Hovnanian Enterprises Inc (HOV) 2006 Q4 法說會逐字稿

Good morning and thank you for joining us for Hovnanian Enterprises Fiscal 2006 Year-End Earnings Conference Call. By now, you should have received a copy of the earnings press release, however, if anyone is missing a copy and would like, please contact Donna Roberts at 732-383-2200. We will send you a copy of the release and ensure that you are on the Company's distribution list. There will be a replay of today's call. This replay will be available after the completion of the call and run for 12 months. The replay can be accessed by dialing 888-286-8010 with the pass code 65946531. The replay number is 888-286-8010, pass code 65946531.

[OPERATORS INSTRUCTIONS] This conference is being recorded for rebroadcast and all participants are currently in listen-only mode. Management will make some opening remarks about the fourth quarter and year-end results, and then open up the line for questions. The Company will also be Webcasting a slide presentation along with the opening comments for management. The slides are available on the investor's page of the Company's Web site at www.KHOV.com. Those listeners who would like to follow along should log into the Web site at this time.

Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in press release also applies to any comments made during the conference call and to the information in the slide presentation. I would now like to turn over the conference call to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Thanks. Good morning and thank you for participating in today's call to review the results of our fourth quarter and fiscal year-end. Joining me today from the Company are Larry Sorsby, Executive Vice President and CFO; Paul Buchanan, Senior Vice President and Corporate Controller; Kevin Hake, Senior Vice President and Treasurer; Brad O'Connor, Vice President and Associate Corporate Controller; and Jeff O'Keefe, Director of Investor Relations.

For those of you viewing our slides at KHOV.com, please turn to Slide number 1. We reported disappointing results for fiscal '06 despite increases in our deliveries and revenues, we had to cut prices and offer incentives more than we had anticipated, obviously, early in the year.

Revenues grew 15% over fiscal '05 to $6.1 billion, but our home homebuilding gross margins before interest declined 330 basis points from the record high level of 26.4% achieved last year due to the price reductions and incentives. Net earnings for fiscal '06 were $139 million or $2.14 per fully diluted common share after taking into account the affect of the $336 million of land inventory impairment charges and land option deposit write-offs in fiscal '06, including 315 million in the fourth quarter. I'll provide more background and detail on these charges in a moment.

Prior to the affect of the land-related charges, pretax profits for fiscal '06 were $569 million, down from $786 million in pretax earnings on the same basis in fiscal '05 and roughly in line with the pretax earnings of $557 million on a similar basis in '04. These pretax earnings equate to approximately $5.46 of after-tax earnings per fully diluted common share in '06.

Slide 2. Total deliveries excluding unconsolidated joint ventures for the full year increased 10% to 17,940 homes. We also delivered 2,261 homes in our unconsolidated joint ventures bringing our total delivers to more than 20,000 homes.

Slide 3, our contract backlog at October 31,excluding joint ventures was 8,496 homes down 33% from the year earlier. Backlog decreased 28% in dollar value to $2.9 billion. While backlog is down, it does mean that we began fiscal '07 with about 50% of the year in backlog. Of course, we've learned that backlog may not be quite as solid as it used to be. However, we have flushed many of the older contracts through that are the most susceptible to cancellation.

Slide 4. The decline in our backlog is a direct result in the falloff of our contract pace. Our net contracts for the full year excluding unconsolidated joint ventures declined 18% compared to fiscal '05. However, in Slide 5, you see that our net contracts for the fourth quarter were down 36% from the prior year. The decline in our contracts occurred despite an increase in the number of communities open during the year.

As you can see on Slide 6, we ended the year with 427 open selling communities, a 16% increase from the number of open communities at the end of '05. However, we didn't open as many communities as we had projected. We had previously estimated we'd have 440 open selling communities at the year-end, but obviously having walked away from certain land transactions and a variety of other reasons, we ended the year at a slightly smaller number. The increase in communities means that the decline in our pace of net contracts on a per-community basis was an even greater percentage than the decline in aggregate net contracts. Their per-community number is generally a better indication of the falloff in the net sales market wide.

Slide 7 shows that on a per community basis in the fourth quarter, net contracts were down 44% to 7.3 contracts per community compared to 13.1 in last year's fourth quarter. The net pace of contracts is obviously off significantly, and it's also off from the ten-year average of about 10.8 contracts per community over the last 10 years. Keep in mind that these contracts are all reported on a net basis. Gross contracts after cancellations incurred during the same period, cancellations were significantly higher in '06 than the typical pattern in prior years, and once again, negatively impacted our reported net contracts in the fourth quarter.

On Slide 8, you can see that our cancellation rate of 35% in the fourth quarter is up sequentially from the third quarter's 33% cancellation rate and is 10 points higher than the fourth quarter of fiscal '05. Our sales pace of gross contracts has not fallen as significantly as shown on Slide 9. Gross contracts per community were down 36% in the fourth quarter. The spike in can rates exacerbated this 36% falloff in gross sales and led to a more dramatic 44% decline in the net contracts. Traffic at our communities has held up reasonably well, leaving us with some optimism that the contract pace will begin to recover to more normal levels in the not too distant future.

Pricing and margins. The declining pace of our sales in our markets has led to intense competition in many of our specific community locations. In order to maintain a reasonable pace of absorption, we have increased the incentives we are offering for design finishes, upgrades, or mortgage costs. We've reduced some lot location premiums and in some locations, we've even lowered our base sale prices.

Each of these actions reduces our effective sales prices and thus have been negatively impacting our margins. We even see some home buyers coming to the closing table looking for incentives in order to close similar to what we pay be offering elsewhere in the community or that other builders are offering in nearby communities. In addition, the homes where contracts have canceled have typically been resold at lower net prices further declining our margins . As a result of these conditions, our homebuilding gross margin excluding interest for the full year in '06 fell to 23.1% from 26.4 last year.

'07 guidance, Slide 10. We're providing initial guidance for fiscal '07, which is based on our backlog starting this year, the current sales pace in each of our communities and the continuation of the pricing and margins we are currently achieving in each of our communities. On that basis and assuming the U.S. economy remains steady, we are projecting earnings in fiscal '07 in the range of $1.50 to $2 per fully diluted common share. For the first quarter, we expect earnings to be modestly positive with earnings in the range of $0.05 to $0.10 per fully diluted common share. Earnings will be heavily weighted towards the last half of the year, with only minor improvement in earnings in the second quarter, and the balance of the earnings for the year projected to occur in the back half.

In fact, we anticipate that we may earn more than half of our earnings for the year in the final quarter. Can I assure you this is not the result of projecting any improvement in sales or market conditions, it's only the result of timing of deliveries and the mix of our communities. Our projection for consolidated deliveries for the full year is a range of 15,000, and 16 ,500 homes yielding total revenues between $5.2 and $5.9 billion for fiscal '07. We expect between 1,000, and 1,500 additional home deliveries in unconsolidated joint ventures.

For the first quarter, we expecting consolidated deliveries in the range of 3100 to 3300 homes. This outlook is based on the current market conditions. Should the market conditions deteriorate or improve from the current levels, particularly in terms of sales pace or pricing we are able to achieve, we will make appropriate adjustments to our projections as we report our quarterly results. Larry will give a little more detail on our outlook for '07 in his commentary. Land charge-offs and impairments.

Now I'll give you a little more detail on the land-related charges we incurred during the fourth quarter, which totalled $315 million. I'll first clarify for you the methodology that we used to determine the amounts for the two separate categories of these charges. With respect to the impairments, which were $174 million pretax in the fourth quarter, these charges relate to land positions that we already own. They resulted from a standardized analysis in accordance with FAS 144 that is reviewed carefully with our auditors. Let me walk you very quickly through a trigger calculation so you can see the process.

On Slide 11, we have a hypothetical community, that still has 102 homes to sell at a current sales price of $534,000 per home, so this community is still expecting to generate $54.5 million in revenues. As of the day of this analysis, the book value of investment in this location was $18.5 million. We expect the remaining cost to build out, principally, construction, land development, and interest to be $36.3 million and an additional $1.5 million of direct costs to sell, which are primarily commissions. This closely mirrors a gross margin calculation after interest. As you can see in this hypothetical example, when you subtract the book value of the investment and the remaining costs from expected revenues, the result is a negative $1.8 million and therefore this property would trigger an impairment valuation.

The impairment calculation then is essentially the same trigger calculation; however, the amount of the impairment is determined by discounting the projected cash flows at a 15 % rate and comparing the present value with the book value. The resulting impairment is therefore more than the amount shown on the trigger calculation because of the effect of discounting the cash flow. It's important to recognize that the projected sales pace and sales price in each community is an important aspect of this analysis.

For communities that have been -- that have expected remaining lives of two years or less, we apply the most current net-net sales pace and the most current net-net pricing all the way through the end of the community. When a community has an expected remaining life over two years, we apply the most recent pricing and increase absorption to more normalized levels in '09 and beyond.

For this review, we generally use data from the most recent six to ten-week period, which is reflective of the current market conditions. We also do an intensive comparison of all the competing communities in the market and their respective sales pace and pricing over recent weeks. This can be very tricky in the current environment, because our competitors may be changing their pricing very rapidly, and in some cases disguising the incentives that they are offering, so we actively shop the competition to determine the true conditions.

Finally, we consider closing table renegotiated prices so that in some cases, we find this is more indicative of realistic pricing going forward. It is important to recognize that these communities are written down to a value such that we will earn a sub par IRR going forward assuming we hit the sales pace and pricing that we've projected.

In less market conditions improve, the write-down will not get the profitability or the IRR back to the levels that we initially underwrote for the community, which is typically a 30% unlevered IRR return. The second category of land-related charges is option deposit write-off charges, which totalled $141 million pretax in the fourth quarter. These charges resulted from a decision on our part to walk away from a land option contract, or in certain cases, where the first takedown is months into the future, a very likely decision to walk away in the near future based on the current economics of the transaction.

In these case, the amount of our option deposit and any predevelopment costs were written off in accordance with FAS 67. We rigorously reviewed every single option position in our company. In analyzing these option properties, we estimated our IRRs on a go-forward basis, ignoring some costs, if the returns on new dollars invested were not close to our hurdle rates and the sellers would not renegotiate to reasonable levels, we made a difficult but disciplined financial decision to walk away from the land option.

Although it's painful to incur these charges, we believe it is better than proceeding to build out these communities at low returns or even losses over the coming years. We estimate that the $141 million of walkaway charges we took during the fourth quarter resulted in future cash flow savings related to land acquisition alone of $1.4 billion, not to mention the additional development costs. Again, in determining whether or not to walk away from these options, we assumed a projected sales price and pricing in these communities based on the current conditions lasting through the remainder life of the community, or perhaps with some modest improvement if the expected community life extends beyond fiscal 2008.

To give you an example of the pricing environment that we have faced in certain markets and the rapidity of some of the price declines we've experienced, the next slide, Slide 12, shows an actual competitive market analysis graph that we routinely produce and review. The graph plus the sizes and prices of the homes in each competitive community in a given market. In this case, an actual market in southern California. We eliminated the specific names, including the Rs, which we referred to as community X on the graph.

The graph indicates that price reductions -- that the price reductions each of the builders have implemented in this market over the last ten months including all incentives and netting them from the purchase price shown on this graph. This is the type of competitive pricing environment that has led to impairment and option walkaways. The impacts on our communities where we took write-downs or those that we walked away from was that we had to make similar dramatic pricing reductions as shown on this graph.

In this example, we lowered prices cumulatively over the ten-month period, about $90,000 net-net per home on homes with average sales prices of $558,000, which equates to a 16% discount. Luckily, not all of our communities or markets have seen this dramatic of a price reduction. We believe we have used reasonable estimates of our projected pace and pricing in each community going forward. If market conditions remain stable like current levels, we do not expect to incur material land-related charges during fiscal '07 and have not built any such charges into our projections.

However, if market conditions deteriorate further, we remain exposed, obviously, to further price reductions in the market from our competitors and that could lead us to either renegotiating or walking away or impairing other lands. While we don't believe the market is going to turn rapidly, we do think it is near the bottom. Breakdown by geography. If you turn to Slide 13, you'll see a geographic breakdown of our lot option walkaways. While the number of lots was fairly dispersed geographically, the dollar impact was very concentrated in the northeast and California.

In total, we walked away from 26.1% of all the lots we controlled under option contracts. The remaining 74% of our option lots are in communities that remain economically feasible, including a substantial number that would not have been feasible, but were successfully renegotiated over the past six months.

Slide 14 shows a similar geographic breakdown of the impairment charges on land owned. As you can see, the largest concentration here was in the southeast, almost entirely in Florida, and California, primarily in the more expensive southern Coastal area. You'll notice that we incurred only $200,000 of walkaway charges and zero impairments in our southwest segment, which has made up of Arizona and Texas.

Additionally, we took less than $1 million of walkaway costs in North Carolina. As we have been saying for several quarters, the more competitive markets of Texas and North Carolina are actually performing well. We have not shown the amount of charges related to our joint ventures separately, but they totalled only $2.5 million, a small number relative to our investment of joint ventures, which was about $213 million at year end after taking these impairment charges. Larry will comment a little bit more on our joint ventures in a moment.

I'd like to give you some perspective on the process under which these analyses were completed. I was personally involved in the review of each option contract that we considered walking away from and each impairment review for a community that was above a minimum dollar threshold. Larry Sorsby, our CFO was involved, as were our Senior Group, Region, and Division Presidents, along with our Corporate and Divisional Accounting Personnel and Community Level Managers. This was an intensive process involving many hours of effort over many weeks and months, but we were determined to get it right and to be very comfortable with the projections for each of our communities.

We always review each of offer communities in each division in terms of the projected IRR and sales pace, with each of our budget updates which occur three times a year, but in light of the deteriorated market conditions, there was an additional level of intensity in these reviews for communities that were not performing well. Keep in mind these impairments and charge-offs were largely non-cash charges and thus do not significantly impact our cash flow for the quarter or borrowing needs going forward, except that walking away from land options obviously reduces the amount of capital that we were planning to spend on land. We fully absorbed these charges from our '06 profits, yet we were still able to report positive profits for the year and a 9.1% increase in common shareholder's equity for the year, after absorbing these charges. These charges will have a small positive impact on our '07 results, but have a greater impact on '08 and beyond. Land position.

On Slide 15, we show our remaining lot position of -- excuse me, lot option position of 60,714 lots at year-end. This is down 30% from the peak at the end of our April '06 quarter. As you can see, this is a substantial reduction in our lot option position. In addition, we own approximately two years worth of lots at today's absorption rates. We finish the year with a total of about 95,000 lots controlled, down about 22% from the peak level at the end of the second quarter of '06.

At the year end, we controlled 64% of our lots through option contracts. Our strategy remains to control land primarily through options. Additionally, we had about 6700 lots that we controlled through our unconsolidated joint ventures. Turning to Slide 16, it shows an aggregated option position for all of our lot options in the amount of aggregate deposits, which represented just under 10% on average of the total lot purchase. I'll now turn it over to Larry to discuss the financial performance and projections in greater detail.

Thank you, Ara. Our fourth quarter results are summarized on Slide 17. We reported a net loss of $1.88 per fully diluted common share in the fourth quarter as a result of the $315 million in land-related charges for the quarter. Total revenues for the quarter declined 1.5% compared with the fourth quarter of '05. Our tax rate was 37.9% for the fourth quarter. Gross margin, homebuilding gross margin was 20.4% for the fourth quarter excluding interest, down 300 basis points sequentially from this year's third quarter and down 580 basis points from the fourth quarter of 2005 as shown on Slide 18, which displays our homebuilding gross margin on a quarterly basis for the past several years. Based on the homes that we plan to deliver in 2007, we are projecting that our homebuilding gross margin excluding interest for the full-year of 2007 will be in the range of 18% to 19%, a further decline from the gross margin of 20.4% that we achieved in the fourth quarter of 2006.

This would represent a decline of 410 to 510 basis points from our '06 full-year gross margin an aggregate decline of 740 to 840 basis points from our 2005 gross margin as shown on Slide 19. For the past several years, through the end of 2005, our gross margin has been higher than where we would expect to see normalized margins, which is somewhere in the 20 to 22% range. The above normal margins were a result of significant price increases that we experienced in many of our markets over that period of time.

For 2007, we expect our homebuilding gross margins to dip below the 20 to 22% range of normalized margins, as we're delivering homes that would been sold at significant discounts to the price at which communities were underwritten, including a large number of homes that became what we refer to as accidental spec homes, after contracts were canceled late in the process. We continue to renegotiate with our subcontractors on their cost and we are seeing varying degrees of success across each of our markets. On average, we expect to see about 5% in savings adjustments to contracted amounts, but it will only partially offset some of the margin pressure in 2007. SG&A. As we open more communities throughout the year and increased advertising, we experienced an uptick in total SG&A as a percent of total revenues, which was 11.2% for the full year versus 10% in '05.

In addition to the SG&A expenses related to the 60 additional communities we now have open for sell, during 2006 we had a full-year impact of SG&A costs from acquisitions in Orlando and Fort Meyers, Florida and Cleveland, Ohio. We have made head count reductions already of about 15% from June 2006 levels. This percentage varies significantly by market, depending on how much our sales pace has slowed down. We cannot say for sure that further cuts won't be necessary, but we are committed to right sizing our organization based on local market conditions.

Even with these steps, we will still expect to see our total SG&A ratio increase again in '07 in the range of 11.6% to 12.2% for the full year, mostly due to the fact that we expect to have lower total revenues in '07 and we'll still have to staff the increased number of communities that are now open for sale. So more detail on '07 projections. The gross margin and SG&A projections are shown on Slide Number 20, which also provides additional details that were factored into the $1.50 to $2 EPS range that we're giving as our projection for fiscal '07.

The details of our summary projections for fiscal '07 are also available on the financial information page of the Investor Relations section of our Web site at KHOV.com. We anticipate that the average sales price per home, excluding unconsolidated joint ventures, will be between $335,000 and $350,000 in fiscal '07 compared to $329,000 in fiscal '06. The expect increase in average sales price in our markets is primarily the result of geographic and product mix of our deliveries, rather than an ability to increase home prices. This price range also takes into affect incentives offered on contracts and backlog, and those currently being offered for homes we anticipate selling and delivering in '07.

For fiscal '07, we're projecting total pretax land sale profits to be less than $3 million, compared to the $45 million of pretax profits from land sales we achieved in fiscal '06. For fiscal '07, we expect our effective tax rate to be approximately 38%. A little bit on joint ventures and HOV Stone. For the year, we reported income of $15.4 million from unconsolidated joint venture, a decrease of 56% from fiscal '05, primarily as a result of the wind down of a couple of our joint ventures on individual communities, along with a falloff in deliveries and profits from our HOV Stone joint venture.

The pace of deliveries is slower in the HOV Stone communities due both to slower market conditions and the fact that HOV Stone was set up as a liquidating joint venture, which would only build through the communities identified at the time we closed the joint venture with Blackstone back in '05. With certain limited exceptions, all communities identified post joint venture closing are acquired and developed by Hovnanian on an wholly owned basis. Our investment in unconsolidated joint ventures increased modestly year-over-year to $213 million as of October 31, '06 from $187 million at the end of '05, primarily as a result of the start-up of a couple of new joint ventures that are not yet producing deliveries.

We report significant details on the balance sheet, profits and debt structure of our joint ventures in our 10-Qs and 10-Ks where we break them down into two distinct types. Homebuilding joint ventures and Land development joint ventures. The distinction is whether or not homes are built and sold in the venture or if the lots are developed and then transferred generally at cost to Hovnanian and or other builders of the venture. In either case, we recognize the sales and profits only upon delivery of the completed homes to home buyers. In describing our strategy toward joint ventures, we would also make a further distinction between those that are entered into with other builders or land developers, most of which are focusing on developing lots, versus those that are executed with a financial partner.

We refer to the latter type as a financial joint venture. Financial joint ventures enhance our returns on capital and reduce our risk on larger communities with significant land development over many years, as well as more capital intensive communities, such as mid-rise and high-rise condominiums. We typically contribute 10 to 30% of the required equity and financial joint ventures and leverage is limited to no more than 50% on average throughout the life of the venture. Under the typical structure and base case pro forma projections, we expect to receive more than our pro rata share profits, typically in the range of close the half the total profits.

We are responsible to the day to day operations of the communities and run them as we would run any of our wholly-owned communities. We completed the acquisition of town and country homes in March of '05, utilizing a joint venture structure with the Blackstone group, which encompassed town and country assets in Chicago, Minneapolis, and southeast Florida markets. Many investors have been asking to the status of this venture due to publicity about defaults on the debt of another venture that a homebuilder used to make an acquisition of a private builder in Florida in 2005.

We can tell you that the lenders and the HOV Stone venture are projected to be paid off in full, on time, and without stress on any covenants. The leverage at the joint venture was initially limited to 50% and has declined as cash generated from home delivers has been devoted to debt paydown. The joint venture is in full compliance with this nondebt recourse obligations and there are no maintenance guarantees or other indemnities related to that debt that extend beyond the joint venture entity.

In some of our project level joint ventures our corporate parent Hovnanian Enterprises provides an limited environmental indemnification, completion guarantee, and standard warranty and rep against fraud, misrepresentation, and other similar actions including a voluntary bankruptcy filing. However, even these narrowed limited indemnifications from Hovnanian were not needed due at the HOV Stone joint venture due to significant equity invested by the partners and the low leverage of the venture.

Regardless of the type of joint venture we embark on, debt at the joint venture level is nonrecourse beyond the assets of the venture and the debt is limited to an average of 50% of the total capital of the venture, with no maintenance or other guarantees, other than normal and customary provisions and indemnifications that I just described above. We are confident this is the correct strategy for our joint venture and despite slowing sales in some of our ventures, we do not have issues with the nonrecourse loans in any of these ventures. We are currently projected pretax income to be greater than $10 million in fiscal '07, versus $15 million of reported for fiscal '06. While some of the decreased profits is related to softness in the markets, a good portion of the difference is the anticipated winding down of communities built in our joint venture with Blackstone.

Financial services. I'll update you on our financial services operations, which continue to add to overall earnings. If you'll turn to Slide 21, our pretax earnings from financial services increased 29% to 31 million for all of '06 compared to pretax earnings in the prior year of 24 million. For '07, we expect pretax earnings from financial services to be greater than $25 million.

Turning to Slide 22, our recent data indicates that our customer's credit quality remains quite healthy. We experienced slightly higher FICO stores in '06 compared with 2005, and we saw declining use of adjustable rate mortgages at 32% of our originations, versus 40% for the full year in '05. Nationally for the week ending December 8, adjustable rate mortgages are down to about 25% of applications, the lowest level since October '03 and down 33.5% from last year. Given the inverted yield curve, this is what we expect as consumers adjust their financing plans accordingly. Credit and balance sheet.

I'll now turn to our balance sheet and credit statistics, which we believe remain quite healthy. Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation, amortization, and land charges. A reconciliation of our company's consolidated adjusted EBITDA to net income can be found as an attachment to our quarterly earnings release. For the full year, we generated adjusted EBITDA of $753 million, which covered interest 4.5 times. Due to the slowing velocity of deliveries and each of our open communities, our inventory turnover and thus interest coverage is expected to decline in 2007.

However, we expect coverage to remain healthy at a level of about 2.5 times and the ratio of total debt to EBITDA at year end is expected to remain below 5 times as of the end of '07. We ended the year with a zero balance outstanding on our $1.5 billion unsecured revolving credit facility and $44 million of cash on our balance sheet. The ratio of net recourse debt to capitalization at year-end was 50.8% and our average ratio of net recourse debt to capital for fiscal '06 was 49%.

Our inventories are expected to grow through the first two quarters of fiscal '07 as we invest in new communities and the associated land development and home construction. But for the full year, we expect the net change in inventories to be close to zero, and thus we expect to be marginally cash flow positive for the full year.

As a result, we anticipate that our average ratio of net recourse debt to capitalization will be close to our target of 50% for the full year of '07. One area of note with regard to our lot option walkaways, we did walkaway from three transaction that is we refer to as structured lot options, or options that we had with land bankers. This is important, as many have asked, whether these are structured in such a way that we can actually walk away from them. The answer is obviously yes, as we walked away from three during the fourth quarter.

Now I'll update you on our inventory started and unsold homes. We brought down the number of spec homes per community slightly as you can see on Slide 23. But given our slower selling pace, this number of started unsold homes is still about 2.8 months supply at the end of the year, unchanged from where we were at the end of the third quarter. Remember that we define a speck as a home that is started, beyond foundation, typically very few of these homes are very far along the construction process, let alone finished.

However, our high cancellation rate means that we've been adding to our spec home inventories through cancellations later in the sales and home construction process. At October 31, 2006, as shown on Slide 24, common shareholder's equity, stockholder's equity was $1.81 billion, a 9.1% increase from the $1.66 billion at the end of '05.

Based on our current projections of fiscal '07, we expect common shareholder's equity to grow to more than $1.9 billion by October 31, 2007. Given the current market conditions, we will continue to repurchase shares, but only at a measured pace, which more or less offset it is shares that are issued, either through our stock option or restricted stock plans that many of our senior executives participate in.

Although we believe our stock remains under value, we intend to maintain only the current pace of share repurchases at this time. I'll now turn it back to Ara for some closing comments.

Thanks, Larry. I'll conclude we making a couple of comments on the overall housing markets. We believe that the slowdown in our highly regulated markets is primarily as a result of investor and specular activity over the past few years. That effectively caused the hangover from this spike in resell listings for homes in this markets. While they are listed on the MLS, many of these homes are less than two years old and may have never been occupied. We are unsure how long it will take to work through the resell listings in the more regulated markets, but we are seeing some encouraging signs over the past few months.

Slide 25 shows the level of MLS listings on a historical monthly basis for a select few markets. You can see that all listings remain at elevated levels, with fort Meyers, Florida, being one of the worst in the country.

However, you can also see that we are beginning to see a leveling or even a reduction in listings in certain markets, more than would be typical at this point in the season. The macroeconomics data being reported continues to be healthy in spite of the affect of a slowing housing market, including job growth and quarterly increases in GDP. Last month, the economy added a healthy 132,000 jobs. In addition, long-term demographics based on household formation and immigration paint a very good picture for the long-term demand in our sector. Yet, negative buyers sentiment has been persistent and continues to impact the current sales pace.

We're not quite sure how long it's going to take or what it will take to get the home buyers off the sidelines, but we also see some positive signs in consumer sentiment. The most recent few months of the consumer confident data as reported by the University of Michigan survey on overall home buying conditions has been on an upward trend for the past three months, most recently reaching 136 in December as shown on Slide 26. This is coming off a low in September of 116, the lowest the survey has seen since the end of 1990, which is close to the trough in that downturn.

Just like with resale listings, we need to see surveys like this continue on a positive trend, but we are seeing early indications of better times ahead. In in addition, mortgage rates don't seem to be on the rise and, in fact, are trending back down. The 30-year fixed rate is now just above 6%, 26 basis points lower than a year ago. And although the one-year arm rate is still 26 points above the year-ago rate, it decreased by about three basis points in the latest week to 5 3/4 % and has generally been declining in recent weeks.

For the month of November, the average monthly payments on a 30-year fixed mortgage was down 1% from last year, marking the first year-over-year decline since mid '03. Perhaps the most positive indication of a possible pickup in sales is the mortgage purchase application index, which increased 9% sequentially the week ended December 8, to the highest level since January of '06.

Despite all these positive indicators which led us to believe that there is the potential for an early recovery in sometime '07, we are not calling a bottom to this housing market just yet. Yes, we've seen the pricing and sales stabilize over the past few weeks in many community, in many markets that have been most impacted, but until we actually experience an improvement, in our pace of net contracts we are continuing to manage the Company assuming that current conditions remain with us for the foreseeable future.

When conditions do stabilize, we expect that the market may bounce along the bottom for several months or quarters before gaining any meaningful positive sales momentum. Buyers will readjust to smaller homes and less features if necessary with tighter affordability, offset by the significant price declines that have hit the housing market over the past six to nine months. But regardless of these shifts, the housing market needs to get back to generating 1.2 to 2 million net new housing units on average to meet the fundamental underlying demand.

In conclusion, we believe the steps we are taking, including home price reductions, related land -- excuse me, the land-related charges in the fourth quarter, renegotiation of our subcontractor and material costs and head count reductions are necessary for us to emerge from the current downturn as a stronger and better company. We have been around for 50 years. We've seen many cycles, and we always emerge as a stronger and better company.

We also believe our current land position will allow us to continue to maintain our presence and even improve our market share. We intend to continue to deliver quality homes in these market with an eye toward maintaining and growing our dominant market positions over time. We're confident that we're well positioned to capitalize on these opportunities and to grow in the coming recovery. This concludes our formal comments and I'd be pleased to open up the floor for questions.

Certainly, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Stephen Kim of Citigroup.

Hi. This is Mark Montana on behalf of Stephen Kim.

Good morning.

The sequential increase in cancellation rates seems to have moderated or slowed, at least, in the past couple of quarters. Within your fiscal fourth quarter, was there any trend particularly in the latter half of the quarter giving you an indication of possibly plateauing cancellation rates? Furthermore, are you seeing further moderation and/or a possible retreat in cancellation rates in certain areas in the last month or so?

Cancellation rates are something that are greatly impacted by the number of gross sales that you have, and we're in a seasonally low gross sales period between the Thanksgiving and Super Bowl time period and the holiday season. So you're going to not likely see a cancellation rate decrease in terms of percentage of cans during that particular period of time. We're cautiously optimistic that maybe in the second quarter, our second quarter ending April is probably the more likely time you'll see a decrease in cancellation rates.

Great. Thank you very much.

Your next question comes from the line of Michael Rehaut of JP Morgan.

Hi, good morning.

Good morning.

I was wondering, for the first question, if you could go into more detail on a regional basis in terms of where you saw the healthy or, I believe -- healthier levels of traffic, and if you've seen across-- healthier levels of traffic, and if you've seen across some of the major regions that have moderated and that are on the forefront of investors' minds today, if you've seen any improvement, stabilization, or worsening throughout the quarter? And I have a follow-up. Thanks.

Well, I'd say the general traffic levels have been reasonable pretty much across the country. I can't say that I'd notice that trend anymore or less in one geographic area. The good news is there are interested consumers, there are -- checking the market, the problem is they have seen reductions in pricing, so that's causing them to sit by the sidelines in hopes that prices may reduce further still. They're clearly nervous about committing and then finding that prices are a little lower yet. But the positive thing is, there is traffic. That's been pretty much consistent across the country.

Okay. The second question, on the quarterly distribution, you mentioned that over 50% of your EPS you expect to get in the fourth quarter. I was just wondering, is that type of distribution more being driven by an improvement in SG&A or gross margins that would potentially improve during the year, or is it more related to a closings in a revenue weighted distribution?

It's more the latter. We do expect that volume will be greater at the fourth quarter, just based on where we are in the time -- the construction timing of a lot of our expected deliveries.

So the SG&A would moderate over -- as you get more leverage?

As a percentage, obviously given the greater volume, that's where you'll feel the impact the greatest.

Thank you.

Your next question is from the line of Alex Barron with JMP Securities.

Yes, I wanted to commend you guys on the level of disclosure, especially on the walkaways and impairments. Very good. I wanted to ask you a further question on that. Can you give us some sense of how many communities in your impairments we're talking about per region?

We just -- we haven't provided that level of detail --

I think we're able to give a total one here, but not by region.

Yes.

The impairments, as the slides indicated, were heavily weighted in three primary markets, kind of southern California, including San Diego, Florida, and Minneapolis. That's where the impairments were heavily concentrated, Alex.

Right. And just roughly, how many communities are we talking about, Larry?

Do you have that number? For impairments.

About 214. No, no, no. Impairments is 20 and walkaways is --

20 communities were affected by impairments.

Okay, got it. And as you kind of explained, it seems like the ones that are affected are basically ones that were starting to lose money?

Well --

Or were expected to lose money?

Well, as we explained, on a go-forward basis, essentially on a gross margin after interest basis, if they would lose money, then it triggers it is impairment calculation. Once it triggers it, even if it triggers it by $50, then you do the present value of cash flow to actually calculate the impairment test and compare that to book value, and that can trigger a much more significant impairment than the triggers the calculation itself might imply.

Okay, got it. Another quick question on your definite life and tangibles on your balance sheet, you guys showed a decrease going from about 200 million last quarter to 146 million, but it didn't seem to be reflected on your income statements. I was hoping you could help me reconcile that.

Well, there were two. The one that is, obviously, on the income statement is the amortization of you are intangibles. However, the amount was greater than that and it was really related to a contingent purchase price related to one of our sales -- excuse me, one of our acquisitions that was dependent on certain milestones being reached, which were not reached and therefore the amount of amortization that we had been planning on, the amount of I -- intangibles was reduced.

Okay. Got it. One last one. Just your number of completed specs and total homes in progress?

We don't categorize it that way. We gave you the total started unsold homes. That's the data we provide, Alex.

Okay. All right, thanks, Larry, thanks, Ara.

Okay, thanks.

Your next question is from the line of Margaret Whelan of UBS.

Good morning, guys.

Good morning.

Thanks for all the color on the charges, that helps. Can I just go back to one thing you said that was interesting, Ara, that you're factoring in more normalized pricing in 2009 and beyond?

No, no, not pricing. We're factoring -- on those community that was a life beyond '09, we're factoring a more normalized sales pace. We're holding the pricing. And a more normalized sales pace does not mean '05 levels. We think '05 levels were higher than our normalized level. We think these are lower, so it was a pace somewhere in between that for those communities that had a life beyond fiscal '08.

As you can see by some of the data that we provided, we are at ten-year lows in terms of absorption pace per community. And from a GAAP perspective, we would be criticized if we assumed on a long-life community, one that's over two years, to continue at a very distressed sales pace. So what we did was if a community had a life longer than two years, we would gradually ramp up a pace to a more normalized level, but not at '05 levels, just a more normalized levels.

Start in '09.

Starting in '09.

So just to clarify, because I think a lot of people are confused at this, you had looked at over 100% of the control over the next five to six years that you have this life cycle. So there's no risk that you're going to start looking at new dirt relevant to these impairment hurdles in three months or six months and take --

Well, we have to review the outlook with every budget cycle. So if -- and now we have looked at communities that have options that are expiring three months out, five months out, so that we try to contemplate if those were high likely to be walked from, we tried to address those now.

Okay.

However, if the market continues to deteriorate and we find that prices continue to decline, net prices or net absorption continues to decline, neither of which we particularly think are likely conditions, but if they did, then we would have to go back and reevaluate every parcel once again. But rest assured at the moment, we don't have options that are expiring in the next 60 days, 90 days, 120 days, that we haven't looked at. If they are expiring, we tried to either renegotiate or if we couldn't renegotiate it and it still wasn't economically feasible, we, in a few instances would recognize the land write-off prior to the option expiration.

Let me hit it directly, Margaret. On the owned land, that's the only land you impair and on the owned land, we did look at every parcel we owned anywhere in the country and if market conditions stay where they are now, I do not expect to have any additional impairments in fiscal '07 or beyond for that matter. If market conditions worsen from the level that is we are at now, it's possible, though we don't expect, but it's possible to have additional impairments. But we think it's behind us as long as the market doesn't worsen.

Yes. Now keep in mind it can -- you can suffer impairments or walkaways from a micro market correction. One of our option walkaways was in an area in southern California and several brand new communities opened at very aggressive prices and so even though the market didn't change substantially in that period, a couple of new competitors opened at even lower prices. In that case, that triggered us to reevaluate that option. So that can occur even if the market is relatively stable. But at this point, we've tried to look at everything that we knowledge at this point and feel like we've done a reasonably thorough process.

That's actually a good lead into my second question, Ara. It seems to me that housing affordability is the big reason why housing has corrected. And as prices and rates are come down and your traffic is going to start improving if all these communities open, are you targeting a less expense of the lower price homes as you're opening those communities and try to address affordability too?

Interestingly, it really depends on each situation. In general, you are right in that we have found some of the more affordable locations to do a little better and many locations we are redesigning product, actually, to get to some more affordable price points, maybe stripping out certain options or costs as standard features. But frankly, in other cases, we're going the other way and getting more value by adding more features. So it depends, but if I had to make a generalization, I would say yes, we're generally a little bit more focused on affordable product than the high-end product.

Can I just squeeze in one extra question. Just two and a half, I guess. You had said at my conference last month where you saw land prices were falling down as much as 20%. We followed up with a bunch of our private builder contacts in the last few weeks and they're not seeing that, actually. They're saying that you can buy finished lots in the boonies for 30%, but that raw land prices are far from creatoring and really haven't come down that much. I'm trying to figure out how much you are seeing raw land prices come down? And what your priority for the use of cash in '07?

Well, first of all, we have seen -- I wouldn't characterize some of the adjustments as land prices cratering, nor would I say there's been a uniform reduction of 30%, but we have definitely seen instances, including in some of our option renegotiations of reductions in the 30% range. So I'm not sure who you're talking to, but we have seen reductions.

Now, I did say at your conference also, land prices are much stickier on the way down than house prices and they're much stickier than they are when it's on the way up. Now, having said that, we still don't think that the house price levels justify the land price levels and hangers our new land acquisitions, even with some of the reductions are land price -- our land acquisitions still have not stepped up to normal paces, because we still at the current net-net prices and net-net absorptions can't get republican rates of return on our investment. I would say there will still likely be some further adjustments on land prices as the house prices start stabilizing.

So that's what you're waiting for before before you use cash?

Yes. We will -- we'd be fine in deploying the cash if we saw a good solid return. We have stepped up our hurdle rate just a bit, because the market hasn't quite stabilized and found bottom yet. We think that is near, but in the meantime, because of the little additional risk, we're looking for properties that yield higher than our floor of 30% unlevered IRR. But to the extent we do find some, and we have found a few, we're not afraid to go forward with new investments. However, I think in my opinion, this is a time to keep more powder dry. We've been through these adjustments many times in our 50-year history. While they're painful periods, they usually are proven to be fraught with opportunities and you want to keep enough dry powder. So with the savings we have, we're really just going to be keeping our powder dry to take advantage of the opportunities coming up.

Okay, thank you, guys.

Your next question is from the line of Carl Reichardt of Wachovia.

Good morning, guys, how are you?

Good morning. I think it's almost afternoon.

Morning where I am.

Not where you are, right.

The $92 million in the southeast impairments, how much of that was related to first hall?

I don't think I want to get into that specifics of exactly where it occurred, but a substantial portion of it was.

Okay. Good. And then on the attempts you guys are making to renegotiate on the direct cost side, I'm curious if you can share some specifics about on the material side, not the trade labor, but the material side, where you've had some success in actually pushing your input pricing down --

Well, obviously in the commodity areas, we don't have a lot of clout. The commodity markets are more powerful than any individual builder, however large they are. The good news is some of the commodities, particularly in the lumber area have been kind in recent quarters. On the material side, we've had a little bit more success with some of the national contracts on more brand-type items like appliances and cabinets, but the bigger focus has really been on the labor side of construction costs with our subcontractors. And that's where we're having much greater success than the material side for the reasons I just mentioned.

Okay, terrific. Thanks a bunch. Happy holidays, guys.

Thank you.

Your next question is from the line of Ivy Zelman of Credit Suisse.

Good morning, everybody, or good afternoon. Hey, Ara, if I turn bullish, will I get to go first on the call. That doesn't count as a question.

We'll, Ivy I am just impressed that you are actually on the line yourself so we will let you ask three question.

Three, well alright. I'm very happy to be on, despite the fact I'm sitting looking at the Gulf of Mexico and taking time away from the beach, but I do want to listen and hear what you guys have to say. The number of communities, absolute versus year end '06?

We've not given a projection on that at this point, Ivy.

And the main reason, Ivy, we're still finalizing where -- what the renegotiations look like, et cetera. But we will probably be doing those calculations soon. I'd expect community count movement will be very modest. But we'll get some more data shortly.

Okay. Secondly, related to impairments and I do also appreciate your disclosure, when you were referring to the amount that you looked at and total options, you said you basically looked or abandoned 26% of total options. I wanted to know with respect to what's owned out there. I'm assuming that the impairment tests that you're doing are only on communities opened. Is that a fair assumption?

No. We actually looked at communities to be opened. One of our impairments in Florida was at a community to be opened. And in those cases, we just have to look at the marketplace and make our best guess for what appropriate pricing and pace would be.

We looked on impairments, Ivy, we looked at 100% of the parcels we owned regardless of the stage of construction or whether they're open or not open.

Okay. So realizing that a lot of things that are yet to open, I'm assuming if you use first-in, first-out for the majority of the stuff that will be coming online, you will assume as a higher land cost basis than what you already had open for sale, so you're saying even though they have a higher land cost basis, those communities that are yet to be opened, you're assume that your out of the woods on impairments unless the market were to deteriorate further--

I'm not sure what you mean by first-in, first-out.

I think he's absolutely correct on what she said. We don't use first-in, first-out, per se, we use specific identification, but effectively, it is like a first first-in, first-out in this case. But that's right, at this point we've looked at all of them and unless conditions continue to deteriorate, even with communities we haven't yet opened, we don't expect further impairments.

So if you've looked at the $141 million in impairments that you took this quarter for the fourth quarter, how much of that was on communities that were already opened?

Actually, the $141 was in option walkaways --

I'm sorry, the $174 million.

Yes, we're $174, unfortunately. And regarding the amount --

We'll have to get back to you.

We'll get back, we don't have it right here. Break it down that way.

And finally on that note, if you had to say, in some markets it's tough to say what is stabilizing and what gets worse from here, but as listings typically increase back in the spring and more homes come back on the markets, if incentives are running in a market like Fort Meyers,10 to 15% of sales price and that didn't go to 20, you are saying you wouldn't see any risk of further impairments, is that accurate?

That's correct. And by the way, while we would see a normal seasonal reduction in listings, it has occurred earlier in many of the markets in August, in some cases September or October. Typically you don't see those reductions hit until November and December in many markets.

Okay. All right. Thank you.

Thank you.

You're welcome.

Your next question is from the line of Steve Fockens of Lehman Brothers.

Hi, good afternoon. Just two quick questions. First, Ara, where you talked about traffic looking like it's getting a little better across many markets, are you finding in any cases that in end markets where traffic actually seems to be getting in one market versus another that it has any relationship to the any increased level of incentives, or is that tough to tell?

You know, I would say customers are going to shop all communities, and there's just a lot of active shopping. They are comparing competitors, so even if one community may not have good advertised prices, they are getting the traffic because some of the incentives are not advertised. So I'd say in general, traffic is healthy regardless of the incentives. I will say that buying activity is definitely directly related to the incentive that are out there, without a doubt as we see competitors or our own communities make some good pricing adjustments through concessions or incentives, they absolutely are seeing an affect on their immediate sales.

It's very similar to homebuilding conferences. A couple of years ago when we were performing extremely well as an industry, we didn't have nearly the attendance in homebuilding conferences that we do now. We have standing room only crowds. Not all of them are buyers, but there's certainly a lot of lookers out there.

Fair enough. And then second question, I think you guys had talked about a long-term normal gross margin in the 20 to 22% range. If you take a somewhat longer term view, do you think as markets eventually stabilize, do you envision any scenario where it's a quick snap back to and above that level? Or is this something that takes time?

Well, yes, first of all, we don't anticipate a quick snap back. Some markets will recover faster than others. Generally speaking, the highly regulated markets are the ones that will see more spikeup. They're the ones that saw the spikeup to begin with because it's economics 101. If supply is limited and demand increases, then the pricing goes up to bring the market into equilibrium. However, we're not banking on that at this moment. We're just anxious to get back to having communities perform to the 30% IRR levels and we're not there just yet.

Let me ask quickly, separately -- so in cases where margins could snap back, do you think that's more a function of regaining pricing power, or could cost -- maybe even structural cost improvements be the real driver, if that were to occur.

No, we are going to see some structural cost reductions and everybody will get a little more efficient in overheads, but I think there will be two main drivers. One is going to be the house price and the other is new land purchases will come in at better values. Those two factors are really going to be the drivers to better profitability.

Great. Thanks very much.

Your next question is from the line of Dan Oppenheim with Bank of America Securities.

Thanks very much. Wondering if you can talk about your goals for started by unsold homes. I think we can all agree that one of the issues in terms of pricing right now is too much inventory. As you look out, how much do you plan to bring that down over the next couple of quarters or the year?

Dan, I would like to start by saying national strikes across the country, we're much below the national average of having about a four-month supply of completed unsold home. We've got less than a 3-month supply of started unsold homes. We've always managed this very, very carefully and cautiously, and frankly, it varies by geographic markets. In a Texas market historically and continues today to be a market that in many instances, the just a market to where the buyers would like to buy a completed home, or one that's almost completed so they can move quickly, a relo market or whatever and tradition has gone in that particular direction.

In other markets, the northeast, Washington, D.C., historically. We have very few started unsold homes. Frankly, we have a few more than we would like in Washington, D.C. or a New Jersey, not because we consciously built them, but because of this accidental speck homes I talked about in my part of the script where we had cancellations very late in the process. We manage it market by market, community by community, and continue to be very conservative.

Thanks.

I will say interestingly, some of the buyers today are waiting until they sell their current home, and when they do, they want to act more quickly. So we are getting a little pressure to keep a few more specs on hand than we normally would be comfortable with, but in general our bias is toward a lower level.

Thanks. Can I ask also about the impairments and write-downs. In terms of the impairments, looking at the homesites that you control with almost 34,000 lots, the majority of those lots are in communities that are now open, right? You didn't break it down in terms of how many of those lots are in communities open --

That's correct, they are.

And in terms of the no write-downs in the southwest are very limited there, if we think about the Arizona market, which has weakened, is that a function of not having options that are coming to expiration in the near term, or having more flexibility.

It's really interesting. It really has to do with the fact that most of our land positions there were controlled in 2003 and properties that were tied up back then were in relatively good shape. It's the properties that were contracted in 2005 that were the most challenging and just perhaps by coincidence I would have to say, we didn't have many at that period?

Thanks very much.

Your next question is from the line of Greg Gieber of A.G. Edwards.

Morning or afternoon, as the case may be, gentleman. I wanted to go back to Ivy's questions, but ask you, in your $174 million of impairment charges, how many lots were involved? I don't believe you gave that. I know you gave it for the options.

Yes.

I think we're just going to have to get back to you there. I don't think we have it at our fingertips, but Greg, I would be glad to call you and give you a lot number.

Sure. Do you have any idea, what you do impairment as you're pulling forward in time, cost of goods sold how that spreads between '07, '08 and after '08?

You mean, in terms of benefits --

Yes, the benefits to you.

The benefit is relatively small in 2007, around $20 million of pretax benefit from what we did. So out of the $174, only about $25 in '07 the balance are in '08 and beyond.

Okay. One last -- another -- on a different subject. Can you tell us as you look forward to the first quarter of '07 how many homes you expect to start relative to a year ago? I assume it will be less and possibly a whole lot less?

Yes. We don't project starts, but I'd say in general, lower starts would be an accurate guess.

It's closely correlated to deliveries and deliveries are being projected down in '07 versus '06. So starts logically will be down to it.

Okay. Thank you.

You're welcome.

Your next question is from the line of Nishu Sood of Deutsche Bank.

Thanks. First question. I wanted to ask -- obviously the most important issue facing yourselves and investors as well is figuring out when the housing market is going to bottom, and you folks have said you see it bottoming sometime in the first half of '07. How exactly do you define that? Pricing relative to volumes? And also, how do I reconcile that with your guidance, which I believe is based on current conditions persisting?

Yes, well, keep in mind as we've said in the past, the period between Thanksgiving and Super Bowl towards the end of January is always a very quiet period in terms of new sales activity. Our guess -- and it's anyone's estimate at this point, but our estimate is the period that follows that, we will begin to see the bottom end stability. That's why it does jive with our guidance. What do we mean by the bottom? What that means is basically we believe at that point we'll see stability in the sales pace as opposed to continued deterioration in sales per community, and we'll see stabilization in net-net pricing. We're beginning to see just a few signs of that, just very recently and that's what gives us hope that that will be the case. However, I'll be quick to add that the next six weeks are not a very good indicator, because it is a very quiet time in the marketplace.

Right, okay, thanks. That's helpful. Just a second question on impairments, it was a very helpful discussion. You mentioned that the asset that you're impairing, you're not going to get back to your typical hurdle rate on those projects of an IRR of 30%, so what exactly -- or what rate are you writing them down in terms of IRR back to?

There's a lot of dependent factors, but if our typical hurdle rate is 30%, I think on average we're going to be less than half of that on an impaired deal, so less than a 15% kind of IRR. It really depends on a lot of other factors in terms of turns and some other things, but that's in the ballpark of what occurs.

Got it. Finally, what type of sales pace are you assuming for the first half of '07 to get to the delivery number in your guidance?

I don't think we're making projections of sales by quarters at this point.

Okay. But just roughly, are you consistent with a bottom end, does that mean flat to flattish, or --?

We really kind of project sales pace going forward based on what recent sales pace was. So not taking into account the slower period that's seasonal right now between Thanksgiving and Super Bowl, excluding that, which we obviously always slow down a bit during that period of time and take that into account in our projections, the projection we used on a go-forward basis is the same kind of sales pace that we are occurring in August, September, Octoberish kind of pace.

Great, thanks a lot.

Your next question is from the line of Joel Locker. Please proceed.

Just had a question on your interest incurred. Was 2.7% of gross margin versus 1.5% a year ago. And what do you expect on that going forward is into '07?

Well, first, keep in mind that the interest expense, because that question has come up earlier, that is related to our estimate of absorption going forward, and we project what the cumulative life interest will be trying to project accordingly given each home. Given that we've had a slower sales pace, that amount that we're expensing currently has been rising. In terms of interest incurred, as we've grown this past year and significantly grown our assets and investments as well, we do have a higher debt -- a little higher cost debt and those two factors have driven the interest rate incurred up just a bit.

Right. I understand, I was just saying the expense with a similar revenue base.

We didn't give the exact number on the call, but if you look at our Web site after the call, you'll see a projection for EBITDA for '07. We told you we expect EBITDA coverage or EBITDA divided by interest incurred to be greater than 2.5 times.

Just on the impairments, just the capitalized cost of interest rises give, for example a comparable house and the next neighborhood is $305,000, you have $100 in the land, it's going to cost 100 for labor and $100 for materials to keep it simple. If it's a year labor and you capitalize the interest and it's $107,000 and a 7% interest base, your comp for 305, would you then impair that house?

No, because when we present value the future cash flow cash flows back we took that into consideration and Larry said we're going to get an internal rate of an IRR around 15%, that's going to come down, but not to the point where it's going to create a loss or a negative IRR.

But in the specific example you gave, you added it up so the costs were more than -- [multiple speakers].

Yes, a 500 --

That would trigger. So whether interest caused that to happen or lumber or anything else, if the cost exceeded it, including capitalized interest, yes, that would cause a trigger calg.

Yes, I was trying to hold everything constant, labor, merely, and just increasing the capitalized interest into the land and holding the average selling price --

One the thing you have to take into consideration, however, we when we did the impairment calgs and our projections, we project what the interest carry would be at the current sales pace, except those community that is go beyond two years, as we mentioned, and then we step it up just a bit. So we preanticipate that capitalized interest and that is part of our consideration about what would trigger or not.

All right. So then that's included in the book value of the inventory as of the analysis data on page 11.

Yes.

All right, thanks a lot.

Your next question is from the line of Timothy Jones, please proceed.

Good afternoon. Just a real quick question on this adjusted EBITDA. Was that just -- that doesn't have anything to do with your bank covenants -- your bank covenants are really based on EBITDA, correct?

No, our bank covenants are based on adjusted EBITDA.

They are? They do not include -- all the write-downs are excluded for that debt calculation?

We add back to EBIT any impairment walkaways when we calculate our covenants for a bank loss.

It's defined differently as an operating cash flow.

That makes it -- I wasn't quite sure on that. The other question I --

And by the way, we're in fine shape with the bank covenant, and as weapon announced, we ended the year with $0 drawn on our $1.5 billion facility.

Before I go to my second question, just clear up one thing, on the J.V., I've heard these rumors going around too, why would it when you said you have absolutely nothing, why would that be coming up, just out of curiosity?

Why would what be --

One of our peers --

Yes, what happened there.

-- and a well publicized joint venture that became a problem for them, significantly different situation, much more highly leveraged. I believe their leverage was in excess of 80% --

It was, it was.

In our case, we take the same strategy regarding the appropriate leverage with our joint ventures as we do with our main company and in fact if you will become at the details, you'll see we're at or actually below 50% debt-to-cap ratios in our joint ventures and that's part of the reasons why we haven't seen issues with our joint ventures. The other reasons is the one that was well publicized was heavily, heavily, almost entirely concentrated in the state of Florida, which has been much more impacted and ours were in three different states and that helped.

Only reason we're talking about at all is that we get a lot of questions on.

I think it's very good for you to clarify that, very good. Other question, which nobody, I'm surprised ask you. You said one quick little statement, which I found extremely interesting. You said you had seen pricing stabilize in a number of markets. Would you please identify those markets, because I find that quite interesting --

When we're referring to that, what we mean is more micro markets in specific communities more than broad markets of southern California or whatever. But I will be quick to add the point that I made before, is that I would not try to draw broad conclusions from the marketplace between Thanksgiving and the end of Christmas. So don't over react just yet. There's a reason for optimism, but I wouldn't over react yet.

I wouldn't react on comparisons of orders, but I would react on pricing firming.

Well, we're not seeing declines in pricing at the same retidty we saw previously and right now it does feel in many locations that pricing has been relatively stable. And if we look back a quarter ago, we didn't feel that at all.

We're actually seeing again in certain situations reductions in incentives, so that's a positive sign.

Call you tell me roughly what percentage of your business, 10%, 20%, what a guess?

Of what?

Where you've seen this stabilizing in prices --

I really couldn't render a guess. And I wouldn't, keep focusing -- as I keep trying to mention, I wouldn't focus too much on the last couple of week's results. It's much quieter volume.

Thank you.

Your next question is from the line of Alex Barron with JMP Securities.

Thanks. I had a couple of questions on your guidance. Does it include any further write-downs or impairments?

It does not.

Okay. And on your ASP, looks like you're looking for a rebound or small increase in pricing?

That's because of product and mix of geography, not because of any increase in price, Alex.

Okay. So in terms of geography, which region would be helping to pull it up?

It's not just region, it could be a mix of product within a geography if we happen to project we're selling more larger homes in a given market based on recent sales activity, that would affect the mix. If we conclude one condominium community and open a newer higher-priced town house community, that affects it. We assumed in our projections flat net-net pricing with what we've been experiencing in recent weeks.

Okay, got it. Now in terms of you guys mentioned there was about 20 communities that had the impairments, is is it likely -- are there some others, maybe another ten or whatever are fairly close, or not necessarily?

Alex, I don't know how to say it any clearer than if the market stays like it is now, we don't anticipate any additional impairments. I don't know how to make it any clearer.

Okay. One last clarification. You mentioned -- maybe I a misheard, you had a four-month supply of completed unsold homes?

No, we said the market, most of our peers have about a four-month supply. We have a 2.8-month supply, but not of completed homes, of a home which is beyond foundation, most of which are in the early stages of construction.

Got it. I thought I misheard. Okay, thanks, guys.

Your next question is from the line of Gary Freeman of Gem Realty Capital.

Thanks, guys. Larry, just a quick point of clarification on the impairments, which I think you've mostly addressed. Are you, per the accounting rules able to take a write-down on land that's not currently in service?

Yes.

Okay, great. So you've tested 100% and that's where we are right now?

Yes.

And in terms of your guidance for '07, as I look at the second half of the year versus the first half, are there any pickup in operating metrics that you assume will take place in the second half versus the first half?

No.

Everything is flat from here on out?

Other than the seasonality that we mentioned earlier, that occurs between Thanksgiving and January, other than that, we've assumed no pickup, just a flat market condition.

So what's the big driver in terms of the pickup in earnings?

Primarily volume and where it's coming from. We've opened some communities latter part of '05 -- I mean, latter part of '06, early part of '07 that won't be delivering anything until the latter part of '07 and other projections that are bunched and the mix of deliveries. That's all it is.

So it's somewhat community growth that accounts for that?

[multiple speakers], timing from communities that might already be open. The only comment counts we give is how many that are open for sale as well as current delivering. So there's a lag from the time you open that you actually start delivering from them.

Okay, okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Keith Wiley.

Yes. I was wondering if you could elaborate on the joint venture sales and price decline. How much of that is just because you are winding down some of these joint ventures and how much of it is because of current market conditions?

Both are mixed -- both had an impact of clearly we have reduced the number of communities in the HOV Stone joint venture that we have with Blackstone, as I mentioned in our prepared remarks, but the joint ventures have the exact same impact. Communities inside a joint venture have the exact same impact of slower market conditions than our wholly owned communities do in turns of lower margins. Margins aren't better or worse in a joint venture just because of it's in a joint venture than it would be on a wholly-owned basis. You can assume for your purposes that the same kind of deterioration you've seen in our consolidated margin, we've kind of experienced in our joint ventures on average.

Okay. Then that joint venture with Blackstone, what is the expected time to wind that down to completion?

We just gradually get down to fewer and fewer communities. So as you look out another three or four years, there's very few deliveries in those three markets, Chicago, Minneapolis, southeastern part of Florida, that are coming through the joint venture. The majority of deliveries that we get from those markets at that point will be coming from us. But there are a few communities that have long lives that are inside that HOV Stone joint venture that may go on for years, but it's just a trickle of deliveries.

So you've chosen not to invest in land at that business and make it an an joining --

No, we have. The structure of the joint venture, the structure of the venture, the joint venture with Blackstone, would only build out those communities that were in place, either owned or optioned at the time of acquisition. All new investments or new properties would be acquired and built solely by Hovnanian.

Okay, excellent. Thank you.

Your next question is a follow-up from Joel Locker.

Just real quick on the loan value. Do you have a combined loan value versus last year? Just including seconds?

On the mortgage?

Yep.

Company, we have a -- We'll call you back on that, Joel. We don't have it at our fingertip.

Thanks a lot.

Any additional questions?

You have -- I apologize, sir. You have one question from the line of Wayne Cooperman.

Hello?

Yes.

I think you guys said this, but I didn't get it down. The guidance for '07 assumes no further write-downs, right?

That's correct. We feel that we've captured all the properties and if mark conditions are stable, we don't anticipate --

What's your guidance for gross margin or SG&A?

It's on our Web site. We talked about it extensively in the script --

I missed the beginning.

It's in the slides as well, which would be on our Web site, but our gross margins excluding interest are projected to be between 18 and 19% for '07.

Excluding interest or including?

That's excluding interest.

Got it.. And where do you guys think they come back to '08, '09, whatever? I guess that's the big question, where do margins return to?

Exactly, but we think it's reasonable -- the metrics we follow are what are republican ongoing IRRs at a community level, we think 30% is a normal ongoing level. We are in excess of that in '05. We're under that today. We consider 30% to be more normal, and that would -- IRRs, and that would translate to --

A low 20% kind of gross margin.

A low 20%.

And would also translate to an after-tax return on equity with our current leverage in the range of the 20%, anywhere from the low 20s to the high 20s depending on leverage and size and so forth.

Right. Okay. But obviously you're not predicting when you get back there?

No, not right now. We're just trying to project the next couple of quarters at the moment.

Good luck, thanks.

Thank you. Okay, thank you very much. We appreciate everybody's patience as the market goes through a difficult transition. Many of the steps we took were painful ones, but we're convinced they are the correct steps for the long-term. We've been through this kind of market many times in our 50-year history and while painful, they often, as I mentioned earlier, are filled with opportunities. We look forward to taking advantage of them and reporting to you on our progress in subsequent quarters. Thank you very much.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for participating. Have a wonderful day. You may all disconnect now.