Meritage Homes Corp (MTH) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Meritage Homes third quarter 2011 conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. At this time I would like to turn the conference over to Brent Anderson. Please go ahead, sir.

Thank you, Laura. Good morning, everyone. I would like to welcome you to the Meritage Homes third quarter 2011 earnings call and webcast. Our quarter ended on September 30 and we issued a press release with our results for the quarter before the market opened today. If you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at investors.meritagehomes.com or by selecting the Investors link at top of our home page.

Turn to slide two of our presentation. Our statements during the call and the accompanying materials contain projections and forward-looking statements which are the current opinions of Management and subject to change. We undertake no obligation to update these projections or opinions. Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding these risk factors, please see our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2010 annual report on Form 10-K and subsequent quarterly reports on Forms 10-Q.

Today's presentation also includes certain non-GAAP financial measures as defined by the SEC .To comply with SEC's rules, we have provided a reconciliation of these non-GAAP measures in our earnings press release and at the end of our presentation slides. With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay, our Executive Vice-President and CFO. We expect the call to run about an hour this morning and then a replay of the call should be available on our website within an hour or so after we conclude the call. It will remain active for 30 days.

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

Thank you, Brent. I would like to welcome everyone to our call today. I will begin by reviewing some highlights of the third quarter and turn it over to Larry for review of our financial results.

Let's begin on slide four. The most significant highlights of our third quarter were our sales results. We achieved 28% year-over-year growth in sales and 18% growth in backlog units. Our average sales price in orders increased 4%, resulting in 34% and 19% growth in order value and backlog value respectively. Sales velocity improved 30% overall and was up in nearly all of our markets. Cancellations remain low at 17% of gross units sold, well below our historical mid 20s rate and 24% last year.

Traffic volumes were consistent with the second quarter, and our conversion rate remained fairly constant, despite continued fears and uncertainty related to the financial markets and the economy that dominated the headlines over the last several months. I will provide a little more color on these in a minute, but I would first like to commend our team for these achievements. At a time when buyer confidence is low and most buyers feel little sense of urgency, our people are helping buyers make the decision that it is the right time to buy and successfully demonstrating the extreme value that new Meritage Homes offers that you won't find in most homes.

Turning to slide five. We achieved sales orders gains in every state except Nevada. Florida is up 116% year-over-year, with 130% increase in order value. Colorado was up 105%, with 112% increase in order value. California was up 41%, with a 39% increase in order value. Arizona was up 21%, with a 34% increase in order value. And Texas was up 4% in units, and order value was equal to 2010. We had 17% fewer communities open in Texas, but made it up with 25% more sales per community.

We sold an average of 6.2 homes per community for the quarter compared to 4.7 in the third quarter of 2010 with some other notable improvements. Florida sold an average 11.2 homes per community in the third quarter, more than double last year's sales base of 5.8. Colorado sold 9.4 per community, up from 5.2 last year. And our sales base also improved in Arizona and Nevada while California slipped from 6.9 last year to 6.1 this year.

The greater increases in order values compared to unit sales were due to increases in our average sales price this quarter. In fact, our company average sales price on the third quarter 2011 orders was the highest it has been in the last four years. A large number of our communities today are located in A and B rated submarkets that command higher prices.

Turn to slide six. We reported a net loss of $3.2 million for the third quarter of 2011 compared to net income of $1.2 million for the third quarter of last year. The $4.4 million net change from 2010 to 2011 was driven by a 7% decline in home closing revenue that resulted in $4.5 million less gross margin from home closings. While total home closings were relatively flat at 840 into the third quarter compared to 848 last year, our total revenues and margins were lower primarily due to a geographic mix shift in the third quarter of 2011 compared to the third quarter of 2010. We had a $15 million decline in closing revenues from California caused by reduced prices and fewer closings. Decline was only partially offset by higher closings in Texas, Colorado and Florida where average prices are typically lower than California's. Our average closing prices were down 6% year-over-year.

Our average home closing gross margin for the third quarter was 17.5% in 2011 and 18.2% in 2010, reflecting the impact of softer prices due to competitive conditions in most markets. Excluding impairments, home closing gross margins were 17.9% in 2011 and 18.5% in 2010. We still believe that margins should trend upward over time.

Our total selling, general and administrative expenses were up less than $1 million year-over-year and increased slightly as a percentage of total revenue due to additional marketing expenses, the timing of certain expenses between quarters and negative leverage of overhead. In light of lower revenues, we are currently reviewing our cost structure with the goal of reducing overhead by about $3 million annually. We are optimizing our marketing effort to improve sales which includes the addition of a new national contact center. The initial statistics show that our marketing is driving significant additional traffic to our website and generating more leads. By closely managing and attracting those leads into the call center, we are converting a higher percentage of those leads into appointments and closings. We also ran a national marketing campaign in August and September that we believe helped to generate sales and build our backlog in the third quarter and will result in additional sales and closings in the fourth quarter of this year and or in early 2012.

Now, I will turn it over to Larry to discuss additional financial results for the quarter. Larry?

Thanks, Steve. I'll pick it up on slide seven.

We opened 18 new communities in the third quarter and our total actively selling communities number was flat year-over-year at 149 this September 30, and 150 a year ago. As a result of rebalancing our portfolio of assets, we increased the number of communities in California, Arizona, Colorado, and Florida while reducing the total in Texas. Our sales pace indicates we are focusing more on quality than quantity, replacing communities as they sell out with new communities in A and B locations within our markets. We contracted for approximately 1300 new lots during the third quarter, bringing our total to approximately 16,000 lots owned or controlled, which is equivalent to about a five year supply.

We previously announced our entry into the Raleigh-Durham market back in April. We opened our first community there in October, and have already recorded our first sales. We have two more opening this month and on track to add several more communities early next year.

Turning to slide eight. We ended the quarter with approximately $357 million in all forms of cash and investment securities. Our net debt to total capital ratio was 33.4% at September 30, 2011 compared to 27.1% at September 30, 2010, but still well within our comfort zone. The increase in our real estate assets reflects the additional lot purchases we made this quarter and an increase in width which accounted for most of the decrease in our total cash and securities balance. We ended the quarter with 515 total specs, less than four per community, of which 225 were completed. That's down slightly from last year, but it's still important to maintain a reasonable number of specs to meet demand for quick move-in homes. We generated approximately 40% of our sales in the quarter from specs versus new homes sorted under contract, and expect that will remain in that area for the foreseeable future.

I will now turn it back over to Steve.

Thank you, Larry.

Meritage has established its position as the new standard setter for energy-efficient homes in a high production environment. Turn to slide nine and you will see a picture of one of our first Net Zero homes in Phoenix. We are building extreme energy efficient homes in communities that are in great locations and selling them in prices that are very comparable to homes that are older or not energy efficient. That is helping us to compete successfully with resale homes, foreclosures and other new homes. We are now at a point where a large number of homeowners lived in their new Meritage Homes extreme energy efficient homes throughout the hot summer months and we are gathering customer testimonials that will speak to the energy savings that they have experienced based on their actual energy bills from this past summer. We intend to incorporate these testimonials in our marketing campaigns in the very near future.

Turning to slide ten, we were pleased with our sales results in the quarter and encouraged that we maintain healthy traffic levels despite the recent macroeconomic concerns. Although our fourth quarter 2010 orders were higher than the third quarter last year, we expect more seasonality this year, which would indicate that the fourth quarter should be lower than the third quarter. Even so, we believe we will show positive year-over-year sales next quarter with our energy efficient homes in new community locations.

We were disappointed that we did not remain above break even for the quarter. It has been a challenge to maintain or improve profitability when the housing market is still bumping along the bottom and we are focused on improving our top line while managing our costs and overhead. We remain confident in the long-term demographic support in the home building industry and believe it is just a matter of time before the market improves based on several factors.

The inventory of new homes for sale is extremely low and the month's supply is nearly normal at very low sales volumes. Investors are buying foreclosures, listings are declining, and the months supply of existing homes has come down dramatically in almost all of our markets. In single family home starts, sales appear to have bottomed and year-over-year sales comp positive recently. While economic conditions have deferred household formations in recent years, we believe this is temporary and indicates potential pent up demand. Lastly, our prices have stabilized in most communities while we have been able to raise prices in some of our most desirable communities. Based on the progress we have made, and the results we have seen to date with our strategic initiatives, we believe Meritage is among the best positioned home builders to benefit when the market improves.

Thank you for your attention today and we will now open it up for your questions. The operator will remind you of the instructions. Operator?

(Operator Instructions). Our first question comes from Josh Levin of Citi. Go ahead, please.

Hi, good morning, everybody.

Hi, Josh.

I want to ask about the gross margin trajectory. I think you said it should go up. How do we think about it going forward? Why will it go up going forward? What would be the drivers of that? And when should we see that?

Well, I think there is several reasons why it will go up. Number one, the continual rollout of new communities at higher margins than our older communities we expect over time will help us improve our gross margins. In addition, we see that in some locations we are starting to get some pricing power, although very modest. And we should be able to slightly reduce incentives, which will have an increase on impact on the margins. And just a general improvement in the market I think that we are starting to see you know will also increase the margins.

Okay. And what is the incremental or differential gross margin now between your new and your old communities?

About 300 to 400 basis points.

Thank you very much.

Probably 350 to 400 I should say.

Thank you very much.

Okay.

Our next question is from Michael Rehaut of JPMorgan .

Thanks, good morning. The first question -- again just to circle back to the gross margins, more specifically he just wanted to make sure I heard it right. You know, lower gross margins, were they down sequentially because of the geographic mix but down year-over-year because of the softer pricing? Is that how we should think about that?

Yes, I think that is the way I would look at it. Larry, you agree?

I think it is mainly softer pricing that has happened over a period of a few quarters.

Right. But the more recent 2Q to 3Q, that --

I think that was mix. I mean it was just --

Right.

It was very small.

Closings.

Very small decline, you know, from second quarter to third quarter. And, you know, we are kind of keeping our foot on the gas to maintain what we believe is an appropriate level of absorption of sales and we sacrificed price in some communities to achieve a reasonable level of sales and that showed up to some degree. And, you know, also the mix of our closings. So I think it as combination of both.

As we said before in other calls, our California market hasn't been performing to the level it was a few quarters ago. And because of that, you know, our margins in California are lower, too.

All right. Appreciate that.

The second question on SG&A. Steve, you mentioned that you were looking at your goal of $3 million less in overhead, when does that -- when would that kick in? And are you looking at -- given that that is I believe than less than 0.5% of revenue, are you looking at anything else a little more dramatic? Or do you feel outside of this $3 million that you want to keep this infrastructure in place just given the different initiatives and new communities that you are about pursuing?

Yes, I don't think we are looking to make any dramatic cuts that the point because we have been managing our overhead pretty aggressively throughout the entire downturn. But I think there are some work we can do around the edges to bring our overhead down a little bit more which is what the $3 million is. And I think we can be more aggressive about managing our pricing model, whether it is incentives or the base prices that set on our homes. And we are going to do that going into 2012. So I mean we are not going to see the $3 million next quarter, but throughout next year we will see that. And frankly I hope to do better than that.

One last one, if I could.

Sure.

The orders, you know, you mentioned down sequentially but up year-over-year. That can result in a pretty wide range in terms of potential order growth. Any sense in terms of at least your year-over-year are sales pace type of improvement that might allow us to sharpen the pencil a little bit of potential order growth for the fourth quarter?

It is too hard to tell really at this point. We are still early in the fourth quarter, you know. October is kind of proceeding as we expected it to so far. But clearly the next few months aren't going to be as strong as the last few, because of the seasonality.

Okay. Thank you.

Thank you.

The next question is from Nishu Sood of Deutsche Bank.

Hey you guys. This is Rob Hansen on for Nishu.

Just looking at your SG&A this quarter I imagine there is some additional amount from adding the Raleigh market into there. I wanted to see how much that was and in it general how much it costs to add a new market? And how long before you think these costs would be fully absorbed?

Well, I mean it wasn't that much. It was a few hundred thousand because we don't have a lot of people on the ground there yet. But, you know, as I would say I think we mentioned in our remarks that we opened our first community there and sales are very good out of the chute. We are very happy and we have got a couple more communities opening up here in the next few weeks, and then several more next year. So we don't really expect the market to be a big drag on our SG&A.

Okay. And then I just wanted to see if you could talk a little bit more about your recent land purchases. It seems like you have been going up a little bit more in determine terms of the development chain. Is this going to be a short-term or longer term part of your strategy and generally what is your rationale into land development? And also, how long does it take to turn these assets into revenue?

There is just not a lot of good quality finished lots on the ground in a lot of our markets that we can buy at favorable pricing. So we think the better opportunities going forward are for lots that we have to improve, fully titled lots but lots that we will have to develop. So that is where our focus has been. And in those -- and those take longer and those can take, you know, nine months to a year we can get them on the ground and have models up and producing revenues. So we'll have to deal with that. But that is the direction things are going.

Just to get a little more color during the quarter we spent right at $50 million to buy those 1300 lots and then another $12 million on development. The development number is creeping up a little bits a we do buy more lots but the lot purchase number is going down because we are buying raw lots instead of finished lots.

All right, thanks, guys.

Thank you.

The next question is from David Goldberg of UBS.

Good morning, everybody.

Good morning.

My first question, I wanted to get back on the sales pace a little bit. It was a pretty impressive sales pace you guys achieve. I'm just wondering about how you are thinking about where your pricing relative to some of your competition is maybe not -- who aren't able to necessarily achieve the same sales pace and if you are kind of inching prices up as you are going here which would imply to me there is better margins ahead as we look forward. Because 11.2 sales per community that is not too far from a fairly normal rate, right? So do you think about price increases in those communities? Do you think that is a good target rate for you in some of these areas? And maybe talk about the decision process a little bit more.

I can tell you in Florida particularly and in Colorado we made some really good land buys in really fabulous locations that have commanded a lot of sales activity. And we have been pushing prices there to the -- certainly to the degree we can and still maintain a really compelling value. But that is offset by communities in California that we have opened up that haven't achieved the prices that we anticipated. And that is why the margins haven't expanded to the degree that we expected. But believe me, if we can raise prices and maintain velocity, you know, we are doing that.

Got it. And then just a follow-up. I thought we could talk a little bit about the land deals throughout this quarter and maybe generally on land. I know you mentioned there is more development work you put in, there is not as much lot on the ground in the A locations. Has anybody talked about the community size of these deals kind of typically? Just generally what you are looking at in terms of overall community size and who you are bidding against in the transactions?

I mean we are typically buying communities that are between 50 and 100 lots. Sometimes it is a little less and sometimes a little but more. Generally it is in that range and we are competing against most of the other public homebuilders and a few regionals -- a few private regionals that are still in the market. So it hasn't really changed that much.

It is not niche, not like you are going for something smaller, then maybe it's differently located that others wouldn't be as interested in?

No, not necessarily. I mean there may be some publics that won't buy 30 or 40 lot deals which we would in some cases. But generally speaking almost all of the guys that are building product in our price range are looking at these deals. You know, it is different in every market. You know, some publics are more aggressive in other markets than we are and vice versa so.

Fair enough. Thank you.

Our next question is from Dan Oppenheim of Credit Suisse.

Thanks very much. I was wondering if you could talk a little bit about -- your comments talked about the pressure on the home prices but also expectations for the higher margins. Are you finding that the marketing activities that you are doing have been successful enough that you have been able to hold pricing as of late so we won't see too much more pressure on margin as we look to the next few quarters here?

I do think pricing in most areas has been stabilized and we have had some very modest success raising prices, or I should say reducing incentives, in some markets. So I'm hoping that the tight supply of homes for sale that are listed on MLS, particularly in the resale market, will have an impact on our pricing in 2012 and allow us to get a little higher pricing, net pricing and higher margins.

A follow-up, just wondering about how you are seeing the Texas market -- it is clearly a significant part of the business. How are you seeing the trends there at this point?

Similar. Similar to everywhere else. I would say that it is trending positive.

Okay. Thanks very much.

It is an important point to point out that even though our sales in Texas were only up 4%, our velocity was up 25%, and we just shrunk the business a little bit and got rid of more marginal communities, sold out of those and are down to the core group of communities that are stronger that are performing better as well as the overall market stabilizing there. So that repositioning was a purposeful effort on our part to try to diversify our sales out amongst all of our markets better.

Great, thanks for the color.

The next question from Ivy Zellman from Zellman and Associates.

Good morning, guys. Thanks for taking my questions.

In terms of the expenses on the corporate and you were up $1.5 million sequentially and yet you were pretty flat versus the last quarter on revenues. Can you explain the sequential increase in corporate expense? And then I have a follow-up, please.

We just spent a little bit more on advertising and marketing in the quarter to try to push our sales into the fourth quarter and into next year. And I don't expect that to happen again this quarter. But that is a big chunk of why those expenses went up.

Okay. And then can you characterize then the demand from a normal seasonal perspective is weaker than you'd like it to be to justify those types of incentives? And is it a result of the higher loan limits going back into effect?

I wouldn't say that. I think we were very sensitive to making sure that we had a solid backlog at the end of the year. We had a big miss in the first quarter of this year and we don't want repeat that and we want to make sure our backlog is strong. So we have been working very hard to drive sales, and we had a lot of new communities that opened also and that drives up some of our marketing and advertising expenses as well. But again, I don't see it as a continuing trend.

And would you say the [inaudible] conforming loan limit impact -- has it been relatively benign? Have you felt in Phoenix or some of other areas that might have had a more dramatic change as a result of the higher loan limits going down?

We have not felt it really because we have very few communities that are affected by those loan limits so I can't say that we have been impacted by it at all.

Right. And then lastly, Steve, you talked with me and some of our clients back in June at the Pacific Coast Builders Conference about the possibility of looking at single family rental. Is that something you are still considering, is that something you are interested in doing given the exuberant level of demand for rental product today or is it something you are not as interested in as you might have thought?

We studied it carefully and put a lot of energy into looking at it and we concluded that it doesn't fit within our business model. And there is a variety of reasons why we couldn't make it work. So we are not actively pursuing it at this time.

Great. Well, thanks for your responses. I appreciate it.

Thank you, Ivy.

The next question from Jade Rahmani of KBW.

Yes. Following up on the conforming loan limits -- just on the mortgage market in general can you give some insight into availability, cancellation trends and your buyer profile? For example, are the bulk of cancellations still related to loan rejections or qualification issues and how have you seen this trend? And also have any of your relationships with originating banks changed? Are some more active in the new home space than others? Thanks, we would appreciate any color on that.

Well, there is a lot in there. Number one, we haven't seen a meaningful difference in mortgage trends this quarter versus the quarter or two before. It has been about the same. Relationships with banks have been about the same. Mortgages are tight for a lot of buyers. If you don't fit into the automated underwriting computer model at FHA or Fannie Mae or Freddie Mac, then it is very tight or very difficult to get a loan underwritten. It has been more challenging on the entry level communities than it has been on the moveup communities. We have had to have some appraisal issues on 15% to 20% of our sales that we have to go back and work through with the appraisals that does result in a few cancellations. But I wouldn't say anything meaningful has changed in the mortgage environment this quarter versus last quarter.

Okay, thanks for that. Any change with respect to the mix of FHA sales that that you are seeing?

No.

Can you say where that is running?

I think we are about, correct me if I'm wrong, Larry, about 40% FHA.

Actually, this last quarter it was 34%. VA was 16%.

Thanks a lot.

And now you we have a question from Alex Barron of Housing Research Center.

Thanks. Hey, Steve. Could you talk a little about your green homes? How are you seeing the performance in the sales of those communities? Are they higher than the average or same as the average and also the margins you are getting on those similar or higher than the average?

I can't remember the exact percentage, but I want to say more than 70% of our communities now have homes that have spray foam insulation as standard which is sort of the heart of our green strategy. And in those communities we are able to compensate for the additional cost by slightly reducing the incentives. And I think our sales per community is evidence that our green strategy is working. It is hard to compare green communities with non-green communities because there is a lot of other variable factors, like location, pricing, market, et cetera. Otherwise I feel that the strategy is producing results. We expect those results to get even better as we are able to really come out with the actual utility bills and to really deliver third-party testimonials from our customers and produce the hard evidence that people are looking for and interested in. So that is going to be coming later this year and into next year and we are hoping to get even an additional boost from those communities.

Alex, if I might add, the foam insulation homes are 40% more efficient approximately than a code built home and 50% more efficient than a used home. These are homes that are substantial savings on energy, they essentially cuts the energy use and in half.

I thought your models seemed pretty impressive when I was in Phoenix a few months ago.

The other question I had had to do with SG&A. Was there anything that was one time in nature in either the G&A or the commissions part or do you expect that to come back down to what it was running at in the first two quarters?

I don't believe there was anything one time other than the sort of boost that we -- the extra money that we consciously put into our advertising and marketing program in the quarter. But beyond that, Larry, was there anything else?

Really one thing about North Carolina, we spent in overhead about $300,000 there this last quarter, but now we are starting to get sales and in another quarter we will be getting closings. That overhead as been a drag for the last two or three quarters. We will get revenue from it and that will provide a benefit. So that you need to take into account at hooking at overhead. The cost cutting measures that we talked about earlier -- a lot of those measures are occurring this quarter. So they won't be in the fourth quarter. But most of them should be place and a benefiting the first quarter so we would expect to see some improvement through the next two quarters in overhead.

All right. Thanks, guys.

Thank you.

The next question comes from Stephen Kim of Barclays Capital.

Thanks very much, guys. I guess just one house keeping item at first. What was your interest incurred this quarter, Larry?

Interest incurred runs right around $11 million a quarter.

Yes, it is about $10.8 million or something, okay.

Second question. Steve, I was curious as to whether you could comment on your longer term strategy for the company once you start to see demand picking up, maybe that's a year, maybe that's a month, maybe it's two years. Who knows? Your company is sort of unique in the sense that you are not operating sort of a national footprint or even a superregional footprint, if you will. And so therefore you are one of the builders that can be more opportunistic in your growth. I was curious if you could talk about where your interest lies -- you talked about doing an analysis of the rental market and so forth. I was curious, you probably have looked at maybe making a larger type acquisition or series of acquisitions at some point in the cycle. Can you talk about your interest in and what you are doing at your company to prepare to be able to absorb future acquisitions, have that place in your strategy? And what segments of the market -- be it price point, maybe more urban, stuff like that you have been analyzing and are most interested in?

Okay. I mean I don't think we ever said that acquisitions are big part of our strategy going forward. Certainly they are a big part of our history. We made nine acquisitions between 1997 and 2005 but you know, I don't see the landscape for making acquisitions that favorable going forward. You know, a lot of the private builders that we acquired during that period aren't in existence any more. So I don't see that being our primary strategy. Our strategy is very simple to be a merchant home builder, to have a significant market share are to be a top five builder in every market that we are in and most markets we are already there. And to continue to build out our business particularly in the southeast part of the country.

You know, we are in almost every major western market in the United States. There is very few that we are not in and we have chosen not to be this those markets but important ones in the West were in and across the South we are in most of those markets as well so. I do see us as a national builder -- we build coast-to-coast. We don't build in the northeast and the Midwest and we have a small presence in the Southeast but expect to expand that. We announced the entry into Raleigh. I think we have our eye on some other markets in the Southeast. We may talk about it at a later date. But I think our strategy is pretty straightforward and fairly simple as the market continues to recover.

Great. And in terms of your expansion and you said in the Southeast. I assume you are talk geographic and you are going to sort of adhere to sort of the price point range that you have.

You haven't mentioned anything about maybe moving into even the active adult in a more serious manner or urban. I notice most of the builders really haven't talked about that but in light of the current environment I was curious as to whether that is something you had explored, moving into something a little more urban.

We are in the active adult business in Arizona. That business is pretty slow right now Hopefully it will improve as the economy improves and those buyers get more confidence. I don't expect that we will be expanding that business. And a lot of us builders got into some urban housing in the early part of the last decade and for the most part I think most of us didn't do too well in it. I think there is, you know, a different skillset there in a lot of markets and it is very much a boutique business and I don't think there is a lot of scale to it. So you know, not that we might not do an urban project here or there, you know, I don't see it as a big component to our mainstream business model.

Okay. Great. Thanks a lot, Steve.

Okay. Thank you. Operator, I think we have time for one more question and that may wrap it up.

Certainly. We do have another question, and it is from Adam Rudiger from Wells Fargo Securities.

Okay.

Larry kind of answered this question, but I wanted to ask it again regarding Texas and the decline in community count there. Is that a permanent decision? You mentioned diversity -- is that is permanent decision do you think? Or is that more a reflection of right now, where the better underwriting deals are --

No, it is not a permanent decision. I think we had to focus the last year on quality over quantity and we had quite a few communities that were low absorptions there. So we have been more focused on finding better assets there that we can get higher levels of absorption. I think the downturn in Texas came later. Certainly it wasn't as severe as other markets. And you know, I think some of the adjustments to the new market in reality took a little longer there. But I think we are on track now to start growing community count again in Texas, and I expect next year at this time we will have more communities than we have today.

Okay. Thank you. And then my other question is Steve, I recognize it's a hard question but based upon all of the facts and views that you have now just curious as to how you are positioning yourself into thinking about first quarter of next year?

You know, from what perspective?

Are you going, you know, demand look like? Are you expecting a nice rebound? Are you going to grow some spec counts?

Well, you know, as I said before, I'm expecting next year to be better. And I expect every quarter to be better next year. You know, I don't want to stick my neck out too far and give specific projections on orders and things of that nature. But we certainly want to have the inventory available to our customers that we can drive better results in the first quarter of 2012 than we had in 2011 and I think we are setting ourself up to be able to do that. But, you know, beyond that we will just have to wait and see.

Okay. Thanks very much.

Okay. Thank you. That wraps up our formal comments and questions for today's call. We appreciate your participation and look forward to talking to you again next quarter. Thank you.

The conference is now concluded. Thank you for attending it today's presentation. You may now disconnect.