Hovnanian Enterprises Inc (HOVNP) 2016 Q2 法說會逐字稿

Good morning and thank you for joining us today for Hovnanian Enterprises FY16 second-quarter earnings conference call. An archive of this webcast will be available after completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in listen-only mode.

Management will make some opening remarks about the second-quarter results and then open up the line for questions. The Company will also be webcasting a slide presentation along with 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 turn the call over to Jeff O'Keefe, Vice President Investor Relations. Jeff, please go ahead.

Thank you, Abigail, and thank you all for participating in this morning's call to review the results for our second quarter, which ended April 30, 2016.

All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievement of the Company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statement.

Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for the current or future financial periods, including total revenues, adjusted EBITDA and adjusted income before income taxes. Although we believe that our plans, intentions, and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made; are not guarantees of future performance or results; and are subject to risks, uncertainties, assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors.

Such risks and uncertainties and other factors include, but are not limited to, changes in general and local economic industry and business conditions and impacts of the sustained home building downturn, adverse weather and other environmental conditions and natural disasters, levels of indebtedness and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness, the Company's sources of liquidity; changes in credit ratings; changes in market conditions and seasonality of the Company's business; the availability and cost of suitable land and improved lots; shortages in and price fluctuations of raw materials and labor; regional and local economic factors, including dependency on certain sectors of the economy and employment levels affecting home prices and sales activity in the markets where Company builds homes; fluctuations in interest rates and availability of mortgage financing; changes in tax laws affecting the after-tax cost of owning a home; operations through joint ventures with third parties; government regulation, including regulations concerning development of land and home building, sales and customer financing processes, tax laws and the environment, product liability litigation, warranty claims and claims made by mortgage investors, levels of competition, availability in terms of financing to the Company; successful identification and integration of acquisition; significant influence of the Company's controlling stockholders; availability of net operating loss carry-forwards; utility shortages and outages or rate fluctuations; geopolitical risks, terrorist acts, and other acts of war; increases in cancellations of agreements of sale; loss of key management personnel or failure to attract qualified personnel; information technology failures and data security breaches; legal claims brought against us and not resolved in our favor; and certain risks, uncertainties, and other factors described in detail in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2015, and subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by applicable Securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason. Joining me today from the Company are Ara Hovnanian, Chairman, President, and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor Vice President, Chief Accounting Officer, and Controller; and David Bachstetter, Vice President, Finance and Treasurer. I will now turn the call over to Ara Hovnanian. Ara, go ahead.

Thanks, Jeff. This morning we're going to review our second quarter and provide you with an update on our liquidity, an area that I know has been a concern to many of you. Starting off with the quarter, we made steady progress in most metrics.

If you turn to slide 3, in the top left-hand corner, you can see that we had solid delivery growth. Our consolidated deliveries were 1,598 homes, an increase of 31%. This led to a 40% increase in total revenues, which can be seen on the upper right-hand portion of the slide. Our total revenues were $655 million for the second quarter of 2016.

In the lower left-hand part of the slide, you can see that our gross margin was 16.1% in both the second quarter of this year and last year. I will talk a little bit more about that in a moment. In the lower right-hand quadrant, you can see that our total SG&A ratio decreased to 10.5% during the second quarter from 14.7% in last year's second quarter. We definitely leveraged our SG&A expenses during the second quarter this year.

Turning to slide 4, on the left-hand side, you can see that our adjusted EBITDA increased approximately 225% during the second quarter to $40 million, compared to $12 million in last year's second quarter. On the right-hand side, we show that adjusted EBITDA to interest incurred also increased to 0.9 times compared to 0.3 times in the second quarter a year ago.

We are pleased with the improvements in both of these metrics and we expect better performance in the back half of the year. Our pretax loss prior to land impairments was [$8 million] during the second quarter of 2016 compared to a $25 million loss in last year's second quarter. While it's discouraging to be below breakeven, it is a significant reduction in loss and we are well on the way to profitability for the full year.

Next, let's look at our gross margin, an the area where we're not pleased with our performance. On slide 5, we show 10 of our peers who reported March or April quarter-end results plus our own results, six of the 10 reported declines in gross margin year over year. While our gross margin was flat, it was against poor performance in last year's second quarter.

It's clear that this pressure on gross margin affected the majority of our peers, although it doesn't make us feel much better about our gross margin performance. We have seen rising construction costs throughout many of our markets and still have a little hangover from the 2013 and 2014 land purchases, which were during the slightly stronger housing market. In future periods, gross margins should begin to improve for both the industry and our Company, and as more homes are delivered on more recently acquired land parcels.

Lastly, the fact that our gross margin didn't improve year over year is also reflective of our cash management strategy. Perhaps we're a little more willing than our peers to sacrifice some margin in order to make sure that we meet our delivery in cash targets at the moment. Regardless, we know that we've got some work to do in improving our gross margin.

The lack of gross margin improvement was fortunately more than offset by improved efficiency in SG&A, which you can see on slide 6. On the left-hand portion of this slide, we show that our annual total SG&A ratio from 2001 through 2015; we consider 10% to be a normalized ratio.

On the right-hand portion of the slide, you can see that our second-quarter SG&A ratio declined 420 basis points to 10.5%. The improvement benefited from a 40% growth in revenue, while at the same time, the dollar amount of our total SG&A was flat year over year. Sales pace per community also helped our efficiencies.

During the first half of 2016, we have been achieving the operating leverage we expected on this ratio. In the second half of 2016, we expect the increases in revenues to continue to outpace any incremental increases to our SG&A expenses. As such, we anticipate our SG&A ratio will approach our normalized 10% level for the full year in FY16, a level we haven't seen since 2005.

Now I'm going to switch gears and talk about the sales environment. Slide 7 shows the dollar amount of our consolidated net contracts increased 10% to $768 million for the second quarter, while the number of net contracts increased 1%. Geographic and product mix resulted in a higher average contract price.

Turning to slide 8, we see that consolidated net contracts per community increased 6% to 9.2 net contracts per community from 8.7 in last year's second quarter.

Turning to slide 9, you can see that our consolidated community count has decreased slightly during the second quarter compared to last year's second quarter. We opened 87 new communities during the trailing 12 months and closed out of 98 older communities, reducing our community count from 207 to 196. As we said on our last conference call, we've shifted our focus from growth to reaping operating efficiencies, and improving our bottom line and repairing our balance sheet.

Turning to slide 10, we show that our net contract results -- we show them restacked, as if we had a March quarter end, so that we could compare our results to nine of our public peers who report results for a March quarter end. Despite a 4% decline in community count, our net contract increased 9%, about in the middle of the pack.

On slide 11, we show our net contracts per community for the same peers and for the same period of time. Our sales pace per community improved the most amongst our peers.

Slide 12 shows net contracts per community on a monthly basis. The most recent month is in blue, the same month of the previous year shown in gray. Here we see that there has only been one month in the past 12 that we reported a year-over-year decrease in net contracts per community.

On slide 13, instead of the number of net contracts per community, we show the dollar amount of our consolidated net contracts per month for each of the past 12 months. Each month has had a higher amount of net dollar contracts than the same month a year ago. These increases in the dollar amount of net contracts have led to increases in our revenues for the first half of the year and should lead to continued increases in the second half of the year.

Another metric that suggests that we should have revenue increases in the final six months of 2016 is our backlog, which experienced even greater growth. On slide 14, we show on the left side the dollar amount of our contract backlog, including unconsolidated joint ventures increased 28% to $1.6 billion, while the number of homes in backlog increased 12%. This positive momentum in sales pace and the growth in our quarter-end contract backlog gives us the confidence that we should be able to continue to significantly grow our revenues during the latter half of 2016.

Slide 15 shows that we already stack up well compared to our peers when we look at a key operating metric, home building EBIT inventory over the trailing 12 months. Obviously, our higher leverage creates more of a challenge in our pre-tax comparisons. As we make progress in our EBIT to inventory returns, our profitability will naturally improve as well. I will now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer.

Thanks, Ara. Let me start with an update on Houston. During the second quarter of 2016, we saw the absolute number of net contracts in Houston increase by 3% year over year, and on slide 16, we show that net contracts per community increased 12% year over year to 7.7 net contracts.

We continue to believe our strong performance in Houston is due to our focus on lower average price points, not participating in any of the highly competitive master planned communities, and having less exposure to communities in the energy corridor in Houston than our peers. After more than 18 months of significantly lower oil prices, our margins and profitability levels in Houston remain strong. Our solid Houston performance certainly demonstrates the strength of our Houston management team.

In 2016, our dependence on Houston from both a profitability and volume perspective is expected to decrease, as other parts of our operations are expected to grow significantly, while Houston is expected to remain at level similar to their 2015 results. Despite another solid possible quarter for our Houston operations, we remain cautious about the impact of lower oil prices on the Houston economy. We continued to keep a close eye on the market and we will take appropriate actions should any further developments arise. Our Dallas, Texas market, which is far less dependent on the oil industry, remained strong as well.

During the second quarter, we recorded $5.4 million of impairments on four parcels of land held for sale. Additionally, we walked away from [2,263] lots, which resulted in a charge of $4.3 million. The majority of this quarter's walk-away costs were deposits on communities in our Southwest segment that we decided not to pursue.

Turning to slide 17, you will see our owned and optioned land positions broken out by our publicly reported market segments. Our investment in land option deposits was $67 million as of April 30, 2016. Additionally, we have another $29 million invested in pre-development expenses. Looking at all of our consolidated communities in the aggregate, including moth-balled communities and $313 million of inventory not owned, we have an inventory book value of $1.7 billion net of $489 million of impairments.

Turning to slide 18, you can see that we have the second highest inventory turns over the trailing 12 months as compared to our peers. In addition to our historical focus on more heavily utilizing options than the majority of our peers, more recently our terms are also aided by utilizing land banking, which facilitates us purchasing lots on a just-in-time basis. Achieving a high inventory turnover will continue to be a focus for us going forward.

Another area of discussion for the quarter is related to our deferred tax asset valuation allowance. During the fourth quarter of FY14, we reversed $285 million of a deferred tax asset valuation allowance, which should reverse the remaining valuation allowance when we begin generating sustained profitability levels higher than recent years.

At the end of the second quarter of FY16, our valuation allowance in the aggregate was $635 million. The remaining valuation allowance is a very significant asset not currently reflected on our balance sheet, and we have taken numerous steps to protect it. We will not have to pay cash federal income taxes on approximately $2 billion of future pretax earnings.

On slide 19, we show that we ended the second quarter with a total shareholders deficit of $152 million. You add back the remaining valuation allowance, as we have done on this slide, then our shareholders equity would be a positive $483 million.

If you look at this on a per-share basis, it's $3.28 per share, which means that at yesterday's closing stock price of $1.93 per share, our stock is trading at a 41% discount to our adjusted tangible book value per share. Over time, we believe that we can repair our balance sheet and have no current intentions of issuing equity any time soon.

As seen on slide 20, after spending $187 million on land and land development in the second quarter, paying off $234 million of bonds that matured between October 2015 and January 2016, we ended the second quarter with $126 million of liquidity, below our liquidity target of between $170 million and $245 million. However, subsequent to the end of the second quarter, we raised $75 million of cash through a series of transactions.

First, we closed on land sales transactions to exit our Minneapolis and Raleigh markets. Second, we entered into a new $160 million joint venture partnership with funds managed by GTIS Partners LP by completing the first tranche of the new JV with seven communities. The combination of these activities resulted in a $75 million increase to our liquidity position, giving us second-quarter pro forma liquidity of $201 million.

We were happy to have closed the transactions to sell the land in Minneapolis and Raleigh and complete our exit from both these markets. We still have five open for sale communities in Tampa and plan to sell-through the rest of the communities in that market by the end of 2017.

Lastly, in the East Bay area in northern California, we have two active selling communities which should be closed out by calendar year end. Our third and final community in the East Bay, where we are about to begin construction, will be managed from our Sacramento division.

On slide 21, we show our pro forma maturity ladder, which takes into effect the transaction subsequent to April 30, 2016. Between October 2015 and May 2016, we have paid off $320 million of debt maturities. Given the liquidity levers we have previously discussed on calls, along with our decisions to shrink our geographic footprint, we continue to believe we will have sufficient liquidity to pay the $121 million principal amount of notes maturing in January 2017 and the $86 million principal amount of exchangeable notes maturing in December of 2017.

Turning to slide 22. Because of decreases and projected revenue due to cycle time increases exiting two markets, pressure on our gross margins, and increased interest expense from additional land banking activities, we are refining our guidance for 2016. Assuming no changes in current market conditions, we expect to report total revenues of between $2.7 billion and $2.9 billion for all of FY16. We expect our gross margin for all of FY16 to be between 16% and 17%.

Additionally, we expect SG&A as a percent of total revenues for all of FY16 to be between 9.8% and 10.2%. We expect adjusted EBITDA to be between $200 million and $225 million for the year. Excluding any land-related charges, gains or losses on extinguishment of debt, and other nonrecurring items such as legal settlements, we expect the pretax profit for all of FY16 to be between $25 million and $50 million.

Over the past few years, we aggressively invested in growing our land inventory to position us for more meaningful growth in revenues and profitability. We achieved and are achieving a lot of that growth this year. While we now plan to delever our balance sheet sooner than we had previously anticipated, we believe we can still achieve profitability of growth going forward, due in part to lower interest expenses and also due to a smaller, more efficient, and productive footprint.

We feel like we are in a position to once again deliver solid performance metrics, and we look forward to delevering our balance sheet and delivering improved results for this year. That concludes our formal remarks and we would like to turn it over for questions.

The Company will now answer questions.

(Operator Instructions)

Megan McGrath, MKM Partners.

Good morning, thanks for taking my question. A couple of things here. I wanted to see if you could -- you said you completed the sale of the Minneapolis and Raleigh division. Did that impact your order growth, community count, et cetera, at the end of the quarter? If you could walk us through that, that would be great.

It really didn't impact our community count of the quarter because we closed on those transactions subsequent to the quarter end. Needless to say, it did have some impact on orders during the quarter; once you announce that you are leaving a market, I think it has an adverse affect and there were some slowdown in orders in those markets.

And how should we think about that going forward, Larry?

Well, we've exited those markets, so it won't have an effect going forward, but community count obviously will decline based on us exiting Minnesota and Raleigh.

How many communities there?

Noting the month of May was primarily without those two divisions, and we still have an increase in contract dollars for the month of May without them. As we mentioned earlier, they are not particularly significant divisions for us.

Okay, great. Thanks.

There were nine active selling communities at the time we exited Raleigh and Minnesota.

Thank you. If I could just follow up a little bit on your commentary on gross margins. Two things, you talked about how you have a hangover from the land bought in 2013, but you do think that margins for you and your competitors should improve. Is it that -- I can't imagine that land prices have come down; maybe they have. Or is it just that the underwriting, the price increase underwriting has gotten a little bit more -- that you have to do, has gotten a little bit more reasonable? Can you walk us through that assumption that the margins will be able to improve due to the land?

Yes, well I think you've heard a similar theme with many public builders. Clearly, 2013 was a bit of a false strong rebound in the housing market, and many of us saw accelerated absorption per community and a lot of forward pricing pressure. In the positive sense, a lot of price increases around many of the markets. Because of that, many of us, our Company included, were aggressive in buying land at that point.

Unfortunately, as I mentioned, it was a false move in the recovery. The market has still been recovering but much, much more gradually. And therefore, the underwriting that was used during those acquisitions for us and other companies was a little too aggressive and the margins did not turn out to be what was anticipated, as the market slowed down just a little bit in terms of pace and incentive to sell homes. So that's what was really happening.

With new acquisitions, everyone is looking at current market conditions. We're looking at new prices and incentives and current absorptions, and we underwrite those to a much healthier gross margin. So we'd anticipate our results will be better, as will those of our peers.

Thanks. That's helpful. I will get back in the queue.

Alan Ratner, Zelman & Associates.

Hey guys, good morning. Thanks for taking my question. A question on the land spend. I assume that a lot of the increase that we saw this quarter was related to deals you've committed to previously before the focus shifted more towards cash generation. But it was up quite a bit sequentially and year over year. So, just curious how we should start thinking about that over the next few quarters.

First, on the land you did buy this quarter, what's the composition of that? How quickly do you expect to monetize those investments? And should we expect to see that fall off quite a bit here in the third quarter and going forward? Or do you still have a pretty decent pipeline of committed deals that you need to take down?

I think the land spend was primarily related to deals we had previously committed to, so that part of your assumption is accurate. With respect to future land spend, I do not believe you should assume we're going to continue to spend at the level that you saw us in the second quarter. So I would go back a few quarters and ignore the second quarter, and that will probably give you a little bit better insight [sitting in your chair] as to what maybe you can model for.

In terms of monetizing the land that we've recently spent, I can't really say that I have looked at it, the percentage of how much was finished plots, how much of it we're having to do development on. So I would just be speculating, but I think there is a significant portion of it that is on communities that will be opening later this year and having an impact in 2017. But I can't give you a percentage.

Generally speaking, as Larry indicated in his part of the presentation, we're highly focused on inventory turnover. Clearly, the leader in that area is NBR, and that is an inventory turnover position we'd aspire to.

We are not quite that high, but we are the second highest inventory turnover builder in the industry, and that is because of our increasing focus on finished lots on a takedown basis. Either directly from developers, or where a developer is are not offering the properties that we would like, we do it through land banking.

So generally speaking, this is a lot of our land acquisition strategies going forward. It's also the way, as we continue to focus more on buying finished plots, again, either through developers or land bankers, how we plan to do more with lower inventories.

Great. Thank you both for those comments. My second question, if I could, on the cash balance. So, you ended the quarter a little bit below your range, your specified target range. The transactions post quarter end get you back within that, but that's going to be offset by the maturity that you repaid in mid-May. As you look at your guidance for the full year, which is helpful, what does that translate into in terms of a year-end cash balance when you factor in the profitability range combined with your expected land spend over the remaining few quarters? Thank you.

I fully expect by the end of the fiscal year that we will be back within the range that we have projected or that we have targeted, if not even slightly higher than that. So we're going to get back on track. Needless to say, the liquidity target hasn't changed even though we've paid off $320 million in debt in the last 10 months or so, 8 months, whatever it's been since October. It has inhibited our ability to stay within that range for the last couple of quarters. But by the end of the fiscal year, we expect to be well within our range again.

Thank you. Good luck.

Sam McGovern, Credit Suisse.

Hey, guys, thanks for taking my questions. I think you guys have touched on this a few times, both in the Q&A and on the prepared remarks. But just in regard to the guidance, how much of the reduction do you think was driven by changes in market conditions versus your initial expectations? And how much of that was related to the impact of your focus on deleveraging?

I'd say more of it was driven by some cost pressures that we have experienced in many markets. We've also seen some elongated cycle times. There's been a lot of pressure as the market is recovering and the contractor base is not quite there to deliver.

So as you extend some of these construction cycles, you get fewer delivers than perhaps you were expecting. In spite of the huge growth we had, frankly, we were hoping for even more growth. But the cycles have just gotten a little bit longer and that has affected things.

Finally, as we mentioned, the third factor, we are perhaps a little more sensitive than most to achieving our delivery pace, even when the conditions I just described are there. So we are probably a little more willing to incentivize and sacrifice a little margin at the moment than some of our peers. So all of those factors together I think were the driving force

Okay. Great. And then just following up on Alan's question on liquidity, I know you said at fiscal year end, you expect to get back to that target range. Obviously in January you've got the $120 million of maturities due. Should we expect then that comes back down and then it will be built back up over the course of FY17? Go ahead.

I think I alluded, Sam, that I really think that it'd probably be above the range.

Above the range, okay great. And in terms of bridging there, how much of it is the cash that you'll generate through operating the business or some of the additional liquidity levers that you guys have highlighted in the past, whether it is land banking or other levers?

A lot of it really is coming because we have a substantial fourth quarter. We have been building up our inventory, as we've shown in prior quarters, and you have seen from some of the slides. In the fourth quarter, we get a lot of those deliveries happening that is generating a lot of cash, and that is really the big driver.

Perfect. Thanks so much. I will pass it along.

I think really the only thing factored in there in terms of the levers, of any substance, is future tranches of the GTIS JV that we mentioned in our prepared remarks and in the press release.

Got it, thanks so much.

Alex Barron, Housing Research Center.

Thank you. I was seeing a slight increase in the SG&A rates versus last quarter on the home building side. I understand some of it could be due to increased revenues versus last quarter.

Are you talking about the dollar amount of spend?

I'm talking about the percentage. Sorry?

Ratio was actually down quite a bit, so I'm assuming you're talking about the dollar amount of spend.

I was focusing just on the portion that is not the corporate part. I was just comparing it versus last quarter. Last quarter I had 8.5% and this quarter I had 9%. Although, obviously, you guys improved on the corporate. So can you discuss what are the moving parts there?

One second. I will take a shot at that.

I think that there -- know that there was increased advertising that came through in the second quarter with respect to being prepared for the spring selling season, as compared to the first quarter when you're a slower part of the year. Also as you get new communities open, some of those costs come through before you get the deliveries.

And then bonus accruals would have been lower in the first quarter with operating results being lower. We accrue bonuses as profits are earned at the division level, and so there would be higher bonus accruals in the second quarter versus the first quarter.

Okay. Got it. And then my other question was on the interest incurred of $44 million, why would that be going up if your debt levels are coming down versus a year ago or versus last quarter?

It is partially related to the land banking activity. When we take a parcel of land that is on our books and sell it to a land banker and option the lots back on a just-in-time basis from a GAAP accounting perspective, that is treated as financing and the carry costs come through the interest.

Just to be clear. On other transactions where the [land banker] closes directly, then it is not expensed as interest. It is just recognizing the land cost and appears in the gross margin.

Got it. Okay. Thanks, again.

Petr Grishchenko, Imperial Capital.

Hi guys, and thanks a lot for taking my question. First, can you please help me understand the equity values used in your collateral calculations on slide 25 and 26? I'm trying to understand if the equity value in subs of non-recourse loans include the access assets of the 2% and 5% first lien notes.

No, so what those lines represent in both of the two slides, if a community has a non-recourse loan on it, we cannot put a mortgage on it for purposes of the note indentures. But the dollar value, the inventory value, book value of that property is higher than the value of the non-recourse loan. This is at incremental value over -- of the book value of the inventory in excess of the loan amount. And that would revert to the note holders once the nonrecourse loan was paid off.

Typically, the nonrecourse project-specific loans are lower loan to value. So there's significant equity remaining to support the nonrecourse debt that is put in place that accrues to the benefit of the secured holders.

Got it, but just a make sure I understand correctly, on the slide 26 when you show the assets in excess of 2% and 5% notes, this $112 million of assets, this is excluded from the calculation of the collateral you show on slide 25 of roughly $1 billion. Because I thought -- my understanding was the new collateral group is also guarantors for some of the -- the new collateral group was also guarantor for the subs.

No. The other way around. The old group is guarantor for all of our debt, including the new. The new group is only collateral for the new notes, the 2% and 5%.

That's what I meant.

I think, to answer your question, nothing on page 26 is included on page 25.

That's right. It's bifurcated between the two groups. There's the same line items between both groups.

But then the equity and the JVs, I thought JVs, some of the JVs were unencumbered or non-guarantor subs. Because you're showing $66 million. Is that -- actually, I think footnotes suggest this equity is not pledged to secure the notes, so I'm just wondering how to think of that.

It's not pledged, but it ultimately flows up into the new group. You have a security interest but it is pledged. As the cash comes back, it goes back to the new group.

Okay. Makes sense. As a follow-up, how should we think about JV deal with GTIS? You guys talked about this $25 million of [received]. How would this impact collateral secure in this during the quarter or [9018s]?

We obviously sold GTIS seven properties in May. It may have been that they actually closed on one or two of those simultaneous with us, I just don't recall. So they may not have all come off of our books.

But to the extent that we sold them properties that were on our books, what would happen is that by selling it to them, we get cash back from the new or old group, whichever group owned the individual properties. And then the investments that we make in the JV, our typical JV we put in 15% or 20% of the required capital for -- our investment in the JV would be just our investment in the JV. But the cash for selling the properties less the amount of our investment in the JV comes back to the new group or old group, depending on which one owned the properties that we sold.

Can you clarify $75 million came from old group are new group?

That $75 million, $75 million is a combination of all three items that we discussed. It's the combination of the land sales that we did in Minnesota and Raleigh to exit those markets, plus the proceeds from the first tranche of the GTIS joint venture. We have not disclosed those as individual components but in the aggregate.

Got it, okay, that's very helpful. I will get back in the queue. Thanks.

Susan Berliner, JPMorgan.

Hi this actually [Vikram Wesley] on behalf of Susan. Sticking with the questions on the JVs and the other transactions, how much of the $75 million of proceeds were from the actual exits in Minneapolis and Raleigh, and how much was from GTIS?

We're not disclosing the breakdown of -- between the JV in Minneapolis and Raleigh.

Okay. Fair enough. Sticking to the GTIS, how much more capacity do you have for those types of transactions moving forward? Is that something that we should be expecting in 2016 and 2017 and beyond?

The first thing is that it's a $160 million transaction with GTIS, and we have only closed the first tranche of it and just doing some back of the envelope math sitting in your chair, not knowing -- but if you just assume it's one-third, one-third, and one-third, and that's not 100% accurate by any stretch, we've only closed a minor portion of the JV that we've already got committed with GTIS using those assumptions. But we can do additional JVs or land banking activity.

I haven't trued up the number. I don't know if anyone at the table here remembers or has done -- but I think we said it was like $500 million at the end of January that we could do on top of the land-banking activity that we announced in November and December. And then on top of that, that is just based off our balance sheet, but obviously, we can do 100% of any future land acquisitions that we make could either be done by land banking or by joint ventures. There is no limitation to doing it. So there is no real limit.

Okay, and then that $500 million that you mentioned, that's separate from $500 million of land available for land banking that you mentioned in the past?

No, it's the same; it's land banking and/or JVs and/or nonrecourse debt.

Okay.

My recollection of a January comment.

Yes, I think I remember that comment as well. The other question was on community count and how we should think about that going forward. You closed on the sale, I think you said nine in Minneapolis and Raleigh. Now, that should decrease in the next quarter. Excluding that, should we think that community should continue decline significantly? It was a pretty solid drop off in the second quarter compared to the first quarter.

I don't think we've given any clear guidance in terms of a specific number. But clearly, we are not going to be back in a growth mode. We are focused on delevering the balance sheet and improving our performance.

So the community count, we are no longer expecting it to grow. I think sitting in your chair, I would assume it's going to be in the same ZIP Code as the levels that we were at as of the end of May. Which if you don't have the exact number, but you know that it's reduced by nine just from our sale of land in Raleigh and Minneapolis.

Okay. That makes sense. And then just touching again on the market segment commentary. We noticed that Midwest was down. Was that specifically because of the wind down of the markets in Minneapolis or was it more than that?

What are you referring to, with respect?

Orders. Orders, sorry -- orders, sorry.

I don't know if anybody has any insights. Again, as I mentioned on the call, I think certainly Minnesota was adversely affected in the quarter with the announcement that we were exiting that market. So that probably has some impact on it, and there may have been a delayed opening in Illinois. Ohio I think was pretty strong. So I think it is primarily Minnesota and to a lesser degree, Illinois.

Okay. That works. Thank you.

(Operator Instructions)

Nishu Sood, Deutsche Bank.

This is actually Tim Daley on for Nishu. I will continue along with the order trends. I am just looking at the cumulative net orders in the last three months that you guys have provided to us on a both ex-JV and included JV basis. It looks like including JVs, it's down about 6% and ex-JVs down about 3.5% year over year. It seems to contradict the stories that we're hearing from other builders and the macro data that basically a late spring selling season is where the strength has been.

Obviously, in March there were five Sundays versus four and you exited these markets in Minneapolis, which you said occurred later on and had an adverse affect. But could you just talk us through the general outlook for order trends in the spring selling season? And if this is a truly contradictory or more idiosyncratic on your end.

In terms of the key measurements, really, it's sales community and that was positive. So that is the best measure. Obviously, if we shrank our community count, which we did, that would have an effect. So it's really weighing those two. But overall, we did see a decent spring selling season, as evidenced by the increasing sales per community base.

Understood. Quickly on the absorption pace, but when I look at it month -- year over year for March and April, absorptions for the ex-JV bucket actually were flat and then picked up only in May. Was that maybe due to the absorption pick-up due to the exiting of the markets? Or was that due to a trend that we should expect to continue into the spring selling season as you get more efficient with less communities?

That's a hard one to answer. I don't think it really had anything to do with exiting the markets, because this is on per-community basis data. So it was really flat excluding unconsolidated JVs in March and April and picked up in May. So I would like to think that the May trend will continue rather than the flat March and April trend. But it's just a market nuance. It's nothing that I think was specific to us.

Again, any month is obviously subject to a little fluctuation. In fact, a lot of builders do not even release that level of granularity just because of that point. But if you look at over the 12 months that are here, I think eight or nine of them are up, two were flat. Only one was down and that was a year ago. So I'd say overall, the market in terms of sales pace per community, has felt solid and clearly, we think we will end this year at a higher sales pace per community than we had last year.

All right great. Thank you for that.

I'm showing no further questions. I would like to turn the call back over to Ara Hovnanian for closing remarks.

Great, well thank you very much. Again, as I pointed out, it is a little discouraging to still report a loss for the quarter. It was nonetheless a dramatic improvement from last year's second quarter and just one more step for us to reporting solidly profitable full year. And we'll look forward to giving more positive result in the next two quarters coming up. Thank you very much.

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