Meritage Homes Corp (MTH) 2004 Q3 法說會逐字稿

Good morning. My name is Valerie and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Meritage Homes Corporation Third Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

The call will now be introduced by Mr. Alan Olsheki (ph), and sir you may begin.

Thank you Operator, and good morning everyone and welcome to the Meritage Homes Conference Call to discuss operating results for the third quarter of 2004.

Along with this conference call, you may follow with a slide-show presentation that may be accessed at the Company's website at www.meritagehomes.com.

Participating on the call today from the Company's management team are John Landon and Steve Hilton, Co-Chairman and Co-Chief Executive Officers and Larry Seay, Chief Financial Officer.

Before we start, 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 for 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 Form 10K and 10Q and its Third Quarter Earnings press release.

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.

We also refer you to Meritage's third quarter press release for the definition and discussion of EBITDA, a non-GAAP financial measure.

I'll now turn the call over to John Landon. John.

Thanks Alan. Good morning and thank you for joining us as we discuss Meritage's results for the third quarter and first 9 months of 2004.

In today's presentation, we will recap our performance, review our balance sheet, recurrent measures, and liquidity and discuss our outlook for the remainder of 2004. After that, we'd be happy to answer your questions.

I'll begin on slide 4. Our third quarter and year-to-date results are impressive by anyone's measure. We were able to continue to deliver impressive results to our stockholders because we positioned our Company in the right locations, we offer the right prices, and our product is thoughtfully designed. Combined, these factors allow us to deliver great value to our homebuyers. As important as the right pricing and the product is to Meritage's success, we believe the key component is positioning our communities in the fast-growing Southern and Western states with high-housing demand.

For the third quarter of 2004 we set all-time quarterly records for diluted earnings per share, net earnings, and the dollar value of order backlog. We also set third quarter records for new-home orders and home-closing revenue.

The value of sales orders for the quarter was up 55 percent over last year's third quarter and up 50 percent for the first 9 months. The dollar value of homes in backlog reached $1.3 billion, an increase of 61 percent over the prior year.

Net earnings rose 38 percent from the third quarter of 2003 to $36.5 million during this year's third quarter and 33 percent for the first 9 months.

Diluted earnings per share increased 40 percent for the third quarter and 37 percent for the first 9 months.

Moving to slide 5. In response to the increased pricing in California and the related affordability concerns, we are focusing on moderate move-up price points where the housing market is broader and the demand is strong. We accomplish this by controlling quality, land positions in affordable areas, and designing a product with specifications, size, and features which allow us to build a well-designed home at a moderate price.

Demand for our homes in Las Vegas is very strong right now, providing us with good pricing power. We believe the Pulte Homes pricing adjustment in Las Vegas was an isolated incidence where they increased prices in some of their communities too quickly. However, net of recent adjustments, their prices are still up significantly year-over-year.

In addition, the approximately 3,100 lots we control in Nevada that were purchased over the last 3 years have appreciated a great deal and now contain a significant unrealized profit, which we will realize in the years ahead as homes close on those lots.

Orders for active adult business in Arizona are up from 238 homes for the first 9 months of 2003 compared to 637 homes for the 9 months of 2004. This increase represents the first full season that our active adult communities have been selling with our complete marketing program in place. We are pleased with our better-than-anticipated results in this new business and are optimistic about the future of our active adult division.

We continue to diversify geographically. We entered the Southern California market earlier this year, and in July we completed our first land acquisition in our newly-established Denver division and plan to begin to deliver homes in the fourth quarter of 2005.

We just completed our second stock repurchase program during the third quarter this year by buying a total of 1.2 million shares at a cost of roughly $58 million at an average price of $47.56 per share. This buy-back program took approximately 2 years to complete, having begun in the third quarter of 2002.

Our Board of Directors recently approved a third stock repurchase program for $50 million, which continues to support our belief that our stock price represents a great value.

Slide 6 -- home-closing revenues increased 22 percent from last year's third quarter, and the number of homes closed was up 14 percent. I'd like to point out that with our strong order trends and record backlogs, we expect our fourth quarter closings to be up significantly on a year-over-year comparison.

Slide 7 -- we generated $1.3 billion in home-closing revenue during the first 9 months of the year, up 33 percent from the same period a year ago, and closings increased 26 percent to 4,860 homes for the same period. The 3-year compounded annual growth rates were 38 percent and 30 percent respectively.

Moving to slide 8, during the third quarter and the first 9 months of 2004, the number of home closings increased 14 percent and 26 percent respectively over the same period a year ago, and were up most significantly in California and Arizona. The strong housing markets in these states continue to drive demand for our homes as we continue to successfully execute our business strategies.

Although the number of homes closed in Texas declined 6 percent for the third quarter, the demand for our homes in that market remains good as evidenced by a 10 percent increase in the number of homes ordered during the third quarter.

The second-wettest June on record in Dallas and Houston had an impact on third quarter completions and closings, which will push some of those closings into the fourth quarter.

The reduction in Nevada closings, the rapid sellout of communities for which replacement communities have not yet opened. We added 3 new communities in October and plan to add another in November to bring our Nevada community count to 6 by the end of the year.

Slide 9 -- the average price of homes closed during the third quarter of 2004 was approximately $277,000, an increase of 6 percent as compared to approximately $260,000 during the third quarter of 2003.

Slide 10 -- diluted earnings per share for the third quarter reached an all-time quarterly record of $2.61, rising 40 percent above last year's third quarter. Included in our third quarter earnings is the $4.4 million after-tax gain from land sales, representing 32 cents per share. However, even without the land gain, diluted earnings per share would still have reached an all-time quarterly record of $2.29, increasing 23 percent over the prior year's third quarter.

Pre-tax margin for the quarter, excluding land sales was 10.9 percent versus 10.7 percent for the prior year's third quarter, and 186 basis point improvement over 9 percent for the second quarter of this year.

Moving to slide 11, for the first 9 months of 2004 our diluted earnings per share were $6.28, an increase of 37 percent over the same period in 2003 and pre-tax margin, excluding land sales was up slightly to 10.1 percent. As we announced in our second quarter earnings release, we continue to anticipate that our total full-year 2004 pre-tax margin will be in line or slightly better than last year's pre-tax margin of 10.3 percent.

I would now like to turn the call over to Larry Seay to discuss our balance sheet in more detail. Larry.

Thanks John, and good morning everyone. At Meritage, we've been successful in maintaining a strong balance sheet, one that is able to support our organic growth while providing the flexibility to pursue acquisition candidates.

Slide 12 -- at September 30, 2004 we had $854 million in real estate inventory, a 22 percent increase from the same time last year as compared to a year-to-date 33 percent increase in the home-closing revenue. Our trailing 12-month inventory turnover rate for the period ending September 30, 2004 was stable as compared to the same period a year ago at 1.9 times. At September 30, 2004 we controlled approximately 38,000 lots, representing approximately a 5.5 year supply based on estimated full-year 2004 closings as compared to about 5 years at the same point last year.

We continue to utilize lot-option contracts to purchase the majority of our lots, which we believe offers Meritage increased flexibility with a less land risk. At the end of the third quarter, we controlled approximately 89 percent of our lots through option contracts. Most of these option contracts are at fixed prices, which allows Meritage to benefit from price appreciation.

Slide 13 -- another focus we have at Meritage is maintaining or improving returns to our shareholders. All of our shareholder return measures for the 4 quarters ended September 30, 2004 increased as compared to the 4 quarters ending September 30, 2003. For the 4 quarters ended September 30, 2004 our after-tax return to shareholders were up 11.4 percent on assets, 14.2 percent on capital, and 27.7 percent on equity as compared to 11 percent, 13.5 percent, and 25.8 percent respectively over the same period a year ago.

Slide 14 -- our net debt-to-capital ratio improved modestly from 50 percent at September 30, 2003 to 49 percent at the same time this year, and within our targeted range of 45 to 50 percent. We anticipate that our year-end net debt-to-capital ratio will be in line or slightly lower than the 2003 year-end ratio of 46 percent. Debt to trailing 4 quarters EBITDA ended September 30 improved from 2.3 times last year to 2.0 times this year. Our trailing fourth quarter EBITDA to interest covered ratio declined slightly from 7 times last year to 6.7 times this year. This change is directly the result of the increased interest costs resulting from replacing short-term debt with longer-term debt.

Issuing $133 million of additional long-term debt in April of this year strengthened our balance sheet and is important to support our future growth plan. We presently have $417 million of senior notes outstanding as compared to $288 million from a year ago. At September 30, 2004 we had $55 million outstanding on our $400 million bank credit facility. We also had $44 million outstanding in letters of credit, leaving us $101 million available to borrow, of which $196 million was available after considering our borrowing base limitations on our most restrictive date covenant.

I will now turn the call over to Steve Hilton. Steve.

Thank you Larry. Good morning everyone.

Overall the number of homes ordered increased an impressive 42 percent for the third quarter of 2004 and 39 percent for the first 9 months over the same period of 2003. Sales orders were exceptionally strong in our Arizona and California divisions. In Arizona, the number of homes ordered increased 90 percent during the third quarter, and orders doubled in California for the first 9 months. The strong demand is the result of very healthy housing markets in both states, as well as Meritage Communities that are thoughtfully designed and accepted by our home buyers.

For the first 9 months of 2004, orders per community in Arizona and California increased 121 percent and 78 percent respectively as compared to the first 9 months of 2003. While demand for our homes in Arizona and California is very robust, demand in Texas remains good where it generated a 15 percent increase in home orders for the first 9 months of this year as compared to the same period a year ago. We are pleased with our results in Texas, particularly in light of the current competitive conditions in that market, which is as strong as we've seen in recent years.

Slide 16 -- our order backlog reached all-time quarter-end records of 4,747 homes with a value of $1.3 billion, increases of 48 percent and 61 percent respectively over September 30, 2003. As a result of the strengthened demand of our homes in Arizona and California as we previously discussed, order backlog in those divisions is up significantly. We anticipate orders in the related backlog to increase in Nevada during the fourth quarter as we open several new communities for sales there in October and November.

Slide 17 -- the number of communities in which Meritage actually is selling increased a modest 9 percent from the end of last year's third quarter versus the same time this year. However, orders per community increased 31 percent for the third quarter and 28 percent for the first 9 months of 2004 as compared to the same periods in 2003.

In Arizona, although our community count declined from 33 at September 30, 2003 to 27 at September 30, 2004 we plan to open 3 to 4 new communities for sales during the fourth quarter of this year, bringing our community count to 30 to 31 at the year end.

Overall, we anticipate ending the year with approximately 145 to 147 communities opened for sales, an increase of 18 to 20 percent from 123 opened December 31, 2003.

Slide 18 -- at September 30, 2004, we controlled approximately 38,000 lots representing an approximate 5.5 year supply based on full-year 2004 closings. This represents a 22 percent increase in lots over the year-end 2003 level, and 26 percent above September 30, 2003.

In California where our lots under control increased 139 percent over September 30, 2003 approximately 2,650 of those lots are in Southern California where we were not operating at this time last year. Without these lots, the increase in California would have been 44 percent.

We also recently closed on our first land acquisition in Colorado and anticipate to begin delivering homes there in the fourth quarter of 2005.

Slide 19 -- we anticipate generating slightly more than $1.9 billion in home-closing revenue for the full year 2004 from roughly 7,100 home closings, an increase of 30 percent and 26 percent respectively over 2003. For 2005, we are expecting to close approximately 8,700 homes with a value of about $2.3 billion, increases of 23 and 21 percent respectively over 2004 full-year guidance.

Assuming future annual growth in the 20 to 25 percent range, we anticipate reaching $3.4 billion in home-closing revenue by 2007 representing approximately 12,500 home closings.

Slide 20 -- as a result of our third quarter performance, as well as our land sales, we are raising our diluted EPS guidance by 50 cents to approximately $9.05 to $9.30 for the full year 2004, an increase of 32 to 36 percent over the full year 2003. This also represents a 4-year compounded annual growth rate of 30 to 31 percent.

Slide 21 -- for the fourth quarter of 2004, we anticipate diluted EPS to be approximately $2.77 to $3.02, an increase of 22 to 33 percent over the fourth quarter of 2003.

We are very encouraged by the state of the home-building industry, and particularly Meritage's position in our industry. We believe we are operating in the right markets as evidenced by our strong sales, order demand, and we believe we are poised to increase our profitability and stockholder returns into the future.

With our all-time record level of sales orders and backlog, we believe that Meritage is positioned for solid financial growth and expect 2004 and 2005 to be our seventeenth and eighteenth consecutive quarters of record revenue and earnings.

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

(OPERATOR INSTRUCTIONS).

Margaret Whelan, UBS.

Nice quarter. A couple of housekeeping things for you. Larry the share count was a lot lower than we expected. Were you actually buying in stock in the quarter?

Yes, we did purchase some shares, and it lowered the weighted average shares down to about 13.6 million, a little over that.

Can you tell us how many and what you paid for them?

It was -- I don't recall the specific number off the top of my head, and I'm not in my office today. But the purchase price was around the low to mid-70s.

Okay, and I'll follow up with you on that.

The second thing is the land sales. Where exactly is that land?

That was in Las Vegas.

And was there a reason for the sale?

We got an exceptional price on a higher-priced subdivision that homes were going to be in the $600,000 to $700,000 range, and the price of the land appreciated dramatically in a very short period of time. And it wasn't the mainline of our business, so we felt comfortable taking the land profit.

What's your price in Vegas right now, your average?

I don't have that in front of me, but I'd say it's just under $300,000.

That's what I thought. Okay, and then overall the market expansion was excellent at gross margin. How much of that do you think you can attribute to mix and sizing versus what you're doing to control your costs?

John, you want to take that?

Well, I don't have it in front of me Larry. I think it's more of a, we continue to control our costs, and obviously we're leveraging our SG&A as we grow our business. But I think as much as that is really our mix on what we are able to sell. And we've had good pricing power in our Arizona and California markets. And we're starting to see that in our business, and really as a percentage of our mix as our percentage of Texas business is lowered and California is increased, we're seeing a little bit of a pickup there.

In response to your other question, we bought 250,000 shares in the quarter at an average price of $62.26.

Okay, thanks. And another question for John. Would you look for the Texas markets right now, the competitive environment, and we've heard a little bit about inventory building and more aggressive price discounts than usual from your competitors actually.

Sure, I'll start in Dallas, and you really should break Dallas into Dallas and Fort Worth. And historically, when people talk about Dallas they've spoken about North Dallas, and that's where we're getting a lot of the growth and more of the focus has been worked out. That's been where the most pricing power has been lowered, and where there's strong competition. And there's still good sales there, but pricing power is not what it used to be. You look around at say Fort Worth. Fort Worth right now for us seems to be stronger for the first time in a long time than our Dallas market. So overall, we're still looking at near or at-record levels of demand. But just we're also at near-record levels of supply as well.

So I don't see a big buildup in inventory of finished specs in the price point where we are, which we're really focusing on that mid-100s to the low-300 type price range. So we feel real good that the market is still very healthy there. It's just, it's tough in terms of price environment.

Looking at Houston, Houston is a benefactor of this strong oil industry right now, and we think that a lot of people in Houston have been hesitant to go out and make any capital expenditures. So we think that the Houston market looking forward, we haven't seen as much as we hoped to see through the capital expenditures in the oil industry hit the Houston market. So we feel very strong and good that the Houston market is healthy and will remain at these levels for the foreseeable future.

San Antonio, we're new there. We've only been there, this is our first full year of operation. We're very pleased with that piece of business. We control over 3,000 lots there. And next year will be our real first large year there, and we still see that market as being one of the healthiest and strongest markets in the Texas market.

Austin continues to rebound. There's been a repositioning of where the demand in Austin has been as to more of a lower price point. And we are entering into that price point, as we have announced that we're going to be entering what we call our "Value Series" in that marketplace. And we've got that opening in several communities, and we've seen some strong demand for that.

So overall, as we said in our comments, that Texas is competitive but our orders are up for the year, and our profits are still very acceptable and we see still a lot of growth for us in the Texas market looking forward.

Margaret as far as your question about average price in Nevada, we're selling at kind of a $360,000 to $370,000 range, but as you see some of these newer lower-priced targeted come along, you should see that average price drift down next year.

A little bit, sure. Did you sell that land to a public or a private builder?

Private.

Okay, and a question for you Steve. I mean, it's clear that the West Coast is going to be tough for the industry, not just for Meritage for everybody next year. Do you -- and then it seems like Florida and the Northeast are going to accelerate. Do you envision going East at any point?

We're looking at Florida very carefully right now.

What kind of price point or market?

John?

Well, we're going to continue to focus on that same core business that we've been in. We like Northern Florida. There are a lot of the markets in Florida we've been studying for years now. When we find the real opportunity to launch moving into Florida, we'll take advantage of that. But we would expect to ultimately be geographically diversified in the State of Florida. We'll be hopefully in the southern parts of Florida plus the northern parts of Florida. It's a great big market we see, not only today but looking forward. It's a place where people are going to continue to move to, strong demand and great opportunities for us down here. And we'll be selective in how we go about approaching this market.

But we'll be first, second move-up buyer will be the core of our business just like it is throughout the rest of our business. And we'll do a little bit on the high end and a little bit on the low end.

Okay, thank you very much guys. Well done.

Thank you.

Steven Smart, ABN.

I'm just interested in a good quarter, and estimating how much of your income comes from the State of California in general, this quarter-end perhaps and estimate going forward if possible.

About a third of our income maybe 35 to 40 percent is coming out of California.

Yes, we generally don't break those numbers out, but I would say that that is probably a fair, 35 maybe to 45 percent.

And based on your estimated, I noticed you're going to build a lot more homes next year. Would that percentage be likely to, I mean assuming the prices in California didn't change dramatically, would that approximately stay the same or would it be more or less?

Probably stay the same. It might actually slightly decrease because we're going to be significantly expanding our position in Arizona and in Nevada next year. So it may slightly go down.

Very good, that was my only question. Thank you.

Craig Diever (ph), AG Edwards.

I must say I'm rather impressed by the numbers you put out last night. One of the things that really impressed me was the orders per community, which you said increased 31 percent year-over-year during the quarter, and 28 percent through the first 9 months. Could you tell me is that a dollar number of a unit number? And either way it's impressive because I don't normally see builders reporting that sort of improvement in their sales velocity. Perhaps you could give us some insight that is to what you're doing to get your sales up so much. I know your product looks good, but there are a lot of good-looking products out there.

Craig first of all that's computed on a unit basis.

That's impressive.

I guess I'd ask Steve or John to comment on the reasons why.

I think a lot of that is in Arizona. We're experiencing a tremendous demand right now in Arizona and incredible pricing power, probably our best performance on a per-community basis anywhere in the Company is in Arizona. And we expect that to continue. Arizona is the absolute best value of any market in the West. You can still buy a great home in Arizona for under $200,000, which you can't do in California, Nevada, or Colorado.

So we expect Arizona to probably surpass the Southern California, Orange County, Riverside, San Bernardino market as the top market in the West if not the country.

What sort of price appreciation are you seeing in the Phoenix market?

About 10 percent, 9 to 10 percent right now is the number that's been calculated year-over-year. So it's not as frothy as you've seen in California or Nevada where the numbers have been between 25 and 50 percent. It's still really reasonable at 9 to 10 percent.

Any indication that speculators that were in Vegas have moved over to Phoenix? Some people are talking about that.

There are speculators out there, but we and all the other public builders have done I think an excellent job of locking them out. We have very stiff anti-investor addendums in our contracts prohibiting investors. And 1 or 2 may slip through the cracks, but we have very, very few in any of our communities.

Okay, I'd like to jump to slide 19 where you showed those very nice, perhaps ambitious growth plans. I wanted to ask you, because you mentioned your plans to move into Florida. Are those really built in your '07 number, 12,500 homes you expect to deliver? Is that contingent upon Florida, or if you were to go into Florida would that number go a whole lot higher?

We think that if you look at where we are right now, and the states and the markets we're in, we can achieve 12,500 homes just by looking at growing our existing markets. We're relatively new to Southern California, a big market. We're new to San Antonio, a big market. We're brand new to Denver.

So we've got some built-in growth, and we've still got plenty of room in other areas, we feel in our active adult business in Arizona and our conventional business in Arizona and in Texas. We're still introducing our value series in the Texas market. That's been a large-growing market. In fact, in Texas where we're just starting in there, we know how to do that. We've done that first-time buyer, but we've chosen here recently to focus more on the first and second move-up buyer.

So the answer to your question is we can achieve these numbers without moving into the Southeast part of the United States, but we do expect to enter that market relatively shortly.

Okay, 2 more questions. First, how would you expect to move, I missed this. I mean, would you move in there via acquisition or green field?

At this point, we're really looking at both strategies, and we'd be very well, there are several markets out there we want to be in. My guess is we'll enter some through green-field startups and others through acquisitions.

And finally could you guys sort of guess at the amount of community growth you might have during '05?

We're projecting a top-line revenue growth in the 20 percent range for next year. And I would think the community growth would follow suit.

Okay, so it would be a little bit faster, and you had about a 9 percent growth this year in community count, the faster community growth?

Well, I think we're going to have for the full year around an 18 to 20 percent community growth rate.

Okay, well thank you very much, and again very nice numbers gentlemen.

Thank you.

Robert Manowitz (ph), UBS/US.

The incremental options and the incremental lots I assume were structured through land bankers. And if that's correct, I was wondering if you could help us understand the current sort of rate of return that's required in the land banking market.

That increase Robert represents not only options created through land bankers but also developer options and also purchase contracts with land sellers. So it's a combination, although obviously a large portion of those option lots are controlled through the first type. We haven't really disclosed how many of each, but a significant majority.

And what is the sort of going rate today on the land banking side.

Between 12 and 13 percent on an unleveraged basis.

And how would that compare, let's say 3 or 4 years ago?

I say down maybe 100 or 200 basis points from 3 or 4 years ago, but we don't expect it to either go down any farther or increase in the next year or so. There's more land bankers in the market. There's more capital. It's more competitive. So we think it's less sensitive to interest rates than it may have been in the past.

Okay, and not to belabor the point of speculators, but I guess I would ask your view on the topic from the perspective that the investors aren't going home. They seem to be deterred by the large builders, but they're speculating in the housing market in some way, shape, or form. Maybe some of them are smaller private builders perhaps in the existing home market. And it will, at the end of the day, have some impact if it's a material number. Whether they're buying public builder homes or not, it'll have an impact on the whole industry. Do you have a view or a thought on what percentage of kind of the overall housing demand out there in California, Arizona, and Nevada is coming from speculators?

I don't think there are any small private builders that are doing any significant volume in Arizona, California, or Nevada where we're building. But with that being said, maybe 10 percent of the market, 5 to 10 percent of the market may be slipping through the cracks that are speculators. But I think there's some court cases come into the forefront out here in Arizona. We builders are suing customers who have, or investors who have breached their anti-investor addendums. And I think the more of those we can get in the paper, and we could show that we are, that we will try to put an end to this kind of speculation.

And you can see in Arizona because we have such a great supply of lots out here, and the restrictions are not as great as they are in California and Nevada developing lots. Price appreciation has been help down a lot less than it is in California and Nevada.

And my last question is just on the month of October. Have you bought back more shares?

No we have not.

Okay, thanks a lot.

Joel Walker, Dancemark (ph).

Great quarter. Just wanted to put this in front of you, the specs, just the overall specs finished and unfinished and your cancellation rate for this quarter compared to third quarter of '03.

We have 92 completed specs, which is 2 percent of our backlog versus 192 that we had last year at this time, which was 5 percent of our backlog. Our cancellation rate for the quarter was 22 percent versus 23.7 percent for the same quarter last year.

Thanks a lot.

Craig Kucera, Friedman, Billings.

I had a question about your backlog conversion this quarter. It dropped off a little bit lower than what I was expecting. Obviously, you put those numbers out earlier. Can you comment on is that something that we should expect to see going forward, or maybe what's driving that?

I think a large portion of that was related to weather in Texas. We had difficulty getting some homes started in June that would have closed, some of those would have closed in September. And like I said in my comments, it was the first or second wettest June on record in Dallas and Houston. So it just really pushed everything back. So I don't think you should think that our build time has increased and you start to change that. As a matter of rule, I think stick to your same. Our backlog typically closes in the next 2 to 3 quarters.

Okay, fair enough. And you mentioned that your options are typically fixed, have a fixed price. Does that mean that there is not any sort of escalation clause typically tied to those? Or can you kind of give a little more color on how you structure those options?

That's correct, most of our options are for a fixed price, and there's no acceleration clause. Actually, there's some claw-backs (ph) that are in both of the options. If we exceed the absorption level, we actually get a rebate. There are some developer options that we have primarily in Texas where there's a fixed escalation clause of maybe around 8 percent, 8 to 10 percent on a quarterly basis, annualized basis.

Okay, great. Looks like a great quarter. Thanks.

Jim Wilson, JMP Securities.

Thanks, I think most of my questions are answered. The only one I guess, I'm looking forward to '05, and that's great color on the communities and on the revenues. Any thoughts, I guess, even with margin mix Larry as it relates to since Arizona and Nevada might be a little higher percentage, would you expect any material difference in margins that you might see in '05?

Jim we really aren't updating our '05 earnings guidance from last quarter. We'll wait to do that next quarter. So I really don't think I can give you any help on margins or EPS at this point unless Steve or John want to make a comment.

No but we promise we will next quarter.

Okay, fair enough, and I guess besides Florida, anywhere else you're looking around for new market entry?

The Southeast, I would just say the Southeast in general.

All right, good, great, good quarter.

Thanks Jim.

Mike Kender, Citigroup.

Yes a question on Denver. Obviously, it's small right now, but could you give us some rough goals you have for that market in terms of volume over the next 12 months or so?

Over the next 12 months, I think the volume is going to be pretty low. Our internal goal is to be at break-even in Denver by the end of next year. But I think as we go on to 2006 and 2007, we can wrap up our business pretty quickly there. We're accumulating a very nice lot position, so I think within 3 years we could be between 500 and 700 units in that market.

Which price points are you targeting in that market?

We're targeting just a slight bit over the median house price in the market. I would say the high-200s to low-300s.

Okay, thank you.

Justin Martos, Graham Partners.

Can you just give a little color on the price appreciation in the California and Nevada markets that you saw for this quarter with the homes closed and what you're seeing in the last quarter? I just want to see what your thoughts are on that trend.

I don't have those specific numbers in front of me, but I want to say year-over-year we're in the 20 to 25 percent range. But I would say that as we mentioned in our remarks that we're making big efforts to reduce our average sales price in those markets by repositioning our product as much as we can to more affordable product. And I think you'll see that in quarters ahead as we reduce our ASPs. And I think one of the slides, Larry maybe you can help me there. If you look on slide #9 average home-closing price in California actually was down 3 percent this quarter.

And that's due to the communities that you're opening up there over the next several quarters? We'll just continue to see that?

Yes, the land that we're buying today and the communities we're opening are going to be more affordable. And we're going to be moving down more towards the first move-up and second move-up and reducing our exposure to the luxury and third move-up business.

Thanks, and then on the guidance for the fourth quarter, the range of guidance, can you just give a little color to what has to happen at the high end and the low end in terms of the home closings that you guys are talking about?

We've got to close them. If the weather cooperates and things come in like we think, we'll be on the high end of the range. And if we lose a few closings for whatever reason, we'll be more towards the middle or lower range. That's the best way to really describe it.

Okay, thank you.

Margaret Whelan, UBS.

A couple of things. The first thing is you had already provided an EPS guidance for '05, which is $10.25 to $10.55. You're sticking with that, is that it?

We're not updating it at this time.

Okay, and Steve I have kind of a bigger-picture question for you. We're getting a lot of calls and questions about the amount of expected demand on the West Coast, probably because of the rapid price appreciation. But what I'm trying to get a sense for is you go back 5 years ago, 10 years ago, it's usually the builders who were creating speculative supply, which is not the case right now. We know in inventories on the supply side are at an all-time great demand. Demand is definitely higher, but would you be able to kind of give us a sense as a percent of the total demand you think now speculative now versus 5 years ago?

Well, we have zero completed specs in California and Nevada today. We weren't in Nevada 5 years ago, but in California I think 5 years ago we were building more spec homes. I think obviously there's more speculative demand in those markets today than there's ever been before, but I think again, builders today are more aware of it, and they're doing things to mute it, the anti-investor addendums. So with that being said, I don't know amongst the public builders if there's an appreciable difference as to what there was 5 years ago. But certainly people are more aware of it and I think everybody I talk to wants to take advantage of home appreciation in some way, either with their own home or trying to buy a spec home. But most people are blocked out of that.

But in terms from the supplies reflected from you and your peers on the builders' side it seems like you're building less spec than ever before.

Well, we're virtually building none in those markets. We have trouble keeping up with new orders demand on a pre-sold basis let alone having to go out and build spec. So we put a release on the ground in California/Nevada, it sold within a week or 2 if not the first day. And there's no reason to build spec houses.

So in the event the demand slows overall, we're not going to see that much of a slowdown in prices.

No, I think we are hitting a price ceiling in California and in Nevada. We don't have these waiting lists like we had 6 months or a year ago where we had 5 or 6 people deep for every house. That being said, there still is really strong demand. We are feeling a bit of a ceiling on raising prices.

Okay, and the second question I had was just a follow-up in terms of the share repurchasing. Apart from the obvious, which was the stock price is there any reason why you decided to buy in stock rather than continue to grow, no dividend or anything else?

We think we can do both. If we look at where opportunities are to use our capital, to expand our existing business and to move into the Southeast, and looking at it we think our strategy is to continue to grow our business as we stated. And with that, we also have the opportunity to buy some stock back. We think at these prices, our stock represents a good value. And so stock dividend-wise, we've chosen to not do dividend because we've chosen to use our capital to do other things, and that's acquisitions, start-ups, and stock repurchase.

Margaret the other thing too is we have kind of an internal goal of buying in enough shares each year to offset any diluted effects from stock options. We've always been opportunistic buyers, so we will be buying a little bit more than that when the price is low. And we'll be buying maybe a little bit less of that when the price is a little higher.

And just finally, have you thought about splitting the stock?

Well, it just crossed 80 today, so I think we're going to think harder about it. I think that was kind of the internal number we were looking at. I don't think we have a definitive goal or target, but I think we'll be thinking harder about it now.

Okay, thank you guys, well done.

Joel Walker, Dancemark.

Yes, I just wanted to get back tot hat land sale. I know it was in Vegas, I know I heard that. But just want to know going forward if you thought that might be a strategy that you would start doing that because this is the biggest land sale I've seen you guys do in a long time.

No, it's not a strategy at all. If we do but a piece of land and we think we can make more money on or an equal amount of money than we would building houses, we'll probably sell it. But I think it's an anomaly, it's not a part of our business. And we don't expect to be doing that on a regular basis.

Right, but you don't expect maybe in the coming quarters that there might be some other pieces of land that you can fetch a lot higher price?

There may be a piece here and there along the way over the next several quarters, but I can't tell you that we've got another piece that we're going to be selling next quarter or the quarter after.

Okay, just a question on the piece of land that you did sell. How long ago did you acquire that through an option?

We only owned it less than 90 days.

Less than 90 days.

Yes, we actually didn't even own it. A land banker came in a bought it for us. We put up a deposit, and within 90 days, we had a pre-arrangement with the land bank that we could sell it.

Nice little return.

Yes, the return was extraordinary.

It had been under control for just a hair longer than that, so it's not like it appreciated that much in 90 days.

How long did you have it for under control?

Less than 6 months total.

Less than 6 months total?

Yes.

All right, thanks a lot.

Justin Martos, Graham Partners.

Can you just talk about on the cost issue, material cost, what you're seeing? Is it more steady now, if you can give a little more color about that?

Well, I think what we've earlier this year, we did see some of our materials increase. I think we talked about this last quarter where we saw some concrete increases, and there was some talk of some shortages. But it's amazing how as soon as they got their increase in price, the shortages kind of went away. So we're -- lumber continues to vacillate up and down. That's a commodity that moves, and that'll always be the case with lumber.

So overall, we think that most of the increases on the major materials that we've taken, especially since you look at lumber. Kind of historically speaking, it's kind of at the high end of the range. So I don't think we have a lot of pressure due to lumber. Concrete has made a move, and a lot of other things are really more on a localized basis. And we feel pretty comfortable we'll be able to manage our material costs looking forward into next year.

So you haven't seen any sort of decreases as you said after they put the price increases, the supply sort of came up.

Lumber just moved, but lumber is always going to be something that seasonal and cyclical, and it moves up and down. But everything else is pretty steady.

Thank you.

At this time, there are no further questions. Are there any closing remarks?

Well, thank you for joining us today. We look forward to reviewing our fourth quarter and full-year 2004 results with you in January. Thank you.

This concludes today's Meritage Homes Corporation Third Quarter Earnings Release Conference Call. You may disconnect at this time.