Hovnanian Enterprises Inc (HOVNP) 2009 Q1 法說會逐字稿

Good morning, and thank you for joining us today for the Hovnanian Enterprises fiscal 2009 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 Donna Roberts at 732-383-2200. We will send you a 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 90702453. Again, the replay number is 888-286-8010, pass code 90702453. 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 first quarter results and then open up the lines for questions. The Company will also be web casting a slide presentation along with the opening comments from management. The slides are available on the Investor's Page of the Company's Website at www.KHOV.com. Those listeners who would like to follow along should log onto the Website at this time.

Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call and 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.

Good morning, and thank you for participating in today's call to review the results of our first quarter ended January 31 '09. Joining me today from the Company are Larry Sorsby, Executive Vice President and CFO, Paul Buchanan, Senior Vice President and Chief Accounting Officer, Brad O'Connor, Vice President and Corporate Controller, David Valiaveeden, Vice President of Finance, and Jeff O'Keefe, Director of Investor Relations.

If you turn to slide three, you will see a brief summary of our first quarter results. We gave all of this data and more in our press release which we issued yesterday. There are a few points on this slide worth a little further discussion. First, on the third line down, if you look at net contracts per community during the first quarter, they showed the first year-over-year increase in years. While hardly a cause for celebration, it is a shift in the right direction. Second, you can see that our cancellation rate decreased during the first quarter of '09, to 31%. This is solidly below the 38% for last year's first quarter, and well below the high water mark of 42% that we recorded in the fourth quarter of '08.

Third, deliveries in the first quarter of '08 included about 1345 homes delivered from our Fort Myers, Cape Coral operation because at that time, we determined that we no longer had any further continuing involvement from these homes with construction perm mortgages. Excluding these deliveries, our total revenues in the first quarter of '09 were down 53%, and other deliveries were down approximately 47%, compared to a 66% decline for both deliveries and revenues with the '08 Fort Myers deliveries included.

Fourth, we purchased $53.2 million of face value of debt for $14.7 million in cash, and we exchanged $71.4 million of unsecured notes for about $29.3 million of secured notes. These transactions resulted in just about an $80 million pre-tax gain from debt extinguishment. Since the end of our first quarter, we purchased approximately $315 million of face value of debt for about $105 million in cash, resulting in a $210 million pre-tax gain and a corresponding increase in stockholders equity.

Historically, our first quarter, which runs from November 1st through January 31st, is a tough time of the year to read much in the way of traffic and sales. Even in good economic times, the period between Thanksgiving and New Year's and Super Bowl is a time of year when most people put home-buying decisions on hold. But as the weeks roll off in January, we typically see some seasonal increase in traffic and sales.

On slide four, we show you what our monthly net contracts were since September of '08. In February, monthly sales exceeded 500 for the first time in six months. Additionally, our contracts per community for February were more than two times what they were in the months of October, November, or December. Although we are rebounding sequentially from low levels for new net contracts since mid September, when the deepening financial crisis entered the most recent stage of this recession, the year-over-year comparisons are still off significantly. What these recent trends really say is that there is some level of demand for new homes despite all of the uncertainty regarding the economy. Unfortunately, the sales come at the expense of home prices and margins. In general, we are focused more on sales and cash flow generation than margin.

While reporting that net contracts for the quarter are down 36% is nothing to brag about, compared to the most recent quarter of our peers, our results are somewhat favorable by comparison and you can see that on slide five. We believe this relative outperformance, if you can call it that, is partly the result of our emphasis on cash flow. Despite cash flow being the primary driver in almost every decision that is made in our Company today, we are only slightly cash flow positive for the first quarter, as seen in slide number six, and that does include, as we disclosed, a $145 million tax refund that we received in January.

Historically, the first quarter is the quarter when we use the most cash, so the fact that our cash flow was negative $109 million, absent the tax refund and the debt repurchases, was not surprising to us. Last year, when we generated $368 million of cash flow for the full year, we were a net user of $55 million of cash in our first quarter. Given the continued deterioration in the housing market, generating cash flow in the future is clearly going to be more challenging than it was recently. However, as the chart reflects, annualizing our first quarter cash flow results excluding the tax refund is not an accurate methodology to project our cash flow results for the remainder of the year.

In order to maximize our liquidity, we will still move forward with projects when cash flow makes sense. The way we make this determination is through a lot recovery analysis. We perform a lot recovery analysis to determine the amount of cash that we can generate by building and selling a home on an owned lot. If we are unable to obtain a reasonably recovery on our land costs relative to the perceived long-term value, we will mothball that community. We will save that land until such time as the market improves and we can generate higher returns for a more meaningful cash flow. Through the end of the first quarter, we have mothballed approximately 9500 lots in 65 communities. 13 communities were mothballed during the most recent quarter. The book value at the end of the first quarter for these communities was $531 million, net of an impairment balance of $305 million.

With cash flow as a primary decision driver, we make sure that the choice to take down an option lot makes sense from the cash flow perspective. When it doesn't generate enough cash, we try to negotiate the option either by reducing the price and extending or modifying the takedown schedule. If it still doesn't make sense, then we walk away. We continued to walk away from deals during the first quarter. We walked away from 2390 lots. During the last couple of years, the Texas market is the only notable one where we have entered new lot purchase agreements, typically structured with de minimus deposits. We continue to deliver houses and sell lots when it makes sense.

Slide seven shows the impact that these decisions have made on our owned and option lot position. As of January 31, '09, our total lots were down 69% from the peak that we reached in April of '06. During the first quarter, we delivered approximately 1200 homes and sold about 200 lots. Offsetting these reductions, we took down about 250 lots, and the balance was an increase in the number of lots due to the redesign of several communities. Our option lot position has come down more substantially. Option lots are down 83% from the peak in April of '06. The dollars we have written off from walking away from these options are only a fraction of the impairments that we've taken on owned land. This is why we are such a big user of options in the past and will be in the future.

As we move forward, our focus is on reducing our owned land position. On slide 8, we show a breakdown of the 23,000 lots that we own at the end of the first quarter. Approximately 47% of these were 80% or more finished. 17% had 30% to 80% of the improvement costs already in place, and the remaining 36% were less than 30% finished. While we are currently focused on reducing our consolidated land supply, we recognize that land deals will start making sense again. Land prices should follow a similar pattern to what we have recently seen with home prices, as banks aggressively lower the sales price of foreclosed homes to get them off their books.

In addition to reducing our land supply, we continue to make adjustments to staffing level, based on current levels of activity. As we turn to slide nine, you will see that through the end of February, we have reduced our staffing levels by 69% from the peak level of associates in June of '06. Our community count is down 45% from the peak, and our pace per community is at historical low levels. So the 69% reductions in staffing levels seem to make sense as we move forward. We will continue too right-size our business based on the current activity that we're generating in each of our markets.

We've done a good job in reducing our absolute dollars spent on SG&A. On the right-hand side of slide ten, you will see that our total dollars are down 16% year-over-year during the first quarter. However, our total revenues are down 66% year-over-year in the first quarter, so the first quarter percentage of total SG&A to revenues jumped 27%, much higher than anything we've seen in many years. A portion of this, however, is due to a $12 million non-cash FAS123 expense relating to stock options that were canceled in December of '08, causing a blip in our corporate G&A expense. These cancelled options were granted from '03 to '06 to Larry Sorsby, our Board of Directors, and to me. As you can see on this slide, when you exclude the $12 million from these cancelled options, our total SG&A was $90 million, a 26% year-over-year decline.

Besides reducing staffing levels, we continue to look for ways to eliminate any non-essential costs. During the first quarter, we took additional steps to lower SG&A going forward. We suspended the company 401K matching contributions, and have limited the potential bonus that any associate can get to no more than 50% of the already low '08 levels. Neither of these decisions were reflected in our first quarter results, nor were they easy to make from an associate retention point of view, but they were necessary steps to ensure that we have the liquidity needed to get to the other side of this downturn.

It has been hard to cut SG&A as fast as our revenues have dropped. The sales pace we are achieving at a community level make this very challenging. It is unlikely that we will be able to get back to historical percentages of SG&A, to revenues, until the sales pace per community returns to more normal levels. You can see on slide 11, that the 2009 first quarter was slightly better than it was in last year's first quarter, in terms of net contracts per community. But it is still at very low levels, compared to previous years. The bottom line is that even though traffic and sales have exhibited some seasonal pickup, sales per community still remain near all time lows.

I will turn it over to Larry to discuss our gross margin and the charges we took in the quarter, as well as other topics.

Thanks, ARA. Let me start off by discussing our gross margin. As you can see on slide 12, our gross margin has been in the single digits since the first quarter of 2008. Compared to the first quarter of 2008, our gross margin declined 100 basis points, to 5.7%, for the first quarter of 2009. However, gross margin increased sequentially by 100 basis points from the fourth quarter of 2008. This year-over-year decline is primarily the result of increased construction overheads as a percentage of sales, home sales revenues. Despite the almost 70% in staffing reductions we've made since 2006, construction overhead increased 470 basis points year-over-year, primarily as the result of the lower sales volume. Our gross margin, before overhead, actually increased 370 basis points to 16.1% for the first quarter of 2009, compared to the first quarter of 2008. During the first quarter of 2009, our home building cost of sales was reduced by $35.6 million from the reversal of impairments taken in prior periods.

Turning to slide 13, you can see our owned and optioned land supply broken out by our publicly reported segments. There are some areas where we are more land heavy. These are generally the more supply constrained markets where we do a fair percentage of the land development ourselves. Markets like New Jersey or California. In other markets like Texas, we almost exclusively contract for finished lots, take land down on a just-in-time basis, and therefore, generally keep less owned land on our books. While we still own almost three years worth of land, the good news is that we don't own as much land as some of our peers do on a comparable basis.

Turning to slide 14, you can see how our owned land positions stacks up to those of our peers. It is sorted according to owned land supply based on trailing 12 month deliveries. This is what I call the race to zero. Even at a 2.8 year supply, based on trailing four quarter deliveries, we still own more land than we would like to own right now. But compared to our peers, we're in relatively good shape. The good news is that each quarter we work through more of our own land, and we will eventually get through all of it and be able to replenish our land supply with lower cost land at the bottom of the housing cycle. This will help our gross margins gradually increase back to normalized levels.

I will now talk about the land related charges that we took during the first quarter. We walked away from 2,390 lots in the first quarter and took a write-off of $14.5 million related to these optioned lots. Turning to slide 15, it shows the geographic break out of these charges which represent the amount invested in these options through deposits and also any pre-development dollars we had invested in getting this land through the approval process. Our remaining investment in option deposits was $55.6 million at January 31, '09, and $35.5 million in cash deposits, and the other $20.1 million of deposits being held in letters of credit. Additionally, we have another $72 million invested in pre-development expenses.

The next category of pre-tax charges relates to impairments, which is also shown on the same slide. We incurred impairment charges of $95.7 million, related to land and communities that we owned in the first quarter. 56% of those impairments were on communities in our northeast segment. We took additional impairments in the northeast as the sales pace and pricing in this market have recently been impacted by all of the turmoil on Wall Street. We test all of our communities at the end of each quarter for impairments, whether or not the community is open for sale. If home prices continue to deteriorate, we will see additional impairments in the future quarters. During the first quarter of 2009, we also recorded $21.8 million of write-downs associated with our investments in two joint ventures in New Jersey. Looking at all our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of $1.9 billion, net of $774 million of impairments, which were recorded on 223 of our communities.

Turning to slide 16, it shows our investment in inventory broken out into two distinct categories, sold and unsold homes, which includes homes that are in backlog, started unsold homes, and model homes, as well as the land underneath those homes. The other category includes both finished lots and lots under development, which are associated with all other owned lots that do not have sales contracts or vertical construction. We have reduced our total dollar investment in these two categories by 56% since our peak levels in July, 2006, and we plan to make further progress in reducing our inventories during the remainder of 2009.

Turning to slide 17, you can see that we continue to reduce the number of started and unsold homes. We ended the quarter with 1,142 started, unsold homes, which is a decline of 65% from the peak levels at July, 2006. This translates to about 4.7 started unsold homes per community. While the absolute number of started unsold homes may come down as our community count decreases in the future, the number of started unsold homes per community will likely stay in the range of four to five. This is consistent with the average of five started unsold homes per community on average over the past dozen years.

That leaves us with the last major area of charges for the quarter, which is related to taxes and the FAS109 current and deferred tax asset valuation allowance. We concluded that we should book an additional $79.4 million, after-tax, non-cash, tax asset valuation allowance during the first quarter. While our tax asset valuation allowance charge was non-cash in nature, it did affect our net worth by the same $79.4 million during the quarter, and increased our total valuation allowance to date, to $754.9 million.

Now, let me update you on our mortgage markets and our mortgage finance operation. Turning to slide 18, with average FICO scores of 726, our recent data indicates that our average credit quality of our mortgage customers remains strong.

Turning to slide 19, we show a break out of all the various loan types originated by our mortgage operations during the first quarter of fiscal '09, and compared it to all of fiscal '08. During the first quarter, FHA/VA made up 44% of our volume, as compared to 36% for all loan originations for FHA/VA throughout all of fiscal 2008. We have very little exposure to jumbo mortgages, which were only 1.9%, and 2.5% of total loans for the first quarter of '09, and the 2008 full-year, respectively. The mortgage industry continues to be risk adverse, and has once again embraced sound, reasonable lending practices. There are many loan products from which to choose, and interest rates have never been better.

Today's mortgage customer will have no problem getting a loan, but they need to meet the following requirements. First, a solid employment history. Second, to be able to verify their income using pay stubs, tax returns, and written verifications from their employer. Third, they need to have a decent credit score. Not perfect, but decent. And lastly, they need to be able to document their source of funds to close. The mortgage industry has become more black and white. One either meets the guidelines or one does not meet them. The practice of using compensating factors to get the marginal loan approved is gone. Another change is less reliance on automated underwriting and more reliance on the experienced underwriters manual review of all file documentation.

FHA, Fannie Mae and Freddie Mac have recently increased their loan limits due to the American Recovery and Reinvestment Act. Since job security is often a concern of home buyers, Hovnanian and our mortgage company have partnered in a program to help ensure that mortgage payments will be made in the event of an involuntary loss of income. This along with interest rate buy downs are examples of the types of programs, both internal and external, we are using to assist our home buyers in getting a mortgage loan.

Turning to the topic of our joint ventures. At January 31, 2009, we had $49.5 million invested in seven land development and ten home building joint ventures. As a result of the cumulative effect of $273.3 million of impairments since 2006 within our joint ventures, you can see on slide 20, that our debt to cap of all of our joint ventures in the aggregate increased to 60%. We financed our joint ventures solely on a non-recourse basis. We're now four years into this downturn, and because the loans are non-recourse we have not had any margin or capital calls on any of the debt associated with our joint ventures.

We ended the quarter with $843 million of cash, as you can see on slide 21, and do not have any significant debt maturities coming due over the next few years. Although we have no control over general economic conditions that could adversely impact the price and pace of our sales and deliveries, we remain laser focused on generating positive cash flow from operations during the remaining three quarters of this year.

On slide 22, you can see that our debt maturities are well structured, and our first debt maturity is not until January, 2010, and that is an original face value of only $100 million. After that, nothing comes due until 2012, and even then it is only $240 million of original face value. So between the exchanges and the repurchase, we have reduced our debt by $406 million, and reduced our annual cash interest by $26 million. In order to strengthen our balance sheet, and to further reduce our debt, we continue to explore debt exchanging and repurchases. However, we remain committed to the preservation of our cash balance and would be cautious about spending more cash to buy back debt. Now, I will turn it back over to ARA for some closing comments.

Thanks, Larry. In February, Congress passed a stimulus plan. Unfortunately, the final stimulus plan was essentially a non-event from housing's perspective. Several minor changes were made to the tax credit that was put in place July of '08. It increased the tax credit by $500 to $8,000. It no longer needed to be paid back, and was extended until December of '09. However, it is still limited the credit to first time home buyers only. In some of our lower priced communities, the $8,000 tax credit could be a significant percentage of the home price and could be more meaningful to someone who is undecided whether to purchase a home or not. Unfortunately, the overall dollar amount and the timing of the credit, and the first time home buyer limitation, significantly reduces the potential effectiveness of the tax credit.

While the recent actions to mitigate foreclosures are helpful, the housing industry was disappointed in the stimulus bill, due to the lack of providing any meaningful demand stimulus for home buyers. The housing industry was also hopeful of a meaningful reduction in mortgage rates in the stimulus bill. As you can see on slide 23, while the Federal Reserve has aggressively lowered the federal funds rates to stimulate business, you can see that mortgage rates to stimulate home buyers have not nearly kept pace with the federal funds rate reductions.

A meaningful tax credit and an interest rate buy down were key components of a stimulus package that the federal government used in 1975 to combat a difficult recession in housing market. Historically, the housing cycle has led us into, and more important, led us out of overall economic recessions. Unfortunately, our government has not taken similarly aggressive actions during this housing crisis so far. This lack of action, to date, will mean that even more time is required before we see the housing markets stabilize. Ultimately. this failure to pass more meaningful housing demand stimulus could be costly for the federal government as it continues to prop up the banking industry, whose underlying problems are intricately linked to falling home prices.

Looking at the big picture, we have seen the last two reported annual run rates for housing starts at record low levels. Slide 24 shows that the January annual run rate for housing is 466,000. If you adjust out the estimated 100,000 rental starts, for sale homes are now down to about 366,000 at an annualized rate, down from about 1.8 million in 2005. New home production is clearly grinding to a halt. This means that home builders have adjusted starts to match the recent dismal demand levels. This should clearly help to clear the markets of excess inventory once demand resumes to more reasonable levels. But as you can see on this slide, the current start rate is still well below the 1.6 million average annual starts we've seen for the last several decades.

Home building is a classic cyclical industry. We, as an industry, overproduce in the good times, and we need to absorb the excess supply that was created and under produce for some period of time as we're doing now. While there is not much that is currently in the way of good news, long-term demographics continue to bode well for the future of the industry. In short, the United States population continues to grow, and grow at a slightly more rapid pace. On slide 25, you can see that household formations are expected to increase slightly from what they were during the last decade. Brookings Institute and Moody's have comparable estimates of household formations and long-term demand for this decade.

Over the long term, based on household formations and the population growth, we have faith that equilibrium will be restored again. Falling home prices and historically low interest rates make housing more affordable now than it has been for many, many decades. Current monthly mortgage payments are attractive from a home buyer's perspective. However, potential home buyers now find themselves faced with growing uncertainty about their jobs and their ability to pay for the monthly mortgage. Today, unemployment is a real factor in consumers' decision making process. But, as you can see on slide 26, unemployment is also cyclical, as you obviously know. Over time, on this slide, spikes in unemployment coincide fairly closely with the trough in housing starts. Although it is counter-intuitive, history shows the housing market can improve even while unemployment remains relatively high. 2009 will be another year of historically low starts across the country as we are now at an all time low for seasonably adjusted starts in January. It is certainly possible that 2010 will see an increase in starts, which in these past cycles has occurred as unemployment levels just begin to fall.

Another unfortunate development for the economy, but helpful to the surviving home builders, is the demise of many previously solid competitors, particularly among the private home builders. In fact, a new Website, called builderimplode.com, was initiated, that tracks home builders that have stopped operations. It is sadly growing every single week. We have showed a portion of the list on slide 27. To put the magnitude of these implosions into perspective, in 2005, the dozen builders that are shown on this slide delivered over 43,000 homes. When the economy and the housing market does return, it is likely that half of the home builders will be gone, making a much better environment for those of us that remain.

As we look forward internally, we don't plan for a pickup in demand, but we certainly believe that increased demand is an inevitable scenario that will play out at some point in the near future. Since we are no better at predicting when these outside influences will subside, we must continue taking steps to make certain that we survive this downturn. We believe that we've got the liquidity to ride through this difficult environment by sticking to our long term strategies and offering a broad product array, and maintaining a presence in many markets that will once again present opportunities as the industry rebounds. We feel that we will be well positioned to participate in the eventual recovery. That concludes my comments, and we'll be pleased to open up the floor for questions.

The Company will now answer questions. (Operator Instructions) Our first question will come from the line of Michael Rehaut with JPMorgan. Please proceed.

Hi, thanks. Good morning, everyone.

Good morning.

First question, we appreciate, a lot, the detail month by month that you gave on slide four, in terms of the net contracts. I was hoping, just for perspective, from a year-over-year basis, you could provide the last few months including February, on their year ago basis, on net orders and per community, also?

We don't have that right at our fingertips. Maybe by the end of the call, or during the call, we can gather that.

That would be obviously, pretty helpful, given that you also had mentioned in the press release that you still feel, at this point, the increase is seasonal. So, just wanted to try and get a little more color on that. Second question, and then, I will get back into the queue. I was hoping if you could just talk a little bit more about your expectations for cash flow. Certainly, guidance is extremely challenging, but given the year-over-year decline in the cash flow X the tax refund, I just wanted to know your thoughts about whether '09 could be a positive year or a negative year, as you kind of look out the next couple of quarters at least?

Mike, it is challenging to make longer-term projections on cash flow. But looking at the first quarter, as ARA mentioned in his comments, you can't just annualize the first quarter and assume that that is a meaningful number for any purpose. As he also said, we have negative cash flow in last year's first quarter, and then generated very strong cash flow for the full year. So, although I can understand why you're focusing on this and wanting additional guidance on it, I just don't think anyone should go about trying to annualize our first quarter results.

No, I definitely wasn't implying that, and we recognize the seasonality, but just given the year-over-year comparison and the fact that the backlog is down so significantly, that is more where I was coming from.

And I understand. We're not going to give a specific projection other than to tell you we're laser focused on generating positive cash flow the remainder of this year. I mean there is a lot of things that are out of our control, in terms of what is going to happen to pace, what is going to happen to prices, but we remain laser-like focused on generating cash flow. That really drives, virtually, every decision we make as a Company, and I just can't give you any guidance at this time beyond that.

Okay. Fair enough. Thanks, guys.

The next question will come from the line of Carl Reichardt with Wachovia. Please proceed.

Good morning, guys. How are you?

Good morning.

Good.

Can you tell me a little bit about how your traffic per community has been trending during the quarter, Larry? And can you also define, when you take a community out of the community count, what's your definition of doing that, since different builders do it different ways?

Our definition for doing that is there is less than, I think it is 10 or less homes remaining to be sold. At the time that there is less than 10 remaining in the community, we take it out of our official count. Although as you well know, since you track it from our Website, it will still be on the Website, because we still might have seven or six or five or four homes to sell. But, that is how we do it. I mean traffic, seasonally, has picked up as well. I don't have it right in front of me on a per community basis. Jeff just handed me something. He's got something on a per community basis. I mean I would say it is probably following the same pattern. I'm going to try to give you the contract data here that Mike asked for earlier, and I think traffic is kind of followed that same kind of pattern. So we have had a pickup in traffic, compared to what we were having in the fall.

Which you would expect seasonally, but is the traffic level changed much from this? You've got the up sales per store pace, slightly. Has the traffic increased on a similar pace on a per store basis, or greater than that?

I think it is probably a similar pace.

Okay. Great. That's fine. Last question, ARA, you talked the last couple of quarters a little bit about some of the additional avenues you pursued for capital or joint investment in land and communities going forward. Could you give us sort of an update on where you see that environment right now, the appetite for outside entities to invest in this business, and anything you might be entertaining if it's changed?

Yes, there hasn't been a lot of change. There continues to be an appetite. The real issue has been good investment opportunities, so it becomes a little bit of the chicken or the egg. The good news is, finally, we are seeing land opportunities that make sense, and for the first time in years, other than Texas, we have bid on a few parcels. We didn't get any of those parcels, but we are very close, and the bids were at prices that were, all of them were from banks by the way, and they were at prices dramatically below cost. I mean $0.15, $0.17 on the dollar, in some cases. So, and at those prices, it makes sound economic sense in today's environment. But in any case, as I mentioned, we haven't landed any of them just yet. I am optimistic that we are going to see an increase in good opportunities. The opportunities we've seen all really presented themselves in the last few months. It is the first time in one or two years where we've seen any reasonable opportunities, and I clearly get the sense that there are more coming up. So that is good progress. Once we get the opportunities, that is when we will put the full court press on finalizing deals with a partner.

Before the next question, I can answer Michael Rehaut's question now. I've got the data, by month, for last year's, for '07, and I'm going to start, and this is on slide four for everyone, on the monthly net contracts per community. For the month of November 2007, we had .9 contracts per community compared to the 1.1 that we had in November of '08. And December of '07, we had 1.4 net contracts per community compared to the 1.1 in '08. And in January of '08, we had 1.3 net contracts per community compared to the 1.5 in January '09. In February '08, we had 1.8 net contracts per community compared to the 2.2 in February '09.

And then starting with October of '07, we had 226 contracts compared to the 231 in October '08. But I will just tell that you '07 was impacted to a large extent by the September '07 deal of the century, so we think we pulled some demand forward a year ago. In November of '07, we had 386 net contracts compared to 284 in November '08. In December of '07, we had 582 net contracts compared to 304 in December of '08. In January of '08, we had 543 net contracts compared to 373 in January of '09. In February of '08, we had 804 net contracts compared to 506 in February of '09.

Obviously, the absolute number of sales is more challenging by comparison, because we have reduced the community count dramatically. But as you can see by these comparisons, the sales per community are showing an improved trend, finally, over last year.

Next question.

And our next question will come from the line of David Goldberg with UBS. Please proceed.

Thanks, good afternoon, everybody. First question is, ARA, if we go back to your comments on the decision making process on building or not building, and the recoverability test and how you think about that I'm wondering if you can give us an idea what the range might be in terms of recoverability of current investments? What might be the low, where you would decide to build through, and what, obviously, the match would be 100%, but what might be the low, and kind of some examples and just some more color around the actual decision making process? And I guess with that, not to get overly complex here, but with that, how you think about what would have to happen to prices if you decide not to go ahead and build through, what the expectation is for pricing, to make it worthwhile to hold the communities, or hold the land?

Well, the thinking varies a bit by community. If we're in some parts of the market, like a Bakersfield or a Fresno, or parts of Florida that we feel are over supplied, then we will come down to low lot recoveries, $15,000 or $20,000 per lot, if we can recover that by building a house, then we will continue to do that on the bottom end. In other examples, if there are prime locations with the shortage of land, and markets, just at the moment, can't justify the price, then we might mothball a community or not to go forward if it generates substantially more cash flow per lot than that. But, that is part of the thinking. It kind of is tempered by what we perceive as, the long, the near or intermediate term future based on land supply there.

And just to clarify with that, the $15,000 or $20,000 on the low end, what would the finished lot cost be? What percent would that be of the finished lot cost?

It is all over the board. It could be as low as 20% of the finished lot cost, and obviously, that is why we're generating some of the low margins we're' generating, or if you go down that far in price, that's why we're booking the impairments in those cases.

I guess the question, the second question, as opposed to the build or no build in open communities.

And by the way, the other positive of doing that, in addition to generating cash flow, is you burn through our older valued lots so that we can make room to replenish our land supply at better valuations.

Right. I guess the second question, it is along the same lines, but it specifically relates to the mothballed communities and the $500 million plus dollars of land that you have in the mothballed communities. I guess what I'm trying to figure out is how much prices would have to go up from where we are to make that, or maybe sales base. If you could just give us some sort of an idea about what would make those projects viable? And then, what goes into the impairment analysis? Because you've written off, if the math is right there, about 36% of the original investment value in impairments in those communities, and it seems like a low number given that we're not at pricing now that would sustain opening up the communities.

The answer is all over the place. Obviously, it depends on the community, and it depends on the status of land development, and also, when we put it into mothball. But, there are clearly examples where it doesn't take a lot of price appreciation or velocity, because remember, both of those are taking into account. There are definitely cases where it wouldn't take a lot to get it out of the mothball status for us. But, there is no simple or easy answer. I mean clearly, prices have come down in many of our locations 40%, and if we could recover 10% of that 40%, there are many cases where it might justify reigniting a mothballed community.

And our next question will come from the line of Dan Oppenheimer, Credit Suisse. Please proceed.

Thank you very much. Was wondering if you could talk about your comments are being very focused on cash flow at the expense of margins as it relates to the northeast. Looking at the investment in lots, in your K, and sort of adjusting for the impairments this quarter, it looks like you've got in your planned community, $145,000 of investment per lot in the northeast, whereas every other region maxed out at $40,000 per lot in the west. And given the weak demand in the northeast, should we expect lower pricing and significant impairments to come on that?

Well, I mean you're comparing an apple and an orange. On the west, most of our land holdings remain in very inexpensive areas, in the Inland Empire, in the outskirts of Sacramento, and in Bakersfield, where the land values are just very low. Conversely, in the New Jersey market, and the northeast, near the New York metropolitan area, or in the core areas of New Jersey, the values are dramatically higher. So, it is a bit of an apple and an orange.

Having said that, our impairments during the first quarter, Dan, were weighted towards the northeast and specifically, New Jersey, because we have seen some price erosion based on what has happened on Wall Street since September. So, we make the analysis based on the facts at the time of each quarter end, and make the adjustments accordingly.

If you also look as part of our release, the average price in net contract, I think, says that pretty well. In the west, it was $166,000. In the northeast, it was $470,000, triple the price, so that is also part of the rationale.

Right, I understand that, but even just looking at percentage of the contract price in the northeast, it still looks to be fairly high, especially given the pressure on pricing now. Thanks very much.

Okay.

And our next question will come from the line of Nishu Sood with Deutsche Bank. Please proceed.

Thanks. I wanted to ask first about your debt repurchases, which obviously stepped up in importance here. Wanted to get your thoughts, your kind of goals, your strategies that are guiding here, specifically would like to understand how much cash you intend to allocate to the debt repurchases, how you're altering your maturity structure, which maturities you're targeting for repurchase, and whether or not the repurchases you're doing here are opportunistic, transactions that are coming to you or whether you're going out and seeking them?

I think really all we're going to say about that is what we said in the script. And that is, is that we gave the detail on what we have done very recently. We have a very limited amount of cash, which I'm not going to define specifically, as to how much more we're willing to do, but I can assure you that it is limited, because we need to preserve our liquidity. I think I'm just going to leave it at that.

Got it. So maybe you can give us just some more, maybe your thoughts on the questions asked on what has happened to date already, like which maturities you're buying, whether they were opportunistic or whether they came to you, and just in terms of what has happened already?

No, what has actually happened already, we will put out, incrementally, more data when we file our 10Q later this afternoon. We will break it out between sub debt and senior debt, but we're just not giving any granularity on specifically what issue, what amount, that kind of thing. We will see it as we do it.

Okay, and next question I wanted to ask was about gross margins. At this stage in the down turn, at this stage in the impairment cycle, we're seeing obviously, a larger amount of previous impairments flow back through gross margins. Your gross margins seemed to have kind of stabilized in the, let's say, the 5% to 7% range. Your peers though, generally, have been coming in at about 11% to 13%. So I was just wondering, maybe, if you could give us your thoughts on what the differential is there?

Well, I think part of it could be related to the fact that we've got, and have had, a fair amount of activity in California and Florida, which has some terrible margins. Part of it is also related to the fact that we are more focused on cash flow, and more willing, I think, to accept lower margins in return for sales velocity. You can see that by the fact that while our sales were dismal in the first quarter with a minus 36%, it was the third best, our fourth best in the industry, when you look at the 12 or 13 public builders, and part of the reason we're able to do that and not have our sales decline as much, I suspect, is that we are a little bit more aggressive, and therefore, we're willing to take the pricing hits. As I mentioned, with the California and Florida, I mean we just have a greater portion of our assets in some of the very tough markets.

The next question will come from the line of Megan McGrath from Barclays Capital. Please proceed.

Good morning. Thank you. I just wanted to follow-up a little bit more on the cash flow. Larry, I realize you don't want to give guidance, but you mentioned you're going to be laser focused, so I'm wondering if you can give us any more thoughts on what you can do? You talked about what is out of your control, but what are the things that are in your control? Did you have discretionary land spend this quarter that you can pull back? Does it make sense to be more aggressive on pricing over the next couple of quarters?

Well, I think you've seen us be aggressive on pricing to the extent that we can still make a decent recovery of our current improved lot costs. By selling a house, if we've got to discount the house and can still recover a decent amount of the lot costs, as ARA defined a few minutes ago, we will continue to do that to the extent that the market dictates that we have to do that in order to sell homes. So, that has been our strategy. It is going to continue to be our strategy throughout this downturn. The other thing that we continue to do is obviously monitor, very carefully, all of our overhead costs and you see every quarter, although these decisions are extremely difficult to make, but as business slows down we have to continue to right-size our business, and you will see that happen, if appropriate, in individual markets as well. And, we're just focused on preserving cash in every way that we can.

There is a certain amount of land development work that we just have to do, and in Texas, one of the better markets in the country, we have optioned finished lots. So, we're selling well. We have decent margins there, and we will continue to spend money on land as we sell homes on the lots that we currently own in specific communities. So, we can't stop taking down land in a market where we're getting a good return on our capital.

Okay. Thanks. That's helpful. And ARA, just to follow-up, in your initial comments, I think you very briefly mentioned that you took down some lots as part of a redesign of several communities. Is that something that you're doing?

No, what we were saying is, if you simply took the lot purchases and compared it with the deliveries and lot sales, you couldn't quite get to the number of lots we ended up with. And that's because on some existing lots that we own, or land that we own, the product was redesigned, giving us more lots without buying more land, and I was just trying to explain that.

Okay. Great. Thanks. That's helpful.

And our next question will come from the line of Timothy Jones with Wasserman & Associates. Please proceed.

Excellent presentation. First question, just a follow-up first of all, what was asked to you on that buy back of debt. Can you at least say, has it been bought from debt holders or banks?

I'm sorry, has it been bought from who?

The public debt holders or banks?

They have all been from debt holders.

I thought that was the case. The first question is, on your covenants now, what are your most stringent, especially tangible net worth and debt to capital, and does this $210 million gain in the second quarter, did the banks take it in full faith?

We don't have any tangible net worth covenants either on our bank debt or on any of our public debt. We really don't have any maintenance covenants, such as a minimum net worth or fixed charge coverage, on any of our debt.

Basically, when we switched to a secured facility and reduced the amount, by the way, we don't have anything borrowed on our credit facility, but we exchanged that in return for very lenient covenants.

Good. And now, the banks will give you credit for this gain that you got from buying back this debt early in the second quarter?

There is no covenant that it's related to.

I understand.

They certainly count it as equity.

That's what I wanted to know.

Yes.

Okay, the second one. You gave us the spects, this year versus last year. Can you give us either the total homes under construction, including the spects, and I can take the ones that are not spect out of it?

This is the total under construction.

Non spects too. Either non spects or give me the total, either one, it doesn't make a difference.

I mean, I clearly don't have that number at our fingertips and it is not something that we've ever given out before. Call me afterwards and we can talk about it, Tim.

Okay. Thank you very much.

You bet.

And our next question will come from the line of Alex Barron with Agency Trading Group. Please proceed.

Hi. I was wondering if you could talk about your restricted payments basket? Just trying to get a sense of is there kind of some maximum amount of debt that you can refer to?

All of the information regarding limitations on our restricted payments you can find in the SEC filings for each of our debt issues. There are several different baskets with different kind of limitations that are available to us under the limitations. They're pretty complex. And, I think the important thing is that we remain in compliance of all of those restricted payment baskets, and expect to continue to remain in compliance with all of our debt covenants. So, I think that is what you need to understand.

Okay. And my second question was, you talked a little bit about in some communities there is maintenance costs, and taxes, and so forth. Do you have some estimate of what that amount is for this fiscal year?

The ongoing maintenance, the taxes, the utilities?

No, we don't get down to that level of detail.

No. I mean we have it built into our models, but we don't have a break out of that to provide you.

Okay. Thanks.

Our next question will come from the line of Joel Locker with FBN Securities. Please proceed.

Hi. Just on the job, or actually the 506 orders that you took in February, based on how many of the orders were taken with the mortgage in case you lose your job, you know, six months or a year or whatever you pay?

We only recently started offering that probably within the last three weeks, four weeks. So, I'm not sure how many of the 500 in February were that way. But the program is getting, some interest in it, so able to overcome the objection for some of the customers, but I don't think it is a primary driver of why we got 506.

And how would that run through, or which line item, would you take a reserve immediately through the COGS when you take it an order?

No, we go to a third party insurance provider to get that, so we just pay an insurance premium, so to speak, so it doesn't affect our ability to book the revenues or anything along those lines.

And that would go through other expenses?

The insurance premium itself would be in cost of sales as part of closing costs.

Closing costs. Okay. Thanks a lot.

It is very modest.

Right, I got you. Thanks.

And our next question will come from the line of Lee Brading with Wachovia. Please proceed.

Hi, guys. Can you hear me?

Yes. Sure can, Lee. Go ahead.

I wanted to follow-up on just the balancing act you're doing on the land spend side, because ARA ,one comment you made, land's starting to make sense, you did a bid in Texas. And Larry, you made a comment, it is a race to zero, and it looks like you still have too much land that you own, in general. What I gather and looking at your slide 13, I guess Texas would fall within that southwest, a pretty low, I guess relative to your overall Company, in amount of years of lots owned. Is it a very targeted, geographically, where you're looking to buy land, or is it broader than that?

Well, it is broader. First, a clarification. The race to zero is on the land that we have on our books that was purchased at higher valuations. But in terms of the current lot options that have been done, that has been primarily focused in Texas, and that's been on an improved lot, rolling takedown basis. We're basically buying two or three lots at a time. If we get sales, then you buy another two or three lots, and it turns relatively quickly with little exposure. Regarding the overall larger picture for looking for land opportunities, we're looking really across all of our markets. And as we've mentioned, our focus is to do that without using up a huge amount of our capital by finding joint venture partners.

To the extent we already have a land supply, obviously we wouldn't purchase the identical kind of parcel, but there are many opportunities and many different geographies and many different products, so even though we may have a larger land position than we would like today, based on old land holdings or old land purchases in DC, that doesn't mean that we wouldn't look at a new opportunity, at a price that works today and generates a profit. So, at the same time we're continuing to sell some of our old land, we may have a new location or a new product, or perhaps our land is for 75 foot lots, and we have a new product opportunity four towns over with 40 foot lots, then we would consider looking at those opportunities.

Okay. That's helpful. And just on the interest expense side, just the timing if that. I know you disclosed interest incurred was $50 million or so, and just looking at it from the standpoint of bond payments, you ended up making about $90 million in payments this past quarter. Is that about right?

The bond payments are weighted toward the first and third quarters. They're dramatically higher, dramatically, than the second and fourth quarters.

Our next question will come from the line of Michael Rehaut with JPMorgan, as a follow-up.

And by the way, a clarification. I think the bond interest payment was a little over $80 million in the first quarter, and would be significantly less, significantly less in the second quarter.

Thanks, guys. I just had a quick follow-up. More of a clarification from earlier. You had said that you had mothballed 13 communities during the quarter, and I wasn't sure if the 531, I assume that's related to a larger number of communities, and I was wondering if you could maybe give a little more color in terms of geographic breakdown.

65 total mothballed communities for that.

Okay, and any sense of, geographically, how that 531 breaks apart?

No, we don't break that out geographically.

Thank you.

And our next question will come from the line of Michael Lynn with Fairlawn. (Operator Instructions) You may proceed.

Hi. The question was what the amount of the RP basket was under the secured 11.5% notes, pro forma, for your bonds?

There are several different baskets. So, I don't know which one are you talking about?

I guess the obvious question is, you've spent whatever, $130 million, $140 million in bonds in the open market under the 11.5% indenture, which I presume, would be the most restrictive, how much more could you spend if you wanted to?

The answer is not that straightforward, and I could just repeat the answer I gave earlier, but it stands. If you really want to understand our restricted payment baskets, you probably ought to go look at the SEC filings for it. We remain in compliance with all of those baskets. It is fairly complex, and we intend to remain in compliance going forward, as well.

But in general, it is not unlimited by any stretch. We do have more opportunities. I would say our own internal caution would be the more restrictive factor, right now, than the basket. But that basket does change over time, and that's why Larry mentioned, it is not a straightforward or a simple calculation.

Okay. Thanks.

And our next question will come from the line of Larry Taylor with Credit Suisse. Please proceed.

Thank you very much.

Hey, Larry.

Hi. I wonder if you could share, even if is not an exact number, give us some sense of the sort of level of cash that is your comfort level? I mean, you kept cash about flat during the quarter, notwithstanding whatever happened with operations, you've spent some on debt repurchase since. Is there a level? Is it $500 million, is it 3, is it 7? You see where I'm going with that?

Yes and that is a difficult question to answer. Obviously, more is better. Stating the obvious there. But how long is the downturn going to last? And it would be easier to answer that question. But we're focused that the most important thing to our ability to weather this downturn is having sufficient liquidity, which means sufficient cash. So, we're very cautious on depleting that. And, I don't think I can give you much more clarity than that, Larry.

Okay. Thanks.

And our next question will come from the line of Susan Berliner with JPMorgan. Please proceed.

Thanks. Larry, I guess if I could ask the question a little differently in trying to figure out the restrictive payment basket, which I guess, a lot of people are having difficulty. When you guys look at the collateral package that secures the 11.5, I know you had gotten an appraisal. Is there any way to give kind of an approximation of what the collateral is, and should we include cash in that number as well? What kind of a cushion is there?

You can include cash in the calculation, and I'm just not going to be able to give you any specifics beyond that. But, I will tell you that cash is included.

Okay. Great. Thank you.

And at this time, I show no further questions in the queue. I would like to turn the call back over to Ara Hovnanian for closing remarks.

Thank you very much. It is obviously a challenging environment. We wish we had even better news to give you. But we continue to work hard, focus on cash flow, and we will look forward to reporting to you next quarter. Thank you.

And thank you for your participation in today's conference. This concludes the conference. You may now disconnect. Good day.