Meritage Homes Corp (MTH) 2005 Q4 法說會逐字稿

Good morning. My name is Joseph and I will be your conference operator today. At this time I would like to welcome everyone to the Meritage Homes Corp. 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 session. If you would like to ask a question during this time simply press star and the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you. Mr. Anderson, you may begin your conference.

Thank you, Joseph. Good morning and welcome to our conference call today to discuss Meritage Homes Corp. operating results for the full year and the fourth quarter 2005. We issued our Press Release announcing the results yesterday, which is available on our Web site at www.meritagehomes.com. We've prepared a slide show to accompany the conference call today, which may also be accessed on the Investor Relations page of our Web site. Participating on the call today are Steve Hilton and John Landon, Co-Chairmen and Co-Chief Executive Officers of Meritage and Larry Seay, our Chief Financial Officer. They will discuss Meritage Homes results for the fourth quarter and full year 2005 recapping our performance, return measures and liquidity as well as our outlook for the first quarter and full year 2006. After we conclude our prepared remarks we will take questions from the listening audience.

Our statements during this call and our slides contain projections and forward-looking statements. As such we must remind everyone of the risks implied and I refer you to slides two and three of our presentation. Our projections and other forward-looking statements regarding future events or the future financial performance of the Company are the current opinions of management, which may change and actual results may differ. We refer you to the disclosures that Meritage files with the Securities and Exchange Commission, specifically those contained in the Company's most recently filed Form 10-K and Form 10-Q and our Press Release yesterday and our presentation slides today. These documents describe important factors that may cause our actual results to differ materially from those contained in our projections or forward-looking statements made during this conference call. In addition, we used certain non-GAAP financial measures such as EBITDA to evaluate our business and we will refer to those non-GAAP measures in our comments. Please refer to our earnings release and SEC filings mentioned previously for the definitions and discussion of EBITDA and other non-GAAP financial measures. I'll now turn the call over to Steve Hilton and refer you to slide five of our presentation. Steve?

Thank you, Brent. Good morning everyone and thank you for joining us today. We are delighted to report that we just concluded our best year ever for Meritage Homes by delivering the most homes, the greatest revenue and the highest net earnings in our history. We delivered more than 9,400 homes with a total value of $3 billion producing 256 million in net earnings or $8.88 per diluted share, $9.55 excluding a one-time bond refinancing charge, far surpassing expectations at the beginning of 2005. This was our eighteenth consecutive year of record revenue and net earnings and we grew dramatically over 2004. Home closing revenue for the year increased 49% and net earnings grew 84% over 2004 to continue our longstanding history of superior performance over the past five year period. Over the past five year period we've grown revenue at a compounded annual rate of 42%, net earnings at a compounded annual rate of 48% and diluted EPS at a compounded annual rate of 41%.

On slide seven in that same five year period we averaged over 13% return on assets with an ROA of 16% in 2005 and average over 31% return on equity with an ROE of 37% in 2005. Each of these statistics places Meritage at or near the top of our peer group for key performance indicators and far exceeds the general market averages. They demonstrate the successful execution of our growth strategy, our focus on efficient use of capital and our goal of consistently delivering to our stockholders, delivering value to our stockholders.

Slide eight, we are pleased to be recognized for our exceptional performance by Forbes Magazines who recently named Meritage Homes to their platinum 400 list of Best Managed Companies in America for the third year in a row. Our results for the year were driven by robust demand coupled with strong execution by our operating divisions capitalizing on the robust demand for our homes and increasing our market share resulted in an extensive growth in home sales, home closings and averages sales prices in all of our markets.

Slide nine, the total value-- the total dollar value of orders for the year increased 37% combining 17% growth in homes sold with a 17% increase in average selling price. Fourth quarter orders moderated in some markets from the unsustainably high pace of sales and price increases seen over the last couple of years. While cancellation rates typically are seasonally higher in the fourth quarter, we saw a spike in cancellations in northern California during the fourth quarter, as buyers seemed to pause to evaluate market conditions there. We believe cancellation rates will return to more normal levels there in the first part of 2006. While Nevada slowed modestly during the fourth quarter it still produced the largest percentage gain/order value for the year growing 70% during 2005. Our total-- our dollar value growth came from Arizona, 33%, California 19% and Texas 31%. Home closing revenue increased 49% year-over-year combining a 30% increase in homes sold with a 15% rise in average selling price. 2005 home closing revenue gains in California and Arizona were 51% and 49% year-over-year respectively. Nevada's home closing revenue was up an even stronger 67% and Texas produced a 16% increase during 2005.

Slide twelve; leveraging our exception revenue growth our gross margin for 2005 grew more than 350 basis points from 20% in 2004 to 23.6% in 2005. This was higher than normal primarily reflecting increases in average selling price on homes closed in California 27% and Nevada 25% and a greater percentage of revenue coming from Arizona, Nevada and Florida in 2005, which have higher than average prices.

Slide thirteen; bottom line results were most impressive for the year-over-year growth. Net earnings grew 84% for the year or 98% if you exclude the one-time charge we incurred in the first quarter related to the bond refinancing. Earnings per diluted share of $9.55 excluding the one-time charge grew 90% over 2004's $5.03 per share and far surpassed everyone's expectations at the beginning of 2005 including our own.

Slide fourteen, fourth quarter revenue and earnings were also record setting with home closing revenues up 49% to a record 1 billion and net earnings increasing 97% compared to the fourth quarter of 2004 to 102 million. Average selling price for the quarter were 11% higher on homes closed in 2005 than 2004 driving a 24.6% gross margin and resulting in record quarterly earnings of $3.53 per diluted share, an 88% increase over the comparable period last year. All in all 2005 was an exceptional year. I'll now turn the call over to Larry Seay, our Chief Financial Officer, to review our balance sheet improvements. Larry?

Thanks, Steve. On slide fifteen you can see that we managed our balance sheet carefully throughout the year to drive our capital efficiency, which Steve reviewed in terms of ROA and ROE. In addition we improved in several other areas during 2005 both as a result of direct actions we initiated and the strong growth we generated in revenue and earnings. One strategy we use to reduce our risk is to try to maintain a low level of unsold homes in inventory. We do this by typically building to order rather than building spec inventory normally beginning construction only we have a signed contract. Our success with this strategy as well as extensive use of bought options is evidenced by Meritage consistently having one of the highest inventory turnover ratios in the industry. This year was no exception with a turnover rate of about 2 times compared to the industry average, which is closer to 1.7 times.

On slide 17 you can see another risk management strategy we deploy is to limit the leverage on our balance sheet by carefully managing our level of debt. Success here is measured in terms of debt ratios and related interest coverage ratios. Our debt to EBITDA ratio improved to 1.3 times in 2005 from 1.7 times a year earlier and our net debt to capital ratio improved significantly also to 38% at the end of '05 compared to 45% at the end of '04. We refinanced approximately 275-- excuse me, 279 million of long-term debt in the first quarter of '05 replacing 9.75% notes with 6.25% notes thereby reducing our interest payment by about 9 million annually and hoping to improve our interest coverage ratio to 11 times in 2005 compared to 7 times in 2004.

To maintain additional flexibility we exercised an option in the fourth quarter to increase our borrowing capacity under a revolving credit facility expanding it from 400 million to 600 million early in the fourth quarter of 2005. We had approximately 73 million outstanding in other credit facility and an additional 428 million available to borrow at December 31st, 2005 after considering the borrowing base and the Company's most restrictive borrowing covenants. We believe that our balance sheet and liquidity position provides us with significant resources to use in future expansion or to buy back stock. Meritage has historically repurchased shares opportunistically when they were trading at the low end of an expected price earnings ratio range. Accordingly we repurchased 231,000 shares during the fourth quarter at an average price of $64.47 leaving 35.6 million available under our authorized 50 million share repurchase program.

Slide 17, we continue our strategy to control relatively high percentage of our lots through option contracts. We expanded the number of lots under control by 39% in 2005 from about 39,000 at year-end 2004 to over 54,000 at year-end 2005. Approximately 91% of these lots are controlled through option or purchase contracts. We believe this allows us to grow faster, produce greater returns while reducing the risk of land ownership. In addition, we currently have approximately 5.8 year lot supply based on 2005 closings, which we believe will help us execute our future growth strategy. As a final note before I hand it over to John, I'll point out a change in our reporting procedures going forward. Beginning in the first quarter of 2006 we will announce our quarter results with a single press release consolidating the sales, closing and backlog release with and into the earnings release. By announcing our full financial result at one time we feel we can provide more complete information and analysis to everyone simultaneously. The majority of public builders are now combining their releases. I'll now turn the call over to John Landon to discuss trends and our 2006 guidance. John?

Thank you, Larry. We are extremely pleased with our results for 2005 and our five-year returns. As Steve and Larry have recapped, we believe the opportunities that lie ahead are very good and we believe that long-term demographics favor the public homebuilders and Meritage in particular. Starting on slide eighteen, our strategy has been to leverage our advantages as a public homebuilder to grow our market share through acquisitions, start up operations in new markets and growth in existing markets. Meritage's eighteen consecutive years of record revenues and earnings growth proves our successful execution of this strategy. We now operate in fourteen markets and six of the top growth states in the southern and western United States. In addition, six of the cities we build in are in the top ten single family housing markets in the U.S.

Slide nineteen, our most established markets in California, Arizona and Texas have been good growth engines in the past and we believe will remain good markets for future growth. Our homes are selling very well in Phoenix where our active adult communities offer a great complement to our traditional luxury and move-up communities. In Texas we're experiencing strong demand for all of our products in all four markets there. Fourth quarter order value in Texas grew 40% compared with 31% for the entire year. As northern California appears to be normalizing after a period of accelerated growth, we're ramping up in southern California after our acquisition there two years ago. Arizona continues to be a great market for us posting 33% order value increases for both the fourth quarter and full year of 2005.

Slide twenty; our most recent entry into Florida last year added 12 new Meritage communities and we expect to double Florida sales during the first full year there in 2006. In addition, we're adding attached products to our portfolio in several markets to supplement our traditional detached housing products and provide more affordable housing.

Slide twenty-one, our total active community count is up 32% year-over-year and we expect it to grow roughly another 20% in 2006. We expect these new opportunities to support continued increases in home closing and revenue.

Slide twenty-two, in terms of guidance for the full year we expect to grow revenue 3.8 to 3.9 billion in 2006, an increase of 27% to 30% over 2005.

Slide twenty-three, we begin 2006 with a $2.2 billion backlog, which represents about 56% of our expected 2006 revenue. This compares to beginning backlog last year representing 44% of 2005's revenue. Backlog conversion rates defined as home closing revenue divided by beginning home backlog fell about 10 points from 2004 as 2005 sales outpaced deliveries but we believe we should begin to return to more normal levels in 2006. This provides us good visibility for continued growth in sales and revenues through the first half of 2006. We expect first quarter revenue of 825 to 850 million and net earnings of 235 to 245 per diluted share, an increase of 52% to 58% over the first quarter 2005 excluding last year's first quarter one-time bond refinance charge.

Slide twenty-four, since gross margins in the fourth quarter and full year 2005 were higher than normal and we expect these to moderate somewhat we are, therefore, maintaining our guidance for net earnings for the full year 2006 of 11.25 to 11.50 per diluted share.

Slide twenty-five, in summary we believe the long-term fundamentals of homebuilding remain excellent. Population growth, solid economic and employment statistics and favorable interest rates continue to drive healthy demand. We are enthusiastic about all of our markets and believe our increasingly diversified products and geographic footprint is serving us well today and provides us a great platform for future growth. We expect to continue to increase our market share in 2006 and beyond and our current growth plan is to double closings and revenue by 2009. With that we'll conclude our prepared remarks and open it now for questions. Operator?

[Operator Instructions] Your first question comes from the line of Alex Baron with JMP Securities.

Yes, great, great job guys, once again. I just kind of wanted to focus on market conditions in particular in California and just kind of if you could sort of take us through what you guys are seeing at this point, maybe what traffic was done month-to-date and just you know what kind of incentives are you guys offering and how do you see 2006 shaping up for you guys there?

Well, incentives vary widely from subdivision to subdivision and market to market in northern California and the incentives can be as low as $5,000 a home to as high as $40,000 to $50,000 per home but it's very much dependent upon the competition and the individual community. We're pretty optimistic that the market is going to rebound in northern California. There's pretty strong underlying demand we believe. Traffic in the last couple weeks has picked up but we'll be able to give you a lot more color by the end of this quarter versus today.

Great and how about Florida? I think you guys have been holding back your sales up till so far and can you kind of give us an update there? Are you guys going to have receding homes from your acquisitions for sales now?

Yes. If you look at both Orlando and you look at the Fort Myers Naples area where we're offering we had had some communities that were between phases and some just opening. We are now in the process of getting them open and we feel pretty good about our positions in Orlando. The market there isn't as strong as what it was last year but it's still very good. The lot supply is very tight. There's only a twelve-month lot supply. Equilibrium is only twenty-four months so there's still a very limited lot supply and demand is expected to be stronger this year. Fort Myers Naples we are really only open in one community with four product lines. We are in the process of just releasing on a pre-sale basis in our first community in Naples and our pre-sales there have been very strong so overall everything looks good.

Okay great, I'll let others ask. Thanks.

Margaret Whelan with UBS.

Actually it's Dave Goldberg on for Margaret. Nice quarter. I was wondering if you could talk about the SG&A line this year, this quarter? It was up year-over-year and I guess maybe what caused that and what you're thinking kind of moving into 2006?

Larry, you want to take that?

Sure. You know it wasn't up that much if you look at SG&A as a percent of revenue in the fourth quarter it went up from about 9% last year's fourth quarter to up almost 9.2%.

Right.

And I wouldn't read a whole lot into that. You know obviously we are growing and we need to add some support and supervision to manage that growth and two-tenths of a percent is not a huge number and actually if you look at the year-to-date numbers it's actually less. We were running year-to-date at 9.6% last year and it's 9.5% this year so full year we're actually down and for the fourth quarter we are down from the full year so I think we're still pretty much in line there and going forward that that's a pretty good expectation.

Okay and if I could get one follow-up question, the other income line this quarter was obviously higher. Is that mostly management fees, earnings from JVs, that kind of combination and again, how can we kind of think about that as we move forward?

Well most of that for the full year of the 25.8 million, about 18 million of that is from joint ventures and of that 18 million about half is from mortgage joint ventures and about half is from joint ventures where they had some small land sales so that number is going to continue to be bigger than what it has been in the past but I wouldn't expect that number to get up much over 1% going forward. Of course, to the extent you have a land sell in a joint venture that's very unpredictable so I really can't comment on that piece of it but I think staying in that 0.9% to 1% range going forward is a good number.

Stephen East with SIG.

I guess a couple quick questions; one, you talked about the cancellation rates in northern California but what are you all seeing across the entire Company on your cancellation rates?

That number typically has been, the last few quarters, has been running around 20% or so. It's a little bit seasonal because you in the fourth quarter wind up having some of the sales you took during the strong spring selling season can in the fourth quarter when sales are seasonally low so it causes that ratio to spike up 2 or 3 percentage points above that 20% range but in the fourth quarter because of our spike that we saw in California, that number was closer to the kind of high 20% range in the fourth quarter of this year so it was a little bit higher than the seasonal number and we do expect that as California kind of settles back out and we kind of get through the reassessment of the market conditions there we expect to see that cancellation rate settle back down to where it was.

Okay and then, John, in Texas we just looked at product apples to apples. What type of pricing appreciation are you getting in that market?

You know you've really got to even break it down between the four cities here and if you look at it and we're seeing the homes over 300,000 in Dallas doing much better now than they did a year ago so we're seeing a little bit of pricing power in that part of the business, the same thing I would say down in Austin. The more expensive homes or luxury product that we're just introducing and we go by the brand of Monterey homes down there. We're just seeing some strong margins on that product but I would say that overall as you look at the margins Texas feels real good right now. We've got a good mix of product. We've got well located communities and when you take the hundred plus communities we've got spread over the four cities we're very excited to have the entry level to move up, the luxury production, a little bit attached spread to really feel good about our position and our lots and our product and how we can compete so obviously the margins are making Texas not as great as where they have historically been out west but still very healthy and above the 10% that we've always targeted to get so it's a good market for us.

Okay and then just one last question, you all talked a little bit about your gross margin moderating through the year. I guess what do you have in your backlog right now? How does that compare to what you just reported and sort of your expectations moving throughout the year?

Well our expectations for the first quarter, which is pretty indicative of all the backlog closing in our guidance looking at-- I'm going to give a pre-tax margin because the gross margin number kind of jumps around from builder to builder depending upon what goes in gross or SG&A. Our guidance is predicated on about a 13.5% pre-tax margin and that's up from the first quarter of '05, which was about 12.7% but obviously it's well below the fourth quarter number because you have that seasonally high closing rate which because of success drives the margin up in the fourth quarter so we are generally forecasting it to be up over the first quarter of '05 at that level and that's pretty indicative of what we have in backlog. For the full year the guidance suggests a 13.8% margins for the full year so we are being a bit conservative there based upon what we achieved last year but we feel that that's prudent considering particularly what we've seen in northern California.

Okay thank you. Congratulations on a nice quarter.

Joel Locker with Carlin Financial.

Very solid quarter. I thought it was one of the best of any of those reported so far actually but I was just kind of was curious about your tax rate. It was up to 40.1% versus 37.5 at the end of the third quarter or for the third quarter and up almost 180 basis points year-over-year and I was kind of wondering what was going on there?

Yes, Joel, we spend a lot of time kind of truing up some of our tax accruals at the end of the year. Also we had a lot of purchase accounting true ups so there was a number of things that caused that to go up in the fourth quarter. I don't think that's indicative of what you'll see going forward into '06 so if I were modeling this I'd probably look at what we've traditionally been at, kind of that 38.5% range.

38 because it dipped down to 37.5. There were some tax laws changes last quarter and but you still think it's going to be 38.5 for modeling?

Well, I would use that. It could be a bit lower but you know if you do use something a bit more conservative, that's really up to you.

Right and I just was wondering with the gross margins just overall, are they as high in Arizona now as they are in California?

They're pretty close.

Pretty close, there was a big gap like two years ago wasn't there?

Yes, that gap has shrunk considerably. The gross margins in California and Arizona and Florida are pretty close to each other now.

And just I guess one housekeeping with the 124 million on the goodwill on the balance sheet at the end of the third quarter is that similar projected at the end of the fourth quarter when the 10-Q comes out?

Yes, it's going to go up a little bit but not a whole lot.

Right. All right, thanks a lot.

Dan Oppenheim with Banc of America Securities.

I was wondering if you could talk about your expectations for orders in 2006. You talked about 20% community growth. I'm curious as to what you're seeing for orders?

Well, we've said our revenue is going to be 3.8 to 3.9. We do believe that our orders are going to be above that. We don't-- we still will have a lot better color once we get further into the spring selling season but as we see here today we think orders will be greater than revenues.

Okay and then in terms of the community growth reason we've seen that the stronger order growth in Texas recently. How is the community growth coming by reason where we've continued to see sort of the more strength in Texas both in terms of the absorption but also community count or is the community count relatively even.

Larry, you want to comment on that?

Sure. Well, obviously on our smaller divisions that are more newer like Denver, Reno, southern California a larger percentage on their base is coming from those but looking beyond that I think we're generally planning to continue to grow subdivisions in all of our states pretty evenly. You know I think that the diversification of having good-- of now 14-15 divisions in six states is good for us and California is coming back and if we keep growing in each of our states it will make us less dependent on any one state so I don't see us favoring one state over another.

And just a final question, I was wondering if you can just add a little commentary on the Phoenix market where in terms of just pace of sales that you're seeing and any concerns about the higher inventory level of homes for sale in that market?

The Phoenix market continues to be real good. It's very strong. We don't have lines or waiting lists like we had six months ago but we've got good demand. The investors are gone from the market so the demand is real home buyers that want to have homes to live in and we don't have really any specific inventory to speak of, you know spec homes sitting around waiting for buyers. We're pretty much 100% build to order in Phoenix.

Yes, just over all, Steve, our spec ratio of specs to units under construction has remained very stable. At the end of the quarter it's about 11% and we've maintained that 11 to 12-- that 10 to 12% range over the last several quarters and our completed specs as a percent of it are only 3% and that's right in line with what we've had over the last several quarters so we aren't really seeing any increase in spec inventory at all.

Traffic has been very strong in Phoenix in the first half of this year.

[Charles McQueen] with [Norman Filter Company].

I just have a question about the inventory of backlog. The backlog has [bulked] up tremendously over the last couple years and is there some hope we might monetize that at some time in the near future or--?

We're doing the best we can, Charles. We've-- you know sales have outpaced everybody's ability to get houses build but we think that's going to change to some degree this year and we're going to be able to catch up a little bit as the capacity of all of our contractors and vendors catches up to our sales activity so we think the backlog is going to come more into line with normal conversion rates as we go into the second half of the year.

Let me add to that the one thing that we've done and we watch very closely is we are not selling homes that we can't start within a reasonable period of time. I know some other builders have sold homes and can't start them for a year. We watch it very closely that we've looked at what our production capabilities are and matched that to what we want to sell so we're very comfortable that we don't have exposure to homes we've sold that we can't start for a long time and have the vulnerability of cost increases on houses that we will have trouble starting in the near future.

Your next question is a follow-up from Alex Baron with JMP Securities.

I wanted to ask a little bit more about your share buyback and sort of your thoughts about that going forward.

Larry?

Well we have said this for many quarters is that we're opportunistic purchasers and you saw us purchase some when the stock price was at historic lows in the fourth quarter and I think the expectation is that when we're trading at historic lows we would be buyers of the stock. Other than that I'm not going to comment on how much but we will no doubt be out buying some shares.

Larry, we didn't disclose what we bought in the quarter?

Yes we did. We bought 231,000 shares in the fourth quarter at about 62.5 per share.

And to reiterate we had how much left, Larry, 30-some million of that?

We have a 35 million of the 50 million approval left but the Board can always at any time increase that so I want it-- you know, I don't want to let that 50 million number or 35 million number stick in everybody's mind too hard.

Okay good and I wanted to ask you about you mentioned in the Press Release you guys are going to start focusing a little bit more on attached product. Can you give us-- well, first of all an idea of how much you guys build as a percent of your units today and where you see that going and in what markets?

I think we're building today I mean a very, very nominal percentage of our units attached, maybe 1% or 2% but we have attached communities underway in California, some in fill projects in the Oakland area. We have some in Phoenix and in Scottsdale. We have one or two in Las Vegas. We have attached communities in Texas and underway in Dallas that we're doing very well with and we have attached communities that are going to be under construction this year in Florida so we don't expect it to be a large percentage of our total. I'd say it's going to be less than 5% but it is a growing part of our business.

Our Colonial acquisition in Fort Myers, their mix has been about 45/6-- or 40/60 or 50/50 of attached detached so that's the one division that because of the nature of the that market has been a much higher percentage than the rest of the Company.

Okay, how about on your active adult series where-- what kind of growth are you expecting in '06 in communities or however you view it?

We're not projecting a lot of growth-- we have three active adult communities in Arizona. We're not projecting a lot of growth in the revenue side or in the unit side but we think it's going to have a bigger contribution to us from the earnings side and we're working on several opportunities in other western states to continue to expand our active adult brand and expect to see more from that in the quarters to come.

[Timothy Jones] with [Wasserman & Associates].

A couple questions, first of all just quickly on Arizona a lot of the builders have said that it's become more competitive you know and obviously you've said the speculators have left the market, which we both agree is a positive thing. Are you-- what on the ability to raise prices how is it going there in that market?

I don't think it's any more competitive today than it was last year or the year before. I think we have all the same big public builders and big private builders that are in the market so if anything the market may have consolidated a little bit more. We are continuing to raise prices although at a much smaller clip, more in line with 2% to 5% per year versus the 10% to 20% clip we were at last year.

2 to 5 versus 10 to 20, okay.

Right.

Which everybody respects. Secondly, if I own an apartment in Naples and buy a home there too I happened to go to my real estate financing person and he just bought one of your homes up in Fort Myers and I think he paid over $1 million for a multi-family unit. Is that-- do you go that high?

No. We do go up to that in our Moody River where it's on a canal and you can have access out to the ocean but that would be a single-family home.

I just saw the brochure real quickly and it was a single family then right?

It could be a single family with once again has canal access out to the waterways. Yes.

And since I live in Naples tell me where your new project is in Naples.

It's Copper Cove. It's kind of south down by Fiddler's Creek if you know where that area is.

Yes.

Yes, right next to there.

Right near to the Fiddler's Creek?

Yes.

And what are your price ranges in that project?

Well we're going to have a multi-family product and we're going to have single family and our homes are going to start-- oh, our single families really in the 5's and up and our multi-family is a little bit less than that.

And Fiddler's Creek is probably above you in starting isn't it?

Our plan is we're going to have a very nice community with a lot of amenities and our price is going to be same location as theirs but a much better value.

Paul thinks that that's one of the most successful developments they've ever done so I talk.

Thank you.

Stephen Kim with Citigroup.

Hi. This is [Jon Ara] for Stephen Kim. I had a question about the gross margins. Could you tell me what that was excluding purchase accounting from Greater Homes this quarter and also if you think that gross margin is sustainable going forward?

That's a good question. You know I don't have that number right off the top of my head but there was a significant amount of purchase accounting in Greater Homes in the fourth quarter that significantly lowered that margin but I don't have the specific number. I didn't prepare for that question. Sorry.

Okay great, if you can get back to me on that that would be great and also if you could comment on the quarterly distribution of the gross margin over the next four quarters? What can we expect in the first half versus the back half?

Well, our guidance being that our first quarter we're projecting a pre-tax margin of about 13.5% and it's going up slightly for the full year. We're generally projecting a pretty flat margin trajectory so again, that's--

I think for the year we're projecting about what 100 - 150 basis points less in margin than last year, Larry?

And this is--

Yes, for the full year of '05 you were at about net pre-tax margin we're about at 13.9% and we're at 13.8 for the full year of '06.

But for the fourth quarter we were at--

16.4. That's the number that's dropping because we just don't think the fourth quarter is sustainable.

And in terms of the average closing price this quarter is 324. What can we expect on that going forward?

Repeat the question.

Average closing prices, what can we expect?

ASP.

Average closing prices you know they're going to continue to move up somewhat but not nearly at the pace. We haven't given that number out so I would kind of go off of the guidance that don't be expecting the 10 to 20%. Be expecting something less than that.

Okay so more like the 2 or the 3% or higher than that?

2 to 5%.

2 to 5, okay. And last question could you comment on the Tucson market? I know you talked about the Phoenix market but how's the Tucson market holding up?

Tucson market is still good. It's much like the Phoenix market. I think my comments that I gave earlier could apply directly to that market as well. A lot of it has to do with, as in any market, with the timing of communities that are opening. Some communities are selling out and some communities are opening up and we had a little bit of that situation in the last quarter but we do have some new communities opening up this quarter that we think are going to bolster our activity down there and the market overall in general the traffic is still pretty good.

Timothy Jones with Wasserman Associates.

Question on your average price, you said you were going to double your deliveries in Florida and the sales price of 444,000 for the first quarter is 100,000 than the rest of your Company. Couldn't that just skew the average price up more than what you're saying?

Well certainly there are mix issues that can have an impact. We're talking about kind of comparable same, same house.

Okay so the average price actually for tomorrow the Company could be above that but the per house is in that range.

Exactly.

And then you also as you're going to show the increase in Florida we're going to have that same unit increase in Texas.

Okay you're right. You're right. I forgot about that. Thank you.

And at this time there are no further questions.

Thank you for joining us today. We look forward to reviewing our first quarter 2006 results in April. Thank you very much.

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