Hovnanian Enterprises Inc (HOVNP) 2017 Q3 法說會逐字稿

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2017 Third Quarter Earnings Conference Call. An archive of the website will be available after the completion of the call and run for 12 months. This conference call is being recorded for rebroadcast. (Operator Instructions) Management will make some opening remarks about the third quarter results, and then open up the line for questions. The company will also be webcasting a slide presentation, along with the opening comments from management. These slides are available on the Investors page of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time. Before we begin, I'd like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Candace, and thank you, all, for participating in this morning's call to review results for our third quarter, which ended July 31, 2017. 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 provisions 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 achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. 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 future financial periods. 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 and 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, uncertainties and others are described in detail in the sections, entitled Risk Factors and Management's Discussion and Analysis, particularly the portion of MD&A, entitled Safe Harbor Statement, in our annual report on Form 10-K for the fiscal year ended October 31, 2016, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, change in circumstances or any other reason.

Joining me today from the company are Ara Hovnanian, Chairman, President and Chief Executive Officer; 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'll now turn the call over to Ara. Ara, go ahead.

Thanks, Jeff. I'm going to review the operating results for the third quarter, and discuss our current sales environment. Larry will follow me with a little more detail and discuss a few other items, including our liquidity position as well as the impact the loss on extinguishment from debt had on our deferred tax asset.

Third quarter operating results were in line with our earlier guidance. For many quarters, we discussed the impact of exiting 4 underperforming markets and temporarily reducing our land spend, while paying off $320 million of maturing debt last year. Those actions led to a decrease in our community count, which in turn impacted contracts, deliveries and revenues throughout fiscal '17. Fortunately, the overall housing market continues to gain strength. Contracts per community continue to increase each quarter, which is illustrated by the 12% increase we saw in this most recent quarter, our third quarter. In fact, our contracts per community have increased so much, that despite the community count reduction I mentioned a moment ago, we've had more total monthly sales in 4 of the last 5 months compared to the same period last year, and that includes the recent month of August. Obviously, most of the new sales will deliver in future quarters.

On Slide 4, we show total consolidated revenues in gray and joint venture revenues in blue. And as we've also discussed previously, we've been more active in joint ventures over the last year. Including joint venture revenues, our revenues declined 12% and 4% for our most recent quarter and year-to-date, respectively. We converted 17 communities to joint ventures since the third quarter of fiscal '16.

Turning to Slide 5. You can see in the upper left hand portion of the slide that our adjusted gross margin was just slightly below last year's third quarter at 16.8% compared to 16.9% in the same quarter a year ago.

Moving over to the upper right hand quadrant. Our SG&A decreased 8% from -- during the quarter from $67 million to $61 million. However, the 17% reduction in our wholly owned revenues, because of that, our SG&A ratio grew to 10.3% during the third quarter this year compared to 9.3% during the third quarter last year. In the lower left hand corner of the slide, you can see that total interest dollars declined 17% to $43 million.

And finally, in the lower right-hand corner of the slide, we show that we had a small pretax loss before impairment and loss on extinguishment of debt of $3.7 million for the third quarter compared to a small pretax profit of $2.7 million in last year's third quarter.

Let me take a minute to address our gross margin in a little more detail. On the far right-hand side of Slide 6, you can see that despite the 10 basis point decrease in gross margin for the third quarter, our gross margin is up 30 basis points year-to-date. However, as you can see by comparing it to the annual data on the left-hand portion of the slide, we're still well below the 20% normalized level. You can see we achieved that as recently as '13 and '14.

In the overwhelming majority of our communities, we've been able to raise our home prices. However, higher construction cost continue to negatively impact our gross margin. The supply of labor definitely remains tight, and there's still some cost pressure, but not quite as much as there was last year. We are now beginning to feel the impact of rising material costs primarily because of lumber tariffs. These rising construction costs will have some impact on the gross margin for deliveries on land we already own. However, the higher lumber costs and labor costs are factored into all new land acquisitions that we're underwriting today. The increases in labor and material costs are an issue that has affected our entire industry.

On Slide 7, we show the trailing 12-month gross margin for 14 of our peers, plus our own. Eleven of our peers reported year-over-year declines in gross margin. Two builders reported flat gross margins, and Hovnanian and one other builder reported minor year-over-year increases.

I've already mentioned community count. If you turn to Slide 8, you can see that our -- you can see our community count for the last 5 quarters. As I also mentioned earlier, the declines you see are also -- are primarily a result of the steps that we took in '16, again, to pay off the $320 million of maturing debt, including our decision to reduce our land spend and exit 4 of our underperforming markets. Our community count decreased sequentially each quarter in '16 and the first 9 months of '17. Reflecting a continued improving housing market and compensating for the decline in community count, on top of each quarter, we show an arrow with year-over-year percentage increase in contracts per community for those quarters. On the far right-hand side of the slide, we show that our contracts per community increased again, rising 12% during the third quarter this year. We reported increases in contracts per community for each of the 5 quarters that you can see on this slide.

Slide 9 shows the absolute number of contracts as opposed to contracts per community for the months of April through August. Here, we show the most recent month in blue and the same month a year ago in gray. For 4 of the 5 months shown, we've had more contracts this year than we did for the same month a year ago. Considering that we exited 4 markets and had a 13% decline in community count, we're pleased with the overall sales.

Slide 10 shows our contracts per community on a monthly basis. Once again, we show the most recent month in blue and the same month a year ago in gray. For 11 of the last 12 months, contracts per community were equal to or better than the same month of prior year. The positive momentum we've seen for the last 12 months remains strong.

On Slide 11, we show contracts per community by our geographic segments. This slide shows contracts per community were up year-over-year in 4 of our 6 segments, leading the way were our Southeast and West segments, with 52% and 68% increases, respectively. Our Northeast segment had strong year-over-year growth at 33%, and our Midwest segment was not far behind with 22% growth. Improvements in pace per community will definitely help us get back to profitability faster. It allows us to increase our operating leverage because we obviously get benefits from the extra deliveries from the existing communities without having to add much, if any, SG&A cost.

On Slide 12, we show contracts per community for the last several years, as well as for the trailing 12 months. On this graph, you can see our historical norm of 44 contracts per community. We chose a period as we've done in the past of '97 to '02 because these were neither booms or bust years. You can see the steady progress of contracts per community. We're definitely feeling the positive momentum but we're still well below historical norms. There's a lot of upside to come if history repeats itself. When you look at contracts per community on a monthly basis or on a quarterly basis, our sales results definitely reflect a strengthening housing market.

We're working hard to replenish our land supply. Our land acquisition teams remain very busy throughout the country. On Slide 13, you can see that year-to-date, we increased our net new options by 5,249 lots this year compared to last year. On the bottom portion of the slide, you can see the activity for the most recent quarter. Year-over-year, we increased net new options by 2,234 lots this quarter. Those are significant increases for the quarter and the year-to-date. Our underwriting assumptions use current sales price, current sales pace and current costs. We stay disciplined, and we're not stretching for transactions that don't make sense based on current conditions. We try to control as much land as possible through options, which is consistent with our continued focus on high inventory turns and return on capital.

Turning to Slide 14. You can see that in addition to optioning lots, we've also been busy purchasing new lots. On the top of the slide, we show that during the 9 months of fiscal '17, we purchased 4,894 lots, which is 25% more than we purchased in the same period a year ago. And on the bottom portion of the slide, we show that during the third quarter of fiscal '17, we purchased 1,470 lots, which is 60% more than we purchased in the third quarter of last year. Once we control the land, there's still a significant time lag from the initial contract to the time when the community ultimately opens for sale. This time lag can vary significantly from a few months in a market like Houston to a few years in a market like New Jersey. Given the mix of land that we control today and what we anticipate controlling, we continue to expect our community count will grow sequentially in the second half of fiscal '18. We demonstrated in 4 of the last 5 months, we can sell more homes with a lower community count. When additional communities are added, we should experience even larger increases in absolute number of contracts each month. Once community count begins to grow, delivery and revenue growth will follow a few quarters later. I'm now going to turn it over to Larry, our Executive Vice President and Chief Financial Officer.

Thanks, Ara. If you turn to Slide 15, I'm going to provide an update on Houston. I'll start with a view of our performance for the most recent quarter, and then update you on the impact of Hurricane Harvey.

Despite the fact that we have had over 2 years of significantly lower oil prices, our Houston operations continue to post solid results. Here, we show contracts per community for the trailing 12 months, ended July 31, for the current period and the same period for the prior 3 years. As you can see, the 27.3 contracts per community per year for the current period is the highest on the graph. During the third quarter of 2017, we had 6.8 contracts per community in Houston compared to 6.9 contracts per community in last year's third quarter.

As I've said on prior calls, there are 3 things that set our Houston operations apart for many of the builders we compete against in that market. Number one, we focus on a lower average price point. Our average home prices in Houston delivered for the third quarter of 2017 in Houston was approximately $303,000, which is lower than most of our competitors. Number two, we do not build in any of the highly competitive master-planned communities. And number three, we have less exposure to communities in the energy corridor in Houston than many of our peers.

Much of our success in Houston has to do with the quality of our local Houston management team. Despite continued success for our Houston operations, we will keep a close eye on the market and we're prepared to take appropriate actions, should circumstances change.

Now let me update you on what's going on in Houston with respect to the impact from Hurricane Harvey. The first day the rain stopped was Wednesday afternoon, August 31, and by Thursday morning, we had boots on the ground in each of our 45 communities. Given the widespread destruction that we have all seen on television, we are very fortunate that less than 10 of our homes and only 2 of our communities experienced flood damage. In other communities, we experienced minor wind damage primarily related to roofs, but nothing too significant. We don't anticipate material flood-related expenses. The storm will cause delivery delays, impacting our fourth quarter. However, we have not seen cancellation of homes already sold. So we expect the homes closing delayed from delivering in the fourth quarter will take place in fiscal 2018.

Our Houston team is quite resilient. On Thursday and Friday of last week, we delivered 13 homes in Houston. We even took a contract on Wednesday, August 30, and sold additional homes over the weekend. One of the homes sold was a spec home in our hardest hit community. This home had no flood damage and the person who signed the contract to buy the home figured if it didn't flood now, it likely never will. Clearly, we are back in business in Houston, and residents who saw their apartments or homes flood may soon be looking to purchase a new home. While Houston residents are currently dealing with the aftermath of this horrific storm, the long-term prospects of the Houston housing market remain quite strong. However, we anticipate that there will be strains on both the supply of building material and skilled labor as the Greater Houston market attempts to dig out from the impacts of Hurricane Harvey. Inevitably, we will have construction delays that will adversely affect our fourth quarter deliveries. The storm will also delay the ability of land developers to deliver finished lots. At this point in time, it is impossible to predict just how impactful those construction and land development delays will be, as well as the impact the storm will have on labor and material cost.

Another issue that has occurred, one that you've likely already heard about from other builders is related to Flak Jacket I-joists, coded with a certain type of fire-resistant product that were manufactured by Weyerhaeuser. Our exposure to this product is limited to 63 homes in Delaware and New Jersey. It will likely push the closing of these homes into future quarters or result in contract cancellations. Although we do not yet know the ultimate impact to our business, we do not believe we will incur any material expenses or charges as a result of this issue. Lastly, we have already stopped construction of homes in virtually all of our communities in Florida. Our crews are busy battening down the hatches to prepare for Hurricane Irma's landfall this weekend.

Turning to Slide 16. You will see our owned and optioned land position broken out by our publicly reported market segments. At the end of the third quarter, we controlled 13,528 consolidated lots through optioned contracts. Many investors mistakenly believe that the majority of our land options are held by land bankers, which certainly is not the case. At the end of last year's third quarter, our land bank lots peaked at 16% of our total lot options, and have steadily declined only 8% of our lot options by the end of July 2017. Our investment in land option deposits was $49 million as of July 31, 2017. Additionally, we have another $10 million invested in predevelopment expenses. Looking at all of our consolidated communities in the aggregate, including mothballed communities and the $139 million of inventory not owned, we have an inventory book value of $1.2 billion net of $371 million of impairments.

We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory. This metric neutralizes the impact of debt. On Slide 17, we show the trailing 12-month adjusted EBIT to inventory for us and our peers. This ROI metric measures pure operating performance before interest expense, and we remain in the top quartile when compared to our peers. We and the entire industry are still not at normalized ROI levels yet, but this will improve as we get further into the recovery. One of the ways we're able to achieve this is with a focus on inventory turns.

On Slide 18, you can see that we have the second highest inventory turnover rate over the trailing 12 months compared to our peers. We're behind NVR, and substantially above the ones below us.

You can see on Slide 19 how our inventory turns have improved from 6 years ago at 1.1x to 3 years ago at 1.5x to the most recent trailing 12 months at 2x. As we continue to reactivate pre-bought communities, our inventory turns should improve even further. We are focused on maintaining or improving our inventory turnover.

Another area for discussion for the quarter is related to our deferred tax asset valuation allowance. During the third quarter of 2017, we took a $42 million loss on extinguishment of debt associated with our bond refinancings. This created a 3-year cumulative loss for purposes of assessing the realizability of our deferred tax asset in accordance with GAAP. As a result of this analysis, we recorded a $294 million noncash increase in the valuation allowance for our deferred tax asset, which is now fully reserved. At the end of the third quarter of fiscal 2017, our valuation allowance in the aggregate was $922 million. Our deferred tax asset is very significant, and is not currently reflected on our balance sheet. We've taken numerous steps to protect it. A number of investors inquired about when our DTA will expire. None of our DTA expires within the next 12 years. At the end of the 12th year, only 16% expires. We are confident that we can generate more than the $320 million of pretax profits between now and then to fully utilize the portion of the DTA that expires at that point in time. Furthermore, 44% of the DTA expires between 13 and 15 years, and 13% expires between 16 and 20 years. The remaining 27% does not expire for more than 20 years from now. Assuming no significant changes in tax rates, we continue to believe we will be able to generate sufficient income to fully utilize our DTA prior to expiration. We will not have to pay cash federal income taxes on approximately $2.1 billion of future pretax earnings. I know this sounds like a lot of pretax profit. But keep in mind that between 2002 and 2006, we earn $2.2 billion in pretax profits.

On Slide 20, we show that we ended the third quarter with a total shareholders' deficit of $471 million. If you add back our valuation allowances we did on this slide, then our shareholders' equity would be a positive $451 million. If you look at this on a per-share basis, it's $3.05 per share, which means that at yesterday's closing stock price of $1.86, our stock price is trading at a 39% discount to adjusted book value per share. Over time, we believe that we can repair our balance sheet and have no current intentions of issuing equity anytime soon.

As we look at our maturity ladder on Slide 21, you can see the significant impact our bond refinancing had on our runway. The top portion of the slide shows what our maturity ladder looked like at the end of our April quarter. On the bottom half of the slide, we showed that instead of having $800 million of debt maturing in the fall of 2018 and 2020, we split up and pushed out that maturity. Now we have $440 million due in July 2022 and $400 million due in July 2024. We are running the business today, planning to pay off the $57 million of notes due in December 2017, the $52 million drawn on our revolver and the $15 million to -- in letters of credit under the revolver, due June 2018, all with cash. Furthermore, we are constantly reviewing the capital markets, and are currently focused on refinancing opportunities for our unsecured debt. When we believe the timing is appropriate, we will refinance these bonds.

Slide 22 shows a list of the many liquidity levers we have used in the past and remain at our disposal today. These liquidity levers allow us to control more lots for future deliveries than we could use -- than we could using only our capital. We did not enter into any new land banking or joint ventures during the third quarter, but we do have more joint venture communities today than we did 1 year ago. We expect that our JVs will begin to contribute to our earnings in a positive way in fiscal 2018. Additionally, we have lowered our nonrecourse loan balance by about $11 million this year alone. Given our excess cash position, we've not been pursuing some of the alternative sources of liquidity as aggressively. Should we decide to increase our use of these liquidity levers in the future, we have strong relationships and continue to develop new relationships with alternative capital sources, including land banking, project-specific nonrecourse debt, joint ventures and model sale leaseback financings.

As Ara mentioned earlier, during the third quarter, we optioned 2,243 more lots and purchased 551 more lots than the same period last year. And for the first 9 months, we optioned 5,249 more lots and purchased 984 more lots than the same period last year. We spent $150 million on land and land development in the third quarter of 2017, which brings our 9-month spend to $440 million, slightly more than we spent in the same period a year ago. When we have given our land spend number in the past, it's always been net of any changes in a nonrecourse-specific -- project-specific debt because this shows the cash impact of dollars that we spent on land and land development. Lately, we have had excess cash, so we've relied less heavily on this nonrecourse debt.

On Slide 23, it shows our gross land and land development spend, as well as the net spend after financing for the first 9 months of 2015, '16 and '17. Since nonrecourse levels are dropping due to our excess liquidity position, we believe that the gross number is more indicative of dollars that we are putting into the ground for future deliveries. As such, our gross land and land development spend in 2017 is more than it was last year. Of course, as we mentioned earlier, we still have an ample supply of mothballed lots, which are regularly coming into production.

As seen on Slide 24, we ended the third quarter with liquidity position of $288 million, which is in excess of our liquidity target of between $170 million and $245 million. Since we would rather be at the low end of the liquidity range, this illustrates the discipline we are exercising when underwriting new land deals. Due to the impacts from Hurricane Harvey, we don't know how many homes we will deliver in Houston during the fourth quarter. Addedly, many scheduled for the fourth quarter will now slip into our next fiscal year. It is the same situation for homes affected by the Weyerhaeuser Flak Jacket Joist. And for our trifecta, we now expect Hurricane Irma will impact fourth quarter deliveries in Florida as well. The small bright spot is our exposure in Florida is not as large as it is (technical difficulty). As a result, we will not provide specific guidance for the fourth quarter at this time. I'll now turn the call back over to Ara for some brief closing comments.

Thanks, Larry. We started the call by pointing out the impact of our declining community count and the effect on our most recent results. Despite the decrease in community count, the total number of contracts for 4 of the past 5 months was greater this year than for the same months last year. This demonstrates the growing strength of the housing market, as it continues its journey toward normal, and bodes well for our future performance. These kind of improvements will lessen the impact of a declining community count on our operations. It also allows us to increase our operating leverage because we get the benefits of those extra deliveries, as we said before, without having to add much, if any, additional SG&A. Certainly, it's a helpful step toward improving our operating efficiencies and profitability. There'll be an even greater impact in our future results once we begin to sequentially grow community count in the second half of next year. These additional communities, when combined with more contracts per community, should allow us to grow our revenues even further, and we should see more profits flow through the bottom line. I look forward to reporting these improved results in future quarters. Thanks very much. This concludes our formal comments, and I would like to open it up for questions.

(Operator Instructions) And our first question comes from Arjun Chandar of JPMorgan.

First one is to drill down a little bit more on land spend. Can you talk a little bit more about your thoughts heading into the end of the fiscal year, you're at $440 million through the first 9 months. Do you expect land spend in fiscal '17 to be higher than fiscal '16? And you mentioned the strong absorption numbers. To what extent are you concerned that if the right land opportunities do not present themselves over the next 3 to 6 months that it will become more challenging to increase community count sequentially in the second half of fiscal '18?

Yes, I think we have the capital to increase our land spend in '17 more than '16. We continue to expect to do that, but at the same time, we're going to remain disciplined to make sure that all new land deals meet our underwriting criteria. I think we're seeing opportunities in most of our markets throughout the country, and we've been very busy on land committees. So I think we'll be able to achieve our goals.

Our strategy, as you know, is a widely diversified product array. The -- our challenges to that, it's harder to execute high end, low end townhouses, singles, et cetera. The positive to that is we can really look at every opportunity in a marketplace, whether it's an active adult or a townhouse or a single-family, a low end, high end. And overall, as Larry is pointing out, we've definitely seen opportunities out in the market.

And then just as a follow-up regarding Houston, can you give us a sense -- and I know it may be a little early to quantify, and I appreciate that you're not giving formal guidance for Q4 and in anticipation of the deferral of deliveries. But on a percentage basis, how should we think about the number of deliveries that could potentially be deferred into fiscal '18 from Q4 of '17?

Yes, it is unquantifiable at this point. Houston is a little less than 25% of our overall company. So we just don't know what the impact on construction is going to be. So I really can't give you any guidance beyond what we've done. Now is to tell you, we're confident there's going to be some delays. Having said that, we have a very impressive Houston management team, and they're scrambling as hard as they can to try to make sure that construction schedules continue to be met. It's just unquantifiable at this time.

And our next question comes from Megan McGrath of MKM Partners.

I guess, first of all, maybe a big-picture question on the community count and absorption. You note in your one chart that we're still well below that 44 pace. Just curious, is there a limit now? You've been growing your absorption pace pretty fast. You've got labor shortages across the country. Could we even get to that 44, given the current restraint? Or how should we think about sort of the ability to keep growing that absorption pace?

Sure. I mean, as you know, Megan, we've been around for almost 60 years, so we've certainly seen a lot of these cycles. If we grew from the current pace to 44 next quarter, that would be a challenge for anyone in any part of the market. The reality is that the market's going to slowly get to normal. Frankly, the market will get to over normal. I mean, the peak of the market are -- and for multiple years, our absorption was well over the 44. That's the non-boom, non-bust year. So clearly, it would be a challenge if we did it instantly. The plans are not to do it instantly. And if there is sufficient demand and we're not able to get the labor to build them, homebuilders will do what everybody does in economics 101, and we'll let the market balance by raising pricing, which would help us in that way, but now I fully expect eventually the market will get to a normal pace. It's not what we budget, but we fully expect that, that will happen over time.

Okay, great. And then I guess maybe if you could give more color kind of geographically, it's a little hard to see the trends of that community count, the market as it is, and things like that. So maybe highlight any particular areas of strength there or any markets that are showing any weakness would be great.

Sure. Overall, both Southern and Northern California are certainly strong. Houston and Dallas remain strong. Our Houston operations have just been particularly amazing in light of what's happened in oil over the last couple of years. We see a stronger Virginia market, although the Maryland side has been a little softer, and the Chicago market has been a little softer. Now those are the ones from the top of my head that kind of standout above or below in terms of the overall market.

And our next question comes from Sam McGovern of Crédit Suisse.

I'm glad to hear that the damage was fairly limited and your team members are safe. With regard to the longer-term impact, how do we think about what the magnitude and potential duration of the impact would be to labor and material increases?

It's just so hard to quantify. Obviously, first of all, it's just -- the floods have just receded. So this is really new, and it's hard to quantify how labor will be affected. Clearly, there's going to be a strain on labor, and there are 100,000 homes that are damaged throughout Houston, and there'll be a lot of people focused on cleaning up and doing some kind of damage repair on many of those homes. So I'd say it's just very early. The positive is that we haven't heard of any people wanting to cancel. Interestingly, they've actually sold new homes already. In fact, the day after the storm passed, we started selling homes. So that's all positive. And in theory, some people that were affected, some of the 100,000 homes that did have floods may decide that they'd rather buy in a new community, which generally is at higher elevations and less prone to flooding. So there should be some positive long-term impact from that perspective. Clearly, short term, there'll be a strain on the labor supply, and it's just impossible to quantify it this early right now. I mean it's only been a few days. It's just too hard.

Got it. And with regard to Slide 22, the liquidity levers, always very helpful to have that as a reminder. I was hoping that with regard to the individual levers that you guys have there, if you guys could give us some indication in terms of how much availability you guys have under each of those levers.

I mean there's not a specific amount. There's not a really on newly identified communities. There's not any limit. And I'd say, in general, there have been more land bankers coming into the marketplace than we had a year ago, and certainly more than 2 years ago. Really, we've been doing a little less of it just because we've had so much excess cash over the last few quarters. Larry will describe in a moment maybe the limitations, the only one -- on land that we already own, but frankly, we don't really have plans to land bank land we already own. Similarly, we're just seeing in general, more interest in doing joint ventures going forward. I think a lot of investors see us as a housing industry still early in the cycle compared -- obviously, not if you count years, although compared to the last cycle, which is 15 years, you could still say it's early. But in regards to how many homes are being produced compared to historical norms, we're way under. Compared to demographic household formations, we're way under, and compared to new demographic projections which count on the millennials are finally coming into the marketplace, we're way under. So people just feel good about those opportunities. And the last one I'll talk about is nonrecourse project-specific loans. We don't really have a limit on new properties, and there are more and more banks willing to get into that marketplace. That's my quick comment. But Larry, you want to give a little more detail?

Yes. Just on the land banking, as Ara said, we have no limits on land banking, newly identified land parcels we've not previously owned. With respect to land banking something that's currently on our balance sheet, we're limited to no more than $10 million a quarter or in the aggregate, $50 million if we don't use it in a particular quarter. And with respect to the nonrecourse financing on new properties, although we're not limited, we do have to put the debt financing on within 90 days of acquiring the land.

And our next question comes from James Finnerty of Citi.

Just on the insurance front, just so we can understand, how does that typically work if you have a claim? And what's the timeframe for actually getting funds from insurance companies in these kinds of situations?

You're talking about like a flood insurance claim? Is that what you're pulsing on?

Yes, flood damage to your inventory that you have not yet sold.

Yes. I mean, we would just notify the carrier of the claim, and within a relatively short period of time, they pay. It's a pretty straightforward process. Shouldn't take longer than 30 days or so.

But again, we just want to emphasize, we just did not have much physical damage in Houston. Obviously, nobody knows yet what's going to happen in Florida. But by comparison, we deliver a couple of thousand homes in Texas. We deliver a few hundred homes in Florida. So our exposure is dramatically less there.

Okay, great. And then as -- moving on to community count. You're guiding for quarter-over-quarter growth in the second half of next year. I think you said that's -- gave similar guidance last quarter. So going into year-end and the first half of next year, is it -- should we think about community count declining slightly by single -- low-single digits? Just so we can get some help modeling out community count?

No, I mean, I don't think we're going to give you any specific guidance there. The trend's been slightly down. It's a difficult number to give an absolute projection on because, as you sell faster, like we've been doing, you sell through communities and that can affect the number of remaining communities, so the pace continues to strengthen. It could change that number. We had delays and open communities could affect that number. But if I'm sitting in your chair, I think you can generally look kind of what the trends have been, and the guidance that we've given you is that, that trend is going to stabilize and begin to go up in the second half of next year.

Okay, great. And just one last question. In terms of the unsecured refinancing you stated that you're looking and you're going to do it when it's appropriate, is there a timeframe where you feel that you need to or would like to do it by like sort of July of next year or is it -- sort of just any color there would be helpful.

I mean, closer and closer to maturity, obviously, there's more of an urgency to deal with it. But we don't feel that there's a pressing need to do something until the timing is appropriate and the terms are appropriate at this stage.

Overall, our recent issues are trading very well. We feel very confident about our future performance coming up. So we're just not feeling the urgent pressure to do something right at this moment.

(Operator Instructions) And our next question comes from [Sean Monaghan] of Duane Park.

Just been curious in terms of past floods, I know Houston's had some 500-year floods over the past 4 years. What have you seen in terms of price increases from different labor trades?

I don't think we've seen a flood in Houston in the last 20 years that has anything close to the impact of this particular flood. I think it's unprecedented historically. But in past floods, we've been able to come through it fairly unscathed. We've seen some delays and some cost pressures, but I don't think that's a good indication of what this flood's impact is going to be.

Now I will say this. We give a bit of latitude to our divisions to decide whether they'd prefer to be more spec-home-oriented or advanced-order-oriented. It just so happens that our Houston division prefers not to have a big backlog, but to do more of their sales from spec homes. So the benefit of that in this particular case is that they're not locked on sales price, while construction costs could be rising and they do have an opportunity to consider home price increases if they do find their construction costs go up too greatly. So that's typically what happens. Again, it's just too early to know what those impacts are going to be. There are so many dynamics in each market, and each time, it's hard to predict.

And I guess my last question, I mean, if you look at where we are in terms of average sales price increases for the whole space over the last couple of years, where do you think we're kind of topping out? Or do you guys still think you have the ability to raise home prices as much as you have given affordability factors?

Well, it's a good question, and I'll answer it in numerous ways. First, the important thing is to look at the Affordability Index, and that measures the average family income compared to the cost of -- the monthly payment cost of a median home price. That is still quite affordable. Generally, across the country, obviously, different markets are different. Silicon Valley at the moment is more unaffordable, as are some of the hot spots maybe along the coasts. But generally speaking, national affordability -- the National Affordability Index is better than it has been for many, many of the years over the last 2 decades. But the other important thing to remember, I mean it just so happens I started my personal career right before the 1981 mortgage rate increases. Mortgage rates then hit 18%, and I say that because that affected affordability more than home prices. What we witnessed then, and I think we may witness either with home price increases or with mortgage rate increases, is that people will shift over time their expectations into homes. At that time, we were selling a lot of townhouses because that's -- as home prices went up or -- and as mortgage rates in that case went up, that's what was affordable. And since the primary market for home purchases is shelter as opposed to a discretionary purchase, people will buy what they can afford to buy or they'll move further out. In every one of our communities, we offer more than one model type. People will have a choice of a home that might be 1,500 square feet all the way up to a home that might be 2,500 square feet. As prices go up, they may have to set their expectations on a slightly smaller home or perhaps fewer upgrades. Perhaps, a European cabinet may not be affordable for them. But if they need to change their home, they're growing a family, they've started a new household, whatever that reason might be or they want to downsize from a much larger home because their children have left, then they will make a purchase. They may just have to adjust what they purchase, and that's what we've seen historically over time as different events and prices and rates occur in the marketplace.

And our next question comes from Lee Brading of Wells Fargo.

You guys clearly have done, as you highlight the improvement on the contracts per community, I'm looking at the slide, I was wondering if you can drill down a little bit more maybe on the geographic mix, or operationally, is what I'm trying to get is, is there something nuanced you guys are doing differently? Or it just happens to be the market, something like at the local level that you're doing to drive the improvement in the absorptions?

I think it's -- I mean we're, obviously, focused on absorptions, but it's clearly just a sign that the market is strengthening. Just want to point out again that it is definitely strengthening. We've seen it quarter after quarter. Our absorption's been going up for many, many quarters now, but we're still not at normal. So we think there's still a lot more upside room, and that's just reflective largely of the marketplace. We are focused, in general, on inventory turnover and keeping sales going, and pace per community going is part of that overall formula.

Yes. One other thing that we embarked upon at the beginning of this year was a very comprehensive new sales training program, and I think some of the increased absorptions that we're beginning to see some payoff from that comprehensive national sales training program that we're putting into place. But I agree with Ara that the majority of the improvement is related to the markets just warming up.

Got you. And then the mothballed lots, I was wondering if you could talk about the opportunity there kind of the status of where those stand.

Well, I mean...

So I think, as we pointed out, our largest segment of mothballed lots is on the West Coast, and that's somewhat helpful because that's been a pretty strong market. So we've got a fairly good history of bringing the mothballed lots into production and being active. But we're continuing to do that, really, almost every quarter. You're seeing that number goes down -- going down as we either bring them into production, which is most often the case, or in some cases, we will sell some mothballed lots to someone else.

Yes. 2,900 of our mothballed lots are in California, and we only have 3,700 total mothballed lots. So the vast majority of them are in California and we've been, as Ara said, un-mothballing pretty regularly every quarter.

And our next question comes from James Finnerty of Citi.

Just a follow-up on the insurance, just to make sure I understand it. With the properties that have been damaged by wind in Houston, and potentially, into Florida, is that also covered by insurance? And is there a deductible associated with that?

Yes, and yes.

Okay, great. And then just on cash and liquidity, heading into year end, I know there's a lot of moving pieces. Should we expect liquidity to go up like it typically would in the fourth quarter? Or is it too hard to predict given all the impacts from the hurricane?

I'd say the latter is the issue. I mean we just don't know how many deliveries we're going to get. So it's really hard to predict the cash balance when you're not confident in the number of deliveries you're going to get.

But typically, it would go up in the fourth quarter, absent ...

Typically, it would, yes.

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ara Hovnanian for any closing remarks.

Thank you. We're continuing to work hard. We're bracing for the hurricane in Florida. We're obviously concerned about our associates there, and that's what we have first and foremost on our mind as the storm is coming. The market's continuing to strengthen overall. Obviously, it helps to have some tailwinds, and we're feeling the effects of it. We're seeing it in sales now, which is the lead indicator versus deliveries which is a lagging indicator. We'll look forward to reporting some good results as this market continues to climb back to normal. Thanks very much.

Ladies and gentlemen, this does conclude our conference call for today. Thank you, all, for participating and have a nice day. All parties may now disconnect.