Hovnanian Enterprises Inc (HOVNP) 2002 Q4 法說會逐字稿

Good morning. Thank you for joining us today for the year end 2002 conference call for Hovnanian Enterprises. You should have received a copy of this morning's press release. If someone would like one, contact Dana Almack at 732-747-7800 and we will send you one and ensure you're on the companying mailing list. There will be a replay for today’s call that will begin one hour after the call and will run for one week. The replay can be accessed by dialing 800-428-6051, pass code 428524. This broadcast is being recorded. Participants are in a listen-only mode. Management will make opening remarks about fiscal 2002 results and fourth quarter and then open up the line for questions. The company will also be web-casting its life presentation along with the opening comments from management. The slides are available on the investors page of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time.

Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call. And to the information in the slide presentation. I will now like to turn the conference over to Ara Hovnanian. Please go ahead.

Thank you. Good morning, everyone. We're pleased to report our results for the fourth quarter and fiscal year 02 which ended October 31st we're reporting exceptional performance with revenues and earnings setting all time records in fiscal 2002. The earnings are more than double last year's and we ended the year with a strong balance sheet. The company’s ratio of net debt to equity was .7 to 1 at year end, after taking into account about $250m of excess cash in our balance sheet.

We're once again -- we have set all new records for virtually every category of performance for the fourth quarter and for the full year. We have again exceeded analyst expectations and our own projections for earnings for the quarter. Joining me today on the conference call had from Hovnanian are, Larry Sorsby, our Executive Vice President and CFO, Paul Buchanan, Senior Vice President and Corporate Controller, Kevin Hake, Vice President and Treasurer and Brian Cheripka Assistant Director of Investor Relations.

I do want to mention that Geaton DeCesaris, our COO and President of Home Building Operations is not with us on this call as he usually is. As some of you may know. Geaton was recently diagnosed with lung cancer and has been under going treatment. The good news is that the cancer appears to be contained and they plan to address the cancer with surgery and chemotherapy. He is young and strong as an ox so we're confident he will get past this hurdle and rejoin our management.team later in the year.

Now let's turn back to our financial results. For those of you viewing the slides on the investor pages of our website at www.khov.com, you can begin now with slide number one. Hovnanian Enterprises reported net income of $137.7m for the fiscal year ended October 31, 2002, which is more than double the 63.$7m earned last year. Net earnings have grown at about a compounded annual rate of 66% over the last three years.

Slide two, we significantly exceeded analysts' projections in last year's results by reporting operating income of $4.54 for fully delighted share for 2002, this represents a nearly 100% increase in operating earnings per share from the record level achieved last year in fiscal 2001. The consensus of analysts projections was $4.35 per share. These operating earnings are before a one time charge of $.24 per share that the company incurred in the third quarter related to a change in our [audio gap] and an extraordinary loss in the second quarter equivalent to [audio gap] per share from an early retirement of debt. Net earnings for fiscal 2002 were a record $4.28 per fully diluted share. Slide number three. This represents an 87% increase from fiscal 2001.

Slide four, total revenue for the year increased 46% to $2.6b. We continue to increase our earnings at a faster rate than our revenues.

Slide number five. Our company's pre-tax margin rose 280 basis points for the year to 8.9 from 6.1% last year.

Slide six, the number of homes delivered increased 40% to 9,514 homes, also an all-time record for our company.

Slide seven, in addition to our strong housing performance, our mortgage and title operations contributed in a very meaningful way. Pre-tax earnings from financial services improved 83% to 18.$2m in fiscal 2002 from $10m last fiscal year. We continue to experience the benefits of a healthy housing market in 2002 but our strong performance in 2002 reflects the success of our market concentration strategy. Our attractive land position in some of the best housing markets in the country and our continued focus on improving efficiency in our operations.

Slide eight. We are now a well-diversified company by geography. In fiscal 2002, 22% of our delivery volume came from southern California, 23% was in the northeast, 15% came from our North Carolina markets. 15% came from the metro D.C. markets. 11% from northern California. And 11% from Texas. We're very excited about our recent acquisition of the assets of Park Side homes in Houston which closed in early February. The Park Side acquisition marks our entry into the Houston marketplace and expands our Texas operations which had previously been focused on the Dallas/Ft. Worth market. Park Side is a small company but it offers a great platform for growth with a very solid land position and a niche of providing very affordable homes. Park Side currently controls about 2200 lots and great neighborhood net the Houston area. The company has a great track record with excellent returns.

Slide number nine. Overall, Hovnanian Enterprises achieved a 34% return on beginning equity per share in fiscal 2002. The after-tax return on beginning capital per share for the year was very healthy at 20%. These are key measures of our performance against which we regularly gauge our progress and they indicate we're creating significant value for our shareholders. Our one softer market continues to be North Carolina. The sales pace continues to be slow in each of the three major sub-markets in North Carolina this year and our returns are at below our targets for those markets. The North Carolina markets with easier regulatory requirements have seen greater competition for sales leading to pricing concessions in some locations. We are achieving very strong returns on our investment levels in each of our other core markets and overall, we continue to see solid demand in our markets.

Slide 10. The dollar value of net contracts for the 12-month period in fiscal 2002 increased 50% to 2.$4b and the pace of net contracts for the fourth quarter rose 09% providing an indication of the strength of our market as we finished up the year. The net value of contracts -- excuse me, the net value of the contracts signed in the fourth quarter in the northeast in the Washington, D.C. markets and the Texas markets increased 41%, 18% and 23% respectively. These are significant markets for our company and they were unaffected by the acquisition of Forecast Homes earlier in the year and just shows what we're capable of achieving with internal growth. Sales continued at a strong pace in November. We released this data almost -- already last week, and the value of net sales contracts showed year over year improvement of 74% for the month. Even Thanksgiving week, which is traditionally a slow week, was very, very strong in our company and exceeded our internal budgets.

Slide 11, sales backlog on October 31 reached 38,057homes with sales of 1.1b. The value of our sales backlog represents a 39% increase over the end of 2001 and clearly, there were records for any year end in our history. None of our financial results or sales backlog for 2002 include any affect from the acquisition of Park Side homes which closed in early November, the first month of 2003. We're beginning to book a considerable amount of business for fiscal 2003. As of October 31 of fiscal 2002, the start of our new fiscal year, 39% of our home deliveries needed to make our reforecast was already in the contract backlog. By the end of November, we already had 46% of this year's projected deliver ryes either in sales backlog or already delivered. In our highly profitable northeast and D.C. markets, we already sold more than two-thirds of the homes planned for delivery during the fiscal year. The purchase contracts in these markets contain a substantial down payment with solid, solid margins.

Slide 12. Our strong backlog and recent sales pace combined with good margins gives us the confidence to increase our earnings projection for fiscal 2003 to a range of between $5.20 to $5.20 [sic] per fully diluted share. This increase represents -- between $272m and $283m in earnings before taxes and $163m to $170m in net income. We anticipate increasing revenues by about 8% in fiscal 2003 to a range of $2.72b to $2.76b and we're providing a preliminary estimate of 2003 deliveries to grow to a range of 9,850 to 10,000 homes. Our projected range of net profits represents another 18 to 23% increase over the strong earnings that we are reporting for fiscal 2002, once again growing the bottom line faster than the top line, this is on top of the 66% compounded growth in earnings we have achieved in each of the last three years.

As displayed on slide number 13, we have been generating strong growth in earnings per share. I would like to turn it over to Larry Sorsby to discuss our financial performance in greater detail.

As Ara said, our balance sheet at fiscal year end is as strong as ever. I’m sure that some of our credit statistics will provide a pleasant surprise for investors and bondholders. While our growth in earnings exceeded our plan, we also out performed our plan in terms of lower debt levels, lower leverage, better interest coverage and a stronger balance sheet.

Slide 14, shareholders equity grew 50% to $563m or 18.41 per share as of October 31, 2002, from $376m or $13.48 per share at the end of fiscal 2001. Based on our earnings projections for fiscal 2003, we expect shareholders' equity to grow to about $730m by October 31, 2003, equivalent to about $23.50 per share. There was no balance outstanding under the company's 440m unsecured revolving credit line at the end of the year and we had approximately $250m of excess cash. We continue to have ample liquidity to fund ongoing operations and our continued growth objectives. Due to our strong margins, our cash flow continues to be quite strong. It's unusual in the home building industry to grow and simultaneously generate cash. We are continuing to generate a significant amount of cash, despite our substantial growth. Our net debt level at fiscal year end is only about $15m higher at $411m, than it was a year earlier, even though our revenues for the year increased by 46%.

Turning to slide 15, as a result, the company's ratio of debt to equity was only .7 to 1 as of October 31, 2002, after taking into account the excess cash on our balance sheet this compares with a ratio to 1.1 at the end of fiscal 2001 and is equivalent to ratio of net debt to total capitalization of only 42%. For the full year in fiscal 2002, we achieved an average ratio of debt to equity of 1.1 to 1. This is significantly better than our forecast earlier this year. We're well ahead of our goal of averaging a 1 [audio gap] ratio of debt to equity in 2004 and in fact, we're likely to achieve that goal in fiscal 2003.

Turning to slide 16, for the full year in fiscal 2002, EBITDA rose 82% to 319.2m and covered interest incurred during the year 5.6 times. The ratio of EBITDA to net debt at year end was only 1.3 to 1, reflecting a very strong capability for the company to service its debt requirements.

Now I will give you a few highlights of our earnings performance for the fourth quarter fiscal 2002 and some of the specifics behind the full year results. Turning to slide 17, for the fourth quarter of fiscal 2002, total revenues grew 55% to 831m from fiscal 2001’s fourth quarter revenues of 537m. Net income for last three months of 2002 was 54.4m or $1.66 per fully diluted share, a 151% increase compared to 21.7m or $.74 a share in 2001's fourth quarter. These earnings significantly exceeded consensus analysts projections of $1.45 per share for the quarter. EBITDA doubled for the quarter to 119.3m from 58m in the fourth quarter of 2001 and covered the amount of interest incurred in the quarter by 7.7 times. Our fourth quarter contracts, deliveries and backlog all represent record levels for any fourth quarter in our history

Going to Slide 18. Year to year the dollar value of net contracts during the three-month period increased by 90% and the number of homes deliveries rose by 48%. The forecast acquisition clearly added to our results this year when compared to last year.

Turning to Slide 19. However to illustrate our strong organic growth in earnings this year EPS in the fourth quarter of $1.66 was 52% higher than last year’s fourth quarter calculated on a pro forma basis for our last two acquisitions. Let me repeat that as many have questioned our ability to grow organically. To illustrate our strong organic growth in earnings this year EPS in the fourth quarter of $1.66 per share was 52% higher than last year’s fourth quarter when calculated on a pro forma basis for our last two acquisitions including the Forecast Homes acquisition. On that basis EPS was $1.09 [than] last year’s fourth quarter. This is calculated as if the Forecast acquisition earlier this year and the Washington Homes merger in fiscal 2001 both occurred on November 1, 2000. Our net sales contracts are also a strong indication of the organic growth we have achieved in many of our markets.

Turning to Slide 20, in California, the dollar value of our net sales contracts for the fourth quarter was up 76% on a pro forma basis for the Forecast Homes acquisition, after including Forecast fourth quarter 2001 contracts in the comparison. Also, as Ara pointed out, our fourth quarter sales contract value was up 41% in our northeast region, 23% in Texas and 18% in metro Washington, D.C. These markets were unaffected by the Forecast Homes acquisition.

Turning to slide 21, we have 196 communities open company-wide as of October 31, a 14% increase from the prior year end. Last year's total included 18 communities in our mid south markets, which we exited in the early part of this year, excluding those communities, the number of open communities company wide as of October 31 increased by 27% over the prior year end. Our current plan is to have approximately 35 more communities open at our fiscal year end October 31, 2003, up 18% from our current community count. This projection excludes the communities we have added via the acquisition of Park Side Homes. Each of these additional communities is already owned by the company or controlled under option, so our lot costs are, in essence, locked in. The increasingly difficult regulatory environment in many of our core markets is frustrating the efforts of many small builders these markets. Fortunately as one of the largest builders in each of the highly regulated market we have an excellent land position and an attractive cost basis.

Turning to slide 22, we have a total of nearly 54,000 lots controlled for future development company wide with 75% of these lots controlled under option contracts. The substantial majority of home deliveries in the company's organic growth plan for the next three years will come from communities that we currently own or control under an option contract.

Turning to slide 23, in most of our markets, the company achieves substantially higher gross margins on a community by community basis in the fourth quarter of fiscal 2002 than in the fourth quarter of fiscal 2001, primarily due to higher sales prices but also due to our tight efficiency in controlling costs. As a result, the company's consolidated home building gross margins for the fourth quarter excluding land sales was 23.5%, 260 basis points higher than in the fourth quarter of fiscal 2001. Based on the strong margins in our sales backlog, we expect our gross margin to remain close to 23% in 2003. For the full year in fiscal 2000, two the company's consolidated home building gross margin was 22%, a 140 basis points higher than 20.6% in fiscal 2001.

Turning to slide 24, the average sales price per home delivered company-wide for the fourth quarter was $272,000, a 4.5% increase from the average sales price of $260,000 in the prior year's fourth

quarter. We anticipate that our average sales price will hold fairly steady, near $272,000 in fiscal 2003.

Turning to slide 25, total selling general administrative expense, including corporate expense as a percentage of total revenues was 9% in the fourth quarter of 2002, an 80 basis point improvement from the 9.8% in last you're fourth quarter and a reflection in the company's increased scale and improvement operating efficiency. For the full year fiscal 2002, total SG&A expense as a percent of total revenues was 9.7%, 90 basis points better than last year’s ratio of 10.6%. We are predicting our SG&A percent ratio will increase to 10% in 2003 as we incur a lot of the overhead costs of opening a significant number of enough communities. We will not record a full year of revenues from home sales in those communities until fiscal 2004, which, by the way, is shaping up to be quite a healthy year.

Tushing to slide 26, the company’s pre-tax margin in the fourth quarter rose more than 400 basis points to 11.1% from 6.9% in the prior year's fourth quarter bringing the pre-tax margin to 8.9% for the full year.

Going to slide 27, our financial services segment continues to improve on its healthy performance. Pre-tax earnings from financial services were 6.1m in the fourth quart ever, up 120% from the 2.8m in the prior year's fourth quarter. As Ara stated, assuming the current economic conditions hold, we anticipate increasing revenues in 2003 to a range of $2.72b to $2.76b and we expect to deliver nearly 10,000 homes. Earnings per share anticipated to grow to a range of between $5 and $5.20 a share in fiscal 2003. We expect our pattern of quarrel deliveries and earnings to be more even in fiscal 2003 than in fiscal 2002. As a result, we expect to show substantial improvement in our earnings per share in the first two quarters compared to the first two quarters of fiscal 2002. The third and fourth quarters will be tougher comparisons given the very strong results reported in the last six months of this year, but we still anticipate showing increases in earnings per share for the last half of fiscal 2003.

Going to slide 28, we expect to begin the year with a solid first quarter, showing a healthy increase in EPS over last year’s fourth quarter, with earnings in the range of $.95 to a dollar per fully diluted share, compared with $.60 per diluted share last year, an increase of more than 50%. Details on our updated summary projections for fiscal year ending October 31, 2003 are now available on a company projection page of the investor section of the company's website at www/khov.com. Our projections assume that current absorption rates continue at our communities that are currently open for sale, but we assume zero, nothing, nada, house pricing from current levels. For new communities we will open, we use current prices and absorptions and comparable neighborhood communities to create our forecast and we assume zero price escalation over the life of the community. As we have mentioned earlier, we have much of the first half of expected deliveries in backlog with very strong margins.

Our forecast for fiscal 2003 does include the effect of the acquisition of the Park Side Home assets. However, we do not expect Park Side's operations to have a significant effect on our operations in fiscal 2003. Park Side is expected to close about 300 homes with an average sales price of $118,000 in fiscal 2003. The cost of the Park Side acquisition, which was paid in cash, also did not have significant effect on our balance sheet or leverage ratios. The company does not anticipate booking any good will or any other intangibles in conjunction with the Park side acquisition. During our strong performance -- despite our strong performance in 2002 and additional growth in earnings that we are projecting for 2003, our share price continues to trade at discounted valuations. Our closing price Thursday, of $31.81 per share represented a low multiple of only 6.2 times the midpoint of a revised projection for fiscal 2003 earnings. This is for a company that has achieved a 66% compounded growth in earnings over the past three years and a return on equity, on the beginning equity of 34%.

This PE ratio is at the low end of our historical PE range, as shown in slide number 29. In fact, the entire home building industry continues to be valued as an industry at a substantial discount to the valuation of the overall market. Despite the strong financial performance turned in by our company and our industry, quarter after quarter, home building stocks are selling at recessionary levels, with the industry average PE multiple at only 6 times projected 2003 earnings, less than half the equivalent PE multiples on the S&P 500 and well below prior averages for our industry.

Turning to slide 30, will show that prior to the early 1990s, the housing stocks traded at PE multiples that were on average in line with the S&P multiple. The vastly improved margins and return on investment provide a strong argument that the home building industry PE multiples and the ratio of share prices to book value should now be significantly higher than historical averages.

Slide 31 compares the ROE of our tree and our company with the REO of the S&P 500. You can seep that our industry has been making much better returns than the overall market. As an industry sector, the large public home builders have been performing well and Hovnanian is achieving results that place us near the top of the industry in terms of the growth and return on investments.

Slide 32 shows Hovnanian has the second highest ROE in the industry behind NVR and our return on assets including good will is among the highest in the industry for the latest 12 months as shown on slide number 33. Our EPS growth is among the highest as well as displayed on slide 34. With a revised earnings projections 42003, slide 35 shows that our compounded earnings per share growth for 2003 is projected to be 50%, a stellar growth rate for any industry. We're very pleased with our excellent returns and strong growth ask we're optimistic that our share price will ultimately begin to reflect our end performance. Now I turn it back to Ara for additional comments.

Thanks, Larry. I know that while you've been listening to these great results, every rational and logical brain cell in your brain is saying, that's all great but since the housing market hasn't seen a slow down in any of the last three years, it must be about to happen, maybe next year, and therefore home building earnings are going to go down. I can understand your feelings. It seems logical. On the other hand, we should have already had a slow down as we went into a recession not long ago. That didn't happen. It defied the old rules. So now many believe that the old rules must be upside-down permanently. Because housing normally does well after a recession. Many seem to think this time housing is going to go down as the economy improves. We don't think that's the case.

If you look at slide 36, it shows the housing cycles for the past 30 years. The shaded areas highlight the recessions. You can clearly see that housing activity has generally increased after every recession. As far as I can recall, we have recently experienced an official recession. At some point, we will begin an official recovery, which has traditionally been great for the housing industry. I have joked that perhaps the major home building CEO's should have gotten together and decided not sell any homes for a couple of quarters so we could turn in a couple of bad quarters performance so everyone could then breathe a sigh of relief that the slow down finally happened as they projected and we could get back to business. Instead, we have all foolishly continued to perform very well.

Our company has shown a history of under-promising and over-delivering. In 2001 we started the year projecting earnings per share of $1.80 including the effect of Washington homes and we ended up making $2.29 a share. In 2002, last year, we started the year projecting earnings per share higher than $2.29. We increased the projection to $3 per share when we announced the acquisition of Forecast Homes and we just reported $4.28 per share for the year. In fact, I think we increased our projections virtually every quarter during the last couple of years. I have no reason to over-promise to you now. The company overall and I personally am in this for the long haul.

Incidentally, some of you have raised concerns about the selling of shares by senior executives of the larger home builders. I would like to just point out that the Hovnanian family continues to be far and away the largest shareholder in of Hovnanian Enterprises with 43% of the outstanding shares. This is a larger ownership position by management than any of our public home building peers by a long shot. My father and I filed to sell a total of a few hundred thousand shares earlier this year, although I actually never sold any shares. From time to time, we may sell a small portion of our overall holdings but we do not intend to sell a significant portion at all of our holdings. Keep in mind, my father is turning 80 this year and has rarely sold any shares since he has formed the company. I think it's reasonable he will sell a small number of his holdings at some point. Our interest remains fully aligned with you, our shareholders and they will stay that way fort long-term. Also our COO, Geaton DeCesaris, sold a few shares but took a significant -- after he sold his company with Washington Homes and continues to have a large position with nearly a million shares. As I said, I have no reason to over-promise to you now, misleading you in the hopes of boosting our stock prices in the short-term would not be in our best interests.

With that as a preface, I would like to tell you that business is very, very solid. Our projections are somewhat guarded, as they always are but we feel as optimistic as we have ever been about our future performance. Again, I recognize this goes against the instincts many of you have about a cyclical downturn. I'm just telling you business is not showing any signs of a slow down right now. Yes, North Carolina has seen some discounts but we've been telling you that for some time. North Carolina has been weak for the last year and a half or so and conditions there are pretty consistent and stable. There's been a few instances of a discount here or there but frankly in the last 10 years in various markets from one house location or another or one community location, we always do some sort of discounts. That's always been factored in. Our Dallas market overall has been very solid and our other four core markets, the northeast, D.C., southern California, and northern California, have been and continue to be outstanding. These are extremely supply-constrained markets due to the regulatory conditions.

With all of the hype about the housing bubble, our core markets are producing 20 to 50% less housing per year than during the strong periods of the late 80s. Yesterday, demand is no less in these markets. There's nothing in the land and regulatory environment that would indicate this is going to change. Supply is going to remain very low in these markets. At the same time, we are a dominant builder in these markets with excellent land positions and great land relationships. People like to draw a parallel between home building industry and the dot com bubble but the supply of dot coms was virtually limitless. A good idea would get you on the market. Land with regulatory approvals, particularly in our markets, is very limited. And, of course, the dot coms had an infinite multiple of earnings since they didn't have any, and home builders are selling for about six times good old-fashioned earnings and a just little over book value so I don't see much of a parallel myself.

Well, I've been very excited about our earnings projections for 2003. 2004 should actually be our very best organic growth year in a long time. I say this because we will be opening many new communities this year, which should begin delivering homes in 2004. Keep in mind, many of the communities that we're opening this year were typically put under contract two to four plus years ago. This is certainly the case in our core northeastern and D.C. markets, which have the majority of our new -- of our company's net new openings for this year. These communities made solid financial sense at housing prices that were in effect when they were put under contract years ago. At today's prices, they will be outstanding when they open, even if prices begin to retreat a little bit, producing lower margins than current housing prices would indicate. Which by the we don't see that happening. The additional volume from the communities alone in these highly regulated markets will lead to great total profits.

If you coupled this low land cost with an improving economy which is bound to happen one of these days, we think the future looks very bright for Hovnanian Enterprises. To some extent we have been fortunate that we have significant positions in these difficult markets. Part of our strategy has been not to spread ourselves all over the map but be dominant in a handful of markets. In addition we have not limited ourselves to a price niche or price point or product niche. If the low end is strong, we are there. If mid price housing ,first time move up, second time move up, third time move up is strong, we're there. If there's strength in the active adult market, we're there. Town houses, condominiums, urban in-fill, we're there. The market dominance with an emphasis on highly regulated markets has been paying off handsomely, leading us to one of the best earnings growth and highest ROE's in the industry. Based on our community positions, we feel more bullish today than we did last year, and this is without any further acquisitions, although do you think there are some opportunities out there.

Much attention has been focused recently on the slowing of housing appreciation, as I said before, we think that is reasonable. And if you remember, we set our internal budgets based on zero price appreciation. In fact last week‘s Wall Street Journal article based on the federal report showed that nationally prices appreciated only 1% for the quarter. Any appreciation, even .1% is upside from our projections. Actually the details of the report, if you read it, indicate that our particular markets have, in fact, appreciated far greater than the market overall whole last quarter.

I can tell you since we set our budgets a couple of months ago, we have been able to continue increasing prices as many of our locations. Some of the increases are less than we were able to get a year ago, but the increases are still there. We will have a spectacular year, as we have mentioned many times, without any price appreciation. And because we're building on land that we acquired based on prices set many years ago, we can generate some outstanding returns, even if the home prices slide a bit, which we think is unlikely. Yes, it seems logical a housing downturn is eminent. Something in your gut and all of the number headlines tell us, that housing is due for a slow down.

Let me close by reading a head line from another Wall Street Journal article. The headline reads, "Housing Market Cools Down." The article starts out by saying the housing market has been sizzling but don't expect prices to rise above a simmer next year. And it goes on to add that some markets have stagnated somewhat over the past year and their prognosis for next year remains lackluster. I'm sure you have been reading a lot of articles like this. But this was an article written in 1999 in the Wall Street Journal and we're about to enter 2003. This concern about a pending slow down has been going on for years. As I said at the outset, we just don't see it in our numbers today and we haven't seen it any of the last few years, even though it has been talked about constantly. On that final note we would love to open it up for questions and answers.

Thank you sir. The question-and-answer session will begin at this time. If you're using a speaker phone, please pick up it hand set before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you would like to withdraw your question, press star 2. Your questions will be taken in the order that it is received. Please stand by for your first question. The first question comes from Robert Manowitz with UBS Warburg. State your question.

Good morning. I was wondering if you could talk about the cost of optioning land and if the cost of that flexibility has been increasing, is there a threshold at which you begin to secure land going forward on more of an ownership basis or a higher degree of capital commitment?.

Sure. That's a good question. Actually, first, you reminded me of something I should have mentioned. Our other costs have remained very, very stable. There's been very little increase at all on construction costs. In fact, as we have gotten bigger we have gotten better price concessions on material purchases on – so if anything, some of those costs are going down.

Regarding the terms on options, it varies quite a bit from market to market. Obviously the stronger markets, the four core markets that I talked about, the northeast, the D.C., southern California, and northern California, have been a little more difficult to option new properties going forward. The option terms are getting a little more significant. Now, the types of options we do really fall under two categories. The first category is where we option improved lots. In the markets that I mentioned, that really only occurs in the D.C. -- Washington, D.C. marketplace. And there what is happening is the take down requirements are getting a little more aggressive and the deposit requirements are becoming a little more aggressive. But clearly, we still feel that that is the right way to go and yields a superior return on investment for us. In the other three markets, the options more typically are an option subject to us attaining all of the regulatory approvals and then if we do, we either purchase it all cash or, in some cases, we're able to purchase it in a couple of large take downs but kind of bulk purchases where we do the land development. In no case are we buying land without the entitlements in place or at least 99% of the entitlements in place, so the market has not gotten that difficult. But the deposit requests during that option period are getting more substantial than they were, but still we feel very manageable and very reasonable for the overall risk return rewards.

Great. And just one other question. Given your success on the acquisition front and obviously the large cash balance that you had at year end, are there any opportunities that you're looking at that you would want to talk about at this point?.

Well, first of all, as I mentioned, we're planning a

lot of internal growth this year. So we do plan to invest a lot of our excess cash in our current and existing divisions and operations. Nonetheless, we do think there are some opportunities there and, without being too specific, I wouldn't be surprised if you hear some announcements sometime this year.

Okay. I guess -- so is it possible to give us a little direction as to whether you would be looking at things like Park Side or whether you would be looking at opportunities more like Forecast and Washington Homes.

Park Side is a rare exception for us. It's unusual that we would purchase a company in a market that was that small. There were a lot of unique circumstances that made us deviate, a lot of rationalized deviating from our normal acquisition strategy, which is more sizable acquisitions. I would say, going forward, you know, you will see us doing more sizable acquisitions as opposed to anything like the Park Side. That will remain the exception.

Having said that, Robert, we're going to stay very true to our objective of maintaining a 50% debt total cap as kind of the accelerator or the brake to our ability to make acquisitions.

Yes. I will also add that the acquisitions we do, we're pleased and proud of our track record. They've all been extremely successful acquisitions for us. We are going to continue to be very conservative in not booking a tremendous amount of any premium, if at all, to goodwill, which we think is not a conservative way to manage a balance sheet. And you will continue to see us spend a tremendous portion, if not all of any premium that we might pay. And I’ll emphasize in the park side acquisition while it was small, we did not pay any premium and have not booked any goodwill or other intangibles.

Great. Thank you.

Thank you. Next question is from Mike Kinder with Salomon Smith Barney. Please state your question.

You had given some pro forma volume data earlier in the presentation. I was wondering if you had the pro forma revenues and EBITDA numbers for fiscal 2002?.

Do we have EBITDA?

Kevin, do you want to take that?

We did include that with the press release also, Mike, that -- for both the three-month and 12-month period. I don't have have EBITDA. We can try to calculate that, I think. But revenues for the three-month period on a pro forma basis increased from 701m to 831.4m.

I'm sorry. Was the question for 2003 or --.

No. 2002. Primarily EBITDA if you had the pro forma numbers.

We can try to get that to you Mike.

Great. Thank you.

The next question comes from Rashad Korungifrom ING. Please state your question.

Hi. Congratulations on another great quarter. I wanted to get a sense of how your average price of houses has changed quarter over quarter over all and then if you could get into more specific markets and how that has changed quarter over quarter and take into account incentives used in those markets. Thank you.

Sure. Let me answer the last question first. Incentives, we assume that any incentives that we've been using remain forever in our communities. So if there is a location where for one reason or another we offer some kind of incentive, the assumption is that that continues. That is not being used very often, although there's always some that is figured in as part of the pricing. For example, in North Carolina, it's certainly more widespread now but that tends to be what is referred to as an offer and accept market where, perhaps because of the large influence of realtors, it's expected that you would offer something less than the list price and that the builder would negotiate. That's even the case in the Dallas market, which is very strong right now. It just happens to be the market conditions there. And the market practice. That's not the case in D.C., the North Carolina -- excuse me, the northern or southern California markets typically, or in the northeastern markets. Kevin or Larry, do you want to address the average price question?.

Well, on a historical basis, in the aggregate, the January 2002 quarter, the average price was $253,000 and the April 2002, partially due to the impact of Forecast Homes coming in with some lower price homes, went to 246. Third quarter then went to $257,000 and the fourth quarter to $272,000. We also told you in the conference call script that we think the average for the entire 2003 year will be $272,000. Because we do have such a broad product array, offering everything from entry level homes, first time, second time move up, urban in-fill, there's lot of noise in our average numbers. What I think is a safe comment to say in terms of any ability to increase prices is in heavily regulated markets such as our California marketplace, our D.C. market please, our northeast region marketplace on a community-by community basis, we do see some ability to still increase prices modestly recently. In markets such as North Carolina, we certainly have not seen any ability to increase prices over the last year or so. And in Dallas, I would say that the market's been fairly stable in terms of price increases as well.

All right. In Dallas, we have introduced a very value-oriented product line and have opened up about four new communities in that line. They have met great success, with higher than our average margins and absorption rates. So that's doing quite well and we're thrilled with it. However, it is at a lower average price point. So, as Larry started out saying, we're in a variety of price points and product niches, so there's a lot of noise. You can't simply look at it and say, well, the Dallas average prices are going down, therefore prices are being reduced. That is not the case. Mix has a tremendous affect on it.

And to clear some of that noise, is it reasonable to assume that your quarterly increase in average prices from 257 to 272,000 is a result of you shifting to slightly higher end houses in.

I would say that is an indication that the deliveries that happened to occur in the fourth quarter were made up of a higher mix of higher priced homes. It's certainly not an indication that we raise prices by anything close to that number.

Okay, thank you very much.

Thank you. The next question comes from Timothy Jones with Lawson & Associates. Please state your question.

Yes, good morning. With your $265m of cash Is basically offset by senior and support -- this implies that you also give stock, you could make an acquisition well over $700m, is that correct?.

Well, we --.

Timothy Jones And still keep the 50%?.

Unless we issued a bunch of equity.

In other words, do what a lot of people have done is issued, you know, 50% equity, 50% cash kind of deal.

You can do a deal bigger than that with more equity but there's nothing on our horizon that would lead us -- lead us to believe we have got a billion dollar kind of acquisition in the horizon.

So you would rather pay primarily cash and get it as close to book as you can?.

Well, yeah. I mean, really whether we pay in cash or stock depends on where we are with our target debt to equity ratio. Right now, we have a lot of excess cash that gives us the capacity of doing some reasonably sized deals, certainly far bigger than park side and do it on an all cash basis and hit our long-term target of 1 to 1. If we did that and still saw another opportunity, then there would be a high likelihood that we have look at issuing shares with it. We would only do that in conditions where, under a conservative assumptions that it would be accretive overall per share.

The conservative assumptions assume virtually zero price increases?

Zero price increases and being very conservative regarding how we book good will and intangible. I mean, frankly, a game that can be played is to book 100% of any premium to goodwill. You don't amortize it and it inflates your earnings. We just will not play that game. We think that is not a wise strategy going forward. And we will continue to report much more conservative earnings.

I know a lot of builders have done that. Okay. And secondly, on -- where you're assuming no price increases, given the fact that you are in two very hot markets, California and D.C., you have to have some fairly significant price increases already built in into your backlogs in these two markets?.

Yes. Well, first of all, again, southern California and northern California are virtually two different markets.

I understand. Southern California.

Right. And in the northeast is also another one where we have had big escalations. When we do our projections, we take whatever margins are in our actual backlog, which if I recall at this point, it's about 46% of our year, almost half of the year. So in those, we take our actual backlog margins and anything that we haven't opened or sold yet, we assume zero price escalation in those. But as I mentioned, we are -- even though we made that assumption in our budgets which were set a couple of months ago, we have continued in many locations to see price escalations and if that trend continues, hopefully we can continue to give you more positive upside in our subsequent quarters.

Could you give me a guess on what the price increase was? I know it’s tough because you had so many change and mix and stuff but what would you guess your price increase was last year?.

It's so dramatically different --.

3%? 5%? I think it was up.

Gee, I just would not have that market -- that number off the tip of my tongue. In North Carolina I would say it's zero. In Dallas it's probably just a few percent. And in our California, DC, and New Jersey markets, I would say, price increases from the beginning of the year to the end of the year, you know, in many, many cases could have been 10 to 20 plus thousand dollars. I just do not have anything more specific.

This is very similar to what the existing home price data shows for these markets. Thank you very much.

I will emphasize by the way, something that is often overlooked and I did mention it. In those very markets, for example, in the northeast, in the DC and in southern California, those markets particularly are delivering half the housing right now, compared to what they were in the late 80s. There is -- and it's not for lack of demand. It's simply a very restricted market in terms of supply. We have been urging our division presidents to grow more significantly internally. We think the market has been very strong. They simply cannot quickly add any inventory. It just doesn't exist. You can imagine the pressure to do so with a lot of excess cash. We would rather do internal growth. It's simply not available. You know, it takes years and years, as we have been talking about, to take these properties through the regulatory conditions. So what we have -- and I don't see this changing -- is a condition where the supply is very restricted, and, hence, while demand stays high, prices have been increasing to bring the market into equilibrium.

I wrote about this 25 years ago when I lived in San Francisco and now the numbers say four out of five people can't afford a house in California. I'm just wondering, where are they living?

I don't think it's accurate four out of five can't afford it. Thankfully, the interest rates have been very, very helpful. What is happening is that people are moving either a little further away or they're -- they're compromising their living style to a much smaller home or a condominium or townhouse. That's just part of reality in the markets that we liver in. Finally, it's not their first home, they have the benefit of the appreciation of their own home which has helped in some equity purchases.

Part of our strategy was that they concentrated on that first time home buyer. They're more inland in California and have a much lower average price than our existing coastal California operations did have so we have taken advantage of that trend.

We're also quite significant players in condominiums and townhouses, in all of our markets that tend to have more expensive pricing, DC, the northeast, and in southern California. That allows us, through obviously multi-family housing to come in at some lower prices.

Are you doing the same type of multi-family that you started the company with up in the New Jersey area? Are you doing the that same kind of model down there in southern California?.

It's a little different. I tends to be more upscale than what we did in New Jersey 20 years ago. In New Jersey it was 12,000 square feet, no garages, two bedrooms. And now we will have a little more sex appeal to the homes. They're little larger, many have garages and there could be some volume, ceilings. Overall, of the strategy is the same, and we're coming in at much lower price point than you can on single family --

The same differential as you did 20 years ago in New Jersey, that type of market?

Exactly.

Thank you.

Although we do build that attached product in California, it's not a significant percentage of our overall construction activity in California.

Right. More so in the DC market.

Why don't you make it bigger, because there's such a need for that type of housing, why don't you expand it dramatically in California?

Again, as with many of the other cases, it's just a matter of how difficult it is to find the land in this highly regulated markets. But it's something that we believe in and we continue to look for more opportunities.

Okay, thank you.

thank you. Next question is from Alex Barron with Franklin Templeton. Please state your question.

Hi, good morning, and congratulations on a great year.

Thank you.

My question had to do with your conversion pace from backlog to deliveries in California and Texas. How are you able to achieve such high rates there?.

I'm not sure.

One of the reasons is, is that they build more of their homes are started without a sales contract than we do in the rest of the company. So that you could actually sell a house and close a house in the same month in a market such as Texas and California, whereas, in the northeast, we have a very long backlog, same thing in DC. We don't typically start very many homes unless they actually have contracts on them.

Okay. So I guess if that's the case, then, how much of those homes, you said, that are unsold, do have you on inventory at any one time?.

That's something that we disclose in our Q every quarter. I don't have the current number in front of me. Maybe, Paul, you can get what I started and end sold is. It's 850. That may include models but it's a pretty modest number.

Okay. And as far as your margin increase compared to last year, would you attribute that mostly to price increase or just lower costs or half and half?.

I'm sorry. I didn't hear the question.

Your margin increase over the last year, is that mostly due to higher prices or lower costs?.

All of the above. Plus combined with some of the benefits of larger size. I mean, for example, our corporate overhead has not grown proportionately as our revenues have grown, and that helps also with margins. But it's really been a matter of lower construction costs, some great land purchases coming on, increasing prices and increasing efficiencies, all of those will really coming in to play.

Okay. And just one last question in terms of your orders in the northeast region. Do you feel that the market there is becoming more challenging as far as how soon you can acquire land and you have to slow down the number of homes that you sell to keep on base or --.

No. What's happened, really, we are subject to the regulatory whims. And how many store fronts we have at any one point in time depends on what month we get an approval that we have been looking on for three, four, five years. It so happen this year in 2003, we believe, although we're not 100% certain, but we believe that we're going to get our final approvals or just receive final approvals on a very large number of new communities. And these are communities that we’ve been working on for quite some time. So we will be able to increase the community count, which means that our sales not necessarily deliveries, but sales will be growing quite a bit because of these new community openings. Delivery should be solid, too. But when we open these new communities for sale, we like to develop a lot of backlog, so we will sell them early in the process. We will open the communities in 2003. A lot of these deliveries will be coming up in 2004. Which is why we felt so particularly bullish for the fiscal 2004 year.

Okay.

Alex, just to answer your question on start and unsold homes, these are not completed and unsold. These are anything that -- you know, we put one stick into the ground on. As of October 31, 20002, we had 754 started and unsold homes. We have about 200 active selling communities. So we have about three and a half homes started per community at that time are unsold. And we think that's a very modest number.

Okay. Great. Thank you very much.

Thank you: Next question comes from Carlos Roberio, from CCFB. Please state your question.

Hey guys, congratulations on a great quarter. A follow up on the acquisition questions. In terms of your strategic view, will the acquisitions you make going forward, will they be a couple of acquisitions just to increase your market share or will you expand that to other markets.

I would expect to see both. I think we will -- I think we are seeing opportunities both in current markets and in new markets and, you know, I would expect overall that we would be to achieve what we like which would be both.

In terms of -- obviously, you guys are pretty concentrated in your markets. What markets are you now that you would be targeting?

In prior calls, we have mentioned a handful of markets that we would love to be in. And those would include the Denver markets, the Arizona markets, the Florida markets. But frankly, our general strategy has been that we're not going to limit ourselves to our ideal markets. What's more important for us is to find a builder that has a substantial market share position with a great profit and finance performance track record and a management team that wants to stay in place and we think is aggressive and capable and finally one where it meets all of these criteria is and is available at a fair price. If you want to meet all of those criteria, it's hard to do that and say and we want that in this particular city. So we found that we have the best success if we really focus on those perameters that I just mentioned and be very flexible in geography. The reason we're comfortable with that is, frankly, we can make a great case for some unexciting rust belt marks as we can for the glamorous sunbelt markets. You can see our performance has been sensational in an unglamorous market of New Jersey. So we're comfortable with looking at the opportunities like that. We think there can be great profits. However we're sighted by the growth in markets like southern California. And we will be flexible and I couldn't be surprised if we see some in market acquisitions as well as new market acquisitions.

In terms of your land sales this year, obviously they increased more than three fold. Where do you see the land sell number next year and I understand there's a variability for the land sells.

I think, for your purposes, take the average of the last for years. It's difficult to imagine what is going to happen with land sales we're probably projecting a little less for 2003.

Somewhere in the $30m million range?

Lower.

It's a small number.

Last week you guys an inventory impairment of 5.5m this quarter bringing your total year to about 8.2, almost double of last years -- what is that 5.5m right now for.

A big percentage of the vast majority of that was Poland, where we kind of exited operations and the Poland economy is pretty much down in the dumps right now, and we have taken a write down to ensure that we can get out of there.

We review all of our assets quarterly and try to be conservative, aggressive in taking right downs wherever we can.

Will that necessarily clean you guys out of Poland, you will no longer be in it.

We are no longer building housing in Poland. We own two land parcels and we have substantially written down the value of those land parcels but we have not sold them yet and that will clean us out when we do it. But we have no employees and have no housing operations

Thanks, guys. And congratulations again.

Next question is from Scott Levine with Shenkman Capital.

Quick question regarding accounts payable. This quarter year over year it’s up over 100m. What was that and what offsets the cash for the quarter?

A significant portion of that increase is a result of the acquisition of Forecast Homes and the land acquisition of Quaker Homes.

And I think even if you look at it July versus October, I think it's up 60m or something. I don't have the news in front of me. So you can't just look at it year over year. You need to look at it quarter over quarter. It's not a big deal but it went up from last quarter, 188 to 298 this quarter.

We don't do anything special to drag out accounts payable or anything like that. The cash is real cash that came in the door through our normal operations, and I can't address specifically. Paul, if you have something to add --.

I think you also have to compare to the change in inventories.

Right. Roughly flat quarter over quarter, right, from prior quarter to this quarter sequentially, I mean, inventory?.

Last year this quarter?

I don't have the last quarter.

Okay. I guess just -- I don't want to beat it up. But should we look for accounts payable on a normalized basis to be at this higher level or do you think it will go back to where it was historically. There's nothing that leads me to believe something special happened in the fourth quarter compared to third quarter. I can't give you any guidance other than to say I don't think anything of substance will change in the future either.

Thank you. Once again, if you have any questions at this time please press star 1 on your push button telephone. If there are no further questions now turn the conference back to Mr. Hovnanian.

Before you close I was looking at the balance sheet and that accounts payable line includes other liabilities. And I think other liabilities caused the increase and it's things like we had a few contracts in Texas and a couple in the northeast region that had some specific performance components, and there was roughly $90m, I think, that increased there that was not there a year ago. So I think that is part of the answer.

Right. The actual -- Paul, do have you a breakdown for what had the actual accounts payable segment of that -- of the balance sheet went up or do you think it's a much more insignificant number.

Yes. Accounts -- well, again, this is year over year, not quarter -- this is year over year. Accounts payable went up 30.8m. Of that 30.8m, approximately 25 was from the forecast acquisition and the Quaker acquisition.

Okay. Thanks for the clarification.

Well, that concludes our conference call. Obviously, we're thrilled to report such great numbers. We look forward to giving you some more great numbers as we continue on during the year. As usual, we will all be available for questions if you have more detailed questions afterwards. Thanks again and we look forward to continuing some good news in the future.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

(Time ending the conference is 12:12 p.m.)