Hovnanian Enterprises, Inc. (HOV) Q1 2015 Earnings Report, Transcript and Summary

Good morning and thank you for joining us today for the Hovnanian Enterprises Fiscal 2015 First 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 for rebroadcast, and all participants are currently in a listen-only mode. Management will make some opening remarks about the first quarter results, and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investor Relations' page of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time. Before we begin, I'd like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead. Jeffrey T. O’Keefe - Vice President of Investor Relations: Thank you, Nicole, and thank you all for participating in this morning's call to review the results for our first quarter which ended January 31, 2015. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or 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, industry and business conditions and impacts of the sustained homebuilding downturn; adverse weather and other environmental conditions and natural disasters; levels of indebtedness and restrictions on the company's operations and activities imposed by the agreements governing the company's outstanding indebtedness; the company's sources of liquidity; changes in credit ratings; changes in market conditions and seasonality of the company's business, the availability and cost of suitable land and improved lots, shortages in and price fluctuations of raw materials and labor, regional and local economic factors including dependency on certain sectors of economy and employment levels affecting home prices and sales activity in the markets where the company builds homes, fluctuations in interest rates and availability of mortgage financing, changes in the tax laws affecting the after-tax costs of owning a home, operations through joint ventures with third-parties, government regulations, including regulations concerning development of land, the homebuilding sales and customer financing processes, tax laws and the environment, product liability litigation, warranty claims and claims made by mortgage investors; levels of competition, availability of financing to the company; successful identification and integration of acquisitions, significant influence of the company's controlling stockholders, availability of operating loss carry-forwards, utility shortages and outages or rate fluctuations, geopolitical risks, terrorist acts and other acts of war, and certain risks, uncertainties and other factors described in detail in the company's Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Joining me today from the company are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Controller; and David Valiaveedan, Vice President of Finance and Treasurer. I'll now turn the call over to Ara. Ara, go ahead? Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Thanks, Jeff. Let me get started with our first quarter results which can be found on slide 3. Starting on the upper left-hand portion of the slide, you can see that our revenues increased 22% year-over-year from the first quarter of fiscal 2014. Our revenue growth was driven by both an 11% increase in deliveries and a 10% increase in average sales price from $343,000 to $377,000. The increase in the average sales price is primarily due to geographic and product mix changes similar to other recent quarter. On our last conference call, we said that we expected our 2015 full year gross margin to decline compared to our gross margin in fiscal 2014. Moving along the top of the slide to the upper right-hand portion, you can see that consistent with that guidance, our homebuilding gross margin of 18.2% declined by 60 basis points during the first quarter of 2015 compared to last year's first quarter. Moving to the lower left-hand quadrant, we show that our SG&A ratio decreased 210 basis points this quarter compared to the same period last year. We also show that interest as a percentage of total revenues decreased by 80 basis points to 8.2% compared to last year's first quarter of 9%. Given the solid top line growth we have for the first quarter, these year-over-year improvements demonstrate the efficiencies we achieved through growing our top line. Finally, in the lower right-hand quadrant, we show that both the first quarter growth in revenues and improvements in our SG&A ratio led to adjusted EBITDA increasing 85% to $21 million during the first quarter compared to last year's first quarter. Going forward, we remain focused on generating further growth in revenues so that we can gain more efficiencies and return on our operating metrics to more normal levels. On slide 4, we show quarterly pre-tax earnings for the past two years. As you can see on the slide, the first quarter is typically the slowest seasonal quarter each year and was negative in terms of profitability in both 2013 and 2014, while both years were profitable for the full year. Pre-tax improvement was not as great as EBIT improvement because of the additional interest, much of which was related to the bond offering at the beginning of the year to help us fuel our growth further. Let me go into a little more detail about our gross margin and SG&A. As you can see on the left hand-side of slide 5, we show our annual gross margin percentage for the past four years. After the Great Recession, we saw our gross margin trough at 6.7% in 2008. From that low point, we began to achieve steady annual improvement in gross margin and return to a more normalized gross margin level of roughly 20% in both fiscal 2013 and 2014. On the right hand-side of the slide, you can see that we reported an 18.2% gross margin for the first quarter of 2015, 6 basis points less than last year's first quarter. Turning to slide 6, we show a trend of increasing the number of spec homes from the second quarter of 2013 to the fourth quarter of 2014. We've come to the conclusion that we are a little too aggressive regarding specs and we recently decided to lower the spec levels in certain communities and deal with some of the older specs. Starting in the late fall, we both sell some of our older spec homes and to spur our overall spec sale pace, we increased our incentive on those homes. As a result, we now expect our full year gross margin to be similar to the 18.2% level we reported in the first quarter. The lower gross margin we experienced during the first quarter and the decline in our gross margin expectations for the full year is almost entirely attributable to the additional discounts we have given on the sale of our spec homes. Interestingly, reflecting strength in the overall housing market, our gross margin on our to-be-built homes remains closer to our normalized gross margin of 20% and is now materially higher than the gross margin on spec homes. The impact of offering higher incentives so that we can reduce the spec levels of certain communities will cause our second quarter gross margin to be about 100 basis points lower than the 18.2% we reported in the first quarter. This margin erosion will adversely affect the second quarter year-over-year comparison. We have already a progress in our spec reduction goals since the end of fourth quarter. We've reduced our spec level by about 70 homes, or 8%. Although this strategy is painful in the short-term, we expect our gross margin to improve in the second half of the year as we deliver fewer deeply discounted spec homes in the third and fourth quarters. Additionally, we've already begun to reduce the amount of incentives we're offering on spec homes, which should have a positive impact on the gross margins we report in the second half of the year. If the spring selling season continues to strengthen, we'll reduce the incentives on our spec homes even further. We still believe it's prudent to maintain a few started unsold homes in many of our communities to satisfy demand from buyers who are looking for a quicker closing date. However, we'll be more selective on where and how many we are building. Given that we're early in the spring selling season, we believe it's a little too early for us to give further guidance on our full year profitability. We expect to reassess full-year guidance during the spring selling season, and when it concludes we'll update you on our future conference calls. Turning to slide 7, you can see that our SG&A as a percentage of total revenues decreased year-over-year during the first quarter of 2015 to 14.5% from 16.6% in last year's first quarter. Slide 8, we show that our annual total SG&A expense as a percentage of total revenues going back all the way to fiscal 2001. We consider about 10% as a normalized SG&A ratio. As we continue to generate future revenue growth and achieve more normalized sales pace per community, we expect to be able to leverage our fixed SG&A expenses further and get this ratio back to the normalized levels of 10%. As we said in the past, it's not going to happen overnight, but we continue to make progress to bring this number down over time. Turning, now, to our current sales environment on slide 9, we show the dollar amount of our consolidated net contracts per month for each of the past 12 months. The most recent month is shown in blue. The same month of the previous year is shown in yellow. And we use green arrows pointing up to indicate an increase; and red arrows down, obviously, indicate a decrease. Driven by the combination of increased community counts and, more recently, stronger sales results, the past eight months have all had year-over-year increases. While slide 9 showed total contracts, slide 10 shows contracts per community. On the left hand-side, we show that after two years of improvements in sales pace per community in both fiscal 2012 and 2013, we saw a year-over-year decline in sales pace in fiscal 2014 to 28.4 sales per community from 30.7 sales per community in fiscal 2013. That decline was not something we thought we'd see at this stage of the housing recovery. The sales rate per community in 2014 was disappointing for our company and, also, for the entire industry. Looking at the right-hand portion of the slide, we show that after seeing decreases in the second and third quarter last year, net contracts per community have improved for each of the last two quarters. Feels good to see two quarters of year-over-year increases in contracts per community, and it gives us the confidence that 2015 will be a stronger year from a sales pace perspective. Slide 11 also shows contracts per community, but this slide breaks it down on a monthly basis for more granularity. For the past eight months, we've had three months where our net contracts per community were flat year-over-year, one month showing year-over-year decline and four months of year-over-year improvement. We're certainly encouraged to begin the first three months of our new fiscal year with year-over-year increases in contracts per community; however, the market is still a little choppy, as evidenced by the month of February. The weather in February certainly may have adversely impacted our sales pace, but we're happy to say that the sales pace in March is off to a great start. We remain optimistic for the remainder of the spring selling season. On slide 12, we show that the number of net contracts increased 21% while the dollar amount of net contract increased 23% to $503 million. Even if housing demand levels off for the rest of 2015, we believe the increased community count we've achieved to-date, combined with the additional communities we plan to open later this year, will position us to achieve higher levels of home sales in 2015 and will set us up to have a breakout year in 2016. On the topic of community count, slide 13 shows that our consolidated community count has grown steadily since the first quarter of 2013. There's a lot of activity that goes into a net change of only six communities that we saw from the first quarter a year ago. During the last 12 months, we opened 94 new communities and closed out of 88 older ones. In some markets, we closed out of communities faster than we anticipated because of our increased sales pace, which caused our community count to not increase as much as we had expected. Additionally, during the last half of calendar 2014, similar to what our other peers have experienced and made comments on in their calls, we experienced some regulatory and developmental delays in getting new communities open across the country. In spite of these delays, we expect additional growth in community count during fiscal 2015 and we've made good progress during the month of February when we saw our consolidated community count increased sequentially by eight communities to 207 communities from 199 communities the prior month. During fiscal 2014, we saw a shift in newly acquired land, the lots that require more land development. Given the overall increases in our inventory and the number of communities with longer lead-times to opening because of land development, we expect to grow our community counts even more significantly during the latter part of 2015 and well into 2016. Based on the growth in our community count, net contracts and average selling price, the dollar amount of our backlog has grown compared to last year. On slide 14, we show the dollar amount of our backlog increased 14% to $926 million from $815 million at the end of last year's first quarter. You can also see on the bottom of the slide the number of homes in backlog grew to 2,399, up from 2,223 last year. This increase in backlog, combined with community count growth, gives us confidence that we'll be able to continue to grow our top line throughout the year. As we move forward, we are more convinced than ever that we need to continue to drive top line growth so that we can return to a more significant profitability. Our land acquisition teams are busy throughout the country looking for new land opportunities that meet our underwriting criteria and we are confident that we'll be able to grow our community count further. Any improvements in sales pace will only accelerate our growth. I'll now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Thanks, Ara. In light of lower oil prices, there has been a lot of investor interest in Houston. Slide 15 shows some of the details of our Houston operations. For the trailing 12 months, Houston accounted for 16% of our homebuilding revenues. And as of the end of the first quarter, our inventory in Houston was only 10% of our total homebuilding inventory. About half of that inventory consist of homes under-construction or completed and that is the least risky inventory component we have. So even though 16% of our 2014 home revenues were from Houston, we don't have much in the way of capital tied up in that market. Houston is primarily a market where you control land through option contracts with quarterly finished lot takedowns. And therefore, it is not as capital-intensive as our other markets. To further illustrate this point, as of January 31, 2015, we controlled 3,095 lots in Houston. More than 50% of those lots are currently optioned with a deposit of only $4.9 million. This represents an average option deposit of 6.2% in Houston, compared with our company average of a 7.5% deposit. If the Houston market started to materially deteriorate, we would be able to renegotiate our option contracts or walk away from our option contracts with only a modest expense. Our owned land position in Houston is relatively short at about a 13-month supply. This 13-month supply in Houston compares to our company-wide average supply of 31 months of owned lots, excluding mothballed lots in the remainder of our markets. At the end of the first quarter of fiscal 2015, in Houston, we had 48 active selling communities and another 12 communities in planning. As further evidence of the continued strength of the Houston housing market, during the first quarter, we sold out of eight communities faster than we had expected and had four communities where openings were delayed due to land sellers being behind on their land development schedules. For the first quarter, our Houston net contracts per community year-over-year were flat and, at quarter-end, our year-over-year dollar backlog in Houston was up 14%. At this point, we see no evidence that the Houston market for new home sales has been materially impacted by the decline in oil prices. However, we remain concerned about the potential impact of lower oil prices may have and we'll continue to carefully monitor the situation. Now that we've addressed the Houston market, let me transition to a discussion about our land position. Turning to slide 16 you'll see our owned and optioned land position broken out by our publicly-reported market segments. Our investment in the land optioned deposits was $92 million on January 31, 2015 with $91 million in cash deposits and $1 million of deposits being held by letters of credit. Additionally, we have another $14 million invested in pre-development expenses. Turning now to slide 17, we show our mothballed lots broken out by geographic segment. In total, we have 5,971 mothballed lots within 45 communities were mothballed as of January 31, 2015. The book value at the end of the first quarter for these remaining mothballed lots was $104 million, net of an impairment balance of $412 million. We're carrying these mothballed lots at 20% of the original value. As we mentioned on our last conference call, assuming current market conditions remain steady, we anticipate un-mothballing approximately 900 lots in fiscal 2015 in two locations, one in Natomas, California and the other along the Hudson River Waterfront in New Jersey. Every quarter, we review each of our mothballed communities to see if they are ready to be put back into production. Looking at all of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of $1.5 billion net of $564 million of impairments. We've recorded those impairments on 70 of our communities. For the properties that have been impaired, we're carrying them at 20% of their pre-impaired value. Another area of discussion for the quarter is related to our deferred tax asset valuation allowance. During the fourth quarter, we've reversed $285 million of our deferred tax asset valuation allowance. We will reverse some of the remaining valuation allowance when we begin to generate higher levels of sustained profitability. Back when we had a valuation allowance covering the full value of our deferred tax assets other than minor amounts related to federal or state tax reserves, any income tax benefit or expense was offset by adjustments in the valuation allowance, resulting in no income tax benefit or expense on the income statement. Now that we've reversed a portion of the valuation allowance, income tax benefit or expenses reflected in the income statement consistent with how we've reported taxes prior to having a valuation allowance. At the end of the first quarter of fiscal 2015, our valuation allowance in the aggregate was $643 million. The remaining valuation allowance is a very significant asset, not currently reflected on our balance sheet and we've taken numerous steps to protect it. We will not have to pay cash federal income taxes on approximately $2 billion of pre-tax earnings. On slide 18, we show that we ended the first quarter with a total shareholders' deficit of $130 million. If you add back the remaining valuation allowance, as we've done on this slide, then our shareholders' equity would be a positive $513 million. Over time, we believe that we can repair our balance sheet by returning to higher levels of profitability and have no intentions of issuing equity anytime soon. Now, let me update you on our mortgage operations. Turning to slide 19. You can see that the credit quality of our mortgage customers continues to remain strong with average FICO scores of 745. For the first quarter of fiscal 2015, our mortgage company captured 71% of our non-cash home-buying customers, which was an improvement compared to the 65% capture rate for all of 2014. Turning to slide 20. We show a breakout of all the various loan types originated by our mortgage operations for the first quarter of 2015, compared to all of fiscal year 2014. Our percentage of FHA loans increased from 12% during the fourth quarter of 2014 to 15% for the first quarter of fiscal 2015. Given the recent reduction in FHA mortgage insurance cost, it is likely that our percentage of FHA originations will continue to rise. Recently, there has been a number of modifications to mortgage underwriting criteria that are incremental positives such as the removing of credit overlays and the reduction in mortgage insurance costs for FHA loans. Although this loosening of credit standards is a step in the right direction that creates slightly easier mortgage credit conditions for homebuyers, none of these are game-changers. As seen on slide 21, after spending $226 million on land and land development during the first quarter, we still ended the first quarter with $325 million of liquidity, which includes $274 million of homebuilding cash and $51 million undrawn under our $75 million unsecured revolving line of credit. We ended the quarter in excess of our target liquidity range of $170 million to $245 million. Having raised $250 million of debt at the beginning of the first quarter, we took some near-term steps in order to more fully deploy that cash. These steps allowed us to avoid the negative arbitrage of paying interest both on our new debt and interest on items such as non-recourse mortgages, model sale leasebacks and land banking arrangements. However, we will reactivate these programs when we decide to increase our liquidity or deploy additional cash to grow our land position even further. Now, turning to our debt maturity ladder, which can be found on slide 22, the red bars on this slide represent unsecured debt. We believe that we have the ability today to refinance all of our unsecured debt that matures between 2015 and 2017. However, in order to reduce the high cost associated with the make-whole provisions, we're not likely to pay off or refinance those bonds until such time as we're closer to the maturity dates. Needless to say, we feel good about our liquidity position and we'll continue with land purchases that meet our 25%-plus unlevered underwriting hurdle rates based on today's construction cost, home prices, and absorption rates. As you can see on slide 23, beginning in the second half of 2012, the number of net additions to our lot count has exceeded the number of deliveries by about 9,900 lots. After walking away from 1,700 lots during the first quarter, our net additions totaled 400 lots which was lower than the 1,220 deliveries we achieved in the first quarter. Our option deposits are typically fully refundable during the due-diligence time period, so these walk-aways resulted in only modest charges primarily consisting of investigative expenses during the first quarter. This was the second consecutive quarter that our net additions fell below our quarterly deliveries and is reflective of our decision to remain disciplined in our underwriting approach. Despite the slower housing market during the latter half of 2013 and into 2014, land sellers have been reluctant to adjust land prices downward and, as a result, the pace of our land acquisitions have slowed. If the increase in sales pace per community we've experienced during the past two quarters continues, we believe the pace of land acquisitions will likely increase going forward. Taking into account that we plan to grow deliveries in both fiscal 2015 and 2016, we currently control all the land needed for our projected 2015 deliveries and over 90% of the land we need for our projected 2016 deliveries. Assuming no changes in market conditions, this gives us the confidence that 2016 should be a breakout year and that we will not only be able to grow our deliveries, but also expect to achieve a substantially higher level of profitability in 2016 than we achieved during the past two years. We have plenty of liquidity and our land acquisition teams continue to work hard across the country to identify new land parcels. We remain focused on controlling more land, opening more communities and growing our top line in order to leverage our fixed cost. Recently, we launched a completely redesigned website at www.khov.com. Not only does it provide a much richer environment for our customers to find the information they want to know about both the company and our communities, but we also revamped our Investor Relations section to make it easier for each of you to find the data you want as well. With that, I'll turn it back over to Ara for some brief closing comments. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Thanks, Larry. There were many positive trends that we reported in the first quarter, such as revenue growth, year-over-year increase in sales pace per community, and the growth in our backlog. Obviously, we were disappointed with the gross margin for our first quarter and our expectations for gross margin in the second quarter. Nonetheless, we are confident that we are taking the steps in fiscal 2015 to position ourselves for dramatically improved results in 2016. Our new fiscal year begins in about seven months. We're planning substantial growth in communities during this year. We'll have additional interest and SG&A associated with opening many new communities, but the short-term pain should set us up for a breakout year in 2016, as Larry just mentioned, with significantly greater revenues and profitability, and far better leveraging of our SG&A and interest. That concludes our formal remarks and we'll be happy to open it up for questions.

Thank you. The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to one question and one follow up. After which, they will have the option to return back to the queue. At this time, we will open the call for questions. Our first question comes from the line of Alan Ratner of Zelman & Associates. Your line is now open. Alan Ratner - Zelman & Associates: Hey, good morning, guys. Thanks for taking my question. First question, on the February order trends, pretty significant slowdown from what you saw in the quarter. Was – I know you mentioned weather as a possible headwind there, but I was curious if you can give any color on what you saw, specifically, in Houston in February, and also maybe just talk a little bit more about what you're hearing from your salespeople about what could have caused that – at least, the sequential decline in absorptions in February, which is pretty unusual for this time of year. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Yeah, as I tried to elaborate with a lot of detail, Houston continues to be performing quite well into February, into March. So Houston wasn't any significant impact. I just think it was a little slower. The only thing we can come up with is maybe weather in some of our markets, but we're very pleased that the first couple of weeks in March that little slower trend we saw in February completely reversed and the market seems to be back stronger, again. So that's about all the color I can give you. Alan Ratner - Zelman & Associates: Okay, great. I appreciate that. Second question, just on the spec strategy, I think that you mentioned you – in retrospect, maybe you built a few more specs than you should have. But with the demand environment accelerating nicely in the spring selling season, I think, if anything, we hear that inventory is very tight in the marketplace. It would seem like having a few more specs on the ground would be a good problem to have, quite frankly. So I was curious, is there – are there specific markets where you feel you're over-weighted to specs right now? Or were you seeing something different from the demand side on your specs versus your to-be-built, meaning the buyers just are not looking for a spec home right now, because, given the demand, I would assume that you should have a little bit of pricing power on that inventory given how tight the resale market is right now? Ara K. Hovnanian - Chairman, President & Chief Executive Officer: I think the issue is very situational. I think we got a little higher in certain markets, like the Virginia market, for example. It doesn't tend to be a spec market, and we probably got a little over anxious there. Also, in some of our – we built more specs than normal at some of our higher price points. So, I think – and, finally, I think we had built some specs that we just – had been around for a while, and I think our divisions were not being realistic in right-pricing certain locations. So, just felt like it was time to do a little clearing of house of some of the older specs and bring a little more balance community by community. We're leaving it up to the divisions, but I think we clearly felt like we got just a little ahead of ourselves, and trying to fine-tune the strategy on a very site specific basis. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: We agree with your comment that you would think that with the small supply of existing homes in many markets that we should have some pricing power when we're meeting the demand of a consumer that needs to move in rapidly. However, historic trends for new homebuilders are to slightly discount spec homes especially as they age a bit in the field, the realtor community really knows that that happens and educates our prospects on that fact, and expect discounts even though logic would say that we ought to get even more price if we can meet the specific need of moving a customer in more rapidly, but the facts of the matter is the opposite occurs. Alan Ratner - Zelman & Associates: Okay. Thanks a lot and good luck. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Thanks.

Thank you. Our next question comes from the line of Michael Rehaut of JPMorgan. Your line is now open.

Thanks. Good morning, everyone. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Good morning.

First question I just had, I wanted to just kind of review and make sure I'm fully capturing the updated guidance around the gross margins. So, previously you had said that you expected fiscal 2015 gross margins pre-interest to be around like roughly flattish with 2014's 19.9% and now you're saying you expect it to be closer to the first quarter's 18.2%, is that correct? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: No. Previously, we said it was going to be flattish around the fourth quarter's 19.2%, 19.3%, I don't have it memorized. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: 3 (34:25). J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: 3 (34:26).

Okay. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: 19.3% (34:27) for the full year and now we're saying it's going to be around the 18.2% we've reported for the first quarter with a step-down from that 18.2% in the second quarter by about 100 basis points.

Okay. No, thanks for that clarification. So – and then the interest amortization in COGS in fiscal 2014 was 2.6%. Would that be a similar number in 2015 or a little bit higher or lower? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: It's a reasonable assumption for you to make that it's – follow what it was last year.

Okay. And then just on the gross margins as well. The – you mentioned the de-mothballing of lots and is about – you expect 900 lots in fiscal 2015. I was wondering if you could give us a sense of how much in terms of closings, percent of closings do you expect – closings from these de-mothballed communities to be as a percent of the total and the gross margins of these closings relative to the broader corporate average. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Well, first of all, one of those communities that we're un-mothballing is a 12-story or 13-story building, so we'll be starting that in the spring with kind of two-year construction cycle. So, don't expect much impact from that. But given that it's a larger building, those generally have higher gross margins to compensate for the longer build time. And that's on the Gold Coast of New Jersey, overlooking Manhattan and the river. The other large one we're un-mothballing is on the West Coast in Northern California. It's going to start really in the fall, so the impact is just not going to move the needle in terms of our overall delivery projection. So, I know you're looking for a little more specific guidance, but I'd say don't get hung up on the un-mothballing effect. I just don't recall from memory the gross margin projection for that compared to the overall average. But, again, it doesn't start until the fall and just not going to meaningful (37:17) in the overall scheme of (37:18). J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: I think neither is going to have any impact on gross margin in 2015, and in 2016 it will be an insignificant impact, up or down, as Ara mentioned.

Okay. One last one if I could, guys. Any thoughts around closings and ASPs for the full year? I know, obviously a lot has to depend on the spring, but at least now that you're seeing – you're kind of getting into the second quarter and maybe directionally you can give us a sense of ASPs and then maybe perhaps, some type of a range for closings? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: We're just not prepared to give more guidance than we did in the formal part of our scripted call. I mean, you can be encouraged that we had seven – an increase of seven in the community count in this last month. So that gives you a little bit of an insight. And we also gave you some insight that we expect community count to continue to grow in the latter half of this year. And that will impact sales more than it's going to impact deliveries this year, but it's really setting up 2016.

All right, great. Thanks, Larry.

Thank you. Our next question comes from the line of David Goldberg of UBS. Your line is now open.

Good morning. It's actually Sue on for David. My first question goes back to the difficulty that you talked about in terms of acquiring lot. Have you made any adjustments to your underwriting in order to perhaps be more aggressive and to win more of those deals? Ara K. Hovnanian - Chairman, President & Chief Executive Officer: So, we're trying to stay disciplined, and that's why it didn't make as much progress this quarter. We just think it's the smart way to go. But we're finding sufficient opportunities. And I think we mentioned, we're in great shape for our planned fiscal 2016 deliveries already in terms of land acquisition. And that includes substantial growth. So, we don't feel pressured to make the land acquisitions or lower our underwriting criteria right now. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Actually, we did the opposite. After the first half of 2014 showed slower contracts per community, we actually increased our hurdle rate from 20% to 25% because of the uncertainty of the markets. And when we were spending the money and buying land, we wanted to make sure that they were good deals. So, we actually increased our hurdle rate. In spite of that increase in hurdle rate, we've continued to find deals, but we also, during the due diligence period on our other deals, if they didn't underwrite to that kind of a level or we found some other issues that caused us pause during the due diligence period, we walked away from. But we're in fine shape. Our teams are very busy out there and I would expect the pace of our land acquisitions to grow in the future.

Okay, thanks. That's very helpful. And then in terms of your liquidity range, you've been very consistent in the range that you've given us throughout the sort of improvement that we've seen in demand. As we get closer to fiscal 2016, which as you said could potentially be a breakout year for you, could we see you get maybe a little more aggressive in that in terms of maybe moving to the lower end of the range, or maybe even just changing the range? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: I think we'll probably keep the range somewhere to what it is now and as we see opportunities to invest in land, at or near the bottom of this cycle, we would like to get into the range or even to the bottom of the range. It's really more a function of finding sufficient land deals that meet our underwriting hurdle rates, rather than our desire to manage that number higher than our range. So, as we find deals, we're going to invest. And I would say that's going to be true all the way through 2015 and into 2016. And then at some point, if we think the industry is beginning to kind of see some significant growth in housing starts and approach higher and higher levels of starts across the country, that's when we would want to begin to kind of tap on the break of our investment and maybe build our cash position higher or even start to pay off debt.

Okay, great. Thank you.

Thank you. Our next question comes from the line Joel Locker of FBN Securities. Your line is now open.

Hi, guys. Just talk about the February orders down 2% and then a March pickup you've seen in the last week and a half or so. Is that – I mean, March last year was 20% absorption rates and seems like that might be traditional seasonal. So, are you seeing more than just the actual 20% increase in seasonality that kind of goes from February to March, or is it just an increase from February? Ara K. Hovnanian - Chairman, President & Chief Executive Officer: We're – I mean we try to give a lot of granularity and that's why we report the most current month even though when it's after the quarter, and we try to give a flavor for March. But we've only had two weekends. We don't want to be uber-specific. But suffice it to say, we're very pleased with the March start so far.

All right, thanks. And just a follow up on direct costs. What were they, up or down year-over-year in the fourth quarter per square feet? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: I don't think we have that number at our fingertips. But, I mean, I can give you kind of a generic answer to that, and that is that I think most of the cost pressure that we experienced in 2013 in terms of both labor and materials abated during 2014. So, my expectation, though I don't have the specifics on a per-square-foot basis at my fingertips, is we didn't see much of a change.

Right. All right, thanks a lot, guys. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Okay.

Thank you. Our next question comes from James Finnerty of Citi. Your line is now open.

Hi. Good morning. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Good morning.

So just looking at your specs on slide 6, what percentage of, say, 1Q specs were located in Houston? Can you give us an idea of that? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Jeff, do we have that? If you got another question while we're looking that up...

Sure thing. And the one bigger picture question is regarding liquidity, in 2015, do you see any need – I know you said you don't want to raise equity, is there any need to raise additional capital in 2015 based on what you're looking to do in terms of community count and in terms of de-mothballing the building in New Jersey? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Debt comes due in October of 2015, so we'll either pay that off or refinance it as we get closer to that maturity date. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Yeah. But the plan is not net additional capital. The property, the 12-story building we referred to on the New Jersey coast, highly likely we'll have a joint venture partner on that. And we already owned the land without any project-specific debt on it. So, we don't anticipate that to be a big drain. And so overall, we feel very comfortable with the capital position, and we don't have any expectations to go to the market to increase, although at some point we will go to market just to refinance a few dollars of the short-term maturities coming up.

Okay, thank you. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: As of the end of February, just a little over 200 of our total specs were located in Houston.

A little over 200. Great. Thank you very much. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: You're welcome.

Thank you. Our next question comes from the line of Brendan Lynch of Sidoti & Co. Your line is now open. Brendan Lynch - Sidoti & Co. LLC: Good morning. Thanks for taking my questions. First, Ara, you mentioned that there have been some regulatory and development delays in opening new communities. Can you tell us what has changed recently to cause these delays? Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Yes. Well, first, there have been more communities as I've mentioned that we're acquiring that needed land development and, along with that, some final entitlements. This has been a shift that accelerated a bit this past year. So, what that means is as opposed to having lots on the ground, streets in and you're not needing to go back to the municipalities, more recently, we and all of our peers have had to go back to the municipalities. And that's just delayed municipalities because they haven't – they've had years of very little activity as, of course, overall activity was down in general, plus we were all building sites that had already been through the process. So, there's just a little bit of a bottleneck; more than most of us expected. Brendan Lynch - Sidoti & Co. LLC: Great. That's helpful. And you also mentioned that the pace of net additions to your total lot count waned a bit and you're finding it harder to source land. What, besides price, are the particular constraints and are there are particular markets where you're finding it particularly difficult, and do you anticipate this is temporary? Ara K. Hovnanian - Chairman, President & Chief Executive Officer: I do anticipate it being temporary. We go through these periods. Land prices are always sticky on the way down. So we underwrite, always, to current market, and since we saw a little more price and pace challenge, our underwriting standards reflected that and that translates to sometimes lower prices; and sellers weren't willing to do it. But as I mentioned, we feel pretty good about our land position. We're well out in front and have most of next year quite secure. So, we can afford to be selective right now. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: And that's after expecting some significant increase in community count deliveries in 2016, too. So, it already takes that into account when we say virtually – well, most of it. 90%-plus of our expected 2016 deliveries are already tied up from a land perspective. Brendan Lynch - Sidoti & Co. LLC: Great. Thank you very much.

Thank you. And our next question comes from the line of Michael Rehaut of JPMorgan. Your line is now open.

Thanks. Thanks for taking my follow up. I just wanted to clarify a couple of quick things. When you discussed Texas, I think – or was it – I think it's Houston, more specifically, just wanted to make sure I heard it right that you said Houston orders in the first quarter were flat. Is that right? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: I said per community, they're flat. Yes.

Okay. And did you have any commentary on – when you talked earlier, I think it was the first question out there about the February trend reversing in March, was that more of a broad-based overall company statement, or was that – was there anything about Houston trends in that statement in terms of February being down a little bit, but reversing in March? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Nothing Houston-specific in that comment; it was broad company consolidated comment.

Okay. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: We know people find it surprising, but given what's happening with oil prices, and I think our peers are seeing the same thing, generally, that is that the Houston market just remains quite tight and solid; so at this point, no issues. We don't tend to build in many of the big master plans that can get a little overheated. We do a little more infill, quite a bit more infill, and in less intensely crowded location. So, that could have an effect on it as well. We're also quite active in the non-oil patch part. Houston, as you probably know, has huge medical area as well. So we're nicely balanced and we're having great results right now in Houston. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Given the interest in Houston, I'll give everybody one more little factoid, and that is – is that, similar to our consolidated comment about a pickup in sales in March versus February on a consolidated basis, we saw that exact same thing in Houston. So the last couple of weeks, Houston sales, for whatever reason, have also been stronger.

That's helpful. And I know you kind of also tried to offer ideas around why February was down a little bit, and maybe you pointed to some weather issues, but were you surprised aside from that, because, typically, the sales pace in February would be demonstrably stronger than January, as you saw last year? And so, now, it was a little bit softer. So, did it – I mean, was there anything, also, about perhaps the number of new communities that opened in January versus February? I know your total active community count went up, so I don't know if that's the case. But that slightly lower sales pace in February versus January, I think, was what was also a little surprising. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Yeah. Frankly, it was a little surprising to us as well. We had made some great progress, as we reported, in the quarter overall. I can only think that some record weather, particularly in the Northeast, but even snow in Dallas has had an effect. But we're not overly concerned. Again, March is off to a great start. So, we think – just hopefully, just was a little postponement based on some odd factors.

Right. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Just a little choppiness, so... Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Yeah. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: ...we'll see as we go forward. We remain quite optimistic about the remainder of the spring selling season.

Fair enough. I appreciate it guys.

Thank you. And our next question comes from the line of Nishu Sood of Deutsche Bank. Your line is now open.

Thanks. This is Rob Hansen on for Nishu. I just wanted to kind of return to the specs a little bit. And I just wanted to kind of get an idea, what was the kind of average age of these specs? And I just wanted to confirm right, you kind of mentioned it, this is more targeted in certain markets. And then just looking at this from a bigger kind of gross-margin perspective, is this largely a kind of 1Q, 2Q event for you folks? And then kind of the back half of the year, we start to see kind of more normalized margins, like – well, closer to normalized margins kind of like how we saw in 2014. J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: Yeah. Let me tackle that. I tried to give pretty good granularity in the script on this point. But I would say that the falloff in gross margins that we saw in the first quarter, and the further falloff that we're expecting to see in the second quarter, another 100 basis points down, is almost entirely weighted towards the actions that we've taken on specs to sell both the older specs and some of the specs where we had too many in particular communities and we've consciously tried to reduce. And then the other piece of data that we gave you all was that we expect margins to pick back up in the second half of the year or the third quarter and fourth quarter for that to happen, either we're expecting the gross margin on our to-be-builts to increase or we're expecting our margins on specs to increase, I'll just tell you, we're expecting our margins on specs to climb back up somewhat to where we can come to that year average of 18.2% or so. And there might even be more upside to that if the spring selling season continues to be strong. So most of the erosion that we're seeing, if not all of it, is related to the actions we've taken on specs.

Got it. And what is the kind of dirt sale – what's the kind of difference between a dirt sale and a spec sale kind of normally for you folks? And then what is the gap going to kind of widen to here? J. Larry Sorsby - Chief Financial Officer, Director & Executive VP: >: I'm not sure we're prepared to give you the – what is going to widen to, but traditionally, somewhere around 150 basis points might be the difference between a to-be-built and a spec.

Got it. Thanks. That's all I have for now. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Okay, thanks.

Thank you. I'm showing no further questions at this time. I'd like to hand the call back over to Ara Hovnanian for any closing remarks. Ara K. Hovnanian - Chairman, President & Chief Executive Officer: Great. Thank you very much. Well, again, we're optimistic on the spring selling season, and we'll look forward to reporting some good results in our next quarter. Thank you.