Meritage Homes Corp (MTH) 2005 Q1 法說會逐字稿

Good morning. I am Lacy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Meritage Homes Corporation first quarter results conference call. All lines have been placed on mute to prevent any background noise. After speaker's remarks, there will and question and answer period. [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 first quarter of 2005. During the call you may follow along with a slide presentation, which can be accessed through the company's Website at www.meritagehomes.com. Participating on the call today from the Company's management are John Landon and Steve Hilton, Co-Chairmen and Co-Chief Executive Officers, and Larry Seay, Chief Financial Officer. Before we start I would 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 Form 10-K and 10-Q and its first quarter 2005 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 first quarter press release for the definition and discussion of the use of EBITDA and the discussion of a one-time bond tender charge along with financial results excluding this charge, those non-GAAP financial measures. I will now turn the call over to John Landon. John?

Good morning, and thank you for joining us as we discuss Meritage's results for furs quarter of 2005. In today's presentation, we will recap our performance, review our balance sheet, return measures and liquidity, and discuss out look for 2005 and beyond. After that, we will be happy to answer your questions. Please note that all share , EPS and share price amounts in this call and presentation reflect our 2-for-1 stock split, effective January 7, 2005. I will begin the presentation on slide four.

For the first quarter of 2005, the dollar value of sales orders and home closing revenue each set first quarter records, advancing 49% and 30% respectively, over first quarter 2004. Order backlog nearly doubled to 1.8 billion at March 31, 2005 from the same date a year ago, primarily the result of strong housing demand. Both net earnings and diluted earnings per share did decline 10% from the same period last year due to our first quarter one-time bond refinancing charge. However, both of these earnings numbers increased by more than 60% quarter-over-quarter, excluding the impact of the one-time charge.

During the quarter, we issued 350 million of 6-1/14 senior notes due 2015 and used most of the proceeds to repurchase 277 million of our 9-3/4 senior notes due 20-11. We believe the approximately $9 million of annual savings and interest payments achieved from retiring the 9-3/4 senior notes, and replacing them with the 6-1/4 notes is a very positive strategic move to support the Company's future success. This refinance refinancing also locks in a very favorable 6-1/4 rate for 10 years, and we believe the benefits far offset the impact of this one-time charge. We were able to expand our gross margin by 201 basis points from 2004 to the first quarter 2005 as a result of pricing power in many of our markets due to strong demand and our ability to manage construction and land costs.

The first quarter of 2005 was a tremendous quarter for Meritage. The results were we were able to deliver as compared to the same quarter a year ago are even more impressive when considering the increase from the first quarter 2003 to the first quarter 2004 for revenue was 49%, for net earnings 71% percent, and for diluted earnings per share was up 67%. We anticipate that, based in part on our strong order demand and all-time quarter-end record for backlog, 2005 will mark the 18th consecutive year of record revenues and earnings.

Moving to slide five. We are extremely proud of many of our recent achieve achievements. We were originally ranked number 1 in terms of five-year annualized total return on "Forbes's" magazine prestigious Platinum 400 list of America's best-managed big companies. This list is made up of top 400 top-performing American companies, and Meritage captured the top spot total return, not only in the construction sector but across all companies and all industries on this elite list. This also marked the second consecutive year that Meritage was included in the Forbes's Platinum 400. Recognizing our successful growth strategy, we were recent;y ranked 747th on "Fortune" magazine's Fortune 1000, up from 864th last year.

We also continued to expand geographically by entering five new markets during the past five quarters. Two of these were through acquisitions in the Southern California Inland Empire and the Fort Myers - Naples, Florida markets, and three, our start-up operations in Denver, Orlando, and most recently, Reno, Nevada. With the addition of Reno, we now have a presence in 14 of the most dynamic housing markets in the southern and western regions of the country. And with our entry into Orlando, we now operate in six of the 10 largest single-family housing markets in the nation. For the first time in our company's history, we eclipsed the $2 billion mark in home closing revenues in 2004.

Moving to slide six. Reflecting our belief that Meritage has a bright future, we announced a 2-for-1 stock split in early January. This came after delivering a 70% share price appreciation to our stockholders in 2004. And as we discussed earlier, in the first quarter of this year, we tendered for a 9-3/4 senior notes, issued new 6-1/4 notes and issued just over 1 million new shares of common stock. These transactions increase our capital base roughly 143 million, net of offering cost.

Slide seven. Home closing revenue increased 30% over last year's first quarter, reflecting a 14% rise in the number of home closings and a 14% increase in the average selling price of those homes to approximately 308,000. The number of closings was somewhat impacted by wet weather conditions in Texas, Arizona and California.

Slide eight. Despite the wet weather, the number of home closings and home closing revenue advanced 57% in Arizona and home closing revenue was up 49% in California. Both the Arizona and California housing markets continue to be very strong, and in the very competitive Texas housing market the weather conditions delayed some of the deliveries we anticipated closing in the first quarter. Some closings were delayed also in California and Arizona. As we will discuss later on, demand for homes in Nevada is very strong right now and we anticipate that we will close a considerable greater number of homes there beginning in the third quarter of this year, due to the opening of new communities.

Slide nine. The overall 14% increase in the average selling price of homes closed during the first quarter of 2005 is primarily the result of product mix changes and pricing power in California, and to some degree Nevada. We recently introduced and have had strong sales order activity in several higher priced communities in those markets that were not open at this time last year. However, we remain committed to offering homes in the moderate price range in both California and Nevada. Additionally, rising demand in those states, combined with restricted land supply, is providing appreciation in those markets.

Slide 10. Our gross margin climbed 201 basis points to 21.7% during the first quarter of this year, ad compared d to the same quarter a year ago. This positive change reflects overall price appreciation, as well as our ability to manage construction and land costs.

Slide 11. For first quarter of 2005, pre-tax margin declined 325 basis points to 7%, due to the one- time bond refinancing charge, which accounted for a 568 basis point change-- charge in pre-tax margin. Therefore, excluding the charge, pre-tax margin rose 243 basis points over the first quarter of 2004 to 12.7% this quarter, reflecting the expansion in gross margin, as well as our ability to leverage SG&A expenses.

Slide 12. Although diluted earnings per share declined 10% to $0.86 in the first quarter of 2005, from $0.96 in the first quarter of 2004, excluding the 69% per share one- time bond refinancing charge, diluted earnings per share actually rose 61% to $1.55. Again as positive as this is, it is even more impressive considering last year's first quarter, $0.96. per diluted-- per share was 67% higher than the previous year's $0.58. I would now like to turn the call over to Larry Seay to discuss the balance sheet in more detail. Larry?

Thank you, John and good morning, everyone. At Meritage , in addition to growing our business and emphasizing profitability, we focus on managing our balance sheet in order to deliver solid returns to our stockholders. We also drive strive to maintain a strong a capital position, one that is able to support organic growth, while providing the flexibility to pursue acquisition candidates, as well as start-up operations.

On side 13, at March 31, 2005, we had approximately 1 billion in real estate inventory, resulting in a trailing 12-month inventory turnover ratio of 1.9 times stable, compared to the prior period a year ago. During the quarter we once again expanded our land supply by increasing our lots under control by about 26%, from 35,251 at March 31, 2004 to approximately 44,300 at March 31, 2005 resulting in an approximate five-year supply. Our percentage of lots optioned was 90% as of March 31, 2005, one of the highest percentages in the public homebuilding sector, which we believe has helped Meritage generate high returns of capital with a lower risk. Our trailing four quarter after-after return on equity stood at 27.3% for the quarter ended March 31, 2005. This slight reduction from 27.7% for the four quarters ended March 31, 2004, is due to the one-time bond offering refinance charge incurred during the quarter, as well as our recent stock offering, which we completed in order to expand our capital position to augment our growth strategy.

Moving to slide 14. Our net debt-to-capital ratio of 4% at the end of first quarter 2005 is an improvement from 46% at March 31, 2004, and remains in the middle of our target range of 40 to 50%. Our debt to trailing four quarter EBITDA and trailing four quarter EBITDA-to-interest -incurred ratios both would have improved if not for the one-time bond refinancing charge. As part of the refinancing, the balance of the senior notes increased approximately 73 million in principal amount this past quarter, and we ended the first quarter 2005 45 million in cash, and had no outstanding balance against our bank credit facility,. though we had the ability to borrow an additional 254 million against our 400 million credit facility after considering out most restrictive borrowing-based covenants.

In addition, we recently issued 1,035,000 shares of common stock to further enhance our capital position to provide future growth, ranging approximately 70 in capital, net of offering costs. Due to this offering, our diluted share count on a going-forward basis will be about 29 million shares, so you should use this number when modeling EPS calculations, going forward. I will now turn the call over to Steve Hilton. Steve?

Thank you, Larry, and good, morning, everyone. Demand for our homes continues to be robust in our western markets. In particular, the dollar value of homes ordered by 96$ in Nevada, 80% in California and 31% in Arizona for the first quarter of 2004 to the first quarter 2005. The housing market in these states continues to be strong, as the restricted supply of land, combined with rising demand, has helped to provide pricing power. In Texas, where the housing market remains very competitive, we are maintaining a loading position in the move-up market, and are broadening our efforts to expand our entry-level business, which we anticipate will become a larger portion of our growth there in the next few years. Now that we have seven communities for sale in Las Vegas on March 31st, versus one a year earlier, sales orders are rebounding. I Florida, we are quite pleased with the response to our homes in Fort Myers - Naples a a result of our February 1, 2005 acquisition of Colonial Homes of Florida.. We exceed our expectations in that market by taking orders for 138 homes in February and March.

Slide 16. Our visibility for the future is excellent, as evidenced by our all-time quarter-end record backlog. The dollar value of home and backlog ended the first quarter of 2005 at nearly double from a year prior. This increase is primarily due to strong order demand, along with pricing power we have in may of our divisions and closings that were delayed due to the first quarter weather conditions. Supporting our assertion that demand is still strong in Texas, is the fact that number of homes and backlog is up 30% as compared to the same quarter a year ago. Our March 31, 2005 backlog also includes 367 homes, valued at approximately 130 million in our Fort Myers - Naples, Florida division acquisition of Colonial homes of Florida. Excluding this order backlog, the number of home in backlog rose 60%.

Slide 17. The number of communities in which Meritage is actively selling increased 14% over the past year to end this year's first quarter at 147. This is despite a 19% decline in Arizona, where as a result of our strong sales order activity, we sold out of several communities faster than we anticipated. However, we plan to be selling an additional three to four new communities in Arizona by the end of 2005. where we'll add more communities in our divisions as well, bringing our anticipated overall community count to a range of 160 to 165 by year--end 2005, an increase of 15 to 19% in the level at the beginning of 2005.

To support our growth strategy, we continued to expand our lot position during the first quarter. March 31, 2005 we controlled approximately 44,300 lots, a 26%. increase over the same point last year. This level of lots represents about a five-year supply, based on estimated 2005 closings. We feel comfortable with our lot supply in all of our regions.

Slide 19. We remain very encouraged by the position of our company, as well as the homebuilding industry in general, particular in our markets in the southern and western United States. We now have a presence in 14 markets, compared to nine at the end of 2003. As previously discussed, we anticipate generating between 2.7 and 2.8 billion in home closing revenue in 2005, up 34 to 39% over the approximately 2 billion in 2004. Our goal is to grow revenue and earnings at an annual rate of 20 to 25% per year over the next several years. We expect that this level of revenue will come from existing, as well as potential start-up and acquisitions. We currently anticipate second quarter diluted earnings per share to be in line with the first quarter at approximately $1.55. This is approximately 70 to 75% higher than the second quarter of last year.

Along with the expectation of achieving our 18th consecutive year of record revenue in 2005, we anticipate the same for earnings and expect to achieve diluted EPS in the range of 615 to 640, an . increase of 22 to 20% over 2,004, included in the impact of a $0.69 per share one- time bond refinancing charge. Excluding this charge, we expect diluted earnings per share to approximate $6.84 to $7.09, an increase of 36 to 41% from a year earlier. This ends our formal comments and we will now open the floor to questions. The conference call operator will provide instructions on how to register your questions.

[OPERATOR INSTRUCTIONS]We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of Margaret Whelan with UBS.

Morning, everyone. Well done. Top quarter again, and I have a couple of questions. The first one is, you know, maybe you can give us, each you, an idea by the markets, but can you give us a sense for what your organic sales price appreciation is? I know there is mix going on in a lot of the different markets between price points and so on, but you know, kind of apples to apples versus product you were selling last year and this year - high market.

I don't think we have that, do we Larry, right here in front of us right now?

Well, we've looked at that and tried to figure out what percentage is coming from just general price appreciation, each market, versus mix. And Margaret, it is more difficult to figure out than what you might imagine. It is hard to separate the two.

Yes.

Although, just kind of off the top of my head, I would say, and Steve, you and I talked about this a bit, that probably about half of it is coming from price appreciation, or little bit less, and a half or a bit more is coming from mix issues.

We had four communities that are kind of outside of our normal price band that we want to be in. They're on the higher end,

three of them in California and one them in Arizona that kicked in with substantive closings in this quarter that were to 800,000 to 1 million dollar price range, that we think to some degree skewed our average selling price. And I think that's going to continue for another quarter or two, and then those communities will be gone. And then we expect to kind of have more communities that are in the price band that we want to be in.

Okay, and I guess the second part of that question is, relative up to the mix and the pricing, where do you think your gross market expansion is coming from? Is it from the pricing you are realizing versus where you sort of might have been when you took control of the land, or is it from your cost management?

I think it is both. I mean, we just continue to have strong pricing power in Arizona and Nevada, in California. And you know, like a lot of builders, some of the land that we have now, we've controlled for a few years, looks pretty cheap. And that is helping us grow our margins. At the same time, I think we are doing a good job of holding our costs down.

Using your leverage [crosstalk]

Yes, managing our SG&A and those factors combined are helping us increase our gross margin..

Are you seeing, can you give us any specific examples of the leverage you're getting in cost per home as you are getting bigger?

Larry of John, you want-?

Well, Margaret, you know we hired an executive vice-president in charge of purchasing to manage our supply chain. And that person has been on board long enough where we are starting to see benefit at that. But at this point in time, I think it would be premature to start providing--

Any numbers on it?

And plus, as our divisions get bigger, they are able to get bigger pricing power. And we have a lot of divisions now that are doing over 1,000 house as year, which wasn't the case two or three years ago. And they are just able to get better pricing from our contractors and vendors.

Do you think 1,000 units is about critical mass at which point you gain that?

I think in some of these western markets that we're in, if you can say you are doing 1,000 units, I think it has a big impact.

Okay. Can you also talk, I think John referenced it in his prepared comments, but in terms of quantifying maybe what you think the weather delays were, both in closings and orders?

John, you want--?

Larry, I don't know if you have numbers on that. I think it probably had an impact of maybe, at least in Texas, of maybe 10, 12%. of closing units.

Okay.

It will shift later in the year. We are not losing them. Obviously, they're just shifting later in the year.

And are you, given that we're halfway through April, or more than halfway, are you making any of them up already or are you still experiencing delays?

Well no, we have got them start, and they are in the pipeline. And our starts are coming out as planned, and will pick up, really which is just a very wet seasonal-- it hurt us on getting some houses started and. consequently, it delayed the closings. But that all is really manageable now. And I don't see any problems there.

Margaret, I think you're probably looking at two or three weeks in general. So I pushed the closings out of the first quarter into the second quarter. Also, we had a very, very strong sales season in the fourth quarter of '04. And that's. I think, why we are kind of saying that the back half of the year, some of these house that we are starting in the first quarter aren't being delivered in the second quarter. They will be delivered in the third.

The other thing. just to drop back to your average, you know, your. sales price comment, most of the sales price increase came from California, where Steve was mentioning we had those three subdivisions that were higher priced than [inaudible]. The other came from Florida, because Florida's average sales price is running around 440,000 which is significantly higher than our average fourth-- for the company. So, those two factors, I think, caused the great majority of the the increase you saw.

My last question actualy is on Florida. What-- by year-end, what percent of closings do you think it will represent and do you have a target for next year yet?

I think in closing, I am not sure what, we're planning on clothing around 500 home in Florida this year. So whatever percent that is, maybe what, maybe what, 500 of 9,000, Larry.

It's about 5 or 6%.

And about the same for next year or do you think it will grow more quickly?

It will grow a little quicker. We don't have a number yet for that. Really it depends on being able to get the communities open in Orlando [crosstalk] on line. We really aren't . going to see a lot of unit growth in the Fort Myers - Naples area. We knew when we bought that that it would be about the same in '05 and '06. And then '07 we'll see significant growth in the Fort Myers - Naples area.

Just based on the communities that are coming online?

Exactly.

Okay. Thank you very much. Well done.

Your next question comes from the line of Greg Geiber with A.G. Edwards. Edwards.

Obviously very good results. I would like to follow up on one of Margaret's questions. Do you have any guidance on your average sales price for the full year and what it might be, once-- say the fourth quarter once this more expensive product rolls off?

Well, Gregg, I think we have given guidance on the total revenue number. And I think, if you take that and look at what-- interpolate between the closings and new order prices, that that's a pretty good number to use.

Okay.

So that number will allow you to back into our unit closing estimate.

Okay, well, if I just take out the higher priced impact stuff, I mean how much of an impact did that have on average sales price? Do you have any rough guess?

I don't have a rough number for you. I'ts one of those things that it is having an impact but we haven't measured the impact of those four or five higher priced communities alone.

We are kind of giving guidance right now that we are going to be around 2.7, 2.8 billion. And is it about 9,000 units, Larry?

Yes.

So, if you use 2.8 divided by 9,000 that would give you about 310,000, 311,000. I think that's the kind of number that we are directing people towards.

Okay. That's fair. Now next question is, and this maybe require a guess or you may not have it at hand, but if you look at the land that went with the houses you sold during the quarter, how long ago were the initial contracts signed on that land? Are we talking three years ago, if you have a five-year supply would have been five years ago? Just how long do you hold the land under option and then-- before you actually deliver the house? Do you have any rough ideas?

I think it can really vary. It could be land that we bought 18 months ago that we are delivering our first houses on right now, and it could be some land that we've owned or controlled for as long as four years. So I don't think you can paint it with a real broad brush. If you want to average that, you can say between two and three years.

Okay. Now, if I look, you said you controlled a little bit over 44,000 lot lots, only 10% of what you own. That leads me to a lot number that's less than your backlog. If you take numbers you actualy started construction out of that lot number or what?

Yes, our lots under control does not include lots on which we have houses being constructed.

Okay, I thought that was the answer. Now you said you've gone from nine markets at the end of '03 to 14 now. Can you venture a guess as to where you will be this time next year or where you would like to be if things go smoothly as planned?

II think you will see us -- I will take that one. We continue to look and investigate new markets to enter, and if you look historically we've normally entered one or two markets a year. I think you could plan that in the next 12 months we will continue with the same type of growth, hope to be in probably several new markets in the next 12 months. That could be two markets, that could be probably one to three new markets in the next 12 months.

Okay. Now, when does the Denver market start coming on line for you?

We are building homes there right now, so we expect to start delivering homes there in the third and fourth quarter this year.

What are the margins , anticipated margins there compared to, say, Arizona?

I think our gross margins are going to probably be a little less than Arizona right now because the pricing power is a little stronger, but I would say they're going to be in the 18, 20% range.

Okay. Well, thank you very much.

Your next question comes from the line of Michael Novak with Frontier Capital.

Excellent quarter. I appreciate it. My first question is on your backlog conversion ratio. Can you talk about, other than weather, some of the factors that are impacting it and where you would like to manage the business to?

Historically, our backlog can [ph] rates have been running in the low 20s over the last couple of quarters. Things have kind of trended toward improving, so I think we are running now in kind of the high teens, kind of in the in the 17 to 20% range. We believe that the strong market conditions have really lessened our can rate. And we have always gotten a high deposit level, ranging from 3 to 10%, depending on the price range of the home. And I think that helps us to achieve a lower can rate. Having said all that, once we start the house construction is when we have the full deposit money up. And we have a very, very can rate, running in the 1 to 2% after start of construction.

Maybe I wasn't clear about my question. I was looking for the percentage of your backlog that you convert to closings in any given quarter. And it has been down from previous years, and I understand there was some weather issues that caused things to slip. But if you look industry-wide, those conversion ratios seem to be coming down for everyone, and I am wondering if it is a problem getting subcontractors.

Yes, it is no secret that, industry-wide, it is taking longer to get houses built. There's constraints on labor in a lot of markets, and you know, we are doing our best to convert our backlog in a six to eight month period. It is just going to vary by product type and it's going to vary by market. But we are, like a lot of builders, starting to govern our sales so that we can keep our production in line with our sales activity. And we have a lot of communities that are on allocation where we're only going to sell what we can build. So, hopefully that answers your question. But we dont have a-- I can't give you a hard target though of what we are trying to get to.

Would you expect the conversion ratio to improve sequentially as we go throughout the year?.

Let me take another stab at that, too. Also, there is a selling season, if you will, and if you measure your backlog conversion at different points in the year, you are going to get different conversion rates. So typically, sales are strongest in first and second quarter, so you are going to be increasing your backlog by more than what you are closing. And then exact opposite actually happens in the third and fourth quarter. A lot of times, you are closing more than you are actually selling. So, if you look at it and and you, say you annualize it, . but typically, let me say this, we typically, from the time we typically sell a home to close a home, our average is seven to nine months, depending upon when you sell it in the quarter and whether you sell it in the first quarter, when you are selling more than you are closing, or you sell it in the last quarter, will depend upon tha conversion. But typically, wouldn't you say, Larry, it's a seven to nine month average from sale to close on our homes?

Agreed. Although, if you look at, as a percent of, you know, closings as a percent of the backlog number, we probably average in the 50 or 55% range. And, as you said, John, during the first quarter, that range is typically a lower percentage towards the end of the year. During our closing season it is higher percentage. So it is a seasonal number.

So you would expect that to improve throughout-- as we go thought this year? I was just asking, because if I do that math and work it through your backlog, and you come up with well above 9,000 homes closed, given the size of your backlog.

That could happen but we are not-- it's hard right now to predict that. We have fot a lot of work to do.

Okay, and are you getting any pushback from consumers or the home purchasers that the lead times are lengthening? Is there frustration or--?

I think our sales force is doing a good job on communicating what the situation is and giving them good estimates when they purchase a home, when they can expect to close it. And we have pushed those expectations out 60 days, and everybody is pretty cool with it.

And at the beginning of our-- the conversion ratio for this quarter, taking the closings as a percent of beginning backlog, was 40, 41%. That is a little bit lower than what i's traditionally run during the first quarter of the year. And that's where our concern is, is that 50% range may be a little bit lower than average because some of the elongation in delivery times. So that's why we are not willing to commit to a higher number today.

Okay. Well, thank you very much and good quarter.

Your next question come from the line of Alex Barent [ph] with AMP Securities.

Great numbers, guys.

Thanks, Alex.

Had a question here again regarding the backlog. And you mentioned that you are managing the sales pace. Can you be a little bit more specific and tell us where, I guess, you guys are working to raise prices and kind of slow down the sales pace? And maybe is there any chance that the year-over-year number and say in next quarter or next two quarters would be down in any of your regions because you are sort of trying to slow down the sales pace?

Well, we got tough comps coming up because every year-- every quarter last year was a record, a substantial shattering of the record from the year before. But, given even that said, we expect to do better than we did last year. But we are, you know, in a lot of communities in California, Nevada and in Arizona kind of metering out our sales and holding back on the reins to make sure the production doesn't get too far behind sales.

Okay. So Arizona, California and Nevada, okay. Now, in terms of your community drop off in Arizona, you said you mentioned -- you expect that to climb to three or four by the end of the year?

Yes, I did say that.

Okay, would that be more towards the end or would that start kind of right away?

We actually have quite a few that are opening, starting really in the second, and the latter part of second quarter and continuing throughout the rest of the year. But also, you know, when you take those and you say what are we closing out and what are adding, that's how we come up with the net increase of that four number..

Right. Now you're -- on the SG&A front, you came in quite a bit better than we were expecting, especially being that it's the first quarter. I just wanted to get a sense where you think the next few quarters will be relative to this first quarter.

Well, we are at, all in about 9%, and I think that would be a good number to kind of use for modeling, going forward. We are growing fast, so that's leveraging the SG&A better, but on the flip side to make sure we keep proper control over the growth, we are adding to a position. So I think there is a balance there where you won't see a whole lot of additional SG&A leverage through the rest of the year.

So you said 9% would be a good number?

That's the total SG&A number.

Okay, all right, great. Thanks a lot.

Thanks, Alex

Your next question comes from the line of Timothy Jones with Wasserman & Associates.

Good morning. A couple of fast questions. You mentioned that your line of credit was 254 out of 400 million under the most restrictive covenants. What are the risks, given how well you are doing, what are the covenants that are holding it down?

In this case, it's really the borrowing base. Our line works off of a percentage of value to borrowing ratio on different components within our balance sheet. Pre-sold houses are at 1% AGN, undeveloped land is at a lower percentage. If you add all of those numbers up with the appropriate percentages and back out the amount of borrowings we have, we could borrow an additional $254 million under the borrowing base. So actually our covenants aren't the most restrictive things, like debt-to-equity or something..

That's what I was wondering about.

Okay, It is the borrowing base component.

Second question, other than Dallas/Fort Worth, what other Texas markets you in?

We're in really all the major ones. We're in San Antonio, Austin, Huston and Dallas/Ft. Worth.

Okay. Now yesterday or day before, I don't remember, it was Ryland said that they had flat orders too. Huston, San Antonio and Austin were up fairly nicely and Dallas was down. What was your experience, was it similar or was it different?

Without having it in front of me, just real quickly, I think that - let me just talk in terms of Dallas orders, I think were just a hair up. I think every market we were up. Yes, let's say flat, except San Antonio where we're in a growth mode where it's a relatively small base, and you're going to see significant percentage increase in San Antonio because we are talking about relatively small numbers and we're adding communities there relatively quickly.

Generally speaking, the same results - Dallas was a bit off and the other three markets were a flat or a bit up.

Okay. But Dallas and Ft. Worth is still the biggest by far, right?

I would say, and the thing is too, let's also talk about that historically Dallas had been probably the strongest market in Texas and so the comps were a little bit more difficult. If yes, if you take it from where the comps are, Dallas is off from where it had been.

But just a tad. It is not really off very much.

Okay. Good. Of your lots, your 4r,000 lots, what was --you didn't give the optioned and owned percentage.

It is 90% optioned and 10% percent owned.

Excellent. Two more questions real quickly. I am very pleased to see that you are getting 10% down payments in some markets. Is this on the high-priced homes, 800,000. or is it related to some speculative markets?

No. Generally, the higher priced the home, the more deposit we get.

That's similar to Tolls [ph] that's basically the 800,000.

And that has has been that way for years and years and years for us.

Okay, well that's sort of industry average.

Yes.

And last, what are you doing to curb speculation in these hot markets -- Las Vegas, Phoenix?

We are very restrictive anti-investor addendums we require all of our buyers to sign in Arizona, California and Nevada, which requires them to forfeit any profit they would make if they sell their house within one year of purchasing it from us. And we enforce those and, by the fact that we have our own mortgage company, we are able to weed out any speculative buyers. And we believe we have few speculative buyers, investors in our communities.

Has anybody ever gone to court on that yet?

Actually I think there is a couple of builders here in Phoenix hat are prosecuting cases right now.

Really? Do you know who they are?

I don't know that I can say. I believe there are a couple of private builders.

Great. I would like to see that resolved one way or the other.

We are keeping an eye on it. And we will let you know what happens.

Okay. Thank you very much.

Thanks.

Your next question comes from the line of Joel Walker with Carlin Financial.

Hi, guys. Great quarter. I wanted to say that first. And also how much goodwill did you guys have at the end of the quarter, just from the Colonial Homes? . I know it was 91 million at the end of the year, but just wondering how much that went up.

Good will is going to go up about 25 million or so, give or take 2 or 3 million. I think we are still massaging that number, but it is pretty close to 25.

So it should should be around 115 million total?

Correct.

Somewhere around there? And also,I guess on the income statement, you had other income level increase from-- to 4.13 million from 2.19 million. Just what was the reason for that ?

That is mainly coming from our mortgage company operations. As Steve mentioned, we do have a couple of mortgage joint ventures which we have been rolling out over the country, and those have been scaling up. So most of that increase is coming from that. You will continue this year to see that number be higher as compared to last year, and then next year it will tend to be a little more comparable because we won't be scaling up the operations.

Right. So, you kind of think it will almost double every quarter like it did this quarter?

I don't know if I say double, but you will still see a strong positive comparison.

Right. I noticed you guy's tax rate decreased a little bit from 38.1% a year ago to 37.5%.. Do you expect this going forward?

Yes, that's a great question. Actually, there is a new law that was passed by Congress. It is Section 199, which was supposed to give manufacturing companies an advantage over foreign competition and it was written very broadly, so it positively impacts homebuilders too. So we got about a half a point, .5% tax rate benefit on that. And I think you will see that continue forward.

So the regular rate will be around 37.5%, you think?

Correct.

Just, I guess one last thing on the guidance. I know you guys are pretty conservative usually, but I am coming to a number of like 786 for the quarter just based on margins kind of where they were this quarter, and was just wondering, you know, unless I see, or we see a huge slowdown in backlog conversion, I mean even lower than this quarter, I just don't see how you guys don't make far above $7 a share.

Well, you could look at our guidance and say that we have been a bit conservative on margin or maybe a bit conservative on average sales price. But we don't have a completely clear crystal ball, and we aren't willing to publicly, you know, go beyond the guidance we have given today.

All right. Thanks a lot.

Thanks.

Your next question comes from the line of Abe Boston with AJB Capital.

Good morning. I wonder if you are able to provide any information concerning the financial conditions of the buyers, specifically? What is the average loan-to-value, loan-to-purchase price on the homes you sell and do you know what the income to carrying charges is for your buyers?

Larry?

Yes, we don't have the number for all of our closings because we don't control all of the mortgages, but with our main joint venture, MTH Mortgage, our FICO scores on average are above 700, which is a very strong number. And I don't have the average loan to value number right now to tell you, but generally speaking, we believe our buyers are financially well-healed. They are move-up buyers, so they aren't squeezing to get into their first home. They typically have a lot of equity that they are rolling out of the home that they are selling. So they aren't - at least the great majority of them aren't doing very high -- a really high loan-to-value purchase.

Thank you.

Your next question comes from the line of John Kim with the MAC [ph] Capital.

Hello.

Hello.

Hi, guys. Just to follow up on that previous call, you don't have the LTV's even for the mortgages you originate?

I don't have them in front of me right now. I can't give you that number.

Okay, so you don't have the ARM percentage or the interest-only percentage?

We do,. but again, I don't have tha statistic in front of me. It has been, as short term rates have gone up a bit, longer term rates have remained relatively stable. The ARM percentage has moved down from kind of the 30 to 40% down below that somewhat. But I can't give you the exact numbers..

Do you have it for the prior quarter LTV?.

No I don't

We have never really given that number out.

Okay, all right, thanks.

There are no further questions. Are there any closing remarks?

Thank you for joining us today. We look forward to reviewing our second quarter 2005 results with you in July. Thank you.

Thank you, bye bye.

This concludes today's conference call. You may now disconnect.