Hovnanian Enterprises Inc (HOVNP) 2007 Q4 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2007 year-end earning conference call. By now you should have received a copy of the earnings press release. However, if anyone is missing a copy and would like one, please contact Donna Roberts at 732-383-2200; we will send you a copy of the release and ensure that you are on the company's distribution list. There will be a replay of today's call. This telephone replay will be available after the completion of the call and run for one week. The replay can be accessed by dialing 888-286-8010, pass code 47517323. (OPERATOR INSTRUCTIONS)

An archive of the webcast slides will be available for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the fourth-quarter results and then open up the line for questions. The Company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor 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 and forward-looking statements contained in the press release also applies to any comments made during this conference call and the information on the slide presentation.

I would now like to the call over to the conference -- Mr. Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Good morning and thank you for participating in today's call to review the results of our fourth-quarter and fiscal year ended October '07. Joining me from the Company are Larry Sorsby, Executive Vice President and CFO; Kevin Hake, Senior Vice President and Treasurer; Paul Buchanan, Senior Vice President and Corporate Controller; Brad O'Connor, Vice President and Associate Corporate Controller; and Jeff O'Keefe, Director of Investor Relations.

Overall, the housing market remains very challenging resulting in the first fiscal year loss for our Company in a very long time. For the full year, the Company was just below breakeven before land related and intangible charges with a pre-tax loss of $21 million equivalent to about .04% of revenues.

Slide one. We're working hard on the cost side of the equation to get us on the other side of breakeven. We've had further reductions in construction costs and overheads. In addition, a significant number of our remaining land options have been renegotiated reducing our land costs and extending terms which should also help our margins as we build through our own lots and start to deliver more homes on lots with renegotiated prices.

The sizable loss we are reporting for fiscal '07 was largely related to our charges in the fourth quarter and the full year so I'd like to begin by discussing those charges. First, charges regarding definite life intangibles, if you turn to slide two. In the fourth quarter, we wrote off $78 million of definite life intangibles. These were most of the remaining intangibles associated with the various company acquisitions over the last seven or eight years. In total, we impaired or amortized $217 million of definite life intangibles in fiscal '06 and fiscal '07.

As you can see on the slide, we ended '07 with only $4.2 million remaining in definite life intangibles. This means that there is very little definite life intangible balance left for any further potential impairments. It also means we will no longer have the expenses associated with amortizing these assets which have been running $30 million, $40 million or even $50 million per year over the last few years.

We do have approximately $32 million of goodwill remaining. However, the majority of that is associated with our 1999 acquisition of Goodman Homes in Dallas which has remained solidly profitable throughout the industry's current cyclical correction.

Next I will discuss land option walkaways. We took charges of $105 million related to land option walkaways in the fourth quarter and $126 million for the full fiscal year as shown on slide number three. These charges represent the amount invested in these options primarily the option deposits. In addition, there were $77 million of impairments that were indirectly associated with the land option walkaways.

Basically if we walked away from the remaining sections of an ongoing project, some of the common infrastructure costs were reallocated to land that we owned which triggered impairments in certain cases. Thus the combination of direct and indirect walkway costs was over $180 million and therefore the largest component of our pre-tax charges for the quarter. These additional walkaway costs recorded in the fourth quarter resulted from our shift to an even greater focus on cash flow versus profits as well as a continued softening of the market at the end of our fiscal year.

We terminated and walked away from land contracts totaling about 9000 lots during the quarter and about 18,000 lots for the full year. Our remaining investments in option deposits has dropped dramatically from about $275 million at the end of the third quarter to about $148 million at the end of our fourth quarter.

In our more challenging operations, our land option positions have come down even further. In Florida, California, Minnesota and Chicago, we only have about 4200 options remaining out of a total option position companywide of about 36,000 options. Most of the price or terms or both have been renegotiated on these remaining options so that they make economic sense going forward even in this environment. The majority do not have land takedown until after fiscal '08; in fact, in one of our two remaining parcels under option in California, no land takedowns are scheduled to occur until 2010.

The majority of our remaining lots under option are in Texas, North Carolina, Washington D.C. and the Northeast, about 27,000 total in these areas or 75% of the total of all of our options. In Texas and North Carolina, we are generally taking down loss on a rolling option basis from developers and thus we have a very short position in owned lots. Those two markets represent a little less than half of the above total. The markets in Texas and North Carolina have performed relatively well and certainly better than California, Florida and the Midwest. Although conditions are obviously slow, sales and pricing have also held up better in D.C. and the Northeast than in California and Florida.

In some of these markets, the resale listings have started to level off. This began to occur in markets like New Jersey as you can see in slide number four, and in Virginia, as you can see in slide number five. Virginia actually had a lower level of listings in the summer of '07 than in the summer of '06. Even the more challenging markets in Florida like Tampa are showing signs of leveling. This gives us some reason for optimism. Obviously while the trends show some leveling, they are still at very high levels. We need to see the existing home inventories home come down further for the markets to improve.

Excuse me -- Tampa was on slide six. Our lot position has been reduced dramatically. We reduced our lot position by over 10,000 lots in the fourth quarter from the third quarter. Our remaining 36,000 option lots constitute about a 2.7 year supply at our most recent fiscal year pace. In the most challenging markets like California and Florida, we are down to very few remaining lots, less than 10% of the total and many of those and most of those in fact have been renegotiated. Hence, we believe that our risks of further land option walkaways are dramatically less going forward than they have been for the past two years.

Next category of pre-tax charges relates to impairments. As shown on the slide, we incurred impairment charges of $168 million related to land and communities that we own in the fourth quarter and $332 million for the full fiscal year. As I mentioned earlier, nearly half of our impairments in the fourth quarter were actually the result of land option walkaways causing a reallocation of common costs into the remaining owned lots. The balance of the impairments are a result of a slower sales pace and/or lower pricing in other communities where we own lots.

We've impaired a total of 98 communities in '06 and '07. About half of the remaining active communities, 101 communities in Texas and 52 in North Carolina, are located in states with a high community count and states that remain profitable with far lower risks of impairments. While there is always some risk of further impairments, our exposure is far less in these markets today.

On our communities in Florida, California, Chicago and Minnesota, some of our more challenging markets, we've already recognized a total of $442 million of impairments in '06 and '07, so our exposure continues to reduce in these markets as well.

Let me talk for a moment about pricing. I'll focus on California because this is one of the markets where we saw some of the biggest price appreciation toward the end of the cycle. Prices of new homes have come down substantially in California which has led to the large dollar impairments that we have taken in that state.

Turn to slide seven, you see an example of two different communities where our prices have come down over the last 12 months by 28% and 35% respectively. I wish I could say these were the exceptions in California but they are not. Somehow this kind of price reduction does not readily show itself in public data but it is very real. New homes have rolled back to prices of many years ago before the hyper heated market.

Taking a step back for a minute, and looking at new home prices in general as compared to the price of existing homes, an unusual phenomenon has occurred. Turn to slide eight, we've tried to illustrate that historically new homes represented by the red line were priced higher than equivalent existing homes represented by the dashed blue line. However, home builders have lowered prices on their new homes much more dramatically than existing homeowners have been willing to lower prices on their homes. The public builders in particular have lowered prices dramatically to move inventory.

Now things are backwards, with new homes selling at a discount to existing home levels. We believe that when market analysts speak of the corrections that need to come in home prices, what they are really focused on are the existing home prices and their need to lower their prices similar to what the home builders have done with new home prices over the last 18 months. The widely discussed Case-Shiller Index tracks changes in existing home prices and this can often be misleading and confusing.

As existing home owners move prices to be competitive with prices of new homes, there is likely to be more sales activity for everyone as potential new home buyers must often sell an existing home to buy a new home.

Okay, enough about microeconomics. Let me get back to our fiscal year. The combination of a slight pre-tax loss before charges with the significant land and intangible charges resulted in a total pre-tax loss for the year of $647 million. We made over $1 billion pre-tax in '05 and '06 and unfortunately we're effectively giving back a big chunk of those profits in '07. That leaves us with the last major area of charges for the quarter and the year which are related to taxes and FAS 109.

Normally when we record losses, we would be recognizing a significant tax benefit. Many of the losses, primarily related to impairments of land, are not eligible for a current tax refund until we actually sell the inventory but the tax benefit can be carried forward for 20 years. After a recent consultation with our auditors regarding the application of FAS 109, we concluded that we should book a $216 million after-tax non-cash valuation allowance during the fourth quarter.

FAS 109 charge was a GAAP -- was for GAAP purposes only. For tax purposes again, our tax asset may be carried forward for 20 years and we fully expect to utilize those tax loss carryforwards as we generate profits in the future. The net result is that we are recording taxes for the fourth quarter in spite of our losses. The combination of our losses from operations and charges including FAS 109 resulted in an after-tax loss for fiscal '07 of $638 million. Larry will further clarify the issues revolving around FAS 109 in a moment.

After all of our walkaways, impairments and FAS 109 adjustments, we still ended the year with approximately $1.3 billion in shareholders equity or approximately $19 per common share. Our share price is still trading at about 40% of book value even after all of these charges I've just described.

Now I will comment on our cash flow and debt reduction. For the fourth quarter of fiscal '07, we were significantly ahead of our previous cash flow guidances of $175 million to $250 million as we generated $376 million of cash flow in the fourth quarter. We used the cash we generated during the fourth quarter to reduce our debt. We retired the remaining $140 million of our 10.5% senior notes and reduced the amount drawn under our $1.5 billion unsecured revolving line of credit by $250 million from about $456 million in the third quarter to about $207 million at the end of the fiscal year.

We anticipate increasing our bank borrowings modestly in the first half of fiscal '08 with reductions weighted toward the second half of the year which follows our typical seasonal pattern. On to slide 19, you can see that typical seasonal pattern. You also see the cash flows were better in '07 than they were in '06 and we expect them to be better in '08 than they were in '07 with more than $100 million of cash flow generated in total in '08.

Sales, our net contracts for the fourth quarter were down 10% compared to the prior year but as we stated in our November announcement, the sales for the period were helped by our national sales promotion in September partially offset by significantly slower sales after the promotion. Interestingly, our contract pace in December, normally the slowest month of the year has been higher than the contract pace in October and November. Obviously a few weeks does not constitute a trend but we are encouraged that December sales pace has improved significantly.

Let me give a little more detail on our national sales promotion in September. We reported approximately 2100 sales that comprised of 1700 contracts and 400 sales deposits during the sales. On slide 10, you see that through November 25th we converted 206 of those deposits into contracts and ended up with about 1920 gross contracts from that sales promotion. 418 of these contracts have canceled to date representing a 22% cancellation rate thus far. This compares to our consolidated cancellation rate of 40% during the fourth quarter. Another 451 homes have delivered and that means we still have a little over 1000 homes to deliver over the next few quarters.

All in all, we are very happy with the success that we had in this nationwide sales promotion. We exceeded our internal goals by a wide margin.

Now let me get back to talking about cash flow and debt reduction which we are accomplishing largely by reducing our inventories. If you turn to slide 11, we ended the year with 36,000 option lots. It is down about 59% from the peak in April '06. This reduction has been painful as demonstrated by our charges but it is the prudent thing to do. Today we are proceeding more cautiously in converting optioned land to owned land. We are at the point now where each land take must be approved by me personally.

While it once was enough for our divisions to move forward with a land take if the initial transaction was approved and it was in our budget, we are now being even more diligent and reexamining all aspects of a land take at corporate before we move forward. Our owned lot position was just a little over 28,000 lots at the end of October. This was down 21% from a peak a year ago in July of '06. It's a little over a 24-month supply at the '07 pace.

We expect our total land position to continue to decline as our pace of lot takedowns under options remains below our pace of deliveries. We will soon be burning through our old land supply and replenishing it with renegotiated land. If our cash flows are not meeting our targets or if liquidity becomes more of a concern, we could reduce our remaining land takedowns even further or eliminate them entirely. At this stage, we are primarily taking down lots that will generate a good margin and already have a home contract on them.

Other areas of inventory management. We are also keeping a close eye on dollars that we are spending on land development. During the quarter, we mothballed communities where current performance did not justify further investment at this time. We'd prefer to avoid spending money to improve the land today and save the raw land until such time as the markets improve and we can generate higher returns.

We are also closely monitoring the total number of our started unsold homes under more stringent criteria. Our strategy historically has been to build homes after we have a contract and today we are more disciplined than ever in controlling the number of unsold homes that are started. We ended the quarter with 5.5 started unsold homes per community. That is down from 6.2 homes per community in the third quarter as you can see on slide 12.

Based on the most recent quarter's sales pace, we have only a 2.6 month supply of started unsold homes compared to an average of 7.2 months for the industry. We have been able to manage this portion of our inventory well and will continue to make strides to reduce our capital that is tied up in these started unsold homes. In absolute terms, the total number of spec homes started has come down from about 2942 homes at year end '06 to about 2390 at this most recent year end.

The market is too challenging right now to make accurate forecasts for fiscal '08. Fiscal '08 will clearly be a difficult year and we have -- but we have already taken significant steps to position ourselves and reduce our overheads to be better prepared for an environment with lower sales and prices.

I will now turn it over to Larry Sorsby to discuss our fourth quarter and the full financial year performance in greater detail.

Thank you, Ara. Let me start by further explaining one of the more complicated components of our year-end release. On December 7, Ernst & Young distributed their interpretation of FAS 109 as it applies to homebuilders. After consulting with E&Y and completing our own research on FAS 109, we determined that we were required to take an after-tax, non-cash charge during the fourth quarter by recording a $216 million valuation allowance against our deferred tax assets. Even though 2007 represented our first loss in many years and we only had a $21 million pre-tax loss prior to land related charges and all impairments, under FAS 109, we were required to set up valuation allowance for our deferred tax assets.

Due to our October year end, we once again find ourselves being the first builder that has to deal with a new or unusual accounting issue. I can assure you that the other public builders will also soon be dealing with this issue so let me try to explain and clarify how FAS 109 works.

Under FAS 109, homebuilders were advised that they have to determine if they are in a three-year cumulative loss position. Even with the $626 million non-cash, pre-tax charges we took during fiscal 2007, we determined that we were not in a three-year cumulative loss position at our October 31, 2007 year end. However, this fact did not cause FAS 109 issues to go away. We were then advised that even if we were not in a three-year cumulative loss position at the end of 2007, we then had to project forward to ascertain whether it was likely we would be in a three-year cumulative loss position at the end of fiscal 2008. That meant that we had to drop off our highly profitable 2005 year and replace it with our 2008 projection.

We determined that it was likely that we would be in a three-year cumulative loss position by the end of 2008 and that is why we booked a $216 million non-cash, after-tax valuation allowance against our deferred tax assets. The non-cash charge was for GAAP purposes only. For tax purposes, the tax deductions associated with the Company's deferred tax assets may be carried forward for 20 years.

Although financial accounting requirements limits the Company's ability to consider future profits in determining the need for valuation allowance, the Company is confident that it will generate sufficient profits in the future to ultimately fully utilize its deferred tax assets. As we generate future profits, the valuation allowance reserve will reverse such that we will not have to pay any federal taxes on our earnings. Once we can determined that we are no longer in a three-year cumulative loss position, the entire remaining valuation allowance will be reversed.

We are concerned that not all accounting firms and homebuilding companies will interpret FAS 109 in the same way. Due to the cyclical nature of the homebuilding industry, the fact that most homebuilders have only experienced one year of losses and the view that it is probable that the homebuilding industry will return to profitability during near-term years, it is likely that not all accounting firms will interpret FAS 109 in the same manner.

Certain homebuilders with the concurrence of their outside auditors will likely not look forward to ascertain if they project that they will be in a three-year cumulative loss position at the end of their 2008 fiscal year. Even if those companies are actually in a three-year cumulative loss position at the end of 2008 year, their accounting firms may advise them not to book a tax charge if they believe that that charge will likely be reversed due to profits being generated in the near term future. Unfortunately there is likely to be an inconsistent application of FAS 109 across our industry.

While our valuation allowance charge was non-cash in nature, it did affect our balance sheet and our net worth by $216 million. As a result of the FAS 109 charge, we needed waivers from our banks with respect to our tangible net worth covenant and our credit facility. We received approval from our lenders for the necessary waiver. Without the $216 million FAS 109 charge, we would not have needed a waiver from our banks and we would have been in full compliance with all our bank covenants at October 31, 2007.

We have also begun discussions with our bank group regarding an amendment of our current credit facility in anticipation of more challenging ratios in fiscal '08. The majority of the public homebuilders have already successfully amended their credit facilities at least once. Many of them amended their facilities two to three times to better operate under the current housing market conditions. This will be our first amendment since the housing downturn began.

We have a strong long-standing relationship with many of the banks and our revolving credit facility. Based on our initial discussions, we believe that we will be able to successfully negotiate changes that are needed to the credit agreement to adjust for the change in tax treatment as well as to provide us with adequate operating room as we manage the remainder of the current housing slowdown. We expect to close the amendment in late January of 2008.

Let me touch on the mortgage markets and our mortgage finance operation since that area continues to get a fair amount of attention. I want to comment briefly on the plan announced by President Bush to clean up the mortgage crisis a couple of weeks ago. The steps outlined by the President will certainly help reduce the number of homes which could be exposed to foreclosures. Obviously this is a positive for the market both structurally and psychologically.

Similarly, with respect to the Fed decision to lower the discount rate another 25 basis points, this too will have a slightly positive impact. Again, the impact will be more helpful to home buyers' psychology.

If you turn to slide 13, our recent data indicates that the average credit quality of our mortgage customers remains higher than national averages. The average FICO score for all of fiscal 2007 was 725, higher than the 715 achieved in fiscal 2006. Of course some of this improvement in our FICO scores is likely linked to tighter underwriting criteria and the falloff in subprime originations this year. A percentage of buyers using adjustable-rate mortgages declined to 7% in the fourth quarter bringing the full year to 14% of our originations compared to 32% for the full fiscal year of '06. For the fourth quarter of '07, 93% of our customers utilized a fixed-rate mortgage to purchase their home.

Turning to slide 14, we show a breakout of all of the various loan types originated by our mortgage operations during fiscal '06 compared to the fourth quarter of fiscal '07. Keep in mind that we sell all of our loans on a whole loan basis. We identify a buyer of the loans prior to closing on the loan and would not go to the closing table with a loan that we did not have presold. Our conventional prime loan business, defined as conventional loans with full documentation of income and assets with either conforming or nonconforming loan limits has increased from 48.7% during fiscal '06 to 56.7% in the fourth quarter of fiscal '07. There has been no issue regarding availability of conforming conventional loans.

FHA and VA loans also increased somewhat to 10.6% during the fourth quarter of '07 from 7.2% of total originations in fiscal '06. There has similarly been no issue of availability of FHA and VA loans. As underwriting criteria for subprime mortgages has tightened, our level of subprime business has continued to contract. The amount of subprime mortgages generated by our mortgage company declined from 11.1% during fiscal '06 to 3.7% of total of loan volume during fiscal '07 and accounted for only 1% of our volume during the fourth quarter of '07.

Alt-A loans were 22% of our volume in '06; 27% of our volume in '07; and 26.1% during the fourth quarter of '07. It has risen slightly over '06 because it has filled some of the gap created by the sharp reduction of subprime loan availability.

To reiterate what we told you on our last call, the industry is going back to mortgage lending 101 basics. If the borrower can verify their income and assets, are willing to put down a reasonable down payment and have a track record of paying their bills on time, there are loans that are available. The market has just returned to sound mortgage credit underwriting criteria principles.

Percentage of our loans that were conforming loan limits increased during the fourth quarter to 95% from 91% in the third quarter. That means that only 5% of our originations are jumbo loans, which have recently been more challenging in terms of rates and availability. Our pretax earnings from financial services was $28 million in fiscal '07, down slightly from the prior year, primarily based on lower volumes.

Now I'll turn it back to the performance of our homebuilding operations in the third quarter. Our contract backlog at October 31, '07, excluding unconsolidated joint ventures, was 5938 homes with a dollar value of about $2 billion. On slide 15, we show the backlog at October 31st for the prior five years, and we provide a breakout of the portion of backlog associated with our Fort Myers Cape Coral operations.

At the end of our fourth quarter of fiscal '07, 1652 homes amounting to $459 million of backlog or associated with the company's Fort Myers Cape Coral operations. Our operations in this market are very different from most of our company's divisions, and we've commented that we view Fort Myers as likely the worst housing market in the country. So we think it is worth providing some additional clarity on the status of the sizable sales backlog and the change you will see in this when we report our first-quarter 2008 results.

Most of our homebuyers in this market first buy a lot from us and then use construction financing from a third-party lender to build the home. We typically receive between 75% and 90% of the purchase price from our Fort Myers customers via their construction loans. However, given that the market has deteriorated so significantly in Fort Myers, many buyers have chosen not to convert to permanent financing where we would normally receive the balance of our sales price.

Approximately 1400 of the 1652 homes in our Fort Myers backlog are expected to deliver during the first quarter of 2008, because construction is now completed and we know longer have any further continuing involvement. Since we will not be receiving the last 10% to 25% of our purchase price from the customers who have not closed on a permanent loan, we will report deliveries for these homes at a gross margin close to zero, and these closings will cause our first-quarter consolidated gross margin to be much lower than otherwise would have occurred.

As of October 31, 2007, our remaining investment in land and lots in Fort Myers is only $20 million, so our exposure to this market is rather minimal going forward. Notwithstanding the effects of Fort Myers, the incentives and price reductions that we've instituted across the country have kept our margins below normal levels for the past several quarters. Reflecting the continued weakening of the housing market, our homebuilding gross margin was 10.9% for the fourth quarter of '07.

Regarding SG&A, we have made difficult decisions with respect to our staffing levels, so the number of full-time associates is down -- excuse me, so far the number of full-time associate is down 43% from peak levels in June 2006. Making these decisions is never taken lightly, but it is necessary to take these actions when they are called for by the difficult operating headwinds that our industry faces today. Our staffing reductions should help our SG&A levels for fiscal 2008.

Our investment unconsolidated joint ventures declined to $176 million as of October 31, '07, compared to $213 million at the end of last year. Turning to slide 16, we have continued to maintain modest leverage in our joint ventures and have financed them solely on a nonrecourse basis. At year end, our debt to cap of all of our joint ventures in the aggregate was 45%.

We report significant details on the balance sheet in profits of our unconsolidated joint ventures in our 10-Qs and 10-Ks, so look there for more details.

Now I will comment further on our cash flow and liquidity. Although we are working to generate positive cash flow by reducing our inventories, EBITDA has been declining in line with our profits. For all of 2007, we generated adjusted EBITDA of $135 million, down from adjusted EBITDA of $753 million last year. Adjusted EBITDA represents earnings before interest expense, income taxes, depreciation, amortization of land charges. A reconciliation of our company's consolidated adjusted EBITDA to net income can be found as an attachment to our quarterly earnings release.

Due to the slowing velocity of deliveries in each of our open communities, our inventory turnover and thus our interest coverage declined in fiscal '07. We're working to bring our inventory investment into alignment with our lower revenues and profit, so that our interest coverage begins to improve and our ratio of debt to EBITDA returns to a healthier level.

Although EBITDA fell substantially, we generated $376 million of cash flow in the fourth quarter, and we used the cash we generated to reduce our debt. We generated this cash flow primarily by reducing our inventories. This is also how we will continue to generate cash going forward, by reducing inventories which occurs as we deliver significantly more lots with homes on them for cash than the number of new lots we are purchasing.

We ended a year with $207 million outstanding on our $1.5 billion unsecured revolving line of credit. Our borrowing excess improved over $200 million at year end from approximately $132 million at the end of the third quarter. Remember that this is not an absolute limit because the borrowing base would grow if we borrowed more funds and invested dollars in qualified assets. A breakout of the qualified inventory assets in our borrowing base at October 31 is shown on slide 17.

One last comment before I turn it back to Ara. I want to make it clear that we have a covenant in our public debt indentures that now prevents us from paying dividends on our 140 million non-cumulative perpetual preferred stock so we are not expecting to pay those dividends during fiscal '08.

Now Ara for some closing comments.

Thanks, Larry. I'd like to step back for a moment to give a little bit of long-term perspective because it is easy to get caught up in the throes of this current market downturn which no doubts feels very negative right now. I'd like to look at the longer-term history of our industry. If you turn to slide 18, it shows you housing starts over the last 30 years in this country. Obviously we are one of the quintessential cyclical industries, a little like the autos but we are not threatened by imports.

There have been a lot of ups and downs in our industry. I put in here in blue the most recent data for '07, that is annualized housing starts as of November, which were down to just over 1.1 million starts per year. These numbers just came out yesterday and we are at a 16-year low. As you can see, '07 is clearly a very sharp correction although not unprecedented as you look at past cycles.

If you look at the arrows indicating the downward corrections, you will see that 1975 and 1981 both had downturns that were also very sharp and quite similar in degree of downturn. I suppose the only good thing I can say about the sharp downturn in the current correction is in at least those two cycles where we saw a sharp downturn, it was followed by a very sharp upturn. After under producing longer-term demand for long enough, the market does tend to correct sharply, at least it has in the past.

The last downturn in late '80s and early '90s was quite different in nature from this one and one that was much more gradual in reductions year by year, never really having a sharp correction in any one year. Corollary is that we also had a gradual recovery never having a sharp upturn in any year. The years shown with the gray overheads are there just to give you a little more perspective because they show when we had national economic recessions. As you can see, all three of the last three major correction had an economic recession at the same time. Thus we have currently some unusual times for the housing market.

The lack of a recession should create a little easier environment for an eventual recovery than we've had in the last corrections. And by the way, Hovnanian Enterprises has been here for all of these corrections plus a few more as we've steered our way through these prior downturns. My father founded the Company back in 1959 so we are quite familiar with these patterns and what needs to be done during the difficult housing markets. Each housing correction is a little different but what homebuilders have to do is essentially the same.

An additional point of interest having steered through a bunch of these, you see the orange bar on the top of the chart. This shows what mortgage rates were like at each of those cycles, all certainly very challenging. 1981 though stand out as perhaps the most challenging from the rate perspective and the mortgage perspective. For those of you that were in the housing market at the time, the 30-year fixed-rate mortgages were over 18%. You can imagine what we had to deal with then, an economic recession, an 18% 30-year fixed-rate mortgages.

Today we are worried about the marginal credit households qualifying for a home because of the challenges in subprime and Alt-A. In 1981, we didn't even have an option of subprimes or Alt-As; everyone had qualification problems because the mortgage rates jumped to over 18% and people were losing their jobs because of the recession. There was a lot of doom and gloom everywhere then as there is in every housing cycle. Inventories were also at high levels then. Amazingly the markets eventually cleared and in 1983, just a short period after the bottom, the market saw a 70% increase in housing starts.

One last bit of information on this particular chart, the dashed horizontal line shows you average housing starts during these three decades, nearly 1.6 million average annual starts. Unfortunately the industry has tended to over produce and underproduce that long-term average.

If you go to slide 19, the good news is from the long-term perspective demographics are getting stronger. Almost every demographer and actuarial list is projecting greater household formation and creation over the next two decades than what we've experienced recently. Top row shows the key driver of housing and that is household growth. The first three columns you see what the history has been over the last three decades; the most recent decade we had about 1.2 million net new households created every single year.

The next three columns or the last three show projections and they include Moody's projections and the Harvard Joint Center for Housing projection, that projection going forward is about 1.4 million to 1.5 million households being created per year. This translates to greater household demand going forward than we have had recently.

On slide 20, you see new home inventories courtesy of Zelman Associates hot off the press. While it is clearly at very high levels, it is similar to what the market has experienced in virtually every housing correction. We are not in uncharted waters. We have seen the number of months supply of new homes at or higher than these levels in the past.

We are experienced operators and we have been around as a Company for almost 50 years. We've been through many downturns. We are much smaller than, less diversified, far fewer products and price points and in far fewer geographies. We've successfully managed through these difficult times and we are taking the steps necessary to ensure that we will be in the best possible position when the inevitable recovery takes place.

So with that, I conclude my comments for today and we will be pleased to open up the floor for questions.

(OPERATOR INSTRUCTIONS) Stephen Kim, Citigroup.

Thanks, guys. You covered a lot of ground. It's hard to know exactly where to begin. But let me start with the commentary regarding your gross margin. I think you had indicated, Larry, that the Fort Myers effect with the couple of quarters worth of zero gross margins, would it be fair for us to assume that the remainder of your business outside of Fort Myers is probably still likely to generate a low double-digit gross margin?

Yes, I mean -- we didn't have that many deliveries in the fourth quarter from Fort Myers so the fourth-quarter gross margin of a little over 10% wasn't really impacted by Fort Myers.

Steve, just to be clear, what Larry was trying to explain is that we expect in our first quarter we'll be delivering those margins, those homes in Fort Myers and that is where you will see the additional effect for that quarter of those homes.

Okay, that is going to be a pretty huge effect if it's all happening in one quarter. Okay. So, that is important. I'll leave the FIN 40 -- I will leave the FAS ruling for someone else. But let me ask you about your joint ventures. You gave some -- I think you gave some commentary about the debt that resides with the joint venture. I was curious if you could give us a sense for what your proportionate share -- you know let's just use a completely Draconian assumption and a set of assumptions and say that worst-case scenario, you got to shoulder a bunch of debt related to the joint ventures. Could you quantify for us what you think that might be and maybe walk us through the relevant parts?

I guess I'm a little confused by your question. I mean the debt is truly nonrecourse. They can't put the debt back to us. We have not taken the same approach some of our peers have with respect to providing maintenance and other types of financial guarantees that would permit the banks to come back. So, I don't really understand the question.

Okay, so you basically say that there are no sort of ways that they can come back to you? Your proportionate share you would say basically is zero in terms of repayment guarantees, contingent payment obligations and all the rest of it, that really doesn't relate to you and your joint ventures?

Correct.

That is correct, and Steve, just to emphasize that was specifically our strategy in going with low leverage joint ventures. Our target was to be under 50% and as our chart indicates, we are at about 45% at the end of the last quarter. And that is why we were able to obtain those kind of terms.

Perfect, thanks very much.

Carl Reichardt, Wachovia Securities.

Good morning, guys, how are you? Larry, I hate to ask you to do this, I'm a little confused about the comment I think, Ara, actually you made earlier about further impairments due to shift of costs from communities that you are walking away from where you've got costs allocated to lots that you aren't going to build on now. Can you quantify that numerically for us I guess for the year? And maybe explain it in a way that allows me to get to kind of a number that I should be think about as things go forward?

Yes, sorry for the confusion. Okay, when you walk away from an option, the easy and identifiable costs to write off are the option deposits and that is pretty straightforward. What gets more complex is when you have common costs in an ongoing community and you are keeping some lots but walking away from other lots. Essentially what happens is rather than record some proportionate share of those common costs in the write off of options, instead you reallocate those common costs to the land that you still own in their early sections.

And then once you have those additional costs, you do an impairment calculation and if it impairs -- triggers an impairments then you have additional costs that indirectly are related to the decision to walk away. And I believe those were $77 million in our recent quarter.

Okay, so it's in increase in the cost side of the forward projection on the impairment because you've got to reallocate to what you still own and --

That is correct.

I just want to make sure and (inaudible). Okay then the second and final question is bigger picture, you mentioned that you were a smaller company in past cycles in fewer markets. As you look at your footprint today and recognizing that some of your lot count has shrunk in some of the markets you entered more recently. Do you anticipate significantly shrinking your geographic footprint or even if you run out of lots in a market like California or elsewhere staying in those markets and continuing to reinvest in there in those places?

Yes, our current plan is not to shrink our footprint but shrink the size of the foot that is in that footprint, if you will. We just plan to pare down our inventories in virtually all of our markets.

Okay.

And use other strategies to mitigate risks that would -- in being in some of those markets that takes more dollars to play like in California. So there is different strategies we are contemplating once the market turns to reduce our exposure, Carl.

Okay, I appreciate that guys, thanks, much.

Michael Rehaut, JPMorgan.

Thanks, good morning everyone. First question is on cash flow. I was wondering if you could share with us some of the drivers of being able to exceed in the fourth quarter your -- I believe it was guidance of 175 to 250? And likewise why it seems like your -- if this has anything to do with seemingly lowering the goal of '08 where you had previously said 100 million to 400 million and now you are just saying over 100 million if you could give us insights into both -- 4Q drivers and how that is affecting your outlook for '08? And then I have a second question.

Sure. I will try and began. Some of the drivers obviously making the tough decisions of walking away from some more land and renegotiating the takedown schedules of some of the ones that we continued with certainly helped us exceed our projections. Being even more strict with land development was certainly one of the factors and also as you saw, we made good progress in reducing our specs. That was one of the factors as well that helped increase our cash flow.

Going forward into '08, keep in mind that I believe that we made the $100 million to $400 million projection for '08 at least two or three quarters ago. And the market has weakened in the intervening time period. So even though we are taking additional steps that Ara just outlined to control kind of the outflow of cash, deliveries have not been as strong as we would have otherwise expected, margins have been a little bit lower than we would have otherwise expected and therefore, we are moderating our position.

We are not saying we can't get to 400 million. We don't know exactly where we are going to end up at this point but we are more confident saying in excess of 100 million.

Basically the issue say similar to trying to project earnings and revenues, everyone in our industry has been reluctant to do that. Clearly and particularly as you get further out, cash flow is very tied to that so we are trying to be on the safer side of our guidance.

Thank you. The second question is just related to some of your comments about month-to-month trends and obviously you had a lot of success getting units in or orders in the door for the sale to Century. It seemed like perhaps that could have contributed to a kind of an opposite period where in October/November you had an extreme low. And then more recently, you noted a pick up in December.

I was wondering if you could give us some perspective in terms of is this volatility in some ways related to or begun by the [sale] at Century? How would you characterize December relative to October and November and relative to September and how are we to think about what perhaps has spurred some of the December pickup perhaps from incentives? If you could just give some background on that?

Well, first, yes, undoubtedly our national sales promotion did have an effect on sales in the subsequent weeks. But thus far what we are seeing in December is not just relative to that post sale slowdown. What we have been saying for a while is that the psychology is such an important part of what is going on in the marketplace. Again, compared to other cycles, interest rates are at record lows, mortgage rates have actually dropped -- 30-year mortgage rates have actually dropped in the last month for conventional product which is the majority of our housing product.

Prices have been dropping for a while so that housing is definitely much more affordable. And at this stage, job growth is continuing. So what we've really been battling is just a lot of negative psychology. No I'm not saying that psychology completely changed and homebuyers are doing cartwheels or potential homebuyers are doing cartwheels down the sidewalk, but what did change in December is at least some glimmer of positive news with both our President and the Treasury Secretary announcing some plan for the subprime resets which have really been problematic and of concern for people.

Keep in mind subprimes, I think in the total amount of outstanding mortgages are about 7% of the total mortgages outstanding and in fact, I think the adjustable subprimes are an even smaller percentage. But it has been getting a huge amount of press. So some good news about the resets has definitely helped. And then on top of that if you remember, the Fed tried to send earlier a message that they -- to the market to not anticipate rates and then in the beginning of December it changed that message and in fact lowered rates.

All of that while not solving all of the problems were steps that helped create a little more positive consumer sentiment, a little better confidence and I believe that is part of what helped improve the sales environment in the most recent weeks.

And was that seen across the board nationally or more prevalent in certain regions?

(multiple speakers) We did not see it related to any one market. It has been pretty uniform in the last three weeks.

And degree of magnitude in terms of improvement versus November?

Substantial, I mean it was almost like somebody took the faucet that had been slowing to a trickle and opened it to kind of a medium high kind of level. I mean December is a tough market to judge anyway as you know because it is a seasonal slow time of the year. But from being well below our expectations every week in October, every week in November, we are now at or above expectations to date in December.

Okay, one last question and then I will move on. The gross margins, could you just for the fourth quarter -- was there any benefit in that from prior impairments in previous quarters?

Sure, we had a little benefit. We will have a benefit -- a big benefit in '08 obviously as well in every quarter given the large amount of impairments that we have taken in the last two years.

Larry, do you have a sense of the dollar impact?

I think the team is looking for it. What was it?

It was 88 million, Mike.

88 million benefit from in the gross margin from impairments from prior quarters?

Yes.

Okay, thank you.

Mike one point in that, some of that is in the land sale gross cost of sales as well; it is not just homebuilding cost of sales.

If it is possible to get that to me later the breakdown, or if you have it now that would be great.

We don't have it now, we will try to get back to you.

Thank you.

David Goldberg with UBS.

Thanks, good morning. Larry, I was wondering if you could give us an idea of how you got to the 216 million for the FAS 1 '09 charge? And what gives you the confidence of the deferred tax assets that are still on the balance sheet are going to be recognized?

I'm going to take the second half of that question, I am going to let Brad O'Connor answer the first half. The reason that we are confident that we will be able to use them is we've been in business for almost 50 years, we've been through these down cycles, we are going to return to profitability just as I believe virtually all the other homebuilders will as well. And as we return to profitability we will be able to take a tax benefit every time we earn a dollar.

But how does that differ from --

-- when we return to a 3 year or when we get out of the 3-year cumulative loss we will be able to reverse the entire allowance in a single shot. So the only way you wouldn't be able to realize the benefit is if you never make money again.

I guess what I'm trying to understand is the difference between what was taken in the reserve and what is still on the balance sheet as nonreserve?

-- answer that part of the question. The way we determine how much we needed to reserve is we looked at what deferred tax assets would actually turn in '08 which we would be allowed to carry back for two years to 2006 when we had income. So those we know we will use, as well as we have some amount of deferred tax liabilities that will turn in the timeframe of the 20-year period we are talking about which will also be able to be used against the assets. So the amount that is remaining on the balance sheet is what will turn in '08 and be used against, carried back to '06's income as well as the small amount of deferred tax liabilities that will turn during the timeframe of the assets and be used against those assets. So that is how we are left with what we are left with on the balance sheet.

Perfect. If I could get a follow-up on that I guess my question would be about the three-year forward cumulative loss situation you guys judged you were in; what kind of assumptions are you putting in your models to get to that level? Does it include impairments, does it include --

Again to emphasize, we are not in a cumulative loss position now --

-- look forward?

-- which was what we initially thought was the key test. We are not in a cumulative loss position. The issue is as you look forward which has been clarified as an interpretation and you drop the highly profitable fiscal '05, where we had pretax earnings of almost $800 million, when you drop that if you have in '08 which would be nowhere near that level of profitability, that is what could drive you into a cumulative loss position if you look forward.

David, again I'm going to talk about it from the industry's perspective rather than Hovnanian's specifically. I believe virtually the industry as a whole had a grand slam year in '05. If you drop that for everybody, then you have '06 which was kind of a so-so year for the industry, '07 which was a bad year for the industry and add a projection for '08, even if you project modest to reasonable profitability, virtually the entire industry is going to be in a three-year cumulative loss.

I got you, so it's not an '07, '08, '09 calculation. It's an '06 ,'07, '08 calculation?

That is correct.

Got it. If I could sneak one more in, Ara, you were talking about the macroeconomic conditions and the idea that existing home sales prices need to come down to become more in line with where new home sale price declines -- new home sale prices are now. Do you think that if we start to see more pressure on existing home sale prices that is going to cause another round of decline in new home so prices again even though there (inaudible) equilibrium?

I don't think so because traditionally -- I mean look, there is always pressure in the markets and we will see what the future holds. But traditionally new home prices sell at a premium to the comparable existing home. It is a very odd scenario right now where existing home buyers, many of them have just held onto higher prices that is why you see this inventory rising in the new homes and yet new homebuilders' inventories are generally starting to drop.

So I think it's got to get back to the normal balance that has been in place for decades which is that a comparable existing house should sell at a discount to a comparable new house.

Okay, thanks.

Andrew Brausa, Banc of America Securities.

Hey, guys, I wanted to just address quickly in your negotiations with your lenders on your amendment to your credit facility, how as bondholders should we think about the potential for layering? Meaning that collateral is something that is at the table for negotiation and providing your bank lenders or is everything under negotiation and are all options open -- have you guys thought about that? And can you frame that a little bit for us being that we're on the public side of things?

Sure, I think at this point, there are many things on the table including securitization on the revolving credit facility. Really it's just a matter of what the entire package looks like. Obviously we are not the first to seek amendments. In fact, we're one of the few that hasn't had to have an amendment yet so we're about to go through that process. But I suspect like everyone all things are on the table and we have to look at the total package and determine what makes the most sense.

Okay, and I guess the second question I would have is with regards to drawing the revolving facility. I mean in the first half of last year, you drew about $400 million in the first two quarters of the fiscal year on the facility and this year you expect a modest draw up from 207 in the fourth quarter. Is it possible for you to maybe drill down on that a little bit and give us kind of a range that modest would quantify?

No.

We've had a lot of moving parts right now. It's a little hard to be really precise. So we'd suspect our increases will be modest relative to what they were.

But Andrew, I mean it's also why we don't get quarterly cash flow projections. I mean they go hand in hand and if you look at the two prior year pattern which we showed you on a chart, it gives you some indication of the way our sort of normal seasonality. Two years ago we were also growing still and growing our inventories in some of those early quarters. We don't expect to be doing that. We do just expect the normal seasonal patterns.

So it is very challenging to project on a month-by-month and quarter-by-quarter basis which is why we are hesitant to do that. We think by the end of next year we will have generated positive cash flow and pay down the revolver and debt from where we are today.

Nishu Sood, Deutsche Bank.

Thanks, first question I wanted to ask was on your pricing and incentive trends and the effects that it is having on your gross margins. Now the steep drop in your gross margins in the last quarter would tell me that you were being pretty aggressive in terms of pricing and incentives in late spring and the summer. Now heading obviously into the Deal of Century, Ara, you had said previously that that was more just collecting a lot of promotions that have been out there already.

So my question is I just wanted to get an update on that. Does the Deal of Century pricing mean that we should expect further pressure on gross margins in the coming quarters and also what has happened since the Deal of the Century?

Well, I think you are cleverly trying to get us to project our gross margins which we are trying to stay away from. I'd say gross margins in general clearly were affected by Deal of the Century but also to a greater extent have been affected by the market in general. I don't see that there has been a big change in our incentives or pricing in the most recent months.

How about this, what has happened in the communities, let's say, where the Deal of the Century was very successful after that sale was over? I mean did you pull the promotions that were in place or have you kept them in place or have you increased them?

In many instances where sales were very good, we pulled the promotion and went back to either pre-promotion pricing or something close to that. And then in other cases where sales did not do well, as well as we had hoped in Deal of the Century, something very close to the Deal of the Century might still be in place. So it is varied dramatically. Frankly, again, this is generally a very difficult time to really gauge what's going on in the marketplace. At you know, everybody is more focused on the holidays and New Years, so we really can't get a good indication of what is going on until after Super Bowl.

Okay, great. And my second question on your inventories, you did a great job of giving us a lot of details on the amount of lots you will be taking down through options, also on the spec part of the inventory. So the third piece though -- I just wanted to get a little more detail -- the land under development which you described obviously you are differing a lot of the infrastructure and development costs that you would normally be putting in and I think the amount from the slide was about 1.6 billion or so -- I'm sorry, 1.8 billion or so I think of land under development.

I just wanted to see if I could get a sense of if I wanted to model what that would be on a finished basis, how much would I add to that? I'm just looking for kind of an order of magnitude -- would I add 25% to that, 50% to that?

It is just not something -- it's just not a metric that we track in that way. So I'd love to give you that info because we love lots of data but it's just not a way that we track it.

Okay, thanks a lot.

Dan Oppenheim, Banc of America Securities.

Hi, this is Mike Wood. Can you give us the dollar amount invested in unsold inventory currently? And also how much you think you can work that down next year?

Show you the total of sold and unsold homes on that same chart of 1.4 billion.

Looking for the unsold?

Yes.

Yes, we don't break that out. In general, just in number, I suspect that unsold will start to trend down a little bit. Keep in mind what we track and it's a little different than some builders, we track a home as soon as it is started not just finished unsold homes. So frankly in a lot of the cases, we hope to get a sale before the house is even completed.

In today's environment while we'd love to bring unsold homes down to zero, it is prudent to have some unsold homes on hand at each community. We are running about five right now throughout the country. And the reason for that more than ever in the past is that there are many consumers that don't want to sign a contract to build a new house until they have sold their existing house. The problem is that once they've sold their existing house, they typically have to move in 45 days, 30 or 45 days and you can't build a house that rapidly. So, it is important to have some level of specs a little higher than we generally have targeted.

Having said that, specs because of accidental specs, if you will, people that canceled in their contract did creep a little higher so we still believe we've got some opportunity to reduce our general spec level. We just haven't quantified what that would mean in dollars and cents.

Okay and we've seen some large land sales from some of the large competitors out there. How are you thinking about the trade-off of potentially selling land to pad cash flow and work down on your land inventory versus needing to put out more cash for construction in order to work through land inventory that way?

Well we've done a number of land sales. We certainly followed what is going on in the industry and the very interesting transaction with Lennar and Morgan Stanley. We are very familiar with joint ventures as we have done a few. As I said earlier, in regard to the credit facility, the same would be here, we are looking at all options that make sense for our Company going forward. So we don't have any definitive plans but it is certainly is one of many intriguing options in the environment

Thanks.

Wayne Cooperman, Cobalt Capital.

Hey, guys. You wrote off a lot of stuff this quarter and you still got a $19 book value. I was wondering if you could actually opine what I should take that to mean? I mean does that imply that you should earn some kind of return on that $19 book value or you could sell all the rest of your assets and we could get $19? Because your stock is at 7 and you know something doesn't make sense.

The stock is too cheap.

No seriously though, I mean what should I -- what does 19 mean to me? I mean are we going to earn a 15% return on that $19 book value? Are we going to keep selling assets that are now at the same price we've written them down to?

As I'm sure you are well aware, Wall Street has not been kind to homebuilders, many are selling below book value and --

(multiple speakers) believes the book value. You guys just wrote off a lot of stuff. 19 is now your kind of -- you would think accurate book value or at least that is part of the question.

What you are really asking us to do is make a projection because I think we've made it pretty clear we're just not in a position that we are going to make a projection.

I don't even want a projection. I just wonder if you could talk about what you guys see -- what's embedded in that? Do you think you can sell your assets for what you've written them down to or do you think they are written to a level where you actually earn a return on them?

Well, if you are planning on a 15% return on $20 of book value, I wouldn't bank on that at this moment. A 15% ROE is for normal times. We are not in normal times. So I'd say if that is your benchmark, I wouldn't count on that for the short term.

Yes. When the market recovers, which it ultimately will do, we will get back to earning those kinds of returns. But when we are still in a cyclical correction or downturn, it is difficult to approach a 15% return and that is about all we can say at this point.

Right.

I mean, obviously when the markets were better, we were earning in excess of 40% returns on our after-tax on our beginning equity. 15%, we kind of consider a more normalized part of the market and then when you are in the trough of the market, you'd expect to earn below that for sure.

Got you. Well -- the other question -- I mean would you guys expect to sell off more raw land or assets and get close to your book value and pay down debt that way?

You know, I think generally speaking the most logical course right now is to continue building and selling homes. We think that maximizes value and cash flow. As opportunities arise on land sales or potential joint ventures, we are certainly going to explore those as well. The main focus and certainly the main thrust is continuing to build through the housing and we think that maximizes the recoverable dollars that we've got invested.

Okay, and thank you.

Susan Berliner, Bear Stearns.

Hi, just wanted to make sure I was clear, the $100 million, does that include any pay down on the bank line for next year?

We are not talking about exactly what we are doing with the $100 million. We're just saying we expect to generate more than $100 million of cash flow.

So that does that does not incorporate any additional pay down on the bank line?

We're not saying we're going to have excess cash of $100 million after paying down some amount of debt, it that is what is what your question is. We are just saying that we are going to generate in excess of $100 million of cash flow and then we will determine how to best use it.

And I guess just --

Maybe you are confused about what our definition of cash flow is. We were careful about that when we started talking about cash flow and there's actually a pretty clear description as a footnote on our -- end of our press release about non-GAAP financial measures. And essentially if you are looking for what that number is, you can get it off of our cash flow statement which we will be filing shortly for the year and for the quarter.

But it is essentially equal to what our cash flow from operating activities, plus our cash flow from investing activities, but we have a funny category on there called changes and in mortgage notes receivable at our mortgage company, so it excludes that. So back to your question, is it prior to any changes in debt. So we're going to generate $100 million or more next year prior to any changes in cash. Maybe that answers it for you?

That helps. And can you quantify at all -- I think last quarter you kind of quantified how much you would spend on land. Can you update us at all on that going forward?

I don't think we did give that. And it is just something we don't generally look at in terms of -- we look at overall changes in projected inventories really more than the sub components of what the money is being spent on.

So Kevin, can you describe that at all what your change in inventory would be going forward? Do you see that accelerating?

Well, we're going to generate $100 million of cash flow next year and very little of that potentially from EBITDA. So most of that is going to be some changes in the balance sheet, primarily inventory.

Okay, thank you.

Larry Taylor.

Thank you. I wonder if we can sort of follow up -- you had given us an $88 million figure as the contribution from write-downs on land under products you delivered in the fourth quarter. Roughly what percentage of the lots that were delivered in the fourth quarter had write-downs in them?

We just don't track that number.

I mean in a ballpark -- is it half -- is it --? I mean I'm not asking for ten decimal places but just a rough -- is it 90% --?

I mean it is just not something we track, Larry. I mean we just don't have it.

Do you have any sense in terms of subsequent to the write-downs that you've taken what that number might look like going forward?

We are just not projecting that along with any of our projections, Larry, I don't think any builder is.

I think you gave some color on a number of communities written down and those that we haven't and we just don't track where our deliveries are coming out of which communities -- impairments or not impaired.

Okay, thank you very much.

Alex Barron, Agency Trading Group.

Thanks, hi, guys. I hope you can hear me. I wanted to ask about the Deal of the Century. I was under the impression that most of the homes that participated in that program were basically finished specs so I'm kind of a little surprised why only 450 or so have been delivered so far. Can you comment on that?

Sure, yes, actually it was interesting that -- and we had announced this earlier -- that while we thought the big focus would be on specs that in fact we sold a lot of new orders as well. So in fact, I think we announced it was less than 50% of our sales were specs. So many of our homes are currently being built from that for our customers.

Yes, we announced that publicly, Alex. I'm not sure why you came to the conclusion that most if not all of them were specs.

Okay, I guess it was just from some company -- community visits I made that was my understanding so maybe I got it wrong.

Well it certainly varied from one community to the other and some communities definitely emphasized specs more. Others targeted specific lots that they thought were more challenging so the actual selection varied greatly from community to community.

Got it. I wanted to switch topics here a little bit -- understand the FAS 109 and I'm sorry I'm not that familiar with this accounting pronouncement. But to understand three-year cumulative loss position, is this on a pretax basis? Is it also on the last 12 month basis or you only do it at the end of every fiscal year?

Pretax basis -- what we did, Alex, again just to clarify, is we looked as of the 36 months ended October 31, '07. We determined that we were not in a three-year cumulative loss position. In spite of that, what we then did was drop off the twelve months ending October 31, '05 and replace that highly profitable year with a reasonable projection of what '08 would be which obviously will not look nearly as good as '05. And when we drop off '05 and add '08, it is likely that we will be in a three-year cumulative loss in light of the loss we just posted for our '07 year.

So basically that is why in a sense you reversed what you had taken before and then you took a new charge this quarter?

Well, I mean, Ara did mention that but it has nothing to do with FAS 109, it is just in essence what has kind of occurred.

Okay. Now you mentioned that some other builders might not or some other auditors might not interpret things the same way. Are you referring to that only Ernst & Young has a three-year sort of cumulative loss interpretation or is that standard across the group?

I don't want to speak for what the other auditors may or may not do. We are aware that not all of the firms are interpreting or applying FAS 109 in an identical manner that E&Y has advised us to apply and that's about all I'm going to say.

FAS 109 does not go into the level of detail to tell you what three years you are supposed to look at, etc.

It doesn't even define three years.

-- an interpretation. So firms may interpret differently.

So what I'm saying is three years something they invented or is that something (inaudible)?

That is their interpretation.

Okay.

And frankly I think the three years is probably common -- the issue is you only use the current year and two backwards or do you actually project. And I think that is where some of the variation may come.

And I think it is also that even if your determined to be in a three-year cumulative loss regardless of whether it is historical three years or two years historical and one year prospectively, if a firm or a company believe that they were going to be in a position up being able to recover and generate profits in the near-term years which is an accounting term, then even then certain firms may not advise clients that they need to take the charge.

Great. Now some people have been talking lately about taking tax carrybacks -- not carryforward -- and being able to I guess collect some money from the government. You guys aren't in a position to do that?

We are. The issue is you can carry back to two years so that would be '05 and '06 for us for this current year. And we are doing that. And do get refunds. But the impairments we have and particularly in some of the cases of the intangibles, they go beyond what you can currently deduct and receive refunds for.

But since like '05 is going to be behind us, does that mean -- is it pretty immaterial what you were able to get back or can you quantify that?

There was a material amounts but we didn't fully receive -- I mean if we had done a transaction like Lennar did and sold a bunch of assets to steep discounts right before the end of our fiscal year, we would have gotten a much more material number in a refund than we are going to be receiving now. There is nothing we can do now to go back and recover a cash refund for the '05 year because that is more than two years carried back now because our '07 year is now ended.

So all we can do is focus on the '06 year and the '06 year we will get a refund of virtually 100% of the taxes that we paid in that year.

Okay. Our right, thanks, guys.

Jim Wilson, JMP Securities.

Thanks. I guess my two questions one, Larry, was wondering the -- I don't have the inventory on the balance sheet of land and land options for future development if it actually went up year-over-year? And I was wondering if you could explain a bit of the component since I assume land options themselves went down but maybe I am wrong?

Repeat the question again.

On the balance sheet, when you are on your assets on your inventory, obviously your in-process inventory sold on some homes went down but your next item of land and land options held for future development or sale increased year-over-year. I was wondering what the components were that drove that up since I assume within it land options themselves in dollars actually declined.

One of the primary reasons that went up was because we did have properties that we called mothballed. So those communities went from being under development into being held for future sale.

Is that a pretty material number? Is there any way of describing what is actually -- (inaudible) options in it?

Remember in the conference call we gave you the numbers on how much is invested in option deposits which did come down.

Okay, so the difference would be -- that would be the difference, okay.

Well the difference is not all of it but most of that is a good --

The vast majority --

Okay, all right, that would be fine, okay, that is fine. And then the other one then I was just looking through cancellations and looking and noticing the number on the Sale of the Century, obviously wasn't too bad like 20% -- 21% but your total cancellations for the whole quarter were 40. So doing the math right would that -- that would imply an awfully high cancellation rate on the non-Sale of the Century stuff, is that about right and any thoughts or comments on that?

Yes, I think that is factually correct and I think one of the reasons that that occurred was that we had people in our backlog that had been previously approved for certain mortgage programs that subsequently became not available and therefore they couldn't find alternatives they'd qualify for and they canceled as well as people just getting nervous about what was going on in the housing industry and deciding not to move forward with their transactions.

Okay, any geographic concentration or anything particular to color that further?

No, I think that is a fairly generic response that we are hearing pretty much everywhere in the country other than -- well even in Texas we had the people using Alt-A and subprime. So I think it is fairly generic.

Yes, okay, makes sense. All right, thanks.

Stephen Kim, Citigroup.

Thanks. I had a couple of follow-ups. Can we start with the cash flow. I just want to understand the impact of the Fort Myers deliveries on your cash flow. For example, I think you indicated there's like almost $500 million worth of --

Steve --

Yes, can you hear me?

Yes, let me just short-circuit you there. Because we've already got the cash because these people bought a lot from us and then went and got a third-party construction loan and as we built the house, we were advanced monies under their construction draws --

Got it, construction -- okay.

-- for the most part is going to be cash flow neutral.

Got it, forgot about that. Okay, yes, because I was really confused other than that. Okay, fine. That helps. And then the second thing relates to the FAS -- I just want to make sure that I am clear on it. I mean obviously, from my perspective, it seems a little silly. But essentially the only way -- what this really seems to do is just create a deeper V in your GAAP earnings. Whereas it doesn't really seem to have much impact at all on your cash. It doesn't impair your ability to use deferred tax assets in terms of reducing your cash tax payments going forward. What it does though is it sort of warps your reported earnings going forward. Once you become profitable, you're just going to have an all-at-once recovery that is going to boost your book value in much the same way that it just hit your book value basically.

You are exactly 100% accurate.

So by extension, if somebody wanted to let's say evaluate your Company, your stock on a price-to-book basis, one would therefore think that they should be taking your stated book value and perhaps assuming an ongoing concern adding back this $3 of book value hit theoretically as well?

That would be a logical analysis in conclusion to go through. It also perhaps highlights why some of the accounting firms don't necessarily come to exactly the same conclusion because they are fearful that in future periods if you take the charge now that perhaps future periods will have higher than normal earnings and can be criticized for that.

Yes, no, absolutely. Okay, a couple of just housekeeping items if I could. There was -- you gave disclosure on the number of owned and option lots. Can you give us a sense for what the JV lot balance stands at the end of the quarter?

Someone is looking that up.

Okay. And then meanwhile, I had another housekeeping item regarding your -- what is the purchase price of the options that you currently hold? I think it was $3 billion last quarter. I'm just trying to figure out roughly do you know what it was this quarter?

I know we have that in the draft to the K if anybody has it. We will look that up too and if we don't get it in a couple of seconds, we will call you with both those numbers.

Okay, that is fine. And I guess just lastly just a conceptual question as it relates to modeling. Over the last couple of years, your conversion ratios -- the number of closings you generated in any quarter relative to your backlog was surprisingly low. Not surprising, but significantly lower and that obviously related to this Fort Myers acquisition you had. And so therefore as this sort of fades in the rear view mirror, one should naturally expect that your conversion ratios would be higher -- sort of going back to a more normal rate.

Higher than they've been in the last couple, three quarters, yes.

Absolutely, which is -- okay, got it. Perfect. Thank you very much and if I can get that data later.

Hold on. I think we got one answer for you, Steve.

Steve, the JV lots are about 4300.

And zero under option in the JVs.

Zero under option in the JV -- okay, right, got it. Okay.

Okay. We will get back to you with -- hold on. Do you think you've got option dollars here? We can answer that (inaudible). Is this just JV or is this for --

No, it's for everything, it's $2.1 billion.

Okay, great, thank you very much.

Chris Melendes, JPMorgan.

I have two questions. First, could you give me some color on the negotiations with the bank for the amendment, give me more comfort on why you feel like that you will be able to accomplish this in January?

First off, you all have been very accommodating in your own firm and approved our waiver very timely, so we appreciate that. And secondly, similar to all of our peers who have gone for at least one amendment, most of them have and some of them two and three times, we expect to have similar success as we negotiate our amendment going forward. But I'm not going to be able to give you any color on the negotiations beyond that point.

Well, not on the negotiations, but is it a smaller syndicate than normal? I think we've talked in the past in that you are very close with three or four banks and the line is widely syndicated.

No, we are not bifurcating our line at this point or anything like that. It is the full bank group that we are dealing with.

Okay. So can you give me a number on -- and the process of --

It's like 26 banks or something like that. It is all publicly available and it's not much different than any other big builders.

Okay. Then secondly is that with regard to inventory reductions, you guys were talking about a -- in the fourth quarter, about a 15% reduction, $597 million sequentially. What should I expect for next year, a sort of similar number?

Repeat the question.

With regard to your inventory reduction, in the fourth quarter sequentially, you produced a 15% reduction, 14.5% reduction of $597 million. Can I expect a similar number to that for 2008?

I am just not going to be making projections for you.

We answered earlier that we are going to generate $100 million of cash flow for the year and we expect most of that likely to come through or more and there is potential upside to that, but it is largely going to come through inventory reduction. So that is the answer for the year.

Lastly, with the borrowing base, is that 200 now?

That is what it was as of October 31st, 2007. Yes, that is what we --

$200 million. Okay, thanks.

Keith Wiley, Goldman Sachs.

I'm just wondering if your cash flow projections are incorporating any significant land sales or if you are considering doing any other means to help get the revolver down?

We're just not going to give you the details of our cash flow projections. We are confident that we are going to be able to achieve in excess of $100 million cash flow in the year.

Okay and then one more if you don't mind. As far as your write-downs that you've taken so far, most economists are expecting an additional price decline in housing as a result of all the foreclosures that are expected to come in 2008. Are you incorporating additional price declines for next year into your write-downs or if there's additional price declines, should we expect possibly additional write-downs?

As I discussed in my portion, we think there is going to be a lot more pressure on existing homes and foreclosures would be competition for existing homes than there is on new home prices. New home prices have already gone through a significant downward adjustment.

So you don't think there'll be much more additional downward price adjustment on it --?

We believe don't know. We think that the new home builders are way in front of the existing home sellers and if they can significantly more cuts than existing homes. And when you hear economist quote the Case-Shiller Index, that is only on existing homes and we acknowledge that existing homes haven't come down much. But I think if you talk to just about any of the public builders, they will tell you that they have significantly lowered prices. Is more price decreases going to be needed in the future? We don't have a crystal ball that answers that question.

But Keith, with regard to the second part of your question, it wouldn't matter what rosy scenario or what negative future view we had. We've been very clear as how impairments work and how we go through that process. And we think we are reasonably conservative in that process but we are using what we believe are today's conditions and projecting that for a fairly long period going out into the future. If it's a very long lived community, then we may go some improvement in pace generally not in pricing out a couple of years.

So the accountants sort of very much work closely with us in terms of being very consistent in the approach we take. And it wouldn't really want us to be assuming there is going to be a further decline in pricing and things are going to get worse. Making our impairment number bigger would not be something auditors would necessarily look favorable on, that was sort of our standard approach. So if things deteriorate significantly further, I think we've been clear on this comment in prior calls, yes, if pricing does fall further, that could trigger further impairment.

Okay, thank you.

Michael Rehaut, JPMorgan.

Hi, thanks. I know it is getting a little long here in the tooth with this call but just a couple of quick questions. Could you give an idea of the geographic dispersion of the asset impairment charges?

Let's see if we happen to have that --

It will be in the 10-Q that is going to be filed in the next few days. I don't know if we have it right here.

We didn't give it here but I think we've given it in the past through the last quarter and I think you're going to see a similar weighting toward California and the East -- it will be in our K.

Okay. Also there was a question about land sales and cash flow and you declined to give an idea of what that would contribute to '08 cash flow. But in terms of 4Q and perhaps fiscal '07, can you give us an idea what land sales how much land sales contributed to those periods?

We (multiple speakers) reported our land sales.

Sorry?

-- since our release, hold on one moment. Land sales I think in the fourth quarter were about $42 million. That was the gross (multiple speakers).

No, that is revenues. So the gross margin is 6 million.

But he was talking about cash flow -- (inaudible)

Right.

Okay and just lastly, you gave a breakdown of the lots under option and you have about 25,000 that are in Texas, North Carolina, D.C. and the Northeast. Is it safe to say that the remainder is in largely California or Florida -- maybe you can give us an --?

(multiple speakers) go on to say actually then there are about 4200 in California, Florida, Minnesota and Chicago. So then the rest are in other smaller markets, South Carolina, Georgia, Ohio, Phoenix and a few others little markets.

Right, thanks very much.

-- relative to the big ones, yes.

Thank you.

Timothy Jones, Wasserman & Associates.

Good afternoon. Just a quick question, on this Fort Myers situation, I find it very intriguing -- I don't think and 40 years I've seen something like this. But am I to understand that the people bought the lots and paid you for that portion. You got that from a cash flow basis and now that that -- you got 80% of the construction loan but since they are keeping construction loans and not changing them to conventional loans, you lose the last 20%, is that correct?

You basically have it right. They may have gotten a construction loan that paid us for the lot rather than the customer actually paying us for the lot. But I think the rest of that you are pretty much on track, Tim.

So basically you're not getting that last 20%. Does the customers own borrowing go down by that amount too, just not in your profit?

I'm sorry, what did you say?

In other words you were supposed to get $100 but you got $80; the other $20 was your profit. Does the customer basically own instead of 100, does he [80 of the construction loan]?

-- 80 on the construction loan?

In other words, does he own 80% instead of the 1005 because part of that was just get what you're going to get as the profit?

Are you saying owe, o-w-e, or are you saying own, o-w-n?

No, what they owed. Did they owe -- they had to owe if you were borrowing $100 but $20 of that dollars was going to you and you are not taking it now, do they actually owe $80 to the special loan company?

Yes, they have a construction loan to the bank and your simple analysis roughly $80 is what they owe the bank.

Okay, lastly, when you said zero gross margins, you were talking just about these 1400 homes in Fort Myers, hopefully.

Correct.

Okay, thank you, have a nice holiday.

Joel Locker, FTN Securities.

Hi, guys. Just wanted to get a little more in-depth on the gross margins, like I guess the sequential drop last quarter was about 45 basis points and the two quarters before that was about 200 basis points. And this time it was 570. And this is actually with the impairment reversal that would actually add to the gross margin. So just wanted to see if there was like maybe a higher percentage of specs that were actually closed versus the prior quarter or what was behind just the massive falloff in gross margins?

I think it is an indication of the market conditions out there and in general.

And earlier in the year, we had a lot more sales from backlog that was obtained during better pricing times with higher margins and as we deliver through the backlog, it shifted to more new sales which clearly have a lower margin.

And the people on backlog just to keep them there, did you have to give them another 5% or 6% from the actual contract price just to make sure that they closed or --?

I wouldn't describe it as an additional 5% or 6%. But were we negotiating with customers from time to time that were in our backlog is they saw us adjust prices for people that haven't yet bought? And the answer is yes, we did make adjustments.

Right. Because it just seemed you had a 230 bp reversal in impairments in the third quarter and this quarter it looks like maybe 400 or 500 so that would actually add 2% or so to gross margin. And so technically it might have dropped somewhere between 700 and 800 basis points sequentially which just seems like something severe more than just continued deterioration.

(multiple speakers) continued deterioration.

I think we've tried to describe it as best as we could.

Right. All right, thanks a lot.

There are no other questions at this time. I'd like to turn the call back over to Mr. Ara Hovnanian for closing remarks.

Thank you very much. As I started out by saying, these are indeed challenging times but not times that are unfamiliar to our industry or our Company. We will navigate through these difficult times as we have many times in our 50-year history and look forward to more positive views on future conference calls in the future. Thank you very much.

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