Hovnanian Enterprises Inc (HOVNP) 2004 Q1 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises' fiscal 2004 first quarter earnings conference call. By now, you should have all received a copy of press release. However, if anyone is missing a copy and would like one, please contact Dana Almack at 732-747-7800. We will send you a copy of the release and ensure that you're on the company's distribution list. There will be a replay of today's call, this replay will be available one hour after the completion of the call and run for 12 months. The replay can be accessed by dialing 800-428-6051, passcode 340104. Again, the replay number is 800-428-6051, passcode 340104. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening marks about the year-end results, and then open up the line for questions.

The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor's page of the company's website at www.khov.com. Those listeners who would like to follow along should log onto 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 for the information in the slide presentation. I would now like to turn the conference call over to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Good morning and thank you for joining us on today's call. Joining me today from the company are Larry Sorsby, Executive Vice President and Chief Financial Officer; Paul Buchanan, Senior Vice President and Corporate Controller; Kevin Hake, Vice President and treasurer; and Brian Cheripka, Assistant Director of Investor Relations. I'm pleased to report the results for our first quarter of fiscal '04. We set all-time first quarter records, once again, for our company in many categories of our financial performance; including net contracts, contract backlog, home deliveries, revenues, and net income. We better positioned the company for future growth and healthy returns during the quarter by strengthening our balance sheet, opening a significant number of new communities to fuel organic growth, and completing the acquisition of Windward Homes, a home-building company in the Tampa market. We're extremely pleased with the current operations and the foundation they provide for continued growth and profitability.

For those of you viewing the slides on the investor page of our website at www.khov.com, you may now begin with Slide Number 1; which displays the increase in our earnings for the first quarter fiscal '04 compared with the same period in '03. We significantly exceeded last year's results by reporting net income of $1.74 per fully diluted share for the first quarter ended January '04. This represents a 29% increase in EPS from the prior year's record earnings of $1.35 per share, achieved in the first quarter of '03. It's important to note that more than 91% of our net earnings for the quarter were generated for the company's organic operations, which exclude earnings from acquisitions closed since the beginning of fiscal '03. Remember, we take a conservative approach of rapidly expensing any premiums for -- paid for acquisitions. The results were achieved despite the adverse weather-- winter weather during the quarter that delayed our ability to start and complete homes in several of our markets in the northeast and southeast regions. And, in fact, today as we speak, while it's a little warmer, we have precipitation once again.

The increased costs we had anticipated due to the inclement weather during the first quarter were not as high as we originally contemplated. The lower than anticipated costs had a positive impact on our results, and helped us achieve -- exceed our original earnings projection of $1.65 per fully diluted share. While we are attempting to provide accurate guidance, the weather conditions in our -- many of our markets do make it particularly difficult to be more accurate. As shown on Slide Number 2, net income of $57.7 million increased by 29% over last year's first quarter income of $44.7 million. We continued to achieve strong returns on our invested capital, Slide Number 3. The company's after tax return on beginning capital, for the trailing 12 months ended January, was 24.6%, compared to 19.4% last year. On a trailing 12 month basis again, our after-tax return on average capital ending January '04 was 20.3%, compared to 17.3% for same period last year. Our return on capital continues to rank as one of the best in the industry, which is earning greater returns overall than other industries.

Slide 5, the company's return on beginning equity for the trailing 12-month period ended January, another key measure of our performance, was 44.5% compared to 37.4% in last year's equivalent quarter. Our return on average equity for the same period was 36.4%, again, up significantly over last year's similar period of 31.8%. We're very proud of our record performance in the first quarter and believe that these results clearly demonstrate the fundamental strength of our core business strategies. Slide 7, total revenues for the three months ended January, increased 24% to $775 million, from $628 million in the year earlier period. Our growth in earnings continues to outpace our growth in revenues, and those of you that have followed us for a while do know that the revenues in our first quarter tend to be among the weakest of our full year. Slide 8, our company's pretax margin in the quarter continued its upward trend, increasing 70 basis points to 12% from 11.3% in the prior year's first quarter; an indication of our ability to raise prices in a number of our communities, as well as our improved operating efficiencies.

Slide 9 including unconsolidated joint ventures, deliveries increased to 2,911 homes, eclipsing last year's record of 2,295 homes by 27%. Slide 10, perhaps the most significant sign for our strong performance going forward, net contracts in the period rose to an all-time first quarter record of 3,225 homes; including 92 from unconsolidated joint ventures, valued at $915.7 million, an increase of 61% in dollar value from last year's results. The increase in net contracts demonstrates our ability to continue achieving substantial growth by continuing to gain market share from smaller builders, through both dominance of the market, for land purchases in our current markets; as well as significant industry consolidation in which we have been actively participating via acquisitions. Our healthy net contract activity also exhibits the strength of our underlying demand for new housing in our markets, which is primarily driven by healthy and stable levels of household formation in the United States. We are particularly pleased at our ability to increase the number of open communities and our net contracts in our larger, heavily regulated markets, which tend to be more supply-constrained; thus allowing to us continue raising prices in many communities.

Markets with much easier regulatory environments like Texas and North Carolina, while successful for us, have seen smaller price increases, and have greater competition for sales. Although we have completed five smaller acquisitions over the last 14 months, it is particularly important to note that we are experiencing considerable increases in the dollar value of our net contracts from markets which are totally unaffected by our acquisitions. Our net contracts in the northeast were up 64% for the first quarter, excluding the effect of the Summit Homes acquisition in Ohio. The dollar value of net contracts increased 38% in the southeast, not including the Windward Homes acquisition in Tampa. In the west, again unaffected by acquisitions, the dollar value of our net contracts for the first quarter increased 28%. We will continue to open a number of new communities in the west, and expect to report -- to continue favorable trends in that region during fiscal '04 when compared to '03. Our organic growth from operations that have been with us for multiple years, continues at a solid and steady pace.

We will release our net contract data for the month of February later this week, but preliminary results indicate that we will report a substantial year-over-year increase compared to the same month last year. The sales environment remains solid and steady. Slide 11, contract backlog at January 31, reached 6,554 homes, including 118 homes from unconsolidated joint ventures, with a sales value of $1.8 billion, both all-time records for any first quarter end in our history. The value of contract backlog represents a 65% increase over the same period last year, this includes the contract backlog of Windward Homes, but the acquired backlog of Windward on the closing date of acquisitions was 443 homes, valued at $71 million, clearly most of the growth is from our other operations. We now have considerable visibility for the better part of fiscal '04. At quarter end, we had more than 65% of our projected deliveries for '04 either in contract backlog, or already closed, and as I mentioned, February has been a spectacular month on top of that.

Our fiscal first quarter is traditionally a slower seasonal period for housing sales, as well as housing deliveries, while our net contract pace has remained very healthy, and is ahead of our plan for this period; we will get a clearer picture of the overall demand in our markets as the spring selling months unfold. The adverse winter weather has delayed our ability to start and complete homes in several of our markets in the northeast and southeast regions. These weather delays will result in a greater number of homes being delivered toward the latter half of the year. We still plan to exceed last year's results in each and ever quarter this year, nonetheless, we're disappointed the weather has dampened our ability to complete more home deliveries in the earlier part of the year. As we have previously stated, the markets with the greatest regulatory challenges have had the greatest price appreciation. Tight regulations in many of our markets have artificially restricted the available supply of housing, thus leading to excess demand, and substantial price increases that have occurred in some of these areas.

We don't see anything changing in the future regarding the tight regulatory environment, if anything it's getting more difficult. The prospect of overbuilding in these markets is remote, because of the regulatory restrictions. In fact, in many of these highly regulated markets, housing production remains 20 to 50% less than it was during the mid-'80s, in spite of stronger demand. Due to our long-term land position in these markets, our land prices were locked in at various times over the past several years, a significant number of these parcels were secured at considerably lower prices than the current market. We believe that our considerable position in highly regulated markets, of something that does differentiate us from some of our competitors, will enable us to continue to achieve significant organic growth and market-leading returns on our invested capital in a steady, housing market. In fact, a steady housing market is what we foresee, and we believe this will allow to us achieve healthy growth and earn solid returns in excess of our targets.

Let me remind you that our strength -- that the strength of our performance is not contingent on an increase in national housing starts or new sales. In fact, we expect housing starts to continue to be relatively flat, as it has been for the last few years, in the range of about 1.6 to 1.8 million new housing starts for each year over the next decade. This is based on demographics in household formation as projected by a number of institutions, including the Harvard Joint Center for Housing Studies. More importantly, recent analysis conducted by the Harvard Joint Center for Housing Studies indicates that its projections for total household formation, the key driver to demand in our industry; and housing needs, over the next decade, will be revised upwards in the coming months. The upward revision is due to the consistent underestimation of immigration and its impact on the need for housing. The net effect on residential housing will probably be the addition of between 100,000 and 200,000 net additional households per year, which should translate to that much higher housing starts being needed per year.

We expect to continue to achieve significant market share gains in each of our markets. Our growth has been driven by the tremendous market share gains and consolidation that have been occurring in our industry, with larger builders like ourselves rapidly taking market share from smaller builders through acquisition, and other competitive advantages. For example, we compete against smaller builders--that's on Slide 12, for new land acquisitions in our markets every day. We are winning these transactions more often due to our greater access to capital, our cost efficiencies, and our sophisticated team of specialists that have the capability and expertise to process these transactions due to the increasingly complex regulatory process. Bottom line, is that land sellers want to work with a company that can maximize the value of their land parcel and successfully complete their transaction. Unlike smaller builders, we don't have to search for capital for each and every transaction, particularly as land transactions are requiring larger amounts of capital.

This advantage will only increase if the market slows. Smaller builders will have even greater difficulty during this slower market period and this will increase the pace of consolidation by the larger, well-capitalized home builders who don't need approval for each individual property acquisition. For that matter, company acquisitions will likely become more prevalent if the market slows down, as well. I just actually finished a land acquisition meeting just an hour ago in our new Windward Homes company acquisition, and they were proposing a transaction for a $20 million land parcel. I think that's a prime example of the difference today. That's a transaction that they absolutely would not have been able to do as a private home builder, as they were just six months ago, and now we have the perfect combination of their local expertise and success in track record; combined with the capital backing, and some of the other cost advantages, including purchasing and other areas, of our company, that make it a solid, solid opportunity. And it is another example of how we can continue to accelerate the pace of consolidation and organic growth in our markets.

Slide 13, we have grown our deliveries at a compounded annual rate of 38% over the past three years, while national housing starts have grown only at a 5% rate. We expect our market share gains to continue, even without any further consolidation. Our focus on organic growth and on being a dominant builder in each of our markets is yielding noticeable advantages in terms of land acquisition, pricing power, and cost efficiencies. At the same time, our broad product array strategy provides the flexibility to ensure we're meeting consumer demands, and enhances our ability to further penetrate our geographic markets by being able to consider many, many land opportunities. As we look forward throughout fiscal '04, the solid demand for our new homes, along with our first quarter results and significant contract backlog, gives us the confidence to increase our projections for the current fiscal year to more than $9.50 per fully diluted share.

Slide 14. This revised projection represents over a 21% increase from last year's record earnings of $7.85 per share, and that's on top of the average annual compounded growth in earnings of 74% that we've achieved over the past three years. Fiscal '04 home building revenue, is now expected to climb more than 22% to $3.9 billion, on deliveries of more than 14,500 homes. Net income is expected to grow by more than 23% to $316 million. As we have regularly made clear to the market, our projections assume that the current market -- the current absorption rates continue at our communities that are currently open for sale, and we assume zero home price appreciation from the current levels. If home prices do continue to appreciate, there will be additional upside in our margins for unsold homes. The supply of available lots for new housing is very constrained in our highly regulated markets including Washington, D.C., and its suburbs, Southern California, northern California and our northeast region. This has generally led us to have the ability to raise prices in many of our communities in these markets.

Details on our updated summary projections for fiscal -- for the fiscal year-ended October 31, '04, are available on our -- on the financial information page of our investor's section of our website at www.khov.com. I'll now turn it over to Larry Sorsby to discuss our financial performance in greater detail.

Thanks, Ara. As Ara mentioned, earlier, our first quarter contracts, deliveries, backlog, revenues and earnings all represent record levels for any first quarter in our history. Turning to Slide 15, the company's consolidated home building gross margins for the first quarter excluding land sales, was 25.7%; 100 basis points higher than in the first quarter of fiscal 2003. The margin increase was due to our continued ability to increase average sales price in selected communities, our mix of communities, and lower cost resulting from some of the process improvements that we've been implementing. However, as we expected, our consolidated gross margin fell 20 basis points on a sequential basis from the prior October quarter as a direct result of our most recent acquisitions. Our recent acquisitions increased the number of deliveries in the quarter for markets that have lower average gross margins than our consolidated average gross margin. As anticipated, the effect of these lower margins on a combined basis caused a decline in aggregate gross margins when compared with the prior October quarter. This trend will continue to impact our consolidated gross margins to varying degrees throughout fiscal 2004.

Our recently acquired operations have a lower gross margin than the company's average gross margin, due in part to the stepped up basis which we applied to the assets in some of those acquisitions including Brighton Homes, Great Western Homes, and Windward Homes acquisitions. The stepped up basis is generally applied most heavily to the homes that will be delivered in the first year or two of operation. Each of those -- each of these operations also generally operates with a lower gross margin than our consolidated average gross margin, because they have higher inventory turnover since they generally are buyers of finished lots on a rolling option basis, or focus on entry-level housing with higher absorption rates per community. Both of these strategies lead to returns on invested capital that meet or exceed our targets. Slide 16, total selling, general and administrative expense including corporate expense as a percent of total revenues was 11.1% in the first quarter of 2004, a 10 basis-point increase from 11% in last year's first quarter. However, we anticipate that our total SG&A expense ratio will represent about 9.7% of total revenues for the full year in 2004, down from 10% in fiscal 2003.

Turning to Slide 17, the average sales price per home delivered, company-wide, for the three months ended January 31 was $261,000, a 1.7% decrease from the average sales price of $265.5 thousand in the prior year's first quarter. These prices include the impact of our unconsolidated joint ventures. The average sales price in our markets decreased as a result of the variation in our mix of communities, and the effect of our recent acquisitions. We expect our average sales price to remain in the range of $260,000 to $270,000 for the remainder of this fiscal year. Turning to Slide 18, our financial services segment continues to improve on its healthy performance. Pretax earnings from financial services were $6.7 million in the first quarter, up 44% from $4.7 million in the prior year's first quarter. Turning to Slide 19, EBITDA for the first quarter rose 33%, to $117.4 million, from $88.4 million in the first quarter of 2003. EBITDA represents earnings before interest expense, income taxes, depreciation, amortization, and other noncash nonrecurring write-offs and charges.

The reconciliation of our company's EBITDA to net income can be found as an attachment on the previously distributed earnings release. EBITDA covered the amount of interest incurred in the quarter by 5.4 times, reflecting the company's ability to more than adequately service its debt requirements. For the full year we expect EBITDA to cover interest incurred by more than seven times. Our credit statistics continue to be excellent and are at levels that many investment grade companies would be pleased with. Slide 20, our net recourse debt-to-capitalization at January 31, 2004, was 50.5%, compared with a ratio of 48.9% at the end of the first quarter 2003. We anticipate that the company's average net debt-to-capitalization ratio for fiscal 2004 will be at or below 50%. While we continue to invest in our future growth, we remain focused on conservative management of our balance sheet. We continue to have ample liquidity to achieve our long-term growth objectives. There was no outstanding balance on the company's $590 million unsecured revolving credit facility at the end of the quarter and we have more than $100 million in excess cash.

Our 9 1/8% senior notes due 2009 become callable May, 2004. In anticipation of this event, this past Thursday we sold 150 million aggregate principal amount of 6 3/8% senior notes due 2014 at an offering price of 99% to yield roughly 6.5%. Identity to our current outstanding senior notes, the new notes will be issued by K. Hovnanian Enterprises, Inc., and will be guaranteed by Hovnanian Enterprises, and the company's current and future restricted subsidiaries. The net proceeds of this issuance will be used to redeem all of the company's outstanding 9 1/8% senior notes due 2009. In essence, we're replacing higher cost debt, the 9 1/8% notes, with lower cost debt, the 6 3/8% notes. The early retirement of debt will result in an $8.7 million pre-tax charge, or roughly 16 cents per diluted share in the third quarter of fiscal 2004. However, this refinancing will result in annual interest savings of 8 cents per fully diluted share going forward.

In December 2003, the FASB issued a revision to interpretation Number 46, consolidation of variable interest entities, or FIN 46 as it's commonly referred to. The revision defers the effective date of implementing FIN 46 for variable interest entities created prior to January 2003 and provides certain additional exceptions. While we are still assessing the revised time requirements of fully implementing FIN 46, we now expect to apply the consolidation provisions to all the companies VIEs no later than April 30, 2004; unless further delays are announced by FASB. Slide 21, shareholders equity grew 10%, to $898.9 million as of January 31, 2003, from $819.7 million at the end of fiscal 2003. Based on our revised earnings projections for fiscal 2004, we now expect shareholders equity to grow to about $1.2 billion by October 31, 2004. Slide 22. We have a total of nearly 80,000 lots controlled for future development company-wide, roughly a six-year supply, with 70% of these lots controlled under option contracts. As illustrated on Slide 23, 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 option contracts. This increases our confidence that we can continue to grow our profits by roughly 20% per year going forward organically.

Slide 24 shows our aggregate option position for all of our lot options, and the amount of aggregate deposit we have at risk, which are 6.8% of the total purchase price of the lots. We are continuing to execute our strategy of using lot option contracts with regard to minimizing our land risks and maximizing our ability to adjust any slowdown in the housing market. Slide 25. We have 288 communities open company-wide as of January 31st, a 24% increase over the prior year. Our current plan is to have about 300 communities open at our fiscal year-end October 31, 2004. This represents a 17% increase from the 257 communities open at the end of fiscal 2003. Although we are subject to potential delays in exact timing of regulatory approvals in a few of the new communities, we have significant expertise in managing and projecting the approval process. Each of these additional communities is already owned by the company or controlled under option so our lot costs are locked in providing good earnings visibility. The full benefit of sales from some of these newer communities will not be felt until fiscal 2005, which begins in only about eight months.

Turning to Slide 26, looking ahead to the second quarter, we are projecting earnings in the range of $1.90 to $1.95 per fully diluted share for the quarter showing a healthy increase in EPS over last year's second quarter earnings of $1.60 per share. As we indicated in our January quarterly orders release, adverse weather in our northeast and southeast regions during the winter months will affect our pattern of quarterly deliveries. Harsh winter weather has prevented us from starting many homes that otherwise would have closed during the second and third quarters. And what we expect as a result of that is that both our earnings and deliveries are going to be even more heavily weighted toward the latter half of fiscal 2004. We're very optimistic about our prospects for continued organic growth throughout 2004, and into our next fiscal year. I'll now turn it back to Ara for some closing comments.

Thanks, Larry. This was another excellent quarter for Hovnanian Enterprises. We're extremely pleased with the performance of our operations, and continue to look for appropriate opportunities to deploy our capital and increase our shareholders' returns. We've been generating substantial returns, and substantial cash, and have been finding excellent opportunities to reinvest in both land and companies. Our company continues to achieve financial results that place us near the top of the industry in terms of earnings growth and return on investment. We analyze every new community and every potential acquisition, based on return on investment. As a result, we've consistently improved our financial performance and are providing greater returns for our shareholders. We believe that this focus, combined with our operating strategies, is the best way to create long-term value and profitability for our shareholders. Slide 27. Last year, I ended our call discussing the positive news coming out of our company and the industry.

One year later, despite the continued good news, the continued solid order growth, upwardly revised earning projections, and analyst estimates for solid long-term housing demand, home-building stocks still sell at a significant discount to industries that are not even close to comparable returns; including industries, by the way, that are cyclical as well, at least have been historically. The industry average PE multiples at only 8.3 times this year's earnings, are at a huge discount to the equivalent PE multiples on the S&P 500, and well below prior industry -- prior averages for the home-building industry. Keep in mind, if we're completely wrong, and profits in the home-building industry were cut in half, we'd still be selling at a deep discount to the average PE multiples of the S&P 500. Hovnanian share price has performed well over the past 12 months, which might cause some to say it's too late, as they have said for each and every one of the last three years, five years, and so forth. However, our closing share price Friday of $80.69 represents a low multiple of only 8.5 times our revised projections for this year. And again, we're already in our second quarter.

This is for a company that has achieved 47% average annual compounded growth in earnings over the last five years, and has already sold more than 65% of the homes needed to achieve our projected earnings for '04. We are confident that the consistent execution of our proven business strategies in the consolidating industry, with bigger advantages to the bigger players, will enable us to accomplish our long-term goals for growth and profitability. This concludes our presentation, and we'll now be pleased to open it up for questions.

Thank you, sir. The question-and-answer session will begin at this time. If you're using a speakerphone, please pick up the handset before pressing numbers. Should you have a question, please press star 1 on your push button telephone. If you would like to withdraw the question, press star 2. Your question will be taken in the order that it is received. Please stand by for your first question, sir. Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star 1 on your push button telephones. Our first question comes from Ivy Zelman with CSFB. Please state your question.

Good morning, guys, actually Dennis McGill on behalf of Ivy. Just a couple of things. If you could touch on the the JV's and how they might flow through the P&L from an earnings standpoint?

Yeah, we haven't done very many JV's, but we're going to account for it on the equity method, so that we'll just account for the profits that flow through--our portion of the profits that flow through.

But quarterly, the coming year, how much earnings from JV's is incorporated in your guidance? Almost none, because the JV's are just starting up, they really haven't had any significant deliveries yet; so I wouldn't really impact my model with that. Okay. That's what I was looking at. Okay. How about pricing in the west region, Larry, can you give us an idea of how much of that is apples to apples versus product mix? And, you know, is it reaching a level where it just provides difficult comparisons as it eases, maybe historical-type levels?

We haven't made any acquisitions in the west, that's only California; so it's just our organic operations there. It is impacted by a mix of communities that we have, especially in our coastal California, southern coastal California operations where we have higher-priced homes. So it can be a little confusing from an outsider, looking in, trying to predict. But we have had the ability in California to raise prices in select communities because demand's outstripping supply. So that's part of the answer. And part of the answer is just mix of communities that we're delivering and selling in.

In general, I'd say we are definitely seeing house price appreciation and our ability to raise prices in the entire northeast -- in most of the entire northeast, the whole DC market, all of Southern California, and all of northern California. Those are where we're really seeing a huge imbalance of supply and demand. Our other markets are healthy, but are a more balanced supply and demand market. We don't see anything in the horizon that is going to be loosening up the supply of housing to really change that. Obviously, demand could fluctuate, but we're pretty comfortable. We see a very tight, tightly constrained supply market because of this regulatory environment. Fortunately, we have a really solid land positions, and we're major players in these highly restricted markets. Typically in those markets you just described, we're either Number 1, Number 2 or Number 3 player. So we've got typically first look or second look at some of the prime land parcels, and that's been proving to be a great strategy for us.

Okay. So you see, would it be fair to say on an apples to apples basis, of ignoring the community mix issue, that low double digits is the type of price increases you're seeing in the supply-constrained type markets?

I can't quote the exact percentage but on an annualized basis, of course I can only relate to this recently. On an annualized basis, I'd say that's a reasonable ballpark. Now, keep in mind, to some extent, there are cost increases that might offset some of that. But obviously, as you could see from the margins, you know, the price increases are flowing through to the bottom line.

And you believe that these supply/demand type inbalances can--those type of price increases can be maintained going forward?

Well, for budgeting purposes, we assume no. We assume the world stops, and we can't increase a nickel, and that's what our projections are based on. However, if you had to ask me my personal opinion I'd say, at the moment, we don't see anything that's fundamentally going to change the scenario that we see in place right now. Of course, you know, ultimately at some point rates will go up a little bit. We're not overly concerned about that because the likely scenario for rates to go up would be a much stronger economy, more job growth, more consumer confidence. That's generally really good for housing. But nonetheless, we think the prudent thing to do is budget zero price increase. And, you know, if the market continues to be reasonably steady, as the has been for the last five years, we'd have upside in our earnings as we have had quarter after quarter, year after year for quite a while now.

Okay, I understand then. Lastly, you commented on the estimates for immigration and those have probably been underestimated recently. Do you track what percentage of your buyers are immigrants and what would that level be?

No, actually, it's interesting. First of all, we don't specifically, although I will say that there are certain markets, and certain communities, in particular, where we may appeal to a 90% plus immigrants, whether they're Hispanic speaking or Asian, et cetera; and knowing how to target market and knowing the audience is important because there are design implications. But in many of those cases, these are immigrants that have been in this country for a number of years. The recent immigrants, really ensure long-term housing demand. Interestingly, one of the studies that was done show that immigrants actually, after seven to 10 years of residence in this country, have a higher propensity to own a home than native American born residents. That's because there's a very intangible goal of foreigners to own their own home, which is not possible in their own countries. And that's been a very positive factor in the housing industry here.

Okay. But it's not something that you're able to quantify as far as how much --

No, we can't. It varies obviously by market. But we don't quantify I specifically.

Okay. Thank you very much, guys.

Thank you. The next question comes from Timothy Jones with Wasson & Associates, please state your question.

Good morning. A couple of things. First of all, I've been looking at the west on your deliveries and your contracts, and you have no acquisitions, you're up 17 to 19%. This implies that your prices were up at least 10% or probably more in that region. Is that correct? I don't think mix could account for more than like 5%. Am I right or wrong?

You're wrong. Mix could have a huge effect. But we have had price increases. We just don't break that out specifically, it would be a huge exercise. But mix can have a huge effect.

Would you say that mix --

To give you an idea, we have communities that average over a million dollars in sales price in California. We also communities that average in the high $100,000 price range. And in any given quarter, there can be a big different in mixes.

Have you seen that happen in both in the deliveries and the contracts right now? Have you had very high-priced developments coming on or something like that?

Well, again, we don't track it. I can just tell you in general, there have been solid price increases. I can't give you a percentage, but there have been solid price increases in the marketplace.

And the mix definitely has been shifting around as well, especially as we grow our southern California coastal operations; which are historically much higher-priced than our northern California operations, which are more inland and than our Southern California inland operations.

To give you an example, our southern California coastal operations have an average price, I believe, somewhere around $450,000. Our southern California inland operations have an average price in the high $200s. This year, our southern California coastal operations through organic growth, is going from about 650 homes to a thousand homes. That's a huge change in mix. Our inland operations also growing, you know, at a real solid pace, but proportionately not as much, we're not trying to be cute by --

No, I understand that.

But there is, you know, there are real mix changes. I don't think that's the case in northern California, but it certainly is in southern California.

Okay. And then there's got to be an answer also to the northeast, because I know and you know you can sell anything you want in Washington, D.C., and yet there your average prices were up slightly in the contracts and down slightly in deliveries. Is that the acquisition or was hat something else that's happened there?

The acquisition greatly impacts the average sales price in the northeast. Summit Homes acquisition in Ohio.

What's their average price?

It's build on your own lot, there's no land included, it's in the $100,000, $150,000.

That's what it's doing it. Are you going to expand that, I know Centex is thrilled with their Wayne Home acquisitions, and are you going expand that operation to other markets.

It's a good question, we actually had a strategic meeting with the management there yesterday, on that topic. You know, we think we are. We're very pleased with the results there, the return on investment capabilities are huge there. So it is something that we're going to explore. And what we're really looking at now is, you know, what's the priority? Do we expand it into new geographies first, do we expand their current geography which still has big opportunities, do we augment to our traditional land development business as well in those geographies? We've got a lot of opportunities, which is a really exciting thing for us, based on that acquisition; and we're trying to prioritize it. But I would say it's very likely you will see us, once we conclude this strategic plan in that particular area, you'll see that as a bigger part of our business.

Okay. Lastly, you have one of the most aggressive unit growth of any company. I mean, of that, what is it, 25% or so of unit growth for this year, 27%, roughly how much of that will be the acquisitions? I mean, that's an incredible rise. Is it 10% or something from the acquisitions or something?

Good try, Tim, but as you know, we don't break that out.

I mean, what I'm trying to get, do you have, when you start giving that type of a rise in units, the question obviously comes up -- excuse me, do you have the infrastructure there to handle it?

Yes. We do have the infrastructure, and what we do do, is we gave some detail in Ara's section of the call showing we were up organically in markets unaffected by the acquisitions. And so that gives you an idea what we're able to do organically. And certainly with the acquisitions we're very comfortable that the aggregate consolidated delivery number that we're projecting, very comfortable that we have the infrastructure to do it.

Remember the numbers I quoted earlier, in the northeast without acquisitions, we are up 64%.

Yes.

In the southeast, without acquisition.

38%.

I mean, we've had some substantial organic growth, and that's the exciting part of the story and obviously we're augmenting that with acquisitions.

Well, the acquisitions obviously because the 28 versus the 108 is mostly in the southwest, and that's a tough market. Could that affect your margins?

You know, a lot of things obviously affect our margins.

Yeah, I mean.

In other words, the southwest is obviously not the margins that you got in the west and Washington, D.C. and so forth?

Partially because of the step-up that we did on the acquisitions, obviously, that lowers the margins, as I mentioned in my portion of the conference call script. But I'll assure you that with we did due diligence and decided to make these acquisitions on a prepurchase accounting basis, they were earning very, very respectable returns on investment, which is how we underwrite every land deal, much less every acquisition that we do. We're very comfortable with how our southwest operations are performing.

I wrote off the DuPont formula in 1972, so I think higher turnover is good.

Okay. Next question.

The next question comes from Greg Nejmeh with Deutsche Bank. Please state your question.

Hi, good morning Ara, Larry. I have a few. Actually, Larry, to start, the charge of 16 cents for the early extinguishment of debt, how are you treating that in your guidance of $9.50? Is that being ignored or is it, in your mind, being treated as a normal operating expense in arriving at your guidance of at least $9.50?

It's cooked into our $9.50, and it will hit in the third quarter.

So it's in there as an operating expense then?

Correct.

Okay. Ara, one of the items that I think has driven underlying demand for single-family homes, and single-family home ownership is the renter-to-owner phenomenon. Obviously, in lots of MSAs, it's more economical and more attractive to own a home on an after tax basis than to rent an apartment; particularly when you include the influence of the investment component. I'm wondering, now that apartment rents have softened in select markets, is that economic equation still as powerful an incentive as it's been with respect to inducing people to buy homes? How much of a consideration do you think that has been in your market specifically?

You know, Greg it is a good question and I guess the best answer I can give was someone who was actually on a studio set of an interview I did recently for Fox, who was telling me as they were prepping for the interview, and had heard a recent interview by someone else, said -- it was a young woman who was just married, and said listen, I know there's all this hype about what happens if rates go up to 7%, and I've heard this question about renters. She said I can tell from you my experience, I'm renting right now and my husband and I can't wait to purchase a home, and whether or not interest rates are 7% or 8% or whether or not the monthly payment is more or less, we're going to buy a house as soon as we can get enough down payment to buy a house. And you know, it's interesting, that is a mood and mentality I hear time and time again.

I'm quite convinced that it is not -- people don't look apples and oranges and say let me see, I can rent a house for $1,500 or buy a house for $1,600, no I'll save $100 a month and rent. House purchase is more than just, you know that, monthly financial trade-off. There's a huge subjective and emotional factor, there's a huge goal attainment factor, a huge control of your shelter factor. And I'm convinced that that is going to become more and more prevalent, particularly as immigrants become a larger part and more interspersed part of our demographic makeup.

Are you seeing evidence, though, that vacancy rates for apartments in the markets where you participate are on the rise and rents are softening? Is that something that you can track specifically?

Well, actually, there has been -- maybe a little bit of that already, I think, for the last year I'd say rents have softened, maybe the last two years they've been softening. It's actually created an interesting opportunity for us. One, you might be familiar with, on the east coast, because it's overlooking Manhattan, one on the west coast; what's happening, we are buying two properties where they actually started construction and were intending to use them to build apartments. When they did the economics they found the rentals did not fare as well as condominiums, but that wasn't their expertise. So in those two cases, we're buying buildings that were under construction, and we're going to be completing them and selling them as condominiums. These are opportunities that wouldn't have been available normally.

We're also finding that sites that were -- we had to previously compete against apartment builders are now becoming available. And we have considerable expertise in condominiums. Because they don't -- they're not able to bid it up because the economics are there. So I guess, frankly, we haven't focussed on, you know, the threat of competition from renters or people building rentals. What we do notice more strategically is the increased land opportunities, and these unique opportunities of buying buildings under construction, that is caused by this softening in rentals. It's not a new phenomenon that's all of a sudden hitting, this has been in place--you know rentals have softened for the last two years. If anything, because they slowed down a little bit, in terms of new construction, I'd say maybe the last three months it may be firming up just a little bit in terms of rentals in the markets we see. At least that's what I've heard.

I want to go back to a question that was asked earlier, I think by Tim. That has to do with Summit and its platform. I'm wondering if there's an opportunity for Summit to partner with your private portfolio division, and for the two of those to come together in such a way that you might be able to serve perhaps smaller markets, more effectively, more economically, and begin to advance your market shares in, perhaps, smaller MSAs than those in which you now participate; by virtue of the uniqueness that Summit offers, as well as the private portfolio offering.

Well, you must have been sitting in on our strategic planning meeting yesterday. We agree with you. I mean, they clearly have a unique operating model that does give us the opportunity to get into some of these small marketplaces. You know, to give you an idea, marketplaces of that over 5,000 starts per year make up about 600,000 of the 1.1 million housing starts, single-family starts. I guess the 1.1 is maybe now 1.2 or 1.3. It's roughly half. That means half of the housing starts occur in markets smaller than 5,000 homes. And ultimately, as the large builders gain more and more market share, we're going to have to be proficient in attacking those markets. We believe we've got a really good model as one of the ways to do that.

There are other ways and we're exploring those as well, and we do operate in some of the markets that are below the top 50, clearly; and we do that successfully. But, no, we think this is a huge strategic advantage for us to have that expertise in-house, and also, you know, as you might have heard from the past, of course, just the build on your own lot from the return on capital is just a wonderful strategic knowledge to have. Not to mention some of the advantages we have now from their advantage of distribution and the installation base--the installation business that give us some competitive advantages of cost or our additional profit centers, depending on how you want to view it. We're frankly really excited about all of the opportunities created by the Summit Homes acquisition and knowledge. You know, to some extent we're like the child in the candy shop, what we've got to do is figure out which direction we're going in. There are many great and juicy opportunities for us.

Is there an opportunity to integrate Summit with the portfolio division --

Well, yes, in fact, again, I think you must have a spy here, we just recently decided to have the private home portfolio report to management of Summit Homes. It's basically the same business with some minor twists. And we think they know that business slightly better than we do. And we think that's going to accelerate the growth, and they're convinced of it, of what we're doing here in New Jersey with the private home portfolio. It's the exact same business, they just, I think, are even better at it than our little group which we just started up. They've been doing it obviously for many, many years.

Right, right. Terrific, thank you.

Okay.

The next question comes from Tony Campbell with Knott Partners. Please state your question.

Good morning and congratulations on your fine numbers. I wondered if you could, obviously lumber prices are on everybody's mind, I wondered if you could talk a little bit about the lumber pricing as you see it, the impact on your business. And have there been other price increases that we should be aware of, and I'm wondering if you could sort of give us some color on those?

Lumber is, although it's the largest single component that goes into a house, it's still a tiny fraction of the sticks, bricks and labor that goes into a house, less than 10%. And we manage our lumber cost by trying to buy forward from our suppliers, anywhere from three to six months. We don't historically hedge that in the futures market. So our hedge really is our forward contracts from our suppliers. We've been able to more than offset any increases in lumber costs that have occurred by increasing the sales price to our customers. So it's not been a significant issue for us. There's no our commodities that I'm aware of currently that are causing any problem. Insulation is one that we hear may become tougher over the next few months. But I think the last, you know, companies that are going to feel it are the large public builders. It probably will be price increases.

One of the phenomenons that are going on as the industry's consolidating, much like Wal-Mart, or Office Depot have done to their industries, the bigger players are getting buying power. It doesn't help as much on certain commodity products like lumber, however, we're absolutely seeing price and cost reduction in certain areas in other areas, whether they're regional or major national purchases. That goes in areas like, you know, appliances, carpeting, windows, door locks, plumbing fixtures. We are absolutely seeing price reductions in those important areas. So there are many sides of it.

Everybody likes to focus on lumber. It is an important component, it has cost us dollars. And the price increases have cost us some margin points. But there are other factors going on as well. So on the whole, material prices are not at all of concern to us. There are movements in both directions. The long-term trend, other than a few commodity products, we feel, are probably going to be going down as we continue to gain in size, and the suppliers are more and more anxious to make deals with the big national players, because they see the future in the national players, and absolutely want to build a relationship.

Thank you very much.

The next question comes from Craig Kucera with Friedman, Billings, Ramsey.

Hi, good morning. I wanted to know if you anticipated any additional hangover from the acquisitions you did last year as far as relates to intangible amortization this year?

I don't know what you mean by hangover, but our stated philosophy, and you actually see it on the face of the income statement, we have a line called amortization of intangibles. So that--typically it takes anywhere from three to five years after we make an acquisition for the amount of premium that we put to intangibles, if, in fact, we put anything to intangibles to flow through the income statement.

So then are you saying it would be reasonable to assume a similar amount of amortization through the rest of the year?

Actually, Paul, you want to comment on the amount of amortization?

Yeah, I mean if you look at the release on the -- if you look at the release on the -- one of the attachments, we do have the amount also on our EBITDA calculation, all right? But on the face of the income statement, you'll see that we had $4,808,000. That's pretty much going to be -- it's really being done on a straight line over a certain number of years for each one of those acquisitions. So, it should be approximately that number for all the four quarters this year.

Okay, thanks. Also, you seem to be focusing primarily on organic growth this year, but you have historically been a relatively aggressive acquirer. Are there any markets out there right now that are more appealing than some others that you might consider entering?

We interestingly have not particularly targeted any market. We feel that we're better served by really being very flexible geographically, and finding the right management team in terms of opportunity. If we find the right management team, you know, we could make a great case for rust belt nonglamorous markets versus glamorous sun belt markets. Having said that, we continue to see opportunities, we continue to explore them throughout many parts of the country. If I absolutely had my druthers, everything else being equal, I'd say we'd love to be in the Las Vegas market, we'd love to be in Denver, even though I know it's a slow market there; sometimes it's very good to buy your straw hats in the wintertime. We'd love to be in Chicago. We'd love to be in a couple more markets in Florida. Those are probably the ideal targets for us strategically. But we're very open to geographic, you know, opportunities as they come up.

We virtually never target a state and say let's go find an acquisition. We really look for great acquisitions and then look at the market secondary.

Okay. Great. Thanks. And finally, you commented on some of the appreciation you're seeing in the market in homes. How about land? Can you comment at all on some of the land price appreciation you're seeing?

Yes. Basically, land is appreciating also. In many of our markets, obviously, because we option property well in advance of when we're going to use it, we lock the land price so we're coming to market with properties that are considerably undermarket, and will continue to do that for a while. On the other hand, some of the brand-new parcels are at higher costs than some of our old parcels. With every acquisition we do in land, we basically say, okay, we have to pay today's land price and we have, even though we may not deliver the homes for a year or two, and we have to assume current prices, we never assume price appreciation in justifying the land acquisition. And with those assumptions, we are able to continue to find land opportunities that meet our return on investment and IRR hurdle rates.

So, yes, there has been price appreciation and new land is more expensive. But luckily, housing prices have appreciated as well, and we continue to find good opportunities. Interestingly, many of those land opportunities are being -- are larger, more complex deals. And that is the kind of transaction that we're particularly well suited for, and that's kind of transaction that we have an advantage over our small peers when -- or mid-sized peers when we have to compete against them for those larger, more complex transactions.

Can you comment at all on what those internal hurdle rates are?

Sure. We typically have an IRR of 30% on our new acquisitions.

Great. Thanks a lot.

The next question comes from Avery Sum with Ivory Capital. Please state your question.

Good morning, guys, nice quarter. Just had a couple questions. Can you add more color to the weather-related delivery impact going forward in terms of relative backlog conversion rates? Just trying to understand when that issue is cleared up, and when the cashup occurs.

It's going to lean things much more to the fourth quarter. Obviously, with 2-foot of frost line, we weren't able to dig foundations for a number of weeks during our first quarter. So the delay of those starts, you know, some of those might have happened at the very end of the second quarter or end of the third quarter. It's just going to heavily weight things away from the second quarter into the third and fourth quarter, most especially into the fourth quarter in terms of our overall projections.

Again, we've taken that into account, and we still believe we're going to have every quarter in terms of earnings, and deliveries, exceed prior year's quarter. It's just that we'd really like to see, and I'm sure you'd like to see more even quarterly deliveries and profit. I think had the weather not been there, we would have had much more of our earnings geared towards the earlier quarters than we are going to have. So that's --

Absolutely. Okay, thanks. The other question was just on the drivers behind the margin revision for the '04 forecast. I just wanted to get a better understanding there. It sounds like you guys are still assuming no price increases, and it looks like the margin is relatively flat; which means--or seems to imply that the cost side here is relatively flat. Can you guys comment on that?

If you look at our projection previously, that we had on the website, we were actually projecting, with we put out our fourth quarter results for '03, margin declines this year. The new projection that we just put on our website actually shows margins roughly flat against '03 results, you know, part of our margin mix has to do with the acquisitions, the stepped up basis, the mix in communities. It's not clean apples to apples, but in spite of that, we've actually increased in our projection, our home building gross margin rather significantly. And primarily because of our ability to continue to raise prices in select communities, especially those that are in heavily regulated environments.

Okay. So are you guys still assuming no price increases or are there -- that's what I'm trying to figure out.

Our projections use today's prices.

Okay.

Okay? We assume they won't go up another nickel from today forward, but it does take into account price increases that we've been able to get through the end of the first quarter, say.

Okay. Got it. So it's basically reflecting one quarter of price increases? Effectively.

Yes.

Great, thanks a lot, guys.

Keep in mind a lot of our homes for the year have already been sold. If we raised prices, you know, at least 65% of the homes that we're delivering in '04 that are unaffected by any price increases we're going to do going forward; because they've already been contracted at a fixed price.

Uhm-hmm. Okay, thanks.

Thank you.

The next question comes from Stephen Kim with Smith Barney. Please state your question.

Hi, it's Jed Barron for Stephen Kim. Just a piggyback on the previous question, if I could, understanding the guidance here for the gross margin for the year; could you just talk about the trajectory that you might expect over the course of the year?

You want to know what the gross margin might look like for each of the quarters?

Right. Right.

Yeah, I would say relatively flat, they might decline a little bit in the latter half of the year as communities that have higher cost land start delivering, so that will have some suppression on margins in the latter half of '04.

Okay. Great. Thanks very much.

Thank you. As a reminder, ladies and gentlemen f you wish to ask a question at this time, please press star 1 on your push button telephones. If there are no further questions, I'll turn the conference back to Ara Hovnanian for final remarks.

Thank you very much. As always, of course, we're all available for some questions afterwards. We're thrilled to give you great results once again. We'll be releasing our sales orders in just a few days for the month of February. And we'll look forward to giving you continued good results next quarter.

Ladies and gentlemen, again, if you wish to access the replay for this call, you may do so by dialing 800-428-6051, with an id number 340104. This will be available in approximately one hour and will run for 12 months. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.