Hovnanian Enterprises Inc (HOV) 2015 Q4 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises FY15 fourth-quarter and year-end earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months.

This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the fourth-quarter results and then open up the line for questions.

The Company will also be webcasting a slide presentation along with the opening comments from Management. Those 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 website at this time. Before we begin, I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, operator, and thank you all for participating in this morning's call to review the results for our fourth quarter and year ended October 31, 2015. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include, but are not limited to, the statements related to the Company's goals and expectations with respect to its financial results for the current or future periods, including total revenues and adjusted pretax profit.

Although we believe that our plans, intentions, and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors.

Such risks and uncertainties and other factors include, but are not limit to, changes in general and local economic industry and business conditions and impacts of the sustained homebuilding downtown; adverse weather and other environmental conditions and natural disasters; levels of indebtedness and restrictions on the Company's operations and activities imposed by the grievance governing the Company's outstanding indebtedness; the Company's sources of liquidity, changes in credit ratings, changes in market conditions, and seasonality of the companies business; the availability and cost of suitable land and improved lots, shortages in and price fluctuations of raw materials and labor; regional and local economic factors, including dependency on certain sectors of the economy and employment levels affecting home prices and sales activity in the markets where the Company builds homes; fluctuations in interest rates and availability of mortgage financing; changes in tax laws affecting the after-tax costs of owning a home; operations through joint ventures with third parties; government regulation, including regulations concerning development of land, the homebuilding sales and custom and financing processes; tax laws and the environment; product liability litigation, warranty claims and claims made by mortgage investors; levels of competition; availability in terms of financing to the Company; successful identification integration of acquisitions; significant influence of the Company's controlling stockholders; availability of net operating loss carryforwards, utility shortages and outages or rate fluctuations; geopolitical risks, terrorist acts and other acts of war; and certain risks and uncertainties and other factors described in detail in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, changed circumstances, or any other reason. Joining me today from the Company are Ara Hovnanian, Chairman, President, and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer, and Controller; and David Bachstetter, Vice President Finance and Treasurer.

I'll now turn the call over to Ara Hovnanian. Ara, go ahead.

Thanks, Jeff.

Well we're pleased that we've exceeded our guidance for gross margin, SG&A ratios, and pretax profit for the fourth quarter of FY15. It was a great ending to the year and a precursor of better performance ahead. I'd like to review a few of the key metrics for the quarter, and let me get started with net contracts, which can be found on slide 3.

On the left hand side we show the dollar amount of net contracts, including unconsolidated joint ventures, increased 29% while the number of net contracts we signed increased 21%. If you look at consolidated net contracts without the joint ventures, as we've done on the right hand side, we had a 22% increase in dollars and an 18% increase in the number of net contracts.

On slide 4, our net contracts per community, including unconsolidated joint ventures, increased from 6.4 to 7.1 during the fourth quarter, up 11%, while consolidated net contracts per community increased 8%. On top of that, our community count increased by 9% during the fourth quarter. The combination of more communities selling at a better pace yielded some solid results for us.

Slide 5 shows on the left side that the dollar amount of our contract backlog, including unconsolidated joint ventures, increased 49% to $1.35 billion while the number of homes in backlog increased 33%. Consolidated net contract backlog shown on the right increased 42% to $1.2 billion at the end of the fourth quarter, compared to $856 million at quarter end last year.

At the end of the fourth quarter our consolidated backlog units increased 2,229 -- excuse me, from 2,229 to 2,905, up 30% year over year. This 42% increase in consolidated backlog dollars, combined with the recent strength in sales trends, bodes well for our expected revenues and profitability growth during 2016.

Turning to slide 6, in the top left hand quadrant we show that our total revenues declined by 1% to $693 million during the fourth quarter. This decrease was primarily due to a 2% year-over-year decline in deliveries, offset by a 1% year-over-year increase in average sales price of our homes delivered.

Larry will discuss revenues a little more fully in just a moment. The upper right portion of the slide shows that gross margins for the fourth quarter -- the gross margins for the fourth quarter were 18%, down 130 basis points from last year but up 20 basis points from the third quarter and 40 basis points higher than our guidance.

While the increases were small, this was our second consecutive quarter of sequential gross margin increases. Moving to the lower left quadrant, we see that our total SG&A as a percentage of total revenues decreased 7.1%.

SG&A expenses during the fourth quarter included a $15 million benefit related to a reduction of our construction defect reserves. Without this benefit, our SG&A ratio for the fourth quarter of FY15 would have been 9.3%, which is the same as last year's fourth quarter and a significant improvement from the 12.6% SG&A ratio in the third quarter of 2015.

Finally, in the lower right hand portion, you see that for the fourth quarter of FY15 we reported a pretax profit, excluding land related charges and gains or losses from the extinguishment of debt, of $42 million versus our $22 million guidance. Even if you ignore the $15 million benefit from reducing construction debt defect reserves, our pretax profit of $27 million exceeded our $22 million guidance for the fourth quarter.

Let me go into a little more detail about our gross margin. On slide 7, on the left hand side of the slide, we show our quarterly gross margin for all of 2015.

As we've discussed during our second and third quarter analyst calls, our gross margin during the second quarter in particular was negatively impacted by lower than normal gross margins on spec homes, which we define as started and unsold homes. It's not unusual for spec homes to be sold with lower gross margins than to be built homes, but the increased incentives we offered on second quarter spec deliveries were atypical.

Much of the improvement in gross margins we saw during the third and fourth quarter was due to both reducing the number of spec homes that we offered for sale, and the steps we took to lower the levels of incentives and concessions offered on spec homes. Additionally we're seeing a little pricing power in a few geographies around the country.

The percentage of deliveries from spec homes decreased from 52% during the second quarter to 48% in the third quarter, and reduced even further to 41% in this year's fourth quarter. On the right hand portion of this slide, we show our annual gross margin percentages from 2011 to 2015.

In both 2013 and 2014 we reported annual gross margins of approximately 20%, a level that we'd consider to be in the normal range. However, in 2015 we saw that number dip to 17.6%.

The year-over-year decline is primarily due to cost pressures on labor and materials, higher priced land purchases from 2013 when the market seemed a little stronger, and a little slowing in the market in the beginning of the year causing greater incentives. Additionally, our gross margin was also adversely impacted by our spec sales strategy during the first half of the year.

Finally, the elongated cycle times are increasing construction supervision per home, which is part of gross margin costs. The increase we have seen on the labor costs are primarily due to labor shortages in certain markets where we're seeing increased demand.

We are feeling the same thing that many of our peers have been talking about. These labor shortages are causing cycle times to increase. We're not seeing labor shortages in all of our markets.

Some markets are worse than others. For us cycle times have increased the most in the Dallas/Fort Worth market.

In Dallas we've seen construction cycle times go from five to six months to about seven to eight months. This is a significant increase in cycle times, obviously.

In markets where we've been experiencing longer build times we're proactively managing our home buyers' expectations about their expected delivery dates. We're not the only builder that has felt the pressure on its gross margins this past year.

If you turn to slide 8, we show a comparison of our gross margins in blue for the most recent quarter and in yellow for 13 of our public peers. At the top of each bar is an arrow which indicates the year-over-year change in gross margin for each of the builders.

12 of the 14 builders reported year-over-year declines in gross margin, one reported a slight increase, and one was flat. Eight of the builders that had margin decline -- excuse me, eight of the builders had margin declines in excess of 100 basis points. Although it doesn't make us feel better about our year-over-year decline in gross margin, it's clearer that this was an industry-wide phenomenon that impacted the vast majority of our peers as well.

Let me update you on the progress of reducing our specs on slide 9. You can see that for the past consecutive four quarters, we reduced the number of spec homes per community. They've fallen from 4.7 at the end of the fourth quarter of 2014 to 3.7 at the end of 2015's fourth quarter.

Turning to slide 10, we show our total annual SG&A expense as a percentage of total revenues going back to 2001 that can be seen on the left hand part of the slide. We consider 10% a normalized SG&A ratio. As we do every year in our fourth quarter, we enlist an actuarial firm to conduct a study to estimate reserves necessary to cover our outstanding exposure for reserves related to construction defects.

Any increases or decreases in these reserves impact our SG&A expenses. As a result of improvements in our construction defect claims over the past two years, the impact of those improvements on the actuarial analysis of our total reserves, we recorded a $15 million reduction in our construction defect reserves during the forth quarter of 2015. If you exclude this benefit, our SG&A levels for 2015 were similar to last year.

On the right hand portion of the slide you see that our fourth quarter SG&A ratio, including the $15 million benefit from reducing our construction reserves, declined to 7.1%. This is shown in the dark blue. If you exclude the $15 million benefit it would have been 9.3%, which is consistent with the prior year's fourth quarter.

As we move forward, we expect our increases in deliveries and revenues to grow much faster than the incremental increases to our SG&A expense, and as such we anticipate our SG&A ratio will approach our normalized 10% level for our FY16 year. I'll now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer.

Thanks, Ara. We were pleased that we exceed our fourth-quarter guidance for gross margin, profitability, and a lower SG&A expense ratio. However, our total revenues fell a bit short of our guidance.

This was driven by two factors: a 3% miss in our deliveries, and the mix of actual deliveries being skewed more towards lower priced homes than we expected. Similar to the comments you've heard from some of our peers, the delivery miss was caused by construction delays in several of our markets. This resulted in our fourth quarter total revenues being $52 million less than our guidance of $745 million.

Turning now to slide 11. We show the dollar amount of our net contracts, including unconsolidated joint ventures, per month for each of the past 12 months.

The most recent month is shown in blue, the same month of the previous year is shown in yellow, and we use green arrows pointed up to indicate an increase and down red arrows to indicate a decrease. Our recent sales trends have been strong; 11 of the past 12 months have increased.

More recently the results have been even stronger. The dollar value of our net contracts for the past eight months increased 27% year-over-year when you include unconsolidated joint ventures, and increase 20% year-over-year on a consolidated basis. These year-over-year increases in our sales results should lead to dramatically improving revenue in FY16.

While slide 11 showed the dollar amount of net contracts, slide 12 shows the number of monthly net contracts per community. For seven of the last eight months our year-over-year monthly comparisons have been positive.

On slide 13, we show our net contract results restacked as if we had a September quarter end so that we could compare our results to nine of our public peers who report a September quarter end. The year-over-year results range from a decline of 0.3% to an increase of 18.8%.

We were up 18.8% and tied for the highest year-over-year increase. Our positive sales momentum carried over into October and November. During October we saw the number of net contracts, including unconsolidated joint ventures, increase 30% and the number of consolidated net contracts increase 24%.

In November, including unconsolidated joint ventures, we had a 23% increase in the number of contracts and a 27% increase in the dollar amount of net contracts. On a consolidated basis, the number of net contracts increased 17% while the dollar amount of net contracts increased 16%.

On slide 14, we tried to put the current sales situation into perspective with a longer-term view. The dark blue bar on the far left shows that we averaged 44 net contracts per community per year from 1997 through 2002, a period of neither boom nor bust times.

Then in yellow we showed average net contracts per community bottoming at 21.3 per year in 2011, followed by two years of improvement in 2012 and 2013 at 28.1 and 30.7 per year respectively. Surprisingly we, along with the entire homebuilding industry, took a step backwards in sales pace per community in 2014 with 28.4 net contracts per year.

Looking at the gray bar it shows that net contracts per community for all of FY15 was 30. This is now approaching the 30.7 contracts per community level we saw in FY13.

One big difference between 2015 and 2013 is that we ended 2015 with an improving trend. If you look at the last quarter in 2013, 2014, and 2015, which we show on the right hand side of this slide, you can see that the fourth quarter net contracts per community have increased year over year in both 2014 and 2015.

This improvement in sales pace per community in FY15 is certainly a step in the right direction, and we hope it is a positive trend that will continue into FY16. Houston remains a hot topic within our industry, so I want to provide a brief update on what we're seeing in that market.

With an average sales price of $302,000 in Houston, compared to our Company average sales price of $396,000, our primary focus in Houston is on entry level and first time move up product. After strong sales results during the month of July, we saw declines in our sales result during the fourth quarter.

Turning to slide 15, you can see our quarterly net contracts per community in Houston for 2013, 2014, and 2015. During the fourth quarter of 2015, the net contracts per community decreased to 5 compared to 5.6 in the fourth quarter of 2014.

We also saw the absolute number of net contracts in Houston decrease by 9% year over year during the fourth quarter. Reversing the trend we saw in the fourth quarter, our first quarter net contract results for Houston have started on a positive note.

For the month of November the number of net contracts in Houston were up 13%, and the net contracts per community increased 9% versus last year. Our focus on lower average price points, not building in highly competitive master plan communities, and less exposure to the energy corridor have allowed us to continue to outperform the overall new home market in Houston.

Turning to slide 16, it shows some other details of our Houston operation. For all of FY15 Houston accounted for 16% of our homebuilding revenues.

At the end of the year, our inventory in Houston was only 10% of our total homebuilding inventory. So even though 16% of our full-year home revenues were from Houston, we don't have much capital tied up in that market.

Houston is primarily a market where we control land through option contracts with quarterly finished lot takedowns, and therefore it is not as capital intensive as some of our other markets. To further illustrate this point, as of October 31, 2015, we controlled 3,023 lots in Houston.

Almost 50% of those lots are currently optioned with our deposits totaling only $4.7 million. This represents an average option deposit of about $3,000 per lot in Houston, compared with our Company average of approximately $5,000 per lot.

If the Houston market started to materially deteriorate, we would be able to renegotiate our option contracts or walk away from our option contracts with only a modest expense. Our owned land position in Houston is relatively short, at about 17 month's supply.

The 17 month supply in Houston compares to our countrywide average supply, excluding mothballed lots, of 32 months of owned lots in the remainder of our markets. At the end of the fourth quarter of FY15, we had 52 active selling communities in Houston and another 11 communities in planning.

Slide 17 shows an analysis that John Burns Real Estate Consulting did back in September on the distribution of communities for us and several of our peers in the Houston market. They split the market into two broad geographies, West/North corridor, which contains what is commonly called the energy corridor which is shown in blue, and the East/South corridor which is shown in red.

What they found was that we had much less exposure to the West/North or energy corridor than our peers. We think this coupled with our strategy of focusing on lower priced homes and not building in master plan communities in Houston have served us well.

In summary, after 12 months of significantly lower oil prices, our margins and profitability levels in Houston remain very strong. In 2016, our dependence on Houston from both a profitability and volume perspective is expected to decrease as other parts of our operations are expected to grow while Houston is expected to level off.

Despite another solidly profitable year for our Houston operations, we remain cautious about the impact of lower oil prices on the Houston economy. We continue to keep a close eye on the market and will take appropriate actions should any further developments arise.

Moving back to our overall Company, on slide 18 it shows that our consolidated community count has grown steadily over the past two years. There is a lot of activity that goes into an increase of 18 communities that we saw in the last year.

During the last 12 months we opened 101 new communities and closed out of 83 older communities, growing our community count from 201 to 219. We expect to see continued community count growth during 2016.

Turning to slide 19, you will see our owned and optioned land positions broken out by our publicly reported market segments. Our investment and land option deposits was $83 million as of October 31, 2015.

Additionally we have another $16 million invested in pre development expenses. Subsequent to the end of the fourth quarter, we finalized and funded our joint venture for a 14-story building along the white hot Hudson River waterfront in West New York, New Jersey.

We're very excited to un-mothball and to start construction on this 278 home community. It should result in profits with minimal additional capital investments for us.

In fact, $26 million of cash that we already invested in this community was paid back to us in November when we signed the joint venture agreement. We also opened the first of our recently un-mothballed communities in Natomas in Northern California to strong sales and above average margins.

In total we have 632 lots to be delivered in Natomas, including several other new Natomas communities opening later in FY16. Looking at all of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of $1.6 billion net of $540 million of impairments.

We've recorded those impairments on 72 of our communities. For the properties that have been impaired we're carrying them at 23% of their pre-impaired value.

Another area of discussion for the quarter is related to our deferred tax asset valuation allowance. During the fourth quarter of FY14 we reversed $285 million of our deferred tax asset valuation allowance.

We should reverse the remaining valuation allowance when we begin generating higher levels of sustained profitability. At the end of FY15 our valuation allowance in the aggregate was $635 million.

The remaining valuation allowance is a very significant asset not currently reflected on our balance sheet, and we've taken numerous steps to protect it. We will not have to pay cash federal income taxes on approximately $2 billion of future pretax earnings.

On slide 20, we show that we ended the fourth quarter with a total shareholders deficit of $128 million. If you add back the remaining valuation allowance, as we've done on this slide, then our shareholders equity would be a positive $507 million.

If you look at this on a per share basis, it is $3.45 per share, which means that yesterday's closing stock price of $1.71 per share, our stock has traded at a 50% discount to our adjusted tangible book value per share. Over time we believe that we can repair our balance sheet by returning to higher levels of profitability and have no intentions of issuing equity any time soon.

As seen on slide 21, after spending $192 million on land and land development and paying off $61 million of debt that matured on October 15 during our fourth quarter, we still ended the year with $250 million of liquidity. We once again ended the quarter in excess of our target liquidity range of $170 million to $245 million.

Keep in mind that the two land banking arrangements totaling $300 million were first quarter 2016 events and did not increase our cash position at year end. Now turning to our debt maturity ladder, which can be found on slide 22.

Looking ahead we have $173 million that comes due January 15, 2016, and another $87 million that comes due on May 15. Recently, the high yield market for CCC credit companies, including Hovnanian, has been difficult.

While our preference is to refinance these near term maturities as they come due, we will choose to pay them off with cash if we are not receptive to the prevailing high yield rates where the market for CCC issuers is not open. We have already taken steps primarily with two land banking transactions to ensure we have sufficient liquidity to both pay off these near term maturities as well as continue to grow our Company.

Turning to slide 23, on our last call I went into detail to explain some of the liquidity levers we have available. The four levers listed on this slide are land banking, joint ventures, non-recourse project specific loans, and model sale leasebacks.

I will take a moment to highlight recent activity that we've had for each of these. The first lever is land banking. On October 8 we announced a $125 million land banking arrangement with Domain Real Estate Partners, an affiliate of DW Partners.

And yesterday we announced $175 million land banking arrangement with GSO, an affiliate of the Blackstone Group. After taking into account the inventory that will be included in both the DW and GSO land banking transactions, there remains over $500 million of inventory on our balance sheet today that is available for additional land banking, joint venture, and project financing transactions.

In addition to that, the Company also has the ability to utilize these same levers for all of our future land transactions. The second lever is joint ventures.

As I mentioned earlier, in November we entered into a new joint venture for a 278-unit mid-rise building in New Jersey that generated $26 million of cash proceeds back to Hovnanian. Since the beginning of FY15, we closed on two joint ventures, including the mid-rise in New Jersey totaling over $300 million committed capital.

Furthermore, we continued to talk with potential partners about additional joint ventures. The market for joint ventures with us is active and vibrant.

Our third lever is non-recourse project loans. During the fourth quarter, we entered into four new non-recourse project specific loans. For all of FY15, we've added loans that allow us to borrow up to $131 million to fund land development and/or vertical construction at very competitive rates.

At October 31, 2015, we had $144 million of non-recourse financing outstanding. We continue to close on additional non-recourse project financings -- we expect to continue to close on additional ones, non-recourse project financing in future quarters as well.

Finally, we continue to utilize our model sale leasebacks. For all of FY15, we closed $43 million of model sale leasebacks. As we open new communities during FY16, we intend to finance new model homes with our model sales leaseback program.

Even though these alternative capital sources were administratively burdensome, each of these levers provides us with additional liquidity and enhances our returns on capital. Keep in mind that these are the same levers we talked about in 2009, and successfully executed at a point in time when both Hovnanian and the housing market were in a much tougher position than we find ourselves now.

Let me reiterate, while we still prefer to access the high yield market to refinance our debt, we believe that we can continue to utilize the levers outlined above which will allow us to pay off near-term debt as it matures and allow us to continue the growth that our business plans contemplate. As you can see on the left-hand side of slide 24, we've been aggressively investing in the land over the last three years.

We've gained control of about 9,700 more lots than we actually delivered homes on during that period of time, and our land acquisition teams across the country continue to work hard to identify new land parcels to purchase today. Over the past three years, we've grown inventories by 71%, and we now expect that inventory growth will drive increased deliveries, revenues, and profits in FY16.

I'll now turn it back to Ara for some closing comments.

Thanks, Larry. I was pleased we exceeded our fourth quarter guidance and profitability, even without the extra boost from reserves.

If you move on to liquidity, we were comfortable with our position at year end, and given the steps that Larry outlined to enhance our liquidity position, I'm confident that we can remain within our target range of cash even if we don't refinance our bonds maturing in January and May of 2016. I want to elaborate on our inventory for a moment by taking a look at our longer-term trend in our inventory levels.

Slide 25 shows quarterly inventory levels going back to 2008. Because of the financial constraints that we had in the great recession we had less capital to spend on land and therefore near the bottom of the cycle we were less aggressive on investing in land than some of our peers.

As a result, many of our peers have been able to recover much more quickly and achieve improved levels of profitability sooner than we have. This is apparent when you look at the lack of growth we had in our inventory from the fourth quarter of 2009 through the third quarter of 2012.

During this time our inventory was relatively stable, as we didn't have sufficient capital to grow our inventory levels. That changed recently as you can see by the 71% increase in inventory on the right hand portion of the slide.

If you turn to slide 26 you can see that even more clearly. Since the forth quarter of FY12 we've increased from our inventories from $891 million to $1.5 billion, up 71%. Since much of our inventory investment is in raw land, it takes time to obtain the final permits, grade the land, and install the utilities and build the streets.

That work is well under way, and community growth that we've been working towards is now occurring. Additionally, our fourth quarter demonstrates some of the benefits of our growth in inventory.

First, as shown on slide 27, we achieved a 29% increase in contract dollars, including unconsolidated joint ventures, and a 22% year-over-year increase in consolidated net contract dollars during the Fourth Quarter. As indicated on slide 28, we ended the year with a 49% increase in the dollar amount of our contract backlog, including unconsolidated joint ventures, a 42% increase without the joint ventures.

Increases of this magnitude give us the confidence in our ability to substantially increase revenues and profitability during 2016. This is solid evidence that the growth we have planned for 2016 and beyond is realistic.

To utilize an analogy, our increased investment in inventories was like a farmer planting his crops. It takes awhile for the crops to grow and ripen so he can harvest them.

FY16 represents the beginning of our harvest. Due to financial constraints again, we are a little late to the party compared to some of our peers, but we can now feel, see, and touch the growth we expect to achieve in 2016 and beyond.

I'd like to reiterate our expectations for all of FY16, assuming no changes in market conditions, including the construction delays that we've already seen due to shortages of labor in our markets, we expect to report total revenues between $2.7 billion and $3.1 billion for all of FY16. We expect our gross margin for all of 2016 to be between 16.8% and 18%.

We expect total SG&A as a percentage of our total revenues for all of 2016 to be between 9.8% and 10.2%, which as we mentioned earlier was approaching normal levels for us historically. Excluding any land related charges, gains or losses from the extinguishment of debt, or other non-recurring items, we expect pretax profit for all of FY16 to be between $40 million and $100 million.

Over the past few years, we've aggressively invested in growing our inventory, and we believe we're now on the cusp of achieving meaningful growth in both revenues and profitability. Furthermore, we recently made a number of changes to our Management team.

These additions are all seasoned, industry professionals who will be instrumental in our future successes. And they are all integrating very well into our organization. We look forward to delivering significantly improved results beginning with performance of our current first quarter and continuing through the remainder of 2016 and beyond.

That concludes our formal remarks, and we'll be happy to open it up for questions.

(Operator Instructions)

Our first question comes from the line of Sam McGovern from Credit Suisse.

Hi, thanks for taking my questions. If we could go back to slide 23 where you laid out the liquidity levers, I was hoping you could discuss a little bit more about your plans going forward.

I mean how much more additional land banking should we expect? Will that land banking sort of shift in focus from raising liquidity towards investing in new land, and how much more additional JVs, non-recourse debt, and model sale leaseback should we expect?

Yes, we certainly have all those levers available, and I think what we've done to the two significant transactions with DW as well as with GSO, and that covers our needs pretty much through the May liquidity -- the May bonds that are maturing. But as we look at new land transactions going forward, I think we will probably do more of that in the form of either getting project-specific debt, getting land banking, or getting joint ventures in place until such time as the high yield market for CCC issuers such as ourselves becomes available at a reasonable price again.

Okay, great and --

Just want to add also one other comment, and that's the huge growth in inventory levels that we've experienced, we're not projecting to continue that kind of pace going forward. We really have digested the big growth and we've got a lot of land under development right now. So we expect a lot more modest growth in inventories as we reap what we already invested, and that means a lot less demand on our capital needs.

Okay, great. And then as you guys see the effect of the two land banking transactions that you guys recently announced, if we look back at the slides from the last quarter where you laid out your expectations for the future and the upside/downside and base cases, what should we expect the impact of that to be?

Is it just lower inventory, lower debt, and lower gross margins? What other impacts should we be running through on our model?

When we land banked an asset that we had already owned which is what we pretty much announced with respect to DW and what a significant portion of the GSO land banking arrangement is, it doesn't flow through gross margin at all. It flows through -- the impact flows through interest expense. So that would be the first thing you'd need to think through.

Obviously we're paid off a bunch of debt by not refinancing the debt that came due in October and the debt that's going to come due in January. If we don't refinance it we'll be paying off a lot of debt.

So we'll be getting rid of that interest expense and replacing it with interest expense with respect to these land banks. You had more to your question, so ask it again.

Yes, sorry. If there were other impacts on that model beyond those levels?

It would temporarily reduce inventory numbers as we took that off of our balance sheet, and then it comes back on our balance sheet on a just in time basis we take down finished lots. So it's just a timing difference.

Okay great. I'll pass it along.

Thank you our next question comes from the line of Nishu Sood from Deutsche Bank.

Thanks. And following up on the implications to gross margins, that's very helpful Larry. The description of the impact flowing through interest expense as opposed to gross margins. Your guidance for 2016 implies flattish gross margins against this year.

Given that the land banking is not going to be a drag on the gross margins, what's going into that assumption? It sounds like from the pricing trends and the lower specs and decent demand, and it sounds like a conservative assumption given those favorable tailwinds.

So I was just wondering if you'd walk us through why you're only forecasting flat year over year given -- and then I see the harvesting analogy that Ara was using as well. Why only flat given all those tailwinds?

Well the margin projection for all of 2016 is not dissimilar to what we had for all of 2015, that would be the first thing that I would point out. And we still -- it's built from kind of a bottoms up community basis in each of our business units based on current absorption paces, current construction costs, current sales prices, and that's kind of the range that we're conformable with right now. If the market continues to improve, obviously there could be some upside to our margins.

And the only other additional point is, as Larry described, when we land bank existing assets it flows through interest, not gross margin. But on our normal basis as we do land banking, and we do anticipate returning to our normal land banking process which is that we close simultaneous or the land banker actually closes first, that does flow through gross margin.

And in general we'll do a little more land banking probably if we don't refinance than we would have. So that's all factored into the gross margins as well.

Got it. That's very helpful. Second question on the average selling prices.

The ASP in the fourth quarter was a little lower than we would have expected given the selling ASP. Larry, you mentioned that similar to other builders higher priced homes with longer delivery cycles are the ones that have been more prone to delays. So if that's the main driver for ASPs coming in a bit lower than expected should we expect a rebound --

No, let me back you up. I made that comment specifically with respect to the Houston marketplace, not the overall markets that we're in.

Oh, got it. Okay, then. If you could help us understand the lag in ASPs versus your order prices and how we should expect that to flow as we head into 16 please.

Well I mean if you look at the average price and contract backlog at quarter end, end of the year, including joint ventures it's $433,000, on a consolidated basis it's $418,000. That's probably your best indication of what's going to be happening to average sales prices in future quarters.

Got it. Okay, thanks for the details.

Our next question comes from the line of Michael Rehaut from JPMorgan.

Thanks. Good morning, everyone.

Good morning.

First question I had was just on the more of like I guess a modeling question, but related to, Larry, your comments around some of the more recent land banking arrangements. The interest expense amortization I think this year came in FY15 around 2.9% of revenue. Given some of the perhaps changes in mix as it relates to the land banking, but also obviously you have revenue growth you anticipated, can you give us a sense from a range or from a dollar, absolute dollar perspective what you expect the interest expense amortization to come in for 2016?

I think right now the best assumption would be to just use what it's kind of been running at. That varies depending on the mix of communities that are delivering and how long those homes take to build, et cetera. So the best you can do is look at our historical run rate for cost of sales interest.

When you say what its been running at, are you talking about on a dollar basis or on a percent of revenue basis?

I'd say more on a percentage basis.

Okay. And then just going back to the gross margins for a moment, and I know you've been talking about this in the last question or two, but again want to make sure I'm understanding things at least from a conceptual standpoint. You mentioned that in the upcoming year you're going to be selling some communities out of Natomas, which you mentioned were higher above average margins.

You also obviously highlighted the land that's starting to come through that you're harvesting that was more developed land, owned, which is also typically a higher gross margin type product. So with those types of positive mixes occurring, what's offsetting that that you're still looking at the midpoint of the range pre-interest for it to be a similar gross margin?

Are there other areas of geography that are offsetting some of those benefits? Is it again the labor expense that continues to impact anything conceptually in terms of you've highlighted those positive drivers, but what's the offset to that?

Some of it's just mix, Mike. Again we do a very diligent, detailed, bottoms up budgeting process community by community, and the mix of geographies, the mix of communities and product types within a geography, can impact those types of things. As Ara mentioned, as we do a little bit more land banking on a traditional basis, that could have an impact.

So there's a whole bunch of things that goes into it. We are encouraged with the market trends that we've seen recently. You can kind of see it in our orders.

We're very pleased with what we've reported for the October quarter. We're pleased how we stacked up against our peers when we restacked for September quarter, and we were pleased with the November orders that we reported as well.

And again, if that trend continues, I think there might be the potential to also increase prices at a community level that could have some positive impact on margins in 2016. But as we built our budget we used no changes in the sales price, no changes in absorption or in construction cost, and we gave you our best estimate of what those margins would be taking current conditions into account.

Just to add to that, again we have seen construction cost increases as everyone has, so we've tried to factor that in. We have a different mix of land banking, we're trying to factor that in, and new land purchases. So we're trying to factor all of those in and give you the best guidance we can at this early stage.

No, we appreciate that and those comments do make sense. I guess just lastly, and I'm glad you brought up the October/November order trends, which were obviously very, very solid.

Any color around that in terms of, and I apologize I don't have the slides right in front of me, I'm presuming that you had a solid improvement in sales pace, driving the overall order growth. And so if I'm right on that assumption, what do you feel might be driving that?

Are there certain regions that are doing a little bit better than let's say your fiscal fourth quarter? Were there any maybe promotions or timing related to community openings? Any sense of those stronger trends in the last couple of months?

Well first of all the stronger trends are really pretty disbursed geographically. I can't say that we felt any particular weak areas in terms of better sales pace.

It's been feeling pretty good, and we didn't have any special promotions going on recent. So I'd attribute it to just obviously we've got new land positions, and part of the growth as we mentioned was from growth in communities.

Part of it was from an increased pace per community. We've got some good locations, got some new designs out there, and the market feels like it's getting a little bit better than it was in the first half of 2015.

And Mike to specifically answer your question on contracts per community, for each of the last five months through November they've been up year over year. So that's just an encouraging sign that the overall market -- I mean we're not in a fabulous time of the year for sales, but it's just an encouraging sign that maybe the spring selling market is going to be good too. Obviously we didn't factor in any improvement in that, and there are projections, but it just feels a little bit better the last five months or so.

Great, thanks a lot, guys.

Thank you. Our next question comes from the line of Alan Ratner from Zelman & Associates.

Hi, guys, good morning. Nice quarter.

Thank you.

I was hoping to get, sorry, one more question on the land banking here. So my understanding is the $300 million that you've got committed on the land bank, part of that is that the land value that's on your books in terms of what you're committing and then part of that is future development cost of that land.

So some of that's going to be coming cash in the door and some of that's more in the form of cash savings, if you will. So do you have the breakout of that in terms of the land that you're committing, how much cash is actually going to be coming in the door in the first quarter?

No, I don't have that handy.

Should we assume it's like roughly 50/50 in terms of that breakout?

No, it's much higher than that.

Much higher in terms of cash in the door now?

Yes.

Okay. Second question on the Houston improvement in November. Would you say that that's a market-wide trend, or do you feel like that's more a function of the repositioning of your community as more towards the lower price points and the non-energy corridor?

That's not a repositioning, that's been our strategy all along in terms of lower price points and lack of focus on the -- as much focus as some of our peers on energy. Of course that's not a shift. We didn't do anything different in November than what we did in August, September, and October.

So hopefully it's a market-wide phenomenon, but to be perfectly candid I don't know the answer to that. It will be interesting to see what our peers are saying about the month of November. This is very fresh news, but we were pleased to see that trend kind of reverse what we saw the previous three months.

Great that's encouraging. If I could sneak in one more on your typical cash flow seasonality, to go back the last couple of years generally you use up cash in the first half of the year as you're building your backlog for the spring, and then generate some cash in the back half. So should we expect that seasonality to be any different given your debt maturities are front-half loaded? Are you going to change your land spending to kind of more even flow that to ensure that you've got enough liquidity for the year to build up that backlog?

I think that we're going to continue to buy the land parcels, we may do more of it via land banking -- the new parcels, not the stuff that we own. So that when you look at it, it will appear from a factual perspective I guess as well that we're using less cash but we're controlling the same amount of land. If that makes sense to you.

Got it, that's helpful. I appreciate that. Thanks and good luck.

Thank you.

Our next question comes from the line of Susan Berliner from JPMorgan.

Hi, good morning. Just following up on that last question, I guess with regards to land spend for 2016, so Larry, it's clearly coming down from 2015 from what you guys own. Any help there how we could model that?

I'm sorry coming down from what, Susan?

From the land spend that you did in 2015 you said you're going to be doing a little bit more from land banking, so how should we adjust our model for land spend next year?

I don't know how to give you great granularity on that one. As Ara said, we're not trying to grow inventory, so that's one of the issues that -- we were still growing inventories quite a bit.

It's much more modest growth in order to hit our business plans. And we gave you that and pretty good granularity last quarterly call when we put out the illustrative scenarios.

So you can look back at that and just see that inventory growth was slowing significantly, and then kind of leveling off. But it's hard for me to tell you precisely what's going to happen in terms of land spend. It will be a little bit lower because we're doing more in land banking, and that's about the only thing I can tell you right now.

Okay. And then I guess with regards to guidance for 2016, I guess how are you thinking about the various markets, specifically what are you thinking for Houston for 2016? Because a couple of your peers have definitely noted some cautious comments regarding 2016. And then if you can just go over your other markets, what you were seeing and your expectations for 2016?

Well I'll tackle Houston and then we'll turn it over to Ara to make some broader comments on the rest of our markets. But I mean Houston for us has been really hanging in there. We're not expecting Houston to grow in 2016.

It might shrink a little bit, and that's kind of what's factored into our numbers. But everywhere else is going to grow significantly, more so as a percentage of revenue, as a percentage of earnings. Houston is going to be a much smaller percent in 2016 as compared to 2015 for us.

And just overall, as I mentioned earlier, I think we're seeing pretty much across-the-board strength in our markets around the country. It's clearly a little hotter in the Bay Area and maybe southeast Florida is particularly hot as well, which is not a huge market for us.

But the Bay Area has been a particularly large market. I should mention we've got a number of new models and communities coming up in Southeast Florida.

So while it historically has not been a big area, we anticipate it playing a much larger role for us. But overall the market has been just very, very solid. I guess maybe I'd add that we continue to see the DC market be just a little bit sluggish, and the guess is that some of the sequestering is just having an impact on the job market there. So we haven't seen the robust recovery there that we would have been expecting and that's been there in prior recoveries.

And if I could sneak one other thing, with the collateral coverage on the bonds, Larry, should we just assume it will be in your 10-Q this time?

It's actually -- the slides are in the appendix, Sue.

Oh, okay perfect.

They are all there.

Okay, thank you.

Our next question comes from the line of James Finnerty from Citi.

Hi, good afternoon. Just a couple quick questions. On the liquidity front, historically you have the range of $170 million to $245 million. And in your third quarter slides, I guess you'd modeled out that cash would be somewhere north of $200 million by year end 2016. Should we assume that would be the case for 2016?

Well I think our target range remains unchanged, so that $200 million was just within the range is how we modeled it when we put those numbers out last quarter.

In terms of the profit guidance for the full year, should we assume that you'll be profitable each quarter during the year or is it more of a full-year target?

We're not giving any granularity quarter by quarter, it's significantly improved year overall, but we are not giving quarterly guidance at this time.

Okay, great. And then on the non-recourse funding, is there any limit to how much non-recourse funding you can do?

No.

Okay, great. Thanks very much.

(Operator Instructions)

Our next question comes from the line of Peter Grishchenko from Imperial Capital.

Hi, guys. My questions have already been answered, but if you can just elaborate some more I guess on the mechanics of the GSO and GW transactions, like what's the embedded cost of capital there?

I'm sorry can you repeat it?

Can you just elaborate on the GSO transactions? What's the embedded cost of capital?

We're under a confidentiality agreement both with GSO and DW and frankly on any of our land banking, so I can't share with you what that is.

Well the direction, I mean at least you're raising capital to pay down your front end maturities, is that --?

It's higher than the debt we paid off.

Okay, cool. Thanks, guys.

And we've, again, baked in those costs into our guidance. It's still baked in.

Got it. Thanks.

Thank you. And our next question comes from the line of Alex Barron from Housing Research.

Thank you, guys. Was hoping you could share with us your thoughts on -- seems like the Fed seems more ready to raise interest rates I guess potentially later this month. So just your approach to if that happens what you expect to happen to mortgage rates and your approach to -- if rates start to go higher I guess how you would approach that, and whether you expect to increase your exposure to the entry level as time goes by?

Well first of all, I think that it's reasonable to assume any movement is not going to be Draconian with interest rates. And frankly it's not clear how much the short-term interest rate increases are going to affect long-term mortgage rates at the moment.

But notwithstanding that point, obviously all of our communities offer a multitude of model types. Currently in this very -- and at different price points. Currently in this environment customers are gravitating toward most of our larger models.

And on top of that, we're seeing quite a bit of options and upgrades. I think it's reasonable to assume that as interest rates increase they might select a slightly smaller model than the largest models, which are very popular right now.

We are pretty much gross margin neutral on most of our models, so we make in terms of percentages a pretty similar and consistent gross margin on our smaller models, medium models, and larger models. So we don't think it will have a great impact.

We do make a little better gross margin, not dramatically but a little better gross margin on our options and upgrades. So perhaps there might be a slight impact if that's disproportionately where the changes come from. But overall, at this time we're not expecting huge changes, and therefore I wouldn't expect to see a huge shift in either of those factors.

I would also say that the Fed rate is a very short-term rate and the mortgage rates fluctuate up and down multiple times during the day, much less over a month or six months. So I think the anticipated Fed rate increase is probably already built into mortgage rates already.

And frankly if the Fed continues to increase rates, which is probably more along, Alex, where your comment may be coming from, I think that's going to be an indication that the US economy is doing better and I think that will give consumers the confidence to go out and buy houses. So although it's incrementally harder to qualify them, if we had a lot more people wanting to buy a house because they're doing better in their jobs and earning more and were confident in the US economy, I think that would really bode well for our industry and our company specifically.

Okay, great. Thank you and good luck.

That concludes our question-and-answer session for today. I would like to turn the conference back over to Ara Hovnanian for any closing comments.

Thank you. Again we are pleased to report some good results, and based on our backlog and the sales pace, we certainly believe that our better results from this last quarter were just a precursor of better performance ahead. And we look forward to sharing those with you in upcoming quarters. Thank you very much.

Thank you. This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.