Hovnanian Enterprises, Inc. (HOV) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2013 Second Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded and rebroadcast .[Operator Instructions] The company will also be webcasting a slide presentation, along with the opening comments from management. These slides are available on the Investor page of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time. Before we begin, I would like to turn the call over to Jeff O'Keefe, Vice President of Investor Relations. Jeff, please go ahead, sir.

Okay, thank you. Before we get started, I would like to read through our forward-looking statements quickly. All statements made on this conference call that are not historical facts should be considered as forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Such risks, uncertainties and other factors include, but are not limited to, changes in general and local economic and industry and business conditions and impacts of the sustained homebuilding downturn; adverse weather and other environmental conditions and natural disasters; changes in market conditions and seasonality of the company's business; changes in home prices and sales activity in the markets where the company builds homes; government regulation, including regulations concerning development of land, the homebuilding, sales and customer financing processes; tax laws and the environment; fluctuations in interest rates and the availability of mortgage financing; shortages in and price fluctuations of raw materials and labor; the availability and cost of suitable land and improved lots; levels of competition; availability of financing to the company; utility shortages and outages or rate fluctuations; levels of indebtedness and restrictions on the company's operations and activities imposed by the agreements governing the company's outstanding indebtedness; the company's sources of liquidity; changes in credit ratings; availability of net operating loss carryforwards; operation through joint ventures with third parties; product liability litigation; warranty claims and claims by mortgage investors; successful identification and integration of acquisitions; significant influence of the company's controlling stockholders; changes in tax laws affecting the aftertax cost of owning a home; geopolitical risks; terrorist acts and other acts of war; and other factors described in detail on the company's Annual Report on Form 10-K for the year ended October 31, 2012. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Now, I'll turn the call over to Ara Hovnanian, our Chairman, President and Chief Executive Officer.

Thanks, Jeff. And thank you, all, for participating in this morning's call to review the results of our second quarter ended April, 2013. Joining me on the call today are Larry Sorsby, our Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Corporate Controller; David Valiaveedan, Vice President of Finance and Treasurer; and Jeff O'Keefe, Vice President of Investor Relations. Let me start on Slide 3. We see in the top left-hand portion of that slide that our total revenues continue to increase year-over-year due to increased volumes, higher selling prices for our homes and mix. Here, we show that the second quarter of 2011 in gray, the second quarter of 2012 in yellow, and the second quarter of 2013 in blue. Total revenues have increased 66% over the 2 years shown. Moving across the top, our gross margin has also continued to show year-over-year improvements. The 150 basis point year-over-year improvement in gross margin this quarter also resulted from our change in community mix and home price increases across many of our communities. Over the 2-year period shown, our gross margin has increased 410 basis points for the quarter. There are 3 general scenarios that are playing out across the country with respect to home price increases and construction cost increases, the topic that's on everyone's minds. These increases have varied from market to market, with the hottest markets seeing the biggest increases in both home prices and construction costs. In the majority of the situations, we have been able to raise our home prices more than the construction costs have increased, thereby increasing gross margin. Southern and Northern California, as well as Phoenix, certainly have many communities that fall into that category. In other markets, we've been able to raise prices -- home prices equal to construction cost increases. Houston and Dallas are examples of that. And finally in some markets, the construction cost increases have actually risen ahead of our community home price increases. This is in a minority of the markets but Minneapolis comes to mind in this category. Fortunately, home prices are gaining momentum here as well. In the aggregate, our home price increases have more than offset any increases in construction costs that we have seen to date, helping contribute to our gross margin increase. In the bottom left-hand quadrant, you can see that as our total revenues increased, both total SG&A as a percentage of total revenues and total interest as a percentage of total revenues declined each year from the prior year. Over this 2-year period, we saw SG&A and interest percentage decrease 810 and 720 basis points, respectively. All of these positive trends led to approximately $1 million of pretax profit before land impairments and gains on extinguishment of debt during the second quarter of '13. And that's compared to a $21 million loss in the second quarter of last year and a $55 million loss in the second quarter of 2011. For the second quarter of 2013, we reported a net income of $1.3 million. While this is a very small number, it's definitely a positive step in the right direction. Given our improving sales pace and backlog position, we expect revenues to continue to increase and fixed costs, as a percentage of revenues, to continue to decline throughout the remainder of 2013. Assuming that market conditions remain stable and excluding any expenses if we decide to retire any of our debt early, we are reiterating our guidance that we will be profitable for all of fiscal '13, with our fourth quarter producing the strongest results. Turning to Slide 4. We show that there is still a lot of positive momentum in the market today with respect to our sales office activity. New order trends continue to exhibit strength during the second quarter of 2013 with a 22% year-over-year increase in the dollar value of net contracts, including unconsolidated joint ventures. Since the second quarter of 2011, our net contract dollars have more than doubled. Despite a 5% year-over-year drop in active-selling communities, our net contracts increased 10% on a unit basis in the second quarter of 2013, compared to the second quarter of 2012. This resulted in a 16% year-over-year increase in net contracts per community. The dollar value of our backlog increased year-over-year by 34% during the second quarter to just over $1 billion. On Slide 5, you can see a more granular view of our recent sales trends. Here, we show the dollar amount of net contracts for each fiscal 2013 month in blue, the same month 1-year ago in yellow, and the same month 2 years ago in gray. Our sales volume on a dollar basis continues to grow. If you look at net contracts per actively selling community, as we do on Slide 6, you can see the improvements in each and every month here as well. This slide shows the monthly net contracts per community for the most recent 12-month period in blue, and the same month 1-year before in yellow. We sold more homes per community in each of the prior 12 months than we did for the same month a year ago. The trend has improved sequentially throughout the spring selling season. The sales pace in February has been the best since September of 2007, when we had our Deal of the Century promotion. We then beat this in March with 3.4 sales per month per community, and then topped that with 3.6 sales per month per community in April. Now keep in mind, these are all our peak months of the spring selling season. Following a normal seasonal pattern, May of 2013 net contracts fell off compared to April of '13 but were better than a year ago, May of '12. Slide 7 shows the annual net contracts per community for the last 16 years. The seasonally adjusted number for 2013, shown in blue, is a significant improvement at 32.8 net contracts per community, compared to last year's pace of 28.1. There's still a substantial amount of upside opportunity before we return to more normalized pace levels in the mid-40s per community that you see on the left-hand side of the slide. And certainly, a lot of room before we get to the peak of last decade. On Slide 9, we show consolidated, newly identified communities in yellow and consolidated legacy communities in blue -- excuse me, I forgot to point out that on Slide 8, that we have the fourth highest net contracts per community in the industry for the prior 12 months when you compare us to our peers. On Slide 9, we show consolidated newly identified communities in yellow, consolidated legacy communities in blue. We finished the April '13 quarter with 177 wholly owned, actively selling communities. Since the end of fiscal '12, our wholly owned community count has increased modestly each quarter. As sales absorption rates per community increase, we continue to sell through communities faster than we had anticipated, which makes growing our community count even more challenging. During the first 6 months of fiscal '13, we have opened 51 new communities and closed out of 46 communities. So a lot of activities for a net increase of 5 communities. While we continue to work hard to achieve both a faster selling pace per community and an increasing community count, our real focus is on growing revenues so that we can further leverage our fixed operating costs. Even though our wholly owned community count was flat compared to the community count at the end of the second quarter last year, we have seen our revenues increase by 24% and our SG&A and interest expense as a percentage of revenues decline by 170 basis points and 350 basis points, respectively. We controlled 2,700 additional lots during the second quarter and spent $118 million on land and land development in the second quarter of fiscal '13. Similar to last quarter, we ended the second quarter with cash above the high end of our cash target range. We definitely have the liquidity to increase our land acquisition pace even further going forward. We plan to grow deliveries in fiscal 2014. And our land acquisition teams continue to pursue attractive land parcels in all of our markets. So far, we have secured 92% of the lots needed to meet our internal fiscal 2014 delivery expectations. That puts us in a very solid position at this point in the year. Slide 10 shows our quarterly deliveries in blue and net additions of our newly acquired land in yellow for each of the past 4 quarters. Over this time period, our net additions were in excess of our home deliveries. We have grown our total lots controlled position by about 1,200 lots over this period of time. The land market certainly remains competitive in all of our markets. While at this point in the recovery cycle, we would've liked to have controlled even more land, we were able to gain control of our fair share of land deals and have been steadily growing our land position. Our land acquisition teams are very busy and our corporate land committee calendar to review and approve new land parcels is continually filling up. When evaluating these land parcels, we remain disciplined in our underwriting assumptions. We are still able to find land that generates unlevered IRRs that meet or exceed our underwriting guidelines based on the current home prices and sales pace. While we don't assume increases in home prices, construction costs or absorption paces when underwriting land, for a limited number of prime land sites in hot markets, we occasionally will lower our 25% IRR to around 20%. On Slide 11, we show the home building gross margin percentage each quarter since the second quarter of 2011. We have seen a steady trend of increasing gross margins each quarter. The lone exception is the first quarter of 2013. On our last call, we explained that the sequential drop in our gross margin for the fourth quarter of '12 and the first quarter of '13 was primarily due to our fixed indirect overheads and lower volume of deliveries in the first quarter. During the second quarter of 2013, our gross margin increased 190 basis points, when compared to the first quarter of 2013. During the second quarter of '13, 76% of our wholly owned deliveries were from newly identified land, compared with only 39% in the second quarter of 2011. Given the fact that 89% of our wholly owned, open-for-sale communities are from newly identified land parcels, we would expect our gross margins to continue to improve. We are pleased to see that our gross margins increased to 18.9% for our second quarter. And given the gross margins in our backlog, we remain confident that our gross margins for all of fiscal '13 will surpass all of fiscal '12 gross margins of 17.8%. We've made good progress on improving our gross margins over the past several years and expect that we will continue to see progress as we march toward returning to a normalized gross margins in the 20% to 21% range. During the second quarter of 2013, there were $12.4 million of impairment reversals related to deliveries compared to $20.8 million in the second quarter of 2012. Turning to Slide 12, we continue to leverage our total SG&A expenses. Here we see total SG&A as a percentage of total revenues. Once again, 2011 is in gray, each quarter of 2012 is in yellow, and that first 2 quarters of '13 are in blue. Below each of these bars, we show the absolute dollar of our total SG&A for each quarter. As seen on this slide, SG&A as a percentage of revenues has declined each of the past 6 quarters on a year-over-year basis. During the second quarter of fiscal 2013, our total SG&A dollars increased slightly to $52 million compared to the first quarter of fiscal 2013. However, our ability to grow revenues without proportional increases in SG&A continues to provide us with operating leverage. Total SG&A as a percentage of total revenues improved from 13.9% in fiscal '12, second quarter, to 12.2% in our second quarter of fiscal '13. Our plan is to hold the dollar amount of our SG&A expenses relatively steady throughout the remainder of 2013. As our revenues continue to grow throughout the year, we would expect further improvements in our SG&A ratio each quarter and favorable year-over-year comparisons. On a historical note, our normalized SG&A ratio is approximately 10% of revenues. Now, I'll turn it over to Larry who will discuss our inventory, liquidity and mortgage operations, as well as a few other topics.

Thanks, Ara. We're very focused on controlling new land parcels. On Slide 13, we show that since January 2009, we've controlled 26,200 lots in 450 communities. At the end of the second quarter of 2013, there are still about 15,400 of these newly controlled lots remaining at attractive land values for future deliveries. The right-hand side of this slide shows that total gross additions during the second quarter were 3,100 lots. During the second quarter, we walked away from about 400 newly identified lots. In recent quarters, these walk-aways have typically occurred during the initial due diligence period and our deposit has been refunded. The net results for the second quarter was that our total lots purchased or controlled since January 2009 increased about 2,700 lots sequentially from the first quarter of 2013. Turning now to Slide 14. You'll see our owned and optioned land position broken out by our publicly reported segments. Based on our trailing 12-month deliveries, we own 3.1 years worth of land. However, if you exclude the roughly 6,800 mothballed lots, we only have 1.8 years of land based on the delivery rate of the past 4 quarters. At the end of the second quarter, 81% of our optioned lots are newly identified lots. Excluding mothballed lots, 72% of our total lots are newly identified lots. Our investment and land option deposits was $64 million at April 30, 2013, with $62.3 million in cash deposits and the other $1.7 million of deposits being held by letters of credit. Additionally, we have another $6.3 million invested in predevelopment expenses. Turning now to Slide 15. We show our mothballed lots broken out by geographic segments. In total, we have about 6,800 mothballed lots within 52 communities that were mothballed as of April 30, 2013. The book value at the end of the second quarter for these remaining mothballed lots was $125 million net of an impairment balance of $455 million. We are carrying these mothballed lots at 22% of the original value. Since 2009, we've unmothballed approximately 3,400 lots within 61 communities. As home prices continue to rise, we expect to unmothball additional communities as we move forward. Turning to Slide 16. Last quarter we showed you our ability to raise prices in 8 of our communities in Northern California, which is highlighted in blue on this slide. We continue to raise prices in most of these communities during the second quarter. Last quarter, we showed that we had raised prices in Northern California as much as 11.3% in the 13-week period ended February 24, 2013. From that same starting point of December 2, now through May 26, as shown in yellow, our home prices increased as much as 22% in one of these communities. Every quarter, we review each of our mothballed communities to see if they are ready to be put back into production. Assuming market conditions remain strong, as we look across the entire country, there are approximately 1,000 lots in 6 communities that could move from mothballed to active over the next couple of quarters. The combination of our 15,400 remaining newly identified lots and the 6,800 mothballed lots provides approximately 22,200 lots at very attractive land values for future deliveries. Turning to Slide 17. It shows another area where we have had tremendous pricing power. Here we show what happened to prices in our 7 communities in Phoenix, Arizona since the beginning of the fiscal year. We've been able to raise prices between 4.8% and 15% over that period. Both Phoenix and Northern California have been white, hot markets lately, but these data points give you an idea of how much our decision to raise prices is truly made on a community-by-community basis, even within small geographic areas. Even though we've been able to raise prices in 73% of our communities since the beginning of the fiscal year, the price increases in Northern California and Phoenix are not indicative of what's going on in every market. In places like New Jersey, Minnesota, Texas, Chicago, our ability to raise prices has been more modest. Looking at all of our consolidated communities in aggregate, including mothballed communities, we have an inventory book value of just over $1 billion net of $656 million of impairments, which we recorded on 95 of our communities. Of the properties that had been impaired, we're carrying them at 22% of their preimpaired value. Another area of discussion for the quarter is related to our current deferred tax asset valuation allowance. At the end of the second quarter, the valuation allowance in the aggregate was $941.8 million. Our valuation allowance is a very significant asset not currently reflected on our balance sheet, and we've taken many steps to protect it. We expect to be able to reverse this allowance after we generate consecutive years of solid profitability and continue to project solid profitability going forward. When the reversal does occur, we expect the remaining allowance to be added back to our shareholders' equity, further strengthening our balance sheet. As you are aware, we are predicting a return to profitability for our full 2013 fiscal year. If current market trends continue next year, we are optimistic that we could reverse the vast majority of our valuation allowance in the fourth quarter of fiscal 2014. We ended the second quarter with our total shareholders' deficit of $479 million. If you add back the total valuation allowance as we've done on Slide 18, then our shareholders' equity would be $463 million. While we have no intention of issuing equity anytime soon, we could issue approximately $100 million additional shares of Hovnanian common stock for cash without limiting our ability to utilize our net operating losses. 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 from occurrence and we expect to utilize those tax loss carryforwards as we generate profits in the future. We will not have to pay federal income taxes on $2.1 billion of future pretax profits. Now let me update you briefly on our mortgage operations. Turning to Slide 19. You can see that the credit quality of our mortgage customers continues to improve with average FICO scores of 747. For the second quarter of fiscal 2013, our mortgage company captured 72% of our noncash home-buying customers. Turning to Slide 20, we show a breakout of all the various loan types originated by our mortgage operations for the second quarter of fiscal 2013 compared to all of fiscal 2012. 22.1% of originations were for FHA loans during our fiscal 2013 second quarter, compared to 27.8% we saw during all of fiscal 2012 and the 34.1% we saw during fiscal 2011. Our use of FHA mortgages clearly has been declining. At the same time, we saw our conforming conventional originations increase to 62.9% during the second quarter of 2013, compared to 53.7% for all of fiscal 2012 and 47.1% during fiscal 2011. Regarding the make whole and repurchase request we've received from various banks, we continue to believe that the vast majority of the requests that we received are unjustified. On Slide 21, you'll see our payments for repurchases of make whole requests from fiscal 2008 through the first half of fiscal 2013. During the first half of 2013, our repayments were $650,000 on 18 loans. 13 of those 18 loans during the first half 2013 were for second-lien repurchases, which have dramatically lowered dollar amounts. During the first half of 2013, we received 24 repurchase inquiries, which was slightly lower than the 17 average repurchase inquiries per quarter in fiscal 2012. We believe that any losses resulting from repurchase and make whole requests have been adequately reserved for in the previous periods. At the end of the second quarter, our reserve for loan repurchase and make whole requests was $9.8 million, which we believe is adequate for our exposure. To date, mortgage repurchases have not been a significant problem but we will continue to monitor this issue closely. Now turning to our debt maturity ladder, which can be found on Slide 22. We have only $122 million of debt maturing before 2016, and we remain quite confident that we can deal with the unsecured notes maturing between 2014 and 2017 either through refinancing them or paying them off as they come due. Since the end of fiscal 2008, we've reduced our debt by more than $975 million. As you can see on Slide 23, after spending $118 million on land and land development, we ended the second quarter of fiscal 2013 with approximately $263 million in home-building cash, including cash used to collateralize letters of credit. We feel good about our current liquidity position. We have very little debt maturing over the next couple of years and our cash position at the quarter end exceeded our target range of $170 million to $245 million. Our land acquisition teams remain very busy and continue to look for new land parcels that meet our underwriting criteria. With the cash we have on hand, the cash we generate through the delivery of homes each quarter, our ability to place nonrecourse loans on recently acquired land parcels and our land banking arrangements with GSO, we have a significant amount of liquidity to grow our land position further. We are working hard to make sure that the amount of our land and land development investment increases over the next couple of quarters. Over the past couple of years, we've been explaining to investors that we believe we would be able to increase our inventory turnover rate, which will allow us to grow the company even if we did not increase our capital position. On Slide 24, you can clearly see the progress we've made on this front during the past year. First bar shows our inventory turnover rate at 2.1x in fiscal 2002 before the boom and the bust of the industry. The next 2 bars indicate our turnover rates in fiscal 2011 and 2012. We increased our inventory turnover rate from 1.1x in fiscal 2011 to 1.4x during fiscal 2012. Looking to the right-hand side of the slide, you'll see that on a trailing 12-month basis ended April 2013, our turnover rate increased further to 1.6x. We believe our historical turnover rates will be achievable again in the future. We remain confident in our ability to grow the company. And now I'll turn it back over to Ara for some closing comments.

Thank you, Larry. If -- I'd like to close by giving a few comments on the overall housing cycle. Frankly, it amazes me that I'm already hearing some concerns that we're in a new bubble or that the market will crash once mortgage rates move at all. As a homebuilder that's recently been through the mother of all cycles, we are constantly reviewing housing data to keep a perspective on the housing market and if you'll bear with me for a moment, I'd like to share some of the key metrics with you. I'd like to start with Slide 25, which shows total housing starts by year, from World War II to the present. I've shown this slide, although -- on prior calls, although this is updated a little bit more. There's a lot of data on this slide, but I'll focus on decade average starts, which are represented by the horizontal green lines. You see them toward the top of the bars, spanning 10 years at a time. Five of the last 6 decades since World War II have had average annual housing starts between 1.4 million and 1.5 million. The exception was the decade of the '70s, which had average starts, about 1.75 million per year. In the decade of the 2000s, in spite of the overproduction mid-decade, we also averaged just over 1.4 million starts per year, thanks to the significant reduction in housing starts toward the end of the decade. Prior to this downturn, annual housing starts had only gotten as low as 1 million starts per year in the worst downturns. I've circled some of those recent troughs on the chart. It's happened 3x in recent history, once in the '70s, '80s and '90s. Twice, it stayed that low for 1 year, once for 2 years. It quickly went up to 1.4 million starts plus after the trough. In this cycle, we have recently seen 3 years at 500,000 to 600,000 starts, half the previous lows, and a fourth year at 780,000 starts, still well below the 1 million of the previous lows, much lower annual production for a much longer period of time than we've ever seen since World War II. While the housing market is clearly recovering, we have not yet reached the level of the previous lows of 1 million starts. All of the excess production of mid-decade has now been wiped out by the deficit production plus a little. In fact, on Slide 26, we show the excess starts from the last decade and stack them -- excess above the average, stack them on top of the deficit reduction of the last 5 years, and what you see is that the -- we are still far below the average production for the decade. As has often happened, the market has overcorrected, and on -- in this case, on the downside. In addition, like the '70s, most demographers are projecting higher housing needs this particular decade, based on population and household growth. The Harvard Joint Center for Housing Studies, Moody's and others, are projecting housing starts between 1.6 million and 1.9 million new home starts per year for the entire decade. This exacerbates the current underproduction issues. Certainly, from the pure production perspective, we are not in a new housing bubble. In fact, this data would suggest we are early in the recovery cycle. Incidentally, in the bottom of this chart we show U.S. population by decade since World War II, and that has obviously been growing, and we're in a much larger population today than at any of these periods in the past. Slide 27 looks at the housing cycle with respect to home prices. You can clearly see the pricing bubble, mid-decade, and the subsequent price deterioration. You can also see that prices have recently gradually begun to trend up, but even with the recent home price increases, we're only back to prices of 10 years ago. Further, the compounded annual growth rate, going all the way back to 2000, averages -- with all the ups and downs, by the way of the cycle I just pointed out, averaged about a 3.2% from that period to today. That seems like a reasonable level for the current time. Slide 28 finally shows another key metric, the affordability index. The affordability index compares medium family incomes to the income necessary to qualify to purchase a median-priced home. The chart measures the national average, which is a key barometer, although obviously every specific market is somewhat different. It is clear that the affordability index has never been higher since it began back in 1975. The current index of 191.7 means that the median family has 191.7% of the income necessary to buy the median-priced home. Prior to this recent cycle, the best affordability index was about 138. You might say, yes, but what happens if rates go up or prices go up? Well, if you look at the small sub-chart on the upper left-hand side of this slide, you can see how the index is affected by rates and home prices. If mortgage rates, and by the way, we start on the top line of that, with the current index, 191.7. If mortgage rates were to increase by 275 basis points, or home prices were to increase another 35%, the affordability index would still be higher than at any other period since 1975, other than this current down cycle. In fact, you could combine 138 basis point increase in rates and an additional 18% increase in home prices, and the index would still be the highest it's been since the mid-70s. We've had strong housing markets with indexes far lower than the above scenarios. In the mid-'80s, this country had far greater housing production, with mortgage rates in the low teens, with far lower incomes and a smaller population. In the end, housing demand is driven by household formations. Today, households can afford a larger home than they ever dreamt, thanks to rates and prices. Eventually, they will have to settle for smaller homes or attached homes, as they have in the past, but the population is continuing to grow and the need for shelter will grow with it. There will undoubtedly be a point where the affordability index or home prices or mortgage rates or housing starts get to dangerous levels, but the key metrics that we follow suggest that we are early in this housing recovery, and there's room for movement in any of these metrics before the red lights should be flashing. We're pleased with our results early in this housing recovery, and look forward to continued improving results as this country gets back to a more normalized housing market. That concludes our formal remarks and we'll be happy to open it up for questions and answers.

[Operator Instructions] Your first question comes from the line of Alan Ratner from Zelman & Associates. Alan Ratner - Zelman & Associates, LLC: Thanks for all the commentary on the market and kind of where you guys see things playing out. That was very helpful, and I guess just to expand on that, given the focus on rates today, and the increases that we've seen over the past few weeks, I was hoping you might be willing to provide a little bit more commentary on your May order results, which it looks like if you look at it sequentially versus April, it was down about 20% or so, which is a bit more than you typically see, May versus April, and obviously the year-over-year increases are contracting as well, partly due to tougher comps. But was just hoping you can maybe tie that into what we are seeing in rates right now, and maybe what you're seeing out of buyers in response to those higher mortgage rates?

Well, there are a variety of factors moving at the same time. I'd say, what you might see in terms of less than robust growth, compared to the prior quarters, but still growth over prior months. Maybe more affected by the fact that we have been, as our peers have been, more aggressively moving home prices. It's difficult to replenish the land supply, and we've been run -- burning through our communities faster than we'd like. So we've had the luxury of not being as focused on sales pace and focusing more on price and margin, and we've been more aggressive than we have in the past. I think many of our competitors have been more aggressive than they have in the past as well. So I think that may be driving it more than rates at this stage. Alan Ratner - Zelman & Associates, LLC: So, following on to that then, if I hear that correctly, is it possible in some markets, you might be kind of hitting that resistance point on price, maybe where things have -- you gave the anecdotes in Northern Cal and Phoenix, I'm not sure what your order trends look like there specifically, but is it something now that order growth is kind of flat lining here, that maybe you found that resistance point and you would expect to see some more modest price increases, or maybe flatlining?

I would not say we're hitting resistance points, but I would say, obviously, as we've raised prices more aggressively, the velocity has slowed, and the velocity growth has slowed, but we're far from hitting resistance points, and we still have solid sales in all locations.

Your next question comes from the line of Michael Rehaut from JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question I had was on -- just following on the May orders if, and I apologize if this was in a slide, I'm dialing in from outside of the office, but just to give us a sense, in terms of the community count, I believe for 2Q, it was down, I believe you said 5% year-over-year. If that, also -- if there was a greater decline, average community counts in May, and how you're thinking about community count for the rest of the year?

I'm looking it up, Mike, just give us a second. We'll come back to you if you have another one. Hold on, I think we've got it. What is it?

189 in May.

No, that's the total, give me, how many, JVs, what was the consolidates? Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Consolidated was 176.

It was down 1 from April, Mike. 176 versus 177 wholly-owned.

And Mike, you may not have it, again, you might not have had the slides in front of you, but sales per community were at 2.8 in May of '13, and that compared to 2.6 last year. So we're still up a little bit, maybe up slightly less than the prior few quarters. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Before I hit my second question, just the thoughts on community count for the rest of the year?

Yes, a difficult number to predict. I sound like a broken record, but we're working hard to have it grow, and it's grown modestly so far this year, and we would hope to see continued, modest growth. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Great, and then, also on your comments about the mothballed communities and lot position that you have 1,000 lots that you can move from mothball to active, I believe you said, correct me if I'm wrong, over the last next 12 months. . .

The next, I think he said, the couple of quarters. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: The next couple of quarters. Is that part of the 92% of controlled lots that you cited in fiscal '14?

No, it is not.

Your next question comes from the line of Nishu Sood from Deutsche Bank.

I wanted to ask you a question about the products mix, the first time buyer versus the move-up buyer. Now you folks, as well as other builders, have seen a tailwind in terms of your average selling price from being able to sell more move-up products. Maybe that's a function of the -- the high affordability IRR that you were talking about, and maybe the first time buyers are still suffering from hangover from the homebuyer tax rate, but eventually in the recovery, the first-time buyer has to come back. So my question is, how do you see that playing out in terms of your -- the trends in your revenues, your ASP, your margins. Is it enough? Does it become a headwind to the ASP and the revenue growth? How significant do you foresee that in the next couple of years?

Well first of all, our margins are actually not dramatically different for the first time home buying product or the move-down product or the active adult product. They're are somewhat similar. However, in absolute price, obviously there's a difference in absolute dollars per home. First time home-buying product would obviously be lower. When I referred to margins earlier, I meant percentages in margins. So that part might be a negative. On the other hand, that would clearly be a little bit of an afterburner effect that would help the market in a time when it might normally want to start leveling off for a variety of reasons. We've had a very good recovery without this part of the food chain really in the battle, so to speak, and I think having first-time homebuyers join in as well would really help the overall market, increase demand and when first-time homebuyers buy their first home, in some cases, from somebody that owns a home that wants to move up, it enables them to move up. So while there may be a little downward pressure on average price, in average dollar profit per home, not on margin, I think that would be offset by the positive effects of the first-time homebuyers being able to really get some financing and get back into the market in a normal way.

And the second question, I wanted to also ask about the mothballed lots. You guys give terrific details on that, so do appreciate that. I wanted to focus in on the 4,800 lots that are in the West, the California region. Now I think by most folks' reckoning, California, Northern California, Southern California, #1 and #2 markets in the country probably, and certainty your example, that you showed on pricing support that. So that's obviously a huge positive for these 4,800 lots that you have mothballed. I wanted to ask how much progress has been made in kind of getting those back to the breakeven or above water point. How much further do we need to see before that significant chunk of the mothballed lots begins to approach feasibility again?

I think it really depends, community by community. There's not one answer for every community that represents that 4,800 mothballed lots in California, but it is clearly accurate to state that because of those rapid price increases that we're seeing in -- throughout the state of California, that a number of those mothballed communities in California are becoming ripe to be unmothballed, and it's not so much driven by margin to make our decision to unmothball those communities. I mean when we wrote those communities down, in most instances, the way GAAP worked, we wrote them down to roughly 1/2 a normalized margin, and we've seen price increases. We get the margin very close to normalized margins, but all of that's a factor that we look at -- the primary thing that we look at is how much cash are we going to recover from the lots that are invested, and where those parcels are located, and we just know that as the market just continues along the trend line, we certainly don't have to have the same kind of price increases to see quite a number of our California mothballed lots come back into production.

Your next question comes from the line of Dan Oppenheim from Credit Suisse. Daniel Oppenheim - Crédit Suisse AG, Research Division: I was wondering if you can talk a little bit more about some of the West. I think it's helpful again in terms of some of the pricing in your comments in terms of -- trying to be aggressive on that. I guess, one thing that we've also seen is an effort, really, in terms of meter out the pace of sales. I guess, just trying to think, I think a lot of the questions have been trying to get a better sense, in terms of why some of the West -- orders in the West were just a little bit weaker than some of the other regions, given the strength in pricing there. How -- what portion of the communities would you say you're sort of metering out the orders right now, versus the slow orders being a function of the consumer slowing down, based on price.

Well, orders in the West have been affected by a couple of factors. Certainly, we've been particularly aggressive in pricing, but part of the reason we've been aggressive in pricing is that we've been burning through the communities there, and haven't had the new ones open up yet, so it's been just a little more challenging from the number of storefronts, and I think that has affected it. The West, in fact, has been the most rapidly improving and appreciating market. Though -- that I wouldn't misread those numbers.

I think just to echo Ara's point, the community count in California dropped by 6 on a year-over-year basis. So I think the decline in contracts you're seeing is primarily driven by the drop in community count.

Your next question comes from the line of Joel Locker from FBN Securities.

Just was curious on the corporate expenses. It moved up the last quarter, I guess sequentially $1.2 million, where do you see that going forward, and was there any one-time issues in that in the second quarter?

I think -- nothing really comes to mind. I don't think there's any one-time issues. It's tweaked up very modestly. It fluctuates a little bit from quarter-to-quarter, just because of the timing of certain issues. So I wouldn't read too much into it. I think it's going to be relatively fixed for the foreseeable future.

Close to the -- so closer to the $14 million range, versus the, I guess $11 million or $12 million, previous?

I think you just got to look at what our current run rate has been, and draw your own conclusions. I'm not going to get granular than that.

Right, and on the May consolidated orders, what were they, excluding JVs for 2013 and 2012?

Repeat that again, please?

The May consolidated orders for 2013, 2012?

Well, the absolute number?

Excluding joint ventures.

Excluding JVs, yes.

It was -- in May of 2013, it was 493, and the prior year, that was 462.

Your next question comes from the line of David Goldberg from UBS.

It's actually Sue on for David today. Can you talk a little bit about the material prices and what you're seeing there. We've seen lumber coming down recently. How long do you think it is before we start to see that in your results, and more generally speaking, as material companies, as the producers there start to bring more capacity online, do you think that we could actually move from seeing some price inflation there to maybe seeing things normalize or perhaps come down a little bit, especially maybe as we move into 2014 or a little further out?

That's a good question, I was frankly surprised by lumber prices coming down. Well at first, I wasn't surprised by the previous period where they've been going up quite significantly over the last year. I was surprised that they recently came back off their highs over the last 6 to 8 weeks. As I understand it, in lumber, which is the single most significant material cost in a house, it was really because other mothballed mills have been coming back online again, and increasing capacity, in anticipation of increasing demand, and some had purchased lumber in greater quantities as prices were going up to protect their costs, and basically that pulled in demand from futures. So that combination of factors, as I understand it, helped lumber prices fall off. Lumber prices had been hurting our margins in the past, it clearly, as the single most cost important material, and now that, that's going down, that will definitely help, and that will -- should play out into the next few quarters, but there are a lot of other moving parts, copper as you might have seen, well that's not a really significant part, has been moving up, so different materials are going up and down at different times.

Typically, we lock lumber prices up kind of 90 days into the future, so there's a little lag effect before we'll see the benefit flow through our P&L of declining prices, and as Ara says, there's are a lot of moving parts that may obfuscate what the real impact of lumber is. Lumber represents 14%, 15% of the total construction cost of a home.

Okay, and then just a follow-up question, in terms of the land market, we have heard that there are some more nontraditional, kind of lending sources that are coming together to fund private builders again. Are you seeing any of this out there, and is that leading to any greater competition, in terms of the land market?

Not exactly sure what you mean by nontraditional lenders. I mean, we've been using GSO, a wholly-owned subsidiary of Blackstone on land banking, I don't know if that's what you mean, or whether you just mean people that are non-banks, that are not lending just for land, but actually for the entire project, including the vertical construction. We are seeing different kinds of lenders that are out there, and we're occasionally seeing traditional banks making lower loan-to-value loans on projects as well. So we're -- the general trend I think is clearly that financial institutions of one kind or another are sticking their foot back in the water, but it's still hard to find traditional banks that are doing it. So higher cost, lenders, financial institutions, hedge funds whatever you want to describe it, that are tiptoeing back in, perhaps.

Right. And overall, I wouldn't say that we've seen a huge impact on that with our private homebuilders competing. I'd still say -- while that is happening, and I'm sure it will gradually increase, I'd say in most cases, in most markets, the primary competition really still remains from our fellow peers among the publics.

And your next question comes from the line of Alex Barrón from Housing Research Center. Alex Barrón - Housing Research Center, LLC: I was just -- wanting to understand if your incentives have changed much, as these interest rates have moved in the month of May, and I guess just generally how you guys think about adjusting your approach to sales, if some rates don't come back down to 3.5?%.

Overall, our net pricing has been going up. We do that, in a variety of ways, we increase base prices, we increase lot premiums or the calls for options, we reduced concessions, or we reduce incentives. Generally speaking, I would say incentives have absolutely continued to come down, even with the little blip up that we have seen in mortgage rates. We have continued to see reductions in incentives. I really don't anticipate that changing dramatically at this point. Alex Barrón - Housing Research Center, LLC: What about on the cost of land, are you seeing more competition for land in the last couple of months, or are you seeing land prices start to taper off?

I would say it's more or less the same competitors, and we are all being a little more aggressive because we've been -- the sales pace has been greater, and we've been selling through our communities more rapidly and perhaps, we're all filling a little more confident that this recovery is here to stay, and is gaining momentum. So I would not say land prices are falling off. I would say we are -- as you might expect in this point of the recovery, we're seeing recovery in land purchases as well.

Yes, Alex, as home prices rise in the market or absorption paces increase in the market, land is more valuable, and that more valuable land is what's being reflected in what the builders that are -- the winning bidders are willing to pay. Alex Barrón - Housing Research Center, LLC: But you're not changing your underwriting too much?

What we've said in the script, and we'll reiterate it now, is in certain, very hot markets, we might change our underwriting criteria from the then current home prices, then current absorption pace and construction cost. We will continue to use that, but instead of having a 25% unlevered IRR hurdle rate, we might lower it to around 20%.

Your next question comes from the line of Susan Berliner from JPMorgan.

This is actually Wade. I just have a quick question in terms of looking at like the Southeast and West regions. I see in the West, obviously that the average price is up pretty substantially year-over-year, but just that the number of actual contracts is down versus the Southeast region, just was wondering if there was any kind of color there you might be able to provide, if that's due to community growth or just a...

You might have missed a similar question, and we pointed out that there has been a reduction in community count in the West, and when you combine that with more aggressive prices, part of which is because we're running it through -- burning through our communities, it wasn't surprising to us that the overall sales are down.

Just last quick question, with the land banking, if there's any update you guys might be able to provide on -- expanding relationship with GSO again?

We have a $250 million kind of agreement with GSO in 2 major tranches. The first $125 million as we mentioned earlier, probably in the last call or 2 is totally done. The second $125 million tranche, we're probably close to halfway through that, and although we don't have any firm agreement with GSO to expand it beyond that $250 million, they've indicated that if we have an interest in it, that they have an interest in talking to us about it as well, so we have a great relationship with them. It's been mutually beneficial, and nothing leads me to believe that if we wanted to go back to them, that they would not be willing to increase it, but at this point, we've not approached it.

Ladies and gentlemen, this will conclude our question-and-answer session for today's conference. I would now like to turn the call over to Ara Hovnanian.

Great. Well thank you, very much. We're pleased to report a profit after a long drought in that category, but obviously as you heard, the market really shows signs of continued improvement, continued momentum, and we'll look forward to reporting continued progress in our subsequent quarterly calls. Thank you.

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