think lots have gone up equal to or greater than house prices, particularly in California. So there continues to be pricing appreciate you. Lots everywhere that we build. That being said, we're going to have to just continue to hold the line on construction cost increases and our G & A and all those other components that go into the makeup of the house price. We don't see that as a cost change or strategy of not taking land risk without making a land profit.

One thing I will add to that is it's interesting that I think as we've talked about the consolidation in the industry and the larger well capitalized builders are getting bigger, I think you're seeing more and more that the people who are selling lots preferred to do business with the stronger well capitalized builders and because of that it makes it -- we're on the A list with many of the developers in many of the markets that we operate. So I think that's a good thing. and it definitely puts the larger well capitalized builders at an advantage over the smaller builders.

Greg Negmesh (ph): Can you maintain gross margin in a climate where home price realizations are moderating and you continue to face upward pressure in term of lot costs?

I think we can because, remember, the raw lot cost is really 20 percent or less of the total price of the home. So I think -- and we still do have some appreciation in the markets for we're doing business in so I think we can maintain those margins.

Greg Negmesh (ph): Can you tell me what specific action steps you took during the quarter to hold the line on SG&A and what predict ability exists with regard to being able to maintain SG&A at a low level as we move forward?

Larry or John?

I think one of the things that happens is as we've grown in the marketplaces we're operating in, you spread that SG&A out over more units and we haven't had to add a lot of additional infrastructure for the incremental increase in units. And I think that we're going to continue to see that trend moving forward, so that's a huge thing in being able to spread that SG&A out over more units. And I think that will continue moving forward into '03.

Greg Negmesh (ph): Okay. Terrific. Thank you.

Thanks, Greg.

We'll take our next question from Alex Bear on with Franklin Templeton.

Hi, good morning and congratulations, excellent quarter. I have a couple questions here. Can you give us an update on the good will you booked on Hammond?

Yes, I talked a little bit about that in our script. Essentially the Hammonds good will number is after writing up inventory that was in backlog under construction. The Hammonds good will number is going to be around 20 million with about 3 million of the purchase price in excess of Hammonds original book being the write up to inventory. and as I said, 2 million of that approximately was amortized through cost of sales in the third quarter and the about a little less than a million is going to be amortized through in the fourth quarter.

Okay. and then another question regarding the earn out for the two recent acquisitions, can you discuss what that looks like?

Hammonds has no earn out, and the Perm A Build acquisition, there's two components The owner seller Zenith National Insurance Company will receive a 10 percent of pretax earnings after a capital charge earn out for over the next three years. As I said, and then one of the main principals there will receive another 10 percent pretax after earnings charge number. So they each get after capital charge they each get two 10 percent numbers. It's similar to what we did in the past when one of the principals stayed on board, together it's 20 percent pretax after capital charge earn out.

How long does the earn out last and also when is the capital charge?

It's three years and the capital charge runs around 10 or 11 percent.

Ten-and-a-half percent.

Okay. and then I also had a question regarding the deep freeze or slow down in orders in Arizona. I guess I'm assuming that that's just a temporary phenomenon and it's going to come back and the Hancock, but do you think that that translates into a lower number deliveries for Arizona next year?

You know, I think that if you look at the number of communities that we're currently operating in, we're down about over 30 percent just because we were successful selling those communities out faster and as soon as we bring on these communities I was talking about earlier over the next 14 months, our community count will actually be higher than what it was prior to now. When you balance those two things out, we see going into '04, we're going to have a very healthy community count. '03 we think the closings are going to be pretty much even maybe up slightly in '03, versus '02. What do you think, Steve?

You hit it right on.

Okay, great. and lastly I guess on your share count it seems that increased a little bit was that related to options exercises or what else?

Yeah, basically option exercises. It is adjust a small increase. That number usually creeps up a little bit quarter to quarter as people exercise options.

Okay.

Also, if you're looking fully diluted, it's also impacted by the way you compute fully diluted earnings per share because there's a stock option equivalent calculation that's dependent on the current stock price that number can go up and down as the stock price goes up and down, too.

Okay, I see. and then I guess on your tax rate, that went down a little bit from previous two quarters. Do you expect that to be what we can expect going forward?

No, I think that's just you have a little minor fluctuation in the tax rate from quarter to quarter depending upon timing differences either being created or being reversed. and I don't necessarily think that's a trend you ought to look at. You ought to look at the trend over the last few quarters and average that if you're modeling water tax rates going to be going forward.

Okay. and then, let's see here. I guess lastly your other income line item, is that just purely due to financial services?

A great majority of that is financial services. When we do have a couple of different joint ventures or mortgage companies that do generate some income from essentially acting as a broker in the origination process.

Okay. and then lastly, did you comment on your interest incurred in the quarter?

I don't have that interest incurred number right now to tell you.

Okay. That's no problem. Thanks a lot. Congratulations.

Thank you, bye-bye.

Next we have a question from Matt Moer (ph) with A.G. Edwards.

Thanks, guys. I'll keep it brief. Many of these questions have been asked and answered already. Could you comment a little bit about your active adult business in the Arizona area?

Yes, we're just getting it opened. Our initial response, we're very pleased with. That business takes some leg work and some up front marketing, but we're actually going to be grand opening our first community called Sun Dance on the west side of Phoenix in January. So we should be able to tell you more how it's going really after the end of the first quarter.

What name brand is that under? Is that part of some of the new communities that you're talking about that are coming on line in Arizona?

Yes, they are.

Okay. and is that under the Hancock name brand?

Yes, they are.

Okay, great. and finally, I appreciate the conservatism, but your guidance for full year earnings kind of implies that fourth quarter is going to be below third quarter which would be, if that happens, it will be the first time in your company's history. You know, do you think there's quite a bit of conservatism in these numbers, or could you maybe give a little bit more flavor on some of the things that are affecting your guidance for fourth quarter?

Matt, this is Larry. I don't necessarily think it applies we'll be below, but I don't think it a implies a large increase over the third quarter and depending upon how closings go at the end of December, that number could be a bit better. But at this point in time, we're not willing to go out further and raise the estimate.

Okay. I appreciate that. Thanks, guys. Good quarter.

We have a question from Anthony Erofino (ph).

Anthony Erofino (ph): Hi. First if you could give us an idea just to get a sense of how your capitalization is going to play out for the year. What do you expect to be spending for 2002 just in the land acquisition leaving aside the outright acquisitions of companies?

Larry?

We typically -- well, first of all, we're into the fourth quarter so if you're asking about 2002 or 2003, since we -- but I'm not quite sure about that, but I wanted to say generally we option the great majority of our new land purchases. So we don't have a large capex number on land. We put a very small deposit up front, and that number then total our amounts 60 million at 9/30. So we treat land like we treat a lot of the other materials that go into a house as kind of a just in time inventory component, and therefore we don't have a large capex capital requirement to grow the company or to purchase land going forward.

Anthony Erofino (ph): I figured that in certain markets you'd be able to, you know -- you employ less of that, so just in general, you're saying everything will be pretty much falling through your cost of goods sold except for that?

Exactly. We have a very small 10 to 15 percent over land purchases going up front as a deposit. the rest of it is just purchased as we start homes.

Anthony Erofino (ph): Okay. Nonetheless, can you give us an idea for this year and what it was in 2001?

I don't have those numbers precisely what our land purchases were, but as Steve said, you know, our land is typically running less than 20 percent. I think a finished lot would probably be about a good average would be at 25 percent of sales. So if you just take our revenue number and multiply by 25 percent, that is a reasonably good estimate of the cost of the lots that we purchased and closed during the year.

Anthony Erofino (ph): Very good. Thanks.

Thank you.

There are no more questions in queue at this time. So I'll turn the conference back over to our panel for any additional or closing remarks.

Once again, we thank you for joining us this morning. We are clearly excited about the future of Meritage. Should you have any further questions, we would be happy to speak with you individually. We look forward to talking to you at the end of our next question quarter. Thank you.

This does conclude today's teleconference. You may now disconnect.