Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2007 First Quarter Earnings 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 [Donald Roberts] at 732-383-2200. We will send you a copy of the release and assure 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 two weeks. The replay can be accessed by dialing 888-286-8010, pass code 52966380. Again, the replay number is 888-286-8010, pass code 52966380. 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 line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investor's 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 would like to remind everyone that the cautionary language about forward-looking statements contained in the press release, also applies to any comments made during this conference call and to the information in the slide presentation. I would now like to turn the call over to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Thank you. Good morning, and thanks for participating in today's call to review the results of our first quarter ended January. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO; Paul Buchanan, Senior Vice President and Corporate Controller; Kevin Hake, Senior Vice President and Treasurer; Brad O'Connor Vice President and Associate Corporate Controller; and Jeff O'Keefe, Director of Investor Relations. For those of you viewing our slides at www.khov.com, please turn to slide number one. Prior to the effect of charges related to our Fort Myers-Cape Coral operations, pre-tax earnings for the first quarter were $26.7 million, equivalent to $0.20 of net earnings per fully diluted common share. This is above our previous guidance of earnings between $0.05 and $0.10 per fully diluted share in the first quarter. This is based on deliveries for the quarter, excluding unconsolidated joint venture deliveries of 3,266 homes. We also delivered 289 homes in our unconsolidated joint ventures in the quarter. During the quarter, we incurred $93 million of pre-tax charges related to the company's Fort Myers operations due to a continued substantial decline in sales pace and general market conditions, as well as increasing cancellation rates during the quarter. The charges consisted of $42 million in inventory impairments, and a complete write-off of the remaining balance of intangibles associated with the acquisition of Fort Myers, which occurred in August 2005. After these charges, we reported a net loss of $57 million for the first quarter of fiscal '07, or $0.91 per fully diluted common share, compared to earnings of $81.4 million or $1.25 per fully diluted common share in last year's first quarter. In addition to the charges related to the Fort Myers operation, we incurred $4.6 million of impairment charges on land owned and $3 million in…

Thanks Larry. I want to reiterate that we are not being overly optimistic in calling for a recovery. What we are talking about here is finding a bottom. The initial data that we have regarding the first four weeks of our spring selling season, combined with the market data are showing some positive trends that we may be getting close to a bottom. Again, we also don't expect a quick recovery. We expect to remain in a range near the bottom for a bit. Before I turn it over to questions, let me walk through a quick list of some of the markets that are relatively stronger or weaker than others. In terms of bad markets for us, the Fort Myers market is definitely our worst market today. It is followed closing by our operations on the East Coast of Florida and in the greater West Palm Beach market. Our Southern California markets are still struggling with some locations better than others and most locations seeming to have at least found some price stabilization. Houston and Dallas continue to hold up better than other markets. And until recently we would have put North Carolina in that category, but they've generally gotten a little softer over the past couple of months. While the North Carolina markets are still doing relatively well, they continue to be highly competitive at all times. We are seeing increasing strength in the DC market on both sides, but particularly in Virginia, as well as certain locations in New Jersey. In these markets, we're actually performing reasonably well and we are happy with the direction of the sales pace and pricing right now. What we are looking for is stability in both pricing and absorptions. We've just started the selling season. But I can say that the stabilizing trends experienced during our first quarter have remained fairly steady through the month of February. With the dollar value of net contracts up 4.3% in February, things are feeling a little better today than they did in mid-to-late '06. I am hoping we might be there right now, but we'll see over the next couple of months, how this plays out. Obviously, every market is a little different. We are maintaining a conservative strategy in today's market given the uncertainties, but there are a couple of macroeconomic conditions that give me a little more comfort and confidence. To the point, we are at a very unusual time for a housing slowdown, because we have a positive economy and low interest rates. By historical standards, these factors should work in our favor. This concludes our formal comments. And I’ll be pleased to open up the floor for questions.

And, thank you for the presentation. The company will now answer questions so that everyone has an opportunity to ask questions. (Operator Instructions). And your first question comes from the line of Margaret Whelan with UBS. Please proceed.

It’s actually Dave Goldberg on for Margaret, how are you doing?

Very good, thanks.

I was wondering if you could give us some more details on the communities that are going to open by the end of the year and where they are going to be and maybe the average tenure of how long you've controlled the land that's making up these communities?

We really don't have the new communities broken down by market at our fingertips. But, I can tell you and obviously the question regarding the tenure is trying to figure out what the margins or prices would look like. We've tried to incorporate our best guess and analysis as to what the margin and sales pace of those communities might be. And they are already baked into our projections. Basically, as we reviewed all of our options, we made what we refer to as go/no-go decisions. Based on the financial returns on those properties on a go-forward basis, we treated the existing costs as some cost and said, okay, does the property make economic sense and satisfactory returns on a go-forward basis? Those that did not, we walked from and most of that occurred in the fourth quarter. And those that did, we are going forward with them. However, while it may make sense on a go-forward basis, if you go back and do include the sub-costs, the margins are obviously not what we would like. And hence, that's part of the reason we are projecting a little more margin decline for this year.

Were you able to change the product offering in those communities at all, maybe smaller homes?

In many of them, we did. And typically, we either reduced the specifications in our homes, reduced what we did at standard flooring, or cabinets or appliances. Or in other cases, we actually introduced new lower-priced, smaller or more cost-efficient homes. In some cases, that was practical. In other cases, we are too far long. And by the time you built models and went through the additional expenses, it might not have made sense.

Thanks. And then as a follow-up, wondering if you can give more details on the reversal on the prior deposits you had expensed on the option deposits? I guess, do you have any other deposits that you think there might be reversals on in the future? What were the circumstances behind that?

No, we really don't. Those were really a couple of very unusual situations to where there was a dispute on whether or not the deposit was refundable or not. We took it to arbitration and we ended up winning partial refunds in arbitration.

But there is not really any other case like that outstanding?

Not that we know of.

We don't anticipate it.

Okay. Thank you.

And your next question comes from the line of Carl Reichardt with Wachovia Securities. Please proceed.

Good morning guys. How are you?

Good morning, Carl.

Very good.

I am not sure, if I saw this in the release or not. What was your penetration rate for the mortgage company in Q1 and if you have it for last year?

Both last year and this quarter were roughly 70%, Carl.

Okay. So the 18% total originated and brokered is on the 70, so there is still 30 out there that could be also prime, but probably aren't. Okay. And then the next technical question is, just on the tax rate, is it a function of the write-off of the intangibles that creates the tax rate issue? Can you just give me a little more detail on that? And does that mean that assuming that you've finished that, obviously in Fort Myers, you don't have any more of your tax rate in Q2 even the loss should be more normal?

That is correct. The intangible that we ended up putting on our books from the acquisitions had to do with the fact that the seller had booked the lot sales for tax purposes already and he paid the taxes on those. But for GAAP purposes those profits should not have been recognized. As a result of putting that on their books, it was totally a GAAP adjustment. Therefore, as that intangible amortized from that GAAP entry, it was not deductible. Amortizing it over 8 to 10 years, it had a minimal effect on our effective tax rate as a permanent difference. Writing it off all at once had a substantial effect on our effective tax rate because the vast majority of the intangible write-off was a permanent difference for tax purposes.

Okay. That makes sense. All right, great, I appreciate that. Thanks so much, guys.

Thank you, Carl.

And your next question comes from the line of Michael Rehaut representing JP Morgan. Please proceed.

Hi, Thanks.

Hi, Michael.

Good morning. On the sub-prime also, I guess just following up with Carl, first just to understand the originated at 6% and the brokered at 8%. You kind of blend that together and get a feel for the mortgage that falls under your own capture rate. How do you think about the 30% that’s not in that capture rate? Is that safe to assume that’s a higher portion of sub-prime?

The real answer is we don't know for sure, but it wouldn’t surprise us if that 30% was more highly weighted towards sub-prime than our 70% that was but it's just a guess. We just don’t keep that data. And the overall market's use of sub-prime, I have seen statistics around 20%. So my belief is that our use of sub-prime is not unlike the overall market. That’s my expectation for what most people used to tell me. If you would have asked me two weeks ago, frankly we hadn’t really focused on this a great deal and we would have been working under the premise that we were 5%, 6%, 7% use of sub-prime. But once we actually did the analysis and got the data put together, we're telling you what our mortgage company originated. We just don't know for sure what happened on that 30%. But I think it's a safe bet that it is slightly higher.

I appreciate that. And then just obviously this has been unfolding very quickly over the last 3 to 4 months and continuing in terms of the turning off the spigot of credit in particular. Have you seen in some of your markets that have, maybe two parts to this and then I'll get back in the queue. But, which of your markets that you’ve seen higher levels of sub-prime and in those markets over the last two, three months, have you seen any particular changes in demand in those markets as the sub-prime financing has shrunk?

I think California has always been a user of the most exotic mortgages that you can find including the sub-prime. So of our 14% year-to-date, probably a disproportionate percentage of that is in California, because of the affordability factor. As we've increased incentives, lowered prices, affordability is coming into line a little bit better, but it is going to shrink the number of qualified customers in all of our markets, including in California. There is going to be some impact. I just don’t know how to quantify it.

It is important to note that number one, I think about 72% of our buyers are using plain vanilla fixed-rate mortgages much more so than before. Even just normal adjustables are much lower in usage given the rates. But the other thing that’s important to note is that the sub-prime mortgage market has not gone away. They've just tightened the criteria. That clearly does shrink the pool of potential qualifying buyers, but that market has not going away. Other questions?

And from the line of Citigroup, with the next question we have Stephen Kim. Please proceed.

Thanks. I was wondering if I can get a little clarity on the specific dollar amount that was written off in terms of the definite life intangibles this quarter and may be if there was any in previous quarters?

I mean the definite life intangible was $51 million this quarter.

Can we get a couple of decimals on that?

Excuse me.

Can we get any more decimals on that?

You mean more precision than $51 million

Yes.

Give us a few minutes, we'll find it out.

Okay. If you can just come back to that, that will great. Second question I had, in your guidance for the margins over the course of this year, wanted to try to get a sense for what's embedded in that. First of all, I thought you had made some sort of an offhand remark about not being surprised if you are needed to take additional write-offs and so forth. Let us say you did take some additional write-offs, would that be embedded in -- is any portion of that embedded in your 17 to 70 math?

No, our assumption is that the market is stable and we won't take any more write-offs. What I said was in spite of that, there may be a community here or a community there, nothing on a material basis. But, it just wouldn’t surprise us if they were some. We just (inaudible) in any of our projection.

Okay. Great. Thanks.

The combination of intangible write-off and intangible amortization for Fort Myers for the first quarter, so this is the amortization we had taken for November, December, January, and then the write-off as of January 31, was $54,439,000. This is the first time we've ever written-off an intangible associated with an acquisition, definite life intangible associated with an acquisition that we made of any material amount anyway. We write it off. Is that number okay?

Yes. That’s great. Thanks.

And the 54, Steve, obviously differs from the 51 in that we had one quarter of normal amortization we are doing anyway.

Yes, I know. I figured.

As a reminder ladies and gentlemen, please limit yourself to one question and one follow-up.

Steve, we didn't tell her to say that.

From the line of Banc of America, with the question, you have Dan Oppenheim. Please proceed.

Thanks very much. I was wondering if you can talk about the order trends in February. Looking at your early slide on Fort Myers market, you showed a lot of cancellations there in December and January. How much of that then ends up being orders coming in February where you are discounting those homes to sell those? And what do you think the order trends would have been in February without that, if that did impacted?

I would say that net contract in February was an immaterial amount in Fort Myers. I mean we were positive, but single-digit or maybe double digit in terms of absolute numbers. So, there are very, very few net contracts in Fort Myers in February.

It happened to be a month where we cleaned out a lot of deposits in Fort Myers. So, not a meaningful comparison, Dan.

Okay. Thanks. And then just one other question. I was wondering about your outlook for some of the markets where you’re seeing signs of stabilization. As you see inventory coming down a bit, clearly some of that is seasonal, how do you look at that where we are seeing sales continue to fall with inventory falling? Is that a sign that sellers of homes are just not optimistic about selling it right now, and you have concerns that will have more inventory coming to market once people do get a sense that there is stabilization out there?

Well, that is clearly a big question that no one knows the answer to. It is important to note that while we are saying the level of listings are coming down, they are still way above the normal levels. So, there is still a lot of oversupply in the markets. As it comes down and prices stabilize, will other buyers say, okay, I am going to list now? That certainly could happen. So, it's definitely not yet time to break open the champagne bottles.

Okay. Thanks very much.

And with UBS, you have a question from the line of Robert Manowitz. Please proceed.

Hi, good morning. I was wondering if you could talk a little bit more specifically about the book value of your inventory through the remainder of '07, the peak level and how you envision yearend?

In terms of the inventories?

Yes.

I think inventories at year-end are going to be not materially changed versus the end of last year. So, it's going to peak up. On a normal seasonal basis, our inventories typically probably peak in July and then fall off quite a bit in the fourth quarter.

Okay. And then as a follow-up to that and I'll play around after the call with the math on those comments. But could you help me understand the magnitude of that cash flow deficit for '07?

I don’t think it’s going to be huge. We were hoping that it would be positive and it might still be a little bit positive. I am just not as confident that it will be.

Yeah, the fourth quarter itself will be very cash flow positive. But as Larry mentioned, we are growing our community count. I will emphasize, this is not something we are doing now that the market is slow to try to counter that. We put a lot of those decisions into motion back in '05. And if it continues to make economic sense on a go-forward basis as I said, we are proceeding with those investments. In retrospect, obviously, I wish we weren't quite as aggressive in '05 for organic growth. But we are where we are, and the investments do make economic sense on a go-forward basis. And that's part of reason our inventories are not shrinking and we are not generating the surplus cash. Obviously, if the markets really deteriorated, we certainly have the ability to not go forward with option exercises and then we would be generating more cash. At this point those investments are warranted.

Great. If it is alright, I would like to speak one last question?

Sure. Go ahead.

Thank you. And that is that, historically you guys have been a fairly large user of third-party capital and controlling land. And I was wondering if you can speak, somewhat generically to your understanding of the financial position of some of those partners, and how they are faring. And most importantly, how do you envision the cost of that type of capital evolving over the next two to three years?

It's just to clarify your question. You are talking about on our existing joint ventures?

Yeah, joint ventures. And I imagine some of the off balance sheet capital is directly with land bankers.

Okay. Yeah, well, we use options in general as a strategy. As you know, we have about 63% of our total lot controlled though options. Really, I think we have about maybe a dozen and a half properties out of 400 some odd, that we could not get the seller to option them. And therefore we went out to find a financial institution to option that for us. We have gone back in several cases and walked away from some of those options. And more often in those cases, we have renegotiated with them. At this point, we don't see any financial health issues with those [optioners]. They are usually representing significant institutions and have a pretty decent capital base.

And with respect to using them on a go-forward basis, it was beyond our expectation, that as land sellers adjust to today's economic realities of a lower sales price and a lower sales pace; that we've already seen them losing up the terms, rather than winning all cash, because there are bidding frenzies for every property. They are just not losing up the terms and lower the prices enough to make it attractive now. But my full expectations would be that there would be even less of a need going forward to use, what you'd call, traditional land bankers, as we find new deals. Just because I think the land sellers will just be giving us takedown 20% of it upon approval, and then six months later takedown another 20%. So that it just takes less capital and no longer be demanding all cash upon approval. So I just think there is going to be less pressure on builders overall to try to go to land bankers.

Great. And on the cost of that capital through the land bankers, is that yet hitting higher or is it too early to tell?

We've really not been renegotiating or trying to get new deals with them.

Yeah.

Kevin, I don't know if you have any feel for that.

I don’t think we've had a sense that they're going to adjust pricing. I think it's a question of availability and we also haven't heard that they’re completely out of the market. Although, they're clearly, dealing with their current portfolio is now more than they are doing the business.

Great, I really appreciate it. Good luck.

Thanks.

Thanks

And your next question comes from the line of Alex Barron representing JMP Securities. Please proceed.

Good morning guys.

Good morning

Just to ask about how many communities you guys impaired this quarter, as well as how many lot options you walked away from?

We impaired three communities. And the expenses regarding the options walk-aways, really were the predevelopment expenses. I think the option deposits were refundable at that stage, but we had dollars expended in analyzing and researching the properties. And that's what was expensed.

And those three are all Fort Myers?

No, outside of Fort Myers.

Okay. And how many were in Fort Myers.

Fort Myers, we owned it. So we impaired it. But it is really in the communities, because there are scattered lots. But the impairment we took in Fort Myers was on owned lots, they just weren't divided in the communities. So I can't answer the question with an answer of a community.

Right, sorry about that. And these three were in what markets?

I think they were primarily in Minnesota, and New Jersey.

Okay. Got it. My second question here has to do with, again financing a little bit. What is your CLTV, for the quarter and then what percentage of the loans in order of 80/20's option ARMs, no-dock, low-dock those kind of stuff?

We don’t have all that data at our fingertips. We gave you, 77% loan-to-value that wasn't a combined loan-to-value. The combined loan-to-value is probably in the mid 80s. So that's where the combined is and we don't break out the statistics and certainly don't have it anywhere in this room, Alex, to give you how much we do of each one of the different kinds of loans. So as more and more interest is there, we might begin to try to accumulate that data as well.

Got it, Larry. And as far as your guidance for next quarter, can you give me some break down like units, I guess, margins, are you implying any write-downs? I am just trying to get to the $0.05 to $0.20 loss, where you guys are getting that from?

I have given you as much guidance as we can give you. Our website has the full year. We have told you that we're not going to make money. You can back into the numbers if you want to back into.

Okay. Great. Thanks.

From the line of Credit Suisse with the next question, we have Denis McGill. Please proceed.

Hi guys, just a question on the cash flow. Larry, can give us a sense of in '06 and then your expectation for '07, how much you spent and expecting to spend on the acquisition of land versus the development?

Yeah, we just don't have that break down.

Do you have this?

That’s not something we normally track.

Do you have the total spend?

Nobody sits around this table just saying yes. We really track change in inventories frankly and project change in inventories. We don't break it down further than that.

To do that, wouldn't you have to have the piece of how much you're acquiring?

No, we don't break down land acquisition. What we do, every single community does a projection for what its inventory will be by quarter. Sometimes, the inventory growth is by land development. Sometimes, it's because we've got a big slew of homes under production. Sometimes, it's a payment in fees. Sometimes, it's taking down more land. We do not analyze what part of that is in each of those components. What we do is, we track every single community for the total capital that's laid out and we look at it that way. I will mention that our incentive programs are based on return on investment for our divisions. So they were wary and try to focus on not spending more than they have to, either on land or land development or fees et cetera. And they try and monitor it tightly.

Okay. I look at it in a different way then. I would guess work in progress is coming down particularly with spec coming down and with inventories up year-over-year, I guess that you would expect to be spending more on acquisition and development than you are selling through --?

I think the real answer is, because we are increasing our community count, therefore it's partially on land for those communities, models for those communities, and work in process for those incremental new communities.

And putting land development in place.

Yeah, land development. So, that's what's driving it.

Okay and second question. The average delivery price in the west seemed a little high relative to prior quarters versus the order rate. Is there something unique about the first quarter or is that the run rate that we should expect for the rest of the year?

I think the coastal area in Southern California might have had a higher proportion and they tend to have a higher average price.

I don't think, I'd imply that for the full year.

Okay. Thanks, guys.

Okay.

And representing Bear Stearns, the next question comes from the line of Susan Berliner. Please proceed.

Thanks, good morning. Can you give some details, I guess, on your incentives? Was that a lot of focus in the financial services business?

I am not sure, I understand.

What do you mean by it?

Well, I guess, in terms of providing incentives or giving someone instead of a reduction in price, any sort of benefit in the financial services business?

Not primarily. Often times, we'll include any closing costs. Often times, we'll tie an incentive to the mortgage company. But generally speaking, the incentives have been more in upgrades and options that we provide at a better value, or just an outright reduction of the purchase price.

Okay, that’s helpful. And I am sorry to repeat this. Again on the sub-prime, I guess, if the overall market is about 13% sub-prime based on originations, if things are going to be pulling back at least for the short term, what kind of impact overall, is that a few percentage, could it be higher? Any sort of additional outlook would be great.

We don’t know how to quantify it. Clearly, as Ara mentioned, the sub-prime market is not going away. So, the sub-prime market is going to get tighter by 5%, 25%. Use whatever number you like and multiply that times our percentages. And, that’s the impact. Now, some of those people, we can still qualify on some basis, but it shrinks the pool by something.

Okay. And then, my last question just following up on that. On sub-prime, it seems with the added detail you guys are giving that your sub-prime exposure is higher. But with your product diversification and some of your peers, it may seem rather unlikely. So, is it apples-to-grapefruit comparisons, or what's going on?

We don’t necessarily think ours is higher than anybody else.

Right.

Frankly, it’s nothing that we ever tracked before. It was never a big issue. And as Larry mentioned, if you asked us a couple of weeks ago, we would have guessed it within a few percent. But, we read the papers as well as everyone else and it’s something that we are now focused on. And as we dove deeper, we got more of the data points that we shared with everyone today.

I mean, it's possible that someone else is defining sub-prime differently than we define it. There is not a definition that is precise with respect to what a sub-prime loan is. But, we went back and used credit scores between X and Y at different loan amounts, and did the research that way. I am not sure everybody else can track it in the same fashion that we do or did. But I just don't believe in my heart that we are a disproportionate higher user of sub-prime. Now, I would say that geographically, someone that didn't have a California operation, their sub-prime is going to be lower than ours, because California is a higher user of the sub-prime market. So, there are specific geographies that are disproportionate users of sub-prime. And I don't think that we are weighted dramatically towards that, vis-à-vis our peers either, but who knows.

All right, and I appreciate it very much.

Okay.

And representing Lehman Brothers, you have a question from Steven Fockens. Please proceed.

Hi, guys. Just one question, recognizing may be that your timing wasn't as greater as you would like on the Fort Myers acquisition. Have you gone --

That is an understatement.

I appreciate your honestly on that. Have you gone back and looked at that deal and found any factors, either in the marketplace or in the company itself, that with hindsight would have prevented you from doing the deal and any plan to use that factor or look at that factor when you consider future deals?

Yes, one of the things we do know is as we look back, there was a period of almost a year where resale listings equaled monthly sales. What that should have told us is; hey, you have a market which is out of balance and overheated, and we should not have done our analysis based on that condition. But we had been eyeing that market and frankly talking to this company for many, many months and it continued, and continued, and continued, and finally we negotiated transaction and of course as it turns out in hindsight, it was just as it was about to end. But I'd say that's probably one thing we would really focus on a little bit more that we never use to track.

Yes. And frankly, even if we are not making company acquisitions, we think that MLS data is something that on our organic operations to track meticulously every month as well. That gives you a hint as to whether the market is getting better or getting worse. It might be a leading indicator. It's kind of a thesis that we have at this point. But clearly, if supply-demand gets out of balance on used homes, it has a repercussion on the homes.

So you had planned to use that kind of analysis more so, than in the past?

Well we haven't used at all in the past.

Fair enough, great. Thanks very much.

Okay.

With Wachovia Securities, the next question comes from Lee Brading. Please proceed.

Hi guys.

Hey Lee.

Hi. Thanks for the detail, and going by the markets, I was wondering if I could drill down a little bit more in the mid-Atlantic. From that order trends data that we saw this past quarter, it was up 22%, average sales price down 16%. I was wondering, what drove the growth? Was it incentive side, or community count growth or if you are seen positive comps in that market?

Well, in general we're seeing a little more strength in that market. Virginia was one of the first markets to slowdown. So it seems to be one of the first markets that hit the bottom and I don’t want to get overly optimistic and use the recovery word. But that market is showing a little sign in recovery. We are being aggressive in terms of the incentives that we need to do keep product moving there. But on the whole, we've been much more pleased. It's one of our better performing areas today.

Absorptions in the DC market really has exceeded our own internal total budgets in recent months. They certainly don’t have pricing power to increase prices, but at the level that they are pricing now, we've got a little more pace than we expect.

I would like to say, it's just us, we are so brilliant. But I think that market in general is getting a little stronger.

All right, that’s helpful. Also I want to follow-up on the free cash-flow comment. Another way to look at it, should we be expecting debt levels by the end of the year to approach debt levels where you ended your fiscal '06 year?

We don't anticipate a lot of change in debt levels during the year, just some minor fluctuations, up and down. We do think our leverage should go down by the end of the year by the fact that we will make some equity in the following quarters and it will bring the ratio down in that way. And again as we mentioned, the big burst in earnings is really going to go at the very tail end of the year in the fourth quarter.

Okay, thank very much.

(Operator Instructions). And your next question comes from the line of Joel Locker representing FTN Securities. Please proceed.

Hi, guys. Just wanted to get your take on the interest percentage of the homebuilding revenues, I see it’s 3.1% as projection of total interest. But do you expect it to stay around 2.4% range that was reported in the first quarter?

Yes.

Right on that. And also, how much total deposit dollars do you have from your customers on the --?

The customer deposits?

Yes.

Hold on, we'll look that up right on the balance sheet.

I was going to say about a $140 million.

142, 143, something like that.

Hold on, we will get the exact number.

143.

143 million. And just on the trajectory of your debt-to-capital ratio. If you are modeling that, how would you expect it to play out like at the end of the second, third, and fourth quarters?

We gave you pretty good hints that we are going to be little above our target of 50%. We are above that right now. So, it's not going to be above roughly where it was in the end of January. And then, it should come down a little bit by yearend.

All right. Thanks a lot.

Okay.

And with Citigroup, you have a follow-up question from the line of Stephen Kim. Please proceed?

Thanks. Early on your presentation, Ara, I think you made a few comments. So, I just wanted to follow up on. One, actually maybe this one was from Larry, but you talked about deliveries. And, I think you had given numbers to try to help us triangulating on what you thought deliveries might be for the second quarter. But, I think I may have misheard you, so I was just wondering if you could sort of give us an idea of what we should look for in terms of closings for 2Q?

We didn't really give any guidance on that.

I thought you said like first half or something like that, like a certain percentage of your closings.

You know what’s that, Steve, is that the earnings were going to be negative in the second quarter. And therefore, all the earnings were going to happen in the second half of the year. And more than half of the earnings in the second half of the year will be in the fourth quarter. So, we said weighted towards the fourth quarter.

Okay. So you were talking about earnings in other words you are saying not the --. No, there was some comment you made I thought about closings. You said that a certain number, your percentage of deliveries like 28%, 38% something like that in the first half. I thought that you had said something like that, no?

I don’t think so.

Okay. Well, then, you didn't and maybe I just completely misheard. That's fine. That way it is certainly possible.

Also, replay the webcast later.

Well, that's okay. That's fine. The second question I had related to Ara, a comment you made about the longer-term gross margin. I believe you made a comment about something from 22% is what you sort of felt was the long term sort of normal --

No, no. What I said, that's a more a normalized gross margin. Obviously, we were above that for good many years 24, 25. And we are well below that right now.

Right.

But I'd say that's a more normalized. I will caution although by saying, we are IRR focused.

Right.

And sometimes, we get that with a lower margin and high turnover like buying developed lots on an option basis. Sometimes, we get it through high margin, low turnover like when we have to develop our own parcels and larger parcels. So this is a mix. We don't focus specifically on gross margins.

And that's obviously a welcome change from 10 to 15 years ago, as we covered at our conference. I guess, I just wanted to sort of revisit though. Given what does matter, what do you think the normalized return on equity or the return on capital is?

I would say, somewhere in the mid 20s on an after tax return on equity. With our debt targets of 50% debt to cap or slightly less, it should work backwards to at least with that kind of level. We underwrite specific communities to a 30% unlevered IRR.

Right.

The only thing that it doesn't include is an allocation for corporate overhead. But all the other overheads, and frankly, there are far more overhead in the divisions than there is at the corporate level. But if you took all those 30% IRRs and we hit them, we would be slightly above the mid 20% for an after-tax ROE.

Okay. And so you are basically basing that long-term sort of conversation about where normalized margins are. With an assumption that eventually you will have the majority of your projects hit the intended IRR at the time of feasibility basis?

Yes, yes. We have been in excess of our IRR targets for the last few years. And obviously if we reversed it, we are well under right now. But we would expect it on normal basis to be able achieve our pro forma IRRs.

Right. And the move to adopt this IRR focus, as you said, the genesis of that was somewhere around 96-97, correct?

Correct.

Got it. Thanks a lot guys.

Okay.

And your next question comes as a follow-up from the line of Alex Barron representing JMP Securities. Please proceed.

Yeah, thanks guys. I wanted to ask about SG&A. I guess in dollars, it was kind of flat this quarter. So, I wanted to understand, how much in the way of headcount have you guys already done reduction and I guess, how should I think about SG&A going forward?

I don't know whether you may be missed part of the presentation, but in my part, Alex I said that we have already reduced headcounts in the past three quarters by 20%.

Okay. Sorry, Larry

What we are going to do going forward, is as particular markets experienced lower sales, we'll obviously right-size the organizations, market-by-market and if they have great sales, we won’t have to make adjustments. So it's a market-by-market kind of decision.

Got it. And in terms of your covenants, interest coverage, leverage, what are those ratios?

Well, our revolving credit agreement does include a debt service coverage test. However it only applies, if our leverage ratio is substantially higher than where it is today. We don't anticipate allowing that leverage ratio to reach that level. However, we recognized that we need to increase cash flow, decrease debt levels during this period of our slower housing market to just provide an even bigger cushion. But right now, with respect to our revolving credit facility, we are in fine shape.

But what is that ratio?

You are not going to be able to calculate, because it’s adjusted debt levels and adjusted tangible net worth divided by adjusted debt. But just trust me it's substantially higher than where it is today.

Okay. If things don't pick up in term of sales pace, are you anticipating you are going to have to cut prices in some regions or how are you thinking about what is -

Again, we don't need prices, I mean sales pace to pick up. We just want them to stay stable. And based on the last few weeks, it seems like they are stable. If sales pace drops then absolutely, we would likely adjust our thinking by reducing prices further or adding concession and then we reevaluate land options again, the remaining land options. All of our discussions are really assuming that the most recent market environment continues. It doesn’t get better and it doesn’t get worse. And all of our projections assume flatness in the price and flatness in the pace.

And frankly, Alex since early in our first quarter, which began in November, at the very beginning of the quarter, we did offer some additional incentives and concessions but since that time we've really not had to, other than a community here and there. We've not had to increase incentives and concession. We've already kind of been feeling some stability for a number of months now in the aggregate across the country. I mean obviously there is some exceptions to that here and there but that's how it feels on average.

Great, but assuming the sales pace is stable, is that an acceptable sales pace to you guys or would you rather do something for you to pace higher?

[I'd like to double the] current sales pace.

I'd like to triple that.

But I don't know what the word acceptable means. But it's what we have incorporated into our forecast. Obviously, we’d love to do more. We want to raise prices and increase sales pace, but we have to balance everything with the market realities.

Okay. All right, thanks.

Okay.

And your next question comes as a follow-up from the line of Stephen Kim representing Citigroup. Please proceed.

Okay, thanks. I guess I wanted to follow-up on your guidance on the margins with respect to your $17 or $17.5 I think is what you gave for the next three quarters. I was curious as to what you felt might be some potential drivers that could move that number, that could happen in time to able to move let’s say your fourth or third quarter number up. We all know what could move it down, that’s obviously been covered very well. But you had made some mention about efforts on your part to get your cost down with your suppliers. I was wondering how much if any was embedded in your let’s say third and fourth quarter gross margin outlook from that particular area?

We have incorporated a much of it, of the savings we are getting, but not all of it yet. And keep in mind, as for example, new prices that we've negotiated in the last month or two, if it’s a concrete [person], well, homes we are delivering in the fourth quarter, we've already paid for that concrete because that’s in the ground already.

Right.

So it does get phased in. But in general, we feel like we've built in a lot of the cost savings we are getting, frankly margins might have been worse if it wasn’t for that fact. Might there be a little more upside on the cost in terms of benefit for us with further cost reductions, a little bit but we think we've captured a lot of it and built it in. At this point we have as we mentioned 68% either delivered or in backlog. So we really only have price opportunities on, up or down I guess in the remaining 32%. However, I will caution that I guess we've learned something that we have never really had to worry about before, that old backlog does not necessarily close at the price they are contacted for in some markets and luckily is quite isolated. But in some markets, we had to offer concessions at the closing table. Particularly, if we've lowered prices in the community and at lower net prices or new houses that are backlog. So, we've tried to build all of that into our best guess for today.

Okay. So, that was where I was going to go at this. In other words, that phenomenon which we know has been obviously impacting yours as well as many other people's margins in terms of your margin not being as good at the closing tables as you thought it was when it was in backlog. You've already factored something for that over your remaining two or three quarters?

Yes.

Okay, continuation --.

Obviously, you don't really know until you get to the closing table.

Sure.

But we've taken our best guess of the market and tried to build that in.

So, I guess where I am going with this. And again, I am not trying to put words in your mouth or trying to make it seem like everything is starry-eyed and rosy. We all know the downside. I am trying to understand the upside. If your pricing environment stabilizes or even slightly improves, and the impetus for buyers in your backlog or the strength they have to come to you at the closing table and demand such concessions -- well, my guess would be, it would probably not likely happen to the degree anywhere close to what you had seen over the last six months. So, what you are saying is that, since you've factored something of that in your guidance that could actually affect your gross margin realized even in the next two to three quarters, is that correct?

I think, I understand your question. And I guess that's correct, yes.

Because ordinarily, people wouldn’t think so. Someone would say, well you are going to sell it, maybe you don’t have to give as much concessions on it in let’s say three to six months. But that's not going to close until next fiscal year. And I am saying that that dynamic of having pricing stabilizing or strengthening in your communities might actually affect your backlog's margin being closer to what you think it is currently today. And if you factored in some allowance that it might be lower than that when you get to the closing tables. And that portion of it could represent upside. That's what I am getting at.

Yes, it could. In this environment, I just would be very cautious.

Sure, you shouldn't be embedding anything differently in your guidance. I am just trying to understand it. Okay and I think that was it. Thanks very much.

Okay.

And representing Neuberger Berman, your next question comes from Basu Mullick. Please proceed.

Hi, I have a quick question. Can you tell me what the $51 million of intangibles write-down, how would it flow through the income statement? And the other question is, as I look at your backlog, which shifts significantly from 6,000 in south east down, and I look at the new contracts written as only very small percentage of the contracts, which is obvious for your Fort Myers write-off. How does that change the gross margin in net contracts that you are writing now?

The first question on intangibles, I didn't hear all of it.

My question is, using intangibles, how do they impact the going forward gross margin of the company, or is it is G&A that's flows through?

It is in the intangible amortization line on the income statement.

Okay. So, $51 million would impact how much in pro forma '07?

About $12 million a year.

Okay. And my next question is, if you look at the mix change as south east becomes much smaller on the net contracts in '07 first quarter; how does that change your gross margin?

You mean, as we have --

As you write the contracts, yes.

Contracts for next quarter. As you write new contracts? Well, Fort Myers is just not a market that you could say much about right now. So the margins are --

Zero.

Yes, non-existent.

So, if I took 5,800, which was in your backlog, right.

Yes.

And now its 2,100, right?

3,100, yes.

Right, so that’s --

But not all of that is Fort Myers, but large portion is.

That’s 2,700, right?

Yes. I think your point Basu, and you are right; is we are getting a very sub-par margin on any Fort Myers deliveries which were affecting our average margins.

So, between the two, what kind of gross margin are you writing at; in the net contracts that you are writing, assuming that the south-eastern mostly was zero, and that’s coming down to nothing. In your 2600 net you wrote this quarter.

I am not sure, I understood the question Basu.

Once again, its 2600 homes you wrote this quarter, right?

Yes.

Out of that only 144 is south-east?

That’s correct, yes.

Down from a year ago, 1,015.

Yes, that’s correct.

Out of 3,600.

Right.

Right.

So, net-net, what happens to the gross margin now? I took a 1,000 out of the 3,624 to 2,613.

Yes, well we don’t look at gross margin as [median or a] contract. We tend to look at any backlog. We now have 8,600 total homes in backlog, as you said with only 3,000 of those from the south-east versus a higher percentage last year 14,000 homes in backlog. We know that, we are giving you guidance as we deliver that backlog and so another 30% of the homes as we need to sell still for this year; we expect to have gross margins that for this year will average 17% to 17.5%.

And the Fort Myers is definitely substantially lower than that and the other market which is dragging it down. So the other markets are obviously higher than that, but we don't give specific details by market in terms of Fort Myers.

But I think it is safe to say because of the Fort Myers impact that what we are selling on average, because we are not selling anything in Fort Myers. The new contracts we’re selling on average of higher margins perhaps than what we are going to be delivering in margins this year.

Which stands in sharp contrast to what you just reported in gross margin, your guidance for rest of the year?

Well, except that it has impacted, because there is still stuff in backlog from -

Which is flying, which is flowing through there?

Which is flowing through there, right?

Okay. Got it. Thank you.

Okay. Thanks Basu.

Ladies and gentlemen, this now concludes the question-and-answer session. At this time I will turn the call over to Mr. Ara Hovnanian for closing remark.

Thank you very much. It's obviously not as pleasant reporting in the last couple of quarters that it has been for the last 5 or 10 years. But we've been through these ups and downs for many years, many times in our 50-year history. And we are sure that in the not too distant future, we will be reporting some more positive results. Thank you very much and we look forward to giving you an update in the next quarter.

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