Hovnanian Enterprises, Inc. (HOV) Q4 2010 Earnings Report, Transcript and Summary

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2010 fourth quarter and year-end earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. [Operator Instructions.] Management will make some opening remarks about the fourth quarter and year-end 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 Investors page at the company's website at www.khov.com. Those listeners who would like to follow along should log onto the website at this time. Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call and to the information in the slide presentation. I would now like to turn over the conference call over to Ara Hovnanian, Chairman, President, and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Good morning and thank you for participating in today's call to review the results of our fourth quarter and fiscal year ended October 2010. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO; Paul Buchanan, Senior Vice President and Chief Accounting Officer; Brad O'Connor, Vice President and Corporate Controller; David Valiaveedan, Vice President, Finance and Treasurer; and Jeff O'Keefe, Director of Investor Relations. On slide 3, you can see a brief summary of our full-year results, which were in line with our expectations but still obviously far from where we'd like to be. The year can generally be described as one where we and the industry were bouncing along the bottom. Slide 4 shows that we saw improving trends from November '09 at the beginning of our fiscal year through April of 2010, and then sales dropped off significantly in May and June after the expiration of the tax credit. The market gradually improved from July through September, but was still below the levels we saw a year ago. In October, sales per community improved again, finally matching the same levels as the prior year. However, sales pace slowed more than expected in November and fell back below last year again. You can see this in our monthly data, which we show on slide 5. When you look at the change in the absolute level of monthly net contracts this year, compared to last year, as we do on slide 6, you can see that the gap narrowed every month from June through September, which reflects the market beginning to rebound after the expiration of the tax credit. In October, we signed more contracts this year than we did in October of '09, helped by a slightly higher community count. However, in November we experienced slower sales for the entire month, similar to what we experienced in sales per community. Mid-November through mid-January is the holiday season when it's difficult to gauge what trends are really occurring in residential for sale housing. We'll not get another good read on the housing market until early February, when the spring selling season kicks off. Slide 7 looks at net contracts per community on an annual basis. This slide certainly makes the point that we are bouncing along the bottom. 2010 net contracts per community were 23.1, which is almost identical to last year, when we reported 23.3 net contracts per community. Clearly the market has stabilized from the dramatic declines we saw in sales pace per community from 56.6 in '04 down to 17.7 in '08. However, the market has a lot of upside before we reach more normalized levels like what we saw from 97 to '02 of about 44 net contracts per community, a period which was neither a boom nor bust period. While we do believe that there's pent-up consumer demand for homes based on demographics, consumers are clearly waiting to see signs of an economic recovery and job growth before they make their decision to purchase a home. The good news is that our internal forecasts do not require any improvement in sales pace or sales price for us to get back to profitability. The key drivers for us getting back to profitability are increasing the mix of deliveries from our newly identified communities versus our legacy communities and for us to grow our top line through increases in our community count. On average, the newly identified communities are expected to generate a 20% gross margin, which is another key to our ability to return to profitability. As we increase our mix of newly identified communities and shrink our mix of legacy communities, our consolidated margins should continue to improve. We took steps down this path throughout 2010. On slide 8, after several years of quarterly declines you can see that our community count leveled off early in fiscal 2010. In the July quarter, it increased for the first time sequentially since the summer of '07 and in the fourth quarter it increased year-over-year for the first time since the summer of '07. As we began fiscal 2011, 105, or 55% of our communities that were open for sale were communities that we controlled after January 31, 2009. We recently opened many of these newly identified communities and therefore those communities will not begin to deliver homes until the second half of 2011. Given no changes in the market conditions, the second half of fiscal 2011 is also when we expect to see improvements in our gross margin, helped by these new communities. We don't have a specific target that we're going to set today, but we once again expect to see the number of active selling communities increase during fiscal 2011. Slide 9 shows the progress we have made in purchasing or optioning new land parcels. From January 31, '09 through October 31, 2010, we purchased or optioned approximately 15,000 lots in 235 new communities. As you can see on slide 10, almost half of these new lots were purchased or optioned in the last two quarters of fiscal 2010, which means that they were written at today's current sales prices and today's current sales absorption paces. We expect to achieve a 25% plus unlevered IRR hurdle rates on these new purchases. That's not to say that lands that we purchased early on in the process are not doing well. For instance, in the fourth quarter of '09 we entered our first joint venture with GTIS Partners and bought about 1800 lots. This joint venture continues to meet or exceed its original underwriting. During the fourth quarter, we purchased about 960 newly identified lots in 73 communities. In addition, we purchased about 200 lots from legacy options that achieved acceptable returns. In total, we spent about $100 million of cash in the quarter to purchase 1200 lots and to install overall new land development across the company. Starting with the right side of slide 11, the fourth quarter marked the seventh consecutive quarter of year-over-year increases in gross margin. Even without the $35 million of fourth quarter 2010 impairment reversals, and a $59 million fourth quarter '09 impairment reversal, our margins would have shown a year-over-year improvement. As we have said in the past, gross margins have the potential to fluctuate from quarter to quarter. Sequentially, margins took a small step backwards during the fourth quarter, but at this point I wouldn't read too much into that slight dip, as the mix of deliveries for 2011 will eventually shift more toward newly identified land parcels later in the year, which should have a positive impact on gross margin. If you look at the full year of fiscal 2010 on the left side of slide 11, a year when only 12% of our consolidated deliveries were from newly identified land, our gross margin was 16.8%. With such little impact from new land, this is essentially what the gross margin on our current mix of deliveries from legacy land is. While we are happy with the gross margin improvements that we've realized in fiscal 2010, it's plain to see there's still room for improvement. Normalized gross margin for us is in the 20%-21% range, which we achieved in the 2000 and 2001 fiscal years, again, neither a boom nor bust period, as you can see on this slide. In fiscal '11, we continue to expect more than 40% of our deliveries will come from newly identified land. So if home prices remain stable, our gross margin should continue to improve in fiscal 2011 without a recovery, but we don't expect to increase margins back to the normal 20% plus range this year. If you look at the gross margin including home-building cost of sales interest, it should improve even more than just the improvement in gross margin before interest in 2011. We expect this further improvement to occur because capitalized interest on homes being delivered from older legacy communities should be higher than the capitalized interest on newly identified homes, as the newly identified homes have higher inventory turns, and have not been carried as long. Assuming no changes in the market conditions during 2011, we expect our pre-interest gross margin to improve as well as an additional increase for gross margin including interest because of the impact of the capitalized interest that I just described. In total, our after-interest gross margin on deliveries from newly identified communities should be roughly 500 basis points higher than our after-interest gross margin from deliveries in legacy communities. Keep in mind that much of the improvement will come in the later quarters as the mix of deliveries from newly identified communities increases. On slide 12, we show SG&A as a percentage of total revenues. For the full year we saw a 180 basis point improvement in 2010 for this ratio when compared to 2009, as seen on the left hand side of the slide. The right side shows the improvements we saw in these three quarters of the year, and part of the increase in the fourth quarter is due to a lower revenue base due to the surge of deliveries in the third quarter related to the tax credit expiration. Part of it was also due to some unusual expenses in the fourth quarter. On slide 13, we show the major categories of expenses that made up the difference in homebuilding SG&A from the third quarter to the fourth quarter. The biggest portion had to do with numerous small accruals that we took for ongoing litigation in Southern California, where we established some additional legal reserves of $3.9 million for seven small miscellaneous cases. None of these additional reserves were related to construction defects or warranty claims. We continue to consolidate our operations and had at lease abandonment accruals and severance charges for another $2.7 million. Additionally, we accelerated depreciation of models in Ohio that we are no longer using. One other contributor to the increase spending that will be reoccurring as we grow was the increased advertising that was due primarily to dollars spent on newly-opened communities. We continue to take steps to rightsize our organization and reduce our level of SG&A expenditures. In spite of our rightsizing efforts, we still have capacity at corporate and many of our divisional and regional offices. As we open new communities, we should not need to add associates to our corporate or divisional regional offices. Incremental spending related to increasing our community count will come at the community level. There, we typically need to add a construction supervisor and at least one sales associate per new community. Over time, the combination of further improvements in gross margin, trending back to normalized gross margins in the 20-21% range, coupled with SG&A leverage and increased deliveries, will get us to the point where our homebuilding operations are once again profitable. So, we have our work cut out for us to find new land parcels to invest in that will bring us the types of returns that we need to continue down the path to profitability. Fortunately, the deal flow remains steady as we continue to improve land acquisitions on a regular basis. I'll now turn it over to Larry, who will discuss our inventory, liquidity, and mortgage operations, as well as a few other topics.

Thanks Ara. Let me start with a discussion of our current inventory from a couple of different perspectives. Turning to slide 14, you'll see our owned and optioned land positions broken out by our publicly reported segments. Based on trailing 12-month deliveries, we own 3.7 years' worth of land. Both our owned lot position and our optioned lot position decreased slightly on a sequential basis in the fourth quarter. We purchased approximately 1200 lots during the fourth quarter, which was offset by about the same number of deliveries and the sale of about 100 lots. On the optioned side of the equation, at virtually no cost we walked away from 1000 options on newly identified land, most of which are still in the initial due diligence period. We walked away from 700 legacy lots at a cost of about $12 million. Additionally, we bought about 1200 lots previously optioned. Our option contract on about 800 lots was nullified due to lending institutions taking those lots back from a land developer that went into bankruptcy. We signed new option contracts for an additional 2900 lots during the quarter. At the end of the fourth quarter, 60% of our optioned lots were newly identified lots. When you combine our optioned and owned land, 39% of the total lots that we control today are newly identified lots that we underwrote to a 25% plus unleveraged IRR. We contracted roughly half of those newly identified lots after the market slowed through the expiration of the tax credit in April this year. On slide 15, we show a breakdown of the 17,676 lots we owned at the end of the fourth quarter. Approximately 37% of these were 80% or more finished, 11% had 30-80% of the improvements already in place, and the remaining 52% have less than 30% of the improvement dollars spent. While our primary focus is on purchasing improved lots, it is getting more difficult to find finished lots for sale at a reasonable price. About 42% of the lots we've purchased or contracted to purchase are lots where it makes economic sense to do some level of land development. And, we started to complete land development on sections of our legacy land as well. Now, I'll turn briefly to land-related charges, which can be seen on slide 16. We booked $68.3 million of land impairments in the fourth quarter; $55 million, or 80%, of the impairments were on the four communities in New Jersey. In the fourth quarter, $39 million of the land impairments were isolated to just 2 communities in New Jersey. Given the long land position in adjacent mothballed communities, we recently decided to sell portions of these two land parcels rather than build them out. Our decision to market these land parcels for sale changes how GAAP requires us to value that land on our books, which triggered the impairments. The good news is that upon sale of these land parcels we would anticipate generating approximately $44 million of cash flow. Two other communities in New Jersey accounted for $16 million of impairments during the quarter. The remaining $13 million of impairments was spread out over 39 communities. No impairments were taken on any newly identified parcels. During the fourth quarter, our walk away charges were $12 million, with $7.7 million coming from one community in Maryland. In total, we booked $80.6 million of land related impairment and walkaway charges; 78% of these charges were related to just five communities. Our investment in land option deposits was $36.3 million at October 31, 2010, with $31.6 million in cash deposits and the other $4.7 million of deposits being held by letters of credit. Additionally, we have another $38.5 invested in pre-development expenses. Turning to slide 17, we show that we have 7,614 lots and 58 communities that were mothballed as of October 31 and on this slide we break these lots out by geographic segment. The book value at the end of the fourth quarter for these communities was $174 million net of an impairment balance of $580 million. We are carrying these mothballed lots at 23% of their original value. During the fourth quarter, two previously unmothballed communities were opened for sale. In fiscal 2010 we opened up for sale a total of 9 communities that were previously mothballed. Looking at all of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of $1 billion net of $859 million of impairments which were recorded on 169 of our communities. Looking at all of our owned land, we are carrying it on our books at 53% of its original value. Turning now to slide 18, on a sequential basis the number of started, unsold homes, excluding the models, has decreased. We ended the fourth quarter with 786 started, unsold homes. This translates to 4.1 started and unsold homes per active selling community, compared to 4.5 started, unsold homes per community at the end of the third quarter, which is lower than our long-term average of 4.9 unsold homes per community Another area of discussion for the quarter is related to our current and deferred tax asset valuation allowance. During the fourth quarter, the tax asset valuation charged to earnings was $64.4 million. At the end of the fourth quarter, the valuation allowance in the aggregate was $810 million. We view this as a very significant asset not currently reflected on our balance sheet. We expect to be able to reverse this allowance after we generate consecutive years of profitability. When the reversal does occur, the remaining allowance will be added back to our shareholders' equity and will further strengthen our balance sheets. We ended the quarter with a total shareholders' deficit of $339 million. If you add back the total valuation allowance as we've done on slide 19, our total shareholders' equity would be $472 million. Let me reiterate that the tax asset valuation allowance is for GAAP purposes only. For tax purposes, our tax assets may be carried forward for 20 years, and we expect to utilize those tax loss carry forwards as we generate profit in the future. For the first $1.7 billion pre-tax profit we generate, we will not have to pay federal income tax. Now let me update you briefly on the mortgage markets and our mortgage finance operations. Turning to slide 20, you can see here that the credit quality of our mortgage customers remains strong, with an average FICO score of 734 and our mortgage company is capturing 82% of our noncash homebuying customers. Turning to slide 21, here we show a breakout of all the various loan types originated by our mortgage operations during all of fiscal 2010 compared to fiscal 2009. 49.3% of our originations were FHA VA during 2010, slightly higher than the 45.9% we saw during fiscal 2009. There's been a lot of press about banks and mortgage companies owned by builders being requested to buy back loans that were originated near the peak of the market. We continue to believe that the vast majority of repurchase requests that we've received are unjustified. On slide 22, you'll see that our payments during fiscal 2008, 2009, and 2010 for loan repurchase and make-whole requests were relatively minimal. During 2008 and 2009 we repurchased or sold investor repurchase claims on a total of 28 loans in each of those 2 years. The payments in 2008 and 2009 were only $2.6 million and $1.6 million respectively. During 2010 we paid claims on 17 loans totaling $1.8 million. It is our policy to estimate a reserve for potential losses when we sell loans to investors. All of the above losses have been adequately reserved for in previous periods. At the end of the year, our reserve for loan repurchases and make-whole requests was $5.5 million. To date, repurchases have not been a significant problem, but we continue to monitor it. In general, mortgages are available today. It's true that prospective buyers need to have a solid credit history and job history as well as a modest downpayment, but that seems reasonable. So mortgages are available today for those who are credit-worthy. We continue to offer competitive mortgage rates and loan programs and we're leveraging our mortgage associates' knowledge and expertise to assist our home buyers in obtaining mortgage loans suited best to their needs and qualifications. Turning to slide 23, it shows our debt maturity schedule as of October 31, 2010. What you see very clearly is that we have very little in the way of debt coming due over the next several years. Through the end of calendar 2013, we have less than $160 million of debt maturing. We did not repurchase any debt during the fourth quarter. Our ability to repurchase debt is limited, and will not be a primary focus as we look to deploy our cash. Our cash position can be seen on slide 24. At the end of October, after spending approximately $100 million of cash to purchase 1200 lots on overall new land development across the company, we had $451.4 million of home building cash at quarter end. This cash position does include $92.3 million of restricted cash used to collateralize letters of credit, which has declined from $135 million at the end of fiscal 2009. We have spoken of our intention to enter into new joint ventures with financial partners. As you most likely saw with the press release that we issued this morning, we entered into a second joint venture partnership with GTIS Partners. This most recent joint venture is for about 400 lots that are located in 3 communities. One community is in Southern California, another is in Northern California, and a third one is in Virginia in the DC suburbs. The JV has been formed all the way through home construction and sales. Approximately $75 million of capital will be invested in the joint venture. We will contribute 26% and GTIS is providing the balance. At closing, approximately $40 million of cash will be returned to us for prior expenditures for land and land deposits during fiscal 2010 in anticipation of forming a joint venture. These communities were transferred to the joint venture at our cost basis. We will then invest $19 million of capital into the JV. Similar to our past JVs, we will receive a disproportionate share of the profits - about twice the percentage of our investment if we get pro forma returns. This is a very efficient and profitable use of our capital. Since we believe that we are at or near the bottom of the housing market, we think that we should be more fully invested in land. We will manage our cash position to a target of $275 million. It may fluctuate on a quarterly basis, but should not fall below $200 million at any quarter end. We are comfortable targeting this level of cash because of the bulk of our investments in wholly-owned inventory will be in communities with shorter lives and finished lot takedowns. With these shorter time frames, we can be more flexible with our investment decisions and choose to invest more or less cash in anticipation of future capital needs. We think it makes more sense to put our cash to work in earning a 25% plus IR rather than leaving the cash in Treasury bills that are earning very low returns. To the extent that we see further opportunities in the land market, we may continue to enter into more joint venture agreements and would be open to a capital markets transaction should we see a window of opportunity. We believe the cash generated from delivering legacy assets, combined with reductions in SG&A and investments of more of our cash in new land parcels, will allow us to increase our community count, which will further our goal of returning to profitability. We will look to joint venture larger communities, those with slower inventory turns and invest cash on a wholly owned basis in smaller to mid-sized communities which are quicker-turning assets. That concludes our prepared remarks, and now we will be glad to open it up for questions.

The company will now answer questions. So that everybody has an opportunity to ask questions, participants will be limited to one question and a follow up, after which they will have to get back into the queue to ask another question. [Operator Instructions.] And your first question comes from the line of Nishu Sood of Deutsche Bank. Please proceed. Nishu Sood – Deutsche Bank: I wanted to ask first about the sales trends that you described in November. Your fourth quarter numbers, the numbers through October, were definitely stronger, I think, than most folks were expecting, stronger than your peers, and obviously showing the upward trend, whereas most people were describing it as flat. So I wanted to get some sense of what the drivers may have been in November. Was it mortgage rates perhaps, or was there some promotional activity in October that may have pulled sales from the November month? Or was it a return to the kind of level of demand that many of your peers are seeing?

Well, we didn't really have any special promotions. We certainly had no national campaign. There's always one division or another that will be running some kind of promotion or concession opportunity. Frankly, we saw the improvements beginning in July, August, September. We initially assumed everybody was feeling this. We were kind of surprised that it wasn't, because we didn't do any extraordinary or special activity to make that happen, and by October, as we mentioned, per community we matched last year. It kind of got back to, finally, where we were. In total we did a little better. But just as I couldn't quite explain that recovery, which kind of felt like we finally got through that post-tax credit malaise. I really can't explain why November dipped down. Again, we didn't do that much differently. Keep in mind November for all practical purposes is typically a half-month, because once you start approaching Thanksgiving everybody's focus goes elsewhere. So we're anxious, as everyone is, to see how the market returns when it gets back to normal late January early February. Nishu Sood – Deutsche Bank: And so specifically, on mortgage rates, were you hearing anything from the field which leads you to believe that that may have been part of the impact?

No, I don't think so. I think clearly rates were extremely low. We did see them increase a bit recently, but I don't think that caused a surge of buying activity when they were very low nor do I think it's the reason that sales slowed a bit in November.

Yeah, on the whole, mortgage rates are very, very affordable. Frankly I think more of the issue is where consumer sentiment and confidence and outlook for the economy is at the moment than any particular promotion or the rates. Nishu Sood – Deutsche Bank: And a followup question on the joint ventures. The GTIS joint venture, clearly some successful execution here of something you've been talking about for some time. I wanted to get a sense of how you view the principal purpose of the JVs. Is it to get access to opportunities that you wouldn't maybe for size reasons be able to otherwise? Is it to leverage the returns a little bit more?

It's a little bit of both. Obviously we have a finite amount of capital and we need to maximize what we can do with that capital. It's plenty for the finished lot takedowns and we could pretty much do those on an unlimited basis. It's plenty for smaller communities that we are getting in and out of. However, it would be a concentration of our capital if we did the larger transactions wholly on balance sheet, using our own cash. There are parts of California, parts of DC, parts of the New Jersey market that take larger amounts of capital, and there are larger opportunities in some cases in terms of the number of lots. We don't want to miss them, nor do we want to tie up our capital there in spite of the fact that they generate very good returns. So we see combining with a joint venture partner as the most efficient way to maximize our capital. The added benefit, and frankly I could make a case we should do everything with joint ventures, just from the pure return standpoint, is we really leverage our returns because of the promote structure. If we hit pro formas - and our pro formas don't assume any price appreciation - we do significantly better on our returns on capital than we do on most5 wholly owned communities. We can, frankly, if we put up 25% of investment, we can make 50% of the profit. If we put up 20%, we can make 40% of the profit just from hitting pro forma. And then, if there is a recovery, and we're not banking on it, but if there is, we get an even higher percentage. So I think it's a very efficient use of capital all the way around. This is our second joint venture with GTIS. They've been great partners and we think it's a win-win all around.

And your next question comes from the line of Carl Reichardt with Wells Fargo Securities. Please proceed. Carl Reichardt – Wells Fargo Securities: I had a question about the land that you've looked at on the finished lot side that you thought was too expensive to take down now. Could you give me a sense as to how overpriced you view these lots? Is it 10%, 40%? What seems to be the disconnect between the seller and what you guys will pay?

Are you talking about the lots that we walked away from? Carl Reichardt – Wells Fargo Securities: Not that you walked away from, but deals that you've been looking at where you just thought - you mentioned you thought finished lot prices in some cases were too high relative to you being able to hit 25% unlevered IRR. I'm just trying to figure out how high.

I'm not sure we actually made that comment, but we certainly - I mean what I said was our new transactions we clearly are comfortable where even at this moment's underwriting - and the bulk of our new transactions have been in the last two quarters - we feel very comfortable they're going to hit or exceed the high 25% IRRs. But we certainly do see transactions - finished lot takedowns in particular operate with a lower margin but a higher inventory turnover to get the returns. So they don't quite have as much room on the margin side, and you really have to underwrite them properly. There tends to be a little bit more wiggle room if you will on the larger properties or the ones where we develop them or larger land positions because they have more margin and lower turns. So you can accept a little lower margin and still do okay. But not so on the finished lot takedowns. Carl Reichardt – Wells Fargo Securities: Okay. And then in terms of the deals that you have done recently that you expect your IRR hurdles with constant price and constant pace from now, what kind of cost of goods increases or lack thereof are you assuming in those numbers? What's your sense as to the direction that hard costs will go - labor and materials?

We've always used an assumption of no home price appreciation and no changes in cost, either the labor side or the brick side of the equation. Our feeling always has been if we see increases hopefully we'll be able to increase home prices to offset it. There has been fluctuation in commodity prices over time. As demand increases for homes in the future, whenever that ends up occurring, I think it's a safe bet that you'll begin to see material and labor costs start to inch up as well and hopefully at that time we'll be able to increase prices to offset it.

I will say we continue to have price reductions on the labor side throughout a variety of locations around the country. Commodities we have less control over, obviously, but we continue to have successes on the labor side.

Your next question comes from the line of Jonathan Ellis with Bank of America Merrill Lynch. Please proceed. Jonathan Ellis – Bank of America Merrill Lynch: My first question is, if we just look at the lots purchased this quarter and the price point, it looks like the average price per lot has come up somewhat materially from prior quarters. I just want to get a sense - is that a function of geographic mix? I know you talked a little bit about more difficulty in getting access to finished lots at reasonable prices. Is that reflected in the average price point this quarter? Any compare and contrast to average price per lot in prior quarters?

It's highly, highly dependent on the geographic mix. Lots similar to what we have in our joint venture that are purchased in good markets in California, north or south, Washington, the finished lot cost can be double or triple, or four times, what we pay in North Carolina or Chicago or Houston. So it just depends on in a given period what the geographic mix is. The other thing is it depends on whether they're finished lots, closing at a quarter, or raw lots. We have been buying some raw lots and obviously those are at a much lower price per lot than the finished lot.

Having said all that, which is 100% accurate, we didn't provide any data this quarter that I'm aware of that you can ascertain what we paid for those lots. The $100 million is a combination of what we paid for land as well as what we spent on land development of parcels, not necessarily the parcels that we just bought. So if that's how you're coming to the conclusion of one price being higher than the other, I don't think you can draw that conclusion from that data. Jonathan Ellis – Bank of America Merrill Lynch: Has this mix in development changed much from prior quarters?

I think it's starting to increase, but I just don't think you can draw any conclusions from that data.

In general, early on, more throughout '09, a lot of our opportunities, probably 90%, were for developed lot opportunities. Now there is definitely a mix of more undeveloped lots. We're still getting developed lot opportunities, but there's a greater mix of undeveloped lots. Fortunately there are plenty of small packages of lots - 35 lots, 50 lots, etc. So even though we have to spend the dollars to develop them, the asset still turns relatively quickly. 18 months and we're in and out and liquefy the investment in those cases. And once again, the larger ones where that's not the case we're orienting toward joint ventures and they have great returns but more capital, more life, and they don't turn as quickly.

And one last point on this is that the land development spend that we discussed is not necessarily on lots that we first controlled this quarter. We might have controlled them one quarter ago, two quarters ago, three quarters ago and are just now doing the development on it as well. So again, I'm not sure I answered your question fully, but I just don't think you can use the data we provided to draw any conclusions on lot prices. Jonathan Ellis – Bank of America Merrill Lynch: Okay. Second question, just the cash position you're targeting, $275 million, and a minimum level of $200 million, does that include the restricted cash portion, or is that just the unrestricted?

It includes the restricted cash. In general, keep in mind that the restricted cash has been shrinking as we build out more legacy communities. It's possible that at some point would reverse, but generally speaking we haven't had to tie up nearly as much in restricted cash in the new transactions compared to our older ones which were burning down. Jonathan Ellis – Bank of America Merrill Lynch: Right. That makes sense. The related question there is you mentioned potential valuation of capital markets transactions. Have you changed your view on equity issuance? I think you had said previously that you would not consider equity issuance until you were profitable after interest expense. Is that still the case, or are you reevaluating that?

You know, in general we still remain comfortable with our capital position and cash position. I know some can get concerned. Obviously we can control the governor by controlling the kinds of lots that we purchase and the amount of lots that we purchase in any given quarter, so the cash is largely in our control. Having said that, we are seeing some very good opportunities in the marketplace, so I'd say we're a little bit more open to even considering equity in the near future. It really just depends on the combination of the opportunities that we see and the capital that we need to take advantage of them. But we're a little more open on the equity side than we have been.

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

First question on the drill back on the November slowdown. Granted, it's one month and this is kind of a slower, more erratic time, and I think also to a previous caller's point, maybe some other builders haven't seen as much of an improvement going into November, perhaps more stability. But in either case, I was wondering if in that slowdown if that was led by any one or two regions or markets more than others, and you said it didn't really have anything to do with higher interest rates, which is consistent with our view. But any other type of financing drivers that you see out there that may be helping or hurting demand at this point on a marginal basis?

You know, what it kind of felt like is the holidays came a couple of weeks early. Usually the slowdown is the second half of the month of November as we're approaching Thanksgiving and the holidays, and for whatever reason it was broad-based really across the country. No particular drivers from any kind of incentives concession or anything like that that we could tell and it just seemed like people took a breather earlier this year for the holidays than they normally would have.

So not really tied to any one region per se?

No, very broad.

Pretty even overall.

Okay. Also, going into the spring selling season, are you comfortable with spec levels? Obviously it was down a little bit from 3Q end but do you need to trim anywhere? Is that something where on the margin pricing or incentives or discounts maybe increase to make any adjustments?

I think we're comfortable with our spec strategy. It's really not finished unsold. These are started unsold. We really manage it on a community basis. Obviously there's a few more when you have a multi-family community than you have on a single family detached, but I wouldn't expect to see any significant variations in our average per-community started unsold numbers.

Last one, if I could, on the comments around your cash position. Getting to that $275 [million] level, is that something that you anticipate that you should get there by the end of fiscal '11 or something that might happen even sooner?

I'd say we'd like to get there sooner if we can. I'm just not certain we'll find enough of the opportunities to invest it that quickly. I'd like to get there before the end of the year. I'm just not certain we can find enough opportunities that quickly.

Your next question comes from the line of Joel Locker with FBN Securities. Please proceed. Joel Locker – FBN Securities: I was looking at December and the orders, just the way they're trending right now, do you think they would get to the 1.3 sales a month that they got to in November? It might even be lower.

We've not put any data out about December, but as you look at the slide that we showed you on slide 5 you can see what it was in '08 and '09. It typically falls from November is a typical pattern. In '08 it was 1.1 and December of '09 it was 1.4. But we've not made any comments on December. Joel Locker – FBN Securities: Right. And the gross margin backlog, I know you touched on the gross margin overall, but are they about the same as recorded in the fourth quarter, or are they a little higher or a little lower?

I think from your seat the only thing you can assume is that what we recently closed is what the backlog is.

Yeah, we're not projecting a huge change in the first half of the year. We think the real benefit of our gross margin improvement comes toward the end of the year, third or fourth quarter.

Your next question comes from the line of David Goldberg with UBS. Please proceed. David Goldberg – UBS: First question is on the JVs. I want to maybe follow up on Nishu's question. He asked about some of the motivation for doing the joint ventures, and I wanted to ask about an ancillary benefit, that being maybe accelerating tax benefits by realizing losses up front and then presumably booking income from the joint venture if it's profitable.

Well, just to be clear, we sold them at about cost basis. There was no loss up front, so that's not a motivator. David Goldberg – UBS: But I assume it was an impaired cost basis, right?

No, these were newly identified land parcels that we recently purchased that were transferred to the joint venture at cost basis, so there was nothing involved with taxes there. David Goldberg – UBS: Understood. And along that line, I know you guys identified that there would be some $40 million returned to you after the deal is closed in exchange for this land, but I'm just wondering about the cash flow dynamics out of the joint ventures. As you look forward, does it differ, earning stream versus cash flow stream in the JV at all? Is there any kind of waterfall or any [inaudible] or anything or special payment to the JV partner that would come first, or is it all pretty pro rata based on your equity ownership and kind of a normal GAAP accounting?

Always the promote really comes toward the tail end. Cash flow, the meaningful one for us, in all of our joint ventures, really happens at the end. David Goldberg – UBS: Okay. And then if I could sneak one more in here, I just wanted to get some perspective. I think it's interesting, and I think all the builders are doing this, opening new communities to try to drive some higher volumes, and I'm wondering how you think about cannibalizing sales in currently open neighborhoods and avoiding doing that. Clearly if you're selling two homes per community or 1.5 homes per community per month, that's well below an optimal level. How do you look at the tradeoff between trying to drive some more sales in your existing communities versus increasing the community count? And I guess with that are the sales between, I would assume in the newer communities higher than in the older communities?

First part, we almost always are not cannibalizing. It's either in a very different geography or submarket, or it's a different product line. In one we may be building 2000 square foot homes on a 50 x 100 foot lot. And we may open up or find a new opportunity in an 80 foot lot and where there our average square footage target may be 3000 square feet. In some cases it's an age targeted community versus a non-age targeted. In some it's a townhouse community versus the existing community which would be a single family. So it's very rare where there would be overlap in the community and it's a net-net if not a benefit to us. Plus we can often get a variety of small efficiencies from having additional communities in the area. David Goldberg – UBS: Got it. And then is the sales base a little bit higher in the new communities presumably, or it just depends on product?

You know, it depends on product and geography. In Texas you tend to have slower sales paces, even on successful communities. They just operate at a lower absorption per year. Then you go to a place in DC or in Northern California, same returns but they'll do it on double the sales pace. So it just depends. In general I'd say one of the benefits in the market - I mean the overall market has dropped off significantly. The for sale housing sector is probably down from over 2 million housing sales to about 300,000. On the other hand, the sales per community as bad as they are, they're not nearly that bad. And the reason is because there are just far fewer communities overall and far fewer builders and competitors out there. And that's helping. Certainly the publics have been around and strong, but many of the private builders either are gone or have far, far fewer communities open than they used to and are buying less.

Your next question comes from the line of Alan Rattner with Zelman & Associates. Please proceed. Alan Rattner - Zelman & Associates: Larry, I was hoping to kind of push you a little bit on some of the cash flow numbers you gave, and I just wanted to kind of run a few things by you here. Looking at your cash flow over the past two years if you kind of throw out the tax refunds for a second you've been pretty consistent at about a $200 million cash burn per year. And I know, Ara, I think you made a comment that you kind of control the drivers there on the cash balance, but when you think about the big outflows, you have $150 million plus that you're spending on interest plus $200 million at least on SG&A there. So as I look into your 2011, your backlog's down 30%. Chances are you're not going to get the gross margin benefit until the back half of the year like you indicated. So is that $200 million cash burn number a good number to operate on and could it be even greater than that assuming you continue developing at a higher pace and moving through some of these raw parcels that you've recently put under contract?

We just haven't made a projection beyond what we're going to manage cash to. We've not provided any data to the market on what we expect cash flow to be in the future, so I can't really give you any specific guidance beyond what we've already said.

Suffice it to say we anticipate we're going to be growing community count and we've already established some targets on cash so we're again very comfortable with our cash position. Keep in mind our older positions were typically more capital intensive. We're farming some cash from those. Many of our newer positions, other than the ones we're putting into joint ventures, are far less cash-intensive and have much greater [returns]. So that could benefit us. It allows us to do more without some of the same cash burn. Alan Rattner - Zelman & Associates: Okay, and then I guess just in terms of managing the cash, I think you did mention that you're selling those projects in Jersey and I think getting about $44 million and then you're getting the cash inflow from the joint ventures. Should we expect any additional bulk land sales or any other types of asset sales in order to manage that cash balance above the $275 [million] or do you think those two items alone are enough to keep you there looking over the next two quarters?

We haven't made a projection on any others. If we decide to do others, we'll certainly let you know. Right now I'll just tell you we don't have anything imminently in mind in that regard. Alan Rattner - Zelman & Associates: And then just one last one in terms of your comments about the equity markets. Have you done any work internally with your accountants as far as what type of stock sale or capital infusion might trigger a change of control on the DTA and any type of guidance you can give us there about that?

We were kind of the first ones to adopt some of the devices to minimize the likelihood of ever triggering a change in control. We perceive that the tax asset valuation allowance as one of our largest and best assets so we're not going to take any action that would put that in jeopardy and we have significant room such that we have lots of flexibility before even getting close to doing something that would put it in jeopardy. Alan Rattner - Zelman & Associates: So how much stock could you sell without triggering -

I'm not going to give a specific number. Just suffice it to say that we have lots of room and we have not contemplated a specific transaction even at this point. But we monitor it all the time. We do the calcs on an ongoing basis, and we have significant room. And we adopted that particular pill almost two years ago now. You have a three-year look back, so anything that we had prior to that goes away during this year. So that should give you a hint in and of itself.

And your next question comes from the line of Susan Berliner with JP Morgan. Please proceed. Susan Berliner – JP Morgan: Just a couple questions on land. I just wanted to make sure I was comparing apples and apples. If you go back the past few quarters it seems from the slides that you guys have spent more acquiring land and I think the numbers you've given us in the past were about $70 million and this quarter obviously $100 million. But I wanted to make sure I was comparing acquisition of land as well as development to prior quarters. If you could just -

There's an apple and an orange. In prior quarters I believe we've given you just land. This quarter we gave you land and land development. Susan Berliner – JP Morgan: So if we go back to the prior few quarters did you increase your land spend this quarter or is it roughly the same as the past few quarters if you include both?

Well let me do it the other way, because I'm not sure we have the information for land development in all the other quarters. The best way to answer this would be that probably just the raw land spend is similar to what we did in prior quarters. Susan Berliner – JP Morgan: Okay. And I was just wondering if you could give us - I know you kind of mentioned that the land you were acquiring were matching the recent patterns in sales. Can you just talk about the competitive environment and kind of the pricing on land deals? Any color there would be really helpful.

Sure. Well, we basically do residual pricing on land. We know where the market is in terms of price and pace. We know our costs. We know the returns we want to make and are required to make on any new land acquisitions. So whatever's left over is what we can afford to pay for land. That's obviously very different depending on if it's all cash. It's obviously very different if it's a finished lot takedown and so forth to get to the returns. We in general have continued to see opportunities that [parcel] in this environment. I don't think there has been in recent periods price appreciation in land, but it really just depends on the specific market and opportunity. We continue to find pieces that parcel. I think that's the key takeaway, even in this competitive environment. The builders are not being overly aggressive to buy and the banks have not been overly aggressive to dispose, so there's been an environment that's working right now.

[Operator Instructions.] Your next question is a followup from the line of Michael Rehaut with JP Morgan. Please proceed.

Just a couple of more smaller detail questions. Just first, just for comparison's sake, just wanted to make sure - I believe you said this last conference call as well, but you're expecting over 40% of your deliveries in 2011 to come from new communities. For fiscal '10 do you still expect it to be in the 5-10% range?

For fiscal '10, for new deliveries, I believe we quoted 12% roughly, so a significant change.

So 12% going to over 40% in '11. Second, on the mortgage put-back information, very much appreciated there. Obviously it's something that's been discussed a lot in the last few months. I guess the question is more, you know, we see that the amount that you've expensed over the last few years has been pretty minimal. But over the last 12 months has the request of put-backs or make-whole requests increased on a month to month basis, or could you describe the level of activity there as we've gone throughout the last six months?

I'd say the last six months if anything maybe it's slowed. That may be more of a reflection that the institutions are more focused on the robosigning and foreclosure problem issues than they are on these repurchase requests. So I'm not sure what, if anything, to draw from it. We continue to get some flow in. Certainly it's not escalating. So I'd say steady to maybe slightly down, but I'm not sure I'd read much into it one way or the other.

One more if I could. Just on a regional basis, you know, with all the land activity that you're doing and you expect to continue to do. Maybe if you could give us a sense as you look across the country, where at this point do you feel there are greater opportunities or areas where you'd be a lot more confident investing in as you look at those markets and the sales pace and price trends that they're demonstrating right now?

We feel, obviously, good about all the locations where we're buying. I'd say we're finding fewer opportunities in the New Jersey market, only because there just doesn't seem to be as much distressed there that we can buy at a sufficiently low price. And we're not finding as many opportunities in the Minneapolis market. The sales pace has been generally slow, so it's hard to find that combination of pace and price. Ohio had been dry for us in new opportunities, but we just found a couple of transactions that made sense, one on a finished lot basis, one all cash. But frankly, in Ohio, the lot costs are so low it's almost the capital equivalent of a quarterly lot takedown. But we feel very good. In general, certainly, we're very bullish on DC. The northern Virginia market has about a 4.7% unemployment rate so we feel great about that market, not as much distressed land but there are opportunities there nonetheless. And in northern and southern California, I'd say we are seeing the opportunities that are more coastally oriented than further inland. Not as many opportunities in the Sacramento side, certainly not as many in the Stockton-Modesto side. But much more the Bay Area and in Southern California seeing more opportunities closer to the coast than way out in the Inland Empire where it's tougher to make numbers work.

Ladies and gentlemen, that concludes the question and answer session. I would now like to turn over the conference call to Ara Hovnanian for closing remarks.