Meritage Homes Corp (MTH) 2004 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Fourth Quarter and Full Year Meritage Homes Conference Call. (OPERATOR INSTRUCTIONS). Thank you. Mr. Oshiki, you may begin your conference.

Thank you Operator, and good morning everyone. And welcome to the Meritage Homes Conference Call to discuss operating results for the fourth quarter and full year 2004. On this conference call, you may follow along with a slide show presentation that can be accessed through the Company’s website at www.MeritageHomes.com. Participating on the call today from the Company’s management are Steve Hilton and John Landon, Co-Chairmen 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 or the future financial performance of the Company. We refer you to 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 fourth quarter 2004 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 fourth quarter press release, for the definition and discussion of the use of EBITDA, a non-GAAP financial measure.

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

Good morning, and thank you for joining us as we discuss Meritage results for the fourth quarter and full year 2004. In today’s presentation, we will recap our performance, review our balance sheet, return measures and liquidity, and discuss our outlook for 2005. After that, we’d be happy to answer any of your questions. All per share amounts in this call and presentation reflect our two for one stock split effective January 7, 2005. Begin the presentation on slide 4.

For the fourth quarter of 2004, we set all time quarterly records for net earnings, diluted earnings per share, and home closing revenue, increased at 64%, 66%, and 48%, respectively, over the same period a year ago. We also set a fourth quarter record for the dollar value of sales orders at $670m, up nearly double over the fourth quarter of 2003. For the full year 2004, we set all time records for net earnings, diluted earnings per share, the dollar value of the sales orders, and home closing revenues. The dollar value of new orders increased 59% over 2003, resulting in an 86% rise in year-end backlog to $1.3b.

We anticipate that, based in part on our strong order demand and record year-end backlog, as well as continued generally favorable market conditions, that 2005 will mark our 18th consecutive year of record revenue and earnings. We are very proud of our many recent achievements.

First, and foremost, Meritage is ranked number one in terms of five-year annualized total return on Forbes Magazine’s prestigious Platinum 400 list of America’s best managed big companies. This list is made up of 400 top performing American companies. And Meritage captured the top spot for total return, not only in the construction sector, but across all companies in all industries in this elite list. This also marked the second consecutive year that Meritage was included in the Forbes Platinum 400.

We entered three new markets during the past year – Southern California Inland Empire, Denver and Orlando. We now have a presence in 12 of the most dynamic housing markets in the Southern and Western regions of the country. With the additions of these markets, we’ll be operating six of the top ten largest single family housing markets in the nation.

For the first time in our Company’s history, we eclipsed the $2b mark in home closing revenue, exceeding last year’s $1.5b. Not only did our share price nearly double during 2003, in 2004 we delivered superior share price performance to our stockholders, with a 70% appreciation in our share price, closing the year at $56.35. In fact, over the past five years, our share price has advanced at a compound annual growth rate of 83%.

Reflecting our belief that Meritage has a bright future, we recently announced a two for one stock split, which was effective earlier this month. We continue to diversify our product offerings, to take advantage of emerging demographic trends, such as maturing baby boomers. In Arizona we are now successfully operating in three active adult communities, with eight distinct product lines. During 2004, we generated 786 sales orders in those communities, as compared to 302 in 2003. We are very excited about the future of our active adult operations.

Slide 6 - reflecting a 50% increase in the value of new orders through the first nine months of 2004, home closing revenue increased 48% from the prior year’s fourth quarter, a 34% increase in the number of homes closed, and a 10% increase in the average selling price of those homes.

Slide 7 - the strong fourth quarter performance drove full year revenues past the $2b mark for the first time in the Company’s history, as we closed more than 7,200 homes, an increase of 38% and 29%, respectively, over 2003. The strength in fourth quarter closes was led by our California and Arizona regions, where the housing markets are very strong in general, and where we have honed our competitive positions, offering the right product in the right locations at the right price.

The number of closings in our Texas region rose 11% for the year, reflecting more competitive market conditions. However, closings there increased 17% during the fourth quarter, reflecting increased year over year order activity during 2004. Closings were off moderately in Nevada for the year, because we sold out of several communities faster than anticipated before our replacement communities were open for sales.

We have not seen any weakness in demand, as reported by some in the press. As you can see, our closing momentum improved in Nevada in the fourth quarter as compared to earlier in the year. In addition, we opened more communities during the latter part of 2004, which was reflected in the 56% increase in our fourth quarter orders, which bodes well for positive results in Nevada during the 2005 year.

Slide number 9 – the average price of our homes closed during the fourth quarter of 2004 increased by 10% as compared to the fourth quarter of 2003, and was up 7% for the full year. We hope to raise prices in California. And there has been an increase in our closing mix towards California, our highest priced region. This more than offset some shift in mix towards our more affordable homes in Arizona, particularly in our active adult and Tucson communities.

Slide 10 – our pre-tax margin reached 12% for the fourth quarter, 120 basis points higher than the fourth quarter of 2003. This increase was primarily due to a 100 basis point increase in gross margin, that reflected the overall favorable pricing picture. Also contributing to the favorability in pre-tax margin was the net 20 basis point improvement in SG&A expenses and other income as a percentage of revenue. Diluted earnings per share for the fourth quarter of 2004 reached an all-time quarterly record of $1.88, rising 66% above the prior year’s fourth quarter.

Slide 11 – for the full year 2004, our pre-tax margin was up 72 basis points, to 11%, for essentially the same reasons as in the fourth quarter. And diluted earnings per share reached $5.03, an increase of 47% over 2003. I will now turn the call over to Larry Seay, our Chief Financial Officer, to discuss our balance sheet in more detail. Larry?

Thank you Steve, and good morning everyone. At Meritage we’ve been successful in delivering solid returns for our shareholders, while maintaining a conservative balance sheet, one that is able to support organic growth, while providing the flexibility to pursue acquisition candidates, as well as start-up operations.

On slide 12, at December 31, 2004, we had approximately $867m in real estate inventory, a (68%) (ph) increase from the same time in 2003. This compares favorably to a 38% rise in home closing revenue, and a 47% increase in net earnings, resulting in a more efficient use of assets. Similarly, our trailing 12 month inventory turnover ratio for the period December 31, 2004 improved to 2.0 times.

The model homes we use to market our communities are built by us on lots owned by a third party and leased to us during the sales phase. Under these arrangements, we do not legally own the models, we are reimbursed by the owner for our construction costs, and we have the right, but not the obligation, to purchase these homes. Historically we have treated these arrangements as operating leases.

In connection with the preparation of our 2004 year-end financial statements, due to our continuing involvement, we have determined our model construction costs should be included in the Company’s financial statements. In terms of our balance sheet, for 2004 this changed the result in an increase in real estate, and in notes and loans payable of $53.8m. Had we made this change in 2003, the effect would have been to add approximately $26m to those same line items in our year-end balance sheet.

In terms of our income statement, it has no effect on reported pre-tax and net income. And we remain in full compliance with our debt covenant. At the end of 2004, we controlled approximately 39,000 lots, representing about 5.4 years supply, based on 2004 closings, in line with the 5.3 year supply at September 31, 2003. This level of quality lot supply will support our future growth plans.

We continue to utilize lot option contracts to purchase the majority of our lots, which we believe offers Meritage increased flexibility, with less risk associated with owning land. At the end of the year, we controlled approximately 89% of our lots through option contracts, as opposed to 85% at the end of 2003. A primary focus we have at Meritage is to yield solid returns for our stockholders. Our after-tax return on average equity for 2004 increased over 2003 to 30.3%.

On slide 13, our net debt to capital ratio was 45% at September 31, 2004, as compared to 46% at December 31, 2003, which was within our 44% to 55% target range. We anticipate that this ratio will remain within our target range during 2005. We continued to maintain a healthy degree of liquidity to finance our future growth.

For the quarters ended December 31, 2004, our debt to EBITDA ratio was 1.7 times, as compared to 1.9 times at December 31, 2003. And our EBITDA to interest incurred ratio was consistent with last year’s, at 6.9 times. Please note that these prior ratios do not reflect a change in our accounting treatment for model home arrangements.

At December 31, 2004, we had approximately $470m of senior notes outstanding, due to the additional $130m that we added in April of 2004, as compared to $288m from a year ago. We had no outstanding debt on our $400m bank credit facility at the end of the year. I will now turn the call over to John Landon. John?

Thank you Larry. And good morning everyone. Continuing on slide 14, we ended 2004 on a very strong note, as the number of homes ordered increased an impressive 79% for the fourth quarter 2004, versus the same period a year earlier, bringing the full year increase to 46%.

Gains were particularly strong in Arizona and California, the result of a healthy housing market in both states, as well as communities that are thoughtfully designed, in good locations, and homes that are well accepted by our home buyers. In Arizona, the number of homes ordered more than doubled during the fourth quarter, and rose 84% in California.

The number of sales orders advanced 62% in Texas during the fourth quarter, bringing the full year increase to 23% over 2003. Conditions were more competitive in Texas than in our other markets in 2004, but appear to be improving as we head into 2005.

We talked about Nevada earlier with regard to the softer closing levels. And it is evident, with the strong 56% gain in orders in the fourth quarter, that the issue was opening new communities, not a lack of demand.

Slide 15 - our optimism regarding the coming year is anchored by the very strong backlog at year-end 2004, and the market conditions and order flow underpinning that backlog. As a result of accelerating order momentum during the second half of 2004, we began 2005 with 4,408 homes in backlog, 71% higher than at the end of 2003, and dollar backlog, 86% higher at $1.3b, both year-end records.

Slide 16 - you can see here that the number of communities in which Meritage is actively selling increased 13% over the past year in 2004, with 139 communities. This is despite a 24% decline in Arizona, where, as a result of our strong sales orders activity, we sold out of several communities faster than we had anticipated. However, we plan to open several new communities for sale throughout 2005 in Arizona, as well as in our other regions, bringing our anticipated overall community count to a range of 160 to 165 by year-end 2005, an increase of 15-19% from the level at the beginning of 2005.

Slide 17 - to support this expected growth in new communities in 2005 and beyond, we were successful in expanding the number of lots we control by 31% during 2004, to approximately 39,000 at year end. This level of loss represents a 5.4 year supply, based on 2004 closings. We feel comfortable with our lot supply in all of our regions. In Nevada, although a 7.4 year supply may appear high, this is based on 2004 closings, which were relatively low compared to what we expect in 2005.

In California, although our lots under control increased 137%, or by approximately 4,000 lots from the year-end 2003 to the year-end 2004, about 1,700 of those are in Southern California, where we were not operating at the end of 2003. Without the Southern California lots, our lots under control would have increased by 78%, fairly consistent with the year-end backlog increase in that region.

Moving to slide 18 - after exceeding a $2b revenue mark in 2004, we anticipate our 2005 revenue will approximate $2.5b to $2.6b, an increase of 23% to 27%. Looking further into the future, we expect our home closing revenue to reach $4.5b by the end of 2008, representing approximately 15,200 home closings. These projections are based on 20-25% annual growth in revenue, and include organic growth, as well as potential acquisitions and start-up operations.

Slide 19 - we remain very positive regarding the state of the home building industry, particularly in the markets in which we operate. And we believe that Meritage is positioned for our 18th consecutive year of record revenue and earnings in 2005. As a result of our fourth quarter performance, as well as our year-end backlog of homes, we now anticipate diluted earnings per share to approximately $6.05 to $6.30 in 2005. This represents an increase of 20-25% over 2004, and a three year compounded annual growth rate of 32% to 33%.

In the first quarter of 2005, we expect diluted earning per share to be in the $1.10 to $1.15 range, also up 15-20% over the same period a year ago. We are very excited about what lies ahead for Meritage. We believe that the consolidation of the U.S. home building industry has many years left to run, and we expect economic conditions to remain supportive, as job growth and consumer sentiment improves during a period of expansion, even with somewhat higher interest rates. We further believe that Meritage, as a result of our proven operating and financial strategies, can remain one of the fastest growing companies in our sector.

That ends our formal comments. And we’ll now open the floor for questions. The conference call Operator will provide you with instructions on how to register your questions.

(OPERATOR INSTRUCTIONS.) Margaret Whelan with UBS Warburg.

Just the one question we’re getting this morning is around your guidance. I understand that the first quarter is seasonally low for you. But is there anything you’re seeing right now that’s leading you to believe that it’s going to be so much lower than we were expecting?

I’ll take that one guys. I think a lot of it has to do with the weather in California, and in Arizona. It’s actually raining in Arizona right now, as I look at the window. And we’ve had some trouble with construction. We had like two weeks straight of rain. In Northern California we didn’t get a lot of stuff done.

So does that delay you by two weeks, or by more than that?

Well, it pushes some of those houses back that were going to close in March, now into April. And the same in Arizona. And houses we were going to start in November and December that we were going to close in March, we couldn’t get started. And I think that, and I think generally cycle times are a little longer right now in the West, because we’ve got such a big backlog. And it’s a bit challenging for the trades to keep up. Not that they’re not keeping up. But (fees) (ph) just came off a record year of 62,000 housing starts.

Yeah. Is it the sales, more than the availability of supplies?

It’s more the labor.

It’s more the labor?

Yeah.

That kind of leads into my next question, which was just given the rate at which you’re growing, do you have the controls in place in the management to really support the growth?

We think we do.

Or do you still need to hire more people?

No. We’re very confident in the management that we have. We have experienced veterans, that have been on our team for a long time. A lot of our division presidents have been with us eight, nine, ten years or longer. They have public company experience. You know, they have managed large operations. Their operations are growing. And we’re very confident in our abilities to product these kind of numbers.

Okay. Was there any change in your cancellation rate?

I don’t believe so. Larry?

Do you have that Larry?

Our cancellation rate has been trending in the low 20s. And it remains in that. So, in fact, if anything, the trend has been for cancellations to be somewhat less than what they were a year ago.

I think we were, in dollars, our can rate for the quarter was 19.8% versus 19.2% in the previous quarter.

Okay. So it started the year in the teens, and then it went up to 22%. And now it’s back down again?

Yeah. Well in units, I think last year we were around the mid 20s. And I think we’re in the low 20s right now. I think we’re at a 24% in units, and about 20% in dollars.

Okay. Thanks. And okay, can I ask John a question just about the Texas market? We’re getting a lot of mixed results in Texas over the last couple of weeks.

Yeah. I guess I would say that still very competitive. There is good demand. Unfortunately, pricing power is a lot left to be desired, compared to some of the other markets that we’re operating in. It’s just very important to be disciplined, and evaluate your communities that you go into, and just really continue to do all the things you need to do to be successful in Texas. And we continue to be successful here. Our sales orders are up year over year. Our margins are down a little bit, but still in a very acceptable range for us. And we still feel very optimistic and positive about our Texas business.

Do you feel like you’re gaining share with your products?

I think we are gaining a little share. I think San Antonio is a new market for us. We’re very pleased with the results we’ve had down there. We’ve had strong growth down in the Houston market. Austin, we’re really expanding into the lower price range. Our higher price range is doing well. But we’re entering into the lower price range. We’ll see some increased unit count down in the Austin market. In Dallas, which historically has been, I’d say, the strongest market in Texas, right now it feels probably the toughest.

Because, just at your price point? Or is it over supply?

I don’t think it’s -- you know, the demand is still pretty good. It’s just a lot of competition. And the ability to raise prices is much tougher than it is in other parts of the country. But, having said that, we’re still doing 1,200 units here. And we’re expected to do more this coming year. So it’s good. It’s just not as good as it’s been.

Okay. And in terms of Florida, you’ve just announced you’re moving in there, green field. And you’ve recruited someone. I guess you’ve secured some lots with that. Will you just talk about the opportunity there, and where it’s going to be over the next couple years as a percent of your total?

Well, sure. As everyone knows that’s in the housing industry, the Florida market is one of the three largest markets in the country. California and Texas are the other two. Florida is very strong. We’ve decided -- we studied Florida for a long time. We talked to a lot of people there. We’ve become very familiar with the Florida market. And we decided the best way to enter that at this point in time was through a start-up in Orlando.

We’ve secured a gentleman that we’ve worked with in the past in Dallas. He’s started it. We’ve already got two communities under contract. We hope to begin building our first homes in Orlando in the second quarter, with closings toward the latter part of the year.

What price points?

We’ll be priced in the mid-hundreds, is where we’re going to start. We’ll be mid-hundreds up to the low twos. We see a lot of opportunity to expand in Florida. And we expect over the next four to five years to enter additional markets, either through start-ups or acquisitions. We like all the other big markets that are in Florida, those being South, looking down toward the Ft. Meyers/Naples market, Tampa, Sarasota, Jacksonville would be the next markets logically that we would enter. And we expect to grow a billion dollar business in the Southeast within the next four to five years.

That’s going to be a big part of it?

Pardon?

And Florida is going to be a big part of that.

Florida will be the primary part of it. You look around and you say the Southeast really would include the George, the Carolinas. But Florida being the largest market in the Southeast would be a large part of that growth, of trying to build a billion dollar business down there.

So then, that’s the same question I have for Steve in terms of how do you find the people to do that for you?

Well, I think we’re very well known in the industry as being a good place to work. We’ve got long tenured employees. We really encourage people that come on board to just talk to some of our key people and just see if the opportunities that they’ve had here, the support they get, the systems that we have, the overall environment for success, the entrepreneurial spirit, as long as good financial controls, all leads us to really have a -- to pick the top candidates to come work for us.

John, you might want to add that the gentleman that we have that runs the Florida, the Orlando operation, actually is from Florida. And he has local market experience. And though he works for us in Dallas, he’s a Florida guy.

So he had worked for you? I didn’t know that.

He had worked for us for a short time. But he is very familiar. He’s got many years experience in the Orlando market. He’s connected with the developers, and has got that local market knowledge that is so important in this business.

Sure. Sure. Okay. Well, good luck with this. Thank you guys. Well done.

Margaret, if I could add one thing on the earnings number, also, our business tends to be fairly seasonal. We close more houses during the latter half. And that also has the effect of not leveraging our fixed SG&A as much. So it tends to be our net margins during the first quarter are less.

Are lower. I know, I mean 17-18% you’re earning, your annual earnings, are always in the March quarter. It just seems that, based on the size of the backlog, that all the guidance you’re giving is very conservative.

Well the other thing, as I say, is I think this year, because of the way our newer communities are coming on line and starting to deliver homes, that our year is a little bit more back-end laded than maybe it has been in the past. So you might want to factor that in.

Factor that in. Okay. And 27.5 was the share count for the ‘05?

Yes.

Okay. Thank you.

It’s just a tad higher than that.

Okay. Thank you.

Greg Gieber, A.G. Edwards.

I have a question on your projections going forward, when you talk about up to 15,000 plus homes in ‘08, how much -- is that largely going to be coming from expansion in Florida? Are you looking at other markets? And just how much of that 15,000 would you say might come from markets that you are not in currently?

I think probably half of it, at least half of it, maybe more than that, can come from markets that we’re already in. We still have a lot of room to grow our business in Texas, in California, and Arizona. We have no deliveries last year in our new markets of Orlando and Denver. And, as John just said, we’re going to grow a billion dollar business in Florida. So it’s going to be in all the markets we’ve already identified, and then maybe a few new markets, most likely in the Southeast.

I have a question about your guidance on the number of homes to be closed this year. When I look back at your history, the number of homes that you’ve closed in a year has always been greater than the number of sales in the prior year. For example, in ‘03 you sold 6,200 homes.

In ‘04 you closed 7,300 homes. In ‘04 you sold 9,000 homes. And yet you expect the closings to be below 9,000 in ‘05. Is there some stretch out here? Because I would assume with new markets coming on that you’re going to have a sales pace that’s going to, at least in unit terms, seasonals aside, kind of match the fourth quarter results.

One of you guys want to take that?

Yeah, I’ll take it. I believe that we’re looking at our business right now. And yes, historically, we have been able to do that. And we’re starting the year with a great backlog, maybe a bigger backlog than we historically have had, percentage increase over the year earlier.

And I just think that we’re maybe being a little conservative, looking at getting them started, getting them in the ground, knowing that our construction cycles are a little bit longer than they’ve been in the past. And we feel comfortable with the 8,200. Are we going to shoot to try to do more than that? Absolutely. But to think we’re going to do 9,000, we’re not comfortable coming up with really any more than the 8,200 as we sit here today.

Okay. When I look at your -- you talk about having a community count of 21 to 26 net increase over the course of the year. How much of that will be in, how many of those units will be in, or communities will be in Florida, and how many in Denver?

I think we’re going to open up probably four communities in Denver this year, probably four communities in Florida, and then the balance will be spread out amongst other divisions. Larry, do you want to add to that?

Yeah. Plus, I would also add that Southern California we will have several community openings there. So that’s going to be a much greater percentage increase than maybe some of the more established divisions.

Any rough count there for Southern Cal?

I don’t have a rough count for you.

Probably around another four.

Four or five there.

Four or five.

And let me just add, in Florida, even though we’ll probably open that many communities, we’ll probably only get closings out of one community in Florida. So this year is a year, obviously, of just getting some communities open, and then closings to follow next year.

Same in Denver.

I am trying to look at your potential orders, and then your closings going into ‘06, which again should be strong I would imagine. You may have given this and I didn’t hear it. I think you did previously. What would be your guidance on share count for the year?

Greg, could I – ? Well, it’s -- on share count, I think you should assume that the number that we have at the end of the year of about 27.5. At this point in time, that doesn’t take into account share repurchases, that those are done on an opportunistic basis. And so that’s the guidance we can give you today. But I also would look back at your question regarding sales. We had just a blow-out sales quarter in the fourth quarter.

And I think that’s one of the reasons that’s resulting in that sales number during ‘04, being higher than the closing number during ‘05, is just we had an unusually high and strong third and fourth quarter. And I think we’re just being a bit more conservative on our projections for ‘05. And the number in our slide, just to be clear, is closings of somewhere between 8,500 to 8,800 homes.

Yeah. I saw that. And I do agree that you’re probably being a tad conservative. But home builders have that reputation. Can you just tell me what your average option price is on land? I mean what percentage you’re paying for options?

For land?

For land. Yes.

Land options?

Yeah.

You know, I wouldn’t go by an average, because it varies market to market. We have some markets that we’re buying finished lots for less than 20% of the value of the homes. And we have other markets that it could be as high as between 40% and 50% of the sales price of the home. So Larry, do you want to?

It’s all over the board. It’s really impossible to provide an accurate average number. California is obviously a much higher percentage as a percent of sales. And Texas is typically the lowest percentage. And it’s a broad range.

Do you feel you’re giving up any profits by buying land retail rather than buying a little bit further out, and doing some developing that the other builders are making money on?

Well sure, absolutely we’re giving up profits. But we’re able to keep our balance sheet conservative. And we’re able to fuel our growth by not -- by buying land on option. But obviously, yeah, we are giving up some profits.

Greg, there are two components to that. One is there is an implicit kind of interest rate that a land banker would factor in. And sure, that in and of itself makes our lot costs slightly higher than if they were on balance sheet, because that rates higher than on balance sheet financing.

On the flip side though, we do tie up land out to five years or so. And we do a lot of the development on that land. And that land is bought at a fixed price. So during that period of time, there are development profits. And there is appreciation. So we are capturing a portion of that, but just not as much as somebody that might have a ten year supply of land.

Okay. Well thank you very much gentlemen.

[Joel Locker] with [Carlin] Financial.

Just wanted to get kind of a little more color on the margins, just gross margins by different regions. If you could give me some kind of indication of what they were for your four major regions.

Larry, do you have some numbers? Or do we disclose that information?

Yeah, we typically haven’t talked about gross margins by regions. For the full year, our gross margins were right at 20%. And our margins in the California and Nevada markets are stronger than that. And our margins in the Arizona and Texas markets are a bit lower than that. But I don’t think we want to get into providing specific margins by state.

Right. Just for the fourth quarter, you’re around 20.6. I mean can you give me some kind of ballpark, say in California and Nevada? Is it like 25-30? Or 30-35?

I’d say 25-30 is a good guess.

25-30, and somewhere between 15-20 in the others?

Right.

Yeah. I would go more towards the lower end of the 25-30 range personally.

Right. All right. Thanks a lot.

Jim Wilson, JMP Securities.

Thanks. Two questions guys. I guess one is on the margins that you saw in Q4. And I guess I was looking back and noticed it. But compared to basically most all the other builders, where the December quarter always has the highest margin, you tend to get them in the third quarter. Is there a mix issue? I suppose it looks like Texas closes a lot more on a percentage basis in Q4. And I am sort of wondering why that was, and that seasonal tendency.

And then just my other question, I guess everybody has obviously focused on your guidance. And we know you guys are conservative and all of that. If, with this big a backlog, though, you kind of only close -- I will use the word only -- 8,800 or 8,700 homes, you’d have presumably an enormous backlog still at the end of next year, given a steady sales pace in these community openings. And would you start to run the risk, if you don’t get them closed, that you start losing more people if the closing cycle is that long?

You guys want to take that?

Okay. First question had to do with, Jim, help me out again? It was your gross margin question third versus fourth quarter?

Yeah, because seasonally I mean it’s usually, Q1 to Q4 and it rises seasonally, just the nature of the closing cycle. And you, this quarter again, had Q4 gross margin below what you got in Q3.

Jim, I look at that general overall yearly seasonal trend. I think the variance between the third and fourth quarter is kind of a random event. And I don’t think you can read a lot into that. I do think what is happening though is, because we do get a lot of closings in the fourth quarter, and you wind up having some states that may have slightly higher margins, having a little blip in their closings between quarters. And it causes that variation. But I wouldn’t attempt to read anything in.

As we’ve always said, as we have said consistently this year, generally our gross margin for the year this year, and we believe into next year, are going to run in that kind of 20% range. And to be any more specific than that I think is difficult for us to do.

Fair enough. And then the other one is just, it’s that blessing and curse of having such an enormous backlog. And you said it’s tough to get it built out. But do you worry about if you don’t get the pace fast enough, you start losing people who are in the queue for delivery quite a ways out, compared to maybe where other builders might have a more modest backlog?

Let me take that one. I know we don’t think we’re in any danger of doing that. If in the markets where construction is taking a little bit longer, all the builders would be experiencing the same thing. And the buyers would know that. And so we don’t feel that we’re going to see, if construction goes a month or two longer on houses, we’re going to start having a larger cancellation rate. I don’t see that.

Okay. And then just a final question. Then with that big backlog, are you going to try to slow your offering to the market in any given markets, just in order to try to balance the construction pace with your backlog?

Well, one of the things we’re really focused on this year is not selling too far out in front of what we can deliver, and to increase the turnover of our backlog. So we don’t want to leave money on the table by selling houses when we don’t have the prices locked in, or I should say our costs locked in. So we’re going to be, particularly in the strong demand markets, we’re going to be measuring our sales not to outpace our ability to build those homes.

All right. Good.

[Joseph Block] with First New York.

Just a quick question. I got on the call a little late. So I don’t know if you addressed this. But how much is the increase in average selling prices? And just wondering what you guys see as far as those going forward?

Larry?

Well, the average selling prices -- and we have a slide on this, it’s slide 9 -- generally were up on the fourth quarter about 10%, and for the full year about 7%. Most of that was coming in ‘04 from Nevada, with some modest increases in Texas and California. And actually, because we were pushing to make sure our product is affordably priced, and because of some mix issues, Arizona actually decreased a bit.

But overall it’s been in this 7-10% range. We are thinking that you probably will not see quite as large of price increases in ‘05 as you’ve seen in ‘04, simply because some markets were running ahead of a sustainable level. So I think our price increases are going to be below that 7-10% average in ‘05.

I would say we’re making a company wide effort to lower our average price in our mix, move our mix more towards lower priced houses. As interest rates rise, and houses appreciate, we want to remain affordable in all the markets that we’re in. We’re working hard to keep a lid on the increase of our average price.

Okay. That’s what I figured. Thank you.

Craig Kucera with Friedman, Billings, Ramsey.

I have a question about what are you seeing as far as the level of second home buyers that are coming in and buying your homes? Is it changing? At what percentage of overall homes do you think that might be?

Second homes or investors?

Combination of both?

Well, we’ve got strict controls in place to prohibit investor sales in almost all of our markets. So we’re not seeing any of those, unless they are able to slip through a crack. And I would say we’re not offering many homes as second homes, other than maybe in our active adult communities. But the rest of our business is, I would say, is oriented towards primary homeowners, and not second homes.

So it’s probably roughly 5-10%, something like that?

I don’t think it’s even that high.

Okay. And given that -- I know you guys don’t originate any loans in-house. But do you have any stats of the people who you’re brokering loans for say?

Regarding what?

As far as the types of products that they’re using, and what are their FICO scores.

Unfortunately, I don’t have those with me today.

Okay. I can follow up with Larry on that.

Yeah.

Okay. That’s fine. And what, as far as your deposits that you’re requiring for homes out in your markets, I mean is there – ? Typically what are you asking for to record an order?

John, do you want to take that?

Yeah. I’ll take that. Really it’s a market by market basis. But we require actually a little more deposit than most of our competitors. Even on our lower end homes, we’re getting as much as -- like a $120,000 home, we’re getting $2,000. Plus, if they choose a few more options, we get some money on their options. And then we, on our higher priced homes, we’re getting as much as 5-10%.

Mmm-hmm. Is that 5-10% after any structural options that are chosen? Or is that just 5-10% up front?

It’d be 5-10% up front, plus those structural options.

It varies by state. I mean California the maximum deposit that you can keep is 3%, plus the options. So if people put options, we’re going to generally get 50-100% of those options paid for in advance, non-refundable, plus the 3%. In Arizona, on higher priced houses, we’ll definitely get a minimum of 5-10%. And it varies by product type. We have to be competitive in the market. But we want to secure our backlog, and make sure that we have a number that we can stand behind, that’s going to withstand any fluctuations in the market. And w get a significant deposit.

Okay. One more question. I guess you’ve opened up a fair amount of communities this year. But your sales pace was pretty extraordinary, certainly relative to what it’s been in the last couple of years. What do you attribute this big increase in your sales per community being? Do you identify anything that it might be?

I think one of the things was, in Arizona particularly, and in some of our other markets, we’ve had a move towards lower priced products. I would say more towards between entry level and then first move-up. And we had several communities that had extraordinarily high absorption rates, that were selling between 20 and 30 homes a month an individual community that a typical community may be more in the 5-10 homes per month. So we were able to increase our net sales per community, driven by those handful of communities in Arizona.

Part of the fact of that is in our active adult communities, those tend to be larger communities. And the individual product type offerings tend to have larger sales rates, because of the larger number of lots within the community, and the amenity package. So that has a small impact on increasing the average sale per community too.

Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

We’d like to thank you for joining us today. We look forward to reviewing our first quarter 2005 results for you in April. Thank you.