Hovnanian Enterprises Inc (HOVNP) 2005 Q1 法說會逐字稿

Ladies and gentlemen, good morning. And thank you for joining us today for Hovnanian Enterprises Fiscal 2005 First Quarter Earnings Conference Call. By now, you should have all received a copy of the earnings press release. However, if anyone is missing a copy and would like one, please contact Dana Allmack [ph] at 732-747-7800. We will send you a copy of the release and ensure that you are on the Company's distribution list. There will be a replay of today's call. This replay will be available after the completion of the call and run for 12 months. The replay can be accessed by dialing 888-286-8010 with a pass code of 11024764. Again, the replay number is 888-286-8010 with a pass code of 11024764. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the first quarter results and then open up the line for questions. The Company will also be webcasting a slide presentation along with the opening comments from Management. 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 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 to the information in the slide presentation. I would now like to turn over the conference call to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Thank you. Good morning and thank you for participating in today's call to review the results of our first quarter ended January 31. Joining me today from the Company are Larry Sorsby, Executive Vice President and Chief Financial Officer, Dan O'Connor, Vice President and Associate Corporate Controller, Kevin Hake, Senior Vice President and Treasurer, and Jeff O'Keefe, Director of Investor Relations.

Once again, we are proud to report that we set all-time first quarter records in nearly all categories, including net contracts, contract backlog, deliveries, revenues, and net income. We are excited to have this opportunity to share our results, talk more about our recent acquisitions, and provide an updated outlook for the remainder of fiscal '05. I will review the highlights and focus on other operational developments, including the two acquisitions we announced earlier this week. And then, Larry will spend more time reviewing our financial performance in greater depth. For those of you that are viewing the slides on the Investors page of our website at www.khov.com, you may now turn to Slide No. 3.

For the first quarter of 2005, we recorded earnings per fully diluted share of $1.25. This is in line with our revised guidance and represents a 44 percent increase from 2004's record earnings of 87 cents per share. As shown on Slide No. 4, net income rose 41 percent in the first quarter to $81.5 million, compared to $57.7 million in the first quarter of fiscal '04. Our record financial results, once again, produced returns that rank us among the highest in the industry. For the trailing 12 months, we posted after-tax return on beginning equity of 41.4 percent and an after-tax return on beginning capital of 21.9 percent.

As shown on Slide No. 5, our return on average equity over the past 12 months was 35 percent. Our entire industry is generating great returns, although we are particularly proud to be achieving one of the highest returns on equity in the industry.

Slide No. 6. Total revenues for the first quarter increased 36 percent to $1.1 billion, up from $775 million in the prior year, setting a record for first quarter revenues for our Company.

Slide 7. Consolidated deliveries increased 13 percent in the first quarter to 3,256 homes, another record for our first quarter. We achieved these record results despite record severe wet weather conditions during the quarter in California. We continued to increase our product diversification in many of our markets, pre-opening our first independent living community and introducing town homes, mid-rise communities, and active adult communities where we previously did not have them. This further product diversification means that we are now reaching customers that we did not consider our target audience in those particular markets. This is leading to additional community openings and has added to our ability to grow organically.

As we've stated in the past, we have a two-pronged growth strategy. Organic growth through product diversification and community talent expansion in our existing market is one component of that strategy. Going forward, we remain focused on achieving 20 percent growth and earnings organically each year prior to the effect of any future acquisitions. We continue to see opportunities to achieve this goal organically and believe it is certainly achievable over the next several years even if market conditions are less favorable than they are today. The second part of our strategy is seeking to make financial sound acquisitions of other homebuilders to further grow our operations and expand our geographic footprint.

We have continued to look at a lot of acquisition opportunities over the past 18 months. However, since our acquisition on Windward Homes in Tampa in November of '03, we have not been able to find many that would make sense for us due to their market scale, cultural fit, acquisition price, or other factors. We were able to complete the strategic in-market acquisition of the assets of Rocky Court [ph] Homes in Virginia in September of last year, but those assets and operations were in our existing market footprint, and that was the limit of our acquisition activity over that period.

Slide 8. The dry spell for acquisitions for our Company has now ended with two significant acquisitions announced this week. These new acquisitions bolster our position in Florida, gain us entry into the Chicago market, and provide an added boost to our startup operation in Minneapolis. These markets represent very attractive opportunities for us. And I'll discuss each market in a little more detail in just a moment.

Our track record for successfully making acquisitions of other builders and integrating them into our Company is extensive. Like each of our prior acquisitions, these latest acquisitions further our strategy of expanding our national presence while focusing on becoming a dominant builder in each of our markets. Our prior acquisitions have each succeeded in furthering this strategy, including Washington Homes in North Carolina and the Metro D.C. market, Forecast Homes in Southern and Northern California, Goodman Homes in Dallas, Brighton and Parkside Homes in Houston, Great Western in Phoenix, and Windward in Tampa. Through the acquisition of Town and Country Homes, we now enter the Chicago market and expand our Minneapolis presence, making us the top ten builder in each. We also greatly increased our presence in Florida and entered the new markets of Palm Beach County and Orlando with the additions of Town and Country and Cambridge Homes.

We expect that our increased size and market concentrations in Chicago and Florida will provide the powers of scale and the economies of scale similar to those that we have experienced in markets that we've operated in for many years. We believe the competitive advantages significantly enhance our returns on investment in the markets where we are the dominant builder.

Before I get into a discussion about the market opportunities that these acquisitions provide, I want to welcome our new associates from both of these strong homebuilders. The addition of Town and Country brings about 250 new associates for our team. And through the acquisition of Cambridge Homes, we are adding an additional 180 associates to our roster. Mike and Tom Ryan, Bill Orows [ph], and their respective teams bring an impressive level of talent with them to our organization. After having spent a lot of time with associates from both of these organizations, one thing I can tell you is the depth of talent we gain as a result of these transactions is impressive. One of our biggest challenges to growing in this business is to make sure we have the best and the brightest associates. And I think we took a very positive step toward achieving that goal through these acquisitions.

Through both Town and Country and Cambridge we are making a big move up in increasing our presence in Florida. Today, and into the foreseeable future, Florida is one of the strongest housing markets in the United States. Since our acquisition of Windward Homes, we have been saying that we want to be in more markets in Florida in addition to the strong Tampa foothold that acquisition has provided for us.

As you can see on the map on Slide 8, through the acquisitions made this week, we now have a presence in West Palm Beach, Boca, and Fort Lauderdale, and the Orlando markets. Individually, each of these markets represents opportunity for growth, and our combined presence in the State of Florida gives us a much larger platform for growth, one that we believe is critical to achieving our strategic objectives over the years to come.

Our footprint in the Midwest is expanding as well through the acquisition of Town and Country. Chicago is the sixth largest housing market in the country and a market that Town and Country has been operating in for the past 47 years. They delivered 744 homes in Chicago in 2004, and are already a top ten builder in this market. They are planning to deliver just under 1,000 homes in the Greater Chicago market this calendar year. We believe that through the prudent investment of our capital we can expand into additional communities and strengthen this position further in the future.

We have also added nicely to our presence in the Minneapolis/St. Paul market with the addition of 13 existing Town and Country communities. We entered the Minnesota market with a startup operation last year, and already have a handful of communities planned to open in that division in fiscal '05. Minneapolis is the 10th largest housing market in the country. Town and Country was ranked as a top ten builder in this market based on 2003 deliveries. We will keep the operations of this existing division and the Town and Country operations in Minneapolis separate. This is a strategy that we've proved successful in the past, and we believe will give us the best competitive position in this vibrant market. As a combined company, we will definitely be among the largest homebuilders in the Minneapolis market.

I want to take a step back for a moment and explain the significant of the structure of the joint venture that we are using for the Town and Country acquisition. We are utilizing a joint venture structure to own, develop, and sell the residential communities that Town and Country currently controls, assets that are either owned or under option. We have partnered in this investment with the Blackstone Group, a world-class institutional partner and a private equity investor with significant experience and a strong track record in making investments in operating companies as well as real property ownership and development. We look forward to achieving rewarding returns for both organizations from these operations. However, as we identify new land parcels in our Town and Country markets in the future, Hovnanian will pursue them on a wholly owned basis.

As of today, all of Town and Country's employees are Hovnanian Enterprises associates and will provide management, sales, and property development services to the joint venture. We believe that this structure provides us with an opportunity to achieve significant growth and increase our geographic presence while reducing our risk profile and maintaining our commitment to a modest leverage ratio by raising equity specific to this new investment without diluting our common shareholders. In addition, while we are--while we will be sharing the profits and returns of this investment with Blackstone and their investors, our return on capital invested in this acquisition will be enhanced through the venture structure, and thus, our return on Hovnanian equity will be enhanced as well. We view this as a way to leverage what we call our intellectual capital.

There is another reason this structure makes sense for us. Historically, we take a very conservative approach to purchase accounting on each acquisition and we plan to continue this in the future. We do not like goodwill, and we attempt to apply any premium we pay on acquisitions first to inventory and any remaining amount to definite life intangibles that amortize over roughly three to seven years. Our conservative accounting approach erodes GAAP profits and our GAAP returns on capital during the first few years of an acquisition, even though the cash flow can be quite good. We think teaming up with a financial partner who is more interested in cash flow in the early years when the GAAP returns are not as good, and then, pursuing all new communities at book value with no premium on a wholly owned basis, makes a lot of sense for our Company.

While the joint venture structure has a lot of advantages, we will not use it for every acquisition that we make. As we have done with our prior acquisitions, we acquired Cambridge Homes as an outright cash purchase that will be wholly owned by our Company. Given the size of the acquisition, the risk profile, and anticipated returns, we decided an outright acquisition made the most sense for our Company and our shareholders. We believe that both of these transactions will be accretive to earnings in fiscal '05 starting in the second quarter. The impact will be gradual at first, but as the integration process moves forward, each deal should contribute more and more to our financial performance. Notwithstanding these acquisitions, we were increasing our guidance for the fiscal year to greater than $6.75 per share. These acquisitions should bring us to over $6.85 per share due to the estimated 10 cents per share combined accretive effect of the two acquisitions.

Slide 9. The revised projections represent over a 28 percent increase from 2004's record earnings of $5.35 per share. This projection includes second quarter 2005 EPS of greater than $1.60 per share, up more than 51 percent, compared to $1.06 per share in last year's second quarter. Fiscal '05 revenue is expected to increase more than 24 percent to over $5.2 billion on deliveries over--of more than 16,400 homes. This excludes Town and Country altogether, since they will be reported on an unconsolidated basis, and includes only a partial year for Cambridge Homes. Details on our summary projections for the fiscal year ending '05 will be available later today on the Financial Information page of the Investor Relations section of our Company website at www.khov.com.

I'll now turn it over to Larry Sorsby to discuss our financial performance in greater detail.

Thank you, Ara. I will go into more detail pertaining to the first quarter and some specifics behind our revised 2005 expectations. Before I begin, I'd like to add some additional information on the joint venture with Blackstone. Although Town and Country is a sizeable homebuilder, and the transaction is a significant acquisition for our Company, the joint venture structure with the Blackstone Group allows Hovnanian to raise equity, capital specific to our new investment in these markets, without diluting shareholders by issuing additional common stock at the parent company level. We have capitalized the venture with debt that begins at roughly at 50 percent ratio to total capital and declines over time from there. The equity portion of the JV was funded by a combination of investments from Hovnanian and Blackstone. We retained the responsibility for oversight of Town and Country's day-to-day management and operations. We will account for the venture using the equity method. Under the equity method, we expect our share of earnings from the Town and Country venture to be approximately 5 cents accretive to our earnings per fully diluted share in '05. Although the venture will not be consolidated on our balance sheet, the effect of such consolidation if one were to analyze it that way, would be to have a very little effect on our overall leverage ratio.

At the end of the first quarter, excluding JV communities, we had 292 active selling communities Company-wide, up slightly from 288 at the end of January 2004.

Turning to Slide 10. Although weighted to the second half of this year, we have a very strong pipeline of new communities scheduled to open during the year. Excluding JV communities, but including the 15 additional communities projected from Cambridge Homes, we expect to have approximately 330 active selling communities at October 31, '05, an increase of 20 percent in community count over October 2004.

Turning to Slide 11. Including unconsolidated joint ventures, the dollar value of net contracts for the first quarter ended January 31, '05, increased by 13 percent from the first quarter of fiscal '04. And the number of home deliveries rose by 13 percent. The number of contracts for the quarter was virtually flat at 3,240 contracts versus 3,225 in last year's first quarter. Excluding the impact of our two recent company acquisitions, and due to new community openings being weighted towards the second half of fiscal '05, we now expect contracts for the second quarter to be similar to last year's second quarter results. As we open additional communities during the third and fourth quarters, we expect our sales base to increase.

Turning to Slide 12. The average sales price per home delivered Company-wide, excluding JVs, for the first quarter was $311,000, a 19 percent increase from the average sales price of approximately $261,000 in the prior year's first quarter. The average sales price in our markets increased primarily as a result of geographic and product mix of our deliveries as well as our continued ability to raise prices in select locations. We expect that the average sales price per home, excluding unconsolidated joint ventures, will be in the range of $300,000 to $311,000 for fiscal '05. Although our average sales price in backlog at the end of the first quarter was $334,000, excluding unconsolidated joint ventures, we continue to anticipate that the average sales prices of homes and backlog will decrease as we move through fiscal '05 as a result of changes in product and geographic mix as we open new communities during the year.

For the first quarter in 2005, turning to Slide 13, the Company's consolidated homebuilding gross margins, excluding land sales and after interest and cost of sales, was 24.2 percent, slightly higher than the 24.1 percent gross margin reported in the prior year's quarter. Prior to deducting interest and cost of sales, the gross margin was 25.5 percent in the first quarter of this year, down 20 basis points from 25.7 percent in last year's first quarter. The decline was primarily due to the severe weather in California, which prevented us from delivering additional higher margined homes. Based on the homes we have in backlog for delivery in fiscal '05, we are projecting our homebuilding gross margins for the full year, prior to the effect of interest expense, to be between 25.5 and 25.8 percent, compared to the 25.5 percent homebuilding gross margin achieved in fiscal 2004.

During the quarter, we booked a gross margin on a land sale of $8.8 million, or about 8 cents per share. Every quarter we attach a schedule to our press release that details revenue, cost of sales, and gross margins from land sales separately. Occasional land sales are a regular ongoing part of our business. The exact timing and profitability of land sales are difficult to predict, but when we make our forecast we generally factor in the possibility of a certain amount of land sales in most quarters. Our most significant land sale during the first quarter was a land parcel that we had under option in California where we were having difficulty obtaining regulatory approvals. We found a buyer who was willing to close on the parcel, take on the approval risk, and pay us an attractive price for our option contract.

We were very clear in lowering our revised EPS guidance for the quarter to a rough estimate of $1.20 per share as a reflection of our best possible estimate of the number of delayed deliveries in California. But we did not provide specific guidance on the amount of land sales included in the $1.20. Given the California rains, we are pleased that we ended up very close to that $1.20 estimate.

We are projecting a minor amount of land sale profits that we expect to occur in the second half of fiscal 2005. As a general rule, we do not intend to provide specific guidance on projected land sales, but we will try to give you a heads up for particular transactions that will have a significant impact on our income for one of our future quarters.

Turning to Slide 14. Total selling, general, and administrative expense, including corporate expense as a percentage of total revenues, was 10.8 percent in the first quarter of '05, a 30-point--30 basis point decrease from 11.1 percent in last year's first quarter. We anticipate that our total SG&A expense as a percentage of total revenue will be in the range of 9.5 to 9.8 percent of total revenues for the full year in '05.

Turning to Slide 15. The Company's pre-tax margin in the first quarter increased 50 basis points, 12.5 percent from 12 percent in the prior year's first quarter.

Now I'll cover the performance of the financial services operation, turning to Slide 16. Due to the fall off in the refinance business, we are experiencing increased competition from third party mortgage lenders who've been reducing their margins in order to originate more new business. This, combined with an increased demand for adjustable rate mortgages, which are historically less profitable than fixed rate mortgages, has adversely impacted the profitability of our financial services operations. Pre-tax items from financial services were $4.3 million in the first quarter, down from $6.7 million in the prior year's first quarter.

Turning to Slide 17. We are currently originating mortgages in all of our markets except Florida and a portion of our Houston operations. Through the acquisition of Cambridge, we will originate mortgages in Orlando and expect to begin offering these services in our other Florida markets and Chicago over time. Our recent data indicates that our customers' credit quality remains quite healthy. Our average loan-to-value ratio was 76 percent for the first quarter, flat with our fiscal '04 results. For the quarter, our average FICO score was 710, roughly equal to fiscal 2004's FICO score of 713. We believe that our customers' average FICO scores are higher than mortgage industry averages and represents an excellent credit worthy homebuyer. For the quarter, the average FICO scores for customers utilizing an adjustable rate mortgage were equal to that of our traditional fixed rate loans. This further demonstrates the strong credit profile of our customers who choose to finance their home purchase with ARMs.

As we noted on our previous earnings calls, we've seen an increase in the use of adjustable rate mortgages. In the first quarter, ARMs represented 45 percent of ARM origination volume versus 41 percent ARM originations for the entire fiscal 2004 year. The majority of our homebuyers that are choosing ARMs are selecting three or five-year ARMs. Our cash flow, balance sheet, and credit statistics continue to be very strong and are proving further. During the quarter, Moody's recognized these trends. We received a ratings upgrade from Moody's on our corporate rating and all of our outstanding debt, moving us one notch closer to investment grade ratings. Our corporate ratings and senior note ratings were raised from BA-1 to BA-2 by Moody's, and our senior subordinated notes were raised to BA-2 from BA-3.

Turning to Slide 18. For the quarter, EBITDA increased 38 percent to $162.4 million from $117.4 million in the first quarter of '04. EBITDA represents earnings before interest expense, income taxes, depreciation, and amortization. The reconciliation of our Company's EBITDA to net income can be found as an attachment to our quarterly earnings release.

On Slide 19, EBITDA covered the amount of interest incurred by 7.7 times for the quarter, an increase from 5.4 times during last year's first quarter. We expect to cover interest more than seven times for full fiscal year. And the ratio of total recourse debt at year-end to EBITDA for the year is expected to be below 1.5 times. We ended the quarter with a strong balance sheet and the ability to more than adequately service our debt requirements.

While EBITDA and interest coverage levels remain strong, many investors still ask about operating cash flow for homebuilders. Slide 20 shows what would happen if we were to decide not to add to our land position each year by freezing our land position at the beginning of each year. What kind of cash could we generate? It adds back our change in land investment each year to EBITDA. We would have generated more than $1.1 billion in cash in fiscal '04. We see that this trend has continued during the first quarter as we would have generated more than $1.2 billion in cash over the trailing 12 months. Although we would still have to pay taxes under this scenario, we could generate enough cash to pay off our $1.2 billion in debt in just over a one-year time period.

Turning to Slide 21. We ended the quarter with a ratio of net recourse debt to capitalization at 46.8 percent. Even with the recent acquisitions, we anticipate that we will have an average ratio of net recourse debt to capitalization below 50 percent again in fiscal '05, in line with our current operating strategies.

Turning to Slide 22. We finished the quarter with shareholders equity of $1.3 billion, a 42 percent increase from $898.9 million at the end of the first quarter of fiscal '04. Based on our revised earnings projections for fiscal '05, we expect shareholders equity to grow to more than $1.6 billion by October 2005.

Turning to Slide 23. At January 31, we controlled over 100,000 lots in our various homebuilding markets for future developments. Roughly 74 percent of our lots are controlled under option contract, which minimizes our risk exposure to any significant decrease in the land value. Our current land position represents more than a six-year supply, based on '05 projected deliveries.

Turning to Slide 24. It shows our aggregate option position for all of our lot options, and the amount of aggregate deposits we have at risk, which are only 5.5 percent of the total purchase price of the lots. We believe that this strategy maximizes our ability to reduce risk [indiscernible]. In addition, our controlled land gives us excellent forward visibility and confidence that we will be able to continually grow organically--to organically grow our earnings by 20 percent per year over the next several years. With the additional new company acquisitions, we could grow at an even faster compounded annual growth rate.

Before I turn the call back to Ara, I'd like to mention a few other points regarding our projections for the current fiscal year. Our updated fiscal '05 projections, which include the effect of both recent acquisitions, are net of all amortization of definite life intangibles and include $45.1 million of definite life intangible amortization, representing costs of about 42 cents per share. After this amortization, our total remaining definite life intangibles will be approximately $104.4 million at fiscal '05 year-end. Assuming no additional Company acquisitions, during 2006 we anticipate amortization of definite life intangibles to be $37.4 million with a year-end balance of only $67 million. We continue to believe that our financial treatment of acquisition premiums is among the most conservative in the industry and is the most appropriate way to represent our balance sheet. We do not anticipate booking any goodwill in conjunction with our two recent acquisitions. At January 31, 2005, we only had $32.7 million of goodwill on our balance sheet.

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

Thanks, Larry. We performed well in the first three months of '05, but not without some difficulties. We certainly faced tough weather conditions in the west. Thankfully, our geographic diversity helped smooth out some of that impact. Going forward, the additions of Town and Country and Cambridge should help future earnings be even less affected by weather related events in any one geography. We also realize that our business will feel some impact from rising interest rates one day. However, the likely scenario for increased rates is a stronger economy and increased job growth. That's a trade we're willing to make as job growth gives customers the confidence to purchase new homes even if they have to compromise by buying a smaller home or less options or upgrades due to affordability issues.

There are a number of factors that allow us to continue along our path of profitable growth even if interest rates rise modestly. First, the overall demographic trends for our homebuilding industry remain strong. Household formations, one of the largest components of this demand, are expected to remain positive. According to the Brookings Institute, new housing starts should average $2 million per year for the next 25 years. That's a solid and steady level and higher than we've had over the last 10 or 20 years.

Number two, we operate both in less regulated markets and in some of the most highly regulated markets in the country. In the highly regulated markets, where the demand for housing far outstrips what can be built there, our returns are higher than average. In our markets that are not as highly regulated, our local management teams have consistently been able to implement strategies that have generated solid returns.

Number three. We believe that some of--with some of the broadest product arrays in the industry that we can build the right product in the right market at the right time. We will continue to introduce more and more of our active adult and urban infill communities in particular throughout our markets. We strongly believe that the compelling demographic for these products will remain strong in the years to come.

Number four, our strong organic growth, coupled with the incremental gains from our most recent acquisition, will lead to strong growth. One of the reasons that we've been so successful at integrating the acquisitions that we make is that we allow the entrepreneurial spirit that these companies bring to thrive. We do not sit in Red Bank, New Jersey and tell the people in the local markets where to invest their capital. It's just the opposite. We allow the local experts to tell us how and where we should be investing. And then, if they are comfortable with--if we are comfortable with a specific community risk and with the IRR returns, which have a hurdle rate of about 30 percent after all overhead without any assumed price appreciation, then we move forward.

Number five. We will continue to prudently leverage our balance sheet, whether it is through our lot option strategy or through joint ventures. Investing through joint ventures with third party equity investors, like the recently completed acquisition of Town and Country, reduces our equity investment in certain communities in exchange for shared profit and increased ROI without the risk of increased debt.

Number six. We have a strong track record of successfully integrating acquisitions. It's one of our core skills. These most recent transactions represent two very attractive investment opportunities that are consistent with our pledge to pursue strategic acquisitions where we see a strong cultural fit and where management has a track record of generating strong returns and is committed to staying with us to help us grow our operation. Many of the--of our senior leaders have come to us through acquisitions over the many years. These acquisitions not only diversify operations by adding complementary markets, but serve as new vehicles for accelerated growth. In short, this will diversify our revenue stream, leverage our operating expertise, expand our market opportunities, and enhance our talent. Both of these are operationally and financially strong organizations, and the cultures and very similar to ours. We, therefore, see these collectively as a natural fit with our existing operations.

We performed well for the first three months of '05, and our outlook for the remainder of the year is very positive with a very solid backlog position of $2.7 billion. Over the coming months, we'll be focused on executing our strategic initiatives and integrating the recent acquisition. I know that our associates are up to the challenges that lie ahead, and I am confident of our ability to continue to outperform through '05 and beyond.

This concludes our presentation, and I'll be pleased to open up the floor for questions.

Thank you, sir. The Company will now answer questions. (Caller Instructions.) Our first question is from the line of Stephen Kim.

Thanks very much. Can you hear me? Okay. Well, congratulations on a very strong quarter and really an innovative deal with Town and Country. That's really great. Had a question for you with respect to first, your gross margins. You mentioned, Larry, that some weather in the western part of the country hurt your margin a little bit because it pushed out some of the delivery of high margin units. I'm wondering if you could, you know, quantify that for us a little bit in terms of what happened in the quarter, and give us a sense for what the impact on a purchasing accounting basis--because of purchase accounting, how much that's going to be a drag in the next couple of quarters.

Well, in terms of the California impact, it's pretty straightforward, as I mentioned in my formal remarks. I mean, the fact is that California historically gets higher gross margins than our overall average and the fact that we pushed out some California deliveries due to weather-related delays did impact, you know, the aggregate margin during the quarter. For the full year, we're still expecting margins that are equal to or slightly better than the margins that we were able to achieve in 2004. With respect to the effect of purchase accounting on gross margins, keep in mind that because we did the Town and Country options through a joint venture, they won't have any impact on our gross margins. We're reporting that under the equity method, so it will just be a single line on our financial statement. With respect to Cambridge Homes, you know, they get to their returns on capital by having slightly lower margins than our overall average margins and having higher inventory turns to get kind of the return on capital. But it's also going to be harmed in the first few years of operations due to our purchase accounting conservative methodology where it will actually hurt their margins a little bit. I don't think it will be material enough that it affect the projections that I've put out today.

Okay. That's fine. With respect to the California effect, though, would it be safe to say that that hurt you by maybe 30 [indiscernible] this quarter?

You know, I really haven't gone back and tried to quantify it precisely, Steve. But there was a meaningful impact.

Okay. And then, the second question I had relates to Blackstone, or your partnership with Blackstone. A very interesting deal. I was wondering if you could give us a sense for how you are going to, you know, receive your pro rata share of the returns? I guess what I'm asking here is Hovnanian going to buying lots in this venture? Is Blackstone going to be involved on a daily basis with operating decisions like pricing, velocity, marketing, and stuff like that? Walk us through how you guys are going to be, you know, actually working on a day-to-day basis in that joint venture.

Ara, you want to tackle that or you want me to?

I'll tackle that. Well, first of all, all of the employees are Hovnanian Associates as of this week, and we will be the ones managing the day-to-day performance. Blackstone is a partner with us on the complete development, not just for the land, but all the way through the housing development and construction and sale, right through the very end. The financial returns, as we mentioned, are very good on a cash flow basis, and their investors are more concerned about past flow than GAAP, which is why we like this match up quite a bit. You know, as I pointed out, all new communities that were not under contract on the day of closing, we will do 100 percent on our own. I'm not sure if that specifically answers it for you.

Well, I was hoping for a little more color, Ara. I guess, what I'm saying is, you know, you obviously have gotten involved with projects that you have identified today. I imagine some of those projects have a life that could stand a few years. You know--.

--The bulk of the housing deliveries through the joint venture will really happen over the next four years, and it will gradually, as you might imagine, start to diminish. At about that same time, our new communities will start to ramp up very slowly over that same four-year period. If you look out five years from now probably, my guess is it would be about 80 percent pure Hovnanian deliveries and maybe 20 percent of the remaining Blackstone joint venture communities.

Right. Now that I understand. I guess what I'm saying is that, you know, things can change over the next few years in terms of the environment. You guys might decide well, geez, we think we might want to maybe roll out some more inexpensive product with faster terms, or maybe we might want to slow the pace of orders down so that we can, you know, for whatever reasons, and all of those kinds of decisions. I guess I was curious as to whether Blackstone is going to be weighing in on them.

No. The--I mean, the responsibility for day-to-day management, including those kind of decisions, is with us, and frankly, we will be looking largely to the management that we've acquired, much like we do on every single acquisition. Having said that, certainly, Blackstone has a wealth of knowledge. They are experienced in real estate. And we certainly will look to their input. But this is primarily a financial investment for them in an area that they understand well, real estate. And they will be looking to us for the day-to-day management.

Great. Well, thanks very much for that and congratulations.

Your next question is from the line of Michael Rehaut.

Hi. Good morning. Just a couple quick questions. The--just a quick one on the community count growth. And then, I have a follow-up on just an update on demographics. I believe you mentioned that you expect the second quarter to be also roughly flat year-over-year, and then, for the community growth to kick in in the second half of the fiscal year? Do I have that right?

Yes.

Okay. And--.

--And with that, by the way, obviously, since we're not growing community count very much, I would say it's fair to say we wouldn't forecast a big increase in sales in the second quarter. But you'll see much bigger increases in the third and fourth quarters of this year as we open up our new communities.

Okay, great. And the bigger part of my question really focuses on the--just an update, if you could give us, on your demographic diversity as you look at, you know, percent of closings at this point, you know, between first time, first time move up, and also the luxury product that you do in active. It's all urban infill. And after just giving us an update roughly on, you know, exposures to those segments, what at this point you feel that the growth rates would be for from what I understand are the higher growth segments, such as urban infill and active adult?

It's really an interesting question. It is not one that, you know, we quote statistics on regularly. And part of the reason for that is it does change quite significantly from market-to-market from new land venture to new land--to another land venture. And what we have is essentially an arsenal of many, many different products that we can use. And we look at the land opportunities that are available and if we happen to get three more active adult communities that make economic sense for us, then we will jump on those. If we find three market rate communities for entry level, we'll move on those. If there happens to be three market rate single-family detachable luxury, we will move on those. In general, we give a lot of flexibility to our local management to get the best returns regardless of what the product is. At the same time, we encourage very much employing a broad product arsenal. And we spend a lot of time with our division presidents to share knowledge of their product types. We get them together a couple of times a year. We tour our different communities in different markets across the country. We have different divisional presidents share statistics, costs, market research of all the different product sides. So they are available to all the operation. We do have a particular emphasis on the active adult segment and that will be growing faster than our overall rate of growth. And we have a particular emphasis on urban infill, including, but not limited to, mid-rise and high-rise. And I would say that will also grow proportionately at a greater rate than our overall rate of growth.

Having said that, we don't have very specific targets and they vary quite a bit from market-to-market from quarter-to-quarter depending on what communities are open. What we love about our strategy is we can shift it around quite rapidly as markets dictate and as demand changes. We have the skill set and can change that quite a bit. And it allow sour managers to look at all of the opportunities without being forced to segment into certain percentages, and say, okay, at this moment, what do I see as the best opportunities for the highest returns right now knowing that they can shift around as need be.

So that's a long-winded response to basically say we don't quote them and--nor do we have very specific quotas, but we are emphasizing the active adult and urban infill. And I will add one interesting point. From the urban infill--actually appeals to a wide variety of demographics. We do urban infill for first-time homebuyers, as we did recently in San Diego with a very affordable high-rise product that did very, very well and attracted a younger buyer. Yet, in another location where we're doing some mid-rises, it's the other extreme and we're doing urban infill with $1.5 million large luxurious mid-rises and those are doing very, very well. And, incidentally, we're also about to do an active adult urban infill and we think there's a lot of demand in that area as well. So we're extremely broad. We continue to market in that area. And that's a key part of our strategy in general.

Thanks, Ara. Just following up on that briefly. Could you just at least give us an idea of the mix for Town and Country in terms of what segments that [indiscernible] currently serves?

Yes. That's a good question. Town and Country primarily served first-time homebuyer and first-time move up. They have virtually--I think they have one community and it's a very small one and it's their first one in the urban--excuse me, in the age-restricted area. And they really have nothing at the moment on urban infill, although, down here in Southeast Florida they do have a mid-rise. But it's not an urban infill. We think that yields great opportunity for us and is one of the ways that we achieve accelerated growth in our geographies. They are very excited about learning about the active adult business. They think in all three of their areas, Chicago, Minneapolis, and in Southeast Florida, there are huge opportunities for active adult. We agree 100 percent and we think--and they're excited about urban infill. So I would venture to say within the next 24 months they will absolutely have numerous communities open in all three areas in this brand new area, which has added growth, an incremental growth, on top of what they already have underway.

Great. Thanks, Ara.

Your next question is from Alex Barron.

Yes. Hello? Hi. Congratulations. A number of questions here. I'm not sure if you gave it, but wanted to get a sense for what percent of the deliveries in Town and Country are in the three various markets.

We gave a high level in terms of expected '05 deliveries. Roughly 1,000--just under 1,000 in the Chicago market and almost equally split the other 1,000 that we're expecting between Minneapolis and Florida, weighted a little bit towards Minneapolis.

Okay. And then, just to get a sense for their margins once you get past the purchase accounting and so forth, or excluding that, how do they compare relative to your company-wide margins?

Their margins, again, yeah, they've gotten very solid returns. They I would say have margins that aren't too different than our average margins across the entire Company. But again, I want to highlight, because we've done this in a joint venture structure, you'll never see that, because we're only going to report a single line on the equity method when we report the results.

Understood. Now given that, and you've made it sound as though I guess the other partner--oh, one question was what percent is the JV split between you guys and Blackstone?

We're not going to disclose that at this time.

Okay. And so, any incremental land that you'll buy so that will be fully owned by Hovnanian? Not--it won't be part of--.

--That is correct.

Okay. And then, just one quick other question on Cambridge. Given the backlog you have with roughly 480-something units, relative to their 600 deliveries in last year, can we imply that, I mean, deliveries are going to be significantly higher? Because usually most home--most builders take roughly, you know, six months or so.

The first you need to take--you know, keep in mind is they were on a calendar year-end. We're on an October year-end. And we're only going to have them for eight months this year. So--but on a full 12-month basis, they're certainly in a growth mode. That's a fair comment.

Okay.

And the Orlando market is real solid and steady at the moment.

Yeah, I just wanted to get a feel for like what's the delivery--the average delivery time that it takes for the kind of homes they build.

I don't know the answer to that, but my guess is it's not too far different than our averages across the country. Ara, I don't know whether you have color.

No. I mean, there are two factors. One is the actual construction time, and then, the other question has to do with at any given point in time how far in advance do they pre-sell prior to when they can even sell--start the home. That varies dramatically from community to community, from time to time, season to season. But in general, they are a pre-sale builder and have some good backlogs.

All right. And can you give us any sense for what your expected growth rate is for these two acquisitions?

Well, we certainly, you know, once they are on board, we consider them organic operation and we absolutely will be thriving and believe it will be achievable to attain 20 percent growth and earnings on an annual compounded basis. The land holdings are there and lot positions are there to make that happen. And we certainly will be sharing additional product knowledge to hopefully even accelerate on that.

Okay. Thank you.

Sir, we have a question from the line of Dan Oppenheim.

Thanks. Wondering if you can talk about the two acquisitions in terms of the--their land positions and how they are relative to Hovnanian's land strategy in terms of ownership versus the use of options.

Yes. In terms of Cambridge Homes, since they're going to be--they are a wholly owned subsidiary, they will show up in our financial reporting going forward. And when we say controlled lots they'll obviously flow into that. Town and Country will not, again, because of the joint venture. But on Cambridge, they are heavily weighted towards options similar to us. In fact, they are even more weighted toward options than we are. About 86 percent options, 14 percent owned. With respect to Town and Country, although you'll never see this going forward, I will tell you based on what we just did in terms of the acquisition, but again, because it's in a joint venture structure, those lots will never show in our controlled land position. But just for your information, 67 percent of their land was owned, 33 percent was optioned.

Okay, thanks. And then, wondering if you can talk about the, you know, some of the recent trends? You were talking about the second quarter of this year, we'll likely see flat orders relative to the second quarter of last year. How much of that is related to the continued wet weather in California? Is there--can you talk about what the impact is currently?

Well, yeah, I guess you're saying is the weather going to continue to be wet with that question, to some degree. I mean, obviously, you know, it's been one of the wettest California, Southern California especially, seasons on record. I think it was even still raining a week ago.

Actually, it was still raining last night in California, amazingly, in some [indiscernible].

Yeah. So, I mean, it's hard for us to guess what the impact on sales has been. I'm sure there's been some impact, but, you know, I don't know how to quantify it is the real answer, Dan. But I'm certain there's been some impact on sales in California because of the wet weather. It's very unusually wet and you know, traffic might even be down just a little bit there because of that. But, you know, I think the more significant impact in terms of orders being flat is just that community count year-over-year is roughly flat as well. So, you know, that's the bigger driver.

Sure. Okay.

I will emphasize that we continue to see really solid demand in almost all of our markets. Just really solid and steady. The only market I'd say where we are seeing some weakness continue is in our Ohio market. Other than that, we're just seeing really steady demand in all of our markets.

Okay. Thanks very much.

Your next question is from the line of Ivy Zelman.

Hello, guys. Actually, Dennis McGowen for Ivy. Hey, just to clarify on the joint venture you just talked about earlier. The way we should think about the joint venture is actually going to cease to exist once they run through the current land supply?

Correct.

As far as Minnesota, can you talk about your expectations for both orders in '05 and '06 and what kind of price point you're targeting there?

Talking about the Town and Country joint venture launch or are you talking about our startup?

No, you're startup.

Our startup--our first deliveries will only actually occur in the fourth quarter. And I think it's literally about 20 homes. So I wouldn't get overly focused on that. It's kind of an interesting thing, by the way, because we have done a startup there and we've done a quasi-startup in Southern California in the Bakersfield area. Somewhat different, because that startup will be serviced in the back office from our Newport Beach office. But it really kind of emphasizes the--some of the advantages of acquisitions. We love the startups. We're very pleased with what we have there. But it certainly takes time to ramp up the operation, get the deliveries going. By the time you staff up people, acquire your first site, develop the land, start building the houses, it can take a lot of time and including some startup losses, as you might imagine. Nonetheless, we think it's important to have that skill set and we are continuing to do a two-pronged growth strategy of both some startups and continue on our very successful strategy of acquisitions.

What do you think that could ramp to by '06 and to what kind of price point?

I believe roughly in Minneapolis in '06 we're planning about 250 deliveries and in '07 about 450. So that's kind of the level of ramp up. And obviously, the profitability increases dramatically. I think the average price points are similar to our Company average. We'll be doing a wide variety of product there, including some multi-family and single family. So I'd say pretty similar to our Company average at this moment.

Okay, thanks. Just one more question. You were touching on demand across the country. I'm not sure if you were talking revenues or units. But can you talk about the pricing trends that you're seeing in some of your major markets?

Yes. Overall, I'd say pricing trends have really leaped--well, let me go market-by-market a bit. In California, I'd say, you know, six months ago or so there were some real adjustments taking place in the marketplace as prices had gotten ahead of themselves. We're now seeing pricing really start to firm up and even having opportunities to raise prices again. I would say in that market we're getting back to a little more normalized price increases. But more price increases after a period of some real adjustments. The northeast and Washington, D.C. markets continue to see solid and steady price increases. They did not really see the kind of price adjustments that we saw in California occur over the last six to nine months. Our other markets, if you exclude those, have really been much more stable in pricing. They never really had the big price run ups, other than, I guess, perhaps Tampa, to a more moderate degree. And those markets really remain quite stable as they have been. And their great returns have really just been from super operations, not from any opportunities for big price increases.

What do you consider as normal in California? And then, can you touch on what you're seeing in Phoenix?

Sure. Well, Phoenix, we operate, or at the moment, on pretty affordable price points. And I'd see we're seeing price appreciation there maybe of 5 or 6 percent a year, just from the top of my head. And, you know, I'd say price appreciation of 5 to 10 percent might be considered a more normal environment in terms of annual price appreciation in Southern California. Over the last two or three years, it certainly has been greater than that. However, keep in mind, we have zero price appreciation built into all of our budgets. So any price appreciation we get is simply, you know, additional opportunities for profitability for us.

Understandable. Thanks a lot, guys. Very helpful.

Sir, your next question is from the line of Joel Locker.

Hi, guys. Good quarter. Just wanted to see if you guys had a cancellation rate for the first quarter or have that handy?

Yeah, hold on just a second. I mean, it typically varies between 18 and 22 percent and we were in the 21 percent kind of level for the quarter.

Pretty much flattish. And just on the lots. How many lots do you expect just total under control and under option at the end of the second quarter?

How many did we have?

How many are you expecting?

We don't project that.

You don't project that. How many did you have at the end of the first quarter?

A little over 100,000. I think 101,000.

And how many were options?

74 percent of that. It's actually in the slide presentation that you have access to.

All right. Thanks a lot.

Your next question is from the line of William Nodler.

Thanks very much. Congratulations again on a good quarter. On the amortization, could I just confirm what was said that you project your earnings this year net of goodwill of 45.1 or 42 cents a share?

Well, it's not goodwill. It's--.

--Go ahead, [indiscernible].

[Indiscernible] of definite life intangibles associated with prior acquisitions that we've made. And we are projecting to amortize 45 was it?

$45.1 million?

$45.1 million in the entire fiscal year.

And did you say that including the acquisitions it will be $104.4 million total at year-end after that amortization?

After the amortization, there will be $104 million at the balance. The balance will be $104 million. So there will be another $104 million that in future years will be amortized.

And if you didn't make any acquisitions, how fast would the 104 be written off, amortized?

Well, $37 million of the $104 million would be amortized in '06, and the remainder would be in future years. You know, it would probably be another three years it will be gone.

Well, at the end of '06, the amount of intangibles that we expect to be on our books, barring any new acquisitions, will be approximately $67 million. Keep in mind, we've got about $3 billion of assets. So we're talking about a tiny percentage of our overall asset value.

Right. And just one last question. You talked--I guess there was a question having to do with the impact of the two acquisitions going forward. And, you know, I was looking at the Town acquisition and it seemed to me if you sell 2,000 homes this year and do, if I recall, 650 in sales, that this could be a billion dollar revenue acquisition in '06.

Well, we're not going to make an '06 projection for you other than what Ara has already said, that we try to grow them 20 percent a year. You grow 600 million by 20 percent. It doesn't add up to a billion.

Right. But wouldn't it be true that you would probably grow it faster than your other existing markets, because you can add products, you can add--?

--That stuff doesn't happen overnight. It takes time. And again, keep in mind that, you know, it's in the venture, so it won't hit our revenues anyway.

Well, suffice it to say, you know, this will in short order be a billion dollar revenue operation. Whether that's 12 months from now or 24 months from now. They clearly have the momentum. They've got some significant growth. A lot of new communities. A lot of upside opportunity for us. So we're very, very excited about it. It is a significant addition to our Company.

Thanks very much. Congratulations on what appears to be two excellent acquisitions.

Thank you.

Your next question is from Thomas Catala.

Hey, guys. Thank you for taking the call. I saw in your slides that your estimate for SG&A in '05 was 10.8 percent. Will--I guess, generally, because you guys obviously do a great job of running a company. So kind of from a top down perspective, what's driving the SG&A down and are there specific prophecies in the core company, you know, pre-acquisition, that you embrace or perfected that you want to drive into the acquisitions, into those management teams, without obviously affecting, you know, them running the business?

Sure. Well, first of all, obviously in general, as we grow on a national level, corporate overhead becomes more and more efficient because we don't have to grow corporate overhead pro rata to our revenue growth. So just size alone certainly helps overall. Secondly, in each geographic area, size makes a difference also, because the larger we are--most of the overhead in homebuilding does not occur at corporate. Most of the overhead happens in the local divisions. And the more we grow, the more efficient we are in those geographies. Certainly, there are a variety of opportunities for efficiencies in time. You know, the amount of time these private companies spend in seeking capital goes away and that's much more efficient. There are many hours that become more efficient by utilizing our national contract versus bidding out all the time in all the geographies and trying to negotiate and spend all the time to get the systems up for those material purchases.

Then, you know, a key initiative that we hope will certainly take effect in the near future will be some of the efficiencies that we hope to garner as we roll out a new enterprise-wide system. We're hoping to launch the first division in Southern California in May, and if it's as successful as we hope, we'll roll that out across the country over the next couple of years. And that has inherent in it a lot of efficiencies. Other than that, in general, we have been very focused on process in a variety of areas, some of which improve efficiencies, some of which help us improve customer satisfaction. Some of them help us enhance construction cycle time and reduce mistakes and construction errors. The process focus really is in a variety of areas in addition to overhead efficiencies. And we expect to get benefits from all of the above. National side, divisional side, process enhancements, systems enhancements, and so forth.

Can you elaborate on this--a little bit on the system enhancement you were--?

Yes. Well, we are launching a software. We'll actually be the pilot large company to roll it out. It is software that the ownership has changed probably five times in five years. It started as a J. D. Edwards system and then went to a private company that went public and then was purchased by People Soft, then was purchased by Oracle. Obviously, so that has changed around quite a bit. We will be the first large user to implement this latest state of the art platform. We're very excited about the capabilities. It does everything from scheduling to automated payments to website data distribution to our subcontractors, including purchase orders and schedules and billing. We think it's very exciting. But, you know, are we counting on it for any efficiencies in the next 24 months? Not really. If anything, it will cost us money to get it implemented. As you roll it out, we have to add additional personnel and staffing and so forth. However, we think the long-term prospects for production efficiencies and productivity are very, very strong.

Great. Thank you very much, guys.

Tom, just to clarify for everyone else. You said that our projection for the year was to have SG&A at 10.8 percent. That was actually the first quarter. For the year, we're expecting it to be between 9.5 and 9.8 percent.

Fantastic. Thanks very much.

Sir, we have a question from the line of Alex Barron.

Yes. Hi. I have a follow-up about joint ventures, but not having to do with this new acquisition. You have almost 400 units there with an average sales price of $600,000. Can you tell us what markets and what kind of product that you guys are doing there?

Sure. We--first of all, we had never really done joint ventures until the last 12 months. But we consider the opportunity intriguing for a variety of reasons, one of which is the first couple of joint ventures that we've done - and we only have a few - were in areas where they were significant land purchases in mid-rise communities where there was a significant investment in one asset. And we considered the joint venture to be a more prudent approach on some of those communities. In addition, because they were mid-rises, [indiscernible] and we are about to do it on the West Coast. Again, with some higher priced land assets. We also like the joint venture because it--we get a disproportionate percentage of the profit and yet we're not increasing our risk through leverage. In fact, we employ the exact same leverage in the joint ventures as is our target on a Company-wide basis. So we think that it is an interesting opportunity to enhance our overall returns on equity. It is still a very small percentage of our business. Obviously, with 400 homes, you know, compared to the over 16,000 homes we hope to deliver this year. But we're intrigued with the prospect and I would say we'll be experimenting a little more with more opportunities for joint ventures.

So given that they are mid-rises, is it fair to assume, even though we see a large increase in the backlog, it will take a little bit longer to see deliveries coming from those?

That's probably fair. The mid-rises have a longer delivery cycle.

And Alex, as we go forward that may change. Right now, a couple of those are in the early stages, but if we're reporting a significant number in backlog six or nine months from now, it may be in a building--there may be a lot of units in a building that are going to deliver in the next quarter. So right now that statement is true, but that will change as we go forward.

Okay. And in terms of the accounting you're using there, are you just booking revenues once you've closed all the units or is it a percentage of completion or--?

No, we're not doing any percentage of completion on any of our mid-rise or high-rise properties. It's all done the same way we do our detached single-family homes.

Right. And for clarification, some mid-rises we do as wholly owned, and those we report revenues, as Larry just stated, we don't use percentage of completion. But if it's a joint venture, we don't report revenues at all. We only report the profitability on the equity method.

Great. Okay. Thank you.

Sir, we have a question from the line of Craig Kucera.

Hey, guys. Good afternoon. I had a question about the community count you guys had at the--at quarter end. What was the breakout of that?

What do you mean by the breakout?

I mean, how many communities--I know you closed out the year and you had say 28 communities in the northeast. And I'm just trying to get a sense of, you know, do I need to wait for the Q to see that or can you give it to me today?

We don't have it right here. It'll be the end of the Q.

Okay, fair enough. And then, finally, with the timing of the accretion from some of the acquisitions. Is that going to be primarily back-loaded towards third and fourth quarter?

Yeah. I think, you know, again, we only have two months in the second quarter, so that in and of itself is one reason it might be a little back-end weighted. But, in general, it's back-end weighted.

Okay. Thanks a lot.

Gentlemen, we have no further questions at this time. Back over to Mr. Hovnanian for any closing remarks.

Thank you very much. We continue to be excited to report the results that have forever seem to be setting new records for our Company. The market seems to be holding very steadily. We are extremely excited about these new acquisitions increasing our platform for future growth. And we think our prospects continue to be really strong for the foreseeable future. We look forward to reporting continued positive results in our next quarter. Thank you very much.

Ladies and gentlemen, this concludes the presentation, and you may now disconnect.